Opinion
22-cv-07148-AMO
03-20-2024
FIBROGEN, INC., Plaintiff, v. HANGZHOU ANDAO PHARMACEUTICAL LTD., et al., Defendants.
ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS RE: DKT. NOS. 31, 78, 105
ARACELI MARTINEZ-OLGUIN UNITED STATES DISTRICT JUDGE
This case is about former employees' use of an employer's intellectual property. Defendants Hangzhou Andao Pharmaceutical Ltd., Kind Pharmaceuticals LLC, Dr. Dong Liu, and Dr. Shaojiang Deng's motion to dismiss was heard before this Court on August 17, 2023. Also pending before the Court is Defendants' motion for sanctions. Having read the papers filed by the parties and carefully considered their arguments therein and those made at the hearing, as well as the relevant legal authority, the Court hereby GRANTS IN PART AND DENIES IN PART the motion to dismiss and TERMINATES the motion for sanctions, subject to resubmission, for the following reasons.
The Court accepts Plaintiffs' allegations in the complaint as true and construes the pleadings in the light most favorable to the Plaintiffs. See Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008) (citation omitted).
Plaintiff FibroGen, Inc. (“FibroGen”) is a biopharmaceutical company that develops and commercializes therapeutics. Compl. (ECF 1, 101) ¶ 2. Defendants Dr. Dong Liu and Dr. Shaojiang Deng (“Individual Defendants”) are former FibroGen employees. Compl. ¶¶ 6-8. Liu worked for FibroGen from 2006 to 2015 as a scientist in the Pharmacology Group. Compl. ¶ 30. Deng worked for FibroGen from 2004 to 2019 as a scientist in the Medicinal Chemistry Group. Compl. ¶ 44. In 2013, while employed at FibroGen, Liu founded Kind Pharmaceuticals LLC (“Kind”), a biopharmaceutical company that develops small molecule therapeutics, and named himself CEO. Compl. ¶ 7. Liu left FibroGen in 2015 to focus on Kind. Compl. ¶ 7. Deng remained employed at FibroGen until 2019 (when he joined Kind) and supplied Liu with confidential information about FibroGen's HIF-PHI compounds that Kind used in its patents. Compl. ¶¶ 8-11.
Kind filed a patent and patent applications which contain FibroGen's proprietary HIF-PHI compounds: PCT Application No. WO2018/205928 (WO'928), filed on May 8, 2018; U.S. Patent No. 11,021,478 (the '478 patent), filed November 7, 2019, and issued on June 1, 2021; and U.S. Patent National Phase Application No. 17/239,362 (the '362 application) (a continuation of the '478 patent), filed April 23, 2021. Compl. ¶¶ 11, 64-67, 72. WO'928, the '478 patent, and the '362 application describe four compounds which overlap with compounds FibroGen conceived and developed, but did not patent, in 2008. Compl. ¶¶ 11, 65-77. Deng developed the four HIF-PHI compounds in 2008 along with Wen-Bin Ho, another scientist at FibroGen. Compl. ¶¶ 68, 74-77. Liu and Deng were aware of FibroGen's work with these compounds, Compl. ¶¶ 31, 45, and Liu had access to the compound library, Compl. ¶ 32. The '478 patent contains fifteen claims; one claim - claim 14 - contains 64 compounds, four of which FibroGen conceived of in 2008. Compl. ¶ 69; ECF 1-5 at 128:35-135:25.
Liu and Deng signed a Confidentiality Agreement (“Agreement”) with FibroGen when they began employment. Compl. ¶¶ 35-37, 48-51. Upon resigning from FibroGen, they certified that they complied with the terms of the Agreement and that they did not have any of FibroGen's confidential information in their possession. Compl. ¶¶ 41-42, 54-55. The Agreement, governed by California law, states that employees to assign all “Inventions” to FibroGen, which are defined as:
[A]ny and all inventions, discoveries, concepts and ideas, whether patentable or not . . . resulting from work performed by Employee for the Company, performed during Employee's regular working hours, utilizing equipment, supplies, facilities or CONFIDENTIAL INFORMATION of the Company, which
(i) relate to the actual or demonstrably anticipated research or development of the company, or
(ii) are made or conceived or reduced to practice by Employee individually or in conjunction with others during either Employee's employment at the Company; or
(iii) based on or related to CONFIDENTIAL INFORMATION, within one (1) year after termination of employment.ECF 101-1 (Agreement) §§ 1(b), 5, 11(e). The Agreement also prohibits employees from disclosing confidential information (i.e., inventions, patent applications, trade secrets, and “any other information of value relating to the business and/or field of interest of the Company”). Id. §§ 1(a), 3.
FibroGen brought this lawsuit against Defendants Hangzhou Andao Pharmaceutical Ltd. and Kind Pharmaceuticals LLC (collectively, “Kind”), and Dr. Dong Liu and Dr. Shaojiang Deng (“Individual Defendants”) (all collectively, “Defendants”) alleging eight causes of action based on Defendants' use of FibroGen's four HIF-PHI compounds: correction of inventorship; declaration of patent ownership; breach of contract and breach of implied covenant of good faith and fair dealing; and inducing breach of Liu's and Deng's confidentiality agreements. Compl. ¶¶ 78-158. Defendants filed a motion to dismiss on February 7, 2023, seeking to dismiss the complaint in its entirety. Motion (ECF 31, 98).
II. LEGAL STANDARD
Federal Rule of Civil Procedure 8(a) requires that a complaint contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” A defendant may move to dismiss a complaint for failing to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6). “Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008). To survive a Rule 12(b)(6) motion, a plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible when a plaintiff pleads “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Courts do not “accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Secs. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (citation omitted).
III. DISCUSSION
Defendants seek to dismiss each of the eight counts in FibroGen's complaint: (1) Correction of Inventorship; (2) Declaration of Patent Ownership; (3) Breach of Contract and (4) Breach of the Implied Covenant of Good Faith and Fair Dealing (against Liu); (5) Breach of Contract and (6) Breach of the Implied Covenant of Good Faith and Fair Dealing (against Deng); (7) Inducing Breach of the Liu Confidentiality Agreement; and (8) Inducing Breach of the Deng Confidentiality Agreement. The Court considers each argument in turn.
A. Improper Inventorship - Correction of Patent Ownership (Count I)
As a general matter, patents must list all the true inventors. Trovan, Ltd. v. Sokymat SA, Irori, 299 F.3d 1292, 1301 (Fed. Cir. 2002). Under 35 U.S.C. § 256, when a person is erroneously named or not named in an issued patent, a court may order correction of the patent on notice and hearing of all parties concerned. Section 256 “provides a cause of action to interested parties to have the inventorship of a patent changed to reflect the true inventors of the subject matter claimed in the patent.” CODA Dev. S.R.O. v. Goodyear Tire & Rubber Co., 916 F.3d 1350, 1358 (Fed. Cir. 2019) (citing Fina Oil & Chem. Co. v. Ewen, 123 F.3d 1466, 1471 (Fed. Cir. 1997)). “Section 256 addresses two types of inventorship errors - misjoinder and nonjoinder.” CODA, 916 F.3d at 1358. “Misjoinder is the error of naming a person as an inventor who is not an inventor; nonjoinder is the error of omitting an inventor.” Id. Section 256 allows “complete substitution of inventors” through claims of nonjoinder and misjoinder together. Id. (citation omitted).
“The inventors named in an issued patent are presumed correct.” Univ. of Pittsburgh of Commonwealth Sys. of Higher Educ. v. Hedrick, 573 F.3d 1290, 1297 (Fed. Cir. 2009) (“Hedrick”). To overcome that presumption, a party must allege that “the persons to be removed did not contribute to the invention of any of the allowed claims.” Id. To state a claim for complete substitution of inventors under Section 256, a plaintiff must plausibly allege facts demonstrating that (1) the erroneously omitted inventor conceived the invention claimed in the patent and (2) the named inventor(s) on the patent did not conceive the invention. See CODA, 916 F.3d at 1358-59. FibroGen brings both claims of misjoinder and nonjoinder to remove Liu and add Deng and Ho to the '478 patent. The Court addresses each claim in turn.
1. Misjoinder
FibroGen brings a claim of misjoinder against Liu, alleging that he was not involved in conceiving or developing FibroGen's HIF-PHI compounds. Compl. ¶¶ 79, 86. Defendants argue that the misjoinder claim as to Liu fails because 1) FibroGen has failed to allege that Liu did not conceive of any of the various inventions claimed in the '478 patent, including any of the many other compounds that FibroGen does not claim it invented, and 2) even if someone may have separately invented the four overlapping compounds, that alone does not show that Liu did not also invent them. Motion at 30. The Court agrees with Defendants.
Defendants argue that FibroGen must allege misjoinder and nonjoinder by clear and convincing evidence. Motion at 28. That is incorrect. Although FibroGen must ultimately prove the inventorship claims by clear and convincing evidence, see Hedrick, 573 F.3d at 1297, it need not allege clear and convincing facts to survive a motion to dismiss. See generally Iqbal, 556 U.S. 662; CODA, 916 F.3d at 1359 (“[W]e conclude that Plaintiffs' correction-of-inventorship claims are plausible.”)
FibroGen alleges that Liu was not involved in conceiving or developing FibroGen compounds. Compl. ¶¶ 30-33, 79-80. FibroGen argues that “the Complaint makes clear that Dr. Liu would have been incapable of inventing such compounds and therefore could not plausibly have contributed to the inventions claimed in the '478 patent.” Response (ECF 102) at 26. However, the Complaint simply alleges that Liu did not invent the four FibroGen compounds while working at FibroGen and was not involved in studies using the compounds. Compl. ¶¶ 33, 80. Nowhere does the Complaint allege that Liu was incapable of inventing these four compounds, or that he did not contribute to any of the other patent inventions or compounds. These allegations cannot support the inference that Liu did not contribute to any of the patent inventions. See Hedrick, 573 F.3d at 1297.
In CODA, the Federal Circuit found allegations of misjoinder plausible where the defendants had previously failed to invent the technology, were eager to meet plaintiffs, had two meetings with them, and took unauthorized photographs of plaintiff's functional prototype, in addition to the suspicious timing of distancing themselves from plaintiff company and filing the patent, and a “pointed accusation” from a former employee. 916 F.3d at 1359. Similarly, the district court in Emergy Inc. v. The Better Meat Co. found that the allegations supported a reasonable inference that two doctors at Emergy conceived of the inventions, and not the “shortterm intern and research fellow” who lacked relevant training and experience. No. 221-CV-02417-KJMCKD, 2022 WL 7101973, at *5 (E.D. Cal. Oct. 12, 2022). The Emergy court considered that the research fellow contacted one of the doctor's twice offering services at no cost, asked to become a one-third shareholder after less than a year of working with Emergy, abruptly quit the fellowship when Emergy denied the request, and co-founded and became Chief Technology Officer of Better Meat and filed a provisional patent application within four months. Id.
By contrast, FibroGen makes only a conclusory assertion that Liu did not develop the four HIF-PHI compounds developed in 2008, that he had access to the compound library, and three years after Liu left FibroGen, Kind filed a patent application that listed four compounds that FibroGen developed. Compl. ¶¶ 7, 32, 33, 64. This fails to plausibly allege that Liu did not contribute to the inventions in the patents. See, e.g., Iceotope Grp. Ltd. v. LiquidCool Sols., Inc., No. 20-CV-2644 (WMW/JFD), 2022 WL 204923, at *4 (D. Minn. Jan. 24, 2022) (allegations that the inventions were “actually invented by [plaintiffs], not by [defendants]” and that defendants had knowledge of plaintiff's invention and technology were “insufficient to plausibly allege that the named inventors, who are presumptively correct, did not contribute to conceiving the inventions”). Accordingly, taking all the allegations in the Complaint as true, FibroGen has not alleged facts to overcome the presumption that the inventors in the patent are correct. See Hedrick, 573 F.3d at 1297.
2. Nonjoinder
FibroGen also alleges that Deng and Ho were improperly omitted from inventorship in the '478 patent. Compl. ¶¶ 81-86. Where, as here, a plaintiff alleges joint inventorship, the Court conducts a two-part inquiry. First, the Court asks whether the allegations in the complaint “allow the reasonable inference that [plaintiff] made a more-than-insignificant contribution to the conception of at least one claim” of the patent. CODA, 916 F.3d at 1359. Second, the Court asks whether the allegations in the complaint allow the reasonable inference that there was some element of joint behavior, such as “collaboration or working under common direction.” See Kimberly-Clark Corp. v. Procter & Gamble Distrib. Co., 973 F.2d 911, 917 (Fed. Cir. 1992); CODA, 916 F.3d at 1359-60.
FibroGen does not allege that Deng and Ho alone invented each of the 75 compounds in the '478 patent, nor do they allege that the six additional Kind inventors were improperly named.
Defendants argue that the nonjoinder claims fail because FibroGen has not alleged that Deng and Ho collaborated with the six Kind inventors or made any contribution to the invention on which Kind filed the 2018 patent. Motion at 31. Regarding the first part of the test, a joint inventor “need not make the same type or amount of contribution to the invention nor contribute to every claim - a contribution to one claim is enough.” CODA, 916 F.3d at 1358-59 (internal quotation marks and citation omitted). FibroGen alleges that Deng and Ho invented four of the 64 compounds claimed in claim 14. Compl. ¶¶ 83-85. Defendants do not argue that this was insignificant, and the Court finds that these allegations may constitute a more-than-insignificant contribution. See CODA, 916 F.3d at 1358-59. Thus, FibroGen's allegations regarding Deng and Ho's contributions to the invention satisfy the first part of the nonjoinder test.
As for the second part of the test, joint inventorship “can only arise when collaboration or concerted effort occurs - that is, when the inventors have some open line of communication during or in temporal proximity to their inventive efforts.” Eli Lilly & Co. v. Aradigm Corp., 376 F.3d 1352, 1359 (Fed. Cir. 2004) (noting collaboration is satisfied when, for example, one inventor sees another's report “and build[s] upon it” or when one inventor “hear[s] another's suggestion at a meeting” (quoting Kimberly-Clark Corp., 973 F.2d at 917)). Joint inventors need not physically work together or at the same time or contribute to the subject matter of every claim of the patent. 35 U.S.C. § 116. Although the test is “not demanding,” a plaintiff must still allege that the individuals worked together in some capacity, or that an inventor used the other inventor's materials. Intel Corp. v. Tela Innovations, Inc., No. 18-2848, 2019 WL 2476620, at *5 (N.D. Cal. June 13, 2019) (citations omitted). In Intel Corp., for example, the plaintiff sufficiently alleged collaboration where a team with an inventor interviewed Becker - the individual who patented the technology - and Becker signed an NDA, was “informed in detail about [the company's] technology at the meeting, including regular layout geometries with unidirectional gridded gate and metal layers,” and Becker indicated a lack of familiarity with gridded layout technology, which he later incorporated into the patents. 2019 WL 2476620, at *6. In Emergy, the court found sufficient allegations of collaboration where the joint inventor “directly observed Emergy's highly confidential and proprietary cultivation process and procedures,” had full access to the small laboratory room where Emergy conducted its confidential research and the “master electronic lab notebook” where Emergy stored its trade secret information, lacked training in the field, and filed a patent application within four months of leaving Emergy, which covered the same harvesting methods and food products that the individual learned while conducting research of Emergy. 2022 WL 7101973, at *5; see also Imprenta Servs., Inc. v. Karll, No. 220CV06177GWPVCX, 2021 WL 4555333, at *6-7 (C.D. Cal. July 13, 2021) (concluding that plaintiffs adequately pleaded joint inventorship where the parties engaged in a mutual nondisclosure agreement, and plaintiffs emailed defendant with a PDF attachment depicting changes in the invention and sent defendant production level samples for testing, thus giving defendant “the opportunity to study Plaintiffs' design and use it as the basis of the invention”). Here, FibroGen makes no allegations as to the joint behavior or collaboration between inventors. FibroGen contends that whether the six additional individuals invented the compounds in claim 14 or were correctly named as inventors is a factual dispute for the Court to decide after the record has been developed through fact discovery. Response at 24. However, the Complaint contains no factual allegations that Liu (or any of the other individuals) viewed or worked with Deng and Ho's inventions.
The Complaint alleges that Liu was “aware of FibroGen's work with HIF-PHI compounds,” had access to the compound library that contained thousands of compounds, and attended project meetings where chemists presented work related to synthesizing HIF-PHI compounds. Compl. ¶¶ 5, 30-32. However, FibroGen does not allege that any project meetings involved the four compounds at issue. These broad allegations about Liu's general awareness of FibroGen's work with HIF-PHI compounds and access to the large database do not indicate that Liu had any knowledge about the four overlapping compounds, accessed the compound library, or lacked the requisite training or experience to conceive of these compounds. Further, the Complaint alleges only that Deng provided “assistance” and “confidential information” to Liu, Compl. ¶¶ 8-9, but fails to include any factual allegations showing that Liu observed research or learned about the specific compounds at issue or that any meetings, emails, or phone calls were ever exchanged between Deng and Liu. Cf. CODA, 916 F.3d at 1359 (inferring collaboration from defendant's prior failures with the specific technology, two meetings between the companies organized by defendant company, defendant's request to spend time alone with plaintiff's functional prototype which defendant photographed without permission, email inquiry about the status of plaintiff's technology in the month before defendant applied for a patent, and accusation of theft from former employee).
FibroGen attempts to use the alleged theft of trade secrets to make misjoinder and nonjoinder claims. However, without factual allegations to support these claims, the claims do not cross the requisite threshold. Accordingly, the Court DISMISSES the misjoinder and nonjoinder claims with leave to amend.
B. Assignment Provision in Employment Agreements
Defendants argue that the causes of action for declaration of patent ownership (count two), breach of contract against Deng (count five), breach of implied covenant of good faith and fair dealing against Deng (count six), inducing breach of Liu confidentiality agreement against Kind (count seven), and inducing breach of Deng confidentiality agreement against Kind and Liu (count eight) are based entirely on Defendants' alleged violation of their contractual obligations. Motion at 12-13. They contend that these causes of action should be dismissed because the assignment provision in Defendants' Confidentiality Agreements violates California Business and Professions Code Section 16600. Id. at 13. FibroGen does not contest that the challenged claims rely on the validity of the assignment provision in the Agreements, but instead argues that the Agreements comply with California law, and Section 16600 is not implicated because the inventions were conceived during employment. Response at 10-18.
Defendants argue that the causes of action for breach of contract against Liu (count three) and breach of implied covenant of good faith and fair dealing against Liu (count four) are based in part on that ground, and in part on the failure to inform FibroGen about the founding of Kind. Id. at 13.
1. California Law on Assignment Provisions
California Business and Professions Code Section 16600 states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Bus. & Prof. Code § 16600(a). California courts have interpreted Section 16600 to advance the state's policy that “[a] former employee has the right to engage in a competitive business for himself and to enter into competition with his former employer, even for the business of . . . his former employer, provided such competition is fairly and legally conducted.” Reeves v. Hanlon, 33 Cal.4th 1140, 1149 (2004) (citation omitted).
The language of Section 16600 is “broad on its face.” Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal. 5th 1130, 1150 (2020). Courts apply a “reasonableness standard to contractual restraints on business operations and commercial dealings,” but “strictly interpret[] section 16600 to invalidate noncompetition agreements following the termination of employment.” Id. at 1159; see Whitewater W. Indus., Ltd. v. Alleshouse, 981 F.3d 1045, 1053 (Fed. Cir. 2020) (explaining that the California Supreme Court in Ixchel “emphasized just how ‘strictly' § 16600 forbids agreements that impair the post-employment liberty of former employees”); Golden v. Cal. Emergency Physicians Med. Grp., 896 F.3d 1018, 1024 (9th Cir. 2018) (“a contractual provision imposes a restraint of a substantial character if it significantly or materially impedes a person's lawful profession, trade, or business”). Indeed, “California's legislature has clearly expressed its disapproval of contracts that restrain lawful business and professional activities,” and “it will be the rare contractual restraint whose effect is so insubstantial that it escapes scrutiny under section 16600.” Golden, 896 F.3d at 1024. Section 16600 prohibits contracts requiring assignments of inventions conceived after employment, except to the extent necessary to protect an employer's trade secrets. Whitewater, 981 F.3d at 1054-55.
2. Analysis
Defendants assert that the Agreement defines “inventions” more broadly than Section 16600 permits because the assignment clause (1) extends past employment and (2) is not limited to inventions based on the former employer's confidential information. Motion at 12-19. They argue that the first and third subclauses of the assignment provision (drafted in the disjunctive) violate Section 16600. Id. The Court first assesses whether the assignment clause extends beyond the term of employment.
Section 16600 applies to “contracts requiring assignments of rights in inventions conceived after employment.” Whitewater, 981 F.3d at 1054-55 (emphasis added). Assignment clauses are “unlawful non-compete provisions where they require an employee to assign an invention conceived after departing from an employer's service.” Applied Materials, Inc. v. Advanced Micro-Fabrication Equip. (Shanghai) Co., 630 F.Supp.2d 1084, 1086, 1090 (N.D. Cal. 2009) (“Applied Materials I”) (finding assignment provision invalid where it required assignment of inventions “described in a patent application or . . . disclosed . . . within one (1) year after terminating my employment” based on a presumption “that the invention was conceived or made during the period of [the] employment”).
Here, subclause one of the confidentiality agreements requires assignment of all ideas, concepts, and inventions:
[R]esulting from work performed by Employee for the Company, performed during Employee's regular working hours, utilizing equipment, supplies, facilities, or CONFIDENTIAL INFORMATION of the Company, which (i) relate to the actual or demonstrably anticipated research or development of the Company.Agreement § 1(b). Defendants argue that the first subclause is unlimited in time and captures inventions not based on confidential information. Motion at 17. The Court agrees.
The first subclause requires assignment of inventions “resulting from work” performed for FibroGen and which “relate to” the company's research or development. This does not limit assignment to inventions conceived of during employment or based on confidential information. See, e.g., Applied Materials I, 630 F.Supp.2d at 1090 (concluding that a clause requiring assignment of “any invention disclosed within one year of terminating employment . . . provided the invention relates to work the employee performed for [company]” impermissibly encompassed “both inventions based on confidential employer information and inventions relating to former [company] employees' work in the broad field of semiconductor research and manufacturing”); Conversion Logic, Inc. v. Measured, Inc., No. 2:19-CV-05546, 2019 WL 6828283, at *6-7 (C.D. Cal. Dec. 13, 2019) (invalidating under Section 16600 a provision requiring assignment of “all Inventions . . . conceived or developed by Employee while employed with the Company or within one (1) year following termination of such employment which relate to or result from the actual or anticipated business, work, research or investigation of the Company” as overbroadly extending beyond the term of employment and “sweeping up inventions and discoveries unrelated” to the companies' proprietary information).
Additionally, the first subclause contains no temporal limitation limiting assignment to inventions conceived of while an employee remains employed at FibroGen. As in Applied I and Conversion Logic, the first subclause here requires assignment of inventions related to FibroGen's research or development beyond the term of employment, and regardless of whether they are based on confidential information. Agreement § 1(b); see, e.g., Applied Materials, Inc. v. Demaray LLC, No. 5:20-CV-09341-EJD, 2021 WL 4222177, at *11 (N.D. Cal. Sept. 16, 2021) (“Applied Materials II”) (invalidating same clause as Applied I as it included “broad language sweeping up inventions and discoveries unrelated to [the company's] proprietary information.”). Consequently, the first subclause violates Section 16600 as it requires assignment of rights in inventions conceived after employment.
Further, when read as part of the whole agreement, the first subclause is most naturally read to broadly encompass post-employment inventions. The second subclause of the assignment provision explicitly limits assignment to inventions “made or conceived or reduced to practice . . . during . . . Employee's employment as the Company.” Agreement § 1(b). Because this language was included in the second subclause but not the first, the first subclause sweeps more broadly, and the Court cannot agree with FibroGen that such language can be read into the first subclause. See Walt Disney Parks & Resorts U.S., Inc. v. Superior Ct., 21 Cal.App. 5th 872, 879 (2018) (“Where, as here, the Legislature has chosen to include a phrase in one provision of the statutory scheme, but to omit it in another provision, we presume that the Legislature did not intend the language included in the first to be read into the second.”). Indeed, to the extent FibroGen argues that the contract could be read to limit assignment to inventions conceived of during employment, “ambiguous contract provisions should be construed against the drafter.” Int'l Bhd. of Teamsters v. NASA Servs., Inc., 957 F.3d 1038, 1042 (9th Cir. 2020); see Jacobs v. Freeman, 104 Cal.App.3d 177, 189 (1980).
FibroGen argues that the first subsection does not extend beyond the term of employment because it adopts a carveout to Section 2870 of the labor code. Response at 15. California Labor Code Section 2870 prevents employees from requiring assignment of rights to an invention “developed entirely on [the employee's] own time without using the employer's equipment, supplies, facilities, or trade secret information,” except for inventions that:
(1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.Cal. Labor Code § 2870(a).
FibroGen asserts that because the first subclause copies language from Section 2870(a), and Section 2870(a) can only be read to apply during the term of employment, the subclause limits assignment of inventions conceived of during employment. Response at 15-16. However, nothing in the text of Section 2870 permits assignment of post-employment inventions or supersedes the requirements of Section 16600. Indeed, this interpretation of these California laws has already been rejected. See Whitewater, 981 F.3d at 1057. In Whitewater, the Federal Circuit explicitly “reject[ed] [the] premise that § 2870(a) clearly covers, and through its exceptions clearly approves, an agreement requiring assignment of post-employment inventions.” Id. The court held that “[Section] 2870(a) does not clearly cover agreements requiring assignments of post-employment inventions.” Id. The Whitewater court reasoned that Section 2870(a) “does not apply to post-employment inventions, much less affirmatively authorize all agreements that require assignment of post-employment inventions as long as they meet the ‘except for' criteria, regardless of other characteristics, such as the absence of any temporal limit on the contractual assignment duty.” Id. at 1057-58. Therefore, even though the language in subclause (i) of the assignment provision at issue in this case tracks the language in Section 2870(a)(1), the provision remains invalid, as it fails to include a temporal limitation.
Because the contract requires assignment of post-employment inventions, regardless of whether they are based on confidential material, the Court finds that the assignment clause violates Business and Professions Code Section 16600 and is an unlawful non-compete provision. See Golden, 896 F.3d at 1024 (an assignment provision “need not completely prohibit the business or professional activity at issue, nor does it need to be sufficient to dissuade a reasonable person from engaging in that activity;” instead, its enforcement must “implicate the policies of open competition and employee mobility.”). As such, it is void under California law. Because the Court finds that the first subsection is void, it need not consider Defendants' arguments that the third subsection violates Section 16600.
Defendants persuasively argue that the Court should not rewrite the provision to rescue it because it would incentivize employers to draft broad, illegal assignment clauses knowing that the worst-case scenario would be that the Court would narrow the language. Motion at 19; see Applied Materials II, 2021 WL 4222177, at *11; Dowell v. Biosense Webster, Inc., 179 Cal.App.4th 564, 579 (2009). Plaintiffs do not argue that the Court should re-write the assignment clause, and the Court will not do so here. See Arthur J. Gallagher & Co. v. Tarantino, 498 F.Supp.3d 1155, 1169-70 (N.D. Cal. 2020) (declining to rewrite overbroad noncompete clause to save illegal contract).
C. Declaration of Patent Ownership (Count II)
FibroGen seeks a declaration against Kind and Liu that it is “the true and lawful owner of the entire right, title, and interest in and to the Kind Patents.” Compl. ¶¶ 91-94. To be entitled to such a declaration, FibroGen must “produce a written instrument documenting the transfer of proprietary rights in the patents.” Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245, 1250 (Fed. Cir. 2000). FibroGen contends that the assignment provision in Liu's Confidentiality Agreement is such a written instrument. Response at 9. However, because the Court finds that the assignment provision in the Agreement invalid, the contract cannot support a patent ownership claim. FibroGen has offered nothing else. Accordingly, FibroGen has not alleged that it is entitled to the declaration it seeks and the Court DISMISSES without leave to amend. See Serra v. Lappin, 600 F.3d 1191, 1200 (9th Cir. 2010) (amendment would be futile).
D. Breach of Confidentiality Provisions (Counts III-VIII)
Defendants move to dismiss counts three through eight, arguing that they lack any other viable basis other than the assignment provision. Motion at 21. Specifically, they contend 1) Liu did not breach his Confidentiality Agreement by founding Kind or failing to inform the Board of this outside employment, and that there are insufficient allegations regarding his use of confidential material; and 2) Deng did not breach his Confidentiality Agreement as there are no factual allegations that he provided Liu or Kind with confidential material. FibroGen's Confidentiality Agreement prohibits employees from engaging in any outside company “in the business of manufacturing, selling or distributing products in competition with the products and/or services of the Company[.] . . .” Agreement § 10. The Agreement requires the employee to “furnish to the Board of Directors of the Company a detailed statement of any outside employment or consulting services in which Employee seeks to engage or invest, and, as from time to time requested by said Board, resubmit for approval a detailed statement thereof.” Id. Finally, the employee may not perform any act “which may confer any competitive benefit or advantage upon any enterprise competing with the Company[.] . . .” Id.; Compl. ¶ 38.
1. Breach of Contract and Covenant of Good Faith and Fair Dealing Claims Against Liu (Counts 3-4)
Defendants argue that FibroGen fails to allege breach of any contractual provision. FibroGen counters that Liu breached additional provisions of the Agreement by 1) founding Kind before leaving FibroGen, 2) failing to provide a statement of outside employment to the Board, and 3) failing to return confidential material at the end of employment. Response at 19-23. The Court addresses each in turn.
Defendants also argue that if the assignment clause is invalid, the compounds are not FibroGen's, and no breach could have occurred. Reply (ECF 99) at 14. However, regardless of whether the inventions were assigned to FibroGen, the Complaint alleges that the compounds are confidential information, and thus may not be disclosed. See Compl. ¶ 109; Agreement § 1(a) (defining “confidential information”).
a. Founding Kind Entities
FibroGen argues that Liu conferred a competitive advantage on the Kind entities by founding Kind prior to leaving FibroGen. Response at 21-22. Liu argues that he did not breach the contract or implied covenant by merely founding the company, emphasizing that he did not engage in any competitive activity while employed at FibroGen. Motion at 25-26.
Both parties rely on Mamou v. Trendwest Resorts, Inc., 165 Cal.App.4th 686, 719 (2008). In Mamou, the court held that “an employee's mere formation of a potentially competing corporation does not breach a duty to his employer.” Id. Indeed, “[a]n employee does not breach his duty of loyalty by preparing to compete with his employer.” Id. (emphasis in original); see Fowler v. Varian Assocs., Inc., 196 Cal.App.3d 34, 41 (1987) (“California law does permit an employee to seek other employment and even to make some ‘preparations to compete' before resigning [but] . . . does not authorize an employee to transfer his loyalty to a competitor”) (citation omitted).
FibroGen alleges that Liu's actions were more than mere “preparations” as he founded and incorporated Kind and named himself CEO, plus he founded Hangzhou Andao Pharmaceutical and became Chairman, CEO, and General Manager before leaving FibroGen. Compl. ¶¶ 7, 56, 57, 102, 103. However, FibroGen's Complaint contains no allegations that Liu, Kind, or Hangzhou engaged in any activity, much less any competitive activities, prior to Liu leaving FibroGen in May of 2015. Without allegations of any actions taken by Liu or the Kind entities during Liu's employment, FibroGen's claim that Liu breached the contract merely by founding the companies fails. See Compl. ¶¶ 7, 56-57, 102-03; Mamou, 165 Cal.App.4th at 719.
FibroGen also argues that Liu conferred a competitive advantage on the Kind entities by founding them prior to leaving FibroGen, and because these companies compete with FibroGen by focusing on HIF-PFI development and anemia treatment. Response at 21-22; Compl. ¶¶ 2, 58. Again, the Complaint does not allege that these companies conducted any business at all, much less worked on HIF-PHI compounds prior to Liu leaving FibroGen. Instead, the Complaint refers to Kind currently being a competitor. See Compl. ¶¶ 7, 58, 63 (Kind “intends for its AND017 compound to compete with FibroGen's Roxadustat product once commercially available”). Because FibroGen has not alleged that Liu engaged in any business competing with FibroGen prior to leaving, it fails to state a claim.
b. Statement of Outside Employment
The clear language of the Agreement states: “during the term of his or her employment,” the employee “shall furnish the Board of Directors of the Company a detailed statement of any outside employment . . . in which Employee seeks to engage or invest, and, as from time to time requested by said Board, resubmit for approval a detailed statement thereof.” Agreement § 10. Defendants argue that this provision only required them to submit such a statement at the start of their employment. Motion at 26-27. They assert that reading the provision to require a continuing duty to disclose outside business would render null the clause permitting the Board to request statements “from time to time,” as employees would be required to submit these statements whenever applicable. Motion at 26-27. The Court cannot agree. The paragraph discussing conflicting employment obligations refers to an employee's duties “during the term of his or her employment.” Agreement § 10. Accordingly, Plaintiffs make a plausible allegation that Liu breached the contract by failing to provide a detailed statement of the outside employment in which he sought to engage.
c. Failure to Return Confidential Material
FibroGen alleges that Liu failed to keep confidential and return information on FibroGen's four proprietary compounds upon the termination of his employment. Compl. ¶¶ 31-33, 64-69, 109, 117. However, beyond alleging Liu's awareness of the existence of proprietary compounds, his access to the FibroGen library, and the overlapping compounds in the Kind patent, the Complaint fails to provide any factual support for the assertion that Liu removed or failed to return confidential information. In fact, FibroGen admits that Liu was not involved in pharmacology studies using FibroGen's proprietary HIF-PHI compounds. Id. ¶¶ 79-80. The Complaint does not allege that Liu ever accessed the compound library or obtained any information about the structure of FibroGen's compounds, and there are no allegations of any emails, phone calls, or meetings where Liu requested or received confidential information. Accordingly, FibroGen has failed to state a claim for breach of contract under this theory.
2. Breach of Contract and Covenant of Good Faith and Fair Dealing Against Deng (Counts V and VI)
FibroGen alleges that Deng was one of the two true inventors of FibroGen's proprietary compounds, and “conveyed [confidential] information concerning FibroGen's proprietary HIF-PHI compounds” to Kind and Liu. Compl. ¶¶ 81, 126, 131. However, as discussed above with respect to the allegations against Liu, the Complaint contains no allegations to support the conclusion that Deng conveyed FibroGen's confidential information to Kind or Liu. There are no factual allegations that Deng communicated, downloaded, removed, or transferred information in an unauthorized manner. Instead, this cause of action relies on the existence of a four-compound overlap with compounds over a decade old, and Deng joining Kind after Kind patented its technology. Conclusory assertions that Deng provided confidential material to Liu cannot survive a motion to dismiss. See Twombly, 550 U.S. at 556-57.
3. Breach of Implied Covenant of Good Faith and Fair Dealing (Counts IV and VI)
Defendants argue that the claims of breach of implied covenant of good faith and fair dealing also fail as they are based on the same alleged contractual violations as the breach of contract claims. Motion at 27 (comparing Compl. ¶¶ 109 and 131 (Counts III and V) with ¶¶ 117 and 139 (Counts IV and VI)). FibroGen counters that these allegations rest on Liu and Deng “actively distributing FibroGen's proprietary information to Kind and knowingly publishing this information” in the WO'928 application, '478 patent and '362 patent application. Response at 23.
“There is implied in every contract a covenant by each party not to do anything which will deprive the other parties thereto of the benefits of the contract.” Harm v. Frasher, 181 Cal.App. 2d 405, 417 (1960). A “ ‘breach of a specific provision of the contract is not . . . necessary' to a claim for breach of the implied covenant of good faith and fair dealing.” Thrifty Payless, Inc. v. The Americana at Brand, LLC, 218 Cal.App.4th 1230, 1244 (2013) (citing Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc., 2 Cal.4th 342, 373 (1992)). However, “[i]f the allegations in a breach of implied covenant claim ‘do not go beyond the statement of a mere contract breach and, relying on the same alleged acts, simply seek the same damages or other relief already claimed in a companion contract cause of action, they may be disregarded as superfluous as no additional claim is actually stated.' ” Malcolm v. JPMorgan Chase Bank, N.A., No. 09-4496-JF (PVT), 2010 WL 934252, at *6 (N.D. Cal. Mar. 15, 2010) (citing Careau & Co. v. Sec. Pac. Bus. Credit, Inc., 222 Cal.App.3d 1371, 1395 (1990)); Woods v. Google, Inc., No. 5:11-CV-01263-EJD, 2017 WL 4310765, at *2 (N.D. Cal. Sept. 28, 2017) (same); see also Kaar v. Wells Fargo Bank, N.A., No. C 16-01290 WHA, 2016 WL 3068396, at *2 (N.D. Cal. June 1, 2016) (citing California Shopper, Inc. v. Royal Globe Ins. Co., 175 Cal.App.3d 1, 54 (1985)) (“[T]he authorities hold that breach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself”).
The allegations in the breach of covenant of good faith and fair dealing are the same as those in the breach of contract claims. Accordingly, the Court dismisses these claims with leave to amend.
E. Inducing Breach (Counts VII and VIII)
Defendants argue that counts seven and eight for inducing breach of the confidentiality agreement fail as they are based on an invalid assignment clause. As noted above, the Court agrees with Defendants that the assignment clause is invalid. A cause of action for inducing breach requires showing that Defendants took “intentional acts design to induce a breach of disruption of the contractual relationship.” Pac. Gas & Elec. Co. v. Bear Stearns & Co., 50 Cal.3d 1118, 1126 (1990); see Jenni Rivera Enterprises, LLC v. Latin World Ent. Holdings, Inc., 36 Cal.App. 5th 766, 782 (2019). These claims fail because the Complaint contains no factual allegations as to what conduct Kind took to induce the breach of the confidentiality agreement. Accordingly, the Court dismisses counts seven and eight.
IV. CONCLUSION
For the foregoing reasons, the Court DISMISSES count one with leave to amend. The Court DISMISSES count two without leave to amend. The Court DENIES the motion to dismiss the breach of contract claim based on the allegations that Liu failed to inform FibroGen's board about his outside employment. The Court finds that the assignment provision is void under California Business and Professions Code Section 16600. The Court DISMISSES the remaining counts with leave to amend based on allegations that do not involve the invalid assignment provision. FibroGen's amended complaint must be filed by April 19, 2024. No additional parties or claims may be added without leave of Court or stipulation of Defendants.
The Court TERMINATES Defendants' motion for sanctions. ECF 78, 100. Now that the parties have the benefit of the Court's decision on the motion to dismiss, if Defendants would like to pursue their motion for sanctions, they may re-file it within 7 days from this Court's order. Plaintiffs shall FILE any opposition to the motion for sanctions within 14 days from Defendants' filing. The Court also DENIES AS MOOT Defendants' administrative motion for leave to file a statement of recent decision and statutory authority. ECF 105.
IT IS SO ORDERED.