Court deals major blow to Fraunhofer in intellectual property dispute

A biotech company once located in Delaware has won a decisive battle in its ongoing legal fight with one of the state's leading research institutions.

But the war may be far from over.

A Delaware Court of Chancery judge ruled July 29 that iBio is entitled to exclusive ownership of the technology scientists at the Fraunhofer USA Center for Molecular Biotechnology in Newark created or acquired during a decade-long partnership that began to sour in 2013.

"We are very pleased with the decision," said Mary Graham, who represents iBio for the Wilmington law firm Morris, Nichols, Arsht & Tunnell.

The ruling, by Vice Chancellor Tamika Montgomery-Reeves, settles one of the central questions in the case. But it does not fully resolve the intellectual property lawsuit filed by iBio, now headquartered in New York. And it remains to be seen exactly what the ruling will mean for the former partners.

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The lawsuit centers on a technology developed by Fraunhofer that rapidly creates batches of vaccines for a host of diseases. The process involves infusing bacteria into nicotiana – a relative of the tobacco plant used to make cigarettes.

Using DNA from the bacteria, the infused plants are able to begin producing value-added proteins on their own. After a few weeks of growth, the plants are harvested and the protein is removed, purified and packaged into a working vaccine.

Under the terms of their once-promising partnership, Fraunhofer’s role was to advance the science, while iBio, a former neighbor in Newark's Delaware Technology Park, would own and license the technology to pharmaceutical companies.

The two sides say the process is less expensive and more reliable than traditional vaccine production methods involving animal cells. The technique also avoids using genetically modified plants central to the “biopharming” technologies developed by other companies.

Together, Fraunhofer and iBio were able to attract millions of dollars in grants from the U.S. and Brazilian governments, Delaware state government and private sources, such as the Bill & Melinda Gates Foundation.

The partnership also resulted in several promising vaccines for influenza, anthrax, hookworm, malaria and yellow fever. Future targets were to include the plague, human papillomavirus and a protein for treating exposure to nerve agents.

But when iBio discovered its partner was working with a Canadian competitor, the company filed a lawsuit claiming it had exclusive rights to the technology developed by Fraunhofer.

IBio claims that use represented a breach of contract, while Fraunhofer contends it used a separate technology involving the use of viruses with genetically modified plants rather than the bacterial technique used with non-modified plants owned by iBio.

Both sides have claimed their very futures are at stake with lucrative contracts and million-dollar grants hanging in the balance.

“If upheld, iBio’s claim would cause [Fraunhofer] to default on government contracts involving national security, usurp rights owned by third parties and threaten [Fraunhofer’s] very existence,” the research center’s lawyers contend in court filings.

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IBio, meanwhile, claims Fraunhofer’s efforts to withhold details about its research are damaging the biotech’s ability to commercialize the science it spent $17 million to acquire over the course of 12 years.

“Potential deals will be stymied if iBio, on the one hand, offers a third party the ‘keys’ to the technology and, on the other hand, has to inform the third party that the ‘keys,’ are locked away at Fraunhofer,” according to the biotech’s lawsuit.

Late last year, the 18-month legal fight came down to the question of exactly what technology and how much information iBio is owed through the 27 contracts the two parties signed between 2003 and 2014.

Fraunhofer lawyer Thomas O'Brien said the nonprofit already had handed over information related to the 49 patents associated with the work commissioned by iBio, even while awaiting a final $3 million payment for their work. They asked that Montgomery-Reeves force iBio to specifically identify the remaining intellectual property the biotech believes is being withheld.

Failure to do so, he argued, would allow iBio to cast a wide net and claim ownership over all plant-based research conducted by Fraunhofer.

“The implication of what is being asked for is dramatic,” he told the court in December. “It’s comparable to Kafka’s ‘The Trial’ in which charges are never specified.”

Graham said iBio does not possess the technical "know-how" Fraunhofer developed for bringing the process to fruition and should not be forced to narrow its request.

“IBio cannot identify more ‘precisely’ the items Fraunhofer has developed and refused to disclose any more than the queen could guess the name of the imp Rumpelstiltskin without having heard it,” she wrote in court documents.

Montgomery-Reeves last week decided the "threshold question" in iBio's favor, stating that Fraunhofer's reading of the contracts is "flawed," "strains the bounds of reasonableness" and "makes no sense."

Her ruling grants iBio ownership over all of the technology Fraunhofer developed before Dec. 31, 2014.

That would appear to settle iBio's request for a declaratory judgment and its right to a "technology transfer." But several questions remain unanswered, including when and how Fraunhofer must deliver any remaining intellectual property to its former partner and what monetary damages or other relief iBio is now due.

Lawyers from both sides declined to discuss the ongoing case. Officials from iBio and Fraunhofer did not return messages seeking comment.

The two parties are expected to begin negotiations in the coming weeks. The outcome of those talks could determine whether the case now moves toward an out-of-court settlement or into a lengthy discovery phase in which iBio and Fraunhofer would likely demand documents and depositions from each other.

"These types of intellectual property disputes are common, but it's still disturbing to see things like this develop in a business partnership that was once so promising," said Bob Dayton, who heads the Delaware BioScience Association.

"I continue to believe Fraunhofer is a great research engine for this state," he said. "And I think the intellectual property it is has developed still has promise for helping people in the future."

Contact business reporter Scott Goss at (302) 324-2281, sgoss@delawareonline.com or on Twitter @ScottGossDel.