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Demodulation, Inc v. Applied Dna Sciences

December 12, 2012

DEMODULATION, INC.,
PLAINTIFF,
v.
APPLIED DNA SCIENCES, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: William J. Martini, U.S.D.J.:

OPINION

Plaintiff Demodulation, Inc. ("Demod") brings this action against four Defendants: (1) Corning Inc. ("Corning"); (2) Alfred University (the "University"); (3) Alfred Technology Resources, Inc. ("ATRI"); and (4) Applied DNA Sciences, Inc. ("Applied DNA"). All four Defendants have filed motions to dismiss. There was no oral argument. Fed. R. Civ. P. 78(b). For the reasons set forth below, all four motions are GRANTED in part, and DENIED in part.

I.BACKGROUND

The following facts are drawn from the Amended Complaint.*fn1 Plaintiff Demod is a technology start-up company with its principal place of business in Westwood, New Jersey. First Amended Complaint ("FAC" or "Amended Complaint") ¶ 1, ECF No. 34. Defendant Applied DNA is a competing technology start-up company with its principal place of business in Stony Brook, New York. Id. ¶ 3. Peter Brocklesby was the former CEO of Applied DNA. Id. ¶ 41. He was replaced by Dr. James Hayward. Id. ¶ 29. Defendant Corning is a corporation with its principal place of business in Corning, New York. Id. ¶ 4. Defendant University is a private university located in Alfred, New York. Id. ¶ 5. Defendant ATRI is a non-profit joint venture between Corning and the University with its principal place of business in Alfred, New York. Id. ¶¶ 6, 20-21.

Robert Ecklin was an Executive Vice President at Corning and the President of ATRI. Id. ¶ 19.

ATRI and the University own and operate the Ceramics Corridor Innovation Center (the "CCIC"), a business incubator that helps start-up companies develop and market emerging ceramics-related technology. Id. ¶¶ 19-20. The CCIC was established with the help of grants from the New York State government. Id. The CCIC advertises that companies "under its care" can take advantage of services, including "intellectual property management," "investor/strategic partner linkages," "international trade assistance," and "technology commercialization." Id. ¶ 20.

Demod owned certain patents and other intellectual property related to an amorphous glass-coated metal microwire. FAC ¶ 9. Microwire is a high-tech hair-like fiber with a unique signature that can be encoded and modified. Id. ¶¶ 13-15. Microwire is practically invisible, but the signal from a small strand of microwire can be detected from several kilometers away, even if no power source is connected to the microwire. Id. The properties of the microwire change based on changes in temperature and pressure, and biological and chemical conditions. Id. ¶ 15. Demod's patents concern, among other things, several specific methods and systems for manufacturing and engineering microwire, and detecting and reading the signal produced by microwire at both short and long distances. Id. ¶ 14. The U.S. Department of Energy conducted an evaluation of Demod's microwire technology and concluded that it had myriad applications for homeland security, national defense, article tracking and authentication, and the energy industry. Id. ¶ 15.

In 2003, Demod entered into an agreement with the University to commercialize its microwire. FAC ¶ 17. Pursuant to this agreement, the University was granted a one percent (1%) royalty on all gross revenue recognized from the eventual sale of microwire products, in exchange for the University's efforts to obtain state and federal funding for the research and development of the microwire technology. Id. At the time the parties entered the agreement, experts at the University determined that the annual market for microwire products was likely to be between $250,000,000 and $2,000,000,000. Id. ¶ 18. As part of its agreement with Demod, the University invited Demod to become a tenant of the CCIC. FAC ¶ 19. Demod accepted this offer and moved into the CCIC in 2003. Id. ¶ 21. Demod executed written non-disclosure agreements ("NDAs") with the University, ATRI, and Corning to protect its trade secrets relating to the microwire. Id. ¶ 22. Demod "revealed extensive trade secrets to these defendants." Id.

Demod alleges that the University, ATRI, and Corning failed to disclose various conflicts of interest while Demod was at the CCIC. FAC ¶ 23. Demod identifies four conflicts specifically. First, Demod alleges that Mr. Ecklin, the Corning and ATRI executive, was on the Board of Directors of the SUNY Research Foundation (the "Foundation") with Dr. Hayward, the CEO of Demod's competitor Applied DNA. Id. ¶ 44. Second, Demod alleges that Corning had an undisclosed $57,000,000 venture with Elbit Systems, Ltd. ("Elbit"), a large Israeli defense contractor. Id. ¶¶ 23, 24. Elbit's subsidiary, Advanced Coding Systems ("ACS"), was producing "glass coated amorphous magnetic MicroWires" in Israel. Id. ¶ 23. Third, Corning allegedly paid $800,000,000 to acquire Intellisense, a company that produced devices that could be used in wireless sensors. Id. ¶ 25. Fourth, Corning and the University allegedly formed the Center for Excellence in Photonics ("Infotonics"), a business incubator like the CCIC, to develop applications for remote micro-sensors. Id. at 26.

Demod alleges that Defendants intentionally "blackball[ed]" Demod in order to protect their conflicting interests. FAC ¶ 38. Demod identifies five specific examples. First, Demod alleges that Corning provided Applied DNA with proprietary information concerning the characteristics and specifications of Demod's microwire, and its methods for encoding and detecting microwire. Id. ¶ 29. Second, Demod alleges that Mr. Ecklin and Dr. Hayward used their positions at the Foundation to ensure that grants from the Foundation and "similar New York State entities" went to Applied DNA instead of Demod. Id. ¶¶ 29, 44. Third, Demod alleges that Mr. Ecklin publicly made false statements concerning Demod's technology, telling various government officials that it was "insignificant and not deserving of investment," and that Demod had stolen the technology from Corning. Id. ¶¶ 30-33. Fourth, Demod alleges that, after it began negotiations with a company called In-Q-Tel, a Corning executive who was on the Board at In-Q-Tel directed In-Q-Tel to deny Demod funding. Id. ¶ 36. Finally, Demod alleges that it provided confidential information to the Empire State Development Corporation ("ESDC") to seek research funding, but was not told that the Chairman of the ESDC was a shareholder of Applied DNA. Id. ¶ 37.

Demod alleges that, while it was being harmed, Applied DNA was benefiting from Defendants' misconduct. Applied DNA received large amounts of funding from the Foundation, and secured military contracts for its products. Id. ¶ 39. Applied DNA also formed a business relationship with ACS to acquire ACS's microwire product. Id. ¶ 40. In response to a press release announcing the joint venture between Applied DNA and ACS, Demod contacted Applied DNA's then-CEO, Mr. Brocklesby. FAC ¶¶ 40-41. Demod asked Mr. Brocklesby how Applied DNA came into contact with ACS. Id. Mr. Brocklesby responded that he was "directed" to ACS by "an individual from New York." Id. ¶ 41. Demod notified Mr. Brocklesby that the Applied DNA-ACS venture would likely infringe Demod's patents. Id. ¶¶ 40-42. Mr. Brocklesby responded by telling Demod that Applied DNA had terminated its relationship with ACS. Id. ¶ 42. Shortly thereafter, Mr. Brocklesby was replaced by Mr. Hayward, and Applied DNA continued its relationship with ACS. Id. ¶ 44. In late 2006 or 2007, Applied DNA made a proposal to the Far East Empire Group in which Applied DNA represented that it produced "DNA Embedded Amorphous Micro Wire security products." Id. ¶ 43.

Demod's tenancy at the CCIC was terminated in 2008. FAC ¶¶ 91, 57(b). Demod alleges that it suffered damages as a result of Defendants' misconduct, including the loss of a lucrative contract with Family Dollar and the loss of the capital it used to pursue funding and business relationships. Id. ¶¶ 47-48. In addition, without any funding or investment, Demod was unable to pay the fees to maintain some of its patents. Id. ¶ 49.

II.LEGAL STANDARD

Federal Rule of Civil Procedure 12(b)(6) provides for the dismissal of a complaint, in whole or in part, if the plaintiff fails to state a claim upon which relief can be granted. The moving party bears the burden of showing that no claim has been stated. Hedges v. United States, 404 F.3d 744, 750 (3d Cir. 2005). In deciding a motion to dismiss under Rule 12(b)(6), a court must take all allegations in the complaint as true and view them in the light most favorable to the plaintiff. See Warth v. Seldin, 422 U.S. 490, 501 (1975); Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts Inc., 140 F.3d 478, 483 (3d Cir. 1998).

Although a complaint need not contain detailed factual allegations, "a plaintiff's obligation to provide the 'grounds' of his 'entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). Thus, the factual allegations must be sufficient to raise a plaintiff's right to relief above a speculative level, such that it is "plausible on its face." See id. at 570; see also Umland v. PLANCO Fin. Serv., Inc., 542 F.3d 59, 64 (3d Cir. 2008). A claim has "facial plausibility when the 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, 129 S.Ct. 1937, 1949 (2009) (citing Twombly, 550 U.S. at 556). While "[t]he plausibility standard is not akin to a 'probability requirement' . . . it asks for more than a sheer possibility." Iqbal, 129 S.Ct. at 1949 (2009).

Pursuant to Federal Rule of Civil Procedure 9(b), a plaintiff alleging fraud must state the circumstances of the alleged fraud with sufficient particularity to place the defendant on notice of the "precise misconduct with which [it is] charged." Frederico v. Home Depot, 507 F.3d 188, 200 (3d Cir. 2007)(quoting Lum v. Bank of America, 361 F.3d 217, 223-224 (3d Cir.2004)) (internal quotation marks omitted). To satisfy this standard, the plaintiff must plead or allege the date, time and place of the alleged fraud or otherwise inject precision or some measure of substantiation into a fraud allegation. Id.

III.DISCUSSION

Demod asserts seventeen causes of action in its Amended Complaint:

(1) Count 1 -- NJ Civil RICO (NJSA 2C:41-2(c)) against all Defendants;

(2) Count 2 -- NJ RICO Conspiracy (NJSA 2C:41-2(d)) against all Defendants;

(3) Count 3 -- Federal Civil RICO against Corning and the University;

(4) Count 4 -- State and Federal Antitrust Violations against all Defendants;

(5) Count 5 -- Breach of Contract against the University;

(6) Count 6 -- Piercing the Corporate Veil against the University and Corning;

(7) Count 7 -- Breach of Contract against ATRI;

(8) Count 8 -- Breach of Contract against Corning;

(9) Count 9 -- Trade Libel against Corning;

(10) Count 10 -- Misappropriation of Trade Secrets against all Defendants;

(11) Count 11 -- Unfair Competition against Corning, the University, and ATRI;

(12) Count 12 --NY General Business Law Violations against ATRI;

(13) Count 13 -- Section 1983 Violations against ATRI;

(14) Count 14 -- Patent Infringement against Applied DNA;

(15) Count 15 -- Fraud against the University, ...


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