No Prize for Nobel Laureate in Fight for Bigger Stake in Biotech Company
May 21, 2018
The Nobel Prize symbolizes the apex of human achievement in the arts and sciences. It is no guarantee, however, that its recipients are equally adept when it comes to their own business endeavors.
Dr. Günter Blobel, pictured accepting his Nobel Prize in Medicine in 1999 for his revolutionary work in molecular cell biology, shortly afterward formed a business venture with two others — one his research assistant, the other a corporate lawyer — to commercialize a patented process called Chromovert, used in cell discovery assays. Almost two decades later, their company, Chromocell Corp., appears to be flourishing.
Not so for Dr. Blobel’s relationship with his fellow shareholders, eventually naming them defendants in a lawsuit he brought in Manhattan Supreme Court, seeking to enforce an alleged oral agreement to equalize his ownership stake. It didn’t turn out well for Dr. Blobel, whose suit was dismissed earlier this year by Manhattan Commercial Division Justice Andrea Masley in Blobel v Kopfli, 2018 NY Slip Op 30298(U) [Sup Ct NY County Feb. 13, 2018].
Five days after the court’s decision, Dr. Blobel succumbed to cancer at the age of 81.
Background
As related in the court’s decision, the German-born Dr. Blobel was a longtime professor at Rockefeller University, head of its Laboratory of Cell Biology, and was also employed by the Howard Hughes Medical Institute (HHMI). In 2000, Dr. Blobel and his then-research assistant, Dr. Kambiz Shekdar, co-invented and co-patented Chromovert.
A year later, Dr. Shekdar and his close friend, a corporate lawyer named Christian Kopfli, approached Dr. Blobel about creating a start-up company to commercialize Chromovert, which soon led to their formation in Delaware of Chromocell Corp., with Mr. Kopfli serving as CEO and Dr. Shekdar as Chief Science Officer.
According to Dr. Blobel’s complaint, when Chromocell was formed, HHMI had a policy preventing its researchers, including Dr. Blobel, from obtaining more than a 5% ownership interest in a company. To comply with HHMI’s policy, Dr. Blobel agreed to accept a 3.9% equity interest in Chromocell while Dr. Shekdar and Mr. Kopfli split equally the remaining 96.1%.
Dr. Blobel alleged that his acceptance of a 3.9% interest, as memorialized both in a written Stock Agreement and Consulting Agreement, was accompanied by an oral “Share Allocation Agreement” that, should HHMI ever revise or terminate its policy restricting equity ownership, they would allocate sufficient shares to Dr. Blobel to make him a one-third owner of Chromocell.
I’ll let Dr. Blobel’s complaint tell the story as to what allegedly happened in the lead-up to litigation:
¶ As a result, Dr. Blobel assigned to Chromocell patent rights covering technology developed in his lab, continued to provide expert guidance to Chromocell, generated business for Chromocell using his personal relationships and professional reputation, and made substantial monetary contributions necessary to keep Chromocell afloat.
¶ Dr. Blobel’s participation, guidance, and financial support—all provided in reliance on the Share Allocation Agreement—were critical to Chromocell throughout the company’s existence. It is no exaggeration to say that Chromocell would not exist, at least in the form it does today, without Dr. Blobel’s contributions.
¶ In short, Dr. Blobel trusted Mr. Kopfli and Dr. Shekdar. That was a mistake.
¶ Defendants took advantage of Dr. Blobel, accepting his significant—indeed, existential—contributions to Chromocell, but then, when HHMI revised its policy, they refused to make good on their agreement.
¶ In or around 2012, HHMI revised its policy on equity ownership, permitting researchers, including Dr. Blobel, to own up to 50% of the equity of a company. As a result, Dr. Blobel triggered implementation of the Share Allocation Agreement. During the ensuing discussions and related communications, Mr. Kopfli and Dr. Shekdar effectively admitted the existence of the Share Allocation Agreement, never once disputing its terms. Rather, they continually put Dr. Blobel off by raising various issues related to the manner in which it should be implemented, given purported tax and other issues.
¶ After being strung along by Mr. Kopfli and Dr. Shekdar for more than a year, Dr. Blobel insisted that they put implementation of the Share Allocation Agreement in writing. Mr. Kopfli and Dr. Shekdar rejected Dr. Blobel’s request and, although they effectively conceded the existence of the Share Allocation Agreement, they refused, and continue to refuse, to honor it.
Dr. Blobel’s complaint included claims against Dr. Shekdar, Mr. Kopfli, and Chromocell for breach of the oral Share Allocation Agreement, unjust enrichment, constructive trust, promissory estoppel, and equitable estoppel.
The defendants moved to dismiss the complaint, primarily contending that the merger clauses in the Stock Agreement and Consulting Agreement, triggering application of the parol evidence rule, precluded Dr. Blobel’s enforcement of the alleged oral Share Allocation Agreement which, they argued, sought to contradict the fully integrated written agreements. The defendants argued that the deficiency of Dr. Blobel’s claim for breach of contract, as well as the Statute of Frauds, also doomed his remaining quasi-contract claims based on the same subject matter governed by the written agreements.
The Court’s Decision
Justice Masley agreed with the defendants’ arguments on all counts, and dismissed Dr. Blobel’s complaint in its entirety. Her analysis of the written agreements’ merger clauses and the parol evidence rule focused on, and rejected, Dr. Blobel’s multi-pronged argument against the rule’s application to the oral Share Allocation Agreement.
First, he argued that the two written agreements were not integrated. Justice Masley disagreed, quoting from the two agreements’ merger clauses and finding that they “constitute a concerted effort by the parties to finalize the terms of their agreement,” and that the agreements’ “parallel drafting unmistakably reflects the parties’ intent that the Agreements are fully integrated on the issue of Dr. Blobel’s equity ownership.”
Second, Dr. Blobel argued that the parol evidence rule did not apply because Dr. Shekdar and Mr. Kopfli were not signatories to the two written agreements between Dr. Blobel and Chromocell. Justice Masley again disagreed, holding that Dr. Shekdar and Mr. Kopfli “may seek the protection of the agreement as third parties” and “intended beneficiaries.”
Third, Dr. Blobel argued that the oral Share Allocation Agreement did not contradict the written agreements because neither prohibited Dr. Shekdar and Mr. Kopfli from transferring a portion of their own shares to Dr. Blobel, as opposed to Chromocell issuing him shares. Justice Masley rejected this interpretation, citing a provision in the Consulting Agreement defining an impermissible “indirect” holding of Chromocell shares which, she concluded, “must not be operationally inconsistent with the Agreement’s recorded equity interest,” adding that “the requested transfer would contradict the Agreement’s stated equity ownership, no matter the source of the transfer.”
In short, Justice Masley saw no way around the merger clause and the parol evidence rule, writing:
Additionally, by executing the Agreement, Dr. Blobel sought to be bound by each Agreement’s merger clause, which expressly repudiated all prior agreements. Dr. Blobel’s argument requires the court to accept that, despite agreeing to reject all prior agreements on the issue, Dr. Blobel nevertheless believed the Allocation Agreement was exempt from these clauses’ controlling reach, even if it misrepresents the Agreements’ stated terms. This the court declines to do, particularly, where enforcing the Allocation Agreement would uproot each written Agreement’s merger clause and recital of Dr. Blobel’s 3.9% equity ownership. As this is an integrated agreement, the court applies the parol evidence rule with full force.
Justice Masley’s decision also vanquished each of Dr. Blobel’s remaining quasi-contract claims, primarily invoking the principle that, where there is a valid and enforceable written contract governing a disputed subject matter, recovery in quasi-contract is precluded for events arising out of the same subject matter.
Closing Thoughts. On a pre-answer, pre-discovery motion to dismiss such as occurred here, the court had no occasion to determine the truth or falsity of Dr. Blobel’s alleged oral agreement to grant him additional shares once HHMI revised its policy. If we assume the truth of his allegation, does the outcome seem harsh? Here’s how a judge on Montana’s Supreme Court answered the question in sizing up the parol evidence rule in Baker v Bailey, 240 Mont. 139 [Mo. 1989]:
As this case illustrates, application of the rule can work to create harsh results. However, the policies behind the rule compel its consistent, uniform application. Commercial stability requires that parties to a contract may rely upon its express terms without worrying that the law will allow the other party to change the terms of the agreement at a later date.
Will there be an appeal of Justice Masley’s decision? I have no direct knowledge, but I’m guessing there will be an appeal based on the fact that Dr. Blobel’s counsel filed a motion earlier this month for an order permitting the substitution of his estate’s executor as the named plaintiff.