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Lab. Corp. of Am. Holdings v. Kearns

United States District Court, M.D. North Carolina

January 30, 2015

LABORATORY CORPORATION OF AMERICA HOLDINGS, Plaintiff,
v.
WILLIAM G. KEARNS, Defendant

For LABORATORY CORPORATION OF AMERICA HOLDINGS, Plaintiff, Counter Defendant: JENNIFER H. DUPUY, LEAD ATTORNEY, PATRICIA T. BARTIS, PARKER POE ADAMS & BERNSTEIN, RALEIGH, NC; ROBERT I. STEINER, KELLEY DRYE & WARREN LLP, NEW YORK, NY.

For WILLIAM G. KEARNS, Defendant, Counter Claimant: MARK VASCO, LEAD ATTORNEY, MARGARET K. THIES, BRYAN CAVE, LLP, CHARLOTTE, NC; MAURY S. EPNER, SELZER GURVITCH, ATTORNEYS AT LAW, BETHESDA, MD.

MEMORANDUM OPINION AND ORDER OF PRELIMINARY INJUNCTION

Thomas D. Schroeder, United States District Judge.

Before the court is the motion of Plaintiff Laboratory Corporation (" LabCorp" ) to preliminarily enjoin its former employee, Defendant William G. Kearns, Ph.D., from competing with it in alleged violation of his contract of employment. (Docs. 3, 17.) The parties have submitted an evidentiary record, and the court held a hearing on the motion on January 12, 2015. For the reasons set forth herein, LabCorp's motion will be granted in part and denied in part.

I. BACKGROUND

A. Factual Background

Pursuant to Rule 65(d)(1)(A) of the Federal Rules of Civil Procedure, the court finds the following facts for purposes of the present motion.

Kearns is an associate professor in the Department of Obstetrics and Gynecology at the Johns Hopkins School of Medicine in Baltimore, Maryland. (Doc. 22-1 (Kearns Decl.) ¶ 1.) In 2002, he and other partners formed the Shady Grove Center for Preimplantation Genetics, LLC (" Shady Grove Center" or " the Center" ). (Id. ¶ 5.) Kearns owned approximately seven percent of the business and served as the Center's director. (Id.)

Around a year after forming the company, Kearns met Richard Leach, Ph.D. (Id. ¶ 6.) The two began collaborating on a method to increase the likelihood of successful pregnancies for women undergoing in vitro fertilization. (Id. ¶ ¶ 7-11.) By 2006, the two men believed they had developed a patentable process for achieving this goal, so they set out that process in a provisional patent application filed with the United States Patent and Trademark Office on or about September 26, 2006. (Id. ¶ 11.) The process aimed to improve preimplantation genetic diagnosis (" PGD" ) by a method of testing the cells of newly formed embryos for genetic abnormalities. (Id. ¶ ¶ 12-14.) To this day, Kearns still uses this process, generally referred to as " microarray" testing, though he sometimes uses another equally effective method generally known as " next generation sequencing." (Id. ¶ ¶ 15-16.)

In 2007, LabCorp approached the Shady Grove Center about acquiring the company. (Id. ¶ 18.) LabCorp provides a suite of reproductive services, including PGD testing. (Doc. 5 (Schmalz Decl.) ¶ ¶ 3-6.) Like the Shady Grove Center, LabCorp provides PGD services to fertility clinics. (Id. ¶ ¶ 5-6.) LabCorp was interested in acquiring the Shady Grove Center, in part, to acquire its goodwill and customer relationships. (Id. ¶ 12.)

In negotiations to purchase the Center, LabCorp indicated that it would only be interested in the acquisition if Kearns stayed on as director. (Kearns Decl. ¶ 19.) LabCorp sought to have Kearns sign an employment contract with restrictive covenants. (Id.) Initially, Kearns refused because the covenants would have prohibited him from continuing to pursue his patent. (Id.) Ultimately, the parties negotiated around this obstacle. Consequently, in July 2007, LabCorp entered into an agreement (the " Purchase Agreement" ) to buy substantially all of the assets of the Shady Grove Center.[1] (Id. ¶ 22; Schmalz Decl. ¶ 11; Doc. 22-1 Ex. 1B.)

Also in July 2007, and effective as of the Purchase Agreement, Labcorp and Kearns executed an Employment Agreement (" Employment Agreement" ), which retained Kearns as Director, Pre-Implantation Genetics Services of LabCorp at an annual salary of $150,000.00. (Doc. 5-1 ¶ 1.) Relevant here, the Employment Agreement contained the following covenants:

9. Restrictive Covenants.

(a) . . . during the term of this Contract and for a period of one (1) year following the termination or expiration of this Contract, Employee will not, without the prior written consent of the Corporation:
(i) directly or indirectly through a subordinate, co-worker, peer, or any other person or entity contact, solicit or communicate with a customer or potential customer of Corporation or its subsidiary or affiliated companies with whom Employee has had contact while employed at Corporation or its subsidiary and affiliated companies for the purpose of (x) offering, selling, licensing or providing the same or substantially similar assays, commercial medical testing or anatomical pathology services offered and/or provided to such customer or potential customer by the Corporation or its subsidiary and affiliated companies or (y) influencing said customer's or potential customer's decision on whether to purchase or use such assays, commercial medical testing or anatomical pathology services offered by the Corporation or its subsidiary and affiliated companies . . . .
* * *
(iii) directly or indirectly own, invest in, consult for, be employed by or otherwise engaged by any person, trade or business either (x) involved in the research and development, licensing, production, distribution, or sale of preimplantation genetic diagnosis and testing that directly competes with the Corporation or any of its subsidiary and affiliated companies in the same geographic markets serviced by them or (y) supplies, services, advises or consults with a person, trade or business involved in the research and development, licensing, production, distribution, or sale of preimplantation genetic diagnosis and testing that directly competes with the Corporation or any of its subsidiary or affiliated companies in the same geographic markets serviced by them, except that nothing in this Contract shall prohibit Employee from holding not more than three [sic] (3%) of the outstanding shares of a publicly traded company whether or not engaged in business activities that compete with the business activities of the Corporation and its subsidiary and affiliated companies.

(Doc. 5-1 ¶ ¶ 9(a)(i), (iii).)

The Employment Agreement further provided that these restrictions " shall not apply to Employee's actions, efforts or business pursuits with respect to the Patent referenced in Paragraph 8(b)." (Id. ¶ 9(b).)[2] Paragraph 8(b), in turn, described the patent as

the provisional patent application for " Method for In Vitro Fertilization (IVF) and Genetic Testing of Human Embryos for Chromosome Abnormalities, Single Gene Mutations, Segregating genetic Disorders in Families, and Mitochondrial Mutations" filed Septembar [sic] 22, 2006; applicants: William G. Kearns & Richard A Leach; Serial No. to be assigned (" Patent" )."

(Id. ¶ 8(b).)

Beginning around July 2007, Kearns ran LabCorp's PGD testing lab, doing the same work he had previously performed for the Shady Grove Center, including the process for PGD testing described in his provisional patent application. (Kearns Decl. ¶ 26.) His responsibilities and duties also included sales and marketing of PGD services, as well as research and development of new genetic tests for LabCorp. (Schmalz Decl. ¶ 24.) Such duties involved Kearns' meeting with various PGD customers for LabCorp. (Kearns Dep. at 109, Doc. 22-2.[3]) Kearns also attended LabCorp meetings concerning formulation and implementation of sales strategies, including pricing strategies and analysis of competitive threats. (Id. ¶ 26; Kearns Dep. at 91-93, Doc. 20-1.) In this regard, he was involved in setting the pricing of PGD services for LabCorp. (Kearns Dep. at 114-17, Doc. 22-2.) Kearns' LabCorp team provided services to between thirty and forty fertility clinics. (Schmalz Decl. ¶ 25; Kearns Dep. at 91-93, Doc. 20-1.)

There are many competitors in the PGD testing industry, and LabCorp relies on the relationships it develops with customers to maintain and expand its clientele of fertility clinics. (Kearns Dep. at 93, Doc. 20-1; Schmalz Decl. ¶ 7.) Similarly, LabCorp's sales strategies and plans are confidential information shared only with employees who require the information to perform their jobs. (Schmalz Decl. ¶ 8.) Kearns knew this information and developed relationships with LabCorp's customers. (Id. ¶ ¶ 54-56.)

On September 24, 2007, Kearns and Leach filed a permanent application for a patent based on their PGD microarray testing process. (Kearns Decl. ¶ 27.) For the next several years, during his tenure at LabCorp, Kearns worked with Leach in an attempt to secure a patent based on this permanent application. (Id. ¶ 28.) In 2012, however, the two decided to abandon pursuit of the patent, determining that the expense was too great to bear. (Id. ¶ 29.) In July 2012, the United States Patent and Trademark Office issued a Notice of Final Rejection of the patent application (Doc. 1-3), and in March 2013 deemed it abandoned. (Doc. 1-4.)

In January 2014, Kearns was invited to breakfast by two of his supervisors, Michael Davis and Peter Paperhausen. (Kearns Decl. ¶ ¶ 30-31.) They told him that LabCorp had decided to close the PGD lab in May 2014 and to contract with a lab in New Jersey for all PGD services. (Id. ¶ ¶ 31, 33.) The contract lab would be performing the actual PGD testing, but Kearns would be the primary contact for LabCorp's customers and patients and overseer for the interpretation and reporting of the contract lab's test results. (Schmalz Decl. ¶ 28.) As a result, Kearns would be working from home. (Kearns Decl. ¶ 33.) Kearns was very upset by the decision and considered resigning. (Id. ¶ ¶ 31-32.) His new supervisor, Jeffrey Schmalz, asked Kearns to stay with LabCorp to manage the transition. (Id. ¶ 32.) Kearns felt obliged to the fertilization clinics and their patients to ensure a successful transition. (Id.)

LabCorp's decision left Kearns without a lab to continue his research and to train his medical school students. (Id.) Therefore, in April 2014, he formed a limited liability company called AdvaGenix and a laboratory of the same name, which would provide a place to continue his research and teaching. (Id.) AdvaGenix is wholly owned by William Kearns and Laura Kearns as joint tenants with right of survivorship. (Doc. 5-2 at 14.) AdvaGenix's operating agreement states that its business purposes include " (i) provid[ing] genetic services for in vitro fertilization clinics and to do all things related thereto; [and] (ii) provid[ing] genetic services for any fetus or individual requiring genetic testing." (Id. at 1-2.)

Kearns told Schmalz that he was forming the lab. (Kearns Decl. ¶ 33.) He did not tell Schmalz that the lab would serve a commercial purpose, however. (Kearns Dep. at 195, Doc. 22-2.) At this point, Kearns was not using the lab to undertake commercial PGD testing of any kind, whether for LabCorp's clients or anyone else, nor was he soliciting LabCorp's clients for work. (Kearns Decl. ¶ 34.) Kearns believed, however, that under the patent carve-out to his restrictive covenants, he could have immediately begun competing against LabCorp. (Id.)

In May 2014, LabCorp asked Kearns to amend his Employment Agreement. (Kearns. Decl. ¶ 35.) On May 12, 2014, he and LabCorp executed an amendment which, among other things, changed his title to " Technical Director and Business Development for Pre-Implantation Genetics" and increased his salary $190,000.00, with bonus opportunities; however, the amendment did not change the restrictive covenants.[4] (Id. ¶ ¶ 36-37; Doc. 5-1.)

Kearns began managing the transition to the contract lab for LabCorp, calling and visiting clinics to convince them that they would receive the same quality of service from the contract lab. (Kearns Decl. ¶ 35.) However, the transition was not without wrinkles. In June 2014, the contract lab refused to test certain PGD samples submitted on the grounds that the saline solution in the LabCorp-provided kits made it difficult to run the necessary tests. (Id. ¶ 39.) Kearns brought the problem to Schmalz's attention. (Id.) Schmalz asked Kearns what should be done to fix the problem. (Id. ¶ 40.) Kearns told Schmalz that he could run the PGD testing in his own lab, the one he had told Schmalz about previously. (Id.) Schmalz directed Kearns to run the test in his own lab, for this case and the twelve problematic cases like it. (Id.; Kearns Dep. at 197, Doc. 22-2.) Kearns did so but did not charge LabCorp for the work. (Kearns Dep. at 201, Doc. 22-2.)

During this exchange, Kearns did not explicitly tell Schmalz that his lab was capable of commercially running PGD testing. But, to be legally permitted to sign these clinical case reports, Kearns' lab had to be certified and licensed for diagnostic work, which meant that the lab was not purely for research. (Kearns Decl. ¶ 40; Kearns Dep. at 197-98, Doc. 22-2.) Therefore, Schmalz knew that Kearns' new lab was capable of providing commercial PGD services.

Later, in the summer of 2014, several clinics complained to Kearns about LabCorp's contract lab, finding it incapable of undertaking or unwilling to undertake certain cases. (Kearns Decl. ¶ ¶ 41-42.) Some of LabCorp's clients abandoned LabCorp and asked Kearns to perform the tests in his AdvaGenix lab. (Id. ¶ 42.)[5] Although Kearns may have made some effort to persuade the clinics to send their cases to LabCorp, he ultimately performed many of these cases for about ten different clinics throughout the summer and fall of 2014, for a total of about 100 cases by October 28. (Id. ¶ 42; Doc. 20-2 at 79-104.)[6]

In October 2014, one of LabCorp's customers told a LabCorp employee that Kearns had visited the customer on his own behalf, not LabCorp's, and had informed the customer that Kearns was forming his own lab for PGD testing and would soon be resigning from LabCorp. (Schmalz Decl. ¶ 29; Kearns Dep. at 146-48, Doc. 20-1.)[7] LabCorp commenced an investigation and learned that Kearns had developed a new business entity called AdvaGenix. (Schmalz Decl. ¶ ¶ 31-33.)

Schmalz invited Kearns to a meeting on October 28, 2014, that Schmalz sad would concern budgeting and planning. (Kearns Decl. ¶ 45; Schmalz Decl. ¶ 34.) In fact, the meeting was arranged to discuss Kearns' formation of AdvaGenix. (Kearns Decl. ¶ 45; Schmalz Decl. ¶ 35.) At the meeting, Schmalz accused Kearns of hiding his company from LabCorp. (Kearns Decl. ¶ 45.) Kearns told Schmalz that he already told him about the lab twice before. (Id.) Schmalz told Kearns that the restrictive covenants prohibited Kearns from running this lab. (Id. ¶ 47.) Kearns claimed that he was permitted to do so under the Employment Agreement's patent carve-out. (Id.) Kearns was placed on administrative leave and was required to turn over his LabCorp cell phone and laptop. (Id.; Schmalz Decl. ¶ 39.) Shortly thereafter, on November 17, 2014, LabCorp fired him for cause. (Kearns Decl. ¶ 49; Schmalz Decl. ¶ 43.)

On the day of his termination, Kearns sent an email to various recipients describing services that his AdvaGenix lab would be offering -- services which LabCorp also offers. (Schmalz Decl. ¶ ¶ 44-45.) After Kearns was terminated, one of LabCorp's customers sent LabCorp an email explaining that it had " elected to continue [its] care with Dr. Kearns at his new practice." (Id. ¶ 52; Doc. 5-6.)

By the time of his October 28 meeting, Kearns had performed PGD testing on around 100 cases for customers who had been clients of LabCorp but had left LabCorp during the transition because the contract lab allegedly could not or would not run some of their cases. (Kearns Dep. at 138, 179, Doc. 20-1; see Doc. 20-2 at 79-104.) For the period from July 5, ...


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