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As Affy Nears Settlement with Shareholders, Navigenics is Sued for Using its Chips for Genotyping Service

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This story has been updated from a previous version to include information about the new suit against Navigenics.

Affymetrix is preparing to settle with shareholders who accuse current and former officials of backdating stock-option grants.

Meantime, the Massachusetts Institute of Technology and E8 Pharmaceuticals have filed a patent-infringement suit against direct-to-consumer genetics firm Navigenics for using the Affy GeneChip platform for genotyping services. The suit is based on IP at the heart of a suit that E8 and MIT filed against Affy last year.

In the first case, the firm entered into a stipulation of settlement on April 29 that set the terms to end the nearly three-year-old shareholder derivative litigation, Affy said in a filing with the US Securities and Exchange Commission last week.

On May 6, the US District Court for the Northern District of California preliminarily approved the settlement and scheduled a hearing for June 29, the company said.

According to court documents obtained by BioArray News, the stipulated settlement calls for Affy to cancel more than 700,000 stock options held by Affymetrix’s officers; to implement a variety of corporate governance measures related to director independence, officer and director compensation, board membership and election procedures, stock option-granting procedures, and accounting procedures; and to pay $3.5 million in attorney’s fees and expenses.

The suit, known as Horwich vs. Fodor and In re Affymetrix Derivative Litigation, is the consolidation of two complaints filed in 2006 against former and current Affy officials (see BAN 11/21/2006).

The first suit, filed Sept. 12, 2006, accused Affy and more than a dozen of its current and former officials of backdating grants of stock options; taking tax deductions based on those stock options; and making false statements related to the granting of those options.

The second suit, filed the following day, accused 12 Affy officials of diverting "hundreds of millions of dollars of corporate assets to themselves via the manipulation of grant dates associated with hundreds of thousands of stock options granted to Affymetrix insiders.”

Affy and the shareholders involved in the suit have been working on a settlement since at least January, when court documents showed the two parties to be in mediation (see BAN 1/27/2009).

According to the April 29 stipulation agreement, the plaintiffs in the case continue to assert that Affy officials backdated grants, while the defendants continue to deny any wrongdoing.

The two parties agreed to settle the case, though, because the plaintiffs "acknowledged the expense and length of continued proceedings" necessary to prosecute the case through trial and possible appeals. Both the plaintiffs and the defendants determined instead that the settlement was in the "best interests" of the company and its shareholders, the document states.

The stipulation itself calls for all unexercised stock option grants to Affy officers dated between July 1, 1999, and Oct. 2, 2000 — 729,000 shares in total — to be cancelled once the settlement becomes final.

Affy's board of directors is also expected to adopt a series of corporate governance reforms. The manner in which stock options and stock awards are granted will be revised to eliminate opportunities for possible backdating of stock option grants in the future. The stipulation also states that the majority of the board of directors should be "independent directors" with no financial ties to the company.

The proposed governance reforms also call for the position of CEO and chairman of the board to be held by different individuals. When the suit was filed, the CEO and chairman positions were both held by Stephen Fodor. In 2007, though, Affy hired Kevin King as president, who became president and CEO earlier this year. Fodor remains company chairman (see BAN 10/28/2008).

According to the document, all proposed reforms in the stipulation will only take effect once the settlement becomes final.

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Navigenics Sued

In their suit against Navigenics, MIT and E8 Pharmaceuticals allege that the consumer genomics shop infringed a genotyping patent that was issued to MIT and licensed to E8.

The suit is the second that MIT and E8 have filed regarding US Patent No. 6,703,228, "Methods and products related to genotyping and DNA analysis." Issued in 2004, the IP covers the use of SNPs to perform high-throughput genome scans.

Last July, MIT and E8 sued Affymetrix in the US District Court for the District of Massachusetts, claiming that Affy is infringing the '228 patent through the "use, manufacture, and sale of GeneChip products and services … as well as Affymetrix’s inducement and contribution to its customers’ use of the pioneering technology claimed in the '228 patent" (see BAN 7/8/2008).

The new suit, which was filed last week in the same US District Court, claims that Navigenics "has directly infringed the '228 patent by providing, selling and offering to sell, on a nationwide basis, genetic counseling services that use certain GeneChip products manufactured by Affymetrix," including, but not limited to, the company's 6.0 Array and associated reagents, "in the patented methods claimed in the '228 patent."

Specifically, the suit notes that because Navigenics has purchased Affy's clinical testing services business, the firm "has taken over infringing activities that were previously performed by Affymetrix and has continued to provide, sell and offer to sell services that directly infringe the '228 patent." Navigenics acquired Affy's Clinical Laboratory Improvement Act-compliant lab earlier this year (see BAN 3/17/2009).

MIT and E8 are asking the court to find that Navigenics willfully infringes the '228 patent, and that it award damages three times the amount assessed. It also seeks "an ongoing royalty sufficient to compensate adequately for Navigenics’s ongoing infringement or … a permanent injunction prohibiting Navigenics from continued unlicensed infringement."

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