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Court Rejects Protiva Motion to Dismiss Sirna Suit, OKs Request to Stay the Case

The US District Court for the Northern District of California last week rejected a bid by Protiva Biotherapeutics to dismiss a suit filed against it by Sirna Therapeutics alleging breach of contract and fraud.
Earlier this year, Protiva asked the court to throw out Sirna’s lawsuit because it did not include Protiva’s US subsidiary and because Sirna allegedly failed to provide sufficient evidence of Protiva’s duplicity in negotiating a drug-delivery licensing deal (see RNAi News, 9/21/2006).
However, the court said last week that the subsidiary “is not a necessary party” to the lawsuit, and that the existence of an escrow provision in the companies’ licensing arrangement does not preclude Sirna’s claim that it relied on allegedly false statements by Protiva’s management in negotiating the deal.
But the news wasn’t all bad for Protiva. The federal court also ruled that Sirna’s lawsuit should be put on hold until two related cases in the state court system are resolved.
“The issues in the federal and state court actions are substantially entangled and … there is a corresponding substantial likelihood of duplication of efforts by the … courts and a danger of inconsistent judgments,” which justifies a stay of the case, the US District Court said in a court document obtained by RNAi News.
At the heart of Sirna and Protiva’s legal battle is Protiva’s so-called SNALP drug-delivery technology, which essentially comprises a nucleic acid encapsulated by cationic and fusogenic lipids, all of which are surrounded by a polyethylene glycol coating.
Though SNALPs were originally developed to deliver protein-encoding plasmids, Protiva fine-tuned the technology — which was in-licensed from former parent firm Inex Pharmaceuticals — for use in delivering RNAi molecules such as siRNAs. As early as 2003, Protiva was looking for companies interested in licensing SNALPs for RNAi applications (see RNAi News, 11/7/2003) and eventually found a partner in Sirna.
Sirna had some success with SNALPs, publishing data in Nature Biotechnology showing that it could use the delivery technology to achieve a significant knockdown of hepatitis B virus in mice (see RNAi News, 7/29/2005, 7/29/2005). However, the companies’ relationship fell apart when Sirna sued Protiva and its management for allegedly lying about its ownership of the SNALP technology for RNAi applications (see RNAi News, 3/2/2006).
According to Sirna, the RNAi rights for the drug-delivery technology remain with Inex.
In response, Protiva filed its own suit against Sirna in the Superior Court of the State of California, County of San Francisco, charging that Sirna maintained a "hidden agenda" throughout the companies' strategic alliance to develop its own siRNA delivery technology using Protiva's proprietary technologies (see RNAi News, 3/30/2006).
Protiva also filed lawsuits in the Supreme Court of British Columbia and in the California Superior Court alleging that Inex made inappropriate statements indicating that Protiva did not own the SNALP technology in the field of RNAi, which led to the termination of its licensing deal with Sirna and a possible deal with Alynlam Pharmaceuticals (see RNAi News, 11/9/2006)
No Dismissal …
As part of its defense, Protiva asked the US District Court in September to dismiss Sirna’s original lawsuit for failing to include its US subsidiary, Protiva USA, in the litigation. According to Protiva, the unit was formed in 2000 “for the purpose of obtaining funding for Protiva product development, including products arising out of Protiva’s SNALP technology, and ultimately marketing and distributing Protiva’s products in the United States.”
By being left out of the suit, Protiva USA “risks having its claimed interest in Protiva’s intellectual property rights decided in its absence,” Protiva argued. Furthermore, while the subsidiary was not a signatory to Protiva’s deal with Sirna “it still claims an interest in the SNALP technology rights involved.”
In its order handed down last week, the District Court was unconvinced, stating, “Protiva USA does not claim any ownership interest in the intellectual property rights at issue. [Also,] that Protiva USA ultimately may benefit financially if Protiva is found to have rights in said intellectual property does not suffice to demonstrate that it has an ‘interest’ in the [legal] action.”
The court said that “Protiva’s interests are completely aligned with those of Protiva USA … and Protiva has every incentive to make the same arguments that Protiva USA would assert. Accordingly, the court finds that Protiva USA is not a necessary party [to the litigation] and will deny the defendants’ motion to dismiss” on those grounds.
The court was also unmoved by Protiva’s argument that the suit should be dismissed because Sirna failed to provide evidence supporting one of its key complaints: that Protiva misled it about its ownership of SNALPs.
In its request for dismissal, Protiva said that although “Sirna’s fraud claim alleges that it contracted with Protiva in reliance on Protiva’s misrepresentation that it had certain intellectual property licenses that it did not actually have,” this allegation is “directly contradicted by the language of the agreement between the parties” — namely, the existence of an escrow provision that called for Protiva to receive a certain amount of money upon “receipt of duly executed amendments” to Protiva’s original technology-licensing deal with Inex to establish Protiva’s ownership of SNALP IP in the RNAi field.

“The issues in the federal and state court actions are substantially entangled and … there is a corresponding substantial likelihood of duplication of efforts by the … courts and a danger of inconsistent judgments.”

Sirna responded to Protiva’s claims early last month, stating that “Protiva USA … cannot claim a bona fide interest in the subject matter of this lawsuit … [as] it does not claim any ownership interest in the intellectual property rights at issue.” Additionally, “the mere possibility that an adverse ruling against Protiva will harm Protiva USA’s purported economic interests in marketing or distributing Protiva technology [is not satisfactory] because the risk of economic harm to an absent person does not make that person necessary.”
Sirna tackled Protiva’s escrow argument by claiming that “Protiva officers and employees told Sirna representatives that Protiva held all intellectual property rights that [it] was licensing to Sirna,” and that the escrow provision existed as an “exercise in caution.”
“What was hidden from Sirna was that Inex also staked a claim to all of the RNAi technology developed by Protiva,” Sirna added, making its caution with the escrow provision “prophetic.”
The court agreed with Sirna, stating that the escrow clause reflected Sirna’s willingness to “pay an additional sum for written documentation [from Inex] of Protiva’s ownership” of the SNALP technology, and does not preclude its claim that it was misled by Protiva.
“Accordingly, the court will deny [Protiva’s] motion to dismiss the fraud claim,” the court ruled.
… But a Stay
Protiva had argued that if the Sirna suit was not dismissed it ought to be put on hold until its own lawsuits against Sirna and Inex were settled. As part of its denial of the dismissal request, the US District Court agreed that the state court proceedings should be resolved first in order to avoid piecemeal litigation.
“Piecemeal litigation occurs when different tribunals consider the same issue, thereby duplicating efforts and possibly reaching different results,” the court said in last week’s ruling.
In the litigation between Sirna, Protiva, and Inex, “courts in both the federal action and state action will be required to determine the scope of the parties’ obligations under the agreement,” the US District Court noted. “Further, all three actions include the issue of whether Protiva has obtained any rights from Inex in the … technology” at issue.
The court also considered that while Sirna’s federal suit was filed first, “nothing of substance has occurred in the … action.” By contrast, a November 2007 trial date has been set for Protiva’s suit against Sirna filed in the Superior Court of the State of California.
Because of the risk that piecemeal litigation will lead to “inconsistent judgments” combined with the fact that “the parties have placed the [Sirna] state court action on a faster track than the [District Court] action,” the District Court granted Protiva’s motion to stay the Sirna suit until the state lawsuits are decided.
The District Court also asked that Sirna and Protiva file joint statements every six months beginning June 1, 2007, to provide updates on the state suits. 

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