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Case 1:07-cv-05860

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IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

INTEGRATED GENOMICS, INC.,

)

)

Plaintiff,

)

)

vs.

)

Case No. 07 C 5860

)

TILLMAN GERNGROSS,

)

)

Defendant.

)

FINDINGS OF FACT AND CONCLUSIONS OF LAW

MATTHEW F. KENNELLY, District Judge:

Integrated Genomics, Inc., has sued Tillman Gerngross, asserting a claim of

fraudulent misrepresentation.

1 The Court held a bench trial on September 23 and 24,

2009. This constitutes the Court’s findings of fact and conclusions of law pursuant to

Federal Rule of Civil Procedure 52(a).

Facts

Integrated Genomics is a purveyor of genomic sequencing data for industrial

microorganisms–microorganisms used to develop products. Genomic sequencing

refers to the process of mapping the genome of a particular organism. Integrated

Genomics provided sequencing data to both commercial and noncommercial

customers in a variety of formats. As a general rule, Integrated Genomics charged

1 The Court granted summary judgment in Gerngross’s favor on Integrated Genomics’ other claims.

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commercial customers several times more than what it charged academic customers

for the same information.

Genomic sequencing data becomes more valuable as it becomes more

complete. The relative completeness of a particular set of genomic data is referred to

as coverage. Any level of coverage has gaps in the sequence because the process

can only map out a small segment of the genome at a time. The greater the coverage,

therefore, the fewer the gaps in the sequence. Genomic sequencing data also

increases in value if it has been annotated. Annotation provides information about the

location of specific genes on the genome and what they do.

Tillman Gerngross has been a professor of bioengineering at Dartmouth College

since 1998. Gerngross also co-founded GlycoFi, Inc. The idea behind GlycoFi was to

produce for commercial applications genetically engineered organisms that express

proteins in a way similar to human cells. Gerngross also served as GlycoFi’s chief

scientific officer. GlycoFi’s founders, Gerngross and another Dartmouth professor,

arranged to have GlycoFi “incubated” at Dartmouth. In exchange for an equity stake in

the company, Dartmouth agreed to allow GlycoFi to operate in Gerngross’s lab at

Dartmouth. Dartmouth also agreed to pay for equipment and staff salaries and

benefits. GlycoFi reimbursed Dartmouth for these expenses at the end of each month.

In the spring of 2002, Gerngross contacted Integrated Genomics after learning

that it was working on sequencing the genome of the yeast Pichia pastoris. Gerngross

testified that he spoke first with Yakov Kogan, who later became involved in business

development at Integrated Genomics. Kogan does not recall speaking to Gerngross at

that time. Gerngross later negotiated with Yuri Nikolsky, then Integrated Genomics’

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vice president of business development, a deal to purchase a copy of the Pichia data

available at that time on a CD for a single payment of $5,000. Nikolsky also promised

to send Gerngross an updated version of the data the following year.

Gerngross testified that he informed Kogan that he was involved in a commercial

effort. The Court was unpersuaded by that testimony. Both Nikolsky and Kogan recall

that Gerngross was a professor at Dartmouth College, and no one at Integrated

Genomics recalls Gerngross mentioning a commercial effort.

None of Gerngross’s

communications with Integrated Genomics that survive mention anything about a

commercial venture or even about his affiliation with GlycoFi. Rather, all of those

communications referenced only Dartmouth. In dealing with Integrated Genomics,

Gerngross used his Dartmouth e-mail address. Integrated Genomics invoiced

Dartmouth, and it is fair to infer that it did so at Gerngross’s direction.

It is possible, as Gerngross’s counsel argued at trial, that Integrated Genomics

might have been able to discover through investigation of other sources that Gerngross

had an affiliation with GlycoFi. But that is less than clear. In any event, the evidence

that Gerngross’s GlycoFi affiliation could have been discovered elsewhere does not

suggest that he advised Integrated Genomics of that affiliation when he negotiated and

made the deal to purchase the Pichia data, let alone that he intended to use that data

for commercial purposes.

That is not to say that Gerngross affirmatively misrepresented anything by using

only his Dartmouth affiliation in his dealings with Integrated Genomics. He was, in fact,

a professor at Dartmouth and was using a Dartmouth laboratory staffed at least in part

by Dartmouth students and personnel, and Dartmouth was paying, at least in the first

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instance, GlycoFi’s expenses. And when Gerngross and his colleagues published the

results of research that was being conducted via GlycoFi, Gerngross acted in his

capacity as a Dartmouth professor.

That said, however, the Court finds that Gerngross did not disclose to Integrated

Genomics his affiliation with GlycoFi or his intended commercial use of the Pichia

pastoris data. Rather, his dealings left Integrated Genomics’ personnel, and would

have left any reasonable person in their position, with the belief that Gerngross was

dealing with Integrated Genomics as an academic.

As indicated earlier, Nikolsky and Gerngross agreed on a price of $5,000 for the

Pichia data in CD form. This was in the range of prices that Integrated Genomics

quoted to academic customers. Nikolsky testified that it was common in the industry at

the time to quote a higher price to commercial customers than to academic customers.

Integrated Genomics’ evidence did not clearly show, however, that it would have

charged Gerngross a higher price had he disclosed his affiliation with GlycoFi. Among

other things, there was evidence that Integrated Genomics sometimes quoted lower

“academic” rates to customers with dual academic and commercial affiliations in the

hope of getting higher-priced commercial business in the future. Nikolsky also testified

that a customer’s affiliation with an academic institution, rather than his intended use of

the data, was the decisive factor in determining whether a customer was considered an

academic or not. As noted earlier, Gerngross unquestionably was affiliated with an

academic institution.

The evidence also showed that at the time Gerngross and Nikolsky negotiated

the deal for the Pichia data, Integrated Genomics was in some financial trouble and

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was described by some of its employees as being in disarray. Overall, the evidence

indicated that Integrated Genomics’ sales practices did not follow any hard-and-fast

rules, that the company essentially would take whatever it could get for the data in

question, and that it was not particularly careful about imposing restrictions on its

customers’ use of data they purchased.

After agreeing on a price, Nikolsky sent Gerngross a draft written agreement, but

Gerngross did not sign it. (Neither party retained a copy of the draft.) Gerngross

testified that he told Nikolsky that the contract was unacceptable because he wanted to

use the data in a commercial effort. Nikolsky did not recall any such conversation, and

for the reasons stated above, the Court was unpersuaded by Gerngross’s testimony

that he disclosed his intention to use the data in a commercial venture.

After further discussions, Gerngross and Nikolsky agreed that Integrated

Genomics would give Gerngross a CD containing the data, subject only to restrictions

on publication of the data. Gerngross sent an e-mail confirming this agreement, in

which he stated,

This is to state the restrictions that apply to the data that we are obtaining from Integrated Genomics Inc. My research group at Dartmouth College is restricted to the publication of no more than 10kb of sequencing data from the Pichia genome per calendar year. This restriction is void if the genome data becomes available from a public domain at not [sic] charge.

Joint Ex. 1. The letter did not impose, and Integrated Genomics did not insist on, any

restrictions regarding commercial use of the data. Rather, the only restriction that

Integrated Genomics imposed on Gerngross concerned the extent of “publication” of

the data. Significantly, Integrated Genomics did not attempt to obtain any confirmation

that Gerngross would not use the data for commercial purposes.

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After Nikolsky faxed Gerngross an invoice for the Pichia data, Integrated

Genomics received a check from Dartmouth College for $5,000. Integrated Genomics

sent the Pichia CD to Gerngross’s Dartmouth address.

By May 2003, John Campbell, who previously led the microarray group at

Integrated Genomics, was handling business development for the company. Gerngross

called in 2003 to request an update of the Pichia data. Gerngross identified himself as

a professor at Dartmouth and said that he had an understanding at the time of his 2002

purchase of the Pichia data that Integrated Genomics would provide him with updates

free of charge. Campbell looked through the company’s records and discovered that

there was no file on Gerngross and no documentation regarding the deal.

Nevertheless, Campbell sent Gerngross an updated version of the Pichia data and did

not charge him. Campbell made no attempt to impose restrictions on Gerngross’s use

of the data and did not inquire of Gerngross whether there any restrictions were in

place. In other words, in 2003 Integrated Genomics gave Gerngross the updated

Pichia data for free and without imposing any restrictions.

Discussion

In Illinois, the elements a claim of fraudulent misrepresentation are: “(1) a false

statement of material fact (2) known or believed to be false by the party making it; (3)

intent to induce the other party to act; (4) action by the other party in justifiable reliance

on the truth of the statement; and (5) damage to the other party resulting from such

reliance.” Gerill Corp. v. Jack L. Hargrove Builders, Inc., 128 Ill. 2d 179, 193, 538

N.E.2d 530, 536 (1989) (citations omitted). The plaintiff must prove each of these

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elements by clear and convincing evidence. Linhart v. Bridgeview Creek Development,

Inc., 391 Ill. App. 3d 630, 634, 909 N.E.2d 865, 870 (2009).

Integrated Genomics contends that Gerngross misrepresented the purpose for

which he wished to acquire the Pichia data. Integrated Genomics failed to prove,

however, that Gerngross made any affirmative misrepresentation in this regard.

Gerngross identified himself as a Dartmouth professor and indicated, both in his e-mail

confirming the use restriction and otherwise, that the data would be used by his

research group at Dartmouth. Those representations were not false in and of

themselves. Gerngross was a professor at Dartmouth, the people working on GlycoFi

projects in early 2002 were Dartmouth employees and students working in Gerngross’s

lab at Dartmouth, and Gerngross published research produced by that lab under his

Dartmouth title.

Gerngross did not disclose his intention to use the Pichia pastoris data for

commercial purpose. In Illinois, however, nondisclosure of information is actionable as

fraud only “under circumstances creating a duty to speak.” See, e.g., Williams v.

Chicago Osteopathic Health Sys., 274 Ill. App. 3d 1039, 1052, 654 N.E.2d 613, 622

(1995). Such circumstances require the existence of a fiduciary or special legal

relationship between the parties. See, e.g., Magna Bank of Madison County v.

Jameson, 237 Ill. App. 3d 614, 618, 604 N.E.2d 541, 544 (1992). The burden of

proving such a relationship lies with the party asserting the fraud. Id.

Integrated Genomics has not attempted to prove the existence of a fiduciary

relationship. In addition, it has not cited, and the Court has been unable to find, any

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Illinois case indicating that a party to an ordinary commercial transaction like this one

can be held liable for fraud for failing to disclose facts that the other side might consider

pertinent. “Passive concealment of pertinent facts during a business transaction does

not constitute actionable fraud.” Ill. Cent. Gulf R. Co. v. Dep't of Local Gov't Affairs, 169

Ill. App. 3d 683, 689-90, 523 N.E.2d 1048, 1052 (1988). In short, Integrated Genomics

has not established a claim of fraud based on Gerngross’s nondisclosure of his

affiliation with GlycoFi or his intended commercial use of the Pichia pastoris data.

There is, however, a good deal of territory between affirmative misrepresentation

and simple omission, and that is where Integrated Genomics’ best case lies. As the

Illinois Appellate Court has stated, “[e]ven a technically true statement may constitute a

misrepresentation if the statement omits some qualifying material, because a half-truth

oftentimes is more misleading than an outright lie.” Williams v. Chicago Osteopathic

Health Sys., 274 Ill. App. 3d 1039, 1052, 654 N.E.2d 613, 622 (1995). See also, e.g.,

Brown v. Broadway Perryville Lumber Co., 156 Ill. App. 3d 16, 23 508 N.E.2d 1170,

1175 (1987); Kurti v. Fox Valley Radiologists, Ltd., 124 Ill. App. 3d 933, 938, 464

N.E.2d 1219, 1223 (1984).

A solid argument can be made that when Gerngross represented himself as a

Dartmouth professor and advised Integrated Genomics that the data would be used by

his research group at Dartmouth, those representations were technically true but

misleading. Integrated Genomics has failed to show by clear and convincing evidence,

however, that the undisclosed information was material or that it would have acted

differently had it known of Gerngross’s commercial affiliation. As discussed earlier,

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Integrated Genomics did not establish that it had a hard-and-fast practice at the time of

charging more to dual-affiliation customers like Gerngross or that it would have charged

him more had it been aware that the data would be used in GlycoFi’s work. In addition,

there is no evidence that Integrated Genomics asked Gerngross how he intended to

use the Pichia data. The evidence reflects that at the time in question, Integrated

Genomics was not particularly careful about such matters, which is consistent with its

failure to inquire into Gerngross’s purpose. Indeed, the limited restriction that

Integrated Genomics imposed when it sold the Pichia data to Gerngross did not restrict

him from commercial use of the data. This indicates that the possibility that an

academically-affiliated customer might also use data for commercial purposes was not

a particularly significant factor for Integrated Genomics at the time.

For these reasons, the Court concludes that Integrated Genomics has failed to

prove its fraud claim by clear and convincing evidence.

Conclusion

For the reasons stated above, the Court finds in Gerngross’s favor on Integrated

Genomics’ fraud claim, its only remaining claim. The Clerk is directed to enter

judgment in favor of the defendant and against the plaintiff.

Date: October 7, 2009

MATTHEW F. KENNELLY United States District Judge
MATTHEW F. KENNELLY
United States District Judge

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