ACS Versus Leadscope - Leadscope Tells Its Story in Court Document

November 04, 2010

The continuing legal battle between ACS and Leadscope is more than just a longwinded courtroom drama. The documents this case is forcing into the public record raise serious questions about the behavior of ACS, the world's largest scientific organization, and Chemical Abstracts Service (CAS), its largest source of revenue and a giant in the world of scientific informatics.

An alert reader recently pointed me to a Memorandum in response filed by Leadscope with the Ohio Supreme Court disputing the claims made by ACS in their filing. The allegations made in this brief should give pause to anyone who supports the ACS financially or through volunteer effort, particularly in light of multiple court rulings upholding the substance of the case made by Leadscope.

Unfortunately, no scientific news organization I'm aware of has decided to tell this part of the story, so it falls to yours truly, a mere "freelance" blogger with no credentials, to use the "megaphone of the internet" to raise awareness about this serious issue.

What follows is a verbatim excerpt taken from Leadscope's memorandum of response filed on August 30, 2010:

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Three Dedicated Scientists Leave Chemical Abstracts to Start Their Own Business

On November 1, 1997, three scientists left Chemical Abstracts Service (CAS), a division of ACS, to start their own business in Columbus, Ohio. Paul E. Blower, Jr., a disabled Vietnam veteran with a Ph.D. in chemistry, had worked at CAS since 1977. Wayne Johnson, a computer scientist with a Master's degree in artificial intelligence, joined CAS in 1989. Glenn Myatt received his Ph.D. in chemoinformatics (the application of computers to chemistry) and began working for CAS in 1995. In leaving CAS, the three scientists sought to design a new software product to help the pharmaceutical industry develop new drugs to treat and cure diseases.

The Three Scientists Start Leadscope and Develop a New Software Product

The three scientists formed a corporation and named it Leadscope, Inc. They worked without pay for 14 months because they loved their work. Dr. Blower lived on a small Army disability pension and a $13,000 annual pension he had eamed from 20 years of service to CAS. Dr. Myatt had modest savings of $15,000 to $30,000. And Mr. Johnson struggled to support his wife and five children because "the risks seemed small ... and the opportunity was large." (Johnson Tr. 3212-13.)3

After almost two years, the three scientists had created a new software product that met a critical need in pharmaceutical research. Existing technologies allowed chemists to test hundreds of chemicals for drug efficacy, but chemists had no tool to organize the results. (Myatt Tr. 2618.) Leadscope provided that tool through "novel computer software linking chemical and biological data that allows medicinal chemists to visualize and interactively explore large sets of chemical compounds, their properties, and biological activities." (D29a, at 2.)

Leadscope Gains Recognition in Ohio and in the Scientific Community

By the fall of 2001, Leadscope had launched its flagship product. (Myatt Tr. 2725-26.) At that time, business "was going very [] well," and Leadscope began "to sign up [new] customers." (Id.) Dr. Myatt recounted: "...up to that point, it was an awful lot of work we put into that, but we were finally seeing things happening. It was really going great." (Id. at 2726.)

Leadscope began to enjoy acclaim as a successful, emerging Central Ohio technology company. Leadscope's founders noted the respect their company was earning as the "poster child for the high-tech community in Columbus." (Id. at 2728.) Then-Governor Robert Taft even mentioned Leadscope in his 2002 State of the State Address and visited Leadscope in February 2002. (See 0. Smith Tr. 3606-07; D318 (article noting that Leadscope "has nailed down contracts with eight of the 10 major pharmaceutical companies").)

In April 2002, Leadscope was poised to receive its second round of venture capital, an investment that would ensure the company's growth and progress. It appeared that its founders' hard work was about to pay off. But Robert Massie had other ideas.

ACS Targets the Three Scientists and Leadscope Because They Are Competitors

ACS is the world's largest scientific organization, with more than 160,000 members. In 1992, CAS (ACS's largest operating unit) was struggling financially and ACS brought in Robert Massie as CAS president with the charge of making it profitable. Some of Mr. Massie's key strategies included litigation and the threat of litigation. For example, he sued Google for unfair competition and threatened to sue the National Institutes of Health when it provided the public free Internet access to drug information. Mr. Massie's efforts were successful, and CAS grew from "dire" financial straits in 1992 to annual revenues of $260 million in 2006.

As Leadscope started to take off, Mr. Massie took notice. He and his senior management team tracked Leadscope's activities, and in May 1999 they formed an "action plan" for Leadscope. For the next three years, however, ACS made no complaint against Leadscope. Mr. Massie waited for the opportune time to strike. As ACS bided its time, it closely monitored Leadscope's finances. Mr. Massie told his senior management that "Leadscope was going through its money," that Leadscope was "needing financing to continue on" (Swann Tr. 3763), and that "Leadscope was running out of money." (Roche Tr. 2304.)

In November 2001, Mr. Massie became infuriated when Leadscope's founders were awarded a patent for their invention. Michael Dennis, CAS' Chief Legal Counsel, testified "We wanted the patent." (Dennis Tr. 1907; see also Massie, Tr. 301 ("[T]his patent that was now a threat to us.").) ACS alerted Spotfire, a competitor of Leadscope, and tried to get Spotfire to attack Leadscope and "kill" the patent. (D5; D145; O'Korn Tr. 827.) Undeterred by Spotfire's eventual unwillingness to help ACS destroy Leadscope and its founders, Mr. Massie persevered.

In February 2002, upon learning that Governor Taft planned to visit Leadscope and publicly endorse it, Mr. Massie told his senior staff, "I'm going to call the governor on this, he shouldn't be involved with something like this." (Swann Tr. 3761.) Mr. Massie emailed the governor's office, attempting to dissuade him from visiting Leadscope. (D30.) Specifically, Mr. Massie questioned what "the CAS researchers did or did not remove from CAS in terms of code, work product, plans, etc." and cautioned "how far in their camp the Governor wishes to be perceived." (Id.) Mr. Massie also commented on Leadscope's finances, writing: "Leadscope depends on capital at this point in its development. The governor's remarks and any endorsement would be important to them." (Id.)

ACS Files Litigation in Bad Faith and Defames the Defendants

The final straw came two months later. On about April 10, 2002, Mr. Dennis of CAS received a call from Battelle Technology Fund alerting ACS to Battelle's potential investment in Leadscope. (Dennis Tr. 1925.) Mr. Dennis then called Leadscope on April 11th, threatening to bring "both [a] civil and criminal complaint" and "fast and furious publicity" if Leadscope representatives refused to meet with ACS. (Conley Tr. 4209-10, 4235; P431, at 17.) Leadscope had no choice but to comply, even though it was scheduled to close on a new infusion of venture capital on April 19th. (Id. at 4209.) When the parties met, ACS demanded the Leadscope patent, $1 million, and Leadscope's agreement to halt all sales. (D33.)

When Leadscope did not accede to its demands, ACS filed a lawsuit accusing Leadscope and its founders of civil and criminal wrongs. As the jury found at trial, ACS had absolutely no evidence to support its claim that the three scientists stole trade secrets. Perhaps the one witness who made this clearest was Robert Swann. Mr. Swann was the number two executive under Mr. Massie and had supervised the three scientists. Mr. Swarm testified that he knew of no "facts to support" the allegations in ACS's complaint, that the "allegations [we]re simply the conjecture" of Mr. Massie, and that Mr. Massie never indicated "that he had any facts to support his conjecture that Drs. Blower and Myatt and Mr. Johnson took trade secrets." (Tr. 3750-51.)

In addition to its malicious litigation, ACS defamed Leadscope and its three founders to a worldwide audience of 1,900 ACS employees and the readers of the Business First newspaper, which is based in Columbus and published worldwide on the internet. ACS argues that its defamatory statements were innocuous, but the Tenth District (as well as the jury) rejected ACS's after-the-fact characterization. The "published statements branded the Leadscope principals as morally and legally impeachable in their actions;" indeed, the jury was entitled to find that the statements "unambiguously accused co-defendants of criminal behavior and are libelous per se." (Ct. of Appeals Opinion, 9[y[ 57-58.)

ACS's Actions Destroy the Defendants, Precisely as ACS Intended

ACS's malicious conduct had the exact effects ACS intended: decimating Leadscope and professionally destroying its founders. Immediately, ACS's conduct derailed Leadscope's equity financing; Battelle chose not to proceed after reading the defamatory article in Business First. (Crocker Tr. 4542, 4531.) In the longer term, Leadscope's sales suffered tremendously. (Lucas Tr. 4728-29.) As a result of the "bad press" about Leadscope and its founders, Leadscope's business activity declined and its future clouded. (0. Smith Tr. 3627, 3601.) Before the lawsuit, Leadscope was a thriving company with 39 employees; after the lawsuit and two rounds of layoffs, it had only 13 employees. (Lucas Tr. 4739.) The cloud over Leadscope prevented it from capitalizing on as many as seven merger and acquisition opportunities. (Id. at 4746-47.)

In addition to destroying Leadscope, ACS destroyed the careers and reputations of its founders. Dr. Blower lost his job with Leadscope, and expert testimony established that he suffered $1,073,672 in lost earning capacity. (Rosen Tr. 4625.) Moreover, Dr. Blower testified:

I think it's caused a great deal of mental distress. I'm worried about my future. I'm too old to start over again. It occupies my mind a great deal of time I worry about the loss of my life savings, also my house, the effect it has on my family, things like that. (Blower Tr. 3882-83.)

Mr. Johnson deferred 25% of his salary between December 2002 and October 2005 and worried that he would "face personal bankruptcy and financial ruin." (Johnson Tr. 3277-79, 3281.) He was forced to leave Leadscope and move to Georgia, where his wife had found work. (Id. at 3281-82.) Mr. Johnson also lost $2,600,000 in earning capacity. (Rosen Tr. 4626.)

Dr. Myatt also lost his job at Leadscope and suffered diminished earning capacity of up to $2,158,000. (Rosen Tr. 4626.) He testified to his reputational damages: "Based on the publication of this lawsuit, it's been widely disseminated in the local media, you know, in newspapers in Columbus, it's in journals. It's widely known across the country that this lawsuit - these allegations have been made against me." (Myatt Tr. 2902.) ACS's defamation exacerbated the harm: "So my own professional society is accusing me of violating employment agreements and, you know, misappropriating proprietary information ... having such a prestigious organization level these allegations against me is very damaging." (Id. at 2903.)

The Verdict

In March 2008, the jury returned a verdict vindicating these three dedicated scientists and the company they founded. The jury rejected all of ACS's claims and found that ACS brought its trade secret claim in bad faith. The jury also found for the Defendants on their counterclaims and awarded Defendants damages based on the harm ACS caused to each of them:

1.) For Leadscope: $10 million in compensatory damages and $312,500 in punitive damages for defamation; $750,000 in compensatory damages and $1 million in punitive damages for unfair competition; and $750,000 in compensatory damages and $2.25 million in punitive damages for tortious interference. 2.) For Dr. Blower: $1 million in compensatory damages and $312,500 in punitive damages to Defendant Blower for defamation; and $1 million in compensatory damages and $1 million in punitive damages for unfair competition. 3.) For Mr. Johnson: $1.25 million in compensatory damages and $312,500 in punitive damages for defamation; and $1.25.million in compensatory damages and $1 million in punitive damages for unfair competition. 4.) For Dr. Myatt: $1.5 million in compensatory damages and $312,500 in punitive damages for defamation; and $1.5 million in compensatory damages and $1 million in punitive damages for unfair competition.

Several months later, the trial court denied ACS's motion for judgment notwithstanding the verdict in a 73-page opinion addressing the same objections ACS tries to raise here.

The Appeal

ACS then appealed to the Tenth District Court of Appeals. On June 15, 2010, that court unanimously affirmed the trial court's decision in a 45-five page opinion that rejected each and every assignment of error asserted by ACS, including the same objections ACS makes here.

Footnotes

3) Citations to the trial transcript include a page number for the consecutively paginated record transcript in addition to the identification of the speaker. Citations to trial exhibits include the prefix of the offering party and the exhibit number.

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More source documents from the ACS v. Leadscope case are available from the Ohio Supreme Court website.