Investors Rake DuPont Directors After $1 Billion Jury Award
WILMINGTON, Del. (CN) - DuPont's fraudulent conduct cost it $1 billion in its Roundup Ready patent dispute with Monsanto, and punitive damages could cost it another $2 billion, which is almost all of the cash DuPont carries on its balance sheet, shareholders say in a derivative complaint.
Monsanto's Roundup, or glyphosate, is an herbicide. Monsanto's genetically modified food crops, such as soybeans, are resistant to glyphosate, and are patent-protected as Roundup Ready through 2014, according to the federal complaint. DuPont subsidiary Pioneer Hi-Bred International licensed the Roundup Ready trait from Monsanto in 2002 and still sells seeds using it.
Beginning in or about 2005, Pioneer and DuPont began devoting enormous time and effort to developing a competing herbicide-resistant technology, known as Optimum GAT or 'OGAT,' the complaint states. If OGAT could be perfected, it might replace Roundup Ready, or at least allow DuPont to take away a sizeable portion of Monsanto's Roundup Ready business.
The success of this project was crucial to DuPont's agricultural business, which by 2007 was DuPont's largest segment, accounting for $6.8 billion in revenue. Between 2005 and 2007, DuPont spent almost $4 billion on research and development, much of which was devoted to the development of OGAT. The centrality of this effort to DuPont's business was clear. By about 2008, roughly 90 percent of soybean and cotton seeds carried the Roundup Ready trait, with corn seeds almost as high. DuPont's competitive disadvantage was admitted by an attorney for DuPont in 2010, who said:'Farmers will not buy soybeans without Roundup Ready in it. So, that gives Monsanto an amazing amount of leverage. A seed company can't stay in business without offering seeds with Roundup Ready in it, so if they want to stay in that business, essentially they have to do what Monsanto tells them to do.'
Simply put, Roundup Ready seeds were killing DuPont: For example, in 2001, DuPont had 40 percent share of the U.S. corn market to Monsanto's 10 percent. But by 2008, Monsanto had taken 36 percent of that market to DuPont's 30 percent, the complaint states. Frustrated in its attempt to compete, DuPont cheated, the shareholders say: It stacked its failed OGAT trait with the Roundup Ready trait, knowing it was violating Monsanto's patent. That resulted in the $1 billion jury verdict, with punitive damages still to come.
The complaint states: On September 23, 2008, DuPont named defendant Ellen J. Kullman 'Kullman' as its new Chief Executive Officer, effective January 2009 and as President and a director immediately. Kullman had been with DuPont since 1988, having been a member of DuPont's Office of the Chief Executive and was under severe pressure to affect a turnaround. When Kullman was named CEO, DuPont shares were trading at $42 per share; five months into her tenure, in March 2009, the stock price had fallen as low as $16 per share.
One way of reviving DuPont's fortune would be for it to employ OGAT as an alternative to Roundup Ready. For years, DuPont had been promising investors that OGAT was on target to be commercialized by 2009. However, in reality, DuPont knew that OGAT was a failure as stand-alone product. In fact, in 2008, DuPont's former CEO, Charles Holliday, Jr., called Monsanto's CEO, Hugh Grant, to suggest the two companies collaborate [on] technologies, including a project to improve soybean oil. During that conversation Holliday admitted his company DuPont was falling behind in the race to engineer a better soybean. As a jury was later to find, DuPont began as early as 2008 to engage in efforts to create an 'alternative' to its failed program to develop OGAT as a stand-alone product by combining or 'stacking' OGAT with Roundup Ready. Kullman's endorsement of this process was part of DuPont's effort at this time to create an image of an innovative, growing company.
Monsanto was carefully monitoring DuPont's actions, as Monsanto did not believe it had granted Pioneer any such stacking rights under its license, and such action would be a patent infringement. Although Monsanto initiated a complaint process with Pioneer as early as December 2008, evidence mounted in early 2009 that DuPont and Pioneer were moving full speed ahead on their stacking plans. Indeed, Pioneer at a March 2009 investor conference even described DuPont's potential new product as 'Optimum GAT/RR.'
Monsanto filed suit against DuPont and Pioneer on May 4, 2009 claiming breach of contract and patent infringement ('the Missouri Monsanto litigation'). The case proceeded to a jury trial. On August 1, 2012, the jury returned a $1 billion compensatory damages verdict against the defendants, finding willful infringement. Punitive damages, yet to be determined, may bring the award to $3 billion, which is almost all of the cash DuPont carries on its balance sheet.
In the shareholder derivative complaint, lead plaintiff Robert Zomolosky claims DuPont's Board of Directors allowed DuPont to act in bad faith and to suffer substantial damages as a result of its bad acts. DuPont could have avoided the $1 billion judgment by simple honesty, the complaint states: During the trial, Monsanto's attorneys told the jury, that DuPont had been trying to come up with its own system to rival Roundup Ready and began touting its Optimum GAT system, but then acknowledged it was failing and posed an 'unacceptable risk' to farmers. Monsanto CEO Hugh Grant told the jury that DuPont approached the Company, asking for the ability to combine or 'stack' the GAT technology with the Roundup Ready technology. Monsanto said it would give Pioneer full rights to the technology for a lump sum of $1.5 billion, but DuPont declined the offer.
The court sealed several of its own orders before trial, to avoid tainting the jury pool. The documents that were filed under seal included: a June 6, 2012 Order finding that DuPont had 'breached their license agreement with Monsanto by stacking OGAT with RR' (Ex. B); another order dated June 6, 2012 finding that DuPont's contentions that the license permitted it to research and develop the same stack was 'not tenable', 'illogical' and 'nonsensical' and that Monsanto was not required to provide regulatory letters of access for the stacked product (Ex. C) ; a June 29, 2012 order finding that DuPont stacking of OGAT with RR was not otherwise permitted under the safe harbor provision of the Hatch-Waxman Act (Ex.D); and the District Court's December 21, 2011 Sanctions Order (the 'Sanctions Order'), according to the complaint.
It continues: On Aug. 1, 2012, an eight-person jury deliberated for less than an hour and returned its verdict in the patent trial finding Monsanto's patent was valid and willfully infringed by DuPont and awarded damages to Monsanto of $1 billion.DuPont responded by issuing a statement that Monsanto's Roundup Ready patent is invalid and unenforceable, and that Monsanto intentionally deceived the United States Patent and Trademark Office on several occasions as it sought patent protection.
That failed to impress the court, which in November 2012 issued a memorandum and order unsealing certain documents which included the District Court's December 21, 2011 Sanctions Order ('Sanctions Order') (Ex. A), the complaint states. In the Sanctions Order, the Missouri District Court determined, among other things, that during the period from 2002 through 2008, DuPont and its inside and outside counsel knew that the 2002 License Agreements with Monsanto prohibited DuPont from stacking and commercializing glyphosate-tolerant traits and that DuPont was infringing on Monsanto's patent.
The Sanctions Order held that DuPont and its inside and outside lawyers had perpetrated a fraud on the District Court and the public by making false statements regarding the terms of the 2002 License Agreements. The District Court held that:
'The Court finds that this email, Monsanto's exhibit O, conclusively shows that Defendants have perpetrated a fraud against the Court by stating to the Court, repeatedly, that they always believed that under the license agreements, they always had the right to stack RR traits with OGAT traits. Defendants have perpetuated a fraud upon the Court by knowingly making false factually statements to the Court in order to further their argument for contract reformation. This conduct constitutes an abuse of the judicial process and is sanctionable.'
The Sanctions Order further found that DuPont's 'fight-to-the-death' mentality had clouded Defendants' judgment and that notwithstanding the 'clear and unmistakable content of the documents that clearly and convincingly show that Defendants knew of the 2002 [L]icense [A]greements stacking restrictions, they nevertheless persisted to this day, in advancing false claims that they always believed that they had the right to stack RR and OGAT traits and commercialize this stack. They claimed excuse is not plausible. Defendants have knowingly committed a fraud upon the Court.'
The Sanctions Order found that DuPont showed no remorse for its wrongdoing.
Confronted with this credible evidence, Defendants failed to make good faith efforts to prevent or remedy the fraud being committed on the Court and the public, and, instead, engaged in a cover-up. Following the sanctions ruling, the Board of Directors increased Kullman's salary. (Brackets as in complaint.) The shareholders say the DuPont Board of Directors violated their fiduciary duties and exposed the company to material civil liability and court sanctions.They seek damages, with interest, costs, and want DuPont ordered to improve its corporate governance.Shareholders' lead counsel is Blake Bennett with Cooch and Taylor.