Univ. of N.C. at Chapel Hill v. Vesta Therapeutics, Inc.

2022 NCBC 54

• Court: North Carolina Business Court
• Decided: September 21, 2022
• Docket: 21-CVS-970
• Status: Published

Opinion

Univ. of N.C. at Chapel Hill v. Vesta Therapeutics, Inc., 2022 NCBC 54.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION ORANGE COUNTY 21 CVS 970

THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL,

Plaintiff,

v. ORDER AND OPINION ON PARTIAL MOTION TO VESTA THERAPEUTICS, INC. and DISMISS COUNTERCLAIMS PHOENIXSONGS BIOLOGICALS, INC.,

Defendants.

1. This case arises out of a contractual dispute between the University of North

Carolina at Chapel Hill (“the University”) and two biotechnology companies, Vesta

Therapeutics, Inc. (“Vesta”) and PhoenixSongs Biologicals, Inc. (“PhoenixSongs”).

The University has moved to dismiss three counterclaims asserted by Vesta and

PhoenixSongs. (ECF No. 45.) For the reasons given below, the Court GRANTS the

motion.

Robinson, Bradshaw & Hinson, P.A., by Cary B. Davis, Preetha Suresh Rini, and Brendan P. Biffany, and Marla S. Bowman of the Office of University Counsel at the University of North Carolina at Chapel Hill, for Plaintiff University of North Carolina at Chapel Hill.

Ekstrand & Ekstrand LLP, by Robert C. Ekstrand, and Christian Levine Law Group, by James W. Christian and Nicole J. Newman, and Bondurant, Mixson & Elmore LLP, by John E. Floyd, for Defendants Vesta Therapeutics, Inc. and PhoenixSongs Biologicals, Inc.

Conrad, Judge. I. BACKGROUND

2. The Court does not make findings of fact on a motion to dismiss. The

following background assumes that the allegations of the counterclaims are true.

3. For nearly 20 years, Vesta has held a license to certain stem cell technology

owned by the University. Vesta initially held an exclusive worldwide license for all

applications. In 2013, the parties agreed to divide the license rights so that Vesta

has an exclusive license for clinical applications and PhoenixSongs has an exclusive

license for nonclinical applications. (See Countercl. ¶¶ 13–15, ECF No. 36.)

4. Throughout this period, Vesta has also funded related research at the

University. This research is governed by two sponsored research agreements—one

from 2010 and the other from 2018—and associated amendments. These agreements

include provisions regarding funding amount and timing, research scope, record

keeping, handling of confidential material, publication rights, intellectual property

protections, and more. (See Countercl. ¶¶ 24–27.)

5. Disputes arose in 2019. Early that year, the University invoiced Vesta for a

funding installment of over $800,000. When Vesta did not pay, the University filed

suit for breach of the 2018 sponsored research agreement. The University also

asserted claims against Vesta and PhoenixSongs for breach of their license

agreements based on allegations that they had failed to commercialize the underlying

stem cell technology. (See generally Am. Compl. ECF No. 8.)

6. Vesta and PhoenixSongs counterclaimed. They allege, in over 200

paragraphs, that the University is at fault. In short, the University allegedly failed to perform the required research, destroyed evidence of its inactivity, disclosed

confidential information to a foreign government, improperly disposed of tissue

samples and other materials, and interfered with commercialization efforts. Based

on these allegations, Vesta and PhoenixSongs assert counterclaims for breach of the

license agreements and sponsored research agreements, breach of the implied

covenant of good faith and fair dealing, a taking of property without compensation in

violation of the North Carolina Constitution, negligent misrepresentation, and

negligence. (See, e.g., Countercl. ¶¶ 140–76, 185–207.) Vesta and PhoenixSongs have

stipulated that their other counterclaims—including fraud and misappropriation of

trade secrets—are barred by sovereign immunity and have voluntarily dismissed

them. (See Notice of Voluntary Dismissal, ECF No. 44.)

7. Pending is the University’s partial motion to dismiss. It seeks to dismiss the

constitutional and negligence-based counterclaims but not the contract-based

counterclaims. On 23 August 2022, the Court held a hearing at which all parties

were represented. The motion is ripe for determination.

II. ANALYSIS

8. The University’s motion rests on multiple grounds. It is partly a motion to

dismiss for failure to state a claim and partly a motion to dismiss based on principles

of sovereign immunity.

9. A motion to dismiss for failure to state a claim “tests the legal sufficiency of

the [counterclaim] complaint.” Isenhour v. Hutto, 350 N.C. 601, 604 (1999) (citation

and quotation marks omitted). Dismissal is proper when “(1) the complaint on its face reveals that no law supports the . . . claim; (2) the complaint on its face reveals

the absence of facts sufficient to make a good claim; or (3) the complaint discloses

some fact that necessarily defeats the . . . claim.” Corwin v. Brit. Am. Tobacco PLC,

371 N.C. 605, 615 (2018) (citation and quotation marks omitted). In deciding the

motion, the Court must treat all well-pleaded allegations as true and view the facts

and permissible inferences in the light most favorable to the nonmoving party. See,

e.g., Sykes v. Health Network Sols., Inc., 372 N.C. 326, 332 (2019). The Court may

also consider documents, such as contracts, that are the subject of the complaint. See,

e.g., Oberlin Cap., L.P. v. Slavin, 147 N.C. App. 52, 60 (2001).

10. A valid assertion of sovereign immunity is not merely a defense to liability;

it is an “absolute and unqualified” immunity from suit altogether. Guthrie v. N.C.

State Ports Auth., 307 N.C. 522, 534 (1983) (emphasis omitted). When a motion to

dismiss is based on sovereign immunity, it must be decided as a threshold

jurisdictional issue (though whether it “is a matter of personal or subject matter

jurisdiction” remains unsettled). Teachy v. Coble Dairies, Inc., 306 N.C. 324, 327–28

(1982).

A. Constitutional Counterclaim

11. The Court begins with the constitutional counterclaim. Article I, Section 19

of the North Carolina Constitution provides in part, that “[n]o person shall be taken,

imprisoned, or disseized of his freehold, liberties, or privileges, or outlawed, or exiled,

or in any manner deprived of his life, liberty, or property, but by the law of the land.”

This is better known as the Law of the Land Clause. Vesta and PhoenixSongs contend that the University, a state agency, violated the Law of the Land Clause by

taking tangible and intangible property without just compensation.

12. The University argues that Vesta and PhoenixSongs have an adequate

remedy at law—their contract counterclaims—and therefore may not assert a direct

constitutional claim. Vesta and PhoenixSongs respond that the University is “merely

fighting the facts alleged in the complaint” and that their state-law remedies are not

adequate “by reason of immunities or otherwise.” (Defs.’ Opp’n Br. 9, ECF No. 50.)

13. Direct constitutional claims against the State and its agencies are allowed

in narrow circumstances. The claimant must plead and prove “that (1) her state

constitutional rights have been violated, and (2) she lacks any sort of ‘adequate state

remedy.’ ” Taylor v. Wake Cnty., 258 N.C. App. 178, 183 (2018) (quoting Corum v.

Univ. of N.C., 330 N.C. 761, 782 (1992)); see also Deminski v. State Bd. of Educ., 377

N.C. 406, 2021-NCSC-58, ¶¶ 16–18 (2021). A remedy is adequate if it addresses the

alleged constitutional injury and gives the claimant “at least the opportunity to enter

the courthouse doors.” Craig v. New Hanover Cnty. Bd. of Educ., 363 N.C. 334, 340

(2009); see also Copper v. Denlinger, 363 N.C. 784, 789 (2010); Taylor, 258 N.C. App.

at 185.

14. It is clear from the face of their pleading that Vesta and PhoenixSongs have

an adequate remedy under state law. Their contract counterclaims address the

constitutional injury because every alleged taking is also an alleged breach of the

relevant contracts. These include the University’s disclosure of confidential

information (compare Countercl. ¶ 155, with ¶¶ 167–68); its destruction of tissue samples and specialized research mice (compare Countercl. ¶¶ 60–61, with ¶ 169);

and its decision to allow third parties to freely use a certain culture medium for

growing stem cells (compare Countercl. ¶ 156, with ¶ 170). Indeed, Vesta and

PhoenixSongs expressly allege that the University “took” the “exclusive license

rights” granted by the contracts. (Countercl. ¶ 167.) The contractual and

constitutional injuries are one and the same. See Carl v. State, 192 N.C. App. 544,

556–57 (2008) (reversing denial of motion to dismiss constitutional claim based on

alleged “taking” of contractual right).

15. The contract counterclaims also allow Vesta and PhoenixSongs to enter the

courthouse doors. When the State or an agency makes a contract, it “implicitly

consents to be sued for damages on the contract in the event it breaches the contract.”

Smith v. State, 289 N.C. 303, 424 (1976). Thus, sovereign immunity does not bar the

contract counterclaims. That sovereign immunity led Vesta and PhoenixSongs to

dismiss various tort counterclaims is immaterial.

16. To be sure, Vesta and PhoenixSongs made a conclusory allegation that

existing state-law remedies are not adequate. (See Countercl. ¶ 165.) But the Court

need not accept conclusory allegations. See, e.g., Wray v. City of Greensboro, 370 N.C.

41, 46 (2017).

17. They also contend that dismissal before discovery is premature. In some

cases, discovery may be necessary to evaluate the adequacy of a remedy. Here,

though, the pleading itself demonstrates that the counterclaims for breach of contract

are available and address the alleged constitutional injury. 18. Because Vesta and PhoenixSongs have not sufficiently alleged that they lack

an adequate remedy under state law, the Court grants the motion to dismiss their

constitutional claim.

B. Negligence & Negligent Misrepresentation

19. Next, the Court turns to the counterclaims for negligence and negligent

misrepresentation. Vesta and PhoenixSongs allege that the University breached its

duty of care by reporting false and incomplete information, failing to perform research

in the manner required by the sponsored research agreements, and disposing of tissue

samples and other materials.

20. The University moves to dismiss both counterclaims. It contends that the

State Tort Claims Act requires aggrieved parties to bring negligence-based claims

against the State or its agencies before the North Carolina Industrial Commission.

See N.C.G.S. § 143-291(a). In their opposition brief, Vesta and PhoenixSongs contend

that the Act’s grant of jurisdiction over these claims to the Industrial Commission is

not exclusive and does not divest the superior courts of jurisdiction.

21. Our appellate courts have answered this question. “Because an action in

tort against the State and its departments, institutions, and agencies is within the

exclusive and original jurisdiction of the Industrial Commission, a tort action against

the State is not within the jurisdiction of the Superior Court.” Guthrie, 307 N.C. at

539–40. Put another way, negligence-based claims against the State or its agencies

may “be pursued in the Industrial Commission but not in superior court.” Kawai Am.

Corp. v. Univ. of N.C., 152 N.C. App. 163, 167 (2002). 22. There are limited exceptions. By rule, a litigant may assert third-party

claims against a state agency in superior court “[n]otwithstanding the provisions of

the Tort Claims Act.” N.C. R. Civ. P. 14(c). Likewise, our Supreme Court has held

that “the State may be held liable as a coparty under Rule 13(g) for purposes of [a

crossclaim for] contribution and indemnification to the same extent that the State

may be held liable as a third-party defendant under Rule 14(c).” Selective Ins. Co. v.

NCNB Nat’l Bank, 324 N.C. 560, 564 (1989).

23. At the hearing, Vesta and PhoenixSongs argued for the first time that these

exceptions also apply to counterclaims. But they cite no rule, statute, or case that

supports that position. And the Rules of Civil Procedure refute it. In contrast with

Rule 14(c)’s express modification of the State Tort Claims Act for third-party claims,

Rule 13(d) stresses that “[t]hese rules shall not be construed to enlarge beyond the

limits fixed by law the right to assert counterclaims or to claim credit against the

State of North Carolina or an officer or agency thereof.” N.C. R. Civ. P. 13(d)

(emphasis added). The limits fixed by law include the State Tort Claims Act. This

means that a claimant may not assert a tort claim against the State as a counterclaim

in superior court but must instead bring that claim before the Industrial Commission.

Federal courts have construed the analogous Federal Rule of Civil Procedure 13(d) in

exactly the same way when dealing with counterclaims against the United States.

See, e.g., United States v. Davis, 2019 U.S. Dist. LEXIS 224635, at *17–18 (C.D. Ill.

July 15, 2019) (citing Fed. R. Civ. P. 13(d) and holding that counterclaims were statutorily required to be brought in Court of Federal Claims not federal district

court).

24. Accordingly, the Court grants the motion to dismiss the negligence-based

claims. Having dismissed these claims on jurisdictional grounds, the Court need not

and does not decide whether they are barred by the economic loss rule, as the

University also contends.

III. CONCLUSION

25. For all these reasons, the Court GRANTS the University’s motion to

dismiss. The counterclaim for violations of the North Carolina Constitution is

DISMISSED with prejudice. The counterclaims for negligence and negligent

misrepresentation are DISMISSED without prejudice.

SO ORDERED, this the 21st day of September, 2022.

/s/ Adam M. Conrad Adam M. Conrad Special Superior Court Judge for Complex Business Cases