Some legal rights and obligations are so venerated and longstanding that they have become virtual absolutes—categorical imperatives that trump other less urgent considerations. But what happens when two such absolutes collide? This was a question that the US District Court of the Northern District of California had to wrestle with recently, in a case pitting directors’ fiduciary duties against their entrepreneurial rights to innovate.
The case concerned a medical device company’s complaint against its former director for breach of fiduciary duty. His offense? Secretly developing a new technology that competed with (and arguably improved upon) the corporation’s core product line.
The plaintiff, AngioScore, is a Delaware corporation and leading producer of “specialty balloon catheters” used to treat plaque occlusions in blood vessels – a common cardiovascular condition. The principal defendant, Dr. Eitan Konstantino, had helped found AngioScore in 2003, and was an inventor of AngioSculpt – the flagship device in AngioScore’s product line. After serving as a senior officer and director of AngioScore for two years, Konstantino in 2005 sought and received permission from the AngioScore board to start a new company, TriReme Medical, to produce a “bifurcation stent,” a product with distinct clinical uses (and a distinct market) from AngioSculpt’s. He remained on AngioScore’s payroll as a chief scientist, however, until 2007, when the parties terminated their employment relationship. Konstantino nevertheless continued to serve on the AngioScore board, subject to the standard array of fiduciary duties that directors owe their corporations.
Flash forward to 2009. TriReme’s foray into bifurcation stents had met with little commercial success, and it was searching for alternative growth avenues. Konstantino began to experiment with specialty balloon catheters, homing in on a new design: although the basic materials were the same as AngioSculpt’s, Konstantino’s device – which would come to be known as “Chocolate” – altered the design in a way that could result in greater precision and reliability. The Chocolate device was designed and prototyped through much of late 2009, undergoing its first animal test in early 2010. It has since proven to be a significant commercial success.
Such entrepreneurial innovation is something we typically applaud, and is thought by many to be a core driver of economic growth. In this instance, however, Konstantino’s innovative zeal came with a significant string attached: he remained on the AngioScore board, fiduciary duties intact. Moreover, by entering the specialty balloon market, he caused TriReme to stray from a limitation on its product line it had inherited at its 2005 founding, when AngioScore’s board specifically disclaimed commercial interests in bifurcation stents (but nothing else). This type of resolution is now commonplace among Delaware firms, and for good reason: if outside investors cannot trust the good faith and loyalty of managers, then capital markets – another central driver of economic growth – are sure to languish. The 2005 product-line demarcation enabled Konstantino to wear two “hats” (one for AngioScore and one for TriReme) without falling into an irresolvable conundrum requiring him to partition his “undivided loyalty” among two masters.
The case presented one additional factual twist: Konstantino never came clean to others about his simultaneous pursuit of the Chocolate device at TriReme, even when confronted by fellow AngioScore board members in February 2010 (a confrontation that led to his resignation). Rather, at various times, he took concrete steps to conceal that portion of the device’s development that overlapped with his board service. These steps included: (a) inaccurately characterizing the status of TriReme’s interest in specialty balloons as being preliminary and prospective; (b) taking steps to hide an early provisional patent he filed on the Chocolate device while still on the AngioScore board; and (c) emphatically denying – through a deceptive letter sent through counsel – that he and/or TriReme had “evaluated, negotiated or otherwise pursued the acquisition or licensing of any technology that competes with AngioScore’s products.” Only years after the instant litigation had commenced did plaintiffs discover the nature and extent of Konstantino’s work on Chocolate contemporaneous with his AngioScore board service.
Among many other issues, this case teed up for U.S. District Court Judge Yvonne Gonzalez Rogers a tantalizing tension between the “inveterate, established law of fiduciary duties” on the one hand, and innovation rights on the other. When pitted against one another, which prevails? Although the case law on the fiduciary duties of corporate opportunities is vast, this dispute was arguably one of the first to present squarely the question of whether fiduciary norms take precedence over general policies encouraging innovation. This question is particularly salient in California, where statutes significantly constrain an employer’s ability to constrain the mobility of its employees.
After a six-day bench trial, on July 1, 2015, the Court released a 63-page opinion siding with the plaintiffs. Judge Gonzalez Rogers held (a) that Konstantino breached his fiduciary duties under Delaware law by appropriating a corporate opportunity belonging to AngioScore; (b) that TriReme and its affiliates aided and abetted Konstantino in this breach; (c) that Konstantino and TriReme misled AngioScore about the breach; and (d) that defendants’ collective conduct violated California’s Unfair Competition law.
The opinion contains interesting insights about several important issues, ranging from equitable tolling, to causation, to damages, to corporate governance, to corporate successorship, and even to Greek mythology. In addition to its wide-ranging analysis, the opinion is well drafted, and thus likely to garner attention among corporate law textbook writers. However, the gravamen of the court’s substantive opinion concerns the legal prioritization of directors’ fiduciary duties against the right to innovate. Here, the opinion leaves no doubt that fiduciary duties do not yield (at least not fully). Assessing the defendants’ claim to the contrary, Judge Gonzalez-Rogers wrote:
The fact of inventorship does not absolve a director of his fiduciary obligations with respect to inventions he may develop that compete with the corporation he serves. To hold otherwise would work an absurdity. Directors of corporations would be free to invent and develop competing technologies for their own benefit, concealing the same from the companies they serve, even where elements of those inventions would likely benefit the companies. This scenario stands in stark opposition to the foundational principles of corporate governance, which demand that directors exalt the interests of the companies they serve above their own.
The opinion goes on to hold both Konstantino and TriReme affiliates liable for significant damages (discussed below).
The AngioScore-TriReme opinion could well become an important landmark for navigating the devilish details of directors’ fiduciary duties, particularly (though not exclusively) in technology industries. And, while it may not be the last word on the subject, the opinion provides a significant and noteworthy reference point for future cases. As I prepare to teach this case to my own corporate law students, I will be sure to highlight several characteristics that stand out:
- The Fiduciary Duties of a Director/Officer Are Distinct from Those of an Employee. As noted above, many jurisdictions ostensibly grant rank-and-file employees considerable latitude to pursue their own entrepreneurial interests through innovation. Even so, the opinion makes clear that the nature and scope of ordinary employees’ duties to the corporation pale in comparison to those of officers and directors. Unlike ordinary employees, corporate fiduciaries serve critical gate-keeping functions within the firm’s decision-making hierarchy. Investors’ faith in corporate managers’ diligence and loyalty is – in large part – what makes capital markets work. Such expectations become untenable when one is also beholden to a rival corporate interest, and thus required to serve “two masters.”
- Legal Clarity Is a Double-Edged Sword. The “two masters” problem in fiduciary law has proven so significant in the corporate opportunities context that it catalyzed a major corporate law reform. In 2000, Delaware amended its corporate statutes to allow companies to “disclaim” classes and categories of corporate opportunities, thereby permitting officers, directors, or dominant shareholders to pursue such opportunities with diminished fear of irreconcilable fiduciary duties. That amendment has been a clear success, and thousands of public companies (in addition to countless private ones) have made such provisions. AngioScore was no exception, when its board specifically disclaimed interest in bifurcation stents in 2005. The clarity provided by such a product-line partition, however, can prove dangerous should a corporate fiduciary stray beyond it, as Konstantino and TriReme eventually did in their pursuit of Chocolate – a specialty balloon that was clearly outside of the 2005 resolution.
- Intellectual Property Is an Asset, Just Like Others. Although the defendants in the case had argued that patentable innovations should be exempted from the definition of corporate opportunities, the Court was notably unpersuaded. And for good reason: Corporate investors, after all, entrust directors to manage the assets of the corporation, regardless of whether such assets consist of real property, contractual rights, business plans, or intellectual property. Exempting IP assets from the definition of corporate opportunities would effectively eviscerate a core fiduciary duty from IP-intensive industries – one that helps justify investors’ faith and trust. The outcome would be untenable, unworkable, and ultimately bad for the economy.
- Oh, what tangled web we weave, when fiduciaries practice to deceive. The central tension in this case between fiduciary principles and the right to innovate is truly foundational. Shorn of additional facts, the AngioScore-TriReme opinion might have been harder to predict based on this tradeoff alone. Ultimately, though, the defendant’s own behavior sealed his fate, for a simple reason: in addition to the duty to refrain from appropriating corporate opportunities, directors owe duties of candor and good faith to their corporations. By taking multiple affirmative steps to hide his actions and cover his tracks, Konstantino not only revealed awareness of his prior transgressions, but he serially propagated new ones. He might have taken several steps to avoid (or at least reduce) his exposure, including (especially) resigning from the AngioScore board before taking concrete steps to develop a competing product. Having decided instead to stay silent and cover his tracks, he was left to face the consequences.
- A Corporate Opportunity May Not Imply Outright Ownership: Although the Court ultimately favored the sanctity of fiduciary duties over innovation rights, it did so with a “Solomonic” twist. Specifically, Judge Gonzales Rogers rejected the plaintiff’s claim that, because Chocolate was a corporate opportunity, AngioScore owned outright the rights the technology. Instead, the Court explicitly acknowledged the policy goal of promoting innovation, holding that the plaintiff’s ownership claim extended only to the opportunity to acquire the rights to the Chocolate device. By failing to offer such an acquisition to AngioScore, Konstantino breached his fiduciary duties. While this reasoning seems sensible as far as it goes, it also is noteworthy in what it leaves unexplored: The case did not present – nor did the Court analyze –thornier factual scenarios where, say, a fiduciary discloses the innovation but proceeds to sabotage ensuing negotiations (e.g., by holding out for an exorbitant price). Is the director then free to walk, on the theory that the corporation “rejected” the opportunity? Or alternatively, does (s)he owe an underlying duty of good faith / best efforts in negotiating? Resolving such questions appears to be for another day, another court, another case, and (perhaps) another commentator.
- Equitable Remedies Can Sting: The remedy the Court fashioned was significant. Konstantino individually was ordered to disgorge all the benefits he personally obtained from his breach, including a $250,000 payment he received from assigning his intellectual property rights to TriReme and affiliates, as well as a nearly 3% royalty he negotiated on Chocolate’s future sales revenue, and all of the equity interests he received in the companies that sold the Chocolate device. In addition, the Court held the defendants jointly and severally liable for past and prospective lost profits from foregone sales of AngioSculpt, to the tune of approximately $20 million. Notably, the court refused to grant AngioScore the injunction it had sought on sales of Chocolate, and also refused to order full profit disgorgement from the TriReme affiliates. Doing so, Judge Gonzales Rogers reasoned, would overshoot the measure of damages that equity prescribes: “sufficient to repair and deter without being gratuitously extreme.” This rationale seems intuitively defensible, and it is consonant with according some weight to promoting innovation even while enforcing fiduciary duties: the remedy protects AngioScore’s interests while providing an avenue for outside investors of TriReme to realize a fair return as well.
Beyond these individual observations, there is a greater reason this case seems destined to command attention in classrooms, courtrooms, and boardrooms: It is unlikely that we have seen the end of this species of dispute. The economic stakes within many technology industries are simply too high to leave the remaining tensions between corporate governance and innovation untested. In the meantime, the AngioScore-TriReme opinion represents an important cautionary tale for director-inventors (and their advisers) – one whose lessons we would all do well to heed.
 AngioScore v. TriReme et al, FINDINGS OF FACT AND CONCLUSIONS OF LAW, 12-cv-03393-YGR (available at https://cases.justia.com/federal/district-courts/california/candce/4:2012cv03393/256625/665/0.pdf?ts=1435824632) (hereinafter “AngioScore-TriReme opinion”).
 In 2014, AngioScore was acquired by the Spectranetics Corporation.
 See Del. Gen. Corp. Law 122(17).
 See Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928).
 AngioScore-TriReme opinion, supra note 1 at 97.
 For an overview of the case law, see Eric Talley, Turning Servile Opportunities to Gold: A Strategic Analysis of the Corporate Opportunities Doctrine, 108 Yale L.J. 277 (1998).
 Although the defendants asserted this to be a case of first impression, some notable early precursors to this dispute can also be found. See, e.g., Energy Resources Corp. v. Porter, 438 N.E.2d 391 (Mass. App. Ct. 1982) (finding that a corporate director appropriated a corporate opportunity in pursuing a government research grant in his own capacity, one that eventually culminated in a patent).
 See Cal. Bus. & Prof. Code 16600 (declaring non-competition agreements to be generally against public policy, subject to enumerated exceptions).
 See Cal. Bus. & Prof. Code 17200.
 AngioScore – TriReme opinion, supra note 1, at 15.
 See Del. Gen. Corp. Law 122(17).
 AngioScore-TriReme opinion, supra note 1, at 35.
The preceding post comes to us from Eric Talley, the Isidor & Seville Sulzbacher Professor of Law at Columbia Law School. Professor Talley served as a testifying expert witness on behalf of Plaintiff AngioScore in the underlying action. The views herein are his alone, and not those of AngioScore or its counsel