ACS v. Leadscope Questions and Answers

For further information contact: Glenn Ruskin, Director of the ACS Office of Public Affairs, at g_ruskin@acs.org or 202-872-4475

The American Chemical Society v. Leadscope et al. litigation has been settled to the satisfaction of all parties. Without intending to reargue ACS’s positions in that matter, and recognizing the very disappointing outcome that resulted for ACS, we offer the following additional information. We hope it will allow ACS members and other stakeholders to have a richer understanding of our perspectives on the chronology of events surrounding this case.

1. How did this case start?

This case arose out of an effort by ACS begun back in 1997 to protect its valuable intellectual property–confidential software invented and developed by ACS at CAS called CA PathFinder. This software was a user-friendly scientific research tool for extracting information about chemical compounds and reactions from the CASREACT database. It enabled scientists and researchers to correlate reactions with commercially available substances in the CAS CHEMCATS file. CA Pathfinder provided a graphical user interface for browsing, sorting and searching the analysis tables and easy access to reactions and CHEMCATS information. In February 1997, CAS decided to suspend, temporarily, further development of CA Pathfinder and instead to focus its efforts on the production of another research tool– “SciFinder.” (Although, after the employees left CAS, and as ACS revised SciFinder, elements of the CA Pathfinder product were incorporated into SciFinder.)

After CAS decided to suspend the development of CA Pathfinder, three individuals who worked on the CA Pathfinder project at CAS left ACS and formed Columbus Molecular Software, Inc., the predecessor of Leadscope, Inc.

Initially, ACS expressed concerns that a software product of this new company might have incorporated ACS intellectual property, but the company’s representatives on several occasions assured ACS that their product did not incorporate ACS property. In November 2001, the three former ACS employees obtained a patent on the Leadscope software. The information in the patent and the patent application regarding the Leadscope software led to an inquiry on the Society’s behalf by a general litigation law firm, together with specially retained patent counsel, to determine whether Leadscope had violated, and was continuing to violate, the Society’s intellectual property rights, and if so, what steps, if any, the ACS should take. The outside counsel and our in-house counsel recommended that ACS file suit against Leadscope.

The results of this effort were presented to the ACS Governing Board for Publishing on March 13, 2002. The Governing Board for Publishing was created by the ACS Board of Directors in 1995 to oversee and manage the operations of Chemical Abstracts Service and the ACS Publications Division. Members of the Governing Board urged the Society to seek an amicable resolution of the dispute, but in the event such efforts failed, the Governing Board voted to recommend to the ACS Board of Directors that ACS pursue legal remedies against Leadscope and the three former ACS employees. At its April 4 - 7, 2002, meeting, after reviewing the recommendations of in-house and outside legal counsel, as well as those of the ACS Governing Board for Publishing, the ACS (2002) Board of Directors (www.acs.org/boardlisting) approved the Governing Board’s recommendations, voting to authorize ACS “to pursue such legal remedies in regards to Leadscope as are necessary and appropriate to protect the Society’s interests.”

Although the Board was aware of the possibility that the Leadscope defendants might file counterclaims against the ACS, the Board exercised its judgment and concluded that ACS had important legal claims against the Leadscope defendants.

The ACS, desirous of avoiding litigation, attempted to resolve the dispute with Leadscope via a settlement. Two senior ACS employees at CAS met with Leadscope’s Chief Financial Officer and other Leadscope staff. After several weeks of serious settlement negotiations, Leadscope’s management suggested a tentative agreement under which Leadscope and ACS would have shared the rights to the patent. While ACS accepted this proposal, Leadscope’s investors refused to support the Leadscope proposal. The settlement efforts were unsuccessful.

Consequently, in the spring of 2002, ACS filed suit against the three Leadscope founders and the company, claiming misappropriation of trade secrets and other causes of action. The Leadscope defendants brought counterclaims against ACS for defamation, unfair competition (including by means of “malicious litigation”), and tortious interference with prospective contractual relations.

Trial commenced in February 2008 in the Franklin County Court of Common Pleas in Columbus, Ohio. ACS supported its claims with significant evidence – including the testimony of several respected experts. At the conclusion of the evidence, the jury found for the Leadscope defendants on ACS’s claims and found that ACS had pursued its misappropriation claim in bad faith. The jury also found that two statements made on behalf of ACS were defamatory. The jury awarded $26.5 million on the Leadscope defendants’ counterclaims. Thereafter, the trial court awarded approximately $7.9 million in attorneys’ fees to the Leadscope defendants. ACS did not strongly contest the decision of the jury as to the Society’s claims against Leadscope, but instead focused its appellate efforts on Leadscope’s claims against ACS.

2. Did ACS have evidence to support its claims against the Leadscope defendants?

Yes. As is typical in most civil trials, at the close of the case the Leadscope defendants moved for judgment on ACS's claims, arguing that ACS's evidence was insufficient. The trial judge denied that motion and ruled that ACS had presented sufficient evidence in support of its claims for the claims to be presented to the jury.

After the Supreme Court of Ohio’s decision in this case, ACS directed its appellate counsel to review the evidence ACS presented at trial and determine whether that evidence was sufficient for a jury to have found in ACS’s favor. Conducted by counsel who had played no role in the trial (Jenner & Block), the review concluded: “there was substantial evidence to support ACS’s claims and the decision to pursue the case against Leadscope. Indeed, it was never significantly disputed at trial that ACS had established an adequate basis on which the jury could have ruled in favor of ACS on its claims.”

The review continued:

Dr. Anton Hopfinger, a professor and chemo-informatics specialist at the University of Illinois, testified that “in terms of the operational functionality of the two programs, they are amazingly similar to one another,” and he added that the Leadscope patent claims “are remarkably similar to what the PathFinder software can do.” … Dr. Sudhakar Yalamanchili, a professor and computer engineer at the Georgia Institute of Technology, testified in detail regarding the capabilities, organizational structure, and operational flow of the PathFinder and Leadscope products, and he concluded that [these aspects of the products] … were not just similar, but “identical.”

At trial, Dr. Hopfinger explained that the CA Pathfinder and the Leadscope software’s claims in the Leadscope patent entailed overlapping technology, functionality and similarities in seven major categories: project characteristics, chemical structure hierarchy, precompiled database/project, restrictions to analyze the data, search capabilities, ACS strategy and design goals, and alpha testers' feedback. In short, he explained that CA Pathfinder technology can carry out the same types of functions and includes the same type of capabilities as does the Leadscope software. Critically, Dr. Hopfinger testified that the Leadscope patent basically describes Pathfinder technology.

3. What happened after the trial?

After a lengthy discussion and evaluation of possible outcomes, in November 2008, the ACS (2008) Board of Directors (www.acs.org/boardlisting) authorized ACS to file an appeal in the Ohio Tenth District Court of Appeals. ACS sought to overturn the judgment on the Leadscope defendants’ counterclaims. That court rendered its decision on June 15, 2010, and affirmed the 2008 judgment in all respects. http://www.sconet.state.oh.us/rod/docs/pdf/10/2010/2010-ohio-2725.pdf

Although ACS did not seek to prolong the litigation or its costs needlessly, the ACS Board of Directors believed that further review by the Supreme Court of Ohio of the substantial judgment that had been entered against ACS was warranted. The ACS (2010) Board of Directors (www.acs.org/boardlisting) again examined its options carefully and decided to appeal. Accordingly, ACS sought review before the Supreme Court of Ohio on July 30, 2010.

To the knowledge of ACS and its appellate counsel, there had never before been a case where an Ohio court had awarded damages based upon a theory of “malicious litigation.” The right of a party to petition the courts and to bring claims supported by substantial evidence is a central feature of our American system of justice, even if those claims ultimately are not successful. ACS believed that the statements it made about its claims were not defamatory and that defendants failed to prove any damages resulting from the statements alleged to be defamatory. ACS believed that these were important legal issues.

On October 27, 2010, the Supreme Court of Ohio agreed to hear the ACS appeal. On February 28, 2011, the ACS filed its Brief urging the Court to reverse the decisions of the trial court and the Court of Appeals.

At the same time, several prominent Ohio organizations submitted briefs in support of ACS to the Supreme Court of Ohio:

• The Ohio Attorney General (on behalf of the State of Ohio)

• The Ohio State Bar Association

• The Ohio Chamber of Commerce

• Ohio Manufacturers’ Association

• Ohio Council of Retail Merchants

In April 2011, the Leadscope defendants filed two motions seeking to dismiss the appeal of ACS. The Supreme Court of Ohio denied these motions in June 2011. All of the filings are available at http://www.sconet.state.oh.us/Clerk/ecms/resultsbycasenumber.asp?type=3&year=2010&number=1335&myPage=searchbyentityname.asp

Oral arguments were heard by the Supreme Court of Ohio on September 7, 2011, and on September 18, 2012, the Court rendered its decision that in part affirmed and reversed portions of the case. http://www.sconet.state.oh.us/rod/docs/pdf/0/2012/2012-ohio-4193.pdf

The Court, in a 5-2 vote, found that ACS did not defame the Leadscope defendants and vacated the lower court’s award of damages on that issue, which constituted the majority of the damages awarded against ACS at trial.

As to the Leadscope defendants’ claim of unfair competition, the Court acknowledged ACS’s First Amendment right to seek judicial review of its original claims. The Court also agreed with ACS’s legal arguments that the trial court had improperly instructed the jury on that claim. Nevertheless, the Court, in a close 4-3 vote, denied further relief to ACS. ACS believes that it is likely that a properly instructed jury would have found in its favor on all the Leadscope defendants’ claims.

On October 5, 2012, the parties announced that they had mutually decided to forego additional litigation and had reached a settlement of this case. As a provision of the settlement, the parties agreed that all right, title, interest, and ownership in the Leadscope software and products that were the subject of the litigation belong exclusively to Leadscope. ACS made a payment of $22,633,377.00 in exchange for mutual releases settling and resolving all current and future claims arising out of this long dispute.

4. What is ACS’s reaction to the decision of the Supreme Court of Ohio decision?

ACS was of course very disappointed in the overall outcome of this litigation. The Society takes very seriously its failure to obtain a more favorable outcome to the litigation it initiated in 2002. However, although ACS had hoped to prevail on all issues before the Ohio Supreme Court, the ACS Board of Directors is gratified that the Court, in a 5-2 vote, found that ACS did not defame the Leadscope defendants and vacated the lower court’s award of damages on that issue, which constituted the majority of the damages award at the trial court. Similarly, ACS is relieved that as a result of the Court’s opinion, the Society’s exposure decreased from nearly $50 million to the $22.6 million paid to settle all current and future claims arising out of this long dispute.

ACS also appreciates and acknowledges the strong support it received from the Ohio Attorney General, the Ohio Chamber of Commerce, the Ohio State Bar Association, the Ohio Manufacturers’ Association and the Ohio Council of Retail Merchants – all of which submitted briefs supporting ACS to the Supreme Court of Ohio.

5. What is the total amount of the judgment against ACS and what impact does the Supreme Court of Ohio decision have on that judgment?

Prior to the Supreme Court’s decision, ACS’s total exposure exceeded $45 million. This included the original 2008 award of $26.5 million, an additional award of $7.9 million for the Leadscope defendants’ legal fees and approximately $11 million in post-judgment interest. Had ACS lost its appeal to the Supreme Court, it faced possible exposure of up to $5 million in additional, appellate attorneys’ fees to the Leadscope defendants.

The Supreme Court’s decision reversing the award of $15 million on the Leadscope defendants’ defamation claim removed the largest portion of the damages awarded at the trial. On October 5, 2012, the parties announced that they had mutually decided to forego additional litigation and had reached a settlement of this case. As a provision of the settlement, the parties agreed that all right, title, interest, and ownership in the Leadscope software and products that were the subject of the litigation belong exclusively to Leadscope. ACS made a payment of $22,633,377.00 in exchange for mutual releases settling and resolving all current and future claims arising out of this long dispute.

6. Does ACS have insurance to cover the judgment?

The ACS has a comprehensive suite of insurance, including primary commercial general liability and umbrella general liability coverage. As a result of this insurance, ACS has been reimbursed for over a million dollars in attorney’s fees. In light of the Supreme Court’s ruling, we are working with our legal counsel to determine the amount ACS will be responsible for paying and then we will work with our insurance providers to determine what portion, if any, may be covered by insurance.

7. How did ACS pay the $22.6 million settlement with the Leadscope defendants? What impact does this have on ACS dues and services? Did paying the settlement put ACS in a financial bind?

ACS paid the settlement using funds from the Society’s substantial cash reserves and investments. Nevertheless, ACS recognizes that paying $22.6 million to settle litigation begun over a decade ago is a very negative outcome to this litigation.

One of the reasons why large nonprofits strive to maintain financial reserves is to cover large, unexpected financial losses. Members and others should be assured that the settlement in this case will not result in higher ACS member dues or increased prices for ACS products, programs or services. The settlement in this case will neither restrict ACS staffing levels nor impair the ACS’s continued ability to achieve its mission.

The Leadscope settlement will require an accounting charge against unrestricted net assets. Unrestricted net assets represent the “net worth” or “financial reserves” of an organization. As the term implies, unrestricted net assets do not include any restricted funds such as the ACS Petroleum Research Fund or any endowment funds. It is essentially the difference between total assets and total liabilities.

The Society had $102 million of unrestricted net assets at December 31, 2011. The Society’s final 2012 results will be announced at the New Orleans National Meeting in April 2013. Because of prudent financial management by ACS Boards of Directors over many decades, the Society has more than sufficient cash and unrestricted net assets to pay the settlement and absorb the required accounting charge.

The decline in the Society’s unrestricted net assets from 2008 to the present has been largely driven by accounting charges related to the Society’s postretirement benefit plans.1 The plans have become underfunded due to historically low interest rates, which have caused the discount rate to decline. The discount rate is used to calculate the postretirement benefit plan liabilities. The rate has declined from 6.5% at December 31, 2007, to 4.0% at November 30, 2012, and resulted in accounting charges of $153 million during this period. If, as most observers expect, interest rates eventually rebound to higher levels, the accounting charges related to these plans will reverse and the Society’s unrestricted net assets will increase accordingly. Other factors impacting unrestricted net assets include the Society’s net from operations, investment gains/losses and non-operating gains/losses.

The Leadscope settlement of $22.6 million falls into the non-operating loss category. Fortunately, in 2012 the Society’s favorable operating results and investment gains are expected to largely, if not fully, offset the impact of the Leadscope settlement and anticipated accounting charges related to the Society’s postretirement benefit plans.

The Society’s ability to pay the settlement, however, does not diminish the fact that the ACS has received a powerful reminder of the uncertainties of litigation. ACS members should be assured that ACS rarely initiates litigation and does so only after robust pre-filing investigation and consultations.

8. What role has the ACS Board of Directors played in this case?

Under the ACS Constitution, as well as established principles of corporate and nonprofit law, the ACS Board of Directors is the sole legal representative of the Society. As such, and as recounted in questions 1 and 3, the ACS Board of Directors has played an integral role in this matter, both at the time ACS considered initiating this case and afterwards.

To recap: The results of the review of the Leadscope patent and patent application were presented to the ACS Governing Board for Publishing on March 13, 2002. Members of the Governing Board urged the Society to seek an amicable resolution of the dispute, but in the event such efforts failed, the Governing Board voted to recommend to the ACS Board of Directors that ACS pursue legal remedies against Leadscope and the three former ACS employees. At its April 4 - 7, 2002, meeting, the ACS Board of Directors approved the Governing Board’s recommendations, voting to authorize ACS “to pursue such legal remedies in regards to Leadscope as are necessary and appropriate to protect the Society’s interests.”

All subsequent members of the ACS Board of Directors have been kept fully apprised on a regular basis on this case by both internal and external legal counsel. During the entire trial litigation phase of this case, the ACS Board of Directors received regular briefings on the progress of this matter and engaged in informed and lengthy discussions. In addition, the Board has met with, questioned and been advised by, our outside counsel. The Board has convened special conference calls in between regularly scheduled meetings to receive updates, information and make decisions. The Board made the decision to appeal the case to the Ohio Court of Appeals. Similarly, after a thorough review and consideration of the Court of Appeals’ decision, the Board voted to seek further review of the case by the Supreme Court of Ohio.

The ACS Board formally approved the final $22.6 million settlement with Leadscope on September 27, 2012.

No member of the 2002 Board is currently on the ACS Board of Directors.

9. How much has ACS spent on this case, including the appeal to the Supreme Court of Ohio?

ACS takes the protection of its intellectual property very seriously. Since filing the Leadscope complaint more than ten years ago, ACS has spent more than $9 million in legal fees and associated costs. (This includes the appeal to the Supreme Court of Ohio.) Of this amount, ACS has been reimbursed by its insurance carrier for more than $1 million.  It is not yet clear whether additional legal costs may be ultimately covered by the Society’s insurance coverage. In addition during the Leadscope appellate litigation, ACS, like nearly all parties to civil appeals was required to post security. The cost of this security was nearly $1.4 million. This includes bond and letter of credit fees totaling $864,000 and an estimated $530,000 in incremental investment fees for a total of nearly $1.4 million. (The incremental investment fees represent the additional fees the Society was charged for the management of the investment portfolio held as collateral for the Society’s letter of credit.)

Without factoring additional insurance payments, the maximum amount this case has cost over the entire course of the litigation is approximately $32 million.

10. I don’t want my dues money going to pay for this lawsuit. Can you assure me that it will not? Can you assure me that this lawsuit settlement will not lead to increases in dues, meeting registrations, publications or other services?

Revenues from member dues are allocated to specific member services such as Chemical & Engineering News and local section/division allotments. Member dues revenues were not used to pay the settlement. The Society’s settlement payment came entirely from the Society’s cash reserves and investments.

11. This whole case seems like it was a very bad idea. If ACS had it to do all over again, would it still file suit? Will there be management changes as a result of this outcome?

In hindsight, it is very easy to second guess the 2002 recommendations made by the Society’s in-house and outside lawyers and the Governing Board for Publishing, as well as the 2002 Board’s decision to file suit.

However, given the information available to ACS management and governance at the time and the advice provided by legal counsel, ACS elected to file a suit in an effort it believed was necessary to protect valuable ACS intellectual property. ACS and its in-house and external counsel believed that its claims were valid and supported by evidence. Prior to and during the pendency of the Leadscope case, ACS management and governance engaged in a robust and thorough decision-making process. Moreover, the decision to pursue this case was not made by any one individual but rather was authorized after a careful and thoughtful analysis of the nature of the Society’s claims by internal and external legal counsel, ACS senior management, and the ACS Board of Directors.

There will be no management changes as a result of the Leadscope outcome. 

12. The Ohio Court of Appeals decision makes it appear that members of CAS management acted to disrupt Leadscope’s viability. Now that the Supreme Court of Ohio has rendered its decision will ACS be holding these executives accountable for those actions?

ACS management is always held accountable, both for its successes and its failures. While it may be human nature to look back and try to blame someone or some group of individuals for decisions that were made many years before, the decision to pursue this case was not made by any one individual but rather was authorized after a careful and thoughtful analysis of the nature of the Society’s claims by internal and external legal counsel, ACS senior management, and the Board of Directors.  The sole intent of the lawsuit and ACS’s actions in connection with it was to protect ACS intellectual property. The jury found otherwise, and ACS did not contest further the decision of the jury as to the Society’s claims against Leadscope.

13. With all this concern about protecting intellectual property and filing a law suit, it seems like ACS is acting more like a business than an association. Is this true?

No. Unlike a business, the American Chemical Society is a federally-chartered nonprofit organization recognized as such by the Internal Revenue Service in its granting the Society section 501(c)(3) status. ACS is strongly committed to meeting the broad goals of its federal charter. ACS’s objectives include:

• To be the most authoritative, comprehensive and indispensable provider of chemistry-related information;

• To empower an inclusive community of members with the networks, opportunities, resources, and skills to thrive in the global economy;

• To foster the development of the most innovative, relevant and effective chemistry education in the world;

• To communicate chemistry’s vital role in addressing the world’s challenges to

the public and policymakers.

In its pursuit of these goals, ACS relies on the combined dedicated efforts of our members, volunteers and professional staff.

Each of these goals is predicated on the Society’s maintaining its financial stability. Over the years, ACS governance and staff have strived to ensure that ACS remains a financially viable organization by operating in accordance with sound business practices while at the same time never losing sight of its charitable purposes. An important part of the Society’s sound business practices is to remain vigilant in protecting its considerable intellectual property. The Leadscope litigation arose out of the Society’s desire to pursue its chartable goals and preserve its important intellectual property.

Thanks to many years of prudent financial management by many members of ACS governance and staff, the settlement in this case will not impair the ACS financially.

14. Was the CA PathFinder software really “valuable intellectual property?” I understand that it was not even patented.

The CA Pathfinder software was valuable intellectual property. While it is true that ACS had not attempted to patent the CA PathFinder software, it is also true that not all valuable intellectual property is patented. It is also true that ACS had decided not to pursue the CA Pathfinder project at the time the Leadscope founders left ACS. Nevertheless, this intellectual property constituted a trade secret of great value to ACS. The most famous example of a trade secret is the secret formula for Coca-Cola; trade secrets are commonplace, both in for-profit and nonprofit organizations. As noted elsewhere in this document, several parts of the CA Pathfinder software were later incorporated as important aspects of the ACS’s SciFinder research tool. One impetus for filing the suit was the concern by counsel that Leadscope, by virtue of its patent, would claim ownership of the Society’s intellectual property.

15. After a decade-long litigation effort that has cost the ACS millions of dollars, has ACS learned anything from this ACS v. Leadscope?

Most litigants strongly believe in their positions going into litigation, but if they knew in advance how a jury was going to decide, there would never be any jury trials. However, there are a number of important lessons learned as the result of ACS v. Leadscope. In legally privileged settings, the Governing Board for Publishing and the Board of Directors have discussed, at length, lessons learned from the Leadscope litigation. One lesson, in particular, should be emphasized.

This case serves as a reminder as to why it is important that ACS continue its long practice of avoiding litigation if at all possible. Prior to filing suit in Leadscope, ACS employed a robust review, involving two separate outside law firms, staff and governance. Obviously, ACS will continue to have a heightened awareness of the risks and uncertainties involved in litigation and will redouble its efforts to settle disputes amicably.

In Leadscope, we know that the governance members who supported and authorized filing suit were aware that the Leadscope defendants might file counterclaims. It is very doubtful that they could have appreciated the full extent of the risks associated with the filing of a counterclaim.

Although Leadscope is a reminder that litigation is always risky, it must be emphasized that there are also risks in failing to protect the intellectual property that allows an organization to promote its charitable mission.

12/20/12

1 The post-retirement plan has been frozen and post-retirement medical plan has been capped. Both plans have been closed to new employees for several years.