The Great Algae Robbery

Solazyme-Roquette-022615-9An arbitration ruling details how Roquette seemingly attempted one of the most brazen intellectual property heists in the history of biotechnology, and almost got away with it

Today, the story of a JV gone wrong, a finding of Roquette misconduct, and a big arbitration award to Solazyme – all over a new way to make flour.

On November 30th, 2009, an American living in France, Johnny Depp, was named Sexiest Man Alive by People Magazine, and if many thoughts flickered eastward and across the Atlantic that cold Monday after the Thanksgiving holiday, they were surely tuned in on the charismatic star of Pirates of the Caribbean. Certainly not to another American in France, Solazyme CEO Jonathan Wolfson, had just come to France for a meeting with Roquette.

If Depp was cool, Solazyme was hot. In fact, it had recently landed the #1 ranking, for the first time, in the 50 Hottest Companies in Bioenergy poll conducted by Biofuels Digest. The company, founded in 2003 by Wolfson and Harrison Dillon and backed by friends, family, and a small group of angel investors, had made remarkable progress in developing ways to make fuels from microalgae. A Mercedes Benz C320 running on Soladiesel fuel, had been a crowd favorite at the 2008 Sundance Film Festival in Park City, Utah.

The company had landed a $22 million grant from the Department of Energy for construction on an integrated biorefinery making drop-in algae oils, and Solazyme sold 20,000 gallons of algae fuel to the Navy earlier in the year.

But like all young industrial technology companies, Solazyme was short of cash for commercial-scale operations, short of manufacturing expertise, and short on international recognition beyond the world of industrial biotechnology.

But Solazyme had something that no one suspected at the time, which had brought Wolfson to France even at the price of interrupting the Thanksgiving weekend.

You see, Solazyme had come up with a way to make a high lipid algal flour and an algal protein with attractive nutritional characteristics.

Why does algae flour matter?

Now, let’s backtrack just a bit and think about the world “diabesity” crisis, an ominous combination of diabetes and obesity that is threatening to cause ballooning medical bills and shortened average life spans.

The culprit? An excessive intake of carbohydrates, mostly, especially in the developing world. And especially from carbohydrate-rich bread and carb-loaded flour. And while there were many good healthy food choices available, not many of them tasted so good.

Low-fat options are often so weak in taste that companies load them with “fat-free” sugar to add back some flavor. But the people eating those sugar-laden muffins and cakes wouldn’t remain “fat-free” themselves, for long.

How do you get a good flavor, but with healthy fats (instead of transfats, for instance) and other nutritional benefits? That was the challenge. The company that could come up with a healthy and palatable flour — many saw a route to riches.

So, that’s one reason why Solazyme was pretty darn hot in late 2009 — about 18 months before the company would complete a celebrated IPO.

The meeting this November 30th was a first opportunity for Wolfson to showcase his new “stealth” products. And, after unveiling them, Roquette was excited too.

More about Roquette Freres

Who are Roquette Freres? It’s a French family group “with an international dimension, processes plant-based raw materials: maize, wheat, potatoes, peas and micro-algae,” as their website proclaims, adding that the company is “one of the top-ranked processors of starch (N° 2 in Europe and N° 5 in the world), as well as being the world leader in polyols, N° 2 in maltodextrins worldwide, and the leading European producer of pyrogen free raw materials and cationic starches. In 2013 it achieved a turnover of 3.4 billion euros.”

In short, Roquette was big, experienced in fermentation technology, and had access to sugars, manufacturing, customers, and capital. Exactly the qualities on Solazyme’s shopping list when seeking a partner to help commercialize its technology.

Roquette was impressed, but they had their own green algae technology. The problem was, they had trouble with a fishy flavor that permeated the algae-based ingredients they developed.

They could see the potential, though.

Whole algal flour was, as they would write on their website, “A whole food ingredient which significantly improves the nutritional qualities of recipes (reduces fat, optimizes lipid profile) while preserving taste and texture.” It could be used to make “Delicious brownies with lipid profile enhancement.”

Whole Algal Protein was, as they would write, “A whole food ingredient (under development), which combines plant-based proteins (as an alternative to animal proteins), fibers and unsaturated lipids,” that could be used to make, as an example, “A tasty high protein soup with improved nutritional profile.”

The Solazyme technology difference

Solazyme was taking a radically different approach to most companies. For years, researchers had been trying to grow algae in open ponds, then turning in the 1990s to enclosed photobioreactors. The former became easily contaminated, the latter were just too expensive to make affordable products.

What Solazyme used were relatively exotic heterotrophic algae. Instead of taking energy from sunlight through photosynthesis, these algae obtained energy by consuming sugar, and could grow in the dark in closed, industrial-scale fermenters. The growth rates were excellent, and Solazyme was using advanced genetics to optimize algae into accumulating what they referred to as “tailored oils” — highly-customized triglyceride oils that were high-value targets for potential customers in sectors from fuels to food ingredients.

As an arbitration panel found this week, “After it had been approached by Solazyme, but before the Joint Venture was created, Roquette had taste tests conducted at the Paul Bocuse Institute, using its [own] green algae in various foods such as cakes, cookies and ice cream. The tastes were basically unsatisfactory in that the products often tasted of fish and other unpleasant tastes.”

A JV is formed

From that meeting in France in November 2009, a partnership developed, and ultimately a joint venture.

The JV, Solazyme Roquette Nutritionals LLC was announced after one year, in November 2010. The partners said at the time that the JV offered “an entirely new category of natural, healthy and multifunctional ingredients based on microalgae that help consumers live healthier lives. These ingredients offer superior nutritional properties along with outstanding taste and texture. Founded in 2010 and headquartered in South San Francisco, Solazyme Roquette Nutritionals’ portfolio includes a variety of oil, protein and fiber based products aimed at delivering better tasting foods with a vastly superior health profile compared to ingredients in the market today.”

The structure was straightforward. As arbitrators related, “The parties reached agreement as to the contribution to be made by each party in the joint venture. They agreed that Roquette’s controbution would be primarily in the form of money and manufacturing capacity and Solazyme’s contribution would be primarily in the form of technology.

The money was substantial, as arbitrators found: “Roquette agreed to contribute $60 million and provide credit up to $190 million. Solazyme agreed to contribute intellectual property consisting of 35 foundational patent applications, sixteen nutritional patent applications, a summary of the know-how and made its personnel available for interviews by Roquette. Solazyme also provided the microbial strain used.”

Protections were put in place. Should the JV dissolve, the original intellectual property would revert back to the parner who had contributed it, plus any enhancements made to that IP during the life of the JV by the partners. In [the Material Transfer Agreement] Roquette “agreed not to file any patent application directed to the “material” delivered to Roquette.”

Good Times

A year into the JV’s life, prospects looked decidedly rosy. Solazyme had just completed its IPO. An internal Roquette memo crowed: “This partner provides us with technology we do not have under heterotrophic conditions”. Then, the partners announced in October 2011:

“Solazyme Roquette Nutritionals, a microalgae-derived food ingredients company, announced today the location of its Phase II manufacturing facility. The company will begin producing its lead microalgae derived food ingredient, Whole Algalin Flour, at Roquette’s commercial production plant in Lestrem, France. It is anticipated that the 300 metric ton Phase I facility will be completed on-schedule by year end 2011 and operational in early 2012. This facility will be expanded into the 5,000 metric ton Phase II facility in 2012.

“Lestrem is the technology base for Roquette and its flagship manufacturing facility. Having our Phase I and II facilities located there will allow Solazyme Roquette Nutritionals to leverage Roquette’s world-class manufacturing capabilities and expedite large-scale commercial production,” said Jodie Morgan, President and General Manager of Solazyme Roquette Nutritionals. “Given the incredibly positive feedback from the market as it awaits the introduction of our new microalgae-based food ingredients and oils, we are excited to be taking these fundamental commercialization steps.”

“This is a significant step forward in the progress of Solazyme Roquette Nutritionals’ manufacturing timeline and we are excited about moving forward with this incredible market opportunity,” said Guy Talbourdet, CEO of Roquette. “Roquette’s state of the art location in Lestrem contains the essential infrastructure necessary to rapidly commercialize the manufacturing of this breakthrough food ingredient, Whole Algalin Flour. We are looking forward to bringing it to market in 2012.”

But as arbitration filings would show, the partners were struggling to scale the technology. Arbitrators found “a difference in work habits of the parties,” and they noted “a serous problem of contamination arose during the fermantation process.”

Technical issues were ultimately worked out and, as arbitrators would later report, “the transfer [of Solazyme’s Intellectual Property to the joint venture] ultimately was deemed successful”.

A change of heart at Roquette

“Despite this success,” Roquette appeared to be losing interest — and indicated that wanted to terminate the joint venture.  Solazyme did not agree, but ultimately Roquette cut off the funds, and the JV simply ran out of money.

Then, the shock public announcement in June 2013. The partnership was dissolved, and the news was conveyed to the public markets almost without warning. We wrote about it in “Le Break-up in La Boulangerie”, and the break-up prompted a 13% one-day drop in Solazyme’s share price. The break led to a serious loss of confidence in Solazyme, in some quarters.

The damage to Solazyme

We wrote at the time: “Our Vince Vaughn just broke up with Jennifer Aniston, and now shareholders are throwing tomatoes at the screen.”

Other observers were less kind, and threw brickbats at Solazyme over suspicions that the technology wasn’t working out.

Mike Ritzenthaler, an equities analyst with Piper Jaffray wrote at the time: “The history of the Industrial Biotechnology space is littered with major strategic partners pulling out of agreements that struggled during commercialization – when promise doesn’t match up with reality. Now we can add Roquette to that list…We can presume that if profitability was as near at hand as Solazyme’s management team would have us believe, Roquette’s hat would still be in the ring.”

That was a common theme. It must be the technology’s fault, many reasoned — why else would Roquette pull out when there was substantial money to be made from a product hit?

The cause cited by the partners, publicly, at the time was “divergent views on an acceptable commercial strategy and timeline for the manufacturing and marketing of joint venture products” and in the announcement, Solazyme tipped that it “intends to accelerate commercialization of its suite of innovative microalgal food ingredients.”

Roquette goes rogue

What we didn’t know then, and know now, thanks to an arbitration ruling this week, was that “Roquette at this time did not disclose that it retained its strong interest and belief that the products were capable of being marketed.”

Ominously, the arbitrators found, “thanks in part to its access to Solazymes Intellectual Propety and know-how, Roquette now knew how to make the products in question.”

The arbitrators pointed to a January 2013 internal memorandum which stated: “Significant progress has been accomplished to master this technology and Roquette has acquired know-how.”

Solazyme-Roquette-022615-4

Acquire they had, but perhaps not the old-fashioned way by earning it.

The most explosive revelation from the arbitration report was a description of the steps which Roquette took to assume ownership of the intellectual property, after acquiring access to it during the JV’s life, and after shoving Solazyme aside.

The arbitrators found that “The evidence at the hearing revealed that during the life of the Joint Venture, Roquette, surreptitiously, and without notice to Solazyme, filed patent applications on its own behalf, based on Patent Applications filed by the Joint Venture.”

Incredibly, the arbitrators found that Roquette had secretly been filing patent applications. While the JV had filed patent applications credited to both Roquette and Solazyme individuals, “The Roquette patent applications …were essentially copycat or shadow-applications of the SRN applications with the names of the Solazyme investors deleted.”

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Roquette defended itself by asserting that “A Roquette employee…informed a Solazyme employee of the filings,” but Roquette could not produce not could the arbitrators find any “written documentation of that communication,” and owing to what it termed “the significance of these filings and the total absence of any written commmunications of them to either Solayme or SRN, Roquette has failed to prove that the alleged disclosure took place.”

Having made what could politely be termed a theft, Roquette proceeded to develop marketing materials asserting that it had “found a new process” to make high lipid algal flour and a high protein algal powder.  The arbitrators found that “other than utilizing Solazyme’s Intellectual Property and know-how that Solazyme contributed to the short-lived SRN joint venture, the record is devoid of any evidence to support Roquette’s claim.”

The products prove popular

The products, indeed, were a marletplace hit. Shortly after the JV’s dissolution in 2013, Roquette won two awards for innovation at the Food Ingredient Europe Awards Ceremony in November 2013 for two products.

One was a high lipid algal flour and the other, er, was a high protein algal powder. Exactly the products that Solazyme CEO Wolfson had brought to Roquette.

Solazyme-Roquette-022615-7

The arbitrators found that “the awards given to Roquette were for products that Solazyme introduced to it on November 30, 2009, when Mr. Wolfson went to France and introduced the Solazyme products. There is no evidence that Roquette, on its own, developed either product for which it received an award.”

Solazyme-Roquette-022615-8

Whoops.

Roquette continues to market the products as its own. In a posting dated January 19, 2015 on the Roquette corporate website, the company asserts its history in microalgae with any reference to Solazyme Roquette Nutritionals, and asserts its invention of the whole algal flour and whole algal protein it sells, as well as a chlorella food supplement product. The website says:

Involved in the microalgae area for several years, Roquette has developed three new microalgae-based ingredients with nutritional and functional benefits for Nutrition, Health and Nutraceuticals.

The company adds that “Numerous applications can benefit from algility™ ingredients robust nutritional and functional potential, such as improving the softness and nutritional profile of brioche, providing detoxifying properties to smoothies, enriching soups with a new combination of plant-based proteins, and more.”

As a pioneer in the microalgae sector with a long-term strategy, Roquette seeks to capitalize on the extraordinary potential of this renewable resource to respond to the nutritional and demographic challenges of the planet.

Since the year 2000, Roquette has strongly believed in the future role of microalgae in food, nutrition and health. With its expertise in generating value from agricultural raw materials, the Group invested in microalgae:

– creating a dedicated research laboratory in 2006,

– leading a research program in 2008 (ALGOHUB® supported by OSEO now Bpifrance),

– acquiring production sites in Germany in 2008 and in China in 2009,

– building an industrial unit in Lestrem (France) in 2013, now fully operational.

The binding arbitration

This week, a distinguished panel ruled in binding arbitration on the suit, and the documents have come to light because of legal maneuvers associated with entering the ruling with the courts (or preventing its entry, as the case may be).

The arbitrators concluded in their AwardL

The Panel…hereby finds and orders…that Solazyme is entitled to be assigned all of the imporvments SRNmade to Solazyme’s intellectual property, including:

1) All of the patent applications currently assigned to SRN,

2) All of SRN’s know-how related to the production of the SRN products, including all know-how related to the production of whole cell microalgal products…high lipid flour…high protein flour;

3) All Roquette patent applications filed on or after November 3, 2010 relating to microalgal foods. microalgal food ingredients, and microalgal nutritionals, as well as all methods realting to making and using the same.

In comments to shareholders yesterday, Solazyme CFO Tyler Painter said:

“To say that we are pleased with the award and that we view it as a validation of our technology and importantly, its value, would be an understatement.  The award is binding and not appealable, though Roquette has commenced an action in Delaware contending that the award is void because the panel took too long to render its decision.  We do not believe the argument has any merit and earlier today we filed in Delaware asking the court to confirm the arbitration award and order Roquette to comply with the arbitration award – access to that filing is publicly available.  We are also seeking extensive damages for Roquette’s misappropriation of Solazyme’s trade secrets, breach of contract and misuse of our confidential information.”

Meanwhile, Solazyme’s own progress

Having seen its efforts to work within a JV stymied, Solazyme embarked on a journey to commercialize the products themselves.

The product has been named AlgaVia, and a new website was launched in conjunction with an advertising campaign in early February.  Solazyme’s CEO Jonathan Wolfson said that “The site serves as a substantial customer outreach platform and a valuable sales tool for educating current and potential customers, as well as retail consumers.

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Wolfson added that “our AlgaVia powders are beginning to see a strong re-order cadence with existing customers and distributors.  To that end, we are currently in over 65 active application projects with leading Food & Beverage manufacturers worldwide; double where we were just 6 months ago, with projects ranging across more than 30 product categories in the grocery store.”

The Digest’s Take

Well, bottom line, the binding arbitration ruled that Solazyme owns essentially the entire family of intellectual property relating to whole algal flour and algae protein powder  — including all of Roquette’s patents since 2010. The arbitrators also awarded Solazyme some $2.35 million towards legal costs.

Have we heard the complete story? There’s another chapter in the courts, for sure, as Roquette is fighting the arbitration decision.

But, at the least, it’s a stunning cautionary tale. Based on the material and conclusions presented in the arbitration decision, we would have to see it here in Digestville as one of the most brazen attempts at intellectual property theft — for a product that could have materially positive impact on global health & nurtition — that we have ever seen or heard of.

Specifically, filing for copycat patents, behind a JV partner’s back, and dropping the names of people employed by the JV partner — it leaves us speechless.

The damage to the Solazyme brand was considerable. It drained a fund of shareholder goodwill that the company needs and will continue to need as it reaches for nameplate capacity production and steady-state operations in Brazil. It has cost the company share value — and thereby the ability to raise capital to solve challenges, develop products and reach new markets.

Solazyme is, in fact, darn lucky that it has the size it does, to pursue vindication through arbitration. Smaller companies might not have been able to wait out the process and fund the legal effort.

But let’s look at the larger picture.

The damage to the global pace of innovation could be incalculable — if partners have to engage in a continual industrial espionage to verify that JV partner isn’t stealing technology by filing patents in some obscure part of the world. It can cost small companies precious resources, and precious time — chewing up cash and slowing down the internal rate of return.

JVs are an important vehicle for sharing risk and pooling resources. By damaging faith in joint venturing, it could reduce the appetite for risk and partnership at a time when the planet could really use accelerants for innovation to meet the substantial challenges in energy, agriculture, food, health and nutrition.

One solution migth be to impose harsh criminal and civil penalties for piracy in high tech, just as society has done for piracy on the high seas. We can well afford to take a romantic view of Pirates of the Caribbean, now that they are three centuries now done in by law enforcement — and it’s nothing but an entertainment nowadays to see Captain Jack Sparrow portrayed by the Sexiest Man Alive.

But one of these days the Sexiest Technology Alive might be subject to piracy, and there’s no romance in that. A slow-down innovation in a world with rising populations, energy demands, affluence and expectations is as dangerous a practice as can be imagined.

This time it was Solazyme and it appears we are en route to a happy ending where justice will prevail — but who’s next?

You can read the entire arbitration decision here and here.

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