The Fortress loan, the 2018 wind-down and the fate of the Theranos patents

analysisIn late 2017, according to the SEC's complaint, Theranos was on the verge of bankruptcy and obtained a term loan secured on the value of its patent portfolio, expected to fund about one more year of work on its miniLab device. The lender was Fortress, as Theranos's 2018 letter to stockholders shows; Fortress Investment Group LLC is a Delaware company based in New York (SEC Central Index Key 0001380393). David Taylor, then general counsel, says in his law-firm profile that he led the team that secured $100 million of debt financing. ^{1 2 3 4}

analysisThe loan's size and terms are known only from secondary accounts: a 2020 law-review article describes a $100 million loan from Fortress, then a division of SoftBank, secured in part by the patents, and notes reports that only $65 million was disbursed before Theranos defaulted; a trade journal, citing a national newspaper, reported a $65 million loan with a covenant allowing foreclosure if cash fell below a threshold; and an online encyclopaedia says it was made for 4 percent of the company. The loan agreement is not in the record. ^{5 6 7}

analysisOn December 11, 2017 Theranos assigned its interest in 284 patent properties to Theranos IP Company, LLC, at the Newark laboratory address, including a patent on transmitting assay results with Holmes as inventor; the same day Theranos IP Company granted a security interest in them to Fortress Credit Corp., care of Fortress Investment Group. Both instruments were recorded at the patent office on December 12, 2017. The law-review article describes Theranos IP Company as a wholly owned subsidiary, and the 2018 letter says the company's intellectual property was owned by a "special purpose subsidiary" without naming it; no registry record of it was retrieved. ^{1 2 3 4}

analysisOn April 10, 2018 Theranos warned stockholders of an imminent cash shortage; an online encyclopaedia says it laid off most remaining workers that day, leaving fewer than 25 employees against about 800 at its peak. On June 15, 2018 Holmes stepped down as chief executive, remaining chair, and Taylor became chief executive and general counsel. ^{1 2 3}

analysisIn a September 2018 letter Taylor told stockholders that Theranos was in default under the Fortress facility, that Fortress could foreclose on all its assets, including the intellectual property held by the special purpose subsidiary, and that the company owed at least $60 million to unsecured creditors. A search for new investment and a sale through the investment bank Jefferies had failed. Theranos proposed that Fortress take its interest in the subsidiary and the intellectual property but give up its claim to the remaining cash, about $5 million net of fees, for unsecured creditors. It would make an assignment for the benefit of creditors under California law and then dissolve under Delaware law, and shareholders would receive nothing. A public radio network reported on September 5 that Taylor said Theranos would dissolve after trying to pay creditors. ^{2 4}

analysisAccording to an online encyclopaedia, Theranos told investors on September 4, 2018 that it would cease operations, having laid off most remaining staff on August 31. On September 12, 2018 it executed a General Assignment of all its assets and liabilities to Theranos (assignment for the benefit of creditors), LLC, a California company acting solely for the creditors, whose manager, Michael A. Maidy, signed a 2023 settlement on its behalf. Walgreens filed a claim against the assignee in March 2019, allowed at $45,000,000 under that settlement. ^{1 5}

analysisThe law-review article states that when Theranos defaulted it assigned ownership of Theranos IP Company to Fortress, and that Fortress took ownership of more than 700 Theranos patents worldwide when Theranos ceased operations; the transfer documents are not in the record. Patents continued to issue to Theranos IP Company, LLC, including U.S. Patent 10,533,994 in January 2020 and two point-of-care device patents in April and June 2020, with Holmes among the inventors. According to the same article, Fortress renamed Theranos IP Company as Labrador Diagnostics LLC in March 2020; no registry record of the change was retrieved, and the 2020 patents still name Theranos IP Company as assignee. ^{1 2}

analysisOn March 9, 2020 Labrador Diagnostics sued BioFire Diagnostics and its parent bioMérieux in Delaware for infringing U.S. Patents 8,283,155 and 10,533,994, which it said it owned by assignment; the complaint alleged that bioMérieux's U.S. subsidiary had agreed with the former owner, on or about June 5, 2018, to inspect patent assets. A technology news site reported that the suit sought to block BioFire's technology, apparently including newly developed COVID-19 tests, and quoted a Stanford patent scholar's sharp criticism of its timing. Labrador said it had not known of BioFire's coronavirus test, offered royalty-free licences for COVID-19 tests and filed a notice of voluntary dismissal on June 28, 2020. ^{3 4 5}