PEDIATRIX SCREENING v. TELECHEM INTERN.

• Citation: 602 F.3d 541
• Decision Date: 20 April 2010
• Docket Number: No. 08-1391.,08-1391.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
• Parties: PEDIATRIX SCREENING, INC.; Pediatrix Screening, L.P., Appellant v. TELECHEM INTERNATIONAL, INC., t/a/d/b/a Arrayit.Com.

602 F.3d 541

PEDIATRIX SCREENING, INC.; Pediatrix Screening, L.P., Appellant v. TELECHEM INTERNATIONAL, INC., t/a/d/b/a Arrayit.Com.

No. 08-1391.

United States Court of Appeals, Third Circuit.

Argued December 15, 2009.

Filed April 20, 2010.

Deena J. Schneider, Esquire (argued), Joseph J. Anclien Schnader Harrison Segal & Lewis LLP, Philadelphia, PA, Jeffrey G. Brooks, Esquire, Minto Law Group Mary-Jo Rebelo, Esquire, Houston Harbaugh, PC, Pittsburgh, PA, Attorneys for Appellant.

Kim M. Watterson, Esquire (argued), Barry J. Coyne, Esquire, Kevin S. Katona, Esquire, Reed Smith LLP, Pittsburgh, PA, Attorneys for Appellee.

Before: SLOVITER, JORDAN and WEIS, Circuit Judges.

OPINION

WEIS, Circuit Judge.

This action grew out of business disputes marked by sharp disagreements over asserted trade secrets and contractual obligations. A jury resolved multiple issues leaving but one count which has been appealed. The principal questions before us are whether, under Pennsylvania law, a fraudulent misrepresentation is to be treated as a tort or breach of contract and whether that point has been properly preserved for our review. We conclude that the issue was not waived in the District Court and will remand for a new trial.

TeleChem International, Inc., a California corporation, provided technical assistance and hardware for use in microarray technology applicable in genetic screening or "genotyping." The process allows microscopic spots of DNA to be placed on glass slides for use in genetic research and testing.

Pediatrix Screening, Inc., a Pennsylvania corporation, was engaged in traditional methods of genetic screening of newborn infants.¹ The company became interested in applying for a research grant, but needed a collaborator with expertise in microarray technology. After preliminary discussions during a trade show attended by representatives of both entities, an officer of Pediatrix wrote to TeleChem to arrange a meeting with personnel from the two companies. In that letter, Pediatrix set forth that the parties' joint efforts might ultimately lead to "a long-term mutually beneficial relationship," which would require that "significant effort be made by both parties."

On February 7, 2000, Pediatrix sent a letter to TeleChem outlining a two-part proposal. During Phase One, TeleChem would assist Pediatrix in performing a "small pilot experiment" using microarray technology and in preparing a grant application to the National Institutes of Health. Phase Two was envisioned as a two-year study during which the parties would develop a microarray screening process for nearly a dozen genetic disorders. According to Pediatrix's letter, "all of these proposals are achievable in the short term and will lead to long term commitments and mutual benefits."

TeleChem responded on March 24, 2000, that it "fully accepted and embraced" the February 7 proposal "in the hopes that TeleChem will benefit from the residual commercial uses" arising out of the collaboration. Following the outline of Pediatrix's overture, TeleChem agreed that all grant money would go to Pediatrix and that TeleChem would forego a $500,000 subcontract. TeleChem further agreed to devote $1.5 million in like-kind commitments of personnel, research, use of capital equipment, and supplies and stated that it would build Pediatrix a "clean room"² if necessary.³ Pediatrix, with the support of TeleChem, secured the grants from NIH in August 2000 and commenced its research.

At a meeting in October 2000, Pediatrix presented TeleChem with a proposal for a joint corporation to be named NGS-ArrayIt and in December 2000, followed up with a suggested "Pre Incorporation Agreement." According to the draft, NGS-ArrayIt would be created to "engage in and maintain a business which develops and sells microarray-based genetic tests for newborn screening and other diagnostic purposes." TeleChem would own 67% of the company's stock; Pediatrix would possess 33%.

The parties executed the Agreement on April 12, 2001,⁴ promising to "cause the corporation to be formed ... within thirty days." TeleChem signed the necessary incorporation papers and returned them to Pediatrix. However, Pediatrix did not file the documents with the appropriate authorities. Unaware of the omission, TeleChem continued to work with Pediatrix while touting NGS-ArrayIt at trade shows and providing additional promotional publicity.

On June 18, 2001, Pediatrix wrote to TeleChem with complaints about its performance. After correspondence and face-to-face meetings failed to resolve their differences, Pediatrix terminated the Pre Incorporation Agreement on July 24, 2001. TeleChem responded on August 21, 2001, that it "declined Pediatrix's request to terminate the Pre-Incorporation Agreement" and would "continue to operate as NGS-ArrayIt, Inc. and in the best interests of NGS-ArrayIt, Inc."

In the months following this exchange, the parties discussed future collaborations and the development of a business plan. TeleChem, with Pediatrix's encouragement, continued working on the microarray project. However, on November 14, 2001, TeleChem gave notice that Pediatrix had breached Contract Two and demanded specific performance or return of consideration. Pediatrix filed this suit six days later, seeking declaratory relief and asserting breaches of Contracts One and Two.

TeleChem counterclaimed, requesting declaratory and injunctive relief as well as damages. In particular, TeleChem asserted a breach of Contract Two, as well as a number of claims sounding in tort, including fraudulent misrepresentation and misappropriation of trade secrets. TeleChem did not plead a breach of Contract One, but averred that Contract Two had memorialized what it dubbed the "Oral Agreement." Pursuant to that understanding, TeleChem was to "provide tools, skills and expertise ... thereby enabling Pediatrix to qualify for and benefit from various research grants, while TeleChem would retain all commercial rights to any product developed."

Pediatrix moved to dismiss the counterclaims under Federal Rule of Civil Procedure 12(b)(6), asserting, inter alia, that TeleChem's tort counts were barred by Pennsylvania's "economic loss doctrine." Because that concept typically applied to products liability suits and was "remarkably similar" to Pennsylvania's "gist of the action" test,⁵ the District Court applied the latter label. Observing that "caution should be exercised in determining the gist of an action at the motion to dismiss stage," the Court declined to dismiss the misrepresentation and other tort claims.

The "gist of the action" question apparently was not raised again until a June 7, 2007, pre-trial conference, shortly before the trial began, when the court requested counsel to submit points for charge. Addressing TeleChem as to which claims the jury should receive, the trial judge stated,

"Count 3 is misrepresentation. And then, that brings to question, are you proceeding in tort,⁶ or are you proceeding in contract? This is the issue ... what's the gist of the action. My sense is the gist of this action is contract, breach of contract. So you'll need to tell me whether that's in or out."

TeleChem's counsel requested, and later was granted, an instruction listing the elements of a misrepresentation tort claim and a related damages charge.

At the conclusion of lengthy testimony, the case was submitted on special interrogatories. The jury's responses set forth that: (1) there were two contracts at issue; (2) TeleChem had breached Contract One, for which Pediatrix would receive only nominal damages; (3) both Pediatrix and TeleChem had breached Contract Two, resulting in a $1 million award in liquidated damages for each;⁷ and (4) Pediatrix was liable for fraudulent misrepresentation, for which TeleChem was granted $500,000 in compensatory and $3.5 million in punitive damages. In addition, the jury nullified the claims for asserted trade secrets.

After the District Court entered judgment, Pediatrix filed a motion under Federal Rule of Civil Procedure 59, seeking "Post-Trial Relief and to Amend Judgment With Respect to Defendant's Counterclaim." In that motion, Pediatrix argued that the evidence of record did not support the misrepresentation claim, the gist of the action doctrine barred TeleChem from recovering for misrepresentation, and the punitive damages award was unwarranted and excessive.

After the parties briefed the issues, the Court conducted a lengthy oral argument, during which the trial judge found that "the misrepresentation here was with respect to fraud in the inducement. There was no separate duty under ... Contract One that would have required Pediatrix to actually commercialize the efforts on which they were collaborating."

The District Court later issued an order denying Pediatrix's Rule 59 motion, stating that "the fraudulent misrepresentation alleged by TeleChem did not concern the performance of contractual duties." In addition, the Court held that Pediatrix could not argue insufficient evidence, having failed to timely raise the issue. The damages awards were left undisturbed.

Pediatrix timely appealed, asserting that the District Court erred in failing to apply the "gist of the action" doctrine, that the punitive damage verdict was excessive, and that the recovery for misrepresentation was duplicative of the breach of contract award. TeleChem contends, inter alia, that Pediatrix waived its challenge to the misrepresentation claim by failing to ask for judgment as a matter of law as prescribed by Rule 50 and disputes that the damages were inappropriate.

I.

The jury's verdict and parties' arguments on appeal have effectively transformed the dispute from an action focusing primarily on whether Pediatrix had wrongfully appropriated asserted trade secrets into a judgment for damages in favor of TeleChem for misrepresentation on the part of Pediatrix. Before we address the merits of Pediatrix's contention...