Crowley v. Epicept Corp.

• Decision Date: 13 February 2018
• Docket Number: No. 15-56571,15-56571
• Citation: 883 F.3d 739
• Parties: Kenton L. CROWLEY; John A. Flores, Plaintiffs-Appellants, v. EPICEPT CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

883 F.3d 739

Kenton L. CROWLEY; John A. Flores, Plaintiffs-Appellants,

v.EPICEPT CORPORATION, Defendant-Appellee.

No. 15-56571

United States Court of Appeals, Ninth Circuit.

Filed February 13, 2018

Submitted April 5, 2017^* Pasadena, California

Karen A. Larson, Karen A. Larson P.A., Dana Point, California, for Plaintiffs-Appellants.

Philip Tencer, TencerSherman LLP, San Diego, California, for Defendant-Appellee.

Before: Kim McLane Wardlaw and Consuelo M. Callahan, Circuit Judges, and Gordon J. Quist, Senior District Judge.^***

Dissent by Judge Wardlaw

This appeal follows the trial on Drs. Crowley and Flores's (the Doctors) claims against EpiCept Corporation (EpiCept) for breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud. The Doctors' claims arise from their assignment to EpiCept of two patents for a non-FDA approved drug (referred to as "NP-2") and EpiCept's failure to develop those patents into FDA-approved drugs. Following an adverse jury verdict, the Doctors take issue with certain jury instructions, the district court's answer to a jury question, the evidence supporting the verdict, and the district court's exclusion of the Doctors' expert. The majority of the Doctors' arguments center on the jury's determination that the Doctors materially breached their contract with EpiCept by failing to disclose that Dr. Flores treated burn patients with NP-2. We find that the district court did not abuse its discretion in formulating the jury instructions, or in determining that the jury's verdict was not against the clear weight of the evidence. Accordingly, neither the jury instructions given in this case nor the evidence presented at trial warrants the do-over the Doctors demand. The district court's response to the jury's question also does not merit a new trial, as the jury's question was essentially factual and the court's answer appropriately directed the jury to consider its original instructions and the evidence presented at trial. Finally, because we affirm the jury's finding that the Doctors materially breached the contract, the district court's exclusion of the Doctors' damages expert was necessarily harmless. Accordingly, we affirm.

I. BACKGROUND

A.

The Doctors jointly invented a process for the preparation of ketamine ointment ( U.S. Patent No. 5,817,699 ) and a method for the preparation of the same ointment containing various amounts of ketamine and butamben ( U.S. Patent No. 5,817,961 ). The cream, also referred to as NP-2, is designed to treat six types of pain. EpiCept was a private pharmaceutical company that focused on developing technology for pain management. EpiCept secured funding through private venture capital.

The Doctors and EpiCept entered into a contract in December 2000 (the Agreement), in which the Doctors agreed to "assign to EpiCept [their] entire right, title and interest in and to the Invention, any Improvements," and the patents themselves. Dr. Crowley and Peter Golikov, EpiCept's then-President and Chief Operating Officer, negotiated the Agreement. EpiCept paid a $300,000 up-front assignment fee and agreed to pay the Doctors royalties on commercial sales. The Agreement also contained a New Jersey choice-of-law clause. Section 2.1 of the Agreement required the Doctors to "provide written notice to EpiCept of each Improvement within thirty (30) days of the date of conception of such Improvement or, if conceived prior to the Effective Date [of the Agreement], then within ten (10) days after the Effective Date...." The Doctors were also required to assign any improvement to EpiCept. Section 1.3 defined an improvement as "any modification of the Invention that is, on or after the Effective Date, or was, prior to the Effective Date, invented, conceived and/or reduced to practice by [the Doctors], provided that such modification or the use thereof would, if unlicensed," infringe one of the patents. Section 10 provided the process by which the parties could terminate the Agreement. The Doctors had the right to terminate the Agreement under certain circumstances, including EpiCept's failure "to use commercially and scientifically reasonable efforts to" pursue an Investigational New Drug Application or a New Drug Application with the United States Food and Drug Administration (FDA) within specified time frames. Section 10 further provided that "[i]n the event of any material breach or default ... by a party ... the other party ... shall give the Defaulting Party written notice of the default and its election to terminate this Agreement at the expiration of a cure period of ninety (90) days from the date of the notice." If the Doctors "duly terminate[d]" the Agreement, EpiCept was to return the patents to them.

At some point prior to entering the Agreement, Dr. Flores used NP-2 to treat "a few" first- and second-degree burns at his clinic. The Doctors never disclosed this use to EpiCept.

Between December 2000 and October 2001, EpiCept conducted various studies on NP-2 and corresponded with the FDA regarding the drug's potential for approval. EpiCept ultimately decided to postpone direct development of NP-2 in October 2001, but waited until November 2002 to give notice of this decision to the Doctors. The parties corresponded over the next several years regarding the status of NP-2's development. On May 18, 2004, the Doctors demanded a cure under § 10 of the Agreement because EpiCept had done no work on NP-2 since late 2001. In April 2006, the Doctors terminated the Agreement and demanded reassignment of the patents.

B.

Over two and a half years later, in December 2008, the Doctors filed suit alleging claims for breach of contract, breach of implied covenant of good faith and fair dealing, fraud, and rescission.¹ On January 26, 2012, the district court granted EpiCept's motion for summary judgment. 2012 WL 253153 (S.D. Cal. Jan. 26, 2012). The district court excised the definition of "Improvement" from the Agreement because it "produce[d] an absurd outcome," and concluded that term "reasonably means and includes any modification of the patents that is invented, conceived and/or reduced to practice by [the Doctors]." Id. at *7–8. The Doctors appealed this decision, and we found that the district court erred by excising and re-defining "[I]mprovement" because "[a]n ‘improvement’ that updates a component of the technology used in a method patent ... could be both a modification and an infringement." Crowley v. EpiCept Corp ., 547 Fed.Appx. 844, 846 (9th Cir. 2013) (citing Energy Transp. Grp., Inc. v. William Demant Holding A/S , 697 F.3d 1342, 1352 (Fed. Cir. 2012) ).

Questions of fact therefore remained as to whether Dr. Flores's use of NP-2 to treat burns constituted an infringement and, if so, whether the Doctors' failure to disclose this use constituted a material breach. We explained: "[E]ven if Plaintiffs' failure to report this use of the ointment was a breach, it must have been a material breach—one that ‘defeat[s] the purpose of the contract,’—to excuse Defendant from the performance of its duties." Id. (internal citations omitted).

On remand, the Doctors continued to advance their breach-of-contract theory. EpiCept's primary theory of the case was that the Doctors could not demonstrate the second element of a contract claim under New Jersey law—that they "did what the contract required [them] to do"—because (a) Dr. Flores used the NP-2 ointment on patients suffering from first- and second-degree burns, (b) the use constituted an improvement under the Agreement, (c) the Doctors failed to timely notify EpiCept of an improvement, violating § 2.1 of the Agreement, and (d) this conduct constituted a material breach.

As the case progressed towards trial, the Doctors sought to have Chris Pedersen, a business appraiser, opine as to a number of issues, particularly on the value of a drug patent. Following a Daubert² hearing, the district court excluded Pedersen's opinion testimony because it was unreliable. Specifically, the court determined that Pederson's "testimony regarding FDA approval is either based on pure conjecture, or simply a parroting of what Dr. Flores told him," and was not based on sufficient facts or data because Pederson "refused to look for any statistics to estimate the risk that the FDA would not approve NP-2, because he [thought] that investors do not consider such things. Instead, he simply assumed that there was no risk."

The trial finally began on March 12, 2015, and the "material breach" issue continued to feature prominently. On the fifth day of trial, EpiCept moved for judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50. EpiCept argued, among other things, that the undisputed evidence established that the Doctors were required to disclose any improvements in writing and had failed to disclose Dr. Flores's use of NP-2 to treat burn patients, which constituted a material breach of the contract. The Doctors responded that, pursuant to the Ninth Circuit's ruling on the summary judgment order, the jury should decide whether the Doctors' failure to disclose this use of NP-2 was a "material" breach. In hearing argument on EpiCept's Rule 50 motion, the district court inquired whether there was any evidence that the Doctors had complied with the Agreement's 90-day cure provision, but the court's order denying EpiCept's motion neither addressed the Doctors' compliance with the 90-day cure period nor recognized that issue as a basis for EpiCept's Rule 50 motion.

The trial continued, with the parties sparring over the jury instructions on material breach, waiver, and adoptive admissions. The Doctors agreed to the jury instruction entitled "Plaintiffs Failure to Do What the Contract Required," but later argued that the "Claims of Breach" instruction should be modified to make clear that "material breach" applied to both the Doctors and EpiCept. The Doctors argued this change was necessary to ensure the jury understood that Dr....