Kenton Crowley v. Epicept Corp. ( 2018 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
KENTON L. CROWLEY; JOHN No. 15-56571
A. FLORES,
Plaintiffs-Appellants, D.C. No.
3:09-cv-00641-L-BGS
v.
EPICEPT CORPORATION, OPINION
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of California,
M. James Lorenz, Senior District Judge, Presiding
Submitted April 5, 2017*
Pasadena, California
Filed February 13, 2018
Before: Kim McLane Wardlaw and Consuelo M. Callahan,
Circuit Judges, and Gordon J. Quist, Senior
District Judge.**
*
The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
**
The Honorable Gordon J. Quist, Senior District Judge for the
United States District Court for the Western District of Michigan, sitting
by designation.
2 CROWLEY V. EPICEPT CORP.
Per Curiam Opinion;
Dissent by Judge Wardlaw
SUMMARY***
Jury Instructions
The panel affirmed the district court’s judgment in favor
of EpiCept Corporation in a diversity action brought by
doctors alleging claims arising from their assignment to
EpiCept of two patents for a non-FDA approved drug and
EpiCept’s failure to develop those patents into FDA-approved
drugs.
The panel held 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.
Specifically, the panel held that the doctors waived two of
their challenges to the jury instructions. The panel further
held that the challenged instructions correctly stated the law,
and the jury was clearly and adequately informed that only a
material breach by the doctors could defeat their breach of
contract claim against EpiCept. Accordingly, the district
court did not abuse its discretion in denying the doctors’
request for a new trial on this ground. Finally, the panel
rejected, as harmless error, the doctors’ challenge to the jury
instructions, or lack thereof, relating to EpiCept’s position at
***
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
CROWLEY V. EPICEPT CORP. 3
trial that even if it had breached the parties’ agreement, the
doctors were not entitled to return of their patents as a
remedy.
The panel rejected the doctors’ challenge to the district
court’s response to the question posed by the jury during
deliberations. The panel concluded that the district court’s
original instructions to the jury were adequate and accurately
stated New Jersey law, and the jury’s question did not
indicate that the jury was interpreting the law incorrectly.
Accordingly, the district court did not abuse its discretion in
referring the jury back to the instructions already given and
the evidence presented at trial.
The panel rejected the doctors’ challenges to the verdict’s
evidentiary basis. The panel held that the doctors waived
their right to directly challenge the sufficiency of the
evidence by failing to make the appropriate Fed. R. Civ. P. 50
motions. Concerning the doctors’ motion for a new trial
under Fed. R. Civ. P. 59, the panel held that the district court
did not abuse its discretion in denying the motion where there
was sufficient evidence of a material breach of the agreement
under New Jersey law.
Judge Wardlaw dissented, and would reverse and remand
for a new trial. Judge Wardlaw would hold that the jury’s
verdict was not supported by substantial evidence because no
rational jury could find material breach on the evidence
presented, and, that the district court inadequately instructed
the jury on this claim.
4 CROWLEY V. EPICEPT CORP.
COUNSEL
Karen A. Larson, Karen A. Larson P.A., Dana Point,
California, for Plaintiffs-Appellants.
Philip Tencer, TencerSherman LLP, San Diego, California,
for Defendant-Appellee.
OPINION
PER CURIAM:
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
CROWLEY V. EPICEPT CORP. 5
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
6 CROWLEY V. EPICEPT CORP.
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
CROWLEY V. EPICEPT CORP. 7
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 F. App’x
844, 846 (9th Cir. 2013) (citing Energy Transp. Grp., Inc. v.
William Demant Holding A/S, 697 F.3d 1342, 1352 (Fed. Cir.
2012)).
1
The case was originally filed in the District of New Jersey, but
eventually made its way to the Southern District of California.
8 CROWLEY V. EPICEPT CORP.
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 Daubert 2 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
2
Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993).
CROWLEY V. EPICEPT CORP. 9
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. Flores’s treatment of burns with NP-2
could only defeat the Doctors’ breach of contract claim—as
10 CROWLEY V. EPICEPT CORP.
set forth in the “Elements of Contract Claim” instruction—if
that conduct constituted a “material” breach.3 The court
rejected the Doctors’ arguments. It found that the “Claims of
Breach” instruction was adequately mutual, and that the
Doctors could explain to the jury in closing arguments that if
the jury found that Dr. Flores’s treatment of burns was not a
“material” breach, then the Doctors satisfied the second
element of their breach of contract claim, as set forth in the
“Elements of Contract Claim” instruction.
The Doctors also insisted that the jury should be
instructed regarding adoptive admissions, thereby permitting
the jury to find that, by failing to respond to the Doctors’
written communications accusing them of breach, EpiCept
admitted that it had breached the Agreement. The Doctors
further asserted that the verdict form should reflect that the
jury could find that EpiCept had waived the Doctors’
compliance with the 90-day cure provision.
In response to these and other arguments, the court gave
the jury instructions entitled “Elements of Contract Claim,”
“Claims of Breach,” and “Plaintiffs Failure to Do What
Contract Requires.” The “Plaintiffs’ Failure to Do What
Contract Requires” instruction provides, in full:
EpiCept claims that Plaintiffs cannot establish
a breach of contract because Plaintiffs failed
to do what the contract required of them.
Specifically, EpiCept claims the contract
3
The Doctors’ counsel argued that “there’s no way any reasonable
person could argue that . . . treatment of the burns was such a substantial
breach of the contract it excused all of [EpiCept’s] conduct.”
CROWLEY V. EPICEPT CORP. 11
obligated Plaintiffs to disclose, in writing,
their treatment of burn patients with NP2.
To decide this issue, you must determine
whether:
1. Dr. Flores’ use of NP2 was at all times
covered by the ‘961 patent;
2. The ‘961 patent makes no mention of
treating burn patients;
3. Plaintiffs failed to disclose the treatment of
burn victims with NP2 in writing to EpiCept;
and
4. The failure to disclose the treatment of burn
victims with NP2 in writing to EpiCept was
material. A failure to disclose is material if it
defeats the purpose of the contract.
If you answered yes to all four issues, then
you must find that Plaintiffs cannot prevail on
their breach of contract claim.
The “Claims of Breach” instruction provides:
One of the elements that the plaintiffs must
prove is defendant’s breach of contract.
Failure to perform a contract in accordance
with its terms constitutes a breach of contract.
It does not matter if the failure was purposeful
or inadvertent. The plaintiffs claim the
12 CROWLEY V. EPICEPT CORP.
defendant breached the contract in the
following manner:
EpiCept stopped its effort to obtain FDA
approval of plaintiffs’ drug and failed to
return the patents after plaintiffs demanded
their return.
The defendant denies this. EpiCept contends
that it never had an obligation to return the
patents because its efforts to obtain FDA
approval were commercially and scientifically
reasonable and Plaintiffs failed to perform its
obligations under the contract.
A breach may be material or minor. Plaintiff
can sue for any breach, even if minor
providing the breach causes the plaintiff
measurable injury or damage. When there has
been a minor breach that may have caused the
plaintiff injury or damage, it is possible for
you to conclude that the defendant has
nevertheless substantially performed the
contract.
To find that the defendant substantially
performed the contract, you would have to
conclude from the evidence that the defendant
made a good faith effort that actually achieved
the essential purpose of the contract and
provide[d] the plaintiff with the fundamental
benefits that plaintiff was supposed to receive
from the contract.
CROWLEY V. EPICEPT CORP. 13
Now, let me explain what happens if you
conclude the breach was not minor but was
material. A breach is material if it affects the
purpose of the contract in an important or
vital way. A material breach defeats the
purpose of the contract and is inconsistent
with the intention of the parties to be bound
by the contract terms. When a defendant
materially breaches a contract, the plaintiff
has a right to terminate the contract and may
be excused from further performance of
plaintiff’s remaining obligations under the
contract. When the plaintiff’s promise under
the contract was dependent upon the
defendant’s performance and the defendant
fails to perform, then the plaintiff is excused
from his/her further performance of his/her
promise.
When a party materially breaches the contract
but does not indicate any intention to
renounce or repudiate the remainder of the
contract, the plaintiff can elect to either
continue to perform or cease to perform. If
the plaintiff elects to perform, plaintiff is
deprived of an excuse for ceasing
performance. But even if the plaintiff elects
to perform, plaintiff can still sue for any
injury or damages suffered because of the
material breach.
The court further instructed the jury that it could only
consider EpiCept’s failure to respond to the Doctors’ written
communication to EpiCept, which stated that EpiCept was in
14 CROWLEY V. EPICEPT CORP.
breach of the contract, if conditions were satisfied so that
EpiCept’s failure to respond constituted an adoptive
admission. The jury was also instructed regarding EpiCept’s
affirmative defense that the Doctors had waived their right to
insist on return of the patents.
Shortly after it was instructed and retired to deliberate, the
jury asked by note: “Was the burn treatment (patient) before
or after the agreement was entered? Does it matter?
Specifically to plaintiffs [sic] failure to do what contract
required.” The court answered:
In response to your question . . . these are
factual questions that must be determined by
the jury . . . . You must determine the facts in
this case based on the evidence presented.
The jury should review the contractual
provisions in addition to all of the other jury
instructions . . . in arriving at a verdict.
The jury returned a verdict for EpiCept on all counts of the
complaint. The Doctors moved for a new trial under Rule 59,
arguing, among other things, that the instructions failed to
clarify “that the concept of material breach was equally
applicable to the [the Doctors] as to any condition [with
which] they were required to comply.” The court denied the
motion, and entered judgment in the EpiCept’s favor.
The Doctors appealed. We have jurisdiction pursuant to
28 U.S.C. § 1291.
CROWLEY V. EPICEPT CORP. 15
II. DISCUSSION
A.
The Doctors make a number of arguments related to the
jury instructions. First, they contend that the jury instructions
were erroneous because they did not require the jury to decide
whether Dr. Flores’s use of NP-2 to treat burns was an
“improvement” under the Agreement. Second, the Doctors
argue that the jury was not adequately instructed that the
Doctors’ own breach could only defeat their breach of
contract claim if their breach was material. Finally, the
Doctors challenge the instructions, or lack thereof, dealing
with EpiCept’s late-raised argument that the Doctors were not
entitled to return of their patents because they failed to
comply with the Agreement’s 90-day notice-to-cure
requirement. They contend not only that the district court
erred in giving the instructions as it did, but that the district
court abused its discretion in denying the Doctors’ motion for
a new trial on this basis.
“When a party raises a contemporaneous objection to a
jury instruction, we review the jury instruction either de novo
or for abuse of discretion, depending on the nature of the
error.” Chess v. Dovey, 790 F.3d 961, 970 (9th Cir. 2015).
“We review a district court’s formulation of civil jury
instructions for an abuse of discretion, but we consider de
novo whether the challenged instruction correctly states the
law.” Wilkerson v. Wheeler, 772 F.3d 834, 838 (9th Cir.
2014). Similarly, a new trial may be warranted if the district
court has given “erroneous jury instructions” or failed “to
give adequate instructions.” Murphy v. City of Long Beach,
914 F.2d 183, 187 (9th Cir. 1990). We review the district
16 CROWLEY V. EPICEPT CORP.
court’s denial of a motion for a new trial for an abuse of
discretion. Id. at 186.
Challenges to jury instructions may be waived, however.
A “party forfeits a right when it fails to make a timely
assertion of that right and waives a right when it is
intentionally relinquished or abandoned.” United States v.
Kaplan, 836 F.3d 1199, 1216 (9th Cir. 2016), cert. denied,
137 S. Ct. 1392 (2017) (citing United States v. Olano,
507 U.S. 725, 733 (1993)). “Waiver of a jury instruction
occurs when a party considers ‘the controlling law, or omitted
element, and, in spite of being aware of the applicable law,
proposed or accepted a flawed instruction.’” Id. at 1217
(quoting United States v. Perez, 116 F.3d 840, 845 (9th Cir.
1997) (en banc)). “Forfeited rights are reviewable for plain
error, while waived rights are not.” Perez, 116 F.3d at 845;
see also C.B. v. City of Sonora, 769 F.3d 1005, 1017–18 (9th
Cir. 2014) (discussing plain error standard in civil context).
1.
The Doctors waived their argument that the jury
instructions were faulty because they did not require the jury
“to decide as a preliminary issue whether Dr. Flores’ use of
the ointment, on a few patients for burns, prior to the contract
constituted an improvement under the Agreement.” The
Doctors have likewise waived their argument that the district
court “should not have permitted the instruction at all . . .
[because] there was no testimony presented as to what
constituted an infringement of the Patent, and when home
use, authorized by the contract, would be considered an
improvement.” EpiCept and the Doctors, after a jury
instruction conference, explicitly agreed to use the instruction
“Plaintiffs’ Failure To Do What Contract Required,” and
CROWLEY V. EPICEPT CORP. 17
agreed that this instruction should omit the law regarding
patent infringement. This instruction explained infringement,
improvement, and materiality in a manner requested and
agreed to by the Doctors. The Doctors intentionally
abandoned any argument that the jury was not adequately
instructed regarding improvement or infringement of the
patents, or that the evidence did not permit this instruction.
See Kaplan, 836 F.3d at 1216 (citing Olano, 507 U.S. at 733).
2.
For different reasons, we also find unavailing the
Doctors’ argument that the jury was not adequately instructed
that any breach by the Doctors amounting to a “failure to do
what the contract required” must have been a material breach.
The instructions relevant to this issue were entitled
“Plaintiffs’ Failure to Do What Contract Required,” “Claims
of Breach,” and “Elements of Contract Claim.” After
agreeing on these instructions, the Doctors raised “a
mutuality issue.” They argued that because the “Plaintiffs’
Failure To Do What Contract Required” instruction did not
include a more detailed explication of materiality, and
because the “Claims of Breach” instruction defined
“materiality” only in terms of a defendant’s breach, the
instructions on this issue were inadequate. The Doctors
argued that the “Claims of Breach” instruction should be
modified to make clear that “material breach,” as defined in
that instruction, applied to both the Doctors and EpiCept.
The Doctors’ challenge to these instructions presents an
issue of formulation or wording, which we review for an
18 CROWLEY V. EPICEPT CORP.
abuse of discretion.4 Wilkerson, 772 F.3d at 838. The third
and fourth elements listed in the “Plaintiffs Failure to Do
What Contract Required” instruction make clear that for
EpiCept to succeed on its theory that the Doctors’ breach of
contract claim failed because the Doctors had not disclosed
their use of NP-2 to treat burns, EpiCept needed to prove that
the failure to disclose was material. This instruction clearly
told the jury that:
EpiCept claims that Plaintiffs cannot establish
a breach of contract because plaintiffs failed
to do what the contract required of them.
Specifically, EpiCept claims that the contract
obligated Plaintiffs to disclose, in writing,
their treatment of burn patients with NP-2. To
decide this issue, you must decide whether:
. . . the failure to disclose the treatment of
burn victims of NP-2 in writing to EpiCept
was material. A failure to disclose is material
if it defeats the purpose of the contract.
The “Claims of Breach” instruction explains “material
breach” both in terms of a “Defendant’s” breach, and in
general terms. For example, that instruction states: “A breach
is material if it affects the purpose of the contract in an
important or vital way. A material breach defeats the purpose
4
Even if the Doctors challenged the jury instructions as an incorrect
statement of the law, requiring us to review the challenged instructions de
novo, Wilkerson, 772 F.3d at 838, we would affirm. The instructions did
not misstate New Jersey’s law regarding material breach, or fail to
adequately inform the jury of it. Cf. Magnet Res., Inc. v. Summit MRI,
Inc., 723 A.2d 976, 981 (N.J. Super. Ct. App. Div. 1998); Medivox Prods.,
Inc. v. Hoffman-La Roche, Inc., 256 A.2d 803, 809 (N.J. Super. Ct. Law
Div. 1969).
CROWLEY V. EPICEPT CORP. 19
of the contract and is inconsistent with the intention of the
parties to be bound by the contract terms.” The Doctors had
every opportunity during closing arguments to argue that the
jury should consider the definition of materiality in more
detail, and the district court reminded them of their
opportunity to do so.
We therefore hold that the district court did not abuse its
discretion in formulating the jury instructions or in denying
the Doctors’ requested modification. The challenged
instructions correctly state the law, and the jury was clearly
and adequately informed that only a material breach by the
Doctors could defeat their breach of contract claim against
EpiCept. Accordingly, the district court did not abuse its
discretion in denying the Doctors’ request for a new trial on
this ground.
3.
The dissent takes issue with these instructions, but for
reasons not advanced by the Doctors. The Doctors do not
argue that the definition of materiality was “wholly
inadequate.” Nor do the Doctors argue that the definition of
material breach—defeating the purpose of the contract—is
incorrect as a matter of New Jersey law. They do not take
issue with the fact that the instructions did not include the
factors from the Second Restatement mentioned in the third
footnote in the New Jersey Model Instructions. The Doctors
had the obligation to raise these issues if they wanted the trial
court to consider them, and they failed to do so. Nor do they
raise these issues on appeal. We have noted:
There are . . . important reasons for holding
that an appellant waives an issue if it fails to
20 CROWLEY V. EPICEPT CORP.
provide argument about the issue in its
opening brief. Rules are enforced to deter the
type of improper, or inattentive, conduct that
occurred here. Moreover, “appellate courts do
not sit as self-directed boards of legal inquiry
and research, but essentially as arbiters of
legal questions presented and argued by the
parties before them.”
Brown v. Rawson-Neal Psychiatric Hosp., 840 F.3d 1146,
1149 (9th Cir. 2016) (quoting United States v. Mageno,
762 F.3d 933, 954–55 (9th Cir. 2014) (Wallace, J.,
dissenting)).
4.
Finally, we reject the Doctors’ challenge to the jury
instructions, or lack thereof, relating to EpiCept’s position at
trial that even if it had breached the Agreement, the Doctors
were not entitled to return of their patents as a remedy
because the Doctors had not complied with the Agreement’s
90-day notice-to-cure provision. The Doctors contend that
the district court erred by not including their proposed special
instructions on waiver, adoptive admissions, and materiality
in connection with this issue. But EpiCept prevailed on the
basis that the Doctors materially breached the contract by
failing to disclose Dr. Flores’s use of NP-2 on burns. Thus,
even assuming that the jury was not properly instructed
regarding the legal import of EpiCept’s failure to respond to
the Doctors’ written communications or the Doctors’
compliance with the 90-day notice-to-cure provision, those
errors were harmless. See Cheffins v. Stewart, 825 F.3d 588,
596 (9th Cir. 2016).
CROWLEY V. EPICEPT CORP. 21
B.
In addition, the Doctors challenge the district court’s
response to the question posed by the jury during
deliberations, which they characterize as “nearly non-
responsive and cursory.” The jury queried: “Was the burn
treatment (patient) before or after the agreement was entered?
Does it matter? Specifically to plaintiffs [sic] failure to do
what contract required.” The jury thus asked the court to
resolve a factual issue—whether the Doctors’ breach was
material—that the jury was charged with deciding. The court
properly responded by referring the jury both the evidence
presented at trial and the instructions the court previously
gave.
“The Supreme Court has clearly stated that it is reversible
error for a trial judge to give an answer to a jury’s question
that is misleading, unresponsive, or legally incorrect.” United
States v. Anekwu, 695 F.3d 967, 986 (9th Cir. 2012) (quoting
United States v. Frega, 179 F.3d 793, 810 (9th Cir. 1999)).
“When a jury makes explicit its difficulties a trial judge
should clear them away with concrete accuracy.” Id. (quoting
Frega, 179 F.3d at 809). But we have also recognized that “a
trial judge . . . enjoys wide discretion in the matter of
charging the jury,” and that “discretion carries over to a trial
judge’s response to a question from the jury.” Arizona v.
Johnson, 351 F.3d 988, 994 (9th Cir. 2003) (citations and
internal quotations omitted). “Because the jury may not
enlist the court as its partner in the factfinding process, the
trial judge must proceed circumspectly in responding to
inquiries from the jury . . . .” Id. (quoting United States v.
Walker, 575 F.2d 209, 214 (9th Cir. 1978)). Often the most
prudent approach, under such circumstances, is to “fram[e]
responses in terms of supplemental instructions rather than
22 CROWLEY V. EPICEPT CORP.
following precisely the form of question asked by the jury.”
Id. (quoting Walker, 575 F.2d at 214). When the jury’s
question does not indicate that “the jurors were affirmatively
interpreting the law incorrectly,” Anekwu, 695 F.3d at 987,
and the court’s original instructions provide a correct
statement of the law and “generally address[] the jury’s
question,” a district court acts “within its discretion by simply
referring the jury to the instructions they had already been
given,” Johnson, 351 F.3d at 995 (citing United States v.
McCall, 592 F.2d 1066, 1068–69 (9th Cir. 1979); United
States v. Collom, 614 F.2d 624, 631 (9th Cir. 1979); Wilson
v. United States, 422 F.2d 1303, 1303–04 (9th Cir. 1970);
Davis v. Greer, 675 F.2d 141, 145–46 (7th Cir. 1982)).
Here, the district court’s original instructions to the jury
were adequate and accurately stated New Jersey law, and the
jury’s question does not indicate that the jury was interpreting
the law incorrectly. Rather, the question indicated that the
jury sought to enlist the judge as its partner in determining
and interpreting the facts. The district court did not abuse its
discretion when it refused to invade the province of the jury,
and instead referred the jury back to the instructions already
given and the evidence presented at trial.
C.
The Doctors raise two challenges to the verdict’s
evidentiary basis. First, they contend that there was
insufficient evidence to support the verdict, and second, they
argue that the district court abused its discretion in finding
that the verdict was not contrary to the clear weight of the
evidence. Before the district court, the Doctors brought a
motion for a new trial under Federal Rule of Civil Procedure
59, but did not file a motion for judgment as a matter of law
CROWLEY V. EPICEPT CORP. 23
under Federal Rule of Civil Procedure 50(a) or (b). “[A]
post-verdict motion under Rule 50(b) is an absolute
prerequisite to any appeal based on insufficiency of the
evidence.” Nitco Holding Corp. v. Boujikian, 491 F.3d 1086,
1089 (9th Cir. 2007) (citing Unitherm Food Sys., Inc. v.
Swift-Eckrich, Inc., 546 U.S. 394 (2006)). The Doctors
waived their right to directly challenge the sufficiency of the
evidence by failing to make the appropriate Rule 50 motions.
See id. We thus assess only the trial court’s denial of the
Doctors’ motion for a new trial under Rule 59.
Under Rule 59, a court may grant a new trial “for any
reason for which a new trial has heretofore been granted in an
action at law in federal court.” Fed. R. Civ. P. 59(a)(1)(A).
Such reasons may include a “verdict [that] is contrary to the
clear weight of the evidence,” a verdict “based upon false or
perjurious evidence,” or “to prevent a miscarriage of justice.”
Passantino v. Johnson & Johnson Consumer Prods., Inc.,
212 F.3d 493, 510 n.15 (9th Cir. 2000) (citations omitted).
We review the trial court’s determination that the verdict was
not against the clear weight of the evidence for an abuse of
discretion. Kode v. Carlson, 596 F.3d 608, 612 (9th Cir.
2010). The district court’s denial of a Rule 59 motion on this
basis is “virtually unassailable. In such cases, we reverse for
a clear abuse of discretion only where there is an absolute
absence of evidence to support the jury’s verdict.” Id.
(emphasis in original) (quoting Desrosiers v. Flight Int’l of
Fla., Inc., 156 F.3d 952, 957 (9th Cir. 1998)).
New Jersey law provides that a party to a contract “may
be considered to have committed a material breach” when,
“during the course of performance,” he “fails to perform
[]essential obligations under the contract . . . .” Medivox
Prods., Inc. v. Hoffmann-La Roche, Inc., 256 A.2d 803, 809
24 CROWLEY V. EPICEPT CORP.
(N.J. Super. Ct. Law Div. 1969). And, it provides, “[w]here
a contract calls for a series of acts over a long time, a material
breach may arise upon a single occurrence or consistent
recurrences which tend to ‘defeat the purpose of the
contract.’” Id. (quoting Winfield Mut. Housing Corp. v.
Middlesex Concrete Prods. & Excavating Corp., 120 A.2d
655 (N.J. Super. Ct. App. Div. 1956)).
The district court concluded that EpiCept presented
sufficient evidence, through the testimony of the Doctors and
Peter Golikov, that Dr. Flores’s treatment of burn victims was
a material breach of the Agreement under New Jersey law.
This conclusion was by no means an abuse of discretion. The
two witnesses who negotiated the contract both testified that
the clause requiring the Doctors to inform EpiCept of
improvements to the patents practiced by the Doctors was
important. Dr. Crowley testified that “the goal of EpiCept
was to control all of the world patent rights on topical
Ketamine, and with that portfolio, they would be much more
successful than someone who didn’t own all the intellectual
property rights. They didn’t have to worry about assignment
issues, infringement issues, none of that.” He also testified
that he understood that “EpiCept was buying not only the two
patents but also all improvements thereto . . . .” Dr. Flores
testified that he used the patented formula to treat burn
patients, and Dr. Crowley confirmed that Dr. Flores’s use of
NP-2 to treat burn pain was an “improvement” of the patent.
Dr. Crowley testified that he “understood that providing the
information to EpiCept about improvements was important to
EpiCept because it could either help them get through the
FDA process or potentially apply for a new indication with
the FDA . . . .” Nonetheless, all three witnesses confirmed
that disclosure was never made.
CROWLEY V. EPICEPT CORP. 25
Golikov, the President and COO of EpiCept who
negotiated the contract on EpiCept’s behalf, testified that:
The purpose of the improvements clause in
any agreement is to sort of have some
confidence that after you pay all this money
for a particular patent that there isn’t
something around the corner that is slightly
better. So, you know, it’s a way of making a
fair deal for the licensor and licensee to
understand that what they’re getting is what
they’re getting, and there’s not something
better that they don’t know about, or if there
is something better 10 days later, then for all
that compensation, you would get rights to it.
He further testified that he would want to know about
improvements that were practiced “because it could
potentially affect the patient population in human trials. It
could be a better or worse population. We certainly would
like to know . . . .” Finally, he testified that EpiCept would
not have signed the contract if that particular clause was not
included.
The dissent, however, suggests that this evidence
regarding the purported “improvement” is not persuasive.
But whether a breach is material is a question for the jury to
decide, Magnet Res., 723 A.2d at 982, not an appellate court,
and at trial the Doctors themselves recognized that the
evidence on this issue went both ways, such that it was
appropriate for the jury to decide the question. Because it
cannot be said that there was an “absolute absence of
evidence to support the jury’s verdict,” Kode, 596 F.3d at
26 CROWLEY V. EPICEPT CORP.
612, we find that the district court did not abuse its discretion
in denying the Doctors’ motion for a new trial.
D.
The Doctors finally challenge the district court’s
exclusion of their expert witness, who was to testify regarding
the Doctors’ damages. “We review a district court’s
evidentiary rulings, such as its decisions to exclude expert
testimony . . . for an abuse of discretion, and a showing of
prejudice is required for reversal.” Ollier v. Sweetwater
Union High Sch. Dist., 768 F.3d 843, 859 (9th Cir. 2014).
Pederson was originally to offer opinions not only on whether
the Doctors sustained damages, but on whether EpiCept
breached its contractual obligations to the Doctors, whether
EpiCept’s efforts were commercially reasonable, and whether
the Doctors could have mitigated their damages. After
EpiCept moved to exclude Pederson’s testimony in its
entirety, the trial court concluded that the Doctors opposed
only Pederson’s exclusion as a damages expert. The district
court thus deemed the Doctors “to have admitted that Mr.
Pederson” was not qualified to opine on other topics in this
litigation. It is not clear whether the Doctors contend, on
appeal, that the district court erred in excluding Pederson’s
testimony in its entirety, or only on the issue of damages.
However, even assuming that the district court erred in
excluding Pederson from testifying on all of the topics
included in his expert report, that error was harmless in light
of our affirmance of the jury’s verdict finding EpiCept not
liable. The Doctors do not argue, and the record does not
reflect, that any of Pederson’s proposed testimony would
have any impact on the jury’s determination that the Doctors
failed to do what the contract required them to do.
CROWLEY V. EPICEPT CORP. 27
III. CONCLUSION
For the foregoing reasons, we AFFIRM.
WARDLAW, Circuit Judge, dissenting in part:
EpiCept’s claim that Plaintiffs materially breached the
parties’ agreement by using their patent to treat a few burn
victims was the legal equivalent of a Hail Mary pass. It
worked—miraculously, one might say. But EpiCept was
aided by two significant errors on the part of the district court
which require reversal and a new trial. First, the jury’s
verdict was not supported by substantial evidence because no
rational jury could find material breach on the evidence
presented. Second, the district court inadequately instructed
the jury on this claim.1 Our failure to correct these errors will
only increase uncertainty, and by extension bargaining costs,
for contracting parties.
A material breach is one that “defeats the purpose of the
contract,” Magnet Res., Inc. v. Summitt MRI, Inc., 723 A.2d
976, 981 (N.J. Super. Ct. App. Div. 1998) (internal quotation
marks omitted), leaving the promisee with “something
substantially less or different from that for which he or she
bargained,” 23 Williston on Contracts § 63:3 (4th ed. 2017).2
1
I dissent only with respect to the jury instruction and substantial
evidence issues.
2
The Restatement provides the following factors for determining
whether a breach is material:
28 CROWLEY V. EPICEPT CORP.
Whether a breach is material is generally a question of fact
for the jury. Magnet Res., 723 A.2d at 982. However, if this
question “admits of only one reasonable answer” in a given
case, “the court should intervene and resolve the matter as a
question of law.” 23 Williston on Contracts § 63:15 (4th ed.
2017) (citing Parker v. Byrne, 996 A.2d 627 (R.I. 2010)).
Here, there is only one reasonable answer: The clear
weight of the evidence demonstrates Plaintiffs’ breach was
not material. Indeed, there is no record evidence that Flores’s
treatment of a few burn patients with the patented formula
harmed EpiCept at all, much less defeated the purpose of the
contract. EpiCept concedes that it decided to stop work on
the NP-2 patent because its time was better spent on drug
candidates that were further along in development. EpiCept
(a) the extent to which the injured party will be
deprived of the benefit which he reasonably
expected;
(b) the extent to which the injured party can be
adequately compensated for the part of that benefit
of which he will be deprived;
(c) the extent to which the party failing to perform or
to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform or to
offer to perform will cure his failure, taking
account of all the circumstances including any
reasonable assurances;
(3) the extent to which the behavior of the party failing
to perform or to offer to perform comports with
standards of good faith and fair dealing.
Restatement (Second) Contracts § 241 (Am. Law Inst. 1981).
CROWLEY V. EPICEPT CORP. 29
does not even attempt to argue that its strategy would have
changed had it known of Flores’s use of the product on burn
victims. That the majority manages to find a material breach
where there is not even a claim for damages is strange indeed.
See, e.g., 23 Williston on Contracts § 63:3 (“In many cases,
a material breach of contract is proved by the established
amount of monetary damages flowing from the breach.”)
The majority incorrectly reasons that the jury’s finding of
material breach was supported by substantial evidence,
pointing to testimony that the use of NP-2 constituted an
“improvement” and testimony that it was an important clause
in the agreement. And I agree with the majority, that if this
were the appropriate inquiry, then evidence was undoubtedly
sufficient to find material breach. However, the question is
not the significance of the breached provision—an issue
courts are ill-equipped to determine—but rather the
significance of the actual breach. We must ask what EpiCept
actually lost, not what it might have lost. See, e.g.,
23 Williston on Contracts § 63:3 (“In many cases, a material
breach of contract is proved by the established amount of
monetary damages flowing from the breach.”). Accordingly,
if we ask what EpiCept lost by the Plaintiffs’ failure to
disclose their use of NP-2 on burns, the answer is “nothing.”
The majority’s holding that a breach is material any time
an important contractual term is breached would render
substantially all breaches material. For example, in a contract
with a single term, to “build a house with a ruby red roof,”
painting the roof maroon would be a material breach because
the term “house with a red roof” is crucially
important—indeed, it is the only thing the offeror receives
from the contract. But this is exactly the kind of situation the
material breach doctrine is designed to avoid. Instead of
30 CROWLEY V. EPICEPT CORP.
holding that the offeror has no duty to pay the contractor
because he painted the roof maroon, a court will simply
reduce the money owed by the cost of repainting the roof the
desired color.
Accordingly, I would find that the verdict was not
supported by substantial evidence, and that the district court
therefore abused its discretion in denying Plaintiffs’ Rule 59
motion for a new trial.
I would also hold that the district court abused its
discretion in failing to properly instruct the jury on the issue
of material breach. The majority blithely asserts that the
Plaintiffs waived this argument by failing to object to the jury
instructions at trial. This is a blatant misrepresentation of the
record. In fact, Plaintiffs vociferously objected. The district
court refused Plaintiffs’ pleas: “At this point, I leave it the
way it is. Your objection is highly noted.”
Each party claimed that the other was in material breach:
Plaintiffs as part of their prima facie case, EpiCept as an
affirmative defense. In Plaintiffs’ prima facie case, the
district court gave the jury a modified version of the New
Jersey model instruction on breach, including four paragraphs
explaining the concept of material breach in exhaustive detail.
But the court inexplicably refused Plaintiffs’ counsel’s
request for a substantially similar instruction on EpiCept’s
affirmative defense. Instead, the court offered the following
instruction, which is amended for clarity:
To decide [whether EpiCept was excused
from performance], you must determine
whether . . . [t]he failure to disclose the
treatment of burn victims with NP2 in writing
CROWLEY V. EPICEPT CORP. 31
to EpiCept was material. A failure to disclose
is material if it defeats the purpose of the
contract.
This instruction was wholly inadequate. While courts
may issue customized jury instructions so long as they “fairly
and adequately cover the issues presented,” United States v.
Peppers, 697 F.3d 1217, 1220 (9th Cir. 2012), the district
court’s instructions did not come close to doing so. Judges
trained in the law struggle to apply the same definition of
“material breach” that the court gave the jury.3 This difficulty
is precisely why the Restatement, which New Jersey’s
sanctioned jury instruction quotes in full, uses a detailed five-
factor test, see Restatement (Second) Contracts § 241, and
why the bulk of the New Jersey model instruction on breach
is devoted to explaining the concept of material breach—92
percent by word count. N.J. Model Civ. Jury Instruction
4.10L (2017).
New Jersey strongly favors the use of model jury
instructions, see State v. R.B., 183 N.J. 308, 325 (2005), and
there was particular reason for giving the model instruction
here. The district judge’s statement that jurors would have
found a more detailed explanation than the one he gave
“confusing,” does not square with his assent to four
paragraphs of explanation on the same issue in the instruction
on Plaintiffs’ prima facie case.
The majority reasons that the district court’s instructions
were sufficient because Plaintiffs could have told the jury to
3
See Eric G. Andersen, A New Look at Material Breach in the Law
of Contracts, 21 U.C. Davis L. Rev. 1073, 1091 (1988) (“An ‘essence of
the contract’ approach to materiality, of course, is [not useful].”)
32 CROWLEY V. EPICEPT CORP.
apply the instruction given on Plaintiffs’ prima facie case to
EpiCept’s affirmative defense, as well. However, the
majority cites no authority for the curious proposition that an
otherwise faulty instruction is acceptable so long as the trial
court does not prevent the challenging party from arguing the
issue to the jury. I sincerely doubt any exists. The judge is
the authority on the jury instructions it gives; the jury
necessarily gives less credence to the advocates’ descriptions
of the law, especially where those descriptions appear to
conflict with the judge’s instructions.
This case is a good illustration of how little understood
the concept of material breach is among lawyers and
judges4—and how important it is to fully instruct lay jurors in
it. The district court initially granted EpiCept’s motion for
summary judgment on the ground that Plaintiffs’ breach
excused EpiCept from performance. A different panel of our
Court reversed on appeal, correctly pointing out that only
material breaches excuse a counterparty’s performance.
Crowley v. EpiCept Corp., No. 12-55376, 547 F. App’x 844,
846 (9th Cir. Dec. 3, 2013) (unpublished). On remand, the
district court again demonstrated its failure to appreciate the
nuances of the doctrine. The disagreement among the judges
4
See William J. Geller, The Problem of Withholding in Response to
Breach: A Proposal to Minimize Risk in Continuing Contracts,
62 Fordham L. Rev. 163, 192 (1993) (“Courts have been accused of
determining the materiality of breach without any coherence, rationality,
or justification.”); Amy B. Cohen, Reviving Jacob and Youngs, Inc. v.
Kent: Material Breach Doctrine Reconsidered, 42 Vill. L. Rev. 65, 67
(1997) (“The problem with the current application of material breach
doctrine is in large part a result of an absence of focus. The courts apply
the test without articulating any foundation or context on which it is
based.”)
CROWLEY V. EPICEPT CORP. 33
on this panel is only further evidence of the concept’s
difficulty.
This is not a purely academic concern. The confusion
engendered by decisions like ours today has real-world
effects. Uncertainty about when courts will find a material
breach increases the cost of private transactions, which in turn
decreases economic welfare. The majority’s disposition only
adds to this uncertainty, and perpetuates an injustice.5
I respectfully dissent.
5
Because the jury found that Plaintiffs materially breached the
contract, it did not reach Plaintiffs’ argument that EpiCept was in breach.
Had Plaintiffs prevailed on this argument, they may have been entitled to
compensatory damages and/or the return of their patents.