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Kenton L. Crowley, et al v. Epicept Corporation

January 24, 2012

KENTON L. CROWLEY, ET AL.,
PLAINTIFFS,
v.
EPICEPT CORPORATION,
DEFENDANT.



The opinion of the court was delivered by: M. James Lorenz United States District Court Judge

ORDER:

(1) DENYING PLAINTIFFS' MOTION TO AMEND COMPLAINT [DOC. 57], AND (2) GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT [DOC. 50]

On December 1, 2008, Plaintiffs Kenton L. Crowley and John A. Flores commenced this action against Defendant Epicept Corporation. This action involves the circumstances surrounding an agreement whereby Plaintiffs assigned two patents to Defendant for development. Defendant now moves for summary judgment, and Plaintiffs concurrently move to amend their complaint. Both motions are opposed.

The Court found these motions suitable for determination on the papers submitted and without oral argument. See Civ. L.R. 7.1(d.1). (Docs. 69, 80.) For the following reasons, the Court DENIES Plaintiffs' motion to amend the complaint (Doc. 57), and GRANTS Defendant's motion for summary judgment. (Doc. 50.)

BACKGROUND

Between 1998 and 2000, Dr. Crowley, a pharmacist, and Dr. Flores, a physician, jointly obtained two patents. (Crowley Decl. ¶ 2--3.) The first is U.S. Patent No. 5,817,699, entitled "Patent For Process For The Preparation of Ketamine Ointment," and the second is U.S. Patent No. 6,017,961, entitled "Ketamine and N-Butyl-P-Aminobezoate in PLO." (Id.) These patents, collectively referred to as the Crowley Flores Patents,*fn1 provide a topical treatment for neuropathic and other forms of pain and other diseases, such as Parkinson's Disease. (Id. ¶ 6.) Prior to the Crowley Flores Patents, the only commercially available forms of ketamine were through intravenous, subcutaneous, or intramuscular injection. (Id. ¶ 7.) These commercially available applications were known to have side effects such as sedative and cognitive impairment. (Id.)

A. Assignment Agreement

On December 1, 2000, the parties entered into an Assignment Agreement. (Talley Decl., Ex. B.) The Agreement was negotiated between Dr. Crowley and Peter Golikov, who was Defendant's President and Chief Operations Officer at the time. (Crowley Dep. 82:4--86:14; Golikov Dep. 205:10--206:1.) Dr. Crowley does not believe that Mr. Golikov made any false representations or failed to disclose any information during the negotiations. (Crowley Dep. 290:12--16, 297:19--298:6.) Both sides were assisted by outside counsel. (Crowley Dep. 86:3--12; Golikov Dep. 205:10--206:1.) Furthermore, Defendant entered the Agreement planning to develop a commercial product based on Plaintiffs' patents. (Golikov Dep. 111:18--119:8.) Though Mr. Golikov never discussed with Dr. Crowley that Defendant may stop development of NP-2 altogether, Dr. Crowley knew that there was a possibility that the FDA would not approve NP-2. (Golikov Dep. 241:5--16; Crowley Dep. 154:7--15.)

The Agreement provides that "Crowley and Flores each does hereby assign to EpiCept his entire right, title and interest in and to the Invention, any Improvements, and the [Crowley Flores] Patents." (Agreement § 2.) It further provides that Plaintiffs shall provide written notice to Defendant of each improvement within thirty days of the date of conception or, if conceived prior to the effective date, then within ten days after the effective date. (Id. § 2.1.) In consideration for the rights granted by the assignment, Defendants were to pay Plaintiffs an assignment fee of $300,000, and royalties beginning on the date of the first commercial sale, continuing for a set time period. (Id. § 4.1--4.2.)

The Agreement also contains language for termination of the assignment if there is a material breach. Specifically, if there is a material breach by Defendant:

[Plaintiffs] shall have the right to terminate this Agreement pursuant to this Section 10.2 only if (a) EpiCept material breaches the payment obligations set forth in Section 4 hereof; or (b) EpiCept fails to use commercially and scientifically reasonable efforts to (i) file an Investigational New Drug Application, or its equivalent, with the United States Food and Drug Administration ("FDA"), directed to a Patented Product within two (2) years of the Effective Date hereof, or (ii) file a New Drug Application, or its equivalent, with the FDA directed to a Patented Product within four (4) years of the Effective Date hereof, provided that EpiCept and [Plaintiffs] agree to renegotiate, in good faith, the terms of this Section 10.2.1(b) at any time upon the request of EpiCept. If [Plaintiffs] duly terminate this Agreement pursuant to this Section 10.2.1, EpiCept shall execute an Assignment . . . transferring EpiCept's entire right, title, and interest in and to the Patents to [Plaintiffs], jointly. (Agreement § 10.2.1.) If there is a material breach by Plaintiffs, "EpiCept shall have the right to terminate this Agreement pursuant to this Section 10.2 only if one or both of [Plaintiffs] material breach (a) the confidentiality obligations . . . and/or (b) the terms and conditions of Section 7."

§ 10.2.2.) In the event of a material breach, the non-breaching party must provide written notice and an election to terminate at the expiration of a 90-day cure period. (Id. § 10.2.3.) The non-breaching party may terminate by giving a second written notice should the breaching party fail to: (1) cure the default, (2) provide a satisfactory written explanation that a default has not occurred, or (3) enter into a written agreement resolving the default. (Id.)

Lastly, the Agreement contains an integration clause and a New Jersey choice-of-law provision. (Agreement §§ 13.3, 13.6.)

B. Performance Under the Agreement

Around the time that the parties entered into the Agreement, Dr. Flores used the ketamine-butamben ointment to treat his patients for pain who had first-degree and second-degree burns. (Flores Dep. 46:6--51:23.) He found the ointment effective in treating the pain associated with such burns. (Id.) However, the treatment of pain associated with first-degree and second-degree burns is not a claim or an indication of the '961 Patent. (Talley Decl. ¶ 28.) Furthermore, Plaintiffs did not inform Defendant that they used the ketamine-butamben ointment to treat Dr. Flores' patients suffering from first-degree and second-degree burns. (Id. ¶ 26; Flores Dep. 51:2--4.)

Pursuant to the Agreement, Defendant paid Plaintiffs the $300,000 assignment fee. (Golikov Dep. 111:18--112:6; Crowley Dep. 289:8--21.) When Defendant began developing NP-2, it also hired Dr. Crowley as a paid consultant to assist in the process. (Dr. Crowley Dep. 102:15--103:13, 182:1--185:4, 250:14--16.) Defendant worked directly on developing NP-2 for a year. (Talley Decl. ¶¶ 2--19.) During that year, Defendant conducted formulation, stability, and permeation studies to further develop NP-2 in an effort to submit an Investigational New Drug ("IND") Application to the FDA. (Id. ¶¶ 6, 10; Crowley Dep. 182:2--188:1.) In fact, Dr. Crowley was directly involved in some of the pre-clinical studies, and agreed that Defendant performed as expected during the first year or two. (Crowley Dep. 182:2--188:1, 289:8--25, 298:7--12.)

After finishing the three studies, Defendant decided to prioritize its development efforts NP-1 over NP-2. (Talley Decl., Ex. A.) It explained to Plaintiffs that the decision was made due to "limited resources" and the belief that "the scientific information gained from the development of NP-1 would greatly enhance the chances of success for another ketamine-based product [such as NP-2]." (Id.) Defendant also informed Dr. Crowley that it believed that it would be easier to obtain FDA approval for NP-1. (Crowley Dep. 320:4--14.) This concern was particularly important because sometime after entering into the Agreement, the FDA expressed concerns to Defendant about the topical use of ketamine in NP-1 and informed Defendant that it would not allow Defendant to rely upon safety studies that the FDA already had supporting ketamine. (Talley Decl. ¶ 14.) According to Defendant, it also postponed direct development of NP-2 because Plaintiffs' technology was inferior to a cream version of NP-2 and Plaintiffs' technology as reflected in the '961 Patent could not be commercialized because the patented formula was not stable enough for FDA approval. (Golikov Dep. 133:22--138:4, 219:16--221:24.) By October 2001, all development work on NP-2-both preclinical and clinical-had ended. (Talley Dep. 93:8--94:1.)

In November 2002, Defendant acknowledged in a letter to Plaintiffs that it was not going to file an IND application by December 1, 2002, but wrote that it had "every intent to do whatever is necessary to eventually file an IND, and later an NDA [or "New Drug Application"] directed at a Patented product" and "look[ed] forward to continuing this relationship." (Larson Decl., Ex. B.) The purpose of this letter was to assure Dr. Crowley that work was proceeding on NP-2. (Kozak Dep. 74:6--12.) Thereafter, in September 2003, an email was sent to Dr. Crowley stating that "[a]s we stated in our June 2003 email, we will keep you involved in the IND process and development for NP-2 as we move the project forward." (Larson Decl., Ex. C.)

By January 2004, Plaintiffs began inquiring as to the status of NP-2 in order to assess whether they should terminate. (Larson Decl., Ex. D; Phillips Decl. ¶ 31.) The following month, Defendant responded to the inquiries, stating that it was in compliance with the Agreement, that it was working on NP-1 to help develop NP-2, and that it had every intention of filing an IND application and NDA for NP-2. (Larson Decl., Ex. E; Phillips Decl. ¶ 32.) In March 2004, through their counsel, Plaintiffs advised Defendant in writing that they were not satisfied with the update given. (Larson Decl., Ex. G; Phillips Decl. ¶ 32.) Shortly thereafter, Defendant responded that: (1) Defendant believed that its ketamine work will help the company in submitting NP-2 to the FDA; (2) Defendant has a meeting set up with the FDA to help guide the company in its development efforts of ketamine; (3) after that meeting, Defendant may have a basis for submitting an IND application for NP-2; and (4) Defendant's executives looked forward to a continuing relationship with Plaintiffs and meeting Dr. Crowley in New York. (Larson Decl., Ex. H; Phillips Decl. ¶ 33.)

On May 18, 2004, Plaintiffs received a letter proposing a termination agreement in which Defendant retained licensing rights. (Larson Decl., Ex. J; Phillips Decl. ¶¶ 13--16, 36.) Plaintiffs rejected the proposal. (Id.) In addition to rejecting the proposal, they suggested that no work had been done on NP-2 since 2001, when Dr. Crowley stopped consulting for Defendant, and demanded a cure in accordance with the Agreement. (Id.) It is unclear what immediately transpired next, but Plaintiffs contend that Defendant refused to terminate without retaining licensing rights. (Phillips Decl. ¶ 37.) Then in April 2006, Plaintiffs terminated the Agreement due to "[Defendant's] failure to abide by the terms of Section 10.2.1" and demanded that Defendant assign the patents back to Plaintiffs. (Larson Decl., Ex. K.)

For next year, Plaintiffs continuously inquired about the termination, but to no avail. (Phillips Decl. ¶¶ 41--42, 44, 46--47.) Other companies approached Plaintiffs concerning the licensing of the patents, but became disinterested when learning that Defendant had not reassigned the patents back to Plaintiffs. (Crowley Decl. ¶ 26.)

On December 1, 2008, Plaintiffs commenced this action. In the complaint, they assert four claims: (1) breach of contract, (2) breach of implied covenant of good faith and fair dealing, (3) fraud, and (4) rescission. Defendant now moves for summary judgment, and Plaintiffs concurrently move to amend their complaint. Both motions are opposed.

MOTION TO AMEND ...


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