Sargon Enter. v. U.S.C. 2/9/11 CA2/1

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State: California

Court: 1st District Court of Appeal 1st District Court of Appeal

Docket No: B202789

Case Date: 04/29/2011

Preview:Filed 2/9/11 Sargon Enterprises v. USC CA2/1

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION ONE

SARGON ENTERPRISES, INC., Plaintiff and Appellant, v. UNIVERSITY OF SOUTHERN CALIFORNIA et al., Defendants and Appellants.

B202789, B205034 (Los Angeles County Super. Ct. No. BC209992)

APPEALS from a judgment and orders of the Superior Court of Los Angeles County. Terry A. Green, Judge. Judgment reversed with directions; orders affirmed. Browne Woods George, Allan Browne, Eric M. George, Benjamin D. Scheibe, Robert B. Broadbelt and Ira Bibbero for Plaintiff and Appellant. Quinn Emanuel Urquhart Oliver & Hedges, Quinn Emanuel Urquhart & Sullivan, John B. Quinn, Michael E. Williams, Michael T. Lifrak, Kathleen M. Sullivan and Daniel H. Bromberg for Defendants and Appellants.

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The University of Southern California (USC) breached its contract with Sargon Enterprises, Inc. (Sargon), yet convinced the trial court for the second time to exclude evidence of lost profits on the ground it was speculative. We conclude the trial court erred by excluding Sargon`s evidence in that regard. Rather, the evidence proved lost profits with reasonable certainty. Accordingly, we again return the matter to the trial court for a new trial on the issue of lost profits. With respect to the other issues raised on appeal, we affirm. Defendants filed a cross-appeal challenging the trial court`s award of attorney fees to Sargon. We also affirm as to that issue. I BACKGROUND This is the second appeal in this case. In 1991, Sargon obtained patents on a dental implant. Sargon desired that USC use the implant in teaching at its dental school, and USC requested a clinical study be conducted to allow USC to provide academic support for the device. The implant had the approval of the United States Food and Drug Administration (FDA), permitting it to be sold and used in the United States. In November 1996, the parties entered into a Clinical Trial Agreement (CTA), intending to conduct a five-year study of the implant. Over a year into the study, Sargon contended USC failed to deliver timely the promised reports and otherwise breached the CTA. On May 7, 1999, Sargon filed this action against USC and certain faculty members of USC`s dental school involved in the study. Sargon asserted claims for breach of contract, fraud, and other torts. USC cross-claimed for breach of contract. After Sargon`s tort claims and claims against the individuals were eliminated by demurrer and summary judgment, the remaining contract action against USC was tried in 2003. Before trial, the court ruled in limine, excluding evidence of Sargon`s lost profits on the ground they were not foreseeable to defendants. The jury awarded Sargon $433,000 in compensatory damages on its breach of contract claim, and found for it on USC`s cross-complaint for breach of the CTA. The trial court found USC to be the prevailing party because Sargon`s verdict was less than USC`s Code of Civil Procedure

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section 998 offer, and awarded USC attorney fees. (All undesignated section references are to the Code of Civil Procedure.) Sargon appealed the judgment, but USC did not separately appeal the judgment against it on its cross-complaint. We reversed, finding the trial court erred in excluding evidence of Sargon`s lost profits on the grounds of foreseeability and remanded for a new trial on that issue. We also reversed the judgment of dismissal on Sargon`s fraud claims, and reversed the postjudgment orders awarding USC costs and attorney fees. (Sargon Enterprises, Inc. v. University of Southern California (Feb. 25, 2005, B167519, B163707) [nonpub. opn.], p. 26 (Sargon I).) On remand, in April 2006, Sargon filed a second amended complaint based on two contract and four tort theories. Sargon`s claim for breach of the covenant of good faith and fair dealing was dismissed by demurrer, its tort claims by summary adjudication, and the case again proceeded to trial on the breach of contract claim. The trial court again excluded in limine evidence of lost profits. In August 2007, the parties stipulated to entry of judgment for $433,000 on the breach of contract claim, and the trial court awarded attorney fees to one of the individual defendants who had been dismissed from Sargon`s second amended complaint and to Sargon on its contract claim. Sargon filed the present appeal. Defendants cross-appealed, challenging the award of attorney fees to Sargon. Dr. Sargon Lazarof, the president and CEO of Sargon, first began placing dental implants in patients in his private practice in 1988 or 1989 after taking courses in implantology. He began to develop the Sargon implant, which could be implanted immediately following an extraction and contained both the implant and full restoration. In the 1980`s, the standard implant was the Branemark implant developed at the University of Gothenburg in Sweden. The Branemark implant required several steps. First, surgery would place the implant in a healed extraction socket in the patient`s mouth; a second surgery would inspect the implant to see if it had properly integrated with the bone (a process known as osseointegration); last, a crown would be placed on the implant. Sargon`s implant was a one stage implant: it expanded immediately into the

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bone socket with an expanding screw; this mechanism permitted the implant to be loaded with a crown the same day. In 1992, after obtaining a patent on the implant, Dr. Lazarof formed Sargon to develop, market, and sell the implant. After receiving FDA clearance, Sargon began marketing the implant in the United States. Dr. Marwan Abou-Rass, one of Dr. Lazarof`s professors at USC, contacted Dr. Lazarof to discuss the implant and received training in its use. After placing the implant in some of his own patients, Dr. Abou-Rass believed the implant should be used at USC, and approached Dr. Howard Landesman, the Dean of the USC dental school. Dean Landesman agreed with Dr. Abou-Rass`s assessment that the Sargon implant could change dentistry. Although USC had an exclusive contract with Nobel Biocare requiring USC to use Nobel Biocare`s Branemark implant exclusively, an exception to the contract with Nobel Biocare permitted USC to study other implants. Dean Landesman proposed to Lazarof that USC conduct a study to evaluate the Sargon implant because such a study would permit USC to determine for itself that the implant could do what it was supposed to do.` If the study results were good, USC would be in a position to exercise its right to cancel its contract with Nobel Biocare and position itself as the premier institution associated with the Sargon implant. In early 1996, USC initiated a meeting with Sargon that was attended by Dr. Lazarof, Dr. Abou-Rass, Dean Landesman, and Dr. Robert Garfield, a dentist who worked for Sargon. Dean Landesman told Dr. Lazarof if the implant worked as Sargon claimed, association with USC would put USC back in the number one position it had once enjoyed among dental schools. USC told Dr. Lazarof it would need a study to prove that the implant was successful, and Dean Landesman told Dr. Lazarof, Give me one year, and I will give you the world.` The one-year period was based on the scientific consensus in the dental field that if an implant had not failed after six months to one year, it was highly unlikely it would fail after that time. During the negotiations that led to the CTA, Dr. Lazarof stressed to USC the importance of a timely one-year interim report to Sargon`s marketing, and Sargon would need interim six-month reports. 4

USC wanted to appoint defendant Dr. Winston W. L. Chee, director of implant dentistry at USC, to head the study. During the negotiations leading up to the CTA, Dr. Lazarof realized that Dr. Chee harbored animosity toward him. Dr. Chee said to Dr. Lazarof, Here you go, you are a general Practitioner, and I am the prostodontist, the university professor, I am specializing in restoring implants. You are a general practitioner in private practice and you have come up with this technique, and you want to come change the way USC does dentistry, and through USC you want to change the whole world and the way they do implantology.` When he learned that Dean Landesman and Dr. Abou-Rass wanted Dr. Chee to head the study, Dr. Lazarof became concerned and informed them that Dr. Chee did not like him, did not like the Sargon implant, and was committed to Nobel Biocare`s competing Branemark implant that he had been working with exclusively for many years.1 Dr. Lazarof told them that USC would be taking a big risk in appointing Dr. Chee, and asked whether USC would be responsible if Dr. Chee compromised the study. Dean Landesman and Dr. Abou-Rass assured Dr. Lazarof they would properly supervise Dr. Chee. In September 1996, USC appointed Dr. Lazarof clinical professor of dentistry. The purpose of the appointment was to permit Dr. Lazarof to train all faculty members to use the Sargon implant, in particular those professors participating in the study. According to Sargon, Dr. Chee objected to Dr. Lazarof`s appointment as clinical professor and refused to be trained to use the implant or to allow the graduate students who were performing restorations on study patients to be trained to use the implant. On November 8, 1996, Sargon, USC and Dr. Chee entered into the CTA, in which USC agreed to conduct a clinical trial of the Sargon implant. At a cost of $200,000, Sargon would fund the study of the implant at USC. The study would examine 40

In 1996, Dean Landesman had told Dr. Lazarof that USC had an agreement with Nobel Biocare pursuant to which USC was purchasing all of its implants for teaching from Nobel Biocare. Sargon alleged Nobel Biocare is the largest producer of implants in the world and Sargon`s biggest competitor, and stood to lose if the Sargon study confirmed the efficacy of the Sargon implant. 5

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implant sites, and cover a five-year period so that the success of the implant could be evaluated. Dr. Chee was designated as principal investigator to oversee the study in accordance with the protocols set forth in the CTA. Defendant Dr. Hessam Nowzari, a professor at USC`s dental school, was to perform surgeries that were part of the study. Although USC represented that it had the expertise and qualifications to perform the study, according to Sargon, Dr. Chee had inadequate experience to conduct a clinical trial study, had never prepared a report for a clinical trial study, and was unfamiliar with the requirements for such reports. Pursuant to the CTA, USC and Dr. Chee agreed to prepare and submit, within 30 days of each June 30 and December 31 during the time the study was being conducted, a written report to Sargon detailing the study results. In addition, Sargon had the right to review and be present at clinical procedures, and to meet and confer with Dr. Chee and other university employees involved in the study; if Dr. Chee was the principal author, Sargon had the right to review and comment on any USC publications regarding the study; otherwise, publications concerning the implant could not be disseminated without Sargon`s consent; and USC was required to keep confidential all information regarding the study. The CTA also provided at paragraph 11.3 that USC and Dr. Chee jointly and severally represented that [t]o their actual knowledge, without any duty to investigate, they know of no reason why Dr. Chee will not continue to serve as the Principal Investigator throughout the entire Research Period. Dr. Chee signed the CTA both on behalf of USC and individually, solely as to the representations, warranties and covenants contained in Section 11.3 hereof. At the end of 1997, when he had not received any reports from the study, Dr. Lazarof asked Dean Landesman, Dr. Chee, and Dr. Nowzari for them. They told Dr. Lazarof that USC was going to release the report orally at a USC periodontal symposium in February 1998 and at a Monte Carlo symposium in April 1998. Further, they would not provide Dr. Lazarof with a report until after the Monte Carlo symposium. At the February 1998 symposium, Dr. Chee reported a 100 percent success rate for the 6

Sargon implant. At that time, Dr. Nowzari gave Dr. Lazarof a letter for use in marketing the implant in Saudi Arabia. The letter stated that our animal and human studies conducted in USA and Europe confirm the superiority of the Sargon Dental Implant to our present system (Branemark System)` and that the Sargon tooth replacement system has been introduced at the USC School of Dentistry as the system of choice for patient care.` In March 1998, Dean Landesman and Dr. Chee sent Dr. Lazarof a letter advising him that USC had completed the last of the implants called for by the study, and 16 months into the study, there had not been a single failure. At the Monte Carlo symposium in April 1998, over 400 dentists and leaders of the dental profession attended. Sargon paid for the symposium at a cost of $172,000. At the symposium, Dr. Chee and Dr. Nowzari made very positive comments about the implant and stated that the one-year success rate was 100 percent. After hearing about the implant`s success, many of the dentists who attended the symposium asked Dr. Lazarof for a copy of the report and expressed interest in using or distributing the implant. A book about the implant, The Immediate Load Implant System: Esthetic Implant Dentistry for the 21st Century, was available that had been authored by Dr. Nowzari and two other dentists participating in the study. But when Sargon was not able to provide copies of the study report, Dr. Lazarof alleged Sargon lost credibility with dentists. Dr. Lazarof continued to ask Dean Landesman for the study report. In the Fall of 1998, he learned Dean Landesman was leaving the dental school and would be replaced by Dr. Gerald Vale. In the latter part of 1998, Dean Landesman and Dean Vale told Dr. Lazarof that Dr. Chee was causing the delay in the report because he was refusing to provide it. In February 1999, Dr. Lazarof received the first report. According to Sargon, the report failed to summarize results of the work in customary clinical format because it failed to contain sufficient and detailed information on the patients in the study; the report was unprofessional in appearance; it was not on USC letterhead; and it did not mention USC or state that the study was being conducted by USC. Further, the study itself was not in accord with the protocol; medically inappropriate patients were admitted; and

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improper implant cement was used in numerous cases. As a result, Sargon was not able to use the report to market the implant. Dr. Lazarof asked Dean Vale and Dean Landesman to provide him with the patient records. In April 1999, Dean Vale and Dean Landesman told him they could not get Dr. Chee to give them the records, and there was nothing they could do about it. As a result, in May 1999, Dr. Lazarof filed this action.2 In July 1999, while this action was pending, Dr. Chee provided a second written report. Although it was printed on USC letterhead, the second report -- according to Dr. Lazarof -- suffered from similar deficiencies as the first report. In addition, it was not signed by Dr. Chee and described problems in patients that had not been set forth in the first report, causing Dr. Lazarof to become suspicious that USC was either describing problems that did not exist or was failing to follow the study protocol. Based upon his observation of implant surgeries, Dr. Lazarof concluded the second report included new information of adverse patient reactions, namely, bone loss, fistulas, and bleeding gums, and the patient charts had been altered by deletions and additions in order to make them consistent with negative comments in the second report. Dr. Lazarof did not receive any patient records until September 1999 when they were produced in response to a court order. He did not receive the complete records until six or seven months later. Dr. Lazarof`s review of the records showed that of the 23 patients (who received a total of 43 implants), 12 patients (who received a total of 20 implants) should not have been included in the study because they fell within the exclusion criteria: They exceeded the age limit of 65, smoked, used alcohol, had poor bone quality, psychiatric problems, infections, or were undergoing other treatments

The first amended complaint alleged claims against USC, Dr. Chee, Dr. Nowzari and several other individual defendants for breach of written contract, intentional interference with prospective economic advantage, trade disparagement, violation of Business & Professions Code section 17200, conversion, fraudulent deceit, fraudulent misrepresentation, fraud, breach of the covenant of good faith and fair dealing, negligence, and breach of oral agreement. 8

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before the implants could be used. Some patients had more than one of these exclusion criteria.3 After terminating the study, in December 1999 Sargon did not contact any other dental schools to do a study of the implant. In June 2000, Dr. Lazarof learned that Nobel Biocare had made substantial monetary payments to USC and paid honorariums to Dr. Chee. II DISCUSSION On appeal, Sargon challenges (1) the sustaining of the demurrer to its breach of covenant claim, (2) the granting of the motion for judgment on the pleadings as to its breach of contract claim as to Dr. Chee, (3) the granting of the summary adjudication motion as to its fraud claim, (4) the granting of the motion in limine to exclude evidence of lost profits, and (5) the award of attorney fees to Dr. Chee. USC cross-appeals as to the award of attorney fees to Sargon. We conclude the trial court properly resolved all of these issues with the exception of the granting of the in limine motion to exclude evidence of lost profits. We therefore remand the case for a new trial on that issue. A. Demurrer to Second Amended Complaint On review of the sufficiency of a complaint against a general demurrer, [w]e treat the demurrer as admitting all properly pleaded material facts, but not contentions, deductions or conclusions of fact or law.` (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 6.) We also consider matters subject to judicial notice. (Ibid.) Our sole task is to determine as a matter of law whether the complaint states a cause of action. (People ex rel. Lungren v. Superior Court (1996) 14 Cal.4th 294, 300.) [W]hen [a demurrer] is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its Twelve patients had exclusion criteria, as follows: age violations (four), smokers (three), diabetic (one), alcohol (two), poor bone quality (four), psychiatric problems (one), adjacent infection (one), concomitant treatment required (one). 9
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discretion and we reverse; if not, there has been no abuse of discretion and we affirm. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The burden of proving such reasonable possibility rests squarely on the appellant. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) On April 10, 2006, Sargon filed its second amended complaint against USC, Dr. Chee, and Dr. Nowzari, alleging claims for breach of contract, breach of the covenant, fraud, intentional interference with economic advantage, breach of fiduciary duty, and negligence. (Dr. Nowzari is not a party to this appeal.) The second amended complaint alleged as follows. The first cause of action, for breach of contract, against Dr. Chee and USC, alleged they breached the CTA by failing to provide the written reports as provided in the CTA; failing and refusing to permit Sargon to review and copy patient records as provided in the CTA; failing and refusing to permit Sargon to be present at all clinical procedures and to meet and confer with persons involved in the study as provided in the CTA; publishing descriptions of the study without providing Sargon with a written copy of the proposed publication for Sargon`s review and comment as provided in the CTA; releasing and disseminating information regarding the CTA and the study without Sargon`s prior written consent as provided in the CTA; releasing and disclosing confidential information to third parties and known competitors, as that term was defined in the CTA; and selecting patients for the study who were not within the age or health guidelines of the study. Sargon also alleged that it was entitled to attorney fees on this claim pursuant to this court`s opinion in Sargon I. The second cause of action, for breach of the covenant, alleged that USC and Dr. Chee had breached the covenant by, among other things, intentionally selecting patients of the study who were not within the age or health guidelines of the study; intentionally including patients in the study the parties had agreed to exclude; improperly discrediting the study by informing third parties that the implant had unacceptably high rates of failure; destroying, altering and damaging records; failing to disclose receipt of

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contributions from Sargon`s largest competitor, Nobel Biocare; and permitting the approval of the study by the Institutional Review Board (IRB) of USC to lapse. The third cause of action, for fraud, alleged that USC and Dr. Chee misrepresented their expertise, willingness, and qualifications to perform the study competently, and misrepresented that they intended to perform their obligations as described in the CTA. Sargon alleged such representations were known to be false at the time USC and Dr. Chee made them, and had Sargon known the true facts, it would not have engaged in promotion, marketing, sales, and other activities. The second amended complaint also alleged in its fourth, fifth and six causes of action, which are not at issue here, claims for intentional interference with economic advantage; breach of fiduciary duty based on defendants` entrustment with Sargon`s confidential patient information and intellectual property; and negligence based on defendants` failure to perform the CTA competently. Defendants demurred to all causes of action in the second amended complaint except the first cause of action for breach of the CTA. Defendants argued that with respect to the claim for breach of the covenant, Sargon sought to relitigate issues that had previously been adjudicated against it. In particular, Sargon claimed that defendants had breached the CTA (1) by selecting patients for the study who were not within the age guidelines, (2) intentionally including in the study patients that the parties had previously agreed to exclude, and (3) improperly discrediting the study by informing third parties that the implant had unacceptably high levels of failure. Defendants contended that in Sargon I we drew a distinction between the primary right underlying the fraud allegations and the contract allegations by finding the fraud allegations involved acts outside the scope of the CTA. Further, in Sargon I, we granted leave to plead a breach of the covenant, but only insofar as it was based on the alteration of patient records.4 Therefore,

In Sargon I, we stated that we agreed with Sargon`s analysis that [t]he mere failure of performance of the clinical trial agreement does not violate the same primary right as actions deliberately and fraudulently undertaken to destroy the reputation of the implant by altering patient records, accepting bribes from plaintiff`s competitor, and
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by pleading breach of the covenant based upon the three classes of acts, Sargon was seeking to relitigate issues previously adjudicated in Sargon I. Sargon argued in opposition to the demurrer that collateral estoppel did not preclude its breach of the covenant claim because collateral estoppel did not apply to further proceedings in the same case; Sargon I specifically mentioned that claim and did not consider it to be precluded by prior proceedings;5 defendants did not demur to the remaining factual allegations underpinning the claim;6 and the jury`s verdict established that it found against USC on these three factual issues. The parties submitted supplemental briefing as to whether the breach of covenant claim was (1) the legal equivalent of Sargon`s breach of contract claim or (2) foreclosed by Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654 and its progeny, including Mitsui Manufacturers Bank v. Superior Court (1989) 212 Cal.App.3d 726. Sargon argued that a claim for breach of the covenant was independent of a breach of contract claim. While acknowledging that such a claim that relied on the same alleged acts and sought the same damages could be disregarded as superfluous, Sargon argued that where the underlying acts supporting each claim differed, a claim for breach of the covenant was distinct where none of the acts complained of were disallowed by the agreement, but had the effect of injuring the plaintiff`s right to receive the benefits of the agreement. Sargon also argued that, under Foley, breach of the covenant need not be tortious, and could constitute a claim grounded in contract law.

permitting approval of the [IRB] to lapse. [

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