USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 93-1385
MARUHO COMPANY, LTD.,
Plaintiff, Appellant,
v.
MILES, INC.,
Defendant, Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
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Before
Breyer, Chief Judge,
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Aldrich, Senior Circuit Judge,
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and McAuliffe,* District Judge.
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Alan R. Hoffman with whom John R. Cavanaugh and Lynch, Brewer,
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Hoffman & Sands were on brief for appellant.
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Sydelle Pittas with whom Powers & Hall, P.C. was on brief for
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appellee.
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December 29, 1993
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*Of the District of New Hampshire, sitting by designation.
BREYER, Chief Judge. Miles, Inc., invented and
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patented a pain-killing drug called Xorphanol. In 1984,
Miles gave Pars Pharmaceutical Co. the
exclusive right throughout the world to
make, have made, use and sell
Xorphanol, in return for which Pars promised to pay a
royalty and
to use reasonable efforts directly or
through its subcontractors to develop
one or more compounds . . . to the point
of [obtaining] . . . government . . .
approval for . . . [Xorphanol's]
therapeutic use . . . .
In 1988, Pars sublicensed the plaintiff in this lawsuit,
Maruho, Inc., to develop Xorphanol "compounds" and to sell
them in Japan.
According to Maruho, Pars misled it during the
sublicense negotiations. Although Maruho asked Pars to
produce all relevant studies, Pars did not tell it about 1)
an important negative study conducted by the Charterhouse
Research Unit of a well-known British pharmaceutical firm,
Glaxo, Inc., and 2) a less important negative study
conducted by the Director of the Stanford Pain Clinic. Both
of these studies indicated that Xorphanol, while effectively
reducing pain, also caused adverse side effects, such as
headaches, drowsiness, dizziness, and euphoria. Maruho says
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that, had it seen these studies, it would not have bought
the sublicense. In its view, Pars is guilty of fraud.
Maruho, however, seems unlikely to get its money
back from Pars, for Pars is in the midst of bankruptcy
proceedings. Maruho instead seeks recovery from Miles,
Xorphanol's original licensor; and, in this (diversity-
based) lawsuit against Miles, it pleads various theories of
state law. The district court, after examining the evidence
proffered by the parties, granted summary judgment for
Miles. Maruho appeals. We affirm the district court's
judgment.
I
Maruho's Procedural Argument
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At the outset, Maruho raises a procedural point.
It says that the district court improperly converted a
motion by Miles for judgment on the pleadings, Fed. R. Civ.
P. 12(b)(6), into a motion for summary judgment, Fed. R.
Civ. P. 56, without giving Maruho a "reasonable opportunity"
to present "pertinent material." See Fed. R. Civ. P. 12(b)
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(court shall treat motion for judgment on pleadings as a
motion for summary judgment where "matters outside the
pleading" are presented to and accepted by the court and
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"reasonable opportunity" to present "pertinent material" is
"given").
The record, however, does not support Maruho's
claim. Miles' motion gave Maruho adequate notice of the
risk of summary judgment, for Miles entitled it "Motion to
Dismiss or, in the Alternative, for Summary Judgment"
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(emphasis added). We concede that Maruho immediately told
the court that it thought Miles' motion requested summary
judgment on only one count. But Maruho also told the court,
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in writing at the same time, that it would assume "that all
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of Miles' contentions are asserted under both Fed. R. Civ.
P. 12 and [summary judgment rule] 56" (emphasis in
original). Maruho then presented to the court three volumes
of documents, which it titled "Plaintiff Summary Judgment
Record." In response to questioning by this court at oral
argument, Maruho could not identify any piece of evidence
that it had lacked the opportunity to submit. Given these
circumstances, Maruho converted Miles' motion into a motion
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for summary judgment on all counts by presenting pertinent
material outside the pleadings; and Maruho not only had, but
also took advantage of, a "reasonable opportunity" to
present all "pertinent" material. See In re G.& A. Books,
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Inc., 770 F.2d 288, 294-95 (2d Cir. 1985), cert. denied, 475
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U.S. 1015 (1986). The district court was therefore legally
entitled to treat Miles' motion as one for summary judgment
on all counts.
II
Miles' Participation in the Fraud
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Maruho argues that Miles is liable as an actual
participant in Pars' fraud, either by "aiding and abetting"
Pars' fraud, by acting "in concert" with Pars, or by
engaging in an "unfair or deceptive act or practice." See
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Mass. Gen. L. ch. 95, 11; Kyte v. Philip Morris, Inc., 556
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N.E.2d 1025 (Mass. 1990); Restatement (Second) of Torts
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876(a), (b) (1979) [hereinafter "Restatement (2d)"]. It
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says that, in the circumstances, a showing that Miles either
1) actually knew about the fraud, or 2) should have known
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about the fraud, is sufficient to trigger Miles' liability
as an actual participant. We shall consider, in turn, each
of the two branches of Maruho's argument.
1. Actual knowledge. We shall assume, for
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argument's sake, that a finding that Miles actually knew
about Pars' fraud would trigger Miles' liability.
Nonetheless, like the district court, we do not believe the
record would permit a reasonable juror to make that factual
finding.
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Maruho says that a juror might find Miles' "actual
knowledge" by inferring, from Miles' conceded knowledge that
Maruho was willing to pay $3 million for the sublicense,
that Miles must have known that Pars hid the negative
Xorphanol studies from Maruho. Otherwise, why would Maruho
pay so much for so little? To make the inference, however,
requires some kind of propositional link, such as, "a
knowledgeable firm would likely not have paid $3 million had
it known about the studies." The problem for Maruho is that
this link is missing.
We agree with Maruho that a reasonable juror could
believe that Miles knew the following:
a. After obtaining its license in 1984, Pars
sublicensed Glaxo, Inc., a highly reputable
British firm, to prepare Xorphanol for
marketing. In 1986, Glaxo, after paying Pars
more than $1.5 million for the sublicense,
terminated the agreement.
b. Glaxo cancelled the sublicensing agreement
after its Charterhouse Research Unit tested
Xorphanol by giving ten volunteers single
doses (each in an amount growing from 0.25 mg
to 4.0 mg over the course of several days).
The Charterhouse study showed that many of
these volunteers suffered some significant
adverse side effect not suffered when they
took a placebo.
c. Earlier, in 1985, the Director of Stanford
Pain Clinic had conducted a multidose study
of Xorphanol, giving volunteers several doses
of 2 mg and 4 mg over several days. More of
these volunteers suffered some significant
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adverse side effect than those who received
comparable doses of codeine, a commonly used
pain killer.
d. After Glaxo's 1986 termination, Maruho, in
mid-1987, agreed to pay Pars $3 million for
Japanese sublicensing rights.
The record, however, also shows the following
facts, which are not significantly disputed:
a. Xorphanol was potentially a very valuable
product. The market for pain killers amounts
to several billion dollars annually.
Xorphanol seemed to have the pain killing
properties of a narcotic, such as codeine,
without any addictive quality. Financial
newspapers spoke initially of expected
"annual worldwide" Xorphanol "sales of at
least $50-100 million."
b. Miles, after receiving "updated IND
information on Xorphanol," (which Maruho says
included the Stanford, as well as the
Charterhouse, studies), wrote Pars a letter
in which it basically accepted the fact that
the Charterhouse study was negative, but
nonetheless pointed to other, positive,
studies; urged Pars to perform further
studies; noted the large sales of combination
and other pain killers; and concluded, in
reference to Xorphanol, that "there is still
a place for a moderate to strong, orally
active, non-dependence producing" pain
killer.
c. Other studies in the record show Xorphanol as
having highly desirable pain-killing effects,
with the frequency of side effects depending
upon the study and the dose. The studies all
make clear that codeine and other pain
killers also have side effects, and that,
since many of the side effects are
subjective, placebos have them as well.
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d. The experts differed about the significance
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of the Charterhouse study, with at least one
prominent expert finding that it was not
critically important and did not warrant
abandoning the Xorphanol project. Dr. Louis
Lasagna, the Dean of Tufts University School
of Graduate Biomedical Sciences, examined the
Charterhouse study and concluded that:
1) "[T]here is nothing in the
Charterhouse data that is
disturbing about the 0.25 and
0.5 mg doses, and even at the
1.0 and 2.0 mg doses, there is
no reason for excessive
anxiety about adverse effects,
if one compares the results on
active drug with the results
with placebo."
2) "There is nothing in this
report, in my opinion, that
would call for a halt to
clinical testing of Xorphanol
at doses up to (and including)
2 mg."
3) "In my view it is premature to
make a judgment as to the
clinical utility and safety of
this drug in the absence of
more clinical trial data."
The upshot is a record that, even when viewed in
Maruho's favor, shows (1) a product potentially worth a
great deal of money; (2) Miles' belief, after learning of
the negative studies, that Xorphanol was still valuable; (3)
experts (at Glaxo) who thought that Xorphanol was not worth
developing; but (4) a respected expert who thought that
Xorphanol was still worth developing. Had Maruho presented
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favorable expert testimony on the relevant question --
whether the hidden studies were conclusive to the point that
a reasonable pharmaceutical executive would have thought
Xorphanol had little or no value --- the jury might have had
a basis for reaching a favorable conclusion about what Miles
knew. But Maruho presented no such expert testimony. And,
our lay reading of the record, including the relevant
studies, leads inexorably to the conclusion that experts
differed in their views about Xorphanol's value, with Miles
indisputedly arguing for further development. That fact, in
turn, means that Miles need not have concluded, from the $3
million payment, that Pars must have hidden the studies.
And, a reasonable jury could not conclude that Miles in fact
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knew about Pars' misconduct.
2. "Should have known." Maruho argues that Miles
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is liable as long as it "should have known" about Pars'
fraud. The record, however, even when interpreted favorably
to Maruho, supports the factual part of this claim only to
the point where a reasonable juror might find that Miles
should have been suspicious -- and no further. And, that
factual finding does not provide sufficient basis for a
legal finding that Miles is liable as an actual participant
in the fraud.
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First, insofar as Maruho's "actual participant"
theories rest upon a tortfeasor's intentional action, a
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finding about what Miles "should have known" is insufficient
for a finding of an actual unlawful intent, whether one
defines that "intent" in terms of a "purpose" or, more
broadly, as a "belie[f] that the consequences are
substantially certain to result from [the act]."
Restatement (2d) 8A (1965). The Massachusetts courts have
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made clear that a defendant "aids and abets" a tortfeasor
only if, at the least, the defendant actually knows about
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"its substantial, supporting role in an unlawful
enterprise." Kyte, 556 N.E.2d at 1028. Similarly, the
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Massachusetts courts have held that a defendant acts "in
concert" with a tortfeasor only if the defendant "agrees" to
work toward the unlawful result. See, e.g., id. at 1027-28;
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Gurney v. Tenney, 84 N.E. 428 (Mass. 1908). Without actual
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knowledge that Pars was hiding negative tests, Miles can
neither have known of Pars unlawful (i.e., fraudulent)
objective nor have agreed to help achieve it.
Second, insofar as Maruho tries to predicate
liability upon Miles' negligence, a jury could find, at the
very worst, nothing more than a negligent failure to act
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upon a suspicion, that is, an omission on Miles' part. To
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predicate tort liability upon a negligent omission, one must
find a special relationship, between defendant and
plaintiff, that imposes a duty upon the defendant to take
positive steps to protect the plaintiff. See Restatement
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(2nd) 291 comment f (negligent "nonfeasance" requires a
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special relationship), 314 & comments a, c (1965) (stating
the general rule that liability for failure to take action
for the aid or protection of another is limited to
situations in which there exists some special relationship
between the parties). We are not aware of any authority
suggesting that the simple relationship
"licensor/sublicensee" automatically, by itself, creates
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such a duty. The exceptional situations in which authority
supports the existence of such a duty are not present here.
See id. 314A-324A (listing exceptions to the general rule
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of non-liability, none of which encompasses the licensor-
sublicensee relationship). Finally, Maruho has not argued
any other ground that might support the existence of the
necessary duty. We therefore agree with the district court
that no such duty existed.
3. Maruho argues that Miles has violated chapter
93A of the Massachusetts General Laws by engaging in an
"unfair or deceptive act or practice." Mass. Gen. L. ch.
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95, 11. But, to prove a violation, Maruho must show
conduct that involves some kind of "rascality." Tagliente
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v. Himmer, 949 F.2d 1, 7 (1st Cir. 1991). Maruho has cited
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no authority that would justify such a finding where a
licensor has only suspicion, not actual knowledge, of a
licensee's improper conduct, and where the licensor has no
duty to act to protect the potential victim. The
circumstances simply do not indicate "rascal-like" behavior
on Miles' part. We therefore do not believe the
Massachusetts courts would find a violation of the chapter.
III
Vicarious Liability
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Maruho says that, even if Miles is without fault,
it is nonetheless "vicariously" liable for the harm Pars
caused, either because Pars was Miles' agent, or because
Miles and Pars were engaged in a "joint venture" (or "joint
enterprise"). The theories of vicarious liability that
Maruho argues, however, all require Maruho to show that
Miles had the legal right to control Pars' negotiating
activity. See, e.g., Lyon v. The Ranger III, 858 F.2d 22,
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27 (1st Cir. 1988) (joint enterprise exists where
participants "'ha[ve] an equal right to direct and control
the conduct of the other[s] concerning acts or omissions
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which cause, or contribute to the causation of, injury.'"
(quoting Adams v. Dunton, 187 N.E. 90, 92 (Mass. 1933));
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Payton v. Abbott Labs, 512 F. Supp. 1031, 1036 (D. Mass.
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1981) (joint venture requires "joint [but not necessarily
equal] control of the objectives of the undertaking and of
the means of achieving those objectives"); Restatement
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(Second) of Agency 1 comments a, b (1958); W. Page Keeton
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et al., Prosser and Keeton on the Law of Torts 72, at 519-
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20 (5th ed. 1984) (joint enterprise requires something that
shows a mutual right of control). Yet Maruho can make no
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such showing here.
The licensing agreement between Miles and Pars did
not give Miles any right to participate in or control the
negotiation and granting of sublicenses. And the record
provides no evidence of any statement, or action, by Miles
that suggests any right to control Pars' negotiating
activity. We concede that, sometimes, a jury might use
evidence of actual control as a basis for inferring the
existence of a corresponding legal right. But here, there
was no actual control. Miles did not even know that Pars
and Maruho were negotiating a sublicense until the
negotiations were already roughly seven months old; and it
first learned the terms of the proposed contract -- such as
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the fee Maruho was to pay for the sublicense -- only a few
weeks before the contract was scheduled to take effect.
Maruho nevertheless argues that Miles' legal
ability to grant, or deny, Pars a needed extension of the
basic license permitted Miles to influence the terms of, or
to benefit from, the sublicense. But, we have no reason to
believe that the simple, unexercised, practical power to
influence a negotiation could, by itself, create an agency,
or joint venture (or enterprise), for otherwise, every
negotiator would discover himself the agent of, or venturer
with, any of the many persons who might influence the
negotiations. We are not surprised that we could find no
legal authority supporting such a proposition. We add that
the simple fact that Miles might have benefitted from the
sublicense (through the royalty-sharing provision in the
Miles/Pars license agreement) does not make Miles
vicariously liable for Pars' conduct. See, e.g., Payton,
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512 F. Supp. at 1036 (recognizing that profit sharing and
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joint control are central to a joint venture); Stock v.
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Fife, 430 N.E.2d 845, 847-48 (Mass. App. Ct. 1982) (absent
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joint control, a common (pecuniary) interest is not enough
to establish a joint enterprise).
IV
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Unjust Enrichment
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Maruho argues that Miles was "unjustly enriched"
by having received a share of the $3 million sublicense fee,
and that it must therefore "return" the share to Maruho.
See Restatement of Restitution 1 (1937) ("A person who has
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been unjustly enriched at the expense of another is required
to make restitution to the other."). The controversial part
of this argument, however, lies in its premise. Did Miles
ever receive a portion of the $3 million?
The relevant facts are not in dispute. Miles and
Pars disagreed about whether Miles was entitled to some of
Maruho's $3 million sublicense fee. Miles argued that the
fee was a "royalty," in which case it was entitled to one-
half. Pars argued that the entire sum represented a return
of Xorphanol development expenses, in which case Miles was
entitled to nothing. Miles and Pars then agreed that Pars
would deposit $1,350,000 of the fee into an escrow account
and retain the remainder. The escrow agreement provided
that the money "shall remain in escrow" until
a. The Parties . . . either reach a
satisfactory agreement as to . . .
distribution; or
b. A final decision is reached by
arbitration . . .; or,
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c. In the event the Parties cannot agree
to arbitration, a final decision on the
distribution . . . is rendered by an
appropriate court . . . .
Eventually, Miles decided not to bring a legal proceeding
and permitted Pars to take the money from escrow.
For Maruho to obtain "restitution" from Miles, it
must show, at a minimum, that Miles had "possession of or
some other interest in" this money. Restatement of
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Restitution 1 comment b. But Miles never did have
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possession of the money. The interest that it had (in the
absence of an agreement from Pars as to distribution)
consisted of little more than a right to bring a lawsuit to
obtain money to which its legal right (the record indicates)
was highly uncertain. And, since Pars would not agree, the
escrow served only to isolate and protect the money from
other potential Pars creditors while Miles made up its mind
whether or not to bring suit.
This kind of interest -- at best analogous to an
attachment -- seems to us too slight to count as the kind of
benefit that might support a suit for restitution. This
undefined interest is not analogous to that of a joint owner
in a joint bank account. We can find no convincing analogy
to any other kind of joint ownership. Nor does the record,
read favorably to Miles, show anything of value that Miles
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received for releasing the escrow. (It shows no "promise"
by Pars to engage in development work that it would not
otherwise have undertaken.) The record shows only that
Miles, for a time, thought it had a right to the money and
convinced Pars (in part through its power to extend, or not
to extend, the basic license) to place the money in escrow
while Miles decided whether or not to sue. (If there was
some more tangible interest here, Maruho at least had the
burden of showing just what it consisted of, but Maruho did
not even try to do so.) We are not surprised that we could
find no authority supporting the proposition that such an
"interest" falls within the scope of the Restatement's
description of "enrichment," while we found contrary
authority directly on point. Gilpin v. AFSCME, AFL-CIO, 875
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F.2d 1310, 1314-15 (7th Cir.), cert. denied, 493 U.S. 917
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(1989). The authority that Maruho cites, Gill Equipment Co.
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v. Freedman, 158 N.E.2d 863 (Mass. 1959), says that a person
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may be "unjustly enriched" by money that he does "possess"
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under a constructive trust created by his promise to assume
"personal responsibility," which trust he violates by later
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giving the money to another. That case is not on point.
For these reasons the judgment of the district
court is
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Affirmed.
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