                                                                                FILED
                            NOT FOR PUBLICATION                                  DEC 03 2013

                                                                             MOLLY C. DWYER, CLERK
                     UNITED STATES COURT OF APPEALS                           U.S. COURT OF APPEALS



                            FOR THE NINTH CIRCUIT

KENTON L. CROWLEY; JOHN A.                        No. 12-55376
FLORES,
                                                  D.C. No. 3:09-cv-00641-L-BGS
              Plaintiffs - Appellants,

  v.                                              MEMORANDUM*

EPICEPT CORPORATION,

              Defendant - Appellee.


                   Appeal from the United States District Court
                      for the Southern District of California
                 M. James Lorenz, Senior District Judge, Presiding

                      Argued and Submitted November 7, 2013
                               Pasadena, California

Before: O’SCANNLAIN, GRABER, and BEA, Circuit Judges.

       Plaintiffs Dr. Kenton Crowley and Dr. John Flores appeal the district court’s

grant of summary judgment to Defendant EpiCept Corporation on Plaintiffs’

claims for breach of contract, breach of the implied covenant of good faith and fair

dealing, fraud, and rescission, and the district court’s denial of Plaintiffs’ motion to



        *
          This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
amend. In this diversity case concerning a patent-assignment contract with a New

Jersey choice-of-law provision, we apply federal procedural law and New Jersey

substantive law. Goldberg v. Pac. Indem. Co., 627 F.3d 752, 755 (9th Cir. 2010).

Reviewing de novo the district court’s grant of summary judgment for Defendant,

County of Sonoma v. Fed. Hous. Fin. Agency, 710 F.3d 987, 992 (9th Cir. 2013),

we reverse and remand. Reviewing for abuse of discretion the district court’s

denial of Plaintiffs’ motion to amend, Chodos v. W. Publ’g Co., 292 F.3d 992,

1003 (9th Cir. 2002), we affirm.

      1. On Plaintiffs’ breach of contract claim, the district court erred in granting

summary judgment to Defendant because there were genuine issues of material

fact. Coszalter v. City of Salem, 320 F.3d 968, 973 (9th Cir. 2003).

      First, the district court erred when it held that the contract’s definition of an

"improvement" as any "modification . . . [that] would, if unlicensed, infringe" the

patent would produce absurd result, on the theory that no improvement could be

both a modification and an infringement. An "improvement" that updates a

component of the technology used in a method patent, however, could be both a

modification and an infringement. See Energy Transp. Grp., Inc. v. William

Demant Holding A/S, 697 F.3d 1342, 1352 (Fed. Cir. 2012) (affirming a jury’s

verdict that the defendant’s hearing aid infringed the plaintiff’s method patent; the


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defendant’s hearing aid used a new technological component that had not been

available when the plaintiff’s patent was filed, and was an infringement under the

doctrine of equivalents), cert. denied, 133 S. Ct. 2010 (2013). Because the district

court excised the definition of "improvement" as an infringing modification from

the contract, it did not reach the question whether Plaintiffs’ use of the ointment to

treat burns would have infringed and was therefore an "improvement" under the

contract. Genuine questions of material fact remain as to whether Plaintiffs

breached their contractual duties by failing to report Plaintiff Flores’ use of the

patented product as a burn ointment.

      Second, even 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," Magnet Resources, Inc. v. Summit MRI, Inc., 723 A.2d 976, 981 (N.J.

Super. Ct. App. Div. 1998) (internal quotation marks omitted)—to excuse

Defendant from the performance of its duties, Nolan ex. rel v. Lee Ho, 577 A.2d

143, 147 (N.J. 1990) (per curiam); Magnet Resources, 723 A.2d at 981. Whether

Plaintiffs’ purported breach was material is a question of fact, Magnet Resources,

723 A.2d at 982, making summary judgment improper, Coszalter, 320 F.3d at 973.

      2. On Plaintiffs’ claim for breach of the implied covenant of good faith and

fair dealing, the district court erred in granting summary judgment to Defendant


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because there were genuine issues of material fact. Id. Plaintiffs proffered

evidence that Defendant, which had an exclusive right to develop Plaintiffs’

patents, repeatedly reassured Plaintiffs that it was taking steps toward developing

Plaintiffs’ patents, but instead devoted resources to other projects. A rational trier

of fact could find from such evidence that such conduct by Defendant

demonstrated "bad motive or intention," Brunswick Hills Racquet Club, Inc. v.

Route 18 Shopping Ctr. Assocs., 864 A.2d 387, 396 (N.J. 2005), and destroyed

Plaintiffs’ "reasonable expectations and right to receive the fruits of the contract,"

Sons of Thunder, Inc. v. Borden, Inc., 690 A.2d 575, 589 (N.J. 1997). Because

there was "conflicting evidence" about whether Defendant "reasonably exercised

its discretion under the circumstances and in light of the reasonable expectations of

the parties," summary judgment for Defendant on the claim for breach of the

implied covenant of good faith and fair dealing was improper. Emerson Radio

Corp. v. Orion Sales, Inc., 253 F.3d 159, 172 (3d Cir. 2001) (applying New Jersey

law) (internal quotation marks omitted).

      3. On Plaintiffs’ fraud claim, the district court erred in part in granting

summary judgment to Defendant because there were genuine issues of material fact

concerning Plaintiffs’ claim for fraud after the parties had entered into the contract.

Coszalter, 320 F.3d at 973. Defendant failed to meet the contract’s 2002 Food and


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Drug Administration filing deadline, but Plaintiffs proffered evidence that

Defendant reassured them that it was still taking steps to do so. A rational finder

of fact could find that this missed deadline gave Plaintiffs grounds to seek

reassignment of the patents in 2002, but they did not begin to do so until 2004.

Viewing the evidence in the light most favorable to Plaintiffs, Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 255 (1986), a rational trier of fact could find (a) that, at

some point after the parties entered into the contract, Defendant knowingly made a

material misrepresentation to Plaintiffs about its then-present intent to develop

Plaintiffs’ patents, and (b) that Plaintiffs relied, to their detriment, by delaying

seeking reassignment of the patents, Gennari v. Weichert Co. Realtors, 691 A.2d

350, 367 (N.J. 1997).

      Plaintiffs concede, however, that Defendant did not make any

misrepresentations or withhold facts in the negotiations leading up to the contract.

Therefore, the district court correctly granted summary judgment to Defendant on

the claim of fraud in the inducement of the contract, because Plaintiffs present no

evidence of material misrepresentations by Defendant before the signing of the

contract. Id.

      4. On remand, if the trier of fact finds fraud, the district court has discretion

to consider rescission as an equitable remedy, so long as Plaintiffs have acted


                                            5
within a reasonable amount of time, there has not been substantial performance

and, as far as it is practicable, rescission would return the parties as closely as

possible to their original positions. Notch View Assocs. v. Smith, 615 A.2d 676,

679–80 (N.J. Super. Ct. Law Div. 1992). Accordingly, the district court erred in

dismissing the request for rescission.

       5. The district court did not abuse its discretion, Chodos, 292 F.3d at 1003,

when it denied Plaintiffs’ motion to amend their complaint. Plaintiffs did not seek

to add a new party or theory. Rather, they sought to add new evidentiary support

for their claims, which they will now have the opportunity to do at trial. See, e.g.,

Church of Scientology of Cal. v. United States, 920 F.2d 1481, 1490–91 (9th Cir.

1990) (holding that, even if the district court had erred by not allowing the plaintiff

leave to file a reply brief, any error was harmless because it did not prejudice the

plaintiff’s rights).

       AFFIRMED in part; REVERSED and REMANDED in part. Costs on

appeal awarded to Plaintiffs-Appellants.




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