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Merix Pharmaceutical Corp. v. Clinical Supplies Management, Inc.

United States District Court, N.D. Illinois, Eastern Division

July 17, 2014

MERIX PHARMACEUTICAL CORPORATION, Plaintiff,
v.
CLINICAL SUPPLIES MANAGEMENT, INC., Defendant

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[Copyrighted Material Omitted]

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For Merix Pharmaceutical Corporation, Plaintiff: Richard Kirk Cannon, LEAD ATTORNEY, Law Offices of Cannon & Associates, Barrington, IL.

For Clinical Supplies Management, Inc., Defendant: Jeffrey Singer, LEAD ATTORNEY, Adam J Jagadich, Brian H Eldridge, Carly Everett Kennedy, Segal, McCambridge, Singer & Mahoney, Ltd., Chicago, IL.

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CORRECTED MEMORANDUM OPINION AND ORDER

MATTHEW F. KENNELLY, United States District Judge.

Merix Pharmaceutical Corporation has sued Clinical Supplies Management, Inc. (CSM) asserting claims including breach of contract, breaches of confidential disclosure agreements, fraud, breaches of a master services agreement, conspiracy, and negligent spoliation of evidence. The Court previously dismissed certain of Merix's claims. Merix Pharm. Corp. v. Clinical Supplies Mgmt., Inc., No. 11 C 3318, 2012 WL 1577676 (N.D. Ill. May 4, 2012). Merix has now moved for summary judgment on its breach of contract claim, and CSM has moved for summary judgment on all of Merix's remaining claims and separately on Merix's request for consequential damages. For the following reasons, the Court denies Merix's motion, grants CSM's motion for summary judgment on some of Merix's claims but not others, and grants in part CSM's motion for summary judgment as to consequential damages.

Background

Merix is a pharmaceutical company based in Illinois that produces a drug called Releev, which is used to treat cold sores. The active ingredient in Releev is benzalkonium chloride (BKC).

In 2005, Merix was involved in litigation in New Jersey with GlaxoSmithKline (GSK), a pharmaceutical company that manufactures medications that compete with Releev. GSK challenged claims that Merix made about the efficacy of Releev in the drug's packaging and advertising. The court in the New Jersey case issued a preliminary injunction prohibiting Merix from making claims about Releev, save for any references to " a clinical study concerning RELEEV which is conducted in accordance with principles which are generally approved by the scientific community." Pl.'s Ex. 43 at 2. Then, while the litigation was still ongoing, Merix hired PRACS Institute, Ltd. to conduct a clinical trial comparing Releev to a placebo.[1] To avoid learning which patients received Releev and which the placebo, PRACS decided to use a subcontractor to receive the clinical supplies and then label, package, and distribute the supplies to the sites where the trial would occur. PRACS suggested CSM as the subcontractor. In October

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2005, PRACS hired CSM to process the clinical supplies and distribute them to test centers.

In October 2005, Merix, CSM, and PRACS entered a contract entitled " CSM[TM] WORK ORDER." Def.'s Ex. 9 at 1. The Work Order had a " Scope of Services" section featuring three subsections identifying tasks that " will be provided by CSM[TM]" : " Project Management," " Packaging and Labeling," and " Storage and Distribution." Id. Under " Packaging and Labeling," the Work Order stated that CSM will " [i]nspect and release for processing all incoming components by Quality Assurance." Id. Under " Storage and Distribution," the Work Order similarly stated that CSM will " [i]nspect and release for processing all incoming products by Quality Assurance," and it stated that CSM would " [o]btain MSDS and Certificate of Analysis or equivalent for all drug supplies received." Id. at 2. In addition, the Work Order included an " Optional Services" section for tasks that were " [n]ot included in the stated prices but may be added for additional cost" ; among the tasks was " ID confirmation." Id. at 2. The Work Order also featured a cost breakdown, with $14,700 to be paid to CSM.

Finally, the Work Order included two other sections: " General Terms" and " Additional Terms." Id. at 4-5. The General Terms section stated that " [w]hen this Work Order is finalized by signatures from both Parties, it will become incorporated into the MSA between the parties." Id. at 4.[2] The Additional Terms section stated the following:

CSM shall use its best efforts to be available to Merix Pharmaceutical Corporation to testify, if necessary, in any litigation concerning the Study(ies), and Merix Pharmaceutical Corporation and CSM shall enter into a separate agreement concerning such services on CSM's then customary and reasonable rates and related expenses for expert testimony. . . . Any expert testimony given by CSM will be based solely on its independent testing, evaluation and objective opinions of its employees.

Id. at 5.

The signatories to the Work Order were Brian Moe, CSM's vice president of operations, Meryl Squires, president and CEO of Merix, and a PRACS representative. When asked during her deposition what CSM or PRACS told her about what tasks CSM would perform for Merix, Squires said " they would oversee the quality of the materials from start to finish." Pl.'s Ex. 1 at 190-91. When asked to elaborate, Squires said: " They would quality control it, quality assure it. They would receive-- They would receive the materials. . . . They would quality control and quality assure the materials what--what the materials were and what they were meant to do." Id. at 191. Squires was then asked whether she expected " CSM to run independent tests on the placebo and active trial products that were shipped to them." Id. " True," she responded. Id. She was then asked if anyone " from CSM suggested to you that they would run independent tests on those particular products." Id. Her response: " Correct." Id.

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During the same deposition, CSM's counsel asked Squires other questions about this phone call, which Merix alleges occurred on October 6, 2005. On the call, Squires said, were a PRACS employee named Vicki Clauson as well as Moe and another CSM employee named Stephen Pirdee. (CSM denies that the phone call occurred.) During the call, Squires testified in her deposition, she asked whether Moe and Pirdee had signed Merix's confidential disclosure agreement. In response, Squires testified, Clauson " said yes," and Squires also " heard murmurs of assent," although she could not tell who uttered the murmurs. Id. at 182. Following this exchange, Squires testified, the parties discussed the litigation history between Merix and GSK, as well as the protocol for the clinical trial Merix wanted to conduct.

The Work Order made reference to a " Protocol," entitled " A Multicenter, Randomized Double-Blind, Placebo-Controlled Trial of ViraMedix® -RELEEV[TM] in the Treatment of Recurrent Herpes Simplex Labialis in Immunocompetent Subjects." Def.'s Ex. 9 at 1. The Protocol is also mentioned under the duties attributed to PRACS: " Ensuring that CSM[TM] receives current copies of the Protocol." Id. at 2. PRACS had to " [p]rovid[e] drug product and appropriate documentation, including MSDS, Certificate of Analysis, material expiration date" under the Work Order. Id. There are multiple copies of a document the parties refer to as the Protocol in evidence, but they dispute which one governed the Releev clinical trial. One, submitted in evidence by Merix, is dated August 10, 2005. Another, submitted by CSM, is dated August 12, 2005. Under the heading " STUDY PRODUCT," the August 10 document lists ingredients for both the " Test Product" and the placebo in the study; the test product contains, among other ingredients, something called " Viracea," which has among its ingredients " bezalkonium [sic] chloride." Pl.'s Ex. 5 at 17. The placebo ingredient list does not contain Viracea. The August 12 version of the Protocol, however, has a different ingredient list for the placebo, including " Viracea® ." Def.'s Ex. 6 at 17. The August 12 Protocol has signatures from Squires, as well as three PRACS employees; the August 10 Protocol that has been offered in evidence has no signatures.

In October 2005, CSM received two boxes of drug products from EMS, a manufacturer that Merix hired. EMS also sent PRACS two certificates of analysis, one for each of the boxes EMS sent to CSM. The certificate for the " Viramedx Releev Placebo" states that EMS performed analyses on the product, and in the " Results" section says, " BKC % 0.1308%." Def.'s Ex. 11. A PRACS employee sent a copy of the two certificates to CSM. After CSM packaged the drug products for the clinical trial and the trial was completed, Merix had the drug products tested. It discovered that the placebo contained benzalkonium chloride, the listed active ingredient in Releev, and thus it was not in fact a placebo. This, Merix said, made the trial useless. Merix says that it then paid for a new clinical trial, the duration of which prolonged Merix's litigation with GSK and consumed funds Merix otherwise would have used for advertising. GSK's litigation against Merix ultimately settled. In addition, at some point after GSK filed its suit against Merix, Merix filed suit against GSK in Illinois for false advertising. Merix also filed suit in Illinois against its onetime counsel in the GSK litigation, Winston & Strawn, alleging it had committed legal malpractice during the pendency of the GSK litigation. Merix hired another firm to prosecute that lawsuit and incurred expenses in doing so. Merix also began to pay a monthly $20,000 retainer to

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its current attorney, Richard Cannon, during the GSK litigation.

Merix filed its complaint in this case on May 17, 2011. In May 2012, the Court dismissed Merix's claims for negligence, breach of fiduciary duty, breach of implied warranty, and breach of a confidential disclosure agreement. The Court also dismissed Merix's fraud claim for its failure to comply with Federal Rule of Civil Procedure 9(b) but noted that Merix potentially could amend its complaint to comply with Rule 9(b). The Court later denied Merix's motion for reconsideration.

In October 2012, Merix filed a fourth amended complaint (the current version), reasserting its fraud claim and adding claims alleging further breaches of a master services agreement, conspiracy, and spoliation of evidence. Merix moved for summary judgment on its breach of contract claim in March 2014, and CSM filed two summary judgment motions that same month: one for summary judgment on Merix's claims, and another on Merix's request for what CSM termed consequential damages. In May 2014, Merix filed a motion for relief from Local Rule 56.1(b)(3), in which Merix's counsel argued that he mistakenly failed to file responses to CSM's statements of undisputed facts associated with its motions for summary judgment. The next day, CSM filed a motion to strike Merix's reply to CSM's response to Merix's Local Rule 56.1(b)(3) statement of undisputed facts associated with its own summary judgment motion.

Discussion

A party is entitled to summary judgment if it " shows that there is no genuine dispute as to any material fact and is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). A court " must determine whether the evidence, so construed, establishes genuine disputes of material fact with respect to" plaintiffs' claims. Harper v. Fulton Cnty., 748 F.3d 761, 765 (7th Cir. 2014). A genuine dispute of material fact " exists only if there is enough evidence upon which a reasonable [finder of fact] could return a verdict in" the non-movant's favor. Swetlik v. Crawford, 738 F.3d 818, 826 (7th Cir. 2013). On cross motions for summary judgment, the court assesses whether each movant has satisfied the requirements of Rule 56. See Cont'l Cas. Co. v. Nw. Nat'l Ins. Co., 427 F.3d 1038, 1041 (7th Cir. 2005). " As with any summary judgment motion, we review cross-motions for summary judgment construing all facts, and drawing all reasonable inferences from those facts, in favor of the non-moving party." Laskin v. Siegel, 728 F.3d 731, 734 (7th Cir. 2013) (internal quotation marks omitted).

A. Breach of contract

Both Merix and CSM have moved for summary judgment on Merix's breach of contract claim. Because the parties' arguments associated with their respective motions merge somewhat, the Court will discuss both motions together.

" When there are no triable issues of fact, . . . contract interpretation is a subject particularly suited to disposition by summary judgment." Hickey v. A.E. Staley Mfg., 995 F.2d 1385, 1389 (7th Cir. 1993) (internal quotation marks and alterations omitted). " If the words in the contract are clear and unambiguous, they must be given their plain, ordinary and popular meaning. However, if the language of the contract is susceptible to more than one meaning, it is ambiguous." Thompson v. Gordon, 241 Ill.2d 428, 441, 948 N.E.2d 39, 47, 349 Ill.Dec. 936 (2011). The question of whether a contract is ambiguous is a question of law in Illinois. Curia v. Nelson, 587 F.3d 824, 829 (7th Cir. 2009). But if " contractual ambiguity is established, the task of interpreting the

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contract's meaning generally becomes a question of fact for the jury." Harmon v. Gordon, 712 F.3d 1044, 1051 (7th Cir. 2013). There is an exception to this rule if " the extrinsic evidence bearing on the interpretation is undisputed," in which case a court " can decide the matter on summary judgment." Citadel Grp. Ltd. v. Wash. Reg. Med. Ctr., 692 F.3d 580, 587 (7th Cir. 2012).

Merix contends that the Work Order required CSM to perform " independent testing" on the drug products for the clinical trial, during which it presumably would have discovered that the purported placebo contained BKC, which would have revealed it was not a placebo for purposes of the trial. Pl.'s Mot. at 4. Merix also argues that the Work Order obligated CSM to comply with federal regulations, which, Merix argues, separately required CSM to test the drug products for the clinical trial before packaging them for use. For its part, CSM contends that Merix's complaint alleges that CSM failed to inspect the certificates of analysis for consistency of the drug products with the Protocol, and it contends that it did, in fact, make such an inspection. CSM further argues that the certificates of analysis were indeed consistent with the Protocol and thus that CSM did not breach its contract with Merix.

1. Federal regulations

Merix argues that a passage in the Work Order stating that CSM " is conducting an independent labeling and packaging of Merix Pharmaceutical Corporation's product(s) under current GMP and federal regulations" obligated CSM to follow certain drug manufacturing regulations that require manufacturers to test drug components. Pl.'s Mot. at 4. These regulations, Merix argues, required CSM " to do an identity test to verify that the drug product it was labeling as a 'placebo' was in fact appropriate for use as such." Id. at 8.

The Food and Drug Administration's regulations for good manufacturing practice of finished pharmaceuticals include subparts related to " Control of Components and Drug Product Containers and Closures," as well as " Production and Process Controls," " Packaging and Labeling Control," " Holding and Distribution," and " Laboratory Controls." 21 C.F.R. § 211, subparts E-I. Merix cites a provision entitled " Responsibilities of quality control unit," which states, " There shall be a quality control unit that shall have the responsibility and authority to approve or reject all components, . . . and drug products, and the authority to review production records to assure that no errors have occurred or, if errors have occurred, that they have been fully investigated." Id. § 211.22(a). The same section requires a quality control unit to have " [a]dequate laboratory facilities for the testing and approval (or rejection) of components, drug product containers, closures, packaging materials, in-process materials, and drug products." Id. § 211.22(b). Elsewhere, the regulations state: " Each lot of components, drug product containers, and closures shall be withheld from use until the lot has been sampled, tested, or examined, as appropriate, and released for use by the quality control unit." Id. § 211.84(a). That section also lays out requirements for testing of samples, but it permits a manufacturer to accept a report of analysis from a supplier in lieu of testing each component, " provided that at least one specific test is conducted on such component by the manufacturer," and provided further that the manufacturer establishes the supplier's reliability. Id. § 211.84(d)(2).

Merix contends that CSM is a " manufacturer" under these regulations and thus was obligated to perform testing

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as the regulations required. As support, Merix points to this provision from the " Definitions" section of the regulations: " Manufacture, processing, packing, or holding of a drug product includes packaging and labeling operations, testing, and quality control of drug products." Id. § 210.3(b)(12). Merix also references a section of the regulations that says the regulations " contain the minimum current good manufacturing practice for methods to be used in, and the facilities or controls to be used for, the manufacture, processing, packing, or holding of a drug." Id. § 210.1(a).

In response, CSM points to another section of the regulations, which states: " If a person engages in only some operations subject to the regulations in this part [and] in part[ ] 211, . . . and not in others, that person need only comply with those regulations applicable to the operations in which he or she is engaged." Id. ยง 210.2(b). Because CSM does packaging and labeling and not manufacturing operations, it argues, the testing provisions of the regulations do not apply to its ...


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