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For the first time, a research university that mishandled a clinical trial could be held liable for lost profits unless the California Supreme Court overturns an appellate ruling to that effect. What’s at stake, according to the University of Southern California (USC) and others, will be the willingness of research institutions to take on clinical studies if they can be held liable for lost-profit damages for breaching a noncommercial academic research agreement. Such a rule will deter research and impose an “unseemly” incentive to satisfy a study’s sponsor, they claim. Sargon Enterprises Inc., a company that commissioned a clinical trial from USC, claims that the dispute is a run-of-the-mill breach of contract and fraud case. It says that since the unpublished California Court of Appeal ruling in its favor has no precedential value, there’s no need for the high court to intervene. A jury had found that USC breached its contract by delaying and mismanaging the clinical study, and awarded Sargon approximately $433,000 in compensatory damages. But the trial court found that such damages were not a foreseeable result of the breach and were disproportionate to the cost of the clinical trial. Sargon appealed. The court of appeal found that the trial judge was wrong not to allow the jury to decide how much, if any, Sargon is owed in lost profits. Sargon Enterprises v. USC, No. 167519 (Calif. Ct. App. 2d Dist. Feb. 25, 2005). The appellate court also said that the trial judge should have allowed Sargon to amend its complaint to seek damages for fraud. Sargon alleged, among other things, that it had discovered that USC attempted to cover up its mistakes, and received undisclosed donations from Sargon’s chief competitor. USC’s counsel, Barry Thompson of Reed Smith’s Los Angeles office, denied that USC acted fraudulently. In its petition to the California Supreme Court, USC argues that as a matter of law, lost-profit damages have never been available anywhere in the country for breach of a noncommercial agreement meant to answer questions about public health. It said that there are 23,000 clinical trials in progress, 7,000 of which are at universities and many of which could be put in jeopardy if the appellate court opinion stands. Under the contract, USC was to receive $200,000 for a five-year study of dental implants. Sargon sought $40 million in damages, most of it in lost profits. In its California Supreme Court brief, Sargon said that the university had failed to raise the public policy argument in the court of appeal, even though the trial court had rejected it. Sargon also said that it was premature for the high court to intervene because no jury has yet decided whether USC will be held liable for lost profits. “If there’s no case law anywhere in the country on the availability of lost profits in this context, that makes the issue novel, but it doesn’t make lost-profit damages unavailable as a matter of law,” said plaintiffs’ counsel Jens Koepke of Greines, Martin, Stein & Richland in Los Angeles. “Defendants can’t have it both ways.” Not so, said Thompson. “The fact that no court has addressed the issue is because it is so plainly against public policy,” he said, adding that the trial court had not found against USC on the public policy issue. “The elephant in the room in this case has always been whether lost profits are recoverable,” he said. “The judge did not reject our public policy argument.” In a written order, the trial judge refused to establish a bright-line rule that forbade lost-profit damages. He said, “[A]ny special damage rule is a question for the political branches or higher courts.” Three Washington-based organizations that represent universities’ interests; two California universities—Stanford and the California Institute of Technology; and medical device maker St. Jude Medical of St. Paul, Minn., have written letters to the court as amici, urging it to grant review.

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