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Pediatrix Screening Inc. v. Telechem International

July 21, 2006

PEDIATRIX SCREENING, INC. AND PEDIATRIX SCREENING, L.P., PLAINTIFFS,
v.
TELECHEM INTERNATIONAL, INC., DEFENDANT.



MEMORANDUM OPINION

Pending before the Court are objections by Plaintiffs and Counterclaim Defendants Pediatrix Screening, Inc., and Pediatrix Screening, L.P. (collectively, "Pediatrix"), to the Report of Proposed Findings and Recommendation of Special Master. (Docket No. 216, "Pediatrix Obj.") For the reasons discussed below, the Special Master's recommendations are accepted in part and modified in part.

I. INTRODUCTION

A. Factual Background*fn1

Since its founding by Dr. Edwin Naylor in the 1980s, Pediatrix*fn2 has been in the business of biochemical and molecular research and development, focused on testing blood specimens of newborn infants to detect potential metabolic disorders. The two Pediatrix entities are a Pennsylvania limited partnership and a Pennsylvania corporation, located in Bridgeville, Pennsylvania. Defendant and Counterclaim Plaintiff TeleChem International, Inc. ("TeleChem"), is a Delaware corporation with its principal place of business in Sunnyvale, California. TeleChem is in the business of commodity purchase and sale; under the name "arrayit.com," TeleChem manufactures and sells products used in the microarray process*fn3 of DNA analysis, e.g., glass slides, printing pins, chemicals and related products. TeleChem has never been involved in newborn genetic screening per se.

In November 1999, representatives of both parties met at a professional conference when a Pediatrix researcher announced that the companies were interested collaborating with others to pursue federal research grants. As a result of shared interests, TeleChem and Pediatrix subsequently agreed to work together in an effort to win Small Business Innovative Research ("SBIR") grants funded by the National Institutes of Health. The intent of the parties while working on their collaborative efforts was to develop a screening method using microarray technology to detect hereditary hearing loss in newborn infants. (Plaintiffs' Memorandum in Support of Motion for Summary Judgment, Docket No. 152, "Pediatrix Memo," at 3.)

Pediatrix and TeleChem exchanged a number of letters and eventually entered into two agreements which Pediatrix refers to as "Contract 1" and Contract 2.*fn4 Contract 1, a letter dated March 24, 2000, dealt with the parties' initial applications for the SBIR grants. Contract 2, also referred to as the Pre-Incorporation Agreement, included matters not addressed in Contract 1, e.g., the formation of a new entity to exploit microarray technology and the allocation of proceeds from subsequent grants or business ventures.

Within weeks of signing Contract 2 in April 2001, the collaborative effort began to fall apart, each party blaming the other for the failure. On June 18, 2001, Dr. Naylor wrote to Rene Schena, chief executive officer of TeleChem, complaining that TeleChem had failed to provide its cash capital contribution, failed to assign certain intellectual property to "NGS-ArrayIt, Inc." (the name of the corporation to be created), and failed to execute shareholder and subscription agreements pertaining to NGS-ArrayIt. The parties met in late June in an attempt to iron out these problems. On July 24, 2001, Dr. Naylor again wrote to Ms. Schena stating that because TeleChem had failed to cure the material breaches of its obligations as stated in the June 18th letter, Pediatrix was exercising its right to terminate Contract 2. However, the same letter expressed an interest in continuing to work with TeleChem on an informal basis, e.g., through a joint venture, contract or other business relationship, in order to pursue the parties' interests in commercialization of new screening technology.

Ms. Schena responded on August 21, 2001, stating that TeleChem would not accept Pediatrix's request to terminate Contract 2 and that her company considered the contract to be enforceable. Dr. Naylor replied on August 31, 2001, stating in part that Pediatrix had not made a "request" to terminate Contract 2, but was rather exercising its rights pursuant to that contract. Moreover, if TeleChem insisted that the contract was still in effect, Pediatrix intended to impose the monetary penalties permitted therein for TeleChem's continuing failure to cure.

On November 14, 2001, TeleChem advised Pediatrix that it considered Pediatrix to be in breach of Contract 2, and demanded either specific performance or return of the consideration it had provided in connection with Contract 1.

B. Procedural History

Pediatrix responded to TeleChem's notice by filing suit in this Court on November 26, 2001, seeking declaratory judgments regarding the status of the commercial ties between the parties and other contract claims. After Pediatrix filed an Amended Complaint on January 15, 2002 (Docket No. 10), TeleChem filed counterclaims (Counterclaims of TeleChem International, Inc., for Damages and Injunctive Relief, Docket No. 45, "Counterclaims"), asserting multiple contract-based claims, and, most importantly for the purposes of this Opinion, misappropriation of its trade secrets by Pediatrix.

After a long and contentious discovery period, including two appeals to the United States Court of Appeals for the Third Circuit, each party filed for partial summary judgment. On February 2, 2005, the parties agreed to have those motions and two related motions decided by a Special Master appointed for that purpose. Having considered the motions, supplemental briefing, and oral argument, the Special Master filed his Report of Proposed Findings and Recommendation (Docket No. 203, "R&R") on February 1, 2006.*fn5 On February 21, 2006, Pediatrix filed the objections which are addressed herein. TeleChem did not file its own objections to the R&R but responded to those of Pediatrix,*fn6 recommending that the report be adopted as stated. (Docket No. 218, "TeleChem Resp.")

C. Jurisdiction and Venue

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a)(1) inasmuch as the amount in controversy exceeds $75,000 and the Pediatrix entities are citizens of Pennsylvania while TeleChem is a citizen of California or Delaware. 28 U.S.C. § 1332(c). Venue is appropriate under 28 U.S.C. § 1391(a).

II. APPLICABLE LAW AND STANDARD OF REVIEW

As the parties have previously conceded, this action is governed by substantive Pennsylvania law.*fn7 See Glenn Distribs. Corp. v. Carlisle Plastics, Inc., 297 F.3d 294, 300, n3 (3d Cir. 2002), citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). Decisions of the Pennsylvania Supreme Court provide the authoritative source of law to this federal court while sitting in diversity. State Farm Mut. Auto. Ins. Co. v. Coviello, 233 F.3d 710, 713 (3d Cir. 2000). If the Pennsylvania Supreme Court has not yet passed on an issue, this Court will consider pronouncements of lower state courts, together with federal appeals and district court cases interpreting state law. Id.

Under Federal Rule of Civil Procedure 53(g), the district court is required to review de novo all findings of fact and conclusions of law made by a special master. After allowing the parties to be heard as to any objections to the special master's conclusions, the court may adopt the report, modify it, reject it in whole or in part, receive further evidence, or recommit the matter to the special master with instructions.

The underlying motions which were considered by the Special Master herein include two motions for partial summary judgment. A court may grant summary judgment if the party so moving can show, based on "pleadings, depositions, answers to interrogatories, and admissions on file together with the affidavits, if any, . . . that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c)); Rossetti v. Busch Entertainment Corp., 87 F. Supp.2d 415 (E.D. Pa. 2000). If a reasonable jury could return a verdict for the non-movant, the dispute is genuine and if, under substantive law, the dispute would affect the outcome of the suit, it is material. A factual dispute between the parties that is both genuine and material will defeat a motion for summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986).

In considering a motion for summary judgment, the court must view all the evidence in the light most favorable to the non-movant, accept the non-movant's version of the facts as true, and resolve any conflicts in its favor. Rossetti, id., citing Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986), and Big Apple BMW, Inc. v. BMW of North America, Inc., 974 F.2d 1358, 1363 (3d Cir. 1992). In short, the movant must show that if the pleadings, depositions and other evidentiary material submitted to date were admissible at trial, the opposing party could not carry its burden of proof based on that evidence and a reasonable jury would thus decide all genuine material disputes in favor of the movant. Celotex Corp. v. Catrett, 477 U.S. 317, 318 (1986).

Once the moving party has demonstrated that there are no genuine issues of material fact, the burden shifts to the non-moving party to "make a showing sufficient to establish the existence of every element essential to his case, based on the affidavits or by depositions and admissions on file." Celotex, id. at 322-23; Rossetti, id.; Fed.R.Civ.P. 56(e). The sum of the affirmative evidence to be presented by the non-moving party must be such that a reasonable jury could find in its favor, and it cannot simply reiterate unsupported assertions, conclusory allegations or mere suspicious beliefs. Liberty Lobby, id. at 250-252; Groman v. Township of Manalapan, 47 F.3d 628, 633 (3d Cir. 1995).

III. ANALYSIS

A. Report and Recommendation as to Motion for Summary Judgment Filed by Pediatrix, Docket No. 151

In his Report and Recommendation, the Special Master first considered Pediatrix's motion for summary judgment on the TeleChem trade secrets counterclaims. (See Counterclaims, Count VIII, Misappropriation of Trade Secrets, and Plaintiffs' Motion for Partial Summary Judgment, Docket No. 151, "Plfs.' Mot.") In its response to Plaintiffs' first set of interrogatories, dated July 12, 2004, TeleChem contended that during the period July 11, 2000, to November 14, 2001, it disclosed the following trade secrets to Pediatrix:*fn8

1. Use of a C6 amino modifier on one of the two DNA strands;

2. HPLC purification of oligonucleotides;

3. Use of Premier Biosoft software for ...


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