First Circuit Weighs in on the Law of Unjust Enrichment in Massachusetts

by Lee Gesmer on March 3, 2009

First Circuit Weighs in on the Law of Unjust Enrichment in Massachusetts

The terms “unjust enrichment,” “restitution,” “quasi-contract” and “constructive trust” cause the average lawyer to recoil with apprehension (although she doesn’t show it, of course). We were forced to grapple with some of these ancient legal concepts in law school, but we quickly migrated to more modern legal principles, and although we may have remembered the terms (any lawyer worth his salt can throw around the terms unjust enrichment and restitution), the depth of knowledge of most lawyers on these topics is shallow at best. We were relieved when we could move on to things like the Uniform Commercial Code, which dates back only to the early 1950’s.

In fact, it’s easy to trace “unjust enrichment” and related terms back as far as the 1600s, and earlier. A search on Google Book Search reveals a volume titled “Unjust Enrichment in England before 1600.” References to Roman Law are also not difficult to find. When you start dealing with legal principles forged during the Middle Ages or Roman times, you know it’s going to be difficult.

Imagine, then, how QLT, Inc., a Canadian-based biopharmaceutical company, felt when it learned that it had been sued in federal court in Massachusetts and that the outcome of the case hinged on the application of these ancient legal doctrines? That was the situation that QLT faced. Even worse, QLT found itself in the courtroom of U.S. District Judge William Young, one of those rare judges who never backs down from a challenge, and probably mastered Latin so he could read the ancient legal texts in the original.

In early January the U.S. Court of Appeals for the First Circuit issued a decision, affirming a $100 million-plus judgment against QLT. The facts of the case are complex, but the First Circuit summarized them nicely in the opening paragraph of its 64 page decision:

These appeals require us to grapple with the metes and bounds of Massachusetts unjust enrichment and restitution law. Like many such cases, the present case involves one party’s conferral of a valuable benefit during ongoing contract negotiations, followed by an irreparable breach in the bargaining process. What makes this case unusual is that its subject matter — the development of a blockbuster pharmaceutical — poses challenges in valuing the benefit conferred, . . . . Defendant QLT Phototherapeutics, Inc. (“QLT”) appeals a jury finding that it was unjustly enriched because plaintiff Massachusetts Eye and Ear Infirmary (“MEEI”) conferred on QLT several benefits during the course of the development of Visudyne, a successful (and highly profitable) treatment for age-related macular degeneration (“AMD”), a leading cause of adult blindness.

The Court of Appeals decision is a tour de force on the law of unjust enrichment in Massachusetts, and although not binding on the Massachusetts state courts, is likely to be the guiding case in this area until something more authoritative comes along from the Massachusetts state courts. After a recitation of the well-known legal standard for unjust enrichment (see the three-part standard at bottom**), where the case got interesting was when the court held that:

  • the “benefit conferred” under this doctrine did not require proof of a “trade secret.” The First Circuit affirmed Judge Young’s decision to allow the jury to to proceed to an unjust enrichment verdict based on the plaintiff’s ownership of merely “confidential information.” “Confidential information” and “trade secrets” are two different things, with confidential information generally being things such as pricing or marketing plans – information of some value, but usually ephemeral in nature. Trade secrets tend to be proprietary formulas, algorithms, things that are of lasting value and importance. However, the First Circuit held that mere “confidential information” could be used to support a claim of unjust enrichment. This holding is noteworthy, and it opens to door to a category of claims that would have been precluded had the court held otherwise. Unjust enrichment may not stand where the benefit is publicly available information, but almost anything short of that can be deemed confidential, and will support a claim.
  • The First Circuit held that while a plaintiff may not recover its lost profits under a theory of unjust enrichment, it could force the defendant to disgorge its profits. Although Massachusetts courts have not spoken on the issue of profit disgorgement in the context of quasi-contracts, the First Circuit held that it was “likely” it would rule as described. Thus, the court clarified the measure of damages in unjust enrichment cases, again to the benefit of plaintiffs.

Read the case  here: Mass Eye and Ear Infirmary v. QLT Phototherapeutics, Inc.

(** The elements of unjust enrichment are: (1) a benefit conferred upon the defendant by the plaintiff; (2) an appreciation or knowledge by the defendant of the benefit; and (3) acceptance or retention by the defendant of the benefit under the circumstances that would be inequitable without payment for its value.)

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