In 2011, I wrote about the PharmAthene, Inc. v. SIGA Technologies, Inc. case, in which the Delaware Chancery Court found that SIGA Technology Inc. failed to negotiate in good faith with PharmAthene, Inc. for the grant of a license to SIGA’s smallpox drug known as ST-246. This case provided an important reminder that negotiate in good faith provisions create enforceable obligations, which, if breached, can result in significant damage awards.
On January 15, 2015, the Delaware Chancery Court ordered SIGA to pay damages in the amount of $195 million, including costs and interest, based on expected profits that PharmAthene would have earned from selling SIGA’s smallpox drug. Here is a link to the court’s damages order.
Background of the Case
In late 2005, SIGA began discussing a possible merger or collaboration with PharmAthene with respect to ST-246. In June 2006, the parties signed a merger agreement, which provided that if the merger was terminated, the parties would negotiate a definitive license agreement in accordance with a two-page term sheet attached as an exhibit to the merger agreement. The term sheet itself was not signed and included a footer indicating it was non-binding. The merger agreement also included a provision obligating the parties to use best efforts to carry out and consummate the transactions contemplated by the merger agreement.
While the merger was pending, the NIH awarded SIGA $16.5 million for the development of ST-246, and in October 2006, SIGA elected to terminate the merger. The parties then began to negotiate the terms of a license agreement as required by the merger agreement. However, instead of following the terms from the previously agreed-upon term sheet, SIGA initially proposed a different structure with new financial terms. After PharmAthene indicated a willingness to consider such an alternative structure, SIGA proposed another set of financial terms, after which PharmAthene brought suit against SIGA.
The Court’s Decision and Analysis
The Delaware Chancery Court found that SIGA breached its contractual obligation to negotiate a license agreement in good faith with PharmAthene. Once the merger agreement was terminated, SIGA proposed terms that were significantly more favorable to SIGA than those in the term sheet attached to the merger agreement.
The Delaware Chancery Court found that SIGA had acted in bad faith because the parties had determined the primary economic terms for a license, PharmAthene acted in reliance on the parties’ agreement, and SIGA disregarded those terms and attempted to negotiate an agreement containing terms “drastically different and significantly more favorable to SIGA than those in the term sheet.” According to the court, the parties were required “to negotiate in good faith a license agreement with economic terms substantially similar to those contained in the [term sheet],” and SIGA breached that obligation.
With respect to damages, the court found that absent SIGA’s bad faith negotiations, the parties likely would have entered into a license agreement generally in accordance with the terms in the term sheet. Based on the discussions between the parties after the merger was terminated, the court determined that PharmAthene likely would have accepted a 50/50 profit split with an upfront payment of approximately $40 million.
Conclusion and Practice Points
The PharmAthene v. SIGA case serves as an important reminder that obligations to negotiate in good faith are enforceable and should not be taken lightly.
Practitioners and companies should exercise caution in agreeing to obligations to negotiate in good faith where there may not be a serious commitment to reach agreement or where potential changes in circumstances could materially alter a party’s willingness to move forward with the pre-determined terms.