In this opinion, the Court of Chancery found the defendant liable (i) for breach of its contractual obligations to negotiate a license agreement in good faith in accordance with the terms of a previously negotiated, non-binding term sheet and (ii) under the doctrine of promissory estoppel.
In late 2005, defendant SIGA Technologies, Inc. (“SIGA”) discussed a collaboration with plaintiff PharmAthene, Inc. (“PharmAthene”), for the development and commercialization of an antiviral drug for the treatment of smallpox called ST-246. The parties negotiated a non-binding license agreement term sheet (the “LATS”) in which SIGA would grant PharmAthene a worldwide exclusive license to develop and sell products related to ST-246 in exchange for a license fee. Shortly thereafter, the parties agreed to pursue merger discussions with the understanding that if the merger did not occur, they would proceed with the license agreement. SIGA, however, had immediate cash needs so PharmAthene merger or license agreement upon the terms set forth in the LATS. While the LATS was never signed, it was attached as an exhibit to the merger term sheet, merger agreement, and the bridge loan agreement, each of which were signed by both parties and each of which expressly provided that if the merger was not completed, the parties would negotiate in good faith to execute a license agreement in accordance with the LATS.
After execution of the merger agreement, ST-246 passed a number of key milestones (due in large part to the PharmAthene funding) and was awarded a NIH grant for $16.5 million for the development of ST- 246, greatly increasing SIGA’s value. In light of these events, SIGA’s receptiveness to the merger waned and SIGA declined to extend the merger termination date. As such, the merger failed to close within the prescribed timeframe and SIGA terminated the merger agreement. Following the termination of the merger agreement, the parties entered into a contractually-stipulated ninety-day exclusive negotiating period regarding a license. During the negotiations, SIGA proposed terms vastly different than those contained in the LATS, including, among others, that the parties enter into an LLC agreement rather than a licensing transaction. PharmAthene objected to SIGA’s proposal and insisted that SIGA was obligated to execute a license agreement with the same or similar terms to those contained in the LATS, but was nonetheless willing to consider changes to the LATS. SIGA contended that the LATS was non-binding and failed to address PharmAthene’s subsequent counterproposals
PharmAthene then brought this action claiming (1) that SIGA breached a binding license agreement containing the same economic terms as those in the term sheet attached to the merger and bridge loan agreements; (2) that SIGA breached its obligations under the merger and bridge loan agreements to negotiate in good faith a license agreement in accordance with the terms contained in the term sheet; (3) that SIGA promised that PharmAthene ultimately would control the drug at issue, either through a license agreement or merger, and that PharmAthene reasonably relied on SIGA’s promise to its detriment; and (4) that SIGA was unjustly enriched by the capital and assistance that PharmAthene provided to SIGA during the period in which the parties were working toward closing the merger. Primarily, PharmAthene sought specific enforecement of a license agreement that strictly conformed to the LATS, or expectation damages stemming from SIGA's alleged breach and the full benefit of PharmAthene's bargain.
PharmAthene argued that because the parties executed three separate documents explicitly referencing the LATS (the merger agreement, merger term sheet, and bridge loan agreement), the parties were contractually obligated to enter into a license agreement containing the terms specified in the LATS. The Court determined that the evidence did not support the contention that the parties intended for the LATS, standing on its own, to be a binding license agreement, or to require that any later formal agreement include exactly the same terms as the LATS. For instance, each draft of the LATS contained a “Non Binding Terms” footer and certain provisions of the Bridge Loan Agreement and Merger Agreement contained statements requiring that the parties “negotiate” a license agreement in accordance with the terms of the LATS and further recognizing that the parties might never enter into any license agreement. In addition, the Court found that the Bridge Loan Agreement and Merger Agreement provisions incorporating the LATS did not constitute a basis for binding SIGA to the terms of the LATS because they did not contain all the essential terms of a license agreement for a product like ST-246. It held that "[r]egardless of whether the parties intended to be bound, where they fail to agree on one or more essential terms, there is no binding contract.”
Despite the non-binding nature of the LATS, the Court found that the term sheet still remained relevant because under the terms of both the Bridge Loan Agreement and the Merger Agreement the parties were obligated to "negotiate in good faith with the intention of executing a definitive license agreement in accordance with the terms set forth in the [LATS]" and both agreements included the LATS as a exhibit. The Court found that based on the facts surrounding the negotiation of the LATS, when the parties negotiated and compromised the terms of the LATS and the later merger agreements, they mutually understood that any future license agreement would contain terms substantially similar to the LATS. The Court concluded that SIGA, by disregarding the terms previously negotiated into the LATS, and attempting to negotiate a definitive license agreement that contained terms drastically different and significantly more favourable to itself than those in the LATS, acted in bad faith in relation to its duty to negotiate.
The Court also held that PharmAthene demonstrated the necessary elements of promissory estoppel. It found that PharmAthene made the bridge loan and provided operational support to SIGA in reliance on SIGA’s promise to grant PharmAthene an opportunity to control ST246. Regarding PharmAthene’s unjust enrichment claims, the Court concluded that the claims were subsumed in PharmAthene’s breach of contract and promissory estoppel claims. It found a further finding of unjust enrichment would not lead to different or addition relief and the Court did not address the claim any further.
The Court acknowledged the limited precedent available to aid it in fashioning an appropriate remedy for breach of contract and promissory estoppel claims involving a duty to negotiate in good faith. Applying the principles underlying the equitable remedies of the constructive trust and equitable lien, the Court concluded that an appropriate remedy would be to afford PharmAthene a stream of future payments if and when commercial sales of ST-246 commenced. Specifially, the Court granted an "equitable payment stream” or an equitable lien on all sale proceeds from ST246 and related products as follows: once SIGA earned $40 million in net profits or margin from net sales of ST-246, PharmAthene would be entitled to 50% of all net profits from such sales thereafter for a period expiring ten years following the first commercial sale of any product derived from ST-246.
The full opinion is available here.