On February 25, 2014, a jury sided in favor of Salix Pharmaceuticals that Salix met its contractual obligations under a license agreement with Napo Pharmaceuticals for the development of crofelemer (Fulyzaq®).  For business development professionals, lawyers and others who frequently work on license agreements, the most interesting issues were decided in pretrial rulings by the New York Supreme Court when the court on December 24, 2013 and January 29, 2014 granted summary judgment for Salix dismissing Napo’s claims that Salix had breached the agreement by not using commercially reasonable efforts to develop crofelemer for indications other than the treatment of HIV-associated diarrhea (which is referenced throughout the remainder of this article as the “Main Indication”) and for markets outside of the United States.

Key Agreement Provisions

They key provisions of the agreement at issue in the dispute were as follows (emphasis added):

Diligence Clauses

“Commercially Reasonable Efforts” means “...efforts and resources commonly used in the research-based pharmaceutical industry for an internally-developed product of similar commercial potential at a similar stage in its lifecycle, taking into consideration its safety and efficacy...and the likelihood of regulatory approval.  Commercially Reasonable Efforts shall be determined on a market-by-market basis for each Licensed Product without regard to the particular circumstances of a Party, including any other product opportunities of such Party....”

Section 2.1.1 – “Each of Napo and Salix shall use Commercially Reasonable Efforts to perform the Development activities designated for Napo or Salix, as the case may be,in the Development Plan and Budget, in accordance with the terms and conditions of this Agreement.”

Section 9.1.1 – “As between the Parties, Salix shall have the sole right and obligation to Commercialize the Licensed Products in [all human fields in certain countries].” 

Section 9.1.2 – Salix, directly or through one or more Affiliates, Sublicensees or Distributors, shall use Commercially Reasonable Efforts to Commercialize a Licensed Product [for the Main Indication].”

Joint Steering Committee Clauses

Section 2.4 – “The Development of [crofelemer for the Main Indication] and of each Licensed Product for other indications as to which the Joint Steering Committee may determine to pursue Development activities, shall be governed by a comprehensive, multi-year plan and budget relating to such Development....”

Section 5.1.1, which gives Salix the right to name the Chairperson of the Joint Steering Committee.

Section 5.1.2(a), which requires the Joint Steering Committee to establish a strategy for development and commercialization of Licensed Products in not only the Main Indication but also other fields.

Section 5.1.2(b), which provided that in the event the Joint Steering Committee cannot agree on any matter, then the decision “shall be finally and definitively resolved by the Chairperson.”

Section 9.1.3, which required Salix to submit a preliminary Commercialization plan to include forecasts and marketing and other commercialization activities but only for crofelemer for the Main Indication, plus any other matters or activities determined by the Joint Steering Committee.

Court’s Analysis

In disposing of Napo’s claims that Salix should have pursued development in other indications and countries outside the United States, the court pointed to the provision in Section 2.1.1, which limits the parties’ obligations to perform development activities “designated in the Development Plan and Budget.”  It also referenced Section 2.4, which requires the Development Plan and Budget to include development of crofelemer for the Main Indication and any other indications which the Joint Steering Committee may elect.  Since the Development Plan and Budget included development activities only for the Main Indication and only with respect to the United States, and the Joint Steering Committee did not elect to pursue any other indications or any other countries, the court found that as a matter of fact Salix has no obligation to pursue crofelemer for any other indications or countries. The agreement grants to Salix the right to name the chairperson to the Joint Steering Committee, and, according to the court, the chairperson has “final and absolute discretion regarding whether and when to pursue development of [other indications].”

The court specifically addressed the fact that Salix’s license rights are broader than the Main Indication, and explained that a broader license may be justified in order to exclude competitors in other indications for use of the same product.

One of Napo’s main arguments was that Section 9.1.1 provides an obligation for Salix to use commercially reasonable efforts to commercialize the licensed products in other fields and territories outside of the United States.  The court was not persuaded by this argument because it interpreted Section 9.1.1 as merely assigning responsibility between the parties.  It also said that if Section 9.1.1 required Salix to use commercially reasonable efforts in all indications, it would directly conflict with Section 9.1.2, which limits Salix’s obligation to commercialize only for the Main Indication.

Lessons:

This case provides a number of lessons for business development professionals, attorneys and others who structure and draft license agreements, including the following:

  • If a licensor intends for the licensee to have an obligation to pursue multiple uses or to commercialize in multiple territories, the agreement should include clear obligationsto do so.
  • Commercially reasonable efforts to develop and commercialize a product for a particular indication or use in a particular territory may not imply an obligation to develop and commercialize the product for any other uses or territories, even if the license grant extends to other uses and territories.
  • Commercially reasonable efforts to develop and commercialize a product in accordance with a development or commercialization plan, where the licensee can control the development or commercialization plan contents, may provide significant latitude to the licensee with respect to diligence obligations.
  • Establishing a joint steering or other committee structure where the licensee has final decision-making authority may be similar in effect with respect to diligence obligations to a structure where there is no committee and the licensee controls all decision-making.