Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP (Del. Ch. Apr. 8, 2011) (Parsons, V.C.)
In this memorandum opinion, the Court of Chancery denied the defendants’ motion to dismiss a breach of contract action, finding that no Delaware court had squarely addressed the issue of whether a reverse triangular merger may constitute an assignment “by operation of law.” Thus, the Court declined to decide as a matter of law whether the plaintiffs’ consent, pursuant to a nonassignment clause, was required in order to effect the reverse triangular merger.
In 1992, defendant Roche Holding Ltd. (“Roche”) obtained from defendant IGEN International, Inc. (“IGEN”) an exclusive, but narrow, license (the “1992 License”) to use the then-patent holder’s electrochemiluminescence (“ECL”) technology. In 1995, IGEN entered into a joint venture with plaintiff Meso Scale Technologies LLC (“MST”) and formed Meso Scale Diagnostics, LLC (“MSD”) (together with MST, “Plaintiffs”) to develop the venture partners’ ECL-related intellectual property. As part of the venture, IGEN granted MSD exclusive rights to certain broadly-defined ECL fields (“MSD License”). After a federal district court ruled in 2003 that Roche had violated the field restrictions of the 1992 License, Roche sought to reacquire an ECL license from IGEN. As part of a transaction comprised of approximately a dozen contemporaneously executed agreements (the “Transaction”), Roche obtained a second nonexclusive license from IGEN in the field of individual patient human diagnostics (the “Roche License”). Also as part of the Transaction, Roche acquired IGEN, but before it did so, IGEN transferred all of its intellectual property assets, including its ECL patents and licensor rights and obligations under the Roche and MSD Licenses, to a newly-created public corporation, defendant BioVeris Corporation (“BioVeris”). Plaintiffs, Roche, IGEN, and BioVeris entered into a Global Consent and Agreement (the “Global Consent”), which provided that the parties consented to the “Transaction Agreements and the consummation of the Transactions” and “grant[ed] all waivers and consents which are necessary under the MSD Agreements to permit the consummation of the Transactions and the performance by [IGEN, BioVeris], and each Consenting Party of their obligations under the Transaction Agreements in accordance with their terms.” In addition, the Global Consent contained a nonassignment clause providing that none of “the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . . .”
After another dispute arose relating to Roche’s ECL license, Roche acquired BioVeris in a 2007 reverse triangular merger (the “Merger”) in which newly-created Roche subsidiary Lili Acquisition Corp. (“LAC”) merged into BioVeris by paying BioVeris stockholders cash for their shares. BioVeris emerged as the surviving entity and Roche as its sole stockholder. The effect of the Merger was that “all properties, rights, privileges, powers and franchises of [BioVeris] and [LAC] [vested] in [BioVeris], and all claims, obligations, debts, liabilities and duties of [BioVeris] and [LAC] [became] the claims, obligations, debts, liabilities and duties of [BioVeris].” After the Merger, Roche announced layoffs, closures, and the discontinuation of product lines at BioVeris.
In this action, Plaintiffs alleged Roche and its affiliates, by executing the Merger, breached provisions in (1) the Global Consent and (2) the Roche License acquired in the Transaction. As to the Global Consent, Plaintiffs contended that BioVeris owned the same property IGEN owned before its acquisition by Roche in the Transaction, and that pursuant to the nonassignment clause, BioVeris could not assign this property without Plaintiffs’ written consent. Plaintiffs argued that, lacking consent, the defendants breached the nonassignment clause because the Merger constituted an assignment of BioVeris’s intellectual property “by operation of law or otherwise.” As to the Roche License, Plaintiffs argued that Roche breached covenants to Plaintiffs by developing ECL-based products outside of the field for which Roche had licensed the technology.
In denying the defendants’ motion to dismiss, the Court found two reasonable interpretations of the contract language: the nonassignment clause could apply to all the rights, interests, and obligations arising from the Transaction in 2003, as argued by Plaintiffs; or the clause could apply just to the rights, interests and obligations created by the Global Consent, as argued by the defendants. The Court also rejected the defendants’ argument that a change in control of a continuing corporation is not an “assignment by operation of law or otherwise,” finding that no Delaware court had considered the issue in the context of reverse triangular mergers. The Court dismissed the defendants’ contention that reverse triangular mergers were analogous to stock acquisitions, which Delaware courts have found do not constitute assignments “without more.” While recognizing similarities between the transactions, the Court ruled that stock acquisition case law was not controlling. Instead, the Court noted that Plaintiffs cited Delaware case law suggesting forward triangular mergers may constitute an assignment, as well as a California decision holding that an reverse triangular merger is an assignment. Defendants, on the other hand, cited no Delaware cases holding that an reverse triangular merger, where the subsidiary “essentially was gutted and converted into a shell company,” cannot constitute an assignment. Lastly, in determining whether Plaintiffs’ consent to the Merger was required, the Court considered, and found, the possibility that Plaintiffs would suffer harm as a result.
Finally, before considering the merits of the Roche License claim, the Court addressed whether the claim should be arbitrated and whether that issue should be decided by the Court or the arbitrator. The Court held that the issue was substantive because it concerned “gateway questions” relating to the applicability of an arbitration provision in the Roche License, and therefore the underlying question was whether the parties decided in the contract to submit a particular dispute to arbitration. Finding clear and unmistakable evidence of the parties’ intent to arbitrate arbitrability, the Court ruled that the arbitrator should decide standing issues raised by the defendants and, if Plaintiffs have standing, the merits of the Roche License claim. As a result, the Court stayed further proceedings as to the Roche License claim in favor of arbitration.