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PharmAthene, Inc. v. SIGA Technologies, Inc., C.A. No. 2627-VCP (Del. Ch. Nov. 23, 2010) (Vice Chancellor Parsons)

November 23, 2010

The Court of Chancery denied defendant’s motion for partial summary judgment because the plaintiff, PharmAthene, Inc. (“PharmAthene”), demonstrated a material issue of fact as to whether a term sheet it had entered into with defendant SIGA Technologies, Inc. (“SIGA”) constituted a binding licensing agreement. The Court also found that, upon a more complete record, PharmAthene might be able to prove by clear and convincing evidence that it was entitled to specific performance of the alleged licensing agreement. Although the Court believed it would be difficult for PharmAthene to prove its claim for expectation damages was not speculative, the Court held that the question required further development of the record.

PharmAthene and SIGA are biodefense corporations involved in the development of drugs for use in countering biowarfare agents. The two companies negotiated a licensing agreement term sheet (the “Licensing Term Sheet”) with respect to a drug SIGA was developing for the treatment of smallpox. The negotiations then turned to merger discussions, and the companies entered into a “Merger Term Sheet.” To ensure it would have rights to the smallpox drug even if the merger negotiations terminated, PharmAthene requested that the parties enter into a definitive licensing agreement before negotiating the merger. Instead, at the suggestion of the Chairman of SIGA’s board of directors, the parties attached the Licensing Term Sheet to the Merger Term Sheet. PharmAthene and SIGA entered into a merger agreement, which provided that, upon its termination, the two companies would negotiate in good faith with an intent to execute a definitive license agreement in accordance with the terms set forth in the attached Licensing Term Sheet.

Before the merger closed, the smallpox drug achieved several success thresholds in the clinical trial process, and SIGA terminated the merger agreement. When PharmAthene contacted SIGA to execute a definitive licensing agreement, SIGA stated that it did not consider the Licensing Term Sheet binding and sought to renegotiate the term sheet. PharmAthene filed a lawsuit, alleging that SIGA breached its obligations under the Licensing Term Sheet. SIGA moved for partial summary judgment seeking a ruling that the Licensing Term Sheet was not a binding licensing agreement and that PharmAthene could not pursue a remedy of expectation damages because such a remedy would be too speculative. 

The Court first addressed whether the Licensing Term Sheet was an enforceable contract. To so find, the Court reasoned it would require proof demonstrating that (i) PharmAthene and SIGA intended the Licensing Term Sheet to be binding and (ii) all essential terms of the parties’ agreement were set forth in the Licensing Term Sheet. For purposes of the motion for partial summary judgment, the Court assumed that PharmAthene and SIGA intended the Licensing Term Sheet to constitute a binding contract. The Court next found that PharmAthene produced evidence supporting an inference that the parties had reached agreement on all essential terms. Although the Licensing Term Sheet was not signed and contained a legend on each page describing it as nonbinding, the Court held that its attachment to the Merger Term Sheet, the merger agreement, and a bridge loan agreement between PharmAthene and SIGA, together with the negotiating history alleged by PharmAthene, supported an inference that both parties believed the Licensing Term Sheet contained all essential elements of a licensing agreement. The Court therefore denied SIGA’s motion for partial summary judgment on the issue of whether the Licensing Term Sheet constituted a binding agreement.

SIGA also sought partial summary judgment on the issue of whether specific performance was an appropriate remedy. SIGA argued that a specific performance remedy would be inappropriate because the terms of the Licensing Term Sheet were not sufficiently definite to permit the Court to devise a clearly articulated order. To obtain specific performance, the Court reasoned, PharmAthene would have to demonstrate by clear and convincing evidence that the Licensing Term Sheet constituted an enforceable agreement on all essential terms. Noting that meeting this high standard would be difficult, the Court was not convinced that PharmAthene would be unable to do so as a matter of law. The Court found that PharmAthene had adduced sufficient facts to support its claim that SIGA breached its agreement with PharmAthene. The Court also noted that, due to the nature of the companies’ business, the Court would find it challenging to devise an appropriate remedy if PharmAthene should prevail on the merits at trial; therefore, the Court stated it was more prudent to defer the question of specific performance until the record was fully developed at trial. 

The Court also denied the part of SIGA’s motion for partial summary judgment seeking a ruling that PharmAthene was not entitled to expectation damages. SIGA contended that expectation damages were too speculative because of the risky nature of the drug development process and uncertainties with respect to the drug approval process and the potential market size for a new drug. SIGA cited several non-Delaware cases holding that expectation damages in the context of drug development were speculative, but the Court, noting that this question was unsettled in Delaware, utilized its discretion to deny summary judgment because a more thorough development of the record would clarify the law or its application. The Court also held that a full record was needed to decide whether any information about events occurring after the date of SIGA’s alleged breach of contract should be admissible. Generally, expectation damages must be measured as of the date of the breach, but, in some circumstances, courts have allowed the admission of ex post evidence to calculate damages. The Court held, however, that PharmAthene would not be entitled to receive patent damages such as royalties and profits derived from the smallpox drug because this type of damages is available by federal law only in patent infringement cases. Because this case did not involve a patent infringement claim, there was no basis to award any form of patent damages if PharmAthene were to prevail on its claims.

The full opinion is available here