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SIGA Tech., Inc. v. PharmAthene, Inc., C.A. No. 2627 (May 24, 2013)

May 24, 2013

In this en banc opinion, the Delaware Supreme Court upheld the Court of Chancery’s decision that a contract to negotiate in good faith in accordance with a term sheet is an enforceable obligation under Delaware law, and that where a trial judge finds that the parties would have reached an agreement but for the bad faith of a contracting party, the non-breaching party is entitled to contract expectation damages. Because this was the first time the Delaware Supreme Court addressed the proper damages for such a breach, it reversed and remanded for the Court of Chancery to reconsider the award of damages in light of the opinion. 

The appeal rose out of an action for breach of contract commenced by PharmAthene, Inc. (“PharmAthene”), in which PharmAthene claimed that SIGA Technologies, Inc. (“SIGA”) violated its contractual obligation to negotiate the final terms of a license agreement.  In late 2005, SIGA discussed a collaboration with plaintiff 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”) that contemplated SIGA granting 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 finalize the terms of a binding license agreement. To address SIGA’s immediate liquidity needs, PharmAthene also agreed to provide SIGA a bridge loan. In making the loan, PharmAthene made clear it was doing so in anticipation of eventually controlling ST-246, either through a 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 (the “Merger Agreement”), and the bridge loan agreement (the “Loan Agreement”), each of which was 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 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, when the merger failed to close before the drop-dead date, SIGA terminated the Merger Agreement. During the ensuing negotiations on the proposed license agreement, SIGA proposed terms materially 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 SIGA failed to address PharmAthene’s subsequent counterproposals. 

PharmAthene filed suit, and the Chancery Court held that SIGA breached its obligations under the Merger Agreement and the Loan Agreement to negotiate in good faith a license agreement in accordance with the terms of the LATS and was liable under promissory estoppel.   Recognizing that there was no clear precedent establishing an appropriate remedy for breach of contract and promissory estoppel claims involving a duty to negotiate in good faith, the Court of Chancery determined that an equitable payment stream following the original terms of the agreement was a suitable remedy.  SIGA appealed, arguing that the Court of Chancery erred in concluding that SIGA breached an obligation to negotiate in good faith under the Merger Agreement and the Loan Agreement because the LATS was non-binding.

The Supreme Court affirmed that contracting parties are bound to follow express contractual obligations, and that contractual obligations to negotiate in good faith are enforceable under Delaware law.  The Loan Agreement and the Merger Agreement expressly stated that the parties were required to negotiate in good faith, in accordance with the LATS, and the Supreme Court held that the record supported the Court of Chancery’s finding that those agreements demonstrated the parties’ intent to negotiate for a license agreement with similar terms to the LATS if the merger failed, even though the LATS was not signed and stated it was non-binding. The Supreme Court also held that the record supported the Court of Chancery’s finding that SIGA acted in bad faith by seeking to negotiate terms that were materially different from the terms in the LATS.

The Supreme Court next held that, as a matter of law, promissory estoppel does not apply when there is a “fully integrated, enforceable contract” that controls. Because the Loan Agreement and the Merger Agreement were controlling contracts, the Supreme Court reversed the Court of Chancery’s holding that SIGA was liable under promissory estoppel.

In addressing the question of the proper remedy for breach of an agreement to negotiate in good faith, the Supreme Court discussed the two types of preliminary agreements that require parties to negotiate in good faith, “Type I” and “Type II”, and determined that the agreement at issue here was a Type II agreement.  Type II agreements do not guarantee the parties will reach an agreement on a final contract due to good faith differences that may arise, but a Type II agreement “does, however, bar a party from renouncing the deal, abandoning the negotiations, or insisting on conditions that do not conform to the preliminary agreement.”  The Supreme Court held that when parties to a Type II agreement are required to negotiate in good faith, and the record supports the trial court’s finding that the parties would have reached an agreement but for the defendant’s bad faith negotiations, the non-breaching party is entitled to recover contract expectation damages.  The Supreme Court held that the Court of Chancery’s finding that PharmAthene and SIGA would have reached an agreement but for SIGA’s bad faith negotiations was supported by the record, and therefore determined that PharmAthene was entitled to its expectation damages under the LATS.  Because this was the first time the Supreme Court addressed the appropriate remedy for this type of breach, and because the Court of Chancery’s award of damages was predicated in part upon finding the defendant liable under the doctrine of promissory estoppel, the Supreme Court remanded the issue of damages back to the Court of Chancery.

Finally, the Supreme Court affirmed the award of attorney’s fees to PharmAthene based on a fee-shifting provision in the Loan Agreement, but remanded the issue to the Court of Chancery to reconsider the award of expert fees in light of the Supreme Court’s opinion.

The full opinion is available here