Commercial Division Denies Pfizer's Motion To Dismiss, Holds Allergan's Claims for Defense Costs Are Ripe

Farrell Fritz, P.C.
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It’s back to business as usual for Commercial Division Justice Andrew Borrok, who recently issued a slew of decisions contributing to New York’s robust Commercial Division jurisprudence.   In one decision, Allergan Fin., LLC v Pfizer Inc. (2020 NY Slip Op 50422 [U] [Sup Ct, NY County Apr. 13, 2020]), Justice Borrok denied a motion to dismiss brought by Pfizer, Inc. (“Pfizer”), finding that the plaintiff’s claims are ripe for adjudication and Pfizer is contractually obligated to reimburse plaintiff for its defense costs in connection with the multi-district federal opioid litigation.

Allergan involved a claim for, among other things, contractual indemnification arising out of an Asset Purchase Agreement (the “APA”), dated December 17, 2008, between Actavis Elizabeth, LLC (“Actavis”) and King Pharmaceuticals LLC (“King”), pursuant to which Actavis acquired from King the prescription opioid Kadian®.

Under the APA, King agreed to indemnify Actavis and its successors for, among other things, third party claims based on the pre-2009 (i.e., pre-closing) marketing and sale of Kadian®.  King also agreed to reimburse Actavis, on a quarterly basis, for “the reasonable and verifiable” costs and expenses, including attorneys’ fees, incurred in connection with any such claim.

Plaintiff Allergan Finance, LLC (“Allergan”), the successor to Actavis’ rights and obligations under the APA, was later sued in a multi-district litigation in connection with its marketing of Kadian® (see In re: Natl. Prescription Opiate Litig., No. 1:17-MD-2804, ECF No. 1201, at *1 [ND OH Dec. 17, 2018]) (the “Opioid Actions”).  The primary basis for the allegations against Allergan was the allegedly improper marketing and sale of Kadian® in the months and years before Actavis acquired the prescription painkiller in December 2008 (i.e., pre-closing conduct for which Allergan claimed Pfizer, as successor to King, should be liable).

Allergan timely notified King/Pfizer (“Defendants”) of the claims in the Opioid Actions, and sought indemnification and reimbursement of its defense costs pursuant to the APA.  Defendants, however, disclaimed coverage and refused to reimburse Allergan for the defense costs.

Allergan ultimately filed an action against Defendants seeking reimbursement for its defense costs, contractual and equitable indemnification, and a declaratory judgment.  Defendants moved to dismiss the complaint, arguing each of Allergan’s claims were “unripe” and “premature,” since Allergan had not yet been found liable in the Opioid Actions, and therefore could not be considered an “Indemnified Party” entitled to reimbursement of its defense costs.

The Court’s Analysis

Justice Borrok rejected Defendants’ arguments and denied the motion, concluding Allergan’s claims were ripe, and that the APA expressly required Defendants to reimburse Allergan for its defense costs.

The Court carefully analyzed the relevant provisions in the APA, concluding that Defendants’ “limited reading of the APA” was “plainly at odds with [its] other provisions,” which expressly provide for both defense and indemnification in connection with any third party claims related to pre-closing conduct, and obligate Defendants to reimburse Allergan on a quarterly basis (i.e., “now”) for costs and expenses incurred in defending the Opioid Actions.

Significantly, the Court noted that the APA does not require an adverse determination as a precondition to the right to receive indemnification or defense costs, and explicitly provides Defendants the right to a refund “in the event” they are ultimately held to not be obligated to indemnify Allergan – a provision which “simply makes no sense if the Defendants are not obligated to provide defense costs until liability is adjudicated.”

The Court also rejected Defendants’ reliance on Dresser-Rand Co. v Ingersoll Rand Co. (2015 WL 4254033 [SD NY Jul. 14, 2015]) for the argument that Allergan’s declaratory judgment claim was premature.  The Court noted that Dresser-Rand, Southern District case, was decided in the context of the federal Declaratory Judgment Act, and had no applicability here.

As the Court explained, New York state courts do not follow the Second Circuit’s approach to ripeness for declaratory judgment claims, which requires careful analysis of several different factors, including (i) whether the judgment will serve a useful purpose in clarifying or settling the legal issues involved, (ii) whether it would resolve or finalize the controversy involved, and “(iii) whether the proposed remedy is being used merely for procedural fencing or a race to res judicata, (iv) whether the use of a declaratory judgment would increase friction between sovereign legal systems or improperly encroach on the domain of a state or foreign court, and (v) whether there is a better or more effective remedy” (Dresser-Rand, 2015 WL 4254033 at *6, citing Dow Jones & Co. v Harrods, Ltd., 346 F3d 359 [2d Cir 2003]).  Those concerns, which were present in Dresser-Rand, were simply not present in Allergan.

As explained by Justice Borrok, the rule in New York state is “that on a motion to dismiss the complaint for failure to state a cause of action, the only question is whether a proper case is presented for invoking the jurisdiction of the court to make a declaratory judgment, and not whether the plaintiff is entitled to a declaration favorable to him” (quoting Law Research Serv., Inc. v Honeywell, Inc., 31 AD2d 900 [1st Dept 1969]).  And so, “where a proper case for a declaration is set out, the merit of the claim is not a relevant factor and New York courts must permit the action to proceed to discovery, trial and judgment” (id.).

In upholding Allergan’s declaratory judgment claim, the Court concluded that Allergan

[I]s not required to wait until its liability is established in an underlying action before it can bring a declaratory action under New York law (see Hudson Ins. Co. v AK Const., LLC, 92 AD3d 521 [1st Dept 2012]). And, here a live and justiciable controversy exists as to whether the Defendants must provide Allergan with its defense costs in the Opioid Lawsuits.

Three main points may be taken from the Allergan decision:

First, where the right to indemnification or defense costs is based upon a written agreement, the specific language of the contract is paramount to the court’s decision.  New York courts will strictly construe an indemnification agreement as a whole and, whenever possible, interpret the agreement to give effect to its intended purpose.  Courts cannot, and will not, narrowly interpret an agreement so as to render any portion of it meaningless.

Second, although in some cases it may be premature to assert indemnification or declaratory judgment claims until there is a finding of liability,  certain indemnification-based claims may be ripe where the issue of indemnification is not contingent upon a finding of liability, and the parties’ respective obligation are clearly spelled out in the agreement.  In Allergan, the Defendants had a present obligation to reimburse and indemnify Allergan for defense costs incurred in the Opioid Actions (subject to a right of refund), which was not contingent upon a finding of liability.

Third, on a motion to dismiss a declaratory judgment claim on ripeness grounds, New York state courts will not analyze the multiple factors set forth by the Second Circuit in Dow Jones.  Rather, New York state courts will look to see whether “a proper case is presented for invoking the jurisdiction of the court to make a declaratory judgment” – that is, whether a live and justiciable controversy exists – not whether the plaintiff will ultimately be successful on such claim.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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