The Delaware Chancery Court Awards Lump-Sum Expectation Damages, Including Interest and Attorneys Fees, in the Amount of $194,000,000 for Breach of a Covenant to Negotiate in Good Faith in a Merger Agreement

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This Legal Insight updates our Legal Insight dated June 25, 2013, regarding the Delaware Chancery Court case captioned PharmAthene, Inc. v. SIGA Technologies, Inc., Civ. Action No. 2627-VCP, in which K&L Gates LLP serves as litigation counsel for PharmAthene. This case involves a suit to enforce a provision in a merger agreement between PharmAthene and Siga that required the parties to negotiate in good faith a license for an early-stage drug developed by Siga in the event the merger did not take place. The merger, in fact, did not take place, and PharmAthene sued Siga in the Delaware Chancery Court for breach of its obligations to negotiate in good faith and sought either a license for the drug or damages.

After a trial and a decision dated September 22, 2011, Vice Chancellor Parsons declined to require Siga to enter into a license agreement for the drug and found that lump-sum damages were too speculative and instead awarded a cash flow amounting to 50 percent of Siga’s net profits running for 10 years after the first sale of the drug.

On appeal, the Delaware Supreme Court [1] affirmed the Chancery Court’s decision that Siga had negotiated in bad faith. The Supreme Court also found, for the first time, that under the circumstances of this case a party could recover its expectancy damages for breach of covenant to negotiate in good faith as long as the damages were not speculative, and remanded the case for further proceedings.

Following a new trial on remand, Vice Chancellor Parsons, in decisions dated August 8, 2014 and January 7, 2015, found that PharmAthene should indeed be awarded “lump-sum” expectancy damages. The judgment was entered on January 15, 2015, awarding PharmAthene $194,000,000, representing the present value of expected future profits from sales of the drug (as of the date of the breach), plus prejudgment interest and attorneys fees. The Chancery Court based its decision on the Supreme Court’s decision, new evidence introduced since the first trial that Siga had entered into a contract to sell the drug to the federal government, and a finding that the award was not speculative under the circumstances.

The key take-away: A plaintiff may not be limited to its out-of-pocket damages, but may, in fact, be able to recover substantial expectation damages in the form of a lump-sum award for the defendant’s breach of a promise to negotiate in good faith. This may be true even though the subject matter of the negotiation is a new start-up (in PharmAthene, a start-up drug) and even though the ultimate sale of the product does not take place until several years after the breach. Of course, the result in any given case depends on the applicable facts and circumstances.

Notes:
[1] SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.2d 330 (Del. 2013).

 

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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