John Hancock Life Ins. Co. v. Abbott Labs.

• Decision Date: 12 July 2017
• Docket Number: No. 16-1661,16-1661
• Citation: 863 F.3d 23
• Parties: JOHN HANCOCK LIFE INSURANCE COMPANY et al., Plaintiffs, Appellants, v. ABBOTT LABORATORIES, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

863 F.3d 23

JOHN HANCOCK LIFE INSURANCE COMPANY et al., Plaintiffs, Appellants,

v.ABBOTT LABORATORIES, Defendant, Appellee.

No. 16-1661

United States Court of Appeals, First Circuit.

July 12, 2017

Joan A. Lukey , with whom John A. Nadas , Stuart M. Glass , Kevin J. Finnerty , and Choate, Hall & Stewart LLP , Boston, MA, were on brief, for appellants.

Jeffrey I. Weinberger , with whom Gregory D. Phillips , Elizabeth A. Laughton , and Munger, Tolles & Olson LLP , Los Angeles, CA, were on brief, for appellee.

Before Howard, Chief Judge, Selya and Lynch, Circuit Judges.

SELYA, Circuit Judge.

The development of new drugs is a costly, time-consuming, and highly speculative enterprise. In an effort to hedge their bets, drug companies sometimes opt to share the risks and rewards of product development with outside investors. This appeal introduces us to that high-stakes world. The outcome turns primarily on a contract provision that the parties disparately view as a liquidated damages provision (and, thus, enforceable) or a penalty (and, thus, unenforceable). A sum well in excess of $30,000,000 hangs in the balance.

Following a lengthy bench trial, the district court held the key provision inapposite and, in all events, unenforceable. See John Hancock Life Ins. Co. v. Abbott Labs., Inc. (Hancock III ), 183 F.Supp.3d 277, 321, 323 (D. Mass. 2016). After careful consideration of a plethoric record, we reverse the district court's central holding, affirm its judgment in other respects, and remand for further proceedings (including the entry of an amended final judgment) consistent with this opinion.

I. BACKGROUND

Plaintiff-appellant John Hancock Life Insurance Company,¹ disappointed by the meager fruits of its multimillion-dollar investment with defendant-appellee Abbott Laboratories (Abbott), seeks to increase its return through litigation. In particular, Hancock aims to recover damages under its contract with Abbott or, in the alternative, to rescind that contract. The parties' dispute is by now well-chronicled. See John Hancock Life Ins. Co. v. Abbott Labs. (Hancock II ), 478 F.3d 1, 2–6 (1st Cir. 2006) ; Hancock III , 183 F.Supp.3d at 285–301 ; John Hancock Life Ins. Co. v. Abbott Labs. (Hancock I ), No. 03-12501, 2005 WL 2323166, at *1–11 (D. Mass. Sept. 16, 2005). We assume the reader's familiarity with these opinions and rehearse here only those facts needed to place this appeal into a workable perspective.

A. The Agreement .

In late 1999 or early 2000—the exact date is of no consequence—Hancock (a financial services company) and Abbott (a pharmaceutical manufacturer) entered into negotiations regarding a potential investment in a menu of new drugs that Abbott was developing. The parties chose nine specific Program Compounds that they hoped would mature into commercially successful drugs to treat various afflictions (such as cancer

and urinary tract blockages). During these negotiations, both Hancock and Abbott were represented by seasoned counsel, who exchanged approximately forty drafts of the proposed contract over a period of a year or more.

On March 13, 2001, the parties signed a research funding agreement (the Agreement). The Agreement is long and intricate, and we outline here only those provisions that are central to an understanding of the issues on appeal.

In the Agreement, Abbott pledged to develop the Program Compounds in accordance with Annual Research Plans that Abbott would submit for each Program Year over the course of a four-year Program Term. These Annual Research Plans were to contain "detailed statement[s] of the objectives, activities, timetable and budget for the Research Program for every Program Year remaining in the Program Term." Abbott prepared the first such Annual Research Plan for attachment as an exhibit.

The parties were to fund the development of the Program Compounds as specified in the Agreement and were meant to share in the profits. Hancock's funding obligations are precisely defined in section 3.1 of the Agreement: it would make four annual Program Payments, ranging from $50,000,000 to $58,000,000 each, over the course of the Program Term (a total of $214,000,000). Section 3.5, entitled "Hancock Funding Obligation," makes explicit that "Hancock's entire obligation [under the Agreement] shall be limited to providing the Program Payments set forth in [s]ection 3.1." In return for its investment, Hancock receives emoluments based on the progress and success of the Program Compounds. These emoluments include payments for the achievement of certain milestones, such as the initiation of a clinical trial or U.S. Food and Drug Administration (FDA) approval. It also receives royalties from any out-licensing or sales of the Program Compounds.

The Agreement saddles Abbott with both annual and cumulative spending obligations. Annually, Abbott was responsible for meeting the Annual Minimum Spending Target; that is, it had to spend annually at least the sum of Hancock's contribution for that year, plus $50,000,000, plus any shortfall from the prior year's minimum spending target. Cumulatively, Abbott had to spend "at least the Aggregate Spending Target"—defined as $614,000,000—"during the Program Term." In addition, Abbott is "solely responsible for funding all Program Related Costs in excess of the Program Payments from ... Hancock."² These obligations comprise only Abbott's minimum spending commitment: that commitment is a floor, not a ceiling, and Abbott projected in its first Annual Research Plan that it would spend over one billion dollars (about five times Hancock's expected total contribution) through the end of 2004.

In what turned out to be a prescient precaution, the Agreement anticipates that Abbott might not fulfill its spending commitment. In this respect, section 3.2 of the Agreement provides that if Abbott "fail[ed] to fund the Research Program in accordance with" its obligations, "Hancock's sole and exclusive remedies" are those remedies "set forth in [s]ections 3.3 and 3.4" of the Agreement. Section 3.3, entitled "Carryover Provisions," is divided into two subsections. If Abbott spends less than its Annual Minimum Spending Target, Hancock is allowed, under section 3.3(a), to defer its annual Program Payments until Abbott makes up that shortfall. Section 3.3(b) describes Hancock's remedies in the event that Abbott did not meet its cumulative spending obligations:

If Abbott does not expend on Program Related Costs the full amount of the Aggregate Spending Target during the Program Term, Abbott will expend the difference between its expenditures for Program Related Costs during the Program Term and the Aggregate Spending Target (the "Aggregate Carryover Amount ") on Program Related Costs during the subsequent year commencing immediately after the end of the Program Term. If Abbott does not spend the Aggregate Carryover Amount on Program Related Costs during such subsequent year, Abbott will pay to ... Hancock one-third of the Aggregate Carryover Amount that remains unspent by Abbott, within thirty (30) days after the end of such subsequent year.

Section 3.4 permits Hancock to terminate future Program Payments under certain circumstances, including Abbott's failure to "reasonably demonstrate in its Annual Research Plan its intent and reasonable expectation to expend on Program Related Costs during the Program Term an amount in excess of the Aggregate Spending Target."

To complete the picture, the Agreement contains a full-throated integration clause. Specifically, section 16.3 confirms that the "Agreement contains the entire understanding of the parties with respect to the subject matter hereof. All express or implied agreements and understandings, either oral or written, with respect to the subject matter hereof heretofore made are expressly merged in and made a part of this Agreement."

B. The Fallout and the Litigation .

After the Agreement was signed, Hancock made its first two Program Payments, totaling $104,000,000. Even so, the relationship quickly began to fray. Abbott terminated the development of several compounds in the first two years and significantly reduced its spending on the development of other compounds. At the end of 2002, Abbott informed Hancock that Abbott's 2002 spending had been appreciably less than its Annual Research Plan had anticipated. More troubling still, Abbott's preliminary research plan for 2003 projected a sharp reduction in spending for that year compared to its previous estimate and made no mention at all of expected 2004 spending. In September of 2003, Abbott belatedly proffered its 2003 Annual Research Plan, which did include some projected spending for 2004. That submission, though, further reduced total spending and admitted that Abbott would not reach the Aggregate Spending Target by the end of 2004.

After reviewing this document, Hancock responded that, in view of the insufficient spending that Abbott was prepared to undertake, it regarded its obligation to make future Program Payments as null and void. Abbott's rejoinder was of little solace to Hancock: it submitted a preliminary 2004 Annual Research Plan, indicating that Abbott would expend well below its annual minimum contribution in 2003 and would fail to reach the Aggregate Spending Target through the end of 2004. In both the final 2003 Annual Research Plan and the preliminary 2004 Annual Research Plan, however, Abbott predicted that it would reach the Aggregate Spending Target if 2005 spending were included.

Unsettled by this news, Hancock invoked diversity jurisdiction, see 28 U.S.C. § 1332(a), and filed suit in the United States District Court for the District of Massachusetts. That suit sought a declaration that Abbott's failure to meet its spending commitments terminated Hancock's obligation to make the third and fourth Program Payments. The district court granted summary judgment in favor of Hancock, holding that "Hancock's obligation to make the Program Payments for 2003 and 2004...