BioLife Solutions, Inc. v. Endocare, Inc.

Decision Date01 October 2003
Docket NumberC.A.No. 20057.
PartiesBIOLIFE SOLUTIONS, INC. a Delaware corporation, Plaintiff, v. ENDOCARE, INC., a Delaware corporation, Defendant.
CourtCourt of Chancery of Delaware

David A. Jenkins, Joelle E. Polesky, Smith Katzenstein Furlow, LLP, Wilmington, Delaware, for the Plaintiff.

Arthur L. Dent, Brian C. Ralston, Potter Anderson & Corroon, LLP, Wilmington, Delaware, for the Defendant.

OPINION

LAMB, Vice Chancellor.

I.

The plaintiff sold assets to a competitor in return for a mixture of cash and shares of the competitor's publicly traded common stock. The purchaser later refused to perform its obligation under a related registration rights agreement to file a registration statement covering the shares so that they could be sold in compliance with the federal securities laws. Shortly afterwards, the market price of the shares plummeted, and, eventually, the shares were delisted after the seller's public accountants withdrew their report on its prior period financial statements.

The seller sought a variety of remedies for this breach of contract, including specific performance and, alternatively, money damages. The claim for money damages was tried beginning on March 31, 2003. In this post-trial opinion, the court concludes that the seller is entitled to damages measured by reference to the market price of the shares over a period of five consecutive trading days beginning when the seller could first have sold them had the necessary registration statement been filed in a timely manner.

II.
A. The Parties

Plaintiff BioLife Solutions, Inc., which was formally named Cryomedical Sciences, Inc. ("CMS"), is a Delaware corporation with its principal place of business in Binghamton, New York. BioLife's current business is the development, manufacture and marketing of solutions for the preservation of cells, tissues and organs at low temperatures (the "Solutions Business"). Before June 24, 2002, BioLife also was engaged in developing, manufacturing and marketing minimally invasive cryosurgical devices for the ablation of tissues (the "Cryosurgical Business").

CMS was one of the first companies to perfect the use of cryosurgical devices for the treatment of prostate diseases. During the early 1990s, it had essentially 100% of the worldwide market for this application. CMS began to struggle thereafter, and was quickly passed in marketplace acceptance by Endocare, Inc. (and a competitor, Galil Medical Systems, Inc.), whose cryosurgical equipment was viewed as superior for the treatment of prostate cancer. By the spring of 2002, CMS was facing severe financial difficulties.

Defendant Endocare, is a Delaware corporation with its principal place of business in Irvine, California. Endocare is engaged primarily in the development, manufacture, and marketing of temperature-based, minimally invasive surgical devices and technologies designed to treat certain cancers. Endocare was a direct competitor of CMS. By the spring of 2002, Endocare had approximately 80% of the market share for cryosurgical equipment used for prostate cancer.

B. The Transaction

In early 2002, BioLife and Endocare entered into negotiations regarding the acquisition of the Cryosurgical Business by Endocare. On May 28, 2002, BioLife and Endocare entered into an Asset Purchase Agreement (the "Agreement"). Closing on the Agreement occurred on June 24, 2002 (the "Closing"). Pursuant to the Agreement, Endocare acquired all of the tangible and intangible assets relating to BioLife's Cryosurgical Business. At the Closing, Endocare paid to BioLife $2,200,000 in cash, and provided BioLife with a stock certificate representing 120,022 shares of Endocare's common stock.

Included among the financial information provided in the Agreement was the Statement of Operations for the CMS business. This Statement showed that CMS's revenue for calendar year 2001 was approximately $954,000 (or an average of approximately $240,000 per quarter), while its revenue for the first three months of 2002 (the only quarter available as of either the signing of the Agreement or the Closing) had declined to $82,893.

At Closing, the parties also entered into a Registration Rights Agreement. Pursuant to Section 1.2 of the Registration Rights Agreement, Endocare agreed, "as soon as reasonably practicable after the [June 24, 2002] Closing Date ... but in no event more than 90 days thereafter" to file a registration statement on SEC Form S-3 and "as soon as reasonably practicable thereafter, effect all such qualifications and compliances as may be reasonably necessary and as would permit or facilitate the sale and distribution of" the stock transferred pursuant to the Agreement.1 Because the closing occurred on June 24, 2002, this 90-day period expired on September 22, 2002.2

Section 1.2(a) of the Registration Rights Agreement also gave Endocare the right to delay filing the Form S-3, but only under the following limited circumstances:

1. where the "Form S-3 is not available for such offering;" or
2. until Endocare received "the consents and the financial statements and other financial information required by the [Securities] Act [of 1933] and the SEC to be included in such registration statement from the independent certified public accountants of both [Endocare] and [BioLife];"
3. "if [Endocare] shall furnish to [BioLife] a certificate signed by [Endocare's] Chief Executive Officer stating that in the good faith judgment of the Board, it would be seriously detrimental to [Endocare] and its stockholders for such Form S-3 Registration to be effected at such time, in which event [Endocare] shall have the right to defer the filing of the Form S-3 registration for a period of not more than 90 days after receipt of the request of [BioLife] under this Section 1.2;"3 or
4. where the filing of the registration statement or effecting qualification or compliance "in any particular jurisdiction" that would require Endocare "to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance."
C. Delivery Of The Assets

Pursuant to Section 2.1 of the Agreement, the assets sold to Endocare consisted for the most part of intellectual property, 47 pieces of tangible assets (primarily equipment), inventory and accounts receivable. According to Endocare, "[t]he primary assets sought ... were the intangible assets held by BioLife-its patents, trademarks, and customer lists."4

1. The "Primary Assets"

The intellectual property (the patents, trademarks, and copyrights) were delivered at Closing in the form of an Assignment of Patents, an Assignment of Servicemarks and Trademarks, and an Assignment of Copyrights. The customer lists were provided to Endocare on May 27, 2002, the day before the Agreement was signed.

In addition to the actual assignment of the patents, there were also patent files that BioLife was required to deliver to Endocare. These files, which were maintained by BioLife's patent attorneys, contained the material that had been collected in connection with the various patent applications-correspondence to the patent office and the client, and notes and memoranda to the file by the patent attorneys. There is no doubt that Endocare was entitled to receive those documents, and there is also no doubt that delivery of those documents occurred slowly.

On August 9, 2002, Lawrence Ginsberg, Endocare's intellectual property counsel, contacted the law firm of Pillsbury Winthrop, LLP, which had represented BioLife in connection with the Agreement. The purpose of this call was to ascertain why the patent files had not been transferred and when they would be transferred. Following that initial conversation, Ginsberg again made contact with Pillsbury, and was told by Glenn Perry, a Pillsbury attorney, that he would "set the wheels in motion."5 BioLife, through Pillsbury, forwarded what it believed were the correct patent files to Endocare on September 3, 2002. In fact, some of the files sent were not related to patents that had been assigned under the Agreement, and certain patent files that were assigned were not actually sent. On October 14, after recognizing this error, Ginsberg e-mailed Anthony Miele, BioLife's new patent attorney at the law firm of Palmer & Dodge, LLP, to inquire about transferring the proper patent files. Miele responded later that day, stating that the patent file transfers "were in the works" and that he would "push these along."6 On October 21, Ginsberg again e-mailed Miele to inquire about the status of the patent file transfers. Finally, on November 4, 2002, Ginsberg e-mailed Miele, reiterating Endocare's need to obtain the patent files.

On November 11, 2002, BioLife transferred what Endocare initially thought were the complete patent files. However, not all the patent files had in fact been transferred to Endocare. Several patent files were not turned over to Endocare until March 13, 2003.

John Baust, CMS's president and CEO at the time of the Agreement, testified at trial that the late delivery of these patent files was due to the actions of one of CMS's former patent firms. He stated:

[t]here was an earlier firm we dealt with in the early nineties, Sherman & Shalloway, in Alexandria, who were retaining patent files that, frankly, neither of the other patent firms [that CMS utilized], to my knowledge knew about. Nor did I.
And when we found out about that, we then asked Sherman & Shalloway to transfer those files to Mr. Miele, at Palmer Dodge, so that he could determine what was appropriate to forward to Endocare, because I had no idea what was in those files.
That took some time. Sherman & Shalloway was reluctant to transfer. They felt there was an outstanding bill from the mid-nineties, and they were holding those files until that bill was satisfied. And so it took some months for them
...

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