Eli Lilly and Co. v. Emisphere Technologies, Inc.
| Decision Date | 06 January 2006 |
| Docket Number | No. 103CV1504DFHTAB.,103CV1504DFHTAB. |
| Citation | 408 F.Supp.2d 668 |
| Parties | ELI LILLY AND COMPANY, Plaintiff, v. EMISPHERE TECHNOLOGIES, INC., Defendant. |
| Court | U.S. District Court — Southern District of Indiana |
Donald E. Knebel, Dwight D. Lueck, Erin Roth Bohannon, Helen K. Geib, Barnes & Thornburg, Indianapolis, IN, for Plaintiff.
George C. Lombardi, James F. Hurst, Samuel S. Park, Winston & Strawn LLP, Chicago, IL, Maureen E. Ward, Michael Rabinowitch, Wooden & McLaughlin LLP, Indianapolis, IN, Aliza Ross, Bruce E. Fader, Colin A. Underwood, Steven H. Holinstat, Proskauer Rose LLP, New York, NY, for Defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON COUNTERCLAIM FOR BREACH OF CONTRACT
Beginning in February 1997, plaintiff Eli Lilly and Company and defendant Emisphere Technologies, Inc. agreed to collaborate in research on new chemical "carrier" compounds. The goal was to use these molecules to deliver therapeutic proteins to patients orally. Through mechanisms that are not well understood, the carriers may enable the therapeutic proteins to bypass the digestive processes. Those processes ordinarily break down proteins into their component amino acids, but with carriers, the proteins may stay intact and cross the intestinal membrane to enter the patient's bloodstream. If successful, such research could make it much easier to treat patients with proteins such as insulin that have been administered in the past through injections or other methods that introduce the proteins directly into the blood. The research project was focused on finding a carrier to enable oral delivery of parathyroid hormone (PTH), which is used in treating osteoporosis and currently is administered by injections.1
The research relationship required Lilly and Emisphere to share valuable information. The relationship has broken down in a dispute over whether Lilly breached the relevant contracts by pursuing its own secret research projects with Emisphere's proprietary carriers. On September 4, 2003, an international patent application by Lilly was published for a carrier compound for the delivery of a particular glucagon-like peptide (GLP) known as "GLP-1." GLP is a natural protein produced by the intestine. It is used to treat patients for diabetes and obesity. It is not currently available for oral delivery.
After reviewing the Lilly patent application, Emisphere notified Lilly on September 26, 2003 that it believed Lilly had breached contract provisions restricting Lilly's use of Emisphere's technology and giving Emisphere ownership of patent rights to Lilly inventions derived from Emisphere's technology. Lilly responded by filing this action for declaratory judgment. After a period of negotiations proved unfruitful, Emisphere notified Lilly in August 2004 that it was terminating the relevant contracts. By agreement of the parties, Emisphere's counterclaim for breach of contract was tried to the court in January and February 2005 to determine whether Emisphere is entitled to terminate the agreements and is free to pursue collaboration with another major pharmaceutical company.
As explained below, Emisphere has proved that Lilly breached the relevant contracts, and Emisphere is entitled to terminate the contracts effective the date of its termination letter, August 23, 2004. Pursuant to Rule 52 of the Federal Rules of Civil Procedure, the court now states its findings of fact and conclusions of law on the counterclaim. As the parties agreed in their contracts, the court applies New York law to the dispute. The court has blended the findings of fact and conclusions of law in one narrative. Where the court has cited specific exhibits and testimony in support of particular points, the court does not necessarily mean to imply that the cited evidence is the only supporting evidence.
Plaintiff Lilly is a major pharmaceutical company with annual revenues of more than ten billion dollars. Emisphere is a relatively new and much smaller company. Lilly is an Indiana citizen for purposes of federal diversity jurisdiction. Emisphere is a citizen of Delaware and New York. The matter in controversy has a value well in excess of the jurisdictional limit under 28 U.S.C. § 1332. The court has jurisdiction of the subject matter and jurisdiction over the parties.
Emisphere's principal assets are technology and know-how involving a family of chemical compounds that Emisphere calls "carrier" compounds. The carriers may offer a solution to a basic biological barrier to some forms of drug treatments. Many human diseases can be treated by introducing proteins into the body, such as insulin to treat diabetes. The human digestive system is designed to break down proteins into their component amino acids. Tr. 456. If a doctor tries to treat a patient by administering a therapeutic protein orally, the patient's digestive system will break it down so that it loses any therapeutic value.
Emisphere believes that its carrier compounds can be used with therapeutic proteins to protect the proteins from the digestive mechanisms, so that the therapeutic proteins may pass intact into the bloodstream to provide effective therapy to the patient. This prospect is, to put it mildly, very interesting for Lilly and other pharmaceutical companies. In general, it is easier, cheaper, and more effective to deliver medicine orally than through injections or other methods that bypass the digestive system. For example, this technology might allow a diabetes patient in the future to take an insulin pill instead of needing frequent hypodermic injections of insulin.
In 1996, Lilly and Emisphere began negotiating a possible research collaboration on carrier compounds that could be used for oral administration of parathyroid hormone (PTH) and human growth hormone (hGH). See Ex. 13. Almost all the evidence here deals with the work on PTH, which is produced by the parathyroid glands. Its principal role in the body is the regulation of bone metabolism. PTH can be used to treat osteoporosis, a disease that weakens bones, especially in older women. Lilly has introduced to the market an injectable PTH product called Forteo, but PTH is not currently available for oral delivery.
On February 26, 1997, Emisphere and Lilly signed their first Research Collaboration and Option Agreement, called RCOA I. Ex. 1. In RCOA I, Lilly and Emisphere agreed to collaborate on a research and development program ("the Program") to research the use of "Emisphere Technology" for oral delivery of PTH and related compounds, as well as some non-oral methods of delivery. As part of RCOA I, the parties agreed that Emisphere would grant Lilly an option for an exclusive worldwide license to make and use the Emisphere carrier technology to develop oral PTH products. Lilly could exercise that option by giving notice to Emisphere and by paying Emisphere a substantial sum of money. RCOA I, § 2.1. In the negotiations on RCOA I, the parties also agreed on the terms of the separate license agreement that would take effect if and when Lilly exercised the option. That license agreement is known as the PTH License Agreement. See Ex. 2.
Both sides were represented by highly capable counsel in negotiating and drafting the agreements. The agreements are superb examples of sophisticated and complex draftsmanship, often with multiple layers of many careful definitions of key terms, as noted below.
RCOA I took effect in February 1997 and expired in February 1999. In Section 1.1, Emisphere agreed to "make available to Lilly access to all Emisphere Technology relevant for the Program," i.e., for the PTH research. The parties defined "Emisphere Technology" broadly in the preamble to RCOA I as:
proprietary synthetic chemical compounds that enable the delivery of therapeutic macromolecules and other compounds that are not currently deliverable by oral means or by certain non-oral means (including all related patents, patent applications and Know-How presently owned by Emisphere and all patents, patent applications, and Know-How relating to inventions developed by Emisphere pursuant to the Program ...).
Ex. 1. RCOA I included confidentiality provisions in Section 5. Those provisions did not restrict distribution within Lilly of information relating to the Program, nor did RCOA I restrict Lilly's internal use of information obtained in the PTH Program. See Ex. 23.
Research collaboration began in 1997 after execution of RCOA I. On March 6th and 7th, scientists from both companies met in Indianapolis. Ex. 17. Emisphere scientists identified the best carrier candidates for use with PTH and provided specific test results on PTH experiments they had already conducted, including studies of primates. At the meeting, Emisphere agreed to provide carrier samples and some methods and protocols for producing the carriers. Ex. 17 at 523. By May 6, 1997, Lilly scientists had synthesized several Emisphere carriers for themselves, with critical help from Emisphere scientists. See Ex. 724.
The early work on carriers for PTH was sufficiently promising that Lilly paid Emisphere $4 million in April 1998 to exercise the PTH option. Section 2.1 of the PTH License Agreement provided that Emisphere granted Lilly during the term of the agreement:
an exclusive license to use (a) the Emisphere Patents, the Emisphere Program Patents and Emisphere's share of the Joint Patents for the Field, and (b) the Emisphere Know-How, the Emisphere Program Know-How and Emisphere's share of the Joint Know-How for the Field. All proprietary rights and rights of ownership with respect to the Emisphere Technology and Emisphere Program Technology shall at all times remain solely with Emisphere unless otherwise specified in this Agreement. Lilly shall not have any rights to use the Emisphere...
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