Intermune, Inc. v. Harkonen
| Decision Date | 10 May 2023 |
| Docket Number | C. A. 2021-0694-NAC |
| Parties | INTERMUNE, INC., and ROCHE HOLDINGS, INC., Plaintiffs, v. W. SCOTT HARKONEN, M.D., Defendant. |
| Court | Court of Chancery of Delaware |
Date Submitted: April 3, 2023
Karen A. Jacobs, Megan W. Cascio, Courtney Kurz, MORRIS, NICHOLS ARSHT &TUNNELL LLP, Wilmington, Delaware; Laurie Carr Mims, Benjamin D. Rothstein, Candice Mai Khanh Nguyen Melissa Cornell, Catherine C. Porto, KEKER, VAN NEST & PETERS LLP, San Francisco, California; Counsel for Plaintiffs InterMune, Inc., and Roche Holdings, Inc.
Michael A. Weidinger, Megan Ix Brison, PINCKNEY, WEIDINGER, URBAN & JOYCE LLC, Wilmington, Delaware; Elizabeth Sandza, Richard W. Sandza, SANDZA LAW, PLLC, Washington, District of Columbia; Counsel for Defendant W. Scott Harkonen, M.D.
COOK, V.C.
Defendant Dr. W. Scott Harkonen is the founder and former CEO of InterMune, Inc. (the "Company"). In 2009, Harkonen was convicted of wire fraud. A federal jury found beyond a reasonable doubt that Harkonen acted with an intent to defraud when he directed the Company to issue a false and misleading press release about the results of one of the Company's clinical trials.
Harkonen litigated the validity of his conviction for over nine years. He challenged the evidence of his intent after trial, on appeal, collaterally, and in the Supreme Court of the United States. Top-tier lawyers advocated for him in every challenge and provided constitutionally effective assistance. Every challenge failed.
Having exhausted judicial avenues for overturning his conviction, Harkonen sought clemency from the President of the United States. In 2021, then-President Trump pardoned Harkonen's conviction. The pardon did not expunge Harkonen's conviction or declare him innocent of wire fraud. Instead, the pardon restored the basic civil rights that any federal felony conviction removes.
The Company and its insurers advanced Harkonen's defense costs. After Harkonen was convicted, the insurers invoked a policy exclusion for crimes involving intentional fraud to seek repayment from the Company of a portion of the sums they had advanced. During arbitration, the Company argued that Harkonen's conduct did not fit the plain language of the exclusion. The arbitrators rejected the Company's argument and ordered the Company to repay the insurers.
Through this action, the Company seeks a declaration that Harkonen is not entitled to indemnification. The parties have cross moved for summary judgment on two questions of law. The first is whether, under Section 145(c) of the Delaware General Corporation Law, a presidential pardon renders a corporate officer "successful on the merits or otherwise." The second is whether a corporate officer who has been convicted of federal wire fraud may relitigate the issue of "good faith" under Section 145(a) when the guilty verdict necessarily determined that the officer acted in bad faith and the officer had a full and fair opportunity to challenge the verdict. The answer to both questions is no.
Under Section 145(c), a successful outcome in a criminal action is anything other than a conviction. Harkonen was convicted. So he was not successful.
A presidential pardon does not erase the conviction or operate as a determination of innocence. Harkonen's pardon explains that.
To redefine success, Harkonen argues that the pardon restored his civil rights. He says Section 145(c) indemnification was a "basic civil right" eliminated by his conviction such that denying him indemnification would impermissibly punish him for a pardoned crime. Corporate indemnification is indeed important, but it is not a basic civil right. Basic civil rights are fundamental rights. Indemnification offered to corporate officials under a state statute is not a right that belongs to every United States citizen.
Even so, the basic civil rights maneuver stumbles over Section 145(c)'s text. Section 145(c) indemnification is not unconditional; it depends on success. A conviction is not success. And the pardon did not overturn Harkonen's conviction. So even if, somehow, corporate officer indemnification qualified as a basic civil right restored by a federal pardon, Harkonen never lost it because he never had it.
Harkonen's Section 145(a) arguments fare no better. The Company chose to treat as mandatory the permissive indemnification provided under Section 145(a). But that choice did not modify the statute. An officer is not entitled to indemnification under Section 145(a) unless the officer acted in good faith. Bad faith is an element of wire fraud. A jury found Harkonen guilty of wire fraud. Multiple courts affirmed. And the pardon did not vacate any of the judgments. Precedent explains that a conviction based on bad faith is conclusive evidence of a failure to act in good faith. So Harkonen cannot litigate his state of mind anymore.
To undermine the preclusive effect of his conviction, Harkonen raises a number of issues that, according to him, render his conviction infirm. He contends, for example, that after he was convicted, the Supreme Court of the United States validated the statistical methods he used to reach the conclusions in the press release that were found fraudulent. But this argument-and all the others-were already considered and rejected during Harkonen's criminal proceedings. Were Harkonen to reassert those arguments in federal court today, they would be procedurally barred under post-conviction rules. The indemnification phase of a Section 145 proceeding is not a means of collateral attack. The General Assembly did not enact Section 145 to give directors and officers of Delaware corporations an additional vehicle for postconviction review.
Harkonen alternatively invokes the judicial admissions doctrine. He insists that because the Company told arbitrators he did not act with an intent to defraud, the Company cannot now argue that he acted in bad faith. But the Company's argument was, if anything, an interpretation of its insurance contracts. The judicial admissions doctrine does not apply to legal arguments.
Harkonen's position also overlooks that Section 145 prohibits a Delaware corporation from indemnifying bad faith conduct. The Company cannot "admit" that, despite a conviction conclusively establishing that he acted in bad faith, Harkonen is entitled to indemnification under Section 145(a).
Harkonen's motion for summary judgment is therefore denied. The Company's cross motion for summary judgment is granted.
The material facts are undisputed or are not subject to reasonable dispute.[1]
A. The Parties
The Company is a Delaware corporation that commercializes drug treatments. Harkonen served as the Company's CEO from 1998 until 2003. Plaintiff Roche Holdings, Inc. acquired the Company and, through the merger agreement, agreed to honor the Company's indemnification obligations.[2]
B. The Criminal Proceedings
In 2002, the Company issued a press release. The press release announced the results of a clinical trial that the Company conducted on one of its drug products, "Actimmune." According to the press release, the clinical study's results showed that Actimmune significantly reduced mortality rates associated with idiopathic pulmonary fibrosis ("IPF"). As Harkonen touted in the press release:
We are extremely pleased with [the clinical study's] results, which indicate Actimmune may extend the lives of patients suffering from [IPF] .... Actimmune is the only available treatment to have clinical benefit in IPF, with improved survival data ....[3]
In reality, "overwhelming, undisputed evidence" showed that the clinical study "was a failure."[4] The clinical study did not meet its endpoints. The press release flatly misrepresented the results of the clinical study.
Harkonen was the brains behind the press release and the lead drafter of its contents. So federal prosecutors charged him with one count of wire fraud.[5] The government alleged that Harkonen "falsely portrayed the results" of the press release.[6] The government further alleged that Harkonen directed the issuance of the press release with the intent to defraud.[7] Harkonen assembled a defense team comprising counsel from prestigious law firms and a now-sitting Judge of the Superior Court of California.[8] His team unsuccessfully moved to dismiss the indictment for failure to support the element of intent.[9] Then the case was tried before a jury in the United States District Court for the Northern District of California.
Trial lasted six weeks. The government sought to prove that the results in the press release were false and misleading because they were not derived from the original clinical study data, but rather from Harkonen's post hoc manipulations.[10]The evidence included testimony from Company insiders who were present when Harkonen reworked the clinical study data and created the press release. The defense team "amply" cross-examined all the government's witnesses.[11]
After the parties rested, the district court instructed the jury on the elements of wire fraud. The district court explained that Harkonen could not be found guilty of wire fraud unless the government proved beyond a reasonable doubt that he "(i) made at least one false or fraudulent statement; (ii) knew the statement(s) were false or fraudulent[;] and (iii) acted with an intent to defraud."[12] On September 29, 2009, the jury found Harkonen guilty of wire fraud. The government advocated for a 10-year prison sentence. The district court sentenced Harkonen to probation and ordered him to pay a fine.
C. The Challenges To The Conviction
Harkonen spent nine years challenging his conviction. From 2009 through 2018, he used seven different vehicles to contest...
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