Siga Techs., Inc. v. PharmAthene, Inc., 20, 2015

• Decision Date: 23 December 2015
• Docket Number: No. 20, 2015,20, 2015
• Citation: 132 A.3d 1108
• Parties: Siga Technologies, Inc., a Delaware Corporation, Defendant Below, Appellant/Cross–Appellee, v. PharmAthene, Inc., a Delaware Corporation, Plaintiff Below, Appellee/Cross–Appellant.
• Court: United States State Supreme Court of Delaware

132 A.3d 1108

Siga Technologies, Inc., a Delaware Corporation, Defendant Below, Appellant/Cross–Appellee,

v.PharmAthene, Inc., a Delaware Corporation, Plaintiff Below, Appellee/Cross–Appellant.

No. 20, 2015

Supreme Court of Delaware.

Submitted: October 7, 2015

Decided: December 23, 2015

Corrected: December 28, 2015

Stephen P. Lamb, Esquire (Argued), Meghan M. Dougherty, Esquire, Matthew D. Stachel, Esquire, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Wilmington, Delaware, for Defendant Below, Appellant/Cross–Appellee SIGA Technologies, Inc.

Roger Crane, Esquire (Argued), K&L Gates LLP, New York, NY, Christopher A. Selzer, Esquire, McCarter & English, LLP, Wilmington, Delaware, for Plaintiff Below, Appellee/Cross–Appellant PharmAthene, Inc.

Before STRINE, Chief Justice;HOLLAND, VALIHURA, VAUGHN, and SEITZ, Justices, constituting the Court en Banc.

SEITZ, Justice, for the Majority:

I. INTRODUCTION

This is the second appeal by SIGA Technologies, Inc. ("SIGA") from a Court of Chancery judgment awarding PharmAthene, Inc. ("PharmAthene") damages stemming from failed merger and license negotiations between the parties. In the first appeal, this Court upheld the Court of Chancery's finding that SIGA in bad faith breached its contractual obligation to negotiate a license agreement consistent with the parties' license agreement term sheet, known throughout this litigation as the "LATS." This Court also held that where parties have agreed to negotiate in good faith, and would have reached an agreement but for the defendant's bad faith conduct during the negotiations, the plaintiff can recover contract expectation damages, so long as the plaintiff can prove damages with reasonable certainty. Because the Court of Chancery ruled out expectation damages in its first decision, this Court remanded the case to reconsider an award of damages to SIGA in a decision we will call "SIGA I. "¹

The Court of Chancery did as instructed and reevaluated the evidence, including evidence of expectation damages. Although the court previously found that lump-sum expectation damages were too speculative to recover, the Court of Chancery held on remand that PharmAthene met its burden of proving with reasonable certainty expectation damages and awarded PharmAthene $113 million.² The parties once again appealed to this Court.

SIGA raises essentially two claims of error in the current appeal: first, the Court of Chancery was not free to reconsider its prior holding that lump-sum expectation damages were too speculative; and, second, if reconsideration was permitted, the expectation damages awarded following remand were too speculative. After careful consideration of SIGA's arguments, we find that the law of the case doctrine did not preclude the Court of Chancery from reconsidering its earlier determination that lump-sum expectation damages were too speculative. In SIGA I, this Court clarified that expectation damages were available, instructed the Court of Chancery to revisit its damages award, directed the trial court to reevaluate the helpfulness of expert testimony, and permitted the court to make any order in further progress of the case not inconsistent with the SIGA I decision. The Court of Chancery followed the law of the case by complying with the mandate in SIGA I.

We also find that the court did not abuse its discretion when it awarded PharmAthene lump-sum expectation damages, and its factual findings supporting its new damages determination were not clearly erroneous. The Court of Chancery considered anew all issues relevant to the remedy, including the uncertainty caused by the wrongdoer's breach. When a party breaches a contract, that party often creates a course of events that is different from those that would have transpired absent the breach. The breaching party cannot avoid responsibility for making the other party whole simply by arguing that expectation damages based on lost profits are speculative because they come from an uncertain world created by the wrongdoer. Rather, when a contract is breached, expectation damages can be established as long as the plaintiff can prove the fact of damages with reasonable certainty. The amount of damages can be an estimate.³ When awarding lump-sum expectation damages for breach of a Type II contract, the Court of Chancery correctly took into account all the circumstances of the breach, including the wrongdoer's willfulness,⁴ especially when the wrongdoer caused uncertainty about the economic terms of the transaction by its failure to negotiate in good faith.⁵ Accordingly, we affirm the judgment of the Court of Chancery.

II. FACTUAL BACKGROUND⁶

A. SIGA's Development Of ST–246

In 2004, SIGA acquired technology for ST–246, an antiviral drug for the treatment of smallpox. At that time, the viability, potential uses, safety, and efficacy of the drug, as well as the likelihood of SIGA obtaining regulatory approval or making sales to the government, were, as is typical in this industry, uncertain.

By late 2005, SIGA was running out of money, its largest shareholder, MacAndrews & Forbes, refused to invest additional funds, and the NASDAQ threatened to de-list its shares. SIGA estimated that it needed an additional $16 million to complete development of the drug. On top of its financial problems, SIGA was having trouble developing ST–246 because it had no experience or employee expertise bringing a drug to market.

B. SIGA And PharmAthene Negotiate A Business Collaboration

In dire straits, SIGA began discussing a possible collaboration with PharmAthene. This was not their first attempt to work together. PharmAthene had previously backed out of merger negotiations between the parties in late 2003. Nevertheless, Thomas Konatich, SIGA's Chief Financial Officer, contacted Eric Richman, PharmAthene's Vice President of Business Development and Strategies, to begin discussions. According to Richman's contemporaneous notes, due to the prior failed attempt at a merger and to SIGA's need for a fast cash infusion, SIGA insisted on framing a license agreement before discussing a potential merger.

Both companies put together teams to negotiate the potential business collaboration. On SIGA's side, in addition to CFO Konatich, the key participants included the Chairman of SIGA's board, Donald Drapkin, who also served as the Vice Chairman of SIGA's biggest stockholder, MacAndrews & Forbes; SIGA's Chief Scientific Officer, Dennis Hruby, who kept SIGA's senior management apprised of ST–246's scientific developments; and then-board member and current Chief Executive Officer, Eric Rose. SIGA's financial controller, Ayelet Dugary, prepared financial projections that informed the negotiations. Additionally, several in-house lawyers from MacAndrews & Forbes took an active role in negotiating with PharmAthene on SIGA's behalf, including Michael Borofsky who was involved in negotiating the terms of the LATS; and Steven Fasman, who worked with SIGA personnel to prepare a valuation of ST–246, and who was involved in discussions with PharmAthene after SIGA experienced positive developments and backed out of the merger and the LATS negotiations. SIGA also hired attorney Nicholas Coch to represent it in communications with PharmAthene's attorney right before SIGA breached its obligation to negotiate a license agreement according to the LATS.

PharmAthene's team, assembled by Richman, included CEO David Wright; CFO Ronald Kaiser; and board member Elizabeth Czerepark; as well as attorney Jeffrey Baumel. PharmAthene also later hired attorney Elliot Olstein who communicated with SIGA's attorney Coch in the time leading up to SIGA's breach.

1. SIGA And PharmAthene Negotiate And Sign The LATS

Konatich and Richman led the negotiations over the license agreement on behalf of their companies. The Court of Chancery found that at the end of 2005, the parties conservatively valued ST–246's market potential at around $1 billion to $1.26 billion.⁷ The parties reflected their negotiations in the specific terms of the LATS, with the last revisions dated January 26, 2006. This final version of the LATS was titled "SIGA/PharmAthene Partnership" and the footer of the document read: "Non Binding Terms."⁸ The objective read: "To establish a partnership to further develop & commercialize [ST–246] for the treatment of Smallpoxand orthopox related infections and to develop other orthopox vims therapeutics."⁹ The LATS provided that SIGA would grant PharmAthene a worldwide, exclusive license to use, develop, sell, and sublicense ST–246 and related products. The LATS also contemplated a joint research and development committee and allocated certain roles on the committee to PharmAthene and SIGA. PharmAthene would also fund research at SIGA based on a defined research and development plan and budget.

The LATS included a number of economic terms. PharmAthene had to pay a total "License Fee" of $6 million, consisting of (1) a $2 million upfront cash payment; (2) a $2.5 million deferred license fee to be paid 12 months after the execution of a license agreement upon the occurrence of certain events; and (3) a $1.5 million payment to be made after SIGA obtained over $15 million in financing. The LATS also required PharmAthene to pay up to an additional $10 million for SIGA's achievement of certain milestones such as meeting specific sales targets and obtaining necessary regulatory approvals. Additionally, PharmAthene was required to make incremental annual royalty payments on net sales of "Patented Products" on a sliding percentage scale of between 8% and 12%, depending on the amount of yearly sales. SIGA was also "entitled to receive 50% of any amounts by which [the] net margin exceed[ed] 20% on sales to the [U.S.] Federal Government."¹⁰ After negotiating the LATS, the parties turned their focus to merger negotiations.

2. SIGA And PharmAthene Enter Into A Bridge Loan Agreement And A Merger Agreement

Due to SIGA's precarious financial position, PharmAthene agreed to provide SIGA...