March 20, 2016

DELAWARE INSIDER: Delaware Supreme Court Affirms Award of Expectation Damages Resulting from a Party’s Failure to Negotiate the Terms of a Final Agreement in Good Faith

Gary W. Lipkin

In SIGA Technologies, Inc. v. PharmAthene, Inc., 2015 Del. LEXIS 678 (Dec. 23, 2015) (SIGA II), the Delaware Supreme Court provided valuable guidance as it relates to “agreements to agree” and the potentially significant consequences for failing to do so in good faith. 

SIGA II was the second appeal of an action involving a merger agreement (the Merger Agreement) executed between SIGA Technologies, Inc. and PharmAthene, Inc. The Merger Agreement provided that if the parties failed to consummate the merger by a certain date, the parties, in lieu of merging, would instead agree to negotiate a license agreement (the License Agreement) in good faith, in accordance with the terms of the License Agreement Term Sheet (LATS). 

The parties ultimately failed to merge, and also failed to agree on the form of a final license agreement, leading PharmAthene to file suit, claiming that SIGA failed to negotiate the License Agreement in good faith. Evidence at trial reflected that, following the parties’ execution of the Merger Agreement and LATS, the value of SIGA and its product, a pharmaceutical drug that treated smallpox, increased dramatically. This rise in value caused SIGA to attempt to renegotiate the final License Agreement on vastly different terms from what was originally agreed upon in the LATS. 

Following an 11-day trial, the Delaware Court of Chancery held that SIGA failed to negotiate the license agreement in good faith and, as a result, awarded PharmAthene an equitable payment stream based on SIGA’s future profits under the theory of promissory estoppel. The court of chancery declined to award expectation damages, however, finding that “a specific sum of money representing the present value of the future profits it would have received about SIGA’s breach is speculative and too uncertain, contingent, and conjectural.” PharmAthene, Inc. v. SIGA Techs., Inc., 2011 Del. Ch. LEXIS 136, at *131 (Sept. 22, 2011). 

On appeal, the Delaware Supreme Court, in SIGA I, affirmed the lower court’s finding that SIGA failed to negotiate in good faith, but reversed the decision as to promissory estoppel, finding that doctrine inapplicable because the parties’ agreement to negotiate the license agreement in good faith was fully enforceable. SIGA Techs., Inc. v. Pharmathene, Inc., 67 A.3d 330, 2013 Del. LEXIS 265 (Del. 2013) (SIGA I). As a result, and because the court of chancery found that the parties would have reached an agreement but for SIGA’s bad faith, the Delaware Supreme Court held that PharmAthene may be entitled to its reasonable expectation damages to the extent they could be proven with reasonable certainty, and remanded the case so that the court of chancery could reconsider whether such damages should be awarded. Following remand and further evidentiary proceedings, the court of chancery ultimately awarded $115 million in expectation damages to PharmAthene. 

On appeal once again in SIGA II, SIGA argued that the court’s award of expectation damages was improper because it was far too speculative and not reasonably certain. Rejecting SIGA’s argument and affirming the court of chancery’s decision, the Delaware Supreme Court held that “[w]here the injured party has proven the fact of damages – meaning that there would have been some profits from the contract – less certainty is required of the proof establishing the amount of damages. In other words, the injured party need not establish the amount of damages with precise certainty where the wrong has been proven and injury established.” SIGA II, at *56 (citations and internal quotations omitted). 

The SIGA II court further explained that the court of chancery properly applied the “wrongdoer rule,” in which doubts about the certainty of damages are resolved against the party causing the uncertainty. The court held that willfulness of the breach is a factor that could be considered by the trier of fact in determining the adequacy of proof needed to establish damages. 

The court’s decision in SIGA II is notable. As observed by Justice Valihura in her dissent, SIGA II appears to be in conflict with the law in several other states as expectation damages are not usually awarded for breaches of preliminary agreements, as they are too speculative to quantify. Justice Valihura observed this was especially true in the pharmaceutical context. 

It will be interesting to see how Delaware law in this area develops. SIGA II will likely cause Delaware practitioners and parties to rethink the language used in preliminary agreements, if not reconsider their use altogether. If nothing else, SIGA II serves as a reminder that a party’s agreement to negotiate in good faith must be taken extremely seriously.

Gary W. Lipkin

Gary W. Lipkin is a member of the Wilmington, Delaware, office of Eckert Seamans, where he focuses his practice in the area of corporate and commercial litigation.