Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Contract Claim For Failure To Use “Commercially Reasonable Efforts” To Obtain Regulatory Approval For Pharmaceuticals
On December 28, 2018, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery declined to dismiss a breach of contract claim brought by former stockholders of Ception Therapeutics, Inc. (“Ception”) against pharmaceutical company Cephalon, Inc. (“Cephalon”), which acquired Ception, alleging violations of an earn-out provision in their merger agreement. Himawan v. Cephalon, Inc., C.A. No. 2018-0075-SG (Del. Ch. Dec. 28, 2018). Ception claimed that Cephalon failed to use “commercially reasonable efforts,” as defined in the merger agreement, to obtain FDA approval for an antibody as treatment for a specific medical condition. The Court found that because the agreement defined the standard for “commercially reasonable efforts” objectively, with reference to the effort that would have been expended by other companies similarly situated, the question of what constituted “commercially reasonable efforts” could not be decided on the pleadings. The Court also dismissed an implied covenant claim against Cephalon and tortious interference claims against Teva Pharmaceutical Industries Ltd. and its affiliates (together, “Teva”), which acquired Cephalon after the Cephalon-Ception merger.
The 2010 merger agreement provided that Cephalon would pay Ception $250 million at closing, and another $550 million in milestone payments to former Ception stockholders if certain FDA approvals were received after closing. The merger agreement required Cephalon to use commercially reasonable efforts “to develop and commercialize” the antibody as treatment for two medical conditions and defined such efforts as “the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as [Cephalon], with due regard to the nature of efforts and cost required for the undertaking at stake.” Cephalon made $200 million in milestone payments related to the approval of an antibody for one medical condition but allegedly abandoned its efforts with respect to the second condition. Plaintiffs sued Cephalon for breach of contract and breach of implied covenant, and sued Teva for tortious interference.
Although all parties agreed that the “commercially reasonable” standard was objective, the Court found that because the definition introduced the concept of what other similarly situated companies would do—and because the parties disagreed as to which competitors were similarly situated and what efforts would have been undertaken—the term was ambiguous and Plaintiffs had adequately stated a breach of contract claim. The Court did, however, dismiss Plaintiffs’ claim for breach of implied covenant, reasoning that the agreement “set a contractual standard by which to evaluate” Cephalon’s conduct, meaning that there was “no ‘gap’” to be filled with an implied term of good faith and fair dealing. The Court also dismissed claims of tortious interference against Teva, finding that the complaint failed to allege facts sufficient to infer that Teva did anything improper to cause Cephalon to allegedly breach the merger agreement.