IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JEFF HIMAWAN, JOSH TARGOFF ) and STEPHEN TULLMAN, as the ) duly-appointed Representatives of the ) former stockholders of CEPTION ) THERAPEUTICS, INC., ) ) Plaintiffs, ) ) v. ) C.A. No. 2018-0075-SG ) CEPHALON, INC., TEVA ) PHARMACEUTICAL INDUSTRIES ) LTD., and TEVA ) PHARMACEUTICALS USA, INC., ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: September 21, 2018 Date Decided: December 28, 2018
Richard L. Renck and Oderah C. Nwaeze, of DUANE MORRIS LLP, Wilmington, Delaware; OF COUNSEL: John J. Soroko, Wayne A. Mack, Jessica Priselac, and Joseph J. Pangaro, of DUANE MORRIS LLP, Philadelphia, Pennsylvania, Attorneys for the Plaintiffs.
Kevin Shannon and J. Matthew Belger, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Jay P. Lefkowitz, Matthew Solum, Shireen A. Barday, Amanda B. Elbogen, and Z. Payvand Ahdout, of KIRKLAND & ELLIS LLP, New York, New York, Attorneys for the Defendants.
GLASSCOCK, Vice Chancellor An antibody is a protein that allows an organism’s immune system to
overcome disease-causing pathogens. Science has identified numerous antibodies
that are or may be useful in fighting human diseases. As with new drugs, the process
of bringing antibodies to market, it appears, is long, arduous, and risky. Rigorous
governmental oversight for risk and efficacy, in both the United States and in
Europe, requires a significant investment of time and effort on the part of an entity
seeking to monetize potentially beneficial antibodies. The Plaintiffs here are
representatives of former stockholders of a company, Ception, that owned rights to
such an antibody. It was purchased by another entity, Cephalon; like Ception, a
Delaware corporation. The parties to that sale attempted to allocate the risk of the
development of the antibody among the parties. The resulting merger agreement
provided an initial sales price, together with earn-outs to be paid to the sellers by the
buyer. Those earn-outs were payable upon the meeting of certain milestones in the
approval of the antibody to treat two different conditions, in both Europe and the
United States. The buyer agreed to use commercially reasonable efforts to develop
the antibody and achieve the milestones.
This matter involves the sellers’ contention that the buyer’s efforts, which
have been abandoned with respect to development of the antibody to treat one of the
medical conditions upon which earn-outs depend, were not commercially
reasonable. The sellers argue that this breached the merger agreement, and seek
1 damages from the buyer and its affiliates. This Memorandum Opinion concerns the
Defendants’ Motions to Dismiss for failure to state a claim. In short, the Defendants
argue that the Complaint is inadequate, because, per the Defendants, it is entirely
conclusory as to their failure to use commercially reasonable efforts.
Ultimately, the Plaintiffs here face a difficult matter of proof. The merger
agreement leaves discretion on how to pursue development of the antibody with the
buyer. It is, perhaps, unlikely that the buyer failed to use commercially reasonable
efforts to develop the antibody, given the buyer’s financial interest in monetizing the
antibody. However, here the parties have defined “commercially reasonable efforts”
as “the exercise of such efforts and commitment of such resources by a company
with substantially the same resources and expertise as [the buyer], with due regard
to the nature of efforts and cost required for the undertaking at stake.” 1 This rather
inartful draftsmanship appears to create a standard based on the effort that companies
similarly situated in the market employ, or would employ. The Plaintiffs, in the
Complaint, point to other companies and their efforts to develop similar medical
treatments, as exemplars against which the Defendants efforts fall short. In briefing,
the Defendants point to dissimilarities between the buyer and its products, and the
exemplars and their products. These dissimilarities, according the Defendants,
render the Plaintiffs’ exemplars contractually irrelevant. That may ultimately prove
1 Compl. ¶ 74.
2 true. At the pleadings stage, however, I must employ plaintiff-friendly inferences,
consonant with which I find that the Defendants have only identified factual issues
that may be resolved when a record is created. The Plaintiffs have stated a claim for
breach of contract, and the Motion to Dismiss that claim is denied. However, other
ancillary claims must be dismissed. My reasoning follows.
I. BACKGROUND
The Plaintiffs, Jeff Himawan, Josh Targoff, and Stephen Tullman, are
appointed representatives of the former stockholders of Ception Therapeutics, Inc.
(“Ception”).2 Ception was acquired by Defendant Cephalon, Inc. (“Cephalon”) in
February 2010. 3 Both companies were organized under Delaware law. 4 The merger
agreement governing that acquisition forms the basis of this litigation. Later, in
October 2011, Cephalon itself was acquired by Defendant Teva Pharmaceutical
Industries Ltd. (“Teva Ltd.”), an Israeli company that lists its principal place of
business in Petah Tikva, 5 Israel.6 Teva Ltd. has filed a Motion to Dismiss for lack
of personal jurisdiction under Court of Chancery Rule 12(b)(2) and for failure to
state a claim under Rule 12(b)(6). 7 Cephalon and Defendant Teva Pharmaceuticals
2 Id. ¶¶ 20–23. 3 Id. ¶ 71. 4 Id. ¶¶ 19, 24. 5 And not Beit Hatikva, Israel, which, I note, is spelled with a “B.” 6 Compl. ¶¶ 26, 77. 7 See Def. Teva Ltd. Mot. to Dismiss.
3 USA, Inc. (“Teva USA”), a Delaware corporation and a wholly owned subsidiary of
Teva Ltd., 8 have also filed a Motion to Dismiss under Rule 12(b)(6).9
On a Rule 12(b)(6) motion to dismiss, the Court must assume as true all well-
pleaded allegations of fact in the complaint, and accept as true all inferences that can
be reasonably drawn in favor of the plaintiff from those well-pleaded allegations of
fact.10 The Court does not normally consider documents extrinsic to the complaint,
with the exception of “documents[s] integral to a plaintiff’s claim and incorporated
into the complaint.”11 As a result, the factual background that follows relies only on
the Plaintiffs’ Complaint, which this Court accepts as true for purposes of the
motions before it.
A. Ception Acquires the Rights to “RSZ” and Pursues a Sale
In 2004, Plaintiff Stephen Tullman and others formed Ception, 12 and through
Ception they licensed the rights to Rezlizumab (“RSZ”), an antibody. 13 Ception
sought to develop and commercialize RSZ as a treatment for eosinophilic asthma
(“EA”) and for eosinophilic esophagitis14 (“EoE”). 15 Ception took such steps as
8 Compl. ¶¶ 9, 24, 27. 9 See Defs. Cephalon and Teva USA Mot. to Dismiss. 10 LeCrenier v. Cent. Oil Asphalt Corp., 2010 WL 5449838, at *3 (Del. Ch. Dec. 22, 2010). 11 Orman v. Cullman, 794 A.2d 5, 15–16 (Del. Ch. 2002). 12 Compl. ¶ 19. 13 To be precise, RSZ is an “anti-interleukin 5 monoclonal antibody.” Id. ¶ 3. 14 “EoE is a chronic disorder of the digestive system in which large numbers of a particular type of white blood cells called eosinophils are present in the esophagus.” Id. 15 Id. ¶ 42.
4 qualifying RZA for certain Food and Drug Administration (“FDA”) development
programs, 16 submitting data to the FDA, 17 and gaining FDA approval for clinical
trials of RZA. 18 Ception designed three clinical trials, two trials for the treatment of
EoE and one trial for the treatment of EA. 19 The EA clinical trial and one EoE
clinical trial were designed to measure improvements in defined endpoints (an
“endpoint study”). 20 The other EoE clinical trial was an “open label extension study”
and was designed to measure long term safety and efficacy of RSZ, 21 whereby, after
the completion of the EoE endpoint study, its participants would be invited to
continue receiving RZA. 22
In 2008, after the FDA had approved the clinical trials, but before Ception
began conducting them, Ception was approached separately by Wyeth
Pharmaceuticals, Inc. and Cephalon to conduct a sale.23 In January 2009, Ception
entered into an option agreement with Cephalon (the “Option Agreement”). 24 Under
the Option Agreement, Cephalon paid $100 million for the option to acquire Ception
16 Such as the Orphan Drug Designation Program, which provided incentives to develop drugs for rare diseases. See id. ¶¶ 43–46. 17 Id. ¶ 48. 18 Id. 19 Id. ¶ 47. 20 The EA endpoint study had one endpoint, improvement in the participant’s responses to an asthma questionnaire. Id. ¶ 51. The EoE endpoint study had two endpoints, changes in the participant’s esophageal eosinophil levels and changes in physicians’ assessments of the participants. Id. ¶ 49. 21 Id. ¶¶ 49–51. 22 Id. ¶ 86. 23 Id. ¶ 52. 24 Id. ¶ 57.
5 for a further $250 million.25 The prospective acquisition would be made pursuant to
a pre-agreed form of merger agreement, which included potential milestone
payments to Ception stockholders totaling $550 million; the milestone payments, in
large part, related to the development and commercialization of RZA by Cephalon.26
As part of the Option Agreement, Cephalon also loaned Ception $25 million to help
conduct the clinical trials.27 The exercise period for Cephalon’s option to purchase
Ception was tied to the completion of the EoE endpoint study. 28
B. The Merger of Ception and Cephalon
The EoE endpoint study was completed in October 2009; the study met one
of its two endpoints.29 The completion of the study triggered the exercise period for
Cephalon’s option to acquire Ception.30 However, Ception agreed to extend the
exercise period until after the EA endpoint study was also concluded. 31 The EA
endpoint study was completed in February 2010; the study missed its only
endpoint. 32 With knowledge of both studies, Cephalon decided to exercise its option
25 Id. ¶ 58. 26 Id. ¶¶ 59, 60. 27 Id. ¶ 62. 28 Id. ¶ 58. According to the Option Agreement, Cephalon had fifteen days to exercise its option to purchase Ception after being notified that the EoE endpoint study had met its endpoints, or thirty days if the endpoints had not been met. Id. 29 Id. ¶¶ 64–66. 30 Under the option agreement, as the EoE endpoint study had not met both its endpoints, Cephalon had thirty days after the conclusion of the EoE endpoint study to decide whether to exercise the option. Id. ¶ 68. 31 Id. 32 Id. ¶ 69.
6 to acquire Ception, pursuant to an amended version of the form of merger agreement
(the “Merger Agreement”). 33
Under the Merger Agreement, Cephalon would pay Ception stockholders
$250 million at closing. 34 Following closing, Cephalon would pay up to $550
million in milestone payments to the now-former stockholders of Ception.35 The
milestone payments (the “Milestones”) were: (A) $150 million for FDA approval of
RSZ as treatment for EoE, (B) $50 million for the European Commission’s grant of
marketing authorization of RSZ for the treatment of EoE, (C) $50 million for the
completion of the EA endpoint study, 36 (D) $150 million for FDA approval of any
asthma indication for RSZ, (E) $50 million for the European Commission’s grant of
marketing authorization of RSZ for the treatment of any asthma indication, and (F)
$100 million for FDA approval of an Oral Anti-TNF Product. 37
The development and monetization of new medical treatments involves
substantial risk, risk the parties attempted to allocate by their agreement. As laid out
33 Id. ¶¶ 71, 72. 34 Id. ¶ 73. 35 Id. 36 The only notable difference between the form of merger agreement in the Option Agreement and the Merger Agreement was a change in the definition of the milestone payment related to the EA endpoint study. As discussed, the exercise period for the option was extended to allow Ception to complete the EA endpoint study, and the study was thus completed before the Merger Agreement. The change in definition effectively eliminated the $50 million milestone payment envisioned in the form of merger agreement for completion of the EA endpoint study. Id. ¶¶ 72, 73. 37 Id. ¶ 73. The “Oral Anti-TNF Product” is unrelated to RSZ, and is otherwise not defined in the record. Id. ¶ 60.
7 above, the initial payment to Ception stockholders was relatively modest, while a
large part of the purchase price was contingent on the success of RSZ. To
recapitulate, RSZ was seen as a potential treatment for two conditions, a type of
asthma, EA, and an inflammation of the esophagus, EoE. In the Merger Agreement,
Cephalon agreed if certain Milestones related to RSZ as a treatment for those two
conditions were reached, it would pay former stockholders of Ception additional
lump sums. If RSZ was approved as a treatment for EoE by both the FDA and the
European Commission, then Cephalon would pay former stockholders of Ception a
total of $200 million, according to Milestones (A) and (B). If RSZ was approved as
a treatment for EA by both the FDA and the European Commission, then Cephalon
would pay former stockholders of Ception a total of $200 million, according to
Milestones (D) and (E).
According to Section 3.4(a)(iii) of the Merger Agreement, Cephalon was
required to use “commercially reasonable efforts to develop and commercialize (or
cause the development and commercialization of) [RSZ] so as to achieve the
Developmental Milestones set forth in clauses (A) through (E);” these are
Milestones (A)-(E) referenced above.38 “Commercially reasonable efforts” was
defined “for purposes of . . . Section 3.4” as “the exercise of such efforts and
commitment of such resources by a company with substantially the same resources
38 Id. ¶ 74.
8 and expertise as Parent, with due regard to the nature of efforts and cost required for
the undertaking at stake.”39
Under Section 3.4(c) of the Merger Agreement, “(i) . . . control of the
Surviving Corporation . . . shall rest with Parent . . . and the [former stockholders]
shall have no right object to the manner in which business of the Surviving
Corporation is conducted . . . and (ii) Parent shall have complete discretion with
respect to all decisions related to the business of the Surviving Corporation . . . .” 40
The Merger Agreement was signed on March 10, 2010.41
C. Cephalon’s Post-Merger Efforts and the Acquisition of Cephalon by Teva Ltd.
In May 2011, Teva Ltd. announced it was acquiring Cephalon at an enterprise
value of $6.8 billion.42 Teva Ltd. completed its acquisition of Cephalon in October
2011, and Cephalon became a wholly owned subsidiary of Teva Ltd. 43 After the
acquisition, Tullman met with Teva leadership 44 more than a dozen times between
2012 and 2016 to discuss the development and commercialization of RSZ, 45
39 Id. 40 Id. ¶ 75. 41 The Complaint does not actually provide the date the merger was closed, only that Cephalon decided to exercise its option to buy Ception in February 2010. Id. ¶ 71. However, the Merger Agreement, which is dated March 10, 2010, was incorporated into the Complaint. Id. at Ex. A. 42 Id. ¶ 77. 43 Id. 44 The Complaint does not distinguish between Defendants Teva Ltd. and Teva USA in this regard; presumably, then, the Plaintiffs refer to leadership of both entities. See id. ¶ 99. 45 Id.
9 including for the treatment of EoE. 46 In 2015, Teva Ltd. acquired Allergan Generics
in a transaction valued at $40.5 billion; Teva Ltd. announced that as a result of the
transaction it “planned for 1,500 generic launches globally in 2017.” 47
Cephalon and Teva48 continued to develop and commercialize RZA for EA;49
in March 2016, Teva Ltd. announced FDA approval for RZA as a treatment for EA;50
and in August 2016, Teva Ltd. received approval from the European Commission to
market RSZ as an EA treatment. 51 These were Milestones (D) and (E) of the Merger
Agreement. Teva USA made the related Milestone payments to the former
stockholders of Ception,52 totaling $200 million.
When Teva Ltd. acquired Cephalon, the EoE open label extension study was
ongoing. 53 Data collection for the study was substantially completed in January
2012, but Cephalon did not immediately submit the results to the FDA. 54 In 2012,
Congress passed the Food and Drug Safety and Innovation Act (“FDSIA”), which
created new development programs for certain types of drugs; Cephalon did not
46 Id. ¶ 100. 47 Id. ¶¶ 104, 105. 48 The Complaint again does not distinguish between Defendants Teva Ltd. and Teva USA in this regard; presumably, then, both entities worked to develop and commercialize RZA for EA. See id. ¶ 78. 49 Id. 50 Id. ¶ 81. 51 Id. ¶ 82. 52 Id. ¶ 84. 53 Id. ¶¶ 50, 63, 85. 54 Id. ¶ 92.
10 attempt to designate RSZ as a treatment for EoE under any of these new programs.55
One of the researchers who helped conduct the EoE open label extension study
continued to use RSZ to treat patients with EoE; and in February and March 2016
the researcher independently published and presented positive results for RSZ as a
treatment for EoE. 56 In March 2016, Cephalon and Teva Ltd. submitted the results
of the EoE open label extension study to the FDA, although not all the data collected
was submitted.57
On October 10, 2016, Plaintiff Himawan wrote to Francine Del Ricci, then a
Senior Vice President at Teva USA, 58 and specifically asked about Cephalon’s and
Teva Ltd.’s efforts to commercialize and develop RSZ as a treatment for EoE. 59 Del
Ricci replied on November 3, 2016.60 Del Ricci wrote, in pertinent part:
Cephalon has the obligation under its March 10, 2010 Merger Agreement with Ception to use commercially reasonable efforts to develop and commercialize [RSZ]. However, the Merger Agreement goes on to provide that Cephalon will have “complete discretion with respect to all decisions relating to the research, development, manufacture, marketing, pricing and distribution of [RSZ] . . . and shall have no obligation to conduct clinical trials related to, or otherwise pursue regulatory approvals of, any indication for [RSZ] . . . or otherwise take any action to protect, attain or maximize any payment
55 Id. ¶¶ 111, 112. 56 Id. ¶¶ 96–98. 57 Id. ¶¶ 92–94. 58 Tullman had previously corresponded with Del Ricci in 2013 about RSZ. Del Ricci’s position at that time was Vice President of Corporate Alliance Management & Pipeline Governance at Teva USA. Id. ¶ 102. 59 Id. ¶ 106. 60 Id. ¶ 106; id. at Ex. C.
11 to be received by the holders of Stock Certificates and Stock Agreements pursuant to this Section 3.4.”
In any event, it would not be commercially reasonable for Cephalon to develop [RSZ] for [EoE] for numerous reasons, including the need to commit substantial resources that such an undertaking would require in light of other ongoing development and portfolio-building initiatives of the company. 61
In other words, Del Ricci revealed that Cephalon had abandoned its efforts to
develop and commercialize RSZ as a treatment for EoE. 62 Pharmaceutical
companies Shire,63 Sanofi and Regeneron, 64 Celgene,65 and GlaxoSmithKline,66
have substantially similar resources and expertise to Cephalon and are currently
pursuing products for treatment of EoE. 67
D. Procedural History
The Plaintiffs filed the Complaint in this action on February 1, 2018.
Cephalon and Teva USA filed a Motion to Dismiss on February 28, 2018. Teva Ltd.
61 Rather than reproduce the segments of Del Ricci’s response provided in the Complaint, I have reproduced a fuller response, which was incorporated into the Complaint. Id. at Ex. C; see id. ¶¶ 106, 107. 62 Id. ¶ 17. 63 Shire has received FDA Breakthrough Therapy designation for its EoE treatment, which is currently in a Phase III clinical trial. Id. ¶ 109a. 64 Sanofi and Regeneron are planning Phase III trials for their EoE treatment in 2018. Id. ¶ 109b. 65 Celgene has completed a Phase II trial for its EoE treatment and is currently conducting an open label extension study. Id. ¶ 109c. 66 GlaxoSmithKline has received FDA approval for “Nucala” to “treat eosinophilic granulomatosis with polyangiitis” and is now seeking FDA “approval of Nucala as an add on treatment for patients who have COPD with an eosiniphilic phenotype.” Id. ¶ 109d. 67 Id. ¶ 109.
12 filed a Motion to Dismiss on April 10, 2018. I heard oral argument on both Motions
to Dismiss on September 21, 2018.
II. LEGAL ANALYSIS
The Plaintiffs bring a breach of contract claim against Defendant Cephalon,
alleging that by abandoning efforts to develop and commercialize RSZ as a treatment
for EoE, Cephalon breached the Merger Agreement. The Plaintiffs also bring a
claim for breach of implied covenant of good faith and fair dealing against Cephalon,
to the extent Cephalon’s conduct is not covered by the Merger Agreement. Finally,
the Plaintiffs bring a tortious interference with contract claim against Defendants
Teva USA and Teva Ltd., arguing that they intentionally interfered with Cephalon’s
ability to meet its obligations under the Merger Agreement. The Plaintiffs seek,
among other things, monetary relief in the amount of the Milestone payments related
to EoE and a grant of the rights to RSZ. 68
In response, the Defendants have filed Motions to Dismiss all of the claims
brought by the Plaintiffs. Cephalon argues, pursuant to Rule 12(b)(6), that the
Plaintiffs failed to state a claim that Cephalon breached the Merger Agreement;
specifically, that the Plaintiffs did not sufficiently plead that Cephalon failed to use
“commercially reasonable efforts.” Cephalon also argues, under Rule 12(b)(6), that
the Plaintiffs failed to state a claim for breach of implied covenant of good faith and
68 Id. ¶¶ 38–39.
13 fair dealing because there was no room in the Merger Agreement for such an implied
covenant and, in any event, there was no bad faith. Teva Ltd. argues, pursuant to
Rule 12(b)(2), that it should be dismissed from this action because Teva Ltd., an
Israeli company, is not subject to personal jurisdiction in Delaware. Teva USA and
Teva Ltd. argue, pursuant to Rule 12(b)(6), that the Plaintiffs made only conclusory
allegations that Teva USA and Teva Ltd. “direct[ed] Cephalon to abandon . . . RSZ
for EoE,” and that therefore the Plaintiffs failed to state a claim for tortious
interference with contract. 69 Finally the Defendants together argue that all claims
against them should be dismissed because the Plaintiffs acquiesced and the
Defendants relied on the Plaintiffs’ apparent consent to their efforts to develop RSZ.
I begin with Cephalon’s Motion to Dismiss.
A. Cephalon’s Rule 12(b)(6) Motion to Dismiss the Counts of Breach of Contract and Breach of Implied Covenant of Good Faith and Fair Dealing
1. Legal Standard
Defendant Cephalon has moved to dismiss the counts of breach of contract
and breach of implied covenant of good faith and fair dealing. Cephalon does so
pursuant to Rule 12(b)(6). A motion to dismiss for failure to state a claim must be
denied “unless the plaintiff could not recover under any reasonably conceivable set
69 Id. ¶ 138.
14 of circumstances susceptible of proof.”70 During this inquiry, the Court accepts all
well-pleaded allegations in the complaint as true and draws all reasonable inferences
in favor of the Plaintiff.71 However, “[c]onclusory allegations unsupported by
specific factual allegations will not be accepted as true.”72 A claim for breach of
contract requires: “(1) a contractual obligation; (2) a breach of that obligation by the
defendant; and (3) a resulting damage to the plaintiff.” 73 A claim for breach of
implied covenant of good faith and fair dealing requires a similar showing, except
that the obligation is a “specific implied contractual obligation.” 74
2. The Plaintiffs Stated a Claim for Breach of Contract
Cephalon argues that the Plaintiffs failed to state a claim for breach of contract
because the Plaintiffs failed to plead facts sufficient to establish that Cephalon did
not use “commercially reasonable efforts” to develop and commercialize RSZ for
EoE, as was their contractual obligation per the Merger Agreement. Furthermore,
Cephalon argues that the Complaint shows Cephalon actually used commercially
reasonable efforts as it developed and commercialized RSZ as a treatment for EA.
70 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536 (Del. 2011). 71 Id. 72 LeCrenier v. Cent. Oil Asphalt Corp., 2010 WL 5449838, at *3 (Del. Ch. Dec. 22, 2010). 73 Cedarview Opportunities Master Fund v. Spanish Broad., Inc., 2018 WL 4057012, at *6 (Del. Ch. Aug. 27, 2018) (internal quotations omitted). 74 The elements for breach of implied covenant of good faith and fair dealing are “a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff.” NAMA Holdings, LLC v. Related WMC LLC, 2014 WL 6436647, at *16 (Del. Ch. Nov. 17, 2014) (internal quotations omitted).
15 In response, the Plaintiffs point to allegations in their Complaint that studies showed
positive results for RSZ as a treatment for EoE75 and that Cephalon could have
submitted RSZ for certain FDA development programs; and that despite the promise
of and opportunities for RSZ, Cephalon chose to abandon efforts to commercialize
and develop RSZ for EoE. Additionally, the Plaintiffs point out that the Merger
Agreement required Cephalon to use commercially reasonable efforts to achieve the
Milestones related to RSZ for EoE, and not just for RSZ for EA. To determine
whether the Plaintiffs sufficiently pled that Cephalon breached their contractual
obligation, I turn first to the contractual obligation.
“Commercially reasonable efforts” is defined in the Merger Agreement 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.”76 There is no dispute
that this is an objective standard. Furthermore, it is undisputed that other provisions
in the Merger Agreement gave Cephalon sole discretion to decide how to proceed
with RSZ. That discretion, however, was cabined by the objective standard. Thus
the question remains what was required from Cephalon under this standard.
75 Cephalon suggests that results of the EoE endpoint study result were not positive because the study missed one of its two endpoints. However, the EA endpoint study missed its only endpoint and yet Cephalon was still able to commercialize and develop RZA for EA. As a result, and given the pleadings stage of this action, I will assume that the studies showed positive support for RSZ as a treatment for EoE. 76 Compl. ¶ 74.
16 Contract interpretation “is a question of law and thus suitable for
determination on a motion to dismiss.”77 “If the contractual language is ‘clear and
unambiguous,’ the ordinary meaning of the language generally will establish the
parties’ intent.”78 However, where there is ambiguity, “[o]n a motion to dismiss, a
trial court cannot choose between two different reasonable interpretations of an
ambiguous document.” 79 The Plaintiffs argue that Cephalon was obligated to pursue
the development and commercialization of RSZ as a treatment for EoE under all
circumstances.80 The Merger Agreement is clear and unambiguous in this regard:
Cephalon was obligated to use only “commercially reasonable efforts,” as defined,
and was not obligated to pursue RSZ as a treatment for EoE to all ends. However,
it is not clear and unambiguous, at this stage in the pleadings, what additional
obligation “the exercise of such efforts and commitment of such resources by a
company with substantially the same resources and expertise as [Cephalon]”
imposes on Cephalon. This contractual language presumptively has meaning.81 If I
were faced with two reasonable interpretations of ambiguous contractual language
77 Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *7 (Del. Ch. Dec. 22, 2010) 78 Id. 79 Id. 80 At Oral Argument, counsel for the Plaintiffs stated that “[t]he reference to similarly situated companies is to talk about a resource, that resources must be expended in an absolute affirmative effort to advance RSZ for EoE. It must occur.” Transcript of Oral Argument at 34:22–35:2. 81 “We will not read a contract to render a provision or term ‘meaningless or illusory.’” Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (quoting Sonitrol Holding Co. v. Marceau Investissements, 607 A.2d 1177, 1183 (Del. 1992)).
17 on a motion to dismiss, I would have to deny that motion. Here, as of yet, neither
side has convincingly suggested a reasonable interpretation of this language,82 a fact
which similarly supports denial of a motion to dismiss. One reasonable
interpretation, I suspect, is to treat the language as intending to define “commercially
reasonable efforts” as those efforts “a company with substantially the same resources
and expertise as [Cephalon]” would expend under the circumstances at hand; such
a definition, again supports denial of the Defendants’ Motion to Dismiss. Before
denying the Motion, however, I analyze whether that language is implicated in the
alleged breach of contract.
On many occasions, this Court has dealt—indeed wrestled—with contractual
obligations in merger agreements made subject to varying “efforts clauses” imposed
82 See Transcript of Oral Argument at 32:23–40:3, 50:8–52:7.
18 on the acquiring party. 83 While some cases required factual inquiry and even trial,84
others could be (and were) resolved at the pleadings stage.85 Cephalon explained to
the Plaintiffs in its November 3, 2016 letter that “it would not be commercially
reasonable for Cephalon to develop [RSZ] for [EoE] for numerous reasons,
including the need to commit substantial resources that such an undertaking would
require in light of other ongoing development and portfolio-building initiatives of
83 For example, in Alliance Data Systems Corp. v. Blackstone Capital Partners V L.P., there was an obligation to use “reasonable best efforts,” which “[a]lthough it does not have a specific meaning . . . is, at least, clearly understood by transactional lawyers to be less than an unconditional commitment. 963 A.2d 746, 763 n.60 (Del. Ch. 2009). In Ev3, Inc. v. Lesh there was an obligation to act in “good faith,” and the Delaware Supreme Court found that it would not “constitute bad faith . . . to refuse to proceed . . . if the pursuit, after taking into account the milestones and development costs, was not expected to yield . . . a commercially reasonable profit . . . .” 114 A.3d 527, 541 (Del. 2014). In Williams Companies, Inc. v. Energy Transfer Equity L.P. the Delaware Supreme Court found that provisions that obligated “reasonable best efforts” and “commercially reasonable efforts” together “placed an affirmative obligation on the parties to take all reasonable steps.” 159 A.3d 264, 273 (Del. 2017). For a description of the various standards of “efforts clauses” as defined by certain practitioners and a description of the Delaware Supreme Court’s ruling in Williams on “commercially reasonable efforts,” see Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *86–88 (Del. Ch. Oct. 1, 2018). What these various obligations or “efforts clauses” require also depend on the context of the obligation. In Williams, for example, the context was obligations in a merger agreement to expend efforts to achieve necessary pre-requisites for closing, specifically “an affirmative obligation on the parties to take all reasonable steps to obtain [a tax] opinion and otherwise complete the transaction.” Williams, 159 A.3d at 273. By contrast, here, the obligation in the merger agreement is to expend efforts post-merger and is directed at the discretionary business decisions of the merged corporation. 84 As the Plaintiffs highlight in their briefing, several notable cases on “efforts clauses” went to trial. See e.g., Williams Cos., Inc. v. Energy Transfer Equity, L.P., 2016 WL 3576682 (Del. Ch. June 24, 2016), aff’d, 159 A.3d 264 (Del. 2017); WaveDivision Holdings, LLC v. Millennium Dig. Media Sys. L.L.C., 2010 WL 3706624 (Del. Ch. Sept. 17, 2010); Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008). 85 See, e.g., Alliance Data Sys. Corp., 963 A.2d 746 (granting a motion to dismiss a breach of contract claim where there was an obligation to use “reasonable best efforts”); Sparton Corp. v. O’Neil, 2017 WL 3421076 (Del. Ch. Aug. 9, 2017) (granting a motion to dismiss a breach of contract claim where there was an obligation to use “commercially reasonable efforts”).
19 the company.” 86 The Plaintiffs allege that there was promise and opportunity in RSZ
as a treatment for EoE. However, as Cephalon points out, the Plaintiffs have not
made any allegations that pursuing such promise and opportunity was commercially
reasonable “with due regard to the nature of efforts and cost required for the
undertaking at stake.” 87 That is, the Plaintiffs have not alleged any facts that
controvert Cephalon’s stated economic rationale for abandoning RSZ as a treatment
for EoE.
If taking into account the “nature of efforts and cost” was all that was required
of Cephalon, it might be appropriate and consistent with this Court’s prior rulings to
grant a motion to dismiss for failure to state a claim in this instance, as the Plaintiffs
did not allege facts from which to reasonably infer that the “nature of efforts and
cost” supported continued efforts. However, Cephalon was also obligated to
“exercise . . . such efforts and commit[] . . . such resources [as] a company with
substantially the same resources and expertise as [Cephalon].” 88 In their Complaint,
the Plaintiffs alleged that several companies with substantially the same resources
and expertise as Cephalon are currently working to develop treatments for EoE. I
assume that one reasonable reading of the contractual language here is that the
actions of other similarly situated companies are a relevant yardstick to decide at this
86 Compl. ¶¶ 106, 107; id. at Ex. C. 87 Id. ¶ 74. 88 Id.
20 stage in the pleadings whether Cephalon itself used “commercially reasonable
efforts.” At Oral Argument, the Defendants argued that, even so, the exemplars in
the Complaint are not similar to the Defendant entities, and are not pursuing approval
of the same antibody. The Defendants conclude that the actions of these companies
are ultimately irrelevant to the reasonableness inquiry here. Perhaps so. However,
at the pleading stage, I find that the allegation that similarly situated companies are
pursuing treatments for EoE reasonably supports the inference that Cephalon, in
doing otherwise, did not meet its contractual responsibility here.
In light of the absence of reasonable interpretations of the contractual
obligation to “exercise [ ] such efforts and commit[ ] such resources by a company
with substantially the same resources and expertise as Parent, with due regard to the
nature of efforts and cost required for the undertaking at stake,” the relative novelty
of this contractual obligation, and the Plaintiffs’ allegations that companies with
similar resources and expertise as Cephalon are currently developing treatments for
EoE, I cannot say that the Plaintiffs cannot recover under any reasonably
conceivable set of circumstances susceptible of proof. As a result, the Motion to
Dismiss as it relates to the breach of contract claim brought against Cephalon must
be denied.
21 3. The Plaintiffs Failed to State a Claim for Breach of Implied Covenant of Good Faith and Fair Dealing
Defendant Cephalon moved to dismiss the claim of breach of implied
covenant of good faith and fair dealing. “When presented with an implied covenant
claim, a court first must engage in the process of contract construction to determine
whether there is a gap that needs to be filled.”89 That is, “because the implied
covenant is, by definition, implied, and because it protects the spirit of the agreement
rather than the form, it cannot be invoked where the contract itself expressly covers
the subject at issue.”90
Here, the subject at issue is Cephalon’s efforts (or lack thereof) to
commercialize and develop RSZ for EoE. Cephalon argues that the parties to the
Merger Agreement expressly chose an objective standard, “commercially reasonable
efforts,” as defined in the Agreement, to measure Cephalon’s efforts, and that this
standard leaves no “gap” for an implied term. The Plaintiffs, in turn, argue that they
“reasonably expect[ed] that Cephalon would take affirmative steps to develop and
commercialize RSZ for EoE” and “Cephalon’s refusal to develop and commercialize
RSZ for EoE is unreasonable and arbitrary, and intentionally designed to avoid
achieving [the Milestones in the Merger Agreement and making the associated
89 Allen v. El Paso Pipeline GP Co., L.L.C., 2014 WL 2819005, at *10 (Del. Ch. June 20, 2014). 90 Id. (quoting Fisk Ventures, LLC v. Segal, 2008 WL 1961156, at *10 (Del. Ch. May 7, 2008)).
22 payments] . . . .” 91 The Plaintiffs contend that there is no language in the Merger
Agreement to address such behavior.
The Plaintiffs have not, however, identified a gap in the Merger Agreement,
and there is therefore no role for the implied covenant of good faith and fair dealing.
Cephalon and the Plaintiffs contracted for a series of Milestones and related
payments, and Cephalon agreed to use “commercially reasonable efforts” to achieve
those Milestones. “Commercially reasonable efforts,” as defined by the Agreement,
is an objective standard. Cephalon did not meet the Milestones related to RSZ as a
treatment for EoE and the Plaintiffs cried foul. The Agreement set a contractual
standard by which to evaluate whether Cephalon’s failure to achieve and pay these
Milestone payments was improper.92 The standard (once adequately construed) is
applicable and relevant, even if Cephalon’s failure to achieve the Milestones was
based on complete inaction or if it was based on Cephalon’s opinion that the
Milestone payments would make the endeavor uneconomical. As such, in the light
most favorable to the Plaintiffs, there is nevertheless no gap.
Through their claim of breach of an implied covenant of good faith and fair
dealing, the Plaintiffs seek to impose an alternative standard with which to review
91 Compl. ¶¶ 129, 130. 92 Here, I paraphrase Chancellor Bouchard in Fortis Advisors LLC v. Dialog Semiconductor PLC. 2015 WL 401371, at *5 (Del. Ch. Jan. 30, 2015) (“Thus, the Merger Agreement sets a contractual standard by which to evaluate if Dialog's failure to achieve and pay the earn-out payments in its operation of the Power Conversion Business Group was improper.”).
23 Cephalon’s efforts. To the extent I understand the Plaintiffs’ view, this alternative
standard prohibits Cephalon from abandoning efforts to develop and commercialize
RSZ for EoE because that abandonment could never be “commercially reasonable”
in light of the associated Milestone payments.93 But this contradicts the express
understanding of the parties.
The Plaintiffs, having agreed to the Milestones being contingent on
Cephalon’s “commercially reasonable efforts,” cannot now contend that they did not
actually expect any contingency. “The implied covenant of good faith and fair
dealing . . . serves a gap-filling function by creating obligations only where the
parties to the contract did not anticipate some contingency, and had they thought of
it, the parties would have agreed at the time of contracting to create that
obligation.”94
Ception and Cephalon negotiated over the Milestones in the Merger
Agreement, and the bargained-for language requires Cephalon to use “commercially
93 The Plaintiffs cite the Delaware Supreme Court for the proposition that “[s]ophisticated parties in competitive negotiations ‘do not include obvious and provocative conditions’ in their agreements.” Pls. Br. in Opp’n to Defs.’ Mot. to Dismiss at 38 (quoting Dieckman v. Regency GP LP, 155 A.3d 358, 368 (Del. 2017)). Plaintiffs then claim that an “obvious and provocative” condition in this case would be “Cephalon will not act in an unreasonable and arbitrary manner to intentionally avoid achieving Development Milestones in order to avoid making Development Milestone Payments.” Id. The Plaintiffs define their own position to be “that Cephalon deliberately thwarted the clinical approval process in order to avoid making contractually mandated payments to the former stockholders.” Id. 94 Am. Capital Acquisition Partners, LLC v. LPL Holdings, 2014 WL 354496, at *5 (Del. Ch. Feb. 3, 2014).
24 reasonable efforts” to achieve those Milestones. I have found that a claim for breach
of contract based on that “commercially reasonable efforts” standard survives the
Defendants’ Motion to Dismiss and may proceed past the pleadings stage. However,
no gap exists within which to employ implication, and the implied covenant claim
must be dismissed.95
B. Teva Ltd. and Teva USA’s Rule 12(b)(6) Motion to Dismiss the Count of Tortious Interference with Contract
Defendants Teva Ltd. and Teva USA argue that the tortious interference with
contract claim against them should be dismissed for failure to state a claim, pursuant
to Rule 12(b)(6). I have already reviewed the applicable legal standard for Rule
12(b)(6) above. A claim for tortious interference with contract requires a showing
that: “(1) there was a contract, (2) about which the particular defendant knew, (3) an
intentional act that was a significant factor in causing the breach of contract, (4) the
act was without justification, and (5) it caused injury.” 96
Teva Ltd. is an Israeli company. Its principal place of business is Petah Tikva,
Israel. 97 In addition to moving to dismiss under Rule 12(b)(6), Teva Ltd. also moved
to dismiss on the ground of lack of personal jurisdiction under Rule 12(b)(2).
95 “[T]he implied covenant is not a license to rewrite contractual language just because the plaintiff failed to negotiate for protections that, in hindsight, would have made the contract a better deal.” Winshall v. Viacom Intern., Inc., 55 A.3d 629, 637 (Del. Ch. 2011). 96 WaveDivision Holdings, LLC v. Highland Capital Mgmt., L.P., 49 A.3d 1168, 1174 (Del. 2012). 97 “Such a city, everybody loves it.” See David Yazbek, The Band’s Visit (Broadway 2017).
25 Logically, this defense should be examined first, as absent jurisdiction any resolution
of the Rule 12(b)(6) motion with respect to Teva Ltd. would be moot. In this case,
however, the jurisdictional issues, involving Teva Ltd.’s business-related actions
within this jurisdiction and its alleged contractual waiver of jurisdictional defenses,
are complex. Moreover, the Rule 12(b)(6) defense mounted by Teva Ltd. is
practically indistinguishable from that raised by Teva USA, jurisdiction over which
is unquestioned; in other words, the Rule 12(b)(6) defense must be engaged whether
or not Teva Ltd. remains in the case. Because I find that I must dismiss the claims
against both Teva entities under Rule 12(b)(6), I need not reach the jurisdictional
defense.
Returning to the Rule 12(b)(6) Motions to Dismiss, Teva Ltd. and Teva USA
are affiliates of Cephalon. “The gist of a well-pleaded complaint for interference by
a corporation of a contract of its affiliate is a claim that the ‘interfering’ party was
not pursuing in good faith the legitimate profit seeking activities of the affiliated
enterprises.” 98 The other side of the same coin would be that the “affiliate sought
not to achieve permissible financial goals but sought maliciously or in bad faith to
injure the plaintiff.”99 In the parent-subsidiary context, “the test for holding a parent
corporation liable for tortious interference ha[s] to be high or every-day consultation
98 Shearin v. E.F. Hutton Grp., Inc., 652 A.2d 578, 591 (Del. Ch. 1994). 99 Id.
26 or direction between parent corporations and subsidiaries about contractual
implementation would lead parents to be always brought into breach of contract
cases.”100 With that guidance in mind, I evaluate the Motions to Dismiss.
2. The Plaintiffs Failed to State a Claim of Tortious Interference Against Teva Ltd. and Teva USA
In support of their Motions to Dismiss, Teva Ltd. and Teva USA argue that
the Plaintiffs made only conclusory allegations of bad faith in their Complaint and
thus failed to adequately plead bad faith on the part of Teva Ltd. or Teva USA. They
further argue that the Plaintiffs failed to plead any actual acts taken by either Teva
Ltd. or Teva USA in regard to the alleged breach of contract. 101 The Plaintiffs did
allege in their Complaint that Teva Ltd. and Teva USA “did not pursue the profit-
seeking objectives of Cephalon, but instead acted in bad faith to injure Plaintiffs,”102
and also alleged that “Teva Ltd. and/or Teva USA control the actions of
Cephalon.”103 The Plaintiffs disagree that their allegations are merely conclusory
and argue that their claim is a fact-intensive one that should survive a motion to
dismiss.
100 Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1039 (Del. Ch. 2006). 101 Teva USA and Teva Ltd. also argue that the Plaintiffs failed to adequately plead an underlying breach of contract, which is a necessary element of a claim of tortious interference with contract. As discussed above, I find that the Plaintiffs have, given this early stage in the pleadings, alleged sufficient facts to defeat a motion to dismiss on the breach of contract claim. 102 Compl. ¶ 138. 103 Id. ¶ 28.
27 The Plaintiffs argue that they have alleged, or that it can be reasonably inferred
from their allegations, that Teva Ltd. and Teva USA have taken intentional acts that
were significant factors in causing a breach of contract and did so for reasons other
than legitimate profit-seeking activities of the affiliated enterprise. In their
Complaint, the Plaintiffs aver that Teva Ltd. acquired Allergan Generics, and as a
result, Teva Ltd. planned to launch thousands of generic products. However, this
allegation says nothing of the effect of the Allergan acquisition on Cephalon and on
the Merger Agreement. The Plaintiffs ask that I infer—based on the fact that Teva
Ltd. acquired Allergan—that Teva Ltd. instructed Cephalon, an existing subsidiary,
to breach its contract with the Plaintiffs, presumably in order to focus on Teva Ltd.’s
plan for Allergan. However, I do not find it is reasonable to infer from only the fact
that a parent company acquired another subsidiary that the parent then directed a
different subsidiary to abandon its contractual obligations. Such an inference is
unreasonable, without further factual allegations linking the parent’s plans for its
new subsidiary to the parent’s plans for its existing subsidiaries. For example, there
is no allegation in the Complaint that Allergan and Cephalon are competitors, such
that it may be reasonable to infer that Teva Ltd. may prefer one to the detriment of
the other. Nor do the Plaintiffs posit in their Complaint that Teva Ltd. has
insufficient resources, such that it may be reasonable to infer that Teva Ltd.’s
acquisition and plan for Allergan would necessarily involve removing resources
28 from Teva Ltd.’s other subsidiaries. The pleading, in this regard, is simply
conclusory.
In their Complaint, the Plaintiffs also alleged that the FDA launched new
development programs and that Cephalon did not pursue a designation in these
programs for RZA as a treatment for EoE. This allegation makes no mention of
either Teva Ltd. or Teva USA. I do not find it reasonable to infer from the fact
Cephalon, a subsidiary of Teva Ltd., made a decision not to seek designation in this
program, that the decision was actually made by Teva Ltd., its parent, or Teva USA,
its affiliate, let alone that the decision was taken for reasons other than the legitimate
pursuit of their business.
Finally, the Plaintiffs alleged in their Complaint that an independent study,
performed by a former researcher of the EoE open label extension study, produced
positive results. The Plaintiffs do not allege in their Complaint that those result were
ignored by Cephalon, much less by Teva Ltd. or Teva USA. I do not find it
reasonable to infer, from a mere description of a study done independent of Cephalon
that Teva Ltd. or Teva USA took action—or; more accurately here, inaction. The
allegations that the Plaintiffs cite, even with all reasonable inferences drawn in their
favor, do not support the allegation that Teva Ltd. or Teva USA intentionally acted
to interfere with the Merger Agreement, much less that they did so in bad faith. The
allegation is therefore conclusory.
29 The Plaintiffs also allude to their correspondence with an employee of Teva
USA about Cephalon’s efforts related to RSZ. It was this employee who told the
Plaintiffs that Cephalon would no longer pursue RSZ for EoE, effectively ending
Cephalon’s obligations in the Merger Agreement. However, it is not reasonable to
infer from those facts alone that Teva Ltd. or Teva USA, as affiliates of Cephalon,
acted with an improper purpose. The sole act of ending efforts to develop the
antibody, which Cephalon was permitted to do if development is not commercially
reasonable, cannot by itself be inferred to be improper conduct on behalf of Teva
Ltd. or Teva USA. In the parent-subsidiary or affiliate context, this Court has held
that a high standard applies; otherwise, a parent and a subsidiary would be unable to
discuss the subsidiary’s contractual obligations without pulling the parent into a
breach of contract suit. As a result, Rule 12(b)(6) requires that the tortious
interference with contract claim against Teva Ltd. and Teva USA be dismissed.
C. The Defendants Motion to Dismiss Based on the Plaintiffs’ Acquiescence
The Defendants argue that each of the Plaintiffs’ claims should be deemed
forfeited under the acquiescence doctrine. As explained above, only the Plaintiffs’
claim of breach of contract against Cephalon remains; the rest of the Plaintiffs’
claims have been dismissed. With respect to the remaining claim, dismissal based
on acquiescence is premature at this pleadings stage. “To prevail on a defense of
acquiescence, a defendant must show: “(1) the plaintiff remained silent (2) with
30 knowledge of her rights (3) and with the knowledge or expectation that the defendant
would likely rely on her silence, (4) the defendant knew of the plaintiff's silence, and
(5) the defendant in fact relied to her detriment on the plaintiff's silence.” 104
The Plaintiffs’ Complaint does not support an argument for acquiescence.
The acquiescence doctrine is particularly fact intensive, and the facts supporting
acquiescence are not in the record. As a result, I deny the Defendants’ Motion to
Dismiss based on acquiescence.
III. CONCLUSION
The count of tortious interference with contract brought against Defendants
Teva Ltd. and Teva USA is dismissed for failure to state a claim pursuant to Rule
12(b)(6). As a result, Teva Ltd.’s Motion to Dismiss for lack of personal jurisdiction
pursuant to Rule 12(b)(2) is moot. The count of breach of implied covenant of good
faith and fair dealing brought against Defendant Cephalon is also dismissed for
failure to state claim under Rule 12(b)(6). However, the count of breach of contract
brought against Cephalon survives the Defendants’ Motion to Dismiss. As a result,
the Defendants’ Motions to Dismiss are granted in part and denied in part. The
parties should provide an appropriate form of order.
104 Cedarview Opportunities Master Fund, L.P. v. Spanish Broad. Sys., Inc., 2018 WL 4057012, at *13 (Del. Ch. Aug. 27, 2018) (internal quotations omitted).