Breaking Up is Hard to Do

In today's business climate, it takes more than vision and skill to succeed-it also requires aligning with the right partners that have the products and services to help take your company to the next level. Partnerships that look promising can sour during negotiations. And when one party later wants to pull the plug, it can lead to expensive and high-risk court fights over whether the parties have somehow bound themselves to one another. Whether in love or business, it's the timeless dilemma-breaking up is hard to do.

The PharmAthene-SIGA Saga

Before signing a preliminary agreement, letter of intent or an agreement to agree, consider the recent case of PharmAthene Inc. v. SIGA Technologies.  In that case, an influential Delaware court held that a spurned suitor (PharmAthene) had shown that an explicitly non-binding term sheet with SIGA and other conduct had resulted in an agreement in fact-and required SIGA to pay PharmAthene some of the proceeds of sales from the drug at the heart of the dispute.

The groundwork: Both SIGA Technologies and PharmAthene develop drugs for military and public health applications. SIGA developed and owned the intellectual property rights to a drug for the treatment of smallpox, called ST-246. In late 2005, PharmAthene and SIGA began talking about a potential deal under which SIGA would license the technology to PharmAthene. At that time, the commercial viability of ST-246 was unknown, and SIGA was quickly running out of cash. At that time, PharmAthene loaned SIGA $3 million that helped it perform clinical drug trials. The companies attempted to negotiate a license agreement and, after significant negotiation, finally arrived at a license agreement term sheet, which was never signed and contained the legend Non-Binding Terms. The companies instead moved on to discussion of a merger. 

The agreement: On March 9, 2006, the companies signed a letter of intent with an attached merger term sheet (MTS). Here again, though, the letter of intent provided that it was only an indication of the companies' intention to consummate a merger, and the MTS stated that it was non-binding and only an expression of interest subject to negotiation and execution of a definitive merger agreement.

On June 8, 2006, the companies executed a merger agreement stating the deal would close by Sept. 30, 2006, but that if the merger agreement was terminated, SIGA and PharmAthene will negotiate in good faith with the intention of executing a definitive License Agreement in accordance with the license agreement term sheet. SIGA granted a 90-day period of exclusivity to PharmAthene for any
such negotiation. 
 
Changed material terms: During the summer of 2006, ST-246 clinical trials showed signs of great success and, as the Sept. 30 deadline approached, PharmAthene asked for an extension. SIGA ignored its request: The success of ST-246 clearly affected the receptiveness of SIGA's representatives to the anticipated merger with PharmAthene, court documents state. On Oct. 4, 2006, SIGA sent notice of its termination of the merger agreement. On Oct. 12, PharmAthene sent SIGA a definitive license agreement, generally consistent with the terms of the license agreement term sheet. After some further discussions-during which the companies disagreed on whether the license agreement term sheet was binding-SIGA sent PharmAthene a proposed limited liability company agreement, which dramatically changed the terms set forth in the license agreement term sheet. This included an increase of the upfront payment for the license from PharmAthene from $6 million to $100 million. Discussions ended.

The lawsuit: PharmAthene sued SIGA, alleging that the companies had reached a binding agreement either in the form of a license agreement consistent with the license agreement term sheet or an enforceable obligation to execute such an agreement. SIGA argued that the license agreement term sheet was expressly non-binding, had not itself been signed, contemplated further negotiation, and could not, in any event, be binding because it did not contain all essential terms. PharmAthene argued that the other agreements annexing and/or relying on the license agreement term sheet demonstrated that it in fact contained all the essential terms. 

The outcome: After a costly 11-day trial, the Court issued a 118-page ruling, which held that the license agreement term sheet was not itself an enforceable agreement. The Court noted that the document was never signed, was marked with a non-binding legend, and in fact did not contain all of the essential terms of a license agreement. Nonetheless, the Court held that SIGA was under a valid contractual obligation to negotiate in good faith a license agreement containing substantially the same economic terms set forth in the license agreement term sheet; that it had breached that obligation and in fact acted in bad faith when it proposed the limited liability company agreement. The Court ruled that PharmAthene was entitled to damages in the form of an equitable payment stream from the proceeds of SIGA's potential billion-dollar drug.

Lessons of the SIGA Saga

From this, we can ask whether there are any lessons for businesspeople (and their lawyers) to learn. First, it is a true, but incomplete, statement that most courts will not enforce mere agreements to agree, such as a term sheet intended to serve as a template for a formal and definitive agreement.  Courts will also apply a holistic approach and focus on the central issue of whether the companies have agreed to all of the essential terms of a transaction.
 
Second, terms like draft and non-binding may not be enough to forestall a duty to continue to negotiate in good faith. The reality is that SIGA probably thought that it was enough to note, on every page of the unsigned license agreement term sheet, that it was non-binding. SIGA did not consider the potential consequences of repeatedly annexing it, without modification, to further agreements that relied on it and identified it as the companies' agreed-upon target or failsafe in the event their merger agreement was not finally consummated.

What PharmAthene v. SIGA may mean is simply this: It may not be enough even to stamp the document Non-Binding, or state that it is subject to further negotiations and an executed definitive agreement. Companies must consider the full panoply of facts, including the manner in which each speaks with and treats one another after an otherwise non-binding agreement to agree or non-binding letter of intent is drafted. Once your non-binding document is annexed to, relied upon by or even repeatedly discussed as a template for all or part of a possible future business relationship, without modification, you risk transforming an innocuous non-binding template into an agreement with which you are stuck.

Finally, even in the rough and tumble of commercial life, a sense of fairness matters. The evidence demonstrated that the companies had agreed in the non-binding a license agreement term sheet on many if not most of the important points for a license of ST-246. Once SIGA got word of favorable clinical trials-and after a separate agreement under which PharmAthene loaned SIGA $3 million-it terminated the merger agreement and reneged on virtually every aspect of the license agreement term sheet. As the Court pointedly stated, Virtually every term of the draft LLC agreement was more favorable to SIGA than the corresponding provision in the LATS [license agreement term sheet]. For the Court, SIGA's turnaround on previously contested and compromised points was evidence of its bad faith and breach of its duty to negotiate in good faith. For the businessperson and lawyer, good faith means fairness in fact, a sense of proportion and a careful regulation of greed.

Christopher Cole is an attorney and partner of the Manchester law firm of Sheehan Phinney Bass & Green, Professional Association. His practice is substantially devoted to business litigation, counseling employers on the protection of confidential business information and trade secrets, and litigating cases involving employee departures and enforcement of employment agreements. He can be reached at ccole at sheehan dot com.