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Eli Lilly and Co. v. Emisphere Technologies, Inc.

District Court, S.D. Indiana
2006 U.S. Dist. LEXIS 1036, 408 F. Supp. 2d 668, 2006 WL 42084 (2006)
ELI5:

Sections

Rule of Law:

Under New York law, a contractual provision stating a licensee 'shall not have any rights to use' proprietary technology outside a specific field creates an implied negative covenant, meaning unauthorized use constitutes a breach of contract rather than merely a claim for patent infringement.


Facts:

  • In 1997, pharmaceutical giant Eli Lilly and smaller firm Emisphere agreed to collaborate on using Emisphere's proprietary chemical 'carriers' to orally deliver a specific protein called parathyroid hormone (PTH).
  • The parties signed a License Agreement granting Lilly exclusive rights to use Emisphere's technology solely within the 'Field' of oral PTH delivery, explicitly stating Lilly had no rights to use the technology outside this field.
  • The agreement required Lilly to assign ownership of any improvements or new inventions related to Emisphere's technology back to Emisphere.
  • In 2001, while collaborating on PTH, Lilly formed a secret internal group called the 'Oral Protein Delivery Team' (OPD Team) to research using Emisphere's carriers with other proteins, specifically GLP-1.
  • Lilly staffed this secret team with key scientists, including Dr. Khan and Dr. Havel, who had gained intimate knowledge of the carriers through the authorized PTH collaboration.
  • Despite attempting to create a 'firewall,' these scientists shared confidential Emisphere data and know-how with the secret team to accelerate the GLP-1 research.
  • Lilly eventually filed a patent application for the GLP-1 research results without notifying Emisphere or assigning the patent to them.
  • Upon discovering the published patent application in 2003, Emisphere demanded compliance; after negotiations failed, Emisphere sought to terminate the agreements.

Procedural Posture:

  • Emisphere notified Lilly of the alleged breach of contract in September 2003.
  • Lilly filed a complaint for declaratory judgment in the U.S. District Court for the Southern District of Indiana.
  • Emisphere filed a counterclaim for breach of contract.
  • Emisphere formally notified Lilly it was terminating the contracts in August 2004.
  • The District Court held a bench trial specifically to adjudicate Emisphere's counterclaim for breach of contract.

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Issue:

Does a licensee breach a collaboration agreement and justify contract termination when it secretly uses the licensor's proprietary technology and confidential information for research outside the agreed-upon field?


Opinions:

Majority - District Judge Hamilton

Yes, Lilly breached the agreements by conducting secret research outside the licensed field, and these breaches were material enough to justify Emisphere's termination of the contracts. The court rejected Lilly's argument that the contract language merely limited the scope of the patent license, leaving Emisphere with only a patent infringement remedy. Instead, the court found that the provision stating Lilly 'shall not have any rights to use' the technology created a contractual obligation not to use it. Furthermore, because the secret GLP-1 invention relied on suggestions and know-how from the joint collaboration, Lilly violated the contract by failing to assign the patent to Emisphere. Finally, Lilly breached confidentiality provisions by sharing Emisphere's data with its secret internal team. Because these actions violated the trust necessary for a collaboration, they went to the 'root of the agreement,' constituting a material breach that allowed Emisphere to terminate the relationship.



Analysis:

This decision serves as a critical warning to large corporations involved in collaborative research agreements. It clarifies that contractual limitations on the 'use' of technology are enforceable as contract breaches, not just as patent infringement issues. The distinction is vital because it allows for contract remedies, such as termination of the entire relationship, which can be more devastating than monetary damages for infringement. The court emphasized that sophisticated parties cannot 'sail too close to the wind' by using a partner's confidential know-how for side projects. It reinforces the principle that research collaborations rely heavily on implied covenants of good faith and fair dealing.

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