SIGA Technologies, Inc. v. PharmAthene, Inc.
Del. 2013 (2013)
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Rule of Law:
A contractual obligation to negotiate in good faith in accordance with a term sheet is an enforceable preliminary agreement. If a party breaches this duty in bad faith and a court finds the parties would have reached a final agreement but for the breach, the non-breaching party is entitled to recover expectation damages.
Facts:
- In late 2005, SIGA Technologies, Inc., a financially distressed biodefense company, began discussions with PharmAthene, Inc., about developing SIGA's smallpox drug, ST-246.
- By January 2006, the parties had negotiated a detailed License Agreement Term Sheet (LATS) outlining the economic and structural terms of a license for ST-246, though the document itself was unsigned and marked 'Non Binding Terms.'
- The parties then prioritized negotiating a full merger, with PharmAthene providing SIGA a $3 million bridge loan.
- The signed Bridge Loan Agreement (March 2006) and a subsequent Merger Agreement (June 2006) both contained clauses explicitly requiring the parties to 'negotiate in good faith' a definitive license agreement 'in accordance with the terms' of the LATS if the merger were terminated.
- While merger preparations were underway, SIGA's financial position improved dramatically after it was awarded a $16.5 million government grant and achieved successful clinical trial results for ST-246, causing SIGA representatives to express 'seller's remorse.'
- In October 2006, SIGA terminated the Merger Agreement, triggering the obligation to negotiate the license agreement.
- During subsequent negotiations, SIGA proposed a deal structured as an LLC agreement with economic terms that were radically different from the LATS, including increasing the upfront payment from $6 million to $100 million and drastically increasing milestone and royalty payments.
- SIGA's final negotiating position was an ultimatum that PharmAthene agree to negotiate 'without preconditions' regarding the LATS, leading to a breakdown in talks.
Procedural Posture:
- PharmAthene sued SIGA in the Delaware Court of Chancery (the trial court) for breach of contract and promissory estoppel.
- SIGA filed a motion to dismiss, which the trial court denied.
- After an eleven-day trial, the Vice Chancellor found SIGA liable for breaching its contractual obligation to negotiate in good faith and also found liability under the doctrine of promissory estoppel.
- The trial court awarded PharmAthene an equitable payment stream to approximate the license agreement it found the parties would have reached, as well as attorneys' fees.
- SIGA (appellant) appealed the trial court's final judgment to the Delaware Supreme Court (the state's highest court), and PharmAthene (appellee) filed a cross-appeal regarding the remedy.
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Issue:
Does a party breach a contractual obligation to negotiate in good faith in accordance with a detailed term sheet by proposing drastically different terms after its bargaining position improves, and if so, are expectation damages an available remedy for the breach?
Opinions:
Majority - Steele, Chief Justice
Yes, a party that contractually commits to negotiate in good faith in accordance with a term sheet breaches that duty by proposing drastically different terms, and expectation damages are available if a final agreement would have been reached but for that bad faith breach. The court held that the express contractual obligation in the Bridge Loan and Merger Agreements to negotiate 'in accordance with the terms' of the LATS was a binding 'Type II preliminary agreement.' This duty required SIGA to negotiate toward a definitive agreement with economic terms substantially similar to those in the LATS, not merely use it as a 'jumping off point.' The record supported the trial court's finding that SIGA acted in bad faith, driven by 'seller's remorse' after its drug became more valuable, by proposing terms that 'differed dramatically' from the LATS. The court established that where a trial judge finds as fact that the parties would have consummated an agreement but for the defendant's bad faith, the proper remedy is expectation damages ('benefit-of-the-bargain' damages), not just reliance damages. However, the court reversed the trial court's finding of liability based on promissory estoppel, holding that the doctrine does not apply where a fully integrated, enforceable contract already governs the promise at issue.
Analysis:
This decision solidifies Delaware's position on the enforceability of agreements to negotiate in good faith, formally adopting the 'Type II preliminary agreement' framework. By making expectation damages available for a bad faith breach, the court significantly raises the stakes for parties considering abandoning a preliminary deal after their circumstances improve. This precedent discourages strategic or bad-faith renegotiations and provides a powerful remedy for parties who are harmed when their counterparty walks away from the core terms of an agreed-upon framework. Future litigants and contracting parties in Delaware must now consider that a commitment to negotiate based on a term sheet can expose them to liability for the full value of the contemplated deal if they fail to negotiate in good faith.
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