Search results for: "diligent effort"

A recent Delaware Court of Chancery opinion is useful for commercial litigators who encounter the frequent situation where one party is required to use some variation on the standard of “best efforts” to either sell a product or reach certain revenue milestones, for example, in connection with a joint venture or a post-closing earn-out. In BTG International, Inc. v. Wellstat Therapeutics Corporation, C.A. No. 12562-VCL (Del. Ch. Sept. 19, 2017), the court applied the contractually defined standard of “diligent efforts” to the promotion of a pharmaceutical product, in a post-trial opinion.  This discussion of the contractually defined standard of diligent efforts is at least generally analogous to other cases highlighted on these pages that address the standard of “reasonable best efforts” or “commercially best efforts” or the like, to perform certain tasks or to reach certain goals.  Due to the relative paucity of cases thoroughly analyzing these types of standards, this case will likely be useful to many readers.

Background: This case involved a distribution agreement between two pharmaceutical companies. BTG was the larger company and agreed to promote, distribute and sell a drug called Vistogard, that the smaller Wellstat did not have the resources to promote, distribute and sell.  After extensive negotiations, the parties agreed to a contractual definition of “diligent efforts” which BTG was required to employ in order to reach various sales goals for Vistogard.  In addition, the parties were required to work together to formulate and finalize a business plan that would describe the details for promoting, distributing and selling Vistogard.

Key Findings: The court found that BTG failed to hire a sufficient number of sales representatives and failed to devote other resources to sell Vistogard, but instead focused most of its efforts and resources on a completely different product in a different division of the company – – with instructions from the CEO to keep the costs flat related to Vistogard and not to increase the resources that were necessary to implement the business plan.

The court found that BTG failed to comply with the contractually defined standard of “diligent efforts” and also breached the agreement by not complying with the business plan that required certain resources, including a sufficient number of sales representatives, to be devoted to the sale of Vistogard.

Legal Analysis: The court provides a useful discussion of the elements of a claim for breach of contract and for awarding damages. The court also took the rare step of shifting fees due to bad faith litigation tactics, and explained its reason for doing so.

The court recited the familiar elements for breach of contract: (1) the existence of a contract, whether expressed or implied; (2) the breach of an obligation imposed by that contract; and (3) the resultant damage to the plaintiff.

BTG took the aggressive approach of filing a declaratory judgment action seeking a declaration that it had not breached the contract. In response, Wellstat asserted a counterclaim for breach of contract. In sum, the court treated the DJ action as a defensive tactic, which failed, in part because Wellstat did not breach the agreement such that it would have excused a performance of BTG.

This 60-page decision provides extensive detailed factual background which is necessary to fully appreciate the court’s thorough analysis. For purposes of this relatively short overview however, the key points in the analysis are based on the court’s finding that BTG failed to devote the necessary resources for Vistogard – – and instead prioritized the sale and promotion of other products of BTG other than Vistogard.  In addition to failing to comply with the contractual definition of diligent efforts, BTG also breached the agreement by failing to comply with the business plan that required a minimum amount of resources to be devoted to the sale and promotion of Vistogard.

The court also discussed principles applicable to claims for breach of contract damages. The basic remedy for breach of contract should give the non-breaching party “the benefit of its bargain by putting the party in the position it would have been but for the breach.” See footnote 170.  Expectation damages require the breaching party to compensate for the reasonable expectation of the value of the breached contract.  These damages are to be measured “as of the time of the breach.” See footnote 172.

Although expectation damages should not act as a windfall, the “injured party need not establish the amount of damages with precise certainty when a wrong has been proven and injury established. Doubts about the extent of damages are generally resolved against the breaching party.” See footnotes 173 through 175.

Moreover the court noted that: “Public policy has led Delaware courts to show a general willingness to make a wrongdoer bear the risk of uncertainty of a damages calculation where the calculation cannot be mathematically proven.” See footnote 175.

The court concluded by taking the unusual step of shifting fees due to bad faith litigation conduct, which included the need during the litigation for Wellstat to file a motion to compel before BTG complied with its discovery obligations, as well as BTG presenting a misleading demonstrative exhibit at trial. See footnotes 216 through 218.

SUPPLEMENT: The Delaware Supreme Court, by Order dated June 11, 2018, affirmed this decision with the exception of one minor point regarding the start date when pre-judgment interest will accrue.

This post was prepared by Frank Reynolds, who has been following Delaware law and writing about it in various publications for over 30 years.

A recent milestone Chancery Court opinion found shareholders were not too late in charging  that opioid maker AmerisourceBergen Corp.’s directors and officers disloyally prioritized profits over regulatory compliance and ignored red-flag warnings that the drug was being wrongly marketed.  Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 2021-1118-JTL (Del. Ch. Dec. 15, 2022).

Vice Chancellor J. Travis Laster’s 94-page opinion ruled that under a “separate accrual” method of determining when the Company should have been put on notice of their potential liability for allegedly mismarketing a purportedly dangerously addictive drug, the various charges were timely filed.

 But that novel ruling – which addressed the first part of the defendant directors’ two-prong dismissal move — only kept the derivative suit alive for an additional week.  In a separate December 22 opinion, the vice chancellor agreed with the directors’ argument that under the pre-suit demand futility test, dismissal was justified because a majority of the board was not too conflicted to objectively decide whether the suit had enough merit to go forward. Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 2021-1118-JTL (Del. Ch. Dec. 22, 2022).

Director liability already decided

He found that a federal court in West Virginia, in a related bellwether test case to decide nationwide liability for damages to opioid users, had already ruled that the directors could not be held legally liable for making decisions that directly caused the damage.  The vice chancellor said that federal judge had considered all the evidence and testimony in the opioid damages trial and found insufficient reason to hold the directors individually liable for causing the damages.

Therefore, he ruled in the December 22 opinion, that it was unlikely that the directors’ decision on the merits of the suit would be swayed by the possibility that they might face liability and a conflict of interest that would disqualify them under the pre-suit rule for lack of objectivity.  That opinion will be summarized in a forthcoming article.

However, the December 15 opinion should be of interest to corporate law specialists for its extensive analysis of how timeliness should be determined for two charges – a “Red flag claim” and a “Massey claim” — where the starting points of the alleged wrongs are often difficult to determine:

  1. “For their Red-Flags Theory, the plaintiffs contend that the Company’s officers and directors were confronted with a steady stream of red flags that took the form of subpoenas from various law enforcement officials, congressional investigations, lawsuits by state attorneys general, and a deluge of civil lawsuits. Meanwhile, as the opioid epidemic raged, the rates at which the Company reported suspicious orders remained incomprehensibly low. The plaintiffs contend that based on those red flags, the defendants knew that the Company was violating federal and state laws regarding opioid diversion and needed to implement stronger systems of oversight. Yet the Company’s officers and directors consciously ignored the red flags and did not take any meaningful action.”
  2. For their Massey Claim, the plaintiffs seek an inference that between 2010 and 2015, the Company’s officers and directors took a series of actions which, when viewed together, support a pleading-stage inference that they knowingly prioritized profits over law compliance. In re Massey Energy Co., 2011 WL 2176479, *20 (Del. Ch. May 31, 2011) The most telling evidence of intent was a decision in 2015, when management proposed and the directors approved a revised order monitoring program. AmerisourceBergen’s existing order monitoring program used static criteria to flag orders of interest.

Background

AmerisourceBergen, one of three major wholesale distributors of opioid pain medication in the United States, over the past two decades, found itself at the center of America’s opioid epidemic and in 2021, agreed to pay over $6 billion as part of a nationwide settlement to resolve multidistrict litigation brought against the three and has incurred hundreds of millions of dollars settling other lawsuits and over $1 billion in defense costs.

According to the court’s record, two pension funds sued, contending that the Company’s directors and officers breached their fiduciary duties by making affirmative decisions and conscious non-decisions that led ineluctably to the harm that the Company has suffered. Plaintiffs seek to shift the responsibility for that harm from AmerisourceBergen to the human fiduciaries that allegedly caused it to occur.

The dismissal motion

Defendants moved to dismiss on grounds that both the Red Flags and  Massey claims were filed late.  Vice Chancellor Laster said, “No Delaware court has addressed how to determine when a Red-Flags Claim or a Massey Claim accrues.  Delaware decisions have applied three methods to determine when claims for breach of fiduciary duty accrue, the discrete act method, the continuing wrong method, and the separate accrual method.

The discrete act method applies in the vast majority of cases. When a plaintiff contends that fiduciaries have breached their duties by making a specific decision that was complete when made, that decision constitutes a discrete wrongful act that causes the claim to accrue.

For a Red-Flags Claim or a Massey Claim, the discrete act approach dramatically constrains the stockholders’ ability to sue, because an initial decision to ignore a red flag or pursue an illegal business plan often will be difficult to detect and will not have discernable consequences, the vice chancellor said.

The separate accrual method

Vice Chancellor Laster said the separate accrual approach treats a series of related decisions and conscious non-decisions as a sequence of wrongful acts, each of which gives rise to a separate limitations period.  Under this approach, the plaintiff can seek to impose liability and recover damages for any portion of the wrongful conduct where the statute of limitations has not yet run, but not for wrongful conduct that occurred earlier. “To apply the statute of limitations, the court determines when the plaintiff filed suit, looks back from that point over the length of the limitations period, and checks whether actionable conduct took place within that period,” he said. 

“When applying the separate accrual approach within a laches framework, the court looks to when the plaintiff began vigilantly pursuing its claims. For purposes of a derivative action, that can be when a plaintiff begins seeking books and records,” Vice Chancellor Laster wrote.

“In this case, the plaintiffs’ diligent efforts to obtain books and records could support using May 21, 2019, as a starting date for the actionable period,” the court decided. “The plaintiffs, however, are content to use October 20, 2019, so the court uses that date. Using a three-year statute of limitations, the actionable period began on October 20, 2016.”   Using that timetable, the claims were not filed late, the court ruled.

A recent article on The Harvard Law School Corporate Governance Blog collected decisions, mostly based on Delaware law, that address Earn Out disputes, which generally involve agreements for the sale of a company that allow for post-closing payments subject to various milestones or revenue targets being satisfied. Commonly, the buyer of the company is required to use a level of effort to reach those milestones or revenue goals that is variously described as reasonable efforts or diligent efforts or similar “hard to measure” language.

Recent Delaware decisions on those topics have been highlighted on these pages here and here and here, but the above-linked article does a notable job of compiling many recent cases in one place with helpful commentary.

My favorite scholarly commentary on the topic of “commercially reasonable efforts” in general, is provided by friend of the blog, Professor Stephen Bainbridge, whose scholarship is often cited in Delaware court opinions.

A recent Delaware Court of Chancery opinion addressed issues that are of importance to commercial and corporate litigators. In CompoSecure, L.L.C. v. CardUX, LLC f/k/a Affluent Card, LLC, C.A. No. 12524-VCL (Del. Ch. revised Feb. 12, 2018), the court provided a thorough analysis of a contract dispute in a post-trial ruling that primarily relied on New Jersey law, and even though that reliance on non-Delaware law for most issues in this case guarantees cursory treatment on this blog–there are several nuggets of Delaware law which the court cited, for some of its analysis of a marketing agreement for credit cards, that have widespread application in Delaware litigation. For example, the court addressed:

As a postscript for readers who might enjoy trivia, this opinion features as plaintiff’s counsel Delaware’s former Chief Justice, Myron Steele, as well as Arthur Dent, a classmate of mine who was the editor-in-chief of the law review the same year that I was the law review’s internal managing editor. That last bit of data, plus a few dollars, may get you a small coffee at a local coffee shop.

UPDATE: In November 2018, the Delaware Supreme Court had a different perspective on this matter, and affirmed in part and remanded in part.