SLIGHTS, Vice Chancellor.
Parties to a merger agreement dispute the right of the seller's representative to receive certain contingent post-closing payments. Plaintiff, Fortis Advisors LLC ("Fortis"), in its capacity as Stockholders' Agent for the former stockholders of SARcode Bioscience Inc. ("SARcode"), alleges that Defendant, Shire US Holdings, Inc. ("Shire"), has breached the provisions of the parties' agreement by refusing to pay so-called milestone payments that Fortis alleges are past due.
Shire acquired SARcode pursuant to an Agreement and Plan of Merger by and among Shire, Owl Merger Sub, Inc., SARcode Bioscience Inc., and Fortis Advisors LLC, as Stockholders' Agent Dated as of March 23, 2013 (the "Merger Agreement"). At the time the parties entered into the Merger Agreement, SARcode was in the process of developing and seeking regulatory approval for a drug, Lifitegrast, that showed promise to treat the signs and symptoms of dry eye disease. The Merger Agreement set forth a structure whereby the parties agreed to share the risks and rewards of developing Lifitegrast by allocating merger consideration between fixed up front payments and subsequent contingent payments that depended on Shire's ability to shepherd the drug through clinical trials and regulatory approvals. This arrangement allowed SARcode to monetize its at-risk investment in Lifitegrast while securing the promise of financial rewards if the drug continued to be developed successfully and ultimately was commercialized. For Shire, the milestone payments allowed it to hedge against future risks inherent in the drug's development and commercialization by allocating the price it would ultimately pay for SARcode between an initial upfront payment and subsequent payments that would become due only if the defined milestones were reached per the agreed upon schedule.
In its Verified First Amended and Supplemental Complaint (the "Complaint"), Fortis alleges that two of the designated milestones have been achieved. This, in turn, has triggered Shire's obligation to make $425 million in milestone payments to former SARcode stockholders. Shire denies that the two milestones have been met and has refused Fortis' demands to make the milestone payments. The Complaint asserts a single Count for breach of contract. Shire has moved to dismiss the Complaint under Court of Chancery Rule 12(b)(6) on the ground that Fortis' claim of breach is premised on a construction of the Merger Agreement that cannot be reconciled with its clear and unambiguous terms.
After carefully considering the parties' arguments, I conclude that Shire's proffered construction of the relevant provisions of the Merger Agreement is the only reasonable construction. Because Fortis has failed to proffer a competing reasonable construction of the operative language, it has failed to state a claim for breach of contract. Accordingly, the motion to dismiss must be GRANTED.
I. FACTUAL BACKGROUND
The facts are drawn from allegations in the Complaint, documents integral to the Complaint and matters of which the Court may take judicial notice.
A. The Parties
Prior to the Merger Agreement, SARcode was a privately-held biopharmaceutical company based in Brisbane, California. By the terms of the Merger Agreement, Fortis serves post-merger as the "sole agent and attorney-in-fact" for and on behalf of the former SARcode stockholders.
Shire is a Delaware corporation and subsidiary of Shire PLC, a global biopharmaceutical company, whose United States headquarters is located in Lexington, Massachusetts. Shire acquired SARcode in March 2013.
B. SARcode's Development of Lifitegrast
Prior to the Shire acquisition, SARcode developed Lifitegrast as a treatment for dry eye disease. Dry eye disease is diagnosed by an eye care professional based on tests for objective signs of the disease, such as staining or tear break-up time (signs), and subjective symptoms reported by patients, such as eye dryness or discomfort (symptoms).
SARcode developed Lifitegrast to Phase III clinical trials. Phase III clinical trials are performed to test both efficacy and safety of drugs using larger patient populations than are involved in Phase I and Phase II trials. Prior to the Merger Agreement, SARcode had conducted a Phase II clinical trial and a Phase III clinical trial (OPUS-1) that had successfully established the efficacy and safety of Lifitegrast in reducing the signs of dry eye disease. These clinical trials demonstrated the commercial potential of Lifitegrast and their results attracted the interest of several pharmaceutical companies that sought to acquire development rights for the drug.
A second Phase III clinical trial (OPUS-2) was designed and initiated in late 2012 to evaluate the efficacy, safety and tolerability of Lifitegrast. The OPUS-2 Study had two co-primary efficacy endpoints that were specified in the OPUS-2 Study Protocol. One efficacy endpoint, the co-primary sign endpoint, was designed to evaluate Lifitegrast's effectiveness in treating the signs of dry eye disease while the other efficacy endpoint, the co-primary symptom endpoint, would evaluate the drug's effectiveness in treating the symptoms of dry eye disease. The OPUS-2 Study was underway when Shire approached SARcode with an interest in acquiring the company and, by extension, Lifitegrast. Shire and SARcode began negotiating the Merger Agreement in early 2013.
C. The Merger Agreement
At the time SARcode and Shire entered into the Merger Agreement, the OPUS-2 Study was ongoing and Lifitegrast was many steps away from commercialization. To share the risks and rewards of further development of the drug, the parties included in the Merger Agreement a number of additional payments to SARcode stockholders that were contingent upon the drug successfully achieving certain defined milestones. These milestones are divided into several categories, described in § 9.1 of the Merger Agreement, only one of which is relevant to the current dispute. That category of milestone payments, the "Base Case Milestones," is triggered by the occurrence of the OPUS-2 Study Endpoint Achievement Date (the "Achievement Date"). When the Achievement Date is reached, former SARcode stockholders are entitled to receive $175 million for the OPUS-2 Successful Completion Milestone.
Following achievement of the OPUS-2 Successful Completion Milestone and regulatory approval of the drug, Shire is required to make an additional $250 million payment for the Base Case Approval Milestone. If certain revenue targets are met following commercialization, former SARcode stockholders would be eligible for another $100 million for the Base Case Revenue Milestone. Fortis alleges that it is currently due the OPUS-2 Successful Completion Milestone Payment and the Base Case Approval Milestone Payment.
As noted, all of the Base Case Milestones are contingent upon the occurrence of the Achievement Date. That term is defined in the Merger Agreement as follows:
If the Achievement Date is reached, the former SARcode stockholders are eligible to receive the Base Case Milestones payments at various designated intervals defined, in relevant part, as:
The Merger Agreement defines several other terms that appear in the definition of Achievement Date and are relevant to the determination of whether the Achievement Date has occurred. The term "OPUS-2 Study" is defined as:
The OPUS-2 Study Protocol is defined as:
Importantly, the Merger Agreement separately defines the prior Phase III clinical trial, the OPUS-1 Study, as:
Both parties were represented by sophisticated counsel in connection with the negotiation, drafting and execution of the Merger Agreement. As noted, the Merger Agreement was finalized on March 23, 2013.
D. Regulatory Approval of Lifitegrast
Following the Merger Agreement, and at the completion of the OPUS-2 Study in November 2013, Shire informed Fortis that the OPUS-2 Study had achieved the co-primary symptom endpoint but had failed to achieve the co-primary sign endpoint. In a December 5, 2013 press release, Shire publicly reported that "Lifitegrast did not meet the pre-specified co-primary endpoint for the sign of inferior corneal staining score (change from baseline to Week 12) using fluorescein staining compared with placebo (p-value = 0.6186)."
Shire designed and initiated an additional Phase III clinical trial called the OPUS-3 Study in November 2014. In early 2015, Shire filed a New Drug Application ("NDA") with the United States Food and Drug Administration ("FDA") for Lifitegrast. The data Shire submitted to the FDA included evidence from the OPUS-2 Study, the OPUS-1 Study and other previous trials. In October 2015, the FDA issued a complete response letter in which it declined to approve Lifitegrast based on the data submitted in the NDA and requested additional data demonstrating the efficacy of the drug to treat the symptoms of dry eye disease.
On October 16, 2015, apparently believing that the Achievement Date had occurred, Fortis wrote to Shire to inquire whether it intended to make the $175 million OPUS-2 Successful Completion Milestone Payment. Later that month, on October 27, 2015, Shire announced that the OPUS-3 Study had been completed and the data from that clinical trial showed that Lifitegrast had achieved the symptom endpoint, data which would be provided to the FDA in a refiled NDA. Shire responded to Fortis' inquiry regarding the OPUS-2 Successful Completion Milestone Payment on November 12, 2015, stating that none of the Base Case Milestones had been met (or ever would be met) because the Achievement Date had not occurred given that the OPUS-2 Study had failed to meet the sign co-primary endpoint.
In February 2016, Shire refiled its NDA with the FDA and included the OPUS-3 Study data in its application. With this data in hand, on July 11, 2016, the FDA approved Lifitegrast, under the brand name Xiidra, to treat the signs and symptoms of dry eye disease. The FDA also approved the language and content of the Xiidra label that had been proposed by Shire. On July 12, 2016, the label appeared on the Shire website and showed graphical representations of the results from the clinical trials submitted to the FDA. Following approval by the FDA of Lifitegrast under the brand name Xiidra, Fortis alleged that the former SARcode stockholders were now due the Base Case Approval Milestone Payment in addition to the previously earned OPUS-2 Successful Completion Milestone Payment.
E. Procedural History
On March 29, 2016, Fortis filed its Verified Complaint alleging a breach of the Merger Agreement. Shire moved to dismiss the complaint on April 19, 2016. On July 29, 2016, with briefing on the motion to dismiss complete, Fortis moved to amend the complaint to update its allegations with facts relating to the FDA approval of Lifitegrast and the approval of the Xiidra label, which Fortis alleged entitled the former SARcode stockholders to the Base Case Approval Milestone Payment. Fortis opposed the motion. After a hearing on the motion to amend, the Court granted Fortis leave to file its amended complaint which it did on November 8, 2016.
The Complaint sets forth a single count of breach of contract. Shire moved to dismiss on December 9, 2016, arguing that Fortis' reliance upon an unreasonable interpretation of the plain and unambiguous language of the Merger Agreement as the basis for its breach of contract claim warranted dismissal under Court of Chancery Rule 12(b)(6) for failure to state a claim.
While the parties agree that the language of the Merger Agreement is clear and unambiguous, they disagree on how that language should be interpreted. Shire's motion to dismiss can be granted at this procedural stage only if its proffered interpretation stands apart as the lone reasonable construction of the Merger Agreement. After carefully considering both parties' proffered constructions of the relevant provisions of the Merger Agreement, for the reasons that follow, I conclude that Shire's construction is reasonable and that Fortis' construction is unreasonable.
A. Motion to Dismiss Standard
The standards governing this motion to dismiss for failure to state a claim under Rule 12(b)(6) are now well settled:
Questions involving contract interpretation can be answered as a matter of law on a motion to dismiss "[w]hen the language of a contract is plain and unambiguous."
B. The Parties' Competing Constructions of the Operative Language
By the clear terms of the Merger Agreement, the Base Case Milestone payments are not due unless the Achievement Date has occurred.
Shire, on the other hand, argues that the Achievement Date has not occurred, which forecloses Fortis from claiming that either the OPUS-2 Successful Completion Milestone Payment or the Base Case Approval Milestone Payment are due.
C. Shire's Construction of the Merger Agreement is Reasonable
In support of its construction, Shire begins by pointing to the definition of Achievement Date which occurs "upon receipt . . . of audited final tables, figures and listings from the OPUS-2 Study (x) that demonstrate that both components of the co-primary efficacy endpoints of the OPUS-2 Study as specified in the OPUS-2 Study Protocol have been achieved . . ."
According to Shire, by separately defining the OPUS-1 and OPUS-2 studies, the Merger Agreement makes clear that the studies and the data from each study are distinct. And by expressly linking the Achievement Date to the receipt of data "from the OPUS-2 Study," and no other study, Shire argues that the only reasonable construction of the definition of Achievement Date is that the OPUS-2 Study data is the exclusive data relevant to determining whether the Achievement Date has occurred.
Moreover, Shire contends that any results reached in the OPUS-2 Study must be statistically significant in order to "achieve" the co-primary endpoints. In this regard, Shire points to the OPUS-2 Study Protocol which specifies that "[s]tatistical significance is required for both the sign and the symptom for treatment success."
If the Merger Agreement is construed to require that the determination of whether the Achievement Date has occurred be assessed by reference to OPUS-2 Study data only, and that the OPUS-2 Study data must reach statistical significance in order to "achieve" the co-primary endpoints, Fortis' demand for payment of the Successful Completion Milestone Payment and the Base Case Approval Milestone Payment fizzles. This is because the Merger Agreement clearly provides that to reach the Achievement Date, "both components of the co-primary efficacy endpoints of the OPUS-2 Study as specified in the OPUS-2 Study Protocol [must] have been achieved . . ."
Shire's interpretation of the Merger Agreement is reasonable. By its clear terms, the definition of the Achievement Date requires that data "from the OPUS-2 Study" demonstrate that the sign and symptom co-primary efficacy endpoints have been achieved. No other data is referenced in the definition and no other provision of the Merger Agreement suggests that the parties intended other data to be relevant to the determination of whether the Achievement Date has occurred. Shire's construction harmonizes and gives meaning to all of the provisions in the Merger Agreement, including those that identify and define the OPUS-1 Study as separate and distinct from the OPUS-2 Study. It is also reasonable to construe the definition of Achievement Date as requiring that results from the OPUS-2 Study be statistically significant given that the OPUS-2 Study Protocol, which lays out how the OPUS-2 study is to be conducted, requires statistically significant results.
Having determined that Shire's proffered construction is reasonable, however, does not end the inquiry. Shire's construction cannot prevail on a motion to dismiss if Fortis' construction of the same provisions is also reasonable.
D. Fortis' Construction is Unreasonable
Fortis maintains that the Merger Agreement makes clear that data from clinical trials other than the OPUS-2 Study can be considered when determining whether the Achievement Date has occurred. This construction rests on three principal arguments. First, Fortis contends that the absence of any language expressly excluding data from clinical trials other than the OPUS-2 Study in the definition of Achievement Date reflects the parties' intent that such data could and should be considered when determining whether the Achievement Date has occurred. Indeed, according to Fortis, in order for Shire's construction of the operative language to make sense, the Court would have to insert additional language into the definition of Achievement Date. Specifically, Fortis argues that the following bracketed and bold language would need to be added:
Fortis contends that "without the addition of this language not contained in the actual text of the Merger Agreement, the OPUS-2 Study Endpoint Achievement Date simply does not have the limitation that Shire seeks to impose."
Second, Fortis argues that not only does the definition of Achievement Date not explicitly exclude data from prior studies, it makes clear that the parties did, in fact, contemplate that data from other clinical trials would be included. Specifically, Fortis points to the definition of OPUS-2 Study, a term incorporated in the definition of Achievement Date, and argues that while the OPUS-2 Study Protocol is defined separately from the OPUS-1 Study Protocol, the contractual language makes clear that a Phase III clinical trial need only be conducted "in accordance with" the OPUS-2 Study Protocol in order to constitute part of the OPUS-2 Study as referenced in the Achievement Date definition.
Third, Fortis argues that once the Xiidra label was approved by the FDA and publicly made available on Shire's website, Fortis was able to confirm that, contrary to Shire's representations, the OPUS-2 Study had, in fact, achieved both co-primary efficacy endpoints. Indeed, according to Fortis, the FDA approval and the contents of the Xiidra label confirm that the former SARcode stockholders are entitled to an additional Base Case Milestone Payment as well as providing further evidence that both co-primary efficacy endpoints have in fact been achieved for purposes of determining whether the previously earned milestone payments are due.
Fortis' construction of the Merger Agreement is unreasonable. As for its first argument—that the parties' intent to allow data from the OPUS-1 Study to be considered in the definition of Achievement Date can be gleaned from the absence of any express exclusion of such data from the definition—Fortis' proffered construction turns a "four corners" construction of the definition inside out. The canon of construction expresio unius est exclusio alterius—to express or include one thing implies the exclusion of the other—seems particularly apt here.
Of course, this new language that Fortis would have the Court blue-pencil into the Merger Agreement ignores that the Merger Agreement both defines the OPUS-2 Study as a separate Phase III clinical trial from the OPUS-1 Study and requires that the "audited final tables, figures and listings" that demonstrate both co-primary efficacy endpoints have been achieved come "from the OPUS-2 Study."
Fortis' second argument—that the definition of OPUS-2 Study clearly and unambiguously allows for data from other clinical trials to be used to satisfy the Achievement Date—is likewise unpersuasive. To support this contention, Fortis argues that, while the OPUS-2 Study is defined as "the Phase III clinical trial for Lifitegrast to be conducted in accordance with the OPUS-2 Study Protocol . . .," the Merger Agreement makes clear that "the singular . . . shall include the plural" and, therefore, it is reasonable to include other unspecified Phase III clinical trials within that definition.
Even when one changes singular terms to plural within the definition of OPUS-2 Study, the language from that definition still does not support the notion that data from multiple clinical trials should be considered when assessing whether both co-primary efficacy endpoints have been achieved as contemplated in the definition of Achievement Date. The OPUS-2 Study is clearly defined as a clinical trial that is "to be conducted."
Fortis engages in even more strained interpretive gymnastics when it argues that any data from any clinical trial conducted "in accordance with" the OPUS-2 Study Protocol can be considered when determining whether the Achievement Date has occurred. This construction just outright ignores that the OPUS-1 and OPUS-2 studies were conducted pursuant to separately defined protocols. Moreover, even if the OPUS-1 Study was conducted "in accordance with" the OPUS-2 Study Protocol, a point Shire disputes at full throat, Fortis simply cannot explain how that clinical trial could fit within the definition of Achievement Date when that term is defined to include only clinical trials "to be conducted" in accordance with the OPUS-2 Study Protocol. To reiterate, the OPUS-1 Study had already been conducted at the time of the Merger Agreement, a fact that is undisputed and is, in any event, clear from the definition of the OPUS-1 Study in the Merger Agreement. For these reasons, it is unreasonable to construe the definition of OPUS-2 Study as encompassing data from multiple clinical trials in addition to the OPUS-2 Study.
As for Fortis' third and final basis to argue that the Achievement Date has occurred—that the Xiidra label provides irrefutable evidence the OPUS-2 Study did achieve both co-primary efficacy endpoints—the argument ignores that the Merger Agreement clearly and unambiguously requires that the study data achieve statistical significance. And it glosses over the fact that Fortis has not pled that the Xiidra label showed a statistically significant result for the OPUS-2 Study. To get around the reference to statistical significance in the OPUS-2 Study Protocol, Fortis contends that the reference to the OPUS-2 Study Protocol within the definition of the Achievement Date is simply intended to identify the co-primary efficacy endpoints as defined in the OPUS-2 Study Protocol; it does not, however, reflect an intent to incorporate all aspects of the OPUS-2 Study Protocol, including the requirement of statistical significance, within the Achievement Date definition. To characterize this construction as fanciful would be charitable.
In advancing its proffered construction, Fortis would have the Court ignore that the OPUS-2 Study Protocol, in its entirety, is an attached schedule to the Merger Agreement and is thereby expressly incorporated as part of the entire agreement.
Moreover, as noted, Fortis has not attempted to plead that the Xiidra label shows that the co-primary efficacy endpoints were achieved in a statistically significant manner. Rather, it construes the data on the label as revealing only that the OPUS-2 Study demonstrated that the reduction for the sign endpoint was favorable for Lifitegrast as compared to the placebo.
To state a claim for breach of contract, Fortis must proffer a reasonable construction of the operative terms of the Merger Agreement that would support its claim of breach. It has not done so. On the other hand, Shire's construction is entirely reasonable. Because Shire's construction reveals that it has not breached the Merger Agreement, Shire's motion to dismiss the Complaint must be GRANTED.