SIGA Technologies v. PharmAthene: When is a non-binding term sheet actually enforceable?

By Patrick McKenzie, Esq.

The Delaware Supreme Court in May 2013 considered the issue of when term sheets — documents that outline material aspects of a negotiation — become binding, even when the document expressly states it is non-binding.

Facts:
In 2006, SIGA Technologies experienced financing problems with the development of an antiviral drug for the treatment of smallpox. In order to obtain funding, SIGA proposed an exclusive license to PharmAthene in return for an upfront payment of $6 million, an additional $10 million payment after certain sales milestones were reached, and annual royalty payments of 8-12% on yearly net sales.
These terms, among others, were summarized in a License Agreement Term Sheet (“LATS”) that expressly stated it was non-binding and was not signed by either party. Further negotiations resulted in a bridge loan from PharmAthene and a subsequent merger of the two companies. Both agreements were made on condition that if the merger was terminated, the parties would negotiate in good faith a license agreement in accordance with the terms of the LATS.
Shortly thereafter, SIGA representatives expressed “seller’s remorse” after SIGA received over $20 million from the National Institute of Health. When the merger ultimately fell apart, PharmAthene reinstituted negotiations regarding a license agreement consistent with the LATS. In response, SIGA drafted a formal license agreement demanding the following changes: (1) the upfront payment increased from $6 million to $100 million; (2) the milestone payment increased from $10 million to $235 million; and (3) the royalty percentages increased from 8-12% to 18-28%.
When SIGA refused to negotiate in accordance with the LATS, stating it was non-binding, PharmAthene filed suit for breach of contract, promissory estoppel, and unjust enrichment.

Holding:
The Delaware Supreme Court concluded that under Delaware law:
• An express contractual obligation to negotiate in good faith is binding on the contracting parties.
• Additionally, where parties agree to a term sheet and to negotiate in good faith, neither party may later demand terms that directly contradict the preliminary agreement.

Here, both the bridge loan and merger agreement required the parties to negotiate in good faith a license agreement based on the terms of the LATS. Thus, the question became whether the parties intended to negotiate terms “substantially similar” to the LATS or to merely use it as a “jumping off point.”
Since the bridge loan and merger agreement both specifically incorporated the LATS, the court found the parties intended to negotiate a license agreement with “substantially similar” terms. The fact that the term sheet was not signed, and stated it was non-binding, did not outweigh the evidence of their intent to negotiate based on the LATS. The court noted that while the new terms did not directly contradict the LATS, they “differed dramatically” to the extent they “virtually disregarded” the preliminary agreement.
Next the court looked at whether SIGA’s actions amounted to bad faith. Finding that SIGA’s personnel had “selective and biased memor[ies] of the . . . negotiations,” coupled with the fact that SIGA expressed “seller’s remorse” during the merger negotiations, the court ultimately concluded that SIGA’s negotiating position constituted bad faith. The court further explained that bad faith is “not simply bad judgment or negligence, but rather . . . implies the conscious doing of a wrong because of dishonest purpose or moral obliquity.”

Damages:
Turning to the remedy, the court clarified that where (1) parties have reached a preliminary agreement on certain major terms, but leave others open for future good faith negotiation; and (2) the aggrieved party is able to establish that a final agreement would have been reached but for the other’s bad faith negotiation, the aggrieved party is entitled to recover expectation damages.
Here, the record reflected that the parties memorialized the basic terms of the transaction in the LATS. They also expressly agreed in the merger agreement and bridge loan to negotiate in good faith a license agreement in accordance with those terms. Thus, but for SIGA’s bad faith negotiation, the court found the parties would have formed a final agreement. This entitled PharmAthene to recover its benefit of the bargain under the LATS.

Practice Pointers:

• Be cautious when drafting a letter of intent or term sheet. Explicitly stating it is non-binding is sometimes not enough, especially if one of the parties fails to negotiate in good faith.
• Including a provision to negotiate in good faith may bind the parties to terms that are “substantially similar” to those agreed upon in the preliminary negotiations.
• Failure to reach a final agreement is not automatically grounds for a finding of bad faith. Good faith differences in the negotiation may prevent the formation of a final contract. However, when a party’s behavior moves toward a “conscious doing of wrong” a court may find bad faith and award damages.

This article is presented for educational and informational purposes only and is not intended to constitute legal advice. Patrick McKenzie is an attorney with the law firm of Morris, Manning & Martin, LLP in Atlanta, Ga. www.mmmlaw.com