(Nadia Borowski Scott)

The Delaware Court of Chancery has awarded PharmAthene Inc. lump-sum damages based on the expected profits from a smallpox vaccine it developed with Siga Technologies Inc.

In 2011, the Chancery Court had granted PharmAthene half of the vaccine’s profits, but the Delaware Supreme Court reversed the trial court’s decision last year. The Supreme Court concluded Chancery Court Vice Chancellor Donald F. Parsons Jr. could not award damages based on the doctrine of promissory estoppel because a valid contract already existed between the two parties.

Upon remand, Parsons reaffirmed his finding that Siga acted in bad faith when it negotiated the licensing agreement with PharmAthene to market the drug, identified in court papers as ST-246. The vice chancellor also ruled that PharmAthene had presented enough evidence to calculate damages based on the expected sales of ST-246 to various government agencies.

“After reconsidering the expert testimony presented at trial, I have determined that PharmAthene has carried its burden of demonstrating its entitlement to lump-sum expectation damages for its lost profits related to ST-246 by a preponderance of the evidence,” Parsons wrote in PharmAthene v. Siga Technologies.

In the original decision, Parsons found that Siga, a New York vaccine manufacturer, breached its obligation to negotiate in good faith with PharmAthene when the parties were discussing a marketing agreement for ST-246, an antiviral drug that could be used in case of a biological attack. Both companies had developed the product.

As a result, Parsons’ initial ruling ordered Siga to share half of its profits with PharmAthene, of Annapolis, Md., once the product reached $40 million in sales. The vice chancellor said too many factors—such as price, demand, competition and regulatory matters—made it near impossible to determine possible damages. He noted that it was even possible that ST-246 may not generate any profits at all.

Siga appealed Parsons’ decision, arguing the vice chancellor did not have the authority to craft such a remedy because the parties did not have a binding marketing agreement. Upon appeal, the Delaware Supreme Court concluded Siga could not be held liable under the promissory estoppel doctrine.

Promissory estoppel can be invoked when one party fails to fulfill a binding promise it made to another party, which operates as if the promise will be kept. However, the Delaware Supreme Court held that such a doctrine cannot be applied when there is an existing written contract between the two parties. The Supreme Court held that Siga and PharmAthene had created a Type II preliminary agreement, which is defined as a contract when parties “agree on certain major terms, but leave other terms open for further negotiation.”

Upon remand, Parsons held that PharmAthene presented enough evidence to award the drug company lump-sum expectation damages. The vice chancellor ordered the lump sum to be calculated at a later date, based on the guidelines set out in his opinion. Among the factors that the court will consider to determine the damages amount will include the likelihood of the drug being commercialized; the view that sales of ST-246 would start in 2010; the companies’ plan to sell ST-246 to the government at the price of $100 per course of treatment; the number of treatment courses the government planned to buy; sales to the U.S. Department of Defense; and sales outside the United States.

“To determine PharmAthene’s reasonable profit expectancy from ST-246 at the time of SIGA’s bad-faith breach, including whether it was reasonable for PharmAthene to believe it would succeed in commercializing ST-246, it is necessary to consider the parties’ reasonable expectations at that time regarding several factors,” Parsons said.

Parsons also increased PharmAthene’s attorney fees from his initial opinion and awarded fees incurred during the remanded proceedings. The vice chancellor upped the fee award for the original trial to 40 percent from his initial finding that the drug manufacturer was entitled to one-third of fees and expenses. He also awarded PharmAthene one-third of its attorney fees and expenses incurred after the case was remanded to the Chancery Court.

Parsons said he increased the attorney fees because of the “helpfulness” of the expert testimony, causing him to reevaluate his initial damages reward.

Siga was represented by Stephen P. Lamb and Meghan M. Dougherty of Paul, Weiss, Rifkind, Wharton & Garrison. Harold P. Weinberger and Jennifer L. Rochon of Kramer Levin Naftalis & Frankel served as of counsel.

PharmAthene was represented by A. Richard Winchester and Christopher A. Selzer of McCarter & English, with Roger R. Crane of K&L Gates serving as of counsel.

Lamb and Winchester did not return calls seeking comment, but Siga’s general counsel, William J. Haynes II, issued a statement vowing to appeal the decision to the Delaware Supreme Court.

“While we are not surprised that the court left undisturbed Siga’s ownership and control of our smallpox drug, we respectfully disagree with the Chancery Court’s decision on damages,” Haynes said. “We believe that aspect of this decision is not supported by the record or the law, and we expect to appeal it to the Supreme Court of Delaware.”

This article first appeared in Delaware Business Court Insider, a Legal sibling publication.

Jeff Mordock can be contacted at 215-557-2485 or jmordock@alm.com. Follow him on Twitter @JeffMordockTLI.