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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Superior Court Affirms Jury Verdict of Breach of Implied Covenant of Good Faith and Fair Dealing Concerning a Patent Dispute Settlement Agreement
This decision demonstrates the rare case where a breach of the implied covenant of good faith and fair dealing survived a legal challenge and resulted in a jury verdict in favor of the plaintiff. The case arose from a patent license and settlement agreement resolving a patent ownership dispute over the use of antibodies to treat Lupus. The 2008 settlement agreement gave ownership of the inventions to the defendants and obligated them to pay royalties to the plaintiff DRIT and its predecessor in interest. After paying the royalties for several years, in 2015, the defendants filed a request for a statutory disclaimer of the patent in question and notified the plaintiff that the disclaimer had the effect of eliminating any ongoing claim for royalties. This event was not addressed in the parties’ agreement, and the court in post-trial motions upheld the jury’s verdict in favor of the plaintiff on its implied covenant claim because the evidence supported findings that the defendants’ exercise of the disclaimer in these circumstances was an unusual event that the parties would not have reasonably anticipated, and the disclaimer was not a normal rational action and was taken solely for the purpose of discharging defendants’ royalty obligations. The Superior Court found that the defendants simply had not presented sufficient evidence to convince the jury that the defendants had a credible business justification for filing the disclaimer. The Superior Court also rejected a challenge to the testimony of plaintiff’s industry expert that the defendants’ rationale for use of the disclaimer fell outside normative, rational behavior in the circumstances. The court thus found that the jury reasonably could have found the defendants’ proffered justification to be pretextual and not credible.
Finally, the court granted damages in the form of royalties to DRIT from the time of the defendants’ breach to the date of the jury’s verdict, with a declaration of ongoing royalty obligations through the expiration of the patent. Going forward, the future royalty would be determined by the sales of the licensed drug. The court held that its ruling would uphold the expectation of the parties at the time of contracting, which was that DRIT would continue to receive royalties until the patent expired.
It is well-settled Delaware law that the right to bring a derivative claim in the corporation’s name or a direct claim in the individual stockholder’s name is a property right associated with the ownership of shares and that those rights normally pass from a selling stockholder to the buyer. Relatedly, Delaware law imposes two conditions for derivative standing: first, a contemporaneous ownership requirement, meaning the plaintiff must have been a stockholder at the time of the complained of wrong; and, second, a continuous ownership requirement, meaning the plaintiff must continue to be a stockholder to pursue its claims. The rules are slightly different in the direct standing context. In contrast to the continuous ownership requirement for derivative claims, a selling stockholder may retain the right to bring a direct claim by contract. This decision explains and applies these concepts, finding certain stockholders lost both forms of standing when reaching a settlement, despite an apparent attempt to avoid that result in the relevant contracts. More ›