Delaware Business Litigation Report

Chancery Finds Corporation Fraudulently Induced Investor into Contract, Acting “Through Concealment and Silence”

Maverick Therapeutics Inc. v. Harpoon Therapeutics, Inc., C.A. No. 2019-0002-SG (Del. Ch. Apr. 3, 2020).

In this post-trial opinion, the Court of Chancery found that Harpoon Therapeutics, Inc., (“Harpoon”), a Delaware corporation in the business of developing novel cancer therapies, fraudulently induced an investor into acquiring an interest in one of its business divisions by intentionally drafting a non-compete narrowly to exclude certain opportunities Harpoon wished to pursue, in contrast with its representations to the investor about its future plans.

Harpoon began to market a division of its cancer therapy business for sale in 2016.  Harpoon entered into negotiations with a pharmaceutical corporation (“Millennium”) and agreed to divest certain of these business assets, intellectual property rights, and employee contracts pursuant to an asset transfer agreement (the “ATA”). Under the ATA, Harpoon spun off these business assets into a new Delaware corporation (“Maverick”). Millennium agreed to provide investment to Maverick pursuant to a bilateral contract between Millennium and Maverick, and also had the option to buy Maverick on a future date. Additionally, in the ATA, Harpoon signed a carefully drafted non-compete provision, providing that Harpoon would not compete with Maverick in this field of cancer therapies for four years. The transaction closed in December of 2016, but by January 2017, Harpoon had already begun generating ideas for new cancer therapies in a related field. After discovering Harpoon’s efforts to develop an apparently competing cancer therapy, Maverick and Millennium brought contract and tort claims in the Court of Chancery, alleging, inter alia, that Harpoon breached its non-compete with Maverick and fraudulently induced Millennium into investing in Maverick.

The Court of Chancery held that Harpoon did not breach its contractual non-compete with Maverick. Specifically, the Court held that “the non-compete [was not] drawn broadly enough to encompass Harpoon’s new methodology” and, as a result, Harpoon could not be found to have breached the contract’s provision. However, the Court held that when Harpoon “had the opportunity to define [the parameters of the non-compete]” it was also trying to keep the parameters narrowed to “the current Maverick invention or something very close to it.” This allowed Harpoon, at the same time it was negotiating with Millennium, to plan to “design around” the spirit of the non-compete without violating it, all without disclosing these facts to Millennium. Indeed, Harpoon repeatedly represented to Millennium that, going forward, the two businesses would be engaged in distinct businesses, and move forward on divergent trajectories. Internal Harpoon emails showed that Harpoon intentionally concealed its true plans. 

Notably, the Court found that the element of reasonable reliance was satisfied despite its finding that Harpoon did not breach the non-compete. In this regard, the Court reasoned that Millennium was not a party to the ATA. Moreover, the scope of the non-compete was not easy to understand and, in light of Harpoon’s misrepresentations, Millennium reasonably misunderstood its scope. In finding Harpoon liable for fraudulent inducement, the Court held that “Harpoon made its false statements with the intent to induce Millennium into investing in Maverick … and Harpoon maintained, through concealment and silence, its intent to continue innovation in [a substantially similar] sector of immunotherapy ….”

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