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Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH

Court of Chancery of Delaware

June 25, 2014

MESO SCALE DIAGNOSTICS, LLC, MESO SCALE TECHNOLOGIES, LLC, Plaintiffs,
v.
ROCHE DIAGNOSTICS GMBH, ROCHE DIAGNOSTICS CORP., ROCHE HOLDING LTD., IGEN INTERNATIONAL, INC., IGEN LS LLC, LILLI ACQUISITION CORP., BIOVERIS CORP., Defendants.

Submitted: November 8, 2013

Collins J. Seitz, Jr., Esq., David E. Ross, Esq., SEITZ ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Mark C. Hansen, Esq., Michael J. Guzman, Esq., Joseph S. Hall, Esq., Gregory G. Rapawy, Esq., Christopher C. Funk, Esq., Joseph A. Bingham, Esq., KELLOGG, HUBER, HANSEN, TODD, EVANS & FIGEL, P.L.L.C., Washington, D.C.; Attorneys for Plaintiffs.

Joel E. Friedlander, Esq., FRIEDLANDER & GORRIS, P.A., Wilmington, Delaware; Nancy J. Sennett, Esq., Paul Bargren, Esq., Brett H. Ludwig, Esq., Eric L. Maassen, Esq., FOLEY & LARDNER LLP, Milwaukee, Wisconsin; Attorneys for Defendants.

MEMORANDUM OPINION

PARSONS, Vice Chancellor.

This action arises from the alleged breach of a license agreement pertaining to sophisticated diagnostic and assay technology. In 2003, a foreign pharmaceutical and diagnostic holding company lost or was in danger of losing its license to that technology. The holding company, therefore, sought to acquire a new license from the then"patent holder. In 2003, the holding company entered into a series of contemporaneously executed agreements that granted it a new non"exclusive license from the patent holder. The plaintiffs, two Delaware limited liability companies with disputed springing rights to the same patented technology, consented to the second non"exclusive license and "joined in" the licenses granted thereunder. As part of that transaction, the holding company acquired the patent holder, but not before its intellectual property assets were transferred to a separate company. In 2007, the holding company also acquired that separate company.

The plaintiffs allege that, since at least 2007, the defendants have disregarded repeatedly and deliberately the field"of"use restrictions prescribed in the 2003 license agreement. The plaintiffs aver that, by consenting to and "joining in" the licenses granted in the license agreement, they became parties to that agreement with the corresponding right to enforce the agreement's field"of"use limitations. As such, the plaintiffs assert that they are entitled to both an award of monetary damages, perhaps as much as several hundred million dollars, for the defendants' breaches of the license agreement since 2007 and an order of specific performance requiring the defendants to honor the 2003 agreement's field"of"use constraints for so long as the agreement remains valid.

In response, the defendants deny that the plaintiffs became parties to the license agreement by virtue of the "join in" language. According to the defendants, they neither needed nor received a license from the plaintiffs. Thus, the defendants argue that they do not owe the plaintiffs any contractual duties under the 2003 license agreement and that the plaintiffs lack standing to assert claims for breach of that agreement.

This Memorandum Opinion constitutes my post"trial findings of fact and conclusions of law on the plaintiffs' claim for breach of contract. For the reasons that follow, I conclude that the plaintiffs have failed to establish that they are parties to the license agreement or that they otherwise have standing to enforce the agreement's field"of"use restrictions. Because the plaintiffs are not parties to the license agreement and cannot enforce it, they have failed to prove that the defendants owed them a contractual duty under that agreement. Therefore, I find in favor of the defendants and dismiss the plaintiffs' claim for breach of contract with prejudice.

I. BACKGROUND

A. The Parties

The plaintiffs, Meso Scale Diagnostics, LLC ("MSD") and Meso Scale Technologies, LLC ("MST" and, collectively, "Plaintiffs" or "Meso") are Delaware limited liability companies. MST was founded by Jacob Wohlstadter ("Wohlstadter") to commercialize his invention of a new application of electrochemiluminescence ("ECL") technology. In 1995, MST and IGEN International, Inc. ("IGEN") formed MSD as a joint venture. The joint venture was created to research and develop the use of various technologies in diagnostic procedures, including procedures utilizing ECL technology. Wohlstadter is the President and Chief Executive Officer ("CEO") of MSD and MST.

The defendants in this case (collectively, "Defendants") are identified below and are all affiliates or subsidiaries of the F. Hoffmann"La Roche, Ltd. family of pharmaceutical and diagnostics companies. Roche Holding Ltd. ("Roche") is a publicly traded joint stock company organized under the laws of Switzerland. Roche Diagnostics GmbH is a limited liability company organized under the laws of Germany and a wholly owned subsidiary of Roche. Roche Diagnostics Corp., which is incorporated in Indiana, is also a wholly owned subsidiary of Roche. IGEN is a Delaware corporation that was acquired by Roche in 2003 and remains a wholly owned subsidiary of Roche. IGEN LS, LLC ("IGEN LS") is a Delaware limited liability company and wholly owned subsidiary of IGEN. BioVeris Corp. ("BioVeris") is a Delaware corporation and wholly owned subsidiary of Roche. BioVeris owns and licenses a portfolio of patents based on and related to ECL technology. Lili Acquisition Corp. ("Lili Acquisition") was a subsidiary of Roche; it was merged into BioVeris on June 26, 2007, and no longer exists.

B. Facts

1. The 1992 and 1995 Licenses

In 1992, IGEN granted an exclusive license to Boehringer Mannheim GmbH ("Boehringer") to use ECL technology for diagnostic testing at hospitals, blood banks, and clinical reference laboratories (the "1992 License").[1] Boehringer also agreed in the 1992 License not to "advertise, market, sell or otherwise commercially exploit" ECL technology outside of those specified areas.[2]

In 1995, IGEN and MST formed MSD as a joint venture. Arguably, IGEN's most significant contribution to the joint venture was granting MSD an exclusive license to practice ECL technology in certain areas (the "1995 License"). Specifically, MSD received an exclusive license "to practice [ECL technology] to make, use and sell products or processes (A) developed in the course of the Research Program, or (B) utilizing or related to the Research Technologies."[3] IGEN, however, was not required "to grant MSD a license to any technology that is subject to exclusive licenses to third parties granted prior to the date" of the 1995 License. This apparently included the technology licensed to Boehringer in the 1992 License. The 1995 License also contained a "springing rights" provision. The provision states that, if any preexisting exclusive license "terminates, or IGEN is otherwise no longer restricted by such license from licensing such technology to MSD, such technology shall be, and hereby is, licensed to MSD pursuant hereto."[4]

2. IGEN sues Boehringer

In 1997, IGEN sued Boehringer for numerous breaches of the 1992 License, including the sale of products outside of the agreement's designated markets.[5] Shortly thereafter, Roche acquired Boehringer, took over the defense of the IGEN lawsuit, and began its efforts to negotiate a non"judicial resolution to the dispute.

For several years, Roche and IGEN engaged in fruitless settlement discussions. In December 2001, Roche made an offer to resolve the two sides' disagreement by acquiring IGEN for $1.5 billion.[6] Roche's offer was contingent on due diligence, which "quickly identified the relationship between IGEN and MSD as a roadblock to the intended acquisition."[7] Although Roche's due diligence team was able to "to obtain an unedited version" of the "voluminous and convoluted contracts" that defined the relationship between IGEN and Meso, the diligence team's analysis was "complicated by the fact that neither IGEN nor MSD/MST legal counsel nor operations personnel appeared forthcoming or willing to discuss" those agreements.[8] Nevertheless, the team concluded that if Roche acquired IGEN, as it was, that acquisition "would not achieve the stated objectives of unencumbered ownership [of certain ECL technology], avoidance of future litigation and discontinuation of business relationships with business entities controlled by the Wohlstadter family."[9] Consequently, in late"December 2001, Roche informed IGEN that it would "not pursue an acquisition unless IGEN/MSD/MST would first redefine the nature of their relationship substantially."[10]

IGEN and Roche were continuing to negotiate when, on January 10, 2002, IGEN prevailed at trial against Roche on, among other things, its claim that Roche had breached the terms of the 1992 License.[11] A jury awarded IGEN damages in excess of $500 million and the district court ruled that, based on Roche's breaches of the 1992 License, IGEN could terminate that agreement.[12]

3. Roche decides to pursue a new license from IGEN

Notwithstanding the verdict against Roche, IGEN and Roche continued to discuss the possibility of settling their dispute by having Roche acquire IGEN. On May 3, 2002, however, Roche advised IGEN that it was no longer interested in pursuing an acquisition[13]. Its reason for the change in objective was twofold. First, for Roche to become comfortable with acquiring IGEN, there would need to be a "major modification" of the relationship between IGEN and Meso. Roche believed that Meso's demand for compensation to effectuate such a modification was "likely to be substantial, " and there was "not enough value in the business" to warrant a purchase price that likely would be acceptable to both IGEN and Meso.[14] Second, Roche expressed concern that any payment to Meso would be perceived by certain IGEN shareholders as payment "behind their back, " designed to divert value away from them, which, in turn, could lead those shareholders to attempt to enjoin the transaction or refuse to tender their shares. Roche proposed that the best path forward for both sides was to agree to a non"exclusive license because Roche was "the best possible licensee of IGEN."[15]

About a month later, in June 2002, Roche and IGEN participated in a court"ordered mediation of their dispute. Consistent with Roche's May 2002 letter, Roche proposed that IGEN grant it a non"exclusive license "to the ECL Technology which is the subject of the [1992 License]."[16] The proposal also included a list of some of the "material elements" of such a license, including that "[Meso] would consent to and join in the license granted to Roche as necessary to insure Roche's non"exclusive use of the ECL Technology in Roche's field."[17] Another "material element" was that improvements to the ECL Technology previously made by Roche and conveyed to IGEN could be used by IGEN only in "fields of use other than the Field licensed to Roche." [18]

4. Roche and IGEN begin to exchange draft license agreements

On July 22, 2002, IGEN circulated a draft license agreement to Roche. This appears to be the first draft of an agreement that was shared among both sides. IGEN's proposal included a defined "Field" in which Roche would be allowed to utilize ECL technology. The draft made no reference to Meso.[19]

On August 1, 2002, Roche proposed its own draft of a license agreement to IGEN. Roche's draft called for IGEN and its "Affiliates" to grant Roche a license to use ECL technology within a defined field.[20] The definition of the term "Affiliates" explicitly included Meso.[21] Roche also included an attached page entitled "Consent by IGEN Affiliates." The proposed consent provided that Meso would "consent to and join in the licenses granted" in the agreement.[22] In addition, Roche's draft contemplated that Meso would represent and warrant that it did not have "any right, title, and interest in the Licensed ECL Technology licensed to Roche" in the proposed agreement "that would in any way restrict or limit Roche's exercise of the licenses [being] granted."[23] Less than two weeks later, Franz Humer, the Chairman of Roche, wrote to Samuel Wohlstadter, Chairman and CEO of IGEN and Wohlstadter's father, to reemphasize Roche's position in the ongoing settlement discussions. Humer wrote in part that "[a]ny settlement has to achieve for Roche complete freedom of operation in our field, including complete protection from the "Meso' companies. Roche will not negotiate with Meso and I consider it your responsibility to deliver the necessary consents and covenants from Meso."[24]

On October 9, 2002, IGEN granted certain Roche employees access to unredacted versions of its agreements with Meso.[25] Roche's outside counsel had been in possession of those documents for a "few weeks" before IGEN authorized anyone employed by Roche to review them.[26]

On November 6, 2002, IGEN circulated an updated draft of the license agreement to Roche. In this version, IGEN removed the Meso "consent" and also amended the definition of "Affiliate" such that "[MSD] . . . shall not be deemed an Affiliate of [IGEN] for purposes of this Agreement unless [IGEN] elects by written notice to [Roche] to include such company as an [IGEN] Affiliate."[27] IGEN also removed all references to "Affiliates" from the draft agreement's grant clause.[28]

On November 22, 2002, Roche sent IGEN its next proposal for how the license agreement should be structured. In it, Roche reinserted: (1) MSD and MST into the definition of Affiliates; (2) the term "Affiliates" into the agreement's grant clause; (3) and the Meso consent, which, as in previous drafts, appeared after the Roche and IGEN signature blocks, but before the agreement's exhibits.[29] The consent also contained a new footnote stating that "Roche is considering whether a formal license of ECL Technology from MSD/MST to [Roche] may be necessary to assure [Roche's] access to all ECL Technology. This issue is subject to further due diligence by Roche."[30]

On January 17, 2003, IGEN's counsel circulated a marked"up draft agreement to Roche's counsel. The marked changes had "not been accepted by either party, " but, instead, were "merely intended to memorialize what [was] discussed during [a] conference call" held earlier that day.[31] The mark"up of the grant clause, Section 2.1 of the agreement, read "IGEN OBJECTS TO "and its Affiliates'[32]: Roche is concerned (1) that there are springing exclusive rights in Meso that would preclude granting all of these non"exclusive rights to Roche; and (2) that IGEN has not granted rights to its Affiliates which would prevent IGEN from granting these licenses."[33] IGEN's mark"up did not comment regarding Roche's first listed concern, but it stated that "IGEN believes (2) can be resolved through due diligence."[34]

5. Roche and IGEN continue to negotiate; MSD signs a confidentiality agreement

On April 29, 2003, Roche and MSD executed a formal confidentiality agreement.[35] Immediately thereafter, Roche and IGEN began including Meso's outside counsel on emails circulating draft license agreements.[36]

Meso argues that before the execution of the confidentiality agreement, Wohlstadter represented Meso in negotiating directly with Roche and IGEN. The record, however, does not support this assertion. In addition to his roles at Meso, Wohlstadter also served as a consultant to IGEN.[37] There was credible testimony that, during the early negotiations between Roche and IGEN, Wohlstadter's presence and participation in various meetings was in his role as a consultant to IGEN.[38] In addition, IGEN's General Counsel, on numerous occasions, indicated specifically that he was, pre"April 2003, forwarding documents and drafts to Wohlstadter related to IGEN's negotiations with Roche, "solely in his capacity as a consultant to IGEN."[39] I also note that, on December 2, 2002, the Joint Venture Operating Committee ("JVOC") of MSD met to discuss IGEN's negotiations with Roche and the "effect [] the proposed transaction with Roche would have upon [MSD]."[40] In response to a question from IGEN's management "as to what role, if any, the [JVOC] envisioned for Jacob Wohlstadter in the negotiations with Roche scheduled to begin the following day, " after "considerable discussion, " the JVOC "concluded that Jacob's role in the negotiations should be limited to technical advice only and that it was not appropriate for Jacob to be a party to [IGEN's] negotiation strategy."[41]

As of April 29, MSD and MST still were defined explicitly as "Affiliates" of IGEN and the Meso consent from the November 22, 2002 draft agreement remained largely unchanged.[42] IGEN considered this draft consent "acceptable, " but noted that it was subject to "discussion with MSD and MST" after they completed a confidentiality agreement with Roche.[43]

On May 2, 2003, Kenneth Slade, outside counsel for IGEN, [44] distributed an updated draft of the license agreement purporting to reflect changes based on discussions held earlier that day between IGEN, presumably with input from Meso, and Roche. In this draft, MSD and MST were excluded specifically from the definition of an IGEN "Affiliate." Additionally, the definition of "Licensed ECL Technology" was amended to specify that IGEN either owned, or had the right to sublicense, the underlying technology at issue.[45] As to the Meso consent associated with this version of the agreement, Meso asked that the "join in" language and Meso's representation that they had no rights in the Licensed ECL Technology be removed.[46]

On May 8, 2003, Slade circulated the next draft of the agreement. In this updated version, Roche reinserted the "join in" language and suggested a modified version of the "no rights" clause that had been included in the April 29 version. Specifically, Roche proposed that MSD and MST "represent and warrant to [Roche] that they have no right . . . to in any way restrict or limit [Roche's] exercise of the license granted in the License Agreement."[47]

On May 30, 2003, IGEN circulated a draft of the agreement and corresponding comments internally and to Meso. Of particular relevance are Section 9.6 and the attached consent. Regarding Section 9.6, the draft stated:

ROCHE MAY 20 PROPOSAL: and (iv) no consent, notice, approval, authorization, waiver or permit, to or from any person [MSD: excluding any consents attached hereto], including, but not limited to, any Governmental Entity or third party holder of intellectual property rights is required to be obtained or made by IGEN in connection with its execution and delivery of this Agreement [MSD: delete remainder] or the consummation of the transactions contemplated hereby.[48]

At this time, the consent still included both the "join in" language and Roche's request that Meso represent and warrant that it had "no rights" that could interfere with Roche's exercise of the license being granted in the License Agreement.[49]

On June 3, 2003, Slade distributed the most updated version of the agreement to Roche, IGEN, and Meso. By this date, Roche's proposed language in Section 9.6(iv) had been modified to read:

(iv) no consent, notice, approval, authorization, waiver or permit, to or from any person (other than the consent attached hereto), including, but not limited to, any Governmental Entity or third party holder of intellectual property rights is required to be obtained or made by IGEN in connection with its execution, delivery and performance of this Agreement.[50]

The Meso consent in the draft circulated on June 3 included the "join in" language, but, at Meso's insistence, did not include the "no rights" representation and warranty that Roche previously had sought.[51] After the June 3 draft, the substance of the Meso consent remained the same.

6. IGEN's right to terminate the 1992 License is upheld; Meso seeks compensation for the first time

During the course of negotiations regarding the License Agreement, on July 9, 2003, the United States Court of Appeals for the Fourth Circuit decided Roche's appeal of the January 2002 verdict against it.[52] In its decision, the Fourth Circuit reduced the compensatory damages award and vacated the punitive damages award that the trial court had entered against Roche. The Fourth Circuit, however, upheld IGEN's right to terminate the 1992 License. That same day, IGEN's General Counsel, Daniel Abdun"Nabi, sent written notice to Roche that IGEN was terminating the 1992 License.[53]

On July 15, 2003, Humer sent a letter to the Roche board to update them on the status of the ongoing negotiations with IGEN. Humer noted that, although the Fourth Circuit upheld IGEN's right to terminate the 1992 License, it was in both Roche's and IGEN's interests to agree to a new license, and that the two sides were "as close as they have ever been to a successful conclusion."[54] According to Humer, the two sides had reached agreement on a "deal structure" that would allow Roche to achieve several "objectives" including "[f]ull unhindered access to ECL technology" and "[c]onsent and agreement of "Mesoscale Diagnostics', an associated company of IGEN owned by [Samuel] Wohlstadter's son to all agreements between Roche and IGEN."[55] Humer described this "consent and agreement" as "necessary" because "Mesoscale could block the deal based on a complicated set of internal agreements between IGEN and Mesoscale."[56] Nowhere in the letter, however, does Humer suggest that Roche had sought or obtained a license ...


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