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Fortis Advisors LLC v. Allergan W.C. Holding Inc.

Court of Chancery of Delaware

October 30, 2019

FORTIS ADVISORS LLC, in its capacity as the Shareholders' Representative for the former stockholders of Oculeve, Inc., Plaintiff,
v.
ALLERGAN W.C. HOLDING INC., Defendant.

          Date Submitted: July 9, 2019

          Bradley R. Aronstam, Roger S. Stronach, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Martin S. Schenker, Matthew D. Caplan, Kristine A. Forderer, COOLEY LLP, San Francisco, California; Attorneys for Plaintiff Fortis Advisors LLC

          Michael A. Barlow, Daniel J. McBride, ABRAMS & BAYLISS LLP, Wilmington, Delaware; David W. Haller, COVINGTON & BURLING LLP, New York, New York; Attorneys for Defendant Allergan W.C. Holding Inc.

          MEMORANDUM OPINION

          Zurn, Vice Chancellor Judge.

         The parties to a merger dispute the seller's entitlement to post-closing milestone payment consideration. For the seller to earn the milestone payment, the new company had to achieve a specifically defined enhanced treatment authorization from the Federal Drug Administration. After the Federal Drug Administration gave its authorization, the company declined to pay the seller the milestone payment.

         The seller stockholders' representative asserts the buyer breached the merger agreement by refusing to pay the milestone payment and by failing to exercise commercially reasonable efforts in pursuit of the authorization. The buyer moved to dismiss, contending the enhanced treatment authorization did not trigger the milestone payment, and that the buyer failed to allege sufficient facts in support of its commercially reasonable efforts claim. This decision concludes that the seller adequately alleged a breach of contract claim based on the plain meaning of the contract and the authorization, and that the seller alleged sufficient facts to support its commercially reasonable efforts claim. Accordingly, I deny the buyer's motion to dismiss.

         I. BACKGROUND

         I draw the facts from the seller's Verified First Amended Complaint (the "Amended Complaint") and the documents incorporated by reference therein.[1] I must accept as true the Amended Complaint's well-pled factual allegations and draw all reasonable inferences from those allegations in plaintiff's favor.[2]

         A. The Merger Agreement

         In July 2015, an affiliate of defendant Allergan W.C. Holding Inc. ("Allergan") acquired Oculeve, Inc. ("Oculeve"). At issue in this case is Oculeve's primary product in development at the time: a medical device for insertion in the nostrils that causes a person's eyes to tear by way of a small electric charge (the "Product").

         The parties executed an Agreement and Plan of Merger (the "Merger Agreement") on July 5, 2015, and the merger closed on August 10. The Merger Agreement designated Fortis Advisors LLC ("Fortis") as the seller stockholders' representative.

         Under the Merger Agreement, Allergan's affiliate paid the sellers $125 million at closing and contracted for future payments of up to $300 million upon achievement of specific post-closing milestones. The first two milestones compensate the sellers for the Product's regulatory achievements, namely Federal Drug Administration ("FDA") authorization, while the remaining milestones track the Product's sales.

         The first milestone is triggered by "achievement of U.S. Launch, "[3] defined as the first sale of the Product "following written receipt from the FDA of FDA Authorization for the Product with an 'indication for use' for Increased Tear Production associated with dry eye disease."[4] The Merger Agreement defines "Increased Tear Production" as "the temporary increase in tear production in the study population in response to administration of electrical stimulation as measured by [the] Schirmer score."[5] Allergan received FDA approval of the Product on April 24, 2017, with an indication for use that "[the Product] provides a temporary increase in tear production during neurostimulation in adult patients."[6] Allergan then made the first milestone payment of $100 million.

         The second milestone is triggered by "achievement of Enhanced Product Labeling, "[7] which "means the receipt by a Milestone Party of written notice of FDA Authorization of the Product that includes an 'indication for use' for Increased Tear Production and for the treatment of at least one Dry Eye Disease Symptom" (the "Enhanced Product Labeling Milestone").[8] The Merger Agreement provides varying payments based on the date the FDA authorized the Enhanced Product Labeling Milestone: a $100 million payment if authorized by March 31, 2018; a $75 million payment if authorized by June 30, 2018; or a $50 million payment if authorized by September 30, 2019.

         Section 2.11(i) of the Merger Agreement requires that Allergan use "Commercially Reasonable Efforts," as defined therein, when pursuing the Enhanced Product Labeling Milestone.[9]

         On May 2, 2017, Allergan began its pursuit of the enhanced product labeling by submitting a premarket notification to the FDA to obtain enhanced product labeling (the "510(k) Application").[10] The 510(k) Application sought an indication authorizing that "[t]he [Product] provides a temporary increase in tear production during neurostimulation and a temporary improvement in dry eye symptoms following neurostimulation in adult patients."[11]

         In June, the FDA informed Allergan that the new indication required a "de novo application"[12] because the

predicate device is indicated "to increase tear production"; however, you propose to indicate your device for "temporary improvement in dry eye symptoms." Because your new indication now includes a specific patient population along with an intended treatment/therapeutic effect (e.g., your new indication includes mitigation of a disease), there are new safety and effectiveness concerns that were not included as risks in the review of the predicate device in the [initial] De Novo classification request.[13]

         On October 20, Allergan submitted its de novo application (the "De Novo Application") seeking approval of the following indication for use: "The [Product] provides a temporary increase in tear production during neurostimulation resulting in an improvement in dry eye symptoms in adult patients with dry eye disease."[14]Allergan based its De Novo Application on a clinical study that asked patients to self-assess their symptoms five minutes after using the Product.

         On December 22, the FDA responded with a deficiency letter asking for additional metrics supporting a benefit assessment for the Product's proposed indication for use. The FDA requested "outcomes among subpopulations" and "the persistence of symptom relief after the application of the [Product]."[15] As for the clinical study assessing symptoms five minutes after using the Product, the FDA requested measurement of the "change of symptom severity over time after the treatment in the [controlled adverse environment] to evaluate the persistence of the treatment effect."[16]

         Allergan responded to the deficiency letter two months later, on February 15, 2018. In the letter, Allergan focused on validating the study methodologies; stratifying the results among patient populations, including mild, moderate, and severe dry eye disease; and identifying the duration of symptom relief.

         About three months later, on May 17, the FDA notified Allergan that it had approved the following indication for the Product's use (the "Second Authorization"): "[the Product] provides a temporary increase in tear production during neurostimulation to improve dry eye symptoms in adult patients with severe dry eye symptoms."[17]

         Upon receiving this FDA authorization, Allergan refused to pay the Enhanced Product Labeling Milestone. Allergan told the seller that the Second Authorization did not meet the Enhanced Product Labeling Milestone because it "does not include 'treatment' or 'disease'[; and] increase is 'temporary.'"[18]

         On February 26, 2019, Fortis commenced this litigation.[19] Fortis filed the Amended Complaint one month later, on March 26.[20] Fortis claims Allergan materially breached its obligations under the Merger Agreement by failing to make the Enhanced Product Labeling Milestone payment, and by failing to use commercially reasonable and good faith efforts to achieve the Enhanced Product Labeling Milestone before March 31, 2018. Allergan moved to dismiss the Amended Complaint on April 24.[21] The parties finished briefing on June 21, [22] and the Court held oral argument on July 9.[23]

         II. ANALYSIS

         Allergan has moved to dismiss Fortis' Amended Complaint pursuant to Court of Chancery Rule 12(b)(6). When reviewing a motion to dismiss, the Court must

accept all well-pleaded factual allegations in the Complaint as true, accept even vague allegations in the Complaint as 'well-pleaded' if they provide the defendant notice of the claim, draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof.[24]

         A. The Court Considers Extrinsic Documents Integral To The Amended Complaint, And Those Subject To Judicial Notice.

         As an initial matter, Allergan asserts that the Court should consider twenty-five exhibits filed in support of Allergan's motion to dismiss.[25] Allergan contends that all of its exhibits are integral to the complaint or constitute judicially noticeable facts. Allergan cites the Amended Complaint's "liberal[] discuss[ion]" of the regulatory record as justification for including that entire record.[26]

         "On a motion to dismiss, the Court may consider documents that are 'integral' to the complaint, but documents outside the pleadings may be considered only in 'particular instances and for carefully limited purposes.'"[27] "Whether a document is integral to a claim and incorporated into a complaint is largely a facts-and-circumstances inquiry."[28] Generally, "a document is integral to the claim if it is the 'source for the . . . facts as pled in the complaint.'"[29] Fortis concedes that it referenced some of Allergan's exhibits in its Amended Complaint, but contends that those documents are not integral to its breach of contract claim.[30] I find that Fortis uses these referenced documents to form the factual foundation for its claim, and therefore that they are integral to the claim. I conclude that only those Allergan exhibits that Fortis cited are properly considered as integral to Fortis' complaint. I will consider Allergan's Exhibits 1, 6, 8, 11, 12, 13, 14, and 18.

         Allergan also claims that the Court should take judicial notice of Exhibits 2 through 19, comprising FDA approvals and nonpublic communications between Allergan and the FDA, because the FDA regulatory record contains facts that are "not subject to reasonable dispute."[31] Under Delaware Rule of Evidence 201, a Court may take judicial notice of adjudicative facts.[32] A judicially noticed fact "is not subject to reasonable dispute because it: (1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned."[33] "Applying Rule 201, Delaware courts have taken judicial notice of publicly available documents that 'are required by law to be filed, and are actually filed, with federal or state officials.'"[34]

         Delaware courts frequently take judicial notice of public filings with the Securities and Exchange Commission ("SEC").[35] Allergan analogizes the FDA to the SEC, and invites this Court to extend judicial notice to the FDA's final approvals submitted as Exhibits 5 and 19. Exhibit 5 is the FDA final report that triggered the Product's first milestone payment. Exhibit 19 is the final FDA approval of another, unrelated device. Allergan cites two cases in support of judicial notice for these Exhibits. In Funk v. Stryker Corp., the United States Court of Appeals for the Fifth Circuit affirmed the lower court's decision to take judicial notice of "publicly-available documents and transcripts produced by the FDA, which were matters of public record directly relevant to the issue at hand."[36] In Eidson v. Medtronic, Inc., the United States District Court for the Northern District of California took judicial notice of "all of the documents at issue [that] appear on the FDA's public website."[37]

         Like in Funk, Allergan asks this Court to take judicial notice of FDA pre-market approval letters. Allergan has represented that these Exhibits are publicly available documents produced by the FDA, similar to those documents at issue in Eidson.[38] Fortis has not refuted that representation. Accordingly, I am persuaded by Funk and Eidson to take judicial notice of Allergan's Exhibits 5 and 19.

         Exhibits 2 through 4, and 6 through 18, are Allergan's nonpublic correspondence with the FDA.[39] Allergan's communications with the FDA are not publicly available, and their contents cannot be reasonably described as "generally known." While the existence of the communications may be readily determined, the accuracy of the facts contained therein cannot.[40] The same is true for Exhibit 25, which is correspondence between the FDA and a nonparty. I decline to extend Rule 201 to these communications, which are being offered to prove the facts asserted therein.

         I will take judicial notice of Allergan's Exhibits 1, 5, 6, 8, 11, 12, 13, 14, 18, and 19. The remainder of Allergan's Exhibits are not properly considered on Allergan's motion to dismiss.[41]

         B. Allergan Has Not Shown That The Plain Meaning Of The Merger Agreement Forecloses The Enhanced Product Labeling Milestone.

         Having circumscribed the pleadings and documents integral thereto, I consider whether Fortis has stated a claim. Allergan claims Fortis' breach of contract claim must be dismissed because the Second Authorization plainly fails to satisfy the Enhanced Product Labeling Milestone.

         "[T]o survive a motion to dismiss for failure to state a breach of contract claim, the plaintiff must demonstrate: first, the existence of the contract, whether express or implied; second, the breach of an obligation imposed by that contract; and third, the resultant damage to the plaintiff."[42] "[A] claim may be dismissed if allegations in the complaint or in the exhibits incorporated into the complaint effectively negate the claim as a matter of law."[43] Otherwise, "[t]he court may grant a motion to dismiss based on contractual language . . . only if the contractual language is unambiguous-meaning, the language is susceptible of only one reasonable interpretation."[44]

         To determine the obligations imposed by a contract, "Delaware courts start with the text."[45] "When the contract is clear and unambiguous," Delaware courts "will give effect to the plain-meaning of the contract's terms and provisions."[46] "[A] term is not ambiguous simply because it is not defined[.]"[47] "Delaware courts look to dictionaries for assistance in determining the plain meaning of terms which are not defined in a contract."[48] "If a contract is unambiguous, extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract or to create an ambiguity."[49]

         Allergan's motion to dismiss hinges on whether the FDA's indication for use "to improve dry eye symptoms" is equivalent to the Enhanced Product Labeling Milestone's requirement of "treatment of dry eye disease symptoms." As a prefatory matter, I consider whether the indication, limited to symptoms, falls short of any contractual requirement to treat the underlying disease. The FDA approved the following indication for use: "The [Product] provides a temporary increase in tear production during neurostimulation to improve dry eye symptoms in adult patients with severe dry eye symptoms."[50] The FDA explained, "[t]he [Product] is limited only to the improvement in dry eye symptoms as the safety and effectiveness in the treatment of dry eye disease has not been established."[51] Thus, the Second Authorization explicitly distinguished the treatment of dry eye disease, and is cabined to symptoms.

         Similarly, the Merger Agreement only contemplated the treatment of dry eye disease symptoms. Under the Merger Agreement, the Enhanced Product Labeling Milestone required the "receipt by a Milestone Party of written notice of FDA Authorization of the Product that includes an 'indication for use' for Increased Tear Production and for the treatment of at least one Dry Eye Disease Symptom."[52] "Dry Eye Disease Symptoms" are defined as just that: symptoms.[53] The Merger Agreement does not hinge milestone payments on treatment of the underlying disease. So, the Second Authorization's exclusion of the treatment of disease does not foreclose the satisfaction of the Enhanced Product Labeling Milestone.

         I now turn to Allergan's specific arguments as to why the Second Authorization did not satisfy the Enhanced Product Labeling Milestone. Allergan reads the Enhanced Product Labeling Milestone as imposing three requirements- causation, duration, and the entire patient population-and concludes the Second Authorization failed to satisfy all three. I conclude Fortis pled a breach of the Merger Agreement over each of Allergan's arguments.

         First, Allergan contends that the Merger Agreement's use of the word "treatment" requires "a causal relationship" not present in the Second Authorization's use of the term "to improve."[54] The Merger Agreement does not define "treatment," and Allergan has provided no other definition. Dictionary definitions for treatment include "a particular method or type of medical care";[55] "to care for or deal with medically or surgically";[56] and "management in the application of medicines, surgery, etc."[57] Delaware courts have also defined treatment as "[t]he management of illness, by the use of drugs, dieting, or other means designed to bring relief or effect a cure."[58] I accept these definitions as the plain meaning of "treatment," an unambiguous term. The definitions also support Allergan's view that "treatment" implies causation. The ...


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