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John Hancock Life Insurance Co. v. Abbott Laboratories, Inc.

United States District Court, D. Massachusetts

April 29, 2016

JOHN HANCOCK LIFE INSURANCE COMPANY, JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY, and MANULIFE INSURANCE COMPANY f/k/a INVESTORS PARTNER LIFE INSURANCE COMPANY, Plaintiffs,
v.
ABBOTT LABORATORIES, INC. Defendant.

I. INTRODUCTION ................................................ 5

II. FINDINGS OF FACT ........................................... 6

A. The Parties .............................................. 6

B. The Negotiations for the Agreement ....................... 6

1. Early Negotiations ..................................... 6

2. Negotiations in Late 2000 and Early 2001 ............... 9

3. Abbott’s March 2001 Portfolio Review Meeting .......... 10

C. The Final Agreement ..................................... 12

1. General Structure of The Agreement .................... 12

2. Specific Provisions of The Agreement .................. 13

a. Representations and Warranties - Article 12 ......... 13

b. Annual Research Programs - Section 2.2 .............. 15

c. Audit - Section 2.5 ................................. 16

d. Outlicensing - Section 4.3 .......................... 16

e. The Spending Obligations - Article 3 ................ 17

(i) Hancock's Obligations .............................. 17

(ii) Abbott's Obligations ............................. 19

3. Representations Regarding the Relevant ................ 22

Program Compounds .......................................... 22

a. ABT-518 ............................................. 22

(i) Abbott’s Disclosures ............................... 22

(ii) Review of ABT-518 at the Portfolio Prioritization .. 25

Meeting and Subsequent Events ........................... 25

(iii) ASCO Conference and Termination ................... 26

b. ABT-594 ............................................. 27

(i) Abbott’s Disclosures ................................ 27

(ii) Hancock’s Due Diligence .......................... 29

(iii) The Initial Portfolio Review ...................... 30

(iv) Phase IIb Trial .................................. 31

(v) Reduction In Planned Spending For 2001 .............. 33

(vi) Termination ...................................... 34

c. ABT-773 ............................................. 34

(i) Abbott’s Disclosures ............................... 34

(ii) Dosing of ABT-773 ................................ 35

(iii) Liver Toxicity and QT Prolongation Issues ......... 37

(iv) The Pediatric Program ............................ 39

(v) Termination ........................................ 40

4. Hancock's Attempted Audit ............................. 42

5. Abbott’s Outlicensing Efforts Regarding ABT-518 and ABT-594 .................................................... 45

III. CONCLUSIONS OF LAW ....................................... 45

A. Illinois Law Applies .................................... 46

B. Abbott's Rule 12(f) Motion to Strike Hancock’s ........ 46

Prayer for Rescission in the Amended Complaint .............. 46

1. Hancock’s Procedural Challenge to the Motion to Strike 47

2. The Merits of Abbott’s Motion to Strike ............... 48

a. Election of Remedies ................................ 48

b. Undue Delay ......................................... 51

c. Judicial Estoppel ................................... 52

3. Conclusion ............................................ 54

C. Breach of Contract ...................................... 54

1. Representations and Warranties Regarding Section 12 ... 56

a. ABT-518 ............................................. 57

b. ABT-594 ............................................. 60

(i) Number of Patients in the Phase IIb Clinical Trial 60

(ii) Failure to Disclose that Patients Dropped Out .... 63

of the Phase IIb Trial Because of Side Effects .......... 63

(iii) Projected Spending ................................ 65

(iv) March 2001 Termination Consideration ............. 66

c. ABT-773 ............................................. 67

(i) QT Prolongation and Liver Toxicity Issues ........... 67

(iii) The Pediatric Program ............................. 71

d. Damages ............................................. 72

(i) Hancock’s Lost Royalty and Milestone Damage ........ 73

(ii) The New Business Rule ............................ 75

(iii) Hancock’s Damages Theory is Speculative ........... 76

2. Outlicensing Required by Section 4.3 .................. 80

3. Spending Projections Required by Section 2.2 .......... 81

a. Breach .............................................. 81

b. Damages ............................................. 83

4. Audit Obligations under Section 2.5 ................... 84

5. Aggregate Carryover Spending Required by Section 3.3 .. 85

a. Application of Section 3.3 .......................... 86

(i) Estoppel ............................................ 87

(ii) Interpretation of Section 3.3 ...................... 89

(iii) Whether Abbott’s Performance was Contingent ....... 91

(iv) Unenforceable Penalty .............................. 97

D. Fraud .................................................. 103

E. Indemnification ........................................ 105

IV. CONCLUSION ............................................... 110

MEMORANDUM AND ORDER

DOUGLAS P. WOODLOCK UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

In this litigation a disappointed investor group, which has successfully limited its obligation to continue contributions, is pursuing additional remedies after a joint venture to develop pharmaceutical compounds turned unsuccessful. Plaintiffs John Hancock Life Insurance Company, John Hancock Variable Life Insurance Company, and Manulife Insurance Company (collectively "Hancock") and Defendant Abbott Laboratories, Inc. (“Abbott”) entered into a Research Funding Agreement (the “Agreement”) on March 13, 2001. Under the Agreement, Abbott agreed to develop a Research Program for a portfolio of nine compounds in exchange for a funding contribution by Hancock. Hancock, in return, was to receive royalties on any commercially successful compound as well as milestone payments when a compound advanced to a particular stage in its development.

Shortly after the parties signed the Agreement it became clear that some of the compounds would not be successfully developed. Hancock prevailed in its first lawsuit against Abbott, securing a declaration that it could terminate its funding contributions under the Agreement. John Hancock Life Ins. Co. v. Abbott Labs., No. 03-12501, 2005 WL 2323166 (D. Mass.) (“Hancock I”) aff’d, 478 F.3d 1 (1st Cir. 2006) (“Hancock II”). Hancock initiated this second case as a vehicle to raise further contract and fraud claims and ultimately a rescission claim stemming from the RFA. Following a non-jury trial, I make these Findings of Fact and Conclusions of Law pursuant to Fed.R.Civ.P. 52.

II. FINDINGS OF FACT

A. The Parties

Hancock provides various financial services. Abbott develops, among other things, pharmaceutical compounds. Prior to entering into the Agreement, Hancock and Abbott had developed a business relationship based upon a series of joint investments in pharmaceutical and biotech companies.

B. The Negotiations for the Agreement

1. Early Negotiations

In late 1999 or early 2000, Abbott and Hancock began discussions about a possible investment by Hancock in a portfolio of pharmaceutical compounds that Abbott had under development. Most of the preliminary discussions regarding the Agreement were between Stephen Blewitt, a Managing Director at Hancock, and Phillip Deemer, the Director of Abbott’s Corporate Licensing Department. Hancock sought an investment opportunity that would provide above-average returns with a reasonable level of risk. Abbott was interested in a deal that could limit its risk and share the costs associated with pharmaceutical development. As negotiations progressed, the parties focused their discussions on an investment structure through which Hancock would invest approximately $50 million per year over a four-year period to fund the development of a basket of pharmaceutical compounds (“Program Compounds”) in Abbott’s research and development portfolio. In exchange for this funding, Abbott would compensate Hancock through a series of milestone and royalty payments that would become due if the compounds were commercialized. Abbott would also invest a contractually-agreed amount of money in the compounds over the four-year period.

In mid-2000, the parties began to identify pharmaceutical compounds to be included in the deal and to develop a royalty payment structure. Hancock requested a diversified basket of compounds reflecting a variety of therapeutic indications, at different stages of development, and with different projected sales. Among the proposed Program Compounds were ABT-518, a Matrix Metalloproteinase Inhibitor (MMPI) for the treatment of cancer; ABT-594, a selective neuronal nicotinic receptor (NNR) agonist for the treatment of chronic pain; ABT-773, one of a new class of antibiotics known as ketolides; and ABT-980, a selective alpha blocker for the treatment of urinary tract blockages. Hancock required that Abbott formally represent and warrant the status, condition, and plans for the proposed Program Compounds.

During the negotiations, Abbott provided Hancock with a Descriptive Memorandum regarding each of the proposed Program Compounds. The Descriptive Memoranda were prepared by Abbott and included information regarding: 1) the development status and technical merits of each compound; 2) the specific indications for which each compound was being developed; 3) the nature and severity of any known side effects associated with each compound; 4) the estimated size of the commercial markets for each compound; and 5) the identity of any actual or potential competing products from other pharmaceutical companies. Drafts of the Descriptive Memoranda were reviewed by Deemer and Dr. John Leonard, Abbott’s Vice President of Development, before they were sent to Hancock.

Abbott also provided Hancock with information regarding Abbott’s anticipated development spending on the proposed compounds through projections and drafts of Abbott’s first Annual Research Program (“ARP”). The ARP drafts included information regarding Abbott’s objectives, activities, and budget for each of the proposed compounds over the life of the Agreement.

To verify the accuracy of Abbott’s Descriptive Memoranda, Hancock conducted its own research assessment regarding each of the proposed Program Compounds. Hancock retained Dr. Lynn Klotz, an independent consultant with expertise in biotechnology, to review the Descriptive Memoranda and to verify the accuracy of the information that Abbott supplied in those documents. Klotz reviewed publicly available information related to the compounds and interviewed independent researchers and physicians who he believed could offer useful information about the compounds. He also interviewed Leonard and asked him a series of questions regarding the proposed Program Compounds.

Klotz finished his research in mid-July 2000 and provided Blewitt with summaries of his preliminary findings. Klotz ultimately concluded there was no “indication of deception on Abbott’s part” in the Descriptive Memoranda. However, Klotz reviewed only the June 2000 Descriptive Memoranda; Blewitt did not ask Klotz to review the November 2000, February 2001, or final versions of the Descriptive Memoranda. Klotz also did not review Abbott’s first ARP.

2. Negotiations in Late 2000 and Early 2001

Hancock and Abbott continued to negotiate in the fall of 2000. In October 2000, Abbott notified Hancock that it had discontinued development of ABT-980, one of the proposed Program Compounds. In response to the discontinuance of ABT-980, the parties negotiated through the end of 2000 to modify the terms of the proposed deal. In early 2001, the parties agreed to replace ABT-980 in the basket with two other compounds, ABT-510 and ABT-492. Abbott and Hancock continued to modify and refine the terms of their proposed Agreement in various ways, but the group of nine Program Compounds remained unaltered through the execution of the Agreement on March 13, 2001.

3. Abbott’s March 2001 Portfolio Review Meeting

From March 7-9, 2001, Abbott conducted an off-site Portfolio Review Meeting. At this meeting, Abbott reviewed all the pharmaceutical compounds that it had in development, including the compounds Abbott had acquired as a result of its acquisition of the Knoll Pharmaceutical Division of BASF Corporation (“Knoll”) in late 2000. Dr. Jeffrey Leiden, the Executive Vice President of Abbott’s Pharmaceuticals Division and its Chief Scientific Officer; Leonard, and other Abbott employees attended the meeting. ABT-518, ABT-594, and ABT-773 were three of the compounds reviewed by Abbott at that time.

In late 2000 or early 2001, Abbott had retained the consulting firm McKinsey & Company (“McKinsey”) for the purpose of managing its integration with Knoll. Jessica Hopfield, a member of McKinsey’s pharmaceuticals and medical products practice, was involved in the Knoll integration. She also attended the Portfolio Review Meeting. The purpose of the attendance of Hopfield and other McKinsey employees at this meeting was to learn about Abbott’s portfolio of pharmaceutical compounds and to observe the senior leadership of Knoll.

After the meeting, Hopfield created a document titled “Initial Portfolio Prioritization” that purports to summarize the status of various compounds Abbott reviewed at the meeting. Hopfield characterized ABT-594's priority as “pending” and stated Abbott’s next step was to “[a]wait results from ongoing PII trial - probabl[y] T[erminate].” Hopfield characterized ABT-773’s priority as “continue” and identified the next step as undertaking to “[a]ssess side effects issues with expert review (QTc and liver tox.).” Finally, Hopfield characterized the status of ABT-518 as “Hold, ” and stated the next steps were to “[w]ait for May results from Pfizer” and “[h]alt all further expenditures” in the interim. Hopfield emailed her Initial Portfolio Prioritization document to Leiden on March 13, 2001. In the email, Hopfield explained the document was “a detailed list of the next steps by project” and invited him to make changes “before it is more broadly distributed.” No one at Abbott informed Hopfield that the information contained in the document was not accurate. Leiden testified that he never reviewed the document or forwarded it to any other Abbott employee. Both Leonard and Leiden testified that the information contained in the document Hopfield prepared was not accurate with respect to ABT-594.

I do not credit the document prepared by Hopfield as accurately reflecting Abbott’s position at or following the meeting. The information in the document is directly contradicted in material respects by the testimony of Abbott personnel regarding the status of the compounds and the decisions that were made at the Portfolio Review Meeting. As will appear below, I credit the testimony of those personnel.

C. The Final Agreement

1. General Structure of The Agreement

The final version of the Agreement was executed by Blewitt for Hancock and Leiden for Abbott on March 13, 2001. The terms of the Agreement called for Hancock to invest up to $214 million over four years in the development of nine compounds including ABT-518, ABT-594, and ABT-773. Hancock’s return on its investment in the Program Compounds was made dependent on the commercial success of those compounds. Hancock would only share in revenues generated by the Program Compounds for a set number of years. In consideration for Hancock’s financial contribution, Abbott promised to continue to research and develop the nine compounds and pay Hancock royalties and milestone payments for the commercially successfully drugs. Both the final Descriptive Memoranda and Abbott’s first ARP are attached to, and incorporated in, the Agreement as Exhibit 12.2(i) and Exhibit 1.6, respectively.

Deemer sent the final versions of the Descriptive Memoranda for each of the Program Compounds and the first ARP to Hancock on February 15, 2001. On March 12, 2001, Deemer emailed Blewitt and said that “Leonard looked at all of the documents one last time in preparation for execution.” Leonard noted only one oversight relating to the Program Compounds. Specifically, the Phase I trial for ABT-518 had not started as scheduled on December 2000, but began in March 2001. This delay was not anticipated to push back the planned launch date for the compound. Abbott did not identify any other inaccuracies in the final Descriptive Memoranda on March 13, 2001.

2. Specific Provisions of The Agreement

a. Representations and Warranties - Article 12

Abbott expressly represented and warranted the information contained in its Descriptive Memoranda and in its first ARP in Article 12 of the Agreement as true. Specifically, Abbott represented and warranted to Hancock in Section 12.2(i) of the Agreement that

neither this Agreement nor any Exhibit to this Agreement (including the compound reports attached as Exhibit 12.2(i) hereto (the “Compound Reports”)) contains any untrue statement of material fact or omits to state any material fact necessary to make the statements contained herein or therein not misleading. There is no fact known to Abbott (other than generally available information concerning the pharmaceutical industry in general) as of the date of this Agreement that has not been disclosed in this Agreement or any Exhibit to this Agreement which has resulted in, or could reasonably be expected to result in, a material adverse effect on the prospects or condition (including safety, efficacy, scientific viability or commercial [viability]) of the Research Program or any of the Program Compounds.[1]

Additionally, in Section 12.2(m), Abbott represented and warranted

[w]ith respect to each Program Compound, since the date of its respective Compound Report, no condition, circumstance or fact has arisen (other than generally available information concerning the pharmaceutical industry in general) nor has Abbott made any change in the conduct of the Research Program which, individually or in the aggregate, has resulted in, or could reasonably be expect[ed] to result in, a material adverse effect on the prospects or condition (including safety, efficacy, scientific viability or commercial [viability]) of such Program Compounds.

Hancock relied on Abbott’s representations and warranties when deciding to enter into the Agreement.

b. Annual Research Programs - Section 2.2

Section 2.2 of the Agreement required Abbott, inter alia, to provide Hancock, at least forty-five days (45) prior to the start of each Program Year, with a written ARP. The ARP is defined in the Agreement as

a reasonably and consistently detailed statement of the objectives, activities, timetable and budget for the Research Program for every Program Year remaining in the Program Term, it being understood that less detail shall be required ...

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