Glaxo Group Limited v. DRIT LP ( 2021 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
GLAXO GROUP LIMITED and §
HUMAN GENOME SCIENCES, § No. 25, 2020
INC., §
§ Court Below: Superior Court
Defendants Below, § of the State of Delaware
Appellants/Cross-Appellees, §
§ C.A. No. N16C-07-218
v. §
§
DRIT LP, §
§
Plaintiff Below, §
Appellee/Cross-Appellant. §
Submitted: December 16, 2020
Decided: March 3, 2021
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and
MONTGOMERY-REEVES, Justices, constituting the Court en Banc.
Upon appeal from the Superior Court of the State of Delaware. REVERSED.
Philip A. Rovner, Esquire, and Jonathan A. Choa, Esquire, POTTER ANDERSON
& CORROON LLP, Wilmington, Delaware; Lisa S. Blatt, Esquire (argued), Sarah
M. Harris, Esquire, Sumeet P. Dang, Esquire, and Kimberly Broecker, Esquire,
WILLIAMS & CONNOLLY LLP, Washington, D.C.; Attorneys for Defendants-
Appellants/Cross-Appellees Glaxo Group Limited and Human Genome Sciences,
Inc.
Gregory P. Williams, Esquire, Chad M. Shandler, Esquire, and Nicole Pedi, Esquire,
RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Keith R.
Hummel, Esquire (argued), and Karin A. DeMasi, Esquire, CRAVATH, SWAINE
& MOORE LLP, New York, New York; Attorneys for Plaintiff-Appellee/Cross-
Appellant DRIT LP.
SEITZ, Chief Justice:
Glaxo Group Limited and Human Genome Sciences, Inc. (collectively,
“GSK”) owned patents covering Benlysta, a lupus treatment drug. To expand its
intellectual property rights, GSK filed a patent application with the United States
Patent and Trademark Office (“PTO”) claiming a method for treating lupus. Biogen
Idec MA Inc. (“Biogen”) held an issued patent covering a similar method for treating
lupus. When parties dispute who was first to discover an invention, the PTO declares
an interference. Rather than suffer the delay and uncertainty of an interference
proceeding, the parties agreed to settle their differences through a patent license and
settlement agreement (“Agreement”). GSK ended up with its issued patent. The
PTO cancelled Biogen’s patent, and Biogen received upfront and milestone
payments and ongoing royalties for Benlysta sales.
The claims in a patent define its metes and bounds. Under the Agreement
GSK agreed to make royalty payments to Biogen until the expiration of the last
“Valid Claim” of certain patents, including the lupus treatment patent. The
Agreement defines a Valid Claim as an unexpired patent claim that has not, among
other things, been “disclaimed” by GSK.
GSK paid Biogen royalties on Benlysta sales. After Biogen assigned the
Agreement to DRIT LP—an entity that purchases intellectual property royalty
streams—GSK filed a statutory disclaimer that disclaimed the patent and all its
2
claims. GSK notified DRIT that there were no longer any Valid Claims under the
Agreement and stopped paying royalties on Benlysta sales.
DRIT sued GSK in the Superior Court for breach of contract and breach of
the implied covenant of good faith and fair dealing for failing to pay royalties under
the Agreement. The court dismissed DRIT’s breach of contract claim but allowed
the implied covenant claim to go to a jury trial. The jury found for DRIT, and the
court awarded damages.
On appeal, GSK argues that the Superior Court should have granted it
judgment as a matter of law on the implied covenant claim. On cross-appeal, DRIT
asserts that, if the Court reverses the jury verdict on the implied covenant claim, it
should reverse the Superior Court’s ruling dismissing the breach of contract claim.
For the reasons explained in this opinion, we find that the Superior Court properly
dismissed DRIT’s breach of contract claim but should have granted GSK judgment
as a matter of law on the implied covenant claim. Thus, we reverse the court’s
judgment.
I.
We recount from the record what are largely undisputed facts relevant to our
ruling. In 2007, GSK and Biogen each claimed patent rights to a method for treating
lupus. Biogen held an issued U.S. patent and GSK had a pending U.S. patent
application covering substantially the same subject matter. At the time of the
dispute, U.S. patent law followed a “first to invent” regime where the PTO awarded
3
priority to the party who first came up with the invention.1 The PTO declared an
“interference,” which is an administrative proceeding to decide who has priority over
the intellectual property rights. For GSK, winning the interference would cancel
Biogen’s patent. If Biogen prevailed, it could block GSK from commercializing
Benlysta. Given the uncertainty, GSK and Biogen agreed to settle their dispute.
First, the parties executed a binding term sheet to navigate their way clear of
the interference. The parties appointed a neutral arbitrator to decide the priority
between GSK’s patent application and Biogen’s issued patent. The arbitrator
decided that GSK was the first to invent the lupus treatment method. Thus, its patent
application had priority over Biogen’s issued patent. The parties agreed that GSK
would continue with its patent application. Biogen agreed to cancel its patent.
Next, in October 2008, GSK and Biogen entered into the Agreement. GSK
agreed to pay Biogen a $3.5 million up-front payment, two milestone payments of
$1.5 million each, and royalties on Benlysta sales through the expiration of certain
patent rights, including any patent rights from GSK’s pending patent application.
Section 3.4 of the Agreement states that GSK must pay royalties until expiration of
the last “Valid Claim” of any patent covering Benlysta. Section 1.49 of the
definitions section defines a “Valid Claim” as:
1
Patent Act of 1952, Pub. L. No. 82-593, 66 Stat. 792 (later amended by the Leahy-Smith America
Invents Act, Pub. L. No. 112-29, 125 Stat. 284 (2011) (codified as amended in various sections of
35 U.S.C.)).
4
[A] claim of an issued, unexpired patent within the Patent Rights that
has not expired, lapsed, or been cancelled or abandoned, and that has
not been dedicated to the public, disclaimed, or held unenforceable,
invalid, or cancelled by a court or administrative agency of competent
jurisdiction in an order or decision from which no appeal can be taken
or was timely taken, including through opposition, re-examination,
reissue or disclaimer.2
On December 6, 2011, the PTO issued to GSK U.S. Patent No. 8,071,092(“‘092 Patent”). GSK paid Biogen royalties for Benlysta sales as required by the
Agreement. In 2012, DRIT, a healthcare investment vehicle that purchases royalty
streams on pharmaceutical products, purchased Biogen’s rights under the
Agreement. GSK paid royalties to DRIT on Benlysta sales for three years.
What happened next involves patent disclaimers. Some background is
helpful. A patent gives its owner the right to exclude others from making, using,
offering for sale, or selling an invention.3 The scope of the monopoly is defined by
the claims in the patent. Provided that periodic maintenance fees are paid, a utility
patent expires twenty years from the application filing date. 4 Once the patent
2
App. to GSK Opening Br. at A083 (Settlement Agreement § 1.49). The Agreement covers a
number of patents. For simplicity, we will refer only to the ‘092 Patent and Benlysta sales,
recognizing that the Agreement is broader.
3
35 U.S.C. § 154(a)(1) (“Every patent shall contain . . . a grant to the patentee . . . the right to
exclude others from making, using, offering for sale, or selling the invention throughout the United
States . . . .”). A patent owner may assign or license his invention at any time during his ownership
term. See 35 U.S.C. § 261.
4
35 U.S.C. § 154(a)(2). In limited circumstances the PTO may extend the patent term to account
for undue delays in the patent application examination process. See 35 U.S.C. § 154(b).
5
expires, the patent holder can no longer assert its monopoly over the claimed
invention, and typically the invention enters the public domain.5
A disclaimer cuts short the patent term. A disclaimer is the “renunciation of
one’s own legal right or claim, such as a renunciation of a patent claim . . . .” 6
Section 253 of the Patent Act provides that a patentee may voluntarily “disclaim” all
or part of his or her interest in a patent.7 The Patent Act contemplates two types of
disclaimers: terminal and statutory disclaimers. Here, GSK filed a statutory
disclaimer, which generally is “a statement in which a patent owner relinquishes
legal rights to one or more complete claims of a patent.”8
In 2015, GSK filed a statutory disclaimer and disclaimed the entire term of
the ‘092 Patent from December 6, 2011—the day the PTO granted the patent to
5
See Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 230 (1964) (“[W]hen the patent expires
the monopoly created by it expires, too, and the right to make the [invention] . . . passes to the
public.”); see also Robert A. Matthews, Jr., 1 Annotated Patent Digest § 1:6 (2020) (“When a
patent expires, the patentee may no longer assert exclusionary rights . . . .”).
6
DISCLAIMER, Black’s Law Dictionary (11th ed. 2019).
7
35 U.S.C. § 253(a)-(b); see also 37 CFR § 1.321(a). Section 253 provides in relevant part that:
A patentee, whether of the whole or any sectional interest therein, may, on payment
of the fee required by law, make disclaimer of any complete claim, stating therein
the extent of his interest in such patent. Such disclaimer shall be in writing, and
recorded in the Patent and Trademark Office; and it shall thereafter be considered
as part of the original patent to the extent of the interest possessed by the
disclaimant and by those claiming under him.
35 U.S.C. § 253(a).
8
Manual of Patent Examining Procedure § 1490 (2020) (defining statutory disclaimer). A terminal
disclaimer “is a statement in which a patentee . . . disclaims or dedicates to the public the entire
term or any terminal part of the term of a patent . . . .” Id. A terminal disclaimer “disclaims or
dedicates to the public the entire term or any terminal part of the term of a patent or patent to be
granted.” 35 U.S.C. § 253(b) and 37 CFR 1.321(a) and (b).
6
GSK. GSK informed DRIT that the statutory disclaimer eliminated any “Valid
Claim” for royalties under the Agreement. In 2016, DRIT filed an action in the
Superior Court and asserted claims for breach of contract and breach of the implied
covenant of good faith and fair dealing for what it described as GSK’s bad faith
disclaimer of the ‘092 Patent.
GSK moved to dismiss the complaint. For the breach of contract claim, GSK
argued that the Agreement expressly authorized GSK to disclaim the patent. For the
implied covenant claim, GSK contended that the implied covenant cannot be used
to imply terms—like a good faith requirement before disclaiming a patent—that are
absent from the Agreement and that Biogen could have sought in negotiations. And,
according to GSK, the implied covenant cannot modify action expressly permitted
by the Agreement.
DRIT responded with an imaginative interpretation of Section 1.49. As DRIT
argued, the phrase “in an order or decision” modified more than its closest
antecedent.9 In addition to modifying “held enforceable, invalid, or cancelled by a
court or administrative agency,” DRIT claimed that it also modified a patent “that
has not been dedicated to the public, disclaimed.”10 Thus, any disclaimer must result
from “an order or decision” and cannot be disclaimed voluntarily, as was the case
9
App. to GSK Opening Br. at A145 (Memorandum Opinion on Defendants’ Motion to Dismiss,
DRIT LP v. Glaxo Group Ltd. and Human Genome Sciences, Inc., C.A. No. N16-07-218 WCC
NCC, at 13 (Del. Super. Ct. Apr. 6, 2017) [hereinafter Motion to Dismiss Opinion]).
10
Id.7
here. DRIT also argued that, for the implied covenant claim, the parties did not
anticipate that GSK could use a statutory disclaimer to undermine the economic
basis for the Agreement. Thus, according to DRIT, the implied covenant required
GSK to exercise its right to disclaim in good faith instead of acting in its economic
self-interest.
The Superior Court found DRIT’s interpretation of Section 1.49 “both legally
and grammatically flawed.” 11 The court reasoned that GSK had the express
contractual right to disclaim the patent, and DRIT’s request for the court to “interpret
the Agreement as requiring that a Court/agency order or decision precede any
disclaimer” violated the closest antecedent rule and was “untenable.”12 The court
dismissed the breach of contract claim and held there was “no express contractual
restriction” in the Agreement that limited GSK’s ability to disclaim its rights to the
patent.13
But the court allowed DRIT’s implied covenant claim to proceed. As the court
held, “[w]hen material aspects of an agreement are left to one party’s discretion, the
implied covenant demands that party exercise its discretion reasonably and in good
11
Id. at A146 (Motion to Dismiss Opinion, at 14). The Superior Court observed that, “the plain
and customary meaning of the term ‘disclaim’ in the context of patent rights refers to a patentee’s
renunciation of legal rights to claims of a patent, which is achieved by the patentee’s filing of a
disclaimer with the [PTO].” Id. at A147 (Motion to Dismiss Opinion, at 15).
12
Id. at A148 (Motion to Dismiss Opinion, at 16).
13
Id. at A149-50 (Motion to Dismiss Opinion, at 17-18).
8
faith.”14 The court also noted that “the royalty payments were a ‘critical component
of the consideration Biogen accepted in exchange for giving up its claim to
ownership of the inventions at issue’” and “it is ‘virtually unknown for the owner of
a patent voluntarily to disclaim a patent.’”15 Thus, according to the court, whether
GSK acted in bad faith when it disclaimed the ‘092 Patent was a factual issue to be
determined by the jury.
Following discovery, GSK moved for summary judgment on DRIT’s implied
covenant claim. The Superior Court denied the motion and found that, despite
GSK’s express contractual right to disclaim the ‘092 Patent, GSK still had an
“overarching obligation to comply with the implied covenant and [to] use good faith
when exercising [its] right to disclaim as it impacts [DRIT]’s royalty payments
defined in the Agreement.”16 The court concluded that genuine issues of material
fact remained “whether [GSK] disclaimed the ‘092 Patent for the sole reason of
eliminating royalty payments and therefore acted in bad faith[,]” or if GSK did so
14
Id. at A150 (Motion to Dismiss Opinion, at 18 (citing Airborne Health, Inc. v. Squid Soap, LP,
984 A.2d 126, 146-47 (Del. Ch. 2009); Black Horse Capital, LP v. Xstelos Hldgs., Inc., 2014 WL
5025926, at *30 (Del. Ch. Sept. 30, 2014))).
15
Id. at A152 (Motion to Dismiss Opinion, at 20 (quoting Pl.’s Answ. Br. in Opp’n to Defs.’ Mot.
to Dismiss at 14-15; Compl. at ¶ 50)).
16
Ex. A to GSK Opening Br. at 19 (Memorandum Opinion on Defendants’ Motion for Summary
Judgment; Defendants’ Motion to Dismiss; and Plaintiffs’ Motion for Partial Summary Judgment,
DRIT LP v. Glaxo Grp. Ltd. & Human Genome Sciences, Inc., C.A. No. N16-07-218 WCC NCC,
at 19 (Del. Super. Ct. Aug. 17, 2018)).
9
for strategic business reasons because the patent was likely invalid and no longer
commercially viable.17
After trial, the jury returned a verdict that GSK breached the implied covenant
by statutorily disclaiming the ‘092 Patent. GSK renewed its motion for judgment as
a matter of law. The Superior Court denied the motion, holding that GSK’s
disclaimer “was such an unusual event” that “it would not have been reasonably
anticipated by the parties.”18 And, even if it had been anticipated, “it certainly would
have been addressed in the contract as it went to the “fundamental underpinning of
the Agreement, the continued payment of royalties for which Biogen bargained.”19
After rejecting GSK’s argument that misleading and prejudicial testimony by
DRIT’s expert witness warranted a new trial, the court awarded damages to DRIT
for lost royalties.
II.
GSK argues on appeal that the Superior Court erred by allowing DRIT to rely
on the implied covenant of good faith and fair dealing to displace express contract
terms. GSK contends that the Agreement permitted disclaimer of the ‘092 Patent.
Thus, the Agreement leaves no gap, and the implied covenant cannot be used to alter
the Agreement’s express terms. GSK further asserts that because neither party
17
Id. at 20.
18
DRIT LP v. Glaxo Grp. Ltd., C.A. No. N16C-07-2018 WCC CCLD, 2019 WL 5420095, at *3
(Del. Super. Ct. Oct. 17, 2019).
19
Id.10
disputes that the Patent Act gives GSK the right to disclaim its patent, the parties
could have reasonably foreseen the possibility of a disclaimer, given the express use
of the term in the Valid Claim definition. GSK also argues that DRIT failed to prove
that GSK would have agreed to limit its right to disclaim the ‘092 Patent while the
parties were negotiating the Agreement. Finally, GSK contends that the Superior
Court erroneously implied a limitation on GSK’s right to disclaim because the
Agreement did not require GSK to exercise any discretion before disclaiming the
‘092 Patent.20
In response, DRIT asserts that the Agreement does not expressly authorize
GSK to disclaim the ‘092 Patent. Rather, the term “disclaimer” only appears in the
definition of a Valid Claim, and according to DRIT, definitions do not confer any
affirmative rights. DRIT further contends that the parties failed to foresee GSK’s
use of a disclaimer as it did here. Thus, the Superior Court correctly held that the
implied covenant required GSK to exercise its discretion to disclaim reasonably and
in good faith. According to DRIT, the evidence presented at trial was sufficient to
support the jury’s verdict that GSK acted in bad faith and breached the implied
covenant. On cross-appeal, DRIT argues that if the Court finds that the implied
20
GSK makes two additional arguments on appeal: (1) that GSK is entitled to a new trial because
the Superior Court admitted misleading and irrelevant testimony from DRIT’s expert witness, and
(2) that court erred in basing its damages calculation on the date that the patent was issued.
Because we find that the Superior Court erred in applying the implied covenant, we need not reach
GSK’s second and third arguments on appeal.
11
covenant does not apply, we should uphold the Superior Court’s judgment on the
alternative ground rejected by the Superior Court—that GSK breached the
Agreement by failing to pay royalties even after GSK disclaimed the ‘092 Patent.
We review questions of contract law and contract interpretation de novo.21
Likewise, we review de novo the denial of a motion for judgment as a matter of
law.22
A.
We address first whether the Superior Court erred when it dismissed DRIT’s
breach of contract claim. Section 3.4 of the Agreement states that GSK must pay
royalties until expiration of the last “Valid Claim” of any patent within the scope of
the Agreement. Under Section 1.49, a “Valid Claim” of a patent is one “that has not
expired, lapsed, or been cancelled or abandoned, and that has not been dedicated to
the public, disclaimed . . . .”23 GSK disclaimed the ‘092 Patent and its claims. After
disclaimer, GSK no longer had a “Valid Claim.” Thus, its royalty obligation ceased
under the Agreement.
DRIT argues that “the Agreement unambiguously provides that GSK must
continue to make royalty payments if it voluntarily disclaims the royalty-bearing
patent.”24 As DRIT argues, a voluntary disclaimer “is not an event which would
21
Salamone v. Gorman, 106 A.3d 354, 367 (Del. 2014).
22
Trievel v. Sabo, 714 A.2d 742, 744 (Del. 1998).
23
App. to GSK Opening Br. at A083 (Settlement Agreement § 1.49).
24
DRIT Answering Br. on Appeal and Opening Br. on Cross-Appeal at 53 (emphasis added).
12
take a royalty-bearing patent out of the corpus of valid claims.”25 But DRIT resorts
to the same tortured reading of Section 1.49 that was rejected by the Superior
Court—that the phrase “ordered by a court or administrative agency” modifies
disclaimers and other voluntary acts such that only disclaimers ordered by a court or
administrative agency terminate the royalty payment obligation.
We agree with the Superior Court that DRIT’s interpretation of Section 1.49
is “both legally and grammatically flawed.” 26 Under the Agreement, a “Valid
Claim” is one “that has not been . . . disclaimed . . . or held unenforceable, invalid,
or cancelled by a court or administrative agency.”27 DRIT reads the word “or” out
28
of the agreement. It also ignores the fact that declaring patent claims
“unenforceable, invalid, or cancelled” are actions taken by courts and administrative
agencies, while a disclaimer is an action taken by the patent holder. And DRIT
disregards the last antecedent rule, where “by a court or administrative agency”
logically refers to its closest antecedent—“held unenforceable, invalid, or
cancelled.”29 The Superior Court correctly held that, under the express terms of the
25
Id. at 54.
26
App. to GSK Opening Br. at A146 (Motion to Dismiss Opinion, at 14).
27
Id. at A083 (Settlement Agreement § 1.49).
28
See Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (quoting Kuhn Constr.,
Inc. v. Diamond State Port Corp., 990 A.2d 393, 396-97 (Del. 2010)) (Delaware courts “read a
contract as a whole and . . . give each provision and term effect, so as not to render any part of the
contract mere surplusage”).
29
Rubick v. Sec. Instrument Corp., 766 A.2d 15, 18 (Del. 2000) (“The [last antecedent] rule . . . is
that ‘[r]eferential and qualifying words and phrases, where no contrary intention appears, refer
solely to the last antecedent.’”) (alteration in original) (citation omitted).
13
Agreement, “once Defendants disclaimed the patent rights covering Benlysta, they
were no longer required under the Settlement Agreement to pay royalties with
respect to U.S. sales of the product.”30
B.
Next, we turn to DRIT’s implied covenant claim. Under Delaware law,
sophisticated parties are bound by the terms of their agreement. Even if the bargain
they strike ends up a bad deal for one or both parties, the court’s role is to enforce
the agreement as written.31 As we have explained, “[p]arties have a right to enter
into good and bad contracts, the law enforces both.” 32 Holding sophisticated
contracting parties to their agreement promotes certainty and predictability in
commercial transactions.33
There are, however, instances when parties fail to foresee events not covered
by their agreement or defer decisions to later. “No contract, regardless of how tightly
or precisely drafted it may be, can wholly account for every possible contingency.”34
30
App. to GSK Opening Br. at A150 (Motion to Dismiss Opinion, at 18).
31
11 Williston on Contracts § 31.5 (4th ed. 2020) (“Unless the contract is voidable due to mistake,
fraud, unconscionability, or another invalidating cause, or invalid in whole or in part due to
illegality or another violation of public policy, the court must enforce it as drafted by the parties,
according to the terms employed, and may not make a new contract for the parties or rewrite their
contract while purporting to interpret or construe it.”).
32
Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010).
33
Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006) (courts
should not use the implied covenant to grant substantive rights a party did not extract during
negotiation because “[b]y such judicial action, the reliability of written contracts is undermined,
thus diminishing the wealth-creating potential of voluntary agreements”).
34
Amirsaleh v. Board of Trade of City of New York, Inc., 2008 WL 4182998, at *1 (Del. Ch. Sept.
11, 2008).
14
Subject to the express terms of the agreement, when gaps in an agreement lead to
controversy, the court has in its toolbox the implied covenant of good faith and fair
dealing to fill in the spaces between the written words. The implied covenant,
inherent in all agreements, ensures that the parties deal honestly and fairly with each
other when addressing gaps in their agreement.35 The court’s goal is to preserve the
economic expectations of the parties.36
The implied covenant, however, is a “cautious enterprise.” 37 As we have
reinforced on many occasions, it is “a limited and extraordinary legal remedy”38 and
“not an equitable remedy for rebalancing economic interests that could have been
anticipated.”39 It cannot be invoked “when the contract addresses the conduct at
issue.”40
The implied covenant should not have been deployed in this case. There was
no gap to fill in the Agreement. As the Superior Court found, and we affirm on
35
Dieckman v. Regency GP LP, 155 A.3d 358, 361, 367 (Del. 2017) (explaining that “[t]he implied
covenant is inherent in all contracts[,]” and that the covenant is well-suited to imply obvious
contractual terms–“like the requirement that [a party] not engage in misleading or deceptive
conduct to obtain [certain] approvals”).
36
Nemec, 991 A.2d at 1126 (the implied covenant is invoked to “imply contract terms when the
party asserting the implied covenant proves that the other party has acted arbitrarily or
unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably
expected”).
37
Cincinnati SMSA LP v. Cincinnati Bell Cellular Sys. Co., 708 A.2d 989, 992 (Del. 1998).
38
Nemec, 991 A.2d at 1128.
39
Id; see also Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 445 (Del. 2005) (“[A]bsent
grounds for reformation, courts should not rewrite contracts.”).
40
Oxbow Carbon & Materials Hldgs., Inc. v. Crestview-Oxbow Acquisition LLC, 202 A.3d 482,
507 (Del. 2019) (citing Nationwide Emerging Managers, LLC v. Northpointe Hldgs., LLC, 112
A.3d 878, 896-97 (Del. 2015)).
15
appeal, the parties agreed that GSK could voluntarily disclaim patents. GSK filed a
statutory disclaimer of the ‘092 Patent. The parties excluded “disclaimed” patents
from royalty payments. “[O]ne generally cannot base a claim for breach of the
implied covenant on conduct authorized by the terms of the agreement.”41
Further, that GSK might act voluntarily to end its patent rights was not an
event outside the contemplation of the parties. Disclaimer was just one of several
ways for GSK to voluntarily end its patent rights. GSK could let the patent “lapse”
for failing to pay periodic maintenance fees.42 GSK could also “abandon” the patent
by “permitting the invention to be subject to open competition.”43 And, as happened
here, GSK disclaimed the ‘092 Patent. Biogen knew that court rulings or
administrative proceedings were not the only way GSK’s patent rights could be
terminated. The time to demand restrictions on an express contractual right was
during negotiations—not years later through the implied covenant.44
Finally, we disagree with the Superior Court’s characterization of GSK’s right
to disclaim patents as a discretionary act that GSK had to exercise in good faith. It
is one thing to imply a good faith obligation when the parties have expressly agreed
41
Dunlap, 878 A.2d at 441.
42
See 35 U.S.C. § 41(b)(1).
43
2 Moy’s Walker on Patents § 8:266 (4th ed.) (citing 35 U.S.C. §102(c) (pre-America Invents
Act)).
44
Nemec, 911 A.2d at 1126 (“The implied covenant only applies to developments that could not
be anticipated, not developments that the parties simply failed to consider . . . .”).
16
that a certain act is within a party’s discretion. 45 It is another matter to imply
discretion to restrict actions expressly permitted by the parties’ agreement. The
implied covenant imposes a good faith and fair dealing obligation when a contract
confers discretion on a party.46 It should not be used to imply terms that modify or
negate an unrestricted contractual right authorized by an agreement.
GSK and Biogen agreed that GSK’s royalty obligations would end if GSK
disclaimed the ‘092 Patent. Biogen no doubt assumed that GSK had strong
economic incentives to maintain its patent rights. After all, a patent confers
monopoly power on the patent holder to eliminate competition and maximize profits.
Unfortunately for DRIT, the economic incentives shifted under the Agreement. It
45
See Oxbow, 202 A.3d at 503-04 (observing that a shareholder agreement conferring discretion
to the board was a contractual choice that does not relieve the board of its obligation to exercise
that discretion in good faith) (emphasis added); Airborne, 984 A.2d at 146-47 & n.1 (“When a
contract confers discretion on one party, the implied covenant requires that the discretion be used
reasonably and in good faith.”); see also Gilbert v. El Paso Co., 420 A.2d 1050, 1055 (Del. Ch.
1984) (“[I]f one party is given discretion in determining whether the condition in fact has occurred
that party must use good faith in making that determination.”), aff’d, 575 A.2d 1131 (Del. 1990).
46
See Miller v. HCP Trumpet Inv., LLC, 194 A.3d 908, 2018 WL 4600818, at *1 (Del. Sept. 20,
2018) (TABLE) (observing that “the mere vesting of ‘sole discretion’” to the board as an express
contractual term “[does] not relieve the Board of its obligation to use that discretion consistently
with the implied covenant . . .”); Charlotte Broad., LLC v. Davis Broad. of Atlanta, L.L.C., 2015
WL 3863245, at *7 (Del. Super. Ct. June 10, 2015) (concluding that where a contract permitted
either party “in its sole discretion” to terminate the agreement, the implied covenant required
plaintiffs to exercise that discretion in good faith); Amirsaleh, 2008 WL 4182998, at *8 (holding
that a party to a merger agreement was required to exercise its discretion in good faith where the
agreement mandated that election forms be submitted at a time and on a date that the contracting
parties “mutually agree”); see also Chamison v. HealthTrust, Inc., 735 A.2d 912, 922 (Del. Ch.
1999) (finding that the defendant-indemnitor breached the implied covenant by exercising its
“broad discretion” in an attempt to force the plaintiff-indemnitee to accept a defense that was
inferior to a known alternative), aff’d 748 A.2d 407 (Del. 2000); Bay Ctr. Apartments Owner, LLC
v. Emery Bay PKI, LLC, 2009 WL 1124451, at *7 (Del. Ch. Apr. 20, 2009) (applying the implied
covenant where an operating agreement gave the defendant “broad authority” to manage and
operate an LLC, but the defendant did so in bad faith).
17
appears that GSK no longer needed the patent to protect Benlysta from competition.
As assignee, DRIT is stuck with the agreement that Biogen negotiated. DRIT cannot
use the implied covenant to vary the express terms of the Agreement, which gave
GSK an unqualified right to disclaim the ‘092 Patent and end its royalty obligation.
III.
The Superior Court’s judgment is reversed.
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