## Facts

- SIGA Technologies, Inc. owned ST-246, an experimental antiviral drug intended to treat smallpox.
- SIGA faced serious financial difficulty and needed immediate funding to continue development and testing of ST-246.
- SIGA approached PharmAthene, Inc. seeking financial assistance and the parties began negotiating a business combination.
- The parties executed a merger agreement, but SIGA also needed short-term cash while merger negotiations proceeded.
- PharmAthene provided SIGA a bridge loan.
- In connection with the transaction, the parties negotiated a detailed License Agreement Term Sheet (LATS), labeled “Non Binding Terms,” containing specific economic and structural terms for a potential license to ST-246.
- The merger agreement and bridge-loan agreement attached and incorporated the LATS and provided that, if the merger did not close, the parties would negotiate in good faith to execute a license agreement in accordance with the LATS.
- After execution of the merger agreement, ST-246’s prospects improved substantially and SIGA received significant government funding (including NIH support), increasing the drug’s value and reducing SIGA’s need for PharmAthene.
- The merger did not close by the contractual deadline, and SIGA terminated the merger agreement.
- During the ensuing license discussions, SIGA proposed a draft license that departed materially from the LATS, including increasing PharmAthene’s payments dramatically (from roughly $16 million under the term sheet’s structure to hundreds of millions of dollars) and revising other key terms to favor SIGA.
- PharmAthene sued in the Delaware Court of Chancery for, among other things, breach of the contractual obligation to negotiate in good faith.
- After trial, the Court of Chancery found the incorporated LATS operated as a Type II preliminary agreement requiring good-faith negotiations and found that, but for SIGA’s bad-faith conduct, the parties would have reached a final license consistent with the LATS.
- The Court of Chancery awarded PharmAthene damages on a promissory estoppel theory rather than awarding expectation damages.
- SIGA appealed and PharmAthene cross-appealed to the Delaware Supreme Court.

## Issues

1. Whether contracts requiring the parties to “negotiate in good faith” to execute a license agreement “in accordance with” an incorporated term sheet create an enforceable obligation, even if the term sheet itself is labeled non-binding.
2. Whether the record supported the finding that SIGA breached its contractual obligation to negotiate in good faith by proposing terms materially inconsistent with the LATS after ST-246’s value increased.
3. Whether expectation damages may be awarded for breach of an agreement to negotiate in good faith when the factfinder determines the parties would have reached agreement but for the breach and damages can be proven with reasonable certainty.
4. Whether promissory estoppel is available when the promise at issue is contained in an enforceable written contract.

## Decision

- The Delaware Supreme Court held that an express contractual commitment to negotiate in good faith in accordance with a term sheet is enforceable under Delaware law.
- The court affirmed the Court of Chancery’s determination that SIGA breached its duty to negotiate in good faith by departing materially from the LATS in the post-merger license negotiations.
- The court held that, where the trial court finds the parties would have reached a definitive agreement but for bad-faith negotiations, the trial court may award expectation damages, so long as damages are proven with reasonable certainty.
- The court reversed the promissory estoppel ruling because a promise contained in a fully enforceable contract cannot also serve as the basis for promissory estoppel.
- The court reversed the remedy as structured by the Court of Chancery and remanded for reconsideration of damages consistent with the Supreme Court’s expectation-damages holding.

## Legal Principles

- A Type II preliminary agreement can be binding as to the duty to negotiate open terms in good faith, even when the parties have not yet executed the final contract.
- A term sheet labeled non-binding may still supply the negotiated baseline for required good-faith negotiations when the term sheet is incorporated into executed contracts that impose a duty to negotiate “in accordance with” it.
- Breach of a contractual duty to negotiate in good faith can be shown by insisting on terms that materially depart from the agreed term-sheet structure or by using negotiations to recapture economic concessions already made.
- Expectation damages are available for breach of an obligation to negotiate in good faith when the trial court finds (i) the parties would have reached agreement absent the bad-faith conduct and (ii) the damages can be determined with reasonable certainty.
- Promissory estoppel is not available to enforce a promise that is contained in a valid, enforceable contract governing the parties’ relationship.

## Conclusion

The Delaware Supreme Court held that SIGA’s merger and bridge-loan contracts created an enforceable obligation to negotiate a license in good faith using the incorporated LATS as the required point of reference, affirmed that SIGA breached that obligation by proposing materially different terms after ST-246 increased in value, rejected promissory estoppel because the promise was contractual, and remanded for the Court of Chancery to reconsider damages, including potential expectation damages if proven with reasonable certainty.


SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (2013)