Promises are everywhere in biotechnology. In this industry, parties promise to provide information, evaluate and keep it secret, perform experiments, test compounds, develop and market products, prosecute and enforce patents, pay for these things, and so on and so forth. Parties rely on these promises with the expectation that they are enforceable. Yet, a naked promise, without more, is not enforceable. It is not a contract. What, then, is?
A contract is an exchange of certain things between two or more parties. As we will see in this chapter, this exchange is what makes a contract legally binding.
Ideally, a contract is more than a nebulous, cordial understanding of future events. At its best, it concretely defines the meeting of minds between the parties: what each party will do and how, when, and for how long each party will do it. It also accounts for what can foreseeably go wrong, how it can go wrong, and what if anything can be done when it does.
Strictly speaking, a contract can be oral as well as written. However, oral contracts, while relatively expedient, have shortcomings that written contracts do not. For example, there are limitations on the monetary value and substance of oral contracts. An oral contract also suffers from the ease with which the parties can forget or misrepresent its provisions and the difficulty of orally establishing anything but the simplest of rights and obligations. For at least these reasons, written biotech contracts are the norm and are the focus of this chapter and the next one.
Contracts, also called agreements, are a part of nearly every human endeavor—whether labor relations, real estate purchases, trade deals, mergers and acquisitions, or matrimonial arrangements. Those relating to biotechnology make up only a sliver of all possible ones. This section, in turn, introduces just four specific contracts: confidentiality agreements, material transfer agreements, patent license agreements, and collaboration agreements. These four contracts are merely a sampling of the many relevant to this industry—a tiny subset of an already tiny subset. Yet, we focus on them here because of their ubiquity and the degree to which they require an understanding of the underlying science.
This chapter lays the foundation for our discussion of specific contract types in the next chapter. Here, we learn the elements of an enforceable contract: lawful purpose, legal capacity, offer and acceptance, and mutual consideration. We then see how a party can breach a contract and sometimes cure its breach. Finally, we learn about remedies available to a nonbreaching party when enforcing a contract.
In this chapter, we use biotech and pharmaceutical scenarios to exemplify these legal concepts. We must remember, though, that these concepts apply to contracts generally.
For one party to sue another under contract, that contract must be enforceable. That is, it must be such that a court will address harm resulting from one party’s failure to perform its contractual duties. An enforceable contract is distinct from a naked promise by one party to another, which, without more, a court will not enforce.
An enforceable contract must have certain features called elements. These are presented next.
An enforceable contract may be formed only to accomplish a lawful objective, such as performing research or licensing a patent during its term. An unlawful act, like importing a banned drug, cannot be the subject of an enforceable contract.
Biotech X is a U.S. company that makes and sells antibody-based drugs for treating cancer. Biotech X is developing AbX as a candidate drug for treating melanoma. The company has not yet submitted an IND for AbX.
To further test AbX, Biotech X enters into a contract with Physician Y. Under the contract, Physician Y will perform “pre-IND” clinical trials on five patients with melanoma in the United States using AbX. Biotech X will pay Physician Y a specified fee for her services.
This contract between Biotech X and Physician Y was entered into to perform an unlawful act, namely, performing clinical trials in the United States absent FDA approval. Thus, it is not enforceable.
EXAMPLE 17.2
Now, however, the contract requires Physician Y to perform in vitro experiments using human melanoma cell–based reagents and methods. It does not require Physician Y to perform clinical experiments. Assuming that performing these in vitro tests does not violate FDA or other applicable laws, this contract has a lawful purpose. As such, it is enforceable, assuming of course that it meets the other requirements of an enforceable contract.
Each party to a contract must have legal capacity to enter it. That is, each party must have the legal authority to bind herself or her organization in contract, as appropriate, and thereby assume whatever rights and liabilities the contract specifies. Each party to a contract must, of course, also be “competent” by virtue of being an adult, sober, and not under duress. Given this book’s scope, the following examples focus on legal capacity rather than competence.
University X, a U.S. institution, employs Scientist X.
University X, through its counsel, files Patent Application X in the United States. The application claims a new genus of antiviral compounds and related therapeutic formulations and methods. It names Scientist X as the sole inventor. Scientist X is obligated under her employment agreement to assign her rights in the invention to University X. Despite this obligation, she does not do so. (Note: It is common for inventors not to assign their rights in an invention until after a patent application to the invention has been filed.)
Meanwhile, Company Y develops and markets antiviral drugs in the United States. Scientist X and Company Y’s CEO discuss collaborating to develop an oral formulation of compound X1, a species of the genus claimed in Patent Application X. Toward that end, Scientist X and the CEO sign a contract whereby Scientist X grants a license to Company Y under Patent Application X.
Scientist X does not have legal capacity to enter this contract with Company Y. She is obligated to assign her rights in the application to University X and has no right to license those rights to another party. Her contract with Company Y is not enforceable for at least this reason.
EXAMPLE 17.4
Assume the same facts as in example 17.3. Again, Company Y’s CEO and Scientist X discuss collaborating to develop an oral formulation of compound X1.
Now, however, Scientist X assigns her rights in the invention to University X. Moreover, Scientist X informs the university’s technology transfer officer of her discussions with Company Y and her desire to collaborate with it. The officer agrees that this work could help commercialize University X’s technology.
So, toward that end, an authorized officer of University X and the CEO of Company Y sign a contract whereby University X grants a license to Company Y under Patent Application X.
Both parties to this contract have legal capacity. The authorized officer of University X has the right to bind University X in contract by transferring rights to property that the university owns. Presumably, the CEO of Company Y has the right to assume payment and other obligations on the company’s behalf. This contract is enforceable, assuming that it satisfies the other requirements of an enforceable contract. (Note: As for Scientist X, she may also realize her goal of collaborating with Company Y by entering into a contract with the company, such as a consulting agreement. Importantly, though, any such contract must, among other things, comply with Scientist X’s existing obligations to University X.)
An enforceable contract must embody a meeting of the minds. Each party must accept the provisions that the other has offered. These elements are known separately as offer and acceptance and collectively as mutual assent.
EXAMPLE 17.5
Scientist A and Scientist B enter into a written agreement having a one-year term. Under Section 1 of the agreement, Scientist A will perform Experiment X and provide the results to Scientist B, all as defined in Appendix X of the agreement. Also under Section 1, Scientist B will pay Scientist A $30,000 within thirty days after Scientist B receives the results of Experiment X. Scientists A and B have legal capacity to enter this agreement, and Experiment X is lawful.
Three months later, Scientist A performs Experiment X and provides the results to Scientist B. Scientist B timely pays Scientist A $30,000.
Under Section 2 of the agreement, if Experiment X succeeds, Scientist B may request, in writing, that Scientist A perform a follow-up experiment, namely Experiment Y. The general nature of Experiment Y, a lawful experiment, is described in Appendix Y of the agreement. In this request, Scientist B must solicit from Scientist A a written proposed protocol for Experiment Y (proposed protocol) and a proposed fee for performing it.
Also under Section 2, if Scientist B provides to Scientist A written acceptance of the proposed protocol and fee, Scientist A must perform Experiment Y according to the proposed protocol and provide the results to Scientist B. Scientist B must then pay Scientist A the proposed fee within thirty days of receiving the results.
Three months after the completion of Experiment X, Scientist B requests, in writing, that Scientist A perform Experiment Y. In the request, Scientist B solicits from Scientist A a proposed protocol and fee.
In response, Scientist A provides to Scientist B, in writing, a proposed protocol for performing Experiment Y, and a proposed fee, namely $10,000.
Scientist B never accepts Scientist A’s proposed fee and protocol or otherwise acknowledges them. Nevertheless, without first informing Scientist B, Scientist A performs Experiment Y according to the proposed protocol and provides the results to Scientist B. Although Scientist B requested Scientist A to perform Experiment Y in the first place, Scientist A’s protocol—which Scientist B never approved—yielded results of no benefit to Scientist B. Scientist B does not make use of these results and informs Scientist A accordingly.
Scientist B never accepted Scientist A’s proposed fee and protocol and thus never accepted Scientist A’s offer regarding Experiment Y. There was no mutual assent between Scientists A and B regarding the performance of Experiment Y. For at least this reason, Scientist A cannot enforce Section 2 to compel Scientist B to pay the $10,000 fee.
EXAMPLE 17.6
Again, Scientist A sends Scientist B a written proposed protocol for performing Experiment Y and a proposed fee of $10,000.
Now, though, Scientist B accepts this offer in writing. Since Scientist B has accepted Scientist A’s offer, there is mutual assent between them, and Scientist B is obligated under Section 2 to pay $10,000 to Scientist A after receiving the results of Experiment Y.
An enforceable contract requires more than one party’s promise to do something of value for the other with nothing promised in return. Each party must promise something of value to the other, such as money, products, services, or rights. These things of value are called consideration. The element of mutual consideration requires that each party provide something of value to the other.
EXAMPLE 17.7
Assume the same facts as in example 17.2. Again, Biotech X is developing AbX as a candidate drug for treating melanoma, and the company has not yet submitted an IND for AbX. To further test AbX, Biotech X enters into a “contract” with Physician Y. Under the contract, Physician Y will perform in vitro experiments using human melanoma cell–based reagents and methods.
Here, though, Biotech X does not promise to pay Physician Y for her services or to provide her with anything else of value.
This arrangement lacks the element of mutual consideration. It is not an enforceable contract for at least this reason.
EXAMPLE 17.8
Now, though, the contract specifies that Biotech X will pay Physician Y a specified fee for her services.
Since each party has promised something of value to the other, there is mutual consideration. As such, this is an enforceable contract, assuming, of course, that it meets the other requirements for enforceability.
(Note: In a sense, a contract is a surrender of legal rights by the parties. So, for example, by agreeing to perform these experiments, Physician Y surrenders her legal right not to do so. Likewise, by agreeing to pay Physician Y, Biotech X surrenders its legal right not to do so.)
If a party to a contract fails to perform one of its contractual obligations, it has breached the contract.
EXAMPLE 17.9
Biotech Y wishes to retain the services of Biotech X for the manufacture and delivery of biologic drug Y1 in the United States. Biotech X prepares a contract to that effect. Under the contract, Biotech X agrees to produce 10 kg of pure Y1 and deliver it to Biotech Y within three months of the date the contract is signed. Biotech Y agrees to pay Biotech X $500,000 upon signing the contract and $1.5 million upon receiving the Y1.
The parties sign the contract on June 1, making Biotech X’s delivery deadline September 1. Biotech Y pays $500,000 to Biotech X on June 1.
Biotech X begins producing Y1. However, just before the delivery deadline, Biotech X discovers that through its own oversight, the 10 kg batch of Y1 it has just produced is contaminated. It would take more than one month to produce a new, pure batch of Y1 or otherwise deliver the required product to Biotech Y.
On September 1, Biotech X informs Biotech Y that owing to its own oversight, it cannot deliver any of the pure Y1 by September 1 as promised under the contract. Biotech X has breached the contract.
Depending on the facts, the breaching party may cure the breach if it can promptly take corrective steps.
EXAMPLE 17.10
Here, though, the contract has a provision governing the cure of a party’s breach. Specifically, if a party breaches the contract, it may cure its breach if it does so within thirty days.
Again, Biotech X breached the contract by failing to deliver 10 kg of pure Y1 to Biotech Y by September 1.
Now, though, Biotech X discovers the contamination problem earlier. Biotech X notifies Biotech Y of this development and tells Biotech Y that it can deliver 10 kg of pure Y1 to Biotech Y by September 8—one week late but within the thirty-day cure period.
On September 8, Biotech X delivers 10 kg of pure Y1 to Biotech Y. By doing so, Biotech X has cured its breach. (Note: Depending on the facts and the terms of the contract, Biotech X might be liable to Biotech Y for penalties stipulated in the contract and/or any monetary harm caused by this one-week delay.)
When an enforceable contract is breached and cure is not possible, the nonbreaching party can sue the breaching party to remedy the breach. Remedies come in several forms, both monetary and equitable. Equitable remedies are possible under special circumstances. For example, where monetary damages are inadequate, a court might grant specific performance to compel the breaching party to perform the acts promised under the contract.
The most common remedies, though, are monetary damages. A contract can stipulate, or fix, the monetary damages due in the event of breach. When a breached contract doesn’t stipulate damages, a court must determine the monetary damages instead. There are three kinds of monetary damages: expectation, reliance, and restitution. Each is based on a different legal theory. These theories yield different, yet ideally fair, outcomes.
Expectation damages are forward looking. Damages under this theory place the nonbreaching party in the same financial position that it would have been in had no breach occurred. Expectation damages are the preferred form of monetary damages.
Also assume that Biotech Y expects to sell the 10 kg of Y1 for $10 million and thereby earn a profit of $8 million. Biotech Y’s expected $8 million profit is determined by subtracting from its expected $10 million income the $500,000 already paid to Biotech X and the $1.5 million it would have paid to Biotech X had no breach occurred. Economic data show that Biotech Y’s profit expectation is accurate.
Again, on September 1, Biotech X informs Biotech Y of its breach. Biotech X is unable to cure it, and Biotech Y is unable to mitigate its loss by obtaining pure Y1 from another source. Given Biotech X’s breach, Biotech Y does not pay it the $1.5 million it otherwise would have.
In this situation, expectation damages would be $8.5 million. This amount is the sum of $8 million in expected profit plus the $500,000 already paid to Biotech X. This sum would make Biotech Y $8 million richer than it was before entering the contract. By doing so, it would place Biotech Y in the same financial position that it would have been in had Biotech X not breached. (Note: It is common for contracts to specify the amount of monetary damages to be paid in the event of a breach. Under certain circumstances, including a liquidated damages clause in a contract is preferable to the alternative of relying on economic data to establish expectation damages.)
When a contract is breached and does not specify monetary damages, it is not always possible to determine those damages by looking forward. This is because it is not always possible to ascertain what financial position the nonbreaching party would have been in absent the breach.
In such cases, the reliance theory provides relief when the expectation theory cannot. The reliance theory looks back in time rather than forward. Specifically, reliance damages place the nonbreaching party in the same financial position that it would have been in had it never entered the contract.
EXAMPLE 17.12
Now, though, Biotech Y merely hopes to sell the 10 kg of Y1 for $10 million and earn a profit of $8 million. There are no economic data showing that Biotech Y’s desired profit is realistic. There are no economic data establishing a different profit that Biotech Y could reasonably expect, either.
Biotech Y also promptly spends $100,000 to modify its storage facilities in anticipation of its activities regarding Y1.
Again, on September 1, Biotech X informs Biotech Y of its breach. Biotech X is unable to cure it, and Biotech Y is unable to mitigate its loss by obtaining pure Y1 from another source. Given this breach, Biotech Y does not pay Biotech X the $1.5 million it otherwise would have.
Reliance damages would be $600,000. This award would place Biotech Y in the same financial position it would have been in had it never entered the contract. The award would do this by returning to Biotech Y the $500,000 paid to Biotech X and the $100,000 spent on storage preparation. Simply put, $600,000 replaces the money that Biotech Y spent relying on Biotech X’s promises under the contract.
Like reliance damages, restitution provides relief by looking back in time. Rather than returning the nonbreaching party to its pre-contract financial state, however, restitution does this with respect to the breaching party. That is, it returns the breaching party to its pre-contract financial state by relieving that party of its gains under the contract. Restitution, while technically not a contract remedy, prevents the breaching party’s unjust enrichment.
Assume the same facts as in example 17.12. Again, Biotech Y pays $500,000 to Biotech X upon signing the contract. And Biotech Y promptly spends $100,000 to modify its storage facilities in anticipation of its activities regarding Y1.
Now, though, before expending any effort or resources on preparing Y1, Biotech X discovers an equipment flaw that prevents it from making Y1. Biotech X informs Biotech Y of this problem. Biotech Y does not pay it the $1.5 million it otherwise would have if Biotech X had performed its obligations under the contract.
Restitution would be $500,000. This is the amount by which Biotech X—the breaching party—was unjustly enriched. A restitution award of $500,000 would prevent this enrichment and place Biotech X in the same financial position it had been in before entering the contract. Importantly, this restitution award is less than the $600,000 reliance damages that would place Biotech Y in the same financial position it would have been in had it never entered the contract.
Every contract is different. It serves a specific purpose in a specific way via specific language. This language takes the form of provisions, also called articles or clauses. In a contract, a provision describes a facet of what the contract does.
The typical contract has many provisions, one or more of which are central to its purpose. For example, a grant clause would be central to its corresponding patent license. Likewise, details of a collaboration would be unique to its corresponding agreement.
There is much more to a contract, however, than the provisions central to it—more to the patent license than its grant clause and more to the collaboration agreement than the details of the collaboration itself. Namely, there is a host of provisions common to many contracts, if not most. These provisions are ubiquitous for good reason. Though they may not define the contract’s raison d’être, they do provide the context for the rights granted and obligations assumed. They also help set the contours for how parties will perform their contractual duties, what will happen when they do, what will happen if they fail to do so, and how and when those duties will cease to exist.
It is beyond the scope of this book to list those provisions encyclopedically, let alone to discuss the features of each. Instead, we briefly identify a few general provisions and the key matters they address.
Then, in the next chapter, we explore a select few contract types vital to biotechnology. For each, we focus on the provisions at its core and the concepts they embody. Where appropriate in that chapter, we also discuss in greater detail some of the following general provisions, such as confidentiality and patent rights.
When parties exchange legally binding promises, they already have reasons for doing so. Those reasons form the basis for the contract they are entering, specifically for the rights and obligations they assume by entering it. It is only logical, then, that a contract begin with a section, often called “Recitals,” devoted to telling the parties’ story. Recitals make clear where the parties have been and where they are now. They describe who the parties are, what they do, what they have already done together, and what they now do together. For example, have the parties conducted joint development? Do they have a confidentiality agreement or a research agreement in place? Does one of the parties have a legal obligation to a third party, such as a duty to assign patent rights? The contract provisions that follow the recitals either accommodate or supersede any preexisting rights and obligations that the recitals identify.
Contract language matters, just as patent language does. Absent an agreed-upon definition, parties can reasonably construe a key contract term more than one way. And it is easy to see how construing term like develop, product, or net sales one way versus another could alter a party’s financial position by millions of dollars.
To address this problem, contracts typically have a section for defining terms for which added clarity is appropriate. It is not uncommon for this contract section to include more than one hundred definitions.
The larger and more complex a contract’s obligations are, the more important it is to know who will call the shots. Will one party control all facets of all projects performed under the contract? Or, will that party control only some facets of some of those projects? Provisions governing control answer these questions. Simply put, they make clear which parties and/or individuals have the power to make what decisions. We explore this topic further in the next chapter regarding collaboration agreements.
A contractual endeavor such as the development of a drug is, in essence, a joining of existing resources in the hope of creating new ones. Materials, know-how, and patent rights exemplify these resources. It is vital to agree at the outset on who already owns what resources and who will own what resources if and when they come into existence. Ownership provisions in a contract do just that. We explore them in the next chapter, again when discussing collaboration agreements.
Ownership of patent rights is a special subset of ownership generally. Particular attention is paid, for example, to who will own inventions arising from work performed under a contract. As a related matter, it is also important to clarify who will control the process of obtaining and asserting patents on such inventions and the circumstances under which that control will be exercised. Patent provisions, often included in a section titled “Intellectual Property,” govern such matters, as will be discussed in the next chapter.
As one would expect, a contract specifies who pays whom, when, how much, and on what conditions. A contract’s payment provisions do this. Payments can take several forms, such as up-front payments, milestone payments, and royalties. We explore these in the next chapter.
Most endeavors between companies, institutions, and individuals involve sharing confidential information. Thus, contracts governing these endeavors have provisions ensuring that confidential information remains so. In the next chapter, we discuss confidentiality agreements and confidentiality provisions appearing in larger agreements.
One feature of a well-written contract is that it takes into account what can go wrong regarding each party’s performance and addresses those risks head on. For example, it would be reasonable for a patent licensee to want an explicit assurance that the licensor in fact owns the licensed patents. It would also be reasonable for the licensee to want assurances that the licensor has the right to grant the license in question (e.g., that the licensor has not already granted all of its patent rights to another party). And it would be reasonable for the licensee to want assurances that the patents being licensed are not being challenged in an ongoing litigation. Warranties, also called warranties and representations, are a vehicle for addressing these concerns and many others.
There is another risk that contracts address, and it relates to liability. Assume, for example, that a start-up were to enter a license agreement with a drug company whereby the drug company would develop and sell an antibody drug covered by the start-up’s patents. Also assume that, years later, the drug company begins selling the antibody drug, and a patient sues the start-up (and the drug company, of course) for harm caused by it. The start-up would reasonably want assurances that if it were sued for this reason, the drug company would be monetarily responsible for any damages awarded and other costs incurred. Indemnification provisions provide this assurance. Their scope varies according to the liability risks in question.
All good things end. Contracts are no exception. Typically, a contract has a “Termination” or “Term and Termination” section. This section states when the contract’s term begins and ends. It also states who may terminate the contract and why. The next chapter covers this topic further.
Contract drafting is the province of attorneys. They draft these documents using specialized knowledge and skills gained through years, and often decades, of practice. Certain guiding principles form a part of that expertise. Of these, there are at least two that clients—that is, the contracting parties themselves—would do well to keep in mind.
Industrial parties to contracts, such as companies, universities, and research institutes, usually remain the same for decades. Not so, the people who form those parties. Years after negotiating and signing a contract on behalf of an institutional party, the officer of that party will likely be elsewhere and no longer affiliated with it. Often, the people who negotiate and sign a contract today are not the same people who ultimately must abide by its terms. They often are not the same people who might breach it or enforce it. Put differently, those who negotiate and sign a contract obligate their successors to carry out its provisions, as much as they obligate themselves to do so. Rather than an exercise in gauging the integrity and reliability of those in the room when a contract is entered, negotiating and drafting the contract is instead an exercise by each side in protecting its interests against acts by those in the future whose integrity and reliability cannot be gauged. This sobering fact helps those on each side foresee failures and misdeeds by those on the other and then address them.
Many things must go well for a contract to achieve its purpose. It must set forth a venture between the parties that makes sense. And it must have the elements of an enforceable contract.
To succeed, though, a contract must also embody linguistic and logical precision. This precision is not reached quickly, and the tedious road to it can frustrate even the most patient clients. For example, a contract has many interconnected parts. The larger the contract, the more of these parts there are. When drafting a contract, the attorney must track each of its parts and must also track the relationship of that part with every other part. When an attorney changes one part of a draft contract, she must also determine if, and how, that change affects each other part and revise the draft accordingly.
A contract must reflect an attorney’s mastery of word choice, grammar, and internal consistency. It must also rigorously address logistical permutations. In short, details matter, and a contract’s success or failure can hinge on them.