Alto v. Sun Pharmaceutical Industries, Inc.

Background

The plaintiffs were the former owners of Pharmalucence Inc., which Sun acquired under an Equity Purchase Agreement governed by New York law. The agreement provided for a $70 million payment at closing and up to $30 million in additional milestone payments tied to regulatory events involving pharmaceutical products.

The agreement’s milestone schedule allowed Sun, in its sole discretion and after written notice, to reprioritize or substitute products. It stated that the first four products “filed” from the facility would be subject to the milestones and that substitute products could receive the milestone payments associated with the products they replaced. The agreement also required Sun to continue in good faith developing and filing products if Sun materially reduced the facilities’ capacity in a way that affected the ability to file four products.

After the Halol Facility in India was found non-compliant with Food and Drug Administration standards, products made there could not be shipped to the United States for a period of time. Sun transferred production of certain Halol products to Pharmalucence’s Billerica facility. The plaintiffs alleged that this transfer competed with Pharmalucence’s existing projects and led to the de-prioritization of tetrofosmin. They claimed that the transferred products should have been treated as substitute products under the milestone schedule.

The amended complaint asserted six counts. Count I sought a declaration that the first four products from the Pharmalucence facility triggered milestone payments and that no formal written substitution was required. Counts V and VI alleged, respectively, that Sun breached the agreement’s commercially reasonable efforts provision and the implied duty of good faith and fair dealing by refusing to develop tetrofosmin or recognize substitute products. Sun moved to dismiss Counts I, V, and VI under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not adequately state a legal claim.

Court’s analysis

For Count I, the court held that the requested declaration was inconsistent with the unambiguous contract language. The agreement referred to the first four products “filed” from the facility, and the milestone provisions tied payment to filings or approvals. Because the amended complaint did not allege that the products transferred from the Halol Facility had been submitted for approval, the court concluded that those products could not qualify as substitute products that triggered the milestones on the allegations presented.

The court also concluded that the plaintiffs were attempting to use the substitution provision to address conduct covered by a different contractual provision concerning material reductions in manufacturing or development capacity. The court therefore granted Sun’s motion as to Count I and denied the plaintiffs leave to replead because doing so would be futile.

For Count V, the court held that the plaintiffs plausibly alleged that Sun failed to use commercially reasonable efforts under Section 5.2 of the agreement. Whether Sun’s refusal to resume or reprioritize development of tetrofosmin was commercially reasonable presented a factual question. The court therefore denied Sun’s motion as to Count V.

For Count VI, the court held that the plaintiffs plausibly alleged a breach of the implied covenant of good faith and fair dealing. The court rejected Sun’s arguments that the plaintiffs’ allegations foreclosed the claim or made it duplicative of the contract claim. Because it was unclear whether the agreement’s specific provisions covered the dispute, the plaintiffs could pursue the claim at this stage. The court therefore denied Sun’s motion as to Count VI.

Disposition

Judge Gregory H. Woods granted Sun’s motion to dismiss as to Count I and denied the plaintiffs leave to replead that count. He denied the motion as to Counts V and VI. The opinion did not resolve whether Sun ultimately breached the agreement or the implied covenant; it ruled only on whether those claims could proceed past the dismissal stage. The Clerk was directed to terminate the pending motion.