2 Pharma Connect, LLC v. Mission Pharmacal Company

Background

(RC) 2 Pharma Connect, LLC, a pharmaceutical broker, and Mission Pharmacal Company, a pharmaceutical company that develops and manufactures products as a contract partner for third parties, entered into a nondisclosure agreement and a proposal agreement concerning docosanol 10% cream. The proposal agreement required Mission to perform specified development activities, including stability testing on registration batches and assistance with an Abbreviated New Drug Application.

(RC) 2 initially sued Mission in December 2021, alleging that Mission had violated or intended to violate the nondisclosure agreement and had breached or intended to breach the proposal agreement. A central allegation was that Mission had not performed, or might not perform, required stability testing by specified deadlines. After receiving the complaint, Mission’s counsel told (RC) 2’s counsel that Mission had initiated testing for the first batch and planned to collect samples from two other batches. Mission confirmed that information in writing on December 29, 2021.

That night, (RC) 2 filed an amended complaint. It continued to allege that Mission’s refusal to grant an exclusive license showed an intent to misuse confidential information, alleged that Mission was not complying with the proposal agreement, and added an anticipatory-breach claim. (RC) 2 also filed an emergency request for a temporary restraining order, which it later withdrew. The court subsequently dismissed the amended complaint for failure to state a claim. At argument on that dismissal motion, (RC) 2 said it was no longer pursuing the anticipatory-breach claim.

Sanctions Motion

Mission sought sanctions under Federal Rule of Civil Procedure 11, 28 U.S.C. § 1927, and the court’s inherent power. (RC) 2 sought permission to file a sur-reply; the court denied that request because the proposed filing repeated an argument already made and would not change the result.

Rule 11

Rule 11 requires a party or lawyer presenting a pleading to have made a reasonable inquiry and to have a factual and legal basis for the filing. The court held that Mission’s request for Rule 11 sanctions was well-founded.

The court concluded that (RC) 2’s nondisclosure-agreement claim was based on speculation. Mission’s refusal to grant an exclusive license to its own technology did not, by itself, show that Mission intended to misuse (RC) 2’s confidential information or breach the nondisclosure agreement. The court also concluded that the refusal was not a clear and definite refusal to perform the proposal agreement.

The court further found that (RC) 2 lacked evidentiary support for alleging that Mission had failed to begin stability testing or would fail to complete it. Mission had confirmed that it had initiated the first batch’s required stability pull and was performing the testing, and had stated that it planned to pull samples for the other batches. The court found no basis for (RC) 2’s claim that Mission’s communications showed a breach of the proposal agreement.

The anticipatory-breach claim also lacked a basis when filed. The court reasoned that Mission’s earlier communications could not support that claim because Mission continued performing under the contract. It also concluded that the December 29 settlement communication did not clearly and definitely refuse future performance and could not itself be used as evidence of the claim’s validity under Federal Rule of Evidence 408.

The court therefore imposed Rule 11 sanctions. It determined that an award of the attorneys’ fees and costs Mission incurred defending against the amended complaint was necessary to reimburse Mission and deter similar conduct. The court did not set the amount immediately because Mission had not submitted records showing the dates, hours, attorneys, and work performed. Mission was directed to submit that documentation by September 28, 2022; (RC) 2 was given one week to respond; and the court stated that it would then determine the amount.

Section 1927 and Inherent Power

Section 1927 permits sanctions against an attorney who unreasonably and vexatiously multiplies court proceedings. The court held that sanctions under Section 1927 were not appropriate. Although the allegations were not made after a reasonable investigation and were unsupported by evidence, the record did not show that the amended complaint was filed in bad faith or for an improper purpose such as harassment or delay. The court found evidence that (RC) 2 was trying to ensure that Mission complied with its contractual obligations.

The court also denied sanctions under its inherent power. It found no particularized showing of bad faith, which was required for that type of sanction.

Disposition

The court granted in part and denied in part Mission’s motion for sanctions. It granted Rule 11 sanctions and deferred determining the amount of fees and costs. It denied the requests for sanctions under Section 1927 and the court’s inherent power. The court directed the clerk to close the sanctions motion and the motion concerning the proposed sur-reply.