Some journalists cover Middle East peace conferences, the Academy Awards, or the Super Bowl. I go to meetings of the American Tort Reform Association.
One reason to attend an ATRA gathering, other than the delicious muffins and piping-hot coffee (don’t spill and expect to sue!), is to hear about important business cases not yet prominent on most lawyers’ radar scopes. There’s one in California that has the likes of Apple (AAPL), Google (GOOG), Microsoft (MSFT), and Yahoo! (YHOO) all stirred up. The case involves an obscure-sounding dispute from the biopharmaceutical industry. The legal issues concern the relationship between parent corporations and subsidiaries and the calculation of prospective lost profits. Sounds dull, I know, but it’s really important. Trust me—I go to American Tort Reform Association meetings.
The background: In 2006, Asahi Kasei Pharma (3407:JP) of Japan made a licensing deal with CoTherix, a South San Francisco startup. CoTherix agreed to develop an Asahi angina drug called fasudil, which still needed testing and approval from the U.S. Food and Drug Administration. So far, so good.
In 2007, CoTherix was acquired by Actelion (ALTN:VX), a Swiss drug company that was intensely interested in another CoTherix product that already had FDA approval. Actelion ordered its new subsidiary to stop developing fasudil, citing risks of dangerous side effects. Asahi was not happy.
Enter the lawyers. Asahi, which got back its rights to develop fasudil, pursued arbitration against CoTherix, alleging breach of the licensing agreement. Asahi prevailed, and CoTherix paid about $90 million in damages, interest, and attorneys’ fees. Asahi was still not happy.
The Japanese company sued Actelion in state court in California, alleging that the Swiss acquirer of its former licensing partner “tortiously interfered” with the now-dashed licensing agreement. In 2011 a jury awarded the Japanese company hundreds of millions of dollars for the forgone profit potential of fasudil as well as punitive damages. The total tab, after a reduction by the trial judge, came to about $400 million—hardly chump change. The California Courts of Appeal, the state’s intermediate appellate body, affirmed the judgment last December. Now Asahi was pretty darned happy, but a whole lot of other companies were not.
Actelion has asked the California Supreme Court to review the case. The top state court has discretion to decide whether to do so. Actelion’s anxiety is easy to measure in terms of immediate damages. Why, though, have a series of other companies and trade groups—including TechNet, an alliance representing the notables I mentioned earlier—urged the state’s high court in “friend-of-the-court” filings to reverse Asahi’s victory?
Tech giants and other corporations that have grown by serial acquisition fear the Actelion precedent could expose them—at least in California—to open-ended liability over licensing disputes involving the smaller new-technology companies they are wont to gobble up like so many cocktail nuts. Acquirers can make a decent estimate of the contract-law costs of reneging on a new subsidiary’s licensing agreement in the fashion Actelion did. Actelion, recall, paid some $90 million in arbitration. “Tortious interference,” by contrast, is a more expansive legal theory that allows a jury to make what amounts to an informed (or not so informed) guess at the extent a victim has suffered.
The other issue that has an even wider array of companies riled up is the way that the Actelion jury was allowed to estimate the profits that Asahi claimed to have lost when its former licensing partner dropped development. Given the uncertainties about fasudil’s safety, according to Actelion and its supporters, there’s no way any jury could rationally come up with $400 million as the hypothetical lost profits.
The California Courts of Appeal “opened the floodgates to lottery-like damage awards by upholding the $400 million prospective profits award in this case,” says Richard Samp, chief counsel of the Washington Legal Foundation, a corporate-funded public interest law firm that urged the California Supreme Court to get involved. If the state’s top court “allows this judgment to stand,” Samp adds, “it will discourage companies from investing in California for fear of opening themselves up to crippling tort awards on the thinnest of speculative claims.”
Bottom line: One business, Asahi, likes what the California civil justice system has done on its behalf. Some other companies don’t like it at all. “Jackpot justice” or just plain old justice? Depends on your perspective. Either way, the tort reform mavens are on the edge of their seats.
UPDATE ON MARCH 13: The California Supreme Court announced that it will not hear Actelion’s appeal. Game over.