G. Hudson wrote an article about the litigation between PharmAthene (NPIP) and SIGA Technologies (NASDAQ:SIGA) that attempted to refute arguments that I made here. I wrote a response, and he just wrote a counter-response. Now I am returning the favor. Of course, we are doing this to distract ourselves from the agony of waiting for the Vice Chancellor's next step. Below, I acknowledge the accuracy of one of Hudson's criticism, compliment him for a fine paragraph, and challenge three of his key points that relate to what the judge will do.
I Acknowledge the Accuracy of One of Hudson's Criticisms
In my rebuttal, I acknowledged that the following statement was irrelevant, but nevertheless said, "SIGA's action comes very close to [meeting] the criteria for tortious interference." Saying that was not only unnecessary, but it also was stupid. Hudson didn't call me out for being stupid, but rather for being ignorant. He said, "Tortious interference involves a third non-contractual based party interfering with a plaintiff's business." I didn't know that. Thank you, Sir, for enlightening me.
A Tip of the Hat to Hudson for a Well-Written Paragraph
G. Hudson is a CPA. Drawing upon his expertise, he summed up clearly and concisely a number of difficulties that Parsons would face if he tried to once again impose an income stream remedy. Well done! No wonder the Vice Chancellor has taken more than six months.
Challenges to Hudson's Three Points That Relate to What the Judge Will Do
I will not comment on Hudson's sections regarding unjust enrichment and specific performance, since my main claim is that the bulk of Parson's remedy will involve an income stream. So here are the three Hudson points that I challenge below:
- When the Supreme Court said that Parsons must propose a "damages award consistent with this opinion," it meant that because it didn't cite cases dealing with payment streams, Parsons may not impose one.
- Investors should be scared because even Parsons acknowledges that the rationale for imposing an income stream in this case is weak.
- When it comes to citing precedents, the differences between this case and either Cura Financial Services or ID Biomedical are more important than their similarities.
Hudson Point #1: When the Supreme Court said that Parsons must propose a "damages award consistent with this opinion," it meant that because it didn't cite cases dealing with payment streams, Parsons may not impose one. I shall discuss the second part of this first: Because the Supreme Court didn't cite cases dealing with payment streams, Parsons may not impose one. Specifically, Hudson said, "I challenge anyone to find a legal case referenced within the Supreme Court's May 24, 2013 opinion that is about a damage award based upon an equitable damage payment stream."
I think Hudson meant that because the Supreme Court didn't cite any contract cases in its 2013 decisions containing language that supported equitable remedies such as income streams, such remedies were off the table. Technically, his factual assertion is wrong because on p. 18, the Supreme Court cited Hogg v. Walker (a contract case) in both footnotes 30 and 31. I said "technically," because the context in which this case was cited had nothing to do with what remedy was appropriate in SIGA v. PharmAthene.
Nevertheless, in Hogg v. Walker, the thrust of the Supreme Court's closing statement required judges to use their imagination to design appropriate remedies: "[T]he trial court has broad latitude to exercise its equitable powers to craft a remedy. Its failure to do so . . . here was an error of law."
I challenge Hudson's claim that Parsons can't impose an income stream because the Supreme Court didn't say that he could. Why didn't they say that he could? Because they were not reviewing the substance of the remedy. They only criticized his rationale (see below). Re-read the excerpt that Hudson quotes from pages 30 to 38 of the Vice Chancellor's ruling. They all lead to one conclusion, which is spelled out in the third bullet below.
If we take out the part of the claim that said that Parsons could only impose remedies in the form that the Supreme Court endorsed (when in fact, it didn't endorse any), Hudson's claim boils down to this: "When the Supreme Court said that Parsons must impose a 'damages award consistent with this opinion,' it meant that Parsons may not impose an income stream." To evaluate the validity of this claim, review the SC's four findings:
- SIGA breached its contractual obligation to negotiate in good faith.
- Promissory estoppel doesn't apply and because it doesn't, he it must base his remedy on contract law.
- Expectation damages are appropriate in contract cases such as this.
- Parsons made findings of fact, supported by the record, (1) that had SIGA not breached its contractual obligation, the two parties would have consummated a definitive license agreement with economic terms substantially similar to those in the LATS, and (2) that after the two contracts were signed, the parties expressed willingness to make minor adjustments in the economic terms of the LATS.
So when the Supreme Court said that the Vice Chancellor's remedy had to be "consistent with this opinion," it meant that it could not be inconsistent with any of the four bulleted points. Please note that it is not inconsistent with any of them to impose a remedy in the form of an income stream.
Hudson Point #2: Investors should be scared because even Parsons acknowledges that the rationale for imposing an income stream in this case is weak. Hudson says: "Judge Parsons doesn't have a lot of confidence in his ruling . . . This is Judge Parsons' first sentence of the section titled- "EQUITABLE PAYMENT STREAM": 'Admittedly, there is little precedent to aid this Court in fashioning an appropriate remedy for the breach SIGA committed.' The fact that Judge Parsons is willing to hang his hat on some remotely supported basis such as . . . as he discusses on page 87 . . . , establishing a quasi-contractual obligation to support the possibility of using some type of equitable payment stream to award damages, should scare both SIGA and PharmAthene investors since the Supreme Court will be making the final decision as to the appropriateness of his ruling."
But the term "quasi-contractual obligation" only appears in a quote relating to constructive trusts (one form of income stream). In his immediately following sentence, Parsons drives home his take-away point: "The design of a constructive trust is not 'to effectuate the presumed intent of the parties, but to redress a wrong,' and, in this way, '[i]t is an equitable remedy of great flexibility and generality.'" To assess the Vice Chancellor's confidence in his income stream remedy, pair this just quoted passage with this statement on the previous page:
"These concepts must be considered in the context of the maxim of equity that '[e]quity will not suffer a wrong without a remedy.' To that end, the Court of Chancery will award 'such relief as justice and good conscience may require' and 'has broad discretion to form an appropriate remedy for a particular wrong.'"
Hudson Point #3: When it comes to citing precedents, the differences between this case and either Cura Financial Services or ID Biomedical are more important than their similarities. I return to apples and oranges. Hudson says that while they both obey the laws of gravity, they are different. But my point is that even though apples are smooth and oranges have a tough skin and are organized in sections, they act the same when rolled down an inclined plane. In plain English, PharmAthene's argument is not that Parsons may impose an income stream because other judges imposed an income stream in similar contract cases. Instead, it was to refute SIGA's claim that there were no Delaware contract cases in which income streams had been imposed.
Once you have proved that income streams have been imposed before in contract cases, you have proved that it is a legitimate form to impose in subsequent contract cases. It doesn't matter whether the particular cases in which they were imposed are similar. It only matters that the facts of the case make imposing such a remedy appropriate.
Of course, even if there were no contract breach cases in which expectation damages had been imposed in the form of an income stream, it is important to keep in mind the passage quoted above from page 86 of the Vice Chancellor's 2011 order:
"[T]he Court of Chancery will award 'such relief as justice and good conscience may require' and 'has broad discretion to form an appropriate remedy for a particular wrong.'"
Hudson succeeded in spooking some investors by claiming that the Supreme Court opinion contained no cases that held that Parsons could impose an income stream remedy, when it would have been inappropriate to have been included any (given that the Supreme Court's message was that in the next round, his remedy justification must not mention or depend on promissory estoppel). Hudson claimed that Parsons recognized that he was on shaky ground when in fact he repeatedly maintained that he has broad discretionary powers. And Hudson is arguing that there are differences between precedent-setting cases when there is no need for them to serve as a precedent to anything but the proposition that in contract cases, the Chancery Court may impose an income stream remedy.
On balance, mischaracterizing what Parsons and the Supreme Court said and engaging in faulty reasoning is not persuasive.
Vice Chancellor Parsons, save us from going around Robin Hood's barn again!
Disclosure: The author is long PIP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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