Antitrust Law Daily Wrap Up, FRANCHISING AND DISTRIBUTION—D.N.J.: Teva’s breach of distribution agreement claims against Biogen survive, (Oct 15, 2024)

By Martin A. Steinberg, J.D.

Biogen claimed that prior suspension of the distribution agreement superseded Teva’s right to sell any drugs purchased prior to termination.

The federal court in New Jersey granted Defendant’s motion to dismiss the unjust enrichment claim but denied the motion as to the breach of contract and implied covenant of good faith claims in a case where Defendant Biogen International GmbH, as manufacturer, terminated its distributorship agreement with Teva Pharmaceuticals USA, Inc. to sell its generic drugs. Contrary to the contract, Biogen then forbade Teva from selling any drugs purchased prior to termination. In refusing to dismiss the breach of contract claim, the court found that the contract clearly gave Teva the right to sell its remaining inventory. The court dismissed the unjust enrichment claim because a remedy at law, namely the breach of contract claim, is available (Teva Pharmaceuticals USA, Inc. v. Biogen International GmbH, No. 2:23-cv-02491-MEF-JRA (D.N.J. Oct. 11, 2024)).

Background. The distribution agreement gave Biogen the right to terminate the agreement. Should that occur the contract gave Teva the right to “sell off” the drugs it had previously bought. Biogen, however, told Teva not to sell off any leftover Drugs, which left Teva with drugs that it purchased but could not sell. Biogen argued that it suspended the contract a few weeks before terminating it, and under the relevant suspension provision there were no drug sell-off rights. Teva sued to recover its damages for the unsold drugs. The complaint raised three claims: breach of contract, breach of the implied covenant of good faith, and unjust enrichment. Biogen moved to dismiss all claims.

Breach of contract claim. The court denied the motion as to the breach of contract claim because a motion to dismiss based on ambiguous terms should be decided by the jury. Only unambiguous terms are decided by the court. Biogen’s interpretation of the contract was that suspension (during which there are no sell-off rights) can run past and supersede termination (upon which there are sell-off rights). Under Delaware law, however, words in a contract generally take their common or ordinary meaning. Dictionaries are clear that suspension is a way station and termination is an end point. The court noted that it was hard to see Biogen’s proposed construction as one that “an objective, reasonable third party” would land on. Biogen’s interpretation would allow a suspension to keep going after a termination. But this appeared to be wrong since a termination is not a speed bump that a suspension can roll through.

A strings-attached manufacturer–distributor agreement was essentially what was agreed to by the parties since the contract allowed Biogen to terminate the agreement. A protection was built into the contract to address the possibility of this kind of at-will termination which plainly presented an especially large risk to Teva. In the face of this risk to Teva, the contract protected Teva from being stuck with the drugs it had bought and had on hand by being allowed to sell them off. Accordingly, the court observed that there would be no reason to include sell-off rights in the contract for an at-will termination if an endless suspension period could void them.

The contract provided that Biogen may suspend Teva’s right to distribute without terminating the contract. But it said nothing about Biogen suspending distribution rights while terminating the contract. The contract spells out those provisions that “shall” survive termination. But suspension is not listed as one of the things that can survive termination. Further, the contract stated that Teva “shall” be permitted to sell off any inventory of generic drugs in its possession as of the date of termination.

Breach of implied covenant claim. A court or a jury might not ultimately determine that Teva should prevail on its breach of contract claim, perhaps because it will find that the precise written terms of the contract had not been violated. But based on the same arguments that support the breach of contract claim, the same court or jury might potentially think Teva should win on its implied covenant claim. Under Delaware law, such claims do not depend quite so much on the contract’s strict words, and rest instead on the idea that “a party in a contractual relationship must refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the contract.” Wilgus v. Salt Pond Inv. Co., 498 A.2d 151, 159 (Del. Ch. 1985). A good deal of the breach of contract analysis zeroed in on possible “unreasonable conduct” by Biogen. That same analysis defeated Biogen’s motion to dismiss Teva’s claim for breach of the implied covenant.

Unjust enrichment claim. The court dismissed the unjust enrichment claim because, under Delaware law, such a claim can work only in the absence of a remedy provided by law. Here contract damages is such a remedy. Teva argued that the unjust enrichment claim should go forward because the contract, having been terminated, no longer exists. The question under Delaware law, however, was not whether the contract was terminated but whether the alleged wrong arose from a relationship governed by contract. When it does, Delaware courts have consistently refused to permit a claim for unjust enrichment. All the more so where sophisticated parties negotiated the contract.

The Case is No. 2:23-cv-02491-MEF-JRA.

Judge: Farbiarz, M.

Attorneys: Gabrielle Kelerchian (Shook, Hardy & Bacon L.L.P.) for Teva Pharmaceuticals USA, Inc. Daniel Mark Schwartz (McCarter & English, LLP) for Biogen International GmbH.

Companies: Teva Pharmaceuticals USA, Inc.; Biogen International GmbH

Cases: FranchisingDistribution NewJerseyNews