Life sciences disputes
The cross-border nature of life sciences collaborations provides a fertile ground for disputes, with subject-matter spanning jurisdictions, often with very different markets, cultures, regulatory systems and laws. This is further complicated by changes in market conditions that inevitably arise during the lifetime of a collaboration.
Disputes can arise from a myriad of issues and across many types of transactions, from licensing and M&A to research and development collaborations or manufacturing and supply arrangements, and can occur at any stage in the post-signing relationship. Disputes may arise from issues spanning the failure to complete an M&A transaction to those covering the ownership of co-developed intellectual property (IP) or stock-outs caused by a contract manufacturing organisation’s failure to perform.
The most notable disputes, weighted in terms of frequency and value, tend to be those relating to the achievement or otherwise of milestones linked to the development or commercialisation of an acquired or licensed molecule, commitments which are often linked with a party’s obligation to make commercially reasonable efforts (CRE), further discussed below.
Recently, the fallout from the COVID-19 pandemic and regulatory changes in various jurisdictions have further prompted disputes.
The contracting phase: CRE clauses
Before entering into any contract, parties should conduct thorough due diligence on each other, the assets that are intended to form the subject matter of the proposed arrangement and the regulatory environment in which the assets operate. That initial work will serve to inform the nature of the collaboration and obligations going forward.
When negotiating a collaboration, the priority for a business development manager or in-house lawyer is to agree clear and unambiguous rights that can be readily enforced. Bearing in mind that for contracts spanning several years, it is not unusual for those who negotiated the contract to move on, leaving successors to perform the obligations based solely on the wording of the contract.
A common source of dispute is the CRE obligation requiring a party to make commercially reasonable efforts to achieve an outcome. A co-developer might hold its counterparty to CRE obligations to make expenditure or achieve progress. An IP rights holder might claim that a manufacturer or distributor has not used CRE to produce or promote/distribute the product. A seller may hold a buyer to CRE obligations to achieve certain milestones that would trigger earnout payments for the seller.
CRE clauses do not stipulate that a party must achieve precise metrics, such as sales, spending or work targets. Such precision might be considered impossible during a long-term collaboration. Instead, CRE clauses may state that a party must use CRE to achieve those metrics. However, this flexibility also opens the door to debate and disagreement further down the line as to whether this standard has been met.
Parties may want to limit ambiguity in CRE clauses by defining what is meant by CRE in the contract or, more specifically, what conduct would not constitute a breach of CRE. But even when the concept of CRE is defined in a contract, it is usually by reference to broad standards. This might be an objective test, for example, conduct that may be reasonably expected given a drug’s potential, stage of development and other market circumstances. Alternatively, it may be subjective, for example, stipulating the same diligence that the performing party took in relation to its own drugs.
In either case, if a dispute arises, the parties will need to lead evidence to prove their case on whether the expected standard of CRE has or has not been achieved, which may involve adducing expert evidence as to market practice or witness evidence as to prior conduct. For cross-border transactions, parties should bear in mind that standards in different jurisdictions may vary, so it is important to have a meeting of minds when determining CRE standards.
The contracting phase: Dispute resolution clauses
While it is important to negotiate strong substantive protections, it is equally necessary to agree a robust mechanism to enforce them. In Asia-related collaborations, this usually means agreeing to international arbitration.
Arbitration offers a host of advantages to court litigation when it comes to resolution of cross-border life sciences disputes.
- Arbitration is independent and offers participants dispute resolution in a neutral jurisdiction and before an independent tribunal without giving either party ‘home court’ advantage. This can be necessary given the sometimes politicised nature of the life sciences industry.
- Arbitration is flexible, meaning that for highly technical disputes, such as those commonly found in the life sciences industry, it is possible to appoint arbitrators with relevant and appropriate technical expertise.
- Moreover ‒ and essentially for parties in an industry where confidentiality of know-how and a reputation as a good collaboration partner are of the utmost priority ‒ arbitration is confidential. This means IP can be protected, and companies can avoid harming their wider strategic priorities by having their confidential information, including their prior track record, inadvertently revealed in public through witness testimony and production of evidence, amongst other things.
- Most importantly, arbitration awards are routinely enforceable across borders by virtue of the widespread adoption of the New York Convention on the reciprocal enforcement of arbitral awards. This is particularly important for Asian collaborations given there is no pan-Asian equivalent for court judgments.
Executives or in-house counsel wishing to minimise the likelihood of disputes sometimes insert a stepped or escalation clause into their arbitration agreements. These clauses, which require parties to undergo negotiation or mediation prior to formally resolving disputes by arbitration, can sometimes lead to settlement. However, they should be drafted clearly so that bad faith actors cannot exploit ambiguity to thwart claims by seeking to delay pre-arbitration phases.
The operational phase: Communication and reporting
At the operational phase, the priority is to safeguard the relationship while preserving rights.
Long-term life sciences collaborations involve a host of milestones and reporting, notification, governance and consultation obligations. Often, these duties overlap, with one party’s performance contingent upon another’s.
Organizations with strong alliance management functions, staffed with appropriately experienced personnel that are empowered to make decisions, can effectively ‘head off’ disputes before they arise, as well as improve the collaboration experience for the counterparty. In practice, strong alliance management also means prioritising communication with partners and putting in place systems to enable reporting, consultation and meeting obligations to be met. This will also deliver reputational benefits for an organisation wanting to be seen as a ‘partner of choice’ for collaborations and other types of transactions in an industry where a good standing can be hard won but easily lost.
In the event a party finds it necessary to communicate unwelcome news, such as threats to milestones, sub-optimal trials or patient recruitment, it should first consult with lawyers to ensure its position is protected. In the same way, a party negotiating extensions of timeframes or relaxations in standards in favour of its counterparties should take legal advice to avoid waiving rights.
The dispute phase: Protecting and enforcing rights
When a dispute arises, swift action is needed to protect and enforce rights.
In-house lawyers and executives should take early legal advice from dispute resolution lawyers. Parties should appraise themselves early of the merits of the dispute, the validity or otherwise of the arbitration agreement and the pre-arbitration steps, if any, which must be taken before a valid claim can be advanced. This will put them in an advantageous position when it comes to settling the dispute through commercial negotiation or, if necessary, prosecuting or defending claims.
Parties should also get an early grip on documents and correspondence as part of evidence preservation preparation. Life sciences collaborations can be document-heavy and parties should take steps to identify and retain relevant documents and communications to ensure these are available if the dispute proceeds to arbitration. Parties should also implement internal management controls to limit the possibility of correspondence that could later compromise a claim or defence.
Finally, parties should consider interim relief, which can be an incredibly powerful tool to protect their rights. It may be possible to freeze or preserve counterparty assets or documents or obtain orders otherwise maintaining the status quo, pending the outcome of a dispute. In the life sciences context, this might be essential if there is a risk that a party might, for instance, withhold documents necessary to prove contested IP issues, enter into a rival collaboration or sell or dissipate proprietary IP.
Conclusion
Life sciences collaborations typically involve long-term obligations and can be complex, particularly when they involve cross-border transactions. Effective risk management requires action at every stage of the transaction life cycle. Experienced external counsel with a global platform can help organisations to ‘war game’ at the contracting phase, preserve rights at the operational phase and help set a strategy when disputes arise.
The above topics were discussed at a Reed Smith client roundtable titled “Navigating life sciences disputes in Asia”, which was held on 17 November 2022.
In-depth 2022-385
