Meso Scale Diagnostics v. Crescendo Biosciences (Cir. Ct. Mont. Cnty.)

Filed: November 29, 2017

Opinion by: Judge Rubin

Holding:

The post-termination materials requirements contract provision was enforceable despite it being removed during negotiations. In resolving a contract dispute, governed by Delaware law, the court may consider extrinsic evidence of the parties’ intentions.

Facts:

William Hagstrom (“Hagstrom”) formed Defendant in 2007 to commercialize Vectra DA, a test for rheumatoid arthritis.  On March 2, 2009, Defendant accepted Plaintiff’s proposal to evaluate the Vectra DA test’s viability.  The parties began to negotiate for a long-term supply agreement in 2010 after the development phase.  Both parties were invested in their relationship for the long-term, and Defendant knew that Plaintiff wanted to share in the long-term success of Vectra DA. Hagstrom understood that Plaintiff would not move forward with signing the agreement without some means of sharing in the upside potential if the product was commercially successful.

Section 10.1 of the Purchase Agreement contained the post-termination provision.  The Court found Plaintiff’s General Manager’s, Jim Wilbur’s (“Wilbur”), testimony more credible than Hagstrom’s testimony regarding Wilbur explaining Section 10.1 to Hagstrom.  Hagstrom denied Wilbur explained it and further argued that he never intended Defendant to be bound to deal with Plaintiff after the contract’s termination.  During the negotiation process, the provision was removed and re-inserted at least once, but the agreement that Hagstrom signed on April 2, 2012, included Section 10.1. 

On April 21, 2016, Defendant notified Plaintiff that it intended to terminate the agreement effective on April 30, 2018.  Plaintiff sued Defendant on May 23, 2016. (see the opinion for litigation details).

Analysis:

In Delaware, the parties’ subjective expressions are considered when a contract is negotiated between parties on an equal footing and the contract/provision is ambiguous.  SIManagement L.P. v. Wininger, 707 A.2d 37 at 43 (1998).  Extrinsic evidence that is considered “must speak to the intent of all of the parties to the contract.”  Id.  In addition, contracts “should be read to give effect to all its provisions and not to render any part of it ineffective.”  Restatement (Second) of Contracts § 203(a) (1981).

The Court acknowledged that Hagstrom was a “seasoned biotech entrepreneur with more than three decades of executive and board-level experience”, having raised $100 million for Defendant from venture capital firms.  In addition, the contract was reviewed by a global law firm.  The Court found Section 10.1 was a “business compromise” and the materials requirement was a “central element of the bargained for exchange”.

The full opinion is available PDF.

Neitzey v. Allen (Cir. Ct. Mont. Cnty)

Filed: August 31, 2017

Opinion by: Judge Michael D. Mason

Holding:  A covenant not to solicit clients that is overbroad on its face will be interpreted based on the wording of the agreement and is not partially enforceable if the employer voluntarily commits to limit its right of enforcement to only those remedies necessary to protect the employer’s legitimate business where such partial enforcement is not achievable based on the wording of the agreement. 

Facts:  A former employee sued his former employer to have certain restrictive covenants stricken from his employment agreement as overbroad.  At issue was a non-solicitation provisions that restricted the former employee from soliciting and accepting business from any customer of the former employer.  The term “customer” was not defined in the employment agreement and was not limited to customers of the former employer during the former employee’s employment by the former employer.  The former employer offered to restrict the meaning of “customer” to those with whom the former employee had personal contact while employed by the former employer. 

Analysis:  The court held that the former employer’s offer to limit enforcement of the non-solicitation provision could not save the provision from being declared unenforceable.  After a lengthy discussion of Holloway v. Faw, Casson & Co., 78 Md. App. 205 (1989) (“Holloway”), Holloway v. Faw, Casson & Co., 319 Md. 324 (1990), and Fowler v. Printers II, Inc., 89 Md. App. 448 (1991), the court agreed with the Court of Appeals in Holloway, that the enforceability of the non-solicitation provision at issue turned on its internal severability.  The non-solicitation provision at issue was not internally severable because, without some measure of damages on a client-by-client basis similar to the liquidated damages clause in Holloway*, there was no way to establish separate damages for clients with whom the former employee had personal contact and the other clients of the former employer.  Therefore, the non-solicitation provision could not be enforced even if the court limited enforcement in the manner proposed by the former employer.

* In Holloway, the non-solicitation provision was accompanied by a liquidated damages provision equal to 100% of the prior year’s fee for any clients solicited in violation of the non-solicitation provision.

Full text of opinion available here.

Comptroller of the Treasury v. Jalali (Ct. of Special Appeals)

Filed: January 31, 2018

Opinion by: Judge James A. Kenney III

Holding: The Court of Special Appeals held that: (1) the question of whether advances of money to a business are considered debt or equity (the “debt-equity” question) is a mixed question of law and fact; (2) in deciding the debt-equity question, the Maryland Tax Court applied correct legal principles and properly evaluated the relevant facts and circumstances when it found that a taxpayer’s advances of money to business entities were advances of debt; and (3) the Court of Special Appeals would not consider an issue not raised by the Comptroller before the Tax Court because, on judicial review of administrative agency decisions, the Court of Special Appeals is restricted to the record before the agency and generally does not consider issues not encompassed in the agency’s final decision (although the Court went on to find that a taxpayer’s advances constituted bad business debt because the record supported a finding that the taxpayer’s dominant motivation for making the advances was to protect his employment).

Facts: Taxpayer made several advances to businesses he owned or in which he had an ownership interest. Each advance was documented by a written promissory note containing a loan amount, loan period, interest rate, and other repayment terms. The interest and repayment terms of the notes were not strictly complied with or enforced. None of the advances were secured. Ultimately, the businesses failed and the advances were not repaid. Taxpayer filed amended tax returns with the Maryland Revenue Administration division and the Internal Revenue Service for the relevant tax year. The amended returns reported the unpaid advances as unreimbursed business expenses and sought a resulting carried-back net operating loss and tax refund. The Comptroller rejected the returns. Taxpayer requested a final determination, and the Comptroller issued a Notice of Final Determination denying the requested refunds, in part, because (i) proof of acceptance of one applicable return by the IRS had not been provided; and (ii) the advances were not bona fide loans. Taxpayer appealed to the Maryland Tax Court, which reversed the Comptroller’s determination and granted the requested refunds. The Comptroller filed a petition for judicial review, and the Circuit Court for Anne Arundel County affirmed the Tax Court. On appeal by the Comptroller, the Court of Special Appeals affirmed the Tax Court’s decision.

Analysis:  The Court of Special Appeals first held (in contrast to Fourth Circuit precedent) that the debt-equity question is a mixed question of fact and law. Therefore, the Court limited its review of the Tax Court decision to determining whether “a reasoning mind reasonably could have reached the factual conclusion that the Tax Court reached”. Applying this standard, the Court found that, in addressing the debt-equity question, the Tax Court properly evaluated the facts of the case in light of many of the factors deemed relevant by applicable case law, including the adequacy of capitalization of the businesses, availability of outside financing, the presence of written promissory notes, the presence of stated loan terms, the unsecured position of the advances, the failure of the businesses to comply with interest and repayment terms, the taxpayer’s subjective intent, and the source of repayments. The Court then addressed the Comptroller’s claim that, even if the advances at issue were debt, the advances were non-business bad debt and therefore not deductible. The Court held that it would not consider the argument because it had not been raised before the Tax Court, noting that “[o]n judicial review of administrative agency decisions, we do not ordinarily ‘pass upon issues presented to us for the first time on judicial review.’” Nevertheless, the Court went on to find that there was sufficient evidence in the record that the taxpayer’s “dominant motivation” in making the advances at issue was to protect his employment, and, as such, the advances constituted deductible bad business debt.

The full opinion is available in PDF.