October 19, 2017

Efforts Clauses: The Delaware Chancery Court Speaks!

Lawyers like to fight over whether a party to a contract has to exercise “best efforts,” “commercially reasonable efforts” or some other level of efforts – but as we’ve noted in the past, courts either don’t seem to distinguish between different versions of “efforts clauses,” or provide little guidance on how those versions might be different.

The bottom line is that there’s not a whole lot of helpful case law on “efforts clauses,” so when the Delaware Chancery Court weighs in on one of them, it’s big news.  This recent blog from Francis Pileggi reviews BTG International v. Wellstat Therapeutics Corporation, (Del. Ch.; 9/17), where the court interpreted a clause requiring a party to use “diligent efforts” to fulfill its contractual obligations.  Here’s an excerpt:

This case involved a distribution agreement between two pharmaceutical companies. BTG was the larger company and agreed to promote, distribute and sell a drug called Vistogard, that the smaller Wellstat did not have the resources to promote, distribute and sell.  After extensive negotiations, the parties agreed to a contractual definition of “diligent efforts” which BTG was required to employ in order to reach various sales goals for Vistogard.  In addition, the parties were required to work together to formulate and finalize a business plan that would describe the details for promoting, distributing and selling Vistogard.

The court found that BTG failed to hire a sufficient number of sales representatives and failed to devote other resources to sell Vistogard, but instead focused most of its efforts and resources on a completely different product in a different division of the company – – with instructions from the CEO to keep the costs flat related to Vistogard and not to increase the resources that were necessary to implement the business plan.

The court concluded that BTG did not meet the “diligent efforts” standard & breached the agreement by failing to comply with the agreed-upon business plan.

What makes this case different from many others is that the parties to this transaction negotiated a detailed definition of what the contract’s efforts clause was intended to require.  Here’s what they came up with:

Diligent Efforts means, with respect to a Party, the carrying out of obligations specified in this Agreement in a diligent, expeditious and sustained manner using efforts and resources, including reasonably necessary personnel and financial resources, that specialty pharmaceutical companies typically devote to their own internally discovered compounds or products of most closely comparable market potential at a most closely comparable stage in their development or product life, taking into account the following factors to the extent reasonable and relevant: issues of safety and efficacy, product profile, competitiveness of alternative products in the marketplace, the patent or other proprietary position of the Subject Product, and the potential profitability of the Subject Product. Diligent Efforts shall be determined without regard to any payments owed by a Party to the other Party (excluding the transfer price for supply of such Subject Product).

The court was able to latch on to that definition and use it in interpreting the scope of the obligations required under the contract – and the real takeaway from this case may be that if you want a court to take your efforts clause seriously, then you need make the effort to define exactly what it means in your contract.

Icahn Enterprises’ Jesse Lynn points out that his company still holds the record for the most amusing defined efforts clause out there. I think the man has a point. Check out Sections 7.1 & 7.6 of this purchase agreement – which say that “in determining whether such parties acted reasonably or in a commercially reasonable manner, such parties shall not be required to ‘drop everything’ or ignore their existing responsibilities to conduct their business. . .”

John Jenkins