Breach of an option agreement: what’s the big deal? (Exelogen v The University of Birmingham)

The University of Birmingham entered into an exclusive option agreement with Exelogen, an American company, in relation to a new medical treatment for hypertension. The University intentionally breached the agreement in order to secure third party funding, and fully admitted this when Exelogen sued them. However, the High Court did not award any damages to Exelogen since the “lost opportunity” they were claiming was found to have no basis. In this article, Jeremy Isaacson and Ethan Ezra examine the facts of the case and the key practice points from the judgment.

Facts

A professor at the University of Birmingham (UoB) identified a new clinical treatment method for a form of hypertension. UoB then entered into an agreement with a Delaware-registered company called Exelogen, Inc. (Exelogen) under which Exelogen was granted an exclusive right to negotiate for a licence of UoB’s IP rights in the treatment, in return for Exelogen securing investment for the treatment’s clinical trials.

In November 2018, UoB entered into negotiations with another pharmaceutical company, long before the expiry of the exclusive arrangement with Exelogen, and ultimately assigned their IP rights in the treatment over to this third party. UoB did not dispute that they had breached the option agreement, but argued that their hand was forced because of their frustration at Exelogen’s inability to raise any funding as part of the arrangement.

Exelogen then sued UoB under various heads of claim, some of which were abandoned. The claim which formed the basis of the trial and judgment was, ultimately, for breach of contract.

The judgment

Exelogen argued that the primary basis for awarding them damages for breach of contract was the net profit they would have made for bringing the drug to market having secured a licence from UoB. For a “lost opportunity” claim to succeed, the following had to be established: (i) whether the lost opportunity was real rather than speculative, (ii) whether the breach of contract caused the loss in chance, and (iii) the value of that lost chance.

Much of the judgment is devoted to point (i), with Pelling J concluding that Exelogen’s purported lost opportunity was merely speculative as the parties were nowhere near sourcing funding or agreeing a subsequent licence:

“There was of course the speculative possibility that an investor might turn up but that cannot be characterised as a real or substantial chance. Why that may be is in part a matter of speculation … it was highly improbable that a commercialisation plan or financial projections could be prepared or an investor could be attracted and for those reasons there was no real prospect of the claimant being granted a licence by the defendant.”

The judge referred to a November 2018 message from one of Exelogen’s directors noting that potential investment sources were “drying up” and the UoB professor’s “despair at the lack of progress”. Overall, the various possible investment opportunities which Exelogen relied on, from third party companies to early valuations, to attendance at a JP Morgan investment conference (identified dismissively as a “sign of desperation” by Pelling J), were purely speculative.

Interestingly, Pelling J observed that the main reason behind the lack of progress on the investment front was the “commercial undesirability” of the product. The parties had failed to address the fact the medication which the treatment method relied on was available generically, the exclusivity period provided by UoB’s patents was rapidly diminishing, and no work had been undertaken on drug dose, composition, or delivery. In fact, even the eventual assignees who UoB dealt with admitted the inherent uncertainty in the product and the difficulty of estimating future profits.

Due to Exelogen’s failure to successfully make out point (i), it followed on point (ii) that UoB’s breach did not cause the (speculative) loss which was asserted and, consequently, the claim was dismissed: the underlying “option’ within the option agreement was deemed to have had no value whatsoever.

Practice points

The case presents a number of useful learning points, both from a contract law and IP perspective:

• Caution with option fees: despite Exelogen’s failure to secure external funding, UoB agreed to extend the agreement and received a $20,000 “option fee” from Exelogen in consideration for doing so. Exelogen also negotiated the unilateral right to further extend the exclusivity period if they paid an additional $25,000 sum to UoB. Whilst these fees appeared lucrative, they papered over the fact that UoB were granting greater exclusivity rights to a counterparty with no real track record or prospect of commercial success. In turn, this reduced their chance of a satisfactory commercial and clinical outcome in the longer term.
• Termination: the parties failed to draft any contractual termination mechanism into the agreement. The issue was further compounded by the frustratingly distant expiry term, all of which ultimately forced UoB’s hand in breaching the agreement. The (perhaps obvious) approach when preparing these types of agreements is to set a feasible term and build in clear termination rights, whether for convenience, breach, or falling short of definable KPIs (among other triggers).
• Underlying IP: as discussed above, the agreement’s shaky foundations were in part due to the commercial undesirability of the underlying product and the lack of appropriate IP protection. Parties in similar option agreement / licensing scenarios would be wise to properly value the IP assets in question, consider the relevant protection timeframes, reconcile those protection windows with the term of the agreement (and the expiry / termination rights), and (if required) draft appropriate provisions to renew / cultivate those rights.
• Lost opportunity claims: Exelogen’s jump from making out that UoB had breached the agreement to establishing a quantifiable loss was, ultimately, found to be flawed. They were unable to point to a substantial and clear loss of opportunity due to the poorly conceived commercial arrangement. Furthermore, their strategy of including other heads of claim (eg breach of confidence and unjust enrichment) in the hope that something would stick, also failed. Simply proving a breach of contract may not therefore be enough in these scenarios. The prudent approach would be to consider the materiality of the underlying commercial arrangement before betting the house on trying to enforce the option.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2023