The principal goal in calculating damages is to make the injured party whole. This exercise often is simple in theory but can be excruciatingly complicated in practice. In most cases, courts are presented with competing experts offering damage valuations based on estimates, forecasts, projections and discounts, and are then tasked with rending this information into a monetary amount sufficient to compensate a party for its injury. As a result, a damage award may be more of a "best guess" than a mathematically precise reflection of the harm caused by the liable party.
In Maverick Therapeutics v. Harpoon Therapeutics, C.A. No. 2019-0002-SG (Del. Ch. April 23, 2021), the Delaware Court of Chancery considered the appropriate measure of damages for fraudulent misrepresentations made in connection with investments in a cancer therapeutics company. Given that the technology involved was cutting-edge but unproven (at present, but more importantly as of the historic date of the fraud), the court was challenged to determine the value of the defrauded party’s investment. To deal with this challenge, the court employed a useful analogy: that the defrauded party’s investment in a novel, nascent treatment was akin "to the purchase of a lottery ticket, a risky investment with a low probability of a large pay-out." Applying this analogy, the court reasoned that the defrauded party’s damages could be calculated as the difference between two lottery tickets—the ticket the defrauded party thought it had purchased, and the ticket it actually received as a result of the fraud.
Prior to 2016, Harpoon Therapeutics developed therapies for treating cancer by using the body’s own defenses, called T cells, to kill cancer cells. At the time, approved T cell therapies were indiscriminate—they attacked both cancer cells and healthy cells. To solve this problem, Harpoon developed certain T cell therapies that modified the way T cells bind to the cells they are targeting. In a radically simplified summary, Harpoon ultimately developed T cell therapies that were "conditionally active," meaning the T cell would only engage a target cell when cancer was present.
In 2016, Harpoon spun out its conditionally active T cell technology to a new company, Maverick Therapeutics. The spinout was governed by an asset transfer agreement, in which Harpoon agreed that it would not compete in the "Maverick Field" for four years. The "Maverick Field" was in turn specifically defined, in arcane fashion, to encompass all then-existing, conditionally active T cell therapies.
The new company was supported by an investment from Millennium Pharmaceuticals, a wholly owned subsidiary of Takeda Pharmaceutical Co. Limited. Millennium’s investment included $10 million in exchange for 19.9% of Maverick’s shares; a warrant to purchase additional shares in the company; and a commitment to fund additional future investments in the approximate amount of $52 million during the four-year noncompete period.
Prior to spinning out Maverick, Harpoon never informed Millennium that Harpoon intended to develop new conditionally active T cell therapies that could potentially compete with Maverick’s products. Indeed, in public statements, Harpoon described the companies’ respective trajectories as distinct—Maverick would develop conditionally active T cell therapies, while Harpoon would continue development of traditional "inherently active" therapies. Notwithstanding these statements, Harpoon was clandestinely working to develop conditional active T cell therapies that would fall outside of the heavily negotiated scope of the "Maverick Field."
In 2018, Harpoon publicly launched a conditionally active T cell treatment platform able to compete with Maverick’s technology. In response, Maverick sued Harpoon for breach of contract and misappropriation of trade secrets. Millennium intervened, asserting numerous claims including fraud. After a bifurcated trial in September 2019, the court found Harpoon liable to Millennium for fraudulent inducement with respect to Millennium’s investment in Maverick. Specifically, the court concluded that based on Harpoon’s knowingly false representations, Maverick believed it was purchasing rights to develop conditionally active T cell therapies "without fear of competition from Harpoon in that field."
Following its determination of liability, the court held a one-day trial in September 2020. Millennium offered a damages expert who opined that Millennium’s damages exceeded $146 million. In contrast, Harpoon’s expert offered that Millennium’s damages were as low as $400,000. Perhaps unsurprisingly given this range of opinion, the court "found the assistance from the parties’ experts … of limited utility." Instead, the court determined that Millennium’s award should reflect the difference between the value of Millennium’s investment in Maverick as it was represented to Millennium by Harpoon (i.e., with broad noncompete protection barring Harpoon from the field), and the value of what Millennium actually received (i.e., much narrower noncompete protection permitting Harpoon to enter the field).
To determine the value of Millennium’s expected investment, the court looked directly to the terms of the investment itself. Describing "an arm’s length transactions between sophisticated entities represented by counsel," the court concluded that that "the parties negotiated the value of Millennium’s investment, with the broad noncompete, at around $95 million." Importantly, the court recognized that this investment price had already accounted for the risk that Maverick’s technology faced a potentially low probability of commercial success. The court thus analogized Millennium’s investment to a lottery ticket with a low probability of a high payout.
The court next considered what Millennium actually received: equity in Maverick, but with much narrower non-compete protection. Extending its analogy, the court recognized that Millennium still held its Maverick "lottery ticket" and that the odds of winning (i.e., monetizing Maverick’s technology) had not changed. However, the court recognized that without broad non-compete protection from Harpoon, the potential winning-ticket payout was dramatically reduced by virtue of the risk of competition. As the court summarized, "the value of the first ticket is determined by the risk of no pay-out in light of the value of the pay-out: the value of a monetized product without competitors in its market. The value of the second ticket is comparatively diminished by the risk of a different pay-out; entering a market in competition with a direct and better known competition." Accepting the suggestion of Millennium’s damages expert, the court concluded that a potential market split between Maverick and Harpoon would diminish the value of Millennium’s million-dollar investment by half.
Finally, the court recognized that it is required to determine damages as of the time the fraud occurred. Accordingly, the court’s damages calculation needed to account for the potential that, at the time of Millennium’s investment and notwithstanding any noncompete protection, Harpoon would ultimately fail to develop a competing conditionally active T cell therapy. Despite that it ultimately did develop such a competing therapy, Harpoon argued at trial that on the date of Millennium’s investment in Maverick, the chances Harpoon would be able to develop such technology was one-in-four. The court rejected this estimate as too modest. Indeed, the court reasoned that the fact Harpoon took great effort to fraudulently structure the non-compete provisions to cryptically reserve an ability to compete in the field "showed it ha[d] some confidence in its ability to do so." In consequence, the court applied only a 20% discount.
The court’s ultimate damage calculation in this case is notable for the fact that two of the discount components—the 50% "market-split" reduction and the 20% "market entry" discount—reflected rough estimates and not mathematically precise figures. To be sure, the court acknowledged as much in its opinion, noting as to the market-split reduction that 50% was "reasonable in light of the record, which does not permit a more precise determination." Likewise, as to the market entry discount, the court explained that the 20% figure was based on inferences from the record and not mathematical certainty, which was "not possible in these circumstances." Yet as applied, each component has the effect of significantly reducing Millennium’s damage award. In preparing and supporting a damages calculation, parties and counsel should thus remain mindful that the process is not an exact science. (Though it is certainly not a lottery!)
Jarret P. Hitchings, a partner at Duane Morris, practices in the area of commercial finance, financial restructuring and business bankruptcy and corporate litigation.
Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.