BigLaw’s defining feature is its insistence on perfectionism to excess. Junior associates quickly learn the devastating consequences of the seemingly inconsequential. Firms insist on the outward appearance of perfection because the profession is so driven by signaling that appearing perfect on all the details is considered vital to demonstrate just how good you are.
Once in a while, however, BigLaw still somehow makes catastrophic errors. Such stories are always a schadenfreude joy to read, particularly to those of us who find the very idea so delightfully absurd when juxtaposed with the BigLaw we know, love, and hate. During my time in BigLaw, I made it a point to collect examples of such stories.
My first such story is below. Identifying details have been changed and certain tangential topics are oversimplified.
Once upon a time, there was a Small Drug Lab who was developing a promising new drug. As is typical nowadays, this was a single-purpose drug lab, founded to research this exact drug, and funded by a small group of investors hoping to get big returns.
The goal of any such venture is FDA approval. Nearly all such ventures fail, but a very few get FDA approval and make their investors extremely wealthy. And the holy grail is a drug that treats a common condition, is significantly better than status quo, and can be prescribed as a first-line medication. A successful new drug that does any of those three is a black swan. A successful new drug that does all three is a black swan getting struck by lightning while winning the lottery.
This particular Small Drug Lab was developing a very promising treatment for a particularly common type of irritation that had no adequate treatment – which, as you can imagine, got investors pretty excited. The drug had already passed Phase I / Phase II clinical trials, and so it was at this point that the investors got involved, to fund the most expensive part: Phase III human clinical trials.
To get a drug approved, the FDA wants to see two1 things from your Phase III clinical trials: you have to meet sign, and you have to meet symptom.
- Meeting sign means you do better than placebo on treating the objective indicia of the disease.
- In the case of irritation, it means your patients are objectively less red and dry.
- Meeting symptom means you do better than placebo on treating the subjective indicia of the disease.
- In the case of irritation, it means your patients report feeling better.
Obviously both sign and symptom are important. But equally obviously, symptom is a bajillion times more important than sign for irritation. “Your Skin Will Look Better But Still Feel Like Crap” is not a great marketing tagline.
This was, disappointingly, the result of Small Drug Lab’s Phase III clinical trial. Its treatment for this kind of irritation beat placebo on sign, but it did not beat placebo on symptom. However, it came reallllly close on symptom, and symptom is usually harder to meet, so Small Drug Lab decided to begin a second Phase III clinical trial to try again.
Small Drug Lab’s investors, however, had only really planned on one Phase III clinical trial, and were now somewhat reluctant to shell out more. Many other once-promising treatments for this condition had also failed at symptom, after all. At the same time, these results had caught the attention of Drug MegaConglomerate. They saw enough in the study that they were willing to bankroll the second round of trials, and offered to buy Small Drug Lab. Small Drug Lab’s investors accepted.
There was just one problem. How much was Small Drug Lab worth? After all, the second round of trials wouldn’t be done for another year. If that study also failed, then the FDA would probably never approve the drug, and the patent (Small Drug Lab’s only meaningful asset) wouldn’t be worth the paper it was printed on. But if that study was successful and the FDA approved the drug, then all signs pointed to the drug being a potential blockbuster.
To a certain type of person, the answer to this problem is obvious. The purchase contract would simply account for these future contingent events.2 So each side’s fancy BigLaw lawyers sat down and worked out that most of the money would be paid after the second Phase III clinical trial, as follows:
- If the second trial met sign AND symptom, then Drug MegaConglomerate makes a gigantic payment on the order of hundreds of millions of dollars.
- In this scenario, this is a promising drug that is almost certainly getting FDA approval to treat a very common disease. This is the jackpot.
- If the second trial again met sign but NOT symptom, then Drug MegaConglomerate makes a medium payment, on the order of tens of millions of dollars.
- In this scenario, this is a drug with a pretty limited future. It might still get approval for a more limited indication, but it’s hard to envision it being a true blockbuster.
- If the second trial meets neither sign NOR symptom, then Drug MegaConglomerate makes a pittance payment to Small Drug Lab’s investors, less than a million dollars.
- This is basically the “thanks for trying” payment. The first trial was a fluke, we all did our best, but things didn’t work out, so sorry old chap, here’s a little something for the chairs and monitors in your office.
A sharp-eyed reader will note that the purchase agreement between the two parties did not exactly cover all possibilities. Specifically, no provision was made for what would happen if the second Phase III trial met symptom, but not sign.
There is no clear answer as to why this is. In speaking to those involved, my understanding is that it was just a genuine oversight. Literally no one on either side, nor any of the lawyers drafting the agreement, thought this was a possibility. The treatment had already met sign, after all, and sign was a lot easier to meet usually than symptom. So it simply never occurred to anyone that this could happen.
That is, of course, what happened.
When the second round of trials came in, everyone was stunned to find that it just barely missed sign, but blew symptom away.
From a regulatory perspective, this was fantastic news. Doing so well on symptom, coupled with only barely missing sign while having met it previously, was a near-guarantee this would get FDA approval and head to market.
After the celebration, the investors went back to the agreement to figure out how much Drug MegaConglomerate would be paying them. What they expected to see was a contract that basically said this:
- Sign and symptom? Hundreds of millions of dollars.
- Otherwise – sign only? Tens of millions of dollars.
- Otherwise – neither sign nor symptom? Less than a million dollars.
In other words, the contract is silent as to what would happen. Legally, when a contract is silent, a judge will hear from both sides as to what the parties must have intended. In this scenario, everyone would probably have a good chuckle about how silly they were, and Drug MegaConglomerate would just pay the hundreds of millions of dollars without going to a judge. That’s because 99⁄100 judges would have found that to be the fair result. Hundreds of millions of dollars was the intended reward for FDA approval, and though they might not have gotten that approval the way they expected, they got it in the end.
But to the investors’ horror, what the contract actually said was this:
- Sign and symptom? Hundreds of millions of dollars
- Otherwise – sign only? Tens of millions of dollars.
- Otherwise? Less than a million dollars.
Now the argument above doesn’t work any more. Now the contract does explicitly say what should happen in this scenario: the investors will receive less than a million dollars.
But wait – that’s totally unfair! Yes it is. And 99⁄100 judges would agree it’s unfair. But that no longer matters. Because 100⁄100 judges will never override the explicit terms of a contract to achieve a “fair” result. Court opinions along the lines of “Regrettably, I have no choice but to uphold the unambiguous terms of the contract as written…” are practically a cliché.
Now, maybe once in a while, an especially soft-hearted judge might bend the rules, and strain to find an ambiguity when none exists, for a particularly sympathetic plaintiff.3
But this is a contract for hundreds of millions of dollars. Even the most soft-hearted judge in the world isn’t going to mess with that kind of contract, because the assumption is that everyone involved hired fancy expensive BigLaw lawyers and got exactly what they wanted. Which they did – sort of!
Not only that, but as is typical in commercial contracts, the two parties had explicitly agreed that any dispute would be heard in front of the least soft-hearted judges in the country: the esteemed members of the Delaware Court of Chancery. This is a court that only hears business cases and is respected by businesses everywhere for their very business-focused approach. A court where wearing a light blue shirt instead of a white shirt under your suit would be a major faux pas. In short, the court least interested in your sob stories and most interested in exactly what was negotiated.
And so the rest of the story basically writes itself. The investors wrote Drug MegaConglomerate a letter asking when they would get their hundreds of millions. Drug MegaConglomerate sent back a letter that politely told them to pound sand. The investors sued, in an attempt even they surely knew was fruitless, and got exactly nowhere.
In total, the investors were paid a million or two for the drug. The drug received FDA approval and went on to generate half a billion annually for Drug MegaConglomerate. Earlier this year, the drug was sold to some other MegaConglomerate, this time for over five billion dollars. This sale also had a few contingent payments built in, and I think it will surprise no one that the lawyers were instructed to pay a bit of extra attention to that section this time.
- They actually want to see a million other things, but these are two of the big ones. [return]
- There’s actually a second answer, which is for the price to be a nominal upfront fee plus a share of future revenue. For various reasons this isn’t always preferred by either the buyer or the seller, and in any event it’s not what happened here. [return]
- These judges tend to be Democratic appointees. That fact is either everything right with Democrats, or everything wrong with Democrats, depending on your political views. [return]