Medicis Pharma. Corp. v. Anacor Pharma., Inc., C.A. No. 8095-VCP (Del. Ch. Aug. 12, 2013) (Parsons, V.C.)

In this opinion, the Court of Chancery denied the defendant’s motion to dismiss the plaintiff’s complaint for specific performance of a license agreement, holding that the plaintiff’s claims were not subject to mandatory arbitration under the terms of the parties’ license agreement. 

In February 2011, the plaintiff, Medicis Pharmaceutical Corporation (“Medicis”), and the defendant, Anacor Pharmaceuticals, Inc. (“Anacor”), entered into a license agreement (the “Agreement”) for the development of drug candidates to treat acne.  The Agreement contained a dispute resolution clause providing that, if the parties were not able to resolve a given dispute within a specified period, “either Party may have the given dispute settled by binding arbitration pursuant to Section 13.2.”  However, Section 13.2 of the Agreement contained the following language: “Notwithstanding anything contained in this Section 13.2 to the contrary, each Party shall have the right to institute judicial proceedings . . . to enforce the instituting Party’s rights hereunder through specific performance, injunction, or similar equitable relief” (the “Equitable Relief Carve-Out”). 

On November 28, 2012, after a dispute under the Agreement arose between the parties, Anacor sent Medicis a demand for arbitration.  On December 11, 2012, Medicis filed a complaint in the Court of Chancery relating to the same dispute and seeking (a) to enjoin Anacor from proceeding with arbitration, (b) specific performance of the Agreement, and (c) a declaratory judgment.  Anacor moved to dismiss Medicis’ complaint, contending that the Court of Chancery lacked subject matter jurisdiction because, under the terms of the Agreement, the claims at issue in the Court of Chancery action were subject to mandatory arbitration.  Medicis contended that the claims were subject to litigation under the Equitable Relief Carve-Out. 

In analyzing whether Medicis’ claims were subject to arbitration, the Court of Chancery focused on the language of the Equitable Relief Carve-Out.  In determining the scope of the Equitable Relief Carve-Out, the Court of Chancery considered the meaning of the word “hereunder,” as used in the Equitable Relief Carve-Out.  Anacor argued that, as used in the Equitable Relief Carve-Out, hereunder meant “under this section,” rather than “under this entire Agreement.”  As such, Anacor contended that the parties intended the Equitable Relief Carve-Out to allow for litigation if necessary to enforce the arbitration provisions—not to allow a broad right to initiate litigation in connection with equitable relief.  The Court of Chancery disagreed.

Though acknowledging that, in one section of the Agreement, the parties used the word “hereunder” to mean “under this section,” the Court of Chancery concluded that the parties intended the word “hereunder,” as used in the Equitable Relief Carve-Out, to mean “under this entire Agreement.”  In making that determination, the Court of Chancery relied on language in the Agreement providing that the word “hereunder” and similar words refer to “this entire Agreement.”  The Court of Chancery also concluded that interpreting the word “hereunder” in the Equitable Relief Carve-Out to mean “under this Agreement” did not render other provisions of the Agreement meaningless.  Thus, the Court of Chancery concluded that, by using broad language in the Equitable Relief Carve-Out, the parties intended to construct a broad exception to the Agreement’s mandatory arbitration provisions. 

The Court of Chancery went on to distinguish this case from the cases upon which the parties primarily relied, including James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006), and GTSI Corp. v. Eyak Technology, LLC, 10 A.3d 1116 (Del. Ch. 2010).  In doing so, the Court of Chancery highlighted, among other things, the differing language of the arbitration provisions at issue in Willie Gary and GTSI and the provisions of the Agreement at issue in this case.  In addition, though noting that Willie Gary arguably supports a finding that the first-filed status of Anacor’s arbitration demand precluded Medicis from instituting litigation, the Court of Chancery did not find that the order of filing was dispositive, in part, because the time difference between Anacor’s demand for arbitration and Medicis’ filing of its complaint was less than two weeks. 

Therefore, because the parties did not clearly express an intent to arbitrate the merits of Medicis’ claims, the Court of Chancery held that it had subject matter jurisdiction over Medicis’ claims and denied Anacor’s motion to dismiss.

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