The first question you probably have is, “What is a ‘hurricane verdict?’” It is possible that we here at Abnormal Use are coining a term because a quick search on the Interwebs yields no references to this new phrase. In any event, a hurricane verdict is a verdict which is both a windfall to the plaintiffs and a rainfall in that it creates a slippery slope. I got pretty lost in the series of remittiturs and offsets, so it is unclear how big the verdict in Asahi Kasei Pharma v. Actelion Ltd. actually was, but it appears that the verdict awarded by the California jury totaled roughly $500 million.
You probably have a lot of questions.
For starters, you are probably wondering whether a hurricane is called a typhoon or a cyclone on the Pacific coast. As it turns out, in order to be considered a typhoon, the storm must form west of the international dateline. Your next question is probably about the case. In a nutshell, Asahi, a Japanese pharmaceutical company, contracted with a U.S. company, CoTherix, to sell its product in the U.S. As part of the contract, CoTherix was required to perform all necessary pre-sale regulatory and other work. Actelion, a Swiss company, had a competitor drug on the market in the U.S., which accounted for almost all of its U.S. sales. Allegedly, fearing the effects of competition, Actelion purchased CoTherix solely for the purpose of preventing the sale of Asahi’s drug on the U.S. market. Actelion’s acquisition of CoTherix was successful, and CoTherix backed out of the agreement with Asahi. As it often does, litigation ensued.
It appears that this $500 million verdict, which included lost profits for a drug that never made it to market, would qualify as a windfall, or “an unexpected, unearned, or sudden gain or advantage.” That is just my initial reaction. Those of us who have waded into the waters of proving/disproving and/or calculating consequential damages know that it is complicated and tedious. I do not have the time to devote to unravelling the specifics of the consequentials in the Asahi case for this post. The bottom line, though, is that after subtracting litigation costs, Asahi ended with hundreds of millions in revenues for a product that it never had to put on the shelf. Of course, Asahi went to great lengths to prove that these numbers were not speculative. It was able to show that the drug had already been approved in China and Japan, and that is was a good drug in those markets, among other things. Notwithstanding, as a practical matter, Asahi never had to face the risks involved with selling the drug in the U.S. It never had to worry about suits against it based on side effects of the drug. It never had to spend money to market the drug. Apart from the courtroom, Asahi never had to actually compete with Actelion’s drug, which already had a foothold on the U.S. market.
The rainfall portion of the hurricane verdict is more problematic than the windfall component. As always, the case had its nuances, but essentially, the basis for liability against Actelion was that it intentionally interfered with the contract between CoTherix and Asahi by buying CoTherix and directing it to breach. In other words, even though CoTherix was a wholly-owned subsidiary of Actelion at the time of the breach, Actelion was treated as a third-party – a stranger to the contract in this case. This is important because the difference between breaching the contract and interfering with the contract was essentially a $400 million difference. How did I determine that? Asahi pursued ICC arbitration against CoTherix, the company that actually breached the contract, and was awarded just shy of $100 million. The verdict against Actelion, based on the interference with the contract, was around $500 million, and there were no remaining claims against CoTherix when the case went to trial. So there are several layers to Asahi’s rake. CoTherix’s actual breach of the contract was worth $100 million. Actelion’s interference with the contract was worth $400 million (after the CoTherix offset). And there is yet another layer that is perhaps the most disturbing aspect of the verdict. While there were no punitive damages awarded against Actelion, there were roughly $30 million in punitives awarded against three Actelion executives who allegedly directed the interference with the contract.
The result in this case does not add up. The civil conspiracy theory of liability (that all of the defendants conspired to harm Asahi) was dismissed before trial, so the jury did not find that executives of CoTherix, and Actelion were in cahoots. Yet both organizations and all three executives were all found liable for essentially the same act. The antitrust allegations did not make it to trial, either. The sole theory of liability was that Actelion purchased a controlling interest in CoTherix such that CoTherix no longer made its own decisions, and that it did so in order to direct CoTherix to induce the breach.
This result sets precedent for three distinct theories of liability based essentially on a single breach by a single organization – 1) the subsidiary with no control over its decisions is liable for the actual breach; 2) the parent company is liable as a nonparty for inducing the subsidiary to breach; and 3) the executives who made the decision to induce the breach are even more liable (such that punitives are warranted) for making the decision to induce the breach. Piercing the corporate veil understates what occurred here. Asahi was able to fire a bunker busting bomb that went through CoTherix, through Actelion, and exploded in the executive wing of Actelion. Additionally, one could argue that this decision sets the dangerous precedent that companies cannot purchase competitor companies without giving rise to liability. Actelion had a duty to its stockholders to maximize profit. Had CoTherix performed on the contract, and had the competitor drug been successful, Asahi would have been able to consume an indeterminate amount of Actelion’s market share. Had Actelion not purchased CoTherix when it was possible to do so, it would have resulted in an indeterminate amount of market share loss. Thus, arguably Actelion could have been liable to its shareholders for not purchasing CoTherix and inducing the breach.
So it appears that the real theory of liability is negligent purchase of a competitor, which Actelion was arguably compelled to do in the course of business. The verdict and decision are arguably an unfair restriction on free markets and the capitalist system in general.