Eli Lilly & Co. v. Emisphere Techs., Inc.

Brief Fact Summary.

Plaintiff and Defendant entered into a collaborative agreement under which the parties would work together and exchange proprietary information in order to develop oral delivery of Plaintiff’s therapeutic compounds. Some of Plaintiff’s employees formed a secret team in order to apply Defendant’s carrier technology to other compounds not contemplated in the agreement. Defendant terminated the original agreement and the subsequent license agreement after Plaintiff, filed for a patent for combinations of fifty-six delivery agents, which included Defendant’s carriers that Defendant had divulged as part of the original collaborative agreement. Plaintiff sued Defendant for breach of contract, arguing that the secret research could result in a patent infringement claim at most, but not termination of the agreements.

Synopsis of Rule of Law.

There is an implied covenant not to use proprietary information outside the scope of the contract in a collaborative contract that provides for open sharing of that proprietary information.

Facts.

Eli Lilly & Co. (Plaintiff) entered into a collaborative agreement with Emisphere Technologies, Inc. (Defendant), under which the parties would work together to use Defendant’s technology to develop oral delivery of some of Plaintiff’s therapeutic compounds. The agreement necessitated and provided for a confidential exchange of proprietary information between the parties. In addition, Plaintiff exercised an option in the agreement to obtain an exclusive license to use Defendant’s carrier technology to develop oral products. Plaintiff paid $4 million to exercise the option. While the collaborative research was ongoing, Plaintiff employees working on the research formed a secret team without Defendant’s knowledge in order to apply Defendant’s carrier technology to other Lilly compounds not contemplated in the agreement. After this secret research, Plaintiff filed for a patent for combinations of fifty-six delivery agents, including Defendant’s carriers that Defendant had divulged as part of the original collaborative contract. At this point, Defendant terminated the original agreement and the subsequent license agreement. Plaintiff brought suit for breach of contract, arguing that the secret research could result in a patent infringement claim at most, but not termination of the agreements.

Issue.

Whether there is an implied covenant not to use proprietary information outside the scope of the contract in a collaborative contract that provides for open sharing of that proprietary information.

Held.

Yes. Plaintiff breached the implied covenant in the agreement and that the breach afforded Defendant the right to terminate the agreement and the related license agreement. There is an implied covenant not to use proprietary information outside the scope of the contract in a collaborative contract that provides for open sharing of that proprietary information.

Discussion.

When parties contract to share proprietary information for purposes of achieving a common goal, there is a certain level of trust that should be understood between the parties. Thus, in a collaborative contract that provides for open sharing of proprietary information, there is an implied covenant not to use that information outside the scope of the contract. Under the agreement in this case, Plaintiff and Defendant shared proprietary information. And Plaintiff took that information and used it outside the scope of the agreement, performing secret research with the information without Defendant’s knowledge. Accordingly, Plaintiff is not merely subject to a patent infringement claim, but Defendant was within its rights to terminate the agreement. Given the proprietary nature of the information that Defendant shared under the agreement, a certain level of trust between the parties was paramount. Plaintiff broke that trust and there is no indication that Plaintiff will be able to restore it.