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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
Joint Venture Adventure
Richard Lutringer
General Information
Star Pharma Ltd., a family-owned Borovia corporation, is a manufacturer of dermatological products, including steroidal creams, salves and ointments for sale by prescription primarily in Europe. Two of Star Pharma’s most profitable products, Creamex and Phisoderm, are well known and prescribed routinely by medical doctors in Europe.
In January 20141 Star Pharma entered into a Joint Venture Agreement with Omega Research S.p.A. (“Omega”), a small Ardistanian company, 80% of the shares of which are owned by Professor Bartolino, a professor of dermatology at the University of Ardistan, and 20% by the Ardistan Business Development Institute, a government sponsored fund to aid start-up companies. In early 2012, Professor Bartolino and the head technician at Omega, Dr Schwarz, began work on a formula devised by Professor Bartolino for a product, named “Gold Cream”, which has the potential for treating certain types of skin cancers that do not respond well to currently available medications. By October 2013, Omega had tested several variants of the formula on a few laboratory mice, but had not yet done any extensive testing. Further research by Omega and eventual clinical trials on humans would still be necessary before a product using the Gold Cream formula could be commercially sold.
Realizing the commercial potential of his invention, Professor Bartolino approached Star Pharma in November 2013 at their booth at Pharmako, a major trade show for the pharmaceutical industry in Borovia, to see if they would be interested in distribution rights for the product in exchange for funding Omega’s continued laboratory testing of the Gold Cream formula and, if successful, carrying out the clinical trials (on humans) necessary for regulatory approval. After a week of negotiations at Star Pharma headquarters, Dr Bennett, the Managing Director of Star Pharma, agreed on 1 December 2013 to provide limited instalment funding based on clear milestones being met by Omega.
The Joint Venture Agreement, dated 4 January 2014, provides, inter alia, that:
1. Star Pharma will contribute €400,000 to Omega to cover a portion of the costs to be incurred by Omega in developing a product based on the Gold Cream formula, as follows:
2. Upon successful completion of all of the above milestones, Star Pharma will provide the necessary technical staff and facilities to carry out clinical testing and regulatory applications for obtaining government approvals to market and sell the Gold Cream product in the European Union. Omega will be entitled to utilize the results of the testing for the purpose of obtaining government approvals outside the European Union.
3. Omega will immediately begin the application process in its own name for patents to the invention underlying the Gold Cream formula in the European Union, the costs thereof to be reimbursed by Star Pharma on a monthly basis (Omega is free to apply for patents elsewhere at its own expense).
4. Omega grants Star Pharma an exclusive licence for the European Union to manufacture and sell dermatological products for human applications based on the Gold Cream formula at a licence fee of 5% of the net revenues received by Star Pharma until the expiration of the last to expire of the European Union patents and any patented improvements.
5. In the event Omega fails to meet a milestone (unless due to a cause beyond Omega’s reasonable control) during the development stage, Star Pharma has the right, upon 10 days’ notice to Omega, at its discretion, either a) to terminate the project without further liability, all rights to remain with Omega, or b) to purchase from Omega and Omega must sell all
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European Union rights to the Gold Cream formula, including patent rights and related technology, for a cash payment to Omega of €1 million, less all amounts previously paid by Star Pharma as milestone payments, in which event Omega shall make the necessary Omega technical personnel available to cooperate with Star Pharma as to necessary patent formalities and will be reimbursed for such assistance at a rate of €200 per hour.
Omega was able to meet the first milestone and in fact delivered the necessary reports to Star Pharma by 15 May 2014, receiving €100,000 from Star Pharma on 1 June 2014. The second milestone was also met ahead of schedule by Omega, and Star Pharma paid Omega another €100,000 on 1 November 2014. Dr Bennett was so delighted that progress had been made so promptly that a press conference was held on 15 November 2014 announcing that the product was meeting all expectations and that Star Pharma intended to have the Gold Cream product ready for sale by 2017.
On 15 October 2015, Omega informed Star Pharma that it would not be able to meet the third milestone of 31 December 2015 because of delays caused by electric power interruptions in its local area and computer breakdowns that were not within its control and that Omega would need an extension until 15 February 2016. On 20 October 2015 Star Pharma notified Omega that it did not consider those events as excusable because Omega should have had backup generators and computer systems in place. Star Pharma would not agree to an extension and notified Omega that it would be exercising its right to purchase the Gold Cream European patent rights for €1 million less the €200,000 already paid to Omega.
On 1 January 2016, Star Pharma formally notified Omega of the breach by failure to meet the third milestone and that its lawyers were preparing all necessary transfer documents, with a completion date for the purchase scheduled for 15 February 2016.
Since mid-October 2015 all requests by Professor Bartolino to meet with Dr Bennett were declined by Star Pharma, ostensibly because of the unavailability of Dr Bennett. In early January, Dr Bennett wrote a friendly e-mail to Dr Schwarz informing him/her that the position of technical director of Star Pharma, which includes a generous profit sharing plan, is currently open at Star Pharma in case s/he would be interested.
In a letter dated 15 January 2016, Omega notified Star Pharma that its exercise of the option was invalid because the conditions for the exercise had not been met since the delay was due to a cause beyond Omega’s reasonable control and required an extension of time. In addition, it considered the actions of Star Pharma in trying to recruit its most senior technical employee as motivated by ill will and as a breach of their agreement.
Under the dispute resolution provisions of the Joint Venture Agreement, before commencing litigation for any controversy concerning the agreement, the parties have to attempt to resolve the dispute by mediation, under the ICC Mediation Rules. Omega notified Star Pharma of its exercise of its right to mediation and filed the request as the Requesting Party. The mediation will take place in the first week of February 2016.
At the mediation Omega will be represented by Professor Bartolino and Omega’s lawyer and Star Pharma will be represented by Dr Bennett and Star Pharma’s in-house counsel. Both Professor Bartolino and Dr Bennett have full settlement authority.
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Confidential Information for Omega (Professor Bartolino)
Requesting Party
After Star Pharma’s press conference on 15 November 2014, you were approached by several major pharmaceutical companies to see if the US and other worldwide rights for Gold Cream would be available, assuming European patent and regulatory approval were obtained. Jackson & Jackson Corp., a diversified US pharmaceutical product manufacturer, offered to pay €500,000 for an option to purchase the non-EU rights for €1 million plus a 3% royalty, once it had been approved for sale in the major European countries (France, Germany, Italy, Poland, Spain, the UK), since US and other approvals would be easier once the work had been done to have the product approved in the European Union with copies of the testing protocols and results. Although it was understood that the European Union rights were currently licensed to Star Pharma, Jackson & Jackson wanted Omega to know that it would pay €5 million, plus a 6% royalty, for worldwide rights if they ever became available.
Dr Schwarz was proud of the efficiency of the Omega team in reaching the first and second milestones ahead of schedule. Work on the third milestone was progressing well and the testing was almost complete, until late one evening in May 2015, when a laboratory technician accidentally slipped on the wet lab floor. While falling, the technician’s elbow struck a valve on a container holding a concentrated muscle relaxant solution which was being slowly dripped into the test animals’ water supply at the rate of 0.1 gram per hour. Five litres of the solution entered the main water drip tube that led to 200 rabbit cages. Within 24 hours most of the rabbits in the Omega lab had peacefully gone to sleep and died, effectively destroying six months of testing work. Since the milestone deadline was eight months away, Dr Schwarz believed that they could begin again with 200 new test rabbits. Because of the normal lead time for deliveries of laboratory test animals, the new rabbits did not arrive until 1 July 2015 and the testing commenced shortly thereafter. Several regional power failures and computer breakdowns further delayed the progress of the tests by a total of six weeks, so that by 1 October 2015 it was clear that results would not be available until 15 February 2016.
You believe that Omega is entitled to an extension of the third milestone date, because if the computer and electric power problems had not occurred, Omega would still have been able to make the original deadline. Omega’s lawyers have told you that getting an extension due to causes outside Omega’s control is not certain and that since the earlier delay due to the technician’s slip and fall is likely to come to light when the daily laboratory logs are reviewed by Star Pharma, the chances are even lower.
You were very upset when Dr Schwarz forwarded to you the e-mail from Dr Bennett trying to recruit your colleague to work for Star Pharma, and your lawyers believe that this can be considered a breach of the Joint Venture Agreement. Even if it was not technically a breach, it appears to be a malicious act, which certainly needs explaining.
You do not want to risk losing the European Union rights for merely an additional €800,000 and see the potential value in staying in the relationship with Star Pharma, since the Ardistan Business Development Institute has no additional funding available to pay the costs of clinical testing. Additionally, the non-European rights will have significantly greater value if the approvals in Europe are obtained. Of course, the worldwide rights, including Europe, would be extremely valuable to a major pharmaceutical company like Jackson & Jackson, if a way could be found to offer them the entire worldwide rights.
Your interests going into the mediation are:
Or, if that is not attractive to Star Pharma:
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Confidential Information for Star Pharma (Dr Bennett)
Responding Party
When you were recruited in 2011 to be the Managing Director of Star Pharma, you had not realized how serious its internal problems were. Once known as “innovators” when managed in the 1970s by its founders, the Brancato brothers, over the last 20 years Star Pharma has not invested in research or acquisitions. Its cash flow and profit and loss statements were healthy, but that was due primarily to the successful products Creamex and Phisoderm, on which all of the European patents will expire in 2017 and 2018 respectively. Because of the positive cash flow primarily derived from the sale of Creamex and Phisoderm, major bank loans were not required over the years, so no sophisticated analysis of the business had been undertaken until you came on board. Particularly since the early 2000s, the company has essentially been “administered” by a Board of Directors consisting of third-generation family members, who are more interested in their show horses and villas than building the Star Pharma business.
After talking it over with the Board and the principal family members, you achieved consensus at the end of December 2013 that Star Pharma either has to grow through a capital infusion from outside investors, such as a venture capital fund, or become part of a larger company, i.e. put itself up for sale to a large pharmaceutical company. In any event, time is running out to replace the revenue streams from Creamex and Phisoderm. To motivate you to remain with Star Pharma during this critical period, the Board of Directors granted you an option to purchase 20% of the shares of Star Pharma at a favourable price.
You see the potential for Gold Cream becoming a replacement revenue stream for the two brands whose patents are expiring. When you received consent in early 2014 from the Board and major shareholders to enter the joint venture with Omega, they would not consent to acquiring any distribution rights outside Europe, their traditional market. You have now convinced them that having patent rights in the US and other major countries would make Star Pharma much more valuable to a potential buyer or venture capitalist or, at a minimum, would be the first stepping stone to bringing Star Pharma to a stable future.
By notifying Omega of the exercise of the option to acquire the European rights to Gold Cream for failure to meet a milestone, you are hoping to negotiate a better position for Star Pharma, i.e. the worldwide rights, which you estimate are worth at least €4 million to Star Pharma. However, Star Pharma does not have the in-house capability to finish the research work being done by Omega, so in any event Star Pharma would need a solution that would allow it to finish the development phase and supervise the clinical testing (much of which was intended to be outsourced to a testing company in any event, but overall supervision is necessary). A few weeks ago you e-mailed Dr Schwarz to see if s/he would be willing to leave Omega and join the Star Pharma team, which would give Star Pharma the technical expertise to finalize the clinical testing. Dr Schwarz has not yet responded.
Star Pharma’s lawyers have advised that although Star Pharma’s options in the Joint Venture Agreement in the event that Omega fails to meet a milestone are clear, the position of Omega regarding the delay being beyond its control has some chance of being validated by a court, depending on whether or not it was reasonable to expect precautionary measures, such as backup computers, in a laboratory like Omega’s. They are also concerned that your e-mail to Dr Schwarz might be construed as an interference in the contractual relationship between Dr Schwarz and Omega and possibly a breach of an implied term of the Joint Venture Agreement.
The interests of Star Pharma are to maintain and possibly expand their rights to the Gold Cream Product.
In order to resolve this matter the Board of Star Pharma has authorized you to extend the time for performance of the third milestone until 15 March 2016, provided that:
a) Star Pharma is granted a right of first refusal on the sale or license by Omega of any rights to manufacture and sell Gold Cream anywhere, or
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b) the territory under its license from Omega be expanded to include at least North America, Japan and China (Star Pharma to reimburse the additional regulatory expenses).
Alternatively, the Board of Directors of Star Pharma has authorized you to buy from Omega all worldwide rights to the Gold Cream product, including all patent rights, for a purchase price between $3 million and $4 million, payable $1 million now and the balance by paying Omega 10% of the net revenues of Gold Cream until paid in full, provided that Dr Schwarz will be either transferred or seconded to Star Pharma to supervise the remaining testing and regulatory procedures.
Realistically, the Board of Directors, realizing the difficult situation that Star Pharma would be in without a commercially viable flagship product, has authorized you to consider any reasonable alternative that would keep the current Gold Cream product rights and return additional value to the shareholders.
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Colin J Wall
Case Analysis
This is a role-play where one partner, Omega, has a good and promising product but needs the investment and expertise of a larger company to exploit it, hence the forming of a joint venture. All progressed well, indeed better than expected, in the joint venture, until Omega gave notice that it would not be able to meet the third of its milestone dates for the development of the product. This gave Star Pharma the option to either terminate the joint venture agreement on certain conditions or to purchase from Omega the European rights to the product for €800,000, including patent rights. Omega maintains that it has excusable delays that give it the right to a time extension for the third milestone but Star Pharma disagrees. The parties have brought that disagreement to mediation in accordance with their contractual obligations.
To add a twist to the plot there is also an allegation that Star Pharma has acted improperly and breached the joint venture agreement in trying to recruit Dr Schwarz, a key member of Omega’s development team, to join as technical director of Star Pharma. There is therefore not only a counter-argument to say that Star Pharma has breached the joint venture agreement but a level of distrust shown by Professor Bartolino, Omega’s mediation representative towards Dr Bennett, Star Pharma’s mediation representative.
As usual there is a degree of uncertainty as to whether or not Omega has a valid legal argument for an extension of time to the date of the third milestone. The respective lawyers are not confident that their legal arguments will prevail, should the dispute be adjudicated (we are not told if this would be in litigation or international arbitration).
Both parties’ confidential information sets out clearly what their respective interests are. Omega wishes to avoid a termination of the joint venture for failing to meet the third milestone, to explain that Dr Bennett’s approach to recruit Dr Schwarz was a material breach of the joint venture agreement and that without Professor Bartolino’s expertise, it would be better to terminate the joint venture. These interests are driven by a desire to exploit the product, via a rival pharmaceutical company, Jackson & Jackson, which would be able to offer a more lucrative deal to Omega to exploit the product worldwide, including Europe.
Dr Bennett’s interests are to use Omega’s product to provide a source of revenue when the patents of Star Pharma’s two most lucrative products expire, to extend the time for performance of the third milestone in return for expanding Star Pharma’s rights to the product and to exploit it in a greater area than Europe. Alternatively, Dr Bennett is authorized to buy from Omega the worldwide rights including patent rights for a substantial sum of money.
As each party has at least two alternative solutions, it will be essential for the mediator to avoid running with one possible solution alone. Developing viable options within the caucuses and reality testing them will be a vital part of the mediation. Ultimately, if a mediated settlement is to be achieved it will depend to a large extent on whether Professor Bartolino agrees that Omega remains with Star Pharma or decides to exploit the product via Jackson & Jackson. That decision is likely to be driven by monetary considerations.
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Greg Bond
Commentary for Training
Mediator Impartiality
The mediating parties in this case seem to have got themselves into a position neither of them needed to be in. A successful joint venture was under way, milestones were met and payments were made, and a new product that would have been beneficial to both was being developed for market. An unfortunate accident on the one hand, and a quick move to take advantage on the other, have resulted in this dispute.
A quick move to take advantage? This is how Star Pharma’s reaction to Omega’s missing the third milestone might be construed, not least by Omega. Reading the confidential information for Star Pharma, it seems that Star Pharma saw a business opportunity in buying Omega out while trying to secure the technical know-how by trying to recruit Dr Schwarz from Omega to finish the development work. Omega knows that Dr Schwarz was approached, as Dr Schwarz made no secret of the matter. Omega’s Professor Bartolino can put two and two together: Star Pharma is taking advantage.
The mediator does not know this at the outset, and it is important here, as in all of these role-play exercises, that the mediator does not read the Confidential Information. Looking at the deal in another light — without the suspicion of ulterior motives — it would be easy to conclude that the two companies should easily be able to work around the missed deadline and get back on track. The deadline was missed due to technical problems (no one except Omega knows at the outset that there might have been some incompetence on the part of Omega; this is in the Confidential Information only), and missed only by a short period of time. Surely these joint venture partners can get back together?
This role-play provides an excellent opportunity for training mediators to reflect on their impartiality skills. It is easy here to jump to the kind of conclusions drawn above: that Star Pharma is taking advantage; that the two parties in reality should be able to settle their differences easily, as the problem is minor. A third quick conclusion that would be easily arrived at is that the solution to the problem lies with the opportunity provided by an involvement of Jackson & Jackson. Should Omega reveal during the mediation that this multinational is interested, then it would be easy to assume that a deal whereby Omega and Star Pharma approach Jackson & Jackson together might be the best way forward.
Mediator impartiality is not merely about treating the parties equally and fairly and not just about working for the benefit of them both. In facilitative mediation, it is also important that mediators are able to suspend judgement and not draw evaluative conclusions or form their own views of the best settlement options. Of course, mediators will always be mentally assessing what is on the table. For training purposes this role-play might be used as a catalyst for discussion of various understandings of the role of the mediator. It might be used in debriefing to discuss how mediator impartiality was perceived by the students who played the parties. In a facilitative model of mediation, a key mediator skill is being able to remain curious about how the parties understand their dispute and their interests and being careful to keep this very separate from the mediator’s own reactions.
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1 For this role-play, it should be assumed that the mediation is to take place in the first week of February 2016.