JOHN HANCOCK LIFE INSURANCE COMPANY ET AL., Plaintiffs, Appellants,
ABBOTT LABORATORIES, Defendant, Appellee.
FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MASSACHUSETTS [Hon. Douglas P. Woodlock, U.S. District Judge]
A. Lukey, with whom John A. Nadas, Stuart M. Glass, Kevin J.
Finnerty, and Choate, Hall & Stewart LLP were on brief,
Jeffrey I. Weinberger, with whom Gregory D. Phillips,
Elizabeth A. Laughton, and Munger, Tolles & Olson LLP
were on brief, for appellee.
Howard, Chief Judge, Selya and Lynch, Circuit Judges.
development of new drugs is a costly, time-consuming, and
highly speculative enterprise. In an effort to hedge their
bets, drug companies sometimes opt to share the risks and
rewards of product development with outside investors. This
appeal introduces us to that high-stakes world. The outcome
turns primarily on a contract provision that the parties
disparately view as a liquidated damages provision (and,
thus, enforceable) or a penalty (and, thus, unenforceable). A
sum well in excess of $30, 000, 000 hangs in the balance.
a lengthy bench trial, the district court held the key
provision inapposite and, in all events, unenforceable.
See John Hancock Life Ins. Co. v. Abbott Labs., Inc.
(Hancock III), 183 F.Supp.3d 277, 321, 323 (D. Mass.
2016). After careful consideration of a plethoric record, we
reverse the district court's central holding, affirm its
judgment in other respects, and remand for further
proceedings (including the entry of an amended final
judgment) consistent with this opinion.
John Hancock Life Insurance Company,  disappointed by the meager
fruits of its multimillion-dollar investment with
defendant-appellee Abbott Laboratories (Abbott), seeks to
increase its return through litigation. In particular,
Hancock aims to recover damages under its contract with
Abbott or, in the alternative, to rescind that contract. The
parties' dispute is by now well-chronicled. See John
Hancock Life Ins. Co. v. Abbott Labs. (Hancock
II), 478 F.3d 1, 2-6 (1st Cir. 2006); Hancock
III, 183 F.Supp.3d at 285-301; John Hancock Life
Ins. Co. v. Abbott Labs. (Hancock I), No.
03-12501, 2005 WL 2323166, at *1-11 (D. Mass. Sept. 16,
2005). We assume the reader's familiarity with these
opinions and rehearse here only those facts needed to place
this appeal into a workable perspective.
1999 or early 2000 - the exact date is of no consequence -
Hancock (a financial services company) and Abbott (a
pharmaceutical manufacturer) entered into negotiations
regarding a potential investment in a menu of new drugs that
Abbott was developing. The parties chose nine specific
Program Compounds that they hoped would mature into
commercially successful drugs to treat various afflictions
(such as cancer and urinary tract blockages). During these
negotiations, both Hancock and Abbott were represented by
seasoned counsel, who exchanged approximately forty drafts of
the proposed contract over a period of a year or more.
March 13, 2001, the parties signed a research funding
agreement (the Agreement). The Agreement is long and
intricate, and we outline here only those provisions that are
central to an understanding of the issues on appeal.
Agreement, Abbott pledged to develop the Program Compounds in
accordance with Annual Research Plans that Abbott would
submit for each Program Year over the course of a four-year
Program Term. These Annual Research Plans were to contain
"detailed statement[s] of the objectives, activities,
timetable and budget for the Research Program for every
Program Year remaining in the Program Term." Abbott
prepared the first such Annual Research Plan for attachment
as an exhibit.
parties were to fund the development of the Program Compounds
as specified in the Agreement and were meant to share in the
profits. Hancock's funding obligations are precisely
defined in section 3.1 of the Agreement: it would make four
annual Program Payments, ranging from $50, 000, 000 to $58,
000, 000 each, over the course of the Program Term (a total
of $214, 000, 000). Section 3.5, entitled "Hancock
Funding Obligation, " makes explicit that
"Hancock's entire obligation [under the Agreement]
shall be limited to providing the Program Payments set forth
in [s]ection 3.1." In return for its investment, Hancock
receives emoluments based on the progress and success of the
Program Compounds. These emoluments include payments for the
achievement of certain milestones, such as the initiation of
a clinical trial or U.S. Food and Drug Administration (FDA)
approval. It also receives royalties from any out-licensing
or sales of the Program Compounds.
Agreement saddles Abbott with both annual and cumulative
spending obligations. Annually, Abbott was responsible for
meeting the Annual Minimum Spending Target; that is, it had
to spend annually at least the sum of Hancock's
contribution for that year, plus $50, 000, 000, plus any
shortfall from the prior year's minimum spending target.
Cumulatively, Abbott had to spend "at least the
Aggregate Spending Target" - defined as $614, 000, 000 -
"during the Program Term." In addition, Abbott is
"solely responsible for funding all Program Related
Costs in excess of the Program Payments from . . .
Hancock." These obligations comprise only
Abbott's minimum spending commitment: that commitment is
a floor, not a ceiling, and Abbott projected in its first
Annual Research Plan that it would spend over one billion
dollars (about five times Hancock's expected total
contribution) through the end of 2004.
turned out to be a prescient precaution, the Agreement
anticipates that Abbott might not fulfill its spending
commitment. In this respect, section 3.2 of the Agreement
provides that if Abbott "fail[ed] to fund the Research
Program in accordance with" its obligations,
"Hancock's sole and exclusive remedies" are
those remedies "set forth in [s]ections 3.3 and
3.4" of the Agreement. Section 3.3, entitled
"Carryover Provisions, " is divided into two
subsections. If Abbott spends less than its Annual Minimum
Spending Target, Hancock is allowed, under section 3.3(a), to
defer its annual Program Payments until Abbott makes up that
shortfall. Section 3.3(b) describes Hancock's remedies in
the event that Abbott did not meet its cumulative spending
If Abbott does not expend on Program Related Costs the full
amount of the Aggregate Spending Target during the Program
Term, Abbott will expend the difference between its
expenditures for Program Related Costs during the Program
Term and the Aggregate Spending Target (the
"Aggregate Carryover Amount") on Program
Related Costs during the subsequent year commencing
immediately after the end of the Program Term. If Abbott does
not spend the Aggregate Carryover Amount on Program Related
Costs during such subsequent year, Abbott will pay to . . .
Hancock one-third of the Aggregate Carryover Amount that
remains unspent by Abbott, within thirty (30) days after the
end of such subsequent year.
Section 3.4 permits Hancock to terminate future Program
Payments under certain circumstances, including Abbott's
failure to "reasonably demonstrate in its Annual
Research Plan its intent and reasonable expectation to expend
on Program Related Costs during the Program Term an amount in
excess of the Aggregate Spending Target."
complete the picture, the Agreement contains a full-throated
integration clause. Specifically, section 16.3 confirms that
the "Agreement contains the entire understanding of the
parties with respect to the subject matter hereof. All
express or implied agreements and understandings, either oral
or written, with respect to the subject matter hereof
heretofore made are expressly merged in and made a part of
The Fallout and the Litigation.
the Agreement was signed, Hancock made its first two Program
Payments, totaling $104, 000, 000. Even so, the relationship
quickly began to fray. Abbott terminated the development of
several compounds in the first two years and significantly
reduced its spending on the development of other compounds.
At the end of 2002, Abbott informed Hancock that Abbott's
2002 spending had been appreciably less than its Annual
Research Plan had anticipated. More troubling still,
Abbott's preliminary research plan for 2003 projected a
sharp reduction in spending for that year compared to its
previous estimate and made no mention at all of expected 2004
spending. In September of 2003, Abbott belatedly proffered
its 2003 Annual Research Plan, which did include some
projected spending for 2004. That submission, though, further
reduced total spending and admitted that Abbott would not
reach the Aggregate Spending Target by the end of 2004.
reviewing this document, Hancock responded that, in view of
the insufficient spending that Abbott was prepared to
undertake, it regarded its obligation to make future Program
Payments as null and void. Abbott's rejoinder was of
little solace to Hancock: it submitted a preliminary 2004
Annual Research Plan, indicating that Abbott would expend
well below its annual minimum contribution in 2003 and would
fail to reach the Aggregate Spending Target through the end
of 2004. In both the final 2003 Annual Research Plan and the
preliminary 2004 Annual Research Plan, however, Abbott
predicted that it would reach the Aggregate Spending Target
if 2005 spending were included.
by this news, Hancock invoked diversity jurisdiction,
see 28 U.S.C. § 1332(a), and filed suit in the
United States District Court for the District of
Massachusetts. That suit sought a declaration that
Abbott's failure to meet its spending commitments
terminated Hancock's obligation to make the third and
fourth Program Payments. The district court granted summary
judgment in favor of Hancock, holding that
"Hancock's obligation to make the Program Payments
for 2003 and 2004 terminated when Abbott failed to
demonstrate its 'intention and reasonable
expectation' to meet the . . . Aggregate Spending Target
within the four-year Program Term in its [Annual Research
Plan] for 2003." Hancock I, 2005 WL 2323166, at
*28 (quoting relevant language from the Agreement). We
affirmed. See Hancock II, 478 F.3d at 2.
that Hancock was judicially relieved of its obligation to
make its last two Program Payments, it retained its rights
under the Agreement to whatever profits might be derived from
any of the Program Compounds. Hancock reports - and Abbott
does not deny - that it has received slightly more than $14,
000, 000 in milestone payments, out-licensing revenues, and
management fees. Comparing these receipts to its $104, 000,
000 investment, Hancock alleges that it incurred a net loss
of almost $90, 000, 000 on the benighted venture.
seldom swallow losses of this magnitude complacently. And
this case is no exception. In June of 2005 - while
Hancock I was still unresolved - Hancock filed the
instant action. It asserted that Abbott had breached the
Agreement in five ways: (1) violating its representations and
warranties through material misrepresentations and omissions
regarding the development of the Program Compounds; (2)
failing to provide Hancock with accurate spending
projections; (3) refusing to pay Hancock one-third of the
Aggregate Carryover Amount in accordance with section 3.3(b)
of the Agreement; (4) failing to take appropriate steps to
out-license the Program Compounds; and (5) obstructing
Hancock's audit of Abbott's compliance with the
Agreement. Hancock further asserted that Abbott fraudulently
induced Hancock to enter into the Agreement and, separately,
that under the indemnification provision of the Agreement,
Abbott was liable for Hancock's losses attributable to
October of 2006 - roughly a month after this court's
decision in Hancock II - Hancock sought leave to
amend its complaint in this case to include a prayer for
rescission. Hancock included the rescission claim in its
first amended supplemental complaint (filed in December of
district court held a ten-day bench trial, which ended in
2008. The court then solicited post-trial briefing and took
the case under advisement. It was not until April of 2016,
though, that the court ruled. In its opinion, the court made
extensive findings of fact and conclusions of law.
See Fed.R.Civ.P. 52(a). We summarize here only those
findings and conclusions that are helpful to an understanding
of the issues on appeal.
begin, the court found that Abbott violated its
representations and warranties in three ways:
. Without notifying Hancock, Abbott paused one compound's
development two days before the Agreement was signed, only to
lift the hold on the day the Agreement was signed. Abbott
canceled the compound three months later. The court found
that Abbott's failure to inform Hancock of the hold on
the compound's development was a material omission.
See Hancock III, 183 F.Supp.3d at 294, 306.
. Abbott represented that it intended to spend over $35, 000,
000 in 2001 on developing a compound intended to treat
chronic pain. Yet Abbott knew before signing the Agreement
that it actually intended to spend less than half that amount
in 2001. The court found that "this misrepresentation .
. . was material." Id. at 308-09.
. Abbott made a further material misrepresentation as to an
anti-infection compound. See id. at 310. Abbott
represented that it expected once-a-day dosing would be
possible for the four conditions that the drug was designed
to treat. Yet, the court found that, at the time the
Agreement was signed, Abbott did not have enough information
to know that once-a-day dosing would be possible for the two
more severe conditions. Since Abbott knew that once-a-day
dosing was important, this misrepresentation was material.
these findings are emblematic of the rocky road down which
the parties' relationship traveled, they proved to be
hollow victories for Hancock. The district court ruled that
Hancock did not sufficiently prove damages attributable to
Abbott's misrepresentations and omissions because
Hancock's methods for calculating damages were
"speculative and unconvincing." Id. at
district court also found that Abbott breached the Agreement
by providing Hancock with spending projections that assumed
that every Program Compound would remain velivolant all the
way to FDA approval. Those projections, the court found, were
submitted in lieu of more realistic projections of expected
spending, which would have been adjusted for the risk that
some compounds might be terminated. See id. at 315.
Once again, Hancock could not recover for Abbott's breach
because it did not adequately prove damages. See id.
to an issue that has become central to this appeal, the
district court concluded that Abbott had not reached the
Aggregate Spending Target. The court determined that,
including Hancock's contributions, Abbott fell $99, 100,
000 short of the target. See id. at 292. Hancock
argued that section 3.3(b) entitled it to one-third of this
amount, that is, an award of approximately $33, 000, 000. The
district court disagreed. While it rejected Abbott's
arguments that Hancock was judicially estopped from asserting
its claim under section 3.3(b) and that the Agreement capped
Abbott's spending obligation at $400, 000, 000, see
id. at 317, it nonetheless concluded that Hancock was
not entitled to any damages under section 3.3(b), see
id. at 321, 323.
reach this conclusion, the court identified an "apparent
implied condition, " which limited Abbott's
liability under section 3.3(b) to pay Hancock one-third of
the Aggregate Carryover Amount to situations in which Hancock
made all four Program Payments. Id. at 318-19.
Striking Hancock a second blow, the court held in the
alternative that even if section 3.3(b) applied, it
constituted an unenforceable penalty. See id. at
district court did allow recovery for one of Hancock's
breach-of-contract claims. It ruled that in the course of
Hancock's audit of Abbott's compliance, Abbott
"fail[ed] to provide information and material necessary
for Hancock's vendor . . . successfully to conduct an
audit." Id. at 316. The court ordered Abbott to
pay Hancock the cost of the audit, which amounted to $198,
731. See id.
to Hancock's rescission claim, the court struck that
claim as "wholly irrelevant or impertinent."
Id. at 303. The court reasoned, inter alia, that
rescission was inconsistent with the enforcement of the
Agreement and that Hancock had chosen (in Hancock I)
to enforce the Agreement. See id. at 302-03. Under
the doctrine of election of remedies, it could not both
affirm the contract and simultaneously seek its rescission.
the district court rebuffed Hancock's claim that Abbott
was obligated under the Agreement to indemnify it for the
losses that it incurred. The court ruled that this
indemnification provision only applied to claims by third
parties. See id. at 326.
the smoke cleared, the court below awarded Hancock $198, 731
in damages for Abbott's frustration of the audit,
together with $110, 395.34 in prejudgment interest (a total
judgment of $309, 126.34). See id. This timely
appeal challenges the district court's conclusion that
its remedies under section 3.3(b) are contingent on its
making all four Program Payments. Hancock also challenges the
district court's alternative holding that those remedies
constitute an unenforceable penalty. Finally, Hancock
challenges the order striking its rescission claim.
a layered approach to these challenges. We first consider
Abbott's contention that recovery under section 3.3(b)
should be barred on grounds rejected by the district court.
We then address the grounds upon which the district court
relied. Those grounds are attacked by Hancock, and we address
the components of Hancock's asseverational array one by
one. We end with a brief comment on prejudgment and
approach these several issues mindful that the Agreement
contains a choice-of-law provision specifying that Illinois
law governs. In line with this provision and with the
parties' acquiescence, we apply the substantive law of
Illinois (except where otherwise specifically noted). See
McCarthy v. Azure, 22 F.3d 351, 356 n.5 (1st Cir. 1994)
(explaining that "a reasonable choice-of-law provision
in a contract generally should be respected").
general matter, issues of contract interpretation engender de
novo review under Illinois law. See St. Paul Mercury Ins.
v. Aargus Sec. Sys., Inc., 2 N.E.3d 458, 478
(Ill.App.Ct. 2013). A reviewing court's principal task in
interpreting a contract is to divine the parties' intent,
which is manifested most clearly by "the plain and
ordinary meaning of the language of the contract."
Id. When a fully integrated contract is unambiguous
on its face, the court will determine its meaning from its
language alone. See Air Safety, Inc. v. Teachers Realty
Corp., 706 N.E.2d 882, 884 (Ill. 1999). The court below
concluded that the Agreement was unambiguous in its ...