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PACIRA BIOSCIENCES, INC. and PACIRA CRYOTECH, INC., Plaintiffs,
v.
FORTIS ADVISORS LLC, SOLELY IN ITS CAPACITY AS REPRESENTATIVE OF THE FORMER SECURITYHOLDERS OF MYOSCIEINCE, INC., TIMOTHY STILL, GUMBALLA KRIS KUMAR, JESSICA PRECIADO, and THE FORMER SECURITYHOLDERS OF MYOSCIENCE, INC., Defendants.
Court of Chancery of Delaware
October 25, 2021
Date Submitted: June 2, 2021
Lisa A. Schmidt, Raymond J. DiCamillo, Megan E. O'Connor, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Randy M. Mastro, Declan T. Conroy, GIBSON, DUNN & CRUTCHER LLP, New York, New York; Attorneys for Plaintiffs.
R. Judson Scaggs, Jr., Lauren K. Neal, Sarah P. Kaboly, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Christopher J. Marino, DAVIS MALM & D'AGOSTINE, P.C., Boston, Massachusetts; Attorneys for Defendant Fortis Advisors LLC.
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Henry E. Gallagher, Jr., Shaun Michael Kelly, Jarrett W. Horowitz, CONNOLLY GALLAGHER LLP, Wilmington, Delaware; Attorneys for Defendants Timothy Still, Gumballa Kris Kumar, and Jessica Preciado.
MEMORANDUM OPINION
FIORAVANTI, VICE CHANCELLOR
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Pacira BioSciences, Inc. ("Pacira") acquired MyoScience, Inc. ("MyoScience") in a 2019 merger (the "Merger"). The merger agreement provided for an up-front cash payment to MyoScience's former securityholders along with contingent consideration if certain post-closing milestones have been achieved. Pacira has made certain milestone payments but seeks a declaration that it is not required to make further milestone payments. That claim is not the subject of this opinion. This opinion addresses a motion to dismiss the other six counts of the complaint.
Pacira contends that the securityholders' representative and three former employees and securityholders of MyoScience owed and breached contractual obligations, either direct or implied, not to interfere with Pacira's operation of the acquired company, now Pacira CryoTech, Inc. ("Pacira CryoTech" and together with Pacira, the "Plaintiffs"). The defendants have moved to dismiss those claims, and this opinion concludes that no such contractual obligation exists under the plain language of the merger agreement. Nor does the complaint state a claim under the implied covenant of good faith and fair dealing that the defendants made bad faith demands for milestone payments, interfered with Plaintiffs' relationships with their employees, or impermissibly retained MyoScience's former outside legal counsel. Plaintiffs have also asserted breach of contract and breach of fiduciary duty claims against two of the individual defendants based on post-merger conduct, and a claim
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against the other individual defendant for aiding and abetting those breaches of fiduciary duty. This opinion dismisses those claims for lack of personal jurisdiction over the individual defendants.
I. BACKGROUND
Unless otherwise specified, the facts recited in this Memorandum Opinion are drawn from the Verified Complaint (the "Complaint" or "Compl.") and documents integral thereto.[1]
A. The Parties
Pacira is a "provider of non-opioid pain management solutions."[2] Pacira is a Delaware corporation based in Parsippany, New Jersey.[3] Pacira CryoTech is a Delaware corporation based in Fremont, California and a wholly owned subsidiary of Pacira.[4] Pacira CryoTech is a successor to MyoScience, a Delaware corporation that Pacira acquired pursuant to an Agreement and Plan of Merger, dated March 4, 2019, by and among Pacira Pharmaceuticals Inc., [5] PS Merger, Inc., MyoScience,
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Inc., and Fortis Advisors LLC ("Fortis"), as the Securityholders' Representative (the "Merger Agreement").[6] MyoScience, and now Pacira CryoTech, manufactures iovera® ("iovera"), a medical device that "applies controlled doses of extreme cold to targeted nerves to relieve pain."[7]
Fortis (or the "Securityholders' Representative") serves as the representative of the MyoScience Securityholders (as defined below) pursuant to the Merger Agreement. [8] Defendants Timothy Still ("Still"), Gumballa Kris Kumar ("Kumar"), and Jessica Preciado ("Preciado") were MyoScience employees prior to the Merger. Kumar, Preciado, and Still all reside in California, and they are collectively referred to as the "Individual Defendants." None of the Individual Defendants is a party to the Merger Agreement.
Still was the CEO of MyoScience.[9] Following the Merger, Still became a member of a three-person "Advisory Committee" to Fortis.[10]
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Kumar is a former head of Marketing & Product Management at MyoScience.[11] "Following Pacira's acquisition of MyoScience, Kumar worked for six months as a consultant for Pacira [CryoTech]."[12]
Preciado is the former Principal Scientist at MyoScience.[13] Following Pacira's acquisition of MyoScience, Pacira retained Preciado as Senior Director, Health Outcomes Value Assessment.[14]
B. Pacira Acquires MyoScience
Pacira acquired MyoScience in the Merger for $120 million in cash, subject to certain adjustments, and contingent payments ("Milestone Payments") of up to $100 million to former MyoScience stockholders or option holders.[15] The Merger closed on April 9, 2019.[16] The former MyoScience stockholders or option holders entitled to Milestone Payments executed either a Letter of Transmittal for Securities of MyoScience or an Option Holder Letter of Transmittal for Company Options of MyoScience (the "Option Holder Letter").[17] The foregoing signatories are referred
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to as the "Escrow Participants" or "MyoScience Securityholders."[18] Among other milestones triggering Milestone Payments, the Merger Agreement required Pacira to pay up to $50 million to the Escrow Participants if treatments involving iovera in certain specified medical settings could be reimbursed at certain specified levels within a certain period of time.[19]
C. The iovera Product and CPT Codes
iovera is a patented Class II FDA-cleared handheld medical device that administers "cryoanalgesia" or "cryoneurolysis"-the application of "controlled doses of extreme cold temperature to targeted nerves to relieve pain."[20] iovera goes under several technical names that the Merger Agreement refers to as "Smart Tip Products."[21] Pacira alleges that
[a]ccording to the [FDA's] Indication Statement for the product, iovera can be used to (i) "destroy tissue during surgical procedures," (ii) "produce lesions in peripheral nervous tissue by the application of cold to the selected site for the blocking of pain," and (iii) "relie[ve] [] pain and symptoms associated with osteoarthritis of the knee for up to 90 days."[22]
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The success of iovera "was closely tied" to reimbursement rates and guidance issued by the Centers for Medicare and Medicaid ("CMS").[23] In order to be reimbursed by an insurance payer (e.g., Medicare or Medicaid) for performing a medical procedure on a patient, a medical provider must be able to describe that procedure using a generalized description known as a Current Procedural Terminology code ("CPT Code").[24] The responsibility for maintaining and publishing the list of CPT Codes falls to American Medical Association ("AMA"), which also provides guidance on how to apply the codes.[25] CMS sets the reimbursement rates for each CPT Code pursuant to Section 1848(b) of the Social Security Act.[26] The reimbursement rates must be updated each year and are published in the Medicare Physician Fee Schedule.[27]
The CPT Codes have national reimbursement rates as well as locality-specific reimbursement rates. To determine the national reimbursement rate for a given CPT Code, CMS quantifies and aggregates the costs of applying the procedures associated with the CPT Code across several categories.[28] CMS also develops a
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geographic practice cost index for each of more than 110 different localities that is used to determine locality-adjusted reimbursement rates.[29] According to Plaintiffs, "[w]hen CMS publicizes the reimbursement rates for various CPT Codes, it consistently cites to the standard, nationwide reimbursement rates for those codes, not to the dozens of different locality-adjusted reimbursement rates."[30]
As part of the annual process for updating the reimbursement rates, CMS solicits "feedback from practitioners and industry groups regarding the costs associated with types of procedures performed under the various CPT codes."[31]CMS then publishes draft reimbursement rates in July for a public comment period.[32]After the comment period closes, "CMS reviews the feedback from industry participants, updates reimbursement rates as appropriate, and then publishes the final rules" for the upcoming calendar year in November.[33]
The usage of a medical procedure depends in part on at least two factors. First, it is important that the CPT Codes reflect the actual costs of the medical procedure to ensure that the provider will be fully reimbursed for the costs of the procedure.[34]
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Second, the popularity of a particular procedure depends on the clarity of guidance from the AMA on the reimbursement rate for that procedure; "[p]ractitioners who assign the wrong CPT Codes to procedures risk costly audits of their reimbursement requests, as well as possible clawback of reimbursement payments."[35] With inconsistent or ambiguous guidance, medical device manufacturers face the risk that the usage of their device will "plummet."[36]
D. MyoScience Seeks New CPT Codes and Favorable Reimbursement Rates
Prior to the Merger, the Individual Defendants, on behalf of MyoScience, mounted a campaign in 2018 and 2019 to clarify which CPT Codes "should apply to procedures that used the [iovera] product to treat knee pain" and to persuade the AMA to rescind its "confusing" prior guidance.[37] The Individual Defendants worked with Gail Daubert, MyoScience's "outside reimbursement counsel" to persuade the AMA to rescind prior 2018 guidance...
