Filed: Jul. 17, 2007
Latest Update: Feb. 12, 2020
Summary: UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 06-1587 MARTEK BIOSCIENCES CORPORATION, Plaintiff - Appellee, versus ROBERT ZUCCARO, as Stockholders’ Representative of the former Interest Holders of OmegaTech, Inc., Defendant - Appellant. Appeal from the United States District Court for the District of Maryland, at Baltimore. Andre M. Davis, District Judge. (1:04-cv- 03349-AMD) Argued: May 24, 2007 Decided: July 17, 2007 Before NIEMEYER and DUNCAN, Circuit Judges, and HAMIL
Summary: UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 06-1587 MARTEK BIOSCIENCES CORPORATION, Plaintiff - Appellee, versus ROBERT ZUCCARO, as Stockholders’ Representative of the former Interest Holders of OmegaTech, Inc., Defendant - Appellant. Appeal from the United States District Court for the District of Maryland, at Baltimore. Andre M. Davis, District Judge. (1:04-cv- 03349-AMD) Argued: May 24, 2007 Decided: July 17, 2007 Before NIEMEYER and DUNCAN, Circuit Judges, and HAMILT..
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UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 06-1587
MARTEK BIOSCIENCES CORPORATION,
Plaintiff - Appellee,
versus
ROBERT ZUCCARO, as Stockholders’
Representative of the former Interest Holders
of OmegaTech, Inc.,
Defendant - Appellant.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. Andre M. Davis, District Judge. (1:04-cv-
03349-AMD)
Argued: May 24, 2007 Decided: July 17, 2007
Before NIEMEYER and DUNCAN, Circuit Judges, and HAMILTON, Senior
Circuit Judge.
Vacated and remanded by unpublished opinion. Judge Niemeyer wrote
the opinion, in which Judge Duncan and Senior Judge Hamilton
joined.
ARGUED: J. Clifford Gunter, III, BRACEWELL & GIULIANI, L.L.P.,
Houston, Texas, for Appellant. Mark D. Gately, HOGAN & HARTSON,
L.L.P., Baltimore, Maryland, for Appellee. ON BRIEF: Andrew M.
Edison, BRACEWELL & GIULIANI, L.L.P., Houston, Texas; Shelby J.
Kelley, BRACEWELL & GIULIANI, L.L.P., Washington, D.C., for
Appellant. Lauren S. Colton, HOGAN & HARTSON, L.L.P., Baltimore,
Maryland; Catherine E. Stetson, HOGAN & HARTSON, L.L.P.,
Washington, D.C., for Appellee.
Unpublished opinions are not binding precedent in this circuit.
-2-
NIEMEYER, Circuit Judge:
Under the terms of a March 2002 merger agreement between
Martek Biosciences Corporation and OmegaTech, Inc. -- two
manufacturers of “DHA,” a type of long-chain fatty acid thought to
be good for cardiovascular health -- Martek agreed to pay OmegaTech
shareholders an additional $10 million in Martek stock if and when
each of four “milestones” was achieved after the date of the merger
agreement. One such milestone, which is at issue in this case,
would be achieved if the National Academy of Sciences published an
authoritative statement recommending a “dietary reference intake”
of DHA that would permit an application to the United States Food
and Drug Administration (“FDA”) for a “nutrient content claim on
food labels,” so that upon approval of the application, Martek’s
customers could advertise the presence of DHA in their products.
The National Academy of Sciences in fact published a report,
which came after the date of the merger agreement, but it stopped
short of setting a precise dietary target for DHA. The report did,
however, endorse DHA as contributing to the proper intake of a
short-chain fatty acid, “LNA,” leading OmegaTech’s former
shareholders to request payment under the milestone. When Martek
and the OmegaTech shareholders could not agree whether the National
Academy of Sciences’ report sufficiently recommended DHA to satisfy
the milestone requirements, they decided to seek regulatory
approval for the product claims based on the report, on the theory
-3-
that FDA approval would signal that the milestone had been
achieved. Even though the FDA approved the product claims, the
parties still could not agree whether Martek owed the OmegaTech
stockholders the $10 million for satisfaction of the milestone.
Martek commenced this action for a declaratory judgment that the
milestone had not been achieved, and the former OmegaTech
shareholders through their appointed representative, Robert
Zuccaro, counterclaimed for breach of contract.
On Martek’s motion for summary judgment, the district court
ruled that the milestone had not been achieved, entering a
declaratory judgment that Martek had no duty to pay the additional
$10 million. We conclude, however, that the language of the
contractual milestone is ambiguous and that the district court must
therefore assess, as a factual matter, the intentions and purposes
of the parties to the bargain and whether Martek received the
benefit of the bargain. Accordingly, we vacate the summary
judgment and remand for further proceedings.
I
Prior to the merger, both Martek and OmegaTech manufactured
DHA (docosahexaenoic acid) from algae that naturally produce that
type of long-chain fatty acid. DHA is used as a dietary
supplement, in baby formula, and as a food additive.
-4-
Under the merger agreement between Martek and OmegaTech, dated
March 25, 2002, Martek agreed to pay OmegaTech’s stockholders
approximately $50 million in Martek stock. It also agreed to pay
an additional $10 million in stock for each of four “milestones”
that was achieved during an “earn-out period” -- the period between
March 25, 2002, and October 30, 2004. Two of the milestones
related to financial performance, recognizing that OmegaTech would
be worth more if the combined companies sold an increased amount of
product in the two years after the merger. The other two
milestones related to regulatory approval of claims that could be
made about DHA on food packages. The milestone at issue in this
case is the “nutrient content claim milestone,” which rewarded
potential FDA regulatory action permitting certain types of claims
about DHA on product packages.
The parties recognize that OmegaTech would have greater value
if customers of the combined companies could make certain types of
“nutrient content claims” on their product packages, such as “this
product contains DHA” or “this product contains 32 milligrams of
DHA, 20% of a daily value.” The ability to make such claims was an
important business goal because “it would be extremely difficult,
if not impossible, to sign major food companies to DHA licensing
deals unless DHA could be promoted on food labels.”
-5-
The language of the milestone, keyed to compliance with and
the language of the Food and Drug Administration Modernization Act,
reads as follows:
If the National Academy of Sciences (the “NAS”), at any
time during the Earn-Out Period, makes an authoritative
statement recommending a Dietary Reference Intake (a
“Recommendation”), including, without limitation, a
Recommended Daily Intake or any Adequate Intake, citing
a specific milligram level for the long-chain fatty
acid[] [DHA] that permits application to the U.S. Food
and Drug Administration, pursuant to the Food and Drug
Administration Modernization Act, for a nutrient content
claim on food labels for [DHA], provided, however, that
this nutrient content claim must be limited to [DHA] and
shall specifically not include the short chain omega-3
fatty acid alpha-linolenic acid (“LNA”), such numbers of
shares of Martek Common Stock equal to $10 million . . .
shall be distributed to the Interest Holders.
Cf. 21 U.S.C. § 343(r) (with respect to the emphasized terms).
The parties initially crafted the language of the milestone to
depend on the FDA’s approval of a nutrient content claim for DHA.
They abandoned that concept, however, because FDA approval would
take too long and the merging parties did not believe that Martek
would be able to obtain FDA authorization based on the then-
existing science. Therefore, they linked the $10 million milestone
payment to the publication of a scientific statement sufficient to
permit regulatory approval of nutrition claims for DHA -- in the
language of the statute, an “authoritative statement” sufficient
for FDA approval. The agreement thus set achievement of the
milestone at a time earlier in the regulatory process than actual
FDA approval of a nutrient content claim.
-6-
Also important to the merging parties was the right to make a
freestanding nutrient content claim with respect to DHA, a long-
chain fatty acid, as distinct from LNA (alpha-linolenic acid), a
short-chain fatty acid. If the nutrient content claim for DHA had
to be tied to a claim for LNA, it would be of less commercial value
to the parties. LNA was substantially cheaper than DHA, and Martek
lacked a competitive edge in making LNA.
Thus, at a high level of generality, the milestone would be
achieved when a scientific statement was published that was
sufficient to support an application to the FDA for approval of a
nutrient content claim for DHA, independent of LNA.
On September 5, 2002, a division of the National Academy of
Sciences issued a pre-publication draft of a report entitled
“Dietary Reference Intakes” (hereafter “Report”), which set dietary
reference intakes for certain food components, including fatty
acids. The Report, which the OmegaTech stockholders contended
qualified as the “authoritative statement” of the milestone,
stated:
Because of a lack of evidence for determining the
requirement for n-3 fatty acids, an [Adequate Intake] is
set based on the highest median intake of [short-chain
LNA] by adults in the United States where a deficiency is
basically nonexistent in free-living populations . . . .
Small amounts of [long-chain DHA] can contribute towards
reversing an n-3 fatty acid efficiency . . . . [DHA] can
contribute up to 10 percent of the total n-3 fatty acid
intake and therefore up to this percent can contribute
towards the [Adequate Intake] for [LNA].
-7-
Martek, however, did not agree that the Report was adequate. To
resolve the question whether this statement satisfied the
milestone, the OmegaTech stockholders (through Zuccaro) offered to
file a notification with the FDA for nutrient content claims for
DHA, on the theory that FDA approval of the nutrient content claims
would be strong evidence that the milestone was met. Martek agreed
with this course of action. The OmegaTech stockholders, as part of
a group of DHA manufacturers, applied for approval from the FDA in
January 2004 by submitting to the FDA a “notification” of the
specific nutrient content claims for DHA they wanted, basing these
claims on the Report. Under the FDA’s process, the FDA could have
approved the submitted claims, as contained in the notification, or
it could have allowed 120 days to elapse without disapproving the
claims, see 21 U.S.C. § 343(r)(2)(H), in which case the claims
would be approved by operation of law.
FDA let the 120 days elapse, and on May 15, 2004, the DHA
manufacturers were free to make the nutrient content claims
contained in the notification. Consistent with this approval, the
FDA placed a notice of the claims on a public docket.
Unsatisfied by the nutrient content claims of this
notification, Martek itself filed a nutrient content claim
notification in January 2005 for different claims, again based on
the Report. According to a Martek nutritionist who worked on
drafting the notification, an approval of these nutrient content
-8-
claims “would probably satisfy the milestone” in the merger
agreement. The Martek notification represented that the Report was
an authoritative statement and that the nutrient content claims for
DHA met the FDA requirements, as a recommended level of DHA could
be derived from the Report.
Again the FDA approved the Martek notification by allowing the
120 days to pass without comment, and by operation of law,
manufacturers were then permitted to make the nutrient content
claims for DHA (without referring to LNA), as claimed in the Martek
notification. Again, the FDA placed a notice on the public docket
for the allowed claims.
To date, the FDA has left in place the nutrient content claims
contained in both OmegaTech’s notification and Martek’s
notification and has approved, in addition, a Martek petition,
based in part on the Report, to make health claims for DHA (more
potent claims than simple nutrient content claims).
When the parties failed to agree thereafter on whether the
milestone in the merger agreement had been met, Martek commenced
this action for a declaratory judgment and moved for summary
judgment declaring that the milestone had not been met. In
granting Martek’s motion, the district court held that the
milestone had not been achieved because (1) “[T]he merger agreement
specifically requires that [a National Academy of Sciences]
endorsement of [DHA] come unattached to a recommendation on LNA
-9-
. . . [T]his is not the case”; and (2) the Report did not cite a
“specific milligram level” for DHA.1 From the district court’s
judgment, the OmegaTech stockholders, through Zuccaro, filed this
appeal.
II
Delaware law, which applies in this diversity action by reason
of the merger agreement’s choice of law provision, requires that
the text of a contract be applied if its meaning is clear. But if
the text is ambiguous, the court “will consider testimony
pertaining to antecedent agreements, communications and other
factors which bear on the proper interpretation of the contract.”
Pellaton v. Bank of New York, 592 A.2d 473, 478 (Del. 1991).
The district court found the text of the milestone provision
clear and applied the clear meaning to grant Martek summary
judgment. It based its conclusion on two reasons. First, it held
that “the merger agreement specifically requires that [a National
Academy of Sciences] endorsement of [DHA] come unattached to a
recommendation on LNA” and that the Report’s endorsement of DHA did
not come unattached to a recommendation on LNA. The court’s
reasoning, however, misreads the milestone provision. The
1
The district court did not reach Martek’s two other arguments
why the milestone was not achieved -- that the Report did not
contain “authoritative statements” and that the Report did not
“permit application” for a nutrient content claim for DHA.
Nonetheless, we find these arguments to be without merit.
-10-
provision does not require that the National Academy of Sciences’
recommendation on DHA come unattached to a recommendation on LNA.
Rather, it requires that the nutrient content claim for DHA not
include LNA. The parties bargained for the sort of recommendation
that would reasonably support a nutrient content claim for DHA,
which is why the decoupling of DHA and LNA was only required in the
nutrient content claim, not the recommendation supporting that
claim. With the text as written, the district court would have
been required to determine whether the recommendation was
sufficient to support a freestanding nutrient content claim for
DHA.
Second, the district court held that the “[Report] does not
‘cite a specific milligram level’ that it recommended for [DHA]
that could be applied to a nutrient content claim.” Because the
Report gave a range of intakes for DHA consistent with good health,
there was no “specific milligram level.” “Whereas the parties, by
the nutritional milestone, sought a declaration of the level of DHA
that a person should take, what they got from the [Report] was an
upper limit of how much someone could take. In this (material)
sense, the nutritional milestone is not met.” In making this
holding, the court construed an ambiguous term, resolving the
ambiguity to reach one chosen result. The same language, however,
equally supports the conclusion that the Report did cite specific
milligram levels for DHA.
-11-
The Report cited a specific milligram level for the short-
chain fatty acid LNA, giving a level, for example, of 1600
milligrams per day for adult men. It then proceeded to state that
up to 10% of that milligram level for LNA could be achieved by
consuming DHA. Thus, the Report could be read to say that 160
milligrams of DHA could, for adult men, help achieve the health
benefits suggested by the Report. While some levels could to this
extent be derived from the Report for DHA, the question remained
whether they were the type of levels bargained for by the parties.
The parties focus on the semantics of whether the “range”
cited by the Report can include a “specific milligram level.” The
OmegaTech stockholders rely on a dictionary definition of “range,”
noting that the term means a “series extending between certain
limits.” They argue accordingly that the Report’s citing of a
range is tantamount to citing a series of acceptable levels.
Martek responds by arguing that because the Report’s range was
consistent with zero consumption of DHA, the Report contains no
“precise numeric value.”2 Both of these arguments are based on
abstract understandings of the meaning of the word “level” and
whether citing a range is equivalent to citing a level. In a
particular setting, however, each might be correct in light of a
2
Martek does not on appeal defend the district court’s
distinction between a statement of how much DHA a person “should”
take and a statement of how much DHA a person “could” take.
Neither the parties’ agreement nor the industry practices seem to
assign relevance to this distinction.
-12-
particular purpose. Nothing on the face of the contract indicates
which of these specific meanings the drafters had in mind. Indeed,
the drafters appear to have focused on any level “that permits
application . . . for a nutrient content claim on food labels.”
The proper definition of the term therefore depends not only on an
abstract linguistic analysis, but also on the commercial purpose of
the milestone provision. And determining that purpose requires an
examination of extrinsic evidence of the parties’ intent.
The milestone provision also includes a structural ambiguity.
It provides that the OmegaTech stockholders would receive an
additional $10 million if (1) the National Academy of Sciences
issued an “authoritative statement,” (2) recommending a “dietary
reference intake,” (3) citing a “specific milligram level,” (4)
that “permits application” to the FDA for a “nutrient content
claim” for DHA. Structurally, the provision identifies three
criteria for the Report (items 1, 2, and 3), and one goal of the
milestone (item 4). As a whole, the provision appears to be aimed
at rewarding OmegaTech’s stockholders when the forward-looking
criteria reasonably suggest that a nutrient content claim for DHA
could be expected to be approved by the FDA. But in this case, we
need not look forward to see whether a nutrient content claim could
reasonably be expected to be approved, because we can look backward
and see that a nutrient content claim was indeed approved by the
FDA, no less than three times. Because the milestone is phrased as
-13-
if it will be evaluated after the issuance of the Report but before
any FDA action, it does not provide guidance as to how, or even
whether, the criteria were to be evaluated once the FDA had
approved a nutrient content claim. The milestone provision is thus
ambiguous, because not all reasonable readers of the contract would
conclude that the criteria are freestanding contractual
requirements rather than proxies for an ultimate goal, which we now
know has been accomplished.3
Because the milestone provision is ambiguous, the
responsibility for the courts is to find the intent of the parties,
relying on whatever evidence sheds light on that intent. See
Comrie v. Enterasys Networks, Inc., 837 A.2d 1, 13 (Del. Ch. 2003)
(holding that when a contract’s terms are ambiguous, “the court may
consider extrinsic evidence to uphold, to the extent possible, the
reasonable shared expectations of the parties at the time of
contracting”); accord Seaford Golf & Country Club v. E.I. duPont de
Nemours & Co., 2007 Del. LEXIS 221, at *20-*22 (Del. May 15, 2007);
Eagle Indus. v. DeVilbiss Health Care, Inc.,
702 A.2d 1228, 1232-33
(Del. 1997).
3
It is possible that the only reasonable reading of the
contractual purpose is the OmegaTech stockholders’ position. But
we leave this issue for further development. We also leave open
the issue of whether Martek, by virtue of its representations to
the FDA in its nutrient content claim notification, should be
judicially estopped from asserting that the milestone was not
achieved.
-14-
In sum, the ambiguities in the milestone provision require
factfinding as to what precisely the parties bargained for and
whether Martek has received the benefit of that bargain. See Brehm
v. Eisner, 906 A.2d 27, 69 (Del. 2006).
III
Because we find the relevant milestone provision ambiguous, we
proceed to determine whether the OmegaTech stockholders have
presented enough extrinsic evidence to create a question of fact
about the parties’ shared intent and therefore to defeat Martek’s
motion for summary judgment.
Taking the evidence in the light most favorable to the
OmegaTech stockholders, the record supports the conclusions that
the purpose of the milestone provision was to reward OmegaTech’s
stockholders for the ability to make nutrient content claims and
that Martek has therefore received the benefit of the bargain.
Because the parties wanted a shorter earn-out period than would be
needed to await final FDA approval of a nutrient content claim, the
milestone was keyed to publication of a report reasonably
calculated to support approval of a nutrient content claim. This
is supported by the milestone’s tracking of the statutory terms
governing FDA approval of nutrient content claims, as well as the
explicit allusion to a report that “permits application to the
[FDA] pursuant to the Food and Drug Administration Modernization
-15-
Act.” Compare J.A. 120-21 (“If the National Academy of Sciences
. . . makes an authoritative statement”) with 21 U.S.C. §
343(r)(2)(G)(I) (“the National Academy of Sciences or any of its
subdivisions has published an authoritative statement”); compare
J.A. 120-21 (“citing a specific milligram level”) with 21 U.S.C. §
343(r)(2)(G)(I) (“which identifies the nutrient level to which the
claim refers”). The reference to and use of the statutory language
reflects a single purpose of obtaining permission to make nutrient
content claims relating to DHA. Thus, in the light most favorable
to OmegaTech stockholders, the approval of the nutrient content
claim would prove a fortiori that the recommendation was sufficient
to meet the business goals of the merger agreement.
Parol evidence likewise suggests that the milestone was simply
intended to reward the ability to make nutrient content claims, a
reward well-earned in view of the FDA’s actions. For example, Kent
Meager, former chairman of the board of OmegaTech, testified in
deposition that:
I recall being delighted by some of its language,
specifically the language permits, because there was
concern associated with the timing of actually getting a
nutrient content claim, what I considered to be the
ultimate objective of the milestone.
* * *
[The milestone] changed to simply not have as the
objective a filed and allowed nutrient content claim, but
simply the permission or permitted notification slash, as
this is termed, application.
* * *
-16-
It was basically saying that if the report came out with
something that distinguished DHA such that you could make
-- and had a recommendation -- such that you can make a
notification under FDAMA for a nutrient content claim,
that rather than having us wait through the process of
will the FDA grant it or not, that we would -- the
milestone would be considered achieved and the shares
would be distributed.
(Emphasis added). Robert Di Scipio, former general counsel of
OmegaTech, testified similarly by affidavit:
While OmegaTech realized the importance of securing a
Nutrient Content Claim for [DHA] for Martek, OmegaTech
did not want to wait two to three years until a Nutrient
Content Claim was achieved under the FDAMA procedures to
receive payment on the Nutrient Content Claim Milestone.
Martek’s CFO, Pete Buzy, indicated that he also did not
want to wait until a Nutrient Content Claim was achieved
to pay off the Nutrient Content Claim Milestone, because
he did not want the Martek shares escrowed for the
milestones to be outstanding for that long.
The Martek and OmegaTech negotiators agreed that the
milestone should be paid if it appeared that a Nutrient
Content Claim for [DHA] could be secured. Both companies
agreed that the Nutrient Content Claim Milestone would be
deemed achieved if an anticipated [Report] contained a
statement regarding [DHA] that would simply permit
application for a [DHA] nutrient content claim so that
OmegaTech shareholders would be paid before the FDAMA
process even got underway. Accordingly, OmegaTech and
its shareholders would not be waiting for payment on the
Nutrient Content Claim Milestone while the notification
worked through the system.
* * *
At all times during the negotiations, the intended
purpose of the Nutrient Content Claim Milestone, . . . ,
was to achieve a Nutrient Content Claim for [DHA] that
did not include LNA.
Mark Braman, then-CEO of OmegaTech, testified:
-17-
Both OmegaTech and Martek realized the National Academy
of Science/Institute of Medicine Report making an
authoritative statement identifying a nutrient value for
DHA was a lower hurdle (trigger) for achieving the
milestone than actually obtaining a DHA nutrient content
claim, and agreed that if the Report simply “permitted”
the filing of an application (notification) for a [DHA]
nutrient content claim, under the FDAMA, then the
“Nutrient Content Claim Milestone” would be considered
achieved.
* * *
At no time during the negotiations did the parties
discuss or express the idea that a nutrient content claim
for [DHA] could be achieved pursuant to the FDAMA without
satisfying the “Nutrient Content Claim Milestone”.
Finally, the chief negotiator for OmegaTech, Jim Flatt, who later
went to work for Martek, testified in deposition:
Q. So there would be a benefit to Martek if a nutrient
content claim could be obtained for DHA; correct?
A. Correct.
Q. And the purpose of the milestone was to reflect
that; correct?
* * *
A. The purpose of this milestone was to reflect an
achievement or a fairly objective and specific
achievement, it would represent a step towards the
nutrient content claim. Because, again, if you
reviewed the milestone, it is based on the National
Academy of Sciences making an authoritative
statement regarding a very DRI, or dietary
reference intake for DHA as specified milligram
level that would be sufficient to allow one to
apply for a nutrient content claim under FDAMA.
So the milestone, in my understanding and the
intent at that time, did not reflect the issuance
of the nutrient content claim but rather the
issuance of a report that would serve as an
-18-
authoritative statement that would allow for the
nutrient content claim to be filed for.
Q. In other words, under the milestone, a nutrient
content claim did not necessarily have to be
achieved?
A. That’s correct.
Q. You simply had to have the prerequisites to obtain
a nutrient content claim; correct?
A. To have one of the princip[al] prerequisites,
that’s correct.
The remainder of Flatt’s deposition suggests that all discussion
revolved around what criteria would be required to predict whether
the Report was sufficient to permit a nutrient content claim.
All of this testimony supports the position of the OmegaTech
stockholders that the specific criteria for the necessary Report
existed only to predict when the FDA would allow a nutrient content
claim, and that once such a claim had been approved, Martek had
received the benefit of the bargain. But there is also at least
some evidence that supports Martek’s position that the parties
bargained for a specific kind of recommendation, rather than simply
one that was sufficient to justify a nutrient content claim.
Taking the evidence in the light most favorable to the OmegaTech
stockholders, however, the evidence would amply support a
reasonable factfinder in concluding that the milestone was
achieved; that Martek received the benefit of the bargain; and that
therefore Martek owes the performance promised under the milestone.
-19-
There is therefore a genuine dispute of material fact that should
not have been resolved on a motion for summary judgment.
Accordingly, the judgment of the district court is vacated,
and the case is remanded for further proceedings.
VACATED AND REMANDED
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