Pharmaceutical drug development is expensive. One recent study estimates that the median cost to develop a new drug is $985 million, while the average is $1.3 billion. And those figures appear to be on the low end of a broad range. Others have estimated the average cost at approximately $2.5 to $3 billion, with costs increasing annually at a post-inflation rate of approximately 8.5%.

As a result, companies engaged in drug development often enter into a wide array of agreements—including pure funding agreements, R&D collaboration agreements, and IP license agreements—to help defray costs, mitigate risk, and/or recoup some of their initial investment. A common feature of these agreements is the obligation of one party to expend a specified level of effort to advance the product candidate through the development, regulatory and/or commercialization processes. That level of effort is very often expressed as “commercially reasonable efforts”. It is therefore important for parties to understand the ways in which that standard of effort is interpreted and applied by the courts.  This article focuses on New York substantive law.

As an initial matter, “[t]here is no settled or universally accepted definition of the term ‘commercially reasonable efforts’ . . . In fact, New York case law interpreting other efforts clauses, including best efforts and reasonable efforts clauses, is anything but a model of clarity.” Holland Loader Co. v. FLSmidth A/S. Nonetheless, certain jurisprudential principles have emerged, and they provide at least some indication of how a court or arbitral tribunal would analyze whether a company complied with its covenant to expend “commercially reasonable efforts”.

Courts have held that the “standard for satisfying commercial reasonability under New York law is a fairly lenient one.” Shane Campbell Gallery, Inc. v. Frieze Events, Inc. Often, the standard is expressed in terms of what is not required of the party. Thus, a party is not required to use “a degree of efforts that jeopardizes [its] business interests,” and “[i]s not required to do things . . . it would not have made commercial sense to do,” In re Condado Plaza Acquisition LLC.  Additionally, “evaluation of a party’s compliance with a ‘[CRE]’ requirement does not involve a hindsight comparison of the party’s actual conduct to that which could have been undertaken to produce a better result; a court should evaluate only whether the party’s actual conduct was sufficient.” Significantly, the party alleging that its counterpart has failed to utilize “commercially reasonable efforts” must “establish the objective standard by which the breaching party’s efforts are to be judged, in the context of the particular industry.”

Based on the foregoing, parties seeking to enforce a “commercially reasonable efforts” clause often face an uphill battle. At a minimum, they must procure experts to establish the factors that pharmaceutical companies ordinarily consider when making drug development decisions, and to explain why the company’s decision(s) in the instant case did not comport with the decision(s) that a reasonable pharmaceutical company ordinarily would have made. See MBIA v. Patriarch Partners VIII, LLC.

In an attempt to avoid the uncertainties associated with enforcement of a “commercially reasonable efforts” clause, parties sometimes set forth specific actions or behaviors that will necessarily be deemed to have satisfied the obligation to utilize “commercially reasonable efforts,” or specific factors that can or cannot be considered when making decisions as to the level of efforts to expend on the drug’s development. See, e.g., Merck & Co., Inc. v. Pericor Therapeutics, Inc. Specified actions might include, for example, a minimum budget for the project; and factors that might be removed from consideration might include other product candidates that could conceivably compete for limited development funding.

In those circumstances, it is debatable whether judicial interpretations of “commercially reasonable efforts” clauses are even applicable. That question has not yet been squarely addressed, although some decisions could be read to suggest that the interpretative principles set forth in decisions where an undefined “commercially reasonable efforts” obligation is at issue are, in fact, inapplicable when the parties have specifically defined the term. See Holland Loader Co. v. FLSmidth A/S, 313 F. Supp. 3d at 473 (setting forth applicable legal principles “[w]hen the term ‘commercially reasonable efforts’ is not defined by the contract”). Still, one could argue that New York case law at least puts a gloss on how a defined “commercially reasonable efforts” term should be interpreted. Therefore, parties seeking to set forth a specific, objective standard for satisfactory development and/or commercialization efforts should carefully consider whether they want to employ the phrase “commercially reasonable efforts” as shorthand, or whether they would be better served by avoiding it altogether.

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Photo of Russell T. Gorkin Russell T. Gorkin

Russell T. Gorkin is an associate in the Litigation Department. Russell’s practice encompasses a broad range of complex commercial litigation matters, including product liability defense and contract disputes, across a wide variety of industries, including life sciences and pharmaceuticals, consumer goods, sports, and…

Russell T. Gorkin is an associate in the Litigation Department. Russell’s practice encompasses a broad range of complex commercial litigation matters, including product liability defense and contract disputes, across a wide variety of industries, including life sciences and pharmaceuticals, consumer goods, sports, and financial services. He has represented some of the world’s most successful and sophisticated entities and individuals in state and federal trial and appellate courts, as well as before arbitral tribunals.

Most recently, Russell helped secure a favorable settlement on behalf of an alternative investment firm alleging breach of contract and other claims against a multinational pharmaceutical company after a two-week arbitral merits hearing featuring 20 witnesses. Other notable recent or current representations include:

  • Assisting the trial team that achieved a complete defense verdict in Echeverria v. Johnson & Johnson, a product liability case arising from the plaintiff’s use of Johnson & Johnson talcum products;
  • Representing Bank of New York Mellon, Wells Fargo, and several other financial institutions in litigation arising from the Tribune Company’s Chapter 11 bankruptcy filing following a leveraged buyout the year before;
  • Representing Madonna in a dispute concerning the ownership of certain property, including a letter written by the late Tupac Shakur;
  • Representing several financial services clients in litigation arising from the Madoff Ponzi scheme; and
  • Counseling Major League Soccer with regard to various club and player governance issues.

Russell also maintains an active pro bono practice. He was awarded the firm’s Golden Gavel award in 2019 for his role in securing a settlement on behalf of deaf and hard of hearing probationers and parolees under the supervision of the Louisiana Department of Public Safety and Corrections by requiring the Department to, among other things, provide qualified, certified American Sign Language interpreters. The case was the first in the nation to assert the right to an ASL interpreter on behalf of probationers and parolees.

Prior to joining Proskauer, Russell served as a law clerk to the Honorable George B. Daniels at the U.S. District Court for the Southern District of New York and, before that, to the Honorable Robin S. Rosenbaum at the U.S. Court of Appeals for the Eleventh Circuit.

While in law school, Russell served as a Senior Editor for the Duke Journal of Constitutional Law and Public Policy, and received the Dean’s Award for Evidence. His scholarship has appeared in the Harvard Journal of Sports & Entertainment Law and the Duke Journal of Constitutional Law and Public Policy Sidebar, and has been cited in the Harvard Law Review and in an amicus curiae brief filed with the Supreme Court of the United States, among other places.

Prior to law school, Russell worked for several years as a management consultant.

Photo of Colin G. Cabral Colin G. Cabral

Colin Cabral is a litigator and trial lawyer specializing in complex patent, intellectual property, and contract disputes.

Colin has wide-ranging experience litigating cases in federal district court. He has represented pharmaceutical companies in patent disputes relating to small molecule compounds and biosimilar drugs.

Colin Cabral is a litigator and trial lawyer specializing in complex patent, intellectual property, and contract disputes.

Colin has wide-ranging experience litigating cases in federal district court. He has represented pharmaceutical companies in patent disputes relating to small molecule compounds and biosimilar drugs. He has also served as lead trial counsel in patent and trade secret matters involving computer software, electronic devices, and consumer products.

Recently, Colin has represented pharmaceutical companies and investors in contract disputes arising out of unsuccessful drug development programs.

In 2017, Colin was named to Benchmark Litigation’s Under 40 Hotlist, which recognizes attorneys under the age of 40 who “have been deemed the most promising emerging talent in their respective litigation communities . . . by peers and clients.”

Previously, Colin served as in-house litigation counsel for a global life sciences company. He also served as a Special Assistant District Attorney in Dorchester, MA.

Colin volunteers as regular faculty for the National Institute for Trial Advocacy. He is Board Chairman of FreeFrom, a charitable organization that helps survivors of domestic violence achieve financial independence. He is also a board member of the Legal Aid Foundation of Los Angeles (LAFLA).