Virulite LLC v Virulite Distribution Ltd & Anor

Where the Court does not have the luxury of a formal contract document that is agreed to constitute the entire contractual agreement, English law generally resorts to an analysis founded on the concepts of offer and acceptance in order to determine whether there is a contract and, if so, on what terms. The justification for this analytical approach is that “it has the great merit of providing a degree of certainty which is both desirable and necessary in order to promote commercial relationships.”: see Tekdata Intercommunications Ltd v Amphenol Ltd [2009] EWCA Civ 1209 per Dyson LJ at [25]. It is applied even in circumstances which do not easily lend themselves to such an analysis. In such cases “English law, having committed itself to a rather technical and schematic doctrine of contract, in application takes a practical approach, often at the cost of forcing the facts to fit uneasily into the marked slots of offer, acceptance and consideration.”: see New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd [1975] AC 154,167 per Lord Wilberforce.

In this analytical approach an offer is typically “an expression of willingness to contract on specified terms made with the intention (actual or apparent) that it is to become binding as soon as it is accepted by the person to whom it is addressed”; and an acceptance is “a final and unqualified expression of assent to the terms of an offer”, with the objective test of agreement applying to an acceptance no less than to an offer: see Chitty on Contracts, 31^st Edn at 2-003, 2-027. With rare exceptions, no particular form of words is required in order to constitute offer and acceptance, as is clear from the fact that acceptance may be signified by conduct or even silence in appropriate cases. In particular, the parties may not use the words “offer” or “accept”, the question being whether each has signified an intention to be bound by identical terms that can be identified objectively with suitable certainty. It is for that reason that the exercise undertaken by the Court may be described as being “to look at all the documents passing between the parties – and glean from them, or from the conduct of the parties, whether they have reached agreement on all material points.”: see Butler Machine Tool Co v Ex-Cell-O Corp [1979] 1 WLR 401, 404 per Lord Denning MR, in a “battle of the forms” case.

In a case such as this, where negotiations have gone back and forward, it is appropriate to apply an offer and acceptance analysis, for precisely the reasons given by Dyson LJ. While recognising that the parties to such negotiations were not required to use the language of “offer” and “acceptance”, the implication of their not having done so may support the conclusion that there was no moment of contractually binding consensus ad idem.

Issue 2(iii)(c) raises the issue of acceptance by conduct. The relevant principles are usefully summarised at Chitty on Contracts at 2-076. Silence is generally equivocal; but circumstances may arise where silence is sufficient to amount to acceptance of an offer. Similarly, a party’s conduct when viewed in context may demonstrate acceptance of an offer: it will be a question to be decided on the particular facts of each case whether it has done so.

The only other point to be noted at this stage is that it is entirely possible in the course of prolonged communications between parties that they may reach a contractually binding consensus at some intermediate point and then continue to communicate or negotiate going forward from that established consensus. However, where negotiations continue without interruption, that fact may contribute to the difficulty of establishing that the intermediate point represented a moment of contractually binding consensus: see Chitty at 2-028.

1072/VDL places at the forefront of its submissions that LLC’s case has undergone numerous iterations from the first response of its US Attorneys through the original Particulars of Claim, the witness statements of Ms Higginson and Mr Field, the Amended Particulars of Claim, and finally the oral evidence. The references relied upon by 1072/VDL in closing submissions show significant developments and shifts in emphasis, which are reflected in the need for LLC to amend the Particulars of Claim late in the proceedings, though there is a degree of consistency in making the Claimant’s primary case by reference to an offer made by Ms Higginson on 26 November 2008 with acceptance on 22 January 2009, as was advanced in the US Attorney’s original letter. In my judgment the developments with time are sufficient to require the Court to be cautious when assessing the evidence: a broad brush approach is not appropriate.

The other submission placed by 1072/VDL at the forefront of its submissions is that it is impossible to identify any consensus ad idem on the documents that passed between the parties. I bear that submission in mind at all times; but it is right also to bear in mind that the LLC does not rely solely upon the written communications between the parties: it also relies upon conversations, in particular the conversation in Cambridge on 26 November 2008 and what was described as the dog-walking conversation which is alleged to have occurred at the end of January or early in February 2009.

Before the meeting between Ms Higginson and Mr Rothon on 26 November 2008, the three Managing Members of LLC discussed their approach to the meeting. Mr Field’s witness statement states what LLC’s position was to be: “Our agreed position that Ms Higginson presented to Mr Rothon at the meeting was that we had a potential lawsuit against [1072/VDL]. Consequently we would insist that all further Consideration Payments should be suspended until after FDA clearance had been obtained, and we were generating income from the sales of the CSF. Our position was that we did not want to make any further payments to Dr Dougal, and [1072/VDL], until we had some money coming in.” Mr Mencanin agreed in evidence that this represented his position. Ms Higginson’s witness statement did not deal with the LLC pre-meeting discussions but when she came to give evidence she shaded the position as set out in Mr Field’s statement by saying that delaying until there was a revenue stream was LLC’s ideal position, with delaying until FDA approval being their fall-back position. Mr Field gave oral evidence to the same effect, which marked a clear shift from the position evidenced by his witness statement.

Ms Higginson’s account of the meeting in her witness statement is important. She printed off the results of the Hargate 2 trial, showing the gap in recruitment during 2007.

“I told Mr Rothon that we wanted any further Consideration Payments to the Defendants delayed until after we had income from sales of the CSD to pay towards these i.e. we would not pay these until after FDA clearance. I looked upon this as a point of principle because we had put so much effort into getting the FDA submission ready, that we believed it was wrong for Dr Dougal to expect us to make a payment to him when he was so at fault in the FDA trial process, in terms of the delays and the incompleteness of the data as provided.

We also wanted the £50,000 Consideration Payment delayed. We did not see why we should make this payment to the Defendants without receiving an income. We were also concerned that we would no longer be first to market and that the Zeno device might obtain traction before we were able to launch. It looked as though it might now be much harder to make money out of the [Device] post clearance. There was also a good commercial reason why we wanted both Consideration Payments delayed. We would have been obliged to pay £75,000 at the very time we were seeking to launch the product. I thought this might have had a detrimental effect on our ability to maximise sales of the CSF at the very time when we should be exploiting the commercial opportunity to the maximum. My position was that we wanted both the Consideration Payments delayed until we saw a financial return from sales of the CSD and at least until FDA clearance. I also reiterated the standing agreement with Dr Dougal that no payments would be made until patents were granted in the USA, Canada and Japan. Mr Rothon’s position was that he thought it reasonable that we should not have to make any further Consideration Payments until clearance was obtained and he would speak to Mr Tassell and Dr Dougal about this.”

Under cross-examination Ms Higginson developed her evidence that she had put forward a fall-back position while pushing for everything that she could get (i.e. delaying further Consideration Payments until there was an income stream). As she put it: “That’s what business people do.” She said of her meeting with Mr Rothon:

“…having discovered the lengthy periods when the Hargate II trial had been interrupted and ceased, I showed him a printout of the spreadsheet with the data with the dates on it, realising that we had had no idea just how long there had been no activity going on in the pursuit of that trial. I said to him either "This is a lawsuit," or "There's a lawsuit here", but the solution is, you know, in my opinion quite easy: if we delay the payment until we receive FDA clearance, then any issues with this data not being good enough, being incomplete or taking this long will be negated because the FDA clearance will validate it all anyway. Ideally, what we want is not to pay anything more until we've got a revenue stream because we felt that we'd waited all this time for a revenue stream and not knowing that part of those -- quite a significant part of those delays are caused by Dr Dougal not doing anything to pursue the clinical data …”

According to Mr Field’s witness statement, Ms Higginson told him that the meeting had gone well and that Mr Rothon had said that LLC’s proposal sounded fair. It is to be noted that Mr Field’s account of LLC’s proposal in his witness statement did not include the fall back position.

Mr Rothon’s witness statement gave little detail about the conversation on 26 November 2008 beyond saying that Ms Higginson requested that 1072/VDL put back the timing of the balance of the payments due under the DLA until LLC was in receipt of revenue. In his oral evidence he said he remembered that to be what she had said. Throughout his evidence he was consistent in saying that he would not have countenanced the suggestion that the Consideration Payments should be delayed until LLC was in receipt of an income stream.

Two days after the meeting he sent an email to the three Managing Members of LLC, copied to Mr Tassell and Dr Dougal, in which he outlined from his perspective the major issues that had been discussed. The email dealt first with Geographic Coverage: Mr Rothon felt that LLC should put more effort into countries outside the United States. The email recorded that 1072/VDL and LLC appeared to be far apart on the issue of pricing, with LLC proposing a much higher price than 1072/VDL thought right. At the end of the email he wrote:

“10.

Contractual payments from LLC to Virulite UK. Louise asked if the balance of payments could be changed and only become due when FDA and patent approval is achieved. This I will discuss with Chris and Gordon next week.”

Mr Rothon’s evidence was that his Item 10 was mistaken and did not accurately reflect what Ms Higginson had said. However, there is no obvious reason why Mr Rothon should have made a mistake so soon after the meeting. Furthermore, if Ms Higginson had not even mentioned deferral until FDA clearance as at least a fall back position on which LLC would be prepared to agree, there is no reason why Mr Rothon should have mistakenly recorded Ms Higginson’s request in these particular terms. If, on the other hand, Item 10 was accurate then it would be consistent with Mr Rothon being implacably opposed to deferring payment until there was a revenue stream (so that he refused to discuss it further and did not mention it in the email) but considering that deferral until after FDA approval sounded reasonable (so that he was prepared to discuss it with Dr Dougal and Mr Tassell). The email therefore provides material support for Ms Higginson’s evidence about what was said at the meeting on 26 November 2008.

Ms Higginson replied to Mr Rothon’s email on 1 December 2008 under the subject heading “Pricing/FDA”. A fair reading of the email as a whole reveals that, as was stated at its outset, LLC was troubled by what Mr Rothon had said. It also shows that what Ms Higginson was concentrating on was the sections of Mr Rothon’s email that had dealt with pricing and geographic areas other than the United States. Paragraph 6 was directed to Mr Rothon’s suggestion that they should start marketing in Canada. At the end of that paragraph Ms Higginson wrote: “We have already told you that we are not putting our hands in our pockets again until we start to see returns from the Virulite project. We’re paying out for the FDA & we want to see that further investment realised.” 1072/VDL relies upon this extract as showing that Ms Higginson’s sole proposal on Consideration Payments had been deferral until there was a revenue scheme. I disagree. Seen in its proper context, these sentences were not directed to the question of Consideration Payments but to the suggestion that LLC should start funding other countries than the United States. Much of the rest of the email concentrated on pricing. There was no reference to the deferral of Consideration Payments. That is how Mr Rothon understood the email: his response the next day (Footnote: ⁷) concentrated on pricing and did not mention Consideration Payments either, which he would probably have done if he had regarded Ms Higginson’s email as saying that LLC would only contemplate deferral of the Consideration Payments until there was an income stream. The position remained that Mr Rothon was to come back to LLC after he had discussed the issue of Consideration Payments with Mr Tassell and Dr Dougal.

On 22 January 2009 Mr Rothon came back as he had said he would. Since this email is relied upon by LLC as 1072/VDL’s acceptance of LLC’s fallback position I set the relevant parts out in full, summarising the rest in square brackets:

“Just a quick update regarding our discussions with Gordon yesterday and some developments we are planning for the future.

The meetings with Gordon went well and we are all in agreement that gaining FDA approval is to be our major focus. [Mr Rothon disclosed that they had been in contact with two individuals – later revealed to be Ms D’Arcy and Mr Baker – and made observations on pricing for the Device.]

We also started to put together our future financial plans and I thought it would be good to outline our expectations from you once we gain FDA approval (which are in line with the contract we have with you.)

If we assume FDA approval is gained in March 2009.

1.

25k to be paid by LLC to Virulite within 30 days. This is the delayed stage payment we agreed prior to FDA approval.

2.

£50k to be paid to LLC 90 days after FDA approval. This is the final stage payment as per the contract.

3.

…

4.

…

Comments welcome. Will get back to you when I have more info.”

There are a number of points to be made about this email:

When considering whether the words “if we assume FDA approval is gained in March 2009” are a condition precedent, it is necessary to take an objective view bearing in mind that the email was written by a non-lawyer to non-lawyers and that it was written without attempting the precision of language that might be expected of a lawyer’s communication. Adopting that approach, I do not consider that a party in the position of LLC and having LLC’s knowledge at the time would reasonably have understood the meaning of the email to be that deferring payment until after FDA approval was only acceptable to 1072/VDL if that approval was obtained before 1 April 2009, for a number of reasons. First, the previous line had referred to 1072/VDL’s expectations “once we gain FDA approval” without limitation as to time. Second, even allowing for imprecision in language, the words used did not say or necessarily imply that obtaining approval in March 2009 was a pre-requisite to any deferral. Third, while a detailed syntactical analysis shows that the words do not lead naturally to some other defined end point (e.g. a statement that if approval in March 2009 is assumed, certain payments have to be made by a specified date as opposed to a certain period after approval), Mr Rothon’s confused language elsewhere (e.g. in the second sentence of numbered paragraph 1) shows that such detailed syntactical analysis is inappropriate. Fourth, the lack of clarity and potential ambiguity in the words would have been reinforced in the minds of LLC by their clear understanding (which had been passed on to 1072/VDL) that there was no realistic prospect of approval being obtained then: so an offer that was contingent on approval in March 2009 was in reality no offer at all.

A reasonable understanding that the reference to March 2009 was not an essential prerequisite to deferral would have been and is reinforced by a further email which Mr Rothon sent to Mr Field the next day in which he said: “I will do all I can to get the info you need from Gordon, as stated we are committed to getting FDA approval ASAP. It is my number 1 priority. Regarding the stage and royalty payments …. what I really tried to say is 12 months after FDA approval we expect LLC to have paid us a minimum of £415k. This simply has to happen at the agreed timescales and if [you] have any issues committing to these payments I need to know now, not when we get FDA approval. … Lance, look forward to your reply on this subject, now is the time to talk.” Apart from there being no reference to March 2009, the reference to getting the information that LLC needed from Dr Dougal was a reference to the information that LLC had been asking for on the basis that it was necessary for the obtaining of FDA approval. Mr Rothon’s email therefore carried some recognition that, with only two months to the end of March 2009, LLC had still not been provided with necessary information. Once again, Mr Rothon’s email did not use the language of offer and acceptance. However, taking all of the information known to the parties at that point, the emails of 22 and 23 January 2009 taken together were a clear statement that 1072/VDL was prepared to defer the £25,000 to after FDA approval provided it then was paid within 30 days and that 1072/VDL required the total of £415,000 to be paid within a year of approval.

Mr Rothon followed up by a further email on 28 January 2009 to Mr Field when he wrote: “Don’t forget I need your inputs today regarding the stage payments after FDA approval. If you would like to discuss this then call my mobile, but I need to know if you can comply.” His reference to compliance was raising the question whether LLC would have the money to enable it to comply. The language of the first sentence of the email is the language of an ongoing discussion, although that does not determine the issue whether an agreement had already been reached.

When she responded on 28 January 2008 Ms Higginson started by welcoming the fact that LLC and 1072/VDL were now agreed that making FDA clearance was the priority. That did not say or imply that they had agreed about deferral of the Consideration Payments (as Ms Higginson wrongly contended in her witness statement). She turned to the issue of Consideration Payments later in the email. Since 1072/VDL submits that the email was a rejection of any offer that had been made by Mr Rothon, I set out the material parts in detail, summarising other parts in square brackets:

“Consideration Payments: When you & I met in November, I openly explained our concerns about the consideration payments and asked you to suggest a payment structure that would address all those concerns. I should make it clear, we have absolutely no issue with the amount due or the fact that the balance payment shall be made, it is a question of timing and Principal milestones. We do not feel that what you have suggested addresses our concerns & so I think a call to talk it over would be useful…

•

[The Consideration Payments were in exchange for the “Patent Area” and there had been delays in obtaining patents and avoidable delays that were not LLC’s responsibility.] We’re seeking some reciprocation of the patience we have given our Principal. The aim being to time the payments so as to enable us to launch product & have the revenue stream pay for the consideration, rather than go further out of pocket. You have told us that Pacer is finding it hard going financially & Pacer is a going concern with turnover…we on the other hand have kept Virulite LLC going since 2002, with no revenue stream.

•

[LLC was spending heavily on trying to break into Canada pre-clearance]

•

[Delay in providing clinical data was directly responsible for the loss of Walgreens, which may not be retrievable]

•

[LLC could not now negotiate similar post-clearance deals with other major retailers because it could not afford a repeat of Walgreens.]

•

[Payments were broken down by reference to different countries]

…

I do think we are all on the same page here…& can find a mutually acceptable structure for consideration payments. But it cannot be forgotten that we are all in this position because clinical data has never been provided in a timely fashion.

My greatest regret to date is that you & I never had the opportunity to talk prior to your deal with Jim Haslam…I believe that every issue we now face could have been taken into consideration in your deal and we would all be moving forward at a different pace now.

Let Lance know a good time for yourself & Chris and we’ll set up a conf call facility if needed.”

When read in full and in context, what Ms Higginson was doing was keeping negotiations on deferring payment until there was a revenue stream open. She did not reject the terms that Mr Rothon had proposed but laid the ground for further discussion, which she hoped might lead to a shift in his position. While it was not a rejection of the terms set out by Mr Rothon, her email also made no reference to those terms already being the subject of agreement between the parties. In cross examination she accepted that the parties had not achieved a mutually acceptable structure, but she explained that as meaning that LLC did not think that Mr Rothon had gone far enough and that, although he had agreed on 22 January 2009 to defer payment until after FDA approval, she was pushing for more.

Mr Rothon replied on 29 January 2009:

“Comments appreciated.

I am encouraged that you have no issue with the Consideration payment and my assumption is that you will make full payment to Virulite once we have FDA approval. This simply must happen and is not for negotiation as I have previously stated and I appreciate your cooperation here.

Royalty payments are also not up for negotiation, we will insist on the contracted amount going forward. I will try to arrange a conf call next week to go over the other issues in your email when I have spoken to Chris.”

Once again it is to be noted that the reference to FDA approval was not qualified by reference to time. Ms Higginson replied: “Thanks for getting back to me. We’ll look forward to hearing from you with some call times for next week. From our perspective the only issue for discussion is timing of the consideration payments.” Once again, Ms Higginson was keeping the subject of Consideration Payments open for further discussion. She did not reject deferral until after FDA approval; but nor did she say that it was already agreed.

LLC says that there was then a telephone call between Mr Rothon and Mr Field while Mr Field and Ms Higginson were out walking their dogs in late January or early February. There is no mention of this conversation in the original letter from LLC’s US attorneys or in the original Particulars of Claim, both of which allege an earlier agreement to defer payment until after FDA approval. The Amended Particulars of Claim asserts that Mr Rothon’s email of 29 January 2009 was an offer to defer which was accepted during the dog-walking conversation. There is no contemporaneous document which records or refers to the conversation.

In his witness statement Mr Field said:

“I spoke to Mr Rothon, in an attempt to negotiate the best timeframe, from our standpoint, for the payment of the two remaining Consideration Payments. I used words to the effect that following clearance whatever we were obliged to pay to the Defendants within that year, we would have paid. Mr Rothon’s response was that was what he wanted to hear, and wished me good luck. He then asked whether we would be able to make the royalty payments too, to which I replied we would, and he said that he was happy to hear that too. He did not mention March at all. I could not persuade Mr Rothon to delay the Consideration Payments beyond the period he had proposed in his email dated 22^nd January 2009.”

In evidence Mr Field spoke of this conversation as happening on 29 January, saying:

“We spoke on the 29^th, [Mr Rothon] and I, and it was agreed. Then his position was made very – you know, that was his final position on it. The £25,000 would be delayed until FDA clearance had been obtained, but everything else was expected to be paid on time and that was it. There was no point me discussing it any further with him. It was done. That was his position on behalf of [1072/VDL].”

When it was put to him that he had not at any stage said words to the effect “Well, all right then, I suppose that’s the deal we’ve agreed.”, he disagreed.

Ms Higginson’s evidence was that Mr Field described the conversation to her immediately after it happened.

“Mr Field told me that Mr Rothon would not budge beyond agreeing to delay the £25,000. The call lasted quite a long time. They discussed whether [1072/VDL] would agree to our requests to delay not just the £25,000 Consideration Payment, but also the £50,000 payment and linking it to revenue from sales of the [Device]. In the event Mr Rothon would not agree to this, and the matter was left there. Accordingly, by the end of January 2009, or at the very latest early February, the issue over the £25,000 Consideration Payment was put to rest.”

In cross-examination she maintained her evidence that Mr Field had told her that Mr Rothon would not budge beyond delaying the £25,000.

Mr Rothon’s evidence was that the telephone conference that had been suggested in his email of 29 January 2009 never took place and that no agreement was reached on the issue. In evidence he said that he had no recollection of a telephone conversation as described by Mr Field and Ms Higginson. His evidence about whether he had reached any agreement with LLC was full of inconsistencies. When being cross-examined about his emails on 22 and 23 January 2009 he first accepted that what he had been trying to say was that whenever FDA approval was achieved the sums would have to be paid and that he had agreed that with LLC (Footnote: ⁸). After a short break he resiled from those answers and said that it was all subject to getting FDA approval in March 2009 (Footnote: ⁹) and that he had merely made a proposal. Still later, while accepting that there was a dispute about whether or not he had stipulated March 2009, he agreed that as far as he was concerned, he reckoned that he had reached an agreement about deferring the £25,000; but soon thereafter he reverted to saying that he had made a proposal that had not been accepted by LLC (Footnote: ¹⁰).

Mr Field also gave evidence of a telephone conversation with Mr Rothon in May 2010 during which Mr Rothon asked him if LLC was okay with making the payments due under the DLA after clearance. Ms Higginson says that Mr Field told her of this conversation shortly after it happened. There is no document referring to or arising out of such a conversation.

There is one further piece of evidence that bears on whether or not an agreement was concluded and, if so, what terms were incorporated (Footnote: ¹¹). On 29 November 2009, Mr Rothon sent an email to Mr Tassell, Ms D’Arcy and Mr Baker under the subject heading “What does FDA mean to us??”. In it he wrote “I thought it might be a good idea to remind us all what FDA will mean to us, and these are minimum royalty payments that LLC need to achieve or they are in breach of contract.” He then set out a list of annual payments starting with “Year 1 (when FDA approval is achieved) … £75k within 30 days to buy the licence and £340k in royalty within 12 months” and totalling £14.9 million. It is evident from the string of emails that followed that this email was subsequently discussed by Mr Rothon with Ms D’Arcy and Mr Baker, and I reject the evidence to the contrary given by the witnesses for 1072/VDL. In his witness statement, Mr Rothon said that he reached the figure of £75k for year one by “lumping together payments due before and after FDA approval without differentiating between the two.” In his oral evidence he offered a different explanation, namely that his email looked at the global situation of what they could potentially get once they had both FDA approvals and patents. Basing herself on that email, Ms D’Arcy included in a Pacer Therapeutics Business Plan produced in early 2010 that “When FDA clearance is obtained … LLC do have payments that they have to make to Pacer. The conditions of the deal are that on clearance [LLC] pay Pacer £75k upfront and a £5.00 royalty on sales in the first year.” There is no evidence that Mr Rothon approved the Business Plan, though it seems likely that he and Mr Tassell would have seen it when it was produced.

Standing back and reviewing all of the evidence, including those parts that I have expressly referred to above, I turn to make the necessary findings of fact that will enable me to answer Issues 1 and 2.

I find as a fact that Ms Higginson made the Post-FDA Offer at the meeting on 26 November 2008. First, although it represented a fall back position from the position that had been agreed with Mr Field and Mr Mencanin in advance, I have no doubt that Ms Higginson as the prime mover in the business and the person charged with conduct of the meeting had authority to adopt a fall back position and would have done so when it became apparent that Mr Rothon would not countenance the suggestion of delaying payment until there was an income stream. It would have been in her nature as a businesswoman to do so, since she would always look to achieve the best result that she could. Second, I place significant weight on the terms of Item 10 of Mr Rothon’s email of 28 November 2008, for the reasons outlined at [83] above. Third, I think it unlikely that on 22 and 23 January 2009 Mr Rothon would have homed in on delaying until FDA approval was granted if the idea had not already originated from Ms Higginson. Fourth, there has been a measure of consistency since the original letter from LLC’s US attorneys, through the original Particulars of Claim and into Ms Higginson’s witness statement that she did offer a fall back position, even though I would accept that some of her witness statement is curiously worded and structured. Fifth, although I am sure that Ms Higginson will have pressed for deferral until there was a revenue stream, the reference to “not putting our hands in our pockets” on 1 December 2008 does not sustain the weight that 1072/VDL seeks to place on it, for the reasons outlined in [84] above. I therefore accept Ms Higginson’s evidence that she proposed that payment of the £25,000 should only become due when FDA approval was achieved and that Item 10 of Mr Rothon’s email on 28 November 2008 accurately recorded what had been discussed in the meeting.

Mr Rothon’s emails of 22 and 23 January 2009 were intended to be and were the occasions when he came back to Ms Higginson as he had said he would on 28 November 2008. I have found that, viewed objectively, the reference to March 2009 was not made a condition precedent or essential prerequisite to the acceptance or application of the terms there set out. I have also found that, taken together, the emails of 22 and 23 January 2009 were a clear statement that 1072/VDL was prepared to defer the £25,000 to after FDA approval provided it then was paid within 30 days and that 1072/VDL required the total of £415,000 to be paid within a year of approval. I therefore conclude that, as at that date, each party was in the position of being prepared to agree that the £25,000 could be deferred until after FDA approval. However, Mr Rothon’s emails were not framed in language that can objectively be interpreted as an acceptance of LLC’s offer, even allowing for natural and reasonable levels of imprecision in what he wrote. Instead, they were framed as a statement of what 1072/VDL expected LLC to agree to, which is materially different. Furthermore, they were not limited to the question of deferral of the £25,000 but covered other matters as well. I therefore conclude that, although both parties were then prepared to agree to deferral of the £25,000 until after FDA approval, and came within an ace of doing so, they had not agreed to do so by 23 January 2009.

Going forward from 23 January, both parties had made a clear statement of their willingness to defer the £25,000 payment and it would have been open to either party to conclude an agreement by accepting the other’s position. In particular (and by reference to the terms of Issue 2.2) Mr Rothon’s email of 22 January as confirmed by his email of 23 January 2009 was a Post-FDA Offer by 1072/VDL. I have set out the relevant passage from Ms Higginson’s email of 28 January 2009 above and find that neither that email nor any other email from LLC rejected 1072/VDL’s Post-FDA Offer. What Ms Higginson was astute to do was to keep negotiations open in the hope of doing better, without rejecting or jeopardising the Post-FDA position. This was as much by luck as by judgment because I accept that after 22/23 January 2009 she probably considered that deferral of the £25,000 was agreed. In one sense it was, in that it represented the position that both parties were prepared to adopt: unfortunately for her that sense was not contractual.

Mr Rothon’s email on 29 January 2009 will only have reinforced LLC’s understanding that 1072/VDL was prepared to defer payment of the £25,000 until after FDA approval and that 1072/VDL assumed that would happen. As such, it confirmed the Post-FDA Offer. Ms Higginson’s email in response did not reject the offer: it kept the subject of further negotiations on Consideration Payments open for further discussion. The Post-FDA Offer therefore remained open for acceptance or rejection.

Despite the absence of contemporaneous documentary records, I find as a fact that there was a conversation between Mr Field and Mr Rothon broadly as described by Mr Field and Ms Higginson. I am influenced in reaching this decision by my overall assessment of Mr Field and Ms Higginson, which is that they have not lied about this conversation - though this does not mean that their recollection is complete or accurate in all respects; and by my assessment of Mr Rothon, which is that his evidence on this topic is much less satisfactory than that of Mr Field and Mr Higginson. Second, the question of deferral of Consideration Payments was important and was up in the air after Mr Rothon’s latest emails, and I consider it highly improbable that the parties just let it drop. Equally, having decided that a conversation took place between Mr Field and Mr Rothon on the issue of deferral of Consideration Payments, it seems highly unlikely that either Mr Field or Mr Rothon would have conducted the conversation exclusively by reference to deferring until there was an income stream and without reference to LLC’s fall back position. On that basis, when Mr Field said that Mr Rothon would not budge, I find that reflected a conversation in which he and Mr Rothon negotiated about whether 1072/VDL would budge from their previously stated position of being prepared to agree to defer payment of the £25,000 until after FDA approval. I find that at some point Mr Field faced the inevitable and said that LLC would pay whatever was due following clearance (which both men would have understood to mean FDA clearance) and Mr Rothon said words to the effect that that was what he wanted to hear and wished Mr Field luck. That was sufficient to indicate that he agreed to what Mr Field had just said. Applying the analysis of offer and acceptance, Mr Field’s statement was an acceptance of Mr Rothon’s offer to defer until FDA clearance and Mr Rothon’s response was confirmation that he understood and was content with that acceptance. The parties agree that LLC provided consideration for the agreement, without specifying what that consideration was.

Neither party reprised the agreement in an email or otherwise. This is a surprising omission, not least because of Ms Higginson’s earlier statement of support for recaps; but it is not so surprising as to require a conclusion that no agreement was reached. The parties were still on reasonable working terms; the issues had been extensively canvassed already by the email exchanges since November 2008; and the parties doubtless considered that the deal was done and got on with their lives and their work. I am confident that the agreement was meant to be relied on and to affect the parties’ contractual relations and that, in the light of the previous experience to which I have referred earlier in this judgment, neither party felt it necessary to record the agreement in accordance with the requirements of the DLA in order for it to be effective.

My conclusion is not dependant upon, but is supported by, the terms of Mr Rothon’s emails in November 2009. Their terms are clear and reflected his knowledge that he had reached an agreement with LLC that £75,000 (i.e. the £25,000 and the £50,000 consideration payments) were to be paid after FDA approval had been achieved. His two inconsistent explanations that tried to avoid this conclusion are wrong and are rejected.

The conversation was not relied upon in the US attorney’s letter in December 2010 or the original Particulars of Claim. It would have been more comfortable for LLC if it had been. However, it is plain that LLC has throughout regarded the 26 November 2008 meeting and the response on 22/23 January 2009 as the prime foundations for its case, which is a sufficient explanation for the contents of the US Attorney’s letter. In the event, those exchanges did not quite amount to a contractual agreement, although they laid the ground for what came after.

As a further fall back position, LLC submitted that it accepted the Post-FDA offer by continuing to pursue the FDA application and expending money and resources doing so until about January 2011. Since it is not necessary for me to decide this issue given my findings thus far, I do not deal with it at any length. In this context, it is important that LLC had since mid-2007 been expressing its (justifiable) frustration about 1072/VDL’s failure to provide clinical data and other support, and that the discovery of the lack of progress on the Hargate 2 trial had led Ms Higginson (whose evidence about the meeting I accept) to assert to Mr Rothon on 26 November 2008 that 1072/VDL’s failures created a conflict that could end in a law suit. At the end of the period of negotiations from November 2008, the position was reached that 1072/VDL was expressing its willingness to continue to be bound by the terms of the DLA provided that LLC paid the £25,000 after FDA approval but would budge no further. After the period of negotiations, LLC dropped its complaints about 1072/VDL’s prior lack of performance and continued to fulfil its other obligations arising under the DLA (Footnote: ¹²). 1072/VDL asserts that LLC continued because it believed that the Device had great potential. That is a partial explanation of LLC’s willingness to continue; but the evidence as a whole supports the conclusion that LLC’s dropping of its complaints and its future co-operation with 1072/VDL in the pursuit of FDA clearance (including the accommodation of 1072/VDL’s favoured FDA consultants) is also referable to LLC’s acceptance of 1072/VDL’s offer to defer the £25,000 consideration payment. If, therefore, I had concluded that no agreement had been reached by the end of Mr Field’s dog-walking conversation with Mr Rothon, I would have held that that LLC accepted 1072/VDL’s offer by continuing to pursue the FDA application and expending money and resources doing so until about January 2011. To my mind, it does not matter whether a lawsuit, as threatened by Ms Higginson on 26 November 2008, would have been successful or not. It was a threat that was capable of exercising leverage and having value for LLC; and the dropping of the threat and continued cooperation was a benefit to 1072/VDL arising out of the negotiations.

Issue 1(ii): While I respectfully question the use of the term “evidential presumption”, the burden rests on LLC to show on sufficient evidence that the terms of the DLA were varied without a written instrument signed by both parties, notwithstanding the provisions of clauses 1.4.7, 26.4 and/or 27 of the DLA.

Issue 1(iii): LLC has discharged the burden on the facts, as summarised under Issue 2.

Issue 2(i): The post-FDA Offer was made by LLC at the meeting on 26 November 2008. It was not accepted by 1072/VDL by emails dated 22 and 23 January 2009.

Issue 2(ii): The post-FDA offer was made by 1072/VDL in the email of 22 January 2009 (confirmed by their email of 23 January). It was not rejected by LLC’s emails in response.

Issue 2(iii): The post-FDA Offer was confirmed by 1072/VDL in their email of 29 January 2009. It was not rejected by LLC in its email in response that day. It was accepted by LLC during a telephone conversation between Mr Rothon and Mr Field at the end of January or in early February 2009. Alternatively, if it was not accepted during that conversation, it was accepted by LLC by its conduct in continuing to pursue the FDA application, dropping its prior complaints about 1072/VDL’s lack of support, and expending money and resources doing so until about January 2011.

In the light of my findings under Issue 2, it is not necessary for the Claimant to rely upon waiver or estoppel. This section proceeds on the assumption that, contrary to my findings under Issue 2, no contractual variation occurred.

LLC’s case is lightly sketched at [18-19] of the Amended Particulars of Claim. It is alleged that by the words and conduct relied upon by LLC as giving rise to a contractual variation, 1072/VDL represented to LLC that they would not require payment of the consideration payment of £25,000 until after the receipt of FDA clearance and the Claimant relied on such representation by submitting and pursuing the FDA application and expending money and resources doing so until about January 2011 and by failing to make provision for such payment. In those circumstances it is alleged that 1072/VDL waived compliance with the time limit in Clause 18(2)(iv) and/or were estopped from contending that LLC was in breach of that clause.

1072/VDL makes the obvious and immediate point that LLC cannot have relied upon representations made in January 2009 when instructing Mr Noblitt to prepare the FDA submission in and from 16 October 2008 and submitting it to the FDA on 18 December 2008. That is correct but, for reasons that appear below, is not the end of the issue.

The leading statement of principle is contained in the speech of Lord Goff in The Kanchenjunga [1990] 1 Lloyd’s Rep 391, 399:

“Equitable estoppel occurs where a person, having legal rights against another, unequivocally represents (by words or conduct) that he does not intend to enforce those legal rights; if in such circumstances the other party acts, or desists from acting, in reliance upon that representation, with the effect that it would be inequitable for the representor thereafter to enforce his legal rights inconsistently with his representation, he will to that extent be precluded from doing so.”

For the most part, these principles give rise to no controversy; but some points have become the focus of argument.

It is not necessary for LLC to show that it has acted to its detriment. What is required is that a party’s acts (or desisting from acting) should make it inequitable for the representor thereafter to enforce his legal rights inconsistently with his representation.

The effect of a representation is generally revocable: see Chitty on Contracts 3-082, 3-095 to 3-097. As Chitty makes clear, the determinative consideration is whether it is inequitable in all the circumstances for the representor to enforce his rights inconsistently with his representation. Those circumstances will include, but are not limited to, the precise terms of the representation, how the representee has responded to the representation, and whether it remains possible for the representee to comply with his original obligation.

Where, as in Hughes v Metropolitan Railway (1877) 2 App Cas 439 the representation has been in the nature of an open-ended forebearance, the effect will generally be to suspend the representor’s ability to rely upon the underlying contractual obligation and any breach of it until reasonable notice is given that brings the period of suspension to an end. When the period of suspension is ended, the representor will be allowed to rely upon the underlying contractual obligation as from that date, but he is generally not entitled to enforce the obligations as if they had been in full force during the period of suspension. So in Hughes, the Appellant’s representations in November and December 1874 had the effect of suspending the notice issued in October 1874 to the Respondents requiring them to repair premises within six months. That period of suspension did not come to an end until 31 December 1874, until which time the operation of the notice was waived. Time ran under the notice from the end of the period of suspension; but no time during the period of suspension could retrospectively be relied upon by the Appellant: see Lord Cairns LC at 447. It could therefore be said that the effect of the suspension was to extinguish the Appellant’s right to rely upon the rights that would otherwise have accrued to him during the period of suspension.

In Collier v P & MJ Wright Ltd [2008] 1 WLR 643 at [37] Arden LJ cited the decision of Denning J in Central London Property Trust Ltd v High Trees House Limited [1947] KB 130 as a case where the effect of resiling would be sufficiently inequitable that the right to recover the original debt was not merely postponed but extinguished. At first sight, the representation in High Trees was a simple forebearance by a landlord agreeing to accept a reduced ground rent, which was duly paid. However, Denning J interpreted the landlord’s promise as being “that the ground rent should be reduced to £1,250 a year as a temporary expedient while the block of flats was not fully, or substantially fully let, owing to the conditions prevailing” as a result of the war. The landlord gave notice by letter dated 21 September 1945 requiring full payment of the rent going forward and arrears of over £7,000. Denning J allowed the claim going forward, because the war conditions no longer prevailed; but he refused the claim for the arrears. In reaching that conclusion he said:

“If the case had been one of estoppel, it might be said that in any event the estoppel would cease when the conditions to which the representation applied came to an end, or it also might be said that it would only come to an end on notice. In either case it is only a way of ascertaining what is the scope of the representation. I prefer to apply the principle that a promise intended to be binding, intended to be acted on and in fact acted on, is binding so far as its terms properly apply. Here it was binding as covering the period down to the early part of 1945, and as from that time full rent is payable.”

High Trees would be a clearer factual example of the extinguishing effect of a representation if the landlord had given notice at a time when the war conditions still prevailed and had been held not to be entitled to recover the full ground rent until they ceased to prevail at some point in the future. It seems to me that there is scope for confusion in the use of the terms “suspensory” and “extinguishing” in this context, since a representation may be revocable, and in that sense suspensory, while effectively extinguishing the representor’s right to rely upon his contractual rights during the period of suspension. However, the approach adopted by Denning J in the passage set out above, supports the proposition that the terms of the representation are highly material when deciding whether it is suspensory (i.e. revocable) or extinguishes the representor’s right (i.e. irrevocable) to rely upon a breach of the established terms of the underlying contract going forward. While the law of waiver and estoppel has been extensively developed since High Trees, I consider that there may be a material difference between an open-ended forebearance and a promise not to enforce until a particular date is reached or a particular set of circumstances prevails when considering whether it is inequitable to allow the representor to rely upon the original rights and obligations arising under the contract.

There is a dispute about the legal effect of giving notice if it is held that, until the time of notice being given, 1072/VDL waived reliance upon LLC’s breach of contract in failing to pay the £25,000 in accordance with the terms of the DLA or is estopped from relying upon that failure. Although LLC was distinctly unhappy at Dr Dougal’s failure to progress the Hargate 2 trial so that it became necessary to make the submission “lite”, it has not joined issue with 1072/VDL on their assertion that, in the absence of a contractual variation, LLC was in breach of the terms of the DLA as executed because of its non-payment of the £25,000. It is common ground that a waiver or estoppel in these circumstances does not mean that there is no breach; it merely has the effect that 1072/VDL cannot rely upon the breach as a basis for the remedies that would otherwise have been available. Starting from this point of common ground, 1072/VDL submits that the effect of the notice it gave on 18 November 2009 was to render time for payment of the £25,000 of the essence and to allow 60 days for payment, which it submits is reasonable notice, failing which it was entitled to terminate the DLA.

In support of this submission, 1072/VDL relies upon three authorities which support the proposition that a party to a contract may, in appropriate circumstances, give notice making time the essence of the contract. In Hartley v Hyams [1920] 3 KB 475, time was originally of the essence of the contract so that when the supplier failed to deliver by 15 November 1918, the purchaser could have taken that failure as entitling him to terminate the contract. Instead the purchaser persistently complained of the delay and asked for better deliveries, thereby leading the supplier to believe that the contract still subsisted and to act on that belief at expense to himself. When the purchaser gave notice without warning in March 1919 cancelling the contract it was held that he had waived his right to insist on delivery by 15 November 1918 and was estopped from alleging that the period for delivery had terminated on that date. McCardie J held that the purchaser could have given notice in March 1919 fixing a reasonable time within which the supplier was required to supply the undelivered balance of the contract goods, but had not done so. It is implicit in his reasoning and ruling that, if notice had been given and not complied with, it would have been the supplier’s failure to deliver after the giving of notice that would have entitled the purchaser to terminate.

Charles Rickards v Oppenhaim [1950] 1 KB 616 is direct Court of Appeal authority for the proposition that where time is of the essence of a contract for the sale of goods and, on the lapse of the stipulated time, the buyer continues to press for delivery thus waiving his right to cancel the contract, he has a right to give notice fixing a reasonable time for delivery, thus making time again of the essence of the contract: see Denning LJ at 623-624. However, the giving of such notice does not entitle the buyer retrospectively to rely upon the seller’s breach of contract in the period of the waiver or estoppel, since that is the breach which is waived or he is estopped from relying upon. To hold otherwise would retrospectively cancel the effect of equity’s protection, which is unconscionable. The requirement that the buyer give notice fixing a reasonable time for delivery, thereby once again making time of the essence of the contract, has the practical effect that the time on which he is entitled to rely starts to run from the date on which notice is given, not from the date of the original and waived breach.

This is made clear by the third authority upon which 1072/VDL relies. In Behzadi v Shaftesbury Hotels Ltd [1992] Ch 2, the Court of Appeal held that a purchaser of land under an agreement, which specified a time for performance of an obligation without making the time of that performance the essence of the contract, was entitled to serve a notice giving a reasonable time for performance and making that time the essence of the contract: he did not have to wait until a reasonable time after the original breach before serving notice. In reaching this conclusion the Court of Appeal relied upon Australian authorities which provided the rationale and an “entirely satisfactory basis” for the decision: see Nourse LJ at 15A-16G. In particular, at 15E Nourse LJ cited with approval a passage from the judgment of Mason J in the decision of the High Court of Australia in Louinder v Lewis 149 CLR 509 at 526, which was also cited with agreement by Purchas LJ at 30D:

“Accordingly, delay beyond the stipulated date will give rise to a liability in damages. But because equity treats the time stipulation as non-essential, mere breach of it does not justify rescission by the innocent party and will not bar specific performance at the suit of the party in default. Unreasonable delay in complying with the stipulation in substance amounting to a repudiation is essential to justify rescission. It is to this end that, following breach, the innocent party gives notice fixing a reasonable time for performance of the relevant contractual obligation. The result of non-compliance with the notice is that the party in default is guilty of unreasonable delay in complying with a non-essential time stipulation. The unreasonable delay amounts to a repudiation and this justifies rescission.” (Emphasis added)

Behzadi was a case where the contract itself did not make time for the performance of the obligation in question the essence of the contract. In such a case the contractual route for the innocent party is clear: it is open to him by giving notice to make time of the essence so that failure to comply with the notice is taken as repudiation of the contract. It is, however, important to note Nourse LJ’s observation at 12E that the description of a notice making time of the essence of the contract “is not quite accurate. That is because one party cannot vary the terms of the contract on his own. In reality the notice is given in order to bring to an end, by equitable means, equity’s interference with the legal rights of the parties.” To the same effect, at 24A Purchas LJ said:

“What, then, is the effect of serving a so-called notice "making time of the essence?" It certainly does not make time of the essence so far as the obligations in the contract of sale are concerned, since one party cannot unilaterally vary the terms of the contract. It cannot be served until after there has been a breach by the defaulting party either of the term fixing the date for compliance, or of the implied term where the contract is silent as to the date for performance. The notice has in law no contractual import. With the modern practice of including standard conditions into contracts for sale of land, occasions when a date is not prescribed for completion or for the performance of intermediate steps (e.g. delivering an abstract of title) have become increasingly rare. It is only in such cases that the reasonable time for performance term can be imported into the contract. In most cases, therefore, the effect of the notice will be to give the defaulting party an opportunity to perform his obligations under the contract. However, I see no reason for the imposition of any further period of delay after the breach of contract has been established by non-performance in accordance with its terms before it is open to a party to serve such a notice. The important matter is that the notice must in all the circumstances of the case give a reasonable opportunity for the other party to perform his part of the contract.”

The contract in the present case includes contractual mechanisms and routes to termination in case of breach of contract under Clauses 18.2, 18.3 and 22.2. In that respect it differs from the contracts in each of the three authorities upon which 1072/VDL rely. In Hartley and Charles Rickards, the original contracts made time for the delivery of the goods the essence of the contract but included no contractual provisions about how the contract should be terminated in the event of breach. In Behzadi time was not originally of the essence and there were no contractual provisions for termination after breach of the non-essential implied term requiring delivery within a reasonable time. The absence of contractual mechanisms for termination in those cases is, to my mind, a critical distinction. Although the three authorities establish that in contracts where there is no contractual mechanism for termination after breach, giving reasonable notice to perform establishes a period after which the law will hold that the party in breach has repudiated his contract, it does not follow that an innocent party to a contract which does provide such a mechanism can set up a termination “on reasonable notice” by giving notice to the party in breach to perform. The reason why the distinction is critical is that, in the latter case, the party giving notice would be varying the terms of the contract unilaterally by substituting non-performance after a reasonable time as the basis for termination in place of the contractual mechanism.

Assuming that waiver or estoppel is established in the present case, what 1072/VDL waived (or is estopped from relying upon) was the right to rely on LLC’s breach of contract in not paying the second consideration payment after delivery of the clinicals for use in the FDA approval application. Therefore, although 1072/VDL is correct to submit that the payment was “due” under the terms of the DLA, the effect of the waiver or estoppel is that 1072/VDL is not entitled (even after giving notice) retrospectively to rely upon the fact that the payment was “due” during the period to which the suspension applied, which covered the whole period from the date of breach to the date of notice. Assuming also that it is not inequitable for 1072/VDL to bring that period of waiver or estoppel to an end by giving notice, the first date on and from which 1072/VDL could conceivably rely upon the fact of non-payment as a breach of contract would be the date of giving notice. The contract provides the mechanisms for termination once 1072/VDL is entitled to rely upon LLC’s breach of contract and, both under Clauses 18.2 and 18.3 and under Clause 22.2, the minimum period to termination is 90 days. If 1072/VDL were to be permitted to terminate only 60 days after giving notice, it would mean either that it was permitted to vary the terms of the contract or that the giving of notice effectively removed the protection of the waiver or estoppel 30 days before the notice was given. Neither of these conclusions is contractually acceptable in the light of the explanation of the principles underlying the authorities upon which 1072/VDL relies as provided by Nourse and Purchas LJJ in Behzadi.

If therefore 1072/VDL waived or was estopped from relying on the failure by LLC to pay the £25,000 on and from the date of delivery of clinicals, then it was not open to 1072/VDL to terminate the DLA until at least 90 days after the conclusion of whatever period of notice was reasonable to bring any period of waiver and/or estoppel to an end so that, from that date, 1072/VDL was entitled to rely upon LLC’s non-payment of the £25,000 consideration payment as being a breach of Clause 18.2.

A slightly different approach to the same problem is to ask what would have been a reasonable period of notice for 1072/VDL to give on 18 November 2010. There is limited authority on what impact, if any, an express contractual provision for termination after breach may have upon this question. In Hughes Lord Cairns LC at 448 took the provision of the lease requiring six months notice to repair as being “that which according to the view of the parties was a reasonable time for the execution of such repairs.” Lords O’Hagan, Selborne and Blackburn agreed. Lord Blackburn added at 453:

“I think the very object for which the stipulated time of six months was named, was to prevent that uncertainty in saying what would be a reasonable time, and to enable one of the parties to know that he had got six months to do the repairs in, even if that was more than was needed, and to enable the other to know that whether it turned out to be either too much or too little, the repairs were to be done within that time.”

The giving of notice may be intended to serve two functions. The first is to bring the period of suspension to an end so that, from that date, the party giving notice may rely upon his contractual rights. The second is to fix a time after the suspension is ended for compliance by the other party, failing which the other party will be taken to have repudiated the contract. The extracts from Hughes to which I have just referred do not address the first of these purposes. Turning to the second, where the parties have agreed what is to happen in the event of breach, and (as here) those provisions are directly applicable, I am not persuaded that the question of “reasonable notice” in the second sense applies at all: the conditions of the contract prevail. In other cases (as was the case in Hughes), the contractual agreement may not be directly applicable as a mechanism that applies in the event of breach. However, even so, Hughes indicates that the terms of the contract should always be highly influential and will usually be determinative when determining what period is reasonable. This seems entirely consistent with the modern emphasis of the Courts upon respecting the terms of agreements freely negotiated by commercial parties to complex contracts.

On my findings of fact, as set out above, 1072/VDL made its position plain on a number of occasions:

In my judgment, these statements (whether taken singly or cumulatively) constituted a clear representation and promise to the Claimant in January to February 2009 that the payment of £25,000 due under clause 18.2(iv) of the DLA would only become payable after FDA clearance for the Device was obtained. 1072/VDL intended them to be taken as such, which is why Mr Rothon asked Mr Field in about May 2010 if LLC was okay with making the payments due under the DLA after FDA clearance. It also explains the terms of the “What does FDA mean to us??” email on 29 November 2009. LLC understood them as such, and got on with the job.

The negotiations in late 2008 and early 2009 were serious and intended to be taken seriously. On the one hand, LLC had significant complaints about what it perceived, with justification, to be 1072/VDL’s failure to support it and to provide the necessary clinical data in good time (or at all). On the other hand, Dr Dougal (at least) was conscious of the need for flexibility in a business relationship where FDA clearance, originally anticipated for 2004, was still far off because of the lack of clinical data; and 1072/VDL considered that the DLA royalty fee of £5 per device was a very beneficial deal. Both sides, therefore, were engaged in serious negotiations aimed at ensuring the continuance of their business relationship. 1072/VDL’s witnesses did not at any stage suggest that the proposal to delay the consideration payment until after FDA clearance was not to be taken seriously. Their case at trial was that achieving FDA approval by March 2009 was a condition precedent to their proposals being implemented and that no agreement was reached, on which I have made my findings above.

I find that 1072/VDL intended LLC to rely on the representation or promise.

Ms Higginson and Mr Field were challenged about what they would have done if 1072/VDL had not agreed to deferral. They accepted that LLC could have paid the money if required to do so and that they still had faith in the Device as a potential money-spinner. It is, however, to be remembered that Ms Higginson went to the meeting on 26 November armed with the printout from the Hargate 2 trial and that she started off with the battle cry that this was a potential lawsuit. For the same reasons as set out at [111] above, I find that LLC did rely upon the representation or promise and demonstrated that reliance by carrying on with the process of attempting to get FDA approval, which proved to be long and difficult despite the intervention of iSmart, and continuing to expend money and resources with a view to the distribution of the Device while dropping the complaints that they had been making in the period to early 2009. The dropping of the complaints is not essential to my finding of reliance but supports it.

The following matters seem to me to be most material to be brought into the balance:

I consider that where, as here, the representation defined its intended duration and substantial reliance sufficient to give rise to waiver or estoppel has been shown over a significant period, a positive justification will generally need to be shown if revoking the representation part-way through is not to be characterised as inequitable. That is because the Court’s first instinct should be to encourage commercial (and other) parties to comply with their promises and to foster commercial certainty and trustworthiness. No justification is apparent here. I consider that in all the circumstances the balance falls decisively in favour of the conclusion that it was inequitable for 1072/VDL to insist in late 2010 on payment of the £25,000 consideration payment at any time before FDA clearance.

Should be treated as only falling due for the first time after a reasonable period from 18 November 2010?

Should be treated as having arisen on 18 December 2008, so that the effect of the letter of 18 November 2010 was to put LLC immediately in breach of the DLA?

If, contrary to my finding on issue 3.4, it had been open to 1072/VDL to serve notice requiring payment of the £25,000 before FDA clearance, two questions may arise. The first is what would have been a reasonable period after the giving of notice before it would be equitable for 1072/VDL to rely upon LLC’s non-payment of the £25,000? My answer to this question is conditioned by my conclusions that (a) the effect of the waiver or estoppel was that 1072/VDL could not retrospectively reintroduce reliance upon the fact that the payment had been “due” in the period until the suspension was terminated and (b) once the suspension was terminated and 1072/VDL was entitled to rely upon LLC’s breach from then on, the contractual routes to termination under Clauses 18.3 and 22.2 would apply: see [131-132] above.

In favour of a short period is that the contractual mechanism under Clause 18.3 gave 30 days before the 5% would operate, while the mechanism under Clause 22.2 gave LLC 30 days before 1072/VDL could serve notice of intention to terminate 60 days thereafter. In favour of a longer period is that the waiver or estoppel had been in place for 20 months and the notice was given without warning. Balancing these considerations, I conclude that a reasonable period of notice would be 14 days: in other words, the suspensory effect of the waiver or estoppel would cease 14 days after notice was given.

If I were wrong in my conclusion that the contractual mechanisms would then become operative, the second question would arise, namely what would be a reasonable period from the end of the suspensory period before 1072/VDL could terminate the contract. If that question arose, I would hold that a reasonable period from the end of the suspensory period would be 90 days, adopting the same reasoning as that of Lord Cairns LC and Lord Blackburn in Hughes.

Were the Defendants entitled to serve the default notice under clause 22.2.1 of the DLA on 18 November 2010?

Were the Defendants entitled to terminate the DLA on 31 January 2011:

Under clause 22.2.1; or

Under clause 18.3?

My primary finding is that there was a contractual variation such that the £25,000 was not payable until after FDA clearance: see Issue 2. It follows that payment was not yet due and there was no basis for serving the default notice under Clause 22.2.1 on 18 November 2010. Had I concluded that there had been no contractual variation, 1072/VDL would have waived or been estopped from relying upon the fact that the payment had been “due” since delivery of the clinicals and from requiring payment to be made until 14 days after the service of notice terminating the suspension. On that basis too, payment was not due on 18 November and there was no basis for serving the default notice under Clause 22.2.1 on 18 November 2010: it could not be served until 30 days after the termination of the period of suspension i.e. at least 44 days after 18 November 2010. The notice was therefore invalid.

By 31 January 2011 1072/VDL had failed to serve a valid notice under Clause 22.2.1 and were therefore not entitled to terminate the DLA under that clause. Furthermore, 90 days had not passed since termination of the period of suspension, with the result that 1072/VDL were not entitled to terminate the DLA on 31 January 2011 pursuant to Clause 18.3.

In the light of my conclusions on Issue 2, Issue 3 does not arise. If it did, my conclusions would be as follows.

Issue 3.1: 1072/VDL clearly represented or promised to LLC in January to February 2009 that the payment of £25,000 due under clause 18.2(iv) of the DLA would only become payable after FDA clearance for the Device was obtained.

Issues 3.2 and 3.3: 1072/VDL intended LLC to rely upon the representation or promise and LLC did so.

Issue 3.4: It was inequitable in all the circumstances for 1072/VDL to insist on payment of the £25,000 before FDA clearance because of a combination of the nature of the original representation or promise, LLC’s reliance upon it during the 20 months since February 2009 and the absence of any demonstrated reason or justification for demanding earlier payment.

Issues 3.5 and 3.6: In the light of my conclusions on issue 3.4, these issues do not arise. If they had done so, my conclusions would be that the letter of 18 November 2010 did not constitute valid notice to terminate the suspensory period of the waiver or estoppel or to give rise to a right to terminate. 14 days notice should have been given to terminate the suspensory period. Once the suspensory period had been terminated, the contractual mechanisms under Clauses 18.3 and 22.2 applied. If they had not applied, 90 days would have been a reasonable period after which 1072/VDL could have terminated. On any view, 1072/VDL was not entitled to terminate on 31 January 2011.

Issue 4.1: 1072/VDL were not entitled to serve the default notice under Clause 22.2.1 of the DLA on 18 November 2010.

Issue 4.2: 1072/VDL were not entitled to terminate the DLA on 31 January 2011 either pursuant to Clause 22.2.1 or pursuant to Clause 18.3.

It is agreed that, on these findings, the purported termination on 31 January 2011 amounted to a repudiatory breach of the DLA, which LLC was entitled to accept on 4 April 2011.

Schedule 4 to the DLA set out sales targets for the various territories. The size of the Canadian market is about 10-15% of the size of the United States market (Footnote: ¹³). The targets for the USA and Canada combined were as follows:

Clause 10.1 provided that if, during the first 36 months from the commencement date, the number of products sold by LLC in any area fell short of the sales targets then, unless LLC paid a sum equal to the resulting deficiency in royalty payments for that area within 90 days of the end of the applicable year, 1072/VDL could terminate the right to that area on giving 30 days notice. After 36 months, if any of the sales targets was not reached by LLC then LLC would lose all rights to the territory in question unless LLC verified to 1072/VDL’s reasonable satisfaction that the target was unrealistic, in which case it was to be reassessed.

LLC’s case, based on the expert evidence of Mr Boghigian, is that it would have achieved sales in the United States as set out in the table below, at a retail price of $79.99 and a wholesale-to-retail mark-up of 35%. The annual sales figures for which it contends are as follows:

1072/VDL contends that the retail price of $79.99 is far too high and would have ensured that negligible sales would have been achieved, which would have entitled them to terminate the DLA. They go further and say that there is no retail price at which the Device could have been successfully marketed that would have enabled LLC to make a profit. The major points of difference between the parties are the price that could realistically be charged and the marketing spend that would have been required in order to launch and sustain the Device. As a result of these differences, and because Mr Bell considers that the purchase of a Device would then take the purchaser out of the market, he projects higher sales at a much lower price in the early years, with sales falling off to well below Mr Boghigian’s projections thereafter.

It is common ground that LLC’s claim is to be assessed by reference to the principles developed in and since Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602. There is no need for any detailed examination of those principles here. LLC submits that, when reviewing the evidence and making findings of fact, the court should mirror the approach sometimes taken in the context of claims in tort and be generous to the innocent party. In my judgment there is no real scope or justification for such an approach when assessing damages for breach of contract after a trial has examined all available evidence in detail and when the burden of proof remains on the Claimant throughout.

The primary evidence was that of Mr Boghigian and Mr Bell, who found few points of agreement. This polarisation stemmed from the fact that Mr Boghigian sees the Device as a “breakthrough” product (i.e. one that is capable of driving a paradigm shift in consumers’ perceptions and buying habits) while Mr Bell is convinced that it is a “me too” product (i.e. an addition to the market which does not offer any differentiating qualities so as to cause a breakthrough). Each has had long and wide-ranging experience in the United States, including relevant experience of bringing products into a crowded pharmaceutical market. Of the two, Mr Boghigian was more ready to take on board good points when they were put to him; and Mr Bell sometimes appeared to shift from a position of giving evidence of his expert opinion to arguing the case for 1072/VDL. I formed the impression that, although both experts had been informed of their duties as experts under the CPR, Mr Bell’s relative intransigence may have reflected cultural differences in the perception of how litigation should be conducted on the other side of the Atlantic. While I take these features into account in my assessment of the expert evidence, they are not so serious as to cause me to reject the evidence of either witness wholesale: each had much to contribute and did so.

There was, however, one feature of Mr Bell’s evidence that requires separate treatment. He was asked by the solicitors acting for 1072/VDL to supplement his own opinion with the opinions of other experts in the field. As a result, he sent to a number of correspondents a short and non-technical YouTube promotional clip about the Device with an online survey which asked questions about their perception of the Device, offering prescribed answers by drop-down boxes. In emails thanking them for agreeing to participate Mr Bell gave his correspondents an undertaking that their identities would remain confidential. When the correspondents had completed the online survey, Mr Bell spoke to them about their responses and kept notes of their replies. He then provided as an annexe to his report a summary of the responses which he had received and relied upon that material in support of his opinions.

When his report was exchanged, LLC’s solicitors wrote to 1072/VDL’s solicitors requiring that the anonymous experts be identified, with details of their expertise, and requiring the provision of all communications between Mr Bell and his correspondents. Although he was aware of these requests, Mr Bell did not ask the correspondents if they were prepared to be identified. 1072/VDL’s solicitors refused LLC’s requests stating that the correspondents had “only agreed to speak to [Mr Bell] on the understanding that they would remain anonymous.” This was materially inaccurate since there is no evidence that any of them made anonymity a condition of their participation.

Ultimately, LLC tried again early during the trial and, after court hours on day 5, 1072/VDL offered to provide the identity of the correspondents and brief details of their expertise on condition that the information would be kept confidential and that LLC would not try to contact any of the eight correspondents either directly or indirectly. LLC agreed to these terms. However, when Mr Bell came to give evidence on day 6, it became apparent that his notes had still not been provided. They were provided overnight, by which time Mr Bell was in the middle of his cross-examination.

There are a number of fundamental problems arising out of this sequence of events:

Mr Segal QC rightly accepted that things had gone wrong. That is blindingly obvious. However, for the purposes of a judgment on quantum the real problem is what impact the involvement of the correspondents has on the evidence of Mr Bell. He was adamant that he relied upon the contribution of the experts only as support for views which he held anyway. That may be so, but the fact that he included their contributions shows that he regarded them as material. In my judgment, the wholesale disregard for proper procedure and the consequent unfairness to LLC in depriving it of essential information about the correspondents until Mr Bell was in the course of giving his evidence leads directly to the conclusion that the contribution of the correspondents should be disregarded altogether. It also affects my attitude to Mr Bell’s own evidence in three respects. First, while I acknowledge that the sequence of events would have been driven (or at least overseen) by 1072/VDL’s legal team, I do not think that he can escape all responsibility for what happened, particularly in his failure to go back to his correspondents to request them to agree to being identified. Second, the comfort that he attached to the contribution of the correspondents must be discarded. That said, however, I have formed the clear view that Mr Bell was right in maintaining that the views he expressed were views that he held independently of the contribution of his correspondents. Third, the inaccuracy of his summary accounts of his dealings with his correspondents makes me examine his evidence generally with extra care, particularly when that evidence is not objectively verifiable. I approach his evidence on that basis.

Ms Pincott is a chartered accountant who reported and gave oral evidence called by LLC. She was heavily dependent upon information from LLC which she took as the basis of her calculations of LLC’s potential losses. She adopted Mr Boghigian’s figures for sales and price, since that was in his field of expertise and not hers. She considered the costs that were proposed by LLC (including, importantly, marketing spend) and applied her expertise to whether or not they were reasonable. Her opposite number, Mr Holland, attended trial but was not called. It was agreed that his evidence should be taken as if he had been called but LLC had elected not to cross-examine. There were few issues of principle dividing Ms Pincott and Mr Holland. Each offered calculations of loss based upon various different assumptions, and further illustrative permutations were submitted after the hearing.

All of the experts founded their evidence on a fairly limited supply of primary evidence, to which I now turn.

Between April 2006 and May 2007 the Device was sold online through Walgreen’s website. 1,567 Devices were sold in total. There was an upward curve of sales from a handful per month at the outset, starting to rise in September 2006 and peaking at a maximum of 275 in March 2007. The Device retailed at $79 (with a wholesale price to Walgreens of $59 (Footnote: ¹⁴)) until April 2007 when, at the suggestion of Walgreens, it was increased to $99 (with a wholesale price of $73). Sales fell back in April 2007, which is likely to have reflected the increase in price. Sales stopped in May 2007, which I find was related to the intervention of Tyrell and the actual or anticipated intervention of the FDA. The FDA was interested because these were pre-clearance sales and therefore unauthorised.

It is common ground that the website offering the Device for sale made a number of claims that have not subsequently been authorised and would not be allowed under the terms of the FDA clearance that has been obtained. Those claims included that use of the Device can prevent cold sore eruption if used during the tingling phase; that complete pain relief is experienced by most people within minutes; that it was risk free and had zero side-effects; that repeated use may reduce the recurrence rate of cold sores; and that the Device has an anti-biotic effect on viruses. The main clinical claim approved by the FDA and used for the Walgreens trial is that the Device shortens healing time (Footnote: ¹⁵).

There is a conflict of evidence about what marketing was carried out to support the online Walgreen’s sales. I find that LLC supported the sales by spending $4500 per month on Google pay-per-click; customers accessing the Virulite website were redirected to Walgreens; and a supportive article was printed in Prevention Magazine. Walgreens sent out some “box-stuffers” advertising the Device, but in the light of Mr Mencanin’s evidence I am not satisfied that the number sent out was as high as 300,000. On 28 February 2006 Mr Mencanin emailed his main contact at Walgreens to say that an email “skin” (a form of opt-in email advertising) had been launched that morning to 15 million Health & Beauty email accounts, which would take three weeks to send. His evidence was that he later discovered that this skin did not take place: the firm that was due to execute it gave LLC the run around and was unable to provide any evidence that they had done it. This is consistent with what was written in the Frederick Hall Opinion on Value in February 2008, which refers to periodical ad spots on Walgreen’s website and stuffing leaflets in outbound orders but to no other brand awareness campaign. I find that no or no significant skin was sent out.

LLC’s evidence is that Walgreens were enthusiastic about the Device and were contemplating marketing it in-store at a retail price of $129. Published data on Walgreens Inventory Turnover Ratio reveals the number of turns of inventory at 6.98 which suggests that, to meet Walgreen’s in-store requirements, the Device would have to sell at a rate of about 7 units per store. There is evidence that “within three months the device became the website’s best selling Cold Sore remedy, bypassing the market leader, Abreva” (Footnote: ¹⁶) though the source of that information is not clear. 1072/VDL relies upon an exchange of emails in January 2007, which it interprets as meaning that Walgreens were concerned that the Device could not be differentiated from other cold sore treatments (Footnote: ¹⁷). However, read in context, what Walgreens meant was that a draft advertisement failed to differentiate between the Device and other cold sore treatments and needed to be improved so that it did. Support for LLC’s case that Walgreens were enthusiastic is provided by an email from Mr Field to 1072/VDL dated 19 October 2008, immediately after Walgreens had backed out, in which he said that “in recent discussions Walgreens were forecasting an initial PO of 60,000 units. We had agreed the retail price would be $129 and we would wholesale to Walgreens for $82.”

I do not detect any lack of enthusiasm for the Device at any stage before the intervention of Tyrell. When the Walgreens’ deal collapsed Mr Mencanin sent a strongly worded email to Andrea Collaro at Walgreens on 16 October 2008 which was certainly not calculated or likely to endear him to the recipients. But his evidence, which I accept, is that a number of people have moved on and that he has remained able to do business with Walgreens since then. What is common ground is that the proposed deal with Walgreens in 2008 was very favourable in a number of respects that would be unlikely to be replicated in any later deal. In particular, Walgreens was prepared to pay 30% of the wholesale price on submitting its initial order, which was unusually favourable.

In 2012 Ms D’Arcy and Mr Baker re-approached Walgreens with a view to Walgreens stocking the Device. After a limited presentation the correspondence was equivocal and appears to have petered out in about November 2012 after a request for further information from Walgreens. While it is clear that Walgreens were open to considering whether or not to stock the Device now that it had FDA approval, the disclosed correspondence does not enable any further inferences to be drawn. On 7 October 2013 a Mr Bobber of Walgreens emailed Mr Mencanin asking for an update on FDA approval of the Device. Again, this suggests a willingness to consider the Device, but does not go further than that.

Boots is a national retailer. It has been selling the Device in-store since about September 2008. According to Ms D’Arcy, in the period from 2008 to November 2013 Boots sold 74,840 Devices, an average rate of slightly under 14,500 per annum. In the 55 week (13 month) period to 24 November 2012 Boots sold 13,430 Devices, at a weekly average rate of 244. In the 49 week (11 month) period to 2 November 2013 Boots sold 12,189 Devices, at a weekly average rate of 248. The Device was stocked and sold from about 1300 stores, which indicates an average turnover rate of between 9 and 10 per store per annum over the two years. The average retail price during that time has been almost exactly £35 per device (£35.11 in the first period and £34.87 in the second).

When Boots first started marketing the Device, there was considerable optimism for much higher sales than have in fact been achieved. On 3 October 2008 Mr Rothon emailed Mr Field and others reporting that Boots’ Oxford Street and Covent Garden stores were selling more than 30 devices per day per store. Mr Field reported information to Ms Higginson and Mr Mencanin, which he said came from Mr Rothon: Pacer and Dr Dougal were said to be confident that sales via Boots would be 50,000-60,000 units in the first year. Such levels of sales were never forthcoming.

Boehringer Ingelheim [“BI”] is a leading German pharmaceutical manufacturer. Before FDA clearance was achieved, BI showed interest in the Device which led to discussions during 2012 about their distributing the Device, possibly on a world-wide basis. BI carried out concept testing for the Device in the United States, Germany, Japan and China. The purpose of the research was to obtain information about the prevalence of cold sores, frequency of suffering, product awareness and usage, and initial purchase interest for two product variants including price. The sample size was 2000 per country, representative of the general populations, and the testing was carried out in July 2012. BI tested two concepts. The first, Concept D (which was taken during trial to mean disposable), concentrated on effective prevention and had as its primary claim that the Device “reduces likelihood of the outbreak of cold sores at first signs.” It was said to be “the first medical light therapy to help prevent outbreaks when used at the first signs and to shorten healing process of active sores by up to 3 days”. It was said to be designed to be used for up to 5 cold sore applications. The second, Concept P (which was taken to mean permanent), concentrated on shortening healing time and had as its primary claim that the Device “cuts your cold sore healing time by up to 3 days.” The Device was said to be covered by a 3 year warranty, which emphasised its durability.

The Summary of results included that “the acceptance levels of both concepts are on an average level in the US and in China, in Germany and Japan only below average...”. The main strength of the product ideas was said to be the expected shortened healing time (a claim which was on a par with those made for Abreva). The purchase intention was said to be “rather average” in Germany, USA and Japan. Both concepts were perceived to be “very new and different.” The price sensitivity measurement “shows that the planned prices of both concepts are far beyond acceptance.” The optimum price for the USA was said to be $25, or $30 as a maximum, which contrasted with the planned price of $34.95 for the disposable Device and $58.95 for the disposable device. The purchase intention at the planned price for the permanent concept was “quite low in all countries, a confirmation that the intended price is clearly too high.” The conclusion of the report included that “Both concepts initiate a low to average purchase intention unpriced ... . But the planned prices, especially for the [permanent concept] are far beyond acceptance in all countries.” Recommendations included that the “concepts would only be promising, if there was a possibility to lower the prices to an acceptable level.” Another recommendation was that “the inconvenient size of the product could be a purchase barrier, as it turned out to be a weakness, especially in comparison to the currently used products against cold sore.” These findings were against the background that most respondents were satisfied with the product that they had last used and the re-purchase intention for the product used last was “quite high”.

The report provided the detailed findings of the research, which provides additional insights:

The details relating to Pharmaco are contained in the confidential annexe.

The wholesale value of cold sore treatments sold in the United States in 2012 was $128.3 million. The percentage increase in value in recent years has been 3% (2010), 2% (2011) and 4% (2012). In US$ terms, the market has increased by 85% between 2002 and 2012 and by 16% between 2007 and 2012. The volume of sales in 2012 was 12.6 million packs. That was 2% down on 2011 and 13% down on 2007. During that period, sales of Abreva have increased from 5.8 million packs in 2007 (40% market share by unit sales) to 6.7 million packs in 2012 (53% market share by unit sales). In 2012 Abreva had 74% market share by revenue. Abreva is marketed by GlaxoSmithKline and retails at around $19, sometimes being discounted. Abreva enjoys patent protection which will run out in 2014. When that happens, the price is likely to fall. It is common ground that a pack of Abreva may be used to treat 2.5 outbreaks. If that is applied as an order of magnitude to the 12.6 million packs sold in 2012, those products could be used to treat about 31.5 million outbreaks.

The BI research invites high level inferences about the number of heavy cold sore sufferers in the United States’ population of about 314 million. That figure is probably too high a starting point because the BI research was conducted on a sample aged from 16-65 and it is not self-evident that those aged under 16 or over 65 would have the same incidence of cold sores. However, leaving that to one side for the moment, BI’s 8% suffering from cold sores either often or very often, if extrapolated to the population level would result in a group of about 25 million. If 16% of those suffered cold sores once every 3 months, 12% once a month and 7% (say) twice a month, that would suggest that those heavy cold sore sufferers suffered about 94 million outbreaks per year (Footnote: ¹⁸). BI’s research indicated that 90% of heavy cold sore sufferers had treated their cold sores with medication over the past 12 months. Even if they had bought only one pack each (and ignoring those lighter suffers who had also used medication), sales of medication should have far exceeded 12.6 million packs in 2012. This reinforces the conclusion that it is not appropriate to extrapolate the BI data to a population of 314 million when attempting to identify the number of heavy cold sore sufferers who might form part of a prospective market for the Device.

Miss D’Arcy’s evidence was that BI started by considering that the market for heavy cold sore sufferers, which is the obvious target market for the Device if marketed as a “permanent” device, was 13 million and that the figure was later revised down to 11 million after release of information by Walmart. Her evidence (which has documentary support on this point) was that Pharmaco also considered the market to be 11 million heavy cold sore sufferers (Footnote: ¹⁹). In an email to BI on 1 February 2012, Miss D’Arcy had referred to a population of 13.25 million recurrent sufferers, that figure being based upon two published papers that are not before the court. She described them as “the “low hanging fruit” that appear to purchase the device in the initial marketing stages.” She later reduced her estimate to 12.1 million recurrent sufferers on the basis of further information and discussions with BI.

Miss D’Arcy also gave evidence that, in terms of volume of treatments sold, the United States market was similar in size to that of the United Kingdom, despite the population of the United States being many times greater than that of the United Kingdom. Her only explanations for this curious equivalence were that the retail price in the United Kingdom is lower than in the United States and that the United States market is less mature because consumers in the United Kingdom have been exposed to cold sore preparations for longer than in the United States. While the price differential would explain a lower take-up in the United States, her evidence about relative maturity is more problematic, not least in the light of the decline in absolute terms in the number of treatment packs sold per annum in the last decade in the United States, which cannot sensibly be attributed to a lack of maturity in the market. Her evidence suggests that there should be scope for some expansion of the market with maturity; but the sales figures over the last decade do not suggest that current medications are likely to achieve any dramatic inroads into the untapped market, and support Pharmaco’s observation that there is a barrier because not all heavy cold sore sufferers are presently prepared to invest in medication for their problem. There is no reason to believe that the incidence of cold sores in the United States differs markedly from that in the United Kingdom: to the contrary, the evidence of similar incidence rates in the United States and Germany supports the inference that incidence rates in the United States and the United Kingdom will also be similar. I therefore infer that the population of cold sore sufferers in the United States is many times greater than that in the United Kingdom, although I accept Ms D’Arcy’s uncontradicted evidence that the volume of cold sore treatments sold is similar in each country.

Mr Bell was adamant that the available market should be taken at 12.6 million units per annum. On all the evidence I would agree with him if one was considering the introduction of another “me-too” product into the market, since a straight-forward “me-too” product would have no characteristics that might cause additional consumers to enter the market in any numbers. The question therefore arises whether there is anything about the Device that might lead to an expansion of the market driven by its introduction. I deal in the next section with the question whether the Device is a breakthrough product and conclude that in some respects it is. There is evidential support for the view that introducing the Device as a disposable device would lead to attrition of existing sales of less than 100%, which suggests an expansion in the market overall. However, and particularly because of the premium price which forms the basis of LLC’s case, I do not consider that LLC has demonstrated a substantial chance that the introduction of the Device as a “permanent” device would lead to significant expansion of the market. According to the BI research, heavy cold sore sufferers who are the target market for the Device are already the most likely to be buying medication. While some who are not may be attracted by the new technology that the Device offers, the evidence does not justify a finding that those people will be very numerous.

On this evidence, I conclude that, although there is a population of about 11 million heavy cold sore sufferers in the United States, a significant proportion are not buying medication or, if they do, are not buying it regularly. The evidence does not establish that introduction of the Device would tap into a significant number of those who are at present not buying medication. It follows that the market should be taken as being in the region of 12.6 million packs (or medication for about 31.5 million outbreaks) with some scope for modest expansion on the introduction of the Device and as the market matures further.

In order to have the effect of a breakthrough product it is common ground that the Device needs to have characteristics that are distinctly different from its competitors and will drive a change in perception and buying habits. When selling into the pharmaceutical market in the United States, the claims that are authorised to be made by the FDA will be vitally important in establishing the product’s characteristics. In Mr Boghigian’s words: “Products that cause a paradigm shift are those that offer unique advantages and superior outcomes. A paradigm shift usually involves a new scientific method that replaces the old.” And “The key to marketing a drug or medical device successfully, that rises to the top of its class ... is to establish the value to consumers and patients. The value proposition is a statement of value that is to be delivered with the product. It is what makes it different and unique from existing competitive products on the market. It explains how this product will help solve a medical need or improve the outcomes. It delivers specific benefits that are quantifiable and reinforces with the customer why they should purchase the product.” I accept the general thrust of this evidence.

The medical claims that are authorised by the FDA to be made on behalf of the Device fall short of those that were made during the Walgreens on-line trial. The authorised claims about shortening healing time are at best equivalent to those made on behalf of Abreva. In addition, there are medical claims that Abreva can make about mitigation of symptoms (i.e. tingling, pain, burning and/or itching) that cannot be made on behalf of the Device at present. That may reflect the lack of clinical research carried out by 1072/VDL; and Pharmaco’s research suggested that further claims might become authorised in the future. But, at present, the Device cannot claim to deliver a superior clinical outcome.

I bear in mind that, before matters became litigious, both LLC and 1072/VDL believed that the Device had real potential as a breakthrough product. It is easy to understand LLC’s excitement (which was shared by 1072/VDL) as initial reports and projections came through from Boots in late 2008, and with a favourable deal thought to be all but done with Walgreens. I also bear in mind that 1072/VDL and iSmart have continued to sing the praises of the Device in their attempts to get it distributed by others. However, only limited weight can be placed on the parties’ early hopes or what has been said, particularly by Ms D’Arcy, about the breakthrough possibilities of the Device when trying to sell it. Greater weight is to be given to the objective evidence of the limited market research that has been undertaken and the expert evidence.

The feature of the Device that is distinctively different is the technology. Having emphasised the need for superior outcomes in his main report, Mr Boghigian continued to maintain that a market for the Device could be created on the basis of its unique technology and on the basis of additional claims that could be made without infringing FDA approvals (e.g. that no subject’s cold sore got worse, the prolonged use of the “permanent” Device, there are no side effects, it is portable and easy to use with no messy creams, and it is cost-effective for the heavy user.). Mr Bell relies on evidence of low customer dissatisfaction with current treatments and the lack of distinguishing claims. He also claims support from the research carried out by BI and Pharmaco and the experience of Boots and others in the United Kingdom.

I agree that the research carried out by BI and Pharmaco is relevant. To my mind the most relevant findings from the BI research for these purposes were that (a) 74% of the cold sore sufferers allocated to the permanent concept regarded it as being “much better than” or “somewhat better than” their existing medication, with 25% considering it to be “much better than” and (b) at a price of $58.95, 35% of the allocated sample of heavy cold sore sufferers said that they would definitely or probably buy the permanent Device. However, (c) the researchers suggested that $25-30 was the optimum price and (d) the size of the Device was seen by consumers as a drawback.

The Pharmaco research, based on a price of $58.50 for a Device providing 5 applications disclosed that (a) the technology was regarded as a breakthrough, (b) purchase intentions were above average for a device, (c) on use the Device more than met expectations and had strong product performance ratings but (d) the size of the Device was again seen as sub-optimal.

The Boots experience, where cream-based treatments are cheaper than in the United States, suggests that the Device has a place in the United Kingdom market priced at £35 (c. US$55). Early predictions of sales of 50,000-60,000 units proved unduly optimistic. There is no direct evidence of what sums are spent on marketing. On 6 November 2008 Mr Rothon wrote that Boots intended to announce the Device in The Times’ health supplement and would release various Boots flyer type promotions to its advantage card clients. On 14 December 2009, Mr Baker wrote to a contact at GSK that the only promotional activity Boots had carried out was a 1/3 saving between September and December 2008 and that there had been no recorded promotional activity, although the Device was a “champion brand” for Boots. Ms Pincott was instructed that no significant marketing or brand investment has gone into the promotion of UK sales. On the available evidence, those instructions were correct. (Footnote: ²⁰) 1072/VDL has incurred no marketing expenditure on the Device apart from maintaining its website.

In the course of the trial Mr Grodzinski QC offered Mr Bell the analogy of electric shavers being introduced into the wet-shave market. The electric shaver has a distinctive technological edge and avoids the mess of wet shaving, but delivers no appreciable improved outcome in the quality of the shave. Its capital cost is much greater than an individual wet razor, but its longevity equals things out. It has established a place in the market, though it cannot expand the market to any extent. When taxed with this analogy, Mr Bell was initially unwilling to recognise its relevance. While asserting that the nature of the claims that can be made was more important with an FDA approved product than with shaving materials, he eventually conceded that the electric shaver is not a “me too” product.

The picture that emerges from this limited market research and the evidence of the experts is clear. The LED technology is distinctive and new and would be seen by some (though not necessarily all) as beneficial in itself because it avoids the use of creams. It is portable and reasonably discrete to use, though I agree that a person would be unlikely to want to sit using the Device for minutes on end in a public place such as a bus, and I regard the suggestion that users might wish to collect Devices in different colours as if they were a technological fashion accessory as completely fanciful. The buying intentions disclosed by the BI and Pharmaco market research support the view that the Device would have a place in the market, as does the experience of Boots in the United Kingdom. The BI research supports the view that a price well below $59 would be optimal for maximising sales; but the Pharmaco research supports the view that substantial sales could be achieved with a Device branded for 5 applications at that price. I therefore conclude that the Device is not a “me too” product, that it has a potential place in the United States market, but that it is unlikely to cause a paradigm shift in buying habits that would materially expand the market, at least in the absence of significant expenditure on marketing and brand awareness.

LLC has consistently seen the Device as a premium product providing a “permanent” solution, with a price to match, which created an immediate conflict of interest with 1072/VDL for whom lower pricing would mean increased unit sales and £5 royalties under the DLA. It advances its claim on that basis.

In a business plan prepared in August 2006, before the trial with Walgreens, LLC projected a wholesale price of $59 and a retail price of $79. After the Walgreen’s experience, LLC raised its sights further. On 28 November 2008 Mr Rothon emailed Ms Higginson that “you need to accept that the product has a market value of around $55 max... .” Ms Higginson’s response was “$55 is ludicrous.” After trenchant criticism of Boots’ pricing strategy she explained the reasons why LLC looked to a higher price. There were two main strands to her argument. First, assuming that retailers would want a mark-up of 60% on their wholesale price, a retail price of $55 would represent a wholesale price of $34.40 which was “not enough for a very basic marketing budget, let alone any profit.” Second, she relayed the advice of Walgreens that the Device should launch at $129 and asked the rhetorical question: “So who’s right?”

LLC has not deviated from this approach. The spreadsheet that accompanied the initial Letter of Claim adopted a wholesale price per unit of $53 dollars, that was intended to reflect a retail price of $79, giving the retailer a mark-up of 49%, which is excessive in the light of the agreed expert evidence that a retailer would expect a 35-40% mark-up on the wholesale price. It now advances its claim on the basis of a wholesale price of $59, which would lead to a retail price of $79.65 (35% mark-up) to $82.60 (40% mark-up).

LLC submits that the Device is cost effective at this price. There are many illustrative permutations that can be adopted. First, if the Device is assumed to be good for 50 applications, it could adopt a price multiple of 20 over a pack of Abreva or other medications (Footnote: ²¹). On this approach, the Device is cost effective retailing at around $80. Second, if it is assumed that the life of the Device will be the same as the proposed three year warranty period, a consumer would need to spend just short of $27 per annum before the Device became cost effective: this would equate to 1.4 packs of Abreva at present prices, sufficient to treat approximately 3.4 outbreaks of cold sores. The BI research suggests that this would be a cost effective alternative for somewhere between 19 and 35% of cold sore sufferers provided that they were already buying medication regularly, which many do not: see [179(ii) & (iv)] above. Once the price of Abreva falls on its losing patent protection, the balance will shift. If it is assumed (as 1072/VDL emphasises) that the Device is to be sold as a permanent device, the balance of cost-effectiveness shifts back in the direction of the Device once more (though the prospects for repeat sales diminish correspondingly).

The price being claimed by LLC is lower than was advised by Walgreens. 1072/VDL submits that no weight can be placed upon the Walgreens trial at all because it was conducted on the basis of false claims. Mr Boghigian’s initial report attributed the sales that were achieved to the claims that had been made, a proposition with which Mr Bell agreed. What is impossible to know is the extent to which the sales were attributable to (a) the claims that would in due course be permissible, (b) the claims that would not be permitted by the FDA clearance, and (c) the technological and non-clinical advantages that may have been perceived by customers. The evidence requires the conclusion that some sales would not have been made but for the inflated claims; but it neither requires nor permits the conclusion that no sales or no significant sales would have been achieved if the Walgreens trial had been conducted on the basis of the FDA-approved medical claims. Similarly, while Walgreens’ enthusiasm for the Device should be discounted to some extent because it was founded on unauthorised claims, it would in my judgment be unrealistic to discount it altogether. The numbers of units sold were small in absolute terms; but, on the evidence, the Device became the best selling cold sore medication sold on-line with the limited advertising that I have described above. Walgreens know their business and there is no justification for attributing all of their enthusiasm and their assessment of the appropriate price to the unwarranted claims.

Mr Bell gave evidence that sales would be adversely affected because the present packaging is ill-suited to presentation in-store on the J-hooks that are typically used by Walgreens (or other major retailers in the United States), and that, because of the premium price, the Device would be displayed in secure cabinets (as an anti-theft measure) away from the creams with which it would be meant to compete. I am far from convinced that packaging would be allowed to be an obstacle to successful sales; and, to the extent that he is right about the need to display the Device in secure cabinets, I can only assume that Walgreens would have been conscious of that when suggesting a retail price of $129 and that this consideration did not deter them.

I accept that, at a retail price of about $80, a reasonable case can be made for the Device being cost effective for a heavy cold sore sufferer when compared with the competing creams. The case will still be presentable after Abreva loses its patent protection and comes down in price in and after 2014. The precise take-up is not calculable with mathematical precision, but the BI research in the United States and the Boots experience in the United Kingdom suggest that there are consumers who will pay a premium price for the Device.

For these reasons, I assess LLC’s claim on the basis that the Device would have been marketed by LLC at a retail price of $80 (bar 1 cent) and that, while sales would be sensitive to price, this price would not of itself prevent the Device from achieving a place in the United States market.

LLC’s letter of claim was accompanied by a spread-sheet prepared by Ms Higginson before the involvement of Mr Boghigian or Ms Pincott. The spreadsheet assumed a wholesale price of $53 and projected sales and marketing spend as set out below:

In January 2012 Ms Higginson produced a different version of the spreadsheet adopting $33 as the wholesale price for the Device. I accept her evidence that this was an exercise that she undertook to see whether a profit could be made if a wholesale price of $33 (which had been suggested by 1072/VDL) was adopted. The revised spreadsheet projected sales and marketing spend as follows:

The cover sheet setting out Ms Higginson’s assumptions for this version of the spreadsheet appears to suggest that a marketing spend of 42% should be adopted, but it evidently was not. Instead, Ms Higginson adopted a declining rate of marketing spend, which resulted in a decline in the absolute spend from year 6 onwards. The two websites to which the cover sheet referred support a marketing spend of about 20%, one stating that “retail and pharmaceuticals lead the spending, with many of these companies spending more that 20% of net sales. The overall average is reported to be 4-6%.” As can be seen, Ms Higginson adopted a rate above 20% in years 1-5 and below it thereafter.

Ms Pincott, relying primarily upon the expertise of Mr Boghigian, adopted 5% of retail price for MDF (Footnote: ²⁴), representing the direct contribution to the retailer. In addition, she allowed between $30,000 and $50,000 per annum for website costs and pay per click Adwords campaigns. For promotions and advertising she allowed:

LLC’s 2006 business plan contemplated a promotion campaign that would include feature articles and product reviews, direct mail to buying groups and advertisements in trade publications, and integration with physician and pharmacist materials, once FDA clearance had been obtained. It contemplated relatively inexpensive short television advertisements through Cable TV networks, focusing on California in the first instance. There is no reference to web-based or email advertising, which probably reflects the relative immaturity of those media in 2006. It projected unit sales, revenues and Advertising/Promotion spend as follows:

The 2008 Opinion of Value predicted an initial media blitz and marketing spend of $10 million for years 1 and 2, $6 million for years 3 and 4, and $4 million for year five. Combined Selling and Administration expenses were projected to be over 48% of all revenues generated for the first five year period and 27.3% for year six and beyond. This level of spend was projected to generate sales in years 1 to 5 of 160,198, 343,334, 492,879, 597,804 and 662,463 units respectively, an aggregate total of 5,175,819 over the five years. Average selling price was projected to be $76 per unit (Footnote: ²⁵), generating annual sales of over $12 million in year one and rising to $50.3 million in year 5. Ms Higginson’s evidence, which I accept, was that the exercise being undertaken by Mr Hall was to look at what a major pharmaceutical company would spend and to see what their costs of capital would be. She accepted that the unit sales figures being projected were in the ballpark of what she would have hoped to achieve if LLC had been in charge of selling the Device (Footnote: ²⁶), but they are well ahead of Mr Boghigian’s figures on which LLC’s claim is based.

It is common ground that there would be a non-linear relationship between marketing spend and achieved levels of sales. There are also a number of reasons that suggest the need for significant marketing expenditure if the Device is to catch on in the United States. Those reasons include the dominance of Abreva, which itself is supported by a $20 million annual marketing spend; the likelihood that GSK would move to protect Abreva by retaliatory marketing; the likely fall in the price of Abreva (and its competitor products) when Abreva loses its patent protection in 2014; the relatively low level of dissatisfaction with existing medications; the lack of differentiating clinical claims; the consequential need for advertising to create brand awareness; and the fact that patent protection for the Device runs out in 2018, so that the window of opportunity is short.

Mr Bell was adamant that it was not feasible to market the Device with a soft launch. As he put it, “in the US market it’s not a learn as you go market. … The way it works in the US is if you want to be … in 8,000 Walgreens’ stores, that you need to meet minimum hurdle rates”, which he identified as a turnover rate of approximately 7 units per store per annum (or 56,000 units for 8,000 stores). His experience was that it was a complete misconception for a small manufacturer to think that it could spend a little on marketing and “learn as you go”. His opinion was that a marketing spend of $20 million per year for the first 4 years would be required to persuade a relatively limited number of consumers to pay even $30 in any significant numbers. Such expenditure is clearly not feasible on the projections being put forward by LLC. Even if it was, Mr Bell considers the model of a “permanent” Device to be doomed because each sale will remove the purchaser from the market, thereby shrinking it permanently for the future.

Mr Boghigian’s directly relevant experience was of bringing to market a product to compete with Aleve (a pain relief treatment for osteoarthritis). The intention was to acquire 5-7% market share in 12-18 months with what he regarded as a “me-too” product against a well-established market leader. The marketing spend was substantial, and measured in millions of dollars. The projected revenue from a 5-7% market share is not known.

The parties have not attempted to calculate what percentage of the 2012 market (measured by unit) would be represented by the various sales projections that have been advanced by LLC. It is not possible to make a unit-based comparison since it is not known how many individual cold-sore sufferers contribute to the 12.6 million units sold; it is therefore impossible to determine how many of those unit sales would be eliminated by each purchase of the Device. Furthermore, while I reject Mr Bell’s evidence that the sale of a Device should be regarded as taking that consumer out of the market permanently, no exact alternative period has been established on the balance of probabilities. My instinct is that purchasers of the Device would on average be taken out of the market for about 3-4 years, allowing for loss, breakage or other possible reasons for replacement: but that is no more than instinct informed by the evidence that has been presented. What is clear is that sale of a “permanent” Device is intended to and would take the consumer out of the market for a period that should be measured in years.

In these circumstances, the only estimate that can be made is of projected revenue from sales of the device as a proportion by value of the 2012 market value of $128.3 million. This will give some insight into the impact of the projected sales on the market, but does not provide an accurate reflection of market share. Subject to those constraints, and assuming a wholesale price of $59 for the Device, the projected sales represent the following % by value of the 2012 market:

When viewed overall, the evidence points in the direction of a marketing spend of at least 20%, for a number of reasons. First, the Boots experience shows that, in the absence of any substantial marketing, the Device can maintain a position in the market but not make substantial inroads. Second, given the market dominance of Abreva, a soft launch is not feasible for the Device: it is necessary to create some brand awareness. Third, the Device will be in competition with Abreva which is supported by an annual marketing spend of $20 million or about 20% of revenue. Fourth, it is likely that if the Device were to make inroads in the market in competition with Abreva to the extent indicated by any of the illustrative projections in [214] above, GSK would retaliate with additional marketing to shore up its market leader. Fifth, the figures in the Hall Opinion of Value are of some interest. That Opinion projected much more aggressive unit sales into a market that in 2008 was considerably smaller in value than it was in 2012, and the wholesale price being suggested ($70) was higher than now suggested by LLC’s claim. In those circumstances expenditure of 48% of revenues in years 1 to 5 and 27.3% for years six and beyond is understandable. It does not support the need for equivalent percentage expenditure in support of the figures being projected by LLC’s claim, still less the suggestion that a minimum spend of $20 million per annum for four years is necessary. Sixth, Ms Higginson’s selection of 20% expenditure when compiling the spreadsheet for the Letter of Claim may be taken as her view of the minimum marketing spend that could realistically be advanced in her claim document. Seventh, there is some documentary support for marketing spend in excess of 20% on product launches in the pharmaceutical industry. Eighth, when Ms Higginson reviewed her Letter of Claim spreadsheet to see if she could work the figures so that LLC would make a profit on the basis of a $33 wholesale price, she maintained roughly comparable sums of marketing expenditure for the first three years, although that led to the percentage of revenue being spent on marketing being markedly increased, which suggests that she recognised the need for an irreducible minimum spend in the early years. Ninth, the working assumption on which LLC’s claim is based is that, in addition to LLC’s marketing spend, it will have a substantial partner (such as Walgreens was intended to be) which will contribute to the presentation of the Device to the public.

On the basis of this material, I have come to the conclusion that, for there to be a realistic prospect of a successful launch and subsequent promotion of the Device, budgeted marketing spend would have to be in excess of 20% of wholesale revenues. Ms Pincott’s adoption of the higher of $2 million or 20% for years 1 and 2, in addition to which there is an additional 6.875% of wholesale price contributed by MDF and $30,000 to $50,000 for other marketing costs appears realistic. If the Device makes headway, I consider that it will be necessary to continue to support it at such levels, because of the need to continue to build market awareness in the face of Abreva and GSK’s likely response to the Device’s success. It is therefore necessary to budget for the higher of $2 million or 20% of wholesale revenues in addition to MDF and the other marketing costs throughout years 1 to 10.

In her calculations, Ms Pincott assumed that the Device would be launched 12 months after FDA clearance. I consider that may be pessimistic since LLC would have taken steps to line up a deal before clearance was obtained and the only necessary delay to the launch after FDA clearance was about 3 months to ensure compliance with the conditions of clearance. I bear that in mind while accepting Ms Pincott’s assumption for the purposes of calculation.

There is a measure of agreement on other costs of sales, but some matters remain in dispute:

I have held that the Device is not a “me too” product, that the technology is distinctive and new and that it has a potential place in the market while being unlikely to cause a paradigm shift in buying habits that would materially expand the market in the absence of significant expenditure on marketing and brand awareness. At present it is and remains the only Device which has FDA approval, and has patent protection until 2018. I recognise that if the scale of sales achieved during the Walgreens online trial and by Boots (which I regard as the most relevant sources of data relating to actual sales) were replicated, LLC would fail to achieve the DLA sales targets and the venture would not be profitable for LLC or 1072/VDL. However, I consider that there are solid reasons for concluding that LLC had a real or substantial chance of making a success of the launch and subsequent marketing of the Device, making the assumptions as to pricing and costs identified above.

The sales targets in Schedule 4 of the DLA were negotiated at arm’s length and represented the parties’ reasonable assessment in July 2006 of what would be achievable. By then, they had been in association since 2002 and the initial date for FDA clearance in 2004 had passed without their being anywhere near ready to make a submission. Only limited weight can be attributed to this assessment, since it predated either the Walgreens’ trial or any sales through Boots. However, apart from the dispute about pricing, there is no evidence that either party later considered the DLA sales targets to be unrealistic; and there is no evidence that 1072/VDL was simply sitting back waiting for LLC to fail with a view to recouping damages for breach of the DLA targets.

It was central to LLC’s thinking that the launch would be in conjunction with a major partner. That could be either a retailer such as Walgreens or a major pharmaceutical company. LLC’s formulation of its claim on quantum assumes wholesale sales to a retailer, which I accept as being the more likely option; but it does not follow that it was the only one. While the evidence shows that the deal that LLC thought it would conclude with Walgreens before the intervention of Tyrell was favourable to an extent that was unlikely to be repeated, I see no reason why a major retailer should not conclude that the Device should be stocked, particularly in the light of Mr Bell’s evidence that if targets were not met, the Device would be delisted and unsold stock returned, thereby minimising the risk to the retailer. Although the evidence is sparse, not least because 1072/VDL have been pursuing other options since termination of the DLA, there is evidence that Walgreens has not lost interest in the Device, to the extent that its interest in taking it on may be rekindled. And if, during the period from termination of the DLA to FDA clearance and beyond, Walgreens had proved unreceptive, there are other major retailers who I am confident that LLC would have approached.

It is possible to put the DLA sales targets and other projections into context by considering the turnover of stock that would be required if the Device were to be stocked in 8,000 Walgreens’ stores. To achieve the DLA first year requirement, the stores would have to sell just over 6 Devices per store. That may be compared with Walgreens’ standard requirement of 6.98 turns of inventory and with Boots’ experience of turning over about 9-10 Devices per store per annum at a lower price but without any significant marketing spend or promotion.

Sales are obviously price sensitive, but the proposed retail price of $79.99 would not be prohibitive, for the reasons discussed above. In particular, I take into account (a) Walgreens’ view in 2008 that the Device should sell in store for over $120, (b) the BI research indicating take-up by 35% of heavy sufferers at a retail price of $58.95, (c) Pharmaco’s projections of sales generating $58 revenue per Device, and (d) Boots’ levels of sales achieved without significant marketing spend or promotion.

For the purposes of illustration and considering whether there was a real and substantial chance of success, I have assumed total marketing spend in excess of 27% of wholesale revenues, which provides significant differentiation from the United Kingdom experience. There remains the risk, as advocated by Mr Bell, that this level of marketing spend would prove too lean. While I have no hesitation in rejecting his evidence that an initial spend of $20 million per annum was required, I accept that there is risk associated with the lower level of marketing spend that I have adopted.

Pharmaco’s market research indicated that consumers who tried the Device felt that it more than met their expectations. That is consistent with the BI research indicating that 74% of the cold-sore sufferers allocated to the permanent concept thought it better than their existing medication and that, subject to price, 52% would be inclined to buy it.

Ranged against these features, there is the possibility that LLC might have failed to find a partner, though I think this unlikely. Launching the Device into a market so dominated by Abreva would clearly risk retaliation from GSK. Furthermore, given that the Device was to be sold as a permanent device, unit sales would have the effect of taking their purchasers out of the market for a period of years, though not permanently as Mr Bell contended. Maintaining sales at 13.8% of the 2012 market by value would be a significant task and one which is likely to be dependant upon the marketing spend and presentation of the Device creating significant brand awareness. Although it is a significant task, it is not one that takes the entire business plan from the realms of having a real or substantial chance of success into the realms of the purely speculative or fanciful. There is also the fact that, if LLC failed to achieve the DLA Sales Targets, 1072/VDL would be entitled to terminate in accordance with the terms of the DLA. However, even this is not straightforward because the royalty provisions of the DLA were very favourable to 1072/VDL so that, if they removed LLC, they could not expect to replicate them. It would therefore not be obvious that every failure to meet the sales targets would result in termination. That said, the risk of termination is a risk to be taken into account.

Attempting to balance all the considerations that have been advanced on either side, and adopting the assumptions as to pricing and costs that I have set out above, I have concluded that there was a real and substantial chance that LLC would have achieved the DLA Schedule 4 sales targets for North America, whether by sales in the United States alone or in Canada as well. I do not consider that Mr Boghigian’s upper range was realistic in years 2 and 3, but I do consider that there was a real and substantial chance that his lower range predictions would have been achieved, though the predictions are more aggressive than the DLA Schedule 4 sales targets (Footnote: ²⁸) and the chance was accordingly less good. Similarly, I consider that the projections in Ms Higginson’s first spreadsheet were realistic for years 1 to 5, but not thereafter.

Discounting to reflect the risks of failure is necessarily imprecise. In addition to the agreement of the experts that there should be a 12% annual compound discount, further reductions require to be made to reflect the additional risks attributable to the Device being launched by LLC rather than by a major pharmaceutical company. The parties made broad brush submissions on this point, with LLC submitting that there should be no substantial reduction because it would be launching a patented Device for which there is a ready market with the benefit of FDA approval. To the contrary, 1072/VDL submits that LLC’s prospects require a very substantial discount because of the risks inherent in a small business launching a start up product in the face of likely opposition from a dominant market leader backed by the financial might of GSK.

I have found that there is substance in the concerns expressed by Mr Bell and 1072/VDL, even though I have not accepted the full force of his evidence and their submissions. The DLA Schedule 4 requirements, Mr Boghigian’s projections and years 1 through 5 of Ms Higginson’s first spreadsheet all involve annual increments in the early years, with Schedule 4 and Mr Boghigian settling thereafter on 300,000 units per year. In a perfect world, the evidence might permit individual assessments of the risk of success or failure in each year, which could then be valued. However, the evidence in this case does not permit so detailed an approach. Also, in a case such as this where there are so many variables, it would give spurious accuracy to try to attach individual discount rates to individual risk factors, and I will not do so. Two points need to be clarified. First, because of a combination of the annual increments in the early years and the fact that sales of a “permanent” device will have an effect on future sales by taking people out of the market, the risk of failing to meet the various projections increases with time. Second, a conclusion that LLC had an X% chance of meeting a projection as a whole is of itself uninformative about where and to what degree the risks may lie along the time-line of the projection. In general terms, and taking into account the first point just made, if LLC had an X% chance of meeting a projection as a whole, it implies that it had a better than X% chance of achieving the projection up to an earlier point, since the risks of failure in each period are cumulative in leading to the conclusion that the overall prospect of reaching the end of the projection is X%.

An illustrative analogy might be given by comparing (a) the binary outcome in Hall v Meyrick [1957] 2 KB 455 where, if proper advice had been given, the deceased may have expressed his will as being made in contemplation of marriage rather than leaving his widow to claim under intestacy rules and (b) the more complicated outcome that would in theory arise if, say, a sportsman were prevented from competing in a tournament where, in addition to the prize for the winner, progressing through each round would lead to increased recovery of prize money. In Hall v Meyrick there was only one chance to be assessed, namely the chance of the will being appropriately changed; but the sportsman may lose an A% chance of progressing to the second round, a B% chance of progressing to the third, and so on until, finally, he has lost an X% chance of winning the final.

LLC submits that the Allied Maples approach does not work by compounded discounting. That is, in my judgment, an oversimplification. What the Court is doing in such cases is assessing the value of the chance that a Claimant has lost. Where the lost chance is binary there is no obvious place for compounded discounting; but where, as here, what is being assessed is the current value of the loss of the chance of the business succeeding, there is no principled reason to reject outright the conventional approach to such an evaluation – and the experts have agreed that it is appropriate to adopt that approach, at least to the extent of the 7% annual discount that would attach if the Device were being launched by a major pharmaceutical company. While I accept that the application of the Allied Maples approach normally results in the adoption of one overall figure representing the value of the chance of achieving a particular outcome, it seems to me that it is informative to have regard to the effect that compounded discounting at given rates would have if, for example, the experts had been able to agree on an appropriate rate to reflect LLC’s risks. To that end, the table set out below, which is derived from Ms Pincott’s schedules, illustrates the effect of discounting at 5%, 12% and 25% compound (Footnote: ²⁹), by setting out the resulting discount factor year on year.

Further illustrative assistance can be derived from Ms Pincott’s schedules. Applying a 5% annual compound discount leads to a discounted net profit over a projected period of production of 10 years in the order of 68% of undiscounted net profit (Footnote: ³⁰). Applying 12% leads to a discounted net profit over the same period which is in the order of 41% of undiscounted net profit (Footnote: ³¹). Applying 25% leads to a discounted net profit over the same period which is in the order of 20% of undiscounted net profit (Footnote: ³²). The precise figures will vary depending upon the variables that are adopted when computing undiscounted net profit. That said, these illustrative figures help in providing some information about how relative risks impact upon prospective net profit.

Subject to the risk of termination, the conclusion I would reach would be that the value of LLC’s lost chance of achieving the Schedule 4 Sales Targets in their entirety is fairly represented by discounting their full value by in the region of 60% and that their prospects of achieving Mr Boghigian’s lower rate projections were slimmer than that, because of the more aggressive projections in years 1-5. While I accept the force of LLC’s submissions about the advantages enjoyed by the Device when coming to be launched, the considerations that drive LLC’s chances down to this level are primarily (a) LLC’s lack of an established track record or financial muscle and the consequential need to find a suitable partner; (b) the start up nature of the business; (c) the difficulties inherent in tackling Abreva; (d) the possibility that the provision for marketing that I have made will prove insufficient; and (e) the difficulties caused by the effects of the device being “permanent”. They mean that a substantial further discount is required over and above the discounts agreed by the experts. Taking into account all of the risk factors that have been discussed in this judgment that are attributable to the fact that it was LLC running this start up business, I draw some comfort in assessing the Allied Maples discount from the fact that a discount in the region of 60% is the same order of magnitude as a further 12% annual compounded discount. That is not determinative but seems to be within a reasonable range when added to the 7% already built into the experts’ agreed position by reference to a major pharmaceutical company.

The risk of termination needs to be brought into consideration when valuing the lost chance because, if 1072/VDL terminated, no further profits would be made by LLC, which is not taken into account in the figures calculated by the accountants. Once again, any pretence of mathematical precision would be spurious. Conceptually, the solution is clear: if in year 1 there is an X% chance that LLC would not meet the Schedule 4 sales targets, there would be a Y% chance that 1072/VDL would terminate the DLA so that the only profits that LLC could make would be those made in year 1 (Footnote: ³³). Assuming that the risk of failing to meet the sales targets is constant and cumulative year on year (which is by no means certain), a further process of compounded discounting could be applied to assess the chances that LLC would survive to have the opportunity to meet the sales targets in each successive year. In the absence of any expert evidence to assist the Court in determining what further rate of discount would be appropriate I can only observe that my progress so far takes account of two compounded discounts for the risk of failure, namely the experts’ 7% compound per annum and my further discount in the region of 60% which approximates to a further 12% compound per annum; and that the mathematical application of further compounded discounting for the risk of termination at a level approaching 20% per annum would substantially reduce LLC’s net recovery.

In this fluid and unsatisfactory state of affairs, I repeat that I do not consider that there is scope for mathematical precision either in relation to my initial discount or in relation to a further discount for the risk of termination. I remain of the view that LLC had a substantial chance of success for which it should be compensated. Taking into account all of the considerations I have set out above, I assess LLC’s prospects as being fairly represented by reference to discounts of 70% (for the Schedule 4 projections) and 80% (for Mr Boghigian’s lower rate projections). Viewed another way, I assess that LLC’s prospects of achieving the Schedule 4 projections were 50% better than its prospects of achieving Mr Boghigian’s lower rate projections, largely because of Mr Boghigian’s more aggressive projections in the early years.

For the avoidance of any doubt, in reaching these conclusions I have taken into account 1072/VDL’s submission that the evidence relating to Pharmaco shows that it is wrong to conclude that LLC had any real or substantial prospects of making a profit or complying with the requirements of Schedule 4. While I accept that Pharmaco and LLC are in very different positions, both in relation to their position in the market and in their view of how the Device could or should be marketed, I consider that Pharmaco’s continued interest in the Device lends some support to LLC’s case that there is a real future for the Device as it has projected.

The experts have agreed that applying the assumptions on “Other Costs of Sales” that I have set out above to the Schedule 4 projections lead to a loss of profit of $4,637,000, which being discounted by 70% gives a figure of $1,391,100; while Mr Boghigian’s lower rate projection leads to a loss of profit of $10,795,000, which being discounted by 80% gives a figure of $2,159,000. These figures are not identical, which is to be expected – not least because the assessment of loss of a chance is necessarily imprecise. Also, to my mind, it is not to be expected that the chances of two different outcomes will lead to the same valuation, since a Claimant’s prospects of achieving one outcome may be more valuable than its prospects of achieving another. In the event, the two outcomes are not so far apart as to cast doubt on the process that has led to them: discounting Mr Boghigian’s lower rate projections by 85% would have led to a figure of $1,619,250 which, to my mind, is surprisingly close to the discounted Schedule 4 projection, and I have resisted the temptation to adjust the discount factors that I had settled on before knowing how the figures would turn out.

Allowing for the necessary imprecision of the process and the figures it has produced, it would not be sufficient simply to take the higher figure as the appropriate figure for damages. Instead, the Court’s overall assessment of the value of the chance lost by LLC should adopt a figure in between the two but towards the higher end of the range, reflecting the fact that both calculations indicate the loss of substantial value but that the figure based on Mr Boghigian’s projection indicates a loss approaching that figure.

On this basis, I conclude that an appropriate award of damages adopting the principles established by Allied Maples is $1,900,000. I then stand back and consider separately whether this appears overall to be a reasonable sum to award for the loss of a relatively speculative prospect of achieving very high returns. To my mind, it is reasonable.

If 1072/VDL had managed before FDA clearance to find a partner who was interested in marketing the Device on a global or multi-national scale it may have been in their interests to renegotiate the DLA so as to give the new partner access to the United States (and, possibly, other territories covered by the DLA). Valuing LLC’s business for the purpose of renegotiation would have been as difficult and imprecise then as it is now, but the fact that 1072/VDL wanted to renegotiate in such circumstances would of itself give LLC some leverage. Conversely, if LLC had lost the will or the means to continue under the DLA, 1072/VDL would have been in a strong position because of the £5 royalty provision. Although some discussions were carried out between LLC and Ms D’Arcy they had not advanced to an extent that makes the outcome of those discussions predictable; nor do they enable the court to determine what royalty payments may have been agreed in all or any of the possible permutations of fact that might have led to negotiations. For these reasons, I consider that LLC’s claim is better assessed as set out above and do not feel compelled to try to conjure a figure on this alternative basis.

Given my findings on LLC’s primary claim it is also not necessary for me to consider LLC’s alternative formulation of a claim for wasted expenditure, and I do not do so.

The accountants agreed calculations of interest for the Schedule 4 and Boghigian projections each of which approximated to 4.25% overall to the end of December 2013. Applying that rate, interest on an award of $1,900,000 is $80,750. That figure may require adjustment because of the date on which this judgment is delivered.

Issue 5.1: There is a substantial chance that it would have sold the number of units predicted by Mr Boghigian’s lower range.

Issue 5.2: The Retail price would have been $79.99 which would have given the retailer a 37.5% mark-up on the wholesale price.

Issue 5.3: The costs of sale per unit would have been as summarised at [218] above and as set out in the agreed calculations provided by the experts.

Issue 5.4: The required level of annual marketing spend was (a) the higher of $2 million or 20% of wholesale revenue plus (b) MDF at 5% of retail or 6.875% of wholesale revenue plus (c) $30,000-50,000 for other marketing costs.

Issue 5.5.1: The Device is not a “me too” product. The medical claims that can be made about shortening healing time at present are at best equivalent to those made by Abreva, and there are claims that Abreva can make that are not presently open to the Device. The technology is distinctively different and the Device has a place in the United States market without being likely to cause a paradigm shift in buying habits that would materially expand the market in the absence of significant expenditure on marketing and brand awareness.

Issues 5.5.2, 5.5.3 and 5.5.4: The sales data for Walgreens, the sales data for Boots and the market research studies provide evidence that is relevant to determining the viable price point for the Device, for the reasons set out above. I have taken into account data about other sales in the United Kingdom and in Europe but do not find that they provide valuable insights into what may happen in North America.

Issue 5.5.5: the available market is to be calculated by reference to the 12.6 million units sold in 2012 allowing for modest expansion attributable to (a) further maturing of the market and (b) the prospect that the Device might lead to a slight increase in the numbers of those entering the market.

Issue 5.6: LLC had a 40% chance of complying with the sales targets set out in Schedule 4 of the DLA and lesser chance of achieving Mr Boghigian’s lower rate projections. However, the effect of the termination provisions in the DLA requires to be reflected in the overall assessment of LLC’s chance of making its projected net profits. I therefore assess damages by reference to the Schedule 4 targets discounted by 70% and Mr Boghigian’s lower rate targets discounted by 80%. In the result I assess damages in the sum of $1,900,000 with interest to be added in the sum of $80,750.

Issue 5.7: Not determined.

Issue 5.8: Not determined.