John Hancock Life Insurance Co. v. Abbott Laboratories
2017 WL 2962228
1st Cir.2017Background
- Hancock and Abbott negotiated and executed a four‑year Research Funding Agreement (2001) covering nine drug Program Compounds; Hancock agreed to four Program Payments totaling $214 million and Abbott agreed to meet annual minimum spending targets and a $614 million Aggregate Spending Target.
- Agreement provided exclusive remedies for Abbott's failure to fund in sections 3.2–3.4; section 3.3(b) required Abbott to spend any shortfall in the year after the Program Term, and if it failed to do so to pay Hancock one‑third of the remaining Aggregate Carryover Amount within 30 days.
- Hancock made the first two Program Payments ($104 million); Abbott substantially reduced spending, projected it would not meet the Aggregate Spending Target by 2004, and Hancock stopped the remaining payments (a cessation the First Circuit earlier held was excused by Abbott's breach).
- Hancock sued for multiple breaches, fraudulent inducement, indemnification, and sought rescission; after a bench trial the district court found Abbott breached, awarded Hancock ~$198,731 for audit obstruction, held Hancock could not recover under §3.3(b) (finding an implied condition and alternatively that §3.3(b) was a penalty), and struck rescission.
- On appeal the First Circuit (applying Illinois law per the choice‑of‑law clause) reversed the district court as to §3.3(b), holding the clause applies notwithstanding Hancock’s excused failure to complete payments and is an enforceable liquidated damages provision ($33,033,333.33), affirmed denial of rescission under election of remedies, and remanded for entry of amended judgment and interest adjustments.
Issues
| Issue | Plaintiff's Argument (Hancock) | Defendant's Argument (Abbott) | Held |
|---|---|---|---|
| Whether Hancock's excused failure to make the last two Program Payments bars recovery under §3.3(b) | Hancock: Its cessation was excused by Abbott's breach; §3.3(b) still applies to recover one‑third of the Aggregate Carryover Amount. | Abbott: Hancock's partial nonperformance (failure to pay all four installments) discharges Abbott's §3.3(b) obligation. | Held: Hancock's excused nonpayment does not bar §3.3(b); Abbott remains liable. |
| Whether an implied condition requires Hancock to have made all Program Payments before invoking §3.3(b) | Hancock: Agreement is clear and integrated; no such implied term exists. | Abbott: Contract should be read to require Hancock to have funded fully for §3.3(b) to apply (preserves a 65/35 funding ratio). | Held: No implied condition; court will not add terms to a clear, fully integrated commercial agreement. |
| Whether §3.3(b) is an unenforceable penalty or an enforceable liquidated damages clause | Hancock: §3.3(b) is a negotiated, proportional formula intended to fix damages where actual damages are uncertain. | Abbott: Formula can produce a windfall, fails to account for causes of the shortfall, and is not a reasonable estimate of damages. | Held: §3.3(b) is an enforceable liquidated damages provision — intent, uncertainty of damages, and reasonable relation to anticipated loss satisfied; Abbott must pay one‑third of the Aggregate Carryover Amount (~$33,033,333.33). |
| Whether Hancock may pursue rescission after recovering under the contract | Hancock: Sought rescission in amended complaint. | Abbott: Election of remedies bars inconsistent relief. | Held: Election of remedies forbids seeking rescission after affirming and enforcing the contract; rescission properly struck. |
Key Cases Cited
- John Hancock Life Ins. Co. v. Abbott Labs., 478 F.3d 1 (1st Cir.) (prior appellate decision addressing Hancock's obligation to make Program Payments)
- XCO Int'l Inc. v. Pacific Sci. Co., 369 F.3d 998 (7th Cir. 2004) (deference to parties' negotiated liquidated damages where damages estimation is difficult)
- Jameson Realty Group v. Kostiner, 813 N.E.2d 1124 (Ill. App. Ct.) (characterization of liquidated damages clauses and factors for enforceability)
- Dallas v. Chicago Teachers Union, 945 N.E.2d 1201 (Ill. App. Ct.) (elements for valid liquidated damages clause)
- Penske Truck Leasing Co. v. Chemetco, Inc., 725 N.E.2d 13 (Ill. App. Ct.) (labeling not dispositive; substance of clause controls)
- St. Paul Mercury Insurance Co. v. Aargus Security Sys., Inc., 2 N.E.3d 458 (Ill. App. Ct.) (contract interpretation: plain and ordinary meaning governs)