Court Denies Motion to Dismiss Contractual Indemnification and Contribution Claims But Grants Motion With Regard to Equitable Indemnification Claim

• Posted on: Apr 20 2020

It has been some time since this Blog examined claims for indemnification and contribution (See, e.g., here and here). In today’s post, we get the opportunity to examine these principles once more through our examination of Allergan Fin., LLC v. Pfizer Inc., 2020 N.Y. Slip Op. 50422(U) (Sup. Ct. Apr. 13, 2020) (here). Allergan involved a claim for indemnification and other related claims arising out of an Asset Purchase Agreement (the “APA”), dated December 17, 2008, by and between Actavis Elizabeth, LLC (“Actavis”) and King Pharmaceuticals, Inc. n/k/a King Pharmaceuticals LLC (“King”), pursuant to which Actavis acquired from King the prescription opioid Kadian®. 

A Quick Primer on The Law

Generally speaking, indemnity and contribution sort out the degree of culpability of multiple defendants and their responsibility for the payment of damages to the plaintiff. In the “classic indemnification case,” the one seeking indemnification “had committed no wrong, but by virtue of some relationship with the tort-feasor or obligation imposed by law, was nevertheless held liable to the injured party.” D’Ambrosio v. City of New York, 55 N.Y.2d 454, 461 (1982). Thus, “where one is held liable solely on account of the negligence of another, indemnification, not contribution, principles apply to shift the entire liability to the one who was negligent.” Id. at 462.

Indemnification “may be based upon an express contract,” though it is “more commonly” implied “based upon the law’s notion of what is fair and proper as between the parties.” Mas v. Two Bridges Assocs., 75 N.Y.2d 680, 690 (1990) (internal citations omitted). Where the right to indemnification is based upon a written agreement, the specific language of the contract is paramount to the court’s decision. Roldan v. New York Univ., 81 A.D.3d 625, 628 (2d Dept. 2011). 

Under the well-settled rules of contract interpretation, courts must construe contracts so as to give full meaning and effect to all their material provisions. Beal Sav. Bank v. Sommer, 8 N.Y.3d 318, 323 (2007). A contract should not be construed so as to render any portion of it meaningless. Id.  In addition, a contract should be read as a whole and, whenever possible, interpreted to give effect to its general purpose. Id. (citing Matter of Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 358 (2003)). Therefore, under the foregoing rules, the promise to indemnify should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding facts and circumstances. See Roldan, 81 A.D.3d at 628 (citing Hooper Assoc. v. AGS Computers, 74 N.Y.2d 487, 491-492 (1989); 905 5th Assoc., Inc. v. Weintraub, 85 A.D.3d 667, 668 (1st Dept. 2011) (indemnification provisions “must be strictly construed so as to avoid reading unintended duties into them”).

The principle of equitable indemnification, also known as common law indemnification, allows a non-culpable party who has been compelled to make a payment to shift the entire burden of loss to the liable party and obtain from that party full reimbursement for its loss. Live Invest, Inc. v. Morgan, 57 Misc. 3d 762 (Sup. Ct., Suffolk County Sept. 7, 2017). “[T]he key element of a common-law cause of action for indemnification is not a duty running from the indemnitor to the injured party, but rather is a separate duty owed the indenmitee by the indemnitor. The duty that forms the basis for the liability arises from the principle that every one is responsible for the consequences of his own negligence, and if another person has been compelled to pay the damages which ought to have been paid by the wrongdoer, they may be recovered from him.” Raquet v. Braun, 90 N.Y.2d 177, 183 (1997) (internal quotation marks, citations, and ellipsis omitted.)

“[W]here a party is held liable at least partially because of its own negligence, contribution against other culpable tort-feasors is the only available remedy.” Glaser v. Fortunoff, 71 N.Y.2d 643, 646 (1988).  “[I]n contribution, the tort-feasors responsible for plaintiffs loss share liability for it …. [T]heir common liability to plaintiff is apportioned and each tort-feasor pays his ratable part of the loss.” Mas, 75 N.Y.2d at 689-690 (internal citation omitted). See also Godoy v. Abamaster of Miami, 302 A.D.2d 57, 61 (2d Dept. 2003) (Contribution is available where two or more tortfeasors combine to cause injury and is determined in accordance with the relative culpability of each party). Under Article 14 of the Civil Practice Law and Rules, “[t]he ‘critical requirement’ for apportionment by contribution … is that the breach of duty by the contributing party must have had a part in causing or augmenting the injury for which contribution is sought.” Raquet, 90 N.Y.2d at 183 (citations omitted).

A claim for contribution generally does not arise until the prime obligation to pay has been established. However, in appropriate circumstances, courts have allowed claims for contribution to go forward on the basis of liability. See Mars Assoc., Inc. v. N.Y. City Educ. Constr. Fund, 126 A.D.2d 178, 192 (1st Dept. 1987); Gorton v. Marmon, 2012 WL 1463416 (Sup. Ct., N.Y. County Apr. 16, 2012).

Allergan Finance, LLC v. Pfizer Inc.

Background

As noted, Allergan concerned a claim for indemnification pursuant to the terms of the APA. 

Allergan Finance, LLC (“Allergan”), the successor to Actavis’s rights and obligations under the APA, had been sued in a multidistrict litigation in connection with its marketing of Kadian®. See In re: Natl. Prescription Opiate Litig., No. 1:17-MD-2804, ECF No. 1201, at *1 (N.D. OH. Dec. 17, 2018) (the “Opioid Lawsuits”). 

The primary basis for the allegations against Allergan was the allegedly improper marketing and sale of Kadian®, including in the months and years before Actavis acquired Kadian® in December 2008. 

Allergan sought indemnification from Defendants. Under the APA, King agreed to indemnify Actavis and its successors, for, among other things, “the use by [King] or its Affiliates of the [Kadian®] Marketing Materials prior to the [December 2008] Closing” and for any third party claims “incurred in connection with, arising out of, or resulting from the ownership and operation of the Purchased Assets [including Kadian®] or the conduct of the Business prior to the [December 2008] Closing.” Slip Op. at *1-*2. 

King also agreed to reimburse Actavis “on a quarterly basis” for the “reasonable and verifiable costs and expenses, including fees and disbursements of counsel” incurred “in connection with any claim,” with a right of refund in the event that King was found not to be obligated to indemnify Actavis. 

Defendants rejected any obligation to indemnify Allergan and have not reimbursed Allergan for any of its defense costs, denying that the Opioid Lawsuits involve any pre-2009 conduct (as required under the APA). Consequently, Allergan filed claims against Pfizer, Inc. (“Pfizer”), the successor to King’s obligations, alleging: (1) breach of contract, (2) contractual indemnification, (3) declaratory judgment (i.e., that Allergan is entitled to indemnification and reimbursement), (4) equitable indemnification, and (5) contribution.

Defendants argued that Allergan’s claims were premature because Allergan had not yet been held to be liable for any pre- or post-closing conduct and, therefore, “it [was] entirely speculative whether Allergen ever [would] be held liable and, if so, what the basis of that liability would be.” Slip Op. at *2. Defendants said that, to date, all Allergan had paid in connection with the Opioid Lawsuits were the costs and legal fees for its defense. 

The Court’s Decision

The Court held that Defendants were contractually obligated to pay Allergan’s defense costs and to indemnify Allergan for any liability assessed against it in the Opioid Lawsuits.

As an initial matter, the Court found that the “Opioid Lawsuits do not concern pre-2008 conduct (the ‘Pre-Closing Conduct’).…” Slip Op. at *4-*5. Although the Opioid Lawsuits alleged that Allergan engaged in deceptive marketing techniques as far back as the 1990s, including through the circulation of Kadian® patient brochures starting in 2003, publications in medical journals regarding Kadian® in or about 2005, and through representations made by sales representatives concerning Kadian® between 2006 and 2008, the Court observed that Allergan and its predecessors did not and could not have committed any of those actions because Actavis did not acquire Kadian® from King until December of 2008. Id. at *5. “Sales and marketing of Kadian® prior to December 2008 was conducted by Pfizer, King and its predecessors and the APA makes clear that they ‘remain solely responsible for’ such Pre-Closing Conduct.” Id. 

The Court determined that Defendants’ reading of the APA was “limited”. Id.  The Court explained that Defendants’ reading of the APA (i.e., that Allergan was not entitled to its costs and expenses unless and until its liability was “adjudicated in the underlying opioid cases”), was “plainly at odds with the other provisions of that contract. To wit, …, the term ‘Indemnified Party’ is defined as ‘[t]he Person entitled to indemnification under this Agreement.’” Id. 

The Court further explained that “the provision [did] not require an adverse determination as a precondition to the right to receive indemnification. And, significantly, Section 12.02(e) entitle[d] Allergan to receive reimbursement on a quarterly basis — i.e., now— and, provides that defendants may obtain a refund ‘in the event’ that the Defendants are ‘ultimately held not to be obligated to indemnify’ Allergan.” Id. (orig’l emphasis). “The provision simply makes no sense,” observed the Court, “if the Defendants are not obligated to provide defense costs until liability is adjudicated.” Id. (orig’l emphasis). Therefore, “[t]o interpret the APA as narrowly as the Defendants urge would render all of these heavily negotiated and carefully constructed provisions superfluous and read them out of the APA.” Id. “Put another way,” concluded the Court, “Section 12.02(e) contemplates this exact situation where there is a dispute as to whether indemnification will ultimately be required and provides for reimbursement of costs and expenses on a quarterly basis in the interim, with the possibility of a refund at a future time.” Id. (orig’l emphasis).

As a result, said the Court, “a party is not required to wait until its liability is established in an underlying action before it can bring a declaratory action under New York law.” Id. at *6. (citing Hudson Ins. Co. v. AK Const., LLC, 92 AD3d 521 [1st Dept 2012]). This was especially true in Allergan, where “a live and justiciable controversy exists as to whether the Defendants must provide Allergan with its defense costs in the Opioid Lawsuits.” Id.

Further, the Court held that the foregoing analysis was “true for other provisions of the APA, such as Section 12.02(d)(i), which allow[ed] Defendants to ‘assume the defense of any Third Party Claim.’” Id.  (orig’l emphasis). Outside of the insurance context, where the duty to defend is exceedingly broad and distinct from the duty to indemnify, contractual defense obligations are generally treated like any other contractual provision. See Viacom Inc. v. Philips Electronics N. Am. Corp., 16 A.D.3d 215 (1st Dept. 2005); Mercolla v. Manmall, LLC, 2008 WL 4699066 (Sup. Ct., N.Y. County Oct. 14, 2008) (“Although, as often proclaimed, the duty to defend is broader than the duty to indemnify, this rule is generally applicable [only] to insurers”). The Court concluded that, as with the analysis of the APA for indemnification purposes, this provision “would also be rendered superfluous by the Defendants’ narrow reading of the term ‘Indemnified Party’” Id. 

The Court dismissed Allergan’s claim for equitable indemnification because the obligations that Defendants undertook with respect to Kadian® were expressly defined in the APA. Id. Under New York law, a valid and enforceable contract generally precludes recovery in quasi contract for losses arising from the same subject matter. Id. (citing Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y.2d 382 (1987). The Court concluded that “Allergan cannot circumvent the APA by proceeding under an equitable theory of indemnification to recover more than it would otherwise be entitled to under the APA.” Id. (citing CSC Scientific Co., Inc. v. Manorcare Health Serv., Inc., 867 F. Supp. 2d 368 (S.D.N.Y. 2011)). Nevertheless, the Court gave Allergan 30 days to replead the claim if it could do so on a non-contractual basis. Id.

Finally, the Court denied the motion to dismiss the contribution claim. Defendants argued that the claim was premature because no finding of responsibility had been made in the Opioid Lawsuits. Although contribution generally does not arise until the prime obligation to pay has been established, in appropriate circumstances, such as in Allergan, “courts have allowed claims for contribution to go forward on the basis of liability.” Id. (citations omitted). “This is particularly compelling here,” observed the Court, “because it is not at all clear that this action is wholly independent from the Opioid Lawsuits. In fact, there are likely to be significant issues of fact development and liability that may well be determined in the Opioid Lawsuits that might effect the Defendants’ obligations in this action.” Id.

Takeaway

Contractual indemnification “requires a clear expression or implication, from the language and purpose of the agreement as well as the surrounding facts and circumstances, of an intention to indemnify.” Martins v. Little 40 Worth Assocs., Inc., 72 A.D.3d 483, 484 (1st Dept. 2010) (quoting Drzewinski v. Atlantic Scaffold & Ladder Co., 70 N.Y.2d 774, 777 (1987)). Customary rules of contract interpretation are used to determine an intent to indemnify. In Allergan, the Court found that the language of the APA, when read as a whole, embodied such an expression of intent. As the Court noted, “[t]o interpret the APA as narrowly as the Defendants urge would render all of these heavily negotiated and carefully constructed provisions superfluous and read them out of the APA.” Slip Op. at *5. 

Allergan is also notable for its holding concerning the ripeness of a declaratory judgment claim for contractual indemnification. In a typical case, it is premature to assert such a claim until there is a finding of liability. In these cases, liability is contingent upon “future events that may not occur as anticipated, or indeed may not occur at all.” Dresser-Rand Co. v. Ingersoll Rand Co., 2015 WL 4254033 (S.D.N.Y. July 14, 2015). In Allergan, however, the issue of indemnification for defense costs was not contingent on any future event. In fact, as the Court noted, the APA provided “for a refund of advanced defense costs to the Indemnifying Party in the event that indemnification [was] ultimately not found to be required.” Slip Op. at *5. Thus, there was “a live and justiciable controversy … as to whether the Defendants must provide Allergan with its defense costs in the Opioid Lawsuits.” Id. at *6.