KIVETT v. NEOLPHARMA, INC.

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

DAVID KIVETT,

Case No. 2:20-cv-00664-JDW

v.

NEOLPHARMA, INC.; CEDIPROF, INC.;

and NEOLPHARMA INTERNATIONAL,

S.A. DE C.V.,

MEMORANDUM

David Kivett claims that Neolpharma, Inc. (“Neolpharma”) violated a representation

agreement by failing to pay a commission. The Court held a bench trial on liability and

damages. After thorough consideration of the evidence presented at trial and relevant

law, the Court makes the following findings of fact and conclusions of law pursuant to

Fed R. Civ. P. 52(a).

I. FINDINGS OF FACT

A. Ownership And Administration Of Cediprof And Neolpharma

1. Cediprof owns New Drug Applications (“NDA”) and Abbreviated New Drug

Applications (“ANDA”) to sell and market pharmaceuticals. Among these are the NDA

for Levothyroxine (“Levo”), which Cediprof owned at all times relevant to this matter.

2. Cediprof does not manufacture anything. Neolpharma is the sole

manufacturer for Cediprof products. From 2013 to the present, Neolpharma has not

owned any NDAs or ANDAs.

3. Marco Monrouzeau is the Chief Financial Officer and Vice President of

Administrations for both Cediprof, Inc and Neolpharma, Inc. He has served as the CFO for

both companies since 2013, and as the VP of Administrations since May 2020. As CFO for

each company, he is responsible for all accounting, treasury, budgets, banking

relationships, and new business for Cediprof and Neolpharma.

4. From 2017 to May 2020, Mr. Monrouzeau was the General Manager of

Cediprof and was responsible for all employees at Cediprof and Neolpharma.

5. Neolpharma and Cediprof maintain the same address and offices.

6. The majority of the executive structure for both companies is the same,

including, among others, the general manager, manager of human services, manager of

human resources, manager of supply chain, and manager of quality assurance.

7. Neolpharma International S.A. DE C.V. (“Neolpharma International”) owns

Neolpharma. The Ocampo family owns Neolpharma International. Neol de Mexico owns

Cediprof, and the Ocampo family owns 80% of Neol de Mexico. Thus, the Ocampo family

controls both Cediprof and Neolpharma.

B. Mr. Kivett’s Contractual Relationship With Neolpharma

8. On April 29, 2013, Mr. Kivett entered into a contract with Neolpharma (the

“First Representation Agreement”). Neolpharma drafted the First Representation

Agreement.

9. Under the First Representation Agreement, Mr. Kivett served as an

“independent representative selling the services of Neolpharma.” (Ex. 9 at 3.1) It tasked

Mr. Kivett with “solicit[ing] the services that Neolpharma offers to the industry to include

that of contract manufacturing and packaging ….” and “possibly uncovering other

opportunities via drug licensing and or R&D development project which could generate

commissionable orders.” ( )2

10. The First Representation Agreement contemplates several different forms

of compensation to Mr. Kivett:

a. Mr. Kivett received a monthly payment of $3,500;

b. For the completion of any “Business Transaction between

Neolpharma and a client directly related with the services” that Mr. Kivett provided, Mr.

Kivett received a “standard maximum success fee of 3%.” ( ) However, if Neolpharma’s

“[g]ross margin” on any transaction would be less than 10%, then Mr. Kivett’s commission

was to be 10% of Neolpharma’s gross margin. ( ) The parties agreed to calculate “Gross

Margin” as “Sales Price-Labor at standard-Overhead at standard-Materials at standard.”

1 Citations to “Ex.” refer to Exhibits admitted into evidence at trial.

( ) Neolpharma had to pay Mr. Kivett “not later than 30 days after a successful business

transaction is completed” ( at 4); and

c. For the completion of a “Capital Transaction,” Neolpharma had to

pay Mr. Kivett a “2.5% success fee from the gross estimated transaction value” within “30

days from the execution of the Capital Transaction.” ( at 4.) The First Representation

Agreement does not define “Capital Transaction.”

11. On November 29, 2018, Neolpharma cancelled the First Representation

Agreement and indicated its intent “to continue doing business with [Mr. Kivett” and

negotiate a new Representation Agreement under mutually agreed conditions and

terms.” (Ex. 38 at 2.) In its letter, Neolpharma indicated its desire to “provide continuity to

our Business [sic] relationship.” ( )

12. On December 8, 2018, Mr. Kivett and Neolpharma entered into a modified

Representation Agreement (“Second Representation Agreement”). Neolpharma drafted

the Second Representation Agreement. The only substantive change between the First

Representation Agreement and the Second Representation is that the Second

Representation Agreement eliminated the monthly payment to Mr. Kivett. ( Ex. 14.)

13. Mr. Kivett has not entered into any contracts with Cediprof or Neolpharma

International.

C. Mr. Kivett’s Work For Neolpharma

14. Neolpharma did not provide Mr. Kivett any business contacts. Instead, he

relied on his own industry contacts to develop opportunities for Neolpharma.

15. When Mr. Kivett developed new contacts interested in Neolpharma or

Cediprof products or services, he would set up a meeting with Edwin Placeres of

Neolpharma, who would present to the potential client and coordinate visits to Puerto

Rico. Mr. Kivett did not engage in pricing or negotiations with customers.

16. Mr. Kivett summarized his new contacts and expenses in a document he

provided each month to Mr. Placeres.

17. On April 7, 2013, Mr. Kivett emailed Michael Block, Manager of Business

Development at Lannett Company, to introduce Lannett to business opportunities with

Neolpharma. Prior to this email, no representative from Neolpharma nor Cediprof had

any contact with Lannett. This initial communication did not result in a business deal, but

Mr. Kivett remained in contact with Lannett as part of his work for Neolpharma.

18. In an email dated January 13, 2017, Mr. Kivett identified Lannett as a

company with whom Neolpharma had “active opportunities.” (Ex. 2.)

19. On July 10, 2018, Mr. Kivett contacted Mr. Block to set up a meeting with

Mr. Placeres regarding a list of eight to ten products that Lannett was considering

outsourcing and to arrange a visit to audit Neolpharma’s facility in Caguas, Puerto Rico.

20. On August 20, 2018, Mr. Kivett saw a press release indicating that Lannett

had lost its deal with Jerome Stevens for the distribution of Levo in the United States. That

same day, Mr. Kivett forwarded the press release to Mr. Placeres and wrote, “maybe we

could make Levo for Lannett.” (Ex. 39.)

21. Later that same day, Mr. Kivett emailed Mr. Block, stating “why don’t we

make Levothyroxine for you? Just a thought! Obviously, it’s above my pay grade to make

that decision, but it is something to discuss at our meeting.” (Ex. 40.) Mr. Block responded,

“That sounds great. If you would like to leave Sandoz for us that sounds wonderful! We

are ready to work with you.” (Ex. 7.)

22. Near the end of August 2018, Mr. Kivett set up a meeting between Mr. Block

and Mr. Placeres at which the parties discussed Levo, among other potential deals. That

meeting did not result in a deal, though.

23. Shortly after the August 2018 meeting, representatives from Lannett

travelled to Puerto Rico to perform the audit of Neolpharma’s Caguas facility. Mr. Kivett

met with the Lannett representatives at the facility in Puerto Rico. This meeting marked

the first contact between Mr. Monrouzeau and any Lannett representative.

24. Mr. Kivett did not participate in any negotiations with Lannett or discussions

about pricing. And the meeting did not result in any immediate negotiations or deals

between Lannett and Neolpharma (or Cediprof).

25. Before entering any deal, Mr. Monrouzeau and his finance department

would evaluate whether Neolpharma would generate a gross margin below 10%.

D. The Cediprof/Lannett Agreements

26. On July 3, 2019, Cediprof and Lannett entered into an agreement (the “Main

Lannett Agreement”). The Agreement provides that it is made between Lannett and its

“Affiliates” and Cediprof and its “Affiliates.” (Ex. 41 at 1.) It defines an “Affiliate” as “any

other person or legal entity directly or indirectly controlling or controlled by or under

direct or indirect common control with such Party” and specifies that “control” means “the

power to direct the management and policies of such person or legal entity directly or

indirectly, whether through the ownership of voting securities, by contract or otherwise.”

( )

27. In the Main Lannett Agreement, Lannett paid $20,000,000 to Cediprof “to

obtain certain future rights and obligations associated with the Cediprof Products listed

on Exhibit A,” and “to engage Cediprof on an exclusive basis to manufacture, supply,

package and label the Products.” (Ex. 41.)

28. Also on July 3, 2019, Cediprof and Lannett entered a Distribution

Agreement (the “Lannett Distribution Agreement”) to begin “manufacturing and

supplying various pharmaceutical Products, including Levothyroxine Tablets...” (Ex. 43.)

The Lannett Distribution Agreement had an effective date of no later than August 1, 2022,

and provided it was made between Cediprof and its “Affiliates,” with the same definition

as in the Main Lannett Agreement.

29. In 2020, Lannett and Cediprof entered into an Interim Distribution

Agreement (the “Interim Lannett Distribution Agreement” and, together with the Main

Lannett Agreement and the Lannett Distribution Agreement, the “Lannett Agreements”),

effective August 1, 2020 through July 31, 2022. Again, the Interim Lannett Agreement

provides that it is made between Cediprof and its “Affiliates,” with the same definition of

“Affiliate.”

30. Neolpharma manufactured Levo for Lannett under the Interim Lannett

Distribution Agreement. Neolpharma began producing Levo for Lannett on August 1,

2020. When Lannett wanted to order Levo under the agreement, it did so by submitting

a Purchase Order to Neolpharma.

31. Mr. Kivett learned about the deal between Cediprof and Lanett via a press

release from Lannett.

32. Upon learning about the deal, Mr. Kivett emailed an invoice for his services

to Mr. Monrouzeau. Mr. Monrouzeau responded, “David I think you have the wrong

information the 20 million are not revenue are an advance for services to be performed

by a Service Agreement for several years. Also Lannett CMO business that originally they

presented never was materialized.” (Ex. 3.) Mr. Kivett never received commission for the

Lannett transaction.

33. Neolpharma’s net sales of Levo to Lannett from August 2020 to October

2021 were $15,662,747.88 (ECF No. 64 at 143:1-3; Exs. 52, 53, 67.)

II. CONCLUSIONS OF LAW

1. Neither side has addressed what law governs the Second Representation

Agreement; instead, both sides have assumed that Pennsylvania law applies. The Second

Representation Agreement does not contain a choice of law provision, and its parties are

from different jurisdictions. As a federal court sitting in diversity, the Court applies

Pennsylvania’s choice of law rules. , 313 U.S. 487,

496 (1941). Pennsylvania applies a flexible rule that directs courts to apply the law of the

state with the “most interest in the problem.” ,

609 F.3d 223, 229 (3d Cir. 2010) (quote omitted). In this case, Neolpharma hired Mr. Kivett

to perform work out of his home in Pennsylvania, and Neolpharma would realize those

benefits in Puerto Rico. The Court concludes that Pennsylvania has at least as strong an

interest as Puerto Rico in the case. That, coupled with the Parties’ apparent agreement

that Pennsylvania law applies, is enough for the Court to apply Pennsylvania law.

2. The elements of breach of contract under Pennsylvania law are: (1) the

existence of a contract, including its essential terms; (2) a breach of the contract; and (3)

resultant damages.

, 137 A.3d 1247, 1258 (Pa. 2016).

3. Under Pennsylvania law, “[w]hen interpreting a contract, the court’s

paramount goal is to ascertain and give effect to the intent of the parties as reasonably

manifested by the language of their written agreement.” , 961 F.3d

203, 212 (3d Cir. 2020) (quoting , 639 A.2d 37, 39 (Pa. Super. Ct.

1994)). Therefore, the Court must begin by examining “the express language of the

agreement.” , 584 F.3d 575, 587 (3d Cir. 2009)

(quotation omitted). If that language is clear and unambiguous, the Court must follow its

plain meaning. , 693 F.3d 417,

426 (3d Cir. 2012). A court should construe the terms of a contract in their “natural, plain,

and ordinary sense,” and can inform its understanding by considering dictionary

definitions.” , 735 A.2d 100, 108 (Pa. 1999).

B. Claims Against Cediprof And Neolpharma International

4. Neither Neolpharma International nor Cediprof entered into a contract with

Mr. Kivett. Mr. Kivett’s breach of contract claim against each of those entities therefore

fails at the first element.

C. Claim Against Neolpharma

5. The Second Representation Agreement governs any commission that

Neolpharma owes to Mr. Kivett because the Second Representation Agreement was in

effect when Cediprof and Lannett executed the Lannett Agreements. The Parties agree.

( ECF No. 66 at ¶¶ 49-52 ECF 69 at ¶ 4, 5, 9, 14.)

6. The Second Representation Agreement applies to a Business Transaction or

a Capital Transaction “between Neolpharma and a client ….” (Ex. 14 at 1, 2.) Although

Neolpharma did not sign any of the Lannett Agreements, the agreements do qualify as

agreements between Neolpharma and Lannett because Neolpharma qualifies as

Cediprof’s “Affiliate” under each of the Lannett Agreements, and those agreements state

that they are made between Cediprof “and/or its Affiliates.” ( , Ex. 41 at 1.) The Court

reached that conclusion in denying Defendants’ summary judgment motion, and nothing

that occurred at trial caused it to change that conclusion.

7. The Lannett Agreements constitute Business Transactions, not Capital

Transactions. The Second Representation Agreement does not define either term, but

context clues lead to that conclusion. The term “Business Transaction” appears in a series

of bulleted paragraphs under the heading “Contract Manufacturing and packaging

transactions.” ( ) Those paragraphs also contemplate commissions for “possible

licensing agreements.” ( ) The term “Capital Transaction” appears under the heading

“Product Acquisition success fee (NDA’s, ANDA’s).” ( at 2.)

8. From that, the Court concludes that a “Capital Transaction” is one involving

the acquisition of an asset, primarily an NDA or ANDA, and a “Business Transaction” is

one for ongoing business that does not result in the transfer of an asset, including

manufacturing and packaging. With those definitions in mind, the manufacturing and/or

packaging that Neolpharma did pursuant to the Lannett Agreements falls within the

definition of “Business Transaction.”

9. The Second Representation Agreement makes Neolpharma liable for any

Business Transaction that is “directly related with the services provided by Kivett

hereunder.” (Ex. 14 at 1.) The Agreement does not define “directly related,” so the Court

must give those words their plain, ordinary meaning.

10. At the time that the Parties executed the Second Representation

Agreement, “directly” meant “without anyone or anything intervening.” The American

Heritage Dictionary 512 (5th ed. 2018). “Related” meant “being connected; associated.”

at 1482. Thus, the phrase “directly related” meant that there had to be an uninterrupted

connection from Mr. Kivett’s efforts on behalf of Neolpharma to the Lannett Agreements.

11. The evidence demonstrates that the Lannett Agreements resulted directly

from Mr. Kivett’s efforts. Mr. Kivett was the first Neolpharma representative to contact

Lannett on Neolpharma’s behalf, in 2013. He maintained contact with Lannett for several

years. In 2017, he proposed to Lannett that Neolpharma could make Levo for Lannett.

And he arranged a meeting between Lannett and Neolpharma in August 2018. Then, in

July 2019, Cediprof and Lannett executed the Lannett Agreements, which planned for

Cediprof and its Affiliates (including Neolpharma) to manufacture Levo for Lennett. At the

time, Cediprof expected Neolpharma to manufacture the Levo for Lannett because

Cediprof did not manufacture anything for itself. This constitutes the type of unbroken

chain of causality that makes the Lannett Agreements “directly related” to Mr. Kivett’s

efforts.

12. Of note, the Second Representation Agreement suggests that the execution

of the Lannett Agreements was close enough in time to suggest a direct link to Mr. Kivett’s

work. The Second Representation Agreement provides that Mr. Kivett would receive a

commission for any agreement that Neolpharma executed with a company for three years

after Neolpharma terminated the Second Representation Agreement. That provision

suggests that Neolpharma and Mr. Kivett expected that it might take as long as three

years for Mr. Kivett’s efforts to bear fruit in the form of a signed agreement. The Lannett

Agreements were signed less than a year after Lannett personnel visited Neolpharma, well

within the timeframe that the Parties appear to contemplate as directly related to Mr.

Kivett’s efforts.

13. Defendants have not offered any credible evidence to the contrary. At trial,

Mr. Monrouzeau testified that “Cediprof … put out RFPs for different companies to do

distribution deals when the date came[]” and that “Lannett was one of the companies that

issued an answer to the request for proposal.” (ECF No. 64 at 99:19-101:9, 132:2-10.) If

that were true, it might disrupt the chain of causation and take the Lannett Agreements

outside the scope of the Second Representation Agreement. But the testimony was not

credible. There are no documents in the record to support the idea that Cediprof engaged

in an RFP, let alone that multiple companies bid for the opportunity. That absence of

proof, coupled with the Court’s observation of Mr. Monrouzeau, leads it to conclude that

his testimony on that issue was not credible. Without that evidence, the preponderance

of the evidence supports the conclusion that Mr. Kivett’s work led directly to the Lannett

Agreements. Mr. Kivett is entitled to a commission as a result.

14. Under the Second Representation Agreement, Neolpharma had to pay a

commission of 3% of the net sales for a Business Transaction unless the gross margin

from the transaction was less than 10%.

15. Under Pennsylvania law, the party seeking to invoke a contractual provision

for its benefit bears the burden of proving the provision applies.

, 121 A.3d 593, 604 (Pa. Commw. Ct. 2015) (burden to

establish immunity under an exculpatory clause is on the party asserting it);

, 182 A.3d 1011, 1027 (Pa. Super. Ct. 2018) (burden to

prove whether contractual exception applies on the party asserting it). The provision that

could adjust Mr. Kivett’s success fee to 10% of Neolpharma’s gross margin benefits

Neolpharma because it reduces the amount Neolpharma might owe to Mr. Kivett. Thus,

Neolpharma bears the burden of proving that provision applies.

16. Neolpharma offered no evidence at trial to permit the Court to conclude

that the gross margin on any of the Lannett Agreements was less than 10%. At trial, Mr.

Monrouzeau testified about calculations that he performed about the actual costs that

impacted Neolpharma’s gross margin. But the Second Representation Agreement

specifies that Neolpharma must make the calculation using standard costs, not actual

costs. Neolpharma did not introduce any evidence about the standard costs, let alone

how those standard costs might impact its gross margin. It therefore has not carried its

burden of demonstrating that the commission should be based on gross margin, rather

than on net sales.

17. Because Mr. Kivett’s contract is with Neolpharma, he is only entitled to a

commission based on Neolpharma’s net sales to Lannett. He is not entitled to revenues

that Lannett paid to Cediprof as a licensing fee or for other purposes.

18. From August 2020 (when Neolpharma first made Levo for Lannett) through

October 2021, Neolpharma’s net sales to Lannett total $15,662,747.88. Mr. Kivett is

entitled to a commission of 3% of that amount, totaling $469,882.41.

19. Although it is clear from the Lannett Agreements and testimony at trial that

Neolpharma continues to manufacture Levo for Lannett, the Court has no basis to

determine the amount of sales. Testimony at trial indicates that sales to Lannett are

declining, but there was no indication of how much. In addition, Mr. Monrouzeau testified

that competition in the market has driven the price of Levo down by about 70%. Given

these variables, the Court has no way to know how much Levo Neolpharma has sold or

will sell to Lannett after October 2021 or to project the net sales on those sales.

20. Breach of contract damages cannot be based on a guess or speculation, but

courts can fairly estimate them from the evidence, even if there is not mathematical

certainty. , 545 A.2d 861, 866-67 (Pa. 1988). Because

there is no evidence regarding future sales, the Court cannot award Mr. Kivett any

damages for any period after October 2021 without making a litany of assumptions that

would render any damages amount nothing more than a guess. The Court notes, though,

that given the declining sales and the need to discount future sales to present value, the

likelihood that future sales will have substantial economic value is low.

III. CONCLUSION

Mr. Kivett has demonstrated by a preponderance of the evidence that he is entitled

to a commission for the Lannett transaction. The Court will award damages in accord with

these findings of fact and conclusions of law. Based on the combined calculation of actual

and projected commissions on Net Sales, Mr. Kivett is entitled to $469,822.41. An

appropriate Order follows.

BY THE COURT:

Hon. Joshua D. Wolson

United States District Judge

April 21, 2022