Matthew Schmalz

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

In 2001, the pharmaceutical company Sanofi-Aventis (“Sanofi”) sold the rights to a chronic inflammation treatment called Acthar Gel to Mallinckrodt PLC (“Mallinckrodt”).^[3] Mallinckrodt paid $100,000 up front and agreed to pay a perpetual royalty of 1% of net sales over $10 million annually.^[4] Although Sanofi took a security interest in the upfront payment, it did not take one in the royalty. Sales of Acthar Gel grew to almost $1 billion by 2019, and in 2020 Mallinckrodt filed its petition for bankruptcy relief.^[5] The bankruptcy court discharged the contingent royalty and allowed Mallinckrodt to sell Acthar Gel royalty free, holding that the right to future royalties was an unsecured claim.^[6] After the District Court for the District of Delaware affirmed, Sanofi appealed, arguing that the claim to royalties could not be discharged because they were too indefinite to be a claim, and the claim could not arise until Mallinckrodt hit the sales trigger each year.^[7]

First, the Third Circuit considered whether the future royalties were too indefinite and unliquidated to be a claim.^[8] Section 101(5)(a) defines a claim as a “right to payment, whether or not such right is reduced to judgement, liquidated, unliquidated, fixed, contingent, unmatured, disputed, legal, equitable, secured, or unsecured.”^[9] The Third Circuit found that a contingent claim is a right to payment that is not guaranteed until something that is contemplated by the contract triggers the claim.^[10] Here, the royalty payments were expressly conditioned on sales over $10 million.^[11] The Third Circuit also pointed out that the uncertainty of royalty amounts does not exclude the right to payment from the definition of “claim” because the Bankruptcy Code explicitly includes unliquidated claims.^[12] Because the contract between the parties gave a definite trigger to Sanofi’s right to receive money, and the Bankruptcy Code contemplates unliquidated claims, the indefinite and unliquidated nature of the future royalties did not prevent it from being a claim.^[13]

Second, the Third Circuit determined that the claim to royalties arose once the parties agreed to a contingent right to payment.^[14] Sanofi argued that because the claim to payment was conditional, they would not be exposed to injurious conduct until Mallinckrodt hit the trigger and did not pay, so the claim should be treated in the same way tort claims are.^[15] The Third Circuit rejected this argument because contracting parties negotiate for, and consent to, the contingent claim.^[16] Relying on the “regular rule” for when claims arise from contracts—that contract claims arise when the parties sign the contract—the Third Circuit held that because Mallinckrodt’s post-bankruptcy conduct was not unexpected or gaming bankruptcy, Sanofi’s claim arose when the contract was signed.^[17]

In conclusion, a contingent right to payment is a claim despite being indefinite and unliquidated, and it arises when the contract is signed.^[18] This incentivizes parties contracting to receive royalties to either secure their claim or structure the deal as a license or joint venture.^[19]