Nektar v. Lilly: Lilly Defeats CRE Claim, but Jury Finds It Owes $90M for Breaching the Implied Covenant of Good Faith and Fair Dealing

On September 24, 2026, after five days of deliberation, a federal jury in the Northern District of California found that Eli Lilly & Co. (“Lilly”) breached the implied covenant of good faith and fair dealing under its 2017 license agreement with Nektar Therapeutics (“Nektar”) for the development of rezpegaldesleukin (“Rezpeg”), awarding Nektar $90 million in damages. Notably, while the jury found that Lilly had breached the implied covenant of good faith and fair dealing, it rejected Nektar’s claim that Lilly had breached the terms of the license agreement, finding that Lilly satisfied the contract’s express commercially reasonable efforts (CRE) obligation but nonetheless acted in a manner that deprived Nektar of the benefit of its bargain.

The verdict underscores the legal and commercial risks that can arise when a licensee acquires a competing asset and allegations surface that it deprioritized a partnered program or made development decisions without a well-documented legitimate business justification. Below, we summarize the key facts, the jury’s findings, and the practical implications for parties on either side of biopharma licensing and co-development agreements.

Background

The Implied Covenant of Good Faith and Fair Dealing

Under New York law, which governed the license agreement at issue, every contract carries an implied covenant of good faith and fair dealing. The implied covenant is not an independent source of duties; rather, it requires that neither party act in a manner that would deprive the other of the benefit of its bargain. The doctrine operates most forcefully where a contract grants one party discretion — such as discretion over development strategy, resource allocation, or clinical decision-making — and that party exercises its discretion in a way that, while not violating any express term, effectively undermines the purpose of the agreement. An implied covenant claim can thus succeed even where the plaintiff cannot establish a breach of any specific contractual provision, making it a powerful — and, for licensees, potentially unexpected — source of liability in biopharma collaborations.

Factual Background

In 2017, Nektar and Lilly entered into a license agreement for the development of Rezpeg, an investigational compound designed to address immune system imbalances underlying autoimmune disorders and chronic inflammatory conditions. Under the license agreement, Lilly assumed the lead role in clinical development and, in late 2019, commenced trials evaluating Rezpeg’s efficacy in treating conditions including atopic dermatitis (eczema) and lupus.

In early 2020, Lilly acquired Dermira Inc., a biopharmaceutical company developing an asset that Nektar alleged would compete directly with Rezpeg. Nektar argued that, following the acquisition, Lilly deprioritized Rezpeg in favor of competing internal programs, delayed clinical timelines, and mishandled trial analyses. Lilly ultimately terminated the collaboration, at Nektar’s request, and returned the asset to Nektar in July 2023.

Nektar sued Lilly in August 2023 in the U.S. District Court for the Northern District of California, asserting claims for breach of contract and breach of the implied covenant of good faith and fair dealing. Trial began on September 8, 2026, before Judge James Donato.

The Parties’ Claims and Defenses

Nektar argued that Lilly failed to exercise CRE because Lilly did not devote the same effort, expertise, and resources it applied to comparable internal programs — including by applying different internal standards to Rezpeg, delaying development milestones while favoring competing internal programs, abandoning funded and approved trials, designing certain studies in ways that increased the likelihood of failure, and failing to assign qualified personnel to oversee statistical analyses. Nektar further alleged that Lilly breached the implied covenant of good faith and fair dealing by concealing development timelines, delaying key milestones, and terminating Rezpeg’s lupus program without conducting a reasoned scientific analysis — conduct that, Nektar argued, frustrated the agreement’s purpose and deprived it of the expected benefits of the collaboration even if Lilly’s actions did not independently violate the express CRE standard.

Lilly countered that it had conducted seven clinical trials over six years and made a substantial financial investment in Rezpeg’s development and that Rezpeg failed to produce acceptable clinical results under agreed-upon success criteria. With respect to atopic dermatitis, Lilly argued that its evaluation and management of injection site reactions reflected a legitimate scientific response to a significant clinical challenge, consistent with its approach to internal comparable products. With respect to lupus, Lilly argued that its decision not to advance Rezpeg was scientifically justified because the drug missed its primary endpoint and failed to satisfy agreed-upon critical success factors in a Phase 2 trial — consistent with Lilly’s standard practice of declining to advance a compound to Phase 3 after a failed Phase 2 study. Lilly also disputed causation and damages, arguing that Rezpeg never achieved the contractual milestones that would have triggered further payments; that Lilly terminated the agreement at Nektar’s own request before the first milestone was reached, as it was expressly permitted to do; and that the license agreement’s consequential damages waiver precluded recovery of lost profits or their functional equivalent.

The Verdict

The jury found for Lilly on the express breach-of-contract claim, concluding that Lilly had used CRE as required by the license agreement. However, the jury nevertheless found that Lilly breached the implied covenant of good faith and fair dealing and awarded Nektar $90 million in damages — a substantial recovery, though well below the approximately $1 billion Nektar had sought.

Lilly has stated that it intends to challenge the result, maintaining that no liability or damages should have been imposed. The appeal is expected to raise significant legal questions, including: (i) the permissible scope of implied covenant claims alongside express breach of contract claims; (ii) the viability of diminution-in-value damages theories under New York law’s consequential damages framework; and (iii) whether the jury’s finding of no express breach is legally compatible with the $90 million implied covenant damages award. The outcome will be closely watched, particularly on the threshold question of whether a party that satisfies its express CRE obligations can nonetheless be held liable under the implied covenant for conduct that effectively undermined the commercial prospects of the licensed asset.

Why the Verdict Matters: Key Implications and Practical Considerations

Satisfying a CRE Standard Is Not a Safe Harbor

Perhaps the most significant takeaway is that compliance with an express CRE standard may not insulate a party from liability under the implied covenant of good faith and fair dealing. Under New York law, which governed the license agreement at issue, all contracts carry an implied covenant of good faith and fair dealing, and a party may breach that covenant through conduct that does not independently violate any express contractual provision.

The verdict does not establish a categorical rule that every implied covenant claim may proceed alongside an unsuccessful CRE claim. Such claims remain highly dependent on the contract language, the discretion it grants, and the alleged misconduct. Nonetheless, the verdict illustrates that exercising contractual discretion in a way that frustrates the agreement’s purpose or deprives a counterparty of its bargain may create liability despite literal compliance with a CRE clause.

The verdict highlights several drafting and negotiation priorities that can help close the gap between express CRE compliance and implied covenant exposure:

• Supplement CRE with specific development obligations. A general CRE standard may leave room for implied covenant claims to fill the gaps. Parties may consider supplementing general CRE standards with concrete contractual requirements, such as development plans, timelines, budgets, governance procedures, reporting obligations, and defined decision criteria, which can reduce the discretion on which implied covenant theories depend.
• Define the CRE comparator with precision. Specify whether performance is measured against similarly situated companies or the licensee’s own programs and whether the licensee may consider milestone obligations, opportunity costs, portfolio priorities, or competing internal assets. Licensors may seek CRE definitions that exclude consideration of the licensee’s internal competing programs when evaluating whether the CRE standard has been met. Some CRE definitions go further still by excluding consideration of the payments owed under the license agreement itself when evaluating CRE.
• Address shelving and conflicts expressly. Consider negotiating anti-shelving provisions and competing program provisions that expressly restrict or impose conditions on the acquisition or advancement of competing assets — whether acquired through asset purchases, in-licenses, or entity acquisitions. Parties may also wish to consider what obligations or remedies are triggered if the licensee acquires a competing program, which may range from requirements for segregating competing programs to termination rights or reversion of the licensed asset.
• Consider the allocation of consideration between up-front and contingent payments. The structure of deal economics can itself serve as a form of protection against deprioritization. A licensee that has made a substantial up-front investment has a stronger economic incentive to advance the licensed program and may be better positioned to demonstrate good faith in any later dispute. Conversely, where the up-front payment is relatively modest and the bulk of the licensor’s expected return depends on future milestones and royalties, the licensor may be more exposed to shelving risk — and correspondingly more justified in seeking robust diligence obligations, anti-shelving protections, and competing program restrictions.

Competing Programs May Create a Bad-Faith Narrative

Lilly’s acquisition of Dermira — whose lead compound competed directly with Rezpeg and its subsequent termination of the Nektar collaboration — provided the jury with a compelling conflict-of-interest narrative. When a licensee acquires a competing asset mid-collaboration, subsequent decisions regarding the original licensed compound may become susceptible to an implied covenant claim even where the express CRE standard is not independently breached. The risk may be heightened where the competing program carries more favorable economics for the licensee — for example, because it involves no (or smaller) royalty or milestone obligations to third parties — creating a financial incentive to favor the competing asset over the in-licensed program. Parties should consider the drafting considerations discussed above to address these scenarios.

Although owning a competing asset will not normally itself constitute a breach, contemporaneous analyses, internal communications, portfolio reviews, resource allocation decisions, and scientific assessments may become central evidence in any later dispute. When a competing program enters the portfolio — whether through direct acquisition, in-license, or a change of control of the licensee — consider formal governance measures, including competing program provisions that impose segregation requirements (separating development teams and decision-making for the competing and partnered programs), firewalls restricting the flow of confidential information between programs, independent review committees, and escalation procedures. Clear, contemporaneous documentation of how resource allocation decisions were made and why the partnered program was not disadvantaged is essential.

Damages Waivers May Not Resolve Every Valuation Claim

The verdict highlights the importance of addressing damages exposure with precision at the drafting stage. If the parties intend to exclude claims for diminution in asset value, lost milestones, lost royalties, or expectation damages, the agreement should say so expressly, subject to applicable law and negotiated carve-outs.

Parties often assume that a waiver of consequential damages or lost profits will foreclose claims based on future milestone and royalty streams. Here, the license agreement barred recovery of “lost profits” and other special damages absent gross negligence or willful misconduct, and Lilly argued that Nektar’s damages theory was a lost-profits claim in disguise. But that assumption may not hold where, as here, a plaintiff frames its loss as a diminution in the value of the licensed asset — a theory that courts have recognized as general, rather than consequential, damages.

Older Agreements Warrant Review

Before the recent wave of CRE decisions — including the Delaware Court of Chancery’s rulings in SRS v. Alexion and Fortis v. Johnson & Johnson — CRE was widely considered a low-risk obligation where licensees enjoyed broad latitude (see Goodwin September 12, 2024, Client Alert and Goodwin June 18, 2025, Client Alert). Parties holding rights under such agreements should evaluate whether those contracts adequately protect against the types of conduct at issue in Nektar v. Lilly and the recent Delaware decisions, particularly where valuable milestones remain unachieved, development timelines are long, or a partner maintains a competing internal program. That review should assess whether the contract, the parties’ conduct, and the contemporaneous record align with both the express development standard and the collaboration’s underlying purpose.

Conclusion

The Nektar v. Lilly verdict presents two developments that merit close attention. First, a CRE claim — long considered a low-risk obligation — survived dispositive motions and was tried to a jury verdict, signaling that licensees can no longer assume such claims will be resolved before trial. Second, even though Lilly prevailed on the express CRE claim, it was nonetheless found liable for $90 million on an implied covenant theory, raising the question of whether defeating a CRE claim can fairly be characterized as a “win” when the accompanying implied covenant exposure produces a verdict of that magnitude. For licensors, the verdict may validate the implied covenant as a potent alternative theory of recovery. For licensees, it may raise questions about the residual risk that remains even after successfully defending against an express breach claim. How the industry and the courts ultimately assess that risk — and whether the verdict survives post-trial motions and appeal — will be among the most closely watched developments in biopharma licensing disputes in the near term.

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The evolving legal landscape surrounding CRE obligations and the implied covenant of good faith and fair dealing may have significant implications for your existing and future biopharma partnership agreements. We will continue to monitor developments in this case and related matters. Please contact the authors or your Goodwin team for further details or to discuss the implications for your specific agreements.