Delaware Corporate and Commercial Litigation Blog - Summary & Analysis from Delaware's Supreme Court & Court of Chancery

Edgewater Growth Capital Partners L.P. v. H.I.G. Capital, Inc., C.A. No. 3601-CS (Del. Ch. April 18, 2013).  This ruling explains both an issue about attorneys’ fees and the revision of a previous Chancery opinion in this case highlighted on these pages here.

Issue Addressed:  The standard that applies to award fees pursuant to the terms of a contract, and the standard that will apply to a challenge regarding the amount of those attorneys’ fees awarded.

Brief Overview

This relatively short decision provides a pithy summary of the standard that applies to (i) reviewing the fees awarded pursuant to fee shifting terms in an agreement which provides for fees be awarded to the prevailing party, and (ii) the basis for such an award of fees, and (iii) a challenge to the amount of fees.

One worthwhile aspect of this decision is the re-appearance of what has become known as Delaware’s “pizza principle” which, in essence, makes it very difficult to successfully challenge an award of fees in terms of the amount awarded, when the award is based on either a provision in a contract or a determination by the court that bad faith litigation tactics were employed.  In connection with that discussion the court also addresses the relevant factors in Rule 1.5(a) of the Delaware Lawyers Rules of Professional Conduct.

Lastly, the court makes adjustments to the original opinion in this case that was highlighted on these pages at the link above.

In re Comverge, Inc., Shareholders Litigation, C.A. No. 7368-VCP (Del. Ch. April 10, 2013).

Issue Presented: Whether the attorney-client privilege was a defense to a motion to compel documents.

Short Answer:  Yes, under the circumstances of this case.

Summary of Analysis
The court observed that under Court of Chancery Rule 26(b)(1), the “parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action . . ..  A party asserting a privilege has the burden of proof to show that the privilege is applicable to the communication.”  See footnote 3.  Rule 502 of the Delaware Rules of Evidence codifies the lawyer-client privilege and the five elements of that rule.

Communication is confidential if it is not “intended to be disclosed to third persons other than those to whom disclosure is made in furtherance of the rendition of professional legal services to the client or those reasonably necessary for the transmission of the communication.”  See footnote 5.  The lawyer-client privilege as described in DRE 502 is not absolute and can be restricted or denied entirely when a party places an otherwise privileged communication “at issue” in the litigation.  See footnote 7.

This “at issue exception” to the lawyer-client privilege is based on waiver and fairness to prevent a party from using it at both an offensive and defensive weapon.

A party places the lawyer-client communication “at issue” and waives the lawyer-client privilege when:

(1) a party injects the privileged communications themselves into the litigation, or (2) a party injects an issue into the litigation, the truthful resolution of which requires an examination of confidential communications. See footnote 9.

Court’s Reasoning

The court reasoned that the examination of privileged communications was not required for the truthful resolution of this litigation because the defendants merely seek to rely on the fact that they sought and obtained legal advice – - rather than arguing that they relied on the substance of the privileged communications to prove that the board was fully informed.

Therefore, the court explained that the defendants:  “did not inequitably use attorney-client privilege as a sword or inject a privilege-laden issue into the litigation.”  See footnote 21 and related text.

The court referred to cases where the defense was that legal counsel was obtained and that the existence of legal advice was material to the question of whether the board acted with due care, but the substance of that advice was not inquired into.  See, e.g., Hollinger International, Inc. v. Black, 844 A.2d 1022 (Del. Ch. 2004), aff’d, 872 A.2d 559 (Del. 2005) (referring to the dismissal of a breach of fiduciary duty claim because the board had adequately informed themselves by seeking the advice of counsel even though the exact content of that advice was not disclosed).

Another reason the court rejected the argument that the attorney-client privilege was waived due to the “at issue” exception, was because the information disclosed regarding any privileged communications was summary in nature and comparable to what would be disclosed in a privilege log.

Redaction of Board Minutes

The court conducted an in camera review of redacted board minutes to determine whether they were protected by the attorney-client privilege.

The court recited the well-settled Delaware law that:  “the presence of a lawyer in a business meeting called to consider a problem that has legal implications does not itself shield the communications that occur at that meeting from discovery.  Rather, it is communications to a lawyer by or on behalf of a client for the purpose of the rendition of legal services or lawyers’ statements constituting legal service that are protected.”  See footnotes 42 and 43.  Likewise the attorney-client privilege protects legal advice as opposed to business or personal advice.  See footnote 44.

However, communications that contain an inseparable, combination of business and legal advice may be protected by the attorney-client privilege.  See footnote 45.  Moreover, if it is a “close call” whether a communication reflected in a document contains a mixture of legal and business matters and is more closely related to legal advice as opposed to business advice, the party asserting the privilege will be given the benefit of the doubt.  See footnote 46 and related text.

Simplexity, LLC v. Zeinfeld, C.A. No. 8171-VCG (Del. Ch. April 5, 2013) (Redacted Version)

Issue Addressed:  This case involves a dispute between two companies over the hiring of the former CEO of Simplexity, Andrew Zeinfeld.  (The publication of this opinion was delayed while confidential data was redacted.)

Short Overview

Simplexity contends that Zeinfeld’s employment with Brightstar Corp. would violate the non-competition agreement with Simplexity and that Zeinfeld has divulged confidential information about Simplexity that constitutes a breach of his fiduciary duties.

Brief Overview of Holding 

The court found that Simplexity has not shown that it will likely prevail on the breach of contract claim and has not shown that its alleged breach of fiduciary duty or breach of a confidentiality agreement justified enjoining the employment of Zeinfeld at Brightstar, but Simplexity has shown a reasonable probability of success and ultimately shown that the non-competition agreement is enforceable and that Brightstar’s proposed employment of Zeinfeld will violate the non-competition agreement.

Lastly, the court found that plaintiff demonstrated threatened imminent irreparable harm that outweighs the harm to the defendants of an improvidently granted injunction.  Therefore the court found that the plaintiff is entitled to preliminary injunction relief.  [Notably, this decision was redacted to delete the names of confidential third parties, and this public version was not released publicly until approximately a week or so after it was decided.] 

Short Summary of Analysis
Because the central issues in this 38-page decision, which are described in extensive factual detail, do not apply Delaware law for the most part we will give them short billing.  Several references to Delaware law in footnotes are noteworthy, however.

For example, in footnote 72 the Court refers to the 2006 decision by the Delaware Supreme Court in the case of In re: Walt Disney Co. Derivative Litigation, 907 A.2d 693, 758 (Del. Ch. 2005) aff’d, 906 A.2d 27 (Del. 2006) for the statement of Delaware law that:  “former directors and officers owe no fiduciary duties, and after [he was terminated] Ovitz cannot breach a duty he no longer has.”

Because the non-compete agreement involved in this case was governed by Virginia law, we will not discuss it on this blog devoted to Delaware corporate and commercial litigation.

The Court did apply Delaware law to the standards applied in the context of determining when a preliminary injunction will be granted.  For purposes of the elements of irreparable harm and balance of the equities, the court determined that there was ample evidence that the employment of Zeinfeld by Brightstar was in violation of Zeinfeld’s non-compete agreement and would cause Simplexity imminent, irreparable harm.

The Court of Chancery explained that it has

consistently found a threat of irreparable injury in circumstances when a covenant-not-to-compete is breached.

The parties acknowledged in their agreement that any threatened breach of the non-compete clause would be irreparable harm.  In Delaware, that contractual stipulation normally suffices to establish irreparable harm for the purposes of establishing the right to a preliminary injunction.  Third, the record indicates that a potential screen, to prevent irreparable harm, would be ineffective.  See footnotes 115 to 118 and related text.

The court also found that the balance of harms tips heavily in favor of Simplexity, and the harm to Simplexity would be difficult to mitigate absent an injunction.  The court explained in great detail why that harm could not be prevented without an injunction.

In sum, the Court granted the motion for preliminary injunction, and required the plaintiff to file a bond in the amount of $350,000.

Baden-Wurttenberg v. Walton Seattle Mezz Holdings VI-B, LLC, C.A. No. 7933-VCG (Del. Ch. April 1, 2013).

This decision applies the familiar first-filed rule, and on that basis stayed this action in favor of a prior-filed lawsuit in the state of Washington 

Very Short Overview

This case involves the growing phenomenon in corporate litigation of multiple suits involving common facts proceeding simultaneously in multiple jurisdictions.  Although the Court of Chancery has expressed a strong interest that Delaware has in adjudicating matters involving the internal affairs of corporate citizens, when a first-filed action does not involve Delaware law or the internal governance of a Delaware entity, the Court carefully considers principles of comity and judicial economy that might support deference to the court overseeing the first-filed action, particularly, as here:  “Where that court has enjoined a Delaware plaintiff from taking actions that would impinge upon the operation of an order that the court has put in place.”  See generally, McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281, 283 (Del. 1970).

Because this decision applies a well-settled rule and the facts are not especially noteworthy, and because the agreements involved in this case are governed by New York law, the reader is directed to the 29-page opinion if the latest iteration of the first-filed rule is of interest.

In closing, the court reasoned that “Delaware has no particular interest in this case.”  Nonetheless, although the defendants requested a dismissal, the Court exercised its discretion sua sponte in ordering a stay, and retained jurisdiction in the event that the court in Washington refrains from acting on issues that had been presented in Delaware.

Li v. Standard Fiber LLC, C.A. No. 8191-VCN (Del. Ch. March 28, 2013).

This Court of Chancery opinion addressed a recurring theme in Delaware commercial litigation: substantive arbitrability.  That is, whether the court or an arbitrator should determine whether a particular claim is subject to an arbitration clause.  This opinion also addresses how multiple agreements, each with an integration clause, interface with each other when some but not all of them have arbitration clauses.

Brief Overview

This claim is based on an indemnification agreement which also provided for advancement.  The court determined that the advancement claims were subject to arbitration.

The court applied the familiar test of arbitrability in the seminal Delaware Supreme Court decision of James and Jackson LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006), highlighted on these pages here.  The threshold question of who decides arbitrability, the court or the arbitrator, was determined in a test set forth in the Willie Gary case.

Although there is a general presumption that the question of substantive arbitrability, i.e., whether the parties agree to arbitrate, is generally one for the courts to decide, that presumption is overcome when there is “clear and unmistakable” evidence that parties agree to arbitrate.

The court in Willie Gary held that “such clear evidence is present when an arbitration clause:  (1) generally provides for arbitration of disputes, and (2) incorporates a set of arbitration rules that empower arbitrators to decide arbitrability.”  Willie Gary’s progeny have since modified the “clear and unmistakable test” in one important respect.  Even when the Willie Gary test is satisfied, a court:  “must still make a preliminary evaluation of whether the party seeking to avoid arbitration of arbitrability has made a clear showing that its adversary has made “essentially no non-frivolous argument about substantive arbitrability.”  See footnote 45.  This additional step was meant to avoid situations in which the Willie Gary test is “technically satisfied but there is no non-frivolous argument that the arbitration clause covers the underlying dispute.”

Although related agreements involved in this case included arbitration clauses that satisfied the two prongs of the Willie Gary test, the indemnification agreement had an integration clause that did not include an arbitration clause.  The court determined however, that the arbitration clauses in the related agreements also covered the claims related to the advancement and indemnification issues.

The opinion also includes a helpful discussion of integration clauses in multiple related agreements that also have integration clauses even though they are obviously interfacing with other agreements.