Court Imposes Penalties for Failure to Fulfill Discovery Obligations

The Delaware Court of Chancery recently issued a decision that should be required reading for any lawyer that practices before it, whether they be Delaware counsel or non-Delaware counsel admitted pro hac vice, and whether they engage in corporate and commercial litigation or other types of cases before the court.  In the matter styled: In re Examworks Group, Inc. Stockholder Appraisal Litigation, Cons. C.A. No. 12688-VCL (Del. Ch. Feb. 21, 2019), the court explained in a heavily footnoted and scholarly analysis how serious the court regards scheduling orders, pretrial deadlines, discovery obligations, and the importance of properly-prepared and timely-submitted privilege logs.

For the last 13 or so years that this blog has highlighted key decisions from the Delaware Court of Chancery, the purpose has been to provide noteworthy excerpts from important decisions that are of practical application to lawyers who toil in the vineyards of the Delaware courts.

I have intentionally avoided using names of counsel involved in this case, and have focused on the “nuggets” of the court’s ruling that a busy litigator would need to know. I provide bullet points of the most noteworthy statements of law and the principles emphasized in this decision that should be memorized by any practitioner in the Court of Chancery who seeks to avoid the types of penalties that were imposed in this case for the failure to meet deadlines and the failure to fulfill various discovery obligations.

  • The court begins its analysis with the doctrinal underpinning and the public policy rationale for the importance of candor and fair dealing during the discovery process in order to reduce the element of surprise at trial and to insure that a trial decision is the result of a disinterested search for truth from all available evidence.
  • The court reminded parties that scheduling orders are “not merely guidelines but have the same full force and effect as any other court order.” See footnote 39.
  • The court bluntly underscored the rule that a “party that disregards the provisions in a scheduling order that govern discovery is engaging in discovery abuse.”
  • The court remonstrated that: “Discovery abuse has no place in Delaware courts, and the protection of litigants, the public and the bar demands nothing less than Delaware trial courts be diligent and promptly and effectively take corrective action to secure the just, speedy and inexpensive determination of every proceeding before them.” See footnote 41.
  • Importantly, the court interpreted Court of Chancery Rule 37(b)(2), based on Delaware Supreme Court decisions, as generally requiring the mandatory award of fees for discovery abuses unless the failure to comply with discovery obligations was “substantially justified.” See Slip Op. at 15-17.
  • One of the several problems that the court addressed was that the production of documents came many weeks after the discovery deadline, and well after the depositions were taken. The court noted that the offending party neither requested an extension of the deadline from the court nor sought an extension by agreement with the other parties in the case.
  • The court rejected with emphasis the argument that because the receiving party did not “nag” or press for the compliance with the discovery deadline, that there should be no penalty for non-compliance. The court refused to allow the offending party to “shift the obligation for compliance” to the other party.

Two Levels of Consequences for Missed Discovery Deadlines:

  • The court described the first level of consequence for misconduct involved as including the actual prejudice that resulted from the belated production of documents that the company could have used in discovery for depositions and with their experts.
  • The second level of prejudice involves the “degradation of the litigation process.” The court explained that in order for the litigation system to function, the parties must follow the rules.
  • The court’s reasoning on this point deserves a block quote:

“If participants suspect that others are not following the rules, then the process deteriorates. People who follow the rules feel like chumps when others seem to be cutting corners or breaking rules and getting ahead. People who otherwise might not think of pushing limits become more aggressive if they think everyone else is doing it. It is this broader, systemic interest that the Delaware Supreme Court seems to have had in mind when stressing the courts must address discovery abuse not only to protect litigants, but also to protect the public and the bar.” See footnote 57.

  • The foregoing rationale is one of the best articulations of the need for the courts to enforce discovery obligations so that those who don’t follow the rules gain some advantage, and those who do follow the rules feel, in the words of the court, “like chumps.”

Penalties Imposed

  • The penalty that the court imposed for the substantially tardy production of documents was that the offending party that missed the production deadline was required to produce their witnesses again for deposition and pay for the cost of the depositions, or as the court described it, “bear all expenses associated with their late production of documents and the remedy imposed by this decision.” The court listed in an extended description the types of additional efforts that would be included in the fees that the offending party would be responsible for.

Privilege Logs:

  • Although many prior Chancery decisions have described in detail the importance of privilege logs and the specific components required to be included in privilege logs, as well as the penalty of waiver if the contents of the privilege logs are not sufficient, this opinion provides an additional reminder for those who might not have gotten the message in prior decisions.

For example, the court emphasized that:

  • Producing a timely privilege log is part of a party’s obligation when asserting privilege. The privilege logs must be produced by the same deadline as the date for documents to be produced.
  • The burden of establishing privilege rests on the party asserting it. See footnote 61.
  • The court emphasized that: “An insufficiently supported claim of privilege can result in waiver.” See footnote 63 for cases supporting that well-established statement of Delaware law. Those cited cases also describe the detailed contents that a privilege log must include in order to avoid waiver.
  • The court explained that: “Just as you can’t hit what you can’t see, you can’t challenge what the other side has hasn’t described.” That is, the privilege log must provide sufficient information to enable the adversary to “assess the privilege claim an decide whether to mount a challenge.”
  • The court reiterated Delaware law that: “Producing a privilege log after the discovery cutoff prevents the opposing party from evaluating the log, making timely challenges, and using the resulting documents in discovery. Producing a post-cutoff log has the same effect as not producing a log, which is the same thing as not providing any support for a claim of privilege. Improperly asserting a claim of privilege is no claim of privilege at all.” See footnote 57 (cases collected).

Conclusion:

  • In sum, the court gave the party who did not receive the documents on time leave to conduct supplemental depositions to explore any materials produced after the depositions were taken, or as a result of the penalties imposed by this decision. The court imposed on the offending party the cost of the supplemental depositions of its own representatives, as well as the additional costs of additional efforts incurred as a result of the late production, as more specifically described in the opinion.
  • This opinion should be required reading for anyone who practices before the Delaware Court of Chancery, especially out of state counsel who are admitted pro hac vice, in order to “bring home” the importance that the court places on timely compliance with discovery deadlines and discovery obligations, as well as the severe and costly penalties that the court will impose, on a mandatory basis, if those discovery deadlines and obligations are not complied with properly.

POSTSCRIPT: Several years ago, a Delaware Supreme Court opinion was highlighted on these pages, addressing a related issue of what penalties are appropriate for missing pretrial deadlines. See Christian v. Counseling Resource Associates, Inc., Del. Supr., No.  460, 2011 (Jan. 2, 2013) (revised March 26, 2013).

Advancement Claim Partially Denied Based on L.P. Agreement

A recent decision by the Delaware Court of Chancery contrasted the difference between advancement rights based on an L.P. agreement as compared to the right of a corporate director or officer to receive advancement of fees and costs to defend a lawsuit. In Weil v. VEREIT Operating Partnership, L.P., C.A. No. 2017-0613-JTL (Del. Ch. Feb. 13, 2018), the court also distinguished between the different procedural and substantive aspects of an indemnification claim as compared to an advancement claim. This opinion provides important statements of the law and nuances of practical value to those engaged in this frequent subject of Delaware corporate and commercial litigation.

Also, unlike the claims in the context of an alternative entity such as an L.P. agreement, Delaware General Corporation Law (DGCL) Section 145 provides certain “default boundaries” that are not necessarily applicable to an advancement claim based on pure contract terms in the L.P. context. Unlike rights based on an L.P. agreement, generally speaking, once there is an advancement right in the corporate context, DGCL section 145 imposes certain restrictions on the corporation that attempts to deny those rights. See, e.g., one of the three decisions in the Holley v. Nipro cases highlighted on these pages.

For those who need to know the latest iteration of Delaware law on advancement and how it differs from indemnification in the L.P. context, this 37-page opinion with over 70 footnotes is required reading. For purposes of this short blog post that is intended for busy corporate litigators, I provide highlights of the decision:

Background:

  • The procedural context of this case was a motion for summary judgment which featured 55 exhibits. There were multiple parties involved and several different entities–only some of whom were entitled to advancement or indemnification under the applicable alternative entity agreements.
  • Because this advancement claim was based on an alternative entity agreement, as opposed to corporate documents that were subject to the default constraints of DGCL section 145, the primary framework of the analysis was contractual and not statutory. The court provides a comprehensive review of the detailed factual setting which is necessary to grasp for a complete understanding of the case.

Key Legal Principles:

  • The court referred to Section 17-108 of the Delaware Revised Uniform Limited Partnership Act which gives a limited partnership the power to indemnify any partner or other person, and also includes an empowerment to provide for advancement. Section 17-108 defers completely to the contract of the parties to create rights and obligations with respect to indemnification and advancement of expenses.
  • Importantly, Section 17-108 of the LP Act gives limited partnerships wider freedom of contract to draft their own framework for indemnification and advancement than is available to corporations under Section 145 of the DGCL, which creates mandatory indemnification rights for corporate indemnities in some circumstances–and also bars indemnification in others. See footnote 8 for supporting cases.
  • The court provided a thorough contractual analysis of the advancement and the indemnification provisions in the LP agreement. The court noted the tension and lack of consistency in the LP agreement between the provisions for advancement and the legally quite distinct conceptual analysis of indemnification. The agreement here appeared to describe differently those covered by advancement and indemnification.
  • The court emphasized the important distinctions between an analysis for advancement, which is a summary proceeding where the only question involves the extension of credit, and a completely separate procedural and substantive analysis of indemnification.
  • In advancement cases, when there is an issue whether someone is sued in a covered or non-covered capacity, the court will generally resolve the doubt in favor of advancement, and defers until the subsequent indemnification analysis whether or not the advanced funds might later be subject to disgorgement if a party is later determined to be ineligible for indemnification. See footnotes 20 through 23.
  • The court distinguished the case of Fasciana v. Electronic Data Systems Corp. (“Fasciana I”) 829 A.2d 160 (Del. Ch. 2003), because that case dealt with the determination of who was a “agent” for indemnification purposes under Section 145, but this case focuses on advancement.
  • Based on the contractual basis on which the advancement claims were made in this case, the court analyzed and applied the defined terms, whose definitions were not the model of clarity. See footnotes 28 and 29 and accompanying text.

Specific Disputes About Allocation of Which Fees are Covered

  • Although the parties seemed to acknowledge that there was a right to some advancement, the challenges were based on whether or not all of the fees demanded were properly allocated among covered and non-covered proceedings, as well as covered and non-covered persons.
  • Consistent with prior case law, the court explained that the court will not engage in a line by line review of bills to determine if allocation was proper between covered and non-covered persons or proceedings, and will rely on the certification of senior counsel involved at the advancement stage of the proceedings.
  • The court will wait for the indemnification stage to determine a more specific allocation of what fees were incurred for covered parties and which would be allocated to non-covered parties. See footnotes 33 to 39 and accompanying text.
  • Nonetheless, the court emphasized that an effort must be made to allocate fees, to the extent possible, between those incurred for covered persons and underlying covered proceedings, and those fees incurred for persons or proceedings that are not covered by advancement. See footnote 40.

Unilateral Imposition of Conditions to Payment Rejected:  

  • This is an important principle that should have widespread application even outside the alternative entity context: A company cannot unilaterally impose conditions on advancement that are not contained in the underlying documents on which advancement is based. For example, in this case the court rejected efforts by the company to impose a litigation budget or impose billing guidelines as a condition for advancement because those conditions were not included in the advancement provision of the LP agreement. See footnotes 46 to 48 and accompanying text.
  • Likewise, the court rejected an argument that a company could refuse to pay for annual increases in hourly rates. No such limitation was in the L.P. Agreement.
  • Regarding invoices from third-parties, the court determined that at the advancement stage, it was sufficient to rely on the verification of a senior attorney involved that those invoices were necessary and reasonable.

Reasonableness of Total Fees:

  • The limited partnership agreement allowed for advancement of “reasonable expenses.” Consistent with Court of Chancery Rule 88, as well as Delaware Lawyers’ Rule of Professional Conduct 1.5(a), the court explained that the fees requested must be reasonable in amount based on the eight factors applied under Rule 1.5(a) to make that determination.
  • Nonetheless, the court will not review each line item or time entry and disbursement, nor will it second-guess the judgment of lawyers on the appropriate staffing of the case at the advancement stage.
  • The parties do not have a blank check in this context, however, and the amount of fees are subject to review again at the indemnification stage. The court also observed that the client should also serve as a level of review because until indemnification is decided, that person incurs the risk that the fees may need to be paid back.
  • Regarding the challenge to the rates charged by staff attorneys, the court found that there were factual issues that could not be resolved at summary judgment stage.
  • Regarding allegations that the hours worked on the case were excessive and that the Paul Weiss firm overstaffed the matter, the court determined that it would rely on a certification from a senior partner of Paul Weiss by sworn affidavit that the amount of fees and expenses were reasonable under the circumstances.
  • The court emphasized however that the firm does not have a blank check and that the person receiving the advancement has an incentive to monitor those bills in the event that it may be ultimately determined that the advancement was improvidently granted and may later need to be disgorged. Thus a more detailed review of fees alleged to be excessive is deferred until the indemnification stage, at which time levels of staffing and number of hours worked and rates can be reviewed.

Procedure for Determining Advancement Due on Future Invoices:

  • The court described at pages 32 through 37 of the slip opinion the detailed procedure that the court required to be followed going forward based on the very specific methods described in the Fitracks case which is a very comprehensive procedure designed to minimize the amount of disputes about monthly bills that the court will need to address going forward.

Regarding Fees on Fees:

  • The court determined that because only some of the claims were successful, only a partial amount of fees on fees would be awarded and that the parties should use the same Fitracks procedure to determine those amounts.

Chancery Interprets “Reasonable Efforts” Clause

Several recent Delaware decisions, as noted on these pages earlier this week here, and commented on here, have added to the case law that still only amounts to a relatively modest body of law in Delaware, interpreting the phrase: “reasonable efforts” and various permutations on that phrase, often found in post-closing earn out disputes but prevalent in other contract disputes as well. A Delaware Court of Chancery decision two days ago has added again to the jurisprudence on this topic.

In the opinion styled In Re Oxbow Carbon LLC Unitholder Litigation, C.A. No. 12447-VCL (Del. Ch. Feb. 12, 2018), Delaware’s equity court published a 178-page magnum opus that has already been the subject of articles in Bloomberg and other legal publications. Prior Chancery decisions during the course of this hotly litigated case have been highlighted on these pages, and those rulings also provide background color. The opinion provides a comprehensive analysis of a factually complex dispute involving the billionaire William Koch and contractual rights of a minority member of an LLC in which Koch owned a majority. The post-trial tome deserves a robust synopsis, but in this short post I will only focus on the small aspect of the titular topic.

The following bullet points should entice readers to consult the full opinion if they need to know the latest iteration of Delaware law on these issues:

  • The court relied on Delaware Supreme Court precedent (n. 602) applying “commercially reasonable efforts” to “impose an affirmative obligation on the parties to take all reasonable steps to complete a transaction.”
  • Koch testified at trial that the Reasonable Efforts Clause involved required each party to “act in good faith to do what it takes….”
  • The court found support in the record to conclude that Koch spent resources and energy to thwart the sale instead of using reasonable efforts. See Chancery opinion in WaveDivision cited at note 614 and accompanying text.
  • This decision is also notable for its exemplary explanation and application of the following key Delaware concepts often involved in corporate and commercial litigation:
  • (i) the implied covenant of good faith and fair dealing;
  • (ii) unclean hands; and
  • (iii) interpreting an LLC Agreement in a manner that avoids an inequitable result.

 

Collection of Cases on Earn Out Disputes

A recent article on The Harvard Law School Corporate Governance Blog collected decisions, mostly based on Delaware law, that address Earn Out disputes, which generally involve agreements for the sale of a company that allow for post-closing payments subject to various milestones or revenue targets being satisfied. Commonly, the buyer of the company is required to use a level of effort to reach those milestones or revenue goals that is variously described as reasonable efforts or diligent efforts or similar “hard to measure” language.

Recent Delaware decisions on those topics have been highlighted on these pages here and here and here, but the above-linked article does a notable job of compiling many recent cases in one place with helpful commentary.

My favorite scholarly commentary on the topic of “commercially reasonable efforts” in general, is provided by friend of the blog, Professor Stephen Bainbridge, whose scholarship is often cited in Delaware court opinions.

Chancery Addresses Commercially Reasonable Efforts and Pre-Judgment Interest

A recent Delaware Court of Chancery opinion addressed issues that are of importance to commercial and corporate litigators. In CompoSecure, L.L.C. v. CardUX, LLC f/k/a Affluent Card, LLC, C.A. No. 1254-VCL (Del. Ch. revised Feb. 12, 2018), the court provided a thorough analysis of a contract dispute in a post-trial ruling that primarily relied on New Jersey law, and even though that reliance on non-Delaware law for most issues in this case guarantees cursory treatment on this blog–there are several nuggets of Delaware law which the court cited, for some of its analysis of a marketing agreement for credit cards, that have widespread application in Delaware litigation. For example, the court addressed:

As a postscript for readers who might enjoy trivia, this opinion features as plaintiff’s counsel Delaware’s former Chief Justice, Myron Steele, as well as Arthur Dent, a classmate of mine who was the editor-in-chief of the law review the same year that I was the law review’s internal managing editor. That last bit of data, plus a few dollars, may get you a small coffee at a fancy coffee shop.

Supreme Court Bars Wal-Mart Claims Based on Issue Preclusion

The Delaware Supreme Court recently issued an epic opinion, ending the lengthy saga of litigation involving efforts by some stockholders of Wal-Mart to pursue claims in connection with alleged improprieties relating to the Mexican subsidiary of Wal-Mart, in California State Teachers’ Retirement System v. Alvarez , Del. Super., No. 295, 2016 (Jan. 25, 2018).  Multiple prior decisions in this matter have been highlighted on these pages over the last several years. The unusual procedural history included multiple appeals of various aspects of Section 220 litigation in which the plaintiffs in Delaware sought books and records prior to filing a plenary complaint.

This most recent decision of Delaware’s high court in the matter must be read by anyone interested in the latest iteration of Delaware law on the topic of issue preclusion, which is also referred to in some circles as collateral estoppel. (A photo of the Supreme Court building in Dover is shown nearby.)

For purposes of this cursory blog post, and in light of the lengthy procedural history of this case, which is presumed to be familiar to readers (or which can be reviewed at the foregoing link by accessing highlights of prior decisions in this matter), the most efficient way to catalog this matter for future reference is with the following bullet points that highlight key aspects of the most recent ruling in this case.

  • Following a familiar pattern, after an article in the New York Times indicating apparent misfeasance by the Mexican subsidiary of Wal-Mart that called into question the compliance by the board of directors with their fiduciary duties, multiple lawsuits were filed in multiple fora. A final decision in a case filed in the U.S. District Court in Arkansas dismissed claims filed in that court based on failure to satisfy the standard of demand futility.
  • A later decision of the Delaware Court of Chancery found that the decision in Arkansas had a preclusive effect on the derivative action filed in Delaware.
  • The Delaware plaintiffs followed the advice of the Delaware courts by employing the tools of DGCL Section 220 to obtain books and records prior to filing their plenary complaint. In contrast, the plaintiffs in Arkansas did not do so, and therefore, were able to proceed more quickly with their plenary complaint.
  • A cynical wag might conclude that an unintended consequence of this decision will be to encourage some plaintiffs to file stockholder suits in courts “anywhere but Delaware” without the added expenditure of time and money using the tools of Section 220 before filing their plenary complaint.
  • The court carefully considered the many policy considerations implicated, including the serious constitutional criteria of Due Process, and the Full Faith and Credit required to be given to judgments of the courts in other states.
  • Also importantly, the court in this opinion concluded that based on the facts and circumstances of this case, the failure of the plaintiffs in Arkansas to use Section 220 before filing their complaint, in this particular instance, did not constitute the type of “grossly deficient representation” of the plaintiff class such that the preclusive effect of the judgment was avoided.

Procedurally Important Point: Footnote 184 should be of great interest to corporate and commercial litigators because it cites to a Supreme Court rule, (that has potential analogs in decisions by the Court of Chancery), that if a particular argument is confined to a footnote only in a brief on appeal, as opposed to appearing in the body of the brief, that argument will be considered waived.

Court of Chancery Rejects Efforts to Seek Attorneys’ Fees from Stockholder of Insolvent Corporation

In deciding an issue of first impression, the Delaware Court of Chancery in City of Miami General Employees’ and Sanitation Employees’ Retirement Trust v. C&J Energy Service, Inc., et al., C.A. No. 9980-CB (Del. Ch. January 23, 2018), addresses several principles that should be of interest to corporate litigators:

  • A fee award, such as one that would typically be granted when a corporate benefit or a common fund is created in a derivative suit, cannot be imposed on one stockholder or a subset of stockholders even if the corporation is unable to pay, when the benefit accrued to all stockholders.
  • Pursuant to DGCL Section 325(b), a creditor is barred from seeking to collect from a stockholder prior to first obtaining a judgment against the corporation. In this case, a corporate bankruptcy discharged any fee obligation that the corporation might otherwise have had.
  • Also, for policy reasons it would be unprecedented and inconsistent with the rationale of the corporate benefit doctrine, as well as being inequitable, to require a stockholder or a subset of stockholders to pay fees in this situation.
  • The court provided an additional reason to reject the fee request: finding that the litigation did not create a price reduction which was the alleged benefit of the litigation on which the fee request was based

A prior decision of the Delaware Supreme Court in this matter was highlighted on these pages, and that opinion was selected by Vice Chancellor Laster as especially noteworthy.

Fraudulent Transfer Claims Allowed to Proceed After Account Drained

The letter ruling by the Delaware Court of Chancery in Daugherty v. Highland Capital Management, C.A. No. 2017-0488-SG, (Del. Ch. January 16, 2018), provides a helpful description of the elements of a fraudulent transfer claim and their application to facts involving efforts to escape collection efforts.

Background Facts: The essential background facts involve allegations that funds were transferred from an escrow account, without value, in order to avoid efforts to collect on a judgment. In particular, based on an award in Texas of $2.6 million against an entity abbreviated as HERA, the funds that had been placed in escrow to cover that judgment were transferred out of a lawyer’s escrow account. The law firm was not implicated in any wrongdoing according to the opinion because it was following the instructions given to it by the person creating the escrow account. Subsequent to the transfer of the funds from escrow, HERA filed an affidavit averring that it was insolvent.

Key Findings of Court: On a factual level, the court found that after the funds were transferred without value, it left HERA insolvent for the primary purpose of the defeating the efforts of the creditor of HERA to collect a judgment. For purposes of a motion to dismiss, that satisfied the necessary elements of a claim for fraudulent transfer.

Notable Reasoning of the Court: The court’s reasoning in this short letter ruling was that once a claim was reduced to a judgment, and the amount in the bank account was transferred without value, leaving HERA insolvent, those allegations satisfy the elements of a claim in Sections 1304, 1305 and 1309 of Title 6 of the Delaware Code–at least for purposes of surviving a motion to dismiss.

Chancery Refuses Invitation to Apply Garner Exception to Attorney-Client Privilege

Anyone interested in the most complete and recent explanation of the Garner exception to the attorney-client privilege needs to read the Delaware Court of Chancery’s ruling in Buttonwood Tree Value Partners, L.P. et al. v. R.L. Polk & Co., Inc., et al., C.A. No. 9250-VCG (Del. Ch. Jan. 10, 2018).

This letter ruling addresses a motion to compel production of communications that would otherwise be protected by the attorney-client privilege. In particular, the motion to compel was based on the Garner exception to the general rule that attorney-client privileged communications need not be produced during discovery.

Background:  The factual background involves derivative claims for breach of fiduciary duty in connection with a self-tender.  More detailed facts involving the underlying claims in this suit were highlighted in a synopsis of the prior Chancery decision in this matter on these pages.

Key Legal Principles:  The court recited the doctrinal underpinning and public policy reasons for Delaware Rule of Evidence 502(b) which codifies the attorney-client privilege, which stands in contrast to the bulk of the Rules of Evidence which are designed to provide for disclosure of relevant facts in a search for the truth.  Delaware recognizes the Garner “exception to the attorney-client privilege exception” to the general rule that relevant facts must be disclosed.

The Garner exception is based on the balancing of:  (i) the purpose of the attorney-client privilege that encourages open communication with counsel and client; with (ii)  the right of the stockholder to understand what advice was given to fiduciaries who are charged with breaching their duties.

There are nine factors that are generally considered in order for the court to determine whether to apply the Garner exception, but three in particular are given greater significance:  (1) The colorability of the claim; (2) The extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; (3) The apparent necessity or desirability of the shareholders having the information, and availability of it from other sources.  (citing Salberg v. Genworth Fin., Inc., 2017 WL 3499807 at *5 (Del. Ch. July 27, 2017)). The Salberg case, also a very useful and thorough explanation of the Garner exception, from last year, was highlighted on these pages.

The Delaware Supreme Court had described the Garner exception as “narrow, exacting, and intended to be very difficult to satisfy.” See Wal-Mart Stores, Inc., 95 A.3d at 1278 (that decision was previously highlighted on these pages).

The court in this decision determined that the first two factors were satisfied but they were only “gatekeeper criteria.” The third factor was not satisfied in this case based on the court’s finding that the same information could have been obtained through depositions.

The court also explained why the “crime-fraud exception” to the attorney-client privilege did not apply. See footnote 29. See Rule of Evidence 502(d)(1) for codification of the crime-fraud exception to the work-product doctrine.

The court also noted that the Garner factors overlap with the required showing under Rule 26(b)(3) pursuant to the work-product doctrine.

Chancery Rejects Contract-Based Claim for Attorneys’ Fees

Anyone seeking attorneys’ fees in Delaware based on a “prevailing party clause” in an agreement–who has not been completely and unequivocally vindicated in that litigation, needs to read the Chancery court ruling in the case styled: The Mrs. Fields Brand, Inc. v. Interbake Foods LLC, C.A. No. 12201-CB (Del. Ch. Jan. 5, 2018). In essence, citing to prior Chancery decisions, the Court of Chancery explained that the standard that the court will apply to determine whether it will award fees based on a contract provision entitling a “prevailing party” to fees, will be the “predominance in the litigation” standard. 

As applied to the facts of this case, the court determined that there was no single party in the case that satisfied that standard because among multiple claims and cross-claims involved in this litigation, each party both won some and lost some. This is a useful iteration of the law on a topic of practical application in corporate and commercial litigation.

The court explained that it will not parse the results of litigation on a claim-by-claim basis to determine predominance, and in some cases, as in this one, no party can be said to prevail for purposes of the standard that applies to a claim for fees based on a “prevailing party” fee-shifting provision in an agreement.

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