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My latest ethics column for the publication of the American Inns of Court, The Bencher, appears in the current edition regarding the titular topic, and is reprinted on these pages with the courtesy of the publisher. (I have been writing the ethics column for more than 20 years for The Bencher.)

Delaware Supreme Court Clarifies Pro Hac Vice Standards

By Francis G.X. Pileggi, Esquire

A recent ruling from the Delaware Supreme Court reversed a trial court’s revocation of a non-Delaware attorney’s admission pro hac vice. In the process, Delaware’s high court clarified for Delaware trial courts and lawyers the appropriate standard for pro hac vice admissions and revocations.

Overview of Decision

In July 2020, a defamation action was filed in Delaware Superior Court alleging that published articles falsely accused the plaintiff of “colluding with Russian agents to interfere with the 2016 presidential election.” Page v. Oath Inc., Del. Supr., No. 69, 2021, Order at 1 (Jan. 19, 2022). The same day as the ruling on the pro hac vice issue, the Supreme Court issued a decision on the substantive appeal in the defamation action.

The Superior Court sua sponte issued a rule to show cause why the admission pro hac vice of the non-Delaware lawyer should not be revoked—based on conduct that the trial court on its own observed as having taken place in other jurisdictions. The non-Delaware lawyer responded by explaining that there was no finding by any court in any other state of either litigation misconduct or other wrongdoing in the matters the trial court referred to in its rule to show cause.

Notwithstanding his rejection of any basis for the court to revoke his pro hac vice admission, the non-Delaware attorney voluntarily withdrew his application for pro hac vice admission and his appearance in the case. Nonetheless, without a hearing, the trial court revoked his pro hac vice admission.

Delaware’s high court was troubled by the trial court’s description of the non-Delaware lawyer’s actions in other states as wrongful, even though the courts in those states did not make any such findings. The trial court also cast aspersions on the non-Delaware attorney’s character with vituperative allegations and reference to what the trial court thought was the non-Delaware lawyer’s role in national political events—an issue not included in the rule to show cause.

Highlights of the Supreme Court’s Decision

The appellate review standard for the revocation of a pro hac vice admission under Superior Court Rule 90.1(e) is abuse of discretion. Because the revocation ruling by the trial court was “based on factual findings for which there was no support in the record,” the Supreme Court determined that the trial court’s decision was an abuse of discretion.

The high court reasoned that even though a trial court is not powerless to act when a lawyer admitted pro hac vice is accused of serious misconduct in another state:

“…when, as here, the allegations of misconduct in another state have not yet been adjudicated, there is no assertion that the alleged misconduct has disrupted or adversely affected the proceedings in this State, and the lawyer agrees to withdraw his appearance and pro hac vice admission, it is an abuse of discretion to preclude the lawyer’s motion to withdraw in favor of an involuntary revocation of the lawyer’s admission.”

The Supreme Court’s reasoning was also buttressed by its finding that despite the trial court’s statement that the trial court’s decision was not impacted by its “conjecture” that the non-Delaware lawyer’s conduct had “precipitated the traumatic events” that occurred in Washington, DC, in January 2020: The trial court’s “willingness to pin that on [the non-Delaware lawyer] without any evidence or giving [the non-Delaware lawyer] an opportunity to respond is indicative of an unfair process.”

The trial court also held that the denial of a request for injunctive relief in a Georgia case the non-Delaware lawyer was involved in was, in the trial court’s estimation, “textbook frivolous litigation.” To the contrary, the Supreme Court explained that a determination of the absence of factual or legal support for injunctive relief is not the equivalent of a finding that a complaint is frivolous. Rather, the Supreme Court instructed that “our own ethical rules, by prohibiting a lawyer from asserting claims ‘unless there is a basis in law for doing so that is not frivolous,’ implicitly recognize that a claim ultimately found to lack a basis in law and fact can nonetheless be non-frivolous.”

Although it was not stated in the ruling, this author’s insight suggests that additional support for the Supreme Court’s decision might also be found in a recent opinion of Delaware’s high court that underscored the general rule that only the Delaware Supreme Court has authority to regulate the professional conduct of Delaware attorneys and to enforce the Delaware rules of legal ethics.

The Delaware Business Court Insider published in its current edition my commentary on a recent Delaware Supreme Court opinion on the titular topic. Courtesy of the Delaware Business Court Insider, the article is reprinted below.

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A recent Delaware Supreme Court decision provides a lesson for drafters of agreements for the sale of a business by providing an example of the problems caused by a lack of clarity in describing a deadline to send notices of claims for indemnification post-closing. To paraphrase a former member of the U.S. Supreme Court, the Delaware Supreme Court is always right when it comes to deciding Delaware law not because the members of the Court are infallible, but rather because they always have the last word.  The reader can decide how that aphorism applies to the decision of a divided court in the matter of North American Leasing v. NASDI HoldingsDel. Supr., No. 192, 2020 (April 11, 2022).

The court decided three issues in this case. First, whether the Delaware Court of Chancery erred in interpreting an agreement of sale according to the principles of Delaware contract law in connection with determining what the deadline was in the agreement for giving notices of indemnification claims. Second, the court decided whether an affirmative defense of set-off and recoupment was waived. Lastly, the court decided whether it was appropriate for the Court of Chancery not to consider evidence that the total amount of the claims should have been reduced. Three members of the Delaware Supreme Court affirmed the decision of the Court of Chancery, and two dissented from the majority opinion.

Key Background Facts

This case involved the sale of a company that, among other things, was involved in the construction of bridges. One of the bridge projects underway at the time of the closing on the sale of the business had a bond in place that the seller posted in the approximate amount of $20 million. After the closing, because the buyer decided to discontinue work on the bridge project, the letter of credit was drawn down in the full amount of the bond. The seller sued the buyer setting forth three causes of action: breach of contract regarding an indemnity obligation; equitable subrogation; and a claim for declaratory judgment that the defendants breached their indemnity obligation.

The Court of Chancery granted summary judgment in favor of the seller and also denied a motion for reargument. In connection with the motion for the entry of the final judgment, the Court of Chancery determined that the affirmative defense of set-off/recoupment was waived because it was not raised in response to the motion for summary judgment, or in the motion for reargument.

Legal Analysis

The majority decision acknowledged that questions of contract interpretation on appeal are reviewed de novo. Delaware’s high court observed that Delaware law adheres to an objective theory of contracts, which means that the construction of a contract should be “that which would be understood by an objective, reasonable third party.” That theory gives priority to the intentions of the parties reflected in the four corners of the agreement, “construing the agreement as a whole and giving effect to all its provisions.”

The majority opinion carefully considered the various provisions of the agreement at issue and examined the reasoning of the Court of Chancery which rejected the buyer’s arguments that Section 9.3(a) provided for a deadline which ended before the indemnification claim of the seller arose, which would have rendered the indemnification notice untimely.

The decision turned in large measure on the reading of one phrase. The majority explained its reasoning for the interpretation of the phrase “but in any event” as introducing an exception to the sentence that followed—not a limitation of the phrase that followed.

The majority also agreed with the Court of Chancery’s conclusion that the set-off/recoupment defense was waived.  The buyer argued that set-off/recoupment was a defense that pertained to damages, and damages did not need to be briefed in the motion for summary judgment.  Not so, according to those with the last word on the topic, because damages were central to the relief requested in the motion.

Regarding the last issue of damages, the Supreme Court concluded that the Court of Chancery did not err when it did not consider the evidence regarding the reduction of damages because the set-off/recoupment defense was waived.

Dissent

Notably, both the majority and the dissent agreed on the basic contract principles of Delaware law that applied to this case, although they disagreed on the result after applying those principles to the facts.

A substantial focus of the dissent was its different interpretation of the phrase “ in any event,” and whether: it applied to all indemnification claims; or it only applied to the “representations and warranties” claims. The majority held that the phrase created an exception, but the dissent explained why in its view the phrase introduced a limiting or qualifying clause. The dissent referred to a dictionary definition for the adjective “any” as meaning “without limitation.” The phrase “in any event” means “no matter when [an event] happens.”

The dissenters explained that the drafters of the agreement could have used the verb “the” instead of the word “any”—if the drafters wanted to establish an exception to the deadline for sending a notice of claim.

Moreover, the dissent noted that even if the deadline for the notice of a claim were missed, the seller could still rely on equitable subrogation as a basis for a claim. The dissent added that the availability of that remedy supports the view that an earlier notice deadline would make an indefinite period for indemnification claims unnecessary.

The dissent included the following memorable quote: “The majority sacrifices the plain meaning of Section 9.3 on the altar of the context of the provision and the contract as a whole.” The dissent concluded by explaining that its view demonstrated more than one reasonable interpretation of the agreement, which is one definition of an ambiguous contract. Therefore, the trial court should not have granted summary judgment and, in the view of the dissenting opinion, should have considered extrinsic evidence.

In the recent Delaware Court of Chancery opinion styled: Knight v. Miller, C.A. No. 2021-0581-SG (Del. Ch. April 27, 2022), the court described this case as “. . . another bloom on the hardy perennial of director compensation litigation.”  Slip op. at 2.

The court granted some parts of a motion to dismiss, but allowed other claims to proceed based on the application of the entire fairness standard and the difficulty in securing a dismissal of claims at the initial pleadings stage when that fact-intensive standard applies, for example, when, as here, stock option awards are challenged.

Another Memorable Quote

The opinion begins with the following eminently quotable truisms of Delaware corporate law that aptly describe how the court reviewed the allegations in this case:

“The oft-noted fact that corporate actions are ‘twice-tested’–first in light of compliance with the DGCL, second for compliance with fiduciary duties–is neatly illustrated by directors’ actions to set their own compensation.  Those actions are clearly authorized by statute, and just as clearly an act of self-dealing, subject to entire fairness review.”

Slip op. at 2.

Highlights

This case involved a challenge to the award of stock options to members of the board of directors, some of whom are considered to be controllers and insiders.

The court noted that Section 141(h) of the Delaware General Corporation Law authorized the board to “fix the compensation of directors.”  The board in this case was implementing a stock incentive plan that vested the compensation committee with authority to award stock options in its discretion.

The court began its consideration of the claims by describing the causes of action as requiring a “somewhat convoluted analysis” as the challenge to the stock awards implicates different standards of review for different grants.  Slip op. at 16.  Thus, the court reviewed the claims in three categories:

(i) whether the Compensation Committee acted in bad faith as an independent breach of fiduciary duty for granting the awards;

(ii) alleged breach of the duty of loyalty for granting the awards generally; and

(iii) alleged breach of the duty of loyalty for accepting the awarded stock options.

The court rejected the bad faith claims, and instructed that: ” Bad faith is one of the hardest corporate claims to maintain.” Slip op. at 18. This version of a breach of the duty of loyalty claim typically is made when a plaintiff cannot establish lack of independence or lack of disinterestedness.

Notably, the court observed that because the stock options were granted to individuals in “varying factual postures”:  “. . . different standards of review will apply to the Compensation Committee Defendants’ choices in making the grants.  As in nearly all pleadings stage challenges to the viability of a breach of fiduciary duty claim in the corporate context, deciding the standard of review will be outcome determinative.”  Slip op. at 20-21.

When Entire Fairness Standard of Review Applies–Absent an Exception

Because the decision by directors to determine their own compensation is necessarily self-interested, even when done pursuant to a pre-existing equity incentive plan, such decisions are subject to the entire fairness standard of review, “unless a fully informed, uncoerced, and disinterested majority of stockholders has approved the compensation decisions and therefore ratified them.” Slip op. at 21 (citing In re Investors Bank Corp., Inc. S’holder Litig., 177 A.3d 1208).

Standard for Awards to Controllers

The court explained that even if a controller of a company, such as a majority stockholder, is not actually a member of the compensation committee, the entire fairness standard still applies to compensation granted to a controller:  “Because the underlying factors which raise the specter of impropriety can never be completely eradicated and still require careful judicial scrutiny.  The underlying risk is that the independent committee members who pass upon a transaction in question- -here the granting of equity awards- -might perceive that disapproval may result in retaliation by the controlling stockholder.”  Slip op. at 20-21.  This principle applies equally to outside directors as decisionmakers, given the controlling stockholder’s ability to elect directors.  Slip op. at 26-27.

Nascent Standard of Review–When Accepting Compensation Allegedly is “Clearly Improper”

The court acknowledged that the standard of review for breach of fiduciary duty claims in connection with accepting compensation is “nascent in its development.”  Slip op. at 32.  With over 200 years of decisions in the Delaware Court of Chancery about fiduciary duty, it’s surprising that any aspect of caselaw about fiduciary duties is “nascent,” but so it is.

The court discussed this aspect of the case by beginning with the definition of the duty of loyalty.  Slip op. at 29-30. The plaintiff conceded that there is a relative lack of caselaw defining what might constitute “clearly improper” to the extent that it might be a breach of fiduciary duty to accept compensation that is clearly improper.  The court found that even though the caselaw is not well developed on this issue, courts have found actions for breach of fiduciary duty for accepting compensation to survive a motion to dismiss when two factors are present:  (1) the compensation award was ultra vires, and the recipients knew it, or (2) where compensation was repriced advantageously in light of confidential and sensitive business information which the recipients knew, and which they accordingly used to the company’s detriment.

Standard for Accepting “Clearly Improper” Compensation

The court  acknowledged that : “The ‘clearly improper’ standard, if standard it is, is nascent in its development”. Then the court asked the question: “What is the standard that must be applied to the facts when considering whether such a breach of duty has been plead?”  The court concluded that:

“What is required is defendant’s knowingly wrongful acceptance of compensation, and the standard must be bad faith.  That is, there must be sufficient pleading of scienter to support a bad faith claim, which serves as a claim based on breach of the duty of loyalty.  But, as discussed above, there is an insufficient record to sustain even a claim that the Compensation Committee Defendants making the awards acted in bad faith, much less that the recipients’ acceptance violated that standard.  All that is alleged is that option awards were made at what proved to be the bottom of the market.”

Slip op. at 32

Therefore, the court granted the motion to dismiss with respect to the cause of action alleging breach of fiduciary duty by all defendants for accepting the March 2020 awards.  The court distinguished Howlan v. Kumar, 2019 WL 2479738 (Del. Ch. June 13, 2019) and Pfeiffer v. Leedle, 2013 WL 5988416 (Del. Ch. Nov. 8, 2013).  Unlike the Howlan case, the instant case does not plead nonpublic facts known to the company and the defendants that give rise to an inference of “clearly improper” compensation.  Unlike Pfeiffer, there is no allegation that the awards violate the stock incentive plan, let alone that the defendants were aware of the same.

The court also noted that the claim against the Compensation Committee Defendants for accepting the self-dealing awards merged with the breach of duty claim against the Compensation Committee Defendants for making the awards.

Waste Claims Dismissed

The court dismissed the corporate waste claims because in order to constitute waste, the grants must have been “without business purpose” but that cause of action was insufficiently plead.

Stock Incentive Plan Not Self-Executing

Regarding the grant of stock options to outside director defendants, the court explained that there are other cases such as Kerbs v. California Eastern Airwaves, 90 A.2d 653 (Del. 1952), which involved a self-executing stockholder-approved plan where the equity incentive plan listed grants of unissued stock in specific amounts to named executives based on the mathematical formula which left no room for discretionary decisions by the directors.  No such formula constrained the directors in this case.

Key Point–Difficult to Win Motion to Dismiss When Entire Fairness Standard Applies

The court instructed that when entire fairness is the applicable standard of review, dismissal of a complaint under a Rule 12(b)(6) motion is usually precluded because:  “A determination of whether the defendant has met its burden will normally be impossible by examining only the documents the court is free to consider on a motion to dismiss.”

Although the court listed at footnote 102 the many other cases that have followed this approach–it also acknowledged at footnote 103 a few cases that have granted motions to dismiss, but “generally where a plan has failed to allege any evidence of unfair process or price.”

The court found that the facts in this case were sufficient to raise a reasonably conceivable inference of an unfair transaction–but the finding does not preclude the Compensation Committee Defendants from establishing that the awards were entirely fair.

The court observed that it would allow the claims against the outside directors to proceed  even though it found that: the facts alleged in this case were “not overwhelming.”  Slip op at 21-25.

Standard Applicable to Officer Defendants

The third standard applied was to officer defendants and the court determined that the standard of review applicable to officer defendants was the business judgment rule unless the plaintiff pleads:  (1) Facts from which it may be reasonably inferred that the board or compensation committee lacked independence (for example, if they were dominated or controlled by the individual receiving the compensation); or (2) Facts from which it may be reasonably inferred that the board or compensation committee, while independent, nevertheless lacked good faith in making the award.

The court found that the Compensation Committee Defendants did not act in bad faith in making the awards, and plaintiff did not plead facts relating to the lack of independence by the Compensation Committee for purposes of making the compensation awards.  Although the business judgment rule can be dislodged by the successful pleading of corporate waste, the court explained why that was not successfully plead here.  Therefore the motion to dismiss this claim with respect to the officer defendants was granted.

The author of this overview was co-counsel for all the defendants–and the intent of this short post was to provide objective highlights without any advocacy of any party’s position.

The Delaware Court of Chancery opinion styled:  In re PLX Technology Inc. Stockholders Litigation, Cons. C.A. No. 9880-VCL (Del. Ch. April 18, 2022), described its opinion as a public service.  It addressed the payment logistics and administration for the settlement of a class action.  An impasse arose because the Depository Trust Company (“DTC”) implemented a policy that required the recipients of the payments to sign a letter agreeing to certain provisions before DTC would distribute the settlement proceeds.  This put the administrator in the untenable position of being required to distribute settlement proceeds through DTC when DTC refused to proceed without the letters, and some recipients refused to sign those letters.

The court approved a revised procedure to distribute the settlement proceeds and explained that:

  “The court has issued this decision largely as a public service announcement.  Corporate litigators need to be familiar with the bug in this particular settlement technology and understand the fix.”

Slip op. at  2.

When the Court of Chancery makes an announcement that it states: “corporate litigators need to be familiar” with, smart practitioners will pay attention.  The court’s announcement of a “fix to a bug,” makes it important to include on this blog.  The above link provides access to the entire opinion which is required reading for any corporate litigator involved in the distribution of settlement proceeds in a Delaware class action case.

 

 

 

A recent Chancery decision is notable for the following quote:  “A party cannot act intentionally to create harm, then invoke equity in relief of that harm.  If that is not a traditional equitable maxim, it should be.”  Pentwater Capital Management LP v. Kaz, C.A. No. 2021-1087-SG, Slip op. at 14 (Del. Ch. April 8, 2022).

The introductory sentence to this opinion is also noteworthy: “The power of the common-law courts is largely limited to awards of damages. Not so with this court of equity which in addition to damages may use its equitable puissance to order litigants to refrain from, and even to take, actions.”  Slip op. at 1. The court in this case largely refused to enforce a forum selection clause due to delay and other procedural infelicities by the moving party.  (Use of the word “puissance” should be noted.)

Countless highlights of decisions and commentary have been provided on these pages regarding forum selection clauses.  Adding to that scholarship is a recent law review article, unrelated to this case, entitled: John F. Coyle, Contractually Valid Forum Selection Clauses, 108 Iowa Law Review (2022 Forthcoming).

 

 

 

The Delaware Court of Chancery opinion styled:  Zhou v. Deng, C.A. No. 2021-0026-JRS (Del. Ch. April 6, 2022), is notable for addressing two useful aspects of Delaware corporate and commercial litigation:

First, DGCL Section 225 is a very narrowly focused summary proceeding that is considered to be “in rem”.  This limits the ability to join others who might not be subject to the personal jurisdiction of the court.  See Slip op. at 8-9.

Second, this opinion features useful references to authority that describe when issues will be considered waived: for example, when they are raised for the first time in a pretrial brief, or only “generally addressed,” such as in background facts.  See footnotes 61 and 64.

In the Chancery decision of Hawkins v. Daniel, C.A. No. 2021-0453-JTL (Del. Ch. April 4, 2022), the court found that an irrevocable proxy was ambiguous and it did not state that it would “run with the shares” based on the “special principles of contract interpretation” applicable to proxy agreements.  This 85-page opinion needs to be read by anyone who wants to know the latest Delaware law on enforceability of proxies.

In the case styled:  Sorenson Impact Foundation v. Continental Stock Transfer & Trust Co., C.A. No. 2021-0413-SG (Del. Ch. April 1, 2022), the Delaware Court of Chancery denied a motion to dismiss filed by former stockholders of an acquired company who did not receive the proceeds from the sale of their shares in their company because the wire transfer from the buyer to them for the purchase of their shares was hacked.  An intermediary transfer agent was used to disburse the funds and transfer the stock.

This, of course, is a nightmarish situation that anyone who expects to receive wired funds wants to avoid. For a graphic display of the various parties involved and at what point the hacking occurred, a chart appears as an exhibit attached to the last page of the opinion linked above.

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

Corporate lawyers have a unique opportunity to influence American companies to benefit by practicing the ethical standards their mission statements and codes of conduct espouse, a Villanova Law School professor told a gathering of Delaware’s bench and bar recently.

After a two-year pandemic pause, jurists and attorneys returned to the Hotel DuPont in Wilmington for the 36th Annual Francis G. Pileggi Distinguished Lecture in Law to hear Business Ethics: What Everyone Needs to Know,’ presented by J.S. Nelson, an Associate Professor at the Harvard Business School and an Associate Professor at Villanova Law School.

Nelson began by popping what she identified as numerous myths about ethics

Compared to the statutes and rules that corporate lawyers deal with, ethics is rather esoteric

Ethics–essentially, man’s instinct to do the right thing–is not a theoretical subject, but is rather the foundation for the formulation, interpretation, application and enforcement of laws, Nelson said.  “Ethics is nothing like what you think it is.”

Ethics are just a matter of subscribing to a set of principles

It’s more complicated than that because humans have a dual nature regarding ethics, she pointed out.  On one hand, they proudly endorse certain values and behaviors and believe they are ethical, but on the other, they are very susceptible to pressure from certain institutions and situations to compromise or suspend even fervently held values and principles—often with famously disastrous results.

The people who said they were “just following orders” during the Holocaust were unique

Nelson told the group that extensive behavioral studies have repeatedly produced the exact opposite conclusion: regardless of ethnic, cultural or religious background more than two thirds of test subjects will yield to consistent unified pressure to join with an institution or group’s program –when the program directly contradicts the subject’s core ethical principles.

She said this dynamic applies in the corporate world when employees confront a corporate culture that tolerates or even promotes lax quality control, poor safety or working conditions, gender inequality or sexual harassment or questionable financial practices.  They will often do what they must to get along in the world in which they find themselves.

Ethical management does not produce a better bottom line.

Actually, in the long run, a management that provides good working conditions with equal pay, benefits and opportunities and prioritizes quality and safety over short-term operating cost savings will attract and retain more engaged, efficient staff, enjoy greater profits, and “won’t have to worry about where the next scandal will be coming from,” Nelson predicted.

But to have that positive proactive effect, the institution must present a consistent unified position against even small ethical wrongs, because it’s all too easy for a company’s effect on ethics to reverse and snowball in the negative direction, she said.

The Boeing example

For example, Nelson said, the Boeing Company had a stellar safety record until its management and board decided to create a higher passenger capacity version of its workhorse 737 jetliner without a complete redesign.  Instead, they opted to essentially hang bigger engines on its wings to lift the greater weight and when that caused a tippy fore/aft balance problem, they devised a computer program to help pilots compensate, but the program had deadly flaws that allegedly caused two crashes with the loss of all aboard, she explained.

That triggered an FAA investigation that grounded the entire 737 MAX fleet for 20 months and a successful shareholder suit in the Delaware Chancery Court that claimed Boeing’s directors were liable for lax safety that caused large financial losses. In Re the Boeing Company Derivative Litigation, No. 2019-0907-MTZ opinion issued, (Del. Ch. Sept. 9, 2021).

As this blog has reported, ethical failure allegations played a key role in Vice Chancellor Morgan Zurn’s Sept 9, 2021 landmark ruling which found plaintiffs’ derivative director oversight claims met the tough pleading standards of the Delaware Supreme Court’s Marchand ruling with well-supported allegations that a majority of the directors are likely liable for Boeing’s billions of dollars in losses and penalties. Marchand v. Barnhill, 212 A.3d 805 (Del. 2019).

Importantly, Vice Chancellor Zurn’s ruling repeatedly pointed to the Marchand standards in finding that Boeing’s directors:

  1.  Got no regular safety information on the 737 MAX or any of its planes due to their “complete failure” to establish a committee or regular board reports on safety issues,
  2.  After the first crash, did not immediately investigate what caused the 737 MAX to repeatedly push its nose down in a series of disastrous dives at low speeds and instead virtually ignored the problem even though safety was a “mission critical” area,
  3. Intentionally misled federal regulators about the scope and seriousness of a computer pilot training program meant to help them use software that would allegedly minimize nose-down dives,
  4. Allegedly lied to the public and regulators about how comprehensive, how much in good faith and how quickly implemented their post-crash safety program was.
  5. Never pressed the CEO for more information or questioned his conclusions when he repeatedly told the board the 737 MAX was safe and blamed the crashes on pilot and maintenance errors.

But Nelson pointed out that rulings on alleged low points in corporate behavior often prompt positive changes in ethical standards, “and sometimes today’s ethics become tomorrow’s laws.”

In my latest article for the current issue of The Delaware Business Court Insider, I provide highlights of a recent Chancery decision that involved virtually no damages for non-compliance with a confidentiality provision. Courtesy of that publication, the article is reprinted below.

A recent noteworthy Delaware Court of Chancery decision should be kept handy by corporate and commercial litigators for its practical and persuasive analysis of noncompliant handling of confidential documents: AlixPartners v. Mori, C.A. No. 2019-0392-KSJM (Del. Ch. April 14, 2022).

Key Aspects of Decision

This litigation is based on the defendant’s departure from AlixPartners to work for a client of AlixPartners in Italy.

 

The court awarded virtually no damages for noncompliance with the confidential designation given to certain documents. The introductory paragraph in the court’s 58-page post-trial opinion includes a money quote that captures the essence of this decision. In connection with the end of his employment with the plaintiffs:

“… the defendant copied thousands of the plaintiffs’ confidential documents onto his personal devices. He did so to use them in a follow-on employment lawsuit in an Italian court [—he lived in Milan—], although he also used certain of the documents for other innocuous, personal ends—to update his curriculum vitae and email goodbyes to his former clients.” Slip op. at 1 (emphasis added).

 

One could infer that the court was less than enthused that plaintiffs “pressed on with their claims,” on this issue—notwithstanding the return of the documents defendant had copied other than those he needed for his separate employment lawsuit with the plaintiffs.

Key Background Facts

The defendant, Giacomo Mori, was a managing director in the Milan, Italy, office of AlixPartners.

Italian law applied to some aspects of this dispute and experts on Italian law testified that Mori had a right to take and use documents from AlixPartners that he needed for his lawsuit with AlixPartners about his departure. See AlixPartners v. Mori, 2019 WL 6327325 (Del. Ch. Nov. 20, 2019) (prior decision in this case addressing jurisdictional issues). See generally Slip op. at 20 and n. 92 (observing that the court often grapples with employment disputes that the parties make into partnership agreement disputes, citing a recent case as another example.)

Breach of Confidentiality Obligations

This post-trial opinion features an application of the Italian Constitution, as well as a discussion of decisions of various courts throughout Italy, in addition to Italian statutory authority and various opinions of experts on Italian law.

Importantly, regarding whether there was a defense to a breach of a confidentiality provision for Mori to use some of the documents in connection with his separate employment litigation, the court relied on Section 178(1) of the Restatement (Second) of Contracts for the statement of law that a promise or other term of an agreement is unenforceable in some instances on grounds of public policy. Section 178(3) identifies four additional factors to consider “in weighing a public policy against enforcement of a term.”

The court assumed that Italian law provided a strong public policy to permit Mori to use confidential documents for use in his Italian litigation, based on either Section 178(1) of the Restatement (Second) of Contracts, or Section 187(b) of the Restatement (Second) of Conflict of Laws, regarding the law of the state chosen by the parties to govern their contractual rights and which state has an applicable fundamental policy relevant to an issue in dispute. The court also cited to Williston on Contracts, Section 19:8.

Nonsolicitation

The court found no violation of a nonsolicitation clause, and employed reasoning that has widespread applicability. The court explained that a non-solicitation provision “should not be construed to prohibit a former employee from responding to unsolicited inquiries. Otherwise, a former employee would have to be on guard at every turn and possibly barred from responding to a host of acceptable communications.”

Trade Secrets Under Italian Law

The court determined that Italian law applied to the issue of trade secrets and that the Delaware Uniform Trade Secret Act does not have extraterritorial effect. The court emphasized the challenge it faced to independently test the parties’ Italian law contentions by being unable to conduct its own independent research in original Italian sources, and that it was entirely reliant on the information provided by the parties, one of whom appeared pro se. Therefore the court cautioned that the precedential value of its decision on Italian trade secret law should be understood to be limited to the facts of this case and the law presented by the parties. Nonetheless, the court regaled the reader with a discussion of multiple decisions of several courts throughout Italy that decided trade secret issues under Italian law.

Permanent Injunction and Damages Denied

The court provides the reasons why permanent injunctive relief was denied. Notably, an Italian court awarded the defendant in this case nearly $2 million against AlixPartners regarding employment claims.

The Court of Chancery awarded a mere $7 in nominal damages, which was the amount requested by the plaintiffs, and which for all practical purposes, as an economic matter, is the functional equivalent in the context of this case, of no damages awarded for the breach of confidentiality provisions.