In O’Brien v. IAC/Interactive Corp.,  No. 3892-VCP (Del. Ch. Aug. 14, 2009), read decision here, the Court of Chancery addressed cross-motions for summary judgment in what could be considered a routine action for advancement and indemnification of a former officer against his former employer/corporation, except that the factual setting is far from routine. Indeed, the facts are too long and too complicated to be discussed in any great detail in this summary.

Kevin Brady, a highly regarded Delaware litigator, provided the synopsis of this case.


On July 15, 2008, the Plaintiff O’Brien, a CEO and COO Precision Response Corporation (“PRC”) from October 20, 1998 to November 20, 2003, filed this action seeking advancement and indemnification for attorneys’ fees and expenses arising out of a dispute with a third-party which ended with an arbitration decision issued in January 2005. While O’Brien was successful in the arbitration (he was found not liable for the claims against him), the arbitrator determined that each party would be responsible for their own costs.

Indemnification and Which Law Applies — Florida or Delaware

When he was hired as CEO, O’Brien entered into an Indemnification Agreement with PRC, wherein PRC agreed to indemnify O’Brien “to the fullest extent permitted by law.” In 2000, PRC merged with and became a wholly-owned subsidiary of Defendant IAC/InterActiveCorp (“IAC”). IAC assumed the Indemnification Agreement between PRC and O’Brien. The Indemnification Agreement between PRC and O’Brien was governed by Florida law, but the merger agreement with IAC/Interactive Corp. assumed the obligation was governed by Delaware law.

Merger Two – Arbitration Then Termination

In August 2001, PRC acquired Avaltus, Inc. (“Avaltus”). The merger agreement in that instance contained a dispute resolution clause requiring arbitration. The provision also stated that: “[t]he decision of the arbitrator or arbitration panel will not be subject to appeal, review or re-examination, except for fraud, perjury, manifest clerical error, or evident partiality or misconduct by an arbitrator that prejudices the rights of any party to the arbitration.”

In October 2002, PRC found itself in arbitration after being sued by the principal shareholder of Avaltus attempting to recover certain escrow funds. On November 20, 2002, PRC terminated O’Brien and then asserted counterclaims against O’Brien, and another former PRC executive. O’Brien denied the allegations and then sought a declaratory judgment that he had not committed the alleged wrongs. Despite a January 9, 2003 request for advancement of his attorney fees before arbitration, O’Brien was rebuffed by PRC and denied advancement of fees and expenses during the arbitration.

On January 19, 2005, the arbitration panel found that neither party had prevailed and accordingly required each party to be responsible for its own fees and expenses. On February 23, 2005, O’Brien again requested that PRC indemnify him for his successful defense in arbitration. After PRC denied O’Brien yet again, he filed suit against PRC in Florida for indemnification. Over a two year period, O’Brien’s claims bounced between appellate and trial courts. Ultimately, on May 29, 2007, the Florida trial court entered an order finding that O’Brien was entitled to indemnification and required the parties to engage in further proceedings to ascertain the amount O’Brien was owed. Those proceedings never materialized because on January 23, 2008, PRC filed for bankruptcy resulting in an automatic stay of the Florida action. PRC’s Chapter 11 plan for reorganization was approved on June 20, 2008 thus enjoining O’Brien from moving forward against PRC in Florida and effectively diminishing any potential recovery to a negligible amount. O’Brien filed suit in Delaware on July 15, 2008 seeking indemnification and advancement for fees and expenses incurred in arbitration and the Florida and Delaware actions. O’Brien moved for summary judgment on the advancement claim. IAC moved for summary judgment as to both claims.

Because there were cross motions for summary judgment on the claim for advancement, the Court noted that under Rule 56(h) “where, as here, the parties have cross moved for summary judgment and have not presented argument that there is an issue of fact material to the disposition of either motion, “the Court shall deem the motions to be the equivalent of a stipulation for decision on the merits based on the record submitted with the motion.”

IAC Asserts the Statute of Limitations

IAC argued that O’Brien’s breach of contract claims were barred by the three-year statute of limitations applicable to indemnification, advancement and contracts claims. O’Brien countered by arguing that the indemnification claim was subject to Florida’s five-year statute of limitations. Alternatively, O’Brien argued that even if Delaware’s three-year statute applied, the claim did not arise until the breach became apparent, which occurred when PRC filed for bankruptcy and thus became unable to indemnify. Finally, O’Brien argued that, in a court of equity, the doctrine of laches controls and “Delaware’s equity jurisprudence militates against rigid application of the statute of limitations in the circumstances of this case.”

Laches, Not the Statute of Limitations, Guides Considerations of Timeliness

The Court noted that “[a] cause of action for indemnification accrues when a director or officer entitled to indemnification can be confident any claim against him has been resolved with certainty.” Certainty is not achieved “[u]ntil the final judgment of the trial court withstands appellate review . . . .” IAC alleged that the applicable date was April 19, 2005 when the period for appealing the arbitration award expired. Since O’Brien filed this action on July 15, 2008, that date was outside the three-year statute of limitations period and would bar O’Brien’s claims. Conversely, O’Brien alleged that the applicable accrual date is much later than April 19, 2005 and that the statute of limitations did not begin to run from the date based on the entry of an award because the Arbitration Award specified that neither party prevailed.

After a lengthy discussion of the factual background and procedural setting, the Court stated that it did not need to determine the applicable date for statute of limitations purposes, because “the doctrine of laches applies to this controversy and that based on the unusual conditions and exceptional circumstances of this case, it would be inequitable for this action to be time-barred.” Unlike a statute of limitations, the doctrine of laches bars a lawsuit where there has been “an unreasonable delay by a party, without any specific reference to duration, in the enforcement of a right. An unreasonable delay can range from as long as several years to as little as one month.” Statutes of limitations are not controlling in equity and:

while an analogous statute of limitations period at law may create a presumption that a longer delay is unreasonable and would bar a claim for laches, unusual or mitigating circumstances may rebut the presumption that the claim is stale. . . . Thus, laches may not bar an action that would be untimely in terms of the analogous statute of limitations if, in terms of equity, the plaintiff’s delay has caused no prejudice to the defendant and is not unreasonable based on the unusual conditions of the action.

The Court found “that unusual and mitigating circumstances exist here to rebut the presumption that the three-year statute of limitations period should be controlling.” First, the arbitration panel’s decision “that neither party had prevailed and each was responsible for its own costs created a cloud over O’Brien’s claim for indemnification.” O’Brien then spent significant time in limbo in the Florida courts on his indemnification claim. In addition, because IAC controlled PRC and its litigation strategy, IAC knew of PRC’s inevitable inability to indemnify. IAC could not claim prejudice in Delaware after the way it orchestrated PRC’s defense in Florida. Therefore, given the circumstances, the doctrine of laches did not bar O’Brien’s indemnification claim. However, the Court did hold that “because O’Brien’s right to indemnification of his expenses is subject to a final determination on the merits by this Court, he may be required to provide a full accounting of his expenses to IAC and repay any funds to which he ultimately is found not to be entitled under the terms of the Indemnification and Merger Agreements.”

O’Brien also prevailed on his claim for advancement. IAC’s sole defense was that O’Brien was pursuing a stale indemnification claim. Since the Court had already addressed that argument when the Court decided the motion for summary judgment, the Court granted O’Brien’s similar motion as to advancement and denied IAC’s motion for summary judgment.

Supreme Court Denies Petition for Interlocutory Appeal

On September 9, 2009, IAC petitioned the Delaware Supreme Court, pursuant to Supreme Court Rule 42, for an appeal from the Court of Chancery’s August 14, 2009 interlocutory order for indemnification and advancement. On September 18, 2009, the Supreme Court denied the petition concluding that “exceptional circumstances as would merit interlocutory review of the Court of Chancery’s memorandum opinion and order do not exist in this case.” IAC/Interactive Works f/k/a USA Networks, Inc. v. O’Brien (Del Supr., No. 531, 2009, Sept. 18, 2009), read Order here.