The Delaware Court of Chancery’s confidential and expedited arbitration procedure, in which selected disputes are heard before a member of the Court at a final hearing within 90 days of a complaint being filed, as described in a prior post here, have been challenged in a federal lawsuit that was filed in October to contest the constitutionality of the procedure. The Court of Chancery sits in Wilmington in the New Castle County Courthouse pictured below at the left.

The Court of Chancery Courthouse in Georgetown is featured in the photo at the right. The Court of Chancery also sits in Dover. Due to the recusal of all the members of the U.S. District Court for the District of Delaware, the case is being heard be federal judge Mary McLaughlin of the U.S. District Court for the Eastern District of Pennsylvania, sitting in Philadelphia. Prof. Brian J.M. Quinn wrote about an oral argument in the case before Judge McLaughlin recently in which she expressed some skepticism about the alleged secrecy of the arbitration conducted by members of the Court of Chancery.  David Marcus of The Deal wrote about the hearing as well. Sean O’Sullivan of the Wilmington News Journal also discussed the arguments that both sides made to the federal court. Reportedly, only about 6 cases have taken advantage of this procedure in the more than two years since it has been available.

The actual rules allowing for confidential arbitration by one of the five members of Delaware’s court of equity, are available here.  Key points about the relatively new procedure and rules include the following:

  • As a prerequisite for cases seeking money damages, the amount in controversy must exceed one million dollars.
  • The arbitrator will be a permanent sitting member of the Court.
  • A preliminary conference will be scheduled within 10 days of the commencement of the case to address procedural and substantive aspects of the case.
  • The statutory authority for the parties to consent to this procedure is 10 Del. C. Section 349.
  • The arbitration hearing will generally “occur no later than 90 days following receipt of the petition”. See Del. Ch. Ct. R. 97(c).
  • The arbitration proceedings will be confidential.
  • Discovery and motion practice are expected to be limited.
  • Appeals will be directly to the Delaware Supreme Court
  • Filing and hearing fees are as follows: $12,000 for filing the petition, and $6,000 for each day of arbitration (to be shared by the parties). See Order of Jan. 4, 2010 establishing fee schedule here.

(Parenthetically, the fact that a decision on the validity of a procedure used in a Delaware state court, is being made by a judge in Philadelphia may be indicative of the overlapping business and cultural ties between Wilmington and the birthplace of U.S. independence about 30 miles north of Wilmington. Though the customs, standards and “unwritten rules” of practicing law differ greatly in Wilmington compared to Philadelphia, there is a substantial amount of “cross-pollination” that occurs from lawyers and firms–and businesses–that operate in both cities.)

Doroshow, Pasquale, Krawitz & Bhaya v. Nanticoke Memorial Hospital and Maria Acosta, Del. Supr., No. 41, 2011 (Jan. 23, 2012)

Issue Addressed

Whether Delaware recognizes an attorney’s right to assert a charging lien.

Answer:  Yes.  (Compare recently recognized “attorney retaining lien” to keep file until paid for fees, infra.)

This summary was prepared by a former associate of Eckert Seamans Cherin & Mellott, LLC.

Background and Legal Analysis

In order to understand the Delaware Supreme Court’s recognition of this lien, a brief background is needed.  Maria Acosta was seriously injured in a car accident, and treated at Nanticoke Memorial Hospital. Her hospital bill totaled more than $150,000. Since Acosta could not pay her medical bills, the hospital filed a Notice of Hospital Lien against any recovery or judgment obtained by Acosta arising from the car accident.

Acosta retained the law firm of Doroshow Pasquale to represent her on a contingency basis in a personal injury suit against the person who caused the accident. Doroshow Pasquale settled Acosta’s suit with the personal injury defendant’s insurance company for $19,671.49. Pursuant to the contingent fee agreement, Doroshow deducted 40% of the award and put the remaining money in escrow. Acosta never gave Doroshow permission to release the escrowed funds, so Doroshow filed an interpleader suit against Acosta and Nanticoke Memorial seeking permission to release the funds.

Nanticoke answered the complaint claiming that it was owed the entire $19,671.49, and that Doroshow was not entitled to assert an attorney’s charging lien. The Superior Court ruled in favor of Nanticoke, and Doroshow appealed.

The Delaware Supreme Court undertook a full study of the common law history of the attorney charging lien, which is defined as “the right of an attorney at law to recover compensation for his services from a fund recovered by his aid, and also the right to be protected by the court to the end that such recovery might be effected.” The Court noted that while charging liens are equitable in nature, they are based on general principles of justice, and should be asserted as a common law right.

Other Issues Addressed

The Court also addressed its prior decision in DiLoreto v. Tiber Holding Corp., 804 A.2d 1055 (Del. 2001), declining to adopt a “first in time, first in line” rule for determining the precedence of charging liens. Here, the Court held that “[t]he attorney’s charging lien rests on a higher level than all other liens and is not subject to a first in time, first in line rule.”

Additionally, the Court implored the Delaware General Assembly to consider the public policy issues surrounding the precedence of charging liens by competing professionals—namely attorneys and doctors. In this case, the Court held that Doroshow was entitled to its fee even though Nanticoke asserted a lien against Acosta first. However, the Court acknowledged that it is not a “superlegislature,” and deferred any decision on the precedence of charging liens to the General Assembly.

Related

A recent decision from the Court of Chancery in Judy v. Preferred Comm. Sys., on a lawyer’s right to retain the file of a client who has not paid her bill, is highlighted here. This related decision recognizing a retaining lien is another option may be relevant to attorneys exploring their options to collect from deadbeat clients.

 

We are pleased to announce that Kevin F. Brady, a veteran Delaware litigator, will be joining the Wilmington, Delaware, office of Eckert Seamans, effective February 15, 2012. Regular readers will recognize Kevin’s name as a regular contributor to these pages. Kevin spent 20 years as a litigator with the Delaware office of Skadden Arps and has been recognized as one of the nation’s most prominent practitioners in the increasingly important area of litigation known as electronic discovery.  Most recently, he spent the last 6 years at the Wilmington office of Connolly Bove. Kevin’s list of publications in the area of corporate law rivals the production of many law professors, but more importantly, his many years of experience at the highest levels of practice, and the respect he has earned from the bench and bar for his uncommon blend of integrity, industriousness and insight, will provide an enviable addition to the roster of the Wilmington, Delaware, office of Eckert Seamans.

Amalgamated Bank v. NetApp, Inc., C.A. No. 6772-VCG (Del. Ch. Feb. 6, 2012).

Issue Addressed

Whether supplemental documents should be produced to comply with post-trial determination pursuant to DGCL Section 220 that books and records must be provided.

Background

In October 2010, the plaintiff in this case filed a stockholder derivative action in California based on a Caremark claim, relying on Delaware Law. Prior to that California case, the plaintiff had not previously filed a books and records demand pursuant to DGCL § 220.  The California court gave the plaintiff an opportunity to amend its complaint, explaining that it was relying on the Delaware Supreme Court’s decision in King v. VeriFone Holdings, Inc., 12 A.3d 1140 (Del. 2011) (highlighted on these pages here), to give the plaintiff an additional period of time to file its Section 220 case in Delaware before the deadline for amending the California complaint.

The Section 220 case in Delaware was filed on August 9, 2011 and the defendant answered the complaint on August 30, 2011.  The plaintiff moved for summary judgment on September 12, 2011.  Without having received any information pursuant to the Section 220 action, the plaintiff filed a second amended complaint in California. Next, in the Delaware Section 220 action, the plaintiff filed a Motion to Expedite on September 26, 2011.  A trial in the Delaware Section 220 case was held on November 16, 2011, and the Court of Chancery ruled from the bench that the plaintiff had a proper purpose for its books and records demand, and ordered production.

Post-trial Production Issue in this Section 220 Case.

This is one of the rare Delaware opinions which addresses compliance, post-trial, with a ruling pursuant to Section 220, that certain books and records must be produced. This decision ruled on a Motion to Compel Production of Documents based on a post-trial decision to produce books and records. The plaintiff alleged that the production was not in full compliance with the post-trial ruling in favor of the plaintiff pursuant to Section 220.

The issue of electronically stored information (ESI) does not appear to have been an issue in the post-trial motion to compel in this case. [Kevin Brady and I will be publishing an article in the near future that addresses the lack of controlling authority in Delaware on the issue of what ESI must be provided after a determination has been made that “books and records” must be produced pursuant to Section 220.]

Procedural Posture

On December 5, 2011, the Court of Chancery held a teleconference to instruct the parties on the “universe of documents that needed to be made available” based on its post-trial ruling in favor of the plaintiff in November. This was designed to address the dispute that arose between the parties over the scope of the material to be produced as ordered after trial.  On December 7, 2011, the defendant produced 286 heavily redacted pages of documents.  On December 20, 2011, the plaintiff filed a Motion Requesting to be Allowed to File Under Seal, a Motion to Compel Documents.  That motion to file under seal was granted on January 3, 2012, and on January 4, 2012 the plaintiff filed his Motion to Compel Documents and the parties stipulated to a briefing schedule.  On January 13, 2012, the defendant filed its Answer to the Motion to Compel. On January 23, 2012 the plaintiff filed its Reply to the Motion to Compel.  The Court held a teleconference for argument on the motion on February 1, 2012. This 15-page decision followed on February 6, 2012.  Meanwhile, however, the California derivative action was proceeding on a parallel course. The plaintiff met a deadline in California on February 1, 2012 by which a Reply Brief on the Motion to Dismiss in California was due.

Analysis of Section 220 Standard

The Court reviewed the familiar Section 220 standards for seeking an inspection of corporate books and records, which include the prerequisite of establishing a proper purpose reasonably related to one’s status as a stockholder.  The Court noted that seeking books and records to amend an already filed shareholder complaint can be a proper purpose but the Court also observed that it would be more consistent with the requirements of Rule 11, and economy, to bring a Section 220 action before filing a plenary action. It is well-established that a proper purpose under Section 220 includes the goal of seeking information necessary to meet the pleading requirements in a plenary action.

King v. VeriFone Holdings, Inc.

The Court of Chancery in this opinion discussed the recent Delaware Supreme Court decision in King v. VeriFone, which addressed the issue of whether seeking books and records to amend a dismissed stockholder derivative complaint could constitute a proper purpose.  The Delaware Supreme Court reversed the Chancery decision in King v. VeriFone, and established the Delaware law in Section 220 cases as follows: a rule that would automatically bar the stockholder-plaintiff from bringing a Section 220 action solely because that plaintiff previously filed a plenary derivative suit, was unsupported by the text of the statute or the policy underlying Section 220. See footnote 50.

The Section 220 trial in this case on November 16, 2011, relied heavily on statements by the presiding judge in California and his comments about allowing the plaintiff to pursue a Section 220 case and to use that information in the pending California derivative action.

Motion to Compel Post-Trial Section 220 Production to Comply with Post-Trial Order 

In its Motion to Compel Post-Trial Production, the plaintiff argued that the production of books and records provided by the defendant, after trial, was insufficient in a variety of ways.  The defendant opposed the motion, denying that its production was incomplete but in any event stating that the purpose for plaintiff needing books and records was now moot in light of developments in the parallel California derivative action.

The Court distinguished the Delaware Supreme Court decision in King v. VeriFone, as applied to the facts of this case, in light of post-trial developments in the California case, regarding whether plaintiff still had a proper purpose in seeking books and records, even though that prerequisite had been established and acknowledged as being satisfied at trial. The Court explained that the previous need to obtain data to use in the California derivative action had become moot due to developments in the California litigation that occurred after the trial in the Section 220 case.  Specifically, the Court of Chancery determined that it was no longer possible to use books and records to amend the California complaint in the pending derivative matter.

The Court of Chancery concluded its reasoning by emphasizing that: “nothing in King or Section 220, however, permits a books and records examination to become a device for parallel discovery to be pursued in two jurisdictions” nor does the theoretical possibility of leave to amend the pleading convert the desire for such discovery into a proper purpose” See footnote 82.

Postscript. Substantial commentary on Section 220 cases has filled the electronic pages of this blog but suffice it to say for purposes of these closing comments that this case serves as another reminder of the expense of Section 220 cases with no guarantee, ex ante, whether a Section 220 case will “survive a cost/benefit analysis”. For example, in this case, the plaintiff won after the expense of a trial the right to receive books and records that were sought pursuant to Section 220. After trial, however, the plaintiff still needed to file a Motion to Compel to obtain the data sought, but that motion was denied, however. At the “end of the day” the plaintiff did not receive all the records he sought.

Williams v. Calypso Wireless, Inc., C.A. No. 7140-VCL (Del. Ch. Feb. 8, 2012).

Issue Addressed

Whether it was appropriate to appoint a receiver to dissolve Calypso Wireless, Inc.?

Short Answer

The Court of Chancery appointed a receiver to dissolve Calypso and wind up its affairs in light of Calypso’s failure to comply with an order of the Court requiring it to hold an annual shareholders’ meeting, Calypso’s continual violation of federal securities law, and the lack of any apparent ability to obey the Court order or become compliant with federal law.

Another Chancery decision this month also involved the appointment of a receiver, in a case summarized here, involving the failure to comply with an Order granting a demand for books and records.

This summary was prepared by Tara Lattomus of Eckert Seamans. 

Background

This suit was commenced by David Williams, a former director of Calypso, challenging his removal as a director.  However, this issue was rendered moot by the appointment of a receiver to dissolve the company. 

Calypso came into existence in 2002 after the merger with a now defunct but publicly listed Delaware corporation.  Since the merger, Calypso never held an annual meeting of shareholders and had not filed a 10K or a 10Q in nearly four years.  Although Calypso maintains a website that describes the company in favorable terms, the website contains no information about the company’s finances or governance.  However, as of January 31, 2012, Calypso had a market capitalization of approximately $4 million.  Most of the publicly available information about Calypso appears on an online stock message board commonly referred to as iHub.  Calypso’s directors, including Williams, frequently placed anonymous posts on iHub spreading false information about themselves and the company.  Although ascertaining Calypso’s current financial position was difficult, it was clear that it had no income and never generated any revenues.  The only significant asset held by Calypso was a U.S. patent which related to the ability of a mobile device to switch between cell towers and Wi-Fi networks.  The value of the patent was uncertain however, because although Calypso sued T-Mobile for patent infringement, Calypso assigned away its right to receive 28% of the gross recovery as part of a settlement of matter. 

In March 2008, Williams petitioned the Court for an order compelling Calypso to hold an annual meeting.  An order was entered on November 5, 2008, requiring Calypso to hold an annual meeting within 45 days of the entry of the order. 

Williams attempted to compel Calypso to hold an annual meeting, but was unsuccessful.  The company first responded by stating that it could not hold an annual meeting unless it provided stockholders with audited financial statements.  Although, at the time, the SEC had adopted a mechanism for a corporation to hold an annual meeting without audited financial statements, the company made no effort to pursue an exception.  Williams then attempted to collect the company’s books and records so that the financial statements could be prepared.  In the meantime, Williams’ relationship with two other directors, Cristian Turrini and Kyle Pierce, began to deteriorate when he identified unexplained wire transfer and withdrawals and discovered that Pierce’s spouse was disclosing confidential information on iHub and not maintaining his anonymity.  Williams had no problem with the posts, just that they weren’t anonymous.  Turrini and Pierce demanded the return of the corporate records, but Williams refused.  They then sought to remove Williams from the board and called a special meeting on December 15, 2011.  Despite misleading statements in the proxy card, the affirmative vote fell short of the majority of the shares entitled to vote on the issue.  However, Turrini and Pierce claimed that Williams had been validly removed and appointed someone else to take his position on the board.  When Williams challenged his removal, Pierce informed Williams that they had been advised by Delaware counsel that Williams’ removal was valid.  Nobody was ever able to identify this Delaware lawyer.

Summary of Court’s Reasoning

The Court of Chancery began by pointing out that Calypso was required to hold an annual shareholders’ meeting on or before December 22, 2008, over three years ago.  Calypso never asked the Court to modify its order or took any steps to receive the discretionary exception offered by the SEC to hold a meeting without audited financial statements.  Section 322 of the Delaware General Corporation Law (“DGCL”) provides that if a corporation fails to obey an order of the Court there is sufficient grounds for appointment of a receiver. 

After recognizing the scope of a receiver’s powers under DGCL Sections 323 and 291, the Court stated that the case called for a receiver with a broad charge.  The Court recognized that Calypso lacked the resources to hold an annual meeting and had no realistic ability to become compliant with federal securities laws, but what the Court found most troubling was Calypso’s website and its glowing treatment of the company as well as the false statements on iHub.  The Court stated that the online information presented a significant risk of harm to innocent investors. 

Recognizing that Delaware has a powerful interest in preventing its corporations from being used as vehicles for fraud, the Court found it appropriate to appoint a receiver to dissolve Calypso and wind up it affairs.  The responsibilities of the receiver included marshalling the company’s assets, including the patent, and through an appropriate sale process, delivering the value of the patent to Calypso for the benefit of its creditors.

We typically focus on summarizing corporate and commercial decisions of Delaware’s Supreme Court and Court of Chancery, but today we find noteworthy a bevy of new lawsuits just filed in the Delaware Court of Chancery.

These new suits challenge bylaws in several companies that require shareholder suits to be filed exclusively in the Delaware Court of Chancery.  If suits are filed elsewhere, the company threatens to sue those shareholders to recoup fees for breach of the bylaw provision. The challenge is based on the alleged violation of due process rights because there was no mutual consent by the shareholders. The suits were filed by the highly-regarded corporate litigator Michael Hanrahan of the Prickett Jones firm in Wilmington. Among the companies sued by shareholders challenging the exclusive forum bylaw provision, in separate lawsuits, are the following Delaware corporations:

Navistar International Corp., AutoNation, Inc. Chevron Corp., SPX Corp., Superior Energy Services, Inc., Franklin Resources, Inc., Curtiss-Wright Corp., Danaher Corp., and Solutia Inc.

Friend of this blog and well-recognized corporate law expert, Professor Stephen Bainbridge, provides timely comments on these new lawsuits. Thomson Reuter’s Alison Frankel wrote an excellent article about these cases that provides a very helpful overview and also has a link to the actual complaints. Broc Romanek on his site called The Corporate Counsel.net, provides helpful observations on this development.

The concept of a forum selection clause in a corporate charter was given momentum by the dicta and citations to Delaware decisions and law review articles, in Vice Chancellor Laster’s footnote 8 in his opinion in the case of In Re Revlon, Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL (Del. Ch. March 16, 2010), read opinion here.

Scholarship on the Topic

Corporate law scholars have written extensively about this topic and we have featured much of that scholarship on these pages. For example, Professor Joseph Grundfest of Stanford, one of the early promoters of the idea of adding a charter provision (as compared with a bylaw provision), with an exclusive forum selection clause for shareholder suits, presented a lecture in Delaware before the Bench and Bar on the issue, as discussed on these pages here . Prof. Steven Davidoff provided insights on the topic here. Ted Mirvis of Wachtell Lipton, who often litigates high-stakes matters in the Delaware Court of Chancery, has also been credited with this particular forum-selection concept, as indicated in his 2007 article available here.

Although Delaware Courts have not squarely decided the issue of a forum selection clause in a bylaw provision, that is not voted on by the shareholders, a California court struck down a provision in a case noted on these pages here. Professor Bainbridge comments on the topic here.  Prof. Brian J.M. Quinn wrote a law review article on the issue, available here.

Our post here  on this topic and related issues, includes commentary by the late, great scholar Prof. Larry Ribstein and others who have addressed the related problems with multi-jurisdictional litigation and the challenges that arise with an apparent increase in the number of non-Delaware courts deciding issues of Delaware corporate law. A ruling on these new cases by the Delaware Court of Chancery, which will likely be appealed to the Delaware Supreme Court, will be a welcome addition to provide a measure of certainty on this cutting edge topic.

Supplement: Corporate attorney Claudia Allen prepared a study of Delaware forum selection clauses in charters and bylaws that is available via a post by Professor Bainbridge here. Delaware litigator Edward Micheletti has written an article on the issues of multi-jurisdictional litigation that these bylaw amendments are attempting to address. Kevin La Croix on his blog called The D & O Diary compiles articles and statistics and related sources on the various issues related to an increase in M& A/Takeover litigation here  including multi-jurisdictional aspects of that litigation here.

The Wilmington News Journal has an article co-authored by Phil Milford that examines average awards of attorneys’ fees in cases challenging deals even when it is not apparent if the shareholders are receiving a quantifiable benefit from the lawsuit.

N.K.S. Distributors, Inc. v. Tigani, et al., C.A. No. 4640-VCP (Del. Ch. Feb. 3, 2012).

This summary was prepared by Tara Lattomus of Eckert Seamans.

Issues Addressed
Whether the automatic stay provisions of section 362(a) of the Bankruptcy Code deprived the Chancery Court of jurisdiction to terminate an existing sealing order where one of the individual defendant involved in the case had filed for bankruptcy.

Short Answers
The Court of Chancery in this decision concluded that it retained jurisdiction to determine the applicability of the automatic stay to litigation pending before it.  Specifically, the Court determined that it had jurisdiction to determine whether the automatic stay applied to the request to terminate the sealing order.  Turning to the merits, the Court then considered whether the request to unseal certain portions of an expert report and trial transcript should be granted.  Finding that the passage of time did nothing to change the fact that the information contained in the report was confidential and proprietary, the Court denied that portion of the request.  With respect to the twelve volume trial transcript, the Court found that with the exception of two volumes, only a handful of pages were redacted and that good cause existed for keeping such information under seal.

However, with respect to two volumes that were placed under seal in their entirety, the Court directed the parties to identify specific portions of those volumes that they believed should be kept confidential, and then to file a redacted, public version of those transcript volumes.

Background

This letter opinion was a result of a request from a reporter of The News Journal for full access to an expert report and the trial transcript.  Portions of the report and trial transcript had previously been designated as confidential and sealed pursuant to Court of Chancery Rule 5(g).  N.K.S. Distributors, Inc. (“N.K.S.”), plaintiff and counterclaim defendant, and Wilmington Trust Company, third-party counterclaim defendant, objected to the reporter’s requests on two grounds.  The first objection was that the Court lacked authority to terminate the sealing order because Christopher J. Tigani, a defendant in the matter, had filed for bankruptcy and the litigation was stayed pursuant to the automatic stay of section 362(a) of the Bankruptcy Code.  Second, they argued that the portions of the documents currently under seal contain non-public financial information and therefore, good cause existed to keep the documents under seal.

Summary of Court’s Reasoning

The Court began by recognizing that the purpose of the automatic stay under the Bankruptcy Code is to protect the debtor from harassment and collection efforts, and to protect all creditors from the overly aggressive collection tactics of a select few.  In short, the purpose of the stay is to maintain the status quo.  The Court did not contest the fact that the overall litigation was stayed pursuant to the automatic stay; however, it also recognized that all proceedings in a case are not lumped together for purposes of the automatic stay, and that some aspects of a case may be stayed and others not.

The Court further reasoned that, while only a Bankruptcy Court can grant relief from the automatic stay, other courts retain jurisdiction to determine the scope of the stay with respect to the litigation pending before them.  Finding that the reporter’s request did not constitute a collection effort, did not permit any of Mr. Tigani’s creditors to obtain payment, and did not disrupt the status quo, the request to terminate the sealing order was properly before the Court.

The Court then considered the reporter’s position that due to the passage of time, i.e., a year since the trial, that the information contained in the report and trial transcript no longer qualified as proprietary information.  The Court concluded that the passage of time did not change the fact that the report contained N.K.S.’s non-public financial information.  Accordingly, the continued enforcement of the sealing order with respect to the report was appropriate.  However, with respect to the transcript, the Court concluded that sealing two volumes in their entirety was not appropriate.  Of the other ten volumes of the transcript, only 87 pages were redacted.  Accordingly, the parties were directed to redact confidential portions of the two volumes and to file versions suitable for public access.

In re Delphi Financial Group Shareholder Litigation, Consol. C.A. No. 7144-VCG(Del. Ch. Feb. 7, 2012). 

Issue Addressed

The Court of Chancery in this decision addressed a motion to vacate the stipulated leadership structure and to appoint a new lead plaintiff and new lead counsel in a class action.

Short Overview 

The Court addressed a motion by plaintiff, Oklahoma Firefighters Pension and Retirement System, seeking appointment as lead plaintiff representing the Class A stockholders of Delphi Financial Group and the appointment of its counsel as co-lead counsel, alongside current lead counsel.  At the conclusion of a teleconference regarding the motion, the Court requested that the parties attempt in good faith to negotiate a leadership structure that will be acceptable to all involved, in recognition of the fact that the participating law firms should have a better idea than Court on what structure they can employ to best serve the plaintiff class.  The Court was notified, however, that counsel were not able to reach an amicable result.

The Court granted the motion to the extent that it agreed to appoint the Oklahoma Firefighter Pension and Retirement System’s counsel as co-lead counsel alongside the existing lead counsel for the consolidated plaintiffs.  The Court asked counsel to file an amended consolidated complaint incorporating the strongest statement of the case of the plaintiff class.

Standard Applied 

In resolving the dispute over lead counsel, the Court’s “overriding goal is to establish a leadership structure that will provide effective representation to the stockholder class”.  The well-known Hirt factors provide “guidance in reaching a decision that achieves that objective.” See footnotes 2 and 3 (citing Hirt v. U.S. Timberland Service Co. LLC, 2002 WL 1558342, at *2 (Del. Ch. July 3, 2002) and In re Del Monte Foods Co. S’holders Litig., 2010 WL 5550677, at *6 (Del. Ch. Dec. 31, 2010)).

The Court also emphasized that the Hirt factors are not a checklist that will serve as a scorecard to determine a winner, but rather a guidepost in the analysis by the Court of the primary issue regarding which leadership structure will ensure the most effective representation of the plaintiff class.  The Court also explained that a firm “does not win the lead counsel’s spot by accumulating the most points” as it might by demonstrating that its client owns the most shares or that it has litigated the most cases….

The ultimate focus in selecting lead counsel is to determine the best interests of the plaintiff class.  The Court then reviewed each of the factors. For example, the Court rejected any notion that the experience of one firm in this type of case gives it any advantage over the other competing firms. Also, the Court explained that to avoid rushes to the courthouse, the court gave no special weight to the status of first-filing plaintiff.  The Court discounted the argument that the existing counsel for the plaintiffs should have any preference because they were the first filers, and also rejected the argument that adding a co-counsel would interfere with the leadership structure currently in place.

The Court was not persuaded by the arguments of existing counsel for plaintiffs who opposed further additional lead counsel, “questioning the ability of all counsel to work productively together”.

In closing, the Court vacated its prior order appointing lead counsel and expressed its optimism that the parties could work productively together as co-lead counsel, and directed that the parties should supply an appropriate form of order.

In Danenberg v. Fitracks, C.A. No. 6454-VCL (Jan. 3, 2012), the Court of Chancery granted summary judgment in favor of the petitioner Danenberg on the issues of liability for advancement and indemnification on the grounds that the claims in the underlying case pending in Delaware arose out of representations Danenberg made in his capacity as the CEO of Fitracks.

This summary was prepared by Kevin F. Brady

Background

Fitracks was acquired by Aetrex in a triangular merger in 2008.  As part of the merger agreement, Danenberg and others were given the right to form a new company that would receive an exclusive worldwide license to develop “Virtual Stores.”  Danenberg formed  Just4Fit, Inc., as the entity through which Danenberg pursued the Virtual Store concept.  Aetrex  and  Just4Fit  executed  a Virtual  Store  License Agreement that required that Just4Fit establish a certain numbers of Virtual Stores by certain dates to retain its license.  A dispute subsequently arose as to whether Just4Fit hit those benchmarks.  Litigation ensued in the District of Delaware wherein Aetrex alleged, among other things, fraud, civil conspiracy, and unjust  enrichment.  Aetrex argued that “Danenberg solicited Aetrex with an idea to develop  a ‘Virtual Store’ concept and that representations made to Aetrex and provided by Danenberg as to the intended appearance . . . of Virtual Stores, and that ‘[i]n reliance on Danenberg’s representations regarding (among other things) the intended purpose and appearance of Virtual Stores, Aetrex agreed  to grant Danenberg a limited license to open Virtual Stores in the form that Danenberg had  represented to Aetrex prior to signing the V[irtual] S[tores] License Agreement.’”

Procedural History

Danenberg moved to dismiss the underlying case for lack of personal jurisdiction.  In its brief in opposition to the motion to dismiss, Aetrex represented to the Court that it was relying on Danenberg’s pre-merger representations.  In May 2011, Danenberg filed a petition in the Court of Chancery seeking advancement and in September 2011, the parties cross-moved for summary judgment on liability for advancement in the District Court action and indemnification in the Court of Chancery action.  The lawyers for Fitracks (who were the same lawyers for Aetrex in the District Court) represented to the Court of Chancery, contrary to their representations to the District Court, that they were not suing Danenberg for any pre-merger conduct.

Analysis

Fitracks’ bylaws provide that Fitracks is required to indemnify “its directors  and  executive  officers  .  .  .  to  the  fullest  extent  not prohibited by the Delaware General Corporation Law or any other applicable law . . .”   With respect to advancement, the Bylaws focus on whether the individual was named as a defendant “by reason of the fact” that he was a Fitracks’ officer.

Thus the Court’s inquiry focused on whether the allegations in the District Court action sufficiently implicated Danenberg’s conduct when he was CEO of Fitracks.  The Court determined that although the Virtual Store License Agreement ultimately was signed post-closing (and although there were some post-closing negotiations over terms), these events  were the  consequences  of  the  core  agreement  to  provide additional  consideration to Danenberg and others in the form of the Virtual Store Provision.  In addition, the Court found that the claims  in Aetrex’s complaint “necessarily relate in significant part to representations made by Danenberg in his covered  corporate capacity during the pre-merger negotiations” and that Aetrex “cannot disavow its representations for the limited purpose of avoiding the advancement obligations it triggered by choosing to sue Danenberg personally.”

As a result, the Court concluded that Danenberg was entitled to advancement for 100% of his fees and expenses for defending against the underlying action.  Moreover, because Danenberg was successful on the merits in seeking advancement in this action, the Court found that he was entitled to indemnification for the fees and expenses incurred in this proceeding.

In a case involving allegations of misappropriation of proprietary and confidential information from a former employer, the Court of Chancery in Gore v. Long. et al. , C.A. No. 4387-VCP (Dec. 28, 2012), addressed a unique issue regarding a motion to strike certain testimony of one of the defendants.  In Count VI of the Amended Complaint, Gore asserted a civil cause of action for unauthorized access to and misuse of computer system information under 11 Del. C. §§ 932 and 935 which is also punishable as a criminal matter.  As a result, testimony concerning unauthorized access to or misuse of computer system information reasonably could be used to incriminate the witness.  Gore called defendant Darrell Long to testify in Gore’s case-in-chief and Long invoked his constitutional rights against self-incrimination and refused to answer certain questions regarding the issue of downloading data to a USB drive before he left employment at Gore.  On friendly cross-examination, however, he testified as to why he had legitimate reasons to access that information and denied disclosing or using any such confidential information after he left Gore and went to work for defendant BHA Group, Inc. (d/b/a “GE Energy”).

Parties’ Contentions

Gore argued that Long waived the privilege for three reasons: (i) Long’s testimony regarding access to Gore documents for legitimate business reasons overlaps with its questions regarding whether and why he downloaded “a massive amount of data” to his personal USB and other data storage devices; (ii) to the extent that Long testified that he did not use or communicate any Gore confidential information while employed by GE Energy, Gore claimed that it should have been permitted to inquire into the related issue of what happened to his personal USB and other storage devices containing Gore documents after he left Gore; and (iii) Long’s testimony regarding retention of storage devices containing Gore information to the extent that: (a) returning his company Blackberry supports an inference that Long did not retain any of the data that previously had been stored on that device once he returned it; or (b) retaining his cell phone, including the business contacts stored on it, supports a finding that Long retained Gore customer and supplier information.  The defendants countered that there was no waiver and even if there was, the correct steps would be for Gore to have sought to reexamine Long within the scope of the purported waiver, which it failed to do.

Legal Analysis

In analyzing the law regarding the waiver of constitutional privileges, the Court explained that “to the extent a witness testifies to a matter by choice, the witness invites his or her adversary to attempt through an adverse examination to undermine the inferences to be drawn from that testimony.”  Thus, the Court focused on whether the questions Long refused to answer were both “reasonably related” to and among the “details and particulars” of the testimony he gave in response to Defendants’ counsel’s friendly cross-examination.

After a detailed factual analysis, the Court found that as to questions about whether and why Long downloaded documents from his personal drive onto a USB device are “reasonably related‟ to his testimony that he saved these documents for . . . legitimate business reasons,” the Court concluded that no waiver had occurred. The Court found that because Long did not testify that he downloaded Gore documents for legitimate reasons, questions about why he downloaded documents to a USB device are neither “reasonably related” to nor among “the details and particulars” of the testimony he voluntarily gave regarding that subject.

With respect to the issue of “what Mr. Long actually did with the thousands of Gore documents he downloaded to his USB devices in his final days at Gore is “reasonably related” to his testimony that he did not communicate or use that same information at GE,” the Court found that because Long testified that he never communicated or disclosed Gore documents to anyone at GE Energy, “Long necessarily testified that he never physically delivered a USB device containing such documents to anyone at GE Energy. Having himself opened the door to questions concerning any possible way in which he might have communicated or disclosed Gore documents, Long then could not deny Gore, or the trier of fact, the benefit of subjecting his testimony to the truth-testing process of adverse examination.”  As a result, the Court found that “once Long testified that he did not disclose or use Gore information in any way, Gore should have been permitted to inquire into what documents, if any, Long possessed after leaving Gore and the relative ease with which he would have been able to disclose or use them while employed at GE Energy.  Such questions are “reasonably related” to and among the “details and particulars” of Long’s blanket denials that he disclosed or used Gore documents.”

With respect to the final issue of whether Long’s testimony that he returned his company Blackberry and retained his personal cell phone waived a privilege regarding whether he retained any external data storage devices containing confidential information after he left Gore, the Court found that no waiver had occurred.  Long’s testimony concerning the Blackberry is limited to the return of a physical device belonging to Gore and does not preclude an inference based on other evidence that Long retained the electronic data that may have been stored on the Blackberry.  As to Long’s cell phone, Plaintiff’s questions on this subject were limited to whether Long printed out any customer or supplier information from the Lotus Notes program on his Gore computer. The fact that Long retained his personal cell phone, including the business contacts stored in it, simply does not overlap with Plaintiff’s narrow questions.

Appropriate Remedy

While Gore argued that Long’s testimony should be stricken, the defendants argue that, “[i]f there was any waiver of Mr. Long’s rights against self-incrimination based on the scope of his testimony, it was during his friendly cross” and, therefore, “Gore could have sought to examine Mr. Long within the scope of the purported waiver.”  In addition, because “Gore chose not to conduct any significant hostile redirect,” Gore is not entitled to strike any portion of Long’s testimony.  In rejecting the defendants’ argument, the Court found that certain portions of Long’s testimony evaded “a searching, adverse examination.” The Court went on to note that “an equitable balancing of the prejudice suffered by Gore against the detriment to Long does not require an express finding of waiver.”  Instead the Court chose to strike Long’s testimony “denying that he communicated, disclosed, or used any Gore confidential information after leaving Gore …  except to the extent such testimony is limited to communications or disclosures orally, verbally, or in paper format.”  By way of footnote, the Court explained that it chose to disregard the testimony instead of finding a waiver because the defendants stipulated that they would consent to such a remedy if necessary “to preserve Long’s constitutional rights” and Gore did not object to that approach.