Delaware Gun Restrictions Held Unconstitutional

This post was written by Eckert Seamans attorney Jamie Inferrera.

A Delaware court recently issued a decision reaffirming an individual’s right to keep and bear arms outside of the home. In Delaware State Sportsmen’s Association and the Bridgeville Rifle and Pistol Club v. Delaware Department of Natural Resources and Environmental Control and Delaware Department of Agriculture, C.A. K18C-05-047-JJC (Del. Super. Oct. 11, 2018), the Plaintiffs challenged a new regulation that prohibited firearms in camping areas of state parks and state forests where people sleep overnight with their families, such as lodges, as well as related restrictions that extended beyond what state statutes provide.

This case was based in part on the Delaware Supreme Court’s ruling in Bridgeville Rifle and Pistol Club, Ltd. v. Small, Del. Supr., No. 15, 2017 (Dec. 7, 2017) (“Bridgeville I”)(previously highlighted on these pages), where the High Court found regulations that banned firearms in all areas of the state parks to be a violation of both the Second Amendment of the U.S. Constitution, and Article I, Section 20, of the Delaware Constitution. Section 20 recognizes a right to bear arms that is much broader than the Second Amendment, and expressly enumerates the right to bear arms for the protection of self, home, family, state, as well as for recreational and hunting purposes.

In a 41-page opinion on cross motions for summary judgment, the Delaware Superior Court held that the new restrictions, while more narrowly-tailored in scope than the blanket restrictions in Bridgeville, were in part both constitutionally and statutorily invalid.

Brief Factual History

Following the Delaware Supreme Court’s decision in Bridgeville I, the State Agencies drafted emergency regulations restricting the possession of firearms in designated “sensitive areas,” which included camping areas in state parks and state forests. The Agencies developed an administrative record including public comments, a hearing officer’s report and legal responses from the Delaware Department of Justice. The Plaintiffs challenged the regulations within two weeks of the effective date.

State’s Burden of Proof

The Court noted the complex nature of the burden of proof in this case. The Plaintiffs challenged both the illegality of the regulations because of statutory preemption and the unconstitutionality of the regulations. Typically, the plaintiff holds the burden of proof challenging the legality of regulations and the regulations are presumed valid. However, when the constitutionality of regulations are challenged, it is on the agency to establish their constitutionality and the regulations are subject to intermediate scrutiny. Doe v. Wilmington Housing Authority, 88 A.3d 654, 666 (Del. 2014)(previously highlighted on these pages); Bridgeville I, 176 A.3d at 656.

Notable Principles of Law

The Court held that the Agencies’ designation of camping areas as “sensitive,” and thus further restricting individuals from carrying firearms, does not survive intermediate scrutiny.

  Right to Bear Arms

The Court noted that the straightforward language in Bridgeville I recognizing “the people’s right to have a firearm while camping overnight in a State park,” Bridgeville I, 176 A.3d at 638, presents a high hurdle to satisfy intermediate scrutiny. The Court took guidance from Bridgeville I and summarized a three-part test for determining if an area’s designation as “sensitive” satisfies intermediate scrutiny: (1) Is there a controlled entry point? (2) Are visitors screened by security? (3) Is the area supervised by law enforcement personnel or easily accessible to law enforcement and emergency responders?

The Court found that the administrative record did not support finding that the aforementioned test is met for camping areas. The Court further noted that the administrative record was void of any evidence that demonstrates that the regulations are related to achieving the Agencies’ generalized safety concern. Thus, the Court struck camping areas of state parks and state forests from the regulations.

  Fourth Amendment Rights

The Plaintiffs also challenged a portion of the regulations that would permit law enforcement officers to ask an individual for identification sufficient to undertake a background check. The Court held that “[t]hese regulations give unfettered discretion to law enforcement to stop visitors, question them and require identification without requiring a scintilla of evidence of criminal activity.” The regulations pertaining to the request for identification were held to be facially unconstitutional, whereby “no set of circumstances exist under which the [regulations] would be valid.” United States v. Salerno, 481 U.S. 739, 745 (1987). A facial challenge to a regulation is the most difficult type of constitutional challenge to mount successfully. Id. The Court struck the portion of the regulations as unconstitutional under both the Fourth Amendment and Article I, Section 6 of the Delaware Constitution.

The Court also struck down a provision of the regulations whereby the Agencies attempted to overreach their authority and recognize out-of-state concealed carry permits for visitors of state parks and state forests. The Delaware Attorney General has the sole authority to issue concealed carry permits. 11 Del. C. §1441(k). The Court held that this portion of the regulations was preempted on state statutory law grounds.

As an appendix to its opinion, the Court provided a redlined version of the regulations that showed the stricken portions that it held unconstitutional and preempted in its opinion. (A local paper published one of several articles about the case.)

Chancery Allows Termination of Merger Agreement Based on Material Adverse Change

The Delaware Court of Chancery recently issued an epic decision that serves as a mini-treatise on several topics of importance to corporate and commercial litigators including: (1) interpretation of material adverse change clauses or material adverse effect clauses in merger agreements; and (2) the meaning and application of the phrase “commercially reasonable efforts” or “reasonable best efforts” often found in merger agreements.

The opinion in Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018), will be firmly ensconced in the pantheon of the most notable decisions of Delaware courts and could easily be the subject of a full-length law review article.  But for purposes of a blog post that merely attempts to highlight the key issues addressed by the court, so that interested readers might review the entire opinion if relevant to their practice, I will focus on several key aspects of the decision only.

Procedural Background:

The procedural context in which this decision was written, was expedited proceedings in which two parties to a merger agreement sought competing rulings on the meaning of the agreement. On the one hand, the seller argued that the merger agreement should be specifically enforced.  The buyer, however, filed a counterclaim that sought a ruling that it properly terminated the merger agreement based in part on the occurrence of a material adverse effect or a material adverse change, as defined in the agreement.  The purchaser prevailed in its argument that it properly terminated the agreement.

Notably, a 5-day trial was held with nearly 2,000 exhibits. A total of 16 witnesses testified, and 54 depositions were lodged.  The trial was held less than 3 months after the complaint was filed.  This 246-page opinion was issued less than one week after the final post-trial briefs and oral argument were completed.

Factual Background:

The detailed facts on which the court’s reasoning and conclusion are based are described in the first 110 pages of this decision. It would be a challenge to do the facts justice in a brief overview, but for purposes of providing the highlights of the legal principles in the case, suffice it to say that the court provided exhaustive detail about each of the factual aspects of the parties’ dispute and why one party sought to enforce the merger agreement and one party successfully argued that it was justified in terminating the merger agreement prior to closing.

Highlights of Legal Principles and Analysis by the Court:

       Material Adverse Change Clauses:

  • In a comprehensive and scholarly analysis, the court surveys the law on Material Adverse Change (“MAC”) provisions or Material Adverse Effect (“MAE”) provisions in merger agreements, including prior cases that discuss them and copious footnotes are provided with reference to specific percentages, for example, that are necessary in determining whether a MAC clause or a MAE clause should be triggered. See pages 117 to 204. The court refers to a MAC clause and a MAE clause as synonymous.
  • This decision is thought to be the first Delaware opinion upholding the termination of a merger agreement due to the occurrence of a MAC/MAE.

       Key Treatise Cited:

  • Notable is the court’s reference in footnote 558 to the many Delaware decisions that cite to the Kling and Nugent treatise on M&A agreements and M&A practice as an authoritative source for issues relating to merger agreements, such as MAC/MAE clauses and post-closing indemnification provisions.

       Is Delaware Pro-Sandbagging—or Not?

  • Importantly, the court discusses whether Delaware should be considered a “pro-sandbagging” state as it relates to the enforcement of representations in contracts when one party might know prior to closing that the adverse party’s representations are not accurate. See footnote 756 to 767 and accompanying text. But cf. Eagle Force Holdings LLC v. Campbell, in which the Delaware Supreme Court declined to affirmatively decide the issue, but questioned whether Delaware was a pro-sandbagging state. 187 A.3d 1209, 1236, n. 185 (Del. 2018); id. at 1247 (Strine, C. J. & Vaughn, J., concurring in part, dissenting in part). This case was previously highlighted on these pages.
  • Also noteworthy is a robust explanation, with citations to many authorities, that describe the factors that must be considered to determine when the breach of a contract is material. See pages 208 to 211.

       Commercially Reasonable Efforts and Reasonable Best Efforts:

  • In what may be the most comprehensive analysis in a Delaware decision of the meaning of the phrase “commercially reasonable efforts” and similar phrases such as “reasonable best efforts,” the court discussed the meaning of these contractual standards and their variations, as well as how they should be interpreted and applied. See pages 212 to 220.
  • The court compares the differences, if any, between these similar standards, with citations to treatises, cases and articles that discuss them. See pages 213 and 214, as well as footnotes 788 to 800.
  • See generally Professor Bainbridge’s analysis of this topic with citations to many authorities. (The corporate law scholarship of Professor Stephen Bainbridge is often cited by Delaware courts.)  See also several Delaware decisions highlighted on these pages that also discuss the topic.
  • In its analysis of this topic, the Court of Chancery cites to the Delaware Supreme Court opinion in Williams Companies v. Energy Transfer Equity, L.P., highlighted on these pages. The Delaware high court explained in that decision that it: “did not distinguish between” the two phrases, “commercially reasonable efforts,” and “reasonable best efforts,” but rather the court described those phrases as both imposing “obligations to take all reasonable steps to solve problems and consummate the transaction.” (quoting Williams, 159 A.3d at 272). See also footnote 808, and accompanying text.

Delaware Aspects of New California Law Requiring Female Corporate Directors

A recent California law that requires public companies with their primary executive offices in California to have a minimum number of female directors, has been analyzed by nationally-prominent corporate law expert Prof. Stephen Bainbridge, who addresses several aspects of this new legislation–including how it fares when one applies the reasoning in several seminal Delaware court decisions on the internal affairs doctrine, for example.

I predict ample litigation around this new law, and the above-linked article would be an excellent starting point for anyone who needs to prepare a brief or a memo on the topic.

Chancery Rules on Two Covenants Not to Compete

In the first of two decisions on the same day addressing two separate covenants not to compete, in Lyons Insurance Agency, Inc. v. Wilson, C.A. No. 2017-0092-SG (Del. Ch., Sept. 28, 2018), the Delaware Court of Chancery explained the essential elements for enforceability of a non-competition provision in an agreement. The second case highlighted below deals with the interfacing and tension between California law and Delaware law on this topic. Many other decisions involving covenants not to compete, or non-competition agreements, in general have been highlighted on these pages over the last 13 years. 

Brief Overview:Related image

The Lyons case involved a rather lengthy procedural history, but for purposes of this brief blog post the most notable facts involved an employee of an insurance agency who attempted to bring his “book of business” to a new agency notwithstanding a covenant not to compete.  A Pennsylvania court had granted an injunction to prevent the enforcement of the covenant not to compete, but after that injunction expired in two years, the employee left for another insurance brokerage.  The Lyons Insurance Agency sued to enforce the covenant not to compete that it had made the employee sign before he joined a third employer–which he joined in just over two years.

Notable Procedural Aspect:

The court in this case refused to grant a preliminary injunction because of a liquidated damages provision which raised questions about irreparable harm. This decision was presented on cross-motions for summary judgment.

Noteworthy Principles of Law:

This decision includes the familiar prerequisites under Delaware law for the enforcement of a covenant not to compete. See page 14.  The three basic elements familiar to most readers are that a covenant not to compete under Delaware law must: (1) be reasonable in geographic scope and temporal duration; (2) advance a legitimate economic interest of the party seeking its enforcement; and (3) survive a balancing of the equities in order to be enforceable. See footnote 85.

Notable about this case is the nuance involving the geographic scope of the territorial area that was restricted under the applicable clause. See page 15.

The employee argued that the covenant was not enforceable because the geographic scope was undefined and too broad. The court disagreed.  The most important aspect of this nuanced issue is that the court relied on prior case law to enforce non-competition agreements that limited activity that “competes” with a former employer, which is enforceable, as opposed to a provision that seeks to limit activity that is “merely similar to” the business of a former employer—which is not enforceable, even when a geographic area is not specified. See footnote 91.

The court also discussed the truism under Delaware law one cannot be liable for aiding and abetting a breach of contract. See footnote 115. The court also discussed the elements for tortious interference with contractual relationships. See footnote 116.

Lastly the court discussed the remedies available in this case, which required further clarification of factual issues by the parties. This decision includes many practical statements of law that have broad application for those who labor in the field of commercial litigation.

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The second Chancery decision on September 28, 2018 involving a covenant not to compete was styled NuVasive, Inc. v. Miles, C.A. No. 2017-0720-SG (Del. Ch., Sept. 28, 2018).  This second Chancery decision on the same date involving a covenant not to compete was most noteworthy for its discussion regarding choice of law principles.  This case should be contrasted with a prior Chancery decision in the matter of Ascension Insurance Holdings, LLC v. Underwood, in which a choice of law analysis was applied to prevent the application of Delaware law based on California public policy preventing the enforcement of a covenant not to compete.

By contrast, the instant decision in the NuVasive matter applied a new California law, that was enacted after the Ascension case was decided, now known as Section 925 of the amended California Labor Code.  Section 925 as amended exempts from the California law that restricts importing the law of another state for covenants not to compete, those instances where the employee is “represented by legal counsel in negotiating the terms of the choice of law provision in the covenant not to compete.” See page 2.  In this case, the former president and COO of NuVasive was represented by counsel in the negotiation of the choice of law and forum provisions of the employment agreement at issue.  Although Section 925 is not retroactive under California law, the court found that the California legislature strongly expressed the public policy of California which in this case allowed the enforcement of the choice of Delaware law by the parties, as well as the choice of Delaware forum.

Noteworthy Aspects of NuVasive, Inc. Decision:

  • In a parallel action, a California court upheld the Delaware forum provision prior to this decision in NuVasive.
  • The Court of Chancery in this matter based its analysis not only on the new exception under California law to the enforcement of the law of other states for covenants not to compete, but also the Restatement (Second) of Conflicts of Laws § 188 (1971). See also footnote 46. Based on the court’s analysis, the court found that in the narrow circumstances of this case where an employee had legal representation during the negotiation of a covenant not to compete, the public policy of California was not violated, nor did it violate comity, to uphold the parties’ choice of Delaware law and Delaware forum under the circumstances allowing for the enforcement of a covenant not to compete in this case.
  • Because this decision only involved the issue of what state’s law would apply, the court did not decide the actual enforceability issue at this time.

Chancery Remedies Fraudulent Inducement in Formation of New Entity

A recent Delaware Court of Chancery decision provided remedies in connection with the formation of a business entity by two entrepreneurs based on the court’s finding that the equity, and employment agreement, given to one of the businessmen was based on fraudulent representations. Trascent Management Consulting, Inc. v. Bouri, C.A. No. 10915-VCMR (Del. Ch. Sept. 10, 2018), contains a practical statement of principles and analysis for those engaged in corporate and commercial litigation.

Overview of Court’s Holding:

The court found that the defendant not only fraudulently induced the formation of the limited liability company and his employment agreement, but also made numerous false statements during the litigation. As a remedy, the court rescinded the employment agreement and declared the limited liability company agreement unenforceable by the defendant.  The court also awarded some attorneys’ fees and costs as a penalty for bad faith litigation conduct.

The 75-page long opinion provides copious factual details that are necessary to understand the factual basis of the court’s reasoning and decision, but for purposes of a short blog post, I will highlight the key statements of law that have the most widespread applicability to corporate and commercial litigation practitioners.

Noteworthy Legal Principles in Court’s Decision:

  • The court listed the elements of “fraudulent inducement”, which are identical to the elements of common law fraud. See pages 36-37.
  • The court described a 2-part test that is used to determine if an entity can assert fraud claims for fraud committed prior to, but related to, its formation. See page 38.
  • The court explained the nuances within the definition of misrepresentation, including liability for “half-truths” as well as the duty to correct misleading impressions. See pages 45-46.
  • The court also discussed the aspects of the following elements of fraud: (i) when a statement is intended to induce action (pages 49-50); and (ii) when a statement is justifiably relied on. (page 51).

Remedies:

  • Rescission as a remedy was found to be appropriate for an agreement that was fraudulently induced. See page 57.
  • The court explained that a fraudulently induced agreement may be either voidable or unenforceable at the option of the innocent party. See page 59.
  • The court also discussed the rare application of the bad faith litigation conduct exception to the American Rule, in connection with the court’s decision to make a partial award of attorneys’ fees in this case. See pages 64 to 67.

Chancery Filings Now Due at 5:00 p.m. Eastern Time in Non-Expedited Cases

As foreshadowed earlier in a post about a recent Delaware Supreme Court Order whose purpose was to promote a better work-life balance for lawyers and their staff, the Court of Chancery recently amended its Rule 79.2 to require most filings to be made by 5:00 p.m. Eastern Time in non-expedited cases. This does not apply to initial filings or notices of appeal. In expedited cases, filings must be submitted by midnight Eastern Time, on the due date. (This may be a minor challenge for the many attorneys on the West Coast for whom we serve as local counsel.)

The Delaware Supreme Court has implemented a similar rule change. These rule changes will require more coordination between Delaware counsel and their co-counsel in other time-zones. Nonetheless, striving to reach the elusive goal of work-life balance is a laudable endeavor.

Two New Vice Chancellors Nominated for Delaware Court of Chancery

The number of jurists on the Delaware Court of Chancery was recently increased from five to seven by legislation. Today, the Governor nominated the two new vice chancellors for Delaware’s equity court, and they now will be considered by the Delaware Senate. A local Delaware publication at this link provides details about the two nominees: Morgan Zurn, who is currently a Master in Chancery, and Kathaleen McCormick, a Delaware corporate litigator. (Yes, that is how her first name is spelled. Get used to it.) I expect that their confirmation hearings in the Delaware Senate will not follow the circus-like atmosphere that seems to have prevailed in the “extended” U.S. Senate committee hearings for the nominee for the U.S. Supreme Court.

Few Court Filings Meet Confidentiality Requirements

For those who need to understand the prerequisites for, and limitations of, maintaining court filings as confidential, the recent Delaware Court of Chancery opinion must be read in the matter styled:  In re Appraisal of Columbia Pipeline Group, Inc., Cons. C.A. No. 12736-VCL (Del. Ch. Aug. 30, 2018).

Issue addressed:

This decision describes when documents filed with the court, even if labeled “confidential” must be disclosed to the public, and pithily explains why relatively few documents filed with the court qualify for continuing confidential treatment, which in the past have been described as “filings under seal.”

Overview:

The court explained that under Chancery Court Rule 5.1, and its underlying public policy reasons described with citations to many authorities, as well as constitutional principles that animate that public policy, the presumption remains that all judicial records are available to the public.  Other reasons also prevented the company in this case from prevailing in its efforts to keep court records under seal, because the Company did not meet its burden of proof.

This gem of a decision includes bountiful citations to constitutional principles that form the basis for the presumption that all court proceedings are open to the public and that filings with the court are a matter of public record. See footnotes 1-10 and accompanying text.

The court’s opinion is based largely on Court of Chancery Rule 5.1(b)(2), which defines the “good cause” requirement that must be satisfied for public filings with the court to be kept confidential, as follows: good cause shall exist only if the public interest in access to court proceedings is outweighed by the harm the public disclosure of sensitive, non-public information would cause.  Such information includes trade secrets and sensitive financial, business or personnel information, but does not include information that may be awkward to disclose “merely because disclosure has the potential for collateral economic consequences.”  See footnotes 11-13.

Under Rule 5.1, unless the party seeking confidential treatment meets the standard for confidential treatment, the information becomes public.  Columbia failed to meet those prerequisites in this case.The court did observe that there is an exception to the use restriction for information that is already public or which becomes public. 

The court reasoned that there is no injustice in the public having access to information in judicial filings and potentially using that information to identify and pursue potential wrongdoing.  The court quoted from Justice Brandeis who famously observed that:  “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”  See footnote 16.

As a final procedural note, the court explained that Rule 5.1 does not contemplate a reply, after a  motion and a response to that motion to challenge or maintain confidentiality, and therefore, the court struck the reply that was filed, although for the sake of completeness it did address the points made in that reply.

In conclusion, the court reasoned that public policy interests work against a special exception to Rule 5.1 under which non-confidential information and judicial records in an appraisal proceeding would remain confidential, simply to mitigate the risk of additional litigation for the respondent. 

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