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

The Delaware Chancery Court recently rejected most of a motion for re-argument of a ruling in which it had found an attorney-client and work-product privilege log deficiently documented in expedited litigation over a non-compete agreement between two biopharmaceutical research companies in Thermo Fisher Scientific PSG Corporation v. Arranta Bio MA, LLC C.A. No. 2022-0608-NAC, letter opinion issued, (Del. Ch. Nov. 28, 2022.)

Vice Chancellor Nathan Cook’s Nov. 28 letter opinion rejected each of the arguments plaintiff Thermo Fisher Scientific PSG Corp. made in support of its bid under Court of Chancery Rule 59(f) to reverse his November 15 order that Thermo must quickly address 563 documents it had withheld without sufficient reason or failed to specify an attorney connection to a communication to justify privilege.

No do-over or re-argument

In declining to grant most of Thermo’s re-argument petition in a multi-front discovery battle, the vice chancellor said, “At bottom, the (Nov.15) Order found that Plaintiff failed to comply with basic logging requirements, and Plaintiff now argues for a “do-over,” which the Order already rejected.” He explained that, “This is highly expedited litigation involving sophisticated parties and counsel with substantial litigation resources. Even setting aside the concerns over gamesmanship, I would still reject the request.”

The ruling should be of interest to Chancery Court practitioners since it examines a long list of what the vice chancellor found to be defective privilege logging and the ways in which a litigant could fall far short of the “heavy burden” a petitioner for re-argument bears.

Background

When Thermo sued Arranta Bio MA, LLC over how supplies of genetic ingredients for biomedical research in which they were jointly involved should be handled, Arranta filed a motion to compel Thermo to fill what it claimed were numerous gaps in its log of nearly two thousand documents it had fully or partially withheld on grounds of attorney-client or work-product privilege.

In a November 15 ruling after oral argument on the privilege log issue, the vice chancellor had ordered that within five business days, Plaintiff must produce to Defendant in unredacted form the 563 documents from its log that Plaintiff had entirely withheld and for which Plaintiff has identified no attorney.

“With respect to Plaintiff’s 1,974 total privilege log entries, approximately 95% repeated one of three generic phrases to describe the purported topic of legal advice,” Vice Chancellor Cook wrote, adding that, “nearly 80% of Plaintiff’s 1,974 entries were entirely withheld (rather than redacted) …and Plaintiff failed to identify an attorney involved for over 33% of the documents that Plaintiff had entirely withheld.”

Laying out general rules for re-argument, he said:

“The Court will deny a motion for re-argument ‘unless the Court has overlooked a decision or principle of law that would have a controlling effect or the Court has misapprehended the law or the facts so that the outcome of the decision would be affected.”

A motion for reargument “may not be used to relitigate matters already fully litigated or to present arguments or evidence that could have been presented before the court entered the order from which re-argument is sought.”

“Where the motion merely rehashes arguments already made by the parties and considered by the Court when reaching the decision from which re-argument is sought, the motion must be denied.”

No misapprehension

The vice chancellor said Thermo argues that he misapprehended the law by holding that every entry on the privilege log must name an attorney, but “this is also incorrect. To be sure, a document does not have to be sent to or from an attorney to be properly withheld, and the Order does not hold otherwise—but an attorney needs to be involved somehow and identified.”

“The burden of proving that the privilege applies to a particular communication is on the party asserting the privilege,” he ruled. “

The court exempted a few draft versions of complaints and regulatory filings but otherwise found, “it is unclear why Plaintiff believes that presentations and draft correspondence are so obviously privileged that Plaintiff should be excused from satisfying basic logging obligations.”

Otherwise, the court denied the motion, finding that Plaintiff “has failed to meet its heavy burden to show that re-argument is warranted and instead seeks to relitigate matters that have been fully litigated.”

The Delaware Court of Chancery recently published a comprehensive and scholarly analysis of the limited scope of the subject-matter jurisdiction of Delaware’s court of equity, and refused to accept a case that sought a permanent injunction, in a formal opinion styled: In re Covid-Related Restrictions on Religious Services, Consol. C.A. No. 2021-1036-JTL (Del. Ch. Nov. 22, 2022).

Practice Tip: Depending on the level of scrutiny given by the court, either sua sponte or in response to the arguments made by the parties, if any, the request in a complaint for injunctive relief may not be sufficient to satisfy the requirements for enjoying the capacious benefits of the jealously-protected, narrow, equitable subject-matter jurisdiction of the Court of Chancery.

This decision corrects several mistaken prior Delaware decisions, and persuasively describes the true prerequisites for obtaining a permanent injunction. See Slip op. at 46-47.

Prefatory Comments

Experienced equity practitioners should be forgiven if they discover when reading this thoughtful decision that the finer points and nuances of the circumscribed boundaries of the equitable jurisdiction of the Court of Chancery are not always absolutely clear–if only because the members of the court do not always uniformly give this somewhat esoteric issue the same level of scrutiny. In addition, there are cases where final decisions have been rendered but neither the parties nor the court sua sponte raised the issue of equitable jurisdiction.

Most veteran Delaware litigators naturally would think that if injunctive relief (a typical equitable remedy) were to be requested, that the Court of Chancery would have subject-matter jurisdiction–but that is not always true, and it was not true in the instant case.

For those experienced equity practitioners who thought they understood the equitable basis for the Court of Chancery’s limited jurisdiction, and wonder why the court in this case rejected subject-matter jurisdiction when injunctive relief was requested, perhaps their self-doubt might be assuaged by the court’s observation in the instant opinion that many prior Delaware decisions were wrong when they did not follow the majority view nationwide about what the requirements are for a permanent injunction. See Slip op. at 42-43 and n.9.

Although the Court of Chancery has, both recently and in the more distant past, awarded injunctive relief to enjoin the enforcement of unconstitutional statutes, and it remains well-settled generally that the violation of constitutional rights amounts to irreparable harm, see generally, Doe v. Coupe, C.A. No. 10983-VCP (Del. Ch. July 14, 2015)(highlighted on these pages), the instant case (and another recent letter ruling), found that the Court of Chancery lacked equitable jurisdiction notwithstanding the request for injunctive relief based on the violation of constitutional rights.

Procedural and Factual Overview of the Decision

This case sought permanent injunctive relief based on allegations that restrictions on religious worship during formal religious services imposed during the height of the Covid-19 pandemic by the Governor of Delaware were violations of fundamental constitutional rights. Those restrictions were eventually lifted more than two years ago, in part due to settlement of a federal lawsuit in Delaware making similar allegations–but the plaintiffs sought permanent relief to prevent similar future violations of their rights by the Governor. The Governor moved to dismiss for lack of subject-matter jurisdiction in Delaware’s court of equity.

The opinion begins with a overview of the almost two dozens Emergency Orders, as amended, that Delaware’s Governor issued, starting in early 2020, as the Covid-19 pandemic resulted in many public activities around the country and the world grinding to a halt.

Legal Analysis

In addition to engaging in a deep-dive into the underpinnings of equity jurisdiction, the court also provides a practical review of the basics.

The Basics

For example, the three typical triggers for equitable subject-matter jurisdiction that open the doors of Delaware’s court of equity generally include the following:

The court “can acquire subject matter jurisdiction in the first instance by three different means: (1) the invocation of an equitable right; (2) a request for an equitable remedy when there is no adequate remedy at law; or (3) a statutory delegation of subject matter jurisdiction.” Kraft v. WisdomTree Invs., Inc., 145 A.3d 969, 973 (Del. Ch. 2016) (cleaned up). “[W]here a remedy provided by a law court of the state would be sufficient, that is, complete, practical, and efficient, this Court is without jurisdiction.” Int’l Bus. Machines Corp. v. Comdisco, Inc., 602 A.2d 74, 78 (Del. Ch. 1991) (cleaned up).

Slip op. at 29.

Requirements for a Permanent Injunction–And Why Prior Delaware Cases Are Wrong on this Point

The court candidly explains why, understandably, several prior Delaware decisions that have described the requirements for obtaining a permanent injunction are simply wrong:

Sometimes a Delaware decision deviates from a settled or majority rule intentionally and for good reason.³ Other times, a little digging uncovers one of the inevitable spontaneous mutations generated by an adversarial process in which practitioners
understandably seek to depict authorities in the manner most favorable to their clients, and in which busy judges do not always have the time for reflective consideration of every legal issue in the case.

This opinion then provides detailed reasoning, with copious citations, for this conclusion:

Delaware’s customary framing of the standard for a permanent injunction errs by projecting onto the ultimate remedial determination the requirement from earlier phases of the case that a plaintiff show imminent irreparable harm. When a party seeks interim injunctive relief, such as through a TRO or preliminary injunction, the plaintiff must show why the court needs to act at an early stage, before a final adjudication. A plaintiff makes the necessary showing by pointing to a threat of something happening that cannot be addressed after a final adjudication during the remedial phase, i.e., a threat of irreparable harm. Additionally, the threat must relate to something that may transpire before the case can reach a final adjudication during the remedial phase, i.e., it must be imminent. To earn a TRO or a preliminary injunction, therefore, a plaintiff must show imminent irreparable harm. (Some citations omitted.)

But when a plaintiff seeks permanent injunctive relief after a final adjudication, a showing of irreparable harm is sufficient but not necessary. As a leading  procedural treatise explains, it should be noted that although a serious threat of irreparable injury usually must be shown on an application for a temporary-restraining order or a preliminary injunction, irreparable injury is not an independent requirement for obtaining a permanent injunction; it is only one basis for showing the inadequacy of the legal remedy.

Wright & Miller, supra, § 2944 (footnotes omitted). There is also no longer a near-term temporal requirement for the harm to take place before the court can review the matter further. Because the court is issuing its final ruling, the question is whether a permanent injunction is warranted because legal remedies are inadequate. The considerations driving that analysis need not be imminent; they need only be persuasive.

[The court divides into three parts its explanation for why imminent irreparable harm is not a requirement for a permanent injunction.]

This decision rejects the Governor’s argument that a permanent injunction requires a showing of imminent irreparable harm. The more detailed explanation unfolds in three parts. First, this decision describes the different forms of injunctive relief and the purposes they serve, which illustrates why imminent irreparable harm is a necessary element of the test for a TRO or a preliminary injunction but not for a permanent injunction. Second, this decision explains why the proper formulation of the standard for a permanent injunction should examine the inadequacy of other remedies. Finally, this decision explores how the irreparable injury prong entered Delaware’s permanent injunction test and confirms that it reflects an unintentional jurisprudential mutation rather than a conscious choice.

3 See Aranda v. Philip Morris USA Inc., 183 A.3d 1245, 1251–52 (Del. 2018)(“Although the federal courts and most state courts require an available alternative forum before dismissing for forum non conveniens, our Court never adopted this requirement. Admittedly, our cases have not directly addressed the question. But, several factors point to an implicit rejection of the requirement.” (footnotes omitted)); Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1059–64 (Del. Ch. 2006) (Strine, V.C.) (discussing the majority rule in Restatement (Second) of Contracts § 195 which prevents a contract from insulating a party from the consequences of its fraudulent conduct, then permitting a contractual anti-reliance clause to defeat a claim for extra-contractual fraud).

Slip op. at 32-34; and 42-43.

The court described the three different forms of injunctive relief that may be available–sometimes–in the Court of Chancery, and the subtle differences between them:

(i) TRO;

(ii) Preliminary Injunction; and

(iii) Permanent Injunction (which are further divided into mandatory and prohibitive injunctions.)

Slip op. at 34-38.

Inadequacy of Legal Remedy Required–But Irreparable Harm Not Needed for Permanent Injunction

Even experienced equity practitioners in Chancery who are familiar with equity practice may not be familiar with the minutiae discussed by the court in its explanation about why it must be demonstrated that a remedy at law would be inadequate–but notably: that irreparable harm is not a prerequisite for obtaining a permanent injunction. Slip op. at 38 and n.5. See also Slip op. at 44 and n.10-11.

After explaining why irreparable harm is not needed for a permanent injunction, though it remains one of several ways to show the inadequacy of a legal remedy, the court provided other examples of how the requisite inadequacy of a remedy at law may be demonstrated:

• If the defendant is insolvent and a judgment would not be collectible, but the defendant is capable of performance to which plaintiff is entitled as an alternative to the money.
• Defendant’s actions would require plaintiff to bring more than one suit to effectuate a legal remedy.
• Money damages cannot be measured with any degree of accuracy, and are so speculative that any award would be inadequate.

Slip op. at 43.

The court also noted that in addition to the common formulation of money damages not being sufficient to make a party whole, the situation may exist when:

… the legal remedy is not as practicable and efficient toward the ends of justice as an injunction.

Slip op. at n.6

Proper Formulation for Requirements to Obtain Permanent Injunction–Correcting Prior Errant Chancery Decisions on this Topic

Practitioners take note: contrary to prior recitations in prior Chancery decisions, the correct list of prerequisites for a permanent injunction include the following:

1. Actual success on the merits.
2. Inadequacy of a remedy at law; and
3. Balancing of the equities that favors an injunction.

Slip op. at 46.

Additionally, in order to satisfy the test for equitable subject-matter jurisdiction when seeking a permanent injunction, a threshold requirement is to allege facts that:

“create a reasonable apprehension of a future wrong.”

Slip op. at 46-47.

The Reasonable-Apprehension Test

Two competing considerations must be addressed when attempting to satisfy this requirement:

• injunctions against future wrongdoing are generally unavailable–especially against government entities; but
• “on the other hand”, … where there is a reason to believe that a defendant will resume his wrongful course of conduct, a court may issue a permanent injunction.

Slip op. at 47.

However, to invoke equitable jurisdiction, there must be more than “unsupported, subjective concern about a future harm….” Slip op. at 48.

Court’s Conclusion

The reasonable-apprehension requirement was not satisfied in this case to the extent that there was no likelihood that the restrictions imposed on churches during the height of the pandemic are likely to be repeated, especially in light of the Governor not imposing the initial restrictions, later lifted, when subsequent surges of Covid-19 arose two years after the initial orders were terminated–and in light of the Federal Court settlement in which the Governor agreed not to impose similar restrictions.

Caveat

In closing, the court provided a potential avenue for the plaintiff to return to the Court of Chancery if, in the future, the Governor were to fail to comply with the order of another Delaware court: in which case “… coercive relief from this court will be available.” Slip op. at 50.

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

The Chancery Court’s chief judge recently ruled Carvana Corp. controller Ernest Garcia ll stated only one of eight needed factors for a quick appeal of her June decision that he and his son, CEO Ernest Garcia III, must prove their stock deal was entirely fair to the on-line used car dealer’s investors in In Re Carvana Co. Stockholders Litigation, C.A. No. 2020-0415-KSJM (Del. Ch) Oct. 3, 2022.

Chancellor Kathaleen McCormick’s detailed Oct. 3 order denied Garcia II’s bid for an interlocutory appeal of her June 30 opinion that declined to dismiss derivative breach-of-duty charges that the Garcias profited by orchestrating an allegedly unfairly-priced $600 million stock offering while Carvana’s share price was depressed by the pandemic.  In that earlier ruling, she found the long, dependent business relationships two directors had with the CEO excused the plaintiffs’ pre-suit demand on the board.  In Re Carvana Co. Stockholders Litigation, C.A. No. 2020-0415-KSJM (Del. Ch) June 30, 2022.

In the Oct. 3 ruling, the Chancellor examined and rejected in turn four of the five reasons Garcia II offered in support of his Delaware Supreme Court appeal under Rule 42—which establishes a two-step test for determining whether to certify interlocutory appeal.  She said:

The court must first determine whether “the order of the trial court decides a substantial issue of material importance that merits appellate review before a final judgment.”

If the substantial-issue requirement is met, this court will then analyze eight factors concerning whether “there are substantial benefits that will outweigh the certain costs that accompany an interlocutory appeal.”

She acknowledged as to the first step that although the substantial-issue requirement is met when a decision speaks to the merits of the case, in practice, the state supreme court has accepted appeals of non-merits-based questions that implicate significant issues under Delaware law.  Recently, the Delaware high court has granted interlocutory appeals “concerning the exercise of personal jurisdiction over non-resident fiduciaries,” she wrote.

But the Chancellor said although the Opinion addresses a substantial issue, it does not follow that the issue must be resolved by Delaware’s Supreme Court at an interlocutory as opposed to final stage. The second step under Rule 42 is to consider whether eight factors provide sufficient support when conducting a balancing analysis.

Here, she said, Garcia presents only five factors and of them, “only one provides clear support. The others weigh against interlocutory appeal or are neutral.”

Factor A considers whether the Opinion involves a novel question of law in the state’s jurisprudence. Although Garcia Senior contends that personal jurisdiction has not previously been asserted on the exact facts present here, his narrow view ignores the well-settled rule of law that implicit consent can serve as a basis for personal jurisdiction. “The mere application of long-held precedent to new facts does not make an order worthy of appeal.” the court said in finding Factor A does not support Garcia Senior’s application.

Factor B asks the court to consider whether the Opinion conflicts with other trial court decisions. Garcia Senior contends that the Opinion is inconsistent with the “longstanding Delaware precedent which holds that purchasing or owning shares of stock in a Delaware corporation, standing alone, is not enough to enable a Delaware court to exercise personal jurisdiction over a non-consenting party, even in cases of sole ownership.” But the court said jurisdiction was not the result of Garcia’s majority ownership of shares but his use of that position to force the adoption of a bylaw requiring breach of duty suits to be filed in Delaware–which is consistent with most Delaware decisions.

Factor D looks to whether the Opinion sustains the controverted jurisdiction of the trial court. The Opinion held that this court’s exercise of personal jurisdiction over Garcia Senior is appropriate. This factor is accordingly satisfied. Although Factor D is satisfied, it is not dispositive, the Chancellor said.

Factor G considers whether interlocutory appeal may terminate the litigation. Without citing any case law, Garcia Senior contends that this factor has been satisfied because reversal of the Opinion would terminate the litigation in this Court “as to him.” This is true, but to the extent Factor G looks to judicial and administrative efficiency, it is irrelevant, the court said.

Factor H concerned whether interlocutory review would eliminate litigation, but the court said even if it eliminated charges against Garcia ll, the litigation would continue against the other defendants.

The Delaware Court of Chancery’s recent opinion in XRI Investment Holdings LLC v. Holifield, No. 2021-0619-JTL (Del. Ch. Sept. 19, 2022), should be included in the pantheon of consequential Delaware Chancery opinions and will remain noteworthy for many reasons that deserve to be the subject of a law review article, but for purposes of this short blog post, I only intend to highlight a few of the many gems in this 154-page magnum opus with the most widespread applicability  to those engaged in Delaware corporate and commercial litigation.

Brief Background

The background facts are described in the first 50 pages or so of the opinion, but for purposes of this high-level short overview, this case involved a disputed transfer of interests in an LLC that were alleged to be in violation of the transfer restrictions in the LLC Agreement.  The membership interests were used as security for a loan, and upon default the membership interests were foreclosed upon in an inequitable manner.

Key Points

This opinion engages in a deep and comprehensive analysis regarding the historical foundation of equitable defenses and their applicability to claims that are not the type of traditional claims pursued in a court of equity, as well as other key aspects of Delaware Law, including a discussion of:

• The Step-Transaction Doctrine and when a series of transactions will be treated as a unitary whole.
• Void and voidable transactions–and when an act will be treated as void ab initio, in which event it generally cannot be cured or defended against.
• Equitable Defenses: Some, such as laches, can only be asserted as defenses to equitable claims–but other equitable defenses, such as acquiescence, are available to defend against both equitable and legal claims. This holding by the Court is contrary to a “smattering of recent decisions” in Chancery that did not fully address “nuances that permeate this area of the law”.
• This decision attempts to bring more harmony and cohesiveness to that smattering of recent decisions.
• The Court examines in extensive depth the somewhat ancient historical origins of the courts of equity, and the claims and defenses permitted in those courts.
• The always useful fundamentals of contract interpretation are reviewed as well. See pages 45-47
• The Court addresses the distinction between: (i) a “right tied to an ownership interest in an entity” and (ii) “the right to whatever cash that interest might generate once it reaches a particular person’s pocket”. See footnote 25. Also cited in the footnote is the recent Supreme Court opinion in Protech Minerals Inc. v. Dugout Team LLC, 288, 2021 (Del. Sept 2, 2022), and the important need to distinguish between the above two concepts.
• Although the Court of Chancery faithfully (but maybe reluctantly) follows the Supreme Court’s precedent in CompoSecure LLC v. Card UX, LLC, No. 177, 2018 (Del. Nov 7, 2018), regarding void transactions, in dictum the opinion encourages the Supreme Court to reconsider its decision in CompoSecure. A polite list of reasons is offered for why Delaware’s high court should reconsider that precedent, in part because it prevented the trial court in this case from avoiding an inequitable result–and because there is a need to harmonize several areas of Delaware law at issue in this case. See page 111.
• For example, current Supreme Court precedent allows parties to an agreement to declare certain acts as void–not voidable–and this current ability to “contract out” of equitable review and prevent a court of equity from applying its traditional equitable powers and remedies, deserves (reasoned this opinion respectfully), to be revisited.

• Among the multi-faceted aspects of the opinion’s rationale for encouraging the  Delaware Supreme Court to reconsider its CompoSecure opinion, this opinion cites to basic contract principles under the common law that considered some contracts as void ab initio if they were violative of public policy. See footnotes 58 to 62 and related text. See also footnotes 65 to 68 regarding the aspects of corporate charters and bylaws that are subject to the limitations of the DGCL because corporations are creatures of the state.
• This Court of Chancery decision importantly notes that the Delaware LLC Act recognizes that principles of equity apply in the LLC context. See footnote 96. (Cue: the “maxims of equity”.)
• Even though the Court of Chancery held that its holding was “contrary to the equities of the case”, it held that the result was controlled by precedent–that should be revisited.

Postscript

• There are also other areas of Delaware LLC law, not addressed in this opinion, that are not well-defined or could benefit from clarification by Delaware’s highest court, to harmonize a “smattering of Chancery decisions”, but most parties on the unpleasant side of a decision do not have the benefit of the author of the trial court opinion assisting with appellate arguments.
• This case may also provide a reminder of the truism that the victor in a trial court decision should not celebrate too much, or too soon, while the decision is pending on appeal. (Non-Delaware readers should know that there is no intermediate appellate court in Delaware.)