In re Nat’l City Corp. S’holders Litig., No. 4123-CC (Del. Ch. June 5, 2009), read decision here.

 In this short letter decision, the Chancellor discusses the public policy reasons behind Chancery Court Rule 5(g) which deals with those situations when a document filed with the court may be placed “under seal.” This letter decision involved a request by certain news organizations for access to documents filed under seal and the court explained in this case the interface between the public policy reasons between Rule 5(g) and the general practice of making filings with the court available to the public.

 

SinoMab BioScience Limited v. Immunomedics, Inc., No. 2471-VCS (Del. Ch., June 16, 2009), read opinion here.

Overview

This 50-page Chancery Court decision addresses in great detail the intellectual property rights involved in patent disputes between a biopharmaceutical company and its former employee. I will merely highlight the issues addressed in this case because the court applies New Jersey law to all the legal issues and thus the core of this decision is outside the scope of this blog which of course is obsessed with Delaware corporate and commercial law. This opinion reads in some respects like a science textbook and discusses in excruciating detail the minutiae of the scientific aspects of the patent dispute including such things as DNA sequence and other very technical scientific terminology and processes regarding the biotechnology involved. The main reason why I include this case, however cursorily, is because it is an indication of the types of intellectual property and patent related disputes that the Chancery Court handles.

Issues Addressed

The issues that were decided based on New Jersey law should be of interest generally to any business that employs highly trained and highly educated individuals who develop patents or other intellectual property during the course of their employment. The issues discussed and decided by the Delaware Chancery Court, applying New Jersey law, include the following: (i) the enforceability of restrictive covenants; (ii) misappropriation of trade secrets; (iii) implied covenant of good faith and fair dealing; (iv) the law of unfair competition.

Of great interest to most employers who attempt to confirm their ownership of intellectual property developed by their employees, will be the court’s finding in this case that:  a very sophisticated biotechnology patentable discovery was developed after the employee left the company–despite a presumption, pursuant to a written agreement, that any patent developed within one year after the termination of employment belonged to the employer.

UPDATE: Here is a two-page letter decision of July 10, 2009 that decides the amount of fees awarded for defending only one of the claims in the case–that was abandoned in June 2007 (two years prior to this recent opinion.) The court granted fees of 20% of the fees incurred up until that point of the abandoned claim.
 

Holley Enterprises, Inc. v. The City of Wilmington, No. 4619-VCS (Del. Ch. June 5, 2009), read letter decision here.

This short Chancery Court letter decision provides a useful summary of the standard that must be satisfied before a temporary restraining order is granted–an important instrument to have in the toolbox of the those who handle business litigation in Delaware. The temporary retraining order (TRO) was requested in this case by an unsuccessful bidder for a City contract. The statutory argument revolved around the determination of the “lowest responsible bidder” to whom the City contract was awarded.

The letter opinion discusses the prerequisites for a TRO and why they were not satisfied in this case. The court also provides a practical discussion of the statutory standard for a “lowest responsible bidder” and the discretion that governmental agencies have in determining who satisfies that statutory standard. Also of practical usefulness to Delaware contractors at both the City, County and State level are citations to authority that describe the very broad range of discretion that governmental agencies have in awarding a bid. See cases cited at footnote 9. In this particular case, the contractor involved was the subject of an indictment based on allegations in connection with public contracts in Delaware, Pennsylvania and New Jersey. Thecourt explained why this was relevant under the circumstances of this case.

In addition to reciting prior decisions that explain why courts are reluctant to second guess the decisions of governmental agencies in awarding contracts, in this particular case the court interpreted the City code as giving the City discretion to consider factors that were not expressly included in the City code when determining who a responsible bidder was. The court gives the government agency, and in this case the City, broad leeway in making these decisions and will not overturn them unless they are deemed to be arbitrary or capricious.

Arbitrary and capricious is generally equated with unreasonable or irrational behavior and is not the result of a deliberative process, and is in disregard of the facts and circumstances. The court reasoned that the decision of the City in this situation was neither arbitrary nor capricious in denying the bid award to the plaintiff.

In sum, the TRO request was denied because the contractor was unlikely to succeed on the merits and the harm to the contractor by denying the TRO would be minimal compared to the risk that the City would suffer and the harm to public safety, as well as the prejudice to contractors already awarded related contracts if the court were to grant the TRO. .
 

Duthie v. CorSolutions Medical, Inc., et al., No. 3048-VCN (Del. Ch., June 16, 2009), read opinion here.  A prior Chancery Court decision in this advancement case, which also provides more background facts,  has been summarized on this blog here.
 

Overview

This Chancery Court decision discusses in detail the conceptual and public policy basis for an important aspect of the right to advancement. In particular, a prior decision in this case recognized that the right to advancement includes the right to have legal fees advanced for purposes of pursuing affirmative defenses, mandatory counterclaims, and other “good offense” aspects of an effective defense to claims made against an officer or a director to whom advancement rights must be provided. The prior decision at the above link  provides details regarding the multiple litigations in multiple fora that the parties in this matter have engaged in. Footnote 1 in the instant decision provides citations to court rulings in several jurisdictions that have been rendered in this case.

Key Part of Ruling and Background

The important nugget to be taken from this relatively short letter decision is that the right to advancement can be modified based on changes in factual circumstances involved when a prior order granting advancement rights was made. Specifically, in this case, the court had ordered advancement rights to be provided in order for the plaintiff in this matter to pursue affirmative claims that the court determined were defensive in nature and were for purposes of responding to and offsetting claims that were pending against the plaintiff in a separate forum. See Duthie v. CorSolutions Medical, Inc., 2008 WL 4173950 (Del. Ch., Sept. 10, 2008)(link is above for this case). More specifically, the court held that the right to advancement included fees incurred in connection with a defamation action that was filed by an accused director. That action also included claims for tortious interference with prospective economic advantage and violations of ERISA that were affirmatively made in response to the alleged retaliation by  the ex-director’s employer via the improper termination of health care benefits and allegedly defamatory statements made against the director to whom the advancement rights were owed.

Reasoning

In sum, in this most recent ruling in this case, the Chancery Court relied on the representation that the defendants did not intend to bring any other actions against the ex-director. It was those suits against the ex-director which had been the genesis of the affirmative claims for which the court ordered advancement, and based on the fact that the justification for the advancement of fees and expenses incurred in pursuing the affirmative claims no longer existed, the court agreed to modify its prior award and amend the prior decision granting advancement, such that the court concluded that the plaintiffs are no longer entitled to advancement of fees and expenses associated with their affirmative claims.

The court reasoned that no threat now exists, thus the defamation claims that were pursued as a defense are no longer a direct response to, nor negation of, any claims against the plaintiffs. In order to be defensive, the court reasoned, and thus subject to advancement, the “affirmative claims must be responsive to some actual threat,” but the threat here is ended, thus the court emphasized that there could be no right to advancement of fees and expenses for affirmative claims that were designed to defeat a threat that no longer existed. See Donahue v. Corning, 949 A.2d 574, 579 (Del. Ch. 2008) (see summary here); Zaman v. Amedeo Holdings, Inc., 2008 WL 2168397, at * 37 (Del. Ch., May 23, 2008) (see summary here). The court also clarified in footnote 10 that the doctrine of the “law of the case” does not prohibit the court from modifying a prior award when the facts on which the prior decision was made have materially changed.

Conclusion

The prior award of advancement for the costs of affirmative claims was modified.

Gatz v. Ponsoldt, No. 174-CC (Del. Ch., June 12, 2009), read revised opinion here.

Prior decisions in this case by the Delaware Supreme Court and Chancery Court were summarized here and here on this blog.

Overview

This short letter decision by the Chancery Court approved attorneys’ fees and expenses in the amount of 33% of the settlement  fund plus expenses in connection with the settlement of a class action on behalf of shareholders of Regency Affiliates, Inc. Three complaints alleged breaches of fiduciary duties in connection with a recapitalization plan and related transactions which reduced the ownership of  public shareholders from approximately 61% to approximately 40%, as well as allegations about unreasonable compensation. The Delaware Supreme Court previously ruled in this case that the claims of the plaintiffs were direct in nature.

In January 2008 the parties reached an agreement in principal to settle and executed a memorandum of understanding in April 2008. In December 2008 the parties sought approval of the settlement and a hearing was held in Chancery Court on March 16, 2009, after which the court asked for further briefing to clarify the position of the parties. The settlement agreement calls for defendants to pay $3 million plus interest. In exchange for the cash payment. Defendants received a dismissal of this action and a release of all class member’s claims relating to or arising from the settlement or the action.

Analysis

The Chancery Court observed that it is required to exercise its own sound judgment in deciding whether to approve a class action settlement as fair and reasonable. In doing so, the court must weigh and consider “the nature of the claim, the possible defenses to it, and the legal and factual obstacles facing the plaintiff in the event of a trial.”

One of the obstacles faced by plaintiff was whether their claims would be subject to the entire fairness standard or the less demanding business judgment rule. In order to succeed in having the entire fairness standard applied, the plaintiffs would have to establish that the CEO dominated and controlled the parties on both sides of the transaction and further that the appointment of a special committee to overview the recapitalization was sham and not sufficient to shift the burden back to plaintiffs to show that the recapitalization was unfair.

The court stated that the plaintiffs faced difficult hurdles to achieve success but were nonetheless able to obtain a cash settlement of $3 million. The court observed that the plaintiffs’ claims “lacked a significant probability of success on the merits” and thus the monetary benefits obtained were reasonable in light of the obstacles that they faced, thus allowing for a conclusion that the settlement was fair and reasonable.

Attorneys’ Fees

The court explained that the policy of Delaware was to insure that “even without a favorable adjudication, counsel will be compensated for the beneficial results they produced.” (citing Allied Artists Pictures Corp. v. Baron, 413 A.2d 876, 878 (Del. 1980))(emphasis an original). The court emphasized that such a policy exists in order to promote the policy of providing professional compensation when such suits are meritorious. However, the court acknowledged that it must make its own independent determination of reasonableness of fees and the court recited the five Sugarland factors that it considers in determining whether a fee is reasonable. The court emphasized that it has consistently noted that the most important factor in determining a fee award is the size of the benefit achieved.

The court concluded its reasoning by emphasizing that the shareholders would not be “paying themselves” and that the settlement fund would not be a “circular transfer (minus attorney’s fees)” but rather the settlement was an actual benefit to the shareholder class that was allegedly harmed by the recapitalization transaction because “of the shareholder class that brought this lawsuit, Regency maintains that no more than 27%, and as little as 7% remain as Regency shareholders. Accordingly, as much as 93%, and not less than 73%, of the proposed settlement payment will be borne by non-class members.” 
 

We have summarized many Delaware decisions on this blog regarding the issue of advancement of fees for the benefit of officers and directors of companies who have  been given that right by either contract or bylaws or corporate charter, as authorized by the Delaware General Corporation Law–and as distinguished from indemnification, which generally is not triggered until after the litigation is concluded, and after potentially millions of dollars in fees have been incurred.

Kevin LaCroix on his highly regarded blog, The D & O Diary, here,  provides a current example and analysis regarding the former CEO of Countrywide, who is presumably entitled to advancement by Bank of America, the new owner of Countrywide, contrary to what the average person not well-versed on the topic might initially think based on the mass media’s insinuations of the CEO’s culpability–which is not terribly relevant at the advancement stage, as compared to the indemnification stage. Thus, hypothetically, an officer accused of embezzlement from his company may be entitled to advancement by that company of the reasonable defense costs of the officer who is defending a suit regarding the alleged embezzlement. Kevin explains why the law may require a result that sounds strange to the average person.

UPDATE: Kevin LaCroix provides a contrasting post here regarding a recent decision (from yesterday), of the U.S. Court of Appeals for the Eleventh Circuit that upheld a trial court ruling that denied advancement rights to former CEO of HealthSouth, Richard Scrushy, (apparently despite Delaware law), as part of a class action settlement on the theory that the public policy in favor of settlements was more important than upholding advancement rights. Now I readily acknowledge that the preceding sentence may be an oversimplification of the court’s decision, so I encourage you to read the entire decision and Kevin’s insightful and thoughtful summary at the above link. Bottom line: the court gave short shrift to the importance of advancement rights–and the reality that such rights are in many cases the only thing that stands between a person’s ability to defend themselves in court and not allowing any meaningful defense whatsoever.

In James Cable, LLC, v. Millennium Digital Media Systems d/b/a “Broadstripe”, et al.,  No. 3637-VCL (June 11, 2009),  read opinion here, Vice Chancellor Lamb was faced with what has become an “all-too-familiar” fact pattern given the state of the economy recently.

Kevin Brady, a highly respected Delaware litigator, provides us with the benefit of his following review of this case.

A company, after signing an asset purchase agreement (“APA”) (wherein it agreed to sell substantially all of its assets to another company), sees its valuations fall, leading to disputes between the parties. The buyer refuses to close, citing alleged breaches by the seller, and the seller files a lawsuit. Thereafter, the buyer files for bankruptcy, following which the claims against the buyer are stayed pursuant to the federal bankruptcy code.

While that is what occurred in this case, in an interesting twist, the seller also filed suit against the buyer’s controlling stockholder (which was not a party to either the APA or any written agreement to provide funding) “in an attempt to reach the deeper pockets of that company.” In particular, the seller claimed that the controlling stockholder promised both parties that it would provide funding for the transaction. While the case was stayed when the buyer filed for bankruptcy, the case proceeded against the controlling stockholder.

The Allegations

The plaintiff, James Cable, and the defendant, Broadstripe, own and operate cable television systems and provide internet services. Highland Management is the controlling ownership of Broadstripe. In its amended complaint, James Cable claimed that Highland Management:  (i) tortiously interfered with the APA by refusing to provide funding and by directing Broadstripe to repudiate the APA; (ii) engaged in civil conspiracy with Broadstripe to dishonor the APA; (iii) acted in bad faith in an attempt to insulate itself from its alleged obligation to fund the transaction; and (iv) breached an agreement with Broadstripe to provide funding for the transaction (of which James Cable was a third party beneficiary). James Cable also argued that based upon Highland’s statements/promises regarding funding, it was entitled to recover on a promissory estoppel theory. Highland Management filed a motion to dismiss arguing that the allegations were conclusory and unsupported by specific facts. The Court agreed and granted the motion.

Tortious Interference and Conspiracy Claims

In addressing this issue, the Court stated that in order to succeed on its claim, James Cable had to allege “(1) a valid contract, (2) about which the defendants have knowledge, (3) an intentional act by defendants that is a significant factor in causing the breach of the [contract], (4) done without justification, and (5) which causes injury.”

The Court went on to note that Delaware law “shields companies affiliated through common ownership from tortious interference with contract claims when the companies act in furtherance of their shared legitimate business interests” (citing Shearin v. E.F. Hutton Group, Inc., 652 A.2d 578 (Del. Ch. 1994)). The Court also noted that to overcome the “affiliate privilege” a plaintiff had to adequately plead that the defendant “was motivated by some malicious or other bad faith purpose.” (citing Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020 (Del. Ch. 2006)).

While the Court recognized that James Cable alleged that Highland acted in bad faith when it directed Broadstripe to repudiate the APA, the Court, in finding that James Cable failed to provide any well pleaded factual support for its conclusory allegations, stated:

James Cable does not adequately allege facts to support an inference that Highland had any obligation to fund. To the contrary, the amended complaint and the exhibits attached thereto show that the parties negotiated a transaction where the responsibility to arrange financing fell on Broadstripe’s shoulders. James Cable does not sufficiently allege any purpose behind Highland’s actions outside of an economic interest it shared with Broadstripe. Accordingly, Highland’s alleged actions related to Broadstripe’s repudiation of the APA, taken as true for the purposes of this motion to dismiss, are protected by the affiliate privilege and are insufficient to state a claim for tortious interference with contractual relations.

James Cable also argued that Broadstripe and Highland conspired to tortiously interfere with the APA. However, because civil conspiracy is not an independent claim and there must be underlying wrongdoing (which the Court dismissed), the Court found no basis for the civil conspiracy claim.

Promissory Estoppel Claim

James Cable argued that Highland was liable on a promissory estoppel theory because Highland made statements to James Cable to induce it to enter into the APA. The Court disagreed finding that James Cable failed to show that there was a “real promise” that was “reasonably definite and certain.” The Court noted that some of the alleged promises were made by Broadstripe, some were made after the APA was signed and some were made by Highland but “those did not amount to a real promise.” The Court went on to state that:

In sophisticated merger and acquisition activity with large amounts of money at stake, such as here, the parties typically reduce even seemingly insignificant matters to writing. Parties generally include an integration clause, like the one found in the APA, that expressly states the written agreements compose the entire understanding of the parties. Section 5.5 of the APA states that Broadstripe (not Broadstripe and Highland) had the financial capability necessary to fund the purchase price. If James Cable could have convinced Highland to fund the deal, Highland’s obligations would likely have been extensively negotiated and reduced to writing with a substantial amount of detail.

Breach of Contract/Third Party Beneficiary Claim

James Cable also alleged that Broadstripe and Highland entered into a contract for the benefit of James Cable whereby Highland agreed to provide funding to enable Broadstripe to consummate the APA. Unfortunately, the Court found that James Cable failed to allege any facts (other than the supposed existence of the contract to support its third party beneficiary claim. In particular, the Court noted that James Cable failed to identify the “bargain” or any “consideration” Broadstripe provided to Highland to induce it to enter into a funding agreement. As a result, that claim was dismissed.

 

 

The Delaware Chancery Court recently issued four decisions in as many weeks on topics related to electronic discovery. These cases have been summarized already on this blog but I want to collect links to them all on one page for convenience. The cases with links to their summaries are as follows:

Grace Brothers Ltd. v. Siena Holdings, Inc., (June 2, 2009)(motion to compel directors’ emails granted), summarized here.

Beard Research Inc. v. Kates, (May 29, 2009)(adverse inference and fees imposed for spoliation), summarized here.

Omnicare Inc. v. Mariner Health Care Management Co., (May 29, 2009)(ordered production of back-up tapes for deleted emails), summarized here.

Triton Construction Co., Inc. v. Eastern Shore Electrical Services Inc., (May 18, 2009)(adverse inference and fees for destruction of thumb drive and home computer), summarized here.

Whittington v. Dragon Group, L.L.C., No. 2291-VCP (Del. Ch., June 11, 2009), read opinion here.

Among the several prior decisions of the Chancery Court in this case, the two most recent have been summarized on this blog and are available here.

Overview

This Chancery Court decision is one in a series of Delaware decisions involving a dispute among family members of ownership in a Delaware business entity. The present case arises from the different interpretation of a court order entered over five years ago which attempted to resolve one of the intra-family squabbles. The defendants contend that the plaintiff is not a member of the entity, while the plaintiff seeks a judicial order to compel the defendants to recognize his interest in that entity. The court concluded that the plaintiff was barred by laches from seeking relief because he unreasonably delayed the filing of his complaint for over two years and during that period of time the entity involved extinguished liabilities and the defendants undertook certain risks that were not shared by the plaintiff.

The decision provides an extensive definition and rationale for the concept of laches and why the equitable defense of laches does apply in this case.

Examination of the Equitable Defense of Laches

Of particular note is the concept that laches can be applied to prevent a claim that is filed within the applicable statute of limitations when equitable relief is sought. For example, the court explained that where, as in this case, a claim for specific performance requiring a party to perform its contractual duties is filed, it invokes a “stricter requirement for prompt action by the plaintiff, and a plaintiff may not wait the full period of three years set forth in 10 Del. C. Section 8106 to seek such relief.” (See footnote 44. See also footnotes 42, 43 and 45.)

When applying a bar of laches to a claim that was filed within the statute of limitations, there must be either procedural prejudice, for example where a delay prevented a party from calling a crucial witness who has become unavailable; or substantive prejudice, such as when a party suffers a financial detriment by relying on the failure of the plaintiff to seek relief in a timely manner. (See footnotes 46 and 47.) The court also discussed the concept of “inquiry notice” which exists when a plaintiff becomes aware of “facts sufficient to put a person of ordinary intelligence and prudence on inquiry which, if pursued, would lead to the discovery of injury. A plaintiff is expected to act with alacrity once he has reason to suspect that his rights have been violated, and a statute of limitations runs from the point at which the plaintiff, by exercising reasonable diligence, should have discovered his injury.” (See footnotes 49 and 50.) The court found that even under several alternative findings of facts, that the plaintiff simply waited too long to pursue his claims and that it would be inequitable to permit such a delay even if the claim was filed within the applicable statute of limitations.

The court also rejected an argument that the alleged unclean hands of the defendants, based on the facts of this case, prevented the use of laches as a defense. (See footnote 54.)

In sum, the court emphasized that for the applicability of laches, “the length of delay may be less important than the reasons for it. . . . Additionally, the touchtone of the laches inquiry is whether an inexcusable delay leads to an adverse change in the conditions or relations of the property or parties.” (See footnotes 56 and 57.)

Conclusion

In closing, the court quoted the well known equitable maxim that: “equity aides the vigilant, not those who slumber on their rights.” After an exhaustive description of the facts, the court reasoned that the specific injunctive relief sought by the plaintiff required him to act with more alacrity than would apply if he were requesting monetary damages, and in this case it would be inequitable to ignore the “sluggishness in bringing his claims.”