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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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Showing 8 posts from October 2007.

"It's Not a Crime Against Nature"--But It's Wrong!

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In back-to-back hearings last month, Vice Chancellor Leo E. Strine, Jr., had occasion to stress his—and presumably the entire judiciary’s—intolerance for speaking objections at Delaware depositions. Both cases involved out-of-state attorneys and should thus serve as a reminder to Delaware counsel to inform co-counsel of the judiciary’s strict adherence to this policy. 

In Benton v. Guitar Center, C.A. No. 3075-VCS, Vice Chancellor Strine was so troubled by the defending attorney’s repeated speaking objections, which “unduly lengthened the deposition” and “obstructed the legitimate inquiries of counsel,” that he instructed Delaware counsel and the out-of-state attorney who defended the deposition to draft a letter to disciplinary counsel, enclosing the transcript. And in case that was not enough, he further instructed Delaware counsel to see to it that the out-of-state attorney come to town to chat with disciplinary counsel about the appropriate rules of conduct for a deposition in Delaware. See pages 4-5. 

Court: It's not a crime against nature. But it was -- I can only imagine how patience testing it was for the person taking the deposition, because I read it, and every single question, there were inappropriate speaking objections. It's just ridiculous. And people want to practice that way, they can practice in jurisdictions where inappropriate, ridiculous obstruction of questioning is tolerated. But this ain't one of them.

The attorneys in Benton faced particularly poor timing, though, as Vice Chancellor Strine had encountered a very similar issue the day before in a hearing for SinoMab Bioscience Ltd., et al. v. Immunomedics, Inc., C.A. No. 2471-VCS. There, Vice Chancellor Strine made clear, at pages 62-63 of the transcript, that there was no debate about the impropriety of speaking objections in Delaware:

Court: There’s no wiggle room about whether what your partner did was an inappropriate way to object at a Delaware deposition. Not gray. Clearly wrong.

. . .

It's not a crime against nature. It happens. . . . The best of us do it. But it doesn’t help to come and argue with the basic proposition that it was wrong.

At the hearing, Vice Chancellor Strine awarded costs to the moving party. After the hearing, when he granted the proposed order, Vice Chancellor Strine made clear that the award of costs, which included attorneys’ fees, was partially a remedy for the improper speaking objection. (See the comments section of the order.)

Court of Chancery Explains Limitations Period

In re Coca-Cola Enterprises Inc. Shareholders Litigation, C.A. No. 1927-CC (October 17, 2007).

In breach of fiduciary duty cases, a frequent question is when to apply the three-year statute of limitations that applies to actions at law. Here, the Court again holds that the statute of limitations begins to run in a breach of fiduciary duty case when the parties enter into their contract and not when the harm resulting from that contract occurs.

Thus, when the complaint alleged that Coca-Cola was abusing its bottling company under the  terms of a 1986 contract, the breach ran from 1986, not from when Coca-Cola took certain actions under that contract in 2004. Time and again, the Court has used this approach to reject late claims or claims asserting a so-called continuing wrong theory where the limitations period never expires.

Court of Chancery Upholds Very Broad Arbitration Clause

Ornero v. Country Grove Investment Group LLC, C.A. No. 2245-VCS (October 12, 2007).

In this case the contract required arbitration of any dispute between the parties arising from "any other cause", not just from a cause related to their contract. The Court upheld the claim that even a suit on a dispute unrelated to the contract containing the arbitration clause was within this broad arbitration agreement.

Court of Chancery Interprets Partner Duties

Forsythe v. ESC Fund Management Co., C.A. No. 1091-VCL (October 9, 2007).

The duties of a general partner in a Delaware limited partnership are governed by the partnership agreement. But when those duties may be delegated to third parties under the terms of the partnership agreement, the GP duties are less clear. Here, the Court had to decide if the scienter required by the Caremark case applied to hold the GP liable if red flags pointed to abuses by the parties running the show or whether instead the general partnership obligations of a GP to be responsible for its agents was the standard to apply.

Recognizing that in this case the authority to delegate to third party managers with clear conflicts of interest put the GP on notice, the Court held that the GP had more than just Caremark-like duties -there was a duty of more active inquiry.

District Court Applies Delaware Statute of Limitations Carve Out For Fiduciary Claims, Denies Summary Judgment

Norman v. Elkin, 2007 WL 2822798 (D.Del. Sept. 26, 2007)

In this action the District Court evaluated the application of the statute of limitations to claims that a corporate fiduciary engaged in self-dealing at the corporation’s expense. Plaintiff was a 25% shareholder in a closely-held Delaware corporation with Pennsylvania headquarters, formed to participate in the wireless communications industry. Defendant #1 owned the remaining shares of the corporation, and also served as its President and sole director. Plaintiff alleged that Defendant #1 breached his duties to the corporation when he personally obtained newly-issued communications licenses from the FCC, then sold them along with the corporation’s pre-existing licenses to a third party, keeping the proceeds of the sale himself. Plaintiff further alleged that Defendant #1 took the action without notifying Plaintiff in his capacity as a shareholder, without holding an annual meeting, and without making any disclosure of the sale. Plaintiff sued Defendant #1, along with his wholly owned corporation and another corporate officer, in the Delaware Court of Chancery for breach of contract, unjust enrichment, declaratory relief, and breach of various fiduciary duties. Defendants removed the action to District Court based on diverse citizenship and moved for summary judgment, arguing that all claims were time-barred. More ›

District Court Grants All Motions to Dismiss in Anti-Trust Class Action

Howard Hess Dental Laboratories Inc. v. Dentsply Int'l, 2007 WL 2807292 (D.Del. Sept. 26, 2007)

This opinion resolved several motions filed in two different antitrust class actions (the “Hess” action and the “Jersey Dental” action). The District Court denied Plaintiffs’ motion for partial summary judgment in the Hess action and granted various Defendants’ motions to dismiss in the Jersey Dental action. Plaintiffs were dental laboratories that purchased dental products from one Defendant, Dentsply, a manufacturer and distributor of dental products. In the Hess action, Plaintiffs sued Dentsply for alleged antitrust violations in connection with an adopted policy providing that dental dealers promoting Dentsply’s product not add competitive product lines. In the Jersey Dental action, Plaintiffs sued Dentsply and twenty six dental dealers alleging antitrust violations arising from the same Dentsply policy.  More ›

Court of Chancery Holds Arbitrator Decides If Claim Is Arbitrable

Baypo Limited Partnership v. Technology JV, C.A. No. 2693-VCL (October 10, 2007).

Many arbitration clauses contain provisions that permit a court to grant injunctive relief.  These are used because of a fear that the arbitration panel may not have that power and that sort of relief may be needed, such as to enforce a noncompetition clause. Notwithstanding the presence of such clause, this decision upholds the usual Delaware rule that it is up to the arbitrators to decide if an issue is subject to the arbitration provision. Of course, that does not mean they decide if a court may hear an application for an injunction.

Court of Chancery Explains The "Some Evidence" Rule In Section 220 Cases

Louisiana Municipal Police Employees Retirement System, C.A. No. 2608-VCN (October 2, 2007).

To obtain inspection of corporate records to investigate allegations of wrongdoing, it has long been held that a stockholder must have "some evidence" that there was indeed wrongdoing to investigate. Otherwise, mere allegations would permit intrusive books and records reviews.

Here, the allegation was that options had been back dated and the Court permitted inspection based on a statistical analysis that showed stock price rises immediately after many option grants. The Court felt this was "some evidence" that warranted inspection. However, the Court was clearly skeptical and cautioned that it was going to continue as the gate keeper to limit inspections that were not justified.