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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 26 posts by P. Clarkson Collins, Jr..
Superior Court Affirms Jury Verdict of Breach of Implied Covenant of Good Faith and Fair Dealing Concerning a Patent Dispute Settlement Agreement
This decision demonstrates the rare case where a breach of the implied covenant of good faith and fair dealing survived a legal challenge and resulted in a jury verdict in favor of the plaintiff. The case arose from a patent license and settlement agreement resolving a patent ownership dispute over the use of antibodies to treat Lupus. The 2008 settlement agreement gave ownership of the inventions to the defendants and obligated them to pay royalties to the plaintiff DRIT and its predecessor in interest. After paying the royalties for several years, in 2015, the defendants filed a request for a statutory disclaimer of the patent in question and notified the plaintiff that the disclaimer had the effect of eliminating any ongoing claim for royalties. This event was not addressed in the parties’ agreement, and the court in post-trial motions upheld the jury’s verdict in favor of the plaintiff on its implied covenant claim because the evidence supported findings that the defendants’ exercise of the disclaimer in these circumstances was an unusual event that the parties would not have reasonably anticipated, and the disclaimer was not a normal rational action and was taken solely for the purpose of discharging defendants’ royalty obligations. The Superior Court found that the defendants simply had not presented sufficient evidence to convince the jury that the defendants had a credible business justification for filing the disclaimer. The Superior Court also rejected a challenge to the testimony of plaintiff’s industry expert that the defendants’ rationale for use of the disclaimer fell outside normative, rational behavior in the circumstances. The court thus found that the jury reasonably could have found the defendants’ proffered justification to be pretextual and not credible.
Finally, the court granted damages in the form of royalties to DRIT from the time of the defendants’ breach to the date of the jury’s verdict, with a declaration of ongoing royalty obligations through the expiration of the patent. Going forward, the future royalty would be determined by the sales of the licensed drug. The court held that its ruling would uphold the expectation of the parties at the time of contracting, which was that DRIT would continue to receive royalties until the patent expired.
Chancery Denies Former Derivative Plaintiff Standing to Challenge Merger That Extinguished Derivative Claims
When a stockholder derivative claim is extinguished in a merger, the former derivative plaintiff may have standing to contest the merger directly on the ground that the entity’s fiduciaries permitted a material litigation asset to be extinguished in the merger process without value to the stockholders. In the well-known precedent In re Primedia Stockholders Litigation, 67 A. 3d 455 (Del. Ch. 2013), the Court of Chancery established a three part standing test: 1) Was the underlying claim viable? 2) Was its value material in light of the merger consideration? 3) Did the company fail to receive value for the claim in the merger because the buyer would not be willing to pursue it? Applying this test, here the Court ruled that the former unitholder and derivative plaintiff lacked standing to attack the merger and dismissed the claim. More ›
This case again illustrates the contractual nature of Delaware alternative entities and the important interpretive role the courts perform construing alternative entity agreements when internal governance disputes arise. The case arose out of the parties’ competing requests for declaratory judgment regarding Caiman Energy II, LLC’s (“Caiman”) limited liability agreement (“LLC Agreement”). The Defendants, including Caiman and EnCap Capital Management (“EnCap”), argued that the provisions of the LLC Agreement grant EnCap plenary power with respect to a Qualified IPO, including the ability to change the definition of a Qualified IPO and to modify the procedures the contracting parties would otherwise have to take relating to a Qualified IPO. EnCap asserted that it could implement an Up-C IPO using its authority to effect a Qualified IPO. An Up-C IPO refers to a transaction whereby a limited liability company (“LLC”), which is taxed as a pass-through entity, performs an IPO through a holding company that has an interest in the LLC. Plaintiff Williams Field Services Group, LLC (“Williams”) contended that the Encap proposed Up-C IPO was inconsistent with the terms of the LLC Agreement. More ›
Chancery Addresses the Implied Covenant in an At-Will Employment Relationship and Delaware’s Statutory Restriction on Physicians’ Non-Competes
This case arises out of a physician’s sale of his limited liability company interest, and his subsequent attempts to enforce oral promises outside of – and sometimes in conflict with – written agreements governed by Delaware law. In granting the defendants’ motions to dismiss for failure to satisfy pleading standards, the Court addressed two potentially noteworthy issues. More ›
Chancery Denies Director Access to Privileged Materials Involving Counsel to Preferred-Appointed Directors
As several Delaware decisions teach, each director, as a member of the larger deliberative body that is the board, has a fundamental right to access corporate information to carry out his or her fiduciary duties. Thus, as a general rule, a Delaware corporation “cannot assert the privilege to deny a director access to legal advice furnished to the board during the director’s tenure.” There are several exceptions to this rule. More ›
The Court of Chancery is a court of limited jurisdiction. It maintains subject matter jurisdiction only for (i) equitable claims, (ii) when equitable relief is sought and no adequate remedy is available at law, or (iii) where a statute confers jurisdiction. Applying well-recognized equitable jurisdiction principles, the Court dismissed this breach of contract action. Although Plaintiffs sought equitable relief in the form of specific performance and an injunction, their request for equitable relief was merely a “formulaic incantation” rather than substantive. Applying a realistic assessment of the nature of the wrong alleged and the remedy available at law, the Court concluded that a legal remedy for the breach of contract claim was available in the form of a declaratory judgment and damages, and fully adequate. Normally when a court issues a declaratory judgment establishing the parties’ respective contract rights, the court will not presume that the defendant will fail to abide by the court’s ruling in the future requiring an injunction to secure performance. A real threat of continuing injury must be shown, which was absent here. More ›
Delaware Superior Court Addresses Choice of Law Issues in the D&O Insurance Context and Requires Carriers to Cover Pfizer’s Litigation Costs
Pfizer Inc. v. Arch Insurance Co., C.A. No. N18C-01-310 PRW CCLD (Del. Super. July 23, 2019).
This case from the Delaware Superior Court discusses important D&O coverage exclusion issues that frequently arise during securities litigation. Pfizer sought coverage from its insurers in connection with the defense and settlement of a securities action in the Southern District of New York. Defendants, the excess insurers, denied coverage based on “related wrongful acts” exclusions in the policies. They argued that the action “arose out of” or “shared a common nexus” with another action in the District of New Jersey such that the D&O policies’ exclusion provisions precluded coverage. Noting that the contract interpretation result would likely be different if applying New York law rather than Delaware law, and that the policies lacked a controlling choice of law provision, the Superior Court first applied the Restatement’s “most significant relationship” test to determine which state law should apply. Although some of the Restatement Section 188 factors tipped in favor of New York, the Court ruled that application of Delaware law was most consistent with the parties’ reasonable expectations at the time of contracting and with the Delaware choice of law precedent for D&O policies. For such policies, under Delaware law, the state of incorporation, rather than the state where the corporation is headquartered, has the most significant relationship. This also was consistent with the parties’ choice of Delaware law in the policies to govern arbitration or mediation of their disputes. Applying well-settled Delaware law to the interpretation of the policy provisions, the Court found the two actions were not “fundamentally identical.” Thus, the exclusion did not apply and the insurers were obligated to cover the costs. More ›
An “allegation that a transaction involves a controlling stockholder who stands on both sides is a serious one because it imposes fiduciary duties on the controlling stockholder and potentially strips directors of the deferential business judgment rule,” see Reith v. Lichtenstein, C.A. No. 2018-0277-MTZ (Del. Ch. 6/28/19). In her recent opinion in Reith, Vice Chancellor Morgan Zurn allowed a derivative complaint to proceed against a minority 35.6% stockholder because the complaint alleged with sufficient particularity that the stockholder exercised actual control in the challenged transactions, subjecting it to entire fairness review. Here the court found that the 35.6% stockholder wielded such formidable voting and managerial power in connection with a preferred stock offering and related equity grants that it was no differently situated than if it had majority control. In so ruling, the court adds Reith to a number of Delaware Court of Chancery decisions that have ruled that a minority stockholder’s exercise of actual control subjects the challenged transaction to entire fairness review. More ›
Delaware courts typically apply the McWane first-filed doctrine to stay a later-filed Delaware case in favor of a case already pending in another jurisdiction involving substantially the same parties and issues. In this instance, Alphabet, Inc., a Delaware corporation, and the director defendants, relying on McWane and forum non conveniens, sought to stay or dismiss a second-filed Delaware stockholder derivative action in favor of a first-filed action in California raising similar breach of fiduciary duty and failure of oversight claims. Both litigations arose from alleged workplace harassment at Google by officers and similar allegations against executives and directors of its parent, Alphabet. At oral argument, Vice Chancellor Glasscock, from the bench, rejected the forum non conveniens argument, and explained in this opinion “it is difficult to imagine a derivative litigation involving a Delaware corporation, and alleging breaches of fiduciary duty by corporate directors or officers of that Delaware corporation, that is nonetheless subject to dismissal on forum non conveniens grounds; if such an animal exists, it is absent from the menagerie before me here.” The Court also exercised its discretion to deny the stay motion because (i) the McWane first-filed rationale carries less weight in the context of derivative actions, where Delaware’s interest in promoting well-crafted derivative complaints is more important than filing speed; (ii) the proceedings to date in California were limited to disputes over consolidating related actions and appointing lead counsel; and (iii) Delaware has a higher interest than California in applying Delaware’s common law of corporations and fiduciary duty to the novel issues of corporate law involved in the litigation.
Delaware Supreme Court Reminds Counsel of Obligation to Prevent Clients’ Abusive Deposition Misconduct
“Depositions are court proceedings, and counsel defending the deposition have an obligation to prevent their deponent from impeding or frustrating a fair examination.” After reversing and remanding a contractual dispute involving popular Broadway shows back to the Court of Chancery on unrelated grounds, the Delaware Supreme Court included an Addendum to its opinion reprimanding an out-of-state attorney for permitting his client to engage in abusive deposition misconduct. During the deposition, Carole Shorenstein Hays, a prominent theater producer, repeatedly provided answers characterized by the Supreme Court as ridiculous, problematic, flagrantly evasive, nonresponsive, and flippant. Among other things, Hays claimed not to know whether she earned a university degree, claimed not to measure time in hours, refused to answer myriad straightforward questions, and made unprompted speeches in which she likened herself to Judy Garland and the deposition to a “piece of theatre that’s being recorded.” While no Delaware attorney for Hays attended the deposition, the two attorneys representing her were both admitted pro hac vice and made no attempt to stop her misconduct. The Court of Chancery had previously awarded attorneys’ fees and costs for this bad faith misconduct, and that ruling was not challenged on appeal. The Supreme Court felt compelled, however, to address the situation. The Supreme Court reasoned that, faced with such conduct, the deponent’s counsel “cannot simply be a spectator and do nothing.” In addition, “Delaware counsel moving the admission of out of state counsel pro hac vice also bear responsibility in such a situation. They must ensure that the attorney being admitted reviews the Principles of Professionalism for Delaware Lawyers, but they must also ensure that the out-of-state counsel understands what is expected of them in managing deposition proceedings outside the courthouse so that the litigation process is not abused.” In light of restrictions Delaware court rules and precedent impose on conferring with a client-deponent during the deposition, the Supreme Court advised that these points “should be addressed beforehand in the deposition preparation.”
Unlike most U.S. states and the federal legal system, Delaware retains the historic distinction between courts of law and courts of equity. In the absence of a statute granting it jurisdiction over specific claims, the Delaware Court of Chancery has subject matter jurisdiction only where a complaint (i) states an equitable claim, or (ii) seeks an equitable remedy in circumstances where there is no adequate remedy at law. Here, the Court of Chancery held that it lacks subject matter jurisdiction to adjudicate defamation claims. Specifically, entrepreneur and inventor Stephen G. Perlman and his companies asserted claims of defamation against Vox Media, Inc., and requested relief that included a mandatory injunction requiring the removal of the offending articles from Vox’s websites, a public retraction, and compensatory damages. In response to Vox’s motion for summary judgment, the Court followed its recent decision in Organovo Hlds., Inc. v. Dimitrov, 162 A.3d 102 (Del. Ch. 2017) (Laster, V.C.) and concluded that “in connection with a claim for defamation, the Court of Chancery, in all instances, lacks subject matter jurisdiction to adjudicate the questions of whether a defendant made a false statement about the plaintiff and whether it did so with actual malice.” (emphasis added). Organovo explained that these factual questions have historically been reserved for juries rather than judges, and these determinations are best suited for adjudication by a court of law. Plaintiffs’ effort to couple their defamation claims with requests for equitable relief in the form of an injunction directed at past defamatory statements did not confer equitable jurisdiction, because declaratory relief and money damages generally are adequate remedies at law for defamation claims. The Court explained that equity will intervene to provide injunctive relief only in situations where the defamation claim has been adjudicated in a court of law and legal relief has failed to preclude ongoing publication or is otherwise inadequate. Accordingly, because it lacked subject matter jurisdiction, the Court dismissed the plaintiffs’ claims, but gave the plaintiffs the option to transfer the case to Delaware’s Superior Court, a court of law.
Seeking to inspect an entity’s books and records to value an investment typically is a proper purpose. But a plaintiff must have standing to demand inspection. More ›
Chancery Addresses the Direct and Derivative Claim Distinction and Demand Futility in the LLC Context
Plaintiff sued Defendants, who were supposed to manage the parties’ limited liability company, directly and derivatively for breaching the LLC agreement, and derivatively for breaching their fiduciary duties. In this decision, the Court of Chancery denies Defendants’ motion to dismiss and addresses, among other things, the direct versus derivative claim distinction under the Tooley test and demand futility under the Aronson v. Lewis test in the LLC context. Here, the LLC managers were deemed interested because they stood on both sides of the challenged transactions—i.e., the allegations that they stole millions from the LLC for themselves, for their other companies, for one of their spouses, and for one of their spouses’ companies. Thus, demand was futile as to the derivative claims, which also adequately stated viable causes of action under less stringent Rule 12(b)(6) standards.
Prior to this ruling, no Delaware opinion had addressed the question of whether decisions granting entitlement to advancement rights are immediately appealable even though disputes remain as to the reasonableness of the fees. This ruling finds the answer normally should be “no.” More ›
Superior Court Complex Commercial Litigation Division Holds Settlements Arising out of Dole Stockholder Litigations Constitute “Loss” Under Insurance Policies
After trial and an adverse judgment in the amount for $148 million for breach of the duty of loyalty in a going private merger In re Dole Food Co., Inc. S’holder Litig., C.A. No. 8703-VCL (Del. Ch.), the liable defendants David Murdock, Dole Food Company, Inc. and DFC Holdings, LLC settled the claims by having Murdock pay the full award plus interest. The defendants then were sued by six of their excess insurance carriers, seeking a declaratory judgment that they did not have to fund the settlement. Among other reasons, the insurers asserted that the settlement payment representing the actual fair value of the merger consideration did not constitute a “Loss” under the policy. Defendants counterclaimed seeking declaratory judgment that the insurers breached the policies by refusing to pay for the Court of Chancery settlement as well as the settlement in San Antonio Fire & Police Pension Fund v. Dole Food Co., Inc., No. 1:15-CV-01140 (D. Del.). This decision grants in part and denies in part the parties’ cross-motions for summary judgment. Applying the rules of interpretation applicable to insurance policies, a unique and complex type of contract, the Court determined the settlement payments constituted a “Loss” covered within the policies but genuine issues of material fact remained as to whether the insureds breached a written consent provision and a cooperation clause in the policies.