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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Delaware Superior Court’s Complex Commercial Litigation Division Declines to Dismiss Delaware Attorney General’s Claims Against Opioid Makers
In January 2018, Delaware’s Attorney General filed an action against certain opioid makers and distributors, along with pharmacy chains CVS Health Corp. and Walgreens Boots Alliance Inc. The State alleged that the drug manufacturers lied to prescribers and patients, and encouraged high doses of the painkillers while failing to disclose accurately the risks of addiction and overdose. As to the distributors and pharmacies, the State alleged they had duties to actively prevent opioid diversion and to report any suspicious orders. The Court held that the State stated prima facie claims of consumer fraud and negligence against the manufacturers, reasoning that allegations that they labeled drugs in a manner inconsistent with FDA-approved uses were sufficient to survive dismissal. The Court also held that the State met its pleading requirements for negligence and consumer fraud against the distributors, including by adequately alleging a prima facie case of reasonable foreseeability and proximate cause. The State did not state a claim against the pharmacies, however, because the State’s comprehensive pharmacy regulatory scheme and enforcement procedures preempted the claims in the complaint.
Court of Chancery Addresses the Scope of Summary Control Disputes and Effectiveness of Written Consents
Control disputes, like those under Section 225 of the DGCL, are summary, narrow proceedings limited to the issues regarding title to office. The Court of Chancery will not hear or decide “collateral” matters. Whether something is collateral turns on whether it is necessary to decide it to resolve the claim to office. That, in turn, depends on the particular facts and claims of the case. All this is due to the jurisdictional limitations of statutory control disputes as well as the policy of securing prompt resolutions. In this summary judgment ruling, the Court declines to deem certain defenses collateral that related to the validity of a stockholder consent under equitable principles. The ruling also addresses when a consent is treated as technically effective under Delaware law, i.e., usually upon delivery.
D & O insurance covers actions taken by a director. However, when a director acts on behalf of another entity in dealing with the insured company, it is not always easy to decide if the claim against him arises out of his role as a company director. This decision applies a “but for” test in this way. If the claim would not exist “but for” the conduct on behalf of the other, non-insured entity, then the claim is not based on the director’s conduct as a director of the insured entity and the "capacity” exclusion applies to deny coverage. This result turns in part on the specific language of the policy that insured against conduct “solely” taken as a director.
Superior Court Holds that Judgment Creditors Required to Renew Judgments Every Five Years Under 10 Del. C. § 5072
This case with a tortured history presented an interesting issue regarding when a creditor is required to renew a judgment in the Superior Court. The Court held that plaintiff (the judgment creditor) was required to renew the judgment after five years pursuant to 10 Del. C. § 5072. Although the creditor did not renew its judgment within five years, the Court granted the creditor’s motion to renew the judgment retroactively because of the prior practice of not requiring such motions until ten years after a judgment’s entry, and the creditor’s failure was not attributable to his negligence because of intervening events, including a Supreme Court ruling, that occurred.
This is an interesting decision because it explains when there is privity between parties so as to preclude a claim that one party has resolved previously. Briefly, there needs to be a common interest between the parties without any conflicting interest that would make the settling party an improper representative of the other party. In this action, the Court held that because of newly discovered evidence, the Court could no longer find that the parties were in privity, and it reversed its prior decision dismissing plaintiffs’ claims against one of the defendants on res judicata grounds.
To obtain business judgment rule protection, directors need to make adequate disclosures to the stockholders whose votes directors contend were adequate to invoke the Corwin decision. But exactly what sort of financial disclosures are needed, particularly where there are no audited financial statements available? This decision helps answer that question. At least when the lack of audited statements is due to a failure to restate those statements after the discovery of past errors, the lack of such statements may be enough to show the disclosures were not adequate to fairly inform the stockholders before their vote. This is particularly so when there have not been quarterly reports, an annual meeting or any explanation why the past financial statements have not yet been corrected. This decision is also helpful in pointing out that when directors’ votes are influenced by their receiving extra compensation as a result, there is enough to support a claim of disloyalty to defeat a motion to dismiss.
This decision explains when to stay a Delaware litigation in favor of litigation in a foreign country. As it notes, when the law of that other country is not well explained to the Court with respect to the enforcement of a forum selection clause, it will apply Delaware law to decide that issue.
As this decision points out, if a non-compete agreement conditions its enforcement on the employer’s performance of its end of the bargain, then a failure to do so renders the non-compete unenforceable.
This is a good decision for its explanation of when a non-compete agreement will be enforced when it does not have a geographical limit. If the agreement speaks to not engaging “in competition with” the former employer, that provides a limit based on what customers the old employer had and is enforceable as a result.
Stock preferences are in derogation of the common law and thus strictly construed. Any rights, preferences, and limitations of preferred stock that distinguish it from common stock must be expressly and clearly stated. But, as this decision explains, that does not mean that extrinsic evidence cannot be considered to construe ambiguous provisions. The decision also affirms that stockholder rights to inspect corporate records for a proper purpose cannot be taken away by a certificate of incorporation.
A claim for tortious interference with a contractual relationship must include an allegation that the conduct complained about was itself wrongful. This decision explains what is such “wrongful” conduct and concludes that the use of confidential information to contact a party to a contract to dissuade it from going forward is such wrongful conduct.
Court of Chancery Validates Cure of Defective Corporate Acts Affecting Herman Miller’s Acquisition of DWR
Sections 204 and 205 of the DGCL permit corporations to cure and validate defective corporate acts under the right circumstances. This is another decision explaining when the Court will validate an attempted cure under Section 204. The opinion explains, among other things, that there is no set time limit to seek validation of a cure under Section 205. It further explains what sort of defective acts may be addressed in Section 205 proceedings. More ›
This is an important decision because it upholds the right of an insurance company to recover defense costs it advanced when it is later determined there was no insurance coverage for the underlying litigation. While the opinion applies Tennessee law, some parts of the opinion suggest that the Court would reach the same result if Delaware law applied. That is so even though the Court recognized that permitting such a recovery is the minority positon in the United States. The opinion is also useful for its explanation of how an insurer may preserve its right to recover those advances by making it clear that it is advancing the costs subject to its right to recover them later if a court decides there was no insurance coverage.
It is not always clear when two agreements are to be read as one. This is because incorporating one agreement into a second agreement may not be explicit. This decision sets out the principles under Delaware law that govern how to decide if two agreements should be read together, including that there must be an “explicit manifestation of intent” to incorporate one document into another.
This is an interesting decision because it dismisses a counterclaim that is contradicted by the claimant’s answer to the complaint. Thus it goes beyond the normal rule that requires a factual pleading to be accepted as true when considering a motion to dismiss.