Delaware Business Litigation Report

Court Of Chancery Upholds Derivative Claim Despite Prior Dismissal

Louisiana Municipal Police Employees' Retirement System v. Pyott, C.A. 5795-VCL  (June 11, 2012)

This is one of the most important decisions on derivative litigation in many years. There are 3 key holdings, at least one of which may reverse prior law.  First, the Court held that a derivative suit dismissed for failure to plead sufficient grounds to proceed under the demand rules may be refiled by a different plaintiff who has a better complaint.  This may modify prior law  that had held that once dismissed with prejudice, the suit could not be revived by a better complaint from a new plaintiff.

Second, this decision effectively kills off the old first-filed rule that held that the plaintiff who files the first complaint will control the litigation even if other complaints are filed later by different plaintiffs.  From now on, the better plaintiff will be the lead plaintiff.

Third, the decision again stresses the value of inspecting a company's records before filing a derivative suit.  Indeed, the failure to do so may cause the Court to view the complaint as presumptively meritless, at least with respect to whether the demand rules have been meet.

The opinion is worth reading for many other reasons as well.  Its discussion of the Caremark case alone is a good reason to study the decision.

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Court of Chancery Discusses The Role of a Stockholder Representative In Arbitration Proceedings

Pryor v. IAC/Interactivecorp, C.A. 6884-CS (June 7, 2012)

What is the role of a "stockholder representative" in an arbitration proceeding?  When there are many parties to an agreement, it is common for the parties on one side (such as the selling stockholders entitled to an earn out payment) to chose one of their bretheren to act for them all.  While most assume that the representative chosen has the right to call the shots in the arbitration, her role may be much more.  This decision explains why that may be important.  It holds that notice to the representative that begins the period in which an appeal may be filed also counts as notice to all the parties the chosen one represented.  Hence, if she does not file a timely appeal,  the others may not do so later.  Moreover, the decision suggests that only the representative may argue the merits of an appeal.

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Superior Court Explains When a Contract Claim Is Not A Tort

Cornell Glasgow LLC v. La Grange Properties LLC,  C.A. N11C-05-016 JRS CCLD (June 6, 2012)

Parties often try to plead as many different legal theories as possible.  Pleading tort claims is particularly popular because there is a sense that  it may lead to bigger damages and sounds aggressive.  After all, who wants to be a "tortfeasor?"  This careful decision explains when there is a tort claim and when there is not when the dispute arises out of a contractual relationship.

Briefly, after the contract has been at least partially performed, it is not a tort to promise to continue performance even if you do not mean to do so.  Instead, that is just a breach of the contract. Therefore, there is no claim in such circumstances for fraudulent inducement. Also, when the damages arising out of the breach are not different than the damages recoverable in tort, there is no tort claim either.

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Court Of Chancery Upholds Contract As Bar To Estoppel Claim

Blaustein v. Lord Baltimore Capital Corporation,  C.A. 6685-VCN (May 31, 2012)

This decision reiterates the settled Delaware law that when a contract deals with the parties' rights on a particular subject, one of the parties can not claim that it entered into the contract based on an oral promise that differs from what the contract provides.  After all, if you could do that, then why have the contract in the first place? More ›

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Court Of Chancery Implements The Pharmathene Decision

PharmAthene Inc. v. SIGA Technologies Inc., C.A. 2627-VCP (May 31, 2012)

The original PharmAthene decision is a landmark in the law of remedies for breach of contract because it imposed a form of profit sharing. This latest decision in that case, together with the attached Order, explains in detail how that remedy is to work.

This decision, including its award of expectation damages, was largely affirmed on May 24, 2013. See Del Supr C.A, 314, 2012

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Supreme Court Upholds Section 220 Jurisdictional Rules

Central Laborers Pension Fund v. News Corporation,  No. 682, 2012 (May 29, 2012)

The right of a stockholder to inspect a company's books and records is govenned by Section 220 of the DGCL.  A beneficial owner must first show proof of beneficial ownership, however, and Section 220 tells how to do so.  Here the plaintiff for some reason just ignored Section 220's requirements to show beneficial ownership.  When then faced with a motion to dismiss, he argued that he could supply that proof later because it was just a clerical mistake to not do so when his complaint was filed. The Delaware Supreme Court forcefully rejected  that argument and upheld the dismissal of his complaint.

Note that the Supreme Court sidestepped the holding of the Court of Chancery that once it filed a derivative suit, this plaintiff lost its rights under Section 220.

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Court Of Chancery Interprets Release

Travelers Casualty And Surety Company v. Sequa Corporation,  C.A. 7055-VCG (May 29, 2012)

This decision involved an interesting argument over the scope of a release.  As is common, the release was signed on behalf of a parent company and all its subsidiaries. To escape the scope of the release, a subsidiary argued that it was only bound to release the same claims that its parent had, but not any claims that were unique to the subsidiary.  The Court sidestepped that argument because in any case the release did not cover the claims asserted by the subsidiary.  However, this stands as a warning to better draft releases that cover all entities in a control group.

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Court Of Chancery Interprets LLC Consent Rights

Paul v. Delaware Coastal Anesthesia, C.A. 7084-VCG (May 29, 2012)

The LLC statute, like the DGCL, permits the operating agreement to bar member action by written consent.  Here the plaintiff argued that such an agreement's fairly common provisions dealing with how members were entitled to vote at a meeting also precluded member action by written consent. The Court held that any such prohibition must be clearly set out in the operating agreement and not merely implied.  Hence, the written consents were upheld.

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Court Of Chancery Explains Reformation Remedy

Brinckerhoff v. Enbridge Energy Company Inc., C.A. 5526-VCN (May 25, 2012)

This is an interesting decision because it suggests a remedy other than damages in an unfair price case.  Once a deal has closed, the plaintiff may find that his remedies in a pure unfair price claim are limited.  Frequently, damages against directors are foreclosed by an exculpation clause. Here the Court suggests that, at least when the merger consideration is not just cash, reformation may be an available remedy.  Given that has happened just once, it may be a long shot at best.

This decsiion was upheld by the Supreme Court on MAy 28, 2013. 67 A3d 369.

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Court Of Chancery Applies Hirt Test

Coyne v. Catalyst Heath Solutions Inc., C.A. 7448-VCN (May 25, 2012)

This decision applies the familiar Hirt factors to decide who should be lead class counsel.  Note the slight preference for who has the most support among the various plaintiffs' firms.

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Court Of Chancery Permits Jurisdictional Depositions

Reid v. Siniscalchi, C.A. 2874-VCN (May 25, 2012)

Discovery in aid of proving jurisdiction is usually available.  But is there a limit?  This decision explores that question and permits depositions to prove jurisdiction.

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Court Of Chancery Explains Burden Of Proof In Accounting Case

Whittington v. Dragon Group LLC, C.A. 2291-VCP (May 25, 2012)

This decision explains how to apply the burden of proof in an accounting case.  Merely producing a cancelled check is not enough.

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New ANDA Litigation Book

Kenneth L. Dorsney Is Editor-In-Chief and a Co-Author of a New ANDA Litigation Book Published by the American Bar Association

The recently released book, ANDA Litigation, provides both a ready roadmap for novice litigators in the field as well as more detailed material and strategy to assist the more experienced ANDA litigator. The first part details the Hatch-Waxman Act and how it was implemented. Practical tools in these chapters include: an overview of the drug approval process, including required notice and pre-litigation considerations, and issues related to the timeline of litigation.

Following this, the authors explore even deeper into the actual litigation under the act, with topics covering: responses to the complaint, discovery, the work of experts, and patent claim construction and summary judgment. Further chapters are practice-focused, covering issues including preparing the case for trial, the work of trial, managing the litigation process, and post-trial issues, including appeals to the U.S. Court for the Federal Circuit. Finally, the authors discuss remedies, settlement, and antitrust implications, and the book also includes chapters on regulation and litigation of pharmaceuticals outside the U.S.

Please visit the American Bar Association’s bookstore to learn more or to order a copy of this new book, ANDA Litigation: Strategies and Tactics for Pharmaceutical Patent Litigators. 

Representing a compromise in the pharmaceutical industry in balancing patent exclusivity against market competition, the effect of the Drug Price Competition and Patent Term Restoration Act (commonly known as the Hatch-Waxman Act) on controlling the pharmaceutical market remains unsettled. Amendments to the original act included provisions for an abbreviated process for FDA approval of generic versions of patented pharmaceuticals through the filing of an Abbreviated New Drug Application (ANDA) and the right to initiate patent litigation against an applicant. This law has resulted in ANDA litigation cases and a constant struggle to shape the landscape of the patent and regulatory regime governing FDA approved patented and generic drugs.

The Hatch-Waxman Act with it amendments is a hybrid of two already complex areas of the law -- U. S. patent law and FDA regulatory law -- which makes patent litigation in this area especially complicated and hotly contested. ANDA Litigation: Strategies and Tactics for Pharmaceutical Patent Litigators is a single-source guide examining the intersection between the statutory and regulatory scheme governing approval of generic pharmaceuticals and U.S. patent law in the context of Paragraph IV ANDA litigation. In 19 detailed chapters, this single-source reference focuses both on the current and developing law as well as the strategies and tactics employed by the litigants.

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Court Of Chancery Again Decides What is A Security

Fletcher International Ltd. v. ION Geophysical Corporation, C.A. 5109-VS (May 23, 2012)

When a preferred stockholder has the right to approve the issuance of any new securities by its company, the question arises whether that right extends to the issuance of notes.  In the second decision in this case, the Court again determines whether such notes should be considered securities subject to approval by a preferred stockholder.  In keeping with the brevity expected of a blog, the short answer is that the longer the term of the note, the closer it is to being classified as a security.  Of course, that is too short an answer, but you will need to read this detailed opinion to really understand the test.

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Court Of Chancery Awards Fees For Fraud

Paron Capital Management LLC v. Crombie,  C.A. 6380-VCP (May 22, 2012)

Recovering attorney fees is rare in Delaware litigation.  However, this decision enforces another of the few exceptions to the American rule that usually denies a fee award.  The exception is for when a fraud requires a plaintiff to spend the fees in defense or prosecution of a claim involving a third party.  In that case, the fees are really just damages caused by the fraud and may be recovered.

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