Delaware Business Litigation Report

Court of Chancery Examines IP Claims

Sinomab Bioscience Limited v. Immunomedics, Inc., C.A. 2471-VCS (June 16, 2009)

In this rare case for the Court of Chancery, the Court determines the scope of noncompetition employment agreements. What is particularly interesting is the way the Court analyzed the testimony of the key witness to determine if he was telling the truth. This illustrates the critical role of circumstantial evidence in witness credibility and why it is so often a mistake to think that such evidence is not important or irrelevant to the real issues. Often that seemingly small point can make all the difference.

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Court of Chancery Signals Concern Over Fees to be Paid by the Benefited Company

Gatz v. Ponsoldt, C.A. 174-CC (June 12, 2009)

This decision raises an interesting question over whether attorneys fees should be paid when the fees in a way that does not benefit the company for whom the suit was filed. Briefly, the facts were that the defendant directors were found to be entitled to have the settlement of the claims against them paid by their company under their rights to be indemnified. The settlement balance was to go to the stockholder class. The Court's concern was that this meant the company's stockholders were not really benefiting if they, in effect, were funding the settlement by their company.

This issue was resolved when it turned out that under the odd circumstances of this case that the stockholders who were receiving the benefit of the settlement were largely different from those who now owned the company. Had that not been the case, however, the result may not have been the same. This means that there is a potential issue when defendant directors are indemnified for the damages. Whether the amount of fees will be affected in those circumstances remains to be seen.

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Court of Chancery Rejects Claim of Financial Support for Merger

James Cable LLC v. Millennium Digital Media Systems LLC, C.A. 3637-VCL (June 11, 2009)

When a party to a merger agreement must rely on the financial support of a third party to complete the deal, that must be spelled out in written agreement.  Absent that written commitment, the deal is then just an option to close held by the party without assets who is then fee to back out.

This decision rejects some clever attempts to make up for the lack of an agreement to fund the deal.  The Court held that the "affiliate privilege" bars a claim that a parent entity wrongly caused its subsidiary to back out of the transaction by refusing funding.  Other theories of recovery such as a contract claim were also dismissed for want of facts to support them.

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Superior Court: Action May Proceed Against Licensor Despite First-Filed Actions

STMicroelectronics N.V. v. Agere Sys., Inc., C.A. No. 08C-09-099 MMJ (Del. Super. May 19, 2009) (applying New York law per choice of law provision)

This case illustrates the series of events that may arise when a subsidiary is party to a licensing agreement, but its parent is not.

Here, the licensor sued the parent company for patent infringement in the Eastern District of Texas and before the International Trade Commission.  In response, the parent and subsidiary brought this action in Delaware, claiming that the filing of the patent infringement actions, though only naming the non-signatory parent, violated the licensing agreement’s covenant not to sue.

The Superior Court permitted the claim to move forward, denying the defendant-licensors’ McWane motion on the basis that the Delaware action did not present the same legal and factual issues as the first-filed proceedings.  Further, the Court denied the defendants’ motion to dismiss for failure to state a claim and for lack of standing on the basis that additional discovery was necessary to resolve those issues.

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Licensor's Action to Recover Royalties Overcomes Motion to Dismiss in Superior Court

Boyce Thompson Institute For Plant Research v. MedImmune, Inc., C.A. No. 07C-11-217 JRS (Del. Super. May 19, 2009) (applying New York law per choice of law provision)

This opinion discusses some interesting contractual interpretation and jurisdictional issues arising out of a licensing agreement.  The dispute arose because the licensees denied any obligation to pay royalties to the licensor for products they are manufacturing in a country where, they claim, the licensor does not hold a patent.

The Superior Court found that the contract was ambiguous on whether “covered” products included those that were protected by the licensor anywhere or only those that were protected by a patent in the locations where they were manufactured.  In any case, the Court denied the licensees’ motion to dismiss on the basis that there was no evidence presented to rule out the possibility that the licensees are, in fact, infringing on the patent by their acts in this other country.

The Court also raised the issue of whether it had subject matter jurisdiction to decide the case.  While the Court deferred resolution of the issue, it noted that, if the contract claim requires the Court to determine whether the patent was infringed, then it would likely follow that patent law is a “necessary element” of the breach of contract claim and the federal courts have exclusive subject matter jurisdiction.

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Allegations of Accounting Schemes and Material Misstatements Survive Motion to Dismiss

Collins & Aikman Corp. v. Stockman, Civ. No. 07-265-SLR-LPS (D. Del. May 20, 2009)

Magistrate Judge Leonard P. Stark considered the plaintiffs’ state law claims of breach of fiduciary duty and denied the defendants’ motion to dismiss these claims against certain individual defendants. The complaint alleged that the individual defendants, each of whom were directors or officers of Collins & Aikman, owed “fiduciary duties of loyalty, good faith and care to the Company” and breached those duties “by orchestrating, encouraging or utilizing various accounting schemes . . . which materially misstated the financial condition of the Company.”  The Court rejected the defendants’ argument that, with regard to the duty of care claims, C&A’s § 102(b)(7) exculpatory provision eliminated or limited personal liability.  The Court took judicial notice of the exculpatory provision and found it inapplicable as the complaint alleged facts implicating breaches beyond that of due care.
 

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Claim of Material Misstatement Regarding Gray Marketing Survives Motion for Summary Judgment

In re Adams Golf, Inc., Secs. Litig., C.A. No. 99-371-GMS (D. Del. May 26, 2009)

Chief District Judge Gregory M. Sleet rejected the defendants' motion for summary judgment, finding remaining issues of material fact concerning disclosures of gray marketing (marketing that legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer).  The Court found factual disputes as to: (1) whether the defendants had a duty to disclose the risk of gray marketing and (2) whether the gray marketing risk was material.  The defendants argued that gray marketing was not a “known trend or uncertainty” that must be disclosed under Item 303(a)(3)(ii) of Regulation S-K.  The court concluded, however, that a jury could reasonably conclude that the risk of gray marketing was a known trend or uncertainty likely to have a material impact on future revenue or that such knowledge rendered the statements false and misleading.  The Court also could not find as a matter of law that gray marketing risks were obviously unimportant to an investor.

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Court of Chancery Resolves Unclaimed Settlement Proceeds

Oliver v. Boston University, C.A. 16570-VCN (May 29, 2009)

What to do about unclaimed funds from a class action settlement is often a problem.  While the funds should not go back to the defendants, thereby rewarding them, the funds otherwise might be escheated to the State or sent to a charity.  Here the Court has the unclaimed finds going to Boston University, and the discussion will serve as guidance in future cases.

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Court of Chancery Sanctions Electronic Discovery Abuse

Beard Research, Inc. and CB Research & Development, Inc. v. Michael J. Kates, et al., C.A. 1316-VCP (May 29, 2009)

The Court of Chancery has become increasingly unhappy with litigants who fail to preserve electronic "documents" such as email.  In this latest expression of the concern, the Court sets out in detail the duties of client and counsel and explains when sanctions will be imposed for the failure to preserve evidence.

This is a particularly good opinion for its careful analysis of how to determine what sanction should be imposed.  The goal is to make the sanction fit the offense, such as by awarding a presumption that the destroyed emails would have hurt the case of the guilty party.  Exactly how much this will help remains to be seen, but it is a start.

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Court of Chancery Defines When a "Controlling Stockholder" Exists

Dubroff v. Wren Holdings LLC, C.A. 3940-VCN (May 22, 2009)

A claim that stockholders were wrongly diluted by the issuance of additional stock is generally consider a derivative claim that must meet tough pleading standards. However, when the dilution is caused by a controlling stockholder, the claim is also a direct claim that may be filed without meeting  the rules for derivative suits. This is a big advantage.

This decision holds that a group may be consider a "controlling stockholder" for purposes of determining when a direct claim may be filed. Note that acting in parallel or voting together on an issue is evidence of acting as a group but is not enough to meet the rule requiring the pleading of facts that show an agreement to act together as a group.

This decision is also important as the first time the Court has addressed what must be disclosed in the information statement that must be sent to stockholders after stockholder consent under Section 228 is executed.  Fair, if not full, disclosure is required, including whether corporate insiders benefited from the action taken by consent.

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Court of Chancery Resolves Fee Dispute Among Plainitffs Counsel

In Re Cablevision/Rainbow Media Group, C.A. 19819-VCN (May 22, 2009)

In the good old days, the multiple counsel for plaintiffs class or derivative litigation always seemed to be able to agree on how to split the fee awarded by the Court.  Well, the good old days are over.  Here the Court explains how to split the fee in a complex settlement.

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"Handshake Agreement" Overcomes Motion to Dismiss in Superior Court

Sunstar Ventures, LLC v. Tigani, C.A. No. 08C-04-042 JAP (Del. Super. April 30, 2009)

This case illustrates the exception to the statute of frauds of "substantial part performance."

The seller of a $5MM home, and other items, brought a breach of contract action, because the buyer backed away.   The buyer moved to dismiss on the grounds that there was no meeting of the minds, and, in any case, the statute of frauds bars enforcement of such a handshake agreement.

But the Superior Court denied the motion to dismiss, holding, among other things, that the fact that the buyer took possession and began making modifications to the home supported an inference that there was substantial part performance, an exception to the statute of frauds.

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Court of Chancery Delineates Employee Duties in Case of First Impression

Triton Construction Company Inc v. Eastern Shore Electrical Services Inc., C.A. 32390-VCP (May 18, 2009)

While it is well known that directors and officers have fiduciary duties, what about employees who are neither a director nor an officer?  This decision addresses that issue.  While the decision goes into a detailed analysis, in general, even a non-essential employee may have a fiduciary duty to her employer as an agent of the employer.  That duty then would require the employee to disclose certain conflicts of interest and to not compete with her employer.

This decision also has an excellent discussion of how to calculate lost profits in a business tort case.

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Court of Chancery Approves "Continuing Directors"

San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals Inc., C.A. 4446-VCL (May 12, 2009)

One defense against a hostile takeover is a provision that permits only "continuing directors" to approve certain important corporate acts.  In general, to be a "continuing director" you need to be "approved" by the existing board.  Hence, if you are elected in a proxy contest that marks the beginning of a takeover battle, you may not be an approved "continuing director."  That would be a bad thing for your client.

In this decision, the Court upheld the power of the board to approve even candidates from an opposition slate of directors to be "continuing directors."  This unusual circumstance was the result of a bond debenture provision that would have triggered a default if there were too many non-continuing directors on the board.  To avoid a default, it was decided to approve even the enemy.

That, in turn, lead the Court to be concerned about whether the board had acted in the stockholders' best interests.  The Court cautioned that the approval must be a considered act and that the adoption of such continuing director provisions needs to be carefully reviewed by the board in the future if they are to be upheld.

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Court of Chancery Limits Inspection Rights in LLC

Jakks Pacific, Inc.v. THQ/Jakks Pacific LLC, C.A. 4295-VCL (May 5, 2009)

When the business of an LLC is limited, so too may inspection rights be limited. Here the "business" was to exploit a license that was about to come to an end, and the Court held there was no need to inspect business records to value the business as there may well be nothing left to value.

Further, the Court held that mere allegations, unsupported by facts at trial, do not provide a basis to inspect records to determine if there has been any wrongdoing.

 

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