In the recent decision of DG BF, LLC, et al. v. Michael Ray, et al., C.A. No. 2020-0459-MTZ (Del. Ch. June 30, 2021), the Delaware Court of Chancery declined to exercise subject matter jurisdiction over a defamation claim despite the parties stipulating to have the Court hear such claim under the clean-up doctrine.

Earlier, on March 1, 2021, the Court issued a Memorandum Opinion addressing defendant’s motion to dismiss, and ordered supplemental briefing on whether the Court had subject matter jurisdiction over plaintiffs’ defamation claim, which seeks damages but not injunctive relief.  Rather than brief that question, the parties instead submitted a stipulation agreeing that the Court had subject matter jurisdiction over the claim.

While Vice Chancellor Zurn considered the pending motion’s substantive merits, Vice Chancellor Slights issued an opinion in the case of Smith v. Scott, 2021 WL 1592463, at *13–14 (Del. Ch. Apr. 23, 2021) which addressed whether the same issue, i.e. whether the Court has subject matter jurisdiction over a defamation claim.

In Smith, Vice Chancellor Slights concluded that “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.” Id. (emphasis added).

The Court went on to state: “The ‘clean-up’ doctrine serves the important function of avoiding, when appropriate, piecemeal litigation, but the historical imperative that a jury, not a judge, should evaluate whether a defendant’s statements are defamatory shines even brighter.” Id.

Vice Chancellor Zurn adopted the rationale of Smith v. Scott, and therefore declined the parties’ request that the Court hear the defamation claim under the clean-up doctrine.  Rather, the Court dismissed the count, subject to plaintiffs’ right under 10 Del. C. § 1902 to transfer the claim to the Delaware Superior Court.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In the recent decision of Agspring Holdco, LLC, et al. v. NGP X US Holdings, L.P., et al., C.A. No. 2019-0567-JRS (Del. Ch. June 28, 2021), the Delaware Court of Chancery issued a stay of discovery pending resolution of the parties’ cross-motions for summary judgment to confirm or vacate an arbitration ruling concerning advancement obligations.  Earlier in March 2021, an arbitration panel ruled that defendant was entitled to advancement from plaintiff.

The Court also opened the door to a stay of the entirety of the case in the event that the defendant prevailed on its cross-motion and plaintiffs failed to honor their advancement obligations.

Vice Chancellor Slights stated: “Granting a stay is appropriate where it would not prejudice the non-moving party and where it would spare the moving party unnecessary expense or burden.” Slip op. at 2 (internal quotations omitted).

The Court noted that the action was not expedited, and that a stay would not be prejudicial.  The Court held that the incurrence of further fees in the action was not warranted until the advancement issue is resolved.  Accordingly, the Court exercised its discretion and granted a stay of the case pending resolution of the cross-motions.

Of interest, the Vice Chancellor concluded by stating that, if defendant prevails on its advancement claim and plaintiffs fail to advance funds (as their CFO indicated may be the case), then “there are legitimate questions as to whether this action should be stayed until such time as Plaintiffs’ advancement obligations are fulfilled.”  Slip op. at 3 (citing Perryman v. Stimwave Techs. Inc., 2020 WL 2465720, at *4 (Del. Ch. May 13, 2020)) (“a delay in recognizing advancement rights may ultimately render those rights illusory.”).

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

On July 12, 2021, the Court of Chancery issued Standing Order No. 6.  The standing order extends the permitted use of unsworn declarations, verifications, certificates, statements, oaths, or affidavits in filings with the Court of Chancery, pursuant to 10 Del. C. § 3927, until September 30, 2021.

Citing that many law firms and businesses that litigate in the Court of Chancery continue to operate remotely to prevent the spread of COVID-19, the Court determined the continued use of unsworn declarations under 10 Del. C. § 3927 to be appropriate.  The unsworn declaration, verification, certificate, or statement must be in substantially the form approved by Section 3927.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

The United States District Court for the District of Delaware recently issued a Jury Trial Notice on April 5, 2021, stating that jury trials will resume, subject to the discretion of each individual judge as to whether and when any particular case will proceed to trial.

Previously, on February 5th, the Chief District Court Judge issued a Standing Order RE: Criminal and Civil Jury Trial Suspension, which cancelled all jury trials for two months, in light of the continuing impact of the COVID-19 pandemic.

Citing current conditions and after consultation with the Court’s Reopening Committee, the District Court of Delaware determined that it will not extend the February 5th Standing Order.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In the recent decision of Blackmon v. O3 Insight, Inc., C.A. No. 2020-1014-SG (Del. Ch. Mar. 9, 2021), the Delaware Court of Chancery held that the arbitrability of a Delaware director’s claim for advancement must be determined by an arbitrator.

The Petitioner, Theodore Blackmon, is a director and stockholder of respondent O3 Insight, Inc. (the “Company”), a Delaware corporation.  In September of 2020, the Company sued Blackmon in Alabama alleging breach of his fiduciary duty to the Company. The Certificate of Incorporation and Bylaws of the Company provide for advancement following tender of an undertaking to repay.

Blackmon filed an action in the Delaware Court of Chancery seeking advancement of his legal fees. The Company moved to dismiss for lack of subject matter jurisdiction.  The Petitioner had signed an agreement (the “Stockholders Agreement”), which stated: “any dispute, controversy or claim arising out of, relating to, or in connection with, this Agreement . . . shall be finally settled by arbitration. The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association” (the “AAA rules”).

Vice Chancellor Glasscock noted that under the AAA rules, issues of arbitrability—whether the arbitrator is empowered to decide a particular issue—are reserved for the arbitrator.

The Company argued that because the Stockholders Agreement invokes the rules of the AAA, the Court of Chancery is without jurisdiction to determine whether the issue of the Petitioner’s entitlement to advancement of legal fees is reserved to arbitration.

In conducting its analysis, the Court noted that “Delaware arbitration law mirrors federal law”, and that “[j]ust as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, so the question of who has the primary power to decide arbitrability turns upon what the parties agreed about that matter.”  Slip op. at 3 (quoting James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78-79 (Del. 2006)).

Given that “the question of who decides arbitrability is itself a question of contract”, the Court analyzed whether the parties contractually bound themselves to have arbitrability in this context decided by an arbitrator.  The Court noted that the arbitration clause of the stockholders agreement submitted all issues “arising out of, relating to, or in connection with” the Stockholder’s Agreement to arbitration under the AAA rules. Slip op. at 4.

The Court, citing Willie Gary, found that the decision of whether the claims are subject to arbitration, a gateway issue referred to as “substantive arbitrability”, must be decided by the arbitrator in the first instance.  Accordingly, the Court granted the Company’s motion to stay the action pending the arbitrator’s decision on the arbitrability of the advancement claim.

Key Takeaway: Although the Delaware Court of Chancery is vested with subject matter jurisdiction to adjudicate advancement claims of directors of Delaware corporations, such jurisdiction may be contractually vested in an arbitrator, and the Court will look to the operative agreement to determine whether the Court, or the arbitrator, decides the arbitrability of the claim.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In a recent letter opinion, 250ok, Inc. v. Message Sys., Inc., C.A. No. 2020-0588-JRS (Del. Ch. Jan. 22, 2021), the Court of Chancery held that a claim under the Delaware Uniform Trade Secrets Act (“DUTSA”), 6 Del. C. § 2001 et seq., preempted a common law claim for unjust enrichment, when both claims arose from the same purported wrongdoing.

In dismissing the unjust enrichment claim, Vice Chancellor Slights held that, under established Delaware Supreme Court precedent, a trade secret claim under the DUTSA “occupies the field” and preempts a common law unjust enrichment claim. Slip op. at 1.

The Court further explained that preemption applies not just to tort-based claims, but to any “alternative common law claims” ” beyond those expressly exempted from preemption in the statute.  Id. at 13. Moreover, preemption applies at the dismissal stage of a proceeding, even though the Court may later find that the DUTSA does not protect the information at issue. Accordingly, the Court of Chancery dismissed plaintiff’s unjust enrichment claim.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In a noteworthy and recent Court of Chancery decision, Mehra v. Teller, C.A. No. 2019-0812-KSJM (Del. Ch. Jan. 29, 2021), the Delaware Court of Chancery ruled upon a member’s request to invalidate dissolution of a Delaware limited liability company.  The opinion is an important read as the Court considered whether the LLC deadlock–which provided the basis for dissolution–was genuine or simply “contrived” by one member to force the appearance of deadlock.

In this action, Plaintiff Mehra and Defendant Teller had equal say over the member and board decisions of the limited liability company at issue (“Company”), a consumer goods company.  After several successful years, the Company suffered a series of setbacks that soured the parties’ relationship and left Teller strapped for cash.

The LLC agreement contained a deadlock provision which, according to the Court, “created a trapdoor with a hair trigger” (slip op. at 1), in that one member could propose a business divorce to the board, declare deadlock if the other disagreed, and exit the shared-control arrangement between the two parties.

Here, Teller held a meeting whereby he proposed a resolution to remove Mehra as CFO of a Company subsidiary.  As the parties could not agree on this resolution, Teller declared the board deadlocked and dissolved the Company.

Mehra brought suit before the Delaware Court of Chancery to invalidate the dissolution in order to restore the shared-control arrangement among Mehra and Teller.  The Court resolved the issue in Teller’s favor, finding that although Teller may have contrived the circumstances giving rise to the deadlock, Teller nonetheless proved that the parties had an irreconcilable disagreement over Mehra’s continuing management of the Company.  As such, the Court found that the deadlock was genuine and sufficient to warrant dissolution.

The Court also denied Mehra’s assertion that dissolution should be rendered invalid due to Teller’s alleged breach of a “good faith” provision of the LLC Agreement.   The Court disagreed, finding that Teller acted with the honest belief that his conduct was necessary for the Company.

Key Takeaway:

This decision is notable in that while the Court found that Teller was the party responsible for creating the circumstances giving rise to deadlock, a genuine deadlock nonetheless existed, which warranted dissolution.  Members of a Delaware limited liability company who have equal rights and say over the affairs of such LLC should carefully take this opinion into consideration in the event that one member seeks to dissolve an entity over deadlock.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

On January 29, 2021, Chief Judge Leonard P. Stark issued a Standing Order setting forth new procedures for the filing, service, and management of highly sensitive documents, defined as “HSD”. The Standing Order was issued in response to recent widespread disclosures of breaches of both private sector and government computer systems.

As the Order makes clear, most documents are presumptively deemed to not contain highly sensitive information (“HSI”), including “most sealed filings in civil cases, including the overwhelming majority (if not all) sealed documents filed in intellectual property and Chapter 11 cases.”  Standing Order, at 3.

If the document qualifies as an HSD, then the Standing Order provides a separate motion procedure the designating party must follow.

The Standing Order provides that the following documents are presumptively HSDs: (i) applications for electronic surveillance under 18 U.S.C. § 2518, and (ii) documents that adversely affect: national security; integrity of government operations; reputational interests of the US; a foreign sovereign interest; on-going law-enforcement investigations and intelligence-gathering operations; safety of public officials or individual cooperating with law enforcement; and the ability of an entity to maintain cybersecurity.

The Standing Order clarifies that few documents will qualify for this designation, however, stating that, in connection with business and other entities, “documents will likely constitute HSI only (if ever) when they are among the most sensitive records created in the entity’s history and that, if wrongfully disclosed, could result in catastrophic financial and/or other loss for the entity.” Standing Order, at 2.

Of significance, the Order clarifies that the HSD is “exceptional treatment” and the party moving to file the documents as such “bears the burden to justify such exceptional treatment.” Standing Order, at 2.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

A common tactic employed by experienced Chancery litigators defending a lawsuit is to file a motion to stay discovery while a motion to dismiss is pending. The argument is that if the case is dismissed, the expense of undertaking discovery while a motion to dismiss is pending should be avoided.

A recent short letter opinion issued by Vice Chancellor Slights, in the case of Soo Hyun Kim v. Coupang, LLC f/k/a Forward Ventures, LLC, C.A. No. 2020-0772-JRS (Del. Ch. Jan. 22, 2021), adjudicated such a motion to stay discovery while a motion to dismiss was pending.

The Court of Chancery recited the well-known standard for granting a motion to stay discovery pending a motion to dismiss:

Absent special circumstances, discovery will normally be stayed pending the determination of a motion to dismiss the complaint. ‘Special circumstances’ have been found to include situations where (i) the motion does not offer a ‘reasonable expectation’ of avoiding further litigation, (ii) plaintiff has requested interim relief, and (iii) the plaintiff will be prejudiced because the information may be unavailable at a later time.

Slip op. at 1-2 (internal citations omitted).

Counsel for plaintiff opposed the motion to stay discovery on the grounds that the motion to dismiss did not offer a reasonable expectation of avoiding further litigation because the Court will likely deny it.

The Court rejected that argument.  In so ruling, Vice Chancellor Slights wrote that: “But whether vel non the Motion to Dismiss will be granted or denied is not the question on this Motion. The question, instead, is whether the Motion to Dismiss, if successful, will avoid the need for further litigation.”  Id. at 2.

The Court also rejected plaintiff’s argument that the requested discovery would not impose an undue burden, stating that such consideration “is not the standard by which this court reviews applications to stay discovery in the midst of pending dispositive
motion practice.” Id. 

Takeaway

This pithy opinion reinforces the Court’s proclivity to grant a stay of discovery pending a motion to dismiss, provided none of the special circumstances referenced above are met.  This decision should be considered by parties seeking to oppose discovery pending a motion to dismiss.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

According to a recent announcement, the Delaware Court of Chancery amended various rules to match current practices in the Court and to clarify the Court’s expectations.  The Court amended Rules 79, 89, 114, 176, and 180-B.  A summary of the changes, as set forth in the announcement, are set forth below:

  • Rule 79 is amended to remove outdated language regarding how the Register in Chancery maintains its dockets.
  • Rule 89 is amended to remove the outdated language in the standard text of the Court’s form bonds.
  • Rule 114 is amended to clarify that all trust accountings are expected to be filed within ninety (90) days of the end of the accounting period.
  • Rule 176 is amended to permit those petitioning for guardianship to provide notice to interested parties by any courier service that provides real-time tracking of delivery.
  • Rule 180-B is amended to confirm that the Office of the Public Guardian may provide forms for its annual guardianship reviews, subject to the Court’s approval.

A link to the revised rules can be found here, and a redline reflecting the revisions can be found here.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.