Labyrinth, Inc. v. Stephen A. Urich
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LABYRINTH, INC. and HARBOR BUSINESS ) COMPLIANCE CORPORATION, ) ) Plaintiffs, ) ) v. ) C.A. No. 2023-0327-MTZ ) STEPHEN A. URICH, ROBERT M. URICH, ) and COMPLETELY COMPLIANT, LLC, ) ) Defendants. )
MEMORANDUM OPINION Date Submitted: November 27, 2023 Date Decided: January 25, 2024
Blake Rohrbacher, John D. Hendershot, Sandy Xu, Morgan R. Harrison, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Kira N. Lum, ROYER COOPER COHEN BRAUNFELD LLC, Philadelphia, Pennsylvania, Attorneys for Plaintiffs.
Jesse L. Noa, Tyler E. Cragg, Andrew Moshos, Hannah L. Paxton, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware, Attorneys for Defendants.
ZURN, Vice Chancellor. One hundred and seventy years ago, the British army experienced the painful
cost of hastily executing a blundered communication. A Crimean War order
instructed six hundred seventy British soldiers to “recover the heights” and assured
them the support of a nonexistent infantry.1 With heights to every side of the calvary,
the unit’s commander did not know which “heights” to recover; so, he just picked
one. When the commander did not see a supporting infantry, he and the calvary just
charged on. No one in command stopped “to make reply,” or to “wonder why.”2
“[T]hough the soldier knew [s]omeone had blundered . . . , [i]nto the valley of Death
[r]ode the six hundred.”3
The contract in this action, between a buyer and a seller, is rife with blunders
and omissions. As between two reasonable interpretations, I will not just pick one
now; and with contractual signals to nonexistent provisions, I will not just charge
on. For today, I must deny or defer decision on the meaning of the error-ridden
provisions.
1 Military historians and strategists continue to study the attack, now a byword for the senseless waste of soldiers in war, to underscore the importance of military intelligence and a clear chain of command and communication. See Jesse Greenspan, The Charge of the Light Brigade, 160 Years Ago, Hist. (Oct. 28, 2019), https://www.history.com/news/the- charge-of-the-light-brigade-160-years-ago. 2 Alfred Tennyson, The Charge of the Light Brigade, in The Charge of the Light Brigade and Other Poems 52 (2016). 3 Id.
2 The rest of this opinion does not inspire any epic comparisons. It is a tale
this Court hears often: a seller perpetuated fraud on a buyer before and at closing to
load the seller’s pockets. The buyer has told that tale with the requisite particularity,
and the contract permits the buyer to sue on the seller’s alleged fraud. But the buyer
has failed to plead the seller’s affiliate misappropriated any trade secrets, resulting
in dismissal of that claim.
I. BACKGROUND4
Plaintiff Harbor Compliance Corp. (“Harbor” or “Buyer”) provides software
for company compliance solutions. Plaintiff Labyrinth, Inc. (“Labyrinth” or the
“Company,” and together with Harbor, “Plaintiffs”) provides charity, fundraiser,
corporate, “and other similar registration services” through its company software to
“nonprofit and for-profit entities.”5 Defendant Stephen Urich (“Stephen” or
4 For the purposes of the pending motion to dismiss for failure to state a claim, I draw the following facts from the plaintiffs’ Verified Complaint, as well as the documents attached and integral to it. See, e.g., H-M Wexford v. Encorp, 832 A.2d 129, 139 (Del. Ch. May 27, 2003). Citations in the form “Compl.” refer to plaintiffs’ Verified Complaint, available at docket item (“D.I.”) 1. Citations in the form “DOB” refer to Defendants’ Opening Brief in Support of Partial Motion to Dismiss the Verified Complaint, available at D.I. 19. Citations in the form “PAB” refer to Plaintiffs’ Answering Brief in Opposition to Defendants’ Partial Motion to Dismiss, available at D.I. 25. Citations in the form “DRB” refer to Defendants’ Reply Brief in Support of their Partial Motion to Dismiss the Verified Complaint, available at D.I. 28. 5 D.I. 1 at Ex. A [hereinafter “SPA”] § 1.2 (defining “Business”).
3 “Seller”) was the Company’s CEO and sole stockholder.6 Defendant Robert Urich,
Stephen’s father, served as the Company’s treasurer.
A. Harbor And Stephen Begin Negotiations.
On March 19, 2021, Harbor approached Stephen about potentially
collaborating with, merging with, or acquiring the Company. Seven months of
negotiations culminated in the execution of an October 2021 Stock Purchase
Agreement (the “SPA”). Stephen, Robert, Harbor, and the Company all signed the
SPA.
When negotiations began, Seller asked for as much as $42 to $45 million, but
Harbor refused to offer more than $28 million.7 “Soon after negotiations began,”
Robert started drafting a series of Company financials to share with Buyer.8 Stephen
instructed Robert to “let [him] know at such point as [Robert] feel[s] [he] ha[s] a
version that is pretty solid and shows Labyrinth in about as good a light as possible.”9
On May 5, Stephen emailed Robert “regarding the estimate for [2021]” and directed
him to “work from [$9,300,000],” because Stephen “told [Harbor] previously that
6 Compl. ¶ 21. Given the common surname of both defendants, I use first names in pursuit of clarity. I intend no familiarity or disrespect. 7 Id. ¶¶ 25–27. 8 Id. ¶ 135. 9 Id. ¶ 136.
4 [he] was estimating $9,300,000 for [2021].”10 The same day, Stephen represented
to Harbor that the Company “expected an annual revenue for 2021 of $9,300,000
and 28.6% growth over 2020.”11 By May 12, Stephen made “a series of specific
representations [to Harbor] about the Company’s past practices, present financial
state, and future growth representations.”12 Then, on May 12, Harbor presented an
initial letter of intent (the “LOI”) for Seller’s consideration.13 On June 7, after some
due diligence, Harbor and Seller executed the LOI which included price terms.14
B. Stephen Begins Accelerating Billing.
The next day, June 8, Stephen asked an accountant for “the best way to get
the money out [of the Company]”15 before the sale. To date, Labyrinth had generally
billed only once work was complete.16 But that day, Stephen instructed the
Company’s director of accounting to instead bill clients “for work that had not been
completed.”17 On June 9, Stephen instructed employees to pre-bill existing clients
10 Id. ¶ 137. 11 Id. ¶ 22. 12 Id. 13 Id. ¶ 200. 14 Id. ¶¶ 140, 157. 15 Id. ¶ 135. 16 Id. ¶¶ 35, 41. 17 Id. ¶¶ 159–60.
5 for work that had not started.18 On June 14, Stephen instructed employees to
pre-bill new clients.19 On June 16, Stephen called for invoicing clients “even when
the Company did not have adequate information to begin work.”20
Stephen kept it up. In July, he instructed the Company to bill clients “who . . .
have never been billed” and to bill “any new clients that [Labyrinth was] eventually
going to do work for (i.e. most of them).”21 In August, Stephen emphasized he
wanted the Company “to bill all new clients, even if they have not been assigned to
a[] [Company agent] yet” and that he “would like to get in as much money as
possible in the next 45 days.”22 “By the end of September, Stephen was offering
overtime incentives for employees to work on the [new] Invoice Acceleration”
policy; the “overtime wages . . . would be paid not by Seller, but by Buyer on behalf
of the Company post-Closing.”23
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LABYRINTH, INC. and HARBOR BUSINESS ) COMPLIANCE CORPORATION, ) ) Plaintiffs, ) ) v. ) C.A. No. 2023-0327-MTZ ) STEPHEN A. URICH, ROBERT M. URICH, ) and COMPLETELY COMPLIANT, LLC, ) ) Defendants. )
MEMORANDUM OPINION Date Submitted: November 27, 2023 Date Decided: January 25, 2024
Blake Rohrbacher, John D. Hendershot, Sandy Xu, Morgan R. Harrison, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Kira N. Lum, ROYER COOPER COHEN BRAUNFELD LLC, Philadelphia, Pennsylvania, Attorneys for Plaintiffs.
Jesse L. Noa, Tyler E. Cragg, Andrew Moshos, Hannah L. Paxton, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware, Attorneys for Defendants.
ZURN, Vice Chancellor. One hundred and seventy years ago, the British army experienced the painful
cost of hastily executing a blundered communication. A Crimean War order
instructed six hundred seventy British soldiers to “recover the heights” and assured
them the support of a nonexistent infantry.1 With heights to every side of the calvary,
the unit’s commander did not know which “heights” to recover; so, he just picked
one. When the commander did not see a supporting infantry, he and the calvary just
charged on. No one in command stopped “to make reply,” or to “wonder why.”2
“[T]hough the soldier knew [s]omeone had blundered . . . , [i]nto the valley of Death
[r]ode the six hundred.”3
The contract in this action, between a buyer and a seller, is rife with blunders
and omissions. As between two reasonable interpretations, I will not just pick one
now; and with contractual signals to nonexistent provisions, I will not just charge
on. For today, I must deny or defer decision on the meaning of the error-ridden
provisions.
1 Military historians and strategists continue to study the attack, now a byword for the senseless waste of soldiers in war, to underscore the importance of military intelligence and a clear chain of command and communication. See Jesse Greenspan, The Charge of the Light Brigade, 160 Years Ago, Hist. (Oct. 28, 2019), https://www.history.com/news/the- charge-of-the-light-brigade-160-years-ago. 2 Alfred Tennyson, The Charge of the Light Brigade, in The Charge of the Light Brigade and Other Poems 52 (2016). 3 Id.
2 The rest of this opinion does not inspire any epic comparisons. It is a tale
this Court hears often: a seller perpetuated fraud on a buyer before and at closing to
load the seller’s pockets. The buyer has told that tale with the requisite particularity,
and the contract permits the buyer to sue on the seller’s alleged fraud. But the buyer
has failed to plead the seller’s affiliate misappropriated any trade secrets, resulting
in dismissal of that claim.
I. BACKGROUND4
Plaintiff Harbor Compliance Corp. (“Harbor” or “Buyer”) provides software
for company compliance solutions. Plaintiff Labyrinth, Inc. (“Labyrinth” or the
“Company,” and together with Harbor, “Plaintiffs”) provides charity, fundraiser,
corporate, “and other similar registration services” through its company software to
“nonprofit and for-profit entities.”5 Defendant Stephen Urich (“Stephen” or
4 For the purposes of the pending motion to dismiss for failure to state a claim, I draw the following facts from the plaintiffs’ Verified Complaint, as well as the documents attached and integral to it. See, e.g., H-M Wexford v. Encorp, 832 A.2d 129, 139 (Del. Ch. May 27, 2003). Citations in the form “Compl.” refer to plaintiffs’ Verified Complaint, available at docket item (“D.I.”) 1. Citations in the form “DOB” refer to Defendants’ Opening Brief in Support of Partial Motion to Dismiss the Verified Complaint, available at D.I. 19. Citations in the form “PAB” refer to Plaintiffs’ Answering Brief in Opposition to Defendants’ Partial Motion to Dismiss, available at D.I. 25. Citations in the form “DRB” refer to Defendants’ Reply Brief in Support of their Partial Motion to Dismiss the Verified Complaint, available at D.I. 28. 5 D.I. 1 at Ex. A [hereinafter “SPA”] § 1.2 (defining “Business”).
3 “Seller”) was the Company’s CEO and sole stockholder.6 Defendant Robert Urich,
Stephen’s father, served as the Company’s treasurer.
A. Harbor And Stephen Begin Negotiations.
On March 19, 2021, Harbor approached Stephen about potentially
collaborating with, merging with, or acquiring the Company. Seven months of
negotiations culminated in the execution of an October 2021 Stock Purchase
Agreement (the “SPA”). Stephen, Robert, Harbor, and the Company all signed the
SPA.
When negotiations began, Seller asked for as much as $42 to $45 million, but
Harbor refused to offer more than $28 million.7 “Soon after negotiations began,”
Robert started drafting a series of Company financials to share with Buyer.8 Stephen
instructed Robert to “let [him] know at such point as [Robert] feel[s] [he] ha[s] a
version that is pretty solid and shows Labyrinth in about as good a light as possible.”9
On May 5, Stephen emailed Robert “regarding the estimate for [2021]” and directed
him to “work from [$9,300,000],” because Stephen “told [Harbor] previously that
6 Compl. ¶ 21. Given the common surname of both defendants, I use first names in pursuit of clarity. I intend no familiarity or disrespect. 7 Id. ¶¶ 25–27. 8 Id. ¶ 135. 9 Id. ¶ 136.
4 [he] was estimating $9,300,000 for [2021].”10 The same day, Stephen represented
to Harbor that the Company “expected an annual revenue for 2021 of $9,300,000
and 28.6% growth over 2020.”11 By May 12, Stephen made “a series of specific
representations [to Harbor] about the Company’s past practices, present financial
state, and future growth representations.”12 Then, on May 12, Harbor presented an
initial letter of intent (the “LOI”) for Seller’s consideration.13 On June 7, after some
due diligence, Harbor and Seller executed the LOI which included price terms.14
B. Stephen Begins Accelerating Billing.
The next day, June 8, Stephen asked an accountant for “the best way to get
the money out [of the Company]”15 before the sale. To date, Labyrinth had generally
billed only once work was complete.16 But that day, Stephen instructed the
Company’s director of accounting to instead bill clients “for work that had not been
completed.”17 On June 9, Stephen instructed employees to pre-bill existing clients
10 Id. ¶ 137. 11 Id. ¶ 22. 12 Id. 13 Id. ¶ 200. 14 Id. ¶¶ 140, 157. 15 Id. ¶ 135. 16 Id. ¶¶ 35, 41. 17 Id. ¶¶ 159–60.
5 for work that had not started.18 On June 14, Stephen instructed employees to
pre-bill new clients.19 On June 16, Stephen called for invoicing clients “even when
the Company did not have adequate information to begin work.”20
Stephen kept it up. In July, he instructed the Company to bill clients “who . . .
have never been billed” and to bill “any new clients that [Labyrinth was] eventually
going to do work for (i.e. most of them).”21 In August, Stephen emphasized he
wanted the Company “to bill all new clients, even if they have not been assigned to
a[] [Company agent] yet” and that he “would like to get in as much money as
possible in the next 45 days.”22 “By the end of September, Stephen was offering
overtime incentives for employees to work on the [new] Invoice Acceleration”
policy; the “overtime wages . . . would be paid not by Seller, but by Buyer on behalf
of the Company post-Closing.”23
Meanwhile, Seller represented to Buyer that “at least 40% of the Company’s
yearly revenue was concentrated in the fourth-quarter (October through December),”
with at least $3.3 million in collections during the fourth quarter of 2021.24 Buyer
18 Id. ¶ 165. 19 Id. ¶ 166. 20 Id. ¶ 167. 21 Id. ¶ 171. 22 Id. ¶ 173. 23 Id. ¶ 192. 24 Id. ¶ 30.
6 did not know Seller had changed the Company’s billing practices, and financed the
purchase with a loan from Canadian Imperial Bank of Commerce (“CIBC”) that had
a large payment due in December. Harbor insisted the transaction close by
October 1 to capture the Company’s fourth-quarter revenue. On August 19, Buyer
emailed Seller and reiterated its reliance on fourth-quarter revenue for making its
initial loan payments. Seller responded on August 27, reiterating his projected
growth rate and telling Buyer he saw “no reason . . . not to expect the same this
year.”25 Without referencing current billing practices, Seller reiterated its historic
practice of “bill[ing] once a year for . . . services after [Company] ha[s] done all the
filings. Most will pay this year.”26 On August 31, Seller assured Buyer that “nothing
is due upfront” for Company clients.27
On September 14, Seller informed Buyer that the Company would be
collecting a “high level of billings, combined with anticipated future expected
billings” and attached a fourth-quarter collections spreadsheet projecting substantial
accounts receivable and $3,301,865 in revenue for October through December.28
25 Id. ¶¶ 32–33. 26 Id. ¶ 34. 27 Id. ¶ 35. 28 Id. ¶¶ 39–40.
7 Buyer did not know Seller had accelerated billing and that much of the projected
fourth-quarter earnings had already been collected.29
C. Harbor Becomes Concerned.
On September 15, the day after Stephen gave Harbor high fourth-quarter
projections and less than a month before closing, Seller notified Buyer that “the
Company revised [its] collection practices and [that] in September it invoiced a large
number of its clients for completed work.”30 Buyer immediately recognized that
“changes to accelerate invoicing could significantly shrink the amount of revenue
and profits” expected between October and December.31
On September 16, Buyer asked Seller “what actions . . . [he had] taken
regarding the change to [the Company] billing model,” whether he had
communicated that change to employees or clients, and to send Buyer any of those
communications.32 Seller replied that (1) “there ha[d] not been formal
communication” to the clients because the changes were small, (2) “the invoicing
changes would impact only a small percentage of its clients,” (3) “only one member
29 See id. ¶ 216 (“The Invoice Acceleration Scheme therefore had the related effect of falsely including in the Company’s accounts receivable purported ‘revenues’ from work that had not yet been complete or, in many instances, had even been started for the Company’s clients. These practices drastically and materially altered the Company’s internal accounting and other recordkeeping policies and procedures.”). 30 Id. ¶ 43 (quoting SPA Scheds. 4.6(n) and 4.20(b)). 31 Id. ¶ 46. 32 Id. ¶ 51.
8 of the Company’s accounting team . . . was actively following up on open invoices,”
and (4) the Company did not bill all of its new clients.33
The conversation continued over the next several days, with Buyer showing
concern over the disclosed change in billing and Seller trying to boost Buyer’s
flagging confidence.34 On September 19, Stephen asked his father to share Company
expense sheets and to “manipulate the numbers as [he] need[ed].”35 Robert
responded to his son the same day with an attached “Budget 2022.”36
On September 21, Buyer forwarded proposed edits to representations and
warranties in the SPA inspired by the disclosed changes to Seller’s billing
practices.37 Seller did not respond. On September 24, Buyer emailed Seller again,
explaining, “if we go into next week with open negotiation items, it’s just not going
to be possible to close by 10/1. I’ll reiterate that we’re not buying your business
after that date, so if you’re interested in selling, please let me know today . . . .”38
On September 24, “Seller’s counsel rejected the document and noted that Seller’s
last draft of the SPA was ‘our best and final offer.’”39 Separately, Seller emailed
33 Id. ¶¶ 52, 54. 34 Id. ¶¶ 55–58. 35 Id. ¶ 150. 36 Id. 37 Id. ¶ 59. 38 Id. ¶ 61. 39 Id. ¶ 62.
9 Buyer reassuring Buyer that Seller “intended to collect ‘$3 million in profits over
the next 3 months.’”40
On September 29, Buyer again sought additional contractual representations
as to the Company’s financials and billing practices, and Seller again refused: “I
like the existing wording – it seems pretty standard to me as a CPA. There is no
fraud, you are getting a good company, but at this point, I don’t want to reopen parts
of the agreement that were negotiated.”41 Buyer insisted it understood Seller’s “side
was okay with [Buyer’s] changes to the financials section absent a call to make any
necessary clarifications or discuss.”42 Seller simply repeated “[w]e are not changing
the wording at this point . . . . There is no fraud or deception on our side.”43 Two
hours later, Buyer asked Seller how much revenue the Company anticipated from
October 1 through December 31; minutes later, Seller responded repeating the $3
million figure.44
That evening, Buyer’s counsel sent another revised SPA to Seller, seeking a
representation as to Seller’s projected revenue stream for the rest of 2021.45 The
40 Id. ¶ 64. 41 Id. ¶ 68. 42 Id. ¶ 69. 43 Id. ¶ 70. 44 Id. ¶ 71; see id. ¶¶ 39, 64–65. 45 Id. ¶ 73.
10 next day, Buyer sent its own email to Seller, again stressing Harbor’s “struggle with
running the projections for the next year,” as “the change to the billing
practice . . . left [Harbor] wondering how much revenue will be left for [it], if any.”46
Seller quickly reassured Buyer there would be “plenty of revenue,”47 and again
rejected a change to the SPA. The night before the SPA closed, Seller “forwarded a
schedule . . . to Harbor Compliance showing the Company had approximately
$1,652,000 in accounts receivable through the end of September that it expected to
collect on or before December 31, 2021.”48
D. The Transaction Closes.
On October 1, the SPA closed. Stephen agreed to a broad noncompete
provision in the SPA.49 The transaction also included Stephen and Robert’s
consulting agreements, the loan and security agreement with CIBC, and a
subordinated promissory note between Buyer and Seller.
An interim balance sheet (the “Interim Balance Sheet”) covering January 1,
2021 through August 31, 2021 was appended to the SPA in Schedule 4.4 with other
46 Id. ¶ 75. 47 Id. ¶ 76. 48 Id. ¶ 78. 49 Id. ¶¶ 261, 299–300; SPA § 6.7.2.
11 Company financial statements (collectively, the “Financial Statements”).50 It
indicated Labyrinth earned $4,609,850 in income in just eight months.51 The Interim
Balance Sheet, like the projections Stephen had provided in September, included
three months’ worth of radically accelerated billing. Seller did not disclose this.
Instead, the SPA indicated the opposite: Section 4.4(a) represented “[t]here has been
no intentional fraud, intentional misrepresentation, or intentional misconduct in
connection with the preparation of the Financial Statements;”52 and Section 4.20(b)
represented “[e]xcept as set forth on Schedule 4.20(b), since December 31, 2020, the
Company has not (i) collected its Accounts Receivable other than in the Ordinary
Course of Business; or (ii) accelerated or otherwise altered its collection practices.”53
Seller consistently represented to Buyer that in the ordinary course of
business, “nothing [was] due upfront”54 and “at least 40% of the Company’s yearly
revenue . . . concentrated in the fourth quarter (October through December).”55 In
that context, the Interim Balance Sheet’s total revenue communicated the
50 D.I. 49, Ex. “Complete Disclosure Schedules to the Stock Purchase Agreement” at Schedule 4.4 [hereinafter “SPA Sched. 4.4”]. 51 SPA Sched. 4.4 at “Labyrinth Financial Statement August 31, 2021.” 52 Id. § 4.4(a). 53 Id. § 4.20(b); see id. § 1.2 (defining “Ordinary Course of Business” as “the ordinary course of business of the Business, and of the Company in connection with the Business, consistent with the Company’s past practice and custom”). 54 Compl. ¶ 35. 55 Id. ¶ 30.
12 expectation that the Company would receive at least $3,073,233 in fourth-quarter
revenue.56
In the end, with the revenue from Labyrinth’s accelerated invoicing, Stephen
took a $977,930 dividend and Robert received a $190,000 bonus.57 “[T]he Company
had effectively a closing cash balance of $211,029.72.”58 And the fourth quarter
only yielded $900,000 in profits and $2 million in revenues.59 As a result, Buyer
and the Company (together, “Plaintiffs”) defaulted on the CIBC loan. Buyer did not
know Seller had accelerated invoicing starting in June, and could not reconcile the
distance between Seller’s financial representations and the Company’s financial
reality.60
E. Harbor Leases California Office Space From Stephen.
As part of the SPA, Buyer entered into two long-term lease agreements for
rental properties that Seller owns or controls. The SPA’s Schedule 4.7(b) disclosed
56 Working backwards from the Interim Balance Sheet’s total revenue, $4,609,850 is 60% of $7,683,083.33, and $3,073,233.33 is 40% of that. See SPA Sched. 4.4 at “Labyrinth Financial Statement August 31, 2021.” 57 Compl. ¶¶ 194–95 (alleging Stephen “paid himself approximately $885,000, $645,000 of which was paid on September 24, just one week prior to closing”); see SPA Sched. 4.6 (representing Stephen took a $977,930 dividend). 58 Compl. ¶ 196. 59 Id. ¶¶ 93, 94. 60 Id. ¶ 103.
13 these two properties were owned by Stephen, leased by the Company, and “used for
operating business.”61
In negotiations, Stephen had represented to Buyer that Labyrinth’s workforce
preferred to work in the office. In May 2021, Stephen had “issued a mandatory,
Company-wide, exception-free policy requiring all employees to work from the
California offices and not from home.”62 On June 8, the day after signing the LOI,
Seller asked an outside accountant if, among other options, “the best way to get the
money out” of the Company was through “rent on [his] buildings.”63 By July 2, at
least one Company senior employee had “expressed displeasure with the in-office
policy.”64 On July 13, Seller represented to Buyer that the Company made working
from home or the office “optional for about 1 year” and that “most (although not all)
employees chose to work at the office 5 days a week.”65
Buyer then asked Seller to “issue a staff survey to gauge the employees’ desire
to work in-office, versus continuing to work remotely.”66 Seller created the survey,
appended a cover letter to it, and skewed answers in favor of the in-office policy.67
61 SPA Sched. 4.7(b)1–2. 62 Compl. ¶ 200. 63 Id. ¶ 135. 64 Id. ¶ 209. 65 Id. ¶ 91. 66 Id. ¶ 205. 67 Id. ¶ 206.
14 Stephen shared the results with Harbor, noting that “only a couple of inefficient,
undesirable employees” expressed a preference for not returning to the office.68
Harbor determined that employee in-office preferences demonstrated the
Company’s “need to enter into the Leases”69 and executed them with the SPA.
Sometime after the SPA closed, Buyer discovered “that a majority of the Company’s
workforce objected to the mandatory in-person attendance policy.”70
F. Stephen And Robert Try To Erase Their Tracks, But Are Found Out; Stephen Launches Completely Compliant. Stephen and Robert remained with the Company as consultants until the end
of 2021. Upon termination of their consulting agreements, Defendants wiped and
returned their Company devices. But the Company successfully recovered some of
that deleted data.71 Plaintiffs discovered from the recovered data that between
October 4 and December 27, 2021, Defendants exported sensitive corporate data72
68 Id. ¶ 207. 69 Id. ¶ 204. 70 Id. ¶ 228; see id. ¶ 201. 71 Id. ¶¶ 107–08. 72 Id. ¶ 111 (“[1] October 4, Stephen . . . tr[ied] to export his emails to an additional unknown device . . . . [2] October 25, Stephen emailed himself (to a personal email address) a spreadsheet of the Company’s customers, including contact names, phone numbers and addresses . . . . [3] November 16, Stephen emailed himself (to a personal email address) a ‘Labyrinth Monthly Management Meeting’ document, containing strategy and operational details for the Company . . . . [4] December 3, Stephen emailed himself . . . a listing of open invoices . . . . [5] December 26, Stephen emailed himself . . . copies of the Company’s Balance Sheet and Profit and Loss Statement . . . . [6] December 27, Robert
15 and actively worked to ensure Buyer would never see certain communications,
despite Buyer’s directive to Stephen and Robert that Labyrinth “not lose any emails
or files.”73 And, for the first time, Buyer discovered the Company’s accelerated
invoicing had begun in June, not September.74
On October 14, 2022, Buyer notified Seller and Robert of its claim for
indemnification.75 On November 11, Seller refused to indemnify Buyer.76
Seller created Completely Compliant, LLC (“Completely Compliant” or the
“Competing Business”) on December 1, 2022.77 Completely Compliant’s website
went live in February 2023.78 It “offers the same services as those of the Company
and the Buyer,” and markets to the same clientele, in the same territory.79 Plaintiffs
sent Stephen a demand letter regarding his competitive activities on February 27.80
On March 6, “Stephen’s counsel confirmed his role in the Competing Business by
provided Stephen with several Company financial spreadsheets, [and] Stephen emailed them to himself.”). 73 Id. ¶ 113. But see id. ¶ 114 (indicating that Stephen and Robert used a Labyrinth employee to ensure “[Labyrinth] had 0 access to [e]mail”). 74 Id. ¶¶ 104, 118–19, 122–26. 75 Id. ¶ 257; see D.I. 1, Ex. C. 76 Compl. ¶ 259; see D.I. 1, Ex. D. 77 Compl. ¶ 290. 78 Id. ¶ 293. 79 Id. ¶ 294. 80 Id. ¶ 301.
16 refusing to deny his involvement” and further claimed “that [either] his actions were
excused or . . . the [SPA] restrictive covenants were not enforceable.”81
G. Litigation Ensues.
Plaintiffs filed their Verified Complaint for Injunctive and Other Relief
against Stephen, Robert, and Completely Compliant on March 16, 2023.82 The
Complaint includes nine counts: Count I, for breach of restrictive covenants against
Stephen; Count II, for breach of Stephen’s consulting agreement with Harbor (the
“Consulting Agreement”); Count III, for misappropriation of trade secrets against
Stephen and Completely Compliant; Count IV, for fraud against Stephen; Count V,
for conspiracy to commit fraud against Robert; Count VI, for breach of Article IV
of the SPA against Stephen; Count VII, for breach of Article VI of the SPA against
Stephen and Robert; Count VIII, for indemnification against Stephen; and Count IX,
for declaratory judgment as to Harbor’s set-off right against Stephen.83
On May 12, Stephen filed his Answer and Counterclaims, and Defendants
filed their Partial Motion to Dismiss the Verified Complaint (the “Motion”).84
Defendants’ Motion addressed all nine counts, leaving only Count VII against
81 Id. ¶ 303. 82 D.I. 1. 83 Compl. ¶¶ 309–99. 84 D.I. 18, 19.
17 Stephen untouched.85 Harbor moved for dismissal of Stephen’s counterclaims,86
which I denied on August 18.87 I heard oral argument on Defendants’ Motion on
August 22.88
Given the breadth of the issues generated by the Motion’s clash with the
Complaint, and the press of time in the parties’ stipulated expedited schedule, on
November 19 I asked the parties to identify their top three issues for the Motion.89
The parties helpfully submitted their joint letter on November 27.90 Plaintiffs ask
me to address (1) whether the Court has personal jurisdiction over Completely
Compliant, (2) whether Robert remains a party to this action, and (3) whether the
Complaint states a valid claim for misappropriation of trade secrets. 91 Defendants
ask me to address (1) whether Stephen’s noncompete provision in the SPA is
enforceable, (2) whether injunctive relief is barred by the SPA’s exclusive remedies
85 DOB 16–60. 86 D.I. 24. 87 D.I. 50; see D.I. 52. 88 D.I. 59 [hereinafter “Hr’g Tr.”]. 89 D.I. 77. 90 D.I. 79. 91 Id. at 1–2.
18 provision, and (3) whether Plaintiffs stated a claim for fraud.92 I shared brief
responses with the parties on January 3, 2024.93 My explanations follow.
II. ANALYSIS For the most part, Delaware has lenient pleading standards on a motion to
dismiss for failure to state a claim.94 I must accept as true all well-pled “factual
allegations in the Complaint, accept even vague allegations in the Complaint as
‘well-pleaded’ if they provide the defendant[s] notice of the claim, [and] draw all
reasonable inferences in favor of the plaintiff[s].”95 Dismissal is not appropriate
“unless the plaintiff would not be entitled to recover under any reasonably
conceivable set of circumstances.”96 The test for surviving a motion to dismiss is
conceivability, not future evidentiary impossibility.97
92 Id. at 2–3. 93 D.I. 107. 94 Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 132 (Del. Ch. Apr. 30, 2004). Defendants also challenge this Court’s exercise of jurisdiction over Completely Compliant under Court of Chancery Rule 12(b)(2). This argument only applies to Count III and is addressed in connection with that count. See infra Section II.E.1. 95 Cent. Mort. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011). 96 Id. 97 Id. at 536 (“[I]t may, as a factual matter, ultimately prove impossible for the plaintiff to prove his claims at a later stage of a proceeding, but that is not the test to survive a motion to dismiss.”); see also id. at 537 n.13 (“Our governing ‘conceivability’ standard is more akin to ‘possibility’ . . . .” (quoting Ashcroft v. Iqbal, 129 S.Ct. 1937, 1950 (2009)).
19 For the reasons that follow, I deny Defendants’ motion as to Counts IV, V and
VII: Plaintiffs have told a detailed tale of fraud and conspiracy against Stephen and
Robert. I also hold the SPA is reasonably interpreted to permit the injunctive relief
Plaintiffs seek. As to Stephen’s restrictive covenant, it is overbroad, but the unique
circumstances of this action, in which he personally negotiated that covenant and
may have held the upper hand in negotiations, might warrant blue penciling it. I
dismiss Plaintiffs’ claim for misappropriation of trade secrets against Completely
Compliant for failure to state a claim, thereby dismissing Completely Compliant
from the case, and against Stephen as it relates to Harbor’s trade secrets. I defer my
disposition on the merits of Counts I, II, III as to Stephen’s misappropriation of
Labyrinth trade secrets, VI, VIII, and IX until trial in March.98
A. Harbor Stated A Claim For Fraud Against Stephen.
Harbor alleges “Seller made numerous false representations and omissions of
fact concerning the Company’s finances, books and records, and other key Company
information.”99 Harbor identifies two types of false representations: contractual
98 See Ct. Ch. R. 12(a)(1); see also id. 12(d); Spencer v. Malik, 2021 WL 719862, at *5 (Del. Ch. Feb. 23, 2021) (“A party does not have a right to a pleading-stage ruling.”); Slingshot Techs., LLC v. Acacia Rsch. Corp., 2021 WL 1224828, at *3 (Del. Ch. Mar. 30, 2021) (“Under Rule 12(a)(1), a court may postpone the disposition of a pleading stage motion until a later stage of the case, including until the trial on the merits. Rule 12(d) reiterates this point, noting that a court should address a Rule 12(b)(6) motion in a preliminary hearing unless the court orders that the hearing and determination thereof be deferred until the trial.” (alterations omitted) (internal quotation marks omitted)). 99 Compl. ¶ 343.
20 representations and extra-contractual communications. Seller argues Harbor’s fraud
claim must be dismissed because it is barred by SPA anti-reliance language, it fails
to plead fraud with particularity, fails to establish Seller’s knowing culpability, and
fails to show Harbor justifiably relied on Stephen’s representations during
negotiations of the SPA. None of those arguments prevail.
To state a claim for fraud, Harbor must plead facts that allege the following
elements:
(1) a false representation, usually one of fact, made by defendant; (2) the defendant’s knowledge or belief that the representation was false, or was made with reckless indifference to the truth; (3) an intent to induce the plaintiff to act or to refrain from acting; (4) the plaintiff’s action or inaction taken in justifiable reliance upon the representation; and (5) damage to the plaintiff as a result of such reliance.100
Court of Chancery Rule 9(b) imposes a heightened standard for pleading aspects of
a fraud claim.101 It requires that “[i]n all averments of fraud . . . , the circumstances
constituting fraud . . . shall be stated with particularity. [But,] [m]alice, intent,
knowledge, and other conditions of mind of a person may be averred generally.”102
100 In re P3 Health Grp. Hldgs., 2022 WL 15035833, at *3 (Del. Ch. Oct. 26, 2022). 101 See State ex rel. Brady v. Publ’rs Clearing House, 787 A.2d 111, 115 (Del. Ch. Apr. 19, 2001) (explaining the pleading standard for fraud “is an exception to the liberal ‘notice pleading’ standard applicable to most pleadings under the Rule 8”); see also Ct. Ch. R. 9(b). 102 Ct. Ch. R. 9(b).
21 1. Harbor Alleges False Representations With Particularity.
“To plead fraud, a plaintiff must identify a false representation.”103
Identifying a false representation requires Buyer to allege “with specificity what . . .
statements were materially false and why they were false.”104 This “particularity”
standard “generally calls upon plaintiffs to frame their allegations using the
newspaper-story format by alleging ‘(1) the time, place, and contents of the false
representation; (2) the identity of the person making the representation; and (3) what
the person intended to gain by making the representations.’”105 In other words, “an
allegation of fraud is legally sufficient . . . if it informs defendants of the precise
transactions at issue, and the fraud alleged to have occurred in those transactions, so
as to place defendants on notice of the precise misconduct with which they are
charged.”106
103 Prairie Cap. III, L.P. v. Double E Hldg., Corp., 132 A.3d 35, 49 (Del. Ch. Nov. 24, 2015). 104 Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1051 (Del. Ch. Feb. 14, 2006). 105 Bamford v. Penfold, L.P., 2020 WL 967942, at *12 (Del. Ch. Feb. 28, 2020) (quoting Abry P’rs, 891 A.2d at 1050). 106 P3 Health Grp. Hldgs., 2022 WL 15035833, at *4 (quoting Kahn Bros. & Co., Inc. Profit Sharing Plan & Tr. v. Fischbach Corp., 1989 WL 109406, at *4 (Del. Ch. Sept. 19, 1989)); Abry P’rs, 891 A.2d at 1050 (“[T]he plaintiff is required to allege the circumstances of the fraud with detail sufficient to apprise the defendant of the basis for the claim.”).
22 a. Contractual Representations107
Where plaintiff alleges contractual misrepresentations, “it is relatively easy to
plead a particularized claim of fraud.”108 “An allegation of fraud is legally
sufficient . . . if it informs defendants of the precise transactions at issue, and the
fraud alleged to have occurred in those transactions, so as to place defendants on
notice of the precise misconduct with which they are charged.”109 Buyer has placed
Seller on notice of the contractual representations underpinning a claim for fraud
related to accelerated billing, but failed to identify any false contractual
representation related to the California leases.
i. Accelerated Billing
The alleged contractual misrepresentations relating to Stephen’s accelerated
billing involve four SPA sections and three associated schedules.110 First, Buyer
107 Seller contends Buyer’s fraud claims based on contractual representations constitute impermissible bootstrapping and are merely repackaged breach of contract claims. But, the bootstrap rule does not apply where, as here, plaintiff seeks a remedy for fraud based in recission or rescissory damages. Anschutz Corp. v. Brown Robin Cap., 2020 WL 3096744, at *15 (Del. Ch. June 11, 2020). The plaintiff/buyer may also plead a fraud claim next to a breach of contract claim if he can plead “either: (1) that the Seller knew that the Company’s contractual representations and warranties were false; or (2) that the Seller itself lied to the Buyer about a contractual representation and warranty.” Abry P’rs, 891 A.2d at 1064. Buyer has done both. 108 Roma Landmark Theaters v. Cohen Exhibition Co., 2020 WL 5816759, at *11 (Del. Ch. Sept. 30, 2020) (citing Prairie Cap., 132 A.3d at 62). 109 P3 Health Grp. Hldgs., 2022 WL 15035833, at *4. 110 See PAB 15–16 (citing SPA §§ 4.4, 4.6, 4.7, and 4.20; id. at Scheds. 4.6(n), 4.7(b), and 4.20(b)).
23 alleges Section 4.4, which promises the Financial Statements were prepared in
accordance with sound accounting principles and without any intentional fraud or
misrepresentation, was false because the Financial Statements reflected revenue
from work that had not yet been completed or even begun.111
Next, Buyer alleges Section 4.6 and Schedule 4.6(n), and Section 4.20 and
Schedule 4.20(b), were false when made. Section 4.6 states, as elided by Plaintiff,
that
Since the Interim Balance Sheet Date, and except as set forth on Schedule 4.6 of the Disclosure Schedules, the Company has not . . . (a) suffered a Material Adverse Effect; . . . (f) made any change in its accounting methods; . . . (n) conducted the Business outside of the Ordinary Course of Business; . . . [or] (p) entered into any agreement to do any of the foregoing.112
Section 4.20 represented that the Company had not “collected its Accounts
Receivable other than in the Ordinary Course of Business; or . . . accelerated or
111 Compl. ¶ 215 (quoting SPA § 4.4 (“The Financial Statements have been prepared in accordance with cash basis and sound accounting principles applied on a consistent basis throughout the period involved, fairly present on a cash basis the financial condition of the Company as of the respective dates they were prepared and the results of operations for the periods indicated. The Company maintains and, for all periods covered by the Financial Statements has maintained, in accordance with applicable accounting standards, financial books and records which accurately and fairly reflect the transactions of the Company. The Financial Statements are consistent with the financial books and records of the Company. The Company maintains a standard system of accounting established and administered in accordance with sound, cash basis accounting principles consistently applied. There has been no intentional fraud, intentional misrepresentation or intentional misconduct in connection with the preparation of the Financial Statements or to the Knowledge of Seller any allegation made to the Company of the foregoing.”)); id. ¶ 216. 112 Id. ¶ 218 (quoting SPA § 4.6).
24 otherwise altered its collection practices,” and that “all of the Company’s accounts
receivable have arisen from bona fide transactions and represent . . . sales made in
the Ordinary Course of Business.”113 As exceptions to those representations,
Schedules 4.6(n) and 4.20(b) state:
The Company revised its collection practices and in September it invoiced a large number of its clients for completed work as of the date of these invoices and planned to send two additional invoices for the Company’s fee this year to these clients, as opposed to the sending just one for the Company’s fees a year which was more common in past years. The Company tasked an accounting team member to follow up on past due invoices as opposed to past years when it just sent the invoice monthly. The Company also billed some fees for new clients in advance to mitigate risk – the Company had not usually billed new clients in advance in recent years. The Company currently recognizes revenue for registered agents once the following steps have occurred: (i) the Company has ordered and paid for the registered agent, and (ii) the Company has received a payment from a client. In prior years, it would not recognize revenue until all checks for that client had cleared and cleared checks could be balanced out by a payment, meaning it sometimes took years to recognize this revenue. Other than the change in invoice dates, all other collection practices remain in place and are consistent with past practice.114
Buyer claims these statements were false when made because Seller
concealed the accelerated billing scheme and its effects, and included in accounts
receivable revenues that were not collected or generated in the ordinary course of
business.115 Buyer alleges “the [i]nvoice [a]cceleration [s]cheme was a massive
113 SPA §§ 4.20(a), (b). 114 SPA Sched. 4.6(n); id. at Sched. 4.20(b). 115 Compl. ¶¶ 219–20.
25 departure” from Company past practices that had far-reaching consequences.116
Buyer also contends Seller deliberately concealed (1) the “accounts receivable . . .
had not arisen from bona fide transactions with clients,” (2) the Company collected
“all accounts receivable attributable to the invoice acceleration scheme . . . outside
of the ordinary course of business,” and (3) the “vast and significant departures from
the Company’s historic collection practices.”117
Seller argues Buyer’s claim must fail because “the invoicing changes were
expressly disclosed” and nothing in the complaint identified that “the SPA was
rendered false by the invoicing changes . . . or how the disclosures were false.”118 In
particular, Seller points to the disclosures in Schedules 4.6(n) and 4.20(b) that “[t]he
Company revised its collection practices and in September it invoiced a large
number of its clients for completed work.”119
116 Id. 117 Id. ¶ 223. 118 DOB 8–9. Seller’s brief did not engage with the particularity or falsity of Buyer’s fraud allegations based on Section 4.4. Any argument that those representations were not identified as false has been waived. Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”). At oral argument, Seller framed Buyer’s Section 4.4 claim as asserting that the Company failed to comply with GAAP, and defended that claim by arguing Section 4.4 did not mention GAAP and so could not be false. Hr’g Tr. 26, 109–10. Seller missed Buyer’s point. Buyer claims Seller’s “Invoice Acceleration Scheme” “had the related effect of falsely including in the Company’s accounts receivable purported ‘revenues’ from work that had not yet been complete or . . . had even been started for the Company’s clients.” Compl. ¶ 216. Seller has failed to dislodge this claim at the pleading stage. 119 SPA Sched. 4.20(b).
26 Seller argued these disclosures of September revisions are not false on a standalone
basis and leave room for revisions in other months.120
But Seller promised that there were no revisions in other months. He
explicitly disclosed that “all other collection practices remain in place and are
consistent with past practice” and that “[e]xcept as set forth on Schedule 4.20(b),
since December 31, 2020, the Company has not (i) collected its Accounts Receivable
other than in the Ordinary Course of Business; or (ii) accelerated or otherwise altered
its collection practices.”121 Those statements were false for months other than
September.
The disclosures of revisions to collection practices only in September for
completed work were also themselves misleading. They mention invoicing for
completed work and “some fees for new clients” only in September.122 When
coupled with Section 4.20(b)’s promise that no other collection practices had
changed, the disclosure of changes for September misleadingly convey that the
Company did not revise its collection practices in other months or in other ways.
An otherwise truthful but “incomplete statement can amount to fraud when a party
‘purports to tell the whole truth’ but fails to ‘disclose the additional information
120 Hr’g Tr. 14. 121 SPA § 4.20(b); see id. at Sched. 4.6(n), 4.20(b). 122 Id. at Sched. 4.20(b).
27 necessary to prevent the statement from misleading the recipient.”123 Disclosing
limited deviations from the Company’s ordinary collection practices, while
promising no other deviations occurred, gave the misleading impression that no
other deviations occurred. It follows that the failure to disclose other months of
accelerated billing, and billing for work that was not completed or even begun, was
misleading.124
Buyer has fairly identified false representations within the SPA pertaining to
accelerated billing.
ii. Leases
Buyer also complains Seller fraudulently yoked Buyer with long-term rental
obligations to Seller with a false representation in the SPA that “the California
offices were necessary for operating the Company’s business.”125 But Buyer builds
this claim out of circumstantial evidence and not the plain language of the SPA.
Buyer points out that Seller owns or controls two Company rental properties;126 he
asked an accountant if “rent on [his] buildings” would be the best way to “get the
123 NetApp, Inc., 2023 WL 4925910, at *13 (quoting Restatement (Second) of Torts § 551 cmt. g. (1977)). 124 SPA Scheds. 4.6(n) and 4.20(b). 125 Compl. ¶ 228. 126 Id. ¶¶ 5, 89; see SPA Sched. 4.7(b)(1)–(2) (“Leased from CCSD, LLC, which is owned by Seller . . . . Leased from Thibodo, LLC, which is owned by Seller.”).
28 money out [of the Company];”127 he knew employees did not like working in the
office; and the SPA disclosures indicated the office spaces were “used for operating
business.”128 Buyer later discovered that “neither of the California offices were
necessary for operating the Company’s business.”129
Buyer concludes these facts support the inference that Seller falsely
represented in Section 4.7(b) and Schedule 4.7(b) of the SPA that Labyrinth needed
the California office space.130 Not so. Section 4.7(b) states:
Schedule 4.7(b) Disclosure Schedules lists (i) the street address of each parcel of Real Property; (ii) if such property is leased or subleased by the Company, the landlord under the lease, the rental amount currently being paid, and the expiration of the term of such lease or sublease for each leased or subleased property; and (iii) the current use of such property.131
It merely articulates that Schedule 4.7(b) details, among other things, “the current
use of [the leased] propert[ies].”132 Nothing in Section 4.7(b) is false.
Buyer’s argument focuses on Schedule 4.7(b)’s statements that Seller owns
two of the three properties, and that all three properties are “used for operating
127 Compl. ¶¶ 134–35. 128 Id. ¶ 227; see SPA Sched. 4.7(b)(1)–(3). 129 Compl. ¶ 228. 130 Id. ¶¶ 226–29, 354. 131 SPA § 4.7(b). 132 Id.
29 business.”133 Buyer argues the phrase “used for operating business”134 (the
“Property Use Representation”) implied that “the California Offices were necessary
for operating the Company’s business.”135
But the SPA does not say, or imply, that the California offices were necessary.
Neither Section 4.7(b) nor its schedule conveys the Company needed to lease office
space, let alone that it needed to lease Stephen’s office space. Nothing suggests a
future need for the space. Rather, the Property Use Representation pertains to the
leased properties’ “current use.” Buyer has not otherwise established that the
Property Use Representation was false.
b. Extracontractual Representations
In addition to contractual fraud, Harbor also asserts extracontractual fraud.
“In order to state a claim of common law fraud,” the plaintiff must allege with the
requisite particularity that the “defendant either 1) represented false statements as
true, 2) actively concealed facts which prevented [the plaintiff] from discovering
them, or 3) remained silent in the face of a duty to speak.”136 Harbor has fairly
apprised Stephen of all but one of its fraud claims by identifying the time, place, and
133 Id. at Sched. 4.7(b)1–3. 134 Id. 135 Compl. ¶ 228. 136 Metro Commc’n Corp., 854 A.2d at 143 (citing Stephenson v. Capano Dev., Inc., 462 A.2d at 1074).
30 contents of allegedly false and misleading extracontractual statements Stephen made
during SPA negotiations.
It is tempting to simply redirect readers to the background section of this
opinion, which relays Buyer’s detailed allegations of Seller’s fraud. I will highlight
a few examples. Seller allegedly falsely “represented that the key financial
performance metrics—fourth-quarter collections, profits, and accounts receivable—
were all unaffected by Seller’s collection practices disclosures.”137 Buyer identifies
with particularity Seller’s representations that both the key financial metrics and the
collection practices were holding steady. Buyer provides dates and quotations from
Stephen’s emails to Buyer regarding Company financial metrics and growth rates.138
Buyer pled that as late as September 29, and in the days before, Seller represented
to Buyer that the Company would make $3 million in revenue and profits for October
through December.139 “Seller represented . . . $3,000,000 in profits during the
137 Compl. ¶ 80. 138 See id. ¶ 30 (regarding Seller’s representations that 40% of yearly revenue received by the Company was consistently concentrated in the fourth quarter); see also id. ¶¶ 32–34 (relaying Seller’s August 27 email that represented Company’s May 2021 average growth rate disclosure and informed Buyer he saw “no reason . . . not to expect the same this year” and indicating Seller made no reference to the Company’s current billing practices but reiterated its historic practice of “bill[ing] once a year for . . . services after [Company] ha[s] done all the filings”). 139 See id. ¶ 39 (alleging on September 14, Seller sent a spreadsheet to Buyer “representing at least $3,301,865 in collections during the fourth quarter of 2021”); see also id. ¶¶ 64–65 (alleging on September 24, Seller assured Harbor the Company should “collect $3,000,000 in profits over the next 3 months); id. ¶ 71 (alleging on September 29, Seller reiterated that he “expect[ed] around $3,000,000 in additional accounts receivable the next 3 months”).
31 fourth-quarter of 2021 [but] there was only $900,000;”140 Seller represented $3
million for fourth-quarter revenues, but they only amounted to $2 million.141
As for the Company’s accelerated billing practices, Buyer details that Seller
initiated Company’s accelerated collection practices in June.142 Buyer identifies
Seller’s August emails representing to Buyer (1) the Company’s continued practice
of billing only once per year for completed services and (2) that “nothing is due
upfront” for its clients.143 Buyer also identifies Seller’s September statements
downplaying the invoicing changes and promising that the changes would not affect
working capital, estimated receivables, or fourth-quarter profits.144 Buyer
adequately pleads Seller made false or misleading extracontractual statements.
But Harbor fails to allege Stephen fraudulently induced it to enter long-term
California office space lease agreements. Buyer’s allegations that Seller represented
a Company need for the California rental space to accommodate employees who
wanted to work in the office comprise one paragraph:
140 Id. ¶ 93. 141 Id. ¶ 94. 142 Id. ¶¶ 159–60, 165–66, 167, 171, 173, 192. 143 Id. ¶¶ 34–35. 144 Id. ¶¶ 52–55, 58, 64, 72, 76.
32 At various times during negotiations, Seller represented to Buyer that the Company’s California-based employees preferred working in the California Offices, as opposed to teleworking, and that because of this desire, it would be necessary for the Company to lease the California Offices for the Company’s operations following the Transaction.145
Buyer alleges these general representations were false and identifies who made
them.146 In the next paragraph, Buyer alleges with particularity when Seller
represented the staff wanted to work in the office.147 But, “beyond generally alleging
that such statements were made during the [seven-month-long] negotiations,” Buyer
does not allege when Seller made any statement that it was necessary to lease the
California offices.148 This generalized allegation fails to provide the level of detail
Rule 9(b) requires.149 Buyer never alleges with particularity when Seller said the
staff in-office preference necessitated the Company (1) currently use the California
145 Id. ¶ 90. 146 See id. ¶¶ 102, 198–210. 147 Id. ¶ 91 (“Seller made additional representations regarding the working preferences of Company employees on July 13, 2021, when he told [Harbor], ‘[w]e had a work from home process available to all staff for about 15 months and it was mandatory for a few of those months . . . . [Presently] most employees seemed to prefer the office . . . most (although not all) employees chose to work at the office 5 days a week.’”). 148 Malt Fam. Trust v. 777 P’rs LLC, 2023 WL 7476966, at *5 (Del. Ch. Nov. 13, 2023). 149 See MHS Cap. LLC v. Goggin, 2018 WL 2149718, at *9 n.120 (Del. Ch. May 10, 2018) (“Federal courts applying the analogous Federal Rule of Civil Procedure 9(b) have held that alleging a time frame of six or more months is insufficient to satisfy the particularity requirement.”); see also Hatteras Enters. Inc. v. Forsythe Cosmetic Grp., Ltd., 2018 WL 1935984, at *11 (E.D. N.Y. 2018) (“[I]t is insufficient to state that the misrepresentations occurred over a six to seven month period.” (collecting cases)); McCann v. Jupina, 2017 WL 1540719, at *2 (N.D. Cal. 2017) (“[C]ourts have held that a nine-month window is not sufficiently narrow to satisfy Rule 9(b).” (collecting cases)).
33 offices for business operations and (2) continue to use them after the SPA. Buyer
fails to state the circumstances constituting fraud with particularity.
Buyer’s claim for fraud based on extracontractual representations that the
Company needed the California offices is dismissed. Having determined Harbor
pled the accelerated billing fraud with particularity, I next address Seller’s argument
that those allegations fail to satisfy fraud’s scienter and justifiable reliance elements.
The allegations are sufficient.
2. Harbor Sufficiently Pleads Scienter.
Seller argues Buyer failed to plead, as it must, that “the alleged
misrepresentations ‘were known to be false when made.”150 Seller argues that Buyer
“concludes with no facts that Stephen knew the invoicing changes rendered the
corresponding disclosures and representations in the SPA false.”151 As to the
representations of the Company’s future performance and growth, Seller also argues
Buyer failed to plead with particularity that Stephen knew or believed those
representations were false when he made them.152 Seller argues the revenue stream
and profit projections he offered to Buyer in a series of emails between May and
150 DRB 9 (quoting Stein v. Wind Energy Hldgs., Inc., 2022 WL 17590862, at *7 (Del. Super. Dec. 13, 2022)). 151 Id. 10. 152 DOB 40.
34 September were mere forward-looking estimates, and that the truth was not
knowable, so they could not support a fraud claim.153
After identifying false representations, the plaintiff must allege facts showing
a “certain level of scienter on the part of the defendant; a misrepresentation must be
made either knowingly, intentionally, or with reckless indifference to the truth.”154
Because “any attempt to require specificity in pleading a condition of mind would
be unworkable and undesirable,” Rule 9(b) only requires the claim “allege sufficient
facts from which it can reasonably be inferred that this ‘something’ was knowable
and that the defendants were in a position to know it.” 155
The uncertain nature of a future projection does not excuse a knowingly false
projection, where it is reasonably conceivable that Seller made the false projection
with an intent to deceive Buyer.156 Future uncertainty “does not mean [a seller]
153 See id. 37; see also Edinburgh Hldgs. v. Educ. Affiliates, 2018 WL 2727542, at *12 (Del. Ch. June 6, 2018); Knight Broadband LLC v. Knight, 2022 WL 1788855, at *11 (Del. Super. June 2, 2022). 154 Metro Commc’n Corp., 854 A.2d at 143. 155 Abry P’rs, 891 A.2d at 1050. 156 See Phage Diagnostics v. Corvium, 2020 WL 1816192, at *7–8 (Del. Super. Mar. 9, 2020); see also Clark v. Davenport, 2019 WL 3230928, at *12 (Del. Ch. Jul. 18, 2019) (“[W]hen a party makes false statements with an intent to deceive, that party may be liable for fraud regardless of whether the statements expressed opinions, estimates, or projections of the future.”).
35 could say anything he want[s].”157 False forward-looking statements survive a
motion to dismiss where it is reasonably conceivable that a seller’s prediction “was
a known falsehood, and . . . [it] was designed to further mislead.”158 False forecasts
“cannot be considered mere puffery or future predictions if they were made with an
intent to deceive, even if the statements were presented as opinions, estimates or
projections.”159
Buyer alleges sufficient facts to support a reasonable inference Seller intended
to deceive Buyer into overpaying, and to obscure Seller’s acceleration of the
Company’s revenues that would otherwise be due after closing and extraction of
157 Clark, 2019 WL 3230928, at *12. Seller cites Edinburgh Holdings v. Education Affiliates to support his contention that his future profitability representations were “not knowable” at the time they were made. 2018 WL 2727542, at *12; see DOB 36. There, the sellers’ future profitability figures represented what “[the] business unit could achieve in the following four years.” Edinburgh, 2018 WL 2727542, at *12. After concluding that future revenue over four years “was not knowable at the time [the company] made the representations,” the Court acknowledged that forward-looking representations were still actionable if the seller knew them to be false. Id.; see Clark, 2019 WL 3230928, at *12. The statements in Edinburgh failed to state a claim because the buyer’s allegation that “the seller knew the statements were false when made” was conclusory and “legally insufficient to support a fraudulent inducement claim.” 2018 WL 2727542, at *12. Edinburgh does not foreclose reliance on future predictions. Id. (asserting that “[i]n limited circumstances, . . . a promise of future conduct can be actionable in fraud if the plaintiff ‘plead[s] specific facts that lead to a reasonable inference that the promisor had no intention of performing at the time the promise was made’” (quoting Hopkins v. Concorde Career Colls., Inc., 2016 WL 1238775, at *3 (D. Del. 2016)). 158 Phage Diagnostics, 2020 WL 1816192, at *7. 159 Id.; accord Clark, 2019 WL 3230928, at *12 (holding “expressed opinions, estimates, or projections of the future” are not insulated from fraud when a party makes them with the knowledge they were false and with an intent to deceive).
36 those revenues as a pre-closing dividend.160 The day after the LOI was signed, Seller
began investigating how to extract cash from the Company before selling it 161 and
then initiated and expanded the Company’s accelerated billing practices until
closing.162 In the midst of his accelerated invoicing campaign, Seller emailed Buyer
that the Company “typically (though not always) bill[s] once a year for . . . services
after we have done all the filings” and that “nothing is due up front” for its clients.163
As Seller was milking the Company for cash by accelerating invoicing, he was
knowingly misrepresenting that invoicing remained consistent with past practices.
He promised the same in the SPA itself.
Another exchange is particularly telling. After Seller disclosed the changes
to September’s invoicing, Buyer proposed SPA language to firm up the Company’s
billing practices. In so doing, Buyer apprised Seller of Buyer’s expectation that
“[e]xcept as set forth on Schedule 4.20(b), since December 31, 2020, the Company
has not . . . (iii) changed any payment terms for any of its Clients in [a] manner
inconsistent with past practices.”164 Seller never dashed Buyer’s hopes on this point;
160 Compl. ¶ 121. 161 See id. ¶¶ 135, 159. 162 Id. ¶¶ 159–60. 163 Id. ¶¶ 34–35. 164 Id. ¶ 60 (Harbor suggesting that Section 4.20(b) contain a new addition); id. ¶ 62 (alleging Stephen rejected that addition); see SPA § 4.20(b) (“(b) Except as set forth on Schedule 4.20(b), since December 31, 2020, the Company has not (i) collected its Accounts
37 instead, he offered more assurances that the Company would meet revenue targets
and downplayed the scheme’s impact.165
As to the fourth-quarter estimates, Buyer alleges with supporting facts that
Seller presented them with the requisite intent to deceive.166 Seller knew Buyer
depended on the Company achieving those estimates to make its loan payments.167
On September 13, Seller told Robert he had “no idea’ how much revenue would be
received by the end of 2021 [and that] . . . [he] assume[d] for cash it should be close
to zero.”168 Yet on September 14, Seller provided Buyer a fourth-quarter collections
spreadsheet projecting $3,301,865 in revenue.169 The next day, Seller partially
disclosed to Buyer the Company’s accelerated billing practices;170 when Buyer
Receivable other than in the Ordinary Course of Business; or (ii) accelerated or otherwise altered its collection practices.”). 165 Compl. ¶¶ 57, 63. 166 Clark, 2019 WL 3230928, at *12–13 (The plaintiff alleged (1) the company “faced a financial crisis,” (2) the CEO “had exhausted other options,” (3) the company “desperately needed to obtain a cash infusion,” and that (4) the CEO “had significant financial and reputational stake in keeping [the company] solvent” and the company “was his sole source of income . . . .”). 167 See Compl. ¶ 31 (quoting an August 19 email from Buyer reiterating its reliance on the fourth-quarter billing revenue for making initial loan payments); see also id. ¶ 75 (quoting a September 30 email from Buyer voicing concern that “the change to the billing practice . . . left [Harbor] wondering how much revenue will be left for [it], if any”). 168 Id. ¶ 148. 169 Id. ¶¶ 39–40. 170 Compare id. ¶¶ 42–43 with id. ¶ 165.
38 sought assurance that the September 14 spreadsheet remained unaffected,171 Seller
emailed Robert, instructing him to “send over expense sheets” and to “[m]anipulate
the numbers as . . . need[ed].”172 Days before closing and the start of the fourth-
quarter, and one day after Buyer voiced its continued concerns about the fourth
quarter in light of the September billing acceleration disclosure,173 Seller again
forecasted the Company’s fourth-quarter accounts receivable at the consistent $3
million figure.174 Buyer proposed adding representations as to Seller’s fourth-
quarter profits and revenue projections;175 Seller rejected the edits, then emailed
Buyer, “[t]he last 3 months is a very significant amount of the total work that we do
for the year and is our busy season . . . . There is plenty of revenue left for you.”176
Seller provided the fourth-quarter projections in the midst of his accelerated billing
scheme, then stood by them even as contemporaneous documents reveal he knew
they were gutted by his own actions.
Buyer has met its burden to plead scienter, both generally and as to the
forward-looking projections Seller provided.
171 Id. ¶¶ 51, 55–58. 172 Id. ¶ 150. 173 Id. ¶¶ 67–72. 174 Id. ¶¶ 71, 72; see id. ¶¶ 39, 64–65. 175 Id. ¶ 74. 176 Id. ¶ 76.
39 3. Harbor Justifiably Relied On Stephen’s Representations.
Seller argues Buyer fails the element of reliance for its extracontractual fraud
claims because the SPA contains anti-reliance language.177 It does not.
Once a court finds the “plaintiff has adequately pled . . . knowledge and . . .
fraudulent misrepresentations . . . , the rest of the elements of the claim for fraud are
easily satisfied.”178 To adequately plead justifiable reliance, the plaintiff must show
it is reasonably conceivable “that his ‘action’ was ‘taken in justifiable reliance upon
the representation.”179 This “is a contextual inquiry and ‘is judged by reference to
the plaintiff’s knowledge and experience.’”180 Thus, “whether a party’s reliance was
reasonable is not generally suitable for resolution on a motion to dismiss,”181 except
for the legal conclusion that reliance was not reasonable because of a fully integrated
contract’s “explicit anti-reliance representation.”182
177 DOB 31–34. 178 EMSI Acq. v. Contrarian Funds, LLC, 2017 WL 1732369, at *16 (Del. Ch. May 3, 2017). 179 Arwood v. AW Site Servs., LLC, 2022 WL 705841, at *23 (Del. Ch. Mar. 9, 2022). 180 Id. (quoting 37 C.J.S. Fraud § 51 (Feb. 2022 Update)). 181 TrueBlue, Inc. v. Leeds Equity P’rs IV, LP, 2015 WL 5968726, at *7 (Del. Ch. Sept. 25, 2015). 182 Id. (quoting MicroStrategy Inc. v. Acacia Rsch. Corp., 2010 WL 5550455, at *13 (Del. Ch. Dec. 30, 2010)).
40 Although Delaware “honor[s] clauses in which contracted parties have
disclaimed reliance on extra-contractual representations,”183 the contract “must
contain language that, when read together, can be said to add up to a clear
anti-reliance clause by which the plaintiff has contractually promised that it did not
rely upon statements outside the contract’s four corners in deciding to sign the
contract.”184 “[M]urky integration clauses, or standard integration clauses without
explicit anti-reliance representations, will not relieve a party of its oral and
extra-contractual fraudulent representations.”185 And “a disclaimer by the selling
company of what it was and was not representing and warranting” does not relieve
a defendant from extra-contractual fraudulent representations.186 “[C]ontractual
provisions cannot preclude reasonable reliance unless they constitute, when taken
together, a clear promise by the plaintiffs that they were relying only on the
representations in the contract itself and were not relying on any statement outside
the four corners of the agreement.”187 Neither is present in the SPA.
183 Abry P’rs, 891 A.2d at 1056. 184 Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. May 19, 2004). 185 Abry P’rs, 891 A.2d at 1059. 186 FdG Logistics v. A&R Logistics Hldgs, 131 A.3d 842, 860 (Del. Ch. Feb. 23, 2016). 187 Kronenberg, 872 A.2d at 575 (declaring Delaware “is chary about permitting contracts to bar fraud claims, [thus] contractual provisions cannot preclude reasonable reliance unless they constitute, when taken together, a clear promise by the plaintiffs that they were relying only on the representations in the contract itself and were not relying on any statement outside the four corners of the agreement” and holding a provision is not an anti-
41 Seller points to Section 9.3, but that provision is a standard integration
clause.188 A standard integration clause “does not operate as a bar to fraud claims,
but rather simply . . . limit[s] the scope of the parties’ contractual obligations to those
set forth in the written agreement.”189
reliance clause if it cannot be unambiguously read to “constitute an affirmative contractual agreement that the parties to the underlying contract were not relying on any extra- contractual statements of fact in deciding to contract”); see Advisor Invs., LLC v. Powell, 2023 WL 6383242, at * 5 (Del. Ch. Sept. 29, 2023) (“Delaware courts have been clear . . . that an aggrieved buyer must clearly and unambiguously disclaim on extra-contractual representations to bar fraud claims. To be effective . . . such [anti-reliance] provisions must identify the specific information on which a party has relied and which foreclose reliance on other information.”). 188 SPA § 9.3 (“The agreement of the parties that is comprised of this Agreement sets forth the entire agreement and understanding among the parties with respect to the subject matter hereof and supersedes any and all prior agreements, understandings, negotiations and communications, whether oral or written, relating to the subject matter of this Agreement. In the event of any inconsistency between the statements in the body of this Agreement and those in the Ancillary Documents, any Exhibit and the Disclosure Schedules (other than an exception expressly set forth in the Disclosure Schedules), the statements in the body of this Agreement will control.”). 189 Kronenberg, 872 A.2d at 592.
42 Seller also points to Section 4.28,190 but that provision amounts to Seller’s
disclaimer “of what it was and was not representing and warranting.”191 Both
Section 9.3 and Section 4.28 lack an “affirmative expression by Buyer of (1)
specifically what it was relying on when it decided to enter the Merger Agreement
or (2) that it is was not relying on any representations made outside of the Merger
Agreement.”192
Seller also points to Section 5.7 and urges the Court to read it together with
Sections 4.28 and 9.3 to “define the universe of information that the Plaintiffs relied
upon.”193 Section 5.7 reads:
190 SPA § 4.28 (“Except for the representations and warranties contained in Section 3 and this Section 4 (including the related portions of the Disclosure Schedules), none of Seller, the Company or any other Person has made or makes any other express or implied representation or warranty, either written or oral, on behalf of Seller or the Company, including any representation or warranty as to the accuracy or completeness of any information regarding the Company furnished or made available to Buyer and its Representatives or any information, documents or material made available to Buyer in expectation of the transactions contemplated hereby) or as to the future revenue, profitability or success of the Company, or any representation or warranty arising from statute or otherwise in law.”). 191 FdG Logistics, 131 A.3d at 860. 192 Id. 193 DOB 33; see Reault v. Halma Hldgs. Inc., 2023 WL 8005318, at *10 (D. Del. 2023) (“[O]n occasion Delaware courts have read exclusive representation clauses and integration clauses together to find that they have the effect of an anti-reliance clause.”).
43 Independent Investigation: Buyer has conducted its own independent investigation, review and analysis of the business, results of operations, prospects, condition (financial or otherwise) or assets of the Company, and acknowledges that it has been provided adequate access to the personnel, properties, assets, premises, books and records, and other documents and data of Seller and the Company for such purpose. Buyer acknowledges and agrees that in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, none of Seller, the Company or any other Person has made any representation or warranty as to Seller, the Company or this Agreement, except as expressly set forth in Sections 3 and 4 of this Agreement (including the related portions of the Disclosure Schedules).194
Seller would have me invert Section 5.7’s structure, beginning with the last
clause and concluding with the first.195 But “structure and relationship of the parts
of a contract reveal the drafters’ intent.”196 I read Section 5.7 in the order in which
it was drafted.
Seller properly understands the first clause affirms that Harbor “conducted its
own independent investigation . . . and acknowledges that [Harbor] has been
provided adequate access’ to the Company in deciding to enter the SPA.”197
Further, the phrase “conducted its own independent investigation, review, and
194 SPA § 5.7. 195 DRB 4 (“First, Section 5.7 disclaims . . . any representations outside of the SPA . . . . Harbor then affirms that it ‘conducted its own independent investigation’ and again ‘acknowledges that it has been provided adequate access’ to the Company in deciding to enter the SPA.”). 196 JJS, LTD. v. Steelpoint Hldgs., 2019 WL 5092896, at *6 (Del. Ch. Oct. 11, 2019). 197 SPA § 5.7; DRB 4.
44 analysis”198 implies Buyer formed a judgment or opinion of “the business, results of
operations, prospects, condition (financial or otherwise), or assets of the Company”
from what Seller provided, namely “the personnel, properties, assets, premises,
books and records, and other documents and data of Seller and the Company for
such purpose.”199 Section 5.7’s first sentence details all the information that formed
Buyer’s own independent analysis of the company, including the extracontractual
information Seller provided.200 In Anschutz Corporation v. Brown Robin Capital,
this Court explained such a provision “does not communicate any anti-reliance
commitment.”201 Instead of disclaiming extra-contractual reliance, this type of
198 See Analysis, Cambridge Dictionary, https://dictionary.cambridge.org/us/dictionary/ english/analysis (last visited Jan. 16, 2024) (“[T]he act of studying or examining something in detail, in order to discover or understand more about it, or your opinion and judgment after doing this: ‘I was interested in Clare’s analysis of the situation’ . . . . Someone’s opinion, based on the knowledge and information they have, of what a situation is and what it means.”). 199 SPA § 5.7. 200 Id. (“[I]t has been provided adequate access to the personnel, properties, assets, premises, books and records, and other documents and data of Seller and the Company for such purpose.”). 201 Anschutz Corp., 2020 WL 3096744, at *14 (discussing a provision where “Buyer acknowledges and agrees that it has made its own inquiry and investigation into, and, based thereon, has formed an independent judgment concerning, the Company and its business and operations, and that it has been provided with such information about the Company and its business and operations as it has requested”).
45 “clause reasonably can be read to reflect that Buyer was expressly representing it did
rely on extra-contractual information.”202
Having permitted, or even established, reliance, Section 5.7 goes on:
Buyer acknowledges and agrees that in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, none of Seller, the Company or any other Person has made any representation or warranty as to Seller, the Company or this Agreement, except as expressly set forth in Sections 3 and 4 of this Agreement (including the related portions of the Disclosure Schedules).203
This clause identifies Seller’s representations. The question is whether it precludes
Buyer’s reasonable reliance on representations that are not identified. For guidance,
I look to cases discussing other provisions in which the buyer referred to the seller’s
representations: Prairie Capital, in which the provision identified “the universe of
information on which the contracting parties relied,”204 and Anschutz, in which it did
not.
202 Id. (citing Prairie Cap., 132 A.3d at 50) (distinguishing the clause from one in which the buyer stated it was relying on the results of its own investigation and the sellers’ representations). 203 SPA § 5.7. 204 Prairie Cap., 132 A.3d at 51.
46 In Prairie Capital, the buyer represented the following:
The Buyer acknowledges that it has conducted to its satisfaction an independent investigation of the financial condition, operations, assets, liabilities and properties of the [Seller]. In making its determination to proceed with the Transaction, the Buyer has relied on (a) the results of its own independent investigation and (b) the representations and warranties of the [Seller] expressly and specifically set forth in this Agreement, including the Schedules. SUCH REPRESENTATIONS AND WARRANTIES BY THE [SELLER] CONSTITUTE THE SOLE AND EXCLUSIVE REPRESENTATIONS AND WARRANTIES OF THE [SELLER] TO THE BUYER IN CONNECTION WITH THE TRANSACTION, AND THE BUYER UNDERSTANDS, ACKNOWLEDGES, AND AGREES THAT ALL OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED TO, ANY RELATING TO THE FUTURE OR HISTORICAL FINANCIAL CONDITION, RESULTS OF OPERATIONS, ASSETS OR LIABILITIES OR PROSPECTS OF DOUBLE E AND THE SUBSIDIARIES) ARE SPECIFICALLY DISCLAIMED BY THE [SELLER].205
This provision “represents affirmatively that the Buyer only relied on the
representations and warranties in the SPA,” thereby “establish[ing] the universe of
information on which that party relied,” and, together with an integration clause,
“add[ed] up to a clear anti-reliance clause.” 206
By contrast, the provision in Anschutz identified the representations and
warranties made by the seller, but it lacked a representation by the buyer “that it
‘understands, acknowledges, and agrees’ that the seller was disclaiming
205 Id. at 50. 206 Id. at 51.
47 extra-contractual representations.”207 “Buyer made no . . . promise in the UPA not
to rely on extra-contractual representations, warranties or statements.”208
Section 5.7 lacks that promise as well. Buyer did not affirmatively
acknowledge any disclaimer by Seller, or otherwise specifically establish the
universe of information on which Buyer did or did not rely. The first sentence of
Section 5.7 explained Buyer was relying on extracontractual information Seller
furnished, and the second sentence does not disclaim reliance on any
extracontractual information. Like the Anschutz seller, Stephen has offered a
standard integration clause, an independent investigation clause, and a
representation and warranty clause.209 Like the Anschutz provisions, “[w]hat is
notably absent from these provisions is any disclaimer of reliance by Buyer.”210
From there, Buyer’s allegations demonstrate reasonable reliance. In the world
beyond anti-reliance clauses, reasonable reliance is a fact-intensive inquiry.211 For
207 Anschutz Corp., 2020 WL 3096744, at *14. 208 Id. 209 See id. (“[Seller Insiders] point to three provisions they claim, in total, amount to unambiguous anti-reliance language.”). 210 Id. 211 Arwood, 2022 WL 705841, at *23 (citing Trascent Mgmt. Consulting v. Bouri, 2018 WL 4293359, at *17 (Del. Ch. Sept. 10, 2018); Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 2018 WL 6311829, at *33 (Del. Ch. Dec. 3, 2018) (“Whether reliance is justifiable is an objective standard.”); 37 Am Jur. 2d Fraud and Deceit § 239 (Feb. 2022 Update) (“[T]he question of justifiable reliance is one of fact and requires an inquiry into the relationship between the parties.”)).
48 contractual misrepresentations, “reasonable reliance . . . [is] easily met . . . because
the false statements at issue are contained in a written agreement. Specifically, it is
reasonable to infer that the Defendants wanted [plaintiff] to rely on the
representations because they are found in the Contribution Agreement.”212 For
extra-contractual misrepresentations, this Court has considered the nature of the
parties’ relationship, extent of negotiations, length of time in preparing the
agreement, and repetition of the malefactor’s assurances as indicative of reasonable
reliance.213 “A plaintiff’s diligence efforts can be evidence that her reliance on a
false representation was reasonable because she made efforts to verify the
representation and discovered no reason to doubt its truth.”214
Here, Buyer alleges sufficient facts to indicate it reasonably relied on Seller’s
contractual and extra-contractual misrepresentations. Buyer conducted its “own
212 LVI Grp. Inv., LLC v. NCM Grp. Hldgs., LLC, 2018 WL 1559936, at *13 n.198 (Del. Ch. Mar. 28, 2018). 213 Grunstein v. Silva, 2009 WL 4698541, at *12 (Del. Ch. Dec. 8, 2009) (holding the Complaint facially alleged sufficient facts to survive a motion to dismiss when it alleged a preexisting relationship between the parties, the collective work between them in crafting the agreement, the year-long duration until it was finished, defendant employed plaintiff after the agreement closed, and defendant’s repeated assertions of the parties’ shared interest in the deal). 214 Arwood, 2022 WL 705841, at *24 (quoting Great Hill Equity P’rs, 2018 WL 6311829, at *33); see also Great Hill Equity P’rs, 2018 WL 6311829, at *33 (“The fact that a plaintiff’s diligence efforts do not uncover fraud does not render such efforts unreasonable, especially when the fraud was intentionally hidden.”).
49 investigation,”215 and “commissioned a quality of earnings report” to come up with
its own EBITDA figure.216 Buyer made efforts to verify Seller’s collections
representations and to elicit more specific contractual representations, which Seller
obstructed.217 Buyer’s “failure to uncover the fraud during its due diligence review
was not unreasonable, as the fraud was [allegedly] . . . hidden from [Buyer] when its
due diligence team went looking.”218 As in Grunstein v. Silva, several factors
support reasonable reliance: Buyer and Seller collectively drafted the SPA;219 Seller
consistently and repeatedly offered facts and Company data to support his
215 SPA § 5.7. 216 Compl. ¶ 26. 217 See Compl. ¶ 141 (quoting an email between Stephen and Robert indicating Harbor “want[ed] to know about the last payroll in 2020 that normally would have been paid in 2021 and other items which might increase EBITDA and want[ed] back up and details for them” and showing Stephen’s intent to provide Buyer with manipulated data: “We want to give them info that that will make it look like EBITDA is high”); id. ¶ 51 (quoting Buyer’s email to Seller following the September collections practice disclosure, with Buyer asking: “what actions have you taken regarding the change to your billing model? Have you communicated that change to employees or clients? If so, please send me those communications and the number of clients you sent them to”); id. ¶ 189 (“Buyer emailed [Stephen] to better understand what percentage of clients were subject to the Collection Practices Disclosure, and [Stephen] responded that he was not sure which clients were, but he promised that it was only a small number.”); id. ¶ 71 (quoting an email from Buyer to Seller: “[h]ow much [accounts receivable] would you anticipate we would have from 10/1 through 12/31 that is not counted in your balance sheet? I’m asking about revenue we would capture”). 218 Cobalt Operating, LLC v. James Crystal Enters., LLC, 2007 WL 2142926, at *28 (Del. Ch. July 20, 2007). 219 See, e.g., Compl. ¶ 68.
50 misrepresentations;220 and Seller and Robert continued to work for Buyer after the
SPA closed.221 Further, Seller wielded his professional training as an accountant
to buttress his misrepresentations.222 And so, on the facts as pled, it is reasonably
conceivable “that [Buyer’s] ‘action’ was ‘taken in justifiable reliance upon”223
Seller’s contractual representations, and “it would be improper to dismiss reliance-
based claims at this stage.”224
B. Robert Urich Remains A Party To The Action.
Robert is named as a defendant in Counts V and VII only. Defendants moved
to dismiss Count V, for conspiracy to commit fraud, in its entirety, and Count VII’s
breach of contract claim against Robert. Plaintiffs asked me to address whether
Robert remains a party to this action.225 He does.
1. Harbor Stated A Claim For Conspiracy To Commit Fraud.
“A conspiracy to commit fraud is not an independent cause of action. It must
be predicated on an underlying wrong: fraud.”226 Thus, courts first address the fraud
allegations to determine whether plaintiff stated a claim for fraud, “then consider
220 See, e.g., id. ¶¶ 51–79. 221 See, e.g. D.I. 1, Ex. B [hereinafter “Consulting Agreement”]. 222 Compl. ¶ 68 (“I like the existing wording—it seems pretty standard to me as a CPA.”). 223 Arwood, 2022 WL 705841, at *23. 224 Grunstein, 2009 WL 4698541, at *12. 225 D.I. 79 at 2. 226 Boulden v. Albiorix, 2013 WL 396254, at *8 (Del. Ch. Jan. 31, 2013).
51 [the] conspiracy to commit fraud claim.”227 As explained, Harbor stated a claim for
fraud.
A conspiracy “occurs when there is: ‘(1) [a] confederation or combination of
two or more persons; (2) [a]n unlawful act done in furtherance of the conspiracy;
and (3) [a]ctual damage.’”228 “With respect to the first element, ‘[e]ven to prevail at
trial the [plaintiff does] not need to prove the existence of an explicit agreement; a
conspiracy can be inferred from the pled behavior of the alleged conspirator[s].’”229
To survive a motion to dismiss, a plaintiff need only plead “sufficient facts to support
an inference that [Defendants] . . . acted in concert’ with one another.”230 A
complaint showing an alleged conspirator providing “substantial assistance” and
working closely with the other defendant, infers an awareness of fraud and “states a
claim for civil conspiracy.”231 But, this Court has also found facts pleading a
significant “relationship” with the other defendants will satisfy “a fair inference of
[the alleged conspirator’s] complicity in concerted misconduct.”232
227 Id. 228 In re Am. Intern. Gp., 965 A.2d 763, 805 (Del. Ch. Feb. 10, 2009) (quoting Nicolet, Inc. v. Nutt, 525 A.2d 146, 149–50 (Del. 1987)). 229 Agspring Holdco v. NGP X US Hldgs., 2020 WL 4355555, at *21 (Del. Ch. July 30, 2020). 230 Id. (quoting Prairie Cap., 132 A.3d at 64); see Am. Intern, 965 A.2d at 806. 231 Agspring, 2020 WL 4355555, at *21. 232 Am. Intern., 965 A.2d at 806.
52 Harbor pleads facts sufficient to support an inference that Robert and Stephen
acted in concert in the alleged financial misrepresentations. Robert is Stephen’s
father and the Company’s former treasurer.233 As early as May 6, 2021, in “the very
beginning of negotiations with Buyer, Stephen wrote to Robert, asking how best to
funnel cash from the Company for his personal use.”234 That same month, Seller
instructed Robert to cast Company financials in “as good a light as possible” for
sending to Harbor.235 He later told Robert to start not from the objective Company
financials but from $9,300,000, the previous 2021 revenue estimate previously given
to Harbor.236 When Buyer questioned the Company’s high EBITDA, Stephen
instructed his father, “[w]e want to give them info that that will make it look like
EBITDA is high.”237 Seller told Robert the effect of his accelerated invoicing
scheme: he told him he had “no idea’ how much revenue would be received by the
233 See, e.g. Compl. ¶ 7. 234 Id. ¶ 127. 235 Id. ¶ 136. 236 Id. ¶ 137 (“I told them previously that I was estimating $9,300,000 for this year based on sales . . . so I guess that is the number to work from.”). 237 Id. ¶ 141 (“They want to know about the last payroll in 2020 that normally would have been paid in 2021 and other items which might increase EBITDA and want back up and details for them. The Vista print was an overcharge that we used later in 2021. The IP Switch Phone is probably the phone system we bought for the new locations and said it was a one-time item. We want to give them info that that will make it look like EBITDA is high.”).
53 end of 2021 [and that] . . . [he] assume[d] for cash it should be close to zero.”238 And
weeks before closing, Seller directly asked Robert to “[m]anipulate the numbers as
[he] need[ed] to” on the expense sheets for Seller to provide to Harbor.239
Robert benefitted from the accelerated invoicing scheme: he received a
$190,000 bonus.240 He also, alongside Stephen, secured a consulting agreement
through December 31, 2022 with Buyer.241 After the SPA closed, Robert “conspired
to delete Company email and other valuable data,” had his computer wiped, and
provided Stephen with several company financial spreadsheets.242 The Complaint
pleads Robert provided substantial assistance to Seller and worked closely with him,
inferring an awareness of fraud and stating a claim for conspiracy to commit fraud.
Robert argues Count V should be dismissed because its damages duplicate
Count IV’s.243 As explained “in Garfield v. Allen, seeking dismissal of duplicative
claims is ‘a throwback to common law pleading.’”244 At the pleadings stage, “there
238 Id. ¶ 148. 239 Id. ¶ 150. 240 Id. at Sched. 4.6(c). 241 See Compl. ¶ 128 (stating the goal of “a guaranteed employment at a reasonable rate”). 242 Id. ¶¶ 111–17. 243 DOB 47 (“[S]eparate damages’ must still be ‘specifically ascribed to the alleged conspiracy’ and cannot be duplicative of other asserted damages in a complaint.” (quoting AmeriMark Interactive, LLC v. AmeriMark Hldgs., LLC, 2022 WL 16642020, at *12–13 (Del. Super. Nov. 3, 2022)). 244 Malt Fam. Tr., 2023 WL 7476966, at *10 (quoting Garfield ex rel. ODP Corp. v. Allen, 277 A.3d 296, 360 (Del. Ch. 2022)).
54 is little utility” in dismissing a fraud or civil conspiracy claim for redundancy.245 At
this stage, I will not dismiss a claim for conspiracy because its damages might be
coterminous with those from the underlying fraud. Robert remains a defendant in
Count V.
2. Plaintiffs’ Claim For Breach Of The SPA Against Robert Is Not Dismissed.
Having answered in the affirmative that Robert remains a defendant, I will
make quick work of his argument for dismissal of Count VII, for breach of the SPA.
Plaintiffs allege Robert breached Sections 6.7.2 and 6.7.5. Both of these sections
expressly prohibit “Seller and Robert Urich” from engaging in specific post-closing
conduct.246 As his only defense, Robert argues Plaintiffs fail to show the breach of
a contractual obligation: Robert’s SPA signature block only binds him to Section
7.5 and Article 9, and it “fails to include the sections of the SPA alleged to have been
breached in Count VII.”247 What’s more, one section the signature block references
“does not exist”248—there is no Section 7.5 in the SPA.
245 Great Hill Equity P’rs, 2014 WL 6703980, at *22; see Swipe Acq. Corp. v. Krauss, 2020 WL 5015863, at *8 (Del. Ch. Aug. 25, 2020) (“Whether to dismiss a claim as duplicative is within the discretion of the Court.”). 246 SPA §§ 6.7.2, 6.7.5. 247 DOB 53. 248 Id.
55 Of course, to survive a motion to dismiss for failure to state a breach of
contract claim, the plaintiff must allege “the breach of an obligation imposed by that
contract, and the resultant damage.”249 Where interpretations over the meaning or
application of an express contract differ, dismissal is proper only if the defendant’s
interpretation is the only reasonable construction as a matter of law.250 Courts must
avoid interpretations that lead to absurd consequences251 and “prefer an
interpretation which gives a reasonable, lawful, and effective meaning to all
manifestations of intention, rather than one which leaves a part of those
manifestations unreasonable or unlawful.”252 Where a contract is ambiguous, “the
interpreting court must look beyond the language of the contract to ascertain the
parties’ intentions”253 and should not truncate the proceeding without gathering
sufficient evidence.254
249 Bakerman v. Sidney Frank Importing Co., 2006 WL 3927242, at *19 (Del. Ch. Oct. 10, 2022). 250 VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 615 (Del. 2003). 251 Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010) (“An unreasonable interpretation produces an absurd result or one that no reasonable person would have accepted when entering the contract.”). 252 11 Richard A. Lord, Williston on Contracts § 32:11 (4th ed.). 253 GMG Cap. Invs. v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 780 (Del. 2012). 254 Eagle Indus. v. DeVilbiss Health Care, 702 A.2d 1228, 1232–33 (Del. 1997) (holding the Court of Chancery erroneously dismissed a breach of contract claim when the relevant provision was ambiguous, and erroneously truncated the proceeding without adequate evidence to ascertain intent).
56 Robert does not attempt to identify what the parties intended when Robert
agreed to be bound to Section 7.5, and it would be absurd to conclude the parties
intended Robert be bound to a nonexistent section while simultaneously rescinding
Robert’s obligations to a section expressly addressing him. Perhaps the parties
meant Section 7.5 to be Section 6.7.5; perhaps the parties intended something
entirely different. The ambiguity, while perhaps so minor as to be a typo, requires a
greater factual inquiry to determine the parties’ intent.255 It is here that I refrain from
charging “forward” with the “Light Brigade.”256
Plaintiffs have adequately alleged the existence of a contract and obligations
applicable to Robert under that contract. Robert did not raise any other defense
against Count VII. I defer analysis of Robert’s breach of the SPA for trial.
255 The signature block is not susceptible to reformation on these pleadings, where Plaintiffs did not plead mistake. Scrivener’s error is a subset of mistake. “A scrivener’s error is a mutual mistake where a modified term is included simply by a drafter’s mistake.” Bryant v. Way, 2012 WL 1415529, at *12 (Del. Super. Apr. 17, 2012). That scrivener’s error derives from mistake is relevant, as a party must plead with particularity a claim seeking reformation. See Duff v. Innovative Discovery LLC, 2012 WL 6096586, at *10 (Del. Ch. Dec. 7, 2012) (“In order to gain reformation, the party seeking such form of relief must plead with particularity the ingredients on which it is based, namely mutual mistake or fraud, Rule 9(b).”). 256 Alfred Tennyson, The Charge of the Light Brigade, in The Charge of the Light Brigade and Other Poems 52 (2016).
57 C. A Reasonable Interpretation Of The SPA Indicates It Permits Injunctive Relief Under Section 10.12.
Buyer seeks to enjoin Seller from violating contractual obligations under
Counts II and III.257 Seller argues that relief is unavailable because “the SPA
includes an exclusive remedies and general release provision precluding any
injunctive relief sought in the Complaint.”258 Seller’s argument relies on another
typo, which I cannot credit, fix, or otherwise act on at this stage.
Section 9.12 of the SPA permits specific enforcement. It reads in full:
Each of the parties acknowledges and agrees that the other parties would be damaged irreparably in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached or violated. Accordingly, each of the parties covenants and agrees that, without posting bond or similar undertaking, each of the other parties shall be entitled to an injunction or injunctions to prevent breaches or violations of the provisions of this Agreement and to the remedy of specific performance of this Agreement and the terms and provisions hereof in any action, suit or proceeding instituted in any court as specified in Section 9.8 having jurisdiction over the parties and the subject matter, in addition to any other remedy to which such party may be entitled, at law or in equity. Each party further covenants and agrees that, in the event of any action, suit or proceeding for specific performance in respect of such breach or violation, it shall not assert that a remedy at law would be adequate.259
While one might expect the SPA’s Exclusive Remedies provision to carve out
Section 9.12, it repeatedly contemplates an exception under Section 10.12 instead:
257 Compl. ¶¶ 323, 337–40. 258 DOB 22. 259 SPA § 9.12 (emphasis added).
58 Subject to Section 10.12, the parties acknowledge and agree that their sole and exclusive remedy with respect to any and all claims for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement, shall be pursuant to the indemnification provisions set forth in this Section 8. In furtherance of the foregoing, except with respect to Section 10.12, each party hereby waives, to the fullest extent permitted under Law, any and all rights, claims and causes of action for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement it may have against the other parties hereto and their Affiliates and each of their respective Representatives arising under or based upon any Law, except pursuant to the indemnification provisions set forth in this Section 8. Nothing in this Section 8.9 shall limit any Person’s right to seek and obtain any equitable relief to which any Person shall be entitled pursuant to Section 10.12.260
Plaintiffs contend “there was an entire section deleted at some point;” accepting that
premise would permit the reasonable interpretation that the parties intended to
permit specific performance.261 I am inclined to agree with Plaintiffs, but the error
precludes me from doing so today. I will not yet say the SPA precludes injunctive
relief, but without greater factual confidence, neither will I say the SPA permits it.
The availability of specific performance will be determined after trial.
D. Unique Circumstances Preclude Dismissal Of Count I.
Plaintiffs allege Stephen violated the restrictive covenants expressed in
Section 6.7.2 of the SPA. First, Stephen argues Harbor’s prior material breach of
260 Id. § 8.9 (emphasis added). 261 Hr’g Tr. 86.
59 the SPA renders the restrictive covenants unenforceable.262 This argument fails at
this stage because Buyer has pled that Seller breached the SPA at closing by making
fraudulent misrepresentations. Second, Seller contends the restrictive covenants are
unreasonable. This is a good argument.
“When parties have ordered their affairs voluntarily through a binding
contract, Delaware . . . [courts] respect their agreement, and will only interfere upon
a strong showing that dishonoring the contract is required to vindicate a public policy
interest even stronger than freedom of contract.”263 “Courts scrutinize carefully all
contracts limiting a man’s natural right to follow any trade or profession anywhere
he pleases and in any lawful manner.”264 “While Delaware may ‘frown[ ] on’ or
disfavor restrictive covenants, our law nonetheless recognizes their validity.”265
Thus, Delaware does not “mechanically” enforce or deny noncompetes266 but
262 See DOB 17; see also Physiotherapy Corp. v. Moncure, 2018 WL 1256492, at *5 (Del. Ch. Mar. 12, 2018) (prior material breach excused compliance with non-compete provision); L & W Ins., Inc. v. Harrington, 2007 WL 2753006, at *7, 11 (Del. Ch. Mar. 12, 2007) (holding a prior material breach precluded any finding of reasonable success for injunction). 263 ev3, Inc. v. Lesh, 114 A.3d 527, 529 n.3 (Del. 2014) (quoting Libeau v. Fox, 880 A.2d 1049, 1056–57 (Del. Ch. June 16, 2005)). 264 Faw, Casson & Co. v. Cranston, 375 A.2d 463, 468 (Del. Ch. June 14, 1977). 265 Ainslie v. Cantor Fitzgerald, L.P., 2023 WL 106924, at *22 (Del. Ch. Jan. 4, 2023). 266 FP UC Hldgs., LLC v. Hamilton, 2020 WL 1492783, at *6 (Del. Ch. Mar. 27, 2020).
60 “closely scrutinize[s] [them] as restrictive of trade.”267 “Under Delaware law, a
covenant not to compete must: (1) be reasonable in geographic scope and temporal
duration, (2) advance a legitimate economic interest of the party seeking its
enforcement, and (3) survive a balancing of the equities in order to be
enforceable.”268 “The reasonableness standard permits [restricting parties] to
enforce restrictive covenants, but only where the circumstances show it is fair and
reasonable to do so.”269
Here, the SPA’s restrictive covenants are unreasonable. To start, Stephen’s
noncompete lasts ten years.270 Only one Delaware case has found a ten-year
restrictive covenant reasonable, but it is coupled with a tightly circumscribed
geographic scope.271
267 Centurion Serv. Grp., LLC v. Wilensky, 2023 WL 5624156, at *2 (Del. Ch. Aug. 31, 2023). 268 Lyons Ins. Agency, Inc. v. Wilson, 2018 WL 4677606, at *5 (Del. Ch. Sept. 28, 2018). 269 Ainslie, 2023 WL 106924, at *22. 270 See Id. at *19 (holding a four-year duration might be in the range of reasonableness for a “more tailored” restrictive covenant, but finding four years unreasonable when coupled with other overbroad restrictions); see also Am. Homepatient, Inc. v. Collier, 2006 WL 1134170, at *2 n.5 (Del. Ch. Apr. 19, 2006) (stating noncompete agreements covering limited areas for two or fewer years generally have been held to be reasonable and citing Del. Exp. Shuttle, Inc. v. Older, 2002 WL 31458243, at *14 (Del. Ch. Oct. 23, 2002) (concluding three-year restrictive covenant is unreasonable and thus correcting it to two years instead)). 271 See Tull v. Turek, 38 Del.Ch. 182, 192–93 (Del. 1958) (“The seller agrees that she will not directly or indirectly, alone or with others, in her name or in any other name, engage in the business of operating and conducting a sanitarium or hospital in New Castle County and State of Delaware, for a period of ten years from the date hereof.”).
61 The restrictions also exceed Buyer’s reasonable interests, because Stephen is
prohibited from competing against both the Company and Harbor. A buyer “has a
legitimate business interest in protecting the goodwill it purchased when it bought
[the Company], and the confidential information about [Company] operations that
[Seller] knows or could access.”272 But that legitimate interest only supports
reasonable restrictions “in the goodwill and competitive space it purchased from
[Seller] in the market [Company] serves;” it does not extend to Buyer’s own
competitive space.273
I agree with Stephen that these restrictive covenants are unreasonable. But in
this case, that does not end the matter. “In some circumstances, a court may use its
discretion to blue pencil an overly broad non-compete to make its restrictions more
reasonable . . . .”274 “Delaware courts are hesitant”275 to exercise this “mighty . . .
blue pencil.”276 “[D]isparate bargaining power . . . leads the Court to conclude that
when a restrictive covenant is unreasonable, the Court should strike the provision in
its entirety.”277 Blue penciling restrictive covenants often can “create a ‘no-lose’
272 Kodiak Building P’rs v. Adams, 2022 WL 5240507, at *11 (Del. Ch. Oct. 6, 2022). 273 Id. at *12. 274 FP UC Hldgs., 2020 WL 1492783, at *8. 275 Kodiak, 2022 WL 5240507, at *4. 276 In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1015 (Del. Ch. June 22, 2005). 277 Kodiak, 2022 WL 5240507, at *4 n.49 (internal quotation marks omitted) (quoting Del. Elevator, Inc. v. Williams, 2011 WL 1005181, at *11 (Del. Ch. Mar. 16, 2011)).
62 situation for [the enforcing party]” and harms the weaker party.278 “The employer
receives what amounts to a free ride on a contractual provision that the employer is
well aware would never be enforced” because “for every covenant that finds its way
to court, there are thousands which exercise an in terrorem effect on employees who
respect their contractual obligations and on competitors who fear legal complications
if they employ a covenantor.”279 Thus, blue penciling or partially enforcing
restrictions on employees with inferior leverage generally creates “[legal]
incentives . . . for employers [who] ask for as much as possible, with the expectation
that [they] will at least get what [they’re] entitled to should the matter go to court.”280
A sale of a business typically does not involve disparate bargaining power;
that is why it is well-established that “covenants not to compete in the context of a
278 Id.; see Sunder Energy v. Jackson, 2023 WL 8166517, at *24 (Del. Ch. Nov. 22, 2023) (“The differences in bargaining power between repeat-player businesses and individuals suggests that when a restrictive covenant is unreasonable, the court should strike the provision in its entirety.”); see also Griffin Toronjo Pivateau, Putting the Blue Pencil Down: An Argument for Specificity in Noncompete Agreements, 86 Neb. L. Rev. 672, 689–94 (2008) (“The blue pencil doctrine permits employers to overreach, and in so doing, harms employees.”); Lyons Ins. Agency v. Wark, 2020 WL 429114, at *1 (Del. Ch. Jan. 28, 2020) (“[C]ourts will decline to enforce contractual obligations, no matter how clear or sincerely intended when entered,” “when such enforcement is inimical to public policy . . . .”); id. at *4 (“[P]ublic policy exceptions [dictate against enforcing] oppression in employment contracts . . . . Because of this policy, Delaware imposes certain limits on enforcement of employment non-compete agreements.”). 279 Griffin Toronjo Pivateau, Putting the Blue Pencil Down: An Argument for Specificity in Noncompete Agreements, 86 Neb. L. Rev. 672, 689–94 (2008). 280 Charles A. Sullivan, The Puzzling Persistence of Unenforceable Contract Terms, 70 Ohio St. L.J. 1127, 1151 (2009).
63 business sale are subject to a ‘less searching’ inquiry.”281 A bargain struck between
equals carries less risk of one party complying out of fear. Where the restricted party
holds the cards, Delaware has applied the “rule of partial enforcement,” “restricting
[the overbroad covenant] to its proper sphere and enforcing it only to that extent.”282
And so, whether the Court should apply the rule of partial enforcement and “blue
pencil the . . . Agreement’s non-compete [requires] a fact-intensive” consideration
of the equities that the Court may not be able to resolve at the pleadings stage.283
281 Kodiak, 2022 WL 5240507, at *4; see Knowles-Zeswitz Music v. Cara, 260 A.2d 171, 175 (Del. Ch. Nov. 25, 1969) (explaining that “courts should be less prone to enforce [restrictive] covenants” where “the sale of a business is not involved”). 282 See John Roane, Inc. v. Tweed, 33 Del. Ch. 4, 18 (Del. 1952) (finding that defendant was not of inferior bargaining power, that defendant was offered choices and chose the type of restrictive covenant at issue, wishing its benefits and seeking to repudiate its burdens, and holding the rule of partial enforcement for an overbroad restrictive covenant should apply); see also Leo E. Strine, Categorical Confusion: Deal Protection Measures In Stock-For-Stock Merger Agreements, 56 Bus. Law. 919, 941 n.71 (2001) (“[T]o the extent possible the court should not strip a merger partner of all of its contractual deal protections because those protections are unenforceable to their fullest written extent. Instead, the court should endeavor to pare away only the forbidden excess, leaving the merger partner with the benefits of those protections that fall within recognized standards of acceptability.”). 283 FP UC Hldgs., 2020 WL 1492783, at *8 (denying the motion to dismiss for overbroad restrictive covenants but refusing to blue pencil at the pleadings stage); see C & J Energy Servs. v. City of Miami Gen. Empls., 107 A.3d 1049, 1053 (Del. 2014) (holding that “mandatory injunctions should only issue with the confidence of findings made after a trial or on undisputed facts” and that blue penciling a contract without such factual support “is not an appropriate exercise of equitable authority”); see also In re Toys “R” Us, 877 A.2d at 1022 (“I need not and do not reach [plaintiffs’] argument that this court should either strike down [the agreement’s] provisions altogether or blue-pencil them back to reasonable limits, all before a trial has even been held. To grant that sort of mandatory relief would, in my view, be inappropriate on disputed facts . . . .”).
64 Here, Stephen agreed to the restrictive covenants in the context of selling his
business, and Buyer has alleged sufficient facts indicating Stephen held the cards.
Buyer shows that three times it suggested SPA edits, and three times Stephen
rejected Buyer’s proposals.284 Stephen regularly exercised power over Buyer,
dismissing or evading Buyer’s requests during negotiations.285 Stephen even
asserted his acumen over Buyer in response to Buyer’s concerns that the Company’s
financial disclosures did not express compliance with Generally Accepted
Accounting Principles: “I like the existing wording – it seems pretty standard to me
as a CPA.”286 And Plaintiffs argue Stephen “hotly and at length negotiated” the
restrictive covenants.287 While Stephen contends his bargaining power “does not
make [the noncompete] any more enforceable,” that remains to be seen.288 This
284 Compl. ¶¶ 59–62 (“Seller’s counsel rejected the document and noted that Seller’s last draft of the SPA was ‘our best and final offer.’”); id. ¶¶ 67–70 (showing Buyer asserting its “understanding [that Seller’s] side was okay with [Buyer] changes to the financials section absent a call to make any necessary clarifications or discuss” and Seller authoritatively replying “[w]e are not changing the wording at this point”); id. ¶¶ 73–77. 285 Compare Id. ¶ 51 (indicating Buyer requested Stephen identify “what actions [he had] taken regarding the change to [Company] billing model,” whether he “communicated that change to employees or clients,” and that Stephen provide these communications with the number of clients who received them) with id. ¶¶ 52–54 (indicating Seller never directly answered Buyer’s requests and refused to provide any communications); see id. ¶ 79 (showing Seller’s dismissal of Buyer’s fourth-quarter concerns with Buyer’s own due diligence: “We are standing behind the financials and books and records. Buyer has had an opportunity to calculate its own rates based on those numbers”). 286 Id. ¶¶ 67–68. 287 Hr’g Tr. 83; see Compl. ¶ 310. 288 Hr’g Tr. 43.
65 action may well present the opposite side of the blue penciling coin, where a seller
with heightened bargaining power negotiates overbroad restrictions, banking on this
Court striking the restrictions entirely.289
While rewriting an arms-length contract to “make it more reasonable as a
matter of equity” is no small thing,290 on this record, Plaintiffs have adequately pled
facts indicating the context of these restrictive covenants may conceivably present a
rare instance where equity and public policy might require blue penciling. But I
cannot resolve this uncertainty without the “confidence of findings made after a trial
or on undisputed facts.”291
E. Completely Compliant Is No Longer A Party To This Action.
Finally, Plaintiffs bring Count III, for misappropriation of trade secrets,
against Stephen and Completely Compliant. Defendants argue Plaintiffs failed to
establish “the existence of trade secrets and any actual or threatened
misappropriation.”292 “The elements of a misappropriation of trade secrets claim
289 Compare id. at 44 with Kodiak, 2022 WL 5240507, at *4 n.49 (“It seems likely that many [overbroad non-compete agreements], perhaps most, reflect the incentives the law has created for employers: ask for as much as possible, with the expectation that you will get at least what you’re entitled to should the matter go to court.” (quoting Charles A. Sullivan, The Puzzling Persistence of Unenforceable Contract Terms, 70 Ohio St. L.J. 1127, 1151 (2009)). 290 FP UC Hldgs., 2020 WL 1492783, at *8. 291 C & J Energy, 107 A.3d at 1053–54. 292 DOB 28.
66 are . . . well defined. A party may obtain injunctive relief and damages against one
who acquires, uses, or discloses a trade secret obtained through improper means.”293
“To maintain a successful claim for misappropriation of trade secrets, a plaintiff
must show both the existence of a trade secret and its misappropriation.”294
Complaints that plead the existence of a trade secret with overly vague, threadbare,
and factually unsupported conclusory allegations will be dismissed.295
1. Plaintiffs Made A Prima Facie Showing This Court Has Personal Jurisdiction Over Completely Compliant.
As a gating issue, Defendants argue this Court lacks personal jurisdiction over
Completely Compliant because Completely Compliant has no Delaware presence296
and did not sign the SPA, or even exist when the SPA closed. Plaintiffs contend
Completely Compliant is Stephen’s affiliate bound by the SPA’s Delaware forum
293 Savor, Inc. v. FMR Corp., 812 A.2d 894, 897 (Del. 2002). 294 Beard Rsch., Inc. v. Kates, 8 A.3d 573, 589 (Del. Ch. Apr. 23, 2010). 295 See MHS Cap., 2018 WL 2149718, at *14 (dismissing a claim for trade secret misappropriation for failure to allege the existence of a trade secret); see also AlixPartners, LLP v. Benichou, 250 A.3d 775, 783 (Del. Ch. May 10, 2019) (holding plaintiff well-pled the existence of a trade secrete because “the alleged categories of documents are not overly vague or so broad as to be meaningless”). 296 Compl. ¶ 15 (“Completely Compliant, LLC is a Wyoming limited liability company, with its principal office at 1309 Coffeen Avenue Suite 1200, Sheridan, Wyoming 82801, and its headquarters at 8450 Tyco Road, Suite D, Vienna, Virginia 22182.”).
67 selection clause297 because “it was foreseeable that Completely Compliant would be
bound by the SPA, including its forum selection clause.”298
“If the Court has not held an evidentiary hearing, plaintiffs need only make a
prima facie showing of personal jurisdiction and the record is construed in the light
most favorable to the plaintiff.”299 Plaintiffs may do so by showing a defendant
consented to jurisdiction.300 When “parties agree to litigate in a particular forum”
through a forum selection clause “they consent . . . [to] personal jurisdiction in that
forum.”301
The SPA has a Delaware forum selection clause.302 Completely Compliant
did not sign the SPA or agree to its forum selection clause; but this Court may still
297 PAB 54. 298 Hr’g Tr. 104. 299 P’rs & Simons, Inc. v. Sandbox Acqs., 2021 WL 3161651, at *3 (Del. Ch. July 26, 2021); see id. at *4 (discussing foreseeability test as one way a party can be closely related to an agreement, that “Delaware courts have applied this concept in the controller context, where the signatory controls the non-signatory,” and that “the non-signatory must bear a clear and significant connection to the subject matter of the agreement”). 300 Focus Fin. P’rs, LLC v. Holsopple, 241 A.3d 784, 801 (quoting Nat’l Grp. Hldg. v. Carlyle Inv. Mgmt., 67 A.3d 373, 381 (Del. 2013) and citing Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 n.14 (1985)). 301 P’rs & Simons, 2021 WL 3161651, at *3. 302 SPA § 9.9 (“Each party to this Agreement, by its execution hereof, hereby (a) irrevocably submits to the exclusive jurisdiction of the courts with jurisdiction over the State of Delaware for the purpose of any and all actions, suits, or proceedings arising in whole or in part out of, related to, based upon, or in connection with this Agreement or the subject matter hereof, or the transactions contemplated hereby (whether sounding in contract, tort, statute, or otherwise) . . . .”).
68 bind a nonsignatory to a forum selection clause when (1) “the forum selection clause
[is] valid,” (2) “the defendants are . . . closely related to the contract,” and (3) “the
claim arise[s] from their standing relating to the . . . agreement[.]”303 A plaintiff
must satisfy all three requirements in order to bind a nonsignatory to an agreement.304
To satisfy the closely-related requirement, the plaintiff must show either that
it was foreseeable that the nonsignatory would be bound by the agreement or that
the nonsignatory received a direct benefit from it.305 The “foreseeability inquiry
rests on the public policy that forum selection clauses promote stable and dependable
public relations, and it would be inconsistent with that policy to allow the entities
through which one of the parties chooses to act to escape the forum selection
clause.”306 The foreseeability inquiry for a nonsignatory with a sufficiently close
relationship to the agreement sounds in promissory estoppel: having promised to
litigate in a particular forum, a party “cannot later renege on its promise by using a
controlled affiliate to escape the forum selection provision.”307 “On this basis, cases
have applied the foreseeability inquiry . . . in the controller context, where the
303 Neurvana Med., LLC v. Balt USA, LLC, 2019 WL 4464268, at *3 (Del. Ch. Sept. 18, 2019). 304 P’rs & Simons, 2021 WL 3161651, at *4. 305 Id. 306 Id. 307 Fla. Chem. Co., LLC v. Flotec Indus., Inc., 262 A.3d 1066, 1090 (Del. Ch. Aug. 17, 2021).
69 signatory controls the non-signatory involved in the transaction.”308 This
foreseeability test extends even to entities who become affiliates of the controller
after the agreement’s execution,309 especially in the presence of “strong textual
signals that a [p]erson’s status as an [a]ffiliate is determined when contractual
compliance is measured.”310 That said, it does not extend “to all non-signatories that
a signatory happens to control” but only to those that “bear a clear and significant
connection to the subject matter of the agreement.”311
Plaintiffs have met their burden at this stage. It is undisputed that the SPA’s
forum selection clause is valid. And Plaintiffs fairly plead that Completely
Compliant is closely related to the SPA because (1) it is controlled by Stephen 312 and
308 Neurvana, 2019 WL 4464268, at *5 (internal quotation marks omitted) (quoting Weygandt v. Weco, LLC, 2009 WL 1351808, at *5 n.26 (Del. Ch. May 14, 2009)). 309 See, e.g. Symbiont.io, Inc. v. Ipreo Hldgs., LLC, 2021 WL 3575709, at *31 (Del. Ch. Aug. 13, 2021) (holding that an entity that was not an affiliate of defendant when defendant executed the agreement became bound by a noncompete provision when it became defendant’s affiliate) (discussing Universal Studios, Inc. v. Viacom, Inc., 705 A.2d 579, 591 (Del. Ch. May 15, 1997) (binding a later-in-time affiliated entity to a noncompete)). 310 Id. at *29–31 (identifying such strong textual signals in the agreement’s definition of “Affiliate” with “the adjective ‘any’ to frame its scope expansively as extending to ‘any specified Person,’” its lack of limiting language to control the scope, and the use of equity ownership as an assessment of control). 311 P’rs & Simons, 2021 WL 316151, at *4 (quoting Neurvana, 2019 WL 4464268, at *6). 312 See Compl. ¶¶ 288–89, 292; and see PAB 60 (showing (1) Stephen owns Completely Compliant, (2) Completely Compliant’s first address was five miles away from Stephen and now is located at his personal residence, (3) Completely Compliant’s telephone number registration is in Stephen’s name, and (4) Completely Compliant’s voicemail recording is by Stephen).
70 (2) bears a clear and significant connection to the subject matter of the agreement313
as the alleged “entity through which [Stephen] [breached] one of its contractual
obligations.”314 While Completely Compliant did not exist when the SPA was
signed, the SPA bears textual signals of an intent to assess control at the time of
contractual compliance, using equity ownership in its definition of “Affiliate.” 315
As in Florida Chemical Company v. Flotek Industries, “when [Stephen] bound
[himself] to the Delaware Forum Provision for any claim arising out of or relating
to the [SPA], [Stephen] made that promise on behalf of [himself] and [Completely
Compliant as a closely related subsidiary].”316 Finally, the claim arises from
313 See Compl. ¶ 294 (“[Completely Compliant] offers the same services as those of the Company and the Buyer, as defined under the terms of the SPA.”); id. ¶ 299 (“Based upon [Completely Compliant’s] own written representations (including those on its website), it engages in the Company’s Business that was sold to Buyer under the SPA in exchange for millions of dollars, and it is doing so within the Territory defined under Section 6.7.2 of the SPA.”). 314 See Fla. Chem., 262 A.3d at 1093 (holding nonsignatory defendant had “a clear and significant connection” to the Purchase Agreement because it was the entity through which the parent carried out one of its contractual obligations). 315 SPA § 1.2 (defining “Affiliate” to “mean[], as to any Person, any other Person controlling, controlled by or under common control with such Person. For the purposes of this definitions, ‘controlling,’ ‘controlled,’ and ‘control’ means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.”); Symbiont.io, 2021 WL 3575709, at *29 (“Equity ownership can fluctuate and that . . . assessment of control must account for the shares outstanding when contractual compliance is measured.”). 316 262 A.3d at 1092.
71 Completely Compliant’s standing relating to the agreement because “the claim[]
asserted . . . arise[s] from the [SPA].”317
Plaintiffs have made a prima facie showing that this Court may exercise
personal jurisdiction over Completely Compliant for purposes of Count III. But in
any event, Count III is dismissed for failure to state a claim.
2. Plaintiffs Failed To State A Claim For Misappropriation Of Trade Secrets Against Completely Compliant.
Count III asserts Stephen and Completely Compliant have misappropriated
Labyrinth and Harbor trade secrets. Plaintiffs allege “[Stephen] sold and Buyer
acquired the exclusive right to use Company trade secrets pursuant to the SPA.”318
From there, Plaintiffs allege Stephen wrongfully emailed Labyrinth trade secrets to
317 Cap. Grp. Co., Inc. v. Armour, 2004 WL 2521295, at *7 (Del. Ch. Oct. 29, 2004) (holding “a suit to enforce [a stock repurchase agreement] with respect to stock held in the Trust . . . clearly arise[s] from [the nonsignatory’s] standing relating to the SRA”); see SPA § 6.7.2 (“Seller and Robert Urich shall not, and shall not permit any of his Affiliates, directly or indirectly, except for Buyer and the Company (i) engage in or assist others in engaging in (1) the Business . . . .”); see also id. § 4.8(b) (“Other than the Company, no Person has any right, title, or interest in or to any of the Company Software.”); id. at § 1.2 (defining “Company Software” to “mean[] (a) all proprietary software and technology, including all programs, applications, source code, object code, algorithms, models, methodologies, trade secrets, copyrights, patents, and other proprietary technology . . . , including any customizations, modifications, updates, new releases, new versions and other derivative works related thereto as of the date hereof, and (b) all Intellectual Property rights, title and interests in and to each of the foregoing, in each case, with respect to the Intellectual Property . . . that was developed by or on behalf of the Business.”); id. at § 1.2 (defining “Affiliate” to “mean[] . . . any other Person controlling, controlled by, or under common control with such Person”); Compl. ¶ 334 (“[Stephen] Urich and Completely Compliant are in possession of Plaintiffs’ Trade Secrets . . . .”). 318 Compl. ¶ 330.
72 himself,319 his “misconduct and [his] knowledge of Plaintiffs’ Trade Secrets . . .
impute[s] to Completely Compliant,”320 and “Stephen and Completely Compliant
threaten to and will inevitably use and/or disclose the Plaintiffs’ Trade Secrets.”321
Plaintiffs assert that “the Delaware Uniform Trade Secrets Act (“DUTSA”),” “the
California Uniform Trade Secrets Act (“CUTSA”),” “the Pennsylvania Uniform
Trade Secrets Act (“PUTSA”), and “the Virginia Uniform Trade Secrets Act
(“VUTSA”)” govern various aspects of the claim.322 Defendants contend “the
Complaint fails to allege a basis for DUTSA or PUTSA to apply.”323 Then,
Defendants argue “the Complaint fails to state a claim under any cited statute.”324
Where a conflict of law exists between different jurisdictions, “Delaware
courts apply ‘the most significant relationship test from the Restatement (Second) of
Conflict[ ] of Laws.’”325 “[T]he ‘most significant relationship’ test entails a fact-
319 Id. ¶ 111. 320 PAB 36–37. 321 Compl. ¶ 335. 322 Id. ¶ 337. 323 DOB 25. 324 Id. at 27 n.7. 325 Dow Chem. Co. v. Organik Kimya Hldg. A.S., 2018 WL 2382802, at *6 (Del. Ch. May 25, 2018) (quoting UbiquiTel Inc. v. Sprint Corp., 2005 WL 3533697, at *3 (Del. Ch. Dec. 14, 2005)); see Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 773 (Del. Ch. Feb. 18, 2014) (“[I]f the Court finds that an actual conflict exists, then it applies the ‘most significant relationship test,’ as set out in the Restatement (Second) of Conflict of Laws, to determine which jurisdiction’s laws to apply.”).
73 intensive inquiry that often is inappropriate to a motion to dismiss.”326 But, “[i]f
application of the competing laws would yield the same result, then no genuine
conflict exists, ‘and the Court should avoid the choice-of-law analysis
altogether.’”327 “Forty-eight states and the District of Columbia have adopted the
Uniform Trade Secrets Act (“UTSA”).”328 Here, Defendants have acknowledged
that “the elements of each statute appear sufficiently similar.”329 Plaintiffs further
confirm the “Defendants do not identify any material differences among the
statutes,” and “the DUTSA, PUTSA, CUTSA, and VUTSA . . . all provide” similar
pleading requirements and similar definitions for “misappropriation.”330 “[B]ecause
[DUTSA, PUTSA, CUTSA, and VUTSA] would produce the same decision no
matter which state’s law is applied, there is no real conflict and a choice of law
analysis would be superfluous. Thus, I analyze [the] claim[] under Delaware
law.”331
326 Dow Chem., 2018 WL 2382802, at *6. 327 Vichi, 85 A.3d at 773 (quoting Deuley v. DynCorp Int’l, Inc., 8 A.3d 1156, 1161 (Del. 2010)). 328 Dow Chem., 2018 WL 2382802, at *6. 329 DOB 27 n.7. 330 PAB 28; see Vichi, 85 A.3d at 773 (“[T]he laws [do not] actually conflict on a relevant point.”). 331 Great Am. Opportunities, Inc. v. Cherrydale Fundraising LLC, 2010 WL 338219, at *8 (Del. Ch. Jan. 29, 2010).
74 The Complaint “must show both the existence of a trade secret and its
misappropriation.”332 “[T]o qualify as a ‘trade secret’ information must both derive
independent economic value from not being generally known or readily
ascertainable and be subject to reasonable efforts to maintain its secrecy.”333
Relevant here, DUTSA defines “misappropriation” as:
a. Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
b. Disclosure or use of a trade secret of another without express or implied consent by a person who: 1. Used improper means to acquire knowledge of the trade secret; or 2. At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade [secret] was: A. Derived from or through a person who had utilized improper means to acquire it; B. Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or C. Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.334
The parties dispute what defines the universe of Company trade secrets
subject to misappropriation. Defendants contend “[t]he Complaint pleads that
Section 4.8 ‘defined the Intellectual Property sold under the SPA,’”335 and Section
4.8 of the SPA defines “all of the Company’s trade secrets,” 336 and so because
332 Beard Rsch., 8 A.3d at 589. 333 Id. 334 6 Del. C. § 2001(2). 335 DRB 16 (quoting Compl. ¶ 268). 336 Id.
75 “nothing listed on [Schedule 4.8(a)(i)] is at issue,” the Company fails to sufficiently
identify any misappropriated trade secrets.337 Plaintiffs point to the UTSA’s
definition of ‘trade secret’ and contend “the parties never ‘agreed’ that Schedule
4.8(a)(i) of the SPA consists of ‘all’ of the Company’s trade secrets, much less as
the term ‘trade secret’ as defined under the statutes.”338
For purposes of this analysis, this opinion accepts Plaintiffs’ argument. Even
proceeding under this assumption, Plaintiffs must still plead (1) a trade secret exists,
(2) “[t]he plaintiff communicated the trade secret to the defendant,” (3) the
communication followed an express or implied understanding “that the defendant[s]
would maintain the secrecy of the information,” and (4) Stephen and Completely
Compliant misappropriated a trade secret “within the meaning of that term as
defined in . . . DUTSA.”339 This opinion also assumes that at least some of the
information that Stephen possessed reasonably constituted Company trade
secrets,340 that the information was communicated to Stephen, and that it was
337 Id. 338 PAB 32. 339 Alarm.com Hldgs., Inc. v. ABS Cap. P’rs, Inc., 2018 WL 3006118, at *7 (Del. Ch. June 15, 2018). 340 Compl. ¶ 111; see Liveware Publ’g, Inc. v. Best Software, Inc., 252 F.Supp.2d 74, 85 (D. Del. 2003) (noting that a customer list is “precisely the type of business information which is regularly accorded trade secret status . . . .”); Compl. ¶ 111 (indicating Stephen emailed himself a “Labyrinth Monthly Management Meeting” document, containing strategy and operational details for the Company); but see AlixPartners, 250 A.3d at 783
76 communicated pursuant to an express or implied understanding that Stephen would
maintain the secrecy of the information.341 And so, this decision assumes Plaintiffs
satisfied the first three elements of a DUTSA claim.342
The Complaint does not state a claim against Completely Compliant. “Under
the facts alleged in the complaint, the claim [] founders on the fourth element
because [Plaintiffs] ha[ve] not pled facts supporting a reasonable inference of
(finding that notes from meetings constituted “numerous methods, techniques, and processes for conducting and marketing [company’s] consulting business” and satisfied a showing of trade secrets at the pleading stage); Compl. ¶ 111 (indicating Stephen emailed himself “open invoices, which included client names and other details”); but see Great Am. Opportunities, 2010 WL 338219, at *21 (determining post-trial that an order status report listing clients’ names and the status of orders constituted a company trade secret); Compl. ¶ 111 (indicating Stephen emailed himself “copies of the Company’s Balance Sheet and Profit and Loss Statement”); but see Hyman Co., Inc. v. Brozost, 119 F. Supp. 2d 499, 501, 505 (E.D. Pa. Nov. 7, 2000) (finding defendant “had access to and was given, when needed, financial information on the profitability of many of the individual Hyman stores, including the actual profit and loss statements” and holding “[t]he information to which [defendant] was privy during the course of his employment with [plaintiff] regarding [plaintiff’s] lease terms, conditions and negotiations and the profitability of [plaintiff’s] stores constitute such confidential and proprietary information as to be worthy of protection as a trade secret”); Compl. ¶ 111 (indicating Stephen emailed himself Company financial spreadsheets). 341 See SPA § 6.7.1 (“From the Closing Date until the tenth anniversary of the Closing, Seller and Robert Urich shall . . . hold and use . . . in confidence any and all information, whether written or oral, concerning the Company and Buyer, except to the extent that Seller can show that such information (a) is generally available to and known by the public through no fault of Seller . . . .”); see also Consulting Agreement § 5.1 (“Consultant hereby recognizes and affirms Consultant’s responsibility to preserve and protect all Confidential Information, and will not use or disclose any Confidential Information at any time, except to the Company and on the Company’s behalf, as may be required in the course of performing the Services . . . .”); Alarm.com, 2018 WL 3006118, at *7. 342 Alarm.com, 2018 WL 3006118, at *7.
77 misappropriation” by Completely Compliant.343 The Complaint must provide
“specific details suggesting how [Completely Compliant] impermissibly used [or
acquired] the [trade secret].”344 Plaintiffs’ reliance “exclusively on ‘threadbare
recitals of the elements of a cause of action, supported by mere conclusory
statements, [does] not suffice.”345
The Complaint fails to plead Completely Compliant ever acquired Labyrinth
trade secrets. I have agreed to assume for purposes of this analysis that Stephen
improperly acquired Labyrinth trade secrets through a series of emails from October
4 through December 27, 2021. Plaintiffs do not offer any other facts indicating
Completely Compliant actually has, or has used, Labyrinth’s trade secrets.346
Instead, Plaintiffs ask the Court to impute Stephen’s misappropriation to Completely
Compliant. Under principles of agency law, a corporate agent’s knowledge and
actions within the scope of their authority are imputed to the entity.347 And so, when
agents of a corporation “engage in wrongdoing, the corporation itself is a
wrongdoer.”348 Plaintiffs rely entirely on this legal fiction to impute Stephen’s
343 Id. 344 Brightstar Corp. v. PCS Wireless, LLC, 2019 WL 3714917, at *8 (Del. Ch. Aug. 7, 2019). 345 Id. 346 Compl. ¶ 339. 347 Stewart v. Wilm. Tr. SP Servs., Inc., 112 A.3d 271, 302 (Del. Ch. Mar. 26, 2015). 348 Id.
78 tortious conduct to Completely Compliant, citing BrandRep, LLC v. Ruskey for the
general rule that an individual fiduciary or agent’s knowledge is imputed to an
entity.349
But Stephen improperly obtained Labyrinth’s trade secrets a year before
Completely Compliant was formed.350 Plaintiffs make no effort to argue or explain
why Stephen’s conduct should be imputed to an entity he formed months after that
conduct. In BrandRep, the fiduciary defendant allegedly misappropriated
BrandRep’s trade secrets while he owned that company, and then gave the trade
secrets to his affiliates and sold his ownership in BrandRep.351 The affiliates were
in existence when the alleged misappropriation occurred; thus, the fiduciary
defendant was an agent of the acquiring entities, and “his alleged breaches . . . [were]
imputed to the [e]ntity [d]efendants.”352 But here, Stephen could not have been an
agent of Completely Compliant when he took Labyrinth’s sensitive information in
2021, because Completely Compliant had not been formed yet.
Plaintiffs have offered no facts or law that supports imputing Stephen’s
tortious conduct to the later-created Completely Compliant. In the absence of
349 PAB 36–37 (citing BrandRep, LLC v. Ruskey, 2019 WL 117768, at *8 (Del. Ch. Jan. 7, 2019). 350 Compl. ¶ 290 (“The Competing Business was incorporated on December 1, 2022.”). 351 BrandRep, 2019 WL 117768, at *2 (Del. Ch. Jan. 7, 2019). 352 Id. at 6.
79 imputing pre-formation conduct, Plaintiffs must allege facts showing Completely
Compliant obtained or used Labyrinth trade secrets; they have none.
Instead, Plaintiffs suspect that “[b]ecause [Stephen] also formed and began
operating the competing business in violation of the SPA, [Stephen] and Completely
Compliant threaten to and will inevitably use and/or disclose the Plaintiffs’ Trade
Secrets.”353 Potential misuse does not establish actual misuse.354 Possessing a trade
secret and investing in (or forming) a Labyrinth competitor, “without more, [does]
not constitute [Stephen’s] improper use” of a trade secret.355 Plaintiffs merely
identify circumstances that support an inference that Stephen and Completely
Compliant compete with the Company; but they fail to establish a reasonably
conceivable set of circumstances under which Stephen and Completely Compliant
improperly acquired, used, or disclosed Company trade secrets.356
353 Compl. ¶ 335. 354 Callaway Golf Co. v. Dunlop Slazenger Grp. Am., Inc., 318 F.Supp.2d 205, 216 (D. Del. 2004) (holding conclusory allegations are not enough for misappropriation of trade secrets claims); see Savor, 2004 WL 1965869, at *9 n.92 (explaining opportunity to acquire is insufficient to support an inference of misappropriation (citing SEC v. Truong, 98 F.Supp.2d 1086, 1101 (N.D. Cal. 2000)). 355 Alarm.com, 2018 WL 3006118, at *8 (dismissing plaintiff’s misappropriation claim regardless of plaintiff’s identification of a trade secret and a party’s investment in a competing business, because plaintiff failed to show the trade secret was misappropriated). 356 Id. (“Even given this relaxed pleading standard, [the] complaint does not support a reasonably conceivable inference of misappropriation. [The plaintiff] relies only on [the defendant’s] investment in [a competitor], made approximately a year after . . . [leaving] Alarm . . . . [T]hese circumstances only support an inference that [the defendant] invested in a company that competes with [the plaintiff].”).
80 The Complaint fails to state a claim that Completely Compliant
misappropriated Labyrinth trade secrets. I defer the merits of the claim against
Stephen until trial.
3. Harbor Fails To Allege Stephen And Completely Compliant Misappropriated Harbor Trade Secrets.
Count III claims Stephen and Completely Compliant misappropriated not only
Labyrinth’s trade secrets, but Harbor’s as well.357 Plaintiffs must adequately plead
the existence of a trade secret.358 Alleged categories of documents must not be
overly vague or so broad as to be meaningless.359 Plaintiffs must identify the
existence of Harbor information that “derives independent economic value, actual
or potential, from not being generally known to . . . persons who can obtain economic
value from its disclosure or use . . . and is the subject of efforts that are reasonable
under the circumstances to maintain its secrecy.”360 Threadbare complaints
purporting the existence of trade secrets, without any supporting factual detail, will
be dismissed.361
357 See, e.g., Compl. ¶ 334. 358 AlixPartners, 250 A.3d at 782. 359 Id. at 783. 360 PAB 28 (citing 6 Del. C. § 2001(4); 12 Pa. C. S. § 5302; Cal. Civ. Code Ann. § 3426.1; and Va. Code Ann. § 59.1-336). 361 MHS Cap., 2018 WL 2149718, at *14 (holding a threadbare complaint for misappropriation of trade secrets “fail[ed] to state a claim for trade secret
81 Plaintiffs do not identify any additional Harbor trade secrets other than
Labyrinth’s. The Complaint repeatedly identifies Harbor’s trade secrets as
Labyrinth’s.362 While Harbor bought at least some of Labyrinth’s trade secrets under
the SPA, Plaintiffs have not alleged Completely Compliant’s misappropriation of
those.363
The Complaint’s only other connection to Harbor trade secrets is Stephen’s
Consulting Agreement. The Complaint alleges Stephen “was further given access
to trade secrets of Buyer pursuant to the Stephen Consulting Agreement.”364 But
Plaintiffs do not identify any Harbor trade secrets, let alone allege Stephen
misappropriated any.365 The Consulting Agreement does not even establish that
misappropriation” because “at the outset, . . . [plaintiff] ha[d] not alleged the existence of a trade secret”). 362 Compl. ¶ 334 (referring to “the Company’s [Labyrinth’s]” trade secrets); id. ¶ 327 (“[A]s set forth above, Plaintiffs’ trade secrets are comprised of, inter alia, the Company’s . . . .”); id. ¶ 329 (“[Labyrinth’s] trade secrets are the exclusive property of Plaintiffs . . . .”); id. ¶ 330 (“Stephen sold and Buyer acquired exclusive right to use Company trade secrets . . . .”); id. ¶ 285 (“[Stephen] had emailed himself copies of the Company’s intellectual property and trade secrets . . . in disregard for his contractual obligations, including those set forth at Section 6.7.1 of the SPA and Section 5.1 of the Consulting Agreement.”); id. ¶ 339 (“[Stephen] would now be unfairly benefitting from the trade secrets he took from the Company . . . .”). 363 See, e.g., id. ¶ 330. I do not reach whether Stephen misappropriated any Labyrinth trade secrets purchased by Harbor. 364 Id. ¶ 331. 365 See Beard Rsch., 8 A.3d at 589 (indicating a plaintiff must show both “both the existence of a trade secret and its misappropriation”).
82 Harbor gave Stephen access to its trade secrets.366 Section 5.1 states only that Harbor
“may make disclosures to Consultant of confidential information . . . including but
not limited to . . . certain or other trade secrets.”367 “The text of [the
mandatory/permissive canon] is entirely clear, and its content so obvious as to be
hardly worth saying . . . . The traditional, commonly repeated rule is that shall is
mandatory and may is permissive.”368 Section 5.1 says Harbor might disclose trade
secrets to Stephen; nothing in it, or the Complaint, says Harbor actually did. And
the phrase “certain or other trade secrets” does not specify such trade secrets would
even be Harbor’s, as opposed to Labyrinth’s. Plaintiffs’ invocation of the Consulting
Agreement fails to allege Stephen had knowledge of, or misappropriated, any
properly identified Harbor trade secret.369
Count III is dismissed against Completely Compliant, and against Stephen to
the extent it claimed misappropriation of Harbor trade secrets that were not
purchased with Labyrinth. Completely Compliant is no longer a party to this action.
366 Alarm.com, 2018 WL 3006118, at *6 (“To survive a motion to dismiss under Rule 12(b)(6), the complaint must plead four elements: (i) a trade secret exists. (ii) The plaintiff communicated the trade secret to the defendant . . . .”). 367 Consulting Agreement § 5.1 (emphasis added). 368 Antonin Scalia & Bryan A Garner, Reading Law: The Interpretation of Legal Texts 112 (2012). 369 See Beard Rsch., 8 A.3d at 589.
83 III. CONCLUSION
Count III is dismissed as against Completely Compliant, and against Stephen
in part. Count IV is dismissed as to the representations regarding the rental
properties. I otherwise deny Defendants’ Motion as to Counts IV, V and VII. Robert
remains a party to this action. A reasonable interpretation of the SPA indicates it
does not prohibit injunctive relief, and Stephen’s bargaining power might call upon
my equitable discretion to use the blue pencil for tailoring the SPA’s overbroad
noncompete. I defer my disposition on the merits of Counts I, II, III as to Stephen’s
misappropriation of Labyrinth trade secrets, VI, VIII, and IX until trial. The parties
shall submit a stipulated implementing order.
Related
Cite This Page — Counsel Stack
Labyrinth, Inc. v. Stephen A. Urich, Counsel Stack Legal Research, https://law.counselstack.com/opinion/labyrinth-inc-v-stephen-a-urich-delch-2024.