ReCor Medical, Inc. v. Warnking

• Court: Court of Chancery of Delaware
• Decided: October 15, 2014
• Docket: CA 7387-VCN
• Status: Published

Opinion

EFiled: Oct 15 2014 01:25PM EDT Transaction ID 56199109 Case No. 7387-VCN COURT OF CHANCERY OF THE STATE OF DELAWARE

JOHN W. NOBLE 417 SOUTH STATE STREET VICE CHANCELLOR DOVER, DELAWARE 19901 TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179

October 15, 2014

Daniel B. Rath, Esquire Thomas M. Horan, Esquire K. Tyler O’Connell, Esquire Womble Carlyle Sandridge & Rice, LLP Landis Rath & Cobb LLP 222 Delaware Avenue, Suite 1501 919 Market Street, Suite 1800 Wilmington, DE 19801 Wilmington, DE 19801

Re: ReCor Medical, Inc. v. Warnking C.A. No. 7387-VCN Date Submitted: May 14, 2014

Dear Counsel:

Plaintiff ReCor Medical, Inc. (“ReCor”) prevailed in this Court on its claim

that it owns certain Transferred Intellectual Property.1 The Court also concluded

that ReCor was entitled to recover its attorneys’ fees and expenses by virtue of an

Employee Non-Disclosure, Non-Competition, and Invention Assignment

1 ReCor Med., Inc. v. Warnking, 2013 WL 3760022 (Del. Ch. May 31, 2013), aff’d, 85 A.3d 89 (Del. 2014) (TABLE). Familiarity with the facts set forth in that memorandum opinion is assumed. It may be appropriate to note that ReCor acquired the Transferred Intellectual Property under a “catch-all” provision of the asset purchase agreement and it did not specifically pay for that asset; indeed, there were no negotiations about its value. It was not disclosed (and much of the trial was about that failure). Accordingly, ReCor bought an asset (or a concept) that it did not know it was buying and for which it negotiated no specific price. ReCor Medical, Inc. v. Warnking C.A. No. 7387-VCN October 15, 2014 Page 2

Agreement (the “IAA”), which provided: “The prevailing party in any litigation

arising under [the IAA] shall be entitled to recover his or its attorneys’ fees and

expenses in addition to all other remedies.”2

Defendants Reinhard Warnking (“Warnking”) and Sound Interventions, Inc.

(“SII”) (collectively, the “Defendants”) appealed the final judgment entered under

Court of Chancery Rule 54(b). The Supreme Court affirmed and identified the two

issues remaining for this Court’s resolution: “first, the parties’ dispute over the

amount of attorneys’ fees and expenses to be awarded to ReCor; and, second, the

question of whether the Defendants should be credited with their attorneys’ fees

and costs incurred in the filings and prosecution of the Transferred Intellectual

Property.”3 ReCor’s fee applications include fees4 incurred before bringing the

litigation in this Court, its fees incurred during the litigation in this Court, and its

fees incurred during the appellate proceedings.5 It seeks a total of $1,130,993.35.6

2 JX 4 § 5; see Final Judgment, July 16, 2013, ¶ 6. 3 Warnking v. ReCor Med., Inc., 85 A.3d 89, 2014 WL 457786, at *1 (Del. 2014) (TABLE). 4 For convenience, a reference to “fees,” unless the context requires otherwise, will generally include expenses as well. 5 ReCor filed separate fee applications: one on July 23, 2013, and a supplemental one on February 21, 2014. 6 See Letter of Daniel B. Rath, Esq., Mar. 14, 2014, at 4. ReCor Medical, Inc. v. Warnking C.A. No. 7387-VCN October 15, 2014 Page 3

***

As a general matter, the fees sought by ReCor fall within a range of

reasonableness.7 Defendants do, however, offer several grounds for either

reducing or offsetting those fees. Although the Court is addressing ReCor’s fee

applications, it will be more orderly to deal with the Defendants’ contentions.

A. Pre-Chancery

ReCor acquired the Transferred Intellectual Property and related assets and

rights in a bankruptcy proceeding.8 Before commencing litigation, it attempted to

resolve its disputes with Defendants through negotiation. That effort, which

resulted in fees of approximately $64,000, was unsuccessful, but it developed and

framed the issues which were eventually litigated in this Court. ReCor’s

entitlement to recover its fees is a matter of contract. The contract does not limit

recovery to fees incurred during litigation, although it does require prevailing in

litigation, as ReCor did. It is appropriate, and arguably required, to attempt to

7 See Decl. of Vito A. Canuso III in Supp. of Award of Fees and Costs to Pl. ReCor Med., Inc.; Suppl. Decl. of Vito A. Canuso III in Supp. of Award of Fees and Costs to Pl. ReCor Med., Inc. 8 See Decl. of John W. Holcomb in Supp. of Award of Fees and Expenses to Pl. ReCor Med., Inc. (“Holcomb Decl.”) Ex. 1 (Order Authorizing Debtor [ProRhythm, Inc.] to Sell Certain Assets to ReCor Medical, Inc. Free and Clear of All Liens, Claims, Interests and Encumbrances). ReCor Medical, Inc. v. Warnking C.A. No. 7387-VCN October 15, 2014 Page 4

resolve disputes before bringing litigation. That is what ReCor did. If those

efforts had been successful, without resort to litigation, there would be no right to

recover fees. The fees, however, were incurred reasonably, and the amount of the

fees, in light of the effort reasonably necessary, is reasonable.

ReCor commenced litigation against the Defendants in Bankruptcy Court.

Eventually it was determined that the Bankruptcy Court did not have jurisdiction.

The Defendants argue that filing in the wrong court generated unnecessary and,

hence, unreasonable fees. The question of whether the Bankruptcy Court had

jurisdiction was subject to debate,9 and ReCor did not act unreasonably in bringing

its claims to the court which authorized the transaction by which it acquired the

Transferred Intellectual Property. Moreover, to a limited extent, discovery from

the bankruptcy proceeding was used in this Court, and that avoided some expenses

that would otherwise have been incurred here. The fees incurred in the bankruptcy

litigation were reasonable and were part of a proper effort to bring this matter to

conclusion, ultimately in the courts of this State.

9 The Bankruptcy Court’s order authorizing the sale, see supra note 8, at ¶ 34, generally provided that the Bankruptcy Court would retain exclusive jurisdiction over any dispute between ProRhythm and ReCor. ReCor Medical, Inc. v. Warnking C.A. No. 7387-VCN October 15, 2014 Page 5

B. Court of Chancery Proceedings

Defendants complain about duplication and excessive conferencing among

ReCor’s attorneys.10 Multiple lawyers worked on similar tasks and attended the

same hearing.11 It is reasonable to conclude that the efforts of ReCor’s attorneys,

when measured through hindsight, could have been more efficient. That may well

be an almost universal truism about legal services. In this instance, there is no

objective basis for concluding that the efforts of counsel were anything other than

reasonable and consistent with their professional judgment.

ReCor filed its complaint in this Court with seven counts. By the time trial

arrived, ReCor had two counts remaining, and after trial, it had prevailed on one

count. The Defendants argue that the number of counts for which ReCor did not

achieve success renders its fees unreasonable because of unnecessary or unjustified

claims. It is not uncommon for several theories of recovery to be asserted and for

the pretrial process to narrow the scope of the proceeding. That is what has

10 This is a concern that extends beyond the limits of the litigation in this venue. 11 Even though several attorneys participated, the litigation team was relatively small. ReCor Medical, Inc. v. Warnking C.A. No. 7387-VCN October 15, 2014 Page 6

happened here. The two counts that went to trial overlapped and the Court did not

address ReCor’s fiduciary duty claim because it had no need to do so.12

However, five counts were abandoned in the Pretrial Order and Stipulation

and dismissed “with prejudice, with each party to bear its own fees and costs.” 13

Thus, the parties agreed before trial that ReCor could not collect its attorneys’ fees

incurred with respect to the five dismissed claims, even if it did prevail on one of

the two remaining claims. Although ReCor relinquished any right to fees incurred

in having pursued the five abandoned claims, no methodology for separating out

those efforts has been suggested. The claims all involved essentially the same

facts, and it is unlikely that any material effort was dedicated specifically to any of

the abandoned claims. No doubt there was some minimal work performed

distinctly on the five abandoned claims, but modification of the fee award for that

reason would be arbitrary. Proof of entitlement to its fees is, of course, ReCor’s

burden.

12 ReCor, 2013 WL 3760022, at *18. 13 Pretrial Stip. ¶ 5. ReCor Medical, Inc. v. Warnking C.A. No. 7387-VCN October 15, 2014 Page 7

Defendants point out that they incurred $400,000 in attorneys’ fees in this

Court, while ReCor incurred more than twice that amount. This single statistic, the

Defendants argue, demonstrates that ReCor’s fees are unreasonable. Although it is

easy to sympathize with the Defendants, litigation typically imposes a heavier

burden on the plaintiff which must “prove its case.” That, coupled with the limited

deference accorded to the professional judgment of ReCor’s attorneys, persuades

the Court that it has no principled basis for reducing ReCor’s fees on these

grounds.

C. Appellate Proceedings

During the appeal, the Defendants sought interim injunctive relief to protect

a patent application for the Transferred Intellectual Property. Although the

Defendants did not prevail, their efforts were justified in large part because of

ReCor’s uncertain conduct. Protecting the patentability of the Transferred

Intellectual Property was in the best interests of all parties. As a result of the

Defendants’ efforts, ReCor rethought its approach, and, thus, it received a benefit

from Defendants’ efforts. The fees incurred by ReCor in resisting Defendants’

efforts would not have been needed if ReCor had been more attentive to the patent

process and had been more forthcoming with the Defendants in terms of its ReCor Medical, Inc. v. Warnking C.A. No. 7387-VCN October 15, 2014 Page 8

intentions. Accordingly, the fees incurred by ReCor in resisting the Defendants’

application for interim injunctive relief during the appeal are denied. The amount

of reduction based on this effort would be $67,708.

D. Setoffs

Defendants ask to setoff against the fees owed to ReCor the fees they

incurred in prosecuting the patent applications related to some of the Transferred

Intellectual Property and the business costs incurred in developing and supporting

the underlying technology for patent consideration. The fees attributable to patent

prosecution amount to $139,936.09.14 The business development costs exceed

$1.5 million.15

Defendants’ application is committed to the Court’s equitable discretion.

There is no contractual right at issue. Instead, pursuing the patents and developing

and testing the technology were appropriate, and ReCor, not the Defendants, will

obtain the benefits resulting from the Defendants’ expenditures.

14 Decl. of David A. Smith (Ex. A to letter of Thomas M. Horan, Esq., Mar. 7, 2014) Ex. 1. 15 Id. Ex. 2. These costs consist of $1,060,444.59 in research and development expenses; $376,007.19 in animal study expenses; and $247,177.63 in clinical expenses. ReCor Medical, Inc. v. Warnking C.A. No. 7387-VCN October 15, 2014 Page 9

Under these circumstances, it is appropriate that the Defendants be

reimbursed for the costs of prosecuting the patents.16 The question was before the

Court at the time of the appeal. Perhaps the prosecution costs are not as well

documented as one might want, but they are reasonable, and the Defendants are

entitled to a setoff in their amount.

Recovery of the business costs is a different question. These expenditures

evidently were discussed during oral argument before the Supreme Court, but the

Supreme Court’s Order does not speak of business costs. It refers to “attorneys’

fees and costs incurred in the filings and prosecution of the Transferred Intellectual

Property.” The Defendants previously sought that relief in this Court. Nothing in

the record before the appeal addressed business expenses. In addition, not all of

the business expenses are fairly attributable to the technology which ReCor

obtained through the litigation. Accordingly, Defendants’ application for a credit

or a setoff for business costs is denied.17

16 The Court reserved this issue before Defendants appealed. Final Judgment, ¶ 6. 17 Furthermore, documentation of these costs is distressingly superficial. Decl. of David A. Smith Ex. 2. ReCor Medical, Inc. v. Warnking C.A. No. 7387-VCN October 15, 2014 Page 10

ReCor has demonstrated that it reasonably incurred net fees in the amount of

$923,349.26, in connection with the litigation through which it obtained the

Transferred Intellectual Property. This amount reflects two adjustments: first,

denial of fees related to the interim injunctive relief sought during the pendency of

the appeal; and second, a credit to the Defendants for the costs of their patent

prosecution which conferred a distinct benefit upon ReCor.18

Counsel are requested to confer and to submit an implementing form of

order.

Very truly yours,

/s/ John W. Noble

JWN/cap cc: Register in Chancery-K

18 The Defendants have not argued that liability for attorneys’ fees should be imposed upon Warnking but not upon SII.