Red Cat Holdings, Inc. v. Autonodyne LLC

• Court: Court of Chancery of Delaware
• Decided: January 30, 2024
• Docket: 2022-0878-NAC
• Status: Published

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE NATHAN A. COOK LEONARD L. WILLIAMS JUSTICE CENTER 500 N. KING STREET, SUITE 11400 VICE CHANCELLOR WILMINGTON, DELAWARE 19801-3734

January 30, 2024

David S. Eagle Kevin M. Coen Klehr Harrison Harvey Branzburg LLP Emily C. Friedman 919 N. Market Street, Suite 1000 Morris Nichols Arsht & Tunnel LLP Wilmington, DE 19801 1201 N. Market Street Wilmington, DE 19801

RE: Red Cat Holdings, Inc., et al. v. Autonodyne LLC, et al. C.A. No. 2022-0878-NAC

Dear Counsel:

This letter decision resolves the defendants’ motion to dismiss as it relates to

the plaintiffs’ claims against defendant Autonodyne LLC (“Autonodyne” or the

“Company”).1 For the reasons below, those claims must be dismissed.

I. FACTUAL BACKGROUND

I have drawn the relevant facts from the Verified First Amended Complaint

(the “Amended Complaint”) and the documents incorporated by reference or integral

to it.2

1 Red Cat Holdings, Inc. v. Autonodyne LLC, et al., C.A. No. 2022-0878-NAC, Docket (“Dkt.”) 24, Defendants’ Motion to Dismiss the Verified First Amended Complaint (the “Motion to Dismiss”). Pursuant to my forthcoming order, I am deferring my decision on the claims brought against Daniel Schwinn. 2 See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004). Citations in the form of “AC ¶ __” refer to the Amended Complaint. Dkt. 23. Citations in the form of “SLA § __” refer to Exhibit 1 to the Amended Complaint. Dkt. 23. Citations in the C.A. No. 2022-0878-NAC January 30, 2024 Page 2

A. The Parties

Plaintiff Teal Drones, Inc. (“Teal Drones”) is a subsidiary of plaintiff Red Cat

Holdings, Inc. (“Red Cat”) (together, “Plaintiffs”).3 This case arises from a Software

Licensing Agreement (the “SLA”) that Teal Drones entered with defendant

Autonodyne in May 2022.4 Plaintiffs allege that defendant Daniel Schwinn

(together with the Company, “Defendants”) is Autonodyne’s principal equity

holder.5

B. The Software Licensing Agreement

The SLA emerged from a professional collaboration between Teal Drones and

Autonodyne that had been ongoing since 2020.6 The parties devised this document

to regulate Teal Drones’s use of the Company’s avionics software.7 The SLA gave

Teal Drones a non-exclusive license to use certain avionics software and a limited

form “OB at __” refer to the Opening Brief in Support of Defendants’ Motion to Dismiss the Verified First Amended Complaint. Dkt 29. Citations in the form “AB at __” refer to the Plaintiffs’ Answering Brief in Opposition to Defendants’ Motion to Dismiss the Verified First Amended Complaint. Dkt. 33. 3 AC ¶ 1. 4 AC ¶ 22; see also SLA. 5 AC ¶ 9. 6 AC ¶ 18. 7 AC ¶¶ 22–23. C.A. No. 2022-0878-NAC January 30, 2024 Page 3

exclusive license “to certain functionality in the avionics software.”8 This enabled

the Company to carry on servicing other customers, to the extent doing so did not

conflict with the functionality it exclusively licensed to Teal Drones.9

Three sections of the SLA are of particular significance here: Sections 15.3,

9, and 14.3 (b)–(c).

Section 15.3 restricts public announcements relating to the SLA. It provides

that “[n]either party shall issue or release any announcement, statement, press

release, or other publicity or marketing materials relating to this Agreement . . . in

each case, without the prior written consent of the other party, which consent shall

not be unreasonably withheld or delayed.”10

Section 9 governs confidentiality. Section 9.1 defines “Confidential

Information.” The definition includes “all Specifications and unpublished

Documentation” and further provides that “the terms of this Agreement are and will

remain the Confidential Information of both parties.”11

8 AC ¶ 23; see also SLA § 2.1 (describing the software license). 9 See, e.g., SLA § 7.4(a) (contemplating that the Company would have and continue to provide services to its “other customers”). 10 SLA § 15.3. 11 Id. § 9.1. C.A. No. 2022-0878-NAC January 30, 2024 Page 4

Section 9.3 restricts the parties’ use of Confidential Information. It states: “As

a condition to being provided with any disclosure of or access to Confidential

Information, the Receiving Party shall: (a) not access or use Confidential

Information other than as necessary to exercise its rights or perform its obligations

under and in accordance with this Agreement[.]”12

Section 14.3(b) grants the Company an express right to terminate the SLA if

Teal Drones breaches Section 9. It provides that: “[Autonodyne] may terminate this

Agreement, effective on written notice to [Teal Drones], if . . . [Teal Drones]

breaches any of the terms or conditions of Section 2.3, Section 3, Section 9, or

Section 10[.]”13

Lastly, Section 14.3(c) gives either party the right to terminate the SLA in the

event of a counterparty’s uncured or uncurable material breach. It provides that:

[E]ither party may terminate this Agreement, effective on written notice to the other party, if the other party materially breaches this Agreement, and such breach: (i) is incapable of cure; or (ii) being capable of cure,

12 Id. § 9.3. Section 9.3(d) is also relevant. It states that the Receiving Party shall “ensure its Representatives’ compliance with, and be responsible and liable for any of its Representatives’ non-compliance with, the terms of this Section.” Id. The parties do not dispute that Red Cat is Teal Drones’s “Affiliate,” as that term is defined in the SLA. The SLA also defines “Representatives” as including a parties’ Affiliates’ “employees, officers, directors, agents, and legal advisors.” Id. § 1. 13 SLA § 14.3(b), Preamble (defining “Licensor” as “Autonodyne” and “OEM” as “Teal Drones”). C.A. No. 2022-0878-NAC January 30, 2024 Page 5

remains uncured 30 days after the nonbreaching party provides the breaching party with written notice of such breach[.]14

C. The Email Exchange

On August 21, 2022, Jeff Thompson from Teal Drones emailed Autonodyne’s

CEO, Steve Jacobson.15 Thompson’s email to Jacobson stated the following:

Jake, Not sure if you saw Teal / Reveal Technologies press release but the response has been tremendous and it’s already generating orders. I wanted to give you the heads up that we’re developing a similar release about the Teal and Autonodyne relationship. Let me know if you have any objections, or if you want to send us a quote or have our PR team make a quote[.]16

Three minutes later, Jacobson responded: “That sounds great. I’m on vacay

all week up in the Adirondacks. You guys can make up some quote - I’m sure it will

be fine or at least a great start.”17

D. The Press Release

Two days after the email exchange—without further contacting Jacobson or

the Company regarding the press release—Red Cat issued a press release detailing

14 SLA § 14.3(c). 15 AC ¶ 45, Ex. 2 (email exchange). The SLA designates Jacobson as the person to whom any consents, requests, notices, or other communications must be sent for the communications to have legal effect. See SLA § 15.4. 16 AC ¶ 45 (footnote omitted), Ex. 2. 17 Id. C.A. No. 2022-0878-NAC January 30, 2024 Page 6

Teal Drones’s relationship with the Company (the “Press Release”).18 Neither

Jacobson nor the Company ever saw a draft of the Press Release before Red Cat

published it. In the Amended Complaint, Plaintiffs allege that the “Press Release

quoted the exact language of the SLA regarding the exclusive rights that the SLA

granted to Teal Drones.”19 The Press Release also stated that:

Under the terms of the agreement, Autonodyne software will only be made available to Teal, effectively jumping Teal ahead of other drone companies seeking to provide multi-vehicle control or capabilities like unlimited surveillance. Competitors will have to develop their own software or secure licenses from others with inferior test performance.20

E. Termination And Litigation

On August 26, 2023, three days after Red Cat issued the Press Release, the

Company delivered a letter to Teal Drones purporting to terminate the SLA (the

“Notice”).21 The Notice explained that, in addition to “grossly mischaracteriz[ing]

the terms of the Agreement,” Red Cat issued the Press Release without the

Company’s consent and included Confidential Information in the published

material.22 Thus, the Notice concluded, Plaintiffs breached Sections 9 and 15.3 of

18 AC ¶ 47; OB Ex. C (Press Release). 19 AC ¶ 48. 20 OB Ex. C. 21 See AC ¶ 50, Ex. 3. 22 See id. C.A. No. 2022-0878-NAC January 30, 2024 Page 7

the SLA, which triggered the corresponding termination rights in Section 14.3(b)

and (c), respectively.23

Plaintiffs allege that, after delivering the Notice, the Company stopped

performing under the SLA.24 For Schwinn’s involvement, Plaintiffs allege that he

made the Company’s decision to send the Notice and that Schwinn directed the

Company’s employees to stop performing under the SLA.25

Litigation ensued. The Amended Complaint asserts five claims. Count I is a

claim for breach of contract; Count II, breach of the implied covenant; Count III,

tortious interference with contractual relations and prospective contractual relations;

Count IV, declaratory judgment; and Count V, injunctive relief. Plaintiffs assert

Counts I, II, IV, and V against the Company. Plaintiffs assert Counts III and IV

against Schwinn.

II. LEGAL ANALYSIS

Defendants moved to dismiss all counts for failure to state a claim. Defendant

Schwinn also moved to dismiss the claims against him for lack of personal

23 See id. Ex. 3. 24 See id. ¶ 53. 25 Id. ¶ 55. C.A. No. 2022-0878-NAC January 30, 2024 Page 8

jurisdiction. Personal jurisdiction is addressed in a separate order. This decision

solely addresses dismissal of Plaintiffs’ claims against the Company.

“The standards governing a motion to dismiss for failure to state a claim are

well settled: (i) all well-pleaded factual allegations are accepted as true; (ii) even

vague allegations are ‘well-pleaded’ if they give the opposing party notice of the

claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving

party; and (i[v]) dismissal is inappropriate unless the ‘plaintiff would not be entitled

to recover under any reasonably conceivable set of circumstances susceptible of

proof.’”26 But, “[i]f a complaint were held sufficient simply because it restates the

legal elements of a particular cause of action, Rule 8(a) would be rendered

meaningless.”27 Accordingly, “[n]otwithstanding Delaware’s permissive pleading

standard, the court may disregard mere conclusory allegations made without specific

allegations of fact to support them. Pleading serial facts ‘on information and belief’

is no substitute for well-pled facts that will support a reasonable inference of

wrongdoing.”28

26 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002). 27 In re Coca-Cola Enters., Inc., 2007 WL 3122370, at *4 n.28 (Del. Ch. Oct. 17, 2007). 28 HUMC Holdco, LLC v. MPT of Hoboken TRS, LLC, 2022 WL 3010640, at *20 (Del. Ch. July 29, 2022) (quoting In re Xura, Inc. S’holder Litig., 2019 WL 3063599, at *3 (Del. Ch. July 12, 2019)). C.A. No. 2022-0878-NAC January 30, 2024 Page 9

A. The Amended Complaint Fails To State A Claim For Breach Of Contract

Plaintiffs allege that the Company breached the SLA in two ways. First, they

allege the Company improperly declared the SLA terminated and ceased fulfilling

its obligations, including its exclusivity obligations. Second, in the event the

Company properly terminated, Plaintiffs argue the Company failed to fulfill certain

obligations that survive the SLA’s termination.

1. Plaintiffs’ Allegations Regarding Termination Of The SLA “Under Delaware law, the proper interpretation of language in a contract is a

question of law. Accordingly, a motion to dismiss is a proper framework for

determining the meaning of contract language.”29 “In construing a contract, our goal

is to give effect to the intent of the parties.”30 “[I]n giving sensible life to a real-

world contract, courts must read the specific provisions of the contract in light of the

entire contract.”31 “When the language of a contract is plain and unambiguous,

binding effect should be given to its evident meaning.”32 Delaware “respects the

29 Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006). 30 Weinberg v. Waystar, Inc., 294 A.3d 1039, 1044 (Del. 2023). 31 Id. (quoting Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC, 166 A.3d 912, 913–14 (Del. 2017)). 32 Allied Cap. Corp., 910 A.2d at 1030. C.A. No. 2022-0878-NAC January 30, 2024 Page 10

right of parties to freely contract and to be able to rely on the enforceability of their

agreements[.]”33

In resolving a motion to dismiss, I may consider the allegations and

documents incorporated by reference or otherwise amenable to judicial notice.34

Defendants argue that the Amended Complaint and its exhibits, plus certain limited

documents otherwise incorporated by reference, make unequivocally clear that

Plaintiffs breached Sections 9 and 15.3 of the SLA. If correct, Defendants argue that

Plaintiffs’ breach triggered the Company’s clear, bargained-for rights to terminate

the SLA.

For their part, Plaintiffs do not dispute that I may consider these materials at

the pleading stage. The only issue that I must resolve is whether I may conclude, at

this stage, that Plaintiffs triggered the Company’s termination rights and Plaintiffs’

allegations fail to state a reasonably conceivable claim.

For the reasons explained below, I conclude that Plaintiffs’ own allegations

and exhibits make plain their breach of both Section 9 and Section 15.3 of the SLA.

Plaintiffs’ assertions in response do not give rise to a reasonably conceivable basis

33 New Enter. Assocs. 14, L.P. v. Rich, 295 A.3d 520, 565–66 (Del. Ch. 2023) (citation omitted). 34 See Wal-Mart Stores, Inc., 860 A.2d at 320 (Del. 2004). C.A. No. 2022-0878-NAC January 30, 2024 Page 11

to conclude that the SLA remains in effect.35 Plaintiffs’ first claim for breach must

accordingly be dismissed.

a. Section 9

Section 9.1 of the SLA provides that “the terms of this Agreement” fall within

the ambit of “Confidential Information.”36 Section 9.3(a) prohibits access to or use

of Confidential Information other than as required to exercise a right or perform an

obligation under the SLA.37 Section 14.3(b) permits the Company to “terminate this

Agreement . . . if . . . [Teal Drones] breaches any of the terms or conditions of . . .

Section 9.”

The Press Release disclosed that, “[u]nder the terms of the license, Teal has

secured exclusive right to Autonodyne’s software suite for ‘autonomy and exchange

of control among humans and machines to perform tasks involving crewed and/or

uncrewed vehicles.’”38 Plaintiffs’ Amended Complaint confirms that “[t]he Press

Release quoted the exact language of the SLA regarding the exclusive rights the SLA

35 Below, I separately address Plaintiffs’ claim for breach of the limited SLA provisions that survive termination. 36 See SLA. 37 Id. Sections 9.3(b) and (d) of the SLA are relevant only to demonstrate that Teal Drones is liable for Red Cat and its agents’ conduct in issuing the Press Release. See id. § 1 (defining “Affiliate” and “Representative”). 38 OB Ex. C. C.A. No. 2022-0878-NAC January 30, 2024 Page 12

granted[.]”39 Plaintiffs’ Amended Complaint also characterizes the “[e]xclusivity of

these software functions” as a “material term of the SLA, and a key aspect of the

bargain to which Teal Drones agreed.”40

The parties to the SLA bargained over its terms. Those terms include the

definition of Confidential Information. The definition of Confidential Information

plainly includes the SLA’s terms.41 The parties also bargained for a term prohibiting

the disclosure of Confidential Information and a term giving rise to a termination

right in the event of breach of that prohibition.42

These terms are express and plain. No party has argued that these terms are

ambiguous, nor could they. “Under Delaware law, sophisticated parties are bound

by the terms of their agreement. . . . As we have explained, ‘[p]arties have a right to

39 AC ¶ 48; see also Dkt. 45, Tr. 10-23-2023 Oral Argument on Defendants’ Motion to Dismiss (“OA Tr.”) 80:7–21 (“I think that’s a quote directly from the software licensing agreement.”). 40 AC ¶ 86. 41 No party has argued that Teal Drones is not a “Receiving Party” with respect to the SLA. This is understandable, as to argue otherwise would render the text surplusage. See Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (“We will read a contract . . . so as not to render any part of the contract mere surplusage.”). 42 See SLA §§ 9 (defining and restricting use of Confidential Information), 14.3 (granting the Company a termination right for breaches by Plaintiffs of Section 9). C.A. No. 2022-0878-NAC January 30, 2024 Page 13

enter into good and bad contracts, the law enforces both.’”43 Thus, “the court’s role

is to enforce the agreement as written.”44

When Plaintiffs disclosed a quotation from the SLA, they disclosed

Confidential Information. This disclosure breached the terms of Section 9.45 This

breach entitled the Company to terminate the SLA pursuant to its express termination

right in Section 14.3(b). And the Company exercised this right.46

Plaintiffs suggest that, notwithstanding the breach of Section 9 and

termination right under Section 14.3(b), I should consider their allegations that the

Company consented to Red Cat publishing the Press Release under Section 15.3.

But, as I describe in the next section, Plaintiffs do not allege a reasonably

43 Glaxo Grp. Ltd. v. DRIT LP, 248 A.3d 911, 919 (Del. 2021). 44 Id. 45 Plaintiffs also argue that the Press Release did not reveal any material terms of the SLA, and thus no Confidential Information was disclosed. See, e.g., AB at 15. But their characterization of the exclusivity provision as a “material term” belies this assertion. See AC ¶ 86. Moreover, “Confidential Information,” as defined in Section 9.1, is not qualified by an SLA term being a “material” term. See SLA. The same is true for the prohibition against disclosure contained in Section 9.3(a) and the termination right contained in Section 14.3(b). Id. Moreover, the very next subsection in Section 14.3 (i.e., Section 14.3(c)) deals expressly with material breaches. Thus, within the SLA’s four corners appears the “negative implication” that the breaches of the provisions set forth in Section 14.3(b) need not be material breaches to trigger the termination right contained therein. See, e.g., Fortis Advisors LLC v. Medicines Co., & Melinta Therapeutics, Inc., 2019 WL 7290945, at *4, *4 n.33 (Del. Ch. Dec. 18, 2019) (applying expressio unius est exclusio alterius). 46 Compare AC Ex. 3 (Notice), with SLA § 15.4. C.A. No. 2022-0878-NAC January 30, 2024 Page 14

conceivable basis to keep their claims alive. I thus conclude it is not reasonably

conceivable that the Company failed to properly terminate the SLA under Sections

9 and 14.3(b).

b. Section 15.3 Section 15.3 provides that “[n]either party shall issue or release any . . . press

release . . . relating to this Agreement . . . without the prior written consent of the

other party.”47 This language is unambiguous. Before issuing the Press Release,

Plaintiffs were required to first obtain the Company’s “prior written consent.” There

is no dispute over whether the Press Release was subject to the requirements of

Section 15.3 as “relating to this Agreement.”48 Thus, absent the “prior written

consent” required by Section 15.3, Plaintiffs breached the SLA, irrespective of

whether the Press Release disclosed Confidential Information.

Plaintiffs argue it is reasonably conceivable that Jacobson’s reply email to

Thompson constituted consent to publish the Press Release.49 Even affording

47 SLA. 48 Moreover, “our courts have considered the connector ‘relating to’” and interpret it plainly as being “paradigmatically broad[.]” Pharm. Prod. Dev., Inc. v. TVM Life Sci. Ventures VI, L.P., 2011 WL 549163, at *5 (Del. Ch. Feb. 16, 2011). 49 AB at 16–18. C.A. No. 2022-0878-NAC January 30, 2024 Page 15

Plaintiffs the plaintiff-friendly inferences to which they are entitled, Plaintiffs’

argument fails.

There are two ways to view Plaintiffs’ argument, both of which I address

below. First, I consider Jacobson’s email and whether it is reasonably conceivable

that his email constituted the consent required by Section 15.3. Second, I consider

the logical reciprocal, that is, whether Section 15.3 can be reasonably interpreted as

satisfied by Jacobson’s email. Plaintiffs’ argument fails under both assessments.

Jacobson sent his email in near-immediate reply to Thompson’s email.

Thompson’s email provides that he is writing to “give [Jacobson] a heads up that

[Plaintiffs were] developing a similar release” to the Reveal Technologies press

release.50 Thompson asks if Jacobson has objections. Thompson also asks if

Jacobson wants to send a quote for inclusion or “have our PR team make a quote[.]”51

Jacobson replied within three minutes. Jacobson writes: “That sounds great.

I’m on vacay all week up in the Adirondacks. You guys can make up some quote –

I’m sure it will be fine or at least a great start.”52

50 AC Ex. 3. 51 Id. 52 Id. C.A. No. 2022-0878-NAC January 30, 2024 Page 16

In this email, Jacobson communicated his consent to Thompson’s continued

development of a press release and qualified permission to make up a quote for him

as part of that development process. No more and no less. It is not reasonably

conceivable that this email provided Plaintiffs with the necessary consent to publish

a press release relating to the SLA, particularly one containing Confidential

Information, sight unseen.

Plaintiffs highlight two parts of Jacobson’s email: “That sounds great” and

“[y]ou guys can make up some quote - I’m sure it will be fine[.]”53 The former can

only be understood as Jacobson’s response to the contents of Thompson’s email,

which did not seek consent for publication. Regardless of how much Plaintiffs may

wish it to be true, Jacobson’s reply cannot be contorted into a response to a question

Thompson did not ask. That is, whether the Company consented to Plaintiffs’

publication of the Press Release. Thus, it is not reasonably conceivable that this

language constituted the requisite consent.

The latter quotation (“I’m sure it will be fine”) can only be reasonably read as

permissive of Plaintiffs making up some quote as a part of the contemplated press

53 See AB at 8, 17, 25. For obvious reasons, Plaintiffs would prefer to ignore the second sentence of Jacobson’s email, namely that he was on vacation. Although I do not rely on this point, I note it is consistent with the notion that Plaintiffs assumed the risk of their action here. C.A. No. 2022-0878-NAC January 30, 2024 Page 17

release’s development. Jacobson connects “I’m sure it will be fine” with a hyphen

to the first part of the sentence, “[y]ou guys can make up some quote.” Even in that,

it is further qualified by the “or at least a great start” language that trails. Here, I

also conclude it is not reasonably conceivable that this language constituted the

necessary consent to publish the Press Release.

Plaintiffs also point to Thompson’s invitation to raise objections. They argue

this should be read broadly to refer to any and all objections to a “proposed press

release.”54 Even assuming that is true, Thompson’s email does not mention

publication of the Press Release or, for that matter, publication of any press release.

Jacobson stated no objection to developing a press release. That is fine as far as it

goes. But Section 15.3, by its plain terms, requires Plaintiffs to obtain consent for

publication of a press release relating to the SLA. The parties bargained for that

term. Plaintiffs cannot reasonably argue that Section 15.3 permitted Plaintiffs

simply to give notice and, absent receipt of objections, to proceed with publishing a

press release—particularly a press release disclosing Confidential Information.

Having addressed the reasonableness of reading Jacobson’s email as consent,

I turn now to consider the logical reciprocal of Plaintiffs’ argument. This secondary

assessment considers whether Section 15.3 can be interpreted as satisfied by

54 AB at 25 (discussing the implied covenant). C.A. No. 2022-0878-NAC January 30, 2024 Page 18

Jacobson’s email. As I explain below, Plaintiffs’ reading reflects a commercially

unreasonable interpretation of the SLA that I must reject, even at the motion to

dismiss stage.55

Here, the parties bargained for an express term defining the SLA’s terms as

Confidential Information. The parties also bargained for a term that, upon disclosure

of this Confidential Information, gives rise to a termination right not subject to cure

or any materiality analysis.56 The only exception to the prohibition on publishing

press releases “relating to this Agreement” requires Plaintiffs to obtain “prior written

consent” for the disclosure.57

Here, Plaintiffs sent a short email and Jacobson replied three minutes later

saying he was on “vacay all week.” Plaintiffs decided not to send a draft of the Press

Release to the Company before proceeding with publication. And, in addition to

Plaintiffs’ own statement that they disclosed Confidential Information in the Press

Release,58 Plaintiffs went on, according to Defendants, to mischaracterize the

parties’ relationship in a way that benefitted Plaintiffs and injured the Company.

55 See Manti Hldgs., LLC v. Authentix Acq. Co., Inc., 261 A.3d 1199, 1211 (Del. 2021). 56 SLA §§ 9, 14.3(b). 57 Id. § 15.3. 58 Compare AC ¶ 48 (the “Press Release quoted the exact language of the SLA”), with SLA § 9.1. C.A. No. 2022-0878-NAC January 30, 2024 Page 19

These are precisely the sort of effects that are avoided by requiring “prior written

consent” before publication of Confidential Information in a press release.59 The

logical reciprocal to Plaintiffs’ reading—that Section 15.3 is satisfied by Jacobson’s

email—would thus be seen to countermand one of the very purposes Section 15.3

was obviously designed to serve. This Court “cannot countenance such an absurd

interpretation.”60

The foregoing compels me to conclude that it is not reasonably conceivable

that Jacobson’s reply email constituted the consent required by Section 15.3 and that

no commercially reasonable reading of Section 15.3 can be seen as satisfied by

Jacobson’s email.61 Accordingly, by issuing the Press Release, Plaintiffs breached

Section 15.3.

59 See eCommerce Indus., Inc. v. MWA Intel., Inc., 2013 WL 5621678, at *17 (Del. Ch. Sept. 30, 2013) (“the difficulty in quantifying the damages for a breach of the confidentiality provisions is probably why the parties included these provisions in the Agreement and carved them out from the limitation of liabilities section”); OA Tr. 87:5– 88:21. 60 Osborn, 991 A.2d at 1161. 61 Plaintiffs also assert that “Jacobson did not ask to see or review a draft of the press release.” AB at 17. But the unambiguous terms of Section 15.3 did not require that Jacobson request to see or review a draft; instead, it required “prior written consent,” which Jacobson did not provide. See SLA § 15.3. C.A. No. 2022-0878-NAC January 30, 2024 Page 20

Section 14.3(c) permits termination by either party upon a material breach of

the SLA.62 Given my analysis concerning the Company’s termination under

Sections 9 and 14.3(b) and Plaintiffs’ argument as to consent, I can stop my analysis

here and need go no further. That said, I note that, except for a single conclusory

allegation,63 Plaintiffs fail to otherwise allege or argue that their breach of Section

15.3 was not material. It is not hard to see why. The parties expressly bargained for

a prohibition on the disclosure of Confidential Information. The Press Release is

not a generic press release addressing Autonodyne matters. Instead, by Plaintiffs’

admission, it discloses Confidential Information. Information that Plaintiffs’

themselves characterize as including a “material term.”64 There is no reasonable, or

reasonably conceivable, argument that Plaintiffs’ action did not constitute a material

breach of the SLA.65

62 Section 14.3(c) of the SLA only permits termination for a material breach that goes uncured for 30 days or is unable to be cured. Plaintiffs appear to have continued operating at all times as if Defendants never terminated the SLA and have not alleged any attempt to cure the breach derived from publishing the Press Release. See, e.g., OA Tr. 65:1–67:3. 63 AC ¶ 58(g). 64 See AC ¶ 86 (“Exclusivity of these software functions is a material term of the SLA, and a key aspect of the bargain to which Teal Drones agreed.”). 65 “A ‘material breach’ is a failure to do something that is so fundamental to a contract that the failure to perform that obligation defeats the essential purpose of the contract or makes it impossible for the other party to perform under the contract.” eCommerce Indus., Inc., 2013 WL 5621678, at *13, *19 (finding disclosure of confidential information was a C.A. No. 2022-0878-NAC January 30, 2024 Page 21

For the foregoing reasons, I must reject Plaintiffs’ first breach of contract

theory as failing to state a claim.

2. Plaintiffs Have Not Adequately Pled A Breach Of The Terms Surviving The SLA’s Termination

Under their second breach of contract theory, Plaintiffs allege breaches of the

SLA arising under Sections 2.1, 4.1, 6.1, 7, 9, 14.1, and 14.3. 66 Section 14.7

identifies the limited terms of the SLA that survive its termination.67 The only

overlap between the provisions under which breach is alleged and the provisions

identified in Section 14.7 as surviving termination are Sections 7.1, 7.2, and 9.68

Thus, in light of my analysis above, the remaining question here is whether

Plaintiffs have alleged sufficient facts that make it reasonably conceivable that the

Company breached any surviving obligations arising under Sections 7.1, 7.2, or 9.

material breach of provision prohibiting disclosure and thus holding that non-breaching parties validly terminated the contract). 66 See AC ¶ 58; AB at 9–10. 67 SLA § 14.7 (“Surviving Terms. The provisions set forth in the following Sections, and any other right or obligation of the parties in this Agreement that, by its nature, should survive termination or expiration of this Agreement, will survive any expiration or termination of this Agreement: this Section 14.7, Section 2.3, Section 3, Section 7.1, Section 7.2, Section 9, Section 10, Section 11, Section 13, Section 14.4, Section 14.5, and Section 15.”). 68 Compare SLA § 14.7, with AC ¶ 58; AB at 9–10. Plaintiffs allege breaches arising from Sections 2.1 (the software license), 4.1 (software integration), 6.1 (supply of software), 7.3 (support contact), 7.4 (maintenance releases), 14.1 (initial term), and 14.3 (termination). See AC ¶ 58. But Plaintiffs have not asserted that these terms survive the SLA’s termination, nor are they enumerated in Section 14.7. C.A. No. 2022-0878-NAC January 30, 2024 Page 22

Section 7.1 does not place any obligation on the Company. Instead, it provides

that, except as stated in Section 7.2, Teal Drones is “solely responsible for providing

technical support to Customers for the Integrated Products, including Software

incorporated in or used with the Integrated Products.”69 In order to trigger any

obligations on the Company under Section 7.2, Teal Drones must first be unable to

resolve customer support requests “after performing its first and second level

technical support obligations as set forth in Section 7.1.”70

Plaintiffs do not allege that any customers have requested technical support

that Teal Drones was unable to provide. Thus, Plaintiffs do not allege that any

obligation of the Company under Section 7.2 has been triggered. Plaintiffs’ only

response is that the Amended Complaint “alleges that ‘Autonodyne has failed to

provide customer or technical support for its software as required[]’” and that this

allegation must be accepted as true.71 Plaintiffs, however, cannot rest on a wholly

conclusory allegation such as this to avoid dismissal.72

69 SLA § 7.1. 70 Id. § 7.2. 71 AB at 18–19. 72 See HUMC Holdco, LLC, 2022 WL 3010640, at *20. C.A. No. 2022-0878-NAC January 30, 2024 Page 23

The Amended Complaint also alleges that “Autonodyne has, on information

and belief, disclosed Confidential Information to third parties[.]”73 Plaintiffs allege

“on information and belief” that Defendants “breached the confidentiality provision

by offering third parties the opportunity to license the OEM Software features and

capabilities” exclusively licensed to Teal Drones.74

These allegations, too, are insufficient to state a claim for breach of Section 9.

“Notwithstanding Delaware’s permissive pleading standard, the court may disregard

mere conclusory allegations made without specific allegations of fact to support

them.”75 Indeed, Delaware courts have repeatedly stated that “[p]leading serial facts

‘on information and belief’ is no substitute for well-pled facts that will support a

reasonable inference of wrongdoing.”76

For every alleged fact that Plaintiffs point to as supporting their blanket

assertion that Defendants breached surviving obligations in Section 9, each is either

alleged “on information and belief” or is not identified or even alleged to be

73 AC ¶ 58; see also id. ¶ 34 (alleging based on serial “information and belief” statements). 74 Id. ¶ 34. 75 HUMC Holdco, LLC, 2022 WL 3010640, at *20. 76 Id.; see also In re Xura, Inc. S’holder Litig., 2019 WL 3063599, at *3. C.A. No. 2022-0878-NAC January 30, 2024 Page 24

Confidential Information.77 The former is “no substitute for well-pled facts,” and

the latter cannot form the foundation for a claim for breach of Section 9.

Attempting to illustrate Defendants’ breach of Section 9, and in one of the

only statements on this issue not qualified by “on information and belief,” Plaintiffs

assert that Defendants “did not disclose to potential purchasers that it already had

exclusively licensed certain functionality of its avionics software to Teal Drones for

a term of six years[.]”78 But this is the exact response one would expect from a party

that is continuing to respect the SLA’s surviving confidentiality obligation. To do

otherwise would mean to disclose some terms of the SLA, which would appear to

breach Section 9 since the SLA’s terms are Confidential Information.79

Based on the foregoing, I conclude that Section 7.1 does not place any

obligation on the Company that could give rise to a claim for breach of contract. I

also conclude that Plaintiffs have failed to plead facts sufficient to state a claim for

breach of contract arising under Sections 7.2 or 9. I thus conclude that the claim for

breach of contract must be dismissed.80

77 See, e.g., AC ¶ 34. 78 Id. 79 See SLA § 9.1. 80 This conclusion moots the question of whether Red Cat has standing to assert claims under the SLA. C.A. No. 2022-0878-NAC January 30, 2024 Page 25

B. Plaintiffs Fail To State A Claim For Declaratory Judgment

Plaintiffs assert a claim for declaratory judgment.81 To entertain an action for

declaratory judgment, there must first be an “actual controversy.”82 This is a non-

waivable jurisdictional requirement that Plaintiffs “bear[] the burden of

establishing[.]”83

Plaintiffs assert that an “actual controversy” exists over five questions.84 But

my conclusions on Plaintiffs’ breach of contract claim resolve each of the questions

Plaintiffs raise.85 Plaintiffs have thus failed to adequately allege that an “actual

controversy” exists.

81 Although Plaintiffs bring this claim against the Company and Schwinn, for procedural reasons, this decision only resolves the claim as to the former. Schwinn’s motion to dismiss for lack of personal jurisdiction is, as noted above, the subject of a separate order. 82 XL Specialty Ins. Co. v. WMI Liquid. Tr., 93 A.3d 1208, 1217 (Del. 2014) (explaining that an actual controversy exists where four prerequisites are satisfied). 83 Reylek v. Albence, 2023 WL 4633411, at *6 (Del. Super. July 19, 2023). 84 AC ¶ 83. 85 Among other things, and as it aligns with the five numbered questions Plaintiffs raise, I concluded that it is not reasonably conceivable that: (1) Teal Drones complied with Section 15.3; (2) the Press Release complied with the requirements set forth in Section 9; (4) the Company failed to properly exercise its termination rights under the SLA; and (5) the SLA is valid and binding as to any provisions other than those identified in Section 14.7 and that Defendants breached any of these remaining obligations. Plaintiffs’ question (3) asks whether the Press Release mischaracterizes the SLA. This is relevant only to the extent it relates to whether Plaintiffs’ breach of the SLA was material under Section 15.3. Above, I concluded it is not reasonably conceivable that Plaintiffs’ breach was not material. And I arrived at this conclusion without reaching the issue of mischaracterization. Thus, this C.A. No. 2022-0878-NAC January 30, 2024 Page 26

I am then left unable to entertain Plaintiffs’ declaratory judgment claim and

must dismiss it as to the Company.

C. Plaintiffs Fail To State A Claim For Breach Of The Implied Covenant

Plaintiffs assert a claim for breach of the implied covenant of good faith and

fair dealing. “The implied covenant is inherent in all contracts and is used to infer

terms ‘to handle developments or contractual gaps that the asserting party pleads

neither party anticipated.’”86 “The implied covenant, however, is a ‘cautious

enterprise.’ As we have reinforced on many occasions, it is ‘a limited and

extraordinary legal remedy’ and ‘not an equitable remedy for rebalancing economic

interests that could have been anticipated.’ It cannot be invoked ‘when the contract

addresses the conduct at issue.’”87

Plaintiffs argue both that there are certain contractual gaps in the SLA that the

implied covenant must fill, and the Company exercised its discretion in an arbitrary

or unreasonable manner.88

purported controversy cannot serve as a stand-alone basis for a claim for declaratory judgement. 86 Dieckman v. Regency GP LP, 155 A.3d 358, 367 (Del. 2017) (quoting Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010)). 87 Glaxo Grp. Ltd., 248 A.3d at 920 (footnotes omitted). 88 AC ¶¶ 70–72. C.A. No. 2022-0878-NAC January 30, 2024 Page 27

1. Gap Filling

“To sufficiently plead breach of the implied covenant of good faith and fair

dealing, a complaint ‘must allege a specific implied contractual obligation, a breach

of that obligation by the defendant, and resulting damage to the plaintiff.’”89

Plaintiffs fail to identify any contractual gap suitable for the implied

covenant’s application. They suggest three possible gaps, two of which arise from

Section 15.3’s lack of express definitions for (1) “prior written consent” and (2)

“unreasonably withheld.”90 The third is based on the SLA “not address[ing] the

present scenario where one party has purported to terminate the SLA, the other party

objects,” and the SLA’s purpose has “ceased.”91

Plaintiffs can only state a claim under the first two if I assume that Plaintiffs

sought the Company’s consent. But they did not. For their third alleged “gap,”

Plaintiffs try to conjure a claim out of an imagined termination-objection process.

But the implied covenant cannot be employed to override express terms or provide

a party a right it did not obtain at the bargaining table.92

89 Sheehan v. AssuredPartners, Inc., 2020 WL 2838575, at *11 (Del. Ch. May 29, 2020). 90 AC ¶ 72. 91 Id. 92 See Allen v. El Paso Pipeline GP Co., 113 A.3d 167, 183 (Del. Ch. 2014) (“[B]ecause the implied covenant is, by definition, implied, . . . it cannot be invoked where the contract C.A. No. 2022-0878-NAC January 30, 2024 Page 28

Plaintiffs seem to understand the implied covenant to apply—in a manner

nearing infinite regress—anytime that a word or a phrase is used and not defined in

a contract’s express terms. And, after claiming to have identified contractual gaps,

Plaintiffs jump to the conclusion that they have stated a claim for breach of the

implied covenant. That is a head-scratcher.

Plaintiffs failed to identify any suitable contractual gaps for the implied

covenant to fill. This deficiency alone can end my analysis.93 But even assuming

Plaintiffs had identified some gap, they also do not plead any “specific implied

contractual obligation.”94 Plaintiffs’ failure to propose any term to fill the purported

gaps leaves the Company shadowboxing—hoping to guess the implied terms it has

supposedly breached.

But again, even if I found a suitable gap and proper term to fill it—a starting

point requiring mental gymnastics—Plaintiffs still fail to allege that the Company

breached those terms. Instead, Plaintiffs opt for the inarticulate assertion that

itself expressly covers the subject at issue.”), aff’d, 2015 WL 803053 (Del. Feb. 26, 2015); S’holder Representative Servs. LLC v. Albertsons Cos., Inc., 2021 WL 2311455, at *8 (Del. Ch. June 7, 2021) (“[T]he implied covenant will not serve as a means to provide contractual protections that parties ‘failed to secure for themselves at the bargaining table.’”). 93 See, e.g., Oxbow Carbon & Mins. Hldgs., Inc. v. Crestview-Oxbow Acq., LLC, 202 A.3d 482, 507 (Del. 2019) (“We decline to apply the implied covenant here because no gap exists . . . .”). 94 Sheehan, 2020 WL 2838575, at *11. C.A. No. 2022-0878-NAC January 30, 2024 Page 29

“Autonodyne’s conduct constitutes one or more breaches of the implied covenant of

good faith and fair dealing . . . .”95 This befuddlingly vague assertion is set forth in

wholly conclusory terms of the sort I must reject. As noted previously, “[i]f a

complaint were held sufficient simply because it restates the legal elements of a

particular cause of action, Rule 8(a) would be rendered meaningless.”96

Based on the foregoing, I conclude that Plaintiffs fail to state a claim arising

from the implied covenant’s “gap filling” function.

2. Discretion

Plaintiffs further press their implied covenant claim by arguing that the

Company acted arbitrarily or unreasonably. “Beyond its gap filling function, the

implied covenant applies ‘when a party to the contract is given discretion to act as

to a certain subject and it is argued that the discretion has been used in a way that is

impliedly proscribed by the contract’s express terms.’”97 The implied covenant

“requires in part that a party vested with discretion under a contract exercise its

discretion reasonably, in good faith, and not in an unreasonable or arbitrary way that

would destroy the counterparty’s right to receive the fruits and benefits which they

95 AC ¶ 73. 96 In re Coca-Cola Enters., Inc., 2007 WL 3122370, at *4 n.28. 97 Chordia v. Lee, 2024 WL 49850, at *36 (Del. Ch. Jan. 4, 2024) (quoting SerVaas v. Ford Smart Mobility LLC, 2021 WL 3779559, at *10 (Del. Ch. Aug. 25, 2021)). C.A. No. 2022-0878-NAC January 30, 2024 Page 30

reasonably expected to receive under the contract.”98 “When determining the

parties’ reasonable expectations, the court analyzes ‘whether the parties would have

bargained for a contractual term proscribing the conduct that allegedly violated the

implied covenant had they foreseen the circumstances under which the conduct

arose.’”99

Plaintiffs assert that the Company acted arbitrarily or unreasonably by (1)

purporting to terminate the SLA, (2) refusing to perform its obligations under the

SLA, and (3) shopping its software capabilities to third parties that it had exclusively

licensed to Teal Drones.100

As to each, Plaintiffs fail to identify the contractual discretion suitable for

application of the implied covenant. I begin with the Company’s exercise of multiple

express contract rights to terminate the SLA.

It is one thing to imply a good faith obligation when the parties have expressly agreed that a certain act is within a party’s discretion. It is another matter to imply discretion to restrict actions expressly permitted by the parties’ agreement. The implied covenant imposes a good faith and fair dealing obligation when a contract confers discretion on a party. It should not be used to imply terms that modify or negate an unrestricted contractual right authorized by an agreement.101

98 Menn v. ConMed Corp., 2022 WL 2387802, at *39 (Del. Ch. June 30, 2022). 99 Baldwin v. New Wood Res. LLC, 283 A.3d 1099, 1118 (2022). 100 AC ¶ 71. 101 Glaxo Grp. Ltd., 248 A.3d at 920–21 (footnotes omitted). C.A. No. 2022-0878-NAC January 30, 2024 Page 31

Plaintiffs seek just such a restriction on the Company’s exercise of its express

contract rights to terminate the SLA under Section 14.3. Such use of the implied

covenant is improper.

Moreover, had the parties foreseen these circumstances, it is not reasonably

conceivable that they would have “bargained for a contractual term proscribing” the

Company from terminating the SLA in this manner.102 That much is apparent on the

SLA’s face. The parties that entered the SLA anticipated these circumstances. And,

having anticipated them, the parties did not proscribe the SLA’s terminability.

Instead, they wrote this very script into the SLA’s terms. “Here, contrary to being

impliedly proscribed by the [SLA]’s express terms, the [Company] terminated the

[SLA] pursuant to [the] express contract term[s].”103

In setting forth the second and third bases, Plaintiffs fail to demonstrate the

exercise of any contractual discretion to which the implied covenant might apply.

Plaintiffs allege the Company stopped performing and began shopping its software

to third parties after it terminated the SLA. It follows that these acts were not

undertaken pursuant to the exercise of any discretion provided by the contract—as

102 Baldwin, 283 A.3d at 1118. 103 Chordia, 2024 WL 49850, at *36. C.A. No. 2022-0878-NAC January 30, 2024 Page 32

this application of the implied covenant requires.104 Instead, these were the acts of

a party unbridled by the then-defunct obligations in the SLA—a defunct state the

parties anticipated and wrote into the SLA’s terms upon the happening of Plaintiffs’

disclosure of Confidential Information.

Indeed, even to the extent an obligation did exist, it follows that the SLA’s

express terms would control, and this would not be the unanticipated and silent

circumstances suitable for the implied covenant’s application. Plaintiffs cannot

deploy the implied covenant to obtain, through litigation, superior rights that they

“failed to secure for themselves at the bargaining table.”105

Based on the foregoing, I conclude that Plaintiffs fail to state a reasonably

conceivable claim for breach of the implied covenant flowing from any discretion

provided under the SLA. Accordingly, I must dismiss the claim for breach of the

implied covenant.

104 Glaxo Grp. Ltd., 248 A.3d at 920–21 (“The implied covenant imposes a good faith and fair dealing obligation when a contract confers discretion on a party.”) (emphasis added); ConMed Corp., 2022 WL 2387802, at *39 (“The implied covenant of good faith and fair dealing requires in part that a party vested with discretion under a contract exercise its discretion reasonably, in good faith, and not in an unreasonable or arbitrary way . . . .”) (emphasis added). 105 See Albertsons Cos., Inc., 2021 WL 2311455, at *8. C.A. No. 2022-0878-NAC January 30, 2024 Page 33

D. Injunctive Relief Is A Remedy And Not A Cause Of Action Plaintiffs have asserted a claim for injunctive relief. Defendants argue that

this claim is a remedy and not a cause of action, thus requiring dismissal. I agree.

It is well-established that “[i]njunctions are a form of relief, not a cause of

action.”106 This conclusion compels dismissal.107 But even considering it for its

substance, as pled, it is predicated on the continuation of the SLA’s exclusivity

provision. Having failed to adequately plead the survival of this obligation,

Plaintiffs’ assertions here cannot state a reasonably conceivable claim.

III. Conclusion

For the foregoing reasons, Defendants’ Motion to Dismiss is granted in part.

Counts I, II, and V in Plaintiffs’ Amended Complaint are dismissed in their entirety.

Count IV is dismissed as to the Company.

IT IS SO ORDERED.

Sincerely,

/s/ Nathan A. Cook

Vice Chancellor

106 Quadrant Structured Prod. Co. v. Vertin, 102 A.3d 155, 203 (Del. Ch. 2014). 107 See id. (dismissing two counts because they “seek remedies rather than assert claims”); Lidya Hldgs. Inc. v. Eksin, 2022 WL 274679, at *7 (Del. Ch. Jan. 31, 2022) (dismissing claim for injunctive relief).