Non-Signatories May Be Bound By Forum Selection Clause

In the recent matter of Highway to Health, Inc. v. Bohn, No. 2018-0707-AGB (Del. Ch. April 15, 2020), the  Court of Chancery addressed the requirements necessary to bind a non-signatory to a forum selection clause.

The directors of Highway to Health (“Highway”) sought a declaratory judgment against recipients of stockholder appreciation rights – non-residents of Delaware – (“SARs Recipients”) that the directors did not breach any fiduciary duty or any contractual obligation owed to the SARs Recipients and that a new appraiser’s valuations were binding.

The SARs Recipients moved to dismiss the DJ action for lack of personal jurisdiction.  The company contended that the court had personal jurisdiction over the SARs Recipients under the Delaware long-arm statute and the forum selection clause in a 2013 Stockholders Agreement.  The Court found for the SARs Recipients and dismissed the action.

The Delaware Long-Arm Statute

To exercise personal jurisdiction under Delaware’s long-arm statute, Plaintiffs must show that “(1) there is a statutory basis for exercising personal jurisdiction; and (2) subjecting the nonresident defendant[s] to jurisdiction in Delaware would not violate the Due Process Clause of the Fourteenth Amendment.”  Plaintiffs are entitled to reasonable discovery to meet this burden; however, the Plaintiffs here did not attempt any discovery in aid of establishing personal jurisdiction.  The Court found that Plaintiffs failed to demonstrate that “any act actually occurred in Delaware with respect to the dispute in this case” and as such, the long-arm statute did not confer jurisdiction.

2013 Stockholders Agreement

In order for the SARs recipients to be bound by the forum selection clause in the 2013 Stockholders Agreement, a three-part test must be satisfied:

(i) the forum selection clause is valid; (ii) the non-signatories are third-party beneficiaries; and (iii) the claims arise from their standing relating to the agreement.

Although the SARs Recipients disputed the second and third elements, the Court focused on the third element and found Plaintiffs failed to demonstrate that the claims arose from their standing relating to the agreement because the agreement containing the forum selection clause was not the same agreement that gave rise to the substantive claims brought by or against the non-signatories.

Read the full opinion here.

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Court of Chancery Defers to Deal Price in Panera Bread Appraisal

JAB Holdings B.V. (“JAB”) acquired Panera Bread Company (“Panera”) via a cash-out merger for $315.00 per share on July 18, 2017. Multiple dissenting shareholders (“Petitioners”) filed an appraisal action, seeking a fair value determination of $361.00 per share.

Ultimately, the Vice Chancellor disagreed with Petitioners, ruling that the deal price minus synergies was the best evidence of fair value. The Vice Chancellor found that Panera followed a reliable sale process and any flaws in that process did not undermine its reliability.  The Court supported this finding with the following facts: the parties engaged in arm’s length negotiations, Panera’s board was disinterested and independent, JAB was the sole entity that showed interest in a merger, there were price increases during negotiations, and Panera attempted to solicit other potential buyers during the negotiation process.

The Petitioners asserted that the merger suffered from flaws, which questioned whether the deal price reflected the fair value of the shares. Petitioners claimed that a coverage banker at Morgan Stanley, who worked with JAB and communicated with the Panera deal team at Morgan Stanley on two occasions, undermined the sale process.  The Court noted that these communications actually increased the sale price. The Petitioners also argued that the CEO of Panera, having pushed for a price per share “not deep in the 300s” before the board received a full valuation and an accelerated timeline for the merger, undermined the sale process. The Court held that the Board chair’s early comments about valuation and the accelerated timeline did not distort the sale price because the CEO and board had deep knowledge of Panera’s value and the relevant market. The Court acknowledged that these aspects of the negotiations were not ideal but were not so severe as to make the sale process unreliable.                        

The Petitioners also contended that Morgan Stanley should have advised Panera to seek a go-shop provision; however, the Court found that the record established that there were no other interested bidders. No other bidders emerged after news of a potential acquisition leaked to the market. Additionally, the Court held that Morgan Stanley properly advised Panera by recommending a negotiation strategy that was successful with JAB in prior transactions.  The negotiation strategy resulted in the board extracting two price increases that totaled $18.50 per share and a lower termination fee. Accordingly, the Court found these factors supported the finding that deal price was persuasive evidence of fair value.

The Court deducted synergies totaling $11.56 per share from the deal price and found that the Petitioners were entitled to $303.44 per share as fair value. Panera had prepaid the deal price of $315.00 per share to the Petitioners without having secured a clawback provision if the price the Court determined as fair value was less than what the Company paid. In an issue of first impression, the Court held that Panera was not entitled to a refund under the appraisal statute for the excess $11.56 per share that Panera paid to the Petitioners. Specifically, it noted that, although the appraisal statute allows a corporation to lessen the amount of interest that accrues during the pendency of litigation by prepaying stockholders an amount of cash, the specific words of the statute do not provide for recourse if the corporation overpays its stockholders without having negotiated a clawback provision.

Read the full opinion here

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Inquiry Notice Bars Claims Based on Expired Statute of Limitations

In the case of Ocimum Biosolutions India v. AstraZeneca UK Limited, the Superior Court addressed the level of knowledge necessary for a party to be deemed on inquiry notice for statute of limitations purposes.

In 2001, AstraZeneca entered into a contract with an affiliate of Ocimum, Gene Logic (“Agreement”).  The Agreement allowed for AstraZeneca to access Gene Logic’s biological databases for three years.  After the three years AstraZeneca was required to return or destroy all the data in its possession, subject to results that were derived from the data that AstraZeneca was entitled to retain (“AZ Results”).  At the end of the three year period, AstraZeneca sent a letter to Gene Logic stating that AstraZeneca was in compliance with the Agreement and was no longer in possession of Gene Logic’s confidential data (“Termination Letter”).

In 2007, Ocimum acquired Gene Logic’s biological databases and assumed control of its licensing, past and existing. On March 26, 2009, Ocimum first became suspicious that AstraZeneca did not return or destroy all of Gene Logic’s confidential data as was required under the Agreement.  One internal email between officers and directors of Ocimum stated that AstraZeneca has “been breaching our agreement and using Gene Logic data for 3.5 years with [sic] a contract[,]” and another from March stated “[t]his is a serious breach of termination requirements under the agreement.” Thereafter, Ocimum asked its counsel for an opinion on whether AstraZeneca was in breach of the Agreement.  The Court found that, for purposes of the Summary Judgment Motion, Ocimum’s counsel concluded that there was no breach of the Agreement.  The parties continued to do business after the suspected breach.

In June 2012, an AstraZeneca graduate student published her Master’s Thesis.  Based on data in the Thesis, Ociumum believed that, as of July 2012, someone at AstraZeneca was still using Gene Logic’s data in contravention of the Agreement.

Ocimum filed suit on August 21, 2015, and brought four claims: (1) breach of contract; (2) unjust enrichment; (3) misappropriation of trade secrets; and (4) injunction.  Ocimum contended that AstraZeneca wrongfully retained data after the three-year period ended. After several years of litigation, AstraZeneca moved for summary judgment, contending that Ocimum was on inquiry notice outside the statute of limitations.

Ocimum’s claims are subject to a three year statute of limitations.  The breach of contract and unjust enrichment claims may be tolled by concealment or fraud or an inherently unknowable injury.  Whereas the statute of limitations on the trade secret claim begins to run after the misappropriate was, or should have been, discovered. Regardless of tolling, when a party is on inquiry notice of a claim, the statute begins to run. A person is on inquiry notice when it is objectively aware of facts “sufficient to put a person of ordinary intelligence and prudence on inquiry which, if pursued, would lead to the discovery”  of facts constituting the basis of the cause of action.

Although the Court found that the statute of limitations was tolled for some period of time following AstraZeneca’s Termination Letter, Ocimum was on inquiry notice of a potential breach at least before August 21, 2012, three years prior to the Complaint being filed.  Several of Ocimum’s “high-level employees and executives” were suspicious by April 2009 that AstraZeneca retained more than it was entitled to under the Agreement. The Court stated that even if it concluded that Ocimum’s level of suspicion did not raise to the level of inquiry notice in 2009, Ocimum was on inquiry notice in July 2012 based on the data in, and reactions to, the Master’s Thesis.  Indeed, a high-level Ocimum employee stated during her deposition that she believed AstraZeneca retained the database and was using it.  She went so far as to raise her concerns with AstraZeneca. Ocimum was not required to understand the full and complete nature of AstraZeneca’s alleged breach for it to be on inquiry notice.

Therefore, the Court granted AstraZeneca’s Motion for Summary Judgment on all remaining claims based on the statute of limitations. Read the full opinion here.

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Entire Fairness Review Applies to Musk Compensation Package

In the recent case of Tornetta v. Musk, C.A. No. 2018-0408-JRS (Del. Ch. Sept. 20, 2019), the Delaware Court of Chancery determined the standard of review that applies to a board approved and stockholder ratified executive compensation decision that benefits the company’s controlling stockholder.

In January 2018, Tesla’s board of directors approved a performance-based compensation plan for Musk in his role as CEO worth roughly $56 billion which the company’s stockholders also approved.  A Tesla stockholder brought this action in the Court of Chancery against Musk and the board alleging breaches of fiduciary duties in connection with Musk’s compensation plan.  Defendants moved to dismiss, arguing the board’s compensation decision was subject to business judgment review and dismissal in light of the stockholders’ approval.

Under Delaware law, executive compensation decisions by a corporation’s board of directors are entitled to deferential business judgment review, and if approved by the stockholders those compensation decisions are only actionable upon a showing of waste.  Conversely, entire fairness review governs transactions that benefit a corporation’s controlling stockholder due to the inherent coercion that accompanies control.  Before Tornetta, the Court of Chancery had yet to determine the standard of review for an executive compensation decision that benefits the company’s controlling stockholder, but achieved stockholder approval.

As a question of first impression under Delaware law, an executive compensation decision benefiting a controlling stockholder requires entire fairness review and stockholder approval alone will not reduce the standard to business judgment review.

Under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), a board can secure business judgment review of a conflicted controller transaction if it employs dual protections involving: (1) an independent special committee and (2) a majority-of-the-minority stockholder vote.

The Court determined that the MFW rules are not limited to “transformational” conflicted controller transactions but apply equally to the executive compensation context. Thus, according to the Court, a board may obtain business judgment review for an executive compensation decision benefitting a controller if it employs MFW’s dual protections. 

Here, since the board did not utilize MFW’s dual protections, the Court found that entire fairness review applied to the Musk compensation package notwithstanding stockholder approval.  However, because Defendants received the minority stockholders’ approval, Plaintiff bore the burden to sufficiently allege that the plan was unfair to Tesla.  In reviewing the allegations, the Court found Plaintiff accomplished that, and declined to dismiss the Complaint.

Read the full opinion here.

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Section 220 Demands and Confidentiality Agreements

In Tiger v. Boast Apparel, Inc., No. 23, 2019 (Del. Supr. Aug. 7, 2019), the Delaware Supreme Court addressed Section 220 demands and the prevailing corporate practice of requiring confidentiality agreements before a stockholder is entitled to its books and records.

The opinion resulted in two important holdings:

(1) Although Section 220 inspections are typically subject to a confidentiality order, such inspections are not subject to a presumption of confidentiality; and

(2) When the court, in its discretion, enters a confidentiality order, an indefinite period of confidentiality protection is not dependent on a showing of the absence of exigent circumstances by the stockholder.

In the case at bar, an initial Section 220 demand was made in December 2014.  The primary dispute related to the scope and duration of a confidentiality agreement that the company required.  A second Section 220 demand was made in February of 2017, but yet again the parties could not reach agreement over the terms of a confidentiality agreement.  In October 2017, a complaint was filed in the Court of Chancery demanding access to books and records based on an amended demand made in May 2017.  The scope of the confidentiality obligations imposed by the company on its production remained the primary dispute.

A Master in Chancery submitted a report in July 2018 recommending indefinite confidentiality until such time as the stockholder filed a suit based on the inspection, after which confidentiality would be controlled by the applicable court rules. This appeal followed the finality of the Master’s Report.

Although the Supreme Court disagreed with the Court of Chancery’s reasoning, it affirmed the decision because there was no abuse of discretion or reversible error with the result.  The Supreme Court clarified that there is no presumption of confidentiality in Section 220 productions. Instead, the Court of Chancery must assess and compare benefits and harms when determining the initial degree and duration of the confidentiality order.  In crafting the degree and duration of a confidentiality order, the burden on the corporation is more demanding and the burden on the shareholder is less demanding because there is no presumption of confidentiality in Section 220 productions.

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Delaware Superior Court Weighs in on Contract Ambiguity

In V&M Aerospace, LLC v. V&M Co., the Superior Court engaged in contract interpretation to resolve a dispute arising out of an Asset Purchase Agreement (APA) entered into in 2015 by V&M Aerospace LLC (Aerospace) and V&M Company (VMC) for the sale of substantially all of the assets of VMC’s chrome plating business.

Aware that the land the facility was environmentally situated on was contaminated, the parties expressly provided within the term of the APA that VMC would indemnify Aerospace and would be held responsible for any environmental losses occurring prior to the APA’s closing date. Similarly, Aerospace would be held responsible for environmental losses occurring on or after the APA’s closing date and have an obligation to indemnify VMC in actions arising from that harm. An environmental claim was filed in California in 2017 against VMC, who then filed a cross-complaint against Aerospace seeking indemnification under the belief the harm occurred after the APA’s closing date.

Subsequently, Aerospace notified VMC that it would be offsetting any attorneys’ fees incurred against its next quarterly payment to VMC. Aerospace claimed that it was entitled to do so under the APA, which granted it the right to offset any claim for a loss against payments owed to VMC. The question presented before the court was whether Aerospace was justified in exercising its offset rights given that it is allegedly responsible for the harm underlying the California litigation.

The court resolved this dispute by interpreting Section 17 of the APA, the portion granting Aerospace offset rights. The first sentence of Section 17 provided Aerospace offset rights for losses related to non-environmental claims and the second sentence provided offset rights for losses related to environmental claims. The court concluded that the inclusion of the limiting phrase “subject to indemnification” within the first sentence and the phrase’s exclusion in the second sentence demonstrated an intended distinction between the scope of the two offset rights. Further, the court held that based on the clear and unambiguous language of the APA and strong policy of freedom of contract, Aerospace may offset losses related to environmental claims regardless of whether those losses are “subject to indemnification”.

In response to VMC’s arguments that this result would unjustly punish it for exercising indemnification obligations, the court countered that regardless of whether the offset was due to loss from an environmental or non-environmental claim, Aerospace would be permitted to exercise this right before indemnification obligations were resolved. Moreover, the court dismissed VMC’s objections that the interpretation was fundamentally unfair by assuring VMC that if the indemnification obligations were resolved in its favor, it would be able to recoup all improperly offset amounts as contemplated by the language of Section 17, which discussed offsets that are later determined to be improper by the court or arbitrator.

Read the full opinion here.

Kaitlin McCaffrey & Chris Lee

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Deposition Practice – Lawyer Admonished for Failing to Control “Ridiculous” Deponent

The Supreme Court recently heard consolidated appeals in the matter of In Re: Shorenstein Hays-Nederlander Theatres LLC Appeals; however, the issues appealed were of secondary importance to the deponent’s deposition misconduct.  In the Addendum to its Opinion, the Court quoted and addressed the deposition conduct of Carole Shorenstein Hays, a co-fifty percent owner of Shorenstein Hays-Nederlander Theatres LLC, one of the entities subject to litigation, and her counsel’s silence under its “exclusive supervisory responsibility to regulate and enforce appropriate conduct of … all lawyers, litigants, witnesses, and others’ participating in a Delaware proceeding.”

Ms. Hays deposition conduct was, as the Court put it, “ridiculous [and] … flippant.”  The following excerpt serves as a representative but incomplete picture of Ms. Hays conduct:

  • Q. When was SHN founded?
  • A. At the beginning.
  • Q. In what year?
  • A. The year it was founded.
  • Q. Can you give me a year?
  • A. No.
  • Q. Who founded it?
  • A. I was there.
  • Q. What do you mean when you say you were there?
  • A. I was there at the very beginning when it was – at the very day one.
  • Q. Does that make you a founder?
  • A. Does giving birth to a child make you a mother?
  • Q. Yes, but that wasn’t my question. My question was, the fact that you were there, does that make you a founder?
  • A. I believe it’s semantics.

Ms. Hays’ pro hac counsel at no time attempted to “rein in” his client and allowed the absurd responses to continue. The Court noted that counsel has “a responsibility to intercede and not sit idly by as their client engages in abusive deposition misconduct … [a]n attorney representing a client who engages in such behavior during the course of a deposition cannot simply be a spectator and do nothing.”

Delaware attorneys should be forewarned that they have an obligation to ensure that their out-of-state counsel follows Delaware customs and procedures during all the stages of litigation – including controlling a flippant client.

Read the full opinion here (the Addendum starts on page 51).

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Delaware Court Revives Blue Bell Creameries Shareholder Suit

In the case of Marchand v. Barnhill et al., No. 533, 2018 (Del. June 19, 2019), the Delaware Supreme Court reversed the dismissal of a stockholder derivative lawsuit against the members of the board of directors and two officers of Blue Bell Creameries USA, Inc., a leading manufacturer of ice cream products. 

The lawsuit arose out of a listeria food contamination incident in 2015 that resulted in widespread product recalls and was linked to three deaths.  The Plaintiff alleged that Defendants breached their duties of care and loyalty by knowingly disregarding contamination risks and failing to oversee the safety of Blue Bell’s food-making operations, and that the directors breached their duty of loyalty under Caremark

Defendants moved to dismiss in the Court below for failure to plead demand futility.  That motion was granted.  The Caremark claim was also dismissed because the Court of Chancery found that Plaintiff only pleaded that an inadequate monitoring system was in place rather than a complete failure to implement an oversight system – the necessary allegations to maintain a Caremark claim. 

On appeal, the Supreme Court reversed and remanded as to both holdings.  First, the Court held that Plaintiff adequately raised a reasonable doubt that a majority of Blue Bell’s directors could have impartially considered a pre-suit demand. In the Court below, Plaintiff fell one director short of showing that a majority of the members of the board were interested.  The Supreme Court reversed as to one director, Rankin, because they found he owed his successes to the Kruse family, the founders of Blue Bell. Additionally, the Kruses spearheaded charitable efforts that led to a $450,000 donation to a key local college, resulting in Rankin being honored by having Blinn College’s new agricultural facility named after him.

The Court also found that Plaintiff pleaded adequate facts to support the reasonable inference “that no board-level system of monitoring or reporting on food safety existed.”  Even after various regulatory agencies and internal employees reported issues with the cleanliness of Blue Bell facilities, the issues were not brought up during any board meetings.  The Court also concluded that “food safety was essential and mission critical” to Blue Bell’s business.  Because of this, the Supreme Court ruled that bad faith was adequately pleaded and reversed and remanded for proceedings consistent with the opinion.

Read the full opinion here.

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An “Efficient Breach” Does Not Absolve One from Contractually Agreed Upon Damages

In the recent case of Leaf Invenergy Co. v. Invenergy Renewables LLC, No. 308, 2018 (Del. May 2, 2019), the Delaware Supreme Court reversed the Court of Chancery’s nominal damages award under the “efficient breach” theory.  The Supreme Court confirmed that an efficient breach is not a bar to recovery or a device for modifying damages calculations.  Instead, an efficient breach occurs when a party finds an intentional breach’s benefits outweigh the damages it might owe. 

Plaintiff Leaf Invenergy Company invested $30 million in Invenergy Wind LLC.  Leaf negotiated a consent provision in the LLC Agreement that prohibited Invenergy from conducting a Material Partial Sale without Leaf’s consent, unless Invenergy paid Leaf a premium call the Target Multiple.  Several years after the investment, Invenergy closed a $1.8 billion asset sale (a Material Partial Sale) without first obtaining Leaf’s consent or redeeming Leaf’s interest at the Target Multiple.  Leaf then initiated suit for breach of the LLC Agreement.

The Court of Chancery found that Invenergy breached the Consent Provision, but Leaf was not entitled to the Target Multiple.  Applying the “efficient breach” theory, the Court of Chancery posited a hypothetical negotiation exercise where Leaf was required to show that it would have secured additional consideration if given the opportunity to negotiate for its consent, or that it suffered harm because of the asset sale.  Additionally, the Court of Chancery found, Invenergy likely would not have closed on the asset sale if it had to pay the Target Multiple. Only nominal damages were therefore appropriate.   Ultimately, the Court of Chancery ordered the parties to complete a buyout of Leaf’s interests pursuant to a put-call provision in the operative agreement, which Invenergy exercised during the suit. 

On appeal, the Supreme Court reversed, explaining that the Consent Provision was an either-or structure requiring Leaf’s consent or payment. The Court of Chancery’s analysis only considered Invenergy’s breach of the consent portion of the clause at issue, and not its breach of the payment portion of the clause. The Court of Chancery should have considered the full effect of Invenergy’s contractual breach when it failed to seek Leaf’s consent and then failed to pay the Target Multiple, rather than focusing on the harm to Leaf.

The Supreme Court also explained the trial court’s misapplication of the efficient breach theory.  The concept of efficient breach applies where it is economically advantageous for a party to breach a contract because the breach’s benefits outweigh the damages it will be required to pay to the non-breaching party. The concept does not justify modifying the amount of contractually agreed upon damages.  Instead, such damages must be calculated based on the degree of injury suffered.  Since Leaf did not give its consent, the appropriate expectation damages were the Target Multiple.  Accordingly, the Supreme Court reversed the nominal damages award, substituting an award of the Target Multiple, $126,000,000, conditional on Leaf’s surrender of its membership interests.

Read the full opinion here.

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Delaware Court of Chancery Weighs-In on CFAA

In AlixPartners, LLP and AlixPartners Holdings, LLP v. David Benichou, C.A. No. 2018-0600-KSJM, the Court of Chancery was tasked with interpreting the Computer Fraud and Abuse Act (CFAA) absent direct federal authority on the issue.

Image result for computer fraud and abuse act

Federal courts are divided on the proper interpretation between a broad approach and a narrow approach. The relevant section of the CFAA renders a person liable who “intentionally accesses a computer without authorization, or exceeds authorized access, and thereby obtains…information from any protected computer.”[1] The crux of the disagreement centers on the interpretation of the terms “without authorization” and “exceeds authorized access”.

The First, Fifth, Seventh, and Eleventh Circuits have adopted a broad approach which establishes liability where an employee’s use violates an obligation related to computer access. While these Circuits agree on the correct approach, the rationales diverge. The First Circuit held that an employee was exceeding his or her authorized access if that use was in violation of an access-related agreement. In contrast, the Seventh Circuit reasoned that an employee using information in a manner adverse to his employer is violating his loyalty duties, thereby effectively terminating the agency relationship and removing authority to access the information.

 The narrow approach adopted by the Second, Fourth, and Ninth Circuits interprets these provisions to establish liability only where there is unauthorized access of protected computers. The lead rationale for this interpretation is the potentially “far-reaching effects” conceivable under the broad approach, such as imposing liability on an employee who violates company policy by downloading information from her work computer to work at home.

In AlixPartners, the Court of Chancery chose to adopt the narrow approach. This decision was made in consideration of the plain language of the statute, its legislative intent, and the rule of lenity. The Court’s interpretation would impose liability only when an individual accesses a computer or information on that computer without permission. This interpretation would not impose liability for misuse of information to which the individual had authorized access. 

The case at hand that advanced this question involves a former partner of AlixPartners, David Benichou, who allegedly transferred documents from his work computer to a personal external hard drive on two separate occasions. The first instance alleged occurred prior to Benichou’s dismissal from AlixPartners and the second instance after. Applying the newly adopted approach, the Court of Chancery held that the data transfer while Benichou was still employed with AlixPartners did not support a claim under the CFAA as he had authorized access at the time. However, Benichou’s authorization was terminated upon his dismissal and therefore AlixPartners was able to assert a claim under the CFAA for the later data transfer.

Read the full opinion here.

Kaitlin McCaffrey

[1] 18 U.S.C. § 1030(a)(2)(C)

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