UNITED STATES SUPREME COURT FURTHER LIMITS GENERAL PERSONAL JURISDICTION

In 3 recent opinions, the United States Supreme Court has undeniably confirmed that general jurisdiction is only appropriate in a forum where a defendant is either incorporated or headquartered (aka, “at home”).  These decisions come on the heels of the decisions that set the foundations for the new era of personal jurisdiction, Goodyear v. Brown and Daimler v. Bauman.

The first of these new cases, TC Heartland LLC v. Kraft Foods Grp. Brands LLC, required that patent infringement claims be filed where the defendant is incorporated.  The second case, BNSF Railway Co. v. Tyrell, required that FELA cases be filed where the defendant is “at home”.

Finally, on June 19th, the United Supreme Court reversed a California Supreme Court decision and held in Bristol-Myers Squibb v. Superior Court, that plaintiffs must file tort cases where a defendant is “at home”.  In Bristol-Myers Squibb, the California Supreme Court tortured the definition of specific jurisdiction in an effort to get around the law as set forth in Goodyear and Daimler.  The State court allowed an out of state plaintiff to sue the defendant in California although none of the activities giving rise to the plaintiff’s injury (such as sales or manufacturing) occurred there.  The only contact with California was the defendant’s nationwide marketing campaign.  The U.S. Supreme Court reversed the California Supreme Court and held, for the fifth time in six years, that a defendant is subject to general personal jurisdiction in the jurisdictions in which it is “at home,” otherwise articulated as where they are incorporated or headquartered.

Now that the dust has settled, it remains clear that specific jurisdiction, the jurisdiction where the tort was committed, is alive and well.  As such, a manufacturer may be sued in the forum where he sells the product and in which the plaintiff is injured by such product.  However, jurisdiction based on a defendant’s “continuous” presence in a State is no longer a sufficient basis for general jurisdiction.

The practical implication of this line of cases is that plaintiff’s may no longer file huge numbers of cases forums where potentially liable defendants have had continuous and systematic contacts.  They are left with two options:  1) they may go to each states where specific jurisdiction exists; or 2) they may file where a majority of the defendants are “at home”.  Where some states have been slow to recognize Daimler and have found excuses to circumvent it, that door is now firmly shut.  The days of forum shopping to friendly courts are simply over.

Friendly forums for plaintiffs in mass tort cases such as Madison County, Illinois, St. Louis, Missouri and the Southern District of New York may no longer be available because few defendants are “at home” there.  In her dissent, Justice Sotomayor actually observed that Delaware may be the only jurisdiction available to garner numerous defendants.

Read the full opinion here.

Chris Lee and Scott Reese

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SCOTUS DEFINES BOUNDARIES OF FAIR DEBT COLLECTION PRACTICES ACT

In his first written opinion, Justice Gorsuch wrote on behalf of a unanimous Court that the Fair Debt Collection Practices Act does not apply to entities that purchase the debts of others and attempt to collect for themselves.

CitiFinancial Auto loaned money to consumers to purchase cars.  When certain consumers defaulted on their loans, Santander Consumer USA purchased those debts (at a discount, of course) and attempted to collect on their own behalf.  A class of consumers sued Santander on the premise that the efforts they were undertaking to collect the debts they now owned were violative of the FDCPA.

Justice Gorsuch began his opinion with a memorable paragraph:

Disruptive dinnertime calls, downright deceit, and more besides drew Congress’s eye to the debt collection industry. From that scrutiny emerged the Fair Debt Collection Practices Act, a statute that authorizes private lawsuits and weighty fines designed to deter wayward collection practices. So perhaps it comes as little surprise that we now face a question about who exactly qualifies as a “debt collector” subject to the Act’s rigors. Everyone agrees that the term embraces the repo man—someone hired by a creditor to collect an outstanding debt. But what if you purchase a debt and then try to collect it for yourself-does that make you a “debt collector” too? That’s the nub of the dispute now before us.

Ultimately, the Court held that a company may collect debts that it purchased for its own account, like Santander did here, without triggering the statutory definition in dispute.

Read the full opinion here.

-Chris Lee

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United States Supreme Court Issues Much Anticipated TC Heartland LLC v. Kraft Foods Group Brands LLC Decision

This morning, the United States Supreme Court decided a matter that will likely have a significant impact on Delaware.  In TC Heartland LLC v. Kraft Foods Group Brands LLC Decision, the Court concluded that most patent infringement lawsuits can only be brought in the defendant’s state of incorporation.  In so holding, the Court reversed the Federal Circuit’s broad application of 28 U. S. C. § 1400(b), which provides  that  “[a]ny civil  action  for  patent infringement  may  be  brought  in  the  judicial district  where  the  defendant  resides,  or  where the  defendant  has committed  acts  of  infringement  and  has  a  regular  and  established place  of  business.”  The Federal Circuit had concluded that 28 U.S.C. § 1391’s broader definition of what it means for a company to “reside” in a judicial district controlled.

The Court noted that § 1391 (as amended), provides that, “[e]xcept as otherwise provided by law” and “[f]or all venue purposes,” a corporation “shall be deemed to reside, if a defendant, in any judicial district in which such defendant is subject to the court’s personal jurisdiction with respect to the civil action in question.”  The Court concluded, however, that the amendments to § 1391 were not intended to and did not modify the meaning of § 1400(b).  Ultimately, the Court opined that a “domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute.”

With so many companies incorporated in Delaware, the Supreme Court’s holding could lead to even more patent infringement lawsuits being filed in Delaware.  Although a significant percentage of patent suits are already filed in Delaware, many patent plaintiffs chose to file in other jurisdictions that some viewed as more favorable to plaintiffs.  Most of those plaintiffs, however, will now have to come to Delaware if they want to file a claim against a Delaware entity.

The Court’s full Opinion can be found here.

Blake A. Bennett is a Director in the firm’s Litigation Department with significant experience serving as Delaware counsel to both plaintiffs and defendants in patent infringement disputes.

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Cooch and Taylor Obtains Summary Judgment for its Clients on Trade Secret Claims

Cooch and Taylor continues to lead in the field of trade secret law in Delaware.  On April 20, 2017, Delaware Superior Court Judge Butler granted partial summary judgment in favor of Cooch and Taylor’s clients, Defendants Gastroenterology Associates P.A., Thomas Spahr, Mark Corso M.D., David Beswick M.D., Ira Lobis M.D., and Joseph Hacker M.D.  Plaintiff, Atlantic Medical Associates LLC, claimed that Defendants had misappropriated its alleged trade secrets concerning its profitability and reimbursement rates for anesthesia services.  The Court, however, agreed with Defendants that no reasonable jury could conclude that the information at issue constituted trade secrets.  Judge Butler’s forty-nine page opinion is a must read for any attorney who regularly litigates trade secret claims.

Cooch and Taylor attorney Christopher Lee argued the Defendants’ motion, and he and Blake Bennett briefed the complicated summary judgment motion.  They and their clients were extremely pleased to have the Court dismiss the trade secret claim, which sought not only significant damages but also exemplary damages and attorneys’ fees.  In a separate opinion, the Court also dismissed all claims pending against the individual Defendants, leaving only a tortious interference claim against the entity Defendant, Gastroenterology Associates P.A.

The Court’s full opinion on the trade secret claims is available here.

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Attorneys – Will Workers’ Compensation Cover Your Softball Injury?

In the case of Morris James LLP v. Weller, the Superior Court reversed and remanded the findings of the Industrial Accident Board (the “Board”), holding that the Board applied the incorrect legal standard in finding a softball related injury was compensable under workers’ compensation.

A work injury is compensable through workers’ compensation if the injury occurred within the course and scope of employment. To determine whether a recreational event occurred in the course and scope of employment, the court must first determine whether the event is company sponsored.  If the event is company sponsored, the Court uses the four factor conjunctive test set forth in Larson’s Workers’ Compensation Law and adopted by Delaware Court in Nocks.  If the event is not company sponsored, the Court uses the three factor disjunctive test set forth in Larson’s and adopted by Delaware Courts in Dalton.

The Court and the Board found that the event was sponsored by the Wilmington Lawyers’ Softball League, not Appellant, and as such Dalton was the correct test.  Although the Board determined the corrected test, they applied the Nocks factors, which was the source of legal error requiring remand.

Appellant argued that the factor test in Dalton explicitly excludes the types of intangible benefits from which the Board based its decision.  Appellee conceded the Board applied the incorrect legal test, but that such error was harmless because both tests have an identical factor, whether the recreational event provided a direct and tangible benefit to the employer.

In addition to one test appearing in the conjunctive and the other in the disjunctive, another difference exists between the two tests.  Under Dalton, the benefit the employer receives must be a “substantial direct benefit.”  Intangible benefits, such as increased efficiency and morale, are excluded from consideration under the “substantial direct benefit” standard because such benefits arise out of many games played “whether connected with his work or not.”

The Court remanded the matter back to the Board for a full analysis of the course and scope of employment under the Dalton lens to determine whether the probable increased productivity from the games amounted to a “substantial direct benefit”.

Read the full opinion here.

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Standard of Review for Executive Compensation Awards: In Re Investors Bancorp, Inc. Stockholder Litigation

In the case of In Re Investors Bancorp, Inc. Stockholder Litigation, stockholders filed a derivative complaint on behalf of Investors Bancorp, Inc. (the “Company”) alleging directors breached their fiduciary duties in awarding themselves grossly excessive awards under the Equity Incentive Plan (the “EIP”).

At the outset, the Court of Chancery noted that a Board’s grant of an equity compensation package is an inherently self-dealing transaction, and as such the presumptive standard of review in such cases is entire fairness.  Where, as here, the Board seeks stockholder ratification of the plan, the standard of review is business judgment or waste where there are meaningful limits on the amount of awards that can be conferred and the ratification is fully informed.

At issue in the EIP was additional equity compensation that was awarded to company directors. The EIP contained certain limits on how the stock could be awarded based on both the overall allotment of shares available and the allowed individuals and the respective percentage of shares they were entitled to receive pursuant to the EIP.  The limitations on the awards were fixed for both the employee and non-employee directors.  Pursuant to the proxy that was distributed in seeking ratification of the EIP, “[t]he number, types and terms of awards to be made pursuant to the [EIP] are subject to the discretion of the [Compensation] Committee and have not been determined at this time, and will not be determined until subsequent to stockholder approval.”  The awards contained definitive caps; however, the awards did not consist of specified amounts.

The Court noted that after the EIP “sets forth a specific limit on the total amount of options that may be granted under the plan to all directors, whether individually or collectively, it has specified the ‘director-specific ceilings’ that Citrix found to be essential when determining whether stockholders also approved in advance the specific awards that were subsequently made under the plan.”  Because the EIP placed proper limits on the amount of director equity compensation and the stockholders approved the EIP through a fully informed vote, the stockholders also approved the awards and the correct standard of review was waste.  As the Plaintiff had not pleaded waste, the breach of fiduciary duty count was dismissed.

The stockholders took exception to the Court’s finding that the vote was fully informed.  The stockholders alleged that the timing of the award was to avoid restrictions placed by the Federal Reserve Board (the “FRB”) rules when the Board represented that the compensation package was to serve as compensation for all the Company’s employees.  Additionally, the proxy conceded that the Board timed the EIP to avoid the restrictions implemented by the FRB.  The Court found this information was not material and did not affect the fully informed status of the vote.  Further, Plaintiffs’ allegation that the timing of the Board’s determination that additional equity compensation would be awarded shortly after the stockholder vote did not show the Board had pre-determined the amount of the awards.  The Court noted that the process was a lengthy one involving multiple meetings and discussions with outside experts.  As such, the timing of the determination of additional equity compensation did not thwart the fully informed status of the stockholder vote when the stockholders were aware that the Board would take immediate action following the vote.

The Court also held that the Stockholders inability to satisfy demand futility was also a proper grounds for dismissal.  In support of their belief that demand was futile, Plaintiffs raised a quid pro quo argument.  Essentially, plaintiffs claimed that the employee directors and the non-employee directors colluded to award themselves excessive compensation.  The Court disagreed, finding that even if Plaintiffs do not have to show the non-employee directors needed the votes of the employee directors for the approval of the awards, Plaintiffs still need to show that the non-employee directors received something in return for their vote for the Court to consider the transactions as one interested scheme.  Plaintiffs had not done this. The Court dismissed Plaintiffs’ fiduciary duties claims under 12(b)(6) and failure to allege demand futility. Plaintiffs’ unjust enrichment claim was dismissed as duplicative of the fiduciary duty claim.

Read the full opinion here.

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Superior Court Decides Insurance Coverage Dispute Concerning Dole Stockholder Settlement

The Delaware Superior Court recently decided Arch Insurance Company v. Murdock, Del. Super. C.A.N16C-01-104 EMD CCLD.

Six Directors and Officers Liability excess insurers (“Insurers), sought a declaration that they did not have to fund an underlying settlement due to Defendants’ alleged fraud. Alternatively, the Insurers moved to be allowed to subrogate against their insured pursuant to an exclusion provision contained in the relevant policies.

In the underlying action in the Court of Chancery, stockholders alleged Defendants engaged in a lengthy process that manipulated the stock price so that Mr. Murdock could acquire the stock at a lower price. Vice Chancellor Laster, in his Memorandum Opinion (the “Memorandum Opinion”), repeatedly cited to “fraud” and “fraudulent activity.” Vice Chancellor Laster found breaches of the duty of loyalty, and assessed liability against Mr. Murdock, Mr. Carter, and DFC in the amount of $148,190,590.18. Consequently, Dole signed a term sheet settling the underlying action. The underlying parties signed a formal Stipulation and Agreement of Settlement (the “Settlement”) In lieu of an appeal, the parties settled for 100% plus interest. Murdock agreed to pay the settlement on the Defendants’ behalf. Vice Chancellor Laster approved the settlement on February 10, 2016 (the “Order and Final Judgment”).

Defendants, the insureds, argued that there was no controversy between (i) the Insurers and Mr. Carter and Dole regarding Count I, or (ii) the Insurers and Mr. Murdock and Mr. Carter regarding Count II. First, Defendants contended Vice Chancellor Laster approved the Settlement, which obligated only Mr. Murdock to fund the settlement. As such, Mr. Carter and Dole were not seeking coverage from the Insurers. Additionally, as the case settled, Defendants claimed there were no defense costs to seek from the Insurers because the other lower-tiered insurers advanced all defense costs. Defendants also contended that the Insurers may not subrogate against an individual insured as a matter of law. Defendants argue that the Insurers refused to fund any amount of the settlement under the policy’s profit/financial gain exclusion. If the Insurers’ argument prevails, therefore, there is nothing to pay. If the Insurers’ argument fails, and the exclusion does not apply, then the policy clearly and expressly precludes subrogation. Defendants rely on Primary Policy Section VIII. H, which provides that the Insurers will not exercise their right of subrogation “against an Insured Individual unless Exclusion IV.6 applies to such Insured Individual.

The Insurers also contended they had a right to consent to the Settlement. The relevant policies provide:

  • The Insureds shall not admit any liability, settle, offer to settle, stipulate to any judgment or otherwise assume any contractual obligation with regard to any Claim or Insured Inquiry without the Insurer’s prior written consent, which shall not be unreasonably withheld.

The Insurers alleged that Defendants failed to get consent prior to settling.

The Court disposed of the lack of controversy argument quickly and found that the Insurers had met all four necessary conditions to state a claim for declaratory relief. Moving to the subrogation issue, the Court noted that the parties disagreed on whether Exclusion IV.A.6 applied to the facts here. If it applied, then the Insurers would not have to fund the settlement, and if it did not apply then subrogation is not available to the Insurers. In the Endorsement No. 3 to the Primary Policy, Exclusion IV.A.6 was replaced – Section V.6. As replaced, Exclusion IV.A.6 reads as follows:

  • The Insurer shall not be liable for Loss on account of any Claim: . . . based upon, arising out of or attributable to:Any profit, remuneration or financial advantage to which the Insured was not legally entitled; or

    Any willful violation of any statute or regulation or any deliberately criminal or fraudulent act, error or omission by the Insured; if established by a final and non-appealable adjudication adverse to such Insured in the underlying action.

The Court found that the language of Exclusion IV.A.6 in this situation was not ambiguous.

(“The language is not complicated. If a deliberate act of fraud by an insured is determined through a final and non-appealable adjudication, the Insurer will not be responsible for any claim made by that insured relating to the adjudicated fraudulent act.”) The Memorandum Opinion, without more (i.e., a Chancery Rule 54(b) entry of judgment or a Chancery Rule 58 order), was not a final and non-appealable adjudication adverse to the defendants in the underlying action. The only final and non-appealable adjudication in the Chancery Court action was the Order and Final Judgment. Accordingly, Exclusion IV.A.6 did not apply to the facts of this case.

The Court found that there was no conflict between California law, under which an insurer cannot bring a subrogation action against its own insured and Delaware law under which no right of subrogation exists for the insurer against the insured, co-insured, or the wrongdoer if they are an insured under the policy. Section VIII. H of the policy provided that the Insurers will not exercise their right of subrogation against an “Insured Individual” unless Exclusion IV.A.6 applies. As discussed above, the Court decide that Exclusion IV.A.6 did not apply.

The lack of consent defense of the Insurers, while mentioned, was not decided for reasons unexplained in the opinion.

James Semple

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Charging Liens: The Type of Fee Agreement Matters

On appeal from the Court of Chancery, the Delaware Supreme Court addressed whether and to what extent a charging lien may be imposed on a judgment to recover unpaid attorney’s fees.

In the case at bar, Katten Muchin Rosenman LLP (“KMR”) was retained by Martha Sutherland, a minority member of a closely held corporation, who was ousted from her director position.  KMR and Sutherland entered into an hourly fee agreement and filed a derivative and double derivate lawsuit against the remaining directors.  Upon this filing, a new director was added to the company’s BOD for impartiality purposes and determined the suit was without merit; however, two of the directors’ employment agreements were modified as a result of the litigation efforts.

Litigation dragged on and by 2011, Sutherland, while paying some of the attorney fees, had amassed over $750,000 in unpaid fees.  KMR withdrew as counsel, yet litigation continued until its conclusion in 2012 without any further compensation to Sutherland.  At this juncture, Sutherland sought an award of attorney’s fees for her efforts in the sum of $1.4 million. To support her request, Sutherland used KMR’s invoices and argued that the fees were “fair and reasonable.”

The Court of Chancery awarded Sutherland $275,000 for the minor benefits she obtained on behalf of the company.  At this time, KMR intervened and attached a petition for a charging lien on the entire fee award. In denying the petition, the Court of Chancery cited Doroshow, a case involving a contingent fee agreement, for the proposition that “[s]eeking a charging lien for work which produced no benefit when the law firm has already been paid for the work which produced the benefit … is inconsistent with the theoretical underpinnings of the attorney’s charging lien.”  KMR appealed.

On appeal, the Supreme Court reversed and remanded.  The Court, in an Opinion authored by Chief Justice Strine, distinguished between contingent and hourly fee agreements finding, unlike a contingent fee, the total amount a client is required to pay her attorney pursuant to an hourly fee agreement is not based on the client’s recovery.  If an attorney who entered into an hourly fee agreement has reasonable and necessary unpaid fees that are greater than the client’s recovery, the attorney is entitled to a charging lien on the entire recovery. Because the firm’s fees were reasonable and necessary, a charging lien on the entire recovery was warranted.

Read the full opinion of Katten Muchin Rosenman LLP v. Sutherland here.

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Superior Court Judge Rocanelli Grants New Trial Because of Faulty Jury Instruction

981In Lisowski, et al. v. Bayhealth Medical Center, Judge Rocanelli granted the Plaintiffs’ Motion for a New Trial in a medical negligence action.  After an eight day trial, the jury found that Bayhealth had committed medical negligence but that the negligence did not proximately cause the death at issue.

The trial judge granted the new trial, finding that the jury instruction regarding proximate causation was confusing, inaccurate, and appeared to have undermined the jury’s ability to reach a verdict.  The parties agreed on including the following language regarding proximate causation:

  • A party’s negligence, by itself, is not enough to impose legal responsibility on that party Something more is needed: the party’s negligence must be shown by a preponderance of the evidence to be a proximate cause of the injury.
  • Proximate cause is a cause that directly produces the harm, and but for which the harm would not have occurred.  A proximate cause brings about, or helps to bring about, the injury, and it must have been necessary to the result.

Bayhealth, however, asked the Court to further instruct the jury that: “An action is not the proximate cause of an event or condition if that event or condition would have resulted without the negligence.”  Based upon Bayhealth’s representations that this language was included in the Court’s pattern jury instructions, and over Plaintiffs’ objections, the Court eventually did instruct the jury as Bayhealth requested.  It appears, however, that Bayhealth’s proposed addition is not, in fact, in the pattern jury instructions.

During their deliberations, the jury sent a note expressing their confusion regarding proximate causation and asked the Court to “specify or expand” upon the language Bayhealth had convinced the Court to include.  The trial judge explained to the judge that it could not “expand” upon the language and could only reread it.  The jury, thereafter, found that Bayhealth was negligent but that its negligence was not the proximate cause of the death at issue.

Upon Plaintiffs’ motion, the Court has Ordered a new trial due to the inclusion of Bayhealth’s proposed language.  The trial judge concluded that the jury instruction incorrectly referred to an “event” and a “condition” instead of an “injury” or “harm.”  Her Honor distinguished this case from prior cases where the trial judge granted a new trial on a mere “gut feeling” that the instruction confused the jury.  Here, the note from the jury demonstrated conclusively that they were confused.

Accordingly, the trial judge exercised her “sound discretion in the interest of preventing a miscarriage of justice.”

The Court’s Order is available here.

Blake A. Bennett

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DELAWARE’S WAGE PAYMENT AND COLLECTION ACT AND LIMITED LIABILITY COMPANIES: NO PERSONAL LIABILITY FOR MEMBERS

sealx_2010In a case defended by Cooch and Taylor, the Delaware Superior Court recently ruled on the question of a Limited Liability Company (“LLC”) member’s individual liability for alleged LLC wage debts under Delaware’s Wage Payment and Collection Act (“Act”), 19 Del. C. §§ 1101-1115.  Pursuant to Section 1101(b) of the Act, “the officers of a corporation and any agents having the management thereof who knowingly permit the corporation to violate this chapter shall be deemed to be the employers of the employees of the corporation.”  In effect, the Act allows for a piercing of the corporate form to secure liability for wage debts (and associated penalties, damages, costs and attorney’s fees) against corporate officers and agents who knowingly allow the corporation to violate the Act.

In 2010 the Delaware Court of Common Pleas held that the Act did not allow for individual liability of members, even managing members, of an LLC.  Department of Labor ex rel. Chasanov v. Brady, C.A. No. CPU4-09-8966.  In a detailed opinion, Chief Judge Alex J. Smalls held that Section 1101(b) was unambiguous, and does not refer to LLC’s, which are legally distinguishable from corporations.  Accordingly, the LLC’s debts and obligations are not that of members or managers.

It is interesting to note that the Chasanov case was brought on the plaintiff’s behalf by the Delaware Department of Labor, the state agency tasked with enforcement of the Act (Section 1111).  Despite this adverse ruling, no effort was made to address the issue with the Delaware General Assembly to seek to amend the Act to include LLCs (or any other type of non-corporate entity) within the scope of Section 1101(b).

The Court of Common Pleas decision had limited precedential weight; therefore employment attorneys have been in a quandary as to how the Superior Court, or the Delaware Supreme Court, would rule on this issue.  While the latter question as to the State’s highest court remains unresolved, a recent decision by the Superior Court resolves the initial inquiry.  In Giroux v. Downing Partners, LLC, et al., C.A. No. N15C-11-183 MMJ, the Court was asked to address a situation virtually identical to Chasanov.  Finding the lower Court’s ruling persuasive, the Superior Court ruled that the individual member of the defendant LLCs could not be named as a party under Section 1101(b) and dismissed him as a party to that action.

This decision currently remains subject to possible appeal, and the Delaware Supreme Court has yet to address this issue.  Additionally, it remains to be seen what action, if any, the Delaware General Assembly will take to address this issue.  For the time being, however, members of LLCs cannot be held individually liable for alleged wage debts under the Act.

G. Kevin Fasic, Esquire and Katherine Randolph Witherspoon, Esquire

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