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.

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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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Court of Chancery Rule 15(aaa) Expanded…With a Twist

It has long been the case that when a Defendant in a Delaware Court of Chancery matter files a motion to dismiss pursuant to rules 12(b)(6) or 23.1, the plaintiff has one of two choices: 1) amend her complaint instead of oppose the motion, or 2) defend against the motion and risk dismissal with prejudice.

In Otto Candies, LLC v. KPMG, LLP et al., plaintiff initially brought suit in the Superior Court, which upon defendants’ fully briefed and argued motions to dismiss, determined it did not have subject matter jurisdiction. Plaintiff transferred the matter to the Court of Chancery, along with the pending motions to dismiss. Thereafter, the Court dismissed Plaintiff’s claim for lack of personal jurisdiction and failure to state a claim, however, the Court requested additional briefing on whether its dismissal should be with prejudice or without prejudice.

The parties provided supplemental briefing and the Court held that Court of Chancery rule 15(aaa) did indeed apply to transferred cases. However, the Court determined that because this was the first time the Court of Chancery had been faced with this issue, the plaintiff deserved a “mulligan.” As a result, the Court dismissed the matter without prejudice under the “good cause” exception…just this one time.

Read the opinion here.

Chris Lee

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Rent-A-Center not bound by merger deal with Vintage Capital

In the case of Vintage Rodeo Parent, LLC et al., v. Rent-A-Center, Inc., the Court of Chancery announced that Rent-A-Center was within its rights to back out of a $1.36 billion merger deal with private equity firm Vintage Capital Management (collectively with all Vintage entities “Vintage”) last year as a result of Vintage failing to inform Rent-A-Center that it was extending the merger deal by an agreed-upon date (“End Date”).

Vintage agreed to acquire Rent-A-Center last June. Since both parties own rent-to-own retail stores, the merge required antitrust clearance from the U.S. Federal Trade Commission that could take considerable time to accomplish. Vintage Capital’s banker, B. Riley Financial Inc., also guaranteed a $126.5 million reverse termination fee.

Vintage and Rent-A-Center agreed that if the deal was not approved by December 17, 2018, either party could give notice that it was unilaterally extending the contract for an additional 90 days. However, if neither side gave that notice, the contract stated that either party could terminate the deal at will by giving notice. Rent-A-Center terminated the deal on December 18, after receiving no notice from Vintage.

Vintage argued that the parties actions leading up to the End Date showed an intent to close after the End Date and because of those actions, Vintage either adequately gave notice or the extension notice provision had lost its relevance (and enforceability) in light of both parties’ intent to proceed past the End Date, or Rent-A-Center’s actions showed that it waived the notice of election to extend. Alternatively, Vintage argued that Rent-A-Center acted fraudulently by appearing as though it intended to go through with the merger when it did not so intend.

The Vice Chancellor found that these actions were merely consistent with the parties’ mutual obligations to use commercially reasonable efforts to effectuate the closing. The Court ruled that Vintage had offered no explanation for not giving notice, leading to the “startling conclusion” that “certain Vintage and B. Riley personnel, in the context of this $1 billion-plus merger, simply forgot” to give it. The Court sympathized with Vintage, noting it was “understandable” that Vintage and B. Riley were angered at what they perceived as a sharp practice by Rent-A-Center, but that the clear language of the contract allowed Rent-A-Center to take the action it did.

The Court requested further briefing on the reverse termination fee as it was considerably higher than similar fees, which are generally in the range of 3% of the total merger consideration.

Read the full opinion here.

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Court of Chancery Addresses Method for Perfecting Service on a Defunct LLC

In the case of Tratado de Libre Commercio, LLC v. Splitcast Technology, LLC, C.A. No. 2019-0014-JRS, the Court of Chancery was called on to determine the proper method to perfect service on a dissolved LLC that completed the winding up process.

In the Complaint, Plaintiffs sought to: (a) nullify the certificate of cancellation of Splitcast; (b) return assets to Splitcast so that the assets can be used to satisfy Plaintiffs’ claim against Splitcast; and (c) appoint a member of Splitcast to serve as trustee to defend Plaintiffs’ claims against it.

Splitcast asserted that it was properly dissolved in October 2015 and could not be served with process through traditional means.  The Court agreed.   The Court, however, directed that service may be perfected upon Splitcast by publication and certified mail pursuant to Court of Chancery Rule 4(d)(7).

Finding no direct authority on point regarding the proper method to perfect service on a defunct LLC, the Court looked to general corporation law.  Previously, the Court found that pursuant to Chancery Rule 4(d)(7) and 8 Del. C. § 279 service could be perfected on a defunct corporation.  The Court found that like 8 Del. C. § 279 in the corporation context, 6 Del. C. § 18-805 allows service on a dissolved LLC.

In Krafft, the Court found that Chancery Rule 4(d)(7) and Section 279 authorized service on a dissolved corporation that was a necessary party to litigation even though the three-year statutory winding up period expired. The court ordered that, to perfect service, the petitioners were required to publish notice in newspapers published in Delaware and Virginia, the locations of the residences of the dissolved entity’s former officers, and to provide additional written notice to an attorney associated with the corporation.

Drawing on the authority in Krafft , the Court indicated that Plaintiffs could perfect service on Splitcast by: (1) publishing notice in a widely-circulated Delaware newspaper daily for two consecutive weeks; (2) mail copies of the summons, verified complaint, and the Court’s opinion on perfecting service to the former senior officers of Splitcast at their last known addresses and separately to the officers counsel; and (3) file an affidavit of compliance with the Court outlining the steps Petitioners took to comply with the Court’s directions.

The Court also addressed the proper procedure for appointing a trustee to defend the claims against Splitcast.  At the outset, the Court noted that it could not consider the petition to appoint a trustee until service was perfected on Splitcast. After service is perfected, the Court referred the parties to Chancery Rule 150 which prohibits a nonresident from serving as the sole receiver for an alternative entity.  Pursuant to Rule 150, if all the former senior officers of Splitcast are non-Delaware residents, the Court directed Plaintiffs to propose a member of the Delaware bar to serve as co-trustee or explain why Rule 150 should be waived.

Read the Court’s full opinion here.

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Superior Court Applies “Dual” Personal Jurisdiction

The requirements necessary for establishing personal jurisdiction in the United States have grown increasingly difficult in recent years due to SCOTUS opinions such as Bristol-Myers Squibb, Daimler, and Goodyear. Various approaches to establishing personal jurisdiction, such as California’s sliding-scale approach, have been rejected by the SCOTUS.  Delaware’s “dual” personal jurisdiction has not been expressly rejected and was followed by the Delaware Superior Court in the recent case of Cardona v. Hitachi et al.

In the present case, Cardona, a Maryland resident, sued the designer and manufacturer of a nail gun, HKK a Japanese Corporation, along with its wholly-owned US subsidiary and distributing entity, HKU, alleging that the nail gun malfunctioned and caused Cardona serious permanent injuries while at a job site in Delaware.  HKK moved to dismiss as Cardona failed to establish specific personal jurisdiction.

In determining if the court holds personal jurisdiction over a party, the Superior Court recited the two-step approach. First, the court must look to Delaware’s long-arm statute and determine whether jurisdiction is appropriate there.  Second, the court must assure that jurisdiction complies with the Due Process Clause of the US Constitution.

Delaware’s long-arm statute affords the court jurisdiction to the maximum extent allowed by the US Constitution and contains both specific and general personal jurisdiction provisions. A combination of the two, “dual” jurisdiction has developed:

It is conceivable that a tort claim could enjoy a dual jurisdiction basis under (c)(1) [general] and (c)(4) [specific] if the indicia of activity set forth under (c)(4) were sufficiently extensive to reach the transactional level of (c)(1) and there was a nexus between the tort claim and transaction of business or performance of work.

Further clarified, “dual” jurisdiction exists as long as “(1) the defendant manufacturer demonstrates ‘an intent or purpose to serve the Delaware market with its product,’ and (2) that intent or purpose results in the introduction of the product into Delaware and ultimately causes the plaintiff’s injury.”  The Court did note that there have been criticisms to the “dual” jurisdiction approach.

The Court, sub judice, found that an intent to serve the Delaware market was shown by HKK setting up HKU a Delaware entity responsible for distributing HKK’s products to the US.  Also, although the specific nail gun’s point of origin is unknown, the specific model of nail gun is sold at Lowe’s stores nationwide and a strong inference exists that “significant amounts of [nail guns] have been sold in … Delaware.”

The Court went on to conduct a Due Process analysis, holding that, “HKK … solicited business from the whole U.S. market, and … HKK’s products were sold in Delaware.” Additionally, nail gun sales in Delaware were part of the “regular and anticipated flow” of commerce, not a fortuitous event – HKK set up a Delaware subsidiary for exactly this purpose.  The Defendant argued that Bristol-Meyers Squibb overruled the “stream of commerce” theory, but the Court disagreed. What was missing in Bristol-Meyers Squibb was a connection between the forum state and the claim.  Here, Plaintiff was performing a job in Delaware and the nail gun was supplied by a Delaware employer (also a named defendant). The Court found that the above actions satisfied at least two of the tests outlined in Asahi and denied the Defendant’s Motion to Dismiss.

Read the full opinion here.

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Fitbit Inc. Interlocutory Appeal Denied

The Court of Chancery (“Court”) first recited thr standard for granting an interlocutory appeal.  Interlocutory appeals are the exception, not the norm because they disrupt the normal procession of litigation.  The Court should first identify whether the decision being appealed decided a substantial issue of material importance.  Next, the Court must decide whether any likely benefits outweigh the probable costs.  If the balance is uncertain, the trial court should refuse to certify the appeal.

After its Motion to Dismiss was denied (“Opinion”), Fitbit filed an application for certification of an interlocutory appeal.  In its application, Fitbit claimed that (1) the Opinion conflicts with decisions of the trial courts upon a question of law – citing Supreme Ct. R. 42(b)(iii)(B); the Opinion involves an issue of first impression – citing Supreme Ct. R. 42(b)(iii)(A); and review of the Opinion denying the Motion to Dismiss may terminate the litigation – citing Supreme Ct. R. 42(b)(iii)(G).

The Court, while considering these factors, declined to certify the appeal.

First, no merits related decision was reached.  This is generally a necessary component to the certification of any interlocutory appeal.  The Court did acknowledge that no merits related decision will ever be reached on a Rule 23.1 motion to dismiss and although review of the appeal could terminate the litigation, that factor alone did not warrant certification.

Second, the Opinion does not conflict with existing trial court decisions. The appeal argued that the Court erroneously inferred the outside directors’ scienter “based solely upon” the “core operations doctrine[.]”  The Court noted that the Plaintiffs alleged well-pled facts that PurePulse accounted for 80% of Fitbit’s revenue and the curious timing surrounding waive of lock-up agreements supported the reasonable inference that the Fitbit Board knew of the serious problems surrounding PurePulse when they began to emerge.

Lastly, the Opinion did not address a novel question of law. The Court stated that is was satisfied that “it is not particularly novel or controversial as a matter of Delaware law to declare that a fiduciary may not share inside information with a fund he controls so that the fund, in turn, can trade on that inside information as a means to avoid Brophy liability.”

At this stage, the Court could not conclude that the Opinion decided a substantial issue of material importance or that any likely benefits outweigh the probable costs.  The Defendants will have a chance to demonstrate that the directors did not benefit from the trades in a motion for summary judgment.

Read the opinion here.

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Allegations of Insider Trading Amongst Fitbit’s Board of Directors

Fitbit Inc. has found itself in the midst of a shareholder derivative suit alleging the company’s board engaged in insider trading and improper conduct surrounding the 2015 IPO, lock-up agreements, and Secondary Offering after the Court of Chancery denied Fitbit’s Motion to Dismiss earlier this month.

Fitbit launched a new technology – PurePulse in 2014 which was designed to allow Fitbit devices to record a user’s heartrate with “superior accuracy.”  The technology was publicly praised, but internally, the complaint alleges, there were serious concerns surrounding the efficacy of PurePulse.

While the public was led to believe that PurePulse was functioning at or above expectations, Fitbit management structured the company’s 2015 IPO to allow the board to sell “an unusually large percentage of the stock” at higher prices, according to a Delaware Court of Chancery opinion.  The board then voted to waive lock-up agreements that were intended to prevent the board from selling more shares for a period after the IPO.  This waiver allowed the board to offer even more shares during the Secondary Offering – amounting to some $270 million in profit.

The Fitbit board argued that the Court should dismiss the case because the investors did not make a pre-suit demand on the board nor adequately allege demand futility. The Court disagreed and found that the investors “have pled particularized facts” excusing demand under Aronson and Rales.   When the suit was first filed, Fitbit’s board had seven members. Fitbit argued that the court should consider the board as it existed when the investors filed their second amended complaint when there were nine members in determining if demand would have been futile. Under Braddock v. Zimmerman, the Court sided with the investors finding that the operative time to consider the composition of the board is when the original complaint was filed. 

The Court also refused to dismiss the complaint for failure to state a claim.  The Court initially noted that if a complaint survives a motion under Rule 23.1, “it will likely survive a motion under Rule 12(b)(6).”  The board’s additional argument here was that Plaintiffs’ claims are subject to exculpation under Section 102(b)(7) of the DGCL and the exculpation provision in Fitbit’s certificate of formation. The Court found that the exculpation provision does not extend to breaches of the duty of loyalty.  In denying the Motion to Dismiss, the Court extended the Brophy decision for trades made, not by the insider himself, but by an entity he or she controls thus implicating the duty of loyalty.  In addition, the Court found that the board’s actions surrounding the IPO, lock-up waivers, and the Secondary Offering also implicated the duty of loyalty, allowing both claims to survive. 

Read the full opinion here.

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Judicial Dissolution of a Delaware Limited Liability Company

In Decco U.S. Post-Harvest, Inc., v. Mirtech, Inc., C.A. No.2018-0100-JTL (Del. Ch. Nov. 28, 2018), the Court of Chancery was again called on to determine if judicial dissolution of an LLC with two deadlocked managers was appropriate.

The Court held a one-day trial with only two live witnesses and eleven exhibits that resulted in a “mercifully sparse” record.  Vice Chancellor Laster ruled that Essentiv LLC no longer was a viable business because the patented technology upon which its business purpose relied, and which was contributed through a licensing agreement by one of the 50% members, was not within the member’s ability to license because it had already entered into an agreement with a third-party whereby the third-party retained all rights to the patented technology.

In 2010, MirTech and a company called AgroFresh entered into an agreement that called for joint ownership of“any and all inventions conceived or reduced to practice jointly by the Parties.” The parties’ main goal was to commercialize products based on a gas used to delay the ripening of fruit and other produce – 1-MCP.  A year later the parties entered into a new commercial agreement and consulting agreement that granted AgroFresh sole ownership over the parties’ joint inventions.

Essentiv LLC was formed in 2016 as a joint venture by Decco and MirTech to commercialize products based on 1-MCP. MirTech represented that it owned the patented rights in certain inventions using 1-MCP and granted Essentiv a license to use the patented rights.  MirTech did inform Decco that it had partnered with AgroFresh to produce RipeLock, a modified atmosphere package that used 1-MCP but, Decco did not ask to see any of MirTech’s agreements with AgroFresh.

Soon after Essentiv went to market with its first 1-MCP product, AgroFresh filed an infringement suit based on its status as owner of the patented RipeLock technology Essentiv used for its product TruPick. In 2017, the court ruled in favor of AgroFresh in the infringement suit and Essentiv agreed to stop all activity related to TruPick. In a subsequent Consent Judgment, MirTech agreed to entry of judgment against it on 20 different counts of wrongdoing, including willful infringement, fraud,and misappropriation of trade secrets.

Decco filed this suit to dissolve Essentiv after MirTech refused to voluntarily dissolve the LLC based on the company’s loss of its sole technology. The court found that the Consent Judgment “prevents the Company from continuing to sell TruPick”; that the company “has no plans to develop any other products”; and that “there is no viable 1-MCP Business” and “no viable Non-1-MCP Business.”  Therefore, the court held, “it is not reasonably practicable for the Company to carry on its business” and that dissolution is required under Delaware LLC Act § 18-802.

Read the full opinion here.

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Delaware Superior Court Addresses Competing Arbitration Clauses

On November 9, 2018, Judge Carpenter of the Delaware Superior Court issued the Court’s opinion denying Toll Brothers, Inc.’s motion to dismiss homeowners Frederick and Connie Wang’s complaint, thus allowing all six counts of the Wang’s claims against their builder to move forward.

As some background, the Wangs filed suit against Toll Brothers in March of 2015, alleging that their home had suffered significant water intrusion related damage as a result of Toll Brothers’ failure to properly install the windows and stucco exterior during construction.  Toll Brothers filed a motion to dismiss on the grounds that the contract of sale, drafted by Toll Brothers, contained a binding arbitration clause which governed any disputes between the Wangs and Toll Brothers.  Attorneys for the Wangs, Blake Bennett and Christopher Lee of Cooch and Taylor, P.A., argued that the motion should be denied because an arbitration clause found in the later executed warranty agreement controlled, and that arbitration clause explicity stated that the Wangs had the right to “pursue remedies other than conciliation and binding arbitration.”  Alternatively, Mr. Bennett and Mr. Lee argued that the arbitration provision in the contract was unconscionable, which is an issue of fact for a jury.

During a hearing on that motion to dismiss in August of 2015, Judge Carpenter declined to dismiss the complaint but rather stayed the cased pending the outcome of court-ordered arbitration.  At no time did the Court opine that such arbitration would be binding arbitration.  The Court later wrote that it ordered the arbitration because it recognized “that expensive continual litigation would not be helpful to getting Plaintiffs’ house fixed nor in the best interest of Toll Brothers, who had an excellent reputation in the building community.”

The parties moved forward with arbitration in May of 2017, and although the arbitrator ruled in the Wangs’ favor, the Wangs were dissatisfied with the damages awarded and decided to continue to litigate the matter in the Superior Court.  Shortly thereafter, Toll Brothers filed another motion to dismiss on the grounds that binding arbitration had occurred.  The Wangs opposed that motion on the grounds, once again, that the arbitration was not binding arbitration as the arbitration provision in the warranty controlled.  Toll Brothers concurrently filed a complaint to affirm the arbitration award in Chancery Court.

After oral argument before Judge Carpenter, the Court issued its opinion that a) it did not order the parties to binding arbitration in August of 2015, and b) that the arbitration clause in the warranty superseded the arbitration clause in the contract because, consistent with the Delaware Court of Chancery’s decision in Country Life Homes, Inc. v. Shaffer, the warranty was executed at a later date than the contract.  As the Court noted, “when a later-in-time contract addressed the same issues (here, the means of dispute resolution and the rights to be asserted), it will prevail in the absence of evidence to the contrary.”

In its opinion, the Court stated the following regarding its ruling after the August of 2015 oral argument:

The Court was clear that it was hesitant to enforce the contractual arbitration provision as there was a conflict between the Contract and Warranty arbitration clauses.  This hesitation makes it more than obvious that the Court’s suggestion that the parties first go to arbitration – clearly meant non-binding arbitration.  In hindsight, this good faith effort by the Court to hopefully get the parties to come to a reasonable, common sense resolution of this dispute merely provided the parties more grounds to advance legal arguments instead of addressing the real issues of this litigation.  This is clearly unfortunate, as is so often the case, the parties are now only making litigation decisions and not good business ones.

As a result of the Court’s ruling, it retained jurisdiction over all counts of the complaint and the arbitration award will not be entered as a judgment in any court nor may it “be cited as evidence or precedent, with any preclusive effect, in any court, arbitration, or other proceeding.”

The Court’s ruling is likely to be heavily relied upon in Delaware residential construction litigation matters as there are often competing and contradictory arbitration provisions in the contracts and warranty agreements executed by the parties.

Chris Lee

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Equitable Counterclaims in Courts of Law

In the early stages of the American legal system, most state judiciaries were separated into two types of courts – courts of law and courts of equity.  An action at law is an action typically for money damages such as a tort or breach of contract. An action in equity seeks a remedy when there is no available remedy at law, such as, when money damages will not suffice. Over time, this distinction in the American legal system has largely eroded and many courts now hear legal and equitable claims together.  No so in Delaware.  Delaware’s Court of Chancery retains exclusive jurisdiction over claims and counterclaims rooted in equity and fairness.  The Court of Chancery may, under the Clean-Up Doctrine, hear and decide ancillary legal matters to the main equitable claim.  There is, however, no analogous doctrine in the Superior Court.

One can imagine a scenario where a party finds itself defending a case in a court of law, yet wishes to assert equitable counterclaims.  That is exactly what happened in SARN Energy LLC, v. Tatra Defence Vehicle AS, C.A. No. N17C-06-355 EMD CCLD, November 5, 2018.

The parties entered into an agreement where SARN was to use its best efforts to help Tatra sell Pandur military vehicles to the Czech Ministry of Defense. SARN accomplished this goal and Tatra was able to sell 20 Pandurs for approximately $80 million. Tatra failed to fully compensate SARN under the contract and SARN brought suit for breach of contract.  Before filing suit, but after SARN realized that Tatra would not perform under the contract, counsel for SARN sent allegedly false and disparaging letters to Tatra’s parent company, CSG, and the Czech National Security Office concerning alleged illegal actions taken by CSG.  These letters were written on SARN SD3 LLC letter head.

Tatra counterclaimed for, inter alia, bad faith and defamation.  SARN moved to dismiss because SD3, not SARN sent the allegedly disparaging and false letters. Tatra argued that SARN may be responsible under an alter-ego theory of liability.  The Court held that at the motion to dismiss stage, there was at least enough pled to allow discovery on the alter-ego theory of liability, however, the Court of Chancery, not the Superior Court, was the correct court to bring these claims.   The Court dismissed the defamation and bad faith claims but stayed dismissal for 20 days to allow Tatra to transfer the counterclaims to the Court of Chancery.  The Court noted that Tatra could have sought to have the Superior Court judge designated to preside in Chancery over the Counterclaims.  To accomplish this, Tatra should have written to the Chancellor explaining why the designation is appropriate.  The Chancellor would then write to the Chief Justice, and the Chief Justice would ultimately determine if such designation is appropriate. Tatra, however, did not seek designation and was limited to attempt the transfer to avoid dismissal.

Read the full opinion here.

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