The Delaware Keno Lottery Goes Awry

In Brookings, et al. v. Kirk, et al., three Plaintiffs brought claims against the Director of the Delaware Lottery, the Delaware Lottery, and the State of Delaware alleging that Defendants refused to honor Plaintiffs’ seven Keno Lottery tickets, each worth $1,000,000.00.  Defendants filed a Motion for Summary Judgment arguing that the tickets are invalid because an anomaly occurred with the Keno Computer on December 17, 2015 that caused five consecutive Keno Lottery tickets to generate a combination of the same twenty winning lottery numbers.  As a result, they alleged that the lottery was illegal because it did not possess the legally required element of chance.

When the State learned of the anomaly, it instructed Scientific Games International, the operator of the Keno Computer system, to place a hold on all claims related to the tickets in question. Over $23,000.00 was disbursed to ticket holders who purchased tickets during the anomaly.

The Court concluded that a legal lottery requires three elements: prize, consideration, and chance.  During the time of the anomaly, the Keno Computer caused the same twenty numbers to repeat themselves.  This continued until an individual manually restarted the Keno Computer.  Until the Keno Computer was restarted, there was a 100% chance that the same twenty numbers would win.

Plaintiffs argued that chance was present from their perspective because (1) they did not know the numbers were repeating, and (2) even if they did know the numbers were repeating, they did not know how long the numbers would continue to repeat.  The Court found the Plaintiffs’ subjective knowledge did not create chance where it otherwise did not exist and granted the Defendants’ Motion for Summary Judgment.

Read the full opinion here.

Posted in Uncategorized | Leave a comment

Contracting Away the Corporate Opportunities Doctrine

The Delaware Court of Chancery in a recent opinion explained how companies may contract away the duty of loyalty and the corporate opportunities doctrine and how those provisions limit the Court’s power in finding or remedying a breach.  In Alarm.com Holdings, Inc. v. ABS Capital Partners, C.A. No. 2017-0583-JTL (Del. Ch. June 15, 2018), Alarm brought suit against ABS, who acquired a controlling stake in Alarm through a subsidiary, for breach of DUSTA in connection with ABS partners serving on the boards of Alarm and related competing companies.  The Court found Plaintiff failed to state a claim under DUSTA and dismissed the complaint.

Background Facts:

Plaintiff alleged that an ABS partner who served on the Alarm board communicated confidential information he gleaned through various Alarm meetings to ABS.  ABS then communicated that information to a different ABS partner who then began to serve on the board of a competing company of Alarm and used Alarm’s confidential information to Alarm’s detriment.

Key Statements of Law:

To survive a 12(b)(6) motion to dismiss a DUSTA complaint, plaintiff must plead:

(i) A trade secret exists;

(ii) The plaintiff communicated the trade secret to the defendant;

(iii) The communication was made pursuant to an express or implied understanding that the defendant would maintain the secrecy of the information; and

(iv) The trade secret has been misappropriated within the meaning of that term as defined in DUTSA.

Holding:

Although the Court assumed that, for purposes of the opinion, Alarm met the first three elements, the Court found Plaintiff failed to plead the misappropriation of a trade secret and dismissed the complaint.   The Court acknowledged that misappropriation is rarely proven by direct evidence, but through inferences drawn from circumstantial evidence.  The complaint failed even this relaxed standard.

The Court relied on prior contract language between the parties concerning Alarm’s confidential information to find that both Alarm and ABS understood that ABS would invest in companies that competed with Alarm and such investments would not raise to the level of a violation of DUSTA.

Under Article 8 of the Amended Charter, ABS, Terkowitz, and the other ABS representatives on the Alarm board had “no duty (contractual or otherwise) not to, directly or indirectly, engage in the same or similar business activities or lines of business as the Corporation.” This provision waived “any claim for breach of the duty of loyalty against ABS, Terkowitz, or the other ABS director representatives based on either usurpation of a corporate opportunity or anticompetitive activity.”

The Court also dismissed Count Two of the complaint, which asserted a claim for common law misappropriation, as preempted by DUSTA.

Posted in Uncategorized | Leave a comment

Court of Chancery Addresses Availability of Appraisal Rights

City of North Miami Beach General Employees’ Retirement Plan Et al. v. Dr. Pepper Snapple Group, Inc. Et al.

Dr. Pepper’s stockholders initiated this litigation due to their purported inability to exercise appraisal rights pursuant to Section 262 of the DGCL in connection with a merger.

A merger subsidiary of Dr. Pepper Snapple Group and the parent of Keurig Green Mountain entered into a reverse triangular merger to combine their businesses to create a more diversified beverage company.  Keurig was to become an indirect wholly-owned subsidiary of Dr. Pepper.  The Dr. Pepper stockholders would receive a substantial dividend and retain their shares while the indirect owners of Keurig would receive shares of stock in Dr. Pepper.

Dr. Pepper issued a Preliminary Proxy that informed its stockholders that they would not have appraisal rights under the merger.  This led Dr. Pepper stockholders to initiate the instant litigation seeking to enjoin the merger until they are provided appraisal rights under section 262.  Section 262(b) affords appraisal rights for the shares of stock of a “constituent corporation” in a merger.  Additionally, section 262(b) contemplates that the stockholder will forfeit their shares of stock as a result of the merger.

The Court found that the term “constituent corporation” means “an entity actually being merged or combined and not the parent of such an entity.” Because Dr. Pepper is the parent of one of two merging corporations, their stockholders do not have appraisal rights.

The Court also found, alternatively, that since the Dr. Pepper stockholders retained their shares of stock throughout the transaction, they were not entitled to appraisal rights.  Summary Judgment was granted in favor of Defendants.

 

Read the full opinion here.

Posted in Delaware Court of Chancery | Tagged | Leave a comment

Forum Non Conveniens Denial Does Not Warrant Interlocutory Appeal

In Lincoln Benefit v. Wilmington Trust, the Superior Court determined that the denial of a Motion to Dismiss based on forum non conveniens did not warrant an interlocutory appeal.

Lincoln filed a declaratory judgment action against Wilmington Trust seeking to declare a life insurance policy void ab initio under Mississippi law.  Wilmington Trust subsequently filed a breach of contract action in the Mississippi District Court and filed a Motion to Dismiss the Delaware action based on forum non conveniens.  The Superior Court denied the Motion to Dismiss and an Application for Certification of Interlocutory Appeal followed.  The Superior Court refused to certify the interlocutory appeal because the appeal did not meet the strict standards outlined by Supreme Court Rule 42.

To certify an interlocutory appeal, the trial court must have “decid[ed] a substantial issue of material importance that merits appellate review before a final judgment.”  Even if a substantial issue is decided, the court is not required to grant the interlocutory appeal.  Interlocutory appeals are exceptional and should be granted sparingly so as to preserve party and judicial resources.  Several factors outlined in Rule 42 guide the Court’s analysis.

The Court found that although Its denial of Wilmington Trust’s Motion to Dismiss decided a substantial issue, on balance, the factors in Rule 42 did not warrant an interlocutory appeal.  Only one factor, whether the appeal could terminate the litigation, weighed in favor of certification.

The Delaware Supreme Court subsequently refused the application for interlocutory review.

Read the Superior Court’s opinion here.

Posted in Delaware Superior Court, Delaware Supreme Court | Leave a comment

The Coleman Analysis Applies to Untimely Expert Reports

In Kent v. The Dover Ophthalmology, et al., the Superior Court recently clarified the appropriate standard in reviewing a party’s motion to file untimely expert reports.

The Defendants sought to file an untimely supplemental expert report after the Court excluded a portion of Defendants’ causation expert’s opinions, finding them unreliable.  The Defendants urged the Court to apply factors from Christian v. Counseling Resource Associates, Inc., and Drejka v. Hitchens Tire Services Inc. in support of its argument to allow the supplemental report.  The Court found these cases inapplicable and noted that their holdings are confined to situations where a trial court is deciding whether to dismiss a case for discovery violations.

Although the Court’s decision here did exclude a significant portion of the Defendants’ causation expert, the Court noted that the Defendants did not bear the ultimate burden of proof at trial, Defendants’ expert could attack the Plaintiffs’ expert’s opinions, and the Defendants intended to call other witnesses to rebut liability and damages.

The Court found the Coleman standard applicable and balanced the following factors to deny Defendants’ Motion to File a Supplemental Disclosure:  1) the terms of the original scheduling order; 2) whether good cause exists to allow the supplemental disclosure; 3) prejudice to the opposing party; and 4) possible trial delay. Applying the above factors to the case sub judice, the court found: a six month delay in complying with the original scheduling order evinced “substantial noncompliance;” good cause was not shown because the Defendants had three opportunities to disclose the bases for their causation expert’s opinions; Plaintiffs would face substantial prejudice as trial was only days away; and trial would be delayed because based on Defendants’ representations, a second motion to reargue, accompanied by full briefing, would follow.

Read the full opinion here.

Posted in Delaware Superior Court | Leave a comment

Forum Non Conveniens and an Alternate Forum

In a set of consolidated appeals originating from personal injuries allegedly sustained by Argentinian farmers and their children due to the mandatory use of Roundup in tobacco cultivation, the Delaware Supreme Court addressed a singular question – “whether the trial court must first determine that an available alternative forum exists before dismissing a case for forum non conveniens.”

The Court held that the availability of an alternative forum is a factor that should be considered in the forum non conveniens analysis; however, an alternative forum is not a prerequisite to obtaining dismissal.

The Court acknowledged that while federal courts and most state courts require a finding of an available alternative forum before considering dismissal, Delaware Courts do not.  Delaware Courts have routinely considered the availability of an alternative forum as a factor in the forum non conveniens analysis, but it has never been a prerequisite.  The sine qua non of the forum non conveniens analysis has been and remains the inconvenience on the defendant, not the availability of an alternative forum.

The Superior Court’s decision denying the Plaintiffs’ request that the Defendant’s dismissal be conditioned on a waiver of any jurisdictional defenses was similarly affirmed as the Court found an available alternative forum was not necessary to dismiss a case for forum non conveniens.

Of note, Justice Vaughn concurred in the judgment but agreed with the federal courts and a majority of state courts that an available alternative forum should be a precondition to obtaining dismissal for forum non conveniens.

Read the full opinion here.

Posted in Uncategorized | Leave a comment

Deposition Transcripts and Errata Sheets

Vice Chancellor Slights recently addressed the appropriate course of action when a party challenges substantive changes to a deposition transcript made through the use of an errata sheet.

In Mediacom Delaware LLC v. Sea Colony Recreational Association, Inc., Sea Colony moved to strike the errata sheet of Mediacom’s 30(b)(6) witness as either a sham affidavit or under the Court’s rules.

The Court found neither argument persuasive due to Mediacom’s compliance with Chancery Rule 30(e).  The Court noted that it has the authority to strike an errata sheet, but the preferable practice is to allow substantive changes and to consider the changes when assessing the witness’s credibility.  Further, the Vice Chancellor explained that he would reconsider his ruling if Mediacom did not make the witness available for cross examination at an upcoming evidentiary hearing on injunctive relief.

Read the opinion here.

Posted in Delaware Court of Chancery | Leave a comment

The Middle Ground of Forum Non Conveniens

The Delaware Supreme Court recently affirmed but clarified an opinion out of the Court of Chancery addressing dismissal based on forum non conveniens in the case of Gramercy Emerging Markets Fund, et al. v. Allied Irish Banks, P.L.C., et al.

In Gramercy, a Cayman Island investment fund and two of its Delaware subsidiaries initiated suit in Illinois against a bank organized under Delaware law with offices in Bulgaria and Illinois and an Irish bank headquartered in Dublin.  The claims arose under Bulgarian law.  The Defendants moved to dismiss on forum non conveniens grounds, which the Illinois Court granted.  Afterward, the Plaintiffs refiled in Delaware, and the Defendants again moved to dismiss based on forum non conveniens.

Until recently, Delaware utilized a two-tier forum non conveniens approach.  If the Delaware action was first-filed, our courts would apply the traditional Cryo-Maid factors, which include: (1) the access to proof; (2) the availability of a compulsory process for witnesses; (3) the possibility of viewing the premises; (4) factors that would make trial easy, expeditious and inexpensive; (5) whether the controversy is dependent upon Delaware law; and (6) the pendency or nonpendency of a similar action. Based on these factors, a party need show “overwhelming hardship” and inconvenience to be awarded a dismissal of a first-filed Delaware action.

If the Delaware case was not the first-filed, courts apply the McWane factors, which include whether there is: “(1) [] a prior action pending elsewhere; (2) in a court capable of doing prompt and complete justice; (3) involving the same parties and the same issues.”  Dismissal under this standard is discretionary, if all three factors are met.

In the present action, the procedural history did not fit neatly into Cryo-Maid nor McWane.   There was a first-filed Illinois action that the Illinois court dismissed on forum non conveniens grounds.  The court noted that Bulgaria was the appropriate forum as the suit addressed an issue of first impression under Bulgarian law and many of the witness were in Bulgaria.

Based on the odd procedural history, the Court of Chancery turned to a recent decision out of the Delaware Supreme Court, Lisa, S.A. v. Mayorga, due to the similarity of facts and issues to the present case.  In Lisa, the Supreme Court utilized the McWane factors to dismiss Plaintiff’s claims where there was a prior pending suit in another jurisdiction but where that case was dismissed with prejudice.  Based on Lisa, the Court of Chancery applied a mixture of the Cyro-Maid and McWane factors, without requiring a showing of overwhelming hardship as it found “the two doctrines of overwhelming hardship and McWane … operate consistently and in tandem to discourage forum shopping…”

The Supreme Court affirmed the Court of Chancery’s decision, but did so with clarification.  The Court found that “[b]etween Cryo-Maid’s overwhelming hardship standard and McWane’s discretionary standard lies an intermediate analysis that applies to situations like Gramercy’s: a straightforward assessment of the Cryo-Maid factors, where dismissal is appropriate if those factors weigh in favor of that outcome.”  Thus, the Supreme Court utilized the Cyro-Maid factors in granting dismissal, but did so without requiring the Defendants to show overwhelming hardship.

Read the full opinion here.

Posted in Delaware Supreme Court | Leave a comment

Court of Chancery Holds Business Judgment Protections Announced in Kahn v. M&F Worldwide Corp. Extends to Conflicted One-Side Controller Transactions

Stockholders of Martha Stewart Living Omnimedia, Inc. (MSLO) brought suit in the Court of Chancery against Martha Stewart, alleging that Stewart, as controlling stockholder of MSLO breached her fiduciary duties by negotiating greater consideration for herself to the detriment of the minority stockholders  of MSLO during the course of a merger with Sequential Brands Group, Inc. (“Sequential”).  The stockholders also brought suit against Sequential under an aiding and abetting theory.

Much of the litigation was over the appropriate standard the Court should use to review the merger.  Stewart claimed the business judgment rule was appropriate because there was no conflicted transaction, but even if there was, the procedural safeguards – that the transaction was recommended by a properly-empowered and independent special committee of the Board and a nonwaivable condition that the merger be approved by a majority of the minority stockholders, were fully complied with.  The stockholders sought entire fairness review.

Sequential entered into negotiations with MSLO, who in turn formed a special committee to assist in contemplating a merger.  Sequential requested the ability to simultaneously negotiate with Stewart while also negotiating the merger with MSLO’s special committee; the committee granted that request. Relevant to the merger, Stewart was party to several other agreements with MSLO, including: an employment agreement, an IP agreement, and a license agreement.

Sequential and MSLO eventually entered into a merger agreement where the stockholders of MSLO were entitled to $6.15 per share or shares of Sequential common stock equal to the shareholders’ shares in MSLO.  On the same day, Sequential entered into, and extended, certain agreements with Stewart.  The license agreement was extended for three more years, but otherwise remained the same as did the IP agreement, other than Stewart forfeiting the use her name in new businesses. The employment agreement changed slightly, but in no material way, according to the Court.

The Court found there was no conflicted transaction, noting that a conflicted transaction will either have the controlling stockholder on the buy and sell side of the transaction, or the controlling stockholder will extract “different consideration or derive some unique benefit from the transaction…”  Neither of these two scenarios arose under the merger. Stewart was plainly only on the sell side of the transaction, and received the same $6.15 per share merger consideration that other stockholders received.  The Court found that the plaintiffs failed to distinguish the “new” side deals from the “old” side deals in any meaningful way that could support the assertion that Stewart extracted additional consideration that otherwise was afforded to MSLO shareholders.

The Court rejected Plaintiffs’ characterizations of the merger negotiations.  They claimed that after entering into negotiations with Stewart, the offering price dropped from $6.20 per share to $6.15 per share.  Initially, Sequential did offer $6.20 per share; however, after a period of due diligence, but before entering into negotiations with Stewart, that offer dropped to $5.75 per share.  After entering into negotiations with Stewart, that offer increased to $6.15 per share.  The merger consideration actually increased after Sequential began negotiations with Stewart.

The Court answered the additional question of when the dual safeguards of a special committee and a majority of the minority vote need be implemented to secure review under the business judgment rule. Plaintiffs urged the safeguards need be implemented at the outset of discussions between the target and third party, while Stewart argued the safeguards need be applied before any actual agreement between the third party and the controller is reached. The Court ended up in the middle, finding that the necessary time for the safeguards is “where the controlling stockholder actually sits down with an acquirer to negotiate for additional consideration.”  The Court found that both a properly-empowered and independent special committee of the Board and a nonwaivable condition that the merger be approved by a majority of the minority stockholders, were fully complied with at the appropriate time.  As such, the business judgment rule applied, and having failed to plead a claim for waste, the claims against Stewart and Sequential failed. The Court granted the motions to dismiss.

Read the full Opinion here.

Posted in Delaware Court of Chancery | Leave a comment

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

Posted in Uncategorized | Leave a comment