Business Litigation Reporter March 26, 2018

Business Litigation Courts: Regional Case Summaries

California

Holding Company’s Principal Place of Business Is Where Its Meetings Are to Occur. In 3123 SMB LLC v. Horn, No. 16-55304, the Ninth Circuit held that a holding company has a principal place of business where its board meetings are to occur (regardless of whether such meetings have yet occurred), unless evidence shows that the holding company is directed from elsewhere. In so holding, the Ninth Circuit rejected the argument that a holding company’s principal place of business is the state in which its officers reside, finding that such a rule would be unworkable and uncertain. By contrast, the location for a company’s meetings typically is specified either in its bylaws or in the statutes of its state of incorporation. As such, “a rule presuming that from inception a holding company directs its business from the place where it holds board meetings is easy to apply.”

“Individualized Targeting” No Longer Sufficient Basis for Specific Jurisdiction. Prior to the Supreme Court’s decision in Walden v. Fiore, 134 S. Ct. 1115 (2014), the Ninth Circuit had held that a court has specific jurisdiction under an “individualized targeting” theory if the defendant had engaged in wrongful conduct targeting a resident of the forum state. In Axiom Foods, Inc. v. Acerchem Int’l, Inc., No. 15-56450 (9th Cir. 2017), however, the Ninth Circuit held that the “individualized targeting” theory is no longer good law. The court observed that, under Walden, specific jurisdiction requires a “substantial connection” between the defendant’s suit-related conduct and the forum state. In this case, Acerchem, a U.K. company, had sent the newsletter that allegedly infringed Axiom’s copyrights to some 343 recipients. The Ninth Circuit held that because only 10 of the 343 recipients were located in California, California was not the “focal point” of Acerchem’s conduct, and hence that Axiom had failed to establish specific jurisdiction under Walden.

Delaware

Survival Period in Parties’ Contract Shortened Applicable Statute of Limitations. In HBMA Holdings, LLC v. LSF9 Stardust Holdings LLC, C.A. No. 12806-VCMR (Del. Ch. Dec. 8, 2017), the plaintiff claimed that the defendant had violated a contractual covenant to operate the companies in the ordinary course during an earnout period. The court observed that the contract provided that the covenants would survive until June 13, 2016, and it interpreted that date as a contractual statute of limitations, meaning that any claim alleging breach of covenant had to be filed by that date. Because the plaintiff had not filed a claim by that date, and because the plaintiff’s arguments for extending that deadline based on estoppel, waiver, or acquiescence were unavailing, the court held that the plaintiff’s claims were time barred. This decision is important given the widespread inclusion of similar survival provisions in many business contracts.

Limited Inspection of LLC’s Books and Records Permitted. In Aloha Power Co., LLC v. Regenesis Power, LLC, C.A. No. 12697-VCMR (Del. Ch. Dec. 22, 2017), Aloha – a member of Regenesis – sought to inspect Regenesis’s books and records. The court held that, under Regenesis’s operating agreement, Aloha had the right to inspect certain specific records without any showing of need. The court also held that, under Delaware Code § 18-305(a), Aloha had shown a “proper” purpose to inspect a list of the names and contact information for each member of the LLC to understand the dilution of membership interests. But the court barred Aloha from obtaining Regeneris’s operating statements and general ledgers, as well as documents related to its “general affairs,” since attempts to uncover “possible general mismanagement, without more” will not justify an inspection demand. This decision adds to the body of case law concerning demands to inspect the books and records of a Delaware LLC (or, by analogy, a corporation served with a books-and-records request under § 220).

Massachusetts

Broad Release in Severance Agreement Barred Officer’s Claim to Stock Options. In MacDonald v. Jenzabar, Inc., 2018 Mass. App. LEXIS 5, the plaintiff asserted rights to certain preferred shares and stock option rights arising from his employment with the defendant. In support of his claim, he put in evidence that, even after he and the company signed a severance agreement, he and the company continued to communicate about possible ways to convert those options into cash. The Appeals Court held, however, that notwithstanding that evidence, his claim was barred by a broad and unambiguous release of all rights contained in the severance agreement. The court emphasized that Massachusetts law favors giving effect to general releases even if the parties did not, at the time of the release, have in mind all of the matters that it might cover.

Trial Required on Claims Alleging Misappropriation of Confidential Business Information. In Butts v. Freedman, 2017 Mass. Super. LEXIS 194, the plaintiff sued a former partner and employee for breach of fiduciary obligations and breach of contract for allegedly taking confidential information when they left the business. Moving for summary judgment, the defendants argued that they were not bound by any noncompete agreement, but the court held that Massachusetts law applies a multi-factor, fact-dependent test to determine whether information is entitled to information as confidential or proprietary. The court also held that the defendants were not entitled to summary judgment simply because their employment contract did not specify that they owed a fiduciary duty, holding that such a duty may exist unless there is a contractual provision expressly eliminating a fiduciary duty.

New York

Commencement of Action Seeking Rescission and/or Reformation of a Contract Does Not Constitute Anticipatory Breach. In Princes Point v. Muss Dev., 30 N.Y.3d 127 (2017), a prospective real estate purchaser sued the sellers seeking to rescind an amendment to the purchase agreement on the basis of fraud. The seller filed a counterclaim asserting that the lawsuit constituted an anticipatory breach of the agreement. Reversing the First Department, the Court of Appeals held that there was no material difference between the buyer’s action for recession and an action for declaratory judgment and that, particularly where the plaintiff sought reformation of the amendments to the contract and specific performance of the original agreement, there was no “positive and unequivocal” repudiation of the parties’ contract.

Parties Must Notify Putative Class Members of a Proposed Settlement or Dismissal Even Where the Class Has Yet to Be Certified. In Desrosiers v. Perry Ellis Menswear, LLC, 2017 NY Slip Op 08620 (2017), the New York Court of Appeals considered the question of whether CPLR 908, which requires notice of the dismissal or compromise of a class action, applied to putative class actions that are settled or dismissed before the class has been certified. The Court of Appeals held that although the text of CPLR 908 is ambiguous, its legislative history showed that it applies even in cases where the putative class has not yet been certified.

Assurances That a Contractual Offer Is “Firm and Binding” Do Not Transform an Offer Contingent on Execution Into a Binding Agreement. In Keitel v. E*TRADE Fin. Corp., 2017 NY Slip Op 06624 (1st Dep’t Sept. 26, 2017), the plaintiff alleged that the defendant had made a “firm and binding offer” to hire him as a celebrity spokesperson, but later backed out of that deal. The First Department affirmed Justice Ramos’ decision that no binding agreement had even been created. This was so because, even though the defendant had expressly referred to its proposal to the plaintiff as a “firm and binding offer,” the term sheet embodying that offer had expressly stated that “neither party shall be bound until the parties execute a more formal written agreement.”