Tuesday, August 8, 2017

Schneider Electric Buildings Critical Systems v. Western Surety (Ct. of Appeals)

Filed: July 28, 2017

Opinion by: Judge Adkins

Holding:

A surety company that guarantees performance of a construction subcontract with a performance bond is not bound by the subcontract’s mandatory arbitration clause when the subcontract is incorporated by reference into the bond and the clause refers only to the subcontract’s parties and the bond allows for dispute resolution in court.

Facts:

In May 2009, Plaintiff, a construction contractor, signed a Master Subcontract Agreement (“MSA”) with NCS, an electrical subcontractor, to cover future projects.  The MSA included a mandatory arbitration clause (the “Clause”).  In October 2009, Plaintiff was hired by another construction contractor to help build a medical research facility.  Plaintiff in turn hired NCS to help with the project.  Plaintiff and NCS signed a subcontract (“NCS Subcontract”) that incorporated the MSA by reference.  The NCS Subcontract required NCS to furnish a performance bond (“Bond”), which it obtained from Defendant.  The Bond made NCS and Defendant jointly and severally liable to Plaintiff for performance of the NCS Subcontract.

During construction, a dispute arose, NCS abandoned the site and Plaintiff terminated the contract.  In February 2014, Plaintiff filed a demand for arbitration with NCS.  In April 2014, Plaintiff amended the demand to include Defendant.  Defendant filed a petition in Howard County Circuit Court in which it requested a declaratory judgment that it was not bound by the Clause.

The case was transferred to a more proper venue, Harford County Circuit Court, which granted partial summary judgment for Defendant.  That court explained that the Bond is only insuring that Defendant is liable for any construction that has not been performed, and found no evidence of an intention that Defendant should be bound to dispute resolution provisions of the MSA.  

The Court of Special Appeals affirmed, holding that “the ‘joint and several’ obligation clause in the (Bond) does not evince (Defendant’s) assent to be bound by the (Clause) in the incorporated-by-reference chain of documents.”  Schneider Elec. Bldgs. Critical Sys., v. Western Sur. Co., 231 Md. App. 27, 46 (2016).  The Court of Appeals granted Plaintiff’s petition for a writ of certiorari.

Analysis:

The Court of Appeals applied Maryland contract law to determine if Defendant is bound by the Clause.  Precedent in Maryland requires courts to look at the intention of the parties as expressed in the language of the contracts.  The Court of Appeals explained in Hartford Accident & Indem. Co. v. Scarlett Harbor Assocs., 346 Md. 122, 127 (1997) that “arbitration is a process whereby parties voluntarily agree to substitute a private tribunal for the public tribunal otherwise available to them” and an arbitration clause “cannot impose obligations on persons who are not a party to it and do not agree to its terms.” 

The Court of Appeals interpreted the Bond by “constru(ing) (the Bond, NCS Subcontract, and MSA) as a whole…not (by) read(ing) each clause or provision (of each contract) separately.”  Owens-Illinois v. Cook, 386 Md. 468, 497 (2005).

Here, the Court of Appeals agreed with the lower courts because the Clause refers to the “parties” to the NCS Subcontract (which are Plaintiff and NCS) and the Bond permits court actions to resolve disputes between NCS and Defendant.  Since Defendant was not a “party” to the NCS Subcontract, the Clause does not apply to Defendant.  The Court of Appeals found support in its holding in Liberty Mutual Insurance v. Mandaree Public School District #36, 503 F.3d 709 (8th Cir. 2007), whose facts are similar to this case.

The full opinion is available PDF.

Tuesday, August 1, 2017

Hanover Investments, Inc. v. Volkman (Ct. of Appeals)

Filed: July 31, 2017

Opinion: Judge McDonald

Holding: A declaratory judgment action should be stayed or dismissed while a separate action is pending in another state that involves the same parties and that raises essentially the same issues presented in the declaratory judgment action in Maryland. The fact that the Maryland court had previously dismissed an earlier related action did not create “unusual and compelling circumstances” that would justify an exception to the principle that a court should not entertain a declaratory judgment action when there is a pending lawsuit in another state involving the same issues.

Facts: Volkman was subject to two agreements with Hanover, a Maryland corporation [or related companies], an employment agreement dated January 1, 1993, and a separate shareholder agreement entered into in 2007. The genesis of the lawsuit was Ms. Volkman’s termination in 2010. The legal proceedings related to the matter can be divided into four actions: (i) an employment agreement action; (ii) an arbitration proceeding; (iii) a shareholders' agreement action; and (iv) a declaratory judgment action (which is the subject of this opinion).

The employment agreement action - More than two years after her termination, on April 17, 2012, Volkman filed a lawsuit based on the employment agreement. On March 22, 2013, after the court dismissed several of her tort claims, Volkman voluntarily dismissed the employment agreement action with prejudice by stipulation of counsel pursuant to Maryland Rule 2- 506(a).

The arbitration proceeding - On October 10, 2012, while the employment agreement action was pending, Hanover invoked the arbitration provision in the shareholders’ agreement to determine what it was required to pay Volkman when it redeemed her stock. On August 1, 2014, Hanover successfully obtained a default judgment in Montgomery County Circut Court confirming the award. Ms. Volkman did not appeal that judgment.

The shareholders' agreement action - On December 17, 2012, Volkman served Hanover with a complaint that she filed in a state trial court in Minnesota which named Hanover as the lone defendant, alleging that it had violated its contract with her and sought  specific performance – the return of her Hanover stock – a remedy explicitly provided for in the shareholders’ agreement. Hanover moved to dismiss the complaint, asserting that the Minnesota court lacked
in personam jurisdiction of Hanover, but the Minnesota Court of Appeals affirmed the trial court decision. Contemporaneously with its defense in the shareholders' agreement action, Hanover filed a declaratory judgment action in Maryland (discussed below) involving the same issues and Hanover prevailed in the Circuit Court with Volkman appealing that decision. As a result, on January 19, 2015, the Minnesota trial court dismissed Volkman's shareholders’ agreement action, but explicitly reserved
jurisdiction to reopen the case depending on the resolution of the Maryland appeal.

The declaratory judgment action - On June 26, 2013 – two months after the Minnesota trial court denied Hanover’s motion to dismiss, and while that decision was on appeal – Hanover filed a declaratory judgment action against Volkman in the Circuit Court for Montgomery County.  Volkman noted the pendency of the shareholders’ agreement action in Minnesota and asked the Circuit Court to either decline jurisdiction or stay the proceedings in the declaratory judgment action pending a final judgment in the shareholders' agreement action. The Circuit Court declined to do so, citing Marriott Corp. v. Village Realty & Inv. Corp., 58 Md. App. 145 (1984), for the proposition that a declaratory judgment action could be filed “defensively” even if there was similar litigation “pending or impending” in another court and rendered a decision in favor of Hanover. Volkman appealed to the Court of Special Appeals arguing that the Circuit Court should not have heard the case while the shareholders’ agreement action involving the same issues was pending and the Court of Special Appeals held that the Circuit Court erred in issuing a declaratory judgment while the shareholders’ agreement action was pending. 225 Md. App. 602 (2015). Hanover petitioned the Court of Appeals for a writ of certiorari, which it granted.

Analysis: Pertinent to this case, a court should not entertain a declaratory judgment action when there is already a pending action “involving the same parties and in which the identical issues that are involved in the declaratory action may be adjudicated.” Sprenger v. Public Service Comm’n, 400 Md. 1, at 27-28 (2007). The court reasoned that in this case, the shareholders’ agreement action qualifies as an earlier-filed, pending action that would, under customary analysis, operate as a bar to the later-filed declaratory judgment action. The court further reasoned that the two actions involve essentially the same parties and both actions concern the identical issue – the propriety of Hanover’s redemption of Volkman’s Hanover stock under the shareholders’ agreement.

Accordingly, the Court of Appeals affirmed the Court of Special Appeals' decision.

The full opinion is available in pdf.

Monday, July 31, 2017

Curtis Cox v. SNAP, Inc. (4th Circuit)


Filed: June 13, 2017

Opinion by: Diana Gribbon Motz, Circuit Judge

Holding:

            When reviewing a contract providing for a non-qualified stock option to purchase shares of common stock, Defendant corporation's argument that the contract only promised to issue options in the future was without merit because the prevention doctrine provides, "if a promisor prevents or hinders fulfillment of a condition to his performance, the condition may be waived or excused." Consequently, the fourth circuit court of appeals affirmed the district court, holding Defendant corporation liable for breach of contract, awarding Plaintiff damages in the amount of $637,867.42.

Facts:

             “In 2006, SNAP, a Virginia corporation, sought to expand its business in the field of federal procurement by contracting with Curtis Cox, a Maryland resident and the president of C2 Technologies, an established government contracting firm. On January 12, 2006, the parties executed a memorandum of understanding in which Cox agreed ‘to promote and market [SNAP] in exchange for obtaining an equity stake’ in the company.” There was no dispute that the memorandum constituted a binding contract.

            Under the terms of the contract, Cox and C2 Technologies agreed to provide various forms of assistance to SNAP, including using their best efforts to help SNAP obtain specific contracts, to consider SNAP for any potential leads, and to provide SNAP with approximately $240,000 worth of marketing support and assistance.

            “In return, the contract provides that ‘on January 12, 2006,’ the same day the parties executed the contract, SNAP ‘will issue a non-qualified stock option to Mr. Cox granting him the right to purchase 308 shares, representing five (5%) percent of the total authorized shares of stock of [SNAP].’ The contract announces SNAP’s intention to execute a stock split, under which Cox’s options at any time after January 1, 2008 and gives Cox the right to require SNAP to repurchase his options – a “put option” – any time after January 1, 2011. The repurchase price is payable to Cox ‘over a five-year period with interest at the then current prime rate.’”

            “Cox attempted to exercise his put option on March 18, 2011 in a letter to SNAP President Navneet Gupta. The parties discussed but never came to a resolution regarding Cox’s request. On October 6, 2015, Cox sent Gupta a second letter demanding that SNAP pay him the full value of his options. On October 9, 2015, Gupta replied that ‘[SNAP] owed you nothing.’”

            “A month later, in November 2015, Cox filed suit for breach of contract against SNAP in Virginia state court. SNAP removed the case to the district court for the Eastern District of Virginia. After removal, Cox filed an amended complaint alleging breach of contract for failure to repurchase, breach of contract for failure to issue his options, and quantum meruit.”

            In August 2016, the parties filed cross-motions for summary judgment. The district court granted Plaintiff summary judgment, reasoning, “the plain language of the contract showed that SNAP issued the stock options to Cox and that the contract did not require any further steps as a condition precedent before those options issued. In the alternative, the court held that the language at issue was patently ambiguous and must therefore be construed against SNAP. Applying the contract’s formula for calculating the value of Cox’s options and interest owed, the court awarded cox a total of $637,867.42.” Defendant appealed.
           

Analysis:

(1)  Liability and breach of contract

The court held Defendant liable because as the contract conveyed the stock options to Plaintiff, and Defendant breached the contract by refusing to repurchase them when Plaintiff exercised his put option. Defendant argued that the contract did not actually convey stock options to Plaintiff, rather, the contract merely promised to issue stock options in the future, and therefore the issuance of stock options was a condition precedent to Defendant’s obligation to repurchase them.

The court found this defense without merit, calling the defense a “self-defeating position.” The court explains, “even if issuing the stock options was a condition precedent to [Defendant]’s obligation to repurchase, [Defendant] has excused that condition by breaching its promise to issue the options, and so the prevention doctrine dooms its case. Under the prevention doctrine, ‘if a promisor prevents or hinders fulfillment of a condition to his performance, the condition may be waived or excused…For the prevention doctrine to apply, [Plaintiff] need only show that [Defendant] materially contributed to the non-occurrence of the condition.”

The court further bolsters its analysis with Supreme Court of Virginia case law (Parish v. Wightman), which held, “where a contract is performable on the occurrence of a future event there is an implied agreement that the promisor will place no obstacle in the way of the happening of such even, particularly where it is dependent in whole or in part on his own act; and, where he prevents the fulfillment of a condition precedent or its performance by the adverse party, he cannot rely on such condition to defeat his liability.” The court further noted the failure to act can be considered, “contributing to the non-occurrence of the condition.”

Here, “[Defendant] controlled whether the stock options issued, and, even under its own interpretation, it had a contractual obligation to issue those options. By refusing to do so, [Defendant] plainly forfeited its right to rely on their issuance as an unfulfilled condition precedent to its obligation to repurchase [Plaintiff’s] options.”

Finally, the court referred to the Restatement, which reiterates that “when a condition in a contract fails to occur solely because a party breached one of its other obligations in the very same contract, there is no doubt that the party caused the non-occurrence for the purposes of the prevention doctrine.”

Holding that Defendant cannot avoid liability, the court affirmed the district court, explaining, “there is no doubt that [Defendant] had an obligation to bring about the condition it now tries to hide behind.”

(2)  Calculating Damages

Finding that the district court’s natural reading of the contractual language was appropriate, the court affirmed the district court’s holding, awarding Plaintiff a total of $637,867.42. The contract stipulated a formula for calculating the repurchase price of Plaintiff’s options:

“The price shall be determined based on the excess of the then fair market value of [SNAP], with such value determined based on .8 times [SNAP’s] annual sales during the most recently preceding twelve-month period, over the initial strike price…For purposes of determining the strike price of the options issued pursuant to paragraph 1, the value of [SNAP] will be based on a valuation of .8 times [SNAP’s] sales in calendar year 2005. This amount is estimated to be approximately $12,000,000.” [Amount payable] over a five-year period with interest at the then current prime rate [3.25%].
           
            The parties agreed that the value of Plaintiff’s options may be expressed as: ((80% of Defendant’s 2010 sales) – (80% of Defendant’s 2005 sales)) x 0.05. The district court found Defendant’s 2010 sales were $18,365,265 and that its 2005 sales were $4,938,584. Applying the above formula, the court found that Plaintiff’s options were worth $537,067.25. Defendant concedes that the district court used the proper formula to calculate damages, but it contends that the district court erred when it found that Defendant’s 2005 sales were $4,938,584. Specifically, Defendant relies on its contractual language, contending that its actual sales are immaterial because the contract stipulates that the 2005 sales were an estimated $12,000,000. The court disagreed.

The court found Defendant’s argument without merit, and instead held, “the contract provides that the value of [Plaintiff’s] options depends on the growth in [Defendant’s] value from 2005 to the time that [Plaintiff] finally exercises his put option. Under these circumstances, it stands to reason that the parties would have established a rough benchmark against which they could track the value of [Plaintiff’s] options.”

The court provided three reasons why Defendant’s logic was flawed. First, “the ordinary meaning of ‘estimate’ connotes a ‘rough or approximate calculation,’ not a fixed assumption. Common sense recommends we adhere to this meaning, since the parties estimated that the amount described is ‘approximately’ $12,000,000.” Second, the court argued, “it is not clear whether ‘this amount’ refers to [Defendant’s] 2005 sales or an estimate of the initial strike price, that is, 80% of [Defendant’s] sales. This unresolved ambiguity suggested that the parties did not mean for the estimate to serve as a stipulation.” Finally, the court argued, “[Defendant’s] reading would leave the parties and the court no way to establish a concrete strike price, and therefore no way to determine the value of [Plaintiff’s] options…for the purposes of establishing a strike price, it would be exceedingly strange for the parties to stipulate to an indeterminate figure."

In conclusion, the court found that “sales in calendar year 2005” referred to Defendant’s actual sales in 2005, and affirmed the district court’s award to Plaintiff of $637,867.42.

The full opinion is available in PDF.

Thursday, July 27, 2017

Greenspring Quarry Assoc., Inc. v. Beazer Homes Corp. (U.S.D.C.)

Filed:  June 26, 2017

Opinion by:  James K. Bredar

Holding:  Where (1) a principal exerts control over a corporation’s board via a majority acting within the principal’s scope of employment, (2) the board takes actions in breach of contract and in contravention of principal’s express statements, and (3) sufficient privity exists to survive a challenge based on economic loss doctrine, well-pleaded allegations of fraudulent misrepresentation against the principal are sufficient to survive a motion to dismiss for failure to state a claim.

Facts:  Plaintiffs (“Owners”) are members of master and subordinate property owners’ associations in a mixed residential and commercial development.  Defendant (“Developer”) is the developer of the relevant properties.

Development began in 2005, and Developer incorporated master and subordinate owners’ associations one year later.  Soon thereafter, Developer caused its employees to occupy the initial positions on both associations’ boards.  Developer filed on behalf of each association similar covenants under which a management company would maintain common areas, with Developer to pay costs until such time as it transferred title to the common area property to the associations.  Developer began billing Owners in 2008 but did not transfer title to the common areas until December 2015.

Owners, as members of the master and subordinate associations, brought separate but practically identical actions alleging breach of contract, negligent misrepresentation, and fraudulent misrepresentation.  Developer removed both actions under diversity jurisdiction and moved to dismiss the tort claims for failure to state a claim.  Removal was granted, and both actions were joined for convenience and efficiency.

Analysis:  Developer first argued that Owners’ allegations sounded only in contract.  The court began by noting that under the doctrine of respondeat superior, because Developer’s employees joined the boards under its direction and in furtherance of its objectives, Developer would be vicariously liable for any tortious acts committed by the board.  By extension, because board members of Maryland non-stock corporations owe the same fiduciary obligations as any other Maryland corporation, breach of duty accompanying a contractual obligation would be sufficient to support a tort claim.  So finding, the court permitted Owners’ tort claims.

Developer next argued that the economic loss doctrine barred any tort claims, such that its alleged negligence causing purely economic harms ought not create tort liability in the absence of privity, actual physical injury, or risk thereof.  However, noting that Maryland has traditionally permitted tort actions for purely economic losses in the context of fraud, and finding more than sufficient allegation of privity between the parties via the intimate nexus between Owners and the associations, and Developer’s control of the boards, the court deemed risk of tort liability reasonably foreseeable.

Third, Developer argued that Owners’ reliance on Developer’s allegedly negligent or fraudulent statements was unreasonable.  Avoiding the factual question of whether reliance was reasonable, the court evaluated the board’s alleged conduct under the adverse domination doctrine, where knowledge or actions of an agent whose interests are adverse to the principal cannot be imputed to the principal.  Because corporate entities act through agents who wouldn’t rationally be expected to communicate their own wrongdoing to the principal, equitable considerations lean in favor of the corporation and create a rebuttable presumption.  Here, a cause of action against the board (and vicariously, Developer) would not accrue if a disinterested majority board could be proven.  In the court’s view, Developer had not alleged sufficient facts to show that the boards contained a disinterested majority during the time period at issue.

Lastly, Developer argued that Owners’ claims failed to meet FRCP Rule 9(b)’s particularity requirements that time, place, and contents of allegedly fraudulent statements and the person making such statements be pled with sufficiency.  Finding the complaint to contain sufficiently complete allegations (an accounting of dated bills approved by the boards while under Developer’s control, with identities of the board members responsible), the court found Owners to have met their Rule 9(b) burden.

Accordingly, the court found Owners to have survived Developer’s motions to dismiss.

The full opinion is available in PDF.

Tuesday, July 25, 2017

In re American Capital, Ltd. Shareholder Litigation (Cir. Ct. Mont. Cnty)

Filed: July 12, 2017

Opinion by: Ronald B. Rubin

Holding:  A claim that a transaction is subject to the entire fairness standard of review survives a motion to dismiss under Delaware law where a minority shareholder exercised actual control over corporate decision-making by apparently forcing a quick sale for its own short-term gain, threatening ouster of the board to pressure members to ignore other serious bids and alternative courses of action at better values, and demanding unique and unjustifiable compensation for the deal.

Facts: 

Plaintiffs are the common shareholders of American Capital Ltd. (the “Company”). Following a settlement with the Company’s directors and officers, the only remaining Defendant was a management corporation described as being an activist hedge fund. From 2014 to 2015, the Company’s board regularly considered strategic options for the Company and eventually decided on a plan to spin the Company off into a new business development company, which the Company would manage. On September 20, 2015, the Company announced the spin-off plan and requested shareholder approval.

On November 16, 2015, Defendant emailed the Company CEO reporting an 8.4% ownership interest in the Company, and stating their intention to file a preliminary proxy contesting the spin-off plan. This was followed up by a telephone call informing him of their intention to remove him, the management and the board. Shortly thereafter, Defendant sent a letter criticizing the management and board, an attack on the spin-off plan, and a press release. Defendant urged the Company to drop the spin-off plan, replace the board, and undertake a strategic review. Defendant also filed a proxy statement with the SEC contesting the spin-off and urging shareholders to vote against any proposal by the board. After threatening to publicly call for the resignation of the CEO, Defendant began to by-pass him in dealings with the Company.

Shortly thereafter, the Company announced the formation of a strategic review committee to review the Company’s prospects, including a possible sale. Defendant reported an increase in ownership to 9.1%, and on that same day, a Capital Corporation sent the CEO a letter urging the Company to enter into a transaction with them. Defendant made recommendations regarding the review and sought to meet with the committee and the Company’s investment bankers. It continued to demand a sale and to threaten to seek the replacement of the Company’s board and management. It provided a list of potential buyers and continued to report increases in its ownership. When the board announced the decision to solicit purchase offers, Defendant called it the right course of action. Defendant also requested that the Company postpone the annual shareholder meeting and director nomination deadline.

After the Capital Corporation made an unsolicited purchase offer, Defendant urged the Company to reach a deal as soon as possible. The Company’s financial advisers met with the Defendant’s representatives. Defendant encouraged the investment bankers to finalize the sale even if it meant selling at a loss. In February 2016, the Company proposed three alternative scenarios to a quick sale of the whole Company. The Company’s management believed the shareholders would receive greater returns through an orderly liquidation or by remaining a standalone company. Yet the Company’s board continued to push for a sale, as demanded by the Defendant. The board once again pushed back its annual meeting, which extended the deadline for the Defendant to file a competing proxy. Furthermore, the committee and investment bankers withheld the liquidation scenario projections from the Company’s board.

The Company received several bids to acquire it. Defendant signed confidentiality agreements with the Company affording it unfettered access to the review process, and with the Capital Corporation to view its bid information. In a meeting with the Company’s legal and financial advisers, Defendant expressed a strong preference for the Capital Corporation’s bid—even though other offers appeared to have a better value. It also expressed a preference for a quick sale over an orderly liquidation—even at a lower value.

Soon after, the Company’s board outright rejected a competing bidder who increased its proposal subject to an exclusivity provision. The Capital Corporation submitted a revised bid and negotiated a voting agreement to lock in Defendant’s support. Defendant threatened the Company that if it failed to settle with Defendant for its expenses and close the deal, the Company’s board would be reconstituted. When the Company tried to revise terms of settlement, the Defendant threatened another strategic review unless the sale closed.

In May 2016, a merger with the Capital Corporation was announced. The Company approved a settlement agreement on the following terms: if the deal did not close, the board members would be replaced by the Defendant’s selections, the chairman would resign, and another review would be undertaken. In exchange, the Defendant would not launch a proxy fight before the next annual meeting. The Company also agreed to pay the Defendant $3 million.

Defendant filed a Motion to Dismiss the Plaintiff’s Amended Complaint on the grounds that personal jurisdiction is lacking, and that the transaction is not subject to entire fairness review under Delaware law. The Court denied both Motions.

Analysis: 

Defendant satisfied the transacting business prong of the Maryland long-arm statute and the purposeful availment requirement of the Due Process clause because: the Company was headquartered in Maryland where it employed hundreds  (many of which were laid off due to the sale); Defendant initiated many calls to Maryland; Defendant triggered the process and events that led to the filing of the case when it sent the initial email (followed by many others) to the Company; and until the deal closed, Defendant enmeshed itself in the Company’s strategic review process and the board’s deliberations. These constitute repeated and intentional efforts towards the sale of a Maryland-based company. From the facts pleaded, it also appears that Defendant intentionally acquired a large portion of Company stock and increased it for a single purpose—to force a sale and make a short-term gain.

As for the substantive issue, Plaintiffs viewed the merger as the predictable result of Defendant’s pressuring the board to sell or be ousted. Defendant counters that the merger was the best value reasonably available, was vetted through a competitive bidding process, and that the Company’s board merely took the input of a large shareholder seriously.

Where, as here, a shareholder owns less than 50% of the Company’s stock, Plaintiffs must allege domination through actual control of corporate conduct. Under Delaware law, a minority shareholder is a controller if it has such formidable power that it exercises actual control over corporate decision-making. Here, Plaintiffs allege that Defendant was a controller for the specific purpose of forcing the sale, and that Defendant reaped unique benefits unavailable to the other shareholders. The controller test is a fact-based inquiry difficult to satisfy, but this case meets the threshold.

Here, the facts if proven would amount to actual control over the sale. No other shareholder received separate monetary compensation for the deal. The sale was already vetted by the financial advisers, and it is not clear what value Defendants added to merit the $3 million payment. The Plaintiffs adequately laid out the profit-making playbook for activist hedge funds, by forcing quick sales such as this one, which took only about six months.

Also, enough facts were pleaded to show that the board did not act independently. Defendant dominated the process and favored the Capital Corporation to the exclusion of other serious bidders that offered better long-term value. The board effectively took no actions to negotiate with those bidders. Collectively, the active role played by Defendant, the apparent willingness of bidders to pay a higher price, and the discount to book value of the stock gives credence to contention that the board knew the Capital Corporation undervalued the Company, but brushed this concern aside in order not to lose a proxy battle to Defendant. This amounts to a colorable claim of board domination. Thus, Plaintiffs sufficiently invoke the benefit of the entire fairness standard of judicial review.

The full opinion is available in PDF.



Monday, June 26, 2017

Capitol PaymentSystems, Inc. v. Salvatore Di Donato (Maryland U.S.D.C.)

Filed: May 23, 2017

Opinion by: Ellen L. Hollander

Holding:  Transfer of venue is appropriate if the convenience of the witnesses, convenience of the parties, and interest of justice outweigh the plaintiff’s choice of venue.

Facts:  Plaintiff is a Maryland corporation with the principle place of business in Maryland that operated payment transaction processing services to a wide array of businesses. Defendant is a New Jersey company with a principle place of business in New Jersey, that operated as an agent in the electronic payment processing industry. Plaintiff and Defendant entered into a contractual agreement in which the defendant would provide independent marketing services.

Plaintiff alleged that Defendant entered into outside business agreements with third parties in breach of the agreement. Plaintiff and Defendant attempted to renegotiate the terms of the agreement, but failed to reach an understanding.

Plaintiff filed suit seeking injunctive relief in the Anne Arundel County Circuit Court on February 1, 2016. Defendant filed a counter suit in the United States District Court for the District of New Jersey on February 25, 2016 before being served for the Maryland case. After withdrawing the case for an injunction from the Circuit Court, the Plaintiff removed the case to the United States District Court of Maryland on March 23, 2016 and the Defendant moved to transfer venue to New Jersey.

Defendant argued that New Jersey was a more convenient forum because it is where the dispute arose, the potential witnesses reside, and the majority of the evidence is located. Plaintiff contended Maryland is the appropriate venue since it is a Maryland corporation, the agreement is governed by Maryland law, the signed agreement was returned to Maryland, and the first-to-file rule requires adjudication of the case in Maryland.

Analysis:  The Court began its analysis by upholding the validity of both the Maryland suit as well as the New Jersey action. In adjudicating a motion to transfer the Court examines several case-specific factors. The factors pertinent to this case include: 1) the weight accorded to the plaintiff’s choice of venue; 2) witness convenience and access; 3) convenience of the parties; and 4) the interest of justice. (Citing Plumbers and Pipefitters Nat. Pension Fund v. Plumbing Serv., Inc.)

The Court began its analysis by reviewing the Plaintiff’s choice of venue. Since the conduct underlying the claim occurred entirely in New Jersey the Plaintiffs’ choice of venue is diminished. The Court sided with the Defendant that the convenience of the witnesses favored New Jersey because all the third parties citied in the complaint, which the merchant Defendant allegedly interfered with, are located in New Jersey or New York. The convenience of the parties would not be more burdensome in New Jersey or Maryland, so the Court did not weight this factor heavily in the final determination. Likewise, transfer would not negatively impact the interest of justice since New Jersey Courts have ample history of ruling on cases controlled by Maryland law.

Finally, the Court declined to adhere to the first-to-file rule since the convenience of the factors supported transfer to New Jersey. Examining this rule under the interests of justice, the fact that the Plaintiff filed first in Maryland Court did not control because of the specifics of the matter. Defendants filed in Federal Court before the Plaintiff, weeks before being served notice of the Maryland case and the Maryland case was moved to Federal Court.

Motion to transfer Granted.

The full opinion is available in PDF.

Wednesday, June 21, 2017

Amster v. Baker (Ct. of Appeals)

Filed: May 22, 2017

Opinion by: J. Adkins

Holding:  Commercial information is “confidential” and therefore exempt from disclosure under the Maryland Public Information Act (the “MPIA”) if it “would customarily not be released to the public by the person from whom it was obtained.”

Facts:  A developer submitted a zoning application to the Prince George’s Planning Board of Maryland-National Capital Park and Planning Commission (the “Commission”) to develop a certain tract of land for a mixed-use town center.  In connection with the planned development, the developer entered into a lease with a supermarket chain.  The developer voluntarily provided a redacted copy of the lease with the supermarket to the Prince George’s County Executive (the “County Executive”) to assist with ongoing discussions regarding the proposed development.  The plaintiff filed a MPIA request with the County Executive requesting a copy of the lease.  Such request was denied and plaintiff filed suit against the County Executive seeking access to the lease (the developer subsequently intervened as a defendant).  Applying the test established in Critical Mass Energy Project v. Nuclear Regulatory Commission (975 F.2d 871 (D.C. Cir. 1992)), and based in part on an affidavit from an employee of the developer that the contents of the lease were the product of “extensive confidential negotiations,” the circuit court granted the defendants’ motion for summary judgment finding the lease was “confidential commercial information.” On appeal, the Court of Special Appeals affirmed the circuit court’s grant of summary judgment and further held that confidential treatment of the lease had not been waived by the public disclosure of certain terms of the lease.

Analysis:  The MPIA grants a general right of access to records in the possession of the Maryland State and local governments, which is limited by numerous exemptions to the disclosure requirement.  A mandatory exemption to the disclosure requirement applies to any part of a public record containing any confidential commercial information.  Looking to federal courts’ interpretations of a similar exemption under the Federal Freedom of Information Act (the “FOIA”), the Court of Appeals declined to apply the two-part test established in National Parks and Conservation Ass’n v. Morton (498 F.2d 765 (D.C. Cir. 1974)) and instead upheld the circuit court’s application of the test established in Critical Mass, which held that commercial information voluntarily provided to the government is confidential, and therefore not required to be disclosed under the MPIA, if it “would customarily not be released to the public by the person from whom it was obtained.”  The Court of Appeals noted that in National Parks, the commercial information was provided to the government pursuant to statute, whereas in Critical Mass, and in this case, the commercial information was provided to the government voluntarily; therefore, the government interests at stake differed.  In the former situations, the government’s interest focuses on the effect of disclosure on its quality; in the later situations, the government’s interest is in ensuring continued available of the voluntarily disclosed commercial information, since the disclosing party may refuse further cooperation.  

Although the circuit court applied the correct test in granting summary judgment in favor of the defendants, the Court of Appeals vacated the summary judgment and remanded the matter back to the circuit court to conduct the necessary factual inquiry to determine whether all aspects of the lease were confidential and therefore exempt from disclosure under the MPIA.  The Court of Appeals highlighted that the disclosure requirements and exemptions under the MPIA apply to information, not documents, and therefore the circuit court needed to determine whether the lease contained any non-confidential information subject to disclosure, particularly because the defendants failed to demonstrate that the lease should be exempt from disclosure in its entirety because the developer had not demonstrated that it would not customarily disclose any contents of the lease.  Moreover, any information with respect to the lease that was already publically disclosed by defendants in other settings was not protected by the exemption for confidential commercial information.

The full opinion is available in pdf.

Sunday, June 11, 2017

Proexpress Distributors LLC v. Grand Electronics (Ct. of Special Appeals, Unreported)

Filed: May 24, 2017

Opinion by: Judge Glenn T. Harrell, Jr.

Holding:

Simply storing a “trade secret” in a cloud-based service is not sufficient to be considered reasonable to maintain its secrecy under Maryland law.  Reasonable efforts may include changing the password to the account after an employee leaves, limiting access on a “need to know” basis within the company, or restricting the dissemination of information with confidentiality or non-disclosure agreements.

Facts:

Plaintiff sells electronic products on Amazon.com.  Defendant is a competitor and was founded by a former employee of Plaintiff.  Plaintiff alleges it owns a trade secret in its “methodology by which it inputs information into the Amazon search template in order to drive sales for its online tablet computer business.”  Plaintiff keeps its trade secret, along with other business documents, in cloud-based password-protected accounts on the Internet.  Plaintiff shares access to the Dropbox accounts with its service providers.

On September 18, 2014, Plaintiff filed a complaint in the Circuit Court for Montgomery County for misappropriation of a trade secret.  Plaintiff asserted that a consultant of Defendant, who was a former employee of a service provider of Plaintiff, viewed the trade secret in Plaintiff’s Dropbox account in April 2014.

The Circuit Court ruled in favor of Defendant on the trade secret issue.  Plaintiff appealed to the Court of Special Appeals (Court), which affirmed the decision regarding the alleged trade secret.

Analysis:

Md. Code, Commercial Law Art. § 11-1201 states that a “trade secret” is “information… that (1) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

The Court upheld the Circuit’s Court decision in ruling that Plaintiff’s actions were not reasonable to safeguard its proprietary information involving a cloud storage service.  Cloud storage is a “backup and storage service on the Internet” whereby a “customer’s files are downloaded to anyone’s computer with a Web browser and password.”  Dropbox’s desktop applications allow customers to “easily move files from (their) computer to the cloud and vice versa by dragging and dropping them into (their) Dropbox folder.  The service automatically and quickly syncs (their) files across all of (their) devices, so (they) can access everything, everywhere.”

The Court contrasted Plaintiff’s efforts with the company in LeJeune v.Coin Acceptors, Inc., 381 Md. 288, 310-11, 849 A.2d 451, 464-65 (2004), which did not want its customers disclosing its pricing with other customers because it used a “tiered pricing scheme”.  The company acted reasonably under those circumstances by (1) negotiating non-disclosure agreements with its customers, (2) marking “confidential” on pricing and proposal documents, and (3) communicating to the employees in the company’s employee handbook that it required employees to protect the company’s secret manufacturing process and business methods.

The Court determined that merely uploading its proprietary methodology to a cloud-based program on the Internet is not a reasonable effort to protect the information.  The Court suggested ways in which a company can satisfy the second prong of § 11-1201 when information is stored in the “cloud”.  Examples of reasonable efforts to maintain the secrecy of Plaintiff’s methodology include (1) changing the password to the account after an employee leaves, (2) limiting access on a “need to know” basis within the company, and (3) restricting the dissemination of information with confidentiality or non-disclosure agreements.

The Court also reviewed whether the punitive damages award was excessive.

This is an unreported opinion.  See Md. Rule 1-104.

The full opinion is available PDF.