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.

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.

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.

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.

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.

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.

James Dillon v. BMO Harris Bank, N.A. (4th Circuit)

Filed: May 10, 2017

Opinion by: Judge Barbara Milano Keenan

Holding: An arbitration agreement containing choice-of-law provisions applying tribal law and disclaiming the application of federal and state law was held to be unenforceable because (1) by its unambiguous language, it triggered the prospective waiver doctrine, which disallows arbitration agreements that prevent litigants from vindicating federal substantive statutory rights as contravening public policy; and (2) the provisions could not be severed as they went to the essence of the agreement and were negotiated by a party, not in good faith, with superior bargaining power.

Facts:  Plaintiff, a resident of North Carolina, applied for and received a “payday loan” in 2012. “Payday loans” are short, unsecured consumer loans for small amounts and with generally high interest rates (sometimes in excess of 400%). The loan was offered through the website of Great Plains Lending, LLC (the “Company”), which was wholly owned by a federal tribe.  Plaintiff executed a contract (the “Contract”) that contained a loan agreement and an agreement to submit disputes to arbitration. Both agreements contained choice-of-law provisions that required the application of tribal law and disclaimed the application of state or federal law.

Plaintiff filed a putative class action lawsuit in district court, claiming that the Company and other tribal lenders had issued unlawful loans. Instead of suing the lenders for violating state usury laws, Plaintiff sued the financial institutions that facilitated the electronic lending transactions. Plaintiff claimed that the institutions constituted an enterprise whose members, including Defendant BMO Harris (“Defendant”), conducted and participated in the collection of unlawful acts in violation of the Rackeeter Influenced and Corrupt Organizations Act.

In district court, Defendant sought to compel arbitration pursuant to the terms of the Contract and relying on the Federal Arbitration Act (“FAA”). The district court held the Contract unenforceable because it denied the applicability of all federal and state law. Defendant appealed.

Analysis: Pursuant to the FAA, the Court has jurisdiction to review de novo the order denying the motion to compel arbitration. The FAA provides that arbitration agreements are valid and enforceable, except upon grounds at law or in equity for the revocation of any contract. Consistent with such contract principles, the Supreme Court has held that arbitration agreements that operated as prospective waivers of a party’s right to pursue statutory remedies are unenforceable as violating public policy. This prospective waiver doctrine keeps courts from enforcing arbitration agreements that prevent a litigant from vindicating federal substantive statutory rights. 

A mere foreign choice-of-law provision is insufficient to trigger the application of the doctrine. A court must first analyze whether, as a matter of law, “the choice-of-forum and choice-of-law clauses operate in tandem as a prospective waiver of a party’s right to pursue statutory remedies.” Where it is unclear, the arbitrator should decide in the first instance whether a litigant is deprived of those remedies, and the waiver issue is not ripe until a federal court is asked to enforce the arbitrator’s decision. 

In Hayes v. Delbert Services Corp., 811 F.3d 666 (4th Cir. 2015), the Court applied the prospective waiver doctrine to a contract governing an internet payday loan by another federal tribe lender. The choice-of-law provision disclaimed the application of any law other than that of the tribe. The Hayes Court held that this language flatly and categorically renounced the authority of federal statutes. The provision was not severable from the contract because it went to its essence; the animating purpose of the agreement was to circumvent federal law. Another disclaimer of the application of federal and state law in the contract lent support to this position.

Here, Defendant argued that the waiver issue was not ripe as it had not yet come before an arbitrator. Plaintiff countered that the issue was ripe because the language of the choice-of-law provision was unambiguous, thus triggering the prospective waiver doctrine. The Court agreed with Plaintiff. The choice-of-law and other provisions in the Contract are similar or identical to the provisions in Hayes; these applied the law of the federal tribe or disclaimed the application of federal and state laws as to the Contract and lender. As in Hayes, the Contract was an unambiguous attempt to apply tribal law to the exclusion of federal and state law.

The Court held that the choice-of-law provisions could not be severed from the Contract. Severance is allowed only if the provision is not essential to the agreement and the party seeking to enforce the remainder of the agreement negotiated it in good faith. Restatement Second of Contracts § 184 (1981). Here, as in Hayes, the provision went to the essence of the agreement. The Court did not accept Defendant’s request to grant Plaintiff access to federal substantive rights because this would essentially allow Defendant to rewrite the Contract and defeat the purpose of the Contract entirely.

Additionally, the Company used its superior bargaining power to avoid the application of state and federal law, and Section 184 does not permit redrafting where superior bargaining power is used to extract a promise offensive to public policy. Thus, the Company did not meet the second prong to negotiate in good faith.  

The full opinion is available in PDF. 

Egan v. First Opportunity Fund Inc. (Cir. Ct. Balto. City)

Filed: April 22, 2016

Opinion by: Judge W. Michel Pierson

Holding: Stockholders of a Maryland corporation were not entitled to payment of fair value for their shares of stock (commonly referred to as “appraisal” rights) under the Maryland General Corporation Law (the “MGCL”), § 3-202, where the corporation’s charter was amended to expressly divest the stockholders of any appraisal rights in connection with a subsequent consolidation of the fund into another fund because (i) appraisal rights are not “contract rights” nor were they “expressly set forth” in the corporation’s charter as required under MGCL § 3-202(a)(4), and (ii) the amendment of the charter to divest the stockholder appraisal rights occurred prior to the consolidation and thus, at the time of the vote on the consolidation, the charter had eliminated appraisal rights in accordance with MGCL § 3-202(c)(4).

Facts: First Opportunity Fund, Inc., was a registered closed-end investment fund formed as a Maryland corporation (“FOFI”).  In 2014, the stockholders of FOFI and the stockholders of two other funds managed by affiliated directors and fund advisors were asked to approve a plan of reorganization (the “Consolidation”), under which the assets of those three funds would be transferred to Boulder Growth and Income Fund, Inc. (“BIF”).  Of all the funds involved in the Consolidation, FOFI was the only corporation whose stockholders enjoyed Maryland’s statutory appraisal rights under MGCL § 3-202 (because the other funds were publicly traded and thus excepted from the appraisal rights requirement pursuant to MGCL § 3-202(c)(1)).  Therefore, prior to submitting the proposed Consolidation to the stockholders for their consideration, the board of directors of FOFI proposed that the charter of FOFI be amended to divest FOFI’s stockholders of any appraisal rights (“Proposal 1”).

The proxy statement issued by the directors of the four funds disclosed that if Proposal 1 was approved, the stockholders meeting would be temporarily adjourned and FOFI would file articles of amendment to amend the charter to include Proposal 1.  If Proposal 1 was not approved, the proposal to consider the Consolidation would not be considered.

At the FOFI stockholders meeting, Proposal 1 was approved.  The meeting then adjourned and articles of amendment containing Proposal 1 were accepted for record by the State Department of Assessments and Taxation.  The meeting then resumed and the transfer of assets from FOFI to BIF was approved by the FOFI stockholders.  Following these actions, two of FOFI’s stockholders (the “Plaintiffs”) submitted a written demand for the fair value of their shares and otherwise complied with the statutory requirements for perfecting appraisal rights under the MGCL.  FOFI and BIF denied the demand and the Plaintiffs filed suit, seeking fair value of their stock pursuant to MGCL § 3-202.  The defendants moved to dismiss the action, and, for the reasons detailed below, the Court granted the defendants’ motion and dismissed the Plaintiffs’ claims.

Analysis: MGCL § 3-202 provides that stockholders of a Maryland corporation may demand and receive payment of fair value of their stock in the event of certain fundamental corporate changes.  The statute also provides a number of circumstances where a dissenting stockholder has no such appraisal right.  See MGCL § 3-202(c).  In Egan, the Plaintiffs alleged that two fundamental changes occurred in connection with the Consolidation process, thus triggering their appraisal rights under the MGCL.  First, in Count I of the Plaintiffs’ complaint, based on the Consolidation of FOFI into BIF, the Plaintiffs asserted appraisal rights arising under MGCL § 3-202(a)(1), which provides for appraisal rights in the event a “corporation consolidates or merges with another corporation.”  Second, in Count II of their complaint, the Plaintiffs asserted appraisal rights arising under MGCL § 3-202(a)(4), which provides for appraisal rights if a “corporation amends its charter in a way which alters the contract rights, as expressly set forth in the charter, of any outstanding stock and substantially adversely affects the stockholder's rights, unless the right to do so is reserved by the charter of the corporation.” 

As to Count I, the Court found that, although there was “no dispute” that the Consolidation of FOFI into BIF was a consolidation or merger under MGCL § 3-202(a)(1), the Plaintiffs’ claims were subject to the provisos of MGCL § 3-202(c).  Among other things, that subsection provides that “a stockholder may not demand the fair value of the stockholder’s stock and is bound by the terms of the transaction if: … [t]he charter provides that the holders of the stock are not entitled to exercise the rights of an objecting stockholder under this subtitle.”  MGCL § 3-202(c)(4).  The Court found that the amendment to FOFI’s charter was adopted in accordance with the literal requirements of the MGCL and, consequently, pursuant to MGCL § 3-202(c)(4), the Plaintiffs had no appraisal rights by virtue of the Consolidation.  In reaching this conclusion, the Court rejected the Plaintiffs’ arguments that the adoption of Proposal 1 and the consolidation were really one and the same transaction and that the amendment of FOFI’s charter should therefore be ignored for purposes of determining the Plaintiffs’ appraisal rights.  Rather, the Court held that the independent nature of the adoption of Proposal 1 and the approval of the Consolidation could not be ignored by the Court in search of a higher equity under the guise of a substance over form analysis.

As to Count II, the Court found that the Plaintiffs had no appraisal rights as a result of the amendment of FOFI’s charter because, after reviewing the legislative history of MGCL § 3-202(a)(4), the Court concluded that appraisal rights are not “contract rights” as used in the statute but that the statute instead refers to “contractual attributes of the stock itself, and does not mean every contract right included in the corporate charter.”  The Court also found that, even if appraisal rights were contract rights, FOFI’s charter made no mention of such rights and thus they were not “expressly set forth” in FOFI’s charter prior as required under MGCL § 3-202(a)(4).  In reaching this conclusion, the Court rejected the Plaintiffs’ assertion that appraisal rights should be deemed to be expressly set forth in FOFI’s charter because a corporation’s charter is a contract between the corporation and its shareholders and statutory law is incorporated into a contract under Maryland law.  On this issue, the Court concluded that “treating an object ‘as though’ it is expressly set forth is not equivalent to that object actually being expressly set forth.”

The full opinion is available in PDF.