Top 10 Business Law Cases of the Year (2015)

Business & Corporate Law Section Annual CLE

Top 10 Business Law Cases from the Past Year

May 8, 2015

Wendy Gerwick CoutureAssociate Professor of Law

University of Idaho

ContractsDelaware BylawsDelaware Exculpatory ProvisionsSecuritiesLiability for Opinion LettersNegotiable Instruments

1. Agrisource, Inc. v. Johnson, 156 Idaho 903 (Aug. 18, 2014).

Agrisource, Inc.Contract to purchase wheat

Johnson

Johnson Grain Inc. (Brown was majority owner)

Contract:

Johnson Grain

Robert Johnson

Johnson

Contract:

Johnson Grain

Robert JohnsonAgrisource paid with check payable to “Johnson Grain.”Check indorsed “Johnson Grain Inc.”

Johnson

Contract:

Johnson Grain

Johnson Grain Inc. had commodity dealer license.

Johnson

Contract:

Johnson Grain

Johnson’s testimony: (1) told Agrisource that working for “Brown’s company”; and (2) told Agrisource that Brown owned the grain elevator.

Johnson

An agent is liable unless the other party has notice of two facts: (1) the agent is acting for a principal, and (2) the principal’s identity.

§ 4 - If, at the time of a transaction conducted by an agent, the other party thereto has notice that the agent is acting for a principal and of the principal's identity, the principal is a disclosed principal.

Restatement (Second) of Agency

§ 9 - A person has notice of a fact if he knows the fact, has reason to know it, should know it, or has been given notification of it.

The agent must affirmatively and clearly inform the other party he is acting as an agent for a specific principal.

The third party has no duty to investigate.

Contract:

Johnson Grain

Johnson’s testimony: (1) told Agrisource that working for “Brown’s company”; and (2) told Agrisource that Brown owned the grain elevator.

Johnson

2. Wada Farms, Inc. v. Jules & Assocs., No. 4:14-CV-324, 2015 WL 128100 (Jan. 7, 2015).

Wada Farms, Inc.(Idaho corp.)

Jules & Assocs.(Cal. corp.)

breach of contract

Contract• Choice of law = California• Forum selection clause = Los Angeles County

2. Wada Farms, Inc. v. Jules & Assocs., 2015 WL 128100 (D. Idaho Jan. 7, 2015).

breach of contract

I.C. § 29-110(1) - Every stipulation or condition in a contract, by which any party thereto is restricted from enforcing his rights under the contract in Idaho tribunals, or which limits the time within which he may thus enforce his rights, is void as it is against the public policy of Idaho. . . .

breach of contract

Federal law governs the effect and scope of forum selection clauses in diversity cases. Jones v. GNC Franchising, Inc., 211 F.3d 495 (9th Cir. 2000).

breach of contract

When considering a 1404(a) motion to transfer venue based on a valid forum selection clause, the court should deny the 1404(a) motion “only under extraordinary circumstances.” Atlantic Marine Constr. v. U.S. Dist. Ct. for the W.D. of Tex., 134 S.Ct. 568 (2013).

breach of contract

“If I.C. 29-110(1) was determinative, striking down the forum selection clause would be routine rather than extraordinary, standing Atlantic Marine on its head.”

When considering a 1404(a) motion to transfer venue based on a valid forum selection clause, the court should deny the 1404(a) motion “only under extraordinary circumstances.” Atlantic Marine Constr. v. U.S. Dist. Ct. for the W.D. of Tex., 134 S.Ct. 568 (2013).

breach of contract

Forum selection clause overrides I.C. § 29-110(1).

In federal court in 9th Cir., under diversity jurisdiction:

Federal procedural law governs enforceability.

breach of contract

If this case had remained in Idaho state court:

breach of contract

Substantive law governs enforceability.

See Cerami-Kote, Inc. v. Energywave Corp., 116 Idaho 56 (1989) (applying Florida law to invalidate a Florida forum selection clause because Florida would have found that the clause violates Idaho’s public policy, as expressed in I.C. § 29-110(1)).

breach of contract

Would depend on how California law would have treated the forum selection clause. California law may have given more deference to the forum’s public policy expressed in I.C. § 29-110(1).

Bright Harvest H.J. Heinz Co.Breach of

Co-Pack Agreement

3. Bright Harvest Sweet Potatoes Co. v. H.J. Heinz Co., 2014 WL 3845377 (D. Idaho 2014).

Co-Pack Agreement

Section 3 – The production schedule established “a non-binding target of 10 million pounds of sweet potato fries per year, and it is the intent of the Parties that Heinz will deliver to co-Packer purchase orders for such Products as hereinafter provided, subject to the current capacity of Co-Packer to produce such Products.”

Co-Pack Agreement

Section 3(ii) – “Heinz agrees that no monthly purchase order may exceed 50% of Co-Packer’s current forecasted volume without mutual consent.”

Co-Pack Agreement

Section 4 – “Heinz may source the sweet potato fry products from its own factories or from any other source during the term hereof.”

I.C. 28-2-306(2)

(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.

(2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

I.C. 28-2-306(1)

I.C. 28-2-306(2)

I.C. 28-2-306(1)

Cross-MSJ issue: does the contract impose on Heinz an obligation to purchase fries exclusively from Bright Harvest?

Co-Pack Agreement

Court: ambiguous re: exclusivity

Co-Pack Agreement

1st reasonable interpretation: Heinz will purchase all fries from Bright Harvest, to the extent Bright Harvest has capacity.

Co-Pack Agreement

1st reasonable interpretation: Heinz will purchase all fries from Bright Harvest, to the extent Bright Harvest has capacity.

2nd reasonable interpretation: Heinz is not committed to purchase all of its fries from Bright Harvest.

I.C. 28-2-306(2)

I.C. 28-2-306(1)

Cross-MSJ issue: does the contract impose on Heinz an obligation to purchase fries exclusively from Bright Harvest? Ambiguous; question for jury.

I.C. 28-2-306(2)

I.C. 28-2-306(1)

Jury Instruction: In order for the Co-Pack Agreement to be an enforceable contract, it must either . . . or (2) contain a term which requires Heinz to obtain its sweet potatoes exclusively from Bright Harvest.

I.C. 28-2-306(2)

I.C. 28-2-306(1)

I.C. 28-2-306(2)

I.C. 28-2-306(1)

Jury Instruction: In order for the Co-Pack Agreement to be an enforceable contract, it must either (1) contain a term which measures the quantity of sweet potatoes to be sold by a stated estimate of what Heinz requires, or (2) . . .

Co-Pack Agreement

I.C. 28-2-306(2)

I.C. 28-2-306(1)

Jury Instruction: In order for the Co-Pack Agreement to be an enforceable contract, it must either (1) contain a term which measures the quantity of sweet potatoes to be sold by a stated estimate of what Heinz requires, or (2) . . .

4. ATP Tour, Inc. v. Deutcher Tennis Bund, 91 A.3d 554 (Del. May 8, 2014).

Question:May the Board of a Delaware non-stock corporation lawfully adopt a fee-shifting bylaw that obligates a claimant in an intra-corporate suit to pay all “fees, costs, and expenses” if the claimant “does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought”?

DGCL § 109 – “The bylaws may contain any provision, not inconsistent with law or with the certification of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers, or employees.”

Would not conflict with common law – because corporate bylaws are contracts among a corporation’s shareholders, and the American Rule can be modified by contract

But not enforceable if adopted or used for an inequitable purpose – but the intent to deter litigation is not invariably an inequitable purpose

PROPOSED LEGISLATION

DGCL § 101(f) – “The certificate of incorporation may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim . . .”

DGCL § 109(b) – “The bylaws may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim . . .”

DGCL § 115 – “‘Internal corporate claims’ means claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”

5. City of Providence v. First Citizens BankShares, Inc., 99 A.3d 229 (Del. Ch. 2014).

BACKDROP: Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) – forum selection bylaw selecting Delaware as the exclusive forum for litigation relating to corporation’s internal affairs is facially valid (could still be challenged, as applied, because unreasonable or inequitable).

THIS CASE: forum selection bylaw selecting North Carolina (where headquartered) as the exclusive forum for derivative claims, fiduciary duty claims, claims arising under DGCL, and claims governed by the internal affairs doctrine, “to the fullest extent permitted by law”

Likewise facially valid (within proper scope of corporate bylaws under DGCL § 109(b))

BACKDROP: Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del Ch. 2013) – forum selection bylaw selecting Delaware as the exclusive forum for litigation relating to corporation’s internal affairs is facially valid (could still be challenged, as applied, because unreasonable or inequitable).

Argument that violates the “exclusive jurisdiction” provisions of the DGCL (1) is not implicated by these claims; (2) might be misreading the “exclusive jurisdiction” provisions, which arguably only allocate jurisdiction among the Delaware court; and (3) are saved by the “to the fullest extent permitted by law” clause.

As applied here, neither unreasonable nor inequitable.

DGCL § 115 – “The certificate of incorporation or the bylaws may require, consistent with jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State, and no provision of the certification of incorporation or the bylaws may prohibit bringing such claims in the courts of this State.”

AFFIRM STATUTORILY THAT CAN SELECT DELAWARE AS EXCLUSIVE FORUMBoilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013).

OVERRULE TO EXTENT FOREIGN JURISDICTION IS EXCLUSIVE JURISDICTIONCity of Providence v. First Citizens BankShares, Inc., 99 A.3d 229 (Del. Ch. 2014).

CONSISTENT WITH DELAWARE LLC ACT § 18-109 (d) In a written limited liability company agreement or other writing, a manager or member may consent to be subject to the nonexclusive jurisdiction of the courts of, or arbitration in, a specified jurisdiction, or the exclusive jurisdiction of the courts of the State of Delaware, . . . a member who is not a manager may not waive its right to maintain a legal action or proceeding in the courts of the State of Delaware with respect to matters relating to the organization or internal affairs of a limited liability company.

breach of contract

Would depend on how California law would have treated the forum selection clause. California law may have given more deference to the forum’s public policy expressed in I.C. § 29-110(1).

6. In re Cornerstone Theurap. Inc. Stockholder Litig., 2014 WL 4418169 (Del. Ch. 2014)

GO-PRIVATE MERGER WITH CONTROLLING STOCKHOLDER

Plaintiff minority shareholders met burden to establish “entire fairness” standard:(1) Stockholder controlled corporate

machinery;(2) It used that machinery to facilitate a

transaction of which it thus stood on both sides

(3) Transaction was not entirely fair to minority.

Disinterested Directors & Members of Special Committee • Facilitated the unfair transaction

ULTIMATE LIABILITY:Depends on establishing breach of an non-exculpated duty (i.e., breach of duty of loyalty)

MOTION TO DISMISS:Can the disinterested directors obtain dismissal if plaintiffs failed to plead a non-exculpated claim, or are they “along for the ride” once the plaintiffs establish “entire fairness” review?

Emerald Partners II, 787 A.2d 85 (Del. 2001) – “When entire fairness is the applicable standard of judicial review, this Court has held that injury or damages becomes a proper focus only after a transaction is determined not to be entirely fair. A fortiori, the exculpatory effect of a Section 102(b)(7) provision only becomes a proper focus of judicial scrutiny after the directors’ potential liability for the payment of monetary damages has been established.”

Court of Chancery: Bound by “controlling precedent,” denied the motion to dismiss.

CERTIFIED INTERLOCUTORY APPEAL TO DELAWARE SUPREME COURT.

“Isn’t this just creating a status crime?”

Delaware Supreme CourtMay 6, 2015 Oral Argument

“Isn’t this just creating a status crime?”

Delaware Supreme CourtMay 6, 2015 Oral Argument

MY PREDICTION: Reverse and remand. In order to prevent dismissal of independent directors, plaintiffs must plead breach of non-exculpated duties, even if “entire fairness” applies to transaction.

SEC AEHIviolation of § 5 of Securities

Act for offering or selling unregistered securities

7. SEC v. Alternate Energy Holdings, Inc., 2014 WL 2515710 (D. Idaho May 13, 2014).

SEC’s MSJ: Defendant’s burden to show that a question of fact

exists that the offerings were exempt from registration.

exists that the offerings were exempt from registration. Defendant’s burden to show that a question of fact

exists that the offerings were not integrated.

INTEGRATION OF OFFERINGS

§ 4(a)(2) EXEMPTION

Singular Plan of Financing

Issuance of Same Class of Securities

Timing of Offers

Same Kind of Consideration Received

General Purpose

“transactions by an issuer not involving any public offering”

TOUCHSTONE: Whether the particular class of persons affected needs the protection of the Securities Act (i.e., registration), or whether they can fend for themselves.

SEC v. Ralston Purina Co., 346 U.S. 119 (1953).

Number of Offerees

Sophistication of Offerees

Size and Manner of Offering

Relationship of Offerees to Issuer

Court granted SEC’s MSJ that AEHI violated § 5.

Investors Omnicareviolation of § 11 of Securities

Act for alleged misrepresentations in registration statement

8. Omnicare v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318 (2015).

Alleged Misrepresentations: Statements of Opinion“We believe our contract arrangements with other healthcare providers, our pharmaceutical providers, and our pharmacy practices are in compliance with applicable federal & state laws.”

Section 11 violated if registration statement “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.”

Opinion actionable as an affirmative misrepresentation if actually disbelieved.

Opinion actionable as an omission if: (1) it omits material facts about the issuer’s inquiry into, or knowledge concerning, a statement of opinion, and (2) those facts conflict with what a reasonable investor would take from the statement itself.

Rule 10b-5 violated if “make any untrue statement of a material fact or . . . omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading.”

ContractsDelaware BylawsDelaware Exculpatory ProvisionsSecuritiesLiability for Opinion LettersNegotiable InstrumentsX