Kainos Evolve, Inc. v. InTouch Technologies, Inc. ( 2019 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
KAINOS EVOLVE, INC.,
Plaintiff and Counterclaim
Defendant,
V. C.A. No. 2018-0712-AGB
INTOUCH TECHNOLOGIES, INC.,
Defendant and Counterclaim
Plaintiff.
ORDER DENYING COUNTERCLAIM
DEFENDANT’S MOTION TO DISMISS
WHEREAS:!
A. InTouch Technologies, Inc. is a provider of technology and related
services that enable doctors and hospitals to provide telemedicine services to their
patients using virtual care platforms with live audio, instant messages, email, and
live video.
' The facts recited herein come from the Amended Complaint (Dkt. 46), Third Amended
Counterclaims (Dkt. 50), and documents incorporated therein. See Winshall v. Viacom
Int'l, Inc., 76 A.3d 808, 818 (Del. 2013) (citation and internal quotations omitted)
(“[P]laintiff may not reference certain documents outside the complaint and at the same
time prevent the court from considering those documents’ actual terms” in connection with
a motion to dismiss).
B. Kainos Evolve Inc. provides digital services and cloud-based platforms
in the healthcare industry.
C. Starting in 2015 and early 2016, Kainos represented to InTouch that it
had existing software that could serve as a platform for InTouch’s clinical
applications (the “Platform”). The Platform allegedly would allow InTouch and its
customers to more easily reconfigure and adapt InTouch’s telemedicine technology
to meet particular requirements of hospitals and their clinical workflows without
additional programming.
D. On March 1, 2016, the parties entered into a License and Partner
Agreement (the “Agreement”) under which Kainos licensed its Platform to InTouch
for a five-year term for $3.2 million.
E. On November 30, 2017, InTouch provided written notice to Kainos of
its intent to terminate the Agreement. InTouch alleges that Kainos materially
breached the Agreement because the Platform and associated tools (i) did not operate
substantially in accordance with the description of the Platform and (ii) were not
timely delivered. InTouch had paid Kainos $693,750 under the Agreement.
F. On October 2, 2018, Kainos filed its initial complaint, which it
amended on May 6, 2019. Kainos seeks to recover approximately $2.5 million,
reflecting the remaining balance due under the Agreement.
G. On May 22, 2019, InTouch filed its Third Amended Answer and
Counterclaims, which asserts three claims against Kainos (the “Counterclaim”.
Count I asserts that Kainos breached the Agreement by failing to deliver, maintain
and/or support the clinical software applications that were contemplated to run on
the Platform. Count II asserts that Kainos fraudulently induced InTouch to enter
into the Agreement. Count III seeks reformation of the Agreement.
H. On May 19, 2019, Kainos moved to dismiss Count I in part and Count
II in its entirety under Court of Chancery Rules 12(b)(6) and 9(b).
NOW THEREFORE, the court having considered the parties’ submissions,
IT IS HEREBY ORDERED, this 31 day of December, 2019, as follows:
1. The standards governing a motion to dismiss under Court of Chancery
Rule 12(b)(6) for failure to state a claim for relief are well-settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and ([{iv]) dismissal is inappropriate
unless the “plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.””
a Liability Limitations. Kainos contends that any claims for damages
in Counts I and II that exceed the liability limitations set forth in Sections 17.2, 17.3,
2 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal citations omitted).
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19.1, and/or 19.2 of the Agreement should be dismissed. The court DENIES this
aspect of Kainos’ motion to dismiss.
3. Sections 17.2 and 17.3 purport to limit InTouch’s remedies if Kainos
terminates the Agreement or the “Platform Service” pursuant to those provisions.
Kainos alleges, however, that InTouch “repudiated” the Agreement and caused it to
terminate.2 At a minimum, there is a factual dispute over who terminated the
Agreement that precludes applying any remedy limitations in Sections 17.2 and 17.3
at this stage of the case.
4. Section 19.1 provides, in relevant part, that “[t]o the maximum extent
permitted by law, [each party’s] aggregate liability arising out of or related to this
Agreement [shall not] exceed the amounts actually paid.”* Section 19.2 provides, in
relevant part, that “[t]o the maximum extent permitted by law, [neither party shall]
be liable to anyone for any indirect, punitive, special, exemplary, incidental,
consequential or other damages of any type or kind.”°
3 Am. Compl. J 71 (“InTouch repudiated the Agreement by repeatedly taking the position
that the Agreement terminated December 29, 2017 and by refusing to perform under the
Agreement.”); § 72 (“On February 26, 2018, Kainos provided InTouch with written notice
. . that Kainos was electing to treat InTouch’s repudiation of the Agreement as a
termination of the Agreement.”’).
4 Counterclaim Ex. A (the “Agreement”) § 19.1.
> Id. § 19.2.
5 The public policy against fraud may prevent application of the liability
limitations in Sections 19.1 and 19.2 with respect to Count II.° More generally, in
recognition of the fact that it is preferable for the court to have a factual record before
ruling out available remedies, particularly when issues of public policy may be
implicated, Delaware courts have held that “the enforceability of liability limitations
should not be decided on the pleadings or on summary judgment.”’ The court sees
no reason to depart here from this approach of declining to decide the enforceability
of liability limitation provisions on the pleadings.®
6. Count II. In Count II, InTouch alleges that Kainos made fraudulent
representations that fall into two categories: (i) extra-contractual representations
Kainos made before entering into the Agreement and (ii) representations Kainos
made in Section 17.2 of the Agreement itself? Apart from seeking relief under the
liability limitations in the Agreement, Kainos advances four other arguments in
© See ABRY P’rs V, L.P. v. F&W Acq. LLC, 891 A.2d 1032, 1035-36 (Del. Ch. 2006)
(“when a seller intentionally misrepresents a fact embodied in a contract — that is, when a
seller lies — public policy will not permit a contractual provision to limit the remedy of the
buyer to a capped damage claim. Rather, the buyer is free to press a claim for rescission
or for full compensatory damages.”).
7 Data Ctrs. LLC v. 1743 Hldgs. LLC, 2015 WL 9464503 (Del. Super. October 27, 2015)
(citing J. A. Jones Constr. Co. v. Dover, 372 A.2d 540, 553 (Del. Super. Feb. 28, 1977)).
8 But see Beals v. Wash. Int’l Inc., 386 A.2d 1156, 1159 (Del. Ch. 1978) (“a Court of
Chancery has never had jurisdiction to impose punitive or exemplary damages in the
absence of specific statutory authority”).
° Tr. 61 (September 13, 2019) (Dkt. 62) (confirming that Section 17.2 is the only provision
in the Agreement containing a statement on which InTouch bases its claim for fraud).
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support of its motion to dismiss Count II, two of which apply to the first category of
alleged misrepresentations, the third applies to the second category, and the fourth
challenges InTouch’s request for rescission. For the reasons discussed below, the
court DENIES each of these aspects of Kainos’ motion to dismiss.
7. First, Kainos asserts that InTouch’s fraud claim concerning Section
17.2 of the Agreement should be dismissed on the theory that it is duplicative of
InTouch’s claim for breach of Section 17.2 in Count I. Kainos does not challenge
InTouch’s extra-contractual statements as duplicative—it only challenges as
duplicative statements made in Section 17.2 of the Agreement.'°
8. Kainos contends that a fraud claim alleged contemporaneously with a
breach of contract claim may survive only if the fraud claim is based on conduct that
is separate and distinct from the conduct constituting the breach.'' Even if one
assumes for the sake of argument that InTouch’s contract claim for breach of Section
17.2 and its fraud claim based on statements made in Section 17.2 involved the same
conduct, it is quite possible that the measure of damages for the fraud claim would
be different given the public policy against fraud.'? For this reason alone, it would
be premature to dismiss the fraud claim insofar as it is based on Section 17.2.
0 Tr, 5,
'! P].’s Opening Br. 24-25 (Dkt. 53).
12 See supra § 5 n.6.
9. Second, Kainos argues that the court should dismiss the “allegations of
fraud in Count II for alleged misrepresentations made prior to the parties entering
the Agreement . . . because Sections 17.4 and 32 of the Agreement . . . bar any
reliance on oral and extra-contractual representations made prior to the
Agreement.” The court disagrees.
10. In considering the precedents on which Kainos primarily relies, this
court has summarized the relevant legal principles as follows:
As explained in Abry, the Court will not bar a contracting party from
asserting claims for fraud based on representations outside the four
corners of the agreement unless that contracting party unambiguously
disclaims reliance on such statements. The language to disclaim such
reliance may vary,as the Court noted in Prairie Capital, but the
disclaimer must come from the point of view of the aggrieved party (or
all parties to the contract) to ensure the preclusion of fraud claims for
extra-contractual statements under Abry and its progeny.'*
11. Here, the cited provisions of the Agreement, considered collectively,
do not contain language that amounts to an unambiguous disclaimer of reliance on
'3 P].’s Opening Br. 19.
\4 FdG Logistics LLC v. A & R Logistics Hldgs., Inc., 131 A.3d 842, 860 (Del. Ch. 2016)
(citing ABRY, 891 A.2d at 1041; Prairie Capital IIT, L.P. v. Double E Hidg. Corp., 132
A.3d 35, 50 (Del. Ch. Nov. 24, 2015)). See also IAC Search, LLC v. Conversant LLC,
2016 WL 6995363, at *6 (Del. Ch. Nov. 30, 2016) (“[I]n order to bar fraud claims, a
disclaimer of reliance ‘must come from the point of view of the aggrieved party,’ meaning
it must come from the buyer who is asserting the fraud claim. An assertion from the se//er
‘of what it was and was not representing and warranting’ is not sufficient given the law’s
abhorrence of fraud.”) (quoting FdG Logistics, 131 A.3d at 860).
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statements outside the Agreement’s four corners that comes from the point of view
of the “aggrieved party,” i.e., the party asserting the fraud claim—InTouch.
12. Section 17.4 provides, in relevant part, that “[Kainos] makes no
warranties of any kind, whether express, implied, statutory or otherwise, and
specifically disclaims all implied warranties.”'? This provision does not come from
InTouch’s point of view.
13. Section 32 is a standard integration clause. It provides, in relevant part,
that the Agreement “constitutes the entire agreement between the Parties, and
supersedes all prior and contemporaneous agreements, proposals or representations,
written or oral, concerning its subject matter.”'© This type of provision, which “does
not contain explicit anti-reliance representations and which is not accompanied by
other contractual provisions demonstrating with clarity that [InTouch] had agreed
that it was not relying on facts outside the contract, will not suffice to bar fraud
claims.””!”
'5 Agreement § 17.4 (emphasis added). By contrast, the agreement in Harland Clarke
Hildg. Corp. v. Milken 2015 WL 12868204, at *3 (D. Del. Mar. 4, 2015) contained a
disclaimer of reliance by all parties to the contract, and the agreement in Sparton Corp. v.
O’Neil, 2017 WL 3421076, at *4 (Del. Ch. Aug. 9, 2017) contained a disclaimer of reliance
on behalf of the aggrieved party.
'6 Agreement § 32.
'7 Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004).
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14. Third, Kainos argues that InTouch has failed to plead its extra-
contractual fraud counterclaim with the requisite particularity.'® To state a claim for
fraud in the inducement, a plaintiff must allege: “(i) a false representation, (ii) the
defendant’s knowledge of or belief in its falsity or the defendant’s reckless
indifference to its truth, (iii) the defendant’s intention to induce action based on the
representation, (iv) reasonable reliance by the plaintiff on the representation, and (v)
causally related damages.”"
15. Under Court of Chancery Rule 9(b), the circumstances constituting an
alleged fraud must be pled with particularity but the second and third elements may
be averred generally because they relate to conditions of the mind.*” Thus, “a
plaintiff need only point to factual allegations making it reasonably conceivable that
the defendants charged with fraud knew the statement was false.”?'
16. The particularity requirement “means that a plaintiff must allege the
circumstances of the fraud with detail sufficient to apprise the defendant of the basis
for the claim. The relevant circumstances are the time, place, and contents of the
'8 Kainos does not challenge for lack of particularity InTouch’s fraud claim based on
Section 17.2 of the Agreement itself. Tr. 64.
19 Prairie Capital II, 132 A.3d at 49.
20 Anglo Am. Sec. Fund, L.P. v. S.R. Glob. Int’l Fund, L.P., 829 A.2d 143 (Del. Ch. 2003).
*1 7 VI Gp. Invs., LLC v. NCM Gp. Hldgs., LLC, 2017 WL 1174438, at *4 (Del. Ch. Mar.
29, 2017) (internal quotations omitted) (citing Prairie Capital IIH, 132 A.3d at 49).
9
false representations; the facts misrepresented; the identity of the person(s) making
the misrepresentation; and what that person(s) gained from making the
misrepresentation.””? “However, Delaware courts have held that lack of specificity
as to date, place, and time are not fatal, provided that the pleadings put defendants
on sufficient notice of the actual misconduct with which they are charged.””’
17. Kainos challenges the sufficiency of InTouch’s pleading regarding only
the first two elements of its extra-contractual fraud counterclaim. In my opinion,
InTouch has alleged sufficient details to satisfy these two elements with respect to
the statements made in or in connection with two documents Kainos provided to
InTouch before they entered into the Agreement: (i) the “Platform Description”
document that later was attached to the Agreement as Appendix | and (ii) a
PowerPoint presentation dated January 16, 2016.”
18. As to the first element, in my view, paragraphs 56 and 57 of the
Counterclaim sufficiently describe the time and place of the alleged fraud:
e Paragraph 56 alleges that “as early as January 16, 2016 and extending
to the execution of the Agreement, Kainos employees, including
Alistair Allen, Gary McCullough, and Richard Barbour represented to
InTouch Employees Rich Evans and others that Kainos’ Platform was
presently operable substantially in accordance with the Platform
Description” and that the “Platform Description itself was provided to
2 Prairie Capital II, 132 A.3d at 62.
3 LVI, 2017 WL 1174438, at *4.
*4 Counterclaim J§ 56-57.
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InTouch by Kainos as a representation of the current operability of the
Platform no later than February 18, 2016.” (Emphasis added).
e Paragraph 57 alleges that “Kainos represented in a written PowerPoint
representation dated January 16, 2016 [that was] shown to InTouch
employees on January 18, 2016 that the ‘Evolve Connector
Framework’ has ‘Over 100 hospital system interfaces’ that allegedly
permit ‘Easy Exchange of Data’ and ‘Ease of Integration.””
Paragraph 58 of the Counterclaim, furthermore, describes in significant detail the
contents of the alleged fraud by identifying aspects of the Platform (“e.g., Drag and
Drop Forms, Drag and Drop Workflows, Integration Framework and Admin
Utilities”) that allegedly “were not fully functional” when the representations in
paragraphs 56 and 57 were made.”* The Counterclaim also is replete with allegations
of what Kainos stood to gain from making these representations, i.e, inducing
InTouch to enter into an Agreement to pay for a license to a Platform that allegedly
did not work.”
19. As to the second element, which may be averred generally, it is
reasonable to infer that Kainos employees knew or were recklessly indifferent to the
fact that the Platform was not “presently operable substantially in accordance with
the Platform Description’””’ based on the specific allegations in paragraph 58 that
5 See also id. FJ 13, 19.
6 See id. J] 5, 10, 13, 19, 59-61.
27 Id 4 56.
al
aspects of the Platform either were not functional for about eighteen months after
the date of the Agreement or were never functional:
Many of the Core Services in the Platform Description, e.g., Drag and
Drop Forms, Drag and Drop Workflows, Integration Framework and
Admin Utilities were not fully functional in the Evolve Platform or
available for use by InTouch employees or end users until late fall of
2017... . Kainos was still developing drag and drop form and
workflow functionality when InTouch provided its notice of material
breach and intent to terminate the Agreement in November 2017....
A library of interfaces/connectors was not made available up until
InTouch provided its notice of material breach and intent to terminate
the Agreement.””®
20. Fourth, Kainos asserts that InTouch waived its request for rescission
because it “substantially and excessively delayed” in seeking rescission and it
“affirmed the Agreement repeatedly” before seeking rescission.”” It is well
established that this court will not dismiss a request for rescission at the pleading
stage unless “the circumstances of a challenged transaction make rescission
infeasible, and where the plaintiff is not unfairly prejudiced.”3° Kainos does not
28 Td. 458.
29 Pl.’s Reply Br. 25 (Dkt. 59). Kainos also draws a distinction between the legal and
equitable remedies of rescission, yet it “is not challenging that this Court has proper
jurisdiction over any of the claims or counterclaims.” Jd. 27 & n.8. As discussed above,
the availability of certain legal remedies will be determined at a later stage. This approach
is consistent with the well-settled principle that when this court has jurisdiction over a
controversy it will decide the entire matter, and give complete relief, including legal
remedies, as appropriate. Wilmont Homes, Inc. v. Weiler, 202 A.2d 576, 580 (Del.1964).
3° Winston v. Mandor, 710 A.2d 831, 831 (Del. Ch. 1996) (dismissing the plaintiffs request
for rescission, and “‘conclud[ing] that where the circumstances of a challenged transaction
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challenge rescission on this ground. In any event, given the fact-intensive inquiry
that must be undertaken to determine if the remedy of rescission would be warranted,
the court declines to address the availability of this remedy at this stage.*!
KK KR OK
21. For the reasons explained above, Kainos’ motion to dismiss Count I in
ts hfouB
Chancellor
part and Count II in its entirety is DENIED.
make rescission infeasible, and where the plaintiff is not unfairly prejudiced, a motion to
dismiss that remedy may be granted”).
31 See Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL
6703980, at *29 (Del. Ch. Nov. 26, 2014) (“[W]hether rescission is available properly
involves a fact-specific inquiry.”); ENI Hidgs., LLC v. KBR Gp. Hidgs., LLC, 2013 WL
6186326, at *24 (Del. Ch. Nov. 27, 2013) (“Rescission is not a cause of action but a remedy
available only where facts indicate equity so requires. Because such an inquiry is fact
specific, I decline to address it in connection with this Motion to Dismiss . . . .”) (citation
omitted); Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 991 (Del. Ch. 2000) (“In
response to a motion to dismiss, I simply determine whether plaintiff has stated a claim for
which relief might be granted. If I find that plaintiffs have stated cognizable claims, then
the nature of that relief is not relevant and need not be addressed. Because the determination
of relief is beyond the scope of this motion and premature without an established
evidentiary record, I will not address this issue.”) (citations and internal quotation marks
omitted)).
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