Chapter 7 Trustee Constantino Flores v. Strauss Water Ltd. ( 2016 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CHAPTER 7 TRUSTEE CONSTANTINO :
FLORES on behalf of the Estates of Esio :
Beverage Company, LLC, Esio Holding, :
Company, LLC, and Esio Franchising, LLC, :
:
Plaintiff, :
:
v. : C.A. No. 11141-VCS
:
STRAUSS WATER LTD., :
:
Defendant. :
MEMORANDUM OPINION
Date Submitted: June 22, 2016
Date Decided: September 22, 2016
Kathleen M. Miller, Esquire of Smith, Katzenstein & Jenkins LLP, Wilmington,
Delaware, and Todd Kartchner, Esquire, Amy Abdo, Esquire, and Seth
Schuknecht, Esquire of Fennemore Craig, P.C., Phoenix, Arizona, Attorneys for
Plaintiff.
Philip A. Rovner, Esquire and Jonathan A. Choa, Esquire of Potter Anderson &
Corroon LLP, Wilmington, Delaware, and Susan M. Freeman, Esquire and
Justin J. Henderson, Esquire of Lewis Roca Rothgerber Christie LLP, Phoenix,
Arizona, Attorneys for Defendant.
SLIGHTS, Vice Chancellor
Constantino Flores, Chapter 7 bankruptcy trustee for the estates of Esio
Beverage Company, LLC, Esio Holding Company, LLC and Esio Franchising,
LLC (collectively “Esio”), alleges in a Verified Amended Complaint
(“Complaint”) that Strauss Water Ltd. masterminded a fraudulent and otherwise
tortious scheme to drive Esio into financial ruin so that it could seize as collateral
to certain defaulted loan covenants Esio’s valuable technology licenses, clients and
business opportunities. It is alleged that Strauss accomplished this scheme by
making a series of intentional misrepresentations that induced Esio to rely on
Strauss as its sole source for the capital infusion it desperately needed, then
declining to supply that capital infusion after Esio had reached a proverbial point
of no return. Esio ultimately was forced to declare bankruptcy and its trustee
thereafter filed this action to recover damages incurred due to Strauss’s allegedly
wrongful conduct.
Flores has brought claims on behalf of the Esio bankruptcy estate against
Strauss1 for (I) fraud, (II) fraudulent inducement, (III) negligent misrepresentation,
(IV) breach of the implied covenant of good faith and fair dealing, (V) breach of
oral promise, (VI) promissory estoppel and (VII) estoppel. Each of these claims
generally relate to Strauss’ alleged failure to follow through with its promises to
1
For the sake of clarity and brevity, I will hereafter refer to claims brought by Flores on
behalf of the Esio bankruptcy estate as Esio’s claims.
1
infuse Esio with a $30 million equity investment. Esio also has alleged that
Strauss tortiously interfered with certain of Esio’s existing contracts (VIII) and
prospective business relationships (IX) as part of its scheme to accelerate Esio’s
demise. Finally, Esio seeks to compel Strauss to arbitrate these claims (X) per
contractual provisions, allegedly binding upon Strauss, that mandate arbitration.
Strauss has moved to dismiss the Complaint in its entirety for failure to state a
claim upon which relief can be granted under Court of Chancery Rule 12(b)(6).
After carefully reviewing the Complaint, I conclude that Esio has failed to
state claims for fraud, fraudulent inducement, negligent misrepresentation, breach
of the implied covenant of good faith and fair dealing, “breach of oral promise,”
promissory estoppel or estoppel, as all of these claims contradict the clear and
unambiguous terms of the written contracts between the parties. Esio also has
failed to state a claim for tortious interference with contract as all of the alleged
“improper” acts undertaken by Strauss were expressly permitted by the parties’
contracts and all of Strauss’ alleged “improper” omissions involved matters where
Strauss was under no duty to act.
Esio has, however, pled facts sufficient to allow a reasonably conceivable
inference that Strauss tortiously interfered with Esio’s prospective business
relationship with a potential licensing partner. Defendant’s alleged justifications
for its actions with respect to this potential Esio business partner, while possibly
2
meritorious, are fact intensive and not appropriate for disposition on a motion to
dismiss.
Finally, Esio’s effort to compel arbitration fails as a matter of law. Strauss
cannot be bound to an arbitration agreement to which it is not a party and, in any
event, the claims Esio has brought here arise under a contract that contains an
exclusive Delaware forum selection clause.
I. BACKGROUND
In considering this motion to dismiss, I have drawn the facts from the “well-
pled allegations of the complaint, . . . the documents incorporated into the
complaint by reference, and . . . judicially noticed facts.”2
A. The Parties and Relevant Non-Parties
Esio filed for bankruptcy protection in 2013, and Flores was appointed the
trustee of the bankruptcy estate. Esio had been in the beverage industry offering
products that included water-based beverages and beverage dispensing machines.
Its principal place of business was in Arizona.
Strauss is an Israeli limited company with its principal place of business in
Tel Aviv. A portion of Strauss’ business involves the sale of drinking water in the
worldwide market. Non-party Rami Ronen was the Chief Executive Officer of
Strauss.
2
Desimone v. Barrows, 924 A.2d 908, 928 (Del. Ch. 2007) (footnotes omitted).
3
B. Esio Pursues an Infusion of Capital
In 2005, Esio entered into a development agreement and exclusive license
with Intelligent Coffee Company, LLC (“ICC”), an Arizona limited liability
company that, inter alia, developed products for the beverage industry. Under the
license agreement, ICC gave Esio an exclusive license to ICC’s beverage
dispensing technology.
In 2011 Esio found itself strapped for cash and began to look for an infusion
of capital in the range of $20 million–$30 million. It had developed products and
technology, including the ICC licensed technology, and needed additional capital
to promote the products and exploit its technology and intellectual property.
Esio approached Strauss in August, 2011 regarding a possible investment.
Strauss expressed interest in partnering with Esio as a means to enter the United
States market. It was also very interested in the beverage dispensing technology
Esio had licensed from ICC. Esio, in turn, saw Strauss as an attractive partner both
because it was well-resourced and because it had developed a specialized
carbonation technology that Esio thought would fit well with its new products.
During this time, with full disclosure to Strauss, Esio actively explored other
sources of capital. As of September, 2011, Esio had raised over $1 million that it
was holding in escrow for a possible reverse merger and private placement.3
3
The Complaint does not disclose the identity of Esio’s potential merger partner.
4
Esio was clear that it was looking to Strauss to make an investment in Esio;
it was not seeking and did not want debt financing. Strauss assured Esio that it
“was not interested in being a bank that would simply lend Esio money.”4
Throughout the balance of 2011 Esio provided Strauss with extensive due
diligence, including information about its existing and anticipated future
customers, its marketing strategies, partners, suppliers, and client contacts. During
this process Esio apprised Strauss of its contract with Walmart® that would enable
Esio to place its products in more than two thousand Walmart® stores. Esio had
planned to pay for the marketing of the Walmart® release with money invested by
Strauss.
C. The Parties Negotiate the Terms of their Relationship—
The Oral Promises
During a meeting in Israel in November 2011, Esio advised Strauss that it
was looking for an equity investment of $30 million. Strauss agreed. It proposed
that it would initially extend a $5 million dollar “bridge loan” so that Esio would
have access to cash quickly in order to satisfy its obligations to Walmart®.5
Strauss committed that it would convert this initial loan into an equity investment
when it completed the balance of its investment ($25 million). Ronen allegedly
4
Verified Amended Complaint (“Compl.”) ¶ 18.
5
Id. ¶ 26.
5
represented that structuring the initial $5 million investment as a loan was a
“formality [that allowed a] faster way to get Esio the money it needed” because
Strauss board approval would not be required.6 Esio agreed to the loan but only
subject to the “express understanding that the loan would be converted to
equity . . . and the second investment would follow.”7
After Esio and Strauss orally agreed to the structure and amount of Strauss’
investment, Strauss demanded that Esio put aside its plans to pursue a public
offering and return the money it had raised in contemplation of “using a reverse
merger to raise additional capital.”8 Strauss also caused Esio to create a holding
company structure, alter its business plan, and reserve the equity ownership units
that were to be issued to Strauss. Esio agreed to take these steps because Strauss
had agreed to make a sizable investment and Esio was in dire need of capital.
In December 2011, Strauss required Esio to meet with Ofra Strauss, the
Chairwoman of Strauss’ parent company. Strauss representatives allegedly told
Esio that if the deal was approved by Ofra, then the equity investment would be
assured.9 Less than forty-eight hours after Esio’s meeting with Ofra, Strauss
6
Id. ¶ 27.
7
Id. ¶ 28.
8
Id. ¶ 34.
9
I refer to Ms. Strauss by first name to avoid confusion; no disrespect is intended.
6
informed Esio that Ofra had approved the entire deal. In April 2012, however,
Esio learned from Ronen, allegedly for the first time, that the $25 million equity
investment would require approval from both Strauss and its parent company—
approvals Esio had believed were already in place.
Esio and Strauss executed a Term Sheet on January 18, 2012.10 The Term
Sheet outlined the terms of a “mutual licensing of IP.”11 It further provided for
Strauss and Esio to enter into a convertible loan whereby Strauss would loan Esio
$5 million that would be collateralized by Esio’s intellectual property rights and
Esio products. When discussing the loan, the Term Sheet laid out rights that
Strauss would have “during the period until the Loan is either converted or
repaid.”12 Strauss was to have the “option, to be exercised not later than
December 31, 2013, to convert the Loan into shares of Esio.”13 If Esio had repaid
any portion of the principal of the loan, then Strauss’ option to convert the full
amount of the loan would be subject to the revised balance of the loan.
Strauss also was to have the
option . . . to make additional equity investment in Esio of an
additional $25 million based on a pre-money valuation of $45 million,
10
Id. ¶ 41.
11
Id. Ex. 2.
12
Id.
13
Id.
7
subject to Esio meeting certain performance targets . . . . If Esio does
not meet the performance targets . . . Strauss Water will receive
additional shares of equity, which shall serve the purpose of reducing
the pre-money valuation.14
The Term Sheet provided that it, along with the license agreements and convertible
loan agreement, would be governed by Delaware law. It also contained an
exclusive New York forum selection clause.
Following the execution of the Term Sheet, Strauss required Esio to
renegotiate its ICC License Agreement to allow Strauss access to the ICC
technology. Esio alleges that it had “no choice but to agree” to renegotiate the ICC
license because Strauss insisted that it have access to the ICC technology as a
condition of its investment.15 The amended license allowed Strauss a sub-license
to ICC’s technology and required Esio to make minimum quarterly payments to
ICC which were greater than those required by the previous license (the “Amended
ICC License.”) Under the Amended ICC License, Strauss positioned itself to
receive exclusive rights to ICC’s technologies in North America should Esio
default on the $5 million bridge loan. The Amended ICC License was further
amended in May 2012 to give Esio an exclusive license for ICC’s technology to be
used in beverage dispensing systems (the “Second Amended ICC License”). The
14
Id.
15
Id. ¶ 48.
8
Second Amended ICC License is governed by Arizona law and provides for
mandatory arbitration of disputes between the parties arising under the agreement
to be conducted in Phoenix, Arizona.
After entering into the Second Amended ICC License with Esio, ICC signed
a Side Letter Agreement with Strauss on May 10, 2012, whereby ICC consented to
Strauss receiving both a lien and security interest in all of Esio’s rights under the
Second Amended ICC License. The Side Letter Agreement contains a forum
selection clause designating New York as the exclusive forum for resolution of
disputes arising under that agreement.
D. The Parties Memorialize Their Agreement—The Papered Promises
The loan closed on May 14, 2012. Prior to closing, Esio alleges that Strauss
explained that even though the loan agreement would provide that conversion to
equity was an option, “Strauss would automatically exercise the ‘option’ upon
completion of its due diligence.”16 The loan agreement would also provide for
what Esio characterizes as “an aggressive amortization schedule” which Strauss
and Ronen knew Esio would not be able to meet without the additional promised
$25 million capital infusion.17 Through the end of May 2012, Strauss continued to
represent that the conversion of the loan as well as the exercise of a warrant to
16
Id. ¶ 55.
17
Id. ¶ 53.
9
acquire the addition $25 million in equity would occur as soon Strauss’ due
diligence was completed.
1. The Loan Agreement
The Secured Convertible Loan Agreement between Strauss and Esio (the
“Loan Agreement”) was executed May 14, 2012, and provided for Strauss to lend
Esio $5.25 million (the “Loan”).18 DLA Piper LLP served as counsel to Esio.
Under the Loan Agreement and the attached Secured Convertible Promissory Note,
Esio was to repay the outstanding principal amount as well as all other amounts by
December 31, 2013. Esio also had the right to prepay the Loan.
Regarding conversion, the Loan Agreement provided that:
At any time following the Closing Date but before the Maturity Date,
[Strauss] may, at its option, convert all, but not less than all, of its
Note . . . into such number of duly authorized, validly issued, Class A
Units equal to the amount . . . determined by dividing (a) the sum of
the then outstanding principal and unpaid accrued interest on the Note
and the Additional Convertible Amount by (b) the Conversion Price in
effect at the time of such conversion.19
Section 9 of the Loan Agreement sets forth the parties’ rights in events of default,
which events include Esio’s failure to repay the Loan according to schedule.
Significantly, the Loan Agreement does not list Strauss’s failure to convert the
18
The parties agreed to add $250,000 to the initial $5 million Loan amount to pay for
legal fees incurred in connection with the closing of the Loan.
19
Id. Ex. 1.
10
Loan to equity as an event of default, nor does it prescribe any consequence should
Strauss elect not to convert the Loan.
The Loan Agreement provides that the Loan Agreement and the rights and
obligations of Esio and Strauss under it “SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE
STATE OF DELAWARE.”20 The Loan Agreement further provides that Delaware
State courts or the United States District Court for the District of Delaware shall
have “EXCLUSIVE JURISDICTION OVER THE PARTIES (AND THE
SUBJECT MATTER) WITH RESPECT TO ANY DISPUTE OR
CONTROVERSY ARISING UNDER OR IN CONNECTION WITH THIS
AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS.”21
2. The Warrant
Strauss and Esio also entered into a Warrant on May 14, 2012, whereby
Strauss was “entitled at any time . . . to purchase from [Esio] up to 37,395.33
Class A Units.”22 Strauss was entitled in its discretion to execute the Warrant “in
20
Id.
21
Id. “Transaction documents” as defined within the Loan Agreement, include the Loan
Agreement, the Note, the Warrant, Esio’s Limited Liability Company Agreement, and the
Security Agreements. Id.
22
Id. Ex. 5.
11
whole or in part.”23 The Warrant contains a merger clause,24 as well as an
expiration date and remedies for breach. It states that the Warrant is to be
construed under Delaware laws but does not contain a forum selection clause.25
E. The Parties’ Relationship Breaks Down
By the end of May 2012, Strauss began telling Esio that it would need to
conduct additional due diligence before it could convert the Loan. This came as a
surprise to Esio as it believed Strauss had already conducted exhaustive due
diligence prior to entering the Loan Agreement. The following month, during a
meeting with key players of Esio and Walmart® involved in Esio’s scheduled
product launch at Walmart®, Strauss representatives were “disruptive and
disrespectful” towards the Esio representatives and “denigrated the [Esio] business
plan that Strauss had already explicitly approved.”26 Strauss advised Esio that it
might not make the $25 million equity investment even though Strauss knew Esio
23
Id.
24
Section 10.4 provides: “Entire Agreement. This Warrant, together with the applicable
provisions of the Operating Agreement, constitute the entire agreement between the
parties with respect to the specific subject matter hereof. Each provision hereof is
severable for every other provision when determining legal enforceability. The terms and
conditions hereof will inure to the benefit of and be binding upon the parties’ respective
successors and assigns, except as expressly provided otherwise herein.” Id.
25
Id. Section 10.7 of the Loan Agreement, however, provides that the forum selection
clause designating Delaware courts applies to all “transaction documents,” which
includes the Warrant. Id. Ex. 1.
26
Id. ¶ 67.
12
was counting on the investment and Esio was following the business plan that
Strauss had directed and approved.
At some point after the Loan closed, Esio learned that Strauss’ carbonation
technology did not work. This rendered Strauss’ promise of a strategic partnership
illusory since Strauss’ carbonation technology had been factored into Esio’s
business plan. To make matters worse, the launch of Esio products at Walmart®
failed because Esio did not have the promised funds from Strauss to market the
launch properly.
Esio also learned that Strauss had been meeting with Esio’s customers
without Esio’s knowledge or permission. At a meeting with one such customer,
PepsiCo, Strauss allegedly gave a demonstration of an Esio preproduction
prototype of a carbonated beverage dispenser. The prototype malfunctioned.
According to Esio, this episode “subverted Esio’s chances of working with
PepsiCo due to Strauss’ use of a faulty product.”27
In early 2013 Ronen began to make disparaging statements about Esio and
its product to other Esio customers and licensors of Esio’s technology, including
ICC. He also announced to third parties and eventually to Esio that Strauss never
intended to invest in Esio and had only provided the Loan in order to get Esio’s
technology. In February 2013, Ronen said that it would seize the Esio intellectual
27
Id. ¶ 74.
13
property used to secure the Loan unless Esio was able to repay the Loan according
to the agreed-upon schedule.
On February 13, 2013, Esio and Strauss met with Euro-Pro Operating, LLC,
an appliance company interested in licensing manufacturing rights to Esio’s
beverage dispenser products. At the meeting, Esio hoped to discuss measures to
reduce manufacturing costs, which would reduce Esio’s need for a large capital
infusion and help it stay viable. Ronen seized control of the meeting and advised
Euro-Pro that Strauss controlled Esio’s technology and the ICC License. Euro-Pro
thereafter refused to deal with Esio.
During this same period, Ronen met with the Chief Executive Officer of ICC
and the two discussed a potential business deal between Strauss and ICC that
would exclude Esio and “secure Esio’s demise.”28 Strauss sent Esio a formal
notice of default under the Loan on February 17, 2013, and Esio’s bankruptcy
followed.
II. PROCEDURAL STANDARD
“[T]he governing pleading standard in Delaware to survive a motion to dismiss
is reasonable ‘conceivability.’”29 Under this standard, Delaware courts will
28
Id. ¶ 82.
29
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536
(Del. 2011).
14
accept all well-pleaded factual allegations in the Complaint as true,
accept even vague allegations in the Complaint as “well-pleaded” if
they provide the defendant notice of the claim, draw all reasonable
inferences in favor of the plaintiff, and deny the motion unless the
plaintiff could not recover under any reasonably conceivable set of
circumstances susceptible of proof.30
The Court will not, however, “accept conclusory allegations unsupported by
specific facts . . . or draw unreasonable inferences in favor of the non-moving
party.”31
III. ANALYSIS
To address Strauss’ motion to dismiss I have divided Esio’s claims into three
parts. First, I examine whether Esio has stated viable claims for fraud, fraudulent
inducement, negligent misrepresentation, breach of the implied covenant of good
faith and fair dealing, “breach of oral promise,”32 promissory estoppel and
estoppel. It is appropriate to group these claims together since the motion to
dismiss challenges whether any of them are well-pled given that they rest on facts
and alleged promises that contradict the clear terms of the parties’ written
contracts. Second, I examine the viability of Esio’s claims for tortious interference
with contract and tortious interference with prospective business relations. Finally,
30
Id.31
Price v. E.I. DuPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011).
32
I am unaware of any cause of action cognizable under Delaware law for “breach of oral
promise.” I will assume Esio intends to prosecute a claim for breach of an oral contract.
15
I consider Esio’s claim that Strauss should be compelled to arbitrate these claims in
Arizona.
A. Esio’s Claims That it Justifiably Relied Upon Extra-Contractual
Promises and Representations and that Strauss Breached the Implied
Covenant of Good Faith and Fair Dealing Are Belied by the Clear
Terms of the Loan Agreement and Warrant
The disposition of Esio’s fraud, estoppel, oral contract and implied covenant
claims turns on a single factual fulcrum: the contracts between Esio and Strauss
clearly set forth the parties’ rights and obligations and patently contradict the
claims Esio has attempted to plead in its Complaint. Under these circumstances,
there can be no reasonable reliance and there can be no actionable extra-contractual
covenants.
Delaware is a contractarian state.33 As such, a party who enters into a
contract governed by Delaware law will be charged with knowledge of the
33
GRT, Inc. v. Marathon GTF Tech., Ltd., 2011 WL 2682898, at *12 (Del. Ch. July 11,
2011) (noting that Delaware law “is more contractarian than that of many other states”).
See also Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010) (“[W]e must . . . not rewrite
the contract to appease a party who later wishes to rewrite a contract he now believes to
have been a bad deal. Parties have a right to enter into good and bad contracts, the law
enforces both.”) (emphasis added); Libeau v. Fox, 880 A.2d 1049, 1056–57 (Del. Ch.
2005), aff’d in pertinent part, 892 A.2d 1068 (Del. 2006) (“When parties have ordered
their affairs voluntarily through a binding contract, Delaware law is strongly inclined to
respect their agreement, and will only interfere upon a strong showing that dishonoring
the contract is required to vindicate a public policy interest even stronger than freedom of
contract. Such public policy interests are not to be lightly found, as the wealth-creating
and peace-inducing effects of civil contracts are undercut if citizens cannot rely on the
law to enforce their voluntarily-undertaken mutual obligations.”); Asten, Inc. v. Wangner
Sys. Corp., 1999 WL 803965, at *6 (Del. Ch. Sept. 23, 1999) (“Equity respects the
freedom to contract. . . .”).
16
contents of the instrument and will be deemed to have knowingly agreed to the
plain terms of the instrument absent some well-pled reason to infer otherwise. And
this same party will face an uphill climb when it seeks to prosecute claims that it
relied on promises that are explicitly contradicted by its own clear and
unambiguous written contract. These bedrocks of Delaware law apply in full force
here.
1. Esio Has Failed to State Claims for Fraud, Misrepresentation,
Estoppel or Breach of Oral Contract
The gravamen of Esio’s Complaint is that Strauss made promises in advance
of entering into the Loan Agreement and Warrant that it would convert the $5
million Loan into an equity investment and that it would invest an additional $25
million in Esio in short order after the Loan closed. Esio alleges that it relied on
these promises when it agreed, inter alia, to commit its intellectual property to
Strauss as security for the Loan and to amend its license with ICC. Now that it is
clear Strauss never intended to invest in Esio, it is alleged that the pre-contract
promises were either fraudulent or negligent misrepresentations and that Strauss
should be estopped from denying its pre-contract commitments.
Claims for fraud, fraudulent inducement, negligent misrepresentation,
promissory estoppel and estoppel all require a plaintiff to plead that he justifiably
17
or reasonably relied on the defendant’s promise.34 Esio has failed to plead facts
upon which I can reasonably infer that it justifiably relied on Strauss’ promises
made prior to the execution of the parties’ written contracts since the alleged
promises are expressly contradicted by those same contracts. Indeed, “[i]t is
34
“In order to state a claim for fraud or fraudulent inducement, plaintiff must plead with
particularity the following elements: (1) a false representation of material fact; (2) the
defendant’s knowledge of or belief as to the falsity of the representation or the
defendant’s reckless indifference to the truth of the representation; (3) the defendant’s
intent to induce the plaintiff to act or refrain from acting; (4) the plaintiff’s action or
inaction taken in justifiable reliance upon the representation; and (5) damage to the
plaintiff as a result of such reliance.” Duffield Assocs., Inc. v. Meridian Architects &
Eng’rs, LLC, 2010 WL 2802409, at *4 (Del. Super. July 12, 2010) (emphasis added). To
state a claim for negligent representation, a plaintiff must ”plead that (1) the defendant
had a pecuniary duty to provide accurate information, (2) the defendant supplied false
information, (3) the defendant failed to exercise reasonable care in obtaining or
communicating the information, and (4) the plaintiff suffered a pecuniary loss caused
by justifiable reliance upon the false information.” Corporate Prop. Assocs. 14 Inc. v.
CHR Hldg. Corp., 2008 WL 963048, at *8 (Del. Ch. Apr. 10, 2008) (emphasis added).
“Negligent representation is essentially a species of common law fraud with a lesser state
of mind requirement.” Vichi v. Koninkklijke Philips Elec., NV., 85 A.3d 725, 762 (Del.
Ch. 2014). To state a claim for promissory estoppel, “a plaintiff must show by clear and
convincing evidence that: (i) a promise was made; (ii) it was the reasonable expectation
of the promisor to induce action or forbearance on the part of the promise; (iii) the
promisee reasonably relied on the promise and took action to his detriment; and
(iv) such promise is binding because injustice can be avoided only by enforcement of the
promise.” Black Horse Capital, LP v. Xstelos Hldgs., Inc., 2014 WL 5025926, at *21
(Del. Ch. Sept. 30, 2014) (emphasis added) (internal quotation marks omitted). “To
prevail on a claim of equitable estoppel, a plaintiff must show (1) conduct by the party to
be stopped that amounts to a false representation, concealment of material facts, or that is
calculated to convey an impression different from, and inconsistent with that which the
party subsequently attempts to assert, (2) knowledge, actual or constructive, of the real
facts and the other party’s lack of knowledge and the means of discovering the truth,
(3) the intention or expectation that the conduct shall be acted upon by, or influence, the
other party and good faith reliance by the other, and (4) action or forbearance by the
other party amounting to a change of status to his detriment.” Olson v. Halvorsen, 2009
WL 1317148, at *11 (Del. Ch. May 13, 2009), aff’d, 986 A.2d 1150 (Del. 2009)
(emphasis added) (internal quotation marks omitted).
18
unreasonable to rely on oral representations when they are expressly contradicted
by the parties’ written agreement.”35 Given that the parties’ written agreements are
so clear, it is not surpising that Esio has not cited any authority that would support
its argument that reliance upon contrary oral promises would be reasonable. 36
As stated, the extra-contractual promises and representations that Strauss is
alleged to have made are variations on a theme: that Strauss would invest in and
cooperate with Esio as Esio’s long-term business partner. Esio alleges that Strauss
promised that it would share its technology with Esio, that it would work with Esio
to implement Esio’s long-term business plan and that it would provide Esio with
$30 million in equity financing. These alleged promises are expressly contradicted
by the several transactional documents that Strauss and Esio entered into—
negotiated at arm’s-length by sophisticated parties with the guidance of
sophisticated counsel. Each of these contracts—the Term Sheet, Loan Agreement
35
Carrow v. Arnold, 2006 WL 3289582, at *11 (Del. Ch. Oct. 31, 2006), aff’d, 933 A.2d
1249 (Del. 2007). While in Carrow the Court addressed a claim for fraudulent
inducement, this principle also applies to the balance of Esio’s misrepresentation and
estoppel claims. See MicroStrategy Inc. v. Acacia Research Corp., 2010 WL 5550455, at
*14 (Del. Ch. Dec. 30, 2010) (rejecting a fraud claim based on three oral statements that
were expressly contradicted by a later contract); Olson, 2009 WL 1317148, at *12
(“Olson’s [promissory and equitable] estoppel claims fail for the additional reasons that
the alleged promises on which he bases his claims are inconsistent with the terms of the
[contracts]”).
36
See Carrow, 2006 WL 3289582, at *11 (holding that one cannot claim fraudulent
inducement “when one had the opportunity to read the contract and by doing so could
have discovered the misrepresentation” (quoting 17A Am.Jur.2d Contracts § 214 (2006)).
19
and Warrant—structures Strauss’ “investment” as either debt with the option to be
converted to equity or as an option to acquire equity.37 Specifically, the documents
clearly and unambiguously characterize Strauss’ commitment as a loan with an
“option” that Strauss “may” exercise to convert the Loan to an equity investment
(the Loan Agreement) and as an “option” that Strauss “may” exercise to acquire
additional Esio units (the Warrant).38 The contracts do not even hint much less
37
“[T]he parties shall enter into the Convertible Loan Agreement, pursuant to which
Strauss Water shall provide a loan of $5 million to Esio.” Compl. Ex. 2 (the “Term
Sheet”). “During the period until the Loan is either converted or repaid [describing rights
Strauss will be given].” Id. “Strauss Water will have the option, to be exercised not later
than December 31, 2013, to convert the Loan into shares of Esio.” Id. “The Lender
agrees . . . to make a loan (the “Loan”) to the Borrower in an amount of up to five
million two-hundred fifty thousand dollars.” Id. Ex. 1 (the “Loan Agreement”). “The
Borrower’s obligation to pay the principal of, and interest on, the Loan shall be evidenced
by a secured convertible promissory note . . . (the “Note”). Id. “[T]he Lender may, at its
option, convert all, but not less than all, of its Note.” Id. “Strauss Water shall have the
option, to be exercised not later than March 31, 2013, to make an additional equity
investment in Esio of an additional $25 million based on a pre-money valuation of
$45 million, subject to Esio meeting certain performance targets as described below.”
Id. Term Sheet. “This Warrant certifies that, for value received, Strauss Water Ltd. . . .
is entitled at any time . . . to purchase from Company up to 37,395.33 Class A Units
(“Warrant Units”) at a price per Class A Unit equal to $668.53.” Id. Ex. 5 (the
“Warrant”). “Holder may exercise this Warrant, in whole or in part . . . at any time
before the Expiration Date.” Id.
38
Esio has suggested in its papers and at oral argument that the term “option” may be
ambiguous. Pl.’s Answering Br. in Opp’n to Def.’s Mot. to Dismiss Pl.’s Verified Am.
Compl. (“Answering Br.”) 16–18. To the extent Esio still intends to press that argument,
I summarily reject it. I will not embrace a construction of the term “option” that suggests
it might reasonably be read as “mandatory option.” I am aware of no such creature in the
realm of corporate finance or the broader realm of life. The terms “mandatory” and
“option” present the classic binary opposition.
20
expressly reveal that the parties understood, as a matter of contract or otherwise,
that Strauss was somehow obliged to invest in Esio.39
Esio’s attempt to alter the construction of the Loan Agreement’s and
Warrant’s otherwise unambiguous provisions regarding the terms of Strauss’ Loan
to Esio and its possible investment in Esio, respectively, cannot be countenanced
for another reason that also is embedded in Delaware law. Delaware’s “parol
evidence rule bars the admission of evidence extrinsic to an unambiguous,
integrated written contract for the purpose of varying or contradicting the terms of
the contract.”40 Thus, even if a provision is “mistakenly” left out of a document,
“the parole evidence rule precludes the Court from considering the alleged oral
promises made before the execution of [a written contract].”41 The Court, instead,
must be guided by what the parties say in their written contracts; it cannot be
39
See MicroStrategy Inc., 2010 WL 5550455, at *14 (granting motion to dismiss claim of
reasonable reliance that was “contradicted by several express terms in the Agreement”);
Black Horse Capital, LP, 2014 WL 5025926, at *21–22 (same).
40
Phillips v. Wilks, Lukoff & Bracegirdle, LLC, 2014 WL 4930693, at * 3 (Del. Oct. 1,
2014), as corrected (Oct. 7, 2014) (citations omitted).
41
TrueBlue, Inc. v. Leeds Equity Partners IV, LP, 2015 WL 5968726, at *4 (Del. Super.
Ct. Sept. 25, 2015) (further stating that while the agreement at issue “may not set forth
everything in hindsight that TrueBlue intended to include, . . . that does not create an
ambiguity”).
21
distracted by misguided allegations of fraud or estoppel, however passionately they
might be pled.42
Esio also misses the mark by arguing that the express terms of the contracts
it negotiated and agreed to with Strauss cannot defeat its claim of justifiable
reliance on prior oral promises because the Loan Agreement contains no
integration clause and the integration clause within the Warrant is ineffective
because it lacks an anti-reliance clause.43 Strauss’ arguments that Esio has failed to
plead facts that would justify departing from the express terms of the parties’
written agreements do not rest on the presence, or not, of integration or anti-
reliance clauses. Instead, Strauss correctly argues that Esio cannot proffer alleged
oral promises or representations to alter or contradict unambiguous provisions
clearly expressed within the parties’ written contracts. Yet that is precisely what
Esio seeks to do here with respect to its fraud, negligent misrepresentation,44
estoppel and oral contract claims.
42
Black Horse Capital, LP, 2014 WL 5025926, at *24 (“By attempting to plead around
the plain language of their written agreements with allegations of ‘fraud,’ Plaintiffs seek
to shirk the bargain evidenced by the written agreement in favor of a ‘but we did rely on
those other representations” claim).
43
Answering Br. 22–24.
44
The negligent misrepresentation claim also fails because it is barred by the economic
loss doctrine, which allows a party to recover in negligence only “if losses are
accompanied by bodily harm or property damages.” J.C. Trading Ltd. v. Wal-Mart
Stores, Inc., 947 F.Supp. 2d 449, 459 (D. Del. 2013) (internal quotation marks omitted).
It does not permit recovery “for losses that are solely economic in nature.” Id. (internal
22
Even where certain of the alleged oral promises are not expressly
contradicted by the written contracts, such as Esio’s contention that Strauss
promised it would share its working carbonation technology when, in fact, it did
not work, Esio still has failed to plead facts that allow a reasonable inference of
justifiable reliance as a matter of law. The Term Sheet provided that Strauss and
Esio would enter into an agreement regarding Esio’s use of Strauss’ carbonation
technology, and the subsequent License and Distribution Agreement between Esio
and Strauss expressly addresses the parties’ rights to cross license.45 Yet Esio
pleads neither that Strauss breached that agreement nor that Strauss somehow
prevented Esio from exercising its bargained-for right under that agreement to
conduct due diligence with respect to Strauss’ carbonation technology. 46 Once
again, Esio seeks to avoid the deal it made in favor of the deal it now wishes it
quotation marks omitted). Here, Esio is claiming only economic damages and does not
allege damage to its intellectual property or to Esio’s rights as a licensee to ICC’s
intellectual property. While Esio alleges that it lost its technology and licensing rights,
Compl. ¶ 121, it does not allege that there was any damage to the technology or its rights
as a licensee, except that it was unable to pay the Loan and therefore defaulted under the
Second Amended ICC License.
45
Transmittal Aff. of Phillip A. Rovner, Esq. in Supp. of Strauss Water, Ltd.’s Mot. to
Dismiss (“Transmittal Aff.”) Ex. 8. The Court may consider this agreement as it is
integral to the Plaintiff’s Complaint. See Compl. ¶¶ 73, 85(viii). See also Allen v.
Encore Energy P’rs, L.P., 72 A.3d 93, 96 n.2 (Del. 2013).
46
Transmittal Aff. Ex. 8 § 6.4.1(a). See Interim Healthcare, Inc. v. Spherion Corp., 884
A.2d 513, 551 n.305 (Del. Super. Ct.) (“Delaware courts do not rescue disappointed
buyers from circumstances that could have been guarded against through normal due
diligence and [the exercise of] contractual protections”), aff’d, 886 A.2d 1278 (Del. 2005)
(TABLE).
23
made. Delaware law does not permit Esio or the Court to rewrite history when that
history is expressed in clear and unambiguous written contracts.
Esio’s fraud, misrepresentation and estoppel claims require well-pled facts
to support a reasonably conceivable inference that Esio justifiably relied upon
Strauss’ extra-contractual promises or representations. Esio’s written contracts
with Strauss allow no such inference. Nor can the Court enforce alleged oral
promises that directly contradict commitments made in subsequent written
contracts. Strauss’ motion to dismiss these claims must be granted.
2. Esio Has Failed to State a Claim for Breach of the Implied Covenant
Esio alleges that even though Strauss may have complied with written
contracts that directly address the terms of Strauss’ Loan and possible equity
investment, Esio may still hold Strauss liable for breaching the implied covenant of
good faith and fair dealing. I disagree. The implied duty of good faith and fair
dealing applies only when “it is clear from the underlying contract that the
contracting parties would have agreed to proscribe the act later complained of . . .
had they thought to negotiate with respect to that matter.”47 It follows, then, that
the implied covenant of good faith and fair dealing does not apply when the
contract speaks directly to the alleged gap in the contract the implied covenant has
47
Winshall v. Viacom Intern., Inc., 55 A.3d 629, 637 (Del. Ch. 2011) (internal quotation
marks omitted).
24
been proffered to fill.48 Esio’s claim for breach of the implied covenant of good
faith and fair dealing fails since the contracts speak directly to the contested
issue—that the Loan may but need not be converted to equity and that any future
investments are optional, not mandatory.
B. Tortious Interference
As is typical of Esio’s complaint, many of its allegations regarding tortious
interference attempt to reach outside the four corners of its contracts with Strauss
and impose upon Strauss additional obligations or alternatively limit Strauss’
bargained-for rights. As discussed below, Esio’s claim for tortious interference
with contract is not well-pled because Esio again seeks to vary the terms of its
written contracts with Strauss in order to state an extra-contractual claim.
However, a single subset of its claim for tortious interference with prospective
business relations (that does not attempt to alter the parties’ contracts) does survive
as Esio has well-pled that Strauss interfered with Esio’s prospective business
relationship with Euro-Pro.
48
Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 146 (Del. Ch. 2009) (“The
implied covenant does not apply when the subject at issue is expressly covered by the
contract” and “[c]ourts should be most chary about implying a contractual protection
when the contract easily could have been drafted to expressly provide for it.” (internal
quotation marks omitted)).
25
1. Esio has Failed to State a Claim for Tortious Interference with
Contract
Esio alleges that Strauss tortiously interfered with the Second Amended ICC
License by (a) forcing Esio to renegotiate the ICC License and then putting Esio in
a financial position where it was unable to make its payments to ICC and (b)
colluding with ICC in a manner that caused ICC to breach the implied covenant of
good faith and fair dealing by refusing to modify the ICC license.49 Because
Strauss acted within its contractual rights, Esio’s allegations of tortious
interference fail to state a claim.
The typical claim for tortious interference arises when the defendant
wrongfully prevents a third party from performing a contract. This cause of action
follows the Restatement (Second) of Torts, § 766, and requires “(1) a valid
contract, (2) about which the defendants have knowledge, (3) an intentional act by
the defendants that is a significant factor in causing the breach of the contract,
(4) without justification and (5) which causes injury.”50
49
Esio’s only claim for tortious interference with contract relates to the Second Amended
ICC License. While Esio also alleges that Strauss tortiously interfered with its
relationship with Walmart®, it classifies this claim as tortious interference with
prospective business relations and does not allege that Strauss caused Walmart® to
breach an existing contract. Compl. ¶¶ 160, 165–66, 150–57.
50
Irwin & Leighton, Inc. v. W.M. Anderson Co., 532 A.2d 983, 992 (Del. Ch. 1987)
(citing RESTATEMENT (SECOND) OF TORTS § 766 (1979)).
26
Section 766A of the Restatement (Second) of Torts extends the cause of
action to instances where the defendant is alleged to have tortiously interfered with
the plaintiff’s performance of a contract, providing that “[o]ne who intentionally
and improperly interferes with the performance of a contract . . . between another
and a third person, by preventing the other from performing the contract or causing
his performance to be more expensive or burdensome, is subject to liability to the
other for the pecuniary loss resulting to him.”51 The cause of action outlined in
Section 766A is less widely adopted,52 and has never formally been recognized by
Delaware courts.53
As discussed below, whether the claim is brought under Section 766 or
Section 766A, a plaintiff cannot prevail on a tortious interference with contract
claim if the essence of his complaint is that the defendant refused to deal when he
had no obligation to deal,54 or that the defendant’s alleged tortious conduct
51
RESTATEMENT (SECOND) OF TORTS § 766A (1979).
52
See, e.g., Price v. Sorrell, 784 P.2d 614 (Wyo. 1989) (rejecting Section 766A as a
viable cause of action due largely to the potential for abuse and citing cases in accord).
53
Esio cites Allen Family Foods, Inc. v. Capitol Carbonic Corp., 2011 WL 1205138(Del. Super. Ct. 2011), for the proposition that Delaware has formally adopted
Section 766A as a cause of action. This reads too much into the Allen court’s treatment
of Section 766A. Allen merely determined that “Delaware would not reject
Section 766A” on the bases proffered by the defendant there before going on to hold that
the plaintiff had not stated a viable claim under Section 766A in any event. Id. at *6.
The same holds true here; Esio has failed to plead a claim under Section 766A.
54
RESTATEMENT (SECOND) OF TORTS § 766 cmt. b (1979).
27
amounted to nothing more than the defendant acting within its contractual rights.55
Both of Esio’s theories of tortious interference with contract, as pled, rest on these
unactionable premises.
a. Esio Has Not Stated a Claim Under Section 766A.
I have already determined that the contracts between Esio and Strauss
merely provided Strauss with the option to convert the Loan to equity and to make
further equity investments. Therefore, Strauss’s decisions to enforce its Loan
covenants with Esio when Esio defaulted on the Loan, including its seizure of the
pledged collateral, and not to invest further in Esio cannot constitute tortious
interference with Esio’s performance of the Second Amended ICC License or any
other contract since Strauss’ refusal to deal was justified. Since Esio has failed to
plead that Strauss’ conduct was tortious, I need not decide whether vel non
Section 766A should be adopted as Delaware law.
55
See, e.g., Debakey Corp. v. Raytheon Service Co., 2000 WL 1273317, at *18 (Del. Ch.
Aug. 25, 2000) (refusing to find a party liable for breaching its implied covenant of good
faith and fair dealing when it failed to make a further investment where the contract
provided that once investments had exceeded $2 million, further investments were
subject to the party’s “sole discretion”). See also Crivelli v. General Motors Corp.,
215 F.3d 386, 395 (3d Cir. 2000) (applying Pennsylvania law and noting that many
courts have “held that a company’s exercise of a right of first refusal [granted to them in
contract] cannot ordinarily give rise to a claim of intentional interference with a
contract”).
28
b. Esio Cannot Claim that Strauss Tortiously Caused ICC to Breach
the Implied Covenant of Good Faith and Fair Dealing
A party cannot claim a tortious interference with contract when there has
been no breach of that contract.56 To get around this fundamental premise, Esio
seeks once again to invoke the implied covenant of good faith and fair dealing to
achieve what its express contracts (in this instance, the Second Amended ICC
License) will not support—a basis to impose liability upon Strauss for ICC’s
refusal to modify the Second Amended ICC License so that Esio could continue to
exploit it. The implied covenant will not impose on ICC an obligation that Esio
did not bargain for in the Second Amended ICC License.
While it is true that the implied covenant of good faith and fair dealing
inheres to every Delaware contract, it cannot be employed to rewrite an otherwise
comprehensive written contract between the parties.57 Rather, the implied
covenant requires parties to a contract only to “refrain from arbitrary or
unreasonable conduct which has the effect of preventing the other party to the
contract from receiving the fruits of the bargain.”58 The court will not impose the
56
Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d 697, 713 (Del. Ch.), aff’d,
861 A.2d 1251 (Del. 2004).
57
Nemec v. Shrader, 991 A.2d 1120, 1125–26 (Del. 2010).
58
Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005) (internal
quotation marks omitted).
29
implied duty of good faith and fair dealing on a party to require that the party
actually improve the deal the plaintiff struck in the first instance.59
Once again, Esio would have the Court ignore the contract it negotiated with
ICC by injecting it with provisions that would require ICC to modify the license in
the event Esio committed an act of default under either the Second Amended ICC
License or the Loan Agreement. This Court will not engage in that kind of
“judicially compelled charity.”60 Esio could have negotiated for a provision that
expanded its rights to compel a modification of the Second Amended ICC License
in certain instances of default. It did not. Therefore, because ICC was not required
to modify the Second Amended ICC License, Strauss cannot be held liable for
tortiously interfering with the Second Amended ICC License by causing ICC to
breach the implied covenant when it refused to modify that contract.
2. Esio Has Stated a Claim for Tortious Interference with Prospective
Business Relations
To plead a claim for tortious interference with prospective business
relations, Esio was required to allege facts that demonstrate “(a) the reasonable
probability of a business opportunity, (b) the intentional interference by defendant
59
Winshall, 55 A.3d at 641 (holding that Delaware law does not interpret the implied
covenant to a require that the defendant “not simply refrain from upsetting the
fundamental expectations of the other party, as implied by the explicit terms of the deal,
but actually improve that deal by expanding its contractual counterparty’s expectancy as
a matter of judicially compelled charity.”).
60
Id.30
with that opportunity, (c) proximate causation and (d) damages.”61 In addition,
Esio was required to plead that Strauss’ alleged interference was somehow
improper.62 As discussed above, there can be no improper interference where the
defendant acted either (1) affirmatively within its contractual rights or (2) by
omission where it had no contractual obligation to deal. Thus, having determined
that Strauss was within its contractual rights to enforce its Loan covenants and
decline to invest in Esio, any claim that Strauss tortiously interfered with Esio’s
prospective business relations with Walmart® or any other retailer or supplier by
failing to infuse Esio with more capital is not well-pled.63
What remains of Esio’s tortious interference with prospective business
relations claim are Esio’s allegations that Strauss: (1) intentionally sabotaged the
Euro-Pro meeting and thereby interfered with Esio’s prospects of developing a
business relationship with Euro-Pro, and (2) improperly met with PepsiCo without
Esio’s knowledge or permission and thwarted any possible business relationship
61
DeBonaventura v. Nationwide Mut. Ins. Co., 428 A.2d 1151, 1153 (Del. 1981).
See also RESTATEMENT (SECOND) OF TORTS § 766B (1979).
62
See Lipson v. Anesthesia Servs., P.A., 790 A.2d 1261, 1287 (Del. Super. Ct. 2001)
(“Plaintiffs bear the burden of proof with respect to all elements of the claim of
intentional interference, including that the interference was improper”).
63
Compl. ¶¶ 160, 163, 165–66.
31
with PepsiCo by claiming the Esio’s products belonged to Strauss and
demonstrating a faulty product prototype.64
While the plaintiff must ultimately prove the reasonable probability of a
business opportunity, the “existence of such a business expectancy is a question of
fact not suitable for resolution [on a motion to dismiss].” 65 Esio has pled
prospective business opportunities with Euro-Pro and PepsiCo and those well-pled
facts are presumed to be true at this stage of the proceedings.
Esio has also pled that Strauss engaged in conduct with respect to PepsiCo
and Euro-Pro that interfered with Esio’s prospects of developing business
relationships with these two fixtures of the beverage industry. Strauss counters
that any conduct in which it might have engaged at meetings with PepsiCo and
Euro-Pro was justified under Sections 76966 and 77367 of the Restatement (Second)
64
Compl. ¶¶ 74, 161, 163(vi).
65
Gill v. Del. Park, LLC, 294 F.Supp. 2d 638, 646 (D. Del. 2003).
66
“One who, having a financial interest in the business of a third person intentionally
causes that person not to enter into a prospective contractual relation with another, does
not interfere improperly with the other’s relation if he (a) does not employ wrongful
means and (b) acts to protect his interest from being prejudiced by the relation.”
RESTATEMENT (SECOND) OF TORTS § 769 (1979).
67
“One who, by asserting in good faith a legally protected interest of his own or
threatening in good faith to protect the interest by appropriate means, intentionally causes
a third person not to perform an existing contract or enter into a prospective contractual
relation with another does not interfere improperly with the other’s relation if the actor
believes that his interest may otherwise be impaired or destroyed by the performance of
the contract or transaction.” RESTATEMENT (SECOND) OF TORTS § 773 (1979).
32
of Torts because it was protecting its legally protected or financial interests.68
Strauss points to no particular provision in any of its contracts with Esio that would
authorize Strauss to represent to potential business partners that Esio’s products
and technology actually belonged to Strauss or would permit Strauss to make
disparaging comments about the efficacy or quality of Esio’s technology or
product line.69 Instead, Strauss argues generally that it took steps it believed were
necessary under the circumstances to protect its Loan collateral.70 While this may
ultimately prove true, justification defenses under Sections 769 and 773 present
fact-intensive inquiries that are typically not appropriate for disposition on a
motion to dismiss.71
68
The “burden of showing privilege rests upon the [alleged] interferor. . . .” Bowl-Mor
Co., Inc. v. Brunswick Corp., 297 A.2d 61, 66 (Del. Ch. 1972) (addressing a defense
raised under Section 769). See also Matter of L.B. Trucking, Inc., 163 B.R. 709, 725
(Bankr. D. Del. 1994) (in discussing Section 773 the court stated that “[i]f these
circumstances exist, the defendant has a meritorious defense to the alleged tort of
intentional interference with the performance of a contract by a third person.”).
69
These allegations must be accepted as true at this stage of the proceedings.
70
Def. Strauss Water Ltd.’s Opening Br. in Supp. of its Mot. to Dismiss the Am.
Compl. 44–48.
71
For instance, according to the Complaint, the meetings with PepsiCo and Euro-Pro
where Strauss is alleged to have engaged in tortious interference occurred prior to Strauss
declaring a default of the Loan. Compl. ¶¶ 74–81 (Strauss meets with customers after the
Loan closed through early February, 2013); Id. ¶ 83 (Strauss sends notice of default on
February 17, 2013). The extent to which Strauss was justified in taking actions with
respect to PepsiCo and Euro-Pro to protect its collateral prior to declaring a default of the
Loan is, at least in part, a question of fact. Section 769 requires Strauss to demonstrate it
did “not employ wrongful means;” Section 773 requires Strauss to demonstrate that it
33
Esio also must plead that Strauss’ alleged tortious interference was the
proximate cause of its damages. Delaware embraces a “but for” causation
paradigm where proximate cause exists when an act or omission “in natural and
continuous sequence, unbroken by any efficient intervening cause, produces the
injury and without which the result would not have occurred.”72
Esio alleges that Strauss’ statements to PepsiCo representatives that Strauss,
not Esio, controlled Esio’s products and technology, and its demonstration to
PepsiCo of a faulty prototype, tortiously interfered with any prospect that Esio
might form a business relationship with PepsiCo.73 What Esio has failed to plead,
however, is that a business relationship with PepsiCo might have saved Esio from
the harm it alleges to have suffered as a proximate result of the wrong. The
Complaint contains no allegations of what a business relationship with PepsiCo
might have brought to Esio or how it might have saved Esio from its financial
demise. In the absence of such allegations, it is not reasonably conceivable that
acted in “good faith” using “appropriate means.” RESTATEMENT (SECOND) OF TORTS
§§ 669, 773 (1979). These are fact-intensive inquiries that must be undertaken with the
benefit of a factual record. See Bowl-Mor Co. Inc., 297 A.2d at 66 (holding that
justification defense could not be determined “as a matter of law”).
72
Duphily v. Del. Elec. Co-op., Inc., 662 A.2d 821, 828–29 (Del. 1995) (internal
quotation marks and alterations omitted).
73
Compl. ¶¶ 74, 161, 163(vi).
34
Strauss’ alleged tortious interference with Esio’s prospective business relationship
with PepsiCo was a proximate cause of Esio’s alleged harm.74
Esio’s allegations with respect to the lost business opportunity with Euro-
Pro are more substantive. As noted, Esio alleges that Strauss hijacked its meeting
with Euro-Pro and told Euro-Pro that it would have to deal with Strauss because
Strauss now controlled Esio’s technology.75 The purpose of this meeting, at least
from Esio’s perspective, was to enlist Euro-Pro as a partner who might offer
“measures that would help Esio reduce manufacturing costs to remain financially
viable and reduce the need for a larger financial investment.”76 The allegations are
thin but do present a reasonably conceivable basis upon which Esio might
demonstrate that a business relationship with Euro-Pro, had Strauss not interfered
with it, would have lowered Esio’s manufacturing costs in a manner that would
have allowed it to service its debt with Strauss and remain viable. Therefore, Esio
has adequately pled that Strauss’ actions during the Euro-Pro meeting were a
proximate cause of its damages.
74
See Malpiede v. Townson, 780 A.2d 1075 (Del. 2001) (affirming dismissal of tortious
interference claim on motion to dismiss because it was not reasonably conceivable based
on the complaint that the alleged interference proximately caused the harm alleged).
75
Compl. ¶¶ 80–81, 163(ii).
76
Id. ¶ 79.
35
C. Esio Has Pled No Basis to Compel Arbitration
Esio seeks a declaration that Strauss must arbitrate the claims Esio has
brought in this Court because they are connected to claims that are the subject of
arbitration proceedings pending between Esio and ICC in Arizona. Once again,
Esio would have the Court vary the terms of its contracts with Strauss to compel a
result for which it did not bargain.
Esio and Strauss disagree about whether Arizona or Delaware law governs
the determination of whether the arbitration clause in the Second Amended ICC
Agreement is binding upon Strauss. When determining which sovereign’s laws to
apply when laws potentially conflict, Delaware courts use a two-part test:
[F]irst, the court determines whether there is an actual conflict of law
between the proposed jurisdictions. If there is a conflict, the court
determines which jurisdiction has the ‘most significant relationship to
the occurrence and the parties’ based on the factors (termed
“contacts”) listed in the Restatement (Second) of Conflict of Laws.77
Where the result would be the same under both sovereign’s laws, there is a “false
conflict” and “the Court should avoid the choice-of-law analysis altogether.”78
Here, both parties agree in their briefs that the there is no real conflict between
77
Bell Helicopter Textron, Inc. v. Arteaga, 113 A.3d 1045, 1050 (Del. 2015).
78
Deuley v. DynCorp Int’l, Inc., 8 A.3d 1156, 1161 (Del. 2010).
36
Delaware and Arizona with regard to the arbitration issue.79 I will apply Delaware
law.
It is “well settled law in Delaware that choice of forum provisions are
enforceable.”80 The Loan Agreement contains a Delaware forum selection
provision that governs both that contract and the Warrant. Absent some
compelling reason to disregard this provision, it should be enforced. The Side
Letter that Strauss entered into with ICC, which incorporates the Second Amended
ICC License, contains its own forum selection clause selecting New York State
courts or federal courts that sit in the Borough of Manhattan. None of these
agreements to which Strauss is a party require Strauss to submit to arbitration with
Esio.
As a general rule, this Court will compel parties to submit to arbitration only
where they have agreed to arbitrate as a matter of contract.81 A non-signatory will
be bound by an arbitration clause within a contract only if “traditional principles of
contract and agency law equitably confer upon that party signatory status with
79
See Answering Br. 51, n.13 (“Even if Delaware law applied to this analysis, the result
would be the same”); Def. Strauss Water Ltd.’s Reply Br. in Further Supp. of its Mot. to
Dismiss the Compl. 32 (“The result is the same, however, even if Arizona law applies”).
80
Flintkote Co. v. Aviva PLC, 769 F.3d 215 (3d Cir. 2014) (applying Delaware law).
81
James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78–79 (Del. 2006).
37
regard to the underlying agreement.”82 A non-signatory may be found to have
“embraced” a contract “(1) where the non-signatory direct[ly], rather than
indirect[ly] benefit[ted] from the [agreement] during the course of the agreement’s
performance[,]; (2) where the non-signatory consistently maintain[s] that other
provisions of the same contract should be enforced to benefit him[,]; or (3) where
the non-signatory sue[s] to enforce the provisions of a contract that it likes, while
simultaneously disclaiming the provisions that it does not.”83
Under the third-party beneficiary theory, the third-party must directly benefit
from the agreement. While Esio renegotiated with ICC to allow Strauss access to
the ICC technology, Strauss’ rights to this technology did not flow directly from
the Second Amended ICC License. Rather, Strauss’ benefit from the Second
Amended ICC License was indirect and was dependent upon the Side Letter where
ICC approved Strauss’ security interest in Esio’s license to ICC technology, the
pledge of the Second Amended ICC License as collateral for the Loan and the
cross-licensing agreement between Strauss and Esio. Since Strauss did not directly
benefit from the Second Amended ICC License, the third-party beneficiary theory
cannot be used to compel Strauss to join the Arizona arbitration.84
82
NAMA Hldgs., LLC v. Related World Mkt. Ctr., 922 A.2d 417, 430 (Del. Ch. 2007).
83
Flintkote, 769 F.3d at 221 (alteration in original) (internal quotation marks omitted).
84
I note that the third-party beneficiary theory is typically cited as a basis to bind a non-
signatory to arbitration when the non-signatory seeks to prosecute claims outside of
38
The doctrine of equitable estoppel may also bind a party to an arbitration
agreement even where it is a non-signatory if the non-signatory “by his conduct
intentionally or unintentionally leads another, in reliance upon that conduct, to
change position to its detriment.”85 The party who claims that another is bound to
an arbitration clause by estoppel must demonstrate that “(i) [it] lacked knowledge
or the means of obtaining knowledge of the truth of the facts in question; (ii) [it]
reasonably relied on the conduct of the party against whom estoppel is claimed;
and (iii) [it] suffered a prejudicial change of position as a result of their reliance.”86
The estoppel theory breaks down when the party seeking to compel arbitration is a
party to another agreement with the party whom it seeks to compel to arbitrate, that
other agreement is central to the dispute and it contains an express forum selection
provision.87 Under these circumstances, the moving party will be precluded from
claiming that it reasonably expected it would be able to compel arbitration
notwithstanding the contrary forum selection provision to which it agreed.88
arbitration. Esio has failed to cite any cases where this theory has been applied by a court
to bind a non-signatory defendant to arbitrate claims brought against it.
85
Wilson v. Am. Ins. Co., 209 A.2d 902, 903–04 (Del. 1965).
86
Nevins v. Bryan, 885 A.2d 233, 249 (Del. Ch.), aff’d, 884 A.2d 512 (Del. 2005).
87
Flintkote, 769 F.3d at 223.
88
See id. (finding that the defendant was not required to arbitrate where it was party to an
agreement with the plaintiff that contained an express forum selection provision).
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Here, Strauss expressly maintained its right to litigate claims arising under
the Loan Agreement, Warrant and Side Letter in the fora agreed to by the parties to
those contracts. Therefore, Esio cannot be heard to argue that Strauss is estopped
from refusing to submit to arbitration under the Second Amended ICC License or
that it should be compelled to do so.
IV. CONCLUSION
For the foregoing reasons, the Complaint fails to state a claim upon which
relief can be granted under Court of Chancery Rule 12(b)(6). Defendants’ motion
to dismiss is GRANTED as to Counts I, II, III, IV, V, VI, VII, VIII and X with
prejudice, and DENIED as to Count IX (only with respect to the alleged tortious
interference with Esio’s prospective business relations with Euro-Pro).
IT IS SO ORDERED.
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