Brace Industrial Contracting, Inc. ( 2015 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
COURT OF CHANCERY COURTHOUSE
34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
SAM GLASSCOCK III
VICE CHANCELLOR
Date Submitted: August 27, 2015
Date Decided: August 28, 2015
Robert A. Penza, Esquire
Christopher M. Coggins, Esquire
Michael P. Kelly, Esquire
Andrew S. Dupre, Esquire
Brian R. Lemon, Equire Polsinelli PC
Benjamin A. Smyth, Esquire 222 Delaware Avenue
McCarter & English LLP Suite 1101
Renaissance Center Wilmington, DE 19801
405 N. King Street, 8‘“ Floor
Wilmington, DE 19801
Re: Brace Industrial Contracting, Inc. et al. v. Peterson
Enterprises, Inc. et al.
Civil Action No. 1 1 189-VCG
Dear Counselgjé
The matter before me involves enforcement of a covenant not to compete
located in a stock purchase agreement. Following a hearing on the Plaintiffs’
Motion for Preliminary Injunctive Relief (the “Hearing”), I made a partial ruling
from the bench. This letter opinion resolves the remaining issues. with respect to
the Plaintiffs’ Motion. As counsel are aware, in order to demonstrate entitlement
to a preliminary injunction, the moving party must show a reasonable probability
of success on the merits, that irreparable harm will result absent the injunction, and
that such harm outweighs the harm to the non—moving party should the preliminary
injunction prove improvidently granted.1
For the reasons explained from the bench at the Hearing on August 20, 2015,
I found for the Plaintiffs here on the first two factors.2 Because I allowed an
amendment to the Complaint involving injunctive relief shortly before the Hearing,
and because I found that equity so required, I permitted the Defendants to
supplement the record with an affidavit concerning the balance of the equities.
That supplemental affidavit was submitted yesterday; what follows is my decision
in light of that affidavit and the record developed in connection with the Hearing.
To briefly recap,3 the parties entered a Stock Purchase Agreement (the
“SPA”) which provided that the Seller—a Defendant here—would not compete
with the Buyer—a Plaintiff here—for a period of five years in the United States
and Canada in “the Business.” “The Business” is a defined term under the SPA
meaning “the turnkey, integrated business of selling and renting industrial and
commercial scaffolding and the provision of related design, engineering, erection,
dismantling, and jobsite management and maintenance services.”4 The Plaintiffs
clarified at the Hearing that only the rental and sale of the “PERI UP” brand of
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gig-See, e.g., Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1278-79 (Del. 1989).;
fiiPrelim. Inj. Hr’g Tr. 8121—7.
This Letter Opinion will supplement, not displace, my bench ruling at the Hearing.
fiEPls.’ Opening Br. in Supp. of Mot. for a Prelim. Inj. Exhibit B (the SPA), at Exhibit A.
2
“industrial and commercial scaffolding” was the subject of the preliminary
injunction requests.5
The Defendants concede that they are contractually prohibited from
competing in “the Business” in the “Territory,” the United States and Canada,
under the SPA, but contend that a carve-out allows them to sell and rent
scaffolding through the entity Vernon L. Goedecke Company, Inc. (“Goedecke”).
The carve-out provides, in relevant part:
Vernon L. Goedecke Company, Inc. and its Affiliates may continue to
design, engineer, sell and rent scaffolding equipment and other
products to participants in the Business in the Territory, provided that
Vernon L. Goedecke Company, Inc. and such Affiliates are not
allowed to perform the Business in the Territory.6
In other words, the carve-out is limited to transactions between Goedecke and
those “participa[ting] in” the Business, so long as those transactions do not amount
to “perform[ance] of the Business.” Neither “participants in” nor “perform the
Business” are defined terms in the SPA. I found that, although the language is
ambiguous, there is a reasonable likelihood that the Plaintiffs will prevail on their
construction of the contact, which is that the carve-out permits only rental and sale
of scaffolding by Goedecke to those themselves in the business of providing
5 Prelim. Inj. Hr’ g Tr. 29:12—23. At oral argument, counsel for the Plaintiffs suggested that only
PERI UP scaffolding was the subject of the injunction sought, but asked to confirm that with his
client; since, despite subsequent correspondence to the Court from counsel, he has not withdrawn
the suggestion, I limit my consideration to preliminarily enjoining sales and rentals of PERI UP
industrial and commercial scaffolding.
6 Pls.’ Opening Br. in Supp. of Mot. for a Prelim. Inj. Exhibit B (the SPA) at § 5.2(a), (d); see
also id. §5.2(h).
3
scaffolding—that is, business-to-business sales and rentals—and does not carve
out from the prohibition retail sales or rentals to an end user. Goedecke is
currently engaged in such retail rentals and sales. Thus, the Plaintiff has satisfied
the first prong of the analysis. In addition, both because the parties provided in the
SPA that breach of the non-compete would entail irreparable harm and because the
probable effect of competition on the goodwill purchased by the Plaintiffs made
irreparable harm likely here, I found that the second prong of the preliminary
injunctive relief analysis was satisfied.
In addition to unsuccessfully contesting the Plaintiffs’ demonstration of
likelihood of success on the merits and irreparable harm, the Defendant opposed
the injunction on the ground that it would harm its business in a substantial way,
precluding a successful balance of the equities, and in the alternative sought a bond
in the amount of $1 million, which it contends is its yearly revenue in connection
with its business of “renting and selling all scaffolding.”7 But it is clear that the
injunction actually sought—as clarified at the hearings—will have a much smaller
impact. Plaintiffs seek to enjoin only the sale and rental of PERI UP brand
commercial scaffolding in the United States and Canada; the Defendants’
_.._ -
7 Defs.’ Answering Br. in Opp’n to Pls.’ Mot. for Prelim. Inj. Exhibit C (Aff. of Eric Peterson) 1]
12.2.-
8 See supra note 5w
worldwide business involves many types of scaffolding not to be covered by the
preliminary injunction,
In a supplemental submission, the Defendants have placed an affidavit in the
record contending that Goedecke’s (presumably worldwide) sale and rental of
PERI UP scaffolding produces revenue averaging approximately $277,000 per
year, virtually all to end users and subject to the requested injunction. In addition,
the Defendants suggest that other revenue would be lost if these customers could
not purchase or rent PERI UP scaffolding from Goedecke, and that Goedecke
would lose significant but unquantifiable customer goodwill if the injunction
sought is granted,
I find that the balance of the equities in light of these facts—that Goedecke’s
revenue from worldwide PERI UP sales and rentals is only a quarter of its total
scaffolding—business revenue, represented to be $1 million yearly, and that this
injunction will apply only in the Territory, and not worldwide—supports the
preliminary injunctive relief sought when weighed against the irreparable harm
alleged by the Plaintiffs and specified contractually. The Plaintiffs’ request to
enjoin the Defendants from the sale and rental of PERI UP commercial and
industrial scaffolding to end users in the Territory, pending trial, is granted.
I must next provide for surety from which the Defendants may be
compensated if the grant of preliminary relief proves improvident.9 The burden to
demonstrate the proper amount of such surety rests with the Defendants.10
Initially, the defendants sought a $1 million bond, in light of their revenue
involving scaffolding. The injunction granted will apply only to sales and rentals
involving PERI UP, however, which averages approximately $277,000 annually.
In addition, the Defendants point to potential loss of other non-prohibited sales,
and goodwill. But the Defendants fail to limit calculation of potential lost
revenues to those from the Territory—the United States and Canada—and I note
that the Plaintiffs have alleged, and the Defendants have not denied, that the
Defendants do business worldwide. In light of all those factors, and the fact that
the limited nature of the issues here indicates that a prompt resolution of the
contractual issues necessary to permanent injunctive relief is likely, I find
$250,000 sufficient surety.
As to the form of surety, such surety is “usually [provided via] a bond.”11 I
note, however, that here the Defendants admittedly hold property belonging to the
Plaintiffs—funds in the form of payments mistakenly made to the Defendants by
9 Ct. Ch. R.65(c).
'0 E. g. Guzzetta v. Serv. Corp. of Westover Hills, 7 A.3d 467, 470 (Del. 2010) (The party seeking
an injunction bond must support its application with “facts of record or . . . some realistic as
opposed to a yet-unproven legal theory from which damages could flow to the party enjoined.”
(quoting Petty v. Pennlech Papers, Inc, 1975 WL 7481 at *1 (Del. Ch. Sept. 24, 1975»).
“ Id.6
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customers of the Plaintiffs—in the amount of millions of dollars. The Defendants
concede that they are holding this property as a kind of improper self—help, as
leverage in this litigation and as a premature set-off against (much smaller) claims
they have against the Plaintiffs. The Plaintiffs sought a mandatory preliminary
injunction directingthat the Defendants return this money to them, which I denied
on grounds of lack of irreparable harm. However, in this context, it would be
inequitable to require the Plaintiffs to post security, via a secured bond or
otherwise, in the amount I have ordered in addition to the amount of their funds
already held by the Defendants.
Therefore, the Plaintiffs may file an unsecured bond in a form satisfactory to
the Register in Chancery, binding them to payment for benefit of the Defendants in '
the amount of $250,000, conditioned upon Order of the Court, after which bond is
filed the Preliminary Injunction will take effect. If Defendants wish this bond to be
secured by funds held by the Court, they may pay in to the Register in Chancery
$250,000 of the funds which they currently hold for the benefit of the Plaintiffs,
which will constitute security for the bond against which they may recover should
the injunction prove wrongful.
For the foregoing reasons, the Plaintiffs’ request for preliminary injunctive
relief is granted. The Plaintiffs should submit an appropriate form of Order.
Sincerely,
/s/ Sam Glasscock III
Sam Glasscock III