Red Cat Holdings, Inc. v. Autonodyne LLC ( 2024 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
NATHAN A. COOK LEONARD L. WILLIAMS JUSTICE CENTER
500 N. KING STREET, SUITE 11400
VICE CHANCELLOR WILMINGTON, DELAWARE 19801-3734
January 30, 2024
David S. Eagle Kevin M. Coen
Klehr Harrison Harvey Branzburg LLP Emily C. Friedman
919 N. Market Street, Suite 1000 Morris Nichols Arsht & Tunnel LLP
Wilmington, DE 19801 1201 N. Market Street
Wilmington, DE 19801
RE: Red Cat Holdings, Inc., et al. v. Autonodyne LLC, et al.
C.A. No. 2022-0878-NAC
Dear Counsel:
This letter decision resolves the defendants’ motion to dismiss as it relates to
the plaintiffs’ claims against defendant Autonodyne LLC (“Autonodyne” or the
“Company”).1 For the reasons below, those claims must be dismissed.
I. FACTUAL BACKGROUND
I have drawn the relevant facts from the Verified First Amended Complaint
(the “Amended Complaint”) and the documents incorporated by reference or integral
to it.2
1
Red Cat Holdings, Inc. v. Autonodyne LLC, et al., C.A. No. 2022-0878-NAC, Docket
(“Dkt.”) 24, Defendants’ Motion to Dismiss the Verified First Amended Complaint (the
“Motion to Dismiss”). Pursuant to my forthcoming order, I am deferring my decision on
the claims brought against Daniel Schwinn.
2
See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004). Citations
in the form of “AC ¶ __” refer to the Amended Complaint. Dkt. 23. Citations in the form
of “SLA § __” refer to Exhibit 1 to the Amended Complaint. Dkt. 23. Citations in the
C.A. No. 2022-0878-NAC
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Page 2
A. The Parties
Plaintiff Teal Drones, Inc. (“Teal Drones”) is a subsidiary of plaintiff Red Cat
Holdings, Inc. (“Red Cat”) (together, “Plaintiffs”).3 This case arises from a Software
Licensing Agreement (the “SLA”) that Teal Drones entered with defendant
Autonodyne in May 2022.4 Plaintiffs allege that defendant Daniel Schwinn
(together with the Company, “Defendants”) is Autonodyne’s principal equity
holder.5
B. The Software Licensing Agreement
The SLA emerged from a professional collaboration between Teal Drones and
Autonodyne that had been ongoing since 2020.6 The parties devised this document
to regulate Teal Drones’s use of the Company’s avionics software.7 The SLA gave
Teal Drones a non-exclusive license to use certain avionics software and a limited
form “OB at __” refer to the Opening Brief in Support of Defendants’ Motion to Dismiss
the Verified First Amended Complaint. Dkt 29. Citations in the form “AB at __” refer to
the Plaintiffs’ Answering Brief in Opposition to Defendants’ Motion to Dismiss the Verified
First Amended Complaint. Dkt. 33.
3
AC ¶ 1.
4
AC ¶ 22; see also SLA.
5
AC ¶ 9.
6
AC ¶ 18.
7
AC ¶¶ 22–23.
C.A. No. 2022-0878-NAC
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Page 3
exclusive license “to certain functionality in the avionics software.”8 This enabled
the Company to carry on servicing other customers, to the extent doing so did not
conflict with the functionality it exclusively licensed to Teal Drones.9
Three sections of the SLA are of particular significance here: Sections 15.3,
9, and 14.3 (b)–(c).
Section 15.3 restricts public announcements relating to the SLA. It provides
that “[n]either party shall issue or release any announcement, statement, press
release, or other publicity or marketing materials relating to this Agreement . . . in
each case, without the prior written consent of the other party, which consent shall
not be unreasonably withheld or delayed.”10
Section 9 governs confidentiality. Section 9.1 defines “Confidential
Information.” The definition includes “all Specifications and unpublished
Documentation” and further provides that “the terms of this Agreement are and will
remain the Confidential Information of both parties.”11
8
AC ¶ 23; see also SLA § 2.1 (describing the software license).
9
See, e.g., SLA § 7.4(a) (contemplating that the Company would have and continue to
provide services to its “other customers”).
10
SLA § 15.3.
11
Id. § 9.1.
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Section 9.3 restricts the parties’ use of Confidential Information. It states: “As
a condition to being provided with any disclosure of or access to Confidential
Information, the Receiving Party shall: (a) not access or use Confidential
Information other than as necessary to exercise its rights or perform its obligations
under and in accordance with this Agreement[.]”12
Section 14.3(b) grants the Company an express right to terminate the SLA if
Teal Drones breaches Section 9. It provides that: “[Autonodyne] may terminate this
Agreement, effective on written notice to [Teal Drones], if . . . [Teal Drones]
breaches any of the terms or conditions of Section 2.3, Section 3, Section 9, or
Section 10[.]”13
Lastly, Section 14.3(c) gives either party the right to terminate the SLA in the
event of a counterparty’s uncured or uncurable material breach. It provides that:
[E]ither party may terminate this Agreement, effective on written notice
to the other party, if the other party materially breaches this Agreement,
and such breach: (i) is incapable of cure; or (ii) being capable of cure,
12
Id. § 9.3. Section 9.3(d) is also relevant. It states that the Receiving Party shall “ensure
its Representatives’ compliance with, and be responsible and liable for any of its
Representatives’ non-compliance with, the terms of this Section.” Id. The parties do not
dispute that Red Cat is Teal Drones’s “Affiliate,” as that term is defined in the SLA. The
SLA also defines “Representatives” as including a parties’ Affiliates’ “employees, officers,
directors, agents, and legal advisors.” Id. § 1.
13
SLA § 14.3(b), Preamble (defining “Licensor” as “Autonodyne” and “OEM” as “Teal
Drones”).
C.A. No. 2022-0878-NAC
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remains uncured 30 days after the nonbreaching party provides the
breaching party with written notice of such breach[.]14
C. The Email Exchange
On August 21, 2022, Jeff Thompson from Teal Drones emailed Autonodyne’s
CEO, Steve Jacobson.15 Thompson’s email to Jacobson stated the following:
Jake, Not sure if you saw Teal / Reveal Technologies press release but
the response has been tremendous and it’s already generating orders. I
wanted to give you the heads up that we’re developing a similar release
about the Teal and Autonodyne relationship. Let me know if you have
any objections, or if you want to send us a quote or have our PR team
make a quote[.]16
Three minutes later, Jacobson responded: “That sounds great. I’m on vacay
all week up in the Adirondacks. You guys can make up some quote - I’m sure it will
be fine or at least a great start.”17
D. The Press Release
Two days after the email exchange—without further contacting Jacobson or
the Company regarding the press release—Red Cat issued a press release detailing
14
SLA § 14.3(c).
15
AC ¶ 45, Ex. 2 (email exchange). The SLA designates Jacobson as the person to whom
any consents, requests, notices, or other communications must be sent for the
communications to have legal effect. See SLA § 15.4.
16
AC ¶ 45 (footnote omitted), Ex. 2.
17
Id.
C.A. No. 2022-0878-NAC
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Teal Drones’s relationship with the Company (the “Press Release”).18 Neither
Jacobson nor the Company ever saw a draft of the Press Release before Red Cat
published it. In the Amended Complaint, Plaintiffs allege that the “Press Release
quoted the exact language of the SLA regarding the exclusive rights that the SLA
granted to Teal Drones.”19 The Press Release also stated that:
Under the terms of the agreement, Autonodyne software will only be
made available to Teal, effectively jumping Teal ahead of other drone
companies seeking to provide multi-vehicle control or capabilities like
unlimited surveillance. Competitors will have to develop their own
software or secure licenses from others with inferior test performance.20
E. Termination And Litigation
On August 26, 2023, three days after Red Cat issued the Press Release, the
Company delivered a letter to Teal Drones purporting to terminate the SLA (the
“Notice”).21 The Notice explained that, in addition to “grossly mischaracteriz[ing]
the terms of the Agreement,” Red Cat issued the Press Release without the
Company’s consent and included Confidential Information in the published
material.22 Thus, the Notice concluded, Plaintiffs breached Sections 9 and 15.3 of
18
AC ¶ 47; OB Ex. C (Press Release).
19
AC ¶ 48.
20
OB Ex. C.
21
See AC ¶ 50, Ex. 3.
22
See id.
C.A. No. 2022-0878-NAC
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the SLA, which triggered the corresponding termination rights in Section 14.3(b)
and (c), respectively.23
Plaintiffs allege that, after delivering the Notice, the Company stopped
performing under the SLA.24 For Schwinn’s involvement, Plaintiffs allege that he
made the Company’s decision to send the Notice and that Schwinn directed the
Company’s employees to stop performing under the SLA.25
Litigation ensued. The Amended Complaint asserts five claims. Count I is a
claim for breach of contract; Count II, breach of the implied covenant; Count III,
tortious interference with contractual relations and prospective contractual relations;
Count IV, declaratory judgment; and Count V, injunctive relief. Plaintiffs assert
Counts I, II, IV, and V against the Company. Plaintiffs assert Counts III and IV
against Schwinn.
II. LEGAL ANALYSIS
Defendants moved to dismiss all counts for failure to state a claim. Defendant
Schwinn also moved to dismiss the claims against him for lack of personal
23
See id. Ex. 3.
24
See id. ¶ 53.
25
Id. ¶ 55.
C.A. No. 2022-0878-NAC
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jurisdiction. Personal jurisdiction is addressed in a separate order. This decision
solely addresses dismissal of Plaintiffs’ claims against the Company.
“The standards governing a motion to dismiss for failure to state a claim 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 (i[v]) dismissal is inappropriate unless the ‘plaintiff would not be entitled
to recover under any reasonably conceivable set of circumstances susceptible of
proof.’”26 But, “[i]f a complaint were held sufficient simply because it restates the
legal elements of a particular cause of action, Rule 8(a) would be rendered
meaningless.”27 Accordingly, “[n]otwithstanding Delaware’s permissive pleading
standard, the court may disregard mere conclusory allegations made without specific
allegations of fact to support them. Pleading serial facts ‘on information and belief’
is no substitute for well-pled facts that will support a reasonable inference of
wrongdoing.”28
26
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
27
In re Coca-Cola Enters., Inc., 2007 WL 3122370, at *4 n.28 (Del. Ch. Oct. 17, 2007).
28
HUMC Holdco, LLC v. MPT of Hoboken TRS, LLC, 2022 WL 3010640, at *20 (Del. Ch.
July 29, 2022) (quoting In re Xura, Inc. S’holder Litig., 2019 WL 3063599, at *3 (Del. Ch.
July 12, 2019)).
C.A. No. 2022-0878-NAC
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A. The Amended Complaint Fails To State A Claim For Breach Of Contract
Plaintiffs allege that the Company breached the SLA in two ways. First, they
allege the Company improperly declared the SLA terminated and ceased fulfilling
its obligations, including its exclusivity obligations. Second, in the event the
Company properly terminated, Plaintiffs argue the Company failed to fulfill certain
obligations that survive the SLA’s termination.
1. Plaintiffs’ Allegations Regarding Termination Of The SLA
“Under Delaware law, the proper interpretation of language in a contract is a
question of law. Accordingly, a motion to dismiss is a proper framework for
determining the meaning of contract language.”29 “In construing a contract, our goal
is to give effect to the intent of the parties.”30 “[I]n giving sensible life to a real-
world contract, courts must read the specific provisions of the contract in light of the
entire contract.”31 “When the language of a contract is plain and unambiguous,
binding effect should be given to its evident meaning.”32 Delaware “respects the
29
Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006).
30
Weinberg v. Waystar, Inc., 294 A.3d 1039, 1044 (Del. 2023).
31
Id. (quoting Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC, 166 A.3d
912, 913–14 (Del. 2017)).
32
Allied Cap. Corp., 910 A.2d at 1030.
C.A. No. 2022-0878-NAC
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right of parties to freely contract and to be able to rely on the enforceability of their
agreements[.]”33
In resolving a motion to dismiss, I may consider the allegations and
documents incorporated by reference or otherwise amenable to judicial notice.34
Defendants argue that the Amended Complaint and its exhibits, plus certain limited
documents otherwise incorporated by reference, make unequivocally clear that
Plaintiffs breached Sections 9 and 15.3 of the SLA. If correct, Defendants argue that
Plaintiffs’ breach triggered the Company’s clear, bargained-for rights to terminate
the SLA.
For their part, Plaintiffs do not dispute that I may consider these materials at
the pleading stage. The only issue that I must resolve is whether I may conclude, at
this stage, that Plaintiffs triggered the Company’s termination rights and Plaintiffs’
allegations fail to state a reasonably conceivable claim.
For the reasons explained below, I conclude that Plaintiffs’ own allegations
and exhibits make plain their breach of both Section 9 and Section 15.3 of the SLA.
Plaintiffs’ assertions in response do not give rise to a reasonably conceivable basis
33
New Enter. Assocs. 14, L.P. v. Rich, 295 A.3d 520, 565–66 (Del. Ch. 2023) (citation
omitted).
34
See Wal-Mart Stores, Inc., 860 A.2d at 320 (Del. 2004).
C.A. No. 2022-0878-NAC
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to conclude that the SLA remains in effect.35 Plaintiffs’ first claim for breach must
accordingly be dismissed.
a. Section 9
Section 9.1 of the SLA provides that “the terms of this Agreement” fall within
the ambit of “Confidential Information.”36 Section 9.3(a) prohibits access to or use
of Confidential Information other than as required to exercise a right or perform an
obligation under the SLA.37 Section 14.3(b) permits the Company to “terminate this
Agreement . . . if . . . [Teal Drones] breaches any of the terms or conditions of . . .
Section 9.”
The Press Release disclosed that, “[u]nder the terms of the license, Teal has
secured exclusive right to Autonodyne’s software suite for ‘autonomy and exchange
of control among humans and machines to perform tasks involving crewed and/or
uncrewed vehicles.’”38 Plaintiffs’ Amended Complaint confirms that “[t]he Press
Release quoted the exact language of the SLA regarding the exclusive rights the SLA
35
Below, I separately address Plaintiffs’ claim for breach of the limited SLA provisions
that survive termination.
36
See SLA.
37
Id. Sections 9.3(b) and (d) of the SLA are relevant only to demonstrate that Teal Drones
is liable for Red Cat and its agents’ conduct in issuing the Press Release. See id. § 1
(defining “Affiliate” and “Representative”).
38
OB Ex. C.
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granted[.]”39 Plaintiffs’ Amended Complaint also characterizes the “[e]xclusivity of
these software functions” as a “material term of the SLA, and a key aspect of the
bargain to which Teal Drones agreed.”40
The parties to the SLA bargained over its terms. Those terms include the
definition of Confidential Information. The definition of Confidential Information
plainly includes the SLA’s terms.41 The parties also bargained for a term prohibiting
the disclosure of Confidential Information and a term giving rise to a termination
right in the event of breach of that prohibition.42
These terms are express and plain. No party has argued that these terms are
ambiguous, nor could they. “Under Delaware law, sophisticated parties are bound
by the terms of their agreement. . . . As we have explained, ‘[p]arties have a right to
39
AC ¶ 48; see also Dkt. 45, Tr. 10-23-2023 Oral Argument on Defendants’ Motion to
Dismiss (“OA Tr.”) 80:7–21 (“I think that’s a quote directly from the software licensing
agreement.”).
40
AC ¶ 86.
41
No party has argued that Teal Drones is not a “Receiving Party” with respect to the SLA.
This is understandable, as to argue otherwise would render the text surplusage. See Osborn
ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (“We will read a contract . . . so
as not to render any part of the contract mere surplusage.”).
42
See SLA §§ 9 (defining and restricting use of Confidential Information), 14.3 (granting
the Company a termination right for breaches by Plaintiffs of Section 9).
C.A. No. 2022-0878-NAC
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enter into good and bad contracts, the law enforces both.’”43 Thus, “the court’s role
is to enforce the agreement as written.”44
When Plaintiffs disclosed a quotation from the SLA, they disclosed
Confidential Information. This disclosure breached the terms of Section 9.45 This
breach entitled the Company to terminate the SLA pursuant to its express termination
right in Section 14.3(b). And the Company exercised this right.46
Plaintiffs suggest that, notwithstanding the breach of Section 9 and
termination right under Section 14.3(b), I should consider their allegations that the
Company consented to Red Cat publishing the Press Release under Section 15.3.
But, as I describe in the next section, Plaintiffs do not allege a reasonably
43
Glaxo Grp. Ltd. v. DRIT LP, 248 A.3d 911, 919 (Del. 2021).
44
Id.45
Plaintiffs also argue that the Press Release did not reveal any material terms of the SLA,
and thus no Confidential Information was disclosed. See, e.g., AB at 15. But their
characterization of the exclusivity provision as a “material term” belies this assertion. See
AC ¶ 86. Moreover, “Confidential Information,” as defined in Section 9.1, is not qualified
by an SLA term being a “material” term. See SLA. The same is true for the prohibition
against disclosure contained in Section 9.3(a) and the termination right contained in Section
14.3(b). Id. Moreover, the very next subsection in Section 14.3 (i.e., Section 14.3(c)) deals
expressly with material breaches. Thus, within the SLA’s four corners appears the
“negative implication” that the breaches of the provisions set forth in Section 14.3(b) need
not be material breaches to trigger the termination right contained therein. See, e.g., Fortis
Advisors LLC v. Medicines Co., & Melinta Therapeutics, Inc., 2019 WL 7290945, at *4,
*4 n.33 (Del. Ch. Dec. 18, 2019) (applying expressio unius est exclusio alterius).
46
Compare AC Ex. 3 (Notice), with SLA § 15.4.
C.A. No. 2022-0878-NAC
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conceivable basis to keep their claims alive. I thus conclude it is not reasonably
conceivable that the Company failed to properly terminate the SLA under Sections
9 and 14.3(b).
b. Section 15.3
Section 15.3 provides that “[n]either party shall issue or release any . . . press
release . . . relating to this Agreement . . . without the prior written consent of the
other party.”47 This language is unambiguous. Before issuing the Press Release,
Plaintiffs were required to first obtain the Company’s “prior written consent.” There
is no dispute over whether the Press Release was subject to the requirements of
Section 15.3 as “relating to this Agreement.”48 Thus, absent the “prior written
consent” required by Section 15.3, Plaintiffs breached the SLA, irrespective of
whether the Press Release disclosed Confidential Information.
Plaintiffs argue it is reasonably conceivable that Jacobson’s reply email to
Thompson constituted consent to publish the Press Release.49 Even affording
47
SLA.
48
Moreover, “our courts have considered the connector ‘relating to’” and interpret it plainly
as being “paradigmatically broad[.]” Pharm. Prod. Dev., Inc. v. TVM Life Sci. Ventures VI,
L.P., 2011 WL 549163, at *5 (Del. Ch. Feb. 16, 2011).
49
AB at 16–18.
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Plaintiffs the plaintiff-friendly inferences to which they are entitled, Plaintiffs’
argument fails.
There are two ways to view Plaintiffs’ argument, both of which I address
below. First, I consider Jacobson’s email and whether it is reasonably conceivable
that his email constituted the consent required by Section 15.3. Second, I consider
the logical reciprocal, that is, whether Section 15.3 can be reasonably interpreted as
satisfied by Jacobson’s email. Plaintiffs’ argument fails under both assessments.
Jacobson sent his email in near-immediate reply to Thompson’s email.
Thompson’s email provides that he is writing to “give [Jacobson] a heads up that
[Plaintiffs were] developing a similar release” to the Reveal Technologies press
release.50 Thompson asks if Jacobson has objections. Thompson also asks if
Jacobson wants to send a quote for inclusion or “have our PR team make a quote[.]”51
Jacobson replied within three minutes. Jacobson writes: “That sounds great.
I’m on vacay all week up in the Adirondacks. You guys can make up some quote –
I’m sure it will be fine or at least a great start.”52
50
AC Ex. 3.
51
Id.52
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In this email, Jacobson communicated his consent to Thompson’s continued
development of a press release and qualified permission to make up a quote for him
as part of that development process. No more and no less. It is not reasonably
conceivable that this email provided Plaintiffs with the necessary consent to publish
a press release relating to the SLA, particularly one containing Confidential
Information, sight unseen.
Plaintiffs highlight two parts of Jacobson’s email: “That sounds great” and
“[y]ou guys can make up some quote - I’m sure it will be fine[.]”53 The former can
only be understood as Jacobson’s response to the contents of Thompson’s email,
which did not seek consent for publication. Regardless of how much Plaintiffs may
wish it to be true, Jacobson’s reply cannot be contorted into a response to a question
Thompson did not ask. That is, whether the Company consented to Plaintiffs’
publication of the Press Release. Thus, it is not reasonably conceivable that this
language constituted the requisite consent.
The latter quotation (“I’m sure it will be fine”) can only be reasonably read as
permissive of Plaintiffs making up some quote as a part of the contemplated press
53
See AB at 8, 17, 25. For obvious reasons, Plaintiffs would prefer to ignore the second
sentence of Jacobson’s email, namely that he was on vacation. Although I do not rely on
this point, I note it is consistent with the notion that Plaintiffs assumed the risk of their
action here.
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release’s development. Jacobson connects “I’m sure it will be fine” with a hyphen
to the first part of the sentence, “[y]ou guys can make up some quote.” Even in that,
it is further qualified by the “or at least a great start” language that trails. Here, I
also conclude it is not reasonably conceivable that this language constituted the
necessary consent to publish the Press Release.
Plaintiffs also point to Thompson’s invitation to raise objections. They argue
this should be read broadly to refer to any and all objections to a “proposed press
release.”54 Even assuming that is true, Thompson’s email does not mention
publication of the Press Release or, for that matter, publication of any press release.
Jacobson stated no objection to developing a press release. That is fine as far as it
goes. But Section 15.3, by its plain terms, requires Plaintiffs to obtain consent for
publication of a press release relating to the SLA. The parties bargained for that
term. Plaintiffs cannot reasonably argue that Section 15.3 permitted Plaintiffs
simply to give notice and, absent receipt of objections, to proceed with publishing a
press release—particularly a press release disclosing Confidential Information.
Having addressed the reasonableness of reading Jacobson’s email as consent,
I turn now to consider the logical reciprocal of Plaintiffs’ argument. This secondary
assessment considers whether Section 15.3 can be interpreted as satisfied by
54
AB at 25 (discussing the implied covenant).
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Jacobson’s email. As I explain below, Plaintiffs’ reading reflects a commercially
unreasonable interpretation of the SLA that I must reject, even at the motion to
dismiss stage.55
Here, the parties bargained for an express term defining the SLA’s terms as
Confidential Information. The parties also bargained for a term that, upon disclosure
of this Confidential Information, gives rise to a termination right not subject to cure
or any materiality analysis.56 The only exception to the prohibition on publishing
press releases “relating to this Agreement” requires Plaintiffs to obtain “prior written
consent” for the disclosure.57
Here, Plaintiffs sent a short email and Jacobson replied three minutes later
saying he was on “vacay all week.” Plaintiffs decided not to send a draft of the Press
Release to the Company before proceeding with publication. And, in addition to
Plaintiffs’ own statement that they disclosed Confidential Information in the Press
Release,58 Plaintiffs went on, according to Defendants, to mischaracterize the
parties’ relationship in a way that benefitted Plaintiffs and injured the Company.
55
See Manti Hldgs., LLC v. Authentix Acq. Co., Inc., 261 A.3d 1199, 1211 (Del. 2021).
56
SLA §§ 9, 14.3(b).
57
Id. § 15.3.
58
Compare AC ¶ 48 (the “Press Release quoted the exact language of the SLA”), with SLA
§ 9.1.
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These are precisely the sort of effects that are avoided by requiring “prior written
consent” before publication of Confidential Information in a press release.59 The
logical reciprocal to Plaintiffs’ reading—that Section 15.3 is satisfied by Jacobson’s
email—would thus be seen to countermand one of the very purposes Section 15.3
was obviously designed to serve. This Court “cannot countenance such an absurd
interpretation.”60
The foregoing compels me to conclude that it is not reasonably conceivable
that Jacobson’s reply email constituted the consent required by Section 15.3 and that
no commercially reasonable reading of Section 15.3 can be seen as satisfied by
Jacobson’s email.61 Accordingly, by issuing the Press Release, Plaintiffs breached
Section 15.3.
59
See eCommerce Indus., Inc. v. MWA Intel., Inc., 2013 WL 5621678, at *17 (Del. Ch.
Sept. 30, 2013) (“the difficulty in quantifying the damages for a breach of the
confidentiality provisions is probably why the parties included these provisions in the
Agreement and carved them out from the limitation of liabilities section”); OA Tr. 87:5–
88:21.
60
Osborn, 991 A.2d at 1161.
61
Plaintiffs also assert that “Jacobson did not ask to see or review a draft of the press
release.” AB at 17. But the unambiguous terms of Section 15.3 did not require that
Jacobson request to see or review a draft; instead, it required “prior written consent,” which
Jacobson did not provide. See SLA § 15.3.
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Section 14.3(c) permits termination by either party upon a material breach of
the SLA.62 Given my analysis concerning the Company’s termination under
Sections 9 and 14.3(b) and Plaintiffs’ argument as to consent, I can stop my analysis
here and need go no further. That said, I note that, except for a single conclusory
allegation,63 Plaintiffs fail to otherwise allege or argue that their breach of Section
15.3 was not material. It is not hard to see why. The parties expressly bargained for
a prohibition on the disclosure of Confidential Information. The Press Release is
not a generic press release addressing Autonodyne matters. Instead, by Plaintiffs’
admission, it discloses Confidential Information. Information that Plaintiffs’
themselves characterize as including a “material term.”64 There is no reasonable, or
reasonably conceivable, argument that Plaintiffs’ action did not constitute a material
breach of the SLA.65
62
Section 14.3(c) of the SLA only permits termination for a material breach that goes
uncured for 30 days or is unable to be cured. Plaintiffs appear to have continued operating
at all times as if Defendants never terminated the SLA and have not alleged any attempt to
cure the breach derived from publishing the Press Release. See, e.g., OA Tr. 65:1–67:3.
63
AC ¶ 58(g).
64
See AC ¶ 86 (“Exclusivity of these software functions is a material term of the SLA, and
a key aspect of the bargain to which Teal Drones agreed.”).
65
“A ‘material breach’ is a failure to do something that is so fundamental to a contract that
the failure to perform that obligation defeats the essential purpose of the contract or makes
it impossible for the other party to perform under the contract.” eCommerce Indus., Inc.,
2013 WL 5621678, at *13, *19 (finding disclosure of confidential information was a
C.A. No. 2022-0878-NAC
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For the foregoing reasons, I must reject Plaintiffs’ first breach of contract
theory as failing to state a claim.
2. Plaintiffs Have Not Adequately Pled A Breach Of The Terms
Surviving The SLA’s Termination
Under their second breach of contract theory, Plaintiffs allege breaches of the
SLA arising under Sections 2.1, 4.1, 6.1, 7, 9, 14.1, and 14.3. 66 Section 14.7
identifies the limited terms of the SLA that survive its termination.67 The only
overlap between the provisions under which breach is alleged and the provisions
identified in Section 14.7 as surviving termination are Sections 7.1, 7.2, and 9.68
Thus, in light of my analysis above, the remaining question here is whether
Plaintiffs have alleged sufficient facts that make it reasonably conceivable that the
Company breached any surviving obligations arising under Sections 7.1, 7.2, or 9.
material breach of provision prohibiting disclosure and thus holding that non-breaching
parties validly terminated the contract).
66
See AC ¶ 58; AB at 9–10.
67
SLA § 14.7 (“Surviving Terms. The provisions set forth in the following Sections, and
any other right or obligation of the parties in this Agreement that, by its nature, should
survive termination or expiration of this Agreement, will survive any expiration or
termination of this Agreement: this Section 14.7, Section 2.3, Section 3, Section 7.1,
Section 7.2, Section 9, Section 10, Section 11, Section 13, Section 14.4, Section 14.5, and
Section 15.”).
68
Compare SLA § 14.7, with AC ¶ 58; AB at 9–10. Plaintiffs allege breaches arising from
Sections 2.1 (the software license), 4.1 (software integration), 6.1 (supply of software), 7.3
(support contact), 7.4 (maintenance releases), 14.1 (initial term), and 14.3 (termination).
See AC ¶ 58. But Plaintiffs have not asserted that these terms survive the SLA’s
termination, nor are they enumerated in Section 14.7.
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Section 7.1 does not place any obligation on the Company. Instead, it provides
that, except as stated in Section 7.2, Teal Drones is “solely responsible for providing
technical support to Customers for the Integrated Products, including Software
incorporated in or used with the Integrated Products.”69 In order to trigger any
obligations on the Company under Section 7.2, Teal Drones must first be unable to
resolve customer support requests “after performing its first and second level
technical support obligations as set forth in Section 7.1.”70
Plaintiffs do not allege that any customers have requested technical support
that Teal Drones was unable to provide. Thus, Plaintiffs do not allege that any
obligation of the Company under Section 7.2 has been triggered. Plaintiffs’ only
response is that the Amended Complaint “alleges that ‘Autonodyne has failed to
provide customer or technical support for its software as required[]’” and that this
allegation must be accepted as true.71 Plaintiffs, however, cannot rest on a wholly
conclusory allegation such as this to avoid dismissal.72
69
SLA § 7.1.
70
Id. § 7.2.
71
AB at 18–19.
72
See HUMC Holdco, LLC, 2022 WL 3010640, at *20.
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The Amended Complaint also alleges that “Autonodyne has, on information
and belief, disclosed Confidential Information to third parties[.]”73 Plaintiffs allege
“on information and belief” that Defendants “breached the confidentiality provision
by offering third parties the opportunity to license the OEM Software features and
capabilities” exclusively licensed to Teal Drones.74
These allegations, too, are insufficient to state a claim for breach of Section 9.
“Notwithstanding Delaware’s permissive pleading standard, the court may disregard
mere conclusory allegations made without specific allegations of fact to support
them.”75 Indeed, Delaware courts have repeatedly stated that “[p]leading serial facts
‘on information and belief’ is no substitute for well-pled facts that will support a
reasonable inference of wrongdoing.”76
For every alleged fact that Plaintiffs point to as supporting their blanket
assertion that Defendants breached surviving obligations in Section 9, each is either
alleged “on information and belief” or is not identified or even alleged to be
73
AC ¶ 58; see also id. ¶ 34 (alleging based on serial “information and belief” statements).
74
Id. ¶ 34.
75
HUMC Holdco, LLC, 2022 WL 3010640, at *20.
76
Id.; see also In re Xura, Inc. S’holder Litig., 2019 WL 3063599, at *3.
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Confidential Information.77 The former is “no substitute for well-pled facts,” and
the latter cannot form the foundation for a claim for breach of Section 9.
Attempting to illustrate Defendants’ breach of Section 9, and in one of the
only statements on this issue not qualified by “on information and belief,” Plaintiffs
assert that Defendants “did not disclose to potential purchasers that it already had
exclusively licensed certain functionality of its avionics software to Teal Drones for
a term of six years[.]”78 But this is the exact response one would expect from a party
that is continuing to respect the SLA’s surviving confidentiality obligation. To do
otherwise would mean to disclose some terms of the SLA, which would appear to
breach Section 9 since the SLA’s terms are Confidential Information.79
Based on the foregoing, I conclude that Section 7.1 does not place any
obligation on the Company that could give rise to a claim for breach of contract. I
also conclude that Plaintiffs have failed to plead facts sufficient to state a claim for
breach of contract arising under Sections 7.2 or 9. I thus conclude that the claim for
breach of contract must be dismissed.80
77
See, e.g., AC ¶ 34.
78
Id.79
See SLA § 9.1.
80
This conclusion moots the question of whether Red Cat has standing to assert claims
under the SLA.
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B. Plaintiffs Fail To State A Claim For Declaratory Judgment
Plaintiffs assert a claim for declaratory judgment.81 To entertain an action for
declaratory judgment, there must first be an “actual controversy.”82 This is a non-
waivable jurisdictional requirement that Plaintiffs “bear[] the burden of
establishing[.]”83
Plaintiffs assert that an “actual controversy” exists over five questions.84 But
my conclusions on Plaintiffs’ breach of contract claim resolve each of the questions
Plaintiffs raise.85 Plaintiffs have thus failed to adequately allege that an “actual
controversy” exists.
81
Although Plaintiffs bring this claim against the Company and Schwinn, for procedural
reasons, this decision only resolves the claim as to the former. Schwinn’s motion to dismiss
for lack of personal jurisdiction is, as noted above, the subject of a separate order.
82
XL Specialty Ins. Co. v. WMI Liquid. Tr., 93 A.3d 1208, 1217 (Del. 2014) (explaining
that an actual controversy exists where four prerequisites are satisfied).
83
Reylek v. Albence, 2023 WL 4633411, at *6 (Del. Super. July 19, 2023).
84
AC ¶ 83.
85
Among other things, and as it aligns with the five numbered questions Plaintiffs raise, I
concluded that it is not reasonably conceivable that: (1) Teal Drones complied with Section
15.3; (2) the Press Release complied with the requirements set forth in Section 9; (4) the
Company failed to properly exercise its termination rights under the SLA; and (5) the SLA
is valid and binding as to any provisions other than those identified in Section 14.7 and that
Defendants breached any of these remaining obligations. Plaintiffs’ question (3) asks
whether the Press Release mischaracterizes the SLA. This is relevant only to the extent it
relates to whether Plaintiffs’ breach of the SLA was material under Section 15.3. Above, I
concluded it is not reasonably conceivable that Plaintiffs’ breach was not material. And I
arrived at this conclusion without reaching the issue of mischaracterization. Thus, this
C.A. No. 2022-0878-NAC
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I am then left unable to entertain Plaintiffs’ declaratory judgment claim and
must dismiss it as to the Company.
C. Plaintiffs Fail To State A Claim For Breach Of The Implied Covenant
Plaintiffs assert a claim for breach of the implied covenant of good faith and
fair dealing. “The implied covenant is inherent in all contracts and is used to infer
terms ‘to handle developments or contractual gaps that the asserting party pleads
neither party anticipated.’”86 “The implied covenant, however, is a ‘cautious
enterprise.’ As we have reinforced on many occasions, it is ‘a limited and
extraordinary legal remedy’ and ‘not an equitable remedy for rebalancing economic
interests that could have been anticipated.’ It cannot be invoked ‘when the contract
addresses the conduct at issue.’”87
Plaintiffs argue both that there are certain contractual gaps in the SLA that the
implied covenant must fill, and the Company exercised its discretion in an arbitrary
or unreasonable manner.88
purported controversy cannot serve as a stand-alone basis for a claim for declaratory
judgement.
86
Dieckman v. Regency GP LP, 155 A.3d 358, 367 (Del. 2017) (quoting Nemec v. Shrader,
991 A.2d 1120, 1125 (Del. 2010)).
87
Glaxo Grp. Ltd., 248 A.3d at 920 (footnotes omitted).
88
AC ¶¶ 70–72.
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1. Gap Filling
“To sufficiently plead breach of the implied covenant of good faith and fair
dealing, a complaint ‘must allege a specific implied contractual obligation, a breach
of that obligation by the defendant, and resulting damage to the plaintiff.’”89
Plaintiffs fail to identify any contractual gap suitable for the implied
covenant’s application. They suggest three possible gaps, two of which arise from
Section 15.3’s lack of express definitions for (1) “prior written consent” and (2)
“unreasonably withheld.”90 The third is based on the SLA “not address[ing] the
present scenario where one party has purported to terminate the SLA, the other party
objects,” and the SLA’s purpose has “ceased.”91
Plaintiffs can only state a claim under the first two if I assume that Plaintiffs
sought the Company’s consent. But they did not. For their third alleged “gap,”
Plaintiffs try to conjure a claim out of an imagined termination-objection process.
But the implied covenant cannot be employed to override express terms or provide
a party a right it did not obtain at the bargaining table.92
89
Sheehan v. AssuredPartners, Inc., 2020 WL 2838575, at *11 (Del. Ch. May 29, 2020).
90
AC ¶ 72.
91
Id.92
See Allen v. El Paso Pipeline GP Co., 113 A.3d 167, 183 (Del. Ch. 2014) (“[B]ecause
the implied covenant is, by definition, implied, . . . it cannot be invoked where the contract
C.A. No. 2022-0878-NAC
January 30, 2024
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Plaintiffs seem to understand the implied covenant to apply—in a manner
nearing infinite regress—anytime that a word or a phrase is used and not defined in
a contract’s express terms. And, after claiming to have identified contractual gaps,
Plaintiffs jump to the conclusion that they have stated a claim for breach of the
implied covenant. That is a head-scratcher.
Plaintiffs failed to identify any suitable contractual gaps for the implied
covenant to fill. This deficiency alone can end my analysis.93 But even assuming
Plaintiffs had identified some gap, they also do not plead any “specific implied
contractual obligation.”94 Plaintiffs’ failure to propose any term to fill the purported
gaps leaves the Company shadowboxing—hoping to guess the implied terms it has
supposedly breached.
But again, even if I found a suitable gap and proper term to fill it—a starting
point requiring mental gymnastics—Plaintiffs still fail to allege that the Company
breached those terms. Instead, Plaintiffs opt for the inarticulate assertion that
itself expressly covers the subject at issue.”), aff’d, 2015 WL 803053 (Del. Feb. 26, 2015);
S’holder Representative Servs. LLC v. Albertsons Cos., Inc., 2021 WL 2311455, at *8 (Del.
Ch. June 7, 2021) (“[T]he implied covenant will not serve as a means to provide contractual
protections that parties ‘failed to secure for themselves at the bargaining table.’”).
93
See, e.g., Oxbow Carbon & Mins. Hldgs., Inc. v. Crestview-Oxbow Acq., LLC, 202 A.3d
482, 507 (Del. 2019) (“We decline to apply the implied covenant here because no gap exists
. . . .”).
94
Sheehan, 2020 WL 2838575, at *11.
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“Autonodyne’s conduct constitutes one or more breaches of the implied covenant of
good faith and fair dealing . . . .”95 This befuddlingly vague assertion is set forth in
wholly conclusory terms of the sort I must reject. As noted previously, “[i]f a
complaint were held sufficient simply because it restates the legal elements of a
particular cause of action, Rule 8(a) would be rendered meaningless.”96
Based on the foregoing, I conclude that Plaintiffs fail to state a claim arising
from the implied covenant’s “gap filling” function.
2. Discretion
Plaintiffs further press their implied covenant claim by arguing that the
Company acted arbitrarily or unreasonably. “Beyond its gap filling function, the
implied covenant applies ‘when a party to the contract is given discretion to act as
to a certain subject and it is argued that the discretion has been used in a way that is
impliedly proscribed by the contract’s express terms.’”97 The implied covenant
“requires in part that a party vested with discretion under a contract exercise its
discretion reasonably, in good faith, and not in an unreasonable or arbitrary way that
would destroy the counterparty’s right to receive the fruits and benefits which they
95
AC ¶ 73.
96
In re Coca-Cola Enters., Inc., 2007 WL 3122370, at *4 n.28.
97
Chordia v. Lee, 2024 WL 49850, at *36 (Del. Ch. Jan. 4, 2024) (quoting SerVaas v. Ford
Smart Mobility LLC, 2021 WL 3779559, at *10 (Del. Ch. Aug. 25, 2021)).
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reasonably expected to receive under the contract.”98 “When determining the
parties’ reasonable expectations, the court analyzes ‘whether the parties would have
bargained for a contractual term proscribing the conduct that allegedly violated the
implied covenant had they foreseen the circumstances under which the conduct
arose.’”99
Plaintiffs assert that the Company acted arbitrarily or unreasonably by (1)
purporting to terminate the SLA, (2) refusing to perform its obligations under the
SLA, and (3) shopping its software capabilities to third parties that it had exclusively
licensed to Teal Drones.100
As to each, Plaintiffs fail to identify the contractual discretion suitable for
application of the implied covenant. I begin with the Company’s exercise of multiple
express contract rights to terminate the SLA.
It is one thing to imply a good faith obligation when the parties have
expressly agreed that a certain act is within a party’s discretion. It is
another matter to imply discretion to restrict actions expressly
permitted by the parties’ agreement. The implied covenant imposes a
good faith and fair dealing obligation when a contract confers discretion
on a party. It should not be used to imply terms that modify or negate
an unrestricted contractual right authorized by an agreement.101
98
Menn v. ConMed Corp., 2022 WL 2387802, at *39 (Del. Ch. June 30, 2022).
99
Baldwin v. New Wood Res. LLC, 283 A.3d 1099, 1118 (2022).
100
AC ¶ 71.
101
Glaxo Grp. Ltd., 248 A.3d at 920–21 (footnotes omitted).
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Plaintiffs seek just such a restriction on the Company’s exercise of its express
contract rights to terminate the SLA under Section 14.3. Such use of the implied
covenant is improper.
Moreover, had the parties foreseen these circumstances, it is not reasonably
conceivable that they would have “bargained for a contractual term proscribing” the
Company from terminating the SLA in this manner.102 That much is apparent on the
SLA’s face. The parties that entered the SLA anticipated these circumstances. And,
having anticipated them, the parties did not proscribe the SLA’s terminability.
Instead, they wrote this very script into the SLA’s terms. “Here, contrary to being
impliedly proscribed by the [SLA]’s express terms, the [Company] terminated the
[SLA] pursuant to [the] express contract term[s].”103
In setting forth the second and third bases, Plaintiffs fail to demonstrate the
exercise of any contractual discretion to which the implied covenant might apply.
Plaintiffs allege the Company stopped performing and began shopping its software
to third parties after it terminated the SLA. It follows that these acts were not
undertaken pursuant to the exercise of any discretion provided by the contract—as
102
Baldwin, 283 A.3d at 1118.
103
Chordia, 2024 WL 49850, at *36.
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this application of the implied covenant requires.104 Instead, these were the acts of
a party unbridled by the then-defunct obligations in the SLA—a defunct state the
parties anticipated and wrote into the SLA’s terms upon the happening of Plaintiffs’
disclosure of Confidential Information.
Indeed, even to the extent an obligation did exist, it follows that the SLA’s
express terms would control, and this would not be the unanticipated and silent
circumstances suitable for the implied covenant’s application. Plaintiffs cannot
deploy the implied covenant to obtain, through litigation, superior rights that they
“failed to secure for themselves at the bargaining table.”105
Based on the foregoing, I conclude that Plaintiffs fail to state a reasonably
conceivable claim for breach of the implied covenant flowing from any discretion
provided under the SLA. Accordingly, I must dismiss the claim for breach of the
implied covenant.
104
Glaxo Grp. Ltd., 248 A.3d at 920–21 (“The implied covenant imposes a good faith and
fair dealing obligation when a contract confers discretion on a party.”) (emphasis added);
ConMed Corp., 2022 WL 2387802, at *39 (“The implied covenant of good faith and fair
dealing requires in part that a party vested with discretion under a contract exercise its
discretion reasonably, in good faith, and not in an unreasonable or arbitrary way . . . .”)
(emphasis added).
105
See Albertsons Cos., Inc., 2021 WL 2311455, at *8.
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D. Injunctive Relief Is A Remedy And Not A Cause Of Action
Plaintiffs have asserted a claim for injunctive relief. Defendants argue that
this claim is a remedy and not a cause of action, thus requiring dismissal. I agree.
It is well-established that “[i]njunctions are a form of relief, not a cause of
action.”106 This conclusion compels dismissal.107 But even considering it for its
substance, as pled, it is predicated on the continuation of the SLA’s exclusivity
provision. Having failed to adequately plead the survival of this obligation,
Plaintiffs’ assertions here cannot state a reasonably conceivable claim.
III. Conclusion
For the foregoing reasons, Defendants’ Motion to Dismiss is granted in part.
Counts I, II, and V in Plaintiffs’ Amended Complaint are dismissed in their entirety.
Count IV is dismissed as to the Company.
IT IS SO ORDERED.
Sincerely,
/s/ Nathan A. Cook
Vice Chancellor
106
Quadrant Structured Prod. Co. v. Vertin, 102 A.3d 155, 203 (Del. Ch. 2014).
107
See id. (dismissing two counts because they “seek remedies rather than assert claims”);
Lidya Hldgs. Inc. v. Eksin, 2022 WL 274679, at *7 (Del. Ch. Jan. 31, 2022) (dismissing
claim for injunctive relief).