IP Network Solutions, Inc. v. Nutanix, Inc. ( 2022 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
IP NETWORK SOLUTIONS, INC., )
)
Plaintiff, )
)
v. ) C.A. No. N21C-04-014 PRW CCLD
)
NUTANIX, INC., )
)
Defendant. )
Submitted: January 11, 2022
Decided: February 8, 2022
MEMORANDUM OPINION AND ORDER
Upon Nutanix’s Motion for Partial Judgment on the Pleadings,
DENIED
Upon IP Network Solutions’ Motion for Partial Judgment on the Pleadings,
DENIED
Nicholas T. Verna, Esquire, WOMBLE BOND DICKINSON LLP, Wilmington,
Delaware, Counsel for Plaintiff IP Network Solutions, Inc.
Justin M. Forcier, Esquire, Brian M. Rostocki, Esquire, REED SMITH LLP,
Wilmington, Delaware, Counsel for Defendant Nutanix, Inc.
WALLACE, J.
Plaintiff IP Network Solutions, Inc. and Defendant Nutanix, Inc. executed a
Master Services Agreement in October 2019. But, unfortunately, their business then
relationship quickly unraveled. Each party comes here bringing claims alleging that
the other breached its obligations under the MSA, and each has moved for partial
judgment on the pleadings. Their dueling motions pose two core questions. First,
did IP Network Solutions materially breach the MSA by hiring employees who were
not “exclusively dedicated” to providing Nutanix-related services? And second, did
Nutanix effectively terminate the MSA even though its notice of termination did not
strictly comply with the MSA’s notice procedures?
Unresolved factual disputes require that both motions be DENIED.
I. FACTUAL BACKGROUND
A. THE PARTIES
Plaintiff IP Network Solutions, Inc. (“IPNS” or “Service Provider”) is a
Delaware corporation with its principal place of business in Herndon, Virginia.1
IPNS works exclusively with the United States federal government and provides
various government agencies with cloud-based services.2 Defendant Nutanix, Inc.
(“Nutanix”) is a Delaware corporation with its principal place of business in San
1
Compl. ¶ 4, Apr. 5, 2021 (D.I. 1).
2
Id.
-1-
Jose, California.3 Nutanix provides enterprise cloud-based platforms that combine
storage, computing, and virtualization technologies.4
B. THE MASTER SERVICES AGREEMENT
Around April 2019, Nutanix decided to contract with an established IT
company holding certain security clearances in the hope of building its own business
relationship with the federal government.5 Nutanix solicited several bids and
ultimately entered into contract negotiations with IPNS.6 The parties executed the
Master Services Agreement (“MSA”) on October 7, 2019.7
Under the MSA, IPNS was to provide “professional services and related work
on behalf of Nutanix in connection with the sale of Nutanix products and services to
U.S. Federal Government end-customers.”8 The parties agreed IPNS would be the
“exclusive third-party provider of all Nutanix-related services to U.S. government
end-users under contracts where any level of facility security clearance is required
3
Id. ¶ 5.
4
IPNS’s Answering Br. in Opp’n to Nutanix’s Mot. for Partial J. on the Pleadings, 3.
5
Nutanix’s Answer, Affirm. Defenses, and CounterCl., 28; see also IPNS Ans. and Affirm.
Defenses to CounterCl., Resp. No. 7.
6
Nutanix’s Answer, Affirm. Defenses, and CounterCl., 28; see also IPNS Answer and Affirm.
Defenses to CounterCl., Resp. No.8.
7
Nutanix’s Answer, Affirm. Defenses, and CounterCl., 28; see also IPNS Opening Br. in Supp.
of its Mot. for Partial J. on the Pleadings, Ex. A, Nutanix Master Services Agreement (“MSA”)
(D.I. 20).
8
MSA § 1.7; see also Compl. ¶ 1.
-2-
to perform such professional services.”9 The current dispute relates to several
specific MSA provisions detailed below.
1. Section 2: Provision of Service; Headcount Requirements; Performance
Standards; Training
Under Section 2.1, any Nutanix-related services were to be provided by full-
time IPNS employees who “(i) have an active and appropriate level personnel
security clearance from the United States government, and (ii) are exclusively
dedicated to the provision of services defined in the MSA and its related SOWs.”10
Section 2.1 also required IPNS to set up a “Siloed Division” in its accounting
department that would allow it to separately track and account for the work
performed by the Nutanix-designated required personnel.11 Accordingly,
Section 2.2 required IPNS to hire five full-time employees, i.e., “Required Heads,”
to provide the Nutanix-only services.12 Those positions were: “(i) one Assistant
Facility Security Officer (‘Assistant FSO’); (ii) one Bid Desk Manager (‘BDM’);
(iii) two Advisory Service Architects (each, an ‘Architect’); and one Sr. Proposal
9
Id. ¶ 21; see also MSA § 5.
10
Compl. ¶ 15 (emphasis added); see also MSA § 2.1. An “SOW” is defined in the MSA as a
“statement of work,” and “means a mutually-executed written description of the Services . . .
including any work product or deliverables to be provided in connection with the Services . . .
between Nutanix and Service Provider.” MSA § 1.8.
11
Compl. ¶ 16.
12
Id. ¶ 17; see also MSA § 2.2.
-3-
Writer.”13 Finally, Section 2.4 required IPNS to ensure that “all Assigned Personnel
and Approved Subcontractors[] compl[ied] with Nutanix’s Code of Business
Conduct and Ethics.”14
2. Section 3: Nutanix Investment; Investment Clawback; Set Off Rights
Section 3.1 required Nutanix to pay IPNS a total of $1.5 million in four
installments, i.e., “Payment Milestones,” to help fund both the Siloed Division and
the Required Heads.15 First, Nutanix was to pay a $500,000 “Initial Payment” by
January 2, 2020. Second, Nutanix was to pay a $300,000 “FSO Payment” within
ten business days of the Assistant FSO commencing employment with IPNS (the
“FSO Milestone”). Third, Nutanix was to pay a $200,000 “Target A Payment”
within ten business days of both the BDM and at least one Architect commencing
employment with IPNS. Fourth, Nutanix was to pay a $500,000 “Target B Payment”
within ten business days of each of the remaining Required Heads commencing
employment with IPNS.
If any of these milestones weren’t achieved, the MSA provided for
13
Id.
14
MSA § 2.4. In its Answer, Nutanix cites language from its website that prohibits the
performance of “any services as a director, employee, agent or contractor for a customer, a supplier
or any other entity without express written approval from Nutanix’s Legal department” unless
performed by a non-employee director of Nutanix. See Nutanix’s Answer, Affirm. Defenses, and
CounterCl., 31.
15
Compl. ¶ 18; see also MSA § 3.1.
-4-
irreversible “Clawback Payments.”16 Specifically: (1) if the FSO milestone wasn’t
achieved by the three-month anniversary of the Effective Date, the $300,000 FSO
Payment would be forfeited and IPNS would have no future right to that payment;
(ii) if the Target A milestone wasn’t achieved by the twelve-month anniversary of
the Effective Date, the $200,000 Target A Payment would be forfeited and IPNS
would have no future right to that payment; and (iii) if the Target B milestone wasn’t
achieved by the fifteen-month anniversary of the Effective Date, the $500,000
Target B Payment would be forfeited with IPNS having no future rights to that
payment.17
Finally, Section 3.3 provided that if a Clawback Payment is triggered but is
not timely paid to Nutanix, then Nutanix “shall have the right, but not the obligation,
to retain, set-off and deduct the full amount of the applicable Clawback Payment(s)
from any other amounts owed to Service Provider.”18
3. Section 6: Minimum Annual Bookings Commitment
Section 6.1 defined “Bookings” to mean the “aggregate USD value of all fees
for Services set forth in [the Statements of Work] executed during [a] Measurement
16
MSA § 3.2.
17
Id.
18
MSA § 3.3.
-5-
Period,” as calculated either on a fixed-fee or a time-and-materials basis.19 In turn,
“Measurement Period” referred to five intervals of one year each, starting on the
Effective Date of October 7, 2019, and concluding on September 30, 2024.
Under Section 6.2, Nutanix agreed to pay IPNS $1.5 million in Bookings
during each Measurement Period.20 At the end of each Measurement Period,
Nutanix was to provide IPNS with a written notice “setting forth Nutanix’s good
faith calculation of the Bookings with respect to such Measurement Period.”21
Section 6.4 governed “Shortfall Payments” with respect to Bookings made
within a Measurement Period.22 Under this provision, if the Actual Bookings are
less than the Annual Bookings Commitment, then one of three scenarios set forth
more fully in the MSA would govern. As relevant here, Section 6.4 meant any
shortfall regarding the Annual Bookings Commitment for the first Measurement
Period ending September 30, 2020, “rolls over” to the second Measurement Period
ending September 30, 2021.23
19
MSA § 6.1.
20
MSA § 6.2.
21
MSA § 6.2.
22
MSA § 6.4.
23
See Compl. ¶ 30; MSA § 6.4.
-6-
4. Section 16: Term and Termination
Section 16 governs the Agreement’s term and the procedures for an early
termination.24 A main point of contention here is Section 16.4, which governs
termination for cause.25 The relevant sections read as follows:
By Nutanix. Nutanix will be entitled to terminate this Agreement
immediately and for cause if: (i) Service provider . . . materially
breaches any representation, warranty, covenant or agreement set
forth in this Agreement . . . or any [Statement of Work] and such
breach has not been cured within ten (10) business days after
Nutanix provides Service Provider written notice thereof;
provided, however, that no cure period shall be required for a
breach which by its nature cannot be cured; (ii) Service Provider
fails to achieve the FSO Milestone on or prior to the day that is
the three (3) month anniversary of the Effective Date;
(iii) Service Provider fails to maintain, or any U.S. governmental
agency or regulatory body takes any action in an effort to revoke
or invalidate, Service Provider’s facility security clearance; or
(iv) Service Provider consummates an Acquisition Proposal with
any person or entity other than Nutanix or one of its Affiliates.
* * *
Effect of Termination for Cause. Upon any termination of this
Agreement pursuant to this Section 16.4 (i) by Nutanix, then this
Agreement and all [Statements of Work] will terminate and
Nutanix will have no further obligations or liabilities to Service
Provider . . . or (ii) by Service Provider, then (x) with respect to
any [Statements of Work] that are outstanding as of the
termination date, to the extent not already paid Nutanix will, as
soon as practicable, pay Service Provider for the Services
actually completed as of the termination date, provided that
Service Provider has delivered to Nutanix or its applicable end
customer the portion of the Services completed, (y) Service
24
MSA § 16.
25
MSA § 16.4.
-7-
Provider will pay Nutanix the other amounts, if any, that Service
Provider owes Nutanix under the terms of this Agreement as of
the termination date, and (z) except as set forth in the foregoing
clause, this Agreement and all [Statements of Work] will
terminate as of the termination date and neither party will have
any further obligations or liabilities to the other party; provided,
however, that the Surviving Provisions shall survive any
termination under this Section 16.4.26
The parties disagree about the procedures Nutanix must follow before it may
terminate the MSA for cause under Section 16.4. According to Nutanix, Section
16.4 doesn’t require it to provide any notice to IPNS before terminating the MSA if
IPNS fails to achieve the FSO Milestone or if IPNS commits a material breach that
“by its nature cannot be cured.”27 While IPNS insists that any termination for cause
must comply strictly with the notice procedures detailed in Section 17 of the MSA.28
5. Section 17: General Provisions
Section 17.8 governs “Notices” between the parties. It provides that “[a]ny
notice, demand, request, or other communication required or permitted to be given
under [the MSA] will be made in writing and will be delivered either (i) by personal
delivery . . . (ii) by overnight courier . . . (iii) by certified registered mail, return
receipt requested . . . or (iv) by both facsimile and electronic mail (with notice
26
MSA § 16.4 (emphasis in original).
27
Nutanix’s Answer, Affirm. Defenses, and CounterCl., 37 n.4.
28
Compl. ¶ 34.
-8-
deemed given upon confirmation of receipt).”29
C. THE PARTIES’ GRIEVANCES
The MSA became effective on October 7, 2019, and was intended to remain
in effect until September 30, 2024. But things didn’t go as planned and Nutanix
attempted to terminate the MSA in December 2020. What went wrong? That
depends on whom one asks. So, the Court here recounts each side’s story separately.
1. Nutanix’s Version of Events
Around December 2, 2019, IPNS informed Nutanix that it had hired Samuel
Penaloza as the Assistant FSO.30 Nutanix paid IPNS the $500,000 Initial Payment
and the $300,000 FSO Payment in mid-February 2020, relying on IPNS’s
representation that it had hired an Assistant FSO.31 At the time, Nutanix was
unaware Mr. Penaloza concurrently occupied a human resources role at IPNS.32
Nutanix claims this arrangement breached Section 2.1’s requirement that any
Nutanix-related services be provided an IPNS employee who is “exclusively
dedicated” to the provision of MSA-defined services.33
29
MSA § 17.8.
30
Nutanix’s Answer, Affirm. Defenses, and CounterCl., 34.
31
Id.
32
Id.
33
Id.
-9-
Similarly, IPNS informed Nutanix it hired Laks Prabhala as BDM and Alex
Quach and Samul Byrd as Architects, which meant IPNS was entitled to the
$200,000 Target A Payment.34 Nutanix made the payment in reliance on IPNS’s
representations.35 Now, Nutanix claims IPNS breached the MSA by hiring
Mr. Prabhala as BDM because he was concurrently employed as IPNS’s Chief
Technology Officer.36
Nutanix claims most of the Required Heads subsequently ceased their
employment at IPNS, with only Mr. Prabhala still providing services under the MSA
by the latter half of 2020.37 Nutanix’s attempts to work out a solution with IPNS
were unsuccessful.38 On December 15, 2020, counsel for Nutanix emailed a notice
of termination to IPNS’s CEO.39 Nutanix cited the cause for termination as IPNS’s
“(i) failure to properly (and timely) hire and retain the Required Heads in breach of
Sections 2.1, 2.2 and 2.4 (as well as Nutanix’s Code of Business Conduct and
Ethics), (ii) failure to achieve the FSO Milestone, and (iii) attempts to mislead
34
Id. at 34–35.
35
Id.
36
Id.
37
Id. at 35.
38
Id. at 35–36.
39
Id. at 37.
- 10 -
Nutanix about its progress and entitlement to the Milestones.”40 Nutanix also
insisted that it was entitled to the Clawback Payments under Section 3.2. IPNS has
since refused to remit even one Clawback Payment.41
2. IPNS’s Version of Events
In IPNS’s account, it complied with its obligations under MSA Section 2 by
hiring each of the Required Heads. As a result, IPNS claims it was entitled not only
to the Milestone Payments that Nutanix has already paid, but also to the $500,000
Target B Payment that Nutanix has refused to pay. 42 IPNS acknowledges that
Mr. Penaoza performed some “human resources work for IPNS” but denies such
work breached the MSA “because there were no tasks for the Assistant FSO to
perform under the MSA when [he] performed human resources work.”43 Similarly,
IPNS maintains that Mr. Prabhala’s non-Nutanix work did not breach the MSA
because he performed it only when there was no MSA work to perform.44 IPNS
acknowledges that some Required Heads have since left IPNS, but denies that
40
Id. at 37.
41
Id.
42
See Compl. ¶¶ 19, 36; see also IPNS’s Answer to CounterCl. at 8 (D.I. 9).
43
See IPNS’s Answer to CounterCl. at 9.
44
See id. at 10–11.
- 11 -
constitutes a breach.45
IPNS claims Nutanix is the party that breached its exclusivity obligations, not
IPNS. Specifically, IPNS claims Nutanix hired a third-party provider named Corey
Ogeltree and other unspecified firms to provide services the MSA entrusted
exclusively to IPNS.46 IPNS adds that Nutanix recorded only $106,473 in Actual
Bookings during the first Measurement period, well short of Nutanix’s Annual
Bookings Commitment of $1,500,000.47 IPNS claims the deficit has rolled over to
the second Measurement Period, such that Nutanix’s Revised Annual Bookings
Commitment for the second Measurement Period is now $2,893,527.48
IPNS acknowledges Nutanix attempted to terminate the MSA by email on
December 15, 2020, but says that its CEO never received the email.49 Moreover,
IPNS insists that Nutanix had no grounds to terminate the MSA for cause, and even
if it did, Nutanix’s attempt was ineffectual because it did not provide notice “by both
facsimile and electronic mail.”50 IPNS says Nutanix’s attempt to terminate the MSA
45
See id.
46
Compl. ¶¶ 22–25.
47
Id. at ¶ 30.
48
Id.
49
IPNS’s Answer to CounterCl. at 14.
50
Id.; see also Compl. ¶¶ 34–37.
- 12 -
was simply a “transparent attempt to avoid the obligations incurred by Nutanix under
the MSA, which Nutanix unsuccessfully sought to renegotiate a few weeks prior.”51
D. THIS LITIGATION
IPNS’s Complaint has three causes of action. Count I alleges Nutanix
breached the MSA by failing to make the $500,000 Target B Payment due under
Section 3.1.52 Count II alleges Nutanix breached its exclusivity obligations under
Section 5.53 And Count III seeks a declaration that (1) IPNS has not materially
breached the MSA; (2) Nutanix has no grounds upon which it may terminate the
MSA; and (3) Nutanix’s prior attempts to terminate the MSA failed to comply with
Section 17.8 and lacked any legal effect.54
Nutanix answered with two counterclaims and a host of affirmative defenses.
Counterclaim Count I alleges IPNS failed to hire and retain full-time employees—
specifically, the Assistant FSO, BDM, Architect, and Senior Proposal Writer—
exclusively dedicated to the provision of Nutanix services in breach of MSA
Sections 2.1, 2.2, and 2.4, as well as Nutanix’s Code of Business Conduct and
51
Compl. ¶ 37.
52
Id. ¶¶ 40–46.
53
Id. ¶¶ 47–53.
54
Id. ¶¶ 54–58.
- 13 -
Ethics.55 Counterclaim Count I alleges IPNS also breached Section 2.2 by failing to
ensure the Siloed Division was appropriately staffed and equipped to perform under
the MSA.56
Nutanix’s second counterclaim, Counterclaim Count II, seeks a declaration
that: (1) IPNS materially breached the terms of the MSA; (2) Nutanix terminated the
MSA and, as a result, no longer owes anything to IPNs under the MSA; and (3)
Nutanix is entitled to the Clawback Payments and/or Setoff.57
Both parties have moved for partial judgment on the pleadings. IPNS’s
motion concerns Count III of its Complaint, Count II of Nutanix’s Counterclaims,
and most of Nutanix’s affirmative defenses.58 Nutanix’s motion targets Count I of
the Complaint and seeks judgment on its Counterclaim Count II.59
The Court heard argument during which the parties reported that Nutanix had
agreed to withdraw most of the challenged affirmative defenses.60 And by letter
thereafter, Nutanix withdrew its Second, Third, Eighth, and Tenth Affirmative
55
Nutanix’s Answer, Affirm. Defenses, and CounterCl., 38.
56
Id.
57
Id. at 39–40.
58
IPNS’s Br. in Supp. of its Mot. for Partial J. on the Pleadings at 2.
59
Nutanix’s Br. in Supp. of its Mot. for Partial J. on the Pleadings at 8–12.
60
Judicial Action Form (D.I. 35); Official Transcript (D.I. 40).
- 14 -
Defenses.61 As a result, only Nutanix’s Ninth and Eleventh Affirmative Defenses
remain in play.62 These defenses assert IPNS’s claims are barred, in whole or in
part, due to waiver and prior material breach.63
II. STANDARD OF REVIEW
A party may move for judgment on the pleadings under this Court’s Civil Rule
12(c).64 Rule 12(c) review requires the Court to view the facts pleaded and the
inferences to be drawn from such facts in a light most favorable to the non-moving
party.65 The complaint’s well-pleaded facts are deemed as admitted.66 Too, the
Court assumes the truthfulness of all the complaint’s well-pleaded allegations of
fact.67 Exhibits attached to the pleadings or incorporated by reference may be
considered.68 And the Court accords a party opposing a Rule 12(c) motion the same
61
Letter for Judicial Review (D.I. 38).
62
Id.
63
Nutanix’s Answer, Affirm. Defenses, and CounterCl., 27.
64
Super. Ct. Civ. R. 12(c).
65
Almah LLC v. Lexington Ins. Co., 2016 WL 369576, at *4 (Del. Super. Ct. Jan. 27, 2016)
(citing Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199,
1205 (Del. 1993)).
66
Id.67
Id.68
OSI Sys., Inc. v. Instrumentarium Corp., 892 A.2d 1086, 1090 (Del. Ch. 2006).
- 15 -
benefits as a party defending a motion under Rule 12(b)(6).69 In the end, the Court
may grant a motion for judgment on the pleadings only when no material issue of
fact exists and the movant is entitled to judgment as a matter of law.70
When there are cross-motions for judgment on the pleadings, the Court must
accept as true all of each opponent’s well-pleaded factual allegations and draw all
reasonable inferences in favor thereof.71 In that respect, cross-motions for judgment
on the pleadings function just as cross-motions for summary judgment.72
III. PARTIES’ CONTENTIONS
A. IPNS’S MOTION FOR PARTIAL JUDGMENT ON THE PLEADINGS
IPNS seeks judgment in its favor on (1) Count II of Nutanix’s Counterclaims;
(2) Count III of its Complaint; and (3) Nutanix’s Ninth and Eleventh Affirmative
Defenses.
First, IPNS argues Nutanix’s Counterclaim Count II should be dismissed
because it mirrors IPNS’s pre-existing declaratory judgment claim, rendering the
69
Id.70
Id.71
Id.72
Silver Lake Off. Plaza, LLC v. Lanard & Axilbund, Inc., 2014 WL 595378, *6 (Del. Super. Ct.
Jan. 17, 2014) (internal citations omitted); Indian Harbor Ins. Co. v. SharkNinja Operating LLC,
2020 WL 6795965, at *3 (Del. Super. Ct. Nov. 19, 2020).
- 16 -
counterclaim redundant.73 IPNS adds that the counterclaim will be “rendered moot”
by the adjudication of IPNS’s affirmative claims.74
Second, IPNS requests judgment in its favor on its own complaint’s Count III.
That is, IPNS asks the Court to find that Nutanix didn’t successfully terminate the
MSA and that indeed the MSA remains in effect. Under IPNS’s read, Section 17.8
of the MSA provides four means by which the parties could send notices to each
other, and the only one that mentions email requires “both facsimile and electronic
mail.” Incanting this language, IPNS argues that Nutanix’s December 15, 2020
email failed to terminate the MSA because Nutanix neglected to send a duplicate of
its message via fax.75
Third, IPNS turns to Nutanix’s surviving affirmative defenses. IPNS
contends the Ninth Affirmative Defense should be dismissed because Nutanix has
pleaded no facts demonstrating IPNS waived any right under the MSA.76 IPNS does
not expressly refer to Nutanix’s Eleventh Affirmative Defense in its motion. In its
reply brief, however, IPNS elaborated that “the notice required by Sections 16.4 and
73
See IPNS Opening Br. in Supp. of its Mot. for Partial J. on the Pleadings at 6–7 (collecting
cases).
74
See id. at 7 (citing Quantlab Grp. GP, LLC v. Eames, 2019 WL 1285037 *4 (Del. Ch. Mar.
19, 2019)).
75
Id. at 8–9.
76
Id. at 21–22.
- 17 -
17.8 would be rendered a nullity if a party seeking to terminate a contract because
of a material breach did not actually have to give notice as required by the MSA and
could rely solely on the prior material breach doctrine.”77
Finally, IPNS observes that Nutanix had previously suggested that the MSA
doesn’t require Nutanix to give notice before terminating the MSA for cause and
that IPNS must show it was prejudiced by Nutanix’s failure to strictly comply with
the MSA’s notice requirements. IPNS urges the Court to reject both arguments as
contrary to the MSA’s plain language.78
B. NUTANIX’S MOTION FOR PARTIAL JUDGMENT ON THE PLEADINGS
Nutanix seeks judgment in its favor on Count I of its Counterclaims and
Count I of IPNS’s Complaint. The former alleges IPNS materially breached the
MSA by failing to hire and retain the Required Heads as mandated by the MSA,
while the latter alleges Nutanix breached the MSA by failing to pay the $500,000
Target B Payment.
First, Nutanix argues it is entitled to judgment to the effect that IPNS
materially breached the MSA by hiring Messrs. Penaloza and Prabhala as Required
Heads. Nutanix contends there is no dispute that these individuals weren’t
77
IPNS’s Reply Br. in Supp. of its Mot. for Partial J. on the Pleadings, 15.
78
See IPNS Opening Br. in Supp. of its Mot. for Partial J. on the Pleadings, 10–14.
- 18 -
“exclusively dedicated” to the provision of Nutanix’s services as obligated under the
MSA. Nutanix notes that IPNS attempted to justify their non-Nutanix work by
claiming they performed it only when they had nothing to do for Nutanix. But, says
Nutanix, the MSA contains no language permitting IPNS to breach its exclusivity
obligations under such circumstances.79
Similarly, Nutanix seeks judgment in its favor concerning the unpaid Target
B Payment. The MSA provides that if IPNS does not have an Assistant FSO who is
“exclusively dedicated” to MSA services then “Nutanix’s obligation to make the
Target A Payment and Target B Payment will terminate, and [IPNS] will have no
further rights with respect to either such payment.”80 Because IPNS allegedly failed
to have an FSO who was exclusively dedicated to providing MSA services, Nutanix
says IPNS has no right to the Target B Payment.
IV. DISCUSSION
IPNS and Nutanix each argue its opponent’s motion should be denied because
there are material issues of disputed fact. Both are right. So both motions are
DENIED.
79
See IPNS Opening Br. in Supp. of its Mot. for Partial J. on the Pleadings, 8–12.
80
Id. (internal quotation omitted).
- 19 -
A. IPNS IS NOT DUE JUDGMENT ON THE PLEADINGS.
IPNS asks the Court to dismiss Nutanix’s declaratory judgment counterclaim,
to enter judgment in its favor on its own declaratory judgment claim, and to dismiss
Nutanix’s Ninth and Eleventh Affirmative Defenses. IPNS’s motion is DENIED.
1. IPNS is not Entitled to Judgment on the Pleadings
on Count II of Nutanix’s Counterclaims.
First, IPNS argues Nutanix’s declaratory judgment counterclaim should be
dismissed because it is a “mirror-image” of IPNS’s affirmative claim.81 IPNS is
correct that Delaware courts will dismiss counterclaims that “seek declaratory relief
that relates wholly and completely to the claim asserted in the complaint.” 82 And
IPNS is correct that the two declaratory judgment claims overlap in some respects.
But the claims differ to the extent Nutanix, unlike IPNS, seeks a declaration that no
notice was required to terminate the MSA. Because the claims are not entirely
duplicative, the Court denies IPNS’s motion with respect to Counterclaim Count II.
2. IPNS is not Entitled to Judgment on the Pleadings
on Count III of its Complaint.
Most of IPNS’s motion is dedicated to arguing that the MSA unambiguously
required Nutanix to send notice by both email and fax to trigger termination of the
81
IPNS Opening Br. in Supp. of its Mot. for Partial J. on the Pleadings, 6.
82
In re RJR Nabisco, Inc., S’holders Litig., 1990 WL 80466, at *1 (Del. Ch. June 12, 1990).
- 20 -
MSA. Because the Court disagrees that the relevant MSA terms are unambiguous,
IPNS’s motion must be denied as it concerns Count III of the Complaint.
IPNS asks the Court to interpret certain MSA terms. Judgment on the
pleadings can be a proper framework for enforcing unambiguous contracts when
there is no need to resolve material disputes of fact.83 But the Court must first decide
whether the contract at issue is in any way ambiguous by determining whether the
“provisions in controversy are reasonably or fairly susceptible of different
interpretations or may have one or more different meanings.”84
Here, IPNS interprets the MSA as requiring Nutanix to utilize the notice
procedures detailed in Section 17.8 alone to terminate the MSA for cause under
Section 16.4. Although that is a reasonable interpretation of the MSA, it is not “the
only reasonable construction as a matter of law.”85 Section 16.4 states in relevant
part as follows:
Nutanix will be entitled to terminate this Agreement immediately
and for cause if: (i) Service provider . . . materially breaches any
representation, warranty, covenant or agreement set forth in this
Agreement . . . or any [Statement of Work] and such breach has
not been cured within ten (10) business days after Nutanix
provides Service Provider written notice thereof; provided,
83
See Lillis v. AT & T Corp., 904 A.2d 325, 329–30 (Del. Ch. 2006) (internal citations omitted).
84
Id. at 330 (quoting Rhone–Poulenc Basic Chemicals v. American Motorists Ins. Co., 616 A.2d
1192, 1196 (1992).
85
VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 615 (Del. 2003) (emphasis in
original).
- 21 -
however, that no cure period shall be required for a breach which
by its nature cannot be cured; (ii) Service Provider fails to
achieve the FSO Milestone on or prior to the day that is the three
(3) month anniversary of the Effective Date; (iii) Service
Provider fails to maintain, or any U.S. governmental agency or
regulatory body takes any action in an effort to revoke or
invalidate, Service Provider’s facility security clearance; or
(iv) Service Provider consummates an Acquisition Proposal with
any person or entity other than Nutanix or one of its Affiliates.86
This section mentions notice only once: Before Nutanix may terminate the MSA for
cause on account of a material breach by IPNS, Nutanix must provide “written
notice” to IPNS and ten days for IPNS to cure. The section then immediately
qualifies this requirement: “provided, however, that no cure period shall be required
for a breach which by its nature cannot be cured.”87 This qualification does not
expressly state that Nutanix need not provide notice for an uncurable breach; instead,
it provides that Nutanix need not provide the ten-day cure period. So the MSA might
reasonably be interpreted as allowing Nutanix to terminate the MSA for an incurable
breach without providing written notice to IPNS. Again, the only purpose of notice
in this section is to provide IPNS an opportunity to cure a material breach. If the
material breach is uncurable, then notice to IPNS might be deemed futile. Therefore,
Section 16.4 is ambiguous on whether Nutanix must utilize the notice requirements
86
MSA § 16.4 (emphasis in original).
87
Id.
- 22 -
of Section 17.8 before it may terminate the MSA following an incurable material
breach by IPNS. Because Nutanix alleges IPNS’s breaches were incurable,88 IPNS
is not entitled to judgment as a matter of law.
What’s more, Section 16.4 mentions notice only in the context of a
termination following a material breach by IPNS. But Section 16.4 proceeds to list
other circumstances under which Nutanix may terminate the MSA for cause—none
of which mention notice at all. Most notably, Nutanix may terminate the MSA if:
“[IPNS] fails to achieve the FSO Milestone on or prior to the day that is the three (3)
month anniversary of the Effective Date.”89 Nutanix alleges just that.90 This adds
another layer of ambiguity to the question of when Nutanix is required to provide
notice before terminating the MSA under Section 16.4.
Even if Nutanix was required to provide notice under Section 17.8 before
terminating the MSA for cause, IPNS would not necessarily be entitled to judgment
on the pleadings. “When confronted with less than literal compliance with a notice
provision, courts have required that a party substantially comply with a notice
provision. The requirement of substantial compliance is an attempt to avoid ‘harsh
88
Nutanix’s Answer, Affirm. Defenses, and CounterCl., 37, 39.
89
MSA § 16.4 (emphasis in original).
90
See Nutanix’s Answer, Affirm. Defenses, and CounterCl., 37.
- 23 -
results . . . where the purpose of these [notice] requirements has been met.’”91 Here,
Nutanix emailed the notice of termination to IPNS on December 15, 2020. Although
IPNS denies receiving that email, the fact that IPNS was disputing the adequacy of
Nutanix’s notice by January 20, 2021 suggests IPNS must have gotten the message
fairly quickly.92 So, even if one assumed Nutanix was required to comply with
Section 17.8 in the first instance, there’s a material issue of disputed fact on whether
Nutanix did substantially comply therewith.
Finally, the Court notes Nutanix’s claim—first raised in its answering brief—
that it did provide notice to IPNS via facsimile on June 15, 2021.93 Where matters
outside the pleadings are presented to and considered by the Court, the Court may
convert the motion for judgment on the pleadings to one for summary judgment
under Rule 56.94 The Court declines to do so here because IPNS’s motion fails
91
Gildor v. Optical Sols., Inc., 2006 WL 4782348 at *7 (Del. Ch. June 5, 2006) (internal citations
and quotations omitted); see also Kelly v. Blum, 2010 WL 629850, at *8 (Del. Ch. Feb. 24, 2010)
(denying plaintiff’s motion for summary judgment based on substantial compliance with notice
requirement).
92
See Compl. ¶ 35.
93
Nutanix’s Answering Br. in Opp’n, 13.
94
See Del. Super. Ct. Civ. R. 12(c) (“If, on a motion for judgment on the pleadings, matters
outside the pleadings are presented to and not excluded by the Court, the motion shall be treated
as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given
reasonable opportunity to present all material made pertinent to such a motion by Rule 56.”); see
also King v. McKenna, 2015 WL 5168481, at *5 (Del. Super. Ct. Aug. 24, 2015).
- 24 -
regardless of Nutanix’s reference to facts beyond the pleadings.95
In short, IPNS’s motion raises material issues of disputed fact that underpin
Count III of the Complaint. That means the motion on that count must be denied.
3. IPNS is not Entitled to Judgment on the Pleadings
on Nutanix’s Affirmative Defenses.
Finally, IPNS seeks judgment in its favor on Nutanix’s affirmative defenses
asserting waiver (Ninth) and prior material breach (Eleventh). Both requests must
be denied.
First, Nutanix has adequately pleaded its waiver defense. “Waiver is the
voluntary and intentional relinquishment of a known right.”96 “A contractual
requirement or condition may be waived where (1) there is a requirement or
condition to be waived, (2) the waiving party must know of the requirement or
condition, and (3) the waiving party must intend to waive that requirement or
condition.”97 Here, Nutanix has pleaded facts supporting each element. Section 17.8
states notice may be delivered “by both facsimile and electronic mail (with notice
95
See Ki-Poong Lee v. So, 2016 WL 6806247, at *2 (Del. Super. Ct. Nov. 17, 2016) (declining
to convert a motion for judgment on the pleadings because consideration of exhibits outside the
pleadings was not required).
96
AeroGlobal Cap. Mgmt., LLC v. Cirrus Indus., Inc., 871 A.2d 428, 444 (Del. 2005) (internal
citations omitted).
97
Id. (internal citations omitted).
- 25 -
deemed given upon confirmation of receipt).”98 This could reasonably be interpreted
as allowing the requirement of “both” facsimile and email to be waived if the
recipient confirms receipt of either one or the other. Furthermore, it is undisputed
that IPNS was aware of Section 17.8. But the final element is a bit paradoxical under
the current facts. On the one hand, IPNS appears to have confirmed its receipt of
Nutanix’s termination notice by responding to it in January 2020; under the MSA,
that might mean notice could be “deemed given.” But on the other hand, the content
of IPNS’s response was to assert Nutanix’s notice was inadequate, which might
mean notice could not be “deemed given.” This is a puzzle for another day. At this
stage, Nutanix’s waiver defense survives.
Second, Nutanix had adequately pleaded its defense based on prior material
breach. As detailed below, there are factual issues as to whether IPNS’s hiring
practices breached the MSA and, assuming they did, whether that breach was
material. Consequently, neither party is entitled to judgment on the pleadings
regarding these issues.
B. NUTANIX IS NOT DUE JUDGMENT ON THE PLEADINGS EITHER.
Nutanix’s motion focuses on MSA Section 2.1, which states that “[a]ll
Services shall be provided by full-time employees of [IPNS] who . . . (ii) are
exclusively dedicated to the provision of Services under this Agreement and its
98
MSA § 17.8 (emphasis added).
- 26 -
related SOWs.”99 In its Answer, IPNS admitted that “its records reflect that
Mr. Penaloza performed some human resources work for IPNS” and that
Mr. Prabhala “only performed work related to IPNS if (and when) there was no work
for Mr. Prabhala to perform under the MSA.”100 Nutanix believes these admissions
are sufficient to prove IPNS materially breached the MSA. Accordingly, Nutanix
contends that it is entitled to Clawback Payments totaling $1 million and that IPNS’s
right to the Target B Payment has been forfeited.
Nutanix’s motion is DENIED because there are both matters of contract
interpretation and material issues of disputed fact yet to be resolved. One issue is
that the “exclusively dedicated” provision in Section 2.1 of the MSA is reasonably
susceptible to more than one interpretation. Nutanix interprets Section 2.1 as
prohibiting the Required Heads from performing any non-Nutanix work for IPNS
for any reason whatsoever. Although that is one reasonable reading of Section 2.1,
it is not “the only reasonable construction as a matter of law.”101 For instance, IPNS
interprets Section 2.1 as allowing the Required Heads to perform work for IPNS
when they lacked any work to perform on behalf of Nutanix. While this
interpretation might seem less probable than Nutanix’s, it is not entirely
99
MSA § 2.1.
100
IPNS’s Answer to CounterCl. at 9–11.
101
VLIW Tech., 840 A.2d at 615 (emphasis in the original).
- 27 -
unreasonable. It is difficult to imagine the parties intended that the Required Heads
idle away the hours in the event they lacked any work related to Nutanix.102
Even if IPNS breached the MSA by allowing Messrs. Penaloza and Prabhala
to perform non-Nutanix work, it is a factual issue whether that breach was material.
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.”103
Delaware courts routinely recognize that materiality is a question of fact that is
ordinarily not suited for judgment as a matter of law.104 And that is particularly so
here. The pleadings are largely silent on the specifics of Messrs. Penaloza’s and
Prabhala’s joint responsibilities with IPNS. The Court therefore cannot yet
102
To determine whether certain of a contract’s contested language is unambiguous, Delaware
“adheres to the objective theory of contracts.” Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153,
1159 (Del. 2010). That requires a court to interpret a particular contractual term to mean “what a
reasonable person in the position of the parties would have thought it meant.” Lorillard Tobacco
Co. v. Am. Legacy Found., 903 A.2d 728, 740 (Del. 2006).
103
Shore Invs., Inc. v. Bhole, Inc., 2011 WL 5967253, at *5 (Del. Super. Ct. Nov. 28, 2011)
(quoting 23 Williston on Contracts § 63:3 (4th ed.)).
104
See Matthew v. Laudamiel, 2014 WL 5499989, at *2 (Del. Ch. Oct. 30, 2014) (“Typically,
whether a breach is material is a question of fact that cannot readily be resolved under the summary
judgment standard.”); Est. of Buller v. Montague, 2020 WL 996883, at *5 (Del. Super. Ct. Mar. 2,
2020) (“Materiality is, of course, a question of great specificity. It is a question of fact and one
that is ordinarily not suited for summary judgment.”) (quoting Pac. Ins. Co. v. Higgins, 1992 WL
212601, at *6 (Del. Ch. Sept. 2, 1992)); see also Desert Equities, Inc. v. Morgan Stanley Leveraged
Equity Fund, II, L.P., 624 A.2d 1199, 1205 n.9 (Del. 1993) (noting that the “summary judgment
standard provides guidance to courts reviewing motion for judgment on the pleadings”) (internal
citations omitted).
- 28 -
determine whether IPNS’s conduct rose to the level of a material breach, even were
it to assume that conduct was a breach in the first instance.
Because there are material issues of disputed fact, Nutanix is not entitled to
judgment on the pleadings. Nutanix’s motion is DENIED.
V. CONCLUSION
Each party’s motion for judgment on the pleadings must be DENIED.
Neither party has demonstrated that its reading of the contested operable MSA
language represents the only reasonable construction as a matter of law. And neither
has demonstrated that its version of what happened under the MSA adequately
resolves the material issues of disputed fact.
IT IS SO ORDERED.
Paul R. Wallace, Judge
Original to Prothonotary
cc: All Counsel via File and Serve
- 29 -