BioMerieux, Inc. v. Rhodes ( 2024 )

IN THE SUPERIOR OF THE STATE OF DELAWARE
BIOMÉRIEUX, INC. and SPECIFIC )
DIAGNOSTICS, INC., )
)
Plaintiffs, )
) C.A. No. N23C-10-067
v. ) SKR CCLD
)
PAUL A. RHODES and )
iSENSE, LLC, )
)
Defendants. )
Submitted: February 27, 2024
Decided: May 9, 2024
Upon Defendants’ Motion to Strike
GRANTED.
Upon Defendants’ Motion to Dismiss,
GRANTED, in part, DENIED, in part.
MEMORANDUM OPINION AND ORDER
James M. Yoch, Jr., Esquire, Kevin P. Rickert, Esquire, YOUNG CONAWAY STARGATT
& TAYLOR, LLP, Wilmington, Delaware, Brian Massengill, Esquire, Matthew C.
Sostrin, Esquire, MAYER BROWN LLP, Chicago, Illinois, Attorneys for Plaintiffs.
Rudolf Koch, Esquire, Travis S. Hunter, Esquire, Puja A. Upadhyay, Esquire, Jessica
E. Blau, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware,
Attorneys for Defendants.
RENNIE, J.
I. INTRODUCTION
Plaintiffs bring this suit to recover for Defendants’ alleged fraud. Specifically,
Plaintiffs claim they were induced to acquire Defendants’ business by the false
representation that Defendants’ business was not under investigation for illegal
activity. Plaintiffs argue that Defendants knew the federal government was
investigating Defendants’ violations of the False Claims Act while the parties were
negotiating the acquisition. The merits of those accusations, however, are not yet
the topic of the parties’ arguments. For now, the focus is on prefatory arguments that
will guide the rest of the litigation.
The first dispute at this stage is Plaintiffs’ ability to use as evidence a sell-side
email that was, at least initially, subject to an attorney-client privilege. Plaintiffs
argue that the right to enforce—or waive—the privilege over that email was one of
the many benefits that Plaintiffs purchased in this merger transaction. The Court
disagrees. The parties’ merger agreement explained that the attorney-client privilege
over merger-related communications would not go with the target to the surviving
entity and would, instead, stay with the sellers. The Court will enforce the parties’
intent and allow Defendants to maintain the privilege over the email.
Separately, Defendants suggest Plaintiffs’ fraud claims are “barred forever”
because Plaintiffs did not file their accusations as counterclaims in a previously filed
action. That previously filed action is a preemptive suit—filed six days before this
2
one—that seeks a declaratory judgment that Defendants’ nondisclosure of the
government investigation was not fraudulent. For the sake of both fairness and
efficiency, the Court will neither deprive Plaintiffs the opportunity to present their
case nor adjudicate these symmetrical cases on separate tracks. Instead, the most
sensible course, in the Court’s view, is to consolidate these two cases. Plaintiffs will
be permitted to pursue their fraud claims in that consolidated action.
Last, Defendants posit that Plaintiffs’ claims for fraudulent inducement and
fraudulent concealment are precluded by the exclusive remedy provision within the
parties’ agreement. To Defendants, the “Fraud” carve-out contained in the exclusive
remedy provision applies to only “common law fraud,” not related torts. There is
reason to doubt contracting parties’ ability to negotiate away liability for discrete
categories of deliberate fraud. But the Court need not look to public policy to
establish that the parties did not do so here. The Court’s review of the plain language
of the agreement is enough to conclude that fraudulent inducement and fraudulent
concealment fall within the exclusive remedy provision’s “Fraud” exception.
For those reasons, and as explained more fully below, Defendants’ Motion to
Strike is GRANTED, and Defendants’ Motion to Dismiss is DENIED except as to
the claims Plaintiffs’ have agreed to dismiss.
3
II. BACKGROUND 1
A. The Parties
Plaintiff bioMérieux, Inc. (“bMx”) is a Missouri corporation headquartered in
Utah.2 It was the buyer in the at-issue transaction. 3
Plaintiff Specific Diagnostics, Inc. (“Specific” and, together with bMx,
“Plaintiffs”) is a Delaware corporation headquartered in California. 4 Specific
“designs rapid antimicrobial susceptibility tests that allow physicians to evaluate
whether bloodstream infections are caused by antibiotic resistant pathogens.”5
Specific was the target of the at-issue transaction. 6
Defendant Paul Rhodes is a resident of Florida. 7 Rhodes founded Specific
and was its controlling stockholder at the time of the at-issue transaction.8
1
The following facts are derived from the Complaint and the documents incorporated therein.
See D.I. No. 1 (“Compl.”). These allegations are presumed to be true solely for purposes of this
motion.
2
Compl. ¶ 15.
3
Id. ¶ 1.
4
Id. ¶ 16.
5
Id. ¶ 23.
6
Id. ¶ 1.
7
Id. ¶ 17.
8
Id. ¶ 4.
4
Defendant iSense, LLC (“iSense” and, together with Rhodes, “Defendants”)
is a Florida limited liability company. 9 Rhodes founded iSense and is its sole
member.10
B. The Merger Agreement
As part of a June 2021 Note Purchase Agreement between Specific and bMx,
bMx held a right of first negotiation in the event Specific pursued a change of
control. 11 In January 2022, Specific notified bMx that it was pursuing a sale of the
company. 12 That led bMx to exercise its right of first negotiation and engage in due
diligence.13 The negotiations bore fruit and, on April 11, 2022, the parties executed
the agreement at the heart of this dispute (the “Merger Agreement”). 14
Several provisions of the Merger Agreement are implicated in this matter.
First and foremost are the representations that Plaintiffs contend were knowingly
false. Though important to the litigation as a whole, those representations are not
directly relevant to any of the issues presented at this stage; so, the Court will simply
summarize them. In Section 2.11 of the Merger Agreement, Specific represented
that there were no “Legal Proceedings”—which was broadly defined—pending or
9
Id. ¶ 18.
10
Id. ¶¶ 18, 23.
11
Id. ¶ 26.
12
Id. ¶ 43.
13
Id. ¶ 44.
14
Id. ¶ 59; see also Compl., Ex. A (hereinafter “MA”).
5
threatened at any point in the three years preceding the merger. 15 Section 2.13(a)
contained a representation that Specific had complied with all applicable laws since
January 2019. 16 Last, Section 2.34(d) represented, essentially, that Specific had
properly priced its government contracts and was not subject to liability or price
adjustments for mispriced contracts.17
As for provisions that bear on this decision, Section 7.10 of the Merger
Agreement provides for exclusive remedies, saying:
The Parties acknowledge and agree that their sole and exclusive remedy
with respect to any and all claims (other than claims arising from Fraud
on the part of a Party hereto in connection with the transactions
contemplated by this Agreement) for any breach of any representation,
warranty, covenant, agreement or obligation set forth herein, shall be
pursuant to the indemnification provisions set forth in this Article VII.
In furtherance of the foregoing, each Party hereby waives, to the fullest
extent permitted under Legal Requirements, any and all rights, claims
and causes of action for any breach of any representation, warranty,
covenant, agreement or obligation set forth herein, except pursuant to
the indemnification provisions set forth in this Article VII; provided,
however, that nothing in this Section 7.10 shall limit any Person’s right
to seek and obtain any equitable relief to which any Person shall be
entitled pursuant to Section 10.7 or to seek any remedy on account of
Fraud by any Party hereto. Notwithstanding anything herein to the
contrary, this Section 7.10 shall not apply to Section 7.6, which shall be
enforceable by the Securityholders’ Representative in its entirety
against the Company Securityholders. 18
15
MA § 2.11.
16
Id. § 2.13(a).
17
Id. § 2.34(d).
18
Id. § 7.10.
6
The parties defined “Fraud” to mean:
actual and deliberate common law fraud under Delaware Law in the
making of the representations and warranties contained in this
Agreement (as modified by the Company Disclosure Schedule). For
the avoidance of doubt, “Fraud” shall not include equitable fraud,
promissory fraud, unfair dealings fraud or negligent, reckless or
constructive fraud.19
The Merger Agreement also orchestrates how Specific’s attorney-client
privilege over merger-related advice would operate post-merger. In that regard,
Section 10.12(b)(ii) provides:
except with the prior written consent of the Securityholders’
Representative, the attorney-client privilege regarding this Agreement
and the Escrow Agreement and the transactions contemplated hereby
and thereby shall not continue as the privilege of [Specific] but instead
shall be the sole privilege of the Company Securityholders and the
Securityholders’ Representative, and none of [bMx], [Specific], or any
other person purporting to act on behalf of or through [bMx] or
[Specific] will seek to obtain or access attorney-client privileged
communications among [Specific] or any Company Securityholder and
any representative of the Firm related to this Agreement, the Escrow
Agreement, or the Merger or the transactions contemplated hereby or
thereby. 20
The definition of “Company Securityholder” leads to a web of cross-referencing
definitions that collectively encompass a group of Specific’s equityholders,
19
Id. § 1.1.
20
Id. § 10.12(b)(ii).
7
including Rhodes.21 The “Securityholders’ Representative” is Shareholder
Representative Services, LLC, an entity chosen by the Company Securityholders. 22
C. The Alleged Fraud
Plaintiffs’ primary 23 grievance in this action is that the representations
contained in Sections 2.11, 2.13(a), and 2.34(d) were knowingly false and that
Rhodes, in his role at Specific, hid the truth from bMx. Those allegations stem from
“Civil Investigative Demands” (“CIDs”) the United States Attorney’s Office for the
Northern District of California (the “USAO”) issued to Specific and iSense in
December 2021.24 The CIDs pertained to the USAO’s investigation of False Claims
Act violations. 25 The investigation targeted iSense “and related entities,” including
Specific. 26
Rhodes, as the controller of both Specific and iSense, led the response to the
CIDs. 27 Rhodes retained attorneys Christine Adams and James Spertus to assist with
21
Id. § 1.1.
22
Id. § 7.6(a).
23
As briefly discussed in Section V.D of this opinion, Plaintiffs also brought separate, now-moot
claims that Plaintiffs have agreed to dismiss. The details underlying those forsaken claims are
impertinent to this opinion and need not be recounted.
24
Compl. ¶ 31.
25
Id.
26
Id. ¶¶ 33, 36.
27
Id. ¶¶ 31, 34.
8
the response. 28 During this time, Spertus sent Rhodes an email that Plaintiffs now
seek to use as evidence (the “Spertus Email”). 29 Since the Court finds that email is
subject to a privilege that has not been waived, the Court will not describe its
contents.
When, in January 2022, Specific notified bMx that bMx’s right of first
negotiation had been triggered, Specific had not mentioned the USAO’s pending
investigation.30 Once bMx began due diligence, it repeatedly asked about any
government investigations, but Specific—through Rhodes—still did not disclose the
CIDs. 31 Plaintiffs argue that if Rhodes had disclosed the CIDs, bMx would have, at
the least, sought express protections from any resulting liability. 32
Rhodes stayed on as Specific’s general manager in the months following the
merger.33 Even then, he did not inform bMx about the investigation.34 It was not
until Adams questioned Rhodes’s post-merger authority to continue handling the
investigation that Rhodes finally disclosed the USAO’s investigation to bMx.35 That
28
Id. ¶ 34.
29
Id. ¶ 68.
30
Id. ¶¶ 42-44.
31
Id. ¶ 46-52.
32
Id. ¶ 53.
33
Id. ¶ 74.
34
Id. ¶ 79.
35
Id. ¶¶ 80-81.
9
disclosure—which still undersold Specific’s role as a target of the investigation—
came on August 31, 2022, approximately four months after execution of the Merger
Agreement. 36 In December 2022, Rhodes, Specific, and iSense settled with the
government, with Specific paying $4 million.37
D. Procedural History
This case began, in a sense, on October 3, 2023, when Rhodes filed his
complaint in a closely related action, Rhodes v. bioMérieux, C.A. No. N23C-10-014
SKR CCLD (the “Rhodes Action”). 38 The Rhodes Action discusses “threatened”
litigation by bMx and seeks, in part, a declaration that Rhodes “did not commit fraud,
fraudulent inducement and fraudulent concealment through Specific’s representation
that Specific was not the subject of a government investigation.”39
Six days later, on October 9, 2023, Plaintiffs filed the Complaint in this
action. 40 In it, Plaintiffs brought claims for: fraud (Count I); fraudulent inducement
(Count II); fraudulent concealment (Count III); unjust enrichment (Count IV);
breach of the implied covenant of good faith and fair dealing (Count V); fraudulent
36
Id. ¶¶ 82-83.
37
Id. ¶ 87.
38
Rhodes Action D.I. No. 1 (“Rhodes’s Compl.”). The Court may “take judicial notice of . . . the
records of the court in which the action is pending.” D.R.E. 202(d)(1)(C).
39
Rhodes’s Compl. ¶¶ 3, 77.
40
Compl.
10
inducement (Count VI); and tortious interference (Count VII). 41 Plaintiffs have
since agreed to dismiss Counts V through VII. 42
On December 6, 2023, Defendants filed two challenges to the Complaint.
First, they moved to strike Plaintiffs’ use of the Spertus Email. 43 Defendants also
moved to dismiss Plaintiffs’ Complaint.44 Plaintiffs responded to both motions
separately on January 12, 2024.45 Defendants filed a reply brief in further support
of their motion to dismiss on January 31, 2024.46 On February 12, 2024, Defendants
successfully moved to file a reply brief supporting their motion to strike. 47 The Court
heard argument on February 27, 2024 and reserved decision. 48
III. STANDARD OF REVIEW
Upon a motion to dismiss based upon Superior Court Civil Rule 12(b)(6), the
Court determines “whether [the] plaintiff may recover under any reasonably
conceivable set of circumstances susceptible of proof under the complaint.” 49 To do
41
Id. ¶¶ 95-139.
42
See infra Section V.D.
43
D.I. No. 14 (“Defs.’ MTS”).
44
D.I. No. 16 (“Defs.’ MTD”).
45
D.I. No. 31 (“Pls.’ MTS Opp’n”); D.I. No. 32 (“Pls.’ MTD Opp’n”).
46
D.I. No. 33 (“Defs.’ MTD Reply”).
47
D.I. No. 34 (“Defs.’ MTS Reply”).
48
D.I. No. 40.
49
RGIS Int’l Transition Holdco, LLC v. Retail Servs. WIS Corp., 2024 WL 568515, at *4 (Del.
Super. Ct. Feb 13, 2024) (quoting Vinton v. Grayson, 189 A.3d 695, 700 (Del. Super. Ct. 2018)).
11
so, the Court (1) accepts as true the complaint’s well-pleaded factual allegations;
(2) accepts even vague allegations so long as they give the opposing party notice of
the claim; and (3) gives the non-movant the benefit of all reasonable inferences.50
The Court will only grant a motion under Rule 12(b)(6) if the plaintiff cannot recover
under any reasonably conceivable set of circumstances.51
Rule 12(f) permits the Court to “order stricken from any pleading any
insufficient defense or any redundant, immaterial, impertinent, or scandalous
matter.”52 On such a motion, the Court examines “whether the challenged allegation
is relevant to an issue in the case, and if it is unduly prejudicial.”53 “Motions to
strike ‘are granted sparingly, and then only if clearly warranted, with doubt being
resolved in favor of the pleading.’”54
IV. PARTIES’ CONTENTIONS
A. Motion to Strike
1. Defendants
Defendants ask the Court to strike any reference or use of the Spertus Email
because they contend that Rhodes maintains an attorney-client privilege over its
50
Id.51
Id.52
Super. Ct. Civ. R. 12(f).
53
Heisenberg Principals Fund IV, LLC v. Bellrock Intel., Inc., 2018 WL 3460433, at *1 (Del.
Super. Ct. July 17, 2018) (ORDER) (citations omitted).
54
Id. (quoting Pack & Process, Inc. v. Celotex Corp., 503 A.2d 646, 661 (Del. Super. Ct. 1985)).
12
contents.55 They ground their argument on two bases. First, they say Spertus was
Rhodes’s lawyer, not Specific’s, so only Rhodes could waive the privilege.56
Defendants also claim that under Section 10.12(b)(ii) of the Merger Agreement, any
privilege Specific had over the Spertus Email passed to Rhodes and the other
Company Securityholders.57 More generally, Defendants argue that the public
policy undergirding the attorney-client privilege supports their position.58
2. Plaintiffs
Plaintiffs take the opposite positions. They contend that Spertus did not
represent Rhodes individually, with the minor caveat of a tolling agreement, so the
privilege belongs to Specific. 59 Plaintiffs suggest that even if Rhodes was a joint
client with Specific, Specific could still waive the privilege. 60 Plaintiffs also
disagree with Defendants’ reading of Section 10.12(b)(ii) and say that provision only
covered privileged communications between Specific and Specific’s distinct
transactional counsel. 61 Last, Plaintiffs briefly suggest that Rhodes waived any
55
Defs.’ MTS at 5-9.
56
Id. at 6.
57
Id. at 6-8.
58
Id. at 8-9.
59
Pls.’ MTS Opp’n at 8-9.
60
Id. at 9-10.
61
Id. at 6-8.
13
privilege he held over the Spertus Email by disclosing communications with Spertus
that no one contends were ever privileged.62
B. Motion to Dismiss
1. Defendants
As for the merits of this litigation, Defendants make two arguments that were
not mooted by Plaintiffs’ jettisoning of Counts V through VII. Defendants first say
that Counts II and III—i.e., fraudulent inducement and concealment—are barred by
the Merger Agreement’s exclusive remedy provision. 63 They theorize that because
the Merger Agreement’s definition of Fraud says, “common law fraud,” the related
torts are not contained in the exclusive remedy provision’s carve-out of “claims
arising from Fraud.”64
As a broader challenge to Plaintiffs’ Complaint, Defendant’s point to Rule
13(a) and say Counts I-IV of the Complaint are misplaced compulsory
counterclaims. 65 Defendants argue that because they won the race to the courthouse,
Plaintiffs were required to plead their fraud-based claims as counterclaims in
62
Id. at 10.
63
Defs.’ MTD at 13-16.
64
Id.
65
Id. at 16-19.
14
Rhodes’s declaratory judgment action. 66 Because Plaintiffs did not do so,
Defendants insist that Plaintiffs’ fraud claims are “now barred forever.” 67
2. Plaintiffs
In defense of Counts II and III, Plaintiffs put forth two arguments. For one,
they say that fraudulent inducement and concealment “easily fall within the Merger
Agreement’s carve-out for ‘any remedy on account of Fraud.’”68 Plaintiffs focus on
the Fraud definition’s use of “actual and deliberate” and say that all three of the
Complaint’s fraud-based claims meet that requirement.69 Plaintiffs also point out
that fraudulent inducement and concealment are not within the Fraud definition’s
express list of excluded fraud-related causes of action.70 Separate from the
interpretive question, Plaintiffs say they could not have waived claims of deliberate
fraudulent inducement and concealment even if they had intended to, citing ABRY
Partners 71 and its progeny.72
With respect to the Rule 13(a) argument, Plaintiffs maintain that the preclusive
effect of a Rule 13(a) violation does not take hold until the first-filed case reaches a
66
Id.
67
Id. at 19 (quoting Mott v. State, 49 A.3d 1186, 1189 (Del. July 31, 2012)).
68
Pls.’ MTD Opp’n at 25 (quoting MA § 7.10).
69
Id.
70
Id.
71
ABRY Partners V, L.P. v. F&W Acq. LLC, 891 A.2d 1032 (Del. Ch. 2006).
72
Pls.’ MTD Opp’n at 23-24.
15
final judgment.73 Plaintiffs cite various federal cases in which contemporaneous
parallel litigations were permitted notwithstanding an identical compulsory
counterclaim rule. 74 Plaintiffs also indicate their openness to consolidating this
matter with the Rhodes Action or repleading their Complaint as counterclaims.75
V. DISCUSSION
A. The Privilege Over the Spertus Email Passed to the “Company
Securityholders.”
The Court will first address Plaintiffs’ attempt to use the Spertus Email. The
parties agree that the email was initially privileged, so the dispute boils down to
whether Plaintiffs—through Specific—had the power to waive that privilege. There
are two components to this inquiry: (1) whether Specific initially held the privilege
over the Spertus Email; and (2) if so, whether that privilege passed to the Company
Securityholders—including Rhodes—pursuant to the Merger Agreement. Since the
Court is convinced that any privilege Specific might have had over the Spertus Email
transferred by operation of the Merger Agreement, the Court only discusses the latter
inquiry.
73
Id. at 20-21.
74
Id. at 21-22.
75
Id. at 22-23.
16
The general rule for the attorney-client privilege post-merger is that it follows
the target company to the surviving entity. 76 Parties can avoid that result, however,
by contractually providing to whom the privilege should pass.77 Here, the Merger
Agreement did just that, stating in relevant part: “the attorney-client privilege
regarding this Agreement and the Escrow Agreement and the transactions
contemplated hereby and thereby shall not continue as the privilege of [Specific] but
instead shall be the sole privilege of the Company Securityholders and the
Securityholders’ Representative.” 78 Hence, the determinative question is whether
the privilege over the Spertus Email is one “regarding” the Merger Agreement. The
answer is yes.
The Court is reluctant to dive too deeply into discussing precisely how the
Spertus Email relates to the Merger Agreement, lest the Court further violate the
privilege protecting it. The critical point is that while advising Rhodes with respect
to the CIDs, Spertus forayed into advice pertaining to the Merger Agreement. There
can be little debate on that point, as the language Plaintiffs hope to use is squarely
and expressly merger-related advice. Indeed, Plaintiffs’ argument that the privilege
did not pass to Rhodes under the Merger Agreement is based on other grounds.
76
Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155, 156-58
(Del. Ch. 2013) (interpreting 8 Del. C. § 259).
77
Id. at 160-62.
78
MA § 10.12(b)(ii).
17
Plaintiffs attempt to limit the scope of Merger Agreement Section 10.12(b)(ii)
by claiming it only covers communications between Specific and Specific’s
transactional counsel, which was designated as “the Firm” in the Merger
Agreement. 79 In support, Plaintiffs reference portions of Section 10.12(b) that
discuss communications with “the Firm.” One example is Section 10.12(b)(i), which
provides:
communications between [Specific] and the Firm with respect to the
restrictions contemplated herein will become the property of the
Securityholders’ Representative (solely in its capacity as such and for
the benefit of the Company Securityholders) and the Company
Securityholders and will not be disclosed to [bMx] without the prior
written consent of the Securityholders’ Representative[.]80
Plaintiffs’ second example is the second clause within Section 10.12(b)(ii), which
states:
none of [bMx], [Specific], or any other person purporting to act on
behalf of or through [bMx] or [Specific] will seek to obtain or access
attorney-client privileged communications among [Specific] or any
Company Securityholder and any representative of the Firm related to
this Agreement, the Escrow Agreement, or the Merger or the
transactions contemplated hereby or thereby.
If the parties’ disagreement were about ownership of communications or
Plaintiffs’ attempt to access communications, those two clauses would be
controlling. That is not the issue, though. Rather, the issue is whether the attorney-
79
Pls.’ MTS Opp’n at 6-8; MA § 10.12(a).
80
MA § 10.12(b)(i).
18
client privilege over the Spertus Email continued with Specific or became the
Company Securityholders’ privilege. In answering that question, the broader
“regarding this Agreement” language—which makes no mention of “the Firm”—
controls. If anything, the clauses cited by Plaintiffs demonstrate that the parties
knew how to specify communications with “the Firm” when they wanted to, but they
chose not to do so in the relevant portion of Section 10.12(b)(ii).
The Court is also mindful of its obligation to “effectuate the parties’ intent.”81
In fulfilling that obligation, the Court does not ignore the real-world commercial
context of the agreement. 82 Here, Section 10.12(b)(ii) makes clear that the parties
understood the risk of having the privilege over confidential merger-related advice
pass to the buyer, and they intended to prevent that from happening. There is no
apparent reason why the parties would have treated merger-related advice differently
based on which counsel offered it. Thus, in the absence of direct language, the Court
will not infer that Section 10.12’s use of “the Firm” in certain places was intended
to place a limit on which privileged, merger-related communications were subject to
Section 10.12(b)(ii)’s first clause.
81
Brown v. Ct. Square Cap. Mgmt., L.P., 2023 WL 8665122, at *9 (Del. Ch. Dec. 15, 2023)
(quoting Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006)).
82
See Fla. Chem. Co., LLC v. Flotek Indus., Inc., 262 A.3d 1066, 1080 (Del. Ch. 2021). Of course,
consideration of the agreement’s context will not override the plain meaning of the agreement’s
text. Id.19
For those reasons, any privilege Specific might have had over the Spertus
Email became the Company Securityholders’ privilege, not Specific’s. Therefore,
Specific had no power to waive the privilege, so its use of the Spertus Email was
improper. Hence, Defendants’ motion to strike is granted.83
B. Rule 13(a) Does Not Preclude Plaintiffs’ Claims.
Before addressing Defendants’ Rule 13(a) argument, it is worthwhile to
review the timeline of relevant events. First, in July 2023 Plaintiffs alerted Rhodes
to the claims they planned to bring. 84 In response, on October 3, 2023, Rhodes
preemptively filed an action seeking a judicial declaration that he did not commit
the torts Plaintiffs allege.85 Plaintiffs then filed their Complaint six days later.86 On
December 6, 2023, Plaintiffs filed an answer in the Rhodes Action, which did not
83
Plaintiffs made a cursory argument that Defendants waived any privilege over the Spertus Email
by producing non-privileged emails between Rhodes and Spertus. See Pls.’ MTS Opp’n at 10.
Plaintiffs’ argument lacks any substantive discussion of why those submissions would constitute a
waiver of Rhodes’s privilege over the Spertus Email. The Court infers that Plaintiffs hope to
invoke the “at-issue” exception to the attorney-client privilege, which applies “if a party (1) injects
privileged communications into the litigation, or (2) injects an issue into the litigation, the truthful
resolution of which requires disclosure of privileged communications.” Am. Bottling Co. v. BA
Sports Nutrition, LLC, 2021 WL 529099, at *5 (Del. Super. Ct. Feb. 11, 2021) (citations omitted).
Defendants’ submission of non-privileged emails to shed light on Spertus’s respective relationships
with Specific and Rhodes fits neither of those two prongs. Accordingly, Rhodes did not waive his
privilege over the Spertus Email.
84
Rhodes’s Compl. ¶ 3.
85
Id. ¶ 77.
86
Compl. The Court notes that Plaintiffs filed their Complaint well before a responsive pleading
in the Rhodes Action was required under Rule 12(a).
20
contain counterclaims. 87 Eight minutes later, Defendants filed this motion to
dismiss, attacking Plaintiffs’ choice to not repeat their Complaint in the form of
counterclaims. 88 Those facts do not entitle Rhodes to immunity for his alleged fraud.
Rule 13(a) states:
A pleading shall state as a counterclaim any claim which at the time of
serving the pleading the pleader has against any opposing party, if it
arises out of the transaction or occurrence that is the subject matter of
the opposing party's claim and does not require for its adjudication the
presence of third parties of whom the Court cannot acquire
jurisdiction. 89
That Rule also lists two exceptions that are inapplicable here.90
For the proposition that Plaintiffs claims are “now barred forever” by Rule
13(a), Defendants rely on Mott v. State.91 There, a builder named Gerry Mott was
ordered to pay $68,567.89 in restitution for construction fraud.92 Mott tried to reduce
that judgment by $20,000 to account for an unrepaid loan he claimed he made to the
aggrieved homeowner. 93 But, prior to the criminal action in which the restitution
87
Rhodes Action D.I. No. 8.
88
Defs.’ MTD. The respective docket entries reflect that Plaintiffs’ answer in the Rhodes Action
was filed at 4:55 p.m. on December 6; this motion was filed at 5:03 p.m. the same day.
89
Super. Ct. Civ. R. 13(a).
90
Id. One of the exceptions applies to claims if “at the time the action was commenced the claim
was the subject of another pending action.” Id. While the facts here run close to that exception,
Plaintiffs’ action was not yet “pending” when Rhodes filed his action.
91
49 A.3d 1186 (Del. 2012).
92
Id. at 1188.
93
Id.
21
was ordered, Mott was party to a mechanics lien action involving the same
transaction.94 He did not raise the supposed $20,000 loan in that litigation.95 The
Supreme Court ruled that Mott “failed to file the compulsory counterclaim [asserting
the loan] and is now barred forever.”96 Then, applying res judicata, the Supreme
Court held that the failure to raise the loan in the mechanics lien action foreclosed
raising it at the later criminal action. 97
The Court is unpersuaded by Defendants’ invocation of Mott in this readily
distinguishable circumstance. But the Court need not labor to dig out of the
procedural morass Defendants have cultivated. 98 Rather, the Court will exercise its
discretion under Rule 42(a) to consolidate this action with the Rhodes Action.99
Even aside from this Rule 13(a) dispute, the Court is convinced that it will be more
efficient for all involved to address these intertwined—indeed, largely identical—
94
Id.
95
Id. at 1189.
96
Id.
97
Id. at 1189-90.
98
The Court must note its distaste for the patent gamesmanship at work here. For one, it is as
inefficient as it is unavailing. More importantly, it preys upon—and thereby disincentivizes—a
salutary, if ill-fated, attempt to resolve this matter outside of the courtroom. Disputes are best
resolved when the litigants can muster collegiality and forthrightness despite their adversity. And
litigants will find that neither this Court nor its Rules are apt to reward underhandedness. See, e.g.,
Super. Ct. Civ. R. 1 (“[The Court Rules] shall be construed, administered, and employed by the
Court and the parties, to secure the just, speedy and inexpensive determination of every
proceeding.” (emphasis added)).
99
Super. Ct. Civ. R. 42(a) (“When actions involving a common question of law or fact are pending
before the Court, . . . it may order all the actions consolidated; and it may make such orders
concerning proceedings therein as may tend to avoid unnecessary costs or delay.”).
22
issues in a single setting. For the avoidance of doubt, to the extent Plaintiffs may
have tripped over Rule 13(a), the Court grants them leave to use their Complaint as
an amended counterclaim pursuant to Rule 13(f). 100 Accordingly, Plaintiffs’ claims
are not “barred forever” and will be judged on their merits.
C. The Agreement’s Exclusive Remedy Provision Does Not Preclude Counts
II and III.
As for the Complaint’s substance, Defendants argue that claims for fraudulent
inducement and fraudulent concealment were not carved out of the Merger
Agreement’s exclusive remedy provision.101 Plaintiffs, in response, make arguments
both under principles of contractual interpretation and public policy.102 The Court
finds that the plain language of the Merger Agreement permits these claims.
Section 7.10 of the Merger Agreement instructs that the Merger Agreement’s
indemnity provisions are the “sole and exclusive remedy with respect to any and all
claims . . . for breach of any representation.” 103 But that provision expressly excepts
100
Super. Ct. Civ. R. 13(f) (“When a pleader fails to set up a counterclaim through oversight,
inadvertence, or excusable neglect, or when justice requires, the pleader may by leave of court set
up the counterclaim by amendment.”). Here, justice requires that Defendants’ ploy not bar
Plaintiffs from pursuing their timely brought claims.
101
Defs.’ MTD at 13-16.
102
Pls.’ MTD Opp’n at 23-26,
103
MA § 7.10.
23
“claims arising from Fraud on the part of a Party hereto” from the rest of Section
7.10. 104 The parties defined Fraud as:
actual and deliberate common law fraud under Delaware Law in the
making of the representations and warranties contained in this
Agreement (as modified by the Company Disclosure Schedule). For
the avoidance of doubt, “Fraud” shall not include equitable fraud,
promissory fraud, unfair dealings fraud or negligent, reckless or
constructive fraud.105
Thus, the question is whether Plaintiffs’ fraudulent inducement and concealment
claims are “claims arising from [actual and deliberate common law fraud].”
In answering that question, it is useful to look at the commonality between
common law fraud, fraudulent inducement, and fraudulent concealment. And they
share much in common. “[A]ll fraud claims require proof of the same or nearly the
same generic elements.”106 Indeed, “[t]he elements of fraud and fraudulent
inducement are the same.” 107 The main difference between those two torts is that
104
Id.
105
Id. § 1.1.
106
Surf’s Up Legacy Partners, LLC v. Virgin Fest, LLC, 2021 WL 117036, at *13 (Del. Super. Ct.
Jan. 13, 2021) (citing Maverick Therapeutics, Inc. v. Harpoon Therapeutics, Inc., 2020 WL
1655948, at *26 (Del. Ch. Apr. 3, 2020)); see also DG BF, LLC v. Ray, 2021 WL 776742, at *20
(Del. Ch. Mar. 1, 2021) (“Whether Plaintiffs’ claims are cast as common law fraud, fraudulent
concealment, or fraudulent inducement, similar pleading requirements apply.”).
107
Maverick, 2020 WL 1655948, at *26. Those elements are: (1) a false representation by the
defendant; (2) the defendant’s knowing or reckless disregard of the truth; (3) the defendant’s intent
to induce action or inaction by the plaintiff; (4) the plaintiff’s justifiable reliance on the false
representation; and (5) damage to the plaintiff resulting from that reliance. Id. (quoting Great Hill
Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2018 WL 6311829, at *32 (Del. Ch.
Dec. 3, 2018)).
24
some articulations of fraudulent inducement’s elements require that the plaintiff
entered an agreement in reliance on the misrepresentation. 108 Fraudulent
concealment is distinguished by the fact that it depends on wrongful nondisclosures
instead of affirmative misrepresentations.109 Still, active concealment and silence in
the face of a duty to speak can still support a “common law fraud” claim. 110 Hence,
at their core, fraudulent inducement and fraudulent concealment operate as
specialized subsets of common law fraud, not wholly distinct torts.111
That conclusion alone suggests that fraudulent inducement and concealment
fit into Section 7.10’s carve-out. And there are additional indicia in the text of the
Merger Agreement that also militate in favor of that result. For example, the parties
chose to exclude “claims arising from Fraud”—not “claims of Fraud” or “claims for
108
See DG BF, 2021 WL 776742, at *20 n.166 (reciting the third element of fraudulent inducement
as, “the statement induced the plaintiff to enter the agreement” (quoting ITW Glob. Invs. Inc. v.
Am. Indus. Partners Cap. Fund. IV, L.P., 2017 WL 1040711, at *6 (Del. Super. Ct. Mar. 6, 2017))).
109
Id. (reciting the first element of fraudulent concealment as, “[d]eliberate concealment by the
defendant of a material past or present fact, or silence in the face of a duty to speak” (quoting
Nicolet, Inc. v. Nutt, 525 A.2d 146, 149 (Del. 1987))).
110
See Labyrinth, Inc. v. Urich, 2024 WL 295996, at *11 (Del. Ch. Jan. 26, 2024) (quoting Metro
Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 143 (Del. Ch. 2004)).
111
For the first time in their reply brief, Defendants argue that Counts II and III are duplicative of
Count I. Defs.’ MTD Reply at 7. Putting aside the untimeliness of this argument, Delaware courts
permit contemporaneous pleading of common law fraud, fraudulent inducement, and fraudulent
concealment. See Trust Robin, Inc. v. Tissue Analytics, Inc., 2022 WL 17423728, at *5 (Del. Ch.
Dec. 2, 2022) (“[T]o the extent the abundance of fraud claims pled is redundant, obviously, the
Plaintiff can recover for resulting damages (if any) but once. But at this pleading stage, it would
be inappropriate to dismiss for redundancy.”).
25
Fraud”—from the exclusive remedy provision.112 The phrase “arising from” is
typically construed broadly,113 so the use of it here suggests the parties did not intend
a narrow construction of the carve-out.
Moreover, the parties knew how to make sure unwanted fraud-related causes
of action would not get swept up into the Merger Agreement’s definition of Fraud.
Specifically, the Fraud definition provides, “[f]or the avoidance of doubt, ‘Fraud’
shall not include equitable fraud, promissory fraud, unfair dealings fraud or
negligent, reckless or constructive fraud.”114 The express disclaimer of those fraud-
related causes of action implies that other fraud-related causes of action—such as
fraudulent inducement and concealment—were not intended to be outside the
definition of Fraud. 115
The Court is not inclined to presume the parties simply forgot two mainstay
flavors of fraud when crafting their list of non-Fraud, fraud-related causes of action.
Rather, the Court is satisfied that if the parties did not want fraudulent inducement
or fraudulent concealment to fall within the Merger Agreement’s definition of Fraud,
112
MA § 7.10 (emphasis added).
113
See, e.g., Health Corp. v. Claredon Nat. Ins. Co., 2009 WL 2215126, at *17 (Del. Super. Ct.
July 15, 2009); see also Lillis v. AT&T Corp., 904 A.2d 325, 331 (Del. 2006) (“[U]nder Delaware
law, the phrases ‘connecting with,’ ‘relating to,’ and ‘arising out of’ . . . are paradigmatically broad
terms.” (emphasis added)).
114
MA § 1.1.
115
Crispo v. Musk, 2022 WL 6693660, at *5 n.36 (Del. Ch. Oct. 11, 2022) (noting “the expressio
unius est exclusio alterius maxim applies in the contractual interpretation context” (citing
Delmarva Health Plan, Inc. v. Aceto, 750 A.2d 1213, 1216 n.12 (Del. Ch. 1999))).
26
they would have said so. Therefore, Counts II and III are not barred by the Merger
Agreement’s exclusive remedy provision.116
D. Plaintiffs Agree to Dismiss Counts V-VII.
Counts V through VII of the Complaint relate to the supposed wrongfulness
of a lawsuit iSense filed in Illinois federal court that sought to invalidate a license
held by Specific. 117 Plaintiffs acknowledge that iSense has since voluntarily
dismissed that suit.118 Accordingly, “Plaintiffs agree to voluntarily dismiss their
claims relating to the Illinois Action without prejudice (Counts V-VII).” 119 With the
parties in accord, the Court grants the dismissal of those three Counts.
VI. CONCLUSION
For the foregoing reasons, Defendants Motion to Strike is GRANTED, and
Defendants Motion to Dismiss is DENIED as to Counts I-IV but GRANTED as to
Counts V-VII.
IT IS SO ORDERED.
_________________________
Sheldon K. Rennie, Judge
116
Since the plain text of the Merger Agreement does not preclude Plaintiffs’ claims, the Court
need not reach Plaintiffs’ public policy argument. See ABRY Partners, 891 A.2d at 1053-55(examining the contract’s plain terms before looking to public policy).
117
See Compl. ¶¶ 91-92, 125, 132, 137.
118
Pls.’ MTD Opp’n at 5-6.
119
Id.27