OptimisCorp.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
)
OPTIMISCORP, a Delaware )
corporation, ALAN MORELLI, and )
ANALOG VENTURES, LLC, )
)
Plaintiffs, ) C.A. No. 8773-VCP
)
v. )
)
JOHN WAITE, WILLIAM ATKINS, )
GREGORY SMITH, and WILLIAM )
HORNE, )
)
Defendants. )
)
MEMORANDUM OPINION
Submitted: April 30, 2015
Decided: August 26, 2015
Anthony W. Clark, Esq., Douglas D. Herrmann, Esq., Amy C. Huffman, Esq., Danielle
K. Berster, Esq., Ana Lucia Hurtado, Esq., SKADDEN, ARPS, SLATE, MEAGHER &
FLOM LLP, Wilmington, Delaware; Darius Ogloza, Esq., OGLOZA FORTNEY LLP,
San Francisco, California; Attorneys for Plaintiffs OptimisCorp, Alan Morelli, and
Analog Ventures, LLC.
Stephen P. Brauerman, Esq., Vanessa R. Tiradentes, Esq., Sara E. Bussiere, Esq.,
BAYARD, P.A., Wilmington, Delaware; Attorneys for Defendants John Waite, William
Atkins, and Gregory Smith.
Bruce E. Jameson, Esq., Eric J. Juray, Esq., John G. Day, Esq., PRICKETT, JONES &
ELLIOTT, P.A., Wilmington, Delaware; Attorneys for Defendant William Horne.
PARSONS, Vice Chancellor.
On October 20, 2012, the board of the plaintiff corporation, a company involved in
providing physical therapy services and developing physical therapy-related software,
met and voted to terminate the plaintiff CEO upon the advice of several attorneys.
Previously, another attorney, an independent third party, had conducted an investigation
and concluded that the CEO had engaged in conduct—receiving oral sex from a
subordinate employee in his office, which also was the bedroom of his house—that could
amount to sexual harassment. The board, at the same meeting, also voted to amend a
stockholders agreement to remove a provision that granted the initial stockholders, who
were controlled by the CEO, the right to appoint a majority of the board. The CEO, a
former corporate attorney, quickly moved to reacquire control, which included replacing
every director he had appointed who had voted to remove him. Three of the four
defendants also were directors of the plaintiff corporation and, as of the CEO‘s ouster,
collectively held roughly as many shares as the CEO. The October 20 meeting was a
bungled act of corporate governance marred by several flaws. Based on those missteps,
the CEO eventually prevailed in having his removal and the amendment to the
stockholders agreement vacated in a subsequent action in this Court pursuant to 8 Del. C.
§ 225.
Back at the helm, the CEO soon terminated the fourth defendant in this action, the
company‘s CFO, who was involved romantically with the CEO‘s former wife. A few
months later, the three director defendants resigned from the company‘s board and the
next day sued the company in California, where it is headquartered, to rescind the stock-
for-stock transaction by which their former physical therapy company had become a
1
subsidiary of the plaintiff corporation. The director defendants were terminated from that
company shortly thereafter.
In this action, the CEO and the company return to this Court alleging that the four
defendants engaged in a long-running and wide-ranging conspiracy that involved,
essentially, everyone who disagreed with the CEO‘s management of the company. The
plaintiffs seek approximately $50 million in damages, as well as equitable relief in the
form of an extension of the stockholders agreement in order to cement the CEO‘s control
for another two years. The alleged wrongs range from nebulous breaches of fiduciary
duty based on undermining the company‘s strategic vision to breach of contract claims.
After extensive pre-trial proceedings, I tried this matter for six days in February 2015.
This Memorandum Opinion (―Opinion‖) reflects my post-trial findings of fact and
conclusions of law, as well as my rulings on certain ancillary motions. Because of the
far-ranging claims advanced by the plaintiffs and the number of non-party actors who
figure in their narrative, the recitation of the facts is unusually lengthy.
Overall, the plaintiffs seek damages and equitable relief for breach of the duty of
loyalty, breach of contract, and tortious interference, and they advance secondary liability
theories of aiding and abetting and conspiracy. The defendants deny liability on all
counts, argue that there was and is no conspiracy, and contend that the CEO is a paranoid
narcissist. The defendants also accuse the plaintiffs of having undermined the integrity of
the litigation process by engaging in conduct akin to bribing and tampering with
witnesses.
2
For the reasons that follow, I conclude that the plaintiffs‘ actions have threatened
the integrity of this proceeding. The record includes evidence that supports a finding that
the plaintiffs paid witnesses for the content of their testimony, threatened witnesses with
criminal charges, attempted to open criminal investigations, and generally engaged in
threats of civil litigation based on questionable or baseless claims, all in an effort to
secure ―evidence‖ that would aid the plaintiffs in this case. As sanctions for this conduct,
I dismiss the plaintiffs‘ conspiracy claims against all of the defendants (although I also
hold, in the alternative, that the plaintiffs failed to prove their conspiracy claim) and I
draw certain adverse inferences against the plaintiffs in connection with certain of their
other claims. Additionally, I find that the plaintiffs have not met their burden of proving:
(1) their breach of the duty of loyalty claims, with the exception of one claim relating to
candor; (2) their claims for breach of either the terms of the stockholders agreement or
the implied covenant of good faith and fair dealing inherent in that agreement; or (3) their
tortious interference claims. Finally, I find that the plaintiffs have not proven damages.
I. INTEGRITY OF THE PROCEEDINGS
Unfortunately, because it bears on witness credibility and, ultimately, the facts
found in this Opinion, I consider it necessary to start in the middle of this story and
address the defendants‘ charge that the plaintiffs have undermined the integrity of these
proceedings, and only then tell the facts from the beginning.1 After a truncated recitation
1
Citations to testimony presented at trial are in the form ―Tr. # (X)‖ with ―X‖
representing the surname of the speaker, if not clear from the text. Exhibits will
be cited as ―JX #‖ and facts drawn from the parties‘ pre-trial Joint Stipulation are
3
of the necessary background, all of which is explored in greater detail in Section II infra,
I turn to the acts that the defendants argue were wrongful.
A. Relevant Actors
There are three Plaintiffs in this action. Plaintiff OptimisCorp (―Optimis‖ or the
―Company‖) is a Delaware corporation with its principal place of business in Pacific
Palisades, California. Plaintiff Alan Morelli has been the Company‘s CEO since its
inception, with the exception of the period from October 20, 2012 through March 21,
2013, during which time his status was uncertain. Plaintiff Analog Ventures, LLC
(―Analog‖), is a California LLC managed by Morelli that holds many of his Optimis
shares.2 When this action was filed, Morelli owned or controlled at least 7,400,000
shares of Optimis stock.3
Morelli, who is described in detail in Section II.D infra, is the locomotive
propelling this litigation. Described as a charismatic visionary, Morelli succeeded in
convincing numerous successful business owners, including the three director defendants,
cited as ―JS § #.‖ Because of the sheer quantity of the evidence, I note that the
record citations provided often are indicative, rather than exhaustive, and are
provided only for facts that may be disputed.
2
Analog Ventures‘ interests are aligned with Morelli. Accordingly, when referring
to actions taken by Morelli and Analog, I simply refer to them as ―Morelli.‖
3
The Joint Stipulation lists Morelli as personally owning or controlling 4,139,290
shares and Analog as owning 3,250,000 shares. At trial, however, it was revealed
for the first time that Morelli received roughly 1.6 million additional shares of
stock in lieu of cash to satisfy the Company‘s advancement obligations to him. Tr.
588-89 (Morelli). That transaction was approved by the current board of Optimis,
the majority of whom were appointed by Morelli. Id. at 589-90.
4
to sell their companies to Optimis in all-stock transactions, thus tying their success or
failure directly to Optimis and its physical therapy software and indirectly to Morelli. As
a manager, however, Morelli is ineffective. He has been characterized as controlling,
intolerant of dissent, paranoid, and vindictive. He contends that his relations with
Optimis employee and non-party Tina Geller were consensual and that the related sexual
harassment allegations were manufactured by the defendants, and other members of a
large conspiracy, as a baseless pretext to remove him from power.
There are four defendants. Defendant William Horne started as a consultant to the
Company in 2006 and became the Chief Financial Officer in January 2008. He was
stripped of all power and authority on March 25, 2013, placed on administrative leave on
April 16, and formally terminated on May 10, 2013. He owns 167,668 shares (less than
1%) of the Company‘s stock. Defendants John Waite, William Atkins, and Gregory
Smith (collectively, the ―Director Defendants‖ and together with Horne, ―Defendants‖)
jointly owned Rancho Physical Therapy, Inc. (―Rancho‖), a California professional
corporation that provides physical therapy services in various clinics in San Diego,
Riverside, and San Bernardino, with its principal place of business in Murrieta,
California. The Director Defendants entered into a Stock Purchase Agreement and Plan
of Reorganization dated June 14, 2007, pursuant to which Rancho became a wholly
owned subsidiary of Optimis and the Director Defendants became directors and
stockholders of Optimis. Rancho was the first, and largest, of a number of physical
therapy businesses acquired by the Company. Following the Rancho acquisition, the
Director Defendants no longer owned any Rancho stock, having exchanged it for stock in
5
Optimis. The Director Defendants continued to be employed by Rancho after the sale,
but each accepted a significant reduction in salary from what they had received before the
acquisition. Waite also served as the Chief Operating Officer of Optimis from 2009 until
his resignation in the summer of 2013. Collectively, the Director Defendants own
8,755,000 Optimis shares.
Tina Geller4 is a physical therapist formerly employed by Optimis. She joined the
Company in May 2010 and later began managing the Company‘s Pacific Palisades clinic.
As described in detail infra, it was her communication to Waite that triggered the sexual
harassment investigation that formed the basis of Morelli‘s termination by the board on
October 20, 2012. The parties heavily dispute the genesis and propriety of that
investigation. It is undisputed, however, that Morelli received oral sex from Geller on
multiple occasions while she was an employee of the Company and providing physical
therapy to him, and that Morelli also fondled Geller on occasion during those sessions.5
Geller filed suit against Optimis in April 2013.6 Defendants, and in particular Horne,
4
After the events giving rise to this case, Geller changed her surname to Robinson.
For consistency, and because she was known as such during the relevant time
periods, I refer to her throughout this Opinion as Geller and her deposition is cited
as ―Geller Dep.‖
5
Tr. 404-05, 474-76, 618-19 (Morelli). Morelli placed the number of oral sex
incidents at five or six. Id. at 404. Geller testified that it occurred eight to ten
times. Geller Dep. 28.
6
Geller first filed a complaint with the California Department of Fair Employment
and Housing on March 26, 2013. JX 703. On April 10, 2013, she filed a civil
complaint in the California Superior Court for the County of Los Angeles alleging,
6
contend that the manner in which Plaintiffs settled that lawsuit with Geller amounts to
witness tampering and bribery.
Helene Fearon and Stephen Levine co-founded Fearon & Levine, a consulting
firm that they sold to Optimis in December 2008. As with Rancho, that transaction was
stock-for-stock with no cash consideration and Fearon and Levine accepted significantly
lower salaries.7 Fearon and Levine currently are employed by Optimis Services, Inc., a
wholly owned subsidiary of the Company. Their positions at the Company primarily
involve assuring compliance with government and industry regulations, as well as
helping develop and market the Company‘s OptimisPT software package. For many
months before Morelli‘s temporary ouster, both Fearon and Levine had been seeking pay
raises from the Company. Although they briefly received their desired raises around
November 2012 when the Director Defendants were in control, those raises were undone
as part of the Section 225 Action (the ―225 Action‖). Fearon and Levine had significant
reputational capital and they staked it on the success of OptimisPT.8
among other things, quid pro quo sexual harassment, a hostile work environment,
and retaliation. JX 726.
7
Tr. 745-46 (Fearon). Upon joining Optimis, Fearon took a pay cut from making
$150,000 to $180,000 per year to $65,000. Id. at 748 (Fearon). Levine took a
similar pay cut to $65,000. Id. at 1618 (Levine).
8
Id. at 743 (Fearon: explaining that she still worked for the Company ―because of
the 5,000 users of the software that has my name on it, my face behind it, and my
credibility‖); id. at 1576 (Levine: ―[I]f we were to leave the company, that would
be very bad for the company and, frankly, we felt it would . . . damage our
credibility in the industry and our reputation.‖).
7
In the spring of 2014, with discovery in this action underway and Levine on the
brink of personal bankruptcy,9 Plaintiffs ―settled‖ with Fearon and Levine, who then
received raises to $150,000, the amount they demanded, as well as back pay. Notably,
neither Fearon nor Levine was a party to this or any other litigation with Plaintiffs at that
time. Fearon and Levine also exchanged mutual releases with the Company, although
there is no evidence that either Fearon or Levine understood what, if any, claims the
Company legitimately might have against them.10 In turn, Fearon and Levine provided
favorable affidavits that Plaintiffs attempted to submit in opposition to Defendants‘ then-
pending summary judgment motions. Around the same time and on the eve of the
scheduled trial, Plaintiffs also sought to amend their Complaint to allege that Fearon and
Levine were co-conspirators with Defendants.11 Defendants contend that, by these and
related actions, Plaintiffs tampered with and effectively bribed Fearon and Levine.
Chris Olsen formerly served as the Controller of Rancho. He served in that
position from April 2001 until December 2013. I found Olsen‘s trial testimony highly
credible and probative. He also provided a unique perspective, because he was not
involved in the core events giving rise to this lawsuit, but was associated with Optimis
9
Id. at 1618 (Levine).
10
Id. at 775-77 (Fearon); id. at 1618-23 (Levine).
11
In a previous Memorandum Opinion, I denied Plaintiffs‘ motion to amend, held
that the Fearon and Levine affidavits were untimely, and refused to consider them
in resolving Defendants‘ summary judgment motions. OptimisCorp v. Waite,
2015 WL 357675 (Del. Ch. Jan. 28, 2015).
8
while the Director Defendants were employees of Rancho and after they were fired.
Olsen credibly testified that the atmosphere at Optimis following the Director
Defendants‘ termination was ―You‘re with us or you‘re with them [Defendants]. And if
you‘re with them, we‘ll put you in the lawsuit.‖12 At one meeting, Morelli ―suggested
that the Company would reward [Olsen] if [he] were able to come up with the corporate
minutes that [Morelli] was looking for,‖ but which he could not find or did not exist.13
On another occasion, Olsen was asked to sign a declaration that had been prepared in
advance by Optimis‘ agents, but he crossed out the majority of the declaration as false.14
In moving for summary judgment, Defendant Horne requested that the Court
dismiss the claims against him as a sanction for litigation misconduct. The Director
Defendants joined in that request. I deferred consideration of the request until after trial.
Defendants briefed the issue again in their pre- and post-trial briefs, in which they aver
that the settlements Optimis and Morelli made with Geller, Fearon, and Levine constitute
witness tampering and bribery. Defendants further suggest that Plaintiffs essentially
attempted to bribe Olsen. After digressing briefly below to provide an overview of the
major factual disputes in this case, I address Defendants‘ witness tampering arguments in
turn.
12
Tr. at 1217.
13
Id. at 1219.
14
Id. at 1220.
9
B. Factual Preview15
To put in perspective why Plaintiffs‘ actions with respect to these witnesses is so
important, I provide here a summary of the facts found in Section II infra. Optimis
simultaneously developed two software packages: OptimisPT and OptimisSport. Many
individuals at the Company, including Defendants, Fearon, and Levine, believed that
continuing to develop and stabilize OptimisPT was the Company‘s top priority and best
hope for succeeding as a business and that the Company was misallocating resources by
putting too much emphasis on OptimisSport. Morelli made the allocation decisions in the
Company, and he disagreed. Because of a stockholders agreement, Morelli had the right
to appoint five of Optimis‘ nine board members. As time went on, Defendants and
others, including Fearon and Levine, became increasingly frustrated with the stalled
development of OptimisPT and the spending on OptimisSport and its related promotional
events. They blamed Morelli for these problems.
Geller‘s initial role at Optimis is unclear, but she worked on OptimisSport and
functioned essentially as Morelli‘s personal physical therapist. Geller‘s husband also
worked at Optimis. During 2011 and 2012, it is undisputed that, on some occasions,
Morelli engaged in sexual conduct with Geller during these physical therapy sessions.
These interactions ceased as Geller spent more time running the Pacific Palisades clinic.
It is undisputed that, at a conference in February 2012, Geller told Horne about some of
Morelli‘s conduct, and that Horne shortly thereafter told George Rohlinger what Geller
15
Record citations pertinent to this overview are provided in Section II infra.
10
told him, but Horne did not report the matter to Human Resources. Rohlinger worked
closely with Waite, but it is contested whether Rohlinger later told Waite what Horne had
told him. After the February conference, Horne allowed Geller to use his apartment for
free, because it was closer to Pacific Palisades than her home. Horne was not using it
because he was staying with Terry Doherty, Morelli‘s former wife.
Plaintiffs contend that Defendants despised Morelli‘s leadership, wanted to
remove him and take control themselves, and were conspiring with others, including
Fearon and Levine, to develop a plan as to how to do so. Plaintiffs allege that Defendants
encouraged, lobbied, and bribed Geller to turn her purportedly consensual interactions
with Morelli into a sexual harassment complaint. Defendants deny these allegations. On
September 21, 2012, Geller spoke with Waite by telephone. She apparently was
concerned that she was going to be reassigned from the Pacific Palisades clinic, where
she had been working, back to Morelli‘s home, which was his Optimis office. What was
said on the September 21 call is disputed, but Geller told Waite something about
Morelli‘s behavior. Geller asked Waite not to report the matter. Waite reported it to
Human Resources and an investigation began promptly thereafter.
The investigation involved a third-party attorney, chosen indirectly by Optimis‘
insurance carrier, who interviewed several Optimis employees. The investigator, Nancy
Solomon, found Geller credible and corroborated by other witnesses. Solomon did not
find Morelli credible. Morelli contends that the investigation was rushed and that
Defendants manipulated it. Defendants deny those allegations. Waite scheduled a
special meeting of the board of directors for October 20 to deal with Geller‘s allegations
11
and Morelli‘s possible removal. He did not include any sort of meeting agenda in the
notice. Solomon‘s report was completed a few days before the October 20 meeting. At
the meeting, the board formed an ad hoc committee comprised of everyone except
Morelli. The committee was advised by Leonid Zilberman, an attorney hired by the
Company‘s insurer, that the Company needed to fire Morelli as CEO to have the best
defense in a subsequent sexual harassment lawsuit. Other attorneys concurred in that
advice. The board fired Morelli and amended the stockholders agreement to prevent him
from returning himself to power and undoing their action. Waite was appointed interim
CEO.
Plaintiffs‘ primary duty of loyalty claim alleges that Defendants conspired to
remove Morelli from power, bribed Geller to make false sexual harassment allegations,
and used the sexual harassment investigation as a pretext to remove Morelli and take
control of the Company. Geller is key to this claim. Plaintiffs‘ other main duty of
loyalty claim alleges that Defendants undermined Morelli‘s authority and the Company‘s
―strategic vision‖ by countermanding Morelli‘s authority and attempting to divert
resources from OptimisSport to OptimisPT. According to Plaintiffs, Fearon and Levine
were key members of this purported anti-Morelli conspiracy.
C. Analytical Framework: Litigation Ethics and the Administration of Justice
I take extremely seriously the claims of witness tampering and bribery. In the
nearly 300 pages of post-trial briefing, however, the parties failed to articulate a clear
standard under which to evaluate the conduct being challenged. Horne offered the
criminal standards for witness tampering and bribery, cited the Rules of Professional
12
Conduct, repeatedly emphasized that Morelli is a Delaware lawyer, albeit an inactive one,
and asked this Court to dismiss all claims against Defendants as a sanction for litigation
misconduct by Morelli and Plaintiffs‘ Delaware and California attorneys.16 Plaintiffs
deny that there was any wrongdoing, assert that aggressive, good faith pursuit of
settlements is both acceptable and encouraged by public policy, and contend that
Defendants have been treated fairly and have not been impeded from accessing crucial
information. I begin with a review of what I conclude are the guiding principles.
Some of the alleged wrongs can be examined from the perspective of the
Delaware Lawyers‘ Rules of Professional Conduct (the ―Rules‖ or ―DLRPC‖). Rule 3.4,
entitled ―Fairness to Opposing Party and Counsel,‖ forbids a lawyer to ―unlawfully
obstruct another party‘s access to evidence‖17 and further instructs that lawyers shall not
―falsify evidence, counsel or assist a witness to testify falsely, or offer an inducement to a
witness that is prohibited by law.‖18 Rule 8.4(d), which is a catchall provision, provides
that it is professional misconduct to ―engage in conduct that is prejudicial to the
administration of justice.‖19
16
See State Line Ventures, LLC v. RBS Citizens, N.A., 2009 WL 4723372, at *1 (Del.
Ch. Dec. 2, 2009) (―A Delaware lawyer always appears as an officer of the Court
and is responsible for the positions taken, the presentation of the case, and the
conduct of the litigation.‖).
17
DLRPC R. 3.4(a).
18
Id. R. 3.4(b).
19
Id. R. 8.4(d).
13
―In Delaware there is the fundamental constitutional principle that [the Supreme]
Court, alone, has sole and exclusive responsibility over all matters affecting governance
of the Bar.‖20 Accordingly, the Court of Chancery generally does not have jurisdiction to
enforce the Rules. ―The Rules are to be enforced by a disciplinary agency, and are not to
be subverted as procedural weapons.‖21 The Supreme Court has set forth the standard by
which this Court should consider allegations of misconduct:
Absent misconduct which taints the proceeding, thereby
obstructing the orderly administration of justice, there is no
independent right of counsel to challenge another lawyer‘s
alleged breach of the Rules outside of a disciplinary
proceeding. Likewise, the trial courts have no jurisdiction to
entertain such application except as noted above.
Nonetheless, trial courts retain their traditional powers,
which are indeed potent, to address, rectify and punish
conduct of a party or counsel which threatens the legitimacy
of judicial proceedings.22
Thus, for this Court to address directly an alleged violation of the Rules, that violation
must involve ―prejudice to the fairness of the proceeding‖ itself.23 Furthermore, such a
finding must be supported by clear and convincing evidence.24 This is a high bar.
20
In re Appeal of Infotechnology, Inc., 582 A.2d 215, 220 (Del. 1990).
21
Id.22
Id. at 221-22 (emphasis added). See also Crumplar v. Super. Ct. ex rel. New
Castle Cty., 56 A.3d 1000, 1009 (Del. 2012) (―If a trial judge believes an attorney
has committed misconduct, referral to the Office of Disciplinary Counsel, not Rule
11 sanctions, is the proper recourse in the absence of prejudicial disruption of the
proceeding.‖).
23
In re Rehab. of Indem. Ins. Corp., RRG, 2014 WL 637872, at *3 (Del. Ch. Feb. 19,
2014).
14
Outside of the cases involving disqualification of counsel, very little Delaware law
exists on what sort of conduct ―threatens the legitimacy of judicial proceedings‖ such that
a trial court would be justified in employing its ―traditional powers.‖ Most frequently,
the Court of Chancery invokes its ―inherent power to regulate the conduct of the
attorneys that appear before it‖25 and maintains fairness by shifting fees when a party acts
in bad faith.26 Only rarely has this Court dismissed cases on the basis of bad faith
conduct.
24
In re Appeal of Infotechnology, 582 A.2d at 221. ―The clear and convincing
standard requires evidence that ‗produces in the mind of the trier of fact an abiding
conviction that the truth of [the] factual contentions [is] highly probable.‘‖ Hudak
v. Procek, 806 A.2d 140, 147 (Del. 2002) (internal quotations omitted) (quoting
Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1151 (Del. 2002)).
25
Audio Jam, Inc. v. Fazelli, 1995 WL 1791087, at *2 (Del. Ch. Aug. 17, 1995).
26
See, e.g., Choupak v. Rivkin, 2015 WL 1589610, at *21-23 (Del. Ch. Apr. 6, 2015)
(reviewing the law on bad faith fee shifting and concluding that fee shifting was
appropriate after finding, using the preponderance-of-the-evidence standard, that
the defendant committed perjury); ASB Allegiance Real Estate Fund v. Scion
Breckenridge Managing Member, LLC, 2013 WL 5152295, at *10 (Del. Ch. Sept.
16, 2013) (―When a party or its counsel engages in litigation misconduct to a
degree sufficient to support fee shifting, the consequences go beyond monetary
harm to the opposing party. The misconduct affects the court, which must devote
resources to address the resulting problems, thereby depriving other litigants of the
court‘s attention. More broadly, misuse of the litigation process undermines the
public‘s confidence in the legal system.‖); Fairthorne Maint. Corp. v. Ramunno,
2007 WL 2214318, at *9 (Del. Ch. July 20, 2007) (finding bad faith because of the
―plethora of frivolous defenses and counterclaims,‖ the ―shifting nature of
[defendants‘] arguments through their pleadings, briefs and oral argument,‖ and
the ―incivility injected into these proceedings‖).
15
In Bessenyei v. Vermillion, Inc.,27 the Court dismissed a case that was based on
falsely verified pleadings. The Court in Bessenyei concluded that the false verifications
undermined the integrity of the judicial process because the verification requirement is
designed to encourage truthfulness.28 From Bessenyei, one can draw the principle that
actions that undercut the truthfulness of the proceeding are ones that threaten the
legitimacy of the judicial process because they impede, and potentially undermine, the
Court‘s ability to find facts accurately, which in turn prevents the Court from equitably
dispensing justice.
Equally relevant are the principles articulated in Parfi Holding AB v. Mirror
Image Internet, Inc.29 In that case, Chief Justice Strine, then writing as a Vice
Chancellor, addressed a motion to dismiss presented under Rule 41(b) and ―the inherent
authority of this court to hold litigants responsible for misconduct in the litigation
process.‖30 In Parfi, the Court found, by clear and convincing evidence, that the
plaintiffs repeatedly had misled the Court in an effort to gain a tactical advantage, which
―implicate[d] this court‘s inherent authority to police the litigation process, to ensure that
27
2012 WL 5830214 (Del. Ch. Nov. 16, 2012).
28
Id. at *8 (―This Court‘s rules, in an effort to assure truthfulness, require
verifications of complaints, answers, and comparable pleadings. Failing to
comply with this requirement is not some mere technicality; it undercuts the
integrity of the judicial process.‖).
29
954 A.2d 911 (Del. Ch. 2008).
30
Id. at 927.
16
acts that undermine the integrity of that process are sanctioned.‖ 31 The Court dismissed
the plaintiffs‘ claims as a result of their inequitable conduct and, in so doing, held that:
―When a party knowingly misleads a court of equity in order to secure an unfair tactical
advantage, it should forfeit its right to equity‘s aid. Otherwise, sharp practice will be
rewarded, and the tradition of civility and candor that has characterized litigation in this
court will be threatened.‖32
In the present case, the argument is not that Plaintiffs have lied to the Court, but
instead that Plaintiffs fundamentally have impaired the Court‘s ability to find facts by
offering improper material inducements and employing overbearing threats of criminal
and civil litigation, a combination of carrots and sticks that has corrupted the witnesses.
In that vein, Defendants point the Court to this State‘s criminal statutes prohibiting the
bribing or tampering with witnesses.33
If the published case law is any indication, witness bribing is a rare phenomenon
in Delaware. I find relevant, however, the comments of the Delaware Supreme Court in
31
Id. at 932.
32
Id. at 915.
33
11 Del. C. § 1261 (―A person is guilty of bribing a witness when the person offers,
confers or agrees to confer any benefit upon a witness or a person about to be
called as a witness in any official proceeding upon an agreement or understanding
that: (1) The testimony of the witness will be thereby influenced . . . .‖); 11 Del. C.
§ 1263 (―A person is guilty of tampering with a witness when: (1) The person
knowingly induces, influences or impedes any witness or victim by false
statement, fraud or deceit, with intent to affect the testimony or availability of such
a witness . . . .‖).
17
Weber v. State.34 In that case, the Supreme Court reversed a murder conviction on
several grounds. One of those grounds related to the bias of several witnesses to the
stabbing. It was revealed during the trial that the family of the victim paid approximately
$85 to each of three of the State‘s witnesses for haircuts and new suits. Importantly,
there was no evidence that the witnesses were being paid to alter their testimony in any
way. But, the victim‘s family members knew the testimony that the witnesses were going
to provide and approved of those statements. The legal question in Weber related to cross
examination of the witnesses for bias. In the course of addressing that issue, the Supreme
Court remarked that:
[The victim‘s family‘s] actions, if not falling within the ambit
of the criminal proscriptions against bribing a witness (11
Del. C. § 1261), certainly violate the spirit of the law and cast
into doubt the integrity of the proceedings in this case. . . .
Similar conduct by an attorney would violate the Code of
Professional Responsibility. . . . These tactics, as well as less
blatant attempts to improperly influence a witness‘ testimony,
are fundamentally unfair and pervert the truth-seeking
function of trial.35
Plaintiffs downplay the significance of these comments as dicta and emphasize that the
holding in Weber is limited to the right of cross examination, which Defendants have had
as to the witnesses in question here: Geller, Fearon, Levine, and Olsen. I do not agree
that the Court‘s comments were so limited. The Supreme Court, which has the
34
457 A.2d 674 (Del. 1983).
35
Id. at 679 n.6 (emphasis added).
18
constitutional obligation to police the Bar, went out of its way to note that similar conduct
by an attorney would be professional misconduct.
From the foregoing review, I conclude that the inquiry into whether the integrity
of these proceedings has been undermined should focus on the extent to which the
Court‘s truth-finding function has been impaired, thus throwing into question any ruling
that ultimately might issue. With that standard in mind, I turn to Plaintiffs‘ litigation
conduct in this case.
D. The Geller Settlement
Despite the fact that she did not testify at trial, Geller‘s credibility is a key issue in
this case.36 Morelli‘s alleged sexual harassment of Geller formed the basis of Morelli‘s
ouster on October 20, 2012, and that firing ranks highly among the items that led to this
lawsuit. Thus, Geller is an important witness in this litigation. For example, in their
Verified Complaint (the ―Complaint‖), Plaintiffs alleged that Defendants attempted to
―coax Geller into bringing a false sexual harassment complaint against Morelli and to use
it as an excuse to remove him and solicit the other directors and stockholders to support
their change in control.‖37 Plaintiffs further alleged that Defendants ―bribed Geller into
cooperating in an investigation against Morelli.‖38 In their post-trial briefing, Plaintiffs
continue to maintain that Defendants used Geller‘s claims as a pretext to effect a change
36
See infra Section V.A.
37
Compl. ¶ 18.
38
Id. ¶ 20.
19
in control at Optimis,39 and breached their duty of loyalty by manipulating Geller and the
subsequent investigation.40 Plaintiffs‘ failure to prove these allegations seriously would
undercut their case. Aside from documentary evidence, the best sources of information
as to whether Defendants ―bribed Geller‖ and otherwise used her as a pretext would be
the testimony of Defendants and Geller on those issues. If the other evidence is not
determinative, then Geller‘s credibility would be pivotal to resolving these contentions.
1. Evidentiary objections
Plaintiffs did not raise their evidentiary objections to the materials and
communications relating to their settlement with Geller until their reply brief. With
respect to other issues, such as certain hearsay objections, Plaintiffs fairly did not need to
press those objections earlier because they did not know what documents would be relied
upon by Defendants in their briefs. But, the Geller settlement materials are different.
Horne has pursued this witness tampering line of attack since briefing on his summary
judgment motion, including extensive questioning at trial. In addition, Plaintiffs
preemptively responded to the concerns about litigation misconduct the Court expressed
at trial in a lengthy section of their opening brief. Yet, Plaintiffs failed to mention their
evidentiary objections anywhere in that context. Instead, they waited until their reply. I
39
Pls.‘ Post-Trial Opening Br. [hereinafter ―POB‖] 19-22.
40
Id. at 49-50.
20
therefore hold that Plaintiffs have waived their evidentiary objections as to the settlement
with Geller.41
Even if Plaintiffs‘ evidentiary objections were not waived, they are without merit.
As to communications resulting from the California mediation, Plaintiffs object under
California Evidence Code § 1119. That provision makes inadmissible and, indeed,
prevents the discovery of writings prepared for mediations or evidence of things said in
mediations.42 Plaintiffs have not offered any explanation, however, as to how the
California Evidence Code applies in this action. That Code, by its terms, applies only to
the courts and judicial proceedings of California.43 Additionally, any protection Section
1119 may offer has been waived. That section also prevents even the discovery of the
items Plaintiffs now challenge. Even if California law somehow could bind the
evidentiary determinations of the courts of this State, by voluntarily producing the
mediation materials and communications in this action, Plaintiffs have waived any
protection offered by Section 1119.
41
Zutrau v. Jansing, 2013 WL 1092817, at *6 (Del. Ch. Mar. 18, 2013); Emerald
P’rs v. Berlin, 2003 WL 21003437, at *43 & n.144 (Del. Ch. Apr. 28, 2003). I
recognize that Horne pointed out Plaintiffs‘ evidentiary objections in his
answering brief, but that is not surprising because, throughout this case, Plaintiffs‘
positions and the arguments they ultimately have asserted have been a moving
target. See infra Section IV.
42
Cal. Evid. Code § 1119(a)-(b).
43
Id. § 300.
21
Plaintiffs next contend that Delaware Rule of Evidence 408 precludes the
admissibility of any of the Geller settlement discussions. Rule 408 states, in relevant
part:
Evidence of (1) furnishing or offering or promising to furnish,
or (2) accepting or offering or promising to accept, a valuable
consideration in compromising or attempting to compromise
a claim which was disputed as to either validity or amount is
not admissible to prove liability for or invalidity of the claim
or its amount. . . . This rule also does not require exclusion
when the evidence is offered for another purpose, such as
proving bias or prejudice of a witness, negativing a
contention of undue delay or proving an effort to obstruct a
criminal investigation or prosecution.44
Plaintiffs also suggest that, based on the strong public policy favoring settlements, any
doubts should be resolved in favor of excluding such evidence.45 Here, I conclude that
Rule 408 does not apply.
By its terms, Rule 408 precludes admissions of offers of compromise for the
purpose of proving the liability or amount of the claim actually being settled. I do not
read the rule as requiring the exclusion of offers of compromise of Claim A in Litigation
1 from being used to prove or disprove the validity and amount of a different Claim B in
Litigation 2. Plaintiffs purportedly were settling Geller‘s sexual harassment claims in the
44
D.R.E. 408.
45
E.g., Candlewood Timber Gp. LLC v. Pan Am. Energy LLC, 2006 WL 1382246, at
*13 (Del. Super. May 16, 2006) (―Moreover, ‗if application of Rule 408 exclusion
is doubtful, the better practice is to exclude evidence of compromise
negotiations.‘‖ (quoting Chase Manhattan Bank v. Iridium Africa Corp., 2003 WL
22928042, at *2 (D. Del. Nov. 25, 2003)).
22
settlement. Neither the validity nor the value of those claims is at issue here. The
question in this case is whether Defendants breached their fiduciary duties to the
Company. Accordingly, Rule 408 is not applicable in these circumstances.
Additionally, even if Rule 408 did apply, the Geller settlement materials still
would be admissible under the Rule‘s proviso regarding ―another purpose,‖ which
constitutes an illustrative, not exclusive, list. The Geller settlement documents are being
admitted primarily to assist in determining whether Plaintiffs undermined the integrity of
these proceedings—a purpose quite close to Rule 408‘s enumerated ―proving bias or
prejudice of a witness‖ exception—which is separate from whether Plaintiffs‘ claims are
meritorious. Moreover, issues of Geller‘s potential bias and credibility are particularly
important here because she did not appear at trial.
Accordingly, Plaintiffs waived their evidentiary objections and, in any event, I
would overrule those objections.46
2. The mediation settlement
I start my examination of Plaintiffs‘ settlement with Geller with the mediation
settlement. I begin here because the evidence supports the conclusion that the settlement
46
Plaintiffs also contend that the Geller settlement materials are not even relevant to
this case and, as such, should be excluded under Rule 402. Relevant evidence is
―evidence having any tendency to make the existence of any fact that is of
consequence to the determination of the action more probable or less probable
than it would be without the evidence.‖ D.R.E. 401. The Geller settlement
materials are relevant because, among other things, they pertain to Geller‘s
credibility and Defendants‘ charge that Plaintiffs have undermined the integrity of
these proceedings.
23
entered into between Plaintiffs and Geller following their mediation may have been a
legitimate, good faith effort to settle her sexual harassment claims, even if Plaintiffs
simultaneously were contemplating using that settlement for other purposes. More
importantly, the mediation settlement provides a baseline against which to examine the
subsequent Morelli-funded settlement, which is the focus of Defendants‘ complaints.
By mid-April 2013, Geller, through her California counsel, Jack Schaedel, had
filed sexual harassment complaints against the Company. On May 30, 2013, the parties
engaged in a lengthy mediation that lasted about 20 hours. 47 One aspect of the resulting
draft settlement agreement that is central to Defendants‘ contentions that Plaintiffs bribed
Geller is the Geller Declaration: a sworn statement by Geller as to the chain of events that
led to her claims. Early on Saturday, June 1, the parties apparently reached a settlement
agreement (the ―Mediation Settlement‖). At 2:16 a.m., Mike Margolis, counsel to
Optimis, emailed Schaedel stating: ―Jack, this confirms that we have reached a deal.‖48
Attached to that email were the then-final Geller Declaration (―Geller‘s Mediation
Declaration‖) and an interim settlement agreement.
Plaintiffs had required a declaration from Geller as a prerequisite for settlement.
Earlier in the negotiations, Margolis informed Schaedel that the ―declaration is a
threshold problem‖49 and that Morelli and the Company were ―re-evaluating our interest
47
Schaedel Dep. 80.
48
JX 771.0001.
49
JX 770.0003.
24
in the settlement in light of Geller‘s apparent insistence on hedging her bets in the
declaration.‖50 Recognizing that Plaintiffs wanted a declaration consistent with their
view of the events in this case,51 Schaedel touted his view that ―the Declaration supports
the ‗insurgents-conspiracy‘ argument.‖52
The end result of these discussions was Geller‘s Mediation Declaration, a one-and-
a-half-page, eight-paragraph statement. That Declaration includes language geared
toward this case. For example, paragraph 5 states that Geller was encouraged by
Jeannine Gunn to provide more information to Nancy Solomon, the investigator, and that
Geller ―was aware that many leaders of the company, including Jeannine, believed that it
was important to remove Alan [Morelli] in order for the company to get things done.‖53
Paragraph 7 then reads: ―In October 2012, I learned that my statements to Ms. Solomon
had been used to oust Alan from his position as Optimis‘ CEO.‖54 Overall, however,
Geller‘s Mediation Declaration focuses on Geller‘s sexual harassment claims, provides a
timeline for how those claims came to be investigated, and tries to suggest weaknesses in
her story.
50
Id.51
Id. at 0002 (―She isn‘t hedging her bets, she‘s giving you every word she can. She
has financial incentive just to say what you want to hear but she‘s not doing that.
At some point you have to give her credit for that, and accept the best language
you can get.‖).
52
Id. at 0001.
53
JX 771.0004.
54
Id.
25
For reasons that are not entirely clear, but which appear to relate to the fact that
the Company‘s insurer would not fund the Mediation Settlement, that agreement never
was consummated.
3. The Morelli-funded settlement
On December 2, 2013, six months after the Mediation Settlement, the parties
executed a final settlement. That agreement consisted of: (1) a mutual release; (2) a
―Questions and Answers Appendix‖ (the ―Q&A Appendix‖); (3) a revised sixteen-
paragraph, nearly five-page sworn declaration (the ―Final Geller Declaration‖);55 (4) an
unsworn but signed summary statement (the ―Summary Statement‖); and (5) a sworn
declaration from Geller‘s attorney (the ―Schaedel Declaration‖). Together these five
items constitute the ―Geller Settlement.‖ My review of the evidence leaves me with an
abiding conviction that the money Plaintiffs paid to Geller was for the differences
between the Mediation Agreement—to which Plaintiffs previously agreed—and the
various components of the Geller Settlement. Those differences all relate to this
proceeding and in many instances are keyed to specific allegations in Plaintiffs‘
Complaint. Stated more cynically, it appears that, under the guise of settling a California
sexual harassment complaint by an employee making $58,000 a year,56 Plaintiffs agreed
55
JX 920.0016-20 [hereinafter ―Geller Decl.‖].
56
Geller Dep. 235.
26
to pay Geller $550,00057 to provide a declaration with numerous statements intended for
use in this Delaware proceeding.58
Preliminarily, I consider it important to describe what the Geller Settlement
contains before I turn to how Plaintiffs reached that agreement with Geller. Above I
quoted the two sentences from Geller‘s Mediation Declaration that appeared most
directed toward this litigation. By contrast, I quote below some of the many examples of
statements from the Final Geller Declaration that are not in Geller‘s Mediation
Declaration, and that clearly are intended for use in this litigation:
 ―Mr. Horne made it clear on multiple occasions that he
did not like Mr. Morelli and said that the Company
would be better off without him.‖ (¶ 3).
 ―I came to understand that the Rancho executives did
not like Mr. Morelli and claimed that the Company
would be better off without him.‖ (¶ 4).
 ―I was also aware that Mr. Waite and others had a
strong dislike for Mr. Morelli and were unhappy with
the way Mr. Morelli was running the Company. In
retrospect, it is likely that they were setting in motion a
plan to use me as a means to try and accomplish their
objective of removing Mr. Morelli and taking control
of the Company. Messrs. Waite, Horne, Godges, and
57
JX 920.0006.
58
Plaintiffs now have disowned Geller, denied that Geller is their witness, and
explicitly called her a ―perjurer.‖ POB 74. But, on August 23, 2014, in opposition
to the Director Defendants‘ summary judgment motion, Plaintiffs cited the Final
Geller Declaration (Exhibit 25 to that brief) repeatedly as the basis for factual
assertions they made. As of that date, Plaintiffs‘ attorneys claimed that they were
unable to make Geller available for a deposition. Later, when Geller was deposed,
she essentially recanted substantial portions of the Final Geller Declaration.
27
others had apparently wanted to get control of the
Company.‖ (¶ 7).
 ―Ms. Gunn, like Mr. Waite and others, did not like Mr.
Morelli and did not want him to be in control of the
Company. I did not realize at the time that she and
others saw me as their tool to provide a detailed and
damning report against Mr. Morelli as a pretext to
remove Mr. Morelli from his control position at
OptimisCorp.‖ (¶ 9).
 ―The stress of what I was being asked to do by Mr.
Waite, Ms. Solomon, and others was causing me to be
barely able to function or perform tasks such as
processing accounts receivable . . . . Mr. Waite
encouraged me to make a complaint against Mr.
Morelli.‖ (¶ 13).
 ―[A]fter my September 21, 2012 call to Mr. Waite, it
was clear to me that I was being treated much better
than I was treated before I made the call. . . . Based on
what I now know to have been taking place within the
Company, the raise and the support were rewards for
my disclosure about my activity with Mr. Morelli.‖ (¶
14).
 ―I now see that I likely was a pawn being manipulated
by Mr. Waite and others who were seeking to get
control of the Company.‖ (¶ 15).
These statements map almost perfectly to Plaintiffs‘ position in this litigation. Indeed,
the Final Geller Declaration leaves no doubt about its purpose:
 ―I am providing this statement in part because of the
continuing effort by Mr. Waite and others to take over
the Company. . . . I believe I was manipulated and
misled and it was wrong for Mr. Waite and others to
use me to attempt to remove Mr. Morelli.‖ (¶ 16).
Geller provided all of these statements under oath, although it is clear from their
face that she lacked personal knowledge of much to which she swore. Importantly, she
28
also provided the Summary Statement, which, as explained infra, Plaintiffs deliberately
did not ask Geller to provide under oath, but still asked her to sign and include in the
Geller Settlement, making it appear to be her statements. It reads like the synopsis of an
overwrought legal thriller:
The events here involve corporate intrigue and treachery. I
am an aspiring physical therapist, who got into a relationship
with my company‘s CEO, Alan Morelli. I don‘t recall
exactly how it all began, but it would be reasonable to believe
it was initiated by me. . . . [A]s I have now learned, it is clear
that I was being lobbied and manipulated by the CEO‘s
enemies, including John Waite, to become a chess piece in
taking control of the Company. I have also learned Mr. Waite
took my comments and turned them into not only a tale of
egregious sexual harassment, but also a pretext for a
corporate coup. . . . Evidence that I have now seen indicates
that Mr. Waite, Will Horne, and others found a willing lawyer
and a willing investigator to conduct an investigation that
apparently gave them what they wanted most, a pretext to
sack the CEO. This began a lengthy and bitter corporate battle
for control of the Company.59
Many similar remarks are included in the Q&A Appendix.60 Finally, Schaedel,
Geller‘s lawyer, who had had only one conversation with Horne and had never spoken to
Waite, provided the Schaedel Declaration, in which he swore that ―[Horne] desired to see
the company [Optimis] go bankrupt,‖ and that Waite‘s actions ―seem consistent with a
59
JX 920.0011.
60
For example, Geller answered―True‖ to the statement: ―It was common knowledge
among a group of employees that John Waite, George Rohlinger, and/or other
employees had plans to remove Alan Morelli as CEO and Chairman of
OptimisCorp (the ―Company‖) in order to take control of the Company.‖ Id. at
.0009. These true/false statements were neither under oath nor signed.
29
desire to see the company lose lawsuits and to be forced into bankruptcy.‖61 From that
limited source of firsthand information, Schaedel declared under oath that the conclusion
was ―inescapable that Horne, Waite and others saw my client‘s lawsuit against Mr.
Morelli and OptimisCorp as very helpful to their pre-existing desires and intentions to
usurp control of the company.‖62
The record contains extensive evidence showing how the Mediation Agreement
morphed into the sprawling Geller Settlement about which Defendants complain. It is
reasonable to infer from that evidence that the amount of the settlement payments was
directly tied to the content of Geller‘s testimony and its utility in this litigation. Plaintiffs
have emphasized that the settlement discussions all required that Geller tell only ―the
truth‖ and that she swore under penalty of perjury. But, the record also shows that
Plaintiffs unilaterally supplied documents to Geller that supported their position in this
litigation when she resisted providing Plaintiffs with the sworn statements they sought.
In these circumstances, even if I presume Plaintiffs believe the statements they worked to
obtain from Geller to be true, they created an environment, including the potential for a
large six-figure payday for Geller, in which her testimony easily could have been
influenced.
The record is unclear as to what happened in the weeks immediately following the
preparation of the Mediation Settlement, which was never signed. On July 29, 2013,
61
Id. at .0014.
62
Id. at .0015.
30
however, Gary Mathiason, one of Morelli‘s lawyers,63 wrote to Schaedel that he and
Morelli believed the settlement still could happen ―with a combination of resources
including the insurance company and the cooperation of your client.‖64 That same day,
July 29, Morelli and Brian Wing verified the Complaint in this action.
On August 5, 2013, the day that the Complaint was filed, Mathiason again
contacted Schaedel. It is clear from that point on the newly requested changes to Geller‘s
Mediation Declaration were being sought for use in this litigation. After stating that
―[t]he original declaration and the suggested enhanced declaration must be truthful,‖
Mathiason wrote: ―The reason for the declaration is the ongoing conflict between Waite
et al. and Morelli. . . . Anything that can be added to the declaration to show contact and
encouragement from Waite, Horn [sic], and others is valued and appreciated.‖ 65 Morelli,
it seems, offered personally to pay a portion of the settlement, contingent on an
acceptable declaration for use in this proceeding. Mathiason‘s email continues: ―If we
can agree on a truthful expanded declaration such as we have proposed, Morelli is
prepared to personally participate in its funding consistent with the [divorce] court
imposed restrictions on the use of his personal assets. Morelli views Waite, Horn [sic] et
al. as setting in motion events that resulted in Geller‘s ultimate departure from the
63
It appears that Mathiason also represented the Company. Tr. 531 (Morelli).
64
JX 822.0001.
65
JX 831.0001.
31
Company.‖66 According to Morelli, his willingness to fund the settlement depended on
the acceptability, to him, of the declaration and its ―truthfulness,‖67 of which he
apparently was the arbiter.68
As the negotiations continued, Plaintiffs supplied documents to Geller to support
the language they had drafted for and were seeking from her.69 Meanwhile, Geller‘s
counsel undertook to avoid discussing any of the matters with any of Defendants, thus
66
Id.
67
Tr. 531-33.
68
E.g., JX 838.0001 (8/9/14 email from Mathiason to Schaedel and others: ―Since
Alan views your client as having been manipulated into making a claim by Waite
et al, receiving a truthful declaration that more specifically shows his direct and
indirect involvement would be helpful for the overall litigation.‖). Morelli stated
that the truthfulness was ―determined by the facts that we were continuing to
gather as we were able to recover more and more forensic data.‖ Id. at 533. By
the time this lawsuit was filed, two separate committees of the Morelli-controlled
board were investigating the facts of this case. There is no evidence, however,
that either of those committees ever issued a written report or formal findings of
its ―investigation.‖
69
E.g., JX 846.0001 (8/23/13 email from Plaintiffs‘ counsel to Schaedel: ―I sincerely
hope that the documents and information we shared will help develop an expanded
declaration that your client can fully embrace as an accurate statement of what
occurred.‖); JX 848.0001 (8/26/14 email from Schaedel to Plaintiffs‘ counsel:
―Thank you again for taking the time to come to Pasadena last week and to share
relevant information and documentation with us . . . .‖); JX 887.0001 (11/7/13
email from Mathiason to Schaedel: ―Scott McKee firmly recalls the phone
conversations and the corresponding text message. It is entirely reasonable that
Tina would have had this conversation with Scott given that she recalls a similar
call with David [Hwang]. What we want to avoid are unnecessary credibility
conflicts between Tina, David, and Scott.‖).
32
ensuring a one-sided presentation of ―facts‖ from Plaintiffs to Geller.70 Furthermore, the
final Geller Settlement precluded Geller from communicating with any of Defendants, at
least absent a court order.71
The discussions reveal that the payments were tied directly to the content of
Geller‘s declaration, which was to be sworn and used in this proceeding.72 When the
declaration did not implicate Defendants sufficiently, Plaintiffs pushed for more.73 When
Geller either could not recall or, presumably, lacked personal knowledge of the language
Plaintiffs wanted, they offered to ―refresh‖ her recollection.74 In Plaintiffs‘ own words
70
JX 848.0001 (―I instructed Tina not to speak with Will [Horne] or anyone else
about any of this. . . . While we are working on resolving this agreement, I am
certainly not going to communicate with Will, Waite et al, or their counsel.‖).
71
JX 920.0003 (―Geller will not communicate with, cooperate with, aid or assist any
person or entity who is named as an adverse party to Optimis or Morelli in any
Corporate Action, or whose interests are adverse or potentially adverse to Optimis
or Morelli in any actual or potential Corporate Action . . . .‖).
72
Indeed, Morelli also contemplated using Geller‘s Mediation Declaration in this
litigation. In a July 11, 2013 email to James L. Patton, Jr., Esq., the Court-
appointed monitor from the previous 225 Action, Morelli wrote: ―We reached a
confidential settlement with Geller, which includes a statement that will be signed
when it is completed, which is crystal clear in exonerating me and acknowledging
that she was recruited by Waite in an effort to change control of the company.‖
JX 809.0001.
73
JX 849.0002-3 (8/29/13 email from Mathiason to Schaedel: ―The primary concern
is to provide more detail on exchanges with Godges and Horne, as well as others
including Brys, Eastman, Gunn and Kreile. . . . Our goal is to finalize the Geller
declaration and agree upon a consideration package with Alan‘s personal financial
support that will not be contingent on insurance funding . . . .‖).
74
JX 885.0001 (11/1/13 email from Mathiason to Schaedel: ―If we have included
any attributions that Tina does not remember or disputes, the supporting
documentation will be provided.‖).
33
and formatting, there was a ―Correlation Between Payments and Declarations: The
usefulness and truthful transparency of the Geller declaration correlates to the amount of
the initial payment.‖75 On certain subjects, Plaintiffs repeatedly attempted to include
language that Geller had rejected as false, notwithstanding the promise of hundreds of
thousands of dollars.76 Indeed, Schaedel testified at his deposition that Plaintiffs asked
Geller ―to swear to statements that were not true.‖77
When the money was not enough to get Geller to agree to the language, Plaintiffs
resorted to threats. Plaintiffs reminded Geller that the ―most valuable consideration in the
Agreement‖ is that ―Geller is released from being a named defendant in a $25 million or
greater claim against those who have illegally harmed Optimis and Morelli,‖ 78 which
refers to this lawsuit.
This process continued for six months. Very early on, Geller‘s lawyer, Schaedel,
recognized that there was a serious risk that repeatedly asking Geller to agree to the same
75
JX 886.0002 (11/15/13 email from Mathiason to Schaedel).
76
JX 880 (10/8/13 email from Schaedel to Plaintiffs‘ counsel: ―Today, I was told
that in order for Alan to ‗support‘ the settlement (implicitly, at some level less
than 100%), there needs to be information in the Declaration that you‘ve already
requested and we‘ve already rejected: (1) that someone told Tina to make the
recording, and (2) an admission that she initiated sexual contact with Alan. . . On
(2), it‘s the height of audacity for you to bring this demand up again, 4+ months
into the settlement discussions, when this was demanded and rejected in May, and
we‘ve made clear all along that Tina‘s position is that Alan forced Tina into sexual
conduct.‖).
77
Schaedel Dep. 77. See also id. at 76-77 & errata sheet.
78
JX 886.0001.
34
language over and over again, all the while presenting her with only Plaintiffs‘ supporting
documents, and increasing the payments if Geller agreed to the language would lead to
Geller surrendering and saying whatever Plaintiffs wanted.79 The statements to which
Geller nevertheless refused to swear apparently were placed in the Summary Statement.
In Plaintiffs‘ own words and formatting, they told Geller‘s attorney that: ―Since the
Summary Statement is not part of the Geller Declaration nor given under oath, she
should simply sign the Summary Statement since it is written as coming from her.‖80
Geller did sign the Summary Statement, and the parties incorporated it into the Geller
Settlement. And, Geller‘s attorney signed the Schaedel Declaration, a questionable and
highly speculative document in its own right, but something Plaintiffs considered to be
―an important part of the total settlement‖ without which ―the case will not settle.‖81 On
December 2, 2013, the Geller Settlement was signed. The next day, Plaintiffs served
their First Request for Production of Documents82 in this case, which essentially had been
dormant since I denied Plaintiffs‘ motion to expedite on August 16, 2013.83
79
JX 852.0001 (9/2/13 email from Schaedel to Plaintiffs‘ counsel: ―At some point, I
think we might start to get only what we‘re asking for; I am not a skilled enough
interrogator to know how to re-ask the same questions again and again and get
‗new‘ information that is more than a desire to satisfy me. (And that would
withstand anticipated cross-examination.)‖).
80
JX 918.0001 (11/29/13 email from Mathiason to Schaedel).
81
JX 886.0001.
82
D.I. 26.
83
D.I. 15, D.I. 16.
35
At her depositions on September 16 and October 6, 2014, Geller essentially
abandoned significant portions of the Final Geller Declaration. She described the
statements directly alleging a conspiracy, for example, as ―speculation.‖ I will not detail
all of those statements, but they include many of the bulleted points I listed supra.84 At
other points, Geller disagreed with the most natural reading of the Declaration and
instead included extensive undisclosed caveats and background understandings that
completely change the meaning of the statements.85 Many of the ―clarifications‖ related
to terms that Geller said were manipulated during the negotiations.86
Asked why she signed the Final Geller Declaration, Geller testified that she signed
it ―Because I wanted to settle and get this over with. And I was afraid that [Morelli]
would drag me through the mud and prolong our trial forever and ever and run out of
money.‖87 She also stated that her relationship with Morelli eventually became ―very
fear-based‖88 and that ―Alan uses the law to come after people even when he‘s in the
84
E.g., Geller Dep. 179, 201-03 (¶ 7); 354-58 (¶ 13); 363 (¶ 15); 366-67 (¶ 10).
85
E.g., id. at 185-86, 359-60, 364-65.
86
E.g., id. at 359 (clarifying paragraph 14 as Horne providing ―more of an
encouragement to do what was best for me‖ and stating that the Final Geller
Declaration language ―was twisted in the negotiations into that [resulting]
statement‖ by Plaintiffs‘ lawyers).
87
Id. at 77.
88
Id. at 20.
36
wrong.‖89 Geller apparently concluded that she could sign the Final Geller Declaration
notwithstanding that she was under penalty of perjury based on her own self-serving and
idiosyncratic, to say the least, understanding of the meaning of perjury. Specifically, she
understands ―speculation,‖ which she seems to equate with ―opinion,‖ to be okay in
sworn documents, so long as she does not know the statement is a lie.90 How Geller, who
was represented by counsel throughout the negotiations, arrived at this ―not perjury
unless you know it‘s false‖ understanding is a mystery, but I consider the prospect of a
$550,000 payment to be a prime suspect.
4. The “settlement” with Geller undermined the integrity of these proceedings
As previously discussed, the Delaware Supreme Court observed in Weber that the
$85 payments to three witnesses were ―disgraceful‖91 and that, even if the payments did
not constitute outright bribery, they ―certainly violate the spirit of the law and cast into
doubt the integrity of the proceedings.‖92 This was the case even though ―there was no
89
Id. at 55; id. at 59 (―I have a fear that Alan can get away with anything he wants to
by using the law to do so. He‘s bragged about that and shown that to many people
throughout the time that I‘ve known him.‖).
90
E.g., id. at 202 (―I had no facts to back up that statement. So it was opinion, and it
is not a lie, because I have no facts to dispute it and I have no facts to back it up.‖);
id. at 203 (―I swore that it was neither true or untrue. It‘s an opinion and it‘s
speculation.‖); id. at 368 (―It was a negotiated statement, as I said. I didn‘t agree
nor did I disagree with the statement, so I allowed it to be in there because it was
not untruthful.‖).
91
Weber, 457 A.2d at 682
92
Id. at 679 n.6.
37
evidence that the cash payments influenced [the] testimony.‖93 Cases in other
jurisdictions have held similarly.94
Additionally, DLRPC Rule 3.4(b) prohibits lawyers from offering an ―inducement
to a witness that is prohibited by law.‖ In August 2003, the Delaware State Bar
Association Committee on Professional Ethics issued an advisory opinion reviewing the
issue of compensating fact witnesses for testifying. According to the advisory opinion,
the minority view in the United States is that fact witnesses cannot be compensated at all.
The Committee instead adopted the more liberal majority view, which is that of the
American Bar Association, that holds that fact witnesses can be compensated for their
time, but that such payments cannot be compensation for the content of their testimony.95
93
Id. at 678-79. Plaintiffs argue that the primary concern in Weber was the family‘s
lack of candor with respect to the payments. While that lack of candor certainly
played a role in the Supreme Court‘s condemnation of what happened, the
comments quoted above were directed at the payments themselves.
94
See, e.g., HomeDirect, Inc. v. H.E.P. Direct, Inc., 2013 WL 1815979, at *4 (N.D.
Ill. Apr. 29, 2013) (―In the federal courts it makes no difference whether the
purchased testimony is truthful. . . . [California Rule of Professional Conduct 5-
310] bars payment contingent on the content of the testimony, truthful or not.‖);
Holmes v. U.S. Bank, 2009 WL 1542786, at *5 (S.D. Ohio May 28, 2009) (―It is
immaterial that Plaintiff may have only intended to pay [the witness] to provide
truthful testimony. It is a criminal violation of federal law to offer to a person
anything of a value—except a witness fee—for or because of that person‘s
testimony under oath. . . . This is true even if the offeror only seeks to elicit
truthful testimony.‖) (citing 18 U.S.C. § 201(c)(2) and United States v. Blaszak,
349 F.3d 881, 886-87 (6th Cir. 2003)).
95
Del. State Bar Assoc. Comm. on Prof‘l Ethics Op. 2003-3 (Aug. 14, 2003),
available at http://media.dsba.org/ethics/pdfs/2003-3.pdf.
38
It is beyond the scope of this Opinion and I do not address whether Plaintiffs
committed criminal acts of bribery or witness tampering. I do find that the evidence
clearly and convincingly shows that Plaintiffs, and in particular Morelli, paid Geller for
the content of her testimony, in the form of the Final Geller Declaration and the Summary
Statement, which, although not under oath, is signed and misleadingly made to appear as
though it is a truthful statement by Geller. Although they now call her a perjurer,
Plaintiffs cited the Final Geller Declaration in their opposition to the Director
Defendants‘ motion for summary judgment and, as discussed infra, Plaintiffs submitted
that Declaration to the Los Angeles Police Department (―LAPD‖) in an attempt to open a
criminal investigation against Defendants. Although lawyers have an obligation as
advocates to ―zealously assert[] the client‘s position,‖ they must do so ―under the rules of
the adversary system.‖96 Geller‘s credibility is of paramount importance in this case and
Plaintiffs‘ conduct has cast into doubt any finding based on her testimony.97 Thus, I find
96
DLRPC, Preamble ¶2.
97
See HomeDirect, Inc., 2013 WL 1815979, at *4 (―There are sanctions precedents
that concern the settlement of an unrelated case in exchange for a witness‘s
agreement not to testify in another case. . . . Bribing a witness, of course, is a
sanctionable event. . . . This is especially true when the witness is very close to
being absolutely essential to the opponent‘s case.‖) (citing Synergistics, Inc. v.
Hurst, 2007 WL 2422871 (E.D. Mo. Aug. 21, 2007) and Ty Inc. v. Softbelly’s,
Inc., 353 F.3d 528 (7th Cir. 2003) (Posner, J.)).
39
that Plaintiffs‘ actions regarding the Geller Settlement have compromised the integrity of
these proceedings.98
The troubling actions taken as to Geller‘s testimony are exacerbated by the fact
that, as the following Subsections show, this theme of threaten, pay, and settle for the use
of evidence favorable to Plaintiffs reoccurred, to varying degrees, with other witnesses.
E. The Fearon and Levine Settlements
Helene Fearon and Stephen Levine have worked for Optimis since their consulting
firm became a wholly owned subsidiary of the Company in December 2008. Although
not physical therapists themselves, Fearon and Levine were well-known, and well-
respected, consultants in the regulatory sphere. They lent their professional images to
Optimis‘ software products. As a result of the 2008 stock-for-stock transaction, Fearon
and Levine took pay cuts on the scale of $100,000 each, which in Fearon‘s case was on
the order of a sixty-percent reduction in pay.99 By 2012, with their employment
agreements expiring in December, they actively were seeking pay raises. In fact, they
directly addressed the issue on October 6, 2012, in a letter to Morelli, Waite, and
Horne—Optimis‘ CEO, COO, and CFO, respectively—outlining their compensation
98
Horne makes numerous other complaints about the Geller Settlement. For
example, he contends that the non-cooperation provisions denied him the ability to
conduct informal discovery of Geller and prejudiced him in violation of DLRPC
Rule 3.4(f). These non-cooperation provisions are troubling, but I do not consider
it necessary to reach them based on my conclusions on the issue of witness
tampering. Even if I were to find in favor of Horne on that issue, it would not
cause me to alter my disposition of Defendants‘ request for sanctions.
99
Tr. 748 (Fearon); id. at 1618 (Levine).
40
demands and complaints about how the business was being run. 100 The letter suggests
that, if their demands were not met, they ―would then propose to negotiate a separation
agreement from OptimisCorp.‖101
Presumably because of his purported ouster two weeks after this letter was sent,
Morelli never met with Fearon and Levine. After October 20, however, Waite, then
acting-CEO, and Horne agreed to the pay raises and other demands in the letter.102 As a
result of the subsequently filed 225 Action, however, the raises were undone and Fearon
and Levine‘s salaries reverted to $65,000.103 Once the 225 Action settled in late March,
2013, Morelli was restored to power as CEO. But, Fearon and Levine did not get their
raises in 2013. Nevertheless, despite their earlier threat to leave, Fearon and Levine
remained at Optimis, because they had staked their personal reputations on OptimisPT.104
Departing from the Company would have left them without input to a product tied to
their reputational capital in the marketplace.
In fact, it was not until May 2014 that Fearon and Levine ―settled‖ with the
Company. By that time, Plaintiffs had the Geller Settlement and Levine was on the brink
100
JX 317.
101
Id. at 0002.
102
Tr. 773 (Fearon).
103
Id. at 774 (Fearon).
104
Id. at 743 (Fearon); id. at 1576 (Levine).
41
of personal bankruptcy.105 Plaintiffs aggressively pursued a ―settlement‖ with Fearon and
Levine. In an April 6, 2014 email, Laurent O‘Shea, the Chairman of Optimis‘ Board‘s
purported ―Independent Committee,‖ emailed Fearon and Levine that the Company has
―many documents and witnesses that prove that Waite, Horne and their faction tried to
illegally seize control of the Company.‖106 Plaintiffs contended that Fearon and Levine
were members of this faction,107 and effectively threatened litigation against them.108
Levine testified that, at an April 17, 2014 meeting, he and Fearon were shown a ―large
stack of e-mails that were being attributed to us, yet we were only given one to
review.‖109 Evidently, neither Levine nor Fearon was represented by counsel during this
process.110
To sum up, Fearon and Levine‘s reputations were tied to Optimis‘ physical
therapy software, Levine faced personal bankruptcy, from as early as September 2013
105
Id. at 1618 (Levine).
106
JX 964.0001.
107
Later, after settling with Fearon and Levine, Plaintiffs attempted to amend their
Complaint to assert that Fearon and Levine were members of the conspiracy with
Defendants. Plaintiffs did not seek to name Fearon and Levine as defendants;
instead, they sought to expand the scope of Defendants‘ vicarious liability. See
OptimisCorp, 2015 WL 357675, at *5.
108
Tr. 1628 (Levine: ―I believe that I said to [Plaintiffs‘ counsel] that he was
threatening litigation; and he, in turn, said that that‘s not what he was threatening
and gave me a sort of legal maneuvering around that.‖).
109
Id. at 1628-29, 1654 (Levine); JX 976.0003 (4/21/14 email from Levine to Fearon
with proposed email to Optimis Board).
110
Tr. at 1627 (Levine).
42
Fearon had expressed a fear of any lawsuits relating to separating from the Company,111
and Plaintiffs were threatening to sue them while alleging that the Company had
extensive evidence implicating Fearon and Levine in wrongdoing, but apparently not
letting them review it. In May 2014, Fearon and Levine settled.112 They executed mutual
releases with the Company. There is no evidence, however, that, as of that time, either
Fearon or Levine understood what, if any, legitimate claims the Company might have
against them.
Contemporaneous documents from before the settlement make clear that both
Fearon and Levine disliked Morelli.113 Indeed, Fearon said she ―never disliked a person
111
JX 877.0001 (9/26/13 email from Fearon to Levine: ―Biggest thing is I do not
want any lawsuits..losing ground financially has already happened..costing us
money going forward is not acceptable . . . .‖).
112
Levine testified that Optimis‘ actions to meet his financial demands and provide
his back pay were separate from and unrelated to the mutual releases. Tr. 1622-
23. This testimony was not credible. Fearon and Levine made their financial
demand as early as fall 2012, but Morelli did not meet those demands until he
sought their assistance in this litigation. I infer from the close temporal
relationship between the mutual releases and salary increases that the two were a
package deal, even if they occurred with some minor gap in time.
113
E.g., JX 186.0001 (4/21/12 email from Fearon to Gunn) (―[unquotable
profanity]‖); JX 267.0001 (8/21/12 email from Fearon to Gunn) (―Alan is the
master manipulator.‖); JX 295.0001 (8/27/12 email from Fearon to Levine: ―He is
such a f---ing manipulative a--hole . . . how can I trust a single thing he says in this
e-mail‖); id. at .0001 (8/27/12 email from Levine to Fearon: ―Yep . . . my thoughts
as well . . . He has destroyed any relationships that he has had in this company . . .
and those that rally around him do so only for their own benefit, and not for the
company . . . since those that built the company will all be gone at some point.‖).
43
as much as‖ Morelli ―ever in [her] life.‖114 As a result of the settlement, however, Fearon
and Levine‘s salaries were raised to $150,000 each, and they each received substantial
back pay.115 Fearon and Levine then provided highly favorable affidavits to the
Company,116 all of which Plaintiffs concealed for months.117 Those affidavits, which are
nearly identical, aver that Fearon and Levine were members of a group attempting to take
control of Optimis, and, like the Final Geller Declaration, are closely keyed to the
allegations in this action.118
For example, both deceptively state: ―Prior to February 2012, several individuals
at Optimis, including John Waite, George Rohlinger, Jeanine Gunn and Will Horne, as
114
JX 547.0001 (11/6/12 email from Fearon to Gunn, which goes on: ―Total
disregard for anyone or thing other than his own self interest. . . . I really cannot
believe I was such a poor judge of character‖); Tr. 750-51.
115
Tr. 775-77 (Fearon); id. at 1618-23 (Levine).
116
JX 1001 [hereinafter ―Levine Aff.‖]; JX 1002 [hereinafter ―Fearon Aff.‖].
117
This issue was dealt with in my previous Memorandum Opinion, OptimisCorp v.
Waite, 2015 WL 357675 (Del. Ch. Jan. 28, 2015) (concluding that Plaintiffs‘
actions amounted to a knowing concealment).
118
E.g., Levine Aff. ¶ 6 (―This plan [to ‗give Alan a nudge‘] was discussed regularly
among executives and employees of the company, including Waite, Rohlinger,
Horne, Gunn, Tom DiAngeles (Gunn‘s husband), Fearon and me. At some point,
Waite also told me that, if Morelli insisted on remaining as CEO, he (Morelli)
might have to be removed against his will.‖); Fearon Aff. ¶ 6 (nearly identical);
Levine Aff. ¶ 10 (―Despite Morelli‘s status as CEO, and his authority under the
Stockholders Agreement to control the company, Waite, Rohlinger, Horne and
Gunn encouraged Fearon and me to do whatever was necessary to oppose the
directions given by Morelli, in spite of his leadership position at Optimis.‖);
Fearon Aff. ¶ 10 (nearly identical). As shown infra, at least this latter statement is
false.
44
well as Fearon and I, had an interest in taking control of Optimis away from Morelli
. . . .‖119 Fearon and Levine‘s testimony at trial, however, indicated that their concerns
focused on having sufficient resources allocated to the OptimisPT software and the
difficulty they and others were having convincing Morelli of that. In that context, they
discussed removing Morelli‘s oversight of the product, not taking control of the
Company.120 As described in Section II infra, there is an important difference between
the two.
F. Other Questionable Conduct by Plaintiffs
Geller, Fearon, and Levine were not the only instances of Plaintiffs threatening or
attempting to threaten or pay witnesses in connection with testimony. Chris Olsen,
Rancho‘s controller, credibly testified that there was a ―litigation atmosphere at the
company‖ following the Director Defendants‘ termination,121 and that siding with the
Director Defendants essentially meant that you would be added to this lawsuit.122
Olsen attended a meeting at a Starbucks in Anaheim, California with Morelli,
O‘Shea, and an individual identified as Mr. Lin. According to Olsen, ―the gist of the
discussion was they knew I was complicit. They knew that I was involved in these self-
dealing situations. And if I come clean and if I provide them all the information, that
119
Levine Aff. ¶ 3; Fearon Aff. ¶ 3 (identical, but ―Fearon‖ reads ―Levine‖).
120
E.g., Tr. 697-98, 714, 718, 727-28, 782-83 (Fearon); id. at 1571-72, 1577, 1578-
79, 1604, 1609 (Levine).
121
Id. at 1221.
122
Id. at 1217.
45
they‘ll give me a cooperation agreement and resolve me of any liability.‖ 123 No evidence
in the voluminous record in this case implicates Olsen in any purported wrongdoing.
Nevertheless, and consistent with their actions with respect to Fearon, Levine, and Geller,
Plaintiffs asked Olsen to sign a pre-prepared declaration. Olsen said he ―crossed out the
majority of the declaration to where . . . I could, in good faith, sign as being true.‖124
There is no evidence of further communications between Optimis and Olsen on this
subject. Olsen eventually left Rancho because ―it was just an unbearable situation‖ that
included unknown individuals having ―gone through everything in [his] office‖ and
―blam[ing] him for doing something wrong.‖125
Olsen, apparently after consulting with his attorney, had decided to record the
Starbucks meeting.126 The existence of that recording was not revealed until the middle
of trial.127 It was not played at trial or offered in evidence. In cross-examining Olsen,
123
Id. at 1219. Plaintiffs took a similar stance against Atkins, one of the Director
Defendants. Sometime after he was fired from Rancho, Atkins was offered the
chance to return if he surrendered one million of his Optimis shares, which appear
to have been about one-third of his holdings, and admitted wrongdoing. Id. at
1494-95 (Atkins). Atkins declined.
124
Id. at 1220.
125
Id. at 1221.
126
Id. at 1230-31.
127
Olsen was a third-party witness and did not tell Defendants about the recording
until the day before he testified. Tr. 1194 (counsel for Director Defendants).
Defendants promptly turned the tape over to Plaintiffs. Id. at 1194-95. Plaintiffs
attempted to use the existence of the audiotape as a basis for excluding Olsen‘s
testimony at trial, despite the fact that no one sought to admit the tape into
evidence. Id. at 1192 (counsel for Plaintiffs). I denied that request. Id. at 1198.
46
Darius Ogloza, one of Plaintiffs‘ California attorneys who was admitted pro hac vice,128
quickly embarked on a line of questioning that a reasonable lay person—and certainly
one who, like Olsen, had experienced Plaintiffs‘ out-of-court threats of civil lawsuits—
would perceive as threatening criminal charges.129 I perceived it as such, notwithstanding
counsel‘s protestations that the questioning went to ―bias.‖130
This is not the only instance of Plaintiffs arguably threatening criminal
proceedings against a witness. Another occurred in California against Geller. In October
or November of 2012, after Geller‘s sexual harassment claims had been reported,
Morelli, through his California lawyers, had a private investigator contact Geller.131 She
understood the import of the investigator‘s voicemail to be that ―if I did not sit down and
talk with him and basically try to work this out, that I would be sued by Alan.‖ 132 An
128
D.I. 32.
129
Tr. 1231 (―And do you understand that your making that recording may have
violated California law?‖).
130
Id. at 1231-32. The California Rules of Professional Conduct expressly prohibit
lawyers from threatening ―to present criminal, administrative, or disciplinary
charges to obtain an advantage in a civil dispute.‖ Cal. Rules of Prof‘l Conduct R.
5-100(a). In Delaware, such threats may be permissible in certain instances. See
Del. State Bar Assoc. Comm. On Prof‘l Ethics Op. 1995-2 (Dec. 2, 1995),
available at http://media.dsba.org/ethics/pdfs/1995-2.pdf.
131
Geller Dep. 107-08.
132
Id. at 108.
47
audio recording of that voicemail was played at trial during cross-examination of
Morelli.133 The investigator stated, in part:
Evening, Tina. . . . I‘m a retired FBI agent and a consultant
. . . . I‘ve been retained by the law firm of Pepper Hamilton
which is representing Alan Morelli to look into the dispute
that concerns his purported ouster as CEO of your company
. . . . And, you know, what I‘m afraid is going to happen is
that when it comes out, this videotape134—which I‘m afraid it
appears is made in violation of California law and could
possibly subject you to some criminal prosecution for it. . . .
[W]e should expect that Mr. Waite and the others are going to
try to blame that whole thing on you to try to avoid any
responsibility themselves for it. . . . I think you‘re too good of
a person for that, and I‘m worried about you. I don‘t want to
see that happen to you. You don‘t deserve that. And if you‘ll
help me understand exactly what role these people played in
putting you up to this . . . I think I can offer you some help,
just to help you save yourself. Because what I want to do
basically is offer you a lifeline.135
Morelli, under cross-examination by Horne‘s counsel, expressed some discomfort with
the voicemail at trial, stating that the ―criminal prosecution‖ element ―doesn‘t seem
appropriate or could be misconstrued or misperceived as some sort of threat,
potentially.‖136 Later that same day, under cross-examination by the Director
Defendants‘ counsel, Morelli declared: ―I don‘t read this as threatening at all.‖137
133
A transcript of the voicemail also is in the record. JX 613.
134
Geller secretly recorded one physical therapy session with Morelli. That tape is
not in the record.
135
Tr. 624-26 (Mike McCall voicemail).
136
Id. at 526.
137
Id. at 628.
48
Finally, I note that Morelli ultimately did file a criminal complaint against Geller
with the LAPD relating to the video recording she made.138 On November 21, 2012,
about a month after Morelli‘s temporary ouster, Geller emailed Nancy Kreile, the
Company‘s Human Resources manager, that ―Alan appears to be retaliating against me
for filing the sexual harassment claim against him. A Detective Windsor from the LAPD
left me a message to call him back‖ regarding a case filed by Morelli.139
Later, on March 4, 2014, by which time Plaintiffs had settled with Geller, they
provided to the LAPD a lengthy letter (the ―Criminal Complaint‖) that included, among
other items, copies of the Final Geller Declaration, the misleading Summary Statement,
and the Schaedel Declaration.140 The Criminal Complaint includes a fourteen-page
chronology of events about the actions that led to this lawsuit, but does not mention that
Plaintiffs settled with Geller. Only in the annex listing the various actors does the
Criminal Complaint state that ―Tina has settled her lawsuit against Morelli and
Optimis.‖141 There is no indication, however, that the Final Geller Declaration, the
Summary Statement, or the Schaedel Declaration resulted from that settlement. The
Criminal Complaint requests that the LAPD investigate and prosecute the
138
JX 569 (11/14/12 Morelli email to Holger Beckman, an Optimis employee,
regarding the complaint); JX 582 (11/21/12 Morelli email to the LAPD).
139
JX 583.0001.
140
JX 944.0039-.0048.
141
Id. at .0018.
49
―Insurgents,‖142 a defined term meaning ―several high-ranking former executives and
board members‖ that includes ―John Waite, George Rohlinger, Laura Brys, Bill Atkins,
Greg Smith and others.‖143
G. The Integrity of These Proceedings Has Been Undermined
The foregoing review reveals a persistent and troubling course of conduct by
Plaintiffs to gain an advantage in this proceeding. Plaintiffs threatened and paid Geller,
eventually breaking her down over the course of six months, to acquire the language they
wanted to use in this proceeding and then disowned her after she recanted the language in
the Final Geller Declaration during her deposition. While she was still Plaintiffs‘
witness, however, they submitted that Declaration to the LAPD as ―evidence‖ of
Defendants‘ purported wrongdoing. In addition, after stringing them along for over a
year, Plaintiffs met all of Fearon and Levine‘s financial demands in return for favorable
testimony in this case. Plaintiffs also attempted to get Olsen to sign a declaration full of
statements he believed were false, but he refused. After discovering that Olsen recorded
the meeting in which Morelli threatened Olsen with a civil lawsuit, Plaintiffs arguably
threatened him in open court with criminal proceedings.
142
Id. at .0002 (―We believe that the Insurgents violated the following federal laws
and California Penal Code sections and, in some cases, are still violating them, in
an attempt to regain control of Optimis and conceal evidence of their
wrongdoing.‖); id. (―We have obtained evidence that the Insurgents and their co-
conspirators not only engaged in an illegal recording of Mr. Morelli, but also
violated federal and California law by engaging in commercial bribery,
embezzlement, extortion, forgery, fraud, theft, perjury and related crimes.‖).
143
Id. at .0001.
50
I recognize that parties have a right to vigorously pursue their claims. I also
assume that, misguided as I consider it to be, Morelli and his counsel believe their
rhetoric regarding a vast conspiracy to take control of Optimis away from Morelli for the
alleged insurgents‘ own self-serving motives. But, even so, the conduct I have described
here is beyond the pale. Specifically, I find that Plaintiffs‘ conduct was ―prejudicial to
the administration of justice‖144 and has undermined the integrity of these proceedings by
materially impacting the Court‘s ability reliably and accurately to find the facts. The
crucial allegation underlying Plaintiffs‘ breach of loyalty claims is that Defendants used
Geller as a pretext to take over the Company. When deposed, she demolished the
reliability of the key statements in the Final Geller Declaration that might support a
finding that Defendants engaged in a takeover conspiracy and used Geller‘s sexual
harassment claims as a pretext. I, therefore, find it appropriate to disregard, in their
entirety, all of the documents in the Geller Settlement and to reject any attempt by
Plaintiffs to use those documents affirmatively to impeach Geller or any other witness.
Relying on those documents is impossible based on the cynical context and manner in
which they were created. As a result of Plaintiffs‘ improper conduct, I instead find
credible and reliable what Geller said at her deposition and resolve any doubts about her
credibility in favor of Defendants.145
144
DLRPC R. 8.4(d).
145
I have reviewed the relevant portions of the videotape of the Geller deposition and,
in fact, I generally found her statements there cogent, credible, and consistent with
the other evidence and testimony I found reliable. In addition, I note that Geller
51
With respect to Fearon and Levine, their affidavits attempted to prove the
conspiracy Plaintiffs allege. Overall, however, I conclude that Plaintiffs essentially
struck a hard bargain with them at a time when Levine, at least, was vulnerable
financially. While there is less evidence of wrongdoing with respect to those settlements,
I find that the manner and circumstances in which Plaintiffs obtained the two nearly
identical affidavits from Fearon and Levine improperly influenced their testimony. I also
find that portions of the affidavits Fearon and Levine submitted in this case were
materially misleading, as was revealed by their testimony at trial. Upon close
examination, I found their trial testimony, which differed in important ways from the
affidavits, largely credible. Based on the course of events that led to them testifying for
Plaintiffs at trial—and the stark contrast between their affidavits and trial testimony and
their pre-trial views of Morelli and his management of Optimis—I have determined as a
sanction for Plaintiffs‘ conduct to resolve any doubts in favor of Defendants in those
instances where the reliability of the testimony of Fearon or Levine is questionable.146
had every financial incentive to stick to the Final Geller Declaration, particularly if
it was true. I have seen no evidence of a countervailing interest that would cause
her not to tell the truth at her deposition.
146
I have no question about the credibility of Olsen‘s testimony. Plaintiffs‘ conduct
relating to him, ranging from the seeming threat of criminal action in court to
Morelli‘s bogus lawsuit threats and request for a favorable affidavit, is disturbing.
It also is consistent with Morelli‘s repeated attempts to involve the LAPD in this
matter. These actions bolster my conclusion to impose the sanctions I have in this
action.
52
Defendants have requested that I dismiss this action in its entirety as a result of
Plaintiffs‘ conduct. There is precedent for such a harsh sanction.147 I am not convinced,
however, that such a broad-brush remedy is appropriate here. Virtually all of the
misconduct related to Plaintiffs‘ claim of a far-ranging and broad-based conspiracy to
remove Morelli from his position as CEO of Optimis and strip him (and the Initial
Stockholders he controls) of their ability to appoint five of the nine Optimis directors
until 2015. Based on the serious and highly prejudicial nature of the witness tampering
and other misconduct by Plaintiffs that I have found, I hold that the appropriate sanction
for that misconduct also includes dismissal with prejudice of their conspiracy claim
against all Defendants. I decline, however, to order dismissal on that basis of Plaintiffs‘
other claims. Instead, I conclude that the best course of action is to draw inferences
related to the credibility of the affected witnesses against Plaintiffs to the extent described
in this Section and Section V.F infra, and I have done so in the remainder of this Opinion.
This relief is consistent with my findings that Plaintiffs‘ conduct has affected the
reliability of certain witnesses and the fact that Plaintiffs bear the burden of proof.
Finally, and in the alternative, because I am making this decision after trial—and
in the interest of completeness and judicial efficiency—I have considered fully Plaintiffs‘
conspiracy claims in the analysis that follows, notwithstanding my dismissal of that claim
as a sanction. For the reasons stated in the analysis, I conclude that the Plaintiffs failed to
147
See Bessenyei v. Vermillion, Inc., 2012 WL 5830214 (Del. Ch. Nov. 16, 2012);
Parfi Hldg. AB v. Mirror Image Internet, Inc., 954 A.2d 911 (Del. Ch. 2008).
53
prove that claim as to any of the Defendants, which provides a separate and independent
basis for its dismissal.
II. FACTUAL BACKGROUND
In the preceding Section, several of the relevant actors were introduced. This
Section recites my remaining factual findings as to what happened in this case. The
record is voluminous. Trial took place over six days, with thirteen witnesses testifying in
person, including two experts. There were over 1,100 exhibits plus the depositions of
thirty-two individuals, many of which lasted more than a single day. 148 Unfortunately,
almost all of the key facts are disputed. In addition, each side has advanced numerous
evidentiary objections and challenged the credibility of several of the witnesses who
provided important testimony. The latter complication has been compounded by the fact
that certain key witnesses, such as Geller and George Rohlinger, did not appear at trial,
and the Court, therefore, has had to make credibility determinations on the basis of their
video depositions.149
A. Threshold Evidentiary Issues
Before proceeding to the merits, I must address two additional threshold issues.
First, Plaintiffs have moved for an adverse inference against Horne because he deleted an
entire email account, comprising thousands of emails, from his computer. Plaintiffs did
not brief their spoliation request after trial until their reply brief, preventing Horne from
148
The parties waived first-level hearsay objections to the deposition testimony of
those witnesses. JS § VI.G.7.
149
The parties submitted video depositions of some twenty-three witnesses.
54
having an opportunity to respond to it. Thus, I find that Plaintiffs have waived this
argument.150
Additionally, and as an independent holding, I find that the requested adverse
inference is not warranted. ―A party in litigation or who has reason to anticipate
litigation has an affirmative duty to preserve evidence that might be relevant to issues in
the lawsuit.‖151 Here, Horne admittedly deleted his personal email account, comprising
thousands of emails, from his work computer in May 2013 after he essentially was told
he was about to be fired.152 Plaintiffs request that I draw an adverse inference that the
deleted emails would support Plaintiffs‘ claims.
―An adverse inference . . . is appropriate where a litigant intentionally or
recklessly destroys evidence, when it knows that the item in question is relevant to a legal
dispute or it was otherwise under a legal duty to preserve the item.‖153 Here, an adverse
inference is not appropriate for two reasons. First, there is no evidence that the allegedly
150
Plaintiffs originally moved for a spoliation adverse inference in a motion in limine,
and I advised the parties in the Pre-Trial Conference that I intended to deny that
motion unless Plaintiffs made a stronger showing at trial. Pre-Trial Conf. Tr. 7-8.
Plaintiffs did not address that request in their opening post-trial brief and devoted
only one page to it in their reply brief. In these circumstances, I conclude that
Plaintiffs‘ request is waived and, in any event, has not been supported by the
record. Zutrau v. Jansing, 2013 WL 1092817, at *6 (Del. Ch. Mar. 18, 2013);
Emerald P’rs v. Berlin, 2003 WL 21003437, at *43 & n.144 (Del. Ch. Apr. 28,
2003).
151
Beard Research, Inc. v. Kates, 981 A.2d 1175, 1185 (Del. Ch. 2009).
152
I do not find credible Horne‘s testimony that he reviewed the emails before
deleting them, at least not in any serious depth. Tr. 1374-75.
153
Sears, Roebuck & Co. v. Midcap, 893 A.2d 542, 552 (Del. 2006).
55
destroyed emails are not available to Plaintiffs. In originally moving for an adverse
inference based on spoliation, Plaintiffs pointed to 23 emails from Horne‘s personal
email account that allegedly were deleted; all preceded December 2012.154 Horne deleted
his personal email account from his Optimis computer shortly before being fired in May
2013 and having to turn in his computer. But, the Company‘s computers, including
Horne‘s devices, were imaged for Plaintiffs in either December 2012 or January 2013.155
Thus, Plaintiffs had a copy of the emails that allegedly were destroyed and there was no
spoliation. Second, Plaintiffs have not shown that Horne, who was not represented by
counsel in May 2013, had any reason to believe he would be sued in this action, which
was not filed until August, three months later, or any other litigation. Horne was not an
Optimis board member and the 225 Action, in which he was not a named defendant,
settled in March 2013.156 For all of these reasons, I deny Plaintiffs‘ request for an
adverse inference against Horne based on spoliation.
Plaintiffs also have pled a conspiracy. In motion practice before trial, I limited the
persons Plaintiffs could claim participated in that conspiracy to the Director Defendants,
154
D.I. 194, Ex. 10.
155
JX 645, 648; D.I. 200, Exs. A-B.
156
Tr. 1375-76 (Horne). I reject Plaintiffs‘ argument that Horne should have been
aware of the possibility of litigation because he was a member of a far-reaching
conspiracy, because, as discussed infra, Plaintiffs have not proven the existence of
such a conspiracy.
56
Defendant Horne, Joe Godges, and George Rohlinger.157 Whether a conspiracy exists
affects the admissibility of certain statements by Rohlinger and Godges objected to by
Defendants on grounds of hearsay.158 I conclude in Section V.A infra that no conspiracy
exists. Accordingly, I sustain Defendants‘ objections to several out-of-court statements
attributed to either Rohlinger or Godges on the grounds that they are hearsay and
inadmissible.
Because I conclude that there is no conspiracy, I use the term Director Defendants
only when it is unambiguous and a helpful shorthand. Throughout their pleadings and
briefing, Plaintiffs repeatedly and vaguely referred to allegedly wrongful actions by the
Director Defendants or Defendants generally. At trial, it was shown that neither
Defendants nor the Director Defendants were monolithic groups of actors as Plaintiffs
alleged them to be.
B. Rancho Physical Therapy and the Director Defendants
William Atkins founded Rancho Physical Therapy in 1984 in Temecula,
California. The business experienced rapid growth as the surrounding communities
grew. Atkins knew John Waite and asked him to join Rancho, which Waite did in June
1990 after he finished graduate school. Greg Smith, Waite‘s roommate in college, also
joined the business in September 1990. At that time ―Rancho was one single office,‖159
157
OptimisCorp, 2015 WL 357675, at *12.
158
D.R.E. 801(d)(2)(E).
159
Id. at 1253 (Smith).
57
but under these three partners ―it was exploding‖ in terms of growth.160 By 2006, Rancho
had nineteen offices. The business overall was quite successful. Atkins attributed
Rancho‘s success to the Company‘s ―corporate values‖ and ―culture.‖161
Sometime in 2006, the Director Defendants met with Morelli and discussed a
potential transaction with Optimis, which then was called Physical Therapy Holdings,
Inc. This meeting occurred after Joe Godges—a man variously described as a ―true
expert in the field of orthopedics‖162 and an ―icon‖ in the physical therapy profession163—
suggested to Waite that they should meet with Morelli. According to Smith and Waite,
Morelli‘s ―concept was to try and have consistent care in all the different physical therapy
practices,‖164 as opposed to the then-fragmented outpatient physical therapy environment;
it was a plan to ―change the physical therapy world.‖165
The parties negotiated an acquisition over a lengthy period of time. As a
prospective seller, Atkins was ―very, very hesitant‖166 because it was a stock-for-stock
transaction with no cash consideration. According to Smith, around 2005, the Director
160
Id. at 1459 (Atkins); id. at 1013 (Waite).
161
Id. at 1461.
162
Id. at 1014 (Waite).
163
Id. at 1255 (Smith); id. at 1465 (Atkins).
164
Id. at 1254 (Smith).
165
Id. at 1014 (Waite).
166
Id. at 1461.
58
Defendants had been offered about $12 million for Rancho.167 An all-stock deal
eventually was struck, however, and Rancho became a wholly owned subsidiary of
Optimis as of June 14, 2007. The Director Defendants each received Optimis shares, and
they created a stock option pool so that Rancho‘s employees could share in the ultimate
upside of the transaction. The Director Defendants—as well as several of the other
individuals who sold businesses to Morelli and Optimis—expected some sort of liquidity
event in the relatively near future.168
The Rancho transaction included, in addition to the Stock Purchase Agreement,169
two other elements. The first was the Director Defendants‘ employment contracts, all
three of which are substantively identical (the ―Employment Agreements‖).170 Through
these agreements, the Director Defendants tied their fortunes to Optimis‘ success or
failure in another respect as well: they each took substantial pay cuts. While operating
Rancho, they were making between $500,000 and $700,000 a year.171 The Employment
167
Id. at 1254.
168
E.g., id. at 1471 (Atkins: ―The finish line was always our liquidity event. . . . We
did this so that we could get Optimis to a point where it could be publicly traded
or whatever or someone would buy us or something like that, so that we could get
our money out of investing our entire company. . . . [I]t was supposed to be
maybe three, four years at the most.‖); Garlock Dep. 49 (―That liquidation [sic]
event was to occur within three to five years, at the long range.‖); Jennings Dep.
14.
169
JX 61.
170
JX 64 (Smith); JX 65 (Atkins); JX 66 (Waite). For convenience, when referring to
a term in these identical agreements, I use the citation ―Empl. Agmt.‖
171
Tr. 1020 (Waite).
59
Agreements set their base salaries initially at $100,000 and then at $150,000 two years
later.172 The Employment Agreements were between the Director Defendants and
Rancho.173
Consistent with the vision of a near-term liquidity event, the Employment
Agreements had four-year terms. Thereafter, the Employment Agreements could be
extended for successive one-year terms by agreement of Rancho and the Director
Defendants. The Employment Agreements also included protections for the Director
Defendants. For example, they provided that:
In the event that there has not been a liquidity event that
would allow Employee to liquidate at least 30% of the total
number of shares to which Employee is entitled to receive . . .
and the Common Stock Value is less than or equal to $5.00
per share and the Employee has been in material compliance
with the terms and conditions of this Agreement, then the
[Rancho] board of directors shall have the discretion to
extend the Initial Term [of four years] of this Agreement by
one successive year and reevaluate these conditions in future
years.174
The Rancho board consisted of five members, two appointed by Optimis and three
appointed by the Director Defendants.175
172
Empl. Agmt. § 3.1. Bonuses were available if certain EBITDA targets were
achieved. Id. § 3.2.
173
Id. Recital 1.
174
Id. § 2.2.
175
JX 63 (Rancho Operating Plan) § (b).
60
The final element of the Rancho-Optimis transaction was the stockholders
agreement (the ―Stockholders Agreement‖).176 That agreement gave the ―Initial
Stockholders‖ of Physical Therapy Holdings, i.e., Optimis, the right to appoint five
members to the nine-member Optimis Board of Directors (the ―Board‖)177 for a period of
seven years.178 Morelli, individually and by virtue of controlling Plaintiff Analog,
controls the overwhelming majority of the shares held by the Initial Stockholders.
Accordingly, the Board appointment rights effectively belonged to Morelli. The
Stockholders Agreement granted the Director Defendants the right to appoint two
members to the Optimis Board.179 At all relevant times, however, all three Director
Defendants served on the Optimis Board.
C. Optimis: The Company’s Business and Structure
Optimis, then called Physical Therapy Holdings, was founded in 2006 by Morelli,
Scott McKee, and Holger Beckman. Godges was one of the initial employees of the
Company. Morelli‘s goal was ―to develop software that would increase the quality of
care, starting with traditional rehabilitation, and then to build on that nucleus of software‖
to move ―towards the health and wellness industry.‖180 Beginning with the acquisition of
176
JX 62 [hereinafter ―SHA‖].
177
Id. § 3.3(a).
178
Id. § 9(a). The SHA later was amended and its term extended to February 25,
2015.
179
Id. § 3.3(b).
180
Tr. 274 (Morelli).
61
Rancho, the Company essentially had two divisions, which I will refer to as the ―Clinical
Services Division‖ and the ―Software Division.‖ They overlapped to a degree.
Morelli testified at trial that the Clinical Services Division consists of clinics that
render traditional physical therapy rehabilitation care, which are primarily sports and
orthopedic clinics. Optimis owns 51 such clinics, nineteen of which were operated by
Rancho.181 In addition to providing physical therapy, the clinics also helped beta test and
develop the software. The Software Division develops the Company‘s software, which
consists of two separate packages: OptimisPT and OptimisSport.
OptimisPT primarily is a documentation program that deals with electronic
medical records. The Company began developing this software immediately after its
founding in 2006. The eventual goal for OptimisPT was to have its own billing program,
which would allow ―a physical therapy clinic [to] just have one piece of software,‖ as
opposed to being forced to license both an electronic medical records program and a
billing program.182 As of trial, Optimis still had not completed the billing component of
OptimisPT. The PT software also helped physical therapy clinics comply with Medicare
and other third-party regulations by providing the therapist ―prompts and information
about whether or not they‘re documented to be compliant with their services.‖183
181
Id. at 274-75 (Morelli).
182
Id. at 276 (Morelli).
183
Id. at 680 (Fearon).
62
Part of what made the PT software unique was that it ―incorporated a way for the
clinician to really communicate their clinical decision-making‖ and ―took the clinician‘s
information and gave them a decision tree to follow . . . and then document
accordingly.‖184 Fearon‘s belief that the potential for the PT software was ―[h]uge‖ is
what caused her to join the Company in the first place.185 Levine also thought that
OptimisPT was ―the best thing on the market‖ and the only software product ―that ha[d]
embedded clinical decision support systems‖ and ―embedded compliance elements.‖186
The Company began developing OptimisSport around 2009. As such, it was not
even under development when the Director Defendants joined the Company in 2007 or
when Fearon and Levine joined in 2008. Morelli views the Sport software as the key
product for the Company‘s long-term success and ―doesn‘t see any comparison‖ between
it and the PT software.187 As will be shown, the Director Defendants—and basically
everyone else alleged to have conspired with them—considered PT to be the crucial
software that the Company needed to develop in the near term. The Sport software was
designed to go beyond traditional rehabilitation into more of a health and wellness field.
It is not clear from the evidence exactly what the Sport software does beyond
generally being a wellness program. It was not sufficiently developed during most of the
184
Id. at 679-80 (Fearon).
185
Id. at 681.
186
Id. at 1598.
187
Id. at 279 (Morelli).
63
time period relevant to this case even to be marketable.188 Part of Sport involved weight
management,189 but the other wellness aspects of the software are not evident from the
record, except that it was intended to be a continuation of the care begun under the PT
program. ―OptimisSport was to pick up where OptimisPT leaves off.‖190 PT, however,
was designed to document care largely or entirely paid for under third-party
reimbursement regimes and Medicare in particular. Generally, it seems, once
reimbursement from Medicare or private insurance has ended, ―traditional rehabilitation
. . . just stops.‖191 OptimisSport and clinical services rendered under that software, by
contrast, would be paid for by the clients out-of-pocket or, perhaps, by some similar
method such as a health savings account.192
Optimis‘ business structure contemplated a symbiotic relationship between the
Clinical Services Division and the Software Division. The revenues from the Clinical
Services Division financed the Software Division, which developed PT and Sport, and
188
Id. at 1474 (Atkins: describing an instance where he was attempting to promote
OptimisSport at a trade show and stating: ―I had a lot of discomfort because we
could not define OptimisSport. It was a lot of ideas but there was nothing
concrete. . . . We had four boxes. There is a marketing component, a business
component. There was nothing behind the boxes. Nothing was done on it.‖).
189
Id.
190
Id. at 370 (Morelli).
191
Id. at 369.
192
Id. at 372-73 (Morelli).
64
then the Clinical Services Division would beta test the software.193 As Waite testified,
―the business model was that the clinics spun off the revenue to pay for the development
of the software, but we also used the software every day.‖194 For example, Rancho, the
Company‘s largest clinical unit, ―ran more than a million patient records through
Version 1‖ of OptimisPT.195 The Company‘s Pacific Palisades clinic, which was run by
Geller, was a testing ground for the Sport product,196 but the Clinical Services Division
did not utilize the Sport software on a wide-scale basis. One implication of the
interrelationship between the Software Division and the Clinical Services Division is that
a failure of OptimisPT could negatively affect the operation of the clinics that produce
the revenue needed to improve the software, potentially causing a downward spiral.197
The physical structure and geography of the Company bears emphasizing.
Optimis‘ headquarters is located in two houses on the same street in Pacific Palisades that
are owned by Morelli. The houses, based on their location on the street, are known as the
―Upper Bubble‖ and the ―Lower Bubble.‖ The ―lower bubble is where all the
programmers worked, and then the upper bubble is where the admin work was done.‖198
193
Id. at 1039-40 (Waite); id. at 1264 (Atkins).
194
Id. at 1039.
195
Id. at 1036 (Waite).
196
E.g., id. at 1476-77 (Atkins).
197
Id. at 1038-40 (Waite); id. at 1265-67 (Smith).
198
Id. at 44 (Owens).
65
The Upper Bubble also was Morelli‘s personal residence. His bedroom doubled as his
office, and it was not uncommon to have meetings in Morelli‘s bedroom-office.199
Much of the Company‘s work was done remotely. The Director Defendants
operated the Rancho clinics out of Murrieta, California, which is roughly two hours away
from Pacific Palisades. The Company‘s other clinics were even farther away, with the
exception of the Palisades clinic. The Achieve physical therapy clinics, for example, are
in Chicago. The MVP clinics are located in Washington State.
Many of the key employees in the Company also were geographically remote from
Optimis‘ Pacific Palisades headquarters. Fearon, who became an employee in 2008, after
she and Levine sold their consulting firm to Optimis, is the Executive Vice President of
Business Strategy. She oversees OptimisPT and assists with development, upkeep, and
market placement, as well as compliance with regulations such as HIPAA. Fearon is
based in Phoenix, Arizona. Levine, Fearon‘s business partner, is based in South Florida.
He is Optimis‘ Executive Vice President of Compliance and Consulting Services.
George Rohlinger, the Company‘s former Chief Business Development Officer, was
based out of Idaho. Jeannine Gunn, who worked for Optimis from January 2010 until
June 21, 2013, was the Director of Implementation for OptimisPT. She was based in
both Tacoma, Washington and Cincinnati, Ohio. Accordingly, a substantial amount of
the Company‘s work was done remotely, whether telephonically or electronically,
through email, for example.
199
Brys Dep. 32.
66
Some relevant employees, however, spent a substantial amount of time at the
Upper Bubble. Geller is one; Horne is another. Horne started with Optimis as a
consultant in the summer of 2006 and eventually became the Company‘s CFO. Although
originally based in Seattle, Washington, he later acquired an apartment in Pacific
Palisades. Horne apparently did not use his apartment much, because he was staying
with Terry Doherty, Morelli‘s former wife, whom he started dating in the fall of 2010.200
Laura Brys was Optimis‘ General Counsel from around April 30, 2012 through January
15, 2013; she also appears to have spent a fair amount of time in the Upper Bubble.
D. Alan Morelli: The Man and His Management of Optimis
Morelli unquestionably is the driving force behind this litigation. He claims to be
the victim of a vast conspiracy that undermined his authority and attempted to seize
control of Optimis from him. As a result of the Stockholders Agreement, Morelli had the
power to appoint five of the nine Optimis Board members. He also has served as
Optimis‘ CEO and Chairman of the Board since its inception. Defendants characterize
him as a narcissist, in that he has, among other things, an inflated sense of self-
importance and a lack of empathy for others.201 Defendants further argue that Morelli‘s
character affects his credibility, explains the series of events that led to this lawsuit, and
200
Tr. 1311-12, 1319, 1339-41 (Horne).
201
Post-Trial Arg. 105-06.
67
even provides a rationale for how the litigation has been conducted.202 Because, to some
degree, that may be true, I briefly review here Morelli‘s background and his management
of Optimis.
Morelli has a J.D. from Georgetown University and worked as a corporate
attorney for the Wilmington office of Skadden, Arps, Slate, Meagher & Flom LLP
(―Skadden‖). Skadden serves as Plaintiffs‘ lead counsel in this action. Morelli later
moved to Los Angeles and became a partner at the law firm of Manatt, Phelps & Phillips.
Although not a physical therapist, Morelli is an athlete, as were many Optimis
employees. In fact, Morelli is a tri-athlete and at one time won the ―Member of the Year‖
award from the LA Tri Club for having led that club of tri-athletes to its first national
championship.203 Several witnesses described Morelli as a visionary and an ideas-man,
202
According to Horne, this litigation is economically irrational and its purpose is
―annihilation of those who disagreed with‖ Morelli. Horne‘s Post-Trial
Answering Br. [hereinafter ―HAB‖] 70. Plaintiffs‘ damages expert testified that
Optimis has spent $10 million pursuing this case. Tr. 916 (Bratic). Horne further
argues that this lawsuit is all about control of the Company. There may be some
truth to the latter position. Before this litigation, the Director Defendants and
Morelli each controlled about one-third of the outstanding shares of Optimis‘
stock. As a result of the 225 Action, Morelli, apparently at the suggestion of the
Board he controls, caused the Company to provide him advancement in the form
of 1.6 to 2 million shares of stock. Id. at 588-98, 668-69 (Morelli). In a similar
vein of trying to increase Morelli‘s ownership share, one condition the Company
sought for ―forgiving‖ Atkins was that he would need to surrender a million of his
shares. Id. at 1494-95 (Atkins).
203
Tr. 338 (Morelli).
68
with big goals for the future of the physical therapy industry.204 Morelli also was
extremely successful in selling his vision to others and getting them to join him. Fearon
and Levine sold their successful consulting company to Optimis in an all-stock
transaction, and the Director Defendants did likewise with respect to Rancho. All of the
Company‘s other acquisitions of physical therapy businesses appear to have been stock-
for-stock transactions as well.
On the other hand, numerous witnesses convincingly testified that Morelli was
controlling, belittling to others, dismissive, intolerant of dissent or criticism, and had poor
communication skills. Indeed, some of the most striking testimony came from Plaintiffs‘
own witnesses. Kevin Owens, Plaintiffs‘ first witness, is illustrative. Owens competed
in international athletic events and had a marketing background. He began consulting for
the Company in 2007 or 2008 and remained until May 2011. He was married at the time
to Joan Lynch, an employee of ESPN who also consulted for Optimis. Owens admired
Morelli and viewed him as a mentor. While at Optimis, Owens worked with the
OptimisSport team and assisted with some of the Company‘s events, such as the Distance
204
E.g., id. at 1503 (Atkins: stating that he wanted Morelli to remain a consultant
even after being fired as CEO because ―I wanted to have access to his mind, his
vision, those kind of things‖); id. at 1568 (Levine: ―Alan is a CEO, he‘s a
visionary . . . his talent is not in operations. . . . But he is a great visionary.‖).
Rohlinger characterized Morelli as ―a very smart man‖ who ―had great vision for‖
Optimis. Rohlinger Dep. 285.
69
Swim Challenge (the ―DSC‖).205 He was to be paid for his work entirely in stock
options, but he apparently never received any.206
After moving to L.A. in early 2011, Owens worked out of the Upper Bubble.
Although he tried to become more involved with selling the Sport and PT products,
Morelli forced Owens to focus only on the DSC. According to Owens, Morelli ―put me
in . . . literally a back room with a phone and said, ‗You are to call swim sponsorships
and get them.‘‖207 On at least one occasion, Morelli actually screamed at Owens to go
and find sponsorships.208 Owens understandably ―was not very happy with this, being
belittled or treated in that way.‖209 Although he had learned that others in the Company
opposed the DSC as a waste of money, Owens did not bother telling Morelli because
Morelli ―wasn‘t listening to a single word I said, and it wouldn‘t have mattered, so I
didn‘t bring it up.‖210 When Owens attempted to follow up on customer contacts, Morelli
either prevented him from doing so or else insisted that any emails to customers be
205
Tr. 6-22, 39 (Owens). I describe the DSC infra. In brief, it was a marketing event
that Optimis held three consecutive years that was designed to draw attention to
the Company and the Sport product. The event involved mainly a long-distance
swim, but participants also could do shorter swims.
206
Id. at 24. The Company also refused to pay for Owens‘s expenses to relocate from
the East Coast to L.A. Id. at 78.
207
Id. at 58.
208
Id. at 122.
209
Id. at 58.
210
Id. at 70.
70
cleared by him first. Owens found, however, that Morelli was slow or nonresponsive in
replying to his draft emails.211
Owens described the situation as ―demoralizing at best‖ and the working
environment at Optimis as ―utterly dysfunctional.‖212 After yet another instance where
Morelli told Owens not to deal with potential customers, but instead just to sell swim
sponsorships, Owens attempted suicide.213 Yet, even after that, Owens determined to
make one last effort with Optimis.
In late April or early May 2011, Owens sent Morelli a proposal (the ―Owens
Proposal‖) that would shift Owens from selling swim sponsorships to running sales for
Optimis, which is how Owens believed he would be most beneficial to the Company. In
exchange, Owens proposed that he receive up to 10% of revenue.214 The relative merit of
the Owens Proposal is immaterial. What is relevant is Morelli‘s reaction to it.
In an email to Horne, Waite, and Rohlinger, Morelli referred to the Proposal as
―Kevin‘s bizarre ultimatum‖ and viewed it as a ―very blunt power play‖ by Owens and
his wife that they ―intended to use . . . to exert undue influence to coerce me/us into
211
Id. at 131-32.
212
Id. at 78, 79.
213
Id. at 81.
214
Id. at 85-87; JX 101.
71
giving Kevin an inappropriate amount of power and compensation and her a direct stock
option deal.‖215 Morelli, who was the best man at Owens‘s wedding in 2010, continued:
Don‘t be misled by the fact that it resembles a Unabomber-
type manifesto, written by a slow 5th grader; it is an
ultimatum, designed to use (read: mis-use) the authority given
to Joan . . . as a way to pressure us to give Kevin 10% of all
our sales, whether or not he is involved, and be able to exert
contractual rights that manipulate our ability to hire, etc.,
restricting the company‘s ability to make sound business
decisions due to his undue influence. This might not be so
bad except for the fact that Kevin is child-like, never does
what he says and he craves power like Will craves Starbucks
coffee. . . . That itch you are feeling to push the green button
is all part of a coercive, Pavlovian divide-and-conquer
strategy by Joan and Kevin, which is a little bit juvenile and a
lot of bit corrupt.216
At trial, Morelli reiterated that he viewed the Owens Proposal as a corrupt blackmail
attempt.217 After Morelli rejected his proposal, Owens left the Company.
Other witnesses for Plaintiffs echoed some of Owens‘s concerns. Fearon
complained about Morelli‘s non-direct management style and ―very poor‖
communication, testifying that ―communication would often be diverted, or you‘d send
communication and then not hear anything and then not know how to direct your
actions.‖218 Others at the Company counseled Fearon against directly voicing complaints
to Morelli, warning her ―that this is not something that is going to go well if you try to
215
JX 102.0001 (5/4, 5/5 emails from Morelli to Waite, Horne, and Rohlinger).
216
Id. at .0002.
217
Tr. 510, 513-14.
218
Id. at 690, 749.
72
address it head on.‖219 Levine confirmed that it was difficult or impossible to approach
Morelli directly with problems, particularly alone.220 Morelli on at least one occasion
discouraged him from attending a board meeting and, on multiple occasions, chewed
Levine out for raising concerns.221
Levine also observed what he ―believed to be paranoid behavior‖ and discussed
the concept of ―Alan‘s shiny penny.‖ The ―shiny pennies‖ were new people ―with new
ideas, and they would have Alan‘s ear for a while. And then, typically, most of those
individuals either fell into bad graces or would challenge Alan to a direction, different
than he wanted to go,‖ and then Morelli would move on to a new ―shiny penny.‖222
Olsen, a non-party witness called by Defendants, also testified about Morelli‘s
behavior. As previously noted, he believed a ―very threatening type of atmosphere‖
existed at Optimis following the Director Defendants‘ termination.223 In addition, Olsen
219
Id. at 703-04 (Fearon). Her contemporaneous emails comport with this testimony.
JX 196.0001 (5/2/11 email from Fearon to Gunn: ―I have nothing to lose . . . if
Alan goes off . . it is just one more incidence where he discounts a key individual
in the company . . . further weakening the structure.‖); see also supra notes 113-
14.
220
Tr. 1613 (―I think my deposition lays out several very what I would call volatile
conversations between Alan and myself. . . . And so I knew for me, specifically,
that . . . I was not going to put myself in that situation again. Certainly not
alone.‖).
221
Id. at 1614 (Levine).
222
Id. at 1614-15. See also Gunn Dep. 63 (―The running term around the office are
[sic] ‗new shiny pennies,‘ whether those are new individuals or new projects.‖).
223
Tr. 1214.
73
described a meeting where one of the Rancho therapists asked Morelli when the Director
Defendants were going to come back and ―Morelli pretty much exploded on [the person].
And it was at that point that kind of everybody was taken aback. At that point,
communication, all communication stopped.‖224 This testimony is consistent with
Atkins‘s recollection of a Board meeting where Godges, a revered figure in the physical
therapy community, asked some questions about OptimisSport and Morelli ―really went
off on him in a way that was almost shocking. I‘ve never seen someone treated that way
in a professional setting.‖225 Smith similarly described the incident, testifying that
Morelli ―completely unloaded on him. I was—frankly, I was taken back by how rude
and how condescending and how mean he was to Mr. Godges. . . . I mean, the meeting
got deathly quiet. He just—he humiliated him in front of us.‖226 As a result, Smith
stated: ―I don‘t think anybody really wanted to step up and confront [Morelli], you know,
with anything at any of the board meetings for fear that he was going to lambaste you and
basically put you in your place.‖227 Although Defendants obviously have a fair amount
224
Id. at 1215.
225
Id. at 1465.
226
Id. at 1260.
227
Id. at 1260-61. Horne testified that ―Alan had a way of alienating people that he
was upset with.‖ Id. at 1319. Waite also stated that Morelli ―doesn‘t take
disagreement very well. He doesn‘t like it very much when people disagree with
what he‘s doing or question sort of how things are being run.‖ Id. at 1041.
Consistent with these descriptions, Geller testified that ―I could have an opinion
that went against him, but I think that became less tolerable as it went along. . . . I
74
of animosity towards Morelli, I credit their testimony on his management style, because it
comports with that of Plaintiffs‘ own witnesses.
E. Optimis Grows, Software Development Lags, Frustration Begins
The record contains little information on the early years of Optimis following the
Rancho acquisition in June 2007. Olsen described Rancho‘s performance as an Optimis
subsidiary as ―[s]tellar.‖228 The Director Defendants received all of the incentive bonuses
under their Employment Agreements.229 After Rancho, the Company completed several
other acquisitions and eventually grew to fifty-one clinics.230
In early 2009, Morelli asked Waite to serve as the COO of Optimis, and Waite
agreed. In November of that same year, the Company launched OptimisPT at the largest
annual conference of private practice physical therapists.231 According to Waite, ―it
just had to say what he thought I should say, or he would react poorly. . . . He
would almost try to punish somebody in a juvenile way.‖ Geller Dep. 21.
228
Tr. 1206.
229
Morelli now believes that ―those [bonus] calculations are highly suspect in
hindsight‖ and contends that ―those calculations are very much in dispute.‖ Id. at
576. But, there are not any claims in this litigation challenging those payments.
230
Between 2007 and 2009, the Company acquired nine physical therapy companies:
Rancho Physical Therapy, MVP Physical Therapy, Achieve Physical Therapy,
Fortney‘s Physical Therapy, Fearon Physical Therapy—which was owned by
Helene Fearon‘s husband—Beachside Physical Therapy, Cascade Physical
Therapy, Sovereign Physical Therapy, and Schrier Physical Therapy. Id. at 282
(Morelli). Fearon, Schrier, and Sovereign exercised their rescission rights under
their acquisition agreements and left the Company. I excluded claims relating to
those rescissions from this action in my previous Memorandum Opinion.
OptimisCorp, 2015 WL 357675, at *12.
231
Tr. 687 (Fearon).
75
exceeded all of our expectations in terms of the reception that we got in the
marketplace.‖232 Later in 2009, Optimis started raising capital, using a private placement
memorandum (―PPM‖).233 Waite participated and also sold his family and friends on
Optimis. Smith similarly raised funds for the Company from his family, with his mother
investing $80,000, his younger brother investing $200,000, and some of his friends
investing a total of $50,000.234
The early years of the Company appear to have been successful. Fearon described
the atmosphere then as good and the relationships among the executives as
―collaborative, friendly, a lot of joking around.‖235 Trouble began in the latter half of
2010. By that time, both the PT and Sport products were in development and were
competing for limited resources. The Director Defendants had been with the Company
for three years, and the promised liquidity event was nowhere in sight. Additionally, the
Company began spending its limited money on marketing events, geared more for the
then-conceptual Sport product.
One of those events was the OptimisSport DSC. The DSC, which was conceived
of by Morelli and promoted as the world‘s longest open-water swim, took place in Santa
Monica Bay. The purpose of this product-branding event was to ―show the general
232
Id. at 1025 (Waite).
233
JX 75.
234
Id. at 1257-58.
235
Id. at 686.
76
population what the human body can do‖ and encourage people to ―just get up and
move.‖236 The capstone of the event was the 12.6 mile swim, although it also included
shorter swims of 4.8 and 1.2 miles. Tapping Joan Lynch‘s contacts at ESPN, the 2010
event received significant coverage, both in advance and of the actual event itself,
including from sources other than ESPN. Between 150 and 200 swimmers participated in
the inaugural event, which was held in October 2010.237 Overall, Owens thought the
2010 event went ―very well,‖ and Morelli considered it a success.238
Plaintiffs claim that Defendants tortiously interfered with the DSC. The event was
held for three consecutive years: 2010, 2011, and 2012. Plaintiffs‘ allegations with
respect to this claim are vague and it remains unclear whether they allege tortious
interference as to all three years or one year in particular. The only evidence relating to
potential interference with the 2010 event relates to Waite. He swam the 1.2 mile
distance in the 2010 DSC.239 According to Owens, he met Waite at the event and said to
him, ―This is great‖ to which Waite replied ―Yeah, but this is a big waste of money and
we‘re not going to do it again.‖ Waite denied Owens‘s account, but even assuming
Owens‘s recollection is correct, I find it immaterial. It is undisputed that Waite did
236
Id. at 33 (Owens).
237
Generally id. at 30-39.
238
Id. at 33 (Owens); id. at 338 (Morelli).
239
Id. at 1030-31 (Waite).
77
participate in 2010 and there is no evidence that he did anything to interfere with the
event that Morelli agreed was successful.
The bigger problems at Optimis in 2010 related to the software. Although the
launch of the PT product in 2009 was successful, Optimis struggled to improve upon it.
In November 2010, the Company‘s employees again displayed the PT product at the
private practices conference where they had received a good reception the previous year.
The Company had added certain new aspects to the PT product, but they apparently were
not entirely ready for release. As Fearon testified: ―[A]t that meeting, I experienced
being very disappointed in how we presented our product, because part of our product
was really good, and the public was asking for more. And the other part of our product
. . . it was kind of not well-formed or it was half-baked . . . .‖240 Fearon and Levine were
highly respected consultants to the physical therapy market, and their recommendation of
the PT product was likely to cause more therapists to acquire it. By the same token,
Fearon and Levine had a vested interest in seeing that the product succeeded, because
they were putting their reputations on the line in standing behind PT. In that context, I
consider it important that Fearon believed Morelli was devoting insufficient resources to
PT to enable Optimis to meet market expectations.241 Substantial resources were being
devoted instead to OptimisSport and the DSC.
240
Id. at 687.
241
Id. at 688-90.
78
Plaintiffs have accused Defendants and others of hiding their frustration with
Optimis‘ resource allocation from Morelli and secretly opposing Sport. The evidence
does not support these allegations. Morelli knew about the frustration. Plaintiffs‘
witness David Hwang was Optimis‘ Director of Branding and worked on marketing and
graphic design for the Sport product. He told Morelli in 2010 that other employees had a
negative view of OptimisSport.242 Morelli dismissed his concerns, however, and told
Hwang he was being negative and needed to learn to work better with others.243
Plaintiffs also relied heavily on an email chain among the Director Defendants
from November 30 through December 1, 2010 (the ―2010 Emails‖).244 According to
Plaintiffs, this email chain evidences a conspiracy and reveals that the Director
Defendants were plotting to seize the Company as early as November 30, 2010. The
conspiracy allegedly came to fruition almost two years later with Morelli‘s ouster on
October 20, 2012. In the email chain, Defendant Smith expressed concerns about the
status of OptimisPT and suggested raising them directly at an upcoming Board meeting.
Plaintiffs focus on the following two lines from Waite‘s response: ―If we were to create
that confrontation at the board level, then we must be in a position to do what would
amount to a hostile take over. I am not sure that is what we want to do right now.‖245
242
Id. at 159-61 (Hwang).
243
Id. at 232.
244
JX 84.
245
Id. at .0001 (11/30/10 email from Waite to Smith and Atkins).
79
At trial, the Director Defendants testified—credibly, consistent with the text of the
emails, and in accordance with Fearon‘s testimony—as to the context of the 2010 Emails.
Kim Frost, a Rancho employee, had discussed with Smith and Atkins that the PT
software was experiencing problems whereby Rancho was ―actually losing charges.‖246
Smith explained that the PT software was dropping charges and that ―[d]ropped charges
basically means you lose revenue. So if you drop charges and they go away, if they
disappear, it‘s difficult to recapture that.‖247 Accordingly, I find that in late 2010
instability of the PT software and slower than expected improvement of that product were
serious problems for the Company.
The 2010 Emails, when read in full, actually demonstrate the opposite of what
Plaintiffs contend. Because Plaintiffs relied on these emails as evidence of a conspiracy,
I quote them at some length. The first email is a message Waite forwarded from Frost
that discussed PT software errors relating to charges.248 Smith then replied to Atkins and
246
Tr. 1038 (Waite).
247
Id. at 1265; id. at 1469 (Atkins: ―And not that I‘m a software genius in any shape
or form, but I know that the entire company ran off of this software. And so it
looked like this was going to explode. And this, in my mind, looking forward,
was going to . . . have a tremendous negative effect on not only just Rancho.
Since Rancho was about 70 percent of the income of the entire company, if this
were to happen, this would be catastrophic.‖).
248
JX 84.0002 (11/30/10 email from Frost to Director Defendants and others:
―Yesterday I found about 8 errors on the Charge approval screen . . . . Today I
moved on to testing the batching process and have found some other errors that
have been written up . . . .‖).
80
Waite. Smith first mentioned the ―fragility of our current situation as it relates to our data
bases in V1 and CS [OptimisPT] software‖ and then wrote:
We also need to discuss our game plan for the board meeting.
We are at a critical juncture and we need to address the
concerns at the meeting. We also need to discuss the poor
financial budgeting and lack of fiduciary responsibility as it
relates to expenses Optimis is incurring. I know everyone is
concerned and we should discuss how we plan on broaching
this at the meeting. As the three largest shareholders, there is
a lot at stake for all of us.249
Atkins testified that Smith is the most confrontational of the three Director Defendants.250
This is consistent with Smith‘s demeanor at trial and his testimony.251 Smith described
Waite as someone who was less confrontational and would calm him down.252
Waite responded to Smith‘s email by advising against confronting Morelli
directly. Waite‘s email stated, in part:
I have come to believe that we need to think carefully about
our approach and keep in mind our goal, which is to create a
liquidity event for all of us. Upon reflection, I am not sure
that confronting this situation at a board meeting with other[s]
present is the best approach to getting us to our goal of
liquidity. I am afraid that confronting Alan at a board
meeting, in front of colleagues, embarrassing him in his home
will make us feel better in the short term, but in the long run
will likely result in some rapidly deteriorating issues of
249
Id. at .0001-.0002 (11/30/10 email from Smith to Atkins and Waite).
250
Tr. 1469.
251
Id. at 1267 (Smith: ―But I was really fired up. Frankly, I wanted to confront Mr.
Morelli and confront the development team and say, you know, ‗You guys got to
figure this out.‘‖).
252
Id.
81
management which may create significant negative effects on
operations which may include litigation, etc. If we were to
create that confrontation at the board level, then we must be
in a position to do what would amount to a hostile take over.
I am not sure that is what we want to do right now.
Alan is hell bent on creating a listing of a class of equity in
2011. That is our goal as well. He has deep connections
which are likely to make that process go more smoothly and
get us a better outcome.253
Atkins wrote back: ―I have to agree that now is the time to keep the wheels on so we can
get to the finish line,‖ which was always the liquidity event.254
Atkins further testified that ―John [Waite] was our conduit to Optimis. If we
wanted to have a connection to the Optimis folks, John was that.‖255 As COO of
Optimis, Waite had the most interactions with Morelli and was most aware of Morelli‘s
character and behavior, which I described at length supra. I find nothing nefarious,
therefore, in Waite‘s counseling against confronting Morelli directly about development
of the PT software, for which Morelli, as CEO, was responsible, and fearing that a
confrontation would be counterproductive. Conversely, I reject Plaintiffs‘ assertion that
the 2010 Emails reveal a conspiracy. Instead, particularly against the backdrop of the
other evidence, those emails show three large stockholders frustrated with the CEO and
concerned that the PT software‘s instability could threaten the Company‘s future. I also
253
JX 84.0001 (11/30/10 email from Waite to Smith and Atkins).
254
Id. (12/1/10 email from Atkins to Smith and Waite). See also Tr. 1471 (Atkins);
id. at 1267-68 (Smith).
255
Tr. at 1470.
82
do not view the 2010 Emails as suggesting that the Director Defendants were hoping to
take control of Optimis for their own self-interest or otherwise seeking to gain a benefit
not available to all stockholders. Rather, the most reasonable inference from those emails
is that the Director Defendants‘ primary interest was in continuing to work to achieve a
liquidity event that would benefit everyone, which included working with Morelli on
raising capital.
In sum, based on the foregoing evidence, I find that none of the evidence
regarding events that occurred in 2010 provides any material support for Plaintiffs‘
various theories of liability.
F. 2011: Software Development Stalls, Employees Battle Over Resource
Allocation, Frustration with Morelli Increases
The state of affairs at Optimis continued going downhill in 2011. Much of the
evidence in this case focuses on 2012, but Plaintiffs contend that Defendants, and
particularly the Director Defendants, were engaged in a conspiracy during the entirety of
2011. Despite this allegedly ongoing conspiracy, there is little evidence of any
purportedly wrongful action in 2011.
Virtually no significant improvements were made on OptimisPT during 2011.256
Hwang testified that he was told in 2011 not to work with the developers on Sport, which
he understood to mean that the developers were being shifted to PT, and he reported that
256
Id. at 756 (Fearon).
83
to Morelli.257 According to Hwang, ―[e]verybody reported directly to Mr. Morelli.‖258 In
these circumstances, I find that, more likely than not, Morelli did know in 2011 about the
unhappiness among some of the Company‘s employees over allocating resources to
OptimisSport instead of OptimisPT.
Owens also testified about 2011. While he was working on the DSC, Owens met
with Horne, the CFO, at Starbucks in March 2011. Horne allegedly told Owens: ―The
swim is not going to happen this year. The board‘s not behind the swim. It‘s a waste of
money.‖259 Horne further allegedly said ―Alan will be out in six months if we don‘t go
public. . . . So just keep your head down and keep your mouth shut.‖260 Horne denied
saying these things.261 Regardless, Owens testified that, notwithstanding what Horne
allegedly told him, he continued to work on the 2011 DSC to the best of his ability.262
257
Id. at 255-56.
258
Id. at 255.
259
Id. at 54 (Owens).
260
Id. at 56.
261
Id. at 1321-22. In many respects, Owens‘s testimony on behalf of Plaintiffs, and
especially Morelli, did more harm than good. I found Owens to be a well-
meaning, but easily manipulated person. Despite the extremely poor work
environment at Optimis, including Morelli‘s demeaning treatment of him
personally, Owens later emailed Morelli in April 2013 offering unsolicited aid and
stating ―you are and always have been a friend.‖ JX 743 (4/18/13 email from
Owens to Morelli). To the extent Owens offered testimony favorable to Morelli, I
found that evidence unreliable and biased.
262
Tr. 127-28.
84
As further evidence that Defendants allegedly interfered with the 2011 DSC,
Plaintiffs point to the fact that the LA Tri Club withdrew their sponsorship of the event.
Owens testified that he met with Paul Hekimian, an Optimis consultant and the head of
the LA Tri Club, regarding the 2011 DSC. Rohlinger participated in that meeting by
phone and Owens allegedly heard Rohlinger say ―We‘re not even going to have that
event this year.‖263 Plaintiffs aver that Rohlinger‘s comment caused the LA Tri Club to
withdraw their sponsorship, but they failed to prove that such a causal connection exists.
The LA Tri Club not only withdrew their sponsorship of the DSC for 2011, but also
revoked Morelli‘s membership.264 Indeed, several members from the LA Tri Club sued
Morelli because they never received the stock options they were promised for assisting
with the 2010 DSC.265
As previously mentioned, Owens had left Optimis by May 2011. The DSC
happened later that year. Waite again swam in the event, participating in the 2.4 mile
swim.266 Morelli again described the event as successful, with about 400 participants,
including some celebrities, and some television coverage as well.267
263
Id. at 63-66.
264
Id. at 344-45 (Morelli).
265
Id. at 345 (Morelli).
266
Id. at 1031.
267
Id. at 346-47.
85
The other event of note in 2011 was the opening of a physical therapy clinic in
Pacific Palisades. Morelli knew Tina Geller through the LA Tri Club and he recruited
her to join the Company in February 2010. In October or November 2011, Optimis
opened the Pacific Palisades clinic that was to be run by Geller. That clinic ―was Alan‘s
idea to promote the OptimisSport software . . . . He called it a Petri dish for the
OptimisSport software.‖268
At the end of 2011, the Company again was in need of capital. In December 2011,
Optimis had another PPM prepared. The Director Defendants—who, according to
Plaintiffs, were over a year into their conspiracy to ―sabotage[e] the Company‘s strategic
plan‖269—again answered the call. Optimis raised about $860,000, almost all of which
came from two people: a friend of Waite‘s and Atkins‘s brother-in-law.270
G. The February 2012 Chicago Conference
In 2012, the alleged conspiracy gained speed. The first activity occurred in
February 2012. Although the Company largely operated remotely, employees and
executives would meet at various times throughout the year at conferences and
conventions. One of those conferences was the combined sections meeting, a physical
therapy conference, in February 2012 in Chicago (the ―February 2012 Conference‖).
Attendees included Horne, Rohlinger, Geller, Morelli, Gunn, Fearon, and Levine.
268
Geller Dep. 13.
269
POB 45.
270
Tr. 1322, 1335-36 (Horne); id. at 1467 (Atkins).
86
Before Geller became the director of the Pacific Palisades clinic, her position at
the Company was not entirely clear.271 She apparently was involved in OptimisSport, but
also seems to have functioned as Morelli‘s personal physical therapist. The oral sex
incidents began in mid- to late-2011 and gradually ended as she started working more at
the Palisades clinic in spring of 2012. Geller began working at the clinic part time when
it opened in late 2011 and worked there full time by April 2012.272
Geller described the February 2012 Conference at her deposition. I find her
account credible and largely consistent with Horne‘s recollection. One evening at the
conference, Morelli asked Geller to perform physical therapy on him and then he ―tried
making sexual advances,‖ but Geller avoided them, saying she had to meet the rest of the
Optimis employees downstairs.273 She ended up at the hotel bar. A group of employees
was returning from dinner and Horne apparently was among them. He saw Geller at the
bar and, according to Horne, she motioned for him to join her. He did.274 The two spoke
for a period of time, which Horne described as 20-30 minutes275 and Geller recalled being
about an hour.276
271
Geller Dep. 11 (describing unclear job duties and stating that Optimis was her
―first corporate job‖ so she did not know that this was unusual).
272
Id. at 19, 29.
273
Id. at 51-52.
274
Tr. 1338, 1409-13 (Horne).
275
Id. at 1412.
276
Geller Dep. 52.
87
According to Geller, Morelli was mentioned while she and Horne were talking and
she commented to the effect that ―if he ever lays his hands on me again, I might just kill
him.‖277 Horne‘s recollection is that Geller said that ―while she was at his [Morelli‘s]
house in Palisades, the upper bubble, Alan had inappropriately touched her during a PT
session. She said he was incredibly upset at her and threw her out of the room when she
questioned him on his behavior.‖278 Horne also testified that he explicitly asked Geller
whether it was sexual harassment, which he had an obligation to report. 279 Geller did not
mention that, but they both testified that Geller asked Horne not to tell anyone, to which
Horne agreed.280 Horne attributed Geller‘s remarks about Morelli to ―a one-time event, a
misunderstanding. I didn‘t believe it was sexual harassment. I didn‘t believe Alan would
have done anything.‖281 He then offered Geller the use of his apartment in Pacific
Palisades. He confided in her that he was not using it because he was staying with
Morelli‘s former wife. According to Horne, he ―just figured if [Geller] was using it, that
would eliminate any possibility of this happening in the future and just eliminate the
situation.‖282 Geller similarly testified that she believed Horne offered her the apartment
277
Id. at 51.
278
Tr. 1339.
279
Id. at 1339, 1413.
280
Id. at 1339; Geller Dep. 55.
281
Tr. 1340.
282
Id.
88
―to get me to not to have to stay at Alan‘s place anymore.‖283 Horne evidently allowed
Geller to use his apartment rent-free.
Notwithstanding Horne‘s promise not to tell anyone what Geller told him, he soon
told Rohlinger. Horne testified that this conversation—which he allegedly forgot to
disclose in his interrogatory answers in this case—occurred within days, or at most two
weeks, of the February 2012 Conference.284 Horne said that he called Rohlinger to
determine whether he should report the incident to Kreile in HR. According to Horne,
Rohlinger told him to report it, but he convinced himself not to.285 Rohlinger vaguely
recalled the conversation with Horne when asked about it at his deposition. He testified
that it occurred in Chicago at the conference, possibly in person, and that Horne
mentioned inappropriate touching. Rohlinger did not remember any further details, and
said that he concluded that he personally had no obligation to report the matter.286
Levine also attended the February 2012 Conference and testified about a matter
unrelated to Geller. According to Levine, he spoke with Waite, who told him that,
shortly after Rancho became a subsidiary of Optimis, Morelli had told Waite that ―at
some point he would need to step away as managing the company, but that that was
283
Geller Dep. 84. Geller‘s husband also worked for Optimis. His exact job is
unclear, but he appears to have been involved in OptimisSport. The record does
not indicate where the Gellers lived, but it seems that, at least on some occasions,
Geller stayed at the Upper Bubble when working late.
284
Tr. 1414-15.
285
Id. at 1342-44.
286
Rohlinger Dep. 50-55.
89
going to be hard. Alan recognized his control issues, and that he may need to be sort of
assisted out of that role, or sort of, you know, pushed out of that role if he continued to
take control.‖287 According to Levine, Waite then said: ―You know, we may just need to
give Alan a nudge.‖288
H. Suspicious Events Immediately After the February 2012 Conference
According to Plaintiffs, after Horne told Rohlinger about the sexual harassment
allegations, Rohlinger told Waite, but that is heavily disputed. Based on the latter
allegation, Plaintiffs suggest that Waite and his alleged co-conspirators waited seven
months until September 2012 to use those allegations as a pretext to remove Morelli from
power.
As the reader may have noticed, there is little, if any, evidence tying either Atkins
or Smith to the actions taken by Waite or evidence tying Horne to any of the Director
Defendants. Rohlinger, according to Plaintiffs, is the link. Rohlinger was the
Company‘s Idaho-based Chief Business Development Officer. He is not a defendant, but
allegedly is a member of the conspiracy. He did not testify at trial, but he was deposed.
Plaintiffs‘ position is that Rohlinger was Waite‘s close friend and that Rohlinger,
therefore, would have told Waite about what Horne told him.
Rohlinger is a former investment banker with an MBA from Harvard Business
School. He, too, met Morelli through the LA Tri Club and worked for the Company from
287
Tr. 1568.
288
Id.
90
April 2009 through June 2013.289 Initially, Rohlinger worked with the Software Division
and was tasked with overseeing the development of OptimisPT. In late 2010 or early
2011, however, he was reassigned to the Clinical Services Division. According to
Morelli, Rohlinger thereafter had no technical duties ―based on the reporting structure‖ of
the Company, but he ―crept back into it almost like an alternative management team.‖290
Rohlinger, by contrast, did not view the transition as ―that black and white.‖ 291 Like
other witnesses, he testified that the Company lacked a formal organization chart.292
Once Rohlinger joined the Clinical Services Division, he and Waite developed a ―very
good professional relationship‖ and they spoke almost daily.293
Rohlinger did not recall discussing with Waite, or anyone else, the incident that
Geller told Horne about and Horne subsequently relayed to Rohlinger.294 Likewise,
Waite denied that Rohlinger ever told him about his conversation with Horne.295
Plaintiffs contend that the most reasonable inference from the evidence is that Rohlinger
did tell Waite. I return to this issue later, but I note that, even if Waite was told, the
289
Rohlinger Dep. 14-16.
290
Tr. 359.
291
Rohlinger Dep. 17.
292
Id. at 19; e.g., Gunn Dep. 22-23.
293
Rohlinger Dep. 287-88.
294
Id. at 56, 95-96, 337.
295
Tr. 1120-21.
91
evidence at most would support a finding that he was aware of one incident of
inappropriate touching between Morelli and Geller. The actions that Geller later revealed
to Solomon were more explicit and there is no evidence that Waite, Horne, or Rohlinger
knew of those allegations before the investigation into Geller‘s claims.
Two other events occurred shortly after the February 2012 Conference that
Plaintiffs contend support both the Horne-Rohlinger-Waite inference and a conspiracy
generally. Defendants offer neutral explanations for these events. Plaintiffs have the
burden of proof.
1. Circulation of the Optimis Sexual Harassment Policy
The first event relates to Waite allegedly finding out from Rohlinger about
Geller‘s complaint regarding Morelli‘s behavior. Shortly after the February 2012
Conference, sexual harassment compliance materials were circulated around the
Company. Plaintiffs contend that Defendants caused these materials to be circulated.
Their theory appears to be that Defendants were attempting to alert Geller to the
possibility that she could bring a claim against Morelli. The problem with this theory,
despite the suspicious timing, is that the sexual harassment policy apparently was
circulated largely by Kreile, in her Human Resources role, and Jessica Eastman,
Morelli‘s assistant.296 Additionally, Morelli was copied on one of the emails circulating
296
JX 123 (2/15/12 Kreile Memo re: Sexual Harassment Procedures); JX 124
(2/15/12 email from Kreile to Waite and Rohlinger); JX 133.0001 (2/21/12 email
from Kreile to Horne: ―Hi Will, attached is our sexual harassment policy. The
first attachment describes our policy and you can use your judgment whether you
wish to distribute it to Optimis managers. Required is the distribution of the actual
92
the sexual harassment policy, so this distribution was not secretive.297 Waite described
Kreile‘s email as routine, annual sexual harassment training.298 Rohlinger recalled
nothing about this subject.299 Kreile testified at her deposition that ―ideally every year the
sexual harassment pamphlet and policy would go out,‖ and she attributed her email to
Rohlinger and Waite as being related to that goal.300 There are emails from both 2010
and 2011 relating to sexual harassment training, but not a circulation of the sexual
harassment policy.301
policy to all employees. Please let me know if you prefer that I send to Jessica
[Eastman, Morelli‘s assistant,] for distribution or if you wish to handle. This is
required by California law and we need to proceed asap. . . . I ask that Jessica
collect the signature sheets from all Optimis employees and return to me . . . .‖);
JX 137.0001 (3/2/12 email from Eastman to Horne, Kreile, and Waite: ―Hi Nancy
– I‘ll get this started on our end. If you could handle the team in Murrieta, that
would be great.‖).
297
JX 138 (3/2/12 email from Eastman to Morelli and many others). Notably, Kreile
specifically acknowledged receipt of Geller‘s signature. JX 139.0001 (3/2/12
email from Kreile to Eastman, Waite, and Horne: ―I already have this back from
Tina, as she was included in the Rancho directors distribution.‖). Given the events
that unfolded, this specific mention seems suspicious. But, by virtue of running
the Pacific Palisades clinic, Geller also was the only Optimis employee working at
a clinic; all of the other clinics were run by the subsidiaries. Waite, as COO, had
primary responsibility for the clinics.
298
Tr. 1051-52.
299
Rohlinger Dep. 89-99.
300
Kreile Dep. 119.
301
JX 1113 (8/11/10 email from Morelli to Kreile and others regarding sexual
harassment training); JX 1115 (1/21/11 email from Kreile to Eastman regarding
Morelli‘s sexual harassment training).
93
2. Circulation of the Stockholders Agreement
The other event relates to the Stockholders Agreement. On February 20, 2012,
Horne sent the Stockholders Agreement to Rohlinger as an attachment to an email sent
from Horne‘s personal email account to Rohlinger‘s personal email account. The email
contains no text.302 Later that day, Rohlinger forwarded the email to Waite‘s personal
email account, also without text.303 Plaintiffs contend that these emails show members of
the conspiracy planning their next moves on how to remove Morelli from power.
Waite did not recall why the Stockholders Agreement was being circulated.304
Horne testified that he sent the document to Rohlinger, because Rohlinger had just
discovered its existence, considered it material, and was unhappy that it had not been
disclosed in the Company‘s previous PPMs.305 Horne believes he used his personal email
because it was the one that was open when Rohlinger called him and asked about the
Stockholders Agreement. To the extent Rohlinger had any recall about the February
2012 circulation of the Stockholders Agreement, he testified that he was surprised when
he found out about the existence of the Stockholders Agreement.306 Additionally,
302
JX 130.
303
JX 129. Waite responded to this email the next day, writing: ―I don‘t see the
changes as significant. Compare the MVP doc to this one which is Rancho and
see what you think.‖ JX 132.0001. The record contains no explanation of the
subject to which Waite was referring.
304
Tr. 1144-46.
305
Id. at 1335-38.
306
Rohlinger Dep. 100-05. See also id. at 78-79 (discussing PPMs).
94
differences in the PPMs themselves comport with Horne‘s testimony. Neither the 2009
PPM nor the 2011 PPM disclosed the Stockholders Agreements, but the June 2012 PPM
did.307
I. During 2012 Tensions Over the Company’s Direction Approach the Breaking
Point
1. No confidence in Morelli
By spring 2012, many key employees had lost faith in Morelli‘s ability to manage
the Company successfully. A group of at least five people—Gunn, Rohlinger, Waite,
Fearon, and Levine—appear to have been engaging in a regular practice of using personal
emails to gripe about their unhappiness about Morelli.308 Resource allocation issues were
high on the list of concerns, and morale was low.309 The goal of these back-channel
307
Compare JX 75 (2009 PPM), and JX 37 (2011 PPM), with JX 229.0012 (June
2012 PPM disclosing the Stockholders Agreement). The disclosure, listed under
the ―Risk Factors‖ section of the PPM, includes the subheading: ―The majority of
our shareholders have entered into a Stockholders Agreement which provides our
Chief Executive Officer with the right to designate the majority of our Board of
Directors.‖ JX 229.0012.
308
E.g., JX 192.0001 (4/29/12 email from Gunn to Waite, Rohlinger, Levine, and
Fearon: ―I have used our non Optimis emails for this type of communication and
would request we continue to use those as we have this discussion.‖). Waite could
offer no explanation for the use of personal emails. I find Gunn the most credible
witness on this point. She testified at her deposition that by spring 2012 she felt
Morelli ―was more than likely monitoring emails.‖ Gunn Dep. 75. See also Jim
Lynch Dep. 27 (―I felt uncomfortable having those conversations on work e-mail.
At some point, I was told that it would not be unusual to have someone go through
those e-mails and look at them.‖).
309
JX 192 (―Alan is focussing [sic] on all products that do not involve OptimisPT and
is treating this team poorly.‖); Tr. 695-97 (Fearon). One line of questioning of
Fearon misleadingly suggested that it was the back-channel criticisms of Morelli
that were bringing down morale. Tr. 701. Further questioning, however, clarified
95
discussions, according to Fearon, was trying to ―effect change‖ and ―[t]rying to get
something done that would help us accomplish the goal of the OptimisPT product.‖310
Fearon provided the clearest testimony on the problems in this timeframe. She
began holding off on pursuing various opportunities that could have been good for the
Company because she ―didn‘t feel confident in my CEO because of . . . the way he
communicated.‖311 For example, Fearon had business contacts with a company named
WorkWell, but the business relationship with WorkWell failed because ―Alan had
difficulty communicating in some of our meetings with their executives.‖312 Fearon also
described an opportunity for Optimis at a university-based hospital system that did not
materialize ―because we couldn‘t get our act together to be able to have the software be at
that she perceived morale to be low because of decisions about product
―development or resources‖ that were the responsibility of Morelli. Id. at 702.
310
Tr. 697-98. In May 2012, Fearon emailed Gunn that Rohlinger had told her that
he was ―undertaking an effort to see what actually would be involved in taking
control of parts of the company and leaving others to those that are engaged
there.‖ JX 196 (5/2/12 email from Fearon to Gunn). Though they have
highlighted this email‘s existence, Plaintiffs have failed to offer a cogent
explanation of its import. Additionally, because I find that there is no conspiracy,
use of this email to prove a takeover plot by Defendants would make it hearsay
and, therefore, inadmissible.
311
Tr. 707.
312
Id.
96
a level where we could actually do that type of integration.‖313 She provided other
examples as well.314
It also seems that several opportunities failed because OptimisPT had not reached
the desired level of development, which Fearon blamed on the resource allocation
decisions made by Morelli. In her words, she held off on pursuing opportunities because
―what I was watching was the chief executives of the company basically having zero to
no confidence in the CEO and actually trying to do something about that.‖315
2. The Director Defendants extend their Employment Agreements
The Director Defendants renewed their Employment Agreements in spring
2012.316 The Director Defendants had renewed the Employment Agreements in 2011 on
the same terms that had existed in 2010.317 Morelli had disagreements with the Director
Defendants over extending the Employment Agreements in 2012.318 Because the
Director Defendants viewed the Employment Agreements as their safety net, they were
313
Id. at 709.
314
Id. at 709-10.
315
Id. at 744.
316
This factual section is abbreviated, because Plaintiffs have abandoned all claims
directly related to the Employment Agreements. Alternatively, I consider them
waived. Emerald P’rs v. Berlin, 2003 WL 21003437, at *43 & n.144 (Del. Ch.
Apr. 28, 2003).
317
JX 64.0012-.0013; JX 65.0012-.0013; JX 66.0012-.0013.
318
JX 176 (4/9/12 email from Morelli to Director Defendants regarding extensions).
97
quite unhappy about Morelli‘s resistance.319 A Rancho board meeting was necessary to
extend the Employment Agreements; such a meeting had not been held in years. On or
about April 26, 2012, the Director Defendants, without telling Morelli, purportedly
removed him from the Rancho board on the basis that, under Rancho‘s bylaws, he could
not be a board member because he was not a physical therapist.320 As Plaintiffs since
have pointed out, Rancho‘s bylaws also required that the Rancho directors be
stockholders of Rancho. Because Optimis owned all of the shares of Rancho, none of the
Director Defendants technically could have been on the Rancho board either.321
At the April 26, 2012 Rancho board meeting, the Director Defendants and the
remaining Rancho director, Joe Godges, approved the extension of the Employment
Agreements.322 Under that extension, the base salaries of the Director Defendants
remained the same as they were in 2009 and 2010, and the EBITDA targets they needed
to meet to earn bonuses were increased. The change to the bonus provision appears
consistent with the alterations Morelli was demanding in exchange for renewing the
agreements.323
319
E.g., JX 185 (4/20/12 email from Smith to Waite and Atkins: ―I do not want the
comp committee making the decisions on my employment contract do you?‖).
320
JX 58.0002; JX 190.0003.
321
JX 58.0002.
322
JX 190.0003-.0004. Plaintiffs dispute whether such a meeting actually was held.
323
Id. at .0004, JX 191 (4/26/12 email from Waite to Morelli: ―I have had a chance to
review these terms with Greg and Bill and we look good to go. I appreciate your
and Will‘s work on getting this completed . . . .‖).
98
3. The June 2012 Meeting: A “conspiracy” of inaction
By the middle of 2012, the problems already described continued to fester. A June
email chain shows not only the frustrations of the employees, but also demonstrates
Morelli‘s awareness of the problem. Gunn apparently suggested to Morelli that the
software developers go to Rancho and work on site so that they could understand how the
software functioned in the real ebb and flow of a physical therapy office.324 Morelli
responded: ―Under no circumstances are we going to have these developers go out to
Rancho. Aside from the big loss in productivity, I have also observed—the [sic] for the
last couple of years—that our staff never comes back the same from those trips . . . likely
due to confusing messages that they get.‖325
Gunn forwarded these messages to Waite, who then wrote to Rohlinger,
describing the situation as ―f---ing ridiculous and clearly about control. He [Morelli] is
losing his grip on this company and can feel who he is losing it too.‖326 The import of the
second sentence is unclear because of one of two typos.327 Plaintiffs focus on the end of
Waite‘s email, which reads: ―I don‘t expect there is much time left. We must
324
JX 233.0002.
325
JX 233.0003 (6/17/12 email from Morelli to Gunn) (emphasis added).
326
JX 233.0001 (6/18/12 email from Waite to Rohlinger).
327
It is unclear if the typo is the ―too‖ or the inclusion of the word ―who.‖ The
sentence either reads ―He is losing grip on this company and can feel . . . he is
losing it too‖ or ―He is losing grip on this company and can feel who he is losing it
to[].‖ The meaning of the sentence is quite different depending on which reading
is correct. Waite remembered nothing about this email. Tr. 1165-73 (Waite).
99
individually and collectively stay focused on doing the right thing. Set a clear path and
execute. I realize my role in this approach and am committed.‖ 328 Plaintiffs contend that
this indicates a conspiracy, the same conspiracy that allegedly began in late 2010, with
the end goal approaching.
At some point during 2012, there was another conference in Tampa, Florida.
Levine recalled a conversation with Waite in which Waite listened to Levine‘s concerns
and basically placated him and told him that he would attempt to deal with it. Much like
Smith‘s testimony regarding Waite, Levine observed that ―John was very good at sort of
making—certainly me feel that he understood and he empathized with what I was
feeling.‖329 According to Levine, however, by June of 2012 he had ―been hearing the
same thing for over a year‖ from Waite and no progress was occurring.330
Plaintiffs repeatedly asked questions of Levine consistent with the misleading
affidavits he and Fearon filed about a conspiracy bent on ―taking control‖ from Morelli to
achieve some self-interested goal of the conspirators. When the Court asked Levine
directly what the goal of this group of individuals was, he answered:
328
JX 233.0001. Waite testified unconvincingly that the final sentences of this email
likely refer to him staying focused and running the Clinical Services Division, but
he remembered nothing specific about the email.
329
Tr. 1570; id. at 1575 (―I always felt a little better when I talked to John. I mean,
he has a way of soothing you.‖). See also Jim Lynch Dep. 41 (―Mr. Waite
provided an environment where I felt comfortable objecting with anything. . . . He
encouraged me to express my opinions, and if I had concerns, he reaffirmed them
and made me feel that it was okay to feel a certain way.‖).
330
Tr. 1572.
100
My sense was there was a constant understanding that there
were resources being diverted away from what we thought
was our primary mission, was moving OptimisPT forward in
the market. We had very strong projections for the future.
And Alan‘s—almost Alan‘s entire focus seemed to be on
OptimisSport. And while OptimisSport was certainly part of
the vision, it was not something that we—that I felt, that I
believed, that we were ready to move into without making
sure that we were credible in the industry for OptimisPT.
And every time we would bring this up [to Morelli] . . . Alan
would start to pontificate on the vision, which was wellness
and OptimisSport services.331
Levine further explained that he ―and the group that [he] was working with, wanted
[Morelli] out of the way of any day-to-day working at OptimisPT, because it just seemed
like . . . everything was getting diverted.‖332 Having carefully considered this evidence, I
find that Levine‘s testimony supports the view that the goal he, Fearon, Waite, and others
had was to salvage the PT product in the marketplace and prevent Morelli from
interfering with its development. The goal was not to engage in a hostile takeover for the
sake of harming Morelli or some other unexplained reason unique to Defendants and not
shared by the Optimis stockholders generally (other than Morelli, perhaps). As Fearon
testified, all of the actions she took during the relevant time period were because she
believed they were in the best interests of the Company.333
331
Id. at 1571.
332
Id. at 1572.
333
Id. at 782-83.
101
The evidence does not support a finding that Fearon, Levine, Waite, or Rohlinger
were involved in a takeover conspiracy. In this regard, Levine‘s testimony about the pro-
PT group again is illuminating: ―And it just seemed like every time we got together it was
nothing but a gripe session. We didn‘t have a plan. We didn‘t have a strategy. We
didn‘t have anything. And it just became more and more frustrating.‖334 This evidence,
from Plaintiffs‘ own witnesses, is inconsistent with the self-serving, disloyal conspiracy
Plaintiffs contend existed.
On June 15, 2012, Levine wrote to Waite, Rohlinger, Gunn, and Fearon, stating
that he and Fearon were questioning their long-term affiliation with Optimis and
requesting a face-to-face meeting.335 Plaintiffs highlight this email, because Levine
referred to it in a text message to Rohlinger as his ―coup d‘état‖336 email and because it
includes the following lines:
If we have any hopes of a positive outcome for all of us
[presumably the long-awaited liquidity event], we will need
to take some drastic measures, and things will have to be
different moving forward. We have all spent too much
political and reputational capital thus far, and we either need
to stop the bleeding or amputate the effected [sic] limb in
which ever way could save this company from itself. Or, as I
said to John, we either need to take the bull by horns or
recognize it is going to the slaughterhouse and figure out how
to save ourselves!337
334
Id. at 1573.
335
JX 230.
336
JX 28.0010.
337
JX 230.0001.
102
The language is colorful and direct, but I do not read Levine‘s email as stating much
more than what I just described. Virtually all of the actors he addressed had a vested
interest in the success of Optimis. In several cases, the actors had staked their reputations
and financial well-being on OptimisPT. In addition, they all shared the view that the
Company was in difficulty, largely due to Morelli‘s poor leadership and his refusal to
allocate sufficient resources to Optimis PT to ensure its success.
By the time of trial, Fearon and Levine had settled with Optimis and Morelli, and
received the higher salaries Morelli previously had denied them. Fearon and Levine both
appeared as witnesses for Plaintiffs. Nevertheless, Fearon acknowledged that she
understood Levine‘s email to mean ―changing the things that were wrong by stopping
them and trying to improve the things that needed to be done—or the methodologies that
needed to be taken to get OptimisPT in a different place.‖338 Levine testified that ―I
thought we needed to get Alan out of the way. I didn‘t know how to do it. . . . But
clearly, for me, it was a revolution. For me, in my mind, it was about getting rid of the
current administration and putting somebody else in power.‖339 As a stockholder of
Optimis and a professional heavily invested in its success, Levine was entitled to hold
338
Id. at 714.
339
Tr. 1583.
103
those views. I do not find his statement to be cogent and reliable evidence of the state of
mind of Waite and the other Defendants, however.340
The meeting did occur on June 26, 2012, with Fearon and Levine participating
from separate remote locations.341 The testimony about the meeting does not support
Plaintiffs‘ claim that there was a plot to seize control of the Company illegally.
According to Levine, he advocated sitting down ―together with Alan to tell him what our
concerns were and to tell him that we expected something different.‖342 Rohlinger was
―emphatically shaking his head no‖ and Waite disagreed with that course of action,
saying ―don‘t poke the tiger.‖343 I also note, however, that the June 26 meeting also
appears to be the first time Levine learned of the Stockholders Agreement.344
The only concrete action that emerged from the June 26, 2012 meeting was taken
independently by Fearon and Levine, neither of whom is a defendant in this action. As
described in Section I.E supra, their Employment Agreements expired in December 2012
and they took it upon themselves to send a letter to Morelli, dated October 6, 2012,
outlining their demands, including for raises and improvements to OptimisPT.345 Levine
340
Levine is not a defendant in this action.
341
Id. at 1584-85 (Levine).
342
Id. at 1586.
343
Id. at 1587 (Levine).
344
Id. at 1588 (Levine).
345
JX 317.
104
sent a draft of that letter to Waite in June, who, apparently anticipating Morelli‘s reaction,
forwarded the draft to Rohlinger in an email that states: ―FYI eeek.‖346 Although Levine
and Fearon sought input on the letter from Waite and others, they did not receive any.347
There were changes between the draft and the letter sent in October. According to
Fearon, ―those were things that we added, thinking to ourselves, well, we need to do this.
No one‘s giving us direction. We asked, they‘re ignoring us.‖348
In sum, the end result of the June 26 meeting was an October letter by two
individuals not on trial. At the meeting, Waite, the only Defendant in attendance, advised
against ―poking the tiger.‖ Fearon and Levine then proceeded on their own.
4. The Company struggles to raise capital and again hosts the DSC
By the end of the summer of 2012, the Company again sought to raise capital in
the equities market. Although originally looking for an investment of $4 million, the
Company was unsuccessful despite attending ―a lot of meetings in August and
September.‖349 The Company also was in discussions with Wells Fargo for a loan in the
amount of $1 million unsecured and $2.5 million secured by Rancho‘s accounts
receivable and a personal guarantee by Morelli. That loan was at roughly 3%, as opposed
to a competing loan from the Bank of the Internet (―B of I‖) at 6.75%. Morelli, however,
346
JX 239.0001.
347
Tr. 724 (Fearon).
348
Id. at 723-24.
349
Id. at 1323 (Horne); JX 289 (Sept. 2012 PPM). The September 2012 PPM, like
the June 2012 PPM, disclosed the Stockholders Agreement. Id. at .0017-.0018.
105
was unable or unwilling to execute a personal guarantee, so the Wells Fargo deal was not
pursued.350
Notwithstanding the Company‘s financial challenges, Optimis again held the DSC
sometime in mid-August.351 Waite again participated in the event.352 Morelli appears to
accuse Defendants of sabotaging the American Lung Association‘s (―ALA‖) sponsorship
of the 2012 event. The testimony on this issue is unclear, but it seems that the ALA, in
late 2011, agreed to sponsor the 2012 DSC, or that Morelli believed they were sponsoring
it.353 The ALA dropped their sponsorship, however, and Morelli blames that on
misinformation allegedly provided to the ALA by Defendants.354 But, the relevant
testimony was all speculative. In fact, the documentary record contradicts Morelli‘s
testimony. A May 4 email to Morelli from a representative of the ALA stated that the
ALA never had reached a sponsorship agreement with Optimis and spelled out several
irreconcilable differences, such as ALA limits on cross-promotions with a for-profit
company and budgeting problems for the event.355 Morelli contemplated suing the
350
Tr. 1207-09 (Olsen).
351
Id. at 730 (Fearon).
352
Id. at 1031 (Waite). Horne and Atkins also swam in the event at least once, but it
is not clear which years they participated. Id. at 1384 (Horne); id. at 1475-76
(Atkins).
353
Id. at 348-49 (Morelli).
354
Id. at 350-52.
355
JX 1086; Tr. 500-02 (Morelli).
106
ALA.356 Nevertheless, he testified that the 2012 DSC was a success, but claimed it lost
money because of the lack of the ALA sponsorship.357 In any event, Plaintiffs failed to
prove by a preponderance of the evidence that Defendants collectively or any of them
individually caused the loss of that sponsorship.
J. The Geller Sexual Harassment Allegations and Subsequent Investigation
In a September 21, 2012 phone call with Waite, Geller told him about some
inappropriate conduct by Morelli. Defendants‘ version of events is that, upon hearing
that she might be reassigned to work in close proximity to Morelli, Geller became
concerned, contacted Waite and told him about the inappropriate contact by Morelli, and
that Waite then turned the matter over to Kreile in Human Resources with minimal
involvement thereafter. Plaintiffs contend that Defendants bribed Geller and coaxed her
to bring the sexual harassment complaint against Morelli and then Defendants
manipulated the investigation. In the following Subsections, I find Defendants‘ version
of the facts to be more accurate.
1. Knowledge of Geller’s allegations and the call to Waite
Plaintiffs contend that several individuals knew of Geller‘s allegations before she
made them to Waite in September. The implication is that the claims were stale—indeed,
Plaintiffs contend they are false—and instead were used by Defendants as a pretext to
oust Morelli.
356
Brys Dep. 33-34.
357
Id. at 658-59. The DSC was never designed to be a money-making event, and
there is no evidence that it ever broke even.
107
At trial, Fearon testified that by mid-August 2012 she had heard from Gunn about
an inappropriate sexual relationship between Geller and Morelli—though Fearon did not
provide details of what she had heard.358 Geller testified that she had made remarks to
Gunn ―in general passing‖ about Morelli‘s behavior.359 Gunn admitted that she learned
of the allegations from Geller herself, but testified that did not occur until late September
at a conference.360 Thus, Gunn denied telling Fearon about those allegations in or before
the middle of August.361 Levine also claims to have been aware of the allegations in mid-
August, presumably because Fearon told him.362 In Section I.F supra, I concluded that it
would be appropriate to resolve doubts against Fearon and Levine. At the same time,
however, I consider Gunn‘s credibility rather questionable and note that she, like
Rohlinger, did not testify at trial, had limited recall at key moments of her deposition, or
was evasive in responding to Plaintiffs‘ questioning. I return to this matter infra, but,
even if Fearon and Levine did know something about Geller‘s situation, there is no
evidence that Waite knew or that Fearon or Levine told Waite themselves.
358
Id. at 729-30.
359
Geller Dep. 56.
360
Gunn Dep. 50.
361
Id. at 91.
362
Tr. 1589-91.
108
Two people were aware of Geller‘s allegations early on: Horne and Rohlinger. At
his deposition, Rohlinger claimed to have heard Horne‘s story and put it out of his mind.
He could not recall discussing the matter with anyone else or telling anyone else.
Plaintiffs assert that Horne suddenly became much more friendly and helpful to
Geller after learning of her allegations. After their conversation in February 2012, Horne
did let Geller use his apartment rent-free while he was staying with Doherty. The record
is unclear on how frequently Geller made use of the apartment. Plaintiffs also allege that
Horne promised Geller a share of the profits of the Pacific Palisades clinic to induce her
to make false accusations against Morelli. The basis for this proposition appears to be the
interview notes of Nancy Solomon, the attorney who investigated the sexual harassment
claims. According to those notes, Geller told Solomon that Horne discussed a proposed
salary change with Geller in March or April 2012. Specifically, Horne mentioned a
reduction in salary in exchange for a percentage of the profits from the Pacific Palisades
clinic. I note, however, that that clinic had never had profits. Apparently this change was
never implemented.363
Based on this evidence, I find unpersuasive Plaintiffs‘ suggestion that Horne
bribed Geller to bring false sexual harassment claims against Morelli in September 2012.
As to the apartment, Plaintiffs have not proven any link between Horne allowing Geller
to use his apartment beginning in February and Geller telling Waite about Morelli‘s
allegedly inappropriate conduct in September. Plaintiffs have not shown that Horne
363
JX 54.0005.
109
encouraged Geller to make the complaints or that Horne asked anything of Geller for
using his apartment.364
2. Geller’s version of events
I carefully reviewed Geller‘s video deposition with respect to the chain of events
that led to the October 20, 2012 board meeting. I find that account persuasive, consistent
with the other evidence, and credible.
Geller began providing physical therapy services to Morelli in late 2010. Geller
described the incidents involving oral sex as occurring at nighttime in Morelli‘s office-
bedroom. According to her, ―[Morelli] would generally be at night naked already
because he had just [sic] a massage, and then he would ask me to work on him after the
massage, so he would still be naked.‖365 Though he would be wearing a sheet, Morelli
often had a noticeable erection. Morelli would motion or otherwise suggest to her that he
wanted oral sex. On some instances, Geller would initiate because she ―could tell that he
was in that kind of mood‖ and it ―was easier to initiate and get it over with than to try and
reject it and go through a whole world of trouble.‖366 According to Geller, these
incidents ended once she left the Upper Bubble and began working in the Pacific
Palisades clinic. The clinic opened in October or November of 2011 and she was there
364
Horne also had given another employee, Jessica Eastman, a key to his apartment
so that she could ―shower in the morning‖ after working out and ―[wouldn‘t] have
to shower at Alan‘s houses.‖ Eastman Dep. 48.
365
Geller Dep. 26.
366
Id.
110
increasingly from that time onwards. By early 2012, Geller was spending almost all of
her time at the clinic. The incidents of oral sex apparently began in October 2011, with
only physical touching before that.367 According to Geller, she acquiesced to Morelli‘s
fondling of her and his requests for oral sex because if she did not, he would ostracize her
socially or threaten her and her husband‘s jobs.368
Morelli allegedly also made advances on Geller at the February 2012 Conference,
as she described in her conversation with Horne, recounted supra. The incidents with
Morelli had stopped entirely by summer 2012, if not somewhat sooner. In the September
21 phone conversation with Waite, Geller said that she had heard Morelli was going to
hire a new physical therapist for the Pacific Palisades clinic and that this might result in
Geller returning to the Upper Bubble. Geller testified: ―I was afraid that . . . I‘d be forced
to be back at the house and be forced to be subjected to the inappropriate touching and
sexual manner that I did not want. And I couldn‘t stand to be put back in that situation
again.‖369 This explanation for Geller‘s telling Waite about her concerns regarding the
interaction between her and Morelli is consistent with Solomon‘s notes of her interviews
367
Id. at 126.
368
Id. at 104-05.
369
Id. at 63.
111
with Geller.370 It also is consistent with Waite‘s testimony regarding his initial phone
conversation with Geller.371
Consistent with how others have described Waite‘s management style, he told
Geller that the she would be okay and that everything would be alright.372 That first
substantive call happened on the morning of September 21, a Friday. Waite promptly
reported the matter to Kreile.373 Kreile contacted the Company‘s insurer, Professional
Liability Insurance Services, Inc. (―PLIS‖), the same day.374
3. The investigation
Plaintiffs allege that Defendants manipulated the investigation. But, the evidence
does not support that allegation. Plaintiffs also criticize Waite for not reporting Geller‘s
claims to the Board. The record strongly suggests, however, that it would have been
futile for Waite to do that. After Morelli was terminated, he fired every director he could
that voted to remove him, installed a new board, re-appointed himself CEO, and began
investigating Defendants and litigating against them.
After receiving the claim, PLIS apparently contacted Leonid Zilberman, a
California employment lawyer with sixteen years of experience working for the firm
370
JX 54.0001, .0005.
371
Tr. 1066-67.
372
Geller Dep. 63.
373
Tr. 1069-70 (Waite); JX 285.0001 (9/21/12 email from Waite to Kreile
referencing the ―potentially volatile HR issue‖ just discussed by telephone).
374
Kreile Dep. 56-61; JX 282 (―Notification of Claim or Potential Claim‖).
112
Wilson Turner Kosmo LLP.375 He previously had handled an entirely unrelated dispute
involving two Rancho employees; Kreile was Zilberman‘s contact for that matter as well.
Zilberman first contacted Kreile on September 24, 2012, a Monday and the first business
day after Kreile filed a notice of potential claim with PLIS.376 Zilberman testified at his
deposition that, in the case of allegations of harassment against senior management, and
the CEO in particular, the ―three things that are the most important are that the
investigation be done promptly, that the investigation be thorough and that the
investigation be impartial.‖377 After concluding that no one internally at Optimis could
run the investigation without being accused of bias, Zilberman hired an outside
investigator: Nancy Solomon.378 This was the beginning of the ―Geller Investigation.‖
There is no evidence that Defendants, or anyone at the Company, had any
involvement in Solomon‘s retention. In fact, her retention agreement is with the Wilson
Kosmo Turner law firm, not with Optimis.379 Solomon interviewed nine employees,
some more than once. The result of that investigation was sixty-seven pages of single-
spaced typed notes and a thirty-four page report listing her factual findings, including
credibility determinations. Morelli admitted that Geller provided oral sex to him, but
375
Zilberman Dep. 9-10.
376
JX 305.
377
Zilberman Dep. 24-25.
378
Id. at 25. Zilberman‘s concern about bias related to the fact that the other
employees all reported to Morelli as CEO and thus might fear losing their jobs.
379
Id. at 30-33; JX 291 (―Engagement Agreement‖).
113
contended that she initiated it.380 Solomon did not find Morelli to be a credible
witness.381 Similarly, I did not find credible many of Morelli‘s statements regarding
Geller.
It is not necessary to detail every aspect of the investigation. Rather, I note several
salient points. Optimis has a specific sexual harassment training program for supervisors.
Morelli received a ―certificate of completion,‖ but he never completed the training. He
had his assistant, Eastman, complete it for him.382 Unburdened by such training, Morelli
testified that it ―did not occur to me at that time‖ that receiving oral sex from a
subordinate in his bedroom-office, while she was performing work duties, created a risk
of sexual harassment.383
Morelli‘s behavior during the investigation also casts doubt on his credibility. On
or about October 3, 2012, Morelli met for about an hour and a half in his bedroom-office
with the Company‘s General Counsel, Brys, and CFO, Horne. According to Brys,
380
Tr. 404 (Morelli: denying he ever initiated the sex and testifying that, ―It wasn‘t
ever different. It was Tina Geller who initiated it.‖); Solomon Dep. 40.
381
Solomon Dep. 46-48; id. at 47 (―It seems more he was trying to build an
explanation for the things as the interview went on . . . .‖); JX 401.0032
[hereinafter ―Solomon Report‖]. There is a dispute among the parties as to the
usage of the Solomon Report. I do not rely on it for the truth of the matter
asserted, but I conclude that the report is not hearsay when used for another
purpose, such as showing the apparent thoroughness of the investigation or the
statements upon which the Board relied when it met on October 20, 2012. See
801(c). Therefore, I overrule Plaintiffs‘ objection to the use of the Solomon
Report.
382
Tr. 485-87 (Morelli); Eastman Dep. 50-53.
383
Tr. 476.
114
Morelli ―told me to call Ms. Geller and tell her to withdraw the claim‖ because it would
be expensive and bad for the Company.384 Horne also recalls Morelli asking them to
convince Geller to drop her claims.385 Brys and Horne told Zilberman about this meeting
and Zilberman advised them that it would not serve the Company well if they pressured
Geller to drop the claim.386
In addition, Morelli met with Solomon on October 10 in person and then spoke
with her by phone on October 17. According to Morelli, Solomon was being rushed to
complete her report, and although he had lots of evidence to support his claims that he
wanted to provide her, she did not provide him sufficient time to do so. This is contrary
to the overwhelming weight of the evidence. The only witness who asserts that Solomon
was rushed is Morelli.387 I find Morelli‘s testimony on this point unreliable, in part
because, in my view, it reflects his mistaken perception that Solomon was part of, or
actively being manipulated by, a conspiracy out to get him, which included at least
seventeen people.388 Nor did Morelli ever provide to Solomon any of the additional
384
Brys Dep. 20.
385
Tr. 1348-51 (Horne).
386
Zilberman Dep. 60-62.
387
Tr. 406-10.
388
Id. at 605-06. This conspiratorial mindset surfaced repeatedly throughout
Morelli‘s testimony. E.g., id. at 515-16 (―I mean, it was a bittersweet situation e-
mailing Nancy Kreile, who was working closely with John Waite, who I suspected
might be involved. I mean, even e-mailing the general counsel was, in hindsight, a
mistake, because she just took my e-mails and immediately forwarded them to
John Waite, as Nancy Kreile did.‖); id. at 613 (―So was he hired—was Zilberman
115
exonerating information he allegedly had. Moreover, Solomon repeatedly denied being
rushed, and Zilberman did not perceive her to be rushed.389
As part of his defensive strategy, Morelli also filed his own sexual harassment
complaint against Geller on October 17.390 Indeed, he anticipated making that claim as
early as October 11, one day after his first meeting with Solomon.391 I conclude that this
counter-complaint was part of Morelli‘s overall defensive strategy with the objective of
maintaining his position as Optimis‘ CEO, because he thought ―it was the best hope for
the company for [him] to remain CEO.‖392
Plaintiffs also contend that Horne‘s interviews with Solomon evidence a
conspiracy. At his deposition in May and July 2014, Horne testified that he and Morelli
hired before PLIS was notified? I don‘t know that we know that conclusively. It
was a very, very unusual set of circumstances that led to Mr. Zilberman and Ms.
Solomon either appointing themselves or being appointed by the insurance
company.‖).
389
Solomon Dep. 23-24; JX 402 (sworn declaration of Solomon stating that she was
not rushed and that Morelli‘s claim to the contrary was a fabrication); Zilberman
Dep. 64-66, 80-81, 92-96. Plaintiffs‘ counsel also attempted to ―prove‖ Solomon
was rushed or manipulated in a lengthy and contentious portion of her deposition
that reviewed virtually every one of a large number of typos and purported
grammatical errors in her report. This questioning does show Solomon could use
a proofreader and would benefit from reading over her work more carefully. It
does not negate the thoroughness of the Solomon Report, however. The findings
of that report are consistent with the testimony of everyone except Morelli.
390
JX 376.
391
JX 337 (10/12/12 email from Morelli to Kreile referencing a conversation with
Brys the previous day).
392
Tr. 479.
116
had a ―great working relationship‖ and that he considered Morelli ―a good friend.‖393
But, Horne never revealed to Morelli that since 2010 Horne had been involved with
Morelli‘s former wife. In addition, Plaintiffs point out that Horne, referring to Morelli,
told Solomon that ―[P]ersonally I hate the mother f-cker‖394 and that he asked Solomon
not to include the fact that he was involved with Doherty, and she complied.395 Plaintiffs
argue that this and other evidence shows that Horne is a liar and has a motive to
undermine Morelli.
I agree that Horne‘s contradictory testimony is troubling, but I do not see the
situation to be as clear cut as Plaintiffs. Solomon‘s interview notes also reveal that Horne
stated that he ―would never [have] assumed Alan would have been capable of anything
[Geller had] accused him of.‖396 At trial, Horne attributed his stated hatred of Morelli to
his belief that the sexual harassment allegations were hurting the Company: ―We spent
six years building a company, and I saw it all crumbling, and I was incredibly upset at
Mr. Morelli at that time.‖397 Solomon ―did not feel in any way that [Horne] was trying to
bury Mr. Morelli.‖398 And, by telling Solomon about his relationship with Doherty,
393
Id. at 1445 (Horne testifying about his deposition statements).
394
JX 54.0024; Tr. 1446 (Horne).
395
Tr. 1455-56 (Horne).
396
JX 54.0020; Tr. 1448 (Horne).
397
Tr. 1447 (Horne).
398
Solomon Dep. 50.
117
Horne at least revealed to her a bias he may have had. Taking account of all the evidence
regarding Horne, I do not consider it appropriate to disregard all of his testimony as not
credible, but I agree that it is important to examine anything he said with a degree of
skepticism.
Plaintiffs also contend the investigation was tainted because Geller communicated
with Defendants several times during the investigation, despite being told by Solomon
not to talk to anyone about it. Although this allegedly shows that Geller was in cahoots
with Defendants, I do not find these contacts to be material.
Geller called Waite—the ranking officer at the Company aside from Morelli and
the person to whom Geller first reported the allegations in September 2012—numerous
times during the course of the investigation. Geller‘s phone records indicate that she and
Waite had thirty-seven phone calls totaling more than three hours during the relevant
period.399 In one of his shakiest moments on the stand, Waite testified that he only
recalled two phone calls.400 Geller testified that she repeatedly called Waite and others
because she was looking for reassurance. She was ―in a highly emotional state and really
scared for [her] life‖ because she was afraid of what Morelli was going to do to her.401
399
JX 278.
400
Tr. 1097-108. Waite also did not disclose any calls beyond those two in his
interrogatory responses.
401
Geller Dep. 307. This testimony, which I find credible, is consistent with
Solomon‘s notes, which are replete with statements that Geller was afraid of
Morelli. JX 54.0004 (―‗john [Waite] promised this would be quiet that we
wouldn‘t be approaching Alan. Otherwise I would have never met with you. So if
118
The phone records show that many of the calls were only one or two minutes long,
suggesting missed calls or voicemails, which I exclude, and the overwhelming majority
were from Geller to Waite. There were nine calls of five minutes or longer between
September 19 and October 2.402 On September 24, the next business day after Geller told
Waite about Morelli‘s inappropriate touching, Geller had two calls with Waite each in
excess of thirty minutes. On September 25, Geller had a five-minute call and a six-
minute call with Waite. Geller had her first interview with Solomon on September 27
and talked with Waite for thirteen minutes that day.
This pattern of phone calls comports with Geller being concerned about what was
going to happen to her. During the same time period, she also called Horne, who
testified: ―She was scared of Alan. She was scared of retaliation. She was scared about
her job. She was scared about Mo‘s [her husband‘s] job.‖403
Plaintiffs emphasize that Geller talked to Solomon, but did not tell her everything,
and then scheduled another interview to tell her the entire story. After her first interview,
this comes out and he finds out and I get screwed in all this…‘ she starts to cry
again.‖); id. at .0005 (―‗I don‘t know what he‘ll do but I know he‘ll go ape sh-t‘‖);
id. at .0006 (―she is quiet and then whispers ‗He can‘t find out.‘‖). Numerous
additional examples follow in the next nine pages of notes. D.R.E. 801(d)(1)(B);
D.R.E. 803(2)-(3); D.R.E. 807.
402
JX 278. One of the calls, on October 1, is seven minutes long and appears to be
call-waiting. I excluded that call from my tabulations.
403
Tr. 1346. This is consistent with Geller‘s testimony. Geller Dep. 100-01.
119
Geller, as noted, talked to several people,404 including Gunn, who encouraged her to tell
the whole story, whatever it may be.405 Geller soon decided to schedule a second
interview with Solomon to tell her everything. Plaintiffs contend that this shows that
Waite and Horne, among others, either convinced Geller to change her story or were
telling Geller what to say.
Plaintiffs‘ argument is unpersuasive. Solomon‘s notes indicate that during the first
interview, Geller stated that Morelli touched her inappropriately and requested that Geller
provide physical therapy while he was naked under a sheet with a visible erection.
During the second interview, Geller added more detail and disclosed the oral sex.406
Accordingly, it is not true that Geller did an about face between the first and second
404
There were only three calls of any significance with Waite between the first and
second interviews: the thirteen-minute call on September 27 and calls of sixteen
and five minutes on October 1. JX 278.
405
Gunn Dep. 50-52, 95-96; Geller Dep. 316-17.
406
JX 54. Solomon‘s interview notes are not hearsay when used for this purpose.
Hearsay is ―a statement, other than one made by the declarant while testifying at
the trial or hearing, offered in evidence to prove the truth of the matter asserted.‖
D.R.E. 801(c). Here, I rely on the notes only because they indicate what Geller
said to Solomon. Delaware Rule of Evidence 801(c) tracks Federal Rule of
Evidence 801(c). In the comments to Federal Rule of Evidence 801, the advisory
committee noted: ―If the significance of an offered statement lies solely in the fact
that it was made, no issue is raised as to the truth of anything asserted, and the
statement is not hearsay.‖ F.R.E. 801 cmt. c (1972). To the extent there is a
double hearsay objection based on the fact that the interview notes represent an
out of court statement by Solomon that Geller made the statements Solomon
recorded, I hold that the notes qualify under the exception to the hearsay rules for
records of regularly conducted activity. See D.R.E. 803(c); Solomon Dep. 14-27,
67-68.
120
interviews on September 27 and October 2 and told two different stories or that the two
interviews are inconsistent on key points.407
At her deposition, Geller repeatedly denied that anyone encouraged her to bring
the allegations or told her what to say to Solomon.408 Overall, Geller‘s story is consistent
and cohesive: she became concerned after hearing that a new therapist would be going to
the Pacific Palisades clinic, meaning she could be working back in the Upper Bubble
with Morelli; in the course of discussing that concern with Waite, she told him something
about Morelli‘s prior behavior; Waite notified Kreile in HR, who began the investigative
process; Geller was interviewed once, was nervous, and presumably did not tell Solomon
the facts about which she was most embarrassed; because Geller remained afraid that
Morelli would find out and punish her, she called others at the Company to seek solace,
and then, after talking to Gunn, she resolved to tell Solomon the rest of the story, which
she did.
407
Solomon testified that it is not unusual in sexual harassment investigations for the
witnesses to be reluctant during interviews. Solomon Dep. 42.
408
Geller Dep. 298 (―Mr. Waite or Mr. Horne or Mr. Smith or Mr. Atkins never, ever
had me—hinted to me that I should bring allegations against Alan, ever.‖); id. at
310 (―It is my testimony that Mr. Waite never gave me any incentive at all to ever
file a harassment case or to tell Nancy [Solomon] anything that he wanted me to
tell her.‖); id. at 314 (―I didn‘t know what was going on. Nobody asked me to file
a harassment case. Nobody asked me to tell Nancy Solomon anything. Nobody
asked me to do anything. I just want to know what is going to happen to me. I
didn‘t give a sh-t about what was happening to the company at that point. It
wasn‘t my concern.‖).
121
Plaintiffs, at trial, essentially attempted to prove the sexual harassment allegations
were false or, at least, that the sexual contact between Geller and Morelli was consensual
by portraying Geller as promiscuous and putting on the stand David Hwang, with whom
she had an affair while working at Optimis.409 Hwang offered numerous hearsay
statements purportedly made by Geller that Plaintiffs have attempted to introduce into
evidence by arguing that they were statements against interest. I need not reach
Defendants‘ hearsay objections to these statements, however, because I do not find
credible Hwang‘s testimony with respect to Geller and Morelli. Hwang said that, when
he heard about the sexual harassment claim, he ―thought it was probably made up‖ and
that ―it was something that [Geller] was doing either to get money or to get what she
wants.‖410 Hwang reached these conclusions without knowing that Geller and Morelli
admittedly had engaged in sexual activity.411 Hwang testified that he knew Geller‘s
complaint was false, even before he began investigating it as a member of one of the
special investigative committees the Company formed after the abortive attempt to oust
Morelli.412 Thus, I find Hwang too biased against Geller to be credible on this issue.413
409
This affair occurred from March 2011 to October 2011. Tr. 162 (Hwang).
410
Id. at 189.
411
Id. at 251-52.
412
Id. at 262. Hwang‘s comments also support Defendants‘ contention that the
Company‘s investigative committees were looking for facts to support their own
pre-formed conclusions.
413
Hwang also filed with HR a vaguely worded complaint against Geller shortly after
Morelli‘s ouster. JX 544 (11/5/12 email from Hwang to Kreile). Hwang testified
122
K. Contingency Planning by the Optimis Executives
Plaintiffs make much of the fact that certain Optimis executives were engaging in
contingency planning in case Morelli was terminated as a result of the sexual harassment
investigation. Considering the seriousness of the allegations and Zilberman‘s emphasis
on the need to move quickly, I consider Defendants‘ actions to be reasonable.
Zilberman and Solomon were not the only attorneys involved with the sexual
harassment claims at this time. Following a conversation in which Zilberman indicated
that there could be a situation where PLIS‘s interests and the Company‘s interests
deviate, Brys, the Company‘s General Counsel, retained Tom Kaufman of the law firm
Sheppard Mullin to serve as outside counsel for Optimis. ―He was there to provide a
resource to the board of directors, to provide his recommendations and opinions to the
extent it was requested, whether or not Mr. Zilberman was capable of doing so, based on
any perceived conflict of interest on the part of Mr. Zilberman.‖414 According to Brys,
Kaufman‘s retention was not a reflection of dissatisfaction with Zilberman and ―to the
extent [she] ever sought advice from both counsel, they agreed.‖415
that he did not mention Geller by name because he did not like to think about her,
then or now. Tr. 241.
414
Brys Dep. 103. Because Brys is in separate litigation against the Company, she
has a potential bias, but having reviewed her deposition, I found her credible.
415
Id. at 104.
123
Throughout the process, Waite and Brys received periodic updates from
Zilberman.416 Horne received only one update. That occurred during the conversation in
which Horne and Brys discussed with Zilberman the meeting in which Morelli asked
Horne and Brys to convince Geller to withdraw the complaint.
Entering the week of October 14-20, the chronology becomes less clear.
Zilberman had advised Waite that a board meeting should be held promptly to discuss the
investigation and Solomon‘s report, which would be ready later in the week. 417 Waite
began setting up a board meeting, which eventually was scheduled for Saturday, October
20 (the ―October 20 Meeting‖). Zilberman did not think that was too soon.418
Two things needed to be done in preparation for the special meeting of the Board
on October 20. The first involved the Stockholders Agreement. The second was
dissemination of a notice for a special meeting.
Horne attended a meeting at some point before October 20 in which Waite or Brys
said that, based on the outcome of the investigation, Morelli may need to be fired. Horne
then pointed out that the Stockholders Agreement probably would need to be amended.
He reasoned that: ―If the board decided that Mr. Morelli needed to be removed as CEO,
416
Tr. 1072 (Waite).
417
Id. at 1073-75 (Waite).
418
Zilberman Dep. 90-91. Brys testified similarly: ―To my knowledge, at the advice
of Mr. Zilberman and Mr. Kaufman, who were acting as employment counsel for
the company, they recommended having the board of directors meeting based on a
very sensitive report as soon as possible.‖ Brys Dep. 166.
124
then if he had the ability to just turn around, appoint new board members and reappoint
himself as CEO, I think that would go against the spirit of what needed to be done.‖ 419
This led to the development of Amendment No. 2 to the Stockholders Agreement, but
Horne had no further involvement with that amendment.
Amendment No. 2 appears to have been drafted by Waite‘s personal counsel.420
Waite understood Amendment No. 2 to require a two-step process, in that he needed to
have it approved by the vote of the holders of a majority of Optimis‘ stock and have the
Board approve the amendment. According to Waite, in the days before the October 20
Meeting, he contacted other stockholders in the following manner:
I was very careful not to describe to them that this was
anything related to Mr. Morelli‘s sexual harassment
investigation. I simply told them that, as a stockholder, I was
interested in changing the provisions of the stockholders‘
agreement to put the control of . . . who‘s elected to the board
in the hands of the . . . broader shareholder base.421
This approach does not appear to satisfy Delaware law, but it is largely moot, because
Amendment No. 2 was vacated on or about March 21, 2013, in connection with the 225
Action.
A notice of the special meeting also had to be prepared. At this point, another
attorney, Allen Sussman, becomes important. Sussman is a partner at the law firm of
419
Tr. 1357-58; Brys Dep. 157.
420
Brys Dep. 150-52.
421
Tr. 1084; JX 411.
125
Loeb & Loeb in Los Angeles and practices corporate and securities law from a
transactional standpoint. He is a friend of Morelli and, at the time of the October 20
Meeting, he had represented Optimis for some time, was serving as Optimis‘ corporate
secretary, and previously had represented Morelli personally. Horne called Sussman on
October 7 and told him about the ongoing investigation.422 Sussman testified that he told
Horne that the Company was his client, but that he ―was not comfortable acting as the
company‘s counsel with respect to this matter because of [his] personal relationship with
Alan.‖423 Sussman allegedly made this clear to Waite and Brys as well.424 Nevertheless,
Sussman agreed to continue acting as corporate secretary. I find as a fact that at least
Waite and Brys were confused about Sussman‘s role and attempted to rely on him to a
limited extent for legal advice, which resulted in a faulty notice for the special meeting.
The insufficiency of the notice was one of the reasons Morelli succeeded in settling the
225 Action on favorable terms.425
Brys and Waite, the two employees involved in preparing for the October 20
Meeting, believed Sussman could provide them some legal advice. According to Brys,
422
Tr. 810-12 (Sussman).
423
Id. at 813.
424
Id. at 815-16.
425
JX 454 (special meeting notice); JX 684 (Settlement of 225 Action). This problem
might have been avoided if Sussman had advised the Company in writing about
the scope of his representation. See Cal. R. of Prof‘l Conduct R. 3-310. Sussman
admitted that he did not inform Waite, Brys, Horne, or anyone else in writing of
the conflict or the scope of his representation. Sussman denied that he was
providing legal advice. Tr. 857-59.
126
Sussman advised her that ―he could review documents and advise as to whether or not the
documents that were presented complied with the Delaware law and the company
documents already to date,‖ but that ―any actions taken subsequently that would be
involved in the termination of Mr. Morelli, he did not feel like he could render advice
on.‖426 Waite initially understood that Sussman was providing legal advice to the
Company, but during the week before the meeting he told Waite to get another
attorney.427 As discussed below, Waite did hire another attorney and explained in a
November 4, 2012 email that the attorney was hired ―specifically because Allen Sussman
informed Laura [Brys] and I that he would not be able to provide any advice to the
company because of his conflict with his friendship with Morelli.‖428
It is unclear from the contemporaneous documents when Waite concluded that
Sussman was conflicted, but the emails comport with Brys‘s understanding that Sussman
could provide limited legal advice. On October 15, Brys sent emails to Sussman
attaching for his review the Bylaws, the existing Stockholders Agreement, Amendment
No. 1, and the draft notice of the special meeting. The communications are labeled
―confidential attorney-client communication and attorney work product‖ and specifically
ask Sussman if he has any revisions or questions.429 This evidence undermines Plaintiffs‘
426
Brys Dep. 181; see also id. at 115-16.
427
Tr. 1076 (Waite).
428
JX 539.0001.
429
JX 362.
127
position and Sussman‘s testimony that Waite and Brys understood Sussman was
completely conflicted and unable to help them prepare for the meeting.430 Plaintiffs have
pointed to no evidence that Sussman attempted to dispel Brys‘s belief that he would
review the corporate documents she was sending him. In the end, Waite sent out a Notice
of a Special Meeting of the Board of Directors on October 18 scheduling the October 20
Meeting.431 That Notice lacked an agenda of the topics to be covered at the meeting and,
therefore, was defective.432
Brys, who was pregnant, was admitted to the hospital by the evening of October
18. That same day, Waite ―literally pulled David Robbins‘ name out of the newspaper,‖
called him at his firm at the time, Bingham McCutchen, and begged him to represent the
Company. Robbins apparently agreed to get the Company through the October 20
430
See also JX 358 (10/16/12 email from Brys to Sussman attaching Certificate of
Incorporation); JX 365 (10/17/12 email from Waite to Sussman attaching
Amendment No. 2 to the Stockholders Agreement and asking Sussman to ―review
and provide me with any feedback about whether you see any issues‖).
431
JX 392 (10/18/12 email from Waite to Board).
432
After listening to Sussman‘s testimony at trial, Waite implausibly testified that he
specifically asked Sussman whether he needed an agenda for the meeting notice
and that Sussman said ―I checked Delaware law. It‘s not required to have an
agenda.‖ Tr. 1076. Based on all the evidence, I have disregarded this aspect of
Waite‘s testimony as unreliable. See id. at 1077.
128
Meeting.433 It appears from the record that Robbins‘s role was to attend the October 20
Meeting and represent a Special Committee of the Board (which did not yet exist).434
L. The October 20, 2012 Meeting
The October 20 Meeting bears few of the hallmarks of good governance. Brys,
the General Counsel, was still in the hospital and did not attend the meeting. Sussman,
the conflicted outside attorney, attended and acted as Corporate Secretary. Zilberman
participated and presented Solomon‘s report, among other things. Kaufman was present,
representing the Company. Robbins also attended the meeting in the role described
above.
The Board then consisted of nine directors: Waite, Atkins, Smith, Ashraf
Abdelhamid, Morelli, Brian Wing, Maureen Fahey, Terrence O‘Keefe, and Godges. The
latter five individuals were Morelli appointees. The Director Defendants served, in part,
by virtue of their own appointment rights under the Stockholders Agreement.
Abdelhamid also had a contractual right to serve on the Board as a result of Optimis‘
acquisition of his physical therapy practice.
The October 20 Meeting was held at the offices of Sussman‘s firm. He arrived
around 11:30 am. Eight directors attended in person; O‘Keefe participated by telephone.
433
Id. at 1077-78 (Waite).
434
JX 398. Robbins‘s October 18 engagement letter is addressed to Godges as the
leader of the Special Committee. The letter was signed, however, by John Waite
on October 31. It states that Robbins would represent ―the Special Committee
only‖ for the purpose of assisting in the ―evaluation, review and possible
termination of Alan Morelli.‖ Id. at .0001.
129
Robbins and Kaufman were present from the beginning, as was Tim Miller, Waite‘s
personal attorney.435 The full board had assembled, with Waite leading the meeting, and
it was convened once Morelli arrived.436 Although he did not come with his own
counsel, Morelli immediately denied knowing what the meeting was about because there
was no agenda with the notice. He then moved to adjourn the meeting so that he could
get his personal counsel. That motion failed by a divided vote.437 I find that Morelli, a
former corporate litigation partner, knew the purpose of the meeting in advance,438 and
took advantage of the defective notice to create a defense for himself in future litigation.
A series of initial objections were made. Fahey, who apparently had served on
―Fortune 25‖ corporate boards before, complained that the Board should have been
contacted earlier and that an independent committee should have investigated the
435
Tr. 817-20 (Sussman).
436
Id. at 417 (Morelli); id. at 1079-80 (Waite).
437
Id. at 416-18 (Morelli); id. at 821-23 (Sussman); id. at 1080 (Waite).
438
Morelli‘s actions in the days immediately preceding the October 20 Meeting,
including the fact that he had been interviewed for several hours by Solomon,
show that he knew about the meeting and its purpose. In an email to Brys the day
before the meeting notice was sent, Morelli wrote: ―To hold a Board of Directors
meeting this Saturday would preclude me from seeking to defend the false claims
that Tina Geller has alleged against me.‖ JX 372.0001. Similarly, on October 17,
Morelli emailed Brian Wing asking to speak with him and bring him ―up to speed
on some developments.‖ JX 403.0002. The next day, Morelli emailed Wing:
―Thank you again for catching up with me, Brian. I would greatly appreciate any
assistance you are willing to provide.‖ Morelli then provided Wing with the
phone numbers or contact information for all the other directors, except Atkins.
Morelli concluded his email: ―Also, don‘t think for one minute that this power
struggle is going to prevent us from doing our swim to Africa next summer. . . .‖
JX 403.0001.
130
complaint.439 Wing mistakenly objected that the investigator was not independent
because she was hired by Waite.440 The Board then created an ad hoc committee,
comprised of everyone except Morelli, to discuss the Solomon Report and the sexual
harassment allegations in a different room (the ―Ad Hoc Committee‖).441
According to Morelli, before the Board entered the Ad Hoc Committee, he tried to
circulate a written consent ―to replace members of the board pursuant to the stockholders
agreement.‖442 This testimony is incorrect. First, it is inconsistent with Morelli‘s
repeated claim that he had no idea why the meeting was occurring.443 Giving Morelli the
benefit of the doubt, he may have brought the written consents as a fall-back position, if
his lack of notice ploy failed. In that case, he waited too long to raise the consents,
because the record indicates that no one understood him to be talking about written
consents before the Ad Hoc Committee convened.444
439
Tr. 823-24 (Sussman); JX 431.0001.
440
Tr. 824 (Sussman); JX 431.0001.
441
Tr. 420-21 (Morelli); id. at 825-29 (Sussman); id. at 1080 (Waite) (―And this
whole process was led on the advice of Lonny Zilberman of how this should be
run. He stated he told me that Mr. Morelli was not allowed to be in the
subcommittee.‖). This Ad Hoc Committee appears to correspond to the special
committee that Robbins undertook to represent.
442
Id. at 420.
443
That Morelli made that claim is borne out by the testimony of the Director
Defendants. Id. at 1080 (Waite); id. at 1480 (Atkins).
444
Sussman testified that Morelli was saying something about the Stockholders
Agreement as the Board broke to convene the Ad Hoc Committee meeting, but
Sussman ―didn‘t have the details of exactly what he was saying.‖ Id. at 827.
131
With Morelli excluded, the Ad Hoc Committee began discussing the results of
the sexual harassment investigation. Zilberman led the discussion and reviewed the
Solomon Report with the Committee. He described his job as being to ―report and
summarize the investigation, the process, and the results or findings and then give my
advice.‖445 He summarized the investigation and the findings, provided the Committee
members with a copy of the Solomon Report and the Solomon Declaration, and provided
three recommendations to the Board: (1) move Optimis‘ business out of Morelli‘s house;
(2) terminate Morelli as CEO; and (3) aggressively and quickly negotiate a settlement
with Geller.446 Zilberman recommended that Morelli be fired because, in his professional
opinion, based on Morelli‘s admissions and the findings of the investigator, ―nothing
short of termination was the appropriate remedial measure.‖447 Zilberman stated that not
terminating Morelli seriously could compromise the Company‘s ability to defend a
Also, Sussman‘s contemporaneous notes, which are fairly detailed, lack any
indication that Morelli attempted to circulate a written consent during the first part
of the Board meeting or that Morelli even said anything about the Stockholders
Agreement. JX 431.0001-.0002. Consistent with the fact that Morelli later
attempted to circulate a written consent, Sussman‘s notes reflect that effort, id. at
.0006, and are consistent with the rest of the testimony, as discussed infra.
445
Zilberman Dep. 106.
446
Id. at 109-13.
447
Id. at 113.
132
subsequent sexual harassment suit by Geller.448 After providing this advice, Zilberman
gave his number to the Ad Hoc Committee and left the meeting.
Zilberman‘s account is consistent with Sussman‘s recollection and notes and the
testimony of Waite, Smith, and Atkins.449 Both Smith and Waite recalled that either
Zilberman or Robbins made a comment to the effect that this was either ―the most clear-
cut case for termination of a CEO that I‘ve seen in my entire career‖450 or ―the worst case
of sexual harassment I‘ve seen.‖451
Under Robbins‘s guidance, the Ad Hoc Committee then debated the presentation
by Zilberman.452 Kaufman‘s role in this process is unclear, but he apparently seconded
Zilberman‘s advice.453 Wing attempted to defend Morelli and wanted to put him on a
leave of absence, but Robbins advised that the Board basically had no choice but to fire
Morelli.454 At one point, the Ad Hoc Committee also discussed Optimis‘ excessive
expenses, which included massages, treadmills, landscaping, and a housekeeper at the
448
Id. at 113-16. Zilberman also gave other real world examples of CEOs being
terminated for sexual misconduct. Id. at 117-18.
449
Tr. 829-35 (Sussman); JX 431.0002-.0004; Tr. 1081-82 (Waite); id. at 1282-83
(Smith); id. at 1481-83 (Atkins).
450
Tr. 1082 (Waite). Sussman‘s notes reference the same comment. Id. at 836
(Sussman); JX 431.0005.
451
Tr. 1283 (Smith).
452
Id. at 836, 839 (Sussman).
453
Id. at 1483 (Atkins).
454
Id. at 836 (Sussman).
133
Upper Bubble.455 Ultimately, the Committee passed a series of motions to: (1) appoint
Godges the chairman of the Committee (7-0-1, Wing abstained); (2) approve the
engagement of Bingham McCutchen and hire Robbins (8-0); (3) recommend the full
Board terminate Morelli (7-1, Wing abstained or opposed); and (4) appoint Waite as
interim CEO with no additional compensation (8-0).456
The full Board then reconvened. Wing went downstairs to get Morelli and came
back without him, because Morelli apparently was consulting with his lawyer. After
waiting a few minutes, the Board reconvened. Waite then moved to approve Amendment
No. 2. Although Wing objected to proceeding without Morelli, the Board proceeded and
approved the amendment 7-1-0, with Wing opposed and Morelli not present.457 Sussman
understood Amendment No. 2 to strip Morelli of his ability to appoint a majority of the
Board.458 The amendment also stripped the Director Defendants and Abdelhamid of their
Board-appointment rights.459 Smith and Atkins understood that Amendment No. 2 was
necessary so that Morelli could not undo the Board‘s actions and re-appoint himself,
which would endanger the Company in a subsequent sexual harassment lawsuit.460
455
Id. at 837-38 (Sussman).
456
Id. at 840-42 (Sussman); JX 431.0005.
457
Tr. 843-47 (Sussman).
458
Id. at 846.
459
Id. at 1085 (Waite).
460
Id. at 1283-85 (Smith); id. at 1483-84 (Atkins).
134
When he returned to the Board meeting, Morelli raised numerous objections and
attempted to circulate written consents to remove all of the Board members he had
appointed; Sussman, however, told him it was too late.461 Robbins then read portions of
the Solomon Report aloud and the full Board voted to terminate Morelli, with Wing again
not voting or voting against and Morelli not voting. A series of other pre-prepared
motions were considered as well.462
M. Morelli’s Shadow Board and the Section 225 Action
Soon after the meeting, Sussman met with Wing, Morelli‘s supporter on the
Board, to fill in his (Sussman‘s) notes.463 Sussman also had frequent contacts with
Morelli in the aftermath of the meeting. One of the more perplexing documents in the
record, JX 432, is a draft of Sussman‘s contemporaneous notes being converted into a
more formal document. On the second and third pages, the draft switches to Morelli
writing in the first person. Either Sussman gave Morelli the October 20 Meeting notes
and let him embellish them, or Sussman incorporated Morelli‘s first-person notes
wholesale.
Morelli rapidly moved to reassert control over the Company. Sometime shortly
after the October 20 Meeting, Doherty told Morelli that she had been in a relationship
461
Id. at 424-27 (Morelli); id. at 847-48 (Sussman); id. at 1086 (Waite); id. at 1287
(Smith); id. at 1484 (Atkins); JX 431.0006 (―Alan handed out written consent and
request for electing 5 directors.‖).
462
Tr. 849-50 (Sussman).
463
Id. at 877. Interestingly, Sussman did not compare notes with anyone else.
135
with Horne.464 Morelli noticed a special meeting of the Board on October 23.465 Before
that, Morelli removed Fahey, O‘Keefe, and Godges—all of whom voted against him—
and replaced them with Bert Camp, Larry O‘Shea, and Scott Schroeder. In a trial full of
questionable testimony, Morelli astonishingly denied that he removed Fahey, O‘Keefe,
and Godges because they voted to terminate him, but he offered no other explanation for
that action.466 Morelli‘s reconstituted Board met on October 25. At this meeting, Morelli
―suggested that [the board] investigate this purported claim of sexual harassment, which
made no sense, and then . . . investigate the circumstances surrounding this coup attempt
five days earlier.‖467 Thereafter, a special committee was created that included Hwang
and others, who spent the next two years reviewing internal Company documents and
emails.468
Litigation followed, first in California, which was voluntarily dismissed, and then
in Delaware. Morelli filed the 225 Action on November 1, 2012, against Waite, Godges,
O‘Keefe, and Fahey. This Court entered a status quo order in that action on December
464
Tr. 1320 (Horne).
465
JX 454.
466
Tr. 599-601. Morelli also denied that he controlled the Board, despite the fact that
he is the largest Initial Stockholder and the Initial Stockholders had the right to
appoint five of the nine Board members. Id. at 592, 599. These sorts of
statements undermined Morelli‘s credibility.
467
Id. at 436.
468
Id. at 216-17, 223 (Hwang). If Hwang‘s timeline is accurate, the special
committee continued to investigate Morelli‘s termination until shortly after the
filing of the Complaint in this action on August 5, 2013.
136
27, 2012. As a part of the 225 Action, the Company‘s computers were imaged to
preserve documents.
N. Suspicious Post-October 20 Activities
In support of their conspiracy theory, Plaintiffs emphasize the Director
Defendants‘ treatment of Geller after Morelli was ousted on October 20. The evidence
indicates that the Pacific Palisades clinic was the worst-performing clinic in the Company
and that Geller was not a great employee.469 The Pacific Palisades clinic, however, was a
testing ground for OptimisSport, so that clinic is not exactly comparable to the others.
Regardless, financially, the Pacific Palisades clinic performed poorly. In November
2012, Geller received a pay raise that was approved by Waite to equalize her salary with
that of other clinical directors.470 Plaintiffs contend that raise was payment for Geller‘s
role in the conspiracy.
Plaintiffs also note that Geller missed an in-house residency exam on September
20, 2012, but later received permission to join the remediation program and complete the
residency.471 Waite testified that Geller‘s clinic, being an unusual setup, had low patient
volume, which made it difficult for her to complete the number of clinical hours required
for the residency, and that Godges, Geller‘s mentor, recommended she be allowed to
469
Id. at 1116 (Waite).
470
Id. at 1131-32, 1180-81 (Waite). Kreile Dep. 172-76; JX 594 (11/28/12 email
from Kreile to Waite: pointing out that Geller makes $5 to $7 an hour less than
others).
471
Tr. 1130 (Waite). At least one other Optimis physical therapist had been offered
remediation. Id. at 1182 (Waite).
137
remediate.472 Additionally, a September 21, 2012 email from Kreile to Waite suggested
that dropping Geller from the residency program would be a bad idea based on her
allegations.473
O. Terminations, Resignations, and Lawsuits
Following the October 20 Meeting, Waite controlled Optimis in terms of day-to-
day operations, but only for a short while. On December 27, 2012, this Court entered a
status quo order in the 225 Action restoring Optimis, in part, to the conditions that existed
before the October 20 Meeting: Morelli continued as CEO; Waite remained COO; and
the Board consisted of the same nine members as on October 20. But, the status quo
order also required the appointment of an Interim Chief Administrative Officer, a role
filled by James Patton, who was granted ―full authority to act for the Company and who
shall be responsible for running the Company on a day-to-day basis.‖474 The order placed
restrictions on transactions and activities out of the ordinary course of business. Thus, for
all practical purposes, control of the Company during this time was split between Waite
and Morelli as any deviations from the status quo order required consent of both parties.
The 225 Action settled on March 21, 2013, and Amendment No. 2 was
invalidated. Morelli returned to power as CEO. The parties to the 225 Action agreed to
472
Id. at 1130, 1182 (Waite); see also id. at 1277-78 (Atkins: describing remediation
program and Geller‘s clinic).
473
JX 284.
474
Status Quo Order, Morelli v. Waite, C.A. No. 8001-VCP, D.I. 31 ¶ 3 (Dec. 27,
2012). The Status Quo Order was amended slightly on January 17, 2013. Id. at
D.I. 36. Another amendment followed on March 8, 2013. Id. at D.I. 60.
138
form a special committee comprised of Wing and Abdelhamid to investigate the
circumstances leading to the October 20 Action (the ―225 Committee‖). The relation of
the 225 Committee to Morelli‘s separate investigative committee (the ―Special
Committee‖) is unclear, but every member of the Special Committee was appointed to
the Board by Morelli, making its independence and neutrality highly questionable.
Neither the 225 Committee nor the Special Committee has issued a report of its findings.
On March 22, 2013, PLIS denied coverage on Geller‘s sexual harassment claims.
On March 25, the Board—including Horne‘s alleged co-conspirators, the Director
Defendants—voted to remove all authority from Horne.475 Geller commenced the first of
her lawsuits on March 26, 2013, by filing a complaint with the Department of Fair
Employment & Housing.476 On April 10, Geller filed a suit for sexual harassment in the
Superior Court of Los Angeles.477 The Board formally suspended Horne on April 16,
2013, and officially terminated him on May 10, 2013. Shortly before he was terminated,
Horne deleted his personal email account from his computer, as discussed in Section II.A
supra.
The financial condition of the Company in early 2013 bears noting. At various
points in this litigation, Plaintiffs have accused Defendants of attempting to drive the
Company into bankruptcy. The evidence indicates that, as of year-end 2012 and first-
475
JX 699.0009.
476
JX 703.
477
JX 726.
139
quarter 2013, the Company‘s cash position had declined to roughly $600,000 and it faced
a risk of running out of funds.478 Accordingly, the Company was looking for financing
and was negotiating with B of I toward that end.
On June 25, 2013, the same day the B of I loan was supposed to close, the Director
Defendants resigned from the Board, and Waite resigned as COO. In a letter to the
Board, they stated that the corporate structure of Rancho violated California law—
because it was a professional corporation—and they listed pages of alleged misdeeds and
incidents of mismanagement by Morelli.479 The next day the Director Defendants filed
an action in California seeking to rescind the 2007 Rancho transaction (the ―Rescission
Action‖).480 On July 1, 2013, the Director Defendants were removed from the Rancho
Board. Plaintiffs deride the Rescission Action as bad faith litigation, but, in its wake and
on the same day, July 1, they restructured Optimis by assigning Rancho to Edwin
Tinoco.481 This restructuring seemingly cured the defect complained of in the Rescission
Action. As a result of the assignment, however, Optimis no longer wholly owns Rancho.
Instead, it now receives 55 percent of Rancho‘s revenues.482
478
Id. at 1224-25 (Olsen); id. at 1382-83 (Horne); JX 682 (3/5/13 email from Horne
to the Board and others: laying out financial concerns and basically attributing the
Company‘s problems to Morelli).
479
JX 784.
480
JX 790.
481
JX 800.
482
Id. at .0014.
140
Tinoco appears to be a friendly third party to Plaintiffs. Olsen described him as
inexperienced and not respected by the Rancho staff.483 Yet, four days into his job, on
July 5, 2013, Tinoco terminated the Director Defendants‘ employment with Rancho,
ending their successful careers as physical therapists there.484 Predictably, Morelli denied
having anything to do with the decision to terminate the Director Defendants.485 Smith
and Atkins, in particular, described the firing as extremely painful.486 On August 23,
2013, the Rescission Action was voluntarily dismissed without prejudice.487
P. History of This Lawsuit
This brings the story full circle to the events detailed in Section I. Plaintiffs filed
the Complaint in this action on August 5, 2013. The Board, now entirely under Morelli‘s
control, previously had authorized the Company to sue the Director Defendants. 488 On
August 16, I denied a motion to expedite. On October 17, 2013, the Company sued
Zilberman, his law firm, and Brys, as well as 100 unnamed Does, in a California action,
483
Tr. 1216-17.
484
JX 805.
485
Tr. 644. There is no evidence that Tinoco ever met any of the Director
Defendants. Id. at 1089 (Waite).
486
Id. at 1289 (Smith); id. at 1492-93 (Atkins).
487
JX 845.
488
JX 808. There is no evidence that the Company ever authorized suit against
Horne.
141
alleging malpractice and breaches of fiduciary duty.489 This case before me essentially
remained inactive until Plaintiffs finalized the Geller Settlement in December 2013, after
which discovery began in earnest. In May 2014, Plaintiffs settled with Fearon and
Levine. Continuing on the warpath, Optimis sued PLIS in California for bad faith breach
of insurance contract, negligent retention of counsel, and aiding and abetting breaches of
fiduciary duty.490
The Director Defendants and Horne separately moved for summary judgment in
August and September 2014. Plaintiffs responded to those motions by submitting the
affidavits of Fearon and Levine, who had not been identified as likely witnesses before
that point. The related briefing was extensive. Plaintiffs then moved to amend their
complaint and the parties briefed numerous motions in limine. When it became clear that
this case was not ready for trial, I rescheduled the trial, for the third time, to early
February 2015. On January 28, 2015, I denied the summary judgment motions. That
same day, I issued a Memorandum Opinion denying Plaintiffs‘ motion to amend and
granting in part Defendants‘ motion in limine to exclude certain undisclosed causes of
action.491 Although I concluded that the Complaint adequately pled a conspiracy, I held
that Plaintiffs‘ discovery conduct effectively amounted to a knowing concealment of the
489
JX 884. Brys previously had filed suit against the Company in February 2013 for
retaliation and wrongful termination. JX 43.
490
JX 948.
491
OptimisCorp v. Waite, 2015 WL 357675 (Del. Ch. Jan. 28, 2015).
142
scope of their claims. Based on that, and as a sanction for Plaintiffs‘ failure to
supplement their interrogatory responses under Rule 26(e)(1)(A), I ordered that: Fearon,
Levine, and Gunn would be excluded from any alleged conspiracy; claims relating to the
Fearon Rescission would be excluded from this case; and Plaintiffs would be barred from
attempting to impose liability on Defendants for any acts not then disclosed in the record.
I presided over a six-day trial from February 6-13, 2015. The parties extensively
briefed the issues and I heard post-trial argument on April 30, 2015.
III. STANDARD OF REVIEW
Plaintiffs have the burden of proving each element, including damages, of each of
their causes of action against each Defendant by a preponderance of the evidence.
―‗Proof by a preponderance of the evidence means proof that something is more likely
than not. It means that certain evidence, when compared to the evidence opposed to it,
has the more convincing force and makes you believe that something is more likely true
than not.‘‖492 By implication, the preponderance of the evidence standard also means that
if the evidence is in equipoise, Plaintiffs lose.
IV. PARTIES’ CONTENTIONS & STATE OF THE LITIGATION
Defendants‘ main contention is that they have done nothing wrong. The Director
Defendants contend that there is no conspiracy and that Plaintiffs‘ litigation strategy has
forced them to try to prove a negative. Once the conspiracy is eliminated, it is clear that
492
Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb. 18, 2010)
(quoting Del. Express Shuttle, Inc. v. Older, 2002 WL 31458243, at *17 (Del. Ch.
Oct. 23, 2002)).
143
Atkins and Smith had virtually no involvement in the most of the alleged fiduciary duty
breaches. The Director Defendants further argue that the duty of loyalty claims fail, that
the breach of contract claims are legally insufficient, and that the Rescission Action was a
good faith, privileged action that cannot give rise to liability. Defendant Horne denies
that he was involved in any wrongdoing. Horne repeatedly has emphasized that there is
no evidence the Board ever authorized suit against him. Horne argues, therefore, that this
lawsuit is a vendetta by Morelli against him because of his relationship with Morelli‘s
former wife, and that Morelli‘s pursuit of this lawsuit against him on behalf of Optimis,
but without Board authority, is an improper use of corporate funds for personal
purposes.493 Plaintiffs‘ primary claims against Horne at this point are for aiding and
abetting.
All Defendants strenuously have complained that the claims against them have
been a shifting target and impossible to defend against without enormous expense. They
contend that it was not until Plaintiffs filed their final post-trial brief that it was possible
to ascertain exactly what claims were being pursued in this litigation.
In addition to the sprawling conspiracy and the rescission claims I previously
excluded, Plaintiffs have abandoned their claims for at least the following alleged
wrongs: (1) Horne wrongfully disclosed confidential Company information to Doherty
for use in her divorce proceedings against Morelli; (2) Horne improperly set a $2 million
493
Based on my dismissal of the claims against Horne on the merits, I do not reach
the lack of authority to sue defense.
144
reserve for Geller‘s claims; (3) Horne, and possibly the Director Defendants, deliberately
attempted to drive the Company into bankruptcy so that he (or they) could buy its assets
at fire-sale prices; (4) the Director Defendants wrongfully extended their Employment
Agreements with Rancho; (5) the Director Defendants have unfairly competed with
Rancho by working at All-Star Physical Therapy; (6) the Director Defendants stole reams
of confidential information from Rancho shortly before they left; (7) the Director
Defendants wrongfully poached employees from Rancho; (8) Defendants tortiously
interfered with at least eight contracts or business opportunities in addition to the three
still at issue and discussed in this Opinion; and (9) duty of care violations by some or all
of Defendants. To the extent Plaintiffs contend that they have not abandoned these
claims, I hereby deem them waived.494
With only the slightest risk of oversimplification, a fair summary of Plaintiffs‘
position is that everything that has gone wrong at Optimis since at least 2012 is
Defendants‘ fault. Plaintiffs seek over $50 million in damages and an extension of the
Stockholders Agreement (and thus Morelli‘s control) for two additional years. According
to Plaintiffs, at least Horne, the Director Defendants, Rohlinger, and Godges conspired
for years to breach their fiduciary duties. Those breaches include conspiring to: oust
Morelli and seize control of the Company; sabotage the Company‘s strategic plan;
attempt to gain control of Optimis by ambush; try to steal Rancho; and interfere with the
494
Emerald P’rs v. Berlin, 2003 WL 21003437, at *43 & n.144 (Del. Ch. Apr. 28,
2003).
145
B of I financing. Plaintiffs also contend that Defendants breached the Stockholders
Agreement or the related implied covenant of good faith and fair dealing. Finally,
Plaintiffs assert that Defendants tortiously interfered with the DSC, the B of I financing,
and a potential relationship with the Preferred Therapy Provider Network. Horne is
alleged to have at least aided and abetted these wrongs.
V. LEGAL ANALYSIS
A. There Is No Conspiracy
Since the summary judgment briefing, Defendants have contended that the
conspiracy claims must be dismissed because they fail as a matter of law. Delaware law
requires an independent tort underlying a civil conspiracy. As such, the breach of
contract claims cannot serve as a predicate for the alleged civil conspiracy.495 This leaves
the breach of fiduciary duty claims and the tortious interference claims. While these
claims can form the basis of a civil conspiracy, Defendants contend that the law
precludes a conspiracy among fiduciaries to breach fiduciary duties.496 In support of their
position, Defendants cite cases such as Albert v. Alex. Brown Management Services, Inc.,
495
NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 35 (Del. Ch. 2009) (―A breach of
contract is not an underlying wrong that can give rise to a civil conspiracy
claim.‖); Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 892 (Del. Ch. 2009)
(―[U]nless the breach also constitutes an independent tort, a breach of contract
cannot constitute an underlying wrong on which a claim for civil conspiracy could
be based; similarly, a claim for civil conspiracy cannot be predicated on a breach
of the implied contractual covenant of good faith and fair dealing unless the
breach also constitutes an independent tort.‖) (emphasis original).
496
In relation to Optimis, the alleged conspirators here, namely, the Director
Defendants, Horne, Godges, and Rohlinger, all were directors or officers or, in the
case of Waite, both.
146
which states: ―[C]ivil conspiracy is vicarious liability. It holds a third party, not a
fiduciary, responsible for a violation of fiduciary duty.‖497
Defendants have the stronger argument on this issue. The case law on vicarious
liability and fiduciaries admittedly is less than crystalline. In the fiduciary duty context,
conspiracy is treated essentially as coterminous with aiding and abetting.498 It would
make little sense, therefore, particularly given the vicarious liability that attaches to
conspiracy,499 for a lower standard to apply to conspiracy than aiding and abetting. 500 In
497
2005 WL 2130607, at *11 (Del. Ch. Aug. 26, 2005). Plaintiffs, by contrast, cited
other cases that did not include the non-fiduciary requirement in their articulation
of the conspiracy standard. E.g., Nicolet, Inc. v. Nutt, 525 A.2d 146, 149-50 (Del.
1987) (―Plaintiffs must prove: (1) A confederation of two or more persons; (2) An
unlawful act done in furtherance of the conspiracy; and (3) Actual damage.‖).
Nicolet did not address the issue of a conspiracy among fiduciaries predicated on a
breach of fiduciary duties.
498
Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1038 (Del. Ch. 2006)
(―Indeed, our state courts have noted that in cases involving the internal affairs of
corporations, aiding and abetting claims represent a context-specific application of
civil conspiracy law.‖) (collecting cases); See also Gilbert v. El Paso Co., 490
A.2d 1050, 1057 (Del. Ch. 1984) (stating the elements of civil conspiracy as ―(1)
the existence of a fiduciary relationship, (2) a breach of the fiduciary‘s duty and
(3) knowing participation in that breach by the party not in direct fiduciary
relationship . . . [and (4)] damages resulting from the action of the conspiracy
parties‖), aff’d, 575 A.2d 1131 (Del. 1990).
499
Nicolet, 525 A.2d at 150 (―Under Delaware law, a conspirator is jointly and
severally liable for the acts of co-conspirators committed in furtherance of the
conspiracy.‖).
500
See Parfi Hldg. AB v. Mirror Image Internet, Inc., 794 A.2d 1211, 1238 (Del. Ch.
2001) (―Civil conspiracy thus provides a mechanism to impute liability to those
not a direct party to the underlying tort. As such, it can be viewed as parallel to
aiding and abetting.‖), rev’d on other grounds, 817 A.2d 149 (Del. 2002); see also
Allied Capital Corp., 910 A.2d at 1038-39 (―Like the test for civil conspiracy, the
147
those instances where a fiduciary takes actions that would amount to aiding and abetting
by a non-fiduciary, that conduct amounts to a direct breach of fiduciary duties.501
Presumably, the same would be true of a conspiracy: an actor‘s entry into a conspiracy to
facilitate another actor‘s breach of fiduciary duty to an entity to which the first actor
owed a fiduciary duty would itself be a breach of the first actor‘s fiduciary duties. This
conceptual complexity, coupled with the minimal additional benefit likely to result from
holding a fiduciary vicariously, rather than directly, liable for participating in another
fiduciary‘s breach of duty suggests one reason why it is highly doubtful that a conspiracy
of fiduciaries is a legally cognizable cause of action.502
Equally importantly, even if I were to recognize such a cause of action, Plaintiffs
have not satisfied their burden of proving that a conspiracy existed. All of the recitations
test for stating an aiding and abetting claim is a stringent one, turning on proof of
scienter—a plaintiff must prove: (1) the existence of a fiduciary relationship, (2) a
breach of the fiduciary‘s duty and (3) knowing participation in that breach by the
non-fiduciary.‖).
501
Gantler v. Stephens, 965 A.2d 695, 708-09 (Del. 2009); Higher Educ. Mgmt. Gp.,
Inc. v. Mathews, 2014 WL 5573325, at *13 & n.78 (Del. Ch. Nov. 3, 2014) (citing
Gantler for the proposition that any conduct of the CFO‘s ―rising to the level of
aiding and abetting would be a breach of his own fiduciary duties‖).
502
Cf. In re Nine Sys. Corp., 2014 WL 4383127, at *48 (Del. Ch. Sept. 4, 2014)
(allowing aiding and abetting claim to be pled in the alternative and holding: ―In
other words, the Plaintiffs are limited to one recovery—breach of fiduciary duty or
aiding and abetting‖). I do not read Microsoft Corp. v. Amphus, Inc., 2013 WL
5899003 (Del. Ch. Oct. 31, 2013), cited by Plaintiffs, as to the contrary. That
case, at the pleadings stage, allowed a conspiracy claim to proceed as against a
director, a separate entity operated by the director, and a third company. Id. at *2,
*15-16. As such, it did not involve the situation here, where all alleged co-
conspirators are fiduciaries.
148
of the elements of a conspiracy require a ―confederation.‖ Given the overlap with aiding
and abetting law in the context of alleged breaches of fiduciary duties, the confederation
requirement includes ―knowing participation‖ in the conspiracy. Although it is true that
there need not be an explicit agreement, plaintiffs still must prove knowing participation
in a conspiracy.503 They have failed to do so.
The main problem is that the evidence on which Plaintiffs chiefly rely simply does
not say what Plaintiffs argue it does. For example, Plaintiffs rely on the 2010 Emails as
evidence of the start of the conspiracy. The ―hostile takeover‖ line to which Plaintiffs
point is taken entirely out of context.504 Although the 2010 Emails indicate a group of
stockholders and directors coordinating their actions, the actions under discussion related
to concerns about one of the Company‘s primary products and the difficulty of airing
503
See Gilbert v. El Paso Co., 490 A.2d at 1057. Plaintiffs suggest that proof of a
conspiracy ―can be inferred from the behavior of the alleged conspirators.‖ POB
42. That may be true, but Plaintiffs must prove the conspiracy or facts such that
only a conspiracy could be inferred from them. Malpiede v. Townson, 780 A.2d
1075, 1097 (Del. 2001) (holding, in the analogous aiding and abetting context that:
―Knowing participation in a board‘s fiduciary breach requires that the third party
act with the knowledge that the conduct advocated or assisted constitutes such a
breach‖); id. at 1097 n.79 (―‗It may be that some circumstances will arise in which
the terms of the negotiated transaction themselves are so suspect as to permit, if
proven, an inference of knowledge of an intended breach of trust.‘‖) (quoting
Greenfield v. Tele-Commc’ns, Inc., 1989 WL 48738, 15 Del. J. Corp. L. 182, 188
(Del. Ch. May 10, 1989)). Accordingly, because Plaintiffs must prove every
element of their claims, they similarly must prove that an inference is appropriate
under the preponderance of the evidence standard.
504
JX 84.
149
such concerns in a public setting with a CEO like Morelli. Such discussions are a far cry
from the disloyal takeover plot Plaintiffs allege.
Absent the 2010 Emails, there is no evidence suggesting a concerted group effort
to take over the Company. Based on the facts that I have found, the most reasonable
interpretation of the evidence is that there were several independent groups of individuals
in the Company, each focused on OptimisPT, but not operating in a confederation to
commit a wrongful act. Neither Atkins nor Smith had much involvement with the day-
to-day operations of Optimis; they focused on running their Rancho clinics. To the
extent they had a unified goal with Waite, that goal was to improve the PT software and
achieve a liquidity event, an outcome that would be shared with all stockholders. Fearon
and Levine similarly sought to improve OptimisPT, to which their reputations were
linked, and also wanted their employment agreements extended and improved. Contrary
to pursuing some form of confederated action with one or more of Defendants, Fearon
and Levine struck out on their own because Waite could not address their concerns.
Horne only enters the alleged conspiracy because of an email that includes no text in
February 2012. That email was to Rohlinger. Similarly, Horne‘s telling Rohlinger about
Geller‘s allegations does not implicate him in a takeover plot. Even if Rohlinger did later
tell Waite, the only item tying Horne to the purported machinations by Waite is the
February 2012 emailing of the Stockholders Agreement. Defendants have proffered an
innocent, non-conspiracy explanation for that email that is supported by the
contemporaneous documents: disclosure of the Stockholders Agreement in the PPMs.
But, even if the purpose of the email was to enable Horne and Rohlinger to review
150
Morelli‘s rights under the Stockholders Agreement to appoint five of the nine Optimis
directors, as Plaintiffs imply, there is nothing improper about that.
Additionally, the June 2012 email from Waite to Rohlinger505 on which Plaintiffs
focus does nothing to implicate either Horne, Atkins, or Smith. The best reading of that
email is Waite venting. Indeed, the most direct communication that plausibly could
support a reading of an active plot to remove Morelli was written by Levine. 506 But,
Plaintiffs settled with Levine and I have precluded Plaintiffs from contending he is part of
the alleged conspiracy among Defendants. Moreover, even if he was part of the alleged
conspiracy, Waite and Rohlinger both advised Levine at the June 2012 Meeting not to
confront Morelli as Levine planned. Eventually, Fearon and Levine proceeded to contact
Morelli on their own, without any assistance from any of Defendants.
Levine‘s testimony about the June 2012 Meeting—which is temporally close to
the alleged fruition of the conspiracy—undermines the idea that there was a
confederation, particularly one dating back to late 2010. At trial, Levine explained his
frustration with the lack of progress on OptimisPT and on resolving his and Fearon‘s
complaints.507 The evidence does not support a finding that Defendants, or even Waite,
Rohlinger, and Levine, considered as a group, participated in a confederation to
undermine Morelli. Levine, Plaintiffs‘ witness, again is on point. He stated: ―And it just
505
JX 233.
506
JX 230.
507
Tr. 1572.
151
seemed like every time we got together it was nothing but a gripe session. We didn‘t
have a plan. We didn‘t have a strategy. We didn‘t have anything. And it just became
more and more frustrating.‖508 This lack of a plan, the absence of a strategy, and Waite‘s
inability to resolve Fearon and Levine‘s concerns is what led Fearon and Levine to send
their formal letter to Morelli threatening to leave the Company if their demands were not
met. Such evidence cuts sharply against a finding that Defendants were in a conspiracy
to breach their fiduciary duties by undermining Morelli and attempting to take control of
Optimis.
Waite is the most active of any of Defendants in the alleged conspiracy. His
activity, however, primarily involved assuaging others or advising others against doing
things. The evidence does not show a plot between him and the other Director
Defendants or any of the Director Defendants, Horne, and Rohlinger to commit the
wrongs Plaintiffs allege. Rather, the facts indicate several individuals both independently
and collectively discussing their complaints about Morelli. All of those individuals owed
fiduciary duties to Optimis and cared deeply about the success of Optimis; they may have
disliked Morelli and sincerely wanted him gone, not out of animus toward him (with the
possible exception of Defendant Horne), but instead based on a belief that he was doing a
poor job as CEO. As Defendants‘ briefing—and the preceding paragraphs—show, it is
difficult to ―disprove‖ a conspiracy. But, Plaintiffs have the burden of proof. They have
not shown that Defendants participated in a confederation that involved breaches of
508
Id. at 1573.
152
fiduciary duty. The main evidence upon which they rely—the 2010 Emails and the June
2012 Meeting—does not support their position. Moreover, the key piece of the puzzle,
Defendants allegedly having bribed and cajoled Geller to disclose her sexual harassment
complaints, was not proven.
In sum, I seriously question whether a cause of action exists under Delaware law
for a conspiracy among fiduciaries to breach a fiduciary duty. Even if such a cause of
action exists, however, Plaintiffs have not met their burden of proving the existence of
such a conspiracy in this case. As a result, I dismiss Plaintiffs‘ claim of conspiracy and
proceed to examine the alleged wrongs committed by the various Defendants separately.
B. The Duty of Loyalty
Plaintiffs‘ arguments raise basic questions as to what the duty of loyalty requires.
The classic formulation of that duty comes from Guth v. Loft, Inc., in which the Delaware
Supreme Court stated:
Corporate officers and directors are not permitted to use their
position of trust and confidence to further their private
interests. . . . A public policy, existing through the years, and
derived from a profound knowledge of human characteristics
and motives, has established a rule that demands of a
corporate officer or director, peremptorily and inexorably, the
most scrupulous observance of his duty, not only
affirmatively to protect the interests of the corporation
committed to his charge, but also to refrain from doing
anything that would work injury to the corporation, or to
deprive it of profit or advantage which his skill and ability
might properly bring to it, or to enable it to make in the
reasonable and lawful exercise of its powers. . . . The
occasions for the determination of honesty, good faith and
loyal conduct are many and varied, and no hard and fast rule
153
can be formulated. The standard of loyalty is measured by no
fixed scale.509
―Essentially, the duty of loyalty mandates that the best interest of the corporation and its
shareholders takes precedence over any interest possessed by a director, officer or
controlling shareholder and not shared by the stockholders generally.‖510 ―In short,
directors must eschew any conflict between duty and self-interest.‖511
Plaintiffs allege four duty of loyalty breaches: (1) undermining the Company‘s
strategic plan; (2) attempting to gain control of Optimis by ambush; (3) attempting to
steal Rancho from Optimis; and (4) interfering with the B of I financing. I address these
purported wrongs in turn.
Plaintiffs‘ arguments suffer from two fatal flaws. The first is that Plaintiffs allege
a takeover scheme bereft of a motive or interest not shared with the other stockholders
generally. Defendants allegedly engaged in a years-long takeover effort. For what self-
interested reason? Plaintiffs have offered no convincing explanation. The second
problem, which may be the cause of the first, is that Plaintiffs seem to presume that
Morelli has a right to be CEO. He does not. The facts instead show that, at least until the
225 Action, Defendants acted in the best interests of Optimis, the entity, which they
believed coincided with their own interests as stockholders.
509
5 A.2d 503, 510 (Del. 1939) (emphasis added).
510
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993), modified in
irrelevant part, 636 A.2d 956 (Del. 1994) (emphasis added).
511
Ivanhoe P’rs v. Newmont Mining Corp., 535 A.2d 1334, 1345 (Del. 1987).
154
1. Sabotaging the Company’s strategic plan
This is the most nebulous wrong Plaintiffs allege. The claim seems to be that
OptimisSport was the long-run vision of the Company and Defendants undermined it.
The evidence clearly shows that Morelli believed OptimisSport was the path forward.
The evidence also shows, however, that the Director Defendants, then the Company‘s
largest stockholders and the managers of Rancho, the Company‘s largest asset and the
generator of most of its cash, believed that the first priority should be to stabilize and
perfect OptimisPT. At least Fearon, Levine, and Gunn all believed similarly. Plaintiffs‘
arguments on this point are convoluted, but appear to be that Defendants secretly opposed
OptimisSport and the DSC, reallocated resources to OptimisPT, undermined Morelli‘s
authority, and hid all of this by communicating through private emails. It is unclear
whether Plaintiffs are asserting a violation of the duty of candor or the duty of loyalty, or
some sort of hybrid claim. They cite two cases in support of their sabotage argument:
HMG/Courtland Properties, Inc. v. Gray512 and Hollinger International Inc. v. Black.513
Neither supports the sweeping liability theory for which Plaintiffs advocate.
Both HMG/Courtland and Hollinger involved self-dealing transactions. There is
no self-dealing transaction in this case. HMG/Courtland Properties involved a suit by a
corporation against, principally, the corporation‘s former president and a former director.
The individual defendants stood on both sides of the challenged transactions, did not
512
749 A.2d 94 (Del. Ch. 1999).
513
844 A.2d 1022 (Del. Ch. 2004), aff’d, 872 A.2d 559 (Del. 2005).
155
disclose that interest, and later misled the company‘s board about their involvement.514
In discussing a fraud claim, the Court noted that the ―directors . . . had an ‗unremitting
obligation‘ to deal candidly with their fellow directors.‖515 Thus, the directors had an
affirmative obligation to disclose their conflicting interests in the transactions. The
situation in Hollinger is even more factually inapposite to this case. There, the Court
recounted at length the antics of Lord Conrad Black, who: deliberately undermined the
board‘s ability to consider a transaction and instead diverted the opportunity to himself;
misled the board as to his ongoing, secret efforts to sell pieces of the company;
improperly used confidential information to advance his own interests; and effectively
encouraged his secret buyers to try and bribe the financial advisor to approve the sale.516
Both HMG/Courtland and Hollinger, therefore, involved classic examples of
conflicted transactions where an interest adverse to the company was not disclosed. In
this case, there was no transaction at all and Plaintiffs have not shown some sort of self-
514
HMG/Courtland Props., 749 A.2d at 114 (―Gray‘s undisclosed, buy-side interest
in the Transactions is a classic case of self-dealing.‖).
515
Id. at 119 (quoting Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1283 (Del.
1989)).
516
Hollinger Int’l, 844 A.2d at 1062 (―In sum, Black intentionally subverted the
International Strategic Process he had pledged to support through a course of
conduct involving misleading and deceptive conduct toward his fellow directors,
all designed with the goal of presenting them with a ‗fait accompli.‘ . . . It is
difficult to conceive of a meaningful definition of the duty of loyalty that tolerates
conduct of this kind.‖).
156
interest that led Defendants to engage in purportedly disloyal acts. The cases Plaintiffs
rely on have no application to the facts of this case.
Plaintiffs also argue that the Company‘s strategic vision involved devoting
resources to both OptimisPT and OptimisSport, that Defendants sabotaged that plan, and
that, accordingly, Defendants breached their duty of loyalty. This argument fails at
several levels, but principally because Plaintiffs have not proven that Defendants acted in
a manner that elevated any personal interest above the Company‘s interests, even
considering idiosyncratic motivators like pride or greed. Plaintiffs have shown no special
interest or benefit that accrued to Defendants that would not have accrued to all of
Optimis‘ stockholders. In short, Plaintiffs have not shown the key element of disloyalty.
The factual record, as recounted above, indicates that the Company, in fact, did
decide to pursue two products simultaneously. Plaintiffs rely heavily on the minutes of
several meetings of the Optimis Board to suggest some sort of Board-approved strategy.
But, this evidence is weak. It includes statements like ―OptimisPT: George Rohlinger led
a discussion about the developments in our beta program since the last Board of Directors
meeting . . . .‖517 and ―Mr. Morelli led a discussion about OptimisSport and OptimisSport
Events.‖518 Conspicuously absent from the Board minutes is any discussion of the
resource allocation between the two products or any action on a resolution regarding that
issue. Plaintiffs have pointed to no such Board-determined, specific allocation of
517
JX 30.0001.
518
Id. at .0012.
157
resources. In a company with finite resources attempting to develop and market two
separate products, it is not unusual that a decision to expend more effort on one product
results in less effort being spent on the other. Plaintiffs have not proven that the
Company explicitly had decided on a particular resource allocation scheme or that
Defendants subsequently undermined it for self-interested reasons. Absent such a clear
allocation program, it is difficult to see how Defendants acted disloyally in supporting
providing a greater share of the available resources for OptimisPT, which they believed
would better serve the interests of Optimis and its stockholders. Instead, the Company‘s
day-to-day operations involved the customary battle for limited resources.
Plaintiffs attempt to turn this competition, which manifested itself in a difference
of opinion between Morelli and the Director Defendants, into a breach of the duty of
loyalty. The actions complained of do not amount to such a breach. For example,
several executives thought the DSC was a waste of money. Even if Horne told Owens
not to work on the event, Owens did not listen. That disputed fact, regarding Horne‘s
alleged statement, is about the strongest evidence Plaintiffs marshal of ―sabotage.‖
Plaintiffs further contend that ―Defendants repeatedly challenged Morelli‘s authority and
allocation of assets within the Company, all outside of Morelli‘s presence.‖519 The duty
of loyalty is owed to the corporation and the stockholders at large, not to Morelli.520 The
519
Pls.‘ Post-Trial Reply Br. [hereinafter ―PRB‖] 13.
520
See, e.g., Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985)
(―[C]orporate directors have a fiduciary duty to act in the best interests of the
corporation‘s stockholders.‖); eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1,
158
duty of loyalty does not require Defendants to act like lemmings with respect to Morelli.
The evidence may show that Defendants did not like Morelli, but Plaintiffs have not
proven that Defendants ―undermined‖ his authority such that they acted disloyally to
Optimis.
Plaintiffs also argue that Defendants orchestrated a clandestine scheme of secretly
diverting resources and hiding it all from Morelli. But, Morelli knew about the
disagreements over Sport and PT. Hwang, for example, told Morelli about them
directly.521 Moreover, Morelli‘s own emails indicate that he was aware of the allegedly
secret resource diversion problem.522 Additionally, the weight of the evidence shows that
Morelli, who worked in close proximity to the developers, decided the Company‘s
direction with respect to the software as he saw fit.523 Thus, I find that Morelli knew
about the resource allocation dispute.
34 (Del. Ch. 2010) (explaining that directors‘ fiduciary duties include ―acting to
promote the value of the corporation for the benefit of the stockholders.‖); Gilbert
v. El Paso Co., 1988 WL 124325, 14 DEL. J. CORP. L. 727, 743 (Del. Ch. Nov. 21,
1988) (―[T]he directors‘ fiduciary duty runs to the corporation and to the entire
body of shareholders generally, as opposed to specific shareholders or shareholder
subgroups.‖), aff’d, 575 A.2d 1131 (Del. 1990).
521
Tr. 255-56.
522
JX 233.0003.
523
See, e.g., Brys Dep. 193 (―Q. Do you agree with Mr. Morelli‘s assessment that
there was a power struggle going on in around [sic] this time? A. No. I don‘t
agree with his assessment. . . . Because everyone reported to Mr. Morelli. He . . .
decided how the company was going to be managed and that‘s how the company
was managed and directed. So a struggle implies a competing power. I didn‘t see
one.‖).
159
The evidence shows that Defendants, particularly the Director Defendants and
Fearon and Levine, believed that the best thing for Optimis would be the completion of
OptimisPT. That position was not unreasonable: it was the OptimisPT product that led
many successful business people to sell their businesses to Morelli in stock-for-stock
transactions; PT is the product with market share; and it is the product that has a proven
revenue-generating structure—third-party reimbursement, as opposed to Sport‘s apparent
reliance on out-of-pocket payments. Also, PT was the only Optimis product that was
described with any specificity at trial. It remains unclear exactly what Sport consists of,
what it will do, how it will work, and how it will generate positive cash flow.524 Thus, I
find that the battle for resources within the Company was driven by a good faith,
reasonable belief that the Company‘s best interests lay in focusing more on completing
the PT product.525
Plaintiffs allege that Defendants‘ ―self-interested motivation‖ was eliminating
Morelli so they ―could force a liquidity event for themselves.‖526 This argument lacks
merit. There is no evidence Defendants took any action to force a liquidity event.
524
Atkins credibly testified that he previously had experimented with a weight-loss
program at Rancho that was not run through a reimbursement platform. That
program was difficult to monetize effectively and, in fact, most of those efforts
lost money. Tr. 1465-66. When Atkins explained this to Morelli, he replied: ―I
don‘t know if you know that much about this . . . . What we‘re doing is much
bigger than what you‘ve done.‖ Id. at 1466.
525
See Rohlinger Dep. 69-72, 116 (testifying that the dilution of resources across
OptimisPT and OptimisSport was detrimental to all of the Company‘s products).
526
POB 13-14.
160
Indeed, the evidence in the record is to the contrary: the ―hostile takeover‖ email, for
example, expressly discusses following Morelli‘s plan because he was best situated to
bring about a liquidity event.527 Viewing the evidence as a whole, I find that Defendants
shared the hope, as Morelli had promised, of achieving an advantageous liquidity event in
the relatively near future. Morelli apparently believed the most effective means to that
end was focusing primarily on the Sport product. Defendants, for different reasons in
some cases, disagreed; they believed giving priority to development of the PT product in
the near term would maximize the Company‘s chances for a liquidity event.
Plaintiffs suggest that I could find Defendants liable even if they acted selflessly
and in the best interest of the Company.528 It is difficult to envision a situation that would
provide a useful analogy to this case where that would be true. In any event, Plaintiffs
have not explained how a non-self-interested fiduciary could act disloyally when
pursuing an objectively reasonable goal.
527
JX 84.
528
See Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003) (―There might be
situations when a director acts in subjective good faith and is yet not loyal (e.g., if
the director is interested in a transaction subject to the entire fairness standard and
cannot prove financial fairness), but there is no case in which a director can act in
subjective bad faith towards the corporation and act loyally.‖); see also Johnston
v. Pedersen, 28 A.3d 1079, 1092 (Del. Ch. Sept. 23, 2011) (―The defendant
directors therefore breached their duty of loyalty by issuing the Series B Preferred.
Despite this fiduciary failing, they have convinced me that they acted in good
faith. To reiterate, they honestly believed that a period of ―stability‖ (i.e.
entrenched incumbency) would be in the best interests of [the company].‖). These
cases involve either a failure of proof (Guttman) or subjective beliefs that
objectively are unreasonable under Delaware law (Johnston). Plaintiffs also cite
VGS, Inc. v. Castiel for this proposition. I discuss that case infra.
161
Finally, Plaintiffs suggest, without elaborating, that there was a breach of the duty
of candor here. The gist of this argument appears to be that Defendants had a duty to tell
the Board that they opposed the OptimisSport product. There is no evidence that the
Board, before October 20, 2012, operated as any substantial check on Morelli in any area
or served any useful purpose other than rubber-stamping his proposals. When a Board
member did something Morelli disliked, such as disagree with him, he reacted negatively.
For example, when Godges, a highly respected figure in the physical therapy field,
crossed Morelli at a Board meeting, Morelli browbeat him into submission. Morelli‘s
demeaning treatment of Godges surprised and concerned the Director Defendants. 529 Not
surprisingly, therefore, Defendants were reluctant to cross Morelli, especially in the
―public‖ setting of a Board meeting. Plaintiffs have not cited, and I am not aware of, any
case holding that a director‘s disagreement with the amount of resources devoted to a
specific product line without telling the Board amounts to disloyalty, particularly when
no Board action on that issue has been sought.
As stated, Plaintiffs have not proven that the Board set an allocation of resources
as between PT and Sport. Plaintiffs have not shown that any Defendant acted
disloyally—i.e., that a Defendant put the Company‘s and the stockholders‘ interests
second to some personal interest—by competing for those resources on a day-to-day
level. In any event, as discussed above, the evidence shows that Morelli knew there were
internal disagreements over the allocation between Sport and PT. Because Plaintiffs
529
See supra notes 225-27 and accompanying text.
162
failed to prove by a preponderance of the evidence that Defendants acted in some way
other than loyally to the Company, I reject their duty of candor claim as fatally flawed.
Plaintiffs bear the burden of proving that each Defendant ―sabotaged‖ the
Company‘s strategic direction. They have not shown, however, that any Defendant had a
motive contrary to that of the stockholders at large. Similarly, Plaintiffs have shown no
evidence that Atkins or Smith did anything to sabotage the DSC or OptimisSport.
Plaintiffs have not proven that Horne took actions sufficient to constitute disloyalty—at
worst, he told an employee, who ignored him, not to work on a project Horne believed
was a waste of money, but in which he nevertheless participated. Plaintiffs also have not
shown that Waite did anything more than compete for limited resources within the
Company and vent about Morelli‘s performance as CEO. Based on the evidence
presented at trial, therefore, I conclude that Defendants and others in the Company
favoring OptimisPT proceeded in good faith and in the reasonable belief that they were
acting in the best interests of Optimis and its stockholders.530 Thus, I conclude that
Plaintiffs have not proven that Defendants undermined the Company‘s strategic vision.
2. Attempting to gain control of Optimis by ambush
Plaintiffs‘ second theory of liability is the closest to a traditional duty of loyalty
violation. Although not directly an interested transaction, Plaintiffs argue that Morelli‘s
ouster was self-interested—driven by a hatred of Morelli or a decision to divest him of
his contractual right to control the composition of the Board until early 2015 by whatever
530
E.g., Tr. 782-83 (Fearon).
163
means necessary—and fell below minimum standards of fairness. A primary premise of
this theory is that the sexual harassment investigation was a sham and a pretext to
eliminate Morelli. Plaintiffs contend that the entire process was ―tainted by defendants‘
undisclosed material conflicts.‖531 I reject this argument, but note that, in making it,
Plaintiffs relied heavily on certain Delaware case law that appears supportive. Having
carefully considered those cases, I conclude that the main ones were incorrectly decided
and I decline to follow them. In rejecting those cases and applying the law to the facts as
I have found them, I find that the process to oust Morelli, though procedurally bungled,
was a good faith effort to act in the best interests of the Company and that no liability
attaches to that attempt.
a. The super-director theory
The first element of Plaintiffs‘ argument is that Morelli, as a director and
controller,532 was entitled to advance notice of the October 20 Meeting and a chance to
exercise his contractual rights and reconstitute the Board. By depriving him of that right,
Defendants allegedly breached their duty of loyalty. To evaluate Plaintiffs‘ legal
position, it is necessary to examine a line of four cases dating to 1992.
531
PRB 18.
532
Under the Stockholders Agreement, the Initial Stockholders had the right to
appoint a majority of the Board. Morelli, individually and through Analog,
controlled the vast majority of the shares held by the Initial Stockholders.
Accordingly, he unilaterally could determine a majority of the Board. See supra
notes 177-79 and accompanying text.
164
The first of those cases was Koch v. Stearn.533 In that case, the company,
Showcase Communications Network, Inc. (―Showcase‖), had a four-member board.
Stearn, the President, CEO, and majority stockholder, controlled two board seats; Koch,
an outside director who owned preferred stock, had the right to appoint two board
members and the right to elect a fifth director if certain covenants were breached. The
board initially consisted of Stearn, his appointee Ginsberg, Koch, and his designee Bunn.
When Showcase ended up in poor financial condition, Koch offered to invest more
money if Stearn resigned. On April 6, 1992, Bunn faxed Showcase‘s attorney a letter
asking him and Stearn to attend a special board meeting the next morning. That same
day, Bunn circulated to Koch and Ginsberg draft resolutions that provided, among other
things, for Stearn‘s removal, but no one sent those resolutions to Stearn.534
At the meeting, after Stearn refused to reconsider the financing offer, Bunn
proposed the resolution removing him as President and CEO and replacing him with
Ginsberg. Stearn at some point attempted to remove Ginsberg. Koch later purported to
exercise his power to appoint a fifth director. A Section 225 action followed. According
to the Court, the ―validity of the board action taken on April 7th . . . depends upon
whether Stearn was tricked or deceived into attending the meeting.‖535 The Court found
533
1992 WL 181717, 18 DEL. J. CORP. L. 730 (Del. Ch. July 28, 1992), vacated, 628
A.2d 44 (Del. 1993), overruled in part (despite being vacated), Klaassen v.
Allegro Dev. Corp., 106 A.3d 1035 (Del. 2014).
534
Id. at 732-35.
535
Id. at 737.
165
that Stearn was tricked into attending, even though Stearn suspected his removal would
be discussed. More importantly for present purposes, the Court concluded that Stearn
was ―disadvantaged‖ by the failure of the other directors to clue him in on their plans:
If Stearn had seen the draft resolutions before the meeting, he
could have exercised his right to remove Ginsberg as a
director and he could have replaced Ginsberg with another
nominee who would vote with Stearn to block Stearn‘s
removal. Without doubt, Stearn‘s inability to thus protect
himself constituted a disadvantage. Thus, I conclude that the
actions taken at the April 7th board meeting were void and of
no effect.536
The Court cited no authority in support of its decision and I am aware of no case
previously so holding. To the contrary, it long has been the law of Delaware that a
Delaware corporation is managed by the directors.537 The Koch opinion, however,
suggests that a CEO with board-appointment rights must receive notice of board action
against him so that he can preempt the Board.
536
Id. at 738.
537
8 Del. C. § 141(a) (―The business and affairs of every corporation organized under
this chapter shall be managed by or under the direction of a board of directors
. . . .‖); McMullin v. Beran, 765 A.2d 910, 916 (Del. 2000) (―One of the
fundamental principles of the Delaware General Corporation Law statute is that
the business affairs of a corporation are managed by or under the direction of its
board of directors.‖); Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (―A
cardinal precept of the General Corporation Law of the State of Delaware is that
directors, rather than shareholders, manage the business and affairs of the
corporation.‖), overruled in irrelevant part, Brehm v. Eisner, 746 A.2d 244 (Del.
2000).
166
The Delaware Supreme Court vacated Koch, but its holding still was relied on in
the case of VGS, Inc. v. Castiel,538 a case upon which Plaintiffs rely heavily. VGS
involved an LLC. Castiel, directly or indirectly, owned 75% of the member interests and
75% of the voting rights. Sahagen, a venture capitalist, owned the other 25% of the
member interests and the voting rights. Castiel had the right to appoint two directors, and
Sahagen had the right to appoint one. The board consisted of Castiel, his appointee
Quinn, and Sahagen. Sahagen eventually convinced Quinn that Castiel was a bad
manager and needed to be terminated. The pair then used a provision in the LLC‘s
operating agreement allowing the use of non-unanimous written consents and effected a
merger whereby Castiel‘s ownership interest was diluted to 37.5%.539
The Court held that Sahagen and Quinn breached the duty of loyalty they owed to
Castiel, as another LLC member.540 In so holding, the Court stated:
When Sahagen and Quinn, fully recognizing that this [ability
to appoint two directors] was Castiel‘s protection against
actions adverse to his majority interest, acted in secret,
without notice, they failed to discharge their duty of loyalty to
him in good faith. They owed Castiel a duty to give him prior
notice even if he would have interfered with a plan that they
538
2000 WL 1277372 (Del. Ch. Aug. 31, 2000), aff’d, 781 A.2d 696 (Del. 2001)
(TABLE).
539
Id. at *1-2.
540
This holding is inapplicable in the corporate context. Fiduciary duties are owed to
the entity and the stockholders at large, not a single stockholder, even if that
person is a majority stockholder. See supra note 520.
167
conscientiously believed to be in the best interest of the
LLC.541
Next, in 2002, this Court issued a memorandum opinion in the case of Adlerstein
v. Wertheimer,542 a Section 225 case upon which Plaintiffs principally rely. Adlerstein
based its holding on VGS, an LLC case,543 and Koch, which was vacated. Adlerstein
concerned SpectruMedix Corporation (―SpectruMedix‖) and its former chairman and
CEO, Adlerstein. As of 2000, Adlerstein owned about 21% of the equity of
SpectruMedix, but controlled 73% of the vote. The company‘s board then consisted of
Adlerstein, Wertheimer, an investment banker, and Mencher, a money manager with
expertise in distressed investments. In March 2001, a sexual harassment allegation was
lodged against Adlerstein, and an independent consultant later concluded that Adlerstein
was guilty of sexual harassment and had not been cooperative during the investigation.
Adlerstein also was less than forthcoming with the board about the company‘s cash
situation, which was dire. When the board hired a restructuring consultant, Adlerstein
541
VGS, 2000 WL 1277372, at *4.
542
2002 WL 205684 (Del. Ch. Jan. 25, 2002).
543
I question the applicability of VGS to corporate disputes. The facts of that case
were dependent upon particular provisions of the LLC Operating Agreement in
question. See CML V, LLC v. Bax, 28 A.3d 1037, 1043 (Del. 2011) (―Ultimately,
LLCs and corporations are different; investors can choose to invest in an LLC,
which offers one bundle of rights, or in a corporation, which offers an entirely
separate bundle of rights.‖).
168
interfered with his work. The consultant eventually advised the board that SpectruMedix
could not succeed unless Adlerstein was removed.544
Wertheimer contacted Reich, an investor and manager with the wealth and ability
to fix SpectruMedix. Reich offered to invest in the company, but only if Adlerstein were
removed and Reich were put in charge. Soon thereafter, Wertheimer, Mencher, and
Reich discussed firing Adlerstein for cause because of the sexual harassment. By early
July 2001, the company was basically insolvent. On July 5, Wertheimer asked Adlerstein
to attend a July 9 meeting. On July 6, Reich circulated draft transactional documents to
Wertheimer and Mencher, but not Adlerstein. Adlerstein called the July 9 meeting to
order and began discussing an ongoing arbitration. Wertheimer interrupted him, changed
the topic to finances, and showed Adlerstein the term sheet for the Reich deal. Adlerstein
rejected the proposal because it would dilute his shares and eliminate his voting control.
Wertheimer then moved to vote on the transaction; he and Mencher voted in favor,
thereby approving the deal. Next, Wertheimer and Mencher discussed removing
Adlerstein for cause, which they did.545
In response to Adlerstein‘s challenge to the transaction under Section 225, the
Court concluded that he had a right to know of the Reich investment deal in advance,
because it would have eliminated his majority control. In a line relied upon by Plaintiffs,
the Court stated: ―This right to advance notice derives from a basic requirement of our
544
Adlerstein, 2002 WL 205684, at *1-4.
545
Id. at *4-7.
169
corporation law that boards of directors conduct their affairs in a manner that satisfies
minimum standards of fairness.‖546 The Court continued:
Adlerstein possessed the contractual power to prevent the
issuance of the Series C Preferred Stock by executing a
written consent removing one or both of Wertheimer and
Mencher from the board. He may or may not have exercised
this power had he been told about the plan in advance. But he
was fully entitled to the opportunity to do so and the
machinations of those individuals who deprived him of this
opportunity were unfair and cannot be countenanced by this
court.547
The Court stated that the result ―flows from the fact that Adlerstein was both a director
and a controlling stockholder, not from either status individually.‖548 The Court further
held that the ―authority of both Koch and VGS strongly support the conclusion that
Adlerstein had a right to such advance notice in order that he might have taken steps to
protect his interest.‖549
546
Id. at *9.
547
Id.
548
Id. at *9 n.28. In explaining its rationale, the Court recognized that Adlerstein
would not have been entitled to notice as a stockholder, or as a director. But, the
Court held that, ―when a director either is the controlling stockholder or represents
the controlling stockholder, our law takes a different view of the matter where the
decision to withhold advance notice is done for the purpose of preventing the
controlling stockholder/director from exercising his or her contractual right to put
a halt to the other directors‘ schemes.‖ Id.
549
Id. at *11.
170
The final case in this line is Fogel v. U.S. Energy Systems, Inc.550 There, Fogel
was the CEO and chairman of the board, which included three other board members. The
company in question was in financial distress and the board determined, on June 14,
2007, to hire a restructuring officer and to meet again on June 29. Over that fifteen-day
period, the three independent directors discussed Fogel‘s performance and eventually
decided that he should be fired. By the morning of the 29th, the other directors had
resolved to terminate Fogel, and they asked him to resign voluntarily by the end of the
day. One of the directors called him that evening; Fogel declined to resign and the
director told him he was fired. On July 1, Fogel attempted to call a special meeting of the
stockholders to remove the directors, as authorized by the company‘s bylaws. That same
day, the board ignored Fogel‘s call for a special meeting and passed a resolution
terminating him.551
Fogel subsequently filed a Section 225 action. The Court determined that the
meeting where Fogel was terminated was not a board meeting under Delaware law and
thus the action taken there was void. More importantly for present purposes, the Court
held, in the alternative, that the action taken was void because Fogel was tricked into
coming. Relying on Koch and Adlerstein, the Court held that, even though Fogel
probably lacked the votes, ―had he known [the purpose of the meeting] beforehand, he
550
2007 WL 4438978 (Del. Ch. Dec. 13, 2007), overruled on other grounds,
Klaassen v. Allegro Dev. Corp., 106 A.3d 1035 (Del. 2014).
551
Id. at *1-2.
171
could have exercised his right under the bylaws to call for a special meeting before the
board met. The deception renders the meeting and any action taken there void.‖552
Plaintiffs rely on this line of cases, including primarily Adlerstein and VGS, for the
proposition that it was a breach of the duty of loyalty for the Director Defendants not to
provide Morelli fair notice of their intent to remove him and allow him to exercise his
rights under the Stockholders Agreement. To the extent that one or more of the cases on
which Plaintiffs rely can be read to stand for that proposition, I decline to follow those
cases.553
At least three of the four cases just discussed threaten the fundamental premise of
Delaware law that a corporation is managed by the board of directors.554 Vice Chancellor
Laster examined these and other earlier cases at length in his opinion granting a stay in
Klaassen v. Allegro Development Corp.555 I agree with his criticisms of those precedents
and summarize some of them here.
552
Id. at *4.
553
I also note that money damages were not a component of any of these four cases,
whereas the relief Plaintiffs seek here includes damages. Furthermore, VGS is
factually distinguishable from this case. First, the machinations undertaken in that
case depended upon specific provisions of the LLC Agreement in question. See
supra note 543. Second, the primary holding of VGS was that Sahagen and Quinn
breached their duty of loyalty to Castiel. Here, the analogous holding would be
that Defendants breached their duty of loyalty to Morelli. But, no such duty exists
in the corporate context. See supra notes 520 & 540.
554
See supra note 537.
555
2013 WL 5967029 (Del. Ch. Nov. 7, 2013). On appeal in Klaassen, the Supreme
Court recognized that Vice Chancellor Laster questioned the continuing viability
172
In my view, the holdings of these cases depart from key tenets of Delaware law.
In a Delaware corporation, the directors of the corporation manage the corporation and
that principle is statutorily enshrined in Section 141(a). A written contract allowing
board appointment rights cannot be used to thwart that precept of Delaware law.
Plaintiffs‘ theory, fairly understood, is that Morelli had absolute blocking rights
against the Board because it would be unjust to take any action against him before he
could exercise his rights to remove and reappoint a majority of the board. This would
make him, for all intent and purposes, a ―super-director whose powers trump the board‘s
statutory authority under Section 141(a).‖556 Rather than recognize such power in one
individual, however, our law consistently has been to the contrary. 557 The board has a
duty to act in the best interests of the entity and the stockholders as a whole. Thus, in
appropriate instances, the fiduciary duties of directors may enable a board to take action
of these precedents, but did not address that concern because it was unnecessary to
answer the question presented. 106 A.3d 1035, 1045 n.65 (Del. 2014). Whether
or not Koch, Adlerstein, and Fogel are good law squarely has been raised in this
case.
556
Klaassen, 2013 WL 5967028, at *3.
557
Phillips v. Insituform of N. Am., Inc., 1987 WL 16285, 13 DEL. J. CORP. L. 774,
790 (Del. Ch. Aug. 27, 1987) (―Much of plaintiffs‘ argument that the by-law
amendments are invalid seems premised on an assumption that a right to designate
a majority of the board involves legally the right to control the board‘s action and
thus the corporation. However, so long as the law demands of directors, as I
believe it does, fidelity to the corporation and all of its shareholders and does not
recognize a special duty on the part of directors elected by a special class to the
class electing them, such a premise must be regarded as legally incorrect.‖).
173
against a controlling stockholder.558 By contrast, the cases upon which Plaintiffs rely
suggest that, even if the directors in the exercise of their fiduciary duties conclude that the
CEO must be fired, the directors first must give the CEO the chance to fire a majority of
the directors and replace them with his own hand-picked group of more acquiescent
directors—a Catch-22 for Optimis in this case. Such a holding creates serious
entrenchment problems and undermines one of the board‘s chief functions, which is the
appointment of officers, and particularly the CEO, to manage the corporation‘s day-to-
day affairs.559 Thus, I consider the Koch line of cases difficult to square with the bedrock
principle of Delaware law that the directors of a corporation manage the corporation‘s
affairs.
Accordingly, I reject the first premise of Plaintiffs‘ ambush theory, i.e., that
Morelli was entitled to advance notice of the meeting so that he could replace the
directors and thwart the Board. In the circumstances of this case, at least, I find the case
558
See, e.g., Mendel v. Carroll, 651 A.2d 297, 304 (Del. Ch. 1994) (―Where,
however, a board of directors acts in good faith and on the reasonable belief that a
controlling shareholder is abusing its power and exploiting or threatening to
exploit the vulnerability of minority shareholders, I suppose . . . that the board
might permissibly take such an action [and dilute the controller‘s holdings].‖)
(Allen, C.) (citing Blasius Indus., Inc. v. Atlas Corp., 565 A.2d 651 (Del. Ch.
1988), Freedman v. Restaurant Assoc., 1987 WL 14323 (Del. Ch. Oct. 16, 1987),
and Phillips, 1987 WL 16285); see also Hollinger Int’l, Inc. v. Black, 844 A.2d
1022, 1088 (Del. Ch. 2004) (―By parity of reasoning, if actual action to dilute the
majority might be justified, the less extreme act of interposing a rights plan should
not be ruled out entirely as a permissible response to a controlling stockholder‘s
serious acts of wrongdoing towards the corporation.‖) (Strine, V.C.), aff’d, 872
A.2d 559 (Del. 2005).
559
See Klaassen, 2013 WL 5967028, at *15 & nn.6-8 (collecting sources).
174
law supporting Plaintiffs‘ argument to be unsound and I decline to follow it. Rather, each
case must be examined on its own facts, especially in a Court of equity. Here, the first
thing Morelli did after October 20, 2012, was fire all three of the Board members he had
appointed who voted to terminate him as CEO. I have no doubt he would have
terminated those directors in advance of the meeting if he had been given the opportunity.
Thus, I hold that none of the Director Defendants breached their duty of loyalty by not
advising Morelli in advance of his potential termination.
b. The Geller Investigation
Plaintiffs further contend that Defendants breached their fiduciary duties by: (1)
manipulating the Geller Investigation to provide a pretext to oust Morelli; (2)
manipulating the information provided to the Board at the October 20 Meeting; and (3)
botching the October 20 Meeting so badly that it amounted to bad faith. These claims
rely on a number of factual premises that I have rejected. Accordingly, most of these
contentions can be dismissed in short order. For instance, there is no evidence that Smith
or Atkins played any role in the Geller Investigation.
As to Plaintiffs‘ contention that Defendants Waite or Horne manipulated the
Geller investigation, Plaintiffs have the burden of proof. Because I have concluded that
Geller‘s deposition testimony is credible, their manipulation argument is without merit.
Plaintiffs failed to prove that anyone manipulated Geller. Even though she stated to
Waite on September 21 that she did not want to make a sexual harassment claim, Waite
acted reasonably and, perhaps, in accordance with the requirements of California law or,
at least, Optimis‘ sexual harassment policy, when he reported Geller‘s accusations to
175
Kreile. Plaintiffs did not prove by a preponderance of the evidence that Waite knew in
advance of September 21 about Geller‘s allegations. Even if he did, however, Plaintiffs
have not proven: (a) that anyone encouraged Geller to make the claim; or (b) that anyone
encouraged Geller to change her story to Solomon between the first and second
interviews. Plaintiffs allege that Defendants bribed Geller, but the evidence they rely on
is too weak to overcome her testimony to the contrary. Plaintiffs showed that Geller had
free use of Horne‘s apartment, and after October 20, 2012, her pay was equalized with
other physical therapists and she was allowed to remediate her residency program. As
discussed supra, there are innocuous explanations for each of these actions. Thus, based
on the evidence presented, and my discussion of Plaintiffs‘ witness tampering, I conclude
that Plaintiffs have failed to prove by a preponderance of the evidence that Defendants,
individually or collectively, encouraged or bribed Geller to make her claims or
encouraged or bribed her to change her story.
Plaintiffs‘ argument that Horne manipulated the investigation by telling Solomon
about his affair with Doherty and asking her not to include that in her report is illogical.
By telling Solomon about his relationship, Horne put his cards on the table and she fairly
could evaluate his credibility. Similarly, even if Horne lied about previously being
friends with Morelli, I do not understand how telling Solomon that he hated Morelli
undermined the investigation in any way. Horne also told Solomon that he did not
believe Morelli was capable of sexual harassment. In addition, Plaintiffs repeatedly
argued that Waite manipulated the investigation by not telling Solomon about his
takeover plot. But, Plaintiffs have not proven that Waite, individually or in concert with
176
others, was involved in a takeover plot; accordingly, they have not proven that Waite had
any potential bias that he improperly failed to disclose to Solomon.
In any event, even assuming, hypothetically, that Waite personally wanted to oust
Morelli and would lie to accomplish that goal, it remains unclear how that affects the
propriety of Solomon‘s investigation. Under the facts as I have found them, Waite
promptly turned the matter over to Kreile in HR. Kreile contacted the insurer. The
insurer hired Zilberman. Zilberman hired Solomon. Solomon conducted the
investigation and concluded that Geller was credible and that her allegations were
corroborated by the testimony of others besides Waite. Solomon—who credibly denied
she was rushed—provided her report to Zilberman, who made recommendations to the
Board. Meanwhile, Brys engaged Kaufman as independent outside counsel to advise the
Company. Thus, Plaintiffs have not proven that the Geller Investigation either was a
pretext for a secret takeover plot or that it was compromised, lacked independence, or
was not thorough. By contrast, the evidence supports the finding that this was a good
faith, independent investigation by outside counsel that concluded Optimis‘ CEO
apparently had engaged in sexual harassment. At a minimum, the evidence shows that
the Director Defendants had no reason to question the expertise of Solomon or Zilberman
or the reliability of the Solomon Report or Zilberman‘s advice regarding the Geller
Investigation.
Plaintiffs‘ contrary argument, aside from being based on allegations of a wide-
ranging conspiracy, which I have rejected, rests on allegations that one or more
Defendants manipulated Geller, and then manipulated or fooled four different
177
independent third-party attorneys—Solomon, Zilberman, Kaufman, and Robbins. On
one side of the evidentiary ledger, I have found (or the parties do not dispute) numerous
facts that support Defendants‘ explanation of the challenged events, the bona fides of the
investigation, and the actions Defendants took. Morelli admittedly had sexual contact
with a subordinate in his bedroom-office while she was working. At least one other
female employee previously had seen Morelli naked in his bedroom-office.560
Defendants had no role in the selection of the investigator that did the fact-finding.
Morelli, on the other hand, took actions to interfere with the investigation, such as
attempting to convince Horne and Brys to get Geller to rescind her allegations and filing
his own sexual harassment complaint against Geller. Thus, Plaintiffs have failed to prove
that the Geller Investigation was a pretext or that Defendants manipulated that
investigation.
c. The October 20 Meeting
The October 20 Meeting was not a model of corporate governance, but it does not
provide a basis for any breach of the duty of loyalty. Viewing the October 20 Meeting in
light of my findings that Plaintiffs have not proven: (1) a takeover motive by any of the
Defendants; (2) the existence of a conspiracy; (3) that the Geller Investigation was a
pretext; or (4) that Geller was manipulated, the meeting looks like nothing more than a
board attempting in good faith to follow the advice provided by several separate legal
560
Morelli‘s secretary, Eastman, had seen him come out of the shower in his
bedroom-office completely naked. Eastman Dep. 29.
178
advisors.561 For incidental failings in this regard, Delaware law provides a safe harbor for
directors under 8 Del. C. § 141(e).562
Directors are protected under Section 141(e) ―‗when the directors reasonably
believe the information upon which they rely has been presented by an expert selected
with reasonable care and is within that person‘s professional or expert competence.‘‖563
561
Plaintiffs assert that the Director Defendants manipulated the meeting in bad faith.
Bad faith is a high standard. In Stone v. Ritter, 911 A.2d 362, 369-70 (Del. 2006),
the Supreme Court gave the following examples of bad faith conduct: ―where the
fiduciary intentionally acts with a purpose other than that of advancing the best
interests of the corporation, where the fiduciary acts with the intent to violate
applicable positive law, or where the fiduciary intentionally fails to act in the face
of a known duty to act, demonstrating a conscious disregard for his duties.‖
Plaintiffs base their allegations of bad faith on their assertion that Defendants had
a purpose other than advancing the Company‘s best interests. Because Plaintiffs
failed to prove such a purpose, they have not shown that Defendants acted in bad
faith at the October 20 Meeting.
562
―A member of the board of directors, or a member of any committee designated by
the board of directors, shall, in the performance of such member‘s duties, be fully
protected in relying in good faith upon the records of the corporation and upon
such information, opinions, reports or statements presented to the corporation by
any of the corporation‘s officers or employees, or committees of the board of
directors, or by any other person as to matters the member reasonably believes are
within such other person‘s professional or expert competence and who has been
selected with reasonable care by or on behalf of the corporation.‖ 8 Del. C.
§ 141(e).
563
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 985 (Del. Ch. 2000) (Steele,
V.C. by designation) (internal quotations omitted) (quoting In re Cheyenne
Software, Inc. S’holders Litig., 1996 WL 652765, at *2 (Del. Ch. Nov. 7, 1996)).
179
To rebut the Director Defendants‘ claimed reliance on the advisors in question here,
Plaintiffs would have to show that they were grossly negligent in so relying.564
It is not material that the full Board did not make the decision to hire these
advisors. Section 141(e) expressly allows reliance on those selected ―by or on behalf of
the corporation.‖ Zilberman was hired by PLIS, the Company‘s insurer; therefore, he
comes within the scope of the Section 141(e) safe harbor. In addition, Kaufman was
hired by the Company‘s General Counsel, Brys, to represent Optimis in the event of any
conflict between Zilberman and the Company. Those two attorneys were in agreement in
every instance when Brys sought a legal opinion of both.565 Although Robbins‘s
retention is more questionable,566 there is no indication that he was unqualified as a
564
The Supreme Court has provided the following list of examples that, if proven,
would rebut the protection offered by Section 141(e): ―(a) the directors did not in
fact rely on the expert; (b) their reliance was not in good faith; (c) they did not
reasonably believe that the expert‘s advice was within the expert‘s professional
competence; (d) the expert was not selected with reasonable care by or on behalf
of the corporation, and the faulty selection process was attributable to the
directors; (e) the subject matter . . . that was material and reasonably available was
so obvious that the board‘s failure to consider it was grossly negligent regardless
of the expert‘s advice or lack of advice; or (f) that the decision of the Board was so
unconscionable as to constitute waste or fraud.‖ Brehm v. Eisner, 746 A.2d 244,
262 (Del. 2000).
565
Brys Dep. 104.
566
Waite testified that he contacted Robbins because he ―had apparently taken on
Michael Eisner in some board battle or something like that.‖ Tr. 1077 (Waite).
This appears to be a reference Robbins‘s representation of Roy Disney and Stanley
Gold in their Vote No campaign against Eisner. See Bruce Orwall et al., Eisner
Steps Down as Disney Chairman, WALL ST. J. (Mar. 4, 2004), available at
http://www.wsj.com/articles/SB107832734296045356.
180
corporate attorney. Indeed, the Ad Hoc Committee considered his credentials, which
Sussman described as ―impressive,‖ and expressly approved his engagement.567
Plaintiffs complain that none of the advisors was a Delaware attorney. Section 141(e),
however, contains no such requirement. Furthermore, many of the issues involved at the
October 20 Meeting related to sexual harassment under California law.568
Finally, Plaintiffs argue that the Director Defendants manipulated the information
provided to the Board. There is no evidence of any such manipulation by either Smith or
Atkins. This leaves Waite. Plaintiffs contend Waite had an obligation to tell the Board
that he had known of Geller‘s allegations since February. This argument is unpersuasive
because Plaintiffs failed to prove that Waite knew anything about those allegations before
September 21, 2012, let alone the details he learned on that date. In any event, I find that
any knowledge by Waite more than likely would not have affected Zilberman‘s advice or
the Board‘s reliance upon it. Even if Waite knew of the allegations in advance, that does
not change the fact that Solomon found Morelli engaged in unwelcome sexual
interactions with Geller or that Zilberman, Kaufman, and Robbins all advised that Morelli
567
Tr. 841 (Sussman).
568
Plaintiffs speculate that the advisors did not review the relevant Delaware law or
were unfamiliar with Optimis‘ corporate governance documents. Because this is a
post-trial opinion, Plaintiffs must prove what they allege and they supplied no
evidence to support such speculation. I also do not find persuasive the fact that the
meeting may have been contrary to Adlerstein. The key inquiry is whether the
Director Defendants had some reason to doubt that they reasonably could rely on
their legal advisors. No evidence suggests that the existence of a potential
problem under Adlerstein would have been known to or understood by
Defendants.
181
should be fired for that apparent sexual harassment. Plaintiffs again complain that the
Director Defendants hid their takeover motives and that Waite had numerous contacts
with Geller during the investigation. But, Plaintiffs have not proven either a takeover
motive or that Geller ever was encouraged to make the allegations in the first place or
change her story.
Accordingly, Waite and the other Director Defendants were entitled under Section
141(e) of the DGCL to rely in good faith upon the three advisors that were present at the
October 20 Meeting, and they did. The Director Defendants‘ actions leading up to and at
that meeting, therefore, are fully protected. Waite relied in good faith upon advisors at
every step of the way. He relied upon Brys, and probably Sussman, in drafting the
meeting notice. He relied on Robbins and Zilberman in excluding Morelli from the
meeting.569 The Board relied on Zilberman and Solomon (via her report) in determining
to fire Morelli.
Plaintiffs also contend that Waite misrepresented the effect of Amendment No. 2
to the Board. That amendment, among other things, eliminated the right of the Initial
Stockholders (effectively, Morelli) to appoint a majority of the Board until 2015.
According to Abdelhamid‘s deposition, Waite stated that the Amendment was no big
569
See also J. Travis Laster and John Mark Zeberkiewicz, The Rights and Duties of
Blockholder Directors, 70 BUS. LAW. 33, 57-60 (Winter 2014/2015) (discussing
Delaware case law supporting the concept that, in certain situations, a conflicted
director can be excluded from decision making relevant to that conflict).
182
deal.570 Assuming Waite made that statement, I agree with Plaintiffs that it was
inaccurate and potentially misleading. Abdelhamid‘s deposition testimony is murky,
however, in its descriptions and contrary to contemporaneous documents in which
Abdelhamid and Waite discussed the fact that, by virtue of Amendment No. 2,
Abdelhamid would lose his own Board appointment right, as would the Director
Defendants.571 Additionally, even if Waite did say that Amendment No. 2 was a small
thing or that it would not affect Morelli, the other testimony supports a reasonable
inference that, nonetheless, the Board understood that the purpose of the amendment was
to prevent Morelli from undoing his own termination.572 Plaintiffs also argue that the
Director Defendants are liable for ―failing to permit the board to consider Morelli‘s
written consent to elect a new majority of directors.‖573 I have found, however, that
570
Abdelhamid Dep. 68-69.
571
JX 411.0004.
572
Tr. 645-47 (Sussman). Sussman‘s testimony is perhaps the most sympathetic to
Plaintiffs‘ position. To the extent that Sussman implies that the Board did not
understand the amendment and the need for Amendment No. 2, however, I do not
consider his testimony reliable. The reason is that he seems to have misled Brys
and Waite with respect to the meeting notice and then assisted Morelli in creating
an agenda, and also because after the meeting Sussman met only with Wing,
Morelli‘s ally on the Board, to work on documentation of the meeting. I also note
that Sussman, a corporate attorney, recognized Morelli was being terminated and
told Morelli something to the effect that it was ―too late‖ when Morelli attempted
to raise the issue of the written consents. Id. at 1484 (Atkins); id. at 1287 (Smith).
All of the Director Defendants understood the purpose of the Amendment. Id. at
1083-86 (Waite); id. at 1284 (Smith); id. at 1483 (Atkins).
573
POB 53.
183
Morelli did not present his written consents until after Amendment No. 2 had been
approved, by which time Sussman informed Morelli that it was too late.574
Although the Board meeting had many flaws, the Director Defendants reasonably
relied on several attorneys to guide them through the process. Plaintiffs have not proven
a takeover motive or that the Director Defendants acted in bad faith as to the meeting. In
particular, Plaintiffs have not proven that Defendants attempted to take over the company
by ―ambush‖ or in a way that falls below minimum standards of fairness. To the extent
the Koch line of cases otherwise would lead to a different conclusion, I first note that I
am not aware of the Delaware Supreme Court ever having endorsed that line of
reasoning. Furthermore, if Koch or any of its progeny would lead to a different result
here, I consider the reasoning of those cases flawed and decline to follow it in the
circumstances of this case.
3. Trying to steal Rancho
Plaintiffs‘ third theory is that the Director Defendants breached their duty of
loyalty by filing the Rescission Action without telling the Board about the underlying
problem: a flawed corporate structure. Specifically, California Business & Professions
Code § 2694 prohibits any non-licensed person (i.e., Optimis) from being a shareholder
574
Plaintiffs rely on the unclear deposition testimony of Abdelhamid to suggest that
Morelli circulated the written consents before Amendment No. 2 was signed.
Abdelhamid Dep. 68-69. I do not consider this chronology to be accurate or
reliable, as it is contrary to the facts as I have found them, including Sussman‘s
contemporaneous notes. See supra Section II.L; see also infra Section V.C.1.
184
of a physical therapy corporation,575 and California Corporations Code §§ 13406(a) and
13407 render void any transfer of shares in a professional corporation, including physical
therapy corporations, to such a non-licensed person.576 Briefing on this issue by both
Plaintiffs and the Director Defendants was sparse and largely unhelpful.
Preliminarily, I note that the Director Defendants did not breach their duty of
loyalty by filing the Rescission Action because it was filed after they had resigned from
Optimis. Because of the bright-line rule as to the temporal scope of directors‘ fiduciary
duties,577 filing the lawsuit itself could not have breached a duty they no longer owed.
Furthermore, it cannot be said that the lawsuit was meritless. Shortly after the Director
Defendants filed the Rescission Action, Optimis remedied the faulty corporate structure
that the lawsuit pointed out by assigning Rancho to Tinoco, who is a physical therapist.
As Plaintiffs allege, however, the Director Defendants were aware of the illegal
corporate structure while they were Optimis directors and failed to alert the rest of the
Board. The Director Defendants instead secretly planned their lawsuit. This leaves
Plaintiffs asserting that the Director Defendants breached their duty of candor by not
575
Cal. Bus. & Prof. Code § 2694.
576
Cal. Corp. Code §§ 13406(a), 13407.
577
In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 758 (Del. Ch. 2005) (―Just as
Delaware law does not require directors-to-be to comply with their fiduciary
duties, former directors owe no fiduciary duties . . . .‖) (footnote omitted), aff’d,
906 A.2d 27 (Del. 2006).
185
revealing the defect that formed a primary basis for the Rescission Action.578 The
Director Defendants have offered no serious defense to the fact that they failed to inform
the Board.579 Their best argument in that respect stems from an analogy to unfair
competition law, which recognizes that an agent or fiduciary can act consistently with his
or her duty of loyalty while preparing to compete with the entity to which they owe
fiduciary duties.580 I consider this analogy inapt. There is a material distinction between
a fiduciary‘s preparing to compete, such as by forming a new entity, and failing to
disclose a material problem in a corporation‘s structure and then attempting, after
resigning, to exploit that very flaw. The Director Defendants had a duty to deal candidly
578
See Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1283 (Del. 1989) (―[T]he
duty of candor is one of the elementary principles of fair dealing . . . . At a
minimum, this rule dictates that fiduciaries, corporate or otherwise, may not use
superior information or knowledge to mislead others in the performance of their
own fiduciary obligations.‖). The duty of candor, also called the duty of
disclosure, can implicate either the duty of care or the duty of loyalty depending
on the factual situation. See generally In re Transkaryotic Therapies, Inc., 954
A.2d 346, 357-363 (Del. Ch. 2008) (discussing the evolution of the law on this
issue). Here, I infer from the facts that the duty of loyalty is implicated.
579
The Director Defendants weakly contended that Morelli, as a corporate attorney,
should have been aware of the problem with Optimis‘ corporate structure.
Because it appears that no one focused on this issue in the more than five years
since Optimis acquired Rancho, I see no merit in this finger-pointing defense.
580
Triton Constr. Co. v. E. Shore Elec. Servs., Inc., 2009 WL 1387115, at *9 (Del.
Ch. May 18, 2009) (―[A]n agent can make arrangements or preparations to
compete with his principal before terminating his agency, provided he does not act
unfairly or injure his principal.‖), aff’d, 988 A.2d 938 (Del. 2010) (TABLE); see
also Seibold v. Camulos P’rs LP, 2012 WL 4076182, at *21-22 (Del. Ch. Sept. 17,
2012).
186
with their fellow directors.581 Having become aware of the problem with the Rancho-
Optimis structure, I conclude that the Director Defendants breached their duty of candor
by not alerting the Board to the issue. Because they acted intentionally for their own
benefit, I further find the Director Defendants breached their duty of loyalty in this
regard.
Having found that breach, however, I am not convinced that it warrants a
monetary or equitable remedy. The negative effects about which Plaintiffs in fact
complain relate to the Rescission Action. Optimis promptly cured the technical defect
regarding the ownership of Rancho by assigning it to Tinoco. As discussed, however, the
filing of the Rescission Action itself was not a breach of fiduciary duty because the
Director Defendants owed no fiduciary duties at the time of its filing. Furthermore,
Plaintiffs have offered no basis upon which I could award any non-speculative damages
for this breach of the duty of loyalty, as discussed in Section V.F infra.
4. Interfering with the B of I financing
Plaintiffs contend that the Director Defendants breached their fiduciary duties by
unreasonably delaying the B of I financing, withdrawing their support, and then filing the
Rescission Action. This is virtually identical to the tortious interference claim that I
581
Int’l Equity Capital Growth Fund, L.P. v. Clegg, 1997 WL 208955, at *7 (Del. Ch.
Apr. 22, 1997) (noting that directors owe a ―duty to disclose to other directors‖);
see also Hoover Indus. v. Chase, 1988 WL 73758, at *2 (Del. Ch. July 13, 1988).
187
discuss in Section V.D.3 infra. Overall, Plaintiffs contend that the Director Defendants
breached their fiduciary duties by interfering with the Company‘s financing.582
The evidence of disloyally delaying the financing is weak. Morelli testified that it
took longer than necessary to get the documentation together, and Plaintiffs seem to
blame that on Defendants.583 The evidence presented is insufficient to prove a breach of
the duty of loyalty. Plaintiffs have not shown that this purported delay in providing
documentation actually delayed the process of finalizing the loan or that any Defendant
intentionally delayed providing the documentation. Additionally, it is difficult to
understand how the Director Defendants breached their duty of loyalty by resigning from
the Company. Leaving one‘s job could be a breach of contract, but the act of resigning
and therefore choosing to no longer work for a company or owe it fiduciary duties,
without more, generally would not give rise to a breach of the duty of loyalty, absent
unusual circumstances such as those existing in In re Puda Coal, Inc. Stockholders
Litigation.584
582
Plaintiffs rely on Shocking Technologies, Inc. v. Michael, 2012 WL 4482838, at
*10 (Del. Ch. Sept. 28, 2012) (―In short, a loyal director does not put the company
in dire financial circumstances in order to obtain what he perceives as a benefit for
himself and his associated investors.‖). That opinion was vacated after Plaintiffs
filed their brief. 2015 WL 3455210 (Del. Ch. May 29, 2015). The principle for
which Plaintiffs cite it, however, remains viable.
583
Tr. 450-52.
584
C.A. No. 6476-CS, at 22-23 (Del. Ch. Feb. 6, 2013) (TRANSCRIPT).
188
Plaintiffs‘ real complaint is with the Rescission Action, which they contend
scuttled the B of I financing. Again, the Director Defendants were not fiduciaries when
that action was filed. Plaintiffs‘ claim appears to be that by filing a lawsuit at a time
when the Director Defendants were not fiduciaries, those Defendants breached their
fiduciary duties. This claim fails under its own logic. The disruption of the B of I
financing is best understood as a tortious interference claim. I address that argument
infra.
C. Plaintiffs Have Not Proven a Breach of Contract
Plaintiffs contend that Defendants breached the Stockholders Agreement by
adopting Amendment No. 2. These claims, which are asserted against all Defendants, are
legally deficient for the reasons that follow.
1. No Direct Breach
―[T]o state a breach of contract claim, the plaintiff must demonstrate: first, the
existence of the contract, whether express or implied; second, the breach of an obligation
imposed by that contract; and third, the resultant damage to the plaintiff.‖585 There is no
evidence that Defendant Horne ever signed Amendment No. 2, nor was Horne present at
the October 20 Meeting. How he breached the Stockholders Agreement is unexplained
by Plaintiffs.
In their breach of contract claims against the Director Defendants, Plaintiffs assert
that they breached the Stockholders Agreement by refusing to honor the written consents
585
VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003).
189
presented by Morelli on October 20, 2012, thereby breaching Section 3.3(a) of that
agreement. That section entitled the Initial Stockholders to appoint five members of the
nine-member Board. Plaintiffs also assert a breach of Section 11, which is a ―further
assurances‖ clause.
Section 3.1 of the Stockholders Agreement requires the signatories ―to vote or
cause to be voted such Shares at any regular or special meeting of stockholders of the
Company and/or give a written consent as a stockholder with respect to such Shares, in
accordance with the provisions of this Agreement.‖586 Those provisions included a
requirement that ―whenever members of the Board are to be elected by written consent,‖
the Initial Stockholders and the Director Defendants ―agree to vote or act with respect to
their shares so as to: (a) cause and maintain the election to the Board of five (5)
individuals designated by the holders of a majority of the Shares held by the Initial
Stockholders.‖587 The Stockholders Agreement is silent as to how the Initial
Stockholders are to ―designate‖ their candidates to the Director Defendants.
This breach of contract claim is meritless. Plaintiffs claim that the Director
Defendants breached the Stockholders Agreement by not executing written consents to
elect the new directors designated by the Initial Stockholders, i.e., Morelli. Amendment
No. 2 purported to eliminate Morelli‘s right to appoint a majority of the directors of the
586
SHA § 3.1.
587
Id. § 3.3(a).
190
Board.588 Plaintiffs have not shown that Morelli demanded that the Director Defendants
provide such written consents before Amendment No. 2 was adopted. Nor have Plaintiffs
shown how Morelli still had the contractual right to require the Director Defendants to
sign written consents when he did make his demand.589 I have found that Morelli did not
attempt to act by written consents from the stockholders, including consents to be
obtained from the Director Defendants, until after the full Board was called to order for a
588
JX 67.
589
Plaintiffs must prove the existence of the provision that allegedly was breached.
Defendants have asserted that Section 3.3(a) could not have been breached
because it had been amended out of existence. Plaintiffs seem to argue that
Amendment No. 2 never took effect. The burden is on Plaintiffs, however, to
prove that Section 3.3(a) remained in force at the time of the alleged breach, i.e.,
to prove that Amendment No. 2 did not take effect. Two elements were necessary
to effectuate Amendment No. 2: (1) the votes of a majority of the stockholder-
parties to the underlying agreement; and (2) approval by the Board. In their post-
trial briefing, Plaintiffs seemingly contested only the latter of those requirements.
But, the Board did approve Amendment No. 2. The only way that approval would
not have completed the amendment process was if the Board‘s actions were void.
The Delaware Supreme Court, however, has held that board action ―taken in
violation of an equitable rule‖ is voidable, not void. Klaassen v. Allegro Dev.
Corp., 106 A.3d 1035, 1046-47 (Del. 2014). Accordingly, even though the parties
settled the 225 Action in March 2013 and determined that ―any actions of the
board purportedly taken at [the October 20 Meeting] were void,‖ JX 684.0004, I
am not persuaded that that means Amendment No. 2 was not effective when
Morelli attempted to act by the written consents. Rather, I assume that the actions
taken at the October 20 Meeting were only voidable, as the holding in Klaassen
suggests, and therefore remained in force until voided by the settlement
agreement. See generally C. Stephen Bigler & Seth Barrett Tillman, Void or
Voidable?—Curing Defects in Stock Issuances Under Delaware Law, 63 BUS.
LAW. 1109, 1115-16 (August 2008) (discussing the distinction between void and
voidable and noting that the latter is capable of ratification); see also Klaassen,
106 A.3d at 1046 (noting that voidable acts are susceptible to equitable defenses).
191
second time and Amendment No. 2 was adopted. By that time, he no longer had the right
to appoint a majority of the Board.590
2. The Implied Covenant Claims Are Fatally Flawed
Plaintiffs‘ implied covenant claims are more colorable, but still not meritorious.
Plaintiffs make several arguments in this regard, some of which were not introduced until
the post-trial briefing. The first is that Amendment No. 2 violated the implied covenant
590
As discussed in Section V.B.2.c supra, I have rejected, as a factual matter,
Plaintiffs‘ contention that Morelli attempted to act by written consent during the
morning session of the October 20 Meeting. If Morelli properly had invoked
Sections 3.1 and 3.3 of the Stockholders Agreement in the morning, the question
of whether the Director Defendants would have violated the Stockholders
Agreement would be more difficult, but the answer is not as clear as Plaintiffs
argue.
One instance where a party is excused from complying with a contract is when the
counterparty is in material breach of that contract. BioLife Solutions, Inc. v.
Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003) (―A party is excused from
performance under a contract if the other party is in material breach thereof.‖).
Consistent with my rejection of the Koch line of cases, I consider it conceivable
that Delaware law would excuse what otherwise would be a breach of a
stockholders agreement in certain instances, such as when enforcement of the
agreement would undermine the principle established by 8 Del. C. § 141(a) and
consideration of fiduciary duties implicated in a specific situation.
Although I need not reach this issue, I question whether Morelli would have had
the right to demand that the Director Defendants execute written consents so that
he could thwart the Board from determining, in the exercise of its fiduciary duties,
whether Morelli needed to be terminated as CEO. See Rohe v. Reliance Training
Network, Inc., 2000 WL 1038190, at *16 n.50 (Del. Ch. July 21, 2000) (Strine,
V.C.) (―[I]t may well be that the director‘s right to demand a vote was conditioned
on his compliance with an implied covenant not to intentionally breach his duty of
loyalty to the corporation. If the director breached that implied covenant, his prior
material breach could, as a doctrinal matter, be said to excuse subsequent non-
performance by the other party.‖); see also Hollinger Int’l, 844 A.2d at 1076 n.122
(citing Rohe for the proposition that ―an agreement to vote for a director could be
excused if the director later engaged in material misconduct justifying removal‖).
192
of good faith and fair dealing by generally depriving Morelli of the benefit of the bargain
under the Stockholders Agreement. The second argument is that the process of enacting
Amendment No. 2 fell below minimal standards of fairness. The third position is that
Waite solicited the stockholder consents needed to implement Amendment No. 2 by false
pretenses. Under Delaware law, none of these allegations satisfy the standard for stating
an implied covenant claim.
―The ‗implied covenant of good faith and fair dealing involves . . . inferring
contractual terms to handle developments or contractual gaps that . . . neither party
anticipated.‘ It does not apply when the contract addresses the conduct at issue.‖ 591 The
implied covenant ―is recognized only where a contract is silent as to the issue in
dispute.‖592 It is not a tool to re-write contracts and it ―cannot be invoked to override the
express terms of the contract.‖593 Indeed, ―courts should be most chary about implying a
contractual protection when the contract could easily have been drafted to expressly
provide for it.‖594
591
Nationwide Emerging Managers, LLC v. Northpointe Hldgs., LLC, 112 A.2d 878,
896 (Del. 2015) (quoting Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010))
(footnotes omitted). See also Lazard Tech. P’rs, LLC v. Qinetiq N. Am.
Operations LLC, 114 A.3d 193, 196 n.12 (Del. 2015) (collecting cases).
592
AQSR India Private, Ltd. v. Bureau Veritas Hldgs., Inc., 2009 WL 1707910, at
*11 (Del. Ch. June 16, 2009).
593
Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 888 (Del. Ch. 2009).
594
Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1035 (Del. Ch.
2006).
193
Plaintiffs‘ first argument is that they were denied the fruits of their bargain, i.e.,
the right to appoint five members of the Board. Even though the Stockholders
Agreement has a provision expressly allowing for amendment, and even though that
provision literally was followed, Plaintiffs contend that Amendment No. 2 violated the
implied covenant. This argument fails because the express terms of the contract cover
this situation. The Stockholders Agreement previously had been amended to allow
Achieve Physical Therapy, Abdelhamid‘s business, the right to appoint one board
member.595 Thus, the parties themselves previously amended the very provision of the
Stockholders Agreement, Section 3.3, that Plaintiffs now suggest could not be further
amended without violating the implied covenant.596 Moreover, the Stockholders
Agreement contains several other important provisions and rights, so it is not accurate to
say, as Plaintiffs do, that the Stockholders Agreement was amended in a way that
hollowed out the agreement.597 Finally, if Morelli and the Initial Stockholders had
595
JX 69.
596
Plaintiffs‘ argument also ignores the fact that Amendment No. 2 stripped everyone
of their board appointment rights: Morelli, the Director Defendants, and
Abdelhamid. This is not a situation where a majority of the stockholders
conspired to deprive only Morelli of a contractual right while benefiting
themselves. Indeed, Morelli could have triumphed under Amendment No. 2 and
had nine board members installed if he convinced a majority of the stockholders to
favor his nominees.
597
For example, Section 3.6 required consensus of the Rancho Stockholders and the
Initial Stockholders on any Substantial Transactions, such as a merger, JX
68.0006, and Section 4 instituted a ―Market Stand-Off‖ agreement to effectuate a
future underwriting, id. at .0007-.0008. These provisions were not changed by
Amendment No. 2.
194
wished to prevent amendment of their Board-appointment rights under the Stockholders
Agreement, they could have bargained for that right at the outset. They did not and
Morelli cannot seek here via an implied covenant claim what he failed to secure at the
bargaining table.
Plaintiffs‘ second implied covenant claim is that the process by which the
amendment was adopted fell below minimum standards of fairness. The argument is that
Defendants left Morelli and Analog in the dark by not telling them about the amendment.
This argument is based on Adlerstein and VGS. In addition to my having held that the
reasoning in those cases does not control under the facts of this case, this argument is not
a cognizable implied covenant claim, because the complained-of conduct—amendment—
was covered by an express term of the contract and because Plaintiffs have not identified
an implied contractual provision that was violated. Basically, Plaintiffs assert that
Defendants acted unfairly. But, unfairness alone is not an implied covenant claim; either
the contract‘s terms, express or implied, were breached, or they were not. The implied
covenant is not a license for the Court ―‗to create a free-floating duty . . . unattached to
the underlying legal document.‘‖598
The final argument is that Defendants used false justifications to pass the
Amendment. As previously discussed, Plaintiffs have not proven that Waite
misrepresented the import of Amendment No. 2 to the Board. The second aspect of this
598
Nationwide Emerging Managers, 112 A.2d at 896 n.72 (quoting Dunlap v. State
Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005)).
195
argument is that Waite misrepresented the purpose of Amendment No. 2 to the other
stockholders. This is not an implied covenant claim.599 Instead, it appears to involve
Plaintiffs asserting that other people, not parties to this litigation, fraudulently were
induced into adopting Amendment No. 2. Plaintiffs have not explained how they have
standing to bring fraudulent inducement claims on behalf of unnamed stockholders and
then transform those claims into implied covenant claims. They do not have such
standing because only parties to an agreement can assert a claim for breach of the implied
covenant.600
For these reasons, Plaintiffs have failed to prove a breach of the Stockholders
Agreement or the related implied covenant of good faith and fair dealing.
D. Plaintiffs’ Tortious Interference Claims
Plaintiffs also assert three claims for tortious interference with prospective
business relations. They have abandoned all of their tortious interference with contract
claims. With the exception of the B of I financing situation, these claims border on
frivolous. The only tortious interference claim asserted against Horne relates to the DSC.
―To prove a claim for tortious interference with prospective business relations, a
plaintiff must show: (1) a reasonable probability of a business opportunity; (2) intentional
599
Disingenuous invocation of a contractual provision, i.e., utilizing a contractual
provision with ulterior motives, is not an implied covenant claim. Id. at 897.
600
Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 421 n.53 (Del. 2013) (―We
reject [the] argument that the implied covenant applies to nonparties to the
contract.‖), overruled in irrelevant part, Winshall v. Viacom Int’l Inc., 76 A.3d
808 (Del. 2013).
196
interference by a defendant with that opportunity; (3) proximate causation; and (4)
damages.‖601 In the context of tortious interference with contract, Delaware law
602
recognizes a privilege known as the stranger doctrine. Defendants contend that the
privilege also applies to tortious interference with prospective business relations. I
question that, but consider it unnecessary to decide that here.
1. DSC
Horne contends that Plaintiffs‘ interrogatory responses only allege interference
with the 2012 DSC. It is true that those responses only allege that Defendants interfered
with ―the opportunity to obtain media coverage for the benefit of OptimisCorp in
connection with the 2012 DSC in Los Angeles, CA.‖603 Nevertheless, Plaintiffs now
appear to argue that Defendants tortiously interfered with that event in 2010, 2011, 2012,
601
Beard Research, Inc. v. Kates, 8 A.3d 573, 607-08 (Del. Ch.), aff’d sub nom.
ASDI, Inc. v. Beard Research, Inc., 11 A.3d 749 (Del. 2010).
602
The stranger doctrine is a slight extension of the principle that ―a party to a
contract cannot be liable both for breach of that contract and inducing that
breach.‖ Shearin v. E.F. Hutton Gp., Inc., 652 A.2d 578, 590 (Del. Ch. 1994).
Under the stranger doctrine, ―employees . . . of a contracting corporation cannot be
held personally liable for inducing a breach of contract by their corporations when
they act within their role.‖ Id. Stated differently, ―an officer or director may be
held personally liable for tortious interference with a contract of the corporation if,
and only if, said officer or director exceeds the scope of his agency in so doing.‖
Int’l Ass’n of Heat & Frost Insulators & Asbestos Workers Local Union 42 v.
Absolute Envtl. Servs., Inc., 814 F. Supp. 392, 400 (D. Del. 1993). See also
Tenneco Auto. Inc. v. El Paso Corp., 2007 WL 92621, at *5-6 (Del. Ch. Jan. 8,
2007) (describing the stranger doctrine and the policy underlying the privilege).
603
JX 939.0024.
197
and then ―killed the event‖ thereafter.604 This is consistent with Plaintiffs‘ generally
shifting litigation strategy and, in itself, provides a sufficient basis to deny their claim as
to the DSC in all respects except the 2012 event. Regardless, I find no evidence of
tortious interference with the DSC in any year.605
The strongest evidence of ―interference‖ is that Horne allegedly told Owens not to
work on the DSC and that Waite called it a waste of time or money or both. 606 Plaintiffs
also contend that Waite countermanded Morelli‘s instructions. This evidence falls
woefully short of proving tortious interference. By his own testimony, Morelli
acknowledged that the event was successful each year, particularly in 2010. And, Owens
admitted that he ignored the alleged instruction from Horne not to work on the event.
Waite participated in the event all three years, and each of the other Defendants, Atkins,
Smith, and Horne, also participated at least once. Accordingly, Plaintiffs have not proven
there ever was any ―interference‖ with the DSC.
604
POB 66.
605
I summarily dismiss Plaintiffs‘ ipse dixit claim that Defendants ―killed‖ the event
after 2012. This claim was not made previously, and Defendants were not given
fair notice of it. In addition, Plaintiffs failed to identify any evidence supporting
such a claim.
606
Apparently, many people considered the DSC extravagant. E.g., Brys Dep. 192-
93 (―There also was a disagreement because I think various members of the
company thought that the Optimis DSC was—I wouldn‘t say a waste of money,
but it consumed a lot of money and resources and did not give a lot back to the
company.‖).
198
Plaintiffs also completely failed to prove proximate causation, because the event
took place each year and was successful. Plaintiffs seem to contend that, but for the
alleged interference (that Plaintiffs have not proven), the event would have been more
successful and the Company would have received greater media coverage and better
advertising. In that regard, Plaintiffs rely primarily on two specific incidents: the
withdrawal of the LA Tri Club‘s sponsorship and the ALA‘s decision not to sponsor the
event. Neither of those incidents, however, was caused by Defendants. Plaintiffs allege,
for example, that the LA Tri Club backed out because of Rohlinger‘s alleged phone
comment to Owens. But, Rohlinger is not a defendant and Plaintiffs have not proven a
conspiracy, so there is no basis to attribute his action to any of Defendants. Additionally,
based on the evidence, I find that it is more probable than not that the LA Tri Club
backed out because of their ongoing litigation with Morelli. Similarly, there is no
evidence linking Defendants to the ALA‘s decision not to sponsor the DSC event.
Instead, that decision appears to have resulted from the ALA‘s own policies and
limitations as a non-profit entity.
Finally, Plaintiffs have advanced no persuasive evidence of damages. They cite
no record evidence for their bald assertion that ―the Company was damaged because it
was not able to benefit from the visibility it otherwise would have gained through media
coverage and greater penetration of its software into the marketplace.‖607 Optimis
607
POB 66.
199
successfully ran the DSC for at least three years, but Plaintiffs have not provided concrete
evidence of a measurable benefit from that event in any of those years.
2. Preferred Therapy Provider Network
Plaintiffs also contend that Defendants tortiously interfered with a potential
business relationship with the Preferred Therapy Provider Network (―PTPN‖). I did not
include the story of PTPN in the fact Section supra because this claim is so flimsy that it
borders on frivolous. The argument, basically, is that Waite‘s poor negotiating skills
undermined a potential business relationship with PTPN. Plaintiffs contend that Waite
deliberately sabotaged those negotiations.608
According to Morelli, the Company engaged in negotiations with PTPN to partner
on some form of licensing agreement or similar venture in the fall and winter of 2010.
This discussion ―fizzled out at the end of 2010.‖609 Morelli‘s version of events is that
Michael Weinper, the president and cofounder of PTPN, had a wellness initiative called
Physequality and that Optimis had a negotiating strategy under which Optimis would
―present a firm stance to Michael Weinper that to succeed, he had to stop really trying to
cram Physequality down the throats of his members and rebrand and present a new fresh
strategy to them.‖610 Presumably, Physequality would be replaced by OptimisSport,
OptimisPT, or both. Morelli claims that, in the middle of a conference call with Weinper
608
Horne, Atkins, and Smith had no involvement with the PTPN negotiations.
609
Tr. 328 (Morelli).
610
Id. at 330.
200
in early December 2010, Waite interrupted and offered Weinper the opportunity to keep
Physequality. Waite then flew to meet with Weinper and, as a result of that meeting,
Weinper made a proposal to work with Optimis that Morelli described as a nonstarter.
Even according to Morelli, Waite was ―shocked‖ at how off the mark Weinper‘s proposal
was.611 Waite testified that he ―worked hard to try to get that deal to close,‖ which would
have served his own interests as an Optimis stockholder.612 Waite said he volunteered to
fly out to meet with Weinper because, from his perspective, the process was failing and
on the conference call it ―looked like . . . it was going to die.‖613
Even assuming Morelli‘s version of events is accurate, Plaintiffs have not proven
tortious interference. Waite unquestionably acted within the scope of his authority. If
Morelli was displeased with Waite‘s efforts, he should have overruled him as CEO or
otherwise criticized his actions in the nature of a performance review. Instead, Morelli
let Waite meet with PTPN and continue the discussions, notwithstanding Morelli‘s
testimony that Waite already had torpedoed the negotiations. This incident represents
nothing more than a disagreement between two senior executives as to how best to deal
with a prospective client. It is far from an actionable tort.
Furthermore, tortious interference with business relations requires a showing that
there was reasonable probability of a business relationship. The most reasonable
611
Id. at 335.
612
Id. at 1028.
613
Id. at 1029.
201
inference from the testimony of Waite and Morelli is that Weinper was not interested in
letting go of Physequality, as evidenced by PTPN‘s inadequate proposal to Optimis.
Thus, Plaintiffs have not proven a reasonable probability of a business relationship.
Similarly, they also failed to prove the necessary elements of proximate cause and
damages. Thus, Plaintiffs failed to meet their burden of proof on all aspects of the PTPN
claim.
3. Bank of the Internet financing
The B of I financing is a closer call. Ordinarily, the filing of a lawsuit is
privileged action and cannot form the basis of liability for tortious interference.614 Such a
filing, however, must be in good faith. On the one hand, it is difficult to conclude that the
Rescission Action was filed in bad faith. Within days after the Director Defendants filed
it, Optimis tacitly acknowledged the merits of the lawsuit‘s primary claim by reworking
its corporate structure and assigning Rancho away to Tinoco.615 On the other hand, the
timing of the Rescission Action is difficult to ignore. The Director Defendants resigned
on the day the B of I loan documents were supposed to be executed, and they filed the
Rescission Action the next day. This raises the question of whether an otherwise
colorable lawsuit can be filed in bad faith by virtue of its timing.
614
See Corning Inc. v. SRU Biosystems, LLC, 292 F. Supp. 2d 583, 586 (D. Del.
2003) (―Section 773 of the Second Restatement [of Torts] provides a defense to a
party who, in good faith, files an action to protect a legal interest.‖).
615
JX 800.
202
Regardless of whether the Rescission Action was privileged, Plaintiffs have not
met their burden of proving all the elements for a claim of tortious interference. In
particular, it is questionable whether they have shown proximate cause and they
definitely have not shown damages. With respect to proximate cause, the documentary
record indicates that the B of I officials were quite concerned about the Rescission
Action.616 The lawsuit, however, was not B of I‘s only concern. Their representatives
noted the ―huge operational risk with [the Director Defendants‘] departure‖ and wrote
that the lender needed to ―perform an operational assessment of Rancho with your newly
appointed managers and determine its going concern.‖617 Thus, the Director Defendants‘
resignation itself was a concern.
Additionally, the record shows that B of I continued negotiations with Optimis
after the Rescission Action was filed.618 On July 18, a B of I representative emailed
Morelli and stated that the lender‘s ―chief legal counsel believes that unless all of the
complaints have been dismissed we are not in a position to go forward.‖619 That email
specifically references the TRO in the Rescission Action, but Geller‘s litigation against
616
JX 794.0001 (6/28/13 email from B of I representative to Morelli and others:
―This litigation and the issues raised by the litigation have drastically changed
(i.e., increased) the risk profile of the proposed loan transaction.‖).
617
JX 793.0001 (6/28/13 email from B of I representative to Morelli and others).
618
E.g., JX 794.0001 (―This email is not a loan commitment, but rather an expression
of the Bank‘s willingness to continue to investigate the viability of making a loan
to OptimisCorp.‖).
619
JX 813.0001.
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the Company also remained pending at this time, making it unclear if B of I required that
litigation to be resolved as well. Overall, it seems that B of I was concerned primarily,
but not exclusively, about the Rescission Action. In any event, even assuming arguendo
that Plaintiffs have met their burden of proof as to proximate cause, Plaintiffs have made
no showing sufficient to satisfy their burden with respect to damages.
The Company, according to Morelli, eventually did receive financing from a
Boston-based lender called SCM sometime in the summer of 2013.620 The terms of that
financing are not in the record and it is unclear not only when that loan was made, but
also whether the SCM loan was on better or worse terms than the B of I loan. There also
has been no effort to quantify the purported harm to Optimis, if any, caused by the delay
in not receiving financing. Thus, even if Plaintiffs had made a showing sufficient to
overcome the defense that filing a lawsuit is a privileged action, and even if they
sufficiently had proven proximate cause, Plaintiffs failed to meet their burden of showing
damages. Therefore, Plaintiffs‘ claim for tortious interference with the B of I financing
will be dismissed.
E. There Was No Aiding and Abetting
It is unclear whether Plaintiffs assert that Smith and Atkins aided and abetted
Waite,621 but Plaintiffs have asserted that Horne aided and abetted the alleged wrongs
committed by the Director Defendants, and Waite in particular, even if Horne was not a
620
Tr. 669-72. That is less than three months after the filing of the Rescission Action.
621
Plaintiffs essentially put all of their eggs in the ―vast conspiracy‖ basket.
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member of a conspiracy. Aiding and abetting requires proof of: ―(1) the existence of a
fiduciary relationship; (2) a breach of that fiduciary‘s duty; (3) Defendants‘ knowing
participation in that breach; and (4) damages.‖622 Conduct by a fiduciary (such as
Horne), however, that would amount to aiding and abetting is instead an independent
breach of that fiduciary‘s duties.623
Here, the aiding and abetting claim against Horne fails because there was no
underlying breach of fiduciary duty with which he was involved. The only breach of
fiduciary duty claim Plaintiffs have proved involved the failure of the Director
Defendants to inform the Board about the flaw in Optimis‘ corporate structure. There is
no evidence Horne knew of that defect or that Horne had any involvement with the
subsequent Rescission Action. Additionally, with respect to most of the facts underlying
Plaintiffs‘ fiduciary duty claims—such as manipulating the Geller Investigation and
attempting to take over the Company—Waite acted alone. There is no evidence that
Smith or Atkins played any role in the Geller Investigation. Horne‘s role was limited to:
(1) dealing with Morelli‘s attempt to have Horne and Brys convince Geller to drop her
claims; (2) being interviewed by Solomon, at which time he revealed his biases; and (3)
advising Brys about the possible need to amend the Stockholders Agreement. I already
have discussed the first two items. As to the third, it is not surprising that Horne, as
622
In re Crimson Exploration S’holder Litig., 2014 WL 544919, at *27 (Del. Ch. Oct.
24, 2014).
623
Higher Educ. Mgmt. Gp., Inc. v. Mathews, 2014 WL 5573325 at *13 & n.78 (Del.
Ch. Nov. 3, 2014).
205
Optimis‘ CFO, knew about the provision in the Stockholders Agreement effectively
giving Morelli the ability to appoint a majority of Optimis‘ Board until early 2015.
Similarly, once Brys told Horne that it might be necessary to remove Morelli as CEO, it
would have been consistent with Horne‘s duties as an officer of Optimis to advise her of
the provision in the Stockholders Agreement that would enable Morelli to reverse any
such action. Thus, Plaintiffs have not proven any aiding and abetting.
F. Plaintiffs’ Damages Calculations Are Speculative and Unreliable
Plaintiffs request approximately $50 million in damages and equitable relief in the
form of a two-year extension of the Stockholders Agreement. I conclude first that
Plaintiffs have not proven any damages.
With respect to money damages, Plaintiffs‘ showing in this regard was inadequate
to support any form of monetary relief. Plaintiffs‘ damages expert, Walter Bratic,
calculated damages by comparing the Company‘s actual performance against a
combination of prior management projections developed in 2012 and new management
projections developed after Horne and the Director Defendants left Optimis.624 As
Defendants pointed out in their pre- and post-trial briefing, the problems with Plaintiffs‘
damages calculations are legion. Yet, Plaintiffs have failed to address the majority of
those concerns. The most fundamental flaw is that Bratic relied upon management
projections (the ―Projections‖) that are unreliable and highly speculative.
624
JX 1085.0001. Horne also contends that the latter projections were developed for
this litigation and not in the ordinary course of business, rendering them especially
unreliable. I need not reach this argument, however.
206
The Projections come from Optimis‘ September 2012 PPM.625 Notably, although
the Projections paint a rosy picture of Optimis‘ future, no one invested in the Company
on the basis of that PPM. I question the overall growth predicted by the Projections in
general. More importantly, I find no reliable basis in the record whatsoever for the
predicted explosion in revenue from the Software Division. The following table shows
the revenue and income-before-tax figures from the Projections, with year-over-year
growth percentages indicated in brackets:626
2010 (A) 2011 (A) 2012 (E) 2013(E) 2014(E)
Clinical $32,143,500 $39,778,839 $48,862,040 $58,940,076
$28,383,990
Revenue [13.25%] [23.75%] [22.83%] [20.63%]
Software $1,001,157 $1,663,539 $6,372,160 $15,593,826
$528,565
Revenue [89.41%] [66.16%] [283.05%] [144.72%]
Total Income
$ (707,841) $19,983 $ (1,641,631) $1,226,414 $11,287,759
Before Tax
The Projections estimate that software revenue would be fifteen times larger by the end
of 2014 than it was in 2011. Similarly, the Company‘s income before taxes was expected
to be roughly nine times larger in 2014 than in 2013.
Part of the clinical growth was expected to come from acquisitions of additional
clinics, which the Company has not made. Additionally, the assumed growth in acquired
clinics, fifteen per year from 2012-2014 and then ten per year for 2015 and 2016, is
entirely out of line with the fact that the Company acquired, on average, only 4.25 clinics
625
JX 289.
626
JX 289.0119. ―(A)‖ represents actual results and ―(E)‖ represents expected
results.
207
per year from 2009-2012.627 Most of the Company‘s clinical acquisitions occurred in
2007 and 2008, when 19 and 21 clinics were acquired, respectively. There is no basis in
the record to assume that the Company suddenly would start acquiring dramatically more
clinics.
With respect to the Software Revenue, the evidence shows that OptimisPT was, at
best, only marginally more developed as of 2012 than it was when it was released in late
2009. Thus, PT provides no support for the predicted growth explosion.628 Indeed,
Levine testified that, even as of trial in February 2015, OptimisPT still was not being
developed quickly enough and the Company was ―in the same boat of not having
resources.‖629 The likely contribution of OptimisSport to revenue and income is even
630
more speculative. Accordingly, I find that the factual record does not support the
massive predicted growth in revenue for the Software Division.
627
JX 1014.0005-.0006.
628
Tr. 754-56 (Fearon).
629
Id. at 1597.
630
The revenue figures for OptimisSport border on fantasy. Most of the testimony at
trial suggested that Sport was not even at a level to be salable during most of the
time period relevant to this litigation. It generated or was predicted to generate
revenue for the first time at the end of 2012, amounting to $11,880. The
Projections then indicate that Sport was predicted to generate $558,000 in 2013,
$3.4 million in 2014, $8.4 million in 2015, $13.4 million in 2016, $16 million in
2017, and $16.1 million in 2018. JX 1085.0031-.0038. Other than the fact that
senior management of Optimis, including Horne, were willing to give these
Projections to investors, there has been no evidentiary showing that these revenue
figures for the Sport product are anything more than mere speculation. Regarding
the creation of the Projections, Horne testified that Morelli provided the inputs for
208
Perhaps these flaws could be rationalized, to some extent, if the Company
previously had been remotely in the ballpark with respect to its forecasts. But, the
evidence showed that the Company‘s previous projections egregiously overstated future
performance. In the 2009 PPM, the Company forecasted that, in 2012, the Clinical
Services Division would have 90 clinics and $63 million in revenue and the Software
Division would generate $23 million in revenue from OptimisPT alone. 631 The
September 2012 PPM had reduced 2012 revenues for the Clinical Services Division,
which only had 57 clinics, to about $40 million and revenue for the Software Division,
which now included both OptimisPT and OptimisSport, to $1.66 million.632 In quite an
understatement, Horne explained: ―It‘s just—this company did not meet its forecasts.‖633
As of 2012, Optimis‘ 2009 PPM had overstated the number of clinics the Company
would have by 33 and achieved only about 63% of its predicted revenue for the Clinical
Services Division.
Sport: ―If I was looking at OptimisSport, the only person we could really go to
would be Alan, because we never actually developed a product or determined how
we were going to price it.‖ Tr. 1324 (emphasis added). Basically, the Sport
projections were based solely on Morelli‘s vision of the product, which had not
been developed yet. Horne continued: ―But, again, we didn‘t know how we were
going to market it to the [physical therapists]. All we knew is we hoped we were
going to get 70 to $80 a visit. It was going to be cash from the individual patient,
not the insurance companies. And we were going to try and charge a percentage
of that per-visit fee as a licensing fee.‖ Id. at 1325.
631
JX 75.0113; Tr. 1328-29 (Horne).
632
JX 289.0119; Tr. 1329-31 (Horne).
633
Tr. 1331.
209
I therefore find that the Projections that form the basis of Plaintiffs‘ damages
calculation are speculative, especially as to OptimisSport, and generally unreliable.
There is ample support in Delaware precedent for rejecting damages claims based
primarily on speculative evidence.634 Although I need not address all of the other
problems with Bratic‘s damages calculations, I note the following additional concerns.
Neither Plaintiffs nor Bratic made any effort to apportion the harm allegedly suffered
among the three separate plaintiffs, namely, Morelli, Optimis, and Analog.635 Plaintiffs
give short shrift to this concern, but it remains the fact that each Plaintiff has to prove that
he or it is entitled to damages. There also is no indication that Bratic apportioned the
harm from each alleged wrong. Even though I have found liability on one fiduciary duty
claim, the evidence of record makes it impossible to determine what amount of damages,
if any, was caused by that wrong.
Plaintiffs contend that, because they have shown that Defendants engaged in
wrongdoing, the Court should overlook the speculative nature of their damages
calculation.636 In the same vein, they note that ―Delaware law dictates that the scope of
634
See In re Mobilactive Media, LLC, 2013 WL 297950, at *24 (Del. Ch. Jan. 25,
2013); cf. Doft & Co. v. Travelocity.com Inc., 2004 WL 1152338, at *5-6 (Del.
Ch. May 21, 2004) (finding management projections unreliable in the context of
an appraisal action because, among other reasons, management themselves did not
regard them as reliable).
635
Tr. 943 (Bratic).
636
See In re Mobilactive Media, 2013 WL 297950, at *24 (―Public policy has led
Delaware courts to show a general willingness to make a wrongdoer ‗bear the risk
of uncertainty of a damages calculation where the calculation cannot be
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recovery for a breach of the duty of loyalty is not to be determined narrowly.‖ 637 It is true
that this Court shows solicitude for plaintiffs with respect to the difficulty of precise
damages in certain circumstances and that damages in duty of loyalty cases serve the dual
purposes of compensating for injury and deterring future breaches of the duty of loyalty.
It remains the law, however, that ―when acting as the fact finder, this Court may not set
damages based on mere ‗speculation or conjecture‘ where a plaintiff fails adequately to
prove damages.‖638 Here, Plaintiffs‘ damages calculation is not merely uncertain, it is
speculative and unreliable. Even giving Plaintiffs the benefit of the doubt, the
Projections do not provide an appropriate basis from which to determine damages and
any damages award based on them would be mere conjecture. Additionally, even though
I have found one breach of the duty of loyalty—albeit a minor one in comparison to the
claims Plaintiffs alleged—I reach the same conclusion.
Even though Plaintiffs have made out one of their claims relating to the Director
Defendants‘ failure to inform the Board of Optimis‘ faulty corporate structure, I conclude
that no equitable relief is warranted on that claim because of Plaintiffs‘ unclean hands in
this action, particularly with respect to their witness tampering in general and treatment
mathematically proven.‘‖) (quoting Great Am. Opportunities, Inc. v. Cherrydale
Fundraising, LLC, 2010 WL 338219, at *23 (Del. Ch. Jan. 29, 2010)).
637
Thorpe v. CERBCO, Inc., 676 A.2d 436, 445 (Del. 1996).
638
In re Mobilactive Media, 2013 WL 297950, at *24 (quoting Medek v. Medek, 2009
WL 2005365, at *12 n.78 (Del. Ch. July 1, 2009)).
211
of Geller in particular.639 Those actions were inequitable and I consider it appropriate to
apply the doctrine of unclean hands here to deny Plaintiffs any nominal equitable relief to
which they otherwise might have been entitled for the one breach they did prove, out of
the scores of violations they asserted over the course of this litigation.640 Finally, based
on my rulings on the merits, which generally favor Defendants, I deny Plaintiffs‘ request
for their attorneys‘ fees and expenses.
Defendants also have requested their attorneys‘ fees and expenses. That request
also is denied. Although Defendants prevailed on most issues, many of those issues were
close and the Court needed to resolve numerous disputed issues of material fact regarding
them. Some of those disputes were resolved against Defendants. In addition, Plaintiffs‘
legal position regarding the Adlerstein case, for example, was reasonable, even if not
successful. Although after considering all the evidence, I generally adopted Defendants‘
version of the facts and, in particular, I rejected Plaintiffs‘ conspiracy theory, it is my
opinion that there was sufficient evidence to make many of the positions taken by
Plaintiffs, and expertly presented by their counsel, plausible. As a result, apart from the
witness tampering discussed at length supra, I do not find that Plaintiffs engaged in bad
639
See supra Section I.
640
See Nakahara v. NS Am. Trust, 718 A.2d 518, 522 (Del. Ch. 1998) (―The unclean
hands doctrine is aimed at providing courts of equity with a shield from the
potentially entangling misdeeds of the litigants in any given case. The Court
invokes the doctrine when faced with a litigant whose acts threaten to tarnish the
Court‘s good name. In effect, the Court refuses to consider requests for equitable
relief in circumstances where the litigant‘s own acts offend the very sense of
equity to which he appeals.‖).
212
faith or vexatious litigation conduct that would warrant departing from the American
Rule and awarding Defendants, or any of them, their attorneys‘ fees. I consider my
finding that there was improper witness tampering here to be important, and, on that
basis, I imposed serious merits-based sanctions. Because the witness tampering issue is
relatively novel in Delaware and Plaintiffs ultimately produced a significant number of
the underlying documents relating to the settlements in question, I do not believe an
additional sanction in the form of attorneys‘ fees is appropriate here.
VI. CONCLUSION
For the foregoing reasons, Plaintiffs are not entitled to any relief. The conspiracy
alleged was not proven. Plaintiffs did prove a breach of the duty of loyalty with respect
to Defendants‘ failure to alert the Board of the flaw in Optimis‘ corporate structure
regarding Rancho, but Plaintiffs did not prove damages for that wrong. Otherwise,
Plaintiffs claims failed. Plaintiffs‘ claims, therefore, shall be dismissed with prejudice.
An implementing order accompanies this Opinion.
213