Osco Motors Company LLC v. Marine Acquisition Corp et al

Filing 34

REPORT AND RECOMMENDATIONS re 21 MOTION to Dismiss Claims Two, Three and Four, and to Stay Proceeding filed by Marine Acquisition Corp, HIG Middle Market LLC. Please note that when filing Objections pursuant to Federal Rule of Civil Procedure 72(b)(2), briefing consists solely of the Objections (no longer than ten (10) pages) and the Response to the Objections (no longer than ten (10) pages). No further briefing shall be permitted with respect to objections without leave of the Court. Objections to R&R due by 12/19/2013. Signed by Judge Mary Pat Thynge on 12/2/13. (cak)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
OSCO MOTORS COMPANY, LLC, d/b/a
OSCO MOTORS CORPORATION, and
ENGINE DISTRIBUTORS, INC.
Plaintiffs,
v.
MARINE ACQUISITION CORP. d/b/a
SEASTAR SOLUTIONS f/k/a TELEFLEX
MARINE and H.I.G. MIDDLE MARKET,
LLC,
Defendants.

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C. A. No. 13-868-RGA-MPT

REPORT AND RECOMMENDATION
I.

INTRODUCTION
On May 17, 2013, plaintiff, Osco Motors Company, LLC (“Osco”) filed its original

complaint against defendants Marine Acquisition Corp. d/b/a Seastar Solutions f/k/a
Teleflex Marine (“Seastar”) and H.I.G. Middle Market, LLC (“HIG”) (collectively
“defendants”).1 The complaint alleged four causes of action: (1) tortious interference
with contractual relations; (2) injunctive relief; (3) breach of contract; and (4) breach of
the duty to negotiate in good faith.2
On July 22, 2013, defendants filed a motion to dismiss.3 Defendants moved to
dismiss the claim of tortious interference with contractual relations pursuant to Federal
Rule of Civil Procedure (“FED. R. CIV. P.”) 12(b)(1) for lack of standing, and the

1

D.I. 1.
Id.
3
D.I. 12.
2

remaining three claims pursuant to FED. R. CIV. P 12(b)(6) for failure to state a claim.4
In response, on August 6, 2013, Osco filed an amended complaint adding Osco Motors
Corporation, the name Osco does business as, and Engine Distributors, Inc. (“EDI”)
(collectively “plaintiffs”), Osco’s parent company, as plaintiffs.5 After these additions,
defendants withdrew their FED. R. CIV. P. 12(b)(1) motion to dismiss for lack of standing
as to the first count.6
Defendants now move to dismiss the second, third, and fourth counts of the
amended complaint pursuant to FED. R. CIV. P. 12(b)(6) for failure to state a claim.7
Defendants also move to stay the proceedings pending the resolution of an arbitration
between plaintiffs and non-party Quality Mark, Inc. (“QM”), which is tentatively
scheduled on January 13, 2014.8 Both issues are presently before the court.
II.

BACKGROUND
A.

Parties

Osco produces and distributes marine engines, manifolds, risers, and accessory
parts.9 Osco is a wholly-owned subsidiary of EDI.10 Seastar is an end producer of
finished marine boats and boating products.11 Seastar regularly purchases products
made by Osco and utilizes these products in its finished marine boats and boating

4

Id.
D.I. 19.
6
D.I. 20.
7
D.I. 21.
8
Id.
9
D.I. 19 ¶ 7.
10
Id. ¶ 8.
11
Id. ¶ 10.
5

2

products.12 These products include manifolds produced by Osco.13 HIG is a private
equity and venture capital investment firm, as well as Seastar’s partner and equity
sponsor.14
B.

Factual Background

On January 1, 2011, Osco entered into a Manufacturing Agreement15 with QM,
where QM would produce manifolds for Osco on an exclusive basis.16 Pursuant to the
Manufacturing Agreement, QM was not permitted to manufacture Osco products for any
entity other than Osco, or to sell Osco products directly to any other entity.17
Additionally, under the Manufacturing Agreement, if Osco was sold during the life of the
agreement, the Manufacturing Agreement would automatically renew under the same
terms and conditions with the company that purchased Osco.18 Osco sold manifolds
and other manufactured products to Seastar, which QM produced for Osco pursuant to
the Manufacturing Agreement.19
In early 2011, Seastar and HIG inquired about purchasing Osco.20 As part of this
inquiry, Seastar, HIG, Osco, and EDI entered into a Confidentiality Agreement21 on or
about July 25, 2011.22 The Confidentiality Agreement contemplated a “possible

12

Id.
Id.
14
Id. ¶ 12.
15
D.I. 23, Ex. A.
16
D.I. 19 ¶ 13.
17
Id. ¶ 19; D.I. 23, Ex. A § 2.2.
18
D.I. 19 ¶ 15; D.I. 23, Ex. A § 5.1.
19
D.I. 19 ¶¶ 21-22.
20
Id. ¶ 24.
21
D.I. 23, Ex. B.
22
D.I. 19 ¶ 25.
13

3

collaboration” between HIG and plaintiffs.23 The Confidentiality Agreement was signed
by the HIG’s President, Glenn Cummins Jr.24
On or about September 11, 2012, Osco, together with Seastar and HIG, entered
into a Letter of Intent,25 whereby Osco agreed not to solicit or negotiate any other
potential agreements regarding the sale of Osco with any other company.26 Defendants
agreed to conduct timely due diligence regarding the transaction.27 The content of the
negotiations regarding defendants’ acquisition were not to be disclosed to any third
parties, and the terms of the Confidentiality Agreement were incorporated into the Letter
of Intent.28 In late January 2013, Osco and defendants entered into a second Letter of
Intent to extend the exclusivity period whereby defendants would complete their due
diligence.29
During the course of defendants’ due diligence and investigation regarding the
potential purchase of Osco, they received information regarding Osco’s pricing,
customers, quantities shipped, and revenues.30 As a result of their investigation,
defendants were provided the Manufacturing Agreement entered into between Osco
and QM and became aware of the close relationship between the same.31 Additionally,
defendants learned from the Manufacturing Agreement that QM had complete control

23

Id. ¶ 28; D.I. 23, Ex. B.
Id.
25
D.I. 23, Ex. C.
26
D.I. 19 ¶ 29; D.I. 23, Ex. C.
27
D.I. 19 ¶ 29.
28
Id.
29
Id. ¶ 41.
30
Id. ¶ 34.
31
Id. ¶ 35.
24

4

over the Osco product that was being shipped to Osco customers, and the tooling
utilized to manufacture the product.32 As a result of this arrangement, QM could breach
the terms of the Manufacturing Agreement, and ship Osco products, or products
manufactured with the tooling jointly owned by Osco and QM, directly to any customer.33
Once Seastar obtained this information, it communicated with QM about obtaining Osco
manifolds directly from QM.34
In November and December 2012, QM’s President, Mark Ebbenga, had multiple
meetings with Seastar’s Vice President of Sales to discuss the possible purchase of
Osco.35 During these meetings, Ebbenga and Seastar’s Vice President of Sales agreed
QM would sell Osco products directly to Seastar without Osco’s involvement.36 As a
result of these conversations, QM contacted Osco for its approval to sell Osco products
and manifolds directly to Seastar.37 Osco refused to grant permission pursuant to the
Manufacturing Agreement, and informed Seastar all orders for Osco products must go
through Osco and could not be transmitted through QM.38
Nonetheless, Seastar purchased Osco products directly from QM.39 Defendants
did not inform Osco of any direct purchase.40 Defendants now claim ownership of
tooling that is presently jointly owned by QM and Osco under the Manufacturing

32

Id. ¶ 36.
D.I. 19 ¶ 36.
34
Id. ¶ 37.
35
Id. ¶ 32.
36
Id. ¶ 33.
37
Id. ¶ 39.
38
Id. ¶ 38.
39
D.I. 19 ¶ 44.
40
Id.
33

5

Agreement,41 and have entered into agreements with QM to control the production of
Osco products and to use the Osco tooling, within QM’s possession.42
As a result of defendants’ conduct, plaintiffs initiated the instant action alleging
tortious interference with contractual relations, injunctive relief, breach of contract, and
breach of the duty to negotiate in good faith.43 Shortly thereafter, plaintiffs amended the
complaint to change the names of the parties in response to defendants’ motion to
dismiss for lack of standing.44 Subsequently, defendants moved to dismiss the second,
third, and fourth counts of the amended complaint pursuant to FED. R. CIV. P. 12(b)(6)
for failure to state a claim,45 and to stay the proceedings pending the resolution of an
arbitration scheduled between plaintiffs and non-party QM.46
C.

Pending Arbitration Between Osco & QM

The Manufacturing Agreement contains a mediation and arbitration clause
requiring disputes arising from the signatories to be resolved through alternative dispute
resolution.47 On May 30, 2013, Osco filed a demand for arbitration against QM before
the American Arbitration Association (“AAA”).48 On June 12, 2013, QM filed its own
demand for arbitration against Osco, EDI, and Glenn Cummings, Jr., EDI’s Chief
Executive Officer and controlling shareholder.49 The arbitration was originally scheduled

41

Id. ¶ 45.
Id. ¶ 46.
43
D.I. 1.
44
D.I. 19.
45
D.I. 21.
46
Id.
47
D.I. 19 ¶ 20; D.I. 23, Ex. A § 10.11.
48
D.I. 23, Ex. E.
49
Id., Ex. F.
42

6

for November 11-13, 2013, but was continued to January 13-15, 2014.50
III.

DISCUSSION
A.

12(b)(6) Motion to Dismiss Standard

FED. R. CIV. P. 12(b)(6) governs a motion to dismiss a complaint for failure to
state a claim upon which relief can be granted.51 The purpose of a motion under Rule
12(b)(6) is to test the sufficiency of the complaint, not to resolve disputed facts or decide
the merits of the case.52 “The issue is not whether a plaintiff will ultimately prevail, but
whether the claimant is entitled to offer evidence to support the claims.”53 A motion to
dismiss may be granted only if, after “accepting all well-pleaded allegations in the
complaint as true, and viewing them in the light most favorable to the plaintiff, plaintiff is
not entitled to relief.”54 While the court draws all reasonable factual inferences in the
light most favorable to a plaintiff, it rejects unsupported allegations, “bald assertions,”
and “legal conclusions.”55
50

D.I. 22 at 9; D.I. 29 at 9, 20.
FED. R. CIV. P. 12(b)(6).
52
Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993).
53
In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997)
(internal quotations and citations omitted); see also Bell Atlantic Corp. v. Twombly, 550
U.S. 544, 563 n.8 (2007) (“[W]hen a complaint adequately states a claim, it may not be
dismissed based on a district court's assessment that the plaintiff will fail to find
evidentiary support for his allegations or prove his claim to the satisfaction of the
factfinder.”).
54
Maio v. Aetna, Inc., 221 F.3d 472, 481-82 (3d Cir. 2000) (citing Burlington, 114
F.3d at 1420).
55
Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997) (citations
omitted); see also Schuylkill Energy Res., Inc. v. Pa. Power & Light Co., 113 F.3d 405,
417 (3d Cir. 1997) (citations omitted) (rejecting “unsupported conclusions and
unwarranted inferences”); see generally Associated Gen. Contractors of Cal., Inc. v.
Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983) (“It is not . . . proper to
assume [plaintiff] can prove facts that it has not alleged or that the defendants have
violated the . . . laws in ways that have not been alleged.”).
51

7

To survive a motion to dismiss, a plaintiff’s factual allegations must be sufficient
to “raise a right to relief above the speculative level . . . .”56 Plaintiffs are therefore
required to provide the grounds of their entitlement to relief beyond mere labels and
conclusions.57 Although heightened fact pleading is not required, “enough facts to state
a claim to relief that is plausible on its face” must be alleged.58 A claim has facial
plausibility when a plaintiff pleads factual content sufficient for the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.59 Once
stated adequately, a claim may be supported by showing any set of facts consistent
with the allegations in the complaint.60 Courts generally consider only the allegations
contained in the complaint, exhibits attached to the complaint, and matters of public
record when reviewing a motion to dismiss.61
B.

12(d) Matters Outside the Pleading Standard

FED. R. CIV. P. 12(d) provides “[i]f, on a motion under Rule 12(b)(6) . . . , matters
outside the pleadings are presented to and not excluded by the court, the motion must

56

Twombly, 550 U.S. at 555 (citations omitted); see also Victaulic Co. v. Tieman,
499 F.3d 227, 234 (3d Cir. 2007) (citing Twombly, 550 U.S. at 555).
57
See Twombly, 550 U.S. at 555 (citing Papasan v. Allain, 478 U.S. 265, 286
(1986)).
58
Twombly, 550 U.S. at 570; see also Phillips v. County of Allegheny, 515 F.3d
224, 233 (3d Cir. 2008) (“In its general discussion, the Supreme Court explained that
the concept of a ‘showing’ requires only notice of a claim and its grounds, and
distinguished such a showing from ‘a pleader's bare averment that he wants relief and is
entitled to it.’”) (quoting Twombly, 550 U.S. at 555 n.3).
59
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Twombly, 550 U.S. at
556).
60
Twombly, 550 U.S. at 563 (citations omitted).
61
See, e.g., Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d
1192, 1196 (3d Cir. 1993) (citations omitted).
8

be treated as one for summary judgment under Rule 56.”62 However, “a document
integral to or explicitly relied upon in the complaint may be considered [on a motion to
dismiss pursuant to FED. R. CIV. P. 12(b)(6)] without converting the motion into one for
summary judgment.”63 A document will be considered integral to the complaint where
the plaintiff’s claim cannot be evaluated without some reference to that document.64
IV.

ANALYSIS
A.

Motion to Stay Proceedings

As an initial matter, the court will address defendants’ argument to stay the
proceedings pending arbitration between plaintiffs and QM.65 “The power to stay
proceedings is incidental to the power inherent in every court to control the disposition
of the causes on its docket with the economy of time and effort for itself, for counsel,
and for litigants. How this can best be done calls for the exercise of judgment, which
must weigh competing interests and maintain an even balance.”66 “[I]f there is even a
fair possibility that the stay for which [the movant] prays will work damage to some one
else,” “the [movant] for a stay must make out a clear case of hardship or inequity in
being required to go forward.”67 “Only in rare circumstances will a litigant in one cause
be compelled to stand aside while a litigant in another settles the rule of law that will

62

FED. R. CIV. P. 12(d).
See, e.g., Angstadt v. Midd-West School District, 377 F.3d 338, 342 (3d Cir.
2004) (quoting U.S. Express Lines, Ltd. v. Higgins, 281 F.3d 1250, 1261 (3d Cir. 2002)
(internal quotation marks and citations omitted) (emphasis deleted)).
64
See id.
65
D.I. 22 at 17-20.
66
Landis v. N. Am. Co., 299 U.S. 248, 254-55 (1936).
67
Id. at 255.
63

9

define the rights of both.”68
Defendants fail to meet their burden to stay the proceedings. They argument is
three-fold. First, they contend this matter would only be stayed a few months because
arbitration is “imminent.”69 At the time of defendants’ motion, the arbitration was
scheduled for November 2013,70 which has since been continued until January 13,
2014.71 Second, defendants maintain a stay is appropriate because the instant action is
in its initial stages–defendants have not yet answered the amended complaint, and no
discovery has been exchanged.72 Third, they argue a stay has the potential to eliminate
or narrow plaintiffs’ causes of action because the arbitration between plaintiffs and QM
addresses whether QM breached the Manufacturing Agreement when it sold Osco
products directly to Seastar.73 Defendants aver the arbitration effects plaintiffs’ tortious
interference claim in the instant matter.74
None of these arguments demonstrate any type of hardship to defendants, which
is required to stay the instant action.75 Conversely, there is, at a minimum, a fair
possibility plaintiffs situation would be negatively affected by delaying the present
litigation. It is unclear how the findings on arbitration may affect issues in the instant
matter, specifically Seastar’s liability. Although arbitration is presently scheduled for
January 2014, it was rescheduled, resulting in a delay of two months, and when a
68

Id.
D.I. 22 at 18.
70
Id.
71
D.I. 29 at 20.
72
D.I. 22 at 18.
73
Id. at 18-19.
74
Id.
75
See Landis, 299 U.S. at 255.
69

10

decision will be rendered in not certain. Arbitration will not fully address Seastar’s
liability in this matter. Therefore, since defendants have not demonstrated a hardship to
overcome plaintiffs’ right to pursue litigation, their motion to stay should be denied.
B.

Documents Outside Complaint

The court finds the Manufacturing Agreement, Confidentiality Agreement, and the
Letters of Intent are integral to and explicitly relied upon in the amended complaint;
therefore, it may consider these documents in analyzing plaintiffs’ allegations under the
standards of Rule 12(b)(6).
Plaintiffs’ second cause of action, for injunctive relief against Seastar, explicitly
relies on the existence of the Manufacturing Agreement between Osco and QM, and
QM’s alleged breach of the Agreement.76 Therefore, the Manufacturing Agreement is
integral to and explicitly relied upon in the amended complaint.
Additionally, plaintiffs’ third cause of action, for breach of contract against
Seastar and HIG, relies on the existence of the Confidentiality Agreement among Osco,
Seastar, and HIG.77 Not only does the amended complaint reference this Agreement, it
quotes therefrom.78 Therefore, the Confidentiality Agreement is integral to and
expressly focused upon in the amended complaint.
Plaintiffs’ fourth cause of action, for breach of the duty to negotiate in good faith
against Seastar and HIG, relies on the Letters of Intent between Osco, Seastar, and

76

See D.I. 19 ¶¶ 61-70.
See id. ¶¶ 72-79.
78
See id. ¶ 72 (quoting specific language–“potential collaboration”–found in the
Confidentiality Agreement).
77

11

HIG.79 Therefore, the Letters of Intent are referenced within and specifically relied upon
in the amended complaint.
Lastly, while plaintiffs reference the arbitration scheduled with QM in the factual
background of the amended complaint,80 they do not rely on the arbitration proceeding
to support liability under their claims.81 Nor is the arbitration proceeding integral to the
amended complaint because plaintiffs’ claim under the present motion can be evaluated
without reference to the proceeding. As a result, materials from that proceeding will not
be considered in analyzing defendants’ motion to dismiss.
C.

Defendants’ Motion to Dismiss
1.

Count Two–Injunctive Relief

In Count Two, plaintiffs request Seastar be enjoined from ordering Osco products
directly from QM.82 In determining whether a preliminary injunction should be issued, a
court considers the following factors:
(1) the likelihood that the moving party will succeed on the merits;
(2) the extent to which the moving party will suffer irreparable harm
without injunctive relief;
(3) the extent to which the nonmoving party will suffer irreparable harm if
the injunction is issued; and
(4) the public interest.83
The Third Circuit requires a party seeking an injunction must meet all four criteria, as
“[a] plaintiff's failure to establish any element in its favor renders a preliminary injunction

79

See id. ¶¶ 81-89.
Id. ¶ 48.
81
See id. ¶¶ 50-89.
82
D.I. 19 ¶¶ 60-70.
83
See, e.g., Liberty Lincoln-Mercury, Inc. v. Ford Motor Co., 562 F.3d 553, 556
(3d Cir. 2009).
80

12

inappropriate.”84 The burden of proving the first two elements is on the party moving for
an injunction.85 The Third Circuit has long “recognized that the grant of injunctive relief
is an ‘extraordinary remedy, which should be granted only in limited circumstances.’”86
The Third Circuit “has repeatedly insisted that the preliminary injunction device
should not be exercised unless the moving party shows that it specifically and
personally risks irreparable harm.’”87 The Third Circuit has “long held an injury
measured in solely monetary terms cannot constitute irreparable harm.”88 Therefore, an
injunction will not be granted where the claimed injury constitutes a loss of money
because it is “a loss capable of recoupment in a proper action at law.”89 In Instant
Freight Co. v. C.F. Air Flight, Inc., the Third Circuit reversed the district court’s grant of
an injunction where the plaintiff argued if an injunction was not issued to prevent a
breach of the parties’ contract, its “business would be completely destroyed, . . . and its
goodwill and business reputation [would] be ruined” because eighty percent of its
business was devoted to the defendant.90 The Third Circuit added, despite the
defendant accounting for a substantial portion of plaintiff’s business, no financial
84

Conestoga Wood Specialties Corp. v. Sec’y of the U.S. Dep’t of Health &
Human Servs., 724 F.3d 377, 382 (3d Cir. 2013) (quoting NutraSweet Co. v. Vit-Mar
Enters., Inc., 176 F.3d 151, 153 (3d Cir. 1999)).
85
See Acierno v. New Castle County, 40 F.3d 645, 653 (3d Cir.1994).
86
Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 800 (3d Cir.
1989) (quoting Frank’s GMC Truck Center, Inc. v. General Motors Corp., 847 F.2d 100,
102 (3d Cir. 1988)).
87
Liberty Lincoln-Mercury, Inc., 562 F.3d at 557 (quoting Adams v. Freedom
Forge Corp., 204 F.3d 475, 487 (3d Cir. 2000)).
88
Liberty Lincoln-Mercury, Inc., 562 F.3d at 557.
89
In re Arthur Treacher’s Franchisee Litig., 689 F.2d 1137, 1145 (3d Cir. 1982)
(“[W]e have never upheld an injunction where the claimed injury constituted a loss of
money, a loss capable of recoupment in a proper action at law.”).
90
Instant Air Freight Co., 882 F.2d at 798, 801.
13

statements or projections were provided to support the argument that plaintiff’s business
would be “completely destroyed,” because the plaintiff would “still maintain[ ] twenty
percent of its business.”91
Here, plaintiffs argue they suffered irreparable harm in the form of lost business
relationships and goodwill, which cannot be remedied by monetary damages.92 As
addressed in Instant Air, however, merely alleging loss of goodwill and business
reputation is not sufficient to satisfy the irreparable harm prong for injunctive relief.93
Even assuming plaintiffs’ “relationships with its customers and potential customers are
in continuing peril and jeopardy,”94 as plead in their amended complaint, the harm can
be cured through monetary relief.
Assuming arguendo, loss of goodwill and harm to their business reputation is
adequate to show irreparable harm,95 plaintiffs have not alleged sufficient facts to
support a loss of goodwill or harm to their business reputation. In Instant Air, the court
denied injunctive relief where the defendant constituted eighty percent of the plaintiff’s
business.96 Similarly, plaintiffs in the present matter allege they “suffered significant
91

Id. at 802.
D.I. 29 at 13.
93
See Instant Air Freight Co., 883 F.2d at 801.
94
D.I. 19 ¶ 67.
95
Plaintiffs rely on L&W Ins., Inc. v. Harrington, No. 2730, 2007 WL 2753006
(Del. Ch. Mar. 12, 2007), an unreported case from the Delaware Court of Chancery, to
argue the protections of substantial business relationships and goodwill are legitimate
business interests whose impairment gives rise to irreparable harm. D.I. 29 at 13.
However, the L&W court stated “[t]he protection of substantial business relationships
and goodwill are legitimate business interests whose impairment may give rise to
irreparable harm.” L&W Ins., Inc., 2007 WL 2753006, at *11 (emphasis added). Read
in context, the court found that despite the plaintiffs’ loss of customers, they failed to
prove irreparably harm by suffering a non-monetary injury. Id.
96
See Instant Air Freight Co., 883 F.2d at 802.
92

14

damages by losing the sale of Osco products to Seastar, one of Osco’s largest
customers.”97 Furthermore, plaintiffs do not allege a loss of “goodwill” anywhere in their
amended complaint.98 Indeed, the mention of any loss of goodwill is proffered for the
first time in their opposition brief.99 Thus, applying the standards of Rule 12(b)(6),
plaintiffs fail to allege a claim for injunctive relief because the loss of a major customer,
goodwill, and harm to a company’s business reputation do not constitute irreparable,
non-monetary harm for injunctive relief.100 Accordingly, defendants’ motion to dismiss
Count Two for injunctive relief of the amended complaint should be granted.
2.

Count Three–Breach of Contract

Under Count Three, plaintiffs allege Seastar and HIG breached the
Confidentiality Agreement, where the parties agreed to keep exchanged information
confidential.101 Under Delaware law, to survive a motion to dismiss for a breach of
contract claim, the plaintiff must demonstrate: (1) the existence of a contract; (2) the
breach of an obligation imposed by that contract; and (3) damages resulting from the
breach.102 Defendants concede the existence of the Confidentiality Agreement;
however, they argue plaintiffs have failed to demonstrate a breach of an obligation
imposed by the Confidentiality Agreement, because defendants used the information
obtained from the Confidentiality Agreement, rather than disclosing such information to

97

D.I. 19 ¶ 66.
See D.I. 19.
99
See D.I. 29 at 13.
100
See Instant Air Freight Co., 883 F.3d at 801.
101
D.I. 19 ¶¶ 71-79.
102
See VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003);
see also Miller v. Truelink, Inc., 533 F. Supp. 2d 479, 487-88 (D. Del. 2008).
98

15

QM; and they did not disclose any confidential information.103 Additionally, defendants
argue plaintiffs have not sufficiently plead damages resulting from the breach.104 The
court disagrees; therefore, defendants’ motion to dismiss Count Three should be
denied.
a.

Use v. Disclosure

The first issue is whether the language of the Confidentiality Agreement
prohibited both the use and disclosure of confidential, nonpublic information or merely
its disclosure. “A confidentiality agreement . . . is intended and structured to prevent a
contracting party from using and disclosing the other party's confidential, nonpublic
information except as permitted by the agreement.”105 Additionally, “[w]hen interpreting
a contract, the role of a court is to effectuate the parties’ intent.”106 Absent textual
ambiguity, Delaware courts fulfill that role by according to contractual language the
ordinary meaning that “a reasonable person in the position of the parties would have
thought the language of the contract means.”107
In the instant matter, Osco provided certain information concerning its business,
financial condition, and operations (the “Evaluation Material”) to HIG and its
representatives in connection with the potential transaction.108 Under the Confidentiality
103

D.I. 22 at 13-14.
Id. at 14.
105
Martin Marietta Materials, Inc. v. Vulcan Materials Co., 68 A.3d 1208, 1219
(Del. 2012). See also 1 LOU R. KLING & EILEEN T. NUGENT, NEGOTIATED ACQUISITIONS OF
COMPANIES, SUBSIDIARIES AND DIVISIONS § 9.02 (2011) (“[Non-disclosure agreements]
usually provide that [confidential information] . . . will be held as confidential and will be
used only in connection with an evaluation of the transaction in question.”).
106
Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006).
107
Id.
108
D.I. 23, Ex. B.
104

16

Agreement, HIG and its representatives agreed to “keep confidential the Evaluation
Material in accordance with the requirements of [the] letter agreement.”109 According to
the Confidentiality Agreement, Evaluation Material does not include “information that [ ]
is or becomes generally available to the public other than as a result of a disclosure by
[defendants] or [defendants’] Representatives in violation of [the] letter agreement.”110
Defendants argue the language from the Confidentiality Agreement prohibits the
disclosure of confidential information, not its use.111 However, nowhere in the
Confidentiality Agreement does it differentiate between use and disclosure.112 Nor do
defendants point to any specific language that makes this differentiation.113 As noted in
Martin Marietta Materials, Inc. v. Vulcan Materials Co., confidentiality agreements are
intended and structured to prohibit both the use and disclosure of confidential, nonpublic
information, unless the parties agree otherwise.114 Since the plain language of the
Confidentiality Agreement is not specifically limited to use or disclosure of confidential
information, the Confidentiality Agreement between plaintiffs and HIG prohibits both the
use and disclosure of confidential information.
Pursuant to the Confidentiality Agreement’s prohibition against using and
disclosing confidential information, the amended complaint demonstrates defendants
breached, and continue to breach, this Agreement by disclosing and using “confidential
information Osco provided to defendants in contemplation of their potential purchase of
109

Id. ¶ 2.
Id. ¶ 1.
111
D.I. 22 at 14.
112
See D.I. 23, Ex. B.
113
See D.I. 22 at 13-14; D.I. 31 at 4-6.
114
Martin Marietta Materials, Inc., 68 A.3d at 1219.
110

17

Osco.”115 Therefore, plaintiffs’ amended complaint properly states a claim for breach of
contract in relation to defendants’ use and disclosure of confidential, nonpublic
information.
b.

“Confidential, nonpublic” information

Whether the information used and disclosed by defendants was "confidential,
nonpublic information" is also at issue. The contents of the Confidentiality Agreement
are incorporated into the Letter of Intent under Paragraph 7.116 Since the Letter of Intent
does not define "confidential information," it is necessary to review the Confidentiality
Agreement. According to the Confidentiality Agreement, Evaluation Material does not
include “information that [ ] is or becomes generally available to the public other than as
a result of a disclosure by [defendants] or [defendants’] Representatives in violation of
this letter agreement.”117 Additionally, the Confidentiality Agreement permits the use of
confidential information solely “[i]n connection with a possible collaboration involving
[HIG] and EDI/Osco.”118 Disclosure of such information was not authorized to QM and
use of the information was limited to cooperative efforts between plaintiffs and
defendants.
Defendants argue the information they disclosed to QM, contained in the
Manufacturing Agreement, could not be confidential because QM already had
knowledge of the information because it is a party to this Agreement.119 While QM may

115

D.I. 19 ¶¶ 77-78.
D.I. 23, Ex. C ¶ 7.
117
Id., Ex. B ¶ 1.
118
Id., Ex. B.
119
D.I. 22 at 14.
116

18

have been aware of some of the information prior to defendants’ disclosure to QM, the
Confidentiality Agreement does not expressly limit the definition of confidential
information as defendants claim.120 Instead, that Agreement expressly states
confidential information, i.e., Evaluation Material, means any “information that [ ] is or
becomes generally available to the public other than as a result of a disclosure by”
defendants or their representatives.121 Nothing suggests the Manufacturing Agreement
is generally available to the public.122 Therefore, the Manufacturing Agreement falls
under the ambit of the broadly defined “Evaluation Material” in the Confidentiality
Agreement.
c.

Damages

Lastly, defendants argue assuming they breached the Confidentiality Agreement
by using and disclosing confidential information with QM, the breach was not material
and did not cause any damages.123 In VLIW Technology, LLC v. Hewlett-Packard Co.,
the Delaware Supreme Court denied a motion to dismiss the plaintiffs’ breach of
contract claim when the complaint generally alleged “[plaintiff] has been damaged by
[defendant’s] breach of the 1990 Agreement.”124
Here, defendants’ argument is unsubstantiated and conclusory. Similar to the
complaint in VLIW, plaintiffs generally allege suffering ,“significant monetary damages,
plus the loss of additional sales not yet known which discovery will reveal,” resulting
120

See D.I. 23, Ex. B. For example, Osco’s entire revenue and all sources of
revenue may not have been known to QM.
121
Id. ¶ 1 (emphasis added).
122
See D.I. 22 at 14.
123
Id.
124
VLIW Tech., LLC, 840 A.2d at 613.
19

from defendants’ conduct.125 For purposes of a motion to dismiss, plaintiffs have
sufficiently plead damages caused by defendants’ breach of the Confidentiality
Agreement. Therefore, defendants’ motion to dismiss Count Three for breach of
contract should be denied because plaintiffs’ have sufficiently plead: (1) the existence
of a contract between the parties; (2) defendants’ breached the contract; and (3) as a
result of the breach, they sustained damages.
3.

Count Four–Breach of Duty to Negotiate in Good Faith

In Count Four of the amended complaint, plaintiffs allege defendants breached
the duty to negotiate in good faith.126 The issue is whether the Letter of Intent between
the parties created a duty to negotiate in good faith. As a preliminary matter, there is
considerable confusion between the parties regarding the contractual duty of good faith
and the implied covenant of good faith and fair dealing; the court will address the
difference between these two legal principles.
a.

Contractual duty of good faith: created through the parties’
agreement

Under Delaware law, "the intention of the parties controls the creation of a goodfaith duty to negotiate under a letter of intent."127 Such a duty may arise out of express
language.128 “Moreover, ‘[t]he cardinal rule of contract construction is that, where
125

D.I. 19 ¶ 79.
Id. ¶¶ 80-89.
127
Gillenardo v. Connor Broad. Del. Co., No. 98C-06-015, 2002 WL 991110, at
*7 (Del. Super. Ct. Apr. 30, 2002).
128
Id. See also SIGA Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330, 343 (Del.
2013). While there was some ambiguity as to whether an obligation to negotiate in
good faith was enforceable before Titan Investment Fund II, LP v. Freedom Mortgage
Corp., 58 A.3d 984 (Del. 2012), the SIGA court reaffirmed that an express contractual
obligation to negotiate in good faith is binding on the contracting parties. SIGA Techs.,
126

20

possible, a court should give effect to all [express] provisions.’"129 “Thus, ‘a contract
should be interpreted in such a way as to not render any of its provisions illusory or
meaningless.’"130 Determining whether a party has indeed acted in "good faith" is a
"question of fact which generally cannot be resolved on the pleadings or without first
granting an adequate opportunity for discovery."131
The duty to negotiate in good faith may arise from the express provisions of a
letter of intent entered into by the parties.132 In Gillenardo v. Connor Broadcasting
Delaware Co., the court held the parties' letter of intent created a good faith obligation to
negotiate to purchase defendants' radio station, where an offer was accepted by the
seller and the letter of intent expressly included: "(1) the duty to attempt in good faith to
finalize the Sale Agreement; (2) the duty to work diligently to complete the Sale
Agreement; and (3) the duty not to solicit, accept or entertain any other offers for the
Stations while the letter of intent was in effect."133 Additionally, the court pointed out a
difference exists between the failure to sell assets, i.e., the completion of the
transaction, and a breach of the duty to negotiate in good faith, even if the transaction
has not been completed,134 by noting “[r]egardless of whether [the defendant] had
reserved to itself the right not to consummate the [Sale Agreement] if the parties failed

Inc., 67 A.3d at 343.
129
Gillanardo, 2002 WL 991110, at *7 (quoting Sonitrol Holding Co. v. Marceau
Investissements, 607 A.2d 1177, 1184 (Del. 1992) (emphasis in original)).
130
Id.
131
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, LP, 624
A.2d 1199, 1208 (Del. 1993).
132
See Gillanardo, 2002 WL 991110, at *6.
133
Id. (internal citations omitted).
134
Id. at *7.
21

to reach accord on documentation . . . it had clearly not reserved the right to thwart final
agreement by [cutting off negotiations or considering other buyers]."135
Similarly, even when the parties' letter of intent includes a “non-binding provision"
indicating neither party is bound to complete the contract, a party nevertheless can
breach the duty to negotiate in good faith.136 In SIGA Technologies, Inc. v.
PharmAthene, Inc., the Delaware Supreme Court found, although the license
agreement was not binding, the defendants breached their obligation to negotiate in
good faith when they disregarded the letter of intent's term sheet, and attempted to
negotiate an agreement that contained drastically different economic and other terms.137
The provision which gave rise to an express duty to negotiate in good faith stated:
“SIGA and PharmAthene will negotiate in good faith with the intention of executing a
definitive License Agreement in accordance with the terms set forth in the License
Agreement Term Sheet attached as Exhibit C.”138
Not every letter of intent, however, gives rise to a duty to negotiate in good
faith.139 In VS & A Communications Partners, L.P. v. Palmer Broadcasting Limited
Partnership, the Delaware Court of Chancery applied New York law to determine duties
to negotiate in good faith are unenforceable if material terms of the contract remain
open.140 However, as elucidated in SIGA and Gillanardo, New York law differs from
135

Id. at *9 (quoting RGC Int'l Investors, LDC v. Greka Energy Corp., No. 17674,
2001 WL 984689, at *11 (Del. Ch. Aug. 22, 2001) (citations omitted)).
136
See SIGA Techs., Inc., 67 A.3d at 343.
137
Id.
138
Id. at 337-38.
139
See VS & A Commc’ns Partners, L.P. v. Palmer Broad. Ltd. P’ship, No.
12521, 1992 WL 339377, at *7 (Del. Ch. Nov. 16, 1992).
140
Id.
22

Delaware law, in that, under Delaware law, the parties' intentions control whether the
letter of intent creates an obligation to negotiation in good faith, despite whether
material terms of the contract remain open.141
b.

Implied covenant of good faith and fair dealing: created by
statute, implied in parties’ agreements

The implied covenant of good faith and fair dealing "requires 'a party in a
contractual relationship to refrain from arbitrary or unreasonable conduct which has the
effect of preventing the other party to the contract from receiving the fruits' of the
bargain."142 To bring a claim for breach of the implied covenant of good faith and fair
dealing, a plaintiff must allege the breaching party's actions were motivated by an
improper purpose reflecting bad faith.143 However, an implied obligation may not
prohibit acts that the terms of the parties' agreement expressly permit, even when the
allowable conduct expressly favors one party's interests.144 The implied covenant of
good faith and fair dealing applies, if at the time of contract formation, the parties would
have prohibited the conduct had they contemplated it or thought to negotiate about it.145
“To state a claim for breach of an implied covenant of good faith and fair dealing, the
Plaintiffs must identify a specific implied contractual obligation.”146

141

See SIGA Techs., Inc., 67 A.3d at 344-45; Gillanardo, 2002 WL 991110, at *7.
Dunlap v. State Farm Fire & Casualty Co., 878 A.2d 434, 442 (Del. 2005)
(quoting Wilgus v. Salt Pond Inv. Co., 498 A.2d 151, 159 (Del. Ch 1985)).
143
Dunlap, 878 A.2d at 442.
144
Cinncinnati SMSA Ltd. P’Ship v. Cincinnati Bell Cellular, 708 A.2d 989, 992
(Del. 1998).
145
See Katz v. Oak Indus., Inc., 508 A.2d 873, 880 (Del. Ch. 1986); Cincinnati
SMSA Ltd. P’ship, 708 A.2d at 992; Dunlap, 878 A.2d at 442.
146
Kelly v. McKesson HBOC, Inc., No. 99C-09-265, 2002 WL 88939, at *10 (Del.
Super. Ct. Jan. 17, 2002).
142

23

c.

Plaintiffs’ allegation of breach of contractual duty of good
faith

Plaintiffs claim in their amended complaint defendants breached the “duty to
negotiate in good faith” created through the Letter of Intent and the Confidentiality
Agreement.147 Thus, plaintiffs have not specifically alleged a claim for an implied
covenant to negotiate in good faith; rather, they contend the Letter of Intent created an
express covenant to negotiate in good faith.148 Plaintiffs’ introduction of a claim for a
breach of the implied duty of good faith and fair dealing in their brief is not evident
anywhere in the amended complaint, and therefore, has not been properly asserted or
pled.149 Therefore, court agrees with defendants’ argument that this claim should be
dismissed or not considered.
Defendants argue Count Four should be dismissed because the Letter of Intent
did not contain a provision to negotiate in good faith; and alternatively, even if the Letter
of Intent included that obligation, plaintiffs’ damages are improperly based on the lost
sale because of defendants’ failure to purchase Osco.150
i.

Contractual duty to negotiate in good faith

The initial issue is whether the Letter of Intent created a duty to negotiate in good
faith. Paragraph 8 of the Letter of Intent states:
Other than Sections 6 and 7 hereof, which shall be binding and effective
upon the parties hereto . . . the parties acknowledge that they neither
intend to enter, nor have they entered, into any agreement to negotiate a
definitive written agreement pursuant to this letter. Either party may, at
147

D.I. 19 ¶¶ 80-89.
See id.
149
See Kelly, 2002 WL 88939, at *10.
150
D.I. 22 at 15-17.
148

24

any time prior to the execution of such a definitive written agreement,
propose different terms from those summarized herein or unilaterally
terminate all negotiations pursuant to this letter without any liability
whatsoever to the other party.151
Paragraph 6 of the Letter of Intent provides: "[d]uring the Exclusivity Period, Buyer and
the Company will exert every reasonable effort to negotiate and execute a Definitive
Agreement . . . ."152 As pointed out in Gillanardo, the distinction between entering into a
letter of intent that creates no binding obligation to make a purchase and the creation of
a duty to negotiate in good faith is important.153
Defendants argue Paragraph 8 of the Letter of Intent provides no duty to
negotiate in good faith because of its non-binding nature.154 However, in light of the
qualifying language at the beginning of Paragraph 8–“[o]ther than Sections 6 and 7
hereof, which shall be binding and effective upon the parties hereto"–Paragraphs 6 and
8 clearly require that, while the parties are not under any obligation to complete the
sale, they are explicitly bound to use all reasonable effort in their negotiations and
execution of an agreement,155 language which is similar to the language in Gillenardo.156
ii.

Damages

151

D.I. 23, Ex. C ¶ 8.
Id. ¶ 6 (emphasis added).
153
Gillanardo, 2002 WL 991110, at *7.
154
D.I. 22 at 15-16.
155
D.I. 23, Ex. C ¶ 6.
156
Like the agreement in Gillenardo, the Letter of Intent similarly provides
cooperation to complete the transaction, restrictions on soliciting discussing or
negotiating offers by plaintiffs with third parties and the representation to diligently
complete the review process. D.I. 23, Ex. C at ¶¶ 3, 4, and 6. As noted, the parties
were obligated to exercise “reasonable effort” in their negotiations. According to
WEBSTER’S COLLEGE DICTIONARY 2d Edition (1997), reasonable means agreeable to or
in accord with reason; logical; capable of rational behavior. See also, WEBSTER’S NEW
DICTIONARY OF SYNONYMS wherein synonyms include fair, equitable or just.
152

25

Alternatively, defendants argue even if there is a contractual duty to negotiate in
good faith, damages consisting of Osco’s lost sales of its products to Seastar is not a
valid form of relief under Delaware law.157 The Delaware Supreme Court has
recognized two types of damages for a breach of the contractual duty to negotiate in
good faith: reliance damages, measured by plaintiffs’ actually incurred costs and
expenses, where the parties would not have reached agreement absent defendants’
bad faith; and expectation damages, where the parties would have reached an
agreement but for defendants’ bad faith.158
Plaintiffs’ pleading of damages is broader than defendants’ characterization. In
the amended complaint, plaintiffs assert: “[a]s a result of said actions, Osco has
suffered significant monetary damages based on H.I.G.’s and Seastar’s failure to
purchase Osco, plus additional damages not yet known which discovery will reveal.”159
This allegation does not limit their claim to expectation damages; but asserts possible
reliance damages.
As a result of the analysis herein, and since the court must draw all reasonable
factual inferences in the light most favorable to plaintiffs under Rule 12(b)(6),
defendants’ motion to dismiss Count Four should be denied.
V.

ORDER AND RECOMMENDED DISPOSITION
Consistent with the findings contained herein,
IT IS RECOMMENDED that:

157

D.I. 22 at 16.
SIGA Techs., Inc., 67 A.3d at 348, 350-51.
159
D.I. 19 ¶ 89.
158

26

(1) Defendants’ motion to dismiss for failure to state a claim (D.I. 21) be granted
in part and denied in part.
(2) Defendants’ motion to stay proceedings be denied (D.I. 21).
Pursuant to 28 U.S.C. § 636(b)(1)(A) and (B), FED. R. CIV. P. 72 (b)(1), and D.
DEL. LR 72.1, any objections to the Report and Recommendation shall be filed within
fourteen (14) days limited to ten (10) pages after being served with the same. Any
response shall be limited to ten (10) pages.160
The parties are directed to the Court’s Standing Order in Non-Pro Se Matters for
Objections Filed under FED. R. CIV. P. 72 dated October 9, 2013, a copy of which is
found on the Court’s website (www.ded.uscourts.gov.)
Date: December 2, 2013

/s/ Mary Pat Thynge
UNITED STATES MAGISTRATE JUDGE

160

FED. R. CIV. P. 72(b)(2).
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