MarkDutchCo 1 B.V. et al v. Zeta Interactive Corp.

Filing 29

MEMORANDUM OPINION Signed by Judge Colm F. Connolly on 11/12/2019. (nmf)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

MARKDUTCHCO 1 B.V. and
MARKMIDCO s.AR.L,
Plaintiffs and Counterclaim
Defendants,

v.

Civil Action No. 17-1420-CFC

ZETA INTERACTIVE CORP.,
Defendant and Counterclaim
Plaintiff.

William M. Lafferty, John P. DiTomo, Zi-Xiang Shen, MORRIS, NICHOLS,
ARSHT & TUNNELL LLP, Wilmington, Delaware; Stephen M. Juris, Alexandra
Verdi, FRIED, FRANK, HARRIS, SHRIVER & JACOBSON LLP, New York,
New York

Counsel for Plaintiffs and Counterclaim Defendants
Patricia A. Winston, MORRIS JA1\.1ES LLP, Wilmington, Delaware; John Du
Wors, Nathan Durrance, NEWMAN DU WORS DURRANCE LLP, Seattle,
Washington

Counsel for Defendant and Counterclaim Plaintiff

MEMORANDUM OPINION

November 12, 2019
Wilmington, Delaware

()L fc~MgNNOLLY
UNITED STATES DISTRICT JUDGE
This case was removed to this Court from the Delaware Court of Chancery
by Defendant/Counterclaim-Plaintiff Zeta Interactive Corp. (Zeta). Before me are
two motions filed by Plaintiffs/Counterclaim-Defendants MarkDutchCo 1 B.V.
(MarkDutchCo), a Dutch company, and Markmidco S.ar.l (Markmidco), a
Luxembourg company: a motion to confirm an arbitration award and for attorneys'
fees, costs, and interest, D .I. 7; and a motion to dismiss, or alternatively, to sever
counterclaims, D .I. 10.

I.

BACKGROUND

A.

The Interest Purchase Agreement

The parties' disputes arise out of an Interest Purchase Agreement
Markmidco and Zeta entered into as of August 28, 2015. D.I. 9, Ex. 5. Pursuant to
that agreement, Zeta acquired Markmidco' s interest in a customer relationship
management business (the CRM business), which consisted of several companies
that provided to retailers email and text-message marketing, database management,
and related services. Markmidco subsequently assigned certain of its interests
under the purchase agreement to MarkDutchCo.
Under the terms of the agreement, Zeta was to pay Markmidco $23,000,000
in cash, 1,685,717 shares of Zeta common stock, and several "Earn-out" payments.

D.I. 9, Ex. 5 § 2(a). Zeta owed Markmidco the "First Earn-out Payment
Amount"-$4,000,000-"within five (5) Business Days of the date that EBITDA
for the First Earn-out Period [was] finally determined, solely in the event that the
First Earn-out Target [was] achieved[.]" D.I. 9, Ex. 5 § 2(b).
EBITDA is an acronym for earnings before interest, tax, depreciation and
amortization. The purchase agreement provided a specific formula to be used to
calculate the CRM Business's EBITDA to determine the Earn-out payments. The
agreement also defined the First Earn-out Period as "the twelve-month period
commencing on the first day of the month following the Closing Date and ending
twelve-months thereafter." D.I. 9, Ex. 5 App'x A. And it defined the First Earnout Target as "the achievement by the CRM Business of at least $10,000,000 in
EBITDA during the First Earn-out Period." D.I. 9, Ex. 5 App'x A.
The purchase agreement required Zeta to deliver to Markmidco within 30
days of the end of the First Earn-out Period an "Earn-out Statement" detailing
Zeta's determination ofEBITDA for that period and its calculation of the resulting
First Earn-out Payment Amount. D.I. 9, Ex. 5 § 2(b). The purchase agreement
also required Zeta to give Markmidco "the opportunity to review all [the] materials
and information" Zeta used to prepare the Earn-out Statement and calculate the
First Earn-out Payment. D.I. 9, Ex. 5 § 2(b).

2

IfMarkmidco did not provide Zeta with a written "Objection Notice" within
ten business days of receiving the Earn-out Statement, the Earn-out Statement
would become "final and binding." D.I. 9, Ex. 5 § 2(c)(i). On the other hand, if
Markmidco wished to dispute the Earn-out Statement, section 2(c) of the purchase
agreement required Markmidco to "set forth in reasonable detail [its] alternative
calculations (if any), together with reasonable supporting details with respect to the
calculation and components thereof[]" in its Objection Notice. D.I. 9, Ex. 5 §
2(c)(i).
On December 29, 2016, Zeta submitted to Markmidco the First Earn-out
Statement. D.I. 9, Ex. 1 at 2. Zeta represented in the statement that it had
determined the EBITDA for the First Earn-out Period to be less than $10,000,000.
D .I. 9, Ex. 1 Attachment A. Therefore, Zeta said, it was not required to pay
Markmidco the $4,000,000 Earn-out Payment Amount. D.I. 9, Ex. 1 Attachment

A.
On January 10, 2017, Markmidco sent Zeta a letter requesting additional
information related to Zeta's First Earn-out Statement. D.I. 9, Ex. 7. The next
day, Zeta provided Markmidco with some of the requested additional information,
D.I. 9, Ex. 8. In an Objection Notice sent two days later, Markmidco "dispute[d]
the First Earn-out Statement in all respects." D.I. 9, Ex. 9. Markmidco, however,
did not include an alternative EBITDA calculation in its Objection Notice because
3

it claimed it still lacked enough information to fully respond to the First Earn-out
Statement. D.I. 9, Ex. 9.
Zeta responded to Markmidco's Objection Notice by claiming that the notice
was invalid because it did not provide an alternative EBITDA calculation and that
in the absence of a valid Objection Notice, the Earn-Out statement was "final and
binding for all purposes." D.I. 9, Ex. 10.
On January 30, 2017, after receiving more information from Zeta,
Markmidco's counsel sent Zeta a "Supplement" to its Objection Notice. D.I. 9,
Ex. 12. In its supplement, Markmidco disputed Zeta's First Earn-out Statement
and provided an EBITDA calculation for the First Earn-out Period that was
significantly greater than the $10,000,000 threshold that triggered the $4,000,000
First Earn-out Payment. D.I. 9, Ex. 12. On the same day, Markmidco notified
Zeta that it was referring the parties' dispute about the Earn-out payment to an
accounting arbitrator. D.I. 9, Ex. 13.

B.

The Arbitration Award

Under the terms of the purchase agreement, any dispute about the amount of
the Earn-out payment-defined by the agreement as "Disputed Payment
Amount"-"shall be resolved" by an Accounting Arbitrator-defined by the
purchase agreement as "the sole arbiter of all matters, procedural and/or
substantive, as to such Disputed Payment Amount." D.I. 9, Ex. 5 § 2(c)(i)(B).
4

Under the agreement, "absent fraud, bad faith or manifest error[]" the Arbitrator's
decision "constitute[s] an arbitral award that is final, binding and non-appealable
and upon which a judgment may be entered by a court having jurisdiction
thereover." D.I. 9, Ex. 5 § 2(c)(i)(C). In this case, the parties jointly retained
Deloitte & Touche Partner Ken A very to serve as the Accounting Arbitrator. 1
On April 28, 2017, Markmidco and Zeta provided the Arbitrator with their
initial submissions. D.I. 9, Exs. 17, 18. On May 19, 2017, the parties submitted
their rebuttal submissions to the Arbitrator. D.I. 9, Exs. 22, 23. The Arbitrator
then issued a series of targeted questions to the parties. D.I. 9, Ex. 24. The parties
responded to the Arbitrator's questions on July 6, 2017. D.I. 9, Exs. 25, 26.
On August 4, 2017, the Arbitrator issued his final and binding determination
(the Award). D.I. 9, Ex. 1. The Arbitrator began by addressing the procedural
matters associated with the Disputed Payment Amount. D.I. 9, Ex. 1. First, the
Arbitrator found that because Markmidco stated in the Objection Notice that it
"disputed the entirety of [Zeta]' s First Earn-out Statement pending receipt of
additional information from [Zeta][,]" Markmidco' s failure to provide alternative

1

Consistent with the purchase agreement, the April 20, 201 7 Deloitte engagement
letter stated that the Arbitrator would "be the sole arbiter of all matters, procedural
and/or substantive, as to [the parties'] Disputed Payment Amount[]" under the
purchase agreement and that "[t]he Accounting Arbitrator's decision shall be final
and binding upon each party hereto, absent fraud, bad faith or manifest error[.]"
D.I. 9, Ex. 16 at 1.

5

EBITDA calculations did not render the Notice deficient. D.I. 9, Ex. 1 at 3. The
Arbitrator further found that Markmidco's Supplement was procedurally
appropriate because the Supplement disputed seven items in Zeta's First Earn-out
Statement and contained alternative calculations for six of those items. D.I. 9,
Ex. 1 at 3.
After ruling on these procedural issues, the Arbitrator determined that the
EBITDA for the First Earn-out Period was greater than $10,000,000 and, therefore,
Zeta owed Markmidco the $4,000,000 First Earn-out Payment. D.I. 9, Ex. 1
Attachment A.

C.

Arbitration Fees

The purchase agreement provided that the Arbitrator's fees and expenses
would be borne by Zeta and Markmidco "in the proportion that the aggregate
dollar amount of the disputed items submitted to the Accounting Arbitrator by such
Party that are unsuccessfully disputed by such party (as finally determined by the
Accounting Arbitrator) bears to the aggregate dollar amount of disputed items
submitted by [the parties]." D.I. 9, Ex. 5 § 2(c)(i)(D).
The parties initially split payment of the Arbitrator's $96,000 fee equally$48,000 each. D.I. 9, Ex. 21, Ex. 27. But when Zeta refused to pay Markmidco
the Award, Markmidco asked the Arbitrator to allocate the $96,000 in arbitration
fees between the parties "based on the specific amounts that were 'finally
6

determined' by Deloitte." D.I. 9, Ex. 28 at 2. According to Markmidco, the
Arbitrator's decision "finally determined in favor of [Markmidco] with respect to
85% of the disputed items determined in connection with that award ... and in
favor of [Zeta] with respect to 15% of those items[.]" D.I. 9, Ex. 28 at 2.
Markmidco argued that Zeta was therefore "responsible for payment of 85%
($81,600) ofDeloitte's $96,000 fee[]" and Markmidco was "responsible for 15%
of the fee ($14,400)." D.I. 9, Ex. 28 at 2. Because each party had advanced
$48,000 ofDeloitte's fee, Markmidco asked the Arbitrator to award it $33,600
(i.e., $48,000- $14,400). D.I. 9, Ex. 28 at 2.
The Arbitrator declined Markmidco' s request to determine how the parties
should allocate his fee, on the grounds that the purchase agreement and
engagement letter "did not include the involvement of the arbitrator in determining
the proper allocation of the fees to be borne by each of the parties." D.I. 9, Ex. 28
at 1.

D.

The Parties' Pleadings

On September 6, 2017, Plaintiffs filed a verified complaint in the Delaware
Court of Chancery against Zeta. D.I. 9, Ex. 2. Zeta filed an answer and seven
counterclaims in the Court of Chancery on October 10, 2017. That same day, Zeta
removed the case to this Court.

7

1.

Plaintiffs' Complaint

In Count I of its complaint, Plaintiffs seek confirmation of the $4,000,000
Award pursuant to the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq. D.I. 9,
Ex. 2. ,r,r 36-40. In Count II, Plaintiffs allege that Zeta breached the purchase
agreement by refusing to refund Markmidco $33,600 in arbitration fees. D.I. 9,
Ex. 2. ,r,r 41-49. Plaintiffs request that the Court grant them pre-judgment and
post-judgment interest and "all fees, costs, and expenses, including attorneys' fees,
incurred to enforce the Award and recover damages for Zeta's breach of the
Purchase Agreement[.]" D.I. 9, Ex. 2 Prayer for Relief,r,r D-F.

2.

Zeta's Counterclaims

Two of Zeta's counterclaims directly concern the Award. In its sixth
counterclaim, Zeta seeks to vacate the A ward pursuant to the FAA and the
Convention on the Recognition and Enforcement of Foreign Arbitral Awards,

opened/or signature June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38, reprinted in
9 U.S.C. § 201 (historical and statutory notes) (hereinafter "Convention") on the
grounds that the Award contains "manifest errors." D .I. 9, Ex. 3 Counterclaims ,r,r
59-63. In its seventh counterclaim Zeta seeks a declaration "that the Award is to
be set aside or, in the alternative, that the Award be offset by any and all damages
suffered by Zeta from Defendants' breaches of the Purchase Agreement and errors
in the Award." D.I. 9, Ex. 3 Counterclaims ,r,r 64-67.

8

Zeta's first five counterclaims concern patents and patent applications it
acquired as part of the CRM business. Zeta alleges that errors in the inventorship
and assignment of the patents and applications "affect[ ] their enforceability and
validity." D.I. 9, Ex. 3 ,r 10. Zeta seeks in its first counterclaim a correction of
inventorship pursuant to 35 U.S.C. §§ 152 and 256. In its second counterclaim,
Zeta alleges that Markmidco' s failure to identify and correct the inventorship and
assignment errors breached Markmidco' s representation and warranties obligations
under the purchase agreement. In its third counterclaim, Zeta seeks
indemnification under § 6(b)(ii) of the purchase agreement based on these alleged
breaches. In its fourth counterclaim, Zeta alleges that Markmidco' s false
representations regarding the patents and patent applications constituted fraud.
Finally, in its fifth counterclaim, Zeta seeks a declaration that Zeta has the right to
withhold certain payments from Markmidco as a result ofMarkmidco's breach of
the purchase agreement.
II.

THE MOTION FOR CONFIRMATION OF THE AWARD AND FOR
FEES, COSTS, AND INTEREST
A.

Legal Standards

Plaintiffs are foreign companies. Zeta is a Delaware company. It is
undisputed-though, for reasons unclear, not acknowledged by Plaintiffs-that the
arbitration in question occurred in the United States.

9

An arbitration award arising under a commercial contract between a

domestic party and a foreign party is subject to the Convention. See Century
lndem. Co v. Certain Underwriters at Lloyd's, London, 584 F.3d 513,523 (3d Cir.

2009). As a general rule, under the Convention, a district court must confirm an
arbitral award unless the court finds that one of seven vacatur grounds specified in
the Convention applies to the award. See Admart AG v. Stephen & Mary Birch
Found., Inc., 457 F.3d 302,307 (3d Cir. 2005). The vacatur grounds specified in

the Convention are:
[1] The parties to the agreement [giving rise to the
arbitration] . . . were under the law applicable to them,
under some incapacity, or the said agreement is not valid
under the law to which the parties have subjected it or,
failing any indication thereon, under the law of the country
where the award was made; ...
[2] The party against whom the award is invoked was
not given proper notice of the appointment of the arbitrator
or of the arbitration proceedings or was otherwise unable
to present his case; ...
[3] The award deals with a difference not contemplated
by or not falling within the terms of the submission to
arbitration, or it contains decisions on matters beyond the
scope of the submission to arbitration, provided that, if the
decisions on matters submitted to arbitration can be
separated from those not so submitted, that part of the
award which contains decisions on matters submitted to
arbitration may be recognized and enforced; ...
[4] The composition of the arbitral authority or the
arbitral procedure was not in accordance with the
agreement of the parties, or, failing such agreement, was
not in accordance with the law of the country where the
arbitration took place; ...
10

[5] The award has not yet become binding on the
parties, or has been set aside or suspended by a competent
authority of the country in which, or under the law of
which, that award was made ...
[6] The subject matter of the [dispute] is not capable of
settlement by arbitration under the law of [the country
where recognition and enforcement is sought]; [and]
[7] The recognition or enforcement of the award would be
contrary to the public policy of [the country where
recognition and enforcement is sought].
Convention, art. V(l)-(2).

In Ario v. Underwriting Members ofSyndicate 53 at Lloyds for the 1998
Year ofAccount, 618 F .3d 277 (3d Cir. 2010), the Third Circuit created an

exception to the general rule that limits vacatur of awards in Convention cases to
these seven grounds. The Court held in Ario that when, as in this case, the
arbitration in question occurred in the United States, the district court "may apply"
the vacatur standards of the domestic FAA. Id. at 292. Under those standards, a
district court must confirm an arbitral award except
( 1) where the award was procured by corruption, fraud,
or undue means;
(2) where there was evident partiality or corruption in
the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in
refusing to postpone the hearing, upon sufficient cause
shown, or in refusing to hear evidence pertinent and
material to the controversy; or of any other misbehavior
by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and
definite award upon the subject matter submitted was not
made.
11

9 U.S.C. § lO(a).

Ario does not explain whether its holding that courts "may apply" the FAA
vacatur standards when the arbitration occurred in the United States means that
district courts should consider the FAA vacatur standards in lieu of the Convention
standards or in addition to the Convention standards in such cases. The parties
have not briefed this question; from portions of their respective briefs it appears
that they assume that both the Convention standards and the FAA standards apply
to this case. I need not and will not address the question because the only ground
on which Zeta challenges the Award that is specified in either the FAA or the
Convention-Le., that the arbitrator exceeded his powers-is specified in both the
FAA and the Convention.
Courts must strictly and narrowly apply the Convention and FAA standards.

See Admart, 457 F.3d at 308 ("courts have strictly applied the [Convention]
defenses and generally view them narrowly"); see also Ario, 618 F .3d at 295 (The
Domestic FAA provides "[f]our narrow grounds" for vacatur). It is well
established "that the court's function in confirming or vacating a commercial
arbitration award is severely limited." Mut. Fire, Marine & Inland Ins. Co. v.

Norad Reinsurance Co., 868 F .2d 52, 56 (3d Cir. 1989) (internal quotation marks
and citation omitted). And, "[t]here is a strong presumption under the Federal
Arbitration Act, 9 U.S.C. § 1 et seq., in favor of enforcing arbitration awards."
12

Brentwood Med. Assocs. v. United Mine Workers ofAm., 396 F.3d 237,241 (3d

Cir. 2005) (citation omitted). "[T]he party seeking to overturn an award bears a
heavy burden," because courts "accord arbitration decisions exceptional
deference." Dunkley v. Mellon lnv'r Servs., 378 F. App'x 169, 171 (3d Cir. 2010).

B.

Confirmation of The Award

Zeta argues that the Award should not be confirmed because ( 1) the parties
contracted for a "manifest error" standard of review, (2) the Arbitrator exceeded
his powers in this arbitration, and (3) the Delaware Uniform Arbitration Act
applies to procedural matters in this case. D.I. 14. Zeta also argues that
enforcement of the Award is premature. D.I. 14.

1.

The "Manifest Error" Standard

Zeta seeks vacatur of the Award based on allegations that the Arbitrator
committed "manifest error." Zeta first contends that the manifest error standard
applies because the parties contractually agreed to that standard for review of the
Award. D.I. 14 at 14-16. But the "only grounds available for setting aside an
arbitral award" under the Convention are those "enumerated in Article V[.]" Ario,
618 F .3d at 291 (internal quotation marks and citations omitted). And the statutory
grounds for vacatur in the FAA are similarly "exclusive" and may not be
"supplemented by contract." Hall St. Assocs., L.L. C. v. Mattel, Inc., 552 U.S. 576,

13

578 (2008). Thus, parties cannot contract for more judicial review than the FAA
and Convention grant them.
Next, Zeta argues that "manifest error" is equivalent to the judicially
recognized doctrine of "manifest disregard of the law," which at least historically
"allow[ed] a district court to vacate an arbitration award that evidences manifest
disregard of the law rather than an erroneous interpretation." Dluhos v. Strasberg,
321 F.3d 365,369 (3d Cir. 2003) (quotation marks and citation omitted). The
Third Circuit, however, has held that "manifest disregard of the law do[es] not
justify setting aside an award" in actions governed by the Convention. Admart,
457 F.3d at 308 (citations omitted). And the Supreme Court's holding in Hall
Street Associates has "thrown into doubt" "[t]he continued validity of manifest

disregard as a basis for vacating arbitration awards" governed by the domestic
FAA. Goldman v. Citigroup Glob. Markets Inc., 834 F.3d 242,256 n. 13 (3d Cir.
2016).
In any event, application of the standard would not help Zeta in this case, as
Zeta has not identified any instance of the Arbitrator ignoring applicable law. The
only "manifest errors" Zeta alleges the Arbitrator committed were "fail[ing] to
consider the timeliness ofMarkmidco's claims[,] ... the Arbitrator's erroneous
determination on Disputed Issues 1, 2, 3, 5, and 6[,]" and the Arbitrator's "fail[ure]
to consider any ancillary claims[.]" D.I. 9, Ex. 3 Counterclaims ,r,r 27-28. But
14

Zeta has not alleged-and could not reasonably allege-that these failures or the
challenged determination were made in manifest disregard of the law.

2.

The Arbitrator Did Not Exceed His Powers by Considering
Plaintiffs' Submissions

Zeta argues next that the Award should be vacated pursuant to 9 U.S.C. §
10(a)(4) and Article V(l)(c) of the Convention because the Arbitrator exceeded his
powers by considering Markmidco's Objection Notice and Supplement. D.I. 14 at
16-18. Section§ 10(a)(4) of the FAA permits district courts to vacate awards
when arbitrators "exceeded their powers." 9 U.S.C. § 10(a)(4). Article V(l)(c) of
the Convention permits district courts to vacate awards that "contain[ ] decisions
on matters beyond the scope of the submission to arbitration[.]" Convention, art.
V(l)(c).
A party seeking to vacate an award based on an arbitrator acting beyond her
powe~s "bears a heavy burden." Oxford Health Plans LLC v. Sutter, 569 U.S. 564,
569 (2013). "It is not enough to show that the arbitrator committed an error-or
even a serious error." Id. (quotation marks and citation omitted). A court may
only overturn an arbitrator's determination if "the arbitrator acts outside the scope
of his contractually delegated authority" by "issuing an award that 'simply reflects
his own notions of economic justice' rather than 'drawing its essence from the
contract[.]"' Id. (quoting E. Associated Coal Corp. v. United Mine Workers of
Am., Dist. 17, 531 U.S. 57, 62 (2000)). Thus, "the sole question for [the Court] is

15

whether the arbitrator (even arguably) interpreted the parties' contract, not whether
he got its meaning right or wrong." Id. The standard under the Convention is the
same. Under the Convention, vacatur is appropriate when an arbitrator has decided
"matters beyond the scope of the submission to arbitration." SE/ Societa Esplosivi

lndustriali SpA v. L-3 Fuzing & Ordnance Sys., Inc., 843 F. Supp. 2d 509,515 (D.
Del. 2012)
In this case, the Arbitrator's fmdings with respect to the procedural matters
associated with Markmidco's Objection Notice and Supplement were reasonable
interpretations of the purchase agreement. The Arbitrator analyzed the specific
provisions detailed in section 2 of the purchase agreement to determine the
procedural appropriateness ofMarkmidco's Objection Notice, and Supplement.
D.I. 9, Ex. 1 at 2-3. Section 2(c)(i), which the Arbitrator quoted in his
determination, required Markmidco to "set forth in reasonable detail [its]
alternative calculations" "[]to the extent possible based on the information
available to Seller[]" in its Objection Notice. D.I. 9, Ex. 1 at 2 (quoting D.I. 9, Ex.
1 § 2( C)(i)).
The Arbitrator found that because Markmidco was only required to provide
alternative calculations "to the extent possible based on the information available
to Seller[,]" "it [was] [his] determination that although Seller's Objection Notice
did not provide alternate calculations, it disputed the entirety of Buyer's First Earn16

out Statement pending receipt of additional information from Buyer and is
procedurally appropriate." D.I. 9, Ex. 1 at 3. The Arbitrator similarly found that
"Seller's Supplement with respect to its filing is procedurally appropriate, as Seller
set forth its disputed items and alternative calculations following receipt of
information from Buyer, which is prescribed by the Agreement." D.I. 9, Ex. 1 at 3.
Accordingly, the arbitrator was interpreting the contract when he made his
decision and did not exceed his powers.

3.

The Grounds for Vacatur Stated in Delaware Uniform
Arbitration Act Do Not Apply

Zeta contends that the Award should not be confirmed because the vacatur
standards stated in the Delaware Uniform Arbitration Act (DUAA) apply to the
procedural matters in this case. D .I. 14 at 11. Zeta does not explain how the
DUAA standards differ in any material respect from the F AA's standards. But in
any event, under Third Circuit law, state law vacatur standards apply only when
the parties express a "clear intent to apply state law vacatur standards instead of
those of the FAA." Ario, 618 F.3d at 293 (citation omitted). Here, the purchase
agreement does not express a clear intent to apply the Delaware's vacatur
standards. Although the purchase agreement's choice of law provision states that
the laws of the State of Delaware apply, see D.I. 9, Ex. 5 at§ 7(d), this broad
choice of law provision does not demonstrate that the parties clearly intended to
opt out of the FAA scheme. Moreover, Zeta removed this action from the Court of

17

Chancery to this Court on the basis that the Award is governed by the Convention
and the FAA. See D.I. 1 ,r,r 1, 4, 7, 9-13. Accordingly, the grounds for vacatur set
forth in the DUAA do not apply in this case.

4.

Enforcement of the Award is Not Premature

Zeta contends that enforcement of the Award is premature because entering
judgment on the Award before determining the parties' rights on related issues and
related cases would undermine the orderly resolution of these matters. D.I. 14 at
12. Zeta asks that I either deny Plaintiffs' motion without prejudice or stay this
action "until all the counterclaims, offsets, and indemnity claims" in this case and a
related case "have been finally decided such that a final, complete award between
the Parties can be rendered." 2 D.I. 14 at 11-14.
Enforcement of the Award at this time, however, is appropriate for two
reasons. First, Zeta's "counterclaims, offsets, and indemnity claims" do not
overlap with the issues submitted by the parties for arbitration. A stay can be
appropriate when issues implicated by an arbitration award are also implicated in
other proceedings. See Admart, 457 F .3d at 306. In such cases, a stay helps avoid
inconsistent resolutions of the issues. But when the other issues are "not within the
ambit of [a plaintiffs] suit to confirm the Award" a stay should not be granted. Id.

2

The related case is MarkDutchCo I B. V. v. Zeta Interactive Corp., C.A. No. 1:17cv-01641-CFC (D. Del.).
18

Second, denying the motion without prejudice or staying this case would
transform a summary proceeding into a protracted dispute. A basic purpose of
arbitration is "to dispose of disputes quickly and avoid the expense and delay of
extended court proceedings." Id at 311 (internal quotation marks and citations
omitted). That is why judges in this district have not allowed defendants to assert
unrelated counterclaims when doing so would delay arbitration confirmation
proceedings. See, e.g., China Three Gorges Project Corp. v. Rotec Indus., Inc.,
2005 WL 1813025, at *3 (D. Del. Aug. 2, 2005) (rejecting the defendant's attempt
to use potential "setoff' claims as a reason not to confirm an arbitration award).

C.

Fees, Costs, and Interest

Plaintiffs argue that they are entitled to attorneys' fees, costs, and
prejudgment interest. D.I. 8 at 18-20. Plaintiffs also seek reimbursement of
$33,600 in arbitration fees pursuant to section 2(c)(i)(D) of the purchase
agreement. D.I. 8 at 18-20. I find that awarding Plaintiffs attorneys' fees and
prejudgment interest is appropriate, but I will deny Plaintiffs' request for costs and
reimbursement for a share of its arbitration fees.

1.

Attorneys' Fees

Third Circuit law provides that attorneys' fees are generally awarded if the
party opposing confirmation of an arbitration award acted without justification or
did not have a "reasonable chance to prevail." Chauffeurs, Teamsters and Helpers,
19

Local Union No. 765 v. Stroehmann Bros. Co., 625 F.2d 1092, 1094 (3d Cir. 1980)
(quotation marks and citations omitted); see also Wilkes Barre Hosp. Co., LLC v.

Wyo. Valley Nurses Ass'n Pasnap, 453 F. App'x 258, 261 (3d Cir. 2011) (quoting
Chauffeurs for this proposition).
As Zeta acknowledges in its briefing, district courts have an extremely
limited scope of review of commercial arbitration awards under the Convention
and FAA. See D.I. 14 at 10. The Arbitrator's findings and interpretation of the
relevant provisions of the purchase agreement were within the scope of his
authority and no other ground for vacatur even arguably applied to this case. I
think it very clear that Zeta acted without a "reasonable chance" of vacating the
Award. Chauffeurs, 625 F .2d at 1094. Therefore, I will grant Plaintiffs' request
for fees.

2..

Prejudgment Interest

In deciding whether to award prejudgment interest, courts consider: "( 1)
whether the claimant has been less than diligent in prosecuting the action; (2)
whether the defendant has been unjustly enriched; (3) whether an award would be
compensatory; and (4) whether countervailing equitable considerations militate
against a surcharge." Calbex Mineral Ltd. v. ACC Res. Co., L.P., 90 F. Supp. 3d
442, 467 (W.D. Pa. 2015) (quoting Feather v. United Mine Workers ofAm., 711
F.2d 530, 540 (3d Cir. 1983)).
20

First, Plaintiffs have been diligent in pursuing these claims. On December
29, 2016, Zeta submitted to Markmidco the First Earn-out Statement. Twelve days
later, on January 10, 2017, Markmidco sent Zeta a letter requesting additional
information related to Zeta's First Earn-out Statement. On January 13, 2017, two
days after Zeta responded to the request for additional information, Markmidco
sent Zeta an Objection Notice. On January 30, 2017 Markmidco's counsel sent
Zeta a "Supplement" to its Objection Notice and notified Zeta that it was referring
the parties' dispute to the Arbitrator. The Arbitrator issued a decision in
Markmidco' s favor on August 4, 2017. And, when Zeta refused to pay Markmidco
the Award, Plaintiffs filed this lawsuit on September 6, 2017.
Second, the essence of lawsuit is that Zeta has been unjustly enriched by
failing to pay Markmidco the money owed. See Feather v. United Mine Workers
ofAm., 711 F.2d 530, 540 (3d Cir. 1983) ('"To the extent defendant has had the

free use of the income-producing ability of plaintiffs' money without having to pay
for it, he has been unjustly enriched."') (quoting Restatement (Second) of
Contracts§ 370 cmt. a (Am. Law. Inst. 1981) and adopting its definition of unjust
enrichment).
Third, just awarding Plaintiffs the $4,000,000 First Earn-out Payment
Amount would not make Plaintiffs whole. Zeta has owed Plaintiffs $4,000,000
since the Arbitrator made his decision in August 201 7. Plaintiffs have not had
21

access to those funds for two years and lost their bargained-for right to prompt
payment of the First Earn-out Payment Amount. Interest will compensate
Plaintiffs for those losses. Cf Al Haddad Bros. Enters., Inc. v. MIS Agapi, 635 F.
Supp. 205, 210 (D. Del. 1986), aff'd, 813 F.2d 396 (3d Cir. 1987) (awarding a
plaintiff interest to "make it whole for the wrongful deprivation of its money" for
three years following an arbitration award).
Fourth, there are no countervailing equitable considerations.
Accordingly, I will award Plaintiffs prejudgment interest.

3.

Costs

Plaintiff have cited no authority to support their request for costs.
Accordingly, I will deny the request.

4.

Arbitration Fees

Finally, Plaintiffs request in their motion that I order Zeta to reimburse
Plaintiffs for $33,600 in arbitration fees. Those fees, however, were not part of the
Award. Indeed, the arbitrator rejected Plaintiffs' attempt to make the allocation of
arbitration fees part of the Award. Accordingly, I will deny Plaintiffs' motion
insofar as it seeks reimbursement of arbitration fees. The allocation of the
arbitration fees is the subject of Plaintiffs' breach of contract claim and will be
resolved with the adjudication of that claim.

22

III.

THE MOTION TO DISMISS COUNTERCLAIMS, OR
ALTERNATIVELY, TO SEVER

A.

Legal Standards

To state a claim upon which relief can be granted, a complaint must contain
"a short and plain statement of the claim showing that the pleader is entitled to
relief." Fed. R. Civ. P. 8(A)(2). Detailed factual allegations are not required, but
the complaint must set forth enough factual matter, accepted as true, to "state a
claim to relief that is plausible on its face." Bell At/. Corp. v. Twombly, 550 U.S.
544, 570 (2007). A claim is facially plausible when the factual content allows the
court to draw the reasonable inference that the defendant is liable for the
misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). When
considering a Rule 12(b)(6) motion to dismiss, the court must accept as true all
factual allegations in the complaint and view them in the light most favorable to
the plaintiff. Umland v. Planco Fin. Servs., 542 F.3d 59, 64 (3d Cir. 2008).
In actions for fraud, a complaint must also satisfy Rule 9(b)' s the heightened
pleading standards. In re Rockefeller Ctr. Properties, Inc. Sec. Litig., 311 F .3d
198,216 (3d Cir. 2002). Rule 9(b) requires a complainant alleging fraud to "state
with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P.
9(b). The complaint must state the circumstances of the alleged fraud with enough
particularity "to place the defendants on notice of the precise misconduct with
which they are charged, and to safeguard defendants against spurious charges of
23

immoral and fraudulent behavior." Lum v. Bank ofAm., 361 F.3d 217, 223-24 (3d
Cir. 2004) abrogated on other grounds by Bell Atl. Corp. v. Twombly, 550 U.S.
544 (2007) (quotations marks and citation omitted). "Complaints that fail to plead
fraud or false claims grounded in fraud with the requisite particularity are
dismissed in the same manner as a dismissal under [R]ule 12(b)(6)." Ninespot,

Inc. v. Jupai Holdings Ltd., 2018 WL 3626325, at *3 (D. Del. July 30, 2018).

B.

Defendant's Counterclaims
1.

Counterclaim One: Correction of Inventorship

In its first counterclaim, Zeta alleges that Defendants' failure to name all the
true inventors on the patents and patent applications transferred to Zeta pursuant to
the purchase agreement and Defendants' failure to obtain assignments from those
inventors were "error[s] which damage[d]" Zeta and "can be corrected by the
federal district court pursuant to 35 U.S.C. § 256 ... [and] 35 U.S.C. § 152." D.I.
9, Ex. 3 Counterclaims ,r,r 31-32. Zeta further alleges that "[a]s a result" of these
failures, Zeta "has been injured in an amount to be ascertained at trial." D.I. 9, Ex.
3 Counterclaims ,r 34.
Zeta argues in its briefing that its "first Counterclaim ... is controlled by 3 5
U.S.C. § 256." D.I. 13 at 7. Section 256 permits a district court to "order
correction of [a] patent on notice and hearing of all parties concerned[.]" 3 5
U.S.C. § 256(b). It does not, however, create a cause of action for damages. Zeta
24

argues in its briefing that "this Counterclaim does not seek money damages." D .I.
13 at 7. But that contention is belied by the express language of the counterclaim,
which, as just noted, alleges Zeta suffered "damages" and seeks a monetary award
"to be ascertained at trial." Because Zeta's first counterclaim is a claim for
damages made pursuant to § 256, it fails as a matter of law.

2.

Counterclaims 2 and 3: Breach of Contract and
Indemnification

Zeta's second counterclaim alleges that Markmidco breached the purchase
agreement by ( 1) failing to transfer valid patents to Zeta as required by the
agreement, (2) falsely representing that the patents identified on Schedule
3(a)(ii)(N)(l) of the purchase agreement were valid and enforceable, and (3)
falsely representing that it had taken all reasonably necessary or appropriate steps
to secure the assignment of all rights in certain intellectual property defined in the
purchase agreement. D.I. 9, Ex. 3 Counterclaims ,r,r 37-39. Zeta's third
counterclaim seeks indemnification for Plaintiffs' contractual breaches. D.I. 9, Ex.
3 Counterclaims

,r,r 41-4 7.

Plaintiffs argue that Zeta's contractual counterclaims are time-barred. Zeta
concedes that, under the express terms of the purchase agreement, the
representations and warranties upon which Zeta bases its contract claims expired
five months before Zeta filed its counterclaims. D.I. 13 at 13. It counters,
however, that under the purchase agreement "claims involving fraud ... shall
25

survive indefinitely[,]" D.I. 13 at 13, and it intimates that the 18-month limitations
period prescribed by the purchase agreement is unreasonable and thus invalid
under Delaware law, see D.I. 13 at 14.
Zeta is correct that the purchase agreement does not set a limitations period
for fraud claims, and for that reason, I agree that its fourth counterclaim is not
time-barred. But its second and third counterclaims are contract claims, not fraud
claims; indeed, Zeta itself makes clear in its briefing that its contract claims are
distinct from its fraud claim, see D.I. 13 at 13. Accordingly, Zeta's second and
third counterclaims do not fit within the fraud exception to the purchase
agreement's time bar.
Zeta is also correct that under Delaware law, "parties may contractually
agree to a period of limitations shorter than that provided for by statute, so long as
this shortened period is reasonable." Eni Holdings, LLC v. KBR Grp. Holdings,
LLC, 2013 WL 6186326, at *7 (Del. Ch. Nov. 27, 2013). 3 But the 18-month

limitations period here is reasonable. The Delaware Supreme Court has held that
"it is settled Delaware law" that a "one year limitation on suit on an insurance
contract is reasonable and binding[.]" Closser v. Penn Mut. Fire Ins. Co., 457
A.2d 1081, 1083 (Del. 1983 ). And this court has declined to find a contractual,

3

The parties agreed to a choice-of-law provision in the purchase agreement. The
provision states that the laws of the State of Delaware apply to disputes related to
the agreement. See D.I. 9, Ex. 5 at§ 7(d).
26

six-month limitation on suit for Title VII claims unreasonable under Delaware law.

See Johnson v. DaimlerChrysler Corp., 2003 WL 1089394, at *4 (D. Del. Mar. 6,
2003 ). Accordingly, the purchase agreement's more generous eighteen-month
limitation-which these sophisticated and well-represented parties agreed to--is
not unreasonable, and it therefore bars Zeta's second and third counterclaims.

3.

Counterclaim 4: Fraud

Zeta's fourth counterclaim alleges that Markmidco committed fraud in
selling the CRM business to Zeta. See D.I. 9, Ex. 3 Counterclaims ,r,r 48-54.
Under Delaware law, the elements of fraud are:
1) a false representation, usually one of fact, made by the
defendant;
2) the defendant's knowledge or belief that the
representation was false, or was made with reckless
indifference to the truth;
3) an intent to induce the plaintiff to act or to refrain from
acting;
4) the plaintiffs action or inaction taken in justifiable
reliance upon the representation; and
5) damage to the plaintiff as a result of such reliance.

Gaffin v. Teledyne, Inc., 611 A.2d 467,472 (Del. 1992).
I agree with Plaintiffs that Zeta's fraud counterclaim should be dismissed
because Zeta has failed to plead all five elements of a fraud claim. As just one
example, although Rule 9(b) provides that knowledge may be alleged generally,
Zeta does not allege in its counterclaims that Plaintiffs had knowledge or belief
that their representations regarding the validity of the transferred patent assets were
27

false or that Plaintiffs made such representations with a reckless indifference to the
truth. Accordingly, I will grant Plaintiffs' motion to dismiss Zeta's fourth
counterclaim.

4.

Counterclaim 5: Declaratory Relief

Zeta's fifth counterclaim requests a declaration that "as a result of
Markmidco's wrongful conduct, Zeta is not required to release the remaining
amount held back under the Purchase Agreement." D.I. 9, Ex. 3 Counterclaims
158. Zeta alleges that "[a]n actual controversy of a justiciable nature currently

exists between and among the Parties concerning whether Zeta has the right to
withhold such amounts as an offset to the damages caused by Markmidco 's breach
and fraud as described herein." D.I. 9, Ex. 3 Counterclaims 157 (emphasis

added). Thus, an actual controversy exists only insofar as Zeta has asserted the
contract and fraud claims in its counterclaims. Since I am granting Plaintiffs'
motion to dismiss those claims, it follows that no actual controversy exists.
Accordingly, the Court lacks subject matter jurisdiction over Zeta's fifth
counterclaim and it is therefore dismissed. See Nesbit v. Gears Unlimited, Inc.,
347 F.3d 72, 76-77 (3d Cir. 2003) ("[C]ourts have an independent obligation to
satisfy themselves of jurisdiction if it is in doubt[]" and can "raise sua sponte
subject-matter jurisdiction concerns.").

28

5.

Counterclaims 6 and 7: Vacatur Or Correction of The
Award and Declaratory Relief

Zeta's sixth counterclaim seeks to vacate the Award and its seventh
counterclaim seeks a declaration that the Award is to be set aside. D.I. 9, Ex. 3
Counterclaims ,r,r 59-67. I have already decided, however, that Plaintiffs' motion
to confirm the Award should be granted because no cognizable grounds for vacatur
exist. Accordingly, Zeta's sixth and seventh counterclaims are rendered moot and
must be dismissed. See Genesis Healthcare Corp. v. Symczyk, 569 U.S. 66, 71-72
(2013).
IV.

CONCLUSION
For the reasons discussed above, I will grant in part and deny in part

Plaintiffs' motion for confirmation and for fees, costs, and interest. I will also
grant Plaintiffs' motion to dismiss Defendant's counterclaims.
The Court will issue an order consistent with this Memorandum Opinion.

29