Facts
- Karl Hansen claimed that Tesla, CEO Elon Musk, and U.S. Security Associates retaliated against him for reporting misconduct at Tesla. [lines="100-104"]
- Hansen was employed by Tesla in roles where he investigated thefts and alleged drug trafficking and reported concerns to management and the SEC. [lines="112-123"]
- Hansen’s employment was terminated in June 2018, and he was later offered a position with USSA, which subsequently eliminated his role. [lines="128-147"]
- The district court ordered most of Hansen's claims to arbitration, with the exception of his Sarbanes-Oxley Act (SOX) claim. [lines="160-170"]
- Following arbitration, the arbitrator found that Hansen had no reasonable belief that his claims involved securities violations, leading to the dismissal of his other claims. [lines="691-695"]
Issues
- Whether a federal-court order confirming an arbitration award can have a preclusive effect in a Sarbanes-Oxley Act (SOX) retaliation claim. [lines="78-85"]
- Whether the district court properly granted the motion to dismiss Hansen’s SOX claim based on the issue preclusion from the arbitration findings. [lines="248-249"]
Holdings
- The court held that while an arbitrator's decision cannot preclude a SOX claim, a confirmed arbitral award can sometimes preclude relitigation of underlying issues pertinent to that SOX claim. [lines="87-89"]
- The district court properly dismissed Hansen’s SOX claim with prejudice, finding it barred by the preclusive effects of the arbitration award, which established that he had not engaged in protected activity. [lines="260-260"]
OPINION
WELLGISTICS, LLC, Plaintiff/counterclaim defendant, v. WELGO, INC., Defendant/counterclaim plaintiff. / WELGO, INC., Petitioner, v. WELLGISTICS, LLC, Respondent.
C.A. No.: N22C-08-182 KMM | C.A. No.: 2024-0342-KMM
IN THE SUPERIOR COURT OF THE STATE OF DELAWARE / IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
September 27, 2024
Submitted: July 11, 2024; Corrected: November 25, 2024
MILLER, J.
Decided: September 27, 2024
Corrected: November 25, 20242
Upon Wellgistics, LLC‘s Motion to Dismiss Welgo, Inc.‘s Third Amended Counterclaim: GRANTED
Upon Wellgistics, LLC‘s Motion to Strike Welgo, Inc.‘s Affirmative Defenses: GRANTED
Upon Wellgistics, LLC‘s Motion to Dismiss Welgo, Inc.‘s Petition: GRANTED
Chad S.C. Stover, Esquire, Amy E. Tryon, Esquire, Barnes & Thornburg LLP, Wilmington, Delaware, Marc S. Silver, Esquire (pro hac vice) (argued), Christine E. Skoczylas, Esquire (pro hac vice), Barnes & Thornburg LLP, Chicago, Illinois, Attorneys for Wellgistics, LLC.
Basil C. Kollias, Esquire, Gordon L. McLaughlin, Esquire, Kollias Law, LLC, Wilmington, Delaware, Geri Lyons Chase, Esquire (pro hac vice) (argued), Law Office of Geri Lyons Chase, Annapolis, Maryland, Attorneys for Welgo, Inc.
MILLER, J.
Welgo, Inc. (“Welgo“) generated revenue through its wholly-owned subsidiary, Welgo, LLC, which sold prescription medications. Welgo, LLC had negotiated favorable contracts with distributors for certain medications. Prior to Wellgistics, LLC‘s (“Wellgistics“) investment in Welgo, Welgo, LLC‘s distributor contracts were disclosed to Wellgistics.
Welgo alleges that after the identity of Welgo, LLC‘s distributors and its high-profit prescription medications were disclosed to Wellgistics, it improperly used this confidential information to begin purchasing large quantities of these medications. Wellgistics’ sharp increase in purchases substantially contributed to an increase in the national utilization rate, causing insurance companies to curtail or stop covering the medications. This, in turn, caused Welgo, LLC‘s physician-customers to substantially reduce the amount of these medications they dispensed to their patients, resulting in lost revenue for Welgo, LLC and ultimately, Welgo.
Welgo further alleges that just days after the identity of Welgo, LLC‘s distributors were disclosed to Wellgistics, the distributors sold their rights in these medications to third-parties. The new distributors increased the price, cutting into Welgo, LLC‘s profit margin. The new owners aggressively marketed the medications, which also contributed to the increase in the national utilization rate and the attendant loss of revenue for Welgo, LLC. Additionally, Wellgistics’ increased purchases of these medications prompted other companies to jump into the market, further contributing to the incrеase in national utilization rate.
Wellgistics filed motions to dismiss the TAC4 and the Court of Chancery5 action, pursuant to
The TAC asserts a breach of fiduciary duty claim (Count II) despite that claim previously being dismissed for lack of jurisdiction. There is no basis for jurisdiction over this claim in the Superior Court. For the reasons stated in this Court‘s November 29, 2023 Order,7 Count II is DISMISSED.
II. FACTUAL AND PROCEDURAL BACKGROUND
A. The parties and relevant non-parties
1. Welgo and related non-parties
Welgo is a holding company, owning 100% of Welgo, LLC from its formation until March 2023.8 Michael Lion (“Lion“) and Keith Holdan (“Holdan“) each owned 50% of Welgo‘s stock at its formation in 2018.9
Welgo, LLC is a specialty prescription medication wholesaler. In 2019, its business model focused on selling a limited number of medications, but with high profit margins.10 To that end, it contracted with distributors for the purchase of certain medications at favorable prices11 and sold them to physicians, who dispensed the medications directly to their patients.12
2. Welgo, LLC‘s distributors
Prior to the events with Wellgistics, Welgo, LLC contracted with Athena Bioscience LLC (“Athena“) to purchase Naprosyn Oral Solution.14 Athena was the exclusive distributor for this product in the United States.15 Philip Volt is the Chief Operating Officer of Athena.
Also prior to the events with Wellgistics, Welgo, LLC contracted with Crown Laboratories, Inc. (“Crown“) to purchase Ala-Scalp and Ala-Quin.16 David Arapakes (“Arapakes“) is the business development manager at Crown.
3. Wellgistics and related parties
Wellgistics, also a specialty prescription medication wholesaler, sells primarily to independent pharmacies.17 Wellgistics is a much larger wholesaler than Welgo, LLC.18 However, Wellgistics is much smaller than the large national wholesalers, such as AmerisourceBergen, Cardinal Health, and McKession, that control 90% of the wholesale market in the United States.19
Charles Jenkins (“Jenkins“) is an Executive Vice President of Brand Strategy for Wellgistiсs.
Matthew Starley (“Starley“) is the Chief Operating Officer and General Counsel for Wellgistics.
Michael Pearce (“Pearce“) is a consultant for Wellgistics, charged with increasing its profitability.21
4. Other non-parties
Key Therapeutics, LLC (“Key“) “labeled” the only authorized generic of Naprosyn Oral Solution in the period 2016 through October 2019.22
Marnel Pharmaceuticals, LLC (“Marnel“), owned by Jonathan Alba (“Alba“), is a prescription drug distributor.23
Jamison Roberts (“Roberts“) is an executive consultant for Allegis and also “work[s] closely” with Pernix Therapeutics Holdings, a company of which Pearce was the Chief Executive Officer.25
Crowder and Roberts formed Derm Ventures LLC (“Derm“), on September 29, 2019.26
B. Welgo, LLC‘s contracts
While the pill form of Naprosyn Oral Solution and its generic — Naproxen Oral Solution — was widely used in 2019, the oral solution had a low utilization rate (i.e., low sales volume), because it serves a limited population — those who cannot swallow pills.27 With few manufacturers and distributors of this medication, Welgo, LLC sought to take advantage of its high profit margin.28 So, in 2019, it contracted with Athena to purchase generic Naprosyn Oral Solution on favorable pricing terms.29
C. Wellgistics buys 50% of Welgo‘s stock.
Shortly after formation of Welgo, a conflict arose with Holdan who then sought to sell his interest in the company.32 In July 2019, Lion met Jenkins, who indicated that Wellgistics may be interested in purchasing Holdan‘s Welgo stock.33 Jenkins signed a confidentiality agreement, and discussions progressed.34
On September 24, 2019, Welgo and Welgo, LLC entered into a Mutual Confidentiality Agreement (the “MCA“), with Wellgistics, the “Purpose” of which was to exchange information “in connection with their discussions of a possible business relationship.”35 The MCA provides:
During the term of this Agreement, and for a period of five (5) years thereafter, the Rеcipient shall keep confidential and shall not divulge the Disclosing Party‘s Confidential Information to any third party or use such information other than for the Purpose, without the prior written consent of the Disclosing Party.36
In December 2019, Pearce transferred the stock to Wellgistics, thus becoming a 50% owner of Welgo.40
D. Wellgistics receives confidential information.
As of September 2019, a substantial portion of Welgo, LLC‘s gross revenue was derived from selling the Products.41 At the time, Welgo, LLC was servicing 21 physicians.42 In 2020, it added the largest orthopedic practice in the United States to its customer base.43 Welgo, LLC anticipated servicing an additional 100 physicians in each of 2021 and 2022.44
In due diligence in connection with the stock purchase, Wellgistics requested information about Welgo, LLC‘s products. Wanting to protect Welgo, LLC‘s
Once the MCA was executed on September 29, 2019, Wellgistics learned the identity of Welgo, LLC‘s distributors and the products it sold.46 On October 4, 2019, Welgo, LLC‘s distributor contracts were provided to Wellgistics.47 On October 7, 2019, Jenkins told Lion that Wellgistics was already “in the works with several of these.”48
E. Distribution rights to the Products are transferred to third-parties, resulting in higher prices for Welgo, LLC.
Shortly after execution of the MCA, Lion provided Jenkins with contact information for the business development manager at Crown (Arapakes). On October 2, 2019, Arapakes advised Lion that Crown changed its distribution process and Welgo, LLC now was required to purchase Ala-Scalp and Ala-Quin through a distributor — Marnel.49 The result of this new arrangement was a higher product cost for Welgo, LLC: its profit margin on Ala-Scalp dropped from $165 per unit to $105, and on Ala-Quin, it dropped from $150 per unit to $75.50
Also in October 2019, Volt of Athena (Welgo, LLC‘s distributor for Naprosyn Oral Solution) told Lion that he (Volt) met with representatives of Wellgistics.54 Shortly thereafter, Lion learned that Allegis also acquired the rights to sell Naprosyn Oral Solution.55 Prior to this transaction, Welgo, LLC purchased the medication, manufactured by Key, for $925 per unit.56 Allegis was now “relabeling” the product and selling it to Welgo, LLC for $1,135 per unit.57
When Lion learned of these transactions, he warned Wellgistics to “stay away” from Welgo, LLC‘s distributors because if the sales volumes increased, it would hurt his business.58
After obtaining the right to sell Ala-Scalp and Ala-Quin, Marnel and Allegis began aggressively marketing these products.59 As a result, the utilization rate increased, which caused Pharmacy Benеfits Managers (“PBMs“)60 to discontinue reimbursements for Ala-Scalp in June 2020.61
G. Other wholesalers enter the market.
After PBMs stopped reimbursements for Ala-Scalp due to the much higher sales volume, Derm (apparently having entered the prescription drug wholesale market), introduced a dual-pack of Ala-Scalp, which contained two units.62 Because Ala-Scalp was traditionally sold in single-unit packs, the dual-pack was assigned a new “National Drug Code,” essentially becoming a new product.63 As a new
In each of 2020, 2021, and 2022, the Food and Drug Administration (the “FDA“) approved an additional generic drug manufacturer for Naproxen Oral Solution, thus doubling the number of companies selling this medication.65
H. Wellgistics purchases large quantities of the Products, substantially contributing to an increase in the national utilization rate.
Prior to September 2019, Wellgistics did not purchase a significant amount of the Products.66 After the identities of Welgo, LLC‘s distributors were disclosed, Wellgistics began purchasing the Products in large quantities. In addition, Wellgistics encouraged its pharmacy-customers to conduct “test runs” on these medications and in turn, “sell” their customers (the patients) on Wellgistics’ high-margin products.67 Wellgistics used training videos to show the pharmacies how they could profit from this marketing strategy.68
When Welgo learned that Wellgistics’ representatives contacted Welgo, LLC‘s distributors, Welgo and Welgo, LLC immediately demanded that Wellgistics “cease and desist” from interfering with Welgo, LLC‘s contracts and that Wellgistics
Wellgistics purchasing large quantities of the Products from Welgo, LLC‘s “contract manufacturers, other manufacturers, wholesalers or third-party logistics companies” and encouraging its pharmacy-customers to run test claims, caused an increase in the national utilization rates, consequently triggering scrutiny by the PBMs.72 As a result, in late 2020, PBMs limited approvals for Naprosyn Oral Solution and stopped reimbursements for Ala-Scalp and Ala-Quin. Because the Products were no longer fully covered by insurance, Welgo, LLC‘s physician-customers substantially reduced the number of prescriptions they dispensed.
I. Wellgistics’ Aberrant List medications
CVS Caremark is one of the largest PBMs.73 In 2019, it created an “Aberrant List,” a list of restricted medications, the purpose of which was to reduce the sales volumes and thus, save costs for its insurer-customers. Medications were placed on this list due to their high-profit margins, among other reasons.74 Pharmacies were contractually bound to limit the amount of a medication on the Aberrant List they dispensed.75
Prior to 2019, Chlorzoxazone was one of Wellgistics’ principal products, from which it derived substantial revenue.76 CVS Caremark placed Chlorzoxazone on the Aberrant List and stopped reimbursements due to its high cost.77 With the loss of revenue on Chlorzoxazone and its other products on the Aberrant List, Wellgistics needed to find other sources of revenue.78 This led to Wellgistics purchasing Welgo stock and purchasing large quantities of the Products.79
By May 2020, Welgo and Wellgistics decided to part ways. Jenkins met with Lion to discuss “unwinding” the stock transaction. During this meeting, Jenkins made “assurances” to Lion that Wellgistics would “honor the cease and desist and would no longer sell” the Products.80 In August 2020, Wellgistics and Welgo executed a Redemption Agreement and Welgo executed a Promissory Note (the “Note“), to purchase Wellgistics’ interest in Welgo.81
The Redemption Agreement contains the following integration clause:
Entire Agreement. This Agreement constitutes thе entire understanding and agreement between the parties hereto with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties are expressly canceled.82
Wellgistics’ Complaint asserts a claim for breach of the Note because Welgo failed to make required payments.83
K. Welgo files the TAC and asserts the affirmative defenses.
In the TAC, Welgo claims that Wellgistics breached the MCA by using confidential information regarding Welgo, LLC‘s profitable Products. The TAC also asserts claims for fraud and tortious interference with Welgo, LLC‘s distributor
The TAC asserts a claim for estoppel, alleging that Welgo relied on Wellgistics’ promise to stop selling the Products. Had Welgo known that Wellgistics would break its promise, Welgo would not have agreed to the Redemption Agreement and Note. Welgo seeks to be relieved of further payment obligations under the Note.
In Welgo‘s answer to the Complaint, it asserts affirmative defenses of fraud and estoppel, as follows:
FIRST AFFIRMATIVE DEFENSE — ESTOPPEL — “The plaintiff‘s conduct as set forth in the counterclaim appearing below is such that they be [sic] estopped from prosecuting this action;”85
SECOND AFFIRMATIVE DEFENSE — FRAUD — “the plaintiff‘s conduct/actions are as described in the [defendant‘s] counterclaim appearing below is such that the plaintiff‘s actions were fraudulent as to the defendant;”86
The standard of review is the same under
“A complaint that gives fair notice ‘shifts to the [opposing party] the burden to determine the details of the cause of action by way of discovery for the purpose of raising legal defenses.‘”88 Therefore, to avoid dismissal under Delaware‘s notice pleading standard, a party “need not plead evidence,” but at a minimum, must “allege facts that, if true, state a claim upon which relief can be granted.”89
Delaware law requires a claimant to plead fraud with particularity — a
The standard for a motion to strike is similar to thаt for a motion to dismiss.94 Under
IV. DISCUSSION
A. The Superior Court claims
1. Standing
Wellgistics argues that Welgo lacks standing to assert its claims for breach of contract, tortious interference, and fraud98 because Welgo, LLC entered into the contracts with the distributors and generated revenue from sales of the Products, and thus it (and not Welgo) suffered any alleged loss.99 Welgo responds that it has standing because it is a party to the MCA and suffered an injury independent of Welgo, LLC.
“Standing” refers to the right of a person to invoke jurisdiction of the Court to redress its grievance. “The issue of standing is concerned “only with the question of who is entitled to mount a legal challenge and not with the merits of thе subject matter of the controversy.“”100 When a defendant argues that the Court does not
Here, as Wellgistics acknowledges, Welgo is a party to the MCA,103 and as such, Welgo has standing to enforce its rights under the contract. Wellgistics’ argument is that Welgo has not sufficiently alleged facts to state a claim. Therefore, Wellgistics’ standing argument is more aptly addressed under
2. Breach of contract
a. The parties’ contentions
Wellgistics argues that the TAC fails to state a claim because Welgo has not alleged that it directly sustained damages from Wellgistics’ alleged conduct. Additionally, even if Welgo suffered damages, its damages are “so untethered” from its breach of contract allegations that its causation theory is “hopelessly speculative.”104 Finally, Wellgistics argues that Welgo cannot isolate any damages
Welgo counters that its position in the TAC is clear – Wellgistics agreed not to use confidential information and breached that agreement when it used that information to earn a profit for itself.105 Further, Welgo argues that the TAC details facts showing Wellgistics started a “chain of causation” by (i) purchasing large quantities of the Products, and (ii) influencing various players in the pharmaceutical industry, including pharmacies, patients, and physicians, causing harm to Welgo.106
b. Analysis
Under Delaware law,107 a claimant asserting a breach of contract must allege: (1) the existence of a contract; (2) the breach of a contractual obligation; and (3) resulting damages.108 While damages may be pled generally, a factual basis to relate the alleged injury to the breach is required.109 Conclusory allegations of damages
The TAC satisfies the first pleading requirement — the existence of a contract. Welgo is a party to the MCA.
Under the MCA, Wellgistics had a duty only to use confidential information for the possible purchase of Welgo stock.111 The TAC alleges that Lion disclosed the identity of Welgo, LLC‘s products and provided Welgo, LLC‘s distribution contracts to Wellgistics.112 While more than one entity within an organization may have an interest in the same confidential information, “[g]enerally, a parent corporation does not, by reason of owning the stock of a subsidiary alone, own or have legal title to the assets of the subsidiary.”113 Thus, under the general rule, a parent does not have a claim for improper disclosure of confidential information belonging to a subsidiary.114
While the TAC alleges that Welgo disclosed confidential information,115 there are no factual allegations to substantiate this assertion. Indeed, the TAC makes clear
Even if the Court construed the TAC as pleading that Welgo also held an interest in Welgo, LLC‘s confidential information, the TAC fails to sufficiently plead the third element — damages.116
The TAC alleges that Wellgistics used confidential information to purchase large quantities of (and aggressively marketed) the Products, driven by its need to generate revenue after Chlorzoxazone was added to the Aberrant List. Wellgistics’ purchases alone, however, did not cause such an increase in the national utilization rate to prompt action by the PBMs. Other wholesalers jumped into the market for the Products, allegedly due to Wellgistics’ sales and together, caused the PBMs to take action. But, there are no factual allegations in the TAC that these other entities
Similarly, the TAC lacks factual support for the allegations that Wellgistics caused Athena and Crown to sell their rights in the Products and change their distribution processes. Even with Jenkins’ prior connection to Alba and Jenkins advising Lion that Wellgistics was already “in the works” with distributors, it is not reasonable to infer that within a few days of learning the confidential information, Wellgistics caused the distributors to find a contract-counterparty, negotiate a deal, and close on the deals. Without factual support, it is also not reasonable to infer that Wellgistics, a relatively small wholesaler, could influence Athena and Crown in such a way. The timing of the disclosures coupled with the timing of Welgo learning of the changes made by Crown and Athena is not enough to infer that Wellgistics caused these fundamental commercial changes.
Because Welgo did not plead a breach of a contract for which it can seek redress and because it is not reasonably conceivable that Wellgistics caused the alleged harm to Welgo, Count I is DISMISSED.
a. The parties’ contentions
Welgo, LLC contracted with Crown and Athena. Because Welgo was not a party to those contracts, it now argues that it was a third-party beneficiary of the Welgo, LLC contracts. Therefore, Welgo asserts, it may pursue a tortious interference claim.
Wellgistics argues that Welgo did not plead a third-party beneficiary claim and therefore, the TAC fails to state a claim for tortious interference. Additionally, Wellgistics continues, there are no facts alleged (or argued in the brief) to satisfy the elements of third-party beneficiary.
b. Analysis
To assert a claim for tortious interference with a contract, a plaintiff must allege: “(1) a contract, (2) about which defendant knew, and (3) an intentional act that is a significant factor in causing the breach of such contract, (4) without justification, (5) which causes injury.”118
To qualify as a third party beneficiary, (i) the contracting parties must have intended that the third party beneficiary benefit from the contract, (ii) the benefit must have been intended as a gift or in satisfaction of a pre-existing obligation to that person, and (iii) the
Welgo‘s claim fails for two reasons. First, the TAC does not allege that Welgo was a third-party beneficiary of the Welgo, LLC contracts. Supporting facts and allegations must be in the pleading, which cannot be supplemented through briefing.120 There are no facts alleged in the TAC that the parties intended to benefit Welgo, that the contracts were a gift to Welgo, or that a pre-contract obligation existed.121
Second, merely owning the equity of a subsidiary does not make Welgo a third-party beneficiary of Welgo, LLC‘s contracts. Welgo argues that under Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P.,122 a wholly-owned subsidiary is operated for the benefit of the parent, and thus, Welgo is a third-party beneficiary.123 While it is true that the goal of having a wholly-owned subsidiary is to generate value for its parent,124 it does not follow that the parent is automatically a third-party
B promises A to pay whatever debts A may incur in a certain undertaking. A incurs in the undertaking debts to C, D and E. If the promise is a promise that B will pay C, D and E, they are intended beneficiaries...; if the money is to be paid to A in order that he may be provided with money to pay C, D and E, they are at most incidental beneficiaries.125
Here, the purpose of the distributor contracts was to provide Welgo, LLC with medications at a certain price. The fact that Welgo, LLC paid Welgo some portion of Welgo, LLC‘s revenue from further sale оf the medications makes Welgo, at most, an incidental beneficiary. Because Welgo was not a party to the Welgo, LLC contracts or an intended third-party beneficiary, Welgo fails to state a claim for tortious interference with a contract. Accordingly, Count III is DISMISSED.126
4. Fraud
a. The parties’ contentions
In its answer to the Complaint, Welgo asserts as an affirmative defense that Wellgistics’ actions, as described in the TAC, “were fraudulent as to” Welgo.127 In the TAC, Welgo‘s fraud theory consists of two components: (1) Wellgistics never
Wellgistics responds that Welgo‘s first theory is improper bootstrapping of a contract claim into a fraud claim and its second theory is fatally flawed because Wellgistics had no duty of disclosure.
b. Analysis
To state a claim for fraud, a party must allege:
(1) the defendant falsеly represented or omitted facts that the defendant had a duty to disclose; (2) the defendant knew or believed that the representation was false or made the representation with a reckless indifference to the truth; (3) the defendant intended to induce the plaintiff to act or refrain from acting; (4) the plaintiff acted in justifiable reliance on the representation; and (5) the plaintiff was injured by its reliance.128
A claim for fraud may be based on representations in a contract, but the factual allegations of fraud must be separate from the factual allegations for breach of contract.129 Additionally, damages arising from the alleged fraud must be separate
Welgo‘s first theory of fraud is bootstrapping. The factual predicate and alleged damages for the fraud claim are the same as the allegations supporting the breach of contract claim – Wellgistics used confidential information, which harmed Welgo.131 Alleging that a contrаct counterparty did not intend to abide by the terms of a contract does not then turn the claim into one for fraud.132 Rather, such claims must be pursued under whatever rights the complaining party has under the contract.
Welgo‘s second theory also fails. Welgo alleges that Wellgistics failed to disclose that some of Wellgistics’ products were on the soon-to-be-released Aberrant List. Had Welgo known this information, the argument goes, it would not have disclosed the Welgo, LLC contracts to Wellgistics.
“Generally, there is no duty to disclose a material fact or opinion, unless the defendant had a duty to speak.”133 Welgo makes no argument (and provides no facts)
5. Estoppel
a. The parties’ contentions
In its answer to the Complaint, Welgo asserts as an affirmative defense that Wellgistics’ actions, as described in the TAC, were “such that [Wellgistics] should be estopped from prosecuting this action.”136 In the TAC, Welgo asserts that when negotiating the Redemption Agreement, Wellgistics promised to stop selling the Products. Because of this promise, Welgo entered into the Redemption Agreement.
Wellgistics makes two arguments for dismissal of the estoppel claim. First, Welgo‘s claim fails as a matter of law because the integration clause in the
Welgo responds that it has sufficiently pled its claim for estoppel and that it justifiably relied on Wellgistics’ promise. Welgo further argues that it would be unfair to enforce the Redemption Agreement because of an integration clause, but ignore Wellgistics’ obligations under the MCA.139
b. Analysis
i. Estoppel elements
To assert estoppel, the claimant must show that: (i) a promise was made; (ii) it was the reasonable expectation of the promisor to induce action or forbearance on the part of the promisee; (iii) the promisee reasonably relied on the promise and took action to his detriment, and (iv) such promise is binding because injustice can be avoided only by enforcement of the promise.140
““Where the parties have made a contract and have expressed it in writing to which they both assented as the complete and accurate integration of that contract, evidence, whether parol or otherwise, of antecedent understanding and negotiations will not be admitted for the purpose of varying or contradicting the writing.”141
Wellgistics argues that the Redemption Agreement‘s integration clause bars Welgo‘s estoppel claim, but Welgo is not seeking to vary оr contradict the terms of the Redemption Agreement. Rather, Welgo is claiming that it would not have agreed to the Redemption Agreement had it known that Wellgistics would breach its promise to stop selling the Products. Accordingly, the integration clause does not bar the estoppel claim.
iii. Has Welgo sufficiently alleged a claim for estoppel?
Under Rule 8(a), a claim or defense must be stated in a “short and plain statement.”142 An exception to Rule 8(a) is found in Rule 9(b)‘s heightened pleading standard. Under Rule 9(b), “averments of fraud, negligence or mistake, the circumstances constituting fraud, negligence or mistake” must be stated with
In the context of a motion to dismiss under
The crux of Welgo‘s position is that Wellgistics improperly used confidential information, sold large quantities of the Products, causing Welgo to lose millions of dollars in value. Welgo alleges that in negotiations over unwinding Wellgistics’ stock purchase, Wellgistics assured Lion it would stop selling the Products. It is not reasonable to infer that Welgo would obtain such a critical promise but not include
B. Court of Chancery claim
1. The parties’ contentions
Welgo makes three arguments in support of its breach of fiduciary duty claim. First, Pearce breached his duty of loyalty by taking no action to prevent Wellgistics from misusing the confidential information and that he effectively “sat back” and watched his principal “drain the value” from Welgo. Thus, Wellgistics is responsible for its agent‘s (Pearce) inaction. Second, because Pearce owed fiduciary duties to Welgo as a director and he was Wellgistics’ agent, Wellgistics is therefore cloaked with the same fiduciary duties, which it breached by misusing the confidential information. Third, as a majority stockholder, Wellgistics owed fiduciary duties to Welgo, which Wellgistics then breached by misusing the confidential information. Welgo argues that these actions caused the same damages asserted in its breach of contract claim – due to the increase in the national utilization rate and subsequent actions of insurers reducing or eliminating coverage for Welgo, LLC‘s Products, Welgo was damaged.
Further, Wellgistics continues, even if the Court considers the allegations in the TAC, the complaint fails to adequately allege agency. While Pearce was Wellgistics’ agent for purposes of purchasing the Welgo stock, Wellgistics argues that there are no allegations that he was Wellgistics’ agent as a director. Also, there are no allegations in the complaint to rebut the presumption that directors are independent.
Finally, Wellgistics argues that the complaint does not adequately allege that it owed fiduciary duties as a stockholder. The complaint does not allege that Wellgistics owned more than 50%, so it cannot be a majority owner, and further, it argues, the complaint is devoid of allegations that Wellgistics controlled the Welgo board.
2. Analysis
To state a claim for breach of fiduсiary duty, a plaintiff must allege that the defendant owed a fiduciary duty and that he breached that duty.148 Directors of a Delaware corporation owe fiduciary duties to the company and its stockholders.149
Welgo alleges that Pearce, as a director of Welgo, owed fiduciary duties to the company.153 Welgo argues in its brief that Pearce breached this duty when he took no action to prevent Wellgistics from misusing Welgo‘s confidential information. Welgo, does not, however, make any such allegation in its complaint. Factual allegations not asserted in the complaint cannot be asserted through the party‘s briefing.154
The case Welgo relies on, Skye Mineral Investors LLC v. DXS Capital (U.S.) Ltd.,156 also does not support its theory. In Skye Mineral, the director-defendant shared information regarding the value of the company‘s assets with his affiliates, but did not share this information with the other directors. Armеd with information that the assets were worth far more than anticipated, the director-defendant ordered management to take actions that impeded the company‘s ability to meet its financial obligations, he participated in a lawsuit with the intention of blocking much-needed company financing, and he lied to the board about his involvement in negotiating the affiliates’ purchase of the loan from the company‘s secured lender. This was part of a scheme to force the company into bankruptcy, which would (and did) allow
Unlike the director in Skye Mineral, there are no allegations that Pearce took any actions as a director. There are no allegations of a scheme by which Pearce used his position as a director tо assist Wellgistics harm Welgo. Simply asserting that Pearce “sat back” and watched as Wellgistics devalued the company is insufficient to state a claim.
Welgo‘s theory that Wellgistics owed its own fiduciary duties by virtue of Pearce being its agent, also fails. Even assuming that the complaint sufficiently alleged that Pearce was Wellgistics’ agent as a director, Welgo offers no legal authority that imposes fiduciary duties on a third-party just because its agent served as a director. Such a theory would run contrary to the nature of directors’ fiduciary duties, which were developed from a concept that “rested on the fact that stockholders entrusted their capital to the firm, which the directors had virtually plenary power to manage.”158 As Welgo would have it, fiduciary duties would be
Finally, Welgo argues that the definition of а “minority” stockholder is one who owns less than 50% of the stock. Because Wellgistics cannot be a minority stockholder (as it owns 50%), the argument goes, Wellgistics must be a majority holder. Even if Welgo‘s theory is accepted, there are no allegations that Wellgistics, as a stockholder, exerted any control over Welgo. The complaint fails to sufficiently allege that Wellgistics owed a fiduciary duty to Welgo. Accordingly, the complaint is DISMISSED.
V. CONCLUSION
Because Welgo failed to allege any reasonably conceivable circumstances under which it is entitled to recover under its claims in the TAC, Wellgistics’ Motion to Dismiss is GRANTED. Because Welgo has already amended its counterclaim three times, the TAC is dismissed with prejudice.
Because Welgo failed to plead legally sufficient affirmative defenses Wellgistics’ Motion to Strike is GRANTED, and the affirmative defenses are stricken with prejudice.
IT IS SO ORDERED.
/s/Kathleen M. Miller
Kathleen M. Miller, Judge