Delaware Supreme Court Affirms Dismissal Of Misappropriation Claims Against Private Equity Investor That Invested In A Competitor
On February 7, 2019, the Delaware Supreme Court issued an order affirming the dismissal of misappropriation claims by Alarm.com Holdings, Inc. against ABS Capital Partners Inc. (and its affiliates), a private equity firm that had a controlling interest in plaintiff and whose partners served on plaintiff’s board, with one as chairman. Alarm.com Holdings, Inc. v. ABS Capital Partners Inc., No. 360, 2018 (Del. Feb. 7, 2019). After its subsequent initial public offering, plaintiff alleged that defendant misappropriated its confidential information by investing in a competitor and asserted claims for violation of the Delaware Uniform Trade Secrets Act (“DUTSA”) and common law misappropriation. The Delaware Court of Chancery found that multiple agreements between defendant and plaintiff made it clear that defendant could invest in competitors and this fact was also evident in plaintiff’s charter of corporation, which included a provision under Delaware General Corporation Law (“DGCL”) Section 122(17) to exempt stockholders and certain directors from any duty not to pursue corporate opportunities that otherwise might arguably belong to plaintiff. In addition, in the complaint, plaintiff “relies only on [defendant’s] investment in [a competitor],” which was made approximately a year after defendant’s representative left the board, and does not allege specific facts demonstrating the misuse of plaintiff’s confidential information. Therefore, the Court of Chancery held that the facts “do not support a reasonably conceivable inference of misappropriation.” In a summary order, the Delaware Supreme Court affirmed on the same basis.
In reaching its decision, the Court of Chancery highlighted certain expired or terminated agreements that were not directly applicable but made it clear that defendant’s investment in a competitor could not fairly be considered misappropriation. For example, the nondisclosure agreement that preceded the initial investment provided that “nothing in this letter agreement will prevent [defendant] from evaluating a possible investment in and/or collaboration with, or entering into any transaction with (including any investment in), a company whose business is similar or competitive with the business of [plaintiff].” Likewise, a subsequent stockholders agreement expressly provided that defendant could “invest in . . . any other company (whether or not competitive with [plaintiff]),” as long as it did not “disclose or otherwise make use of any proprietary or confidential information of [plaintiff] in connection with such activities.”
Moreover, plaintiff’s charter contained a DGCL Section 122(17) corporate opportunity exemption provision, which the Court found “most important for present purposes.” Specifically, the provision eliminated the duty of stockholders and certain directors to avoid engaging in competitive business activities and the duty to communicate corporate opportunities to plaintiff. The Court explained that the clear intent was to permit defendant’s investment in competitors and “the effect. . . is to waive any claim for breach of the duty of loyalty against defendant” or its representatives on plaintiff’s board “based on either usurpation of a corporate opportunity or anticompetitive activity.” Even though the claims at issue were not breach of fiduciary duty claims, the Court held that “it would be counterintuitive to permit the same corporation to pursue the lesser theories that could be asserted against a non-fiduciary” and that “[r]especting the waiver contemplated by Section 122(17) requires that courts not attempt to forge a fiduciary substitute.”