When an insured is pursuing a representation and warranty insurance (“RWI”) claim, a critical consideration is whether diminution in value damages (“DIV Damages”) can be asserted as Loss covered by the RWI policy.[1] This article, being published in four parts, discusses Delaware mergers and acquisitions (“M&A”) damages law regarding DIV Damages and describes how an insured can pursue them as part of an RWI claim.
This is Part III of this article; it discusses the requirements for a DIV Damages award as part of an RWI claim. Part I of this article addressed (i) the principal differences between DIV Damages calculated using a multiple of EBITDA methodology (“MOE Methodology”) and DIV Damages calculated using a discounted cash flow methodology (“DCF Methodology”), and (ii) the evolution of cases involving DIV Damages calculated using an MOE Methodology under Delaware M&A damages law.[2]Part II of this article addressed the evolution of cases involving DIV Damages calculated using a DCF Methodology under Delaware M&A damages law. Part IV of this article will discuss the limitations on, and other matters regarding, a DIV Damages award as part of an RWI claim.
Each part of this article contains practice tips for attorneys for insureds seeking recovery of DIV Damages as part of an RWI claim.
Requirements for DIV Damages With Respect to an RWI Claim
There are three basic requirements for any RWI claim,[3] and therefore for any claim for DIV Damages under an RWI policy. An insured must establish that:
R&W Breach: An R&W Breach has occurred;
Loss: The target business or the insured has suffered a Loss as defined in the RWI policy (in the case of DIV Damages, a diminution in value of the target business with recurring effect);
Proximate Cause: The R&W Breach was the proximate cause of the Loss.
A different way to say the foregoing is that after the Acquisition, (i) the insured becomes aware of revenue or expense information about the target business without required disclosure by the seller, and (ii) had the insured known about the problem prior to the Acquisition, the insured would have reduced the purchase price that it paid for the target business.
Effectively, the DIV Damages serve as a post-Acquisition purchase price adjustment in favor of the insured.
1. R&W Breach
Some types of R&W Breach are more likely to lead to a claim for DIV Damages, while others are more likely to lead to a claim for out-of-pocket damages (i.e., a “1x claim”).
The following types of R&W Breach are more likely to lead to a claim for DIV Damages:
Historical Income Statements: R&W Breaches regarding the target’s historical income statements[4]—provided in the case of DIV Damages calculated using an MOE Methodology that the income statement line items in question are not those added back in calculating EBITDA (interest on certain types of debt (I), income and similar types of taxes (T), depreciation (D), and amortization (A)) or in making adjustments to EBITDA as that term was used by the buyer—may lead to a claim for DIV Damages.
Significant Customers: R&W Breaches regarding the target’s significant customers are also likely to lead to DIV Damages, particularly representations and warranties that deal with the continued existence or strength of significant customers’ relationships with the target business or the pricing of the products or services provided to those customers.[5]
Other Types: Any other type of R&W Breach that can be deemed to have an adverse effect on the target business’s (i) Measurement Period EBITDA, and an anticipated recurring adverse effect on the target business’s EBITDA going forward after the Acquisition, or (ii) projected cash flows going forward after the Acquisition, may lead to a claim for DIV Damages. Examples are representations and warranties regarding compliance with laws, disclosure of liabilities, operating taxes (e.g., sales and use taxes), and regulatory status.
One other note regarding R&W Breaches: Very rarely does an Acquisition Agreement contain a representation and warranty with respect to the Measurement Period EBITDA itself or with respect to projections provided for the target business.[6] Even though Measurement Period EBITDA or projections may be a critical piece of information regarding the target business and the purchase price to be paid therefor, buyers typically do not request and sellers typically do not offer such a representation and warranty.[7]
2. Loss
Two types of loss can result from an R&W Breach:
Third-party loss, for which the amount is rarely in doubt after the amount owed to the third party has been liquidated or settled, even though there may be an issue of whether the amount thereof (as well as any defense costs with respect thereto) is covered by the RWI policy.
First-party loss, for which both the amount and whether that amount is covered by the RWI policy are at issue.
DIV Damages are expectation damages that are a type of first-party loss. Although there may be other types of methodologies to calculate DIV Damages, they almost always are calculated using an MOE Methodology or a DCF Methodology.[8]
a. Issues With Respect to DIV Damages Using Either an MOE Methodology or a DCF Methodology
Certain issues are similar regardless of the methodology used in calculating DIV Damages.
i. Determining the Validity of DIV Damages
The Loss must be in the form of an adverse effect on the target business.
Examples in the case of an MOE Methodology:
An actual adverse effect in the form of an overstatement of the target business’s Measurement Period EBITDA by reason of revenues of the target business having been overstated or expenses of the target business having been understated due to a financial statements R&W Breach.
A deemed adverse effect in the form of the target business being forced to pay an expense after the Acquisition that should have been reflected in the target business’s Measurement Period EBITDA, such as a regulatory fine or an operating expense that relates back to the EBITDA Measurement Period.
A deemed adverse effect in the form of the target business’s Measurement Period EBITDA having included revenue from a customer that has been lost during or after the end of the EBITDA Measurement Period, with that customer loss being the subject of an R&W Breach regarding significant customers. (Note in this example that the historical Measurement Period EBITDA was still accurate, but that cash flows from that customer will not recur after the Acquisition and can therefore be treated as a deemed reduction of the target business’s Measurement Period EBITDA.)
Examples and principles in the case of a DCF Methodology:
Any type of R&W Breach that has a recurring adverse effect on EBITDA of the target business should also have an adverse effect on the projected cash flows of the target business for the DCF Measurement Period.[9]
The adverse effect on the target business’s projected cash flows may be the result of an overstatement of revenue, an understatement of expense, or a combination of the two. It may be an adverse effect that began before the consummation of the Acquisition of the target business, or after the consummation, but in either case it must result from the R&W Breach in question.
The focus of the Loss requirement for an RWI claim is on an anticipated adverse effect on the target business’s projected cash flows for the DCF Measurement Period. Unlike the adverse effect on the target business’s Measurement Period EBITDA in the case of DIV Damages calculated using an MOE Methodology, which can be either actual or deemed, the adverse effect on the target business’s projected cash flows will always be an actual adverse effect, even to the extent that it is still only anticipated.
A claim for DIV Damages can only readily be made if the buyer can prove that the purchase price for the target business was based on either an MOE Methodology or a DCF Methodology.
The simplest and most effective proof of that is if the indication of interest (“IOI”) or the letter of intent (“LOI”) for the Acquisition explicitly sets forth the metrics of the methodology that the buyer used in arriving at the proposed purchase price for the target business.[10]
Short of such explicit proof, evidence that the buyer established the purchase price for the target business on such a basis and that the seller knew the buyer was doing so should be sufficient under Delaware M&A contract damages law.[11]
Short of that would be proof that the buyer primarily used such a methodology and that it was the most appropriate way to have valued the target business or established the purchase price for the target business.[12]
ii. Determining the Diminution in Value
The determination of the diminution in value resulting from an R&W Breach is more of a forensic science than a legal analysis, and even then with some art mixed in.
The first step is to identify the actual or deemed adverse effect of the R&W Breach on the Measurement Period EBITDA or on the projected cash flows and terminal value. It may seem obvious, but if, for example, a significant customer has been lost prior to the consummation of the Acquisition without required disclosure by the seller, then the adverse effect is not measured by the revenue received from that lost customer during the Measurement Period but instead by that amount of revenue net of the costs that would have been incurred to earn such revenue and that can be avoided by the target business, often referred to as “avoided costs.”[13]
The second step is to determine whether or not such net revenue (i.e., EBITDA or cash flow) from that customer would have been recurring enough to justify the award of DIV Damages.[14]
b. Issues With Respect to DIV Damages Calculated Using an MOE Methodology
An MOE Methodology is composed of two elements: (i) Measurement Period EBITDA and (ii) a multiple applied to the Measurement Period EBITDA.
i. Measurement Period EBITDA
In addition to add-backs for I, T, D, and A, EBITDA is often adjusted to add back certain other costs and expenses to arrive at an “Adjusted EBITDA” for the target business. The buyer’s accounting expert’s quality of earnings (“Q of E”) report is the best source for an explanation of such adjustments and for information about a target business’s EBITDA generally.
ii. Multiple
If the purchase price for the target business was calculated using an MOE Methodology, then the multiple used in calculating DIV Damages should be the same multiple that was used in calculating the purchase price.[15] If a multiple has more than one number right of the decimal point, it is most likely an implied multiple (i.e., a multiple derived simply by dividing the purchase price by the Measurement Period EBITDA).[16]
c. Issues With Respect to DIV Damages Calculated Using a DCF Methodology
A DCF Methodology is composed of three elements: (i) cash flow projections, (ii) terminal value, and (iii) a discount rate applied to each of the projected cash flows and the terminal value.[17]
i. Cash Flow Projections
Because such projections are of cash flows, not of financial accounting income, noncash charges such as depreciation and amortization typically are not treated as reductions to revenue, unlike cash charges such as cost of goods sold (“COGS”) and selling, general, and administrative expenses.[18]
If the purchase price for the target business was calculated using a DCF Methodology, then the calculation of DIV Damages may not require an in-depth analysis of the cash flow projections that were so used, but instead may only require use of the same projections but with the effects of the R&W Breach in question (including any avoided costs) backed out to calculate the deemed actual value of the target business as of the date of the R&W Breach.[19]
ii. Terminal Value
There essentially are two types of terminal value used in a DCF Methodology:
The first type (which is more of a “continuing value”) assumes that the target business will experience steady growth after the final period of the projections, and then applies a mathematical formula to the final period’s net cash flow amount to calculate a sum of the infinite, growing cash flows, with that result discounted to net present value by application of the chosen discount factor.
The second type (which is more of an actual “terminal value”) takes the final period’s net cash flow amount and multiplies it by a market multiple, with that product discounted to net present value by application of the chosen discount factor.[20]
In either case, the terminal value will constitute a significant portion (often 70 percent or more, pre-discounting) of the aggregate cash expected to be received from the target business.
iii. Discount Rate
Except to the extent that the cash flow projections were themselves adjusted for risk, the discount rate used should account for risk,[21] and not solely to account for the time value of money (often referred to as the “risk-free rate”), to arrive at the DIV Damages—that is, the appropriate post-Acquisition purchase price adjustment discounted to then-present dollars and to reflect the probability of future risk.
A typical factor to use to account for risk is the buyer’s weighted average cost of capital (“WACC”).[22] However, if DIV Damages are being calculated on a “with/without” basis, then the same discount rate used by the buyer in calculating the purchase price for the target business (the “with” case) should be used to calculate the deemed actual value of the target business backing out the effects of the R&W Breach in question (the “without” case).
It is often the case that the buyer did not actually use a DCF Methodology to “set the purchase price” for the target business, but instead only to confirm that the purchase price was within a range in line with the buyer’s expectations for its return on the Acquisition. In that context, it may be necessary to resize the DIV Damages calculated from the “with/without” analysis to correspond to the purchase price.[23]
3. Proximate Cause
For DIV Damages to be recoverable Loss under an RWI policy, it is not sufficient merely to identify an R&W Breach and a Loss in the form of a shortfall in Measurement Period EBITDA or with respect to projected cash flows of the target business. That R&W Breach must have been the proximate cause of that Loss.[24]
The typical process for an insured to formulate an RWI claim is to identify an R&W Breach and then to determine what losses have been proximately caused by that R&W Breach and whether such losses are recoverable under the RWI policy.
However, sometimes the script is flipped, and the insured identifies a loss impacting the target’s post-Acquisition business and then tries to find an R&W Breach that might have “caused” that loss (a “loss in search of a breach”).
In the case of an R&W Breach or Breaches with respect to the target’s historical income statement(s), the R&W Breach(es) needs to cover the entire Measurement Period for DIV Damages calculated using an MOE Methodology to be recoverable. Since the Measurement Period will often be a last twelve months (“LTM”) or trailing twelve months (“TTM”) period that does not match up with a single historical income statement covered by the financial statements representation and warranty, the R&W Breaches will need to apply to more than one such financial statement.[25]
Practice Tips for Attorneys for Insureds
In the RWI policy claim evaluation phase, consider doing the following:
Have a qualified forensic accounting firm or valuation firm weigh in on the evaluation and calculation of potential DIV Damages.
Interview any manager or other key employee who worked for both the target business or the seller prior to the Acquisition and the target business or the buyer after the Acquisition, with an eye toward getting their input on the information going into a potential DIV Damages claim (before the RWI carrier or its counsel does so).
For DIV Damages calculated using an MOE Methodology, review in depth the Q of E report prepared for the buyer prior to consummation of the Acquisition to understand the target business’s EBITDA generally and any adjustments thereto specifically.
Determine whether anything should be done or not done to attempt to mitigate Loss associated with the potential DIV Damages.
Try to avoid any action or omission by the target business or the insured that could be asserted as calling into question any material element of the DIV Damages.
This article is the third in the RWI Practice Insights series by John T. Capetta.
This article focuses on buyer-side RWI policies and U.S. law (principally Delaware case law). For purposes of this article:
DIV Damages are a form of expectation damages in which the amount of the damages is the difference between (i) the value of the target business as represented to the buyer, almost always the purchase price paid for the target business by the buyer, and (ii) the value of the target business after giving effect to the diminution in the target business resulting from a breach of the Acquisition Agreement representations and warranties (“R&W Breach”) or from fraudulent misrepresentation or deceit regarding the target business.
Although there are other methods to calculate DIV Damages, this article focuses on those calculated by using either (i) in the case of a multiple of EBITDA methodology (“MOE Methodology”), (a) an actual or deemed shortfall in the EBITDA of the target business for a specified measurement period (“Measurement Period EBITDA”) caused by the R&W Breach or the fraudulent misrepresentation or deceit, times (b) the multiple applied by the insured to the Measurement Period EBITDA in determining the purchase price to pay for the target business; or (ii) in the case of a discounted cash flow methodology (“DCF Methodology”), the loss of future cash flows and of terminal value over a specified period caused by the R&W Breach or the fraudulent misrepresentation or deceit, discounted to present value by the application of a discount factor.
The period of time for which the historical EBITDA is measured in an MOE Methodology and the period of time for which the projections used in a DCF Methodology are included are each referred to in this article as the Measurement Period.
As used in this article:
the term Loss has the definition set forth in the RWI policy;
the term Acquisition Agreement includes stock purchase agreements, merger agreements, asset purchase agreements, and other types of business combination agreements by which a buyer acquires a target business from a seller;
the term Acquisition refers to the business combination contemplated by the Acquisition Agreement;
the term the buyer and the term the insured are often used interchangeably;
the term target and the term target business are used interchangeably;
the term R&W Breach also includes a claim under an RWI policy with respect to a tax indemnification provision in the Acquisition Agreement; and
the phrase without required disclosure by the seller refers to a failure by the seller to make a disclosure to the buyer even though required to do so by a representation and warranty in the Acquisition Agreement.
“Expectation damages” are also sometimes referred to by courts as expectancy damages.
Although relevant M&A damages law regarding DIV Damages may apply with respect to fraudulent misrepresentation or deceit (each a tort) regarding the target business as well as an R&W Breach (a breach of contract), DIV Damages with respect to an RWI claim can only be asserted for an R&W Breach and therefore will always be subject to M&A contract damages law. However, note in this regard the argument described in infra note 3 with respect to an R&W Breach in the form of a claim under the tax indemnity provision in an Acquisition Agreement. ↑
An argument can be made that an indemnification provision in an Acquisition Agreement that is triggered by a specific event, rather than by a breach of representation and warranty, may not be subject to M&A contract damages requirements and limitations that would apply in the context of breach. See Glenn D. West & Sara G. Duran, Reassessing the “Consequences” of Consequential Damage Waivers in Acquisition Agreements, 63 Bus. Law. 777, 785 (May 2008) (section titled “The Impact of Indemnification Provisions on General Contract Damages Rules”). The foregoing brings into question whether an R&W Breach in the form of a claim under a tax indemnification provision triggered by the incurrence post-Acquisition of taxes with respect to the pre-Acquisition Measurement Period may be more effective than one in the form of a claim for breach of the taxes representation and warranty in an Acquisition Agreement with respect to the same incurrence.
On a different side of the foregoing argument, the provision of indemnification as a remedy (and even the sole remedy) in an Acquisition Agreement for breaches of representation and warranty should not be interpreted to prohibit a claim for the contractual remedy of expectation damages, unless expectation damages have been expressly excluded. SeeInterim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 549 (Del. Super. Ct. 2005); see alsoHudson’s Bay Co. Luxembourg, S.A.R.L. v. JZ LLC, No. 10C-12-107, 2011 WL 3082339, at *2 (Del. Super. Ct. July 26, 2011) (“A claim for indemnification resulting from the breach of a representation and warranty is a claim for breach of contract.”), aff’don other grounds, 80 A.3d 960 (Del. 2013) (unpublished table decision). ↑
However, if an R&W Breach with respect to the historical balance sheets of the target business leads to the need to create a new accrual or to increase an existing accrual, and the accrual or increase would have a recurring effect on EBITDA or on the projected cash flows of the target business post-Acquisition, then DIV Damages may be appropriate. ↑
The length of the relationship with those customers is important for this purpose, but with the focus being on the anticipated prospective length, not on the historical retrospective length. ↑
Indeed, most Acquisition Agreements contain an explicit disclaimer of any representation or warranty regarding projections provided to the buyer for the target business. ↑
In Dura Medic, the target did make representations and warranties as to its last twelve months (“LTM”) ending on April 30, 2018, financial statements, but appears not to have explicitly made a representation and warranty as to the LTM April 30, 2018, EBITDA derivable therefrom. In re Dura Medic Holdings, Inc. Consol. Litig., 333 A.3d 227, 243 (Del. Ch. 2025). In Cobalt, the opinion refers to “Crystal’s representation that WRMF’s annual broadcast cash flow was $5 million,” Cobalt Operating, LLC v. James Crystal Enters., LLC, No. 714, 2007 WL 2142926, at *1 (Del. Ch. July 20, 2007) (footnote omitted), aff’d, 945 A.2d 594 (Del. 2008) (unpublished table decision); to “WRMF’s cash flow [being] in fact $5 million, as represented by Hilliard [Crystal’s sole owner],” id. at *7 (footnote omitted); and to “Hilliard’s representation that WRMF’s cash flow for the twelve months leading up to the closing would be $5 million,” id. at *8. However, the description of the Acquisition Agreement in Cobalt does not refer to such a representation, id., and thus the references in the opinion to such a “representation” by Crystal or Hilliard appear not to be references to a representation and warranty in the Acquisition Agreement about WRMF’s cash flow for the Measurement Period. For a finding that a buyer could have sought a specific representation and warranty regarding the value of the target business but failed to do so, see Interim, 884 A.2d at 551. However, the foregoing finding in Interim does not appear to have been followed in other Delaware M&A damages cases. ↑
SeeNetApp, Inc. v. Cinelli, No. 2020-1000, 2023 WL 4925910, at *18 (Del. Ch. Aug. 2, 2023) (“Precedent in the M&A context provides . . . illuminating guidance. In that setting, Delaware courts routinely use the purchase price as the starting point for benefit-of-the-bargain damages calculations. This makes sense. The purchase price for a company is often the result of arms’-length negotiations between sophisticated parties and reflects the potential risks and rewards of execution. The price might have been established with a market approach using a multiple, or an income approach using a discount rate. Damages, then, may be calculated using the corresponding method to account for any diminution in value attributable to the misrepresentation.” (footnotes omitted)).
Interestingly, in NetApp, Vice Chancellor Will rejected the buyer’s claim for lost synergistic profits calculated using a DCF Methodology but granted the buyer DIV Damages calculated using a multiple of revenue methodology proposed by the seller.
It should be noted that, in the case of either methodology, the purchase price calculated assumes a cash-free, debt-free target business, and the purchase price would be subject to adjustment to the extent that was not the case at the closing of the Acquisition. ↑
However, to the extent that the projected cash flows do not include add-backs for Interest or Taxes, or for adjustments to EBITDA, there may be an adverse effect on projected cash flows even though there would not be an adverse effect on EBITDA. ↑
Even where an IOI or an LOI sets forth an anticipated Measurement Period EBITDA and a multiple to be applied thereto, the seller (and therefore the RWI carrier) might still argue that the foregoing did not constitute agreement between the seller and the buyer to that as the methodology of setting the purchase price for the target business, and therefore for calculating DIV Damages, or that any such agreement was nonbinding; but any such assertions would likely have little weight with a court or arbitrator authorized to resolve such a dispute, particularly in light of then–Vice Chancellor Strine’s findings in Cobalt. Seeinfra note 15. ↑
See, e.g., Cobalt, 2007 WL 2142926, at *7; Swipe Acquisition Corp. v. Krauss, No. 2019-0509, 2020 WL 5015863, at *7 (Del. Ch. Aug. 25, 2020) (“At the pleadings stage, it is reasonably conceivable that an EBITDA multiple could support a damages calculation. Plaintiff alleges that the parties discussed using an EBITDA multiple to calculate the purchase price and that the Buyers, in fact, did so.” (footnote omitted)). In Cobalt, as often happens in such a dispute, the seller Crystal contended that it had “not rel[ied] on cash flow in reaching its decision to sell WRMF for $70 million”; that “it would not have sold for anything less than that price”; and that “regardless of what WRMF’s actual or legitimate cash flow was at the time, Crystal would never have done a deal at that [reduced] price.” Cobalt, 2007 WL 2142926, at *29. But then–Vice Chancellor Strine rejected that argument, stating among other things that “[t]his argument misses the point of awarding a remedy in a breach of contract case like this, which is to compensate the non-breaching party for the injury caused by the breach,” and that, “regardless of whether a deal would have been reached at a reduced price, Cobalt has demonstrated an injury equal to the value of the station in light of its legitimate earnings.” Id. Although the inquiry regarding the R&W Breach is focused on the reasonable expectations of the parties ex ante, the inquiry regarding DIV Damages is focused on the reasonable expectation of the nonbreaching party ex ante. See, e.g., Duncan v. Theratx, Inc., 775 A.2d 1019, 1022 (Del. 2001) (“Expectation damages . . . require the breaching promisor to compensate the promisee for the promisee’s reasonable expectation of the value of the breached contract and, hence, what the promisee lost.”); NetApp, 2023 WL 4925910, at *17 (“Damages are measured from the plaintiff’s perspective at the time of the breach.” (footnote omitted)). Notwithstanding the foregoing, Vice Chancellor Will did not accept the plaintiff’s claim of synergistic damages in NetApp but instead awarded the plaintiff DIV Damages calculated using a multiple of revenue, as proposed by the seller. ↑
See, e.g., WaveDivision Holdings, LLC v. Millennium Digit. Media Sys., L.L.C., No. 2993, 2010 WL 3706624, at *23 (Del. Ch. Sept. 17, 2010) (in addition to the buyer’s assertion that it had relied on a multiple of EBITDA methodology in calculating the value to it of the cable systems it had sought to acquire before being jilted, then–Vice Chancellor Strine also favorably noted that it was common in the cable industry to use a multiple of EBITDA valuation methodology, and that the seller, certain debtholders of the seller, and the buyer all used such a methodology to value cable systems in transactions); Taylor Precision Prods., Inc. v. Larimer Grp., Inc., No. 15-CV-04428, 2023 WL 6785802, at *2 (S.D.N.Y. Oct. 13, 2023). In the absence of proof that the seller either agreed to the determination of the purchase price based on a multiple of Measurement Period EBITDA methodology or was at least aware that the buyer was using such a methodology, the seller (and therefore the RWI carrier) may argue that the buyer’s assertion is merely self-serving or does not reflect the entirety of how the buyer determined the purchase price, putting more pressure on the buyer’s proof in that regard.
It is, of course, possible that a buyer may have calculated the purchase price it offered or paid for the target business using neither an MOE Methodology or a DCF Methodology, or using one or both of those methodologies among others. In that situation, the buyer or its expert may introduce evidence regarding what it believes to be the best way to calculate the actual valuation of the diminished target business, but the buyer’s burden of proof will likely be greater in that situation since it cannot rely simply on its calculated expectation of what the target business was worth as the starting point to calculate that diminution in value. ↑
See, e.g., In re Dura Medic Holdings, Inc. Consol. Litig., 333 A.3d 227, 257 (Del. Ch. 2025) (noting that “the Buyers’ [damages] expert . . . calculated the lost earnings for those two customers for LTM April 2018, including offsets for costs and expenses the Company would not have incurred”). For a detailed description of how those avoided costs and expenses were calculated in that case, see id. at 258, n.48. See alsoRestatement (Second) of Contracts § 347 cl. (c) (A.L.I. 2024) (“Subject to the limitations stated in §350-53, the injured party has a right to damages based on his expectation interest as measured by (a) the loss in the value to him of the other party’s performance caused by its failure or deficiency, plus (b) any other loss, including incidental or consequential loss, caused by the breach, less (c) any cost or other loss that he has avoided by not having to perform.”). The issue of which costs and expenses would be avoided, in full or in part, and which would continue to be incurred is one of the most demanding issues in evaluating DIV Damages, and one in which the input of the insured’s forensic accountants or valuation expert is essential.
See the discussion of Zayo and Dura Medic in Part I of this article regarding the need for a recurring effect. Zayo Grp., LLC v. Latisys Holdings, LLC, No. 12874, 2018 WL 6177174 (Del. Ch. Nov. 26, 2018); Dura Medic, 333 A.3d 227; see also NetApp, 2023 WL 4925910, at *20 (“This did not amount to a one-time loss for NetApp, but would continue to affect future cash flows. In these circumstances, dollar-for-dollar damages would not make NetApp whole.” (footnote omitted)). ↑
There appears to have been only one case under Delaware or New York M&A damages law in which a buyer attempted to use a different, reduced multiple to calculate DIV Damages than the one used to calculate the purchase price for the target business, albeit unsuccessfully. SeeTaylor, 2023 WL 6785802, at *5. ↑
For an example of the derivation of an implied multiple, see, e.g., Taylor, 2023 WL 6785802, at *5. Of course, a “multiple” can be derived by dividing the purchase price for a target business by any metric, not just Measurement Period EBITDA. ↑
An attorney familiar with the use of a discounted cash flow methodology to calculate lost profits damages will be familiar with much of the terminology used in this subsection. However, it cannot be emphasized enough that there is a fundamental difference between the calculation of DIV Damages using a DCF Methodology and the calculation of lost profits damages using a discounted cash flow methodology. The former is largely an exercise in doing a “with/without” comparison, and the latter is largely an exercise in searching for an unknown number based on cash flow projections likely to be somewhat unreliable and with a discount factor chosen solely for purposes of that exercise. ↑
Cf.S.C. Johnson & Son, Inc. v. DowBrands, Inc., 294 F. Supp. 2d 568, 582 (D. Del. 2003) (“As to depreciation, . . . SCJ contends that Mr. Dunbar, DowBrands’ expert, agreed that SCJ would have appropriately subtracted that number if the depreciation was included in the cost of goods sold and . . . depreciation was included in the cost of goods sold.”), rev’don other grounds, 111 F. App’x 100 (3d Cir. 2004). ↑
To the extent that the cash flow projections used in the DCF Methodology were prepared by the buyer, then the RWI carrier may have more opportunity to challenge their reliability. The basis and nature of a challenge to the cash flow projections can get into particularly thorny issues such as, or akin to, proximate cause, contributory fault, no windfall, unjust enrichment, seller disclaimer, discount rate suitability, and RWI carrier substitution for the seller, which are beyond the scope of this article. ↑
This second type of terminal value resembles a sale valuation of the target business as of the end of the final period of the cash flow projections calculated in accordance with an MOE Methodology, substituting the projected net cash flow of the target business for the final period for the Measurement Period EBITDA and then subjecting that future deemed sale valuation to the discount factor to account for the time value of money and the “de-risking” of that sale valuation. ↑
Technically, the term risk as used in this context should take into account both the probability that a lesser amount of future cash flows or terminal value will be achieved and the probability that a greater amount of future cash flows or terminal value will be achieved, but it is often understood to mean only the former.
Although a seller (or an RWI carrier, standing in the liability shoes of a seller) could attempt to argue that a disclaimer in the Acquisition Agreement regarding representations and warranties with respect to target business projections precludes their use in DIV Damages calculated using a DCF Methodology, such an argument should fail on the basis that the use of such projections in a DCF Methodology is only for purposes of comparing the ”with” and the “without” cases in such a calculation. ↑
See, e.g., Surf’s Up Legacy Partners, LLC v. Virgin Fest, LLC, No. N19C-11-092, 2024 WL 1596021, at *23 (Del. Super. Ct. Apr. 12, 2024) (“A 26.47% discount rate was used and traditional WACC.” (footnote omitted)).
The use of the buyer’s WACC in determining the appropriate risk-adjusted discount rate is justifiable on the basis that the purchase price represents the amount invested by the buyer to acquire the target business, and the WACC represents the rate of return that the buyer would expect to receive on that investment, taking into account the risks associated with achieving the future cash flows reflected in the projections used. The cost of capital is a weighted average between the expected rate of return on the buyer’s indebtedness and the expected rate of return on the buyer’s equity. The calculation of the former should be relatively straightforward based on the interest rates charged by the buyer’s financing sources, while the calculation of the latter is fairly complex, involving an attempt to approximate the rate of return expected by the buyer’s stockholders on the equity invested in the buyer.
A further explanation of the discount rate is beyond the scope of this article, and likely beyond the scope of what an attorney for an insured needs to know compared to the buyer’s forensic accountants or valuation expert. For anyone interested in a further explanation, albeit one targeted to a lawyer involved in lost profits litigation, see Robert M. Lloyd, Discounting Lost Profits in Business Litigation: What Every Lawyer and Judge Needs to Know, 9 Transactions: Tenn. J. Bus. L. 9 (2007). ↑
See, e.g., S.C. Johnson, 294 F. Supp. 2d at 595–96 (“The Court concludes that SCJ’s damages calculation must be reduced to reflect the ratio of the purchase price to the valuation. Given that SCJ paid $1.125 billion for DowBrands, which was 93% of the valuation, SCJ’s agreement that DowBrands is responsible to reimburse them for the ‘amount of the purchase price’ attributable to Latin America and the instructive case law on the benefit of the bargain rule, the Court concludes that SCJ is entitled to damages in the amount of $21,948,000.00, which is 93% of its valuation of the Latin American business as derived from the valuation of the business as a whole.”). ↑
See, e.g., In re Dura Medic Holdings, Inc. Consol. Litig., 333 A.3d 227, 255–56 (Del. Ch. 2025) (“In addition to showing the existence of damages, the plaintiff must show that the damages flowed from the defendant’s violation of the contract. The court evaluates but-for causation by considering how the positions of the parties would differ in the ‘but-for’ world—i.e., the hypothetical world that would exist if the [a]greement had been fully performed. The court evaluates proximate causation by considering how close the relationship is between the causal factor and the resulting damages. If the causal factor is too attenuated, then a court can decline to award damages because of a lack of proximate cause.” (footnotes and internal quotation marks omitted)); NetApp, Inc. v. Cinelli, No. 2020-1000, 2023 WL 4925910, at *26 (Del. Ch. Aug. 2, 2023) (loss of synergistic profits not the proximate result of the misstatements regarding the target business).
The importance of proximate cause between the R&W Breach, on the one hand, and the Loss, on the other hand, is exemplified by Vice Chancellor Glasscock’s holding in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, No. 7906, 2020 WL 948513 (Del. Ch. Feb. 27, 2020):
In Great Hill, Vice Chancellor Glasscock rejected most of the plaintiffs’ claims of breach of contractual representations and warranties in the Acquisition Agreement and of fraud in connection with the purchase of the target company, Plimus (an intermediary between payment processors and vendors), but did find in favor of the plaintiffs with respect to certain breaches of contractual representations and warranties and fraud, in the latter case committed by the target company’s CEO.
The most significant of such R&W Breaches and fraud involved nondisclosure to the buyer of pre-Acquisition termination threats by PayPal, which at the time of the closing of the Acquisition was the target company’s largest payment processor by volume and its only United States–based payment processor.
In addition, Vice Chancellor Glasscock found that the plaintiffs “suffered harm from the non-disclosure of PayPal’s termination threats.” Id. at *23 (footnote omitted), Moreover, the plaintiffs asserted an enormous amount of losses suffered by them after the Acquisition, in total exceeding the purchase price that the buyer paid for the target company.
Nevertheless, Vice Chancellor Glasscock “award[ed] no fraud or contract damages to the Plaintiffs in connection with the misrepresentations regarding PayPal’s termination threats.” Id. at *23 (emphasis added).
Although the opinion referenced a number of flaws in the plaintiffs’ damages assertions, particularly speculativeness (i.e., a lack of certainty, to be addressed in Part IV of this article), the court’s decision to award the plaintiffs no damages for the R&W Breaches and the fraud regarding the undisclosed PayPal termination threats came down to the lack of proximate cause between those breaches and fraud and the losses that the plaintiffs had asserted.
Those losses assumed that the plaintiffs would prevail on all of their R&W Breach and fraud claims, and the plaintiffs chose not to pare back their losses assertions to those that were the proximate result of the R&W Breaches and fraud that they did prevail on.
Vice Chancellor Glasscock found that the plaintiffs’ choice prevented him from awarding damages to them with respect to the undisclosed PayPal termination threats.
To use a baseball analogy, the plaintiffs in Great Hill tried to hit a grand slam and instead struck out looking with the bases loaded.
For example, if the Measurement Period EBITDA is for a TTM or an LTM Measurement Period ending on April 30, it may be necessary to piece together that twelve-month period from two or more income statements covered by the financial statements representations and warranties in the Acquisition Agreement, such as an annual income statement and one or more interim income statements. ↑
If you are accepting a letter of credit (“LC”) as support for a payment or performance owed to you, what should you require?
LC Features and Types
Determining what to require depends on the underlying transaction supported by the LC and understanding two key features of an LC: it is documentary, and it is independent.
An LC is “documentary” in that it is an undertaking by an issuer to a beneficiary to honor a documentary presentation by payment (or, in rare cases, by delivery of an item of value).[1] In other words, the issuer promises to pay the beneficiary if the document or documents specified in the LC are presented in accordance with the LC. An LC is not a suretyship undertaking, where a surety promises to pay if a primary obligor breaches a payment or performance obligation; an LC issuer’s payment obligation is triggered by the presentation of documents, not by the occurrence of a breach.
An LC is “independent” in that the issuer’s obligation is “independent of the existence, performance, or nonperformance of a contract or arrangement out of which the [LC] arises or which underlies it. . . .”[2] A promise to pay if a primary obligor defaults is a suretyship undertaking; a promise to pay if a beneficiary presents a statement that a primary obligor has defaulted is an LC. An LC issuer’s obligation to pay the beneficiary is independent of whether the issuer is reimbursed or paid a fee or whether the primary obligor actually defaulted.
These features make LCs desirable to beneficiaries, but a promise is only as good as the promisor. You want a creditworthy and reliable issuer, typically an issuing bank or confirming bank located in your jurisdiction and subject to your local law. If the issuer fails to honor the LC, you want to be able to sue it for wrongful dishonor in a convenient forum and not have to worry about cross-border issues like sanctions or currency controls blocking payment.
You also want assurance that the LC is not forged, so you may want your trusted bank to “advise” the LC to you, which means that it communicates the terms and conditions of the LC to you and checks the apparent authenticity of the issuer’s request to communicate those terms and conditions.[3]
LCs are often classified as “commercial” or “standby” LCs. Commercial LCs (sometimes called documentary LCs) are intended to be drawn upon as payment for the sale or lease of goods or provision of services. Standby LCs (sometimes called independent guarantees) are generally intended to be drawn upon only if an underlying obligor defaults in payment or performance. There is a subset of standby LCs called “direct-draw” LCs, which are typically intended to be drawn upon to avoid the preference risk of the underlying obligor paying the beneficiary and thereafter becoming bankrupt during the preference period.
Choice of Law and Practice Rules
Most LCs state that they are subject to letter of credit practice rules. Beneficiaries would generally be well served to require the International Standby Practices 1998 (“ISP98”) as the rules for a standby LC. The Uniform Customs and Practice for Documentary Credits No. 600 (“UCP 600”) is almost always chosen as the rules for a commercial LC.
The beneficiary would typically want the governing law of the LC to be the law of its local jurisdiction (not, if different, the local law of the issuer or of the obligor that owes the underlying performance or payment).
Obtainment of Payment
The LC should describe each document that must be presented to obtain payment. It often helps to attach a form of each required document as an exhibit to the LC.
The beneficiary should ascertain that it will be able to timely obtain and present each required document in every scenario where it expects payment under the LC. For example, if the LC specifies that a document be signed by a third party, will the beneficiary be able to obtain the signed document?
Beneficiaries should resist any requirement in the LC that the “original” LC must be presented for payment lest they risk nonpayment if the original LC is lost, stolen, or destroyed. Alternatively, beneficiaries can insist on a provision for an LC to be replaced by the issuer if the beneficiary certifies that the original LC has been lost, stolen, or destroyed.
Beneficiaries should check the mechanics for how to present the required document(s). For example, the issuer may specify that the document(s) be presented in paper form at its office. The beneficiary should consider requiring the option to instead present by email or fax.
If the LC’s purpose is to protect you both from the risk of nonpayment of the underlying obligation and the risk that payment will be made but must subsequently be disgorged as preferential in the payer’s bankruptcy, consider using a “direct-pay” LC so that you are paid by the issuer rather than the underlying obligor.
Expiration Dates
An LC typically contains an expiration date (or other presentation deadlines). Make sure that each deadline is far enough in the future that you will have ample time to demand payment in every plausible scenario and that, if the issuer refuses to pay, the deadline allows time for one or two subsequent attempts to cure any discrepancies claimed by the issuer. For example, if the underlying performance is owed to you by December 31, 2025, you may want an expiration date not earlier than January 31, 2026.
If the LC contains an “evergreen” or “auto-extension” clause that automatically extends the expiration date from time to time unless the issuer sends you at least “XX” days’ written notice that there will be no further extension, make sure that the LC permits you to demand payment by presenting a document stating that you received a nonextension notice rather than having to state some other basis for drawing. Also, consider requiring the LC to provide for any notice of nonextension to be sent to at least two people or addresses; this reduces the risks of nonreceipt of the notice and of failing to act timely on the notice.
Transferability
LCs are generally nontransferable unless they provide for transfer. There are circumstances where the beneficiary should require transferability. For example, if the LC is acting as a security deposit supporting a real estate lease, the beneficiary should want the ability to transfer the LC to a new owner if the building is sold. The transfer rules in ISP98 and UCP 600 are complicated and may not fit your transaction, but well-drafted provisions in an LC can override any ill-fitting transfer rules.
Final Thoughts
These are just basics to consider. Particular transactions may raise additional concerns. The structuring and drafting of each LC should be carefully coordinated with the structuring and drafting of the underlying contract or arrangement to be supported by the LC.
A well-drafted LC from a strong, reliable local issuer can provide you with valuable credit support. A poorly drafted LC or an undesirable issuer may leave you unpaid.
See U.C.C. § 5-102(a)(6) (“Document”), -102(a)(10) (“Letter of credit”), -102(a)(12) (“Presentation”). ↑
A recurring issue under the Investment Company Act of 1940 (“Investment Company Act”)[1] is whether particular types of loans are considered “securities.” If an operating company holds too many loans that are securities, that company inadvertently could become an investment company.[2] This issue arises, for example, for certain nonbank lending entities, for companies that sell merchandise on credit (the receivable created could be a note or other instrument that is a security), and for companies that make intercompany loans to affiliates.
While the U.S. Supreme Court addressed the issue of when a loan or note is a security under the Securities Act of 1933 (“Securities Act”)[3] and the Securities Exchange Act of 1934 (“Exchange Act”),[4] the Court did not expressly address the issue of when a note or loan is a security under the Investment Company Act. And, despite the fact that the definition of “security” in each of the Securities Act, the Exchange Act, and the Investment Company Act (collectively, “Acts”) includes the term “note,”[5] the U.S. Securities and Exchange Commission (“SEC”) and its staff have suggested, with at least some merit but almost no actionable guidance, that the definition of the term “note” may be broader under the Investment Company Act than it is under the Securities Act or the Exchange Act.
This article analyzes the law governing when a loan constitutes a security for purposes of the Investment Company Act. It discusses the views expressed by the SEC on the question and suggests that some of these views are overbroad (and in some cases likely wrong). It also discusses some of the challenges created by the SEC’s views, particularly with respect to intercompany loans.
Reves and the Family Resemblance Test
While none of the Acts have identical definitions of the term “security,” each definition includes “notes” as securities, and each definition is identical with respect to the inclusion of “note.” Despite the inclusion of the term “note” in each definition, however, determining whether a note, loan, or similar instrument is actually a security is not always a straightforward analysis, particularly for purposes of the Investment Company Act.
The seminal Supreme Court case of Reves v. Ernst & Young[6] sets out the core analysis of when such an instrument meets the definition of “security” for purposes of the Securities Act and the Exchange Act. However, that opinion (and subsequent case law building on Reves) did not discuss the definition in the Investment Company Act.
In Reves, the Supreme Court held that promissory notes payable on demand issued by a farmers’ cooperative were notes, and thus securities, within the meaning of the Securities Act and the Exchange Act.[7] The Court stated, however, that not all notes are necessarily securities because they “are used in a variety of settings, not all of which involve investments.”[8]
In order to determine whether a note is a security, the Court adopted the “family resemblance” test.[9] Under the family resemblance test, a note is presumed to be a security.[10] That presumption may be rebutted by a showing that the note bears a strong resemblance to one of an enumerated category of instruments that are not securities, such as consumer financing notes, mortgages, short-term notes secured by a lien on a small business or some of its assets, short-term notes secured by an assignment of accounts receivable, a note that simply formalizes an open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized), or notes evidencing loans by commercial banks for current operations.[11]
In order to determine whether a note bears a strong resemblance to one of these enumerated categories, four factors should be examined.[12]
First, the motivations of both the buyer and the seller must be examined. According to the Court,
[i]f the seller’s purpose is to raise money for the general use of a business enterprise or to finance substantial investment and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a “security.” If the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller’s cash-flow difficulties, or to advance some other commercial or consumer purpose, on the other hand, the note is less sensibly described as a “security.”[13]
Second, the plan of distribution is examined “to determine whether it is an instrument in which there is common trading for speculation or investment.”[14]
Third, the reasonable expectations of the investing public are examined. In this regard, the Court stated that it would “consider instruments to be ‘securities’ on the basis of such public expectations, even where an economic analysis of the circumstances of the particular transaction might suggest that the instruments are not ‘securities’ as used in that transaction.”[15]
Fourth, it is necessary to examine whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Act and the Exchange Act unnecessary.[16]
If, based upon these factors, an instrument is not sufficiently similar to an item on the list, the decision of whether another category should be added is to be made by examining the same factors.[17]
Since the Reves decision, courts have applied the family resemblance test to determine whether loans are securities for purposes of the Securities Act and the Exchange Act.[18] However, courts have generally not had occasion to determine whether the same test applies for purposes of the Investment Company Act. Furthermore, while the SEC and its staff have made several statements evidencing the view that many loans that may not be securities under Reves for purposes of the Securities Act and the Exchange Act are securities for purposes of the Investment Company Act, there has been little SEC or staff guidance regarding whether Reves should apply and how to analyze whether any particular loan, note, or similar instrument is a security for purposes of the Investment Company Act.
Analysis of the SEC’s Views
The SEC’s Position
Over the years, the SEC and its staff have tried to distance the loan/security analysis under the Investment Company Act from the test set forth by Reves and its progeny. The SEC staff has argued, for example, that
while excluding commercial [loan] instruments from the disclosure requirements of the Securities Act and the Exchange Act is consistent with the purposes of those Acts, issuers that pool these instruments nevertheless may be functionally equivalent to, and present the same investor protection concerns as, investment companies that invest in securities that are registered under those Acts.[19]
The rationale behind this view presumably is that, in the hands of an issuer, a receivable owed by another person in exchange for a loan is, from an economic and risk-based perspective, no different than owning a debt security of the other person. An investment in Issuer A, the assets of which primarily consist of loan receivables owed by other persons, presents the same risks as an investment in Issuer B, the assets of which primarily consist of debt securities of those same persons. Given that Issuer B would generally need to be registered as an investment company, it arguably makes sense from a policy and investor protection standpoint to require Issuer A to register as well.
However, this policy objective runs squarely into a legal issue, alluded to above and discussed further below—that is, the Reves Court held that certain types of notes are not securities, and Congress did not include a provision in the Investment Company Act expressly stating that notes should be deemed to be securities for purposes of the Investment Company Act even when they are not securities for purposes of the Securities Act and the Exchange Act. If certain notes are not securities under the Investment Company Act, then a company or pool holding those notes is not an investment company, regardless of the policy and investor protection considerations of concern to the SEC and its staff.
Informally, and with some merit, the SEC staff has suggested that there also is a statutory basis under the Investment Company Act to treat loans as securities even if they are not securities under Reves. As discussed below, the structure of the Investment Company Act could indicate that Congress intended to include at least some issuers in the definition of an investment company where those issuers’ assets consist primarily of loans. However, that is not the only plausible interpretation of the drafting decisions made by Congress. And even to the extent that a broader category of loans are securities under the Investment Company Act than would be under the Reves test, the structure of the Investment Company Act does not imply that all loans are securities for purposes of the Investment Company Act.
Certain Exemptions Under the Investment Company Act
The SEC’s view that a loan may be a security for purposes of the Investment Company Act, even where it is not a security for purposes of the Securities Act or the Exchange Act, likely stems from several provisions of the Investment Company Act exempting issuers that are engaged in certain lending businesses from the definition of “investment company.”
Section 3(c)(3) of the Investment Company Act, for example, exempts from the definition of “investment company,” in relevant part, “[a]ny bank or insurance company; any savings and loan association, building and loan association, cooperative bank, homestead association, or similar institution, or any receiver, conservator, liquidator, liquidating agent, or similar official or person thereof or therefor; or any common trust fund. . . .”[20]
Most categories of assets that would typically be held by a bank—cash; property, plant, and equipment; etc.—are clearly not “securities” and, therefore, would not contribute to the 40 percent limit for “investment securities” under § 3(a)(1)(C). However, in addition to these assets, banks may also hold large amounts of loan receivables. By exempting such “banks” from the definition of “investment company,” an implication could be that, absent the exemption, at least some banks could meet the “investment company” definition in § 3(a)(1)(C).
Similarly, § 3(c)(4) of the Investment Company Act exempts from the definition of investment company “[a]ny person substantially all of whose business is confined to making small loans, industrial banking, or similar businesses.”[21] The SEC staff has interpreted this provision to apply only to consumer financing agencies,[22] and like § 3(c)(3), an implication of this provision could be that absent this exemption, the loan receivables held by such entities could constitute “securities” under the Investment Company Act.
While one plausible reading of these provisions is that the loans held by these lending institutions are or could be securities, a perhaps more straightforward interpretation is that Congress thought that banks and other lending institutions were comprehensively regulated by federal and state regulators, and that the application of the Investment Company Act to those entities was therefore inappropriate, regardless of whether they held securities (whether those securities were in the form of “loans” or otherwise).
Another example that the staff often informally points to is § 3(c)(5) of the Investment Company Act, which exempts from the definition of the term “investment company”:
Any person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates, and who is primarily engaged in one or more of the following businesses: (A) purchasing or otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance, and services; (B) making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance, and services; and (C) purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.[23]
As is the case for the exemptions in §§ 3(c)(3) and 3(c)(4), an implication of the exemption in § 3(c)(5) could be that the instruments described in the section—such as notes, open accounts receivable, loans, mortgages, and other liens on real estate—are or may in some instances be securities under the Investment Company Act.
Again, however, another and perhaps more likely basis for the § 3(c)(5) exceptions is that when enacting the Investment Company Act in 1940, Congress concluded that “factoring” companies (as described in clause A), “sales financing” companies (as described in clause B), and mortgage lenders (as described in clause C) are not entities that Congress thought should be regulated under the Investment Company Act, regardless of whether the instruments that those entities held were or were not securities. This interpretation is consistent with the structure of the “3(c)” exemptions (i.e., the other exemptions under § 3(c) of the Investment Company Act). Aside from §§ 3(c)(1) and 3(c)(7), each of the 3(c) exemptions exempt a specific business from the definition of “investment company,” rather than discussing which assets constitute “investment securities.” And §§ 3(c)(1) and 3(c)(7)—the exemptions primarily used by private funds—provide exemptions based on the owners of an issuer rather than the business or the nature of its assets.
Furthermore, this interpretation of Congress’s intent is supported by the identical use of the word “note” in the definition of “security” in each of the Acts. Had Congress intended that the term “note” in the Investment Company Act’s definition should mean something different than the term “note” in the Securities Act’s and Exchange Act’s definitions, it would have been a simple matter to explicitly provide for a different meaning. Opting instead to imply a different meaning for the term through the inclusion of certain exemptions in the statute seems an unlikely way for Congress to indicate a difference in the definitions.
Examination of Sections 3(c)(5)(A) and (B)
Sections 3(c)(5)(A) and (B), in particular, merit a deeper examination.
Section 3(c)(5)(A) applies to companies primarily engaged in the business of purchasing or acquiring notes, drafts, acceptances, open accounts receivable, etc. This exemption seems to indicate Congress’s belief that, in the hands of a purchaser or acquirer, such notes, drafts, acceptances, open accounts receivable, etc., could be investment securities, and therefore, a specific exemption for factoring businesses was needed to ensure that such businesses would not inadvertently become investment companies.
Section 3(c)(5)(A) does not apply to companies that originate such instruments. Take, for example, a company (“Tractor Co.”) that manufactures and sells tractors. Tractor Co. sells some of its tractors for cash and some of its tractors on credit. When selling such tractors on credit, Tractor Co. has created, depending on the terms, an open account receivable, a note, or another type of loan receivable owed by its customer. Section 3(c)(5)(A) does not apply to Tractor Co. because (i) Tractor Co. is engaged in the business of manufacturing and selling tractors, not in purchasing instruments described in the section, and (ii) it originated the instrument rather than purchasing it. However, if a factoring company (“Factoring Co.”) purchases instruments such as the one originated by Tractor Co., § 3(c)(5)(A) implies that such instruments in the hands of Factoring Co. could be investment securities, but provides that Factoring Co. may be eligible for the exemption if it meets the § 3(c)(5)(A) conditions.
As § 3(c)(5)(A) applies only to companies that purchase or acquire loans, it does not say anything about, or imply any particular treatment of, loans in the hands of the company that makes the loan, like Tractor Co.
Section 3(c)(5)(B) applies to companies primarily engaged in the businessof making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance, and services. This exemption seems to indicate Congress’s belief that, in the hands of a company primarily engaged in the business of making such loans, the loans could be investment securities, and therefore, a specific exemption for sales financing businesses was needed to ensure that such businesses would not inadvertently become investment companies.
Section 3(c)(5)(B) also doesnot apply to companies like Tractor Co., which are primarily engaged in other businesses (e.g., manufacturing and selling tractors) and not in the business of making loans. And § 3(c)(5)(B) does not say anything about, or imply any particular treatment of, loans in the hands of a company that is not primarily engaged in the business of making loans but that nevertheless makes a loan.
As a result, neither § 3(c)(5)(A) nor § 3(c)(5)(B) would apply to a company like Tractor Co., which makes loans rather than acquiring them but is not “primarily engaged” in the business of making loans. But that does not mean that a loan extended by Tractor Co. is an investment security in the hands of Tractor Co. It is highly unlikely that Congress intended for Tractor Co. to be an investment company solely because it sells merchandise to customers on credit. The test in Reves, including whether Tractor Co. had an investment or a commercial intent when making the loan, seems to fit naturally in determining whether such an instrument should be a security in the hands of Tractor Co.
The SEC and its staff, however, have put forward a much broader analysis. In particular, the SEC and its staff have stated on multiple occasions that “notes representing the sales price of merchandise, loans to manufacturers, wholesalers, retailers and purchasers of merchandise or insurance, and mortgages and other interest in real estate are investment securities for purposes of the [Investment Company] Act.”[24] Given the specific language used (mirroring that in § 3(c)(5)), the SEC and its staff seem to be taking the position that §§ 3(c)(5)(A) and (B) provide a default position that loans are securities, and therefore, an issuer holding large enough amounts of loans must generally meet one of the exemptions in § 3(c)(5) (or another exemption) in order to avoid investment company status.
For the reasons discussed above, this analysis is almost certainly overbroad. If this analysis were correct, §§ 3(c)(5)(A) and (B) would seem to imply that Tractor Co. extending credit to its purchaser would result in Tractor Co. owning an investment security—yet being ineligible to rely on either § 3(c)(5)(A) (as the maker, rather than purchaser, of the loan) or on § 3(c)(5)(B) (as a company not primarily engaged in the business of extending loans).[25]
Applicability of Reves
As discussed above, it is not clear that Congress actually intended the definition of “security” under the Investment Company Act to be broader than the definitions under the Securities Act or the Exchange Act. But even if a broader set of loans may be securities under the Investment Company Act, that does not mean that Reves does not apply, at least in part, when determining whether a loan is a security for purposes of the Investment Company Act. Given the similarity in the definition of “security” between the Acts, it is hard to imagine that Reves is not at least relevant in the determination of when a loan is a security for purposes of the Investment Company Act.
One could envision the SEC taking Reves into consideration in any such determination. For example, a sensible approach might be to start any analysis of whether a loan is a security with the Reves family resemblance test and then, where the analysis is for purposes of the Investment Company Act, separately make a determination of whether, notwithstanding the instrument not being a security under the Reves test, the activities of the issuer indicate that the instrument should be treated as an investment security for purposes of determining whether the issuer is an investment company.
Implications for Companies with Intercompany Loans
One area of particular difficulty for many issuers, in light of the SEC’s aggressive views with respect to loans under the Investment Company Act, arises in the case of intercompany loans (i.e., a loan between two related companies). Companies with multiple subsidiaries may put intercompany loans in place for a variety of valid business reasons. For example, a company wishing to focus its resources on parts of the enterprise that the company feels could be most impacted by additional capital might establish a loan from one subsidiary to another.
While Congress’s drafting of the Investment Company Act did not obviously scope intercompany loans into the definition of “investment security,” and while the limited case law that exists on the topic seems to weigh against treating an intercompany loan as an investment security,[26] the SEC has indicated that it generally views intercompany loans as investment securities. For example, in a 2022 enforcement action, the SEC charged BlockFi Lending LLC with, among other things, acting as an illegally unregistered investment company.[27] In determining that BlockFi met the definition of an investment company in § 3(a)(1)(C), the SEC pointed to several different assets held by BlockFi that the SEC asserted were investment securities, including (without any analysis, citations, or explanation) “intercompany receivables.”[28]
The view that intercompany loans are “investment securities” can mean that a corporate subsidiary making such intercompany loans might face Investment Company Act status challenges. However, in most cases, a corporate subsidiary with a large percentage of its assets consisting of intercompany loan receivables would not raise the same risks from an investor protection standpoint as an investment company. An investor in a company that primarily invests in traditional securities, or else primarily extends loans to third parties, is relying on the ability of company management to pick the right third parties to invest in (or loan money to), and the investor’s returns will depend on the performance of those third parties. Investors in a company that has extended a large intercompany loan to a corporate affiliate have completely different considerations. The investors are not relying on company management to pick the right entity to loan to—they are relying on the ultimate parent of the company to efficiently engage in commercial activities and generate a profit from those activities. The point of most intercompany loans is not for the lender to generate returns from lending money to an affiliate, but instead to aid the overall enterprise in its commercial activities.
Additionally, the SEC’s view that intercompany loans are “investment securities” can mean that a parent of a subsidiary making such intercompany loans might face Investment Company Act status challenges as well. For example, if the subsidiary fails the test in § 3(a)(1)(C), the parent may have to treat its interest in the subsidiary as an “investment security” for purposes of its own § 3(a)(1)(C) analysis. And in this case, an investment in the corporate parent certainly does not raise the same risks from an investor protection standpoint as an investment company. Rather than looking to the performance of one party on a loan, an investor in the parent company likely would not care one way or the other that an intercompany loan exists between two of the parent’s subsidiaries. The economics of that loan cancel out at the level of the parent, and the investor’s returns are not related to the performance of the loan at all.
Due to the potential draconian consequences of transacting with an unregistered investment company,[29] lenders, underwriters, or other counterparties to a transaction often require an issuer to obtain an unqualified opinion from its counsel prior to any such transaction, which states that the issuer is not, and is not required to register as, an investment company. Given the SEC’s expressed view that intercompany loans are generally investment securities, many practitioners treat them as such for purposes of determining whether an issuer is an investment company, despite the unclear legal or policy-based reasoning behind the SEC’s view.[30] This creates unnecessary challenges for issuers that are plainly operating companies but that have large enough intercompany loans in place such that a practitioner treating intercompany loans as securities would not be able to deliver an unqualified opinion that the issuer is not an investment company.
Conclusion
The SEC should reconsider its stance on loans under the Investment Company Act and, in particular, its stance on intercompany loans. The legal basis for the SEC’s apparent position that Reves does not apply to the determination of when a loan is a security for purposes of the Investment Company Act is unclear, and in many cases the policy basis is unclear as well. Until the SEC revisits this stance, issuers that have substantial intercompany loans in place will continue to face challenges in avoiding investment company status, despite not raising the concerns that the Investment Company Act was designed to address.
Investment Company Act, 15 U.S.C. § 80a-1–a-64 (1940). ↑
Seeid. § 3(a)(1)(C) (providing that an issuer that owns or proposes to acquire “investment securities” having a value exceeding 40 percent of the issuer’s total assets may, depending on its business, be an “investment company” for purposes of the Investment Company Act). ↑
Based upon the family resemblance test articulated in the Reves decision, the Reves Court found that the notes were securities because they were sold to raise capital for the cooperative, sold to a broad segment of the public, characterized by the issuer as investments, and not regulated by any other regulatory scheme. Id. at 67–70. ↑
Id. at 62. The Court stated that “the phrase ‘any note’ should not be interpreted to mean literally ‘any note,’ but must be understood against the backdrop of what Congress was attempting to accomplish in enacting the Securities Acts.” Id. at 62–63 (footnote omitted). This statement is notable in light of the Court’s frequent statement that “[t]he starting point in every case involving construction of a statute is the language itself.” See, e.g., Landreth Timber Co. v. Landreth, 471 U.S. 681, 685 (1985). ↑
494 U.S. at 64. The Court noted that the family resemblance test and an alternative test evaluating whether a note was made for investment versus commercial purposes “are really two ways of formulating the same general approach.” Id. However, the Court adopted the family resemblance test because the Court believed that test “provides a more promising framework for analysis.” Id. at 64–65. ↑
See, e.g., Kirschner v. JP Morgan Chase Bank, N.A., 2020 U.S. Dist. LEXIS 90797 (S.D.N.Y. May 22, 2020), aff’d No. 21-2726-cv, 2023 WL 5439495 (2d Cir. Aug. 24, 2023). ↑
U.S. Sec. & Exch. Comm’n Div. of Inv. Mgmt., Protecting Investors: A Half Century of Investment Company Regulation, at n.339 (1992); see also Brief for the United States as Amicus Curiae, at *22–23, Marine Bank v. Weaver, 455 U.S. 551 (1982) (No. 80-1562), 1981 WL 390025 (SEC explaining that “[w]hile the language in the Investment Company Act’s definition of the term ‘security’ is identical to that in the Securities Act, the regulatory context under the Investment Company Act differs fundamentally from that under the Securities Act and the . . . Exchange Act”—and that, as a result, the definitions should be interpreted differently (in this case, the instrument at issue was a bank certificate of deposit)). ↑
15 U.S.C. § 80-3(c)(3). In addition, Investment Company Act Rule 3a-6 provides a similar exemption for foreign banks. 17 C.F.R. § 270.3a-6. ↑
See, e.g., GINS Cap. Corp., SEC Staff No-Action Letter (Sept. 16, 1985); Brody, Robert D., SEC Staff No-Action Letter (Nov. 22, 1979); Prudential Mortg. Bankers & Inv. Corp., SEC Staff No-Action Letter (Dec. 4, 1977); Douglass-Carver Cmty. Devs., SEC Staff No-Action Letter (July 25, 1974); Commonwealth Fund, SEC Staff No-Action Letter (July 15, 1971); see also Navidec Fin. Servs., Staff Response to Registrant’s Response to Staff Threshold Comment Letter on Registration Statement on Form 10-SB (July 13, 2006) (the mere fact that registrant is regulated by federal consumer protection regulations, such as the Truth in Lending Act and Real Estate Settlement Procedures Act, is not enough to establish that registrant can avail itself of § 3(c)(4) exception). ↑
See, e.g., U.S. Sec. & Exch. Comm’n Div. of Inv. Mgmt., supra note 19, at n.251 (emphasis added) (citing SEC Report on the Public Policy Implications of Investment Company Growth, H.R. Rep. No. 2337, at 328 (1966)). ↑
A surface-level reading of §§ 3(c)(5)(A) and (B) could give the impression that Congress intended for loan receivables to generally be considered securities for purposes of the Investment Company Act, and for an issuer holding large amounts of loan receivables to be an investment company unless (i) the issuer has purchased or acquired the loan receivables and meets the conditions of § 3(c)(5)(A) or (ii) the issuer has made the loans and meets the conditions of § 3(c)(5)(B). However, as discussed above, this analysis overlooks the fact that many entities making loans, such as Tractor Co., are not entities covered by § 3(c)(5)(B), as they are not “primarily engaged” in the business of making loans but instead are primarily engaged in their own operating activities. Given that Congress believed a sales financing company, primarily engaged in the business of making certain types of loans, does not raise investment company registration concerns, it seems inconceivable that Congress believed that an operating company, primarily engaged in a noninvestment, non-loan business and extending such loans as part of its business, somehow does raise investment company registration concerns.
Read with this understanding, it seems plain that Congress did not intend §§ 3(c)(5)(A) and (B) to imply that all loan receivables should generally be considered securities for purposes of the Investment Company Act, and that any issuer holding large amounts of loan receivables needs to fit within one of the exemptions. ↑
See, e.g., SEC v. Fifth Ave. Coach Lines, Inc., 289 F. Supp. 3, 33 (S.D.N.Y. 1968), aff’d, 435 F.2d 510 (2d Cir. 1970). In Fifth Avenue Coach Lines, the court held (among other things) that an advance by a parent company for the benefit of a subsidiary, which was a type of intercompany loan, was a cash item and not an investment security. The court noted that to treat these advances as “evidence of indebtedness,” and thus investment securities, “is an unrealistic and incorrect construction of the statutory language.” Id. at 33–36. ↑
In re BlockFi Lending LLC, SEC Release No. 33-11029, ¶ 29, at 7–8 (Feb. 14, 2022). ↑
Section 7(a) of the Investment Company Act generally prohibits illegally unregistered investment companies from, among other things, offering, selling, or purchasing any securities (including their own securities) through the use of the mails or interstate commerce, or engaging in any business in interstate commerce. Section 47(b) of the Investment Company Act provides that a contract that violates the Investment Company Act is unenforceable by any party to the contract, or by a non-party to the contract with knowledge that the contract violated the Investment Company Act, unless a court finds that enforcement of the contract would produce a more equitable result and that the result would not be inconsistent with the purposes of the Investment Company Act. As a result, underwriters, banks and other lenders, and certain other parties that contract with a company may be concerned that if that company is an illegally unregistered investment company, that company’s sale of securities or agreement to borrow money or agreement to enter into other arrangements may be illegal under § 7(a). If so, such an underwriter, bank, other lender, or other party may be concerned that any agreement it entered into with the company (such as an agreement to underwrite the sale of the company’s securities or loan the company money) could be void under § 47(b). This might lead to, for example, a purchaser of the company’s securities in an underwritten offering being able to force the underwriter to unwind the transaction in which the purchaser bought those securities, or the illegally unregistered investment company arguing that it was permitted to unwind a loan transaction notwithstanding any restrictions on termination in the lending agreement. See, e.g., Herpich v. Wallace, 430 F.2d 792, 814 (5th Cir. 1970) (“Section 7 of the [Investment Company Act] imposes the penalty of exclusion from all channels of interstate commerce of investment companies that fail to register in compliance with section 8 [of the Investment Company Act], and contracts made by unregistered companies are subject to the voiding provisions of section 47(b). . . .”). But see Saba Cap. Master Fund, Ltd. v. Blackrock ESG Cap. Allocation Tr., No. 23-8104, 2024 WL 3174971 (2d Cir. June 26, 2024), cert. granted sub nom. FS Credit Opportunities Corp. v. Saba Cap. Master Fund, Ltd., No. 24-345, 2025 WL 1787708 (U.S. June 30, 2025) (granting a writ of certiorari in a case challenging whether a private right of action exists under § 47(b)). ↑
Practitioners that treat intercompany loans as investment securities often take the position that a loan from a parent company to a majority-owned subsidiary is not an investment security because any security issued by a majority-owned subsidiary is not an investment security under § 3(a)(2). ↑
Alternative Dispute Resolution (“ADR”) can be a cost-saving alternative to litigation, but did you know that your contractual provisions designed to take advantage of ADR could likely be stronger? This article will provide succinct practical tips for drafting powerful ADR clauses for your agreements.
Parties can count on faster speed to resolution (and therefore lower costs) when using ADR to resolve their disputes. Quickly reaching a decision is often critical so that business planning can continue and long-term projects can proceed uninterrupted. For example, the average duration for a “full-length” commercial arbitration case from commencement to award is 14.5 months, according to statistics from CPR Dispute Resolution, the ADR provider arm of the International Institute for Conflict Prevention and Resolution (“CPR”). In comparison, the current median time from filing to trial in a civil case in U.S. district courts is 33.7 months[1]—without taking into consideration the additional time the trial, rendering a decision, and the possibility of a lengthy appeal may add to the process. Arbitration facilitates resolution on a faster track, with fewer steps in the process and shorter deadlines. Moreover, most institutions provide an option for expedited arbitration proceedings, such as the CPR Fast Track Arbitration Rules, which contemplate a 90- to 180-day proceeding.
Speed and savings are not the only benefits of ADR. Party control of the process is one of the tenets of ADR, allowing the parties to craft their own process to fit their needs. For example, parties may select knowledgeable neutrals with subject-matter expertise, rather than judges or juries who may not have any experience in the topic area. By using ADR, parties are also afforded greater confidentiality and privacy for sensitive matters, such as proprietary business information, trade secrets, and other intellectual property. ADR offers the possibility of selecting a venue that is neutral to the parties and logistically convenient to both sides. Arbitration offers the certainty of resolution, as awards are generally final and binding (though parties may elect to add an appellate review). Finally, parties will find greater logistical flexibility in ADR processes, which allow them to proceed on their own schedules, rather than a court’s calendar, and provide the option to conduct hearings virtually.
So what can parties do to avail themselves of these benefits? The key is drafting a strong ADR clause in their B2B contract. Arbitration agreements cannot be approached with a “one-size-fits-all” mentality; rather, parties should consider the actors involved and their particular circumstances, so that they can tailor arbitration agreements to best fit their needs.
Necessary Elements in an Arbitration Clause
Every good ADR clause starts with the necessary elements, after which the parties can include additional, optional elements as they see fit. An effective arbitration clause must do the following:
Clearly and broadly define the disputes subject to arbitration.
Commit the parties to arbitration.
Choose an arbitral institution and its rules, or ad hoc arbitration rules (and, in the latter case, an appointing authority).
Choose the seat of arbitration (in a country that has ratified the New York Convention).
Choose the language of the arbitration.
A narrow arbitration clause might only include the above necessary elements. For example, it might read:
Any dispute arising out of or relating to this contract, including the breach, termination or validity thereof, shall be finally resolved by arbitration in accordance with [the CPR Rules for Administered Arbitration (the “Rules”)]. The seat of the arbitration shall be [New York, New York]. The language of the arbitration shall be [English]. There shall be [one or three] arbitrators, [selected in accordance with the Rules].
First, the parties will want to define the disputes subject to arbitration. This is generally achieved with the broad statement “arising out of or relating to this contract” and then a statement committing those types of disputes to arbitration (“shall be finally resolved by arbitration”). However, the parties may also wish to include some carve-outs (such as IP issues, for example) that they wish to have adjudicated in court instead.
Next, parties should decide whether to choose an arbitral institution and its rules or select ad hoc arbitration. Notably, there can be drawbacks to ad hoc proceedings when parties reach a stalemate in the agreed-upon process (for example, if there are issues with arbitrator appointment or payment of fees, or a challenge to an appointed arbitrator), and there is no support or oversight by a neutral outside institution to monitor the arbitrator’s billing, assist in scheduling, or review the award before it is rendered. A solution might be to select non-administered rules that provide fallback provisions, assigning an institution to assist with any issues that might arise. For example, CPR’s Non-Administered Rules provide a safety net, providing a process in case the parties cannot agree during the non-administered proceeding but allowing them to proceed independently if there are no issues. When selecting an arbitral institution, parties should keep in mind differences between institutions on issues such as the costs of administrative fees, responsiveness of staff, etc., as well as differences in the institutional rules. Note that while most rules for domestic commercial arbitration are similar, they may differ on issues such as confidentiality; the default number of arbitrators appointed to a dispute and method of their appointment; procedural time limits; discovery; or triggers for procedures such as mediation or truncated “fast track” procedures.
Finally, the parties should consider the seat, language, and governing law for any disputes. The seat of the arbitration will be the place where the award is deemed to have been made. The governing law of an arbitration agreement is the law that will be applied to determine any dispute that may arise as to the validity, scope, or interpretation of the agreement to arbitrate. Although standard arbitration agreements do not specify the governing law of the arbitration agreement, it is good practice for the drafter to include a governing law provision in case problems arise. In the absence of a clause indicating the governing law of the arbitration, the law governing the seat of arbitration will apply. Parties contemplating international disputes may also wish to specify that English (or another language, if desired) shall be the language of the proceeding.
After including these necessary elements in an arbitration clause, parties wishing to avail themselves of the benefits of arbitration will need to consider whether to include additional components. Many of the additional elements discussed below are addressed by the arbitral rules specified in the ADR clause; however, parties should consider the types of disputes that may arise and whether they expect the rules’ default provisions to be sufficient, or whether they want to customize the process.
Neutral Selection
Parties should consider including additional information surrounding the appointment of the arbitrator. For example, the number of arbitrators may be specified in the ADR clause. Where disputes are likely to be high value and complex, a tribunal consisting of three arbitrators may be more appropriate. Since most arbitrations do not have an appeal process, a three-person tribunal is generally considered a safer option because it is seen as more “balanced” and neutral, in part because it allows for diversity in legal knowledge, culture, and experience among arbitrators, thereby reducing the risk of potential error or mistake. However, a three-person tribunal can be costly, and slower to reach a final resolution due to factors like coordinating schedules for hearings or deliberations. In fact, over the course of the arbitration, three arbitrators may cost almost five times as much as a sole arbitrator. Therefore, if the dispute is low-value and uncomplicated, a sole arbitrator may be a more cost-effective and efficient choice. Parties may specify a financial threshold amount or types of disputes that will have one or three arbitrators. Note that most arbitral institutions’ rules provide the default number of arbitrators: for example, the American Arbitration Association (“AAA”) and CPR have a $3 million threshold for three arbitrators (otherwise one is the default), while JAMS provides for a sole arbitrator by default.
Parties may also wish to specify the method of appointment or selection of the arbitrator(s), or specific qualifications or expertise of the arbitrator(s). However, it is prudent to not be too prescriptive in this area, as a complicated appointment process might greatly increase the time to appointment, and overly specific description of the neutral’s qualifications may unreasonably narrow the pool of available, competent, and qualified arbitrators. Parties should also consider adding a timing provision for arbitrator selection. By adding this provision to the arbitration agreement, parties not only have an expected timeline of when arbitrators will be chosen but also commit to a more efficient process. Yet parties should be careful not to set the time limits too short, so that the choice of neutral is not rushed or hasty.
Resolution Prior to Arbitration
Parties can insert a provision mandating or suggesting negotiation or mediation prior to initiating arbitration. These clauses are often referred to as “step clauses.” The use of mediation and/or negotiation can be helpful to parties, as it can potentially lead to an early settlement and allow the parties to save on costs. However, step clauses can also cause unnecessary delay, particularly if one side has no intention of settling. To mitigate potential drawbacks, drafters should include time limits on each “step.” Alternately, they can include concurrent processes where the mediation or negotiation proceeds in parallel with the arbitration process.
These step clauses may provide off-ramps that will allow the parties to save the time and costs they would need to devote to a full arbitration or litigation process. Negotiation between executives allows those in charge to have a frank discussion before the matter progresses. Furthermore, mediation can end in agreement 70–80 percent of the time.[2] Mediation agreements have high rates of compliance and can preserve business relationships and goodwill.
The flexibility of these processes allows the people involved to find the best path to agreement. Even if there is no settlement reached, parties can narrow the issues or resolve certain interests, thereby shortening the arbitration.
Other Considerations
Arbitrability is a threshold inquiry, asking whether there is a valid agreement to arbitrate. Generally, questions of arbitrability are decided by the court, but parties to an arbitration agreement may agree to delegate questions of arbitrability to the arbitrator. Under CPR Administered Arbitration Rule 8.1 and AAA Commercial Rule R-7(a), the tribunal has the power to hear and determine challenges to its jurisdiction, including any objections with respect to the existence, validity, or scope of the arbitration agreement.
In order for the question of arbitrability to be delegated to the tribunal, there must be “clear and unmistakable” evidence indicating that the arbitrators must decide questions of arbitrability. Most courts have held that incorporating the institutional rules is sufficient. But for those parties that wish to be overly cautious, or in certain jurisdictions, it may be best to include a delegation clause, such as the following:
The arbitrator(s), and not the court, shall have primary responsibility to hear and determine challenges to the jurisdiction of the arbitrator(s).
Or:
The court, and not the arbitrator(s), shall have primary responsibility to hear and determine challenges to the jurisdiction of the arbitrator(s).
Another detail to consider is provisional relief. Most arbitral institutions’ rules expressly authorize arbitrators to issue interim measures to preserve the status quo or to protect the interests of the parties pending the outcome of the proceeding. Drafters can also address the need for provisional relief if they do not wish to rely upon the provisions in the governing institutional arbitration rules.
Parties may also wish to include the type of award to be issued by the arbitrator(s). Institutional rules may specify whether a reasoned or simple award is the default, and parties should be cognizant of which type of award is called for under the rules. Parties might wish to see a reasoned award, as the writing process is an opportunity for the tribunal to carefully consider the evidence, arguments, and law, and it enables the parties to better understand the award. Additionally, some jurisdictions may require a reasoned award for enforcement. However, parties may also wish to consider the time and cost of the award drafting, especially if three arbitrators are involved. Notably, a more detailed award does not entail a higher possibility of challenge in court, as there is a very high threshold for overturning awards in court whether simple or detailed.
Most users of arbitration find the finality of an arbitration award to be an appealing aspect of ADR. But some parties may be concerned about the possibility of an aberrant award and would like to be able to appeal such an award. Many arbitral institutions, including CPR, AAA, and JAMS, have promulgated appellate procedures that allow parties to seek a modified or vacated award in specified circumstances. If parties wish to include an appellate process, this should be agreed to in the arbitration clause. Once the award is issued, parties will be unlikely to agree to an appeal, and it may even be too late, as most appellate processes have requirements, such as a transcript of the hearings, that may not have been fulfilled.
While a simple ADR clause might seem like the easy route, especially if it is the last part of the contract to be negotiated, parties should carefully consider the elements in their ADR clause in order to be able to utilize the benefits of arbitration to the fullest. Many ADR institutions have model clauses or interactive tools for drafting these clauses, which can help guide parties through the process.[3] It is important to consider the types of disputes that might arise, the parties’ relationships, and other factors that are important to the parties when finalizing the ADR clause. Reviewing the above considerations will allow drafters to create a stronger ADR clause for their clients.
This article is related to a CLE program that took place during the ABA Business Law Section’s 2025 Spring Meeting. To learn more about this topic, listen to a recording of the program, free for members.
This is a commonly cited statistic in the industry, and the number varies depending on the study conducted but generally remains in that range. See, e.g., Jeanne M. Brett, Zoe I. Barsness & Stephen B. Goldberg, The Effectiveness of Mediation: An Independent Analysis of Cases Handled by Four Major Service Providers, 12 Negot. J. 259 (1996). ↑
Hong Kong is among the world’s top three financial centers. It has maintained favorable economic relationships with both the United States (“U.S.”) and the People’s Republic of China (“PRC”) for decades, serving as an “economic Switzerland” of sorts between the two superpowers. Given the recent tension between the U.S., the PRC, and Hong Kong, this article explores whether Hong Kong remains a bridge for PRC and U.S. companies to do business. We also assess the advantages of secondary listings on the Hong Kong Stock Exchange (“HKSE”) and provide guidance to navigate regulatory risks across the U.S.-PRC-Hong Kong nexus.
Hong Kong–U.S. Relations
Since 1992, the U.S.-Hong Kong Policy Act has allowed the U.S. to treat Hong Kong separately from the PRC in trade and economic relations. That led to Hong Kong’s status as a distinct customs territory from the PRC, an estimated $33.8 billion in 2024 trading volumes with the U.S.,[1] and $90.6 billion of direct U.S. investment in 2023.[2] With approximately 1,300 U.S. firms operating in Hong Kong,[3] an estimated 84,000 American citizens living there,[4] and visa-free travel between the two locations, Hong Kong and the U.S. share a strong relationship.
Hong Kong–PRC Economic Integration
Since the Maritime Silk Road in the second century BCE, Hong Kong has been the world’s springboard into what is now the PRC. Today, Hong Kong also facilitates the PRC’s global access; in 2022, $1.6 trillion of the PRC’s $2.7 trillion in outward direct investment was channeled through Hong Kong.[5]
The relationship between Hong Kong and the PRC is likely to become even more important as the PRC invigorates growth by shifting from an export-oriented economy to a “dual circulation” model.[6] This model includes the PRC’s Belt and Road Initiative, a global infrastructure and economic development strategy that facilitates trade between 150 countries around the world.[7] Hong Kong’s part in the dual circulation model includes:
Renminbi (“RMB”) Hub: Hong Kong is the world’s largest offshore RMB hub, processing over 70 percent of the world’s offshore RMB payments.[8]
Dispute Resolution: As a leader in Asia-Pacific dispute resolution, Hong Kong plays a significant role in resolving disputes related to the Belt and Road Initiative.[9]
Stock Connect: The Stock Connect Program facilitates cross-border stock trading between Hong Kong and the PRC. Through it, the world can directly access PRC stock markets from Hong Kong, and PRC investors can invest directly in Hong Kong–listed companies.[10] Stock Connect has opened trading for more than 3,300 stocks, representing nearly 90 percent of the total market capitalization across the Shanghai-Shenzhen-Hong Kong markets.[11]
HKSE secondary listings (defined below) also provide critical support for the dual circulation model, enhancing PRC firms’ global profiles, brand recognition, and valuations. Secondary listings also help companies navigate complex regulatory environments in different markets.[12]
What Makes Hong Kong Special?
Hong Kong became a preeminent global financial hub between 1983 and 1997.[13] The advantages of doing business “through” Hong Kong for U.S. businesses are numerous and include the following:
Internationally Aligned Financial and Regulatory Systems: Hong Kong’s legal and financial systems, based on British common law principles, are distinct from the PRC’s. In alignment with the needs of the international business community, they provide contract and intellectual property protection, as well as transparent taxation.
Geographic and Cultural Advantages: As Hong Kong borders the PRC, professionals in Hong Kong speak English, Cantonese, and Mandarin, facilitating cultural alignment. Located at the center of the Greater Bay Area—an area that includes Macao and nine key cities in the PRC’s Guangdong Province, with a population exceeding 87 million and a GDP of more than US$1.9 trillion[14]—Hong Kong is positioned within a regional economy whose industrial prowess rivals that of San Francisco and Tokyo.
Logistical Integration: Hong Kong ports, logistical infrastructure, and talent, coupled with its free and open markets, connect countries around the world, including for the Belt and Road Initiative.[15]
Secondary Listings: Access to Global Markets
Hong Kong invites “secondary listings” where companies already publicly traded on one stock exchange can also list on the HKSE. Hong Kong has the highest stock-market-capitalization-to-GDP ratio or “Buffett Indicator” in the world at approximately 1406.42 percent as of September 3, 2025—almost seven times that of the U.S.[16] This means the HKSE provides tremendous international financial exposure. Companies are increasingly pursuing secondary listings in Hong Kong to access new capital pools and protect themselves from geopolitical and regulatory volatility.
The HKSE’s stringent listing rules mean that having a secondary listing in Hong Kong bolsters companies’ (including PRC companies’) reputation for the following:
Credibility: Investors can trust HKSE-listed companies to maintain high governance standards and not use secondary listings to evade regulatory oversight.[17] HKSE explicitly rejects applicants who attempt to circumvent primary listing rules, thereby maintaining market integrity.[18]
Compliance and Capitalization: Only well-established companies with a minimum of two to five years of regulatory compliance on a qualifying stock exchange[19] and market capitalization of HK$3 billion to HK$40 billion may be listed.[20]
U.S.-PRC Regulatory Challenges
Despite the PRC’s status as the U.S.’s third-largest trading partner,[21] with approximately 5,000 PRC companies operating in the U.S. as of the end of 2022[22] and more than 280 PRC companies listed on U.S. stock exchanges,[23] recent tension between the two countries has led regulators to erect barriers on both sides.
PRC regulations that may be thorny for U.S. businesses include the following:
Unreliable Entity List: The 2020 Unreliable Entity List allows the PRC to restrict PRC company interactions with foreign entities deemed threats to national sovereignty, security, and development. Restrictions include fines, entry restrictions, prohibitions on import/export, and investing restrictions.[24] To date, the PRC has only added U.S. firms to the Unreliable Entity List.[25]
Extraterritorial Export Controls: The PRC has traditionally restricted the export of “dual use” items (i.e., items that can be used for both civilian and military purposes),[26] but since December 2024, it has applied those restrictions extraterritorially.[27] This creates additional compliance burdens and supply chain risks.
Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures: In 2021, the PRC enacted this rule to protect PRC entities from foreign laws that infringe on PRC sovereignty or economic interests. For example, if a U.S. rule prohibited a PRC firm from doing business with Iran, this rule would, among other things, give the PRC firm standing to sue the U.S. actor in Chinese court.[28]
Anti-Foreign Sanctions Law: This law authorizes the PRC to restrict visas, freeze assets, and restrict business activities in the PRC for foreigners that break PRC rules.[29] For example, in February 2022, the Chinese government used the Anti-Foreign Sanctions Law to sanction Lockheed Martin and Raytheon Technologies for arms sales to Taiwan.[30]
The U.S.’s regulatory barriers are similarly daunting for doing business with companies in the PRC. The U.S. Office of Foreign Assets Control prohibits U.S. companies from trading PRC securities in the defense and surveillance industries.[31] It further restricts U.S. persons from engaging in transactions with PRC persons or entities on the Specially Designated Nationals and Blocked Persons List.[32] The U.S. Department of Commerce also maintains a similar list called the Commerce Control List, which restricts PRC transactions involving nuclear materials, semiconductors, and telecommunications software.[33]
As for U.S. tariffs, in 2018, the Office of the U.S. Trade Representative issued tariffs on certain PRC imports under Section 301 of the Trade Act of 1974 (“Section 301 Tariffs”), which have since been expanded multiple times.[34] Beginning in February 2025, in addition to existing tariffs (including Section 301 Tariffs), the U.S. also imposed tariffs on imports of most PRC goods pursuant to the International Emergency Economic Powers Act (“IEEPA Tariffs”), which gradually increased through March and April 2025, reaching 145 percent by April 10, 2025.[35] Subsequently, in May 2025, the U.S. and China agreed to temporarily reduce certain tariffs for ninety days, until August 12, 2025, to reach a formal trade agreement.[36] The temporary reduction has since been extended for another ninety days, until November 10, 2025.[37]
Readers should note that tariff rates and circumstances may have changed since the time of writing. Further, as of the time of writing, the legal status of IEEPA Tariffs remains unsettled.
U.S.-PRC-Hong Kong Relations: A Changing Landscape
Given the U.S.-PRC tension discussed above, it makes sense that U.S. regulators would view Hong Kong and the PRC differently and that secondary listings in Hong Kong would differentiate PRC firms. However, Hong Kong’s robust relationship with the U.S. began to change after the PRC issued the National Security Law, which covers certain acts that endanger national security, including secession, subversion, terrorism and collusion with foreign forces.[38] In response, the U.S. issued Executive Order 13936, suspending Hong Kong’s special status under the U.S.-Hong Kong Policy Act (i.e., beginning “Hong Kong normalization”);[39] modified export controls and licensing requirements on dual-use technologies, semiconductors, and technologies related to artificial intelligence from Hong Kong;[40] and required all imported goods produced in Hong Kong to show “China” as their country of origin.[41] The IEEPA Tariffs equally apply to Hong Kong, although Hong Kong–origin products are not subject to Section 301 Tariffs.[42]
So, although Hong Kong is still a critical business intermediary for the U.S. and the PRC, the complex relationships between the three entities require that U.S. and PRC companies take precautions when considering business together—even for Hong Kong–listed firms.
Accordingly, here are nine steps U.S. and PRC companies should consider taking when doing business together:
Perform due diligence on the counterparty’s beneficial owners to ensure compliance with the Unreliable Entity List (PRC) and the Specially Designated Nationals and Blocked Persons List (U.S.).
Determine whether related products or services are on either country’s restricted lists.
Determine the transaction’s reliance on exports and whether those exports are subject to extraterritorial controls.
Consider the costs of tariffs and determine alternative methods, components, and materials to reduce costs.
Perform a detailed risk assessment on geopolitical and supply chain risks for each product or service, in consultation with appropriate advisors. Analyze relevant data, including the product’s country of origin, classification, and valuation, as well as insights from supply chain mapping.
Regularly review and update contracts to manage and allocate geopolitical risks and costs. For example, consider including events such as embargoes, tariffs, and import/export restrictions in force majeure provisions.
Continuously monitor and assess changes in global trade developments, including tariffs and export controls, to facilitate timely compliance and strategic alignment.
Proactively engage in transparent communications and strategic discussions with stakeholders (including employees, suppliers, and customers), which is essential to successfully navigate the evolving complexity between Hong Kong, the PRC, and the U.S.
Work with strategic partners knowledgeable about how to navigate relationships across the three borders.
This was due to rapid, post–World War II economic growth; the Hong Kong dollar being pegged to the U.S. dollar in 1983; and the “One Country, Two Systems” principle established in 1997. ↑
See, e.g., Notice of Modification: China’s Acts, Policies and Practices Related to Technology Transfer, Intellectual Property and Innovation, 89 Fed. Reg. 76581 (Sept. 18, 2024); Notice of Modification: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, 89 Fed. Reg. 101682 (Dec. 16, 2024). ↑
This article is related to a Showcase CLE program titled “Yogi Berra Does Legal Ethics: An Overview of the Ethical Rules that Govern In-House and Outside Counsel as They Represent Their Entity Clients” that took place at the American Bar Association Business Law Section’s 2025 Fall Meeting. All Showcase CLE programs were recorded live and will be available for on-demand credit, free for Business Law Section members.
Hearing the name Yogi Berra conjures up different things to different people. Most people think of Yogi Berra, a stalwart of the New York Yankees baseball club during one of its golden eras, as an All-Star catcher who helped the Bronx Bombers win ten World Series championships and as the player who won three American League MVP awards. Some might think of Yogi Berra as the manager of the New York Yankees and the New York Mets. Some might even think of Yogi Berra as the World War II gunner’s mate aboard the USS Bayfield attack transport that participated in the D-Day Normandy landings. But many who hear the name Yogi Berra will smile and smirk at any number of “Yogi-isms,” like “It ain’t over ’til it’s over,” for which he is known.
If one delves deeper into these “Yogi-isms,” however, one might find that “Yogi-isms” are full of real-life truths and are an indication that, perhaps, Yogi Berra was far smarter than the general public gives him credit. Regardless of the truth of that statement, some “Yogi-isms” call to mind applications of our legal ethics rules—the ABA Model Rules of Professional Conduct—that may just be better remembered through a “Yogi-ism” mantra.
Consider the following:
“So I’m ugly. I never saw anyone hit with his face.” Lawyers must remember that in the client-lawyer relationship, “it’s not about the lawyer—it’s about the client.” It is the client who makes the big decisions (i.e., sets the objectives) in their matter, and it is the lawyer who determines how that happens (i.e., the means). This concept is embodied in Rule 1.2, “Scope of Representation and Allocation of Authority Between Client and Lawyer.” In fact, the very first sentence of Rule 1.2(a) notes: “Subject to paragraphs (c) and (d), a lawyer shall abide by a client’s decisions concerning the objectives of the representation . . . .”
“I’m a lucky guy, and I’m happy to be with the Yankees. And I want to thank everyone for making this night necessary.” Here, Yogi recognizes that it is the team—the organization—that is important, which brings to mind the importance of Rule 1.13 when representing organizational clients. As established by Rule 1.13(a) and its Comments, when a lawyer represents an organization, it is the organization itself that is the client—not any of the individual constituents (employees, officers, departments, executives) of that organization. While a lawyer may work through an organization’s constituents, they are not the ultimate client.
“Pair up in threes.” Combining aspects of the first two “innings” above, “pairing up in threes” evokes two different tripartite arrangements. The tripartite arrangement that is most commonly thought of in legal ethics circles is that of insured, insurer, and lawyer for the insured. However, one that is just as fundamental is the working relationship between in-house counsel, retained outside counsel, and the organizational client itself. Here, it is very important for in-house counsel and outside counsel to recognize that they both represent the organizational client, even though outside counsel is often getting direction from in-house counsel.
“He hits from both sides of the plate. He’s amphibious.” While a switch hitter can hit from both the left and the right side of the plate, under our conflict rules, a lawyer (and their law firm) cannot represent opposing sides of a transaction. A lawyer may represent one side in the transaction, and, with informed consent confirmed in writing, that lawyer can represent the other side in the transaction in other, unrelated matters, but the lawyer cannot—in essence—negotiate against themself.
“Half the lies they tell about me aren’t true.” Under Rule 4.1, lawyers have an ethical obligation, in the course of representing a client, to not knowingly make false statements of material fact or law to third persons. Also, lawyers may not fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client—except when such disclosure would itself be a violation of the lawyer’s duty to maintain the confidentiality of information relating to the representation of a client, as set forth in Rule 1.6. This obligation against misrepresenting facts extends to using the statements of others, including the client. As the comment to Rule 4.1 notes, “A misrepresentation can occur if [a] lawyer incorporates or affirms a statement of another person that the lawyer knows is false”—whether that person is a client, teammate, or otherwise.
“The towels were so thick there I could hardly close my suitcase.” Contrary to the belief of some lawyers, there are Rules of Professional Conduct that apply to them even outside of the context of representing clients. Rather, some Rules apply simply because the person is a lawyer. In particular, Rule 8.4(c) regarding “Misconduct” provides: “It is professional misconduct for a lawyer to . . . engage in conduct involving dishonesty, fraud, deceit or misrepresentation.”
“It ain’t over ’til it’s over.” Properly terminating a representation or closing out a matter has both legal ethics and risk management implications. For one, when a representation is terminated, under Rule 1.16(d) a lawyer has an obligation to “take steps to the extent reasonably practicable to protect a client’s interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee or expense that has not been earned or incurred.” But moreover, if the end of the representation is the result of the lawyer accomplishing the objectives for which they were retained by the client, it behooves the lawyer to send a “close out” or disengagement letter. Such letters need not be off-putting; they can even be complimentary of the client and invite the possibility of future work to address the client’s future needs. What such a letter does is (a) effectively terminate the representation on the matter and perhaps of the client, which can have ramifications on whether future conflict of interest analysis takes place under Rule 1.9 as opposed to Rule 1.7, and (b) start the clock on application of any document retention policy that the lawyer or their firm has in place.
“Yogi-isms” can be a great device to remember and understand the Rules of Professional Conduct and their application because the Rules, like many of the “Yogi-isms” above, are often grounded in common sense. Ultimately, the Rules are designed to protect our clients and the public at large.
This is the first installment in a series exploring the damages available for intellectual property (“IP”) claims. Understanding damages is essential for two reasons: it highlights the potential rewards of building a robust IP portfolio, and it offers a benchmark for assessing risk when facing an IP claim. In this article, the authors examine damages in trademark cases.
Trademark Infringement
Trademark infringement under the Lanham Act,[1] which is the controlling trademark law in the United States, occurs when an unauthorized use of a mark causes a likelihood of confusion among consumers regarding the source of the products or services. The act addresses not just direct infringement but also counterfeiting, false advertising, and even issues of trademark dilution under the Trademark Dilution Revision Act (“TDRA”) for famous marks well-known to the public.
Trademark Damages
Once a court has determined that a trademark has been infringed, the next step is to determine how to award damages to a plaintiff. The Lanham Act sets out three methods of determining damages for a successful plaintiff: (1) disgorgement of the infringer’s profits, (2) actual damages, and (3) costs of the action. Treble damages can be assessed when a defendant intentionally infringed the plaintiff’s mark. Also, in certain instances of counterfeit marks, statutory damages are available at the plaintiff’s request.
Courts have a great deal of discretion when it comes to applying the above methods and determining how much to award in damages. Nonetheless, courts have developed equitable methods in an effort to balance compensating a successful plaintiff for losses while simultaneously avoiding windfalls.
Disgorgement of Profits
Disgorgement of profits is when a successful plaintiff is awarded the defendant’s profits that are the result of the defendant’s infringement. Courts recognize three theories under which they may order disgorgement of the defendant’s profits: unjust enrichment, compensation, and deterrence.
In determining whether a disgorgement award is proper, a court must balance equitable factors. These include (1) the degree of certainty that the defendant benefited from the unlawful conduct, (2) the availability and adequacy of other remedies, (3) the role of a particular defendant in effectuating the infringement, (4) any delay by the plaintiff, and (5) the plaintiff’s clean (or unclean) hands.
The plaintiff has the burden of proving the amount of the defendant’s revenue that came from the infringing actions. Once a plaintiff establishes the dollar amount, it becomes the defendant’s burden to prove any costs or applicable deductions.
Actual Damages
For a court to award actual damages, a plaintiff must demonstrate with a degree of specificity the amount of profits lost on account of the defendant’s infringement. Courts have held that an award of actual damages under the Lanham Act must be based on a tangible evidentiary showing of loss, not sheer speculation that a plaintiff suffered a financial loss.
Actual damages can be ascertained by an examination of a plaintiff’s financials, specifically focusing on the plaintiff’s lost profits, loss of goodwill, corrective costs (costs taken to correct consumer confusion), and reasonable royalties (money that the plaintiff would have earned if the parties had contracted for the defendant to sell goods with the plaintiff’s mark).
Reasonable royalties are not expressly provided for in the Lanham Act, and they will usually not be awarded unless there is a sufficient basis on which to calculate them, often in the form of evidence of a prior licensing agreement.
Costs of the Action: Attorney Fees
The Lanham Act grants courts discretion to award reasonable attorney fees in “exceptional cases.”[2] Historically, such exceptional cases typically involve infringing acts that are willful, deliberate, fraudulent, or malicious. While the amount awarded under this method is discretionary, a judge must only award reasonable fees; unreasonable fees, such as those that provide plaintiffs windfalls, are not permissible under the law.
Treble Damages
The Lanham Act also paves the way for additional damages in a situation where a defendant willfully infringed upon the mark.[3] If a plaintiff can establish the deliberate and intentional nature of the infringement, then the court must award punitive damages totaling up to three times the defendant’s disgorged profits or the plaintiff’s actual damages, whichever is greater.
Statutory Damages
In a case involving counterfeit marks, the Lanham Act allows for a plaintiff, at any time before final judgment by the trial court, to elect to recover between $1,000 and $200,000 per counterfeit mark per type of good sold.[4] The judge will ultimately determine what that amount is on a case-by-case basis. If the counterfeit mark was willful, the maximum recovery per counterfeit mark increases to $2 million.
Summation
Ultimately, the Lanham Act grants judges relatively significant discretion for awarding damages in trademark cases, enabling them to balance compensation, deterrence, and fairness based on the nature and severity of the infringement.
* * *
Please tune in next month for part two of our series, in which we will discuss patent damages.
It is arguable that standard contracts for the provision of cloud and managed services have improved over the years, becoming more balanced and fairer to customers. However, users of cloud services should still be aware of certain time bombs concealed by some cloud vendors in their standard contracts. This article discusses a few examples of these hidden pitfalls and what can be done about them.
1. Frustrated Backups
It is not unusual for cloud computing agreements to require customers to acknowledge and agree that they, the customers, are solely responsible for ensuring that their data is backed up, including any necessary configuration, monitoring, and management of the backup and recovery process. In the same paragraph, the cloud vendor will then say that it has no responsibility or liability for backing up any data (including customer data), nor for the adequacy, completeness, or security of any backup made by the customer or the customer’s ability to successfully recover the data. All well and good, and arguably part of the “shared responsibility” model that many cloud vendors espouse.
However, from a purely practical and technical perspective, such a model is actually a bit of legal sleight of hand—or skillful deception. Unless the cloud vendor willingly provides the customer with the necessary application programming interfaces (“APIs”) or other technological means to interface with the vendor’s cloud systems, there will be no way that a customer can actually back up the data held by its cloud vendor nor return any data back into the cloud vendor’s systems to resume operations. Frustrating, to say the least—and a considerable business risk for customers who need the peace of mind of knowing that their critical data is always available. Moreover, even if the cloud vendor does back up the customer’s data for a limited period of time, there is no guarantee that such time-limited backups will comply with an individual customer’s own legally mandated data retention obligations, which will depend on the regulations applicable to the customer’s business.
Therefore, during the negotiation process, savvy cloud customers should demand that their cloud vendors make available such backup-and-restore APIs and other software necessary before agreeing to any shared-responsibility-model statements, and should document this obligation in detail in their cloud contract. Additionally, as such activity should continue during the life cycle of the contract, the client’s counsel should consider expressly drafting an additional obligation that the cloud vendor will continue to provide the necessary APIs to perform granular backups and restores from the cloud vendor’s system on an ongoing basis to permit the customer to meet its own regulatory requirements (particularly financial institutions and governmental entity customers) and any contractual obligations between the parties.
2. Who Has the Keys to Customer Data?
These days, many cloud contracts are more forthright about the fact that the cloud provider is reliant upon other third-party companies, such as Amazon, to host their cloud services (“hosting vendor”). However, the downside of such acknowledgment is that the same cloud vendors often endeavor to expressly limit (and disclaim) any liability for the actions and omissions of such hosting vendors, and any compliance by such hosting vendors with the negotiated terms of the cloud contracts (often because such vendors state that they have little practical control over such hosting vendors).
This development is more problematic in that actual cloud contracts may be silent as to the protections that are put in place between the cloud provider and its third-party hosting vendors. Such hosting vendors may not even be considered “subcontractors” for the purposes of the contract, depending on the relevant definitions. Gaps may ensue. For example, does the cloud vendor expressly state that all client data transferred to the hosting vendor is encrypted in flight, at rest, and stored encrypted by the hosting vendor? If so, does the hosting vendor have the encryption keys to decrypt data in order to provide necessary maintenance and support services? If so, this right could serve as a back door for the hosting vendor to access the customer’s data.
It may sound obvious, but cloud customers should pay special attention to cloud vendor attempts to carve out liability for their hosting vendors and should conduct additional due diligence to better understand the contractual and security protections in place between such parties.
3. AI or Not?
The use of artificial intelligence (“AI”) technology has become ubiquitous for many cloud providers, but, unfortunately, many cloud contracts are less than transparent about such usage in connection with the cloud providers’ services. Cloud vendors’ embrace of such technology may raise a host of red flags involving concerns regarding customer data protection/data security; confidentiality; the provenance of the AI systems’ training data (synthetic or customer data?); and potential copyright and legal claims relating to such data, bias considerations, and the like. Alternatively, some cloud vendors hide behind entirely separate AI-focused, hyperlinked terms that contradict the main cloud vendor agreement and that generally seek to disclaim all responsibility and liability for the AI portions of the cloud vendor solution and any output (including services) provided through such AI solutions.
A detailed review of all of the critical contractual terms necessary and required for AI contracts is unfortunately beyond the scope of this article. However, all users of cloud services should be asking pointed questions regarding the use by the vendor of AI tools and systems; and if the answer to any of these questions is yes, then customers should review and vet their contracts through an AI lens and ensure that their cloud agreement contains clear and protective contractual terms regarding data ownership, data security, and usage of customer data. At a minimum, the cloud contract should include very clear guardrails and requirements as to how the cloud vendor can collect and analyze customer data and other information in connection with the cloud vendor’s provision of the services and how the cloud provider will be using information concerning customer data and derived data to improve and enhance its services. Such guardrails should include requirements regarding the anonymization of all customer data, especially personal information and personally identifiable information.
4. “Hotel California” Exits
The lyrics contained in the classic Eagles’ song “Hotel California” that state “[y]ou can check out any time you like you like[,] [b]ut you can never leave” still apply to the treatment some cloud providers give to customers following termination of their cloud contracts. Simply put, many cloud vendors not only make it less than easy for the customer to sever its ongoing relationship but also take the opportunity to extract certain revenge.
This retribution can take many forms, assisted by the fact that most standard cloud agreements either remain resolutely silent on the exit process or devote a few insufficient sentences mainly ensuring that the cloud vendor receives its outstanding payments. Too often cloud providers merely provide clients with the opportunity to retrieve their data during a very short window of time (thirty days or less) and remain mum on everything else associated with an orderly wind-down and exit from a long-term business relationship.
For example, most contracts lack contractual commitments on the part of the cloud vendor to ensure that it continues to maintain its service levels and provide prompt support during the exit period. Most cloud providers do not commit that the data being made available for retrieval by customers is in a format accessible and useful to the client (and any replacement cloud vendor) and do not commit that the existing cloud vendor will be required to actively assist the client to securely migrate its data back to the client’s own cloud or to another third-party vendor cloud. Practically, will the customer truly be able to claw back all of its proprietary information, confidential information, and personal information from the cloud vendor—or is this technically impossible given the ingestion of such data through the vendor’s services and systems? Furthermore, if the cloud vendor is using AI tools and processes, what elements of client data, derived or otherwise, will continue to be used by the vendor post-termination? High-dollar-value-negotiated cloud agreements may contain these details, but many standard lower-value cloud agreements do not adequately address these concerns, which is problematic considering the strategic value and importance of such data to the company.
Unfortunately, experience has shown that while some forward-thinking cloud vendors will remain helpful during this sometimes-difficult transition period, it is entirely preferable (and strongly recommended) that clients seek express commitments from their cloud vendor to ensure continuity of service with no service degradation and, as required, other business requirements through a more robust transition plan (or at least the process to arrive at such a plan) in order to better protect client interests.
Takeaway
To conclude, while standard-form cloud computing agreements have definitely become more balanced during the past several years, there is still room for improvement. The client’s legal counsel, working with the company’s business and technical personnel, will continue to play a critical role in this process.
Representation and warranty provisions are critical to technology transfer transactions, such as intellectual property (“IP”) license agreements, mergers, and acquisitions. The representation and warranty provisions in a technology transfer agreement indicate guarantees or promises made by the IP proprietor (tech licensor or seller) to the receiving party (tech licensee or buyer) regarding the subject technology of the agreement. Often, the guarantees cover the functionality, performance, and IP rights of the subject technology.
IP rights clauses in representation and warranty provisions are simple on their face; however, the full depth of the copyright and patent right implications are often overlooked when the subject technology involves software.
One major issue may arise from the warranty clause of a tech transfer agreement, which typically guarantees that use of the subject technology will not infringe upon or violate the IP rights of third parties. Below is an example warranty clause:
The Transferred IP are free and clear of any liens, charges, encumbrances or rights of others to possession or use; . . . no claims have been asserted or, to Assignor’s knowledge, threatened by any Person, nor has the Assignor any knowledge of any valid grounds for any claim of any such kind . . . to the effect that the use, reproduction, modification, manufacturing, distribution, licensing, sublicensing, sale or any other exercise of rights in any of the Transferred IP infringes or will infringe on any IP of any Person . . . .
With the proliferation of open-source software (“OSS”), further consideration is warranted regarding the terms “any . . . rights of others to possession or use . . . [of] Transferred IP infringes or will infringe on any IP of any Person” (emphasis added) in such tech transfer warranties. Specifically, to the extent that one or more OSS components are employed by the subject technology, there are corresponding OSS license obligations that the IP proprietor needs to be prepared to face. Noncompliance with an OSS license means the IP proprietor is in breach of the OSS license, which can lead to loss of both copyright use rights and patent use rights of the OSS components. Without those IP use rights, the copyrights and patent rights of the OSS contributors or others may be infringed or violated by the subject technology of the tech transfer agreement.
Today, most software technologies utilize some amount of OSS in conjunction with original program code authored by the tech-licensor (or seller). Thus, most software technologies have IP rights of multiple stakeholders at play—namely, rights of the tech licensor (or seller), rights of the tech licensee (or buyer), and rights of parties to and beneficiaries of implicated OSS licenses.
As such, tech licensees (buyers) must carefully conduct due diligence before accepting IP right representations and warranties with respect to software technologies. Likewise, tech licensors (sellers) must carefully audit their software to ensure OSS compliance before setting forth IP right representations and warranties with respect to software technologies.
For tech licensees (buyers), it is essential to understand any OSS that is part of the licensed technology and the IP right implications of the OSS. This is best accomplished by relying upon software developers and third-party OSS auditing services. As part of their due diligence, tech licensees should inquire about any OSS that is delivered as part of the licensed technology and ensure that the tech licensor’s (seller’s) OSS use does not run afoul of IP rights. Further, when relying upon representations and warranties to utilize licensed technology, tech licensees (buyers) must be aware of any added OSS that they are utilizing. If, for instance, a tech licensee (buyer) utilizes some additional OSS code to implement a licensed technology, it is unlikely that the tech transfer representation and warranty provisions will indemnify the tech licensee (buyer) for any IP rights they violate by utilizing the additional OSS.
Representation and Warranty Insurance
As a replacement or alternative to the tech licensor’s (seller’s) indemnity in technology transfer transactions, representation and warranty insurance (“RWI”) is available for the tech licensee (buyer). RWI policies typically cover a wide range of issues, including IP risks and unknown or unforeseen losses. With RWI, if the representations and warrantees made in the IP license agreement (or IP purchase and sale agreement in the case of mergers and acquisitions) are breached after the deal closes, and financial loss for the tech licensee (buyer) results, then the tech licensee (buyer) can seek recourse through the insurance policy. For the tech licensor (seller), RWI shifts the risk of breach in representations and warranties to the insurance carrier. For the cost of a RWI policy, the carrier assumes the risk of the representation and warranty promises made by the tech licensor (seller), and the tech licensor (seller) is relieved of the risk of future claims of breach of such promises.
In the process of obtaining RWI, the insurance carrier expects the tech licensee (buyer) to conduct thorough and independent due diligence that includes verifying the tech licensor’s (seller’s) software assets and IP claims. Thus, RWI can make tech transfer deals less risky for both parties, but it does not alleviate the need for the tech licensee (buyer) to: (i) perform thorough due diligence and (ii) understand the far-reaching copyright and patent use rights ramifications of OSS involved in the subject technology of the tech transfer deal.
Conclusion
In summary, for software-related tech transfer deals, consider the following steps to mitigate IP risks:
Make sure IP due diligence includes an audit of software assets and any third-party or OSS code;
reduce risk by ensuring both sides understand the implications of representations and warranties; and
consider using RWI to facilitate the transaction and provide added protection.
Benjamin R. Norman Daniel L. Colston Agustin M. Martinez Gabrielle E. Supak Sabrina Y. Greer
Brooks, Pierce, McLendon, Humphrey & Leonard LLP 2000 Renaissance Plaza 230 North Elm Street Greensboro, NC 27401 336.271.3155 www.brookspierce.com
Jennifer M. Rutter
Gibbons P.C. 300 Delaware Avenue, Suite 1015 Wilmington, DE 19801 302.518.6320 www.gibbonslaw.com
Marc E. Williams Allyssa Kimbler
Nelson Mullins Riley & Scarborough LLP 949 Third Avenue, Suite 200 Huntington, WV 25701 304.526.3500 www.nelsonmullins.com
Michael J. Tuteur Jamie Steven
Foley & Lardner LLP 111 Huntington Avenue, Suite 2600 Boston, MA 02199 617.342.4000 www.foley.com
Jacqueline Bonneau Anthony J. Wong
Patterson Belknap Webb & Tyler LLP 1133 Avenue of the Americas New York, NY 10036 212.336.2000 www.pbwt.com
Tyson J. Prisbrey
Snell & Wilmer Gateway Tower West 15 West South Temple Suite 1200 Salt Lake City, UT 84101 801.257.1900 www.swlaw.com
Michael W. Tankersley
Alston & Bird LLP 2200 Ross Ave., Suite 2300 Dallas, TX 75201 214.679.2369 www.alston.com
§ 10.1. Introduction
This edition of Recent Developments describes developments in business courts in 2024 and summarizes significant cases from a number of business courts with publicly available opinions.[1] There are currently functioning business courts of some type in cities, counties, regions, or statewide in twenty-seven states: (1) Arizona; (2) Delaware; (3) Florida; (4) Georgia; (5) Illinois; (6) Indiana; (7) Iowa; (8) Kentucky; (9) Maine; (10) Maryland; (11) Massachusetts; (12) Michigan; (13) Nevada; (14) New Hampshire; (15) New Jersey; (16) New York; (17) North Carolina; (18) Ohio; (19) Pennsylvania; (20) Rhode Island; (21) South Carolina; (22) Tennessee; (23) Texas; (24) Utah; (25) West Virginia; (26) Wisconsin; and (27) Wyoming.[2] States with dedicated complex litigation programs encompassing business and commercial cases, among other types of complex cases, include California, Connecticut, Minnesota, and Oregon.[3] The California and Connecticut programs are expressly not business court programs as such.[4]
§ 10.2. Recent Developments
§ 10.2.1. Business Court Resources
American College of Business Court Judges. The American College of Business Court Judges (ACBCJ) provides judicial education and resources, in terms of information and the availability of its member judges, to those jurisdictions interested in the development of business courts.[5] The ACBCJ’s Nineteenth Annual Meeting took place in Grand Traverse, Michigan, from April 30, 2025, to May 2, 2025.[6]
Section, Committee, and Subcommittee Resources.The ABA Business Law Section provides a Diversity Clerkship Program that sponsors current first or second-year law students of diverse backgrounds in summer clerkships with business and complex court judges.[7] The ABA Business Law Section has created a pamphlet, Establishing Business Courts in Your State, which is available among other resources in the online library for the Business and Corporate Litigation Committee’s community web page.[8] The Business and Corporate Litigation Committee’s Subcommittee on Business Courts provides documents and/or hyperlinks to business court resources.[9] This includes links to public sources and legal publications, as well as business court related materials and panel discussions presented at ABA Business Law Section meetings. The Section also has established a Business Courts Representatives (BCR) program,[10] where a number of specialized business, commercial, or complex litigation judges are selected to participate in and support Section activities, committees, and subcommittees. These BCRs attend Section meetings, and many have become leaders within the Section. Judge Richard Platkin of the Supreme Court of the State of New York Commercial Division – Albany County and Judge Patricia A. Winston of the Superior Court of Delaware, serve as BCRs for the 2023–2025 term.[11] Finally, this publication has included a chapter on updates and developments in business courts every year since 2004.
Other Resources. “The National Center for State Courts (NCSC) and the Tennessee Administrative Office of the Courts (AOC) developed an innovative training curriculum[12] and faculty guide[13]—along with practical tools—to help state courts establish and manage business court dockets more efficiently and effectively.”[14] The Business Courts Blog,[15] created by Lee Applebaum and now guided by Doug Toering, aims to serve as a national library to those interested in business courts, with posts on past, present, and future developments. This includes posts on reports and studies going back twenty years, as well as recent developments in business courts.[16] In 2024, articles and reports addressed various aspects of business courts.[17] There are also various legal blogs with content relating to business courts in particular states.[18]
§ 10.2.2. Developments in Existing Business Courts
§ 10.2.2.1. Arizona Commercial Court
No 2024 Opinions. The Arizona Commercial Court did not publish any written decisions in 2024.
§ 10.2.2.2. Florida’s Complex Business Litigation Courts
Following last year’s expansion from six business court divisions to seven, little has changed in Florida’s business courts. Judge John E. Jordan continued to preside over the Ninth Judicial Circuit’ new (for 2023) business court division in Osceola County (Division 23), as well as the pre-existing business court division in Orange County (Division 43).[19] In the Eleventh Judicial Circuit, Judges Thomas Rebúll (Division 43) and Lisa Walsh (Division 44) continued to preside over the business court divisions.[20] In the Seventeenth Judicial Circuit, Judge Carol-Lisa Phillips (Division 26)[21] and Chief Judge Jack B. Tuter (Division 07) continued to preside over the business court divisions. And so too in the Thirteenth Judicial Circuit, where Judge Darren Farfante (Division L) continued in his role presiding over the business court.[22]
§ 10.2.2.3. Indiana Commercial Court
In September 2024, the Indiana Supreme Court adopted a substantial revision of the Indiana Commercial Court Rules[23] based on recommendations from the members of the Indiana Commercial Court Committee.[24] The amended Rules now employ English language throughout to be more accessible to readers. The Indiana Supreme Court also formally amended Commercial Court Rule 5 to permit Commercial Court jury trials to be held in a non-Commercial Court county for good cause shown. The Commercial Court judge would still oversee the trial, but the jurors would come from the non-Commercial Court county where the trial is held. Other revisions include renaming “special masters” under Commercial Court Rule 6 to “court-appointed neutrals” and providing further commentary on discovery pursuant to Commercial Court Rule 7.
In addition to the rule changes, the Indiana Commercial Court now has a publicly accessible online directory of court-appointed neutrals for parties to select. This list includes the names, areas of experience, and hourly rate for the court-appointed neutral.[25]
In 2024, two new judges were selected to oversee Indiana Commercial Court dockets. Judge Christina Klineman became the Commercial Court judge for Marion County, Indiana, replacing Judge Heather Welch. Judge Welch was one of the original six judges of the Indiana Commercial Court and now serves as a senior judge alongside her work in alternative dispute resolution.[26] Judge Stephanie Steele replaced Judge Cristal Brisco for the Commercial Court for St. Joseph County, Indiana[27] after Judge Brisco was nominated and confirmed to join the federal bench at the United States District Court for the Northern District of Indiana.[28] Judge Stephen Bowers, another one of the original six Indiana Commercial Court judges and key driver of the revisions to the Commercial Court Rules, retired at the end of 2024.[29] Judge Andrew Hicks takes Judge Bowers’ place in the Commercial Court for Elkhart County, Indiana.[30]
Indiana maintained ten Commercial Court courts in 2024. Starting in July 2025, Tippecanoe County, Indiana, is set to house Indiana’s 11th Commercial Court.[31]
§ 10.2.2.4. Iowa Business Specialty Court
Iowa Business Specialty Court Issues Its Biannual Review for 2022–2023.To ensure the Business Court continues to achieve its purpose and meet its goals, the Iowa Supreme Court directed the state court administrator to conduct a biannual review beginning on January 1, 2023. The Iowa Business Specialty Court Report, Calendar Years 2022–2023 (the “Report”), was released in 2024. The Report includes survey data for cases resolved in calendar years 2022 and 2023 and case data since the Business Court’s inception in 2013. The Report shows the Business Court has experienced a steady and substantial growth in case volume. After receiving a total of 12 case transfers in the first two years of operation, the Business Court’s case volume grew to a record high of 47 new case transfers in 2023. This increase in case volume has led to gradual expansion of the Business Court, which currently has eight judges. The Report also included survey data assessing the performance of and user satisfaction with the Court. The survey results indicate high levels of satisfaction with the quality of the Business Court judges and the effectiveness of the Business Court in managing and resolving complex business disputes. The vast majority of survey participants reported that they would seek assignment of qualifying cases to the Business Court in the future and moderate to high levels of satisfaction with the efficiency and fairness of the Business Court and its procedures.
§ 10.2.2.5. Massachusetts Business Litigation Session (BLS)
In 2024, the Massachusetts Business Litigation Session (BLS) implemented Superior Court Administrative Directive No. 24-1, which rescinded and replaced Administrative Directive No. 17-1, the operative directive since 2017. Alongside this change, the BLS released an updated Civil Action Cover Sheet. The key updates in Administrative Directive No. 24-1 include expanded use of video conferencing at the judge’s discretion, and a new requirement that the BLS Civil Action Cover Sheet specify the amount in controversy.
§ 10.2.2.6. Michigan Business Courts
Michigan Judicial Institute Conference on Enhancing Mediation Effectiveness. On September 12, 2024, the Michigan Judicial Institute, along with the Commercial Litigation Committee of the State Bar of Michigan’s Business Law Section, hosted a program called Creative Case Resolution: The Art of Case Scheduling and Mediation. Michigan Supreme Court Justice Brian Zahra and most of Michigan’s business court judges attended. The program included discussions on defining an effective mediation process, insights into making mediation most effective, and the benefits of a pre-mediation conference with the parties. A summary of the program may be found in the Michigan Business Law Journal’s Fall 2024 issue.[32]
Business Court Retirements and Appointments. Judge Timothy P. Connors (Washtenaw County) retired on December 31, 2024, and was replaced by Judge Carol Kuhnke. Judge Joyce Draganchuk (Ingham County) retired at the end of 2024 and was replaced by Judge James S. Jamo.
The business court legislation became effective January 1, 2013.[33] Business court judges are appointed for a six-year term.[34] The terms of all business court judges (regardless of when they were appointed) will expire April 1, 2025.[35] At the time of this writing, it is not known which judges the Michigan Supreme Court will reappoint and who will be appointed as new judges.
Other Resources. In 2024, the Michigan Business Law Journal published three Touring the Business Court columns, including interviews with business court judges Judge Curt A. Benson (Kent County), Judge Michael P. Hatty (Livingston County), Judge Brian Kirkham (Calhoun County), and Judge Michael L. West (St. Clair County). Those articles, and others, are available at https://connect.michbar.org/businesslaw/newsletter.
Additionally, the Business Court Blog regularly covers matters pertaining to business and commercial courts in Michigan and across the United States. That blog is available at www.businesscourtsblog.com.[36]
§ 10.2.2.7. New York Commercial Division
New York State Amends Rule Giving Affirmations Same Force and Effect as Affidavits. On January 1, 2024, Section 2106 of the New York Civil Practice Law & Rules (“CPLR”) was amended to give affirmations the same force and effect as affidavits. The amended CPLR 2106 concerning affirmations states: “The statement of any person wherever made, subscribed and affirmed by that person to be true under the penalties of perjury, may be used in an action in New York in lieu of and with the same force and effect as an affidavit.” Prior to this amendment, only certain non-party New York licensed professionals, such as attorneys, health-care professionals, and individuals located outside the United States could submit affirmations in lieu of affidavits.
New York Commercial Division Amends Rule to Include Technology Disputes and to Encourage the Use of Referees. On February 14, 2024, New York’s Chief Administrative Judge signed an Administrative Order amending Section 202.70(b)(1) of the Uniform Rules for the Supreme and County Courts (Rules of the Commercial Division of the Supreme Court) and adding a new Rule 9-b to Section 202.70(g). These rules reiterate that the Commercial Division is capable of handling cases relating to technology disputes and also encourages the use of referees in Commercial Division cases to increase the efficient adjudication of commercial disputes. Although these amendments did not add new authority to the scope of the Commercial Division’s existing practices, they serve to underscore some of the Commercial Division’s under-utilized capabilities.
The amendment to Rule 202.70(b)(1) further clarifies the scope of the Commercial Division’s limited jurisdiction and now emphasizes that “commercial” cases that may be heard by the Division include those resulting from “technology transactions and/or commercial disputes involving or arising out of technology.” As explained in a memo released by the Commercial Division Advisory Council (“CDAC”), this amendment does not expand the Commercial Division’s jurisdiction to include a new category of cases, but is instead intended to serve as a reminder that the Commercial Division is sophisticated enough to adjudicate disputes arising from technology, an increasingly common category of disputes.
The Administrative Order also adds Rule 9-b to Section 202.70(g). The new rule states that “Counsel should be aware that in accordance with CPLR 4301 and 4317(a), on consent of the parties, and with the agreement of the Court, any person may be appointed by the Court to act in place of the assigned Supreme Court Justice, to determine any or all issues or to perform any act, with all the powers of the Supreme Court.”
Rule 9-b is meant to encourage the use of referees in Commercial Division cases. As with the amendment to Section 202.70(b)(1), this rule does not add any new capabilities to the Division’s repertoire but instead highlights the options already available for cases in the Commercial Division. In a memo, the CDAC wrote that this amendment “hopes to bring attention to the availability of referees to adjudicate disputes with a new Commercial Division rule.” The rule is voluntary, but it is hoped that increased use of referees will further the goal of efficient adjudication of commercial matters.
New York Commercial Division Amends Rule Regarding Monetary Thresholds. On January 28, 2025, Chief Administrative Judge Joseph Zayas signed an Administrative Order amending the requisite monetary threshold necessary for a case to be assigned to the New York Supreme Court Commercial Division. The amendment requires cases seeking equitable or declaratory relief to also satisfy the monetary thresholds for each county (currently $500,000 in New York County). Prior to the amendment, a case seeking equitable or declaratory relief could qualify to be heard by the Commercial Division as long as it met the definition of a “commercial” dispute, regardless of the amount in controversy. Under the new rule, the Court will look at the “value of the object of the action” in such cases, which will be determined by the “value of the suit’s intended benefit, the value of the right being protected, or the value of the injury being averted, whichever is greatest” in determining monetary thresholds. This amendment went into effect on March 31, 2025.
§ 10.2.2.8. North Carolina Business Court
Various Changes to the North Carolina Business Court’s Composition. There were various personnel changes at the North Carolina Business Court in 2024. The most notable was the retirement of Judge Louis A. Bledsoe, III (based out of Charlotte). Judge Bledsoe served on the Business Court since 2014 and was the Chief Business Court Judge since 2018. Judge Michael L. Robinson (based out of Winston-Salem), who has served on the Business Court since 2016, was appointed to serve as the new Chief Business Court Judge. Finally, attorney A. Todd Brown was appointed to the Business Court, with chambers located in Charlotte. Judge Brown previously practiced at Hunton Andrews Kurth, including serving as the managing partner of the firm’s Charlotte office, and also served as the President of the North Carolina State Bar.
§ 10.2.2.9. South Carolina Business Court Program
Administrative Order Restructures the Business Court.The South Carolina Supreme Court issued a new administrative order on August 1, 2024, amending the state’s Business Court Program just one year after the prior amendment in July 2023. Notably, the 2024 order omits any reference to the regional structure first implemented with the court’s statewide expansion in 2014 and reaffirmed in recent administrative orders from 2019 and 2023.[37] Although the order does not expressly dissolve the regional divisions or explain the rationale for their omission, its silence may suggest a shift toward a more flexible model, affording the Chief Business Court Judge greater latitude in assigning judges without regard for regional assignments.
The 2024 order also revises the roster of Business Court judges. Judges Edward W. Miller and Clifton Newman are no longer listed, while the order designates five new judges—G.D. Morgan Jr., Courtney Clyburn Pope, Thomas William McGee III, Milton G. Kimpson, and Kristi F. Curtis.[38]
The order retains the core subject matter jurisdiction listed in the 2023 order, covering cases arising under Titles 33, 35, 36 (Chapter 8), and 39 (Chapters 3, 8, and 15) of the South Carolina Code. It also broadens the scope to include “any other matter deemed appropriate by the Chief Business Court Judge,” effectively restoring a level of discretion that had been removed in the 2023 order.[39]
One last change merits mention. The order omits the previous 180-day deadline for requesting Business Court assignment, suggesting parties may make such requests at any stage using the required SCCA BC Form 101.[40]
§ 10.2.2.10. Texas Business Court
Opening of the Texas Business Court and Fifteenth Court of Appeals—September 1, 2024, to December 31, 2024. The Texas Business Court, created by the 2023 Texas Legislature’s enactment of House Bill 19,[41] opened its doors on September 1, 2024.[42] Governor Abbott appointed ten judges to the court in June of 2024,[43] to serve in five multi-county Business Court Divisions encompassing the state’s major business and population centers.[44] Six more rural Business Court Divisions, covering the remainder of the state, were also created in 2023, but funding and the Governor’s authority to appoint judges for those divisions were deferred for confirming action by the 2025 Texas Legislature.[45] The Texas Supreme Court approved amendments to the Texas Rules of Civil Procedure applicable to the Business Court,[46] and the Business Court adopted local rules.[47]
By December 31, 2024, the Business Court had received a total of 56 case filings, 29 in the 11th Division and 15 in the 1st Division, with the remainder spread in approximately equal numbers among the other three divisions. Judges from the Third, Fourth and Eighth Business Court Divisions have been assigned to hear eight of the 29 cases filed in the 11th Division in order to balance workloads.[48] Fifteen of the filings sought to remove proceedings to the business court that had commenced in Texas district courts prior to September 1, 2024, all of which have been declined by the Business Court judges hearing the cases and remanded to the originating courts for reasons discussed below. Those cases are the subject of the eight opinions published by the Business Court in 2024, and the six appeals from Business Court decisions filed in the new Fifteenth Court of Appeals in 2024.[49]
The balance of Business Court case filings consists primarily of breach of contract claims involving damages in excess of $10 million,[50] many of them arising in the energy and real estate industries, and private company governance and control disputes where there is more than $5 million in controversy.[51] With the exception of one injunctive action seeking to protect intellectual property rights that was tried to a decision, denying the plaintiff’s request, and that is currently on appeal,[52] all of the pending 2024 Business Court cases are in early procedural stages.
Joining the Business Court in opening its doors on September 1, 2024, was the Fifteenth Court of Appeals, a new, specialized appellate court having statewide geographic reach that was created by Senate Bill 1045[53] (SB 1045) enacted by the 2023 Texas Legislature. The Fifteenth Court is the exclusive destination for appeals of orders and decisions of the Business Court.[54] It is staffed by three justices, also appointed by Governor Abbott in June, 2024.[55] Unlike the Business Court judges, who are subject to reappointment by the governor at the end of their two-year terms, the Fifteenth Court justices must stand for election in November 2026, and will thereafter serve six-year terms. The Fifteenth Court received six appeals from the Business Court between September 1, 2024, and December 31, 2024.
Is The Fifteenth Court of Appeals Limited to Hearing Appeals of Specified State Interest and Business Court Cases? In an unexpected development, the Fifteenth Court during its first four months of operation also received five appeals of business cases from district court decisions, or motions to transfer appeals of business cases from one of the other fourteen courts of appeals, seeking to take advantage of the Fifteenth Court’s developing business expertise.[56] Advocates for the Fifteenth Court during the 2023 Texas Legislature were clear in stating that its jurisdiction would be exclusively limited to specific types of state interest cases and appeals from the Business Court, and that it would not receive other appeals. Section 22.220(d) of the Texas Government Code, states: “(d) The Court of Appeals for the Fifteenth Court of Appeals District has exclusive intermediate appellate jurisdiction over the following matters arising out of or related to a civil case . . . (emphasis added).” SB 1045 made a number of other amendments to Chapter 22, Tex. Gov’t Code that are consistent with legislative intent that it have a tightly limited subject matter jurisdiction.
The district court appellants seeking to have the Fifteenth Court accept their appeals have pointed out that while SB 1045 is clear in describing the areas where the Fifteenth Court does have exclusive jurisdiction, and also in establishing that it has no criminal law jurisdiction, the statute never states in similarly clear terms that the Fifteenth Court’s general civil jurisdiction as a Texas appellate court has been limited in any way. And since the Fifteenth Court’s geographic jurisdiction covers the entire state, their argument, stated most broadly, is that every appellant from a district court decision anywhere in the state can therefore file their appeal with the Fifteenth Court.
The judges of the Fifteenth Court have split 2–1 over this issue (Chief Justice Brister dissenting), in favor of the court accepting these appeals. The First, Thirteenth and Fourteenth Courts of Appeals, which are in line to receive these appeals if the Fifteenth Court does not, have also reached diverse conclusions. In response, these courts have made the necessary filings under Rule 27a of the Texas Rules of Appellate Procedure (Transfers To and From Fifteenth Court of Appeals), to place the question in the hands of the Texas Supreme Court, which responded in a per curiam opinion on March 14, 2025.[57] The Court does note in its opinion that it retains the authority to direct cases from the regional courts of appeals to the Fifteenth Court for purpose of docket equalization and has begun to initiate such transfers.
Do the New Texas Courts Comply with the Texas Constitution? The single most important judicial decision in the young lives of the new courts was rendered by the Texas Supreme Court on August 23, 2024, before any of the judges and justices had been seated or the first case filed: In re Dallas County, Texas and Marian Brown, in her official capacity as Dallas County Sheriff (In re Dallas County). That action was filed in the Texas Supreme Court[58] on May 22, 2024, in reliance upon Section 3.02 of SB 1045, which conferred upon the Texas Supreme Court “exclusive and original jurisdiction over a challenge to the constitutionality of this Act or any part of this Act.” Section 4 of HB 19 creating the Business Court includes similar language that has not yet been acted upon for reasons discussed below.
SB 1045 required that approximately 90 pending appeals of state interest cases be transferred to the Fifteenth Court of Appeals on September 1, 2024. Dallas County, party to one of those appeals, objected to the transfer and filed suit in the Texas Supreme Court to block it. Three principal constitutional challenges were raised: (1) the geographic scope of the new court’s jurisdiction, covering the entire state, and thereby overlapping with all other courts of appeals, was impermissibly broad; (2) the exclusive subject matter jurisdiction of the new court (enumerated cases of statewide importance where the State of Texas is a party and cases appealed from the Business Court) impermissibly removed jurisdiction over those cases from the existing appellate courts; and (3) the new justices were unconstitutionally installed because they would not stand for election until November 2026, despite having been appointed in September 2024, prior to a November general election in which they should have been included.
The Texas Supreme Court artfully disposed of each of these arguments in a 9–0 opinion delivered August 23, 2024. Justice Evans, writing for the court, provided a thorough 12-page history of the many instances over the past 150 years in which the people of Texas have approved amendments of the Texas Constitution to give the Texas Legislature increasing authority to shape the structure of the Texas court system to meet the needs of the state, and where the Legislature has used that authority in creative ways. The opinion recites a long history of geographically overlapping appellate court jurisdiction (two state appeals court districts, the First and Fourteenth Courts of Appeals, cover the same counties, a complete overlap) and the long-accepted practice of moving appellate cases freely among the fourteen courts of appeals to balance workloads. The opinion notes prior actions of the Legislature having the effect of taking jurisdiction away from specific courts and bestowing it elsewhere, and confirms that the Legislature was not compelled by the Texas Constitution to force the justices appointed in June 2024 to participate in a partisan election in November 2024 that had begun with primaries in March 2024.
So, what is the significance of the In re Dallas County decision for the Business Court? The view of many observers of SB 1045 when it was enacted was that establishing the constitutionality of the Fifteenth Court of Appeals might be more of a challenge than was presented by the Business Court. The constitutionality of the Business Court received substantial support from a 1950 Texas Supreme Court case that addressed a legislatively created court, with an appointed judge and a narrow subject matter jurisdiction, possessed of all the procedural authority of a district court, but dealing with a narrow, specialized subject matter jurisdiction, Jordan v. Crudgington.[59] Further support is provided by Article V, Section 8 of the Texas Constitution, added in 1985 (and carefully avoided in commentary by critics of the Business Court): “District Court jurisdiction consists of exclusive, appellate, and original jurisdiction of all actions, proceedings, and remedies, except in cases where exclusive, appellate, or original jurisdiction may be conferred by this Constitution or other law on some other court, tribunal, or administrative body.”
The general consensus among supporters of the Business Court has been that if the Legislature can by “other law” confer district court jurisdiction upon “some other tribunal, or administrative body . . .” with no limitation that the receiving body even be a court, or that its members be elected (in fact, almost all of them in practice are appointed by the Governor), it can certainly grant concurrent jurisdiction over the matters identified in Sec. 25A.004 Tex. Gov’t Code to the Business Court.
The Dallas County opinion persuasively reviews and interprets essentially all of the older Texas cases that speak to the constitutionality of the Business Court in ways that are confirming of its validity. The opinion, while never speaking directly of the Business Court, addresses and discards interpretations of those cases relied upon by opponents of the Business Court to question its constitutionality.
The Dallas County opinion provides a strong indication that the Texas Supreme Court, in a properly presented case, would uphold the constitutionality of the Business Court. As Chief Justice (Ret.) Tom Phillips and Matthew Hilderbrand state in their October 2024 Texas Lawyer article, “In our view, there should be no doubt that the business court is well within the legislative prerogative to create.”[60] Chief Justice Phillips is among the state’s most respected appellate lawyers. It is rare for him to associate with that sort of unqualified public prediction of what the Texas Supreme Court might decide.
A secondary indicator supporting the conclusion that the Dallas County decision may have substantially diminished or foreclosed the likelihood of a constitutional challenge in the near term is that, with over 120 cases filed in the Business Court as of this writing, and vigorous resistance to litigating in the business court being demonstrated by a fair number of responding parties represented by eminent counsel, no one has initiated a proceeding in the Texas Supreme Court challenging the constitutionality of the Business Court. Lastly, Texas legal writing since the August 23, 2024, issuance date of the In re Dallas County opinion is devoid of fresh public assertions of the Business Court’s unconstitutionality or any effort to distinguish its holdings as not providing assurance of the constitutional soundness of the Business Court.
The First Procedural Controversy—Can Actions Commenced in District or County Courts Prior to September 1, 2024, Be Removed to the Business Court? Section 8 of HB 19 consists of a single sentence, intended to be succinct and clear in its meaning and effect: “The changes in law made by this Act[61] apply to civil actions commenced on or after September 1, 2024.” The implicit counter-proposition is equally succinct and clear: If your case was pending in a Texas district court or county court at law on August 31, 2024, the law creating the Business Court does not apply to your action—it should proceed under the laws of Texas that do not include Chapter 25A, Tex. Gov’t Code, or the Business Court.[62]
Provisions identical to Section 8 appeared in each of the prior versions of business court legislation filed in 2015 through 2021. The language used was consistently viewed by the authors and supporters of each of the bills as intended to prevent a potential flood of preexisting cases from overwhelming the Business Court in its earliest days. It also reflected the recognition that the pending district court cases that might be removed to the Business Court would have been filed in reliance on existing law that predated the creation of the Business Court, representing much expenditure of planning and effort in the expectation of litigating in state district court. An open door for movement of pending cases to the Business Court would inappropriately disturb that status quo and was likely to increase the level of opposition to creation of the Business Court coming from the potentially affected parties and judges.
A surprising number of litigants pursuing complex business litigation in the Texas district courts on August 31, 2024, ultimately 15 of them,[63] have taken a different view of the matter. They either failed to notice Section 8 or failed to interpret it in the manner expected by the drafters of HB 19, and as a result filed motions to remove or transfer their pre-September 1, 2024, pending cases to the Business Court. None of those efforts have succeeded at this point, although several are the subject of pending appeals to the Fifteenth Court of Appeals.[64]
Overlooking Section 8 is a surprisingly real possibility. Sections 4–9 of HB 19 are considered by the Texas Legislative Council, arbiter of proper drafting of Texas legislation, as “transitory provisions” that should not appear in the codified version of the Business Court statute, Chapter 25A, Tex. Gov’t Code, which presents the text of only Section 1 of House Bill 19. As a result, lawyers who consulted the Texas Business Court’s codified statute online would not have seen the language from Section 8 quoted above. Codified versions of Texas statutes that can be easily accessed online are not in fact the official laws of Texas. That status attaches only to the Session Laws enacted by the Texas Legislature and catalogued by the Secretary of State,[65] i.e., “Act of May 25, 2023, 88th Leg., R.S., ch. 380, §§ 8, 2023 Tex. Sess. Law Serv. 919 (H.B. 19).”[66]
Several provisions of Chapter 25A, Tex. Gov’t Code, when read alone without consideration of HB 19 Section 8, would give the impression that a party to a pre-September 1, 2024, lawsuit could remove their case to the Business Court. Many of the parties arguing that the Business Court should accept the removal of their pre-September 1, 2024, cases founded their arguments upon these provisions:
Sec. 25A. 006(d): “A party to an action filed in a district court or county court at law that is within the jurisdiction of the business court may remove the action to the business court. . . .”
Sec. 25A.006(f): “A party may file an agreed notice of removal at any time during the pendency of the action. If all parties to the action have not agreed to remove the action, the notice of removal must be filed: (1) not later than the 30th day after the date the party requesting removal of the action discovered, or reasonably should have discovered, facts establishing the business court’s jurisdiction over the action; . . .”
In any event, the lawyers arguing for the Business Court to accept these cases have brought forward and thoroughly briefed many thoughtful and ingenious arguments for the judges to consider. To this point the Business Court’s judges have accepted none of them, holding firm to the position that the Business Court is without authority to hear any action that commenced prior to September 1, 2024.
Looking Ahead. The Texas Business Court has been in existence for a little more than five months and is making strides that confirm the high expectations of its supporters in the Texas business bar and business community. At the same time, it is widely recognized that the new court is also a work in progress that will continue to develop, face challenges and implement solutions each year.
HB 19 enacted by the 2023 Texas Legislature to create the Business Court was a 30-page bill. The current draft of a 2025 Texas Business Court Improvements Act introduced in the 2025 Texas Legislature clocks in at 44 pages. The 2025 legislation amends Chapters 24 and 25A, Texas Government Code, and the Texas Civil Practice and Remedies Code, to clarify and make technical corrections and improvements in the law applicable to the existence and functioning of the Business Court as an integral part of the Texas judiciary.
The amendments, among other things:
clarify and confirm the Business Court’s subject matter jurisdiction and fill jurisdictional gaps relative to the business courts of other states;
reduce the required amount in controversy for Business Court jurisdiction over disputes relating to qualified transactions and other business and commercial disputes from $10 million to $5 million;
authorize Business Court judges to make determinations of whether a claim is within the Business Court’s supplemental jurisdiction, whereas the current law requires agreement of all parties and the Business Court judge;
direct the Texas Supreme Court to adopt rules for the Business Court that will support prompt and final determination of jurisdictional questions;
authorize the Business Court to hear cases arising out of domestic and international arbitration and proceedings under the Federal Arbitration Act; and
authorize the Governor to appoint an additional judge to each of the First and Eleventh Business Court Divisions on or after September 1, 2026.
§ 10.2.2.11. Utah Business and Chancery Court
The creation of Utah’s Business and Chancery Court represents a significant step forward in the state’s judicial system, designed to adjudicate complex business disputes and equitable claims. This specialized court serves to streamline legal processes for commercial matters, providing a dedicated forum for resolving issues such as corporate governance, contract disputes, and other business-related litigation. By focusing on these areas, the Business and Chancery Court enhances the predictability and effectiveness of legal resolutions, hopefully fostering a more business-friendly environment in Utah.
Unique Features of the Utah Business and Chancery Court.The jurisdiction of the Business and Chancery Court is limited to disputes that are seeking monetary damages of at least $300,000 or seeking solely equitable relief, like an injunction, and with a claim arising from one of several enumerated causes of action, which are all related to commercial activities such as breach of contract, breach of fiduciary duty, business governance disputes, dissolution, and derivative shareholder actions.[67] The statute also provides a list of claims for which the Business and Chancery Court does not have jurisdiction, most notably consumer contract disputes and personal injury cases.[68] Thus, the Business and Chancery Court will not have to contend with thousands of consumer debt recovery cases that currently congest the district courts’ dockets.
A few of the major goals for the Business and Chancery Court are predictability, consistency, and efficiency. The legislature wanted the Business and Chancery Court to create a body of case law that provides businesses with predictability regarding how disputes will be resolved. To that end, the Business and Chancery Court must publish every final decision and order on the Utah Courts’ website.[69] By publishing all of its decisions, the Court will be better equipped to rule consistently, which in turn helps parties make more informed decisions about their operations and legal matters. Additionally, the Business and Chancery Court must provide parties with the judge’s proposed ruling on any motion within 48 hours before the day on which oral argument is held on the motion.[70] This allows the parties to efficiently prepare for oral argument only on issues that may impact the judge’s ruling based on the initial ruling.
Like many other business courts, including the Delaware Court of Chancery, the Business and Chancery Court will not conduct jury trials, only bench trials.[71] The Business and Chancery Court can operate anywhere in the state and has state-wide jurisdiction.[72] However, if either party requests a jury, as is their guaranteed right under Utah’s Constitution, the lawsuit must be transferred to a District Court that has venue.[73]
Finally, due to the nature of the cases before this court, a prospective judge’s prior experience will likely be a significant factor for the judicial nominating commission. The Business and Chancery Court’s first judge, appointed by Governor Spencer Cox on July 26, 2024, is Judge Rita M. Cornish. Judge Cornish had been a Utah District Court Judge since January 2021. Prior to her appointment, Judge Cornish was a partner at the law firm of Parr Brown Gee & Loveless where she maintained a complex-civil litigation practice, including ADR, trial, and appellate work, focusing on construction litigation and control disputes, and breaches of fiduciary duties by officers, directors, or managers in closely-held business entities. Judge Cornish brings years of commercial litigation experience that the Business and Chancery Court needs to live up to its goals of predictability, consistency, and efficiency.
The Utah Business and Chancery Court is an innovative addition to the state’s legal system, created to address the growing demand for specialized business dispute resolution. By focusing on efficiency, predictability, and expertise, the Business and Chancery Court will hopefully streamline the litigation process and help bolster Utah’s status as a competitive hub for businesses.
No 2024 Opinions. Opening its doors in October of 2024, the Business and Chancery Court did not publish opinions in 2024.
§ 10.2.2.12. Wisconsin Commercial Docket Pilot Project
Termination of the Commercial Docket Pilot Project. In 2024, the Wisconsin Supreme Court voted 4–3 to terminate Wisconsin’s Commercial Docket Pilot Project, which began in 2017. Twenty-six Wisconsin counties participated in the program during its 5-year run: Waukesha, Dane, Racine, Kenosha, Walworth, Brown, Door, Kewaunee, Marinette, Oconto, Outagamie, Waupaca, Ashland, Barron, Bayfield, Burnett, Chippewa, Douglas, Dunn, Eau Claire, Iron, Polk, Rusk, St. Croix, Sawyer, and Washburn.
The Project was originally approved in 2017 for a three-year term and was extended in 2022 for an additional two years, with an end date of July 30, 2024. On May 30, 2024, the Business Court Advisory Committee filed a petition seeking to extend the Project until July 1, 2026. The Supreme Court voted to solicit public comments regarding the Committee’s petition and temporarily extended the Project while disposition of the petition was pending. Those comments were considered at a public hearing on September 24, 2024. Following that hearing, the Court met in an open administrative conference where they voted to deny the petition and terminate the Project. On October 7, 2024, the Court ordered that no additional cases shall be assigned to the commercial court docket, but cases already assigned to the commercial court docket shall continue under the existing interim rules pending further order of the Court. Chief Justice Annette Kingsland Ziegler, Justice Rebecca Grassl Bradley, and Justice Brian Hagedorn dissented. The Court has not since issued any orders regarding dissolution of the Project.
No 2024 Opinions. The Wisconsin Commercial Docket did not publish any written decisions in 2024.
§ 10.2.2.13. Wyoming Chancery Court
The Wyoming Chancery Court is now fully operational with selection of its first full-time judge in November of 2024. Judge Benjamin Burningham (co-editor of this publication) was sworn in on January 2, 2025, and has now assumed all chancery cases from Judges Steven Sharpe and Richard Lavery, district court judges who oversaw chancery cases on a part-time basis. Before his appointment, Judge Burningham served as Chief Legal Officer of the Wyoming Judicial Branch and Director of the Wyoming Chancery Court, where he played a key role in establishing the court. His legal career has focused on complex civil litigation, including pharmaceuticals, securities, multidistrict litigation, antitrust, and transactional matters. He previously led the Consumer Protection and Antitrust Unit at the Wyoming Attorney General’s Office and worked on securities litigation at the Washington, D.C., firm Kellogg Hansen. Judge Burningham earned his law degree with honors from George Washington University, where he served as managing editor of The George Washington International Law Review.
Even before having a full-time judge, Wyoming Chancery Court’s growth remained steady last year, with 15 cases in 2022, 31 cases in 2023, and 47 cases in 2024. The court also met its goal of resolving disputes quickly: last year’s average time to disposition was 148 days from filing.
The court’s procedural rules received two significant updates in 2024. First, the starting point for the court’s case-resolution target—found in Wyo. Stat. § 5–13–104 and W.R.C.P.Ch.C. 1—was moved to exclude the sometimes-lengthy delays caused by service of process. The court now aims for case resolution within 150 days after a case’s scheduling order (issued 14 days after any defendant appears) rather than 150 days from a case’s filing. Second, W.R.C.P.Ch.C. 3(a), which allows any defending party to object to proceeding in chancery court, was amended to change a defending party’s objection deadline from “the date its first pleading is due” to “the date its first responsive pleading or motion to dismiss is due[.]” This change sought to avoid gamesmanship of defendants testing the waters with a motion to dismiss—thereby delaying their responsive pleading’s due date—only to later object under Rule 3(a) if dissatisfied with the 12(b) order. The update also clarified that only named parties may object.
§ 10.3. 2024 Cases
§ 10.3.1. Delaware Superior Court Complex Commercial Litigation Division
Pazos v. AdaptHealth, LLC[74] (Granting motion to dismiss petition alleging independent accountant committed manifest errors).This case involves a purchase agreement which included certain post-closing purchase price adjustment calculations. The purchase agreement also contained a provision allowing the parties to dispute such calculations and a dispute resolution mechanism providing that an independent accountant’s determination would be final and binding upon the parties absent manifest error. The buyer alleged that the independent accountant committed such manifest errors. After ordering limited discovery to be completed, the Court held that the independent accountant committed no manifest errors because it weighed various documents, conducted an analysis using its subject expertise, and reached a conclusion about the parties’ intended inclusion.
The Court first concluded that the dispute resolution mechanism in the purchase agreement was an “expert determination” provision, rather than an arbitration provision subject to the Federal Arbitration Act, because the independent accountant’s authority was limited in scope to solely resolving cost adjustment disputes. Because this purchase agreement contained an expert determination provision, the Court applied Delaware rules of contract interpretation and the purchase agreement’s terms to decide whether the independent accountant committed a manifest error. The Court held that an expert commits manifest error only “if it made a plain and obvious error, and the record demonstrates strong reliance on that error.” Without such manifest error, the Court will not “overstep its bounds” to insert its own judgment or analysis. Accordingly, the Court granted the respondent’s motion to dismiss.
Huntsman Int’l, LLC v. Dow Benelux, N.V.[75] (Granting motion for sanctions for spoliation of ESI).This matter arises out of a purchase agreement between the parties in which the plaintiffs acquired certain assets of the defendants, which led to the parties entering into a supply agreement. In connection with the supply agreement, there was a dispute over invoices submitted by the defendants to the plaintiffs. The defendants filed a counterclaim alleging that the plaintiffs failed to forecast product in good faith which tied up the defendants’ product and prevented the defendants from finding alternative buyers for the product. The plaintiffs used a variety of databases to generate such forecasts.
Through the discovery process, the defendants learned that the plaintiffs had failed to preserve documents from the forecasting databases which were central to the defendants’ counterclaim and should have been preserved. The Court found that the plaintiffs had acted recklessly in failing to preserve the ESI and granted the motion for sanctions for spoliation. In particular, the Court found that the plaintiffs failed to take reasonable steps to preserve the ESI such as issuing a litigation hold to preserve relevant documents once it reasonably anticipated litigation and disallowing the automatic deletion of data. The Court further found that the plaintiffs failed to disclose timely their failure to preserve the information to both the defendants and to the Court. Accordingly, the Court awarded defendants an adverse inference as to the lost information, limited the plaintiffs’ ability to rely on certain documents, and awarded the defendants attorneys’ fees.
Matrix Parent, Inc. v. Audax Mgmt. Co., LLC[76] (Fraud claims pursuant to a stock purchase agreement survived a motion to dismiss). In Matrix Parent Inc., in connection with a stock purchase agreement, the plaintiff alleged that it overpaid hundreds of millions of dollars for the defendant and connected entities due to the defendant’s fraudulent scheme to overstate its growth of new bookings and revenue, i.e., cook its books. Under the stock purchase agreement, the defendant expressly represented that its books were accurate and complete. The parties’ stock purchase agreement only permitted claims of knowing fraud as opposed to reckless fraud, a limitation permissible under Delaware law.
The Court found that the plaintiffs raised a reasonable inference that the defendants knew of the fraud. For pleading purposes, the Court applied the “position to know” standard—if a defendant was in a position to know a knowable fact, then it is reasonably conceivable that the defendant did know that fact. The Court held that the fraud claims survived the pleading stage but noted that the defendants may be able to demonstrate the truth of the representations outside of the pleading stage’s imbalanced standards. Notably, the Court held that “the terms of a fraudulently procured contract cannot exempt from liability entities that were knowingly complicit in the fraud, including entities that aided, abetted, or conspired to commit such fraud.” Here, the Court found that there was also sufficient circumstantial evidence to infer that the defendants conspired to perpetrate a fraud, and, therefore, the claims of secondary fraud also survived the pleading stage.
§ 10.3.2. Florida’s Complex Business Litigation Courts
Gencor Industries, Inc. v. Kiel Stead (Notwithstanding the statutory presumption of irreparable harm attendant to violation of a valid restrictive covenant, a defendant may successfully rebut the presumption and avoid a temporary injunction by the presentation of evidence demonstrating that damages have yet to accrue).[77] Notwithstanding the existence of a valid agreement not to compete, within months of his separation from Plaintiff Gencor Industries, Inc. (“Gencor”), Defendant Kiel Stead (“Stead”) began working for a Gencor competitor in violation of the agreement. At the hearing on Gencor’s motion for temporary injunction, the Court heard evidence which established that Gencor was as yet unaware of any damages it had suffered, such as lost contracts or unauthorized use of Gencor’s confidential information, in connection with Stead’s breach of the agreement. In light of the evidence received, the Court found that Stead had successfully rebutted the statutory presumption of irreparable harm for violation of a non-compete created by Section 542.335(1)(j), Florida Statutes. On that basis, the Court held that Gencor had failed to establish the substantial likelihood of success required for injunctive relief, despite Stead’s undisputed and ongoing employment by a direct competitor.
§ 10.3.3. State-wide Business Court in Georgia
Ashgrove Holdings, LLC v. North Perimeter Contractors, LLC[78](Permanent injunction and stay of arbitration proceedings).The dispute giving rise to this case involved a reconstruction project for I-285 and SR 400 in Georgia. Various agreements were executed in connection with that project. As relevant, the Defendant—North Perimeter Contractors (NPC)—contracted to become the design-build-finance contractor on the project. NPC, in turn, contracted with a non-party, Potere Construction, for Potere to supply and build embankment and panel walls, among other things. Potere then entered into a Purchase Order Agreement with another non-party, Inventure, to facilitate its role. But Inventure entrusted its responsibilities to yet another non-party (a subsidiary of Plaintiff Ashgrove Holdings) who allegedly failed to perform adequately, causing significant delays, upward of 28 months, to the project. Potere then assigned its claims under the Purchase Order to NPC. In the meantime, Ashgrove bought all of the equity interest in Inventure. And after learning of that transaction, NPC sought to join Ashgrove to an arbitration it initiated for breach of the Purchase Order Agreement. The Purchase Order Agreement and the original contract for the project that NPC executed each contained arbitration provisions. But Ashgrove contended it was not bound by either. According to Ashgrove, it never entered into any arbitration agreement with NPC; did not “merge” with Inventure but, rather, purchased the equity interests of that company from its prior owners; and as a mere parent company could not be made to arbitrate with NPC based on NPC’s dealings with Ashgrove’s subsidiaries. Ashgrove thus sued NPC in the State-wide Business Court to enjoin and permanently stay the arbitration proceedings.
The court granted that relief. The court started by noting that questions of arbitrability—whether an agreement exists that requires the parties to arbitrate in the first instance—are “undeniably” for the judiciary to resolve. And Georgia’s Arbitration Code allows the courts to stay an arbitration where no valid agreement to arbitrate was made. That was the case as between NPC and Ashgrove, the court determined. Ashgrove was not a named party on either contract with an arbitration provision. Nor could Ashgrove be bound to the Purchase Order under theories of successor liability. Successor liability requires (1) an agreement to assume liabilities; (2) that the transaction was, in fact, a merger; (3) a fraudulent attempt to avoid liabilities; or (4) establishing that the successor is a mere continuation of the predecessor company. The court explained that Ashgrove’s mere acquisition of Inventure did not support successor liability, as it was not a merger, did not entail an assumption of liabilities, did not constitute a fraudulent attempt to avoid liabilities, and did not result in Ashgrove being the “mere continuation” of Inventure because the companies remained separate with no overlapping ownership (which the mere-continuation doctrine requires). Finally, the court declined NPC’s request to apply equitable estoppel to bind Ashgrove to the Purchase Order. The court explained that cases employing estoppel in that way all note clear involvement between the signatory and non-signatory at the time of contracting, which was absent in this case, since Ashgrove had not even acquired Inventure when the Purchase Order was created.
Steuer, M.D. v. Tomaras, M.D.[79] (Discoverability of audio recording involving counsel). This action centers around a neurosurgery practice made up of several LLCs, collectively called Polaris. Dr. Steuer acquired a majority stake in Polaris from Dr. Tomaras, then terminated its other member, Dr. Walkup. The operating agreements then required Polaris to buy back Dr. Walkup’s ownership interests at “Fair Market Value.” Polaris engaged a financial consultant to determine the Fair Market Value of Dr. Walkup’s interests according to a contractual framework. As part of that process, the financial consultant had a 46-minute telephone conversation with Dr. Steuer in which Dr. Steuer’s family members and two lawyers who represented Polaris also participated. The conversation was recorded, and the existence of that recording was disclosed in discovery. Defendants sought its production. Dr. Steuer moved for a protective order, invoking attorney-client privilege and the work-product doctrine. The impasse kicked off the court’s discovery-dispute procedure under Business Court Rule 7-5, after which the court entered its ruling.
The court granted in part and denied in part the motion for protective order. First, the court found that, even if portions of the recording did contain attorney-client privileged communications, the presence of a third-party—Dr. Steuer’s son—waived the privilege. No evidence showed that Dr. Steuer’s son was employed by, or an agent of, Polaris. Indeed, Dr. Steuer himself previously downplayed his son’s role to avoid him being deposed. And without facts to demonstrate why the son’s presence was critical to rendering legal services on the call, the general rule in Georgia is that disclosure of otherwise privileged matters to family members vitiates the privilege. Second, the court turned to the work-product doctrine. It held that most of the recording did not qualify as work product because it was not in response to, or in anticipation of, litigation. Rather, the financial consultant was retained in the regular course of Polaris’ business to calculate the Fair Market Value of Dr. Walkup’s ownership interest for Polaris to repurchase that interest as required under the operating agreements. Such comments were therefore discoverable. But the final 18 minutes of the call were different. The court noted an “inflection point” then, where the conversation shifted from fact-gathering for valuation purposes to focus on potential challenges to the forthcoming valuations and litigation strategy. Because that part of the recording involved mental impressions of Polaris’ counsel, it was subject to “absolute protection” from disclosure, the court held.
Cook v. Cool Air Mechanical, LLC[80] (Denial of petition to transfer to the State-wide Business Court absent consent). O.C.G.A. § 15-5A-4(a)(3) governs the process for transferring existing cases to the Georgia State-wide Business Court. It also requires both parties to consent to transfer, significantly restricting the court’s ability to hear cases. In 2020, the court, itself, interpreted Section 15-5A-4(a)(3). It held that if one party objects to a petition to transfer within 30 days, then the Court does not have authority to compel the transfer and must instead deny the petition even though jurisdiction is satisfied and the court otherwise finds a transfer would be appropriate and would advance the parties’ interests. See Sheffield v. Deloitte & Touche LLP, No. 20-GSBC-0005, 2020 WL 8918290 (Ga. Bus. Ct. Nov. 09, 2020).
That was the case here. Defendant petitioned for transfer from the State Court of Gwinnett County to the Georgia State-wide Business Court. But Plaintiff timely objected. As a result, the court denied the petition. Since an objection to transfer controls under Section 15-5A-4(a)(3), the action needed to proceed in Gwinnett County.
§ 10.3.4. Indiana Commercial Court
Safron Capital Corporation, The General Retirement System of the City of Detroit v. Goldman Sachs & Co. LLC, Elanco Animal Health Corporation, Citigroup Global Markets Inc. et al.[81](Granting motion to dismiss claims for violations of the Securities Act of 1933). The Court granted Defendants’ Motion to Dismiss Plaintiffs’ Second Amended Complaint for alleged violations of the Securities Act of 1933 (“Securities Act”) regarding statements made by Defendants prior to a public offering.
In 2019, Defendant Elanco acquired Bayer’s animal health business to expand its own Companion Animal Segment business. Defendant Elanco intended to use the net proceedings from an upcoming public offering (“Offering”) to finance the acquisition. As part of the Offering, Elanco provided prospectuses and registration statements (“Offering Documents”) containing information regarding the upcoming Bayer acquisition. The Offering Documents also discussed Elanco’s business practices, including relationships with third-party wholesale distributors, but they did not mention that Elanco shifted the distribution of its Companion Animal Segment products to fewer overall distributors. Following the Offering, Elanco experienced a 9% decline in quarterly revenue for its Companion Animal Segment. Elanco’s common stock would also fall throughout the early part of 2020.
Plaintiffs filed suit in the Indiana Commercial Court after initially filing in federal court based on the statements made in the documents associated with the Offering, including Elanco’s discussion of its distributorship relationships and inventory. Defendants moved to dismiss the action. Indiana is a notice pleading state. To succeed on a motion to dismiss under Indiana Trial Rule 12(B)(6), the moving party must establish that the complaint states a set of facts that, even if true, would not support the relief requested. Pursuant to 15 U.S.C. § 77k(a) and 77(a)(2), a defendant violates the Securities Act of 1933 (“Securities Act”) if a disclosure “contain[s] an untrue statement of material fact or omit[s] to state a material fact . . . necessary to make the statements therein not misleading.” The Court held that none of the assertions in the Offering Documents could possibly violate the Securities Act even under Indiana’s notice pleading standard. The Court found that the reduction of the number of distributors could not have been materially misleading to Plaintiffs for the purposes of the Securities Act because, among other reasons, Elanco never stated that the number or scale of its distributors was an essential driver of its business. Similarly, the Court also found that Defendants had satisfied the safe harbor[82] requirements for forward-looking statements under the Securities Act by including cautionary language regarding inventory fluctuations in the Offering Documents. The Court also determined that Plaintiffs failed to plead any factual allegations suggesting that the Defendants knowingly made any false or misleading statements in the Offering Documents. This matter is currently up on appeal.[83]
Reginald A. Bush, II v. The National Collegiate Athletic Association[84] 49D01-2308-CT-033106 (Denying motion to dismiss claim for defamation). In August 2023, former college football player Reginald Bush II (“Bush”) filed a defamation claim against the National Collegiate Athletic Association (“NCAA”) arising from statements made by an NCAA spokesperson implying that Bush had engaged in a “pay-for-play” arrangement while at the University of Southern California (“USC”). Bush filed suit against the NCAA in the Indiana Commercial Court. The NCAA filed a motion to dismiss, which was denied.
Bush starred at the University of Southern California (“USC”) from 2003 to 2005, winning the 2005 Heisman Trophy award given to the top player in college football before embarking on careers in the National Football League and as a football analyst. From 2006 to 2010, the NCAA investigated Bush’s time at USC and determined that he had, among other violations, been given impermissible benefits by an outside entity. The NCAA, however, did not find that Bush had been paid directly for participation in athletics at USC. As a result of the findings, USC’s football program suffered sanctions, and Bush was forced to relinquish his Heisman Trophy. Bush attempted to challenge the findings, but the NCAA did not reopen the matter on technical grounds.
Eleven years later, the United States Supreme Court in NCAA v. Alston[85] held that the NCAA could not limit student-athletes from receiving education-related benefits. Following the Alston decision, the NCAA issued a name, image, and likeness (“NIL”) policy to guide student-athletes and universities in the post-Alston landscape. Under this new policy, student-athletes could receive payments based on licensing their name and image but still could not receive compensation directly in exchange for playing for a university, otherwise known as a “pay-for-play” scheme.
Following Alston and the NCAA’s new NIL policy guidance, there were calls to revisit sanctions issued to players prior to the Alston ruling, including those issued to Bush that resulted in his forfeiture of the 2005 Heisman Trophy. In July 2021, a reporter from ESPN asked the NCAA’s associate director of communications if the NCAA would reconsider its sanctions against Bush. In response, an NCAA spokesperson issued a statement that the NCAA would not revisit sanctions for conduct that is still precluded, such as pay-for-play arrangements. The statement did not refer to Bush specifically. The statement was then published through several media outlets.
Bush filed a defamation claim against the NCAA, alleging that the NCAA falsely implied that Bush had engaged in a pay-for-play arrangement while at USC. In response, the NCAA argued that the statement could not be defamatory because the statement did not directly mention Bush and Bush had not otherwise pleaded the necessary facts to establish a defamation claim. The Court rejected the NCAA’s arguments and determined that Bush had adequately pleaded claims for defamation per se and per quad under Indiana’s notice pleading standard. The Court held that the NCAA could not avoid the defamation claim by not specially referring to Bush in their statement because the statement was issued in direct response to a question about Bush. The Court also found that Bush had pleaded the necessary malice element because the NCAA issued the statement after having already completed an investigation where Bush was not found to have engaged in a pay-for-play arrangement. The Court credited Bush’s allegations that he lost endorsement deals and broadcasting contracts to satisfy the damages element. Litigation is ongoing, and trial is set for 2026.
Yonggang Li v. Longview Capital SCH LLC, Longview Capital SVH GP. LLC, South Bend Homes LLC et al.[86](Order granting in part and denying in part motion to dismiss for lack of jurisdiction). The Indiana Commercial Court in St. Joseph County addressed a motion to dismiss involving a loan dispute between an international business investor and multiple Washington limited liability companies (collectively, “Longview”).
Plaintiff Yonggang Li (“Li”) loaned a substantial sum of money to Longview as a short-term cash infusion, expecting repayment within months pursuant to the terms of a loan agreement (the “Loan”). Li and Longview amended the loan agreement multiple times to allow Longview additional time to repay the Loan, and in exchange, Li received increasingly higher interest rates on the outstanding Loan amounts. The parties subsequently entered into a Final Settlement Agreement (the “Agreement”) whereby Longview agreed not to sell or dispose of any of its assets until the Loan was repaid in full. The Agreement included a forum selection clause that allowed disputes to be resolved in “any court of competent jurisdiction.” Longview’s principal owner, Lu, thereafter began dissipating Longview’s assets. Li initiated proceedings in Singapore and Hong Kong, and two months later commenced this action, naming Longview and South Bend Homes, LLC (“SBH”), an alter ego of Longview, as Defendants.
Defendants moved to dismiss the case for lack of personal jurisdiction, forum non conveniens, international comity, and pursuant to the Federal Arbitration Act. The Court rejected each of these arguments in turn.
First, with respect to personal jurisdiction, the Court determined that Indiana had general personal jurisdiction over Defendants through SBH, which maintained a continuous presence in Indiana through its real property holdings. Since SBH was an alter ego of Longview, the Court attributed SBH’s continuous contact with the State of Indiana to Longview as well. The Court also rejected Defendants’ forum non conveniens argument, determining that the Agreement permitted initiating an action in the Indiana Commercial Court because it was “a court of competent jurisdiction” and a convenient forum for the parties. The Court similarly held that international comity did not necessitate dismissal because the subject matters of the Hong Kong and Singapore cases were sufficiently distinct that the parties would not be subject to inconsistent judgments.
Finally, the Court rejected Defendants’ Federal Arbitration Act argument because the Agreement did not include an arbitration provision and instead allowed the parties to address the dispute in any court of competent jurisdiction. Notwithstanding the foregoing, the Court dismissed Li’s claim for fraudulent transfer on grounds that Li failed to adequately plead the claim under Ind. Trial Rule 12(B)(6), but it did so without prejudice to filing an amended complaint that addressed the pleading deficiency.
S&H Leasing LLC, K&K Real Estate Holdings LLC, Thomas Hagen et al. v. Keith D. Harper[87] (Order assessing liability for breach of fiduciary duty, indemnity, and Indiana Crime Victims Relief Act). In a forty-three-page decision, the Indiana Commercial Court in Elkhart County issued an order regarding claims for breach of fiduciary duty between members of closely held businesses following a substantial breakdown in their business relationships.
The underlying dispute arose when three members—Brian Brisco (“Brisco”), Thomas Hagen (“Hagen”), and Jeremy Noetzel (“Noetzel”) —of two interrelated, closely held businesses—S&H Leasing LLC and K&K Real Estate Holdings LLC (“Entity Plaintiffs”)—attempted to remove the fourth member—Keith Harper (“Harper”)—after Harper’s conduct had a materially negative impact of the operation of the businesses. Initially, Harper was the only owner and member of Entity Plaintiffs. In 2015, Harper invited Hagen and Brisco to become owners and members, issuing them nominal shares during a holiday party. Throughout 2016, Hagen, Brisco, and Harper discussed Hagen and Brisco purchasing additional ownership interests in the Entity Plaintiffs. In 2017, Hagen, Brisco, and Harper signed closing documents for such purchase, including new Operating Agreements with provisions favoring Harper. Harper was paid $20,000 per month for his services as manager of Entity Plaintiffs (the “Management Fee”), and he had a veto power over any action by Hagen and Brisco.
In 2019, Harper became less involved in the day-to-day affairs of the businesses. As a result, Hagen and Brisco proposed an amendment to the Operating Agreements to provide that both Harper and Hagen would serve as managers. However, Harper asked that (1) the Operating Agreement never be amended without his consent and (2) the Management Fee not be eliminated, even if Harper ceased to perform managerial services. Ultimately, the proposed amendment was not executed.
In 2020, Noetzel began working part-time for the Entity Plaintiffs and became interested in purchasing an ownership interest in the same after Harper stated his intention to retire and sell his shares. The members thereafter entered into a purchase agreement for Noetzel to purchase a 10% ownership interest in the Entity Plaintiffs from Harper, leaving Harper with a 24% ownership interest. When Harper caused one of the Entity Plaintiffs to engage in conduct that resulted in a criminal indictment, Brisco, Hagen, and Noetzel moved to terminate Harper’s employment with the Entity Plaintiffs and demanded that Harper sell his ownership interest pursuant to the terms of the Operating Agreements. Harper refused to sell, citing an oral agreement among the members not to amend the Operating Agreements without Harper’s consent. Brisco, Harper, and Noetzel then filed suit against Harper, personally and derivatively, for breach of fiduciary duty and violations of Indiana’s Crime Victim Relief Act. Harper counterclaimed for breach of fiduciary duty related to the termination of the Management Fee.
The ultimately Court held in favor of Brisco, Hagen, and Noetzel, determining that Harper repeatedly breached his fiduciary duties to the other members, particularly in connection with Harper’s sale of an ownership interest to Brisco and Hagen in 2017, as well as Harper’s subsequent use of company funds to satisfy personal debts while he was manager. The Court also held that Harper’s use of company funds for personal expenses violated the Indiana Crime Victim Relief Act and ordered Harper to pay treble damages on the amount misappropriated. The Court dismissed Harper’s counterclaims.
Ulysses Asset Sub II, LLC v. Logan Square, LLC and John Dugan[88] (Order granting in part and denying in part Plaintiff’s motion for summary judgment). The Indiana Commercial Court in Marion County addressed a summary judgment motion on an easement dispute. Indiana consciously employs a summary judgment standard that is more difficult to meet than the federal standard, allowing more marginal claims and defenses to create a genuine issue of material fact and allow the claims to proceed toward trial.[89]
Ulysses Asset Sub II, LLC (“Ulysses”) had an easement over portions of a building owned by Logan Square, LLC (“Logan Square”), including the roof. Pursuant to their agreement (the “Agreement”), (1) Ulysses’s telecommunications provider could access the roof of Logan Square’s building to service equipment and (2) Logan Square was obligated to maintain the property in a manner that would permit such access. Following a structural analysis, Logan Square’s roof was deemed unsafe and Ulysses’s telecommunications provider was unable to access the roof and equipment.
Ulysses sued Logan Square and its owner, alleging claims for constructive eviction, breach of the duty to maintain the property, and breach of the covenant of quiet enjoyment. Logan Square counterclaimed, arguing that Ulysses was in breach of its obligations to Logan Square under the Agreement. Ulysses moved for summary judgment on all claims and counterclaims. As evidence in opposition to the motion, Logan Square designated the Agreement, an engineering report completed prior to the one which declared Logan Square’s roof unsafe, an invoice documenting prior roof repairs, and a photograph of Ulysses’s equipment.
The Court rejected Ulysses’s claims for constructive eviction and breach of covenant of quiet enjoyment because Ulysses failed to cite any Indiana case law recognizing that an easement holder could bring such claims. However, the Court granted summary judgment on Ulysses’s claim for breach of the Agreement, determining that Logan Square failed to designate any evidence to create even a reasonable dispute over whether Logan Square had maintained the roof according to its contractual obligations. The Court also sided with Ulysses on Logan Square’s counterclaims, dismissing those claims as a matter of law.
§ 10.3.5. Iowa Business Specialty Court
Cornlan Farm, Inc. v. Gannon[90] (Buyback of corporate shares from estate). This case concerns whether a corporation was entitled to buy back the shares owned by the Estate of Michael J. Gannon (“Michael’s Estate”), following Michael J. Gannon’s (“Michael”) death.
Cornlan Farm, Inc. (“Cornlan”) was formed in 2014 for the purpose of holding land owned by siblings. Cornlan’s bylaws (the “Bylaws”) included a buy/sell provision that required a deceased shareholder’s shares to be first offered to Cornlan for purchase, and if Cornlan did not purchase such shares, then to the other shareholders, with such shares being purchased for “book value” (the “Buy/Sell Provision”). The Bylaws required Cornlan’s officers and directors to maintain balance sheets “in accordance with generally accepted accounting procedures” (“GAAP”).
Prior to Michael’s death in 2022, the siblings’ relationships had grown contentious. One of the key issues among the siblings was the Buy/Sell Provision. Some the siblings were concerned that the Buy/Sell Provision would disadvantage whoever died earliest by allowing Cornlan to purchase their shares at an unreasonably low price. The siblings generally agreed that the Buy/Sell Provision should be modified and exchanged several oral and written proposals for an amendment. However, the siblings never formally modified the Buy/Sell Provision.
Following Michael’s death, Cornlan sent a letter to Michael’s Estate exercising its option to purchase Michael’s shares for “book value,” with book value calculated using tax basis. Michael’s Estate rejected the offer. Cornlan and two of its shareholders sued Michael’s Estate seeking: (1) a declaratory judgment that Cornlan or the shareholders were entitled to purchase Michael’s shares for book value; and (2) specific performance requiring Michael’s Estate to sell the shares at the price Cornlan offered. =
Following a non-jury trial in March 2024, the Iowa Specialty Court (“Business Court”) issued findings of fact, conclusions of law, and judgment. The Business Court concluded that (1) the original Bylaws were valid and enforceable and (2) Cornlan and/or the shareholders were entitled to purchase Michael’s shares for book value. The Business Court declined, however, to grant specific performance because the Bylaws required the book value of the shares to be determined according to GAAP, not tax basis. Since a proper GAAP calculation had not occurred, the Business Court could not calculate the book value of Michael’s shares.
Clinton Cnty. v. City of Clinton[91](Contract dispute). This case involved a dispute between the City of Clinton (the “City”) and Clinton County (the “County”) regarding a Joint 28E Agreement (the “28E Agreement”).
In 2009, the City sought to develop a railport industrial park known as the “Lincolnway Railport Project.” The County agreed to contribute $6 million to be used solely for the purposes designated in an Urban Renewal Plan. The 28E Agreement provided that the City would repay the County’s contribution by selling property in the industrial park, with one-half of the proceeds from each property sold being “paid to the County,” and the remaining one-half being paid to the City. According to the 28E Agreement, if the County was not fully reimbursed within ten years from the date of the 28E Agreement, then the City “shall reimburse the County for any unpaid monies advanced by the County for this project.” The County subsequently paid the $6 million to the City in a series of installment payments between August 2010 to December 2011. While the City repaid the County $787,842.15, by the time ten years had passed, the Lincolnway Railport Project remained incomplete. The County sued for breach of contract and unjust enrichment, seeking reimbursement of all amounts paid under the 28E Agreement.
The parties filed cross-motions for summary judgment, with the County arguing that the City breached the 28E Agreement and that there were no genuine issues of material fact remaining. The City argued that (1) there was no breach of the 28E Agreement, and that even if there were a breach, the County failed to prove damages, (2) the 28E Agreement was unenforceable due to mutual mistake, and (3) the County’s unjust enrichment claim fails as a matter of law.
The Business Court granted summary judgment in favor of the County. The Business Court disposed of the City’s argument that it did not breach the 28E Agreement because the County’s contribution was a gift, holding that the plain language of the 28E Agreement demonstrated that the County did not intend to gift funds to the City. The City next argued that the term “reimbursement” was ambiguous and that the County was reimbursed because it issued general obligation bonds to obtain the funds for its $6 million contribution and collected significant property taxes in connection with the Urban Renewal Plan. The Business Court rejected this argument as well, holding that the 28E Agreement unambiguously stated that the County’s contribution “shall be repaid from the sale of property” in the industrial park and that the City would reimburse any additional unpaid monies advanced by the County within ten years. Lastly, the Business Court rejected the County’s argument that it was entitled to collect interest paid on the $6 million general obligation bonds it issued to make its contribution under the 28E Agreement. The Court ordered the City to pay $5,212,157.85 ($6,000,000.00 less the City’s $787,842.15 payment), plus recoverable court costs and interest at a 7.16% rate, to the County.
§ 10.3.6. Maine Business and Consumer Docket
In re Mount Desert Island Hospital Data Security Incident Litigation[92] (Data privacy).Data privacy is an area of growing legal importance, and concern, across the country. From April 28, 2023, through May 7, 2023, “cyberthieves” accessed Mount Desert Island Hospital’s (“MDIH”) network. MDIH became aware of the suspicious activity several weeks later and notified Plaintiffs of the data breach. The notice stated:
we determined that your information may be affected by this incident. The types of information may include your name and the following: address, date of birth, driver’s license/state identification number, Social Security number, financial account information, medical record number, Medicare or Medicaid identification number, mental or physical treatment/condition information, diagnosis code/information, date of service, admission/discharge date, prescription information, billing/claims information, personal representative or guardian name, and health insurance.
In addition, MDIH provided Plaintiffs with identity theft monitoring services for twelve months.
Plaintiffs alleged that MDIH failed to properly protect and safeguard their private information. Plaintiffs’ claim that they suffered “imminent and impending injury arising from the substantially increased risk of fraud, identity theft, and misuse” resulting from Plaintiffs’ private information being placed within the hands of unauthorized third parties. In addition, Plaintiffs claimed that the breach caused them to spend a significant amount of time responding to the breach, including verifying the legitimacy of the notice and self-monitoring their accounts. Plaintiffs’ Complaint included allegations that the private information of certain named Plaintiffs was detected on the dark web and that unauthorized purchases had been made on the credit and debit cards of another Plaintiff soon after the breach. Plaintiffs brought claims for negligence, breach of contract, breach of implied contract, unjust enrichment, breach of fiduciary duty, and sought declaratory and injunctive relief.
The BCD ultimately dismissed all claims upon MDIH’s Motion to Dismiss. In doing so, BCD first highlighted that, “[i]n Maine, a legally cognizable, actual injury, is a necessary element of negligence and breach of contract claims.” In addition, the Court noted that, “as to Plaintiffs’ other claims, a complaint must allege facts sufficient to demonstrate that a plaintiff has been injured in a legally cognizable way.”
Prior to the instant matter, In re Hannaford Bros. Co. Customer Data Security Breach Litigation,[93] was the only clear articulation of the law in Maine regarding cognizable harm in the context of data breaches. In Hannaford, a similar data breach occurred and the plaintiffs could be easily split into two categories: (1) those who had never suffered a fraudulent charge as a result of the data breach; and (2) those who had experienced a fraudulent charge that had later been reversed. There, the Court determined that the expenditure of time and effort after a data breach, taken alone, did not constitute a recoverable harm, even when there has been actual misuse because the reversal of the fraudulent charges negated any physical harm or economic loss. Accordingly, even the plaintiffs that suffered a fraudulent charge could not recover.
In an attempt to avoid dismissal based on the holding in Hannaford, Plaintiffs did not allege facts addressing whether the fraudulent credit card charges were reversed. The BCD noted that it was not reasonable to infer that the credit card charges were unreimbursed because the contrary conclusion was just as likely, if not more probable. This approach is consistent with other courts in the country, including the D.C. Circuit Court of Appeals. The BCD further noted that in 2021, the United States Supreme Court determined that the mere risk of future harm is too speculative to support Article III standing—looking specifically at the risk of future harm of dissemination of misleading information to third parties.[94] The BCD noted that while Transunion was not a direct parallel with a data breach, the specter of a future, unspecified injury was similar.
Last, the BCD highlighted that the law in Hannaford differs from that of other jurisdictions, and that elsewhere the Complaint may have alleged a cognizable injury. However, because Hannaford is the law in Maine, the Complaint must be dismissed for failure to state a claim.
§ 10.3.7. Maryland Business and Technology Courts
Cook v. Cook[95] (Motion to disqualify counsel related to a business dispute between brothers and the family business due to conflicts of interest). In Cook, Plaintiff M. Robert Cook (“Plaintiff”) filed claims against his brother, Bruce S. Cook (“Bruce”), and derivative claims on behalf of Site Residential Management Inc. (“SRM”), a family business jointly owned by Plaintiff and Bruce. Shulman Rogers, P.A. (“Shulman”) jointly represented Bruce and SRM in the case. The Maryland Business and Technology Court (“MDBT”) considered Plaintiff’s motion to disqualify Shulman as the defendants’ joint counsel.
Plaintiff alleged that (1) Plaintiff and Bruce each owned 50% of the stock in SRM through stock in Site Management Inc. (“SMI”), (2) Plaintiff and Bruce were deadlocked on whether SRM should be wound up, and (3) Bruce breached his fiduciary duty owed to SRM by preventing Plaintiff from exercising his rights to co-manage SRM, instead allowing Bruce’s sons to run SRM as officers without Plaintiff’s consent. Plaintiff also alleged that Bruce acquiesced in a lawsuit filed by Bruce’s son, Josh Cook (“Cook”), for unpaid wages.
During the litigation, Plaintiff’s counsel sent two separate letters to Shulman claiming that Md. R. Attorneys, Rule 19-301.7 prohibited Shulman from representing SRM and Bruce without the informed consent of both stockholders of SRM and due to other potential conflict of interest. Bruce and SRM ignored those letters, and Shulman did not withdraw as joint counsel. Plaintiff then moved to disqualify Shulman from representing either Bruce or SRM in the suit. Shulman opposed the motion, arguing that (a) it was untimely and (b) lacked a basis in this case.
The MDBT held that Plaintiff did not waive his right to seek disqualification based on “timeliness” and that disqualification of Shulman was warranted on the merits because Shulman should never have sought to represent both SRM and Bruce due to the inherent conflicts of interest. The timeliness factors considered by the MDBT included: (a) when the movant learned of the conflict; (b) whether the movant was represented by counsel during any period of alleged delay; (c) why the alleged delay occurred; (d) whether the motion was brought for tactical reasons; and (e) whether disqualification would prejudice the nonmoving party.[96] The MDBT noted that there was no factual basis for denying Plaintiff’s claim, as counsel for Defendants admitted at oral argument that Plaintiff was a 50% beneficial owner of SRM. The MDBT emphasized that “the mere length of delay is not dispositive, and the court should not deny a motion to disqualify based on delay alone.” The MDBT then considered the merits of the motion under the Klupt standard,[97] which provided that: (i) the movant must identify a specific violation of the rules; (ii) the court must determine whether there has been an actual violation of the rules; and (iii) the court must exercise discretion in deciding whether to impose disqualification. The MDBT rejected Bruce’s argument that this was merely a sibling dispute and that there was no basis for a derivative claim on behalf of SRM, holding that the complaint alleged serious breaches of fiduciary duties, such as the improper facilitation by Bruce of Cook’s suit against SRM. In granting the motion to disqualify counsel, the MDBT pointed to both the precedent of Tydings[98] and the Maryland Corporate Law treatise, which states that, due to inherent conflicts of interest in stockholder derivative actions, “it is commonly accepted today that the corporation and individual defendants should be represented by separate counsel.”[99] The MDBT ruled that Shulman could not continue to represent Bruce if it was disqualified from representing SRM and rejected California case law permitting a disqualified law firm to continue representing individual defendants after joint representation was severed. The MDBT stated that allowing such a continuation would violate Rules 13-3017(a)(1) and 19-301.9(a) and overlook the conflict and ethical violations that led to disqualification in the first instance. The size of the corporation and the number of stockholders did not alter the ethical rules or modify an attorney’s ethical obligations. This decision reinforces the principle that ethical rules governing conflicts of interest in corporate representation take precedence, and it ensures that parties with conflicting interests, particularly in derivative actions, are represented by separate counsel in order to maintain fairness.
§ 10.3.8. Massachusetts Business Litigation Session
Baldwin, et al. v. Connor, et al.[100] (Appraisal rights and fiduciary duties in closely held corporations). This case addressed key issues concerning appraisal rights and fiduciary duties in closely held corporations, deciding a question of first impression under the Massachusetts Incorporation Statute, Mass. Gen. Laws c. 156D, and specifically its appraisal rights provision.
The Plaintiffs—members of the Baldwin family and minority shareholders in two closely held corporations, Polyvinyl Films, Inc. and Indusol, Inc. (the “Companies”)—brought claims against the Connor family, the majority shareholders, alleging that the Baldwins were unlawfully frozen out of the Companies. The Baldwins sought declaratory relief regarding the effect of certain actual or potential amendments to the Companies’ articles of organization and bylaws on their statutory appraisal rights. Specifically, the Baldwins contended that the Connors’ 2019 votes to revise restrictions on the sale or transfer of shares were either invalid or, alternatively, imposed new restrictions on the transfer of shares that triggered the Baldwins’ statutory right to an appraisal and to sell their shares for their fair value. The Companies argued that the 2019 amendments were valid and did not trigger appraisal rights. The parties filed cross-motions for summary judgment on these issues.
The Court granted summary judgment in favor of the Baldwins, holding that the 2019 amendments to the articles of organization were valid and imposed new restrictions on the transfer of outstanding shares that were not present in the Companies’ original articles of organization or bylaws. As a result, the amendments automatically triggered the Baldwins’ statutory appraisal rights under Mass. Gen. Laws c. 156D, § 13.02. Parsing the statute, the Court determined that a shareholder’s right to appraisal is triggered if an amendment to a corporation’s articles or bylaws either (1) “adds restrictions” on a shareholder’s ability to transfer their shares or (2) “amends any pre-existing restrictions . . . in a manner which is materially adverse” to the shareholder’s ability to transfer their shares. Because the 2019 amendments imposed new restrictions, the Baldwins’ appraisal rights were triggered regardless of whether the new restrictions were materially adverse to their ability to transfer their shares. However, the Court also concluded that the new restrictions were materially adverse, further reinforcing the Baldwins’ entitlement to appraisal rights. The Court further held that, because the Companies are closely held corporations, the failure by the directors and majority shareholders to give the Baldwins notice of, and allow them to exercise, their rights of appraisal was a clear violation of the fiduciary duty owed to the minority shareholders under Donahuev. Rodd Electrotype Co. of New England, Inc.[101]
Following the Court’s ruling on summary judgment, the Connors moved for reconsideration, arguing they relied on legal counsel in connection with the amendments and should not be held personally liable for failing to notify the Baldwins. The Court denied the motion for reconsideration, emphasizing that the duty to notify minority shareholders of their appraisal rights is non-discretionary, imposed directly by statute, and cannot be excused on the basis of advice of counsel.
Schlumberger Technology Corporation v. ARE-MA Region No. 103, LLC et al.[102] (Group pleading in claims brought against a parent company and its subsidiary). This case reiterated the insufficiency of group pleading in claims brought against a parent company and its subsidiary. Schlumberger Technology Corporation (“Schlumberger”), asserted, in relevant part, claims for breach of contract and violation of Mass. Gen. Laws c. 93A, against ARE-MA Region No. 103, LLC (“Region No. 103”) arising from its alleged failure to pay $4.4 million in escrowed funds following the sale of a commercial condominium. Schlumberger also asserted a Chapter 93A claim against Region No. 103’s parent corporation, Alexandria Real Estate Equities, Inc. (“Alexandria”), despite making no specific factual allegations that Alexandria actively participated in the misconduct. Instead, the complaint referred to both defendants collectively as “ARE.”
Alexandria moved to dismiss the complaint, arguing that Schlumberger failed to plead sufficient facts specifically tying Alexandria to the alleged wrongdoing. Alexandria argued that Schlumberger’s “group pleading” approach failed to distinguish between the conduct of the parent and the subsidiary and did not meet the pleading standards required under Massachusetts law. The Court agreed, holding that such undifferentiated group pleading is insufficient to state a claim against a parent company, absent factual allegations establishing the parent’s direct involvement in the subsidiary’s alleged misconduct. The Court further emphasized that a parent-subsidiary relationship alone does not give rise to liability, and longstanding principles of corporate separateness protect parent companies from liability for the acts of their subsidiaries unless the parent is shown to have actively participated in or directed the wrongful conduct. Here, the complaint did not allege any facts showing that Alexandria had an “active role” in Region No. 103’s decision not to release the escrowed funds or any other alleged misconduct. Schlumberger’s speculative assertions that Region No. 103 was merely a “shell” for Alexandria were deemed conclusory and unsupported by factual allegations, and therefore failed to satisfy the pleading standard necessary to survive a motion to dismiss.
In granting Alexandria’s motion to dismiss, the Court provided Schlumberger leave to amend its complaint to clarify its factual allegations against Alexandria. Notably, the Court cautioned that when capable lawyers resort to group pleading, it often suggests a lack of adequate facts to implicate the less culpable parent company that they have grouped with its more culpable subsidiary, and that counsel may have named the parent for tactical reasons such as litigation leverage, increasing costs, expanding the scope of discovery, or increasing settlement pressure.
Cummings et al. v. Deloitte Tax LLP[103](Contractual damages cap). This case addresses the enforceability of a contractual damages cap in an engagement agreement between Deloitte Tax LLP (“Deloitte”) and its clients, William and Joyce Cummings. Plaintiffs alleged that Deloitte negligently provided tax consulting and preparation services in connection with a $77 million transaction involving the transfer of Mr. Cummings’ interests in a general partnership to their charitable foundation. According to Plaintiffs, Deloitte’s advice exposed them to significant federal tax liabilities, penalties, and interest following an IRS audit. Deloitte moved for partial summary judgment, seeking enforcement of the limitation of liability clause contained in its 2016 engagement agreement with Plaintiffs (the “Engagement Agreement”) and a declaration that Plaintiffs’ recovery be capped at $250,000, except to the extent the Court found that Plaintiffs’ damages resulted primarily from bad faith or intentional misconduct by Deloitte.
The Court granted Deloitte’s motion, holding that the limitation of liability provision “unambiguously applies” to cap Plaintiffs’ potential recovery. The Court reasoned that the contractual language—limiting damages for claims “relating to this engagement”—was broad enough to cover Plaintiffs’ claims, even if certain services arguably fell outside the four corners of the Engagement Agreement. The Court rejected Plaintiffs’ efforts to introduce extrinsic evidence (including negotiation history and correspondence) to narrow the provision’s scope, finding the contract language itself to be clear and unambiguous. However, the Court held that the limitation of liability provision was unenforceable insofar as it sought to limit Deloitte’s liability for gross negligence. In doing so, the Court reaffirmed the well-established principle under Massachusetts law that public policy prohibits contractual provisions from shielding parties from the consequences of their own gross negligence. Similarly, the Court held that the limitation of liability provision would not bar a Chapter 93A claim, to the extent that it was based on gross negligence or alleged knowing or intentional misconduct.
§ 10.3.9. Michigan Business Courts
Jerome Masakowski v. Kris Krstovski and K2-West Lansing Phase I, LLC[104] (LLC member oppression). Plaintiff Jerome Masakowski (“Plaintiff”) was a member of Defendant K2-West Lansing Phase I, LLC (“WL1”). WL1 was a 50% owner of K2-LIP JV West Lansing, LLC (“JV”). Defendant Kris Krstovski (“Krstovski”) was one of JV’s co-managers, acting as such on behalf of WL1. Plaintiff alleged that Krstovski (1) directed JV to sell a portion of the company’s property to a buyer for $1 million less than another verified offer and (2) improperly retained more than $600,000 that should have been distributed to Plaintiff based on the provisions of JV’s operating agreement. Plaintiff sued Defendants for member oppression.
Krstovski moved for summary disposition under Mich. Ct. R. 2.116(C)(8) (failure to state a claim). The Court held that Plaintiff failed to state a prima facie case for member oppression because Plaintiff’s complaint neither alleged that Krstovski was the manager or member in control of WL1 nor clarified Krstovski’s relationship to WL1. Krstovski argued, and the Court agreed, that the allegedly oppressive conduct related to JV, an “upstream entity,” and not WL1. While Mich. Comp. L. 450.4515 permits a member of a limited liability company to bring an oppression claim, Plaintiff was not a member of JV and therefore could not bring such a claim arising out of Krstovski’s conduct as JV’s manager.
Even if Plaintiff was able to state a claim for oppression and alleged that Krstovski was in control of WL1, the underlying claim—that Krstovski improperly retained $600,000—itself was tenuous at best. The Court concluded that Plaintiff’s allegation was unclear, pointing out two possible points of clarification: (1) if Plaintiff meant that Krstovski, as JV’s manager, retained funds that should have been distributed to JV’s members (including WL1), Plaintiff lacked standing because he was not a member of JV; and (2) if Plaintiff meant that funds flowed from JV to WL1 and Krstovski, as manager, failed to issue distributions to WL1’s members, then Plaintiff may have an actionable claim, but such allegations were not made. Ultimately, the Court granted summary disposition in Krstovski’s favor, dismissing the case in full.
Kidney Consultants of Michigan, PC v. Hilana Kaafarani, M.D., and Beta Medical Practice, PLLC[105] (Preliminary injunction; noncompete; nonsolicitation). In June 2019, Defendant Hilana Kaafarani, M.D. (“Defendant”) was hired as a nephrologist in Plaintiff Kidney Consultants of Michigan, PC’s (“Plaintiff”) medical practice and executed an employment agreement. The employment agreement had a two-year term and contained noncompete and nonsolicitation provisions. The noncompete provision prohibited Defendant from engaging in the same business as Plaintiff within a five-mile radius of Plaintiff’s office during employment and for two years after her termination. The provision also prohibited Defendant from working as a nephrologist at any hospital or patient facility where she worked while employed by Plaintiff. The nonsolicitation provision prohibited Defendant from contacting any of Plaintiff’s patients after termination. Two years later, Defendant became a shareholder of Plaintiff, and the pair executed a shareholders’ agreement.
Defendant resigned from her employment with Plaintiff effective December 31, 2023, and immediately began operating her own nephrology practice less than two miles from Plaintiff’s office. Defendant continued to see patients at the facilities where she practiced while employed by Plaintiff and contacted Plaintiff’s patients. Plaintiff filed suit and sought a preliminary injunction.
Defendant argued that Plaintiff was unlikely to succeed on the merits of Plaintiff’s claim for breach of the employment agreement because the shareholders’ agreement contained an integration clause that superseded the employment agreement. Although both agreements had provisions related to compensation and accounts receivable, the shareholders’ agreement did not contain any restrictive covenants. Thus, the Court determined that the integration clause could not reasonably be interpreted as an agreement to nullify the noncompete and nonsolicitation provisions contained in the employment agreement.
Turning to reasonableness of the restriction, the Court found the geographic scope of the noncompete reasonable because it was narrowly tailored and had limited application because the five-mile radius as measured from Plaintiff’s office. The facility-specific restrictions did not prohibit Defendant from providing services within five miles of those facilities. And regarding harm, Plaintiff’s president testified that it was difficult to calculate how much revenue Plaintiff lost from patients that left for Defendant’s new practice because appointments are scheduled so far in advance. This, and the president’s testimony that the purpose of the noncompete was to prevent Defendant from unfairly benefiting from Plaintiff’s goodwill, satisfied the Court that Plaintiff would suffer irreparable harm if the injunction was not issued.
Kenneth Spindler and William Stover v. NRL Holdings LLC, Brian Chouinard, Anthony Goff, and Adam Long[106] (Breach of contract; condition precedent; release). In 2019, the parties executed a promissory note in which Defendant William Stover (“Stover”)[107] promised to make advances to Plaintiff NRL Holdings LLC (“NRL Holdings”) of $1,000,000 (the “Note”). In 2020, the parties, including Defendant Kenneth Spindler (“Spindler”), entered into an agreement to share business opportunities for a licensed marijuana business (the “Agreement”). The Agreement prohibited the parties from participating in other marijuana businesses without first sharing the opportunity with the other parties. On March 6, 2021, the parties entered into a mutual release which terminated the Agreement. Plaintiffs alleged that in February 2021, Defendants formed a holding company with the intent to compete with NRL Holdings.
Plaintiffs alleged breach of contract claims, among others, wherein they contend that Stover refused to make advances under the Note and that Spindler breached the Agreement by engaging in prohibited activity before the mutual release was signed. Defendants moved for summary disposition of these claims pursuant to Mich. Ct. R. 2.116(C)(7)–(8), (10). The Court granted summary disposition of the breach of contract claims pursuant to Mich. Ct. R. 2.116(C)(8) (failure to state a claim) because Plaintiffs failed to attach the written agreements to their complaint. The claim for breach of the Note also failed under Mich. Ct. R. 2.116(C)(10) (no genuine issue of material fact). The Note provided that advances thereunder must be made upon written request by a representative of NRL Holdings. The Court held that the written request was a condition precedent to Stover’s requirement to pay. In an affidavit, Stover affirmed that he never received a written request for funds in accordance with the terms of Note. Plaintiffs failed to submit evidence rebutting Stover’s testimony, and therefore Plaintiffs’ claim for breach of the Note failed.
Finally, Plaintiffs’ claim for breach of the Agreement failed under Mich. Ct. R. 2.116(C)(7). The Court determined that the mutual release, which was broad and released all claims known or unknown, barred the claim. The release contained a provision in which the parties acknowledged that they were not relying on statements made in negotiations or the accuracy of representations, and further provided that no party had a right to rescind the release on the basis of a claim of misrepresentation. Thus, Plaintiffs’ argument that they relied on Spindler’s alleged misrepresentations in entering into the release did not render the release voidable and precluded their claim for breach of the Agreement.
Steven M. Brooks v. Acrisure of California, LLC and Acrisure, LLC[108] (Breach of contract). Plaintiff Steven M. Brooks (“Plaintiff”) was an employee of Acrisure of California, LLC and Acrisure, LLC (“Defendants”). The parties executed an agreement in which they agreed that Plaintiff’s employment would terminate in March 2020 (the “Agreement”), and thereafter, all matters involving the employment relationship would be governed by the Agreement. The Agreement provided that for eighteen months after the termination of Plaintiff’s employment, Defendants would pay Plaintiff compensation, COBRA premiums, and referral fees equal to five percent (5%) of the revenue generated by any entity acquired by Defendants if (1) Plaintiff referred the entity to Defendants and (2) Defendants acquired the entity between March 20, 2020, and September 21, 2021 (the “Separation Period”). The Agreement also contained an integration clause and a requirement that any modifications be in writing signed by all parties thereto.
After the Separation Period ended, from June 2023 to January 2024, Defendants communicated with Plaintiff and asked Plaintiff to introduce Defendants to Baker and assist in closing the Baker deal. In a November 2023 email to one of Defendants’ employees, Plaintiff asked about the Agreement’s referral fee and the employee indicated that there had been no change. Plaintiff alleged that, based on this communication, Plaintiff continued to assist in closing the Baker deal. After closing, Defendants told Plaintiff that they would not pay him the full five percent.
Plaintiff sued Defendants for, among other things, breach of contract and promissory estoppel. Plaintiff alleged that his communications with Defendants constituted a modification and amendment of the Agreement based on Defendants’ conduct. More specifically, Plaintiff alleged that the communications represented Defendants’ (1) intent to waive the integration and no-modification clauses and (2) agreement to pay Plaintiff a referral fee after September 21, 2021. Defendants moved for summary disposition under Mich. Ct. R. 2.116(C)(8) (failure to state a claim).
Defendants argued that Plaintiff’s allegations did not allege that the parties discussed modifying the Agreement or that they discussed the referral fee before Plaintiff began providing services related to the Baker deal. The Court determined that this argument was “too stringent” and failed to consider reasonable inferences that could be drawn in favor of Plaintiff based on the facts alleged regarding whether the Agreement was modified. According to the Court, the Court could reasonably infer that the parties discussed having Plaintiff introduce Defendants to Baker, assist with closing the deal, and in return, Plaintiff would receive the five percent referral fee. As a result, the Court reasoned that it could not hold that no factual development could justify Plaintiff’s claims. The Court denied Defendants’ motion as to the breach of contract claim.
Rose Nevada, Inc., Jonathan Rose Exempt Trust II, Jonathan Rose Distribution Trust v. Rose Cash Management II, LLC and Warren Rose[109] (LLC member oppression; fiduciary duty; fraud). This dispute involved a series of companies and trusts managed, owned, and held by or for the benefit of the Rose family. In 2016, Defendant Rose Cash Management II, LLC (“RCM II”) was formed for the purpose of loaning capital to an entity called ERC. Defendant Warren Rose (“Warren”) was the sole manager of both RCM II and ERC (the “Companies”). Warren’s brother, Jonathan Rose (“Jonathan”), was the beneficiary of the Plaintiff trusts (the “Trusts”), which were also members of RCM II. HG served as trustee of the Trusts from 2013 to 2021, and he appointed Warren as co-trustee in 2015.
Beginning in 2016, Warren, as manager of both Companies, would cause RCM II to loan funds to ERC and cause ERC to loan funds to certain Rose family companies or trusts, but not to the Trusts. This was the consistent practice of RCM II. In 2021, Plaintiff Rose Nevada, Inc. (“RNI”) replaced HG and Warren as trustee of the Trusts. In 2022, RNI, on behalf of the Trusts, sued Warren and RCM II, claiming that their failure to loan funds to Plaintiffs constituted member oppression, a breach of fiduciary duty, and fraudulent concealment. Defendants moved for summary disposition under Mich. Ct. R. 2.116(C)(7) and (C)(10), which the Court granted.
The Court determined that Plaintiffs’ claims were barred by the applicable statute of limitations, which the Court determined began running in 2016, not in 2021 when RNI became trustee of the Trusts. Plaintiffs did not dispute that the conduct began in 2016, and instead argued, without citation, that their claims did not accrue until RNI became trustee in 2021. The Court disagreed, citing both the absence of cited authority and HG’s testimony that he knew about the loans. Given that the Trusts’ agents, HG and Warren, knew of the loans, the Court held that “there can be no claim that the Plaintiffs did not know and should not have reasonably discovered” that the loans were funding other family companies.
Additionally, the Court determined that Plaintiffs failed to state a claim for oppression, breach of fiduciary duty, and fraudulent concealment. The oppression claim was based on consistently applied company practice and thus was barred by Mich. Comp. L. 450.4515(2). Even if the claim were not barred, it was sufficient that the trustees knew about the loans. Plaintiffs’ allegations that they did not receive distributions and that Warren had a potential conflict of interest by acting as trustee of the Trusts and manager of RCM II were also insufficient, particularly where the Trusts had a second trustee and both trustees had knowledge of the loans.
The Court held that the breach of fiduciary duty claim similarly failed because the Trustees owed duties to the members, not to the beneficiaries of the members. The Trusts, as members, were charged with knowledge of the loans because HG and Warren, as trustees, knew of the loans. There was no requirement to disclose the loans to Jonathan, as the beneficiary of Trusts. The fraudulent concealment claim also failed. While Plaintiffs argued that Warren had a duty to disclose the self-interested transaction to Jonathan under Mich. Comp. L. 450.4409, the Court rejected this argument because the statute does not require such disclosures or create liability where such disclosures are not made. Additionally, the statute was limited to members and managers, and Jonathan was neither. Finally, Plaintiffs failed to identify false or intentionally deceptive statements, and therefore, Plaintiffs’ allegations about impressions of discussions were inadequate.
§ 10.3.10. New Hampshire Commercial Dispute Docket
N.H. Elec. Coop., Inc. v. Consol. Commc’ns of N. New England Co., LLC[110](Condition precedent).In the context of a complex contractual arrangement, there were various for breach of contract. One party asserted that it was excused from complying with a particular provision of the contract because the other party had breached its obligation to collaborate with respect to it. The Court rejected this defense, holding that the collaboration requirement was not a condition precedent. Therefore, even if the obligation was breached, it was not material and did not provide an excuse for the other party’s obligation to perform the contract.
In seeking reconsideration of the Court’s decision,[111] the non-breaching party further argued that if a contract contains a sequence of events, each individual step is a condition precedent to the ones that follow, and thus the entire contract. The Court rejected this argument as well, noting that conditions precedent are disfavored in law, and unless required by the plain language of the contract, will not be so construed.
Vt. Tel. Co. v. FirstLight Fiber, Inc.[112](Costs/prevailing party). In this case, Plaintiff recovered a verdict in excess of $1 million, while Defendant prevailed on a counterclaim in an amount less than $50,000. Following precedent from the New Hampshire Supreme Court, the Court ruled that Plaintiff was entitled to its costs because Plaintiff recovered a verdict substantially more than Defendant’s verdict on its counterclaim, and Plaintiff was thus owed the net balance of the verdicts. In this sense, Plaintiff was the “prevailing party” for purposes of entitlement to costs.
MacDonald v. Bernardo[113](Standing to enforce note). Plaintiff, the sole shareholder of a dissolved corporation, brought suit on a promissory note owed by Defendant to the corporation. Defendant challenged the shareholder’s standing to sue on the note in the absence of a specific assignment, but the Court rejected the argument. Citing the leading treatise, the Court agreed that equitable principles required that title to the property of a dissolved corporation vests in the shareholders. There was no need for a formal assignment.
§ 10.3.11. New Jersey’s Complex Business Litigation Program
Dominick Alfieri, Michael Alfieri, individually and as Trustee of the 2001 Michael Alfieri Family Trust, et al. v. Jennifer Alfieri Frank, as Trustee of the 2001 Jennifer Alfieri Family Trust[114] (Forms of ESI discovery production). In this dispute concerning payments on multiple promissory notes, the New Jersey Superior Court clarified its rules regarding requests for and production of electronically stored information (“ESI”). Specifically, the Court confirmed a party’s right to specify the forms in which ESI is produced in discovery requests.
Defendant moved to compel Plaintiffs to provide ESI in certain formats and load files, as provided in Defendant’s discovery requests. Defendant argued, inter alia, that, because Plaintiffs did not produce ESI with the requested load files, Plaintiffs’ production was not reasonably usable and caused additional delay and costs associated with Defendant’s review. Plaintiffs responded by claiming that, inter alia, they were not required to comply with Defendant’s demand for load files because that demand imposed an undue burden on Plaintiffs and the cost of compliance was not justified by the needs of the case.
The Court, in granting Defendant’s motion to compel, noted that the New Jersey rules governing requests for document production “permit[] a party to specify the forms in which [ESI] is to be produced when requesting discovery” and “clearly provide [D]efendant the ability to request that the ESI be produce [sic] in load files.” The Court also noted that if a responding party objects to such request, it must demonstrate that compliance with such request presents an undue burden or expense. Here, the Court found that there was no such undue burden placed on Plaintiffs in complying with Defendant’s request and granted Defendant’s motion to compel.
Stonington Capital, LLC v. Benjamin Obdyke, Inc.[115] (Spoliation of evidence). In this dispute concerning an allegedly defective roof installation, the New Jersey Superior Court reaffirmed the standard for sanctioning a party for spoliation of evidence.
Plaintiff brought suit against Defendant as a result of an allegedly defective roof design and installation at Plaintiff’s property. Prior to bringing suit, Plaintiff sent Defendant a pre-suit demand letter wherein Plaintiff notified Defendant of the alleged issues with the roof and that Plaintiff had entered into an agreement to sell the property. In response, Defendant claimed that Plaintiff failed to provide Defendant an opportunity to inspect the roof prior to the replacement of the roof and Plaintiff’s sale of the property, both of which occurred before Plaintiff sent the pre-suit demand letter. Defendant then moved for summary judgment, arguing that Plaintiff spoliated evidence which permanently deprived Defendant of the opportunity to inspect and review the product and installation out of which Plaintiff’s claim arose.
The Court concluded that Plaintiff had a duty to preserve evidence (i.e., the allegedly defective roof) because, upon learning of the issues with the roof during the pre-sale inspection, Plaintiff was aware of the probability that litigation involving Defendant’s liability in connection with the roof would ensue. Further, it was foreseeable that Defendant would be prejudiced by being denied an opportunity to inspect the roof prior to the roof’s replacement, as Defendant would not have the ability to obtain evidence disproving that its product was responsible for the alleged defects. The Court sanctioned Plaintiff, barring Plaintiff from admitting any evidence at trial that Plaintiff obtained during the removal and replacement of the roof.
§ 10.3.12. New York Supreme Court Commercial Division
Investcloud, Inc. v. Siegal[116](Arbitration agreement related to discovery dispute). In April 2024, in a case captioned Investcloud v. Siegal, Justice Daniel J. Doyle of the Seventh Judicial District of New York’s Commercial Division issued a ruling that underscores the limited willingness of New York Commercial Division courts to intervene in matters that are otherwise subject to an arbitration agreement, especially as it relates to discovery disputes.
In Investcloud, the Petitioner sought judicial intervention to compel third-party discovery from Evan Siegal and Pricewaterhouse Coopers (“PWC”) in an arbitration proceeding. The underlying dispute involved a software development agreement between Petitioner and Manning & Napier Advisors, LLC (“Manning”), which contained a mandatory arbitration clause requiring that all disputes be settled via JAMS arbitration. After the underlying arbitration had commenced, the assigned JAMS arbitrator determined that the arbitration would be “governed by the JAMS comprehensive Arbitration Rules and Procedures” (“JAMS Rules”), and the Federal Arbitration Act, which Petitioner did not dispute.
During the arbitration, Manning identified Siegal and PWC as relevant witnesses to the arbitral hearing. Petitioner sought discovery from Siegal and PWC through Manning but ultimately determined that Manning’s response to these discovery requests was insufficient. Rather than raising the issue with the arbitrator, Petitioner instead served subpoenas on Siegal and PWC and subsequently sought court intervention by the Commercial Division to compel responses to those subpoenas.
Justice Doyle’s opinion makes clear that New York courts will not involve themselves in arbitration proceedings absent extraordinary circumstances, especially when it comes to discovery disputes. In particular, Justice Doyle relied on precedent from the Second Department of the New York Appellate Division holding that “an arbitrator is authorized to order non-party discovery (through subpoena) upon a showing of ‘special need or hardship,’” in addition to provisions in the relevant JAMS rules that provided for third-party discovery as well as Section 7 of the Federal Arbitration Act, which grants authority to arbitrators to issue subpoenas. Based on this authority, Justice Doyle concluded that whether or not to compel the third-party discovery at issue was a question for the arbitrator to decide and denied Petitioner’s request for judicial intervention.
1125 Morris Ave. Realty LLC v. Title Issues Agency LLC[117](General releases).1125 Morris Ave, which was decided by Justice Fidel Gomez of the Bronx County Commercial Division in December 2023, is a reminder to carefully review the language of general releases before signing such agreements. New York courts continue to enforce such releases, however broad in scope, absent any fraud or wrongful conduct. Notably, not only did the release at issue in this action result in a waiver of the asserted claims, but the Court also imposed sanctions on the party seeking to avoid the impact of the release.
In this case, 1125 Morris Ave. Realty LLC (“1125 Morris” or “Plaintiff”) filed suit against Title Issues Agency and others (collectively the “Defendants”) over a mortgage deal. Plaintiff obtained a mortgage in November 2014, and certain Defendants had agreed to hold a portion of the mortgage until certain taxes and water/sewer charges were settled with the City. Following the satisfaction of the mortgage in July 2016, Plaintiff executed a broad general release discharging the Defendants from all “claims and demands whatsoever from the beginning of the world to the day of the date of this RELEASE.”
Plaintiff filed suit asserting claims for, among other things, fraud, and that alleging that Defendants failed to use the money set aside to pay the taxes and utilities on the property subject to the mortgage. Plaintiff argued that Defendants assured Plaintiff that the loan proceeds would be used to satisfy the liens on the property, but this did not occur. Plaintiff further claimed that it had to obtain another loan in June 2016 to satisfy the taxes that Defendants failed to pay.
The Court analyzed the broad release entered into between Plaintiff and Defendants. In the analysis, the Court held that even if the alleged fraud had occurred, the claim would have accrued by June 2016 at the latest. Since the release was signed after that date, on the release was applicable to the fraud claim and required dismissal of the action.
Plaintiff tried to avoid the consequences of the release by arguing that the Plaintiff’s owner who executed the release on its behalf “did not know what he was signing, had no legal representation in connection therewith, and because the release was one of many documents he was asked to sign.” The Court, noting the incredibly high bar for a claim of fraud in the execution in New York, rejected this argument stating that a party in New York is generally presumed to have read and understood any document they sign absent extraordinary circumstances. In light of this high bar to fraud in the execution claims, the Court refused to set aside the release.
Indeed, the Court not only dismissed Plaintiff’s complaint, but also sanctioned Plaintiff’s counsel for ignoring not only that the claims were time barred, but also that the release executed would have barred the asserted claims. As a result, the Court ordered Plaintiff to reimburse Defendants for any costs and legal fees incurred in defending the action.
Mem’l Sloan Kettering Cancer Ctr. v. Bristol Myers Squibb Co.[118] (Parent corporation liability for contracts entered into by subsidiaries). In Mem’l Sloan Kettering Cancer Ctr., which was decided by Justice Robert Reed of the New York County Commercial Division in January 2024, the Court reiterated that parent corporations will not automatically be held liable for contracts entered into by their subsidiaries under New York law, except under limited, unique circumstances.
In this case, Memorial Sloan Kettering Cancer Center (“MSK”) and Eureka Therapeutics, Inc. (“Eureka”) sued Bristol Myers Squibb Co. (“BMS”), Celgene Corporation (“Celgene”), and Juno Therapeutics, Inc. (“Juno”) for alleged breach of a contract relating to the development of a blood cancer treatment. MSK and Eureka partnered with Juno, a biopharmaceutical company, to develop a blood cancer treatment. Juno was supposed to use and commercialize MSK and Eureka’s product, and Plaintiff would be entitled to certain royalties resulting from this commercialization. Juno was subsequently acquired by Celgene and BMS after the agreement was executed. MSK alleged that, as part of this acquisition, “Juno assigned its rights and obligations under the licensing agreement to BMS, and that BMS acquired and assumed Juno’s rights and obligations under the licensing agreement.” At the time of the acquisition, BMS had developed a competing blood cancer treatment called Abecma. Plaintiff alleges that BMS abandoned its efforts to pursue Plaintiffs’ technology, instead promoting Abecma. Plaintiff sued all three parties, BMS, Celgene, and Juno, all of whom moved to dismiss.
As Justice Reed explained, pursuant to binding precedent from the First Department of the New York Appellate Division, a parent company can be held liable for a subsidiary’s contractual agreements only under the following narrow circumstances:“(1) if the parent manifests an intent to be bound by the contract; or (2) if the elements of piercing the corporate veil are present” (citing Horsehead Indus., Inc. v Metallgesellschaft AG, 239 AD2d 171, 172 [1st Dept 1997]).
Ultimately, the Court opined that neither circumstance was present in the instant action because mere business overlap, including the allegations in the complaint that Celegene and Juno “were subsumed into the regular business operations of BMS” and that “Celegene and BMS took exclusive control of performing under the licenses agreement,” was insufficient to invoke parental liability. “Parent and subsidiary entities are generally considered and treated as separate legal entities, so that the contract of one does not bind the other.” (Capricorn Invs. III, L.P. v Coolbrands Int’l, Inc., 24 Misc 3d 1224 (A) [Sup. Ct. N.Y. Cnty. 2009]). The Court held that “facts must be alleged that establish an intent to be bound, which may be shown by contract negotiation, use of the subsidiary as a shell and use of the subsidiary solely for the parent’s operational purposes.” Based on the absence of any similar allegations with respect to the applicable parent entities, Justice Reed dismissed the complaint against BMS and Celgene, and severed and continued the action against Juno individually.
South32 Chile Copper Holdings Pty Ltd. v. Sumitomo Metal Mining Co.[119](International discovery).South32 Chile, another case decided by Justice Reed of the New York County Commercial Division, serves as a reminder that international discovery is available in the Commercial Division.
In this action, South32 Chile Copper Holdings Pty Ltd. (“South32”) sued Sumitomo Metal Mining Co., Ltd., and Sumitomo Corp. (“Sumitomo”). The basis of the lawsuit was to hold Sumitomo responsible for Dutch tax liabilities for a Chilean goldmine operation that South32 acquired as part of a deal between the two companies.
During discovery, Plaintiff sought to obtain documents from the U.S. affiliates of certain non-party entities in the Netherlands and the United Kingdom. Plaintiffs alleged that these entities “provided financial or tax advice regarding the Dutch tax liability at issue in this case and possess information relevant to the parties’ sale and purchase agreements which purportedly conferred liability for the tax payment.”
In considering whether to permit international discovery in this action, Justice Reed explained that courts must look to three different elements: (1) that the “documents sought are both material and necessary to the legal claims in this matter,” (2) that “the method of discovery sought will result in the disclosure of relevant evidence or is reasonably calculated to lead to the discovery of information bearing on the claims,” and (3) “that the information sought is ‘crucial to the resolution of a key issue in this case.’” Because the Court was satisfied all three prongs were met, Justice Reed issued a Letter of Request for Judicial Assistance Pursuant to the Hague Convention to compel the discovery requested.
O’Rourke v. Ballroom[120] (Discovery compliance). New York County Justice Margaret Chan’s August 2024 decision in O’Rourke v. Ballroom, underscores the importance of discovery compliance in the New York Commercial Division. In this case, Plaintiff repeatedly failed to appear for his deposition. Starting in 2022, through January 2024, the Court held eight discovery conferences with the parties and scheduled a deadline for Plaintiff’s deposition at each conference. Plaintiff nonetheless failed to appear for his court-ordered deposition each and every time. On May 1, 2024, the Court held a ninth and final discovery conference. At that ninth conference, Plaintiff’s counsel apologized for the failures and explained that “extrinsic issues” had caused him and his firm to continuously drop the ball. The Court gave counsel the benefit of doubt and provided Plaintiff with one more chance to appear for deposition on or before June 28, 2024, indicating Defendants would be permitted to seek sanctions, including preclusion, if Plaintiff again failed to appear.
Despite the Court’s warning at the May 1, 2024, conference that further discovery non-compliance would not be tolerated, Plaintiff failed to appear for a deposition three more times between May 1, 2024, and August 22, 2024, notwithstanding repeated attempts by defense counsel to confirm a date certain for the deposition. In light of these repeated failures to appear, Defendants moved for sanctions, including the dismissal of Plaintiff’s complaint.
In granting the motion, Justice Chan analyzed the standards for issuing discovery sanctions under CPLR 3126 (3), which provides that if a party “‘refuses to obey an order for disclosure or willfully fails to disclose information which the court finds ought to have been disclosed pursuant to this article, the court may make such orders with regard to the failure or refusal as are just,’ including ‘an order striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or any part thereof, or rendering a judgment by default against the disobedient party.’”
The Court held that the record of repeated and largely unexplained failures to appear suggested that Plaintiff was never ready for deposition on June 28 or any date, and was never set to be prepared. The Court pointedly noted that Plaintiff’s counsel’s actions and representations “smack of gamesmanship, which this court does not condone.” Based on this record, the Court determined that sanctions were warranted, and that dismissal of the complaint in its entirety was appropriate.
§ 10.3.13. North Carolina Business Court
Biomilq, Inc. v. Guiliano[121](Gatekeeper order against pro se litigant due to misconduct). This case concerned a pro se defendant’s persistent misconduct. The defendant was initially represented by two different counsel, but eventually both withdrew from the case. After his second counsel withdrew, the Court set clear expectations for the defendant regarding his communications with opposing counsel and the Court, given disrespectful prior communications from the defendant to opposing counsel that had come to the Court’s attention.
Despite the Court’s clear expectations, additional admonitions and warnings, and subsequent issuance of a show cause order, the defendant’s misconduct continued and escalated. He repeatedly violated the Court’s orders and the local rules, submitting voluminous and duplicative filings, as well as other improper filings, many of which only served to convey his disagreement or irritation with the Court’s orders. He also “engaged in name-calling and ad hominem attacks on both the Court and opposing counsel.” And he appeared to commit the unauthorized practice of law by attempting to represent the interests of an entity defendant that had its own counsel.
Based on the defendant’s abuse of the legal process and his inability or unwillingness to comply with the Court’s directives and the local rules, the Court determined that sanctions in the form of a gatekeeper order were warranted. Under the gatekeeper order, before filing any document in this case, a related case, or any other Business Court case, the defendant must first obtain a certification signed by an attorney licensed to practice in North Carolina, stating that the attorney has read and is aware of the gatekeeper order’s requirements and that, in the attorney’s opinion, the document sought to be filed by the defendant complies with the Rules of Civil Procedure, including Rule 11.
Atl. Coast Conf. v. Bd. of Trustees of Fla. State Univ.[122] (Governmental immunity; breach of fiduciary duties; motion to stay). This case was one of a pair of cases the court dealt with involving the Atlantic Coast Conference’s Grant of Rights Agreement with member institutions concerning the conference’s television rights deal with ESPN. The ACC sued both Clemson and Florida State in the North Carolina Business Court. Clemson and Florida State also both initiated litigation in South Carolina and Florida, respectively, seeking declarations of their rights under the Grant of Rights Agreement and challenging the scope and enforceability of the agreement—in particular, the withdrawal payment provision. This action began after the Florida State Board of Governors notified the public that it would hold an emergency meeting to consider filing a lawsuit against the conference in Leon County, Florida. In response, the ACC preemptively filed in the Business Court, seeking a declaration that the Grant of Rights Agreement was a valid and enforceable contract and a declaration that Florida State was estopped or had waived any right to challenge the agreement. The Board filed its action in Leon County the next day. The ACC later amended its complaint to bring additional claims based on the Leon County litigation.
The Board first moved to dismiss the ACC’s declaratory judgment claims, arguing that the suit was filed prematurely and that it could have voted not to file the Leon County action. The court rejected this argument, as the Grant of Rights Agreement was based on member institutions not taking any action to affect the validity or enforcement of the rights. The allegations that the Board openly discussed withdrawal from the conference, began advocating for a greater share of revenue from the league, and notified the public of an emergency meeting to discuss initiating the Leon County action were sufficient to create a real judiciable controversy. For the same reasons, the court concluded that the ACC had suffered a cognizable injury, giving it standing to sue.
The ACC brought a breach of fiduciary duty claim, arguing that by seeking retroactive withdrawal from the conference in the Leon County action, Florida State has a clear, direct, and material conflict of interest with the management of the Conference. The court granted the Board’s motion with respect to this claim, determining that because the ACC was an unincorporated nonprofit association, no fiduciary duty existed as a matter of law. Additionally, the conference failed to plead facts establishing a de facto fiduciary relationship, as Florida State was just one of fifteen members of the conference.
Finally, the court rejected the Board’s motion to stay the case in favor of the Leon County action. Although the Board argued that it was the natural plaintiff, whose efforts to select its forum had been thwarted by the ACC’s preemptory filing, the court noted that the ACC, as the non-breaching party alleging a breach of the Grant of Rights Agreement, was a proper plaintiff. Thus, the deference afforded to the plaintiff’s choice of forum was appropriate. Additionally, because of the ACC’s longstanding ties to North Carolina, including having four member institutions located within the state, the court concluded that North Carolina was an appropriate forum and would not work a “substantial injustice” to the Board in litigation.
Atl. Coast Conf. v. Clemson Univ.[123] (Governmental immunity; declaratory judgment; breach of duty of good faith). Clemson University raised some similar and some unique arguments in its own litigation against the ACC. Just as in the Florida State litigation, the court first dealt with a threshold governmental immunity issue related to the “sue and be sued” clause of the North Carolina Nonprofit Corporation Act. Like Florida State, Clemson argued for dismissal on sovereign immunity grounds. However, after examining both United States and North Carolina Supreme Court precedent, the court concluded that despite Clemson being a South Carolina public institution, it had engaged in substantial commercial activity in North Carolina by traveling to state to compete in ACC-sponsored and administered athletic events, as well as engaging in other membership and governance activities. Because its activities as a member of the ACC were more commercial than governmental, it was subject to the sue and be sued clause.
Clemson also moved to dismiss the ACC’s declaratory judgment claims that the Grant of Rights contract was valid and enforceable and that the ACC owned the rights transferred by Clemson, whether or not it remained in the conference. Because Clemson did not dispute the validity of the Grant of Rights Agreement in the South Carolina litigation, the court dismissed the first claim for declaratory relief. However, the court determined that a real and judiciable controversy existed with respect to whether the ACC would own the rights transferred by Clemson if it departed the conference. The court additionally dismissed the ACC’s breach of contract claim, rejecting the conference’s argument that Clemson seeking a clarification of its rights was itself a breach of the agreement. However, the Court allowed the breach of the duty of good faith and fair dealing claim to survive, concluding that a reasonable fact finder could determine that Clemson interfered with the ACC’s right to exploit Clemson’s media rights under the agreement, either by filing the South Carolina lawsuit or by negotiating for a standstill agreement with the conference after the ACC sued the Florida State Board of Governors.
Finally, the court denied Clemson’s motion to stay in favor of the South Carolina litigation. Although Clemson filed the South Carolina action first, the court noted that it was the only body with jurisdiction over Clemson, Florida State, and the ACC—and thus the only court that could assure a consistent, uniform interpretation of the Grant of Rights Agreements and the ACC’s Constitution and Bylaws—which formed the crux of the case. This factor weighed heavily in favor of denying Clemson’s motion to stay. Both cases have since been appealed.
McClure v. Ghost Town in the Sky, LLC[124] (Dissolution).This case involves a western-themed amusement park in the North Carolina mountains called Ghost Town in the Sky. Alaska Presley and Coastal Development, LLC formed the company in 2020. After Ms. Presley died at the age of 98, her interest passed to her niece, Jill McClure. Although McClure initially expressed interest in being bought out by Coastal Development, negotiation proved futile. McClure then brought suit to dissolve Ghost Town in the Sky and wind up its affairs. In the meantime, Ghost Town in the Sky signed a contract with a studio to create a project design plan, but it was contingent on securing financing. During litigation, McClure and Coastal Development continued to quarrel, including over who was responsible for paying property taxes. McClure ultimately filed a motion for summary judgment.
The case centered on whether it was no longer practicable for Ghost Town in the Sky to conduct its business in conformance with its operating agreement. However, the court noted that absent managerial deadlock, it would not be inclined to find so. Because Coastal Development was the sole managing member, no deadlock existed. Thus, it was not unfeasible for the company to carry out its stated purpose. The court also rejected McClure’s arguments that there were insufficient income returns to continue. At only two years old at the time litigation began, the company was too young to make any such determination. Additionally, the property tax dispute was merely a common disagreement among members and did not warrant the drastic remedy of involuntary dissolution. In sum, neither the struggle to obtain financing nor the frosty relationship between members had kept Ghost Town in the Sky from fulfilling its purpose. Therefore, the Court denied McClure’s motion for summary judgment and actually entered summary judgment against her.
Hosie v. 8 Rivers Cap., LLC.[125](Attorney-client privilege in the context of disputes between a corporation and its officer or directors).The attorney-client privilege was recently examined in the North Carolina Business Court case Hosie v. 8 Rivers Capital, LLC, where the plaintiffs alleged that the corporate defendants were improperly withholding documents in response to the plaintiffs’ pending discovery requests. The individual plaintiff is the former CEO of one of the corporate defendants and was serving as a manager on the board of managers of that same corporate defendant at all relevant times. Hosie addressed two key privilege issues under North Carolina law: (1) which state’s law governs privilege matters, and (2) who controls the privilege over corporate communications when a company is in a dispute with its officers or directors.
The Court ruled that privilege is a procedural matter governed by the law of the jurisdiction where the lawsuit is filed—North Carolina in this case—and rejected the argument that the internal affairs doctrine applies to this issue. It also adopted the majority the “entity-is-the-client” approach, determining that the company controls the privilege over corporate communications, which protects privileged corporate communications from officers or directors who later become adverse to the company. The Court further addressed whether the company had waived its privilege by selectively disclosing some documents while withholding others. As a matter of fairness, it found that the company’s use of the privilege as both a “sword and shield” led to a “subject-matter waiver,” meaning the company had to produce nearly half of the withheld documents.
Howard v. IOMAXIS, LLC n/k/a MAXISIQ, Inc.[126] (Personal jurisdiction over foreign corporations under Calder test). This case involves a dispute between the co-trustees of the Ronald E. Howard Revocable Trust and a limited liability company and its members. The Trust purportedly holds a 51% economic interest in the defendant IOMAXIS, LLC.
The Court first addressed whether it had personal jurisdiction over an individual defendant and another entity defendant. The Court, applying the test set out in Calder v. Jones, 465 U.S. 783 (1984), concluded that it had personal jurisdiction over the individual defendant because he was active in, and even led, efforts the Trust alleges targeted it for harm, and the record confirmed that the individual defendant knew the Trust would feel the impact from his actions in North Carolina. With respect to the entity defendant, the Court concluded that it had personal jurisdiction for two reasons. First, the Court determined that the rationale for imposing personal jurisdiction in State ex rel. Stein v. E.I. du Pont de Nemours & Co., 382 N.C. 549 (2022), i.e., that a court will have personal jurisdiction where foreign corporations were set up in part to help a domestic corporation “avoid paying its liabilities[,]” was equally present here because each of IOMAXIS’s owners traded their ownership interest for an ownership interest in the entity defendant, effectively making the entity defendant IOMAXIS’s successor-in-interest. Second, the Court concluded that the Calder test also resulted in the Court having personal jurisdiction over the entity defendant because it exercised control of IOMAXIS’s assets and was profiting from them to the exclusion and detriment of the North Carolina based Trust.
Next, the Court addressed whether plaintiffs had standing and concluded that plaintiffs met their burden of proving the elements of standing based on the evidence then before the Court. However, the Court noted that a more complete record could change this if it was established that the Texas Operating Agreement, rather than the North Carolina Operating Agreement, controls.
Finally, the Court considered whether the Trust’s claims for breach of the buy-sell agreement, breach of the covenant of good faith and fair dealing, fraudulent concealment, and violation of the Uniform Voidable Transactions Act (“UVTA”) were subject to dismissal pursuant to Rule 12(b)(6) for failure to state a claim. The Court ruled that failure to exercise the purchase option in the North Carolina Operating Agreement ended the buy-sell provision, so the Plaintiffs could not claim a breach thereof. The Court granted the motion to dismiss this claim but denied it regarding IOMAXIS’s alleged failure to retain an accounting firm to value Mr. Howard’s interest. Next, the Court allowed the claim for breach of the implied covenant of good faith and fair dealing, finding that IOMAXIS’s failure to pay distributions to the Trust as an economic interest holder, and instead paying them to the IOMAXIS defendants, was sufficient to support the claim. The Court then rejected IOMAXIS’s argument to dismiss the Trust’s fraudulent concealment claim. It ruled that the Trust sufficiently alleged a duty to disclose, detrimental reliance, and harm, and found that the claim was direct, not derivative. Last, the Court dismissed the UVTA claim against the IOMAXIS Defendants and Five Insights, as they were not located in North Carolina when the transfer occurred, but allowed the claim to proceed against Defendant Spade, who was a North Carolina resident.
§ 10.3.14. Rhode Island Superior Court Business Calendar
Memorial Real Estate Group, LLC v. 111 Brewster Condominium Association[127] (Judicial foreclosure). This matter arises from a judicial foreclosure of the former campus of the Memorial Hospital and the subsequent acquisition of the property by Memorial Development via quitclaim. The plaintiff filed a complaint seeking a judicial foreclosure. It has been long established that RI is a title theory state, and thus, “a mortgagee not only obtains a lien upon the real estate by virtue of the grant of the mortgage deed but also obtains legal title to the property subject to defeasance upon payment of the debt.” In re D’Ellena, 640 A.2d 530, 533 (R.I. 1994).
The court found that the language contained in the mortgage originally held by Memorial Hospital was a conveyance, stating, “Borrower mortgages, grants, conveys and assigns to Lender . . . the Mortgaged Property.” The court held no ambiguity existed in the court’s Order. Plaintiff’s position that the Mortgage was not a conveyance failed at the motion-to-dismiss juncture.
Caroline Flynn, et al. v. Nappa Construction Management, LLC, et al.[128] (Binding dispute resolution by arbitration terminated by stipulation). The action arose from a dispute involving the construction of an automotive repair facility between the plaintiffs, Caroline and Vincent Flynn and their LLCs, and NAPPA Construction Management. Disputes arose concerning the flooring and foundation work performed by Nappa. Nappa argued that because § 6.2 of the construction contract mandates that the method of binding dispute resolution is arbitration, they are entitled to judgment as a matter of law on all counts. In § 6.2 of the construction contract and § 15.4 of the general conditions, the parties selected arbitration as the method of binding dispute resolution. Based on the unambiguous language of the construction contract, the sole method of dispute resolution between the parties for any claim was arbitration. However, the arbitration was dismissed by a stipulation between the parties. The question of whether binding dispute resolution provides that an arbitration terminated by stipulation is with prejudice was one of first impression for the Rhode Island courts. As the arbitration had begun, it also had been held. The court decided that arbitration was the only means by which the parties could assert their claims, and it thus granted Nappa’s motion for summary judgment despite the arbitration concluding by stipulation prior to any decision by the arbitrator.
Joseph A. Maraia v. The Alpine Country Club, Inc.[129] (Shareholder dispute). This matter arose from a shareholder dispute between Joseph A. Maraia and Alpine Country Club Inc. Mr. Maraia joined Alpine in 1993 and purchased a share for $7,500 and later resigned in May 2005. Mr. Maraia, through counsel, filed a complaint on August 21, 2015. A check was issued to Mr. Maraia on September 9, 2015. Alpine’s counsel learned of the suit on September 14, 2015, and asked for a prompt dismissal. Mr. Maraia was charged $3,700 for his attorney’s legal fees and therefore refused to cash the $7,500 check demanding that his counsel fees also be paid. In January 2015, Alpine refinanced its mortgage and in connection therewith agreed to a $100,000 limit in redeemed stock payments.
The court held that “it has been well established that there should be no judicial interference with the internal affairs, rules and by-laws of a voluntary association unless their enforcement would be arbitrary, capricious or constitute an abuse of discretion.” The court looked to Alpine’s bylaws and the circumstances surrounding the payment of shares that year and held that “it was not arbitrary or capricious for Alpine to implement a system where it is only required to pay out to no more than ten members in one calendar year and to prioritize payments to families of deceased members.”
The court also considered Mr. Maraia’s breach of contract claim. To establish a breach of contract “‘the plaintiff must prove both the existence and breach of a contract, and that the defendant’s breach thereof caused the plaintiff’s damages.’” Vicente v Pinto’s Auto & Truck Repair, LLC, 230 A.3d 588, 592 (R.I. 2020) (quoting Fogarty v. Palumbo, 163 A.3d 526, 541 (R.I. 2017)). The court found Alpine did not breach the contract with Mr. Maraia because it reasonably interpreted and applied the ten-year stock redemption provision contained in its bylaws and timely made the full payment to Mr. Maraia.
The court further considered Mr. Maraia’s breach of fiduciary duty claim. The RI Supreme court has not addressed the issue of breach of fiduciary duty owed by a corporation to its stockholders; however, it is common to look to Delaware jurisprudence. Courts in Delaware consistently have held that a corporation itself does not owe a fiduciary duty to its stockholders; only directors and officers do. The court held that based on Delaware jurisprudence, the claim against Alpine failed because as a corporation it did not owe Mr. Maraia a fiduciary duty.
Judgment was awarded to the defendant Alpine Country Club, Inc. and against the plaintiff Joseph A. Maraia on all counts.
§ 10.3.15. Texas Business Court
Energy Transfer LP et al. vs. Culberson Midstream LLC et al.[130](Business Court jurisdiction). In this case, originally filed in the 193rd District Court of Dallas County in 2022, the plaintiff sought to remove the case to the Business Court. Judge Whitehill ordered the case remanded to the district court. In his (and the Business Court’s) first published opinion, dated October 30, 2024, Judge Whitehill rejected plaintiffs’ arguments that (1) Section 8 merely affirms the Business Court’s ability to start accepting cases on September 1, 2024; (2) HB 19’s removal provisions in Sec. 25A.006, are procedural, not substantive, so the removal process could apply to pre-September 1, 2024, cases notwithstanding Section 8; and (3) when the Texas Legislature has excluded certain cases from application of a new statutory scheme, it has used language not found in Section 8, relying on careful application of textual analysis. The plaintiff appealed the court’s decision to the Fifteenth Court of Appeals on November 1, 2024. The appeal was dismissed by that court on February 6, 2025, in response to the parties’ settlement of the action.
Following close on the heels of Energy Transfer were Business Court decisions addressing two further attempts to remove pre-September 1, 2024, cases to the Business Court, both featuring the same counsel arguing for removal as in Energy Transfer: Synergy Global Outsourcing, LLC v. Hinduja Global Solutions, Inc.,[131] and Tema Oil and Gas Co. v. ETC Field Servs., LLC.[132]
Synergy Global was originally filed in the 191st Judicial District Court of Dallas County in 2019, with the plaintiff seeking to remove the case to the Business Court. Judge Whitehill’s opinion noted some expansion and refinement of arguments presented by each side when compared with Energy Transfer, but it reached the same conclusion that the case must be remanded to the district court based on careful textual analysis of HB 19. Synergy Global responded with an appeal to the Fifteenth Court of Appeals on November 12, 2024, which remains pending.
Tema was originally filed in the 236th Judicial District Court of Tarrant County in 2017. On September 11, 2024, defendant ETC filed a notice of removal to the Business Court, followed by plaintiff Tema’s motion to remand the case back to the 236th District Court, based on arguments tracking those discussed above. Judge Bullard’s opinion also relied on careful textual analysis to decline to accept the arguments offered to support removal. Tema responded with an appeal to the Fifteenth Court of Appeals on November 8, 2024.
On February 21, 2025, the Fifteenth Court issued its opinion affirming Judge Bullard’s decision and holding “that civil actions transferred to the business court by removal must be remanded if they were commenced in another court before September 1, 2024.” The court also indicated that “in these early days of business court litigation, remand and removal is subject to review by mandamus according to the same principles and rules as in any other pretrial orders.” Subsequent actions by the court in other pending cases raising these issues have followed these principles.
The Business Court’s remaining 2024 published opinions all respond to challenges to the Business Court judges’ consensus that Section 8 of House Bill 19 deprives the Business Court of jurisdiction over actions that had commenced prior to September 1, 2024. The arguments pro and con follow similar patterns, and reach similar results, with a small number of interesting wrinkles:
Seter v. Westdale Asset Management, Ltd.[133](Business Court jurisdiction). Judge Bouressa’s two-page memorandum opinion dated December 16, 2024, set a new mark for judicial efficiency by requiring only two pages to support remanding a 2022 case to the originating Dallas County Court at Law No.3, referencing the holdings in Energy Transfer, Jorrie and Winans discussed above. The defendant appealed that decision to the Fifteenth Court of Appeals on December 30, 2024, in the form of an application for a writ of mandamus and for temporary relief staying the proceeding until the Fifteenth Court of Appeals or the Texas Supreme Court issues a ruling on the question of pre-September 1, 2024, cases being removed or transferred to the Business Court. On January 24, 2025, the Fifteenth Court denied the petition, per curiam, with no explanation.[134] This was followed by defendants filing a petition for a writ of mandamus in the Texas Supreme Court on February 20, 2025, where it remains pending, the first and only Business Court case to reach the high court as of this writing.[135]
Lone Star NGL Product Services, LLC v. EagleClaw Midstream Ventures, LLC[136](Business Court jurisdiction). One of the possible solutions for parties to pre-September 1, 2024, litigation that want to move the proceeding to the Business Court is to nonsuit the case in the original district court and refile it in the Business Court as a new, post-September 1, 2024, action. In this proceeding two highly respected firms, several years into a hard-fought, high-dollar case, demonstrated in detail how to craft a Rule 11 agreement between the parties to nonsuit and refile their case on an agreed basis. All filings in the Business Court relating to the jurisdictional issues were made in agreed, joint form.
At the end of the day, Judge Adrogué could not agree with the parties’ arguments for allowing them to transfer the case to the Business Court, intact and without nonsuiting, based upon their complete agreement on how to accomplish that. Their good faith and hard work did, however, earn them the endorsement of Judge Adrogué and the Fifteenth Court of Appeals for a permissive interlocutory appeal to gain consideration of their arguments and proposed solutions.[137] That appeal is pending.
§ 10.3.16. West Virginia Business Court Division
Axiall Corporation et al v. Great Lakes Insurance Company et al.[138](Insurance coverage and prejudgment interest). This matter concerned property damage stemming from a railroad tank car rupture and chlorine release that occurred in 2016. Plaintiffs claimed that its thirteen different insurers breached their respective insurance contracts by failing to cover the associated losses. As this matter progressed in the Business Court Division, so did a civil action in Pennsylvania. In 2021, the jury in the Pennsylvania action determined that plaintiff Axiall Corporation suffered $5.9 million in damages to its plant and equipment. In 2022, following the verdict in the Pennsylvania action, the Business Court Division granted partial summary judgment to the defendants, finding that, as a matter of law, the plaintiffs’ damages were $5.9 million prior to the application of the appropriate $3.75 million deductible.
In September 2024, plaintiffs moved the Business Court Division for summary judgment, arguing that the defendants issued all-risk insurance policies that indisputably covered the $5.9 million chlorine-rupture, despite their continued nonpayment. Plaintiffs further sought an award of prejudgment interest from the court. In considering the motion for summary judgment, the court analyzed the parties’ contract pursuant to the agreed-upon Georgia law. See Great Lakes Reinsurance (UK) PLC v. Kan-Do, Inc., 639 Fed. App’x 599, 601 (11th Cir. 2016) (employing a two-step analysis to assess whether an insurer breached its payment obligations under an all-risk policy). The court first found that the subject chlorine release was a fortuitous event. The court next found that it had already concluded the rupture was a covered event under the policies. Accordingly, the court found that damages were owed to the plaintiffs. Furthermore, the court also found that an award of prejudgment interest was appropriate due to the significant amount of time that had passed since the Pennsylvania jury found that $5.9 million in damages existed. Therefore, the court entered summary judgment in the plaintiff’s favor for $2.15 million in breach of contract plus prejudgment interest from the date the Pennsylvania court entered its judgment. After a five-year span, the action was then retired from the court’s active docket.
Ezra Schoolcraft v. Jeffrey Isner et al.[139] (Dissolution, winding up, attorneys’ fees). This matter concerned a series of business disputes stemming from various oil and gas companies that the parties had formed together. Following a trial in March 2024, the jury found that the defendant, in his capacity within a business co-owed by plaintiff, had acted “in a manner that is illegal, oppressive, fraudulent or unfairly prejudicial to” plaintiff. After the trial, each party submitted post-trial motions. Plaintiff sought an order governing the dissolution and winding up of the shared business. Defendant sought attorneys’ fees, costs, and expenses, contending that he was the substantially prevailing party in the matter.
The court first considered plaintiff’s motion for dissolution and winding up. Reviewing the verdict form, the court concluded that the jury made the requisite findings warranting a judicial decree of dissolution under West Virginia law. Additionally, due to the jury’s findings of defendant’s conduct, the court concluded that judicial supervision was necessary to accomplish the winding up. Accordingly, the court articulated a set of standards for the parties to follow, including the submission of joint status reports every thirty days until the completion and formal winding up had occurred by year end. Finally, regarding defendant’s motion for attorney fees, costs, and expenses, the court determined that he was the substantially prevailing party. Despite the jury awarding plaintiff $476,000, the court found it clear the defendant had prevailed in nearly all other respects. Therefore, the court ordered that defendant be awarded attorney fees, costs, and expenses totaling $700,261.27. Upon entry of this Order, the court removed the matter from its active docket after approximately three years.
American Bituminous Power Partners, L.P. v. Horizon Ventures of West Virginia, Inc.[140] (Bench trial on damages). This matter came back to the Business Court Division following a remand and directive from the Supreme Court of Appeals of West Virginia, which found that the case was inappropriate for disposition through summary judgment due to factual ambiguities surrounding the interplay between various lease and settlement agreements for a powerplant. Following the remand and directive, the Business Court Division conducted a three-day bench trial on damages. Based on defendant’s various witnesses, the court concluded that three relevant time periods from 2013 through 2024 determined the calculation of rent owed. The court also concluded based on the parties’ agreements that simple interest applied to these time periods. Noting that rent had not been paid to defendant from 2013 to 2023, the court analyzed the calculations offered by defendant’s witness and determined that plaintiff owed defendant $9,168,608.00 in rent. In reaching this conclusion, the court pointed out that plaintiff failed to offer any contrary calculations. After analyzing this figure against the applicable contractual interest rates, credits, and prejudgment interest owed, the court retired the matter from its active docket following its five-year path to resolution.
§ 10.3.17. Wyoming Chancery Court
Aishangyou Ltd. v. Wetrade Grp., Inc.[141] (Issue preclusion and third-party-defendant jurisdictional objection). This matter presented an unusual procedural posture after two unserved third-party defendants objected to proceeding in chancery court under W.R.C.P.Ch.C. 3(a). After the court notified the parties of its intent to dismiss the case due to the objections, the defendant dismissed all claims against the third-party objectors and argued that such dismissal mooted the objections. At that point, plaintiffs—who brought the case but had since thrown in the towel on their claims—supported dismissal based on the third-party objections, while defendants—who still had live counterclaims—opposed. The court found that Rule 3(a) did not require dismissal because it was undisputed that the third-party defendants were no longer parties following their dismissal. Their objections were therefore moot, and the case was maintained in chancery court.
Defendant later moved for summary judgment based on the voluntary dismissal of all of plaintiffs’ claims. They argued that, because the parties had pleaded inverse claims arising out of the same facts, plaintiffs’ capitulation precluded challenge to the counterclaims. The court denied the request, noting that the stipulated dismissal the parties had filed did not evidence an intent to foreclose litigation of issues raised in plaintiffs’ claims. Counterclaimants could therefore not rely on issue preclusion to establish facts material to their summary judgment motion. And having raised no evidence independent of the stipulated dismissal, counterclaimants had failed to satisfy their evidentiary burden under Rule 56.
Flying Phoenix Corporation v. Randall Sinclair[142](Consignment Relationship not a partnership). In this matter the court assessed whether two couples, acting through business entities formed by each side, undertook commercial fireworks sales as a partnership. Plaintiff distributors and defendant retailers had for decades split gross sales of fireworks 60/40 each year. Over the years, the parties’ relationship was complicated by various investments into the enterprise. At first, defendants used a traveling stand to sell the fireworks, but eventually purchased land designated for full-time fireworks sales. Five years later, plaintiffs purchased a building from which defendants could sell the fireworks and affixed that building to defendants’ land. Eventually, defendants began selling third-party fireworks from plaintiffs’ building that was still affixed to defendants’ land. One dispute between the parties was whether selling third-party fireworks breached the duty of loyalty owed to one’s partners.
The court found that no partnership existed because the parties’ relationship, though complex, lacked the core characteristics of a partnership under Wyoming law. Among the missing features were shared control, shared risks, shared community of interests, and shared profits. The parties acted as separate businesses, with plaintiffs distributing and defendants retailing the fireworks independently. Neither had a say in how the other operated, and both sides occasionally pursued their own interests at the other’s expense. Plaintiffs—who borrowed to acquire the fireworks from China—maintained exclusive ownership until sale, meaning they could reclaim any unsold fireworks and were at all times liable for actual losses. Defendants, meanwhile, were financially removed from the distribution process and only ever received a flat cut of sales income. The court concluded that the enterprise was more akin to a consignment than a partnership.
For a more detailed discussion on what may be defined as a business court, see generally A.B.A. Bus. Law Section, The Business Courts Bench Book: Procedures and Best Practices in Business and Commercial Cases (Vanessa R. Tiradentes, et al., eds., 2019) [hereinafter Business Courts Bench Book]; Mitchell L. Bach & Lee Applebaum, A History of the Creation and Jurisdiction of Business Courts in the Last Decade, 60 Bus. Law. 147 (2004) [hereinafter Business Courts History]. ↑
For an overview of business courts in the United States, see, e.g., Business Courts Bench Book, supra note 1, Business Courts History, supra note 1, Lee Applebaum & Mitchell L. Bach, Business Courts in the United States: 20 Years of Innovation, in The Improvement of the Administration of Justice (Peter M. Koelling ed., 8th ed. 2016); Joseph R. Slights, III & Elizabeth A. Powers, Delaware Courts Continue to Excel in Business Litigation with the Success of the Complex Commercial Litigation Division of the Superior Court, 70 Bus. Law. 1039 (Fall 2015); John Coyle, Business Courts and Inter-State Competition, 53 Wm. & Mary L. Rev. 1915 (2012); The Honorable Ben F. Tennille, Lee Applebaum, & Anne Tucker Nees, Getting to Yes in Specialized Courts: The Unique Role of ADR in Business Court Cases, 11 Pepp. Disp. Resol. L. J. 35 (2010); Ann Tucker Nees, Making a Case for Business Courts: A Survey of and Proposed Framework to Evaluate Business Courts, 24 Ga. St. U. L. Rev. 477 (2007); Tim Dibble & Geoff Gallas, Best Practices in U.S. Business Courts, 19 Court Manager, no. 2, 2004, at 25. Further, the Business Courts chapter of this publication has provided details on developments in business courts every year since 2004. Finally, the Business Courts Blog went online in 2019, and serves as a library for past, present and future business court developments, www.businesscourtsblog.com (last visited Apr. 7, 2025). ↑
Business Courts Bench Book, supra note 1, at xx. ↑
Business Courts History, supra note 1, at 207, 211. ↑
Douglas L. Toering, Mantese Honigman, PC partner and co-author of this section, oversees the Business Courts Blog. ↑
Administrative Order, In Re Business Court Program, ¶ (a) (S.C. Aug. 1, 2024) (omitting mention of regions and region judge assignments and authorizing the Chief Business Court Judge to “assign exclusive jurisdiction over the case to any Business Court Judge”); Administrative Order, In Re Amended Business Court Program, ¶¶ 1, 2, 4 (S.C. July 14, 2023) (noting the regions, authorizing the Chief Business Court Judge to “assign exclusive jurisdiction over the case to any business Court Judge,” and assigning judges to preside over regions); Administrative Order, In Re Amended Business Court Program, ¶¶ 1, 2, 4 (S.C. Jan. 30, 2019) (same); Administrative Order, In Re Business Court Pilot Program Expansion, ¶¶ 1, 2 (S.C. Jan. 3, 2014) (expanding the pilot program to cover the entire state, dividing the program into regions, authorizing the Chief Justice to “assign exclusive jurisdiction over the case to the Business Court Judge assigned to that region” and assigning judges by region). ↑
Administrative Order, In Re Business Court Program, ¶ (c) (S.C. Aug. 1, 2024); Administrative Order, In Re Amended Business Court Program, ¶ 4 (S.C. July 14, 2023). ↑
Administrative Order, In Re Business Court Program, ¶ (d) (S.C. Aug. 1, 2024) (allowing jurisdiction over specified titles and chapters, as well as “[a]ny other matter deemed appropriate by the Chief Business Court Judge”); Administrative Order, In Re Amended Business Court Program, ¶ 5 (S.C. July 14, 2023) (omitting reference to jurisdiction over other matters deemed appropriate by the Chief Business Court Judge); Administrative Order, In Re Amended Business Court Program, ¶ 5 (S.C. Jan. 30, 2019) (allowing jurisdiction over specified titles and chapters, as well as “such other cases as the Chief Business Court Judge may determine.”). ↑
Administrative Order, In Re Business Court Program, ¶ (e)(1) (S.C. Aug. 1, 2024); Administrative Order, In Re Amended Business Court Program, ¶ 7 (S.C. July 14, 2023). ↑
These six divisions will not be activated by the 2025 Texas Legislature but may be reconsidered in 2027. ↑
In re Final Approval of R. for Bus. Ct., Misc. Docket No. 24-9037 (Tex. S. Ct., June 28, 2024), https://www.txcourts.gov/media/1459057/249037.pdf; In re Fees Charged in S. Ct., in Civil Cases in Ct. App., Before Jud. Panel on Multi-District Lit., and in Bus. Ct., Misc. Docket No. 24-9047 (Jul. 26, 2024), https://www.txcourts.gov/media/1458913/249047.pdf (approving fees for the Business Court, which are significantly higher than for district courts). ↑
Tex. Gov’t Code § 25A.009(f) (“To promote the orderly and efficient administration of justice, the business court judges may exchange benches and sit and act for each other in any matter pending before the court.”). These cases have not been moved out of the 11th Business Court Division where they were initially filed; the assigned judges are sitting as judges of that Division. In-person hearings and any trial setting will occur in the 11th Division. ↑
TuSimple Holdings, Inc vs. BOT Auto TX Inc., No. 24-BC11A-0007 (Tex. Bus. Ct.). Business Court case numbers describe the year (24), the Division (11), the specific judge (e.g., A is Judge Adrogué, B is Judge Dorfman), and the consecutive number of cases received by that judge (7). ↑
Energy Transfer LP vs. Culberson Midstream LLC, No. 15-24-00122-CV (Tex. App. 15th, filed Nov. 5, 2024); ETC Field Servs. LLC, No. 15-24-00124-CV (Tex. App. 15th, filed Nov. 8, 2024); Synergy Global Outsourcing LLC, No. 15-24-00127-CV (Tex. App. 15th, filed Nov. 12, 2024); In re Energy Transfer LP, No. 15-24-00130-CV (Tex. App. 15th, filed Dec. 6, 2024); In re ETC Field Services, LLC, No. 15-24-00131-CV (Tex. App. 15th, filed Dec. 9, 2024); In re Westdale Asset Mgmt., Ltd., No. 15-24-00135-CV (Tex. App. 15th, filed Dec. 30, 2024). ↑
Letters from Fifteenth Court of Appeals to Supreme Court of Texas pursuant to Tex. R. App. P. 27a requesting resolution of conflicting positions of First, Thirteenth, Fourteenth and Fifteenth Courts of Appeals regarding motions to transfer appeals in the following cases: Patrick Kelley and PMK Group, LLC v. Richard Homminga and Chippewa Construction Co., LLC, No. 15-24-00123-CV (Tex. January 6, 2025) (https://search.txcourts.gov/Case.aspx?cn=15-24-00123-CV&coa=coa1); Devon Energy Production Company, L.P.; Devon Energy Corporation; BPX Operating Company; and BPX Production Company v. Robert Leon Oliver, et al., No. 15-24-00115-CV (Tex. Jan. 13, 2025) (https://search.txcourts.gov/Case.aspx?cn=15-24-00115-CV&coa=coa15). The Supreme Court’s per curiam opinion applicable to both cases can be found in the above-cited online case records. ↑
Two other transitory provisions of HB 19 also receiving significant attention in the ensuing arguments about the fine points of commencing the Business Court were Section 5: “Except as otherwise provided by this Act, the business court is created September 1, 2024” and Section 9: “This Act takes effect September 1, 2023.” ↑
See Tema Oil and Gas Company vs. ETC Field Servs., LLC, No. 24-BC08B-0001 (Tex. Bus. Ct., filed Sept. 11, 2024); James Jorrie vs. AL Global Services, LLC, No. 24-BC04B-0001 (Tex. Bus. Ct., filed Sept. 16, 2024); Lone Star NGL Product Servs. LLC (in its own capacity and as assignee) vs. CR Permian Processing, LLC et al., No. 24-BC11A-0004 (Tex. Bus. Ct., filed Sept. 17, 2024); Vendetti vs. Turner, Stone, & Co. LLP, et al., No. 24-BC01A-0003 (Tex. Bus. Ct., filed Sept. 24, 2024); Morningstar Winans vs. Berry, No. 24-BC04A-0002 (Tex. Bus. Ct., filed Sept. 27, 2024); Energy Transfer LP et al. vs. Culberson Midstream LLC et al., No. 24-BC01B-0005 (Tex. Bus. Ct., filed Sept. 30, 2024); Yadav vs. Agrawal, et al., No. 24-BC03B-0003 (Tex. Bus. Ct., filed Sept. 30, 2024); Seter vs. Westdale Asset Mgmt., Ltd., et al., No. 24-BC01A-0006 (Tex. Bus. Ct., filed Sept. 30, 2024); Enhanced Indus. Techs., LLC, et al. vs. National Oilwell Varco, L.P. et al., No. 24-BC11B-0005 (Tex. Bus. Ct., filed Sept. 30, 2024); Synergy Global Outsourcing, LLC vs. Hinduja Global Solutions, Inc. et al., No. 24-BC01B-0007 (Tex. Bus. Ct., filed Oct. 1, 2024); XTO Energy Inc. vs. Houston Pipeline Co. LP, et al., No. 24-BC11B-0008 (Tex. Bus. Ct., filed Oct. 1, 2024); Clubhouse Ventures, LLC, et al. vs. Exochos Endeavors, LLC, et al., No. 24-BC11A-0009 (Tex. Bus. Ct., filed Oct. 2, 2024); Cypress Towne Ctr., Ltd., indiv. and deriv. on behalf of Kimco 290 Houston II, L.P. vs. Kimco Realty Servs., Inc. et al., No. 24-BC11A-0013 (Tex. Bus. Ct., filed Oct. 14, 2024); Bestway Oilfield, Inc. vs. Cox, et al., No. 24-BC11A-0016 (Tex. Bus. Ct., filed Oct. 24, 2024); Osmose Utils. Servs., Inc. vs. Navarro Cnty. Electric Cooperative, No. 24-BC01A-0011 (Tex. Bus. Ct., filed Nov. 4, 2024). ↑
Energy Transfer LP vs. Culberson Midstream LLC, No. 15-24-00122-CV (Tex. App. 15th, filed Nov. 5, 2024); ETC Field Services LLC, No. 15-24-00124-CV (Tex. App. 15th, filed Nov. 8, 2024); Synergy Global Outsourcing LLC, No. 15-24-00127-CV (Tex. App. 15th, filed Nov. 12, 2024); In re Energy Transfer LP, No. 15-24-00130-CV (Tex. App. 15th, filed Dec. 6, 2024); In re ETC Field Services, LLC, No. 15-24-00131-CV (Tex. App. 15th, filed Dec. 9, 2024); and In re Westdale Asset Management, Ltd., No. 15-24-00135-CV (Tex. App. 15th, filed Dec. 30, 2024). ↑
Ass’n of Texas Pro. Educators v. Kirby, 788 S.W.2d 827, 829 (Tex. 1990); see also Tex. Gov’t Code §§ 311.029, .022. ↑
This summary deals only with the counterclaim-plaintiffs’ claims against counterclaim-defendants. For simplicity, references herein to “Defendants” are to the counterclaim-defendants, and references to “Plaintiffs” are to the counterclaim-plaintiffs. ↑
