Submitted: June 27, 2013
Tara D. Elliott, Esq., Jeremy D. Anderson, Esq., Joseph B. Warden, Esq., FISH & RICHARDSON P.C., Wilmington, Delaware; Attorneys for Plaintiff.
William D. Sullivan, Esq., Seth S. Brostoff, Esq., SULLIVAN HAZELTINE ALLINSON LLC, Wilmington, Delaware; Attorneys for Defendants Amphus, Inc., Patent Revenue Partners, LLC, Henry Fung and Michio Fujimura.
R. Karl Hill, Esq., Kevin A. Guerke, Esq., SEITZ, VAN OGTROP & GREEN, P.A., Wilmington, Delaware; Attorneys for Defendant St. Clair Intellectual Property Consultants, Inc.
PARSONS, Vice Chancellor.
This action arises from the restructuring of a British Virgin Islands ("BVI") company in late 1999 and early 2000. Under the restructuring, the BVI company spun off its assets into four subsidiary operating entities in exchange for substantial equity interests in each of those operating entities. The derivative plaintiff, a shareholder in the BVI company, alleges that one of the company's directors breached his fiduciary duties to the company by using the restructuring to fraudulently obtain a larger financial stake in some of the company's valuable intellectual property and usurping the company's opportunity to sell that intellectual property to an outside party at a time when the company needed cash. The derivative plaintiff further alleges that various entities and another individual either aided and abetted the director's breaches of fiduciary duties or conspired with him to commit the alleged breaches. The plaintiff seeks, among other relief, damages for the director's breach of fiduciary duties and rescission of the resulting fraudulent intellectual property transaction with the company.
The defendants have moved to dismiss the complaint in its entirety on the grounds that this Court lacks personal jurisdiction over several defendants and that the plaintiff's claims are time-barred by the statute of limitations and the corresponding equitable doctrine of laches. In addition, the defendants argue that the plaintiff lacks standing to bring certain claims on behalf of a subsidiary of the BVI company, and that one of the defendants lacks capacity to be sued.
Having considered the parties' briefs and heard argument on the motions, I conclude that the defendants' motions to dismiss the plaintiff's complaint should be granted with respect to two defendants: one who lacks capacity to be sued and the other over whom this Court lacks personal jurisdiction. Because Count VII of the complaint is directed solely at the individual over whom this Court lacks personal jurisdiction, it also is dismissed. In all other respects, the defendants' motions to dismiss are denied.
A. The Parties
Plaintiff, Microsoft Corporation, is a Washington corporation with its principal place of business at One Microsoft Way, Redmond, Washington. Microsoft has continuously owned Series F Preferred Stock in Nominal Defendant, Vadem Ltd., since 1999.
Nominal Defendant, Vadem Ltd. ("Vadem" or "Vadem BVI"), is a privately held international business company incorporated under the laws of the British Virgin Islands with its principal place of business at 473 Sapena Court, Suite 5, Santa Clara, California.
Nominal Defendant, Vadem, Inc. ("Vadem California"), is a California company with its principal place of business at the same address as Vadem. Vadem California is a wholly owned subsidiary of Vadem and was the former assignor of certain patents related to power management and conservation for computer systems (the "Vadem Patents"). The Vadem Patents were transferred to Defendant Amphus, Inc. ("Amphus") in June 2000.
Defendant Henry Fung is a co-founder of Vadem, its former Chief Technology Officer, and its current CEO. Fung is one of two current directors on Vadem BVI's board of directors (the "Vadem BVI Board" or the "Board"), and has served as a director since Vadem's inception in 1993. Fung is the named inventor of several of the Vadem Patents. In addition, Fung was a founder, director, and CEO of Defendant Amphus and is a manager of Defendant Patent Revenue Partners, LLC ("PRP").
Defendant Amphus is a now-dissolved Delaware corporation that maintained its principal place of business at the same office as Vadem and Vadem California in Santa Clara, California. Amphus was formed on December 8, 1999. Vadem BVI initially owned 40 percent of the equity in Amphus, and later increased its share to 50 percent. At inception, Fung owned 20 percent of the equity in Amphus. Amphus was dissolved on December 24, 2008, at which point its remaining assets were purchased by Vadem and Defendant St. Clair Intellectual Property Consultants, Inc. ("St. Clair").
Defendant St. Clair is a Michigan corporation with its principal place of business at 16845 Kercheval Avenue, Suite 2, Gross Pointe, Michigan. St. Clair is the purported current owner of the Vadem Patents.
Defendant PRP is a California limited liability company with its principal place of business in the same California office as Vadem, Vadem California, and Amphus. PRP was formed on December 24, 2001 and, in 2008, replaced Amphus as the recipient of certain revenue streams from St. Clair related to the Vadem Patents.
Defendant Michio Fujimura is a director of Vadem and Vadem California, and has been a director of both entities since at least 1999. Fujimura is also a partner in PRP and was a director of Amphus from the time of its formation to the time of its dissolution.
1. Formation of Amphus
In December 1999, a struggling Vadem BVI began exploring ways to restructure itself to improve shareholder value. The Vadem BVI Board determined that the best course of action would be for Vadem BVI to become a holding company. To achieve this objective, Vadem BVI decided to create four new operating companies and transfer its assets and business into those new entities in exchange for a substantial stake in the operating companies' equity.
On December 6, 1999, Fung presented his idea for one of the operating companies to the Vadem BVI Board. Specifically, Fung proposed forming a new entity named Amphus as a Delaware corporation and moving Vadem BVI's chip product business into that company. The chip product business included numerous patents, among them the Vadem Patents. Fung's proposal also outlined Amphus's management and ownership structure. Fung would be a "founder" and the CEO of Amphus and would have a 20 percent ownership stake in the company. Of the remaining 80 percent, Vadem BVI would receive a 40 percent interest in the company, and the final 40 percent would be divided among Amphus's other "founders" and new outside investors.
At the time of his proposal, Fung knew that Vadem BVI was running out of cash. Vadem BVI previously had raised cash by selling patents to Microsoft. Although Fung believed Vadem BVI could find a buyer for the Vadem Patents, he did not share that belief with the Board or suggest that Vadem BVI explore such a possibility.
At the December 6 meeting, the Vadem BVI Board accepted Fung's proposal, and the two sides began negotiating the terms of Vadem BVI's asset transfer to Amphus. Although Fung believed that the Vadem Patents were worth "hundreds of millions of dollars, " he represented to the Vadem BVI Board that the patents were worthless. In contemplation of the Amphus transaction, Vadem BVI conducted an internal valuation of the Vadem Patents and also retained KPMG in December 1999 to provide an outside valuation perspective. During these valuation processes, Fung intentionally made statements and representations to Vadem BVI and KPMG designed to drive the valuation of the Vadem Patents as low as possible. Based on Fung's representation that "the existence of competing patent designs diminish the possibility of earning future royalties from [the Vadem Patents], " KPMG determined that those patents had no value.
By means of a Bill of Sale dated March 7, 2000, Vadem BVI purported to transfer various assets, including the Vadem Patents, to Amphus. The consideration for the Vadem Patents was nominal. On April 20, 2000, Vadem BVI and Amphus executed a stock purchase agreement in which Vadem BVI was issued approximately 40 percent of Amphus's issued and outstanding stock. As a result of these transactions, Vadem BVI's 100 percent interest in the Vadem Patents was reduced by 60 percent.
2. The Vadem BVI Board sends shareholders the Information Statement
On March 8, 2000, a day after Vadem BVI and Amphus executed the bill of sale, the Vadem BVI Board sent shareholders, including Microsoft, an information statement (the "Information Statement") notifying them that the Board had commenced a restructuring of the company. According to the Information Statement, Vadem BVI already had begun forming operating companies and transferring its assets to those entities. Although the Vadem Patents were not identified specifically, Vadem shareholders were informed that certain intellectual property assets were being transferred to the operating companies. The Information Statement also warned shareholders that the asset transfers to the operating companies would cause "an immediate substantial dilution" of Vadem's shareholders' ownership interests. Vadem BVI did not seek shareholder approval for the asset transfers,  nor did Vadem shareholders ever approve those transfers.
3. The Vadem Patents are sold to St. Clair
Before the bill of sale was executed on March 7, 2000, Amphus asked its outside counsel to locate a company that would be interested in buying the Vadem Patents. Also before March 7, Amphus and St. Clair began discussing St. Clair's interest in purchasing the Vadem Patents. Fung did not inform Vadem BVI that an opportunity existed for Vadem BVI to sell the Vadem Patents to St. Clair rather than transferring them to Amphus.
During its due diligence into the Vadem Patents, St. Clair discovered that Vadem California, and not Vadem BVI, had title to the Vadem Patents. At St. Clair's request, Amphus had Vadem California transfer title to the Vadem Patents to Amphus on June 15, 2000. The next day, Amphus sold the Vadem Patents to St. Clair. In consideration for the patents, Amphus received an initial payment of $300, 000, the rights to the first $1, 000, 000 in licensing revenue that St. Clair collected on the Vadem Patents, and the rights to 50 percent of all Vadem Patent licensing revenues that St. Clair received thereafter. As a result of a later agreement between Amphus and St. Clair, Amphus's interest in the ongoing licensing revenues was reduced from 50 to 30 percent.
In or around October 2000, St. Clair began offering to license some of the Vadem Patents to various companies that sold personal computers. Amphus was kept apprised of St. Clair's efforts. By February 2001, St. Clair had contacted at least seventeen companies and offered them the opportunity to license the Vadem Patents.
4. Amphus Dissolves
In 2008, Amphus began preparing to dissolve and sell its remaining assets to Vadem BVI and St. Clair. In anticipation of the sale of those assets, Amphus retained Serendib Advisors ("Serendib") in 2007 to value the portion of Amphus's business that was to be sold to Vadem BVI. This included Amphus's right to receive ongoing licensing revenue from the Vadem Patents. In that regard, Fung represented to Serendib that Amphus's right to revenues from the Vadem Patents had no value. Consequently, in its valuation of Amphus, Serendib assigned no value to Amphus's right to ongoing revenue from the Vadem Patents.
On May 20, 2008, after Serendib provided its valuation, Amphus and St. Clair amended their patent sale agreement to provide that ongoing revenue from the Vadem Patents would be paid to PRP, instead of Amphus. Amphus created PRP in or around 2001. At its inception, PRP had the same ownership structure as Amphus. Approximately seven months after Amphus and St. Clair amended their agreement, on December 24, 2008, Amphus was dissolved and its remaining assets were purchased by Vadem BVI and St. Clair. These assets did not include the right to ongoing revenue from the Vadem Patents, because that right already had been transferred to PRP.
5. St. Clair files a patent infringement suit against Microsoft's customers
As of May 2009, St. Clair had not generated any licensing revenue from the Vadem Patents. On May 15, 2009, St. Clair brought a patent infringement suit in the United States District Court for the District of Delaware (the "Delaware District Court") against several companies to which it previously had offered to license the Vadem Patents. Because some of St. Clair's infringement claims implicated features of Microsoft Windows, Microsoft commenced a declaratory judgment action against St. Clair, also in the Delaware District Court, seeking a declaration that Microsoft Windows does not infringe the Vadem Patents that were asserted against its customers and that those Vadem Patents are invalid. Pursuant to its agreement with St. Clair, PRP stands to receive 30 percent of any recovery St. Clair obtains as a result of its litigation in the Delaware District Court.
C. Procedural History
On October 14, 2011, Microsoft filed its original verified complaint (the "Original Complaint") in the previous action involving these parties in this Court. That action asserted both direct claims and derivative claims on behalf of Vadem BVI against various defendants. Nominal defendant, Vadem BVI, and the other defendants moved to dismiss the Original Complaint. After briefing and argument, on April 27, 2012, this Court dismissed the Original Complaint in its entirety. Only Microsoft's direct claims, however, were dismissed with prejudice. The Court held that Microsoft had to seek leave from the High Court of the British Virgin Islands (the "BVI High Court") before it could proceed with a derivative suit on behalf of Vadem BVI, but that Microsoft could seek to re-file its derivative claims after obtaining the necessary leave from the BVI High Court.
On May 23, 2012, Microsoft filed its application for leave with the BVI High Court, which granted that application on November 9, 2012. Approximately one month later, on December 11, 2012, Microsoft filed its verified derivative complaint (the "Complaint") in this second action against many of the same defendants. On April 22, 2013, all Defendants other than St. Clair moved to dismiss the Complaint in its entirety. The following day, St. Clair moved to dismiss all the counts relating to it. After full briefing on those motions, I heard argument on June 27, 2013. This Memorandum Opinion constitutes my rulings on Defendants' motions to dismiss.
D. Parties' Contentions
Microsoft has brought seven derivative counts on behalf of Vadem BVI against Defendants. In Count I, Microsoft claims Fung breached his fiduciary duties to Vadem BVI by: (1) inducing Vadem BVI to transfer the Vadem Patents to Amphus by deliberately misrepresenting the value of the Vadem Patents to the company; (2) engaging in self-dealing in negotiating the terms of the transfer of patents from Vadem BVI to Amphus; (3) failing to disclose to Vadem BVI his belief that the Vadem Patents were worth hundreds of millions of dollars; (4) representing to Serendib in 2007 that the Vadem Patents had no value; (5) destroying Vadem BVI documents in 2010 to hide his breaches of fiduciary duty; and (6) causing Vadem BVI to oppose Microsoft's lawsuits in Delaware and the BVI in 2010 and 2011.
Count II is a claim against Fung, Amphus, PRP, and St. Clair for conspiracy to commit, or aiding and abetting in, ...