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NVent, LLC v. Hortonworks, Inc.

Superior Court of Delaware

February 1, 2017

NVENT, LLC, Plaintiff,
v.
HORTONWORKS, INC., Defendant.

          Submitted: October 24, 2016

         Upon Defendant Hortonworks, Inc. 's Partial Motion to Dismiss Counts II, III, and IV of the Verified Complaint GRANTED in part and DENIED in part

          Kurt M. Hcyman, Esquire, Samuel T. Hirzel II, Esquire, Ileyman Enerio Gattuso & Hirzel LLP, Wilmington, Delaware, Neal A. Jacobs, Esquire, Richard E. Miller, Esquire, and Joshua A. Gelman. Esquire, Jacobs Law Group, Philadelphia, Pennsylvania. Attorneys for NVent, LLC

          Jeremy D. Anderson, Esquire, Kelly A. Del Dotto, Esquire, Fish & Richardson P.C., Wilmington, Delaware, and Gus P. Coldebella, Esquire, Fish & Richardson P.C., Boston, Massachusetts. Attorneys for Hortonworks, Inc.

          Eric M. Davis, Judge

         I. INTRODUCTION

         This breach of contract action is assigned to the Complex Commercial Litigation Division of the Court. On May 16, 2016, Plaintiff NVent, LLC ("NVent") filed its Verified Complaint (the "Complaint"). Through the Complaint, NVent seeks to hold Defendant Hortonworks, Inc. ("Hortonworks") accountable for Hortonworks' misrepresentations regarding referrals; Hortonworks' agreement to purchase a minority ownership interest in HVent; Hortonworks' agreement to purchase the assets of HVent; and, Hortonworks' wrongful and oppressive conduct in controlling management operations and decisions at HVent.

         NVent presents four claims for relief in the Complaint. NVent asserts a claim for a declaratory judgment, contending that it is not in default under a Term Loan Agreement (the "Note") entered into between Hortonworks and NVent (Count I).[1] NVent alleges it has a "legitimate interest in the prompt resolution of the issue of whether Hortonworks' vague and false accusations are sufficient to establish that an 'Event of Default, ' as set forth in the Note, has occurred because NVent will suffer damages if forced to comply with Hortonworks' unsubstantiated demands."[2] Second, NVent avers a claim for promissory estoppel (Count II).[3] NVent contends that Hortonworks made clear and unambiguous promises regarding the Note, and NVent relied upon those promises to enter the Note.[4] Third, NVent makes a misrepresentation claim (Count III).[5] Here, NVent claims that Hortonworks allegedly misrepresented that it would acquire NVent, and knew, or should have known, at the time of making the representations, that it would not be able to acquire NVent due to impediments.[6]Further, Hortonworks misrepresented that it had $40 million in work available for NVent. Finally, NVent[7] asserts a Lender Liability claim (Count IV).[8] NVent contends that Hortonworks acted in bad faith in securing the Note, and exercised greater-than-typical control over NVent as its lender.[9] Specifically, NVent alleges that Hortonworks controlled NVent's daily business operations and long-term management decisions, and forced NVent to terminate employees.[10]

         On June 13, 2016, Hortonworks filed its Defendant Hortonworks, Inc.'s Opening Brief in Support of its Partial Motion to Dismiss Counts II, III, and IV of the Verified Complaint (the "Motion"). Hortonworks also filed its answer and counterclaims. NVent filed its Plaintiffs Brief in Opposition to Defendant's Motion to Dismiss (the "Opposition") on July 15, 2016. Hortonworks filed its Defendant Hortonworks, Inc.'s Reply Brief in Support of its Motion to Dismiss Counts 2, 3, and 4 of the Verified Complaint (the "Reply") on August 1, 2016. The Court heard oral argument on October 24, 2016 on the Motion, the Opposition, and the Reply. At the end of the hearing, the Court took the Motion under advisement.

         For the reasons set forth below, the Court will DENY the Motion as to Count II. The Court will GRANT the Motion as to Counts III and IV, dismissing these counts without prejudice to allow NVent an opportunity to amend these two counts within fifteen (15) days from the date of this Opinion.

         II. RELEVANT FACTS[11]

         A. General Background

         Hortonworks is an analytics business, specifically using the Hadoop programming framework.[12] Sometime in 2014, Hortonworks sought to grow its business through an initial public offering due to a growing demand for Hadoop services.[13] So, Hortonworks sought out a start-up enterprise that had the expertise to develop a work force capable of doing Hadoop servicing work, with an eye towards absorbing the start-up down the road.[14] NVent contends it was that enterprise.

         Hortonworks began talks with NVent in the fall of 2014.[15] Hortonworks proposed that it would invest $2.5 million in NVent in exchange for a 19.9% equity ownership in NVent.[16]Further, Hortonworks promised to provide NVent with approximately $40 million in servicing work.[17] Hortonworks also represented that it would assist NVent secure an additional $2.5 million investment in order for NVent to hire and train consultants to meet Hortonworks' servicing demands.[18] Hortonworks executed a Memorandum of Terms ("Memorandum") reflecting the investment.[19] The Memorandum provided that Hortonworks intended to invest $2.5 million by way of a note to be fixed at 5% interest, which could not be prepaid, and which would ultimately be converted to a 19.9% equity ownership in NVent.[20]

         Hortonworks allegedly reneged on the Memorandum's terms, purportedly because "Hortonworks claimed it could not directly acquire an ownership interest in NVent because such an acquisition would negatively impact Hortonworks' valuation for its upcoming IPO."[21] Although the Memorandum was signed, NVent contends that Hortonworks' actions in connection with the Memorandum foreshadowed Hortonworks' future behavior: Hortonworks would lend NVent money, on Hortonworks' terms, for the purported purpose of assisting NVent to gear up and meet Hortonworks' servicing needs, and with the aim to acquire, in whole or in part, NVent.[22]

         Hortonworks and NVent continued business. On February 24, 2015, the parties entered into the Note.[23] Hortonworks provided NVent an unsecured $2.5 million loan, at a fixed 4%, which was not subject to repayment until February 23, 2018.[24] NVent alleges Hortonworks required NVent to accept the Note as a precondition to Hortonworks' sending the promised $40 million business to NVent.[25] NVent relied on this promise, and accepted the loan.[26]

         NVent alleges Hortonworks used the Note to exert control over NVent's operations and management to set up its potential acquisition.[27] Hortonworks directly controlled who NVent hired, how the employees were trained, and what work they performed; regularly monitored NVent's financial performance; and exerted control over NVent's management and marketing efforts.[28] NVent contends that, even with this oversight, Hortonworks failed to provide the repeatedly-promised work.[29] For example, Hortonworks provided only 1/10 of the promised work in the first year of the parties' relationship.[30] Hortonworks also allegedly ignored NVent's concerns about a lack of business.[31] In NVent's view, Hortonworks would have had no reason to lend money to NVent unless it was specifically for the purpose of providing services to Hortonworks' clients.

         The parties' disagreement seemingly escalated in November 2015 when NVent's principals began complaining about the lack of promised work.[32] Will Lowry, an NVent principal, questioned Hortonworks' CEO directly.[33] In response, Hortonworks' CEO demanded NVent terminate Mr. Lowry, and instructed Hortonworks' sales staff to disengage with NVent until NVent fired Mr. Lowry.[34] If NVent terminated Mr. Lowry, Hortonworks would follow through with its promise to acquire NVent.[35] So, NVent terminated Mr. Lowry.[36] Hortonworks then promised to acquire NVent by Christmas 2015.[37]

         On or about November 6, 2015, Hortonworks' CEO emailed NVent, stating:

Let's find a way to get you and your team over to hwks asap and put all this behind us. ..the hwks team highly values your technical domain and customer skills and strategic vision. ..let's put you rob and your key guys on this team and build a great company!!![38]

         On November 8, 2015, Hortonworks' CEO asked for NVent's "most current and up to date financials as well as a current cap table, " which NVent provided.[39] On November 19, 2015, Horton "reach[ed] out to [NVent] to get the ball rolling on financial diligence in anticipation of some sort of acquisition between Hortonworks and NVent."[40] Hortonworks orally proposed to hire all of NVent's employees and assets, and convert the Note to equity, as long as NVent paid the difference between NVent's assets and the Note's outstanding amount.[41] NVent orally accepted the deal, and began doing its due diligence.[42] Hortonworks then delayed the acquisition due to a purported secondary stock offering.[43] Nonetheless, Hortonworks instructed NVent to terminate certain employees, which NVent did.[44] Thereafter, Hortonworks refused to move forward with the acquisition or send additional work to NVent.[45] By April 2016, one of NVent's two remaining principals terminated his relationship with NVent due to Hortonworks' failure to perform as promised.[46]

         On April 15, 2016, Hortonworks sent a letter to NVent alleging NVent breached the Note.[47] The Demand letter accused NVent of committing intentional and incurable breaches under the express terms of the Note, which allegedly rendered NVent in default because: (a) Hortonworks "has reason to believe that NVent is in breach of its obligations under the [Vendor Services Agreement]";[48] and (b) NVent has breached its obligations under Section 4(g) of the Note by engaging in business not reasonably related to the NVent's business.[49]

         B. Contract Provisions

         The Motion's arguments rely heavily on two documents: the parties' Vendor Services Agreement ("VSA") and the Note.[50]

         1. The VSA

         NVent argues it did not sign the VSA. The VSA's preamble states: "This Vendor Services Agreement is made and entered into as of January 20, 2015 (the "Effective Date"), by and between Hortonworks, Inc., a Delaware corporation ... and NVent, LLC, a Delaware corporation."[51] But, it was "accepted and agreed" to by NVent Solutions, LLC and signed by Will Lowry on January 20, 2014 (sic).[52] Clearly, the VSA states that it is an agreement between NVent (as the "Vendor" under the VSA) and Hortonworks.[53] However, NVent Solutions, LLC is the corporate party executing the VSA.[54] At this stage of the proceedings - drawing all reasonable inferences in NVent's favor, the Court must accept that NVent never executed the VSA.

         The VSA's purpose was for NVent to provide work to Hortonworks' other clients. Section 1.1 states:

The parties may, from time to time, agree upon and execute statements of work in the form attached to this Agreement ("SOW"). SOWs will be numbered sequentially. On the terms and conditions set forth in this Agreement, [NVent] agrees to perform the services described in each executed SOW for [Hortonworks] and, as part of those Services, to provide the deliverables outlined in each SOW.[55]

         The VSA also includes an integration clause, which states:

This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between the parties. No modification of, or amendment to, this Agreement nor any waiver of any rights under this Agreement shall be effective unless in writing and signed by the party to be charged. The terms of this Agreement will govern all SOWs between the parties. In the event of any conflict between this Agreement and a SOW, the SOW shall control, but only with respect to the Services set forth therein.[56]

         The VSA also contains a California choice of law provision.[57]

         2. The Note

         The Note states: "This [Note], dated as of February 24, 2015, is entered into by and between NVent, LLC, a Delaware limited liability company ("Borrower'1"), and Hortonworks, Inc., a Delaware corporation ("Lender").[58]

         Further, the parties list several events of default, including:

d) Borrower fails or neglects to perform, keep, or observe the negative covenants contained in Paragraphs 4(a)[.][59]
* * *
Upon the occurrence of an Event of Default, the indebtedness and other obligations of Borrower to Lender herein described shall, if Lender shall so elect, become immediately due and payable.[60]

         Paragraph 4(g) provides "that Borrower will not engage in any business other than the businesses currently engaged in by Borrower or reasonably related thereto[.]"[61]

         The parties' choice of law provision states: "This [Note] shall be governed and construed in accordance with the laws of the State of California."[62]

         Finally, the parties included an integration clause:

This [Note] and the other documents described or contemplated herein represent the final agreement between the parties, embody the entire agreement and understanding between the parties hereto and thereto, supercede (sic) all prior agreements and understandings relating to the subject matter hereof and thereof and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreement (sic) between the parties. This [Note] may only be amended in writing executed by both parties hereto.[63]

         III. LEGAL STANDARD

         Upon a motion to dismiss under Civil Rule 12(b)(6), the Court (i) accepts all well-pleaded factual allegations as true, (ii) accepts even vague allegations as well-pleaded if they give the opposing party notice of the claim, (iii) draws all reasonable inferences in favor of the non-moving party, and (iv) only dismisses a case where the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances.[64] However, the Court must "ignore conclusory allegations that lack specific supporting factual allegations."[65]

         IV. DISCUSSION

         A. Choice of Law

         Hortonworks argues that Delaware law may apply because there is a false conflict between California and Delaware law regarding the parties' contentions. The Note and the VSA include California choice of law provisions. At this stage of the proceedings, the Court will use California law.

         B. Promissory Estoppel (Count II)

         To plead promissory estoppel under California law, NVent must allege facts that demonstrate: (1) Hortonworks made a promise, clear and unambiguous in its terms; (2) NVent relied on that promise; (3) Nvent's reliance was reasonable and foreseeable; and (4) NVent was injured by its reliance.[66]

         NVent's promissory estoppel argument is premised on the idea that there was no reason for Hortonworks to loan NVent $2.5 million but for Hortonworks' promise to provide $40 million in future work. NVent argues: "Simply put, if Hortonworks does not promise to provide $40 million in work, NVent does not take the loan."[67]

         Hortonworks alleges that promissory estoppel is inapplicable because of the parties' integration clauses. NVent responds that parol evidence may be allowed in because Hortonworks' oral promise of $40 million in work is not part of the parties' agreements.

         In Aronowicz v. Nalley's Inc., [68] the California Court of Appeal upheld atrial court's verdict on a plaintiffs' promissory estoppel claim. In Aronowicz, defendant, a food distributor, was interested in procuring a line of deli meats sometime.[69] Plaintiffs, who had some experience in manufacturing deli meat, discussed working with defendant.[70] Plaintiffs incorporated Major Food Products, Inc. ("Major"), and discussions with defendant intensified.[71]

         Defendant agreed to become Major's exclusive distributor as long as plaintiffs met certain performance indicators.[72] Defendant's agreement also stated: "[S]hould we determine your product line is not as represented or is not compatible with our operation we are free to terminate our agreement with 30 days."[73]

         Amidst negotiations, plaintiffs leased plant space, procured products for manufacture, created advertising materials, and installed machinery.[74] Plaintiffs were fully operational and had all appropriate governmental health approvals within the requisite period.[75] Defendant's regional manager wrote a glowing review to defendant's home office.[76] Nonetheless, defendant back out on the deal.[77]

         Plaintiffs sued, alleging, inter alia, promissory estoppel. A jury found for plaintiffs on their promissory estoppel claim. The Court of Appeal affirmed, holding:

Defendant knew that [plaintiffs] were leaving their previous employment, investing and pledging their fortunes and securing the investments of others in substantial amounts to enable themselves to perform under terms of the letters exchanged between the parties. Defendant watched these efforts by plaintiffs, encouraged them, approved the results and went so far as to commence to secure orders for the products[.][78]

         NVent alleges that Hortonworks' behavior shows that it enticed NVent into a contract. There were several agreements, including the Memorandum and the Note, whereby Hortonworks purportedly encouraged NVent's business, causing NVent to make certain corporate decisions and borrow money. NVent contends that Hortonworks invested in NVent for purposes of creating a big data servicing practice for Hortonworks' clients. Hortonworks allegedly enticed NVent to work directly for Hortonworks by promising $40 million in work. Moreover, NVent claims that Hortonworks lent NVent $2.5 million at a fixed, below market rate of 4%.

         The Complaint does not present a situation where a neutral lender, like a bank, loaned NVent money. Rather, the Complaint shows a symbiotic relationship between the parties. This symbiotic relationship allows NVent to pursue its promissory estoppel claim. Given the allegations in the Complaint, and California law, the Court finds that NVent has pled a claim in Count II under which NVent could be entitled to recover under a reasonably conceivable set of circumstances.

         C. Misrepresentation (Count III)

         NVent alleges misrepresentation. NVent's misrepresentation claim, in its entirety, states:

89. Plaintiff hereby incorporates the averments of the preceding paragraphs as if ...

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