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Winklevoss Capital Fund, LLC v. Shaw

Court of Chancery of Delaware

March 1, 2019

WINKLEVOSS CAPITAL FUND, LLC, a Delaware Limited Liability Company, TYLER WINKLEVOSS, and CAMERON WINKLEVOSS, Plaintiffs,
v.
STEPHEN SHAW, THE WESTERMAN TRUST U/T/D FEBRUARY 25, 2011, and TREATS!, LLC, a Delaware Limited Liability Company, Defendants.

          Date Submitted: January 14, 2019

          P. Clarkson Collins, Jr. and Albert J. Carroll, Esquire of Morris James LLP, Wilmington, Delaware and Charles J. Harder, Esquire of Harder LLP, Beverly Hills, California, Attorneys for Plaintiffs.

          Richard G. Placey, Esquire of Montgomery McCracken Walker & Rhoads, LLP, Wilmington, Delaware; Carlos F. Gonzalez, Esquire of Rimon, P.C., Coral Gables, Florida; and Matthew Pace, Esquire of Rimon, P.C., New York, New York, Attorneys for Defendants.

          MEMORANDUM OPINION

          SLIGHTS, VICE CHANCELLOR

         Plaintiffs, brothers Tyler and Cameron Winklevoss, through Winklevoss Capital Fund, LLC, made a substantial investment in an upstart magazine operated by Defendant, Treats! LLC, and founded by Defendant, Stephen Shaw. Plaintiffs allege they have not achieved the return on investment promised them by Defendants and that Shaw's mismanagement of Treats! is to blame. Defendants deny the allegations of mismanagement and bring counterclaims against the Winklevoss brothers in which they allege the brothers breached commitments to allow Treats! to announce and capitalize on the publicity surrounding the brothers' investment. According to the counterclaims, the brothers made their investment in Treats! soon after the release of the movie The Social Network in which their association with the social networking site, Facebook, was depicted. Shaw allegedly accepted the investment, in part, based on the brothers' commitment that Treats! could announce (presumably with some fanfare) that the brothers had selected Treats! as one of the first investments of their newly created firm, Winklevoss Capital Fund, LLC. The counterclaims purport to state claims for fraud, fraudulent inducement, "fraudulent misrepresentation" and promissory estoppel.

         Defendants have moved to dismiss the counterclaims on multiple grounds, including that the claims are barred by laches and by a fully integrated contract governing the parties' relationship that makes no mention of the brothers' alleged commitment to promote Treats!. In rare circumstances, the Court may apply laches at the pleadings stage to bar a claim when it is clear on the face of the claim that it is untimely and that equity would not be offended by the claim's dismissal. This is especially so when the claimant brings common law claims and seeks common law remedies after the applicable statute of limitations has expired. That is what Defendants/Counterclaim Plaintiffs have done here. Accordingly, Plaintiffs' Motion to Dismiss Defendants' Counterclaims as time barred must be granted.

         I. BACKGROUND

         I draw the facts from the allegations in the counterclaims, documents incorporated by reference or integral to that pleading and judicially noticeable facts.[1] As I must, I have accepted as true the counterclaims' well-pled factual allegations and have drawn all reasonable inferences from those allegations in Defendants' favor.[2]

         A. The Parties

         Plaintiffs and Counterclaim Defendants, Cameron and Tyler Winklevoss ("Cameron" and "Tyler," respectively), [3] are businessmen, investors and entrepreneurs. Plaintiff, Winklevoss Capital Fund, LLC ("WCF"), is their investment firm.[4] WCF is a Delaware limited liability company with its principal place of business in New York.[5]

         Defendant and Counterclaim Plaintiff, Stephen Shaw, is a professional photographer and the founder and manager of Defendant and Counterclaim Plaintiff, Treats!, LLC.[6] Treats! is a Delaware limited liability company with its principal place of business in Los Angeles, California.[7] Its members are located in California and New York.[8] Treats!, founded in April 2010, owns and operates Treats! magazine, a print and digital magazine depicting nude and semi-nude photography of models and celebrities.[9]

         Shaw is the settlor, trustee and sole beneficiary of Defendant and Counterclaim Plaintiff, The Westerman Trust u/t/d/ February 25, 2011 (the "Trust").[10] In March 2011, Shaw transferred his entire interest in Treats! to the Trust.[11]

         B. WCF Invests in Treats!

         In early 2011, a mutual friend introduced Shaw to Cameron and Tyler. When they met Shaw, Cameron and Tyler were seeking to strengthen their Los Angeles network. Shaw, a professional photographer well known to many celebrities, opened the door to his social circle for Cameron and Tyler by introducing them to his friends, inviting them to exclusive dinners and parties and photographing their various girlfriends.[12]

         When Cameron and Tyler learned about Treats!, they were intrigued and offered to invest in the company. They emphasized to Shaw the potential significance of the fact that Treats! would be the first investment they made through their newly-formed investment firm, WCF. Shaw believed Treats! would develop into a lifestyle brand and he thought a partnership with WCF would provide the perfect launch pad. The notoriety of the Winklevoss brand following the release of the blockbuster film, The Social Network, in which the brothers were depicted, was the main attraction for Shaw as he sought to secure their investment in, and promotion of, Treats!.

         By July 2011, Cameron, Tyler and Shaw were deciding how publicly to announce WCF's forthcoming Treats! investment. In late 2011, Tyler wrote Shaw to report that he had "toured treats [sic] with my parents. . . . My parents loved it, they totally got it and were hooked (especially my dad lol). We all concluded that treats [sic] is the worlds [sic] best kept secret . . . its [sic] time for everyone to know about it!"[13] Tyler concluded, "our brand can help in a lot of ways."[14]

         On August 15, 2012, WCF invested $1, 310, 000 in Treats! in exchange for 1, 310, 000 series A preferred units under a written Purchase Agreement by and between WCF, Treats! and the Trust (the "Purchase Agreement"), to which an Amended LLC Agreement for Treats! (the "Amended LLC Agreement") was appended.[15] Both the Purchase Agreement and Amended LLC Agreement contain integration clauses stating that the contracts contain the entire agreement among the parties and requiring that any additional agreements be set forth in separate writings signed by all parties (Treats!, WCF and the Trust).[16] On October 26, 2012, Treats! delivered a written promissory note to WCF reflecting a loan to Treats! in the amount of $20, 000 (the "October 2012 Promissory Note").[17]

         C. The Parties' Relationship Quickly Unravels

         Following WCF's investment, the parties' relationship was marked by a consistent refrain. Shaw pressed the brothers to promote Treats! while the brothers pressed Shaw to enhance their personal and professional profiles. For example, Defendants allege that, on October 4, 2012, Tyler asked Shaw to arrange a "special casting" with multiple women he selected from Facebook and a modeling agency's website.[18] Tyler followed this request on October 17, 2012, with further direction to Shaw: "[d]on't hire any of them . . . get their details and call the hot ones up, invite them, and then I can shag them;)."[19] Shaw refused.

         On June 4, 2012, Cameron wrote to Shaw thanking him for offering to speak to actor Kevin Spacey about doing a voice-over for Zum-Zero, a website the brothers were promoting that they hoped would host the world's largest on-line investor community.[20] On November 13, 2012, Tyler asked Shaw and his team at Treats! to promote Hukkster, another of the brothers' investments. Treats!'s then-Chief Operating Officer, Farley Cahen, responded: "until [Cameron and Tyler] announce publicly that they have invested in . . . Treats!, I think promoting sites like Hukkster or other 'off-brand' sites will fall on deaf ears . . ."[21] Both Cameron and Tyler initially indicated that they agreed with this sequencing, but then pressed Shaw again to promote Huckster without having yet taken any steps to promote Treats!.[22] On November 14, 2012, Tyler asked Shaw to connect him with television and radio personality, Ryan Seacrest, so that Tyler could inquire whether Seacrest might be willing to assist the brothers in promoting the Winklevoss brand.[23]

         As the brothers sought Shaw's assistance to promote their own profiles, Shaw continued to solicit the brothers' assistance in promoting Treats!.[24] After failing to make any progress on this front, and then having heard from the brothers that they no longer wished to be a part of Treats!, on December 11, 2012, Shaw emailed Tyler to express his frustration:

An express condition of the sale to you was that I would be able to announce your investment to the World.
** *
Now you are telling me [you] not only do not want me to announce, but you wish to sell your shares and any reasonable offer will be entertained.
** *
If [y]ou are adamant that I do not make such an announcement and 'that seems to be the case' then kindly, by return, make me a proposal that will involve ultimately, us entering into a confidentiality agreement to protect the secrecy of your investment that seems to suddenly have become a priority to you both.[25]

         Shaw's frustration grew in 2013, as the brothers continued in their refusal to promote Treats!. In an email to the brothers dated June 17, 2013, Shaw wrote, "you promised to announce your involvement & strung me along milking it for months until you made it clear that you did not want to tell anyone that you were my partners and my investors." He concluded that email by noting that the brothers' failure to honor their commitment had adversely affected him and Treats!: "Now I'm not the first investment. I'm just some mug who got you into a scene you wanted to be in and have been totally suppressed and financially effected [sic]."[26]

         As Shaw was accusing the brothers of failing to honor their promise to promote Treats!, the brothers were accusing Shaw of mismanagement and failing to grow Treats! as promised.[27] According to Plaintiffs, while Shaw promised them that Treats! would be published at least quarterly, Shaw only managed to get the magazine published twice per year.[28] And rather than strengthen the online readership and advertising revenue, it is alleged that Defendants spent money on Shaw's personal entertainment, food, travel and gifts.[29]

         Plaintiffs first raised their concerns about mismanagement in November 2012. Thereafter, from December 2012 through June 2013, the parties exchanged attacks and ripostes with Plaintiffs alleging mismanagement and Defendants alleging breach of the brothers' promises to promote Treats!.[30] The brothers proposed that Shaw buy them out at a price that would allow them to achieve some positive return on their investment. Shaw rejected that proposal and countered that he would buy-out WCF at a deep discount. That proposal was rejected.[31] The parties then threatened each other with legal action.[32]

         While the brothers declined to make any conciliatory overtures toward Shaw at any time from 2013 through 2018, they also did not take steps to break the relationship. For his part, Shaw approached at least two companies to help raise capital in an effort to continue operations and ultimately reorganize the company.[33]He also periodically would inquire whether WCF was willing to redeem its interest in Treats! at a discount, including a rebuffed proposal in 2018.[34]

         D. Procedural Posture

         Plaintiffs filed their Complaint on June 1, 2018, in which they assert four causes of action: (Count 1) Breach of the Amended LLC Agreement based on Defendants' mismanagement of the assets of Treats!; (Count 2) Breach of the October 2012 Promissory Note based on Treats!'s failure to repay the amount owed to WCF under the Note; (Count 3) Breach of Fiduciary Duty based on Shaw's and the Trust's misappropriation of Treats!'s funds and/or assets; and (Count 4) Declaratory Relief for a judicial determination that Plaintiffs have no contractual obligations to Defendants to market or promote Treats!.[35]

         On July 11, 2018, Defendants filed an Answer and Counterclaims in which they assert five causes of action against all Plaintiffs: (Count 1) Common Law Fraud; (Count 2) Fraudulent Inducement; (Count 3) Fraudulent Misrepresentation; (Count 4) Common Law Fraud; and (Count 5) Promissory Estoppel. Each of these claims arise out of the brothers' alleged promise at the outset of their association with Treats! that they would "publicly announce their investment in Treats! and use their personal brand to help grow the company" as a means "to induce Mr. Shaw and Treats! to partner with [Plaintiffs] and to perform numerous personal and professional favors for [Plaintiffs]."[36]

         Plaintiffs moved to dismiss Defendants' counterclaims on July 31, 2018.

         II. ANALYSIS

         The standards governing a motion to dismiss for failure to state a claim are well-settled. "[D]ismissal is inappropriate unless the 'plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.'"[37] When deciding a motion to dismiss, the Court must read the complaint liberally, accept as true all well-pled allegations and draw all reasonable inferences in favor of the non-moving party.[38] Even still, the trial court is not required blindly to accept as true all conclusory allegations "without specific supporting factual allegations."[39]

         A. The Proper Application of Laches to the Counterclaims

         Defendants are correct that the laches defense is often fact-intensive and, therefore, not readily susceptible to adjudication at the pleadings stage.[40] But "[t]here is no rule barring [laches] as the basis for dismissal under Rule 12(b)(6) where 'it is clear from the face of the complaint that [laches] exists and that the plaintiff can prove no set of facts to avoid it.'"[41]

         In cases where the asserted claims are common law claims seeking common law remedies, this court has made clear that a "plaintiff 'should not be placed in a potentially better position [having filed in Chancery] to seek to avoid a statute of limitation than if she had filed in a Delaware court of law by invoking the more flexible doctrine of laches.'"[42] Indeed, "a filing after the expiration of the analogous limitations period is presumptively an unreasonable delay for purposes of laches . . . and prejudice to defendants is thus presumed."[43] In such cases, "absent some unusual circumstances, a court of equity will deny a plaintiff relief when suit is brought after the analogous statutory period."[44]

         Delaware's statute of limitations for claims sounding in fraud or promissory estoppel claims is three years.[45] And "[t]he statute of limitations [in such cases] begins to run when a plaintiff's claim accrues, which occurs at the moment of the wrongful act and not when the effects of the act are felt."[46] Thus, a claim for common law fraud accrues on the day the misrepresentation is made.[47] Similarly, "[a] claim for fraudulent inducement accrues when the fraudulent statements were made, which must be on or before the date when the parties entered into the contract."[48] A claim for promissory estoppel accrues when the alleged promise behind the claim is broken.[49]

         When "'a complaint asserts a cause of action that on its face accrued outside the statute of limitations,' the plaintiffs have the burden to plead facts 'leading to a reasonable inference that one of the tolling doctrines adopted by Delaware courts applies.'"[50] The doctrines of fraudulent concealment, inherently unknowable injuries and equitable tolling will toll the applicable limitations period only when "the facts underlying a claim were so hidden that a reasonable plaintiff could not timely discover them."[51] "In order to toll the statute of limitation under the fraudulent concealment exception, [therefore], the plaintiff must allege some affirmative act by the defendant that either prevented the plaintiff from gaining knowledge of material facts or led the plaintiff away from the truth."[52] Similarly, to invoke the doctrine of inherently unknowable injuries, the plaintiff must allege facts that would allow an inference that "it would be practically impossible for [him] to discover the existence of a cause of action. . . . [and] that he was 'blamelessly ignorant' of both the wrongful act and the resulting harm."[53] Equitable tolling, likewise, is not available to a plaintiff after he "knew or had reason to know of the facts constituting the wrong."[54]

         B. Laches Bars The Counterclaims

         The allegations in the counterclaims reveal that Defendants' claims accrued for statute of limitations (and laches) purposes no later than June 17, 2013.[55] Each of Defendants' four fraud claims arise from the Winklevoss brothers' allegedly false promise to "publicly announce their investment in Treats! and use their personal brand to help grow the company" as a means "to induce Mr. Shaw and Treats! to partner with [Plaintiffs] and to perform numerous personal and professional favors for [Plaintiffs]."[56] According to Defendants, this false representation convinced them to enter into the written Purchase Agreement, including the Amended LLC Agreement, on August 15, 2012, and then to assist the brothers in their desire to gain entrée into Shaw's social circles for their personal and business purposes.[57] Shaw questioned the veracity of the brothers' promise to promote Treats! as early as December 11, 2012, when he emailed Tyler to confirm that the brothers had informed him they would not promote Treats! and to express his frustration with this development.[58] By June 17, 2013, Shaw's frustration had turned to an appreciation that the brothers had "[taken] what [they] wanted" from Shaw but had no intention of honoring their commitment to Treats!.[59]

          Defendants argue the statute of limitations should be tolled because "repeated efforts over many years to get the Winklevoss twins to [promote Treats!] were met with excuses, delay, and further promises which, ultimately, turned out to be untrue."[60] While the counterclaims do not allege anything about "further promises" by the Winklevoss brothers to promote Treats! beyond their initial commitment at or around the time of their investment, even if there were "further promises," it "became clear" to Defendants at least as early as June 17, 2013, that Plaintiffs had no intention to promote Treats! then or ever.[61] Thus, the fraud and promissory estoppel claims accrued no later than June 17, 2013.[62]

         The statute of limitations governing each of the counterclaims expired no later than June 17, 2016.[63] They were filed more than two years later, on July 11, 2018, and are, therefore, time-barred absent tolling.[64]

         C. Defendants Have Failed to Demonstrate "Unusual Conditions" or "Extraordinary Circumstances"

         In the realm of laches, a late-filed claim may be excused in "rare" instances when the claimant can demonstrate "unusual conditions" or "extraordinary circumstances."[65] While these terms have not been precisely defined, [66] our courts have consistently considered certain factors when determining whether to excuse late-filed claims as a matter of equity, including: (1) whether the plaintiff brought his claim, through litigation or any other means, before the statute of limitations expired; (2) whether the delay in filing suit can be explained by a material and unforeseeable change in the parties' personal or financial circumstances; (3) whether the delay in filing suit can be explained by a legal decision in another jurisdiction; (4)whether the defendant knew of, or participated in, any prior proceedings; and (5) whether, at the time the litigation began, a genuine dispute existed regarding the soundness of the claim.[67]

         Defendants maintain that the application of these factors mandate the conclusion that their otherwise time-barred claims should survive dismissal. I disagree. As explained below, there are no "unusual conditions" or "extraordinary circumstances" present here.

         1. Defendants Did Not Pursue Their Counterclaims Before the Statute of Limitations Expired

         Defendants argue this factor is satisfied because: (a) Shaw "sent numerous communications to [Cameron and Tyler] regarding their fraudulent misrepresentations" and "to notify them of his claims";[68] (b) Shaw's attorney sent a letter on April 24, 2018, in which he advised the Defendants that Plaintiffs were preparing to file suit;[69] and (c) Shaw's attorney sent additional correspondence some time thereafter in which he described the evidence that would support the Defendants' claims.[70] Of these communications, only the June 17, 2013 email was sent before the statute of limitations expired on Defendants' counterclaims. Yet even this communication does not reflect that Defendants had pursued their claims "through litigation or otherwise" as contemplated by O'Brien.[71] In BioVeris Corp., the plaintiff argued that it satisfied the first O'Brien factor by sending two letters to defendants demanding payment and then initiating negotiations to resolve the plaintiff's claims before expiration of the limitations period.[72] The court rejected the argument and held that sending letters stating legal positions and proposing settlement "was not sufficient pursuit of the claims to qualify under the first" O'Brien factor.[73] The court went on to say, ...


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