United States District Court, D. Delaware
MARKDUTCHCO 1 B.V. and MARKMIDCO S.AR.L, Plaintiffs and Counterclaim Defendants,
ZETA INTERACTIVE CORP., Defendant and Counterclaim Plaintiff.
William M. Lafferty, John P. DiTomo, Zi-Xiang Shen, MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware;
Stephen M. Juris, Alexandra Verdi, FRIED, FRANK, HARRIS,
SHRIVER & JACOBSON LLP, New York, New York Counsel for
Plaintiffs and Counterclaim Defendants
Patricia A. Winston, MORRIS JAMES LLP, Wilmington, Delaware;
John Du Wors, Nathan Durrance, NEWMAN DU WORS DURRANCE LLP,
Seattle, Washington Counsel for Defendant and Counterclaim
CONNOLLY UNITED STATES DISTRICT JUDGE
case was removed to this Court from the Delaware Court of
Chancery by Defendant/Counterclaim-Plaintiff Zeta Interactive
Corp. (Zeta). Before me are two motions filed by
Plaintiffs/Counterclaim-Defendants MarkDutchCo 1 B.V.
(MarkDutchCo), a Dutch company, and Markmidco S.ar.1
(Markmidco), a Luxembourg company: a motion to confirm an
arbitration award and for attorneys' fees, costs, and
interest, D.I. 7; and a motion to dismiss, or alternatively,
to sever counterclaims, D.I. 10.
The Interest Purchase Agreement
parties' disputes arise out of an Interest Purchase
Agreement Markmidco and Zeta entered into as of August 28,
2015. D.I. 9, Ex. 5. Pursuant to that agreement, Zeta
acquired Markmidco's interest in a customer relationship
management business (the CRM business), which consisted of
several companies that provided to retailers email and
text-message marketing, database management, and related
services. Markmidco subsequently assigned certain of its
interests under the purchase agreement to MarkDutchCo.
the terms of the agreement, Zeta was to pay Markmidco $23,
000, 000 in cash, 1, 685, 717 shares of Zeta common stock,
and several "Earn-out" payments. D.I. 9, Ex. 5
§ 2(a). Zeta owed Markmidco the "First Earn-out
Payment Amount"-$4, 000, 000-"within five (5)
Business Days of the date that EBITDA for the First Earn-out
Period [was] finally determined, solely in the event that the
First Earn-out Target [was] achieved[.]" D.I. 9, Ex. 5
is an acronym for earnings before interest, tax, depreciation
and amortization. The purchase agreement provided a specific
formula to be used to calculate the CRM Business's EBITDA
to determine the Earn-out payments. The agreement also
defined the First Earn-out Period as "the twelve-month
period commencing on the first day of the month following the
Closing Date and ending twelve-months thereafter." D.I.
9, Ex. 5 App'x A. And it defined the First Earn-out
Target as "the achievement by the CRM Business of at
least $10, 000, 000 in EBITDA during the First Earn-out
Period." D.I. 9, Ex. 5 App'x A.
purchase agreement required Zeta to deliver to Markmidco
within 30 days of the end of the First Earn-out Period an
"Earn-out Statement" detailing Zeta's
determination of EBITDA for that period and its calculation
of the resulting First Earn-out Payment Amount. D.I. 9, Ex. 5
§ 2(b). The purchase agreement also required Zeta to
give Markmidco "the opportunity to review all [the]
materials and information" Zeta used to prepare the
Earn-out Statement and calculate the First Earn-out Payment.
D.I. 9, Ex. 5 § 2(b).
Markmidco did not provide Zeta with a written "Objection
Notice" within ten business days of receiving the
Earn-out Statement, the Earn-out Statement would become
"final and binding." D.I. 9, Ex. 5 § 2(c)(i).
On the other hand, if Markmidco wished to dispute the
Earn-out Statement, section 2(c) of the purchase agreement
required Markmidco to "set forth in reasonable detail
[its] alternative calculations (if any), together with
reasonable supporting details with respect to the calculation
and components thereof]]" in its Objection Notice. D.I.
9, Ex. 5 § 2(c)(1).
December 29, 2016, Zeta submitted to Markmidco the First
Earn-out Statement. D.I. 9, Ex. 1 at 2. Zeta represented in
the statement that it had determined the EBITDA for the First
Earn-out Period to be less than $10, 000, 000. D.I. 9, Ex. 1
Attachment A. Therefore, Zeta said, it was not required to
pay Markmidco the $4, 000, 000 Earn-out Payment Amount. D.I.
9, Ex. 1 Attachment A.
January 10, 2017, Markmidco sent Zeta a letter requesting
additional information related to Zeta's First Earn-out
Statement. D.I. 9, Ex. 7. The next day, Zeta provided
Markmidco with some of the requested additional information,
D.I. 9, Ex. 8. In an Objection Notice sent two days later,
Markmidco "dispute[d] the First Earn-out Statement in
all respects." D.I. 9, Ex. 9. Markmidco, however, did
not include an alternative EBITDA calculation in its
Objection Notice because it claimed it still lacked enough
information to fully respond to the First Earn-out Statement.
D.I. 9, Ex. 9.
responded to Markmidco's Objection Notice by claiming
that the notice was invalid because it did not provide an
alternative EBITDA calculation and that in the absence of a
valid Objection Notice, the Earn-Out statement was
"final and binding for all purposes." D.I. 9, Ex.
January 30, 2017, after receiving more information from Zeta,
Markmidco's counsel sent Zeta a "Supplement" to
its Objection Notice. D.I. 9, Ex. 12. In its supplement,
Markmidco disputed Zeta's First Earn-out Statement and
provided an EBITDA calculation for the First Earn-out Period
that was significantly greater than the $10, 000, 000
threshold that triggered the $4, 000, 000 First Earn-out
Payment. D.I. 9, Ex. 12. On the same day, Markmidco notified
Zeta that it was referring the parties' dispute about the
Earn-out payment to an accounting arbitrator. D.I. 9, Ex. 13.
The Arbitration Award
the terms of the purchase agreement, any dispute about the
amount of the Earn-out payment-defined by the agreement as
"Disputed Payment Amount"-"shall be
resolved" by an Accounting Arbitrator-defined by the
purchase agreement as "the sole arbiter of all matters,
procedural and/or substantive, as to such Disputed Payment
Amount." D.I. 9, Ex. 5 § 2(c)(i)(B).
the agreement, "absent fraud, bad faith or manifest
error" the Arbitrator's decision
"constitute[s] an arbitral award that is final, binding
and non-appealable and upon which a judgment may be entered
by a court having jurisdiction thereover." D.I. 9, Ex. 5
§ 2(c)(i)(C). In this case, the parties jointly retained
Deloitte & Touche Partner Ken Avery to serve as the
April 28, 2017, Markmidco and Zeta provided the Arbitrator
with their initial submissions. D.I. 9, Exs. 17, 18. On May
19, 2017, the parties submitted their rebuttal submissions to
the Arbitrator. D.I. 9, Exs. 22, 23. The Arbitrator then
issued a series of targeted questions to the parties. D.I. 9,
Ex. 24. The parties responded to the Arbitrator's
questions on July 6, 2017. D.I. 9, Exs. 25, 26.
August 4, 2017, the Arbitrator issued his final and binding
determination (the Award). D.I. 9, Ex. 1. The Arbitrator
began by addressing the procedural matters associated with
the Disputed Payment Amount. D.I. 9, Ex. 1. First, the
Arbitrator found that because Markmidco stated in the
Objection Notice that it "disputed the entirety of
[Zeta]'s First Earn-out Statement pending receipt of
additional information from [Zeta][, ]" Markmidco's
failure to provide alternative EBITDA calculations did not
render the Notice deficient. D.I. 9, Ex. 1 at 3. The
Arbitrator further found that Markmidco's Supplement was
procedurally appropriate because the Supplement disputed
seven items in Zeta's First Earn-out Statement and
contained alternative calculations for six of those items.
D.I. 9, Ex. 1 at 3.
ruling on these procedural issues, the Arbitrator determined
that the EBITDA for the First Earn-out Period was greater
than $10, 000, 000 and, therefore, Zeta owed Markmidco the
$4, 000, 000 First Earn-out Payment. D.I. 9, Ex. 1 Attachment
purchase agreement provided that the Arbitrator's fees
and expenses would be borne by Zeta and Markmidco "in
the proportion that the aggregate dollar amount of the
disputed items submitted to the Accounting Arbitrator by such
Party that are unsuccessfully disputed by such party (as
finally determined by the Accounting Arbitrator) bears to the
aggregate dollar amount of disputed items submitted by [the
parties]." D.I. 9, Ex. 5 § 2(c)(i)(D).
parties initially split payment of the Arbitrator's $96,
000 fee equally- $48, 000 each. D.I. 9, Ex. 21, Ex. 27. But
when Zeta refused to pay Markmidco the Award, Markmidco asked
the Arbitrator to allocate the $96, 000 in arbitration fees
between the parties "based on the specific amounts that
were 'finally determined' by Deloitte." D.I. 9,
Ex. 28 at 2. According to Markmidco, the Arbitrator's
decision "finally determined in favor of [Markmidco]
with respect to 85% of the disputed items determined in
connection with that award ... and in favor of [Zeta] with
respect to 15% of those items[.]" D.I. 9, Ex. 28 at 2.
Markmidco argued that Zeta was therefore "responsible
for payment of 85% ($81, 600) of Deloitte's $96, 000
fee" and Markmidco was "responsible for 15% of
the fee ($14, 400)." D.I. 9, Ex. 28 at 2. Because each
party had advanced $48, 000 of Deloitte's fee, Markmidco
asked the Arbitrator to award it $33, 600 (i.e., $48, 000 -
$14, 400). D.I. 9, Ex. 28 at 2.
Arbitrator declined Markmidco's request to determine how
the parties should allocate his fee, on the grounds that the
purchase agreement and engagement letter "did not
include the involvement of the arbitrator in determining the
proper allocation of the fees to be borne by each of the
parties." D.I. 9, Ex. 28 at 1.
The Parties' Pleadings
September 6, 2017, Plaintiffs filed a verified complaint in
the Delaware Court of Chancery against Zeta. D.I. 9, Ex. 2.
Zeta filed an answer and seven counterclaims in the Court of
Chancery on October 10, 2017. That same day, Zeta removed the
case to this Court.
Count I of its complaint, Plaintiffs seek confirmation of the
$4, 000, 000 Award pursuant to the Federal Arbitration Act
(FAA), 9 U.S.C. § 1 et seq. D.I. 9, Ex. 2.
¶¶ 36-40. In Count II, Plaintiffs allege that Zeta
breached the purchase agreement by refusing to refund
Markmidco $33, 600 in arbitration fees. D.I. 9, Ex. 2.
¶¶ 41-49. Plaintiffs request that the Court grant
them pre-judgment and post-judgment interest and "all
fees, costs, and expenses, including attorneys' fees,
incurred to enforce the Award and recover damages for
Zeta's breach of the Purchase Agreement [.]" D.I. 9,
Ex. 2 Prayer for Relief ¶¶ D-F.
Zeta's counterclaims directly concern the Award. In its
sixth counterclaim, Zeta seeks to vacate the Award pursuant
to the FAA and the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, opened for
signature June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S.
38, reprinted in 9 U.S.C. § 201 (historical and
statutory notes) (hereinafter "Convention") on the
grounds that the Award contains "manifest errors."
D.I. 9, Ex. 3 Counterclaims ¶¶ 59-63. In its
seventh counterclaim Zeta seeks a declaration "that the
Award is to be set aside or, in the alternative, that the
Award be offset by any and all damages suffered by Zeta from
Defendants' breaches of the Purchase Agreement and errors
in the Award." D.I. 9, Ex. 3 Counterclaims ¶¶
first five counterclaims concern patents and patent
applications it acquired as part of the CRM business. Zeta
alleges that errors in the inventorship and assignment of the
patents and applications "affect[ ] their enforceability
and validity." D.I. 9, Ex. 3 ¶ 10. Zeta seeks in
its first counterclaim a correction of inventorship pursuant
to 35 U.S.C. §§ 152 and 256. In its second
counterclaim, Zeta alleges that Markmidco's failure to
identify and correct the inventorship and assignment errors
breached Markmidco's representation and warranties
obligations under the purchase agreement. In its third
counterclaim, Zeta seeks indemnification under §
6(b)(ii) of the purchase agreement based on these alleged
breaches. In its fourth counterclaim, Zeta alleges that
Markmidco's false representations regarding the patents
and patent applications constituted fraud.
in its fifth counterclaim, Zeta seeks a declaration that Zeta
has the right to withhold certain payments from Markmidco as
a result of Markmidco's breach of the purchase agreement.
THE MOTION FOR CONFIRMATION OF THE AWARD AND FOR FEES, COSTS,
are foreign companies. Zeta is a Delaware company. It is
undisputed-though, for reasons unclear, not acknowledged by
Plaintiffs-that the ...