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Markdutchco 1 B.V. v. Zeta Interactive Corp.

United States District Court, D. Delaware

November 12, 2019

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 Plaintiff



         This 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 (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.

         I. BACKGROUND

         A. The Interest Purchase Agreement

         The 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.

         Under 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 § 2(b).

         EBITDA 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.

         The 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).

         If 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).

         On 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.

         On 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.

         Zeta 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. 10.

         On 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.

         B. The Arbitration Award

         Under 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).

         Under 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 Accounting Arbitrator.[1]

         On 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.

         On 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.

         After 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 A.

         C. Arbitration Fees

         The 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).

         The 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.

         The 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.

         D. The Parties' Pleadings

         On 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.

         1. Plaintiffs' Complaint

         In 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.

         2. Zeta's Counterclaims

         Two of 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 ¶¶ 64-67.

         Zeta's 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.

         Finally, 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.


         A. Legal Standards

         Plaintiffs are foreign companies. Zeta is a Delaware company. It is undisputed-though, for reasons unclear, not acknowledged by Plaintiffs-that the ...

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