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Carr v. Global Payments Inc.

Court of Chancery of Delaware

December 11, 2019

ROBERT O. CARR, Plaintiff,
v.
GLOBAL PAYMENTS INC. and HEARTLAND PAYMENT SYSTEMS, LLC, Defendants.

          Date Submitted: November 13, 2019

          A. THOMPSON BAYLISS AND ADAM K. SCHULMAN, OF ABRAMS & BAYLISS LLP, WILMINGTON, DELAWARE; OF COUNSEL: PETER L. WELSH AND PAUL S. KELLOGG, OF ROPES & GRAY LLP, BOSTON, MASSACHUSETTS, ATTORNEYS FOR PLAINTIFF.

          T. BRAD DAVEY AND ANDREW H. SAUDER, OF POTTER ANDERSON & CORROON LLP, WILMINGTON, DELAWARE; OF COUNSEL: DAVID L. FEINBERG AND FREDRIC J. BOLD, JR. OF BONDURANT MIXSON & ELMORE LLP, ATLANTA, GEORGIA, ATTORNEYS FOR DEFENDANTS.

          MEMORANDUM OPINION

          GLASSCOCK, Vice Chancellor

         This matter was before me on the Defendants' Motion to Modify an order requiring litigation costs incurred by the Plaintiff, Robert O. Carr, to be advanced by the Defendants. I granted that Motion by Memorandum Opinion of October 31, 2019. The Plaintiff moved for reargument, pointing to a fundamental misapprehension of fact on my part; I granted that motion and withdrew the Memorandum Opinion. The following is my resolution of the underlying Motion to Modify. For the reasons that follow, that Motion is granted.

         I. BACKGROUND [1]

         A. The Parties

         Plaintiff Robert O. Carr is the former CEO and Chairman of the Board of Directors of Heartland Payment Systems, Inc., now Heartland Payment Systems, LLC ("Heartland").[2]

         Defendant Heartland is a Delaware limited liability company that operates as a nationwide provider of electronic payment processing services.[3]

         Defendant Global Payments Inc. ("Global") is a Georgia corporation and Heartland's sole member.[4]

         B. The Merger Agreement

         Carr served as Heartland's Chairman and CEO starting in 2000.[5] In December 2015, Heartland, along with Global, Data Merger Sub One, Inc., and Data Merger Sub Two, LLC, signed an Agreement and Plan of Merger (the "Merger Agreement").[6] Under the Merger Agreement, Heartland became a limited liability company and a wholly owned subsidiary of Global.[7]

         Section 5.9(b) of the Merger Agreement provides that after the merger, Global will cause Heartland to the fullest extent permitted by law to indemnify and advance expenses to Carr for litigation that "arises out of or pertains to the fact that" Carr was an officer and director of Heartland prior to the merger:

[D]uring the period commencing as of the Effective Time and ending on the sixth (6th) anniversary of the Effective Time, Parent shall cause the Surviving Company to the fullest extent permitted under applicable Law, (i) indemnify and hold harmless each Indemnitee against and from any costs or expenses (including attorneys' fees), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement actually and reasonably incurred by such Indemnitee in connection with any Litigation, whether civil, criminal, administrative or investigative, to the extent such Litigation arises out of or pertains to the fact that an Indemnitee is or was an officer or director of the Company or any of its subsidiaries, or an officer, director or trustee of any other Person at the request of the Company or any of its Subsidiaries, prior to the Effective Time, in each case, whether asserted or claimed prior to, at or after the Effective Time; and (ii) pay in advance of the final disposition of any such Litigation the expenses (including reasonable attorneys' fees) of any Indemnitee upon receipt of an undertaking by or on behalf of such Indemnitee to repay such amount if it shall ultimately be determined that such indemnitee is not entitled to be indemnified.[8]
C. Heartland Sues and Carr Seeks Advancement

         After the merger's public announcement, the government initiated investigations concerning the trading of Heartland's stock leading up to the announcement.[9] Allegedly, Carr provided cash along with inside information regarding the merger to his long-time girlfriend so that she could purchase stock and capitalize on the bump in value after the merger's public announcement.[10] These investigations culminated in a lawsuit by the SEC against Carr for insider trading.[11]

         In response to the government investigations, Heartland filed suit in the United States District Court for the District of New Jersey (the "New Jersey Action").[12] This initial complaint (the "Initial Complaint") asserted claims for breach of fiduciary duty and breach of contract against Carr.[13] The breach-of-fiduciary-duty claims concerned the alleged insider trading described above.[14] The breach-of-contract claim alleged that Carr breached the non-compete and non-solicitation clauses of his employment agreement.[15] Specifically, the breach-of-contract claim alleged that Carr founded a new company, Beyond, during his non-compete period that offered competing products and services.[16] Using his new company, he allegedly competed and solicited Heartland employees, in the process using purloined confidential information.[17]

         Regarding confidential information, the Initial Complaint alleged that:

• Heartland entered the employment agreement with Carr to, among other reasons, "preserve and protect its confidential information, "[18] that the purpose of the agreement was "intended to, among other things, preclude Carr from disclosing or misappropriating [Heartland's] confidential information for his own benefit or for the benefit of any other person or entity, "[19] and that the employment agreement "prohibits Carr from using or disclosing [Heartland's] confidential information;[20]
• Carr's employment agreement required him to acknowledge that the restrictions were necessary to protect the company's confidential information;[21]
• Carr breached the confidentiality restrictions outlined in his employment agreement through his insider trading;[22]
• Carr's misuse of confidential information intertwined with his unlawful competition and solicitation because he sought after and used confidential compensation plans, commission plans, and contract terms;[23] and
• "Carr's . . . breaches of the confidentiality . . . covenants, have caused, and continue [to] cause, [Heartland] harm."[24]

         Carr requested advancement for his litigation expenses in the New Jersey Action, and the Defendants refused.[25] In response, on July 30, 2018, Carr sued to compel advancement from the Defendants under § 5.9(b) of the Merger Agreement.[26] In a December 3, 2018 bench ruling, I found that Carr was entitled to advancement for both the breach-of-duty and the breach-of-contract claims brought in the New Jersey Action, and I issued an advancement order on December 7, 2018.[27] The New Jersey Action, meanwhile, was stayed while a criminal investigation in the District of Connecticut over Carr's insider trading proceeded.[28] After my Order issued, this advancement action closed.

         D. Heartland Amends its Complaint and Seeks to Modify the Advancement Order

         The stay in the New Jersey Action lifted on May 30, 2019, and a few days later the Defendants filed their First Amended Complaint in that lawsuit (the "FAC").[29] In addition to the existing claims against Carr for breach of fiduciary duty and breach of contract, the Defendants added claims for "Breach of the Duties of Loyalty, Trust, and Good Faith," "Equitable Fraud," and "Fraud."[30]

         Most importantly for this matter, the Defendants amended their breach-of-contract claim. As described above, the initial breach-of-contract claim alleged that Carr misused confidential information, engaged in unlawful competition, and participated in unlawful solicitation.[31] By contrast, the FAC's breach-of-contract claim removes allegations of the misuse of confidential information and alleges only a breach of the non-compete and non-solicitation aspects of Carr's employment agreement; breaches occurring, per the Defendants here, only after the end of Carr's employment at Heartland.[32] The FAC eliminates allegations that Carr sought after or used confidential information, copied specific compensation and commission plans, or sought after or had access to confidential contract terms.[33] In other words, the FAC distances itself from allegations of misuse of confidential information and focuses solely on Carr's post-employment competition and solicitation activity.[34] The FAC specifically eschews any allegation that Carr acquired confidential information during his service with which he breached his employment contract.

         On June 3, 2019, after amending their claims in the New Jersey Action, the Defendants moved to modify my prior advancement order (the "Motion to Modify"), and this case reopened.[35] The Motion to Modify relates only to the breach-of-contract claim (and not the breach of fiduciary duty, breaches of loyalty, trust and good faith, equitable fraud, or fraud claims) within that suit.[36] The Defendants' amendments in the New Jersey Action suggest they intend the breach-of-contract claim to arise solely from Carr's conduct after he was no longer an officer and director of Heartland.[37] In the FAC, the Defendants state they will not rely on allegations of the misuse of confidential information.[38] Accordingly, they ask that I revisit my finding that Carr is entitled to advancement for the breach-of-contract claim.

         I heard oral argument on July 25, 2019 in Georgetown and considered the matter submitted on that date. I issued a Memorandum Opinion on October 31, 2019 but withdrew that Opinion upon Plaintiff's Motion for Reargument. This decision follows.

         II. ANALYSIS

         Delaware law recognizes the potential for parties to eliminate their advancement obligations by amending their claims.[39] If the amendments successfully "moot [the] advancement dispute by removing any []claims that would trigger an advancement right," modification of a prior advancement order is proper.[40] Such a motion, I confess, engages my skepticism nonetheless. This Court, having found-over the Defendants' protests-a right to advancement, ought be wary of artful attempts at pleading around such a right. The "mere relabeling" of claims will not support modification when the underlying litigation remains substantially the same.[41] Finally, I consider the Motion to Modify in recognition that equity requires that ambiguities in advancement cases generally be resolved in favor of enforcing the advancement right, with the ultimate resolution of those issues to be resolved at the indemnification stage of the proceedings.[42]

         Upon consideration, in light of the facts and instructive case law, I find that the Defendants' motion here must be granted.

         A. Advancement Rights as Defined by the Merger Agreement

         Section 145 of the Delaware General Corporation Law ("DGCL") allows corporations to commit to advancement rights for directors and officers for indemnifiable expenses, either in foundational corporate documents or by contract.[43]Section 145 permits indemnification for litigation that arises "by reason of the fact that" a party is or was an officer or director.[44] As Carr points out, however, his rights arise out of the Merger Agreement via which Heartland became an LLC. LLC's are, largely, creatures of contract, permitted to construct relationships and impose duties free of many of the strictures that bind corporations and their fiduciaries under the DGCL. Therefore, despite the fact that it is Carr's service as a corporate fiduciary which is the basis of the extension of advancement rights, the contract itself implicates the LLC, which was free to contract for advancement rights in way of indemnification, regardless of the strictures of Section 145.

         Here, the parties agree that § 5.9 of the Merger Agreement provides the standard that governs Carr's advancement rights. Section 5.9 of the Merger Agreement promises indemnification and advancement for litigation that "arises out of or pertains to the fact that" Carr was an officer or director of Heartland.[45] The parties appear in agreement, and I find, that "pertains to" is at least as broad in scope as "arises out of," and thus provides the outer limit of advancement rights in this context. In other words, rather than importing the statutory "by reason of the fact" standard, the drafters of the Merger Agreement chose to extend these rights in way of litigation that "pertains to" Carr's status as an officer or director. The first step in deciding this matter, then, is to determine what scope of advancement the parties meant to convey by use of the phrase "pertains to."

         The Defendants argue that because their claim (as amended) is strictly for breach of Carr's non-compete and non-solicitation obligations after his employment ended, the claim is a personal dispute between an employer and employee and does not "pertain to" Carr's former role as Chairman and CEO of Heartland before the merger date. The Defendants point to case law applying the "by reason of the fact" standard in Section 145, and urge me to apply that standard here. Carr, in turn, argues the language in § 5.9 of the Merger Agreement creates a standard broader in scope than "by reason of the fact," and that it includes the breach-of-contract claim, even as amended.

         I assume that the parties chose the verb "pertain" for a reason, and that the failure to employ the familiar statutory standard was purposeful. "When the contract is clear and unambiguous," this Court will "give effect to the plain-meaning of the contract's terms and provisions."[46] Since the term "pertain" is undefined in the contract, I turn to Merriam Webster's Third New International Dictionary as a standard reference.[47] Per that source, to pertain to is to belong to; as a part, attribute, care, concern or duty.[48] In other words, the Defendants are bound to provide advancement for claims that relate to some attribute or duty of Carr's service as a director or CEO.[49] This language is broad, but not unbounded.

         B. The Breach-of-Contract Claim is not Related to an Attribute or Duty of Carr's Position as an Officer or Director with Heartland

         Under the Merger Agreement, the Defendants are liable for advancement of Carr's expenses, including attorney's fees, for legal actions involving an attribute or duty of his service as a corporate officer or director. Conversely, legal actions lacking this nexus are not within the contractual obligation. Applying this standard, the alleged fraud and breaches of fiduciary duty by Carr warrant advancement because they involve his actions as Heartland's CEO; the Defendants do not contend otherwise. The Defendants point to our case law-involving the different standard ("by reason of the fact") of Section 145 of the DGCL-that provides that "[c]laims brought by a corporation against an [individual] for . . . breaches of a noncompetition agreement are quintessential examples of a dispute between an employer" and an employee, and thus not indemnifiable.[50] They argue that unless the contract claim here arises by reason of the fact of Carr's service as an officer or director, he is not entitled to indemnification or advancement under the Merger Agreement.

         I find the cases involving the Section 145 standard, although not controlling, to be informative here. These litigants, with great diligence, have cited the pertinent case law concerning whether allegations of post-employment prohibited competition enabled by company information purloined while acting as an officer or director trigger advancement under Section 145. That case law is not a model of consistency. Vice Chancellor Zurn, in a scholarly opinion, recently considered the same case law, in Ephrat v. medCPU, [51] and I need not repeat that exercise here. The Vice Chancellor sided with the weight of authority under the Brown v. LiveOps[52] line of cases, finding such allegations of breach enabled by purloined confidential information require advancement.[53] The medCPU Court concluded that "allegations relating to post-separation use of confidential information learned pre-separation are 'by reason of the fact' of [plaintiffs'] positions."[54]

         I find the reasoning in medCPU also applicable to the question before me, which involves the broader standard of "pertaining to" Carr's corporate service. Under this reasoning, claims arising post termination fall into two categories. If the claim as pled relies on the misuse of confidential information learned while an officer or director, it "pertains to" the party's former position, and that party is entitled to advancement under the standard applicable here.[55] On the other hand, if the claim merely alleges post-employment breach of a non-compete agreement, and it does not allege that the party used confidential information previously learned to facilitate the breach, then the breach does not "pertain to"-that is relate to a duty or attribute of-the party's position.[56]

         In medCPU, the Court found that claims regarding the failure to return confidential documents and property, misappropriation of trade secrets, and possessing and using confidential and proprietary information all warranted advancement even though the actions arose post-termination.[57] By contrast, claims for breach of employment agreements based on the plaintiffs' competition with the company and solicitation of its employees did not warrant advancement because these claims did not allege that the plaintiffs misused any confidential information in carrying out the breaches.[58] This same dichotomy is pertinent here, and is, I note, consistent with my original bench decision and Order in this matter. In other words, even under the broad standard for advancement chosen by the parties, the activity complained of must relate to some attribute of the indemnified position. If the action complained of would be contractually prohibited regardless of the capacity of the employee as an officer or director, and if the claim does not arise from some activity related to that position, the claim is not one "pertaining to" the corporate service.

         The Initial Complaint here stated that Heartland entered the employment agreement with Carr to, among other reasons, "preserve and protect its confidential information."[59] It further stated that the purpose of the agreement was "intended to, among other things, preclude Carr from disclosing or misappropriating [Heartland's] confidential information."[60] The Initial Complaint alleged that Carr's employment agreement required him to acknowledge that the restrictions were necessary to protect the company's confidential information to which Carr was exposed by reason of his service.[61] The Initial Complaint then intertwined the misuse of confidential information with the allegations of unlawful competition and solicitation.[62]

         In short, as I found in my December 3, 2018 bench decision in this matter, embodied in my December 7 Order, the Initial Complaint in the New Jersey Action alleged that Carr misused confidential information, and the provisions excerpted from the employment agreement made clear that this was confidential information learned while Carr was on the job. This misuse of confidential information was intertwined with the entirety of the contractual allegations against Carr. Under the rationale of medCPU, these allegations "relat[e] to post-separation use of ...


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