JAMES P. JONES, District Judge.
In this diversity action involving the sale of a Virginia business, the disappointed buyer has sued for damages for breach of the written contract governing the transaction, as well as for related tort claims. Because I find that Delaware law governs the case pursuant to a choice-of-law provision of the contract and because that law does not support the claims made by the plaintiff, I will grant the defendants' Motion to Dismiss. My reasons are as follows.
The plaintiff, Pyott-Boone Electronics Inc. ("PBE"), asserts claims in this case arising from a business transaction in which PBE's predecessor, PBE Acquisition, Inc. ("PBE Acquisition"), purchased from PBE's stockholders all of the outstanding capital stock of the company. After the closing, PBE Acquisition merged into PBE, with PBE being the surviving entity.
The plaintiff's claims include an alleged violation of the Virginia Securities Act, a breach of certain representations contained in the Stock Purchase Agreement dated April 1, 2011 (the "SPA"), as well as fraud claims. The defendants include the IRR Trust for Donald L. Fetterolf Dated December 9, 1997, (the "Donald Fetterolf Trust") and the IRR Trust for M. Mitchell Fetterolf Dated December 9, 1997 (the "Mitchell Fetterolf Trust"), which entities were the majority shareholders of PBE prior to the sale and were parties to the SPA.
This court's subject-matter jurisdiction exists pursuant to 28 U.S.C.A. § 1332(a)(1)
The defendants have jointly filed a Motion to Dismiss Complaint with Prejudice pursuant to Federal Rule of Civil Procedure 12(b)(6). The motion has been briefed and orally argued and is ripe for decision.
Federal pleading standards require that a complaint contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). A Rule 12(b)(6) motion to dismiss tests the legal sufficiency of a complaint to determine whether the plaintiff has properly stated a claim. Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999). In order to survive this motion, the plaintiff must state "a plausible claim for relief" that permits "the court to infer more than the mere possibility of misconduct" based upon its "judicial experience and common sense." Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In evaluating a pleading, the court accepts as true all well-pled facts and construes those facts in the light most favorable to the plaintiff. Id. at 680, 129 S.Ct. 1937.
The facts of the case as presented in the Complaint, which I must accept as true for the purpose of deciding the Motion to Dismiss, are as follows.
PBE is located in Tazewell, Virginia, and manufactures mine safety and communications equipment. In April of 2010, the defendants began to market the potential sale of PBE. Among the interested buyers was an investor who would eventually form PBE Acquisition, the vehicle used to facilitate the purchase of PBE. On November 17, 2010, during the course of preliminary investigations and negotiations between these parties regarding a potential sale, the defendants' investment banker sent a document to PBE Acquisition in response to its request for information. This document, which the parties have referred to as the "Distributor Analysis," outlined anticipated future sales opportunities for four major distributors of the Leaky Feeder System ("LFS"), a key PBE product line. PBE Acquisition requested this information from the defendants because for confidentiality reasons, it had agreed to refrain from directly contacting any of PBE's major customers or distributors.
Following negotiations, the relevant parties entered into the SPA. The SPA, which is an exhibit to the Complaint, contains twenty-four pages of express representations and warranties. Appended to the SPA are more than seventy pages of schedules and exhibits, representing the information upon which the parties were to have relied in concluding their agreement. Neither the Distributor Analysis nor the information contained therein was referred to in the SPA or included among the attached schedules and exhibits.
The plaintiff now claims that the Distributor Analysis contained knowing and negligent misrepresentations about the future marketability of PBE's LFS. It alleges that the defendants represented that they expected sales to continue at high levels as a result of new government safety requirements, despite knowing that the majority of mines that had yet to install the required technology had already contracted
In its Complaint, the plaintiff asserts eight separate causes of action against the defendants arising out of these facts. Counts One, Two and Three allege violations of the Virginia Securities Act. Count Four alleges breaches of the representations and warranties set forth in sections 3.02(w) and 3.02(r)(i) of the SPA, for which Count Five seeks indemnification. Count Six alleges a breach of the implied covenant of good faith and fair dealing. Counts Seven and Eight allege fraud, both actual and constructive.
The SPA contains a choice-of-law provision as follows: "This Agreement shall be governed by the laws of the State of Delaware without regard to any jurisdiction's conflicts of laws provisions." (SPA § 12.05(a).)
The defendants have moved to dismiss each of the counts for failure to state a claim for which relief can be granted. See Fed. R. Civil P. 12(b)(6).
Because it goes to the heart of the plaintiff's action, I will first address Count Four, which alleges a breach of certain of the SPA representations and warranties. "In general, the interpretation of a written contract is a question of law." Homeland Training Ctr., LLC v. Summit Point Auto. Research Ctr., 594 F.3d 285, 290 (4th Cir.2010). As such, contract interpretation is an appropriate question to be resolved in a motion to dismiss. Given the SPA's choice-of-law provision, I will interpret these provisions of the contract according to Delaware law.
The plaintiff first alleges that the Shareholder Defendants and defendant Fetterolf Group have breached section 3.02(w) of the SPA.
When interpreting a contract, Delaware courts "strive[] to determine the intent of the parties, looking first at the relevant document, read as a whole, in order to divine that intent." Matulich v. Aegis Commc'ns Grp., Inc., No. Civ.A. 2601-CC, 2007 WL 1662667, at *4 (Del.Ch. May 31, 2007) (citing Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 395 (Del. 1996)), aff'd, 942 A.2d 596 (Del.2008). "In interpreting contract language, clear and unambiguous terms are interpreted according to their ordinary and usual meaning. Absent some ambiguity, Delaware courts will not distort or twist contract language under the guise of construing it." Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1030 (Del.Ch.2006) (internal citations omitted). "Moreover,
In light of these governing principles of contract interpretation, I find that this claim is founded on an impossibly broad interpretation of section 3.02(w). In order to reach the conclusion that the plaintiff advocates, the warranties contained in section 3.02(w) would effectively encompass every statement any of the defendants ever made to the plaintiff regarding the sale throughout months of negotiations. This interpretation is specifically inconsistent with two other provisions of the SPA.
First, the SPA contains a merger and integration clause in section 12.07.
Additionally, the Distributor Analysis cannot be characterized as a "document required to be executed and delivered" under the SPA. The defendants, through their investment banker, provided the Distributor Analysis in response to the plaintiff's request for information four months before the parties entered into any agreement. The provisions of the Distributor Analysis could not have been "required" by an agreement that would not exist until months later. Moreover, the agreement between the parties did not create an obligation to provide this information.
The plaintiff's interpretation of section 3.02(w) is also inconsistent with the plain terms of section 10.02(i) of the SPA, an anti-reliance clause.
The defendants advance an interpretation of section 3.02(w) that is both true to its plain language and consistent with these other provisions. This section warrants statements that were made "pursuant to" or "in connection with" the agreement, which must reference documents and statements required to be furnished to the plaintiff prior to the closing date in order to complete the transaction. A statement provided to a prospective buyer over four months before a deal is ultimately struck cannot truly be understood as being "pursuant to" or in connection with some future and hypothetical agreement.
The SPA in this case is a contract negotiated between two counseled and sophisticated parties. The plaintiff's interpretation of section 3.02(w) — the interpretation that would be required to sustain its claim for breach — is unreasonable and inconsistent with the other provisions for which the parties negotiated.
Count Four of the Complaint alleges with respect to the Distributor Analysis that the Shareholder Defendants and the Fetterolf Group also breached the terms of section 3.02(r)(i).
The defendants argue that the plaintiff has not and cannot plead sufficient facts that would tend to show a breach of this section and the claim should be dismissed with prejudice. I agree that the plaintiff has inadequately asserted a violation of this provision of the SPA. Such facts that have been alleged are not presented in "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). I can only infer "the mere possibility of misconduct," Iqbal, 556 U.S. at 679, 129 S.Ct. 1937, which is insufficient for pleading purposes. Nevertheless, the facts alleged do not foreclose such a claim and accordingly upon proper motion the plaintiff will be granted leave to amend with regard to its claim under section 3.02(r)(i).
In Count Six, the plaintiff claims breach of the implied covenant of good faith and fair dealing in connection with the Distributor Analysis. The plaintiff alleges the SPA incorporated this implied covenant and that the Shareholder Defendants breached it by knowingly making untrue statements of material fact and by omitting to state material facts necessary to make other statements not misleading. The plaintiff claims it relied upon these misrepresentations and suffered damages as a result.
A covenant of good faith and fair dealing is impliedly incorporated into every contract under Delaware Law. Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch.1986). Courts have characterized this implied covenant as "contractual in nature," noting that it "was created to promote the spirit of the agreement and to protect against one side using underhanded tactics to deny the other side the fruits of the parties' bargain." Gloucester Holding Corp. v. U.S. Tape & Sticky Prods., LLC, 832 A.2d 116, 128 (Del.Ch.2003) (internal quotation marks and citation omitted). Contrary to the defendants' assertion, it does not appear that Delaware courts allow parties to generally disclaim this implied covenant through broad merger and integration clauses. "Express contractual provisions always supersede the implied covenant, but even the most carefully drafted agreements will harbor residual nooks and crannies for the implied covenant to fill." ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, LLC, 50 A.3d 434, 441 (Del.Ch.2012). Courts will, however, apply this legal theory "only in narrow circumstances." Chamison v. HealthTrust, Inc-The Hosp. Co., 735 A.2d 912, 921 (Del.Ch. 1999), aff'd, No. 392, 1999, 2000 WL 275649 (Del. Mar. 6, 2000). "The implied covenant cannot contravene the parties' express
In this case, the parties did consider the potential for a situation like the one alleged, and they addressed that potential directly in their agreement. These sophisticated parties negotiated for the inclusion of pages of representations and exhibits in the SPA. The parties agreed that they would rely on those representations, and if any of one party's representations proved to be false or misleading, the other party would have a remedy. The parties further agreed that they would not and should not rely on any information that was not included in these representations. Given these carefully negotiated provisions, and the fact that the implied covenant "cannot be used to forge a new agreement beyond the scope of the written contract," the court should refrain from reading in an additional representation in this case. Chamison, 735 A.2d at 921. Moreover, the plaintiff has not stated a claim for breach of the express contractual terms, nor has it identified what term it would have the court read into the contract to remedy any insufficiencies. See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 901 A.2d 106, 116 (Del.2006). Absent this showing of a need for an implied term to give effect to the original contractual intent of the parties, the plaintiff has not stated a claim for relief under the implied covenant. For that reason, Count Six fails to state a claim upon which relief can be granted.
To address the remaining counts of the Complaint, the court must first resolve a dispute between the parties and determine which state's law should apply.
A federal district court sitting in diversity will apply the substantive law of the forum state. Erie R.R. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The substantive law of the forum state for purposes of Erie includes its choice-of-law rules. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Therefore, I will apply Virginia's choice-of-law rules.
The parties disagree about what law governs the plaintiff's remaining claims. The choice-of-law provision, section 12.05(a) of the SPA, states, "This Agreement shall be governed by the laws of the State of Delaware without regard to any jurisdiction's conflicts of laws provisions." Virginia courts generally enforce choice-of-law clauses, "unless the party challenging enforcement establishes that such provisions are unfair or unreasonable, or are affected by fraud or unequal bargaining power." Paul Bus. Sys., Inc. v. Canon U.S.A., Inc., 240 Va. 337, 397 S.E.2d 804, 807 (1990). Neither party has claimed that this provision is somehow unfair or affected by fraud.
The plaintiff asserts, however, that its tort claims for fraud and its claims under the Virginia Securities Act fall outside the scope of the SPA's choice-of-law provision and are not subject to Delaware law. The
As a threshold issue, the parties disagree as to which state's law — that of the forum state or the state identified in the provision — should be used to determine the scope of the contractual choice-of-law provision. This question is itself a matter of the choice-of-law rules of the forum state. Therefore, this court should determine the scope of a choice-of-law provision in the same manner as the courts of Virginia. It does not appear, however, that any Virginia courts have had occasion to undertake this analysis. It is my responsibility, therefore, to approach this issue in the manner I conclude the Virginia Supreme Court would employ if it were to address the question. See Wells v. Liddy, 186 F.3d 505, 528 (4th Cir.1999) ("To forecast a decision of the state's highest court we can consider, inter alia: canons of construction, restatements of the law, treatises, recent pronouncements of general rules or policies by the state's highest court, well considered dicta, and the state's trial court decisions.").
Jurisdictions across the United States are split regarding what law to apply in defining the scope of a choice-of-law provision. The Second Circuit noted this division of authority in Finance One Public Co. v. Lehman Brothers Special Financing, Inc., 414 F.3d 325, 332-33 (2d Cir. 2005):
The defendants have cited several cases in which courts have concluded that the scope of a choice-of-law provision is a matter of contract interpretation subject to the law chosen in that provision. The Fourth Circuit reached this conclusion in Bunker Holdings, Ltd. v. Green Pacific A/S, 346 Fed.Appx. 969, 973 (4th Cir.2009) (unpublished). The Ninth Circuit found the same in Odin Shipping Ltd. v. Drive Ocean V MV, No. 98-56794, 2000 WL 576436, at *1 (9th Cir. May 11, 2000) (unpublished). Both of these cases, however, were decided under the conflict-of-laws rules of federal maritime law and therefore do not directly inform the analysis that would be appropriate under Virginia law. Additionally, the Supreme Court of California and the Delaware Chancery Court have reached similar conclusions. Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459, 11 Cal.Rptr.2d 330, 834 P.2d 1148, 1154 n. 7 (1992); Weil v. Morgan Stanley DW Inc., 877 A.2d 1024, 1032 (Del.Ch.), aff'd, 894 A.2d 407 (Del.2005). The Weil court even characterized this approach as a "matter of hornbook law." 877 A.2d at 1032.
On the other hand, it appears that a majority, albeit not an overwhelming one, of courts that have addressed this issue have concluded that the scope of a choice-of-law provision is a threshold issue of enforceability to be decided under forum law. The Eighth Circuit provided perhaps the best justification for this result in Schwan's Sales Enterprises, Inc. v. SIG Pack, Inc., 476 F.3d 594 (8th Cir.2007). The court concluded that interpreting the scope of a choice-of-law provision under the chosen law rather than forum law
The Eleventh Circuit similarly applied forum law in its decision in Rayle Tech, Inc. v. DeKalb Swine Breeders, Inc., 133 F.3d 1405, 1409 (1 1th Cir.1998). The court concluded that "[t]he Illinois choice of law provision does not, however, incorporate all Illinois law into the contract. No Georgia case has ever held that such a stipulation will bring in the entire body of law of a chosen state." Id.; accord Krock v. Lipsay, 97 F.3d 640, 645 (2d Cir.1996) (concluding that New York courts apply New York law to determine the scope of a choice-of-law provision); Cunningham Charter Corp. v. Learjet, Inc., 870 F.Supp.2d 571, 575 (S.D.Ill.2012) (applying the conflict-of-laws rules of the forum to determine the scope of a choice-of-law provision); Cypress Pharm., Inc. v. CRS Mgmt., Inc., 827 F.Supp.2d 710, 724 (S.D.Miss.2011) (concluding that Mississippi courts "would likely follow the `more common' view that determining the scope of the choice-of-law provision is a threshold issue to which its law would apply.").
I believe the Virginia court would side with the majority of courts that have concluded that scope is a threshold issue to be determined under forum law. Although applying chosen law may lead to greater certainty in future interpretations of a choice-of-law provision, such an approach is inconsistent with the manner in which modern courts evaluate the enforceability of these provisions. Enforceability is a threshold issue determined according to forum law. Most states give effect to these provisions absent a showing that the chosen law has no substantial relationship with the agreement or would contravene the public policy of the forum state. Restatement (Second) of Conflict of Laws § 187. Courts in Virginia enforce these agreements unless the provision is "unfair or unreasonable" or the result of "unequal bargaining power." Paul Bus. Sys., 397 S.E.2d at 807. Whether a provision violated the public policy of a state, or whether it is "unfair or unreasonable," will often depend on the scope of that provision's application and whether it would preclude otherwise meritorious claims. The scope of the choice-of-law provision is, therefore, a necessary part of the threshold inquiry into enforceability. The Virginia Supreme Court, therefore, would be likely to apply the law of Virginia in determining the scope of a choice-of-law provision.
Having decided that Virginia law should apply, I must now estimate how a Virginia court would interpret the scope of a choice-of-law provision. I first look to
Sophisticated parties, like the ones in this case, use express contractual choice-of-law provisions "as a business planning device which, if properly executed, should enhance the security of the party expectations and reduce uncertainties in litigation." Robert L. Felix & Ralph U. Whitten, American Conflicts Law § 126 (6th ed.2011). Perhaps the clearest description of this contractual intent is found in a decision from the Supreme Court of California:
Nedlloyd Lines B.V., 11 Cal.Rptr.2d 330, 834 P.2d at 1153-54. The courts of Delaware have similarly described contractual intent:
ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1048 (Del.Ch. 2006).
One writer on the subject has noted that whether choice-of-law provisions encompass torts and other non-contract claims is unsettled. See Peter Hay, et al., Conflict of Laws § 18.10 (5th ed.2010). Hay notes that a majority of courts have held that
Id. Hay, therefore, counsels that courts that have been willing to parse choice-of-law provisions based on nuances of language may actually subvert contractual intent and exacerbate the uncertainty associated with contracting and litigation.
I believe that the Virginia Supreme Court would seek to apply sound commercial law that promotes outcomes consistent with the intent of the parties. For that reason, the scope of a choice-of-law provision should, absent a showing of intent otherwise, be read to encompass all disputes that arise from or are related to an agreement. If parties wish to exclude causes of action arising in tort or by statute from the coverage of their agreement, they may do so, but they should reflect that intent in their contract. I believe this disposition will most closely reflect the actual intent of the parties at the time they reached their agreement.
Many other courts have reached similar conclusions. In Northwest Airlines, Inc. v. Astraea Aviation Services, Inc., the Eighth Circuit held that claims for misrepresentation and deceptive trade practices fell within the scope of the parties' specification that their agreement be "governed by and interpreted in accordance with" Minnesota law. 111 F.3d 1386, 1392 (8th Cir.1997). The court noted that, although styled as torts, "[t]hese claims are closely related to the interpretation of the contracts and fall within the ambit of the express agreement...." Id. Similarly, the Southern District of Illinois has concluded that "[c]laims involving fraud in the formation of the contract are subject to that contract's choice of law provisions." Custom Foam Works, Inc. v. Hydrotech Sys., Ltd., No. 09-cv-0710-MJR, 2011 WL 1102812 at *2 (S.D.Ill. Mar. 23, 2011) (internal quotation marks and citations omitted). The court focused on determining whether the claims at issue were dependent on the contract. The court concluded that claims for misrepresentation, fraud in the inducement, reliance and resulting damages each involved "the formation, interpretation and/or construction of the contract." Id. at *3.
These decisions represent a sound approach to determining the scope of a choice-of-law provision. These courts looked to whether the tortious conduct arose as a result of the parties' performance
In support of its argument that Virginia law should apply to its non-contract claims, the plaintiff relies upon language in Hitachi Credit America Corp. v. Signet Bank, 166 F.3d 614 (4th Cir.1999). There, applying Virginia choice-of-law rules, the court concluded that a choice-of-law provision calling for the application of Virginia law to "[t]his Agreement and the rights and obligations of the parties hereunder... including all matters of construction, validity and performance" was sufficiently broad to encompass contract-related torts. Id. at 624 (internal quotation marks and citation omitted). The court stated that the language of the provision indicated an intention to cover more than mere contract claims and, "recognizing the close relationship of the tort claims to the contract," it would apply the chosen law. Id. at 628.
The plaintiff points to the court's statement in Hitachi that "[w]here a choice of law clause in the contract is sufficiently broad to encompass contract-related tort claims such as fraudulent inducement, other courts have honored the intent of the parties to choose the applicable law." Id. The plaintiff thus implies that this sentence indicates that the provision at issue in this case is one of those provisions that is not "sufficiently broad." As I have explained, however, I believe that the choice-of-law provision in this case, when viewed in the context of the entire agreement between these parties, evinces the intent to reduce uncertainty. Given this intention, as well as "the close relationship of the tort claims to the contract," id., applying the chosen law is appropriate.
For all of these reasons, all of the plaintiff's non-contract claims must be governed by Delaware law pursuant to the SPA's choice-of-law provision.
Having concluded that Delaware law should apply to all the plaintiff's remaining claims, I now turn to the defendants' motion to dismiss Counts One, Two and Three, which assert claims under the Virginia Securities Act. The defendants argue that the Virginia Securities Act should not apply to an agreement that identifies Delaware law as the governing law. I agree.
The facts presented in this case are analogous to those considered by the District of Delaware in Organ v. Byron, 435 F.Supp.2d 388 (D.Del.2006). The plaintiff in Organ asserted claims arising from the defendants' alleged failure to disclose "critical, adverse facts" related to a merger transaction. Id. at 389. The plaintiff contended that he could state claims under the Illinois Security Law, despite the agreement's choice-of-law provision specifying that the merger "and all other aspects of this Agreement" would be governed by Delaware law. Id. at 391. The plaintiff argued that its securities claims did not implicate the "merger transaction itself" or "the enforcement and interpretation" of the merger agreement and therefore were not subject to the choice of law provision. Id. at 392.
The court declined to give "force to such ambiguous semantic arguments in the application of a choice of law clause" out of concern that it "would contradict Delaware's policy `to respect the chosen law of the contracting parties, so long as that law has a material relationship to the transaction.'" Id. (quoting ABRY Partners, 891 A.2d at 1046.). The court further noted that, because the Illinois Securities Law was "virtually identical" to the securities statute in Delaware, application of the choice-of-law provision to the securities claims would not violate Illinois public policy.
I believe the same analysis should be applied here. As I have described above, I do not believe a Virginia court would parse a choice-of-law provision like the one presented in this case to apply one state's law to contractual claims but another state's law to non-contractual or statutory claims. Moreover, the plaintiff has not made any showing that applying the choice-of-law provision to these claims would be unfair or unreasonable. In substance and effect, the provisions of the Virginia Securities Act under which the plaintiff seeks to state claims appear virtually identical to the relevant provisions of the Delaware Securities Act.
The plaintiff makes the additional argument that it should be permitted to state these claims despite the enforcement of the Delaware choice-of-law provision because state Blue Sky laws are not subject to choice-of-law analyses. Citing a decision from another judge of this court, the
This case must, however, be distinguished from Lintz. It does not appear that case involved a choice-of-law provision or that the court considered the effect of a choice-of-law provision on its analysis. It is true that Lintz and other cases that have followed it have viewed "[t]he situation created when two state securities law apply to a transaction ... more as an election of remedies, rather than a potential conflict of laws problem." Simms Inv. Co. v. E.F. Hutton & Co., 699 F.Supp. 543, 546 (M.D.N.C.1988). Where the parties have identified the applicable law in a contractual choice-of-law provision, however, it seems clear that they intended to make a selection of remedy ex ante. Contractual elections of remedies have been upheld in any number of contexts, and that is the scenario the parties have created for themselves here.
For these reasons, the plaintiff's claims under the Virginia Security Act — Counts One, Two and Three of the Complaint — must be dismissed.
Finally, in Counts Seven and Eight of its Complaint, the plaintiff alleges claims for both actual and constructive fraud. The plaintiff alleges that the defendants made untrue statements of material fact and omitted material facts when their agent provided the Distributor Analysis to the plaintiff. As explained above, these claims are also governed by Delaware law. The defendants argue that, because the plaintiff founds these claims on statements and representations that were made before the time of contracting and were not incorporated into the SPA, they are barred by the SPA's anti-reliance and integration clauses. I agree.
It is clear that Delaware law precludes these types of claims where the parties' written agreement contains clear anti-reliance and integration language. For example, the Delaware Chancery Court rejected a plaintiff's claim for fraud in the context of a similar agreement in Great Lakes Chemical Corp. v. Pharmacia Corp., 788 A.2d 544, 551 (Del.Ch.2001). The purchase agreement in Great Lakes contained three separate disclaimers all of which mirror those in this case. First, the agreement included a disclaimer of liability for information provided to the buyer in fulfillment of due diligence requests.
The court concluded that these disclaimers were both unambiguous and enforceable. The court noted that "two highly sophisticated parties, assisted by industry consultants and experienced legal counsel, entered into carefully negotiated disclaimer language after months of extensive due diligence." Great Lakes, 788 A.2d. at 555. This environment of negotiation, therefore, warranted enforcement of a provision disclaiming liability for representations not included in the agreement. "`[W]ere we to permit plaintiffs' use of the defendants' prior representations ... to defeat the clear words and purpose of the Final Agreement's integration clause, contracts would not be worth the paper on which they are written.'" Id. at 555-56 (quoting One-O-One Enters., Inc. v. Caruso, 848 F.2d 1283 (D.C.Cir.1988)). The court added that allowing the assertion "under the rubric of fraud, [of] claims that are explicitly precluded by contract, would defeat the reasonable commercial expectations of the contracting parties and eviscerate the utility of written contractual agreements." Great Lakes, 788 A.2d at 556. The Great Lakes court's analysis has been subsequently reviewed and approved by a number of courts. See, e.g., Hovis v. Gen. Dynamics Corp. (In re Marine Energy Sys. Corp.), 299 Fed.Appx. 222, 231 (4th Cir.2008) (unpublished) (construing Delaware law); RAA Mgmt., LLC v. Savage Sports Holdings, Inc., 45 A.3d 107, 113 (Del.2012).
I believe the same analysis is appropriate here. Perhaps the plaintiff regrets failing to negotiate for the explicit inclusion of the information presented to it in the Distributor Analysis, but this regret cannot serve as the basis for its fraud claims. The plaintiff cannot justifiably have relied on information when it has already contractually promised not to rely.
The plaintiff adds two collateral arguments that cannot save its claims. First, the plaintiff submits that, because it has alleged omissions on the part of the defendants, it need not prove that it justifiably relied on any statements of the defendants. The plaintiff cites a decision from the Southern District of Florida, which held that in fraud cases "involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery." Sierra Equity Grp., Inc. v. White Oak Equity Partners, LLC, 650 F.Supp.2d 1213, 1233 (S.D.Fla.2009). The fatal flaw in this argument is apparent on the face of this sentence. The plaintiff primarily alleges in this Complaint that the defendants made false representations in the Distributor Analysis, and thereby omitted to make representations about the true state of the
The plaintiff has further averred in its Complaint that its reliance on the Distributor Analysis was justified by its inability to conduct its own due diligence as a result of the parties' Confidentiality Agreement. The defendants correctly point out that Delaware courts have not found such a prohibition to support reliance on due diligence when the parties have promised not to rely. See Progressive Int'l Corp. v. E.I. Du Pont de Nemours & Co., No. 19209, 2002 WL 1558382, at *8 (Del.Ch. July 9, 2002). Rather than relying on due diligence not included in the agreement, the plaintiff could simply have walked away from the transaction if it believed the risk to be too high, or the plaintiff could have negotiated for the inclusion of this information in the agreement.
The plaintiff further argues that sections 12.07 and 10.02(i) are not sufficiently clear to function as anti-reliance clauses for purposes of disclaiming this form of liability. Under Delaware law:
Addy v. Piedmonte, No. 3571-VCP, 2009 WL 707641, at *19 (Del.Ch. Mar. 18, 2009). The plaintiff claims that the language of sections 3.02(w) and 3.02(r)(i) makes the anti-reliance provisions in the SPA unclear and thereby ineffective to disclaim liability. This argument is founded upon an interpretation of these contractual provisions that I have already analyzed and rejected. For that reason, I find that the anti-reliance provision in section 12.07 of the SPA in this case is clear and precludes the plaintiff's claim for fraud.
Counts Seven and Eight of the Complaint must, therefore, be dismissed.
For the reasons stated, the defendants' Motion to Dismiss will be granted. Provided that the plaintiff files a timely motion seeking to amend its Complaint, leave will be granted to amend as to the claim presently set forth in Count Four alleging a breach of section 3.02(r)(i) of the SPA.
A separate Final Order will be entered herewith.
(SPA § 10.02(i).)
