Judge LeGrow Considers Motion to Dismiss Claim Arising from Stock Purchase Agreement

June 18, 2020

Publication| Commercial Litigation

In Merrit Quarum v. Mitchell International, Inc., C.A. No. N19C-03-087 AML CCLD, Judge LeGrow granted in part and denied in part the defendant’s motion to dismiss Count I of the plaintiff’s second amended complaint. The litigation arose from a 2016 stock purchase agreement between individual sellers and Mitchell International, Inc. wherein Mitchell purchased the sellers’ shares of QMedtrix Systems, Inc. As part of the transaction, the parties also entered into an earnout agreement and employment agreement, which allowed continued employment of one of the sellers.

Two years later, Merrit, the sellers’ representative, filed the instant action, alleging non-compliance with the earnout agreement and other employment claims. Mitchell moved to dismiss Count I of Merrit’s second amended complaint, which alleged various breaches of the earnout agreement, specifically the provision requiring Mitchell to undertake certain efforts intended to improve the sales of QMedtrix’s products.

In considering the motion, the court first addressed whether the sellers adequately pleaded that Mitchell’s failure actively to promote the product breached a clause in the earnout agreement that prohibited Mitchell from taking actions that materially would reduce the earnout. Judge LeGrow dismissed the majority of the sellers’ claim relating to the material reduction clause. In so holding, the court reasoned that the governing provision imposed a negative covenant that Mitchell could only breach by taking positive action. Since a majority of the allegations focused on the lack of action taken by Mitchell and strategies he could have pursued but did not, those allegations did not allege a breach of the earnout agreement. But, to the extent the sellers’ claims alleged that Mitchell took affirmative actions that would reduce the earnout amount, those allegations survived the motion to dismiss.

Judge LeGrow then considered whether the sellers elected a remedy by sending notice that Mitchell’s failure to use commercially reasonable efforts extended the term of the contract. The court determined that the sellers did not elect a remedy that would preclude their damages claim and held that the balance of Count I survived the minimal pleading standard. Judge LeGrow explained that the notice was not a “decisive act” under the Election of Remedies doctrine and that the sellers’ allegations permitted a reasonable inference that Mitchell’s purported breach damaged the sellers.

Analysis: In this case, the court analyzed the Election of Remedies doctrine, pursuant to which a plaintiff is deemed to “elect” a remedy when (1) the plaintiff makes a decisive act, (2) that act evinces an intent to pursue one remedy rather than another, and (3) the remedies are inconsistent. Stoltz Realty Co. v. Raphael, 458 A.2d 21 (Del. 1983). Unlike in Stoltz, where the plaintiff elected the remedy of a binding arbitration and was barred from proceeding with litigation, the notice letter was not a decisive act, which is generally defined as pursuing a remedy to final judgment or filing a claim.

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