Delaware Court of Chancery Slams Plaintiffs’ Firm for Using “Ostensible” Stockholder Plaintiff in Books and Records Action

By Jay McMillan

The Delaware Court of Chancery has held, apparently for the first time, that the requisite “proper purpose” in a books and records action must be the stockholder’s own purpose and not one devised by the stockholder’s lawyers. Based on the Court’s ruling in Wilkinson v. A. Schulman, Inc., C.A. No. 2017-0138-JTL, 2017 Del. Ch. LEXIS 798 (Del. Ch. Nov. 13, 2017), stockholder plaintiffs in books and records actions will be required to have “substantive involvement” in the litigation – a requirement that does not exist in stockholder class-action and derivative cases.

The Delaware Supreme Court has urged stockholder plaintiffs to use the “tools at hand,” in particular the right to inspect and copy corporate books and records under Section 220 of the Delaware General Corporation Law, to investigate potential claims before bringing plenary actions challenging corporate transactions. See Rales v. Blasband, 634 A.2d 927, 934 n.10 (Del. 1993); Grimes v. Donald, 673 A.2d 1207, 1216 & n.11 (Del. 1996). However, where a stockholder in a Delaware corporation seeks inspection of the corporation’s books and records, other than its stock ledger or list of stockholders, Section 220 requires the stockholder to establish that the inspection sought is “for a proper purpose,” defined as “a purpose reasonably related to such person’s interest as a stockholder.” In Wilkinson, the Delaware Court of Chancery has found that the required proper purpose must be the stockholder’s own purpose and not one devised by the stockholder’s counsel.

Based on a stockholder plaintiff’s admission that his stated purpose for inspection was his counsel’s invention and not his own, the Court granted judgment in favor of the corporate defendant and against the stockholder following a bench trial. In Wilkinson, Vice Chancellor J. Travis Laster rejected the plaintiff’s books and records demand based on his finding that the plaintiff’s stated purpose for inspection was not his true purpose.

The plaintiff, represented by the New York firm Levi & Korsinsky, LLP (“L&K”), sought inspection of the books and records of plastics maker A. Schulman, Inc. for the stated purpose of investigating a decision by the corporation’s board of directors to accelerate the vesting of shares of restricted stock, valued at more than $3.9 million, for the corporation’s president and chief executive officer upon his retirement at the end of 2014. However, the plaintiff testified that he contacted L&K because he was concerned with the corporation’s November 2016 announcement of a loss of $365 million following the acquisition of another plastics company. The plaintiff testified that he was not aware of any impropriety concerning the 2014 compensation award.

The Court found that “Wilkinson simply lent his name to a lawyer-driven effort by entrepreneurial plaintiffs’ counsel” and that he “did not take any steps to confirm the accuracy of the allegations in the complaint,” did not read the corporation’s answer to the complaint, and did not participate in drafting answers to interrogatories, but rather verified the complaint and interrogatory answers in reliance on his counsel.

The Court may have been influenced by the fact that Wilkinson was a serial plaintiff. The Court noted that Wilkinson had been a plaintiff in at least seven L&K lawsuits, “most of which challenged mergers,” that he “did not do anything to verify the factual allegations in those lawsuits, other than to read the complaints that L&K drafted,” that he “agreed to serve as a plaintiff reflexively after seeing the press releases L&K issued announcing investigations into the transactions,” and that he participated “because he wanted more money for his shares, regardless of whether the deal price was fair,” that he “never received a dime of additional consideration,” and that “most, if not all, of the cases settled for supplemental disclosures.” The Court did not, however, suggest that Wilkinson had been found to be an inadequate stockholder representative in any of those seven cases.

The Court emphasized that it is advisable for stockholders seeking inspection of corporate books and records to retain experienced counsel, but stated that “retaining counsel to carry out the stockholder’s wishes is fundamentally different than having an entrepreneurial law firm initiate the process, draft a demand to investigate different issues than what motivated the stockholder to respond to the law firm’s solicitation, and then pursue the inspection and litigate with only minor and non-substantive involvement from the ostensible stockholder principal.”

The Court’s decision in Wilkinson reflects some of the obstacles that may confront a stockholder bringing a books and records action. The opinion suggests that stockholder plaintiffs in books and records actions must act on their own initiative with a proper purpose in mind and that they must have substantive involvement in the litigation. In a plenary class or derivative action, there is no “proper purpose” requirement, and the only statutory requirement under Delaware law is that the plaintiff in a derivative action must have held shares at the time of the challenged transaction. See 8 Del. C. § 327. The Court has never required class-action or derivative plaintiffs to be self-motivated or have substantive involvement in litigation. Thus, based on Section 220’s “proper purpose” requirement, the Court of Chancery would appear to require more from a books and records plaintiff seeking to use the “tools at hand” to investigate a transaction than it would require of the same plaintiff bringing a plenary action challenging the same transaction without first bringing a Section 220 action.

James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP. He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery. For more information on the firm, visit

Delaware Supreme Court Sends Plaintiffs to Bring Suit in Bulgaria, Establishes Intermediate Standard for First-Filed Cases

By Jay McMillan

Although Delaware is the preferred jurisdiction for deciding business disputes, it sometimes happens that a defendant would prefer to litigate elsewhere. When that happens the defendant may move to dismiss the action based on forum non conveniens, that is, because the forum is not convenient to the defendant. The decisive factor in such cases is whether there is a prior-filed action pending in another jurisdiction. Delaware courts typically rule in favor of the first-filed action. Where the Delaware action is first-filed, to prevail on a motion to dismiss, the defendant must show that it would suffer “overwhelming hardship” from being forced to litigate in Delaware. Where a prior-filed action is pending in another jurisdiction, a Delaware court will grant the motion to dismiss if the other action involves the same parties and the same issues and was brought in a court capable of doing prompt and complete justice. Either way, the prior-filed action is favored.

A less common scenario arises when a prior-filed action has been brought in another jurisdiction but is no longer pending. In a recent Delaware Supreme Court case, Gramercy Emerging Markets Fund v. Allied Irish Banks, p.l.c., 2017 Del. LEXIS 452 (Del. Oct. 27, 2017), the plaintiffs, a Cayman Islands company and two Delaware subsidiaries, had first brought suit in Illinois against the defendants, a bank organized under Delaware law with offices in Illinois and Bulgaria, and an Irish bank based in Dublin. The claims were brought under Bulgarian law. The Illinois court dismissed the complaint based on forum non conveniens. The plaintiffs then filed suit in the Delaware Court of Chancery, where Vice Chancellor Sam Glasscock III granted the defendants’ motions to dismiss on the same grounds.

The Delaware Supreme Court affirmed, finding that the plaintiffs’ claims “involve important and unsettled issues of Bulgarian securities law arising out of an investment in a Bulgarian bank” and that the plaintiffs knew from the start that they were investing in a Bulgarian bank governed by Bulgarian law.

Forum non conveniens standards: Cryo-Maid and McWane

Where the Delaware case is first-filed, Delaware courts apply a plaintiff-friendly standard based on General Foods Corp. v. Cryo-Maid, Inc., 198 A.2d 681 (Del. 1964) which requires a defendant to show that it would suffer “overwhelming hardship” from being forced to litigate in Delaware. This is because Delaware courts are reluctant “to lightly disturb a plaintiff’s first choice of fora.” Under Cryo-Maid, the court considers five factors: “(1) [t]he relative ease of access to proof; (2) the availability of compulsory process for witnesses; (3) the possibility of the view of the premises, if appropriate; . . . (4) all other practical problems that would make the trial of the case easy, expeditious and inexpensive;” and (5) “whether or not the controversy is dependent upon the application of Delaware law which the courts of this State more properly should decide than those of another jurisdiction.” The court also considers a sixth factor, whether or not there is a similar action pending in another jurisdiction.

Where the Delaware case is not the first-filed case and the earlier case is pending in another jurisdiction, the analysis favors the defendant (who is typically the plaintiff in the other, first-filed case) and the court applies a defendant-friendly standard based on McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., 263 A.2d 281 (Del. 1970). Under McWane, dismissal is within the court’s discretion and is strongly favored where: “(1) [there is] a prior action pending elsewhere; (2) in a court capable of doing prompt and complete justice; (3) involving the same parties and the same issues.”

In another, more recent case, Lisa, S.A. v. Mayorga, 993 A.2d 1042 (Del. 2010), three actions that the plaintiff had filed in Florida had been dismissed, one of them on the merits with prejudice, so there was no prior-filed case pending elsewhere. The Court of Chancery applied the Cryo-Maid factors and found that litigating in the alternative forum (Guatemala) would cause the defendant “overwhelming hardship.” The Delaware Supreme Court affirmed, but did so under McWane, finding that the fact that the Florida action was no longer pending did not change the outcome, and that McWane should apply because the plaintiff-friendly standard of Cryo-Maid “would ignore the binding effect of the Florida adjudication, and create the possibility of inconsistent and conflicting rulings.” Allowing the plaintiff to proceed in Delaware after dismissal on the merits in Florida would be “precisely the outcome McWane’s doctrine of comity seeks to prevent.”

In Gramercy, however, the prior-filed action was dismissed not on the merits, but on procedural grounds, without prejudice. Therefore, the Court of Chancery treated the Delaware action as first-filed and applied the plaintiff-friendly Cryo-Maid standard. However, the Court found in favor of the defendants, granting their motions to dismiss without finding that they would suffer overwhelming hardship. On appeal, the plaintiff argued that the Court of Chancery should have applied the overwhelming hardship standard. The Delaware Supreme Court rejected that argument and affirmed the Court of Chancery’s ruling in favor of the defendants. In addition, the Supreme Court clarified “the spectrum of standards under which motions for forum non conveniens are considered in Delaware.” The Court established an “intermediate” standard, concluding that “when a case is later-filed and its predecessors are no longer pending, the analysis is not tilted in favor of the plaintiff or the defendant. In that situation, Delaware trial judges exercise their discretion and award dismissal when the Cryo-Maid factors weigh in favor of that outcome.”

The Delaware Supreme Court found that its earlier ruling in Lisa was “case-specific.” In Lisa, the Court of Chancery ruled in favor of the defendant even under the plaintiff-friendly Cryo-Maid standard. Had Lisa been decided by balancing the Cryo-Maid factors under the neutral standard prescribed by Gramercy, without the overwhelming hardship “overlay,” rather than under the defendant-friendly McWane standard used by the Delaware Supreme Court in that case, the outcome would have been the same.

James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP. He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery. For more information on the firm, visit

Plaintiff who Alleged that Corporation “Illegally Committed” Patients to Mental-Health Facilities Can’t Cherry-Pick Documents

By Jay McMillan

In drafting a complaint, an attorney might rely on a document “in isolation, not in bad faith but perhaps over-zealously in the belief that the document reveals more than it does.” Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 799 (Del. Ch. 2016). Ordinarily, a defendant responding to such a complaint in a Delaware state court could be frustrated by the rule that blocks the defendant from introducing other documents in the same context unless they are specifically incorporated by reference in the complaint. But that rule does not always apply.

In several recent cases involving stockholder demands for inspection of corporate books and records, the Delaware Court of Chancery has approved an “incorporation condition” providing that all documents produced by the corporation in response to such a demand are incorporated into any subsequent derivative complaint filed by the stockholder against the corporation’s directors on behalf of the corporation. Ordinarily, a defendant may only move to dismiss a complaint based on the insufficiency of the complaint itself and the documents incorporated by reference in the complaint. In other words, at the pleading stage a defendant may not refute the plaintiff’s documents with other documents of its own. However, where an incorporation condition applies, the defendant may use any of the documents it produced to the stockholder plaintiff in response to a books-and-records demand. A recent case, City of Cambridge Retirement System v. Universal Health Services, Inc., C.A. No. 2017-0322-SG (Oct. 12, 2017), solidifies the use of incorporation conditions in books-and-records cases.

In that case, the corporation, UHS, agreed to produce documents in response to a stockholder demand only if the stockholder entered into a confidentiality agreement with an incorporation condition. The stockholder refused and brought a books-and-records action in the Court of Chancery under Section 220 of the Delaware General Corporation Law, seeking production of the documents free of the incorporation condition.

Although the allegations against UHS were sensational, Vice Chancellor Sam Glasscock III found in UHS’s favor on the narrow issue of the incorporation provision. The plaintiff alleged that UHS illegally committed patients to behavioral health facilities by luring them in with “advertisements for free wellness examinations … [and] trick[ing] patients into implying they harbored suicidal thoughts,” keeping them in the facilities “until their insurance benefits ran out.” The Court in a footnote pointed out that UHS “stoutly denied” the allegations, but “If true, in addition to being morally despicable behavior by the individuals responsible, this would represent the worst abuse of a Delaware corporate franchise of which I am aware.”

The plaintiff argued that incorporation provisions are “pernicious” because they allow companies to “manipulate” their document productions “without any punishment for failing to produce [harmful] documents.” Although the Court pointed out that the same argument could be made about a corporation’s ability to manipulate the record available to a plaintiff through discovery on a motion for summary judgment, the plaintiff argued that a stockholder making a Section 220 demand “has substantially less ability to test the sufficiency of production, compared with a litigant receiving discovery.” The Court rejected that argument, concluding that “the benefits of allowing the court to eliminate complaints involving misleading citations to a limited subset of records” outweighed “the risk of potential malfeasance” by producing defendants.

The Court stressed that the standard on a motion to dismiss in Delaware “remains plaintiff-friendly” – a complaint survives unless the plaintiff could not prevail based on any “reasonably conceivable” set of facts inferable from the complaint. The Court expressed confidence in its ability, “through proper application of that standard [to] eliminate much of the risk of gamesmanship and improper dismissal.”

The Court found that the plaintiff in UHS had failed to distinguish the previous cases in which the Court had approved incorporation conditions. Those cases, along with UHS, make incorporation conditions virtually the norm in books and records cases. After UHS, Stockholders making books-and-records demands and corporations confronted with them should both anticipate that any production will be subject to a confidentiality agreement that includes an incorporation condition.

James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP. He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery. For more information about the firm, visit

Directors May Not Knowingly Allow a Corporation to Violate the Law

By Jay McMillan

The Delaware Court of Chancery has found that corporate directors breach their duty of good faith if they knowingly allow their corporation to violate positive law, for profit or otherwise.[1] Directors of Delaware corporations can be held personally liable for fines and other damages resulting from known violations of law. In Kandell v. Nviv, Civil Action No. 11812-VCG (Sept. 29, 2017), the stockholder plaintiff brought a derivative action against the directors of FXCM, Inc., a “foreign exchange broker” engaged in the business of buying and selling foreign currencies on customers’ orders. Industry practice was that customers’ trades were highly leveraged, but FXCM distinguished itself by promising clients that it would not attempt to collect on their losses beyond the relatively small amounts they invested. That policy at first led to significantly higher revenues.

The Corporation’s Violations of Law

However, rules promulgated by the United States Commodity Futures Trading Commission (CFTC) in connection with the Dodd-Frank Act of 2010 prohibit foreign exchange traders such as FXCM from representing that they will limit their clients’ trading losses. According to the plaintiff, FXCM’s board knowingly allowed the corporation to violate 17 C.F.R. (Code of Federal Regulations) § 5.16 (Regulation 5.16). The directors’ knowledge was evidenced by the company’s public filings, which disclosed a “risk” that Regulation 5.16 forbade making guarantees against loss to retail foreign exchange customers. The directors were thus aware of Regulation 5.16 and of the company’s advertised policy of not pursuing customer losses beyond the investment amount.

The policy eventually led to catastrophic losses for FXCM. On January 15, 2015, the Swiss National Bank announced that it would allow the Swiss franc to “float freely” against the euro, leading to a “Flash Crash.” In the 45 minutes following the announcement, FXCM customers “locked in” losses of $276 million, which FXCM was unable to collect because of its liberal policy regarding customer losses.

The Complaint and the Court’s Ruling

The derivative complaint, initially filed in December 2015, sought damages from the directors on behalf of the corporation for losses incurred in the Flash Crash. The defendants moved to dismiss the complaint, arguing that while they knew of Regulation 5.16 and of the corporation’s policy, they did not know that the policy violated Regulation 5.16.

Denying the motions to dismiss, Vice Chancellor Glasscock looked to the text of Regulation 5.16, which provides that no retail foreign exchange dealer may “guarantee” a customer against loss or “Limit the loss of such person.” The Court found that “the Regulation itself, on my reading, clearly prohibits touting loss limitations to clients, and I find that the Company did precisely that.” The Court stated that “my reading of Regulation 5.16 is sufficient at the pleadings stage to infer scienter” on the part of the board. Because the Regulation clearly prohibited the corporation’s conduct, the Court inferred that the directors were aware that the corporation was in violation of Regulation 5.16. The Court emphasized that the case presented “a highly unusual set of facts” in which a corporation’s business model relied on “a clear violation of a federal regulation” of which it could be inferred that the board had knowledge.

The Court noted that this case did not involve a typical Caremark claim because it did not involve “a director’s bad-faith failure to exercise oversight over the company” to ensure that violations of law did not occur, but rather involved violations of law that were actually known to the directors. In Caremark, the Court of Chancery approved a settlement because it found that the record did not “tend to show knowing or intentional violation of law” by the director defendants. In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959, 961 (Del. Ch. 1996). Neither Caremark nor FXCM involved a mere breach of the duty of care that could be exculpated by a corporate charter provision under Section 102(b)(7) of the Delaware General Corporation Law. The statute expressly excludes exculpation for “acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law.” 8 Del. C. § 102(b)(7).[2]

Practice Pointers

Attorneys advising boards of directors should stress that corporate directors may not tolerate known violations of law, including regulatory law, even if it might make economic sense to do so in the board’s exercise of its business judgment. In the case of FXCM, the corporation may have taken a risk in violating the law that proved disastrous in a crisis. As the Court stated, “Where directors intentionally cause their corporation to violate positive law, they act in bad faith…. a fiduciary of a Delaware corporation cannot be loyal to a Delaware corporation by knowingly causing it to seek profits by violating the law.”

[1] According to Wikipedia, positive law consists of “human-made laws that oblige or specify an action,” from the verb “to posit,” as opposed to “natural law.”

[2] Exclusions for illegal conduct or violation of law, and possibly bad faith, would typically apply to directors’ and officers’ insurance policies as well.

James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP. He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery. For more information on the firm, visit

Another Good Reason Not to Oppose a Motion to Amend a Pleading in the Delaware Court of Chancery

By Jay McMillan

For good reason, it is unusual for a party in litigation in the Delaware Court of Chancery to oppose a motion to amend a complaint or other pleading. Under the Court’s Guidelines to Help Lawyers Practicing in the Court of Chancery (available here), parties are urged to agree to the filing of amended pleadings, but may reserve the right to file motions to dismiss the amended pleadings once filed. Following that procedure, the party opposing the amended pleading on a motion to dismiss (typically the defendant) gets to submit two briefs, one opening brief in support of the motion to dismiss and a reply brief in response to the plaintiff’s opposition brief. If the defendant chooses to oppose the amendment at the outset, it gets only one brief, an answering brief in opposition to the plaintiff’s motion to amend. Since two briefs are better than one, the defendant will typically follow the Court’s Guidelines and stipulate to the amendment, then move to dismiss the amended pleading. From the Court’s point of view, this procedure also precludes the defendant from taking two bites at the apple by first opposing the motion to amend, then filing a motion to dismiss if the plaintiff’s motion to amend is granted.

A motion to amend can be denied where amendment would be futile, that is, where the amended pleading would be dismissed under Rule 12(b)(6) for failure to state a claim upon which relief could be granted. Unless the party opposing amendment demonstrates that it will be prejudiced, a motion to amend may be reviewed under the same standard as a motion to dismiss. See Paine Webber v. Centocor, 1997 WL 30216, at *1, *3 (Del. Ch. Jan. 15, 1997) (Steele, V.C.). A defendant that stipulates to a motion to amend may thus assume that the standard for futility of amendment is the same as that for a motion to dismiss under Rule 12(b)(6).

A recent, unusual case provides another reason not to oppose a motion to amend a pleading, because there may in fact be a difference in the standards for futility of amendment and failure to state a claim. In a Final Report issued on September 22, 2017, in Apogee Investments, Inc. v. Summit Equities LLC, Civil Action No. 12897-MZ, Master in Chancery Morgan Zurn recommended that the Court grant a stockholder’s motion to amend a complaint in a books-and-records action. Master Zurn quoted NACCO Industries, Inc. v. Applica, Inc., 2008 WL 2082145, at *1 (Del. Ch. May 7, 2008), for the principle that a motion to amend may be denied under Court of Chancery Rule 15(a) “if the amendment would be futile, in the sense that the legal insufficiency of the amendment is obvious on its face.”

In Delaware, “legal insufficiency” under Rule 12(b)(6) occurs when relief could not be granted under any “reasonably conceivable” set of circumstances. See Central Mortgage v. Morgan Stanley Mortgage Capital Holdings, 27 A.3d 531, 536-37 (Del. 2011). If a motion to amend can only be denied where legal insufficiency is “obvious on its face,” that presents a lower hurdle for a motion to amend. Thus, it is possible for an amendment to clear the hurdle for a motion to amend and not clear the hurdle for a motion to dismiss. While the legal insufficiency of an amendment may not be “obvious on its face,” it may appear upon closer scrutiny on a motion to dismiss.

Given that the Court may be less receptive to a defendant’s motion to dismiss after it has granted a motion to amend over the defendant’s opposition, the defendant would be well advised to stipulate to the amendment and present its opposition to the amended complaint where the plaintiff faces the higher hurdle, on a motion to dismiss. Delaware’s “reasonably conceivable” standard is a low enough hurdle for a pleading party; legal insufficiency being “obvious on its face” is even lower. In Apogee Investments, Master Zurn found that the allegations of the proposed amendment were not “so obviously deficient on their face as to be deemed futile.” She concluded that the defendant’s opposition to the proposed amendment failed to overcome the “compounded liberal standards” for a motion to amend.

In short, it does not pay to oppose a motion to amend a pleading in the Delaware Court of Chancery. The Court may apply an extremely liberal standard to the motion, the opposing party is limited to a single brief in opposition to the motion, and the opposing party may be less likely to prevail on a subsequent motion to dismiss than it would be if it had stipulated to the amendment and reserved the right to move to dismiss.


James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP. He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery. For more information on the firm, visit

Delaware Court of Chancery Places Biological and Non-Biological Persons on the Same Footing Regarding Trial Testimony

By Jay McMillan

Where one party to a lawsuit is a business entity or other organization, the other party to the lawsuit may take the organization’s pre-trial deposition testimony on specified topics by questioning a witness designated by the organization. Rule 30(b)(6) of the Delaware Court of Chancery Rules (like Rule 30(b)(6) of the Federal Rules of Civil Procedure) requires the designated person to testify as to matters “known or reasonably available to the organization.” That means that the organization must designate a human witness who already possesses the organization’s “institutional knowledge” or it must educate a witness to the point that he or she is able to so testify.

It sometimes happens, however, that the designated witness lacks complete knowledge of the specified topics and is unprepared to testify or, worse yet, that the witness’s knowledge is inconsistent with the organization’s true institutional knowledge. The question then arises whether the organization should be bound by the witness’s deposition testimony or whether it should be allowed to supplement or correct the testimony at trial.

In ADT Holdings, Inc. v. Harris, C.A. No. 2017-0328-JTL (Del. Ch. Sept. 7, 2017), Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled that organizations, or “non-biological persons,” should have the same opportunities to correct or supplement their testimony as “biological persons.” In ADT Holdings the plaintiffs filed a pre-trial motion in limine seeking to preclude the corporate defendant from offering evidence that “contradicts or seeks to expand” the deposition testimony of its designated witness. The plaintiffs urged the Court to adopt the view held by a minority of federal courts that treat Rule 30(b)(6) testimony as “something akin to a judicial admission—a statement that conclusively establishes a fact and estops an opponent from controverting the statement with any other evidence.” Id. at 2 (quoting State Farm Mut. Auto. Ins. Co. v. New Horizons, Inc., 250 F.R.D. 203, 212 (E.D. Pa. 2008)). Those courts have concluded that binding organizations to their Rule 30(b)(6) testimony prevents them “from thwarting inquiries during discovery, then staging an ambush during a later phase of the case.” Id. at 3 (quoting Rainey v. Am. Forest & Paper Ass’n, Inc., 26 F. Supp. 2d 82, 95 (D.D.C. 1998)).

Vice Chancellor Laster rejected the plaintiffs’ argument, instead adopting the view of a majority of federal courts that allow a Rule 30(b)(6) designated witness to “testify differently from the way he or she testified in a deposition, albeit at the risk of having his or her credibility impeached by the introduction of the deposition.” Id. at 4 (quoting R & B Appliance Parts, Inc. v. Amana Co., 258 F.3d 783, 786 (8th Cir. 2001)). The Court noted that allowing an organization to contradict the testimony of its own 30(b)(6) witness is consistent with Delaware Rule of Evidence 607 and its federal analog, which allow a witness’s credibility to be “attacked by any party, including the party calling him.”

The Court found that the purpose of Rule 30(b)(6) is “to afford comparable treatment to biological and non-biological persons” and place them “on the same footing” by allowing them to contradict their own testimony, only at the risk of losing credibility.

As a court that conducts only bench trials, and not jury trials, it is not surprising that the Court of Chancery would allow broad leeway in admitting evidence at trial, including evidence to contradict or supplement Rule 30(b)(6) testimony, relying on its own judgment to assign credibility to witnesses at trial. The lesson for corporations and other organizations in litigation is that, although they may be able to supplement or correct their testimony, they should thoroughly prepare their Rule 30(b)(6) witnesses so as to avoid loss of credibility at trial. The lesson for the other side is never to be satisfied with an unprepared Rule 30(b)(6) witness because the organization may be allowed to supplement the witness’s testimony at trial.


James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP. He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery. For more information on the firm, visit

Delaware Court of Chancery Dismisses Case After Trial for Lack of Personal Jurisdiction; No Contract Where “Essential” Schedule Was Left Blank

By Jay McMillan

When a defendant contests a court’s personal jurisdiction, the defendant may file a motion to dismiss the action under Rule 12(b)(2) of the Federal Rules of Civil Procedure or its state-court analog. Such a motion is typically decided before the court considers the merits of the plaintiff’s claims. If the court determines that it lacks personal jurisdiction, the case is dismissed at the outset and the plaintiff must seek relief in another jurisdiction that may have personal jurisdiction over the defendant.

One basis for a court’s personal jurisdiction is a forum selection clause under which the parties to a contract consent to the personal jurisdiction of the courts of a specified jurisdiction. However, if the alleged contract is not valid and binding on the parties, and there is no other basis for personal jurisdiction, the specified courts cannot exercise jurisdiction over the defendant.

In Eagle Force Holdings, LLC v. Campbell, C.A. No. 10803-VCMR (Del. Ch. Sept. 1, 2017), Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery found it necessary to conduct a trial to determine whether the document executed by the parties, which contained a forum selection clause, was a valid and binding contract. Following trial, she found that the parties did not enter into a valid and binding contract and dismissed the action under Court of Chancery Rule 12(b)(2) for lack of personal jurisdiction over the defendant. It was necessary for the Court to decide the merits of the case in order to resolve the jurisdictional issue.

The defendant, Stanley Campbell, developed “certain medical diagnosis and prescription technology.” Mr. Campbell and Mr. Richard Kay “decided to form a business venture” to market Campbell’s technology. Kay contributed cash and Campbell contributed the intellectual property. The two men “outlined the principal terms of the investment through two letter agreements,” and subsequently entered into a contribution agreement and an operating agreement to form a Delaware limited liability company, Eagle Force Holdings, LLC. The contribution agreement and the operating agreement both contained Delaware forum selection clauses.

Although the parties clearly had formed a business venture together, Campbell argued that the agreements were not valid and binding because the parties did not agree on certain “essential” terms, including the consideration he would contribute to the new company. The “precise scope” of the consideration was to be “captured” by two sections of the contribution agreement and four schedules to that agreement, but those portions were “either blank or inconsistent with the reality” known to the parties. For example, Campbell was to contribute all of the equity in two Virginia companies, but it was unclear whether some of that equity was held by the companies’ employees, so the schedule that would specify Campbell’s equity contributions was left blank (except for a bracketed reference to an employee equity participation plan).

The Court found that the parties “recognized that Campbell likely does not own 100% of the equity” in the two Virginia companies and had not obtained releases from the employees. Although the parties were aware of the problem, “they did not come to agreement on terms that addressed the reality.” The term was “material” to the parties because it bore on whether the two men would have equal equity and control in the new company. Because the parties had not completed negotiations on terms they considered “essential,” the Court ruled that they had not entered into a binding contract.

The Court also found based on the record at trial that Campbell did not “actively participate in the management of a Delaware limited liability company” and therefore was not subject to personal jurisdiction under Section 18-109 of the Delaware Limited Liability Company Act.

In this “unusual” business divorce case, although the action was dismissed for lack of personal jurisdiction, the plaintiff will not have a viable opportunity to pursue the defendant in another jurisdiction (for example, Virginia) because the substantive claims for breach of contract have already been decided – there was no valid and binding contract. The moral of the story: when signing a contract, take your time and make sure none of the schedules is left blank.


James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP. He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery. For information on the firm, visit

A Colorable Claim of Privilege Triggers a Duty to Alert Opposing Counsel of Inadvertently Produced Documents

By Jay McMillan

Every litigation attorney has reviewed documents produced by adverse parties in discovery, and many of us have had the experience of finding an attorney-client privileged document that was inadvertently produced by the other side. We generally assume that we are under an ethical obligation, or required by court rules, or both, to notify the producing party of the inadvertent production and perhaps to return or destroy the documents. However, ethical rules and court rules vary, and they provide little or no guidance for determining whether a particular document should be considered privileged. The Delaware Court of Chancery has recently expressed its view: lawyers should not weigh the arguments for and against privilege or rely on the strength of their own arguments; they should notify the producing party of the inadvertent production if a colorable argument could be made for privilege.

The American Bar Association’s Model Rules of Professional Conduct (which do not apply in Delaware) provide: “A lawyer who receives a document or electronically stored information relating to the representation of the lawyer’s client and knows or reasonably should know that the document or electronically stored information was inadvertently sent shall promptly notify the sender.” (Rule 4.4(b)).

While “relating to the representation of the lawyer’s client” is broad, the ABA has not provided any guidance for determining whether a document “relates” to the representation.

In Delaware, the Superior Court’s Complex Commercial Litigation Division has a Protocol for the Inadvertent Production of Documents that requires the recipient of “privileged or confidential information or documents” that the recipient “believes were produced inadvertently” to either return the materials to the producing party or notify the producing party of the apparent inadvertent production.

However, the Protocol does not define “privileged or confidential” and does not provide any guidance for determining whether a document is privileged.

For lawyers practicing in the Delaware Court of Chancery, neither the Court’s rules nor the Delaware Lawyers’ Rules of Professional Conduct require a party to notify another party of receipt of inadvertently produced materials. The Court of Chancery’s sample confidentiality stipulation (available on its website) requires a receiving party to refrain from use of, and return or destroy inadvertently produced materials upon notice from the producing party, but it does not require the receiving party to give notice to the producing party.

However, the Court appears to expect it, and to expect a receiving party to give notice if the producing party “might” have a “colorable claim” of privilege. In an oral ruling in Zohar II 2005-1, Ltd. v. FSAR Holdings, Inc., C.A. No. 12946-VCS (Del. Ch. June 7, 2017), Vice Chancellor Joseph R. Slights III gave guidance for determining whether a document should be considered privileged. The Court stated that “under this Court’s precedent … plaintiffs’ counsel’s duty to alert defense counsel is triggered in any instance where a document inadvertently produced is subject to even a ‘colorable claim’ of privilege.” The Court stated “counsel doesn’t get to make its privilege call but must instead allow opposing counsel to be heard on the issue whenever even a colorable claim of privilege might be asserted.” The Court defined a “colorable claim” as “one that has a reasonable chance of succeeding” or “a claim worthy of serious consideration.”

The Court in Zohar found that, although the document in question did not convey any legal analysis or strategy, the Court could “certainly see an argument that the purpose of the communication was to facilitate the rendition of professional legal services to the client.” The Court further stated “we don’t want attorneys making close judgment calls on privilege themselves, hoping that a Court will agree with their privilege analysis after the fact, even if there are potentially good arguments to defeat the privilege or strong arguments that the privilege has been waived, both of which exist here.”

Based on the Court’s ruling, even if the receiving lawyer sees strong arguments that the document is not privileged or that the privilege has been waived, the lawyer must notify the producing party of the potentially inadvertent production.


James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP. He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery. For more information on the firm, visit

Synergies Made the Difference in Clearwire Stockholders’ $70 Million Loss on Appraisal Bid in the Delaware Court of Chancery

By Jay McMillan

Without exaggeration, Skadden Arps, which represented the merger target, Clearwire, and the buyer, Sprint, called it “the biggest appraisal defense victory ever” and “the most dramatic downward departure from a deal price in the court’s history.” Sprint acquired Clearwire at a merger price of $5.00 per share. In the statutory appraisal action that followed, based on competing discounted cash flow (DCF) analyses, Clearwire’s expert valued the company at $2.13, while the stockholder petitioners, affiliates of Aurelius Capital Management, LP, sought $16.08 per share. In ACP Master, Ltd. v. Sprint Corp., C.A. No. 8508, and ACP Master, Ltd. v. Clearwire Corp., C.A. No. 9042 (Del. Ch. July 21, 2017, corrected Aug. 8, 2017), Vice Chancellor J. Travis Laster of the Delaware Court of Chancery rejected the petitioners’ expert’s $16.08 valuation and adopted the company’s $2.13 valuation without adjustments. The petitioners held more than 25 million Clearwire shares and would have received more than $125 million if they had accepted the $5.00 per share merger consideration. Because they rejected the merger price and opted for appraisal, the petitioners are entitled to only $2.13 per share, for a total of approximately $53 million – a loss of more than $70 million. Their time for appeal has not yet expired.

The Court of Chancery rejected Aurelius’ $16.08 valuation because its DCF analysis relied on financial projections developed by Sprint, the buyer, in an effort to raise its offer for Clearwire in response to a competitive bid. The Court found that the Sprint projections were based on a model that was “not a plausible business plan” and that the projections “did not reflect Clearwire’s operative reality on the date of the merger.” By contrast, Clearwire’s DCF analysis relied on the company’s own projections prepared in the ordinary course of business by management with “significant experience preparing long-term financial projections,” and were “regularly updated … to reflect changes to Clearwire’s operative reality.” The only other significant difference between the competing DCF valuations was in perpetuity growth rates. Aurelius’ expert used a “generic” growth rate equal to expected GDP growth, while Clearwire’s expert used a rate at the “the mid-point between inflation and GDP growth.” The Court adopted Clearwire’s perpetuity growth rate, finding that it was “if anything, generous for Clearwire.”

The real difference, however, was “massive” synergies. The Court’s “dramatic” ruling makes sense because synergies resulting from a merger are not included in the Court’s estimation of “fair value.” Under Delaware law, the “appraisal statute requires that the Court exclude any synergies present in the deal price—that is, value arising solely from the deal.” Merion Capital LP v. BMC Software, Inc., 2015 WL 6164771, at *14 (Del. Ch. Oct. 21, 2015). Fair value is based on “the value of the company . . . as a going concern, rather than its value to a third party as an acquisition.” M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 795 (Del. 1999).

The synergies came from the fact that Clearwire was the “largest private holder of wireless spectrum in the United States,” and access to that spectrum was “key” to Sprint’s success. Sprint projected that “spectrum would cost Sprint an average of $3.30 per gigabyte, compared to less than a dollar if Sprint owned the spectrum,” and Sprint paid as much as $6.00 per gigabyte under its existing contract with Clearwire. As a result, Sprint estimated potential synergies at $1.5 billion to $2 billion, or $1.95 to $2.60 per share. Other estimates were as high as $3 billion to $5 billion ($3.90 to $6.50 per share), and Clearwire’s own estimate was more than $3 billion. In light of those projected synergies, the Court of Chancery’s finding that fair value net of synergies was $2.87 below the $5.00 merger price does not seem unreasonable.


James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP. He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery. For more information about the firm, visit

Patent Litigation After Heartland v. Kraft: New Considerations and Strategies on Where to Enforce Patents


By L. Peter Farkas and Theodore A. Kittila[1]

For 27 years, most federal courts assumed that the same general venue law that applied to non-patent commercial disputes also applied to patent infringement cases, meaning that patent cases could be brought wherever jurisdiction was available over the defendant. However, on May 22, 2017, the United States Supreme Court, in a surprising unanimous decision, TC Heartland LLC v. Kraft Food Group Brands LLC, 197 L.Ed. 2d 816 (2017), held that the patent venue statute requires patent infringement suits to be brought only in the judicial district in which the allegedly infringing defendant is incorporated or, alternatively, where the defendant infringes and has a a place of business. This means that, unless the latter alternative patent venue provision applies, patent claims against the majority of U.S. corporations will now default to the U.S. District Court for the District of Delaware.

The Supreme Court’s decision is bound to re-establish the District of Delaware’s historic lead as the jurisdiction where the highest number of patent cases are filed. Historically, patent plaintiffs in Delaware have enjoyed shorter than median time to trial, higher than average success rates, and higher than median damage recoveries.[2] However, with Delaware serving as the home of many U.S. corporations, and the Heartland decision mandating that cases be filed in the District where those corporations are incorporated, Delaware will face an increased case load—and with this, a likely increase in the time to trial. Coupled with this is the fact that the District of Delaware is now facing a change on the bench with two of the four judges in Delaware announcing retirement and/or the taking of senior status.[3] All of this will lead to a great deal of pressure being placed on the Delaware bench.

With this increased pressure, the ability of the District of Delaware to juggle these cases could lead to some changes in the way the Delaware bench has managed patent infringement cases. For example, while the District of Delaware historically tended to deny stays of cases where a request was made to defer to defendants’ filings seeking invalidation of patents by the U.S. Patent and Trademark Office in Inter Partes Reviews (“IPR”), 3 U.S.C. § 311, already in 2016 (with a heavy patent load on the bench), the District of Delaware granted stays in two out of four cases for IPRs. A grant of a stay related to an IPR can increase the time to trial by 18 to 24 months. With the grant of a stay in favor of an IPR now becoming more of the norm, the bench in the District of Delaware may be more willing to grant stays in order to manage the case load.

While Delaware remains a desirable patent venue, its desirability may wane with an increased caseload and with more willingness to grant stays. The Heartland decision should spur potential plaintiffs to consider and maybe even reassess where to sue patent infringers. In certain cases, an attractive alternative to both the general venue and even the patent venue provisions may be the U.S. International Trade Commission in Washington D.C. The ITC has in rem jurisdiction over imported products that are charged with infringing U.S. patents in Section 337 Unfair Imports Investigations. The advantage of Section 337 is that it is speedy: most cases are decided within 12 months and the Commission has never, to date, granted a stay pending an IPR. One limitation of Section 337 is that a successful patentee obtains an exclusion order, by which the Customs Service is ordered to bar the entry of the infringing imports, rather than damages for infringement being ordered by a juridical body. Nevertheless, an exclusion order provides an opportunity for the patentee to negotiate a settlement by way of a royalty-bearing license or paid-up damages with infringers who want to stay in the market.

Regardless of the decision where to file, prospective plaintiffs should be aware of the sea-change elicited by the Heartland decision and options available.

Heartland’s Impact on Venue.

In Heartland, the Supreme Court considered 28 U.S.C. §1400(b), the patent venue statute, which provides that “any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.”   In 1957, the Supreme Court interpreted “resides” in the first prong of §1400(b) in the context of a corporate defendant as the state in which the corporation is incorporated. See Fourco Glass Co. v. Transmirra Products Corp, 353 U.S. 222, 226 (1957). However, for nearly three decades thereafter, numerous federal courts interpreted the term “resides” in §1400(b) as having the same expanded meaning of “residence” as is under 28 U.S.C. §1391, the general venue statute. Based on a 1988 amendment by Congress of the general venue provision of §1391, venue is appropriate in “any judicial district in which such defendant is subject to the court’s personal jurisdiction,” and a defendant that is a corporation is deemed to reside “in any judicial district in which it is subject to the court’s personal jurisdiction ….” In 1990 the Federal Circuit, the court with jurisdiction of appeals in patent cases, held that the amendment of the general venue statute also amended the patent venue statute. See VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990).

Apparently relying on this authority, Kraft, a Delaware corporation, sued Heartland, an Indiana corporation, in the District of Delaware, and Heartland challenged, seeking to have the case transferred to the Southern District of Indiana. The District Court denied Heartland’s motion, and Heartland filed a petition for mandamus with the Federal Circuit. See Kraft Foods Grp. Brands LLC v. TC Heartland, LLC, 2015 U.S. Dist. LEXIS 127972 (D. Del. Sept. 24, 2015). The Federal Circuit denied Heartland’s petition for mandamus. In re TC Heartland LLC, 821 F.3d 1338 (Fed. Cir. 2016). Thereafter, the Supreme Court granted certiorari and, following argument in March 2017, reversed and remanded the prior decision in a May 22, 2017, opinion, holding that the 1988 amendment to the general venue statute did not amend the patent venue statute and “that a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute.” TC Heartland LLC, 197 L.Ed.2d at 820 (2017).

Is Heartland a Swipe at “Patent Trolls”?

While the full impact of the Heartland decision for patent practitioners may not be fully known for years, a fair amount of speculation has already been raised in the media. For example, some media sources have claimed that Heartland is a rebuke of forum shopping by so-called “patent trolls”[4] and will be a boon for the tech industry.[5] San Jose’s Mercury News, under the headline “Supreme Court Ruling Puts Patent Trolls in their Place,” called the Heartland decision “a major win for the tech industry that should be celebrated throughout Silicon Valley.”[6] This in spite of the fact that Heartland was (a) brought not by a patent troll, but a Fortune 200 company; (b) brought not against a tech company, but a division of a food products company; and (c) brought not in a District that is a known magnet for “forum shoppers,” but in the District of Delaware, the forum of choice for many of the largest corporations in the world. Other factors show that certain characterizations of the impact may be off base.

First, any suggestion that the Heartland decision discloses anti-patent troll sentiments by the Supreme Court is misplaced. The decision, based on (candidly) dry statutory construction of the two venue provisions, returns the patent venue statute to the Supreme Court’s prior interpretation in its 1957 Fourco Glass decision.

Second, the idea that any setback for a patent troll (NPE) is a boon for the “tech industry” actually reflects a misunderstanding of the value that such NPEs bring to startups by providing a market for sale of IP when a startup fails. Startups expend substantial resources on developing and protecting potentially disruptive intellectual property. While some startups succeed, many others fail—and some before they enter the market with a viable product. Thus, NPEs prevent established tech companies from depriving investors in failed startups from the ability to recoup their investment in R&D and intellectual property by selling them to third parties (including other NPEs or in bankruptcy auctions) for use or resale to others for enforcement against free riders. Without the market for failed startups to sell this intellectual property, many angel investors may prefer to place their bets on only the “sure things” rather than the potential revolutionary “disrupters.”

Third, while Heartland will result in some changes in where infringement suits are brought, it will not eliminate forum shopping altogether. The Supreme Court did not disturb the second prong of the patent venue statute concerning where infringement cases can be filed: “where the defendant has committed acts of infringement and has a regular and established place of business.” §1400(b). Acts of infringement include “whoever without authority makes, uses, offers to sell, or sells any patented invention.” 35 U.S.C. §271(a). The only other requirement for venue under the second prong of the patent venue statute is that the defendant has a “regular and established place of business” in the District. Depending on the type of business and its business model this prong offers significant choice of venue.

The District of Delaware as the Default Forum.

What is clear from the Heartland decision is that it does set the default for venue for patent infringement suits in a defendant’s State of incorporation, if no alternative exists. Nearly 1.2 million business entities have their legal home in Delaware including more than half of all U.S. publicly-traded companies and 64-66% of the Fortune 500.[7] In short, Delaware is likely to be the “winner” of the venue sweepstakes triggered by Heartland.

The Delaware Court’s track record in patent infringement cases, in general, and in cases brought by putative “patent trolls” (NPEs), in particular, is instructive. In 2015 and 2016 the District of Delaware led the top 15 jurisdictions ranked for most “favorable venues for patent holders, with shorter time-to-trial, higher success rates and greater median damages awards.”[8] The District of Delaware is also not inhospitable to NPEs. The success rate for NPEs may suffer somewhat in Delaware, but recoveries could be double from recoveries in the Eastern District of Texas.[9]

The cited PWC Patent Studies show that the recoveries in Delaware for NPEs are close to the median recoveries overall in the 15 most active jurisdictions reviewed by PWC. Compare the 2016 PWC Study at page 11 (NPEs $13.2 million for corporate NPE plaintiffs and $16.3 million for university/nonprofit NPE plaintiffs) to overall Delaware median recoveries of $17 million (id. at p. 15), to 2017 PWC Study at page 17 (NPEs $13.0 million for corporate NPE plaintiffs and $16.3 million for university/ nonprofit NPE plaintiffs) to overall median recoveries in Delaware of $16.2 million in the following year (id. at 22). The median recoveries by individual NPE plaintiffs were substantially less than for corporate, university, and non-profit NPE plaintiffs in the 2016 PWC Study ($3.3 million) and the 2017 PWC study ($6.7 million).[10] In short, the Delaware Court has awarded remarkably consistent above or near median damages to plaintiffs and NPE plaintiffs alike.

One possible note of caution concerning the speedy trial finding with respect to the District of Delaware is that in the past the Delaware Court was unlikely to stay patent litigation pending determination by the PTO of whether to accept a petition for IPR of issued patents asserted in infringement litigation and pending the completion of such reviews. Prior to 2016 the District Court in Delaware was “likely to deny a stay.”[11] In 2016, however, the Delaware Court split 50-50 in considering four motions for stay.[12] As noted, granting a stay can double the time to trial.

While it is too early to draw any inference of a trend, were this to become a trend, such a development would strengthen the case for a lesser known alternative to District Court litigation in a subset of patent (and trademark) infringement cases that qualify for Section 337 Investigations by the U.S. International Trade Commission.

ITC Section 337 Investigations.

The International Trade Commission (“ITC”) enforces Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, following tripartite administrative litigation that closely resembles litigation under the Federal Rules of Civil Procedure, albeit “on steroids” to meet abbreviated ITC deadlines. The three parties to these investigations are the patent holder or “Complainant,” the accused infringer(s) or “Respondents,” and a Commission Staff Attorney from the Office of Unfair Imports Investigations who is independent of the Complainant and Respondents. Multiple Respondent importers can be joined in a single in rem proceeding.

Section 337 affords remedies against imports that violate U.S. intellectual property rights, including patent infringement, copyright infringement, misappropriation of trade secrets, and other forms of unfair competition. Not all Respondents need to be charged with coextensive intellectual property violations.

Such investigations afford the parties full discovery and motions practice, including interrogatories, requests for production, requests for admission, depositions under oath, and means to enforce discovery requests.   An evidentiary hearing is held within approximately six months of the institution of an investigation before an Administrative Law Judge (“ALJ”) who is experienced in intellectual property matters, complete with pre-hearing briefs, motions in limine, and post-hearing briefs.

Successful 337 cases can lead the full Commission to review the ALJ’s “Initial Determination” and issue general exclusion orders, limited exclusion orders, or cease and desist orders barring imports by product or specific foreign manufacturers and importers found to have violated the Complainants’ intellectual property rights. Exclusion orders operate as injunctions against the importation of the offending goods, enforced at their point of entry into the U.S. by the Customs Service, usually within one year of the institution of the investigation, or 18 months in more complex cases.

Two factors distinguish between District Court infringement litigation and ITC investigations—one procedural and the second remedial. First, the ITC has never stayed a Section 337 investigation pending a petition for, or completion of, an IPR during its pendency before the PTO. See In the Matter of Certain Laser-Driven Light Sources, Subsystems Containing Laser-Driven Light Sources, and Products Containing Same, 2016 ITC LEXIS 196 (Int’l Trade Comm. Mar. 3, 2016) (motion for stay denied).

Second, while the ITC lacks jurisdiction to award damages against Respondents,[13] the ITC requires settlement conference and mediation between the Complainant and individual Respondents that allow the parties to negotiate license and damage settlements. Some Complainants file District Court complaints, possibly to ward off looming statute of limitations issues or add the spectre of damages to pressure Respondents, expecting a stay of the District Court action either pending an IPR or pending the more expeditious ITC investigation.

In any event the ITC investigation can either lead to a faster settlement than a District Court proceeding or present an advance dry run by which to assess prospects in litigation. The choice of an ITC proceeding has as much as a three-year time advantage over taking the District Court route, if the District Court action is stayed pending an IPR.


Far from being a victory against “patent trolls” on behalf of the “tech sector,” Heartland will effect a change for patent litigators. The decision will require greater pre-filing investigation of where patent infringers can be sued and a determination of other available options with respect to venue. The outcome of that investigation will likely result in nuanced decision-making on where to bring a patent infringement suit: Delaware or another State of incorporation; a State where infringement occurs and the defendant has an office or manufacturing facility; or potentially the ITC, particularly where infringement involves imported goods; multiple foreign infringers; the patentee is a domestic company (or a foreign company with a substantial U.S. presence); and the patentee is open to injunctive relief against, or licensing of, the infringers.


[1] L. Peter Farkas and Theodore A. Kittila are partners with Halloran Farkas + Kittila LLP (“HFK”), a law firm with offices in Washington, D.C., Wilmington, Delaware, Palo Alto, California, and Jackson, Wyoming. Mr. Farkas is a member of the Bars of the District of Columbia and the States of Maryland and New York and practices in HFK’s Washington, D.C. office. Mr. Kittila is a member of the Bars of the States of Delaware and New York and practices in HFK’s Wilmington, Delaware office. More information about HFK can be found at

[2] See 2016 PWC Study and 2017 PWC Study, discussed infra and cited at n.8.

[3] See (last visited June 5, 2017) (noting that in response to the judge shortage, the District of Delaware will “borrow” four judges from the Eastern District of Pennsylvania).

[4] “Patent trolls” are known less pejoratively as Nonpracticing Entities (“NPEs”) or Patent Assertion Entities (“PAEs”).

[5] See, e.g., (last visited June 5, 2017).

[6] See (last visited June 3, 2017).

[7] See Delaware Division of Corporations website, (last visited June 3, 2017). See also Delaware Division of Corporations 2015 Annual Report, available at (last visited June 5, 2017). The Delaware Secretary of State also noted in his 2015 Annual Report that “86 percent of U.S. based Initial Public Offerings in 2015 chose Delaware as their corporate home, including Box, Etsy, Go Daddy, Shake Shack, and Square.” Id. at p. 1.

[8] See PWC 2016 Patent Litigation Study (“2016 PWC Study”), available at
actions/assets/2016-pwc-patent-litigation-study.pdf (last visited June 3, 2017), at p. 15. See also PWC 2017 Patent Litigation Study (“2017 PWC Study”), available at http://www. (last visited June 3, 2017), at p. 22.

[9] See id.

 [10] The most striking finding of the PWC Patent Studies is that NPEs had a threefold advantage in the median amount of recovery in the 2016 PWC Report and nearly a four-fold advantage in median recovery in the 2017 PWC Report.

[11] D.H. Swanson, Esq., Staying Cases Pending PTAB’s Decision to Institute IPR or CBM Review: A Survey of 10 Jurisdictions with the Most Patent Litigation, at 1 (July 2015), available at (last visited June 3, 2017). In 2014, grants of stays varied from 78 percent by the Northern District of Illinois to 20 Percent by the Eastern District of Texas. Jones Day Publications, Stay or Go! Tracking District Court Stays Pending Parallel USPTO Post-Grant Review Proceedings, at Conclusions (July 2014), available at (last visited June 5, 2017).

[12] In 2016, the District of Delaware granted stays pending IPR in: (1) 454 Life Scis. Corp. v. Ion Torrent Sys., 2016 U.S. Dist. LEXIS 153978 (D. Del. Nov. 7, 2016); and (2) Sirona Dental Sys. GMBH v. Dental Wings, Inc., 2016 U.S. Dist. LEXIS 155706 (D. Del. Mar. 22, 2016). Stays pending IPR were denied by the Delaware Court in: (1) Toshiba Samsung Storage Tech. Korea Corp. v. LG Elecs., Inc., 193 F. Supp. 3d 345 (D. Del. June 17, 2016); and (2) Advanced Microscopy Inc. v. Carl Zeiss Microscopy, LLC, 2016 U.S. Dist. LEXIS 17363 (D. Del. Feb. 11, 2016).

[13] See (last visited June 3, 2017).