IN THE COURT OF CHANCERY OF THE STATE OF DELAWAREZAYO GROUP, LLC,
Plaintiff,v.
LATISYS HOLDINGS, LLC,
Defendant.

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C.A. No. 12874-VCS

MEMORANDUM OPINION

Date Submitted: September 5, 2018
Date Decided: November 26, 2018

Elizabeth S. Fenton, Esquire and Scott W. Perkins, Esquire of Saul Ewing Arnstein& Lehr LLP, Wilmington, Delaware, Attorneys for Plaintiff Zayo Group, LLC.
Philip Trainer, Jr., Esquire and Marie M. Degnan, Esquire of Ashby & Geddes,
Wilmington, Delaware and Mark D. Cahill, Esquire, Phoebe Fischer-Groban,
Esquire and Christina GT. Lau, Esquire of Choate Hall & Stewart LLP, Boston,
Massachusetts, Attorneys for Defendant Latisys Holdings, LLC.

SLIGHTS, Vice ChancellorIn law, as in life, the well-known principle of caveat emptor (“let the buyer
beware”) comes as a rude awakening to many-a-buyer.

The principle wasgraphically illustrated and perhaps first embraced as a canon of our commercial law
in the seminal Laidlaw v. Organ.1 During the War of 1812, the British successfully
suppressed the free flow of American trade, depressing the price of tobacco trapped
within the United States. The Treaty of Ghent officially ended the war on Christmas
Eve 1814.

Ships carrying news of the Treaty were dispatched and reached

New Orleans weeks later. Before the ships’ couriers could deliver official news of
the armistice, the news was leaked to a tobacco buyer named Organ. Armed withthis non-public information, Organ rushed to Laidlaw & Company at dawn the next
day eager to close a previously negotiated deal to purchase 111 “hogsheads”(120,715 lbs.) of tobacco. Sensing Organ’s urgency, Laidlaw’s representative asked
Organ if there was some reason for his haste. Organ said nothing of the peace andthe tobacco deal closed that morning. Later that day, in reaction to news that theforeign tobacco markets had re-opened, the price of tobacco jumped by fifty percent.
Angered by Organ’s “deception,” Laidlaw forcibly seized the tobacco it had sold toOrgan. Organ then sued for its return. The case reached the United States Supreme
Court two years later.

1

Laidlaw v. Organ, 15 U.S. (2 Wheat.) 178 (1817).
2

Writing for the majority, Chief Justice Marshall ruled, “[Organ] was notbound to communicate [his knowledge of the armistice]. . . . . ‘It is no more
forbidden to sell at the current price, without disclosing the circumstances which
may cause it to fall, than it is to buy without communicating those which may cause
it to rise.’”2 While our common law and our Uniform Commercial Code have eased
the harsh reality of caveat emptor somewhat, its core doctrinal premise remains in
our law today. Buyers, indeed, must beware. If they want to manage risk, they are
well-advised to address and allocate it clearly in their contracts.
In this case, an unhappy buyer of a company has sued the seller for breach ofcontract. The seller and buyer agreed that if any of the buyer’s most valuable
customers cancelled or modified their contracts with the seller before the closing,
the seller would disclose that fact to the buyer. The seller and buyer did not agree,
however, that the seller would advise the buyer if any of these customers elected not
to renew one of their contracts. After the transaction closed, the seller discoveredthat certain major customers had elected or were electing not to renew theircontracts. This litigation ensued.

2

Id. at 194, 185 n.C (internal quotation omitted).
3

At bottom, this case involves sophisticated parties bargaining to allocate risk
through carefully negotiated warranty and indemnification provisions in theiragreement of sale. Delaware is a contractarian state.3 Our courts honor and enforce
the bargain struck. That is what must be done here.
In this post-trial Memorandum Opinion, I conclude: (1) Plaintiff has notproven that Defendant breached the operative contract; and (2) in any event, Plaintiff
has not proven its damages above the bargained-for contractual thresholds that limit
its damages recovery. My verdict, therefore, is for Defendant.
I. FACTUAL BACKGROUND
I have drawn the facts from the parties’ pre-trial stipulation, evidence admitted
at trial and those matters of which the Court may take judicial notice.4 The trial

3

See, e.g., Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 551 n.305 (Del.
Super.), aff’d, 886 A.2d 1278 (Del. 2005) (TABLE) (“Delaware courts do not rescue
disappointed buyers from circumstances that could have been guarded against throughnormal due diligence and negotiated contractual protections.”); VGS, Inc. v. Castiel, 2004
WL 876032, at *6 (Del. Ch. Apr. 22, 2004) (finding that a sophisticated investor’s failure
to recognize the importance of a contract that was made available during due diligence
diminished the plaintiffs’ fraud and breach of contract claim); Debakey Corp. v. Raytheon
Serv. Co., 2000 WL 1273317, at *26–28 (Del. Ch. Aug. 25, 2000) (finding that asophisticated party’s failure to conduct adequate due diligence or to procure express
warranties for facts that it supposedly relied upon in entering a transaction made it
impossible to prove justifiable reliance. Instead, this behavior indicated the sophisticatedparty made a business decision it was willing to accept in order to complete the deal quickly
and cheaply, a decision the court would not second-guess.).
I cite to the Verified Complaint as “Compl. ¶”; the Joint Pre-Trial Stipulation and Orderas “PTO ¶”; the joint trial exhibits as “JX #”; and the trial transcript as “Tr. # (witnessname).”
4

4

record consists of 494 joint trial exhibits, 803 pages of trial testimony and 17 lodged
depositions. The following facts were proven by a preponderance of the competentevidence.
A. Parties and Relevant Non-Parties
Plaintiff, Zayo Group, LLC (“Zayo”), is a Delaware limited liability company
headquartered in Boulder, Colorado.5 Zayo is a publicly traded company thatprovides high-capacity dark fiber, wavelength, IT infrastructure services andEthernet products and services.6

Since its founding, it has made forty-one

acquisitions of fiber and data center companies, averaging about three to four
acquisitions per year.7
Defendant, Latisys Holdings, LLC (“Latisys”), is a Delaware limited liability
company, founded in late 2007 by Pete Stevenson, Doug Butler and Evans Mullan.8
Before the execution of the Stock Purchase Agreement, Latisys owned all of theissued and outstanding stock of (1) Latisys Holdings Corp., (2) Latisys-Chicago
Holdings Corp. and (3) Latisys-Ashburn Holdings Corp. (collectively, the “L-

5Compl. ¶ 8.

6

Tr. 11–16 (Reardon).

7

Tr. 71–72 (Reardon).

8Def. Pre-Tr. Br. at 6; Compl. ¶ 9.
5

Companies”).9 At the time of the acquisition, Latisys offered a collection of
IT infrastructure services, including data center colocation services, managed
hosting services, and enterprise and public cloud services.10 It operated out of eightdata centers in the United States, as well as a cloud storage platform in London.11
Non-party, Great Hill Partners, LP (“GHP”), is a growth private equity firmbased in Boston, Massachusetts.12 GHP made the initial equity investment in Latisys
that allowed Latisys to make its first data center acquisitions in Orange County,
California and Denver, Colorado.13

It ultimately became Latisys’ majority

shareholder through various GHP investment funds.14
Non-party, DH Capital, is the investment bank Latisys engaged to run its sales
process.15 Non-party, Pete Stevenson, was Latisys’ Chief Executive Officer.16 He,along with the rest of Latisys’ management team, left the company shortly after the9Compl. ¶ 9; PTO ¶ 1.

10

JX 62.

11

Id.

12

PTO ¶ 1.

13

Tr. 487 (Stevenson).

14

Tr. 487 (Stevenson).

15

PTO at 3; see JX 31.

16

Tr. 495 (Stevenson).
6acquisition.17 Non-party, Doug Butler, was Latisys’ Chief Financial Officer.18 Nonparty, John Hayes, was the Managing Partner at GHP at the time of the transaction.19
He is one of the three founders of GHP.20 Non-party, Dan Glisky III, was the chiefarchitect of Zayo’s financial model for evaluating Latisys.21 And, non-party, Scott
Reardon, was Zayo’s former head of corporate development.22
B. The Business of Latisys: Clouds, Customers and Contracts
Two types of contracts governed Latisys’ relationships with its customers:
Master Services Agreements (“MSAs”) and Service Order Forms (“SOFs”).23
MSAs governed the customer relationship at a macro level.24 SOFs specified theservices the customer purchased, the prices and rates, the monthly recurring charges
to the customer, the contract term and the details of any one-time optional renewal

17

PTO at 30.

18

Tr. 354 (Butler).

19

Tr. 7 (Hayes).

20

Tr. 417 (Hayes).

21

Tr. 92 (Reardon).

22

Tr. 7 (Reardon).

23

Tr. 238 (Butler).

24

Tr. 238–41 (Butler).
7

periods for the SOF.25 Put simply, the SOFs drove the customer relationship andmarked its contours.26
Latisys customers often entered into one or more SOFs to cover the majorityof their services (“parent” SOFs).27 They would then add SOFs as needed over time
for additional products and services (“add-on” SOFs).28 The parent and add-on
SOFs usually expired at the same time.29 The average term of a Latisys SOF wasthree years.30
When a customer’s SOFs expired, the customer was “out of contract” with
Latisys.31 Latisys would then provide services to the customer under the terms of
the expired SOF on a month-to-month basis.32 Once the customer entered thismonth-to-month phase, it could terminate its services with Latisys with thirty days’

25

Id.

26

Id.

27

Id.

28

Id.

29

Tr. 242–43 (Butler).

30

Tr. 239 (Butler).

31

Tr. 242–44 (Butler).

32

Id.
8

notice.33 Approximately thirty percent of Latisys’ revenue was month-to-month.34
In other words, thirty percent of the company’s revenue was guaranteed only for
thirty days.35 Latisys’ average customer tenure—in contrast to the average term of
Latisys’ SOFs—was about four and a half years.36
Latisys’ customers’ needs naturally fluctuated over the duration of theirrelationship with Latisys.37 It was common for customers to require less storage
space after they developed their own ability to perform the functions they had reliedon Latisys to provide.38 As the expiration of their SOF term approached, Latisys
customers routinely would negotiate new SOFs with Latisys on more favorable
terms.39 “More-for-less” was the mantra that the Latisys sales force regularly
confronted as SOFs expired.40

33

Id.

34

Tr. 251 (Butler).

35

Id.

36

Tr. 500 (Stevenson).

37

Tr. 248–49 (Butler).

38

Id.

39

Id.

Tr. 248 (Butler). (“Q. Was it routine that customers at the end of a SOF term would
renegotiate with Latisys for more or different services? A. . . . You know, they’d always
want to get more for less . . . .”).
40

9

Latisys always aimed to renew customer contracts in order to lock down the
resulting cash flow.41 With market prices declining, however, Latisys often needed
to make concessions in order to keep customers.42 This meant that Latisys would
have to accept either pricing discounts in return for restored space or a longer
contract term.43 While not optimal, this strategy eventually created more guaranteed
revenue.44
C. Latisys Decides to Explore a Sale
Latisys’ investors and the Latisys Board of Directors decided by late spring2014 that it was appropriate to consider strategic alternatives for Latisys, including
a sale of the company.45 By June of that year, Latisys had executed an “Engagement
Agreement” with DH Capital in order to move forward with a potential sales
process.46 DH Capital dubbed the process “Project Caribou.”47

41

Tr. 237 (Butler); Tr. 490–91, 494 (Stevenson).

42

Tr. 491–92 (Stevenson); JX 430 at 23 (former Latisys Senior Sales Account Manager
Bill Rowcliffe made clear that “[p]ricing in this industry is—is slowly dissipating. It’sgoing down.”).
43

Tr. 249–50 (Butler); Tr. 489–90, 494–95 (Stevenson).

44

Id.

45

Def. Post-Tr. Br. at 7.

46

PTO ¶ 3; see JX 31.

47

Def. Post-Tr. Br. at 7. See also Tr. 441 (Hayes).
10In October 2014, DH Capital provided a group of potentially interested
buyers, including Zayo, a Confidential Information Memorandum (“CIM”) that
contained detailed information about Latisys.48 Among the data laid out in the CIM
were summaries of Latisys’ products and data centers, customer operations andrevenue, and historical and projected financial performance.49
The CIM’s Customer Overview slides made clear that the average tenure fora Latisys’ customer was about four and a half years.50 These slides also highlighted
that Latisys had “[m]ore than $157 million in remaining contract value and twothirds contracted beyond 12 months.”51 The CIM’s contract waterfall schedule
broke down Latisys’ customer contracts by the amount of time remaining on thecustomers’ contracts, which ranged from fewer than six months to over two years.52
For each band of customers, the waterfall indicated the value remaining on eachcontract.53

48

PTO ¶ 4; see JX 62; see also Tr. 23 (Reardon).

49

JX 62.

50

Id.

51

Id.

52

Id.

53

Id.
11

DH Capital forwarded the first-round process letter to potential buyers,
including Zayo, on Halloween of 2014.54 The process letter requested non-binding
indications of interest by November 18, 2014.55 The letter also instructed bidders toinclude a proposed purchase price along with the bidder’s basis for the valuation.56
A day after the stated deadline, Zayo submitted its initial indication of interestto acquire Latisys.57 Zayo “propose[d] a total value in the range of $625M – $655M
in cash (approximately 11 – 11.5x Q4 2014E LQA Adjusted EBITDA of $56.8M)
on a cash-free, debt-free basis.”58 According to Zayo, its “[v]aluation [was] basedon the Company’s guidance of $56.8M of LQA Adjusted EBITDA in fourth quarter2014.”59 Zayo acknowledged that “[t]hrough the due diligence process, [it wouldneed] to validate this assumption as well as the near and long-term cash flow outlook
for the business.”60

54

PTO ¶ 5; see JX 70.

55

PTO ¶ 5; see JX 70.

56

PTO ¶ 5; see JX 70.

57

PTO ¶ 8; see JX 109.

58

JX 109.

59

Id.

60

Id.
12

D. Zayo Due Diligence
On November 20, 2014, the day after sending its interest letter, Zayo sent
Latisys a set of diligence requests.61 DH Capital responded on November 26, 2014,
by sending Zayo a spreadsheet that displayed for each customer (not identified byname) the contract expiration dates and the customer’s monthly recurring revenue
by location and product.62 The response also included bookings and “churn”—loss
resulting from customer turnover—information for 2013 and 2014.63
Eight bidders, including Zayo, were invited to participate in round two of
Project Caribou.64 Further due diligence ensued.65 On December 16, 2014, Latisys
shared an “EBITDA Bridge” with Zayo, displaying its actual revenue and expenses
in October 2014, and its projections for November 2014 through March 2015.66

61

PTO ¶ 9; see JX 111.

62

PTO ¶¶ 9–10; see JX 111, 122.

63

PTO ¶ 10; see JX 122.

64

PTO ¶ 11; see JX 112.

65

PTO ¶ 11; see JX 112.

PTO ¶ 12; see JX 151. DH Capital noted “dialogue and diligence calls with Zayo’s
corporate development team” with “[a]reas of diligence focus . . . includ[ing] Bridge to
Q1-2015 unadjusted EBITDA . . . .” JX 153 at 5.
66

13

Importantly, during diligence, Zayo was provided with all of the MSAs and
SOFs for Latisys’ top thirty customers by monthly recurring revenue (“MRR”) in
the Project Caribou virtual data room (“VDR”).67 With this data in hand, Zayo’s
deal team could assess all of the MSAs and SOFs before Zayo signed the Stock
Purchase Agreement (“SPA”).68 As a result, Reardon could attest that Zayo knew
from diligence the exact number of months remaining on Latisys’ contracts with its
top thirty customers by MRR.69
Glisky, the financial analyst on Zayo’s deal team, incorporated theinformation provided in the VDR, including the comprehensive customer base data,
into his financial model.70 The “MRR by Cust” tab of Glisky’s financial model lists
each Latisys customer by size of MRR.71 It also displays the date the customer first67

PTO ¶ 18.

68

Tr. 126–27 (Reardon); JX 212 at 5.

Tr. 125 (Reardon) (“Q. Fair to say that as part of the customer due diligence, you andZayo and others on your deal team knew what the remaining terms were on the top 30
customer contracts? A. Yeah. They varied by service, by underlying service; but I believethat we had that—that detail.”).
69

70

JX 253; Tr. 260:1–3, 261:24–262:1–11 (Glisky).

71

JX 253.
14

began purchasing services from Latisys, the expiration date of the customer’s SOFs
and the customer’s MRR by product and location.72
Glisky’s model calculated how many months of revenue remained undercontract for each customer and how much revenue was guaranteed for each of
Latisys’ customers.73 The model assigned an “expiration profile” to each customer
based on the amount of time remaining before the customer’s contracts with Latisys
expired, which were: “> 2 Years,” “1-2 Years,” “6 Mo’s – 1 Year,” “< 6 Mo’s” and“MTM.”74 At the time Glisky constructed his model, he knew only the code names“TOSH,” “ADD2,” “ECHO,” “ITCO,” and “LEXI” for the five customers at issue
in this case—respectively Toshiba American Information Systems, Inc. (“Toshiba”),
Add2Net, Inc. (“Add2Net,” a.k.a. “Lunarpages”), IT Convergence (“ITC”) andLexisNexis.75 Zayo received a key to the customer names on January 5, 2015.76

72

Id.

73

Tr. 262:8–22, 266:6–19 (Glisky); JX 253.

74

JX 253. “MTM” means month-to-month. Tr. 271:18–20 (Glisky).

75

Tr. 32 (Reardon) (“[T]here’s always sensitivity to providing customer names . . . .”).

76

JX 188; Tr. 125:7–14 (Reardon); PTO ¶ 24.
15

Glisky’s analysis showed that Toshiba and IT Convergence were out ofcontract with only one more month of guaranteed revenue.77 It also revealed that
Echopass and LexisNexis had less than six months remaining under contract.78
Glisky’s analysis did not cover Add2Net’s bandwidth SOF at issue in this case,though this information was provided to Zayo in the VDR.79
E. The Parties Negotiate Key Terms of the SPA
The day before Christmas Eve, 2014, Zayo sent Latisys a Letter of Intent(“LOI”) proposing a base acquisition price of $655,000,000.80 This proposal was“based upon the key terms described below and in the separately included [SPA]
mark-up,” and was conditioned upon exclusivity moving forward.81

77

JX 253.

78

Id.

79

Id. PTO ¶ 18.

80

PTO ¶ 16; JX 168.

81

JX 168 at 1; JX 169.
16

Latisys never agreed to exclusivity and never signed Zayo’s LOI.82 Moreover,while Zayo repeatedly expressed to Latisys and DH Capital its desire to preempt thebidding process,83 Zayo repeatedly rejected that overture as well.84
On the same day Zayo sent its LOI, Zayo sent its first redline of the SPA to
Latisys.85 Zayo changed one contract provision that is particularly relevant here:
Section 4.12(b). Section 4.12(b), as originally proposed by Latisys, stated:
Except as set forth on Schedule 4.12, as of the date hereof, since
December 31, 2013, no Latisys Company has received any written
notice of any default or breach by any Latisys Company under any
Material Contract, except for defaults that have been cured or otherwise
would not reasonably be expected to have a Material Adverse Effect.86

PTO ¶ 17; Tr. 40 (Reardon). Zayo’s LOI stated, “the parties agree to an exclusive
negotiating period expiring at the close of business on Monday, January 19, 2015.” JX 18.
Reardon also raised the issue of exclusivity in a December 26, 2014 email, stating,“our expectation is that we reach agreement on value, key terms and exclusivity before
diving into confirmatory due diligence details.” JX 171. While pressing the issue with
Latisys, Zayo knew that “exclusivity [was] going to be a very thorny issue.” Id. An internal
Zayo presentation in January 2015, after Latisys had proposed a price of $675 million,
described the situation as follows: “Zayo made preemptive bid and indicated we would
require 30-day exclusivity. DH has messaged that they will not shutdown process until
SPA has been executed.” JX 183. The “preemptive bid” in the LOI that Latisys neversigned required 30 days of exclusivity. Id.
82

83

PTO ¶ 14; see JX 157, 159, 168, 183, 191, 192. Internal presentations show Zayo
considered $650 M (13.6 x EBITDA) to $675 M (14.1 x EBITDA) as the “[r]ecommended
range,” and believed “that [the] upper-end could preempt and shut down the process.”
JX 183 at 8.
84

JX 183. Zayo decided on its own to accelerate its bidding process. Id.

85

PTO ¶ 19; JX 169.

86

JX 169 at 110.
17

Zayo changed the provision to read:
Except as set forth on Schedule 4.12, all Material Contracts are valid,binding and enforceable in accordance with their terms against the
Latisys Companies, as applicable, and to the Knowledge of theCompanies, each other party thereto, and are in full force and effect.
No Latisys Company has received any written notice that any party toMaterial Contract intends to cancel, terminate, materially modify,
refuse to perform or refuse to renew such Material Contract or of any
default or breach by any Latisys Company under any Material Contract,
except for defaults that have been cured or otherwise would notreasonably be expected to have a Material Adverse Effect.87
On December 30, 2014, Latisys responded to Zayo’s proposed changes to the
SPA. With respect to Section 4.12(b), Latisys accepted all of the proposed language
except for Zayo’s addition of the phrase “or refuse to renew.”88 Latisys struck that
language from Zayo’s return draft.89 On January 8, 2015, Zayo returned the redline
to Latisys—accepting Latisys’ change to Section 4.12(b).90
The deal price was another key point of negotiation. Before Zayo delivered
its LOI, DH Capital proposed a sales price of $680 million in a phone conversation
with Zayo on December 19, 2014. In an email to Latisys and others reporting on the87

Id. (emphasis supplied).

88

PTO ¶ 20; JX 180 at 106.

89

Id.

PTO ¶ 21. Because Zayo returned the redline with no changes or comments to Zayo’s
deletion of “refuse to renew,” the parties assume, as do I, that Zayo accepted the change
and there was a meeting of the minds that the phrase would not be included.
90

18

call, DH Capital stated, “we are giving [Zayo] a number that is enough to get thedeal done, a realistic price that is only 6–7% above the mid-point of Zayo’s range.”91
For its part, Zayo undertook extensive financial modeling of the Latisys
business.92 It performed a synergies analysis and an analysis of implied multiples ofpublicly known comparable transactions.93 The synergy analysis concluded that
there would be significant cost savings through synergies.94 The comparables
analysis reflected “recent comparable transactions” at “13.6 X Avg Reported LQA
EBITDA Mult.”95 In addition to his modeling of Latisys’ customer contracts andrevenue base, as discussed above, Glisky also performed a 30-year discounted cash
flow analysis, a net present value sensitivity analysis and an internal rate of return
analysis.96

91

PTO ¶ 15; see JX 159 at 1.

92

PTO ¶ 22; JX 253.

93

PTO ¶ 22; JX 253.

94

PTO ¶ 22; JX 253. Tr. 94–95 (Reardon); Tr. 260 (Glisky); JX 97 at 24.

95

PTO ¶ 22; JX 253. JX 183 at 24.

96

PTO ¶ 22; JX 253. Tr. 260–61 (Glisky); Tr. 63–64 (Reardon); Tr. 87 (Reardon); see also
JX 75 at 5 (November 2014 presentation to Zayo’s Board of Directors referencing a “30Year DCF”); JX 97 at 2, 7 (November 2014 “Project Lincoln Overview and Bid
Recommendation” summarizing a “5-Year IRR / NPV Sensitivity w/ Terminal Value”).
19

By the time Zayo returned the draft SPA accepting Latisys’ strike of the“refuse to renew” language, the price negotiations had ended and the parties weresettled on $675 million.97 Latisys was motivated to lower the price to $675 million
in large part to avoid stagnation.98 But $675 million was the floor.99 DH Capitalindicated to Zayo that Latisys was “highly price sensitive to the 675 M . . . not froma return perspective, but from being second guessed for shutting down at less than
12x their marketed ebitda number.”100
Zayo and Latisys executed the SPA on January 13, 2015.101 Zayo continued
to engage in pre-Closing diligence,102 and the transaction closed on February 23,
2015.103

97

PTO ¶ 27; see JX 216.

Tr. 461–62 (Hayes). (“Q. . . . Why was it that Latisys had agreed to lower its price from
680 to 675? A. I would say against my better judgment, I think the collective wisdom on
sort of the folks who had input on our side, felt like it would move the deal along. So wewere prepared to lower a little bit but no more.”).
98

99

Id.

100

JX 192 at 1.

101

PTO ¶ 29; see JX 213.

102

PTO ¶ 32.

103

PTO ¶ 33.
20

F. The Relevant Provisions of the SPA
Zayo’s claims implicate several provisions of the SPA. I discuss each briefly
below.104
1. Section 4.12(b)Article IV of the SPA contains Latisys’ representations and warranties.
Of relevance here, Section 4.12(b) provides:
Except as set forth on Schedule 4.12 . . . [n]o Latisys Company hasreceived any written notice that any party to a Material Contract intends
to cancel, terminate, materially modify or refuse to perform such
Material Contract.105
Section 4.12 defines “Material Contracts”:
Schedule 4.12 lists the following Contracts to which a Latisys
Company is a party or by which it is bound (collectively, the “Material
Contracts”) a true and complete copy of each of which has been madeavailable to Purchaser.106
Schedule 4.12, in turn, lists the “Top 30 Customer Agreements,” which are describedas “Master Service Agreements and related Service Order Forms for each of the104

The SPA contains a clear and broad Delaware choice of law provision. JX 213 § 11.5(“This agreement shall be governed by and construed in accordance with the laws of theState of Delaware. . . .”).
105

JX 213 at 31.

106

JX 213 at 29.
21

[listed] Customers.”107 Importantly, the SPA does not include any representations
or warranties about Latisys’ churn, churn rates, revenue or expected revenue.108
2. Section 10.1
Latisys agreed to indemnify Zayo and the post-close Latisys Companies asprovided in Section 10.1. Section 10.1(a) of the SPA states, in relevant part, that
Latisys will indemnify Zayo and the L-Companies from and against “any and all”
losses, damages and expenses incurred or paid “arising out of or resulting froma[] . . . breach of, default in, or failure to perform, any of the representations,warranties or covenants given or made by the [L-Companies] or [Latisys] in[the SPA],” (collectively “Company Breaches”), subject to a cap of $30,375,000(per Section 10.1(c) of the SPA).109 Section 10.1(c) provides that Latisys would notbeobligatedtoDamages . . . exceeds

indemnifyaZayo“unless

cumulative

aggregate

and

until

amounttheaggregateof$3,375,000(the “Basket”).”110 And Section 10.1(c) makes clear that Zayo’s “costs ofinvestigation and attorneys’ fees incurred in prosecuting the claim shall not count107

JX 214 at 74.

108

JX 213. Tr. 595 (Reardon).

109

JX 213 at 60–61.

110

Id.
22

towards achieving the Basket but shall count as Damages once such threshold has
been achieved and the breach proven.”111
G. The Material Contracts
As noted, the SPA’s Schedule 4.12 listed the Material Contracts that are
subject to Section 4.12’s Material Contracts representation and warranty. The five
Material Contracts at issue in this litigation are described below.
1. Toshiba
Toshiba had two primary parent SOFs (the “Toshiba SOFs”) with Latisys forservices in Latisys’ Irvine, California data center.112 The Toshiba SOFs expired in
November 2014, before the SPA was executed.113 Only one of Toshiba SOFs had
an “auto-renew” provision.114
On October 1, 2014, a Toshiba representative emailed Latisys Senior Sales
Account Manager, Bill Rowcliffe, to advise him that Toshiba’s SOFs had expired
and to inquire whether Latisys would continue to provide services to Toshiba on amonth-to-month basis until April or May 2015, when Toshiba would exit Latisys’

111

Id.

112

JX 481, 482.

113

JX 481, 482.

114

JX 481, 482.
23

data center and end the relationship.115 As anticipated, on July 1, 2015 (after the
Closing), Toshiba provided Rowcliffe, then a Zayo employee, thirty days’ notice of
its intent to exit the data center.116
But that was not the end of the Toshiba/Latisys relationship. In 2016, Toshiba
approached Rowcliffe to explore whether Toshiba might return as a Zayo
customer.117 The parties ultimately struck a new deal as evidenced by Zayo’s$293,659 invoice to Toshiba, reflecting services for January 2017 to September
2017.118
2. Add2Net
Add2Net had a bandwidth SOF with Latisys.119 The Add2Net SOF had an
original term of 24 months with an auto-renewal provision.120 According to thatprovision, the contract would renew for one year at the end of the current term, unlesseither party provided written notice of non-renewal at least thirty days before the end

115

PTO ¶ 49; JX 47.

116

JX 381 at 1.

117

JX 406, 407.

118

JX 418.

119

PTO ¶ 36.

120

JX 480.
24

of the then-current contract term.121 The original term of the bandwidth SOF expiredin December 2013.122

Add2Net then allowed its bandwidth SOF to renew

automatically for another 12 months—extending the expiration date to December
2014. 123
Before the expiration of the extended term, Add2Net emailed Rowcliffe to
notify Latisys that Add2Net would “CANCEL” its bandwidth SOF “at theconclusion of the current contract” on November 25, 2014.124

As a result, theAdd2Net bandwidth SOF ended in December 2014 in accordance with its terms.125
On January 2, 2015, Add2Net emailed Latisys asking to “cancel the notice ofcancellation” for Add2Net’s bandwidth SOF and to continue bandwidth services ona month-to-month basis.126 Latisys agreed and continued to invoice Add2Net for the
bandwidth services month-to-month.127 Because the “cancellation” had already

121

Id.

122

Id.

123

Id.

124

JX 118 at 2.

JX 120. Latisys issued a “deprovisioning ticket” for the SOF, which noted that Add2Net
should not be charged an early termination liability (“ETL”) because it was churning at theend of the contract term. Id.
125

126

JX 185.

127

JX 356.
25

been processed, however, the cancellation was incorporated in the system that
Latisys used for reporting and forecasting. Accordingly, the pending churn was
automatically included in the EBITDA bridge that Latisys provided to Zayo during
due diligence.128 This information was also included in a pending churn report,
identifying $14,850 in churn from the customer ADD2 (the code name for Add2Net)
in Q1 2015.129 Consequently, there was no expectation that this revenue would
continue beyond a 30-month term.130
3. Echopass
EchoPass had two parent SOFs (the “EchoPass SOFs”) with Latisys forservices at Latisys’ data centers in Ashburn, Virginia and Irvine, California.131 Both
SOFs were set to expire in May 2015.132
Beginning in late October 2014, and continuing through the drafting andexecution of the SPA, EchoPass negotiated with Rowcliffe over the terms of two
new SOFs and sought to obtain Latisys’ agreement to a 20% price reduction in the128

JX 151; Tr. 310–13 (Butler).

129

JX 486, 487; Tr. 281–82 (Butler).

130

JX 486, 487; Tr. 281–82 (Butler).

131

JX 483, 484.

132

JX 483, 484.
26

new SOFs.133 After the Closing, Zayo approved the terms of the new Echopass SOFs
and executed the SOFs.134 These new SOFs represented about $1.8 million in total
contract value for Zayo.135
4. ITCITC had a principal parent SOF (the “ITC SOF”) with Latisys for services at
Latisys’ Oak Brook, Illinois data center.136 The ITC SOF expired in April 2014.137
Beginning in September 2014, after the expiration of its old SOFs, Latisys Senior
Account Manager, Gina Gardner, engaged in negotiations with ITC concerning theterms of a new SOF.138 During the course of these negotiations, ITC sought a pricereduction in any new SOF.139 After Closing, Zayo approved and executed ITC’s

133

PTO ¶¶ 82–83; JX 67, 247.

134

JX 430 at 24; JX 342.

135

Tr. 320–21 (Butler).

136

JX 472, 479.

137

JX 472, 479.

138

JX 38, 42; PTO ¶¶ 96–102.

139

JX 92, 164, 268, 311, 320.
27

new SOF.140 This new SOF represented approximately $1.1 million in total contract
value for Zayo.141
5. LexisNexis
LexisNexis had several SOFs142 with Latisys for services at the Oak Brook,
Illinois data center, the last of which (the “LexisNexis SOF”) expired in April
2015.143 Beginning in early 2014, and continuing through the execution of the SPA,
LexisNexis negotiated with Gardner over the terms of a new data center SOF.144 Not
surprisingly, LexisNexis was looking for a price reduction.145 Zayo and LexisNexis
reached an agreement on a new SOF after the Closing.146 Before the Closing, Latisys
had offered LexisNexis a 6% price discount for a five-year term.147 After the140

JX 341.

141

Tr. 330–31 (Butler).

142

JX 473; JX 478; JX 474

143

JX 474.

144

PTO ¶¶ 66–74.

145

Id.

146

JX 325.

147

Tr. 331 (Butler); PTO ¶ 74.
28

Closing, Zayo agreed to the same discount but for a shorter term.148 Even so, thisnew SOF represented approximately $1.1 million in total contract value for Zayo.149
H. Procedural Posture
Zayo filed its Verified Complaint on November 4, 2016.150 The Complaintsets forth two counts.151 Count I seeks indemnification for damages caused bybreaches of representations, warranties and covenants contained in the SPA.152
Count II seeks indemnification for continuing losses, including attorneys’ fees.153
Zayo also seeks an order of specific performance directing Latisys to release funds
held in an escrow account created per the SPA to cover such damages.154
The Court convened a three-day trial in November 2017. Because Latisys’
proposed damages expert, Jeff Litvak, had been placed on immediate medical leave
just prior to trial with no expected return date,155 the Court adjourned the trial

148

PTO ¶ 74; JX 324 at 12.

149

Tr. 330–31 (Butler).

150

Compl.

151

Id.

152

Compl. ¶¶ 51–59.

153

Compl. ¶¶ 60–64.

154

Compl. ¶ 7.

155

Dkt. 112.
29

following the presentation of fact witnesses to allow Latisys to engage a new
damages expert.156 The trial resumed on May 16, 2018, when the Court heard
testimony from Zayo’s expert, Kyle Anne Midkiff, and Latisys’ new expert, Gary
Kleinrichert.157 The parties presented post-trial oral argument on September 5, 2018.
After presiding over the trial, considering the post-trial briefs and closing
arguments and deliberating the evidence, I am struck by the absence of any serious
factual disputes. There are some factual disagreements, to be sure, but the realcontroversy arises from the parties’ disagreement about what the SPA actually says
and what it means. Zayo’s position boils down to this: Latisys was contractually
obligated to disclose that the five customers who were counter-parties to the Material
Contracts at issue here had notified Latisys of their intent not to renew the contracts
or to renew on different terms. According to Zayo, non-renewal is tantamount to“termination” or “cancellation” as contemplated by Section 4.12(b).

Latisysacknowledges that it did not advise Zayo of the non-renewals but maintains that it
had no obligation to do so under Section 4.12(b) or otherwise.
This is the Court’s post-trial decision.

156

Tr. 1–605.

157

Tr. 606–803.
30

II. ANALYSISTo prevail on a breach of contract claim, the plaintiff must prove: (1) the
existence of a contract; (2) the breach of an obligation imposed by the contract; and(3) damages suffered because of the breach.158 The first element is undisputed. The
SPA is the operative contract. The case was tried on the issues of breach anddamages. On these issues, Zayo was charged with meeting its burden of proof by apreponderance of the evidence.159 In deliberating whether Zayo met its burden, I
consider the questions in order: (1) did Zayo prove that Latisys breached the SPA;
and (2) if so, did Zayo prove that it is entitled to damages?
A. Latisys Did Not Breach the SPA
The Court’s first function is to construe the relevant terms of the operative
contract as a matter of law.160 In doing so, the Court must be mindful that, under158

See Bakerman v. Sidney Frank Importing Co., 2006 WL 3927242, at *19 (Del. Ch.
Oct. 10, 2006).
“Proof by a preponderance of the evidence means proof that something is more likely
than not. It means that certain evidence, when compared to the evidence opposed to it, has
the more convincing force and makes you believe that something is more likely true thannot.” Del. Express Shuttle, Inc. v. Older, 2002 WL 31458243, at *17 (Del. Ch. Oct. 23,
2002) (internal quotation marks omitted) (quoting DEL. P.J.I. CIV. § 4.1 (2000)).
159

O’Brien v. Progressive Northern Ins. Co., 785 A.2d 281, 286 (Del. 2001) (“Under
Delaware law, the interpretation of contractual language . . . is a question of law.”).
160

31

Delaware law, a “contract’s express terms provide the starting point in approachinga contract dispute.”161
1. Section 4.12(b) of the SPA Is Ambiguous
Section 4.12(b) of the SPA provides, in relevant part: “[n]o Latisys Company
has received any written notice that any party to a Material Contract intends tocancel, terminate, materially modify or refuse to perform such Material Contract.”162
Zayo maintains the evidence reveals that Latisys did, in fact, receive “written notice”
of (but did not disclose) (1) “an intent to cancel or terminate two Material Contracts(Add2Net and Toshiba); and (2) an intent to materially modify three Material
Contracts (EchoPass, ITC and LexisNexis) by reducing the rates charged to thosecustomers.”163
Even at first glance, Section 4.12(b) is hardly a model of clarity. By reelingoff the terms “cancel,” “terminate” and “refuse to perform” in succession within the161

Ostroff v. Quality Servs. Labs., Inc., 2007 WL 121404, at *11 (Del. Ch. Jan. 5, 2007).
See also Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006)(discussing the court’s “four corners” analysis); City Investing Co., 624 A.2d at 1198
(same); Eagle Indus., Inc. v. DeVilbliss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997)(“[i]f a contract is unambiguous, extrinsic evidence may not be used to interpret the intent
of the parties, to vary the terms of the contract or to create an ambiguity.”); City Investing
Co. Liquidating Trust v. Cont’l Cas. Co., 624 A.2d 1191, 1198 (Del. 1993) (“If a writingis plain and clear on its face, i.e., its language conveys an unmistakable meaning, thewriting itself is the sole source for gaining an understanding of intent.”).
162

JX 213 at 31 (emphasis supplied).

163

Pl.’s Opening Post-Tr. Br. 29 (emphasis supplied).
32

same clause, the parties appear to be saying the same thing with different words.164
With this apparent redundancy in mind, I turn, as our courts often do, to the standard
dictionary definitions of the terms under construction in search of some meaningful
differentiation.165 Unfortunately, but not surprisingly, the exercise has yielded little
in the way of clarity. Black’s Law Dictionary defines “cancel” as “to terminate apromise, obligation, or right.”166 The definition of “terminate” is “[t]o put an end to;to bring to an end.”167 In expanding on its definition of “cancellation,” Black’s
states, “[t]he effect of cancellation is generally the same as that of termination,
except that the canceling party retains remedies for breach of the whole contract or
any unperformed balance.”168

Suffice it to say, the instinctive reaction to

Section 4.12(b) is confirmed; there is considerable overlap between “cancel” and“terminate.”Indeed, at trial and in its briefs, Zayo interchangeably used “terminate” and “cancel” torefer to their claims—e.g., Pl.’s Reply Post-Tr. Br. 29 (“intention to cancel or terminate”);
Tr. 590 (Reardon) (“cancellation or termination by the customer”).
164

165

See Lorillard Tobacco Co., 903 A.2d at 738 (noting the frequency with which Delaware
courts turn to dictionaries to assist in the construction of contractual terms); Norton v. KSea Transp. P’rs L.P., 67 A.3d 354, 360 (Del. 2013) (“We give words their plain meaning
unless it appears that the parties intended a special meaning.”).
166

Cancel, BLACK’S LAW DICTIONARY (10th ed. 2014).

167

Terminate, BLACK’S LAW DICTIONARY (10th ed. 2014).

168

Cancellation, BLACK’S LAW DICTIONARY (10th ed. 2014).
33

“Contractual interpretation operates under the assumption that the parties
never include superfluous verbiage in their agreement, and that each word should begiven meaning and effect by the court.”169 This canon of construction, important as
it is, cannot be honored when the scriveners leave no room to distinguish between
the words they use to memorialize the clients’ agreement. Here, the relevant terms
in Section 4.12(b) appear to be redundant. The parties seize on the redundancy andproffer different constructions. This, of course, does not mean the contract isambiguous.170 If both proffered constructions appear reasonable, however, then the
Court is free to consider extrinsic evidence to discern the intent of the parties.171
One reasonable construction of the apparently redundant terms is that“terminate”/“cancel”/“refuse to perform” capture the scenario where a customer
expresses an intent not to renew its SOFs, and that “materially modify” includes
negotiations for new terms in new contracts.

On the other hand,

169

NAMA Hldgs., LLC v. World Mkt. Ctr. Venture, LLC, 948 A.2d 411, 419 (Del. Ch.
2007), aff’d, 945 A.2d 594 (Del. 2008); see also Majkowski v. Am. Imaging Mgmt. Serv.,
913 A.2d 572, 588 (Del. Ch. 2006) (stating, as a general matter, that courts “attempt tointerpret each word or phrase in a contract to have an independent meaning so as to avoid
rendering contractual language mere surplusage.”).
170

Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del.
1992) (“[a] contract is not rendered ambiguous simply because the parties do not agree
upon its proper construction. Rather, a contract is ambiguous only when the provisions incontroversy are reasonably or fairly susceptible of different interpretations or may have
two or more different meanings.”).
171

Eagle Indus., Inc., 702 A.2d at 1232.
34

“terminate”/“cancel”/“refuse to perform” reasonably could contemplate notice only
when a customer ends, or expresses an intent to end, a contract before the expirationof the contract’s current, non-renewed term, and “materially modify” would apply
only to modifications of an existing contract as opposed to a potentially renewed
contract.
With two reasonable constructions in hand, I am satisfied Section 4.12(b) is
ambiguous under the objective theory of contracts.172 Accordingly, I am now
obliged to “look beyond the language of the contract to ascertain the parties’
intentions.”173 In doing so, I am mindful that I must respect, “to the extent possible,
the reasonable shared expectations of the parties at the time they contracted.”174
2. Extrinsic Evidence Informs the Meaning of Section 4.12
When searching for the proper construction of ambiguous contractual terms,
the court frequently refers to “evidence of prior agreements and communications ofOsborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010) (“The determinationof ambiguity lies within the sole province of the court.”).
172

173

Id. See also BAE Sys. N. Am. Inc. v. Lockheed Martin Corp., 2004 WL 1739522, at *4(Del. Ch. Aug. 3, 2004) (“[T]he Court will . . . consider extrinsic evidence to discern the‘reasonable shared expectations of the parties at the time of contracting.’”) (quoting Comrie
v. Enterasys Networks, Inc., 837 A.2d 1, 13 (Del. Ch. 2003)).
174

Comrie, 837 A.2d at 13 (quoting U.S. West, Inc. v. Time Warner, Inc., 1996 WL 307445,
at *9 (Del. Ch. June 6, 1996) (citation omitted)).
35

the parties as well as trade usage or course of dealing.”175 Our courts also appreciate
that, “[i]n giving effect to the parties’ intentions, it is generally accepted that theparties’ conduct [in performance of the contract] before any controversy has arisen[should be] given ‘great weight.’”176 And finally, the drafting history of particular
disputed provision(s) is often especially revealing of the process by which the parties
reached a meeting of the minds and the ground on which that meeting occurred.177
The SPA drafting history makes clear that Latisys made no commitment to
inform Zayo if existing customers will or will not renew their expiring contract. To
the contrary, Latisys expressly declined to make that commitment when Zayo
proposed it during the course of negotiations. Zayo did not object and the parties

175

Eagles Indus., Inc., 702 A.2d at 1233.

176

Ostroff, 2007 WL 121404, at *11; see also Radio Corp. of Am. v. Phila. Storage BatteryCo., 6 A.2d 329, 340 (Del. 1939) (“It is a familiar rule that when a contract is ambiguous,a construction given to it by the acts and conduct of the parties with knowledge of its terms,
before any controversy has arisen as to its meaning, is entitled to great weight, and will,when reasonable, be adopted and enforced by the courts. The reason underlying the ruleis that it is the duty of the court to give effect to the intention of the parties where it is notwholly at variance with the correct legal interpretation of the terms of the contract, and apractical construction placed by the parties upon the instrument is the best evidence of theirintention.”).
177

See Eagle Indus., Inc., 702 A.2d at 1233; see also Brace Indus. Contr., Inc. v. Peterson
Enters., 2016 WL 6426398, at *9 (Del. Ch. Oct. 31, 2016) (considering drafting history);
Brace Indus. Contr., 2016 WL 6426398, at *9 (finding that drafting history wasdispositive); DCV Hldgs., Inc. v. ConAgra, Inc., 2005 WL 698133, at *10 (Del. Super. Ct.
Mar. 24, 2005) (“Evidence of what was deleted from the original draft sheds light on theintended meaning of” the language agreed to in the final provision), aff’d, 889 A.2d 954(Del. 2005).
36executed the SPA without the “refuse to renew” language in the Material Contracts
representation and warranty.178 The fact that Zayo inserted this added language inits proposed SPA reveals that Zayo, like Latisys, believed that “refuse to renew” hada different meaning than the language already included in Section 4.12(b)—i.e.,“terminate,” “cancel” and “refuse to perform.”
In addition to the drafting history, the testimony presented at trial confirms
the parties’ understanding that Latisys would not represent, and was not
representing, whether customers had “refused to renew” Material Contracts. Hayes
testified the phrase “refuse to renew” indicates a specific allocation of risk between
the buyer and seller that would make the seller liable to the buyer for undisclosed
upcoming churn.179 Latisys very deliberately declined to agree to this language
because it would never agree to a representation that would require it to isolate anddisclose potential non-renewals.180 Hayes explained:
What we would not provide them notice of was if we had received any
written notice from a client who would be refusing to renew. So in thecase of a client [wh]o had expired, had been month to month, or wassoon to expire and they made some indications about what their178

PTO ¶ 20; JX 180 at 106; Tr. 106 (Reardon).

179

Tr. 449 (Hayes).

180

Tr. 449:18–450:12 (Hayes).
37intentions were, we pushed back and said we didn’t think it was
reasonable for us to have to provide a representation on that issue.181
The parties were purposeful in their negotiation of the Material Contracts
representation and warranty. They chose not to include an obligation to disclose acustomer’s election not to renew a Material Contract. They also chose not to include
a seller’s covenant to disclose when a customer entered into a new contract withdifferent terms. There is no room for this Court to impose those obligations now.182
Viewing the drafting history in this light is entirely consistent with the broader
scheme of the SPA, a relevant guidepost as the Court construes individual
provisions.183 Section 9.1 of the SPA, entitled “Termination of Agreement,” states

181

Tr. 450:5–12 (Hayes).

182

DCV Hldgs., 2005 WL 698133, at *10 (concluding the negotiation history revealed a“mutual understanding that in the context of [the disputed provision] the word ‘liabilities’
meant actual liability at the time of the sale, not any liability that could accrue in the future,”
and holding the extrinsic evidence demonstrated “the agreed-upon intention of the parties
was that the sellers would not be liable for future liabilities.”); Brace Indus. Contr., 2016
WL 6426398, at *9 (upholding the defendants’ narrow interpretation of the provision,
reasoning that, based on the drafting history, “it would be difficult for me to conclude that
the Plaintiffs were not aware” of the defendants’ intent to limit the scope of the provision.).
183

BAE Sys. N. Am. Inc., 2004 WL 1739522, at *4 (quoting Council of Dorset Condo.
Apartments v. Gordon, 801 A.2d 1, 7 (Del. 2002)) (the Court “must interpret contractual
provisions in a way that gives effect to every term of the instrument, and that, if possible,
reconciles all of the provisions of the instrument when read as a whole.”); Chi. Bridge &Iron Co. N.V. v. Westinghouse Elec. Co., 166 A.3d 912, 913 (Del. 2017) (“In giving
sensible life to a real-world contract, courts must read the specific provisions of the contract
in light of the entire contract.”).
38

the conditions under which the SPA “may be terminated prior to the Closing.”184
Section 9.3 provides that, “[i]n the event that this Agreement is validly terminatedin accordance with Section 9.1, then each of the parties shall be relieved of theirduties and obligations arising under this Agreement after the date of suchtermination.”185 As used in these provisions, the parties intended “terminate” tomean that a party cancels the agreement before the obligations contemplated by thecurrent contract are performed. There is no basis to believe they intended a different
meaning for “terminate” in Section 4.12(b).
When viewing the SPA in the context of the drafting history, the parties’
expressed intentions to allocate risk in a specific manner and their consistent use of
key terms throughout the SPA, the following is the only reasonable construction ofSection 4.12(b): the phrase “[n]o Latisys Company has received any written noticethat any party to a Material Contract intends to cancel, terminate, materially modify
or refuse to perform such Material Contract” means that none of Latisys’ top thirty
customers had provided Latisys with written notice that they intended to discontinue
services pursuant to a Material Contract SOF before the end of the SOF term and184

JX 213.

185

Id. (emphasis supplied).
39

before the SOF had been fully performed, nor did any customer intend materially tomodify a current Material SOF.186
3. Latisys Did Not Breach Section 4.12(b)Having now provided the construction of the SPA that is supported by thecontract, extrinsic evidence and applicable canons of contract interpretation, I turnnext to Zayo’s allegations of breach. As discussed below, the proper constructionof the contract quickly reveals the fallacy of each of Zayo’s claims that Latisys is inbreach of Section 4.12(b).
a. Toshiba
The Toshiba SOF with the auto-renew provision had a one-month renewal
term duration.187 If this SOF’s renewal term was fixed for two or more months,
Toshiba’s October 1, 2014 email to Rowcliffe (notifying Latisys of the expiration of
the SOF and discussing a one-month renewal) would have constituted written noticeto Latisys that Toshiba intended to “materially modify” that contract. The SOF(even with one-month renewal), however, was on track to expire before the SPA wasto be executed. Accordingly, the contracting party’s decision to avoid automatic

I note that this is also consistent with the plain meaning of “renewal”: “the re-creationof a legal relationship or the replacement of an old contract with a new contract.” Renewal,
BLACK’S LAW DICTIONARY (10th ed. 2014).
186

187

JX 482.
40

renewal of the contract does not constitute a material modification, cancellation or
termination of that contract.
The Toshiba SOF without the auto-renew provision expired by its terms in
November 2014.188 After the expiration of that SOF, Latisys undertook to provide
the same services specified in the SOF on a month-to-month basis. For each monthafter November 2014, Latisys’ continuation of services during each successivemonth constituted an implied promise to provide those services for the rest of thatmonth (but no longer). Thus, as of January 13, 2015, there was a one-month service
contract between Latisys and Toshiba—the term of which was from January 1, 2015
to (and including) January 31, 2015.
Toshiba’s October 1, 2014 email189 to Rowcliffe does not indicate thatToshiba intended to cancel, terminate, not perform or materially modify its SOFs—
in fact, all of its obligations were already fully performed under the two SOFs.190
Latisys’ entry into the new renewal contract was not out of the Ordinary Course of
Latisys’ Business and would not trigger notice under Section 4.12(b).191

188

JX 481.

189

JX 47.

190

JX 253.

The SPA’s definition of “Ordinary Course of Business” is “the ordinary and usual
course of the Latisys Companies’ business.” JX 213. Latisys agreed in Section 7.2(b) that
it would not enter into any contracts other than those in the “Ordinary Course of Business.”
191

41

b. Add2Net
Latisys’ continued provision of bandwidth services after receiving Add2Net’s
January 2, 2015 email constituted a promise to provide those services on a monthto-month basis.192 Add2Net’s subsequent acceptance of Latisys’ bandwidth services
constituted a promise to pay for those services. Thus, Latisys and Add2Net enteredinto a new contract on or about January 2, 2015, the term of which was from thatdate to (and including) February 1, 2015. Consequently, Add2Net’s November 24,
2014 email to Rowcliffe did not notify Latisys that Add2Net intended to cancel,
terminate, not perform or materially modify its expired Material Contract becausethat contract was fully performed. Latisys’ entry into the new contract was not outof the Ordinary Course of its Business. Accordingly, there was no breach of
Section 4.12(b).
c. EchoPass, ITC and LexisNexis
Latisys’ entry into new SOFs with EchoPass and ITC does not constitute a“material modification” of the SOFs set to expire in May 2015 and March 2014,
respectively. Neither the EchoPass SOFs set to expire in May 2015, nor the ITC
SOF set to expire in April 2014, contained an “auto-renewal” provision. Once again,
these contracts were fully performed and were not modified. It was in the Ordinary

192

JX 356.
42

Course of Latisys’ Business to negotiate prices with customers (and to agree to pricereductions) in connection with new SOFs. Rowcliffe described these negotiations
as “[t]otally ordinary” and “standard practice.”193 Moreover, the customer’s election
not to allow automatic renewal of its contracts did not constitute a “cancellation” or“termination” of those contracts––as in the case of LexisNexis. That Latisys did notdisclose the status of renewal negotiations with LexisNexis, or efforts to secure a
new contract (albeit on different terms), therefore, cannot constitute a breach of
Section 4.12(b).
B. Zayo Has Not Proven Damages
While the determination that Zayo failed to prove a breach of the SPA could,
and perhaps should, end the inquiry, for the sake of completeness, I have also
considered whether Zayo proved recoverable damages. It did not.
Even if Zayo had proven a breach of Section 4.12(b), it still was obliged toprove its damages by a preponderance of the evidence in order to recover. In thisregard, Zayo had to be precise in articulating and proving what it was seeking.
Contract damages are not like some works of abstract art; the plaintiff cannot simply
throw its proof against the canvas and hope that something recognizable as damages

193

JX 430 at 23.
43

emerges.194 This was especially so in this case because Zayo’s damages proof had
to account for the indemnification scheme set forth in the SPA and, in particular, thedamages Basket the parties agreed to in Section 10.1(b).195
Zayo’s damages case rested on the opinions of its expert, Kyle Midkiff. Whilecertainly qualified to calculate damages in the ordinary course, Midkiff’s lack ofexperience in valuing going concern businesses proved a disadvantage to her andultimately rendered her opinions in this case unpersuasive.196 Midkiff opined that194

See Duncan v. TheraTx, Inc., 775 A.2d 1019, 1022 (Del. 2001) (holding that the court
may not award speculative damages in a breach of contract case); Paul v. Deloitte &Touche, LLP, 974 A.2d 140, 146 (Del. 2009) (noting that breach of contract damages are
not to provide a “windfall” for the plaintiff and that plaintiffs seeking breach of contract
damages must be precise in their proof).
Only if Zayo’s damages are in excess of the Basket—the cumulative aggregate amountof $3,375,000—is Latisys obligated to indemnify Zayo, and then only for damages inexcess of the Basket. JX 213 (“The indemnification provided for in this Section 10.1 shallnot apply unless and until the aggregate Damages so determined to be due for which one
or more Purchaser Indemnified Persons seeks or has sought indemnification hereunder
exceeds cumulative aggregate amount of $3,750,000 (the ‘Basket’)[.]”)).
See PharmAthene, Inc. v. SIGA Techs., Inc., 2014 WL 3974167, at *7 (Del Ch. Aug. 8,2014) (“In the same vein, the Supreme Court also emphasized the central role of thecontract as the source of any remedy . . . .”).
195

196

Tr. 657:22–658:7 (Midkiff) (explaining that she had never valued a business);
Tr. 726:16–726:19 (Kleinrichert) (“[T]o the extent the damage is derived by an allegedchange in the value of what the deal should have been, then, of course, the valuation
experience is pretty critical.”). Latisys’ expert, Gary Kleinrichert, on the other hand, hassignificant experience in benefit-of-the-bargain damages and business valuations. He is
certified by the National Association of Certified Valuation Analysts as a valuation analyst.
Tr. 724:1–23 (Kleinrichert). He has previously served as an expert in post-acquisition
disputes involving representations and warranties made in a purchase and sale agreement,
and has performed approximately one hundred business valuations. Tr. 725:19–23; 726:3–
4 (Kleinrichert).
44

Zayo had suffered approximately $22 million in damages.197 For reasons still
unclear, Midkiff elected to base her opinion solely on a multiple of EBITDA as ameans to reach Zayo’s expectancy damages. As explained below, this methodology
does not fit the facts here and results in a grossly inflated final damages number.
Benefit of the bargain—or expectancy—damages measure the difference
between the as-represented value of a transaction (typically the purchase price) andthe value the purchaser actually received.198 The actual value the purchaser received,in turn, must assume, and account for, a diminution of the company’s earnings into
perpetuity.199 The “benefit of bargain” methodology is appropriate for calculating
damages only when the alleged breach of the representation or warranty has caused
a permanent diminution in the value of the business (as a result of lost revenues into
perpetuity) and the business has thereby been permanently impaired.200 This iswhere Zayo’s proof, and Midkiff’s damages calculations, fell short.
While Midkiff acknowledged at her deposition that a multiple methodology
in damages calculations fits only where monthly recurring revenue was lost “into the197

Tr. 632:15 (Midkiff).

198

Tr. 726:16–727:4 (Kleinrichert).

199

Tr. 736:23–737:10 (Kleinrichert).

“Impairment” is an accounting term that means the value of a company has declined
below its carrying cost. Tr. 737:14–16 (Kleinrichert).
200

45

foreseeable future,”201 which she defined as “one year,”202 at trial Midkiff admitted
that all of the Material Contracts at issue in this case expired in less than one year.203
For example, Midkiff conceded at trial that if Zayo knew the Toshiba Material
Contracts were month-to-month at the time of the Closing, Zayo’s damages relating
to the Toshiba contract would be no more than one month’s MRR.204 In this regard,
the credible evidence at trial revealed that when Zayo signed the SPA, Zayo knewthat because Toshiba was a month-to-month customer, the maximum amount ofrevenue Toshiba was contractually obligated to pay to Latisys was thirty days ofrevenue.205 For that reason alone, based on Midkiff’s own trial testimony, herdamages methodology does not apply to the Toshiba SOFs. And, for reasons
explained below, it cannot apply to the other four customers’ SOFs either.
Not only did Zayo make no effort to prove a diminution of value into
perpetuity, Zayo did not perform a post-Closing valuation of the company it had

201

JX 447 at 34.

202

Id.

203

Tr. 699:23–700:7 (Midkiff); see also Tr. 689:8–21 (Midkiff) (testifying that theforeseeable future means one year or more).
204

Tr. 706:4–707:2 (Midkiff). In other words, the damages related to Toshiba would be$82,920, not $10,500,000, the number attributed to Toshiba in Midkiff’s damages
calculation.
205

Tr. 596:20–597:20 (Reardon).
46

acquired.206 Whether tactical or not, I can appreciate why Zayo may have avoided
taking on the challenge of proving that Latisys was worth less ($22 million less tobe precise) after Closing.207 Latisys’ cloud storage business was a revolving door;

Tr. 665:9–14 (Midkiff) (“Q. Let me state it this way. You have done no calculation one
way or another about what the value of Latisys was as of the time of the closing; right?
A. That’s correct, I did not do a valuation.”). Indeed, what evidence Zayo did present on
post-Closing valuation revealed that Zayo believed Latisys’ value had actually increased
post-Closing and that the acquisition was delivering positive returns on the investment.
Tr. 739:8–12 (Kleinrichert) (“I looked to internal analysis of value that [Zayo] may havedone at that time or subsequently later. And those internal analyses indicated that [Zayo]
believed the value of [Latisys’] business had increased.”). See also JX 410-0009 (June2016 Zayo presentation titled “zColo Valuation Analysis: Zayo + Latisys Platform” whichreflects that Zayo thought the Latisys acquisition created additional value for Zayo’s
colocation business, stating it was “[c]onfident about zColo + Latisys as optimal platform
for value creation.”).
206

Zayo also did not provide a basis for Midkiff’s opinion that Zayo would not have paid
$675 million for Latisys had Zayo known about the upcoming churn from the five contracts
at issue. Tr. 678:14–679:14 (Midkiff) (“Q. I direct your attention to the testimony on thebottom of page 180 and the top of page 181. In particular, when I asked you about thepricing and whether or not if Zayo had known about this information, you had any
knowledge about whether the parties would or would not have done a deal at 675. You
said on page 181, in response to the questions on lines 4 and line 6, you answered bothquestions: ‘True.’ A. Right. But the answer before that, I said, ‘I don't know that it was
specifically represented or stated, but it's my understanding that they would not have paid.
If they’d known, they might have negotiated a different price.’ Q. Okay. No one ever told
you that they wouldn’t have paid that amount. Correct? A. It’s my understanding. I don’tknow if it came up on some of the phone calls that I had with Zayo folks where they saidno, they don’t think they would have. Q. You are unable to tell the Court at this momentin time what your understanding is based on. Correct? A. Yes.”). To be sure, no Zayo
witness testified that Zayo would not have paid $675 million for Latisys had Zayo known
the status of the Material Contracts at issue. And no Zayo witness testified that Zayo
viewed the Latisys assets as de-valued at or after the Closing. Tr. 628:22–629:2; 665:9–
14 (Midkiff).
207

47

it was built on short-term contracts with customer loyalty of four to five years.208
Customers were utilizing Latisys’ services until they could store their data on theirown or find cheaper storage elsewhere. Indeed, Latisys knew it was buying abusiness with short-term contracts.209 The five Material Contracts at issue in thiscase expired in less than one year from the time Zayo was looking at the Latisys
acquisition.210 To the extent Zayo knew contracts were near expiration or month-tomonth as of Closing, there was no basis for Zayo to claim expectancy damages
beyond one month’s MRR.211
Given this dynamic, it is difficult to understand why Midkiff would choose an
EBITDA multiple as the most accurate and comprehensive metric for valuing
damages. Indeed, there is no evidence that Zayo actually based its purchase priceon a multiple of EBITDA. Glisky used a DCF, an IRR and a NPV-sensitivity

208

JX 62.

Tr. 125:15–126:10 (Reardon). See also Tr. 596:16–19 (Reardon) (“[W]e understoodthat contractually those customers were not obligated to stay any more than 30 days after
they gave notice to cancel or terminate.”).
209

210

Tr. 699:23–700:7 (Midkiff); see also Tr. 689:8–21 (Midkiff) (testifying that theforeseeable future means one year or more).
211

Tr. 706:4–707:2 (Midkiff). See also Tr. 596:20–597:20 (Reardon) (acknowledging that
Zayo knew that because Toshiba was a month-to-month customer, the maximum amountToshiba was contractually obligated to pay to Latisys was thirty days of revenue).
48

analysis.212 Reardon confirmed that the purchase price was the result of a numberof different factors.213 Given this evidence, it is not surprising that Midkiff struggled
to explain how she selected 14.1 as the EBITDA multiple she should apply. Her
explanation, “[i]t’s the highest multiple. . . . [i]t seemed to be the appropriate multiple
based on the sale price,”214 lacked any foundation in the evidence and ultimately was
unpersuasive.215
By contrast, Kleinrichert proffered three credible damages scenarios, each tied
to the evidence, proving that the realized damages would not exceed the Basket. The

Tr. 260:19–261:7 (Glisky). (“Q. Sir, was the purchase price ever based on a precise
multiple? A. The exact purchase price? Q. Yes, sir. A. Sure, no. Q. It wasn’t. The
purchase price was negotiated, and then Zayo implied the multiple from the negotiatedpurchase price; correct? A. Final multiple, correct.”) (Tr. 207:8–16 (Glisky)).
212

213

Tr. 120:17–121:20 (Reardon).

214

Tr. 685:3–22 (Midkiff).

215

While Zayo string cites to cases where courts have relied upon an EBITDA multiple tocalculate damages, it has not credibly argued how or why those cases dictate that result
here. See Pl.’s Post-Tr. Br. 44. See also Priority E.M.S. v. Crescent City E.M.S., 829
So. 2d 1066, 1068–70 (La. App. 4th Cir. 2002) (allegations of fraud and breach of contract
in confection of a loan agreement); see also Cobalt Operating, LLC v. James Crystal
Enters., 2007 WL 2142926, at *80–83, *91–97 (Del. Ch. July 20, 2007), aff’d, 945 A.2d594 (Del. 2008) (EBITDA multiple proper for calculating damages for breach of contract
based on seller’s fraudulent misrepresentation, which resulted in permanent impairment tobusiness, and where it was undisputed that the parties relied on a multiple in calculatingpurchase price); WaveDivision Hldgs., LLC v. Millennium Dig. Media Sys., L.L.C., 2010
WL 3706624, at *23–24 (Del. Ch. Sept. 17, 2010) (finding the use of an EBITDA multiple
was appropriate to calculate damages where the seller breached a stock purchase agreement
and failed to transfer ownership of its company to the buyer; the plaintiff did not receive
the benefit of its bargain, and the question of whether damages should be calculated basedon dollar-for-dollar, as opposed to an EBITDA multiple, was not addressed.).
49

first and most appropriate (and credible) measure, in my view, is an out-of-pocket
costs analysis for the lost revenue through the remaining contract term of each of theMaterial Contracts at issue. This calculation assumes Zayo (and each of the fivecustomers) would re-negotiate contracts at the end of the contract term consistent
with the market.216 The total damages, approximately $2.1 million, is less than the$3.375 million Basket.217
In his second scenario, Kleinrichert looked at the record and calculated
damages for a period longer than the remaining contract term for each of the SOFs
at issue in this case.218 The total damages under this scenario are $3,439,948(slightly above the Basket).219 Of course, Zayo and each of the five customers know
the market and that knowledge would have informed their negotiations of any

216

Tr. 751:13–752:3; 764:20–765:8 (Kleinrichert).

217

SPA § 10.1(c); JX213 at 60–61.

218

Tr. 755:21–24 (Kleinrichert).

219

Tr. 758:22–759:6 (Kleinrichert). As noted, under the second scenario, Kleinrichertcalculated damages for a period longer than the remaining contract term for each of the
SOFs at issue in this case. Tr. 755:21–756:24 (Kleinrichert). In his trial testimony,
Kleinrichert re-examined his premise that Zayo and Echopass, IT Convergence, andLexisNexis would not exercise the optional renewal periods in their respective postClosing SOFs with Zayo. Tr. 758:10–13 (Kleinrichert). Kleinrichert added to his firstdamages calculation additional lost MRR for the optional renewal periods included in the
new Echopass, IT Convergence and LexisNexis SOFs. Tr. 758:13–15 (Kleinrichert).
Discounted to the date of the Closing, as in the first scenario, this added approximately$1.3 million to the damages calculation, bringing the total damages above the Basket byapproximately $65,000. Tr. 758:22–759:6 (Kleinrichert).
50

contract extensions.220 Given the market reality, and the need to offer (sometimes
significant) price concessions to keep customers, a damages calculation that assumes
Zayo would have realized revenue beyond the bargained-for SOF does not comportwith the evidence of record.221
Kleinrichert’s third damages scenario totaled the alleged lost MRR for eachof the five customers, removed the lost Add2Net MRR because Zayo received thebenefit of that contract, subtracted from the total lost MRR the Toshiba MRR that
returned to Zayo in 2017, and annualized the total.222 Under this scenario, thedamages were $3,129,353 (below the Basket).223
As its rebuttal to the Kleinrichert analysis, and its final push for benefit of thebargain damages, Zayo argues that a “permanent impairment” occurs whenever “the220Tr. 744:14–745:8 (Kleinrichert).

See, e.g., Tr. 248:10–249:16 (Butler); Tr. 496:10–22; 494:7–11 (Stevenson) (“So yourreally important customers who had large MRR, which might be defined as [$10,000] or$15,000 a month or higher, they’re sophisticated buyers, so you would end up in that casetalking to the customer about a renewal. . . . I would take a—let’s just say a customer who
was billing a thousand dollars a month, and they said, ‘I want it for 950, but I’ll sign a new24- or 36-month contract.’ I would take that all day long, because if I didn’t, it might be
zero. And zero is not good because zero would have to go and fill up again. So we always
focused in on making sure that we never got to zero. Now, of course, there’s deals you
would look at if the customer came to you and said, ‘I want this stuff below a level that’s
acceptable,’ then sometimes you have to walk away from a deal like that if you can’t makemoney.”).
221

222

Tr. 760:13–761:5 (Kleinrichert).

223

Tr. 761:21–23 (Kleinrichert).
51

buyer’s expectation of the transaction has been materially affected.”224

Zayo

contends that because each of the contracts at issue in this case are Material
Contracts under the SPA, the misrepresentations allegedly at issue in this case are
by design material, and calculating damages using a multiple is automaticallyappropriate.225 This argument is not supported by Midkiff’s testimony, nor by thefactual record, and is inconsistent with the AICPA Practice Aid. As Kleinrichert
testified, and as the AICPA Practice Aid confirms,226 using a multiple to calculate
damages is appropriate only where there is a permanent impairment to the value ofthe business and the value the buyer receives is less than the value for which thebuyer bargained.227 Contrary to Zayo’s characterization, the AICPA Practice Aiddoes not provide that where a buyer’s subjective expectation has been materially224

Pl.’s Post-Tr. Br. at 44.

Pl.’s Post-Tr. Br. at 45 (“The [American Institute of Certified Public Accountants
Mergers and Acquisitions Disputes Practice Aid (‘AICPA Practice Aid’)] also provides
that if materiality is defined within the acquisition agreement, ‘the practitioner should adopt
the agreement’s definition of materiality when evaluating the transaction.’ [(JX 466
at 19).] Here all five contracts in dispute have been defined as material within the SPA,
and hence the misrepresentation was also material.”).
225

JX 466 at 19 (“Indemnity claims can result in damages measured at the multiple. Thismeasurement implies the occurrence of permanent impairment to the value of thebusiness.”).
226

227

JX 466.
52

affected, a multiple methodology is appropriate.228

Simply stated, the result

suggested by Zayo—that because the alleged breaches involved Material Contracts,
a multiples methodology for calculating damages must follow—is not supported by
the competent evidence and not supported by the fundamental premise ofcompensatory damages for breach of contract.229
After carefully considering the evidence, I am satisfied that even assuming
arguendo that Zayo had met its burden to prove a breach of Section 4.12(b), the only
credible basis in the evidence to calculate damages resulting from that breach reveals
that Zayo has not suffered damages in excess of the Basket. Consequently, Latisys
is not obligated to indemnify Zayo in any amount.
III.

CONCLUSION

Because I find that Latisys did not represent and warrant in Section 4.12(b)that it would inform Zayo if customers elected not to renew Material Contracts, orbargained for different terms in new contracts with existing customers, I am satisfied
that Zayo has not proven a breach of contract. Even if Zayo had proven a breach, it

The AICPA Practice Guide, instead, states that when there has been a “permanent
impairment to the value of the business,” then “the buyer’s expectation of the transaction
has been materially affected” and a multiple is appropriate. JX 466 at 17.
228

229

See Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 146 (Del. 2009) (observing,“contract damages are designed to place the injured party . . . in the same place he would
have been had the contract been performed” and that such damages “should not act as awindfall.”).
53

has not proven recoverable damages. My verdict, therefore, is for the Defendant.
The parties shall confer and submit an implementing order and final judgment withinten (10) days.

54