Title: IAC/InteractiveCorp. v. O'Brien

State: delaware

Issuer: Delaware Supreme Court

Document:

IN THE SUPREME COURT OF THE STATE OF DELAWARE
IAC/INTERACTIVECORP, 
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No. 629, 2010
Defendant Below,
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Appellant,
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Court Below: 
 
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v.
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Court of Chancery of the
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State of Delaware
 
WESLEY T. O’BRIEN,
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Plaintiff Below,
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C.A. No. 3892
Appellee.
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Submitted:  May 25, 2011
Decided:  August 11, 2011
Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and
RIDGELY, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery.  AFFIRMED.
Peter J. Walsh, Jr., Esquire, (argued) and Meghan M. Dougherty, Esquire of Potter
Anderson & Corroon LLP, Wilmington, Delaware for Appellant.
Kurt M. Heyman, Esquire and Patricia L. Enerio, Esquire of Proctor Heyman LLP,
Wilmington, Delaware.  Of Counsel:  Mark S. Gregory, Esquire (argued) of Martin
Chioffi, LLP, Stamford, Connecticut.  Robert J. Hunt, Esquire of Hunt & Gross,
P.A., Baca Raton, Florida for Appellee.
BERGER, Justice:
In this appeal we consider, among other matters, whether the Court of
Chancery correctly applied the doctrine of laches in finding that a corporate
indemnification claim was timely filed.  Before filing this action, appellee, a
corporate officer, had successfully litigated an indemnification claim against his
former employer in Florida.  But the former employer went bankrupt before the
litigation concluded.  Appellee then filed this action, seeking the same
indemnification, against the former employer’s parent company.  The Court of
Chancery acknowledged that the claim likely would be barred by the statute of
limitations.  The trial court entered judgment in appellee’s favor, nonetheless,
because it held that the claim was not controlled by the statute of limitations or
barred by laches.  We agree that the unusual circumstances presented here warrant
the trial court’s deviation from the applicable statute of limitations in applying the
doctrine of laches.
FACTUAL AND PROCEDURAL BACKGROUND
Wesley T. O’Brien became chief operating officer and chief executive
officer of Precision Response Corporation (PRC) in 1998.  At that time, PRC
agreed to indemnify O’Brien in his executive roles, “to the fullest extent permitted
by law,” in an indemnification agreement purporting to be governed by Florida
law.  In 2000, IAC/InterActiveCorp (IAC) acquired PRC and, under the merger
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agreement, IAC assumed PRC’s obligations to indemnify O’Brien.  In 2001, PRC
acquired Avaltus, Inc.  The Avaltus merger agreement required that disputes be
resolved through arbitration.  In October 2002, Avaltus’s principal stockholder
commenced arbitration against PRC to recover funds placed in escrow in
connection with the merger.  Shortly thereafter, PRC fired O’Brien and filed
counterclaims against him in the pending arbitration.  PRC alleged that O’Brien
breached his fiduciary duties to PRC and fraudulently induced PRC to acquire
Avaltus.
In December 2002, O’Brien retained Robert Hunt, Esquire to defend against
PRC’s claims and to pursue a claim against PRC for breach of O’Brien’s
employment contract.  In January 2003, O’Brien requested that PRC advance his
legal fees and expenses.  PRC refused.  The next month, O’Brien answered the
arbitration counterclaim and filed his own claim seeking a declaratory judgment
that he had committed no wrongdoing. 
In January 2005, the arbitration panel found that:  (1) PRC was not entitled
to the recovery it sought from O’Brien; (2) O’Brien was not entitled to the
declaration he sought from the panel; and (3) each party was responsible for its
own fees because there was no prevailing party (the Arbitration Award).  In
February 2005, O’Brien requested indemnification from PRC on the ground that he
had successfully defended  all of PRC’s claims in the arbitration.  PRC also refused
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this request.
While the arbitration was pending, O’Brien filed suit against PRC in a
Florida trial court.  The amended complaint alleged breach of O’Brien’s
employment agreement, as well as a claim for specific performance of his
indemnification agreement and advancement of expenses.  After the Arbitration
Award, O’Brien moved for summary judgment on his indemnification claim in the
Florida action.  PRC filed a cross-motion, arguing that the Arbitration Award acted
as res judicata and barred O’Brien’s indemnification claim.  In October 2005, the
Florida trial court denied O’Brien’s motion, and granted PRC’s cross-motion.  
 
        O’Brien appealed.  In December 2006, the Florida appellate court reversed
and remanded for a determination of the fees and expenses owed to O’Brien.  In
May 2007, on remand, the Florida trial court granted O’Brien partial summary
judgment on his indemnification claim.  The court set a June 2008 trial date to
determine the amount of O’Brien’s fees and expenses.  But there was no trial,
because PRC filed for bankruptcy in January 2008, and the Florida action was
stayed.  In June 2008, the bankruptcy court approved a plan under which O’Brien’s
recovery would have been severely limited.
IAC controlled PRC’s defense of the Florida action from the time it was
filed, and continued to control the defense after IAC sold PRC in 2006.  As IRC
explained in its motion to stay this action, “[a]lthough IAC is not a party to the
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Florida Action, it has been controlling PRC’s defense . . . pursuant to its
obligations under the agreement by which it acquired PRC.  Thus, . . . IAC is a real
party in interest to the Florida Action.”1  In July 2008, shortly after the PRC
bankruptcy plan was approved, O’Brien filed this action against IAC seeking
indemnification and advancement of his attorneys’ fees and expenses in the
arbitration, the Florida action, and this action.  The parties filed cross-motions for
summary judgment.  IAC’s motion sought a judgment that, (1) O’Brien’s claim
was time barred by a three year statute of limitations; and (2) O’Brien’s attorneys’
fees, particularly contingent portions of those fees, were unreasonable. 
The Court of Chancery granted O’Brien’s motion and denied IAC’s cross-
motion.  The trial court acknowledged that a three year statute of limitations might
bar O’Brien’s claim.  But the Court of Chancery held that, under the exceptional
circumstances of this case, it was not required to apply the analogous statute of
limitations.  Instead, under a traditional laches analysis, the court held that
O’Brien’s claim was timely.  One year later, after additional submissions as to the
amount owed to O’Brien, the Court of Chancery awarded O’Brien most of his
requested attorneys’ fees, including certain contingent fees.  This appeal followed.
1Appellee’s Appendix, B-155.
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DISCUSSION
O’Brien’s Claim is Not Time Barred
IAC argues that the Court of Chancery erred when it found O’Brien’s
indemnification claim to be timely by applying laches instead of the three year
statute of limitations that controls contract claims at law.  Laches is an equitable
defense based on the maxim that “equity aids the vigilant, not those who slumber
on their rights.”2  Laches is defined as an unreasonable delay in enforcing a right,
which causes prejudice to the defendant.3  The period of time that constitutes an
“unreasonable delay” can range from one month to many years.  The length of the
delay is less important than the reasons for it.4
At common law, “[i]t was a rule . . . that a right never dies; and therefore the
power existed of instituting actions at any length of time . . . .”5  Statutes of
limitation were enacted to “restrain the exercise of this power.”6  Thus, both
statutes of limitations and laches bar untimely suits.  Although “the limitations of
actions applicable in a court of law are not controlling in equity,”7 the Court of
Chancery ordinarily will follow the applicable statute of limitations:
     Under ordinary circumstances, a suit in equity will not be
stayed for laches before, and will be stayed after, the time fixed
2Adams v. Jankouskas, 452 A.2d 148, 157 (Del. 1982).
3Reid v. Spazio, 970 A.2d 176, 182 (Del. 2009).
4Whittington v. Dragon Group, L.L.C., 991 A.2d 1, 8 (Del. 2009).
5Perkins v. Cartmell, 1845 WL 493 at *5 (Del. Err. & App.).
6Ibid.
7Reid v. Spazio, 970 A.2d at 183.
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by the analogous statute of limitations at law; but if unusual
conditions or extraordinary circumstances make it inequitable
to allow the prosecution of a suit after a briefer, or to forbid its
maintenance after a longer period than that fixed by the statute,
the Chancellor will not be bound by the statute, but will
determine the extraordinary case in accordance with the equities
which condition it.  4 Pom. Eq. Juris. 1441.8
In keeping with this rule, the timeliness of indemnification claims normally is
decided by reference to the three year statute of limitations set forth in 10 Del. C.
§ 8106.9 
         The Court of Chancery did not decide whether O’Brien’s indemnification
claim would have been barred by the statute of limitations.10  Rather, the trial court
determined that this is one of those few cases where the analogous statute of
limitations should not be applied because of  “unusual conditions or extraordinary
circumstances.”  There is no precise definition of what constitutes unusual
conditions or extraordinary circumstances.  The Court of Chancery must exercise
its discretion, after considering all relevant facts.  But several factors that could
bear on the analysis include:  1) whether the plaintiff had been pursuing his claim,
through litigation or otherwise, before the statute of limitations expired; 2) whether
the delay in filing suit was attributable to a material and unforeseeable change in
the parties’ personal or financial circumstances; 3) whether the delay in filing suit
8Wright v. Scotten, 121 A 69, 73 (Del. 1923).
9See: Stifel Financial Corp. v. Cochran, 809 A.2d 555 (Del. 2002); Scharf v. Edgcomb Corp., 864
A.2d 909 (Del. 2004).
10The parties disagreed on the date that the claim accrued.
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was attributable to a legal determination in another jurisdiction; 4) the extent to
which the defendant was aware of, or participated in, any prior proceedings; and 5)
whether, at the time this litigation was filed, there was a bona fide dispute as to the
validity of the claim.
We agree with the Court of Chancery’s conclusion that unusual
circumstances justified its disregarding the statute of limitations in this particular
case.  O’Brien promptly sought advancement and/or indemnification from PRC –
first when he was named as a defendant in the arbitration, and then when the
Arbitration Award declared that PRC’s claims against him lacked merit.  Even
before the arbitration had been concluded, he filed suit against PRC in Florida. 
IAC, as the party ultimately responsible for any award in O’Brien’s favor,
controlled that litigation from the outset.  Indeed, it described itself as the real party
in interest.
Second, after the Florida trial court ruled against him, O’Brien could not, in
good faith, proceed against IAC for more than one year, while the decision was on
appeal.  Perhaps he could have filed suit against IAC as a “placeholder” action, but
that suit would have been stayed pending the Florida appellate court decision. 
Moreover, IAC already was litigating the Florida claim on behalf of PRC.  To
disregard this important factor would glorify form over substance.11
11IAC argues that the Court would be disregarding PRC and IAC’s separate corporate forms if it
were to base its decision on the fact that IAC controlled the defense of O’Brien’s Florida action. 
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Third, PRC unexpectedly declared bankruptcy shortly after the Florida
appellate court determined that O’Brien’s claims were valid and enforceable.  IAC
argues that this factor should be disregarded because O’Brien always knew he had
a claim against IAC, but chose not to file suit against IAC until after the statute of
limitations had expired.  It is true that O’Brien knew he had a claim against IAC. 
But he did not know, and there is no evidence that he had reason to suspect, that
PRC would be unable to pay.   
Finally, the Florida courts held that O’Brien’s indemnification claim was
meritorious.  This combination of factors is highly unusual, and constitutes unusual
circumstances that allow the Court of Chancery to ignore the analogous statute of
limitations in deciding whether O’Brien’s claim was barred by laches.  Turning to
the classic laches analysis, we agree with the trial court, for the reasons it
expressed, that O’Brien’s delay was not unreasonable and that IAC was not
prejudiced.
O’Brien’s Attorneys’ Fees Were Reasonable
The attorneys’ fees the Court of Chancery ordered IAC to pay O’Brien
include O’Brien’s attorneys’ hourly fees and certain contingency (premium or
success) fees based on those hourly fees.  On appeal, IAC challenges only the
But this analysis has nothing to do with separate corporate existence.  It is about the waste of
resources that would have resulted if O’Brien had filed this action while the Florida action was
pending.
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premium fee arrangements that would reward O’Brien’s attorneys with payments
above their standard hourly rates.  Specifically, IAC challenges:  (1) a 20% success
fee to the firm that worked on the arbitration; (2) a $100 per hour increase to the
same firm’s hourly rates for all work after the arbitration; (3) a 50% premium
above standard hourly rates to a second firm; and (4) a contingent $100 per hour
premium above standard hourly rates to a third firm.
Corporate officers are entitled to indemnification only for those attorneys’
fees that are “actually and reasonably incurred.”12  In determining whether fees
meet that standard, Delaware courts have considered, “[1] were the expenses
actually paid or incurred; [2] were the services that were rendered thought prudent
and appropriate in the good faith professional judgment of competent counsel; and
[3] were charges for those services made at rates, or on a basis, charged to others
for the same or comparable services under comparable circumstances.”13 
IAC objects to the fee awards on two grounds.  First it says that the premium
fees were not “incurred” because they do not represent work done, but rather the
success achieved.  The Court of Chancery correctly rejected that argument.  A
premium or contingent fee is payable for work done, if that work is successful. 
The fact that the amount of the fee is not set until the result is obtained does not
128 Del. C. § 145(a).
13Delphi Easter Ptnrs. Ltd. P’ship v. Spectacular Ptnrs., Inc., 1993 WL 328079, at *9 (Del. Ch.).
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change the fact that the fee is incurred based on hours or work performed for the
client. 
IAC also objects to the amounts awarded by the trial court.  We review the
trial court’s decision for abuse of discretion, and we find none.14  Although an
award of contingency or premium fees is unusual, the trial court recognized that
fact and decided that O’Brien acted reasonably under the circumstances in making
those fee arrangements.  In addition, the court carefully analyzed the amounts
charged and the work performed, applying the correct legal standard.  Accordingly,
we affirm the award on the basis of the Court of Chancery’s opinion.15
CONCLUSION
Based on the forgoing, the judgments of the Court of Chancery are affirmed.
14Mahani v. Edix Media Grp., Inc., 935 A.2d 242, 245 (Del. 2007).
15O’Brien v. IAC/Interactive Corp., 2010 WL 3385798 (Del. Ch.).
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