Court Opinion

ID: 6329295
Source: CourtListenerOpinion
Date Created: 2022-04-01 21:01:57.014088+00
Date Added: 2024-06-11T09:22:49.716833
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

                              )
CIRBA INC. d/b/a DENSIFY, and )
CIRBA IP, INC.,               )
                              )
                Plaintiffs,   )
                              )
    v.                        ) C.A. No. 2021-0454-SG
                              )
TURBONOMIC, INC.,             )
                              )
                Defendant.    )

                        MEMORANDUM OPINION

                     Date Submitted: December 21, 2021
                        Date Decided: April 1, 2022

Douglas E. McCann, Joseph B. Warden, and Kelly Allenspach Del Dotto, of FISH &
RICHARDSON P.C., Wilmington, Delaware, Attorneys for Plaintiffs.

Kenneth J. Nachbar and Thomas P. Will, of MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Richard T. Marooney,
Brent P. Ray, Allison Altersohn, and Matthew Bush, of KING & SPALDING LLP,
New York, New York, Attorneys for Defendant.

GLASSCOCK, Vice Chancellor
      I have before me cross-motions for summary judgment brought by Plaintiffs

Cirba Inc. and Cirba IP, Inc. (together, “Densify”) and Defendant Turbonomic, Inc.

(“Turbonomic”). This memorandum opinion grants in part and denies in part both

parties’ motions.

      This matter had its inception, remotely, in patent cross-litigation between

these parties in 2020. That litigation ended in a settlement, memorialized in a

settlement agreement. In that agreement, the parties agreed to refrain from further

challenge to the validity of the patents at issue. Moreover, the parties agreed to what

I will call the “Section 6 obligations”: to indemnify one another for any claim for

indemnification brought by a “customer, technology partner, or reseller” against the

counterparty arising out of allegations of patent infringement.

      Most pertinently, here, the parties agreed that rights and obligations embodied

in the agreement could not be assigned to third parties, absent counterparty consent.

The agreement defined “Assignment” in an unsurprising way, as an act to “assign,

transfer, alienate, delegate, sub-delegate, divest or sell”; in other words, the parties

defined “Assignment” as “an assignment.” The contractual language then went on

to provide that “an Assignment” includes “merger, amalgamation, reorganization or

consolidation” and similar actions.

      In 2021, Turbonomic had agreed to be acquired by IBM, via merger. It sought

Densify’s consent to an Assignment, which per the settlement agreement could not
be unreasonably withheld. Densify refused consent, on the ground that IBM was a

customer and that its assumption of the rights under the settlement agreement would

be harmful to Densify. Densify ultimately brought this action seeking to enjoin the

merger, based on its contention that the merger itself was an “Assignment.”

       After hearing the parties on Densify’s proposed Prelimiary Injunction, I

denied the motion. I found that the contractual language was ambiguous, but most

likely prohibited assignment of settlement duties via merger, and did not mean that

a merger constituted a per se Assignment.

       The parties have proceeded to discovery, and now present cross-motions for

summary judgment.

                                    I. BACKGROUND1

       A. Factual Background

       Densify and Turbonomic are competitors in the cloud computing software

industry.2 In April 2020, Densify sued Turbonomic for patent infringement, and

1
  Unless otherwise noted, the information in this opinion is undisputed and taken from the
verified pleadings, affidavits, and other evidence submitted to the Court. Citations in the form of
“Smith Decl. —” refer to the Decl. of Gerry Smith Pursuant to 10 Del. C. § 3927 in Supp. of
Pls.’ Mot. for Summ. J., Dkt. No. 62. Citations in the form of “Smith Decl., Ex. —” refer to the
exhibits attached to the Smith Decl., Dkt. No. 62. Citations in the form of “Warden Decl. —”
refer to the Decl. of Joseph B. Warden Pursuant to 10 Del. C. § 3927 in Supp. of Pls.’ Mot. for
Summ. J., Dkt. No. 63. Citations in the form of “Warden Decl., Ex. —” refer to the exhibits
attached to the Warden Decl., Dkt. No. 63.
2
  Smith Decl. ¶¶ 2, 7.
                                                2
Turbonomic countersued for patent infringement shortly thereafter.3 The parties

settled the patent infringement lawsuit on January 10, 2021, when they entered into

a settlement agreement that provided for the dismissal of the parties’ respective

patent claims “with prejudice” (the “Settlement Agreement”).4

       The Settlement Agreement included several continuing obligations, which are

at issue here. First, Section 5 of the Settlement Agreement provided that the parties

would not challenge “the patentability, validity, or enforceability” of the patents at

issue in the underlying litigation.5 Second, Section 6 of the Settlement Agreement

required both parties to “indemnify, defend and hold harmless” one another “from

and against any claim or suit for indemnification brought by a . . . customer,

technology partner, or reseller” alleging infringement of the challenged patents.6

Finally, Section 7 of the Settlement Agreement contained an anti-assignment

provision, which stated as follows:

            Assignment. Neither Party may assign, transfer, alienate,
            delegate, sub-delegate, divest or sell this Agreement, its
            obligations or liabilities under this Agreement or the rights or
            benefits granted under this Agreement voluntarily or by
            operation of law or otherwise without the other Party’s prior
            written consent, not to be withheld, conditioned or delayed
            unreasonably (an “Assignment”). An Assignment shall be

3
  Id. ¶¶ 7–8.
4
  Smith Decl. ¶ 10; see also id., Ex. B § 1(b) [such exhibit hereinafter the “Settlement
Agreement”]; Settlement Agreement at 7–9.
5
  Settlement Agreement § 5.
6
  Id. § 6.
                                                 3
           deemed to include a merger, amalgamation, reorganization or
           consolidation or other similar transaction, or series of
           transactions, of a Party with another entity other than with a
           wholly owned subsidiary of the Party existing as of the
           Effective Date. Any such Assignment or attempted Assignment
           shall be null and void, and for clarity, in the event of an
           Assignment by or in respect of a Party, the other Party shall [be]
           relieved and released from its obligations in Section 6.7

       In February 2021, shortly after the parties executed the Settlement Agreement,

Turbonomic and IBM began discussing a potential acquisition of Turbonomic (the

“Acquisition”).8     In connection with those discussions, IBM learned of the

Settlement Agreement.9 As a result, IBM asked Turbonomic to obtain Densify’s

consent to the Acquisition in light of the anti-assignment provision in the Settlement

Agreement.10

       On May 4, 2021, Turbonomic informed Densify by letter of the IBM

Acquisition.11     In the letter, Turbonomic wrote, “[o]nce consummated, the

Acquisition would be deemed to constitute an Assignment within the meaning of

Section 7 of the Settlement Agreement.”12 The letter then requested Densify’s

7
  Id. § 7.
8
  Warden Decl., Ex. L at 128:8–10.
9
  Id. at 134:25–135:9.
10
   Id. at 86:2–7.
11
   Warden Decl., Ex. H.
12
   Id. at 1.
                                           4
“consent to such Assignment, which pursuant to the terms of the Settlement

Agreement may not be withheld, conditioned or delayed unreasonably.”13

       After requesting more information about the potential Assignment to IBM,14

Densify informed Turbonomic by letter on May 20, 2021 that it “cannot consent to

Turbonomic’s assignment.”15 Densify explained in the letter that an Assignment of

the Settlement Agreement to IBM would pose “enormous prejudice to Densify,”

given that Densify had “a longstanding relationship with IBM, which is Densify’s

largest partner.”16 Densify’s letter also took the position that “any merger by

Turbonomic,” “including a reverse triangular merger,” would constitute an

Assignment under the Settlement Agreement that “cannot proceed without Densify’s

consent.”17 The letter thus asked Turbonomic to confirm by May 22, 2021 that it

would not close the Acquisition.18

       B. Procedural History

       After Turbonomic failed to confirm that the Acquisition would not close,

Densify initiated this action on May 24, 2021, seeking to enjoin the Acquisition on

the basis that the Acquisition constituted an Assignment, as defined in the Settlement

13
   Id.
14
   E.g., Warden Decl., Ex. I.
15
   Warden Decl., Ex. K at 1.
16
   Id.
17
   Id.
18
   Id.
                                          5
Agreement, requiring Densify’s consent.19                I denied Densify’s motion for a

preliminary injunction in a bench ruling on June 14, 2021.20 In doing so, I held that

the definition of “Assignment” was ambiguous, and that Densify was not “more

likely than not” to succeed in its interpretation that the Acquisition constituted an

Assignment.21 The alternative construction, which I found preliminarily more likely,

was that the rights and duties of the Settlement Agreement could not be assigned to

third parties, including by a merger.22 The Settlement Agreement itself provided the

remedy for such an aborted Assignment; the purported Assignment was null and

void, and the non-breaching party was relieved of its Section 6 obligations.23 IBM

completed the Acquisition of Turbonomic on June 16, 2021, in a reverse triangular

merger structure pursuant to which Turbonomic became a wholly owned subsidiary

of IBM.24

       Densify thereafter filed an amended complaint on June 23, 2021, which is

currently the operative complaint.25 The amended complaint seeks damages from

Turbonomic for consummating the Acquisition without Densify’s consent, and a

19
   See generally Verified Compl., Dkt. No. 1.
20
   Tr. Oral Arg. re Pls.’ Mot. Prelim. Inj. and Ct.’s Ruling, Dkt. No. 43 at 23:23–30:9.
21
   Id.
22
   Id.
23
   Id.
24
   See generally Warden Decl., Ex. Q.
25
   First Am. Verified Compl., Dkt. No. 42.
                                                 6
declaratory judgment regarding the scope of Densify’s and Turbonomic’s rights and

obligations under the Settlement Agreement in light of the Acquisition.26 Densify

moved for summary judgment on November 5, 2021,27 and Turbonomic filed a

cross-motion for summary judgment on November 19, 2021.28 I heard oral argument

on December 21, 2021, and I consider the matter fully submitted as of that date.

                                      II. ANALYSIS

       On these cross-motions for summary judgment, each party must show that

there is “no genuine issue as to any material fact” and that it is “entitled to judgment

as a matter of law.”29 Where neither party has argued that there is an issue of material

fact, “the cross-motions are deemed to be a stipulation for a decision based on the

submitted record.”30 The Court must deny summary judgment, however, if a

material factual dispute exists.31          The moving party bears the burden of

demonstrating that there is no question of material fact.32 A fact is material if it

26
   Id. ¶¶ 54–67.
27
   Pls.’ Mot. Summ. J., Dkt. No. 62; Opening Br. Supp. Pls.’ Mot. Summ. J., Dkt. No. 62
[hereinafter “Pls.’ OB”]; see also Pls.’ Reply Br. Supp. Its Mot. Summ. J. Opp. Turbonomic
Inc’s Cross-Mot. Summ. J., Dkt. No. 72.
28
   Turbonomic, Inc.’s Cross-Mot. Summ. J., Dkt. No. 67; Turbonomic, Inc.’s Answering Br.
Opp. Pls.’ Mot. Summ. J. Supp. Cross-Mot. Summ. J., Dkt. No. 68 [hereinafter “Def.’s AB”];
see also Turbonomic, Inc.’s Reply Br. Supp. Its Cross-Mot. Summ. J., Dkt. No. 74.
29
   Comet Sys., Inc. S’holders’ Agent v. MIVA, Inc., 980 A.2d 1024, 1029 (Del. Ch. 2008); see
also Ct. Ch. R. 56(c).
30
   Comet, 980 A.2d at 1029 (Del. Ch. 2008).
31
   Id.
32
   Id.
                                               7
“might affect the outcome of the suit.”33 In other words, a genuine issue of material

fact exists if the evidence is such that a reasonable fact finder “could return a verdict

for the nonmoving party.”34 “If the movant puts in the record facts which, if

undenied, entitle him to summary judgment, the burden shifts to the defending party

to dispute the facts by affidavit or proof of similar weight.”35

       The parties here dispute whether IBM’s Acquisition of Turbonomic

effectuated an Assignment as defined by the Settlement Agreement. For the reasons

below, I find that the Acquisition did not effectuate an Assignment to IBM.

       As an initial matter, it is undisputed that Turbonomic requested Densify’s

consent to the Acquisition because it viewed the Acquisition “to constitute an

Assignment.”36 That is, Turbonomic conceded that it was attempting to effectuate

an Assignment to IBM via the Acquisition.

       It is also undisputed that Densify refused to consent to the requested

Assignment to IBM.37 Under the Settlement Agreement, Densify’s consent could

not be “withheld, conditioned or delayed unreasonably.”38 Accordingly, the parties

33
   Graven v. Lucero, 2013 WL 6797566, at *2 (Del. Ch. Dec. 20, 2013) (quoting Deloitte LLP v.
Flanagan, 2009 WL 5200657, at *3 (Del. Ch. Dec. 29, 2009)).
34
   Id. (quoting Deloitte, 2009 WL 5200657, at *3).
35
   Comet, 980 A.2d at 1029 (quoting Tanzer v. Int’l Gen. Indus., Inc., 402 A.2d 382, 385 (Del.
Ch. 1979)).
36
   Warden Decl., Ex. H at 1.
37
   Warden Decl., Ex. K at 1.
38
   Settlement Agreement § 7.
                                              8
dispute, and the predicate issue before me is, whether Densify’s withholding of

consent was reasonable.

       Although “reasonableness” “is not frequently amenable to resolution on

summary judgment,”39 I find that Turbonomic has failed to identify a material

disputed fact that “might affect the outcome of the” reasonableness inquiry in its

favor.40   Turbonomic first contends that Densify waived any reasonableness

argument by failing to argue in its opening brief that its withholding of consent was

reasonable.41 In boxing terms, Turbonomic has led with its chin. Densify’s opening

brief included a section titled, “Densify’s Reasonable Withholding of Consent to the

IBM-Turbonomic Merger.”42 Densify argued at length in its opening brief that it

was reasonable to withhold consent to an Assignment to IBM because, as Densify’s

largest reseller, IBM could use its knowledge of Densify’s business, products and

customers to compete with Densify, using the Turbonomic patents that were the

subject of the Settlement Agreement.43 Accordingly, I find no basis to hold that

Densify waived its reasonableness argument.44

39
   Christine Manor Civic Ass’n v. Gullo, 2007 WL 1074763, at *1 (Del. Ch. Mar. 29, 2007).
40
   Graven, 2013 WL 6797566, at *2 (quoting Deloitte, 2009 WL 5200657, at *3).
41
   Def.’s AB at 22–24.
42
   Pls.’ OB § II.D.
43
   Id.
44
   Cf. CHC Cos., Inc. v. Sanders, 2013 WL 1952017, at *5 (Del. Ch. May 10, 2013) (“It is the
preference of this Court always to determine matters on the merits.”); Cartanza v. Cartanza,
2013 WL 3376964, at *1 n.6 (Del. Ch. July 8, 2013) (“Consistent with this Court’s general
                                               9
       Turbonomic next asserts that “genuine factual disputes” preclude summary

judgment regarding the reasonableness of Densify’s refusal to consent to an

Assignment.45 As discussed below, I find that none of the purported factual disputes

raised by Turbonomic are relevant to that reasonableness inquiry.

       First, Turbonomic argues that the potential harm Densify identified to justify

its refusal to consent stemmed from the Acquisition itself, not from an Assignment

made pursuant to the Acquisition.46 Turbonomic argues that Densify has failed to

identify any harm caused by an Assignment of the Settlement Agreement to IBM,

as opposed to harm caused by IBM’s Acquisition of Turbonomic.47 But it was

Turbonomic who took the position, when it requested Densify’s consent, that the

Acquisition itself constituted an Assignment.48                 Densify’s justification for

withholding consent was necessarily responsive to that request, and thus premised

on the potential harms flowing from the Acquisition itself. Turbonomic offers no

reason to suggest that Densify’s concerns regarding a potential Assignment should

have been responsive to Turbonomic’s new litigation-driven view that the

Acquisition was not an Assignment, instead of being responsive to Turbonomic’s

preference for addressing issues on the merits, I have assumed, without deciding, that Defendants
did not waive the arguments contained in the Motion.”).
45
   Def.’s AB at 24–27.
46
   Id. at 24–25.
47
   Id.
48
   See supra note 12 and accompanying text.
                                               10
actual consent request asserting that it was an Assignment. Accordingly, even if

Turbonomic is now correct that the Acquisition was not an Assignment, it was

reasonable for Densify to consider the potential harms posed by the Acquisition itself

when Turbonomic represented in its consent request that it believed the Acquisition

was an Assignment.

       Second, Turbonomic argues that IBM is “now” responsible for 0% of

Densify’s customers, because “[a]ll of Densify’s business relationship with IBM was

transferred to” an independent entity called “Kyndryl.”49 According to Turbonomic,

Densify therefore suffers “no harm” from the “currently” “non-existent business

relationship with IBM.”50 That is irrelevant. Whatever IBM’s “current” business

relationship with Densify is, the reasonableness of Densify’s refusal to consent must

be assessed as of the time it withheld consent, not at some later point in time under

unanticipated facts. Turbonomic does not dispute that at the time Densify refused

to consent to the requested Assignment, IBM sold Densify products to 57% of

Densify’s customers, which amounted to 41% of Densify’s annualized revenue

stream at the time.51 That Densify has since terminated its relationship with IBM

49
   Def.’s AB at 25–27.
50
   Id.
51
   Smith Decl. ¶ 12.
                                         11
says nothing about the harm Densify reasonably anticipated when it decided to

withhold consent, based on its then-existing business relationship with IBM.

       Moreover, Turbonomic offers no facts to suggest that the insight IBM gleaned

into Densify’s business, products and customers as a result of their business

relationship was somehow neuralyzed52 when the relationship terminated. Without

more, the mere termination of Densify’s business relationship with IBM does not

suggest that Densify’s concerns about IBM’s potential competitive advantage as an

assignee of the Settlement Agreement were alleviated.

       Finally, Turbonomic argues that even before the Acquisition and the

requested Assignment, IBM’s partnership with Densify was never “exclusive.”53

Therefore, Turbonomic contends, IBM was always free to sell Turbonomic products,

which was in fact “already occurring” by the time Turbonomic requested the

Assignment.54 Again, that is irrelevant. Notably, although Turbonomic asserts that

IBM was “already” “selling IBM-branded Turbonomic product,” it does not contend

that IBM was using the Turbonomic patents that were the subject of the Settlement

Agreement in connection with those sales.55 If IBM used those patents, absent an

Assignment, Densify could have sued IBM to enforce its patent infringement claims.

52
   See Men In Black (B. Sonnenfeld dir., 1997).
53
   Def.’s AB at 26–27.
54
   Id.
55
   See id.
                                              12
An Assignment to IBM would have destroyed that right. Accordingly, the fact that

IBM was “already” “selling IBM-branded Turbonomic product” has no relevance to

the reasonableness of Densify’s refusal to consent to an Assignment.

       In sum, Turbonomic has identified no material disputed fact that would

demonstrate the unreasonableness of Densify’s refusal to consent to the requested

Assignment. In addition, and whichever party bears the burden of proof on the issue,

I find the evidence of record sufficient to find that Densify’s refusal to consent was

reasonable.

       Accordingly, I examine the effect of the Acquisition under the Settlement

Agreement. That agreement provided that an Assignment was impermissible absent

(in this situation) Densify’s consent. That consent was requested and reasonably

denied. In addition, the contract ambiguity I found fatal to the preliminary injunction

request is irrelevant here. That issue is whether the merger with IBM was itself an

Assignment under the Settlement Agreement,56 or simply the vehicle for an

Assignment.       Under either reading of the Settlement Agreement, however,

Turbonomic’s transaction with IBM embodied an attempted Assignment to which

Densify withheld contractual consent. Accordingly, the attempted transfer of rights

under the Settlement Agreement to IBM, was what the Settlement Agreement refers

 Thus potentially satisfying the “merits” prong of the preliminary injunction analysis of
56

Densify’s attempt to enjoin the merger.
                                               13
to as an “attempted Assignment.”57 According to the Settlement Agreement, such

contractually non-compliant “Assignment[s] or attempted Assignment[s]” are “null

and void.”58

       As a remedy for Turbonomic’s attempted Assignment, Densify requests a

declaratory judgment that, among other things, Turbonomic and “its privies” are no

longer entitled to assert their rights or benefits under Sections 1, 5, and 6 of the

Settlement Agreement, including by asserting claim preclusion or res judicata

defenses to a patent infringement suit brought by Densify.59 Densify’s proposed

order also seeks a declaratory judgement that Densify retains its rights and benefits

under the Sections 1, 5, and 6 of the Settlement Agreement, and relieving Densify

of its obligation under the Settlement Agreement to refrain from bringing a patent

infringement suit against “Turbonomic, its privies, and/or their customers,

technology partners, and resellers.”60

       I find that request for relief to be overly broad, in part, and unripe, in part.

The Settlement Agreement itself defines the scope of the remedy for an Assignment

or attempted Assignment that lacks Densify’s reasonable consent: “Any such

Assignment or attempted Assignment shall be null and void, and for clarity, in the

57
   Settlement Agreement § 7.
58
   Id.
59
   See Proposed Order Granting Pls.’ Mot. Summ. J., Dkt. No. 62.
60
   See id.
                                             14
event of an Assignment by or in respect of a Party, the other Party shall [be] relieved

and released from its obligations in Section 6.”61 I find, accordingly, that under the

plain terms of the Settlement Agreement, the Assignment to IBM that Turbonomic

attempted is a nullity. In other words, Turbonomic did not transfer its rights under

the Settlement Agreement to IBM, and IBM may not enforce the Section 6

obligations—the indemnification obligations—against Densify.           That was the

contract that Densify and Turbonomic bound themselves to in the Settlement

Agreement, and Densify is entitled to a declaratory judgment on that ground. To the

extent, however, that Densify seeks a declaration as to its rights in hypothetical

future litigation, addressing such a request would be speculative and advisory, and I

decline to entertain it here.

         Accordingly, Densify’s motion is granted to the extent that it seeks a

declaratory judgment that the attempted Assignment by Turbonomic was “null and

void” and that Densify is “relieved and released” “from its obligations in Section 6”

of the Settlement Agreement. Turbonomic’s motion is denied to the extent it seeks

a holding to the contrary. Densify’s motion is denied without prejudice to the extent

it seeks further relief, and Turbonomic’s motion is granted to the extent it seeks a

denial of such further relief.

61
     Settlement Agreement § 7.
                                          15
The parties should provide an appropriate form of order.

                                 16