Court Opinion

ID: 6118516
Source: CourtListenerOpinion
Date Created: 2022-02-03 22:02:27.074167+00
Date Added: 2024-06-11T08:22:33.005986
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

SPHERECOMMERCE, LLC (f/k/a              )
SPHERE ACQUISITION CO., LLC) and        )
SPHERE PAYMENTS, LLC,                   )
                                        )
                 Plaintiffs,            )
                                        )
     v.                                 )   C.A. No. 2021-0032-JRS
                                        )
ROBERT CAULFIELD and RMBBD              )
HOLDINGS, INC.,                         )
                                        )
                 Defendants.            )
                                        )
                                        )
ROBERT CAULFIELD and RMBBD              )
HOLDINGS, INC.,                         )
                                        )
               Counterclaim and         )
               Third Party Plaintiffs,  )
                                        )
      v.                                )
                                        )
SPHERECOMMERCE, LLC (f/k/a              )
SPHERE ACQUISITION CO., LLC)            )
SPHERE PAYMENTS, LLC, WAUD              )
CAPITAL PARTNERS                        )
MANAGEMENT IV, L.P.                     )
                                        )
                Counterclaim and        )
                Third Party Defendants. )

                     MEMORANDUM OPINION

                   Date Submitted: November 3, 2021
                    Date Decided: February 3, 2022
William M. Lafferty, Esquire, Kevin M. Coen, Esquire and Sarah P. Kaboly, Esquire
of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware and Timothy W.
Knapp, P.C., Howard M. Kaplan, Esquire and Aleschia D. Hyde, Esquire of
Kirkland & Ellis LLP, Chicago, Illinois, Attorneys for Plaintiffs/Counterclaim
Defendants.

Tammy L. Mercer, Esquire and M. Paige Valeski, Esquire of Young Conaway
Stargatt & Taylor, LLP, Wilmington, Delaware and Evan C. Borges, Esquire and
Matthew S. Ingles, Esquire of Greenberg Gross LLP, Costa Mesa, California,
Attorneys for Defendants and Counterclaim/Third Party Plaintiffs.

SLIGHTS, Vice Chancellor
      Words have consequences.         On August 25, 2020, Defendant, Robert

Caulfield, gained unauthorized access to an all-employee virtual meeting of Plaintiff,

Sphere Payments, LLC (“Sphere”). Using a fake screen name, he sent the following

message to the more than 100 employees in attendance: “Except for our security

officer, and Claudia trying, this executive group is a [expletive] joke. You are just

fools playing office. It’s depressing listening to you [expletive] dip[expletive]s.”

This colossal lapse of judgment has spawned the claims and counterclaims

sub judice.

      At the time he sent his message to Sphere employees, Caulfield, indirectly,

was Sphere’s largest individual equityholder and held a seat on its board of

managers, which he filled with his proxy. Importantly, he was also subject to a

Restrictive Covenant Agreement with Sphere that contained a non-disparagement

clause.   While non-disparagement clauses are routine in restrictive covenant

agreements, and often are dismissed as surplusage by those who agree to be bound

by them, they impose substantive restrictions, and they are enforceable.

      In this case, Plaintiffs allege that Caulfield’s material breach of the non-

disparagement clause has placed him and his affiliated company, Defendant,

RMBBD Holdings, Inc., in breach of other agreements with Sphere such that Sphere

may, as a matter of right, “repurchase” RMBBD’s Rollover Securities (as later

defined) for fair market value as reasonably determined by Sphere’s board of

                                          1
managers (the “Board”). The Board has purported to exercise Sphere’s repurchase

rights and seeks, through its Verified Complaint (“Complaint”), declaratory

judgments that it has lawfully done so.1 Caulfield disagrees––hence the dispute.2

         Caufield’s troubles began in August 2017, when he sold 100% of his equity

in TCPP, LLC (“TrustCommerce”), as held through RMBBD, to Plaintiff,

SphereCommerce, LLC (“Buyer”), in exchange for over $118 million in base

consideration. Following this transaction, TrustCommerce became a subsidiary of

Buyer and an indirect subsidiary of Sphere. To consummate the sale, Caulfield,

RMBBD and Buyer entered into a series of agreements, including a Restrictive

Covenant Agreement (as to Caulfield) (the “RCA”)3 and a Securities Rollover

Agreement (as to RMBBD) (the “Rollover Agreement”).4

         As a condition of the sale, RMBBD reinvested $20 million of the purchase

proceeds back into Sphere, as required by the Rollover Agreement. In exchange for

the reinvestment, RMBBD received substantial equity in Sphere (the “Rollover

Securities”). The Rollover Agreement incorporated by reference certain provisions

1
    Pls.’ Verified Compl. (D.I. 1) (“Compl.”) ¶¶ 53–66.
2
 As discussed below, Caulfield has responded to the Complaint by filing a counterclaim
consisting of 15 counts. See Caulfield Parties’ Verified Countercls. and Third Party
Compl. (D.I. 13) (“Counterclaim”) ¶¶ 61–159.
3
 Ex. 1 to Opening Br. in Supp. of Pls./Countercl. and Third-Party Defs.’ Partial Mot. to
Dismiss Countercls. and Partial Mot. for J. on the Pleadings (D.I. 30) (“Sphere OB”).
4
    Ex. 2 to Sphere Parties OB.
                                              2
of Sphere’s Amended and Restated Limited Liability Company Agreement (together

with Amendment No. 1, the “LLC Agreement”), including provisions relating to

Sphere’s right to repurchase member units.5 Subject to certain limitations, the

Rollover Agreement provided that the repurchase rights outlined in Section 10.2 of

the LLC Agreement would be triggered with respect to the Rollover Securities if

Caulfield materially breached any of the restrictive covenants set forth in the RCA.

As noted, Plaintiffs now maintain that Caulfield’s rant to Sphere employees in

August 2020 was a material breach of the RCA that has triggered Sphere’s

repurchase rights under the Rollover Agreement.

         Buyer and Sphere (together, the “Sphere Parties”) have moved to dismiss the

counterclaims brought by Caulfield and RMBBD (the “Caulfield Parties”), all of

which are premised on the notion that Caulfield did not materially breach the RCA.

Relatedly, the Sphere Parties seek judgment on the pleadings with respect to their

prayers for declaratory relief regarding the propriety of their repurchase of the

RMBBD Rollover Securities. Reduced to their essence, the motions raise two

issues: (1) whether the non-disparagement clause (as later defined) is a “restrictive

covenant,” the material breach of which would trigger repurchase rights under the

Rollover Agreement; and (2) ) if the non-disparagement clause is a restrictive

5
    Ex. 3 to Sphere Parties OB.
                                          3
covenant, whether the Court can determine on the pleadings that Caulfield materially

breached the covenant.

         For reasons explained below, I am satisfied the clear and unambiguous

language of the RCA reveals that the non-disparagement clause was intended to be

one of several restrictive covenants by which Caulfield agreed to be bound. I am

not, however, satisfied that I may determine Caulfield materially breached that

covenant as a matter of law on the pleadings. The motions, therefore, must be

denied.

                                  I. BACKGROUND

         For purposes of the motion to dismiss, I accept as true the Counterclaim’s

well-pled factual allegations and draw all reasonable inferences in favor of the

Caulfield Parties as the non-moving parties.6          The related motion for partial

judgment on the pleadings, as relevant here, is subject to the same deference to well-

pled facts and the same caveat that all inferences to be drawn from those facts must

be drawn in favor of the Caulfield Parties. 7

6
    Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
7
  Greenhouse v. Polychain Fund I LP, 2019 WL 2290245, at *4 (Del. Ch. May 29, 2019)
(quoting W. Coast Mgmt. & Cap., LLC v. Carrier Access Corp., 914 A.2d 636, 641
(Del. Ch. 2006)).

                                            4
      A. Parties and Relevant Non-Parties

           Sphere is a software and financial technology company providing solutions

that integrate payments and software to serve businesses of all sizes, from large,

complex healthcare enterprises to merchants across a range of verticals, including

transportation, education, and insurance. 8     Sphere is a Delaware LLC and its

governing document is the LLC Agreement.9 It is also a party to the Rollover

Agreement with RMBBD.10

           Buyer (SphereCommerce, LLC (f/k/a Sphere Acquisition Co., LLC)) is a

Delaware LLC and a wholly owned subsidiary of Sphere formed to facilitate the

acquisition of TrustCommerce.11 It is a party to the RCA with Caulfield.12

           Counterclaim Defendant, Waud Capital Partners Management IV, L.P.

(“Waud”), is a middle-market private equity firm that focuses on acquiring

companies in the healthcare services and business and technology services sectors.13

8
    Compl. ¶ 5.
9
    Id.
10
     Id.
11
     Compl. ¶ 6.
12
     Id.
13
     Counterclaim ¶ 19.
                                           5
Waud is affiliated with Andrew Rueff and together they formed Buyer to facilitate

the acquisition of TrustCommerce.14

         Defendant, Caulfield, is the founder of TrustCommerce. He is a party to the

RCA. Under the Rollover Agreement, Waud, as the majority shareholder of Sphere,

appointed Caulfield as an additional manager on the Sphere Board. 15 By August

2020, the timeframe relevant here, Caulfield no longer served on the Board, having

vacated his seat and appointed a proxy to serve in his stead.16

         Defendant, RMBBD, is a California corporation formed by Caulfield to hold

his interest in Sphere. 17 Caulfield serves as RMBBD’s President. 18 RMBBD is a

party to the Rollover Agreement. 19

         Non-party, TrustCommerce, is a California LLC and global leader in

electronic payment processing and security.20           In 2017, Buyer acquired

14
     Counterclaim ¶ 20.
15
     Compl. ¶ 8.
16
     Counterclaim ¶ 39.
17
     Counterclaim ¶ 8.
18
     Compl. ¶ 9.
19
     Counterclaim ¶ 8.
20
     Compl. ¶ 7.
                                          6
TrustCommerce from the Caulfield Parties, after which TrustCommerce became a

subsidiary of Buyer and an indirect subsidiary of Sphere. 21

      B. The Relevant Contracts

           In August 2017, the Caulfield Parties entered into a series of agreements to

effect the sale of 100% of their equity interests in TrustCommerce to Buyer in

exchange for more than $118 million in consideration.22 These agreements included

the RCA, 23 the Rollover Agreement,24 and the LLC Agreement.25 The Rollover

Agreement governed the Caulfield Parties’ contribution of units of TrustCommerce

in exchange for “Rollover Securities,” which were units of equity in Sphere.26

           Central to this dispute is Section 6 of the RCA (the “Non-disparagement

Clause”), which provides: “The Restricted Party hereby covenants and agrees not to,

and to cause its Affiliates not to, at any time make negative comments or otherwise

disparage Buyer, the Company or any of their officers, directors, employees,

21
     Id.
22
     Counterclaim ¶¶ 21, 22.
23
     Ex. 1 to Sphere OB.
24
     Ex. 2 to Sphere Parties OB.
25
     Ex. 3 to Sphere Parties OB.
26
     Compl. ¶ 14.
                                             7
shareholders, agents or products.”27 The RCA defines “Restricted Party” as Robert

Caulfield and “Company” as TrustCommerce (once sold). 28

         The RCA and LLC Agreement are explicitly referenced in the Rollover

Agreement.       Specifically, Section 5 of the Rollover Agreement provides that

“[n]otwithstanding anything to the contrary in Section 10.2 of the LLC Agreement,

the repurchase rights set forth in Section 10.2 of the LLC Agreement shall apply to

the Rollover Securities only in the event that: (a) Robert Caulfield materially

breaches any of the restrictive covenants set forth in the Restrictive Covenant

Agreement during the longer of (i) the Restrictive Period (as defined in the RCA),

or (ii) the Employment Term (as defined in the Employment Agreement) plus one

(1) year after the end of the Employment Term[.]” 29 In the event the repurchase

rights are triggered, the Rollover Agreement makes clear that:

27
     RCA § 6.
28
     RCA recitals.
29
   Rollover Agreement § 5 (emphasis by underline in original and by italics added).
Section 10.2 of the LLC Agreement generally addresses the right of Sphere and Waud to
repurchase Sphere units under certain designated circumstances, including in the event of
a Management Unitholder’s (to include Caulfield) “breach[] [of] any of the restrictive
covenants, as determined by the Board in good faith, set forth in any agreement between
such Management Unitholder and the LLC (Sphere) and any of its subsidiaries. . . .”
LLC Agreement § 10.2(a)(iv). Significantly, as discussed below, Section 10.2(a)(iv)
applies generally to Sphere units held by members and allows Sphere to exercise its
repurchase rights with respect to such units held by a Management Unitholder upon a
“breach” of a restrictive covenant by that unitholder. Section 5 of the Rollover Agreement,
by contrast, applies only to the Rollover Securities held by RMBBD and provides for a
right to repurchase those units only upon a “material breach” of the RCA by Caufield.

                                            8
           The repurchase provisions of Section 10.2(b) of the LLC Agreement
           shall apply to the Rollover Securities, except that the purchase price for
           the Rollover Securities shall be a price per unit equal to the Fair Market
           Value of such Rollover Securities as of the Repurchase Option Date.
           For the avoidance of doubt, this Section 5 shall in no way limit the
           Company’s or any of its Affiliates’ ability to recover damages related
           to a Restrictive Covenant Breach and further, Section 10.2(g) of the
           LLC Agreement shall not apply to such repurchase.” 30

      C. The Alleged Material Breach of the Non-disparagement Clause

           On August 25, 2020, exactly three years after the RCA and Rollover

Agreement were executed, Sphere held an all-employee meeting conducted over

Zoom.31 The meeting was password protected. 32 Caulfield was not then and is not

now a Sphere employee, so he was not invited to the meeting. 33

           Near the end of the meeting, Sphere’s CEO opened the floor for questions or

comments to be submitted through the Zoom chat feature that was visible to all of

the more than 100 employees in attendance. 34 In response to the call for questions

or comments, the first posted chat message was addressed “to Everyone”

at 2:49 p.m. ET from a person identified by the username “Its all the pandemic.”35

30
     Rollover Agreement § 5.
31
     Compl. ¶ 23.
32
     Id.
33
     Compl. ¶ 24.
34
     Compl. ¶ 25.
35
     Id.
                                               9
The message stated: “Except for our security officer, and Claudia trying, this

executive group is a [expletive] joke. You are just fools playing office. It’s

depressing listening to you [expletive] dip[expletive]s” (the “Zoom Message”). 36 A

few days after the meeting, Sphere’s Board confronted Caulfield about the Zoom

Message and Caulfield “immediately informed the Board” that the message had

come from him. 37 The Sphere Parties allege that the Zoom Message, sent by

Caufield in the midst of an all-employee meeting, constituted a material breach of

the Non-disparagement Clause. 38

           According to the Sphere Parties, after considering a valuation prepared by

Duff & Phelps, and in light of Caulfield’s conduct, the Board voted to exercise

Sphere’s repurchase rights under the Rollover Agreement during a Board meeting

on November 2, 2020, with Caulfield’s Board proxy in attendance. 39 Afterward, the

Sphere Parties sent Caulfield a letter notifying him of Sphere’s decision and

attaching a subordinated note effecting the repurchase of the Rollover Securities for

36
     Id.
37
     Counterclaim ¶ 51.
38
     Compl. ¶ 63.
39
     Counterclaim ¶¶ 44–45.
                                           10
$27.2 million, consistent with the Duff & Phelps valuation.40 Under Section 10.2(f)

of the LLC Agreement, Caulfield was then issued a note to effect the repurchase. 41

      D. Procedural History

           The Sphere Parties filed their Complaint against the Caulfield Parties on

January 13, 2021.42 The Complaint comprised two counts seeking declaratory

judgments (one each as to Caulfield and RMBBD) regarding the propriety of the

repurchase of the Rollover Securities, and one count asserting breach of contract

against Caulfield for his breach of the RCA. The Caulfield Parties responded by

filing their answer and the Counterclaim, which comprise 15 counts ranging from

requests for counter-declarations regarding the repurchase of the Rollover Securities

to claims for breach of contract and conversion relating to the Sphere Parties’

improper taking of the Rollover Securities. 43 The Sphere Parties have moved to

dismiss all counts of the Counterclaim (except those relating to the value of the

40
     Id.
41
  Compl. ¶ 50. Caulfield alleges that by converting the Rollover Securities from equity to
unsecured, subordinated debt, “the Sphere Parties have removed the Caulfield Parties’
ability to share in the upside of any increase in Sphere’s value, and instead put that upside
directly into the Sphere Parties’ pockets.” Counterclaim ¶ 55. Caulfield’s concern arises
from the fact that the promissory note issued to RMBBD is subordinated not only to current
senior debt but also any debt incurred by Sphere at any point in the future. Counterclaim
¶ 133.
42
     D.I. 1.
43
     D.I. 13.
                                             11
repurchased units) and for judgment on the pleadings for all counts of the Complaint

except, again, for those relating to the value of the repurchased units.44

                                     II. ANALYSIS

         For the Sphere Parties’ motions to be successful, the Court must answer two

questions in the affirmative.45 First, is the Non-disparagement Clause a restrictive

covenant as that term is used in the Rollover Agreement? Second, was the Zoom

Message a material breach of the Non-disparagement Clause? “In answering these

questions, the court must view the facts pleaded in the [C]omplaint [and

Counterclaim] in the light most favorable to [the Caulfield Parties].”46

44
     D.I. 29.
45
   Both parties agree that regardless of whether the Court determines it can decide the
breach of the RCA and related repurchase issues as a matter of law, the issue of whether
the Sphere Parties have properly calculated the fair market value of the Rollover Securities
is fact-intensive and cannot be decided on the pleadings.
46
  Lillis v. AT&T Corp., 896 A.2d 871, 879 (Del. Ch. 2005); see also MPT of Hoboken TRS,
LLC v. HUMC Holdco, LLC, 2014 WL 3611674, at *5 (Del. Ch. July 22, 2014)
(“The procedural standard of review for a motion for judgment on the pleadings under
Rule 12(c) is similar to that for a motion to dismiss under Rule 12(b)(6).”); Desert Equities,
Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1205 (Del. 1993)
(“A motion for judgment on the pleadings may be granted only when no material issue of
fact exists and the movant is entitled to judgment as a matter of law.”) (citations omitted);
Renco Gp., Inc. v. MacAndrews AMG Hldgs. LLC, 2015 WL 394011, at *5 (Del. Ch.
Jan. 29, 2015) (holding that on a motion to dismiss under Rule 12(b)(6), the court takes
well-pleaded factual allegations in the complaint as true, draws reasonable inferences in
the light most favorable to the non-moving party and dismisses a claim only when the party
bringing the claim could not “recover under any reasonably conceivable set of
circumstances susceptible of proof”) (quoting Savor, 812 A.2d at 896–977 (internal
quotations marks omitted)).

                                             12
      A. The Non-disparagement Clause Is a Restrictive Covenant

         The threshold question presented by the competing requests for declaratory

relief is whether the Non-disparagement Clause is a restrictive covenant that, if

breached, would trigger the repurchase rights set forth in the Rollover Agreement.

Not surprisingly, the Sphere Parties maintain that it unambiguously is, while the

Caulfield Parties assert that it unambiguously is not.47 Alternatively, the Caulfield

Parties argue “the phrase ‘restrictive covenant … is ambiguous, and discovery is

necessary to resolve the ambiguity.” 48

         “When analyzing a contract on a motion for judgment on the pleadings, this

Court will grant such a motion only if the contract provisions at issue are

unambiguous.”49 “Ambiguity does not exist simply because the parties disagree

about what the contract means . . . . Rather, contracts are ambiguous when the

provisions in controversy are reasonably or fairly susceptible of different

47
     Compl. ¶ 59; Sphere RB at 1–2; Caulfield AB at 26.
48
     Caulfield AB at 26.
49
   Cooper Tire & Rubber Co. v. Apollo (Mauritius) Hldgs. Pvt. Ltd., 2013 WL 5787958,
at *4 (Del. Ch. Oct. 25, 2013); see also GreenStar IH Rep, LLC v. Tutor Perini Corp., 2017
WL 5035567, at *5 (Del. Ch. Oct. 31, 2017) (“Judgment on the pleadings is a proper
framework for enforcing unambiguous contracts because there is no need to resolve
material disputes of fact.”) (alteration in original) (quoting Lillis v. AT & T Corp., 904 A.2d
325, 329 (Del. Ch. 2006)).

                                              13
interpretations or may have two or more different meanings.”50 With this definition

of ambiguity in mind, I am satisfied that the phrase “restrictive covenants set forth

in the Restrictive Covenant Agreement,” as it appears in the Rollover Agreement, is

unambiguously unambiguous.51

         “Delaware adheres to the objective theory of contracts, [meaning that] a

contract’s construction should be that which would be understood by an objective,

reasonable third party.”52      In making the determination of whether contract

ambiguity exists, the court will “give effect to the plain meaning of the contract’s

terms and provisions,” 53 “will read a contract as a whole[,] and ... will give each

provision and term effect, so as not to render any part of the contract mere

surplusage.”54

         The phrase “restrictive covenants” is clear on its face. One need only go so

far as a legal encyclopedia to understand that “‘restrictive covenants’ are restrictions

50
  Cooper Tire & Rubber Co., 2013 WL 5787958, at *4 (quoting United Rentals, Inc. v.
RAM Hldgs., Inc., 937 A.2d 810, 830 (Del. Ch. 2007)).
51
     Rollover Agreement § 5.
52
  Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (internal quotation
marks omitted) (quoting NBC Universal v. Paxson Commc’ns, 2005 WL 1038997, at *5
(Del. Ch. Apr. 29, 2005)).
53
     Id. at 1159–60.
54
  Id. at 1159 (quoting Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396–
97 (Del. 2010)).

                                           14
arising out of agreements between private parties who can impose whatever lawful

restrictions upon [each other] that they deem advantageous or desirable.”55 In the

RCA, Caufield agreed that his right to make “negative comments” about “the

Company or any of their officers, directors, [or] employees” was restricted.56 In

other words, he gave a restrictive covenant.

         Reference to the dictionary yields similar clarity. Broken down, “restrictive”

means “serving or tending to restrict,”57 while “covenant” means “formal and serious

agreement or promise.” 58 Taken together, a “restrictive covenant” is a promise to

restrict, in this case, to restrict one’s behavior. Viewed through this lens, the Non-

disparagement Clause fits the definition like a glove. Again, it reflects a promise to

restrict oneself from “mak[ing] negative comments or otherwise disparag[ing]

Buyer, the Company or any of their officers, directors, employees, shareholders,

agents or products.” 59         As is typical with restrictive covenants, the Non-

55
     See 20 Am. Jr. 2d Covenants §148 (Jan. 2022 Update).
56
     RCA § 6.
57
     See https://www.merriam-webster.com/dictionary/restrictive (last visited Jan. 31, 2022).
58
  See https://www.merriam-webster.com/dictionary/covenant (last visited Jan. 31, 2022);
see also Lorillard Tobacco Co. v. Amer. Legacy Found., 903 A.2d 728, 738 (Del. 2006)
(noting that “Delaware courts look to dictionaries for assistance in determining the plain
meaning of terms which are not defined in a contract . . . because dictionaries are the
customary reference source that a reasonable person in the position of a party to a contract
would use to ascertain the meaning of [undefined] words . . . in the contract.”).
59
     RCA § 6.
                                              15
disparagement Clause appears among several other promised restrictions within the

RCA.60 Each are restrictive covenants, and a material breach of any would trigger

the Sphere Parties’ repurchase rights under the Rollover Agreement.

      B. The Material Breach Determination Is Not Conducive to Judgment on
         the Pleadings

         Having concluded that the Non-disparagement Clause is a restrictive covenant

within the RCA, I turn next to the Sphere Parties’ contention that Caulfield’s Zoom

Message constitutes a material breach of the Non-disparagement Clause such that

their right to repurchase the Rollover Securities was activated as a matter of law.61

To be clear, unlike the LLC Agreement, where the repurchase right is conditioned,

inter alia, upon a breach of any applicable restrictive covenants, the Rollover

Agreement expressly, and presumably intentionally, conditions the repurchase right

upon a showing that Caulfield materially breached a restrictive covenant, in this

case the Non-disparagement Clause. 62

60
  See, e.g., RCA § 1 (non-competition); RCA § 2 (non-solicitation of employees); RCA § 3
(non-solicitation business of relationships); RCA § 4 (non-disclosure of confidential
information); RCA § 6 (non-disparagement). Accord AG Res. Hldgs., LLC v. Terral,
2021 WL 486831, at *1 (Del. Ch. Feb. 10, 2021) (observing that “the Employment
Agreement, at Sections 7(a)–(e), lays out its own set of restrictive covenants, including a
non-competition provision, a non-solicitation provision, a non-disparagement provision, a
non-interference provision and an agreement not to share confidential information, as
defined in the agreement.”) (emphasis supplied).
61
     Sphere OB at 15; Rollover Agreement § 5.
62
     Compare LLC Agreement § 10.2(a)(iv) with Rollover Agreement § 5.
                                            16
         At first glance, it is difficult to see Caulfield’s Zoom Message as anything but

a material breach of the Non-disparagement Clause. After all, that covenant sets the

disparagement bar quite low by restricting Caulfield from making “negative

comments” about the officers and directors of the Company.63 The only reasonable

characterization of even the tamest portion of the Zoom Message—exclaiming that

the Sphere executives “are just fools playing office”—is that Caulfield made a

“negative comment” about the Company’s management team. If a clear breach of

the Non-disparagement Clause were all that was required, the Sphere Parties would

prevail on their motions with little fanfare. But the material breach inquiry is more

nuanced.64

         As a matter of common law, “[a] breach is material if it goes to the root or

essence of the agreement between the parties, or touches the fundamental purpose

of the contract and defeats the object of the parties in entering into the contract.”65

63
     RCA § 6; Compl. ¶ 39.
64
   See Restatement (Second) of Contracts § 241, cmt. a (1981) (observing that the
determination of whether a breach is material “is necessarily imprecise and flexible”).
65
   Mrs. Fields Brand, Inc. v. Interbake Foods, LLC, 2017 WL 2729860, at *28 (Del. Ch.
June 26, 2017). I note that the material breach inquiry typically is implicated when
determining whether a party to a contract is excused from performing that contract. See,
e.g., id. (finding after trial that party had failed to prove a material breach of contract that
would justify non-performance); AB Stable VIII LLC v. Maps Hotels & Resorts One LLC,
2020 WL 7024929, at *98 (Del. Ch. Nov. 30, 2020) (same); BioLife Sol., Inc. v. Endocare,
Inc., 838 A.2d 268, 281 (Del. Ch. 2003) (same). It is far less common to see “material
breach” utilized as a standard by which to assess whether other contractual rights have been
triggered. Indeed, none of the cases cited by the parties engage in a material breach analysis
                                              17
“Under this doctrine, whether a breach is material ‘is determined by weighing the

consequences in the light of the actual custom of men in the performance of contracts

similar to the one that is involved in the specific case.’”66

         Section 2411 of the Restatement (Second) of Contracts provides five factors

that are useful when determining whether a breach is material. They are:

         (i) the extent to which the injured party will be deprived of the benefit
         which he reasonably expected, (ii) the extent to which the injured party
         can be adequately compensated for the part of that benefit of which he
         will be deprived, (iii) the extent to which the party failing to perform or
         to offer to perform will suffer forfeiture, (iv) the likelihood that the
         party failing to perform or to offer to perform will cure his failure,
         taking account of all the circumstances including any reasonable
         assurances, and (v) the extent to which the behavior of the party failing
         to perform or to offer to perform comports with standards of good faith
         and fair dealing. 67

         The Sphere Parties focus on the first consideration, “the extent to which the

injured party will be deprived of the benefit which he reasonably expected.” 68

According to the Sphere Parties, having bargained for the Non-disparagement

clause, they “reasonably expected not to be defamed and upbraided by Caulfield

before the entire assembled workforce. [And], [b]ased on Section 5 of the [Rollover

in this context. It is also noteworthy that each of the cases cited above considered the fact-
intensive material breach question after a full trial on the merits.
66
     AB Stable VIII LLC, 2020 WL 7024929, at *98.
67
  Id. (quoting Restatement (Second) of Contracts § 241 (1981) (internal quotations
omitted)).
68
     Sphere RB at 14.
                                             18
Agreement], the Sphere Parties reasonably expected that, if they were, they would

have the recourse of repurchase of his units at a fair market price.” 69

         While the Sphere Parties’ characterization of the effects of Caulfield’s

conduct may well prevail on a more developed record, the material breach analysis

implicates a more searching inquiry before reaching that conclusion. For instance,

it appears from the pled facts that Sphere’s employees did not know who authored

the Zoom Message at the time it was sent. 70 If that is borne out in the evidence, that

might affect the fact-finder’s determination of whether the disparagement was

material. 71 In other words, “negative comments” from an anonymous sender may

have a different impact on Sphere employees and, by extension, on the Sphere

69
     Sphere RB at 14–15.
70
  Counterclaim ¶ 51; Compl. ¶ 28 (stating that Caulfield “concealed his identity” before
posting the Zoom Message). Indeed, it does not appear that Caulfield revealed that he was
the author of the Zoom Message “until he was confronted on November 2, 2020, by
Sphere’s Board.” Id.
71
   See Restatement (Second) of Contracts § 241, cmt. b (1981) (observing that “the extent
to which the injured party will be deprived of the benefit he reasonably expected from the
exchange” is relevant when determining whether a breach is material) (emphasis added);
AB Stable VIII LLC, 2020 WL 7024929, at *98 (holding that a “weighing of the
consequences” of the breach is appropriate when engaging in the material breach analysis);
BioLife Sol., Inc. v. Endocare, Inc., 838 A.2d 268, 281 (Del. Ch. 2003) (noting that a breach
may have given rise to a damages claim, but it did not give rise to a material breach claim);
Beacon Assocs., Inc. v. Apprio, Inc., 308 F. Supp. 3d 277, 286 (D.D.C. 2018) (noting that
a breach was not material, in part, because the monetary harm associated with the breach
was insignificant compared to the value of the contract).

                                             19
Parties than “negative comments” from the founder of one of Sphere’s subsidiaries.72

On the other hand, the evidence may reveal that the Zoom Message materially

deprived the Sphere Parties “of the benefit which [they] reasonably expected” from

the RCA either because the impact of the statement was significant in the minds of

the hearers (including employees and management) regardless of the source, or

because the hearers knew or discovered the source well before the Sphere Parties

disclosed that it was Caulfield. 73

         The Court is also encouraged to consider “the extent to which the injured party

can be adequately compensated for the part of that benefit of which he will be

deprived,” and “the extent to which the party failing to perform or to offer to perform

will suffer forfeiture.” 74 Caulfield argues that the harm flowing from the breach of

the Non-disparagement Clause, if any, can readily be compensated in damages, and

that the Sphere Parties’ exercise of the repurchase rights in the Rollover Agreement

72
  Cf. 17A Am. Jur. 2d, Contracts § 547 (Jan. 2022 Update) (noting that the extent of
damage can be a factor in determining the materiality of breach); Samuel Williston &
Richard A. Lord, Williston on Contracts, § 63:3 (4th ed. 1990) (noting that “where a breach
causes no damages or prejudice to the other party, it may be deemed not to be ‘material’”).
73
  In this regard, harm need not be purely financial harm to be material. For instance, the
Zoom Message may be proven to have had a negative impact on employee morale,
employee willingness to follow the direction set by management, or some other internally
disruptive consequence. That all remains to be seen in the evidence.
74
     Restatement (Second) of Contracts § 241.
                                            20
has resulted in a forfeiture of his Rollover Securities. 75 Again, these are fact-

intensive considerations that, to the extent relevant in the non-repudiation context,

cannot be resolved on the pleadings.

      C. The Remaining Claims

         As noted, the Sphere Parties have moved to dismiss the Counterclaim counts

that do not turn on the extent to which the Board properly calculated the fair market

value of the Rollover Securities. Each of these arguments for dismissal rest on the

assumption that the repurchase right in the Rollover Agreement was triggered as a

matter of contract and, therefore, as a matter of law.76 Because the Court cannot

determine on the pleadings whether Caulfield materially breached the Non-

disparagement Clause, the Court cannot yet determine whether the repurchase right

was trigged. If the Sphere Parties possessed a right to repurchase, then there was no

conversion and no breach of contract.77 If they did not, then the conversion and

breach claims may be viable. For now, the claims cannot be dismissed on the

75
     Caulfield RB at 38–39.
76
     Sphere OB at 15; Sphere RB at 18–19.
77
  There can be no conversion or breach of contract if the taking of the Rollover Shares was
authorized by contract. See Gould v. Gould, 2012 WL 3291850, at *7 (Del. Ch. Aug. 14,
2012) (reciting elements of conversion).

                                            21
pleadings because, until the material breach issue is decided, the allegations that the

repurchase right was not triggered must be accepted as true. 78

                               III.   CONCLUSION

         For the foregoing reasons, the Sphere Parties’ Motion to Dismiss and Motion

for Judgement on the Pleadings must be DENIED.

         IT IS SO ORDERED.

78
     Counterclaim ¶¶ 66–105.
                                          22