A few months later, in December 2018, Slingshot and Transpacific entered into a services agreement under which Transpacific agreed to perform “Portfolio Management” and “Foreign Assignment Preparation and Recordation” services for the Orange Patent Portfolio (the Services Agreement). The Services Agreement required that each party treat “all information disclosed whether orally or in writing” as confidential, and provided that “all work product delivered to [Slingshot] pursuant to this Agreement, is the sole property of [Slingshot].” Slingshot then stopped seeking funding from Burford, and Transpacific extended expiration of the Option Agreement through January 30, 2019 to afford Slingshot the opportunity to seek funding from other sources.

Approximately one month after Slingshot and Transpacific entered into the Services Agreement, another patent monetization entity, Acacia, announced in January 2019 that Wolanyk had joined its board of directors. In February 2019, Acacia entered an agreement to acquire the Orange Patent Portfolio from Transpacific. By October 2019, Acacia had formed a California LLC subsidiary, Monarch, and assigned it certain patents from the Orange Patent Portfolio. In January 2020, Monarch filed a patent infringement lawsuit in the Eastern District of Texas against the potential defendant identified in Slingshot’s analyses more than one year earlier.

After learning of Acacia and the other defendants’ actions, Slingshot filed suit in the Delaware Court of Chancery alleging that Acacia became interested in the Orange Patent Portfolio only after Wolanyk joined its board, and asserted, among other claims, that Transpacific breached an implied covenant in the Purchase Agreement by selling the Orange Patent Portfolio to Acacia. Specifically, Slingshot alleged that because the Option Agreement expressly precluded Transpacific from selling the Orange Patent Portfolio to any “Identified Funding Source” for purchase of the portfolio that the plaintiff introduced to the defendant, Transpacific was impliedly precluded from selling the portfolio to an entity that received confidential information Slingshot disclosed to an “Identified Funding Source,” including Acacia.

The court’s decision

The court declined to dismiss Slingshot’s implied covenant claim challenging the sale to Acacia under the Purchase Agreement. Under Delaware law, in order to successfully plead a breach of an implied covenant of good faith and fair dealing, the plaintiff must allege a specific contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff. The implied contractual obligation alleged by the plaintiff must be inferable from what was expressly agreed upon by the parties who negotiated the express terms of the contract. If the alleged implied covenant cannot be anchored to the agreement’s express terms, the claim will fail.

The court explained it was reasonably inferable, based on the facts alleged in Slingshot’s complaint, that the purpose of the provision precluding sale to an “Identified Funding Source” was to protect Slingshot from competition with parties with which Slingshot shared its proprietary analyses of the portfolio:

It is reasonable to infer that the Prohibited Transaction Provision was intended to protect Slingshot from facing competition for the Orange Portfolio from funding sources that Slingshot introduced to Transpacific (an “Identified Funding Source”). The Prohibited Transaction Provision addressed direct competition by barring Transpacific from selling the Orange Portfolio in a deal involving an Identified Funding Source. The parties did not address indirect competition that could result from Transpacific selling to a third party that received information about the Orange Portfolio from an Identified Funding Source.

The court also found it reasonably conceivable that Slingshot and Transpacific did not anticipate at the time of contracting that Transpacific would sell the Orange Patent Portfolio to a buyer that gained access to Slingshot’s confidential information, but had they anticipated such a development, the parties would have precluded Transpacific from selling to a buyer that Transpacific knew had received Slingshot’s confidential information from an Identified Funding Source:

It is reasonable to infer that the parties did not anticipate the possibility that Transpacific would sell the Orange Portfolio to a buyer with access to confidential information that Slingshot had disclosed to an Identified Funding Source. It is reasonable to infer that if the parties had thought to address this issue, then they would have agreed that Transpacific could not sell to a third party that had received information about the Orange Portfolio from an Identified Funding Source. Slingshot clearly sought to prevent this possibility from occurring because it entered into the Burford NDAs. For similar reasons, it is reasonable to infer that Slingshot would have sought to restrict Transpacific from transacting with a party that received information from an Identified Funding Source . . . .

It is also reasonable to infer that Transpacific would have agreed to restrict its ability to transact with an Identified Funding Source. Transpacific granted the Exclusive Option to Slingshot and extended the Exclusive Option on multiple occasions. Transpacific was already comfortable granting exclusivity to Slingshot; an indirect limitation would have reinforced the exclusivity that Transpacific already thought that it was granting.

However, the court found the Prohibited Transaction Provision in the Purchase Agreement indicated that Transpacific would not have agreed to restrict its ability to transact with a buyer if Transpacific was unaware that the buyer had received confidential information from an Identified Funding Source. The court explained that “[t]he Prohibited Transaction Provision only barred Transpacific from selling the Orange Portfolio to a funding source that Slingshot had introduced to Transpacific, i.e., a funding source that Transpacific knew about. It is reasonable to infer that Transpacific likewise would have insisted on a knowledge qualifier for an indirect limitation.” Therefore, the resulting term would have restricted Transpacific’s ability to transact with a buyer that Transpacific knew had received information from an Identified Funding Source, without limiting Transpacific’s ability to transact with other buyers that gained confidential information without Transpacific’s knowledge.

The court found it reasonably conceivable that Transpacific could have known that Acacia was using knowledge gained from Burford and, if so, Slingshot could obtain a remedy against Transpacific; however, the court emphasized the low pleading standard governing the motion to dismiss:

It is thus reasonably conceivable that Slingshot could obtain a remedy against Transpacific if Slingshot can prove that Transpacific knew that Acacia was using knowledge gained from Burford in connection with Acacia’s acquisition of the Orange Portfolio.

The facts relating to Transpacific’s knowledge are uniquely in control of Transpacific. Knowledge also can be alleged generally under [Court of Chancery Rule 8]. For pleading purposes, all that is required is some reason to infer that Transpacific could have known that Acacia was using knowledge gained from Burford. The complaint alleges that Acacia publicly announced that Wolanyk had joined Acacia’s board, described her relationship with Burford, and explained her role in assisting Acacia’s efforts to expand its intellectual property portfolio. At this preliminary stage, it is reasonable to infer that Transpacific knew Acacia had obtained information from Burford through Wolanyk. This aspect of [Slingshot’s implied covenant claim] thus states a claim on which relief can be granted.

At a later stage of the case, after discovery, Slingshot will not be able to benefit from the plaintiff-friendly pleading standard and the inference to which it is currently entitled. Absent evidence that Transpacific knew that Acadia was using knowledge gained from Burford, Slingshot will not be able to establish a breach of the implied covenant.

Key takeaways

• Delaware courts favor freedom of contract, and will give priority to the parties’ intentions as reflected in the four corners of the contract.
• The implied covenant of good faith and fair dealing is inherent in all contracts under Delaware law, and is used to infer contract terms to handle developments or contractual gaps that the asserting party pleads neither party anticipated.
• Delaware courts apply a plaintiff-friendly pleading standard at the preliminary motion to dismiss stage of proceedings, which means plaintiffs are entitled to all reasonable inferences.

Client Alert 2021-128