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OverDrive, Inc. v. Baker & Taylor, Inc., C.A. No. 5835-CC (Del. Ch. June 17, 2011) (Chandler, C.)

June 17, 2011

In one of his last memorandum opinions, Chancellor Chandler granted in part, and denied in part, the defendant’s partial motion to dismiss for failure to state claims upon which relief could be granted.

The plaintiff, OverDrive, Inc. (“OverDrive”), is a software development and electronic publishing services company. The defendant, Baker & Taylor, Inc. (“B&T”), is an information and entertainment services company. In May 2009, OverDrive and B&T entered into a Digital Distribution & Technology License Agreement (the “Agreement”) to distribute eBooks and audio books to libraries and retailers. B&T sought to use OverDrive’s expertise to develop an online platform to distribute digital media because its own distribution expertise was limited to physical media.

Section 10.1 of the Agreement provided that OverDrive would be the “exclusive provider” of digital media, with the exclusion of six pre-existing B&T contracts identified on Schedule J of the Agreement (the “Carve-Out”). Those six contracts were not described in the Agreement, nor were copies of those contracts provided to OverDrive. One of the contracts was a distribution agreement with LibreDigital, Inc. (“LibreDigital”).

OverDrive believed it had an exclusive relationship with B&T and proceeded to develop an online platform for B&T that was more advanced than OverDrive’s existing platforms. This platform also provided B&T with access to OverDrive’s (a) sales and marketing data; (b) competitive position systems; (c) previously developed digital media inventory; (d) list of largest accounts; (e) servers; and (f) proprietary digital catalog data feed.

Six months after entering into the Agreement, OverDrive learned that B&T had begun distributing and licensing a new e-Reader, the “Blio.” In November 2009, B&T allegedly informed OverDrive that LibreDigital would convert files and deliver to certain customers, but that OverDrive would distribute to B&T’s retail and public library customers consistent with the Agreement. In December 2009, B&T informed OverDrive that LibreDigital would be the exclusive distributor of Blio-compatible digital media. The platform that LibreDigital and B&T developed would be directly competitive with OverDrive’s.

B&T contended that its relationship with OverDrive was “semi-exclusive” due to the Carve-Out and that the new relationship with LibreDigital was simply a permitted amendment to the pre-existing agreement. OverDrive contended that its relationship with B&T was exclusive and that the Carve-Out applied to the pre-existing agreements, but not “amendments” that would frustrate the Agreement. OverDrive further asserted that B&T used the Agreement as a “subversive device” to acquire OverDrive’s proprietary information and trade secrets to compete with and undermine OverDrive’s digital media business.

OverDrive asserted seven claims against B&T: (i) misappropriation of trade secrets; (ii) conversion; (iii) fraud; (iv) breach of contract; (v) breach of the implied covenant of good faith and fair dealing; (vi) tortious interference; and (vii) deceptive trade practices. On motion by B&T to dismiss OverDrive’s claims other than the misappropriation of trade secrets claim and a portion of the breach of contract claim, the Court dismissed OverDrive’s good faith/fair dealing, tortious interference and deceptive trade practices claims, while denying dismissal as to the conversion, fraud, and another portion of the breach of contract claim. The sole challenge to the conversion claim was that it was preempted by the Delaware Uniform Trade Secrets Act (“DUTSA”). Applying the standard that claims which are “grounded in the same facts” as a trade secrets claim, such that “the same facts are used to establish all elements of both claims,” the Court held that the conversion claim could not be dismissed because it was not clear that the conversion claim itself was “based upon” a trade secret. In particular, the Court reasoned whether the alleged conversion was actually of trade secrets, or merely of confidential information, could not be determined without discovery.

The Court held the fraud claim survived for two reasons. First, the fraud claim was not solely based upon a trade secret because it was based upon “deceptive conduct relating to contractual promises.” Second, the Court rejected B&T’s argument that the anti-reliance provision barred the fraud claim because OverDrive alleged B&T had affirmatively misrepresented specific provisions in the Agreement when the parties entered into it. The Court reasoned that the alleged misrepresentations “frustrate the very purpose and nature of the Agreement” and public policy would not permit application of the anti-reliance provision.

B&T challenged two sub-parts of OverDrive’s breach of contract claim. The first sub-part alleged breach of Section 10.1 and the second sub-part alleged breach of a dispute resolution provision. The Court denied the motion to dismiss as to the breach of Section 10.1, notwithstanding the Carve-Out, reasoning the Carve-Out’s clear meaning was to create an exclusive arrangement without forcing termination of B&T’s pre-existing contracts. The Carve-Out did not give B&T “free reign to ignore the obvious intent of the Agreement and form a directly competitive platform.” The Court dismissed the dispute resolution claim because that claim had expired by its own terms.

OverDrive’s claim for breach of the implied covenant of good faith and fair dealing was based upon B&T’s alleged “implied contractual obligation to disclose its true intentions and the scope of its agreement with LibreDigital.” The Court dismissed this claim because “this alleged implied contractual obligation comes straight from the Agreement itself,” reasoning that Delaware courts will not imply a covenant where the contract expressly addresses the subject of the alleged wrong but does not provide the alleged obligation.

The Court dismissed OverDrive’s tortious interference claims for failure to make well-pleaded allegations that (i) a single contract had been breached, or (ii) a single prospective opportunity interfered with, due to B&T’s conduct.

Finally, the Court dismissed OverDrive’s deceptive trade practices claim. OverDrive predicated this claim on B&T’s alleged misuse of OverDrive’s trade secrets. The Court reasoned this claim was both preempted by DUTSA and duplicative of the tortious interference claims.

The full opinion is available here