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Ivize of Milwaukee, LLC v. Compex Litigation Support, LLC, et al., and Ivize of Kansas City, LLC v. Compex Litigation Support, LLC, et al., C.A. Nos. 3158-VCL, 3406-VCL (Del. Ch. Apr. 27, 2009) (V.C. Lamb)

April 27, 2009

These two actions were tried together, as each involved claims brought by an indirect subsidiary of Ivize, LLC (“Ivize”) against Compex Legal Services, Inc. and its wholly owned subsidiary, Compex Litigation Support, LLC (collectively, “Compex”).

Compex provides litigation support services in various locations, including -- until July 26, 2007 -- Milwaukee, Wisconsin and Kansas City, Missouri. Ivize, which also provides litigation support services, entered into negotiations with Compex regarding the potential acquisition of the Milwaukee and Kansas City facilities. An “extremely active acquirer” during this time period, Ivize’s strategy entailed “transferring ownership and operations seamlessly” by retaining most of the target company’s employees. On March 5, 2007, the parties signed a letter of intent outlining the terms of the proposed sale of the Milwaukee and Kansas City facilities.

The primary dispute underlying the litigation relates exclusively to the Milwaukee facility. In April 2007, Pete Cobb (“Cobb”), the manager of the Milwaukee facility, was advised of Compex’s intent to sell to Ivize and that he would not be retained beyond a short transitional period. In response, Cobb and several other employees -- in violation of their noncompetition agreements -- began taking steps to form a rival entity, named “Quantum,” to compete with Ivize’s Milwaukee facility. Quantum was formed as a Nevada LLC on May 8, 2007. Cobb and the other employees also (i) met to discuss Quantum’s business during business hours, (ii) solicited Compex’s key salespeople, (iii) rerouted business and payments to Quantum, (iv) stole or destroyed customer records and (v) stole company equipment.

During this time, Ivize was entirely unaware of Cobb’s plan and “believed that everything was business as usual at Compex.” On July 26, 2007, Ivize and Compex executed two separate (but “virtually identical”) Asset Purchase Agreements relating to the Milwaukee facility and Kansas City facility. Under Article 2 of the Asset Purchase Agreements, Compex made various representations and warranties, including that “since April 1, 2007, [Compex] has operated only in the usual and ordinary course,” and that no event or condition “has had or is likely to have a material adverse effect on the Business of the Facility.” The Asset Purchase Agreements also provided that, should litigation arise from the agreements, the prevailing party would be entitled to its reasonable attorneys’ fees and costs.

When Ivize representatives arrived at the Milwaukee facility on the day after closing, they found the facility “largely abandoned” and looking “like it had been ransacked.” Only a few disgruntled employees remained. Ivize and Compex quickly uncovered Cobb’s plan to start a rival entity. On August 29, 2007, having “join[ed] forces” with Ivize, Compex filed suit in Milwaukee against Quantum, Cobb and several former employees, resulting in the imposition of a temporary restraining order against Quantum on September 5, 2007. A settlement was ultimately reached between Compex and Quantum.

On August 10, 2007, Ivize filed suit against Compex. The “only substantive claim” litigated at trial was for Compex’s alleged breach of contract in representing that the Milwaukee facility had “operated only in the usual and ordinary course” since April 1, 2007. Citing Black’s Law Dictionary for the definitions of “usual,” “ordinary” and “course of business,” the Court determined that – in light of the conduct of its division manager and employees – Compex was “not a company operating in the usual and ordinary course, within the plain meaning of those words.” The normal and ordinary course of business simply “does not include destroying business assets and planning to transfer the essence of the business to a competitor.” Compex’s untrue representation constituted a breach of the Milwaukee Asset Purchase Agreement. The Court found that the representation was not limited by any “knowledge qualifier,” and therefore the signatory’s ignorance of the employees’ conduct was no defense.

The question of damages was “more complex” than the question of breach. Ivize had not made the retention of certain key salespeople a condition to closing, and had not secured an agreement with Cobb (as it had with the manager of the Kansas City facility). Thus, “it was entirely possible that none of the Compex employees would sign on with Ivize.” Ivize’s damage expert improperly assumed damages as the amount of Compex’s Milwaukee business “that Ivize failed to retain.” The Court held that although Ivize “certainly incurred some damages due to Compex’s breach,” it failed to provide a reasonably certain damage estimate. Accordingly, the Court awarded nominal damages in the amount of one dollar, as well as Ivize’s reasonable attorneys’ fees and costs relating to the Kansas City action, the Milwaukee action and the Quantum litigation.

Compex successfully asserted counterclaims against Ivize for failure to take on various “assumed liabilities” under the Asset Purchase Agreements, including equipment leases, vehicle leases and employee health insurance. The Court reduced the damages awarded to Compex for its failure to mitigate those damages.

The full opinion is available here