ev3, Inc. v. Lesh, C.A. No. 515, 2013 (Del. Sept. 30, 2014, revised April 20, 2015)
In this en banc Memorandum Opinion, the Supreme Court reversed the Superior Court’s denial of the defendant-below’s motion for a new trial following a jury verdict and remanded the case for a new trial. The Supreme Court determined that the Superior Court committed reversible error when it held that a provision set forth in a non-binding letter of intent was admissible to affect the meaning of a parallel provision in a definitive merger agreement while rejecting the admissibility of relevant parol evidence. The Supreme Court also provided guidance for interpreting a contractual definition of good faith.
This action began when the former shareholders of Appriva Medical, Inc. (collectively with its former shareholders, “Appriva”), plaintiffs-below and appellees, brought suit for breach of a merger agreement entered into between Appriva and defendant-below and appellant, ev3, Inc. (“ev3”). At the time of the merger, Appriva was aggressively developing PLAATO, a medical device designed to prevent and treat strokes. PLAATO’s prospects were high but several regulatory hurdles remained. As such, the merger agreement provided for a $50 million payment at closing with the bulk of the payments to Appriva’s shareholders, $175 million, contingent upon the timely accomplishment of certain milestones toward the approval and marketability of PLAATO. Appriva brought suit for breach of contract when it became apparent that ev3 would not be contributing sufficient capital to achieve the performance milestones.
In the early stages of the negotiation process, the parties signed a letter of intent that contained both binding and non-binding provisions. Among the non-binding provisions was a “Funding Provision” which stated that, “ev3 will commit to funding based on the projections prepared by its management to ensure that there is sufficient capital to achieve the performance milestones detailed above.” Notably, the record reflected that in the course of negotiations, Appriva had tried to include specific funding commitments in the merger agreement, that ev3 had refused to agree to such terms, and that Appriva lost the point at the negotiating table. In contrast to the Funding Provision, Section 9.6 of the merger agreement provided that “[n]otwithstanding any other provision in the Agreement to the contrary, from and after the closing, [ev3’s] obligation to provide funding for the Surviving Corporation, including without limitation funding to pursue achievement of any of the Milestones, shall be at [ev3’s] sole discretion, to be exercised in good faith.” The letter of intent was incorporated into the merger agreement by an integration clause which provided, in part, that the merger agreement “contains the entire understanding among the parties … other than the [letter of intent].”
Prior to trial, the Superior Court denied a motion in limine by ev3, accepting Appriva’s argument that the Funding Provision in the letter of intent was binding on ev3 and was not superseded by the merger agreement. As a result, Appriva was permitted to argue to the jury that ev3 not only failed to act in good faith under § 9.6 of the merger agreement but that it breached a “promise” to honor the Funding Provision contained in the non-binding letter of intent.
After trial, the jury found that ev3 had breached its contractual obligations and awarded Appriva $175 million in damages, the full amount of the milestone payments. ev3 then filed motions for judgment as a matter of law and a new trial. The Superior Court denied ev3’s post-trial motions and reiterated its view that the Funding Provision in the letter of intent was not inadmissible parol evidence because it had been incorporated into the merger agreement through the integration clause’s express reference to the letter of intent and was not otherwise in conflict with § 9.6 of the merger agreement. The Superior Court emphasized that the letter of intent had been admitted solely in support of plaintiffs’ fraud claim which had not been accepted by the jury and, therefore, there was no harm to ev3 from the omission of parol evidence regarding the negotiations surrounding § 9.6. ev3 then filed an appeal from the Superior Court’s denial of its motion for a new trial.
On appeal, the Supreme Court agreed with ev3 and held that the Superior Court erred by accepting Appriva’s position that the non-binding Funding Provision within the letter of intent was admissible to affect the meaning of § 9.6 for several reasons. First, the Supreme Court held that § 9.6, by its plain terms, overrode “any other provision in the [merger agreement] to the contrary,” and that those words rendered ineffective any contrary provision in the merger agreement itself, otherwise binding or not. Second, the Supreme Court rejected the Superior Court’s finding that the reference to the letter of intent in the merger agreement’s integration clause converted the non-binding Funding Provision into a binding contractual obligation. Rather, the Supreme Court found that the language in the integration clause that allowed the letter of intent to survive the merger agreement simply had the effect of ensuring that the expressly binding provisions contained in the letter of intent – which negotiating parties in the merger and acquisition context often expect to survive – would not be extinguished by the integration clause. The Supreme Court cautioned that treating the entire letter of intent as binding because portions of it were not superseded by the merger agreement would set a precedent that would undermine the ability of parties to negotiate and shape commercial agreements.
The Supreme Court further found that the Superior Court’s error was compounded because ev3 was denied the opportunity to admit parol evidence of the negotiation history. The Supreme Court posited that in determining that ev3 was in breach the jury may have improperly relied on the non-binding Funding Provision. As such, the Supreme Court dismissed as clearly erroneous the Superior Court’s finding that ev3 suffered no prejudice because it prevailed on the fraud claim for which evidence of the Funding Provision was admitted. Because the Supreme Court held that the jury was permitted to hold ev3 responsible for breaching the contract on theories that are inconsistent with the unambiguous terms of the parties’ agreement, the Supreme Court reversed and remanded the case for a new trial.
Also at issue on appeal was the single jury instruction provided by the Superior Court for purposes of interpreting § 9.6, which included a variety of definitions of the term “good faith,” including one drawn from the Uniform Commercial Code. Because the Supreme Court ordered a new trial, it declined to reach the merits of ev3’s argument that the Superior Court’s jury instruction regarding the meaning of good faith was erroneous. However, the Supreme Court did provide guidance for defining the term good faith for purposes of the new trial, specifically looking to its recent decision in DV Realty Advisors, LLC v. Policemen’s Annuity and Benefit Fund of Chicago, 75 A.3d 101 (Del. 2013), where the Supreme Court held that when a contract’s express terms incorporate a good faith requirement, the trial court should focus on the meaning of that express contractual duty. The Supreme Court further noted that ”DV Realty indicates an appropriate instruction in this action should have defined good faith by its ‘opposite characteristic – bad faith.’”