EFiled: Oct 15 2014 01:25PM EDT
Transaction ID 56199109
Case No. 7387-VCN
COURT OF CHANCERY
OF THE
STATE OF DELAWARE
JOHN W. NOBLE 417 SOUTH STATE STREET
VICE CHANCELLOR DOVER, DELAWARE 19901
TELEPHONE: (302) 739-4397
FACSIMILE: (302) 739-6179
October 15, 2014
Daniel B. Rath, Esquire Thomas M. Horan, Esquire
K. Tyler O’Connell, Esquire Womble Carlyle Sandridge & Rice, LLP
Landis Rath & Cobb LLP 222 Delaware Avenue, Suite 1501
919 Market Street, Suite 1800 Wilmington, DE 19801
Wilmington, DE 19801
Re: ReCor Medical, Inc. v. Warnking
C.A. No. 7387-VCN
Date Submitted: May 14, 2014
Dear Counsel:
Plaintiff ReCor Medical, Inc. (“ReCor”) prevailed in this Court on its claim
that it owns certain Transferred Intellectual Property.1 The Court also concluded
that ReCor was entitled to recover its attorneys’ fees and expenses by virtue of an
Employee Non-Disclosure, Non-Competition, and Invention Assignment
1
ReCor Med., Inc. v. Warnking, 2013 WL 3760022 (Del. Ch. May 31, 2013), aff’d, 85
A.3d 89 (Del. 2014) (TABLE). Familiarity with the facts set forth in that memorandum
opinion is assumed.
It may be appropriate to note that ReCor acquired the Transferred Intellectual Property
under a “catch-all” provision of the asset purchase agreement and it did not specifically
pay for that asset; indeed, there were no negotiations about its value. It was not disclosed
(and much of the trial was about that failure). Accordingly, ReCor bought an asset (or a
concept) that it did not know it was buying and for which it negotiated no specific price.
ReCor Medical, Inc. v. Warnking
C.A. No. 7387-VCN
October 15, 2014
Page 2
Agreement (the “IAA”), which provided: “The prevailing party in any litigation
arising under [the IAA] shall be entitled to recover his or its attorneys’ fees and
expenses in addition to all other remedies.”2
Defendants Reinhard Warnking (“Warnking”) and Sound Interventions, Inc.
(“SII”) (collectively, the “Defendants”) appealed the final judgment entered under
Court of Chancery Rule 54(b). The Supreme Court affirmed and identified the two
issues remaining for this Court’s resolution: “first, the parties’ dispute over the
amount of attorneys’ fees and expenses to be awarded to ReCor; and, second, the
question of whether the Defendants should be credited with their attorneys’ fees
and costs incurred in the filings and prosecution of the Transferred Intellectual
Property.”3 ReCor’s fee applications include fees4 incurred before bringing the
litigation in this Court, its fees incurred during the litigation in this Court, and its
fees incurred during the appellate proceedings.5 It seeks a total of $1,130,993.35.6
2
JX 4 § 5; see Final Judgment, July 16, 2013, ¶ 6.
3
Warnking v. ReCor Med., Inc., 85 A.3d 89, 2014 WL 457786, at *1 (Del. 2014)
(TABLE).
4
For convenience, a reference to “fees,” unless the context requires otherwise, will
generally include expenses as well.
5
ReCor filed separate fee applications: one on July 23, 2013, and a supplemental one on
February 21, 2014.
6
See Letter of Daniel B. Rath, Esq., Mar. 14, 2014, at 4.
ReCor Medical, Inc. v. Warnking
C.A. No. 7387-VCN
October 15, 2014
Page 3
***
As a general matter, the fees sought by ReCor fall within a range of
reasonableness.7 Defendants do, however, offer several grounds for either
reducing or offsetting those fees. Although the Court is addressing ReCor’s fee
applications, it will be more orderly to deal with the Defendants’ contentions.
A. Pre-Chancery
ReCor acquired the Transferred Intellectual Property and related assets and
rights in a bankruptcy proceeding.8 Before commencing litigation, it attempted to
resolve its disputes with Defendants through negotiation. That effort, which
resulted in fees of approximately $64,000, was unsuccessful, but it developed and
framed the issues which were eventually litigated in this Court. ReCor’s
entitlement to recover its fees is a matter of contract. The contract does not limit
recovery to fees incurred during litigation, although it does require prevailing in
litigation, as ReCor did. It is appropriate, and arguably required, to attempt to
7
See Decl. of Vito A. Canuso III in Supp. of Award of Fees and Costs to Pl. ReCor Med.,
Inc.; Suppl. Decl. of Vito A. Canuso III in Supp. of Award of Fees and Costs to Pl.
ReCor Med., Inc.
8
See Decl. of John W. Holcomb in Supp. of Award of Fees and Expenses to Pl. ReCor
Med., Inc. (“Holcomb Decl.”) Ex. 1 (Order Authorizing Debtor [ProRhythm, Inc.] to Sell
Certain Assets to ReCor Medical, Inc. Free and Clear of All Liens, Claims, Interests and
Encumbrances).
ReCor Medical, Inc. v. Warnking
C.A. No. 7387-VCN
October 15, 2014
Page 4
resolve disputes before bringing litigation. That is what ReCor did. If those
efforts had been successful, without resort to litigation, there would be no right to
recover fees. The fees, however, were incurred reasonably, and the amount of the
fees, in light of the effort reasonably necessary, is reasonable.
ReCor commenced litigation against the Defendants in Bankruptcy Court.
Eventually it was determined that the Bankruptcy Court did not have jurisdiction.
The Defendants argue that filing in the wrong court generated unnecessary and,
hence, unreasonable fees. The question of whether the Bankruptcy Court had
jurisdiction was subject to debate,9 and ReCor did not act unreasonably in bringing
its claims to the court which authorized the transaction by which it acquired the
Transferred Intellectual Property. Moreover, to a limited extent, discovery from
the bankruptcy proceeding was used in this Court, and that avoided some expenses
that would otherwise have been incurred here. The fees incurred in the bankruptcy
litigation were reasonable and were part of a proper effort to bring this matter to
conclusion, ultimately in the courts of this State.
9
The Bankruptcy Court’s order authorizing the sale, see supra note 8, at ¶ 34, generally
provided that the Bankruptcy Court would retain exclusive jurisdiction over any dispute
between ProRhythm and ReCor.
ReCor Medical, Inc. v. Warnking
C.A. No. 7387-VCN
October 15, 2014
Page 5
B. Court of Chancery Proceedings
Defendants complain about duplication and excessive conferencing among
ReCor’s attorneys.10 Multiple lawyers worked on similar tasks and attended the
same hearing.11 It is reasonable to conclude that the efforts of ReCor’s attorneys,
when measured through hindsight, could have been more efficient. That may well
be an almost universal truism about legal services. In this instance, there is no
objective basis for concluding that the efforts of counsel were anything other than
reasonable and consistent with their professional judgment.
ReCor filed its complaint in this Court with seven counts. By the time trial
arrived, ReCor had two counts remaining, and after trial, it had prevailed on one
count. The Defendants argue that the number of counts for which ReCor did not
achieve success renders its fees unreasonable because of unnecessary or unjustified
claims. It is not uncommon for several theories of recovery to be asserted and for
the pretrial process to narrow the scope of the proceeding. That is what has
10
This is a concern that extends beyond the limits of the litigation in this venue.
11
Even though several attorneys participated, the litigation team was relatively small.
ReCor Medical, Inc. v. Warnking
C.A. No. 7387-VCN
October 15, 2014
Page 6
happened here. The two counts that went to trial overlapped and the Court did not
address ReCor’s fiduciary duty claim because it had no need to do so.12
However, five counts were abandoned in the Pretrial Order and Stipulation
and dismissed “with prejudice, with each party to bear its own fees and costs.” 13
Thus, the parties agreed before trial that ReCor could not collect its attorneys’ fees
incurred with respect to the five dismissed claims, even if it did prevail on one of
the two remaining claims. Although ReCor relinquished any right to fees incurred
in having pursued the five abandoned claims, no methodology for separating out
those efforts has been suggested. The claims all involved essentially the same
facts, and it is unlikely that any material effort was dedicated specifically to any of
the abandoned claims. No doubt there was some minimal work performed
distinctly on the five abandoned claims, but modification of the fee award for that
reason would be arbitrary. Proof of entitlement to its fees is, of course, ReCor’s
burden.
12
ReCor, 2013 WL 3760022, at *18.
13
Pretrial Stip. ¶ 5.
ReCor Medical, Inc. v. Warnking
C.A. No. 7387-VCN
October 15, 2014
Page 7
Defendants point out that they incurred $400,000 in attorneys’ fees in this
Court, while ReCor incurred more than twice that amount. This single statistic, the
Defendants argue, demonstrates that ReCor’s fees are unreasonable. Although it is
easy to sympathize with the Defendants, litigation typically imposes a heavier
burden on the plaintiff which must “prove its case.” That, coupled with the limited
deference accorded to the professional judgment of ReCor’s attorneys, persuades
the Court that it has no principled basis for reducing ReCor’s fees on these
grounds.
C. Appellate Proceedings
During the appeal, the Defendants sought interim injunctive relief to protect
a patent application for the Transferred Intellectual Property. Although the
Defendants did not prevail, their efforts were justified in large part because of
ReCor’s uncertain conduct. Protecting the patentability of the Transferred
Intellectual Property was in the best interests of all parties. As a result of the
Defendants’ efforts, ReCor rethought its approach, and, thus, it received a benefit
from Defendants’ efforts. The fees incurred by ReCor in resisting Defendants’
efforts would not have been needed if ReCor had been more attentive to the patent
process and had been more forthcoming with the Defendants in terms of its
ReCor Medical, Inc. v. Warnking
C.A. No. 7387-VCN
October 15, 2014
Page 8
intentions. Accordingly, the fees incurred by ReCor in resisting the Defendants’
application for interim injunctive relief during the appeal are denied. The amount
of reduction based on this effort would be $67,708.
D. Setoffs
Defendants ask to setoff against the fees owed to ReCor the fees they
incurred in prosecuting the patent applications related to some of the Transferred
Intellectual Property and the business costs incurred in developing and supporting
the underlying technology for patent consideration. The fees attributable to patent
prosecution amount to $139,936.09.14 The business development costs exceed
$1.5 million.15
Defendants’ application is committed to the Court’s equitable discretion.
There is no contractual right at issue. Instead, pursuing the patents and developing
and testing the technology were appropriate, and ReCor, not the Defendants, will
obtain the benefits resulting from the Defendants’ expenditures.
14
Decl. of David A. Smith (Ex. A to letter of Thomas M. Horan, Esq., Mar. 7, 2014)
Ex. 1.
15
Id. Ex. 2. These costs consist of $1,060,444.59 in research and development expenses;
$376,007.19 in animal study expenses; and $247,177.63 in clinical expenses.
ReCor Medical, Inc. v. Warnking
C.A. No. 7387-VCN
October 15, 2014
Page 9
Under these circumstances, it is appropriate that the Defendants be
reimbursed for the costs of prosecuting the patents.16 The question was before the
Court at the time of the appeal. Perhaps the prosecution costs are not as well
documented as one might want, but they are reasonable, and the Defendants are
entitled to a setoff in their amount.
Recovery of the business costs is a different question. These expenditures
evidently were discussed during oral argument before the Supreme Court, but the
Supreme Court’s Order does not speak of business costs. It refers to “attorneys’
fees and costs incurred in the filings and prosecution of the Transferred Intellectual
Property.” The Defendants previously sought that relief in this Court. Nothing in
the record before the appeal addressed business expenses. In addition, not all of
the business expenses are fairly attributable to the technology which ReCor
obtained through the litigation. Accordingly, Defendants’ application for a credit
or a setoff for business costs is denied.17
16
The Court reserved this issue before Defendants appealed. Final Judgment, ¶ 6.
17
Furthermore, documentation of these costs is distressingly superficial. Decl. of
David A. Smith Ex. 2.
ReCor Medical, Inc. v. Warnking
C.A. No. 7387-VCN
October 15, 2014
Page 10
***
ReCor has demonstrated that it reasonably incurred net fees in the amount of
$923,349.26, in connection with the litigation through which it obtained the
Transferred Intellectual Property. This amount reflects two adjustments: first,
denial of fees related to the interim injunctive relief sought during the pendency of
the appeal; and second, a credit to the Defendants for the costs of their patent
prosecution which conferred a distinct benefit upon ReCor.18
Counsel are requested to confer and to submit an implementing form of
order.
Very truly yours,
/s/ John W. Noble
JWN/cap
cc: Register in Chancery-K
18
The Defendants have not argued that liability for attorneys’ fees should be imposed
upon Warnking but not upon SII.