IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
INTEAM ASSOCIATES, LLC, )
)
Plaintiff, )
)
v. ) C.A. No. 11523-VCMR
)
HEARTLAND PAYMENT SYSTEMS, )
INC., a Delaware corporation, )
)
Defendant. )
_______________________________ )
HEARTLAND PAYMENT SYSTEMS, )
INC., )
)
Counterclaim Plaintiff, )
)
v. )
)
LAWRENCE GOODMAN, III, and )
INTEAM ASSOCIATES, LLC, )
)
Counterclaim Defendants. )
MEMORANDUM OPINION
Date Submitted: June 10, 2016
Date Decided: September 30, 2016
Thad J. Bracegirdle and Andrea S. Brooks, WILKS, LUKOFF &
BRACEGIRDLE, LLC, Wilmington, Delaware; Attorneys for Plaintiff and
Counterclaim Defendants.
Jeffrey L. Moyer, Travis S. Hunter, and Arun J. Mohan, RICHARDS LAYTON &
FINGER, P.A., Wilmington, Delaware; Attorneys for Defendant and Counterclaim
Plaintiff.
MONTGOMERY-REEVES, Vice Chancellor.
In this action, two Delaware entities, inTEAM Associates, LLC
(―inTEAM‖) and Heartland Payment Systems, Inc. (―Heartland‖), that own K-12
school meal management software each assert breach of contract claims against the
other. inTEAM‘s predecessor, School Link Technologies, Inc. (―SL-Tech‖), and
Heartland entered into a transaction in which Heartland bought substantially all of
SL-Tech‘s assets. The transaction was detailed in three agreements that were
executed together and work in tandem. These agreements contain various non-
competition, non-solicitation, exclusivity, and cross-marketing and support
obligations.
inTEAM alleges that Heartland breached its non-competition obligations as
well as its cross-marketing and support obligations. Heartland claims that
inTEAM breached its reciprocal non-competition covenant, and inTEAM‘s chief
executive officer breached his non-solicitation and non-competition obligations.
In this post-trial Memorandum Opinion, I hold that inTEAM did not breach
any of its contractual obligations. Heartland, however, breached its non-
competition and exclusivity obligations, and inTEAM‘s chief executive officer
breached certain of his non-solicitation provisions. No affirmative defense excuses
any of the breaches. As a result, both inTEAM and Heartland are entitled to relief.
1
I. BACKGROUND
These are my findings of fact based on the parties‘ stipulations, documentary
evidence, and testimony of eight witnesses during a four-day trial. I accord the
evidence the weight and credibility I find it deserves.1
A. Parties and Relevant Non-Parties
inTEAM is a Delaware limited liability company with its principal place of
business in Santa Monica, California.2 inTEAM operates ―in the USDA-driven,
funded state and local school district child nutrition programs, primarily in K
through 12 schools,‖ offering ―consulting services, training services and
technology at both the state and school district level.‖3 Before the parties‘
execution of the Asset Purchase Agreement, dated September 12, 2011 (the ―Asset
Purchase Agreement‖), inTEAM was a division of SL-Tech.
SL-Tech ―develop[ed], manufacture[d], [sold], service[d] and maintain[ed]
computer software and POS terminal hardware‖ that was ―designed to facilitate (i)
1
Citations to testimony presented at trial are in the form ―Tr. # (X)‖ with ―X‖
representing the surname of the speaker, if not clear from the text. After being
identified initially, individuals are referenced herein by their surnames without
regard to formal titles such as ―Dr.‖ No disrespect is intended. Exhibits are cited
as ―JX #,‖ and facts drawn from the parties‘ Joint Pre-Trial Stipulation and Order
are cited as ―PTO ¶ #.‖ Unless otherwise indicated, citations to the parties‘ briefs
are to post-trial briefs.
2
PTO ¶ III.A.1.
3
Tr. 11-12 (Goodman).
2
accounting and (ii) reporting of transactional data functions and management of
food service operations of K-12 schools (including point-of-sale operations, free
and reduced application processing, ordering and inventory, menu planning and
entry of meal and other payments by parents via the Internet or kiosk).‖4
Chip Goodman is the Chief Executive Officer (the ―CEO‖) of inTEAM and,
prior to the parties‘ execution of the Asset Purchase Agreement, was the CEO and
―Major Shareholder‖ (as defined in the Asset Purchase Agreement) of SL-Tech.5
Janet Luc Griffin is the Director of Business Development at inTEAM and is the
contact person for state agency deals, provides consulting services for districts and
state agencies, and reviews software implementation.6 Lei Ditch is the Director of
Technology at High5LA, LLC, formerly Startech Global Corporation (―Startech‖),
who was hired by SL-Tech to help develop their software products.7
Heartland is a Delaware corporation with its principal place of business in
Princeton, New Jersey.8 Heartland is a credit card payment processor for various
4
PTO ¶ III.A.6 (citing JX 25 at 1).
5
Id. ¶ III.A.3.
6
Tr. 361-62 (Griffin).
7
Tr. 481-84 (Ditch).
8
PTO ¶ III.A.2.
3
industries, including K-12 schools.9 Heartland also offers computer software
products designed to help customers manage school meal programs for the K-12
foodservice industry in the United States.10 These products perform menu
planning, create recipes, monitor inventory, process orders, analyze nutrients,
generate production records, and facilitate USDA compliance.11
Michael Lawler currently serves as the President of the Strategic Markets
Group for Heartland and is responsible for the School Solutions division, among
others.12 Terry Roberts is the Senior Vice President of Heartland‘s School
Solutions division; he served as SL-Tech‘s Chief Operating Officer (―COO‖)
before its acquisition by Heartland.13 Tyson Prescott is the Director of Research
and Development for Heartland and was a software development manager at SL-
Tech before its acquisition by Heartland.14
9
Tr. 611-12 (Lawler).
10
Id.
11
Id. at 618.
12
Id. at 608-11.
13
Tr. 982-83 (Roberts).
14
Tr. 789-90 (Prescott).
4
B. Facts
The federal government provides funding to schools that participate in and
comply with certain meal nutrition programs for students.15 The United States
Department of Agriculture (the ―USDA‖) issues national regulations for these meal
nutrition programs, and state agencies monitor compliance with the regulations
through an administrative review process.16 As part of these programs, the federal
government subsidizes meals at various rates that are set each year.17
Until 1977, the regulations focused on four menu ―components:‖ meat,
vegetables/fruits, grains, and milk.18 By the 1990s, the focus shifted to certain
nutrient targets, and the government introduced Nutrient Standard Menu Planning,
which required schools to keep track of extensive nutrition information for various
food offerings.19 This spurred the development of software programs to assist
schools in managing this information. The USDA approves software programs
15
DOROTHY PANNELL-MARTIN & JULIE A. BOETTGER, SCHOOL FOOD & NUTRITION
SERVICE MANAGEMENT FOR THE 21ST CENTURY 5 (6th ed. 2014).
16
Id. at 6-8.
17
Id. at 13 (showing base rates for SY2014 are $0.34 for paid lunch, $2.59 for a
reduced-price lunch, and $2.99 for a free lunch).
18
Id. at 77.
19
Id.
5
that perform the required ―nutrient analysis.‖20 This software, Nutrient Analysis
Software Approved for Nutrient Analysis Required in the School Meal Programs
(―Nutrient Analysis Software‖),21 analyzes calories, saturated fat, sodium, protein,
Vitamin A, total fat, dietary fiber, carbohydrates, water, and iron, among other
nutrients, either by utilizing manual data entry of all menu items or by retrieval of
nutrient data from an approved database.22
In 2010, the federal government promulgated the Healthy, Hunger-Free Kids
Act of 2010 (the ―HHFKA‖).23 Later that year, the Institute of Medicine‘s
Committee on Nutritional Standards for National School Lunch and Breakfast
Programs, of which inTEAM consultant Mary Jo Tuckwell was a member, issued
new recommendations for changes to related USDA regulations (the ―IOM
Report‖).24 The IOM Report suggested an integration of the pre-1977 menu-
component model with the 1990s nutrient-focused model, which would emphasize
20
JX 400.
21
Id.
22
Tr. 910 (Fox); JX 400.
23
42 U.S.C. § 1751 et seq.; PANNELL-MARTIN & BOETTGER, supra note 15, at 78-
80.
24
INST. OF MED. OF THE NAT‘L ACADS. COMM. ON NUTRITION STANDARDS FOR
NAT‘L SCH. LUNCH AND BREAKFAST PROGRAMS, SCHOOL MEALS: BUILDING
BLOCKS FOR HEALTHY CHILDREN v, 194-95, 235 (2010),
http://www.fns.usda.gov/sites/default/files/SchoolMealsIOM.pdf; JX 248, at 1.
6
food-based menu planning and deemphasize nutrient analysis.25 The USDA
followed these recommendations and issued proposed rule changes on January 13,
2011 that stated, ―nutrient-based menus will be eliminated and only food-based
menu planning will be permitted . . . .‖26 The new regulations create five main
food groups (meat/high protein foods, whole grains, vegetables, fruit, and fat-
free/low-fat milk), which have specified subcategories and nutrient targets for
calories, saturated fat, trans fat, and sodium.27
Under the HHFKA, the USDA also introduced performance-based funding
to foster compliance with the new meal standards.28 Currently, a school district
may receive an additional six cents per reimbursable meal if it complies with the
meal pattern requirements promulgated under the HHFKA (―six cent
25
INST. OF MED. OF THE NAT‘L ACADS. COMM. ON NUTRITION STANDARDS FOR
NAT‘L SCH. LUNCH AND BREAKFAST PROGRAMS, supra note 24, at 194-95 (―[The]
USDA could consider . . . approaches [that] would move away from the current
emphasis on completing nutrient analysis and documenting compliance. The
initial approach might address fewer elements at a time but occur on a more
frequent basis. . . . Focusing on Meal Requirements rather than the Nutrient
Targets in planning and assessing school meals fits with the goals of both CRE
and SMI reviews.‖); JX 58, at 4-5; Tr. 58 (Goodman).
26
Nutrition Standards in the National School Lunch and School Breakfast Programs,
76 Fed. Reg. 2494, 2536 (proposed January 13, 2011).
27
PANNELL-MARTIN & BOETTGER, supra note 15, at 78, 80-81.
28
JX 321, at 12.
7
certification‖).29 The governing state authority must make an initial certification
determination and, thereafter, monitor each school district‘s ongoing compliance
with meal pattern requirements through administrative reviews that occur every
three years.30
In 2012, the USDA provided three options to school districts to submit
information to their state agencies for six cent certification. Option 1 involved
submitting menus, a USDA worksheet, and a nutrient analysis.31 This option
allowed school districts that already owned Nutrient Analysis Software for their
other needs to use it towards six cent certification as well. Option 2 allowed
districts to submit menus, the USDA worksheet, and a Simplified Nutrient
Assessment in lieu of nutrient analysis.32 The Simplified Nutrient Assessment only
analyzes calories, saturated fat, and sodium.33 It does not require the data entry of
all menu items or the use of a nutrient database.34 School districts using this option
could purchase another category of USDA-approved software, called Menu
29
See PANNELL-MARTIN & BOETTGER, supra note 15, at 43; see also 42 U.S.C. §
1753(b)(3)(C)(i) & (D).
30
See JX 401, at 5.
31
Id. at 10.
32
Id. at 12.
33
Id.
34
Id.
8
Planning Tools Approved for Certification for Six Cent Reimbursement (―Menu
Planning Tools‖),35 which performs the necessary functions under this option.
Under Option 3, the state agency would conduct an on-site review.36
1. The parties prior to the transaction
Prior to the transaction, SL-Tech owned software and hardware to help K-12
schools monitor their food service operations‘ compliance with applicable
regulations.37 Three of these products are relevant in this dispute: WebSMARTT,
mylunchmoney.com (―MLM‖), and the Decision Support Toolkit (―DST‖).
WebSMARTT, a USDA-approved Nutrient Analysis Software, provided the end-
to-end functionality to allow schools to monitor children‘s nutrition in school
meals.38 WebSMARTT encompassed point of sale, free and reduced meal
eligibility tracking, menu planning, nutrient analysis, and production records
functionalities.39 MLM, a proprietary online payment-processing product, had
approximately 10,000 schools as users.40
35
Tr. at 393-94 (Griffin); JX 400.
36
Tr. at 393-94 (Griffin).
37
PTO ¶ III.A.6 (citing JX 25, at 1); Tr. 20-22 (Goodman).
38
Tr. 793-94 (Prescott).
39
Id.
40
JX 12.
9
In 2007, SL-Tech began building DST Phase 1 as a prototype, and in 2009,
SL-Tech engaged Startech to develop and write the functional design documents
for the full software product, DST Phase 2, which SL-Tech published on January
11, 2011 (the ―Functional Design Documents‖).41 In Phase 1, DST developed data
analytics of sales and meal count data.42 In Phase 2, DST would become cloud-
based software that would allow schools and districts to menu plan and project the
menus‘ effects on staffing, equipment, and other costs, and state administrators
would be able to view this data simultaneously.43
SL-Tech also owned inTEAM, which was a ―15-year-old management
consulting company known historically for its hands-on workshops in financial
management for school nutrition programs.‖44 Additionally, inTEAM provided
―comprehensive assessments of school nutrition programs.‖45
Heartland primarily acted as a credit card processor that provided terminals
and software to enable merchants to accept credit cards.46 In 2010, Heartland
41
Tr. 487-90 (Ditch).
42
Tr. 30 (Goodman).
43
Id. at 33, 54.
44
JX 58, at 4.
45
Id.
46
Tr. 611-12 (Lawler).
10
began entering the K-12 school market because it ―saw an opportunity [to]
acquir[e] these companies that provided [] food management software.‖47 Owning
these products would allow Heartland to make money when the parents of students
used their credit cards to pay for their children‘s lunches.48 This strategy became
the Heartland School Solutions division.49
2. The transaction
As part of their new School Solutions strategy, Heartland approached SL-
Tech about a potential acquisition.50 Goodman prepared an ―Outline of Key
Terms‖ in April 2011.51 Goodman proposed that Heartland pay $17 million at
closing (representing 60% of a ―low-end valuation‖ of SL-Tech) plus earn-out
payments (calculated as a percentage of a multiple of gross profit or EBITDA
realized by Heartland) on each of the first five anniversaries of closing to
compensate SL-Tech for the remaining 40% of the value of the company.52 In
addition, Goodman would become CEO of Heartland‘s School Solutions
47
Id.
48
Id. at 613.
49
Id. at 612-13.
50
Tr. 738 (Lawler); Tr. 60 (Goodman).
51
Tr. 62 (Goodman).
52
JX 9, at 3.
11
business.53 Heartland, however, did not want inTEAM‘s consulting business,
including DST, which it felt was outside their strategy of ―acquiring companies
that provided the point-of-sale solutions to K through 12‖ schools.54
Eventually, the two companies agreed that Heartland would purchase
substantially all of SL-Tech‘s assets, excluding the ―inTEAM Business,‖ among
others.55 Goodman would remain the owner and CEO of inTEAM as a separate
legal entity, and he would serve as a consultant to Heartland.56 The parties
effectuated the transaction through the execution of three agreements: the Asset
Purchase Agreement, the Co-Marketing Agreement, dated September 30, 2011 (the
―Co-Marketing Agreement‖), and the Consulting Agreement, dated September 30,
2011 (the ―Consulting Agreement‖). These agreements contain non-competition,
non-solicitation, exclusivity, and cross-marketing and support obligations that form
the basis of the alleged breaches here.
a. The Asset Purchase Agreement
On September 12, 2011, SL-Tech (the ―Seller‖), Heartland (the ―Buyer‖),
Goodman (the ―Major Shareholder‖), and other shareholders (the ―Seller
53
Tr. 65-66 (Goodman).
54
Tr. 614 (Lawler).
55
JX 25 (―Asset Purchase Agreement‖) Exs. A-4, M.
56
JX 13, at 3-5.
12
Shareholders‖) executed the Asset Purchase Agreement.57 Under the Asset
Purchase Agreement, Heartland acquired WebSMARTT and MLM, among other
assets, for $17 million.58
i. The non-competition provision
The Asset Purchase Agreement‘s covenant not to compete states in relevant
part as follows:
For a period of five (5) years from and after the Closing
Date, neither Seller nor the Major Shareholder will
engage directly or indirectly, on Seller‘s or the Major
Shareholder‘s own behalf or as a Principal or
Representative of any Person, in providing any
Competitive Services or Products or any business that
School-Link conducts as of the Closing Date in any of
the Restricted Territory . . . .59
Thus, this non-competition provision prohibits SL-Tech and Goodman from
engaging, directly or indirectly, on their own behalf or on behalf of any Person, in
providing (1) any Competitive Services or Products, or (2) any business that
School-Link conducts in the United States as of September 30, 2011.
The Asset Purchase Agreement defines ―Competitive Services or Products‖
and ―School-Link‖ as follows:
57
Asset Purchase Agreement at 1. The deal closed on September 30, 2011. Id. at 4.
58
PTO ¶ III.B.4-5.
59
Asset Purchase Agreement § 5(n), Ex. A. (defining ―Restricted Territory‖ as the
United States).
13
―Competitive Services or Products‖ means a business
that develops, manufactures, sells and services and
maintains computer software and/or POS terminal
hardware designed to facilitate (i) accounting and (ii)
management and reporting of transactional data
functions, of food service operations of K-12 schools
(including point-of-sale operations, free and reduced
application processing, ordering and inventory, and entry
of meal and other payments by parents via the Internet or
kiosk); provided, however, that for purposes of clarity,
Competitive Services or Products shall not include the
inTEAM Business as currently conducted.
....
―School-Link‖ means the entirety of Seller‘s business,
including the business of Seller known as ―School-Link,‖
but excluding the inTEAM Business.60
Hence, the Asset Purchase Agreement‘s non-competition provision excludes the
―inTEAM Business‖ from the scope of prohibited activity (the ―inTEAM Carve-
Out‖).
The Asset Purchase Agreement defines ―inTEAM Business‖ as follows:
―inTEAM Business‖ means certain Excluded Assets
consisting of Seller‘s consulting, e[L]earning and DST
segments of the business known as ―inTEAM‖ and
including those products and services described in
Exhibit C to the Co-Marketing Agreement.61
Accordingly, the non-competition obligations of SL-Tech and Goodman under the
Asset Purchase Agreement are limited by and understood with reference to a
60
Asset Purchase Agreement Ex. A-1, A-8.
61
Asset Purchase Agreement Ex. A-4.
14
carve-out defined therein and further described in Exhibit C of the Co-Marketing
Agreement.62
ii. The non-solicitation provision
The Asset Purchase Agreement also contains a non-solicitation provision
stating:
For a period of five (5) years from and after the Closing
Date, none of Seller or any Seller Shareholder will
directly or indirectly, on Seller‘s or such Seller
Shareholder‘s own behalf or as a Principal or
Representative of any Person, solicit, divert, take away or
attempt to solicit, divert or take away a Protected
Customer or a Referral Source in any of the Restricted
Territory for the purpose of providing Competitive
Services or Products.63
The Asset Purchase Agreement goes on further to define ―Protected
Customer‖ as follows:
(a) any Person to whom Seller sold, licensed or leased its
products or services at any time during the twelve (12)
month period ending on the Closing Date and (b) any
Person that at any time during the twelve (12) month
period ending on the Closing Date, Seller (i) provided a
written price quote to or (ii) discussed with in writing
other material terms.64
62
See infra Section I.B.2.b.i.
63
Asset Purchase Agreement § 5(o).
64
Id. Ex. A-7.
15
Thus, neither SL-Tech nor any shareholder of SL-Tech may solicit any Protected
Customer or Referral Source in the United States in order to provide any
Competitive Product or Service on or before September 30, 2016.65
b. The Co-Marketing Agreement
The Co-Marketing Agreement grants both Heartland and SL-Tech the right
to market one another‘s products.66 inTEAM assumed and was assigned all of SL-
Tech‘s rights under the Co-Marketing Agreement through an Assignment and
Assumption Agreement, dated October 31, 2011.67
i. The non-competition and exclusivity obligations
Similar to the Asset Purchase Agreement, the Co-Marketing Agreement
provides that during the five years following closing, ―inTEAM shall not engage,
directly or indirectly, on its own behalf or as a principal or representative of any
person, in providing any services or products competitive with the HPS
Business.‖68 In the same provision, Heartland grants a reciprocal covenant, which
states,
65
See supra Section II.B.1.a.i. for further definitions of Restricted Territory and
Competitive Services and Products.
66
JX 23 (―Co-Marketing Agreement‖) § 2.1.
67
PTO ¶ III.C.15.
68
Co-Marketing Agreement § 9.1.1(B).
16
[Heartland] shall not engage, directly or indirectly, on its
own behalf or as a principal or representative of any
person, in providing any services or products competitive
with the inTEAM Business, and [Heartland] hereby
grants to inTEAM the exclusive right and license under
any intellectual property of [Heartland] (other than
trademarks) to conduct the inTEAM Business.69
The Co-Marketing Agreement further defines ―HPS Business‖ and
―inTEAM Business‖ as follows:
―HPS Business‖ means the development, manufacture, or
sale of computer software and/or POS terminal hardware
designed to facilitate (A) accounting and (B) reporting of
transactional data functions and management of of [sic]
food service operations of K-12 schools (including point-
of-sale operations, free and reduced application
processing, ordering and inventory, and entry of meal
and other payments by parents via the Internet or kiosk).
....
―inTEAM Business‖ means certain Excluded Assets
consisting of inTEAM‘s consulting, eLearning and DST
segments of the business known as ―inTEAM‖ and
including those products and services described in
Exhibit A and those inTEAM products and services
described in Exhibit C and Exhibit D.70
Thus, like the Asset Purchase Agreement, the Co-Marketing Agreement defines
the inTEAM Business by reference to, among other things, products and services
69
Id. § 9.1.1.
70
Id. § 1.1.2.
17
described in Exhibit C, which the parties attached to the Co-Marketing
Agreement.71
Exhibit C states in its entirety:
Functional Specifications
Functional specifications for DST Phase 1 and add-ons
and DST Phase 2 (future release); including unique state
value added functionality (attached)
Student Rewards functional specifications (attached)
Off Campus Merchants functional specifications
(attached)72
Attached to the Co-Marketing Agreement, and incorporated by reference, are the
functional specifications for DST Phase 1 and Phase 2 in the form of the
Functional Design Documents.73
The two DST Phase 2 Functional Design Documents discussed at trial were
―Milestone A – Menu Item‖74 and ―Milestone B – Menu Planning.‖75 These
Functional Design Documents explain how DST utilizes core menu planning
71
Id. Ex. C.
72
Id.
73
See, e.g., JX 3 (DST Phase 2 Functional Design, Milestone A – Menu Item, dated
January 10, 2011); JX 4 (DST Phase 2 Functional Design, Milestone B – Menu
Planning, dated January 11, 2011); JX 326.
74
JX 3.
75
JX 4.
18
concepts, such as ―menu items,‖ ―menu categories,‖ ―menu templates,‖ and ―menu
cycles.‖76 Each represents a building block that a school district or state
administrator would use to create and plan a menu.77 Menu items (servings of a
specific food) are grouped into menu categories (such as fruits, etc.) and combined
to form menu templates (an arrangement of items comprising a single meal). 78 A
menu cycle then aggregates menu templates for each day over a specific period of
time (week, month, etc.).79 Further, the Functional Design Documents show DST
Phase 2 anticipates allowing the user to create, edit, copy, and save in each phase
of menu planning.80
ii. The termination provision
The Co-Marketing Agreement also contains a termination provision.
Section 4.2.2 of the Co-Marketing Agreement states:
76
Tr. 501-03 (Ditch); JX 3, at 7; JX 4, at 6.
77
Tr. 501-02 (Ditch).
78
Id.
79
Id. at 502-03.
80
Id. at 509-36; JX 3, at 8-12 (edit, save, and delete menu category, including create
and input description), 20-25 (copy menu items), 29-30 (input and edit portion size
and service unit for menu items); JX 4, at 19-22 (create new menu template), 23-
27 (copy existing menu template), 29-35 (create, copy, and edit menu items to
populate menu template), 36-39 (create new menu cycle and input menu cycle
data), 40-41 (copy existing menu cycle), 47-48, 52-54 (drag and drop menu
templates into menu cycles).
19
In the event that a Provider does not meet a Renewal
Threshold applicable to a Product of the Recipient, the
Recipient may terminate this Agreement with respect to
the provision of such Product upon thirty (30) days‘ prior
written notice to the Provider, provided that the Recipient
must provide notice of termination within sixty (60) days
after the applicable anniversary of the Effective Date. In
the event of a termination of a product . . . (A) the
corresponding obligations set forth in Section 2 and
Section 3 shall cease to apply and (B) if the termination
is a termination by HPS of Student Rewards or Off-
Campus Merchants, the obligations set forth in Section
9.1, including, without limitation, the exclusivity and
non-competition obligations therein, shall cease to apply
with respect to Student Rewards or Off-Campus
Merchants, as applicable.81
In other words, if for instance, inTEAM does not meet its Renewal Thresholds,
which are sales targets, for a certain Heartland product, Heartland can terminate
the Co-Marketing Agreement with respect to that product with thirty days‘ written
notice.82 Upon termination, the obligations in Sections 2 and 3 no longer apply.
iii. The cross-marketing and support obligations
Section 2 of the Co-Marketing Agreement creates several cross-marketing
and support obligations. The relevant portion of Section 2.4 provides:
As part of HPS Services, during the Term, HPS shall
prominently display the Licensed Content provided by
inTEAM on the MLM website and shall work in good
faith with inTEAM to determine the commercial viability
81
Co-Marketing Agreement § 4.2.2.
82
Id.
20
of incorporating such Licensed Content into other K-12
payment center websites (with functionality similar to
MLM) of HPS that are developed by such parties during
the Term.83
―Licensed Content‖ is defined as ―website content, promotional materials or
campaign-related communications . . . includ[ing] only content developed or
created by or for a Party that such Party delivers to the other Party and specifically
designates in writing as Licensed Content.‖84 Thus, Heartland agrees to display
inTEAM‘s Licensed Content on its MLM website, and Heartland also agrees to
perhaps incorporate the content into other K-12 payment center websites.85
Section 2.5.2 incorporates by reference Section 4.2.2, the termination
provision, and states:
HPS shall provide inTEAM the customer lists and
reseller lists pertaining solely to MLM and the
Developed Websites (including updates to such lists that
are made during the Term) of HPS and HPS Affiliates for
the purposes of marketing and selling Student Rewards
and Off-Campus Merchants to such customers and
resellers.86
83
Id. § 2.4.
84
Id. § 5.2.1.
85
Id. §§ 2.4, 5.2.1.
86
Id. § 2.5.2.
21
Under this provision, Heartland is obligated to provide inTEAM with lists of
parents and schools from MLM and any other Heartland K-12 payment center
websites with functionality similar to MLM in order to allow inTEAM to market
Student Rewards and Off-Campus Merchants.87
The parties also agreed to provisions governing the support of technology.
The relevant language from Section 2.6 states:
To the extent that performance or receipt of Services
hereunder requires a Party to have access to the other
Party‘s intranet or other computer software, networks,
hardware, technology or computer-based resources
(―Required Technology‖), such other Party shall provide
(or cause to be provided) limited access to such Required
Technology . . . In no event shall a Party be obligated to
provide such access beyond the limited access necessary
to permit the other Party to perform or receive the
Services as required under this Agreement.88
―Services‖ are defined as ―inTEAM Services‖ and ―[Heartland] Services.‖
inTEAM Services are ―subject to Section 4.2.2,‖ and give inTEAM Parties ―the
right to market, advertise, and promote sales of the HPS Products.‖89 Heartland
Services are ―subject to Section 4.2.2‖ and give Heartland Parties ―the right to
87
Id. §§ 2.4, 2.5 (incorporating the definition of Developed Websites from Section
2.4.).
88
Id. § 2.6.
89
Id. § 2.1.
22
market, advertise, and promote sales and licenses of the inTEAM Products.‖90 In
other words, each party must allow the other party the minimum access to
whatever necessary technology is required for them to perform their marketing and
sales obligations under the agreement, but no more. These obligations are
expressly subject to the termination provision.
Section 2.8 adds: ―[p]arties shall use commercially reasonable best efforts to
develop and maintain all applicable Products, related websites and related
technology assets and ensure that the Products and related websites and technology
assets are all integrated and interfaced . . . such that the products may be cross-
promoted.‖91
c. The Consulting Agreement
Under the Consulting Agreement, Goodman is to act as a ―strategic advisor‖
to Heartland and as a ―liaison with key industry stakeholders advancing
Heartland‘s objectives.‖92 In return, Goodman is to receive a monthly salary of
$16,666.67.93
90
Id. § 2.1.
91
Id. § 2.8.
92
JX 22 (―Consulting Agreement‖) ¶ 1.
93
Id. ¶ 3.
23
i. The non-competition provision
The relevant non-competition language binds Goodman (―Consultant‖)
as follows:
During the Term of this Agreement and for two (2) years
thereafter, the Consultant shall not directly or indirectly,
on behalf of himself or on behalf of any other person,
firm or business entity: (i) become an owner of any
outstanding capital stock, or a member or partner, of any
company, partnership, or entity that engages in,
Competitive Business within the Restricted Territory; or
(ii) perform or provide any services, whether as an
employee, owner, consultant or otherwise, to, for or on
behalf of any company, partnership, or entity that
engages in Competitive Business within the Restricted
Territory, if such services are the same or similar in
character to the services performed or provided by the
Consultant to Heartland pursuant to this Agreement. . . .
For purposes of this Agreement, ―Competitive Business‖
shall be defined as follows: developing, manufacturing,
selling, servicing or maintaining computer software
and/or POS terminal hardware designed to facilitate (i)
accounting or (ii) management and reporting of
transactional data functions of food service operations of
K-12 schools (including point-of-sale operations, free
and reduced application processing, ordering and
inventory, entry of meal or other payments by parents via
the Internet or kiosk); provided, however, for purposes of
clarity, Competitive Business shall not include the
inTEAM Business (as defined in the Asset Purchase
Agreement) as conducted as of the effective date of the
Asset Purchase Agreement. For purposes of this Section
11, ―Restricted Territory‖ shall be defined as the entire
United States of America.94
94
Id. ¶ 11(a).
24
In other words, for five years95 after the agreement‘s Effective Date on September
30, 2011, Goodman cannot directly or indirectly become an owner of any entity
that does Competitive Business with Heartland, or perform or provide any services
to an entity that engages in Competitive Business, in the entire United States of
America. ―Competitive Business‖ essentially refers to the same definition as
―Competitive Services or Products‖ under the Asset Purchase Agreement, and it
specifically carves out the inTEAM Business.96 If Goodman provides services to a
Competitive Business, he will only be in breach if such services are similar to
those he is providing to Heartland.
ii. The non-solicitation provision
The Consulting Agreement contains a non-solicitation provision that also
binds Goodman. It states:
During the Term of this Agreement and for two (2) years
thereafter, the Consultant shall not directly or indirectly,
on behalf of himself or on behalf of any other person,
firm or business entity: (i) contact, solicit or do business
with, or attempt to contact, solicit, or do business with,
any Customer of Heartland for purposes of conducting
any Competitive Business; or (ii) encourage or attempt to
encourage any Customer of Heartland to terminate, or
95
The agreement‘s ―Term‖ is three years following the effective date, Consulting
Agreement ¶ 5, and the provision at issue adds ―two (2) years thereafter,‖ totaling
five years. Consulting Agreement ¶ 11(b).
96
See supra Sections I.B.2.b.i, I.B.2.a.i.
25
materially and adversely modify, its relationship with
Heartland or to cease or refrain from doing business with
Heartland. ―Customers‖ means all customers, clients,
vendors, and suppliers, as well as any prospective
customers, clients, vendors, and suppliers, of Heartland
(or any of its subsidiaries or affiliated entities), and all
customers, clients, vendors, and suppliers, as well as any
prospective customers, clients, vendors, and suppliers, of
Seller prior to the Effective Date. The non-solicitation
provision in this Section 11 shall only apply to those
Customers with whom the Consultant worked, or about
whose business or needs the Consultant gained
information, either in his capacity as an officer with
Seller, or in his capacity as Consultant under this
agreement.97
Goodman essentially cannot contact or attempt to contact any customer or
prospective customer of Heartland for purposes of conducting Competitive
Business, as defined in the corresponding non-competition provision, or encourage
any customer of Heartland to terminate or modify its relationship with Heartland.
The customer must be someone with whom Goodman worked or on whose
business he gained information through his capacity at SL-Tech or his capacity as
consultant for Heartland.
3. Post-transaction occurrences
After the closing of the transaction, the parties began working together under
the new arrangement. But this co-existence was short lived and unsuccessful.
97
Consulting Agreement ¶ 11(b).
26
a. The parties execute memoranda of understanding and
launch KidsChoose
Shortly after executing the Asset Purchase Agreement and Co-Marketing
Agreement, Heartland and inTEAM executed a Memorandum of Understanding
dated November 29, 2011 (the ―2011 MOU‖) and a supplemental Memorandum of
Understanding dated February 10, 2012 (the ―2012 MOU‖).98 The 2011 MOU
clarified inTEAM‘s ability to develop a state-level Meal Benefits Management
System within DST to fulfill pre-existing contracts with customers without
becoming competitive with Heartland.99
The 2012 MOU memorialized the agreement between Heartland and
inTEAM regarding the new program KidsChoose, but it did not alter the Co-
Marketing Agreement.100 Under the 2012 MOU, inTEAM would develop
KidsChoose to allow parents to set up spending accounts for students to buy third-
party products, and inTEAM would have exclusive marketing rights.101 Heartland
would share student payment information, allow promotion by a ―banner ad‖ in
Heartland‘s existing MLM program, provide the payment processing functionality
98
JX 29; JX 44.
99
JX 29, at 1; JX 34, at 1.
100
JX 44, at 1.
101
JX 42; JX 44, at 2-3.
27
for the KidsChoose website, and, in return, retain a portion of the revenue.102 Over
the course of the next year, Roberts and Goodman had multiple discussions
regarding the pilot launch of KidsChoose.103 Heartland selected the KidsChoose
pilot schools in January 2014 and sent out the initial marketing e-mail campaign in
March 2014.104
The KidsChoose launch failed to meet expectations.105 Thereafter,
Heartland decided not to devote additional resources to KidsChoose.106 In August
2014, Heartland and inTEAM agreed that inTEAM would develop a version of
KidsChoose that was independent of any Heartland product.107 Heartland agreed
to promote KidsChoose every six months through e-mails to parents in twenty
MLM districts and to provide meal history for students who used KidsChoose.108
102
JX 44, at 2-3.
103
JX 105; JX 112; JX 131; JX 142; JX 143.
104
Tr. 1117-18 (Roberts).
105
JX 212 (stating that the first marketing campaign did not yield a single sign up for
KidsChoose).
106
Tr. 1129-30 (Roberts).
107
JX 240.
108
Id.
28
As compensation, Heartland would receive two percent of revenue from
KidsChoose transactions.109
b. The USDA approves DST as a Menu Planning Tool
After the HHFKA‘s new regulations were finalized in 2012,110 inTEAM
incorporated the Simplified Nutrient Assessment components into the existing
DST functions and created the ―Menu Compliance Tool+‖ module, which became
the first USDA-approved Menu Planning Tool for six cent certification.111
inTEAM also added administrative review software to its arsenal in 2014.112
inTEAM‘s Menu Compliance Tool+ currently is not approved as Nutrient Analysis
Software.113
c. Heartland partially terminates the Co-Marketing
Agreement
In November of 2013, Heartland notified inTEAM that it was terminating
the Co-Marketing Agreement as to WebSMARTT, State Compliance Software,
MLM, Student Rewards, and Off-Campus Merchants because inTEAM had not
109
Id.
110
See supra Section II.B.
111
Tr. 387 (Griffin); Tr. 542 (Ditch).
112
Tr. 142 (Goodman).
113
JX 359; JX 360.
29
met sales targets for those products.114 Michael Lawler sent an e-mail to Chip
Goodman stating as follows:
The purpose of this letter is to inform that you [sic]
pursuant to the inTEAM/Heartland Co-Marketing
Agreement, we would like to terminate to [sic] the CMA
in relation to the following products and services
identified in Exhibit B:
WebSMARTT
State Compliance Software
MLM
Student Rewards
Off Campus Merchants
Pursuant to section 4.2.2 of the CMA, the sales
thresholds for these products were not met as of the 2-
year anniversary of the CMA‘s effective date.115
Goodman accepted this termination, but clarified that the MOU was still in
place regarding KidsChoose and DST by stating as follows:
[W]e accept [Heartland]‘s notice to terminate Exhibit B
of the CMA. That said, let‘s clarify a couple of points in
areas where we have made very substantial investments:
As you and I discussed at our meeting last week, the
February 10, 2012 MOU (including the exclusivity rights
described in the MOU) continues to govern our
relationship with respect to Off-Campus
Merchants/KidsChoose, and DST Phase II
114
JX 184; Co-Marketing Agreement § 4.2.2.
115
JX 184.
30
notwithstanding the termination of Exhibit B of the
CMA.116
d. inTEAM employees e-mail potential customers
On July 24, 2014, Goodman sent an e-mail to Geri Hughes, an employee of
inTEAM, with the subject line, ―St Paul Window of Opportunity.‖117 Goodman
writes in the e-mail ―Did Mary Jo recap the opportunity to you?‖ to which Hughes
replies, ―Yes. I will discuss with you when we meet this afternoon. As you know,
Jean‘s replacement (Jim) as [sic] not been as interested in help and this is her new
approach.‖118 Below Hughes‘ reply is the tagline: ―Note to Jim Hemmen regarding
our menu planning tool/production record alternative to WebSMARTT.‖119
On December 15, 2014, Tuckwell e-mailed Jean Ronnei, the COO for St.
Paul Public Schools, stating:
Based on interactions I had with Jim at ANC in July I
believe the department was still struggling with
automating production records. In August there was
discussion of me providing a demo to key central office
staff of the inTEAM menu planning and production
record modules as an alternative to the WebSMARTT
system. That offer remains open if your team is
interested . . . whether you stay with WebSMARTT or
116
JX 187.
117
JX 234.
118
Id.
119
Id.
31
are interested in an alternative, I would urge the team to
prioritize this activity to achieve financial success.120
Tuckwell then forwarded this e-mail to Hughes, who sent it to Goodman and
Michael Sawicky, a senior software engineer at inTEAM, saying that the inTEAM
employees had ―confirmed that Jim is leaving St Paul and he has been stopping our
efforts so that is good. . . . I give MJ full credit for continuing to nurture this key
relationship with Jean and for continuing to push for them to use our tools.‖121
e. Heartland collaborates with Colyar on a joint
proposal and inTEAM submits a competing proposal
On May 12, 2015, the Texas Department of Agriculture issued a
―REQUEST FOR OFFERS TO PROVIDE Menu Analysis & Planning System
(MAPS) Software Solutions‖ (the ―Texas Request‖).122 On May 27, 2015,
inTEAM contacted Heartland regarding a potential joint proposal to the Texas
Request.123 Heartland declined.124
On June 19, 2015, Heartland, teamed with Colyar Technology Solutions,
Inc. (―Colyar‖), an inTEAM competitor since 2014, and submitted a bid to provide
120
JX 248.
121
Id.
122
PTO ¶ III.F.31.
123
JX 261, at 2.
124
Id. at 1.
32
a MAPS solution.125 Colyar‘s software assists state agencies in performing audits
and administrative reviews for USDA compliance.126 Texas did not select the
Heartland/Colyar joint proposal.127 After losing the bid, Heartland promised to
―ramp up efforts with Colyar[]‖ to bid in other states.128
After the Heartland rejection, inTEAM submitted its competing bid to the
Texas Request.129 In its proposal, inTEAM represents that its new software, will
have the capability to meet all of the requirements of the Texas Request, including
point-of-sale, nutrient analysis, and menu planning.130 inTEAM‘s proposal also
was not selected by Texas.131 On July 20, 2015, inTEAM notified Heartland of its
wrongful competition and breach of the Co-Marketing Agreement.132
125
PTO ¶ III.F.32-34; Tr. 142 (Goodman).
126
Tr. 141-42 (Goodman); Tr. 1161, 1165 (Roberts).
127
PTO ¶ III.F.32-34; Tr. 1166 (Roberts).
128
JX 295.
129
PTO ¶ III.F.32.
130
JX 275; Tr. 472-79 (Griffin).
131
PTO ¶ III.F.32-34.
132
JX 433.
33
f. inTEAM launches CN Central
In July 2015, inTEAM presented its ―Big Reveal‖ of the new, rebranded
successor to DST, CN Central, to the public.133 CN Central combined all of
inTEAM‘s modules, including the Menu Compliance Tool+, under one system.134
This brought together the ability to analyze certain nutrients, menu plan, menu
search, menu share, generate production records, and assist administrative
reviews.135
g. An inTEAM employee gathers information regarding
point of sale software
On March 22, 2016, inTEAM Senior Consultant Kim Coleman e-mailed
Lisa Sims at the Kentucky School District stating:
We are looking at adding a POS feature to our inTEAM
software package to go with the Menu Planning,
Production Records, Pre-cost, etc. My boss has asked me
to reach out to several KY schools and see if I could get a
copy of your current POS maintenance invoice for
competitive research purposes. I was told that this
should be public record and could help us offer the best
deal possible in moving forward with this decision.136
133
JX 265; Tr. 29 (Goodman).
134
Tr. 283-84 (Goodman); Tr. 445, 448-51 (Griffin).
135
Id.
136
JX 418, at 2.
34
C. Parties’ Contentions
inTEAM alleges that Heartland has materially breached the non-
competition, exclusivity rights, and cross marketing and support provisions of the
Co-Marketing Agreement. Specifically, inTEAM avers that Heartland‘s
partnership with Colyar breached the first two provisions, and its repeated failure
to support inTEAM in various capacities or to display inTEAM‘s content breached
the final provision. inTEAM seeks damages, costs and attorney‘s fees, specific
performance requiring Heartland to provide certain customer and reseller lists, and
injunctive relief preventing Heartland from continuing to compete with inTEAM.
Heartland denies any breach and argues that the inTEAM Business as
defined at the execution of the Co-Marketing Agreement controls, which at that
time did not contain anything competitive with Colyar. Furthermore, Heartland
contends that it did not actually provide any service to Colyar, and inTEAM
provided no evidence of Heartland‘s breach of cross-marketing or support
obligations. Heartland also asserts the defenses of laches, prior material breach,
unclean hands, and prior termination.
Against inTEAM, Heartland alleges breach of the Co-Marketing
Agreement‘s non-competition provision because inTEAM developed a product,
CN Central, which is competitive with WebSMARTT. Heartland requests
35
injunctive relief enforcing the Co-Marketing Agreement, as well as costs and
attorney‘s fees.
Against Goodman, Heartland asserts breach of both the non-competition and
non-solicitation provisions under both the Asset Purchase Agreement and the
Consulting Agreement. Heartland alleges Goodman violated his non-solicitation
obligations by serving as majority owner and CEO of a company that has
developed a product that competes with WebSMARTT. Heartland further claims
that Goodman breached his non-solicitation obligations through his involvement
with inTEAM employees‘ efforts to solicit business from St. Paul Public Schools.
Heartland seeks injunctive relief preventing Goodman from engaging in any
further competitive activities or further participation at inTEAM, and preventing
inTEAM from using any of the knowledge or services provided by Goodman.
Heartland also seeks disgorgement by Goodman of any profits realized from his
competitive activities.
inTEAM and Goodman contend that they are not in breach of the non-
competition provisions because the three agreements create the inTEAM Carve-
Out, which includes the business currently run by inTEAM. Goodman argues he is
not in breach of his non-solicitation obligations under the Asset Purchase
Agreement or the Consulting Agreement because there is no evidence that he made
any type of contact in violation of either agreement. Goodman contends he also is
36
not in breach of the non-solicitation provision under the Asset Purchase Agreement
because he is not a Seller Shareholder as defined under that agreement. inTEAM
and Goodman also assert the defenses of laches, acquiescence, waiver/estoppel,
unclean hands, prior material breach, failure to mitigate damages, and ask for
reduction/set off of damages against inTEAM‘s own damages.
II. ANALYSIS
―Plaintiffs, as well as Counterclaim-Plaintiffs, have the burden of proving
each element, including damages, of each of their causes of action against each
Defendant or Counterclaim-Defendant, as the case may be, by a preponderance of
the evidence.‖137 Proof by a preponderance of the evidence means proof that
something is more likely than not.138 ―By implication, the preponderance of the
evidence standard also means that if the evidence is in equipoise, Plaintiffs
lose.‖139 Thus, to prevail on their respective breach of contract claims, both
inTEAM as plaintiff and Heartland as counterclaim plaintiff must prove by a
preponderance of the evidence (1) the existence of a contract, (2) the breach of an
137
Revolution Retail Sys., LLC v. Sentinel Techs., Inc., 2015 WL 6611601, at *9 (Del.
Ch. Oct. 30, 2015).
138
Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb. 18,
2010).
139
Revolution Retail, 2015 WL 6611601, at *9; 2009 Caiola Family Tr. v. PWA,
LLC, 2015 WL 6007596, at *12 (Del. Ch. Oct. 14, 2015).
37
obligation imposed by that contract, and (3) damages suffered as a result of that
breach.140
―A contract‘s express terms provide the starting point in approaching a
contract dispute.‖141 Delaware follows an objective theory of contracts, ―which
requires a court to interpret a particular contractual term to mean ‗what a
reasonable person in the position of the parties would have thought it meant.‘‖142
When a contract is clear and unambiguous, ―the court‘s role is to effectuate the
parties‘ intent based on the parties‘ words and the plain meaning of those
words.‖143 ―‗In upholding the intention of the parties, a court must construe the
agreement as a whole, giving effect to all provisions therein.‘ The meaning
inferred from a particular provision cannot control the meaning of the entire
140
Revolution Retail, 2015 WL 6611601, at *9.
141
Ostroff v. Quality Servs. Labs., Inc., 2007 WL 121404, at *11 (Del. Ch. Jan. 5,
2007).
142
Charney v. Am. Apparel, Inc., 2015 WL 5313769, at *10 (Del. Ch. Sept. 11, 2015)
(citing Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d
1192, 1196 (Del. 1992)).
143
Zimmerman v. Crothall, 62 A.3d 676, 690 (Del. Ch. 2013) (citing Lorillard
Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006)).
38
agreement if such an inference conflicts with the agreement‘s overall scheme or
plan.‖144
―The parties‘ steadfast disagreement over interpretation will not, alone,
render the contract ambiguous.‖145 Neither will ―extrinsic, parol evidence . . . be
used to manufacture an ambiguity in a contract that facially has only one
reasonable meaning.‖146 A term in a contract is ambiguous when it is ―reasonably
or fairly susceptible to different interpretations or may have two or more different
meanings.‖147 If a contract is ambiguous, a court may consider extrinsic evidence
to interpret the intent of the parties.148
144
GMG Capital Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del.
2012) (quoting E.I. du Pont de Nemours and Co., Inc. v. Shell Oil Co., 498 A.2d
1108, 1113 (Del. 1985)).
145
Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010) (citing Twin City Fire Ins. Co.
v. Del. Racing Ass’n, 840 A.2d 624, 628 (Del. 2003); Rhone-Poulenc Basic
Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 1992)).
146
United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 830 (Del. Ch. 2007)
(citing Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232
(Del. 1997) (―If a contract is unambiguous, extrinsic evidence may not be used to
interpret the intent of the parties, to vary the terms of the contract or to create an
ambiguity.‖)).
147
Id. (citing Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d
1192, 1196 (Del. 1992)).
148
iBio, Inc. v. Fraunhofer USA, Inc., 2016 WL 4059257, at *5 (Del. Ch. July 29,
2016) (citing Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228,
1232 (Del. 1997)).
39
None of the parties challenges the validity or enforceability of any of the
provisions; as such, I do not analyze those issues. The claims, instead, hinge on
this Court‘s interpretation of inTEAM Business as defined in the relevant
agreements. Thus, I begin by analyzing the definition of inTEAM Business and
determining whether the inTEAM business as currently conducted violates any of
the non-competition provisions. Then, I analyze whether Heartland or Goodman
breached any contractual obligations. Finally, I determine the appropriate remedy
for any breaches.
A. inTEAM’s Business as Currently Conducted Does Not Breach its
Non-Competition Obligations Under the Asset Purchase
Agreement or the Co-Marketing Agreement
Heartland contends that inTEAM breached its non-competition obligations
under the Co-Marketing Agreement because the inTEAM Carve-Out only
extended to functionality that existed as of the closing date.149 Heartland argues
that, because inTEAM‘s CN Central product now can plan menus,150 generate
production records,151 facilitate USDA compliance,152 and analyze nutrients,153
149
Def.‘s Opening Br. 37-38.
150
Tr. 344 (Griffin).
151
Id.
152
Id.
153
Id. at 445.
40
which are capabilities developed after closing, inTEAM is in breach of the non-
competition provision.154 For all the reasons stated below, inTEAM did not breach
its non-competition obligations.
The Asset Purchase Agreement and the Co-Marketing Agreement contain
materially similar non-competition obligations.155 The Asset Purchase
Agreement‘s non-competition provision states that SL-Tech and Goodman will not
provide Competitive Services or Products (or any business that SL-Tech conducts)
in the United States for five years.156 The definition of SL-Tech and the definition
of Competitive Services and Products exclude the inTEAM Business.157 Similarly,
the Co-Marketing Agreement prohibits inTEAM from directly or indirectly
―providing any services or products competitive with [Heartland].‖ 158 Both the
Asset Purchase Agreement and the Co-Marketing Agreement define the inTEAM
Business as the consulting, eLearning, and DST portions of the business.159 And,
154
Def.‘s Opening Br. 43.
155
Although Heartland only asserts claims under the Co-Marketing Agreement
against inTEAM, I also discuss the Asset Purchase Agreement for the sake of
completeness.
156
Asset Purchase Agreement § 5(n), Ex. A-8 (definition of Restricted Territory).
157
Id. Exs. A-1, A-8.
158
Co-Marketing Agreement § 9.1.1.
159
Asset Purchase Agreement Ex. A-4; Co-Marketing Agreement § 1.1.2.
41
both definitions of the inTEAM Business reference those products and services
described in Exhibit C to the Co-Marketing Agreement.160 Exhibit C incorporates
by reference the Functional Design Documents for ―DST Phase 2 (future
release)‖ (emphasis added).161 Thus, the inTEAM Business as defined in the Asset
Purchase Agreement, Co-Marketing Agreement, Exhibit C, and the Functional
Design Documents, does not breach the non-competition provisions.
1. The inTEAM Business definition expressly includes the
ability to plan menus, generate production records, and
assist administrative reviews
Throughout 2010, SL-Tech closely followed the developments of the
Committee on Nutritional Standards for National School Lunch and Breakfast
Programs.162 When the committee published the IOM Report in 2010, SL-Tech
foresaw the sea change the new recommendations would bring under the
HHFKA.163 Thus, SL-Tech incorporated the IOM Report‘s proposed changes to
de-emphasize nutrient analysis and emphasize food-based menu planning into their
―2011 Business Plan,‖ which was published at the end of 2010.164 This plan
160
Id.
161
Co-Marketing Agreement Ex. C.
162
JX 58, at 4-5.
163
Tr. 54-55 (Goodman).
164
JX 58, at 4-5.
42
discusses a product that will ―focus on new menu planning requirements‖ and
―may only be feasible in large districts or when offered by the state agencies.‖165
SL-Tech also began to overhaul DST Phase 2 in 2010 in response to the IOM
Report by incorporating the recommendations into the Functional Design
Documents for DST Phase 2, which were finalized in early January 2011.166
The Functional Design Documents, including those titled ―Milestone A —
Menu Item‖ and ―Milestone B — Menu Planning,‖ envisioned a product that
would have the new, post-HHFKA menu planning as its core concept. The menu
planning functionality would allow the user to create, edit, copy, and save menu
items, menu categories, and menus to be placed in menu cycles.167 The user could
manage the entire menu planning process from inputting a single serving of a
specific food, to assigning it to a larger category, to arranging a collection of foods
into a meal, to finally, creating a cycle of meals to rotate over weeks or months.168
The Functional Design Documents also described a product that would allow
schools or districts to project the menus‘ impact on other areas of food programs,
165
Id. at 8.
166
JX 3; JX 4.
167
See JX 3, at 8-12; JX 4, at 19-22; Tr. 509-36 (Ditch).
168
Tr. 501-503 (Ditch).
43
such as staffing, equipment, and food/labor costs.169 Both Heartland and inTEAM
point to extrinsic evidence to support their competing interpretations of the
inTEAM Business and whether menu planning is included. I need not consider
any extrinsic evidence because I find that the contract unambiguously includes
menu planning in the inTEAM Carve-Out.
The Functional Design Documents also envisioned that DST Phase 2 would
generate production records.170 The Functional Design Documents do not
explicitly reference ―production records‖ in the same way they mention menu
planning. Both parties, however, agree on the definition of a production record.171
Notably, Heartland‘s own witness, Prescott, testified that a production record is a
comparison of what the school planned to serve, what the school actually prepared,
and what the school actually sold.172 He stated these components include: the
menu plan to which the school is referring, the menu cycle‘s week, how many of
each item the school planned to serve, how many the school actually produced, and
how many items they actually served.173 The DST Phase 2 Functional Design
169
JX 3; JX 4; JX 326; Tr. 33, 54-57 (Goodman).
170
JX 4.
171
See Tr. 794 (Prescott); Tr. 451-52 (Griffin).
172
Tr. 794.
173
Id. at 810.
44
Documents have inputs for all of these components.174 Although Heartland points
to extrinsic evidence to argue the agreement unambiguously supports its contention
that production records are not included in the definition of inTEAM Business, I
need not consider this evidence because the functionality is included,
unambiguously, in the Functional Design Documents.175
To prove that the inTEAM Carve-Out includes administrative review
software, inTEAM relies on Exhibit C, which states that DST Phase 2 will include
―unique state value added functionality.‖176 Goodman testified that he understood
the phrase in Exhibit C to mean the ability to ―allow[] [state reviewers or auditors]
immediate access to records that they needed to review electronically that were
created and generated generally at the school district level,‖177 causing ―a
breakthrough in the way audits were conducted and the value that was added for
state agencies.‖178 Additionally, Ditch testified that the cloud-based integration
174
See JX 4, at 31 (showing an input for Name, Served as Meal %, A La Carte %, and
a Week and Day label); JX 326, at 259 (showing editable columns for Served as
Meal %, A La Carte %).
175
See Def.‘s Opening Br. 37, 43 (citing Sawicky Dep. Tr. 78, 79, 87); JX 104;
Sawicky Dep. Tr. 14.
176
Pl.‘s Opening Br. 52.
177
Tr. 91.
178
Id.
45
would allow both state agencies and school districts to use common functions and
access records in real time.‖179
Goodman also testified that the phrase meant ―during an administrative
review related to menu plans, in particular, the ability to have school districts
within that state either to utilize the third-party systems that they already had, or
allow them to utilize our menu compliance tool directly so that the data feed was
always available at the state level.‖180 Griffin then testified that the ―additional
state value‖ of inTEAM‘s Menu Compliance Tool+ was that the state agencies are
able to access the districts‘ menu information directly and, as a result, are able to
modify the menus within the system to assure the district is in compliance before
the agency comes on-site to do a review.181
Heartland does not rebut this testimony and instead argues that because this
functionality did not exist until 2014, three years after the parties signed the Co-
Marketing Agreement, it could not be part of the ―state value added functionality‖
described in the agreement.182 This argument fails because the definition of
inTEAM Business, which references Exhibit C and discusses a ―future release‖ of
179
Tr. 500-01 (Ditch); JX 23, at 33.
180
Tr. 153-54.
181
Tr. 414-15.
182
Def.‘s Answering Br. 26-27.
46
DST Phase 2 as defined in the Functional Design Documents, anticipated the
development of a product with functionality that did not exist at closing.
Heartland also argues ―no inTEAM witness made any effort to show that the
functionality of inTEAM‘s administrative review software module was identified
in the functional design documents.‖183 This argument ignores the first part of
Goodman‘s testimony, which specifically discusses Exhibit C (and, by reference,
the Functional Design Documents).184 This argument also fails to address the
language of the Functional Design Documents, which state ―District
Administrators [] will configure their districts within DST . . . State Agency
Administrators (SAs) will . . . be able to access the new district and building setup
screens.‖185 Heartland offers no testimony or evidence to rebut these descriptions
of the ―unique state value added functionality‖ of the inTEAM Carve-Out, and
inTEAM meets its burden to show it bargained for this functionality at the time of
the transaction.
By January 2011, inTEAM was contemplating a future release of DST Phase
2 that would have greater functionalities than existed at the time of the agreement.
Exhibit C and the Functional Design Documents expressly reference those
183
Id. at 27.
184
Tr. 91 (Goodman).
185
JX 3-4, at 5.
47
functionalities, which included the ability to plan menus, generate production
records, and assist administrative reviews. Heartland agreed to incorporate Exhibit
C and the Functional Design Documents into the inTEAM Business definition
described in the Asset Purchase Agreement and the Co-Marketing Agreement, and
it cannot now simply ignore what those documents state.
2. The ability to analyze certain nutrients does not violate the
non-competition obligations
Heartland also points to the Menu Compliance Tool+‘s ability to analyze
limited nutrients to show that inTEAM attempted to ―engage in providing‖186
products and services competitive with WebSMARTT. 187 The parties seem to
agree that Heartland had the exclusive ability to conduct ―nutrient analysis‖ as the
USDA regulations define that term.188 The parties, however, dispute whether the
ability to analyze a more limited subset of nutrients would violate the non-
competition clause.189 Neither the Asset Purchase Agreement nor the Co-
Marketing Agreement addresses this issue or expressly defines ―nutrient analysis.‖
Therefore, I look to the USDA regulations, because the very purpose of this
186
Co-Marketing Agreement § 9.1.1.
187
Def.‘s Opening Br. 31.
188
See Tr. 21-22, 122, 154-56 (Goodman); Def.‘s Opening Br. 33.
189
Pl.‘s Answering Br. 18; Def.‘s Opening Br. 33 n.10.
48
software is to aid districts in reporting for USDA compliance. Even if Heartland
can point to some overlap in the functionalities of WebSMARTT and inTEAM‘s
Menu Compliance Tool+ in terms of analyzing nutrients, Heartland fails to prove
that inTEAM‘s product improperly competes with WebSMARTT.
Nutrient Analysis Software and Menu Planning Tools perform different
functions under the HHFKA.190 Nutrient Analysis Software, such as
WebSMARTT, can run a full nutrient analysis, while Menu Planning Tools, such
as inTEAM‘s Menu Compliance Tool+, can run a Simplified Nutrient Assessment
of calories, saturated fat, and sodium.191 Heartland‘s own expert witness admitted
that this is only a subset of the nutrients WebSMARTT can analyze, and
inTEAM‘s Menu Compliance Tool+ cannot analyze the full range of components
necessary for a full nutrient analysis.192
Heartland tries to argue that the classification of the products is not the issue,
but rather the overlapping functionality. 193 The USDA, however, classifies these
various software programs according to their functionality in carrying out the
190
See supra Section I.B.
191
See id.
192
Tr. 921-22 (Fox).
193
Def.‘s Opening Br. 35, n.10.
49
purpose of the regulations.194 The USDA approves certain programs as one and
not the other, and some as both.195 Heartland should be familiar with this concept,
as WebSMARTT unsuccessfully attempted to obtain USDA approval as a Menu
Planning Tool,196 and another Heartland program, Mosaic Menu Planning, is an
approved Menu Planning Tool and Nutrient Analysis Software.197 Thus, Heartland
has not met its burden to prove that inTEAM‘s Menu Compliance Tool+‘s ability
to analyze limited nutrients violates the Co-Marketing Agreement‘s non-
competition provision.
B. Heartland Breached its Non-Competition and Exclusivity
Obligations Under the Co-Marketing Agreement
inTEAM argues that Heartland breached its obligation not to compete with
inTEAM (directly or indirectly) when Heartland collaborated with Colyar, a direct
competitor of inTEAM, to create an interface between Heartland‘s Mosaic Menu
Planning product and Colyar‘s administrative review software for the express
194
JX 400 (stating that Menu Planning Tools provide an assessment of meal pattern
contributions and a Simplified Nutrient Assessment that does not require data
entry, while Nutrient Analysis tools provide nutrient analysis from a data source
and weighted nutrient analysis).
195
See JX 359; JX 360 (listing different programs on each list, with only some
programs on both lists); JX 400 (stating that if certain software programs consist
of both assessment of meal pattern contributions and nutrient analysis functions,
they need both approvals).
196
Tr. 875 (Prescott).
197
See JX 359; JX 360 (Mosaic appears on both lists).
50
purposes of ―provid[ing] state auditors a consistent view of school district menu
data so that they can perform audits in a more efficient manner‖ and offering
―access to school district menu data as needed in performing an audit and
providing recommendations.‖198 inTEAM alleges that by enhancing the ―state
value added functionality‖ of Colyar‘s products through a data exchange between
Mosaic Menu Planning and Colyar‘s administrative review software, Heartland
improperly assisted a direct competitor.199 inTEAM concedes that Heartland lost
the bid and had no opportunity to provide the services, but inTEAM argues that
Heartland‘s failure to secure the Texas bid does not excuse Heartland‘s ―indirect[]‖
competition with inTEAM.200
Under the Co-Marketing Agreement, Heartland cannot ―engage, directly or
indirectly . . . in providing services or products competitive with the inTEAM
Business.‖201 This non-competition obligation excludes products and services
defined as ―[Heartland] Business.‖ Thus, I must determine whether the products
198
JX 227, at 3-4; JX 255, at 5 (Heartland will ―[p]rovide Mosaic menu planning in a
hosted environment for access by Colyar‘s Customers (i.e., States) and Users (i.e.,
School Districts).‖).
199
Pl.‘s Opening Br. 55.
200
Pl.‘s Opening Br. 55; see Kan-Di-Ki, LLC v. Suer, 2015 WL 4503210, at *21
n.242 (Del. Ch. July 22, 2015) (―Directly engaging in the proscribed Business
would entail the actual provision of mobile diagnostic services to nursing facilities
by [defendant] himself.‖).
201
Co-Marketing Agreement § 9.1.1.
51
and services at issue are reserved for inTEAM, Heartland, or both. Under the Co-
Marketing Agreement, both Heartland and inTEAM can build and maintain
products with menu planning functions.202 Additionally, Heartland may own
products that conduct a full nutrient analysis, as understood under the relevant
regulations at the time of the transaction.203 inTEAM‘s Business includes the
ability to build products that assist state agencies in conducting their administrative
review process as part of ―unique state value added functionality.‖204
Heartland does not rebut inTEAM‘s purported definition of ―unique state
value added functionality‖ under the Asset Purchase Agreement and Co-Marketing
Agreement.205 Heartland also does not argue that its own business as defined in the
relevant agreements contains a similar ―state value added functionality‖ or
administrative review software of any kind. Thus, the non-competition provisions
allow inTEAM, but not Heartland, to provide administrative review software.
Heartland cannot now obtain through this Court what it did not reserve for itself in
contract negotiations.
202
See supra Section II.A.1.
203
See id.
204
See id.
205
Def.‘s Answering Br. 25-27.
52
Heartland teamed with Colyar to provide the same functionality that the
Asset Purchase Agreement and the Co-Marketing Agreement reserve for inTEAM.
Although offering Heartland‘s Mosaic Menu Planning product on its own would
not have been a breach,206 Heartland assisting a direct competitor of inTEAM‘s
administrative review software, Colyar, indirectly breached the non-competition
obligations under the Co-Marketing Agreement.207 Based on the same facts,
Heartland also breached its exclusivity obligations under the same provision.208
C. Heartland Did Not Breach its Cross-Marketing and Support
Obligations Under the Co-Marketing Agreement
inTEAM argues that Heartland breached its cross-marketing and support
obligations under various provisions of Section 2 of the Co-Marketing Agreement.
Specifically, inTEAM asserts that Heartland breached its obligations with respect
to its lack of support for KidsChoose and its refusal to integrate DST and
206
Both Heartland and inTEAM have the ability to own and develop products with
menu planning functionality.
207
See, e.g., Kan-Di-Ki, LLC v. Suer, 2015 WL 4503210, at *21 n.242 (Del. Ch. July
22, 2015) (holding former CEO‘s involvement in assisting a direct competitor‘s
―efforts to replace [plaintiff] as the service provider‖ was a breach.); Pl‘s Opening
Br. 55.
208
Cf. Def.‘s Answering Br. 27 (arguing ―any exclusivity requirement found in
Section 9.1 of the CMA does not apply because inTEAM was not ‗conducting the
inTEAM Business‘ by marketing menu planning and administrative review
software to Texas.‖).
53
Nutrikids/WebSMARTT.209 inTEAM‘s conclusory allegations of breaches of
Section 2 of the Co-Marketing Agreement fail.
Under Section 2 of the Co-Marketing Agreement, Heartland is obligated to
(1) ―prominently display Licensed Content provided by inTEAM on the MLM
website;‖210 (2) ―work in good faith with inTEAM‖ to consider incorporating the
Licensed Content ―into other [Heartland] K-12 payment center websites;‖211 (3)
provide inTEAM with customer and reseller lists of MLM and Developed
Websites of Heartland in order to market and sell Student Rewards and Off-
Campus Merchants;212 (4) provide limited access (as necessary to perform
obligations under the Co-Marketing Agreement) to intranet, software, networks,
hardware, technology, or computer-based resources; 213 and (5) use ―commercially
reasonable best efforts to develop and maintain all‖ related described products,
websites, and technology assets to ensure the integration and cross-promotion of
the products.214
209
Pl.‘s Opening Br. 56-57.
210
Co-Marketing Agreement § 9.1.1.
211
Id.
212
Id. § 2.5.2.
213
Id. § 2.6.
214
Id. § 2.8.
54
1. Heartland did not breach its obligations with respect to
KidsChoose under Section 2 of the Co-Marketing
Agreement
In order to decide whether Heartland breached its obligations, I must first
determine the true ownership of KidsChoose. The Co-Marketing Agreement
designates Off-Campus Merchants and Student Rewards as Heartland products.215
Goodman testified that KidsChoose was the ―embodiment of Off-Campus
Merchants and rewards program that was described in the [Co-Marketing
Agreement],‖ which Goodman admitted were Heartland products at the time of the
execution of the Co-Marketing Agreement.216 In his deposition, Roberts testified
that Off-Campus Merchants and Student Rewards were ―inTEAM products.‖217 At
trial, Roberts clarified that each side was to focus on developing the capabilities it
knew best—Heartland on MLM and inTEAM on KidsChoose—but that Heartland
did not transfer ownership of Student Rewards or Off-Campus Merchants.218
Further, the 2012 MOU explicitly states that it does not modify the Co-Marketing
Agreement.219 Thus, the Co-Marketing Agreement‘s language remains in full
215
Co-Marketing Agreement Ex. B.
216
Tr. 103, 284-85 (Goodman).
217
Roberts. Dep. 39-40.
218
Tr. 1048-53.
219
JX 44, at 1.
55
effect, and Heartland continues to own Off-Campus Merchants and Student
Rewards, which KidsChoose embodies.
a. Heartland validly terminated the Co-Marketing
Agreement as to Off-Campus Merchants and Student
Rewards
Heartland partially terminated the Co-Marketing Agreement in a November
26, 2013 e-mail from Lawler to Goodman.220 Under Section 4.2.2 of the Co-
Marketing Agreement, the ―Recipient‖ (in this case, Heartland) of the cross-
marketing services has the ability to terminate with respect to a specific product if
the ―Provider‖ (in this case, inTEAM) does not meet its particular goals related to
that product.221 Heartland specifically terminated the agreement as to
WebSMARTT, State Compliance Software, MLM, Student Rewards, and Off-
Campus Merchants.222 inTEAM does not challenge Heartland‘s ability to
terminate or the enforceability of the termination as to Heartland‘s products.223
Instead, inTEAM argues that the 2012 MOU ―continued to govern the relationship
with respect to Off-Campus Merchants/KidsChoose, and DST Phase II.‖224
220
JX 184.
221
Co-Marketing Agreement § 4.2.2.
222
JX 184.
223
Pl.‘s Opening Br. 57-58.
224
JX 187.
56
As discussed more thoroughly above, Goodman testified that KidsChoose
was a ―brand of‖ Off-Campus Merchants and Student Rewards, which were
Heartland products at the time of the execution of the Co-Marketing Agreement.225
Thus, Heartland had the right to terminate its obligations as they related to
KidsChoose. Section 4.2.2 provides that any termination of a product causes ―the
corresponding obligations set forth in Section 2‖ to cease to apply, as long as the
Recipient gives the Provider ―30 days‘ prior written notice‖ and the termination is
within 60 days after the applicable anniversary of the Effective Date.‖226 This
means Heartland‘s obligations under the agreement ended as of December 26,
2013.227
b. Heartland’s conduct prior to the termination did not
breach its obligations under Section 2 of the Co-
Marketing Agreement
inTEAM argues that even if the agreement was terminated at the end of
2013, Heartland is still liable for any breach prior to the termination.228 The 2012
MOU gave inTEAM the ―exclusive right to market and sell products and services
225
Tr. 103, 284-85 (Goodman); see supra Section 2.C.1.
226
Co-Marketing Agreement § 4.2.2.
227
Heartland was validly within sixty days of the execution of the agreement (before
November 26, 2013) and the beginning of the term of the agreement (before
December 1, 2013). inTEAM does not argue Heartland‘s termination was invalid
on timeliness grounds.
228
Pl.‘s Opening Br. 57-58 n.24.
57
on the KidsChoose . . . website[]‖ and stated that inTEAM ―shall develop the
functionality described in the FDD relating to the . . . KidsChoose website[].‖229
Meanwhile, Heartland was to develop ―the functionality contained within MLM
and . . . web service functionality consistent with the FDD to exchange identified
information with the inTEAM-developed websites.‖230 inTEAM asserts that
Heartland did not display any ―Licensed Content‖ to promote KidsChoose and did
not work ―in good faith‖ with inTEAM to promote KidsChoose on its other ―K-12
payment center websites‖ that replaced MLM in 2015.231 inTEAM, however, does
not point to any materials it ―designate[d] in writing as ‗Licensed Content‘‖ under
the Co-Marketing Agreement and provided to Heartland that Heartland then
refused to display as required under Section 2.4.232 Therefore, inTEAM has not
met its burden to prove breach under this section of the Co-Marketing Agreement.
Similarly, with regard to Heartland‘s obligation to provide customer and
reseller lists under Section 2.5.2 of the Co-Marketing Agreement, inTEAM asserts
that Heartland never furnished the required lists of parents to inTEAM in support
229
JX 44, at 2.
230
Id.
231
Pl.‘s Opening Br. 56.
232
Co-Marketing Agreement §§ 5.2.1, 2.4.
58
of KidsChoose before the termination.233 Heartland offers evidence that it did
produce these lists prior to November 2013 for the purposes of allowing inTEAM
to conduct marketing under the Co-Marketing Agreement.234 inTEAM does
nothing to rebut either the list produced by Heartland or Roberts‘s testimony that
the list was produced for marketing purposes. At the very least, inTEAM has not
met its burden of proving that it is more likely than not that Heartland did not
produce these lists.
inTEAM also argues that Heartland failed to timely respond to scheduling
Steering Committee meetings, did not agree to a ―reasonable timeline‖ for
development, and never agreed to a final version of the functional design document
for KidsChoose.235 All of these claims refer to obligations under the 2012 MOU
and under Section 12.2.3 of the Co-Marketing Agreement, neither of which
233
Pl.‘s Opening Br. 57.
234
JX 97 (showing an e-mail from Erik Ramp, Vice President of Operations at
inTEAM, dated Oct. 30, 2012, to Roberts at Heartland, with an attached document
titled ―HPS Customer List 2012‖); Tr. 1080-81 (Roberts) (stating that this list was
sent for the purposes of allowing inTEAM to do marketing under the Co-
Marketing Agreement).
235
Pl.‘s Opening Br. 37.
59
inTEAM argues that Heartland breached.236 Therefore, I need not consider
inTEAM‘s arguments as to these issues.
inTEAM generally argues that Heartland engaged in various delay tactics
that caused KidsChoose to launch much later than expected. Specifically,
inTEAM argues that in 2012, Heartland assured inTEAM it would be ready to
meet its June 15 deadline, but in May, Heartland told inTEAM it was ―stopping
development.‖237 Heartland offered no justification, provided no information about
what Heartland had already developed, refused to establish a new timeline for the
product, and ignored inTEAM‘s inquiries.238 inTEAM also asserts that Heartland
delayed in (1) selecting the pilot schools, which occurred in January 2014, and (2)
sending e-mails to promote KidsChoose, which occurred in March 2014.239
236
See JX 44, at 2 (―The Steering Committee will mutually agree on a functional
design document (‗FDD‘) to detail the functionality described in this MOU.
Based on that FDD, the Steering Committee will agree to a timeline.‖); Co-
Marketing Agreement § 12.2.3 (―The Steering Committee shall meet at such
frequency as mutually agreed by the Parties, but in any event no less frequently
than once per month. Steering Committee meetings shall be at a mutually
acceptable location or telephonically.‖).
237
Pl.‘s Opening Br. 37; JX 380; JX 384; JX 385.
238
Id.
239
Pl.‘s Opening Br. 38.
60
With respect to the June 2012 deadline, Heartland contends that it completed
its development work,240 but that inTEAM caused the delay of the pilot launch
because of its own inability to secure regulatory approval until the end of January
2014.241 Heartland also argues that the departure of Scott Fennel, an inTEAM
employee responsible for securing deals for KidsChoose, caused severe internal
disruption at inTEAM and further delays.242 Moreover, Heartland alleges that as
soon as inTEAM notified Heartland of the necessary approvals, Heartland
immediately complied with its obligations to launch the pilot.243 inTEAM
concedes that the pilot schools were selected in January 2014, presumably the
same time as inTEAM secured its regulatory approval.244 Importantly, inTEAM
240
JX 388; see also JX 137, at 2; JX 142.
241
Def.‘s Answering Br. 16; JX 193 (showing a Jan. 24, 2014 e-mail from Goodman
stating ―it has been a tedious, expensive, and time consuming task to craft a model
for state bank regulators where rules differ. . . . We believe that we have finally
resolved the custodial and other mulit[sic] state issues with the ability to write and
manage differential agreements.‖).
242
Def.‘s Answering Br. 13 (quoting JX 387, an e-mail from Ditch on Jan. 29, 2013)
(―[D]ue to the issues we were having with Scott that it wouldn‘t be wise to hunt
[Heartland] down for this because we wouldn‘t have any Deals to pilot with
anyways, and it was better to restart the conversation when we have our act
together.‖); id. at 15-16 (quoting JX 148, an e-mail from Sawicky on May 7, 2013)
(―[T]he project is already three weeks behind with regard to staffing and
provisioning‖ and ―I‘m trying to fudge an update to the Project Plan that we can
share with [Heartland] and that doesn‘t air too much of our dirty laundry.‖).
243
Def.‘s Answering Br. 16.
244
Pl.‘s Opening Br. 38.
61
does not suggest that it received the regulatory approval before January 2014, or
that Fennel‘s departure did not cause severe issues. Therefore, inTEAM has not
proven that it is more likely than not any delay in the KidsChoose launch or the
integration problems were due to Heartland‘s behavior.
With respect to Heartland‘s ―obligation‖ to send e-mails promoting
KidsChoose, inTEAM suggests that Heartland sent the emails in March 2014, two
months after the launch, which was too late. But, inTEAM does not argue what
specific provision of the Co-Marketing Agreement this action breaches, if any.
inTEAM simply asserts the fact that this occurred, which is not enough to prove a
breach by Heartland.
inTEAM also points to the ―integration problems‖ between KidsChoose and
MLM as causing a negative impact on the pilot launch.245 inTEAM states that it
repeatedly tried to engage Heartland to address the issues, but Heartland ignored
these requests.246 inTEAM‘s evidence of its attempts to engage Heartland are
dated June 2014, months after the pilot launch failure and the termination of the
Co-Marketing Agreement.247 As Heartland did not have any continuing
obligations under the Co-Marketing Agreement to support the prior version of
245
Id.
246
Id.
247
JX 225.
62
KidsChoose in 2014, inTEAM has not met its burden of proving Heartland
breached its obligations.
After the failure of the KidsChoose launch, Heartland further agreed to
allow inTEAM to develop a stand-alone version of KidsChoose, independent of
any Heartland products, and to send promotional e-mails to MLM users every six
months and provide user data to inTEAM.248 Concerning the e-mail obligation,
Heartland agreed to send ―jointly designed emails‖ to parents in certain districts
using their payment platforms promoting KidsChoose and to provide meal
information for students who performed transactions using KidsChoose.249
inTEAM alleges that Heartland failed to comply with its new obligations. But,
inTEAM produces no evidence of any ―jointly designed e-mails‖ or even
inTEAM‘s drafts of such e-mails. Regarding the user data, Heartland produces
evidence that it provided the required user data in December 2014, including an e-
mail from Goodman to Roberts thanking him for the data.250 Although inTEAM
points to certain testimony that the information Heartland produced was not in a
―final usable KidsChoose launchable form,‖251 it provides no explanation for why
248
Pl.‘s Opening Br. 40; JX 240; JX 242.
249
JX 242.
250
JX 414; JX 415; JX 416.
251
Tr. 139 (Goodman).
63
the data was not usable or how being in a final, usable form was required per the
parties‘ 2014 agreement.252 Hence, inTEAM has not met its burden of proving
Heartland did not comply with its obligations.
2. Heartland did not breach its obligations with respect to
DST
inTEAM argues that Heartland did not cooperate with inTEAM‘s attempts
to create an interface between Heartland‘s Nutrikids and WebSMARTT and
inTEAM‘s DST, which would have allowed DST to extract data from Nutrikids
and WebSMARTT.253 inTEAM argues Heartland violated Section 2.8 of the Co-
Marketing Agreement by not using ―commercially reasonable best efforts‖ to
maintain its products for the purpose of cross-promoting inTEAM‘s products, as
well as Section 2.6 of the Co-Marketing Agreement, by not providing limited
access to Heartland‘s technology for the purpose of allowing inTEAM to ―market,
advertise and promote sales and licenses‖ of Heartland.254
As an initial matter, Nutrikids is not subject to the Co-Marketing Agreement,
and any claim regarding obligations towards that product fail. The ―HPS
252
Pl.‘s Opening Br. 40; JX 242 (―[Heartland] will return the meal history for
breakfast and lunch or ―invalid ID‖ or ―no meal history‖. [sic] We will not need
other information or addresses. This query will include some students eligible for
free meals and possibly on other [Heartland] platforms as well.‖).
253
Pl.‘s Opening Br. 46.
254
Id. at 46, 57.
64
Products‖ that are subject to the Co-Marketing Agreement are WebSMARTT,
MLM, Student Rewards, and Off-Campus Merchants.255 There is no mention of
Nutrikids, a product Heartland acquired well after the SL-Tech transaction, in the
Co-Marketing Agreement.256 Therefore, the Co-Marketing Agreement imposes no
obligations as to this product.
With regard to WebSMARTT, inTEAM fails to demonstrate adequately the
basis for this alleged breach. inTEAM‘s sole evidence of this breach is
Goodman‘s testimony that inTEAM ―looked forward to [Heartland‘s] continuing
support connections to WebSMARTT for our Portland contract.‖257 To the extent
this claim relates to Section 2.8, inTEAM does not explain how Heartland failed to
use ―commercially reasonable best efforts‖ to ―develop and maintain‖
WebSMARTT with the specifications under Section 2.8 for the purpose of cross-
promotion.258 inTEAM merely states that Heartland ―failed to continue supporting
an interface‖ that inTEAM relied on for an ―existing contract.‖259 As to Section
2.6, inTEAM does not allege attempts to cross-promote WebSMARTT or that
255
Co-Marketing Agreement at 1.
256
Pl.‘s Opening Br. 41.
257
Tr. 89 (Goodman).
258
Co-Marketing Agreement § 2.8.
259
Pl.‘s Opening Br. 46.
65
inTEAM was not able to access to Heartland‘s technology in order to do so. Thus,
inTEAM fails to prove that Heartland breached Section 2 of the Co-Marketing
Agreement.
D. No Affirmative Defenses Bar inTEAM’s Claims
Heartland asserts the following affirmative defenses as a bar to inTEAM‘s
claims: (1) laches, (2) prior material breach, (3) unclean hands, and (4) failure to
mitigate damages.
First, Heartland argues that the doctrine of laches bars inTEAM‘s claims.
The standard for a traditional laches analysis requires a defendant to prove three
elements: (1) the plaintiff had knowledge of the claim; (2) the plaintiff
unreasonably delayed in bringing suit on that claim; and, (3) the delay resulted in
injury or prejudice to the defendant.260 Heartland asserts that inTEAM knew of the
breach by December 6, 2014,261 but inTEAM waited nine months to file this suit
on September 21, 2015.262 Heartland ignores inTEAM‘s July 20, 2015 letter to
260
Homestore, Inc. v. Tafeen, 888 A.2d 204, 210 (Del. 2005).
261
JX 381 (containing an e-mail attachment to Goodman from Craig Cheslog,
Prinicipal Advisor to California State Superintendent of Public Instruction, which
showed the California Department of Education was using Colyar‘s product for
administrative review, and was working with Heartland to create a menu planning
interface that could be used by state administrators in Colyar‘s system); Tr. 147-49
(Goodman).
262
Def.‘s Answering Br. 45-46.
66
Heartland notifying Heartland of its breach.263 Thus, the ―delay‖ at issue here is
seven months. Heartland fails to convince me that this was an unreasonable delay
under the facts and circumstances of this case. Additionally, Heartland has not
argued adequately that it suffered any injury from this seven-month delay. If the
alleged injury is Heartland‘s investment in the Colyar relationship, Heartland
engaged in that behavior before inTEAM knew about the breach. To the extent
that Heartland has incurred some cost by investing further in its relationship with
Colyar after finding out about inTEAM‘s objections, it did so at its own risk, as it
was on notice of its possible violation.
Second, Heartland asserts that inTEAM‘s development of a product that
improperly competes with WebSMARTT was a prior material breach by inTEAM
that bars its recovery. As discussed above, however, inTEAM is not in breach of
its non-competition obligations, and this defense fails.264
Third, Heartland asserts the unclean hands defense. Heartland argues that
inTEAM ―violated conscience or good faith or other equitable principles in [its]
conduct‖265 by concealing its prohibited development of the Menu Compliance
263
JX 433.
264
See infra Section II.A.
265
Sutter Opportunity Fund 2 LLC v. Cede & Co., 838 A.2d 1123, 1131 (Del. Ch.
2003).
67
Tool+, and as a result, ―the doors of equity should shut against [inTEAM].‖266 The
Co-Marketing Agreement, however, allowed inTEAM to develop its Menu
Compliance Tool+. Further, the evidence on which Heartland relies actually
undercuts Heartland‘s argument.267 On June 8, 2012, the same year the Menu
Compliance Tool+ was approved as a Menu Planning Tool, Erik Ramp, Vice
President of Operations at inTEAM, e-mailed Roberts at Heartland to ―make sure
[he] was clear about what [inTEAM was] doing with menu compliance.‖268 Ramp
informed Roberts that inTEAM was ―building a menu compliance tool for use
under Option #2 to certify menus submitted under the new regulations,‖269 which
expressly included menu planning and analysis of certain nutrients, namely
calories, saturated fat, and sodium.270 Ramp went on to assure Roberts that
inTEAM was ―not building full nutrient analysis software like what you have in
the POS.‖271 He added that the product may be sold to both states and districts.272
266
Id.
267
Tr. 1185-87 (Roberts).
268
JX 425.
269
Id.
270
See supra Section I.B.
271
JX 425.
272
Id.
68
And he ended by stating that the new software is an add-on to DST.273 This is
exactly what inTEAM proceeded to do. Thus, Heartland fails to prove that
inTEAM was not being transparent. Moreover, as explained below, Heartland has
also not met its burden of proving that inTEAM is ―surreptitiously developing‖
point of sale software.274 Thus, the claim of unclean hands fails.275
Fourth, and finally, Heartland asserts the defense that inTEAM has made no
effort to mitigate damages. Because I do not award damages for Heartland‘s
breach of the Co-Marketing Agreement, I need not analyze this defense.
E. Goodman Did Not Breach His Non-Competition Obligations
Under the Asset Purchase Agreement or the Consulting
Agreement
Heartland argues that Goodman‘s ownership of CN Central and his related
work at inTEAM violates the non-competition provisions in both the Asset
Purchase Agreement and the Consulting Agreement because CN Central can
generate the same types of data that WebSMARTT could prior to closing, namely
analyzing nutrients, planning menus, and generating production records, and
273
Id.
274
See infra Section II.E.2.
275
Def.‘s Answering Br. 53.
69
because inTEAM is developing point of sale software.276 Heartland, however, fails
to prove these allegations.
1. Work at inTEAM
The Asset Purchase Agreement provides that Goodman improperly
competes with Heartland if he engages, directly or indirectly, ―in providing any
Competitive Services or Products‖ or ―any business that [SL-Tech] conducts as of
the Closing Date‖ in the United States.277 Under the Consulting Agreement,
Goodman may not ―directly or indirectly . . . become an owner of any outstanding
capital stock, or a member or partner of any . . . entity that engages in Competitive
Business within the Restricted Territory; or perform or provide any services . . . for
any . . . entity that engages in Competitive Business within the Restricted
Territory.‖278
The definitions of SL-Tech and Competitive Services or Products (in the
Asset Purchase Agreement) and Competitive Business (in the Consulting
Agreement) exclude the inTEAM Business.279 The inTEAM Business expressly
276
Def.‘s Opening Br. 30, 33-34.
277
Asset Purchase Agreement § 5(n).
278
Consulting Agreement ¶ 11.a.
279
The Consulting Agreement directly states ―Competitive Business shall not include
the inTEAM Business (as defined in the Asset Purchase Agreement).‖ Consulting
Agreement § 11(a); see also supra Section I.B.2.a.i.
70
includes the ability to create menus and generate production records, and analyzing
certain nutrients does not per se make a product competitive with
WebSMARTT.280 Therefore, Heartland has not proven Goodman violated his non-
competition obligations by owning a competitive business under either the Asset
Purchase Agreement or the Consulting Agreement.
2. Point-of-sale software
Heartland also fails to prove that inTEAM is surreptitiously developing
point of sale (―POS‖) software and, as such, has failed to prove that Goodman
breached certain non-competition obligations under the Asset Purchase Agreement
or the Consulting Agreement.
Heartland cites to Revolution Retail Sys., LLC v. Sentinel Techs., Inc., as
support for the proposition that ―broad non-compete language regarding
development‖281 would prevent an entity from beginning to develop, design, or
market a competitive product, i.e. a ―running start.‖282 Even if the provisions in the
Asset Purchase Agreement or the Consulting Agreement at issue here prohibit a
―running start,‖ Heartland fails to prove that inTEAM began such a process.
280
See supra Section II.A.
281
Def.‘s Opening Br. 38.
282
Revolution Retail Sys., LLC v. Sentinel Techs., Inc., 2015 WL 6611601, at *11
(Del. Ch. Oct. 30, 2015).
71
Heartland relies on one e-mail to prove the ―running start‖ allegations. That e-
mail, sent by inTEAM employee Kim Coleman to the Kentucky School District,
states that inTEAM is ―looking at adding a POS feature‖ to the inTEAM software
package and requests a copy of Kentucky‘s POS maintenance invoice for
―competitive research purposes.‖283 Griffin testified that inTEAM knew this type
of software improperly would compete with Heartland until September 30, 2016;
thus, inTEAM simply was ―gathering information‖ and conducting research.284
Comparatively, in Revolution Retail, the defendant claimed that the non-
competition provision at issue only prohibited an ―actual sale‖ of a competitively
priced product.285 The defendant argued it was not in breach because it was
conducting ―market research,‖ and it never formally agreed to sell a competitive
product.286 This Court held that the defendant was in fact engaging in actual
negotiations intended to sell the competitive product, and the non-competition
283
JX 418, at 2.
284
Tr. 471-72 (Griffin).
285
Revolution Retail, 2015 WL 6611601, at *11-12.
286
Id.
72
agreement prohibited such behavior, as well as other behavior occurring much
earlier than the point of sale.287
The plaintiff in that case proved the breach through an exchange of e-mails
that showed multiple employees‘ ―desire to move towards, or beyond, the
[competitive] price line,‖288 as well as a document specifying the technical plans to
develop the competitive product, and various sell-side documents prepared during
the non-competition period that explicitly discussed the competitive product.289
Here, one e-mail stating that inTEAM is ―looking at adding a POS feature‖ hardly
rises to the level of proving by a preponderance of evidence that inTEAM has
begun development of POS software, or is otherwise actively engaging in selling
POS software while claiming to gather information and conduct research.290 As
such, Heartland has failed to show a breach of Goodman‘s non-competition
obligations.
287
Id. (stating defendant ―undertook, directly and indirectly, to assist and advise
others, and to both engage in, and propose to engage in, the development,
marketing, and manufacturing of the . . . R50 at per unit selling prices above the
Inflation Adjusted Price Line. I find unpersuasive [defendant]‘s argument that the
R50 cannot be proven to ‗have a selling price‘ above the price line because
[defendant] never actually sold an R50 at any price during the Non-Competition
Period.‖).
288
Id. at *12.
289
Id. at *12-13.
290
Def.‘s Opening Br. 26.
73
F. Goodman Did Not Breach His Non-Solicitation Obligations Under
the Asset Purchase Agreement
Heartland argues that Goodman breached his non-solicitation obligations
under the Asset Purchase Agreement by ―working on behalf of inTEAM‖ to solicit
business from an undisputed Protected Customer, St. Paul Public Schools.291
Section 5(o) of the Asset Purchase Agreement prohibits solicitations made
―for the purpose of providing Competitive Services or Products.‖ 292 The definition
of ―Competitive Services or Products‖ explicitly excludes the inTEAM Business.
Therefore, any solicitation of a customer of Heartland simply for the purposes of
providing the inTEAM products included in the inTEAM Carve-Out is not a
violation of this provision. As such, Goodman is not in breach, and the Court need
not address Goodman‘s argument that the Asset Purchase Agreement‘s non-
solicitation provision does not bind him.
G. Goodman Breached His Non-Solicitation Obligations Under the
Consulting Agreement
Heartland also argues that Goodman breached his non-solicitation
obligations in the Consulting Agreement by encouraging St. Paul Public Schools to
291
Id. at 39-40; JX 25, at 291 (showing list of customers of inTEAM for twelve
months ended on June 30, 2011); Tr. 242 (Goodman) (stating that St. Paul was a
WebSMARTT customer prior to the transaction between SL-Tech and Heartland
and was a customer of Heartland after the transaction).
292
Asset Purchase Agreement § 5(o).
74
modify adversely its relationship with Heartland. Heartland points to two e-mail
chains discussing St. Paul Public Schools as a possible opportunity for inTEAM as
evidence that Goodman breached his non-solicitation obligations under the
Consulting Agreement. In the first e-mail chain, dated July 24, 2014, Goodman
emails Hughes about the ―St. Paul Window of Opportunity‖ asking whether
Tuckwell relayed the news to her about the opportunity.293 Included in Hughes‘
reply is a note to Jim Hemmen, the point of contact at St. Paul, regarding
inTEAM‘s ―menu planning tool/production record alternative to
WebSMARTT.‖294 Hughes also plans to have a future conversation with
Goodman about Tuckwell‘s ―new approach‖ to get Hemmen interested in
inTEAM.295
In the second e-mail chain, Tuckwell e-mails Ronnei, the COO at St. Paul,
on December 15, 2014, reiterating her July conversation with Hemmen about St.
Paul‘s struggles with automating production records.296 Tuckwell goes on to say
that in August she offered to provide a demonstration of inTEAM‘s product, once
293
JX 234.
294
Id.
295
Id.
296
JX 248.
75
again, as an ―alternative‖ to the WebSMARTT system.297 Tuckwell then forwards
this e-mail to Hughes, who forwards it to Goodman, stating that Hemmen is
leaving St. Paul, and this is a positive development since Hemmen was blocking
inTEAM‘s efforts in this regard. Further, she applauds Tuckwell to Goodman for
her efforts of continuing to ―push [St. Paul] to use [inTEAM‘s] tools.‖298
The Consulting Agreement prohibits Goodman from directly or indirectly,
on behalf of himself or any other entity, ―encourag[ing] or attempt[ing] to
encourage any Customer of Heartland to terminate, or materially and adversely
modify, its relationship with Heartland or to cease or refrain from doing business
with Heartland.‖299 Customer is defined as any current or prospective customers,
clients, vendors, and suppliers of either SL-Tech prior to closing or Heartland.300
The Customer must be someone ―with whom the Consultant worked, or about
whose business or needs the Consultant gained information, either in his capacity
as an officer with [SL-Tech], or in his capacity as a Consultant [for Heartland].‖301
Thus, any direct or indirect solicitation by Goodman that attempted to affect
297
Id.
298
Id.
299
Consulting Agreement ¶ 11(b).
300
Id.
301
Id.
76
adversely an existing customer‘s relationship with Heartland would breach the
Consulting Agreement, regardless of whether Goodman sought to provide
Competitive Products and Services or a Competitive Business.
Importantly, Goodman does not attempt to rebut the facts that St. Paul is a
customer of Heartland, that St. Paul was a customer of SL-Tech while he was
CEO, that Tuckwell or Hughes work for him, that Tuckwell was marketing
inTEAM‘s products as an ―alternative‖ to WebSMARTT, that Goodman was
aware of an opportunity at St. Paul, or that he was proactively discussing with his
employees attempts to offer inTEAM as an ―alternative‖ to WebSMARTT.302
Instead, Goodman argues that inTEAM was merely ―help[ing] out a consulting
client‖ and that ―inTEAM had every right to market that product to the St. Paul
[P]ublic [S]chools.‖303 What Goodman‘s argument fails to consider is that by
allowing his employees to market this product as an ―alternative‖ to
WebSMARTT, he indirectly is involved in attempting to encourage St. Paul to
modify or alter its relationship with Heartland by replacing WebSMARTT with
inTEAM‘s products. The language in the non-solicitation provision prohibits any
attempts to get customers to materially or adversely ―modify‖ their relationship
with Heartland. Goodman encouraged, or at the very least implicitly condoned,
302
Tr. 240-44.
303
Id. at 244.
77
inTEAM employees‘ efforts to persuade a Heartland customer to use inTEAM
products as an alternative to WebSMARTT.
Goodman attempts to assert multiple defenses against Heartland‘s ability to
bring these claims—namely, laches, acquiescence, waiver/estoppel, unclean hands,
and prior material breach of contract. While I agree that there is ―evidence
establishing that [Heartland] has long been aware that inTEAM developed and sold
software with the functions [Heartland] now alleges are wrongfully
competitive,‖304 I need not analyze individually the affirmative defenses because
each focuses on whether inTEAM‘s business as currently conducted violates the
various non-competition provisions. Here, Goodman has breached the second
clause of the non-solicitation provision, which is not dependant on and does not
relate to the definition of the inTEAM Business. Instead, it precludes Goodman
from encouraging any customer of Heartland to change adversely its relationship
with Heartland. Thus, Goodman has not argued that any of the affirmative
defenses specifically apply to this clause of the non-solicitation provision.
Additionally, no facts in the record support the application of any of the
affirmative defenses to the non-solicitation clause of the Consulting Agreement.
304
Pl.‘s Answering Br. 45; see JX 425; Tr. 1177 (Roberts).
78
H. Remedies
In awarding relief, this Court ―has broad flexibility and discretion.‖305 The
Court also must ―put in place a balanced remedy that is equitable and reasonably
tailored to address the precise nature of the misconduct at issue.‖ 306 In the context
of violations of restrictive covenants, this Court has awarded both injunctive and
monetary relief.307 To obtain an injunction, the plaintiff must show ―(1) actual
success on the merits, (2) irreparable harm, and (3) that the balance of the equities
weighs in favor of issuing the injunction.‖308 With respect to damages, ―[t]he law
does not require certainty in the award of damages where a wrong has been proven
and injury established.‖309 ―[W]hen a contract is breached, expectation damages
305
DONALD J. WOLFE, JR. & MICHAEL A. PITTENGER, CORPORATE AND
COMMERCIAL PRACTICE IN THE DELAWARE COURT OF CHANCERY § 12.01(a)
(2014).
306
Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *24 (Del. Ch. Feb. 18,
2010).
307
See, e.g., Concord Steel, Inc. v. Wilmington Steel Processing Co., 2009 WL
3161643, at *14-17 (Del. Ch. Sept. 30, 2009) (awarding money damages,
injunctive relief, and attorney‘s fees for breach of a non-competition covenant).
308
Concord Steel, 2009 WL 3161643, at *18.
309
Red Sail Easter Ltd. P’rs, L.P. v. Radio City Music Hall Prods., Inc., 1992 WL
251380, at *7 (Del. Ch. Sept. 29, 1992).
79
can be established as long as the plaintiff can prove the fact of damages with
reasonable certainty. The amount of damages can be an estimate.‖310
1. inTEAM is entitled to an injunction
inTEAM seeks an injunction ordering Heartland ―and its agents,
representatives and any persons in active concert or participation with them
(including Colyar) from competing directly or indirectly with the ‗inTEAM
Business,‘ which includes DST‘s ‗unique state value added functionality‘ as
defined in Exhibit C to the CMA.‖311 As discussed above, inTEAM has proven
actual success on the merits by showing that Heartland breached the non-
competition agreement in Section 9.1.1 of the Co-Marketing Agreement.
Delaware law recognizes the uncertainty of what ―could have been‖ had the
non-competition agreement been honored and, thus, has consistently found a threat
of irreparable injury in circumstances where a covenant not to compete is
breached. Measuring the effects of breaches like this involves a costly process of
educated guesswork with no real pretense of accuracy. This court has been candid
310
SIGA Techs., Inc. v. PharmAthene, Inc., 132 A.3d 1108, 1111 (Del. 2015).
311
Pl.‘s Opening Br. 63.
80
to admit this reality and to use injunctive relief as the principal tool of enforcing
covenants not to compete.312
Here, it is unknowable whether inTEAM would have gained more business,
such as that from the Texas Department of Agriculture, had Heartland not
improperly competed with inTEAM. Thus, the irreparable harm prong is met.
Finally, the equities favor injunctive relief as Heartland agreed not to pursue
certain types of actions in the Co-Marketing Agreement, specifically, providing
integrated administrative review and menu planning services to state agencies.
And, inTEAM will continue to suffer the specific type of harm it sought to protect
against in signing reciprocal non-competition clauses if Heartland is allowed to
continue engaging in this behavior.
Heartland‘s breach began on March 17, 2014, when the relationship with
Colyar first began, and ran until September 8, 2015, when Heartland announced
Texas had not selected its proposal with Colyar.313 This totals almost eighteen
months of breach. Thus, I find the appropriate remedy is to extend the non-
competition agreement from September 30, 2016 to March 21, 2018 in order to
give inTEAM the full benefit of its bargain.
312
Hough Assocs. Inc. v. Hill, 2007 WL 148751, at *18 (Del. Ch. Jan. 17, 2007)
(footnotes omitted).
313
JX 295; JX 203; Tr. 1162 (Roberts).
81
2. inTEAM is not entitled to costs and fees
The Co-Marketing Agreement states that ―if a court of competent
jurisdiction . . . determines that either Party has breached this Agreement, then the
breaching Party shall be liable and pay to the non-breaching Party the reasonable
and verifiable legal fees and costs incurred in connection with such litigation or
proceeding.‖314 The Co-Marketing Agreement, however, limits the amount of any
monetary payments by a breaching party to ―not exceed the Fees previously paid
by the other Party.‖315 The provisions state further that these limitations ―shall not
apply with respect to (A) damages caused by the willful misconduct of the other
Party; (B) damages resulting from a Party‘s breach of its confidentiality obligations
. . . or (C) Losses that are the subject of indemnification . . .‖316 inTEAM does
not rebut the fact that inTEAM has not paid Heartland any fees under the Co-
Marketing Agreement, and inTEAM does not argue that any of the exceptions to
the limitation under Section 11.3 apply. Therefore, inTEAM is not entitled to any
costs and fees pursuant to the limitation in Section 11.2 of the Co-Marketing
Agreement.
314
Co-Marketing Agreement § 6.5.
315
Id. § 11.2.
316
Id. §11.3.
82
3. Heartland is entitled to an injunction
Section 11(e) of the Consulting Agreement states that ―any violation or
threatened violation of the provisions of Section 11 by the Consultant would cause
Heartland irreparable harm, and the Consultant agrees that Heartland shall be
entitled, in addition to any other right or remedy it may have at law or in equity, to
an injunction.‖317 Heartland contends that in order to receive the full benefit if its
bargain, the Court should tack on the amount of time from the beginning of
Goodman‘s breach in July 2014, to the end date of the agreement in September
2016, equaling two years and two months.318
Heartland has proven that Goodman breached Section 11(b) of the
Consulting Agreement from July 24, 2014 until December 15, 2014, totaling
almost five months. Essentially, Heartland only received four-and-a-half years of
non-solicitation, rather than the five it bargained for. The parties concede that
under the Consulting Agreement, ―any violation or threatened violation of the
provisions of Section 11 by the Consultant would cause Heartland irreparable
317
Consulting Agreement ¶ 11(e).
318
Def.‘s Opening Br. 51; see also Consulting Agreement ¶ 11(f) (―Consultant agrees
that the time periods referenced [in the operative provisions] shall not include any
period(s) of violation or period(s) of time required for litigation to enforce the
covenants set forth herein.‖).
83
harm.‖319 In balancing the equities in this case, I find Heartland is entitled to an
injunction against Goodman continuing the second clause of the non-solicitation
provision for six months beginning September 30, 2016, and ending March 22,
2017.
4. Heartland is entitled to damages
Section 3 of the Consulting Agreement states that ―[i]n the event the
Consultant breaches Sections 7, 8, 9, 10, or 11 of this Agreement, Heartland shall
have no obligation to pay the Consultant any compensation set forth herein.‖320
Heartland argues Goodman should disgorge all compensation he received, totaling
$600,000, along with pre- and post-judgment interest.321 Heartland continued
paying Goodman fees in July, August, and September 2014, all while Goodman
was breaching the non-solicitation provision. Pursuant to the Consulting
Agreement, Goodman lost his entitlement to those fees as soon as he began
319
Consulting Agreement ¶ 11(e); see Hough Assocs. Inc. v. Hill, 2007 WL 148751,
at *18 (Del. Ch. Jan. 17, 2007) (―[T]he Non-Competition Agreement should be
enforced according to its plain terms, which in this case, specify that Hill‘s breach
would, by definition, cause irreparable harm to Hough and justify the entry of an
injunction against him. No one has to sign a contract with such a provision, but
when one does, he should not complain if the terms are given effect.‖).
320
Consulting Agreement ¶ 3.
321
Def.‘s Opening Br. 51-52.
84
breaching.322 The agreement, however, does not state that Goodman must return
the fees he was entitled to before the breach occurred. Hence, I find that Goodman
must disgorge any consulting fees paid in July, August, and September 2014,
totaling $50,003.01.
III. CONCLUSION
For the foregoing reasons, I find in favor of inTEAM on its non-competition
claims against Heartland and against Heartland on all its claims against inTEAM.
Heartland shall be enjoined for a period of approximately eighteen months from
―engag[ing], directly or indirectly, on its own behalf or as a principal or
representative of any person, in providing any services or products competitive
with the inTEAM Business.‖323
I also find in favor of Heartland and against Goodman for breach of the
second clause of the non-solicitation provision in the Consulting Agreement.
Goodman shall be enjoined for a period of approximately five months from
―directly or indirectly, on behalf of himself or on behalf of any other person, firm
or business entity . . . encourag[ing] or attempt[ing] to encourage any Customer of
Heartland to terminate, or materially and adversely modify, its relationship with
322
Consulting Agreement ¶ 3 (stating in the event of breach, Heartland has ―no
obligation to pay the Consultant any compensation‖).
323
Co-Marketing Agreement § 9.1.1.
85
Heartland or to cease or refrain from doing business with Heartland.‖324 Goodman
also shall disgorge $50,003.01 in consulting fees.
The parties shall submit a joint conforming final judgment within ten days.
IT IS SO ORDERED.
324
Consulting Agreement ¶ 11(b).
86
inTeam Associates, LLC v. Heartland Payment Systems, Inc.
Combined Opinion