Eyal Ephrat v. medCPU, INc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

EYAL EPHRAT and )
SONIA BEN-YEHUDA, )
)
Petitioners, )
v. ) C.A. No. 2018-0852-MTZ
)
MEDCPU, INC., )
)
Respondent. )

MEMORANDUM OPINION

Date Submitted: March 21, 2019
Date Decided: June 26, 2019

Douglas D. Herrmann, James H.S. Levine, and Ellis E. Herington, PEPPER
HAMILTON LLP, Wilmington, Delaware; Jay A. Dubow, PEPPER HAMILTON
LLP, Philadelphia, Pennsylvania; Attorneys for Petitioners Eyal Ephrat and Sonia
Ben-Yehuda

Patricia L. Enerio and Aaron M. Nelson, HEYMAN ENERIO GATTUSO &
HIRZEL LLP, Wilmington, Delaware; Adam P. Samansky, MINTZ, LEVIN,
COHN, FERRIS, GLOVSKY AND POPE, P.C., Boston, Massachusetts; Frank J.
Earley and Andre Cizmarik, MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND
POPE, P.C., New York, New York; Attorneys for Respondent medCPU, Inc.

ZURN, Vice Chancellor.
 The petitioners here, former officers and directors of the respondent, sued to

enforce their rights to payments under a separation agreement. The company

counterclaimed, alleging the petitioners had breached the separation agreement and

had no right to payment. Petitioners seek advancement to defend themselves against

the counterclaims. The parties cross-moved for summary judgment instead of trial.

The motions present two issues.

The first is whether the post-separation conduct underlying the company’s

counterclaims is “by reason of the fact” of the petitioners’ corporate status, or in

breach of personal contractual obligations. In my view, it is a little of both.

Although the conduct occurred after petitioners left their positions, some

counterclaims focus on petitioners’ use of confidential information they learned

during their time at the company. I conclude the claims relating to those allegations

warrant advancement, while petitioners’ breach of personal contractual obligations

do not.

Second, the company argues the petitioners released their claim for

advancement in the separation agreement. I disagree, and hold the petitioners did

not release their claims.

I. BACKGROUND

On the parties’ cross-motions for summary judgment, the facts are drawn from

the evidentiary record developed by the parties.
 A. Petitioners Were Officers, Directors, Employees, And Agents Of
medCPU And Covered By An Advancement Provision.

medCPU, Inc. (the “Company”) is a Delaware corporation in the business of

research, development, and commercialization of software related to electronic

medical record systems.1 Petitioners Eyal Ephrat and Sonia Ben-Yehuda (together,

“Petitioners”) founded medCPU in 2008, with Ephrat serving as its Chief Executive

Officer and Ben-Yehuda as its President. Article SEVENTH of the Sixth Amended

and Restated Certificate of Incorporation of medCPU, Inc. (the “Charter”) states:

The Corporation shall, to the fullest extent permitted by the provisions
of Section 145 of the DGCL, as the same may be amended and
supplemented, indemnify and advance expenses to any and all persons
whom it shall have power to indemnify and advance expenses to, under
said section from and against any and all expenses, liabilities or other
matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of
any other rights to which those indemnified may be entitled under any
By-Law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacity and as to action in
another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee, or agent and
shall inure to the benefit of the heirs, executors and administrators of
such a person. Any amendment, repeal or modification of the foregoing
provisions of this Article SEVENTH shall not adversely affect any right
or protection of any director, officer or other agent of the Corporation
existing at the time of such amendment, repeal or modification. 2

1
Docket Item (“D.I.”) 14 Answer ¶ 5.
2
D.I. 1 Ex. A art. SEVENTH.

2
 Petitioners each entered into Loyalty Agreements with the Company effective

April 1, 2012.3 In relevant parts of the Loyalty Agreements, detailed below,

Petitioners agreed to keep “Confidential Information of the Corporation” in “strictest

confidence” and not to use or disclose that information.4

B. Petitioners Left medCPU And Executed Separation Agreements.

Petitioners were directors, officers, employees, and agents of medCPU until

they left the Company on September 28, 2016 (the “Separation Date”). At that time,

they entered into Separation Agreements. The Separation Agreements contain “the

entire agreement” between Petitioners and medCPU and “supersede[d] all prior

agreements,” while also incorporating the Loyalty Agreements:

This Agreement and the Loyalty Agreement shall constitute the entire
agreement and understanding of the parties with respect to the subject
matter herein and supersedes all prior agreements, arrangements and
understandings, written or oral, between the parties with respect to the
subject matter herein, including the Employment Agreement. The
Executive acknowledges and agrees that Executive is not relying on any
representations or promises by any representative of the Company
concerning the meaning of any aspect of this Agreement.5

3
D.I. 14 Answer ¶ 8.
4
D.I. 20 Ex. G § 1(a).
5
D.I. 20 Exs. B & C § 16.

3
 The Separation Agreements made clear the “covenants and obligations in the

Loyalty Agreement[s] continue to apply in accordance with the terms of the Loyalty

Agreement[s].”6 Some of those include:

A. to hold in strictest confidence and not to disclose or use any of
medCPU’s “Confidential Information” (as defined in the Loyalty
Agreement) and trade secrets;7

B. to return all medCPU Corporation Documents and Property;8 and

6
Id. § 9.
7
Id. §§ 1(a). The Loyalty Agreements defined Confidential Information as follows:
any [medCPU] proprietary or confidential information, technical data, trade
secrets, know-how, including, but not limited to, research, product plans and
developments, prototypes, products, services, client lists and clients
(including, but not limited to, clients of [medCPU] on whom [Petitioners]
call, from whom [Petitioners] provide services or with whom [Petitioners]
become acquainted during the term of [Petitioners’] employment),
prospective clients and contacts, proposals, client purchasing practices,
prices and pricing methodology, cost information, terms and conditions of
business relationships with clients, client research and other needs, markets,
software, developments, inventions, processes, formulas, technology,
designs, drawings, engineering, distribution and sales methods and systems,
sales and profits figures, finances, personnel information (including, but not
limited to, information regarding compensation, skills and duties), as well as
reports and other business information that [Petitioners] learn of, obtain, or
that is disclosed to [Petitioners] during the course of [Petitioners’]
employment, either directly or indirectly, in writing, orally, or by review or
inspection of documents or other tangible property. However, Confidential
Information does not include any of the foregoing items which has been
made generally available to the public and become publicly known through
no wrongful act of [Petitioners][.]
D.I. 20 Ex. G § 1(a).
8
Id. § 3. “Corporation Documents and Property” includes:
records, data, notes, reports, information, proposals, lists, correspondence,
emails, specifications, drawings, blueprints, sketches, materials, other
documents, or any reproductions or copies (including but not limited to on
4
 C. for the 12-month period following their last date of employment
with medCPU, not to, “directly or indirectly, in any capacity
whatsoever, engage in . . . or have any connection with any
business or venture that is engaged in any activities competing
with the activities of” medCPU.9
And Petitioners agreed they would not:

(i) contact or attempt to contact (whether in person, by email, phone, or
otherwise) the Company’s employees, clients or potential clients,
consultants, or advisors; (ii) enter, or attempt to enter, any of the
Company’s offices; (iii) access, or attempt to access, any of the
Company’s computer systems or electronic communication systems;
(iv) take any action, or attempt to take any action, on behalf of the
Company; or (v) represent to any person that the Executive has
authority to act on behalf of the Company.10

Petitioners also had to “cooperate with the Company, and upon the

Company’s request, to (i) provide the Company with computer and/or system

administrative access codes for the Company’s computer and email systems; and (ii)

transition the Company’s clients and the Executive’s responsibilities to other

employees and advisors of the Company.”11

computer discs or drives) of any of the aforementioned items either
developed by me pursuant to [their] employment with [medCPU] or
otherwise relating to the business of the Corporation, retaining neither copies
nor excerpts thereof.”
Id.
9
Id. § 4(a).
10
D.I. 20 Exs. B & C § 1.
11
Id. § 2(b).

5
 In exchange, medCPU agreed to pay Petitioners monthly separation payments

for twelve months.12 The Company had the right to stop paying Petitioners the

monthly separation payments and recoup any money already paid to Petitioners

under the Separation Agreements if the Petitioners breached either the Loyalty or

Separation Agreements.13

The Separation Agreements provide a limited indemnification right for

third-party claims:

The Company agrees to indemnify, defend and hold harmless
Executive in connection with any claims by third parties that may be
brought against Executive, to the fullest extent permitted by the
Company’s articles of incorporation and/or bylaws. The Company
agrees that it shall maintain directors and officers liability insurance
coverage that shall cover claims against Executive to the same extent
as its current officers and directors.14

But Petitioners agreed in the Separation Agreements to release a broad set of claims

against medCPU, as well as “any and all claims for counsel fees and costs”:

The Executive . . . hereby agrees to irrevocably and unconditionally
waive, release and forever discharge the Company, Insperity and
its/their past, present and future affiliates . . . (collectively, the
“Company Released Parties”) from any and all waivable claims,
charges, demands, sums of money, actions, rights, promises,
agreements, causes of action, obligations and liabilities of any kind or
nature whatsoever, at law or in equity, whether known or unknown,
existing or contingent, suspected or unsuspected, apparent or
concealed, foreign or domestic (hereinafter collectively referred to as

12
Id. § 2(a).
13
Id. § 9.
14
Id. § 6 (emphasis added).

6
 “claims”) which he/she has now or in the future may claim to have
against any or all of the Company Released Parties based upon or
arising out of any facts, acts, conduct, omissions, transactions,
occurrences, contracts, claims, events, causes, matters or things of any
conceivable kind or character existing or occurring or claimed to exist
or to have occurred prior to the date of the Executive’s execution of this
Agreement in any way whatsoever relating to or arising out of
Executive’s employment with the Company Released Parties or the
termination thereof, including, without limitation, any right under the
Employment Agreement. Such claims include, without limitation, . . .
any other federal, state or local statutory laws relating to employment,
discrimination in employment, termination of employment, wages,
benefits or otherwise . . . any common law claims, including but not
limited to actions in tort, defamation and breach of contract; any claim
or damage arising out of Executive’s employment with or separation
from the Company Released Parties (including a claim for retaliation)
under any common law theory or any federal, state or local statute or
ordinance not expressly referenced above; and any and all claims for
counsel fees and cost.15

C. Petitioners Sue Over The Separation Agreement, And medCPU
Counterclaims.

On July 7, 2017, Petitioners sued medCPU in this Court, claiming medCPU

breached the Separation Agreements by repudiating its obligation to make

payments.16 medCPU answered and asserted affirmative defenses and

counterclaims, stating it ceased making payments under the Separation Agreements

because Petitioners breached the Loyalty and Separation Agreements first.17

According to medCPU, Petitioners formed non-party Health Precision, Inc. on

15
Id. § 3(a).
16
Ephrat v. medCPU, Inc., C.A. No. 2017-0493-MTZ (the “Merits Action”), D.I. 1.
17
Merits Action, D.I. 4.

7
December 30, 2016, and Health Precision is competing or will compete with

medCPU.18 Ephrat is Health Precision’s Chief Executive Officer and Ben-Yehuda

is its President.19 Petitioners contacted medCPU clients or potential clients and

marketed their competitive product.20 medCPU alleged Petitioners supported these

competitive activities by misappropriating information from the Company,

including by continuing to use their medCPU email accounts,21 and improperly

contacting medCPU employees.22

The Company brought six counterclaims. Count I asserts Petitioners breached

their Loyalty Agreements by soliciting a medCPU client after the Separation Date,23

working for a competitor after the Separation Date,24 retaining medCPU emails

Petitioners obtained after leaving medCPU,25 and retaining medCPU Corporation

Documents and Property.26

18
Id. Countercl. ¶ 16.
19
Id.
20
Id. ¶¶ 17-18.
21
Id. ¶¶ 20-29.
22
Id. ¶¶ 30-33.
23
Id. ¶ 41.
24
Id. ¶¶ 42-43.
25
Id. ¶¶ 44-45.
26
Id. ¶¶ 46-47.

8
 Count II asserts that these acts also breached the Separation Agreements. The

Company claims Petitioners further breached the Separation Agreements by

“contacting then-current employees of medCPU,”27 and by “accessing and/or

attempting to access medCPU’s computer systems or electronic communication

systems.”28

Count III alleges that given their agreement not to engage in competitive

activities for one year following the Separation Date, Petitioners breached the

implied covenant of good faith and fair dealing by continuing to communicate with

a medCPU client, receiving medCPU emails after their departure from medCPU,

accessing medCPU’s computer systems or electronic communication systems, and

communicating with medCPU employees.29

In Count IV, medCPU seeks a declaration that because of Petitioners’

breaches, it “is not obligated to provide any benefits or make any further payments

to [Petitioners] under their Separation Agreements.”30 Count V asserts that

Petitioners misappropriated and did not return medCPU Confidential Information,

Corporation Documents and Property, and trade secrets “in their possession after

27
Id. ¶¶ 61-62.
28
Id. ¶¶ 63-64.
29
Id. ¶¶ 72-79.
30
Id. ¶¶ 102-03.

9
separation from employment with medCPU.”31 And Count VI asserts an unjust

enrichment claim for the separation payments medCPU made to Petitioners, as

Petitioners supposedly experienced a significant benefit from misappropriating

medCPU’s information and breaching their obligations under the Loyalty and

Separation Agreements.32

D. Petitioners Seek Advancement.

On November 21, 2018, Petitioners sued in this Court for advancement and

indemnification under the Charter to cover their expenses in defending against

medCPU’s counterclaims in the Merits Action. The parties cross-moved for

summary judgment, and I heard argument on March 21, 2019.

II. ANALYSIS

On their cross-motions for summary judgment, the parties have not argued

that there are any issues of fact material to the disposition of either motion.

Under Court of Chancery Rule 56(h), the cross-motions therefore became “the

equivalent of a stipulation for decision on the merits based on the record submitted

with the motions.”33 The Court will thus decide the cross-motions as a matter of law

based on that record.

31
Id. ¶ 105.
32
Id. ¶ 112.
33
Ct. Ch. R. 56(h).

10
 A. A Portion Of The Counterclaims Are Asserted Against Petitioners
“By Reason Of The Fact” Of Their Services As Officers And
Directors.

“Section 145(e) of the [DGCL] confers permissive authority on Delaware

corporations to grant advancements.”34 Article SEVENTH of the Charter provides

advancement rights “to the fullest extent permitted by the provisions of Section 145

of the DGCL.”35 Under that language, the Charter’s advancement right is

coterminous with Section 145.36 The Company’s advancement obligation therefore

runs to “any and all persons whom it shall have power to indemnify and advance

expenses to” under Section 145,37 including officers, directors, employees, and

agents. It applies to actions taken in the covered capacity, “and shall continue as to

a person who has ceased to be a director, officer, employee, or agent.”38

The parties agree the Charter incorporates Section 145’s “by reason of the

fact” standard. An advancement claim arises “by reason of the fact” of a person’s

corporate capacity “if there is a nexus or causal connection between any of the

34
Marino v. Patriot Rail Co., 131 A.3d 325, 332 (Del. Ch. 2016).
35
D.I. 1 Ex. A art. SEVENTH.
36
Marino, 131 A.3d at 332; see also Reddy v. Elec. Data Sys. Corp., 2002 WL 1358761,
at *3 (Del. Ch. June 18, 2002) (“the plain import of this provision is to require [the
company] to advance funds to former employees like Reddy if § 145 of the DGCL would
permit it to do so”).
37
D.I. 1 Ex. A art. SEVENTH.
38
Id.

11
underlying proceedings contemplated by section 145(e) and one’s official corporate

capacity.”39 “The scope of an individual’s advancement rights normally turns on the

pleadings in the underlying litigation that trigger the advancement right.”40

The parties focus on timing and capacity: they dispute whether acts

Petitioners took after the Separation Date can support advancement. medCPU

argues its counterclaims “arise exclusively out of Petitioners’ misconduct after the

Separation Date, all in breach of personal obligations they undertook in the

Separation Agreement.”41 Petitioners find allegations underlying medCPU’s

counterclaims that discuss pre-separation conduct, and frame the counterclaims as

based on Petitioners’ use of information and contacts they obtained only by reason

of the fact of their service to medCPU. This Court has provided several decisions

analyzing advancement for a former fiduciary who allegedly used information

learned in an official capacity after leaving the company. I review them in

chronological order.

The first is Brown v. LiveOps, Inc., issued on the defendant corporation’s

motion to dismiss.42 The corporation had sued a former officer and director for

39
Homestore, Inc. v. Tafeen, 888 A.2d 204, 214 (Del. 2005).
40
Marino, 131 A.3d at 346.
41
D.I. 19 at 17-18.
42
903 A.2d 324 (Del. Ch. 2006). Taken to its nascence, this line of cases includes
Merritt-Chapman & Scott Corp. v. Wolfson, 321 A.2d 138 (Del. Super. Ct. 1974) and
Perconti v. Thornton Oil Corp., 2002 WL 982419 (Del. Ch. May 3, 2002). Those decisions
12
violating “its contractual and intellectual property rights by operating a competing

business” formed after the individual left the corporation.43 The corporation’s

claims included copyright infringement, unfair competition, misappropriation of

trade secrets, conversion, and breach of a termination agreement.44 The corporation

initially argued that many of those acts occurred before the individual left his

position, but later removed the pre-departure conduct from its claims.45 Doing so

allowed the corporation to argue “that the claims asserted against [the petitioner]

concern his personal misconduct after his termination as a director and officer of the

company.”46 The petitioner responded that “he would not have had access to the

confidential and proprietary information alleged to have been misappropriated had

he not been a corporate officer.”47

“After careful review of the underlying complaint,” this Court sided with the

petitioner because it was “clear that the claims alleged [] are inextricably intertwined

established that individuals who had access to non-public corporate information had it by
reason of the fact of their official capacities. The individuals in those cases traded for their
own benefit while still at the company, so the courts did not address the question presented
here concerning using the information after leaving the company.
43
LiveOps, 902 A.2d at 325.
44
Id.
45
Id. at 326.
46
Id. at 327 (emphasis in original).
47
Id.

13
with his position as an officer and director of the company.” 48 “[T]he copyright

infringement and the misappropriation of trade secrets claims allege[d] that [the

petitioner] gained access to the company’s source codes while he was a corporate

official at the company”49 and that the petitioner had “wrongly retained and copied

the proprietary information while he was” still at the corporation. 50 Because “[t]he

gravamen of the underlying complaint [was] that [the petitioner] had access to

proprietary information by reason of the fact that he was a director and officer [] and

that he wrongly used that information for his personal benefit,” this Court denied the

motion to dismiss the petitioner’s advancement claim.51

The next case is Zaman v. Amedeo Holdings, Inc., in which the petitioners

sought advancement to defend themselves against breach of fiduciary duty and

breach of contract claims.52 The underlying complaint alleged the petitioners

“breached their obligation to keep confidential certain information they acquired

while” serving as fiduciaries, disclosed the information to adversaries, and refused

to return the information.53 “Although this allegation ar[ose] in part out of conduct

48
Id. at 328.
49
Id.
50
Id. at 329.
51
Id. at 330.
52
2008 WL 2168397 (Del. Ch. May 23, 2008).
53
Id. at *30.

14
that took place after the” petitioners were removed from their positions as officers

and directors, the Court concluded they were still entitled to advancement because

the claims alleged that they “as fiduciaries, had access to confidential information

and breached their fiduciary duty by disclosing it to third parties and by

misappropriating it for themselves.”54 According to then-Vice Chancellor Strine,

that created “the necessary nexus between their official capacity and the claims” to

satisfy the “by reason of the fact” standard.55

In Pontone v. Milso Industries Corp., “[t]he central allegation [was] that [the

petitioner (a former officer and director) and others] engaged in a wrongful scheme

to induce several [] employees and many of their most lucrative customers to move”

to a new company.56 They allegedly did so with “highly proprietary confidential

information and trade secrets” they obtained from their “continuous and unrestricted

access” they enjoyed from their positions.57 The defendants moved to dismiss the

claim for advancement, and lost. Vice Chancellor Parsons summarized previous

54
Id. at *31.
55
Id.
56
100 A.3d 1023, 1030 (Del. Ch. 2014). Master LeGrow’s Final Report in Rizk v.
TractManager, Inc., C.A. No. 9073-ML (Del. Ch. May 30, 2014) was issued before
Pontone. Though the losing side took exceptions, the case settled before a decision on the
exceptions. In short, Rizk applied LiveOps: “Although the alleged wrongful retention of
the equipment and data did not occur until after the Plaintiffs were terminated from TMI,
the claims bear a causal connection to the Plaintiffs’ official capacity, because it was in
that capacity that they had access to the equipment and data.” Id. at 21.
57
Pontone, 100 A.3d at 1051.

15
decisions and noted, “[t]his Court has held previously that where the claims asserted

against a defendant in an action are based on the misuse of confidential information

that the defendant learned in his or her official corporate capacity, that action

qualifies as being asserted ‘by reason of’ that corporate capacity.”58 He concluded

the allegations were “based largely on [a] misuse and misappropriation of

confidential and proprietary information that he learned in his capacity as an officer

or director,” which was “sufficient to support the conclusion that [the petitioner] was

made a party to the [the case] ‘by reason of’ his former role as [an] officer or director,

even in the absence of a claim against him for breach of fiduciary duty.”59

The next decision arrived at a different conclusion. In Lieberman v.

Electrolytic Ozone, Inc.,60 the underlying proceeding involved claims against one

former officer and director, and one former officer. The company alleged those two

individuals breached a “Proprietary Information, Invention Assignment and

Non–Solicit and Non–Compete Agreement” because they failed “to return

[defendant’s] property and proprietary information” and did not “comply with post-

termination obligations[.]”61 Those obligations included destroying or delivering

58
Id. at 1052.
59
Id. at 1052-53.
60
2015 WL 5135460 (Del. Ch. Aug. 31, 2015).
61
Id. at *1.

16
information, returning company property, and not working for a competitor for one

year after the end of their employment.62 The petitioners argued the claims against

them were “based on the alleged misuse of confidential information that the

Plaintiffs learned as officers and employees.”63 Because they only had the

confidential information because of their roles at the company, the underlying

contractual claims were grounded in an “alleged misuse of the substantial fiduciary

responsibility that they were given in their capacities as employees, officers and/or

directors.”64

The Court rejected that analysis, concluding that the misuse stemmed from

“post-termination conduct” and “personal contractual relationships.”65 It reiterated

the point in noting that “[defendant]’s contractual claims are not dependent on any

alleged on-the-job misconduct. Rather, each claim is derived from specific

contractual obligations, which Plaintiffs allegedly breached post-termination.”66

The Court went on: “This is not an instance where conduct inappropriate during

employment continued in some fashion after termination. The dispute is over what

Plaintiffs did post-employment with information they properly and apparently

62
Id. at *4-5.
63
Id. at *5.
64
Id. at *5.
65
Id. at *4-5.
66
Id. at *4.

17
necessarily learned while employed. The bases for the claims are in the [Proprietary]

Agreements.”67 The Court distinguished LiveOps because the claims before it were

“confined to post-termination actions that [did] not depend on [the] use of corporate

authority or position” and the conduct as “officers, directors, or employees [was]

essentially immaterial” to the “contractually-based” claims.68

Finally, in Thompson v. Orix USA Corp.,69 the Court granted advancement to

a former officer, and a former officer and director. One of the individuals “had

begun planning his next career move” and formed an entity shortly before

resigning.70 The petitioners argued the underlying action was by reason of their

former positions with the company because the company had alleged “that they

misappropriated confidential information to which they had access because of their

positions.”71 Because it was “far from clear how much, if any, of the conduct at

issue took place after plaintiffs’ disaffiliation,” “[r]ather than engage in a line-

drawing exercise,” Chancellor Bouchard believed it more appropriate “for counsel

67
Id. at *6 n.43.
68
Id. at *5-6.
69
2016 WL 3226933 (Del. Ch. June 3, 2016).
70
Id. at *1.
71
Id. at *4.

18
to monitor the expenses for which advancement is requested and address granular

disputes as necessary at the indemnification stage.”72

In conducting this review, I found it difficult to harmonize Lieberman with

the other decisions. medCPU understandably offers Lieberman as the case that

dictates the outcome here, while Petitioners prefer LiveOps, Pontone, and

Thompson. I follow the weight of authority under LiveOps, Pontone, and Thompson,

and conclude that medCPU’s allegations relating to post-separation use of

confidential information learned pre-separation are “by reason of the fact” of

Petitioners’ positions. “Determining whether and to what degree [Petitioners are]

entitled to advancements requires applying the preceding framework to the

Underlying Action.”73

i. Counts I, II, III, and V

Counts I, II, and III assert Petitioners’ post-separation conduct breached their

Loyalty Agreements, Separation Agreements, and the implied covenant of good faith

and fair dealing, respectively. “Claims brought by a corporation against an

[individual] for . . . breaches of a non-competition agreement are ‘quintessential

examples of a dispute between an employer . . . and an employee’ and are not brought

72
Id. at *6.
73
Marino, 131 A.3d at 346.

19
‘by reason of the fact’ of the director’s position with the corporation.”74 Petitioners

agreed to personal restrictions in the Loyalty and Separation Agreements. The

allegations that Petitioners violated those restrictions are not, without more, “by

reason of the fact” of their corporate positions. But under the LiveOps line of cases,

where Petitioners allegedly used confidential information they obtained by reason

of the fact of their service to medCPU in breaching their personal agreements,

advancement is warranted.

Breaches that warrant advancement relate to retaining and failing to return

medCPU emails,75 possessing and failing to return medCPU Corporation Documents

and Property (including on a DropBox account that existed before Petitioners left

the Company),76 and “possessing, using and/or misappropriating medCPU’s

confidential and proprietary information.”77

Advancement is also warranted for Count V, a more focused count which

alleges misappropriation of confidential information and trade secrets. medCPU

74
Weaver v. ZeniMax Media, Inc., 2004 WL 243163, at *3 (Del. Ch. Jan. 30, 2004)
(quoting Cochran v. Stifel Fin. Corp., 2000 WL 1847676, at *7 (Del. Ch. Dec. 13, 2000));
see also Cochran, 2000 WL 1847676, at *7 (ruling “Non-Compete Claims were not
brought against [the individual] ‘by reason of the fact’ that he was serving in
indemnification-eligible positions . . . but ‘by reason of the fact’ that he had allegedly
breached a personal contractual obligation he owed”).
75
Merits Action, D.I. 4 Countercl. ¶¶ 44-45, 57-58.
76
E.g., id. ¶¶ 35, 46-47, 59-60.
77
Id. ¶ 49.

20
alleges that “[d]uring their employment with medCPU, [Petitioners] had access to,

acquired, and used certain of medCPU’s confidential information and trade

secrets.”78 This information is allegedly still “in their possession after [their]

separation from employment with medCPU,” constituting a misappropriation of the

information.79 And Petitioners’ “use and disclosure of such information . . .

constitute an unauthorized disclosure or use of medCPU’s trade secrets.”80

Petitioners are entitled to advancement for this count.

Other alleged breaches of Petitioners’ personal agreements do not warrant

advancement because they do not rely on allegations that Petitioners misused or

misappropriated information they learned by reason of the fact of their service to

medCPU, and allege no other nexus or causal connection to that service. These

allegations relate to competitive activities, including working for and soliciting

customers on behalf of a company “engaging in activities competitive with the

activities of medCPU,”81 contacting medCPU employees,82 and accessing

medCPU’s computer or electronic communications systems.83 As alleged,

78
Id. ¶ 105.
79
Id.
80
Id. ¶ 108.
81
E.g., id. ¶¶ 40-42, 54-56, 72.
82
E.g., id. ¶¶ 61-62, 76-77.
83
E.g., id. ¶¶ 63-64, 94-95. Where that access facilitated Petitioners’ use of medCPU
confidential information that existed prior to the Separation Date, advancement is
21
Petitioners took these actions after they left medCPU, and did not use confidential

information Petitioners obtained by reason of the fact of their positions with

medCPU in doing so. The Company did not allege any nexus or causal connection

between these actions and Petitioners’ former corporate roles at medCPU. These

alleged breaches do not warrant advancement.

ii. Counts IV and VI

Count IV seeks a declaratory judgment that the Petitioners’ conduct frees the

Company from their obligations “to provide any benefits or make any further

payments” under the Separation Agreements.84 It alleges the same breaches of the

Loyalty and Separation Agreements and implied covenant based on soliciting

medCPU clients and employees, working for a medCPU competitor,85 and misusing

and failing to return medCPU information.86 Count VI alleges unjust enrichment on

the theory that the alleged “misappropriation and breach of obligations under each

of the Loyalty Agreements and Separation Agreements has conferred a significant

benefit on Counterclaim Defendants.”87

warranted under the first category. See id. ¶¶ 23, 28. But mere access to medCPU’s email
system, without more, has no nexus to Petitioners’ service as an officer or director.
84
Id. ¶¶ 102-03.
85
Id. ¶¶ 85-87, 92-93, 96, 100-101.
86
Id. ¶¶ 88-91, 94-95, 97-98.
87
Id. ¶ 112.

22
 These Counts depend on the same factual allegations as the counterclaims

discussed above. Advancement is similarly awarded only where the underlying acts

depended on or utilized confidential information Petitioners obtained by reason of

their service at medCPU.

B. Petitioners Did Not Release Their Advancement Rights.

medCPU argues that even if Petitioners qualify for advancement, they

released their claims in the Separation Agreements.88 The parties agree New York

law applies.89 “Generally, a valid release constitutes a complete bar to an action on

a claim which is the subject of the release. If the language of a release is clear and

unambiguous, the signing of a release is a ‘jural act’ binding on the parties.”90 “No

particular [form] of words is required to make a written release effective; all that is

necessary is that the words show an intention to discharge. The scope and meaning

88
Petitioners assert medCPU waived this defense, as medCPU did not plead an affirmative
defense of release as required under Court of Chancery Rule 8(c). The Separation
Agreements are the foundation of both Petitioners’ claims and medCPU’s counterclaims
in the underlying case. And Petitioners mention the Agreements more than twenty times
in their Petition for Advancement and Indemnification. The contractual release was thus
sufficiently incorporated into the pleadings and in the record that waiver is not warranted.
See Seven Invs., LLC v. AD Capital, LLC, 32 A.3d 391, 396 (Del. Ch. 2011) (considering
release that was not pled as affirmative defense “because the Complaint incorporate[d] the
Termination Agreement by reference”); James v. Glazer, 570 A.2d 1150, 1154 (Del. 1990)
(describing “exception to the general rule, that affirmative defenses are waived if not pled
. . . when evidence of an unpled affirmative defense is admitted without objection”).
89
D.I. 20 Ex. B & C § 14.
90
Centro Empresarial Cempresa S.A. v. Am. Movil, S.A.B. de C.V., 952 N.E.2d 995, 1000
(N.Y. 2011) (internal citations and quotation marks omitted).

23
of a release will be determined by the manifested intent of the parties,”91 and “the

context of the controversy being settled.”92

The Separation Agreements “supersede[d] all prior agreements, arrangements

and understandings, written or oral, between the parties with respect to the subject

matter herein[.]”93 According to medCPU, Petitioners’ right to advancement must

be reiterated in the Separation Agreements or carved out from the release. Neither

being true under medCPU’s reading of the Separation Agreements, medCPU

concludes Petitioners waived their advancement rights.

The release in section 3(a) of the Separation Agreements only covers

Petitioners’ rights as employees. The release encompasses claims “relating to or

arising out of Executive’s employment with the Company Released Parties or the

termination thereof.”94 Petitioners contrast this language against medCPU’s release

of claims against Petitioners in Section 3(b), which includes “any claims in any way

related to Executive’s employment with the Company or his/her acts or omissions

as a director or officer of the Company.”95 Petitioners point to Section 3(b)’s

additional language referencing acts as a Company director or officer, absent from

91
Gordon v. Vincent Youmans, Inc., 358 F.2d 261, 263 (2d Cir. 1965).
92
In re Schaefer, 221 N.E.2d 538, 540 (N.Y. 1966).
93
D.I. 20 Ex. B & C § 16.
94
D.I. 20 Exs. B & C § 3(a) (emphasis added).
95
Id. § 3(b) (emphasis added).

24
Section 3(a), and conclude they did not release claims stemming from their status as

directors or officers, including their advancement rights.96

Petitioners’ argument is bolstered by the enumerated released claims. These

include, without limitation, claims arising under the Age Discrimination in

Employment Act, Title VII of the Civil Rights Act of 1964, and the Americans with

Disabilities Act. The enumerated list is followed by more general types of claims:

“any other federal, state or local statutory laws relating to employment,

discrimination in employment, termination of employment, wages, benefits or

otherwise; or any other federal, state or local constitution, statute, rule, or regulation,

. . . addressing fair employment practices.”97 These laws govern claims that any

employee could potentially assert related to her employment or the termination of

her employment. They are narrowly described, and do not include sources of

advancement. And under the canon of ejusdem generis, I read the general categories

96
The parties did not focus on how the Separation Agreements defined employment. The
second WHEREAS clause and section 1 imply that the scope of employment included
Petitioners’ roles as officers, but not directors. Including work as an officer in employment,
but not work as a director, would lead to the untenable result of advancement for acts taken
as a director, but not as an officer. Absent clearer language that the parties intended this
unusual division, I decline to read the Separation Agreement this way.
97
D.I. 20 Exs. B & C § 3(a).

25
in light of the preceding specific employment laws.98 Nothing in this provision

shows an intent to release advancement claims.

In sum, Section 3(a) releases rights within the contractual employee-employer

relationship, and not the advancement and indemnification rights the Charter

provides to Petitioners in their roles as officers, directors, employees, and agents.

This conclusion is supported by Section 3(b), in which the parties addressed the

officer and director relationship. Yet they did not do so in Section 3(a).99 In view

of Section 3(b), Section 3(a) has only one reasonable reading: the release covers

Petitioners’ claims as employees, but not as an officer or director.100

98
“The well-established rule of construction, ejusdem generis, is that ‘where general
language follows an enumeration of persons or things, by words of a particular and
specific meaning, such general words are not to be construed in their widest extent, but
are to be held as applying only to persons or things of the same general kind or class as
those specifically mentioned.’” Aspen Advisors LLC v. United Artists Theatre Co., 861
A.2d 1251, 1265 (Del. 2004) (quoting Petition of State, 708 A.2d 983, 988 (Del. 1998)).
99
medCPU also highlights Section 3(a)’s reference to “any and all claims for counsel fees
and costs” and contends that a claim for advancement and indemnification is a claim for
counsel fees and costs, and so was released. Under the plain meaning of the provision,
“claims for counsel fees and costs” refers to those incurred in any dispute subject to the
release. Advancement and indemnification are significant independent rights, not merely
claims for fees.
100
Petitioners’ release contains an additional temporal limitation. Petitioners only released
rights “based upon or arising out of any facts, acts, conduct, omissions, transactions,
occurrences, contracts, claims, events, causes, matters or things of any conceivable kind or
character existing or occurring or claimed to exist or to have occurred prior to the date of
the Executive’s execution of this Agreement.” Petitioners only released claims for actions
they took before executing the Separation Agreement.

26
 Finally, medCPU argues the parties agreed in Section 6 of the Separation

Agreement to limited indemnification only on a going-forward basis, and only for

third-party claims. medCPU reads the provision as displacing previous

advancement and indemnification rights. I read the provision differently: Section 6

provides Petitioners with indemnification protections against all third-party suits,

regardless of whether they were brought by reason of the fact of their fiduciary

service, in addition to the advancement rights they already enjoyed under medCPU’s

Charter.

C. Petitioners Are Entitled To Fees on Fees.

When parties seeking advancement achieve only limited success, their award

of fees must reflect their limited success.101 Petitioners are thus entitled to receive

some fees on fees.

“[T]he determination of the level of success is a nonscientific inquiry that

simply involves a reasoned consideration of the issues at stake in the case and an

assessment of the plaintiffs’ level of success.”102 Here, the two key issues were

whether the counterclaims were “by reason of the fact” of Petitioners’ service as

101
See Zaman, 2008 WL 2168397, at *39 (“this court has held that plaintiffs who are
only partially successful shall receive fees on fees reflecting the extent of their success”);
see also Thompson, 2016 WL 3226933, at *7 (awarding fees on fees only for part of suit
party prevailed on and not issues on which the court reserved decision).
102
Zaman, 2008 WL 2168397, at *39.

27
officers, directors, employees, and agents, and whether Petitioners released their

claims. Petitioners prevailed on half of the first issue relating to the use of

confidential information, and all of the second issue as I concluded they did not

release their advancement rights. I therefore award Petitioners 75% of their fees

incurred in pursuing this action.103

III. CONCLUSION

Partial summary judgment is entered for the Petitioners. The parties shall

submit a stipulated form of order within ten days of this opinion imposing the

framework detailed by this Court in Danenberg v. Fitracks, Inc.,104 which order shall

govern the submission of further requests for advancement and the prompt resolution

of any disputes that arise regarding such requests.

IT IS SO ORDERED.

103
See Pontone, 100 A.3d at 1058 (awarding 75% of fees where petitioner prevailed on
right to advancement for future expenses, but not previously incurred fees); Zaman, 2008
WL 2168397, at *39 (“An award of 80% of the [] fees is a measured way to reflect” the
policy interest of ensuring costs of prosecution do not offset vindication of advancement
rights “while giving the defendants credit for the fact that the [petitioners] did not attain
complete success.”).
104
58 A.3d 991, 1003-04 (Del. Ch. 2012).

28