Opinion
Civil Action No. 2730-VCP.
Submitted: March 27, 2007.
Decided: June 6, 2007.
Noel E. Primos, Esquire Jeffrey J. Clark, Esquire Schmittinger Rodriguez, P.A. Dover, DE.
Matthew F. Boyer, Esquire Timothy M. Holly, Esquire Connolly Bove Lodge and Hutz LLP Wilmington, DE.
David H. Williams, Esquire James H. McMackin, III, Esquire Morris James LLP Wilmington, DE.
Dear Counsel:
Pending before the Court is Defendant's motion for attorneys' fees and costs pursuant to a contractual fee shifting provision in connection with Defendant's successful defense against a motion for preliminary injunctive relief by Plaintiff. Plaintiff, L W Insurance, Inc. ("L W"), brought this action to enforce the post-employment covenants contained in its employment agreement with its former employee, Lewis B. Harrington, III. L W initially moved for a temporary restraining order against Harrington to prevent solicitation of L W clients, which this Court denied on February 13, 2007. L W then moved for a preliminary injunction. After briefing and argument on that motion, I entered a memorandum opinion on March 12, 2007 (the "Memorandum Opinion") in which I concluded that L W would be unlikely to succeed in arbitration on the merits of its claims and denied the motion for preliminary injunction. Harrington has now moved, pursuant to his employment agreement, to recover his reasonable attorneys' fees and costs. For the reasons stated below, I deny without prejudice Harrington's request for fees and costs.
Plaintiff also asserted claims against Harrington's new employer, Lyons Insurance Agency, Inc. ("Lyons"), for damages for tortious interference with contract, to enjoin Lyons from servicing clients solicited by Harrington, and to prevent further solicitation.
L W Ins., Inc. v. Harrington, 2007 WL 809512 (Del.Ch. Mar. 12, 2007).
I. BACKGROUND AND FACTS
Unless otherwise noted, the facts are drawn from the Memorandum Opinion.
After working at L W for eight or nine years, Harrington signed an employment contract, called the Producer Employment Agreement, which had an effective date of January 1, 2005 (the "Agreement"). The Agreement, among other things, contained covenants restricting Harrington's post-employment solicitation of L W's clients. Additionally, an addendum to the Agreement, which described the structure of Harrington's compensation, contained a provision that allowed L W to withhold his commissions in certain situations. Relevant to this motion, the Agreement also provided for the reimbursement of attorneys' fees in Section N:
The Agreement substantially tracked an earlier agreement executed by the parties when Harrington first began working for L W.
If any action be brought by either party to enforce or for damages for breach of any provision of this Agreement, the prevailing party in such action, if there be a prevailing party, shall be entitled to recover, in addition to costs of suit, such reasonable attorney's fees as the tribunal determining the action may award.
Verified Compl. Ex. A., the Agreement, at 12.
In August 2006, L W unilaterally adopted a company-wide policy to help reduce outstanding balances on its employees' customers' accounts. Specifically, this new policy permitted L W to deduct from its employees' quarterly commissions the amount due from these outstanding accounts. Because Harrington had accounts qualifying under the new policy, L W withheld $15,398 from Harrington's $34,727 earned, third-quarter 2006 commissions to reduce his outstanding balances. Additionally, L W informed Harrington that he would be liable for the entire balance of another outstanding account, totaling $92,599.97, that L W asserted was a "bad debt" account. L W presented Harrington with a promissory note for this entire amount on December 13, 2006, which he refused to sign.
By January 12, 2007, L W made it clear to Harrington that his future employment with them depended upon him signing the promissory note. Rather than sign the note, Harrington, following the advice of his attorney, resigned from L W. In his resignation letter, Harrington asserted that L W's withholding of his third quarter commissions and insistence that he sign the promissory note constituted material breaches of the Agreement. Harrington also stated that these material breaches invalidated the Agreement, thus freeing him from the post-employment, nonsolicitation covenants.
Shortly after starting his new job with Lyons, a competing insurance company, Harrington (with the assistance of Lyons) sent letters to 20 to 25 of his former L W clients to inform them that he had changed employers and to solicit their business. L W brought suit to enjoin Harrington and Lyons from servicing clients he had already solicited and to prevent them from further solicitation. L W also brought a claim against Lyons for tortious interference with contract. By the time L W filed its suit, six clients had followed Harrington to Lyons.
Throughout this litigation, the parties have maintained that the merits of L W's claims will be resolved by arbitration. Among other things, the arbitration proceedings will determine whether or not L W's new "bad debt" policy can be applied to Harrington without violating the Agreement. The arbitration also will decide whether and how L W materially breached the Agreement before January 15, 2007, and if it did breach, what the effect would be on the post-employment covenants in the Agreement. Further, the arbitration will determine the scope of Harrington's purported liability for the $92,599.97 of alleged "bad debt."
Section S of the Agreement contains the following arbitration provision:
1. Any controversy or claim arising out of or relating to the Employment Agreement or the Addendum hereto, shall, if the same involves a claim for money or compensatory damages, be resolved by binding arbitration. . . .
2. If such controversy or claim involves a claim for injunctive or other equitable relief, and suit or cross-claim for such relief is filed in a court of competent jurisdiction, the litigation shall be bifurcated to the extent feasible, to the end that all issues other than those required to be determined by the court shall be determined by Arbitration pursuant to subparagraph 5.1 [sic] above.
Based on the evidence L W presented in support of its motion for a preliminary injunction, I concluded that it was unlikely to prevail in the arbitration proceedings. The limited record before the Court did not show that the Agreement justified L W's withholding of Harrington's commissions or that L W's unilateral, self-help measures did not materially breach the Agreement. Because L W's claim against Harrington's new employer was intimately dependent upon L W's likelihood of success against Harrington, I also found that L W had not shown a reasonable probability of success against Lyons. Accordingly, I denied L W's motion for a preliminary injunction. In addition, based on the interrelationship between L W's claim against Lyons for tortious interference and its claims against Harrington, I stayed the claim against Lyons pending the outcome of the anticipated arbitration.
As explained in the Memorandum Opinion, I found, based on industry practices, that L W had not shown it had an exclusive relationship with the clients Harrington solicited or a legitimate expectancy of retaining those clients.
On March 16, 2007, Harrington moved for an award of his attorneys' fees and costs to that date in the amount of $31,816.95. Harrington argues that L W's motions for injunctive relief against Harrington qualify as a separate action from any future arbitration proceedings. According to Harrington, the denial of L W's application for a preliminary injunction triggers Section N of the Agreement, allowing him, as the prevailing party, to recover his reasonable attorneys' fees in defending against it. L W argues that its application for injunctive relief was only part of its larger action to enforce the applicable provisions of the Agreement. L W further contends that, because the merits of its action will be determined by arbitration, Harrington has not yet "prevailed" for purposes of invoking Section N.
See Verified Compl. ¶ 1 ("This is an action for injunctive relief seeking to enjoin the on-going violation by [Defendant] Lewis B. Harrington, III, of a Producer Employment Agreement, and the intentional and tortious interference with that agreement by Defendant The Lyons Companies, LLC.").
II. ANALYSIS A. Attorney's Fees
This Court has broad discretion to award attorneys' fees. Although parties bear their own attorneys' fees pursuant to the American Rule, the parties may shift that burden by contract. Where a contract places the responsibility for payment of attorneys' fees "on any party who either breaches the contract or fails to perform in accordance with the terms of the contract," courts will enforce the bargained-for provision absent evidence of an ambiguity or contrary intent.
Norman v. US Mobilcomm, Inc., 2006 WL 1229115, at *2 (Del.Ch. Apr. 28, 2006).
McNeil v. McNeil, 798 A.2d 503, 514 (Del. 2002); Del. Express Shuttle, Inc. v. Older, 2002 WL 31458243, at *23 (Del.Ch. Oct. 23, 2002). Although exceptions exist to the American rule, such as when it appears that a party or its counsel has proceeded in bad faith, Harrington has not moved for fees or costs under any of these exceptions.
Knight v. Grinnage, 1997 WL 633299, at *3 (Del.Ch. Oct. 7, 1997) ("Delaware law and equity courts routinely enforce provisions of a contract allocating costs of legal actions arising from the breach of a contract."). See also Citadel Holding Corp. v. Roven, 603 A.2d 818, 824 (Del. 1992) ("When construing a contract, and unless a contrary intent appears, we will give words their ordinary meaning.").
In similar cases involving the enforcement of post-termination clauses, Delaware courts have upheld provisions that purport to award fees and costs to the prevailing party. In many cases, the prevailing parties are employers who have succeeded, after a hearing on the merits, in showing that their former employees breached the post-employment provisions in an employment agreement. Although the employer may have been in a stronger bargaining position when the parties signed the contract, this factor has not caused courts to refuse to enforce fee shifting provisions. The prevailing party's "contractual right to the payment of money . . . cannot be `forgiven' in whole or in part by a court out of compassion" for the nonprevailing party.
See Faw, Casson Co. v. Halpen, 2001 WL 985104 (Del.Super.Ct. Aug. 7, 2001); Research Trading Corp. v. Pfuhl, 1993 WL 93369 (Del. Ch. Feb. 26, 1993).
Pfuhl, 1993 WL 93369, at *3.
Id.
Section N of the Agreement provides that "if any action be brought by either party to enforce . . . any provision of this Agreement, the prevailing party in such action . . . shall be entitled to recover, in addition to costs of suit, such reasonable attorney's fees as the tribunal determining the action may award." Harrington argues that by denying L W's motions for a temporary restraining order and a preliminary injunction, this Court has dealt with all of the requests for immediate relief made in the Complaint. Further, because the Memorandum Opinion suggests that L W is unlikely to succeed in arbitration on the merits of its claim, and L W has not commenced an arbitration action against Harrington, Harrington contends that he is the de facto prevailing party and thus entitled to his attorneys' fees pursuant to Section N. L W disagrees, arguing that the "action" here refers to the entire dispute, including its ultimate resolution through arbitration, and not just the individual stages of this litigation. Additionally, L W argues that because the underlying dispute must be resolved by arbitration, which has not yet commenced, Harrington has not prevailed in this action and Section N has not been triggered.
Agreement, at 12 (emphasis added).
I find L W's arguments more persuasive. Unlike the resolution of a case through an arbitration or trial on the merits, a decision to grant or deny a preliminary injunction "necessarily involves an initial determination on less than a complete record and that limitation precludes a detailed consideration of extrinsic evidence." Notwithstanding the interim conclusions reached in the Memorandum Opinion for purposes of the preliminary injunction, the arbitrator may reach different conclusions based on a more complete record and reject Harrington's position.
Benchmark Capital Partners IV, L.P. v. Vague, 2002 WL 1732423, at *14 (Del.Ch. July 15, 2002), aff'd, 822 A.2d 396 (Del. 2003) (Table).
L W, 2007 WL 809512, at *13.
Section N of the Agreement entitles the prevailing party to recover reasonable fees and costs. This provision, however, must be read in conjunction with the arbitration provision of the contract, which requires that any claim, such as L W's claim that Harrington breached the Agreement, be resolved by binding arbitration. Although the Agreement allows a party to bifurcate the claim in order to seek injunctive relief in a court of competent jurisdiction, it expressly tempers this procedural option by emphasizing that "all other issues other than those required to be determined by the court shall be determined by Arbitration." The prevailing party at arbitration, then, "shall be entitled to recover, in addition to costs of suit, such reasonable attorney's fees as the tribunal determining the action [i.e., the arbitrator] may award." Further, in the circumstances of this case, the arbitrator is likely to determine the merits of L W's claims to enforce the Agreement and for damages for any breach. The party ultimately prevailing on those issues, at least arguably, could claim that the arbitrator should determine to what extent, if any, that party is entitled to recover its reasonable attorneys' fees and costs related to this ancillary action for injunctive relief.
Agreement, at 13.
Id. at 12.
Based on the preliminary nature of the relief addressed thus far in this action, the resolution of any arbitration likely would impact the determination of Harrington's claim for fees and costs in this case. Thus, it is premature for this Court to address Harrington's claims for fees and costs at this time. Until an arbitrator determines the merits of the underlying dispute, no party has "prevailed" for purposes of invoking Section N of the Agreement. If L W does not invoke the arbitration provision and fails to pursue this action, however, Harrington could seek dismissal of this case under Court of Chancery Rule 41(e), for example, and renew his claim in this Court for attorneys' fees and costs.
L W also argues that, although Harrington predicates his application for attorneys' fees on the assumption that the Agreement is valid, he consistently has defended himself against L W's claims by arguing that the Agreement is invalid because of L W's breach, or alternatively, that he effectively repudiated the Agreement when he resigned from L W. Taken to its logical conclusion, L W presumably would claim that if the arbitrator agreed with it, L W could recover all of its reasonable fees pursuant to Section N. Conversely, if L W lost and the Agreement was held invalid, they would try to preclude Harrington, as the prevailing party, from recovering his fees and expenses. Under L W's "heads I win, tails you lose" theory, if Harrington prevails, Section N becomes inoperative and the American Rule would prevent Harrington from recovering his attorneys' fees. In that respect, L W's position appears strained, but it depends in any case on the arbitrator's resolution of the merits of the parties' underlying disputes regarding the Agreement.
B. Costs
At this point, Harrington seeks his costs solely under Section N of the Agreement. For the same reasons stated as to attorneys' fees, the Court denies Harrington's claim for costs under Section N as premature.
Independently of the Agreement, 10 Del. C. § 5106 authorizes the Court of Chancery to make an order "concerning costs in every case as is agreeable to equity." Rule 54(d), however, states that such costs "shall not include any charge for the Court's copy of the transcript of the testimony or any depositions." Hence, this Court normally does not award costs for transcription fees.
E.g., All Pro Maids, Inc. v. Layton, 2004 Del. Ch. LEXIS 192, at *9 (Dec. 20, 2004), aff'd, 2005 Del. LEXIS 283 (July 22, 2005) (refusing, under Rule 54(d), to award transcription costs).
In this case, Harrington seeks $1,280.95 in costs, of which, according to L W, $1,246.45 represent impermissible reimbursement of transcription fees paid for nonexpert depositions. Such transcription fees generally are not recoverable under either 10 Del. C. § 5106 or Rule 54(d). Conceivably, as a matter of contract construction, transcription fees might be recoverable under Section N of the Agreement. At this preliminary stage of the litigation, however, the Court expresses no opinion on that issue.
III. CONCLUSION
For the foregoing reasons, I deny without prejudice Harrington's motion for an award of his attorneys' fees and legal costs pending the outcome of the related arbitration proceedings.
IT IS SO ORDERED.