Del. Ct.: No Advancement for Post-Termination Acts

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By Michael Greene

Sept. 2 — Two former officers of Electrolytic Ozone Inc. (EOI) are not entitled to an advancement of legal expenses incurred in defending breach of contract claims arising from actions taken by the plaintiffs after they left the company, the Delaware Chancery Court ruled Aug. 31.

Vice Chancellor John W. Noble concluded that EOI's allegations that the former officers breached Proprietary Information and Invention Assignment (PIIA) agreements revolved around personal contractual relationships with the company and did not exist “by reason of the fact” that they served as officers, directors or employees.

Post-Termination Conduct

The officers were seeking an order entitling them to an advancement of legal expenses incurred in defending third-party breach of contract claims brought by EOI during an arbitration proceeding commenced by their current employer Franke Foodservice Systems Inc.

In ruling against the plaintiffs, the court found that none of EOI's claims against the former officers depended on the use of corporate authority or position. Noble observed that all of the allegations stemmed from the former officers' post-termination conduct, including claims involving the alleged misuse of confidential information.

He further reasoned that the claims that EOI brought couldn't merely be relabeled as ones that would justify an advancement.

“That EOI might theoretically have been able to bring other distinct claims does not justify advancement. Plaintiffs’ conduct as EOI officers, directors, or employees is essentially immaterial to EOI’s contractually-based Arbitration claims,” Noble wrote. “Because those claims arise solely from alleged post-termination breaches of personal obligations under the PIIA Agreements, Plaintiffs are not entitled to advancement.”

Noble also denied the plaintiffs' request to recover expenses they incurred in connection with bringing their advancement claims—“fees on fees”—because they were wholly unsuccessful in their advancement claims.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

The opinion is available at http://www.bloomberglaw.com/public/document/Lieberman_v_Electrolytic_Ozone_Inc_No_10152VCN_2015_BL_281195_Del.