Introduction
This appeal concerns the allocation of patent-litigation risk in a $100 million corporate acquisition. Claude Gendreau and the other owners of Veterinary Orthopedic Implants, LLC (“VOI”) sold the company to entities formed by Fidelio Capital II AB. At signing, VOI was already defending patent-infringement litigation brought by DePuy Synthes Products, Inc. Because the exposure could not be quantified, the sellers agreed to indemnify the buyers for any damages suffered “as a result of, or in connection with” that litigation.
After closing, DePuy expanded its claims to additional patents and products. A jury found willful infringement and awarded more than $59.4 million. With enhanced damages potentially increasing exposure to nearly $180 million, the parties settled for $70 million and a license covering VOI’s Compresiv and Versiv products. VOI financed the settlement through a bank loan.
When the sellers refused indemnification, the buyers sued. All sellers except Claude and his trust settled. The principal questions on appeal were whether the indemnity reached post-closing sales, whether indemnifying willful infringement violated public policy, whether the implied covenant restricted the buyers’ conduct, and which settlement, interest, and attorneys’ fee amounts were recoverable.
Analysis
1. Scope of the Indemnification Provision
The decisive textual feature was the sellers’ obligation to indemnify the buyers for damages suffered “as a result of, or in connection with, the Patent Litigation.” “Patent Litigation” was defined as the pending Florida federal action, together with appeals and related or derivative actions. “Damages” included liabilities, settlement payments, defense expenses, counsel fees, and interest, whether known or unknown, accrued or contingent.
Nothing in this language limited indemnification to pre-closing acts, products sold at closing, or claims existing at signing. The Court therefore rejected Claude’s proposed division between the sellers’ pre-closing conduct and the buyers’ post-closing “business decisions.”
The factual connections were also substantial. VOI had developed and sold the NXT plate before the acquisition, and it was an anticipated infringement target. VOI later introduced the C/V plates as asserted non-infringing alternatives, used them to mitigate damages, and placed them directly at issue during the injunction and settlement phases. The seller representative, Patrick Gendreau, participated in controlling the litigation and approved the settlement.
The Court emphasized that sophisticated parties could have adopted conventional “my watch, your watch” language allocating pre-closing liabilities to sellers and post-closing liabilities to buyers. Because they did not, the Court would not insert that temporal limitation after the fact.
2. Willful Infringement and Public Policy
Claude argued that permitting indemnification would create a moral hazard by allowing buyers to infringe patents while shifting the resulting liability to sellers. The Court declined to recognize a categorical rule against such risk allocation.
Delaware courts ordinarily enforce negotiated contracts, particularly agreements between sophisticated parties represented by counsel. Without a clear statute or firmly established public policy prohibiting indemnification for willful patent infringement, the Court deferred to the parties’ contractual allocation of risk.
The ruling does not establish that every agreement covering intentional misconduct is necessarily enforceable. It instead holds that generalized policy concerns are insufficient to override an otherwise valid Delaware contract. A contrary result ordinarily requires a clear legislative or judicially established policy directly applicable to the conduct at issue.
3. The Implied Covenant of Good Faith and Fair Dealing
The implied covenant protects the parties’ shared expectations where a contract leaves a genuine gap or gives one party discretion capable of defeating the bargain. It is not a free-standing obligation to avoid all misconduct, nor may it be used to renegotiate an unfavorable agreement.
Claude did not identify an unforeseen contingency omitted from the MIPA or a discretionary determination entrusted to the buyers. The agreement broadly allocated the Patent Litigation risk and gave the sellers’ representative an active role in the defense and settlement. Applying the implied covenant would therefore have rewritten, rather than completed, the contract.
4. Loan Interest and Prejudgment Interest
VOI borrowed the $70 million needed to fund the settlement and incurred more than $9 million in loan interest. The Superior Court treated that financing expense as damages and also awarded prejudgment interest.
The Supreme Court held that the combination produced an impermissible overlap. Prejudgment interest compensates a claimant for losing the use of money and prevents the defendant from benefiting from retaining it. Here, the loan allowed the buyers to preserve their own capital, while the loan-interest award compensated them for the cost of doing so.
Accordingly, the buyers had two alternative paths: recover the actual loan interest as damages or recover prejudgment interest representing the time value of the settlement payment. They could not obtain both forms of compensation for the same economic loss.
5. Attorneys’ Fees Incurred to Enforce the MIPA
Delaware follows the American Rule, under which each litigant ordinarily pays its own attorneys’ fees. Contractual fee shifting is enforceable only when the agreement clearly and unequivocally provides for it.
The broad definition of “Damages,” including counsel fees, did not itself create a substantive right to enforcement fees. Nor did the provision excluding “expenses of the Indemnified Party in enforcing its rights” from the $100 million cap create such a right; it merely addressed how an existing indemnity obligation would be limited.
The separate contingent note confirmed this interpretation. The note expressly awarded reasonable fees to a prevailing seller in an enforcement proceeding. The absence of comparable language from the MIPA showed that the parties knew how to draft first-party fee shifting but chose not to do so for the indemnity.
6. The C/V License Was Part of the Covered Settlement
The Superior Court excluded $9.8 million attributed to the C/V license because “license” did not appear in the definition of “Damages.” The Supreme Court found that reasoning too formalistic.
The definition expressly covered “payments,” including amounts paid in settlement. The license was obtained through the agreement resolving the Patent Litigation and eliminated the risk that the federal court would extend injunctive relief to the C/V products. Because settling without addressing those products was unrealistic, the license payment was made “in connection with” the Patent Litigation and was indemnifiable.
7. Patent-Litigation Defense Fees
The Superior Court reduced approximately $8.6 million in patent-defense fees by half because VOI and Fidelio had shared counsel. The Supreme Court reversed. VOI established that it alone paid the invoices and that the request excluded costs attributable solely to Fidelio, with at most one or two questionable entries.
A court may avoid an expensive allocation proceeding where a joint defense is inseparable, but it may not impose an unsupported fifty-percent reduction when the evidence permits a reliable determination. On remand, Claude remains responsible only for his several, ownership-based share of the properly recoverable amount.
8. Precedents Cited and Their Influence
Contract Interpretation and Scope
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Alta Berkeley VI C.V. v. Omneon, Inc. supported the principle that a party cannot obtain judicially a contractual protection it failed to secure at the bargaining table.
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Alcoa World Alumina LLC v. Glencore Ltd., affirmed in Glencore Ltd. v. St. Croix Alumina, LLC, involved materially different general indemnity language and therefore did not support Claude’s proposed temporal restriction.
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State v. Interstate Amiesite Corp., Rizzo v. John E. Healy & Sons, Inc., affirmed in Joseph Rizzo & Sons Constr. Co. v. Sky Climber, Inc., RSUI Idem. Co. v. Sempris, LLC, and In re Fuqua Indus. Inc. S’holder Litig. concerned indemnities, insurance, or releases containing materially narrower operative language. The Court distinguished them from the MIPA’s expansive “as a result of, or in connection with” formulation.
Public Policy
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James v. Getty Oil Co. (E. Operations) stated that contracts relieving parties from intentional or willful acts are generally unenforceable. The Court concluded that this statement had not developed into a controlling Delaware rule.
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CNX Res. Corp. v. CONSOL Energy Inc. was cited for the observation that James had gained little traction in later Delaware decisions.
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RSUI Indemnity Co. v. Murdock emphasized contractual freedom, compensation of innocent victims, and deference to legislative judgments when considering insurance for fraudulent conduct.
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Whalen v. On-Deck, Inc. similarly declined to infer a public policy against insurance for punitive damages without sufficient evidence of such a policy.
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Halo Elecs., Inc. v. Pulse Elecs., Inc. explained that 35 U.S.C. § 284 permits enhanced damages for egregious patent infringement. It supplied context for DePuy’s potential claim for nearly treble damages but did not establish a Delaware prohibition on indemnification.
Implied Covenant
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Johnson & Johnson v. Fortis Advisors LLC described the implied covenant as a narrow “scalpel,” applicable principally to contractual discretion and unforeseen gaps.
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Nemec v. Shrader established that courts enforce both good and bad bargains and may not use the implied covenant to rebalance negotiated terms.
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Glaxo Gp. Ltd. v. DRIT LP recognized that no contract can address every contingency, while preserving the requirement of a genuine contractual gap.
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Dieckman v. Regency GP LP involved deceptive use of a conflicted-transaction safe harbor. The Court distinguished it because the MIPA did not depend on similarly misleading satisfaction of a contractual condition.
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Baldwin v. New Wood Resources LLC required a party to exercise expressly granted indemnification discretion in good faith. The MIPA conferred no comparable subjective authority on the buyers.
Interest and Compensation
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Brandywine Smyrna, Inc. v. Millennium Builders, LLC allowed recovery of interest expenses that were conceptually distinct from prejudgment interest. Here, by contrast, the loan interest and prejudgment interest compensated for the same time value of the settlement payment.
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LG Elecs. Inc. v. Invention Inv. Fund I, L.P. confirmed that prejudgment interest ordinarily follows as a matter of right and need not depend on an out-of-pocket payment. It did not authorize duplicative recovery where an equivalent financing cost had already been awarded.
Contractual Fee Shifting
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Leistner v. Red Mud Enters. LLC identified contractual fee shifting as an exception to the American Rule.
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Deere & Co. v. Exelon Generation Acqs., LLC required clear and unequivocal language for first-party fee shifting and treated express fee language elsewhere in a contract as evidence that its omission was intentional.
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Nasdi Hldgs., LLC v. N.A. Leasing, Inc. identified prevailing-party language as a hallmark of an express fee-shifting clause.
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Four Cents Hldgs., LLC v. M&E Printing, Inc., Fortis Advisors LLC v. Boston Dynamics Inc., and S’holder Rep. Servs. LLC v. Sphera Solutions, Inc. supported the conclusion that generalized references to losses, counsel fees, or enforcement expenses do not necessarily create a first-party fee-shifting right.
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Thompson Street Cap. P’rs IV, L.P. v. Sonova United States Hearing Instruments supported reading the MIPA and its attached note as one integrated contractual scheme.
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AB Stable VIII LLC v. Maps Hotel and Resorts One LLC explained that a defined term substitutes for its definition but does not independently create substantive obligations.
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Schneider Nat’l Carriers, Inc. v. Kuntz was distinguishable because the contract there lacked an express fee-shifting provision elsewhere. Its discussion of Ashland LLC v. Samuel J. Heyman 1981 Continuing Tr. for Heyman reinforced the significance of fee-shifting language appearing in one contractual provision but not another.
Joint Defense Fees and Appellate Review
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Valeant Pharmaceuticals International v. Jerney and Levy v. Hli Operating Co., Inc. permitted courts to avoid burdensome allocation proceedings where joint-defense work was largely inseparable. They did not justify an arbitrary reduction when the record already identified the paying party and excluded most separate work.
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Kroll v. City of Wilmington allowed the Supreme Court to decide an issue fairly presented below even though the trial court had not expressly addressed it.
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Seaford Golf & Country Club v. E.I. duPont de Nemours & Co., In re Columbia Pipeline Merger Litig., and Bako Pathology LP v. Bakotic supplied the applicable standards of review: de novo review for summary judgment and contract interpretation, clear-error review for trial findings, and abuse-of-discretion review for fee awards subject to de novo interpretation of contractual fee provisions.