Diamond Fortress Techs., Inc. v. EverID, Inc.
| Citation | 274 A.3d 287 |
| Decision Date | 14 April 2022 |
| Docket Number | C.A. No. N21C-05-048 PRW CCLD |
| Parties | DIAMOND FORTRESS TECHNOLOGIES, INC., and Charles Hatcher, II, Plaintiffs, v. EVERID, INC., Defendant. |
| Court | Superior Court of Delaware |
Kurt M. Heyman, Esquire, Heyman Enerio Gattuso & Hirzel, Wilmington, Delaware; Walter A. Dodgen, Esquire, Zachary P. Mardis, Esquire, Maynard, Cooper & Gale, PC, Huntsville, Alabama. Attorneys for Plaintiffs Diamond Fortress Technologies, Inc., and Charles Hatcher, II.
United States Corporation Agents, Inc., Middletown, Delaware. Registered Agent for Defendant EverID, Inc.
This breach-of-contract action arises out of Defendant EverID, Inc.’s failure to compensate the Plaintiffs, Diamond Fortress Technologies, Inc. and its CEO Charles Hatcher, II, for their combined assistance in developing EverID's cryptocurrency trading platform and mobile application.
For an exclusive license to use Diamond Fortress's proprietary biometric software, EverID offered to remunerate the Plaintiffs via cryptocurrency token distributions. The promised distributions were to occur upon the Initial Coin Offering ("ICO") of "ID Tokens," EverID's newly created cryptocurrency, and upon subsequent Token Distribution Events ("TDEs"). The ICO and several TDEs came and went without Plaintiffs receiving a single token. No surprise, they then sued EverID.
EverID has never responded, appeared, or otherwise defended itself in any manner in this lawsuit. So the Plaintiffs filed a default judgment motion that the Court granted in part—the Court found the breach but paused on the damages. The Court conducted a subsequent hearing on the Plaintiffs’ purported economic damages that centered on just what might be the appropriate methodology and value source for reckoning a damages judgment. The classification and valuation of cryptocurrency, as well as the calculation of damages resulting from the breach of a cryptocurrency-paid contract are novel matters to Delaware.
Diamond Fortress is a biometric software company.2 Mr. Hatcher is Diamond Fortress's CEO—one with extensive experience in the global market of biometric authentication and identity platform architecture.3
Diamond Fortress developed a patented software named "ONYX."4 ONYX is a secure, touchless fingerprint-identification software application that utilizes the camera on mobile devices, e.g. , smartphones, to detect and verify user identities by fingerprint recognition.5 Third parties can integrate the ONYX software into their own platforms by purchasing a license and software development kit.6 Mr. Hatcher is often hired as an advisor by those buyers to assist with the ONYX software integration and the management of its use thereafter.7
EverID, an entity active in the blockchain and cryptocurrency industry, is a corporation organized under Delaware law that maintains its principal office in Poway, California.8 It created the cryptocurrency "ID Tokens."9 As a component of ID Tokens, EverID also developed a blockchain-based identity and financial platform but needed the means to verify and confirm its users’ identities.10
In or around September of 2017, the parties conferred about integrating the ONYX software into EverID's then-developing cryptocurrency enterprise.11
In addition to integrating the ONYX software into its platform, EverID made other demands. First, it requested Mr. Hatcher serve as an advisor and mentor for the integration and duration of its use of ONYX.12 Second, it required Diamond Fortress to grant EverID an exclusive license to ONYX for digital or blockchain wallets; that required Diamond Fortress to halt its then-active endeavors soliciting other opportunities in the blockchain industry.13 For the award of EverID's exclusive ONYX software license, Diamond Fortress and Mr. Hatcher agreed to be compensated in EverID's ID Tokens when EverID eventually held its ICO (the cryptocurrency equivalent of an initial public offering14 ) and subsequent TDEs.15 The periodic token distributions were to be the means of satisfying EverID's payment obligation in lieu of Diamond Fortress's standard payment requirement of quarterly license "Run-Time Transaction Fees."16
Diamond Fortress and Mr. Hatcher agreed to EverID's demands, and the respective License and Advisor Agreements (together "Agreements") negotiations commenced.17 While the Agreement negotiations were underway, Plaintiffs granted EverID a software license key to immediately begin its integration and use of ONYX.18 Mr. Hatcher also began assisting EverID with its mobile application development utilizing the ONYX software.19
In September of 2018, Diamond Fortress and EverID finalized the License Agreement for EverID's use of the ONYX software.20 The Agreement is valid for a ten-year term and is governed by Delaware law.21
The terms and means of compensation are expressly set forth in the Agreement. Upon execution of the Agreement, an initial license fee of $2,500 U.S. Dollars ("USD") was to be remitted by EverID.22 EverID was also obligated to tender "Run-Time Transaction Fees," which equated to fifteen percent (15%) of the gross revenues received from its use of ONYX, to be paid quarterly.23 As discussed above, these fees were negotiated away in exchange for a set amount of ID Tokens and subsequent periodic token distributions.
Thus, Diamond Fortress's real economic interest for entering into this transaction—and its concession to give EverID an exclusive license to use ONYX—is EverID's assurance "to engage in a token sale" and award Diamond Fortress for its services accordingly:
Ten Million (10,000,000) of ID tokens at the ICO or TDE to [Diamond Fortress]. This token grant shall be deemed to be an advance of, and credited to, [EverID] as payment for the Run-Time Transaction Fees. The value of this token grant shall be determined by multiplying the number of tokens granted times the ICO or last TDE price.24
Additionally, the token grants are subject to a distribution lock-up, awarding the initial 25% of the tokens at the ICO or final TDE and the remaining 75% to be "distributed in 20 equal quarterly distributions" after the ICO or final TDE.25
EverID executed a separate Advisor Agreement with Mr. Hatcher.26 Under this Agreement, Mr. Hatcher's role was that of an independent contractor to mentor or advise EverID on an as-needed basis.27
Mr. Hatcher's compensation structure mostly mirrors Diamond Fortress's, with just a variation in the number of tokens allocated and the distribution schedule. EverID was to distribute Two Million Five Hundred Thousand (2,500,000) tokens to Mr. Hatcher at the ICO or final TDE.28 Similar to Diamond Fortress's lock-up distribution, the initial 25% of the tokens were to be distributed at the ICO or final TDE, with the remaining 75% of tokens to be "distributed in 24 equal monthly distributions after the ICO or final TDE."29
As some clue as to how the parties intended the ID Tokens be treated or classified, both Agreements expressly provide that the token distributions "will also be subject to regulatory compliance such a [sic] Rule 144 of the Securities Act of 1933 ...."30
EverID's ICO occurred on February 8, 2021, and EverID should have then tendered its first partial payments to the Plaintiffs.31 EverID didn't.32 Despite numerous efforts to obtain EverID's assurances that the token distributions were forthcoming—both directly and via counsel—EverID refused to respond or distribute the tokens.33
Diamond Fortress and Mr. Hatcher initiated suit here alleging two counts of Breach of Contract—one count for each Plaintiff.34 Upon EverID's failure to respond or otherwise defend itself, the Plaintiffs filed a motion for default judgment.35
Consistent with this Court's Civil Rule 55(b), which provides for entry of default judgment "when a party against whom a judgment for affirmative relief is sought, has failed to appear, plead or otherwise defend as provided by these Rules,"36 the Court granted the Plaintiffs’ motion with respect to EverID's liability for its breaches. EverID's failure to provide any assurance within a reasonable time, as well as its non-performance of payment, constituted a repudiation and total breach of both Agreements.37 But what then is the remedy?
As observed recently, "Delaware law largely remains silent" on scenarios such as this.38 That said, "significant authority supports the conclusion that a repudiation coupled with simultaneous non-performance gives rise to an action for total breach."39
For instance, Corbin on Contracts teaches:
Suppose next that the contract requires performance in installments or continuously for some period and that there has been such a partial failure of performance as justifies immediate action for a partial breach. If this partial breach is accompanied by repudiation of the contractual obligation such repudiation is anticipatory with respect to the performances that are not yet due. In most cases, the repudiator is now regarded as having committed a "total" breach, justifying immediate action for the remedies appropriate thereto .... The non-performance plus the repudiation constitute one and only one cause of action.40
And though Delaware has not per se adopted the Restatement (Second) of Contracts rule regarding repudiation and adequate assurances, our courts have historically relied on its guidance in such situations.41 The rule prescribes that upon an obligee's request for adequate assurance of performance by the obligor, "the obligee may treat as a repudiation the obligor's failure to provide" such assurance within a reasonable time.42 And "a repudiation coupled with simultaneous nonperformance gives rise to an action for total breach , allowing the non-breaching party to bring an action...
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