Great American Opportunities, Inc. v. Cherrydale Fundraising, LLC, Civil Action No. 3718-VCP (Del. Ch. 1/29/2010)

• Decision Date: 29 January 2010
• Docket Number: No. 3718-VCP.,3718-VCP.
• Parties: GREAT AMERICAN OPPORTUNITIES, INC., Plaintiff, v. CHERRYDALE FUNDRAISING, LLC, n/k/a ELADYRREHC, L.L.C. and DREW MCMANIGLE, IN HIS SOLE AND LIMITED CAPACITY AS THE ASSIGNEE FOR THE BENEFIT OF ELADYRREHC, L.L.C., Defendants.
• Court: Court of Chancery of Delaware

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GREAT AMERICAN OPPORTUNITIES, INC., Plaintiff, v. CHERRYDALE FUNDRAISING, LLC, n/k/a ELADYRREHC, L.L.C. and DREW MCMANIGLE, IN HIS SOLE AND LIMITED CAPACITY AS THE ASSIGNEE FOR THE BENEFIT OF ELADYRREHC, L.L.C., Defendants.

Civil Action No. 3718-VCP.

Court of Chancery of Delaware.

Submitted: September 11, 2009.

Decided: January 29, 2010.

Sean J. Bellew, Esquire, David A. Felice, Esquire, BALLARD SPAHR LLP, Wilmington, Delaware; Attorneys for Plaintiff Great American Opportunities, Inc.

Raymond J. DiCamillo, Esquire, Margot F. Alicks, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Attorneys for Defendant Drew McManigle as Assignee of Eladyrrehc, LLC f/k/a Cherrydale Fundraising, LLC.

MEMORANDUM OPINION

PARSONS, Vice Chancellor.

This action focuses on events that occurred in the months before and after the acquisition of substantially all assets of Kathryn Beich, Inc. ("KB") by Great American Opportunities, Inc. ("Great American"). The case involves two claims made by Great American against a third company, Cherrydale Fundraising, LLC ("Cherrydale"): First, that Cherrydale tortiously interfered with Great American's contractual and prospective business relationships with certain of its employees and customers; and second, that Cherrydale willfully and maliciously misappropriated Great American's trade secrets.

On May 16, 2008, I entered a Preliminary Injunction prohibiting Cherrydale from engaging in much of the activity challenged in the Complaint. That Preliminary Injunction remains in effect.

The case has now been tried on the merits and is before me based on the parties' post-trial briefs and oral argument. For the reasons stated in this Opinion, I find that a number of poor decisions were made and wrongful actions were performed by people working as Cherrydale's agents and are attributable to Cherrydale. Thus, I hold that Cherrydale tortiously interfered with Great American's contractual relationships as to three former KB employees by enticing or encouraging them to breach several provisions in their employment contracts. Additionally, I hold that Cherrydale willfully and maliciously misappropriated certain of KB's trade secrets.

Despite Cherrydale's proven wrongdoing, however, Great American largely failed to meet its burden of proof as to damages. Although Great American sought compensation damages for its actual losses in excess of $1 million, it failed to prove that aspect of its claim. Rather, the only compensatory damages the record supports are based on the degree of Cherrydale's unjust enrichment. Those damages total $61,538. In addition, because Cherrydale willfully and maliciously misappropriated Great American's trade secrets, I award Great American an additional $61,538 in exemplary damages and one half of its reasonable attorneys' fees incurred in connection with this litigation.

Finally, in regard to Great American's motion to hold Cherrydale in contempt of the Preliminary Injunction based on actions its agents took in May 2008, I find Cherrydale liable for contempt and, as a result, award Great American all of its attorneys' fees and expenses it incurred in prosecuting its motion for contempt.

I. FACTUAL BACKGROUND

A. The Parties

Plaintiff, Great American, is a Tennessee corporation with its principal place of business in Nashville, Tennessee. Defendant, Cherrydale, is a Delaware limited liability company with its principal place of business in Allentown, Pennsylvania. This case also relates to KB, a now defunct, nonparty Delaware corporation which had its principal place of business in Illinois.

At the time of the events giving rise to this case, Great American, Cherrydale, and KB competed with one another in the product and service-based fundraising industry. Generally, participants in the fundraising industry market and distribute products and services to nonprofit organizations including schools, student clubs, Parent Teacher Associations (PTAs), church groups, and civic organizations. These groups, in turn, resell the products to raise money for events and activities. Great American, Cherrydale and KB each participated in this industry, marketing similar products and services including chocolates, confections, gift wrap, and magazine subscriptions.

Fundraising companies typically sell these products and services through a team of sales representatives assigned to defined geographical "territories" across the country. Many of these sales reps are former teachers and educators, school coaches, or homemakers and may earn between $80,000 and $120,000 a year.¹ When starting out, sales reps may spend years in their assigned territories developing contacts with school principals, PTA presidents, community and organizational leaders and others before they begin to make a profit for their fundraising company.² Additionally, an experienced sales rep's annual sales may fluctuate because the leaders at these organizations are often students or their parents and, consequently, contacts change frequently and year-to-year turnover in customers is high.³ Finally, because of the potential for conflict resulting from sales reps working in the same assigned territory, fundraising companies seeking to hire new sales reps often consider the potential for territorial overlap.⁴

B. Facts

On April 24, 2008, after weeks of negotiation, Great American closed on an Asset Purchase Agreement (the "APA") with KB whereby Great American purchased substantially all of KB's assets for $9.3 million.⁵ Great American's claims in this case arise from actions taken by Cherrydale and its representatives during the months leading up to and following that acquisition.

Because this action involves so many players, I begin by identifying some of the key participants. Many of Great American's factual claims center on Steven Hoffrichter, who worked for Cherrydale as its National Sales Manager and participated heavily in Cherrydale's plan to recruit KB employees. This action also involves Darlene Williamson, a former KB sales representative and regional and national training manager who joined Cherrydale as an independent contractor in November 2007. In addition, Great American's claims focus on the actions of three former KB employees, Gregory Southern, Richard Fisher, and Michael Johnson, each of whom joined Cherrydale between March and June 2008. Finally, the record contains numerous references to communications with and actions taken by Alan Kraft, Cherrydale's President, Howard Lightstone, Cherrydale's Chief Financial Officer, and Larry Rosen, Cherrydale's Chairman.

1. Cherrydale's Recruiting Plan

Beginning in late 2007, Hoffrichter actively set out to expand Cherrydale's sales force with the assistance of Ross Cherry, a then-part owner of Cherrydale who had worked for the company since 1980.⁶ In part, Cherrydale sought to facilitate broader access to its products by expanding the territory covered by its sales reps into previously unserviced areas.⁷ Cherry formulated a recruiting plan for Cherrydale in November 2007 and suggested that "[g]etting within the KB network, or the network of some of the other national companies, is how to get started."⁸ In an email accompanying this plan, Cherry recognized that such recruitment efforts may be difficult because some of the sales reps who then worked for KB would "have non-competes" which Cherrydale would have to deal with.⁹ After Cherrydale removed Cherry as a recruiter in December 2007,¹⁰ Hoffrichter continued Cherrydale's efforts to recruit sales reps within the KB network.

In November 2007, Williamson, who had left KB in July 2006, joined Cherrydale. The next former KB employee to join Cherrydale was Southern. After working for KB in California for several years,¹¹ Southern contacted Hoffrichter in May 2007 to discuss possible opportunities with Cherrydale, but no serious negotiations took place at that time.¹² Southern again contacted Hoffrichter in early 2008 and, after some discussion accepted a proposal to become an independent contractor for Cherrydale on February 26, 2008 (the "February 26 Proposal").¹³ Though Southern began actively working for Cherrydale on March 25,¹⁴ he remained an employee of KB until April 18, 2008.¹⁵ During this time, Southern accessed documents on the KB report portal, including the Ranking Report¹⁶ and the Order Status Report,¹⁷ maintained a copy of his customer information list,¹⁸ contacted individuals on that list,¹⁹ and assisted Cherrydale in its recruiting efforts.²⁰

Soon after contacting Hoffrichter in early 2008, Southern began assisting Cherrydale with its recruiting efforts and talking with Hoffrichter about "his KB friends."²¹ On February 8, Southern called Fisher, who worked for KB in Phoenix, Arizona, and repeated a rumor to him to the effect that KB had been sold to Great American that day.²² While this rumor turned out to be false, it prompted Fisher to begin thinking about his future in the fundraising industry.²³ A few days later, Fisher called Hoffrichter to discuss possible employment with Cherrydale.²⁴ After communicating with Hoffrichter and a competing fundraising company,²⁵ Fisher signed an agreement with Cherrydale on April 2, 2008.²⁶ Though he began working for Cherrydale on April 14, Fisher did not resign from KB until April 18.²⁷

Shortly after Southern joined Cherrydale, Hoffrichter spoke with him and Williamson regarding KB sales reps they thought might be amenable to Cherrydale's recruitment efforts.²⁸ Based on these conversations and others with Herb Horn,²⁹ on March 4, 2008, Hoffrichter circulated his first "Target List of KB Reps," which included some of the top sales reps at KB.³⁰ Nine days later, on March 13, Hoffrichter circulated an updated "Target List of KB Reps" that, for the first time, indicated the sales volumes of the KB sales reps.³¹ According to an email, this updated list represented "the best of the KB sales force."³² Hoffrichter used these sales volume...