Gwo Litig. Trust v. Sprint Solutions, Inc.

Decision Date25 October 2018
Docket NumberC.A. No. N17C-06-356 PRW CCLD
PartiesTHE GWO LITIGATION TRUST, Plaintiff/Counterclaim Defendant, v. SPRINT SOLUTIONS, INC., Defendant/Counterclaim Plaintiff. SPRINT EWIRELESS, INC., Third-Party Plaintiff, v. THE GWO LITIGATION TRUST, Third-Party Defendant.
CourtDelaware Superior Court

Upon Defendant Sprint Solutions, Inc.'s Motion to Dismiss Counts Three through Seven of the Amended Complaint, DENIED in part; GRANTED in part.

Upon Plaintiff GWO Litigation Trust's Partial Motion to Dismiss Defendant's Amended Counterclaims and Sprint eWireless, Inc.'s Third-Party Claim, DENIED in part; GRANTED in part.

MEMORANDUM OPINION AND ORDER

Richard M. Beck, Esquire, Sean M. Brennecke, Esquire, Klehr Harrison Harvey Branzburg LLP, Wilmington, Delaware, John D. Byars, Esquire (pro hac vice), Joseph C. Smith, Jr., Esquire (pro hac vice) (argued), Bartlit Beck Herman Palenchar & Scott LLP, Chicago, Illinois, Attorneys for Plaintiff.

Steven L. Caponi, Esquire, Matthew B. Goeller, Esquire, K&L Gates LLP, Wilmington, Delaware, David I. Swan, Esquire (pro hac vice) (argued), McGuireWoods LLP, Tysons, Virginia, Brian A. Kahn, Esquire (pro hac vice) (argued), McGuireWoods LLP, Charlotte, North Carolina, Attorneys for Defendant and Third-Party Plaintiff.

WALLACE, J.

I. INTRODUCTION

Sprint Solutions, Inc. ("Sprint") entered into a series of contracts with General Wireless Operations, Inc. ("General Wireless") in early 2015 for the purpose of revitalizing the bankrupt RadioShack Corporation ("RadioShack") through unified Sprint/RadioShack store locations, referred to in the agreements as the "Store-Within-A-Store" ("SWAS") model.

The General Wireless Organization Litigation Trust ("GWO Trust"), the successor-in-interest to General Wireless, now brings suit against Sprint on seven counts: two counts of breach of contract; and one count each of breach of the implied covenant of good faith and fair dealing, misappropriation of trade secrets, conversion, unfair competition, and tortious interference with prospective business relations. Sprint moves to dismiss all but the breach-of-contract claims.

Sprint brings five counterclaims against GWO Trust: two counts of breach of contract; one for declaratory relief regarding limitation of liability; an attorney's fees request under the Delaware Uniform Trade Secret Act ("DUTSA") for a bad faith claim of trade secret misappropriation; and an indemnification claim. Third-party plaintiff Sprint eWireless, Inc. ("eWireless") also claims breach of contract against GWO Trust. GWO Trust moves to dismiss three of Sprint's counterclaims and eWireless's third-party claim.

II. FACTUAL AND PROCEDURAL BACKGROUND

The essential facts are undisputed in this action. While GWO Trust and Sprint each present its version of the story in its respective pleadings, the basic facts are as follows.

A. RadioShack Bankruptcy and the Parties Involved.

RadioShack, founded around 1920, was once an iconic name with a nationwide retail footprint in electronics, computer, and cellphones.1 From 2011 to its bankruptcy filing in 2015 ("First RadioShack Bankruptcy Case"), RadioShack's revenue declined due to increasingly competitive market conditions.2

General Wireless, an entity formed by New York-based hedge fund Standard General LP, was created to acquire the strongest parts of RadioShack's business from bankruptcy and to revitalize the retailer.3 General Wireless, Inc. ("GWI") is the ultimate parent entity of General Wireless.4

Sprint, controlled by the Japanese wireless and internet conglomerate SoftBank Corp. since June 2013, is incorporated in Delaware and sought to expand its business in the United States' wireless market which had been predominated by AT&T and Verizon.5 eWireless, an affiliate of Sprint, is a Kansas corporation.

B. Strategic Alliance Agreement; Investor Rights Agreement

In 2015, Sprint was seeking to expand its footprint in the American market. And RadioShack, while owning many retail stores nationwide, was suffering from weakened finances and the on-going proceeding in the First RadioShack Bankruptcy Case.6 So the parties negotiated various mutually beneficial agreements as part of the first bankruptcy case.

On April 1, 2015, General Wireless and Sprint entered into the Amended and Restated Master Strategic Retail Alliance Agreement (the "Alliance Agreement") under which the parties would establish co-branded retail stores—using the SWAS format—to sell RadioShack products and Sprint products exclusively.7 A week later, the parties entered into the Operation, Management, and Staffing Agreement ("OMS Agreement"), as well as numerous other related agreements, including but not limited to master leases and subleases, a distribution agreement, a retaileragreement, and an Investor Rights Agreement (the "Investor Rights Agreement" or "IRA," collectively, the "Related Agreements").8 The OMS Agreement detailed matters not specified in the Alliance Agreement.9

Under the SWAS model, the parties were to use commercially reasonable efforts to meet an agreed-upon schedule in opening co-branded stores, setting up joint signage, staffing and training employees, and maintaining inventory.10 Specifically, with respect to the cost of signage, Sprint would be responsible for 60% and General Wireless for 40%.11

The SWAS model didn't produce the expected market results.12 Four months into the Alliance Agreement, only about one-quarter of the SWAS model locations were completed.13 Progress stalled due to the parties' failure to provide funding, collaborate on signage, and maintain adequate inventory.14

As mentioned, along with the Alliance Agreement, eWireless, GWI, and certain GWI affiliates entered into the Investor Rights Agreement.15 The IRA was meant to protect eWireless as an investor and shareholder by granting eWireless the rights to receive stock warrants, observe the board, and have General Wireless maintain minimum levels of capital and liquidity.16 In addition, eWireless would have a claim against GWI17 in the amount of $60 million less the amount of commissions General Wireless earned from the ongoing sale of Sprint products (the "Sprint Investor Reimbursement"), referred to as the "Threshold" under Schedule 4.2 of the Alliance Agreement.18 Schedule 4.2 set forth a fees and payment arrangement that required the parties to "negotiate in good faith to modify the application of the Threshold" if General Wireless experienced a negative cash flow.19

For the eight months before February 2016, General Wireless did suffer continuous monthly negative cash flow.20 The parties negotiated and hired outside consultants between December 2015 and March 2016 in an attempt to address that cash flow problem.21 And in April 2016, General Wireless and Sprint executed an amendment to the Alliance Agreement (the "Fourth Amendment").22 Thereunder, Sprint was to increase its cash payment to General Wireless and provide additional support to SWAS locations.23

C. Termination of the Alliance Agreement and the Second Bankruptcy Case.

The RadioShack/Sprint SWAS model didn't take off. And so, around February 2017, General Wireless and Sprint commenced negotiations to wind down the Alliance Agreement.24 On March 5, 2017, General Wireless and Sprint executed a Mutual Settlement and Release, Operations Wind Down, and Bankruptcy Cooperation Agreement (the "Settlement Agreement").25 Three days later, GeneralWireless filed for bankruptcy (the "Second Bankruptcy Case").26 The Bankruptcy Court appointed a statutorily required committee of unsecured creditors (the "Committee") to act in the jointly-administered First RadioShack Bankruptcy Case and the Second Bankruptcy Case.27

Under the Settlement Agreement, Sprint was to: make a "wind-down payment" of $17 million to General Wireless, of which $12 million was to be paid before General Wireless commenced the Second Bankruptcy Case, and set aside a $5 million holdback ("Holdback") during an "investigation period" if General Wireless's creditors agreed to the mutual releases between Sprint and General Wireless.28 But if the creditors filed a claim against Sprint, Sprint forfeited the Holdback.29 The Settlement Agreement also contemplated a joint release of claims between General Wireless and Sprint.30 An estimated $18 million of the Sprint Investor Reimbursement owed to eWireless was excepted from the release of claims.31

General Wireless sought approval of the Settlement Agreement from the Bankruptcy Court.32 And on May 11, 2017, the Bankruptcy Court approved the Settlement Agreement (the "Settlement Approval Order").33

GWO Trust filed the original Complaint in this case in June 2017, asserting two counts of breach of contract and one count of misappropriation of trade secrets.34 GWO Trust's Amended Complaint with additional claims was filed nine months later,35 followed the next day by Sprint's Amended Counterclaims and Third-Party Claims.36

Now before the Court are the parties' cross-motions to dismiss. Sprint moves to dismiss Counts Three through Seven of GWO Trust's Amended Complaint. GWO Trust seeks to dismiss Counts I, II and VI of Sprint's Amended Counterclaims. GWO Trust also seeks dismissal of Count V—eWireless's third-party claim.

III. STANDARD OF REVIEW

When considering a Civil Rule 12(b)(6) motion to dismiss for failure to adequately state a claim, the Court will:

(1) accept all well pleaded factual allegations as true, (2) accept even vague allegations as "well pleaded" if they give the opposing party notice of the claim, (3) draw all reasonable inferences in favor of the non-moving party, and (4) [not dismiss the claims] unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances.37

The Court must accept as true all well-pleaded allegations.38 And every reasonable factual inference will be drawn in the non-moving party's favor.39 But the Court will "ignore conclusory allegations that lack specific...

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