      IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

FORTIS ADVISORS LLC, as the         )
Equityholder Representative,        )
                                    )
                    Plaintiff,      )
      v.                            )     C.A. No. 9522-CB
                                    )
DIALOG SEMICONDUCTOR PLC,           )
                                    )
                    Defendant.      )




                           MEMORANDUM OPINION

                       Date Submitted: November 19, 2014
                         Date Decided: January 30, 2015

Kevin G. Abrams, Derrick B. Farrell, J. Peter Shindel, Jr. and David A. Seal of
ABRAMS & BAYLISS LLP, Wilmington, Delaware; Attorneys for Plaintiff.

Kurt M. Heyman, Samuel T. Hirzel, II and Dawn Kurtz Crompton of PROCTOR
HEYMAN LLP, Wilmington, Delaware; Neal A. Potischman, Sandra West Neukom and
Alyse L. Katz of DAVIS POLK & WARDELL LLP, Menlo Park, California; Attorneys
for Defendant.

BOUCHARD, C.
I.     INTRODUCTION

       This action involves a dispute over whether earn-out payments are owed to the

former equityholders of iWatt, Inc. (“iWatt”) resulting from the sale of iWatt to Dialog

Semiconductor PLC (“Dialog”) through a merger transaction that closed in 2013. The

gravamen of the case is whether Dialog breached the provision of the merger agreement

obligating it to use “commercially reasonable best efforts” to achieve and pay the earn-

out payments in full. That claim is not the subject of the present dismissal motion and is

proceeding through discovery.

       As seems all too common in disputes over earn-out payments, the complaint in

this action asserts, in the alternative to the breach of contract claim, a claim for breach of

the implied covenant of good faith and fair dealing. Notably, plaintiff admits it does not

believe that any gaps exist in the merger agreement from which to imply an additional

contractual term, but it nonetheless seeks to maintain the implied covenant claim as an

alternative legal theory in case the Court may disagree in the future.          I reject this

approach to pleading, and conclude that the failure to identify any gap in the merger

agreement in which the implied covenant would operate warrants dismissal of that claim.

       I also conclude that plaintiff‟s claims for fraud and negligent misrepresentation

must be dismissed. Among other things, the allegations of the complaint fail to satisfy

the particularity requirement of Court of Chancery Rule 9(b) because the complaint does

not identify the time or place of the false representations or specifically who made them.




                                              1
II.   BACKGROUND1

      A.     The Parties

      Plaintiff Fortis Advisors LLC (“Fortis”) is a Delaware limited liability corporation

with its principal place of business in La Jolla, California. Under the terms of an

Agreement and Plan of Merger dated as of July 1, 2013 (the “Merger Agreement”), Fortis

was appointed as the representative of the former equityholders of iWatt.

      Non-party iWatt, formerly a Delaware corporation, was a provider of digital

power management circuits. Before its sale to Dialog, iWatt designed, developed, and

marketed digital-centric power management integrated circuits for AC/DC power

conversion, LED solid-state lighting, and LED display backlighting markets. After the

merger closed, iWatt was operated as a separate, stand-alone business unit of Dialog

known as the Power Conversion Business Group.

      Defendant Dialog Semiconductor PLC is incorporated in England and Wales with

its principal place of business in Green Park, United Kingdom. Dialog is a provider of

highly integrated power management, audio and short-range wireless technologies.

      B.     The Merger Agreement

      In the Merger Agreement, which is governed by Delaware law, Dialog agreed to

acquire iWatt for $310 million plus earn-out payments of up to $35 million depending on


1
  Unless otherwise noted, the facts recited in this Memorandum Opinion are drawn from
the allegations of the Amended Verified Complaint (the “complaint”) and the documents
integral to or incorporated therein.



                                            2
the post-merger revenues of Dialog‟s Power Conversion Business Group. Specifically,

earn-out payments would be triggered if the revenues of the Power Conversion Business

Group exceeded: (1) $51.3 million during the six months ended December 31, 2013 (the

“First Earn-Out Period”) and/or (2) $99.9 million during the nine months ended

September 30, 2014 (the “Second Earn-Out Period”).2

      Aware that Dialog would take control of iWatt‟s operations after the merger, the

parties agreed to specific contractual provisions regarding the earn-out payments and

Dialog‟s ability to manage the business post-closing. In particular, Section 3.04 of the

Merger Agreement provides, in general terms, that Dialog (referred to as “Parent”) was

required to use its commercially reasonable best efforts to achieve and pay the earn-out

payments in full:

      From the Closing Date through the end of the Second Earnout Period,
      Parent shall, and shall cause its Affiliates . . . to, use commercially
      reasonable best efforts, in the context of successfully managing the
      business of the Surviving Corporation, to achieve and pay the Earn-Out
      Payments in full (it being understood and agreed that one of the primary
      objectives of managing the business of the Surviving Corporation shall be
      to achieve and pay the Earn-Out Payments in full, provided that, subject in
      all respects to its obligations under this Agreement, Parent is entitled to
      make changes to the business in its reasonable commercial judgment in
      order to achieve the objectives in managing the business of the Surviving
      Corporation), including allocating appropriate and sufficient resources

2
 The actual amount of the earn-out payments was based on a scale. For the First Earn-
Out Period, iWatt‟s former equityholders would receive at least a partial earn-out
payment if iWatt‟s revenues exceeded $51.3 million and a total of up to $17 million in
earn-out payments if iWatt‟s revenues exceeded $57 million during that period. For the
Second Earn-Out Period, iWatt‟s former equityholders would receive at least a partial
earn-out payment if iWatt‟s revenues exceeded $99.9 million and a total of up to $18
million in earn-out payments if iWatt‟s revenues exceeded $111 million during that
period. Merger Agreement § 3.01 (Am. Compl. Ex. A).

                                           3
          (including sufficient capital expenditure, working capital and human
          resources) to the Surviving Corporation and its Subsidiaries to enable the
          achievement and payment of the Earn-Out Payments in full.3

The next sentence of Section 3.04 goes on to impose a number of specific obligations and

prohibitions concerning Dialog‟s operation of the business:

          Without limiting the generality of the foregoing, (i) Parent shall, and shall
          cause its Affiliates . . . to (A) operate the business of the Surviving
          Corporation and its Subsidiaries as a separate, stand-alone business unit
          (understanding that Parent may elect to integrate sales, service, supply
          chain and administrative functions with those of Parent), (B) maintain a
          separate research and development organization within such business unit
          with engineering headcount at a level not materially below that currently
          maintained by the Company and (C) price the products of the Surviving
          Corporation on a standalone basis and without any reduction related to the
          pricing of products by Parent‟s other product lines and (ii) Parent shall not,
          and shall not authorize or permit its Affiliates . . . to, (A) take any action
          with the intent of avoiding or reducing the payment of any Earn-Out
          Payment, (B) divert to another business of Parent any business opportunity
          in a manner that could reasonably be expected to or does diminish or
          minimize the Earn-Out Payments, (C) take any action for the purpose of
          shifting Revenue outside of the Earn-Out Periods . . . or reducing Revenue .
          . . .4

          C.     The Power Conversion Business Group Fails to Meet the
                 Earn-Out Revenue Targets

          On July 16, 2013, Dialog completed its acquisition of iWatt. On January 28,

2014, Dialog notified Fortis that the Power Conversion Business Group indicated

revenues of $35.355 million during the First Earn-Out Period, well short of the $51.3

million revenue threshold to trigger an earn-out payment for this period under the Merger

Agreement. Based on information it obtained from Dialog after the First Earn-Out Period

3
    Merger Agreement § 3.04(a) (emphasis added) (Am. Compl. Ex. A).
4
    Id.

                                                4
ended, Fortis contends that the Power Conversion Business Group “had three key

revenue shortfalls, all of which could have been easily avoided if Dialog had used

commercially reasonable best efforts . . . to achieve and pay the Earn-Out Payments in

full,” relating to “lower than anticipated sales involving the (1) the LED lighting

business; (2) Samsung; and (3) Apple.”5

        According to the Amended Verified Complaint, which was filed on July 24, 2014,

before the end of the Second Earn-Out Period, certain actions taken by Dialog also made

it apparent that iWatt would not achieve sufficient revenues to trigger an earn-out

payment for the Second Earn-Out Period.          Dialog later confirmed that its Power

Conversion Business Group did not achieve sufficient revenues during the Second Earn-

Out Period to trigger an earn-out payment for this period.

        D.     Procedural History

        On April 9, 2014, Fortis filed its initial complaint in this action on behalf of

iWatt‟s former equityholders. On July 25, 2014, Fortis amended its complaint. As

amended, the complaint contains five counts: (1) breach of Section 3.04 of the Merger

Agreement; (2) specific performance relating to the Second Earn-Out Payment (the time

period for which had not yet ended when the amended complaint was filed); (3) in the

alternative to Count I, breach of the implied covenant of good faith and fair dealing; (4)

fraudulent inducement; and (5) in the alternative to Count IV,                  negligent

misrepresentation. Dialog filed an answer in response to Counts I and II.


5
    Am. Compl. ¶ 28.

                                            5
       On August 8, 2014, Dialog moved to dismiss Counts III, IV, and V for failure to

state a claim for relief under Court of Chancery Rule 12(b)(6) and, for the fraud-based

claims, for failure to satisfy the particularity requirement of Court of Chancery Rule 9(b).

I heard oral argument on this motion on November 19, 2014.

III.   LEGAL ANALYSIS

       A.     Motion to Dismiss Under Rule 12(b)(6)

       Under Court of Chancery Rule 12(b)(6), a motion to dismiss for failure to state a

claim for relief must be denied unless, assuming the well-pled allegations to be true and

viewing all reasonable inferences from those allegations in the plaintiff's favor, there is

no “reasonably conceivable set of circumstances susceptible of proof” in which the

plaintiff could recover.6 “In determining whether a pleading meets this minimal standard,

this Court draws all reasonable inferences in the plaintiff‟s favor, accepts all well-pleaded

factual allegations as true, and even accepts „vague allegations in the Complaint as „well

pleaded‟ if they provide the defendant notice of the claim.‟”7

       B.     The Complaint Fails to State a Claim for Breach of the Implied
              Covenant of Good Faith and Fair Dealing

       Under Delaware law, the implied covenant of good faith and fair dealing attaches

to every contract by operation of law and “requires „a party in a contractual relationship

to refrain from arbitrary or unreasonable conduct which has the effect of preventing the

6
 Cent Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del.
2011).
7
 Seinfeld v. Slager, 2012 WL 2501105, at *2 (Del. Ch. June 29, 2012) (quoting Cent.
Mortg. Co., 27 A.3d at 536).

                                             6
other party to the contract from receiving the fruits‟ of the bargain.”8 “[T]he implied

covenant only applies where a contract lacks specific language governing an issue and

the obligation the court is asked to imply advances, and does not contradict, the purposes

reflected in the express language of the contract.”9 “The Court must focus on „what the

parties likely would have done if they had considered the issues involved.‟ It must be

„clear from what was expressly agreed upon that the parties who negotiated the express

terms of the contract would have agreed to proscribe the act later complained of . . . had

they thought to negotiate with respect to that matter.‟” 10 Where the contract speaks

directly regarding the issue in dispute, “[e]xisting contract terms control . . . such that

implied good faith cannot be used to circumvent the parties‟ bargain, or to create a free-

floating duty unattached to the underlying legal documents.‟”11 “To state a claim for

breach of the implied covenant, a litigant must allege a specific obligation implied in the

contract, a breach of that obligation, and resulting damages.”12


8
  Dunlap v. State Farm Fire and Cas. Co., 878 A.2d 434, 442 (Del. 2005) (quoting
Wilgus v. Salt Pond Inv. Co., 498 A.2d 151, 159 (Del. Ch. 1985), construing Restatement
§ 205).
9
 Alliance Data Sys. Corp. v. Blackstone Capital P’rs V L.P., 963 A.2d 746, 770 (Del.
Ch. 2009) (citation omitted), aff’d, 976 A.2d 170 (Del. 2009).
10
     Lonergan v. EPE Hldgs. LLC, 5 A.3d 1008, 1018 (Del. Ch. 2010) (citations omitted).
11
     Dunlap, 878 A.2d at 441 (citation and internal quotation marks omitted).
12
   Matthew v. Laudamiel, 2012 WL 605589, at *16 (Del. Ch. Feb. 21, 2012); see also
Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 901 A.2d 106, 116 (Del. 2006) (upholding
dismissal of implied covenant claim where plaintiff failed to identify “any implied
contract term that it would have the trial court read into the contract”); Fitzgerald v.
Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998).

                                              7
         To place the implied covenant claim in context, it is important to first review

Count I of the complaint, which is not the subject of the motion to dismiss. In Count I,

Fortis contends that Dialog breached Section 3.04 of the Merger Agreement by failing to

“use its commercially reasonable best efforts . . . to achieve and pay the earn-out

payments in full.”13 Specifically, Fortis alleges that Dialog breached Section 3.04 by

taking and/or failing to take the following six actions:

         (1) failing to replace Ronald Edgerton [iWatt‟s former CEO] following his
         termination; (2) failing to replace the sales staff of Dialog‟s Power
         Conversion Business terminated by Dialog; (3) intentionally not building
         sufficient inventory and supply chains for the Power Conversion Business
         to meet the Earn-Out Revenue Goals; (4) failing to properly manage
         development and introduction of lower price point LED lighting solutions
         for the Power Conversion Business; (5) directing Dialog employees against
         actively marketing the Power Conversion Business‟ LED lighting products;
         and (6) interfering with sales efforts, and failing to dedicate adequate
         manpower and resources to the Apple and Samsung accounts.14

         In Count III of its complaint, Fortis pleads, as an alternative to Count I, that Dialog

breached the implied covenant of good faith and fair dealing by taking or failing to take

these same six actions.15 Significantly, Fortis does not identify any gap or ambiguity in




13
     Am. Compl. ¶ 34.
14
     Am. Compl. ¶ 35.
15
   See Am. Compl. ¶ 51. Five of these six items (1, 2, 3, 5 and 6) are repeated verbatim
in Counts I and III. Item 4 is described slightly differently in Count I than Count III. In
Count I, Fortis alleges that Dialog failed “to properly manage development and
introduction of lower price point LED lighting solutions for the Power Conversion
Business.” Am. Compl. ¶ 35. In Count III, Fortis alleges that Dialog failed “to timely
introduce scheduled lower price point LED lighting solutions for the Power Conversion
Business.” Am. Compl. ¶ 51. I see no substantive difference between these allegations.
Both of them focus on the alleged failure to introduce “lower price point LED lighting
                                                8
Section 3.04 or elsewhere in the Merger Agreement as a basis for implying an additional

obligation owed by Dialog with regard to any of these six alleged actions or failures. To

the contrary, Fortis expressly acknowledges that it “does not believe any” gaps exist in

Section 3.04, but argues that Count III should survive just in case “the Court may

disagree” down the road of this litigation.16

           In opposition, Dialog contends that Count III should be dismissed because it is

duplicative of Fortis‟s breach of contract claim. According to Dialog, Fortis‟s claim for

breach of the implied covenant fails because “there is no implied obligation at issue.” 17

Instead, Dialog argues, “the Merger Agreement expressly defines Dialog‟s obligation

(i.e., to use „commercially reasonable best efforts‟)” and thus, “[t]his case . . . is about an

alleged breach of the contract‟s terms.”18

           In my opinion, the allegations of the complaint fail to state a claim for breach of

the implied covenant because Fortis has not identified, as it must,19 a gap in the Merger

Agreement to be filled by implying terms through the implied covenant.                  Stated

differently, Fortis has failed to identify any implied contract term that it would have this

Court read into the Merger Agreement.


solutions” in a manner that allegedly would have increased the revenues of the Power
Conversion Business during the earn-out periods.
16
     Pl.‟s Ans. Br. 12.
17
     Def.‟s Op. Br. 10.
18
     Id.
19
     Supra note 12.

                                                9
         Instead of identifying any contractual gap or term to be implied, Fortis mimicks

the language of its contract claim to argue that the same six alleged actions and failures

cited as evidence of Dialog‟s alleged breach of Section 3.04 of the Merger Agreement

were contrary to the parties‟ intent in the Merger Agreement because “Fortis reasonably

expected that Dialog would use its best efforts to achieve and pay the earn-out payments

in full during both the First and Second Earn-Out Periods,” but Dialog did not.20 The

Merger Agreement, however, expressly imposed on Dialog the obligation to use

“commercially reasonable best efforts to . . . achieve and pay the Earn-Out Payments in

full.”21 Thus, the Merger Agreement sets a contractual standard by which to evaluate if

Dialog‟s failure to achieve and pay the earn-out payments in its operation of the Power

Conversion Business Group was improper.22 There is no gap in the Merger Agreement to

fill in this regard. Stated more generally, Count III must be dismissed because Fortis has

failed to identify any “interstitial space in which the doctrine of the implied covenant

might operate”23 regarding any of the six actions or failures of Dialog that Fortis

challenges in this action.


20
     Am. Compl. ¶ 49.
21
     Merger Agreement § 3.04 (Am. Compl. Ex. A).
22
   I assume Fortis was using shorthand in its complaint when it referenced a “best efforts”
standard in Count III. Am. Compl. ¶ 49. If it was not, and was intending to suggest that
a different standard should be implied, it would be improper to do so because the Merger
Agreement explicitly sets the standard to be “commercially reasonable best efforts.”
Merger Agreement § 3.04 (Am. Compl. Ex. A).
23
  AQSR India Private, Ltd. v. Bureau Veritas Hldgs., Inc., 2009 WL 1707910, at *11
(Del. Ch. June 16, 2009).

                                            10
           My conclusion is consistent with this Court‟s decision in Matthew v. Laudamiel.24

In Laudamiel, the Aeosphere defendants alleged, among other things, that Matthew had

breached either the LLC agreement or the implied covenant of good faith and fair dealing

by refusing to attend an emergency board meeting.25 The LLC agreement provided that

Matthew was obliged to “use [his] „best efforts‟ to attend all properly called meetings of

the Board.”26 The Court determined that because the LLC agreement expressly required

Matthew to use his best efforts, “a claim challenging Matthew‟s efforts to attend the

emergency Board meeting [had to] be pled as a breach of contract counterclaim applying

the contractually agreed-upon best efforts standard.”27

           In this case, it is equally evident from the Merger Agreement that the parties

carefully negotiated the contours of Dialog‟s obligations to achieve and pay the earn-out

payments – hence, Fortis‟s acknowledgement that it does not believe any gaps exist in

Section 3.04. Thus, Dialog‟s failure to achieve the earn-out revenue thresholds must be

analyzed within the confines of the express contractual obligations set forth in that

provision and any other applicable provision of the Merger Agreement.28


24
     2012 WL 605589 (Del. Ch. Feb. 21, 2012).
25
     Id. at *15.
26
     Id. at *20.
27
     Id.
28
  See also Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *11 (Del.
Ch. Dec. 22, 2010) (dismissing implied covenant claim for failing to expeditiously close
a merger where the merger agreement contained a “reasonable best efforts” clause that
included the obligation to expeditiously close the merger); AQSR India, 2009 WL
1707910, at *11 (dismissing implied covenant claim for “arbitrarily and in bad faith”
                                              11
       Finally, I reject Fortis‟s argument that its implied covenant claim should survive

despite its failure to identify any gap in the Merger Agreement, simply because it has

pled its implied covenant claim in the alternative. Fortis cites two cases in which the

Court has permitted breach of contract and implied covenant claims to survive a motion

to dismiss when pled as alternative theories for recovery. In both cases, unlike here, the

plaintiff had identified an ambiguity or potential gap in a contract that could be filled by

the implied covenant.29 The right to plead alternative claims, as Court of Chancery Rule




determining that there had been a Material Adverse Effect because “[w]hether there was
a Material Adverse Effect [was] governed by the express terms of the [stock purchase
agreement],” leaving “no interstitial space in which the doctrine of the implied covenant
might operate”).
29
   See Bay Ctr. Apartments Owner, LLC v. Emery Bay PKI, LLC, 2009 WL 1124451, at
*7-8 (Del. Ch. Apr. 20, 2009) (finding that plaintiff sufficiently pled “an implied duty to
cause performance of the Supporting Agreements” where the contract was ambiguous “as
to who was responsible for the bulk of the conduct alleged in [Plaintiff]‟s Complaint”);
Clean Harbors, Inc. v. Safety-Kleen, Inc., 2011 WL 6793718, at *9 (Del. Ch. Dec. 9,
2011) (finding that the alleged facts could support a claim for breach of the implied
covenant where an express term of the contract required defendant to use its “good faith
discretion,” but other terms of the contract to which the implied covenant might apply
were potentially ambiguous as to defendant‟s obligations).

Fortis also relies on the post-trial opinion in eCommerce Industries, Inc. v. MWA
Intelligence, Inc., 2013 WL 5621678 (Del. Ch. Sept. 30, 2013). There, after concluding
that the ECI parties had breached an express non-compete clause through certain indirect
marketing efforts, the Court found in the alternative that the same parties had breached an
implied covenant. Critical to the latter holding, the Court found that the parties to the
contract “could not have foreseen the corporate structure and marketing plan” that would
exist after the transaction, and that “had they seen the situation that presently exists, . . .
they would have proscribed it.” Id. at *34, *36. Thus, the Court‟s alternative holding
followed from identifying a gap in the parties‟ agreement. Here, Fortis has not pled that
any of the actions or failures of Dialog challenged in this action were unforeseeable and
thus not addressed in the Merger Agreement. To the contrary, as discussed above, the
Merger Agreement explicitly contemplated that iWatt would be operated as a separate,
                                              12
8(e)(2) permits, “does not obviate the need to provide factual support for each theory.”30

Here, to repeat, Fortis has challenged six alleged actions or failures of Dialog in its

operation of the Power Conversion Business Group after the merger closed, but it has

failed to plead the existence of any gap in the Merger Agreement in which the implied

covenant could operate with respect to any of these alleged actions or failures.

Accordingly, Count III fails to state a claim for relief.

       C.     The Complaint Fails to Plead a Claim of Fraudulent Inducement with
              the Requisite Particularity

       “In order for a fraud claim to survive a motion to dismiss, a plaintiff needs to

allege: (1) that defendant made a false representation, usually one of fact; (2) with the

knowledge or belief that the representation was false, or with reckless indifference to the

truth; (3) with an intent to induce the plaintiff to act or refrain from acting; (4) that

plaintiff‟s action or inaction was taken in justifiable reliance upon the representation; and

(5) damage to the plaintiff as a result of her reliance on the representation.”31

       Court of Chancery Rule 9(b) further requires that “[i]n all averments of fraud . . . ,

the circumstances constituting fraud . . . be stated with particularity.” “To satisfy Rule

9(b), a complaint must allege: (1) the time, place, and contents of the false representation;



stand-alone business unit and imposed both general and specific obligations on Dialog in
its management of the business after the merger closed relating to the earn-out payments.
30
  BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed Martin Corp., 2009 WL
264088, at *8 (Del. Ch. Feb. 3, 2009).
31
  Grunstein v. Silva, 2009 WL 4698541, at *12 (Del. Ch. Dec. 8, 2009) (citing Gaffin v.
Teledyne, Inc., 611 A.2d 467, 472 (Del. 1992)).

                                              13
(2) the identity of the person making the representation; and (3) what the person intended

to gain by making the representations.”32           The particularity requirement requires a

plaintiff to allege “the circumstances of the fraud with detail sufficient to apprise the

defendant of the basis for the claim.”33 To support promissory fraud, a plaintiff must also

“plead specific facts that lead to a reasonable inference that the promissor had no

intention of performing at the time the promise was made.”34

           In Count IV of its complaint, Fortis alleges that Dialog made four materially false

statements during the parties‟ negotiations to induce iWatt to enter into the Merger

Agreement:

           [B]etween March 13, 2013 and July 1, 2013 Dialog, through statements by
           its CEO, Jalal Baherli, and Mark Tyndall, its Vice President of Business
           Development and Corporate Strategy, to Ronald Edgerton and other iWatt
           directors and officers, repeatedly falsely represented to iWatt it would (1)
           keep iWatt‟s existing sales force in place with substantially the same
           responsibilities; (2) only reduce iWatt‟s sales force by a small number if
           Dialog‟s existing sales staff could service some of iWatt‟s customers; (3)
           increase investments in iWatt and add new products to accelerate iWatt‟s
           growth; and (4) use Dialog‟s existing relationships with Samsung,
           Panasonic, Sony, Zumtobel, and Bosch to increase iWatt‟s sales.35




32
     ABRY P’rs V, L.P. v. F & W Acq., LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006).
33
     Id.
34
  Grunstein, 2009 WL 4698541, at *13 (citation omitted) (internal quotation marks
omitted).
35
     Am. Compl. ¶ 16; see also Am. Compl. ¶ 57 (alleging same four false statements).

                                               14
Fortis alleges that Dialog “had no intention to keep these promises at the time they were

made”36 and, as evidence of such, points to the fact that Dialog reduced support for

iWatt‟s products and personnel soon after the merger closed.37

         In seeking to dismiss Count IV, Dialog argues, among other things,38 that the

allegations of the complaint lack the particularity required under Rule 9(b) because the

complaint “does not identify which Dialog employee allegedly made which statements,

or where or when any of these statements were made.” 39 I agree. In my opinion, the

allegations underlying Count IV are deficient in several respects that, taken together, fail

to satisfy the particularity requirement of Rule 9(b).

         First, the complaint fails to allege in any meaningful sense when any of the alleged

four misrepresentations were made.         The complaint does allege that each of the

misrepresentations occurred at some time during a period of approximately 3-1/2 months

from when the parties began their negotiations (March 12, 2013) until the Merger

Agreement was signed (July 1, 2013). This, however, is the functional equivalent to

providing no time parameter at all because the misrepresentations logically could not

have occurred during any other period of time. In short, contrary to the purpose of the

36
     Am. Compl. ¶ 58.
37
     See Am. Compl. ¶¶ 5, 26-32, 51.
38
   Dialog also argues that all of the alleged misrepresentations were promises of future
intent and that Fortis failed “to plead facts showing that the Dialog speaker(s) lacked the
intention of keeping [those] promises at the time(s) that they were made.” Def.‟s Op. Br.
16. Given that I find Count IV to be deficient for failing to plead the circumstances of
the alleged fraud with particularity as required under Rule 9(b), I do not decide this issue.
39
     Def.‟s Op. Br. 17.

                                              15
particularity requirement in Rule 9(b), Dialog is left to guess when Fortis contends that it

allegedly made any of the four false statements attributed to it.

         Pleading when the alleged misrepresentations occurred is especially important

where, as here, the alleged promises are of future performance. When a fraud claim is

premised on promises of future performance, a plaintiff must demonstrate that the

defendant had no intention of keeping its promises at the time they were made.40 To

defend against such assertions, a defendant logically must be apprised when the alleged

statements were made in order to counter the assertion that it did not intend to keep its

promise at that time.41 Fortis, however, has made no effort to provide this information.

         I am unpersuaded by Fortis‟s reliance on this Court‟s decision in Grunstein v.

Silva42 to excuse the lack of any meaningful temporal allegations in its complaint.

Although the facts in Grunstein are somewhat complex, simplified for relevant purposes,

the case concerned two individuals (Grunstein and Dwyer) who alleged that a third

individual (Silva) had entered an oral partnership agreement with them in July or August

of 2005 relating to the acquisition of Beverly Enterprises, Inc., a publicly-held company



40
     See supra note 34.
41
   See Grunstein, at *13 (“Unlike a traditional fraud claim that allows a plaintiff to plead
intent generally, because the factual predicate of a promissory fraud claim is the
speaker‟s state of mind at the time the statement is made, a general averment of a
culpable state of mind is insufficient. Instead, the plaintiff „must plead specific facts that
lead to a reasonable inference that the promissor had no intention of performing at the
time the promise was made.‟”) (quoting Winner Acceptance Corp. v. Return on Capital
Corp., 2008 WL 5352063, at *10 (Del. Ch. Dec. 23, 2008)).
42
     2009 WL 4698541 (Del. Ch. Dec. 8, 2009).

                                             16
that owned and/or operated nursing homes. Grunstein and Dwyer sued Silva for fraud on

the theory that Silva misrepresented his intent to honor the partnership agreement and

“now disclaims the very existence of a contract in the first place.” 43 To demonstrate that

Silva had no intention of performing the partnership agreement when it was made,

Grunstein and Dwyer pointed to two principal factual allegations: “(1) that „[a]t no time

from at least early September 2005 through the closing [in March 2006] did Mr. Silva

ever mention Mr. Grunstein‟s name to WSIB [a third-party financing source for the

transaction] or disclose to WSIB Mr. Grunstein‟s role in the Beverly Acquisition‟ . . . and

(2) that „Mr. Silva represented to WSIB in writing on several occasions . . . that FCP [an

entity owned and controlled by Silva] had signed the Merger Agreement and paid the

deposit to Beverly, when in fact NASC [a special purpose entity the three partners were

using to facilitate the acquisition] had signed the merger agreement and Mr. Dwyer had

put up the deposit pursuant to the agreement between the parties.”44 In the face of a Rule

9(b) challenge, the Court found the foregoing allegations to contain sufficient

particularity because “Plaintiffs have asserted discrete representations by Silva at

specifically delineated times during the acquisition negotiations.”45

          The underlying factual allegations in Grunstein differ from this case in two

important respects that make Grunstein inapposite. The first factual allegation quoted



43
     Id. at *13.
44
     Id. at *13 (citation omitted).
45
     Id. at *14.

                                            17
above concerned an omission of material information. In that circumstance, it is logical

to tie a misrepresentation to a period of time (even one of several months) during which

the information was concealed. This case, however, does not concern an omission. As

explained above, Fortis‟s fraud claim is premised on four affirmative misrepresentations

that had to have been made at some point(s) in time, which the complaint makes no

meaningful attempt to particularize. As to the second factual allegation quoted above, the

plaintiffs in Grunstein had alleged that Silva made this representation on a specific date,

i.e., November 4, 2005.46 That is precisely the kind of factual detail that is missing from

the complaint here.47

         In addition to failing to particularize when any of the alleged misrepresentations

were made, the complaint fails to identify who made any particular misrepresentation and

to whom they were made.48 Instead, the complaint asserts that one of two officers of




46
     See id. at *3 (citing Compl. ¶ 36).
47
   The three other cases Fortis cites in support of its argument that it has met the temporal
requirement of Rule 9(b) are inapt for the same reason: in each, the plaintiff provided
meaningful detail concerning when the misrepresentations were made. See Nacco Indus.,
Inc. v. Applica Inc., 997 A.2d 1, 27 (Del. Ch. 2009) (finding fraudulent statements
alleged to have been made on specific dates over a period of time sufficient to plead a
fraud claim); Griffin Corp. Servs., LLC v. Jacobs, 2005 WL 2000775, at *9 (Del. Ch.
Aug. 11, 2005) (refusing to dismiss fraudulent misrepresentation claim where
counterclaim plaintiffs alleged that false representations were made in December 2003);
and Acker v. Transurgical, Inc., 2004 WL 1230945, at *3 (Del. Ch. Apr. 22, 2004)
(finding the time requirement satisfied where complaint alleged that fraudulent
misrepresentations were made on one of two dates).
48
   See Steinman v. Levine, 2002 WL 31761252, at *15 (Del. Ch. Nov. 27, 2002)
(“Steinman does not even identify misrepresentations made by any particular individuals.
He simply lumps all the Director Defendants together in his cause of action. Steinman is
                                             18
Dialog (either Baherli or Tyndall) made the representations, but we do not know who

allegedly made which statement(s). The complaint also asserts that the representations

were made to iWatt‟s former CEO (Edgerton) and other, unnamed directors and officers

of iWatt, but we do not know who was the recipient of, or even a witness to, any

particular statement.

           Citing this Court‟s opinion in Anvil Holding Corp. v. Iron Acquisition Co.,49 Fortis

argues that “it is not necessary to identify what particular statements were made by

specific individuals.”50 That is too broad a reading of the case. In Anvil, plaintiffs

alleged that all of the individual defendants committed fraud by affirmatively concealing

certain information from the plaintiffs at meetings held on two specific dates.51 In other

words, plaintiffs did identify who committed the misrepresentations (and when) by

alleging all of the individual defendants participated in the omission of material

information.52        It does not follow from this scenario that where the alleged

misrepresentations consist of false promises rather than omissions, that one is excused

from identifying who made the false promises.




required to identify specific acts of individual defendants for his negligent
misrepresentation claim to survive.”).
49
     2013 WL 2249655 (Del. Ch. May 17, 2013).
50
     Pl.‟s Ans. Br. 22.
51
     Anvil, 2013 WL 2249655, at *5.
52
     Id.

                                                19
         Finally, the complaint makes no mention of where or by what means any of the

misrepresentations were made.        The complaint refers generally to “discussions” or

“conversations,”53 but it does not describe where (e.g., at iWatt‟s offices, Dialog‟s

offices, a mutual meeting place) or how (e.g., in person, over the phone, by email) any of

these communications occurred. The lack of these details, in isolation, may not warrant

dismissal under Rule 9(b). But when the lack of any such details is considered together

with the failure of the complaint to identify when any of the alleged misrepresentations

were made and who made any of them, the complaint fails in my view to apprise Dialog

of sufficient information concerning the circumstances of the alleged fraud and thus does

not satisfy the particularity requirement of Rule 9(b).

         D.    The Complaint Fails to State a Claim for Negligent
               Misrepresentation

         In Count V of the complaint, Fortis asserts a claim for negligent misrepresentation

based on the same allegations cited in support of its fraudulent inducement claim. A

claim for negligent misrepresentation is often referred to interchangeably as equitable




53
     Am. Compl. ¶¶ 16, 56, 57.

                                             20
fraud,54 and Fortis itself consistently characterized Count V as a claim for equitable fraud

in its briefing.55

         “A claim of negligent misrepresentation, or equitable fraud, requires proof of all of

the elements of common law fraud except „that plaintiff need not demonstrate that the

misstatement or omission was made knowingly or recklessly.‟”56 Because Fortis failed to

plead its common law fraud claim with the requisite particularity, its negligent

misrepresentation claim fails for the same reason.57

         Fortis‟s negligent misrepresentation claim fails to state a claim for a second,

independent reason.        This Court has held that “an equitable fraud or negligent

misrepresentation claim lies only if there is either: (i) a special relationship between the

parties over which equity takes jurisdiction (like a fiduciary relationship) or (ii)

54
  See, e.g., Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC, 2014 WL 2457515, at
*17 (Del. Ch. May 30, 2014) (“Equitable fraud, also known as negligent
misrepresentation, . . . .”); Envo, Inc. v. Walters, 2009 WL 5173807, at *6 (Del. Ch. Dec.
30, 2009) (“A claim for equitable fraud or negligent misrepresentation . . . .”); Oliver v.
Boston Univ., 2000 WL 1091480, at *11 (Del. Ch. July 18, 2000) (“[N]egligent
misrepresentation and/or equitable fraud claim.”).
55
     See Pl.‟s Ans. Br. 28-29.
56
   Williams v. White Oak Builders, Inc., 2006 WL 1668348, at *7 (Del. Ch. June 6, 2006)
(citation omitted).
57
   See Zebroski v. Progressive Direct Ins. Co., 2014 WL 2156984, at *7 (Del. Ch. Apr.
30, 2014) (applying Rule 9(b) pleading standard to equitable fraud claim); see also Those
Certain Underwriters at Lloyd’s London v. National Installment Ins. Svcs., 2007 WL
1207106, at *5 (Del. Ch. Feb. 8, 2007) (“Court of Chancery Rule 9(b) requires that fraud
be pled with particularity.       This rule almost certainly extends to negligent
misrepresentation (equitable fraud) as well.”) (citing In re Dataproducts Corp. S’holders
Litig., 1991 WL 165301 (Del. Ch. Aug. 22, 1991), reprinted at 17 Del. J. Corp. L. 1159,
1170 n. 5). Fortis does not dispute the applicability of Rule 9(b) to Count V. See Pl.‟s
Ans. Br. 28.

                                              21
justification for a remedy that only equity can afford.”58 Here, no meritorious argument

has been made that this case involves either circumstance. There is no allegation, for

example, that Dialog owed iWatt any fiduciary duties or that there was another

relationship from which equitable duties sprung.59 To the contrary, the gravamen of the

present dispute arises from a transaction that ostensibly was the product of arms-length

negotiation between sophisticated parties. Finally, Count V of the complaint expressly

seeks damages and not any form of equitable relief.60




58
  Envo, 2009 WL 5173807, at *6 (citing Wal-Mart Stores, Inc. v. AIG Ins. Co., 2006 WL
3742596, at *2 (Del. Ch. Dec. 12, 2006)); see also Ameristar Casinos, Inc. v. Resorts
Int’l Hldgs., LLC, 2010 WL 1875631, at *12 (Del. Ch. May 11, 2010) (“equitable fraud
can only be applied in those cases in which one of the two fundamental sources of equity
jurisdiction exist: (1) an equitable right founded upon a special relationship over which
equity takes jurisdiction, or (2) where equity affords its special remedies, e.g., „rescission,
or cancellation; where it is sought to form a contract . . . or to have a constructive trust
decreed.‟”) (internal quotation marks omitted) (quoting U.S. West, Inc. v. Time Warner,
Inc., 1996 WL 307445, at *26 (Del. Ch. June 6, 1996) (Allen, C.)).
59
   Fortis argues “that iWatt had a pecuniary interest in Dialog‟s future plans for iWatt‟s
business” and that “[b]ecause the parties had a pecuniary interest in the information that
serves as the basis of Fortis‟ equitable fraud claim, sufficient „special equities‟ for an
equitable fraud claim exist.” Pl.‟s Ans. Br. 29 (citing H-M Wexford LLC v. Encorp, Inc.,
832 A.2d 129, 147 n. 44 (Del. Ch. 2003)). In H-M Wexford, the Court did not address
whether there existed a special relationship between the parties or whether the plaintiff
sought a remedy that only equity could afford. Cases since H-M Wexford have held that
one of these two circumstances must exist to bring a claim for negligent
misrepresentation or equitable fraud. As discussed above, neither circumstance exists
here.
60
     Am. Compl. ¶ 70.



                                              22
IV.   CONCLUSION

      For the foregoing reasons, Dialog‟s motion to dismiss counts III, IV, and V of the

complaint under Court of Chancery Rules (9)(b) and 12(b)(6) is GRANTED.

      IT IS SO ORDERED.




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