   IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE


ZAYO GROUP, LLC,                          :
                        Plaintiff,        :
                                          :
                v.                        :     C.A. No. 12874-VCS
                                          :
LATISYS HOLDINGS, LLC,                    :
                                          :
                         Defendant.       :
                                          :




                         MEMORANDUM OPINION


                      Date Submitted: September 5, 2018
                      Date Decided: November 26, 2018




Elizabeth S. Fenton, Esquire and Scott W. Perkins, Esquire of Saul Ewing Arnstein
& Lehr LLP, Wilmington, Delaware, Attorneys for Plaintiff Zayo Group, LLC.

Philip Trainer, Jr., Esquire and Marie M. Degnan, Esquire of Ashby & Geddes,
Wilmington, Delaware and Mark D. Cahill, Esquire, Phoebe Fischer-Groban,
Esquire and Christina GT. Lau, Esquire of Choate Hall & Stewart LLP, Boston,
Massachusetts, Attorneys for Defendant Latisys Holdings, LLC.




SLIGHTS, Vice Chancellor
         In law, as in life, the well-known principle of caveat emptor (“let the buyer

beware”) comes as a rude awakening to many-a-buyer.               The principle was

graphically illustrated and perhaps first embraced as a canon of our commercial law

in the seminal Laidlaw v. Organ.1 During the War of 1812, the British successfully

suppressed the free flow of American trade, depressing the price of tobacco trapped

within the United States. The Treaty of Ghent officially ended the war on Christmas

Eve 1814.       Ships carrying news of the Treaty were dispatched and reached

New Orleans weeks later. Before the ships’ couriers could deliver official news of

the armistice, the news was leaked to a tobacco buyer named Organ. Armed with

this non-public information, Organ rushed to Laidlaw & Company at dawn the next

day eager to close a previously negotiated deal to purchase 111 “hogsheads”

(120,715 lbs.) of tobacco. Sensing Organ’s urgency, Laidlaw’s representative asked

Organ if there was some reason for his haste. Organ said nothing of the peace and

the tobacco deal closed that morning. Later that day, in reaction to news that the

foreign tobacco markets had re-opened, the price of tobacco jumped by fifty percent.

Angered by Organ’s “deception,” Laidlaw forcibly seized the tobacco it had sold to

Organ. Organ then sued for its return. The case reached the United States Supreme

Court two years later.



1
    Laidlaw v. Organ, 15 U.S. (2 Wheat.) 178 (1817).

                                             2
         Writing for the majority, Chief Justice Marshall ruled, “[Organ] was not

bound to communicate [his knowledge of the armistice]. . . . . ‘It is no more

forbidden to sell at the current price, without disclosing the circumstances which

may cause it to fall, than it is to buy without communicating those which may cause

it to rise.’”2 While our common law and our Uniform Commercial Code have eased

the harsh reality of caveat emptor somewhat, its core doctrinal premise remains in

our law today. Buyers, indeed, must beware. If they want to manage risk, they are

well-advised to address and allocate it clearly in their contracts.

         In this case, an unhappy buyer of a company has sued the seller for breach of

contract. The seller and buyer agreed that if any of the buyer’s most valuable

customers cancelled or modified their contracts with the seller before the closing,

the seller would disclose that fact to the buyer. The seller and buyer did not agree,

however, that the seller would advise the buyer if any of these customers elected not

to renew one of their contracts. After the transaction closed, the seller discovered

that certain major customers had elected or were electing not to renew their

contracts. This litigation ensued.




2
    Id. at 194, 185 n.C (internal quotation omitted).

                                                3
       At bottom, this case involves sophisticated parties bargaining to allocate risk

through carefully negotiated warranty and indemnification provisions in their

agreement of sale. Delaware is a contractarian state.3 Our courts honor and enforce

the bargain struck. That is what must be done here.

       In this post-trial Memorandum Opinion, I conclude: (1) Plaintiff has not

proven that Defendant breached the operative contract; and (2) in any event, Plaintiff

has not proven its damages above the bargained-for contractual thresholds that limit

its damages recovery. My verdict, therefore, is for Defendant.

                           I. FACTUAL BACKGROUND

       I have drawn the facts from the parties’ pre-trial stipulation, evidence admitted

at trial and those matters of which the Court may take judicial notice.4 The trial



3
  See, e.g., Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 551 n.305 (Del.
Super.), aff’d, 886 A.2d 1278 (Del. 2005) (TABLE) (“Delaware courts do not rescue
disappointed buyers from circumstances that could have been guarded against through
normal due diligence and negotiated contractual protections.”); VGS, Inc. v. Castiel, 2004
WL 876032, at *6 (Del. Ch. Apr. 22, 2004) (finding that a sophisticated investor’s failure
to recognize the importance of a contract that was made available during due diligence
diminished the plaintiffs’ fraud and breach of contract claim); Debakey Corp. v. Raytheon
Serv. Co., 2000 WL 1273317, at *26–28 (Del. Ch. Aug. 25, 2000) (finding that a
sophisticated party’s failure to conduct adequate due diligence or to procure express
warranties for facts that it supposedly relied upon in entering a transaction made it
impossible to prove justifiable reliance. Instead, this behavior indicated the sophisticated
party made a business decision it was willing to accept in order to complete the deal quickly
and cheaply, a decision the court would not second-guess.).
4
 I cite to the Verified Complaint as “Compl. ¶”; the Joint Pre-Trial Stipulation and Order
as “PTO ¶”; the joint trial exhibits as “JX #”; and the trial transcript as “Tr. # (witness
name).”

                                             4
record consists of 494 joint trial exhibits, 803 pages of trial testimony and 17 lodged

depositions. The following facts were proven by a preponderance of the competent

evidence.

      A. Parties and Relevant Non-Parties

         Plaintiff, Zayo Group, LLC (“Zayo”), is a Delaware limited liability company

headquartered in Boulder, Colorado.5 Zayo is a publicly traded company that

provides high-capacity dark fiber, wavelength, IT infrastructure services and

Ethernet products and services.6         Since its founding, it has made forty-one

acquisitions of fiber and data center companies, averaging about three to four

acquisitions per year.7

         Defendant, Latisys Holdings, LLC (“Latisys”), is a Delaware limited liability

company, founded in late 2007 by Pete Stevenson, Doug Butler and Evans Mullan.8

Before the execution of the Stock Purchase Agreement, Latisys owned all of the

issued and outstanding stock of (1) Latisys Holdings Corp., (2) Latisys-Chicago

Holdings Corp. and (3) Latisys-Ashburn Holdings Corp. (collectively, the “L-




5
    Compl. ¶ 8.
6
    Tr. 11–16 (Reardon).
7
    Tr. 71–72 (Reardon).
8
    Def. Pre-Tr. Br. at 6; Compl. ¶ 9.

                                            5
Companies”).9 At the time of the acquisition, Latisys offered a collection of

IT infrastructure services, including data center colocation services, managed

hosting services, and enterprise and public cloud services.10 It operated out of eight

data centers in the United States, as well as a cloud storage platform in London.11

           Non-party, Great Hill Partners, LP (“GHP”), is a growth private equity firm

based in Boston, Massachusetts.12 GHP made the initial equity investment in Latisys

that allowed Latisys to make its first data center acquisitions in Orange County,

California and Denver, Colorado.13            It ultimately became Latisys’ majority

shareholder through various GHP investment funds.14

           Non-party, DH Capital, is the investment bank Latisys engaged to run its sales

process.15 Non-party, Pete Stevenson, was Latisys’ Chief Executive Officer.16 He,

along with the rest of Latisys’ management team, left the company shortly after the




9
    Compl. ¶ 9; PTO ¶ 1.
10
     JX 62.
11
     Id.
12
     PTO ¶ 1.
13
     Tr. 487 (Stevenson).
14
     Tr. 487 (Stevenson).
15
     PTO at 3; see JX 31.
16
     Tr. 495 (Stevenson).

                                              6
acquisition.17 Non-party, Doug Butler, was Latisys’ Chief Financial Officer.18 Non-

party, John Hayes, was the Managing Partner at GHP at the time of the transaction.19

He is one of the three founders of GHP.20 Non-party, Dan Glisky III, was the chief

architect of Zayo’s financial model for evaluating Latisys.21 And, non-party, Scott

Reardon, was Zayo’s former head of corporate development.22

      B. The Business of Latisys: Clouds, Customers and Contracts

         Two types of contracts governed Latisys’ relationships with its customers:

Master Services Agreements (“MSAs”) and Service Order Forms (“SOFs”).23

MSAs governed the customer relationship at a macro level.24 SOFs specified the

services the customer purchased, the prices and rates, the monthly recurring charges

to the customer, the contract term and the details of any one-time optional renewal




17
     PTO at 30.
18
     Tr. 354 (Butler).
19
     Tr. 7 (Hayes).
20
     Tr. 417 (Hayes).
21
     Tr. 92 (Reardon).
22
     Tr. 7 (Reardon).
23
     Tr. 238 (Butler).
24
     Tr. 238–41 (Butler).

                                          7
periods for the SOF.25 Put simply, the SOFs drove the customer relationship and

marked its contours.26

           Latisys customers often entered into one or more SOFs to cover the majority

of their services (“parent” SOFs).27 They would then add SOFs as needed over time

for additional products and services (“add-on” SOFs).28 The parent and add-on

SOFs usually expired at the same time.29 The average term of a Latisys SOF was

three years.30

           When a customer’s SOFs expired, the customer was “out of contract” with

Latisys.31 Latisys would then provide services to the customer under the terms of

the expired SOF on a month-to-month basis.32 Once the customer entered this

month-to-month phase, it could terminate its services with Latisys with thirty days’




25
     Id.
26
     Id.
27
     Id.
28
     Id.
29
     Tr. 242–43 (Butler).
30
     Tr. 239 (Butler).
31
     Tr. 242–44 (Butler).
32
     Id.

                                            8
notice.33 Approximately thirty percent of Latisys’ revenue was month-to-month.34

In other words, thirty percent of the company’s revenue was guaranteed only for

thirty days.35 Latisys’ average customer tenure—in contrast to the average term of

Latisys’ SOFs—was about four and a half years.36

           Latisys’ customers’ needs naturally fluctuated over the duration of their

relationship with Latisys.37 It was common for customers to require less storage

space after they developed their own ability to perform the functions they had relied

on Latisys to provide.38 As the expiration of their SOF term approached, Latisys

customers routinely would negotiate new SOFs with Latisys on more favorable

terms.39 “More-for-less” was the mantra that the Latisys sales force regularly

confronted as SOFs expired.40




33
     Id.
34
     Tr. 251 (Butler).
35
     Id.
36
     Tr. 500 (Stevenson).
37
     Tr. 248–49 (Butler).
38
     Id.
39
     Id.
40
  Tr. 248 (Butler). (“Q. Was it routine that customers at the end of a SOF term would
renegotiate with Latisys for more or different services? A. . . . You know, they’d always
want to get more for less . . . .”).

                                           9
           Latisys always aimed to renew customer contracts in order to lock down the

resulting cash flow.41 With market prices declining, however, Latisys often needed

to make concessions in order to keep customers.42 This meant that Latisys would

have to accept either pricing discounts in return for restored space or a longer

contract term.43 While not optimal, this strategy eventually created more guaranteed

revenue.44

      C. Latisys Decides to Explore a Sale

           Latisys’ investors and the Latisys Board of Directors decided by late spring

2014 that it was appropriate to consider strategic alternatives for Latisys, including

a sale of the company.45 By June of that year, Latisys had executed an “Engagement

Agreement” with DH Capital in order to move forward with a potential sales

process.46 DH Capital dubbed the process “Project Caribou.”47



41
     Tr. 237 (Butler); Tr. 490–91, 494 (Stevenson).
42
  Tr. 491–92 (Stevenson); JX 430 at 23 (former Latisys Senior Sales Account Manager
Bill Rowcliffe made clear that “[p]ricing in this industry is—is slowly dissipating. It’s
going down.”).
43
     Tr. 249–50 (Butler); Tr. 489–90, 494–95 (Stevenson).
44
     Id.
45
     Def. Post-Tr. Br. at 7.
46
     PTO ¶ 3; see JX 31.
47
     Def. Post-Tr. Br. at 7. See also Tr. 441 (Hayes).

                                               10
           In October 2014, DH Capital provided a group of potentially interested

buyers, including Zayo, a Confidential Information Memorandum (“CIM”) that

contained detailed information about Latisys.48 Among the data laid out in the CIM

were summaries of Latisys’ products and data centers, customer operations and

revenue, and historical and projected financial performance.49

           The CIM’s Customer Overview slides made clear that the average tenure for

a Latisys’ customer was about four and a half years.50 These slides also highlighted

that Latisys had “[m]ore than $157 million in remaining contract value and two-

thirds contracted beyond 12 months.”51 The CIM’s contract waterfall schedule

broke down Latisys’ customer contracts by the amount of time remaining on the

customers’ contracts, which ranged from fewer than six months to over two years.52

For each band of customers, the waterfall indicated the value remaining on each

contract.53




48
     PTO ¶ 4; see JX 62; see also Tr. 23 (Reardon).
49
     JX 62.
50
     Id.
51
     Id.
52
     Id.
53
     Id.

                                             11
           DH Capital forwarded the first-round process letter to potential buyers,

including Zayo, on Halloween of 2014.54 The process letter requested non-binding

indications of interest by November 18, 2014.55 The letter also instructed bidders to

include a proposed purchase price along with the bidder’s basis for the valuation.56

           A day after the stated deadline, Zayo submitted its initial indication of interest

to acquire Latisys.57 Zayo “propose[d] a total value in the range of $625M – $655M

in cash (approximately 11 – 11.5x Q4 2014E LQA Adjusted EBITDA of $56.8M)

on a cash-free, debt-free basis.”58 According to Zayo, its “[v]aluation [was] based

on the Company’s guidance of $56.8M of LQA Adjusted EBITDA in fourth quarter

2014.”59 Zayo acknowledged that “[t]hrough the due diligence process, [it would

need] to validate this assumption as well as the near and long-term cash flow outlook

for the business.”60




54
     PTO ¶ 5; see JX 70.
55
     PTO ¶ 5; see JX 70.
56
     PTO ¶ 5; see JX 70.
57
     PTO ¶ 8; see JX 109.
58
     JX 109.
59
     Id.
60
     Id.

                                               12
      D. Zayo Due Diligence

         On November 20, 2014, the day after sending its interest letter, Zayo sent

Latisys a set of diligence requests.61 DH Capital responded on November 26, 2014,

by sending Zayo a spreadsheet that displayed for each customer (not identified by

name) the contract expiration dates and the customer’s monthly recurring revenue

by location and product.62 The response also included bookings and “churn”—loss

resulting from customer turnover—information for 2013 and 2014.63

         Eight bidders, including Zayo, were invited to participate in round two of

Project Caribou.64 Further due diligence ensued.65 On December 16, 2014, Latisys

shared an “EBITDA Bridge” with Zayo, displaying its actual revenue and expenses

in October 2014, and its projections for November 2014 through March 2015.66




61
     PTO ¶ 9; see JX 111.
62
     PTO ¶¶ 9–10; see JX 111, 122.
63
     PTO ¶ 10; see JX 122.
64
     PTO ¶ 11; see JX 112.
65
     PTO ¶ 11; see JX 112.
66
  PTO ¶ 12; see JX 151. DH Capital noted “dialogue and diligence calls with Zayo’s
corporate development team” with “[a]reas of diligence focus . . . includ[ing] Bridge to
Q1-2015 unadjusted EBITDA . . . .” JX 153 at 5.

                                          13
         Importantly, during diligence, Zayo was provided with all of the MSAs and

SOFs for Latisys’ top thirty customers by monthly recurring revenue (“MRR”) in

the Project Caribou virtual data room (“VDR”).67 With this data in hand, Zayo’s

deal team could assess all of the MSAs and SOFs before Zayo signed the Stock

Purchase Agreement (“SPA”).68 As a result, Reardon could attest that Zayo knew

from diligence the exact number of months remaining on Latisys’ contracts with its

top thirty customers by MRR.69

         Glisky, the financial analyst on Zayo’s deal team, incorporated the

information provided in the VDR, including the comprehensive customer base data,

into his financial model.70 The “MRR by Cust” tab of Glisky’s financial model lists

each Latisys customer by size of MRR.71 It also displays the date the customer first




67
     PTO ¶ 18.
68
     Tr. 126–27 (Reardon); JX 212 at 5.
69
  Tr. 125 (Reardon) (“Q. Fair to say that as part of the customer due diligence, you and
Zayo and others on your deal team knew what the remaining terms were on the top 30
customer contracts? A. Yeah. They varied by service, by underlying service; but I believe
that we had that—that detail.”).
70
     JX 253; Tr. 260:1–3, 261:24–262:1–11 (Glisky).
71
     JX 253.

                                            14
began purchasing services from Latisys, the expiration date of the customer’s SOFs

and the customer’s MRR by product and location.72

           Glisky’s model calculated how many months of revenue remained under

contract for each customer and how much revenue was guaranteed for each of

Latisys’ customers.73 The model assigned an “expiration profile” to each customer

based on the amount of time remaining before the customer’s contracts with Latisys

expired, which were: “> 2 Years,” “1-2 Years,” “6 Mo’s – 1 Year,” “< 6 Mo’s” and

“MTM.”74 At the time Glisky constructed his model, he knew only the code names

“TOSH,” “ADD2,” “ECHO,” “ITCO,” and “LEXI” for the five customers at issue

in this case—respectively Toshiba American Information Systems, Inc. (“Toshiba”),

Add2Net, Inc. (“Add2Net,” a.k.a. “Lunarpages”), IT Convergence (“ITC”) and

LexisNexis.75 Zayo received a key to the customer names on January 5, 2015.76




72
     Id.
73
     Tr. 262:8–22, 266:6–19 (Glisky); JX 253.
74
     JX 253. “MTM” means month-to-month. Tr. 271:18–20 (Glisky).
75
     Tr. 32 (Reardon) (“[T]here’s always sensitivity to providing customer names . . . .”).
76
     JX 188; Tr. 125:7–14 (Reardon); PTO ¶ 24.

                                               15
           Glisky’s analysis showed that Toshiba and IT Convergence were out of

contract with only one more month of guaranteed revenue.77 It also revealed that

Echopass and LexisNexis had less than six months remaining under contract.78

Glisky’s analysis did not cover Add2Net’s bandwidth SOF at issue in this case,

though this information was provided to Zayo in the VDR.79

      E. The Parties Negotiate Key Terms of the SPA

           The day before Christmas Eve, 2014, Zayo sent Latisys a Letter of Intent

(“LOI”) proposing a base acquisition price of $655,000,000.80 This proposal was

“based upon the key terms described below and in the separately included [SPA]

mark-up,” and was conditioned upon exclusivity moving forward.81




77
     JX 253.
78
     Id.
79
     Id. PTO ¶ 18.
80
     PTO ¶ 16; JX 168.
81
     JX 168 at 1; JX 169.

                                           16
         Latisys never agreed to exclusivity and never signed Zayo’s LOI.82 Moreover,

while Zayo repeatedly expressed to Latisys and DH Capital its desire to preempt the

bidding process,83 Zayo repeatedly rejected that overture as well.84

         On the same day Zayo sent its LOI, Zayo sent its first redline of the SPA to

Latisys.85 Zayo changed one contract provision that is particularly relevant here:

Section 4.12(b). Section 4.12(b), as originally proposed by Latisys, stated:

         Except as set forth on Schedule 4.12, as of the date hereof, since
         December 31, 2013, no Latisys Company has received any written
         notice of any default or breach by any Latisys Company under any
         Material Contract, except for defaults that have been cured or otherwise
         would not reasonably be expected to have a Material Adverse Effect.86


82
   PTO ¶ 17; Tr. 40 (Reardon). Zayo’s LOI stated, “the parties agree to an exclusive
negotiating period expiring at the close of business on Monday, January 19, 2015.” JX 18.
Reardon also raised the issue of exclusivity in a December 26, 2014 email, stating,
“our expectation is that we reach agreement on value, key terms and exclusivity before
diving into confirmatory due diligence details.” JX 171. While pressing the issue with
Latisys, Zayo knew that “exclusivity [was] going to be a very thorny issue.” Id. An internal
Zayo presentation in January 2015, after Latisys had proposed a price of $675 million,
described the situation as follows: “Zayo made preemptive bid and indicated we would
require 30-day exclusivity. DH has messaged that they will not shutdown process until
SPA has been executed.” JX 183. The “preemptive bid” in the LOI that Latisys never
signed required 30 days of exclusivity. Id.
83
   PTO ¶ 14; see JX 157, 159, 168, 183, 191, 192. Internal presentations show Zayo
considered $650 M (13.6 x EBITDA) to $675 M (14.1 x EBITDA) as the “[r]ecommended
range,” and believed “that [the] upper-end could preempt and shut down the process.”
JX 183 at 8.
84
     JX 183. Zayo decided on its own to accelerate its bidding process. Id.
85
     PTO ¶ 19; JX 169.
86
     JX 169 at 110.

                                              17
           Zayo changed the provision to read:
           Except as set forth on Schedule 4.12, all Material Contracts are valid,
           binding and enforceable in accordance with their terms against the
           Latisys Companies, as applicable, and to the Knowledge of the
           Companies, each other party thereto, and are in full force and effect.
           No Latisys Company has received any written notice that any party to
           Material Contract intends to cancel, terminate, materially modify,
           refuse to perform or refuse to renew such Material Contract or of any
           default or breach by any Latisys Company under any Material Contract,
           except for defaults that have been cured or otherwise would not
           reasonably be expected to have a Material Adverse Effect.87

           On December 30, 2014, Latisys responded to Zayo’s proposed changes to the

SPA. With respect to Section 4.12(b), Latisys accepted all of the proposed language

except for Zayo’s addition of the phrase “or refuse to renew.”88 Latisys struck that

language from Zayo’s return draft.89 On January 8, 2015, Zayo returned the redline

to Latisys—accepting Latisys’ change to Section 4.12(b).90

           The deal price was another key point of negotiation. Before Zayo delivered

its LOI, DH Capital proposed a sales price of $680 million in a phone conversation

with Zayo on December 19, 2014. In an email to Latisys and others reporting on the




87
     Id. (emphasis supplied).
88
     PTO ¶ 20; JX 180 at 106.
89
     Id.
90
  PTO ¶ 21. Because Zayo returned the redline with no changes or comments to Zayo’s
deletion of “refuse to renew,” the parties assume, as do I, that Zayo accepted the change
and there was a meeting of the minds that the phrase would not be included.

                                             18
call, DH Capital stated, “we are giving [Zayo] a number that is enough to get the

deal done, a realistic price that is only 6–7% above the mid-point of Zayo’s range.”91

         For its part, Zayo undertook extensive financial modeling of the Latisys

business.92 It performed a synergies analysis and an analysis of implied multiples of

publicly known comparable transactions.93 The synergy analysis concluded that

there would be significant cost savings through synergies.94 The comparables

analysis reflected “recent comparable transactions” at “13.6 X Avg Reported LQA

EBITDA Mult.”95 In addition to his modeling of Latisys’ customer contracts and

revenue base, as discussed above, Glisky also performed a 30-year discounted cash

flow analysis, a net present value sensitivity analysis and an internal rate of return

analysis.96




91
     PTO ¶ 15; see JX 159 at 1.
92
     PTO ¶ 22; JX 253.
93
     PTO ¶ 22; JX 253.
94
     PTO ¶ 22; JX 253. Tr. 94–95 (Reardon); Tr. 260 (Glisky); JX 97 at 24.
95
     PTO ¶ 22; JX 253. JX 183 at 24.
96
  PTO ¶ 22; JX 253. Tr. 260–61 (Glisky); Tr. 63–64 (Reardon); Tr. 87 (Reardon); see also
JX 75 at 5 (November 2014 presentation to Zayo’s Board of Directors referencing a “30-
Year DCF”); JX 97 at 2, 7 (November 2014 “Project Lincoln Overview and Bid
Recommendation” summarizing a “5-Year IRR / NPV Sensitivity w/ Terminal Value”).

                                             19
           By the time Zayo returned the draft SPA accepting Latisys’ strike of the

“refuse to renew” language, the price negotiations had ended and the parties were

settled on $675 million.97 Latisys was motivated to lower the price to $675 million

in large part to avoid stagnation.98 But $675 million was the floor.99 DH Capital

indicated to Zayo that Latisys was “highly price sensitive to the 675 M . . . not from

a return perspective, but from being second guessed for shutting down at less than

12x their marketed ebitda number.”100

           Zayo and Latisys executed the SPA on January 13, 2015.101 Zayo continued

to engage in pre-Closing diligence,102 and the transaction closed on February 23,

2015.103




97
     PTO ¶ 27; see JX 216.
98
  Tr. 461–62 (Hayes). (“Q. . . . Why was it that Latisys had agreed to lower its price from
680 to 675? A. I would say against my better judgment, I think the collective wisdom on
sort of the folks who had input on our side, felt like it would move the deal along. So we
were prepared to lower a little bit but no more.”).
99
     Id.
100
      JX 192 at 1.
101
      PTO ¶ 29; see JX 213.
102
      PTO ¶ 32.
103
      PTO ¶ 33.

                                            20
      F. The Relevant Provisions of the SPA

         Zayo’s claims implicate several provisions of the SPA. I discuss each briefly

below.104

         1. Section 4.12(b)

         Article IV of the SPA contains Latisys’ representations and warranties.

Of relevance here, Section 4.12(b) provides:

         Except as set forth on Schedule 4.12 . . . [n]o Latisys Company has
         received any written notice that any party to a Material Contract intends
         to cancel, terminate, materially modify or refuse to perform such
         Material Contract.105

Section 4.12 defines “Material Contracts”:

         Schedule 4.12 lists the following Contracts to which a Latisys
         Company is a party or by which it is bound (collectively, the “Material
         Contracts”) a true and complete copy of each of which has been made
         available to Purchaser.106

Schedule 4.12, in turn, lists the “Top 30 Customer Agreements,” which are described

as “Master Service Agreements and related Service Order Forms for each of the




104
   The SPA contains a clear and broad Delaware choice of law provision. JX 213 § 11.5
(“This agreement shall be governed by and construed in accordance with the laws of the
State of Delaware. . . .”).
105
      JX 213 at 31.
106
      JX 213 at 29.

                                            21
[listed] Customers.”107 Importantly, the SPA does not include any representations

or warranties about Latisys’ churn, churn rates, revenue or expected revenue.108

            2. Section 10.1

            Latisys agreed to indemnify Zayo and the post-close Latisys Companies as

provided in Section 10.1. Section 10.1(a) of the SPA states, in relevant part, that

Latisys will indemnify Zayo and the L-Companies from and against “any and all”

losses, damages and expenses incurred or paid “arising out of or resulting from

a[] . . . breach of, default in, or failure to perform, any of the representations,

warranties or covenants given or made by the [L-Companies] or [Latisys] in

[the SPA],” (collectively “Company Breaches”), subject to a cap of $30,375,000

(per Section 10.1(c) of the SPA).109 Section 10.1(c) provides that Latisys would not

be      obligated     to   indemnify    Zayo         “unless     and   until   the    aggregate

Damages . . . exceeds         a    cumulative        aggregate     amount      of    $3,375,000

(the “Basket”).”110 And Section 10.1(c) makes clear that Zayo’s “costs of

investigation and attorneys’ fees incurred in prosecuting the claim shall not count




107
      JX 214 at 74.
108
      JX 213. Tr. 595 (Reardon).
109
      JX 213 at 60–61.
110
      Id.

                                                22
towards achieving the Basket but shall count as Damages once such threshold has

been achieved and the breach proven.”111

      G. The Material Contracts

            As noted, the SPA’s Schedule 4.12 listed the Material Contracts that are

subject to Section 4.12’s Material Contracts representation and warranty. The five

Material Contracts at issue in this litigation are described below.

            1. Toshiba

            Toshiba had two primary parent SOFs (the “Toshiba SOFs”) with Latisys for

services in Latisys’ Irvine, California data center.112 The Toshiba SOFs expired in

November 2014, before the SPA was executed.113 Only one of Toshiba SOFs had

an “auto-renew” provision.114

            On October 1, 2014, a Toshiba representative emailed Latisys Senior Sales

Account Manager, Bill Rowcliffe, to advise him that Toshiba’s SOFs had expired

and to inquire whether Latisys would continue to provide services to Toshiba on a

month-to-month basis until April or May 2015, when Toshiba would exit Latisys’




111
      Id.
112
      JX 481, 482.
113
      JX 481, 482.
114
      JX 481, 482.

                                            23
data center and end the relationship.115 As anticipated, on July 1, 2015 (after the

Closing), Toshiba provided Rowcliffe, then a Zayo employee, thirty days’ notice of

its intent to exit the data center.116

         But that was not the end of the Toshiba/Latisys relationship. In 2016, Toshiba

approached Rowcliffe to explore whether Toshiba might return as a Zayo

customer.117 The parties ultimately struck a new deal as evidenced by Zayo’s

$293,659 invoice to Toshiba, reflecting services for January 2017 to September

2017.118

         2. Add2Net

         Add2Net had a bandwidth SOF with Latisys.119 The Add2Net SOF had an

original term of 24 months with an auto-renewal provision.120 According to that

provision, the contract would renew for one year at the end of the current term, unless

either party provided written notice of non-renewal at least thirty days before the end




115
      PTO ¶ 49; JX 47.
116
      JX 381 at 1.
117
      JX 406, 407.
118
      JX 418.
119
      PTO ¶ 36.
120
      JX 480.

                                           24
of the then-current contract term.121 The original term of the bandwidth SOF expired

in December 2013.122           Add2Net then allowed its bandwidth SOF to renew

automatically for another 12 months—extending the expiration date to December

2014. 123

            Before the expiration of the extended term, Add2Net emailed Rowcliffe to

notify Latisys that Add2Net would “CANCEL” its bandwidth SOF “at the

conclusion of the current contract” on November 25, 2014.124         As a result, the

Add2Net bandwidth SOF ended in December 2014 in accordance with its terms.125

            On January 2, 2015, Add2Net emailed Latisys asking to “cancel the notice of

cancellation” for Add2Net’s bandwidth SOF and to continue bandwidth services on

a month-to-month basis.126 Latisys agreed and continued to invoice Add2Net for the

bandwidth services month-to-month.127 Because the “cancellation” had already



121
      Id.
122
      Id.
123
      Id.
124
      JX 118 at 2.
125
   JX 120. Latisys issued a “deprovisioning ticket” for the SOF, which noted that Add2Net
should not be charged an early termination liability (“ETL”) because it was churning at the
end of the contract term. Id.
126
      JX 185.
127
      JX 356.

                                             25
been processed, however, the cancellation was incorporated in the system that

Latisys used for reporting and forecasting. Accordingly, the pending churn was

automatically included in the EBITDA bridge that Latisys provided to Zayo during

due diligence.128 This information was also included in a pending churn report,

identifying $14,850 in churn from the customer ADD2 (the code name for Add2Net)

in Q1 2015.129 Consequently, there was no expectation that this revenue would

continue beyond a 30-month term.130

         3. Echopass

         EchoPass had two parent SOFs (the “EchoPass SOFs”) with Latisys for

services at Latisys’ data centers in Ashburn, Virginia and Irvine, California.131 Both

SOFs were set to expire in May 2015.132

         Beginning in late October 2014, and continuing through the drafting and

execution of the SPA, EchoPass negotiated with Rowcliffe over the terms of two

new SOFs and sought to obtain Latisys’ agreement to a 20% price reduction in the




128
      JX 151; Tr. 310–13 (Butler).
129
      JX 486, 487; Tr. 281–82 (Butler).
130
      JX 486, 487; Tr. 281–82 (Butler).
131
      JX 483, 484.
132
      JX 483, 484.

                                          26
new SOFs.133 After the Closing, Zayo approved the terms of the new Echopass SOFs

and executed the SOFs.134 These new SOFs represented about $1.8 million in total

contract value for Zayo.135

         4. ITC

         ITC had a principal parent SOF (the “ITC SOF”) with Latisys for services at

Latisys’ Oak Brook, Illinois data center.136 The ITC SOF expired in April 2014.137

Beginning in September 2014, after the expiration of its old SOFs, Latisys Senior

Account Manager, Gina Gardner, engaged in negotiations with ITC concerning the

terms of a new SOF.138 During the course of these negotiations, ITC sought a price

reduction in any new SOF.139 After Closing, Zayo approved and executed ITC’s




133
      PTO ¶¶ 82–83; JX 67, 247.
134
      JX 430 at 24; JX 342.
135
      Tr. 320–21 (Butler).
136
      JX 472, 479.
137
      JX 472, 479.
138
      JX 38, 42; PTO ¶¶ 96–102.
139
      JX 92, 164, 268, 311, 320.

                                          27
new SOF.140 This new SOF represented approximately $1.1 million in total contract

value for Zayo.141

            5. LexisNexis

            LexisNexis had several SOFs142 with Latisys for services at the Oak Brook,

Illinois data center, the last of which (the “LexisNexis SOF”) expired in April

2015.143 Beginning in early 2014, and continuing through the execution of the SPA,

LexisNexis negotiated with Gardner over the terms of a new data center SOF.144 Not

surprisingly, LexisNexis was looking for a price reduction.145 Zayo and LexisNexis

reached an agreement on a new SOF after the Closing.146 Before the Closing, Latisys

had offered LexisNexis a 6% price discount for a five-year term.147 After the




140
      JX 341.
141
      Tr. 330–31 (Butler).
142
      JX 473; JX 478; JX 474
143
      JX 474.
144
      PTO ¶¶ 66–74.
145
      Id.
146
      JX 325.
147
      Tr. 331 (Butler); PTO ¶ 74.

                                            28
Closing, Zayo agreed to the same discount but for a shorter term.148 Even so, this

new SOF represented approximately $1.1 million in total contract value for Zayo.149

      H. Procedural Posture

            Zayo filed its Verified Complaint on November 4, 2016.150 The Complaint

sets forth two counts.151 Count I seeks indemnification for damages caused by

breaches of representations, warranties and covenants contained in the SPA.152

Count II seeks indemnification for continuing losses, including attorneys’ fees.153

Zayo also seeks an order of specific performance directing Latisys to release funds

held in an escrow account created per the SPA to cover such damages.154

            The Court convened a three-day trial in November 2017. Because Latisys’

proposed damages expert, Jeff Litvak, had been placed on immediate medical leave

just prior to trial with no expected return date,155 the Court adjourned the trial




148
      PTO ¶ 74; JX 324 at 12.
149
      Tr. 330–31 (Butler).
150
      Compl.
151
      Id.
152
      Compl. ¶¶ 51–59.
153
      Compl. ¶¶ 60–64.
154
      Compl. ¶ 7.
155
      Dkt. 112.

                                           29
following the presentation of fact witnesses to allow Latisys to engage a new

damages expert.156 The trial resumed on May 16, 2018, when the Court heard

testimony from Zayo’s expert, Kyle Anne Midkiff, and Latisys’ new expert, Gary

Kleinrichert.157 The parties presented post-trial oral argument on September 5, 2018.

         After presiding over the trial, considering the post-trial briefs and closing

arguments and deliberating the evidence, I am struck by the absence of any serious

factual disputes. There are some factual disagreements, to be sure, but the real

controversy arises from the parties’ disagreement about what the SPA actually says

and what it means. Zayo’s position boils down to this: Latisys was contractually

obligated to disclose that the five customers who were counter-parties to the Material

Contracts at issue here had notified Latisys of their intent not to renew the contracts

or to renew on different terms. According to Zayo, non-renewal is tantamount to

“termination” or “cancellation” as contemplated by Section 4.12(b).            Latisys

acknowledges that it did not advise Zayo of the non-renewals but maintains that it

had no obligation to do so under Section 4.12(b) or otherwise.

         This is the Court’s post-trial decision.




156
      Tr. 1–605.
157
      Tr. 606–803.

                                             30
                                    II. ANALYSIS

        To prevail on a breach of contract claim, the plaintiff must prove: (1) the

existence of a contract; (2) the breach of an obligation imposed by the contract; and

(3) damages suffered because of the breach.158 The first element is undisputed. The

SPA is the operative contract. The case was tried on the issues of breach and

damages. On these issues, Zayo was charged with meeting its burden of proof by a

preponderance of the evidence.159 In deliberating whether Zayo met its burden, I

consider the questions in order: (1) did Zayo prove that Latisys breached the SPA;

and (2) if so, did Zayo prove that it is entitled to damages?

      A. Latisys Did Not Breach the SPA

        The Court’s first function is to construe the relevant terms of the operative

contract as a matter of law.160 In doing so, the Court must be mindful that, under




158
   See Bakerman v. Sidney Frank Importing Co., 2006 WL 3927242, at *19 (Del. Ch.
Oct. 10, 2006).
159
   “Proof by a preponderance of the evidence means proof that something is more likely
than not. It means that certain evidence, when compared to the evidence opposed to it, has
the more convincing force and makes you believe that something is more likely true than
not.” Del. Express Shuttle, Inc. v. Older, 2002 WL 31458243, at *17 (Del. Ch. Oct. 23,
2002) (internal quotation marks omitted) (quoting DEL. P.J.I. CIV. § 4.1 (2000)).
160
   O’Brien v. Progressive Northern Ins. Co., 785 A.2d 281, 286 (Del. 2001) (“Under
Delaware law, the interpretation of contractual language . . . is a question of law.”).

                                           31
Delaware law, a “contract’s express terms provide the starting point in approaching

a contract dispute.”161

         1. Section 4.12(b) of the SPA Is Ambiguous

         Section 4.12(b) of the SPA provides, in relevant part: “[n]o Latisys Company

has received any written notice that any party to a Material Contract intends to

cancel, terminate, materially modify or refuse to perform such Material Contract.”162

Zayo maintains the evidence reveals that Latisys did, in fact, receive “written notice”

of (but did not disclose) (1) “an intent to cancel or terminate two Material Contracts

(Add2Net and Toshiba); and (2) an intent to materially modify three Material

Contracts (EchoPass, ITC and LexisNexis) by reducing the rates charged to those

customers.”163

         Even at first glance, Section 4.12(b) is hardly a model of clarity. By reeling

off the terms “cancel,” “terminate” and “refuse to perform” in succession within the


161
    Ostroff v. Quality Servs. Labs., Inc., 2007 WL 121404, at *11 (Del. Ch. Jan. 5, 2007).
See also Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006)
(discussing the court’s “four corners” analysis); City Investing Co., 624 A.2d at 1198
(same); Eagle Indus., Inc. v. DeVilbliss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997)
(“[i]f a contract is unambiguous, extrinsic evidence may not be used to interpret the intent
of the parties, to vary the terms of the contract or to create an ambiguity.”); City Investing
Co. Liquidating Trust v. Cont’l Cas. Co., 624 A.2d 1191, 1198 (Del. 1993) (“If a writing
is plain and clear on its face, i.e., its language conveys an unmistakable meaning, the
writing itself is the sole source for gaining an understanding of intent.”).
162
      JX 213 at 31 (emphasis supplied).
163
      Pl.’s Opening Post-Tr. Br. 29 (emphasis supplied).

                                              32
same clause, the parties appear to be saying the same thing with different words.164

With this apparent redundancy in mind, I turn, as our courts often do, to the standard

dictionary definitions of the terms under construction in search of some meaningful

differentiation.165 Unfortunately, but not surprisingly, the exercise has yielded little

in the way of clarity. Black’s Law Dictionary defines “cancel” as “to terminate a

promise, obligation, or right.”166 The definition of “terminate” is “[t]o put an end to;

to bring to an end.”167 In expanding on its definition of “cancellation,” Black’s

states, “[t]he effect of cancellation is generally the same as that of termination,

except that the canceling party retains remedies for breach of the whole contract or

any unperformed balance.”168          Suffice it to say, the instinctive reaction to

Section 4.12(b) is confirmed; there is considerable overlap between “cancel” and

“terminate.”




164
   Indeed, at trial and in its briefs, Zayo interchangeably used “terminate” and “cancel” to
refer to their claims—e.g., Pl.’s Reply Post-Tr. Br. 29 (“intention to cancel or terminate”);
Tr. 590 (Reardon) (“cancellation or termination by the customer”).
165
   See Lorillard Tobacco Co., 903 A.2d at 738 (noting the frequency with which Delaware
courts turn to dictionaries to assist in the construction of contractual terms); Norton v. K-
Sea Transp. P’rs L.P., 67 A.3d 354, 360 (Del. 2013) (“We give words their plain meaning
unless it appears that the parties intended a special meaning.”).
166
      Cancel, BLACK’S LAW DICTIONARY (10th ed. 2014).
167
      Terminate, BLACK’S LAW DICTIONARY (10th ed. 2014).
168
      Cancellation, BLACK’S LAW DICTIONARY (10th ed. 2014).

                                             33
         “Contractual interpretation operates under the assumption that the parties

never include superfluous verbiage in their agreement, and that each word should be

given meaning and effect by the court.”169 This canon of construction, important as

it is, cannot be honored when the scriveners leave no room to distinguish between

the words they use to memorialize the clients’ agreement. Here, the relevant terms

in Section 4.12(b) appear to be redundant. The parties seize on the redundancy and

proffer different constructions. This, of course, does not mean the contract is

ambiguous.170 If both proffered constructions appear reasonable, however, then the

Court is free to consider extrinsic evidence to discern the intent of the parties.171

           One reasonable construction of the apparently redundant terms is that

“terminate”/“cancel”/“refuse to perform” capture the scenario where a customer

expresses an intent not to renew its SOFs, and that “materially modify” includes

negotiations for new terms in new contracts.                   On the other hand,


169
    NAMA Hldgs., LLC v. World Mkt. Ctr. Venture, LLC, 948 A.2d 411, 419 (Del. Ch.
2007), aff’d, 945 A.2d 594 (Del. 2008); see also Majkowski v. Am. Imaging Mgmt. Serv.,
913 A.2d 572, 588 (Del. Ch. 2006) (stating, as a general matter, that courts “attempt to
interpret each word or phrase in a contract to have an independent meaning so as to avoid
rendering contractual language mere surplusage.”).
170
   Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del.
1992) (“[a] contract is not rendered ambiguous simply because the parties do not agree
upon its proper construction. Rather, a contract is ambiguous only when the provisions in
controversy are reasonably or fairly susceptible of different interpretations or may have
two or more different meanings.”).
171
      Eagle Indus., Inc., 702 A.2d at 1232.

                                              34
“terminate”/“cancel”/“refuse to perform” reasonably could contemplate notice only

when a customer ends, or expresses an intent to end, a contract before the expiration

of the contract’s current, non-renewed term, and “materially modify” would apply

only to modifications of an existing contract as opposed to a potentially renewed

contract.

       With two reasonable constructions in hand, I am satisfied Section 4.12(b) is

ambiguous under the objective theory of contracts.172 Accordingly, I am now

obliged to “look beyond the language of the contract to ascertain the parties’

intentions.”173 In doing so, I am mindful that I must respect, “to the extent possible,

the reasonable shared expectations of the parties at the time they contracted.”174

       2. Extrinsic Evidence Informs the Meaning of Section 4.12

       When searching for the proper construction of ambiguous contractual terms,

the court frequently refers to “evidence of prior agreements and communications of




172
   Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010) (“The determination
of ambiguity lies within the sole province of the court.”).
173
   Id. See also BAE Sys. N. Am. Inc. v. Lockheed Martin Corp., 2004 WL 1739522, at *4
(Del. Ch. Aug. 3, 2004) (“[T]he Court will . . . consider extrinsic evidence to discern the
‘reasonable shared expectations of the parties at the time of contracting.’”) (quoting Comrie
v. Enterasys Networks, Inc., 837 A.2d 1, 13 (Del. Ch. 2003)).
174
   Comrie, 837 A.2d at 13 (quoting U.S. West, Inc. v. Time Warner, Inc., 1996 WL 307445,
at *9 (Del. Ch. June 6, 1996) (citation omitted)).

                                             35
the parties as well as trade usage or course of dealing.”175 Our courts also appreciate

that, “[i]n giving effect to the parties’ intentions, it is generally accepted that the

parties’ conduct [in performance of the contract] before any controversy has arisen

[should be] given ‘great weight.’”176 And finally, the drafting history of particular

disputed provision(s) is often especially revealing of the process by which the parties

reached a meeting of the minds and the ground on which that meeting occurred.177

         The SPA drafting history makes clear that Latisys made no commitment to

inform Zayo if existing customers will or will not renew their expiring contract. To

the contrary, Latisys expressly declined to make that commitment when Zayo

proposed it during the course of negotiations. Zayo did not object and the parties



175
      Eagles Indus., Inc., 702 A.2d at 1233.
176
    Ostroff, 2007 WL 121404, at *11; see also Radio Corp. of Am. v. Phila. Storage Battery
Co., 6 A.2d 329, 340 (Del. 1939) (“It is a familiar rule that when a contract is ambiguous,
a construction given to it by the acts and conduct of the parties with knowledge of its terms,
before any controversy has arisen as to its meaning, is entitled to great weight, and will,
when reasonable, be adopted and enforced by the courts. The reason underlying the rule
is that it is the duty of the court to give effect to the intention of the parties where it is not
wholly at variance with the correct legal interpretation of the terms of the contract, and a
practical construction placed by the parties upon the instrument is the best evidence of their
intention.”).
177
   See Eagle Indus., Inc., 702 A.2d at 1233; see also Brace Indus. Contr., Inc. v. Peterson
Enters., 2016 WL 6426398, at *9 (Del. Ch. Oct. 31, 2016) (considering drafting history);
Brace Indus. Contr., 2016 WL 6426398, at *9 (finding that drafting history was
dispositive); DCV Hldgs., Inc. v. ConAgra, Inc., 2005 WL 698133, at *10 (Del. Super. Ct.
Mar. 24, 2005) (“Evidence of what was deleted from the original draft sheds light on the
intended meaning of” the language agreed to in the final provision), aff’d, 889 A.2d 954
(Del. 2005).

                                               36
executed the SPA without the “refuse to renew” language in the Material Contracts

representation and warranty.178 The fact that Zayo inserted this added language in

its proposed SPA reveals that Zayo, like Latisys, believed that “refuse to renew” had

a different meaning than the language already included in Section 4.12(b)—i.e.,

“terminate,” “cancel” and “refuse to perform.”

         In addition to the drafting history, the testimony presented at trial confirms

the parties’ understanding that Latisys would not represent, and was not

representing, whether customers had “refused to renew” Material Contracts. Hayes

testified the phrase “refuse to renew” indicates a specific allocation of risk between

the buyer and seller that would make the seller liable to the buyer for undisclosed

upcoming churn.179 Latisys very deliberately declined to agree to this language

because it would never agree to a representation that would require it to isolate and

disclose potential non-renewals.180 Hayes explained:

         What we would not provide them notice of was if we had received any
         written notice from a client who would be refusing to renew. So in the
         case of a client [wh]o had expired, had been month to month, or was
         soon to expire and they made some indications about what their




178
      PTO ¶ 20; JX 180 at 106; Tr. 106 (Reardon).
179
      Tr. 449 (Hayes).
180
      Tr. 449:18–450:12 (Hayes).

                                            37
         intentions were, we pushed back and said we didn’t think it was
         reasonable for us to have to provide a representation on that issue.181

The parties were purposeful in their negotiation of the Material Contracts

representation and warranty. They chose not to include an obligation to disclose a

customer’s election not to renew a Material Contract. They also chose not to include

a seller’s covenant to disclose when a customer entered into a new contract with

different terms. There is no room for this Court to impose those obligations now.182

         Viewing the drafting history in this light is entirely consistent with the broader

scheme of the SPA, a relevant guidepost as the Court construes individual

provisions.183 Section 9.1 of the SPA, entitled “Termination of Agreement,” states




181
      Tr. 450:5–12 (Hayes).
182
   DCV Hldgs., 2005 WL 698133, at *10 (concluding the negotiation history revealed a
“mutual understanding that in the context of [the disputed provision] the word ‘liabilities’
meant actual liability at the time of the sale, not any liability that could accrue in the future,”
and holding the extrinsic evidence demonstrated “the agreed-upon intention of the parties
was that the sellers would not be liable for future liabilities.”); Brace Indus. Contr., 2016
WL 6426398, at *9 (upholding the defendants’ narrow interpretation of the provision,
reasoning that, based on the drafting history, “it would be difficult for me to conclude that
the Plaintiffs were not aware” of the defendants’ intent to limit the scope of the provision.).
183
    BAE Sys. N. Am. Inc., 2004 WL 1739522, at *4 (quoting Council of Dorset Condo.
Apartments v. Gordon, 801 A.2d 1, 7 (Del. 2002)) (the Court “must interpret contractual
provisions in a way that gives effect to every term of the instrument, and that, if possible,
reconciles all of the provisions of the instrument when read as a whole.”); Chi. Bridge &
Iron Co. N.V. v. Westinghouse Elec. Co., 166 A.3d 912, 913 (Del. 2017) (“In giving
sensible life to a real-world contract, courts must read the specific provisions of the contract
in light of the entire contract.”).

                                                38
the conditions under which the SPA “may be terminated prior to the Closing.”184

Section 9.3 provides that, “[i]n the event that this Agreement is validly terminated

in accordance with Section 9.1, then each of the parties shall be relieved of their

duties and obligations arising under this Agreement after the date of such

termination.”185 As used in these provisions, the parties intended “terminate” to

mean that a party cancels the agreement before the obligations contemplated by the

current contract are performed. There is no basis to believe they intended a different

meaning for “terminate” in Section 4.12(b).

         When viewing the SPA in the context of the drafting history, the parties’

expressed intentions to allocate risk in a specific manner and their consistent use of

key terms throughout the SPA, the following is the only reasonable construction of

Section 4.12(b): the phrase “[n]o Latisys Company has received any written notice

that any party to a Material Contract intends to cancel, terminate, materially modify

or refuse to perform such Material Contract” means that none of Latisys’ top thirty

customers had provided Latisys with written notice that they intended to discontinue

services pursuant to a Material Contract SOF before the end of the SOF term and




184
      JX 213.
185
      Id. (emphasis supplied).

                                         39
before the SOF had been fully performed, nor did any customer intend materially to

modify a current Material SOF.186

         3. Latisys Did Not Breach Section 4.12(b)

         Having now provided the construction of the SPA that is supported by the

contract, extrinsic evidence and applicable canons of contract interpretation, I turn

next to Zayo’s allegations of breach. As discussed below, the proper construction

of the contract quickly reveals the fallacy of each of Zayo’s claims that Latisys is in

breach of Section 4.12(b).

            a. Toshiba

         The Toshiba SOF with the auto-renew provision had a one-month renewal

term duration.187 If this SOF’s renewal term was fixed for two or more months,

Toshiba’s October 1, 2014 email to Rowcliffe (notifying Latisys of the expiration of

the SOF and discussing a one-month renewal) would have constituted written notice

to Latisys that Toshiba intended to “materially modify” that contract. The SOF

(even with one-month renewal), however, was on track to expire before the SPA was

to be executed. Accordingly, the contracting party’s decision to avoid automatic




186
    I note that this is also consistent with the plain meaning of “renewal”: “the re-creation
of a legal relationship or the replacement of an old contract with a new contract.” Renewal,
BLACK’S LAW DICTIONARY (10th ed. 2014).
187
      JX 482.

                                             40
renewal of the contract does not constitute a material modification, cancellation or

termination of that contract.

         The Toshiba SOF without the auto-renew provision expired by its terms in

November 2014.188 After the expiration of that SOF, Latisys undertook to provide

the same services specified in the SOF on a month-to-month basis. For each month

after November 2014, Latisys’ continuation of services during each successive

month constituted an implied promise to provide those services for the rest of that

month (but no longer). Thus, as of January 13, 2015, there was a one-month service

contract between Latisys and Toshiba—the term of which was from January 1, 2015

to (and including) January 31, 2015.

         Toshiba’s October 1, 2014 email189 to Rowcliffe does not indicate that

Toshiba intended to cancel, terminate, not perform or materially modify its SOFs—

in fact, all of its obligations were already fully performed under the two SOFs.190

Latisys’ entry into the new renewal contract was not out of the Ordinary Course of

Latisys’ Business and would not trigger notice under Section 4.12(b).191


188
      JX 481.
189
      JX 47.
190
      JX 253.
191
    The SPA’s definition of “Ordinary Course of Business” is “the ordinary and usual
course of the Latisys Companies’ business.” JX 213. Latisys agreed in Section 7.2(b) that
it would not enter into any contracts other than those in the “Ordinary Course of Business.”

                                            41
            b. Add2Net

         Latisys’ continued provision of bandwidth services after receiving Add2Net’s

January 2, 2015 email constituted a promise to provide those services on a month-

to-month basis.192 Add2Net’s subsequent acceptance of Latisys’ bandwidth services

constituted a promise to pay for those services. Thus, Latisys and Add2Net entered

into a new contract on or about January 2, 2015, the term of which was from that

date to (and including) February 1, 2015. Consequently, Add2Net’s November 24,

2014 email to Rowcliffe did not notify Latisys that Add2Net intended to cancel,

terminate, not perform or materially modify its expired Material Contract because

that contract was fully performed. Latisys’ entry into the new contract was not out

of the Ordinary Course of its Business. Accordingly, there was no breach of

Section 4.12(b).

            c. EchoPass, ITC and LexisNexis

         Latisys’ entry into new SOFs with EchoPass and ITC does not constitute a

“material modification” of the SOFs set to expire in May 2015 and March 2014,

respectively. Neither the EchoPass SOFs set to expire in May 2015, nor the ITC

SOF set to expire in April 2014, contained an “auto-renewal” provision. Once again,

these contracts were fully performed and were not modified. It was in the Ordinary



192
      JX 356.

                                          42
Course of Latisys’ Business to negotiate prices with customers (and to agree to price

reductions) in connection with new SOFs. Rowcliffe described these negotiations

as “[t]otally ordinary” and “standard practice.”193 Moreover, the customer’s election

not to allow automatic renewal of its contracts did not constitute a “cancellation” or

“termination” of those contracts––as in the case of LexisNexis. That Latisys did not

disclose the status of renewal negotiations with LexisNexis, or efforts to secure a

new contract (albeit on different terms), therefore, cannot constitute a breach of

Section 4.12(b).

      B. Zayo Has Not Proven Damages

         While the determination that Zayo failed to prove a breach of the SPA could,

and perhaps should, end the inquiry, for the sake of completeness, I have also

considered whether Zayo proved recoverable damages. It did not.

         Even if Zayo had proven a breach of Section 4.12(b), it still was obliged to

prove its damages by a preponderance of the evidence in order to recover. In this

regard, Zayo had to be precise in articulating and proving what it was seeking.

Contract damages are not like some works of abstract art; the plaintiff cannot simply

throw its proof against the canvas and hope that something recognizable as damages




193
      JX 430 at 23.

                                          43
emerges.194 This was especially so in this case because Zayo’s damages proof had

to account for the indemnification scheme set forth in the SPA and, in particular, the

damages Basket the parties agreed to in Section 10.1(b).195

       Zayo’s damages case rested on the opinions of its expert, Kyle Midkiff. While

certainly qualified to calculate damages in the ordinary course, Midkiff’s lack of

experience in valuing going concern businesses proved a disadvantage to her and

ultimately rendered her opinions in this case unpersuasive.196 Midkiff opined that


194
   See Duncan v. TheraTx, Inc., 775 A.2d 1019, 1022 (Del. 2001) (holding that the court
may not award speculative damages in a breach of contract case); Paul v. Deloitte &
Touche, LLP, 974 A.2d 140, 146 (Del. 2009) (noting that breach of contract damages are
not to provide a “windfall” for the plaintiff and that plaintiffs seeking breach of contract
damages must be precise in their proof).
195
   Only if Zayo’s damages are in excess of the Basket—the cumulative aggregate amount
of $3,375,000—is Latisys obligated to indemnify Zayo, and then only for damages in
excess of the Basket. JX 213 (“The indemnification provided for in this Section 10.1 shall
not apply unless and until the aggregate Damages so determined to be due for which one
or more Purchaser Indemnified Persons seeks or has sought indemnification hereunder
exceeds cumulative aggregate amount of $3,750,000 (the ‘Basket’)[.]”)).
See PharmAthene, Inc. v. SIGA Techs., Inc., 2014 WL 3974167, at *7 (Del Ch. Aug. 8,
2014) (“In the same vein, the Supreme Court also emphasized the central role of the
contract as the source of any remedy . . . .”).
196
    Tr. 657:22–658:7 (Midkiff) (explaining that she had never valued a business);
Tr. 726:16–726:19 (Kleinrichert) (“[T]o the extent the damage is derived by an alleged
change in the value of what the deal should have been, then, of course, the valuation
experience is pretty critical.”). Latisys’ expert, Gary Kleinrichert, on the other hand, has
significant experience in benefit-of-the-bargain damages and business valuations. He is
certified by the National Association of Certified Valuation Analysts as a valuation analyst.
Tr. 724:1–23 (Kleinrichert). He has previously served as an expert in post-acquisition
disputes involving representations and warranties made in a purchase and sale agreement,
and has performed approximately one hundred business valuations. Tr. 725:19–23; 726:3–
4 (Kleinrichert).

                                             44
Zayo had suffered approximately $22 million in damages.197 For reasons still

unclear, Midkiff elected to base her opinion solely on a multiple of EBITDA as a

means to reach Zayo’s expectancy damages. As explained below, this methodology

does not fit the facts here and results in a grossly inflated final damages number.

         Benefit of the bargain—or expectancy—damages measure the difference

between the as-represented value of a transaction (typically the purchase price) and

the value the purchaser actually received.198 The actual value the purchaser received,

in turn, must assume, and account for, a diminution of the company’s earnings into

perpetuity.199 The “benefit of bargain” methodology is appropriate for calculating

damages only when the alleged breach of the representation or warranty has caused

a permanent diminution in the value of the business (as a result of lost revenues into

perpetuity) and the business has thereby been permanently impaired.200 This is

where Zayo’s proof, and Midkiff’s damages calculations, fell short.

         While Midkiff acknowledged at her deposition that a multiple methodology

in damages calculations fits only where monthly recurring revenue was lost “into the



197
      Tr. 632:15 (Midkiff).
198
      Tr. 726:16–727:4 (Kleinrichert).
199
      Tr. 736:23–737:10 (Kleinrichert).
200
   “Impairment” is an accounting term that means the value of a company has declined
below its carrying cost. Tr. 737:14–16 (Kleinrichert).

                                          45
foreseeable future,”201 which she defined as “one year,”202 at trial Midkiff admitted

that all of the Material Contracts at issue in this case expired in less than one year.203

For example, Midkiff conceded at trial that if Zayo knew the Toshiba Material

Contracts were month-to-month at the time of the Closing, Zayo’s damages relating

to the Toshiba contract would be no more than one month’s MRR.204 In this regard,

the credible evidence at trial revealed that when Zayo signed the SPA, Zayo knew

that because Toshiba was a month-to-month customer, the maximum amount of

revenue Toshiba was contractually obligated to pay to Latisys was thirty days of

revenue.205 For that reason alone, based on Midkiff’s own trial testimony, her

damages methodology does not apply to the Toshiba SOFs. And, for reasons

explained below, it cannot apply to the other four customers’ SOFs either.

            Not only did Zayo make no effort to prove a diminution of value into

perpetuity, Zayo did not perform a post-Closing valuation of the company it had




201
      JX 447 at 34.
202
      Id.
203
    Tr. 699:23–700:7 (Midkiff); see also Tr. 689:8–21 (Midkiff) (testifying that the
foreseeable future means one year or more).
204
   Tr. 706:4–707:2 (Midkiff). In other words, the damages related to Toshiba would be
$82,920, not $10,500,000, the number attributed to Toshiba in Midkiff’s damages
calculation.
205
      Tr. 596:20–597:20 (Reardon).

                                           46
acquired.206 Whether tactical or not, I can appreciate why Zayo may have avoided

taking on the challenge of proving that Latisys was worth less ($22 million less to

be precise) after Closing.207 Latisys’ cloud storage business was a revolving door;




206
   Tr. 665:9–14 (Midkiff) (“Q. Let me state it this way. You have done no calculation one
way or another about what the value of Latisys was as of the time of the closing; right?
A. That’s correct, I did not do a valuation.”). Indeed, what evidence Zayo did present on
post-Closing valuation revealed that Zayo believed Latisys’ value had actually increased
post-Closing and that the acquisition was delivering positive returns on the investment.
Tr. 739:8–12 (Kleinrichert) (“I looked to internal analysis of value that [Zayo] may have
done at that time or subsequently later. And those internal analyses indicated that [Zayo]
believed the value of [Latisys’] business had increased.”). See also JX 410-0009 (June
2016 Zayo presentation titled “zColo Valuation Analysis: Zayo + Latisys Platform” which
reflects that Zayo thought the Latisys acquisition created additional value for Zayo’s
colocation business, stating it was “[c]onfident about zColo + Latisys as optimal platform
for value creation.”).
207
    Zayo also did not provide a basis for Midkiff’s opinion that Zayo would not have paid
$675 million for Latisys had Zayo known about the upcoming churn from the five contracts
at issue. Tr. 678:14–679:14 (Midkiff) (“Q. I direct your attention to the testimony on the
bottom of page 180 and the top of page 181. In particular, when I asked you about the
pricing and whether or not if Zayo had known about this information, you had any
knowledge about whether the parties would or would not have done a deal at 675. You
said on page 181, in response to the questions on lines 4 and line 6, you answered both
questions: ‘True.’ A. Right. But the answer before that, I said, ‘I don't know that it was
specifically represented or stated, but it's my understanding that they would not have paid.
If they’d known, they might have negotiated a different price.’ Q. Okay. No one ever told
you that they wouldn’t have paid that amount. Correct? A. It’s my understanding. I don’t
know if it came up on some of the phone calls that I had with Zayo folks where they said
no, they don’t think they would have. Q. You are unable to tell the Court at this moment
in time what your understanding is based on. Correct? A. Yes.”). To be sure, no Zayo
witness testified that Zayo would not have paid $675 million for Latisys had Zayo known
the status of the Material Contracts at issue. And no Zayo witness testified that Zayo
viewed the Latisys assets as de-valued at or after the Closing. Tr. 628:22–629:2; 665:9–
14 (Midkiff).

                                            47
it was built on short-term contracts with customer loyalty of four to five years.208

Customers were utilizing Latisys’ services until they could store their data on their

own or find cheaper storage elsewhere. Indeed, Latisys knew it was buying a

business with short-term contracts.209 The five Material Contracts at issue in this

case expired in less than one year from the time Zayo was looking at the Latisys

acquisition.210 To the extent Zayo knew contracts were near expiration or month-to-

month as of Closing, there was no basis for Zayo to claim expectancy damages

beyond one month’s MRR.211

         Given this dynamic, it is difficult to understand why Midkiff would choose an

EBITDA multiple as the most accurate and comprehensive metric for valuing

damages. Indeed, there is no evidence that Zayo actually based its purchase price

on a multiple of EBITDA. Glisky used a DCF, an IRR and a NPV-sensitivity




208
      JX 62.
209
   Tr. 125:15–126:10 (Reardon). See also Tr. 596:16–19 (Reardon) (“[W]e understood
that contractually those customers were not obligated to stay any more than 30 days after
they gave notice to cancel or terminate.”).
210
    Tr. 699:23–700:7 (Midkiff); see also Tr. 689:8–21 (Midkiff) (testifying that the
foreseeable future means one year or more).
211
  Tr. 706:4–707:2 (Midkiff). See also Tr. 596:20–597:20 (Reardon) (acknowledging that
Zayo knew that because Toshiba was a month-to-month customer, the maximum amount
Toshiba was contractually obligated to pay to Latisys was thirty days of revenue).

                                           48
analysis.212 Reardon confirmed that the purchase price was the result of a number

of different factors.213 Given this evidence, it is not surprising that Midkiff struggled

to explain how she selected 14.1 as the EBITDA multiple she should apply. Her

explanation, “[i]t’s the highest multiple. . . . [i]t seemed to be the appropriate multiple

based on the sale price,”214 lacked any foundation in the evidence and ultimately was

unpersuasive.215

         By contrast, Kleinrichert proffered three credible damages scenarios, each tied

to the evidence, proving that the realized damages would not exceed the Basket. The


212
   Tr. 260:19–261:7 (Glisky). (“Q. Sir, was the purchase price ever based on a precise
multiple? A. The exact purchase price? Q. Yes, sir. A. Sure, no. Q. It wasn’t. The
purchase price was negotiated, and then Zayo implied the multiple from the negotiated
purchase price; correct? A. Final multiple, correct.”) (Tr. 207:8–16 (Glisky)).
213
      Tr. 120:17–121:20 (Reardon).
214
      Tr. 685:3–22 (Midkiff).
215
   While Zayo string cites to cases where courts have relied upon an EBITDA multiple to
calculate damages, it has not credibly argued how or why those cases dictate that result
here. See Pl.’s Post-Tr. Br. 44. See also Priority E.M.S. v. Crescent City E.M.S., 829
So. 2d 1066, 1068–70 (La. App. 4th Cir. 2002) (allegations of fraud and breach of contract
in confection of a loan agreement); see also Cobalt Operating, LLC v. James Crystal
Enters., 2007 WL 2142926, at *80–83, *91–97 (Del. Ch. July 20, 2007), aff’d, 945 A.2d
594 (Del. 2008) (EBITDA multiple proper for calculating damages for breach of contract
based on seller’s fraudulent misrepresentation, which resulted in permanent impairment to
business, and where it was undisputed that the parties relied on a multiple in calculating
purchase price); WaveDivision Hldgs., LLC v. Millennium Dig. Media Sys., L.L.C., 2010
WL 3706624, at *23–24 (Del. Ch. Sept. 17, 2010) (finding the use of an EBITDA multiple
was appropriate to calculate damages where the seller breached a stock purchase agreement
and failed to transfer ownership of its company to the buyer; the plaintiff did not receive
the benefit of its bargain, and the question of whether damages should be calculated based
on dollar-for-dollar, as opposed to an EBITDA multiple, was not addressed.).

                                            49
first and most appropriate (and credible) measure, in my view, is an out-of-pocket

costs analysis for the lost revenue through the remaining contract term of each of the

Material Contracts at issue. This calculation assumes Zayo (and each of the five

customers) would re-negotiate contracts at the end of the contract term consistent

with the market.216 The total damages, approximately $2.1 million, is less than the

$3.375 million Basket.217

         In his second scenario, Kleinrichert looked at the record and calculated

damages for a period longer than the remaining contract term for each of the SOFs

at issue in this case.218 The total damages under this scenario are $3,439,948

(slightly above the Basket).219 Of course, Zayo and each of the five customers know

the market and that knowledge would have informed their negotiations of any



216
      Tr. 751:13–752:3; 764:20–765:8 (Kleinrichert).
217
      SPA § 10.1(c); JX213 at 60–61.
218
      Tr. 755:21–24 (Kleinrichert).
219
   Tr. 758:22–759:6 (Kleinrichert). As noted, under the second scenario, Kleinrichert
calculated damages for a period longer than the remaining contract term for each of the
SOFs at issue in this case. Tr. 755:21–756:24 (Kleinrichert). In his trial testimony,
Kleinrichert re-examined his premise that Zayo and Echopass, IT Convergence, and
LexisNexis would not exercise the optional renewal periods in their respective post-
Closing SOFs with Zayo. Tr. 758:10–13 (Kleinrichert). Kleinrichert added to his first
damages calculation additional lost MRR for the optional renewal periods included in the
new Echopass, IT Convergence and LexisNexis SOFs. Tr. 758:13–15 (Kleinrichert).
Discounted to the date of the Closing, as in the first scenario, this added approximately
$1.3 million to the damages calculation, bringing the total damages above the Basket by
approximately $65,000. Tr. 758:22–759:6 (Kleinrichert).

                                             50
contract extensions.220 Given the market reality, and the need to offer (sometimes

significant) price concessions to keep customers, a damages calculation that assumes

Zayo would have realized revenue beyond the bargained-for SOF does not comport

with the evidence of record.221

         Kleinrichert’s third damages scenario totaled the alleged lost MRR for each

of the five customers, removed the lost Add2Net MRR because Zayo received the

benefit of that contract, subtracted from the total lost MRR the Toshiba MRR that

returned to Zayo in 2017, and annualized the total.222 Under this scenario, the

damages were $3,129,353 (below the Basket).223

         As its rebuttal to the Kleinrichert analysis, and its final push for benefit of the

bargain damages, Zayo argues that a “permanent impairment” occurs whenever “the



220
      Tr. 744:14–745:8 (Kleinrichert).
221
    See, e.g., Tr. 248:10–249:16 (Butler); Tr. 496:10–22; 494:7–11 (Stevenson) (“So your
really important customers who had large MRR, which might be defined as [$10,000] or
$15,000 a month or higher, they’re sophisticated buyers, so you would end up in that case
talking to the customer about a renewal. . . . I would take a—let’s just say a customer who
was billing a thousand dollars a month, and they said, ‘I want it for 950, but I’ll sign a new
24- or 36-month contract.’ I would take that all day long, because if I didn’t, it might be
zero. And zero is not good because zero would have to go and fill up again. So we always
focused in on making sure that we never got to zero. Now, of course, there’s deals you
would look at if the customer came to you and said, ‘I want this stuff below a level that’s
acceptable,’ then sometimes you have to walk away from a deal like that if you can’t make
money.”).
222
      Tr. 760:13–761:5 (Kleinrichert).
223
      Tr. 761:21–23 (Kleinrichert).

                                             51
buyer’s expectation of the transaction has been materially affected.”224                 Zayo

contends that because each of the contracts at issue in this case are Material

Contracts under the SPA, the misrepresentations allegedly at issue in this case are

by design material, and calculating damages using a multiple is automatically

appropriate.225 This argument is not supported by Midkiff’s testimony, nor by the

factual record, and is inconsistent with the AICPA Practice Aid. As Kleinrichert

testified, and as the AICPA Practice Aid confirms,226 using a multiple to calculate

damages is appropriate only where there is a permanent impairment to the value of

the business and the value the buyer receives is less than the value for which the

buyer bargained.227 Contrary to Zayo’s characterization, the AICPA Practice Aid

does not provide that where a buyer’s subjective expectation has been materially




224
      Pl.’s Post-Tr. Br. at 44.
225
    Pl.’s Post-Tr. Br. at 45 (“The [American Institute of Certified Public Accountants
Mergers and Acquisitions Disputes Practice Aid (‘AICPA Practice Aid’)] also provides
that if materiality is defined within the acquisition agreement, ‘the practitioner should adopt
the agreement’s definition of materiality when evaluating the transaction.’ [(JX 466
at 19).] Here all five contracts in dispute have been defined as material within the SPA,
and hence the misrepresentation was also material.”).
226
   JX 466 at 19 (“Indemnity claims can result in damages measured at the multiple. This
measurement implies the occurrence of permanent impairment to the value of the
business.”).
227
      JX 466.

                                              52
affected, a multiple methodology is appropriate.228          Simply stated, the result

suggested by Zayo—that because the alleged breaches involved Material Contracts,

a multiples methodology for calculating damages must follow—is not supported by

the competent evidence and not supported by the fundamental premise of

compensatory damages for breach of contract.229

      After carefully considering the evidence, I am satisfied that even assuming

arguendo that Zayo had met its burden to prove a breach of Section 4.12(b), the only

credible basis in the evidence to calculate damages resulting from that breach reveals

that Zayo has not suffered damages in excess of the Basket. Consequently, Latisys

is not obligated to indemnify Zayo in any amount.

                                  III.   CONCLUSION

      Because I find that Latisys did not represent and warrant in Section 4.12(b)

that it would inform Zayo if customers elected not to renew Material Contracts, or

bargained for different terms in new contracts with existing customers, I am satisfied

that Zayo has not proven a breach of contract. Even if Zayo had proven a breach, it



228
   The AICPA Practice Guide, instead, states that when there has been a “permanent
impairment to the value of the business,” then “the buyer’s expectation of the transaction
has been materially affected” and a multiple is appropriate. JX 466 at 17.
229
   See Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 146 (Del. 2009) (observing,
“contract damages are designed to place the injured party . . . in the same place he would
have been had the contract been performed” and that such damages “should not act as a
windfall.”).

                                           53
has not proven recoverable damages. My verdict, therefore, is for the Defendant.

The parties shall confer and submit an implementing order and final judgment within

ten (10) days.




                                        54
