This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Friday, October 30, 2015
Ambiguity in Redemption Agreement Keeps Alive Question as to Confidentiality Obligation Under Operating Agreement
in Redemption Agreement Keeps Alive Question as to
Obligation Under Operating Agreement
recent decision from the Delaware Chancery Court highlights how imprecise
drafting can lead to disputes over what obligations are and are not owed.UtiliSave,
LLC v. Miele, C.A. No. 10729-VCP, 2015 WL 54558960 (Del. Ch. Sept. 17,
Utilisave, LLC operating agreement contained a confidentiality agreement that
would “continue to be binding on a Member following the termination of its
interest in the Company.”Miele, an
employee with access to Utilisave’s confidential and proprietary information,
became a member of the company and in so doing became subject to the
her interest in the company was cancelled pursuant to an Assumption and
Termination of Membership Interest agreement that was silent as to the
confidentiality obligation under the operating agreement.It did, however, expressly cut off Miele’s
obligation to contribute further capital to the company.
several years thereafter Miele remained an employee of UtiliSave.After her ultimate resignation she was
alleged to have taken steps to set up a competing venture, including contacting
two clients of UtiliSave.It then brought
suit alleging violation of the operating agreement’s obligation of
relied upon the language of the operating agreement preserving the
confidentiality obligation post-termination of member status.Miele’s defense was essentially that the
Assumption and Termination agreement failed to preserve the confidentiality
obligation, and that it should be read to be a waiver of all obligations
including capital contribution. She also alleged that the confidentiality
obligation itself is overbroad and unreasonable.
Miele’s motion to dismiss, the court began:
As the moving
party, Miele has the burden of showing hers is the only reasonable
interpretation.Because I find both
Defendant’s and Plaintiff’s interpretations are reasonable, Defendant has
failed to carry this burden.
2015 WL 5458960, *6.
failure to carefully review the limitations and obligations imposed by the
operating agreement and to in turn address them in the Assumption and
Termination Agreement, specifying which end and which survive, means this
dispute will carry on.Further drafting
could have avoided that expense.