Friday, October 30, 2015

Ambiguity in Redemption Agreement Keeps Alive Question as to Confidentiality Obligation Under Operating Agreement

Ambiguity in Redemption Agreement Keeps Alive Question as to
Confidentiality Obligation Under Operating Agreement

            A 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, 2015).
            The 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 confidentiality provision.  Thereafter 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. 
For 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 confidentiality. 
UtiliSave 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. 
Rejecting 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.
The 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.

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