Watch What You Say: Disparaging Comments May Trigger Contractual Repurchase Rights Even If Shielded From A Defamation Claim
A recent Delaware decision has demonstrated the limits of the absolute litigation privilege, holding that it did not protect an LLC member from claims that his defamatory statements triggered contractual repurchase rights of his membership interests. Absolute litigation privilege, in Delaware and many other jurisdictions, protects parties from actions for allegedly defamatory statements made during a judicial proceeding that are relevant to the case. While Judge Paul R. Wallace found absolute litigation privilege served an important interest in allowing parties to speak freely once in litigation, those public policy concerns do not always apply when a party is seeking to enforce private contractual rights resulting from the alleged breach of a non-disparagement claim. In so holding, the court demonstrated that Delaware courts will continue to show caution before allowing public policy interests to obviate the obligations in sophisticated parties’ private contracts.
In Seva Holdings Inc. v. Octo Platform Equity Holdings, LLC, the court reviewed a dispute that came about after Octo Consulting Group, LLC (“Octo”) acquired Sevatec, LLC from its founder through a stock purchase agreement. After the acquisition, the founder remained with the company and, under his new employment agreement, agreed with Octo to certain confidentiality and non-disparagement clauses. As part of his agreement, a holding company he owned, Seva Holdings, Inc. (“Seva”), received membership interests in an Octo affiliate, subject to a repurchase option based on certain “Triggering Events” that included:
a material breach by Mr. Kakar of any of the restrictive covenants with respect to confidentiality (but only in the event such breach causes or results in demonstrable material harm to [Octo Platform] or any of its Subsidiaries), non-competition, non-solicitation, non-interference or non-disparagement obligations in either his [Employment Agreement] or his Non-Competition Agreement.
Less than a year later, Octo issued the founder a notice of for-cause termination from the company and removal from the board. Thereafter, the founder sued Octo for defamation in Virginia state court and for fraudulent inducement and breach of contract, among other claims, in Delaware Superior Court. Octo counterclaimed and informed Seva that it was exercising its right to repurchase Seva’s membership units. According to Octo, the founder’s lawsuits and the allegedly disparaging statements made constituted a “Triggering Event” under the repurchase agreement, based on their alleged violation of the confidentiality and non-disparagement obligations.
After receiving the repurchase notice from Octo, the founder (through Seva) filed a new complaint in the Delaware Court of Chancery seeking declaratory relief that, among other things, the repurchase notice was void because of the absolute litigation privilege. The two Delaware suits were consolidated before Judge Wallace, and both parties moved for summary judgment.
After finding that most of the claims would proceed to trial, the court turned to the applicability of the absolute litigation privilege to the repurchase agreement. Although the court found that absolute litigation privilege had been long recognized in Delaware to shield litigants from defamation and similar tort-based claims, it observed that Delaware courts only occasionally had considered the scope of that privilege as applied to contractual claims. In reviewing the few decisions on this issue, the court noted the inherent “tension that exists in balancing the public policy interest of encouraging the freedom of a person pursue one’s claims in court and that of upholding the freedom of contract.”
Here, the court held that “Delaware law affords primacy to the freedom of contract” even where there are countervailing policy interests, “especially in the context of provisions governing the internal affairs of a Delaware limited liability company.” The court found that the Delaware Supreme Court had recently considered this balance in the context of forfeiture-for-competition provisions in a Delaware limited partnership, finding that the public interests against restraints of trade were weakened in a private agreement that did not prohibit competition, but instead resulted in a forfeiture of compensation agreed to by the parties. The court thus held:
Under the LLC Agreement, the parties conditioned Seva’s membership status on Mr. Kakar’s conformity with his obligations under the Employment and Non-Competition Agreements. If Seva were asserting the privilege against any non-disparagement claims Octo was asserting, the privilege would bar such claims. But here, the provision at issue is a repurchase provision, which directly touches on the internal affairs of the company. Accordingly, the Court is “strongly inclined” to respect the parties’ right to voluntarily order their affairs unless “dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract.”
The court found that the public policy interests in avoiding the “chilling” effects of a provision that prevented a party from participating in litigation were not at issue here, as the allegedly disparaging statements already had been made, and the repurchase option did not prevent the founder from continuing his litigation “without fear of incurring tort or nondisparagement-based liability for the statements he makes in those actions.” The court thus concluded that the absolute litigation privilege had no bearing on the enforcement of the repurchase obligation, and granted partial summary judgment to Octo.
This outcome underscores the tension often seen between a court’s competing goals of honoring parties’ freedom of contract while promoting public policy interests. Although the court acknowledged the general rule enforcing absolute litigation privilege and the strong interest inherent in allowing parties to freely pursue their claims in court, it found that those interests would not prevent sophisticated parties from agreeing to consequences that might create a collateral economic effect after those claims are pursued. These collateral effects, Seva Holdings instructs, do not mean that parties’ freedom to pursue their claims are being restricted in a manner that implicates the absolute litigation privilege. Instead, they are consistent with Delaware public policy enforcing parties’ freedom of contract when they are designing and negotiating the internal affairs of their businesses.
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