Barnard v. Marchex, Inc.

1

CHRIS BARNARD and SINC MCEVENUE, in their capacity as the Shareholder Representatives for the former shareholders of Telmetrics Inc. Plaintiffs, v. MARCHEX, INC., Defendant.

C. A. No. 1:22-cv-01382-RGA

United States District Court, D. Delaware

February 2, 2024

REPORT AND RECOMMENDATION

SHERRY R. FALLON, UNITED STATES MAGISTRATE JUDGE

Pending before the court in this contract dispute litigation is a Motion filed pursuant to Federal Rule of Civil Procedure 12(b)(6) by Defendant Marchex, Inc. (hereinafter “Marchex”)^[1]to compel arbitration and dismiss the operative Second Amended Complaint (hereinafter “SAC”) (D.L 20) brought by Plaintiffs, Chris Barnard and Sine McEvenue, in their capacity as the Shareholder Representatives for the former shareholders of Telmetrics, Inc. (hereinafter “the Shareholder Representatives” or “Plaintiffs”). (D.L 23/ For the following reasons, I recommend Marchex's motion to compel arbitration be DENIED and its motion to dismiss be GRANTED-IN-PART as to Counts VI and VII and DENIED as to Counts I-V.

I. BACKGROUND

Plaintiffs are representatives of former shareholders of a Canadian company, Telmetrics, Inc., which was purchased by Marchex on November 5,2018. (See D.I. 20 at ¶¶ 1 5-6) Telmetrics and Marchex specialize in business-to-business call analytics. (Id. at ¶ 16)

The parties entered into a Share Purchase Agreement (hereinafter “SPA”) which is at issue in this breach of contract dispute. (Id. at ¶ 14) The dispute centers on whether Telmetrics' former shareholders are entitled to earnout payments and any of the escrow funds set aside under the Escrow Agreement (hereinafter “EA”). (E.g. id. at ¶¶ 63-69,104) The escrow funds were set aside to serve as security for indemnification claims. (See id. at ¶ 78) Marchex has asserted indemnification claims against Plaintiffs and Telmetrics' former CEO, Andrew Osmak, for allegedly misrepresenting the company's financial projections before the sale. (Id. at ¶ 298) Osmak, who is not a party to the instant suit filed his own claims against Marchex alleging constructive discharge and alleged misconduct that interfered with Telmetrics' ability to achieve its financial targets. (See id. at ¶ 301; see also D.I. 24 at 2) The parties' respective claims have been asserted in two lawsuits in Canada as follows:

• Osmak v. Telmetrics, No. CV-20-00640994-0000 (Ontario Sup. Ct. of Justice);^[2]

• Telmetrics v. Osmak, No. CV-21-00674206-0000 (Ontario Sup. Ct. of Justice)^[3](collectively “Canadian Actions”).

This litigation was filed on October 21, 2022, and is the third lawsuit between the parties concerning their respective rights and obligations under the SPA and EA. (See D.I. 1)

The SPA provides Telmetrics' former shareholders an opportunity to receive two earnouts totaling $3,000,000 (USD), the first for $1,250,000 and second for $1,750,000 (hereinafter “Earnout Consideration”), if Telmetrics' sales increased to meet its “Financial Goals”^[4] across two twelve-month periods. (See id at ¶¶ 22-23; see also SPA § 1.2(b); SPA Ex. B) Former shareholders could also obtain the Earnout Consideration if there was an “Acceleration Event[.]”^[5] (D.I. 20 at ¶¶ 24-28; see also SPA § 1.8(e)) The SPA designated Plaintiffs Barnard and McEvenue, along with Osmak as Shareholder Representatives to act on behalf of all former shareholders of Telmetrics. (SPA § 6.3; see also D.I. 20 at ¶ 1) Under the SPA, Marchex was required to provide the Shareholder Representatives with the statements and financial information relevant to the Earnout Consideration. (D.I. 20 at ¶ 52; see also SPA § 1.8(a))

The SPA contains procedures for resolving disputes concerning the Earnout Consideration as follows:

The Shareholder Representatives shall notify [Marchex] on or before the date fifteen (15) days after the date on which [Marchex] delivers to the Shareholder Representatives such Earnout Statement, failing which such Earnout Statement shall be deemed to be accepted by the Sellers with respect to the corresponding Earnout Period. [Marchex] and the Buyer shall give the Shareholder Representatives and their professional advisors reasonable access to the books and records and working papers of [Telmetrics] and its Subsidiaries and their accountants to enable the Shareholder Representatives to exercise their rights under this Section 1.8. [Marchex] and the Shareholder Representatives shall attempt to resolve any such disagreements in good faith. If [Marchex] and the Shareholder Representatives are unable to resolve all such disagreements on or before the date fifteen (15) days following notification by the Shareholder Representatives of any such disagreements, [Marchex] shall retain the Final Accounting Firm to resolve all such disagreements, who shall adjudicate only those items still in dispute with respect to the Earnout Statement....

The parties hereto agree that judgment may be entered upon the determination of the Final Accounting Firm in any court having jurisdiction over the party against which such determination is to be enforced.

(SPA § 1.8(c)-(d))

The Shareholder Representatives allege that starting from December, 2018, Marchex operated Telmetrics in bad faith and in a commercially unreasonable manner to avoid paying the Earnout Consideration. (D.I. 20 at ¶¶ 48, 170) It did so by limiting Osmak's communication with clients and migrating them to Marchex. (Eg. id. at ¶¶ 174-75) According to the SAC, during this time, Telmetrics allegedly employed less than thirty-five (35) employees, triggering an Acceleration Event. (Id. at ¶¶ 141-45) The Shareholder Representatives allege that Marchex improperly refused to answer information requests about Osmak's departure or provide adequate supporting documentation showing that Telmetrics failed to meet the Financial Goals. (Id. at ¶¶ 50-54)

The SPA also contained provisions for Marchex to obtain indemnification in the event of breaches of representations and warranties, and tax liabilities incurred by Telmetrics prior to closing. An Escrow Deposit of $1,010,000.00 (USD) held by the Escrow Agent, U.S. Bank, (EA §§ 2.1-2.2; SPA § 1.5; see also id. at ¶ 38), served as security for the indemnification obligations set forth in an EA that was incorporated into the SPA. (Eg. SPA § 10.1(a); EA § 1.1.) If an “Indemnifiable Matter”^[6] was asserted, Marchex was required to give the Shareholder Representatives a “good faith estimate of the reasonably foreseeable maximum amount of its claim for the indemnification and the basis for such a claim, and shall make available to the Shareholder Representatives all relevant information regarding such Indemnifiable Matter.” (EA § 3.2) The Shareholder Representatives had the ability to dispute any Indemnifiable Claim “within thirty (30) days after the Escrow Agent's receipt of the notice.” (Id. at §§ 3.3, 3.4) If “the Shareholder Representatives have not given the Escrow Agent notice” that they dispute the claim, “[Marchex] shall be entitled to make demand upon the Escrow Agent ... that it then disburse [the dispute amount] to [Marchex].” (Id. at § 3.3)

Marchex claims that the Shareholder Representatives did not timely notify the Escrow Agent of their objection to Marchex's indemnification claim for release of the funds until after the thirty (30) day deadline had passed. (D.I. 24 at 6-7) The Shareholder Representatives allege in the SAC that Marchex allegedly made “incomprehensible and intentionally vague” claims to $760,000.00 of the Escrow Deposit. (D.I. 20 at ¶ 247) On February 3,2020, Marchex allegedly hand-delivered a letter to the Escrow Agent demanding release of $760,000.00 from the Escrow Deposit. (Id. at ¶ 90) Marchex allegedly sent the required notice of its indemnification demand to the Shareholder Representatives via mail. (Id.) Plaintiffs allege in the SAC that they did not receive Marchex's demand for release of the funds until February 13, 2020, after the funds had already been released by the Escrow Agent. (Id. at ¶ 92)

The instant litigation generally centers on the parties' disputes concerning entitlements to payments under the Earnout Consideration and the Escrow Deposit. In the SAC, the Shareholder Representatives assert seven Counts. The first five are causes of action for breach of contract.

Count I alleges that Marchex breached the SPA by failing to pay the Earnout Consideration following an Acceleration Event. Count II alleges Marchex violated SPA § 1.8(a) by failing to operate Telmetrics in a reasonable and good faith manner purposefully to avoid paying the Earnout Consideration. Count III alleges Marchex did not give the Shareholder Representatives adequate access to books, records, and working papers in violation of SPA § 1.8(c). Count IV alleges Marchex failed to follow the proper Earnout Statement procedures as outlined in SPA § 1.8(b) and (c). Count V alleges breach of SPA § 10.2(a) and § 3.2 of the EA arising from Marchex's alleged unfounded and untimely indemnification claim for which it received $760,000 from the Escrow Deposit. Count VI alleges Marchex breached the SPA's forum selection clause in 2021 when it filed the Telemetries v. Osmak lawsuit in Canada. Finally, Count VII alleges abuse of process by filing the Canadian Actions for an improper purpose to gain a strategic advantage in this case and to delay the pending litigation. In addition, Marchex argues the doctrine of comity requires this court to dismiss the pending case in favor of the Canadian lawsuits.

Marchex filed the instant motion on June 7, 2023. (D.I. 23) The motion was fully briefed as of July 26,2023, (D.I. 28), and was referred to the undersigned Magistrate Judge by District Judge Richard G. Andrews for resolution on October 4,2023 (D.I. 31) Marchex moves to compel arbitration of the...