MarkDutchCo 1 B.V. v. Zeta Interactive Corp.

MARKDUTCHCO 1 B.V.; MARKMIDCO S.ÀR.L v. ZETA INTERACTIVE CORP., Appellant MARKDUTCHCO 1 B.V. v. ZETA INTERACTIVE CORP., Appellant v. MARKMIDCO S.ÀR.L

Nos. 19-3845, 20-2824

United States Court of Appeals, Third Circuit

August 10, 2021

NOT PRECEDENTIAL

Submitted Pursuant to Third Circuit L.A.R. 34.1(a) June 22 2021

On Appeal from the United States District Court for the District of Delaware (D.C. Nos. 1:17-cv-01420; 1:17-cv-01641) District Judge: Honorable Colm F. Connolly

Before: CHAGARES, PORTER and ROTH, Circuit Judges.

OPINION ^[*]

CHAGARES, CIRCUIT JUDGE

Defendant-appellant Zeta Interactive Corporation filed these consolidated appeals challenging the District Court's orders in two lawsuits arising from its purchase of eBay's former enterprise customer relationship management business from a consortium of private equity firms that formed plaintiffs-appellees MarkDutchCo 1 B.V. and MarkMidCo S.ar.l (collectively, "MarkDutch"). In the first suit, the District Court confirmed an arbitral award MarkDutch obtained against Zeta, while in the second, the District Court granted summary judgment to MarkDutch against Zeta for breaching the parties' purchase agreement. The District Court dismissed Zeta's counterclaims in both actions.

Because the District Court made no error of fact or law in confirming the arbitral award, and because we hold there was no error in the District Court's dismissals or grant of summary judgment, we will affirm the orders of the District Court.

I.

Because we write only for the parties, we recount only those facts essential to our decision. A.

These appeals both arise from an Interest Purchase Agreement (the "IPA") that MarkMidCo and Zeta executed on August 28, 2015. Under the agreement, Zeta purchased MarkMidCo's interest in a consumer relationship management business (the "Business") that consisted of several companies providing marketing services. MarkMidCo would go on to assign some of its own interests under the IPA to MarkDutchCo, its corporate affiliate.

The IPA contained several terms that the parties now dispute. In exchange for MarkDutch's interest in the Business, Zeta would pay $23 million in cash ($19.55 million of which was due at closing) and about 1.7 million shares of Zeta stock, as well as several $4 million "earn-out" payments. The agreement obliged Zeta to make each earn-out payment if the Business met certain performance targets as measured by earnings before interest, taxes, depreciation, and amortization ("EBITDA") within an allotted time frame.^[1] The IPA provided that the first earn-out period would end one year after the transaction closed.

To determine whether the Business had met each earn-out target, the IPA required that "[w]ithin thirty[] days following the end of each" earn-out period, Zeta deliver to MarkDutch a written statement setting out the Business's EBITDA for the prior period and calculating the resulting earn-out payment. Appendix in No. 19-3845 ("19-3845 App.") 212. MarkDutch would then have the right to review all materials Zeta used in preparing the earn-out statement and would have ten business days to deliver a notice objecting to the statement to Zeta. The IPA required the notice, "to the extent possible based on information available to" MarkDutch, to set out any of MarkDutch's alternative calculations and supporting details. 19-3845 App. 212. The parties agreed that if they could not resolve a dispute over the earn-out payment themselves, they would submit to an accounting arbitrator who would "be the sole arbiter of all matters, procedural and/or substantive," as to the disputed earn-out payment. 19-3845 App. 213. The Arbitrator's decision would "be final and binding upon [the parties] absent fraud, bad faith or manifest error." 19-3845 App. 213.

The IPA also included representations and warranties regarding the Business. Among these representations were that certain patents would be sold with the Business, and that to MarkDutch's knowledge, all those patents were "valid and enforceable." 193845 App. 227. MarkDutch also made warranties about the organization and existence of certain entities with which Zeta would do business, various labor matters, and tax liabilities Zeta might face.

Finally, the IPA provided that MarkDutch would indemnify Zeta against losses arising from "any breach of any representation or warranty" in the IPA that it had made. 19-3845 App. 235. Under Section 6(a) of the IPA, Zeta could seek indemnification for breaches of MarkDutch's representations and warranties for up to eighteen months after the closing date and could pursue its right to seek indemnification beyond eighteen months so long as it delivered a claim notice to MarkDutch "on or prior to the [eighteenmonth] Expiration Date." 19-3845 App. 234. The ability to seek indemnification would otherwise expire after eighteen months post-closing. Section 6(b)(iv)(A) set out the procedure for Zeta to seek indemnification: it provided first, that Zeta would "promptly transmit" a claim notice; second, that the claim notice should include certain facts; and third, that "[f]ailure to provide such Claim Notice promptly shall not affect the right of [Zeta] to indemnification hereunder except to the extent [MarkDutch would be] materially prejudiced by such failure." 19-3845 App. 235-36.

Zeta could further protect itself by, at closing, retaining $3.45 million of the $23 million cash payment for the Business as a "holdback amount." 19-3845 App. 237, 248. Under Section 6(b)(v) of the IPA, after eighteen months and three business days had passed from the closing date, Zeta could continue to retain any part of the holdback amount that had been "finally determined" to cover a loss that MarkDutch had agreed to indemnify. 19-3845 App. 237. At that time, the IPA required Zeta to remit the remainder of the holdback amount to MarkDutch. A final determination of an amount Zeta could withhold under the holdback provision could include "an agreement [between the parties] in writing," "a final and non-appealable order" from a court of competent jurisdiction, or "a final non-appealable determination" from an arbitrator adjudicating the dispute. 19-3845 App. 237.

B.

Zeta and MarkDutch closed the transaction on November 2, 2015. A year then passed, and with it, the first earn-out period. In line with the IPA, Zeta submitted its first earn-out statement on December 29, 2016. Zeta claimed that it did not owe MarkDutch the first earn-out payment because the Business missed the first earn-out target. MarkDutch and Zeta then exchanged a series of letters, with MarkDutch purporting to have adequately objected to the earn-out statement by the IPA's deadline for doing so, and Zeta claiming that MarkDutch failed because it had not provided an alternative calculation of the Business's EBITDA. On January 30, 2017, MarkDutch informed Zeta that it would refer their dispute to arbitration. The parties agreed to an arbitrator by March, and arbitration began the following month. MarkDutch and Zeta agreed on the issues the Arbitrator would consider, including "the procedural appropriateness of" Zeta's earn-out statement, MarkDutch's objection notice and supplement, and the accompanying correspondence between the parties. 19-3845 App. 337.

The Arbitrator rendered his decision that August. The Arbitrator ruled on both the substantive and procedural questions the parties raised, and concluded that MarkDutch's notice, supplement, and other correspondence through the end of January 2017 were procedurally appropriate. Turning to the substance of the parties' dispute, the Arbitrator determined that the Business's EBITDA met the first earn-out target, and that Zeta owed MarkDutch the first $4, 000, 000 earn-out payment as a result.

Zeta disputed the Arbitrator's award and MarkDutch next filed a complaint in the Delaware Court of Chancery seeking to enforce the decision. On October 10, 2017, Zeta answered the complaint with several counterclaims. Zeta asserted that MarkDutch erroneously omitted certain inventors from the patents it sold, which in turn rendered those patents unenforceable. Accordingly, Zeta sought correction of the patents and accompanying damages under 35 U.S.C. §§ 152 and 256, and further asserted claims against MarkDutch for breach of contract and indemnification under the IPA, fraud, declaratory relief, and to vacate the arbitral award, Zeta then removed the case to the District Court, citing, inter alia, the Federal Arbitration Act (the "FAA") and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention").^[2]

MarkDutch moved to confirm the Arbitrator's award. The District Court granted the motion in November 2019, holding that the Arbitrator acted within his agreed-upon powers, and that a "manifest error" standard did not require setting aside the award as Zeta requested. The District Court also granted MarkDutch's concurrent motion to dismiss Zeta's counterclaims, holding that Zeta's counterclaim for correction of invention improperly sought to recover damages, that the contract counterclaims were untimely, and that Zeta had failed to plead its fraud claim with sufficient particularity. Zeta then timely appealed from this decision.

C.

A separate disagreement between the parties over the holdback provision proceeded on a parallel track while they arbitrated the earn-out dispute. MarkDutch and Zeta closed the transaction on November 2, 2015, so the eighteen-month-and-three-business-day holdback period expired on May 5, 2017. Zeta did not reach an agreement to be indemnified by MarkDutch by that deadline. It also failed to obtain a final, non-appealable judgment for indemnification and similarly did not secure an arbitral award...