The Court of Chancery has recently issued a string of decisions, including Kraft v. WisdomTree Investments, Inc. in which it has tightened the application of the equitable defense of laches to make it more likely that a claim brought after the actual or presumptive statute of limitations has expired will be dismissed.
However, in the recent Chancery decision of inTEAM Associates, LLC v. Heartland Payment Systems, Inc., C.A. No. 11523-VCMR (Del. Ch. Sept. 30, 2016), the Court declined to bar claims under the doctrine of laches. There, Vice Chancellor Montgomery-Reeves adjudicated various breaches of contract, non-competition and non-solicitation claims brought by two Delaware entities, inTEAM Associates, LLC (“inTEAM”) and Heartland Payment Systems, Inc. (“Heartland”).
The entities each own K-12 school meal management software. inTEAM‘s predecessor, School Link Technologies, Inc. (“SL-Tech”), and Heartland entered into a transaction in which Heartland bought substantially all of SL-Tech’s assets. The transaction was detailed in three agreements that were executed together and work in tandem. These agreements contain various non-competition, non-solicitation, exclusivity, and cross-marketing and support obligations.
As an affirmative defense, Heartland among other things asserted that laches barred recovery by inTEAM. Heartland asserted that inTEAM unnecessarily delayed in bringing the suit by waiting 9 months after the alleged misconduct to file its action. However, the Court noted that inTEAM submitted a letter to Heartland two months prior to commencing suit, notifying Heartland of its breach. The Court did not find that the 7-month delay was prejudicial to Heartland.
The Court also noted that if the alleged injury is Heartland’s investment in a particular relationship to compete with inTEAM, Heartland engaged in that behavior before inTEAM knew about the breach. To the extent that Heartland has incurred some cost by investing further in a competitive relationship after finding out about inTEAM‘s objections, it did so at its own risk, as it was on notice of its possible violation.
In sum, the Court held that inTEAM did not breach any of its contractual obligations, but that Heartland breached its noncompetition and exclusivity obligations, and inTEAM‘s chief executive officer breached certain of his non-solicitation provisions. The Court further found that no affirmative defense excused any of the breaches.
This decision demonstrates the limitation of the application of laches. To defeat a claim based upon this affirmative defense, when it is brought within the applicable statute of limitations, a legitimate showing of prejudice will be required.