IAC/Interactivecorp v. O’Brien, No. 629, 2010 (Del. Aug. 11, 2011)

In this en banc decision, the Delaware Supreme Court affirmed the Court of Chancery’s decision that laches, instead of the applicable statute of limitations, applied to the plaintiff corporate officer’s claim for indemnification, and thus upheld the Court of Chancery’s decision that plaintiff was entitled to indemnification for certain actually and reasonably incurred attorneys’ fees and expenses.

The plaintiff/appellee, Wesley T. O’Brien (“O’Brien”), was the president, COO, and CEO of Precision Response Corporation (“PRC”) from 1998 through 2002. The defendant/appellant, IAC/Interactive Corp. (“IAC”) acquired PRC in 2000 and PRC became a wholly-owned subsidiary of IAC. After PRC acquired Avaltus, Inc. (“Avaltus”) in 2001, Avaltus shareholders commenced arbitration proceedings against PRC (the “Avaltus Arbitration”) to recover certain escrow funds in connection with the Avaltus acquisition. Later that year, PRC terminated O’Brien for cause and asserted counterclaims against him in the Avaltus Arbitration. O’Brien successfully sought indemnification against PRC in Florida state court, but PRC unexpectedly filed for bankruptcy during the Florida state court action, prompting O’Brien to seek indemnification from IAC in Delaware.

O’Brien filed suit against IAC in Delaware in July 2008, seeking (1) indemnification of his attorneys’ fees and expenses from the Avaltus Arbitration, the proceedings in the Florida state courts, and the PRC bankruptcy proceedings, and (2) advancement of his attorneys’ fees and expenses in the Delaware action. O’Brien retained three law firms for whose fees and expenses he sought indemnification, and had entered into different contingency agreements with those law firms that each called for the payment of a success premium of 20% to 50% above the firms’ usual hourly billing rates for all hours worked on the various actions seeking indemnification.

O’Brien submitted a motion for summary judgment on his claims, and IAC submitted a cross-motion seeking a judgment that (1) O’Brien’s claim was barred by a three year statute of limitations, and (2) O’Brien’s attorneys’ fees, particularly the contingent portions of those fees, were unreasonable. The Court of Chancery held that, under the extraordinary circumstances of this case, it was not obligated to apply the statute of limitations and instead applied a traditional laches analysis, finding O’Brien’s claims timely. After additional submissions as to the amount owed to O’Brien, the Court of Chancery awarded O’Brien the vast majority of his requested attorneys’ fees, including contingent fees. IAC appealed both rulings.

The Delaware Supreme Court first held that the Court of Chancery did not err in applying laches instead of the three year statute of limitations to O’Brien’s claims for advancement and indemnification. The Supreme Court noted that although the Court of Chancery ordinarily will follow the applicable statute of limitations, the Court of Chancery has discretion to ignore the traditional limitation period in “unusual conditions or extraordinary circumstances.” The Supreme Court held that unusual circumstances justified disregarding the statute of limitations in the present case, and O’Brien’s claims were not time-barred, because (1) O’Brien promptly sought indemnification from PRC arising from both the Avaltus Arbitration and the Florida state court action, (2) O’Brien had to wait for the appeals process to run in the Florida state court action before pursuing an action against IAC in Delaware, and (3) PRC unexpectedly declared bankruptcy shortly after the Florida appeals court upheld O’Brien’s right to indemnification, and O’Brien did not know or have reason to suspect that PRC would be unable to pay.

Turning to the issue of the reasonableness of the attorneys’ fees, the Supreme Court reviewed the Court of Chancery’s decision to award O’Brien attorneys’ fees for abuse of discretion, and found none. The Supreme Court cited settled Delaware law noting that corporate officers are entitled to indemnification for attorneys’ fees that are “actually and reasonably incurred,” and held that a premium or contingent fee is based on hours or work performed for the client, thus making such premium or contingent fees actually incurred. The award of contingency or premium fees, while unusual, was justified under the extraordinary circumstances of this case because O’Brien acted reasonably in making his fee arrangements.

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