Fuhlendorf v. Isilon Systems, Inc.

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Justia Opinion Summary

This case arose when plaintiff entered into an agreement with defendant under which he was entitled to advancement of expenses incurred in defending several actions arising out of his employment with defendant (Indemnification Agreement). At issue was whether the Special Master's fees fell within the definition of "Expenses" under the Indemnification Agreement. The court held that, in accordance with the terms of the Indemnification Agreement, defendant was solely responsible for any fees arising from a reasonableness review conducted by a special master. Therefore, the Special Master's fees were to be paid by defendant, along with any future amounts arising from similar proceedings before the Special Master.

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EFiled: Jul 22 2011 8:53AM EDT Transaction ID 38829631 Case No. 5772-VCN COURT OF CHANCERY OF THE STATE OF DELAWARE JOHN W. NOBLE VICE CHANCELLOR 417 SOUTH STATE STREET DOVER, DELAWARE 19901 TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179 July 22, 2011 Kevin M. Coen, Esquire Morris, Nichols, Arsht & Tunnell LLP 1201 North Market Street Wilmington, DE 19801 Re: Samuel T. Hirzel, Esquire Proctor Heyman LLP 1116 West Street Wilmington, DE 19801 Fuhlendorf v. Isilon Systems, Inc. C.A. No. 5772-VCN Date Submitted: June 11, 2011 Dear Counsel: Plaintiff Stuart W. Fuhlendorf entered into an agreement with Defendant Isilon Systems, Inc. , under which he is entitled to advancement of expenses incurred in defending several actions arising out of his employment with Isilon . Mr. Fuhlendorf filed a motion for summary judgment on October 4, 2010 (the . Because the parties agreed that he was entitled to summary judgment as to his right Fuhlendorf v. Isilon Systems, Inc. C.A. No. 5772-VCN July 22, 2011 Page 2 to advancement,1 the issue raised at that juncture related only to whether a review of the advancement obligation was appropriate at that time. In his opening brief in support of the Summary Judgment Motion, Mr. Fuhlendorf of the submitted amounts and that it could seek a reasonableness review of any disputed expenses. In addition, Mr. Fuhlendorf also argued that he was entitled to an award of fees on fees and preadvance all of his expenses. advancement, argued that the fees and expenses must be reasonable according to both Delaware law and the Indemnification Agreement. For that reason, Isilon set forth that it had proposed a reasonableness review process to Mr. Fuhlendorf that was analogous to the procedures ordered in Duthie v. CorSolutions Medical, Inc.2 1 See Fuhlendorf v. Isilon Sys., Inc., 2010 WL 4570225, at *1 n.1 (Del. Ch. Nov. 9, 2010) (the 2 2008 WL 4173850 (Del. Ch. Sept. 10, 2008). Fuhlendorf v. Isilon Systems, Inc. C.A. No. 5772-VCN July 22, 2011 Page 3 There, the parties were to divide equally the costs of the special master selected to resolve the disputed amounts under the advancement obligation, the exception being that the entire cost of the special master was to be borne by the objecting party if those objections were determined to have been made without good cause.3 In his reply letter in support of the Summary Judgment Motion, Mr. Fuhlendorf reiterated his contention that referral of any disputed amounts to a special master for reasonableness review was contrary to the requirements of Delaware law. Absent evidence of bad faith or clear abuse Fuhlendorf argued had not been presented which Mr. he asserted that a reasonableness review was not proper and, at the very least, should be deferred to avoid prejudicing his defense in the underlying proceedings. Mr. Fuhlendorf advancement obligations. The Court, recognizing that the value of advancement would be impaired if payment was not promptly made, nevertheless observed that the fees and expenses 3 Id. at *2. Fuhlendorf v. Isilon Systems, Inc. C.A. No. 5772-VCN July 22, 2011 Page 4 sought by way of advancement must be reasonable.4 Accordingly, the Court, employing the procedures of Duthie, prescribed a series of steps for the parties to follow; most significantly, if, after following certain steps, a dispute remained as to the reasonableness of the fees and expenses submitted by Mr. Fuhlendorf, those disputed amounts were to be presented to a special master.5 Consistent with Duthie, the Court directed that the costs of the Special Master were to be equally Special Master [was to] be borne by Isilon if it turn[ed] out that its objections to payment of the fees for which advancement ha[d] been sought [were] made 4 6 Fuhlendorf, 2010 WL 4570225, at *1. Id. Duthie sets forth an appropriate procedure in good faith that the fees and expenses for which advancement has been sought were incurred reasonably as a matter of sound professional judgment; (2) Isilon shall identify those fees which it asserts fall outside the standard of Delaware law for advancement; its counsel shall certify their good faith belief that the advancement of such fees is not appropriate; (3) The fees as to which there is no dispute shall be promptly paid; (4) The fees as to which any dispute remains shall be submitted to a Special Master; and (5) The costs of the Special Master will be divided equally between the parties, except that the entire cost of the Special Master will be borne by Isilon if it turns out that its objections to payment of the fees for which advancement has been sought have Id. (citation omitted). 6 Id. 5 Fuhlendorf v. Isilon Systems, Inc. C.A. No. 5772-VCN July 22, 2011 Page 5 In accordance with the Letter Opinion, the Special Master finding that Isilon had sufficient good cause to resist the payments requested by Mr. Fuhlendorf recommended that his fees be allocated equally between the parties.7 Thereafter, Mr. Fuhlendorf filed an exception under Court of Chancery Rule 144 challenging that recommendation and arguing that an equal allocation of the der the Indemnification Agreement. Instead, Isilon must bear the costs of the Special Master, according to Mr. Fuhlendorf, because those fees fall set forth in the Agreement. A reading of Sections 2(e), 9, and 13(d) of the Indemnification Agreement shows that Mr. Fuhlendorf correctly contends , . As a result, Isilon alone is obligated to bear the costs of the Special Master under the Agreement.8 The Letter Opinion, 7 8 Final Report Concerning Special Master Fees Through February 2011, at 2. Section 13(d) of the Indemnification Agreement provides that the intent of the parties is to ost and Fuhlendorf v. Isilon Systems, Inc. C.A. No. 5772-VCN July 22, 2011 Page 6 employing the Duthie procedures, is noticeably inconsistent with the terms of the contractual arrangement. Although the doctrine of the law of the case generally precludes reconsideration of matters that have been previously ruled upon, the Court may revisit its interlocutory ruling in the Letter Opinion.9 Delaware case law suggests, however, that the Court should refrain from doing so, unless a compelling reason exists to disturb that ruling.10 Whether the Special M xpenses under the Indemnification Agreement was not at issue in the Summary Judgment Motion the Summary Judgment Motion litigation or otherwise See , 2010 WL 2705147, at *2 (Del. Ch. July 5, 2010) (quoting , Inc., 1993 WL 10969, at *3 (Del. Ch. Jan. 15, 1993)). This case is unlike Dr Pepper Bottling Co. of Texas, because in that appraisal action the Court was called upon to reconsider its valuation analysis after a form of judgment had been implemented. ship, L.P. v. Dr Pepper Bottling Co. of Tex., 2008 WL 2440303 (Del. Ch. June 4, 2008), d sub nom. Crescent/Mach I Partners, L.P. v. Dr Pepper Bottling Co. of Tex., 962 A.2d 205 (Del. 2008). Here, no final judgment has yet been entered. 10 CNX Gas Corp., 2010 WL 2705147, at *2; see also Zirn v. VLI Corp., 1994 WL 548938, at *2 (Del. Ch. Sept. 23, 19 by a court, it is generally held to be the law of that case and will not be disturbed by that court 9 Fuhlendorf v. Isilon Systems, Inc. C.A. No. 5772-VCN July 22, 2011 Page 7 may have tangentially related to that question, the Court did not consider that matter in crafting the Letter Opinion. Rather, it simply drew upon the procedures set forth in Duthie for a reasonableness review methodology an arrangement that the Court, with the benefit of a more comprehensive understanding of the Indemnification Agreement, concludes is partly incompatible with the provisions of that agreement.11 Moreover, a review of the transcript of the argument on the Summary Judgment Motion reveals no discussion as to what the proper division of should have been in the event the Court was inclined to allow a reasonableness review. For that reason, although the Court arguably ruled on that issue in the Letter Opinion, it was never squarely raised at any point during the Summary Judgment Motion and was not necessary for the Court to have addressed in the Letter Opinion. To the extent a compelling reason is necessary for the Court to revisit its earlier interlocutory ruling contained in the Letter Opinion, a sufficient basis to do so exists in this instance. 11 Although the Court could articulate reasons for The language used in the Indemnification Agreement makes clear that the intent of the parties was to provide substantial protection to Mr. Fuhlendorf and, thus, it is distinctly employeefriendly. Fuhlendorf v. Isilon Systems, Inc. C.A. No. 5772-VCN July 22, 2011 Page 8 concluding that the Letter Opinion is the law of the case and should not be disturbed,12 the better course of action here is to reassess that ruling because of the to give meaning and substance to the words that the parties 13 Moreover, the Court is is intentionally designed to provide directors and stockholders with flexible authority, permitting great discretion for private ordering and adaptation. 14 That preference for private ordering extends, at least to some extent, to indemnification and advancement rights under 8 Del. C. § 145.15 12 The primary reason counseling against revisiting the allocation of the is the significant delay by Mr. Fuhlendorf in raising this issue. He had ample opportunity to object to or to seek reconsideration under Court of Chancery Rule 59(f) pertaining to the Special Maste the Letter Opinion was issued on November 9, 2010. Nonetheless, Mr. Fuhlendorf made no such effort in this Court until he filed his notice of exception on March 21, 2011. By that time, the Special Master had already issued the final report on the reasonableness of the fees requested by Mr. Fuhlendorf under the Indemnification 13 See CorVel Enter. Comp, Inc. v. Schaffer, 2010 WL 2091212, at *4 (Del. Ch. May 19, 2010). sion to reconsider the Letter Opinion is predominantly guided by a concern for giving meaning to the Indemnification Agreement. 14 l, Inc. v. Black, 844 A.2d 1022, 1078 (Del. Ch. 2004) 15 See Perconti v. Thornton Oil Corp., 2002 WL 982419, at *9-*10 (Del. Ch. May 3, 2002). Fuhlendorf v. Isilon Systems, Inc. C.A. No. 5772-VCN July 22, 2011 Page 9 Thus, in accordance with the terms of the Indemnification Agreement, Isilon is solely responsible for any fees arising from a reasonableness review conducted by a special master. For that reason, the approximately $45,000 incurred through February 2011 are to be paid by Isilon,16 along with any future amounts arising from similar proceedings before the Special Master.17 IT IS SO ORDERED. Very truly yours, /s/ John W. Noble JWN/cap cc: Register in Chancery-K 16 fees incurred after that date) are negligible when compared to the approximately $5.53 million advancement obligation of Isilon. It had previously advanced roughly $4 million and, after his review, the Special Master recommended that the Court order the prompt payment by Isilon of roughly an additional $1.5 million, a recommendation to which no exception was taken. 17 Although this iss final report on fees set forth the procedures for the Special Master to follow in deciding how his fees were to be directives. Now, however, the Court is modifying its own earlier ruling, which was the basis upon which the Special Master had recommended his fee allocation.

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