Heartland Payment Systems, LLC v. InTeam Associates LLC , 171 A.3d 544 ( 2017 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
HEARTLAND PAYMENT §
SYSTEMS, LLC, § No. 582, 2016
§
Defendant/Counterclaim § Court Below – Court of Chancery
Plaintiff Below-Appellant, § of the State of Delaware
§
v. §
§ C.A. No. 11523
INTEAM ASSOCIATES, LLC and §
LAWRENCE GOODMAN, III, §
§
Plaintiff/Counterclaim §
Defendants Below-Appellees. §
______________________________ §
INTEAM ASSOCIATES, LLC, §
§
Plaintiff/Counterclaim §
Defendant Below-Appellee/ §
Cross-Appellant, §
§
v. §
§
HEARTLAND PAYMENT §
SYSTEMS, LLC, §
§
Defendant/Counterclaim §
Plaintiff Below-Appellant/ §
Cross-Appellee. §
Submitted: June 14, 2017
Decided: August 17, 2017
Before STRINE, Chief Justice; VALIHURA, and SEITZ, Justices.
Upon appeal from the Court of Chancery: AFFIRMED in part and REVERSED
in part and REMANDED.
Jeffrey L. Moyer, Esquire (argued), Travis S. Hunter, Esquire, and Nicole K. Pedi,
Esquire, Richards Layton & Finger, P.A., Wilmington, Delaware for
Appellant/Cross-Appellee Heartland Payments Systems, LLC.
Thad J. Bracegirdle, Esquire (argued), and Andrea S. Brooks, Esquire, Wilks,
Lukoff & Bracegirdle, LLC, Wilmington, Delaware for Appellees/Cross-Appellant
inTEAM Associates, LLC and Lawrence Goodman, III.
SEITZ, Justice:
In 2010, Congress enacted the Healthy, Hunger-Free Kids Act which made
major changes to the national school lunch program. The Act required the United
States Department of Agriculture (the “USDA”) to develop new regulations to take
effect in 2012 to address new nutritional guidelines. In 2011, Heartland Payment
Systems, Inc. (“Heartland”), a credit card processing company, wanted to expand its
school operations. To pursue this strategy, Heartland purchased some of the assets
of School Link Technologies, Inc. (“SL-Tech”). SL-Tech marketed software
products to schools to manage their foodservice operations.
Through the purchase of SL-Tech, Heartland acquired WebSMARTT, a
software program that allowed schools to monitor school meal nutrition through
point of sale, free and reduced meal eligibility tracking, menu planning, nutrient
analysis, and recordkeeping. Carved out of the transaction, however, was a
consulting division of SL-Tech called inTEAM and its software, Decision Support
Toolkit (“DST”), which was still in development at the time of the transaction.
inTEAM was designing DST for school districts as a complementary product to
WebSMARTT. It was intended to collect menu plan data from WebSMARTT and
similar applications and then use the data to model the effect of menu plans on
staffing, equipment, and other costs.
The parties executed three contracts involving Heartland, SL-Tech, and SL-
Tech’s CEO, Lawrence Goodman. The contracts contained non-compete, non-
solicitation, exclusivity, cross-marketing, and support obligations. Through the
carve-out of SL-Tech’s inTEAM business, the parties agreed that inTEAM could
continue with the “inTEAM Business as currently conducted” after closing.
With the transaction in the rear-view mirror, the parties quickly lost sight of
their post-closing contractual obligations. inTEAM developed a new software
program module, Menu Compliance Tool+, with overlapping capabilities with
WebSMARTT—specifically, nutrient analysis and menu planning. Goodman tried
to solicit one of Heartland’s customers. Heartland paired with one of inTEAM’s
biggest competitors to submit a bid to provide software to the Texas Department of
Agriculture.
The disputes eventually found their way to the Court of Chancery through
breach of contract claims and counterclaims. After a four-day trial, the Court of
Chancery found inTEAM did not breach any of its contractual obligations, but
Goodman and Heartland had breached certain of theirs. According to the court,
although WebSMARTT and the Menu Compliance Tool+ module both analyzed
nutrients, the USDA approved each of the software programs for nutrient analysis
under different standards. Thus, they did not compete with each other. The Court
of Chancery also found that the carve-out for the “inTEAM Business as currently
conducted” allowed inTEAM to develop software with menu planning
2
functionality—the same functionality also present in the WebSMARTT software
program.
Turning to Heartland, the Court of Chancery found Heartland breached the
non-compete and exclusivity provisions of the co-marketing agreement by working
with a known inTEAM competitor. The court decided that Heartland’s breach began
on March 17, 2014 and ran until September 8, 2015, and thus extended Heartland’s
non-compete restrictions for an additional eighteen months. For Goodman, the court
determined that Goodman breached a non-solicitation provision in the consulting
agreement by soliciting one of Heartland’s customers. As the court held, Goodman’s
breach ran from July 24, 2014 to December 15, 2014, and thus the court extended
Goodman’s non-solicitation period by an additional six months. The Court of
Chancery also ordered Goodman to pay Heartland damages equal to the salary he
was paid while he was in breach, totaling $50,003.01. The Court of Chancery did
not award inTEAM attorneys’ fees, finding that a cap on liability in the co-marketing
agreement precluded the fee award. Both parties appealed.
We reverse the Court of Chancery’s finding that Goodman and inTEAM did
not breach their non-compete obligations under the various agreements, but
otherwise affirm the court’s decision. Goodman was prohibited from providing any
competitive services or products or engaging in any business that SL-Tech
conducted as of the closing date. inTEAM had similar restrictions. At the time of
3
the transaction SL-Tech had a software product, WebSMARTT, that was part of SL-
Tech’s business as of the closing date that performed nutrient analysis and menu
planning. inTEAM did not. At closing, inTEAM’s business was data analytics and
modeling, not school lunch program data generation and menu planning for USDA
compliance purposes. The transaction agreements prohibited inTEAM from
developing a software product that competed head to head with WebSMARTT, a
product Heartland paid SL-Tech $17 million to acquire. By changing direction and
developing Menu Compliance Tool+ to perform nutrient analysis and menu
planning, Goodman and inTEAM competed directly with WebSMARTT and
breached the transaction agreements.
As for the remaining issues, the Court of Chancery properly found that
Heartland breached its contractual obligations by collaborating with an inTEAM
competitor, and Goodman breached by soliciting a customer of Heartland. The court
also did not abuse its discretion when it required an extension of the non-competes
and assessed damages against Goodman.
We therefore affirm in part and reverse in part the decision of the Court of
Chancery. We remand the case to the Court of Chancery to exercise its broad
discretion to craft a remedy sufficient to compensate Heartland for Goodman’s and
inTEAM’s breaches of the transaction agreements.
4
I.
A.
Since Congress passed the National School Lunch Act in 1946, the USDA has
regulated and provided federal subsidies to state school lunch programs. From the
mid-1940s into the 1990s, regulations focused on four meal components: meat,
vegetables/fruit, grains, and milk. In the mid-1990s, regulations shifted to aged-
based nutrient targets, which required schools to track extensive amounts of data to
obtain their subsidies. Software developers designed programs to assist school
districts in managing the data and submitting reimbursement claims to state
agencies, which are charged with distributing federal funds made available by the
USDA.
In 2010, Congress passed the Healthy, Hunger-Free Kids Act (“HHFKA” or
the “Act”), the first major change to the school lunch program in fifteen years. The
Act set minimum standards for school wellness policies, mandated minimum fruit,
vegetable, and whole grain servings, and set maximum sodium, sugar, and fat
content of meals. It also authorized the USDA to set new standards for the school
lunch program, and required the USDA to publish proposed meal pattern regulations
within eighteen months of its enactment.1
1
42 U.S.C. § 1753(b)(3)(A)(ii)(I).
5
The newly issued USDA regulations went back to food group-based menu
planning to replace nutrient-based menu planning. The new meal pattern
requirements were centered around five main food groups: meat/high protein foods;
whole grains; vegetables; fruit; and fat free/low-fat milk. Each food group has
specified subcategories and nutrient targets for calories, saturated fat, trans fat, and
sodium. The USDA first proposed the change on January 13, 2011. It became
effective July 1, 2012.
Although the new meal pattern requirements were mandatory, the USDA
offered schools certified to be in compliance with the new regulations an additional
six cents per meal to incentivize schools to implement the changes quickly.2 To
become certified, the school had to submit documentation to the governing state
authority demonstrating its compliance with the meal pattern requirements. The
state agency makes an initial certification determination, and then monitors each
school district’s ongoing compliance with the requirements through an
administrative review process that occurs every three years. This process is known
as “Six Cent Certification.”
2
42 U.S.C. §1753(b)(3)(C)(i); see also Cynthia Long, Child Nutrition Reauthorization 2010:
Questions and Answers Related to the Certification of Compliance with Meal Requirements for
the National School Lunch Program, U.S. DEP’T OF AGRIC., at 2-3 (Jan. 22, 2013) [hereinafter
USDA Memo], available at https://www.fns.usda.gov/sites/default/files/SP31-2012osr3.pdf.
6
Schools have three options to obtain Six Cent Certification. Under the first
option, schools submit one week of menus, a USDA menu worksheet, and a nutrient
analysis with calories and saturated fat for each menu type. Schools that choose this
option must use USDA-approved nutrient analysis software to compile the
information.3 According to the USDA, “[t]his option acknowledges that a large
number of [schools] already use nutrient analysis software to monitor the nutrient
levels in their meals.”4 Under the second option, schools submit one week of menus
and a USDA menu worksheet, but submit a simplified nutrient assessment instead
of the in-depth nutrient analysis.5 As the USDA has stated, “[t]his option recognizes
that not all [schools] use nutrient analysis software. A simplified nutrient assessment
is intended to be a proxy for the nutrient analysis.”6 Under the third option, a state
agency performs an on-site review to certify school compliance with the regulations.
B.
Goodman founded SL-Tech in 1985. SL-Tech provided software products to
assist schools in tracking their child nutrition programs to obtain federal subsidies.
3
7 C.F.R. § 210.10(i).
4
USDA Memo at 7.
5
A simplified nutrient assessment requires schools to track only calories, percent of calories from
saturated fat, and sodium. Estimates for calories and saturated fat of milk, fruits, and vegetables
are pre-programmed in the simplified nutrient assessment software. Schools must provide calories
and saturated fat information for all main dish items, side items with grains, meat, desserts, and
condiments. Directions for Simplified Nutrient Assessment for Lunch, U.S. DEP’T OF AGRIC., at 1-
2 (Sept. 2, 2014), available at https://www.fns.usda.gov/sites/default/files/cn/SP34-
2012assessment_directions.pdf.
6
Id.; see also App. to Opening Br. at 2426-27 (Griffin Trial Test.).
7
The software included both front-of-house and back-of-house operations. Front-of-
house operations means point of sale systems and application processing for free and
reduced price meals. Back-of-house operations means purchasing, inventory, and
menu planning.
Before the transaction, a division of SL-Tech, inTEAM, was a “15 year-old
management consulting company known historically for its hands-on workshops in
financial management for school nutrition programs.”7 SL-Tech purchased
inTEAM in 2004 to complement SL-Tech’s existing software products. Its
consulting services helped customers standardize their processes to collect and use
the data generated from school nutrition programs to improve their operations.8
SL-Tech had three software products relevant to this appeal: WebSMARTT,
mylunchmoney.com, and DST. WebSMARTT was SL-Tech’s “core product.”9
WebSMARTT was a fully integrated end-to-end foodservice management program
that provided point of sale, free and reduced meal application processing, ordering
and inventory, and menu planning and production.10 Menu planning is “the heart”
of WebSMARTT.11
7
App. to Opening Br. at 884 (inTEAM Associates, Inc. 2011 Business Plan).
8
Id.9
Id. at 38 (SL-Tech’s Business and Investment Plans Summary).
10
Id. at 51 (SL-Tech Feb. 18, 2009 Presentation to New York City Dep’t of Educ.).
11
Id. at 56.
8
mylunchmoney.com was an online service that allowed parents to provide
money for their children for cafeteria use, check their account balances, and to see
what they were purchasing. It was used by over 900 school districts in forty-two
states at the time of the transaction in 2011.
DST was cloud-based software first developed as a prototype in 2007 for use
as a modeling tool to collect and analyze the data from point of sale, back-of-house,
financial management, and payroll systems. DST software allowed schools to make
informed decisions about the operation of their school lunch programs.12 As
described in an internal document sent to Goodman in 2009:
The DST modeling component utilizes basic foodservice operating
principles, recognized by inTEAM consultants as fundamental to
achieving high performing school nutrition programs. DST uses a
“systems approach” to assess, develop and refine key foodservice
operating processes such as menu planning, work methods, equipment
selection, employee scheduling and staff training.
DST is not intended to replace the current [point of sale] or back of the
house transactional software. It simply uses data from the current
transactional systems to identify limitations in [the] current operating
process and allows the User to test the effect of making incremental
changes in one or more of these processes. The transactional data sets
used to drive the DST models and inTEAM consulting services will
vary depending on District characteristics, however the process will
remain consistent.
…
It is widely accepted in the industry that the menu is the driving force
affecting all other aspects of a quantity foodservice operation. Thus,
12
Id. at 884 (inTEAM 2011 Business Plan).
9
capturing the current school based menu plans is the first step in
initiating the “what if” modeling capabilities of DST.13
DST relied on sources like WebSMARTT to provide the menu plan data.14
SL-Tech planned to roll out DST in two phases. In Phase, 1 SL-Tech would
develop a program to analyze sales and meal count data. In Phase 2, DST would use
menu planning data to allow users to create operational models such as work
methods, equipment availability, and procurement.15
In 2009, SL-Tech engaged High5LA, LLC16 to develop and write the
functional specifications for DST Phase 2 (the “Functional Design Documents”).
13
Id. at 942.
14
Oral Arg. at 33:22-33:26; App to Opening Br. at 2844-45 (Prescott Trial Test.):
Q: How would customers use the DST products?
A: So they would take data from their source systems, like WebSMARTT,
upload that data into DST, and then we would create different analytics and
reporting on top of that data that the user could then use to make decisions
on their business.
Q: Okay. And how was the DST product supposed to function with the
WebSMARTT product that we talked about?
A: They are meant to work together by exporting the data from WebSMARTT
and then importing into DST.
Q: Okay. And at your time at SL-Tech, what ability, if any, did DST have to
generate transactional data that we discussed a few minutes ago?
A: It did not. You would use a source system, a tool like WebSMARTT, to
create that transactional data.
Q: Just to make sure I understand, when you say a “source system,” what do
you mean by that?
A: So in a data warehouse analytical-type tool, you wouldn’t be expected to
produce the data you are going to analyze. That would come from another
piece of software. For example, WebSMARTT.
15
App. to Opening Br. at 2057 (Goodman Trial Test.).
16
At the time of the transaction, High5LA was named Startech Global Corporation, but changed
its name after continually being confused with the science fiction media franchise “Star Trek.” Id.
at 2509 (Ditch Trial Test.).
10
According to the “overview” section of the Functional Design Documents, in DST
Phase 2, school systems that had installed DST Phase 1 would
[B]e able to leverage menu planning as a tool to project the impact on
staffing, equipment, and food/labor costs. They [would] also be able to
model in advance menu plans, work schedules and financials to
accurately predict the outcome under a variable set of assumptions.
inTEAM philosophy and best practices drive the design of Phase 2,
resulting in a product that allows school administrators to accurately
model future scenarios and compare/evaluate it against reality.17
C.
Heartland provided payment processing services to merchants throughout the
United States. In 2010, it entered the school services market through its School
Solutions division to provide nutrition and payment solutions to K-12 schools. At
the end of 2010, Heartland began considering opportunities to add to its School
Solutions division. Heartland wanted to become the leading K-12 point of sale
provider, and ultimately to offer online payments to all schools. To achieve its goal,
Heartland believed it “needed to provide the full [point of sale] solution to schools”
because schools “were not interested in buying . . . just the front-of-the-house
solution that provided the checkout at the end of the ordering line. [Schools] also
wanted to be able to have all of the back-of-the-house solutions integrated with the
front-of-the-house solution. And so in order for [Heartland] to be successful in this
17
Id. at 97 (Functional Design Documents).
11
market and selling credit card processing, it also required [Heartland] to enter the
food service market with a full solution.”18
Heartland approached SL-Tech about a potential acquisition. It did not want
to purchase SL-Tech’s subsidiary inTEAM because inTEAM was primarily a
consulting business, which Heartland did not view as key to its strategy of “acquiring
companies that provided the point-of-sale solutions to K through 12 schools.”19 As
a result, the parties separated SL-Tech’s inTEAM division—with its DST software
product in development—from the transaction. The parties eventually reached
agreement and documented the transaction through three agreements: (1) the Asset
Purchase Agreement; (2) the Co-Marketing Agreement; and (3) the Consulting
Agreement.
i. The Asset Purchase Agreement
Under the Asset Purchase Agreement (“APA”), Heartland acquired
substantially all of SL-Tech’s assets for $17 million plus earn-out payments on each
of the first three anniversaries of closing. Section 5(n) of the APA also included the
following non-compete:
Covenant Not to Compete. For a period of five (5) years from and after
the Closing Date, neither Seller nor the Major Shareholder will engage
directly or indirectly, on Seller’s or the Major Shareholder’s own behalf
or as a Principal or Representative of any Person, in providing any
18
Id. at 2653-54 (Lawler Trial Test.).
19
Id. at 2641.
12
Competitive Services or Products or any business that School-Link
conducts as of the Closing Date in any of the Restricted Territory
. . . .20
Under the APA, the “Seller” is SL-Tech, Goodman is the “Major Shareholder,” the
“Closing Date” is September 30, 2011, and the “Restricted Territory” is the United
States.21 “Competitive Services or Products,” “School-Link,” and “inTEAM
Business” are defined under the APA as follows:
“Competitive Services or Products” means a business that develops,
manufactures, sells and services and maintains computer software
and/or [point of sale] terminal hardware designed to facilitate (i)
accounting and (ii) management and reporting of transactional data
functions, of food services operations of K-12 schools (including point-
of-sale operations, free and reduced application processing, ordering
and inventory, and entry of meal and other payments by parents via the
Internet or kiosk); provided, however, that for purposes of clarity,
Competitive Services or Products shall not include the inTEAM
Business as currently conducted.22
“School-Link” means the entirety of Seller’s business, including the
business of Seller known as “School-Link,” but excluding the inTEAM
Business.”23
“inTEAM Business” means certain Excluded Assets consisting of
Seller’s consulting, elearning and DST segments of the business known
as “inTEAM” and including those products and services described in
Exhibit C to the Co-Marketing Agreement.24
20
Id. at 380.
21
Id. at 420.
22
Id. at 413 (italics in original).
23
Id. at 420.
24
Id. at 416.
13
ii. The Co-Marketing Agreement
The Co-Marketing Agreement (“CMA”) was a commission-based contract
that gave both Heartland and inTEAM the right to market, advertise, and promote
each other’s products.25 The CMA contained a five-year bilateral non-compete:
Except as otherwise provided herein, . . . (A) HPS shall not engage,
directly or indirectly, on its own behalf or as a principal or
representative of any person, in providing any services or products
competitive with the inTEAM Business, and HPS hereby grants to
inTEAM the exclusive right and license under any intellectual property
of HPS (other than trademarks) to conduct the inTEAM Business and
(B) inTEAM shall not engage, directly or indirectly, on its own behalf
or as a principal or representative of any person, in providing any
services or products competitive with the HPS Business, and inTEAM
hereby grants to HPS the exclusive right and license under any
intellectual property of inTEAM (other than trademarks) to conduct the
HPS Business.26
“HPS Business” is defined under the CMA as:
[T]he development, manufacture, or sale of computer software and/or
[point of sale] terminal hardware designed to facilitate (A) accounting
and (B) reporting of transactional data functions and management of []
food service operations of K-12 schools (including point-of-sale
operations, free and reduced application processing, ordering and
inventory, and entry of meal and other payments by parents via the
Internet or kiosk).27
“inTEAM Business” is defined as:
[C]ertain Excluded Assets consisting of inTEAM’s consulting,
eLearning and DST segments of the business known as “inTEAM” and
25
inTEAM assumed and was assigned all of SL-Tech’s rights under the CMA through an
Assignment and Assumption Agreement, dated October 31, 2011.
26
App. to Opening Br. at 317.
27
Id. at 303.
14
including those products and services described in Exhibit A28 and
those inTEAM products and services described in Exhibit C and
Exhibit D.29
Exhibit C states:
Functional Specifications
Functional specifications for DST Phase 1 and add-ons and DST
Phase 2 (future release); including unique state value added
functionality (attached)
Student Rewards functional specifications (attached)
Off Campus Merchants Functional specifications (attached)30
Attached to the CMA and incorporated by reference are the Functional Design
Documents for DST Phase 2. Two Functional Design Documents were introduced
and discussed at trial: “Milestone A – Menu Item” and “Milestone B – Menu
Planning.”31 The Milestone A Functional Design Document describes its purpose
as the following:
In order to support Operational and Financial Modeling, Milestone A
introduces four new information categories to DST – Staff, Equipment,
Work Method and Menu Item. This design specification is an anchor
document that catalogs the functional requirements for DST Phase 2 –
Milestone A – Menu Item.
28
Exhibit A references the following products and services: inTEAM Consulting Services,
inTEAM eLearning, DST Phase 1, and DST Phase 2. Id. at 328.
29
Id. at 303.
30
Id. at 330. Exhibit D states:
Interface and Mechanical Specifications
DST data interface and content mechanical specifications (attached)
Student Rewards data interface and content mechanical specifications (attached)
Off-Campus Merchants data interface and content mechanical specifications
(attached).
31
Id. at 93, 144.
15
It further states:
A Menu Item is a food item that is ultimately served to the student.
Milestone A defines the setup of these items, while Milestone B will
put collections of items onto menu plans for servicing building
programs and generate work schedules that will model how build staffs
and equipment will work to produce the items needed.32
The Functional Design Document for Milestone B describes its purpose as:
A central component to creating an Operational Model is the modeling
of menus. This design specification is an anchor document that
catalogs the functional requirements needed to create a subset of the
WebSMARTT Menu Planning hierarchy as part of DST Phase 2
Milestone B. This specification contains high level workflows, page
level design specifications, and page level interactions. This chapter
provides a brief overview of each, with rest of the document providing
a page level design specifications.33
iii. The Consulting Agreement
Goodman also executed a Consulting Agreement with Heartland under which
Goodman agreed to act as “a strategic advisor and liaison with key industry
stakeholders advancing Heartland’s objectives at meetings and conferences,” among
other duties.34 Goodman was to be paid $16,666.67 per month over the course of
three years, totaling $600,000. Under § 3 of the Consulting Agreement, “[i]n the
event the Consultant breaches Sections 7, 8, 9, 10 or 11 of this Agreement, Heartland
shall have no obligation to pay the Consultant any compensation set forth herein.”35
32
Id. at 99.
33
Id. at 149.
34
Id. at 290.
35
Id. at 291.
16
Section 11(a) of the Consulting Agreement includes another five year non-compete,
and § 11(b) includes a non-solicitation provision.
D.
i. inTEAM Expands the Functionality of Its Software Products After Closing
At the time of the transaction, inTEAM had finished developing and was
marketing DST Phase 1. After the transaction closed, inTEAM continued to develop
DST Phase 2. inTEAM decided to incorporate the USDA’s simplified nutrient
assessment components into the existing DST functions to create the “Menu
Compliance Tool+” module.36 Unlike the modeling and forecasting functions
contemplated by the Functional Design Documents, the module assisted customers
with ensuring compliance with the USDA’s meal-planning regulations that had been
finalized in 2012.37 The module can analyze nutrients such as calories, saturated fat,
sodium, and carbohydrates—the same analysis done by WebSMARTT, but on a
more limited basis.38 It was the first USDA-approved menu planning tool for Six
Cent Certification. It is not currently certified by the USDA as “nutrient analysis
36
inTEAM Assocs., LLC v. Heartland Payment Sys., Inc., 2016 WL 5660282, at *11 (Del. Ch.
Sept. 30, 2016).
37
App. to Opening Br. at 2414 (Griffin Trial Test.).
38
Id. at 2460-61; id. at 1474 (inTEAM Website Products and Services Page).
17
software.” In 2014, inTEAM also added administrative review software to its
product line.39
inTEAM’s employees questioned inTEAM’s decision to create the new
module. inTEAM’s former Chief Operation Officer, Erik Ramp, wrote to
inTEAM’s Vice President of Operations, Geri Hughes, “you know [we’re] basically
developing a competing product with [Heartland] now. Chip doesn’t think so . . .
but I don’t think an outsider will see it that way.”40
ii. inTEAM Employees E-mail Potential Customers
On July 24, 2014, Goodman sent an e-mail to Hughes with the subject line
“St. Paul Window of Opportunity.” Goodman wrote in the e-mail “Did Mary Jo
recap the opportunity to you?” to which Hughes replied, “Yes. I will discuss with
you when we meet this afternoon. As you know, Jean’s replacement (Jim) [has] not
been as interested in help and this is her new approach.”41 Below Hughes’ reply is
39
inTEAM’s Administrative Review Module is designed to help schools prepare for formal state
agency administrative reviews. The software helps compile and analyze data, and present the data
in an appropriate format to comply with regulations. It also includes “mock reviews” to help
districts assess their readiness for the formal administrative review. See Dramatically Improve
Your Administrative Review Results with a Mock Review from inTEAM, INTEAM ASSOCS., at 1
(2014), available at http://inteam.digitaldogs.com/BI/wp-content/uploads/2014/03/inTEAM-
Admin-Reviews.pdf.
40
App. to Opening Br. at 915. Goodman’s nickname is Chip.
41
inTEAM Assocs., 2016 WL 5660282, at *11 (Del. Ch. Sept. 30, 2016).
18
the tagline: “Note to Jim Hemmen regarding our menu planning tool/production
record alternative to WebSMARTT.”42
On December 15, 2014, Mary Jo Tuckwell43 sent an e-mail to an administrator
at St. Paul Public Schools which said, in pertinent part:
Based on the interactions I had with Jim at ANC in July I believe the
department was still struggling with automating production records. In
August there was discussion of me providing a demo to key central
office staff of the inTEAM menu planning and production record
modules as an alternative to the WebSMARTT BOH system. That
offer remains open if your team is interested. I know the challenges of
bringing establishing and maintaining a traditional BOH system. Yet,
I can tell you that the quality of operational communication is enhanced
tremendously by automated production records to accurately forecast
and provide feedback to the menu planner on usage combinations. So
whether you stay with WebSMARTT or are interested in an alternative,
I would urge the team to prioritize this activity to achieve financial
success.44
Tuckwell forwarded the e-mail to Hughes. Hughes forwarded the e-mail to
Goodman and Michael Sawicky45 and wrote “FYI-- we have confirmed that Jim is
leaving St Paul and he has been stopping our efforts so that is good. However, Jean
is going to bring in a former St Paul director at the moment. I give MJ full credit for
continuing to nurture this key relationship with Jean and for continuing to push for
them to use our tools.”46
42
Id.43
Tuckwell is inTEAM’s Technical Director for Consulting Services.
44
App. to Opening Br. at 970.
45
Sawicky is the Chief Technologist and Business Intelligence Architect at inTEAM.
46
App. to Opening Br. at 970.
19
iii. Heartland Collaborates with Colyar
On May 12, 2015, the Texas Department of Agriculture (“TDA”) issued a
request for proposals titled, “REQUEST FOR OFFERS TO PROVIDE Menu
Analysis & Planning System (MAPS) Software Solutions,” asking vendors to solicit
offers to provide web-based software to support the USDA’s new meal pattern
requirements.47 On May 27, 2015, inTEAM contacted Heartland regarding a
possible joint proposal, which Heartland declined. On June 19, 2015, Heartland
submitted a joint bid with Colyar Technology Solutions, Inc.—an inTEAM
competitor since 2014. inTEAM submitted a bid on the same day. In its proposal,
inTEAM stated that its new software would be able to meet all of the TDA’s
requirements, including point of sale, nutrient analysis, and menu planning. Neither
the inTEAM nor the Heartland/Colyar bids were selected by the TDA.
iv. inTEAM Launches CN Central
In July 2015, Goodman presented inTEAM’s “Big Reveal” of its new
software, CN Central. CN Central combined all of inTEAM’s modules under one
system, including Menu Compliance Tool+, to create “a single destination that
includes all of inTEAM’s technology tools including: Menu Compliance, Menu
Costing, Production Records, Administrative Reviews . . . Data Analytics,
47
Available at, http://www.bidnet.com/closed-government-contracts/menu-analysis---planning-
system--maps--software-solutions?itemId=353530787.
20
eLearning and Menu Sharing.”48 This brought together the ability to analyze
nutrients, menu plan, menu search, menu share, and generate production records.49
E.
On July 20, 2015, after learning of Heartland’s collaboration with Colyar,
inTEAM notified Heartland in writing that it believed Heartland was in breach of
the CMA. On September 21, 2015, inTEAM sued Heartland in the Court of
Chancery alleging breach of contract claims. Heartland responded by asserting
breach of contract counterclaims against inTEAM and Goodman.
After a four-day trial, on September 30, 2016, the Court of Chancery issued
its decision finding that inTEAM did not breach any of its contractual obligations,
but Goodman and Heartland breached some of their post-closing obligations. The
Court of Chancery found that because inTEAM’s Menu Compliance Tool+ could
only conduct a simplified nutrient assessment, and WebSMARTT could run a full
nutrient analysis as defined by USDA guidelines, inTEAM did not violate the non-
compete provisions. The Court of Chancery also found inTEAM’s business
activities did not breach the non-compete obligations under the APA or the CMA.
As the court held, even though the products were directly competitive, the Functional
Design Documents—which defined the carve-out of inTEAM’s business from the
48
App. to Opening Br. at 1473 (inTEAM Website Products and Services Page).
49
Id. at 1473-75.
21
transaction—described a product with menu planning functionality that would allow
users to create, edit, copy, and save menu items, menu categories, and menus to be
placed in menu cycles. Thus, the Court of Chancery determined that the CMA
unambiguously included menu planning in the definition of the inTEAM business
carved out of the transaction.
Next, the Court of Chancery found that Heartland breached its non-compete
and exclusivity obligations under the CMA when it collaborated with Colyar, a
direct inTEAM competitor, to submit a bid to the TDA. The Court of Chancery
found that Heartland did not breach any obligations under the other agreements.
Finally, the Court of Chancery found that Goodman breached his non-solicitation
obligations under the Consulting Agreement by encouraging St. Paul Public Schools
to terminate its relationship with Heartland.
According to the Court of Chancery, Heartland’s breach began on March 17,
2014, when its relationship with Colyar first began, and ran until September 8, 2015,
when Heartland announced that the TDA had not selected its proposal. The court
thus extended the non-compete for eighteen months, beginning September 30, 2016,
and ending March 21, 2018. The Court of Chancery did not award inTEAM
attorneys’ fees, finding that there was a cap on liability in the CMA. As the court
held, because inTEAM had not paid Heartland any fees under the CMA and did not
argue that an exception applied, inTEAM was not entitled to any costs or fees.
22
For Goodman, the court determined that his breach began on July 24, 2014,
when Goodman asked Hughes to work on making St. Paul School District a
customer, and ran to December 15, 2014 when Tuckwell’s e-mail chain with a St.
Paul Public School official was forwarded to Goodman, among other inTEAM
employees. The court ordered a six-month extension of the non-solicitation period
to begin on September 30, 2016 and end March 22, 2017. The Court of Chancery
also ordered Goodman to pay Heartland damages equal to the salary he was paid
during the three months he was in breach of the Consulting Agreement, totaling
$50,003.01.50
This appeal and cross-appeal followed. Heartland claims the Court of
Chancery erred by: (1) finding that inTEAM and Goodman did not breach their
respective non-compete provisions; (2) holding that Heartland breached the non-
compete provision under the CMA and ordering an eighteen-month injunction; and
(3) requiring Goodman to return only $50,003.01 of his $600,000 salary. inTEAM
argues the Court of Chancery erred by not awarding it attorneys’ fees. We defer to
the Court of Chancery’s factual findings supported by the record, but review the
Court of Chancery’s contract interpretation de novo.51
50
Under the Consulting Agreement, Goodman was to be paid a salary for three years (through
September 2014), however, his non-solicitation obligations were extended for an extra two years
(five in total). Thus, he was only paid a salary for three months of the six he was in breach.
51
Honeywell Int’l Inc. v. Air Prods. & Chems., Inc., 872 A.2d 944, 950 (Del. 2005).
23
II.
Before stepping through the specific contractual provisions it is helpful to look
at the transaction from a distance, because “[i]n giving sensible life to a real-world
contract, courts must read the specific provisions of the contract in light of the entire
contract.”52 Heartland paid SL-Tech and Goodman $17 million for a substantial part
of the SL-Tech business so Heartland could expand its presence in the school market.
By acquiring SL-Tech, Heartland could offer schools not just a financial product,
but, through WebSMARTT, a front to back foodservice solution, which included
nutrient analysis and menu planning. WebSMARTT’s nutrient analysis and menu
planning features were at the heart of SL-Tech’s business because they allowed
schools to demonstrate compliance with USDA guidelines. To protect Heartland
from post-closing competition by Goodman and inTEAM in the same business
space, the parties agreed to non-compete and non-solicitation provisions.
Heartland was not interested in inTEAM, SL-Tech’s consulting business, or
its DST software. SL-Tech marketed DST software as complementary to
WebSMARTT. DST Phase 2, which was still in development, would use the menu
planning and nutrient analysis data from WebSMARTT and similar programs to
52
Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, __ A.3d __, 2017 WL 2774563,
at *1 (Del. June 27, 2017).
24
perform data analytics and forecasting. The parties carved out the inTEAM business
“as currently conducted,” which included the DST software, from the transaction.
Because the WebSMARTT and inTEAM businesses were complementary
instead of competitive, the parties agreed to a co-marketing agreement, which
allowed each of them to benefit from selling the other party’s services and products.
Except for the permitted cross-marketing activities, inTEAM protected its consulting
business carve-out and DST software by imposing post-closing non-competition and
non-solicitation obligations on Heartland. Because DST had not been fully
developed by the time of closing, the parties described its intended uses by referring
to technical documents. Heartland also protected its post-closing business with non-
compete obligations.
inTEAM’s arguments on appeal in favor of being able to compete with
Heartland by providing a software product that performs nutrient analysis and menu
planning are in direct conflict with the spirit of the overall transaction. As Heartland
points out, it never would have paid SL-Tech and Goodman $17 million for a
business that inTEAM could compete with directly right after closing. What’s
worse, according to Heartland, is the CMA. If the Court accepts inTEAM’s
interpretation of the transaction agreements, Heartland would have agreed to cross-
market a software program that competes directly with its WebSMARTT product.
Like Goodman and inTEAM, Heartland has also tried to rewrite its non-competition
25
obligations following closing. With these tensions in mind, we turn to the
transaction agreements to decide whether the arguments developed during litigation
are supported by the specific language of the transaction agreements.
III.
A.
inTEAM’s Menu Compliance Tool+, later made a part of CN Central,53
allows school districts to analyze nutrients in school lunch menus, which they then
used to demonstrate USDA regulation compliance and obtain Six Cent Certification.
To decide whether Menu Compliance Tool+’s nutrient analysis functionality
violates the transaction agreement non-competes, two main questions must be
answered. First, did the parties carve out nutrient analysis from the transaction as a
business currently conducted by inTEAM that could continue after closing? And, if
not, did the transaction agreements’ non-competes prohibit Goodman and inTEAM
from offering this functionality after closing?54 The parties agree that nutrient
53
As we understand the record, all of inTEAM’s software modules, including Menu Compliance
Tool+, were combined into one product named CN Central. App. to Opening Br. at 1473
(inTEAM Website Products and Services Page). For purposes of this opinion, we treat CN Central
the same as Menu Compliance Tool+.
54
For the purposes of this Opinion, we treat Goodman and inTEAM the same. Because Goodman
is the “Major Shareholder” and “Consultant” under the transaction agreements, and is the CEO of
inTEAM, inTEAM’s actions are imputed to Goodman. See App. to Opening Br. at 317 (CMA §
9.1.1) (“inTEAM shall not engage, directly or indirectly, on its own behalf or as a principal or
representative of any person . . . .”); id. at 380 (APA § 5(n)) (“[N]either the Seller nor the Major
Shareholder will engage directly or indirectly, on Seller’s or the Major Shareholder’s own behalf
or as a Principal or Representative of any Person . . . .”); id. at 293 (Consulting Agreement § 11(a))
26
analysis software was not part of the business carved out for inTEAM after closing.55
We therefore look to the non-compete obligations of the transaction agreements to
decide whether a violation occurred.
According to the APA non-compete, Goodman could not compete with an
SL-Tech business that SL-Tech performed at the time of closing. The parties agree
that the software program Heartland purchased from SL-Tech, WebSMARTT,
performed nutrient analysis as of closing. Further, the parties also agree that
inTEAM’s Menu Compliance Tool+ performs a form of nutrient analysis, which
would normally end the dispute in Heartland’s favor. Goodman argues, however,
and the Court of Chancery found, that each of the software programs perform a
different form of nutrient analysis as defined by the USDA, and thus do not compete
with each other.
As explained earlier, the USDA accepted three methods for demonstrating
compliance with its new regulations—legacy software designed to track nutrients in
school meals, like WebSMARTT; a simplified nutrient assessment, like Menu
Compliance Tool+; or a manual audit performed by a reviewing state agency.
(“[T]he Consultant shall not directly or indirectly, on behalf of himself or on behalf of any other
person, firm or business entity . . . .”).
55
Id. at 2048 (Goodman Trial Test.) (“Again, built into WebSMARTT was the capability to do
nutrient standard menu planning and was the capability to develop a nutrient analysis. So those
were the guiding design principles at the time that WebSMARTT was built and at the time of the
Heartland closing.”); id. at 2149 (“One of the components we didn’t provide through DST was
nutrient analysis.”).
27
Because inTEAM’s Menu Compliance Tool+ used an abbreviated form of nutrient
analysis when compared to WebSMARTT, the Court of Chancery determined that
inTEAM did not violate the non-compete provisions.
The Court of Chancery erred when it strayed from the language of the non-
competes into the USDA regulatory certifications. The different paths to Six Cent
Certification approved by the USDA do not displace the restrictions of the
transaction agreements. Under the APA, Goodman could not engage in a business
SL-Tech conducted at closing. At closing, SL-Tech marketed WebSMARTT to
school districts to enable them to demonstrate compliance with the USDA
guidelines. Nutrient analysis was part of the functionality required by the USDA,
which was part of the WebSMARTT software platform. Although Menu
Compliance Tool+ used a slimmed down version of nutrient analysis,56 it
nonetheless used nutrient analysis to accomplish the same result—demonstrating
compliance with the USDA guidelines.
As the USDA recognized, simplified nutrient assessment “is intended to be a
proxy for the nutrient analysis.”57 In our view, any software program that performed
56
Menu Compliance Tool+ track only calories, percent of calories from saturated fat, and sodium.
See Answering Br. at 40-41. WebSMARTT can analyze thirteen different nutrients including
calories, percent of calories from saturated fat, and sodium. App. to Opening Br. at 2402-03. See
also note 5.
57
Directions for Simplified Nutrient Assessment for Lunch, U.S. Dep’t of Agric., at 1-2 (Sept. 2,
2014), available at https://www.fns.usda.gov/sites/default/files/cn/SP34-
2012assessment_directions.pdf.
28
nutrient analysis, whether partially or fully, to demonstrate compliance with USDA
regulations, competed directly with WebSMARTT, a product purchased from SL-
Tech at closing.58 Thus, we find that Goodman breached his non-compete
obligations by offering Menu Compliance Tool+ to perform any type of nutrient
analysis to assist school districts in complying with the USDA guidelines.
Further, inTEAM breached the CMA, and Goodman breached the Consulting
Agreement, by offering a product competitive with WebSMARTT. Under both
agreements, neither Goodman nor inTEAM could offer Competitive Services or
Products to the SL-Tech business Heartland purchased at closing. A Competitive
Product is defined as “the development, manufacture, or sale of computer software
58
Goodman admitted Menu Compliance Tool+ and its nutrient analysis capabilities were not
included in the Functional Design Documents:
Goodman Dep. 263:10-264:20:
Counsel: Is it in the function design documents that are attached to the
CMA?
Goodman: Do you have a magic wand? Can you adjust software to
regulations that haven’t yet been written?
Counsel: I’ll tell you what, why don’t I ask the questions. Can you do
that?
Goodman: We anticipated what would be required and moved the
design very close to what we expected to be the final result
as reflected in Exhibits C and D of the CMA dated
September 30, 2011. And there were written plans and
intentions to do so in the business plan published for
inTEAM in 2010.
Counsel: Okay. But it’s not in the function design documents.
...
Goodman: I’m not a magician is the way I will answer that question.
Counsel: How about answering the question: Is it in the function
design documents to the CMA?
Goodman: Because I don’t have ESP, no.
29
and/or POS terminal hardware designed to facilitate (A) accounting and (B)
reporting of transactional data functions and management of [] foodservice
operations of K-12 schools . . . .”59 At trial, Tyson Prescott, the former software
development manager at SL-Tech, explained that “transactional data functions” is
an industry term of art that includes the ability to analyze nutrients, among other
functions.60 inTEAM does not dispute Prescott’s definition of transactional data
functions, except to say that none of the relevant contracts specifically refer to
nutrient analysis as a transactional data function.61 We therefore find that Goodman
breached the Consulting Agreement, and inTEAM breached the CMA, by using
Menu Compliance Tool+ to perform nutrient analysis to demonstrate compliance
with the USDA regulations for Six Cent Certification.
B.
Turning to menu planning, the parties agree that, without the carve-out for
inTEAM’s DST software, the non-compete provisions of the transaction agreements
prohibit Goodman and inTEAM from providing a software product that competes
with the menu planning functionality of the WebSMARTT software. The scope of
the carve-out for inTEAM’s DST software program is set forth in the Functional
59
App. to Opening Br. at 303.
60
Id. at 2836-38 (Prescott Trial Test.). Prescott is now the senior manager of software
development at Heartland. Id. at 2816.
61
Answering Br. at 39.
30
Design Documents. Menu planning is referred to in the Functional Design
Documents. Thus, the dispute boils down to whether the references to menu
planning in the Functional Design Documents were intended to cover the menu
planning functionality in Menu Compliance Tool+, such that it could directly
compete with Heartland’s WebSMARTT software.
The Functional Design Documents for Phase 2 “Milestone B – Menu
Planning,” use the words “menu item,” “menu category,” “menu template,” and
“menu cycle.” The menu planning functionality allowed the user to create, copy,
and save menu items, menu categories, and place menus into menu cycles. These
references led the Court of Chancery to conclude that the DST software was intended
to perform the same type of menu planning as the WebSMARTT software. The
court did not explore further what menu planning actually meant as part of the DST
software program.
To discern the meaning of menu planning within the DST software program,
the Court of Chancery should have examined the use of the term “in the context of
the contract language and circumstances, insofar as the parties themselves would
have agreed ex ante.”62 When menu planning is understood as the term is actually
used in the Functional Design Documents, we conclude that Menu Compliance
62
Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 740 (Del. 2006).
31
Tool+ went far beyond what was intended by the Functional Design Documents, and
thus impermissibly competes with the WebSMARTT software program.
First, as a basis for comparison, it is useful to understand how WebSMARTT
and Menu Compliance Tool+ perform menu planning. In WebSMARTT, a school
district inputs recipes and instructions on how to make a dish. As the school district
edits the ingredient list, it can immediately see how the cost and nutrient composition
of the dish changed. School menu planners can then put menu items together to
create menu cycles, and can track how many items are sold versus what was
originally projected:
63
63
App. to Opening Br. at 59.
32
The school district can also call up a screen to assess whether the nutritional value
of the meals meets the USDA standards:
64
inTEAM’s Menu Compliance Tool+ performs many of the same functions,
which explains the use of the word “compliance” in its description. The user “enters
recipes, menus, documentation and costing from a shared database. As this
information is entered[,] compliance is checked in real time to provide immediate,
ongoing feedback to the planner.”65 It “allow[s] for a quick and easy search on
ingredients, recipes, and menus,” and “provide[s] real-time nutrient analysis within
64
Id. at 60.
65
Id. at 1117.
33
[the] menu planning writing tool as ingredients are being added to recipes.”66 The
module can also “automatically calculate and display nutrient information for
recipes based on ingredients listed.”67
Completed menu plans appear as follows:
68
When the user opens a menu, the software automatically populates nutrient
statistics for that menu:
66
Id. at 1126-27.
67
Id. at 1129.
68
Id. at 1795.
34
69
Having established that WebSMARTT and Menu Compliance Tool+ perform
many of the same menu planning functions, we turn to the Functional Design
Documents for the DST software to see whether the parties agreed to this type of
direct competition after closing. DST Phase 1, which was already being marketed
by inTEAM at closing, provided “data warehousing and analysis tool[s] and related
professional, maintenance and support services.”70 DST Phase 2 would build on
Phase 1 by adding “modeling and pro-forma forecasting tools and related
professional maintenance and support services.”71
69
Id. at 1797.
70
Id. at 488 (CMA Recitals).
71
Id.
35
The focus of DST Phase 2 as a modeling and forecasting tool is confirmed by
another description of DST’s future development:
[DST] Phase 2 extends the work that was done in Phase 1. Whereas
Phase 1 focuses on historical transactions, Phase 2 looks forward to
future periods.
With Phase 2, school systems that installed DST will be able to leverage
menu planning as a tool to project the impact on staffing, equipment,
and food/labor costs. They will also be able to model in advance menu
plans, work schedules and financials to accurately predict the outcome
under a variable set of assumptions. inTEAM philosophy and best
practices drive the design of Phase 2, resulting in a product that allows
school administrators to accurately model future scenarios and
compare/evaluate it against reality.72
A sensible reading of the foregoing DST software description would lead one
to conclude that DST Phase 2 was intended as an analytics and modeling tool, not a
functional tool like WebSMARTT that generates menus and monitors USDA
compliance. In other words, menu planning within the DST software was intended
to capture current menu plans from programs like WebSMARTT to use as a building
block to analyze and model the data. In this way, the products were complementary
to each other, not competitive.
The milestones referred to in the Functional Design Documents also confirm
this understanding. Milestone A states that “[a]t the inTEAM level, all such screens
will fall under a new [Modeling] tab.”73 Milestone B provides that “[i]n Milestone
72
Id. at 148 (emphasis added).
73
Id. (brackets in original).
36
B, the screens required for DAs74 to model real world or hypothetical scenarios in
operations will be built. DAs will be able to create Menu Cycles and combine them
with Staff and Equipment to create Operational Models that produce work schedules
and food/labor costs.”75
Our interpretation of the Functional Design Documents—that DST Phase 2
was aimed at analytics and modeling, not first level menu planning and USDA
compliance—fits well with the overall scheme of the transaction agreements.76 It is
unreasonable to believe that Heartland would have agreed to let inTEAM market a
competitive software program to WebSMARTT, a software program it paid $17
million to acquire. Further, Heartland would never have agreed under the CMA to
market a competitive software program to its school district customers.
The references to menu planning in the Functional Design Documents are also
better understood by reviewing the user guide inTEAM created during development
of the DST software.77 The menu plan module contains six drop down tabs: Setup,
Menu Plan, Staffing Plan, Financial Model, Input Actual Data, and KPI/s
74
“DAs” means District Administrators.
75
App. to Opening Br. at 148 (Functional Design Documents).
76
See GRT, Inc. v. Marathon GTF Tech., Ltd., 2011 WL 2682898, at *10 (Del. Ch. July 11, 2011)
(Purchase Agreement terms interpreted according to “the commercial realities and business
context facing the parties at the time the Purchase Agreement was negotiated and consummated.”).
77
The draft user guide is from September 2007, but inTEAM has relied on the guide to describe
“DST’s menu planning and menu modeling functions” and DST’s “menu creation, editing and
export functions.” Answering Br. at 18.
37
Financial.78 Under the “Menu Plan” tab, there are five options: Work Methods &
Productivity; Items; Menu Plan Wizard; Update, Delete Menu plans; and Menu Plan
Reports.79
80
The “Items” tab under “Menu Plan” refers to menu items. There, the name of the
menu item, its code, cost, and price are listed, along with whether the item will need
to prepared on-site, and if so by what method:81
78
App. to Answering Br. at 1012.
79
Id. at 991.
80
Id.81
Id.38
82
Under “Menu Plan Wizard,” the user can upload menu item data, menu plan data, or
proceed manually. Data can be uploaded from menu planning software, like
WebSMARTT:
83
82
Id.83
Id. at 994.
39
After the data is entered, DST generates reports. The “Menu Plan Report”
shows the quantity of menu items that will theoretically be sold during breakfast,
lunch, and a la carte.84 Unlike the WebSMARTT platform, the Menu Plan Report
generated by DST software does not contain recipes, ingredients, directions on how
to make the meal, nutrient values, or facilitate USDA compliance:
85
After the menu planning information is imported into the DST software, DST
would generate “operational models,” like the reports set forth below:86
84
Id. at 1003.
85
Id. at 1005.
86
“To create an Operational Model, the DA user would first create Menu Cycles such as
[Elementary School Breakfast] to [2 Week Cycles High Schools] and then apply them to a time
period in order to analyze food and labor costs and efficiencies.” App. to Opening Br. at 150
(Functional Design Documents); id. at 272 (inTEAM Sept. 12, 2011 Presentation to Office of
Hawaii Child Nutrition Programs—ART Project) (DST is an “[a]nalytics engine built over a data
warehouse with” the ability to “[l]everage[] disparate systems that are already collecting required
data.” It also has “[r]obust data mining and reporting capabilities” with the ability to “‘slice and
40
87
As the foregoing screenshots demonstrate, DST’s primary function was not to
generate a first level menu plan similar to a plan generated with the WebSMARTT
software. Instead, DST software was intended to capture menu planning data from
other sources to analyze and model the data.
inTEAM’s internal documents confirm the analytical focus of the DST
software. In an internal document regarding the implementation of DST, DST was
described as a different platform than WebSMARTT:
DST is not intended to replace the current [point of sale] or back of the
house transactional software. It simply uses data from the current
transactional systems to identify limitations in [the] current operating
dice’ data in thousands of ways,” “[b]enchmark[] to identify outliers,” and “[i]dentify areas where
corrective action should be taken.”).
87
Id. at 280.
41
process and allows the User to test the effect of making incremental
changes in one or more of these processes.
...
It is widely accepted in the industry that the menu is the driving force
affecting all other aspects of a quantity foodservice operation.
Thus, capturing the current school based menu plan[] is the first step
in initiating the “what if” modeling capabilities of DST. Again, this
process will occur with differing levels of inTEAM consultant
involvement.88
The document further explains that:
Within the “modeling environment” of DST, the District User can
develop new menus or make menu item changes and immediately
observe the impact on other aspects of the foodservice operation.
Changes to item and menu records will be reflected in Financial
Models. Here are a few of the questions that can be answered in the
modeling environment: What happens when raw food costs or labor
rates increase? What is the impact of shifting production to a central
kitchen? Does staff have enough time to handle the new menu item
preparation tasks? Do all the kitchens have the equipment needed to
produce the menu item? Do all kitchens have staff with the necessary
skills to produce the new menu? Working in the simulated environment
of DST, the User can find out answers to these questions prior to rolling
out the menu in “real life.”
…
The DST modeling component allows an inTEAM coach and the
district foodservice director to examine existing systems, propose
incremental changes for improvement and simulate the changes in a
“virtual” environment before rolling out the plans in real life.
Implementing the modeling portion of DST can begin with an
inTEAM coach demonstrating to a director and/or manager on
88
Id. at 942 (inTEAM Internal Document) (emphasis in original).
42
how to systematically evaluate options to improve program
performance.89
inTEAM created an entirely different product from that envisioned by DST,
knowing that it was “invading WebSMARTT territory.”90 The inTEAM carve-out
for DST anticipated that DST would use first level menu plan data from other
sources, such as WebSMARTT, to create models that would project how staffing,
equipment, and other costs would be affected based on changes to the menu. It did
not contemplate the act of first level menu planning itself and its use to establish
compliance with USDA regulations. Because the Menu Compliance Tool+ in CN
Central goes far beyond what is carved out for the DST software in the agreements,
Goodman and inTEAM breached the non-competes in the transaction agreements.
89
Id. at 945-46, 950 (emphasis in original); see also id. at 884 (DST is “designed to supplement
inTEAM offerings by collecting data from point of sale, back of the house, financial management,
and payroll systems to help districts analyze data from disparate systems.”); id. at 943 (emphasis
in original):
Select the Import Defaults from CSV button to import a list of food items and
corresponding descriptions from a pre-existing district food item spreadsheet.
Ideally the item list would be obtained by exporting data from the foodservice
program’s current [point of sale] system or captured from cycle menu plans
entered in an Excel format. Note: For DST purposes the menu items entered
are the generic descriptions of foods on the menu such as cheeseburger, cheese
pizza, . . . etc. Since DST does not evaluate specific recipes nor does it perform an
independent nutritional analysis, the exact manufacturer or composition of the item
is not needed.
90
Id. at 966 (Nov. 11, 2012 E-mail from Griffin) (“But then we can’t be straight up and say menu
planning because that would be invading WebSMARTT territory!”); id. at 2462-64 (Griffin Trial
Test.) (admitting menu planning capability was added in 2012).
43
IV.
Next, Heartland argues that the Court of Chancery erred by finding it breached
the non-compete in the CMA when it collaborated with Colyar. Heartland also
challenges the length of the injunction the court ordered to remedy the breach.
A.
The Court of Chancery found that Heartland indirectly breached its non-
compete and exclusivity obligations under the CMA when it “collaborated with
Colyar, a direct competitor of inTEAM, to create an interface between Heartland’s
Mosaic Menu Planning product and Colyar’s administrative review software for the
express purposes of ‘provid[ing] state auditors a consistent view of school district
menu data so that they can perform audits in a more efficient manner’ and offering
‘access to school district menu data as needed in performing an audit and providing
recommendations.’”91 According to the court, such action fell within the scope of
providing “unique state value added functionality.”92
Under the CMA, Heartland cannot “engage, directly or indirectly . . . in
providing services or products competitive with the inTEAM Business.”93 Within
the definition of the inTEAM Business is “unique state value added functionality.”94
91
inTEAM Assocs., 2016 WL 5660282, at *17 (internal citation omitted).
92
Id. at *17-18.
93
App. to Opening Br. at 317.
94
Id. at 330.
44
The Court of Chancery found that “unique state value added functionality” included
“the ability to build products that assist state agencies in conducting their
administrative review process.”95
On appeal, Heartland argues that the Court of Chancery impermissibly relied
on trial testimony to define “unique state value added functionality.” According to
Heartland, it presented contrary testimony showing “that administrative review
software was not contemplated in the [CMA].”96
But, it was for the Court of Chancery as the “trier of fact to assess the
credibility of the conflicting testimony and the weight it was to be given.”97 The
court credited Goodman’s testimony that he understood the phrase “unique state
value added functionality” to mean the ability to “‘allow [] [state reviewers or
auditors] immediate access to records that they needed to review electronically that
were created and generated generally at the school district level,’ causing ‘a
breakthrough in the way audits were conducted and the value that was added for
state agencies.’”98 The court also cited Goodman’s testimony that he believed the
phrase meant “during an administrative review related to menu plans, in particular,
95
inTEAM Assocs., 2016 WL 5660282, at *18.
96
Opening Br. at 44.
97
Acme Markets, Inc. v. Revello, 547 A.2d 131, 1988 WL 71448, at *1 (Del. June 20, 1988)
(TABLE).
98
inTEAM Assocs., 2016 WL 5660282, at *16 (internal citation omitted).
45
the ability to have school districts within that state either to utilize the third-party
systems that they already had, or allow them to utilize our menu compliance tool
directly so that the data feed was always available at the state level.”99
The court also relied on Janet Luc Griffin,100 who testified that the “additional
state value” of inTEAM’s Menu Compliance Tool+ enabled state agencies to access
the districts’ menu information directly and, as a result, they could modify the menus
within the system to assure the districts are in compliance before the agency comes
on-site to do a review.101
As the Court of Chancery held:
Heartland does not rebut this testimony and instead argues that because
this functionality did not exist until 2014, three years after the parties
signed the Co-Marketing Agreement, it could not be part of the “state
value added functionality” described in the agreement. This argument
fails because the definition of inTEAM Business, which references
Exhibit C and discusses a “future release” of DST Phase 2 as defined
in the Functional Design Documents, anticipated the development of a
product with functionality that did not exist at closing.
Heartland also argues “no inTEAM witness made any effort to show
that the functionality of inTEAM’s administrative review software
module was identified in the functional design documents.” This
argument ignores the first part of Goodman’s testimony, which
specifically discusses Exhibit C (and, by reference, the Functional
Design Documents). This argument also fails to address the language
of the Functional Design Documents, which state “District
Administrators [] will configure their districts within DST ... State
Agency Administrators (SAs) will ... be able to access the new district
and building setup screens.” Heartland offers no testimony or evidence
99
Id.100
Griffin is the Director of Business Development at inTEAM.
101
inTEAM Assocs., 2016 WL 5660282, at *16.
46
to rebut these descriptions of the “unique state value added
functionality” of the inTEAM Carve-Out, and inTEAM meets its
burden to show it bargained for this functionality at the time of the
transaction.
By January 2011, inTEAM was contemplating a future release of DST
Phase 2 that would have greater functionalities than existed at the time
of the agreement. Exhibit C and the Functional Design Documents
expressly reference those functionalities, which included the ability to
plan menus, generate production records, and assist administrative
reviews. Heartland agreed to incorporate Exhibit C and the Functional
Design Documents into the inTEAM Business definition described in
the Asset Purchase Agreement and the Co-Marketing Agreement, and
it cannot now simply ignore what those documents state.102
The Court of Chancery’s conclusion is supported by the record and thus was
not error.103
B.
Heartland next argues that the length of the injunction is inappropriate. We
review the Court of Chancery’s issuance of a permanent injunction for abuse of
discretion.104 An abuse of discretion occurs when a court has “exceeded the bounds
of reason in view of the circumstances” or has “ignored recognized rules of law or
practice so as to produce injustice.”105
102
Id.103
Honeywell Int’l Inc., 872 A.2d at 950 (“To the extent the trial court’s interpretation relies upon
findings extrinsic to the contract, or inferences drawn from those findings, this Court will defer to
the trial court’s findings unless they are not supported by the record.”).
104
N. River Ins. Co. v. Mine Safety Appliances Co., 105 A.3d 369, 380 (Del. 2014).
105
Firestone Tire & Rubber Co. v. Adams, 541 A.2d 567, 570 (Del. 1988).
47
The Court of Chancery found that Heartland’s breach began on March 17,
2014, when its relationship with Colyar first began, and lasted until September 8,
2015, when Heartland announced the TDA had not selected its proposal. Because
the breach lasted roughly eighteen months, the Court of Chancery granted an
injunction extending the non-compete agreement for eighteen months to give
inTEAM the full benefit of its bargain.
Heartland argues that it was improper to use March 17, 2014 as the start of
the breach because that was the date a Colyar executive reached out to Heartland.
According to Heartland, “receiving an unsolicited e-mail from a third party should
not constitute a breach of the [CMA].”106 But the Court of Chancery stated that it
“did not rely on one e-mail alone” to determine whether Heartland breached the
CMA.107 “[R]ather, there was systemic behavior that led the Court to its conclusion.
The [Colyar] e-mail served as an element, among others, to inform the Court of when
this breach began . . . .”108
The court considered the e-mail and the events thereafter to determine when
the breach began. Although Colyar initiated the first interaction, Heartland did not
decline Colyar’s invitation. Instead, Heartland and Colyar opened the dialogue that
106
Opening Br. at 46.
107
inTEAM Associates, LLC v. Heartland Payment Sys., Inc., 2016 WL 6819734, at *2 (Del. Ch.
Nov. 18, 2016).
108
Id.48
led to the underlying breach. The injunction measured Heartland’s breach by
reference to its collaborative efforts with Colyar. Thus, the Court of Chancery did
not “exceed the bounds of reason” or “ignore recognized rules of law” by finding
the breach began on March 17, 2014 and ran until September 8, 2015, when
Heartland announced the TDA had not selected its joint proposal with Colyar.
V.
The Court of Chancery found that Goodman breached the non-solicitation
provision in the Consulting Agreement by encouraging St. Paul Public Schools to
terminate its relationship with Heartland.109 Thus, Heartland argues that under the
Consulting Agreement, it is entitled to recover the full amount it paid to Goodman
for his consulting services.
Heartland agreed to pay Goodman a salary of $16,667.67 per month for three-
years during the Consulting Agreement, totaling $600,000. If Goodman breached
certain sections of the Consulting Agreement, including the non-solicitation
provision, Heartland had “no obligation to pay the Consultant any compensation set
forth herein.”110
The Court of Chancery held that Goodman lost his entitlement to his
consulting fees when he began breaching the agreement in July 2014. Thus,
109
Goodman does not dispute the Court of Chancery’s finding that he breached the Consulting
Agreement on appeal.
110
App. to Opening Br. at 291 (Consulting Agreement § 3).
49
Heartland was entitled to recover $50,003.01, representing the fees Heartland paid
Goodman from July to September 2014—the last three months of the Consulting
Agreement. But, according to Heartland, the use of the word “any” meant Goodman
had to disgorge the entire $600,000 in compensation he received.
We find that the Court of Chancery correctly interpreted the forfeiture
provision as prospective only and did not require Goodman to return the fees he was
paid before the breach occurred. The Consulting Agreement does not contain a
clawback provision, and at oral argument counsel admitted there was no evidence in
the record to show such a provision was specifically bargained for.111 Heartland is
thus only entitled to recoup the fees it paid during the three months Goodman was
in breach of the Consulting Agreement.
VI.
On cross-appeal, inTEAM argues that the Court of Chancery erred by finding
that it was not entitled to fee shifting under the CMA. The Court of Chancery found
that a cap limiting liability to “the Fees previously paid by the other Party pursuant
to this Agreement,” barred inTEAM’s ability to collect attorneys’ fees because
inTEAM had not paid Heartland any fees under the CMA.
Section 6.5 of the CMA includes a fee shifting provision that states “the
breaching party shall be liable and pay to the non-breaching Party the reasonable and
111
Oral Arg. at 14:42-15:36.
50
verifiable legal fees and costs incurred in connection with such litigation or
proceeding, including an appeal therefrom. . . .”112 Here, we have found that both
parties have breached the CMA. At oral argument, the parties agreed that if both
parties are in breach, the provision is inapplicable.113 Thus, this argument is moot.
VII.
We reverse the Court of Chancery’s determination that Goodman did not
breach the non-compete provisions of the APA and the Consulting Agreement, and
reverse its determination that inTEAM did not breach the CMA. Otherwise, the
judgment of the Court of Chancery is affirmed. We remand to the Court of Chancery
for further proceedings consistent with this opinion. Because of the passage of time,
we leave it to the Court of Chancery to fashion a remedy adequate to compensate
Heartland for Goodman’s breach of the APA and Consulting Agreement, and
inTEAM’s breach of the CMA. Jurisdiction is not retained.
In a footnote, inTEAM and Goodman argue that if we find that they breached
the non-compete provision, we must remand to the Court of Chancery to allow it to
consider certain affirmative defenses it did not reach because of its original finding
that the non-compete was not breached. We agree with this argument but only to a
confined extent. For starters, Goodman may not reassert affirmative defenses to the
112
App. to Opening Br. at 315.
113
Oral Arg. at 18:50-20:10.
51
Court of Chancery’s finding that he violated the second clause of the non-solicitation
provision. The Court of Chancery specifically addressed and rejected his affirmative
defenses to the non-solicitation provision violation.114 Goodman has not challenged
that finding on appeal and it thus stands. But, to the extent that inTEAM and
Goodman properly raised and briefed affirmative defenses at trial addressed to the
alleged violation of the non-compete and the Court of Chancery did not reach them
because it found no violation, they are free to reassert them in the course of the Court
of Chancery’s determination of what relief, if any, to grant for inTEAM’s and
Goodman’s violation of the non-compete.
114
See inTEAM Assocs., 2016 WL 5660282, at *26.
52