Avesair, Inc. v. Inphonic, Inc.

Avesair, Inc. v. InPhonic, Inc., 2007 NCBC 32.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF WAKE 04 CVS 10838

AVESAIR, INC., )
)
Plaintiff, )
) ORDER ON MOTIONS FOR
v. ) SUMMARY JUDGMENT
)
INPHONIC, INC., )
)
Defendant. )

{1} This case arises out of Plaintiff’s suit for breach of contract. This
matter comes before the Court on Plaintiff and Defendant’s Motions for Summary
Judgment under Rule 56.
{2} Upon review of the briefs and oral argument, the Court GRANTS
Plaintiff’s Motion for Summary Judgment and DENIES Defendant’s Motion for
Summary Judgment.

Smith Moore LLP by James L. Gale and Laura M. Loyek for Plaintiff
Avesair, Inc.

Patton Boggs LLP by Read K. McCaffrey and Hagan Davis Mangum
Langley & Hale PLLC by J. Scott Hale for Defendant InPhonic, Inc.

Tennille, Judge

I.
PROCEDURAL BACKGROUND
{3} This action was filed in Wake County Superior Court on August 5,
2004. This matter was designated a complex business case under Rule 2.1 and 2.2
of the General Rules of Practice for the Superior and District Courts by order of the
Chief Justice of the Supreme Court of North Carolina dated June 12, 2006, and
assigned to the undersigned Special Superior Court Judge for Complex Business
Cases by virtue of the same order.
{4} Defendant filed a Motion for Summary Judgment under Rule 56 on
April 16, 2007. Plaintiff filed a Motion for Summary Judgment under Rule 56 on
April 26, 2007. The Court heard oral arguments on both motions on June 14, 2007.
The parties have engaged in mediation and, at the Court’s urging, direct
negotiations prior to this ruling.

II.
BACKGROUND
A.
THE PARTIES
{5} Plaintiff Avesair, Inc. is a corporation organized under the laws of the
State of Delaware which had its principal place of business in Cary, Wake County,
North Carolina at all times relevant to this matter. Plaintiff is now located in
Raleigh, Wake County, North Carolina.
{6} Defendant InPhonic, Inc. is a corporation organized under the laws of
the State of Delaware. InPhonic’s principal place of business is Washington, D.C.
InPhonic engages in business in North Carolina and maintained employees in Cary,
Wake County, North Carolina.
B.
THE ASSET PURCHASE AGREEMENT
{7} The parties are involved in mobile communications. Plaintiff Avesair
developed mobile marketing technology used to deliver targeted messages to mobile
devices. Defendant InPhonic distributes mobile phones and provides wireless voice
and data solutions to consumers.
{8} The parties negotiated an asset purchase between approximately
December 1, 2002 and April 16, 2003. (Compl. ¶¶ 10, 12.) On or about April 16,
2003, the parties signed a non-binding letter of intent. (Compl. ¶ 12.) On or about
May 13, 2003, the parties signed the Asset Purchase Agreement By and Between
InPhonic, Inc. and Avesair, Inc. (“APA”). (Compl. ¶ 12.)
{9} The sections of the APA at issue are as follows:
If Buyer [Defendant InPhonic] achieves greater than $2,000,000 in
gross revenues up to a maximum of $3,333,333 in gross revenues
during the twelve (12) month period commencing April 1, 2003 and
ending March 31, 2004 (the “Measuring Period”) as a result of the sale
of products or services derived from Seller’s [Plaintiff Avesair’s]
Intellectual Property . . . Buyer shall, subject to the provisions of
Section 2.9 below, issue to Seller within thirty (30) days following April
1, 2004, additional shares of Buyer’s Common Stock in an amount
equal to three dollars ($3.00) of Buyer’s Common stock for each one
dollar ($1.00) of any such gross revenue recognized by Buyer (the
“Additional Shares”).
(APA ¶ 2.6(a)(i).)
Notwithstanding Section 2.6(a)(i), if (1) Buyer fails to use
Commercially Reasonable Efforts to sell products or services derived
from Seller’s Intellectual Property, (2) if outside audited financial
information is not provided at the end of the Measuring Period, (3) or
Buyer terminates more than one of the Transferred Employees hired
by Buyer after the Closing . . . then Seller shall receive the number of
Additional Shares equal to the maximum net revenues of $3,333,333.
(APA ¶ 2.6(a)(iii).)
For purposes of determining whether Seller is entitled to the
Additional Shares pursuant to Section 2.6(a)(i) or Section 2.6(a)(iii)
above on or before April 15, 2004, Buyer shall cause to be prepared and
delivered to Seller a quarterly statement (the “Revenue Statement”)
signed by an officer of Buyer setting forth the actual amount of the
gross revenue and the basis for such calculation. If, within thirty (30)
days following receipt of the Revenue Statements . . . Seller has not
given Buyer written notice of its objection to the Revenue Statement . .
. then the Revenue Statement shall be deemed accepted by Seller and
will be used to determine whether Seller is entitled to any Additional
Shares pursuant Section 2.6(a)(i).
(APA ¶ 2.6(b).)
{10} Defendant provided Plaintiff with financial information on April 29,
2004. (Def.’s Mot. Summ. J. 4.) Defendant and Plaintiff disagreed as to whether
this financial information was the Revenue Statement. (Def.’s Mot. Summ. J. 4.;
Pl.’s Resp. to Def.’s Mot. Summ. J. n. 2.) Plaintiff gave Defendant written notice of
its objection to the financial information provided on April 29, 2004, on May 26,
2004. (Pl.’s Resp. to Def.’s Mot. Summ. J. Ex. 5.) If that financial information was
the Revenue Statement, Plaintiff still objected within thirty days of receipt in
accordance with APA ¶ 2.6(b).
{11} Both Motions for Summary Judgment focus on whether Defendant
provided the “outside audited financial information” required in the APA and
whether Plaintiff is entitled to damages for failure to provide the Additional Shares
specified in the APA.

III.
ANALYSIS
A.
LEGAL STANDARD
{12} The APA is to be governed by and construed under the laws of the
State of Delaware. (APA ¶ 8.8; Case Management Report ¶ q.) The North Carolina
Supreme Court “has held that where parties to a contract have agreed that a given
jurisdiction’s substantive law shall govern the interpretation of the contract, such a
contractual provision will be given effect.” Land Co. v. Byrd, 299 N.C. 260, 262, 261
S.E.2d 655, 656 (1980). The “law of the forum, North Carolina, governs all matters
of procedure” when a contract governed by another state’s substantive law is
litigated in North Carolina. Taylor v. Abernethy, 174 N.C. App. 93, 103, 620 S.E.2d
242, 249 (2005) (citing Arnold v. Charles Enterprises, 264 N.C. 92, 96, 141 S.E.2d
14, 17 (1965)). “The question of what is procedure and what is substance is
determined by the law of the forum state.” Boudreau v. Baughman, 322 N.C. 331,
339, 368 S.E.2d 849, 856 (1988).
{13} Summary judgment is proper “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that any party is entitled
to judgment as a matter of law.” N.C. R. Civ. P. 56(c). “It is not the purpose of the
rule to resolve disputed material issues of fact but rather to determine if such issues
exist.” N.C. R. Civ. P. 56 cmt. The burden of showing a lack of triable issues of fact
falls upon the moving party. See, e.g., Pembee Mfg. Corp. v. Cape Fear Constr. Co.,
313 N.C. 488, 491, 329 S.E.2d 350, 353 (1985). Once this burden has been met, the
nonmoving party must “produce a forecast of evidence demonstrating that [it] will
be able to make out at least a prima facie case at trial.” Collingwood v. Gen. Elec.
Real Estate Equities, Inc., 324 N.C. 63, 66, 376 S.E.2d 425, 427 (1989). The Court
must exercise caution in granting a motion for summary judgment. N.C. Nat’l Bank
v. Gillespie, 291 N.C. 303, 310, 230 S.E.2d 375, 379 (1976).
B.
BREACH OF CONTRACT
{14} The situation presented is a difficult one. 1 If Plaintiff prevails, it will
receive a benefit that was not earned under the earnout provision of the contract,
but results from a technical breach of contract by Defendant. If Defendant prevails
it will escape liability for ignoring provisions expressly bargained for in the contract
in order to prevent litigation. Neither the Court nor the parties have found middle
ground for compromise. As a result, one must lose. The Court will present the
equities on both sides and then explain why it has ruled in favor of Plaintiff.
{15} The Delaware Supreme Court recognizes many of the same principles
of contract construction as North Carolina. Contracts are to be “construed as a
whole, to give effect to the intentions of the parties.” Northwestern Nat’l Ins. Co. v.
Esmark, Inc., 672 A.2d 41, 43 (Del. 1996) (citations omitted). The Delaware
Supreme Court construes contracts, and by extension the intent of the parties, by
first using the plain meaning of the contract. Seaford Golf & Country Club v. E.I.
DuPont de Nemours & Co., 925 A.2d 1255, 1260 (2007) (citations omitted). It also
holds to the contra proferentem principle of construction that any “ambiguities in a
contract should be construed against the drafter.” Twin City Fire Ins. Co. v. Del.

1
The Court has actually drafted two opinions – each granting summary judgment to one
party or the other. It can only enter one of those opinions.
Racing Ass’n, 840 A.2d 624, 630 (2003). 2 If there is an ambiguity, the court is to
turn once again to the plain meaning of the contract language to discern the intent
of the parties. Northwestern, 672 A.2d at 43. Then the court is to look to extrinsic
evidence for guidance in interpretation. Id.
{16} The terms of the APA called for the transfer of Plaintiff’s assets, both
tangible and intangible, in exchange for 672,389 shares of Defendant’s Common
Stock and 672,389 shares of Defendant’s D-5 Preferred Stock. (APA ¶¶ 2.1, 2.5.)
The monetary value of the exchange was $7 million worth of Defendant’s stock for
$2 million in cash and $5 million in assets. (Pl.’s Resp. to Def.’s Mot. Summ. J. Ex.
1. 7.) Additionally, there was the possibility of $4 million worth of common shares if
the earnout threshold was reached. (See Pl.’s Resp. to Def.’s Mot. Summ. J. Ex. 1. 7
and APA ¶ 2.6(a)(i).) If the earnout threshold was not met, the Plaintiff would not
receive the Additional Shares. (APA ¶ 2.6(a)(i).) The up-front consideration with
an earnout agreement in the form of stock is a common business practice. See, e.g.,
Dale Oesterle, The Inexorable March Toward a Continuous Disclosure Requirement
for Publicly Traded Corporations: “Are We There Yet?,” 20 Cardozo L. Rev. 135,
171-172 (1998) (presenting the steps common in merger negotiations, including
exchanging stock and setting an earnout).
{17} The APA also included a provision designed to avoid litigation over the
earnout agreement. (Pl.’s Resp. to Def.’s Mot. Summ. J. 12; APA ¶ 2.6(a)(iii).) Mr.
Frey, a member of the Board of Directors for Plaintiff, stated that the liquidated
remedies of ¶ 2.6(a)(iii) relieved Plaintiff of the risk that it would lose the Additional
Shares because of its failure “to sustain any such burden of proof” as to whether the
earnout threshold had been met. (Frey Aff. ¶ 10.) The agreement acted to alleviate
Plaintiff’s burden of proving that the earnout threshold had been met. (Frey Aff. ¶¶
9-10.) Plaintiff “agreed to a contract in which those revenues were presumed unless
shown to be the contrary by outside audited financial information.” (Frey Aff. ¶ 10.)

2 For a concise statement of Delaware rules of construction regarding plain meaning

interpretation and the intent of the parties, see Haft v. Dart Group Corp., 841 F. Supp. 549,
564 (D. Del. 1993) and In re Explorer Pipeline Co., 781 A.2d 705, 713-14 (Del. Ch. 2001).
Mr. Frey had experience with difficulties regarding earnout provisions and
“carefully negotiated” the provision with this presumption. (Frey Aff. ¶ 10.)
Plaintiff’s concern was that once the APA was in place, it no longer had control over
the utilization of its assets or the books and records of Defendant. (Pl.’s Resp. to
Def.’s Mot. Summ. J. 12.) Only by utilizing the assets through “commercial[ly]
reasonable efforts” would Defendant’s revenue be enough to trigger the earnout
agreement thereby requiring it to provide Plaintiff with more stock. (Frey Aff. ¶ 8;
Compl. ¶ 33.) It would be very difficult for Plaintiff to prove that Defendant did not
use commercially reasonable efforts to utilize the assets without the outside audited
financial agreement referenced in APA ¶ 2.6(a)(iii). 3 (Frey Aff. ¶ 10.) The parties
agreed to damages as the maximum amount of Additional Shares Plaintiff could
receive. (Compare APA ¶ 2.6(a)(iii) and APA ¶ 2.6(a)(i).) The damages encouraged
Defendant to use commercially reasonable efforts and to provide the outside audited
financial information to Plaintiff which it would need to dispute those efforts and
the revenue. (Compl. ¶ 22.) Mr. Frey’s uncontradicted testimony establishes that
the audit provision was included to protect Plaintiff and avoid litigation.
{18} However, provision 2.6(a)(iii) in relation to the earnout agreement
created a windfall that may not have been expected, but should have been.
Provision 2.6(a)(iii) is a windfall for different reasons. First, the amount of
damages, almost $4 million at the end of the Measuring Period, is over half the total
value of the contract. (Pl.’s Resp. to Def.’s Mot. Summ. J. Ex. 1. 7.) Second, the
Additional Shares in 2.6(a)(i) were further compensation when an earnout threshold
was met. (Pl’s. Resp. to Def.’s Mot. Summ. J. Ex. 1. 7.; APA ¶ 2.6(a)(i).) Therefore,
the Additional Shares were related to the value of the assets being transferred. In

3 The Court notes that these motions only concern Plaintiff’s first claim for relief –

the Defendant’s breach of the APA by failure to provide Additional Shares when it did not
provide outside audited financial information. (Compl. ¶ 30.) The Plaintiff’s second claim
for relief – Defendant has not used Commercially Reasonable Efforts to sell [Plaintiff’s]
products and services, (Compl. ¶ 30), – is still outstanding. The receipt of the outside
audited financial information would be at least beneficial (if not necessary) to the Plaintiff
as it pursues this second claim for relief.
contrast, the Additional Shares under 2.6(a)(iii) were not further compensation but
were liquidated damages. Those Additional Shares were related to a technical
failure on the part of Defendant and not the value of the assets being transferred.
(APA ¶ 2.6(a)(iii)(2).) The windfall could have been easily avoided in two ways.
Defendant could have provided the outside audited financial information or, upon
the decision to not provide the audited financials, the Additional Shares. (APA ¶
2.6(a)(iii).)
{19} Defendant argues in a footnote that the Revenue Statement provided
in April 2004 is in effect the “outside audited financial information” referred to in
APA ¶ 2.6(a)(iii). (Def.’s Mot. Summ. J. 4.) Defendant then spends the remainder of
its brief arguing that the provision awarding Plaintiff Additional Shares is an
illegal penalty. The Court recognizes that the Additional Shares constitute a
windfall to the Plaintiff even though the Court does not agree that the Additional
Shares in the APA should be interpreted as an illegal penalty.
{20} Defendant argues that there is no question that the earnout targets
were not reached and that Plaintiff’s representatives were aware of that fact prior
to the end of the period based upon information they were receiving from insiders
who were former Avesair employees. Defendant also points to at least one instance
in which Plaintiff took advantage of Defendant’s mistakes to receive money it would
not otherwise have been entitled to receive. 4 (Def.’s Resp. to Pl’s Mot. Summ. J. 5.)
The implication, not entirely unfair, is that Plaintiff made its demand for an audit
to trap Defendant into breaching the contract as the only way to get at the earnout.
There is no explanation provided for Defendant’s failure to comply with the audit
requirement other than Defendant’s position that Plaintiff knew the audited
material would not show the target had been met. (Def.’s Reply Br. 12.) Perhaps
the failure to comply was only hubris at work in the decision not to comply with the
contractual obligation. Perhaps it was the very ineptitude Plaintiff was relying
upon. However, given Defendant’s restatements of income, (see infra ¶ 27), the

4
Those facts are unrefuted. Plaintiff argues they are irrelevant.
possibility exists that there was some other reason Defendant declined to have
independent auditors look at the situation. The reason for Defendant’s decision is
not determinative. The decision itself triggers liability.
{21} APA ¶ 2.6(a)(iii) states that outside audited financial information was
to be provided by the Defendant to the Plaintiff at the end of the Measuring Period.
(APA ¶ 2.6(a)(iii).) The Measuring Period was defined as the “period commencing
April 1, 2003 and ending March 31, 2004.” (APA ¶ 2.6(a)(i).) Outside audited
financial information is not defined. The Court recognizes that Delaware’s rules of
contract construction, specifically plain meaning interpretation of contract terms,
apply. (See supra ¶ 15).
{22} According to the West Dictionary of Business Law Terms, “internal
audit” is “[a]n audit conducted by an organization’s personnel.” A Dictionary of
Business Law Terms (Bryan A. Garner, ed., 1999). In comparison, an “independent
audit” is “[a]n audit conducted by an outside person or firm not connected with the
organization being audited.” Id. (emphasis added). While “outside audited financial
information” is not explicitly defined in the referenced dictionary, the Court finds
that the term is consistent with the definition of an independent audit and not an
internal audit.
{23} The intent of providing the outside audited financial information was
first to avoid litigation regarding the earnout threshold and second to provide
Plaintiff with information on whether Defendant used commercially reasonable
efforts to utilize the assets in the APA. (Supra ¶ 17). The contents of the outside
audited financial information must bear on both the earnout threshold (revenue)
and the efforts to utilize the assets (spending) to effectuate the intentions of the
contract. The Revenue Statement does not meet the definition or the intention of
“outside audited financial information.”
{24} Using both a plain meaning interpretation of the contract and extrinsic
evidence regarding the intention of the parties when entering into the contract, the
Court finds that Defendant was required to provide something other than the
Revenue Statement at the end of the Measuring Period, or a reasonable period
thereafter, which bore both on whether the earnout threshold had been met and
whether Defendant used commercially reasonable efforts to utilize the assets in the
APA.
{25} Defendant provided Plaintiff with its S-1 filing on July 7, 2004.
(McCaffrey Aff. Ex. A.) This filing contained the audited consolidated balance
sheets of InPhonic, Inc. and its subsidiaries as of December 31, 2003, and December
31, 2002. (McCaffrey Aff. Ex. A.) As Plaintiff aptly pointed out, the S-1 filing does
not include the entire Measuring Period defined in the APA. (Pl.’s Reply Br. 2-3.)
The S-1 filing also does not differentiate or focus on the financial information that
relates to the earnout threshold or Defendant’s obligation to use commercially
reasonable efforts to utilize the assets. The S-1 filing provided on July 7, 2004, does
not fulfill the requirement of APA ¶ 2.6(a)(iii)(2).
{26} In the current matter, the contract required the outside audited
financial information to be provided at the end of the Measuring Period. (APA ¶
2.6(a)(iii)(2).) However, the financial information was to include the entire
Measuring Period. (APA ¶¶ 2.6(a)(i), (iii).) The ability to provide outside audited
financial information on the last day the financial information was to include would
be Herculean. As discussed above, (supra ¶ 17), the intent of the parties was to
provide Plaintiff with information it would not otherwise have in order to contest
either the earnout threshold revenues or Defendant’s efforts to utilize the assets.
Providing the outside audited financial information on the very day the Measuring
Period ends is not necessary to effectuate these intentions. Instead, Plaintiff would
need well-constructed financial information providing as much information as
possible. Requiring the production of financial information in an extremely short
time would not fulfill the desire for completeness. The Court finds no extrinsic
evidence that would indicate that the provision of the outside audited financial
information by the end of the Measuring Period was necessary to the APA. A
reasonable period of at least sixty days would provide time to complete the required
audit.
{27} Delaware courts will find a material breach when there has been no
performance within a reasonable time. Hifn, Inc. v. Intel Corp., C.A. No. 1835-VCS,
2007 Del. Ch. LEXIS 58, at *37. A reasonable time is inferred when there is no
time for performance fixed in a time is of the essence clause. Id. (citing J.A. Jones
Const. Co. v. City of Dover, 372 A.2d 540, 550 (Del. Super. 1977)). Whether the
financial information or the Additional Shares were provided in a reasonable time is
a question of fact. Id. at 38. In the present matter, neither the financial
information nor the Additional Shares were ever provided. (Supra ¶¶ 19-20). The
facts of this case make it clear that the outside audited financial information is still
pertinent even at this late date. Specifically, Plaintiff notes that there is evidence
that Defendant’s financial statements are unreliable because Defendant has
restated its income for the two periods directly subsequent to the relevant period.
(Pl.’s Reply Br. 2.). If the statements are unreliable, Plaintiff will need the outside
audited financial information to question whether the earnout threshold was truly
not met. Also, Plaintiff still has a second cause of action pending in the present
case, failure to use commercially reasonable efforts to sell the assets transferred in
the APA. The audit provision was included to provide Plaintiff with independently
verified information upon which it could rely in making a decision whether it had
any rights to pursue under the contract. It had to decide to file this suit without
that knowledge.

IV.
CONCLUSION
{28} The APA was drafted by Defendant, including the provisions regarding
the Additional Shares. 5 (Frey Aff. ¶ 11.) The APA was also negotiated over a
period of time in which Defendant could have objected to the Additional Shares

5 The APA was drafted by Defendant’s counsel, who are now in the role of belittling

the contract for containing a liquidated damages provision it claims acts as an illegal
penalty.
provisions. 6 (Frey Aff. ¶ 11.) These two facts put the Defendant in a tenuous
position from which to challenge the APA.
{29} Defendant contends that there were only two possible outcomes
regarding the Additional Shares: either revenue was higher than the earnout
threshold and Plaintiff received Additional Shares, or revenue was lower than the
earnout threshold and Plaintiff did not receive Additional Shares. (Def. Reply Br.
2.) However, a reading of APA ¶ 2.6(a)(iii) proposes a third outcome: regardless of
whether the earnout threshold was met, if Defendant did not provide Plaintiff with
an outside audited financial statement, then Plaintiff received Additional Shares.
(APA ¶ 2.6(a)(iii).) This third outcome is the situation before the Court.
{30} The Court has given considerable thought to the issue of illegal
penalties and liquidated damages raised by Defendant. Damages that were worth
$4 million at the time of the breach are indeed severe when juxtaposed to the
original transaction. The fact that these damages are the very maximum that
Plaintiff could ever hope of receiving under the earnout agreement highlights the
harshness of the amount. (APA ¶¶ 2.6(a)(i), (iii).) Defendant has articulated the
Delaware test of liquidated damages. 7 (Def.’s Mot. Summ. J. 7.) Defendant has
pointed out the inequity involved in allowing Plaintiff to take the Additional Shares
simply because an outside audited financial statement was not provided. (Def.’s
Mot. Summ. J. 4; Def.’s Resp. to Pl.’s Mot. Summ. J. 1–2.)
{31} Plaintiff has not had completely clean hands during the time leading
up to this matter. Plaintiff was aware at the time the outside financial information
was not provided that the earnout threshold under APA ¶ 2.6(a)(i) was most likely

6 Neither this statement nor the previous statement regarding the drafting of the

APA were objected to in Defendant’s Reply Brief.

7 “Where (1) the damages that would result from a breach are uncertain or incapable

of accurate calculation by any accepted rule of law, and (2) the amount fixed is a reasonable
forecast of such damages, the provision is one for liquidated damages and will be enforced
like any other. Conversely, if the provision fails to meet one of these criteria, the damages
stemming from a breach being easily ascertainable or the amount fixed excessive, the
provision is void as a penalty.” W&G Seaford Assocs., L.P. v. E. Shore Mkts., Inc., 714
F.Supp. 1336, 1347 (1989) (citing Wilmington Hous. Auth., 665 F.Supp. 351, 354 (1987)).
not met. (Def.’s Mot. Summ. J. 4-5.) Defendant cites several correspondences
plainly outlining that Plaintiff had no expectation that the earnout threshold would
be met. (Def.’s Mot. Summ. J. 4-5.) Plaintiff does not dispute the content of those
correspondences but only disputes that Plaintiff had accepted that the earnout
threshold had not been met. (Pl.’s Resp. to Def.’s Mot. Summ. J. 4.) Plaintiff is
correct in that whether or not the earnout threshold was met is not at the crux of
the current motion. (Pl.’s Resp. to Def.’s Mot. Summ. J. 4.) However, the intent of
the outside audited financial information was to confirm the revenues that
determined whether the earnout threshold had been met and to avoid litigation
over that matter. (Pl.’s Resp. to Def.’s Mot. Summ. J. 11, 12; Pl.’s Mot. Summ. J. 4.)
The intention of the parties lends itself to assigning damages.
{32} The Court has also considered the fact that Plaintiff did not file for
specific performance to obtain the outside audited financial information, but instead
has initiated this breach of contract action seeking damages which are significant
compared to the scope of the underlying transaction. The Court finds it interesting
that while the purpose of the damages provision in 2.6(a)(iii) was to avoid litigation,
(supra ¶ 17), Plaintiff has initiated this suit based on that provision without seeking
the outside audited financial information. Plaintiff did send one correspondence
after the Measuring Period regarding the outside audited financial information, but
that correspondence requested the Additional Shares and not the audited financial
information. 8 (Pl.’s Resp. to Def’.’s Mot. Summ. J. Ex. 5.)
{33} As the Court noted earlier, (supra n. 3), Plaintiff still has another
claim for relief pending. Plaintiff has accused Defendant of not using Commercially
Reasonable Efforts to utilize the assets transferred under the APA. (Compl. ¶ 30.)
To pursue this claim, Plaintiff could have used the outside audited financial
information. The reasoning for requiring the outside audited financial information
was two fold: to determine if commercially reasonable efforts were used and to

8
In the same correspondence, Plaintiff objected to the financial information that had
previously been provided by the Defendant.
check the accuracy of the Revenue Statement figures that would determine whether
Plaintiff was to receive Additional Shares under APA ¶ 2.6(a)(i). The intent of the
parties was to avoid litigation over both of these matters even though arbitration
was not agreed to for breaches of APA ¶ 2.6(a)(iiii). (Compl. ¶ 32.)
{34} This is a difficult case. The Court has considered what alternatives it
might have to reach some compromise that might appear fairer. Should the Court,
on its own motion, require specific performance and order an independent audit
requiring Defendant to pay Plaintiff’s legal fees in obtaining the audit? No one
asked for that relief. It would, in essence, deprive Plaintiff of the specific thing it
bargained for – an audit or distribution of the shares without litigation over the
earnout. The Court would be rewriting the contract. Should the Court find that
there was a breach, but leave it to a jury to decide damages? Again, that remedy
would deprive Plaintiff of its negotiated bargain, and the Court would be rewriting
the contract.
{35} There is certainly a strong argument to be made that Plaintiff will
receive a windfall and that it intentionally took advantage of Defendant’s failure to
understand its contractual obligations. In this Court’s view, the more important
consideration is the obligation of the courts to enforce contracts as they are written.
This contract was negotiated at arm’s length. It was drafted by Defendant. It
contained one specific provision for the protection of Plaintiff in the earnout
provisions. Defendant failed to comply with that provision. The contract is
unambiguous with respect to the remedy for that failure. Plaintiff was entitled to a
distribution of stock with a value of $3,999,999.99 upon Defendant’s breach. The
Court concludes that Defendant breached the contract and Plaintiff is entitled to
damages in the amount of $3,999,999.99. Plaintiff is entitled to interest at the
statutory rate from the date of breach, which the Court finds is a reasonable period
of sixty days after the close of the earnout period to provide the audited statement,
or May 31, 2004.
{36} The Court will not act to rewrite this contract nor will it save the
Defendant from the consequences of its bargain. The Delaware Supreme Court
states appropriately that “the fundamental maxim [of contract construction is] that
the parties are bound by the terms of their own agreement.” Harry H. Rosin Co. v.
Eksterowicz, 73 A.2d 648, 651 (Del. Ch. 1950). The Defendant finds itself in the
unenviable position of being the party to a contract whose terms are burdensome,
but which must be adhered to nonetheless.
{37} Based on the foregoing, it is hereby ORDERED, ADJUDGED, and
DECREED:
1. Defendant’s Motion for Summary Judgment is DENIED.
2. Plaintiff’s Motion for Summary Judgment on Its First Claim for Relief
is GRANTED
3. Plaintiff is entitled to recover $3,999,999.99 as damages for
Defendant’s breach of contract together with interest from the date of
breach.

This the 16th day of October, 2007.