The Delaware Court of Chancery has issued a ruling in a case involving Cytotheryx, Inc., Castle Creek Biosciences, Inc., and Paragon Biosciences, LLC, addressing several key issues, including the application of Delaware law, the validity of defamation claims, and the court’s jurisdiction over a non-resident CEO. The case arose from a merger agreement and subsequent disputes, culminating in defamation counterclaims.
Background of the Case
The core of the dispute stems from the sale of a Cytotheryx subsidiary to Castle Creek Biosciences. After the sale, Cytotheryx initiated legal action, alleging that Castle Creek made misrepresentations during the negotiations leading up to the merger. In response, Cytotheryx and its CEO, John Swart, issued a press release that announced the lawsuit and made related statements about Castle Creek and Paragon Biosciences. The counterclaims filed by Castle Creek and Paragon allege that the statements in the press release were defamatory.
Choice of Law: Delaware Law Applies
One of the central questions before the court was which state’s law should govern the defamation claims. Cytotheryx and Swart argued for the application of Illinois or Pennsylvania law, while Castle Creek and Paragon contended that Delaware law should apply. The court sided with Castle Creek and Paragon, determining that Delaware law governs the counterclaims.
The court’s decision hinged on the interpretation of a choice-of-law provision within the Merger Agreement. This provision stipulated that Delaware law would govern “all claims and causes of action based upon, arising out of or in connection with” the agreement. The court found this language to be broad enough to encompass the defamation claims, as the statements in the press release related to the performance of the Merger Agreement. The court rejected arguments that the claims were “extra-contractual” and therefore outside the scope of the provision.
Additionally, the court found no exceptions to invalidate the contractual choice of law. It rejected arguments that Illinois law should apply due to the location of one of the counter-claimants, stating that the dispute was based on a transaction between Delaware entities.
Defamation Claims: Sufficient to Proceed
The court then turned to the question of whether the counterclaims stated a valid claim for defamation under Delaware law. To establish a defamation claim, a plaintiff must show that the defendant made a defamatory statement concerning the claimant, that the statement was published, and that a third party would understand the communication as defamatory.
The court determined that the press release’s statements met this standard. The court found that the press release’s statements about misrepresentations made during negotiations, and financial stability, were reasonably susceptible to a defamatory meaning.
Cytotheryx and Swart attempted to defend their statements by arguing that they were protected opinions. However, the court found that the statements were based on objectively verifiable facts and therefore not protected as opinions.
Finally, the court declined to rule on the truth of the statements at this stage, as the determination of the statements’ truth requires further proceedings.
Personal Jurisdiction Over CEO Swart: Dismissed Without Prejudice
A crucial issue was whether the court had personal jurisdiction over John Swart, the CEO of Cytotheryx, who resides in Minnesota. The court found that it did not.
The court considered two potential bases for jurisdiction: the Delaware Long-Arm Statute and the Officer Consent Statute. The court determined that the Long-Arm Statute did not apply because Swart did not make the allegedly defamatory statements while physically present in Delaware.
The court then considered the Officer Consent Statute, which states that non-resident officers of Delaware corporations consent to jurisdiction in certain types of cases. The court found that the statute did apply to Swart, as he was a proper party to the litigation.
However, the analysis did not end there. The court then considered whether exercising jurisdiction over Swart would violate due process, as guaranteed by the Fourteenth Amendment. Applying the “minimum contacts” test, the court concluded that Swart did not have sufficient contacts with Delaware to justify jurisdiction. The court emphasized that Swart did not reside in Delaware, did not make the statements in Delaware, and the claims did not concern a breach of his fiduciary duties.
Therefore, the court granted Swart’s motion to dismiss for lack of personal jurisdiction, but “without prejudice,” meaning the claims could be refiled in a jurisdiction with proper jurisdiction.
Stay of Counterclaims: Denied
Finally, Cytotheryx and Swart requested that the court stay the counterclaims until after Cytotheryx’s claims were resolved. The court denied this request, citing the likely overlap between the evidence and proof needed for both the main claims and the counterclaims.
The court determined that the more efficient approach was to allow the overlapping claims to proceed together.