Squishy the Squid Soap Mascot
We were randomly trolling through the website for recent Delaware Chancery opinions and came across a gem:
AIRBORNE HEALTH, INC. and WEIL, GOTSHAL & MANGES LLP
v.
SQUID SOAP, LP
Why on earth would Weil Gotshal be suing a soap company?
The story, including its place in history, after the jump.
First the history: this appears to be newly appointed Vice Chancellor Laster’s first published opinion, so congratulations to him for getting one up on the scoreboard!
Squid Soap is really the plaintiff in the overall action, but they’re the defendant on the motion for judgment on the pleadings by Airborne and Weil Gotshal, so bear that in mind as we’re going through this.
Recognizing the dearth of quality handwashing products for kids and the increasing attention on proper technique, John Lynn created “Squid Soap.” Its unique proposition was that kids had to wash their hands for at least 20 seconds to get the “ink” off their hands.
That actually seems like a great idea, if you ask us. And we’re not the only ones who were impressed. The product was picked up by various national media outlets, and Lynn made the morning-talk-show rounds. Wal-Mart, Target, CVS, and Walgreen’s all stocked Squid Soap.
Eventually, suitors large (Procter & Gamble) and small (Airborne) came calling. Lynn was drawn to Airborne because it too had started out with a regular person and a single product, in Airborne’s case, Victoria Knight-McDowell and a “cure” for the common cold. Cure is in quotes, because eventually the company got in trouble with the FTC over some of the claims about that product’s efficacy. Still, circa 2006, the company had branched out into other products and was one of the fastest-growing privately held businesses in America.
Seems like a match made in heaven, right?
The two companies agreed on an acquisition, which had a huge earn-out and very little up front cash ($1 million against $26.5 million). Quick note: when you see a spread like that, it means the parties have no idea how to value the potential and are so far apart they probably shouldn’t be doing a deal at all. The deal also had a unique feature: if Airborne didn’t do enough to help Squid Soap meet the marks, he could reclaim his assets.
It’s nice that Lynn had so much faith in his company, but this was just a recipe for disaster.
That, of course, is exactly what happened. Airborne took a big reputational hit when it settled a California class action that alleged Airborne had committed a variety of deceptive trade practices regarding the cold remedy. The Center for Science in the Public Interest was among the parties suing Airborne, calling it the suit a “great opportunity for CSPI to participate in a major lawsuit against one of the biggest supplement frauds in the country.”
Suffice to say, things got worse for the company from there. The FTC got in on the action, wrangling a $30 million settlement, the company paid $7 million to various states’ attorneys general, and the company reserved another $6.5 million for anticipated consumer claims. Weil was also representing Airborne in most of this litigation.
Squid Soap said it was unaware of the suit at the time of signing. And, of course, Squid Soap didn’t hit the benchmarks to get the earnouts under the APA, probably due in no small part to trying to attend to the maelstrom of the fraud claims.
Airborne agreed to return the business to Lynn, but pledged the assets as part of a financing package with BNP Paribas. Despite that, Airborne continued to attempt to return the assets to Lynn (although we don’t understand how they were going to do that after the pledge and filing the patent assignment in favor of the banks). Lynn never accepted the business back, and in December, 2008, sued Airborne and BNP Paribas in Texas, alleging conversion, fraud, negligent misrepresentation, breach of fiduciary duty, unjust enrichment, and conspiracy. Two months later, he dropped BNP Paribas and added Weil Gotshal. Despite knowing all those causes of action, his counsel apparently didn’t know about (or ignored) the choice of forum clause in the purchase agreement, which set Delaware as the exclusive forum. The Texas case was dismissed without prejudice.
Meanwhile, Airborne and Weil didn’t like having that claim pending in Texas, so they sued in Delaware for declaratory relief that they weren’t liable under the APA. Lynn/Squid Soap answered and added the counterclaims he had pled originally in Texas.
Turns out, Squid Soap thought it had relied on a bunch of representations that weren’t actually in the agreement it signed. Its fallback position was the implied covenant of good faith and fair dealing.
This is where Chancellor Laster has grabbed himself a place in our hearts right off the bat. Not only does he cite ADS v Blackstone (one of the highlights of Delaware litigation in 2009), but he describes the narrow situation where it applies in terms of a Venn diagram!
The doctrine thus operates only in that narrow band of cases where the contract as a whole speaks sufficiently to suggest an obligation and point to a result, but does not speak directly enough to provide an explicit answer. In the Venn diagram of contract cases, the area of overlap is quite small.
Wunderbar!
After that, it’s a lot of pointing out provisions that Squid Soap, represented on the deal by Vinson & Elkins (which under cut Squid Soap’s attempts to plead naivete), could have, but never actually, negotiated into the deal.
Weil and Airborne won on pretty much every claim they brought. The only remaining issues are damages for bringing the suit in Texas in breach of the forum-selection clause, and specific performance on return of the assets.
For counsel, Weil Gotshal turned to William Wade, Jeffrey Moyer, David Schmerfeld, and Sarah Stafford of Richards, Layton & Finger. Airborne Health was represented by Joseph Bellew, a partner in Cozen O’Connor’s Wilmington office.
Squid Soap has apparently had enough of BigLaw. After using V&E on the transaction, Lynn turned to two firms we’ve never heard of: Falls Smith, out of Texas; and Seitz, Van Ogtrop & Green as local Delaware counsel.
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