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Appellate Victory for Leading Enterprise AI Software Company C3.AI

April 2021

Quinn Emanuel recently obtained a unanimous affirmance from the Third Circuit Court of Appeals of the firm’s trial victory for client in the District of Delaware.  C3, which recently conducted a high-profile IPO, is a leading enterprise AI software provider.  In 2014, former stockholders of E2.0, a company C3 acquired in a stock-for-stock merger, sued C3, its founder Tom Siebel, and its former CEO David Schmaier for securities fraud under 10(b) of the ’34 Act, common law fraud, and breach of contract related to certain alleged misrepresentations and breaches of contract in connection with C3’s acquisition of E2.0.  Plaintiffs sought $68 million in damages.  After a bench trial, Quinn Emanuel obtained a complete defense victory and an award to C3 of attorneys’ fees and expenses.  

On appeal, the Plaintiffs sought review of a single claim: an alleged breach by C3 of a “holdback” provision in the merger agreement, whereby C3 would award C3 shares to the former E2.0 stockholders if C3 did not have a valid indemnification claim against E2.0 for certain breaches of the agreement.  At trial, the court credited the testimony of Tom Siebel and David Schmaier and found that Plaintiffs had failed to prove any damages from the alleged breach.  Based on a review of the documents and testimony, the court rejected the Plaintiffs’ reliance on the $3.33 “Unit Divisor” contained within the agreement, ruling that it was not indicative of the shares’ value, but rather simply a “plug-in” number for purposes of calculating the stock-for-stock exchange ratio under the merger.  

On appeal, the Plaintiffs argued that the district court was wrong to ignore the $3.33 figure because the figure was an actual representation of the shares’ value.  Plaintiffs also argued that the lower court had overlooked two additional dollar figures in the record that could serve as the measure of damages.  (Plaintiffs had raised neither figure in post-trial briefing.)  Finally, Plaintiffs argued that they should have been awarded at least nominal damages, which they said would have rendered them the “prevailing party” for purposes of the contractual fee-shifting provision.

Quinn Emanuel defeated all of these arguments on appeal.  In an opinion that adopted arguments from the firm’s appellate briefing and oral argument, the Third Circuit affirmed the district court’s findings regarding the $3.33 Unit Divisor, holding that “[t]he District Court thoroughly reviewed the documentary record, the plain language of the Merger Agreement, and its credibility determinations as to the testimony of C3’s lead negotiators, E2.0’s lead negotiator, and C3’s counsel, all of which confirmed that $3.33 was never intended to reflect an actual valuation of C3’s shares.”  

The Third Circuit also agreed that Plaintiffs had forfeited the two alternative purported damages values they relied on by failing to raise them before the district court.  And it agreed with Quinn Emanuel that the district court did not abuse its discretion by not awarding nominal damages because Plaintiffs had failed to request them in pleadings or argument before the district court.