Antitrust Law Daily Wrap Up, ANTITRUST—Del. Sup. Ct.: Court confirms general validity of fee-shifting provisions in bylaws, (May 9, 2014)

By Anne Sherry, J.D.

The Delaware Supreme Court held that fee-shifting provisions in a non-stock corporation’s bylaws generally can be valid and enforceable under Delaware law, although it could not address the specific bylaw at issue. The District Court for the District of Delaware had certified four questions to the Supreme Court on the validity and enforceability of such a provision in the bylaws of a membership corporation that operates a professional tennis tour (ATP Tour, Inc. v. Deutscher Tennis Bund, May 8, 2014, Berger, C.).

Background. ATP Tour, Inc. is the membership corporation in question; its members include owners and operators of professional men’s tennis tournaments and the tennis players themselves. In 2006, ATP’s board added a provision to its bylaws that shifted attorney’s fees and costs to unsuccessful plaintiffs in intracorporate litigation. The following year, the board downgraded the Hamburg tournament and moved it from the spring season to the summer season. The owners and operators of the Hamburg tournament, Deutscher Tennis Bund and Qatar Tennis Federation, which joined ATP in the 1990s, sued ATP and six of its board members in the District of Delaware for alleged antitrust claims and Delaware fiduciary duty claims.

Procedural history. The district court granted the defendants’ motion for judgment as a matter of law on all fiduciary duty claims and on the antitrust claims against the directors. The jury found in favor of ATP on the remaining antitrust claims. ATP then moved to recover its legal fees and costs under Federal Rule of Civil Procedure 54 and the ATP bylaws. The district court denied ATP’s motion, effectively holding that “federal law preempts the enforcement of fee-shifting agreements when antitrust claims are involved.”

The Court of Appeals for the Third Circuit vacated the district court’s order on the basis that the court should have decided whether the fee-shifting provision was enforceable as a matter of Delaware law before reaching the federal preemption question. On remand, the district court reasoned that the issue of enforceability was a novel question of Delaware law and certified four questions to the Delaware Supreme Court.

Delaware law permits fee-shifting bylaws. The court first established that a corporation’s bylaw is facially valid if it is authorized by the Delaware General Corporation Law, consistent with the certificate of incorporation, and not otherwise prohibited. A fee-shifting bylaw is facially valid because it satisfies the DGCL and is not forbidden by statute or common law. Furthermore, corporate bylaws are contracts among a corporation’s shareholders, and contracting parties may agree to modify the American Rule to shift attorney’s fees to the losing party. With respect to the specific ATP bylaw, however, the court noted that its enforceability would depend on the manner of its adoption and circumstances under which it was invoked: “Bylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose.”

Remaining questions. The ATP bylaw stated that it could be invoked against a plaintiff who does not obtain a judgment “that substantially achieves, in substance and amount, the full remedy sought.” Anticipating difficulty applying the “substantially achieves” standard, the district court asked the Supreme Court whether the bylaw would be enforceable where the plaintiff obtains no relief at all against the corporation. The Supreme Court answered that it would.

The court could not fully answer the third question, whether the bylaw is “rendered unenforceable as a matter of law if one or more Board members subjectively intended the adoption of the bylaw to deter legal challenges by members to other potential corporate action then under consideration.” Bylaws adopted for an improper purpose are unenforceable in equity, but the intent to deter litigation is not invariably an improper purpose, the court explained, noting that fee-shifting provisions by their nature deter litigation.

Finally, as a statutory matter, a valid and enforceable fee-shifting bylaw provision is enforceable even against members who joined the corporation before the enactment of the provision. The DGCL permits a certificate of incorporation to confer upon directors the power to adopt, amend, or repeal bylaws. Stockholders are bound by bylaws adopted by boards that are so authorized.

The case is No. 534, 2013.

Attorneys: Philip Trainer, Jr. (Ashby & Geddes) and Bradley I. Ruskin (Proskauer Rose LLP) for ATP Tour, Inc. David M. Powlen (Barnes & Thornburg LLP) for Deutscher Tennis Bund, Rothenbaum Sport GmbH, and Qatar Tennis Federation.

Companies: ATP Tour, Inc.; Deutscher Tennis Bund; Rothenbaum Sport GmbH; Qatar Tennis Federation

Cases: Antitrust DelawareNews