In a case of first impression, the Delaware Supreme Court ruled recently in favor of ATP Tour, Inc.’s (“ATP”) request to have the court determine that a fee-shifting provision in its corporate bylaws is valid under Delaware law. Attorneys representing the ATP said this was an important step in the Tour’s longstanding attempt to be reimbursed for significant legal fees expended defending against “unmeritorious claims” brought by two national tennis federations that are members of ATP.
ATP is a not-for-profit Delaware nonstock membership corporation that operates a worldwide men’s professional tennis tour (the “Tour”). ATP’s members are men’s professional tennis players and men’s professional tennis tournaments. Two members, the German Tennis Federation and the Qatar Tennis Federation (the “Federations”), jointly own and operate an ATP tournament in Hamburg, Germany. The Federations sued ATP and several of its Board members in the U.S. District Court for the District of Delaware in March 2007, “challenging the Board’s decision to restructure the Tour.” In the restructuring, the Hamburg tournament was moved from the highest tier of tournaments to the second-highest tier within the Tour and from the spring to the summer season. Seeking to reverse those changes, the Federations asserted that ATP and its Board violated sections 1 and 2 of the Sherman Act, breached their fiduciary duties, tortiously interfered with the Federations’ contractual and business interests, and converted their membership rights.
After a ten-day trial, the Federal District Court granted ATP’s motions for judgment as a matter of law against the Federations’ state law claims. A jury then found for ATP on the Sherman Act claims. Thus, ATP defeated each of the Federations’ claims at trial on the merits and the Federations obtained no relief against ATP. The court’s judgment was affirmed by the Third Circuit in its entirety (610 F.3d 820 (3d Cir. 2010)), and the Supreme Court denied a petition for a writ of certiorari (131 S. Ct. 658 (2010)).
In October 2008, ATP moved to recover its legal fees, costs, and expenses as authorized by Article 23.3 of ATP’s bylaws, which provides that if a member sues ATP (or ATP sues a member) and does not does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then the party that sued is responsible for all fees and costs, including attorneys’ fees incurred by the other party in connection with the litigation.
The District Court denied ATP’s motion on the ground that a contract-based award of attorneys’ fees to a prevailing antitrust defendant would be contrary to the underlying policy of the federal antitrust laws. Although not central to its holding, the court also questioned whether ATP’s members could be bound by the bylaw, which was adopted after they became members. The court further questioned the timing of the bylaw’s adoption and whether it was intended to deter legal challenges to the restructuring.
ATP appealed to the Third Circuit. In May 2012, the Third Circuit vacated the District Court’s order and remanded the case back to the District Court, holding that the Constitutional issue of federal preemption was not ripe for decision because there had been no threshold determination of whether the bylaw was valid and enforceable under Delaware law. The District Court then certified questions to the Delaware Supreme Court to allow that court to rule on these important issues that had yet to be decided under Delaware law.
In what became a closely watched case for both the sports world and the Delaware corporate bar, the Delaware Supreme Court held on May 8, 2014 that ATP’s fee shifting bylaw was facially valid under Delaware law. Although Delaware follows the so-called “American Rule,” which generally calls for parties to pay their own fees and costs, the rule may be modified by statue or by contract. Here, the court held that a corporation’s bylaws constitute a contract between the corporation and its members/shareholders. The court also specifically held that “an intent to deter litigation” is a valid purpose of a fee shifting provision and that the provision is enforceable even though it was adopted by the Board after the Federations became members of ATP.
Still remaining is the District Court’s determination whether to send the case back to the Third Circuit to rule on its preemption holding.
ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), No. 534, 2013 (Del. May 8, 2014)
The ATP was represented by Proskauer. Sports Law Group co-head Bradley Ruskin argued before the Delaware Supreme Court and led a team that included litigation partners Chuck Sims and Jennifer Scullion and senior counsel Jordan Leader.
In an insightful piece, Skadden Arps recently examined the decision and its meaning: http://www.skadden.com/insights/fee-shifting-bylaws-delaware-supreme-court-decision-atp-tour
