Fifth Circuit Sides With SCA Promotions in Contract Dispute With Yahoo over Basketball Bracket Contest

Sep 29, 2017

The 5th U.S. Circuit Court of Appeals has reversed the finding of a district court and ruled that Yahoo! owes SCA Promotions $5.5 million as part of a cancellation fee spelled out in a contract when it cancelled plans to stage a “perfect bracket contest” in connection with the 2014 NCAA Men’s Basketball Tournament.
In so ruling, the court noted that the terms of the contract were “unambiguous,” and were prevailing even though SCA had not finalized coverage with an underwriter for the full prize amount, $1 billion.
The origins of the dispute stemmed from Yahoo’s desire to sponsor a contest where any individual who correctly predicted the winner of all 63 games in the aforementioned tournament would win $1 billion. The court noted that SCA provides risk management for marketing and prize promotions.
“Yahoo and SCA negotiated terms and eventually executed Contingent Prize Contract #70816 (Contract),” according to the appeals court. “The Contract was dated and signed by SCA on December 27, 2013; Yahoo signed the Contract on January 2, 2014. In return for a fee, SCA agreed to pay the $1 billion prize if any contestant won the Contest and to obtain underwriting coverage ‘to cover full payment of the prize amount . . . from providers with an A.M. Best rating of A+.’ Yahoo was responsible for preparing the Contest’s Official Promotion Rules, ‘subject to the Promotion underwriter’s review and approval, which shall not be unreasonably withheld, and which shall be provided no later than January 3, 2014.’ The Contract provided for 10 million entries and referred to invoices regarding the contract fee.
“Two invoices, dated December 27, 2013, were attached to the Contract with continuous pagination. According to the second invoice, the contract fee was $11 million. Yahoo owed an initial deposit of $1.1 million to SCA ‘[o]n or before December 31, 2013;’ the remaining $9.9 million was due to SCA ‘[o]n or before February 15, 2014.’ The Contract also provided for up to 20 million additional entries, with a fee of 25 cents per entry, to be separately invoiced if incurred.
“The Contract permitted Yahoo to cancel the Contract, with cancellation fees that varied according to when Yahoo cancelled. Section 2(k) of Exhibit A of the Contract (‘Cancellation Fees Provision’) provided as follows:
“Cancellation fees: Upon notice to SCA to be provided no later than 15 minutes to Tip-Off of the initial game, Yahoo may cancel the contract. In the event the contract is cancelled, Yahoo will be entitled to a refund of all amounts paid to SCA subject to the cancellation fees set forth in this paragraph. The parties hereto stipulate that the contract shall be signed on or before December 31, 2013. Should the signed contract be cancelled after that time and before January 15, 2014 a cancellation penalty of 25% of the fee will be paid to SCA. Should the signed contract be cancelled between January 16, 2014 and February 15, 2014, a cancellation penalty of 50% of the fee will be paid to SCA by Sponsor. Should the signed contract be cancelled after February 16, 2014, a cancellation penalty of 75% of the fee will be paid to SCA by Sponsor.”
Yahoo paid the initial $1.1 million deposit to SCA on January 13, 2014. On January 21, 2014, it found out that Quicken Loans Inc. (Quicken) was sponsoring a similar $1 billion perfect bracket contest with Warren Buffett and Berkshire Hathaway. Yahoo and Quicken agreed that Yahoo would co-sponsor the Quicken Contest. Yahoo then cancelled the Contract with SCA on January 27, 2014. It demanded repayment of the $1.1 million initial deposit and “the cancellation of the . . . Contract without penalty to Yahoo on or before February 7, 2014.”
SCA sued Yahoo for breach of contract, alleging that Yahoo owed SCA $4.4 million. It argued that Yahoo owed $5.5 million in cancellation fees pursuant to the Contract—50 percent of the $11 million contract fee—minus the $1.1 million initial deposit Yahoo already paid.
A district judge granted summary judgment to Yahoo and dismissed all claims with prejudice. SCA appealed to the 5th Circuit.
“Because Yahoo cancelled the Contract on January 27, 2014, the applicable clause in the Cancellation Fees Provision provides that ‘a cancellation penalty of 50 percent of the fee will be paid to SCA by Sponsor [Yahoo].’ The parties dispute the meaning of ’50 percent of the fee.’ SCA argues that the cancellation fee is $5.5 million because ’50 percent of the fee’ means 50 percent of the $11 million contract fee. Yahoo argues that the cancellation fee is $550,000 because “50 percent of the fee” means 50 percent of the $1.1 million that Yahoo had already paid to SCA when Yahoo cancelled the Contract. The district court held that Yahoo’s interpretation of the Cancellation Fees Provision is correct. We disagree and hold that ‘50 percent of the fee’ means 50 percent of the $11 million contract fee.”
The appeals court noted that It is “clear that 50 percent of the fee means 50 percent of the $11 million contract fee. This interpretation is consistent with the plain language and structure of the Cancellation Fees Provision, as well as with several other provisions of the Contract.” The panel of judges also emphasized that Yahoo failed “to provide a reasonable alternate interpretation” to the court’s interpretation.
The appeals court also undercut Yahoo’s argument that SCA breached Section 4(h) of the Contract “because it did not obtain coverage for the full prize amount.” Section 4(h) provides that:
“SCA represents and warrants that it will obtain the coverage necessary to cover full payment of the prize amount as exhibited in this contract from providers with an A.M. Best rating of A+ and will authorize the payment of said funds directly to Sponsor as a loss-payee and SCA shall provide Sponsor a certificate evidencing such designation as a loss-payee within ten calendar (10) days of the Effective Date of this Agreement.
“Ten days from the December 27, 2013 effective date of the Contract was January 6, 2014. It is undisputed that SCA did not finalize coverage with D. E. Shaw or another underwriter for the full prize amount by that date or before Yahoo cancelled the Contract. But SCA was excused from this obligation. As the district court explained, SCA’s coverage obligation was unambiguously conditioned on Yahoo first providing the Official Promotion Rules for the underwriter’s review and approval. SCA did not breach the Contract by failing to finalize coverage because Yahoo did not provide the Official Promotion Rules before it cancelled the Contract.”
SCA Promotions, INC. v. YAHOO!, Inc.; 5th Cir.; No. 15-11254, 2017 U.S. App. LEXIS 15845; 8/21/17
Attorneys of Record: (for plaintiff – appellant cross-appellee) Jeffrey Mark Tillotson, Tillotson Law, Dallas, TX. (for defendant – appellee cross-appellant) David E. Keltner, Esq., Marianne Marsh Auld, Jody Scott Sanders, Kelly, Hart & Hallman, L.L.P., Fort Worth, TX; Scott M. Ahmad, Winston & Strawn, L.L.P., Chicago, IL; Michael S. Elkin, Thomas Patrick Lane, Dorian Slater Thomas, Winston & Strawn, L.L.P., New York, NY.


Articles in Current Issue