An investor or subsidiary that sues a corporation and loses may be required to fork over attorney fees under fee-shifting bylaws, the Delaware Supreme Court has ruled. The court upheld the validity of the provisions in a response to certified questions of law asked by the U.S. District Court for the District of Delaware.
The en banc court’s decision in ATP Tour v. Deutscher Tennis Bund carved out a corporate exception to the “American rule” requiring parties in litigation to generally pay their own attorney fees and costs. Delaware typically invokes the American rule in all forms of litigation, but ruled corporations could contractually opt out of the rule. However, the court made it clear that it would not permit fee-shifting in non-corporate litigation.
“It is settled that contracting parties may agree to modify the American rule and obligate the losing party to pay the prevailing party’s fees,” Justice Carolyn Berger said. “Because corporate bylaws are ‘contracts among a corporation’s shareholders,’ a fee-shifting provision in a non-stock corporation’s validly enacted bylaw would fall within the contractual exception to the American rule. Therefore, a fee-shifting provision bylaw would not be prohibited under Delaware common law.”
The men’s professional tennis association, ATP Tour Inc., was sued in 2007 by its member federations, Deutscher Tennis Bund, Qatar Tennis Federation and Rothenbaum Sport GmbH. Collectively, the plaintiffs in the District of Delaware lawsuit own the German Open, a Hamburg, Germany, tennis tournament.
The plaintiffs alleged ATP, a nonprofit Delaware membership corporation, violated the Sherman Antitrust Act when it restructured its tournament schedule. ATP prevailed on every claim and the U.S. Court of Appeals for the Third Circuit affirmed the federal court decision.
ATP filed a post-trial motion seeking attorney fees and costs, citing one of its bylaws requiring any current or prior member who sues ATP to reimburse the association for its legal costs.
U.S. District Chief Judge Gregory M. Sleet denied ATP’s request for attorney fees and the association appealed his decision to the Third Circuit. The federal appellate court remanded the case back to Sleet to determine if the fee-shifting provision, identified as Article 23.3(a) of ATP’s bylaws, is valid and enforceable. Upon remand, Sleet held the fee-shifting bylaw was a novel question of Delaware law and should be addressed by the state Supreme Court.
Sleet sent four certified questions of law to the Supreme Court related to Article 23.3(a)’s enforceability.
In a unanimous opinion, the court held that such provisions are not barred under Delaware General Corporation Law.
“A fee-shifting bylaw, like the one described in the first certified question, is facially valid,” Berger said. “Neither the DGCL nor any other Delaware statute forbids the enactment of fee-shifting bylaws.”
Berger said under the DGCL, corporations can enact any bylaw that “relates to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” The justice added that since fee-shifting provisions pass the business rights and powers test, it is enforceable under the DGCL.
“The corporate charter could permit fee-shifting provisions, either explicitly or implicitly by silence,” she said. “Moreover, no principle of common law prohibits directors from enacting fee-shifting bylaws.”
However, the court stopped short of ruling that ATP’s specific fee-shifting bylaw was enforceable. Berger said the state Supreme Court’s 1971 decision in Schnell v. Chris-Craft Industries granted courts the authority to invalidate corporate bylaws if they were adopted for an improper purpose such as discouraging litigation. She added the district court will have to conduct an inquiry to determine the reason ATP adopted the fee-shifting provisions.
“Because certifications by their nature only address questions of law, we are able to say only that a bylaw of the type at issue here is facially valid, in the sense that it is permissible under the DGCL and that it may be enforceable if adopted by the appropriate corporate procedures and for a proper corporate purpose,” Berger said.
ATP was represented by Philip Trainer Jr. of Ashby & Geddes. Bradley I. Ruskin and Charles S. Sims of Proskauer Rose served as of counsel.
The German Open managers were represented by David M. Powlen and Kevin G. Collins of Barnes & Thornburg’s Wilmington, Del., office. Robert D. MacGill and Peter J. Rusthoven of Barnes & Thornburg’s Indianapolis office served as of counsel.
This article first appeared in Delaware Business Court Insider, a Legal sibling publication.