Recent Development Regarding Fee Shifting By-Laws Under ATP Tour

July 16, 2014 | Comments Off on Recent Development Regarding Fee Shifting By-Laws Under ATP Tour
Posted by Patrick Convery

In ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court ruled that the board of a Delaware non-stock corporation may adopt a fee-shifting by-law that requires a plaintiff-stockholder to pay the corporation’s legal expenses if (i) the fee-shifting by-law is not adopted or used for an inequitable purpose and (ii) the plaintiff-stockholder that brought a claim against the corporation in an intra-corporate dispute does not prevail on that claim.[1]  The underlying case involved a lawsuit brought by Deutscher Tennis Bund and Qatar Tennis Federation (collectively, the “Federations”) against ATP Tour, Inc. (“ATP”), which is an operator of a global men’s professional tennis tour.  ATP was a Delaware non-stock membership corporation.  Upon joining ATP in the early 1990s, the Federations agreed to be bound by ATP’s by-laws, as amended from time to time.  In 2006, the board of ATP unanimously amended ATP’s by-laws to add a new article which included a fee-shifting provision that shifts the fees, costs and expenses (including reasonable attorneys’ fees and other litigation expenses) of an intra-corporate lawsuit to the claiming party (defined in ATP’s by-laws as a current or prior member or owner or anyone acting on their behalf) if the claiming party does not obtain a judgment on the merits that “substantially achieves, in substance and amount, the full remedy sought.”

In 2007, ATP’s board voted to change the tour schedule and format.  Under the proposed new tour schedule and format, a tournament which the Federations owned and operated was downgraded from the highest tier of tournaments to the second highest tier, and was moved from the Spring season to the Summer season.  As a result of these changes, the Federations sued ATP and six of its seven board members in the United States District Court in the District of Delaware, alleging both federal antitrust claims and Delaware fiduciary duty claims.

After a ten-day jury trial, the District Court granted ATP’s and the director defendants’ motions for judgment as a matter of law on all of the fiduciary duty claims and also on the antitrust claims brought against the director defendants.  The jury then found in favor of ATP on the remaining antitrust claims.  Thus, the Federations did not prevail on any claim.  ATP then moved to recover its legal fees, costs and expenses under Rule 54 of the Federal Rules of Civil Procedure and the fee-shifting provisions contained in ATP’s by-laws.  The District Court denied ATP’s motion because it found the fee-shifting by-laws to be contrary to the policy underlying the federal antitrust laws.  The District Court effectively ruled that federal law preempts the enforcement of fee-shifting agreements when antitrust claims are involved.

ATP appealed, and the United States Court of Appeals for the Third Circuit vacated the District Court’s order.  The Third Circuit found that the District Court should have decided whether the fee-shifting by-law was enforceable as a matter of Delaware law before reaching the federal preemption question.  On remand, the District Court determined that the enforceability of the fee-shifting by-law provision was a novel question of Delaware law that should be addressed in the first instance by the Delaware Supreme Court.  The District Court then certified four questions of law to the Delaware Supreme Court:

  1. Whether the governing body of a Delaware non-stock corporation is permitted to adopt a fee-shifting by-law;
  2. Whether the fee-shifting by-law adopted by ATP can be enforced against a member that obtains no relief, even if it might be unenforceable in a situation where the member obtains some relief;
  3. Whether the fee-shifting by-law would be rendered unenforceable as a matter of law if the members of the governing body subjectively intended the by-law to deter legal challenges to potential corporate actions; and
  4. Whether the by-law would be enforceable against a member if it was adopted after the member had joined the corporation (but where the member had agreed to be bound by the corporation’s rules as in effect from time to time).

The Delaware Supreme Court first determined that the Delaware General Corporation Law (“DGCL”) applies to non-stock corporations under Section 114 of the DGCL.  On that basis, the Delaware Supreme Court ruled that fee-shifting by-laws are facially valid. The Court noted that by-laws “are presumed to be valid and the courts will construe the by-laws in a manner consistent with law rather than strike the by-laws down.”  The Court stated that fee-shifting by-laws were not prohibited by the DGCL or any other Delaware statute.  The Court found that a fee-shifting by-law that allocates risk among parties in intra-corporate litigation satisfies the requirement in DGCL Section 109 that by-laws relate “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 Court found that a provision for fee-shifting is not required to be included in the charter of the Delaware non-stock corporation and can therefore be adopted in the by-laws.  The Delaware Supreme Court also held that because by-laws are generally treated as contracts among a corporation’s stockholders and because parties may generally agree by contract to modify the American Rule (which provides that litigation parties’ generally are responsible for their own fees), a fee-shifting by-law would represent a valid contractual modification to the American Rule.

The Court indicated that it could not determine specifically whether ATP’s fee-shifting by-law was enforceable because it did not have the facts necessary to determine whether the by-law was enacted for a proper purpose or properly applied.  The Delaware Supreme Court found that whether a specific by-law would be enforceable under specified circumstances would depend on the manner in which it was adopted and applied.  For instance, if a fee-shifting by-law provision was adopted during or in anticipation of a specific litigation matter in an effort to shift fees on that matter, a court might deem the adoption of the by-law to be for an improper purpose.  Because the questions to the Delaware Supreme Court did not provide stipulated facts that would have enabled it to determine whether the adoption and application of the by-law at issue was inequitable, the Delaware Supreme Court only indicated that the by-law was valid on its face, was not expressly prohibited by the DGCL and could be enforced under appropriate circumstances.

The Delaware Supreme Court also found that a fee-shifting by-law could shift fees if a plaintiff obtained no relief in the litigation against the company.  As a result of the difficulty in applying the “substantially achieves” language in the ATP fee-shifting by-law, the District Court asked the Delaware Supreme Court to determine whether the by-law could be invoked in the limited situation in which a plaintiff achieved none of its requested relief.  The Delaware Supreme Court ruled that in this event, a fee-shifting by-law would be enforceable.  The Delaware Supreme Court also ruled that the adoption of a fee-shifting by-law to deter legal challenges generally is not a per se invalid purpose, despite the fact that fee-shifting provisions inherently deter litigation.

Finally, the Court held that a valid and enforceable fee-shifting by-law is enforceable against members who joined the corporation before adoption of the by-law.  In support of the holding on enforceability against pre-adoption members, the Delaware Supreme Court cited Boilermakers Local 154 Retirement Fund v. Chevron Corp.[2], which was a Court of Chancery decision that upheld the adoption of forum selection by-laws, for the principle that “stockholders will be bound by by-laws adopted unilaterally by their boards” if the directors are authorized to do so.

Although the Delaware Supreme Court in the ATP decision held that a non-stock corporation’s fee-shifting by-law was not facially invalid, it refused to determine whether such by-laws are equitable under any specified circumstances.  The Court specifically emphasized that it was not addressing any equitable issues, suggesting that the Court may have some concerns about potential misuse of fee-shifting provisions in the adoption or use of such fee-shifting provisions in certain circumstances.  Although the Delaware Supreme Court limited its ruling in this matter, the decision by the Delaware Supreme Court in ATP has potentially enormous implications for Delaware non-stock corporations.  As a result of the proliferation of litigation regarding corporate transactions over recent years, many Delaware non-stock corporations (and, as noted below, possibly Delaware stock corporations) may use the ruling in the ATP decision to incorporate fee-shifting provisions in their by-laws or certificates of incorporation.  Additionally, as a result of the Delaware Supreme Court’s reference to Boilermakers Local 154 Retirement Fund v. Chevron Corp. in the ATP decision, many commentators feel that the Delaware Supreme Court would also likely uphold a unilaterally adopted forum-selection by-law if a case raising a question regarding the validity of such a forum-selection by-law was brought before it.

Almost immediately after the Delaware Supreme Court rendered its decision in ATP, some commentators expressed their belief that the ATP ruling might open the door to public companies and other Delaware stock corporations to adopt similar fee-shifting provisions in order to deter shareholder litigation regarding corporate transactions.  Extending the ATP decision to public companies and other Delaware stock corporations could indeed further the laudable goal of reducing and deterring lawsuits which now seem to be filed almost reflexively after any major M&A or other extraordinary corporate transaction is announced.

As an apparent result of the discussion regarding the possible extension of the ATP Tour decision to Delaware stock corporations, legislation was introduced in the Delaware Legislature to amend DGCL Section 102(b)(6) and Section 114 and to add a new Section 331 to the DGCL to limit the applicability of the ATP holding to non-stock corporations, and to make it clear that such fee-shifting liability may not be imposed on holders of stock in stock corporations.  However, some major Delaware-based companies and other companies lobbied hard against the proposed legislation, and the U.S. Chamber of Commerce’s Institute for Legal Reform also opposed the legislation and requested that Delaware lawmakers delay voting on it.  As a result of the objections to the proposed legislation, a resolution was passed in the Delaware Legislature delaying action on the proposed legislation until at least early 2015, during which time the Delaware State Bar Association, its Corporate Law Section and the members of that Section will continue to examine proposed amendments to the DGCL regarding fee-shifting by-laws and other aspects of corporate litigation.  In addition to seeking an examination of the proposed legislation regarding fee-shifting by-laws, the resolution seeks further examination into possible provisions of the certificate of incorporation, by-laws and similar entity documents that affect the conduct of, and forum for, litigation of claims brought under Delaware’s business entity laws, the operation and administration of statutes and court rules governing appraisal rights and the rate of interest on any fair value determination in an appraisal.

At the current time, it is unclear whether fee-shifting by-laws will ultimately be permitted for public companies or other stock corporations in Delaware.  Under the circumstances, many commentators have urged caution for any Delaware stock corporation considering the adoption of fee-shifting by-law provisions, and have noted that there is a risk of significant adverse reactions from stockholders, proxy advisory firms and others.  However, some commentators have suggested that Delaware stock corporations should consider the adoption of fee-shifting by-laws if the corporation does not anticipate significant adverse reactions from its stockholders, proxy advisors or other similarly situated individuals or entities and if such fee-shifting by-laws are not adopted or used for inequitable purposes.  Additionally, commentators have almost universally endorsed the adoption of forum-selection by-laws by Delaware stock corporations.  Although forum-selection by-laws may not allow for the shifting of fees in litigation, forum selection remains an effective tool to reduce the cost and risk of multi-jurisdictional stockholder litigation.

There are serious questions as to whether the ruling of the Delaware Supreme Court in the ATP decision would be followed in the courts of New Jersey.  There are certain key differences between the corporate statutes of the state of New Jersey and the state of Delaware regarding the adoption of by-laws.  Additionally, although it is not entirely clear, the New Jersey Rules of Court may prohibit intra-corporate fee-shifting.  Similarly, there are serious questions as to whether the ruling in the ATP decision would be applied to limited liability companies. New Jersey’s relatively new Revised Uniform Limited Liability Company Act (“RULLCA”) is generally premised in part on the principle of freedom of contract and the ability of the parties in a limited liability company to negotiate their arrangement in the operating agreement of the limited liability company.  However, questions remain under RULLCA as to whether a fee-shifting provision would unreasonably restrict direct corporate actions by members in violation of RULLCA, and whether a fee-shifting provision included in an operating agreement could be deemed to violate the provisions in RULLCA prohibiting an operating agreement from varying the power of a court to order remedies in minority oppression cases involving members of New Jersey limited liability companies.  Due to the relatively recent adoption of RULLCA in New Jersey, there appear to be no major reported decisions interpreting RULLCA or its various provisions.  As a result, although a stronger case can arguably be made for inclusion of fee-shifting by-laws in operating agreements of New Jersey limited liability companies, serious questions nevertheless remain regarding how those provisions would be treated by the New Jersey courts.

For more information regarding the ATP decision, the adoption of fee-shifting by-laws or the adoption of forum-selection by-laws by corporations or other entities, please contact Patrick S. Convery, Esq. at 732-219-5499 or pconvery@ghclaw.com.



[1] ATP Tour, Inc. v. Deutscher Tennis Bund, No. 534, 2013, 2014 WL 1847446, 2014 Del. LEXIS 209 (Del. May 8, 2014).

[2] Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013).

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