On May 8, 2014, the Delaware Supreme Court in the case ATP Tour, Inc. v. Deutscher Tennis Bund, 2014 Del. Lexis 2009 (2014), held that a fee shifting provision in a non-stock corporation’s by-laws can be enforceable under Delaware law provided it was adopted for a proper purpose.
The case involved a Delaware non-stock corporation ATP Tour, Inc. Its members include professional men’s tennis players and entities that own and operate professional men’s tennis tournaments. In 2006, the board amended ATP’s bylaws to add an Article 23, which in summary provided that if any member or owner commences litigation against ATP Tour which “does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) (collectively, ‘Litigation Costs’) that the parties may incur in connection with such Claim).”
After the enactment of that bylaw, two members commenced litigation against ATP asserting that the corporation violated federal anti-trust laws and breached fiduciary duties. A federal jury ultimately found in ATP’s favor after a ten day trial. ATP filed a motion pursuant to Federal Rule of Civil Procedure 54 seeking the recovery of the attorneys’ fees and costs it spent successfully defending itself in that litigation. The Federal District Court Judge denied the application finding that federal law pre-empted the enforcement of fee shifting agreements when anti-trust claims are involved. ATP appealed the District Court’s decision to the United States Court of Appeals for the Third Circuit. That Court disagreed with the trial court’s reasoning but found that there was no Delaware case law answering questions relating to whether or not a Delaware corporation’s bylaws could permit a losing party to pay the prevailing party’s counsel fees and costs. The case was sent to the Delaware Supreme Court to answer those unanswered questions.
The Delaware Supreme Court affirmed that Delaware follows the American Rule, under which parties to litigation generally must pay their own attorneys’ fees and costs.Relying on previous decisions, the Delaware Supreme Court found it was settled that contracting parties may agree to modify the American Rule and obligate the losing party to pay the prevailing party’s fees.The Delaware Supreme Court held that “corporate bylaws are ‘contracts among a corporation’s shareholders,’ [and found that] a fee-shifting provision contained in a non-stock corporation’s validly-enacted bylaw would fall within the contractual exception to the American Rule.”
The Delaware Supreme Court did limit their decision to the enactment of fee-shifting bylaws so long as they were put into place for a proper purpose. Citing the landmark decision, Schnell v. Chris-Craft Industries, 285 A.2d 437 (Del. 1971), the Delaware Supreme Court held when deciding whether or not a specific fee-shifting bylaw is enforceable “depends on the manner in which it was adopted and the circumstances under which it was invoked.” The Delaware Supreme Court further held “bylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose.”
This is an extremely important decision because Delaware is the state where a majority of corporations are incorporated. The decision could profoundly change intra corporate litigation because Delaware corporations may take notice and adopt similar bylaws in an effort to make litigation more expensive and risky. The decision is also extremely important because Delaware law is often followed by other jurisdictions. It is possible that other states may follow Delaware law and permit their corporations to enact bylaws that force the losing party to pay the winner’s counsel fees.