The following post was taken from “The In-House Advisor,” which is hosted on the website of Burns & Levinson.
ATP Tour, Inc. is a Delaware membership corporation that operates as the governing body for the major (and some minor) men’s professional tennis circuits. (A “membership” corporation does not have stockholders like a traditional corporation and often is the corporate form of choice for nonprofits, although for-profit companies can be membership corporations, as well.)
In the early 1990s, ATP adopted a bylaw stating that:
“In the event that (i) any [current or prior member or Owner or anyone on their behalf (‘Claiming Party’)] initiates or asserts any [claim or counterclaim (‘Claim’)] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) 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.”
In 2007, Federations, an ATP member, brought suit against the corporation in the federal District Court in Delaware. Ultimately, however, Federations failed to prevail on any of its claims, and ATP moved for an award of fees based on the above bylaw.
Federations challenged the validity of the fee-shifting bylaw, and, because the District Court felt that its ruling turned on unresolved questions of state law, it sent several certified questions to the Supreme Court of Delaware.
That court then responded to one of the certified questions as follows:
“Delaware follows the American Rule, under which parties to litigation generally must pay their own attorneys’ fees and costs. But 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. Because corporate bylaws are ‘contracts among a corporation’s shareholders,’ a fee-shifting provision contained in a non-stock corporation’s validly-enacted bylaw would fall within the contractual exception to the American Rule. Therefore, a fee-shifting bylaw would not be prohibited under Delaware common law.”
While the ruling technically is limited to “non-stock” corporations, nothing in the decision suggests that it would have been any different if ATP were a different type of closely held corporate entity (although if ATP were a public company, a very different analysis probably would apply).
As such, in-house counsel of closely held businesses (particularly those formed under Delaware law), may want to suggest that their internal clients consider enacting a similar fee-shifting provision to limit the potential for frivolous/nuisance suits that sometimes arise when internal disputes amongst insiders erupt.
Doing so could end up converting a near service ace into a return winner.
Shepard Davidson is co-chairman of the business litigation department at Burns & Levinson in Boston. He concentrates his practice in the areas of complex business torts, contract claims, and real estate and employment disputes.