213 A.3d 39
Del.2019Background
- SHN is a Delaware LLC co‑owned 50/50 by Nederlander (Nederlander of San Francisco Assocs.) and CSH (Carole Shorenstein Hays family entities); SHN operated three SF theaters, including the Curran (leased until 12/31/2014).
- Carole (and her husband Jeff) purchased the Curran through affiliated entities in 2010, thereafter declined to renew SHN’s lease, renovated the Curran, and booked major shows (Fun Home, Dear Evan Hansen, Harry Potter).
- LLC Agreement §7.02 contains a general cooperation/non‑competition duty (§7.02(a)) and a narrower prohibition on staging productions a member “controls” within 100 miles unless specified exceptions apply (§7.02(b)); §7.03 defines “control.”
- Litigation: CSH sued for a declaratory judgment (no obligation to renew lease); Nederlander counterclaimed for breaches of the LLC Agreement and fiduciary duties. Court of Chancery: found no enforceable lease‑renewal promise, held Hayses breached common‑law fiduciary duties, interpreted that Affiliates are within “Shorenstein Entity,” but read §7.06 and §7.02(b) to limit §7.02(a). Nederlander sought a preliminary injunction to block DEH and Harry Potter; the court denied it.
- On appeal the Delaware Supreme Court: affirmed that Affiliates fall within “Shorenstein Entity,” reversed the trial court’s reading that §7.06 and §7.02(b) nullified §7.02(a), held §7.02(a) imposes a contractual duty not to engage in competitive conduct that undermines SHN unless the narrower §7.02(b) exceptions apply, affirmed the PI court’s finding that DEH and Harry Potter were not controlled by the Hayses, and remanded the PI action for proceedings consistent with that legal construction.
Issues
| Issue | Nederlander’s Argument | CSH’s Argument | Held |
|---|---|---|---|
| Whether “Shorenstein Entity” includes CSH Affiliates (including the Hayses) | Definition language and history show Affiliates were meant to be bound; preventing affiliate competition was a core objective | "Members" should mean only formal parties (CSH and Nederlander); including Affiliates creates absurd surplusage | Affiliates are bound; Court of Chancery’s inclusion of Affiliates affirmed (ambiguous text resolved with extrinsic evidence) |
| Scope and interaction of §7.02(a) (duty to maximize SHN) with §7.06 and §7.02(b) | §7.06 does not permit conduct that undermines §7.02(a); §7.02(a) imposes a contractual duty forbidding competitive acts that harm SHN except where §7.02(b) specifically permits | Trial court read §7.06 as an exception allowing outside activities and treated §7.02(b) as the primary limit on competition | Trial court erred: §7.06 is subject to §7.02 in full and does not free Affiliates to compete that undermines SHN; §7.02(a) enforces a duty not to undertake competitive conduct that would harm SHN, qualified but not displaced by §7.02(b) |
| Whether Hayses "control" Dear Evan Hansen and Harry Potter under §7.03 (preliminary injunction) | The Hayses had sufficient contractual rights/influence to jointly control those productions | Producers and theaters negotiate terms; mere venue ownership or negotiation power does not alone equal "control" as defined | Trial court correctly found Nederlander failed to show likely success on control element for DEH and Harry Potter; denial of PI and related Rule 54(b) judgment affirmed |
| Deposition misconduct and counsel’s duties | (Nederlander highlighted) Hays’s deposition was evasive, abusive, and obstructive, warranting sanctions and counsel intervention | Hays’s counsel defended conduct; procedural defenses were raised below | Court criticized deponent and counsel; fee award for deposition misconduct affirmed below and bench admonished that counsel must prevent abusive deposition tactics |
Key Cases Cited
- CompoSecure, L.L.C. v. CardUX, LLC, 206 A.3d 807 (Del. 2018) (standard of review for contract interpretation and chancery factual findings)
- Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206 (Del. 2012) (reviewing contractual interpretation principles)
- Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153 (Del. 2010) (give each contract provision effect; avoid surplusage)
- Salamone v. Gorman, 106 A.3d 354 (Del. 2014) (use of extrinsic evidence when contract ambiguous)
- DCV Holdings, Inc. v. ConAgra, Inc., 889 A.2d 954 (Del. 2005) (specific controls over general contract language)
- Thorpe v. CERBCO, Inc., 676 A.2d 436 (Del. 1996) (directors may not compete with the corporation; duty of loyalty)
- Paramount Commc’ns, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994) (attorney/deposition misconduct and counsel’s duty to maintain integrity of proceedings)
- Kaung v. Cole Nat’l Corp., 884 A.2d 500 (Del. 2005) (court’s supervisory role over participant conduct and sanctions for deposition misconduct)