213 A.3d 39
Del.2019Background
- SHN is a Delaware LLC jointly owned (50/50) by Nederlander and CSH; the LLC Agreement contains Section 7.02 (Cooperation and Non-Competition), Section 7.03 (definition of "control" over a production), and Section 7.06 (Outside Activities).
- Carole Shorenstein Hays and related CSH entities purchased the Curran Theatre in 2010 and did not renew SHN's lease when it expired in 2014; CSH/affiliates then staged productions at the Curran and made investments that gave them certain rights (e.g., Fun Home first-right, guarantees for Dear Evan Hansen and Harry Potter bookings).
- CSH sued for a declaratory judgment (2014) that it could decline to renew the Curran lease; Nederlander counterclaimed for breaches of the LLC Agreement and fiduciary duties. The Court of Chancery (July 31, 2018) found no enforceable lease-renewal promise, held CSH Affiliates (including the Hayses) were bound by Section 7.02, declined to award meaningful contract damages, but found breaches of common-law fiduciary duties and awarded nominal damages and a limited injunction against misuse of confidential information.
- Nederlander separately sought a preliminary injunction (Sept. 25, 2018) to prevent the Curran presentations of Dear Evan Hansen and Harry Potter; the trial court denied the PI and entered partial final judgment on Nederlander's Section 7.02(b) claim (Nov. 30, 2018).
- On appeal the Delaware Supreme Court affirmed that "Shorenstein Entity" includes Affiliates, reversed the trial court's interpretation that Section 7.06 permitted competition notwithstanding Section 7.02(a), held that Section 7.02(a) creates a contractual duty not to engage in competition that would undermine SHN's economic success (subject to Section 7.02(b)'s narrow carve-outs), remanded the PI Action for proceedings consistent with that legal interpretation, and affirmed the PI court's ruling that the Hayses did not "control" Dear Evan Hansen and Harry Potter under Section 7.03.
Issues
| Issue | Plaintiff's Argument (Nederlander) | Defendant's Argument (CSH/Hays) | Held |
|---|---|---|---|
| Whether "Shorenstein Entity" includes CSH affiliates (so Section 7.02 binds affiliates) | Definitions include "Permitted Transferees" and "Affiliate," so affiliates (including Hayses) are bound | "Shorenstein Entity" should mean only CSH (not its affiliates); otherwise surplusage and absurd results follow | Affirmed: Affiliates are included; extrinsic evidence supports that reading |
| Whether Section 7.06 permits affiliates to engage in outside activities that defeat Section 7.02(a) | Section 7.02(a) imposes a duty to maximize SHN and avoid conflicts; Section 7.06 is subject to Section 7.02 and does not authorize competition that undermines SHN | Trial court read Section 7.06 as an exception that allows competition unless limited by 7.02(b) | Reversed trial court: Section 7.06 is subject to Section 7.02 in full; 7.02(a) creates a contractual duty not to engage in competitive conduct that undermines SHN, only limited by 7.02(b)'s narrower carve-outs |
| Scope of interaction between Section 7.02(a) (general duty) and 7.02(b) (100-mile/"control" rule) | 7.02(b) does not wholly displace 7.02(a); some non-controlled competition can still violate the duty to maximize SHN | 7.02(b) qualifies 7.02(a) with respect to staging productions; non-controlled stagings are permitted | Held: Specific (7.02(b)) qualifies general (7.02(a)) but does not wholly swallow it; 7.02(a) can prohibit competition outside 7.02(b)'s exceptions if it undermines SHN's economic success |
| Whether Dear Evan Hansen and Harry Potter were "controlled" by the Hayses under Section 7.03 (for 7.02(b) purposes) | The Hayses negotiated and obtained financial and operational terms sufficient to establish joint control over those productions | Defendants: producers retained independent ability to choose venues and terms; negotiations reflected ordinary venue-producer bargaining, not control as defined | Affirmed: Trial court correctly found Hayses did not "control" DEH or Harry Potter; Nederlander failed to show likelihood of success on the merits for PI |
Key Cases Cited
- CompoSecure, L.L.C. v. CardUX, LLC, 206 A.3d 807 (Del. 2018) (standard of review on contract interpretation and deference to factual findings)
- Osborn v. Kemp, 991 A.2d 1153 (Del. 2010) (principles for reviewing factual findings and legal questions)
- Salamone v. Gorman, 106 A.3d 354 (Del. 2014) (contract interpretation and use of extrinsic evidence when ambiguous)
- DCV Holdings, Inc. v. ConAgra, Inc., 889 A.2d 954 (Del. 2005) (specific contract provisions qualify general provisions)
- Thorpe v. CERBCO, Inc., 676 A.2d 436 (Del. 1996) (directors may not compete with the corporation; duty of loyalty)
- Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994) (court policing of deposition and counsel conduct; standards for pro hac vice and managing deposition misconduct)
- Kaung v. Cole Nat'l Corp., 884 A.2d 500 (Del. 2005) (sanctions and court's supervisory authority over deposition misconduct)