Alf v. Lorillard Tobacco Co.

• Decision Date: 30 January 2003
• Docket Number: C.A. No. 19406.
• Citation: 831 A.2d 335
• Parties: AMERICAN LEGACY FOUNDATION, a Delaware non-profit corporation, Plaintiff, v. LORILLARD TOBACCO COMPANY, a Delaware corporation, Defendant.
• Court: Court of Chancery of Delaware

831 A.2d 335

AMERICAN LEGACY FOUNDATION, a Delaware non-profit corporation, Plaintiff, v. LORILLARD TOBACCO COMPANY, a Delaware corporation, Defendant.

C.A. No. 19406.

Court of Chancery of Delaware, New Castle County.

Submitted: January 7, 2003.

Decided: January 30, 2003.

David C. McBride, Richard H. Morse, Martin S. Lessner, Young, Conaway, Stargatt & Taylor, Wilmington, DE; Thomas P. McGonigle, John L. Reed, Duane Morris, LLP, Wilmington, DE; John Payton, Patrick J. Carome, David W. Ogden, Wilmer, Cutler & Pickering, Washington, D.C.; and Ellen Vargyas, of the American Legacy Foundation, Washington, D.C., for Plaintiff.

Stephen E. Herrmann, Robert W. Whetzel, Steven J. Fineman, Richards, Layton & Finger, Wilmington, DE; Jim W. Phillips, Jr., Robert J. King, III, Charles E. Coble, Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, Greensboro, NC, for Defendant.

OPINION

LAMB, Vice Chancellor.

I.

This action arises out of a landmark settlement agreement between the nation's largest tobacco companies and almost all the U.S. states and territories. As part of that settlement agreement, the signatories provided for the creation and funding of a foundation whose mission is to educate youth about the harms associated with tobacco use and to reduce levels of youth tobacco use. This campaign has proven successful. As part of the settlement agreement, however, the signatories agreed to certain restrictions placed on the content of the foundation's educational programs. The most significant restriction, and the one that is at issue here, provides that the foundation may not engage in the "vilification" of or a "personal attack" on the tobacco companies or their executives. The same restriction appears verbatim in the foundation's bylaws as well.

After its creation, the foundation sponsored a series of television, radio and print advertisements aimed at reducing youth tobacco use and educating youth about health risks associated with tobacco. Thereafter, one of the tobacco companies threatened suit against the foundation for allegedly violating the anti-vilification provisions in the settlement agreement and the foundation's bylaws. Concerned about the possibility of the tobacco company filing suit in several jurisdictions, the foundation brought suit in this court against the defendant tobacco company seeking declaratory judgment on four counts, three of which are the subject of this motion for summary judgment. The foundation seeks a judicial declaration that the defendant has no standing to sue the foundation based on the settlement agreement or the foundation's bylaws. The foundation also seeks corresponding injunctive relief barring the defendant from bringing any claims against the foundation under either the settlement agreement or the bylaws.

The court concludes that summary judgment in favor of the foundation is not appropriate, and that summary judgment should instead be granted in favor of the defendant tobacco company with respect to its ability to sue the foundation under a contract theory based on the settlement agreement. This is due to the fact that the settlement agreement itself contemplates that the foundation will ultimately adopt it, and that the foundation in fact adopted the agreement. Because the identical anti-vilification provisions appear in both the settlement agreement and the foundation's bylaws, and because the court holds that the defendant tobacco company can bring an action against the foundation to enforce the settlement agreement, the court need not address whether the defendant tobacco company has standing to sue based on a breach of the foundation's bylaws.

II.

A. ALF's Creation

Plaintiff American Legacy Foundation ("ALF") was formed in 1999 as a Delaware non-profit corporation with the stated goal of creating advertising to reduce youth tobacco product usage in the United States. ALF exists by virtue of a Master Settlement Agreement (the "MSA") reached in 1998, whereby the nation's largest cigarette companies settled lawsuits brought against them by the attorneys general of 46 states (the "Settling States") seeking monetary and injunctive relief for the injuries inflicted by tobacco products upon the states and their citizens. Defendant Lorillard Tobacco Company ("Lorillard") is the oldest tobacco company in the United States and is a party to the MSA.

The M.S.A. itself clearly states that one of its principal objectives is to reduce the level of smoking by youth and increase the level of awareness in the country through the creation of ALF. The preamble of the M.S.A. specifically provides:

WHEREAS, the Settling States and Participating Manufacturers wish to avoid further expense, delay, inconvenience, burden and uncertainty of continued litigation (including appeals from any verdicts), and, therefore, have agreed to settle their respective lawsuits and potential claims pursuant to terms which will achieve for the Settling States and their citizens significant funding for the advancement of public health, the implementation of important tobacco-related public health measures, including the enforcement of the mandates and restrictions related to such measures, as well as funding for a national Foundation [i.e., ALF] dedicated to significantly reducing the use of Tobacco Products by Youth.¹

To achieve the educational goals of the MSA, the Settling States and the tobacco companies provided for the formation of ALF. The Settling States were responsible for the mechanics of forming ALF, and they effected its incorporation through the National Association of Attorneys General ("NAAG").² On March 4, 1999, ALF was incorporated as a non-profit, non-member corporation, organized under the laws of Delaware, with its principal place of business in Washington, D.C.³ ALF's primary mission was "to support (1) the study of and programs to reduce Youth Tobacco Product usage and Youth substance abuse in the States, and (2) the study of and educational programs to prevent diseases associated with the use of Tobacco Products in the States."⁴ The M.S.A. also sets forth the anticipated functions and activities of ALF, one of which is to "carry[] out a nationwide sustained advertising and education program to (A) counter the use by Youth of Tobacco Products, and (B) educate consumers about the cause and prevention of diseases associated with the use of Tobacco Products."⁵

Consistent with the MSA, and as specified in ALF's bylaws, ALF is governed by a particular board of directors meeting certain criteria. The eleven directors include two governors selected by the National Governors' Association, two state attorneys general selected by NAAG, and two state legislators selected by the National Conference of State Legislators. Those six directors select five additional directors, one of whom must have public health expertise, and four of whom must have expertise in medical, child psychology, or public health disciplines.⁶ The M.S.A. did not provide for the tobacco companies to be given any role in the governance of ALF, either through the appointment or selection of its directors or otherwise.

B. ALF's Funding

Once created, ALF's primary source of funding was the tobacco companies, which are required to make two types of payments under the M.S.A. for the benefit of ALF. Pursuant to Section VI(b) of the MSA, the tobacco companies are required collectively to make "base foundation" payments of $25,000,000 per year for a period of nine years. These payments are used to "fund" ALF, and, pursuant to ALF's bylaws, ALF may use these funds to pay its administrative expenses.⁷ In addition, Section VI(c) of the M.S.A. requires the tobacco companies collectively to make payments in the amount of $250,000,000 in 1999, and $300,000,000 per year for the next four years "for the benefit" of ALF's National Public Education Fund ("NPEF"). These NPEF payments are expended by ALF in its public advertising and education campaign.⁸ Further, Section IX(e) of the M.S.A. provides that, if the tobacco companies' market share exceeds 99.05% in 2004, and any year thereafter, the tobacco companies shall continue to make NPEF payments "for the benefit of" ALF.

The tobacco companies are required to make payments into an escrow account before the funds are ultimately distributed to ALF.⁹ The M.S.A. explicitly provides that the tobacco companies' payments of these funds into the escrow account are "made at the direction and on behalf of the Settling States."¹⁰ Thus, ALF argues that the M.S.A. intended that the funds paid to the escrow agent be the property of the Settling States, and not the tobacco companies.¹¹ There can be little doubt, however, about where the money to fund ALF comes from. Sections VI and IX(e) of the M.S.A. unambiguously require the tobacco companies to pay the money used to fund ALF. The Settling States are not given any discretion or authority to choose what to do with these payments or to decide to direct them to any destination other than ALF.¹² Thus, even though the Settling States are interposed between the tobacco companies and ALF as money flows from the former to the latter, the M.S.A. is clear that this money is for the benefit of ALF and may go nowhere else but to ALF.

C. ALF's Restrictions

As part of the long and arduous negotiations between the Settling States and the tobacco companies, the signatories to the M.S.A. agreed upon certain restrictions on what ALF could do with the money it receives.¹³ Most of these limitations are found in Section VI(h) of the MSA, which provides generally that ALF "shall not engage in, nor shall any of [ALF's] money be used to engage in, any political activities or lobbying, including, but not limited to, support of or opposition to candidates, ballot initiatives, referenda or similar activities." Importantly, Section VI(h) goes on to carefully limit the ways in which the NPEF payments may be used, providing that:

The National Public Education

...