AMERICAN LEGACY v. LORILLARD TOBACCO

• Decision Date: 22 August 2005
• Docket Number: C.A. No. 19406.
• Citation: 886 A.2d 1
• Parties: AMERICAN LEGACY FOUNDATION, a Delaware non-profit corporation, Plaintiff, v. LORILLARD TOBACCO COMPANY, a Delaware corporation, Defendant.
• Court: Court of Chancery of Delaware

886 A.2d 1

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: May 20, 2005.

Decided: August 22, 2005.

David C. McBride, Esquire, Martin S. Lessner, Esquire, Christian Douglas Wright, Esquire, Karen E. Keller, Esquire, Young, Conaway, Stargatt & Taylor, LLP, Wilmington, Delaware; John Payton, Esquire, David W. Ogden, Esquire, Stuart F. Delery, Esquire, Wilmer, Cutler, Pickering, Hale and Dorr LLP, Washington, D.C.; Ellen Vargyas, Esquire, American Legacy Foundation, Washington, D.C., Attorneys for American Legacy Foundation.

Stephen E. Herrmann, Esquire, Steven J. Fineman, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware; Jim W. Phillips, Jr., Esquire, Robert J. King, III, Esquire, Charles E. Coble, Esquire, Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, Greensboro, North Carolina, Attorneys for Lorillard Tobacco Company.

Don A. Beskrone, Esquire, Ashby & Geddes, P.A., Wilmington, Delaware; Michael C. Hefter, Esquire, Dewey Ballantine LLP, New York, New York, Attorneys for Amicus Curiae, The Citizens' Commission To Protect The Truth.

Joel Friedlander, Esquire, Bouchard, Margules & Friedlander, P.A., Wilmington, Delaware; Attorneys for Amici Curiae Alaska, Arizona, Arkansas, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, North Dakota, Northern Mariana Islands, Oklahoma, Oregon, Puerto Rico, South Carolina, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, and Wisconsin.

Thomas G. Macauley, Esquire, Elizabeth D. Power, Esquire, Zuckerman Spaeder LLP, Wilmington, Delaware; William B. Schultz, Esquire, Alexandra W. Miller, Esquire, Zuckerman Spaeder LLP, Washington, D.C., Attorneys for Amici Curiae Campaign for Tobacco-Free Kids, Action on Smoking and Health, American Cancer Society, American College of Occupational and Environmental Medicine, American College of Preventative Medicine, American Dental Hygienists' Association, American Heart Association, American Lung Association, American Public Health Association, American School Health Association, American Society of Addiction Medicine, Association of State and Territorial Health Officials, American Thoracic Society, Community Anti-Drug Coalitions of America, Lung Cancer Alliance, National African American Tobacco Prevention Network, National Association of County and City Health Officials, National Association of Local Boards of Health, and National Latino Council on Alcohol and Tobacco Prevention.

OPINION

LAMB, Vice Chancellor.

I.

This litigation arises out of the historic 1998 tobacco settlement between the nation's largest tobacco companies and 46 of the states' attorneys general. In the settlement, the tobacco companies agreed to fund a foundation charged with creating programs to reduce youth tobacco product usage in the United States. As part of its mission, the foundation created a series of television and radio ads under the brand "the truth."¹

The settlement agreement imposes certain limits on the content of the foundation's activities, including a requirement that its advertising not constitute a "personal attack on, or vilification of" any person or company. After the airing of one of the foundation's radio ads in 2001, a tobacco company threatened to take legal action against the foundation. Several months later, with the issue still unresolved and facing the threat of suit in multiple jurisdictions, the foundation filed an action in this court, seeking a declaration that none of its ads violate the settlement agreement. The tobacco company counterclaimed that the ads do violate the settlement agreement.

Both parties move for summary judgment, arguing that there is no genuine issue of material fact. They both agree that the matter presented is a straightforward contractual issue that turns on the legal interpretation of the words of the settlement agreement.

The restrictive terms used in the settlement agreement do not have well defined legal meanings. Nevertheless, drawing upon numerous sources, including case law, law review articles, and dictionaries, the court is able to ascertain the meaning of those terms and, then, to analyze the disputed advertisements in light of those meanings. As a result of this analysis, and for the reasons discussed below, the foundation's motion for summary judgment is granted and the tobacco company's motion for summary judgment is denied.

II.

A. Background

The defendant is Lorillard Tobacco Company, the oldest tobacco company in the United States and a Delaware corporation. The plaintiff is American Legacy Foundation ("ALF"), a Delaware non-profit corporation formed pursuant to the terms of the Master Settlement Agreement (the "MSA"), a 1998 agreement whereby the nation's largest tobacco companies settled lawsuits brought against them by the attorneys general of 46 states. The MSA requires that the tobacco signatories make collective Base Fund Payments of $25,000,000 per year for nine years. The MSA also requires the tobacco signatories to make collective payments in the amount of $250,000,000 in 1999 and $300,000,000 per year for the next four years for ALF's National Public Education Fund ("NPEF"). These funds have been used by ALF to produce its ad campaigns.

ALF's mission, as originally stated in the MSA and later incorporated into ALF's bylaws, is to educate America's youth about the dangers of tobacco products and to reduce the usage of tobacco products by young people. To fulfill its mission, ALF launched an advertising campaign universally known as "the truth" campaign. This campaign involved various television and radio ads aimed at young people that portray the negative side of tobacco products. To make sure that its ads were effective in reaching young people, ALF purposefully made them edgier and more confrontational than regular television and radio ads. Many ads could be described as "in your face" and "eye-catching."

The funding provided to ALF pursuant to the MSA did not come without restrictions. A majority of ALF's funding was earmarked for the public's education (i.e.advertising), and the content of that advertising is made subject to both requirements and prohibitions. The MSA required that the advertising concern only the "addictiveness, health effects, and social costs related to the use of tobacco products."² The MSA also prohibited the advertising from being a personal attack or a vilification of tobacco company employees or tobacco companies.³

The relationship between ALF and the tobacco companies got off to a rocky start. In July 2001, Lorillard threatened litigation against ALF because of a radio ad that mentions Lorillard by name and implies that cigarettes contain dog urine. Lorillard initially threatened claims of defamation and unfair business practices against ALF, but later changed its position to assert that ALF's ads were a breach of the MSA.

In a January 18, 2002 letter, Lorillard notified ALF that it intended to bring suit for a breach of the MSA. Lorillard could not, however, bring suit at that time due to a 30-day notice provision of the MSA. ALF, as a non-signatory to the MSA, was not similarly bound. Thus, after a Lorillard spokesman indicated that Lorillard might sue ALF in 46 different states, ALF sued first, filing this action in Delaware on February 13, 2002.

In its complaint, ALF seeks a declaratory judgment that its advertisements do not violate Section VI(h) of the MSA. ALF also seeks injunctive relief on the theory that the continuing threat of litigation from Lorillard, especially the possibility that it may need to defend itself in multiple jurisdictions, threatened irreparable harm to its ability to continue its day-to-day operations.

Lorillard counterclaims that ALF's advertisements violate Section VI(h) of the MSA.

B. Procedure

This opinion is the fourth in a series of opinions concerning the litigation between these parties.⁴ In Lorillard I, the court held that ALF's claims would be litigated in Delaware.⁵ In Lorillard II, the court granted partial summary judgment in favor of Lorillard, finding that the MSA could be enforced against ALF even though it did not sign the agreement. In Lorillard III, the court granted a motion to compel certain documents, and denied a motion to compel other documents, all of which related to the contested advertisements.

Now, after years of litigation and several months before trial, both parties move for summary judgment, neither party contending that there is a material issue of fact. This opinion addresses those motions.

C. The Dispute

Section VI(h) of the MSA is at the center of the dispute between Lorillard and ALF. That section, titled "Foundation Activities," states, in relevant part, as follows:

The Foundation shall not engage in, nor shall any of the Foundation's money be used to engage in, any political activities of lobbying, including, but not limited to, support of or opposition to candidates, ballot initiatives, referenda or other similar activities. The National Public Education Fund shall be used only for public education and advertising regarding the addictiveness, health effects, and social costs related to the use of tobacco products and shall not be used for any personal attack on, or vilification of, any person (whether by name or business affiliation), company, or governmental agency, whether individually or collectively.

The parties argue about three separate clauses in this provision: (1) the anti-vilification and personal attack clause; (2) the restriction of ALF to addressing the "addictiveness, health effects, and social costs related to the use of tobacco products" (the "three criteria clause"); and (3) the funding of ALF's advertisements....