Lorillard Tobacco v. American Legacy

• Decision Date: 17 July 2006
• Docket Number: No. 579, 2005.,579, 2005.
• Citation: 903 A.2d 728
• Parties: LORILLARD TOBACCO COMPANY, a Delaware corporation, Defendant Below, Appellant/Cross-Appellee, v. AMERICAN LEGACY FOUNDATION, a Delaware non-profit corporation, Plaintiff Below, Appellee/Cross-Appellant.
• Court: United States State Supreme Court of Delaware

903 A.2d 728

LORILLARD TOBACCO COMPANY, a Delaware corporation, Defendant Below, Appellant/Cross-Appellee, v. AMERICAN LEGACY FOUNDATION, a Delaware non-profit corporation, Plaintiff Below, Appellee/Cross-Appellant.

No. 579, 2005.

Supreme Court of Delaware.

Submitted: April 26, 2006.

Decided: July 17, 2006.

COPYRIGHT MATERIAL OMITTED

Court Below: Court of Chancery of the State of Delaware in and for New Castle County, C.A. No. 19406.

Upon appeal from the Court of Chancery. AFFIRMED.

Stephen E. Herrmann, John A. Parkins, Jr. (argued), and Steven J. Fineman, Esquires, of Richards, Layton & Finger, P.A., Wilmington, Delaware; Of Counsel: Jim W. Phillips, Jr., Robert J. King, III, and Charles E. Coble, Esquires of Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., Greensboro, NC; for Appellant/Cross-Appellee.

David C. McBride, Martin S. Lessner, and Christian Douglas Wright, Esquires, of Young, Conaway, Stargatt & Taylor, LLP, Wilmington, Delaware; Of Counsel: John Payton, David W. Ogden, (argued) Stuart F. Delery, Paul R.Q. Wolfson, Pavnett

Singh, and Carey Bollinger, Esquires, of Wilmer Cutler Pickering Hale and Dorr, LLP, Washington, DC; and Ellen Vargyas, Esquire, General Counsel, Washington, DC, for Appellee/Cross-Appellant.

Don A. Beskrone, Esquire, of Ashby & Geddes, P.A., Wilmington, Delaware and Michael C. Hefter, Matthew L. DiRisio, Kristien M. Kahn, Esquires, of Dewey Ballantine, LLP, New York, NY, for Citizens' Commission to Protect the Truth, for amici curiae.

John Friedlander, Esquire of Bouchard Margules & Friedlander, P.A., Wilmington, Delaware, and Olha N.M. Rybakoff, Esquire, Nashville, TN, for Alaska, American Samoa, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Missouri, Montana, Nevada, New Mexico, New York, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wyoming and Wisconsin, for amici curiae.

Thomas G. Maculey and Elizabeth D. Power, Esquires, of Zuckerman Spaeder, LLP, Wilmington, Delaware and William B. Schultz and Alexandra W. Miller, Esquires, of Zuckerman Spaeder, LLP, Washington, DC, for Tobacco-Free Kids, American Cancer Society, American College of Occupational and Environmental Medicine, American Dental Hygienists' Association, American Heart Association, American Public Health Association, American School Health Association, American Society of Addiction Medicine, Association of Schools of Public Health, Community Anti-Drug Coalitions of America, Lung Cancer Alliance, Medical Society of Delaware, National African American Tobacco Prevention Network, National Association of County and City Health Officials, National Association of Local Boards of Health, National Latino Council on Alcohol and Tobacco Prevention, Society for Research on Nicotine and Tobacco, and Tobacco Control Legal Consortium, for amici curiae.

Before HOLLAND, BERGER, JACOBS, RIDGELY, Justices and GRAVES, Judge,^* constituting the Court en Banc.

RIDGELY, Justice.

Defendant-Appellant Lorillard Tobacco Company appeals the declaratory judgment of the Court of Chancery in favor of the American Legacy Foundation ("ALF") arising from a contract dispute under a Master Settlement Agreement ("MSA") between the nation's largest tobacco companies and forty-six states' attorneys general. Consistent with the terms of the MSA, ALF was created to reduce tobacco usage among youth. ALF sought to do so through advertising which Lorillard contends violates the prohibition in the settlement agreement against "vilification" or "personal attacks" against tobacco companies or their executives. The Vice Chancellor granted ALF's motion for summary judgment and denied Lorillard's cross-motion for summary judgment, holding that all of the advertisements in issue comply with the MSA as a matter of law.

The primary question on appeal is whether any of ALF's advertisements in their "truth®" campaign violate the contractual language of the MSA prohibiting "vilification" or "personal attacks." The truth® campaign informs its audience of reasons to stop smoking and includes references to the conduct of tobacco companies or their executives. ALF has designed the ads to inform its target audience of manipulative marketing techniques because published research has demonstrated that these types of messages are the most effective ones for discouraging the rebellious, anti-authoritarian segment of young people who otherwise are the most likely segment of the population to begin smoking.¹ Lorillard alleges the campaign vilifies and personally attacks it, tobacco companies generally, and their executives. We agree with Lorillard that the ads do refer to tobacco companies or their executives and in one instance specifically to Lorillard. However, we conclude that Lorillard's appeal is without merit because the campaign's advertisements do not satisfy the plain meaning of "vilification" or "personal attacks." We also conclude that the Vice Chancellor did not abuse his discretion, based on the record before him, when declining to award relief on Lorillard's claim that ALF managed an email server to facilitate personal attacks on Lorillard employees.

ALF has filed a cross appeal, raising the issue of whether it may be sued for alleged breaches of the MSA. The Vice Chancellor held that the tobacco companies may sue ALF for the alleged breaches of the MSA. We agree. Under the preincorporation agreement doctrine, the states who agreed to establish ALF bound the nascent corporation to the terms of the MSA. Since ALF was bound to the terms of the agreement by its incorporators, Lorillard has standing to sue ALF for any breach by ALF of those terms.

Accordingly, we affirm the judgment of the Court of Chancery.

I. Background

A. Background of the American Legacy Foundation ("ALF")

We reiterate the background of this litigation as stated by the Vice Chancellor.²

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."

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.

* * *

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 [specifically those young people who are most likely to smoke, i.e., those who challenge authority], 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." The MSA also prohibited the advertising from being a personal attack or a vilification of tobacco company employees or tobacco companies.

Section VI of the MSA entitled "Establishment of a National Foundation" is at issue in this appeal. Subsection VI(h) establishes the prohibition that the advertising "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 MSA does not define the terms "personal attack" or "vilify."

B. The ALF advertisements

Lorillard claims the advertisements of the truth® campaign violate Subsection VI(h) of the MSA and focuses on four examples of ads titled: "Shredder," "Hypnosis," "Lie Detector," and "Dog Walker." We have carefully considered these examples and the other ads in the record before us and find no merit to Lorillard's claims that ALF has breached the MSA.

Our analysis begins with a summary of the examples Lorillard has cited. In "Shredder," a cargo truck with the "truth®" logo tows a large machine labeled "Shredder 2000" and stops in front of an office building on a city street. The words "Outside a major tobacco company." appear at the bottom of the television screen. Although the building is Philip Morris's New...