Opinion ID: 177020
Heading Depth: 2
Heading Rank: 1

Heading: Alleged Liability of The Foundation to Lorillard: The Underlying Suit

Text: American Legacy Foundation, a Delaware non-profit corporation, was formed by the terms of the 1998 Master Settlement Agreement (MSA) between 46 states' attorneys general and the country's largest tobacco companies. Among these was Lorillard Tobacco Company, whose dispute with the Foundation is at the root of the case now before us. The Foundation's mission, as initially set forth in the MSA and incorporated into its own bylaws, was to educate the public about the dangers of tobacco products in order to reduce their use among America's youth. The MSA provided that the tobacco companies would fund advertising campaigns, developed by the Foundation, that demonstrated the negative impact of tobacco product usage. The ads were to be concerned only with the addictiveness, health effects, and social costs related to the use of tobacco products. Ads that amounted to a personal attack on, or vilification of, tobacco companies or their employees were prohibited. The Foundation created a series of television and radio ads branded the truth(). These ads were brash, edgy, impertinent, and disrespectful, to appeal to those teens and young adults who were believed to be more likely to use tobacco products. The ads portrayed Lorillard and other tobacco firms in a mocking and unfavorable light. [1] In 2001, Lorillard sent a cease-and-desist letter to the Foundation, threatening to file suit over one of those ads. A draft complaint included with the letter alleged various torts, including slander per se and per quod, libel per se and per quod, secondary libel, and unfair or deceptive acts or practices. Lorillard's letter also suggested that it might also pursue breach of contract claims. In a letter of January 18, 2002, Lorillard followed up with a Notice of Intent to Initiate Enforcement Proceeding Under MSA. There, Lorillard asserted that the Foundation had improperly used the funding designated by the MSA for public education and failed to meet its obligations under that agreement. The Foundation peremptorily filed a declaratory judgment action against Lorillard in Delaware Chancery Court on February 13, 2002. Six days later, Lorillard brought suit against the Foundation in North Carolina state court. That complaint included no tort claims but alleged breach of the MSA and of the covenant of good faith and fair dealing. Lorillard counterclaimed against the Foundation in the Delaware Chancery Court in September 2002, asserting breach of the MSA; breach of the duty and covenant of good faith and fair dealing implied in the MSA; violations of the Foundation's bylaws and certificate of incorporation; a declaratory judgment that the Foundation was not eligible for public funding under the MSA; and trespass to chattel. The North Carolina suit was stayed and remained pending while the parties litigated the Delaware matter. In January 2003, the Delaware Court of Chancery held that the Foundation, though not a signatory to the MSA, could be held liable for violations of that agreement. Granting summary judgment to Lorillard on this issue, the Chancery Court found that the Foundation had adopted the MSA, both expressly and implicitly by accepting its benefits with knowledge of its terms. Am. Legacy Found. v. Lorillard Tobacco Co., 831 A.2d 335, 348-50 (Del.Ch. 2003). Therefore, the Court concluded that the Foundation was bound by the MSA's provisions. Id. at 351. After lengthy discovery and motions practice, including cross-motions for summary judgment, the Chancery Court found that the ads in question did not breach the MSA. Specifically, the ads did not violate the anti-vilification clause because they did not incorporate scurrilous [or] vitriolic attacks[,] nor did they amount to cruel slander .... public ridicule, traduction, or calumny. Am. Legacy Found. v. Lorillard Tobacco Co., 886 A.2d 1, 32-33 (Del. Ch.2005). In addition, the ads did not contain personal attacks because none of the ads specifically identif[ied] a target of an alleged attack. Id. at 43. Accordingly, summary judgment was granted in favor of the Foundation in August 2005. Id. at 46. On appeal, the Delaware Supreme Court affirmed the holdings of the Chancery Court on both the standing and liability issues. Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728 (Del.2006). Having carefully scrutinized four of the ads that Lorillard had asserted were contrary to the MSA, the court found that [t]he advertisements are not invidious, disparaging, offensive, belligerent, nor fiercely or severely critical. Nor are they denouncements that are both unfounded and abusive or slanderous.... [They] do not qualify as personal attacks or vilifications. Id. at 742. [2] Moreover, because Delaware law provided that a corporation was bound by its preincorporation agreement if [it] expressly adopts th[at] ... agreement or implicitly adopts it by accepting its benefits with knowledge of its terms, the Delaware Supreme Court found the Foundation's cross-appeal to be without merit. Id. at 745.