IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ITG BRANDS, LLC, ) Plaintiff, ) ) v. ) C.A. No. 2017-0129-AGB ) REYNOLDS AMERICAN, INC. and ) R.J. REYNOLDS TOBACCO ) COMPANY, ) ) ) Defendants. ) REYNOLDS AMERICAN INC., and ) R. J. REYNOLDS TOBACCO ) COMPANY, ) Counter-Plaintiffs, ) ) v. ) ) ITG BRANDS, LLC, ) ) Counter-Defendant. )
MEMORANDUM OPINION
Date Submitted: June 4, 2019 Date Decided: September 23, 2019
Stephen C. Norman and Matthew F. Davis, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Robert J. Brookhiser and Elizabeth B. McCallum, BAKER & HOSTETLER LLP, Washington, D.C.; Attorneys for Plaintiff and Counterclaim Defendant.
Gregory P. Williams, Rudolf Koch, Robert L. Burns, and Matthew D. Perri, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Peter J. Biersteker, C. Kevin Marshall, and William D. Coglianese, JONES DAY, Washington, D.C.; Attorneys for Defendants and Counterclaim Plaintiffs.
BOUCHARD, C. In July 2014, Reynolds American Inc. agreed to sell four cigarette brands
owned by its subsidiary, R.J. Reynolds Tobacco Company, to ITG Brands, LLC for
approximately $7.1 billion. As part of the transaction, ITG Brands agreed to use its
“reasonable best efforts” to assume Reynolds Tobacco’s obligations for post-closing
sales of the four cigarette brands under agreements that Reynolds Tobacco entered
into in the late 1990’s with four states—Florida, Minnesota, Mississippi, and Texas.
The purpose of those agreements was to settle lawsuits accusing the cigarette
manufacturers of misrepresenting the risks and addictiveness of smoking. Although
the sale of the four cigarette brands closed in June 2015, ITG Brands has yet to
assume—over four years later—Reynolds Tobacco’s obligations under its
agreements with three of the four states, namely Florida, Minnesota, and Texas.
This opinion concerns the second round of disputes in this action. In round
one, the court ruled in Reynolds’ favor that ITG Brands’ obligation to use its
reasonable best efforts to assume Reynolds Tobacco’s obligations under the
settlement agreements did not terminate when the sale transaction closed but
continues until ITG Brands actually has made reasonable best efforts to assume those
obligations.1 Round two concerns two other questions involving the interpretation
of the Asset Purchase Agreement governing the sale of the four cigarette brands.
1 See ITG Brands, LLC v. Reynolds Am., Inc., 2017 WL 5903355 (Del. Ch. Nov. 30, 2017).
1 The first question, on which the parties have cross-moved for partial judgment
on the pleadings, is whether ITG Brands must indemnify Reynolds for the amount
of a judgment a Florida state court entered against Reynolds Tobacco in August 2018
for approximately $93 million in unpaid settlement payments concerning post-
closing sales of the four cigarette brands that Reynolds sold to ITG Brands. As
discussed below, because the parties each have advanced reasonable interpretations
of the Asset Purchase Agreement that could lead to different results on this question,
their cross-motions must be denied.
The second question, on which only Reynolds has moved for partial judgment
on the pleadings, concerns state “equity fee” statutes that impose fees on tobacco
companies based on their cigarette sales to pay for health care costs in that state.
Specifically, Reynolds asks for a declaration that ITG Brands is not entitled under
the Asset Purchase Agreement to demand, as a condition of joining the settlement
agreements, protection from making payments under equity fee statutes in states that
have not enacted one. This issue only concerns Reynolds Tobacco’s settlement
agreement with Florida. For the reasons discussed below, this motion will be
granted because the plain language of the Asset Purchase Agreement supports
Reynolds’ position on this issue.
2 I. BACKGROUND
The background of this action is described in a Memorandum Opinion the
court issued on November 30, 2017 (the “2017 Opinion”).2 This opinion recites only
facts that are directly relevant to the current disputes. Those facts are drawn from
the 2017 Opinion and the parties’ submissions.3 Any additional facts are either not
subject to reasonable dispute or otherwise subject to judicial notice.
In the mid-1990s, several states sued R.J. Reynolds Tobacco Company
(“Reynolds Tobacco”), Lorillard Tobacco Company, and other major cigarette
manufacturers for publicly misrepresenting the health risks and addictiveness of
smoking.4 In 1997 and 1998, Reynolds Tobacco and other manufacturers—the
“Settling Defendants”—entered into separate settlement agreements with four
states: Florida, Minnesota, Mississippi, and Texas. The Asset Purchase Agreement
at issue in this case defines these four states as the “Previously Settled States” and
their agreements with the Settling Defendants as the “PSS Agreements.”5 Reynolds
2 Id. 3 See OSI Sys., Inc. v. Instrumentarium Corp., 892 A.2d 1086, 1090 (Del. Ch. 2006) (“When there are cross-motions for judgment on the pleadings, the court . . . may consider the unambiguous terms of exhibits attached to the pleadings, including those incorporated by reference.”). 4 ITG Brands, 2017 WL 5903355, at *2. 5 Compl. Ex. 1 (Asset Purchase Agreement) F-1.
3 Tobacco’s 1997 settlement agreement with Florida is referred to hereafter as the
“Florida Settlement Agreement.”
Under the Florida Settlement Agreement, the Settling Defendants agreed to
collectively pay Florida $750 million followed by annual payments, with each
Settling Defendant’s annual payment determined “pro rata in proportion equal to its
respective Market Share” for that year.6 Significantly, none of the settlement
agreements with the Previously Settled States has a provision requiring a party who
acquires a cigarette brand from a Settling Defendant to assume that Settling
Defendant’s payment obligations upon the transfer of the cigarette brand and there
is no mechanism in those agreements for a transferee to join them.7
After Reynolds Tobacco entered into settlement agreements with three of the
four Previously Settled States (Minnesota, Mississippi, and Texas), those states
enacted what are called “direct-pay” or “equity fee” statutes.8 These statutes impose
fees on tobacco companies that have not entered into a settlement agreement with
the state based on their cigarette sales.9 The purpose of equity fee statutes is to
6 ITG Brands, 2017 WL 5903355, at *2. 7 Id. 8 Minn. Stat. Ann. § 297F.24(1)(a) (West 2018) (effective June 30, 2003); Miss. Code Ann. § 27-70-5(1)(d) (2019) (effective July 1, 2011); Tex. Health & Safety Code Ann. § 161.603(a) (West 2017) (effective Sept. 1, 2013). 9 Minn. Stat. Ann. § 297F.24(1)(a) (West 2018) (imposing fee on “the sale of nonsettlement cigarettes”); Miss. Code Ann. § 27-70-5(1)(d) (2019) (exempting the fee on “cigarettes manufactured by any manufacturer which is a party to the tobacco settlement agreement”); 4 compensate the states for costs attributable to cigarette use, in particular health care
costs.10 Florida did not have an equity fee statute when Reynolds Tobacco entered
into the Florida Settlement Agreement and has not enacted one since then.11
On July 15, 2014, Reynolds American, Inc., the parent of Reynolds Tobacco
(together, “Reynolds”), and Lorillard, Inc., the parent of Lorillard Tobacco
Company, entered into a merger agreement.12 At the same time, in order to facilitate
regulatory approval of the merger, Reynolds American and ITG Brands entered into
an Asset Purchase Agreement dated as of July 15, 2014 (the “Asset Purchase
Agreement” or “APA”). In the APA, Reynolds American agreed to sell to ITG
Brands for approximately $7.1 billion four cigarette brands: Winston, Salem, Kool,
and Maverick.13 The APA defines the terms “Acquired Brands” and “Acquired
Tobacco Cigarette Brands” to include these four brands.14 The Reynolds-Lorillard
Tex. Health & Safety Code Ann. § 161.603(a) (West 2017) (imposing fee on “non-settling manufacturer cigarettes”). 10 ITG Brands, 2017 WL 5903355, at *4 n.11 (citing equity fee statutes for Minnesota, Mississippi, and Texas). 11 Id. at *4. 12 Id. at *3. 13 Id. ITG Brands is the successor of Lignum-2, L.L.C., which the APA identifies as the “Acquiror” of the Acquired Brands. Compl. ¶ 11. ITG Brands is a wholly-owned subsidiary of Imperial Tobacco Group PLC. Id. Ex. 1 at 1. 14 Compl. Ex. 1 A-1.
5 merger and the sale of the Acquired Brands to ITG Brands both closed on June 12,
2015 (the “Closing”).15
Attached to the Asset Purchase Agreement is a document entitled “Agreed
Assumption Terms” that is part of the APA.16 Section 2.2 of the Agreed Assumption
Terms requires that ITG Brands “use its reasonable best efforts” to reach agreements
with the Previously Settled States to assume Reynolds Tobacco’s settlement
obligations with respect to post-Closing sales of the Acquired Brands.17
After the Closing, neither Reynolds nor ITG Brands made payments to Florida
for post-Closing sales of the Acquired Brands.18 On January 18, 2017, Florida sued
Reynolds Tobacco in Florida state court and filed a motion to join ITG Brands as a
defendant in order to enforce the Florida Settlement Agreement against both
Reynolds Tobacco and ITG Brands. 19
On August 15, 2018, the Florida state court entered a final judgment against
Reynolds Tobacco, but not ITG Brands, making Reynolds Tobacco liable for
approximately $93 million in unpaid settlement payments from the Closing through
15 2017 WL 5903355 at *3. 16 Compl. Ex. 1 F. 17 Id. F-2 § 2.2. 18 ITG Brands, 2017 WL 5903355, at *5; see Defs.’ Opening Br. (Dkt. 78) Ex. B ¶¶ 1, 4. 19 Norman Aff. (Dkt. 87) Ex. 23 at 1.
6 April 30, 2018 (the “Florida Judgment”).20 The Florida court further held that
“unless and until ITG [Brands] becomes a Settling Defendant, . . . Reynolds
[Tobacco] is liable to make Annual Payments to” Florida for sales of the Acquired
Brands.21 Reynolds subsequently posted supersedeas bonds totaling over $114
million and appealed the Florida Judgment.22 The appeal remains pending.
II. PROCEDURAL HISTORY
On February 17, 2017, ITG Brands filed this action asserting five claims for
injunctive and declaratory relief. On May 16, 2017, ITG Brands filed a motion for
partial judgment on the pleadings on Count II of its complaint, seeking a declaration
that any obligation ITG Brands owed to use its reasonable best efforts to reach an
agreement to join the Florida Settlement Agreement terminated at the Closing. On
June 23, 2017, Reynolds filed a cross-motion for partial judgment on the pleadings,
seeking a declaration that ITG Brands’ duty to use its reasonable best efforts to reach
an agreement to join the Florida Settlement Agreement did not terminate due to the
Closing. In the 2017 Opinion, the court ruled in Reynolds’ favor on both motions.
On September 28, 2018, Reynolds filed an amended pleading, asserting four
counterclaims. On January 4, 2019, Reynolds filed a second motion for partial
20 Defs.’ Opening Br. Ex. B ¶¶ 1, 3. 21 Id. ¶ 4. 22 Id. Ex. C, Exs. 1, 2.
7 judgment on the pleadings, seeking declarations to resolve its Counterclaim III and
to partially resolve its Counterclaim I. On March 11, 2019, ITG Brands filed a cross-
motion for partial judgment on the pleadings with respect to Reynolds’ Counterclaim
III but not with respect to its Counterclaim I.
III. ANALYSIS
The parties’ motions tee up two questions. The first question is whether ITG
Brands must indemnify Reynolds for any liability imposed on Reynolds Tobacco for
post-Closing settlement payments on the Acquired Brands, in particular the Florida
Judgment, under subsections (iv) and/or (v) of Section 2.01 of the APA. The second
question is whether ITG Brands is entitled under Section 2.2 of the Agreed
Assumption Terms to receive protection from a state that does not have an equity
fee statute (i.e., Florida) for the possibility that it may enact one in the future. These
questions are addressed below in Sections B and C, respectively.
A. Legal Framework
This court may grant a motion for judgment on the pleadings “when no
material issue of fact exists and the movant is entitled to judgment as a matter of
law.”23 Judgment on the pleadings “is a proper framework for enforcing
unambiguous contracts because there is no need to resolve material disputes of
23 Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1205 (Del. 1993).
8 fact.”24 Put differently, “[w]hen analyzing a contract on a motion for judgment on
the pleadings, this Court will grant such a motion only if the contract provisions at
issue are unambiguous.”25
Delaware law, which governs the APA,26 “adheres to the objective theory of
contracts, i.e., a contract’s construction should be that which would be understood
by an objective, reasonable third party.”27 When interpreting a contract, this court
“will give priority to the parties’ intentions as reflected in the four corners of the
agreement,” construing the agreement as a whole and giving effect to all of its
provisions.28 A court will “construe the contract in accordance with [its] plain
meaning and will not resort to extrinsic evidence to determine the parties’
intentions.”29 In discerning the plain meaning of a contract, the court may look to
the grammatical construction of a contractual provision.30
24 Lillis v. AT&T Corp., 904 A.2d 325, 329-30 (Del. Ch. 2006) (citations and quotation marks omitted). 25 Cooper Tire & Rubber Co. v. Apollo (Mauritius) Hldgs. Pvt. Ltd., 2013 WL 5787958, at *4 (Del. Ch. Oct. 25, 2013). 26 Compl. Ex. 1 § 12.12. 27 Salamone v. Gorman, 106 A.3d 354, 367-68 (Del. 2014) (internal quotation marks omitted). 28 Id. (citing GMG Capital Invs., LLC. v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del. 2012)). 29 BLG Hldgs. LLC v. enXco LFG Hldg., LLC, 41 A.3d 410, 414 (Del. 2012). 30 See, e.g. Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 146 (Del. 2010) (resolving grammatical dispute to determine the clear and unambiguous meaning of a contractual provision); see also Viking Pump, Inc. v. Liberty Mut. Ins. Co., 2007 WL 1207107, at *17 n.97 (Del. Ch. Apr. 2, 2007, revised Apr. 13, 2007) (Strine, V.C.) (quoting Wirth & Hamid 9 Under Delaware law, “[a]mbiguity does not exist simply because the parties
disagree about what the contract means. . . . Rather, contracts are ambiguous when
the provisions in controversy are reasonably or fairly susceptible of different
interpretations or may have two or more different meanings.”31 “Clear and
unambiguous language . . . should be given its ordinary and usual meaning.”32
B. The Parties’ Cross-Motions Concerning Section 2.01(c) of the APA Must Be Denied Because Each Side Has Advanced a Different Interpretation That is Reasonable Reynolds seeks entry of partial judgment on the pleadings on its Counterclaim
III “in the form of a declaration that, to the extent that [Reynolds Tobacco] is held
to bear any liability for post-Closing settlement payments on the Acquired Brands,
ITG Brands in the APA assumed this liability.”33 Reynolds asserts it is entitled to
this relief under the plain terms of subsections (iv) and/or (v) of Section 2.01 of the
APA. Section 2.01 enumerates a series of “Assumed Liabilities” for which ITG
Fair Booking, Inc. v. Wirth, 192 N.E. 297, 299 (N.Y. 1934)) (“[P]unctuation and grammatical construction are reliable signposts in the search [for contractual intent].”); 11 Williston on Contracts § 32:9 (4th ed.) (“Courts often pay attention to grammar and punctuation in determining the proper interpretation of a contract . . . .”). 31 Cooper Tire, 2013 WL 5787958, at *4 (citations and internal quotation marks omitted). 32 Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006) (quoting Rhone-Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 1992)). 33 Defs.’ Opening Br. 2.
10 Brands is obligated to indemnify Reynolds Tobacco under Section 11.02(a)(vi) of
the APA.34
Reynolds seeks declaratory relief now even though it acknowledges that
indemnification “is not yet ripe” because “the litigation in Florida has not
concluded.”35 In this respect, Reynolds focuses on the Florida Judgment, as will the
court, while pointing out that two of the other Previously Settled States (Minnesota
and Texas) also are seeking judgments against Reynolds concerning ITG Brands’
post-Closing sales of the Acquired Brands.36
ITG Brands counters that the subsections 2.01(c)(iv) and (v) do not apply to
the Florida Judgment “because section 2.01(c)(vii), along with the Agreed
Assumption Terms referenced in that Article, govern assumption of settlement
liabilities.”37 ITG Brands has cross-moved for judgment on the pleadings “that
34 In general terms, Section 11.02(a)(vi) of the APA obligates ITG Brands to indemnify Reynolds against all “Losses” incurred as a result of “any Assumed Liability.” Compl. Ex. 1 § 11.02(a)(vi). 35 Defs.’ Opening Br. 2, 13; Defs.’ Reply & Opp’n Br. (Dkt. 91) 32. 36 On March 23, 2018, the State of Minnesota filed a motion in Minnesota state court against Reynolds Tobacco to require it to make settlement payments for ITG Brands’ post- Closing sales of the Acquired Brands. Defs.’ Opening Br. Ex. D. On January 29, 2019, Philip Morris USA filed a motion in Texas federal court to enforce the Texas settlement agreement against Reynolds and ITG Brands “with respect to cigarettes being sold under the Acquired Brands.” Prisbrey Aff. (Dkt. 95) Ex. 4. 37 Pl.’s Opp’n & Opening Br. (Dkt. 85) 31.
11 sections 2.01(c)(vii) and 11.02(a)(v) exclusively govern any obligation it may have
to reimburse Reynolds for settlement payments.”38
The three subsections of Section 2.01(c) on which the parties rely—
subsections (iv), (v), and (vii)—are recited below:
(c) Assumed Liabilities. Upon the terms and subject to the conditions set forth in this Agreement (including Section 2.01(d)), the Acquiror hereby agrees, effective as of the Closing . . . to assume and thereafter to pay, discharge and perform in accordance with their terms only the following Liabilities of the Sellers, and no other Liabilities of the Sellers or any other Person or any other Liabilities whatsoever (the “Assumed Liabilities”): . . .
(iv) all Liabilities (other than Excluded Liabilities) to the extent arising, directly or indirectly, out of . . . the use of the Transferred Assets, in each case from and after the Closing;
(v) other than Straddle Tobacco Action Liabilities, all Liabilities arising out of or in connection with any Action to the extent relating to the development, manufacture, packaging, labeling, production, delivery, sale, resale, distribution, marketing, promotion, use or consumption of, or exposure to, tobacco products, including smoking and health-related claims, in each case, to the extent relating to the period commencing after the Closing Date and related to one or more of the Acquired Tobacco Cigarette Brands . . .
(vii) subject to the Agreed Assumption Terms, all Liabilities under the State Settlements in respect of the Acquired Tobacco Cigarette Brands that relate to the period after the Closing Date . . . .39
38 Id. In general terms, Section 11.02(a)(v) of the APA obligates ITG Brands to indemnify Reynolds against all “Losses” incurred as a result of ITG Brands’ breach of the Agreed Assumption Terms. Compl. Ex. 1 § 11.02(a)(v). 39 Compl. Ex. 1 §§ 2.01(c)(iv), (v), (vii).
12 The Asset Purchase Agreement defines the term “Liability” broadly to mean
“liabilities, claims, demands, expenses, commitments, Losses, costs or obligations
of every kind and description.”40 Section 2.01(d) is a reciprocal provision to Section
2.01(c) that specifies certain Liabilities that ITG Brands did not assume, which are
defined as the “Excluded Liabilities.”41
In my opinion, for the reasons discussed below, Reynolds and ITG Brands
both have advanced reasonable interpretations of the APA that could lead to different
outcomes concerning whether ITG Brands would be required to indemnify Reynolds
for the Florida Judgment, assuming it is upheld on appeal.
Beginning with Reynolds, its primary contention is that ITG Brands is
obligated to pay the Florida Judgment under Section 2.01(c)(v).42 To repeat, that
provision states that ITG Brands assumed “all Liabilities arising out of or in
connection with any Action to the extent relating to the . . . sale, . . . use or
consumption of . . . tobacco products . . . to the extent relating to the period
commencing after the Closing Date and related to one or more of the Acquired
40 Id. A-8. 41 Id. § 2.01(d), A-5. 42 Because the court finds that Reynolds’ construction of Section 2.01(c)(v) is reasonable, it is not necessary to address Reynolds’ alternative argument under Section 2.01(c)(iv).
13 Tobacco Cigarette Brands.”43 Thus, to be assumed by ITG Brands under Section
2.01(c)(v), the liability must: (i) arise out of an “Action,” (ii) relate to the sale or
consumption of “Acquired Tobacco Cigarette Brands,” and (iii) relate to the post-
Closing period. The Florida Judgment satisfies each of these requirements.
The APA defines “Action” to mean “any claim, suit, . . . or other proceeding
of any nature . . . by or before any court, arbitrator or Governmental Authority or
similar body.”44 A Florida state court entered the Florida Judgment in a proceeding
in which Florida sued both Reynolds and ITG Brands to obtain payments due under
the Florida Settlement Agreement.45 This lawsuit plainly constitutes an “Action”
under the APA because it is a “suit” before a “court,” and the Florida Judgment
unquestionably arose out of that action.46 Thus, the first requirement of Section
2.01(c)(v) is satisfied. ITG Brands does not contend otherwise.
The APA defines “Acquired Tobacco Cigarette Brands” to include the
Winston, Salem, Kool, and Maverick brands that Reynolds transferred to ITG
Brands.47 By its terms, the Florida Judgment pertains to these cigarette brands. It
43 Compl. Ex. 1 § 2.01(c)(v). This subsection excludes “Straddle Tobacco Action Liabilities,” but neither party has argued that this exclusion is relevant here. 44 Id. A-1. 45 See Norman Aff. (Dkt. 86) Ex. 2. 46 See Defs.’ Opening Br. Ex. B. 47 Compl. Ex. 1 A-1.
14 expressly provides that “unless and until ITG becomes a Settling Defendant, the
Court holds that Reynolds is liable to make Annual Payments to the State under the
Florida Settlement Agreement for the sales of cigarettes under the Winston, Kool,
Salem, and Maverick brands it transferred to ITG.”48 Thus, the second requirement
of Section 2.01(c)(v) is satisfied. Again, ITG Brands does not contend otherwise.
Finally, the Florida Judgment expressly pertains only to sales made during the
post-Closing period. As noted above, the transaction whereby ITG Brands
purchased the Acquired Brands closed on June 12, 2015. Referencing that date, the
order granting Florida’s enforcement motion explains that Florida filed its motion
“[b]ecause Reynolds modified its payments under the Florida Agreement subsequent
to the mid-2015 closing and justified the new payments exclusively on the fact that
[ITG Brands], not Reynolds, was selling the cigarettes under the four brands.”49
Paralleling that time frame, the Florida Judgment expressly provides that the
awarded amount is based on “all payments due as of the date of this Judgment for
the period of June 12, 2015 through April 30, 2018.”50
ITG Brands contends that Section 2.01(c)(v) does not apply to the Florida
Judgment on the theory that the Florida Judgment “relates to Reynolds’ own pre-
48 Defs.’ Opening Br. Ex. B ¶ 4. 49 Norman Aff. (Dkt. 86) Ex. 2. at 2-3 (emphasis added). 50 Defs.’ Opening Br. Ex. B ¶ 1. (emphasis added).
15 closing conduct and to its pre-closing decision to enter into the settlements requiring
the payments at issue.”51 This argument is without merit because it is directly
contradicted by the plain terms of the Florida Judgment and the order granting
Florida’s enforcement motion. As just explained, they both expressly provide that
the liability pertains only to sales of the Acquired Tobacco Cigarette Brands made
during the post-Closing period.52
In sum, for the reasons discussed above, Reynolds has articulated a reasonable
interpretation of Section 2.01(c)(v) of the APA that supports the conclusion that ITG
Brands would be obligated to indemnify Reynolds for the amount of the Florida
Judgment if it is upheld on appeal.
Turning to ITG Brands, its core argument looks beyond the four corners of
Section 2.01(c)(v) to consider the interplay of that provision with Section
2.01(c)(vii) of the APA, which governs “Liabilities under the State Settlements in
respect of the Acquired Tobacco Cigarette Brands” for the post-Closing period.
Relying on the specific-over-the-general rule of contract interpretation, ITG Brands
argues that Section 2.01(c)(vii) and not Section 2.01(c)(v) was intended to determine
whether ITG Brands is obligated to indemnify Reynolds for any liability imposed
on Reynolds Tobacco for post-Closing settlement payments on the Acquired Brands
51 Pl.’s Opp’n & Opening Br. 3, 20-21. 52 Norman Aff. (Dkt. 86) Ex. 2.at 2-3; Defs.’ Opening Br. Ex. B ¶ 1.
16 under its settlement agreements with the Previously Settled States. In support of this
argument, ITG Brands relies heavily on our Supreme Court’s decision in DCV
Holdings, Inc. v. ConAgra, Inc. 53
In that case, DCV Holdings acquired a company that “suffered a decline in
profits” and was “implicated . . . in antitrust violations.”54 DCV Holdings sued the
sellers of the company seeking, among other relief, indemnification under the
Purchase Agreement for liabilities resulting from the antitrust violations.55 Two
provisions of that contract were at issue: Sections 3.9 and 3.13.
Section 3.9 was “an all-inclusive warranty” that did not contain a knowledge
qualifier.56 It stated: “None of the Companies has any liabilities or obligations of
any nature” other than three inapplicable exceptions.57 By contrast, Section 3.13
focused on violations of law and contained a knowledge qualifier. It stated: “To the
knowledge of Sellers, the business is not being and has not been conducted, and none
of the Companies has been, or is in violation of any applicable Law . . . .”58
Determining whether or not DCV Holdings was entitled to indemnification for the
53 889 A.2d 954 (Del. 2005). 54 Id. at 956. 55 Id. 56 DCV Hldgs., Inc. v ConAgra, Inc., 2005 WL 698133, at *9 (Del. Super. Ct. Mar. 24, 2005). 57 Id. 58 Id. at *11.
17 costs associated with the antitrust violations turned on which of these two provisions
applied to the parties’ dispute.59
In analyzing this question, our Supreme Court explained that “the specific
provision ordinarily qualifies the meaning of the general one” in situations “where
specific and general provisions conflict.”60 Applying this rule of contract
interpretation, the high court affirmed the Superior Court’s ruling that Section 3.13,
and not Section 3.9, controlled. It reasoned that “[t]he more specific Section 3.13,
which limits that section’s scope to violations of the law that were known to the
Sellers, is the narrower of the two provisions.”61 The high court also found that the
Superior Court “did not err in holding that Sections 3.13 and 3.9 were in conflict”
based on the fact that the two sections would lead to opposite results concerning
liability.62
Turning to this case, ITG Brands argues that subsection (vii) of Section
2.01(c) is a more specific provision than subsection (v) because subsection (vii)
59 Id. at *9-10. 60 DCV Hldgs., 889 A.2d at 961; see also Sonitrol Hldg. Co. v. Marceau Investissements, 607 A.2d 1177, 1184 (Del. 1992) (stating that “where there is an inconsistency between general provisions and specific provisions, the specific provisions ordinarily qualify the meaning of the general provisions”); Restatement (First) of Contracts § 236(c) (same). 61 DCV Hldgs., 889 A.2d at 962. 62 Id. (“If Section 3.9 governed, the Sellers would be liable to indemnify the Buyer for unknown violations of law, contrary to the knowledge qualifiers in Section 3.13—a result that would render that qualifier meaningless.”).
18 specifically concerns “Liabilities under the State Settlements in respect of the
Acquired Tobacco Cigarette Brands” for the post-Closing period while subsection
(v) encompasses a wide range of liabilities for the post-Closing period arising from
legal proceedings. ITG Brands argues further that Sections 2.01(c)(v) and
2.01(c)(vii) conflict because they could lead to different outcomes over whether ITG
Brands would be liable for the Florida Judgment. Thus, according to ITG Brands,
subsection (vii) and not subsection (v) should control here.
The potential for conflict between these two provisions does exist. As
discussed above, Reynolds has advanced a reasonable interpretation of Section
2.01(c)(v) whereby ITG Brands would be liable for the Florida Judgment if it is
upheld on appeal. And, as Reynolds acknowledges, it is possible that ITG Brands
may not incur this same liability under Section 2.01(c)(vii).63 This is because the
assumption of liabilities under subsection (vii) is expressly made “subject” to the
Agreed Assumption Terms, Section 2.2 of which provides that ITG Brands “shall
use its reasonable best efforts” to assume Reynolds’ obligations under the settlement
agreements with the Previously Settled States.64 Thus, the possibility exists that ITG
Brands ultimately may not assume Reynolds’ obligations under the Florida
63 Tr. (Dkt. 103) 21-23 (June 4, 2019). 64 Compl. Ex. 1 F-2 § 2.2.
19 Settlement Agreement under Section 2.10(c)(vii), i.e., if ITG Brands failed to join
that agreement after using its “reasonable best efforts” to do so.
Reynolds argues that DCV Holdings is distinguishable because the contract
there “involved language expressly making one provision more specific than another
on the same question” while, here, Sections 2.01(c)(v) and 2.01(c)(vii) of the APA
“appear in parallel in § 2.01(c)’s list of seven Assumed Liabilities.”65 According to
Reynolds, “[n]othing makes §2.01 (c)(vii) more ‘specifically’ on point than
[§2.01(c)(v)] in the circumstances of the Liabilities at issue in these motions—the
absence of a joinder or a question of breach of the obligation to pursue joinder; and
the presence of a judgment from an Action for payments owed based on post-
Closing sales of the Acquired Brands.”66
In my view, Reynolds’ position takes too limited a view of the specific-over-
the-general rule of contract interpretation for me to find at the pleadings stage that
its interpretation of Section 2.01(c) of the APA is the only reasonable one. As just
explained, in arguing that neither of the two subsections at issue is more specific
than the other, Reynolds focuses on the means by which ITG Brands could become
liable for post-Closing settlement payments under the Florida Settlement
Agreement, i.e., by indemnifying Reynolds for the amount of the Florida Judgment
65 Defs.’ Reply & Opp’n Br. 15-16. 66 Id.
20 under subsection (v) or by assuming Reynolds’ post-Closing obligations in the
Florida Settlement Agreement under subsection (vii). In applying the specific-over-
the-general rule of contract interpretation, however, it would be reasonable to focus
instead on the underlying financial obligation itself.
The underlying financial obligation pertains to settlement payments for post-
Closing sales of the Acquired Tobacco Cigarette Brands, which is governed by the
Florida Settlement Agreement. Section 2.01(c)(vii) of the APA and the Agreed
Assumption Terms referenced therein specifically address ITG Brands’ obligation
to use its reasonable best efforts to assume Reynolds’ obligation to pay those
settlement payments as well the settlement payments due under the settlement
agreements with the other Previously Settled States. Section 2.01(c)(v) never
discusses or even mentions any of the settlement agreements with the Previously
Settled States. Rather, Section 2.01(c)(v) addresses liabilities arising out of legal
proceedings relating to a wide range of subjects, i.e., “the development,
manufacture, packaging, labeling, production, delivery, sale, resale, distribution,
marketing, use or consumption of, or exposure to tobacco products, including health-
related claims.”67
67 Compl. Ex. 1 § 2.01(c)(v).
21 “The primary goal of contract interpretation is to satisfy the reasonable
expectations of the parties at the time they entered into the contract,” which “often
requires courts to engage in an analysis of the intent or shared understanding of the
parties at the time of the contract.”68 In performing this task, Delaware courts favor
specific over general provisions when they conflict because of “the reasonable
inference that specific provisions express more exactly what the parties intended.”69
In my view, it is reasonable at the pleadings stage to construe Section 2.01(c)(vii) as
more specific than Section 2.01(c)(v) when one focuses on the underlying financial
obligation at issue on the parties’ cross-motions, because Section 2.01(c)(vii)
specifically addresses the Florida Settlement Agreement from which the obligation
to make settlement payments to Florida for post-Closing sales of the Acquired
Tobacco Cigarette Brands arises.70
Finally, to repeat, our law provides that “the specific provision ordinarily
qualifies the meaning of the general one” in situations “where specific and general
provisions conflict.”71 Here, as discussed above, Sections 2.01(c)(v) and 2.01(c)(vii)
have the potential to conflict because ITG Brands would be liable for the Florida
68 Demetree v. Commonwealth Tr. Co., 1996 WL 494710, at *3 (Del. Ch. Aug. 27, 1996) (Allen, C.). 69 Katell v. Morgan Stanley Gp., Inc., 1993 WL 205033, at *4 (Del. Ch. June 8, 1993). 70 Id. (finding that one section is “the more specific clause as to the conduct of pending litigation” because it “mentions litigation by name”). 71 DCV Hldgs., 889 A.2d at 961.
22 Judgment (if upheld on appeal) under subsection (v) if that provision applies, but
would not necessarily be liable for the Florida Judgment under subsection (vii).
*****
For the reasons explained above, the parties have advanced two different
interpretations of Section 2.01(c), both of which are reasonable. If a contract is
“reasonably or fairly susceptible of different interpretations or may have two or more
different meanings,” then it is ambiguous.72 When a contractual provision is
ambiguous, judgment on the pleadings is not appropriate to resolve the ambiguity.73
Rather, the court will need to examine whatever parol evidence may exist on the
interplay between Sections 2.01(c)(v) and 2.01(c)(vii) before determining which of
the parties’ competing interpretations represents their shared intent. Accordingly,
the parties’ cross-motions for partial judgment on the pleadings as to the application
of Section 2.01(c) are denied.
72 Cooper Tire, 2013 WL 5787958, at *4 (citations and internal quotation marks omitted). 73 See, e.g., Cypress Assocs., LLC v. Sunnyside Cogeneration Assocs. Project, 2007 WL 148754, at *3 (Del. Ch. Jan. 17, 2007) (Strine, V.C.) (stating that if a contract is ambiguous, “it is generally improper to grant a motion for judgment on the pleadings because to do so would resolve the ambiguity on an incomplete record not shaped by discovery”).
23 C. Reynolds is Entitled to a Partial Judgment that Section 2.2 of the Agreed Assumption Terms Does Not Entitle ITG Brands to Demand Protection from a Hypothetical Equity Fee Statute As a Condition of Joining the Florida Settlement Agreement
Reynolds seeks a declaration with respect to its Counterclaim I that Section
2.2 of the Agreed Assumption Terms “does not entitle ITG Brands to demand, as a
condition of joining a settlement agreement of a Previously Settled State . . .
protection from ‘double payments’ due to an ‘equity fee’ law in a State that has no
such law.”74 ITG Brands has not cross-moved on this issue. The issue apparently
has been a sticking point in ITG Brands’ negotiations about joining the Florida
Settlement Agreement, as ITG Brands has sought to include a provision protecting
it from equity fees even though Florida does not have an equity fee statute.75
Section 2.2 of the Agreed Assumption Terms provides as follows:
The Acquiror, with the assistance and cooperation of RAI and Lorillard in communications and negotiations as required by the Agreement, shall use its reasonable best efforts to reach agreements with each of the Previously Settled States, by which the Acquiror will assume, as of the Closing, the obligations of a Settling Defendant under the PSS Agreement with each such State, with respect to the Acquired Tobacco Cigarette Brands, on the same basis as the Settling Defendants prior to the Closing. Provided, however, that such agreements shall include terms providing either that any direct-pay statute (also known as an equity-fee law or NPM-fee law) of a Previously Settled State does not apply to the Acquired Tobacco Cigarette Brands or that, if the Acquiror is required to make payments with respect to Acquired Tobacco Cigarette Brands under a direct-pay statute (or any distributor
74 Defs.’ Opening Br. 2. 75 See Norman Aff. (Dkt. 87) Exs. 17, 21; Tr. 81 (June 4, 2019).
24 or other party is required to make such payments with respect to the Acquired Tobacco Cigarette Brands), the Acquiror will receive a credit against otherwise due payments under the PSS settlement equal to the full payments made.76
The court analyzed this provision in its 2017 Opinion. The first sentence of
Section 2.2 defines ITG Brands’ obligation to attempt to join the settlement
agreements with the Previously Settled States. The first clause of the first sentence
“requires ITG Brands to use its reasonable best efforts to reach agreements with each
of the Previously Settled States,” and the second clause “describes the nature of the
agreements to be reached.”77 The second clause means that “under the PSS
settlement agreements, ITG Brands will assume, as of the Closing, the same
obligations that the Settling Defendants had prior to the Closing.”78 In other words,
“when ITG Brands assumes the obligations of the Settling Defendants, it will step
into the shoes that Reynolds Tobacco occupied prior to the Closing.”79
The second sentence is a proviso that establishes a condition to which the
obligation in the first sentence is subject. The proviso addresses only one subject—
equity fee statutes. Before examining the text of the proviso, it is helpful to put the
provision in context.
76 Compl. Ex. 1 F-2 § 2.2. 77 ITG Brands, 2017 WL 5903355, at *7 (internal quotation marks omitted). 78 Id. 79 Id.
25 As explained above, three of the four Previously Settled States (Minnesota,
Mississippi, and Texas, but not Florida) enacted equity fee statutes after Reynolds
entered into settlement agreements with those states in the late 1990’s.80 Reynolds
and the other Settling Defendants had no protection under the PSS Agreements from
the risk of making double payments if one of the Previously Settled States
subsequently enacted an equity fee statute. The Settling Defendants, however, were
afforded such protection when Minnesota, Mississippi, and Texas later enacted
equity fee statutes because they were exempted from making equity fee payments
under those statutes.81
Given this context, it makes sense that ITG Brands would secure for itself in
the proviso to Section 2.2 the right to obtain the same protection from the risk of
making double payments that Reynolds and the other Settling Defendants received
from the three Previously Settled States that enacted equity fee statutes. As the court
explained in its 2017 Opinion, albeit in a different context, “the proviso makes clear
that, if a Previously Settled State has a direct-pay statute, ITG Brands is entitled to
obtain contractual protection against making double payments on the Acquired
Tobacco Cigarette Brands, i.e., either the state will agree to exempt ITG Brands from
80 See supra note 8 and accompanying text. 81 See supra note 9 and accompanying text. See also Defs.’ Reply & Opp’n Br. 39-40; Pl.’s Corrected Reply Br. (Dkt. 98) 30.
26 the direct-pay statute or will give it a credit for any payments it makes under the
statute.”82 The proviso thus contemplates two options to protect against making
double payments: either obtain (i) an exemption from the statute or (ii) a credit.
In opposing Reynolds’ motion, ITG Brands argues that it secured for itself not
only the protection from the risk of making double payments that Reynolds had
obtained before entering into the Asset Purchase Agreement, but a form of protection
that neither Reynolds nor any of the other Settling Defendants ever had.
Specifically, ITG Brands contends that Section 2.2 entitles it to demand as a
condition of joining the settlement agreements with the Previously Settled States that
it be protected from the risk of making double payments with respect to an equity
fee statute that does not even exist. The only state this concerns is Florida. In my
opinion, this position cannot be squared with the text of Section 2.2.
Critically, the first option in the proviso—seeking an exemption—states that
the joinder agreement “shall include terms providing . . . that any direct-pay statute
. . . of a Previously Settled State does not apply to the Acquired Tobacco Cigarette
Brands.”83 The verb “does” is in the present tense, which indicates that the equity
fee statute must be in existence when ITG Brands is negotiating the joinder
82 ITG Brands, 2017 WL 5903355, at *8 (emphasis added). 83 Compl. Ex. 1 F-2 § 2.2 (emphasis added).
27 agreement.84 ITG Brands offers no competing interpretation of this option. Thus, it
is conceded that the first option only applies to the three Previously Settled States
that have equity fee statutes in place: Minnesota, Mississippi, and Texas.
ITG Brands’ only textual argument focuses on the second option—seeking a
credit. The relevant language states that the joinder agreement “shall include terms
providing . . . that, if the Acquiror is required to make payments with respect to
Acquired Tobacco Cigarette Brands under a direct-pay statute . . . , the Acquiror will
receive a credit against otherwise due payments under the PSS settlement equal to
the full payments made.”85 According to ITG Brands, this part of the proviso “is
clearly conditional in the future” and, therefore, the proviso as a whole should apply
to both existing and hypothetical equity fee statutes.86 I disagree.
To start, it is not disputed that the second option, like the first option, covers
existing equity fee statutes that three of the Previously Settled States enacted before
the parties here entered into the Asset Purchase Agreement. For example, during
joinder negotiations, one of those three states could require ITG Brands to make
payments under an existing equity fee statute by declining (for whatever reason) to
84 This court has considered the tense of verbs when interpreting contract provisions. See, e.g., Winshall v. Viacom Int’l, Inc., 2012 WL 6200271, at *6 (Del. Ch. Dec. 12, 2012) (noting use of present tense as limiting meaning of contract provision), aff’d 76 A.3d 808 (Del. 2013). 85 Compl. Ex. 1 F-2 § 2.2 (emphasis added). 86 Pl.’s Opp’n & Opening Br. 33.
28 grant ITG Brands an exemption from the statute. In that case, ITG Brands would be
entitled to demand the specified credit as a condition of joining the settlement
agreement of that state. This scenario fits within the plain language of the “if the
Acquiror is required to make payments” trigger in the second option. The parties do
not disagree on this point.
Most importantly, when the two options are considered together, the only
reasonable way to read the proviso in its entirety, in my opinion, is that it was
intended only to apply to existing equity fee statutes. This follows from (i) the
undisputed fact that the first option—seeking an exemption—is written in the
present tense and plainly applies only to the three Previously Settled States that have
equity fee statutes and (ii) it would make no sense to construe second option—
seeking a credit—to apply to a different group of states than the first option. Put
differently, even if the second option theoretically could be read in isolation to apply
to existing as well as hypothetical future equity fee statutes (i.e., to apply to all four
of the Previously Settled States), it would be nonsensical to read the proviso as a
whole that way given that the two options are interchangeable paths to achieve the
same result and the first option indisputably uses the present tense and applies only
to the three Previously Settled States that have enacted equity fee statutes.
Indeed, construing the second option to cover all four Previously Settled
States, while construing the first option to cover only three of those states, would
29 lead to an absurd result. Doing so would mean that the only protection ITG Brands
could demand as a condition of joining the Florida Settlement Agreement would be
to seek a credit from a yet-to-be enacted equity fee statute, and that demanding an
exemption as a condition of joinder would be off the table even though that option
substantively would provide the same protection as the specified credit. In my
opinion, no reasonable person would have sought, much less accepted, this result.87
It is fundamental that contracts must be read in a manner “that is reasonable
and that harmonizes the affected contract provisions.”88 Here, the two options in the
proviso easily can be harmonized by construing both options to apply only to
existing equity fee statutes. For this and the other reasons explained above, it is my
opinion that the only reasonable interpretation of the proviso in Section 2.2 read in
its entirety is that the parties intended it to apply only to equity fee statutes in
existence when a joinder agreement is being negotiated. Accordingly, the proviso
in Section 2.2 does not apply to the Florida Settlement Agreement.
ITG Brands advances a final argument that goes outside the text of the APA.
Specifically, it asserts that “Reynolds’ course of performance and delay” in seeking
87 Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010) (“An unreasonable interpretation produces an absurd result or one that no reasonable person would have accepted when entering the contract.”). 88 Axis Reinsurance Co. v. HLTH Corp., 993 A.2d 1057, 1063 (Del. 2010); see also Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 180 (2012) (“[T]here can be no justification for needlessly rendering provisions in conflict if they can be interpreted harmoniously.”).
30 the requested declaration “confirms its understanding that Section 2.2’s final clause
applies to Florida.”89 It is well-established that “[if] a contract is unambiguous,
extrinsic evidence may not be used to interpret the intent of the parties, to vary the
terms of the contract or to create an ambiguity.”90 Because the court has concluded
from the plain terms of the APA that the proviso in Section 2.2 supports only one
reasonable interpretation and is not ambiguous, course of dealing evidence is
irrelevant and may not be considered by the court.91
IV. CONCLUSION
For the foregoing reasons, both parties’ motions for partial judgment on the
pleadings regarding the application of Section 2.01(c) to the Florida Judgment are
denied, and Reynolds’ motion for partial judgment on the pleadings regarding
Section 2.2 of the Agreed Assumption Terms is granted. The parties are directed to
submit a form of order to implement this decision within five business days.
IT IS SO ORDERED.
89 Pl.’s Opp’n & Opening Br. 34-35. 90 Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997). 91 Id. at 1233 (“In construing an ambiguous contractual provision, a court may consider evidence of prior agreements and communications of the parties as well as trade usage or course of dealing.”) (emphasis added).