Fee-Shifting Provision in a Non-Stock Corporation’s Bylaws Can Be Valid and Enforceable Under Delaware Law

ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), No. 534, 2013 (Del. May 8, 2014)

On May 8, 2014, the Delaware Supreme Court addressed the validity of a fee-shifting provision in a Delaware non-stock corporation’s bylaws, holding that such a provision can be valid and enforceable under Delaware law if adopted by the appropriate corporate procedures and for a proper corporate purpose.

The fee-shifting issues considered by the Supreme Court in ATP Tour came in the form of certified questions from the Delaware District Court.  The District Court has presided over disputes between ATP Tour, Inc. (“ATP”), a Delaware membership corporation, and certain of ATP’s members (collectively, the “Federations”) since 2007 when the Federations sued ATP and six of its board members for violations of federal antitrust laws and breaches of fiduciary duties.  After successfully defending itself, ATP moved to recover legal fees, costs, and expenses pursuant to Federal Rule 54 and its bylaws.  Specifically, Article 23.3(a) of ATP’s bylaws provides, in pertinent part, that:

“In the event that (i) any [current or prior member or Owner or anyone on their behalf (“Claiming Party”)] initiates or asserts any claim or counterclaim (“Claim”)] . . . against [ATP] or any member or Owner . . . and (ii) the Claiming Party . . . does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse [ATP] and any such member or Owners for all fees, costs and expenses of every kind and description . . . that the parties may incur in connection with such Claim.”

On certification, the District Court sought answers from the Delaware Supreme Court as to whether fee-shifting bylaws, such as the ATP bylaw, are permissible under Delaware law, enforceable if adopted for the purpose of deterring legal challenges, and enforceable against members who join the corporation before a provision’s enactment but agree to be bound by future rules adopted and/or amended.

The Court answered these questions in the affirmative but subjected its answers to a few caveats.  More specifically, because no Delaware statute or principle of common law prohibits the enactment of a fee-shifting bylaw and because the American Rule requiring litigation parties to shoulder their own fees and costs may be modified by contracts such as corporate bylaws, fee-shifting bylaws, like the ATP bylaw, are facially valid.  However, the enforceability of a specific bylaw will depend on the manner in which it is adopted and the circumstances under which it is invoked. If the fee-shifting bylaw is “adopted or used for an inequitable purpose,” it will not be enforced under Delaware law. While the Court has found inequity when directors adopt bylaws to perpetuate their own tenures in office, the Court in ATP Tour concluded that the enactment of a fee-shifting bylaw for the purpose of deterring litigation would not necessarily render the bylaw unenforceable, as fee-shifting provisions, by their nature, act to deter litigation and the intent to deter litigation “is not invariably an improper purpose.”  In answering the final question certified, the Court held that an otherwise valid and enforceable fee-shifting bylaw may be enforced against members who join the corporation before the provision’s enactment and who agree to be bound by future rules adopted and/or amended so long as the corporation’s certificate of incorporation authorizes the directors to adopt, amend, or repeal bylaws.