Friday, July 22, 2016

Derek Jeter's undies endorsement flummoxes chancery court

By Anne Sherry, J.D.

A governance-based endorsement deal between Derek Jeter and sports-underwear maker RevolutionWear soured, prompting the Delaware Court of Chancery to warn about "the mixing of roles in a corporate-governance setting." The so-called reverse endorsement installed Jeter on the RevolutionWear board as a means of indirect promotion. But Jeter, wary of disturbing his existing contract with Nike, allegedly refused to approve a press release touting the endorsement. The court granted parts of Jeter's motion to dismiss RevolutionWear's fraud, breach of contract, and breach of fiduciary claims, but most will proceed to trial (Jeter v. RevolutionWear, Inc., July 19, 2016, Glasscock, S.).

According to RevolutionWear, Jeter induced the company to ink the deal by insisting that his arrangement with Nike wouldn't pose a conflict. In 2011 the parties entered into a director's agreement, which entitled RevolutionWear to issue a press release disclosing Jeter's leadership role in the company, subject to Jeter's prior approval. Jeter procrastinated and eventually outright declined to give that approval, citing the Nike contract. Instead, he allowed a statement expressing his excitement about RevolutionWear's underwear product and saying he looked forward to seeing its continued progress—a statement that, in RevolutionWear's view, fell short of the contemplated disclosure. Jeter began the litigation by suing for a declaratory judgment and other relief, but the Delaware Chancery Court's judgment concerns counterclaims by RevolutionWear for fraud, breach of the director's agreement, and breach of fiduciary duty.

Breach of contract. The director's agreement did not condition Jeter's ability to give or withhold approval of a press release. However, RevolutionWear argued that the provision contained an implied covenant of good faith and fair dealing. Jeter conceded at oral argument that there was an implied requirement that he would not withhold his approval unreasonably. This concession sank his motion to dismiss on that aspect of the breach of contract claim: the court found that it was reasonably conceivable that Jeter's refusal to approve the proposed press release was not reasonable and thus breached the agreement.

Breach of fiduciary duty. To the court, the breach-of-duty allegations "illustrate the difficulties that may arise in the fiduciary duty context when a corporation expects its directors to perform acts outside of their traditional fiduciary role." Jeter's membership on the board was, essentially, a marketing move, and the director's agreement contained provisions to further the reverse endorsement strategy that went beyond Jeter's fiduciary obligations. "While such contractual obligations may give rise to breach-of-contract claims, they do not alter the fiduciary obligations of the director," the court wrote. Accordingly, it dismissed all but the claim that Jeter falsely promised investors that he would publicly announce his role.

Jeter was protected by an exculpatory provision, so RevolutionWear needed to make the case that Jeter breached the non-exculpated fiduciary duty of loyalty. RevolutionWear alleged that Jeter, while acting as a fiduciary, made statements that were knowingly false and caused investors to invest. Investors lost faith in RevolutionWear when they discovered Jeter's statements were false, thereby limiting the company’s ability to raise capital. Assuming the truth of these allegations for purposes of the motion to dismiss, the court concluded that Jeter acted in bad faith by acting with a purpose other than that of advancing the best interests of the company.

Fraud. The court denied the motion to dismiss the fraudulent inducement and fraudulent concealment claims. Although there was an argument that the statute of limitations had run, it depended on a factual finding that the court could not make at the motion to dismiss stage. RevolutionWear's counterclaim pleaded falsity sufficient to survive the motion. However, the court dismissed the standalone fraud claim, as it was subsumed by the two other claims sounding in fraud.

The case is No. 11706-VCG.

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