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The Mrs. Fields Brand, Inc. v. Interbake Foods LLC

Court of Chancery of Delaware

June 26, 2017

THE MRS. FIELDS BRAND, INC., Plaintiff,
v.
INTERBAKE FOODS LLC, Defendant.

          Submitted: March 2, 2017

          David A. Jenkins and Robert K. Beste III, SMITH KATZENSTEIN & JENKINS LLP, Wilmington, Delaware; Bijan Amini and Avery Samet, STORCH AMINI PC, New York, New York; Attorneys for Plaintiff.

          Chad S. C. Stover and Kevin G. Collins, BARNES & THORNBURG LLP, Wilmington, Delaware; Damon R. Leichty and Alice J. Springer, BARNES & THORNBURG LLP, South Bend, Indiana; Attorneys for Defendant.

          MEMORANDUM OPINION

          BOUCHARD, C.

          In March 2012, Mrs. Fields Brand, Inc. entered into a Trademark License Agreement that granted Interbake Foods LLC an exclusive license to manufacture Mrs. Fields-branded cookies for sale in certain retail store channels. The License Agreement has an initial term of five years that ends on December 31, 2017.

         In April 2016, after the relationship between the parties had deteriorated, Interbake notified Mrs. Fields that it was terminating the license early, which prompted Mrs. Fields to initiate litigation and seek a declaration that Interbake's purported termination was invalid. For the past fourteen months, Interbake has continued to operate the licensed business under a standstill order, but the litigation quickly escalated, with each side asserting multiple contractual claims for damages and other relief against the other.

         In this post-trial decision, I conclude that Interbake's purported termination of the License Agreement was invalid and that the license thus remains in place. I further conclude that both parties have failed to establish an entitlement to damages or other relief based on any of the numerous theories they advanced.

         I. BACKGROUND

         The facts recited in this opinion are my findings based on over 700 trial exhibits, live and video testimony from a six-day trial in which sixteen fact and three expert witnesses testified, and deposition testimony. I accord the evidence the weight and credibility I find it deserves.

          A. The Parties

         Founded in 1977, plaintiff The Mrs. Fields Brand, Inc. ("Mrs. Fields") is a Delaware corporation headquartered in Broomfield, Colorado. Mrs. Fields operates multiple business lines, including: (1) franchising stores that serve fresh-baked cookies; (2) licensing the Mrs. Fields trademark and recipes to make and sell shelf-stable cookies for sale in retail stores like grocery, drug, and convenience stores; (3) making online and catalogue-based gift sales directly to consumers; and (4) producing confections and other products.[1] Mrs. Fields is owned and managed by Famous Brands International ("Famous Brands"), a portfolio company of Z Capital Partners, LLC ("Z Capital").

         Defendant Interbake Foods LLC ("Interbake") is a Delaware limited liability company headquartered in Richmond, Virginia. Interbake is controlled by Weston Foods US, Inc., ("Weston Foods"), which is itself controlled by George Weston Limited ("George Weston"). Interbake operates as Weston Foods' biscuit division, and provides products through four business segments: retail private brands, Girl Scout Cookies, dairy, and food service.[2]

         B. Mrs. Fields' Branded Retail Business Before Interbake

         In 1999, Mrs. Fields granted a company called Shadewell Grove a license to produce and market a shelf-stable cookie in retail channels.[3] Shadewell ramped up distribution quickly but unprofitably through heavy use of slotting fees and trade spend.[4] Slotting fees are one-time payments from the supplier to retail stores to secure shelf space for a product.[5] Trade spend is a discount off the price charged to retailers in exchange for promoting products through various methods, such as coupons, "buy-one-get-one-free" promotions, and participation in trade shows. The purpose of trade spend is to stimulate sales, but the expense is taken from the supplier's profit margin.[6]

         Under the Shadewell license, gross sales of Mrs. Fields' branded retail products peaked in 2000 at $51.2 million and then declined each year thereafter to $39 million in 2005.[7] By 2006, Shadewell had put itself "in a financial hole" due to its "big infrastructure" and its aggressive use of trade spend and slotting fees.[8] Shadewell defaulted on the royalties it owed Mrs. Fields as well as payments it owed to Oak State, the contractor responsible for manufacturing the products.[9]

         In 2006, Shadewell filed for bankruptcy and Mrs. Fields assumed direct control over the branded retail business, appointing Neal Courtney to manage it.[10]For the first eight to ten weeks, Mrs. Fields experienced product shortages because Oak State had stopped manufacturing the product.[11] In connection with assuming control over the business, Mrs. Fields hired a sales team and a product-supply manager, and developed an accounting department.[12] The transition in-house took approximately six months.[13]

         After the branded retail business was transitioned in-house, sales dropped to $23 million in 2007 before recovering to $29.1 million in 2008.[14] For the next three years, annual sales remained within a fairly narrow range: $27.8 million in 2009, $29.3 million in 2010, and $29.6 million in 2011.[15] Analyzing the sales and trade spend figures from 2007 to 2011, an internal Mrs. Fields board presentation commented that "Trade spend continues to increase to maintain distribution and drive velocity."[16] During this same five-year period, the profitability of the branded-retail business varied significantly:

Year

Sales

Trade Spend %

Profit[17]

2007

$23.4 million

12%

$1.1 million

2008

$29.1 million

14.3%

$0.8 million

2009

$27.8 million

18.4%

$2.3 million

2010

$29.3 million

19.6%

$3.1 million

2011

$29.6 million

21.6%

$2.0 million

         Around 2009 or 2010, Mrs. Fields scored a "big win" by obtaining shelf space from Walmart.[18] According to Courtney, Walmart is a "benchmark" for "every other major grocer, retailer in the country, " and once product is on the shelves at Walmart, it gains credibility among other retailers and obtaining shelf space becomes easier.[19]

         C. Negotiations over the License Agreement

         In 2011, Mrs. Fields and Interbake entered into licensing talks. [20] A considerable part of Interbake's business comprised "private-label" manufacturing, meaning that Interbake manufactured cookies sold under other companies' brands.[21]Mrs. Fields believed that Interbake's vertical integration, extensive experience with private-label cookies, and existing retailer relationships could be leveraged to increase distribution of Mrs. Fields cookies.[22]

         Neal Courtney, who was now Mrs. Fields' Chief Operating Officer, and Seth Monette, Interbake's primary sales leader for retail private brands and contract manufacturing, were the primary negotiators. They exchanged drafts of a trademark license agreement through Mrs. Fields' broker, Stu Seltzer.[23] Other key players in the negotiations included Mrs. Fields' then-CEO, Tim Casey, and Interbake's then-President, Kevin McDonough.[24]

         On February 3, 2012, Mrs. Fields sent Interbake the first draft of a proposed trademark license agreement that it prepared using as a template a previous license Mrs. Fields had with Unilever.[25] Section 15(e)(iii) of the draft, which Mrs. Fields inserted into the Unilever template, allowed for early termination of the agreement if Interbake failed to reach $25 million in net sales in any year.[26] The draft also required Interbake to meet minimum annual sales thresholds, ranging from $20 million to $35 million in net sales from year 1 to year 5.[27] In Section 19(c), Mrs. Fields represented and warranted that "it will not intentionally do anything to destroy or impair its existing image."[28]

         On February 4, 2012, in an internal Mrs. Fields email, Casey asked Courtney about inserting a provision in the license agreement obligating Interbake to spend some minimum amount on advertising and marketing "to ensure [an] aggressive growth strategy."[29] Courtney responded, "That's a little complicated because of trade spend and slotting fees. Do you want a commitment above that?"[30] Casey ultimately decided it was "not worth raising" the topic with Interbake because it would "complicate things."[31]

         On February 16, 2012, the parties met and reviewed the draft agreement.[32] A slide deck Mrs. Fields presented at the meeting stated that the Mrs. Fields brand "attracts the best franchisees because we give them the best support and the best economic model, " that the brand is "on trend" and "still resonates with consumers" nearly "35 years later, " that "we will build and support our brands because they are the reason we are here in the first place, " and that "we will always maintain the integrity and taste of our current recipes." [33] On the other hand, one slide acknowledged that Mrs. Fields was "missing the mark" with aligning "consumer expectations across all channels."[34]

         Later on February 16, Selena Sanderson, an Executive Vice President at Interbake, suggested in an internal email modifying the termination section to add an "out for Interbake in the event of brand deterioration" or a "quality issue" outside of Interbake's control, such as something in "another part of [Mrs. Fields'] business."[35] Section 19(c) of the license agreement later was revised to require Mrs. Fields to "continue to support the brand through advertising and marketing efforts consistent with past practice."[36]

         On February 22, 2012, Interbake circulated a revised draft of the license agreement. Interbake proposed reducing the Section 15(e)(iii) termination threshold from $25 million to $20 million in net sales.[37] Mrs. Fields agreed to this change after a discussion between Courtney and Monette.[38] Interbake also added Section 15(e)(ix), permitting termination of the license agreement if Mrs. Fields made a "fundamental change" to the Mrs. Fields brand or marketing guidelines that renders Interbake's performance "commercially unviable, " and Section 19(d), a representation and warranty by Mrs. Fields that it has no knowledge of any occurrence that could reasonably be expected to become materially adverse to Mrs. Fields' business, the value of the branded retail products, or Interbake's ability to consummate the transaction.[39] The parties exchanged another set of drafts on February 28 with minor alterations.[40]

         On March 12, Interbake sent Mrs. Fields a revised draft of the License Agreement that renumbered Section 15(e) to Section 15(c), and specified that Section 15(c)(iii)-the minimum sales termination provision-must be triggered within 15 days following receipt of the annual report.[41] Section 15(c)(ix) now allowed termination should Mrs. Fields breach a representation or warranty, or materially damage the value of its brand such that Interbake's performance is rendered commercially unviable. Finally, the provision requiring Interbake to achieve minimum sales volumes each year was "INTENTIONALLY DELETED."[42]

         Section 15(c)(iii) in the final License Agreement is silent as to which (or both) of the parties may terminate the agreement if annual sales fall below $20 million. Courtney testified that Mrs. Fields asked for the provision "to ensure that a minimum sales level was maintained, because [Mrs. Fields] had worked hard to build the business back up, " but he could not recall discussing with Monette or anyone else at Mrs. Fields who would have the right to invoke the provision.[43] On the Interbake side of the table, Monette recalled asking Courtney for "downside protection" at some point, [44] and McDonough testified that he instructed Monette "to make sure [Section 15(c)(iii)] was reciprocal, "[45] but there is no evidence in the record that anyone at Interbake actually discussed reciprocity with Mrs. Fields.

         D. "Cookie Confusion"

         During its negotiations with Interbake, Mrs. Fields was experiencing problems with product quality, In particular, the brand was suffering from what witnesses described as "cookie confusion" attributable to the fact that Mrs. Fields sells cookies in various channels (e.g., franchising, branded retail, gifting) that have different shelf lives and are baked using different recipes.[46] Pre-packaged cookies like those sold in retail stores require preservatives and other additives to make them shelf-stable that are not necessary for fresh-baked cookies. Thus, when a consumer purchases a pre-packaged cookie expecting the quality and taste of a fresh-baked cookie, the negative experience damages the Mrs. Fields brand.[47]

         A January 2012 Mrs. Fields board presentation stated that the current branded retail group "product does not meet the Mrs. Fields cookie standard or consumer expectation impacting repeat purchase and overall velocity."[48] In the same vein, Casey remarked to Courtney in a February 1, 2012 email discussing "Priorities" that "We have to fix quality in all three channels-it's our brand."[49]

         On March 2, 2012, Casey sent an internal email to the Mrs. Fields board outlining key initiatives for 2012. The number one initiative was to "Reformulate the recipe of the cookies in all three channels: franchise stores . . . gifting . . . and branded retail." [50] The email further explained that reformulating the recipes for its branded retail products was "less of a priority as a licensing partner is pursued."[51]True to this last email, Mrs. Fields did not reformulate the branded retail recipes after it became apparent it would enter into a license agreement with Interbake.

         E. The License Agreement

         On March 16, 2012, Mrs. Fields and Interbake entered into the License Agreement for an initial five-year term ending December 31, 2017, with an option to renew for an additional five years.[52] The License Agreement provides Interbake with the exclusive right and license to use specified trademarks, recipes and other intellectual property to manufacture, market, and sell Mrs. Fields branded products through certain distribution channels within a defined territory.[53]

         The License Agreement contains no provision requiring Interbake to use best or reasonable efforts, to achieve a minimum amount of sales in a given period, or to spend a minimum amount on trade spend or other forms of promotion in a given period, but it does require Interbake to pay Mrs. Fields a minimum royalty of $2 million each year for the last four years of the contract.[54] The License Agreement also contains no prohibition against Interbake selling competing products.

         Both parties were thrilled with the License Agreement at the time. Courtney at Mrs. Fields was impressed with Interbake's "tremendous expertise in the cookie industry, " its success in the private label business, and the backing it had from

         Weston Foods.[55] He thought that the relationship was a "perfect fit."[56] McDonough at Interbake remarked in an internal memorandum that the project was "a unique opportunity to obtain an iconic brand in the cookie category for minimum investment, " and would give Interbake "entry into branded market with a leading cookie brand that has high brand recognition and opportunity for growth."[57]

         F. Transition of the Business from Mrs. Fields to Interbake

         Between March 16, 2012 and November 1, 2012, Mrs. Fields continued operating the retail brand business while Interbake prepared its sales staff and manufacturing capabilities to take over the operations. Mrs. Fields' lead salesman, Robert Rummel, sent Monette weekly reports and commentary about all branded retail sales.[58]

         In July 2012, Interbake promoted Monette to Vice President of Retail.[59] That same month, Rummel traveled to Interbake's headquarters in Richmond, Virginia to bring its marketing department up to speed on what was needed to market the Mrs. Fields products.[60] Courtney and Rummel provided Interbake with the sales details of all accounts, including trade spend, off-invoice allowances, and promotional activity.[61] Mrs. Fields held weekly meetings with Interbake's supply team to ensure that as Mrs. Fields wound down production, Interbake could ramp up production.[62]

         To produce the Mrs. Fields cookies, Interbake invested $5 million in upgrading its production lines.[63] The investment added cooling capacity required to produce soft-baked cookies and certain packaging capabilities, in particular for selling single-serve cookies.[64]

         While the transition was underway, product quality continued to be a concern internally at Mrs. Fields. In an August 15, 2012 meeting, the Mrs. Fields board discussed the "causes and effects" of declining product performance at CVS and Shopper's Drug Mart.[65] The board then decided that Mrs. Fields would "strongly emphasize to Interbake the need to improve the quality of the current product line."[66]

         On November 1, 2012, Rummel was transitioned from Mrs. Fields to become an Interbake employee, and Interbake took over operation of the business.[67]

          G. Concerns with the Mrs. Fields' Brand

         After Interbake assumed operational responsibility for branded retail, Mrs. Fields continued to grapple with weakness in its franchise business, continuing quality problems, and brand stagnation. On or about November 27, 2012, Tim Casey, Mrs. Fields' CEO at the time, delivered a presentation for the board of Famous Brands, Mrs. Fields' parent company, highlighting the challenges facing the Mrs. Fields brand.[68] Casey discussed the year-after-year decline in the number of franchise stores since 2007. Cautioning that "[b]rick and mortar store fronts are an essential part of the brand's health, " his presentation stated that "[o]ur base continues to erode putting distribution and brand equity at risk."[69] Casey's speaker notes acknowledged that "[w]e are late to focus on the Mrs. Fields Brand, "[70] and that "[w]e have close to a $300M brand with little to no investment in brand stewardship!"[71]

         The presentation included a "Case Study" of the Branded Retail Group ("BRG")-the business licensed to Interbake-as a "good example" of what happens to a business when investment in a brand is neglected:

• With limited investment over the last 6 years the BRG business has realized a relatively flat top line and a very inconsistent bottom line
• If the BRG business had not been licensed early this year, significant investment would have been needed to sustain and grow the business
• Essentially, "INVEST or DIE"
• The BRG scenario is a very good example of what happens when investment isn't made to strengthen and sustain the brand . . . Very predictable results.[72]

         The presentation also included a "5 Year Strategic Plan" that summarized the "Current Reality" facing Mrs. Fields, which reiterated the need for additional investment in its brand:

2. We need to invest in the brands to support growth1. No significant investment in brand marketing to support our franchising or licensing partners has occurred in several years.

3. Mrs. Fields needs revitalizing.

1. Mrs. Fields brand has not been addressed in over 10 years

2. Store unit economics don't work therefore franchising is stagnant[73]

         Addressing point 2.1 quoted above, Casey explained that his presentation was referring to "investment outside the traditional marketing expenditures that hit the P&L" that Mrs. Fields used "to normally support the brand."[74] Casey recommended investing $10 million in 2013 and 2014 on top of the traditional marketing expenditures that Mrs. Fields already was incurring to support "Growth Initiatives, " part of which was necessary to increase brand awareness across all of Mrs. Fields' business channels.[75] The proposed investment was never made, and Casey left the company three months after delivering the presentation.[76]

         H. Interbake's Initial Efforts to Acquire Mrs. Fields in 2013

         Shortly after assuming operational control over the Mrs. Field retail business as licensee, Interbake expressed interest in acquiring the business outright. A December 13, 2012 slide deck outlining Interbake's strategic plan for 2013-2017 stated that one of Interbake's strategic initiatives was to "Secure Mrs. Fields long-term brand control and drive growth of the business and brand (new items, new customers, unlocking trade efficiencies, meaningful innovation.)." [77] The deck identified the "[f]ailure to secure long term brand control" as a "key risk" to expanding Mrs. Fields "across other product platforms and channels."[78]

         In a January 29, 2013 letter, Interbake expressed its "preliminary interest" in purchasing the Mrs. Fields brand for the "retail and licensing segment of the business" for approximately $30 million.[79] Interbake followed up with a letter of intent dated March 6, 2013, offering to purchase the Mrs. Fields brand for $32 million and to provide Mrs. Fields with a worldwide, perpetual, royalty-free license for the franchise and gifting business.[80] After Mrs. Fields balked at the proposal, Interbake sent a revised letter of intent on May 15, 2013, proposing that Mrs. Fields retain ownership of the brand while providing Interbake a worldwide, perpetual, royalty-free license for all purposes other than franchising and gifting for $22 million.[81] Courtney remarked in a May 22 internal email to Joe Nasr of Z Capital: "Obviously, this is not going to fly."[82]

         I. Z Capital Gets Frustrated with Interbake, More Discussions About Selling the Retail Brand, and Internal Turmoil at Mrs. Fields

         On January 28, 2014, James Zenni, President and CEO of Z Capital and Chairman of the Board of Mrs. Fields, stated in an email to one of his partners that he wanted to "break" or "modify" the License Agreement because it is "killing ou[r] brand."[83] Zenni reiterated his views later that day to fellow board member David Barr, blaming cookie confusion between Mrs. Fields' premium products and Interbake's "crap" for crippling Mrs. Fields' ability to expand its other business lines:

I want to revisit the Interbake situation / contract and I don't want to sell the rights (unless it's a huge number today). It's clear to me that their product is not great and killing our brand. To crank up gifting and franchising and have their crap on the shelf doesn't help.[84]

         Barr sympathized with Zenni's concerns, but reminded him that "their crap" was once "our crap:"

I understand and do not disagree with your sentiments. In fact, many years ago while at Great American Cookies, this is exactly why I never went into packaged goods even though we were approached. I could never resolve the quality difference. With that said, we need to remember that 'their crap' they are selling was 'our crap' just two years ago and we sold it to them.[85]

         While Z Capital was expressing frustration with Interbake, Interbake continued to pursue an acquisition of Mrs. Fields' branded retail business. As of May 2014, Interbake was proposing either to acquire the Mrs. Fields' licensing channel for between $36-38 million, or to secure a ten-year, extendable option to acquire the business at higher prices in exchange for an upfront payment of $500, 000.[86]

         On May 31, McDonough informed George Weston that "[w]e finally have agreement to non-binding financial terms with Mrs. Fields for the purchase of the perpetual rights to the Mrs. Fields brand for essentially all bakery products across all channels world wide with the exception of their Mall stores and on-line gifting."[87]

         The parties continued to negotiate a potential sale of the licensed business to Interbake through the summer and fall of 2014, [88] but Mrs. Fields was lukewarm toward Interbake's proposals. On June 15, Zenni of Z Capital instructed Courtney and his team not to "engage in any discussions with Interbake on any topic."[89]Instead, Z Capital and the Mrs. Fields board assumed direct control over the negotiations with Interbake.

         On June 27, Courtney emailed Zenni asking permission to resume contact with Interbake, noting there were "a couple of items they need immediate approval on or they will lose the sales opportunity (primarily promotional)." Courtney never received approval and was fired later that day.[90] Mrs. Fields also terminated its entire marketing department except for one person, Stephanie Brady, who remained until January 2015.[91]

         Courtney's termination marked the beginning of a two-year interregnum where three individuals were appointed and then removed in quick succession as Mrs. Fields' CEO. Courtney was succeeded by Joyce Hrinya, who served in an interim capacity for about six months until he was succeeded by Jeff Werner, who also served for about six months. [92] They were followed by Jonathan Drake, who served as CEO for just five months before he was replaced by Werner, who ran the company for a second stint of about five months before being replaced in August 2016 by Dustin Lyman, who was serving as CEO as of the time of trial. [93] In total, six different individuals served as the CEO of Mrs. Fields in seven separate tenures from March 2012, when the License Agreement was signed, until August 2016.

         In October 2014, George Weston's annual enterprise risk management review included a discussion of the "risk related to not having full control of Mrs. Fields brand, " a topic that appeared in the previous year's review.[94] The presentation identified as one of its "Current Mitigation Actions" the need to "Continue to meet Mrs. Field's targets, "[95] and contemplated having McDonough meet with Mrs. Fields' private-equity group in mid-October to discuss brand ownership with the goal of resolving the issue by the end of the year.[96] The planned October meeting occurred, but the parties failed to come to an understanding and the negotiations ended soon after.[97]

          On November 28, 2014, an enterprise risk management update circulated among senior George Weston, Weston Foods, and Interbake employees, including McDonough, noted that discussions to acquire Mrs. Fields had ended and that going forward Interbake would need to "Protect volume and EBIT as we transition from Mrs. Field's by pursuing licensing arrangements with other biscuit brands."[98] The update also identified a series of future mitigation actions with respect to Mrs. Fields, including:

• Invest prudently in brand insights and R&D (limit of $500K-$700k) to achieve 2016 targets, while taking into account risk of losing brand in long-term
• Hire brand resources to conduct R&D / consumer insights
• Build Mrs. Fields platform to include other channels and products
• Target new business accounts.[99]

         J. Interbake Ends Its Pursuit to Acquire the Mrs. Fields Retail Brand

         In February 2015, consistent with its November 2014 enterprise risk update, Interbake hired Lauren Reynolds as a brand manager to market Mrs. Fields products.[100] Notwithstanding the breakdown in negotiations with Mrs. Fields that occurred in October 2014, Interbake still believed in early 2015 that it would be "successful in buying long-term rights to the brand ownership."[101]

          On April 1, Reynolds shared her 30-day observations on the Mrs. Fields brand with Interbake leadership. The presentation stated: "Mrs. Fields is a strong brand equity that has the potential for long-term success in the cookie category."[102]Reynolds forecasted sales for 2015 at $28.24 million, an 18% increase over 2014.[103]The presentation also reiterated Interbake's goal to "protect control of brand at Retail, " which Interbake would pursue by continuing "to negotiate to gain ownership of the brand."[104] In early 2015, Z Capital decided to solicit bids to sell Famous Brands.[105] An April 15 George Weston presentation summarized the opportunity and the rationale for making a bid, stating that "[w]e continue to believe that Mrs. Fields is a well-recognized, premium brand that is an attractive component of our product portfolio."[106] The "Mrs. Fields business, " the presentation continued, "generated $18M of revenue (5% of total Interbake) and $3M of EBITDA (16% margin in 2014) - this is currently the highest margin business in Interbake (excluding NDS)."[107]The presentation further stated: "Loss of the Mrs. Fields brand would be detrimental to our strategic growth plan and our ability to grow other branded business."[108] On April 20, Interbake submitted a $50 million bid for both the branded retail business and Mrs. Fields' e-commerce platform and gifting business.[109]

         On April 30, 2015, Interbake and Mrs. Fields held a strategic planning meeting. Zenni, Monette, and Reynolds were among the attendees. Product quality was a primary topic. Rebecca Hamilton, a Mrs. Fields project manager, recounted that "[t]here was a lengthy discussion regarding the quality of the Interbake cookie and what we need to do to make formula adjustments. Laura [Reynolds] and Seth [Monette] suggested our R&D teams work together to evaluate and modify existing formula's to better represent the Mrs. Fields brand."[110]

         Another topic discussed at the April 30 meeting was a new promotional program Interbake was undertaking with the United Service Organizations between May and July 2015 called "Share Your Hero." The promotion invited customers to submit stories about their individual heroes in return for coupons and product samples, with the winner to receive one year's worth of cookies and to be featured on Mrs. Fields cookie boxes.[111] Interbake asked to "tie the USO program" to the official Mrs. Fields website to appeal to a broader audience, but Mrs. Fields refused, quarantining the Interbake cookies from Mrs. Fields' other products "to avoid further cookie confusion in the market place."[112]

         On May 6, 2015, Mrs. Fields rejected Interbake's offer to acquire Mrs. Fields' branded retail business and its e-commerce platform and gifting business for $50 million. An internal Weston/Interbake email reported that "Z-Capital has decided to continue to own the business and execute on its business plan."[113]

         K. Interbake Plans to Exit the Mrs. Fields Relationship

         Z Capital's reversal of its decision to sell Famous Brands marked a turning point in the relationship between Mrs. Fields and Interbake. After two years of sporadic discussions, Interbake was faced with the reality that it would not be able to acquire control of the Mrs. Fields brand and that its role would be limited to that of a licensee. This realization set in motion a desire on Interbake's part to exit its relationship with Mrs. Fields. As discussed below, the initial plan was to exit when the term of License Agreement expired at the end of 2017, but the timetable was accelerated later in the hope of negotiating an exit in mid-2016.

         On May 7, 2015, Selena Sanderson at Interbake emailed Monette and Reynolds, asking for Reynolds' recommendation "on additional spend given that we will continue to be" licensees and not owners, and Monette's thoughts on the "sales benefit for this spend (vs what's in the budget)."[114] In response, Monette identified a new risk of $1 million in lost sales due to "[c]ore business softness, "[115] which he described as the "impact of zero consumer spend."[116] On June 2, Reynolds emailed Tiffany Reeve, Interbake's Vice President of Financing, explaining that the trade spend in the budget was committed to various projects and that no additional spend was available for the second half of 2015.[117]

         On June 15, Daryl Gormley took over as President of Interbake, reporting directly to McDonough, who had been promoted to President of Weston Foods' frozen and biscuit divisions.[118] On the same day, Reynolds circulated an updated brand strategy deck.[119] The presentation estimated that sales for 2015 would be $21.5 million, down 10.2% from the prior year and down 15.7% from the 2015 budgeted amount, a drop "driven by strong headwinds, including poor retail velocity, " and that sales for 2016 would be $21.7 million.[120] The presentation also referenced a planned exit from the relationship with Mrs. Fields in 2017:

• Planned exit from Mrs. Fields brand and license in 2017 based upon poor partnership relationship and significant investment needed to reverse brand health
o Minimum Gross Sales of $34.0 million are needed by the end of 2016 for license auto-renewal; large gap exists to achieve minimum[121]

         The plan to exit the Mrs. Field brand and license in 2017 was reiterated in a Weston Foods Brand Strategy Update dated June 22, 2015, which noted that: "Brand health is poor and we anticipate continued deterioration of the brand equity due to lack of support and investment from Famous Brands."[122] Paviter Binning, George Weston's President and CEO, confirmed that, as of mid-June 2015, it was Interbake's plan to exit the relationship with Mrs. Fields in 2017.[123]

         Although it planned to exit the Mrs. Fields business, Interbake still had a business to run in the meantime. On June 23, Reynolds emailed Hamilton at Mrs. Fields:

I wanted to reach out to see if you had an R&D contract you would like us to work with on the cookie formulas? We would like to remove PHO [partially hydrogenated oils] from all formulas and feel this is a great opportunity to optimize the product. Please let me know who I should be working with on this.[124]

         Three weeks later, Hamilton relayed the email to Famous Brand's Chief Marketing Officer, stating: "Lauren's second email inquiring about who to work with from our team on the Interbake formulas. I basically told her that we had some changes internally and were trying to figure out the best person for her to work with and that I would get back to her."[125] Mrs. Fields never responded to Reynolds' request for a contact person, and never offered any resources to address cookie confusion or the formula problem.[126]

         While mid-2015 Interbake internal documents were reflecting its concern that the Mrs. Fields brand was in decline, senior executives overseeing Mrs. Fields also were discussing internally problems with the brand. One email exchange in August 2015, for example, viewed the shrinking pipeline for franchises as a "brand problem and product development problem, " and noted the negative effect that discounting in the retail channel was having on the brand:

The significant discounting of Mrs. Fields' products is a weakness. Every day I receive a different email offering Mrs. Fields cookies at a discount. I believe that this cheapens the brand and I believe that it is training Mrs. Fields' customers to never pay full price because they should wait for a coupon or other discount offer, which inevitably will be arriving sooner rather than later. The discounting is a poor tactic that needs to be reigned in - gifting has been running on their own unchecked chasing sales.[127]

         L. Interbake Accelerates Its Plan to Exit the Mrs. Fields Relationship

         In July 2015, Gormley and his staff at Interbake worked on developing a plan to exit from the Mrs. Fields relationship. On July 1, Gormley asked Monette how much Interbake was planning to spend "to support Mrs. Fields" for the remainder of the License Agreement and the estimated return on that investment.[128] Monette responded that trade spend "just follows sales up or down" as a percentage of sales, and that he anticipated trade spend for 2015 would be $4.2 million (or 25%) of estimated sales of $19 million.[129]

         On July 3, Gormley asked Monette to "review the Mrs. Fields spending in more detail - what are we investing, what is the return within the agreement, what are alternatives and the associated financials including the payment rate if we drop below threshold, what is the impact to customers/customer relationships?" [130] Monette responded that the trade spend Interbake had set up "is in line with the category average as we understand it (25% of gross sales)" and cautioned against reducing it:

There are no required spending minimums within the agreement. The trade we've set up for the business is in line with the category average as we understand it (25% of gross sales). . . . On the Mrs. Fields consumer spending, it really has been and is quite limited. To the extent that we 'invest' in the brand it really has been through our trade spend which is needed to stay on the shelf and drive any customer support whatsoever. If we start to peel back trade in a significant way then our turns, distribution and customer relationships will suffer. I would not recommend that course of action.[131]

         By mid-July, Interbake's plan had shifted from exiting the Licensing Agreement at the end of the term in 2017 to "[m]anag[ing] Mrs. Fields business to maximize cash generation without alienating customers while planning for transition within 12 months, in advance of the agreement termination."[132] On July 23, 2015, Gormley's team reported their goals for the second half of 2015. One of Reeve's goals was to "[d]evelop an exit and backfill strategy for Mrs. Fields."[133] Monette's objectives included using trade spend to ensure that Interbake reached $20 million in sales for the year and developing a two-year plan to manage the exit from the relationship with Mrs. Fields.[134]

         Also on July 23, representatives of Mrs. Fields and Interbake met to discuss the state of their relationship.[135] Dustin Lyman, then Vice President of Finance and soon to become Mrs. Fields' new CEO, was one of the attendees. He testified that Mrs. Fields hoped to reaffirm to Monette that Mrs. Fields would be "available at the highest levels of the company to interact with him and the rest of Interbake management."[136] Among the topics discussed was the USO Share Your Hero campaign, which both sides agreed was a success, and continuing concerns about cookie quality.[137] On the latter issue, Interbake pointed out that it had been using "the recipes they had been given" by Mrs. Fields and that if Mrs. Fields wanted to change the recipes, it could provide new ones, to which Mrs. Fields responded that it "did not have the skill set within the company to come up with a new recipe formulation."[138]

         In the months after its July meeting with Mrs. Fields, Interbake implemented its plan to "backfill" the "significant" "sales and EBIT gap" that would be left by the planned exit from the Mrs. Fields relationship.[139] At the same time, Interbake did not "want to give Famous Brands the opportunity to leave the agreement at year end" by failing to meet the $20 million sales threshold in Section 15(c)(iii) of the License

         Agreement.[140]

          In an August 27 email, Monette said he would pull together a plan to meet the $20 million minimum by using trade spend and other approaches.[141] A few days later, on September 2, Monette emailed his sales team to inform them that he had received "buy-in and support from Weston Senior Leadership to take one last trade deal driven crack at closing our year strong on Mrs. Fields, " and instructed the sales team to "spend like drunken sailors:"

I have received buy-in and support from Weston Senior Leadership to take one last trade deal driven crack at closing our year strong on Mrs. Fields.
The goal is topline volume 1st, incremental contribution to plan 2nd. What does this mean? It means that we can throw out the existing plan and TURN UP THE HEAT.
For example, have a 2/$5 planned that will generate 500 cases in orders? Then let's get a 2/$4 planned that will generate 1500 cases!
All ideas are on the table so come prepared with ideas and an open mind. I don't want to hear anything about what hasn't worked or what is ideal.
The only thing I'm interested in is what do you need to drive incremental volume for the balance of the year. Demos? Shippers? IRC's? Sharpened Price Points? Co-Ops? Display fees? Menu?
Tomorrow's call will be to talk about focus and how.
It's not often that we get the green light to spend like drunken sailors…plan on being aggressive and moving fast.[142]

          While Monette's sales team had the green light to increase trade spend to increase sales, Reynolds was asked to cut back on marketing expenses. On September 30, Reeve emailed Reynolds, asking, "[h]ow much of this can you pull back on if we say we are not going to continue to support MF with marketing $?"[143]Reynolds replied that "I'm at bare bones for Mrs. Fields for 2016. If we no longer have the brand, it is a different story, but for now I would say I have already pulled back as much as possible to keep things up and running at a minimum."[144]

         M. Interbake's Private Label Initiatives

         At the same time that Monette and his sales team were pushing to meet the $20 million sales threshold for 2015, Interbake was exploring ways to "backfill" the volume it expected to lose when it exited its relationship with Mrs. Fields.[145]Interbake started by launching a series of private-label projects to develop substitute products in-house for this purpose.

         On or about October 28, 2015, at Weston Food's third quarter review meeting, Interbake presented an updated Mrs. Fields exit plan that contemplated negotiating an "end date" to its contract with Mrs. Fields in the first half of 2016, and replacing its products through a "Three Prong Replacement Strategy:"

• Leverage 2015 $20MM minimum miss for early exit
• Negotiate first half 2016 end date with Famous Brands
• Three Prong Replacement Strategy
o Project Capricorn for U.S. Mass, Grocery and Club o Two SKU value soft baked line for C-Store
o Exploring "donut" cookie for Shoppers/LCL
• Minimize inventory risk of product and supplies[146]

         The first prong, Project Capricorn, was a "high quality, chocolate chip-based cookie line of products" with packaging "completely different" from the Mrs. Fields product.[147] The Mrs. Fields cookie was soft-baked and packaged in a carton. The Project Capricorn product was a hard cookie that would be sold "in film packaging with a tray, " which meant that the Project Capricorn product could not go in the same spot on the shelf as the Mrs. Fields cookie.[148]

         The second prong was known as Project Bubba. It was an individually wrapped single-serve cookie that was to be sold in the convenience store channel using different recipes and flavors than the Mrs. Fields single-serve product but would be sold in the same size packaging.[149] The Project Bubba cookie never made it past the pilot phase. [150]

          The third prong was known as Project Sugar Shack. It was a "doughnut cookie, " "a completely new innovation" intended for the Canadian market that had "nothing to do with the Mrs. Fields actual product."[151]

         In November 2015, Interbake provided samples of the Project Capricorn product to Walmart when it asked to see a product similar to one that Interbake made in Canada under the "Decadent" brand name.[152] On December 18, Walmart notified Interbake that it was not interested in Project Capricorn. [153]

         Projects Capricorn, Bubba and Sugar Shack were never completed, and the products contemplated by these three projects were never sold to any retailer or consumer.[154] After Project Capricorn failed to draw any interest from Walmart, Interbake adopted another project to make two new cookies for Walmart called "Walmart Homestyle, "[155] which it planned to sell in packaging with the same dimensions as the Mrs. Fields' packaging.[156] Interbake originally developed Project Homestyle as a value soft-baked cookie for Dollar General (under the Clover Valley label) with less expensive ingredients than the Mrs. Fields premium brand.[157] It ultimately was not sold to Walmart or, besides Dollar General, any other customers.[158]

         N. Interbake Explores a Partnership with Back to Nature

         Going into 2016, Interbake's "backfill" strategy became focused on a potential partnership with Back to Nature Foods Company, LLC ("Back to Nature"), a natural food company. On January 29, 2016, Gormley and McDonough met with Vincent Fantegrossi, President and CEO of Back to Nature, who recounted the discussion in an email that day:

Interbake is very frustrated with Mrs. Fields - the brand is owned by a PE company that won't spend against it, no marketing or trade spend - has had six presidents in three years. [McDonough] tried to buy the brand and they don't want to sell it. His strategy is to replace the Mrs. Fields by offering a branded and/or private label offering. They can terminate in less than 60 days, we are targeting a July 1 kickoff. I pressed on the fact that a branded replacement assures better success of transitioning space than waiting for PL product development, etc. Something we are going to need to push. They project this to be worth $3 million in sales to BTN. If we could get a bigger slice, it could go a lot higher. They feel we need four SKU's to do that (we currently have two).[159]

         In mid-February, Interbake and Back to Nature executives met in Florida to discuss the proposed joint venture.[160]

         On March 22, Gormley and Stephanie Bagwell, a program marketing manager at Interbake, spoke with Back to Nature and agreed "to support the Mrs. Fields backfill plan" using existing Back to Nature formulations for seven cookies and "existing Mrs. Fields private label formulation[s]" for seven other cookies, and to develop four other formulations.[161] The next day, Fantegrossi informed his team about a meeting with Interbake planned for April 6, stating: "[t]his is confidential because it has not been announced, but we are working with Interbake toward replacing Mrs. Fields with [SnackWell's and Back to Nature] everywhere Interbake controls it . . . They are notifying Mrs. Fields (Famous Brands) on April 5, then coming to Naples on April 6 to scope our plan of attack."[162] SnackWell's is a non-organic brand owned by Back to Nature. [163]

         On March 24, Interbake sent Back to Nature some recent data on its sales of Mrs. Fields cookies.[164] Several days later, Interbake sent Back to Nature packaging specifications Interbake had used for the Mrs. Fields products.[165] An internal Back to Nature email comments that it was "attempting to stay close to Mrs. Fields traditional architecture, while respecting the Back to Nature Brand" to give "retailers an easy solution to replace the Mrs. Fields product slot on shelf."[166]

         While Interbake was exploring a transition to Back to Nature in March, it was closely managing its Mrs. Fields packaging materials and inventory levels. This led to some product shortages[167] and the decision to discontinue at least one of its flavors: the red velvet cookie.[168]

         O. Mrs. Fields' Audit Request

         Under the License Agreement, Mrs. Fields is entitled to review and audit "relevant financial books and records" of Interbake.[169] On November 16, 2015, Mrs. Fields sent Interbake a letter asking to conduct an "inspection of books and records relating to the License Agreement."[170] The letter stated that the inspection would be conducted by Paul Crystal, a consultant who performs licensee contract compliance reviews, and enclosed an extensive questionnaire and lengthy lists of items Crystal wished to review onsite and prior to arrival.[171]

         On November 24, Interbake objected to Mrs. Field's request as "overly broad" and "outside the scope of the commitment between the parties under the Agreement."[172] After the parties discussed the parameters of the audit in December 2015, the onsite inspection occurred over the course of two days in February 2016.[173]

         On March 4, 2016, Crystal requested some additional information as a follow up to his onsite visit, which was provided on March 15 and 21.[174] Later in the day on March 21, Crystal sent Lyman a 37-page draft audit report.[175] After March 21, Crystal had no further communications with Interbake, and was not asked by anyone at Famous Brands or Z Capital to follow up on his draft audit report.[176]

         P. Interbake Seeks to Terminate the License Agreement as It Continues Discussions with Back to Nature and Walmart

         On April 5, 2016, McDonough and Gormley of Interbake met with Lyman and Kipley, a Mrs. Fields board member, in Toronto. Gormley informed the Mrs. Fields' representatives that Interbake would be terminating the License Agreement under Section 15(c)(iii) because sales in 2015 had not met the specified $20 million threshold.[177] Lyman and Kipley were taken by surprise.[178] That afternoon, Reeve emailed Lyman an "annual report" containing the 2015 sales and royalty figures.[179]

         Also on April 5, Mrs. Fields provided Walmart with updated packaging information for each of the products it sold Walmart, except for its Mrs. Fields products.[180] Two days later, Interbake pitched Walmart on a "great soft baked cookie" that would sell faster ("better velocities") than Mrs. Fields as part of its strategy to transition Walmart away from Mrs. Fields:

Our goal is still to provide you with a great soft baked cookie for your customers. I will do everything I can to transition in a quality way. I want to make sure that we help you with an item that has better velocities than the current items. We can discuss options for you to lead the market in this change if you want to move first.[181]

         On April 13, Walmart informed Interbake that it was "not interested in adding any other items" and had decided to discontinue selling the Mrs. Fields products.[182] Andrew Hotchkiss, an Interbake account manager, attributed Walmart's discontinuance of Mrs. Fields to Interbake's decision to exit from the Mrs. Fields relationship and the timing of Walmart's resetting of its "modulars."[183]

         After giving Mrs. Fields notice of its intention to terminate the License Agreement, Interbake prepared to launch a new partnership with Back to Nature. On April 6, Interbake held a three-hour "Kick-Off Call" with Back to Nature, before which Interbake circulated a presentation deck containing slides for fourteen of its major retailers.[184] The slides displayed the Mrs. Fields logo along with the logo of each retailer and contained information Interbake had compiled during its tenure as licensee of each retailer's recent sales of Mrs. Fields cookies.[185]

         On April 12, Gormley emailed Lyman a copy of Interbake's written notice of termination, "effective immediately, pursuant to Section 15(c)(iii) of the License Agreement."[186] Interbake offered to "work with [Mrs. Fields] to ensure an orderly transition of the Mrs. Fields arrangements."[187] On April 13, Mrs. Fields filed this lawsuit and, a few days later, sought a temporary restraining order to prevent Interbake from taking any action to terminate the License Agreement. On April 18, 2016, the Court entered a Standstill Order to which the parties stipulated. It provides "that neither Mrs. Fields nor Interbake shall take any action to implement any termination of the License Agreement" and that the parties would "continue to honor and meet their respective obligations under the License Agreement" until the Court issues a ruling after trial.[188]

         On May 4, 2016, Gormley sent Lyman a letter providing Interbake's "point of view" concerning its failed relationship with Mrs. Fields.[189] The letter asserted that "Mrs. Fields' brand health has continued to decline since February 2013, despite significant investment and effort by Interbake to drive and build the brand."[190] It further asserted that the business had become "commercially unviable" for Interbake, thus warranting termination under Section 15(c)(ix) "in addition to [its] right to terminate for sales coming in less than $20 million annually under Section 15(c)(iii) of the License Agreement."[191]

         The initiation of litigation by Mrs. Fields disrupted Interbake's planned partnership with Back to Nature. On May 26, Gormley wrote Fantegrossi referencing the litigation and putting on hold "expanding [its] relationship" with Back to Nature.[192]

         In April and May, Interbake continued to experience shortages of various Mrs. Fields products, including its milk chocolate chip cookie, prompting complaints from customers.[193] According to Rummel, Interbake's director of sales, Interbake had "corrected the packaging situation at this point, " which was a key reason for its inability to fill all product orders, but the shortages continued due to "backlog on the product."[194]

         Q. Sales from 2013 to 2016

         The License Agreement was signed in March 2012, and Interbake assumed operational control of branded retails products in or about November 2012. For the four full calendar years on Interbake's watch, the trial record reflects that the volume of Mrs. Fields product sales rose modestly from 2013 to 2014, and then declined significantly in 2015 and again in 2016, while the amount of trade spend Interbake incurred as a percentage of sales increased steadily over the three years for which data are available:

Retail Branded Sales 2013-2016

Year

Gross Sales[195]

Net Sales (98% of Gross)

Trade Spend[196]

Trade Spend (% of Gross)

2013

$22, 764, 278

$22, 308, 992

$4, 056, 725

17.82%

2014

$23, 210, 119

$22, 745, 917

$4, 911, 991

21.16%

2015

$17, 006, 419

$16, 596, 495

$4, 110, 126

24.17%

2016

$10, 951, 446

$10, 732, 418

-

-

         Despite Interbake's failure to achieve $20 million in Net Sales in 2016, Mrs. Fields did not seek to terminate the License Agreement under Section 15(c)(iii).

         II. THE PARTIES' CONTENTIONS

         After this action was filed in April 2016, expedited discovery occurred over a period of approximately six months, after which both parties amended their pleadings. On November 2, 2016, shortly before trial, Mrs. Fields filed a Verified Amended Complaint ("Complaint") asserting four claims:

• Count I seeks a declaratory judgment that Interbake was not entitled to terminate the License Agreement under Section 15(c)(iii) and a permanent injunction requiring Interbake to continue performing under the License Agreement.
• Count II seeks injunctive relief and specific performance for Interbake's alleged breaches of certain provisions of the License Agreement.
• Count III seeks damages for Interbake's alleged breaches of various provisions of the License Agreement.
• Count IV seeks damages for Interbake's alleged breach of the implied covenant of good faith and fair dealing.

         On November 4, 2016, Interbake filed amended counterclaims (the "Counterclaim"), asserting three claims:

• Count I seeks a declaratory judgment that Interbake was entitled to terminate the License Agreement under Section 15(c)(iii) as well as Section 15(c)(ix).
• Count II seeks rescission of the License Agreement and damages for Mrs. Fields' alleged breach of express and implied terms of the License Agreement.
• Count III seeks rescission of the License Agreement on the theory that Mrs. Fields fraudulently induced Interbake to enter into the License Agreement through knowingly false and misleading representations.

         Interbake did not seriously press its third counterclaim during post-trial briefing and later abandoned it.[197]

          III. LEGAL STANDARD

         To succeed at trial, "Plaintiffs, as well as Counterclaim-Plaintiffs, have the burden of proving each element, including damages, of each of their causes of action against each Defendant or Counterclaim-Defendant, as the case may be, by a preponderance of the evidence."[198] "Proof by a preponderance of the evidence means proof that something is more likely than not."[199] This standard applies to both Mrs. Fields' claims and Interbake's counterclaims.[200]

         With certain exceptions not relevant here, the License Agreement is governed by Delaware law.[201] Under Delaware law, a "contract's express terms provide the starting point in approaching a contract dispute."[202] If, on its face, the "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."[203] If a contract is ambiguous, however, the Court may consider extrinsic evidence, including "evidence of prior agreements and communications of the parties as well as trade usage or course of dealing."[204]

         Under Delaware's objective theory of contracts, "a contract is not rendered ambiguous simply because the parties do not agree upon its proper construction. Rather, a contract is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings."[205] In considering extrinsic evidence, the Court should uphold, "to the extent possible, the reasonable shared expectations of the parties at the time of contracting."[206] "In giving effect to the parties' intentions, it is generally accepted that the parties' conduct before any controversy has arisen is given 'great weight.'"[207]

          IV. ANALYSIS OF TERMINATION CLAIMS

         The dispute that precipitated the filing of this action is whether Interbake was within its rights to terminate the License Agreement in April 2016, before the expiration of its initial five-year term on December 31, 2017. That issue forms the basis of the first claim in Mrs. Fields' Complaint and Interbake's Counterclaim.

         In Count I of its Complaint, Mrs. Fields seeks a declaration that Interbake did not have the right to terminate the License Agreement under Section 15(c)(iii), as it purported to do in April 2016, and a permanent injunction requiring Interbake "to continue to carry out its obligations under the License Agreement until December 31, 2017 or, with appropriate advance notice, such earlier date as Mrs. Fields may reasonably select."[208] In Count I of its Counterclaims, Interbake seeks a declaration that it properly and effectively terminated the License Agreement under Sections 15(c)(iii) and 15(c)(ix), [209] which Interbake first invoked in writing as a basis for termination in April and May 2016, respectively.[210] In Count II of its Counterclaim, Interbake seeks to rescind the License Agreement based on Mrs. Fields' alleged material breaches of certain provisions in the License Agreement.[211] I address the issues concerning these purported grounds for termination, in turn, below.

          A. Interbake Is Not Entitled to Terminate the License Agreement

         Under Section 15(c)(iii)

         Section 15(c)(iii) of the License Agreement provides for early termination should "Net Sales" fall below $20 million in any given "Contract Year:"

(c) This Agreement may be terminated as follows:
(iii) Within fifteen (15) days following the receipt of the annual report pursuant to Section 7(b), if LICENSEE fails to reach Net Sales of twenty million ($20, 000, 000) dollars per Contract Year, during the Initial Term and Renewal Term, as the case may be.

"Net Sales" is defined to mean 98% of "Gross Sales, " and the term "Contract Year" corresponds to each calendar year from January 1, 2014 forward.[212]

         In April 2016, Interbake sought to terminate the License Agreement under Section 15(c)(iii) because it achieved only approximately $16.6 million in Net Sales in 2015. Interbake argues that, because Section 15(c)(iii) does not specify which party has the right to terminate, either party must be able to do so. Mrs. Fields counters that it would be unreasonable to construe Section 15(c)(iii) to give Interbake-the exclusive licensee-the ability to terminate for its own failure to reach the $20 million minimum. Having carefully considered the evidence of record, I agree with Mrs. Fields for essentially four reasons that the parties' reasonable expectations when they entered the License Agreement was that only Mrs. Fields would be able to trigger a termination under Section 15(c)(iii).

         First, the structure of the License Agreement and commercial logic support this conclusion. The License Agreement entitles Mrs. Fields to receive a "running royalty" of 9% on every dollar of Net Sales up to $28 million in Net Sales (with the royalty rate declining thereafter), [213] but it does not impose any best or reasonable efforts obligation on Interbake to achieve a certain level of sales. Indeed, at Interbake's request, a provision requiring that it achieve a minimum amount of annual sales (ranging from $20 million to $35 million from year 1 to year 5) was removed from an early draft of the License Agreement. Mrs. Fields did obtain, however, an important economic protection, namely the right to receive a minimum royalty of $2 million each year beginning with the 2014 calendar year until the end of the initial term of the License Agreement. [214] Thus, if Net Sales in a calendar year from 2014 forward do not exceed approximately $22.2 million-the point at which $2 million in running royalties would be due under a 9% royalty rate-Interbake is on the hook to make a true-up payment to Mrs. Fields for the difference.[215]

          Given this structure, it makes little commercial sense to think the parties would have intended that Interbake could terminate the License Agreement early due to its own failure to achieve the $20 million minimum sales threshold and thereby relieve itself of its minimum annual royalty obligation.[216] In interpreting a contract, Delaware courts seek to "give each provision and term effect . . . . We will not read a contract to render a provision or term meaningless or illusory." [217]Interpreting Section 15(c)(iii) to apply reciprocally would negate the purpose of the minimum annual royalty provision because Interbake could avoid the obligation to pay the minimum royalty each year for the rest of the license term if it failed to achieve $20 million in Net Sales in 2014, 2015 or 2016.

         Second, construing Section 15(c)(iii) to be exercisable only by Mrs. Fields is supported by the text of Section 15(d)(iv). That provision relieves Interbake of any "further financial obligation" apart from royalties that already have accrued for a termination under Section 15(c)(iii) "by Mrs. Fields:"

Following the termination by MRS. FIELDS pursuant to Section 15(c)(iii), the expiration of this Agreement or the earlier termination by LICENSEE as set forth herein, LICENSEE shall have no further financial obligations of any kind hereunder other than the payment of Running Royalties which accrued prior to the expiration or termination ….

         "Contracts must be construed as a whole, "[218] and courts will take into account "not only the language of the provision itself, but also the context of this provision within the overall framework of the [contract]. The trial court [thus] consider[s] the purpose of the [provision], as evidenced by its text, as well as other provisions relating to the [same subject]." [219] If the parties had intended that Interbake could trigger a termination under Section 15(c)(iii), it is reasonable to assume they would have said so when referring to that specific provision in Section 15(d)(iv). They did not, which strongly suggests that they did not intend to afford Interbake this right and which is consistent with the commercially logical result of ensuring that Interbake cannot use Section 15(c)(iii) to avoid its minimum annual royalty obligation.

Third, the negotiation history of the License Agreement confirms that Section 15(c)(iii) was not intended to apply reciprocally. It was Mrs. Fields-not Interbake-that inserted the original version of Section 15(c)(iii) into the first draft of the License Agreement.[220] Specifically, using as a template its preexisting license with Unilever, which did not contain a provision similar to Section 15(c)(iii), Mrs.

         Fields added the first version of Section 15(c)(iii), which referred to a $25 million minimum sales threshold.[221] Monette of Interbake thereafter asked Courtney of Mrs. Fields to "reduce it to 20 million, " which Mrs. Fields agreed to do.[222] It would make no sense for Interbake to ask that the threshold be reduced if, as Interbake now contends, the provision was intended as downside protection for its benefit.

         Fourth, contemporaneous evidence demonstrates that Interbake understood when it signed the License Agreement that only Mrs. Fields had the right to trigger a termination under Section 15(c)(iii). This is reflected in an internal Interbake memorandum dated March 21, 2012-two days before the License Agreement was signed-that was prepared to obtain authorization for expenditures related to entering into the license. Summarizing the termination provisions of the License Agreement, the memorandum states:

• Mrs. Fields has right to terminate where net sales [are] less than $20M in any contract year.
• Interbake has the right to terminate where Mrs. Fields materially changes the program or damages the brand such that the arrangement becomes commercially unviable."[223]

         The same understanding of the parties' termination rights was incorporated into several other slide decks that were circulated internally at Interbake and the Weston entities, some as recently as May 2014.[224]

         For its part, Interbake argues that Section 15(c)(iii) was intended to operate for its benefit based on Monette's testimony that he asked Courtney during the license negotiations for "downside protection" if the deal "didn't work out."[225]There is no parol evidence in the record, however, reflecting any discussions between the parties over the specific issue of whether Section 15(c)(iii) was intended to operate reciprocally.[226] Monette's testimony about "downside protection" was vague and never expressly connected to what became Section 15(c)(iii).[227] Based on the clear weight of the evidence, I find that the "downside protection" Interbake requested during the negotiations was provided in the form of Section 15(c)(ix), which logically focuses on the conduct of Mrs. Fields as grounds for termination by Interbake, and not in the form of Section 15(c)(iii).[228]

          In sum, for the reasons stated above, Mrs. Fields is entitled to a declaration that Interbake did not have the right to terminate the License Agreement under Section 15(c)(iii), as it purported to do in April 2016.[229]

         B. Interbake's Purported Termination Under Section 15(c)(ix) Was Invalid

         Section 15(c)(ix) of the License Agreement states, in relevant part:

If MRS. FIELDS (i) has made a representation or warranty in this Agreement that was not correct in any material respect at the time it was given; . . . or (iii) materially damages the value of the Licensed Names and Marks or the goodwill associated therewith, that directly renders the performance of this Agreement by LICENSEE commercially unviable (including but not limited to, a change that materially changes the market for the Royalty Bearing Products and/or materially changes the cost structure of the Royalty Bearing Products)(each a "Material Program Change"), then this Agreement may be terminated upon thirty (30) days written notice to MRS. FIELDS, without prejudice to any and all other rights and remedies LICENSEE may have hereunder or by law provided.

         The first time Interbake invoked Section 15(c)(ix) in writing as a ground for termination was in a letter dated May 4, 2016, three weeks after Mrs. Fields filed this lawsuit.[230] Interbake relies specifically on the first and third subsections of Section 15(c)(ix), quoted above, which I address in that order.[231]

         1. Interbake's Purported Termination Under the First Subsection of Section 15(c)(ix) Was Invalid

         The first subsection of Section 15(c)(ix) permits Interbake to terminate the License Agreement "[i]f MRS. FIELDS (i) has made a representation or warranty in this Agreement that was not correct in any material respect at the time it was given." Interbake contends that it was entitled to terminate the License Agreement under this provision on the theory that Mrs. Fields falsely represented in Section 19(d) of the License Agreement that it had no knowledge when it entered into the agreement of any fact or occurrence that was or could become materially adverse to Mrs. Fields' business:

(d) Absence of Certain Changes, Events and Conditions. MRS. FIELDS represents and warrants that it has no knowledge of any event, occurrence, fact, condition or change that is, or could reasonably be expected to become, individually or in the aggregate, materially adverse to (a) the business, prospects, condition (financial or otherwise) or assets of MRS. FIELDS, its goodwill, or Licensed Names and Marks, (b) the value or marketability of the Royalty Bearing Products, or (c) the ability of LICENSEE to consummate the transactions contemplated hereby, including but not limited to changes in the current customer base, knowledge of an impending or threatened loss of a material customer, and/or material changes to the Designated Distribution Channels.

         The crux of this claim rests on what constitutes a "materially adverse" "event, occurrence, fact, condition or change, " which Section 19(d) does not define and for which the parties offered no parol evidence.

         a. Defining "Materially Adverse"

         Mrs. Fields analogizes Section 19(d) to "material adverse change" or "effect" clauses ("MAC" or "MAE" clauses) that are a routine fixture in merger agreements, which this Court has analyzed on a number of occasions.[232] Citing this Court's 2005 decision in Frontier Oil v. Holly Corp., Mrs. Fields asserts that a "materially adverse" "event, occurrence, fact, condition or change" must be something that would "substantially threaten the overall earnings potential of the target company in a durationally significant manner, " and that none of the purported facts that Interbake relies on satisfies that standard.[233]

         Interbake counters that Frontier Oil is inapt because the License Agreement is not a merger or acquisition agreement but rather a trademark license agreement, but it offers no alternative reading of the text of Section 19(d). Interbake simply observes that the provision does not contain any durational element or requirement that the alleged "materially adverse" fact threaten "overall earnings potential." Interbake further notes that Section 19(d) is an inclusive representation also meant to cover an event that "is or could reasonably be expected to become materially adverse."[234]

         In my opinion, the test in Frontier Oil provides an appropriate framework to analyze whether Mrs. Fields breached Section 19(d). In In re IBP, Inc. Shareholders Litigation, [235] which is the origin of the Frontier Oil test, [236] Chief Justice Strine, writing as a Vice Chancellor, interpreted an MAE clause that, like Section 19(d), functioned as a representation and warranty that the seller had not suffered a "material adverse effect, " and which defined that concept in similar terms as:

any event, occurrence or development of a state of circumstances or facts which has had or reasonably could be expected to have a Material Adverse Effect . . . on the condition (financial or otherwise), business, assets, liabilities or results of operations of [the seller] and [its] subsidiaries taken as whole.[237]

         Based on a careful analysis of the purpose of such a clause, Chief Justice Strine articulated a three-part framework for determining when such a provision is triggered:

[E]ven where a Material Adverse Effect condition is as broadly written as the one in the Merger Agreement, that provision is best read as a backstop protecting the acquiror from [1] the occurrence of unknown events that [2] substantially threaten the overall earnings potential of the target in [3] a durationally-significant manner. A short-term hiccup in earnings would not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror.[238]

         In 2008, Vice Chancellor Lamb analyzed a similar MAE clause and similarly held: "The important consideration therefore is whether there has been adverse change in the target's business that is consequential to the company's long-term earnings power over a commercially reasonable period."[239] He further emphasized that a party "faces a heavy burden when it attempts to invoke a material adverse effect clause in order to avoid its [contractual] obligation."[240]

         Although the License Agreement did not involve a merger or acquisition, its drafters in 2012 had the benefit of the doctrine developed in IBP and its progeny when they negotiated the text of Section 19(d). More importantly, the same factors underlying its approach-knowledge, magnitude, and duration-are relevant to construing Section 19(d) in my view, although, as discussed below, the reasonable expectations of licensees and licensors would not necessarily be the same for buyers and sellers of a business insofar as the durational factor is concerned.

         Beginning with knowledge, Interbake could not reasonably have expected when it entered the License Agreement that it would be able to terminate it on the basis of an adverse fact it knew about and yet ignored.[241] If the fact or occurrence in question were within the parties' contemplation, they presumably would have specifically addressed it in the License Agreement. Put differently, if Interbake entered into the contract despite knowledge of an adverse fact, then it would be reasonable to assume it either considered the fact to be immaterial or decided to assume the risk.[242] Allowing Interbake to terminate the License Agreement based on something it knew about at the outset would be tantamount to building into the agreement an at-will termination mechanism that would vitiate Mrs. Fields' rights under the contract, including its right to collect the minimum royalty.

          As to magnitude, it is reasonable to infer that Mrs. Fields would not have agreed to Section 19(d) if Interbake could terminate on the basis of a minor setback. Common sense and commercial reality suggest that any ground for termination of a license to operate a business should "substantially threaten" the "overall earnings potential" of that business.

         Finally, as to duration, short-term setbacks are a part of business; "the important thing is whether the company has suffered a Material Adverse Effect . . . that is consequential to the company's earnings power over a commercially reasonable period."[243] In an acquisition, where the buyer acquires the assets of a business outright and the cash flows they generate in perpetuity, "one would think" that a commercially reasonable period "would be measured in years rather than months."[244] The License Agreement is different. Mrs. Fields retained ownership of the brand and Interbake's interest in the business only extends until the license expires, which occurs after a five-year term, subject to an option to renew the license for another five years.[245] Thus, given the limited duration of the License Agreement, the period of time that would be "commercially reasonable" in determining whether a consequential decline in earnings has had a material adverse effect on the license presumably would be shorter than the period of time relevant to the acquisition of business.

         With the foregoing considerations in mind, I now assess whether the facts and occurrences Interbake has identified satisfy the MAE requirement in Section 19(d) of the License Agreement.

         b. Interbake Has Not Proven that Mrs. Fields Had Knowledge of a Materially Adverse Fact or Event When It Entered the License Agreement

         The crux of Interbake's MAE theory is essentially twofold: that Mrs. Fields knew when it entered into the License Agreement (1) that its retail cookies tasted awful, and (2) that the value of the Mrs. Fields brand was declining because of a broken franchise model and lack of investment, which impaired Interbake's sales by depressing sales velocity and elevating trade-spend requirements.[246]

         Section 19(d) is a representation of Mrs. Fields's knowledge only as of the date it entered into the License Agreement on March 16, 2012. Interbake relies heavily on a November 2012 internal Mrs. Fields presentation stating that "Mrs. Fields needs revitalizing" and that the "Mrs. Fields brand has not been addressed in over 10 years, "[247] but that presentation postdates the Section 19(d) representation by eight months. The presentation, moreover, was not intended to suggest that Mrs. Fields had not been regularly incurring marketing expenditures to support the brand. As Mrs. Fields' then-CEO (Casey) explained, the presentation was referring to "investment outside the traditional marketing expenditures that hit the P&L, " which Mrs. Fields had been incurring in the normal course to "support the brand."[248]

         Interbake's best evidence pre-dating the License Agreement consists of (1) a September 2011 Mrs. Fields board presentation stating that the price of its retail cookies had "realistically hit the 'ceiling'" and describing the need to improve product quality "to be more consistent with MF brand expectations;"[249] (2) a January 2012 board presentation in which Mrs. Fields acknowledged that the "current BRG [Branded Retail Group] product does not meet the Mrs. Fields cookie standard or consumer expectation impacting repeat purchase and overall velocity;"[250] (3) a February 2012 email where Courtney called the franchising model "broken, " to which Casey responded, "we have to fix quality in all three channels-it's our brand;"[251] and (4) a March 2, 2012 email identifying the need to "reformulate the recipe of the cookies in all three channels" as a key initiative for 2012 and explaining that recipe reformation for branded retail products is "less of a priority as a licensing partner is ...


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