Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

ITG Brands, LLC v. Reynolds American, Inc.

Court of Chancery of Delaware

November 30, 2017

ITG BRANDS, LLC, Plaintiff,
v.
REYNOLDS AMERICAN, INC. and R.J. REYNOLDS TOBACCO COMPANY, Defendants.

          Submitted: September 11, 2017

          Stephen C. Norman, Matthew F. Davis, and Matthew R. Dreyfuss, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Robert J. Brookhiser and Elizabeth B. McCallum, BAKER & HOSTETLER LLP, Washington, DC; Attorneys for Plaintiff.

          Gregory P. Williams, Rudolf Koch, Robert L. Burns, and Matthew D. Perri, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Peter J. Biersteker and C. Kevin Marshall, JONES DAY, Washington, DC; Attorneys for Defendants.

          MEMORANDUM OPINION

          BOUCHARD, C.

         In the late 1990's, several major tobacco manufacturers in the United States entered into agreements with each of the fifty states in response to claims concerning the health risks of smoking. They first entered into separate agreements with four states (Florida, Minnesota, Mississippi, and Texas) before entering into a Master Settlement Agreement governing the remaining forty-six states. Under each of these agreements, the tobacco manufacturers are required to make annual payments based on their volume of tobacco product sales in the United States in the year to which the payment relates.

         The Master Settlement Agreement prohibits a party from transferring any of its cigarette products unless the transferee agrees to assume that party's obligations under the Master Settlement Agreement before the transfer occurs. The agreements with the other four states (the "Previously Settled States" or "PSS") that were entered into earlier do not contain a similar transfer provision.

         In July 2014, ITG Brands, LLC entered into an Asset Purchase Agreement to acquire for approximately $7.1 billion four cigarette brands owned by R.J. Reynolds Tobacco Company ("Reynolds Tobacco"), a wholly-owned subsidiary of Reynolds American, Inc. ("Reynolds American") (together, "Reynolds"). To ensure that ITG Brands would assume Reynolds Tobacco's obligations to the Previously Settled States as of the closing, in particular its annual payment obligations, the Asset Purchase Agreement requires that ITG Brands "use its reasonable best efforts" to reach agreements with those states with respect to the four cigarette brands that ITG Brands contracted to acquire, as follows:

[ITG Brands] shall use its reasonable best efforts to reach agreements with each of the Previously Settled States, by which [ITG Brands] 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.[1]

         The ITG Brands-Reynolds transaction closed on June 12, 2015 (the "Closing"). As of the Closing, however, ITG Brands had not reached an agreement to assume Reynolds Tobacco's obligations under its settlement agreement with Florida. Reynolds Tobacco and ITG Brands are now embroiled in litigation in Florida state court where Florida is seeking to hold both Reynolds Tobacco and ITG Brands accountable for annual payments of approximately $30 million associated with post-Closing sales of the four cigarette brands that ITG Brands purchased. ITG Brands responded by suing Reynolds in this Court, invoking the Delaware exclusive forum provision in the Asset Purchase Agreement.

         The parties have filed cross-motions for partial judgment on the pleadings over whether ITG Brands' obligation to use its reasonable best efforts to reach an agreement with Florida terminated at the Closing. The resolution of this question turns on the meaning of the last four words of the provision quoted above: "prior to the Closing."

         ITG Brands contends that this phrase defines the temporal scope of its obligation to use its reasonable best efforts to reach an agreement with Florida to assume Reynolds Tobacco's obligations, and that this obligation terminated when the ITG Brands-Reynolds transaction closed in June 2015. Thus, according to ITG Brands, it is off the hook for making payments to Florida for post-Closing sales of the four cigarette brands it acquired even though it received (and continues to receive) the benefit of the sales to which those payments relate.

         Reynolds contends that "prior to the Closing" as used in the foregoing provision defines the nature of the obligations that ITG Brands agreed to assume, i.e., the same obligations Reynolds Tobacco owed to Florida "prior to the Closing." Thus, according to Reynolds, ITG Brands' obligation to use its reasonable best efforts did not terminate at the Closing and continues until ITG Brands actually has made reasonable best efforts to assume the annual payment obligations for post-Closing sales of the four cigarette brands it acquired from Reynolds.

         For the reasons explained below, I find that Reynolds' interpretation is supported by the plain language of the Asset Purchase Agreement and that ITG Brands' interpretation is not. Accordingly, Reynolds' motion for partial judgment on the pleadings is granted, and ITG Brands' cross-motion is denied.

         I. BACKGROUND

         Unless noted otherwise, the facts in this opinion are drawn from the allegations in the Verified Complaint that are admitted in defendants' Answer and Verified Counterclaims and documents incorporated therein.[2] Any additional facts are either not subject to reasonable dispute or subject to judicial notice.

         A. Reynolds Tobacco and Other Tobacco Manufacturers Enter into Settlement Agreements with the States

         In the mid-1990s, a number of states sued Reynolds Tobacco, Lorillard Tobacco Company, and other large tobacco manufacturers for publicly misrepresenting the addictiveness and health risks of smoking. In 1997 and 1998, Reynolds Tobacco, Lorillard Tobacco Company, and other manufacturers (the "Settling Defendants") entered into separate settlement agreements with four states: Florida, Minnesota, Mississippi, and Texas (as defined above, the "Previously Settled States" or "PSS"). Reynolds Tobacco's 1997 settlement agreement with Florida is referred to hereafter as the "Florida Settlement Agreement." In November 1998, Reynolds Tobacco and other tobacco manufacturers entered into a Master Settlement Agreement (the "Master Settlement Agreement") governing the remaining forty-six states.

         In the Florida Settlement Agreement, the Settling Defendants collectively agreed to pay Florida an initial amount of $750 million, followed by annual payments.[3] Each Settling Defendant's annual payments are calculated from a base amount "pro rata in proportion equal to its respective Market Share" for that year.[4]The Florida Settlement Agreement and the other PSS settlement agreements have no provisions requiring the assumption of settlement payment obligations upon the transfer of cigarette brands, nor is there any mechanism for a transferee to join those agreements.

         Like the PSS settlement agreements, the Master Settlement Agreement requires that the manufacturers make annual payments based on their volume of sales in the year to which the payment relates.[5] Unlike the PSS settlement agreements, the Master Settlement Agreement provides in Section XVIII(c) that a party may not transfer any of its products covered by the agreement to a nonparty, unless the nonparty assumes the party's obligations under the Master Settlement Agreement before the transfer occurs:

No Original Participating Manufacturer may sell or otherwise transfer or permit the sale or transfer of any of its Cigarette brands, Brand Names, Cigarette product formulas or Cigarette businesses . . . to any person or entity unless such person or entity is an Original Participating Manufacturer or prior to the sale or acquisition agrees to assume the obligations of an Original Participating Manufacturer with respect to such Cigarette brands, Brand Names, Cigarette product formulas or businesses.[6]

         B. The Reynolds-Lorillard Merger and Asset Purchase Agreement

         On July 15, 2014, Reynolds American, the parent of Reynolds Tobacco, and Lorillard, Inc., the parent of Lorillard Tobacco Company, entered into a merger agreement. To facilitate regulatory approval of the merger, Reynolds American and ITG Brands entered into an Asset Purchase Agreement dated as of July 15, 2014 ("Asset Purchase Agreement"), in which Reynolds American agreed to sell four cigarette brands (Winston, Salem, Kool, and Maverick) (the "Acquired Tobacco Cigarette Brands") to ITG Brands for approximately $7.1 billion. Both transactions closed on June 12, 2015 (as defined above, the "Closing").

         The Asset Purchase Agreement provides that ITG Brands will assume liabilities under the Master Settlement Agreement and the PSS settlement agreements. The terms for doing so are detailed in an exhibit to the Asset Purchase Agreement entitled "Agreed Assumption Terms, " which is part of the Asset Purchase Agreement.[7]

         With respect to the Master Settlement Agreement, Section 2.1 of the Agreed Assumption Terms provides that "[a]s required by MSA § XVIII(c), [ITG Brands] shall assume, as of the Closing, the obligations of an [Original Participating Manufacturer] with respect to all of the Acquired Tobacco Cigarette Brands."[8] With respect to the PSS settlement agreements, Section 2.2 of the Agreed Assumption Terms imposes an obligation on ITG Brands to use its "reasonable best efforts" to reach agreements with each of the Previously Settled States, as follows:

[ITG Brands], with the assistance and cooperation of [Reynolds American] 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 [ITG Brands] 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 [ITG Brands] is required to make payments with respect to Acquired Tobacco Cigarette Brands under a direct-pay statute (or any distributor or other party is required to make such payments with respect to the Acquired Tobacco Cigarette Brands), [ITG Brands] will receive a credit against otherwise due payments under the PSS settlement equal to the full payments made.[9]

         The term "direct-pay statute" in the second sentence of Section 2.2 refers to statutes that impose fees on cigarette sales by tobacco manufacturers that have not entered into a settlement agreement with the state. Three of the Previously Settled States (Minnesota, Mississippi, and Texas) have direct-pay statutes.[10] Florida does not. One purpose of the direct-pay statutes is to compensate the state for the costs attributable to cigarette use.[11]

         The Agreed Assumption Terms are addressed in the body of the Asset Purchase Agreement in Sections 6.19 and 6.20. Both provisions provide that the duties specified in the Agreed Assumption Terms apply "both before and after the Closing":

• "As soon as practicable after the date of this Agreement, and both before and after the Closing, each of the Parties shall . . . make all such communications with and provide all such information to . . . the States . . . and take all such other steps . . . as are necessary and/or expedient for the purposes of . . . obtaining the agreement as necessary of the States . . . to the Agreed Assumption Terms."[12]
• ". . . each of the Parties undertakes that from and after the date of this Agreement and both before and after the Closing it shall . . . adhere fully to and not deviate in any respect from the Agreed Assumption Terms including in any communications with any of the States . . ."[13]
• "Each of [ITG Brands] and [Reynolds American] further undertakes from and after the Closing, to take . . . all such steps as are necessary or expedient . . . to cause the Agreed Assumption Terms, as applicable, to become fully effective and binding on each of the States."[14]

         C. ITG Brands' Efforts to Join the Settlement Agreements

         On July 15, 2014, ITG Brands, Reynolds Tobacco, and Lorillard Tobacco Company contacted the Attorneys General of all fifty states, informing them that, with respect to the transferred brands, ITG Brands would assume the obligations of an Original Participating Manufacturer under the Master Settlement Agreement and would attempt to join the PSS settlement agreements in Mississippi, Florida, Texas, and Minnesota.[15]

         In June 2015, ITG Brands joined the Mississippi settlement agreement.[16]

         On June 8, 2015, ITG Brands sent letters to Florida, Texas, and Minnesota, indicating its willingness to join the PSS settlement agreements governing those states.[17] In its letters to Texas and Minnesota, ITG Brands stated that if no joinder was in place when the Closing occurred, ITG Brands would make statutory payments on the Acquired Tobacco Cigarette Brands from that point forward.[18] ITG Brands did not join the Texas and Minnesota settlement agreements before the Closing, but alleges that it has been making statutory payments to Texas and Minnesota since then.[19]

         ITG Brands did not join the Florida Settlement Agreement before the Closing and has made no payments to Florida since it purchased the Acquired Tobacco Cigarette Brands. In December 2015, about six months after the Closing, Florida and ITG Brands discussed the possibility of ITG Brands joining the Florida Settlement Agreement, but the parties did not reach an agreement.[20] On January 11, 2017, representatives from ITG Brands and Reynolds met with Florida to "discuss the potential resolution of the payment issues under the Florida Settlement Agreement, " but those meetings were unsuccessful.[21]

         Reynolds Tobacco is a defendant in a Florida state court action that was filed by the state of Florida. On January 18, 2017, Florida filed a motion seeking to join ITG Brands as a defendant and to enforce the Florida Settlement Agreement against both Reynolds Tobacco and ITG Brands to recover annual payments for post-Closing sales of the Acquired Tobacco Cigarette Brands.[22] According to the motion, Florida "is presently owed more than $45 million and will continue to suffer annual losses of approximately $30 million absent the Court's enforcement of the Settlement Agreement it approved and adopted more than 20 years ago."[23] The motion also states that "Reynolds made its proportionate share of the annual payments under the terms of the Settlement Agreement for nearly two decades, until recently when it sold [four] of its most iconic cigarette brands to ITG for $7 billion in cash consideration plus ITG's assumption of certain liabilities."[24]

         II. PROCEDURAL HISTORY

         On February 17, 2017, ITG Brands filed this action asserting five claims for injunctive and declaratory relief. That same day, ITG Brands filed a motion for a temporary restraining order to enjoin Reynolds from pursuing their claims against ITG Brands in the Florida action based on an exclusive Delaware forum provision in the Asset Purchase Agreement. The Court granted that motion, in part, on March 1, 2017.

         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 with Florida 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 with Florida to join the Florida Settlement Agreement did not terminate due to the Closing.

         III. ANALYSIS

         A. Legal Standards

         This Court will grant a motion for judgment on the pleadings when there are no material issues of fact and the movant is entitled to judgment as a matter of law.[25]Judgment on the pleadings "is a proper framework for enforcing unambiguous contracts because there is no need to resolve material disputes of fact."[26]

         "When 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."[27] "Ambiguity 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."[28]

         The Asset Purchase Agreement, which includes the Agreed Assumption Terms, is governed by Delaware law.[29] Under Delaware law, courts are required to give unambiguous contract terms their plain meaning, without regard to extrinsic evidence.[30] Delaware law also "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."[31] 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.[32]

         In interpreting contract language, "[c]lear and unambiguous language . . . should be given its ordinary and usual meaning."[33] Courts also may look to the grammatical construction of a contractual provision to discern its meaning.[34]

         B. Reynolds' Interpretation of Section 2.2 is Supported by the Plain Language of the Asset Purchase Agreement

         Reynolds contends that the phrase "prior to the Closing" as used in Section 2.2 of the Agreed Assumption Terms is part of a clause that defines the nature of the obligations that ITG Brands agreed to assume with each of the Previously Settled States (i.e., the same obligations Reynolds Tobacco had with each of those states "prior to the Closing") and that the phrase thus did not impose a hard stop on ITG Brands' obligation to use its reasonable best efforts to reach an agreement with Florida. According to Reynolds, ITG Brands' obligation to reach an agreement with Florida remains in place until ITG Brands actually has ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.