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Delaware Chancery Court Keeps Derek Jeter in Hot Water over Turbulent Reverse-Endorsement Agreement

Derek S. Jeter, et al. v. RevolutionWear, Inc.
C.A. No. 11706-VCG (Del. Ch. July 19, 2016). Chancery Court of the State of Delaware
by Matthew S. Sarna, Summer Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://courts.delaware.gov/Opinions/Download.aspx?id=243880

In Jeter, et al. v. RevolutionWear, Inc., C.A. No. 11706-VCG (Del. Ch. July 19, 2016), the Delaware Chancery Court denied Derek Jeter’s motion to dismiss RevolutionWear, Inc.’s (“RWI”) claims of fraudulent inducement and fraudulent concealment, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duties.

RWI is a men’s clothing company that develops and markets men’s undergarments. Through a marketing strategy known as a “reverse-endorsement,” in which celebrities and athletes join the company as significant owners or directors rather than endorsing the product, RWI initiated negotiations with Derek Jeter. At the time, Jeter was under contract with Nike, a relationship that he considered “incredibly important.” In an attempt to accommodate Jeter’s contractual restrictions, RWI requested a copy of his Nike contract to ensure that Jeter’s obligations as an eventual stockholder and director of RWI did not conflict. Jeter’s representatives, however, refused to provide RWI with a copy, assuring RWI that there was a carve-out in the Nike contract allowing for this relationship, and that Jeter had received written permission from Nike to go forward.

The parties subsequently executed a Memorandum of Agreement for Service upon the Board of Directors (“Director Agreement”). The Director Agreement provided that RWI could disclose the identity of Jeter as a Director of RWI, RWI could issue a press release disclosing Jeter’s directorial role provided that Jeter approved of the press release in advance, and, notwithstanding Jeter’s role with RWI, excluded an obligation that Jeter endorse the product.

Months after the execution of the Director Agreement, Jeter, allegedly, repeatedly refused to allow RWI to publicly announce that he was a “co-founder, substantial owner and director” of RWI. Despite its contractual agreement, RWI contended that it did not force the issue as to maintain a good relationship with the former Bronx Bomber. On November 13, 2013, Jeter’s representative informed RWI that due to Jeter’s Nike contract, “there [would] be no mention of Derek’s presence in the marketplace.” According to RWI, this was the first point RWI realized that Jeter had been making false and misleading representations. Jeter had previously attended an investor meeting in Stockholm, in which he represented to RWI and investors that he would publicize his full involvement with RWI at the upcoming launch in late 2013.

Proactively, Jeter filed a Verified Complaint on November 13, 2015 for declarations that he had complied with the Director Agreement. RWI, in its Answer and Counterclaim, alleged five (5) counts, asserting several types of fraud, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duties, seeking no less than $30 million and rescission of the Director Agreement. In response, Jeter filed a Court of Chancery Rule 12(b)(6) motion for dismissal of each of the counts of the Counterclaim.

The Court first looked at RWI’s allegation that Jeter breached the implied covenant of good faith and fair dealing by refusing to allow RWI to issue a press release announcing his role as a director. Jeter moved to dismiss this claim because (1) the Director Agreement expressly covered the press release issue, (2) RWI could have negotiated for unilateral power to issue a press release, and (3) his alleged refusal did not frustrate the overall purpose of the Director Agreement.

The Court unraveled Jeter’s motion by explaining that the implied covenant of good faith and fair dealings imposed a “reasonableness” requirement on Jeter’s decision to refuse a press release. To the extent that Jeter refused to approve the press release as an arbitrary decision, the Court explained that this unreasonable refusal constituted a breach of the Director Agreement. Further, if Jeter refused because of the conflict with his Nike contract, his refusal frustrated the overall purpose of the Director Agreement. Accordingly, the Court denied Jeter’s motion to dismiss as to this portion of Count II.

Moving on to examine RWI’s allegations of fraud, fraudulent inducement, fraudulent concealment, and fraud, the Court laid out five (5) elements necessary to sufficiently plead a fraud claim: a plaintiff must allege (1) that defendant falsely represented or omitted facts that he had a duty to disclose; (2) defendant knew or believed the representation was false or made it with reckless indifference; (3) defendant intended to induce plaintiff to act or refrain from acting; (4) plaintiff acted in justifiable reliance on the representation; and (5) plaintiff was injured by its reliance. See Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC, 2014 WL 2457515, at *7 (Del. Ch. May 30, 2014) (citing Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006)).

Regarding the claim of fraudulent inducement and concealment, the Court concluded that each should survive the motion to dismiss. The Court hinged its initial determination on the tolling of the three (3) year statute of limitations on a fraudulent inducement claim. Rather than starting the clock back in 2011, when Jeter allegedly made the contract-inducing statements regarding the absence of a contractual conflict, the Court explained that RWI’s well-pled, fraudulent concealment claim tolled the statute of limitations until November 2013, when Jeter’s agent revealed Jeter’s misrepresentations. See Smith v. Mattia, 2010 WL 412030, at *5 (Del. Ch. Feb 1, 2010) (quoting In re Tyson Foods, Inc., 919 A.2d 563, 585 (De. Ch. 2007)). As such, the Court could not dismiss Count I due to time constraints.

The Court next briefly examined RWI’s Count III, a separate claim of fraud. The Court succinctly explained that RWI failed to identify individual statements, separate from those made to allegedly fraudulent induce the Director Agreement and fraudulently conceal their falsity, which RWI relied upon to its detriment.

Finally, the Court analyzed RWI’s count for breach of fiduciary duties. Asserting a breach of one of the touchstone duties of a director, the duty of loyalty, RWI claimed that Jeter: (1) made fraudulent statements to RWI and its investors; (2) used the 2013 product launch to promote separate business interests; (3) which caused RWI to alter its product and marketing strategy to fit Jeter’s personal liking in exchange for false representations; (4) demanded the board not pursue certain strategies; (5) attempted to take over RWI’s management; and (6) attempted to capitalize on RWI’s depressed stock price to become the largest RWI stockholder.

The Court explained, “The duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally.” In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 33 (Del. Ch. 2014) (citing Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993). Accordingly, corporate fiduciaries may not use their position to further their own private interests. Id. The Director Agreement in this case contemplated obligations beyond just that of a fiduciary. Specifically, the Court explained, while such extended obligations might have given rise to breach of contract claims, they could not alter the standard fiduciary obligations of the director. Because these extra-contractual obligations appeared to the Court to have enlarged RWI’s expectations of Jeter beyond his fiduciary duties, the Court dismissed the above claims except that of Jeter’s false statements to investors. In that regard, the Court accepted RWI’s well-pled allegation that Jeter knowingly made false statements to investors in an attempt to further a purpose other than that of advancing the best interests of RWI.

In sum, the Court denied Jeter’s motion to dismiss as to the claims for fraudulent inducement, fraudulent concealment, portions of the counts for breach of the implied covenant of good faith and fair dealing and breach of fiduciary duties.