Chancery Court Dismisses Only Certain Counterclaims Against Baseball’s Derek Jeter
By: Merrick Hatcher and Joshua Haft
In a mixed ruling, the Chancery Court denied, in part, baseball legend Derek Jeter’s motion to dismiss claims that he breached his fiduciary duty as a director of undergarment manufacturer RevolutionWear, that he violated the implied covenant of good faith and fair dealing, and that he fraudulently induced a contract with RevolutionWear and fraudulently concealed restrictions in his endorsement contract with Nike that precluded Jeter from fulfilling his promise to allow RevolutionWear to announce his role as a founder, substantial owner, and director.
In Derek S. Jeter, Turn 2 Enterprises, LLC, and Derek S. Jeter 2002 Trust v. RevolutionWear, Inc., Derek Jeter, the former shortstop of the New York Yankees (“Jeter”), moved to dismiss certain counterclaims of RevolutionWear, Inc. (“RWI”), a manufacturer of high-technology undergarments under the FRIGO brand (“FRIGO”). Rather than a traditional endorsement arrangement, RWI negotiated a memorandum agreement with Jeter for service on RWI’s board of directors (the “Director Agreement”) and Jeter became a 15% stockholder of RWI, both in an attempt to use his marketing power through a strategy known as reverse-endorsement. RWI attempted to take advantage of the reverse-endorsement strategy based on the belief that potential consumers would be more impressed by Jeter being a board member and investing in the business, rather than simply promoting the product.
Jeter’s representatives reached out to RWI in 2009 after learning of RWI’s FRIGO product and their reverse-endorsement strategy. After a series of meetings and interactions, Jeter expressed interest in joining RWI subject to authorization from Nike, with which he was under contract. Jeter’s representatives refused to provide the Nike contract to RWI, but represented to RWI that Jeter’s proposed relationship with RWI was carved-out from the Nike contract. Based in part on the representations regarding the Nike contract, Jeter and RWI entered into the Director Agreement. The Director Agreement stated that RWI could disclose Jeter’s identity in the context of RWI’s management or otherwise, but Jeter’s approval was required for RWI to issue a press release disclosing his role with RWI. In addition, the Director Agreement specifically excluded an obligation of Jeter to endorse FRIGO. Jeter ultimately refused to allow RWI to publicly disclose his role with RWI due to Jeter’s Nike contract, despite allegations from RWI that Jeter represented to investors that he would publicly disclose that he was a co-founder, substantial owner, and director of RWI.
Jeter filed a complaint in November 2015, seeking, among other items, a declaration that he fully-complied with the Director Agreement. RWI asserted counterclaims against Jeter for fraud, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duties. Jeter moved to dismiss these counterclaims under Court of Chancery Rule 12(b)(6).
The Chancery Court reviewed Jeter’s motion to dismiss RWI’s counterclaims under Court of Chancery Rule 12(b)(6) on grounds of failure to state a claim upon which relief may be granted. In evaluating a motion to dismiss, the Chancery Court must “accept all well-pled factual allegations as true and draw all reasonable inferences in favor of the non-movant.”
The Chancery Court first analyzed RWI’s allegation that Jeter breached the implied covenant of good faith and fair dealing under the Director Agreement by refusing to approve a press release stating that Jeter was an owner, co-founder, and director of RWI. Under the language of the Director Agreement, RWI was permitted to issue such a press release provided Jeter first approved the release. In oral arguments, the parties agreed that a “reasonableness” requirement attached and must be imputed to Jeter’s approval. Therefore, the Chancery Court denied Jeter’s motion to dismiss with respect to his refusal to approve a press release because it is reasonably conceivable that Jeter’s refusal was unreasonable and thus a breach of the Director Agreement, regardless of whether or not his refusal was due to the Nike contract. However, the Chancery Court dismissed RWI’s counterclaim with respect to certain statements of Jeter because he did not have an obligation to promote RWI or its products.
RWI asserted three fraud-based claims: fraudulent inducement, fraudulent concealment, and fraud. The Chancery Court denied Jeter’s motion to dismiss with respect to fraudulent inducement and fraudulent concealment based on RWI’s assertions that Jeter fraudulently induced RWI to enter into the Director Agreement by falsely representing to RWI that he had approval of Nike and that Jeter fraudulently concealed the truth about the Nike contract from RWI so as to equitably toll the statute of limitations on the fraudulent inducement claim. The Chancery Court granted Jeter’s motion to dismiss on the fraud claim because RWI failed to identify statements from Jeter that contributed to fraud relied upon by RWI to its detriment, separate from the statements to induce the Director Agreement.
RWI also alleged that Jeter breached his fiduciary duty of loyalty and acted in bad faith in seven separate ways. Since RWI’s Certificate of Incorporation included an exculpatory clause absolving directors of liability to the fullest extent permitted by law, RWI’s claims must make it reasonably conceivable that Jeter breached the duty of loyalty, which can’t be exculpated. The Chancery Court dismissed all of the breach of fiduciary duty claims other than the claim that Jeter made false statements to investors in bad faith and while acting as a fiduciary to RWI. The allegations that Jeter acted in a manner inconsistent with the Director Agreement and RWI’s strategy of reverse-endorsement were dismissed as irrelevant to a claim of breach of fiduciary duty. The Chancery Court noted that Jeter’s contractual obligations under the Director Agreement appeared to have enlarged RWI’s expectations of Jeter beyond his fiduciary duties as a director. The Chancery Court clarified that while contractual obligations may give rise to claims of breach-of-contract, they do not alter a director’s fiduciary duties.