Saturday, October 3, 2020

In Which I Play a Contracts Professor Again

I usually leave the arcana of contract interpretation principles to the specialists, but every now and then I apparently dip my toe in, and this is another of those weeks.

VC Laster’s opinion in In re Anthem-Cigna Merger Litigation tells a truly wild tale.  In brief, Anthem and Cigna agreed to merge, but Cigna’s CEO, David Cordani, wanted to helm the combined entity. When it became clear he wouldn’t get the CEO spot, he began a campaign of sabotage, assisted by Cigna executives who supported his ambitions.  Thus, Cigna’s top leadership hired a PR firm to trash talk the merger while concealing the firm’s involvement from Cigna’s Board.  At one point, Cigna’s General Counsel personally leaked certain letters so they would be disclosed publicly, then tasked her head of litigation with conducting an internal investigation to discover the source of the leak.  Cigna’s foot-dragging with respect to integration planning and responding to regulators was so profoundly passive-aggressive that I felt my blood pressure rising – and this is despite the fact that Anthem was not exactly an angel: it lied in federal court proceedings, and the overall merger would certainly have reduced competition in an already-consolidated industry.

In any event, both sides sued, and Laster ultimately concluded that while Cigna’s breaches were many and varied, the merger would have failed anyway due to regulatory opposition.

But entertainment-value aside, a technical point caught my attention, and that’s the burden of proof framework that Laster adopted, and which is in some tension with the framework articulated by the Delaware Supreme Court in Williams v. ETE, 159 A.3d 264 (Del. 2017).  Notably, however, it’s not clear that the framework was outcome-determinative, and even if it was, the party harmed – Anthem – endorsed Laster’s interpretation in its post-trial briefing, so this couldn’t be grounds for an appeal.

The issue: Sometimes, a party’s obligation to perform on a contract may only be triggered if a particular condition occurs. In that case, if the condition does not occur, the obligation is not triggered.  But, if the party prevented the condition from occurring by breaching its own contractual responsibilities, the party is obliged to perform.

In this case, the performance obligation was the merger itself, subject to the condition that there be no regulatory injunction preventing consummation.  Such an injunction did issue, however, when federal courts held the merger would be anticompetitive.  Thus, the parties were nominally relieved of the obligation to close.  Anthem, however, claimed that Cigna’s lack of cooperation breached its obligations under the merger agreement, which was the cause of the regulatory failure.

Laster agreed that Cigna was flagrantly – nay, ostentatiously – in breach of its obligations to cooperate with regulators and to use its best efforts to close.  Thus, the only question was whether those breaches were responsible for the fatal injunction.  And here’s where the burden of proof issue comes up.

In Williams, the Delaware Supreme Court held, “once a breach of a covenant is established, the burden is on the breaching party to show that the breach did not materially contribute to the failure of the transaction.”  Words to that effect are repeated a couple of times in the opinion (e.g., “if a proper analysis of ETE’s covenants led to a conclusion that ETE breached those covenants, the burden would shift to ETE to prove that its breaches did not materially contribute to the failure of the closing condition”), and CJ Strine in dissent also wrote, “As the Majority notes, under our law if a party establishes a breach of a covenant to bring about a condition at closing, the burden is on the breaching party to show that the breach did not materially contribute to the failure of that closing condition.”

So these statements would suggest that all Anthem needed to do was show that Cigna breached its obligations.  After that, the burden would be on Cigna to show that the breaches did not materially contribute to the failure of the condition, i.e., were not responsible for the issuance of the injunction.

But Laster didn’t see it that way.  Both the Williams majority and the dissent cited in support Restatement § 245 comment b.  That section of the Restatement says:

Where a party’s breach by non-performance contributes materially to the non-occurrence of a condition of one of his duties, the non-occurrence is excused.

And the comment reads:

Although it is implicit in the rule that the condition has not occurred, it is not necessary to show that it would have occurred but for the lack of cooperation. It is only required that the breach have contributed materially to the non-occurrence. Nevertheless, if it can be shown that the condition would not have occurred regardless of the lack of cooperation, the failure of performance did not contribute materially to its non-occurrence and the rule does not apply. The burden of showing this is properly thrown on the party in breach.

To Laster, this suggested a more complex burden shifting framework.  First, Anthem would have to show that Cigna breached its obligations in a manner that contributed materially to the issuance of the injunction.  After establishing that, Cigna would have the opportunity to offer an affirmative defense that even if it had cooperated, the injunction still would have issued.  Laster found Williams unclear on this point, I believe, because despite the language I quoted above, it did not distinguish between proof that the breach contributed to the condition’s failure, and proof that lack of a breach would still have led to failure – inquiries that he believed were distinct. And there is precedent from other jurisdictions supporting Laster’s reading, for example, Cox v. Snap, 859 F.3d 304 (4th Cir. 2017) and Cogswell v. CitiFinancial Mortgage, 624 F.3d 395 (7th Cir. 2010).

And so, that’s how he proceeded.  Under this framework, Anthem was unable to make the initial showing that certain of Cigna’s breaches contributed to the injunction, but it did succeed in making that showing with respect to other breaches.  And at that point, the burden switched to Cigna which, Laster concluded, was able to establish that the outcome would have been the same regardless.

Now, all this might be angels-on-pinheads – after all, there were only two Delaware cases that anyone cited regarding this matter, Williams and WaveDivision Holdings, LLC v. Millennium Digital Media Systems, L.L.C., 2010 WL 3706624 (Del. Ch. Sept. 17, 2010) – so it apparently doesn’t come up all that often.  But it does come up.  The Restatement itself offers an illustration involving earn-outs (and, umm, also one involving a husband murdering his wife and then himself, which … okay, we’ll save that for a critical gender studies post), and those apparently have become more popular due to covid-related uncertainty (earnouts, I mean, not murder-suicides), so this is an issue that could have a subtle effect on outcomes in future cases.

Ann Lipton | Permalink


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