Got I, LLC v. XRT, Inc, e al.

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[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 19-12595
Non-Argument Calendar
________________________
D.C. Docket No. 1:16-cv-00038-MHC
GOT I, LLC,
KIDS2, INC.,
Plaintiffs-Counter Defendant-Appellants,
versus
XRT, INC.,
DAVID EUGENE SILVERGLATE,
Defendants-Counter Claimant-Appellees,
__________________________
Appeal from the United States District Court
for the Northern District of Georgia
_________________________
(January 8, 2020)
Before JORDAN, NEWSOM, and ANDERSON, Circuit Judges.
PER CURIAM:
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Kids2, Inc. (“Kids2”) 1 initiated a declaratory judgment action in the district
court below, seeking to establish that it had not violated a royalty agreement that it
had contracted with XRT, Inc., and David Silverglate. Following several summary
judgment motions and a jury trial, Kids2 unsuccessfully sought to invoke the
attorneys’ fees provision in the royalty agreement, claiming that it was the
prevailing party within the meaning of the provision and therefore entitled to
attorneys’ fees. The district court determined that the result of the litigation was a
“mixed” outcome and that neither party was entitled to attorneys’ fees. Kids2
appeals. After reviewing the record and briefs, we reverse the district court’s
order.
I. BACKGROUND
On December 30, 2010, Kids2 purchased the assets of Rhino Toys, Inc.
Rhino had developed a number of toys, including the “Oball” line of products.
The royalty agreement between Kids2 and Rhino provided that Rhino would
receive $4.5 million as an up-front payment; that Rhino’s founder and CEO, David
Silverglate, would be employed by Kids2 for two years with a $200,000 annual
salary; and that Rhino would receive royalty payments for sales of (1) its existing
products, (2) new products derived from existing products or designed by
1
Following the docketing of this appeal, Kids2’s name was changed to its present form
from Kids II, Inc. It moved to amend the caption to reflect the name change and we granted the
motion on November 26, 2019.
2
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Silverglate, and (3) combined toys. After the asset purchase, Rhino reorganized
itself as XRT, Inc. (eX Rhino Toys), to collect the payments.
Because the royalty payments were ultimately the reason that this
declaratory judgment action was initiated, we pause to note exactly how the
payments worked. First, for “existing products”—that is, products already
manufactured or created by Rhino at the time of Kids2’s acquisition—XRT was
paid a 5% royalty. Second, for “newly developed products”—those products that
were derived from “existing products” or that were developed by Silverglate
during his employment with Kids2—XRT was paid a 3% royalty. Third, and most
complicated, XRT was paid a variable royalty for “combined products,” which
were Kids2 products that incorporated or included an “existing product” or a
“newly developed product.” If the starting point for the “combined product” was
an “existing product,” the initial rate was at 5%; if the starting point was a “newly
developed product,” the initial rate was 3%. The applicable royalty for a
“combined product” was then discounted based on the product’s composition—the
more the product included Rhino products, the higher the royalty payment.
The royalty agreement between Kids2 and Silverglate included a provision
providing that the prevailing party in any litigation would receive attorneys’ fees.
The provision states:
17. ATTORNEY’S FEES. In the event of any dispute, action,
arbitration, claim, or other proceeding brought by either party against
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the other in connection with this Agreement, the prevailing party shall
be entitled to recover all costs and expenses in connection with such
dispute, arbitration, action, claim or other proceeding, including,
without limitation, the fees and costs of its attorneys, whether or not
such dispute, arbitration, action, claim or other proceeding proceeds to
final resolution or judgment.
The provision does not define “prevailing party,” but the agreement further
provides, “The laws of Delaware shall control and govern the interpretation and
construction of this Agreement in all respects and this Agreement will be deemed
to have been made in the State of Delaware.”
Several years later, Silverglate believed that Kids2 had changed the way that
it calculated its royalty payments and was underpaying him. He retained counsel,
who sent a letter to Kids2, asserting that it owed him more than $200,000 in
royalty payments. In response, Kids2 initiated the instant declaratory judgment
action in the Northern District of Georgia. XRT responded by adding a
counterclaim for material breach of the contract, seeking more than $100 million in
damages—in other words, it sought an immediate payout of the 75-year term of the
Royalty Agreement.
During the course of litigation, the parties filed cross-motions for summary
judgment on the issue of whether a product is properly classified as a “newly
developed product” because it uses a trademark. The district court denied XRT’s
motion and granted Kids2’s on March 16, 2017, determining that “a product
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cannot be classified as a Newly Developed Product under the Royalty Agreement
based solely on the use of a trademark.”
Later, Kids2 moved for partial summary judgment on the issue of whether it
committed a material breach of the royalty agreement. After concluding that
“Plaintiffs made an initial payment of over $4,450,000, applied a reasonable
construction of the ambiguous Royalty Agreement, paid at least 71% of royalties
owed, sought a judicial declaration defining their obligations under the agreement
when a dispute understandably arose, continued to pay royalties, and escrowed
royalty payments Defendants refused to accept after terminating the agreement,”
the district court concluded that “Plaintiff did not commit a material breach of the
Royalty Agreement” and granted Kids2 partial summary judgment on that ground
on February 27, 2018. In that same order, however, the district court denied
Kids2’s motion for summary judgment on the basis that it had not committed a
partial breach, concluding that the “Royalty Agreement is ambiguous and there
exists significant genuine issues of material fact regarding the proper classification
of products under the Royalty Agreement.”
Kids2 and XRT filed a proposed consolidated pretrial order, each separately
submitting certain issues to be tried. However, the district court framed the issues
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for the jury to decide in a manner not contested on appeal. 2 Interrogatories with
regard to each of the 55 products were submitted to the jury in the form of two
questions: (1) “Have Plaintiffs GOT I/Kids II shown by a preponderance of the
evidence that this product is a Combined Product?”; and (2) “Have Defendants
XRT/Silverglate shown by a preponderance of the evidence that this product is a
Newly Developed Product?” The instructions further provided that “You may
select only one ‘Yes,’ but may select two ‘Nos[.]’” In other words, the jury
would be asked to indicate, product-by-product, if the plaintiffs met their burden, if
the defendants met their burden, or if neither party had met their burden.
The jury ultimately determined that Kids2 had met its burden on 50 of the 55
products, and that XRT had met its burden on 5 of the 55 products. All told,
including the pretrial judgments, this meant that Kids2 met its burden on 51 of the
57 products, while XRT met its burden on 6 of the 57. The district court ordered
$107,184.47 in damages to XRT.
Following the trial, Kids2 sought a declaration that it, as a “prevailing
party,” was entitled to attorney’s fees under the contractual provision, while XRT
sought a declaration that neither party was the prevailing party. The district court
ultimately determined that neither party had prevailed.
2
Though the dispute initially involved 57 contested products, 2 of them were not submitted
to the jury—Kids2 received a judgment as a matter of law on one of the products, and it stipulated
to judgment on another.
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The Court cannot rule that Plaintiffs are the prevailing party. Plaintiffs
identified the issues to be tried as whether they “breached the Royalty
Agreement” by misclassifying certain products. Because the jury found
that certain products were miscategorized, Plaintiffs breached the
Royalty Agreement. Although Plaintiffs previously prevailed at
summary judgment on whether there was a material breach of the
agreement, the outcome of this case was mixed and neither party
prevailed. While Defendants prevailed as to the classification of a small
number of products, the fact remains that Plaintiffs did not prevail on
their declaratory judgment asserting that they properly categorized all
products. The amounts awarded in damages is not relevant to this
inquiry.
Kids2 timely appealed to us on the issue of attorney’s fees.
II. DISCUSSION
As an initial matter, the parties disagree about the appropriate standard of
review. XRT argues that we should review the district court’s denial of attorney’s
fees for abuse of discretion, while Kids2 argues that we should review it de novo.
After reviewing our precedent, Kids2 is correct. While it is true that some of our
cases have said that, generally, we review a district court’s grant or denial of
attorney’s fees for abuse of discretion, see, e.g., In re Application to Adjudge
Trinity Indus., 876 F.2d 1485, 1495 (11th Cir. 1989), we note that this
determination was made in the context of Rule 11 sanctions, not in the context of a
contractual attorney’s fee provision.
When it comes to reviewing the denial of contractual attorney’s fees,
“[b]ecause contract interpretation is a question of law, we review the district
court’s interpretation of the contract and subsequent denial of attorneys’ fees de
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novo.” Johnson Enters. of Jacksonville v. FPL Group, 162 F.3d 1290, 1329 (11th
Cir. 1998). In our embrace of broad common-law principles, we have uniformly
held that “[c]ontract interpretation is a legal question subject to de novo review by
this Court,” BankAtlantic v. Blythe Eastman Paine Webber, Inc., 955 F.2d 1467,
1477 (11th Cir. 1992), and it logically follows, then, that when we interpret a
contractual provision providing for attorney’s fees, the interpretation of that
provision, along with its application, are questions of law, which we review de
novo. Accordingly, we review the district court’s decision anew, as if it had not
been heard before and no decision had been rendered.
We begin by noting that, because the contract at issue provided that “[t]he
laws of Delaware shall control and govern the interpretation and contraction of this
Agreement in all respects,” we apply Delaware law to interpret its provisions. See
Koch Bus. Holdings, LLC v. Amoco Pipeline Holding Co., 554 F.3d 1334, 1338
(11th Cir. 2009). Delaware law provides that “the proper interpretation of
language in a contract is question of law.” Allied Capital Corp. v. GC-Sun
Holdings, L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006). “When interpreting a
contract, a court’s task is to ‘satisfy the reasonable expectations of the parties at the
time they entered into the contract.’” Alliance Data Sys. Corp. v. Blackstone
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Capital Parties V L.P., 963 A.2d 746, 760 (Del. Ch. 2009) (quoting Liquor Exch.,
Inc. v. Tsaganos, 2004 WL 2694912, at *2 (Del. Ch. Nov. 16, 2004).3
The attorneys’ fees provision in the Royalty Agreement is relatively
straightforward. It provides:
In the event of any dispute, action, arbitration, claim, or other
proceeding brought by either party against the other in connection with
this Agreement, the prevailing party shall be entitled to recover all costs
and expenses in connection with such dispute, arbitration, action, claim
or other proceeding, including, without limitation, the fees and costs of
its attorneys, whether or not such dispute, arbitration, action, claim or
other proceeding proceeds to final resolution or judgment.
By using the term “prevailing party,” “the parties can be presumed to have
intended that the term would be applied by the court as it has traditionally done
so.” Brandin v. Gottlieb, 2000 WL 1005954, at *28 (Del. Ch. July 13, 2000). 4 In
determining which party is “prevailing,” Delaware courts apply a context-specific
test to determine what the “main issue” was, and which party prevailed on that
“main issue.” See Comrie v. Enterasys Networks, Inc., 2004 WL 5466650, at *2
(Del. Ch. Apr. 27, 2004). In other words, “To achieve predominance, a litigant
should prevail on the case’s ‘chief issue.’” 2009 Caiola Family Trust v. PWA,
3
We note that Delaware courts allow parties to cite unpublished opinions as precedent.
See New Castle Cty. v. Goodman, 461 A.2d 1012, 1013 (Del. 1983) (“[L]itigants before this Court
may cite Orders as precedent so long as they comply with the dictates of Rule 14(b)(vi).”).
4
Both parties agree that under Delaware law, this contractual provision relating to
prevailing party attorneys’ fees is an “all-or-nothing” proposition. Comrie, 2004 WL 5466650, at
*2.
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LLC, 2015 WL 6007596, at *33 (Del. Ch. Oct. 14, 2015) (quoting W. Willow-Bay
Court, LLC v. Robino-Bay Court Plaza, LLC, 2009 WL 458779, at *9 (Del. Ch.
Feb. 23, 2009)). In some situations, “there can be more than one ‘chief’ or core
issue in a case, and where . . . the parties split on two equally core issues, neither
can be said to have ‘prevailed’ so as to trigger the contractual entitlement to fee-
shifting in the License Agreement.” Mrs. Fields Brand, Inc. v. Interbake Foods
LLC, 2018 WL 300454, at *3 (Del. Ch. Jan. 5, 2018).
In approaching this issue, we find it helpful to contextualize the underlying
litigation. The events preceding Kids2’s filing of the complaint are largely
undisputed. Silverglate believed that Kids2 was making inadequate royalty
payments to him, so he sent a demand letter asserting that he was entitled to around
$200,000 in royalty payments. Kids2, feeling that it did not owe Silverglate any
such payments, initiated the litigation. It sought a declaration that it had complied
with its obligations under the Agreement and the “past due royalties and royalty
rates alleged” by Silverglate were “inconsistent with the parties[’] obligations
under the Royalty Agreement.” Silverglate and XRT responded by filing a
counterclaim for $100 million—in essence, seeking to have the end-value of the
Royalty Agreement realized immediately because of Kids2’s breach.
Throughout the litigation, the scope of relief sought by XRT and Silverglate
significantly narrowed—the district court granted Kids2 summary judgment on
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whether toys produced under a Rhino trademark were “newly developed product”
and partial summary judgment on whether it had committed a “material breach” of
the Agreement, though it denied Kids2 summary judgment on whether it had
committed a “partial breach” of the Agreement. Then, at trial, the combined
determinations by the court and the jury led to the outcome that Kids2 had properly
classified, and made royalty payments on, 51 of 57 disputed toys. This led to an
award of $107,184.47 to XRT and Silverglate—which, we note, is a sharp
reduction from the defendants’ various demands prior to and during litigation.
To determine whether Kids2 is entitled to contractual attorneys’ fees, we
must first determine what the “core” or “chief” issue in the litigation was. The
district court essentially concluded that the core issue in this litigation was whether
Kids2 breached the Royalty Agreement with XRT. Because the jury verdict
determined that Kids2 had partially breached the Agreement with regard to a small
number of products, the district court concluded, “the outcome of the case was
mixed.”
We conclude that the district court erred in its analysis of this “prevailing
party” contract issue. It is true that one of the core issues in the case was whether,
and the extent to which, Kids2 breached the Royalty Agreement by misclassifying
products. With regard to that issue, the result of this litigation was that Kids2 did
misclassify 6 out of the 57 products. But the jury also found that Kids2 properly
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classified 51 of the 57 products, thus endorsing the position of Kids2 and rejecting
the position of XRT. In other words, XRT prevailed with regard to 6 products;
Kids2 prevailed with regard to 51 products. We conclude that, even with regard to
this one core issue, Kids2 achieved predominance, notwithstanding its minor
breach with respect to 6 out of 57 products. Moreover, there were at least two
other core issues—whether there was a material breach entitling XRT to an
acceleration of royalties and $100 million in damages, and whether the mere use of
the Oball trademark dictated a “Newly Developed Product” classification—and
Kids2 won both outright. Applying Delaware law, we think it is clear that Kids2
achieved predominance in the litigation, and is the “prevailing party.”
Accordingly, Kids2 is entitled to “prevailing party” status and to collect attorneys’
fees.
III. CONCLUSION
In sum, we conclude that, pursuant to the attorney’s fee provision in the
Royalty Agreement it signed with XRT and Silverglate, Kids2 is entitled to
“recover all costs and expenses incurred in connection with” the underlying
litigation. Our review of Delaware law makes it clear that Kids2 prevailed on all
of the “core” issues in the case and therefore achieved “predominance” in the
litigation. The district court’s decision to the contrary is incorrect as a matter of
law.
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The district court’s order is REVERSED. This case is REMANDED to the
district court for further proceedings consistent with this opinion.
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