Sky Angel U.S., LLC v. Discovery Communications, LLC

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 16-2050
SKY ANGEL U.S., LLC,
Plaintiff − Appellant,
v.
DISCOVERY COMMUNICATIONS, LLC; ANIMAL PLANET, L.L.C.,
Defendants – Appellees.
Appeal from the United States District Court for the District of Maryland, at Greenbelt.
Deborah K. Chasanow, Senior District Judge. (8:13-cv-00031-DKC)
Argued: December 7, 2017 Decided: March 15, 2018
Before WILKINSON and DIAZ, Circuit Judges, and SHEDD, Senior Circuit Judge.
Affirmed by published opinion. Judge Diaz wrote the opinion, in which Judge Wilkinson
and Senior Judge Shedd joined.
ARGUED: Lynn E. Calkins, HOLLAND & KNIGHT, LLP, Washington, D.C., for
Appellant. David Lawrence Yohai, WEIL, GOTSHAL & MANGES LLP, New York,
New York, for Appellees. ON BRIEF: Jessica L. Farmer, HOLLAND & KNIGHT,
LLP, Washington, D.C., for Appellant. Theodore E. Tsekerides, Gregory S. Silbert,
David E. Yolkut, New York, New York, Peter D. Isakoff, WEIL, GOTSHAL &
MANGES LLP, Washington, D.C., for Appellees.
DIAZ, Circuit Judge:
This case involves a contract dispute between a media company and a television
distributor. In October 2007, Sky Angel U.S., LLC obtained nonexclusive distribution
rights to Discovery Communications, LLC’s television programming. The written
contract contained a satisfaction clause allowing Discovery to terminate the agreement if
at any time it became dissatisfied with Sky Angel’s method of distribution. Discovery
exercised this right after learning Sky Angel’s distribution path relied on the “public
internet.” 1 Sky Angel sued, contending that Discovery acted in bad faith because the
contract expressly allowed it to use the public internet.
Before trial, the district court held the agreement was susceptible to competing
reasonable interpretations as to the scope of Sky Angel’s distribution rights. Relying on
extrinsic evidence adduced at trial to resolve this ambiguity, the district court found no
support for Sky Angel’s claim that the contract permitted distribution over the public
internet, meaning Discovery acted in good faith when it terminated the contract.
On appeal, Sky Angel claims that the district court erred by holding the agreement
was ambiguous and compounded the error by misinterpreting extrinsic evidence. Sky
1
The parties use the phrase “public internet” to refer to the delivery of data over
the internet without using a closed dedicated pathway. For example, a point-to-point
network that only sends and receives data between two parties would not constitute the
public internet. But sending data over an individual’s home WiFi would. The difference
is that the latter sends and receives multiple types of information along computer
networks controlled by myriad parties. For purposes of this appeal, we adopt the
nomenclature of the parties although we recognize the term is hardly precise.
2
Angel also argues that Discovery selectively waived the attorney-client privilege with
respect to certain documents. Finding no error in the district court’s judgment, we affirm.
I.
A.
Sky Angel’s problems began with a fall from heaven. The satellite the company
used to distribute television services was failing and launching a replacement was cost
prohibitive. In need of a new distribution model, Sky Angel landed on Internet Protocol
Television or “IPTV.” 2 Rather than broadcasting in real time over satellite or cable,
IPTV stores programming on servers and then delivers content digitally over a high-
speed network that can be configured in any number of ways. Examples of IPTV include
online streaming services like Netflix as well as Verizon Fios and AT&T U-verse, which
use private fiber-optic cables to deliver live television feeds to set-top boxes.
To develop its IPTV network, Sky Angel partnered with a third company,
NeuLion, Inc. Under the model they developed, Sky Angel would receive third-party
content at its satellite substation and then transcode and transmit it to NeuLion’s servers
via a private line. From there, NeuLion would send the encoded signals over the public
2
IPTV refers broadly to the delivery of media content over data networks using
Internet Protocol. This protocol results in a two-way interactive network: a viewer
requests a specific video signal from their service provider who then delivers the relevant
data. By contrast, cable (whether analog or digital) uses a one-way transmission system
sending a complete set of video signals to the subscriber’s set-top box at all times. Thus
the defining feature of IPTV is how it transmits content, not the type of content itself.
3
internet to subscribers’ set-top boxes. In other words, Sky Angel relied on preexisting
internet connections provided by third-party internet service providers, rather than its
own private lines, to distribute programming. So long as customers had an authorized
set-top box and access to the internet, they could receive Sky Angel’s programming
anywhere in the world.
In 2007, Sky Angel approached Discovery about obtaining programming for its
IPTV system. The bulk of the negotiations focused on understanding Sky Angel’s new
IPTV model. Discovery repeatedly asked whether Sky Angel planned to transmit its
content over the public internet, but was told that Sky Angel would not. 3 Discovery also
tasked one of its technical engineers with investigating Sky Angel’s distribution system,
but Sky Angel refused to share all of the requested information. Without knowing more,
the engineer advised that while it was possible for Sky Angel to use an entirely closed
fiber-optic network, he had “concerns that it may be going over the Internet” which could
present “rights issues” for Discovery. J.A. 959–60
In September 2007, Discovery sent Sky Angel a draft distribution agreement,
under which Sky Angel would receive a nonexclusive license to distribute five Discovery
channels in exchange for monthly payments determined on a per-subscriber basis. The
agreement described Sky Angel’s distribution system as a “cable television system.” J.A.
41. Sky Angel responded by inserting language authorizing it to use IPTV technology,
which it defined as:
3
At the time, Discovery had an internal policy prohibiting such distribution.
4
a closed and encrypted transmission path over a national fiber-optic
network and a high-speed data connection that may be a digital subscriber
line . . . , cable or other broadband connection in a subscriber’s home . . . to
the secure IP address of a Set-Top Box.
J.A. 42. Discovery countered with its form language, which stated:
Affiliate may utilize TCP/IP transmissions to deliver DSC to DSC
Subscribers provided that all transmissions shall be via Affiliate’s
dedicated, private, closed Ethernet network, which shall have absolutely no
connection to the public Internet.
J.A. 440. Following a conference call to address this and other contract issues, Discovery
sent, and Sky Angel ultimately signed, a revised agreement. Three provisions bear upon
this appeal.
First, the agreement now described Sky Angel’s IPTV system as:
a multichannel video distribution system which utilizes Internet Protocol
(“IP”) technology to deliver video programming services over a closed and
encrypted transmission path over a national fiber-optic network to a central
location for subsequent distribution of such video programing services with
proprietary encoding over a high-speed data connection to set-top-boxes
that are secured by industry-standard encryption and conditional access
technologies and are connected to Subscribers’ television sets.
J.A. 603. Second, the agreement gave Discovery the right to terminate:
[I]n the event [Discovery] determines that the Service signal integrity or the
Service signal security measures or distribution methodology used by or on
behalf of [Sky Angel] are not satisfactory, [Discovery] shall have the right
to terminate this Agreement.
J.A. 612. Finally, the agreement stated that all rights not expressly granted to Sky Angel
were reserved to Discovery.
Several months after Sky Angel began broadcasting Discovery programming
under the agreement, another distributor, DISH Network, notified Discovery that Sky
5
Angel was sending programming over the public internet. DISH requested the same
internet rights as Sky Angel under a most favored nation clause in its contract. Surprised
by the request, Discovery reexamined how Sky Angel’s IPTV system operated. In
particular, it reviewed Sky Angel’s website, which marketed its service as “revolutionary
television that uses your high-speed Internet service to deliver over 70 faith and family
channels—not to your computer—but directly to your TV.” J.A. 50. Shortly thereafter,
Discovery alerted Sky Angel of its intention to terminate the contract. After confirming
that Sky Angel could not deliver content to subscribers without going over the public
internet, Discovery formally terminated the agreement.
B.
Sky Angel filed suit in Maryland federal district court for breach of contract.
Following a period of discovery, both parties moved for summary judgment. The district
court noted that under Maryland law, 4 satisfaction clauses must be exercised in
accordance with the duty of good faith and fair dealing, which is breached when one
party denies the other their reasonable expectation under the contract.
The district court therefore framed the question as whether Sky Angel had a
reasonable expectation that it could use the public internet to distribute Discovery’s
programming. Finding the contract ambiguous on this point, the district court set the
matter for trial to consider extrinsic evidence.
4
The parties agree that Maryland law applies under the contract’s choice of law
provision.
6
Following a twelve-day bench trial, the district court found that the evidence did
not establish the broad distribution rights Sky Angel claimed. As such, Discovery’s
termination did not deprive Sky Angel of its reasonable expectations under the agreement
and its breach of contract claim failed. The court also denied Sky Angel’s motion to
compel the production of purportedly privileged documents.
This appeal followed.
II.
We first address Sky Angel’s claim that the district court erred in denying its
motion to compel production of the “Myers Memo” and other due diligence documents
that Discovery withheld on the basis of the attorney-client privilege. 5 Sky Angel argues
that Discovery’s trial witnesses selectively disclosed privileged information and therefore
waived the attorney-client privilege under Federal Rule of Evidence 502. The district
court denied the motion on the ground that the witnesses never discussed a privileged
communication. We review a district court’s legal conclusions regarding the attorney-
client privilege de novo and its factual findings under the clearly erroneous standard.
Hawkins v. Stables, 148 F.3d 379, 382 (4th Cir. 1998).
5
The Myers Memo, which was created by Discovery’s technical engineer during
the initial contract negotiations, advised company executives on how Sky Angel’s IPTV
system operated. Sky Angel claims that the Memo and related communications prove
Discovery knew its content would be sent over the public internet when it entered into the
distribution agreement with Sky Angel.
7
Rule 502(a) extends the intentional waiver of the attorney-client privilege to
include communications concerning the same subject matter that ought to in fairness be
considered together. But to trigger a waiver, there must first be a “disclosure of a
communication or information covered by the attorney-client privilege or work-product
protection.” Fed. R. Evid. 502. Sky Angel says this disclosure occurred when Discovery
employees testified that they were unsure if Sky Angel would use the public internet.
And because the Myers Memo and associated documents related to Discovery’s
understanding of the IPTV system, Sky Angel says that those documents should have
been considered alongside the trial testimony.
Like the district court, we fail to see what privileged information was disclosed by
the employees. It’s true that the Myers Memo and the trial testimony relate to
Discovery’s knowledge of Sky Angel’s distribution method, but that doesn’t mean the
latter is based on privileged information. Sky Angel says the testimony relied on the
contents of the Memo, but there’s no record support for that claim. We also decline to
infer this fact merely because Discovery sought legal advice on the same topic as its
employees’ testimony. Sky Angel must prove the disclosure of a communication in
confidence between a lawyer and a client related to legal advice. See Upjohn Co. v.
United States, 449 U.S. 383, 389–90 (1981). Because it failed to do so, we decline to
upset the district court’s ruling.
8
III.
We turn now to Sky Angel’s breach of contract claim. We review a district
court’s factual findings after a bench trial for clear error and its legal conclusions de
novo. Fed. R. Civ. P. 52; Helton v. AT & T Inc., 709 F.3d 343, 350 (4th Cir. 2013).
Under Maryland law, a party with discretion to terminate a contract “is limited to
exercising that discretion in good faith and in accordance with fair dealing.” Questar
Builders, Inc. v. CB Flooring, LLC, 978 A.2d 651, 670 (Md. 2009). Whether a party has
exercised its contractual rights in good faith is a question of fact. David A. Bramble, Inc.
v. Thomas, 914 A.2d 136, 149 (Md. 2007).
The court’s role is to determine only whether Discovery’s determination was
consistent with the reasonable expectations of Sky Angel, in light of their agreement.
Questar, 978 A.2d at 676. Thus to prevail, Sky Angel must establish that it had a
reasonable expectation that it could distribute Discovery’s content over the public
internet. See id. at 675.
We conclude (as did the district court) that the contract is ambiguous on this
question. The district court was therefore correct to consider extrinsic evidence of the
parties’ intent. And we find no error (clear or otherwise) in the district court’s factual
findings that Sky Angel had no reasonable expectation that it could distribute Discovery’s
content over the public internet and consequently, Discovery exercised its termination
rights in good faith.
9
A.
We begin with Sky Angel’s contention that the contract expressly permits it to
distribute Discovery’s content via the public internet. Sky Angel argues that the internet
is by definition a type of high-speed data connection and thus within the “IP System”
outlined in the agreement, which covers distribution of “video programming services
with proprietary encoding over a high-speed data connection.” J.A. 603. Because this
language is unambiguous, Sky Angel adds that we should not consider extrinsic evidence
regarding the parties’ intent but apply the contract as written. Discovery responds that
distribution over a closed pathway would also qualify as a “high-speed data connection”
and that the contract’s silence on the use of the internet should not be construed as an
affirmative grant in light of the contract provision reserving all rights to Discovery. 6 We
agree with Discovery.
Maryland adheres to the objective theory of contracts, “giving effect to the clear
terms of the contract regardless of what the parties to the contract may have believed
those terms to mean.” Towson Univ. v. Conte, 862 A.2d 941, 946–47 (Md. 2004). It is
only when a contract is ambiguous that courts may consult extrinsic evidence to
6
Relying on our decision in Chesapeake Paper Prod. Co. v. Stone & Webster
Eng'g Corp., 51 F.3d 1229, 1235 (4th Cir. 1995), Discovery also contends that Sky Angel
waived its claim that the contract is unambiguous by failing to renew the argument
following trial. Sky Angel responds that Chesapeake and its progeny preclude review of
factual issues raised in a summary judgment motion but not the legal conclusions a court
adheres to at trial. Ultimately, we need not resolve this question because the district court
correctly found the contract was ambiguous.
10
“determine and effectuate the intent of the parties.” Gresham v. Lumbermen’s Mut. Cas.
Co., 404 F.3d 253, 260 (4th Cir. 2005) (applying Maryland law). “A contract is
ambiguous if, when read by a reasonably prudent person, it is susceptible of more than
one meaning.” Nova Research, Inc. v. Penske Truck Leasing Co., 952 A.2d 275, 283
(Md. 2008). In making this determination, courts should focus on “the entire language of
the agreement, not merely a portion thereof” and apply “the customary, ordinary and
accepted meaning of the language used.” Id. A court must also examine “the character
of the contract, its purpose, and the facts and circumstances of the parties at the time of
execution.” Diamond Point Plaza Ltd. P’ship v. Wells Fargo Bank, N.A., 929 A.2d 932,
952 (Md. 2007). “[C]ontract interpretation, including the determination of the ambiguity
of a contract, is a question of law and subject to de novo review.” Id. at 951. (internal
quotation marks omitted.).
Sky Angel’s argument rests heavily on the definition of “IP System” contained in
the agreement. Sky Angel argues that the portion of this definition related to “subsequent
distribution . . . over a high-speed data connection” plainly covers the second step in its
distribution path, in which NeuLion would send encrypted data over the internet to
subscriber’s set-top boxes for viewing. Sky Angel relies on dictionary definitions of
“high-speed,” “data,” and “connection” to argue that the phrase refers to the fast
transmission of digital information. Though broad, it points out that these definitions are
not ambiguous, and the contract does not contain any restrictions on specific types of
high-speed data connections, such as the public internet.
11
We agree with Sky Angel that broad terms do not necessarily render a contract
ambiguous. But there comes a point, like here, when contractual language covers such a
wide range of meanings so as to make the contract unclear and inexact. “High-speed data
connection” tells us nothing about whether that connection must be a closed path between
Sky Angel and the subscriber, or can be an open network, so as to permit the use of the
public internet.
Nor does the agreement permit Sky Angel to use any type of “high-speed data
connection.” The relevant provision was meant to capture the specific IPTV system Sky
Angel described to Discovery by detailing the first and second steps in the transmission
process. Taking into account this context and purpose means the phrase is describing one
type of data connection, not several as Sky Angel contends. See Diamond Point Plaza,
929 A.2d at 952. But “high-speed data connection” could refer to any number of
transmission systems including private optical networks, digital radio transmissions,
wireline communications, the public internet, or a combination of analog and digital
networks via signal conversion.
Sky Angel also reads the definition of “IP System” in isolation. But Maryland law
instructs courts to consider the entire contract when deciding if it is ambiguous. Id.
According to Sky Angel’s president, a “high-speed data connection” “could be a number
of things. It may even give us room when there was some new technology that was high-
speed . . . to use it under this definition.” J.A. 528. But such an expansive reading would
make the reservation of rights in the agreement largely pointless. Using a definitional
provision to grant internet rights is also at odds with the structure of the contract, which
12
lists the grant of rights and describes the distribution methodology in separately titled
sections.
Because the text of the contract is ambiguous, the district court was right to
consider extrinsic evidence to discern the parties’ intent. Fister ex rel. Estate of Fister v.
Allstate Life Ins. Co., 783 A.2d 194, 203 (Md. 2001).
B.
Sky Angel claims that even if the contract is ambiguous, extrinsic evidence proves
it was permitted to use the public internet. It complains further that the district court
failed to fully consider the drafting history, industry definitions, and Sky Angel’s own
understanding of the contract. Our review here, however, is limited to whether the
district court’s factual findings are clearly erroneous. Provident Life & Accident Ins. Co.
v. Cohen, 423 F.3d 413, 418 (4th Cir. 2005). It’s not enough that we would have reached
a different result had we considered the question in the first instance. Id. Reversal
requires us to be left with a definite and firm conviction that a mistake has been
committed. Id.
If a contract is ambiguous, Maryland courts “consider any extrinsic evidence
which sheds light on the intentions of the parties at the time of the execution of the
contract.” Sy-Lene of Washington, Inc. v. Starwood Urban Retail II, LLC, 829 A.2d 540,
547 (Md. 2003). The focus is on determining “the intent and purpose of the parties at the
time the agreement was made,” not as Sky Angel mistakenly argues, what a reasonable
person would have intended. Cty. Comm’rs of Charles Cty. v. St. Charles Assocs. Ltd.
13
P’ship, 784 A.2d 545, 557 (Md. 2001). We discern no error in the district court’s
evaluation of the evidence.
The district court concluded (we think correctly) that “neither side took the time
and effort to ascertain precisely what Sky Angel’s IPTV system entailed, or what the
specific terms and phrases in the Agreement meant, or were intended to mean.” J.A. 69–
70. 7 As a result, the court looked to Discovery’s internal policy prohibiting distribution
of its linear programming over the public internet. Granting Sky Angel the rights it
claims under the contract would be a clear violation of Discovery’s own rules.
The importance of the policy is confirmed by the fact that none of Discovery’s
other affiliation agreements, including those with national cable and satellite companies,
had ever granted distribution rights over the public internet. While recognizing that the
precise language differed from contract to contract, the district court credited testimony
that the basic meaning was the same: “affiliates are not to deliver content over the
Internet.” J.A. 74. Indeed, granting Sky Angel the right to use the public internet meant
that Discovery had to extend that same right to its other distributors, something
7
Sky Angel says the district court ignored changes in the third draft of the
contract, which removed a previous definition of “IP System” that stated it “shall have
absolutely no connection to the public Internet.” J.A. 519. Both sides, however,
understood this reference to public internet to mean the World Wide Web and thus
prohibiting online streaming, not distribution over the open internet generally. This
makes its omission in the final draft less than helpful on the question before us. We note
also that Discovery rejected language drafted by Sky Angel that would have expressly
permitted public internet distribution by defining “IP System” to mean a “a high-speed
data connection that may be a digital subscriber line (commonly referred to as ‘DSL’…),
cable or other broadband connection in a subscriber’s home.” J.A. 179 (emphasis
added).
14
Discovery had made clear to Sky Angel it was unwilling to do. As a result, the district
court concluded that Discovery never intended to grant Sky Angel the right to distribute
content over the public internet.
Sky Angel doesn’t challenge this conclusion but says it represents only one party’s
view of the contract that was never made known to Sky Angel. But Discovery repeatedly
told Sky Angel that it could not send Discovery’s content over the public internet since
Discovery lacked the requisite programming rights. In response, Sky Angel repeatedly
assured Discovery that it used a closed system.
Discovery’s concerns were also common within the industry and thus well known
to Sky Angel. Walt Disney, Food Network, Golf Channel, and HGTV all ended their
negotiations with Sky Angel after learning their content would be distributed using the
public internet. And other networks either pulled their programming or let their contracts
lapse after getting wind of Sky Angel’s distribution method.
In sum, the problem for Sky Angel is not that the district court ignored evidence
related to Sky Angel’s understanding of the contract, but that this evidence doesn’t
support its case. To prove that Discovery breached the implied covenant of good faith
and fair dealing, Sky Angel had to show that it was deprived of its “reasonable
expectations” under the contract. Questar, 978 A.2d at 676–77. 8 But while Sky Angel
8
In a Hail Mary, Sky Angel says Discovery terminated the contract because it
didn’t want to extend internet distribution rights to DISH under the most favored nation
clause in its agreement. Like the district court, we find no evidence in the record to
support this argument. And we agree with the district court that “Sky Angel cannot
reasonably expect that Discovery would not, when prompted by external parties and
15
claims it could distribute content over the public internet, this is not apparent from the
text of the agreement nor from extrinsic evidence related to the parties’ intent. Having
failed to establish any such expectation under the contract, Sky Angel cannot show that
Discovery acted in bad faith when it terminated the agreement.
IV.
For the reasons given, the judgment of the district court is
AFFIRMED.
supplied with new information, reexamine Sky Angel’s distribution methodology and
become dissatisfied.” J.A. 82. The mere fact that a third party notified Discovery about
Sky Angel’s distribution method does not taint the eventual decision to terminate.
16