In re Cellular Telephone

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE CELLULAR TELEPHONE ) COORDINATED. C.A. No. 6885-VCL
PARTNERSHP LITIGATION )
THIS FILING APPLIES TO COODINATED CIVIL ACTIONS 6886 AND 6908
MEMORANDUM OPINION ADDRESSING CLAIMS FOR
BREACH OF THE PARTNERSHIP AGREEMENT GOVERNING
SALEM CELLULAR TELEPHONE COMPANY
Date Submitted: July 28, 2021
Date Decided: September 28, 2021
Carmella P. Keener, COOCH AND TAYLOR, P.A., Wilmington, Delaware; Thomas R.
Ajamie, David S. Siegel, Ryan van Steenis, AJAMIE LLP, Houston, Texas; Michael A.
Pullara, Houston, Texas; Marcus E. Montejo, Kevin H. Davenport, John G. Day,
PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Attorneys for Plaintiffs.
Maurice L. Brimmage, Jr., AKIN GUMP STRAUSS HAUER & FELD LLP, Dallas,
Texas; Todd C. Schiltz, FAEGRE DRINKER BIDDLE & REATH LLP, Wilmington,
Delaware; William M. Connolly, FAEGRE DRINKER BIDDLE & REATH LLP,
Philadelphia, Pennsylvania; Zoë K. Wilhelm, FAEGRE DRINKER BIDDLE & REATH
LLP, Los Angeles, California; Attorneys for Defendants.
LASTER, V.C.
Salem Cellular Telephone Company (the “Partnership”) was a Delaware general
partnership that held a license to provide cellular telephone services in a geographic area
centered around Salem, Oregon. Defendant AT&T Mobility Wireless Operations Holdings
LLC (“Holdings”) owned 98.119% of the partner interest in the Partnership. Holdings is
an indirect, wholly owned subsidiary of non-party AT&T Inc. Through Holdings and other
affiliates, AT&T controlled the Partnership, directed its business and affairs, and managed
its day-to-day operations.1
In October 2010, AT&T caused the Partnership to transfer all of its assets and
liabilities to defendant New Salem Cellular Telephone Company LLC, another affiliate of
AT&T. As consideration, AT&T paid the Partnership $219 million in cash, reflecting the
value of the Partnership as determined by a valuation firm retained by AT&T. The
Partnership dissolved after selling all of its assets, and each partner received its pro rata
share of the liquidating distribution. After the transaction, AT&T continued to operate the
business of the former Partnership. The transaction thus functioned as a freeze-out of the
minority partners (the “Freeze-Out”).2
1
AT&T came to control the Partnership through a complex series of corporate
transactions spanning years. The evolution of AT&T as an entity is not directly relevant to
this proceeding. For simplicity, this decision refers to AT&T, unless the context requires a
more specific referent. In footnotes, this decision provides context regarding the stage of
AT&T’s evolution.
2
Between October 2010 and June 2011, AT&T engaged in similar freeze-out
transactions involving twelve other partnerships. The thirteen transactions resulted in the
filing of fifteen civil actions in this court. The cases were coordinated for purposes of pre-
trial discovery under the caption In re Cellular Telephone Partnership Litigation, C.A. No.
The plaintiffs were minority partners who owned the 1.881% minority interest in
the Partnership. At the price AT&T paid in the Freeze-Out, they received approximately
$4.1 million for their interest.
The plaintiffs assert that AT&T breached its fiduciary duties by effectuating the
Freeze-Out. They also assert that AT&T breached the terms of the partnership agreement
during the years leading up to the Freeze-Out. This post-trial decision addresses the claims
for breach of the partnership agreement. It does not address the claim for breach of
fiduciary duty.
The plaintiffs advanced three principal claims for breach of the partnership
agreement, but they prevailed on only one. The plaintiffs proved that AT&T failed to
comply with a provision requiring that Partnership assets be titled in the name of the
6885-VCL (the “Coordinated Action”). By agreement, the parties subsequently conducted
a coordinated trial. The court therefore is issuing decisions in the Coordinated Action.
Five of the other partnerships have histories and governance structures that are
substantially similar to the Partnership’s. Those five are (1) Bremerton Cellular Telephone
Company, (2) Melbourne Cellular Telephone Company, (3) Provo Cellular Telephone
Company, (4) Visalia Cellular Telephone Company, and (5) Sarasota Cellular Telephone
Company.
Seven of the other partnerships have histories and governance structures that differ
to varying degrees from the Partnership. Those seven are (1) Alton CellTelCo, (2)
Bellingham Cellular Partnership, (3) Bradenton Cellular Partnership, (4) Reno Cellular
Telephone Company, (5) Bloomington Cellular Telephone Company, (6) Galveston
Cellular Partnership, and (7) Las Cruces Cellular Telephone Company.
At times, this decision refers to the other partnerships. When referring to a specific
partnership, this decision uses the name of its market. For example, a reference to
“Melbourne” refers to the Melbourne Cellular Telephone Company.
2
Partnership. Under an exception to that requirement, any assets titled jointly with or in the
name of another owner had to be held for the benefit of the Partnership. The plaintiffs
proved that AT&T breached this provision by using AT&T affiliates to hold title to the
contract rights with the Partnership’s subscribers and to information generated by the
Partnership’s subscribers. AT&T monetized those Partnership assets for its own benefit
without allocating a share of the income to the Partnership. AT&T thus held Partnership
assets for its own benefit, rather than for the Partnership’s benefit.
The plaintiffs pursued their claims for breach of the partnership agreement to obtain
a damages award based on a contractual dissociation remedy. The partnership agreement
called for any partner who breached a material provision of the agreement to be dissociated
from the partnership. The agreement called for the dissociated partner to receive the value
of its capital account and for the non-breaching partners to receive a pro rata allocation of
the breaching partner’s interest. In substance, the dissociation remedy resulted in the non-
breaching partners receiving the full value of the Partnership, minus the value of the
dissociated partner’s capital account.
The plaintiffs recognize that in 2021, eleven years after the Freeze-Out, it is
impractical to implement the dissociation remedy as written. They accordingly seek the
monetary equivalent. They ask the court to determine the fair value of the Partnership,
subtract the amount of AT&T’s capital account on the date of the Freeze-Out, and award
them the resulting value as damages. They accept that the amount they received in the
Freeze-Out will operate as a credit against the award. As a practical matter, therefore, the
3
plaintiffs would receive as damages the entire amount by which the judicially determined
fair value of the Partnership exceeds the price AT&T paid in the Freeze-Out.
This decision declines to award dissociation damages, because such an award easily
could become so large as to be unconscionable. Under a compensatory damages remedy,
if the court were to determine that the fair value of the Partnership was 10% higher than
the Freeze-Out price, then the plaintiffs would receive a damages award reflecting a 10%
increase in their share of the Freeze-Out price. The plaintiffs received $4,119,390 in the
Freeze-Out, so an award of compensatory damages reflecting a 10% increase would result
in damages of $411,939. Under the dissociation remedy, however, the plaintiffs would
receive 100% of the value of the Partnership, minus the value of AT&T’s capital account
and minus a credit for what the plaintiffs already received. For a 10% increase, that
translates into a damages award of $21.9 million, or roughly a 432% increase over the
plaintiffs’ share of the Freeze-Out. If the court were to determine that the fair value of the
Partnership was 50% higher than the Freeze-Out price, then an award of compensatory
damages would yield $2.06 million to the plaintiffs, while an award of dissociation
damages would yield $109.5 million. As the degree of underpricing increases, the results
diverge exponentially.
The plaintiffs insist that dissociation damages are warranted under Delaware’s
contractarian approach. They point out that AT&T sought to enforce a dissociation remedy
against minority partners in a prior litigation, that AT&T had the power to eliminate the
dissociation remedy but never did, and that AT&T should have to live with its agreement.
4
If the plaintiffs had shown that AT&T had committed a breach that deprived the
minority partners of meaningful value, and particularly if AT&T’s breach was willful or
persistent, then dissociation damages could be warranted. But the plaintiffs only proved
that AT&T deprived the minority partners of a negligible amount of value. The record also
reflects that AT&T engaged in significant administrative efforts to allocate revenue and
expense to the Partnership in accordance with the same principles that AT&T used to
allocate revenue and expense to AT&T’s other market-level entities.
There is a strong argument that AT&T deprived the minority partners of meaningful
value by failing persistently and pervasively to follow certain contractually specified
methodologies for allocating revenue to the Partnership that appear in a management
agreement between the Partnership and an AT&T affiliate. The plaintiffs attempted to
pursue this claim under the guise of a breach of the partnership agreement, but this decision
rejects that approach. And although the record establishes clearly that AT&T ignored the
agreed-upon methodologies, the plaintiffs failed to develop the factual record necessary to
estimate how compliance with the agreed-upon methodologies would have affected the
value of the Partnership. One of the provisions mandated that AT&T add a premium of
25% when allocating revenue to the Partnership, so that increase would need to be taken
into account. Beyond that step, however, the impact is unclear. It seems likely that the other
contractual methodologies would have benefited the partnership, but the court cannot say
more than that.
5
On these facts, the court will not award dissociation damages as a remedy. The
plaintiffs are awarded compensatory damages in the amount of $39,847, plus pre- and post-
judgment interest on that amount.
I. FACTUAL BACKGROUND
Trial took place over five days. The parties introduced 3,187 exhibits, including
thirty-nine deposition transcripts. Four fact witnesses—all present or former AT&T
executives—and three experts testified live. The following factual findings represent the
court’s effort to distill this record.3
A. The Formation Of The Partnership
In the 1980s, during the early days of the cellular telephone industry, the Federal
Communications Commission (the “FCC”) conducted lotteries to award the rights to
construct cellular telephone networks in particular geographic areas. If the lottery winner
built out the network and complied with other regulatory requirements, then the FCC
granted the lottery winner a license to provide cellular telephone service in that area. The
3
Trial was held in the Coordinated Action and addressed all of the partnerships and
all of the coordinated lawsuits. Unless otherwise noted, citations to docket entries refer to
items filed in the Coordinated Action. Citations in the form “PTO ¶ ––” refer to stipulated
facts in the pre-trial order. Dkt. 600. Citations in the form “[Name] Tr.” refer to witness
testimony from the trial transcript. Citations in the form “[Name] Dep.” refer to witness
testimony from a deposition transcript. The parties deposed some witnesses multiple times.
For those witnesses, the citation includes the year of the pertinent deposition. Citations in
the form “JX ––– at ––” refer to a trial exhibit with the page designated by the last three
digits of the control or JX number or, if the document lacked a control or JX number, by
the internal page number. If a trial exhibit used paragraph numbers, then references are by
paragraph.
6
legacy wireline carrier received its own permit and was not allowed to participate in the
lottery, ensuring that a new entrant would receive a license. PTO ¶¶ 4, 20.
No one expected a lottery winner to build and operate an isolated wireless business
limited to a particular geographic area. The value of the rights lay in the ability of the local
system to become part of a larger wireless network.
At the time, pioneering cellular telephone companies were trying to build ever-
larger networks. One method of expanding involved partnering with a lottery winner. For
the cellular provider, the lottery winner’s license added a geographic area to its network.
For the lottery winner, the cellular provider took over the task of building, maintaining,
and operating the local system as part of its larger network.
Many investors participated in the FCC-sponsored lotteries. To increase their odds
of winning, participants often formed groups, called settlement associations. In an
arrangement similar to an office pool, the members of a settlement association agreed that
if one of them won the lottery, then the winning member would contribute the rights to a
partnership comprising all of the members of the association. The winning member would
receive a 50.01% interest in the partnership. Subject to potential adjustments, the other
members would receive equal shares of the remaining 49.99% interest in the partnership.
With the FCC conducting lotteries in regions across the country, standardized agreements
emerged with typical terms. See, e.g., JX 4 at 1, 12–15.
One of the geographic areas where the FCC conducted a lottery was the
metropolitan statistical area centered around Salem, Oregon. A group of lottery participants
formed a settlement association using a standard settlement agreement. One of the
7
members of the association won the lottery and received the rights to build, maintain, and
operate a wireless network in that market. The winning member sold her rights to a
predecessor of AT&T.4
In 1988, the members of the settlement association formed the Partnership. They
entered into a partnership agreement to govern their rights and obligations as partners. JX
15 (the “Partnership Agreement” or “PA”). As the party contributing the rights to build,
maintain, and operate the network, AT&T received a 50.01% interest in the Partnership.
Over 110 members of the settlement association shared the minority interest, with each
member initially receiving a 0.3424% interest in the Partnership. See id. at ’432–33.
The Partnership Agreement recited that the purpose of the Partnership was “to
engage in the business of constructing, owning, investing in and operating, directly or
indirectly, nonwireline cellular telephone systems, including the system for the Market and
for other areas and MSA’s [sic] and to engage in related activities in the communications
business in such form as the Partnership shall determine.” Id. § 1.3. The Partnership
Agreement defined the “Market” by referring to the area centered around Salem, Oregon.
The Partnership’s business, however, was not limited to that area, and it encompassed
“related activities in the communications business.” Id. That aspect of the Partnership’s
4
The predecessor of AT&T was McCaw Cellular Communications, Inc. See JX 42
at ’021 (describing McCaw’s acquisition of majority of Salem); JX 2634 (diagram of
partnerships’ ownership over time); see also JX 59 at 4 (brief in support of petition for
consolidation of actions against the “McCaw Empire”).
8
purpose becomes pertinent later, because AT&T adopted a narrower interpretation of the
Partnership’s business.
As the owner of a majority interest in the Partnership, AT&T controlled the
Partnership from the outset. First, AT&T controlled the Partnership at the partner level.
The Partnership Agreement generally authorized the partners to take action by majority
vote. Id. § 4.1. As the holder of a majority interest in the Partnership, AT&T controlled the
outcome of any partner-level vote.5
Second, in a provision central to the case, the Partnership Agreement stated that
“[e]xcept as otherwise provided in this Partnership Agreement, complete and exclusive
power to conduct the business affairs of the Partnership is delegated to the Executive
Committee.” Id. § 4.3 (the “Governance Provision”). The Partnership Agreement provided
for a three-member Executive Committee, with two representatives appointed by the
majority partner and one by the minority partners. PTO ¶ 24.
5
The Partnership Agreement contemplated a two-thirds supermajority vote to
amend (i) the sections describing the Partnership’s purpose and the nature of its business
and (ii) the sections governing the admission of persons as partners who did not acquire an
interest in compliance with the Partnership Agreement. Id. The Partnership Agreement was
later amended to require a unanimous vote to convert the Partnership into a different form
of entity. Id. None of these limitations are relevant to this proceeding. Moreover, AT&T
soon gained a sufficient partner-level interest to dictate the outcome of any supermajority
vote. The Partnership Agreement contemplated that the Partnership could make capital
calls, and if a partner did not meet a capital call, then the Executive Committee could permit
another partner to fulfill the call and increase its ownership interest in the Partnership to
reflect its additional contribution. See id. §§ 2.3, 2.5. Building and maintaining a network
required lots of capital, and AT&T funded the capital calls. By doing so, AT&T increased
its percentage interest in the Partnership. From time to time, AT&T also purchased interests
from minority partners.
9
As the majority partner, AT&T appointed two representatives to the Executive
Committee. The Governance Provision authorized the Executive Committee to act by
majority vote, meaning that AT&T’s representatives could dictate the outcome.
During the period relevant to this case, Eric Wages served as one of AT&T’s
representatives. Wages was an AT&T executive who oversaw AT&T’s Partnership
Accounting Group.6 The other representative was the director of the regional business unit
that included Salem, Oregon. See Wages Tr. 129.
In practice, AT&T only held Executive Committee meetings to the extent required
in the Partnership Agreement. Id. at 131. The Partnership Agreement initially required two
meetings of the Executive Committee per year, but AT&T amended that provision to
eliminate the requirement for a minimum number of meetings. See PA at ’436. In practice,
AT&T only acted through the Executive Committee on formal matters, such as authorizing
a distribution to the partners. Wages Tr. 131–32, 276. AT&T generally ran the business of
6
Wages served as AT&T’s principal witness. In addition to appearing at trial,
AT&T proffered him for deposition on five different occasions, each time as a Rule
30(b)(6) witness on the topics that the plaintiffs had identified. Wages Tr. 213. During trial,
Wages gave unsatisfying testimony. His counsel conducted the bulk of his direct
examination with leading questions, resulting in counsel testifying and Wages assenting to
counsel’s statements. On cross examination, Wages initially lost his ability to answer
questions directly. He became less evasive after an admonishment from the court, but he
had convenient failures of memory. He often deflected questions by claiming not to be a
lawyer, even though it was clear that he was the point person responsible for overseeing
AT&T’s compliance with its contractual obligations. On redirect, his counsel again
conducted the examination using leading questions. It is not possible to decide the case
without taking Wages’ testimony into account, but his performance caused the court to
approach his statements with care.
10
the Partnership as an integrated part of AT&T’s wireless network, without seeking or
obtaining Executive Committee approval for particular decisions.
Third, AT&T controlled the day-to-day management and operations of the
Partnership. The Partnership Agreement authorized the Executive Committee to enter into
agreements with partners or their affiliates to provide management services to the
Partnership. PTO ¶ 24. The key language stated:
All Partners recognize that the Partnership may enter into agreements from
time to time with Partners and/or Partner Affiliates for management services
in connection with design, development, construction and operation of the
Partnership’s nonwireline cellular systems, and with other persons, firms or
corporations which are Affiliates of Partners for goods and services related
to the Partnership Business.
PA § 4.8 (respectively, the “Affiliate Provision” and an “Affiliate Agreement”).7
7
The Affiliate Provision contained requirements for Affiliate Agreements that the
plaintiffs have not placed at issue. For example, the Partnership Agreement mandated that
any Affiliate Agreement “shall be on terms no less favorable to the Partnership than could
be obtained if it was made with a person who is not a Partner.” PA § 4.8(a). It also required
that any Affiliate Agreement “provide for fees to be paid by the Partnership, representing
reasonable profit and overhead allowances to the contracting parties.” Id. And the
Partnership Agreement required that when negotiating, administering, executing,
amending, or terminating any Affiliate Agreement, the Executive Committee and any
delegee of the Executive Committee owed a duty “to the Partnership and to the Partners . .
. to act in good faith.” PA § 4.8(c) (the “Good Faith Obligation”). The plaintiffs did not
assert claims under these aspects of the Affiliate Provision. See Dkt. 640 at 94–96.
The Affiliate Provision initially required that the Executive Committee approve any
Affiliate Agreement. That provision was amended in 1997 to require the approval “of the
Executive Committee or its delegee.” Id.; see JX 150. After this amendment, the Executive
Committee could delegate to AT&T the power to approve Affiliate Agreements.
11
From the earliest days of the Partnership, there was a settled understanding that
AT&T operated the day-to-day business of the Partnership and had authority to build,
maintain, and operate its cellular network as part of its wider network.8 In effect, there was
an unwritten Affiliate Agreement in place from the formation of the Partnership that
authorized AT&T to manage the Partnership.
Consistent with this reality, the Partnership did not have its own officers or
employees. The Partnership did not have a CEO or a Director of Sales and Marketing. The
Partnership did not have personnel who sold phones or maintained its network. The
Partnership did not even have its own bank accounts. See Wages Tr. 134. AT&T employees
performed all of those tasks. See id. at 125. AT&T then billed the Partnership for those
expenses by either assigning specific items of expense to the Partnership, such as the cost
of an employee’s salary, or by allocating to the Partnership a portion of a broader expense,
such as a share of corporate overhead. AT&T effectively treated the Partnership as an
accounting exercise supported by periodic legal documentation.
B. The Title Provision And The Protected Information Provision
In addition to the Governance Provision, two other provisions in the Partnership
Agreement play significant roles in the case. Both provisions reflected an understanding
8
The minority partners testified to that understanding. See, e.g., Dutta Dep. 49;
Stone Dep. 39–41. AT&T’s representatives held a similar understanding. See Wages Tr.
225, 239–42, 245–47, 286–87.
12
that the Partnership would be managed for the benefit of all of the partners, and not just for
the benefit of the majority partner.
The first provision generally required that the Partnership hold title to all of its
assets. In full, it stated:
The Partnership shall hold title to the capital of the Partnership and to all
applications, authorizations, equipment and other property and assets,
whether real, personal or intangible, acquired by the Partnership.
The Partnership may, however, acquire, own and utilize assets jointly with
other entities, including entities affiliated with a Partner, and may commingle
assets to the extent the Executive Committee reasonably considers, in its sole
discretion, such activities appropriate and in the best interests of the
Partnership, and title may be held in the name of persons designated by the
Executive Committee so long as the Partnership’s interest in such title is held
for the benefit of the Partnership.
PA § 3.1 (the “Title Provision”) (formatting added). The Title Provision thus permitted
another entity—such as AT&T—to hold title to a Partnership asset if (i) the Executive
Committee concluded that doing so was in the best interests of the Partnership, and (ii) the
assets were held for the benefit of the Partnership.
The second provision generally mandated that partners use certain categories of
protected information only for the benefit of the Partnership. It stated:
Without the prior written consent of the Executive Committee, no Partner or
Partner’s Affiliate shall assign, transfer, license, disclose, make available,
use for personal gain, or otherwise dispose of any patents, patent rights, trade
secrets, customer lists, proprietary information, or other confidential
information of the Partnership, whether or not the information is explicitly
designated as confidential.
Id. § 10.2 (the “Protected Information Provision”). By its terms, the Protected Information
Provision extended to four familiar types of information: “patents, patent rights, trade
13
secrets, [and] customer lists.” The provision then added catchall references to “proprietary
information” and “other confidential information.” It also stated that information need not
be designated as confidential to qualify for protection. This decision refers to these
categories collectively as “Protected Information.”
The Protected Information Provision established a general rule against any partner
taking action to “assign, transfer, license, disclose, make available, use for personal gain,
or otherwise dispose” of Protected Information. A partner could not do any of these things
without the permission of the Executive Committee.
C. The Use Of NPA-NXX In The Early Years Of The Cellular Industry
From the beginning of the cellular telephone industry until the early 2000s, carriers
billed their subscribers for the number of minutes that the subscriber used the wireless
network during the previous billing period. Across the industry, it became standard for
wireless companies to track subscribers and usage using a system known as “NPA-NXX,”
a shorthand term for the area code and next three digits of the subscriber’s phone number.9
For example, in the phone number (999)-555-1234, the NPA-NXX is 999-555. The last
9
Wages Tr. 350–51; Taylor Tr. 710. The “NPA” referred to the fact that wireless
carriers received blocks of 10,000 telephone numbers from the North American Number
Plan Administration, a publicly funded entity run by an FCC contractor. The FCC used
NPA-NXX “to approximate the number of subscribers that each provider has in each of
the approximately 18,000 rate centers in the country.” JX 1142 ¶ 169 n.518; see Taylor Tr.
710; Taylor Rebuttal Report at 24.
14
four digits produce a block of 10,000 phone numbers, ranging from 0000 to 9999,
associated with a particular NPA-NXX.10
Wireless carriers assigned particular NPA-NXX blocks to their market-level entities
based on geography. Within its accounting system, AT&T assigned company codes to its
blocks of NPA-NXX numbers. AT&T then used the codes to attribute revenue and expense
to particular market-level entities, such as the Partnership. Wages Tr. 176–77.
To assign the proper NPA-NXX number to a new subscriber, AT&T asked the
subscriber to identify the phone’s primary place of use. An AT&T employee then assigned
the subscriber an NPA-NXX number based on the primary place of use. If the subscriber
identified a primary place of use that corresponded to the geographic area covered by the
Partnership, then the customer received an NPA-NXX number assigned to the Partnership
and was treated thereafter as a subscriber of the Partnership. Id. at 352; Wages 2019 Dep.
167.
By assigning NPA-NXX numbers based on primary place of use and allocating
revenue and expense to the market unit corresponding to the NPA-NXX number, AT&T
sought to connect portions of its network with the revenue and expense that those portions
generated. The system broke down if a customer moved to a new market, because AT&T
had no mechanism for assigning the existing NPA-NXX number to a new market. Instead,
the customer’s usage continued to be attributed to the original market associated with the
10
Wages Tr. 348–51; Wages 2019 Dep. 160; JX 3596 at 4; see JX 643 at 7; JX 2681
at ’359, ’361; Taylor Rebuttal Report at 24.
15
customer’s NPA-NXX number. Taylor Report at 67; Wages Tr. 176–77. In other words, if
a customer with a number assigned to the Partnership moved from Salem, Oregon, to
Salem, Massachusetts, then the customer’s revenue and expense would continue to be
assigned to the Partnership.
Until the mid-aughts, that major defect was not a significant problem, because other
aspects of the wireless industry’s business model resulted in an NPA-NXX number acting
as a strong proxy for primary place of use. During that era, wireless carriers provided
postpaid plans, under which a subscriber entered into a long-term contract (typically one
or two years) that provided for a particular number of minutes of usage per month. The
postpaid plans during this era only covered usage in the subscriber’s local market. If a
subscriber used her cellular phone outside of her local market, then the carrier charged the
subscriber a higher rate for “roaming.” See Wages Tr. 173; Taylor Tr. 709–10; Taylor
Report at 46.
Competing carriers entered into agreements that permitted their subscribers to roam
on their competitors’ networks. As a result, there were two types of roaming. Intra-
company or intra-carrier roaming referred to a customer who used her phone outside of her
home area, but still used her provider’s network. Inter-company or inter-carrier roaming
referred to a customer who used her phone outside her home area, but used a different
carrier’s network.11
11
For example, if a subscriber assigned to Salem used her phone in Bremerton,
Washington, then the Salem subscriber’s use of the Bremerton network would constitute
16
Regardless of type, roaming was expensive. Due to the high cost of roaming, a
customer who relocated outside of her home area had a strong financial incentive to obtain
a new NPA-NXX number. Wages Tr. 354; Taylor Tr. 709–11. Moreover, until the advent
of number portability in 2004, any subscriber who changed carriers was treated as a new
subscriber and received a new NPA-NXX number. Generally speaking, therefore, during
this period in the history of the cellular telephone industry, a customer’s NPA-NXX
number correlated strongly with the customer’s primary place of use. As a result, customers
holding NPA-NXX numbers associated with the Partnership were highly likely to be
primarily using the Partnership’s portion of AT&T’s network.12
D. The Cellular Agreement And The Switch Agreement
In 1995, seven years after the Partnership was formed, the Executive Committee
formally delegated managerial authority over the Partnership to AT&T. The Executive
Committee also caused the Partnership to enter into two agreements with an AT&T
intra-carrier roaming. If the Salem subscriber used her phone in a region of Oregon where
AT&T did not offer wireless coverage, and if the customer obtained coverage from a
competitor like T-Mobile, then the customer’s use would constitute inter-carrier roaming.
12
That said, the system was not foolproof. For example, a college student with an
NPA-NXX number associated with the geographic area where her family lived might use
her phone in a different geographic area while attending college. Or a “snowbird” with an
NPA-NXX number associated with New York might use her phone in Florida during the
winter. Wages Tr. 178–79. But while imperfect, the NPA-NXX system operated as a
reliable proxy for use. See Taylor Rebuttal Report at 24–26.
17
affiliate.13 One agreement was a Cellular System Operating Agreement. JX 110 (the
“Cellular Agreement”). The other agreement was a Switch Sharing Agreement. JX 112
(the “Switch Agreement”).
During the meeting of the Executive Committee held to discuss these changes, an
AT&T representative explained that minority partners in other markets had questioned the
absence of any written agreement governing how AT&T managed their partnerships. See
JX 91 at ’466. AT&T drafted the Cellular Agreement and the Switch Agreement to address
that concern. Id. The representative stated that “[t]he net effect will be positive for the
Salem market.” Id.
In the resolutions adopting the agreements, the Executive Committee recognized
that the Partnership had not previously had any written agreement with AT&T regarding
management services or switch sharing services. The Executive Committee then formally
resolved that “the Majority General Partner is hereby delegated full, complete and
exclusive authority to manage and control the business of the Partnership.” Id. at ’469 (the
“1995 Resolution”). The Executive Committee also formally approved the Cellular
13
PTO ¶ 45. The relevant predecessor of AT&T at the time was AT&T Corporation
(“Old AT&T”), which acquired McCaw in September 1994. JX 70. Old AT&T was then a
separate corporation from the entity now known as AT&T, which was then known as
Southwestern Bell Corporation. The latter was one of the Regional Bell Operating
Companies, or “Baby Bells” spawned from the breakup of Old AT&T in 1982. In 1995,
Southwestern Bell Corporation changed its name to SBC Communications, Inc., and in
2005, SBC acquired Old AT&T and changed its name to AT&T, Inc.
18
Agreement and the Switch Agreement and resolved that “[they] may be executed by the
Majority General Partner.” Id.
The agreements contemplated identifying subscribers by NPA-NXX and allocating
revenue and expense on that basis. See JX 112 §§ 4.1(a)–(b). The Cellular Agreement
provided that “common costs” would be attributed to the Partnership based on its number
of subscribers. JX 110 § 5.1(b). The Switch Agreement provided that (i) all roaming
revenue generated in the Partnership’s market by non-Partnership subscribers would be
allocated to the Partnership and (ii) all roaming charges incurred by the Partnership’s
subscribers in non-Partnership markets would be allocated to an affiliate of AT&T. JX 112
§ 4.2(b).
E. The Business Model Changes.
The basic business model in the cellular telephone industry remained relatively
stable until late 2003. Throughout the pre-2003 period, postpaid plans remained the
dominant source of revenue, and NPA-NXX served as an effective proxy for primary place
of use. See generally JX 1994 ¶¶ 94–95. The period of relative stability came to an end as
a result of two developments: nationwide rate plans and number portability.
During the pre-2003 period, competition among carriers increased steadily. See JX
166 at ’538; see also JX 148 at 2. One consequence of increased competition was a shift to
nationwide plans that eliminated roaming fees. Those plans in turn removed the financial
incentive for a customer to obtain a new NPA-NXX number after relocating to a new
geographic area. Instead, there was a natural disincentive for a customer to go through that
personally burdensome process. Wages Tr. 355–56.
19
As fewer subscribers changed their NPA-NXX numbers, tracking subscribers’
usage by NPA-NXX became less reliable. See id. at 357; Wages 2019 Dep. 259–60, 273–
75. AT&T was aware of these limitations and explored alternative methods, such as
tracking subscribers by billing address. But AT&T concluded that the existing technology
made it “difficult . . . if not impossible” to identify subscribers’ home markets at the
individual subscriber level. Wages Tr. 178. AT&T permitted subscribers to change their
billing address or designate a new primary place of use, but even if a subscriber did both
of those things, the subscriber and her NPA-NXX number still remained associated with
her original billing market. See Wages 2019 Dep. 243–55, 259–60.
The other major industry development was number portability. That concept refers
to the ability of a subscriber to keep the same phone number if the subscriber switches
carriers. Before the advent of number portability, a subscriber who switched wireless
carriers had to obtain a new NPA-NXX number. The new number was associated with the
subscriber’s primary place of use at the time, so the need to change numbers when changing
carriers helped maintain the correlation between a customer’s NPA-NXX number and their
geographic area.
In the Telecommunications Act of 1996, Congress mandated that cellular carriers
take steps to enable number portability. But Congress gave the companies until 2004 to
make the change. See 47 U.S.C. §§ 251(b)(2), 153(37); Wages Tr. 355; JX 300 at 4; JX
1142 ¶ 242 & n.682. The implementation of number portability in 2004 meant that going
20
forward, a subscriber did not have to receive a new NPA-NXX number when changing
carriers.14
The combination of nationwide plans and number portability fatally undermined the
association between a subscriber’s NPA-NXX number and primary place of use. Over
time, as more subscribers relocated, tracking subscribers using NPA-NXX became less
reliable. By the time of the events giving rise to this litigation, the NPA-NXX system had
become so unreliable that AT&T could not provide basic information about its subscribers
or the Partnership’s:
• AT&T did not know the number of AT&T subscribers who resided in the
Partnership’s service area but used a non-Partnership NPA-NXX number. See
Wages Tr. 364.
• AT&T did not know the number of AT&T subscribers who resided in a non-
Partnership service area and used an NPA-NXX number assigned to the Partnership.
See id.• AT&T did not know the number of AT&T subscribers who moved to the
Partnership’s service area, changed their billing address and primary place of use to
an address in the Partnership’s service area, yet continued to use a non-Partnership
NPA-NXX number. See id. at 365.
14
See JX 2122 at 2–3 & n.14. For purposes of regulatory reporting, the FCC
mandated that the ported number remain associated with its original rate center, which was
the FCC-designated “geographic area used to determine distances and prices for local and
long distance calls.” Id. at 6 n.20; JX 2160 at 3; JX 1296 at 1. To comply with the FCC
requirement, wireless carriers established “Location Routing Numbers” that identified the
carrier that previously served the ported number. See JX 2160 at 5; JX 2431 at 4; Wages
2019 Dep. 253. The carriers thus created a system that could distinguish between the
original rate center, which was used for regulatory reporting, and the customer’s primary
place of use, which was used for other purposes.
21
• AT&T did not know the percentage of AT&T subscribers nationwide who resided
in AT&T service areas different from the one that issued their NPA-NXX number.
See id. at 364.
F. The Management Agreement
In 2005, in response to the changing business model in the cellular industry, AT&T
caused the Partnership to enter into a Management and Network Sharing Agreement. JX
217 (the “Management Agreement” or “MNSA”).15 The Management Agreement was
backdated so that it became effective as of January 1, 2003. PTO ¶ 48.
AT&T informed the minority partners that it would be adopting the Management
Agreement during the Partnership’s annual meeting on April 7, 2004. JX 191. According
to the minutes, the AT&T representative explained that the Management Agreement was
replacing the Cellular Agreement and Switch Agreement “because the business has
changed dramatically over the past nine years.” Id. at 2. The AT&T representative also
explained that “[t]he new agreement more closely reflects how the business is currently
managed.” Id. AT&T represented that it “made sure that the agreement will have either a
neutral or positive financial impact on the Partnership.” Id. The Management Agreement
reflects those points, reciting that it was adopted “to adapt to changing market and
15
At this point, the AT&T predecessor that ultimately controlled the Partnership
was Cingular Wireless, LLC, which had acquired Old AT&T’s wireless business in
October 2004. JX 263 at 28; see JX 188; JX 3563 at 10. Cingular was a joint venture owned
60% by SBC and 40% by BellSouth Corporation. JX 359 at 3; see JX 526 at ’016. In 1995,
shortly after causing the Partnership to enter into the Management Agreement, SBC
acquired Old AT&T and changed its name to AT&T Inc.
22
technological conditions.” MNSA at ’748. Those changes included the rollout of
nationwide plans and the advent of number portability.
AT&T personnel drafted the Management Agreement. Wages Tr. 373. The
Executive Committee authorized the Partnership to enter into the Management Agreement
during a meeting on August 10, 2005. JX 229. The Management Agreement was executed
in October 2005. MNSA at ’748. The same AT&T executive, Sean Foley, executed the
Management Agreement for both the Partnership and the AT&T affiliate. Id. at ’759.
The Management Agreement figures prominently in this case. The plaintiffs have
contended that AT&T breached the Governance Provision in the Partnership Agreement
by managing the Partnership unilaterally, rather than through the Executive Committee.
AT&T has relied on its delegated authority to manage the Partnership, regularly invoking
the Management Agreement as a source of that authority. AT&T’s reliance on the
Management Agreement was evident during trial, when AT&T’s counsel used leading
questions on direct examination to elicit testimony from AT&T’s principal witness, Wages,
about the Management Agreement and the authority that it conferred on AT&T.16 The
record shows, however, that when overseeing the Partnership Accounting Group in real
16
See Wages Tr. 126–29, 142–43, 145–147. Wages returned to the Management
Agreement on cross-examination when confronted with provisions in the Partnership
Agreement, like the Governance Provision, which limited AT&T’s ability to manage the
Partnership, or when questioned about AT&T’s authority to take particular actions. See id.at 221–23, 233, 274, 276, 278, 280–81, 285, 320, 325, 443, 447. AT&T’s counsel then
revisited the Management Agreement on redirect and used leading questions to walk
Wages through various provisions conferring authority on AT&T. Id. at 495–502.
23
time, Wages did not pay meaningful attention to the Management Agreement. He simply
thought that AT&T had the ability to run its business, and he believed that any agreements
or other understandings necessarily allowed AT&T to do that. Wages Tr. 274, 285. But as
Wages recognized, neither the Partnership Agreement nor the Management Agreement
enabled AT&T to do anything it wanted with the Partnership.17
1. Provisions Empowering AT&T
The first substantive section in the Management Agreement, titled “Obligations and
Operational Responsibilities,” required AT&T as “Manager” to provide the services to the
Partnership as “Owner.” That section both empowered AT&T to operate the Partnership
and required AT&T to perform specific functions. The operative language stated:
Manager shall provide strategic direction and guidance, management and
operation of the Owner’s Business and shall provide all services as are
necessary to assure the commercially reasonable development and operation
of the Owner’s Business, including, without limitation:
(A) Construction and procurement of tangible and intangible assets, goods
and services acquired for, or associated with the operation and
utilization of, the Owner’s System and Shared Network;
(B) General and Administrative Services;
(C) Technical Operating Services for the Owner’s System and the Shared
Network;
(D) Sales and Marketing Services; and
17
Wages Tr. 126 (“Q: Did you believe that as the manager, AT&T and its affiliates
could do anything they wanted? A: No.”); see id. at 147 (Wages expressing view that
AT&T had to share revenue with the partnerships if it used their information in its
business).
24
(E) Maintenance of Owner’s Licenses.
MNSA art. I (the “Services Provision”).
The second substantive section in the Management Agreement, titled “Authority,”
gave AT&T broad authority to manage the Partnership. It stated:
Manager shall have the authority to undertake, and may undertake, any and
all other commercially reasonable actions necessary or advisable to develop,
manage, and operate the Owner’s Business, which are not prohibited by law
or regulation, including, without limitation, the authority to act as agent for
and on behalf of Owner (a) in entering into contractual arrangements, and (b)
before federal, state, and local governmental authorities.
Id. art. II (the “Authority Provision”).
The same provision in the Management Agreement authorized AT&T-as-Manager
to enter into additional agreements with its affiliates to provide services to the Partnership:
The foregoing authority includes the authority of Manager, on behalf of
Owner, to enter into agreements, contracts, or arrangements with Manager
and its Affiliates, pursuant to which Manager and its Affiliates provide
tangible or intangible assets, goods, or services to the Owner, in connection
with the Manager’s activities hereunder.
Id. AT&T-as-Manager also had the power to “select the Persons who shall perform all
services necessary to the development, management, and operation of the Owner’s
Business.” Id. art. III. The Management Agreement explicitly provided that AT&T-as-
Manager “may, in its sole discretion, elect to rely upon its own employees or employees of
its Affiliates for the performance of services hereunder.” Id.Notably, the Management Agreement defined “Owner’s Business” and “Manager’s
Business” in parallel terms. The “Owner’s Business” was “the business of providing
wireless communications services in Owner’s Area and all the activities associated
25
therewith, including, without limitation, the development, construction, management, and
operation of a wireless communications system and the acquisition and maintenance of
Subscribers.” Id. at ’750.18 Except for a distinction as to area, that definition tracked word
for word the definition of “Manager’s Business,” defined as “the business of providing
wireless communications services in Manager’s Area and all the activities associated
therewith, including, without limitation, the development, construction, management, and
operation of a wireless communications system and the acquisition and maintenance of
Subscribers.” MNSA at ’750. The same parallelism appears in the definitions of “Owner’s
System” and “Manager’s System.” See id.The parallel definitions recognized that the Partnership and AT&T were in the same
business. To that end, the Management Agreement contemplated that AT&T-as-Manager
would manage and operate the Partnership’s business as part of the “Shared Network,”
defined as
all wireless communications system equipment that is owned, leased or used
by Manager and its Affiliates and that allows the cell sites of Manager and
its Affiliates (including Owner) to operate as a single nationwide network,
including, without limitation, switches, base station controllers, data centers,
certain circuits, SS7 network, and all related hardware and software required
for such equipment to operate in accordance with its specifications.
18
The Management Agreement defined “Subscriber” as “a user of wireless
communications services, acquired and maintained by Owner or Manager and its affiliates
pursuant to an ongoing agreement for wireless communications services.” Id. at ’751.
AT&T recognizes that the Partnership was an affiliate of AT&T doing business as AT&T.
Wages Tr. 151.
26
Id. at ’751. The obvious purpose of the Management Agreement was to enable AT&T-as-
Manager to operate the Partnership as part of “a single nationwide network.”
2. Provisions Constraining AT&T
As noted, the Management Agreement obligated AT&T to provide services to the
Partnership, including “General and Administrative Services.” The Management
Agreement defined those services to include “administrative, legal and regulatory,
accounting and tax, billing, credit and collection, Subscriber retention and care, insurance,
information systems, purchasing, human resources, clerical and other general and
administrative services.” Id. at ’749.
The Management Agreement thus authorized AT&T-as-Manager to provide
accounting services to the Partnership. The Management Agreement did not, however,
empower AT&T to proceed however it wanted. It contained specific procedures for AT&T
to follow. Those procedures reflected the changed business model of the wireless industry.
a. Identifiable Versus Non-Identifiable Items
The Management Agreement began by recognizing that AT&T’s nationwide
cellular network generated some categories of revenue and expense that could be identified
with reasonable effort as attributable to the Partnership or another AT&T business unit and
assigned to the Partnership or other business unit. Other categories of revenue and expense,
however, could not be identified and attributed in that manner. For the latter, the
Management Agreement contemplated that AT&T would use an appropriate metric to
allocate a proportionate share of the revenue and expense to the Partnership.
27
The Management Agreement did not give AT&T-as-Manager unbridled discretion
to determine which items fell into which bucket. Nor did it give AT&T-as-Manager
unconstrained discretion over what allocation methodologies to use. The Management
Agreement specified that the categories of identifiable items of revenue and expense were
“as described herein.” Id. § VI(A). The Management Agreement then stated that for
categories without identifiable items, AT&T “will assign such revenues and expenses to
Owner through the allocation methodologies described in paragraph B below and Exhibit
A.” In its entirety, the pertinent section states:
Owner and Manager acknowledge that (a) it is reasonable and practical to
specifically identify certain revenues and expenses to Owner, as described
herein, (b) it is not reasonable or practical to specifically identify certain
other revenues and expenses to Owner, and Manager will assign such
revenues and expenses to Owner through the allocation methodologies
described in paragraph B below and Exhibit A.
Id. (the “Allocation Requirement”).
Properly understood, the only prescriptive language in the Allocation Requirement
is “Manager will assign such revenues and expenses to Owner through the allocation
methodologies described in paragraph B below and Exhibit A.” The rest of the section is a
contractual stipulation about the state of the world that gives rise to the prescriptive
language. It is analogous to a recital, but with binding effect.
As contemplated by the Allocation Requirement, Section IV(B) specified six
methodologies that Manager “will use . . . to determine revenues and expenses related to
the Owner’s business in each period.” Id. They included methodologies for (i) “Shared
Revenues,” (ii) “Outcollect Roaming Revenues,” (iii) “Out-of-Pocket Expenses,” (iv)
28
“Shared Expenses,” (v) “Shared Network Costs,” and (vi) “Other” types of expense. As
described in greater detail below, the Management Agreement called for AT&T to allocate
Shared Revenues, Shared Expenses, and Shared Network expenses to the Partnership based
on a formula. The Management Agreement called for AT&T to identify Outcollect
Roaming Revenues, Out-of-Pocket Expenses, and Other expenses individually and assign
them to the Partnership.
For Shared Revenues and Shared Expenses, the Management Agreement required
AT&T to use a formula to allocate those expenses to the Partnership. The definitions of
Shared Revenues and Shared Expenses are important, and this decision discusses them
below. For present purposes, what matters is that the Management Agreement directed
AT&T-as-Manager to follow a procedure set forth on Exhibit A. That exhibit stated: “Each
period, Manager shall determine Owner’s share of Shared Revenues and Shared Expenses,
as listed in the table below.” Id. Ex. A. The exhibit then called for AT&T-as-Manager to
determine the Owner’s share of Shared Revenues or Shared Expenses using the following
equation.
Id. (the “Sharing Equation”). Below the Sharing Equation, the exhibit identified a single
statistic for allocating Shared Revenues: System Traffic Less Outcollect Roaming Traffic.
It identified a series of statistics for allocating different types of Shared Expenses. In each
29
case, however, the basic principle was the same—AT&T was obligated to use the Sharing
Equation.
Notably, the exhibit that specified the Sharing Equation also called for AT&T to
apply a premium to benefit the Partnership. The operative language stated:
Manager may apply a premium to certain revenues and/or a discount to
certain expenses to ensure that the allocation method set forth below is no
less favorable to the Owner than the allocation method used in prior periods.
Initially, Manager will apply a premium of 25% to Owner’s share of Shared
Revenues and a discount of 10% to Owner’s share of Sales and Marketing
Expenses.
Id. (the “Premium Provision”). The Management Agreement defined the Sales and
Marketing Expenses where the discount applied as “expenses associated with Sales and
Marketing Services,” which the agreement defined as “marketing, sales, advertising, and
other promotional and subscriber acquisition and retention services.” Id. at ’751. Through
the Premium Provision, AT&T committed to treat the Partnership better than its own
business units and indisputably better than an arm’s-length third party.
i. Shared Revenues
The first allocation methodology in the Management Agreement called for AT&T-
as-Manager to allocate “Shared Revenues” by using the Sharing Equation and applying the
Premium Provision. Id. § VI(B)(1). The operative language stated: “Manager shall
determine Owner’s share of Shared Revenues in the manner described in Exhibit A.” Id.
The Management Agreement defined “Shared Revenues” as “the aggregate revenue
generated by Subscribers of Owner’s Business and Manager’s Business utilizing Owner’s
System and Manager’s System, and any other applicable revenues generated by utilization
30
of the Entire Network, but excluding Outcollect Roaming Revenues.” Id. at ’751 (the
“Shared Revenues Definition”). The Management Agreement defined “Entire Network” as
“collectively, the Owner’s System, the Manager’s System, and the Shared Network.” Id.
at ’748. In other words, Shared Revenues meant all revenue of any kind generated from
the utilization of the Entire Network, other than Outcollect Roaming Revenues, which the
Management Agreement addressed separately.
After AT&T-as-Manager had totaled up all revenue generated by any and all
subscribers using the Entire Network, the Management Agreement mandated that AT&T
allocate a portion of the aggregate revenue to the Partnership using a specified statistic. For
Shared Revenues, the exhibit stated that the sharing percentage would be calculated using
the ratio of “System Traffic less Outcollect Roaming Traffic.” Id. Ex. A. Once again, the
omission of Outcollect Roaming Traffic recognized that the Management Agreement
provided a separate allocation methodology for that source of revenue.
The Management Agreement defined System Traffic as the total minutes of usage
“generated on a wireless communications system.” Id. at ’752. At the time, network traffic
predominantly involved voice calls, which were measured in minutes of use (“MOUs”).
The definition of System Traffic noted that “[i]n the future, other Units of Traffic may be
included in the definition of System Traffic as that type of Traffic becomes material and as
it becomes technologically feasible to track that Unit of Traffic.” Id.
The resulting allocation methodology for Shared Revenues obligated AT&T to
aggregate all revenue generated by the Entire Network. The allocation methodology then
required that AT&T allocate to the Partnership a proportionate share of AT&T’s aggregate
31
revenue based on the share of voice traffic carried by the Partnership’s system and add the
premium required by the Premium Provision. As an unrealistic example, if the Entire
Network generated a total of $1 million in revenue, and if the Entire Network carried
1,000,000 MOUs while the Partnership’s network carried 1,000 of the MOUs, then the
Partnership’s share of the revenue before the addition of the premium would be $1,000.
After the addition of the premium, AT&T would allocate $1,250 in Shared Revenues to
the Partnership.
This decision refers to this allocation methodology as the “Shared Revenues
Formula.”
ii. Outcollect Roaming Traffic
The second allocation methodology in the Management Agreement addressed
Outcollect Roaming Traffic. Id. § VI(B)(2). The Management Agreement defined
“Outcollect Roaming Revenues” to mean “revenues generated when Third Party
Subscribers use the Owner’s System or Manager’s System, based on provisions of the
Roaming Agreements.” Id. at ’750. The Management Agreement defined “Third Party
Subscriber” as “a user of wireless communications services acquired and maintained by a
Third Party Carrier.” Id. at ’752. The Management Agreement defined “Third Party
Carrier” as “a domestic and/or international wireless communication carrier that is not
affiliated with either Owner or Manager.” Id.
The allocation methodology directed AT&T to “identify Owner’s Outcollect
Roaming Revenues by multiplying the Outcollect Roaming Traffic each Third Party
Carrier generates on Owner’s System times the applicable rate per Unit of Traffic set forth
32
in the Roaming Agreement with such Third Party Carrier.” Id. § VI(B)(2). That
methodology required that AT&T identify the extent to which a Third Party Subscriber
used the Partnership’s network, then multiply that usage by the contract rate that AT&T
received from the Third Party Carrier. AT&T then was required to assign that revenue to
the Partnership.
AT&T rendered this allocation methodology irrelevant by entering into reciprocal
bill-and-keep agreements with third-party carriers. Under the bill-and-keep arrangements,
the subscriber’s home carrier retained the incremental roaming revenue generated when
the subscriber roamed on another carrier’s network. In other words, if an AT&T subscriber
roamed on T-Mobile’s network, then AT&T (and not T-Mobile) received the incremental
roaming fees. AT&T did not pay anything to T-Mobile. The same was true for a T-Mobile
subscriber roaming on AT&T’s network.
Under the bill-and-keep method, “the applicable rate per Unit of Traffic set forth in
the Roaming Agreement with such Third Party Carrier” became zero, so there was no
revenue to allocate to the Partnership. The plaintiffs do not advance any arguments
regarding Outcollect Roaming Revenues from third-party subscribers to the Partnership.
The Outcollect Roaming methodology therefore does not figure in this decision. The
principal significance of this allocation methodology lies in its exclusion from the scope of
Shared Revenues. By specifically excluding Outcollect Roaming Revenues, the
Management Agreement implicitly confirmed an intent to include all other sources of
revenue within the definition of Shared Revenues.
iii. Out-Of-Pocket Expenses
33
The third allocation methodology addressed “Out-of-Pocket Expenses.” This
methodology called for the identification of specific expenses. It stated simply: “Manager
shall identify Owner’s Out-of-Pocket Expenses.” Id. § VI(B)(3). The Management
Agreement defined “Out-of-Pocket Expenses” as “those expenses which can be
specifically associated with the construction and operation of Owner’s System, including
the expense of any tangible or intangible assets, goods, or services performed by personnel
of Manager . . . or by a third party,” and including “the cost of wireless communications
equipment, network/subscriber toll charges, system leases, rents, and utilities, interconnect
expenses, and other expenses related to cell sites in Owner’s System.” Id. at ’750. The
Management Agreement thus contemplated the direct identification of out-of-pocket
expenses and their assignment to the Partnership.
The plaintiffs do not contend that AT&T failed to assign Out-of-Pocket Expenses
to the Partnership. The methodology for Out-of-Pocket Expenses therefore does not figure
prominently in this decision. The principal significance of this allocation methodology lies
in the fact that the Management Agreement specifically called for identification of those
items, but demonstrated an intent to use the Sharing Equation for other sources of revenue
and expense.
iv. Shared Expenses
The fourth allocation methodology addressed “Shared Expenses.” Id. § VI(B)(4).
This lengthy provision explained the concept of Shared Expenses as follows:
To the extent that expenses incurred by Manager and its Affiliates in
performing their duties under this Sharing Agreement are incurred to support
both Owner’s System and Manager’s System and are of a type such that a
34
direct charge as an Out-of-Pocket Expense is not reasonably practical, such
expenses shall be considered “Shared Expenses.”
Id. (formatting added). The concept of Shared Expenses thus encompassed (i) any expense
incurred to support both Owner’s System and Manager’s System that was (ii) of a type
such that a direct charge as an Out-of-Pocket Expense was not reasonably practical. Stated
conversely, AT&T could identify expenses and assign them to a particular Partnership if
the expenses were incurred only to support the Owner’s System or the expenses were of a
type where a direct charge was reasonably practical.
If an expense category qualified as Shared Expenses, then the Management
Agreement required that AT&T allocate the expenses using the Sharing Equation. The
operative language stated:
Manager shall allocate a portion of each Shared Expenses to Owner in
proportion to the benefit Owner’s Business receives from the Shared
Expenses relative to the benefit Manager’s Business receives.
Manager shall identify the total Shared Expenses for both Owner’s Business
and Manager’s Business; in addition, Manager shall determine Owner’s
share of Shared Expenses, as described in Exhibit A.
Id. This decision refers to this allocation methodology as the “Shared Expenses Formula.”
As with the allocation methodologies generally, the Management Agreement did
not leave it to AT&T to determine on the fly what constituted Shared Expenses. The
Management Agreement stated:
Shared Expenses shall initially be divided into the following categories:
Technical Operating Expenses, Sales & Marketing Expenses, General &
Administrative Expenses, Subscriber Bad Debt Expenses, Pass-Through Tax
Expenses, Incollect Roaming Charges, Handset Equipment Margin for new
Subscribers and Handset Equipment Margin for existing subscribers.
35
Id. The Management Agreement thus required that AT&T use the Sharing Equation for
these identified categories. The Management Agreement identified the following sharing
statistics for each category:
Type Of Shared Expenses Statistic For Calculating
Percentage Sharing
Technical Operating Expenses System Traffic
Sales & Marketing Expenses Gross Subscriber Additions19
General & Administrative Expenses Ending Subscribers
Subscriber Bad Debt Expenses System Traffic Less Outcollect
Roaming Traffic
Pass-Through Tax Expenses System Traffic Less Outcollect
Roaming Traffic
Incollect Roaming Charges20 System Traffic Less Outcollect
Roaming Traffic
Handset Equipment Margin21 for Gross Subscriber Additions
new Subscribers
Handset Equipment Margin for Ending Subscribers
Existing Subscribers
The Management Agreement defined “Gross Subscriber Addition” as “a Person
19
who becomes a new Subscriber during a given period.” Id. at ’749.
20
The Management Agreement defined “Incollect Roaming Charges” as “charges
generated when the Subscribers of Owner’s Business or Manager’s Business use the
wireless communications systems of Third Party Carriers, based on provisions of the
Roaming Agreements.” Id. That allocation methodology thus only addressed third-party
roaming, not intra-carrier roaming. As discussed below, the Management Agreement
eliminated any revenue or expense associated with intra-carrier roaming.
21
The Management Agreement defined “Handset Equipment Margin” as “the net
of handset equipment revenues less the expense of handset equipment sales, such expense
including, without limitation, the cost of the handset and expenses associated with storage,
distribution, fulfillment, obsolescence, and incentives expense (i.e., rebates or other
promotional expenses), as they each relate to wireless handsets, devices, and related
accessories.” Id.
36
Although five of the eight categories called for AT&T to allocate Shared Expenses using
a statistic related to System Traffic, three of the eight categories called for AT&T to make
an allocation based on subscribers. To administer those methodologies, AT&T needed a
means of tracking the subscribers that were assigned to the Partnership.
There is ample evidence that AT&T did not adhere to the Shared Expenses Formula.
Nevertheless, the plaintiffs have not sought to establish that point. The Shared Expenses
Formula therefore does not figure prominently in this decision.22 The principal significance
of the allocation methodology lies in the fact that (i) the Shared Expenses Formula called
upon AT&T to allocate certain categories of Shared Expenses based on a subscriber count,
which required that AT&T have a method for assigning subscribers to the Partnership; and
(ii) the use of subscriber-based allocation methodologies for the Shared Expenses Formula
contrasted with the traffic-based methodology used for the Shared Revenues Formula.
v. Shared Network Costs
The fifth allocation methodology addressed “Shared Network Costs.” Id. §
VI(B)(5). The Management Agreement defined those costs as defined as “the capital costs
incurred by the Manager to develop and construct the Shared Network.” Id. at ’751. The
22
The allocation methodology for Shared Expenses contained language authorizing
AT&T to “add to, eliminate, or modify these categories of Shared Expenses, as necessary,
to adapt to changing market and technological conditions, so long as any such new or
modified categories are within the scope of Shared Expenses, as defined above.” Id. §
VI(B)(4). AT&T thus could depart from Shared Expenses Formula if necessary “to adapt
to changing market and technological conditions” and as long as AT&T adhered to the
principles of what constituted Shared Expenses. This provision is not at issue in the case.
In substance, it closely resembles the Modification Right, discussed below.
37
lengthy provision for allocating Shared Network Costs ultimately required that AT&T
allocate those costs based on the extent of the Units of Traffic “originating or terminating
on Owner’s System” relative to the total System Traffic during that period. Id. § VI(B)(5).
It thus was another traffic-based allocation methodology, comparable to the Shared
Revenues Formula and some of the expense categories governed by the Shared Expenses
Formula.23
The plaintiffs do not contend that AT&T failed to follow the methodology for
allocating Shared Network Costs. That methodology therefore does not figure prominently
in this decision. The allocation methodology is significant only because it represents
another traffic-based allocation method.
vi. Other Expenses
The last methodology was a catchall for “Other.” It stated that “Manager may charge
Owner for other expenses not specifically identified herein to the extent the expenses
benefit Owner and provided that such expenses are charged at Manager’s actual cost.” Id.
23
Like the Shared Expenses Formula, the allocation methodology for Shared
Network Expenses authorized AT&T to
change the way it calculates the specified rate from time to time in order to
adapt to changing market and technological conditions, provided that the rate
is always calculated in a way that the cost Owner pays is in proportion to the
benefit Owner’s Business receives from the Shared Network relative to the
benefit Manager’s Business receives.
Id. This provision is not at issue in the case. In substance, it too closely resembles the
Modification Right, discussed below.
38
§ VI(B)(6). The Management Agreement thus contemplated direct identification of
“Other” expenses and the assignment of those expenses to the Partnership.
This methodology does not play a role in the case. Its principal significance lies in
the fact that the Management Agreement did not contain a similar catchall category for
revenue. The absence of such a category emphasizes that the Management Agreement
envisioned AT&T using the Shared Revenues Formula for revenue other than Outcollect
Roaming Revenues.
b. The Modification Right
As discussed previously, the Management Agreement framed the allocation
methodologies as mandatory obligations for AT&T to follow. Reinforcing that
requirement, after listing the methodologies, the Management Agreement stated that
“Manager shall charge or allocate revenue and expenses to Owner for each given period
using the above methodologies.” Id. § VI(B). The Management Agreement then explained
that the Manager was required to maintain a running intra-company balance between the
Partnership and the Manager based on the positive or negative cash flows from each period,
and the Manager would be charged or earn interest on the net amounts due to or from the
Manager “at the Prime Rate, compounded quarterly.” Id.
Although the Management Agreement plainly contemplated mandatory
methodologies, it also granted AT&T some flexibility. The Management Agreement
provided that
Manager may from time to time amend these allocation methodologies,
including, without limitation, the types of Shared Revenues and Shared
Expenses, statistics for calculating percentage sharing, and the applications
39
of premiums and discounts, to adapt to changing market and technological
conditions, provided that any new methodology fairly accounts for the
revenues and expenses of Owner’s Business.
Id. § VI(A) (the “Modification Right”).
Under this provision, AT&T could exercise the Modification Right if two conditions
were met. First, the change had to respond “to changing market and technological
conditions.” Id. (the “New Conditions Requirement”). Second, the new methodology had
to “fairly account” for the revenue and expense of Owner’s Business. Id. (the “Fair
Accounting Requirement”).
In addition to the two requirements built into the Modification Right, the
Management Agreement imposed a third requirement. Any new allocation method that
AT&T used be “no less favorable to the Owner than the allocation method used in prior
periods.” Id. Ex. A (the “No-Less-Favorable Requirement”).
The Modification Right figures prominently in the case. As will become apparent,
AT&T did not follow the Shared Revenues Formula. To defend its actions, AT&T relied
on the Modification Right.
c. The Intra-Company Roaming Provision
As discussed previously, the Management Agreement contained provisions
specifying how AT&T would allocate revenue associated with third-party roaming,
defined as a situation when a subscriber from another cellular carrier roamed on AT&T’s
network or an AT&T subscriber roamed on another cellular carrier’s network. The
Management Agreement also addressed intra-company roaming, which involved an AT&T
subscriber using the network outside of the subscriber’s home area.
40
The Switch Agreement had called for AT&T to assign intra-company revenue and
expense generated by roaming. JX 112 § 4.2(b). In a significant change, the Management
Agreement eliminated any direct charges associated with intra-company roaming. The
operative language stated:
Affiliate Roaming Activity. Owner acknowledges and agrees that
Subscribers of Owner’s Business shall be entitled to Roam in Manager’s
Area, and Subscribers of Manager’s Business shall have the right to Roam
on Owner’s System, without any direct charges.
MNSA § V(F) (the “Intra-Company Roaming Provision”). Any revenue generated by intra-
company roaming instead fell within the Shared Revenues Formula as revenue generated
by subscribers using the Entire Network. AT&T therefore was obligated to allocate a
proportionate share of the revenue to the Partnership based on the Traffic Ratio, then add
a premium to comply with the Premium Requirement.
G. AT&T Disregards The Management Agreement.
Despite implementing the Management Agreement, AT&T did not follow the
specified allocation methodologies. AT&T did not rescind or amend the Management
Agreement. AT&T did not specifically invoke the Modification Right. AT&T simply
developed its own internal allocation methodologies without considering the Management
Agreement. Those methodologies generally involved identifying items of revenue and
expense and assigning them to the Partnership whenever possible, even if the Management
Agreement specified a different allocation methodology.
By doing so, AT&T adopted an internally inconsistent system. For purposes of
running its own business, AT&T managed the Partnership’s assets with its own assets as
41
an integrated part of a single nationwide network. From an operational standpoint, AT&T’s
senior executives and regional managers treated the Partnership’s assets like any other part
of AT&T’s national footprint.24 And that is what the Management Agreement envisioned,
namely that AT&T-as-Manager would operate the Partnership as part of “a single
nationwide network.” MNSA at ’751.
For purposes of allocating revenue and expense to the Partnership, however, AT&T
treated the Partnership as an independent, stand-alone entity whose business had not
progressed beyond providing voice and basic data services to a limited group of subscribers
in a specific geographic area.25 To that end, AT&T’s Partnership Accounting Group sought
whenever possible to identify specific items of revenue and expense and assign them to the
Partnership, regardless of whether the Management Agreement specified a different
methodology.
24
Stephens Tr. 15; see Hall Dep. 51 (“Q: Were the partnership networks operated
separately and apart from AT&T’s Wireless networks? A: No.”); id. at 59–60 (“Q: So no
distinct[ion] between a partnership’s day-to-day activities as a business entity and AT&T
Mobility Wireless? A: Not to the customers. . . . Or the public, no. There was no
difference.”); Wages 2019 Dep. 146 (“Q: Do you agree that Mobility fully integrated the
partnership’s assets into its business and operated those partnership assets as a fully
integrated part of Mobility’s business? A: My general understanding, yes, I believe it was
fully integrated.”).
25
Stephens Tr. 22; see Teske Tr. 526–27 (“I think of an AT&T partnership as a mini
wireless business within the larger AT&T Mobility business.”); Hall Dep. 60 (“In the back
office, we had to make sure we did the accounting correctly for the separate legal entities
throughout the entire company.”).
42
During the relevant period, AT&T was a partner in scores of partnerships, including
the thirteen partnerships that are the subject of the Coordinated Action. Between ten and
fifteen accountants comprised the Partnership Accounting Group. They determined how to
assign or allocate revenue and expense and how to administer the methodologies that they
decided upon. They also interacted with AT&T’s outside auditors. Wages Tr. 117–18.
Wages oversaw the Partnership Accounting Group throughout the relevant period. Id. In
2004, he took over the group as Director of Financial Reporting and Technical Accounting.
In 2009, he was promoted to the position of Director of Finance for AT&T Mobility LLC,
the entity that managed AT&T’s wireless business, and Bradley Gifford took over as the
head of the Partnership Accounting Group. Id. at 191, 193. After his promotion, Wages
continued to play a supervisory role in the allocation of revenue and expense to AT&T’s
partnerships. Id. at 193. Throughout his tenure, Wages reported to Philip Teske, who was
an Executive Director of AT&T Mobility. Id. at 197; Teske Tr. 524. Teske reported to
Gregory Hall, the controller of AT&T Mobility. Hall Tr. 1083; Teske Tr. 526; Hall Dep.
50.
Wages could not recall anyone at AT&T ever reading the Partnership Agreement.
See Wages Tr. 216. He thought he might have read portions of the agreement from time to
time. See id. at 272–73. He struggled to answer questions about whether AT&T had agreed
to specific provisions in the Partnership Agreement, and he claimed at times that AT&T
had not agreed to specific provisions in the Partnership Agreement. See id. at 216–21.
Wages exhibited a similar lack of recollection about the Management Agreement.
During Wages’ direct examination at trial, AT&T’s counsel subjected him to a series of
43
leading questions about the Management Agreement, with Wages dutifully giving the
answers that counsel’s questions suggested. On cross-examination, it became clear that
Wages and the Partnership Accounting Group had not paid attention to the Management
Agreement when determining how to assign or allocate revenue and expense to the
Partnership. Wages admitted that he could not recall what the Management Agreement
said.26 He simply believed that the Management Agreement gave AT&T the ability to
manage and operate the Partnership. Id. at 221; see id. at 241–42, 274, 276, 278. That
understanding conflicted with express language in the Management Agreement, which
stated: “Nothing in this Agreement permits, or will be deemed to permit, Manager to
exercise de facto or de jure control over Owner or its operations.” MNSA § X(E).
Consistent with that loose and general understanding, Wages thought that AT&T
had “overarching[,] broad” power to identify and assign items or make allocations “as long
as we’re within the confines of the general ways that we run the business and it’s been
apparent that those are the general ways we’re running the business.” Id. at 273–74. As a
result, Wages did not seek guidance about whether AT&T could deploy a particular
allocation methodology unless AT&T began providing a new product or service and used
what Wages viewed to be assets that belonged to the Partnership. Id.
26
See id. at 242. In one telling example, Wages testified that there was never a
writing that defined the term “subscriber” for purposes of AT&T’s assignment or allocation
of revenue and expense to the Partnership. Id. at 349. The Management Agreement
contains a definition of “subscriber.” MNSA at ’751. Wages could not recall ever reading
it. Wages Tr. 374. He admitted that it was different than the definition of “subscriber” that
AT&T used when allocating revenue to the Partnership. Id. at 375, 378.
44
Wages and the Partnership Accounting Group generally believed that the
Partnership should receive revenue if AT&T used the Partnership’s assets to conduct
business. On behalf of AT&T, Wages characterized the Partnership’s assets as consisting
of either (i) classical assets, meaning the types of assets typically listed on a balance sheet,
and (ii) non-classical assets, meaning the types of assets not typically listed on a balance
sheet. Id. at 288–89.
From AT&T’s standpoint, the Partnership’s classical assets included things like
antennae, radio equipment, land and buildings, leases, and FCC-issued spectrum licenses
Id. at 288, 291. From AT&T’s standpoint, the Partnership’s non-classical assets included
its customers, customer service contracts, and information about or generated by the
Partnership’s customers, such as data concerning their use of the network or their geo-
location when using the network. Id. at 294, 318–19. AT&T came to its understanding
regarding the customer service contracts late in the case. When being deposed as AT&T’s
Rule 30(b)(6) witness on the subject, Wages did not know if the contracts between the
Partnership’s subscribers and the Partnership were assets of the Partnership. See id. at 327–
28 (counsel for plaintiffs cross-examining Wages with deposition testimony, where he
testified, “I think of the customers as being assets of the partnership. The contracts, I don’t
know if they are or not”).
Using their concepts and understandings, Wages and the Partnership Accounting
Group sought to assign to the Partnership other types of revenue that they believed should
be associated with the Partnership’s business. In making these determinations, however,
Wages and the Partnership Accounting Group took a narrow view of what constituted the
45
Partnership’s business. They viewed the business of the Partnership as limited to “wireless
activity,” meaning activity involving “cellular phones, voice, data, SMS text, those things
. . . we do with our phones.” Id. at 395–97. As a result, they believed that the Partnership
was “not entitled to participate in the profits of every AT&T business venture that used
partnership assets.” Id. at 406.
For activities not involving their definition of wireless activity, Wages and the
Partnership Accounting Group believed that the Partnership only was entitled to be “made
whole” for AT&T’s use of its assets. Id. They did not think that the Partnership was entitled
to an allocation that would enable it to receive a share of the profit from those businesses.
Id. And they did not think that more limited right to be “made whole” always applied; they
thought it applied only “in certain instances.” Id.
The different approach that Wages and the Partnership Accounting Group used was
not written down anywhere. Id. at 397. AT&T’s Partnership Accounting Group also did
not think they had any reason to seek Executive Committee approval for their
determinations. Hall Tr. 1096.
That unwritten understanding of the Partnership’s business differed significantly
from the Partnership Agreement, which defined the Partnership’s business as involving
“the business of constructing, owning, investing in and operating, directly or indirectly,
nonwireline cellular telephone systems, including the system for the Market and for other
areas and MSA’s [sic] and to engage in related activities in the communications business
in such form as the Partnership shall determine.” PA § 1.3. It also was contrary to the
language of the Management Agreement, which defined the Partnership’s business and
46
AT&T’s business in parallel terms. The Management Agreement envisioned that AT&T
and the Partnership were in the same business—operating and benefiting from the Entire
Network.
The Shared Revenues Formula therefore contemplated aggregating all revenue
derived from any subscriber’s use of the Entire Network, then allocating to the Partnership
a portion of that revenue based on its share of network traffic. Instead, Wages and the
Partnership Accounting Group continued to use a subscriber-based model to allocate
revenue. They treated the Partnership as having a specific number of subscribers based on
the NPA-NXX numbers associated with the Partnership. See Wages Tr. 176; see also
Stephens Tr. 64 (testifying that the partnerships had “specific customers tied, for example,
to those partnerships”). The Partnership Accounting Group then identified and assigned to
the Partnership the revenue that its subscribers generated. Wages and the Partnership
Accounting Group did the same for expenses.
H. The Reliability Of AT&T’s Accounting Records
When Wages, the members of the Partnership Accounting Group, and their
superiors assigned or allocated revenue and expense to the Partnership, they used their
own, internal, decisional paradigm. Wages Tr. 397. Within the narrow confines of that
worldview, Wages, the members of the Partnership Accounting Group, and their superiors
attempted to treat the Partnership fairly. They also sought to identify and assign or allocate
revenue and expense accurately.
Rather than following the Management Agreement, the Partnership Accounting
Group believed it had the discretionary authority to determine how to identify and assign
47
or allocate revenue and expense to the Partnership. When creating, applying, and reviewing
the results of its methods, the Partnership Accounting Group attempted to determine “the
fair and reasonable way” to assign or allocate revenue and expense to the Partnership.
Wages 2020 Dep. 189–90. When making decisions, AT&T’s accountants looked for “the
most directly causal metric” to use to assign or allocate an item. Hall Tr. 1023. Wages
testified that AT&T operated under the principle that a “tie goes to the minority partner if
we didn’t have a . . . better, clearer, way to differentiate” among available methods. Wages
Tr. 513.
The Partnership Accounting Group made significant efforts to identify and assign
or allocate revenue and expense consistently and accurately. Beginning in 2008, the
Partnership Accounting Group held semiannual sign-off meetings where employees and
executives discussed issues and worked on solutions. Id. at 128–29, 493–94, 502–03; Teske
Tr. 531–32; Hall Tr. 1034; see JX 1296; JX 1561; JX 1642; JX 1761; JX 2645. The
Partnership Accounting Group kept minutes of the sign-off meetings. When the meeting
resulted in a new procedure or the resolution of a disputed issue, a series of individuals,
including Hall, Teske, and Wages, had to approve the decision. See 1296 at ’737.
AT&T’s outside auditors reviewed and gave feedback on AT&T’s methods. See
Stephens Tr. 12–13. As the auditors for AT&T’s corporate organization, they had insight
into the reliability and fairness of AT&T’s methodologies from an accounting perspective.
See Hall Tr. 1019–20. AT&T’s outside auditors also audited AT&T’s partnerships. Id. at
1020–21. The Partnership did not require an outside audit, but AT&T conducted audits for
48
all of its partnerships, and AT&T “used [the] same principles, methodologies, on all the
partnerships.” Stephens Tr. 23–24.
Other AT&T executives and employees provided input to the Partnership
Accounting Group. Id. at 25; Teske Tr. 530. AT&T’s regional business operations directors
oversaw regional AT&T market clusters and were tasked with supporting and monitoring
the market-level entities within their territories, including any partnerships. Wages Tr. 130.
Each regional business operations director had to explain any variations between the
budget projections and the actual results from year to year. Id. The compensation of the
regional business operations directors varied based on the financial performance of their
market clusters. Hall Tr. 1023–24. The regional business operations directors therefore
were “very interested” in ensuring that AT&T’s methodologies accurately identified and
assigned or allocated revenue and expense to the market-level entities, including any
partnerships. Id. at 1024; accord JX 2419 at 61–62.
The finance teams for AT&T’s various business units also provided the Partnership
Accounting Group with feedback about the “quality and accuracy” of its methods. Hall Tr.
1024–25. The finance teams created budgets and competed for funding based on the results
of projects they sponsored, which gave them an incentive to make sure that revenue and
expenses were identified and assigned or allocated accurately. Id. Employees responsible
for regional sales and marketing had similar incentives. Id. at 1025.
To memorialize the assignments and allocations of revenue and expense, AT&T
maintained a complex general ledger system that relied on both automatic and manual
allocations. See JX 2145 at 19–23; JX 2610. Automatic or “mass” allocations followed a
49
procedure in which “allocated revenues and expenses were initially booked to certain
headquarter-level companies and then allocated to the market-level companies, including
[AT&T’s partnerships], on a monthly basis.” JX 2403 at 2; see JX 2610. Mass allocations
distributed revenue and expense down to the Partnership using allocation rules created by
AT&T’s GL Expense Group. Woodall Dep. 104, 127–28. The Partnership Accounting
Group then allocated revenue and expense to the Partnership based on the minority
ownership percentage of the Partnership, which AT&T tracked continuously. Id. at 103–
04.
The Partnership Accounting Group also made “manual journal entries,” meaning
entries in AT&T’s accounting system made on a one-off basis by a human accountant. JX
2403 at 5; see Hall Tr. 1040. AT&T used a “multi-step approval process” for manual
journal entries:
• The preparer of a manual journal entry had to attest that the entry was prepared
correctly and appropriate to record in the applicable business month based on the
supporting documentation.
• An approver also had to sign the manual journal entry to certify that it was correct,
timely, and appropriate for the applicable business month. The approver could not
be the same person as the preparer and had to be a second-level manager or higher.
• A manual journal entry could not be recorded in the general ledger of a Mobility
entity without the approval of the individual in charge of the general ledger for that
entity.
• If a manual journal entry was prepared by a business unit other than the Controller’s
unit, then it had to be approved by the Finance group of that business unit.
JX 2145 at 22.
50
Until 2009, the process of making manual journal entries “was a paper process”
with documentation “maintained in binders in whichever accounting organization prepared
the entry.” Id. at 21; see JX 2403 at 6. Starting in 2009, AT&T began transitioning to a
computer-based system. JX 2145 at 21; JX 2403 at 5. The transition was not yet complete
when the Freeze-Out took place. See JX 2145 at 21–23.
As a result of these careful procedures, AT&T’s accounting records accurately
reflected the revenue and expense that AT&T believed should be identified and assigned
or allocated to the Partnership. AT&T’s accounting records also accurately reflected the
methodologies that AT&T used to identify and assign or allocate revenue and expense to
the Partnership. It is not the case, for example, that AT&T decided that the Partnership
should receive a particular type of revenue, and then the Partnership Accounting Group
failed to allocate that revenue to the Partnership. Nor is it the case that the Partnership
Accounting Group decided to use a particular methodology to allocate revenue to the
Partnership, then implemented it errantly or inaccurately.
Because AT&T’s accounting records present an accurate picture of how AT&T
treated the Partnership, the absence of a particular entry for a type of revenue in the
accounting records establishes that AT&T believed that the Partnership was not entitled to
receive a share of that type of revenue. The absence of evidence of a particular allocation
methodology similarly demonstrates that AT&T did not use that methodology to allocate
revenue to the Partnership.
51
I. The Data Revolution
By 2007, the market for wireless voice communications was relatively mature, and
the double-digit subscriber growth of the early 2000s had leveled off to single digits. JX
526 at ’022; see JX 279 at 25. Wireless providers began to see stronger growth in data
services, driven by demand for applications such as downloadable music, games, ring
tones, and text and photo messaging. JX 526 at ’022; see JX 263 at 20; JX 279 at 4. The
growth of data services opened up new revenue streams, including mobile internet
advertising. JX 526 at ’022.
AT&T planned to capitalize on these changes and expand its wireless business.27 In
June 2007, AT&T announced the appointment of Randall Stephenson as its new CEO. JX
282. The press release quoted Stephenson as saying, “Today’s AT&T is a brand-new
company, with wireless at the heart of what we do, supported by an unmatched heritage of
innovation and service.” Id. AT&T and other telecommunications companies viewed
wireless capabilities as a “key driver” for the industry’s future. Lurie Dep. 23.
A cornerstone of AT&T’s plan was the introduction of the Apple iPhone, which
launched on June 29, 2007. JX 285. AT&T was the exclusive wireless carrier for the
iPhone. See id. AT&T correctly predicted that the iPhone would “transform the way people
think about wireless communications.” Dkt. 279 at 4; see Lurie Dep. 31. At an analyst
27
By this point, SBC had completed its transformation into AT&T. SBC also had
acquired Bellsouth, resulting in Cingular becoming a wholly owned subsidiary of the new
AT&T. See JX 279 at 19; JX 526 at ’016. AT&T caused Cingular to change its name to
AT&T Mobility, LLC. PTO ¶ 50; see JX 287; JX 526 at ’016.
52
conference at the end of 2007, AT&T touted the “huge potential in wireless data,” a
business that was quadrupling every year. JX 325 at 11–12. AT&T’s customers had used
significantly more data after the introduction of the iPhone. Id. at 12.
To expand its wireless capabilities, AT&T paid $2.5 billion in October 2007 to
purchase additional wireless spectrum covering “an area which is home to around 196
million people . . . including 72 of the 100 biggest US cities.” JX 319. In the press release
announcing the purchase, an AT&T executive stated that “[c]ustomer demand for mobile
services, including voice, data and video, is continually increasing.” Id.
On January 24, 2008, AT&T reported its earnings for the fourth quarter of 2007.
See JX 342. AT&T announced “record wireless gains” that included “record gross
subscriber additions, reduced subscriber churn, solid mid-teens percentage growth in
revenues and robust growth in operating income.” Id. at 1, 3. Year over year, AT&T
reported 57.5% growth in revenue from wireless data services, which was “driven by
increased adoption of smart phones and 3G wireless devices.” Id. at 4. AT&T viewed data
services as a promising new source of revenue growth, because growth from wireless voice
subscribers continued to mature. See JX 359 at 30 (average voice service revenue per user
for 2007 declined 4.1% while average data service revenue per user grew 46.9%); see also
Stephens Tr. 36 (explaining that during the years leading up to the Freeze-Out, “data traffic
on our networks was growing dramatically”).
J. AT&T’s Efforts To Monetize Its Network
With the importance of data and other services blossoming, AT&T took practical
steps to monetize its network. Those steps included launching new businesses. The record
53
on these topics is more abbreviated than it should be due to positions AT&T took in
discovery.
As part of its efforts to monetize its network, AT&T realized that a customer’s
location information and other data that customers generated by using the Entire Network
had value and could be monetized. During the period relevant to this litigation, the principal
method of identifying a customer’s location was by triangulating from multiple cell sites.
Wages Tr. 155. During the relevant period, AT&T maintained a privacy policy under
which AT&T only provided its customers’ location-based data to service providers if they
opted into that service. Id. at 153. In addition, whenever a subscriber made a call or used
AT&T’s system with a device, the system would generate information about the use,
including the customer name, NPA-NXX number, date, start time of usage, end time of
usage, connection type (voice or data) duration or kilobytes consumed, and destination. Id.
at 136–37.
Wages and the Partnership Accounting Group did not view either location
information relating to Partnership subscribers or the other types of information generated
on AT&T’s system by Partnership subscribers as proprietary information belonging to the
Partnership. See id. at 146–47, 156–57. They decided that AT&T could use that
information in its business, as long as AT&T shared that revenue to some degree with the
Partnership. Id. at 147, 158.
AT&T did not have any formal process for identifying new revenue sources that
could generate revenue that would need to be allocated to AT&T’s various partnerships.
Wages might hear about a new line of business, read about it, or be contacted by someone
54
else in AT&T. See id. at 175. If Wages or one of his colleagues learned about a new line
of business and thought it might be something where the partnerships should participate,
then they would consider it and make a decision. See id. at 175–76. The process was catch-
as-catch-can. See id. at 312 (Wages testifying that he was responsible “to know about what
I could be aware of”).
1. The AT&T Navigator Application
During the relevant period, AT&T launched the “AT&T Navigator” application, a
location-based navigation service, through a contractual relationship with TeleNav, Inc.
See JX 3867. AT&T made the AT&T Navigator available to iPhone users in 2009. See JX
493. By then, AT&T Navigator had become one of AT&T’s “most popular and best-
performing apps.” JX 493.
Wages could not recall if he knew about the TeleNav contract during the relevant
period. See Wages Tr. 431. He believed that the Partnership Accounting Group assigned
revenue related to TeleNav on a subscriber-by-subscriber basis. If a subscriber with an
NPA-NXX number assigned to the Partnership purchased the TeleNav product, then
AT&T assigned that revenue to the Partnership. Id. at 439–40, 494–45. AT&T did not treat
the revenue from the TeleNav contract as Shared Revenues for purposes of the Shared
Revenues Definition and Shared Revenues Formula.
2. The Geolocation Aggregators
During the relevant period, AT&T began selling information about its subscribers
to “geolocation aggregators” such as LOC-AID Technologies, Inc., and Zumigo
Corporation. See JX 1435. A geolocation aggregator purchases location data from cellular
55
carriers that is derived from their subscribers’ cellular phone usage. The aggregator then
sells the information to companies who provided services using the data. See Wages Tr.
442.
During the relevant period, Wages and the Partnership Accounting Group did not
know about AT&T’s sales of geolocation information to aggregators. Wages did not know
about AT&T’s contract with LOC-AID until November 2020, when AT&T proffered him
as its Rule 30(b)(6) witness on that topic. Id. at 445.
As a result, Wages and the Partnership Accounting Group did not determine whether
the Partnership was entitled to any revenue from the LOC-AID contract. Id. Departing from
the view he said he held for purposes of the TeleNav contract, Wages agreed that
geolocation information regarding subscribers assigned to the Partnership belonged to the
Partnership for purposes of the LOC-AID contract. Id. at 443. Wages also agreed that the
revenue from the contracts with the location aggregators fell within a strict reading of the
Shared Revenues Definition. Id. at 449.
The agreement with LOC-AID that is in the record was executed in September 2010,
just one month before the Freeze-Out. See JX 1435 at 56. AT&T projected revenue of only
$100,000 in 2010. See JX 3828 at 23. AT&T actually generated only $952 in revenue from
the LOC-AID contract in 2010. JX 2971, “2010 Pivot” tab, row 187.
3. The Commercial Network Agreements
During the relevant period, AT&T entered into commercial agreements with
companies like Amazon, General Motors, and Garmin (the “Commercial Network
Agreements”). Under those agreements, commercial partners contracted with AT&T to use
56
its network. For example, Amazon entered into a Commercial Network Agreement to use
AT&T’s network for its Kindle product. General Motors entered into a Commercial
Network Agreement to use AT&T’s network for its On-Star vehicle security system. And
Garmin entered into a Commercial Network Agreement to use AT&T’s network for its
navigation devices. This decision refers to the various devices—other than phones—that
connected to AT&T’s network as “Connected Devices.”
AT&T pursued other Commercial Network Agreements that potentially covered a
wide range of commercial applications, including consumer products, fleet management
systems, building automation systems, cargo monitoring systems, medical devices, and
other types of “machine-to-machine” communications. See JX 2166 at 24; JX 2090 at 29.
There is evidence that AT&T entered into Commercial Network Agreements with
particular businesses, such as AT&T’s announcement in November 2009 that it had entered
into “a five-year, $2.6 million contract for wireless services and applications to United
Road Services, Inc., a leading U.S. provider of vehicle logistics.” JX 620.
Under the Commercial Network Agreements, AT&T received data service revenue
from Connected Devices based on “data package rate structures,” which involved either
“(1) a fee per kilobyte or megabyte; (2) a monthly access fee plus a reduced rate per
kilobyte or megabyte; or (3) a monthly fee for a specified amount of data plus a fee for
kilobyte or megabyte of data used in excess of that amount.” JX 2166 at 33–34; see JX 252
at ’002–06 (tiered pricing plan for contract with KORE Telematics Inc., a reseller of
wireless data services); JX 2090 at 39–40 (tiered pricing plan with monthly recurring
charges for contract with Spacenet Inc.). AT&T allocated revenue from Commercial
57
Network Agreements to the Partnership “based upon a weighted average of kilobytes” for
each geographical area. JX 2412 at 13–14, 18. AT&T calculated allocation factors every
month and maintained detailed usage statistics for each market, including the Partnership’s
market. See JX 2409; JX 2412 at 18; see also Hall Tr. 1023 (commercial Connected Device
revenue was allocated based on usage). AT&T then applied the allocation factor to the total
revenue generated by each commercial Connected Device subscriber each month. See JX
2407; Wages Tr. 189; see also JX 2419 at 54–59, 62–63.
The record indicates that AT&T also received other forms of compensation and
streams of revenue under the Commercial Network Agreements. AT&T did not allocate a
share of those amounts to the Partnership.
4. Services To Law Enforcement And Other Governmental Agencies
During the relevant period, AT&T also provided services to law enforcement and
other government agencies that involved monetizing Partnership information.28 AT&T
repeatedly refused to provide information about the revenue it generated by providing
services to law enforcement and other government agencies, resulting in a series of motions
and rulings. The court ultimately ordered AT&T to identify “on a year-by-year basis . . .
the gross consideration that AT&T received from monetizing Partnership Information to
28
See Wages Tr. 166–67. This decision does not consider whether AT&T sold
information to government entities involved in national security activities. The plaintiffs
agreed to waive any claims involving that issue. Dkt. 573 Ex. A. The record establishes
that AT&T sold information to other government entities that were not involved in national
security activities. This decision only considers the latter aspect of AT&T’s business.
58
government entities.” Dkt. 283 ¶ 16. In response, AT&T disclosed the “total revenues and
expenses of one or more business units within AT&T Corp.” JX 2416 at 1 (emphasis
added); see Wages Tr. 477–81. AT&T stated that the figures it disclosed were
the total revenues and expenses from certain AT&T Corp. sales
organization[s] that sell many different types of goods and services to the
federal government, including internet services, telecom services, consulting
services, engineering and design service, etc. Accordingly, the revenues and
expenses identified above also include revenues and gross operating margin
for sales of goods and services to the federal government wholly
unresponsive to the Plaintiffs’ pled and otherwise stated allegations
regarding Defendants’ monetization of partnership assets or information.
JX 2416 at 2. AT&T represented that “[f]urther isolation and presentation of revenues and
operating margins is not practical, however, in light of the risk of disclosure of information
the Company is not free to disclose.” Id. The aggregate revenue figures thus did do not
show the extent to which AT&T profited by selling Partnership subscribers’ information
to government entities. See id.; JX 2567, “Para 16 Funnel” tab.
AT&T concedes that it generated revenue by selling Partnership subscriber data to
government entities under contractual relationships with those entities. See JX 2403; JX
2416. AT&T concedes that it booked the revenue from contracts with government agencies
at the corporate level and that the resulting revenue was “not allocated to AT&T Mobility
companies, including [AT&T’s partnerships].” JX 2416 at 2. The Partnership thus did not
receive any benefit from AT&T’s contracts with government entities.
5. Handset Insurance
In addition to new services, AT&T operated a business between 2002 and 2009 that
offered handset insurance to cover customers’ phones against loss or damage. See Wages
59
Tr. 182–83. Wages admitted that the handset insurance business was “[d]efinitely
associated” with providing wireless communications services. Id. at 413, 420–21. But
Wages did not think it was part of his duties to advocate for AT&T’s partnerships to receive
a share of the revenue from the handset insurance business. Id. at 426.
AT&T offered the insurance through a wholly owned subsidiary named Peachtree
Insurance Company, Ltd. Employees in the Partnership’s AT&T-branded stores offered
the handset insurance to customers. If a customer chose to participate, then the employee
in the Partnership’s store facilitated the subscriber’s enrollment in the program. See JX
2591 at 5. Under the program, the customer paid a monthly fee to an AT&T affiliate for
insurance to “cover damage to, or loss of, their cell phones.” Id. The AT&T affiliate
received the payments from the customers, paid the administrative costs, satisfied claims,
and retained the net profits.29
From the beginning of the program until 2005, AT&T did not provide any
compensation to the Partnership for using Partnership’s assets in the handset insurance
business. JX 2403 at 11. After AT&T’s outside auditors questioned that decision, AT&T
adopted a new system: If an employee whose compensation was identified as an expense
for the Partnership sold a handset, and if the employee received a commission for the sale
as an incremental component of compensation expense, then AT&T credited the
29
Technically, a third party administered the insurance program for AT&T, with
the AT&T affiliate acting as reinsurer. JX 2403 at 9–12. The distinction is not material to
the analysis.
60
Partnership for the commission expense.30 AT&T did not compensate the Partnership for
the use of its other assets, such customer relationships, customer lists, and customer
information. See JX 3866 at ’315; Wages Tr. 418. AT&T did not allocate revenue and
expense to the Partnership so that it participated in the benefits of the business. Wages Tr.
415, 419.
K. AT&T Considers Eliminating The Minority Partners.
With data usage expected to balloon, AT&T began to explore ways to eliminate the
minority partners. In August 2007, Chris Reeves, an executive in AT&T’s Corporate
Development department, gave a presentation to Teske and Wages in the Partnership
Accounting Group.
Reeves’ presentation was titled “Partnership Relations - Restructuring Update and
Buyout Analysis.” JX 310. The presentation identified fifty-one partnerships where AT&T
could benefit by eliminating the minority partners. See id. at ’765–67. The presentation
30
At trial, Wages did not know if the commission was paid “specifically to the
employee” who sold the insurance or “if it was a commission to . . . recognize the benefit
to the partnership.” Wages Tr. 418. The financial statements for Bradenton mention that
handset insurance was offered to subscribers as an optional feature, but do not explain how
Bradenton earned revenue from handset insurance or break out handset insurance as a
separate line item. See JX 541 at 3, 8. The financial statements do show commissions to
Bradenton employees as an expense, and the logical inference is that AT&T simply
reimbursed the partnerships for the sales commissions that the partnerships paid to their
employees. See id. at 3, 17. Regardless, the record makes clear that AT&T did not
compensate the Partnership for the use of its customers. JX 3866 at ’315. But see JX 2591
at 5 (2005 memorandum from Ernst & Young LLP asserting that commission reflected
what AT&T management believed “would be a reasonable approximation of amounts
earned by the partnership for use of its subscriber in the handset insurance plan”).
61
explained that “[a] buyout today will be much less expensive than 1 or 2 years down the
road given OIBDA growth rates.” Id. at ’765.31 Among a list of “Ongoing Issues” that
AT&T faced, the presentation listed the “[i]nability to capture data roaming revenues
within the partnerships.” Id. at ’762.
In early 2008, Reeves gave a presentation to AT&T’s CFO, Pete Ritcher, about
buying out the minority partners. JX 344; Teske Tr. 535. The presentation stated that
“[p]ending asset mergers and accelerating valuations provide an opportune time to buyout
certain minority partnerships.” JX 344 at 2. The presentation contemplated an acquisition
strategy that “would focus on the 18 legacy AT&T wireless partnerships” where AT&T
could “execute a purchase without partner consent.” Id. By acquiring the minority partners’
interests, AT&T projected that it could “[e]liminate[] $186M of Distribution and Dividend
payments over 10 years” or “$113M on a DCF basis.” Id. at 2, 4.
The presentation explained that the minority partners’ lack of “knowledge of the
industry and historically poor relations” had led to “consistent conflict on issues such as
CAPEX spending, and allocations.” Id. at 3. AT&T identified “Internal Systemic Barriers”
that affected relations with its partnerships, including AT&T’s “[i]nability to track data
roaming” and the “[i]nconsistent booking of revenues, expenses and allocations.” Id. at 4.
31
“OIBDA” means “operating income before depreciation and amortization.” See
Teske Tr. 583. It is “essentially the same” as the more familiar “EBITDA,” a profitability
metric that measures “earnings before interest, taxes, depreciation, and amortization.” Id.
62
Both issues resulted in the “extensive use of accounting and field personnel to resolve
ongoing issues.” Id.
The presentation contemplated buyouts at eighteen partnerships. At a total cost of
$100 million, the buyouts would create “total savings of $243M in perpetuity.” Id. at 7.
The presentation observed that for those partnerships, “[v]alue is projected to increase 60%
from 2007 to 2010 based on Mobility OIBDA growth rates,” equivalent to an OIBDA
compound annual growth rate of 18%. JX 344 at 8. The buyouts would enable AT&T to
“retain [the] lift in value driven by [the] projected growth of the business.” Id. The
presentation noted that the partnership assets would be “acquired at a discount to future
growth.” Id. at 9.
AT&T ultimately decided not to buy out the minority partners in 2008. AT&T
preferred to buy additional spectrum and to invest in its network. Teske Tr. 535–36.
As suggested by its spectrum purchases, AT&T remained bullish on the prospects
for growth in data usage. On October 15, 2008, AT&T announced the appointment of
Glenn Lurie to be the head of its Emerging Devices Organization. JX 401. Lurie stated that
“[h]igh speed wireless broadband service can enhance a huge variety of gadgets.” Id. Lurie
stated that there also were “a host of exciting new applications – from social networking to
navigation to location-based solutions – being developed that will rely on wireless
connectivity.” Id.
L. AT&T Again Considers Eliminating The Minority Partners.
In late summer and fall 2009, AT&T again considered eliminating the minority
partners. Teske Tr. 536. The economic rationale remained compelling, and the buyouts
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would have the additional benefit of simplifying AT&T’s internal corporate structure. Over
the preceding decade, AT&T had pursued an effort known as Project LESS that sought to
reduce the number of entities in the AT&T corporate family. Under the auspices of Project
LESS, AT&T had eliminated hundreds of legal entities. Stephens Dep. 153–54.
The Project LESS team was the logical group to spearhead the buyouts of the
minority partners. The effort was by Debbie Dial, an executive who handled special
projects for John Stephens, AT&T’s CFO. Stephens Tr. 34; Teske Tr. 536–37; Wages Tr.
191–92.
Dial directed Teske, Wages, and others to compile information about the
partnerships and assess the potential savings achievable under various streamlining
options. See Teske Tr. 536–38; Wages Tr. 190–91,193–95; JX 587. The team based its
analysis on the “Minority Entity Acquisition Summary” that Reeves prepared in January
2008. See JX 518; JX 547.
Contemporaneously, AT&T’s senior executives were reviewing AT&T’s strategy
for mobile applications and emerging devices. See JX 532. AT&T executives viewed
initiatives in those areas as critical to “provid[ing] AT&T a stronger foothold in the value
chain” and enabling AT&T to compete with the likes of Apple, Microsoft, and Google. Id.
at 5. The strategy depended on “[l]everag[ing] and expos[ing] AT&T assets to promote
application innovation.” Id. at 5. AT&T believed that by using its network to play “a
meaningful role in the delivery of applications to AT&T subscribers,” AT&T would protect
its competitive position in the rapidly changing telecommunications sector. Id. AT&T
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projected that its business plan would “drive a 10% uplift in AT&T data revenue,” equal
to $8 billion, by 2014. Id. at 7.
In November 2009, the Project LESS team presented its findings on the possibility
of eliminating the minority partners. JX 616. The team described multiple “Current
Challenges,” including:
• Multiple audit/operational processes, inconsistent with the manner in which
management runs the business
• Cost allocation and operational issues of accounting for distinct partnerships
• Additional processes to account for non-wireless activities in partnerships
Id. at ’935 (formatting added). The presentation evaluated three alternative structures: a
national asset roll-up, regional asset roll-ups, and minority buyouts. Id. at ’937. The team
strongly preferred the minority buyouts, describing it as the “[s]traightfoward/simple
alternative” that would (i) “[a]void[] litigation risks associated with business unit
integration,” (ii) provide a “[c]lear legal path forward,” and (iii) “[e]liminate 360
ownership stakes” associated with the entities. Id. at ’638.
After the presentation, Stephens directed Teske and Greg Hall, Mobility’s
controller, to engage a valuation firm to estimate the value of the minority partners’
interests. Teske Tr. 544–45. In February 2010, AT&T retained PricewaterhouseCoopers
LLP (“PwC”) to value the partnerships.
In April and May 2010, PwC sent AT&T its final valuation analyses. PWC valued
the Partnership at $219 million. JX 1039 at 41. AT&T used PwC’s valuation to set the price
it paid in the Freeze-Out. PTO ¶ 16.
65
After receiving the valuations from PWC, Stephens met with Stephenson, AT&T’s
Chairman and CEO, to obtain his approval for eliminating the minority partners. Stephens
Tr. 34–35; Teske Tr. 575. In connection with the meeting, AT&T executives sent
Stephenson a memorandum that quantified the administrative, audit, and tax savings that
AT&T would achieve. JX 3514. The memorandum also identified a benefit in the form of
a “[d]ecreased distribution payment stream.” Id. at ’575. The memorandum conspicuously
failed to quantify the decreased payment stream. But AT&T necessarily knew the value of
the payment stream, because AT&T observed that eliminating the minority partners “will
be slightly accretive to AT&T’s earnings and free cash flow per share.” Id.
On June 3, 2010, Stephenson approved the Freeze-Out. JX 3514. Id. at ’575–76.
After receiving Stevenson’s approval, AT&T formed Holdings as a new subsidiary to
effectuate the Freeze-Out. See PTO ¶¶ 53–54. AT&T transferred its interest in the
Partnership to Holdings. JX 1273; JX 1285.
M. AT&T Eliminates The Minority Partners.
In July 2010, AT&T offered to purchase the minority partners’ interests at a 5%
premium above the pro rata value determined by PwC. For the Partnership, PwC’s
valuation worked out to $2,190,000 for each 1% of the Partnership. AT&T offered to pay
$2,299,500 for each 1% interest. See JX 1309; JX 1316; JX 1319.
The offer letter informed the minority partners that if they did not accept AT&T’s
offer, then AT&T would convene a meeting of the partners and vote its interest in favor of
selling the Partnership’s assets and liabilities at the value determined by PwC. The letter
explained that after the sale, the Partnership would be dissolved and each remaining partner
66
would receive its pro rata share of the purchase price. PTO ¶ 59. In other words, minority
partners who declined the buyout offer would receive their pro rata share of PwC’s
valuation, rather than a 5% premium over that valuation.
Some minority partners accepted AT&T’s offer and sold their interests to AT&T.
See, e.g., JX 1365. Others did not. PTO ¶ 61.
In September 2010, AT&T caused an affiliate named New Salem Cellular
Telephone Company LLC (“New Salem”) to send an offer to the Partnership to purchase
all of its assets and assume all of its liabilities for a cash payment of $219 million. JX 1433;
see PTO ¶ 63. Next, AT&T called a special meeting to vote on the offer. JX 1452; JX 1453;
see PTO ¶ 64.
On October 12, 2010, the Partnership held a special meeting to consider the Freeze-
Out. At the meeting, AT&T voted its interest in favor of the Freeze-Out. JX 1485; see PTO
¶ 65. The minority partners in attendance voted against the Freeze-Out. JX 1485; see PTO
¶ 66.
Immediately after the vote, AT&T caused the Partnership to enter into an asset
purchase agreement with New Salem. JX 1489. Immediately after that, the Partnership and
New Salem entered into a bill of sale and assignment and assumption agreement to
effectuate the transfer of the Partnership’s assets and liabilities. JX 1526. Having done so,
Wages executed a “Statement of Dissolution,” also dated October 12, 2010, reciting that
the Partnership had dissolved as a result of completing a sale of all of its assets. JX 1493.
That same day, AT&T sent checks to the minority partners reflecting their share of a
liquidating distribution in the amount of the sale price. JX 1534.
67
Roughly contemporaneous with the Freeze-Out, AT&T engaged in similar
transactions at five other partnerships. Over the following months, AT&T engaged in
similar transactions involving seven additional partnerships, bringing the total number of
freeze-outs to thirteen.
N. Litigation Commences.
On August 26, 2011, former minority partners in the Partnership sent AT&T a letter
asserting that AT&T had breached the Partnership Agreement when engaging in the
Freeze-Out. JX 2030; see PTO ¶ 70. The former minority partners demanded that AT&T
“cure its material defaults” within thirty days. JX 2030 at 2; see PTO ¶ 70.
On September 23, 2011, AT&T filed a lawsuit seeking declaratory relief against the
nine former minority partners in the Partnership. C.A. No. 6886-VCL, Dkt. 1. AT&T’s
complaint sought broad declarations absolving AT&T of any contractual or fiduciary
liability for its actions. Id. ¶ 59; PTO at 3. On October 4, 2011, five of the minority partners
in the Partnership filed suit against AT&T. C.A. No. 6908-VCL, Dkt. 1.
Either AT&T or the minority partners or both filed lawsuits addressing the
transactions involving the other partnerships. In total, fifteen lawsuits were filed involving
thirteen different partnerships. Because of the manner in which the lawsuits were filed,
minority partners appeared as the plaintiffs in some civil actions and as defendants in
others. AT&T occupied the converse positions. To achieve a measure of consistency, the
court realigned all of the minority partners as plaintiffs and AT&T and its affiliates as
defendants.
68
As a result of the court’s orders, the following minority partners are the plaintiffs
for purposes of claims relating to the Partnership. The chart identifies their minority interest
in the Partnership at the time of the Freeze-Out.
Salem Minority Partners Interest
Alan R. Bell 0.3420%
Michael T. Bowers 0.1710%
The Ronald J. Gotchall Living Trust (Rosa Lee 0.1710%
Gotchall, Trustee)
The Rosa L. Gotchall Living Trust (Ronald J. 0.3420%
Gotchall, Trustee)
Om Parkash Kalra 0.3420%
Ellen M. Martin 0.1710%
Roam-Tel Partners 0.3420%
PTO ¶ 9. Collectively, the minority partners held a 1.881% interest in the Partnership, with
AT&T holding the remaining 98.119% interest. See PTO ¶ 10. Based on the consideration
that AT&T paid for the assets and liabilities of the Partnership, the plaintiffs received
$4,119,390 in the aggregate.
O. The Coordination Order
Initially, the actions proceeded separately, albeit with the parties making parallel
moves across their multiple lawsuits. In June 2012, AT&T filed motions to dismiss the
claims which asserted that AT&T failed to comply with the Partnership Agreements when
effectuating the freeze-outs. E.g., C.A. No. 7030-VCL, Dkt. 16. In March 2013, the court
issued a series of orders granting the motions. In summary, the court held that AT&T had
69
the power under the Partnership Agreements to effectuate the freeze-outs. E.g., Dkt. 64 ¶¶
8–9.
In June 2013, the court entered a stipulated order coordinating the actions for
purposes of pre-trial discovery under the caption of the Coordinated Action. The actions
were not formally consolidated. The court directed the parties to make all filings in the
Coordinated Action and designate them as pertaining to all of the coordinated actions or to
specific cases.
P. Discovery
Discovery unfolded over the better part of eight years. During the process, AT&T
aggressively resisted discovery, even after the court ruled against AT&T on specific issues.
As the court noted on several occasions, AT&T was the most obstructive litigant that this
judge has ever seen, whether in private practice or on the bench.32
32
See, e.g., Dkt. 283 ¶ 1 (“The court has considered in particular the defendants’
attempts to portray as excessive and unfounded the discovery that the plaintiffs served in
response to the guidance the court provided, the numerous issues raised by the defendants
in response to that discovery, and the defendants [sic] repeated efforts to argue the merits
of the case in the context of discovery disputes.”); Dkt 454 at 35–36 (“[T]his has been an
effort by the plaintiffs to hack through the – one of the largest forests of discovery,
objections, and delays and problems that I have seen. And that goes for both on being on
the bench and in practice. And you guys are No. 1, you know. It’s good to be No. 1, I guess.
But the number of problems and inability to understand things and need to revisit issues
that you-all have raised over the course of these nine years, both before and after me
bringing in the Special Master, dwarfs anything I have ever encountered.”); see also Tr.
481 (“THE COURT: . . . . I read that [objection in AT&T’s discovery response]. And what
that suggests to me is that it was a contemporaneous admission from you-all that you
weren’t providing what I ordered you to provide.”).
70
1. The Disputes That Led To The Appointment Of The Discovery Master
In late 2015, the plaintiffs pursued a motion to compel that sought to follow up on
information that the plaintiffs obtained during depositions taken in 2014. The plaintiffs
sought to explore the extent to which AT&T sold information belonging to the partnerships
in the Coordinated Action to third parties, including government agencies, without the
approval of their Executive Committees. Dkt. 131. The plaintiffs detailed their extensive
and unsuccessful efforts to obtain this information from AT&T. Id. at 6–12.
AT&T responded to the discovery motion with a fifty-nine page brief, supported by
forty-six exhibits, that advanced a barrage of arguments. AT&T claimed that the discovery
did not relate to any claim in the case. Dkt. 140 at 27–28. AT&T claimed that the plaintiffs
should have sought the discovery earlier. Id. at 29–30. In an effort to obtain summary
judgment under the guise of a discovery ruling, AT&T argued that the materials sought
could not support a breach of the partnership agreements as a matter of law. Id. at 31–35.
In support of that contention, AT&T relied on the fact that certain of the partnerships had
entered into management agreements, which AT&T claimed “explicitly authorized the
Defendants’ affiliates to ‘act as agent for and on behalf of [those partnerships] . . . before
federal, state, and local governmental authorities.’” Id. at 34 (ellipsis in original) (quoting
MNSA art. II). AT&T also claimed that the sharing of subscriber information could not
support a breach of the partnership agreements as a matter of law because federal law
declared that the information belonged to individual subscribers, not the partnerships. Id.
at 35–36. And AT&T claimed that even if the plaintiffs were correct about the meaning of
71
the provision in the partnership agreements, then the provisions would be invalid as a
matter law. Id. at 36.
AT&T also advanced arguments more appropriate to a motion to compel. AT&T
argued that it had provided all the information to which the plaintiffs were entitled and that
providing any additional information would be unduly burdensome. Id. at 36–44. And
AT&T claimed that federal law prohibited them from providing much of the information.
Id. at 44–53.
In their reply, the plaintiffs confirmed that they were seeking information about how
much money AT&T made by selling proprietary information belonging to the partnerships
to third parties. Dkt. 149 at 2. The plaintiffs noted correctly that AT&T had never denied
that it sold the partnerships’ information to third parties. Id. at 7. The plaintiffs also made
clear to AT&T that they were pursuing a claim for breach of the Partnership Agreement
based on AT&T’s sharing of information with third parties. Id. at 16–18.
AT&T then sought leave to file a sur-reply. AT&T claimed that the plaintiffs’
responses to AT&T’s arguments actually constituted new arguments to which AT&T
should have a chance to respond. Dkt. 163. The court denied the request. Dkt. 165.
The court held a hearing on February 11, 2016. Dkt. 203. The court ruled that the
information that the plaintiffs sought about revenue that AT&T received and had not
allocated to the partnerships was relevant and discoverable. Id. at 6, 47. To the extent the
information related to non-governmental counterparties, the court directed AT&T to
provide it. Id. at 9. To the extent the information related to government entities, the court
directed AT&T to determine whether any revenue streams existed that were not allocated,
72
then “figure out a way to provide the information at a sufficiently aggregate level so that it
doesn’t implicate national security concerns, and figure out a way to give the plaintiffs that
information.” Id. at 48. The court instructed the plaintiffs to serve a new set of
interrogatories and requests for production that refined their requests. Id. at 65. The court
also admonished AT&T against relying on overly broad, general objections. Id. at 70–71.
AT&T did not comply with those rulings. AT&T instead served responses cabined
by a host of overly broad, general objections. Dkt. 222 Ex. B; see Dkt. 251; Dkt. 252.
AT&T objected to approximately 100 requests for admission, interrogatories, and requests
for production. AT&T refused to provide any documents in response to thirty-two requests
for production. AT&T effectively disregarded the court’s instructions.
The plaintiffs again moved to compel, styling their effort as a supplemental motion.
Dkt. 222. The plaintiffs also moved to compel discovery regarding revenue that AT&T
generated from contracting with third parties for data-related services. See Dkt. 220.
Through the latter motion, the plaintiffs sought to ensure that they received information
about AT&T’s revenues from what this decision has referred to as Connected Devices and
Commercial Network Agreements. See id. at 8–13. AT&T responded to the supplemental
motion with a thirty-eight page answering brief supported by 320 pages of exhibits. Dkt.
251. AT&T responded to the additional motion to compel with a fifty-one page answering
brief supported by fifty-four different exhibits. Dkt. 252; Dkt. 253.
The court convened a hearing on both motions on June 3, 2016. Dkt. 272. During
the hearing, the court discussed the practical challenges that the motions presented. Id. at
5. In summary, the plaintiffs sought to understand how AT&T generated revenue from its
73
nationwide cellular business, so the scope of discovery was potentially vast. The burden of
that discovery also could be disproportionate, because regardless of the metric used, the
partnerships at issue in the Coordinated Action made up a small fraction of AT&T’s
business. An additional problem was that to evaluate the scope of discovery, the court
would need to develop a deep understanding of AT&T’s business. The court typically
would acquire that level of understanding only after a trial on the merits. The court thus
faced the prospect of conducting a multi-day evidentiary hearing akin to a trial so that the
court could determine what discovery was warranted in preparation for a trial.
Confronted with a seemingly intractable Gordian knot, the court hazarded the
possibility of a special discovery master. If the parties could agree on an independent,
subject-matter expert, then that person could investigate AT&T’s business and make a
recommendation on the extent of discovery that was warranted. Id. at 23–30.33
The court asked the parties to suggest candidates for the position of special
discovery master. Dkt. 272 at 39. The plaintiffs proposed Jim Timmins, a Managing
Director of Teknos Associates LLC. Dkt. 271. Timmins is an expert in both valuation and
technology companies. Dkt. 284 ¶ 5; see JX 2419 at 25–26; Dkt. 271 Ex. A. Notably,
Timmins is not a lawyer.
33
The court also envisioned that as a result of addressing the scope of discovery,
the special discovery master might acquire subject matter expertise so that it would make
sense to transition the special discovery master into a valuation role. Id. As events
transpired in the litigation, the plaintiffs objected to special discovery master transitioning
into a valuation role. As a result, the special discovery master only made a recommendation
regarding the appropriate scope of discovery.
74
On July 27, 2016, the court issued two orders. The first order granted the
supplemental motion. Dkt. 283 (the “Supplemental Order”). The opening paragraph stated:
The court has spent multiple days reviewing the history of this proceeding.
As part of that process, the court has given detailed review to the motion to
compel that the plaintiffs filed in November 2015, the briefing in connection
with that motion, and the hearing during which the court ruled on certain
issues and, as to others, gave the parties substantial guidance on how to
proceed. The court also has reviewed the discovery that the plaintiffs served
following the hearing, the defendants’ responses to that discovery, and the
briefing that ensued on the plaintiffs’ motion to compel and supplemental
motion to compel. The court has considered in particular the defendants’
attempts to portray as excessive and unfounded the discovery that the
plaintiffs served in response to the guidance the court provided, the numerous
issues raised by the defendants in response to that discovery, and the
defendants [sic] repeated efforts to argue the merits of the case in the context
of discovery disputes. Having done so, the plaintiffs’ supplemental motion
to compel is GRANTED.
Id. ¶ 1.
The court overruled AT&T’s objections. Among other things, the court reiterated a
ruling it had made during the hearing on February 11, 2016, regarding the scope of
discovery:
Information about all revenue streams that potentially resulted from
partnership assets is plainly relevant to the valuation issues presented in this
case and therefore discoverable. In addition, many of the categories of
Partnership Information appear likely to be held to be confidential
partnership information. Discovery into their use by AT&T is also relevant
to the plaintiffs’ claims for breach of the partnership agreements that
contained limitations on the use of confidential partnership information.
Id. ¶ 10.
In the Supplemental Order, the court directed AT&T to provide information about
how it monetized Partnership information:
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14. To the extent that Partnership Information was monetized as
an unsegregated part of a larger sale, license, or agreement to provide the
information, AT&T shall (i) identify the larger sale, license, or agreement
and (ii) identify on a year-by-year basis the gross consideration received from
monetizing the information through that channel.
15. AT&T shall identify on a year-by-year basis the gross
consideration that AT&T received from monetizing Partnership Information
to government entities. AT&T shall identify on a year-by-year basis the gross
consideration that AT&T received from monetizing Partnership Information
to commercial entities. AT&T shall provide this information regardless of
whether some or all of the consideration was allocated or conveyed to the
Partnership. The plaintiffs are entitled to the gross consideration to test the
fairness of AT&T’s allocations or conveyances.
16. The identification on a year-by-year basis of the gross
consideration that AT&T received from monetizing Partnership Information
to government entities shall include consideration derived from contracts or
legal processes that may be subject to national security protections, but the
information provided pursuant to this order shall neither (i) identify the
amounts derived from contracts or legal processes that may be subject to
national security protections, nor (ii) identify amounts derived from other
sources that would enable the plaintiffs to determine or estimate the amounts
derived from contracts or legal processes that may be subject to national
security protections. . . .
17. Defendants’ objection to “gross consideration” is overruled.
Consideration means anything of value received from the monetization of a
partnership asset. Gross consideration means the aggregation of the
consideration received. Defendants shall provide discovery using the term
“gross consideration” and not subject to their objections.
Id. ¶¶ 14–17.
The second order appointed Timmins as the special discovery master. Dkt. 284 (the
“Discovery Master”). The court directed Timmins to conduct proceedings to develop a
recommendation as to whether the plaintiffs should be permitted to conduct further
discovery into the four categories of information. The court vested Timmins with the
authority typically afforded to a special master, including the authority to schedule
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proceedings, to conduct hearings, and to take testimony under oath. Id. ¶ 6. The court
stayed all other proceedings in the case pending receipt of Timmins’ recommendations. Id.
¶ 13.
2. The Discovery Master’s Investigation
As Discovery Master, Timmins conducted a detailed investigation that spanned the
better part of two years. He reviewed hundreds of documents. See JX 2419 at 26–27, 31–
33. He interviewed eleven witnesses under oath, including Lurie, Wages, Teske, Hall, and
other AT&T accounting executives. Id. at 33–34, 36–37. He also conducted an informal
interview with Aaron Gilcreast, the leader of the PwC team AT&T retained to value the
partnerships in connection with the freeze-outs. JX 2419 at 36. Timmins met frequently
with counsel for the plaintiffs and AT&T to understand their positions. Id. at 27–28.
Timmins issued a draft report in October 2017. See Dkt. 352. Both sides took
exceptions. Dkt. 354 Exs. 1–6; Dkt. 358. Timmins addressed those exceptions in his final
report dated March 12, 2018. JX 2419 (the “Discovery Report”).
a. Discovery Into Revenue From Connected Devices
The Discovery Report first addressed the plaintiffs’ efforts to conduct discovery in
support of their theory that AT&T “created or anticipated a large business based on
Connected Devices, that these Connected Devices generated substantial activity and
revenue on AT&T’s mobile network, and that this revenue was not presented to and/or
appropriately considered by PwC in preparing its valuations of the Partnerships.” Id. at 45.
Based on concerns about proportionality, Timmins recommended that discovery into
revenue from Connected Devices “be limited, or declined entirely.” Id. at 137.
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In seeking discovery related to Connected Devices, the plaintiffs cited publicly
available materials which showed that AT&T’s executives were optimistic about the future
of the business. Id. at 45–46. Timmins confirmed that “the AT&T wireless business was
doing well and its future prospects looked bright,” but he also noted that revenue from
Connected Devices during the relevant period remained “small relative to AT&T’s overall
revenue.” Id. at 47–48. To support these observations, Timmins noted that AT&T’s annual
revenue from Connected Devices ranged from $110 million in 2008 to a run-rate of $332
million in 2013. Id. at 48–49. He observed that this revenue was
small when compared to revenues for all of AT&T Mobility (e.g.,
$66,627,051,447 in 2012) or even compared to allocated revenues from
sources attributable to the Partnerships other than wireless service and
equipment revenues (e.g., $412,648,534 in 2012) or the fair value estimated
for the Partnerships by PwC (e.g., Bremerton was valued at $76,000,000),
especially in light of the fact that the Plaintiffs owned only – at most – a few
percent of each Partnership.
Id. at 49–50 (footnotes omitted). Timmins also observed that “[t]he number of Connected
Devices did not reach the bullish goals of some industry executives . . . , although the
[plaintiffs] are correct that the number of Connected Devices on AT&T’s network has risen
dramatically over time.” Id. at 51–52 (footnote omitted). Timmins therefore recommended
against additional discovery into Connected Devices and mobile data revenue, believing it
was unlikely to be productive and would be unduly burdensome. Id. at 54.
As an additional reason for his recommendation against permitting further discovery
into revenue from Connected Devices, Timmins noted that AT&T allocated Connected
Device revenue to the partnerships using “processes, procedures, and an outside audit firm
to ensure that revenues and expenses were allocated appropriately . . . in accordance with
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good management practices and generally accepted accounting principles.” Id. at 55–56
(footnote omitted). Timmins observed that “AT&T utilized appropriate accounting
managers with the requisite knowledge, training, and experience to carry out these
functions and that these managers were provided with a workforce, software, and systems
to carry out these functions.” Id. at 56. Timmins also noted that “other checks and balances
were at work within the organization that would ensure revenues were allocated
appropriately.” Id. Timmins based these conclusions on interviews of AT&T personnel,
“accounting walkthroughs” with AT&T executives, and his review of AT&T’s audited
financial statements. Id. at 58. He also examined a sample of revenue allocations to confirm
that AT&T allocated revenue from Connected Devices to the partnerships. Id. at 57–59,
65. Timmins’ investigation did not disclose “any deficiencies in AT&T’s accounting
practices.” Id. at 134.
Timmins cited the complexity of AT&T’s accounting system as an additional factor
that made it less likely that further discovery into revenue from Connected Devices would
be productive. He observed that due to the complexity of AT&T’s general ledger and other
aspects of AT&T’s accounting system, “a number of systems would need to be examined
by personnel with relevant expertise in order for such data to be properly collected,
reviewed, and produced.” Id. at 65–66. For example, after AT&T introduced a new
“subledger accounting system” for manual allocations in 2009, it ran “nearly 70,000”
manual revenue and expense allocations through the system in the following four-and-a-
half years. Id. at 63–64. Before 2009, AT&T used an accounting system that was “no longer
online.” Id. at 64. Before that, AT&T used “a paper process.” Id. Timmins recommended
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that “it would be overly burdensome and of little benefit” to require AT&T to provide
additional information about the allocations of revenue from Connected Devices. Id. at 66.
Timmins also believed that revenue from Connected Devices was “included in the
financial results and financial forecasts provided to PwC for the purpose of preparing the
valuations of the Partnerships.” Id. at 73. Timmins believed that even if revenue from
Connected Devices continued to grow quickly, then those revenues “would make up only
a small part of total revenues during the period of the financial forecast” that PwC used in
its valuations. Id. at 77. Timmins therefore recommended against additional discovery
because “no proportionate benefit to the Plaintiffs would result.” Id.
b. Discovery Into Revenue From Commercial And Governmental
Entities
The second category of information that Timmins investigated related to the
plaintiffs’ efforts to conduct discovery to support their claim that AT&T “gathered data
from the use by Partnership customers of the wireless communications network and similar
activities, that these data were monetized in sales to commercial and government entities,”
and that these revenues were not reflected in PwC’s valuations. Id. at 78. Based on concerns
about proportionality, Timmins recommended against additional discovery into this area.
Timmins reasoned that discovery into the sale of customer data to commercial
entities would be unduly burdensome for AT&T and likely would produce no benefit for
the plaintiffs. Timmins observed that “the first notable commercial use of Big Data by
AT&T did not occur until after the Relevant Period.” Id. at 85. As a result, Timmins
“determined that Big Data activities did not generate any material revenues during the
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Relevant Period.” Id. He accordingly recommended “that broad discovery into AT&T’s
Big Data initiative during the Relevant Period should be denied.” Id. at 88.
Timmins believed that AT&T generated “somewhat more revenues” by selling
Partnership information to governmental entities, but he regarded those revenues as “not
large or material to AT&T” and “not . . . material to the Partnerships.” Id. at 89. He
explained that AT&T monetized its data, including Partnership information, through two
government revenue sources: AT&T’s National Compliance Center, and the sale of
analytics services.
The National Compliance Center responded to subpoenas from law enforcement
agencies and other litigants. Timmins noted that his investigation was “constrained by the
government’s insistence, for national security purposes, that there be no denial or
confirmation of whether AT&T supports or undertakes sales to national security agencies.”
Id. at 90 n.253. He nevertheless believed that revenue from the National Compliance
Center was booked either as a “contra-expense directly on AT&T Mobility’s general
ledger, or netted with expense and billed to AT&T by a separate affiliate. The net expense
thereafter was allocated to the market-level entities including the Partnerships.” Id. at 92.
Timmins recommended against any additional discovery in this area because AT&T
appropriately allocated the revenue to the partnerships.
For the data analytics contracts, Timmins believed that AT&T did not allocate any
of the revenue to the partnerships. AT&T instead booked the revenue to a separate
subsidiary with an independent billing system. Id. at 105–06. Timmins nonetheless
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recommended against additional discovery, citing the fact that the revenue would have
been small from the perspective of the partnerships. Id. at 106.
c. Discovery Into The Monetization Of Partnership Information
Through Intellectual Property
The third category of information that Timmins investigated related to the plaintiffs’
claim that AT&T “derived value from the sale or licensing of intellectual property created
with the use of Partnership Assets or Partnership Information.” Id. at 107. Based on
concerns about proportionality, Timmins recommended against additional discovery in this
area.
Timmins believed as a result of his investigation that AT&T had “a business team
devoted to realizing value from the intellectual property it develops.” Id. at 112. He also
believed that the resulting revenue was “small from the perspectives of AT&T and the
Partnerships,” and that “AT&T’s Intellectual Property division monetized little to no
Partnership Information during the Relevant Period.” Id. at 112, 115. For example, of the
$342.5 million in revenue AT&T generated through patent licensing during the relevant
period, the overwhelming majority was generated from patents for compressing audio files.
Id. at 114–15. Timmins saw no reason to believe that AT&T’s internal startup incubator or
its R&D division had “monetized Partnership information, or utilized Partnership Assets,
in their R&D efforts.” Id. at 115. Individuals associated with the incubator did not have
access to customer or network information, and the R&D division used customer data
“solely for AT&T internal purposes.” Id. at 116. Timmins believed that given AT&T’s
massive patent portfolio “and the very small amount of revenues that would flow to the
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Partnerships” from a hypothetical patent, “it would be disproportionately burdensome” for
AT&T to “locate, review, and produce all potentially relevant information about its
intellectual property development during the Relevant Period.” Id.
d. Discovery Into Non-Monetary Consideration
The last category of information that Timmins investigated related to the plaintiffs’
claim that AT&T “derived non-monetary consideration from barter or peering or similar
arrangements” that involved the transfer of information that included Partnership
Information. Id. at 117. Timmins “found nothing to support these concerns.” Id. at 118.
Timmins therefore recommended against permitting any discovery into this area. Id. at 122.
3. The Court Adopts The Discovery Report’s Recommendations.
The Discovery Master’s bottom-line conclusion, conveyed in the Discovery Report,
was that AT&T’s internal accounting records depicted how AT&T allocated revenue to the
partnerships with a sufficiently high degree of accuracy that discovery into the areas that
the plaintiffs wanted to explore would be overly burdensome and disproportionate to the
needs of the case. The Discovery Master discussed factual matters when making these
recommendations, but he did not make factual findings that would be binding through trial.
Nor did he not make rulings about whether AT&T complied with its contractual
obligations. And he did not make rulings about whether AT&T complied with its fiduciary
duties in connection with the freeze-outs.
As Delaware law requires, the court undertook a de novo review of the Discovery
Report. Dkt. 381 ¶ 5; see DiGiacobbe v. Sestak, 743 A.2d 180, 184 (Del. 1999). The court
accepted the Discovery Master’s recommendations regarding discovery, denied the
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plaintiffs’ motion to compel, and entered a protective order barring further discovery into
the four categories of information addressed in the Discovery Report. Dkt. 381 ¶ 5. In
making this ruling, the court addressed a motion to compel production of documents. The
court did not make factual findings that would be binding through trial. The court did not
make rulings about whether AT&T complied with its contractual obligations. And the court
did not make rulings about whether AT&T complied with its fiduciary duties in connection
with the Freeze-Out.
4. AT&T Finally Provides Limited Discovery.
As part of his work, the Discovery Master noted that AT&T had not produced
certain information that the Supplemental Order had directed AT&T to provide. AT&T
previously had sought to evade the Supplemental Order by asking the court to refer the
subject matter of the order to the Discovery Master. The court issued a letter ruling that
rejected AT&T’s request and directed AT&T to comply. Dkt. 292. The letter ruling stated:
“Paragraphs 14 through 16 [of the Supplemental Order] addressed specific requests for
discoverable information. AT&T has been ordered to provide that information. It should
already have done so.” Id. at 1.
During a teleconference on December 22, 2016, the court reiterated that AT&T
needed to produce the information. Dkt. 301 at 23, 27–28. The court also ordered that
AT&T produce a witness pursuant to Court of Chancery Rule 30(b)(6) to confirm or deny
whether AT&T disclosed Partnership Information to third parties and to produce a witness
from PwC to testify about its valuation process. Dkt. 381 ¶ 5; see Dkt. 383 at 67–75.
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On June 9, 2017, AT&T finally served an interrogatory response addressing the
information covered by the Supplemental Order. In that response, AT&T identified on a
year-by-year basis the aggregate revenue, expense, and operating margin associated with
providing services to the government that involved the monetization of Partnership
Information:
Operating
Year Revenue Expense
Margin
2005 $340,020,899 $321,609,683 $18,411,216
2006 $301,758,469 $276,247,643 $25,510,826
2007 $323,337,184 $292,099,912 $31,237,272
2008 $385,271,417 $341,553,542 $43,717,875
2009 $445,138,157 $372,038,648 $73,099,509
2010 $476,930,483 $388,390,003 $88,540,480
2011 $489,950,426 $405,676,189 $84,274,237
2012 $418,666,959 $337,391,719 $81,275,239
YTD 6/30/2013 $207,522,260 $174,155,903 $33,366,358
JX 2416 at 2. AT&T admitted that none of these amounts were allocated to the
partnerships. Id. In an objection, AT&T asserted that the figures included revenue that the
partnerships were not entitled to receive. Id. AT&T admitted that “[f]urther isolation and
presentation of revenues and operating margins is not practical, however, in light of the
risk of disclosure of information the Company is not free to disclose.” Id. At trial, the court
overruled AT&T’s objection. Tr. 477–81. The data provides persuasive and reliable
evidence of the existence of revenue associated with government contracts that falls within
the Shared Revenues Definition.
Q. The Summary Judgment Motion
In May 2019, AT&T moved for summary judgment on the plaintiffs’ claims that
AT&T had failed to manage the partnerships in compliance with their partnership
85
agreements. AT&T argued that the plaintiffs were bound by the releases in settlements
reached in 1997 and 2007 between some of the minority partners and AT&T’s
predecessor.34 AT&T also contended that the plaintiffs’ claims were time-barred. Dkt. 467
at 26–31.
The court denied AT&T’s motion. Dkt. 551. The court rejected the argument that
by entering into the settlements, the plaintiffs had conceded that AT&T had the necessary
authority as majority partner to engage in the challenged business practices. The court
explained that the settlements were just that—settlements—and “the plaintiffs did not give
up their right to litigate the same issues later if the majority partner decided to engage in
the same conduct that the plaintiffs regarded as problematic.” Id. ¶¶ 9–10. The court also
held that because the “plaintiffs have represented that they are suing only based on conduct
that took place from 2008 forward,” the doctrine of laches did not bar their claims. Id. ¶ 8.
R. AT&T Removes The Case To Federal Court.
In August 2019, the plaintiffs moved to compel AT&T to produce witnesses to
confirm or deny (i) whether AT&T had disclosed confidential information about
Partnership subscribers “to one or more Unaffiliated Third Parties,” (ii) whether AT&T
received any payment for the disclosures, and (iii) whether AT&T had allocated any of the
resulting revenue to the partnerships. Dkt. 525 ¶ 2. The plaintiffs sought this information
34
Dkt. 467 at 25–26; see Linney v. Cellular Alaska P’ship, 1997 WL 450064 (N.D.
Cal. July 18, 1997) (approving settlement of 1997 action); JX 145 (notice of pendency of
settlement of 1997 action); JX 144 (stipulation of settlement of 1997 action); Dkt. 467 Ex.
10 (petition in 2007 action); JX 317 (settlement agreement in 2007 action).
86
because they continued to believe that AT&T had generated revenue by providing
confidential information, including subscriber information, to government entities. See id.The United States Department of Justice (the “DOJ”) opposed the motion, asserting
that “[a]ny confirmation of whether or not particular telecommunications service
providers, including the AT&T Defendants, have assisted the United States in national
security and intelligence matters . . . reasonably could be expected to cause exceptionally
grave harm to the national security of the United States.” Dkt. 542 at 2. After hearing
argument, the court granted the plaintiffs’ motion. Dkt. 547; see Dkt. 571.
On October 7, 2019, the DOJ intervened for the purpose of removing the case to
federal court. Dkt. 567. Later that day, AT&T removed the litigation to the United States
District Court for the District of Delaware. Dkt. 569.
The case remained in federal court for the next nine months. As the price of
returning the case to this court and moving forward with the litigation, the plaintiffs agreed
to “forever disclaim and relinquish” any claim based on AT&T’s use of any Partnership
Information to provide assistance to any element of the intelligence community. Dkt. 573,
Ex. A ¶ 1. The plaintiffs also agreed that no evidence or argument about AT&T providing
Partnership information to the intelligence community would be advanced in this case. Id.
¶ 3. Based on the stipulation, the district court entered orders remanding the cases. PTO at
10; see Dkt. 573, Ex. A ¶ 5.
S. Trial
After the remand, the case proceeded to trial. The initial coordination order had
provided for coordination only for purposes of pre-trial discovery. In the pre-trial order,
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the parties agreed to a coordinated trial. As noted, trial took place over five days, the parties
introduced 3,187 exhibits, and seven witnesses testified live.
II. THE CLAIMS FOR BREACH OF THE PARTNERSHIP AGREEMENT
The plaintiffs sought to prove that AT&T breached the Partnership Agreement. In
their post-trial briefs and during post-trial argument, the plaintiffs advanced three principal
theories.
In their broadest claim, the plaintiffs sought to prove that AT&T breached the
Governance Provision. According to the plaintiffs, AT&T managed the Partnership
however it wished, without obtaining approval from the Executive Committee for any of
the business-related actions it took. To defend its conduct, AT&T asserted that the
Executive Committee delegated broad managerial authority to AT&T, including through
the Management Agreement. To defeat AT&T’s defense, the plaintiffs sought to prove that
AT&T exceeded the scope of its authority in the Management Agreement.
The plaintiffs proved that AT&T pervasively disregarded the Management
Agreement, but judgment nevertheless will be entered in favor of AT&T on this claim. The
record shows that the Executive Committee delegated expansive authority to AT&T to
manage the Partnership’s business. That grant of authority pre-dated the Management
Agreement, then later was confirmed in the Management Agreement. The provisions in the
Management Agreement that AT&T disregarded are not restrictions on the scope of
AT&T’s authority, but rather contractual commitments regarding how AT&T would
exercise its delegated authority. AT&T’s failure to comply with the Management
Agreement therefore does not give rise to a breach of the Governance Provision. AT&T’s
88
failure to comply with the Management Agreement would have supported a derivative
claim against AT&T for breach of the Management Agreement, but the plaintiffs did not
assert that theory. They also did not take steps that might have been necessary to pursue
that theory, such as reviving the Partnership.
Next, the plaintiffs sought to prove that AT&T breached the Title Provision, which
generally required that AT&T hold title to Partnership assets in the name of the Partnership.
The Title Provision permitted Partnership assets to be titled jointly with another entity or
in the name of another entity if (i) the Executive Committee determined that titling the
asset in that manner was in the best interests of the Partnership and (ii) the other entity held
the asset for the benefit of the Partnership.
The plaintiffs proved that AT&T used an AT&T affiliate to hold title to (i) the
contract rights with the Partnership’s subscribers and (ii) information about the
Partnership’s subscribers, including data generated when the Partnership’s subscribers
used AT&T’s network. The plaintiffs proved that the Executive Committee never formally
made a determination that holding title to the asset in that manner was in the best interest
of the Partnership, but the record shows that the Executive Committee delegated
sufficiently broad authority to AT&T so that AT&T could make that determination.
Nevertheless, the plaintiffs proved that with respect to two businesses, AT&T did not hold
title to those assets for the benefit of the Partnership. AT&T used the Partnership’s
contracts with its subscribers, as well as information about those subscribers, to sell handset
insurance, without allocating any of the benefits of the program to the Partnership. AT&T
also sold information about Partnership subscribers to government agencies without
89
allocating any of the benefits to the Partnership. AT&T’s actions in connection with those
businesses breached the Title Provision.
Finally, the plaintiffs sought to prove that AT&T breached the Protected
Information Provision, which prevented AT&T from disclosing Protected Information
without the prior consent of the Executive Committee. The plaintiffs proved that AT&T
disclosed Protected Information when monetizing geolocation data relating to the
Partnership’s subscribers, but the plaintiffs failed to prove their claim for breach of the
Protected Information Provision because the Executive Committee delegated sufficiently
broad authority to AT&T that AT&T could use the information as part of its management
of the Partnership’s business.
A. Threshold Legal Issues
Before addressing the merits of the plaintiffs’ claims for breach of Partnership
Agreement, it is helpful to address two threshold issues. The first involves the principles
of law that apply to the plaintiffs’ claims. The second involves the extent to which a ruling
that the court made during discovery continued to govern for purposes of trial and post-
trial proceedings.
1. Principles Of Law Governing The Plaintiffs’ Claims
This decision addresses the plaintiffs’ claims for breach of the Partnership
Agreement. Delaware law governs the Partnership Agreement. PTO ¶ 7. “Under Delaware
law, the elements of a breach of contract claim are: 1) a contractual obligation; 2) a breach
of that obligation by the defendant; and 3) a resulting damage to the plaintiffs.”
WaveDivision Hldgs., LLC v. Millennium Digit. Media Sys., L.L.C., 2010 WL 3706624, at
90
*13 (Del. Ch. Sept. 17, 2010). The plaintiffs bore the burden of proving each element of
the claim by a preponderance of the evidence. First State Constr., Inc. v. Thoro-Good’s
Concrete Co., 2010 WL 1782410, at *3 (Del. Super. Ct. May 3, 2010).
When determining the scope of a contractual obligation, and when measuring the
parties’ conduct against that obligation to determine breach, “the role of a court is to
effectuate the parties’ intent.” Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728,
739 (Del. 2006). Absent ambiguity, the court “will give priority to the parties’ intentions
as reflected in the four corners of the agreement, construing the agreement as a whole and
giving effect to all its provisions.” In re Viking Pump, Inc., 148 A.3d 633, 648 (Del. 2016)
(internal quotations omitted). “[A] contract is ambiguous only when the provisions in
controversy are reasonably or fairly susceptible of different interpretations or may have
two or more different meanings.” Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins.
Co., 616 A.2d 1192, 1196 (Del. 1992). By contrast, a contract is unambiguous “[w]hen the
plain, common, and ordinary meaning of the words lends itself to only one reasonable
interpretation.” Sassano v. CIBC World Mkts. Corp., 948 A.2d 453, 462 (Del. Ch. 2008).
“A contract is not rendered ambiguous simply because the parties do not agree upon its
proper construction.” Rhone-Poulenc, 616 A.2d at 1196.
“In upholding the intentions of the parties, a court must construe the agreement as a
whole, giving effect to all provisions therein.” E.I. du Pont de Nemours & Co., Inc. v. Shell
Oil Co., 498 A.2d 1108, 1113 (Del. 1985). A reading of an agreement must be reasonable
when the contract is “read in full and situated in the commercial context between the
parties.” Chi. Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 926–
91
27 (Del. 2017). “[T]he basic business relationship between the parties must be understood
to give sensible life to any contract.” Id. at 927. But this principle cannot be used to override
the plain language of the agreement: While our courts “have recognized that contracts
should be ‘read in full and situated in the commercial context between the parties,’ the
background facts cannot be used to alter the language chosen by the parties within the four
corners of their agreement.” Town of Cheswold v. Cent. Del. Bus. Park, 188 A.3d 810, 820
(Del. 2018) (footnote omitted) (quoting Chi. Bridge, 166 A.3d at 926–27). “[I]t is not the
job of a court to relieve sophisticated parties of the burdens of contracts they wish they had
drafted differently but in fact did not.” DeLucca v. KKAT Mgmt., L.L.C., 2006 WL 224058,
at *2 (Del. Ch. Jan. 23, 2006).
This decision also refers frequently to the Management Agreement. That agreement
selects the law of the State of Washington to govern its terms. MNSA § X(F). That
difference is not significant, however, because when interpreting a contract, Washington
law tracks Delaware law in looking to the plain meaning of the words of the agreement.
See Quadrant Corp. v. Am. States Ins. Co., 110 P.3d 733, 737 (Wash. 2005). Moreover, no
one has argued that applying Washington law when interpreting the Management
Agreement would lead to a different result. Consequently, there is no need for a choice-of-
law analysis, and the court will interpret the contract in accordance with its plain meaning
as if Delaware law governed.35
35
See Deuley v. DynCorp. Intern., Inc., 8 A.3d 1156, 1161 (Del. 2010) (when “the
result would be the same under both Delaware and [another jurisdiction’s] law[,] . . .
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2. Law Of The Case
The second overarching issue is the extent to which the court’s adoption of the
Discovery Report resulted in findings of fact that govern for purposes of trial and post-trial
proceedings. In its pre- and post-trial briefs, AT&T relied extensively on the Discovery
Report, to the point where AT&T often cited it as the only factual support for its
contentions. By relying on the Discovery Report, AT&T attempted to treat the assessments
that the Discovery Master made for purposes of evaluating the proportionality of potential
discovery as factual findings that would govern for the rest of the case. The Discovery
Report did not have that effect.
AT&T correctly observes that the court adopted the recommendations in the
Discovery Report as a ruling of the court. Dkt. 614 at 9; Dkt. 622 at 27; see Dkt. 381. But
the court’s adoption of the Discovery Master’s recommendations merely resulted in those
recommendations and his observations in the Discovery Report functioning like any other
discovery ruling. A court’s factual assessments in a discovery ruling do not constitute
according to conflicts of law principles . . . there is a ‘false conflict,’ and the Court should
avoid the choice-of-law analysis altogether.” (second omission in original) (alteration
omitted)); Lagrone v. Am. Mortell Corp., 2008 WL 4152677, at *5 (Del. Super. Sept. 4,
2008) (“The Court has reviewed the applicable law from each of the competing
jurisdictions and has concluded that the end result is the same regardless of which State’s
law the Court applies here. In such instances of ‘false conflicts’ of laws, the Court may
resolve the dispute without a choice between the laws of the competing jurisdictions.”);
15A C.J.S. Conflict of Laws § 31 (“If the laws and interests of the concerned states are not
in conflict, the result is deemed a ‘false conflict’ or no conflict at all, and no choice-of-law
analysis need be made.”); 16 Am. Jur. 2d Conflicts of Laws § 4 (“An apparent conflict of
laws may be treated as false when the laws of the two states are the same or would produce
the same result; or do not conflict . . . .” (footnote omitted)).
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factual findings that remain dispositive at later stages of the case. A court’s factual
assessments in a discovery ruling rather reflect how the evidence appears at that earlier
stage of the case for purposes of informing the court’s rulings on discovery.36 The court
does not bring those findings forward for purposes of trial. The parties instead introduce
evidence at trial, and the court makes factual findings based on the evidence presented at
trial.
In addition to being contrary to law, AT&T’s approach runs contrary to express
language in the Discovery Report. The Discovery Master pointed out that because he was
making recommendations about the scope of discovery, his work “might not touch upon
the ‘concept of the breach of contract claim.’” JX 2419 at 66–67 n.185 (quoting Dkt. 336
at 73). The Discovery Master properly did not make any factual findings about whether the
revenue streams he investigated were “‘material’ in the context of the dissociation or
disgorgement remedies the [plaintiffs] seek.” Id.
36
See Terramar Retail Ctrs., LLC v. Marion #2-Seaport Tr. U/A/D June 21, 2002,
2018 WL 6331622, at *1 (Del. Ch. Dec. 4, 2018) (“Because this is a discovery ruling, the
description of events provided in this section does not constitute formal findings of fact. It
only represents how the record appears at this preliminary stage.”); In re Info. Mgmt. Servs.,
Inc. Deriv. Litig., 81 A.3d 278, 282 (Del. Ch. 2013) (noting that “for purposes of a
discovery ruling,” the court does not make “formal factual findings” and “cannot resolve
conflicting factual contentions”); accord In re Activision Blizzard, Inc., 86 A.3d 531, 533
(Del. Ch. 2014) (same); see also 18B Edward H. Cooper, Federal Practice and Procedure
(Wright & Miller) § 4478.1 (2d ed. 1990 & Supp. 2020) [hereinafter Wright & Miller]
(“The pretrial rulings that may be reconsidered in continuing pretrial proceedings span the
range of pretrial activity. Discovery orders are an example.”); see also id. (explaining that
a court may amend its findings of fact “whether or not labeled as tentative”).
94
AT&T has never explained why a discovery ruling that took the form of the court’s
adoption of recommendations from the Discovery Master would result in dispositive
factual findings for purposes of trial. The closest potential source of authority would be the
law of the case doctrine.
“The law of the case is established when a specific legal principle is applied to an
issue presented by facts which remain constant throughout the subsequent course of the
same litigation.” Gannett Co., Inc. v. Kanaga, 750 A.2d 1174, 1181 (Del. 2000) (internal
quotation marks omitted). The doctrine
requires that issues already decided by the same court should be adopted
without relitigation, and once a matter has been addressed in a procedurally
appropriate way by a court, it is generally held to be the law of that case and
will not be disturbed by that court unless compelling reason to do so appears.
May v. Bigmar, Inc., 838 A.2d 285, 288 n.8 (Del. Ch. 2003) (internal quotation marks
omitted), aff’d, 858 A.2d 1158 (Del. 2004) (TABLE).
“The law of the case doctrine is a self-imposed restriction that prohibits courts from
revisiting issues previously decided, with the intent to promote ‘efficiency, finality,
stability and respect for the judicial system.’” State v. Wright, 131 A.3d 310, 321 (Del.
2016) (quoting Cede & Co. v. Technicolor, Inc., 884 A.2d 26, 39 (Del. 2005)). The doctrine
“presumes a hearing on the merits and only applies to issues the court actually decided.”
Wright, 131 A.3d at 321 (footnote and internal quotation marks omitted) (quoting United
States v. Hatter, 532 U.S. 557, 566 (2001)); accord Wright & Miller, supra, § 4478
(“Actual decision of an issue is required to establish the law of the case.”). The law of the
case most often applies to a trial court’s “legal ruling at an earlier stage of the proceedings,”
95
which continues to control during later stages of those proceedings, “provided the facts
underlying the ruling do not change.” Wright, 131 A.3d at 322.
In the Discovery Report, the Discovery Master considered whether the plaintiffs
should be permitted to seek further discovery into the subjects of their motion to compel.
See Dkt. 288 ¶ 5 (appointing Discovery Master to “assess the requests that are the subject
of [the plaintiffs’ motion to compel discovery], evaluate AT&T’s responses, and determine
what information AT&T should produce”). The central issues that the Discovery Master
assessed were the burden of producing the information and its proportionality to the needs
of the case. In the course of developing his recommendations, the Discovery Master
considered documentary evidence and testimony from AT&T witnesses. He also
conducted witness interviews. Based on his assessment of the record at that stage, the
Discovery Master recommended against further discovery into the topics that he
considered.
The court’s adoption of the Discovery Master’s recommendations resulted in the
denial of the plaintiffs’ motion to compel. Dkt. 381 ¶ 5; see Dkt. 383 at 67–75. By adopting
the Discovery Master’s recommendations, the court made a discretionary decision on the
scope of discovery, informed by the Discovery Report. The court did not elevate the
assessments in the Discovery Report to the status of factual findings. The preliminary
factual assessments in the Discovery Report have no greater weight or significance than
would the court’s factual recitation in a ruling on a motion to compel.
The Discovery Report is not a nullity, and the court considered it. A court may
extend “some measure of deference” to a discovery ruling. See Wright & Miller, supra, §
96
4478.5. The court also has considered the evidence that the Discovery Master generated in
connection with the Discovery Report. But the court has considered that evidence as part
of the overall trial record. The court has not treated the Discovery Report as a set of factual
findings that control for purposes of the trial on the merits.
B. The Claim That AT&T Breached The Governance Provision
In their headline claim, the plaintiffs asserted in their post-trial briefs and during
post-trial argument that AT&T breached the Governance Provision by managing the
Partnership however it wished rather than by acting through the Executive Committee. As
its defense to that claim, AT&T argued that the Executive Committee delegated broad
managerial authority to AT&T, predominantly through the Management Agreement. In
response, the plaintiffs sought to negate AT&T’s reliance on the Management Agreement
by showing that AT&T pervasively disregarded its terms, thereby exceeding its delegated
authority.
1. The Competing Views Of The Claim
The Governance Provision states that “[e]xcept as otherwise provided in this
Partnership Agreement, complete and exclusive power to conduct the business affairs of
the Partnership is delegated to the Executive Committee.” PA § 4.3. As a baseline matter,
therefore, the Executive Committee had “complete and exclusive power” to manage the
Partnership.
The record shows, and it is essentially undisputed, that AT&T always managed the
day-to-day business of the Partnership. As discussed in the Factual Background, the
Executive Committee met periodically, and representatives of AT&T—including the
97
representatives who served on the Executive Committee—provided information about how
AT&T was conducting the business of the Partnership. The Executive Committee did not,
however, manage the business of the Partnership. The Executive Committee only took
action on formal matters, such as authorizing a distribution to the partners. AT&T managed
the assets of the Partnership as part of its larger cellular telephone business. AT&T did not
seek or obtain approval from the Executive Committee for the actions it took.
By demonstrating these facts, the plaintiffs proved a prima facie case of breach. If
that were the whole story, then the plaintiffs would have established a breach of the
Governance Provision. But that is not the whole story.
From the outset, it was understood that the Executive Committee had delegated
authority to AT&T to manage the business of the Partnership. The structure of the
Partnership Agreement as a whole made clear that the majority partner controlled the
Partnership. The manner in which AT&T, the Executive Committee, and the minority
partners conducted themselves evidenced that relationship. Deposition testimony from a
minority partner who served on the Executive Committee confirms that a settled
understanding existed from the outset that the majority partner had the authority operate
the day-to-day business of the Partnership. See Stone Dep. 39–41. To that end, the Affiliate
Provision authorized the Partnership to “enter into agreements from time to time with
Partners and/or Partner Affiliates for management services in connection with design,
development, construction, and operation of the Partnership’s nonwireline cellular
systems.” PA § 4.8. The Affiliate Provision also authorized the Executive Committee to
authorize its delegee—here, AT&T—to approve Affiliate Agreements. Id. That delegation
98
of authority comports with the Delaware Revised Uniform Partnership Act (“DRUPA”),
which provides that “[a] partner has the power and authority to delegate to 1 or more other
persons any or all of the partner’s rights, powers and duties to manage and control the
business and affairs of the partnership.” 6 Del. C. § 15-401(l).
Originally, the delegation to AT&T was unwritten. Then, in the 1995 Resolution,
the Executive Committee formally delegated managerial authority to AT&T. The form of
the resolution was expansive: “[T]he Majority General Partner is hereby delegated full,
complete and exclusive authority to manage and control the business of the Partnership.”
JX 91 at ’469. In conjunction with that grant of authority, the Partnership and AT&T
entered into the Switch Agreement and the Cellular Agreement, in which AT&T committed
to exercise its delegated authority in particular ways.
The Switch Agreement and the Cellular Agreement remained in place until 2005,
when AT&T replaced them with the Management Agreement. When authorizing the
Partnership to enter into the Management Agreement with AT&T, the Executive
Committee did not change the general delegation to AT&T of “full, complete and exclusive
authority to manage and control the business of the Partnership.” Id. The Management
Agreement reinforced that delegation of authority through the Services Provision and the
Authority Provision, which gave AT&T expansive authority to manage the Partnership.
The Services Provision in the Management Agreement charged AT&T-as-Manager
with the “management and operation of the [Partnership’s] Business.” MNSA § I. It further
charged AT&T with providing “all services as are necessary to assure the commercially
reasonable development and operation of the [Partnership’s] Business.” Id. Those services
99
included construction and procurement, general and administrative services, technical
operating services, sales and marketing services, and maintenance of the Partnership’s
licenses. The Authority Provision then gave AT&T the authority “to undertake . . . any and
all other commercially reasonable actions necessary or advisable to develop, manage, and
operate the [Partnership’s] Business, which are not prohibited by law.” Id. § II. Against the
backdrop of the 1995 Resolution, it is difficult to imagine an aspect of the Partnership’s
business that the delegation of authority did not encompass.
The plaintiffs contend that the Management Agreement imposed limitations on
AT&T’s delegated authority such that if AT&T failed to comply with the Management
Agreement, then AT&T exceeded its authority and breached the Governance Provision.
AT&T views matters differently. AT&T believes it possessed broad delegated authority to
manage the Partnership and that the Management Agreement simply represented a contract
between AT&T and the Partnership. AT&T concludes that any claim that AT&T failed to
comply with its obligations under the Management Agreement is a breach of contract claim
that belongs to the Partnership, which a minority partner must assert derivatively.37
37
A simplistic example illustrates the difference between the theories. Assume a
couple hires a painter to paint their house forest green. The painter paints the house ruby
red. The plaintiffs would argue that the couple only gave the painter authority to paint their
house forest green and that the painter exceeded that grant of authority by painting the
house ruby red. AT&T would argue that the couple gave the painter authority to paint the
house, and that the painter merely breached a contractual obligation to paint it the right
color. In the simplistic example, the couple can assert both theories in the alternative and
litigate both claims, subject only to the limitation that the couple can receive only one
recovery. Only in the metaphysical world of entity law does the proper characterization of
the claim become dispositive.
100
The plaintiffs’ approach finds support in the provision of DRUPA which provides
that “[a] partner may maintain an action against the partnership or another partner for legal
or equitable relief, with or without an accounting as to partnership business, to . . . [e]nforce
the partner’s rights under the partnership agreement.” 6 Del. C. § 15-405(b)(1). For
purposes of the plaintiffs’ claim, the Governance Provision intersects with the black-letter
principle that “[a]n agent has a duty to take action only within the scope of the agent’s
actual authority.” Restatement (Third) Of Agency § 8.09(l) (2006 & Supp. 2021)
Consequently, “[i]n the context of the agent’s relationship with the principal, the boundary
of an agent’s rightful action is the scope of the agent’s actual authority.” Id. cmt. b. Thus,
if the Management Agreement imposed requirements on how AT&T could exercise the
authority that the Executive Committee delegated to it, and if AT&T failed to comply with
those requirements, then AT&T exceeded its delegated authority. Under the plaintiffs’
approach, demonstrating that AT&T failed to comply with the Management Agreement
equates to proof that AT&T breached the Governance Provision.
AT&T’s approach finds support in similarly well-settled principles. Under DRUPA,
a general partnership “is a separate legal entity which is an entity distinct from its partners
unless otherwise provided in a statement of partnership existence or a statement of
qualification and in a partnership agreement.” 6 Del. C. § 15-201(a). Neither the
Partnership Agreement nor either a statement of partnership existence or a statement of
qualification otherwise provide. Property acquired by a partnership, such as rights under a
contract, “is property of the partnership and not of the partners individually.” Id. § 15-203.
Under DRUPA, “[a] partner may bring a derivative action in the Court of Chancery in the
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right of a partnership to recover a judgment in the partnership’s favor.” Id. § 15-405(d).
Although derivative actions typically involve internal claims for breach of fiduciary duty
or mismanagement, “[a]ny claim belonging to the corporation may, in appropriate
circumstances, be asserted in a derivative action,” including a claim for breach of
contract.38
It does not seem necessary to stake out a bright line view on which theory is correct.
The answer will depend on the facts of the case.
AT&T’s view better fits the facts of this case. The record establishes that from the
outset, the Partnership gave AT&T expansive authority to operate its business. The
provisions in the Management Agreement regarding the assignment and allocation of
revenue and expense reflect AT&T’s commitments as to how it would exercise its
delegated authority, rather than limitations on its authority. AT&T’s failure to comply with
38
3 Stephen A. Radin, The Business Judgment Rule 3612 (6th ed. 2009) (internal
quotation marks omitted) (quoting Midland Food Servs., LLC v. Castle Hill Hldgs. V, LLC,
792 A.2d 920, 931 (Del. Ch. 1999)). Examples of derivative actions involving the assertion
of an entity’s claim for breach of contract include First Hartford Corp. Pension Plan & Tr.
v. United States, 194 F.3d 1279, 1293 (Fed. Cir. 1999) (permitting “contract actions
brought derivatively by shareholders on behalf of the contracting corporation”); Slattery v.
United States, 35 Fed. Cl. 180, 183 (1996) (same); Suess v. United States, 33 Fed. Cl. 89,
93 (Fed. Cl. 1995) (denying motion to dismiss a derivative claim for breach of contract
against the United States). See also Ross v. Bernhard, 396 U.S. 531, 542-43 (1970)
(holding right to jury trial existed for breach of contract claim asserted by stockholder
derivatively because “[t]he corporation, had it sued on its own behalf, would have been
entitled to a jury’s determination”).
102
those provisions thus would give rise to a breach of the Management Agreement, but it
would not result in AT&T exceeding the scope of its delegated authority.39
From this perspective, the plaintiffs’ contentions regarding the Governance
Provision really are a derivative claim for breach of the Management Agreement. The
plaintiffs recognize that they never asserted a derivative claim for breach of the
Management Agreement. The court accordingly will enter judgment in favor of AT&T on
the claim for breach of the Governance Provision because, in substance, it is a derivative
claim for breach of the Management Agreement that the plaintiffs never pursued.
Although this holding is sufficient to dispose of the claim for breach of the
Governance Provision, the parties each advanced a legitimate perspective. Given how
vigorously the parties have litigated this dispute, it seems certain that appeals and cross-
appeals will follow. This decision therefore will analyze the claim for breach of the
Governance Provision based on the assumption, solely for purposes of analysis, that the
Management Agreement imposes limitations on AT&T’s authority.
For purposes of analyzing this claim, the court has viewed the evidence with the
burden placed on the plaintiffs to prove that AT&T caused the Partnership to act without
39
A different outcome might be warranted on different facts. Envision a partnership
with a similar governance structure, including a provision comparable to the Governance
Provision, that lacked any history of the Executive Committee delegating its managerial
authority. Further envision that the Executive Committee decides to delegate authority to
a partner and that the sole documentation for the delegation is an agreement that specifies
how the partner will allocate revenue and expense. On those facts, the argument that the
agreement defined the scope of the partner’s delegated authority would be more persuasive.
103
obtaining Executive Committee approval. Once the plaintiffs carried that burden and
established a prima facie case of breach, the burden shifted to AT&T to establish as its
defense that it acted within its delegated authority. “As a general rule, the party asserting
the agency relationship has the burden of proving both the existence of the relationship and
the authority of the agent.” 12 Williston on Contracts § 35:2 (4th ed. 1993 & Supp. 2021);
accord Restatement, supra, § 1.02 cmt. d (“The party asserting that a relationship of agency
exists generally has the burden in litigation of establishing its existence.”); see Zeeb v. Atlas
Powder Co., 87 A.2d 123, 128 (Del. 1952) (explaining that “when the authority of an agent
is in issue the burden rests on him who asserts the existence of the agency”). The burden
of proving the existence of an agency relationship “extends to proof of agency as a
defense.” 3 C.J.S. Agency § 541.40
2. AT&T Failed To Follow The Shared Revenues Formula.
The plaintiffs proved that AT&T failed to follow the Shared Revenues Formula in
the Management Agreement. The plaintiffs also proved that AT&T did not and could not
have relied on the Modification Right to adopt different allocation methodologies.
40
The allocation of the burden of proof ultimately would not affect the outcome.
The Delaware Supreme Court has explained that the real-world effect of the burden of
proof is “modest” and only outcome-determinative in the “very few cases” where the
“evidence is in equipoise.” Ams. Mining Corp. v. Theriault, 51 A.3d 1213, 1242 (Del.
2012) (internal quotation marks omitted). In this case, the evidence was not in equipoise.
Even if the burden of proof were placed on the plaintiffs as to all issues, the record
establishes that AT&T failed to allocate revenue as the Management Agreement required.
104
a. The Requirements Of The Shared Revenues Formula
Under the plain language of the Shared Revenues Formula, AT&T committed to
aggregate all of the revenue generated from the utilization of AT&T’s Entire Network.
AT&T committed that when aggregating revenue, AT&T would not distinguish between
the Partnership’s subscribers and other subscribers. AT&T further committed that when
allocating a share of revenue to the Partnership, AT&T would use the ratio of the traffic
carried by the Partnership’s portion of the Entire Network compared to the traffic carried
by the Entire Network as a whole. AT&T committed that it would not itemize the
Partnership’s share of revenue as if the Partnership were a separate, independent business
with its own wireless network. Finally, AT&T committed to add a premium to the
Partnership’s share of revenue.
The plain language of the Shared Revenues Definition establishes these
commitments. It defines Shared Revenues to mean “[1] the aggregate revenue generated
by Subscribers of Owner’s Business and Manager’s Business utilizing Owner’s System
and Manager’s System, and [2] any other applicable revenues generated by utilization of
the Entire Network.” MNSA at ’751. (enumeration added). The first part of this definition
encompasses revenue generated “by Subscribers of Owner’s Business and Manager’s
Business utilizing Owner’s System and Manager’s System.” It does not look only to
revenue generated by Owner’s Subscribers or from the use of Owner’s System. The second
part of this definition goes further and entitles the Partnership to a share of “any other
applicable revenues generated by utilization of the Entire Network.”
105
Other components of the Shared Revenues Definition confirm that it encompasses
all revenue generated by AT&T’s wireless business. The stack of component definitions
that aggregate as the Entire Network leads to that conclusion.
• The Management Agreement defines “Entire Network” as “collectively, the
Owner’s System, the Manager’s System, and the Shared Network.” Id. at ’748.
• The Management Agreement defines “Owner’s System” as all of the equipment,
facilities, hardware, and software “which Owner uses, owns or leases in order to
operate a wireless communications system in Owner’s Area, to deliver Traffic
between and among cell sites and any points of interconnection in Owner’s Area
directly or indirectly to the [landline telephone network], and to deliver Traffic to
and from cell sites in Owner’s Area to the Shared Network.” Id. at ’750.
• The Management Agreement defines “Manager’s System” as all of the equipment,
facilities, hardware, and software “which Manager and its Affiliates use, own or
lease in order to operate a wireless communications system in Manager’s Area, to
deliver Traffic between and among cell sites and points of interconnection directly
or indirectly . . . in Manager’s Area, and to deliver Traffic to and from cell sites in
Manager’s Area to the Shared Network; but shall exclude Owner’s System.” Id.• The Management Agreement defines “Shared Network” as “all wireless
communications system equipment that is owned, leased or used by Manager and
its Affiliates and that allows the cell sites of Manager and its Affiliates (including
Owner) to operate as a single nationwide network, including, without limitation,
switches, base station controllers, data centers, certain circuits, SS7 network, and all
related hardware and software required for such equipment to operate in accordance
with its specifications.” Id. at ’751.
The Management Agreement calls for the Partnership to share in all revenue “generated by
utilization of the Entire Network.” Id. The concept of the Entire Network thus encompasses
every aspect of AT&T’s wireless system.
The plain language of the Shared Revenues Formula required that AT&T aggregate
all revenue generated by any user of wireless communications services under an ongoing
agreement or from the utilization of the Entire Network, then allocate to the Partnership a
106
share of the resulting revenue based on the proportion of “Traffic” carried by the
Partnership’s system. The Management Agreement defines “Traffic” broadly as
“electronic signals, including voice data, and other associated electronic signals.” Id. at
’752. The Management Agreement calls for each “Unit of Traffic” to be allocated based
on “the cell site that carries such Traffic, with the convention that the Unit of Traffic from
any one call or transmission shall be assigned to the cell site upon which such call or
transmission is first carried.” Id. § V(G)(1). If AT&T owned a cell site as part of its system
that served an Owner’s Area, then AT&T committed to attribute Units of Traffic to the
Partnership according to the percentage of site incursions in the Owner’s Area, or otherwise
in proportion to the relative benefits that AT&T and the Owner received from the cell site.
Id. § V(G)(2).
Finally, to ensure fairness to the Partnership, AT&T committed to the Premium
Provision. Id. Ex. A. Although AT&T reserved the right to apply a different premium,
AT&T committed to the No-Less-Favorable Requirement, under which any revised
method would be “no less favorable to the Owner than the allocation method used in prior
periods.” Id. AT&T thus committed to provide the Partnership with at least a 25% premium
on its allocated share of revenue.
Extrinsic evidence explains why AT&T made these commitments. AT&T adopted
the Management Agreement at a critical time in the development of the cellular telephone
industry when carriers were shifting to nationwide plans and number portability had
arrived. The Management Agreement was executed in October 2005, immediately after the
arrival of number portability and AT&T’s introduction of unlimited nationwide roaming
107
as a component of its basic subscriber packages. The Management Agreement was made
effective as of January 1, 2003, to reflect the fact that AT&T already had started managing
the Partnership as an integral part of its nationwide wireless network. The Management
Agreement confirms that AT&T replaced the Cellular Agreement and Switch Agreement
“to adapt to changing market and technological conditions.” Id. at ’748; see JX 191. Two
of the changing “market and technological conditions” were the arrival of number
portability and nationwide plans.
The Management Agreement also arrived during a period of industry consolidation.
When AT&T adopted it, the company was in the final stages of its M&A activity. The
immediate predecessor to AT&T—SBC—was preparing to close on its acquisition of what
was then AT&T, creating a combined company with the largest market share in wireless
customers and data revenue in the United States. And Cingular, which SBC controlled,
recently had completed its acquisition of the former AT&T’s wireless business. See JX
188; JX 263 at 3. The FCC anticipated that large nationwide carriers would dominate the
industry. See JX 300 at 70. The Management Agreement reflected AT&T’s shift toward a
nationwide business model.
Perhaps most notably for industry insiders, the Management Agreement made no
explicit refence to NPA-NXX, the system that AT&T and its predecessors had used to
identify subscribers since the 1980s. Wages Tr. 375; See JX 2681 at ’361 (document dated
November 18, 1988 detailing McCaw’s allocation methodologies that used NPA-NXX).
The Switch Agreement contained explicit references to NPA-NXX, stating that “[f]eatures
revenue . . . shall be assigned according to the subscriber’s NXX . . . , which is specific to
108
[Owner’s] or [Manager’s] System,” and noted that the Partnership would be liable for
roaming charges generated by its subscribers with telephone numbers assigned to its NPA-
NXX ranges. JX 112 §§ 4.1–4.2. By omitting any reference to NPA-NXX and substituting
the Shared Revenues Definition, the Management Agreement demonstrated that AT&T
had moved to a nationwide sharing model for revenue.
b. AT&T’s Departed From The Shared Revenues Formula By
Assigning Revenue By Subscriber And Using A Different
Definition Of The Partnership’s Business.
AT&T failed to follow the Shared Revenues Formula. AT&T instead identified
revenue generated by the subscribers with NPA-NXX numbers assigned to the Partnership.
AT&T also used a different and narrower definition of the Partnership’s business than what
the Management Agreement contemplated. On cross-examination during trial, the
plaintiffs elicited admissions to that effect from AT&T’s principal witness.
At trial, Wages conceded that AT&T did not use the definition of “subscriber” that
appeared in the Management Agreement. Wages Tr. 384 (“Q: Isn’t it true that you did not
identify subscribers in the partnerships on the basis of the management and network sharing
agreement? A: Yes.”); id. at 386 (“Q: . . . . You just didn’t use the definition of subscriber
that’s in the [Management Agreement], did you? A: Not the one that’s in that document,
no.”). Rather than using the Shared Revenues Formula, AT&T used a subscriber-based
model that relied on NPA-NXX. Id. at 384. AT&T treated subscribers with an NPA-NXX
associated with the Partnership’s geographic area as subscribers of the Partnership. AT&T
then identified revenue generate by those subscribers and assigned it to the Partnership. Id.
at 176, 358–59, 383–87, 501–02; see PTO ¶¶ 196–200.
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The Shared Revenues Formula did not permit AT&T to identify and assign revenue
based on a specific group of Partnership subscribers. The Shared Revenues Formula called
for aggregating all revenue generated by all of the Partnership’s subscribers and AT&T’s
subscribers, plus all other revenue derived from the utilization of the Entire Network. The
Shared Revenues Formula then called for allocating the resulting pool of revenue based on
traffic. Finally, the Premium Provision called for adding a 25% premium to the
Partnership’s share of revenue.
The Management Agreement did use subscriber-based concepts for other purposes.
For example, the Shared Expenses Formula used subscriber-based concepts as the sharing
statistic for certain categories of Shared Expenses. And in two sections addressing AT&T’s
administrative obligations, the Management Agreement used the phrase “Owner’s
Subscribers” in isolation.41 Those provisions show that the Management Agreement could
have used a subscriber-based metric in the Shared Revenues Formula, but did not.
AT&T also departed from the Shared Revenues Formula by using a different and
more limited definition of the Partnership’s business than what the Management
Agreement specified. Wages Tr. 391–92 (“Q: You didn’t define our business this way, did
41
In the first provision, the Management Agreement stated that “Manager shall
provide to Owner, to the extent necessary, direct electronic access to certain information
technology systems, for purposes of activating or deactivating Owner’s Subscribers.”
MNSA § V(C). In the second provision, the Management Agreement stated that “Owner’s
Subscribers, if any, shall be entitled to Roam” in areas in which AT&T maintained
reciprocal roaming agreements with third-party carriers. Id. § V(E). Neither suggests that
AT&T could identify assign revenue to the Partnership based on a limited universe of
subscribers identified by NPA-NXX.
110
you? A: From my perspective, no.”). Wages and the Partnership Accounting Group viewed
the business of the Partnership as limited to “wireless activity,” meaning activity involving
“cellular phones, voice, data, SMS text, those things . . . we do with our phones.” Id. at
395–97. As a result, they believed that the Partnership was “not entitled to participate in
the profits of every AT&T business venture that used partnership assets.” Id. at 406. For
activities not involving this narrow definition of wireless activity, Wages believed that the
Partnership only was entitled to be “made whole” for AT&T’s use of its assets. Id.
The Shared Revenues Formula called for the Partnership to receive (i) a share of
any revenue generated by any subscriber, whether that subscriber was assigned to the
Partnership or to AT&T and its other affiliates and (ii) a share of any revenue otherwise
generated from the utilization of the Entire Network. The Shared Revenues Formula did
not differentiate between the Partnership’s business and AT&T’s business. The
Management Agreement defined “Owner’s Business” and “Manager’s Business” in
parallel terms. See MNSA at ’749, ’750. Those parallel definitions make clear that the
Partnership (the Owner) and AT&T (the Manager and its affiliates) were in precisely the
same business: the business of operating and benefitting from the Entire Network. But
AT&T never established the pool of Shared Revenues as contemplated by the Management
Agreement. AT&T also never allocated Shared Revenues to the Partnership based on
traffic. And AT&T never applied a premium to the Partnership’s allocations, as
contemplated by the Premium Provision. See JX 2558.
Wages admitted that AT&T never told the Partnership or its Executive Committee
that AT&T was not using the definition of “subscriber” that appeared in the Management
111
Agreement. Wages Tr. 384. Wages also admitted that the different approach that AT&T
used was not written down anywhere. Id. at 397. When the Partnership Accounting Group
assigned or allocated revenue and expense and prepared the Partnership’s financial
statements, they used AT&T’s unwritten definition, not the Management Agreement. Id.
Wages admitted that AT&T never determined how many people would have
qualified as subscribers using the definition in the Management Agreement. Id. at 384.
Wages admitted that AT&T never determined how much revenue the Partnership would
have received if AT&T had followed the Shared Revenues Definition, then applied the
Shared Revenues Formula and allocated revenue based on traffic. Id. at 385, 406–07.
Wages admitted that it is impossible to know how much more the Partnership would have
been worth if AT&T had followed the methodologies specified in the Management
Agreement. Id. at 398.
c. AT&T Did Not And Could Not Have Invoked The Modification
Right To Depart From The Shared Revenues Formula.
To defend its alternative methodologies for allocating revenue, AT&T relied on the
Modification Right. That argument fails because AT&T could not meet the requirements
for invoking the Modification Right.
At the outset, the record establishes that AT&T never invoked the Modification
Right in real time. To the contrary, there is ample evidence that AT&T’s Partnership
Accounting Group never thought AT&T had to invoke the Modification Right. Wages and
the Partnership Accounting Group thought that AT&T had the discretion to make
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judgments about how AT&T identified and assigned or allocated revenue and expense to
the Partnership. They did not know about the Modification Right or its requirements.
The record also establishes that AT&T could not have met the conditions necessary
to invoke the Modification Right. Under the New Conditions Requirement, a new
allocation methodology had to address “changing market and technological conditions.”
MNSA § VI(A). Any decision to depart from the Shared Revenues Formula and revert to
NPA-NXX could not have satisfied the New Conditions Requirement. AT&T began
disregarding the Shared Revenues Formula promptly after implementing the Management
Agreement. There was no change in market or technological conditions between the
adoption of the Management Agreement and AT&T’s failure to follow the Shared
Revenues Formula. Instead, it was the Management Agreement’s adoption of the Shared
Revenues Formula that responded to changing market and technological conditions,
including the arrival of number portability and nationwide roaming. The Management
Agreement was progressive. AT&T’s failure to follow it was regressive.
To properly invoke the Modification Right, AT&T also had to satisfy the Fair
Accounting Requirement. That condition required that the new allocation methodology
“fairly account” for the revenue and expense associated with Owner’s Business. Id. AT&T
could not have met that standard for purposes of an itemization scheme based on NPA-
NXX.
During the early years of the wireless industry, NPA-NXX was a reasonable
approximation for a subscriber’s primary place of use, albeit an imperfect one. But after
the arrival of number portability, a customer could move across the country and even
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switch wireless carriers, yet her usage still would remain associated with her phone
number’s original rate center. Wages Tr. 361–62. At the same time, the advent of
nationwide roaming eliminated any incentive for the subscriber to obtain a new NPA-NXX
number associated with her new location. Without the underpinnings that historically made
NPA-NXX a reasonable proxy for primary place of use, that system became less reliable
over time. By the time of the events giving rise to this litigation, the NPA-NXX system
had become so unreliable that AT&T could not provide basic information about the number
of subscribers for the Partnership, such as:
• The percentage of AT&T subscribers nationwide who resided in AT&T service
areas different from the one that issued their NPA-NXX;
• The number of AT&T subscribers who resided in the Partnership’s service area and
used a non-partnership NPA-NXX;
• The number of AT&T subscribers who moved to the Partnership’s service area,
changed their billing address and primary place of use to an address in the
Partnership’s area, yet continued to use a non-Partnership NPA-NXX; or
• The number of AT&T subscribers who resided in a non-Partnership service area and
use an NPA-NXX assigned to the Partnership.
See id. at 364–70; Wages 2019 Dep. 260. Wages admitted that he could not say whether
the number of AT&T subscribers in the Partnership’s services was twice as many, three
times as many, or even five times as many as the number of NPA-NXX numbers issued to
the Partnership. Wages Tr. 386.
The plaintiffs proved that after the introduction of nationwide rate plans and number
portability, NPA-NXX became an increasingly unreliable means of allocating revenue to
the Partnership. Having committed to using the Shared Revenues Formula, AT&T could
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not have reverted to the NPA-NXX methodology and satisfied the Fair Accounting
Requirement.42
AT&T’s system of identifying revenue and assigning it to the Partnership based on
NPA-NXX also could not meet the No-Less-Favorable Requirement. That condition
required that any new allocation methodology be “no less favorable to the Owner than the
allocation method used in prior periods.” MNSA Ex. A. In the Management Agreement,
AT&T committed to the Premium Provision, which obligated AT&T to add a 25%
premium to the share of revenue that AT&T allocated to the Partnership. When using the
NPA-NXX methodology, AT&T never added a premium to the items of revenue that
42
In an attempt to show that there remained some linkage between the customer’s
assigned NPA-NXX number and the customer’s primary place of use, Wages testified that
if a subscriber affirmatively told AT&T that her primary place of use had changed, then
the customer could have her number ported to the new area, where it then would be
identified with the market-level entity covering that area. Wages 2019 Dep. 211–12.
Otherwise, her use and monthly recurring access charges would continue to be attributed
to her original home market. Id. at 212. Wages’ testimony overlooked the fact that ported
numbers remained associated with their original rate center, meaning that even after
porting, the customer’s use and access charges would remain associated with her original
home market. See JX 2122 at 6 n.20; JX 2160 at 3. Wages could not state the basis for his
belief that ported numbers would be associated with their new geographic market in
AT&T’s accounting system. Wages described Location Routing Numbers as “ghost
numbers,” and he stated that once a customer was assigned a “ghost number,” then
“something happens in the system . . . that links it to” the new geographic market. Wages
2019 Dep. 189–93. When asked how he knew that “ghost numbers” could point to a
specific geography, Wages testified only that he had “been told that that’s the way it
works.” Id. at 208. AT&T’s valuation expert credibly contradicted Wages’ testimony,
stating that both “intracarrier and intercarrier roaming charges . . . [were] settled by rate
centers determined by NPA-NXX.” Taylor Report at 68. Later in the same deposition,
Wages contradicted himself, admitting that the Location Routing Number would remain
associated with the NPA-NXX number’s original geography. Wages 2019 Dep. 268–71.
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AT&T assigned to the Partnership. AT&T’s reversion to a subscriber-based, NPA-NXX
methodology therefore could not meet the No-Less-Favorable Requirement.
As a general matter, therefore, AT&T failed to adhere to the Management
Agreement by failing to follow the Shared Revenues Formula. Assuming for the sake of
analysis that the Management Agreement defined the scope of AT&T’s delegated
authority, then AT&T exceeded its delegated authority by departing from the Shared
Revenues Formula.
3. AT&T Failed To Abide By The Intra-Company Roaming Provision
For Purposes Of Voice Roaming.
AT&T also failed to abide by the Intra-Company Roaming Provision when
allocating revenue and expense associated with voice roaming. The Intra-Company
Roaming Provision established that AT&T would not identify and assign any direct
charges associated with intra-company roaming.43 The Shared Revenues Definition
mandated that any revenue that AT&T collected as a result of intra-company roaming
become part of the aggregate pool and allocated using the Shared Revenues Formula.
AT&T did not do either of these things.
Instead, AT&T implemented a system for intra-company roaming that used the
concepts of “outcollect revenue” and “incollect expense.” The concept of “outcollect
43
Reinforcing the Intra-Company Roaming Provision, the Management Agreement
called for AT&T to allocate assign identifiable Outcollect Roaming Revenues to the
Partnership when generated by third-party carriers. The specific reference to the latter
reinforces the prohibition on the former.
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revenue” referred to revenue generated from non-Partnership subscribers roaming in the
Partnership’s area and using its network. See JX 546 at ’543–44. The concept of “incollect
expense” referred to revenue generated Partnership subscribers roaming outside of the
Partnership’s area and using the rest of the AT&T network. See id. That was the same
method that AT&T used to track third-party roaming revenue and expense with other
carriers, such as Verizon or Sprint. Id.
To defend its methodology, AT&T again relied on the Modification Right, but
AT&T could not have invoked the Modification Right because the Intra-Company
Roaming Provision did not describe an allocation methodology. It barred charges for intra-
company roaming. To modify the Intra-Company Roaming Provision, AT&T would have
needed to amend the Management Agreement, which it never did.
Assuming for the sake of analysis that AT&T could have invoked the Modification
Right—and there is no evidence that AT&T ever did—then AT&T could not have met the
New Conditions Requirement. AT&T’s methodology for identifying and assigning
revenue and expense for intra-company roaming did not respond “to changing market and
technological conditions.” MNSA § VI(B). The Switch Agreement had provided for
assigning intra-company roaming revenue and expense based on subscribers. JX 112 §
4.2(b). The Management Agreement responded to changing market and technological
conditions by banning any direct charges for intra-company roaming.
To properly invoke the Modification Right, AT&T also would have had to satisfy
the Fair Accounting Requirement, including the No-Less-Favorable Requirement. AT&T
claimed at trial that some of the partnerships were net winners under AT&T’s intra-
117
company methodology, while others were net losers. By its own admission, AT&T could
not satisfy the No-Less-Favorable Requirement if the Partnership was a net loser. AT&T
did not prove that the Partnership was a net winner.
Instead, the record shows that the outcollect-incollect system did not fairly account
for the revenue and expense of the Partnership. Under AT&T’s system, a subscriber who
moved out of the Partnership’s area continued to generate incollect expense for the
Partnership, but the subscriber no longer generated any offsetting network usage revenue
for the Partnership. AT&T’s methodology thus generated expense that had nothing to do
with the operation of the Partnership’s business.
AT&T contended in response that its system could have benefited the Partnership
because a subscriber who moved out of the Partnership’s area continued to generate
monthly recurring access fees for the Partnership. Dkt. 614 at 12–13; see Wages Tr. 344–
45; Hall Tr. 1040–41. AT&T also asserted that because the Partnership incurred the
expense of up-front customer acquisition costs,44 the Partnership was entitled to recoup
44
Framed broadly, customer acquisition costs included the costs of maintaining
physical store locations and employing a sales staff. More significantly, customer
acquisition costs included handset subsidies that AT&T offered as a promotion to new
customers. Equipment subsidies caused the cost of equipment sales to exceed equipment
sales revenue at the partnerships. See JX 647 at ’528; Musey Tr. 1262; JX 627 at 22. In the
years before the Freeze-Out, higher handset subsidies for the iPhone further increased the
cost of equipment sales. See JX 499 at ’558 (describing higher customer acquisition costs
“driven by iPhone”); JX 874 at ’006 (“We have seen sharp increases in the subsidy per unit
since the launch of the iPhone.”); see also JX 627 at 22 (“The importance of equipment
subsidies to industry success can be seen in AT&T’s exclusive agreement with Apple.”).
And as the wireless industry matured and carriers’ competition for subscribers intensified,
equipment subsidies and other acquisition costs increased. See JX 627 at 50 (“[C]arriers
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those costs, and AT&T’s method enabled the Partnership to do that. Although that
argument has some intuitive appeal, the evidence does not establish that the monthly
recurring access fees exceeded the incollect expense, and there is no evidence that anyone
at AT&T ever conducted the cost-benefit calculation in real time. Instead, the record
evidence makes it unlikely that the Partnership came out ahead. AT&T’s valuation expert
recognized that the opposite likely was true, meaning that many relocated subscribers
generated net losses for the Partnership. Taylor Tr. 711–12. Making matters worse, the
Partnership would continue to be billed for each customer’s subsequent equipment
upgrade, even though the subscriber no longer lived in the Partnership’s geographic area
or used the Partnership’s wireless system. See MNSA Ex. A.
The Management Agreement also contemplated that AT&T would allocate three
categories of General and Administrative expense to the Partnership based on the number
of subscribers assigned to the Partnership. Id. Under the NPA-NXX system, the Partnership
gained a subscriber and associated G&A expense whenever it activated a number in one of
its NPA-NXX blocks. Wages 2019 Dep. 175. When that subscriber relocated, AT&T’s
accounting system did not remove the subscriber from the Partnership’s count, meaning
that the Partnership continued to incur G&A expense, but without offsetting revenue.
will focus more heavily on increasing customer value and handset subsidies to win
subscriber share. Over the past five years, carriers [sic] value-boosting initiatives knocked
about six percentage points off their gross margins.”).
119
AT&T could not have complied with the Modification Right when disregarding the
Intra-Company Roaming Provision, departing from the Shared Revenues Formula, and
using the incollect/outcollect methodology. AT&T could not have concluded that its
system met the New Conditions Requirement, the No-Less-Favorable Requirement, or the
Fair Accounting Requirement. Assuming for the sake of analysis that the Management
Agreement defined the scope of AT&T’s delegated authority, then AT&T exceeded its
delegated authority by failing to comply with the Intra-Company Roaming Provision .
4. AT&Ts Approach To Data Usage And Data Roaming
AT&T did not follow the Management Agreement when addressing data usage and
data roaming. AT&T was obligated to allocate all revenue from data usage under the
Shared Revenues Formula, with an additional 25% premium as contemplated by the
Premium Provision. Under the Intra-Company Roaming Provision, AT&T was not
permitted to charge the Partnership for data roaming. Instead, AT&T used its subscriber-
based framework for data usage, never applied a revenue premium, and developed
methodologies for assigning revenue from intra-company data roaming based on NPA-
NXX. In departing from the Management Agreement, AT&T did not and could not have
met the requirements to exercise the Modification Right.
Subscribers generate data-usage revenue by using their cellular phones for various
activities such as browsing the internet, sending photos and videos via text message, and
downloading games and ringtones. Subscribers also generate data-usage revenue when
they access the internet via Connected Devices, such as the Amazon Kindle.
120
Data-usage revenue met both aspects of the definition of Shared Revenues. It was
both (i) part of the aggregate revenue generated by subscribers of Owner’s Business and
Manager’s Business utilizing Owner’s System and Manager’s System and (ii) part of the
revenue generated by utilization of the Entire Network. See MNSA at ’751. AT&T
therefore was obligated to allocate data-usage revenue using the Shared Revenues Formula,
including the premium contemplated by the Premium Provision.
Instead of following the Shared Revenues Formula, AT&T applied its subscriber-
based model to data usage. Just as with voice, if a subscriber assigned to the Partnership
paid for data usage, then the Partnership received that revenue. AT&T did not aggregate
the revenue and allocate it based on traffic, and AT&T did not apply the 25% revenue
premium contemplated by the Premium Provision.
Just as with voice, AT&T came up with approaches to assign data roaming revenue.
AT&T used two different methodologies during two different periods. AT&T did not and
could not have relied on the Modification Right to adopt either method.
a. AT&T’s Use Of The Bill-And-Keep Method To Allocate Intra-
Company Data-Roaming Revenue Before July 2010
The plaintiffs proved that AT&T failed to follow the Shared Revenues Formula to
allocate intra-company data roaming revenue before July 2010. Until July 2010, AT&T
permitted all of its subscribers to engage in data roaming in all AT&T markets without
paying any roaming fees. See, e.g., JX 647 at ’533; JX 2591 at 6–7. This approach utilized
the same bill-and-keep method for intra-company data roaming that AT&T traditionally
used for inter-carrier voice roaming. See JX 647 at ’533.
121
AT&T’s use of the bill-and-keep method for intra-carrier data roaming failed to
comply with the Shared Revenues Formula. As noted, data-usage revenue fell within the
definition of Shared Revenues. AT&T was obligated to include the data-usage revenue in
the overall pool, allocate the data-usage revenue using a traffic-based measure, and add a
25% premium to the Partnership’s share of revenue.
AT&T did not do any of these things. AT&T instead only allocated to the
Partnership the data-usage revenue generated by subscribers with NPA-NXX numbers
assigned to the Partnership.
AT&T did not and could not invoke the Modification Right to adopt the bill-and-
keep method. There is no evidence that AT&T ever invoked the Modification Right. AT&T
simply used the bill-and-keep approach. AT&T also could not have met the New
Conditions Requirement or the Fair Allocation Requirement.
AT&T argued that it used the bill-and-keep method because it was not
technologically possible to track data roaming based on the device’s geographic location.
Dkt. 622 at 46. AT&T thus tried to invert the New Conditions Requirement: Rather than
arguing that new technological conditions necessitated the change, AT&T argued that old
technological conditions necessitated the change.
AT&T’s argument is an exercise in misdirection. The Shared Revenues Formula did
not call for allocating revenue based on the device’s location. The Shared Revenues
Formula called for allocating revenue based on the proportion of overall traffic carried on
the Partnership’s network relative to the Entire Network. AT&T had the ability to track
those levels of data usage. In fact, as discussed below, AT&T contends that it used that
122
method to allocate data-usage revenue from the Commercial Network Agreements that
AT&T entered into with companies like Amazon, General Motors, and Garmin. Id. at 21
(citing JX 2419 at 58). AT&T thus could have allocated data-usage revenue using the
Shared Revenues Formula.
Regardless, the record does not support AT&T’s claim of technical impossibility.
The record establishes that AT&T did not track intra-company data usage by device until
July 2010, but that is a different question than whether AT&T could have done so earlier.
Before trial, AT&T’s witnesses simply claimed it was impossible; they could not explain
why.45 At trial, Wages asserted that many Connected Devices did not have an NPA-NXX
number. Wages Tr. 402. So be it, but AT&T could have tracked revenue for devices that
had NPA-NXX numbers. And AT&T could have assigned NPA-NXX numbers to the
Connected Devices that lacked them, as it did when it began tracking data-roaming revenue
45
See, e.g., Hall Dep. 82 (“I think as the business [e]volved, we were able to track
it; but, you know, some of it in the beginning, it was, you know, we couldn’t.”); Wages
2019 Dep. 84 (“I believe there was a time period in the relevant time period . . . where we
could not if we’re talking intra-company, and then we changed our methodology once we
could track it.”). AT&T also cited internal documents which identified the “[i]nability to
track data roaming” as one of the motivations for the freeze-outs. JX 344 at 4; JX 547 at
’319; see JX 310 at ’765 (presentation recommending squeeze-out of other market-level
AT&T entities to “[p]revent[] reconciling the inability to capture data roaming”). Those
documents do not explain why either, and the references seem more geared to the
accounting department’s inability to track the information using AT&T’s existing financial
reporting systems, rather than commenting on whether or not AT&T had the technical
chops.
123
in July 2010.46 Other carriers assigned NPA-NXX numbers to Connected Devices as early
as 2005. See JX 2122 at 10 (FCC report stating that since 2005, “the wireless [Number
Resource Utilization Form] data has reflected the number of individual subscribers plus a
share of the mobile wireless connections or connected devices”).
AT&T thus had the capability to track data usage. AT&T simply chose not to do so.
AT&T maintained bill-and-keep agreements with third-party carriers, meaning that
modifying its systems to track data usage by location only would have affected the
allocation among intra-company markets.47 AT&T was indifferent to the revenue
allocation among markets where AT&T owned the system, because AT&T received the
value regardless. Tracking data roaming thus only had the potential to benefit entities like
the Partnership. Even then, AT&T ultimately would receive the vast majority of the
revenue, because it owned nearly all of the equity interests in those entities. AT&T thus
did not have an economic incentive to expend resources on complying with the Shared
Revenues Formula for data usage. Perhaps failing to comply with the Shared Revenues
46
See JX 2419 at 55 (“Mr. Lurie confirmed that each Connected Device that attaches
to AT&T’s network has a ten-digit number associated with it that is tracked and allocated
like any other ten-digit device.”); Lurie Dep. 94–98 (AT&T “was able to track data
roaming . . . in other networks, absolutely”); see also JX 2503 at 9 (FCC report stating that
consumers often “use more than one mobile device that have been assigned telephone
numbers – particularly non-voice devices, such as Internet access devices . . . , e-readers,
tablets, and telematics systems”).
47
See Taylor Tr. 963 (before 2010 “it was all bill and keep, including . . . third
parties”); Taylor Report at 80 (“[I]ntercarrier data roaming was not a revenue source during
this period.”).
124
Formula for data usage represented a case of efficient breach for AT&T, but it was a breach
nonetheless.
AT&T only took steps to track data roaming in 2010 because of an FCC mandate
that became effective in 2011.48 To track data roaming, AT&T assigned each Connected
Device an NPA-NXX number and tracked data usage like other network usage. See JX
2419 at 55. AT&T could have done that earlier and fulfilled its commitment under the
Management Agreement to follow the Shared Revenues Formula.
AT&T thus could not meet the New Conditions Requirement. AT&T also could not
meet the Fair Accounting Requirement. The plaintiffs proved that the bill-and-keep method
did not fairly account for the data-usage revenue associated with the Partnership’s portions
of the Entire Network.
As noted, when applied to the Partnership, the bill-and-keep method meant that the
Partnership received all of the service revenue that subscribers with NPA-NXX numbers
assigned to the Partnership generated from data usage, regardless of where those
subscribers were located when they generated the revenue. By contrast, the Partnership did
not receive any share of the service revenue that other AT&T subscribers generated when
they used the Partnership’s system to carry data. In order for the bill-and-keep method to
48
See In re Reexamination of Roaming Obligations of Commercial Mobile Radio
Service Providers and Other Providers of Mobile Data Services, WT Dkt. No. 05-265,
Order on Reconsideration and Second Further Notice of Proposed Rulemaking, 25 FCC
Rcd. 4181 (2010) [JX 1012]; Id., Second Report and Order, 26 FCC Rcd. 5411 (2011) [JX
1924]; Taylor Tr. 754.
125
“fairly account[] for the revenues and expenses of Owner’s Business,” the level of data
usage by those subscribers would have had to be equal.
The record does not suggest that the usage was equal. Instead, AT&T’s use of NPA-
NXX to implement the bill-and-keep method means that the usage was unlikely to be equal.
Because AT&T identified the subscribers assigned to market-level entities based on often
outdated NPA-NXX designations, the Partnership received nothing when subscribers with
NPA-NXX numbers assigned to a different market-level entity used its system. AT&T’s
principal witness could not testify with any confidence about the correspondence between
an NPA-NXX number and primary place of use. See Wages Tr. 367–69.
Even if, by a remarkable coincidence, the usage balanced out, AT&T never applied
the 25% premium to the revenue assigned to the Partnership. AT&T’s use of the bill-and-
keep method could not have not satisfied the Fair Accounting Requirement.49
49
AT&T points out that for those partnerships that received audited financial
statements, the notes to the financial statements for the year ended December 31, 2008,
disclosed the bill-and-keep method. For example, the audited financial statements for
Bradenton for the year ended December 31, 2008, stated that “[d]ata usage revenue is not
allocated between affiliates.” JX 539 at ’926, ’935. For those partnerships with audited
financial statements, the fact that AT&T disclosed a methodology that ran contrary to the
Management Agreement does not mean that AT&T validly exercised the Modification
Right. It rather provides additional evidence that AT&T ignored its obligations under the
Management Agreement. It also would affect the timelines of any claim for breach of the
Governance Provision based on the use of the bill-and-keep method in connection with a
partnership where the disclosure was made. The Partnership did not have audited financial
statements, so the issue is irrelevant.
126
b. AT&T’s Use Of The Kilobyte-Fee Method To Address Data
Roaming Revenue After July 2010
The plaintiffs proved that AT&T failed to follow the Shared Revenues Formula after
July 2010 when allocating intra-company data-roaming revenue. During this brief period
before the Freeze-Out, AT&T continued to use NPA-NXX to assign to the Partnership any
data revenue generated by the Partnership’s subscribers. That approach ran contrary to the
Management Agreement for the reasons explained in the prior section.
What changed was how AT&T priced a subscriber’s use of data. Having assigned
NPA-NXX numbers to track data usage, AT&T adopted an incollect/outcollect
methodology similar to what it used for intra-company voice roaming. To charge for intra-
company data roaming, AT&T’s accounting department estimated a fee per kilobyte of
data use (the “Kilobyte-Fee Method”). See Taylor Tr. 964; JX 2166 at 16, 18; JX 1335; JX
1336; JX 1338; JX 1347; JX 1761; JX 1872. If a Partnership subscriber used AT&T’s
network outside of the Partnership’s area, then the Partnership was charged the fee in a
manner comparable to incollect expense. If a non-Partnership subscriber used AT&T’s
network inside the Partnership’s area, then the Partnership was credited with the fee in a
manner comparable to outcollect revenue.
The use of the Kilobyte-Fee Method for intra-company data roaming contravened
the Management Agreement for all the same reasons that the incollect/outcollect method
did for intra-company voice roaming. For starters, it ignored the Intra-Company Roaming
Provision, in which AT&T committed not to charge for intra-company roaming. Next, it
ignored the principles of revenue aggregation and allocation by traffic prescribed by the
127
Shared Revenues Formula. Finally, it ignored AT&T’s commitment to add a 25% premium
to the Partnership’s share of revenue. The Kilobyte-Fee Method assigned revenue using
the same method that AT&T would use if a subscriber of a competing carrier, such as T-
Mobile, had used AT&T’s network. Wages Tr. 408–09. AT&T thus treated the Partnership
not as a partner, but as an arm’s-length counterparty.
The record again shows that AT&T did not invoke the Modification Right to adopt
the new methodology and could not have done so. The plaintiffs proved that AT&T could
not have satisfied the New Conditions Requirement. AT&T used the Kilobyte-Fee Method
at a time when it had the ability to use the Shared Revenues Formula. AT&T did not need
to adopt the Kilobyte-Fee Method to respond to changing market and technological
conditions.
The Kilobyte-Fee Method also could not have satisfied the Fair Accounting
Requirement because the Partnership was a net loser under the system. Before
implementing the Kilobyte-Fee Method, AT&T’s accountants calculated that the
Partnership would go from having no revenue or expense from data roaming under the bill-
and-keep method to net-negative data roaming revenue of $145,851.23 per quarter under
the Kilobyte-Fee-Method, equating to net negative revenue of nearly $600,000 per year.
See JX 1335, “Data GL 2Q2010-Subtotal %” tab, at Cell S130. More broadly, when using
the Kilobyte-Fee Method, AT&T systematically charged the Partnership and its sister
partnerships a rate for intra-company incollect data roaming expense that was 4.87%
greater than what AT&T used when allocating intra-company outcollect data roaming
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revenue. JX 1872b; see JX 2166 at 16. And AT&T never applied the 25% revenue
premium.
Neither the bill-and-keep method nor the Kilobyte-Fee Method complied with the
Management Agreement.
5. AT&T’s Allocation Of Revenue From Commercial Network
Agreements
AT&T also failed to follow the Management Agreement when allocating revenue
from the Commercial Network Agreements. The revenue from the Commercial Network
Agreements qualified as Shared Revenues, but AT&T did not allocate the revenue using
the Shared Revenues Formula.50
As discussed in the Factual Background, AT&T entered into the Commercial
Network Agreements with commercial counterparties like Amazon, General Motors, and
Garmin. Generally speaking, the Commercial Network Agreements involved the
commercial counterparties contracting to enable their Connected Devices, like the Amazon
Kindle, to use AT&T’s network. The Commercial Network Agreements covered an array
of services derived from the utilization of AT&T’s network, and AT&T received various
types of revenue under the Commercial Network Agreements, including revenue based on
the amount of data carried by the AT&T’s network, which AT&T called data-service
50
The same analysis applies to AT&T’s contracts with geolocation aggregators. It
is undisputed that AT&T did not allocate any revenue from these contracts to the
Partnership. Wages Tr. 445. Wages did not know about those agreements until November
2020. Id.
129
revenue. The data-service revenue categories consisted of “(1) a fee per kilobyte or
megabyte; (2) a monthly access fee plus a reduced rate per kilobyte or megabyte; or (3) a
monthly fee for a specified amount of data plus a fee for kilobyte or megabyte of data used
in excess of that amount.” JX 2166 at 33–34; see JX 252 at ’002–06 (tiered pricing plan
for contract with KORE Telematics Inc., a reseller of wireless data services); JX 2090 at
39–40 (tiered pricing plan with monthly recurring charges for contract with Spacenet Inc.).
Wages and the Partnership Accounting Group decided that AT&T would
compensate the Partnership for the use of its network by allocating to the Partnership a
proportionate share of the data-service revenue generated by each Commercial Network
Agreement subscriber each month. See JX 2407; Wages Tr. 189; see also JX 2419 at 54–
59. AT&T did not allocate to the Partnership any other categories of revenue that AT&T
received under the Commercial Network Agreements.
Wages and the Partnership Accounting Group decided to allocate the monthly data-
service revenue from each Commercial Network Agreement subscriber “based upon a
weighted average of kilobytes” for each geographical market. JX 2412 at 13–14, 18. For
each contract, AT&T maintained detailed usage statistics for each market and calculated
allocation factors every month. See JX 2409; JX 2412 at 18; see also Hall Tr. 1023
(commercial Connected Device revenue was allocated based on usage). AT&T then
applied the allocation factor to the data-service revenue that that the Commercial Network
Agreement generated and allocated the resulting share to the Partnership.
There is no evidence that AT&T sought to mimic aspects of the Shared Revenues
Formula when deciding to use this allocation methodology. The outcome that AT&T
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independently reached nevertheless deployed some of the concepts that the Shared
Revenues Formula required AT&T to use. Despite those similarities, the plaintiffs proved
that AT&T’s approach failed to comply with the Management Agreement.
First, the Shared Revenues Formula did not contemplate a contract-by-contract
allocation of revenue. The Shared Revenues Formula contemplated a single, aggregated
pot of revenue associated with the Entire Network. It then required AT&T-as-Manager to
allocate the total pot of revenue using a traffic-based statistic for the Entire Network. That
approach recognized that in a digital world, there was no distinction between or among
voice calls, video calls, or data services. The network carried packets of data. That approach
also recognized that the signature feature that AT&T sold to its customers was the ubiquity
and reliability of the Entire Network, not pieces of the network.
It is theoretically possible that a contract-by-contract allocation would generate the
same amount of revenue for the Partnership as a single-pot allocation. But there are
infinitely more cases in which a contract-by-contract allocation would generate different
results. Assume, for example, that a subset of commercial counterparties paid lower rates
for data services, while a different subset of commercial counterparties paid higher rates
for data services. A partnership that carried lots of data at the lower rates would lose under
a contract-by-contract allocation relative to the single-pot allocation.
During cross-examination, Wages conceded this point. After counsel had elicited an
explanation of the Kilobyte-Fee Method, the following exchange took place:
Q. And we’ll never know how much more money the
partnerships were entitled to receive from the operation
of Emerging and Connected Devices if AT&T had
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accounted for them in accordance with the plain
language of the Management and Network Sharing
Agreements, will we?
A: No, we won’t, if we looked at it specifically that way.
Wages Tr. 406–07. Wages subsequently agreed that the Kilobyte-Fee Method did not track
the Shared Revenues Formula. Id. at 410. He also agreed that AT&T only allocated data-
usage revenue to the Partnership, not a share of any revenue from the “overall contract.”
Id. at 409. And he agreed that AT&T never wrote down the Kilobyte-Fee Method anywhere
and that the Executive Committee never approved the methodology. Id. at 410.
AT&T’s lawyers sought to argue that its allocation method was justified because a
market that carried more data bore more of the burden and should receive more money.
Absent the Management Agreement and the Shared Revenues Formula, that would be a
reasonable approach. The Shared Revenues Formula, however, required AT&T to
aggregate all revenue into a single pot. To deviate from it, AT&T had to invoke the
Modification Right or amend the Management Agreement.
AT&T’s actions failed to comply with the Shared Revenues Formula in two other
ways. The Premium Provision required that AT&T add a premium to the Partnership’s
revenue allocation. AT&T did not apply a 25% revenue premium when allocating data-
service revenue to the Partnership.
AT&T also failed to allocate other forms of revenue that it received under the
Commercial Network Agreements beyond data-service revenue. See, e.g., JX 439 at ’011–
12. The definition of Shared Revenues encompassed “[1] the aggregate revenue generated
by subscribers of Owner’s Business and Manager’s Business utilizing Owner’s System and
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Manager’s System, and [2] any other applicable revenues generated by utilization of the
Entire Network.” MNSA at ’751 (enumeration added). The counterparties to the
Commercial Network Agreements were subscribers of Owner’s Business and Manager’s
Business who were utilizing Owner’s System and Manager’s System. See Wages Tr. 380–
81 (agreeing that counterparties to Commercial Network Agreements qualified as
subscribers under definition in Management Agreement). The revenue generated by the
Commercial Network Agreements encompassed contained other fees and revenue streams
generated by the utilization of the Entire Network. AT&T thus should have included all of
the revenue from the Commercial Network Agreements in the Shared Revenues Formula,
not just the data-services revenue.
AT&T also argued that the Partnership was not entitled to share in the benefits of
other streams of revenue from the Commercial Network Agreements because the
Partnership did not bear an equitable share of the expenses. AT&T asserted that it incurred
a wide range of expenses on an enterprise level that it did not allocate to the Partnership.51
The short answer is that the Management Agreement addressed this issue through its
allocation methodologies for expenses, including the Shared Expenses Formula. The
longer answer is that AT&T had the power to invoke the Modification Right, if it could
51
For example, by subpoenaing OnStar, LLC, the plaintiffs obtained the
Commercial Network Agreement with that entity, which AT&T failed to produce. AT&T
then pointed to the agreement to argue that it was obligated to remediate technical issues
encountered by OnStar’s end users, and AT&T bore the risk if it failed to fulfill those
commitments. JX 2106 § 4.1(A).
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satisfy the conditions for its use, and AT&T had the ability to amend the Management
Agreement. What AT&T could not do was simply disregard the Shared Revenues Formula.
AT&T’s methods for allocating revenue from Commercial Network Agreements
did not comply with the Management Agreement.
6. The Defense That The Allocation Issues Were Not Fairly Raised
Faced with its witnesses’ concessions about failing to comply with the Management
Agreement, AT&T argued during post-trial briefing that the plaintiffs’ claim for breach of
the Governance Provision was never pled. To the extent that the plaintiffs were obligated
to pursue their theory as a derivative claim for breach of the Management Agreement—as
this decision has held—then that is a valid objection. The plaintiffs, however, maintain that
they pled a claim for breach of the Governance Provision, then elicited proof at trial
regarding AT&T’s allocation practices to respond to the defense that AT&T had advanced
as its principal reason why it did not breach the Governance Provision. Whether fairness
would the prevent the court from considering that claim presents a difficult issue, but one
where the court ultimately sides with the plaintiffs.
AT&T argues that the plaintiffs did not make clear in their pleadings that they were
asserting a claim for breach of the Governance Provision based on AT&T’s failure to
comply with the Management Agreement. The failure to plead a particular legal theory is
not inherently fatal. “Delaware has adopted the system of notice pleading that the Federal
Rules of Civil Procedure ushered in, which rejected the antiquated doctrine of the ‘theory
of the pleadings’—i.e., the requirement that a plaintiff must plead a particular legal theory.”
HOMF II Inv. Corp. v. Altenberg, 2020 WL 2529806, at *26 (Del. Ch. May 19, 2020).
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Through a combination of provisions, the Federal Rules of Civil Procedure “effectively
abolish[ed] the restrictive theory of the pleadings doctrine, making it clear that it is
unnecessary to set out a legal theory for the plaintiff’s claim for relief.” 5 Arthur R. Miller
et al., Federal Practice and Procedure (Wright & Miller) § 1219 (3d ed. 2004 & Supp.
2020). Under the Federal Rules of Civil Procedure, “particular legal theories of counsel
yield to the court’s duty to grant the relief to which the prevailing party is entitled, whether
demanded or not.” Gins v. Mauser Plumbing Supply Co., 148 F.2d 974, 976 (2d Cir. 1945)
(Clark, J.).
The federal rules, and the decisions construing them, evince a belief that
when a party has a valid claim, he should recover on it regardless of his
counsel’s failure to perceive the true basis of the claim at the pleading stage,
provided always that a late shift in the thrust of the case will not prejudice
the other party in maintaining a defense upon the merits.
Miller, supra, § 1219 (footnote omitted). See generally Johnson v. City of Shelby, 574 U.S.
10, 11–12 (2014) (per curiam) (reversing dismissal of complaint for failure to articulate a
claim under 42 U.S.C. § 1983; explaining that the Federal Rules of Civil Procedure rejected
the “theory of the pleadings” and “do not countenance dismissal of a complaint for
imperfect statement of the legal theory supporting the claim asserted”). The real question
is whether the plaintiffs gave the defendant adequate notice that they were litigating a
particular theory such that the defendant had “a fair opportunity to respond.” See Backer v.
Palisades Growth Cap. II, L.P., 246 A.3d 81, 103 (Del. 2021).
The record is mixed on whether the plaintiffs met this standard. AT&T is correct
that the plaintiffs did not formally plead a count titled, in substance, “Breach of the
Governance Provision Based On AT&T’s Allocation Methodologies.” Instead, Count I of
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the plaintiffs’ pleading was called “Breach of Partnership Agreement.” C.A. No. 6886-
VCL, Dkt. 27 at 42. The contentions in that count included the following:
• “The Partnership Agreement does not permit the majority partner to deprive the
Executive Committee of its complete and exclusive authority to conduct the
Partnership’s business affairs, and thereby also deprive the minority partners of their
indirect voice in the management of the Partnership.” Id. ¶ 131.
• “The Partnership Agreement does not allow the majority partner to deprive the
minority partners of the right to participate in management of the Partnership
through the Executive Committee.” Id. ¶ 132.
• “The Partnership Agreement does not allow a partner to conduct or control the
Partnership’s business and does not permit a partner to act for or on behalf of the
Partnership, except as authorized by the Partnership’s Executive Committee.” Id. ¶
133.
• “Under the Partnership Agreement, any partner who commits a material default or
wrongfully causes a dissolution . . . is required to forfeit its interest in the
Partnership. The Salem Partners gave [AT&T] notice of material default. [AT&T]
made no attempt to cure. As a result, [AT&T] has forfeited its interest in the
Partnership and vested in the non-defaulting partners the right to purchase its
interest for an aggregate amount equal to the balance of [AT&T’s] capital account.”
Id. ¶ 144.
• “The Salem Partners are entitled to the contractual remedy of forfeiture as a result
of [AT&T’s] uncured material breaches of Partnership Agreement and to damages
as provided by law.” Id. ¶ 145.
Viewed in isolation, those allegations point to a claim for breach of the Governance
Provision. Earlier allegations in the pleading also suggested a breach of the Governance
Provision.52 Those allegations included specific contentions that AT&T “asserted its status
52
See id. ¶ 61 (alleging that AT&T “effectively took control of the Partnership”);
id. ¶ 78(c) (citing Governance Provision); id. ¶ 84 (alleging that AT&T “acquired the
majority general partner interest in the Partnership” and “entered into management and
operations agreements with the Partnership” pursuant to which AT&T “provided, inter
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as the majority general partner to by-pass the Executive Committee and to act unilaterally
on behalf of the partnerships” and that AT&T’s “attempt to act as a de facto Managing
Partner is a knowing and intentional breach of the Partnership Agreement.” Id. ¶ 92.
AT&T filed a motion to dismiss that construed the plaintiffs’ allegations as only
challenging the Freeze-Out. The plaintiffs opposed the motion to dismiss. They also filed
a cross-motion for summary judgment asserting that the Freeze-Out breached the
Partnership Agreement, including because it required Executive Committee approval. The
court interpreted AT&T’s motion as seeking dismissal of the plaintiffs’ claims “only to the
extent they contend that a sale of assets by [the Partnership] breached the terms of the
[Partnership Agreement].” C.A. No. 6886-VCL, Dkt. 60 at 2. The court rejected the
argument that the Governance Provision required that the Executive Committee approve
the Freeze-Out and dismissed that claim. Id. ¶ 8. The plaintiffs moved for reargument,
which the court granted as to a potential breach of the Protected Information Provision.
C.A. No. 6886-VCL, Dkt. 68.
After these rulings, the parties conducted discovery. AT&T’s interrogatories
suggested that AT&T believed that the plaintiffs were pursuing claims for breach of the
alia, accounting services to the Partnership”); id. ¶ 86 (alleging that AT&T “has taken an
active role in managing the Partnership’s assets and running the Partnership’s business”);
id. ¶ 87 (alleging that AT&T “consistently used their majority position to oppress the
minority partners and commit breaches of the partnership agreements”); id. ¶ 88 (alleging
that “AT&T never fully disclosed to the Executive Committees or the minority partners in
the partnerships (including the Partnership) that AT&T committed the above material
breaches of the partnership agreements”).
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Partnership Agreement, because AT&T asked each plaintiff to identify every “material
breach or material default of the . . . Partnership Agreement . . . and state the complete
factual basis for each such allegation.” JX 2175 at 53–54. But the plaintiffs’ responses did
not clarify matters. The plaintiffs simply referred to their pleadings and objected that
discovery still was ongoing. Id.; see also id.at 64–65. In responses to other interrogatories,
the plaintiffs referred obliquely to allocation issues. See id. at 14–15, 40, 75 (asserting that
“Defendants and/or ATTM improperly allocated their/its costs to the Salem Partnership.”);
id. at 63 (asserting that there were “other monetary benefits not shared proportionately”
with the minority partners); id. at 64 (referring to improper allocations of expense).
Viewing these responses as inadequate, AT&T moved to compel. The court ordered
the plaintiffs to provide supplemental responses that included providing “a description—
in the sense of a summary—of” any material breach or material default of the Partnership
Agreements. Dkt. 217, Ex. A at 20. The court also ruled that if the plaintiffs intended to
challenge conduct that had not been disclosed previously in the pleadings or in discovery
responses, then they must disclose it because “the defendants are entitled to know what
claims they have to defend against by receiving a reasonable summary of the facts in the
plaintiffs’ possession.” Dkt. 218, Ex. A at 26–27. The plaintiffs served supplemental
responses, but they did not meaningfully elaborate on the plaintiffs’ earlier efforts. See JX
2264.
Meanwhile, the plaintiffs served discovery requests which indicated that they were
litigating how AT&T generated revenue and expense from its network and whether AT&T
properly allocated the resulting revenue and expense to the Partnership. Those document
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requests and interrogatories also sought to explore how AT&T monetized Partnership
information and allocated the resulting revenue and expense to the Partnership. AT&T
vigorously resisted this discovery, and after one of the hearings on the plaintiffs’ motions
to compel, AT&T served a second set of interrogatories directed to those issues. The
plaintiffs’ responses identified the sources of revenue that the plaintiffs claimed had been
misallocated. See JX 2281.
The battle over whether the plaintiffs could obtain discovery into these issues
eventually resulted in the appointment of the Discovery Master. The process that the
Discovery Master conducted and the report that he generated focused on sources of revenue
that the plaintiffs claimed had been misallocated. The Discovery Master recommended
against further discovery into these areas, and the court adopted that ruling. The substance
of the Discovery Report, however, showed that these matters were at issue.
After the court adopted the Discovery Report, the plaintiffs continued to seek
discovery into how AT&T monetized Partnership information. Using AT&T’s public
filings, the plaintiffs identified third parties with whom AT&T appeared to have
Commercial Network Agreements, then served subpoenas on those parties. See Dkt. 478;
Dkt. 493. The plaintiffs also sought additional discovery into the extent to which AT&T
monetized Partnership information by providing services to the United States government.
These efforts demonstrated that the plaintiffs were continuing to litigate allocation issues.
During the same period, the plaintiffs noticed a Rule 30(b)(6) deposition. As it had
previously, AT&T designated Wages. During that deposition, plaintiffs’ counsel
questioned Wages about concepts in the Management Agreement including “Owner’s
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Business,” “Manager’s Business,” and “Shared Revenues.” The plaintiffs also laid the
groundwork to impeach Wages at trial regarding AT&T’s approach to the term
“subscriber.” See Wages 2019 Dep. 41–42, 97, 116–53. The plaintiffs explored similar
topics with Hall. See Hall Dep. 54–55, 62–64, 70–71.
The plaintiffs’ efforts during discovery made clear that they were seeking to litigate
allocation issues and pursuing a claim for breach of the Governance Provision. With
discovery finally coming to a close, AT&T filed a motion for summary judgment which
suggested that AT&T believed the plaintiffs were litigating those points. Dkt. 467. In its
motion, AT&T asserted that the plaintiffs were relitigating what AT&T labeled “Historical
Mismanagement Claims.” Id. at 3. AT&T described the first of those theories as a claim
that AT&T “breached the Partnership Agreements” by “[u]nilaterally managing the
Partnerships’ business and affairs without input or authorization from the Partnerships’
Executive Committees.” Id. In support of this assertion, AT&T quoted allegations from the
plaintiffs’ pleading, including the allegation that AT&T had “taken an active role in
managing the Partnership’s assets and running the Partnership’s business” even though
“[t]he Partnership Agreement does not permit the majority partner to deprive the Executive
Committee of its complete and exclusive authority to conduct the Partnership’s business
affairs.” Id. at 21. During argument on AT&T’s motion, plaintiffs’ counsel listed four
claims that they were pursuing, including a claim for breach of the Governance Provision.
See Dkt. 571 at 100 (referring to “operating the partnership except through the executive
committee”). The court denied the motion, allowing the plaintiffs to proceed with their
claims. Dkt. 551.
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After the summary judgment motion, AT&T was on notice that a claim for breach
of the Governance Provision was one of the plaintiffs’ theories. Consistent with that reality,
when the plaintiffs listed their claims in the pretrial order, they identified one of their
theories as whether the defendants breached the Partnership Agreement by “not operating
the Partnership[] through the Executive Committee.” PTO ¶ 76(c).
In the lead-up to trial, AT&T confused matters by filing a motion in limine to
exclude evidence that only was relevant to claims that the plaintiffs had not pled or which
previously had been dismissed. Dkt. 550. The court granted the motion in part. Dkt. 585.
The court held that any breach of contract theories relating to the Freeze-Out had been
addressed earlier in the case. Id. ¶¶ 11–12. The court held that evidence regarding AT&T’s
alleged commingling of assets was admissible to the extent the parties had engaged in
discovery on that topic. Id. ¶ 24. It is now clear that they had.
Against the backdrop of these rulings, the parties went to trial. During trial, AT&T
presented extensive testimony and evidence from multiple witnesses regarding how it
allocated revenue and expense to the Partnership. AT&T also was the party that first raised
the Management Agreement. Using leading questions to conduct a direct examination,
AT&T’s counsel elicited testimony from Wages about the authority that the Management
Agreement conferred on AT&T.53 On cross-examination, Wages regularly returned to the
Management Agreement when asked about AT&T’s authority to manage the Partnership
53
See Wages Tr. 126–29, 142–43, 145, 147.
141
or when confronted with provisions in the Partnership Agreement, like the Governance
Provision, which limited AT&T’s ability to manage the Partnership.54 On redirect, AT&T’s
counsel again used leading questions to walk Wages through provisions in the Management
Agreement to demonstrate the authority that they conferred on AT&T.
Given this history, it is clear that the parties engaged on how AT&T generated
revenue from its network and how AT&T allocated the resulting revenue and expense to
the Partnership. Those issues were the subject of discovery, and AT&T largely prevailed
in its efforts to constrain the scope of discovery on those points on the basis of burden and
proportionality. AT&T also substantially prevailed on its motion in limine. AT&T thus
knew the issues that were being litigated, and AT&T succeeded in shaping the litigation
environment to its advantage. AT&T confronted difficulties at trial not because the
plaintiffs surprised AT&T with a new issue, but rather because the record showed—and
AT&T’s key witness admitted—that AT&T had not complied with the Management
Agreement.
This also is not a situation in which the plaintiffs possessed the relevant evidence
and sprung it belatedly on AT&T. All of the evidence about how AT&T monetized its
network and allocated the resulting revenue and expense was in AT&T’s possession.
Indeed, the theory that the plaintiffs have advanced for breach of the Governance Provision
54
See id. at 221–23, 233, 274, 276, 278, 280–81, 285.
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rests primarily on a combination of what AT&T’s accounting records show and admissions
by AT&T’s witnesses at trial.
Under the circumstances, therefore, the court will not bar the plaintiffs from
asserting their theory for breach of the Governance Provision. AT&T understood that the
theory was being litigated and had a fair opportunity to respond.
7. The Laches Defense
AT&T finally argues that the plaintiffs’ claim for breach of the Governance
Provision is barred by laches. As noted, AT&T previously moved for partial summary
judgment on the basis of laches. The court denied the motion as to “the so-called
mismanagement claims,” noting that the claims generated many factual permutations and
that it made little sense for the court to attempt to determine in the abstract which claims
could be pursued. Dkt. 551 ¶ 16. The court noted, that “[a]fter trial, it will be clear what
claims the plaintiffs have pursued,” and that “[i]n post trial briefing, the defendants can
advance their arguments and explain on a fact-specific and claim-specific basis why laches
should bar the litigation of particular issues.” Id. AT&T failed to prove that the laches
defense would bar the claim for breach of the Governance Provision.
The equitable doctrine of laches is “rooted in the maxim that equity aids the vigilant,
not those who slumber on their rights.” Adams v. Jankouskas, 452 A.2d 148, 157 (Del.
1982). Laches protects a defendant from the “unfair prejudice[]” of a plaintiff waiting “an
unreasonable length of time before bringing [a] suit.” Hudak v. Procek, 806 A.2d 140, 153
(Del. 2002). “[L]aches generally requires the establishment of three things: first,
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knowledge by the claimant; second, unreasonable delay in bringing the claim; and third,
prejudice to the defendant.” Homestore, Inc. v. Tafeen, 888 A.2d 204, 210 (Del. 2005).
“A statute of limitations period at law does not automatically bar an action in equity
because actions in equity are time-barred only by the equitable doctrine of laches.” Albert
v. Alex Brown Mgmt. Servs., Inc., 2005 WL 1594085, at *12 (Del. Ch. June 29, 2005).
Nevertheless, a court of equity presumptively applies the statute of limitations by analogy
when determining whether laches renders a claim untimely. Whittington v. Dragon Gp.,
L.L.C., 991 A.2d 1, 9 (Del. 2009). Otherwise, a plaintiff could “be placed in a potentially
better position to seek to avoid a statute of limitations than if she had filed in a Delaware
court of law by invoking the more flexible doctrine of laches.” Kraft v. WisdomTree Invs.,
Inc., 145 A.3d 969, 976 (Del. Ch. 2016); see Kim v. Coupang, LLC, 2021 WL 3671136, at
*3 (Del. Ch. Aug. 19, 2021). “Absent a tolling of the limitations period, a party’s failure to
file within the analogous period of limitations will be given great weight in deciding
whether the claims are barred by laches.” Whittington, 991 A.2d at 9. For purposes of a
breach of contract claim, the time period for suit begins to run at the time of breach, when
the claim accrues. Pulieri v. Boardwalk Props., LLC, 2015 WL 691449, at *11 (Del. Ch.
Feb. 18, 2015).
“[E]quitable tolling will toll the limitations period ‘while a plaintiff has reasonably
relied upon the competence and good faith of a fiduciary.’” Forman v. CentrifyHealth, Inc.,
2019 WL 1810947, at *8 (Del. Ch. Apr. 25, 2019) (quoting In re Tyson Foods, Inc., 919
A.2d 563, 585 (Del. Ch. 2007)). “The obvious purpose of the equitable tolling doctrine is
to ensure that fiduciaries cannot use their own success at concealing their misconduct as a
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method of immunizing themselves from accountability for their wrongdoing.” In re Am.
Int’l Gp., Inc., 965 A.2d 763, 813 (Del. Ch. 2009). In line with this purpose, equitable
tolling “usually [becomes] unavailable after the injured party is on inquiry notice of the
claim.” In re Ebix, Inc. S’holder Litig., 2014 WL 3696655, at *8 (Del. Ch. July 24, 2014).
“Inquiry notice exists when the plaintiff is ‘objectively aware of the facts giving rise to the
wrong,’ and in the context of inherently unknowable injuries, when ‘persons of ordinary
intelligence and prudence would have facts sufficient to place them on inquiry notice of an
injury.’” Whittington v. Dragon Gp. L.L.C., 2008 WL 4419075, at *7 (Del. Ch. June 6,
2008) (quoting In re Dean Witter P’ship Litig., 1998 WL 442456, at *6–7 (Del. Ch. July
17, 1998)).
AT&T shared the Management Agreement with the minority partners before
causing the Partnership to execute it. The minority partners were entitled to rely on the
good faith of their fellow partner and assume that AT&T was complying with the
Management Agreement, absent evidence to the contrary. Equitable tolling therefore
applies until the point when AT&T provided information to the minority partners sufficient
to put them on inquiry notice.
AT&T has not identified evidence in the record which establishes that the minority
partners in the Partnership were on notice of AT&T’s departures from the Management
Agreement. The Partnership did not have audited financial statements, and its unaudited
financial statements did not have notes that provided detail about significant accounting
policies. For other partnerships with audited financial statements, the description of how
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revenue was recognized likely was sufficient to put the minority partners on inquiry notice
as to particular aspects of AT&T’s departures from the Management Agreement.
The record instead reflects that AT&T did not inform the Partnership or its minority
partners about how AT&T approached allocation issues. For example, Wages admitted that
AT&T never told the Partnership or its Executive Committee that AT&T was not using the
definition of “subscriber” that appeared in the Management Agreement. Wages Tr. 384.
AT&T also has not pointed to evidence in the record to which establishes that the minority
partners in the Partnership were on notice that AT&T was not complying with the Premium
Provision.
AT&T also has argued that the plaintiffs should be treated as if they had asserted
their claims for the first time in post-trial briefing such that the disclosure of information
in discovery put the plaintiffs on inquiry notice and caused the statute of limitations to run.
This decision has held that the parties were litigating actively over how AT&T generated
revenue from its network and allocated the resulting revenue and expense to the
Partnership. The plaintiffs’ theories therefore were validly in the litigation, and the time
for analyzing their claims for purposes of laches is the filing of the lawsuits in 2011.
AT&T failed to prove the affirmative defense of laches as to the minority partners
in the Partnership. That doctrine does not provide an independent basis for entering
judgment in favor of AT&T on the claim for breach of the Governance Provision.
C. The Claim That AT&T Breached The Title Provision
The plaintiffs next sought to prove that AT&T breached the Title Provision. They
advanced three different theories. First, they sought to prove that AT&T used an affiliate
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to enter into subscriber agreements with Partnership subscribers, rather than titling the
agreements in the names of the Partnership. Second, they sought to prove that AT&T used
Partnership employees, stores, and other assets to sell handset insurance for AT&T. Third,
they sought to prove that AT&T sold Partnership information to government entities. The
plaintiffs failed to prove that AT&T’s actions breached the Title Provision under the first
theory. The plaintiffs proved that AT&T’s actions breached the Title Provision under the
second and third theory.
The plain language of the Title Provision establishes that as a general rule, “[t]he
Partnership shall hold title to the capital of the Partnership and to all applications,
authorizations, equipment and other property and assets, whether real, personal or
intangible, acquired by the Partnership.” PA § 3.1 (the “Exclusive Title Clause”). The Title
Provision then creates an exception to the Exclusive Title Clause, but that exception has
two requirements. First, the Partnership may “acquire, own and utilize assets jointly with
other entities, including entities affiliated with a Partner, and may commingle assets,” but
only “to the extent the Executive Committee reasonably considers, in its sole discretion,
such activities appropriate and in the best interests of the Partnership.” Id. (the “Best
Interests Condition”). Second, “title may be held in the name of persons designated by the
Executive Committee so long as the Partnership’s interest in such title is held for the benefit
of the Partnership.” Id. (the “Beneficial Ownership Condition”).
1. The Claim Based On Subscriber Contracts
The plaintiffs sought to prove that AT&T breached the Title Provision by failing to
hold title to subscribers and subscriber contracts in the name of the Partnership. Dkt. 590
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at 39–43; Dkt. 615 at 40. The plaintiffs proved that AT&T failed to comply with the general
obligation established in the Exclusive Title Clause. It is now undisputed that Partnership
subscribers were Partnership assets. It also is now undisputed that the contracts with
Partnership subscribers were Partnership assets. And it is now undisputed that when AT&T
entered into contracts with Partnership subscribers, the counterparty was an AT&T
affiliate, not the Partnership. AT&T thus took title to Partnership assets in the name of the
AT&T affiliate.
The operative question, therefore, is whether AT&T complied with the exception to
the Exclusive Title Clause. There is no evidence that the Executive Committee satisfied
the Best Interests Condition by determining that allowing AT&T to enter into agreements
with the Partnership’s subscribers was in the best interests of the Partnership. Nevertheless,
the delegation of authority that the Executive Committee gave to AT&T, first by unwritten
agreement, later through the 1995 Resolution, and finally through the Management
Agreement, was broad enough to empower AT&T to make that decision. For example, the
Services Provision in the Management Agreement stated that AT&T would provide the
Partnership with “Sales and Marketing Services,” which the Management Agreement
defined to include “subscriber acquisition.” MNSA § I(D); id. at ’751. AT&T was running
a nationwide cellular business, and there were obvious efficiencies associated with using
the same customer contract with all of its subscribers. AT&T therefore satisfied the Best
Interests Condition.
The bigger problem for AT&T is whether it complied with the Beneficial
Ownership Condition. If AT&T properly assigned and allocated the value of the
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Partnership’s subscriber contracts to the Partnership, then AT&T appropriately held title
to the contracts for the benefit of the Partnership, satisfying the Beneficial Ownership
Condition. The question of whether AT&T complied with the Beneficial Ownership
Condition thus devolves into a question of whether AT&T properly assigned and allocated
revenue from those contracts to the Partnership.
This decision has found that AT&T did not comply with the Management
Agreement, but it also has held that the plaintiffs cannot pursue that claim. Without the
constraints imposed by the Management Agreement, the record shows that AT&T sought
to identify items of revenue by subscriber and assign those revenues to the Partnership. The
exceptions are handset insurance revenue and government services revenue, which this
decision addresses separately.
Except for handset insurance revenue and government services revenue, the
plaintiffs failed to show that AT&T did not allocate revenue from the Partnership’s
subscriber contracts to the Partnership. The plaintiffs therefore failed to prove that AT&T
breached the Title Provision by holding all of the subscriber contracts with Partnership
subscribers in the name of an AT&T affiliate. Except for the issues of handset insurance
and government services, AT&T held those contracts for the benefit of the Partnership.
2. The Claim Based On The Handset Insurance Program
The plaintiffs next sought to prove that AT&T breached the Title Provision when
selling handset insurance. The plaintiffs framed this claim as involving the misuse of the
Partnership’s retail stores, employees, customer lists, and subscribers to sell handset
insurance for an AT&T affiliate. To establish a breach of the Title Provision, however, the
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plaintiffs must show a mis-titling of assets. The plaintiffs did not carry their burden for the
Partnership’s retail stores and employees, because they failed to prove how those assets
were titled. The plaintiffs succeeded for the Partnership’s subscribers, which collectively
constituted the Partnership’s customer list.
There is no dispute that the Partnership’s subscribers were assets of the
Partnership.55 As discussed in the preceding section, there also is no dispute that AT&T
entered into contracts with Partnership subscribers through an AT&T affiliate, thus taking
title to the subscriber relationship in the name of the AT&T affiliate. As the preceding
section explained, those practices are not inherently problematic, as long as AT&T
complied with the Beneficial Ownership Condition. That exception required that AT&T
hold the asset—here, the contract with the Partnership subscriber—for the benefit of the
Partnership.
When selling handset insurance, AT&T did not comply with the Beneficial
Ownership Condition. Instead, AT&T used its access to the Partnership’s subscribers to
sell handset insurance for its own benefit. See Wages Tr. 416–18. From the beginning of
the program until 2005, AT&T did not provide any compensation to the Partnership for its
use of the Partnership’s assets. JX 2403 at 11. In 2005, after prompting by its outside
55
See Hall Dep. 54 (“The partnership owned the subscriber.”); Wages 2019 Dep.
377–81 (stating that the “partnerships own the . . . customers”); JX 3866 at ’315 (AT&T
“does not compensate the Partnerships for use of the Partnerships’ customers”); see also
JX 2591 at 5 (AT&T’s auditors stating that “a subscriber who chooses to participate in the
handset insurance program is a partnership’s subscriber”).
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auditor, AT&T began reimbursing the Partnership for certain costs by paying a commission
for each sale of handset insurance, but AT&T did not compensate the Partnership for the
use of the Partnership’s subscribers. See JX 3866 at ’315. AT&T never allocated revenue
and expense to the Partnership so that it received a share of the profits associated with the
handset insurance business. See Wages Tr. 415, 419.
AT&T’s justifications for its conduct are not persuasive. AT&T asserted that the
Partnership was not an insurance company and “did not bear the risk of profit and loss for
the programs.” JX 2415 at 5; accord Dkt. 622 at 20; Wages Tr. 423–24; JX 2403 at 9.
AT&T also was not an insurance company, and there is no reason why AT&T could receive
the benefits of the program but the Partnership could not. See Wages Tr. 423–24. AT&T
easily could have ensured that the Partnership bore a share of the risk of loss. AT&T could
have allocated a share of the net profits from the program to the Partnership, after
accounting for risk, or AT&T could have allocated a share of any losses to the Partnership.
The Management Agreement identified methods for doing just that. AT&T should have
followed those methodologies rather than excluding the Partnership entirely from the
handset insurance business, then later reimbursing the Partnership for employee
commissions. Even without the Management Agreement, AT&T could have allocated a
share of both revenue and expense to the Partnership.
To defend its conduct, AT&T also relied on a provision in the Partnership
Agreement which states that “[n]othing contained in this Partnership Agreement shall
restrict any Partner or Partner’s Affiliate from engaging in any business outside of the
Partnership[,] including business which may be deemed to be in competition with the
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business of the Partnership.” PA § 10.3. That provision is irrelevant. The plaintiffs have
not argued that AT&T could not engage in the handset insurance business; obviously
AT&T could. AT&T breached the Partnership Agreement by conducting a business in
which AT&T used assets that AT&T was obligated to hold for the benefit of the
Partnership, but without sharing the benefits with the Partnership.
AT&T also observed that the amounts were immaterial. The following table shows
the amount of income that AT&T generated from the handset insurance program, the
percentage of AT&T subscribers that were assigned to the Partnership, the resulting
proportionate share of income that the Partnership would have received, and the percentage
to which the plaintiffs would have been entitled.
Year Income Salem % Salem $ Plaintiff Plaintiff $
(in millions) %
2008 $126.3 0.122% $716,342 1.881% $13,484
2009 $139.8 0.116% $674,113 1.881% $12,680
2010 $136.3 0.107% $577,982 1.881% $10,872
JX 2567, “Handset Ins Funnel” tab, row 24. Although it is true that the amounts were small,
there is no de minimis exception to the Title Provision. AT&T held Partnership assets in
its own name and used the assets to generate profit for itself. Under this arrangement,
AT&T treated the Partnership worse than it would treat a third-party vendor, who would
have earned some amount of return on its assets. AT&T failed to hold the Partnership’s
assets for the benefit of the Partnership.
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3. The Claim Based On Selling Partnership Information To Government
Entities
The plaintiffs finally assert that AT&T breached the Title Provision by selling
information belonging to the Partnership to government entities. The analysis of this claim
resembles the analysis of the claim based on handset insurance.
AT&T admitted that it collected data generated by its subscribers, including by
subscribers assigned to the Partnership. The Partnership’s subscriber data belonged to the
Partnership, yet AT&T did not hold that data in the name of the Partnership. As with the
subscriber contracts, therefore, AT&T failed to comply with the general obligation
established in the Exclusive Title Clause.
The operative question therefore becomes whether AT&T complied with the
exception to the Exclusive Title Clause. AT&T had sufficient authority to determine that
holding title to the Partnership’s information in its own name was in the best interest of the
Partnership. AT&T was running a nationwide cellular business that generated data about
all of the subscribers to the network. It would have made no sense for AT&T to partition
that data in an effort to title data generated by the Partnership’s subscribers in the name of
the Partnership. Holding the data in the aggregate was in the best interest of the Partnership
and satisfied the Best Interests Condition.
The problem for AT&T again lies in its failure to comply with the Beneficial
Ownership Condition. AT&T admitted that it booked the revenue earned from these
contracts at the corporate level and that the resulting revenue was “not allocated to AT&T
Mobility companies, including [the] Partnerships.” JX 2416 at 2. The Partnership thus did
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not receive any benefit from AT&T’s sales of Partnership information to government
entities. Put differently, AT&T did not hold title to the information generated by
Partnership subscribers for the benefit of the Partnership. AT&T held it for its own benefit.
The following table shows the amount of income that AT&T generated from selling
information about its wireless and wireline subscribers to government agencies, the
percentage of those subscribers that were assigned to the Partnership, the resulting
proportionate share of income that the Partnership would have received, and the percentage
to which the plaintiffs would have been entitled.
Year Income Salem % Salem $ Plaintiff Plaintiff $
(in millions) %
2008 $43.7 0.071% $31,033 1.881% $584
2009 $73.1 0.073% $53,629 1.881% $1,009
2010 $85.5 0.073% $64,807 1.881% $1,219
JX 2567, “Para 16 Funnel” tab, row 23. The amounts were negligible, but there remains no
de minimis exception to the Title Provision.
AT&T thus breached the Title Provision. AT&T (i) collected data about the
subscribers assigned to the Partnership and held that data in its own name, (ii) sold
information about Partnership subscribers to government entities, and (iii) failed to allocate
any amounts to the Partnership. AT&T thus did not hold title to the Partnership’s asset for
the benefit of the Partnership.
D. The Claim That AT&T Breached The Protected Information Provision
Finally, the plaintiffs sought to prove that AT&T breached the Protected
Information Provision by monetizing geolocation data relating to the Partnership’s
subscribers. The plaintiffs failed to prove their claim of breach because AT&T had
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authority to disclose the information. AT&T also acted appropriately by assigning the
resulting revenue to the Partnership to the extent it was generated by subscribers assigned
to the Partnership.
The Protected Information Provision applies only if geolocation data qualifies as
Protected Information. To qualify as Protected Information, the information must be
“information of the Partnership.” There are multiple parties with legitimate claims of
ownership over geolocation data, including the Partnership, AT&T, and the individual
subscriber.
As between the Partnership and AT&T, any geolocation information generated by
the subscribers that AT&T had assigned to the Partnership belonged to that Partnership.
AT&T has conceded that the Partnership owned the customer geolocation data associated
with its subscribers.56 The information also was proprietary and confidential; AT&T did
not share it openly. All of the agreements AT&T entered into with individual wireless
56
Wages Tr. 319, 442–43. In its post-trial brief, AT&T argued that geolocation data
was generated from GPS satellites and therefore was not subscriber use data. Dkt. 622 at
60–61. The record shows that during the relevant period, geolocation data was created by
triangulating a subscriber’s location from cellular phone towers. Wages Tr. 155; see also
JX 3872 (LOC-AID executive describing how LOC-AID’s technology “uses all three sides
of the [cellular phone tower] to ‘talk’ to the mobile device,” enabling the tower to
“triangulate” an estimate of the device’s location); JX 359 at 39 (AT&T used “a network-
based location solution to estimate the location” of 911 callers). The document AT&T cited
to support its claim about GPS data is from 2020, long after the relevant period. See JX
3867. When the plaintiffs sought to rely on a Notice of Apparent Liability that the FCC
issued against AT&T in 2020, AT&T argued vociferously that the document post-dated
the relevant period and was therefore irrelevant. See Dkt. 622 at 63. The same is true for
AT&T’s document.
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subscribers, all of which were executed in the name of an AT&T affiliate, defined
subscriber geolocation data as confidential information. Wages Tr. 319–20, 464; see JX
530 at 10–12 (AT&T customer privacy policy for location information).
Under the Protected Information Provision, AT&T only could provide Protected
Information to third parties with the written consent of the Executive Committee. The
plaintiffs proved that AT&T sold geolocation data for Partnership subscribers to
geolocation aggregators. See Wages Tr. 323. The plaintiffs also proved that AT&T never
obtained approval from the Executive Committee. Id. at 324. Those facts establish a prima
facie claim of breach.
The claim fails, however, because AT&T proved that the Executive Committee had
delegated authority to AT&T to share information on behalf of the Partnership. Under the
original unwritten delegation of authority, under the 1995 Resolution, and in the
Management Agreement, AT&T had broad authority to manage the Partnership’s business.
That grant of authority necessarily included the authority to provide Protected Information
to third parties if necessary for AT&T to operate its business. See id. at 320, 325.
As part of operating the Partnership’s business, AT&T had the concomitant
obligation to allocate revenue and expense fairly to the Partnership. Under the Management
Agreement, the revenue from the geolocation contracts constituted Shared Revenues,
generated from the utilization of the Entire Network, that AT&T was obligated to allocate
to the Partnership based on its relative share of traffic. The plaintiffs proved that AT&T
did not allocate revenue from the geolocation agreements to the Partnership at the contract
level. Instead, AT&T treated a geolocation application as a “bolt-on” service, so that if the
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Partnership subscriber paid for it, then AT&T assigned the revenue from that subscriber’s
subscription to the Partnership. Id. at 439–40, 448, 494–95. AT&T did not treat the overall
contract revenue as Shared Revenues for purposes of the Shared Revenues Formula, nor
did AT&T apply the premium contemplated by the Premium Provision.
This decision has found, however, that the plaintiffs cannot pursue a claim for
breach of the Management Agreement because that cause of action is a derivative claim
that belongs to the Partnership. Without the ability to rely on the allocation methodologies
in the Management Agreement, the plaintiffs failed to prove that it was unreasonable for
AT&T to allocate revenue among its market-level entities based on the subscribers
assigned to those units. The plaintiffs therefore failed to prove a breach of the Protected
Information Provision.
E. Causally Related Harm
The final element of a claim for breach of contract is causally related harm. That
framing combines two concepts: (i) harm to the plaintiff that is (ii) causally related to the
breach.
All that a plaintiff must prove is the fact of harm. A party’s inability to prove precise
harm is not fatal.
When a party breaches a contract, that party often creates a course of events
that is different from those that would have transpired absent the breach. The
breaching party cannot avoid responsibility for making the other party whole
simply by arguing that expectation damages based on lost profits are
speculative because they come from an uncertain world created by the
wrongdoer. Rather, when a contract is breached, expectation damages can be
established as long as the plaintiff can prove the fact of damages with
reasonable certainty.
157
Siga Techs., Inc. v. PharmAthene, Inc., 132 A.3d 1108, 1111 (Del. 2015).
The plaintiffs proved that AT&T harmed the Partnership by using the Partnership’s
assets while failing to allocate to the Partnership a share of the resulting benefits. The
plaintiffs thus proved all of the elements of a breach of contract claim.
III. THE REMEDY
The plaintiffs proved a single breach of the Partnership Agreement: AT&T breached
the Title Provision when it held Partnership assets in its own name without holding those
assets for the benefit of the Partnership. The final question is what remedy should result.
The plaintiffs argue that the court should craft a damages remedy based on a
contractual dissociation provision in the Partnership Agreement. That provision states that
if a partner breaches a material term of the Partnership Agreement, then the partner must
transfer its interest to the non-breaching partners in exchange for a payment from the
Partnership equal to the value of the partner’s capital account. Recognizing that it is
impractical to enforce the remedy as written at this stage in the life of the Partnership—
eleven years after the Freeze-Out—the plaintiffs ask the court to award the monetary
equivalent of the dissociation remedy. They correctly calculate that an equivalent award of
dissociation damages could be crafted by determining the fair value of the Partnership and
subtracting the value of AT&T’s capital account.
The court declines to award this remedy, because to the extent it yields any remedy
at all, the result would be unconscionably disproportionate. Instead, AT&T will pay to the
plaintiffs their proportionate share of the net income that AT&T should have allocated to
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the Partnership. When allocated to the Partnership based on its proportional number of
subscribers, the resulting amount is trivial.
A. Applicable Principles Of Law
As a general matter, a remedy for breach of contract should seek to give the non-
breaching party the benefit of its bargain. Genencor Int’l, Inc. v. Novo Nordisk A/S, 766
A.2d 8, 11 (Del. 2000). “Delaware is a pro-contractarian state.” Cent. Mortg. Co. v. Morgan
Stanley Mortg. Cap. Hldgs. LLC, 2012 WL 3201139, at *26 n.211 (Del. Ch. Aug. 7, 2012).
“In Delaware, the traditional method of computing damages for a breach of contract claim
is to determine the reasonable expectations of the parties.” Cobalt Operating, LLC v. James
Crystal Enters., LLC, 2007 WL 2142926, at *29 (Del. Ch. July 20, 2007).
Where parties have expressed their expectations through a specific contractual
remedy, Delaware law favors enforcing that remedy. Requiring parties to live with “the
language of the contracts they negotiate holds even greater force when, as here, the parties
are sophisticated entities that bargained at arm’s length.” Progressive Int’l Corp. v. E.I. Du
Pont de Nemours & Co., 2002 WL 1558382, at *7 (Del. Ch. July 9, 2002). The parties’
contractual agreement to that remedy is sufficient, standing alone, to support awarding it.57
That said, a contractual remedy does not bind the court, and the court has discretion to
award a different remedy. “[E]ven if a contract specifies a remedy for breach of that
57
See Gildor v. Optical Sols., Inc., 2006 WL 4782348, at *11 (Del. Ch. June 5,
2006) (specific performance); Kan. City S. v. Grupo TMM, S.A., 2003 WL 22659332, at *5
(Del. Ch. Nov. 4, 2003) (injunctive relief); Dover Assocs. Joint Venture v. Ingram, 768
A.2d 971, 974 (Del. Ch. 2000) (receiver).
159
contract, ‘a contractual remedy cannot be read as exclusive of all other remedies [if] it lacks
the requisite expression of exclusivity.’” Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P.,
817 A.2d 160, 176 (Del. 2002) (alteration in original) (quoting Oliver B. Cannon & Son,
Inc. v. Dorr–Oliver, Inc., 336 A.2d 211, 214 (Del. 1975)).
Delaware’s contractarian approach applies all the more strongly to general
partnerships governed by DRUPA, which articulates a policy of giving “maximum effect
to the principle of freedom of contract and to the enforceability of partnership agreements.”
6 Del. C. § 15-103(d). Enforcing the plain language of partnership agreements fulfills the
public policy that the General Assembly has articulated. Allen v. El Paso Pipeline GP Co.,
L.L.C., 90 A. 3d 1097, 1109 (Del. Ch. 2014).
DRUPA expressly authorizes a partnership agreement to specify the remedy that
will apply in the event of breach. It states:
A partnership agreement may provide that (i) a partner who fails to perform
in accordance with, or to comply with the terms and conditions of, the
partnership agreement shall be subject to specified penalties or specified
consequences, and (ii) at the time or upon the happening of events specified
in the partnership agreement, a partner shall be subject to specified penalties
or specified consequences. Such specified penalties or specified
consequences may include and take the form of any penalty or consequence
set forth in § 15-207(b) of this title.
6 Del. C. § 15-408.
The statutory language expressly permits the contractually designated remedies to
include “specified penalties or specified consequences,” including “any penalty or
consequence set forth in § 15-207(b).” That section provides that if a partner fails to make
a capital contribution, then the contractual penalty or consequence
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may take the form of reducing or eliminating the defaulting partner’s interest
in the partnership, subordinating the partner’s partnership interest to that of
nondefaulting partners, a forced sale of the partner’s partnership interest,
forfeiture of the partner’s partnership interest, the lending by other partners
of the amount necessary to meet the partner’s commitment, a fixing of the
value of the partner’s partnership interest by appraisal or by formula and
redemption or sale of the partner’s partnership interest at such value, or other
penalty or consequence.
6 Del. C. § 15-207(b).
The authorization of penalties and forfeitures that appears in Sections 15-408 and
15-207 reflects a significant departure from standard contractarian principles. Under the
common law, a court generally will not enforce a contractual provision aimed at punishing
or penalizing the breaching party, rather than compensating the non-breaching party.58 The
common law also resists outcomes that result in a forfeiture.59 DRUPA authorizes both.
58
See Restatement (Second) of Contracts § 355 (1981 & Supp. 2021) (barring
recovery of punitive damages as remedy for breach of contract); id. § 356(1) (“A [contract]
term fixing unreasonably large liquidated damages is unenforceable . . . as a penalty.”); see
also Del. Bay Surgical Servs., P.C. v. Swier, 900 A.2d 646, 650 (Del. 2006) (analyzing
whether a liquidated damages provision constituted “a ‘penalty’ . . . inserted into a contract
that serves as a punishment for default, rather than a measure of compensation for its
breach” and explaining that “if a [contract] provision is considered a penalty, it is void as
against public policy and recovery is limited to actual damages”); Brazen v. Bell Atl. Corp.,
695 A.2d 43, 48 (Del. 1997) (determining whether termination fee cast as a liquidated
damages provision represented an unjustified penalty). Comparable provisions appear in
the Delaware Limited Liability Company Act. See 6 Del. C. §§ 18-306, 18-502; CML V,
LLC v. Bax, 6 A.3d 238, 251 (Del. Ch. 2010), aff’d, 28 A.3d 1037 (Del. 2011). A leading
scholar has cited the express authorization of penalties and forfeitures as one of a coven of
reasons why LLCs are not truly creatures of contract; at best they are primarily contractual.
See generally Mohsen Manesh, Creatures of Contract: A Half-Truth About LLCs, 42 Del.
J. Corp. L. 391 (2018).
59
Jefferson Chem. Co. v. Mobay Chem. Co., 267 A.2d 635, 637 (Del. Ch. 1970)
(“Equity . . . abhors a forfeiture.”); see Garrett v. Brown, 1986 WL 6708, at *8 (Del. Ch.
161
While it authorizes contractual remedies, DRUPA also recognizes the broad scope
of the court’s discretion. The statute notes that “[i]n any case not provided for in this
chapter, the rules of law and equity, including the law merchant, shall govern.” 6 Del. C. §
15-104(a). Commentary to the analogous provision of the Revised Uniform Partnership
Act (“RUPA”), on which DRUPA was based, states:
The principles of law and equity supplement RUPA unless displaced by a
particular provision of the Act. This broad statement combines the separate
rules contained in UPA Sections 4(2), 4(3), and 5. These supplementary
principles encompass not only the law of agency and estoppel and the law
merchant mentioned in the UPA, but all of the other principles listed in UCC
Section 1-103: the law relative to capacity to contract, fraud,
misrepresentation, duress, coercion, mistake, bankruptcy, and other common
law validating or invalidating causes, such as unconscionability.
Uniform Partnership Act § 104 cmt. (2020-2021 ed.). See generally Robert S. Summers,
General Equitable Principles Under Section 1-103 of the Uniform Commercial Code, 72
Nw. U. L. Rev. 906 (1978). Consequently, “even where a partnership agreement specifies
a remedy for breach of that contract, the Court of Chancery is not prohibited from awarding
other equitable or legal remedies, at least unless the partnership agreement explicitly states
that the specified remedy is the exclusive remedy.” Gotham P’rs, 817 A.2d at 176.
Consistent with these principles, in jurisdictions outside of Delaware, “[t]he
approach of the cases has been to give effect to expulsion provisions as written.” 2 Christine
Hurt et al., Bromberg and Ribstein on Partnership, § 7.02(f) at 7:50 (1988 & Supp. 2014).
June 13, 1986) (“Forfeitures are not favored and contracts will be construed to avoid such
a result.”); Clements v. Castle Mortg. Serv. Co., 382 A.2d 1367, 1370 (Del. Ch. 1977)
(“Forfeiture as such is highly disfavored by the courts, including those of Delaware.”).
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But there also is authority “against enforcing an expulsion that results in substantial
forfeiture of the expelled partner’s interest.” Id. at 7:51–52 (citing Jones v. Chester, 363
S.W.2d 150 (Tex. Civ. App. 1962) (refusing to enforce liquidated damages provision that
would punish involuntarily terminated partner out of proportion to any damage caused to
partnership)).
B. The Dissociation Remedy
As authorized by DRUPA, the Partnership Agreement establishes a contractual
remedy that applies if a partner commits a “Material Default,” defined as the breach of a
material covenant, representation, or warranty in the Partnership Agreement. The language
of the provision notably does not deploy the common law concept of a “material breach.”
The baseline provision establishes the concept of a “Material Default” by stating as
follows:
Material Default. If a Partner for any reason breaches any material covenant,
representation or warranty of this Partnership Agreement, and the breach is
not cured within thirty (30) days after written notice of the breach is provided
to the defaulting Partner by the Executive Committee, then the Partner shall
be considered to be in material default.
PA § 8.1 (the “Material Default Provision”).
A separate provision prescribes dissociation as the contractual remedy for a Material
Default. The operative language states:
Sale on Material Default. Each Partner who commits an uncured material
default or voluntarily causes a dissolution . . . shall be required to sell its
Ownership Interest, and subject to any required FCC consent, to transfer to
the other Partners pro rata its Ownership Interest, if any, for an aggregate
amount equal to the balance of its capital account. The provisions of this
Section 8.2 may be waived on a case by case basis by the Executive
Committee in its sole discretion.
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Id. § 8.2 (the “Dissociation Provision”). The Dissociation Provision thus calls for a forced
sale of the defaulting partner’s interest in return for the balance of the defaulting partner’s
capital account (the “Dissociation Remedy”). By its terms, the Dissociation Remedy is
mandatory (“shall be required to sell”), but the Executive Committee can waive its
application “on a case by case basis . . . in its sole discretion.” The combination of these
provisions empowers the Executive Committee to determine whether the Dissociation
Remedy applies, subject to fiduciary constraints and the strictures of the implied covenant
of good faith and fair dealing.
The Partnership Agreement likewise makes clear that the Dissociation Remedy is
not an exclusive remedy:
Any Partner who commits such a material default, or who causes the
dissolution of the Partnership . . . shall be liable to the Partnership for, and
shall indemnify the Partnership against, all resulting damages, losses,
expenses and claims, including reasonable attorneys’ fees and litigation
expenses, suffered or incurred by the Partnership.
The exercise of rights provided in Section[] 8.2 [the Dissociation Remedy] .
. . shall not relieve the Partner of such liability or indemnification and shall
not constitute a waiver, by any Partner or the Partnership, of any right or
remedy against the defaulting Partner under this Partnership Agreement,
including the right to set off damages, losses and expenses against any
amount owed to the defaulting Partner.
Id. § 8.1 (the “Non-Exclusive Remedy Provision”) (formatting added).
In broad strokes, the Dissociation Remedy resembles the statutory dissociation
remedy that appears in the DRUPA. Section 15-601 of DRUPA identifies events that will
cause a partner’s dissociation from a partnership. One such event occurs if the Court of
Chancery enters an order directing the partner’s expulsion for having “wilfully or
164
persistently committed a material breach of either the partnership agreement or of a duty
owned to the partnership or the other partners.” 6 Del. C. § 15-601(5)(ii); see RUPA §
601(5)(B).
Despite strong conceptual similarities, the Partnership Agreement creates a more
readily available dissociation remedy than the statute. For starters, the Dissociation
Remedy uses a different and more easily satisfied trigger. The statute contemplates a
material breach, which is a recognized term under the common law. See generally Mrs.
Fields Brand, Inc. v. Interbake Foods LLC, 2017 WL 2729860, at *28 (Del. Ch. June 26,
2017). The Material Default Provision, by contrast, requires only a breach of a “material
covenant, representation or warranty.” The United States Court of Appeals for the Second
Circuit has distinguished the two standards explicitly, holding that it was error for a trial
court to require a showing of “material breach” when the dissociation provision in a
partnership agreement required only that the defaulting partner have breached a material
provision. See NCAS Realty Mgmt. Corp. v. Nat’l Corp. for Housing P’ships, 143 F.3d 38,
46 (2d Cir. 1998) (applying New York law). The Court of Appeals concluded that the
district court had erred because “[i]t required the breach itself to be material, instead of
enquiring whether the breach was of a material provision.” Id. The Court of Appeals also
held that the district court had erred by relying “upon cases involving contracts negotiated
at arm’s-length, not partnership agreements.” Id. This court has distinguished between the
two concepts implicitly, holding that the majority partner in a general partnership breached
a provision in the partnership agreement that prohibited the sharing of confidential
information without formal partner-level approval—a material covenant—but awarded
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only nominal damages because the plaintiff had failed to show proof of actual injury. See
B & L Cellular v. USCOC of Greater Iowa, LLC, 2014 WL 6882207, at *2 (Del. Ch. Dec.
8, 2014).
The Dissociation Remedy’s trigger for dissociation also is lower than the statutory
trigger in two other respects. The statute requires that the breaching party have acted
“wilfully” or that the material breach have occurred “persistently.” The Dissociation
Provision requires only a single breach (“the breach”), and it envisions that the breach
could occur “for any reason.”
The statute and the Partnership Agreement also differ over who controls the remedy.
The statute specifies that the Court of Chancery may enter such an order “[o]n application
by or for the partnership or another partner.” 6 Del. C. § 15-601(5). The statute thus makes
plain that “another partner” can make the application. But the Dissociation Provision gives
the Executive Committee the ability to waive the remedy in its sole discretion. That
language ensures that the Executive Committee controls whether the Dissociation Remedy
is available.60
60
When determining whether to exercise the Dissociation Remedy, however, the
members of the Executive Committee would be obligated to comply with their fiduciary
duties. If AT&T’s representatives on the Executive Committee declined to enforce the
Dissociation Remedy against AT&T, then such a decision would be subject to fiduciary
review. The Executive Committee also would have to exercise its discretion in conformity
with the implied convent of good faith and fair dealing. See Miller v. HCP Trumpet Invs.,
LLC, 2018 WL 4600818, at *1, 194 A.3d 908 (Del. 2018) (ORDER) (“[T]he mere vesting
of ‘sole discretion’ did not relieve the Board of its obligation to use that discretion
consistently with the implied covenant of good faith and fair dealing.”). A provision
granting a general partner “sole discretion” without “further flesh[ing] out what that term
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The statute and the Partnership Agreement also differ in what the dissociated partner
receives. Under the statute, a partner whose dissociation does not cause the partnership to
dissolve is entitled to receive “an amount equal to the fair value of such partner’s economic
interest as of the date of dissociation based upon such partner’s right to share in
distributions from the partnership.” 6 Del. C. § 15-701(b); see Hillman v. Hillman, 910
A.2d 262, 277 (Del. Ch. 2006) (interpreting statute). Under the Dissociation Remedy, the
partner receives an amount equal to the balance of its capital account. That amount
typically will be less than fair value, because the balance in the capital account reflects the
partner’s allocation of net income through the date of dissociation. It does not credit the
partner with a share of the value of the business as a going concern.
Finally, both the statute and the Partnership Agreement make the dissociated partner
liable for any damages to the partnership or the other parties. By statute, if a court orders
the expulsion of a partner under the statutory provision, then the dissociation is wrongful.
See 6 Del. C. § 15-602(b)(3). “A partner who wrongfully dissociates is liable to the
partnership and to the other partners for damages caused by the dissociation. Such liability
is in addition to any other obligation of the partner to the partnership or to the other
partners.” Id. § 15-602(c). The Non-Exclusive Remedy Provision establishes the same rule.
means” does not insulate the general partner’s actions from review; it “simply says that
[the general partner] has the singular (i.e., sole) authority (i.e., discretion) to consider and
decide this matter.” Paige Cap. Mgmt., LLC v. Lerner Master Fund, LLC, 2011 WL
3505355, at *32 (Del. Ch. Aug. 8, 2011). Given those strictures, AT&T’s representatives
on the Executive Committee could not freely waive the Dissociation Remedy if it otherwise
applied to AT&T.
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The parties have not addressed whether the contractual Dissociation Remedy can
co-exist with the statutory alternative. Although DRUPA generally is an enabling statute,
some of its provisions are mandatory. Id. § 15-103(a). Section 15-103(b) identifies the
provisions a partnership agreement cannot modify. United States v. Sanofi-Aventis U.S.
LLC, 226 A.3d 1117, 1128 (Del. 2020). One of them is the statutory dissociation remedy:
“The partnership agreement may not . . . [v]ary the right of a court to expel a partner in the
events specified in § 15-601(5) of this title.” 6 Del. C. § 15-103(b)(5). Commentary to
Section 601(5) of the Uniform Act reinforces this point, stating that “[t]he partnership
agreement cannot vary the stated grounds for expulsion . . . , but can choose an alternative
forum – e.g., arbitration.” RUPA § 601(5) cmt. The Dissociation Remedy and the statute
can be harmonized by recognizing that the statute does not prevent a partnership agreement
from providing an additional contractual remedy, such as the Dissociation Remedy, but
that a partner and the partnership always have resort to the statutory dissociation remedy.
C. The Plaintiffs’ Request For The Monetary Equivalent Of Dissociation
The plaintiffs recognize that on the facts of this case, it is not possible to enforce the
Dissociation Remedy as written. The Partnership has dissolved, and AT&T claims to have
wound up its affairs some eleven years ago. In October 2010, the Partnership made what
AT&T contends is a liquidating distribution, and AT&T maintains that the Partnership’s
existence terminated once the distribution was complete. The record does not reveal what
has happened to the assets of the Partnership since then. Once its affiliate became the sole
owner of the Partnership’s assets, it seems likely that AT&T would have taken steps to
integrate the Partnership’s business more deeply into its operations. It would be a stretch
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to revive the Partnership at this point and attempt to enforce a buyout of AT&T’s
interests.61
Instead, the minority partners ask the court to award damages that will achieve the
monetary equivalent of dissociation. The concept of rescissory damages provides an apt
analogy for this request: When rescission is impractical, a court can award damages
designed to achieve “the monetary equivalent of rescission.” In re Orchard Enters., Inc.
S’holder Litig., 88 A.3d 1, 38 (Del. Ch. 2014). The plaintiffs seek the same result, but with
dissociation as the baseline.
Nothing in the Partnership Agreement would prevent the court from crafting a
remedy based on dissociation damages if the facts warranted it. The Non-Exclusive
Remedy Provision makes clear that the Dissociation Remedy is non-exclusive. That rule
comports with the common law principle that a court “will not construe a contract as taking
61
The plaintiffs never sought to have the court revive the Partnership, whether for
purposes of enforcing the Dissociation Remedy or to pursue derivative claims against
AT&T. Presumably the court could do so, but only if the equities warranted it. Cf. In re
Krafft-Murphy Co., Inc., 82 A.3d 686 (Del. 2013) (contemplating revival of dissolved
corporation and appointment of receiver to defend claims and pursue coverage under
unexhausted insurance policies).
AT&T also argues that there are other impediments to enforcing the Dissociation
Remedy as written. The Material Default Provision contemplates that the Executive
Committee will provide notice to the defaulting partner and give the defaulting partner
thirty days in which to cure the breach. In this case, the Executive Committee (controlled
by AT&T) never gave notice to AT&T of a material breach, and the cure period never took
place. The plaintiffs argue with some force that under the facts of the case, compliance
with the notice requirement would be futile and would be excluded on that basis. They also
argue with equal force that they only discovered the full nature of AT&T’s actions by
conducting discovery in this litigation.
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away a common law remedy unless that result is imperatively required.” Gotham Pr’s, 817
A.2d at 176 (internal quotation marks omitted). When the contract does not specify that a
particular remedy is exclusive, “the Court of Chancery has the discretion to award any form
of legal and/or equitable relief and is not limited to awarding contract damages for breach
of the agreement.” Id. Relying on that principle, this court has ordered the dissociation of
a member as a remedy when an LLC agreement did not provide for it, although in that case
the court allowed the dissociated member to retain its economic interest in the entity as an
assignee. See Eureka VIII LLC v. Niagara Falls Hldgs. LLC, 899 A.2d 95, 107, 115 (Del.
Ch. 2006).
The plaintiffs ask the court to award the monetary equivalent of the Dissociation
Remedy by placing them in the same position that they would have occupied if they had
acquired AT&T’s interest in the Partnership under the Dissociation Remedy, just before
the Freeze-Out took place. It is relatively easy to calculate the monetary equivalent of the
Dissociation Remedy. The core concept underlying the Dissociation Remedy is that the
non-breaching partners receive the breaching partner’s interest in the Partnership in return
for the value of the breaching partner’s capital account. The non-breaching partners thus
benefit from the difference between the value of the interest and the value of the capital
account.
In this case, the balance of each partner’s capital account is known. It is that
partner’s proportionate share of the cash payment of $219 million that AT&T paid for all
of the Partnership’s assets and liabilities. At the time that transaction took place, the
minority partners held a 1.881% interest in the Partnership, and AT&T held the remaining
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98.119% interest. See PTO ¶ 10. Given these figures, in a hypothetical world where the
minority partners could have enforced the Dissociation Remedy against AT&T, the
minority partners would have received a pro rata allocation of AT&T’s interest in the
Partnership, and AT&T would have received $214,880,610. After the transaction, AT&T
no longer would have an interest in the Partnership. Instead, the no-longer-minority
partners would own 100% of the post-payout value of the Partnership.
The critical step in the analysis therefore is to determine the post-payout value of
the Partnership. The starting point is to determine the fair value of the Partnership before
the payout. In this litigation, AT&T’s expert has opined that the pre-payout value of the
Partnership ranged from $169,354,000 to $222,119,000. Taylor Report at 123. The
plaintiffs’ expert made adjustments to that valuation and opined that the Partnership had a
pre-payout value of $478,978,000. Barrick Rebuttal Report at 8.
The high end of the range provided by AT&T’s expert implies that if the plaintiffs
could have enforced the Dissociation Remedy against AT&T, then they would have held
interests in an entity worth $7,238,390 ($222,119,000 minus $214,880,610). The plaintiffs
already received $4,119,390 from AT&T as their share of the proceeds from dissolution,
so they would be entitled to an additional $3,119,000 in damages from AT&T.
The valuation provided by the plaintiffs’ expert implies that if the plaintiffs could
have enforced the Dissociation Remedy against AT&T, then they would have held interests
in an entity worth $264,097,390 ($478,978,000 minus $214,880,610). The plaintiffs
already received $4,119,390 from AT&T as their share of the proceeds from dissolution,
so they would be entitled to an additional $259,978,000 in damages from AT&T.
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Under this approach, the minority partners receive 100% of the court-determined
value of the Partnership that is in excess of the price that AT&T set in the buyout. If the
court determines that AT&T paid a fair price, then dissociation damages do not result in
any recovery for the plaintiffs. But if the court determines that AT&T paid a price that was
unfairly low, then the dissociation damages rapidly become disproportionate and punitive.
The plaintiffs advance several arguments as to why this result is warranted.
• They observe that in other litigation involving similar partnerships, AT&T has
sought to impose the Dissociation Remedy on minority partners, making
dissociation damages a fitting sauce for the gander.
• They note that as the holder of more 98% of the general partner interest in the
Partnership, AT&T could have acted at any time to change or eliminate the
Dissociation Remedy.
• They emphasize out that AT&T only will be required to pay damages if it set the
price too low in the Freeze-Out. AT&T thus will keep its pro rata share of the value
that it unilaterally placed on the Partnership and forced the plaintiffs to accept.
The facts of this case, however, convince me that an award of dissociation damages
would be too untethered from the nature of the proven breach. The plaintiffs only
succeeded on their claim for breach of the Title Provision. The essence of that breach lay
in AT&T’s failure to allocate to the Partnership its share of the value that AT&T generated
from monetizing information about the Partnership’s subscribers. The amount of the
misallocation was negligible.
Dissociation damages would have been warranted if the plaintiffs had proven their
claim for breach of the Governance Provision. To recap, the Shared Revenues Formula
called for allocating to the Partnership a proportionate share of a single, inclusive pot of
revenue based on the relative share of network traffic that the Partnership carried. The
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Shared Revenues Formula also called for the Partnership to receive a 25% premium over
and above its share of revenue. The evidence shows that AT&T either assigned or allocated
to the Partnership at least some share of the vast majority of the revenue to which the
Partnership could have been entitled. But the evidence also show that AT&T did not use a
traffic-based allocation and did not comply with the Premium Provision.
It seems more likely than not that the Partnership would have benefitted materially
from a traffic-based allocation. The evidence demonstrates that the NPA-NXX system for
assigning subscribers to the Partnership became less accurate over time. The evidence also
demonstrates that AT&T’s system of assigning incollect roaming expense and Outcollect
Roaming Revenues was disadvantageous to the Partnership. If one believed that there were
more subscribers using the Partnership’s network than the amount of NPA-NXX numbers
assigned to the Partnership, then a traffic-based allocation could have benefitted the
Partnership significantly. Wages could not say whether the subscriber accounts were off
by 25%, 50%, or even 75%. Assuming the subscriber count was 75% lower than it should
have been, then a traffic-based allocation might have resulted in four times as much
revenue going to the Partnership. And on top of that, AT&T would have needed to add a
25% premium to the Partnership’s allocation of revenue.
The plaintiffs, however, did not pursue a derivative claim for breach of the
Management Agreement. They also did not obtain traffic-based metrics that would enable
the court to assess, if only approximately, how the Partnership’s revenue allocation would
have changed under the allocation principles that AT&T committed to use in the
Management Agreement.
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The plaintiffs thus are in a position where their only proven breach of the Partnership
Agreement does not support a meaningful damages award. Linking the Dissociation
Remedy to that breach risks a disproportionate and punitive outcome. The court therefore
will not enforce the Dissociation Remedy.
D. The Compensatory Award
The plaintiffs are entitled to damages equal to their pro rata share of the value that
AT&T generated by using Partnership information to sell handset insurance and by selling
Partnership information to government entities. The following table shows the breakdown
of the amounts by year:
Handset Government
Year
Insurance Information
2008 $13,484 $584
2009 $12,680 $1,009
2010 $10,872 $1,219
The plaintiffs are entitled to pre- and post-judgment interest on these amounts
through the date of payment. Interest shall accrue at the legal rate, compounded quarterly,
with the legal rate changing with changes in the reference rate. The parties shall confer
regarding the calculation of interest.
IV. CONCLUSION
Judgment will be entered for the plaintiffs on their claim that AT&T breached the
Title Provision. Otherwise, judgment will be entered for AT&T on the plaintiffs’ claims
for breach of the Partnership Agreement.
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