Persons or entities who want to join together in a new business venture have many legal alternatives to their structure. They could form an ordinary business corporation as shareholders, organize a limited liability company as members, or create a limited partnership or even a common law partnership. In each of these situations, there are statutes and court cases that govern the conduct of these entities and their owners and the duties they owe to each other in this legal relationship.
More recently, at least over the past several years, the term "strategic alliance" has become popular to define a relationship. But the problem is that there is no legal entity called "strategic alliance." A recent 7th Circuit Court of Appeals decision dealt with a contract creating a relationship which the parties labeled a "strategic alliance." (Advertising Specialty Institute vs. Hall Erickson, Inc. d/b/a The Motivation Show et. al., 7th Circuit Court of Appeals, No. 08-1097 and 08-1227, April 7, 2010.) The weight, or lack thereof, the court gave to the strategic alliance relationship is interesting.
In 2002, Advertising Specialty Institute (ASI) and Hall-Erickson, Inc. (d/b/a The Motivation Show) (Hall-Erickson) entered into a contract that purported to form a "strategic alliance." The court, throughout the opinion, puts "strategic alliance" in quotes, suggesting it is not clear what the term means. In the end, the court treated the dispute as a contract dispute, analyzing it as a breach of contract, without regard to the parties' characterization of their relationship as a "strategic alliance."
The case presents difficult reading for the plaintiff's trial counsel, which should be second-guessing its handling of the case. The plaintiff actually "won" the case, but, in what must have been a bitter result, received nominal damages of only one dollar.
The plaintiff in this case, Advertising Specialty Institute (ASI) facilitated meetings and trade shows for sellers and purchasers of corporate promotional products. Through its affiliate, the ASI Show, ASI held around 80 shows a year throughout the United States that were targeted mainly at ASI's 21,000 distributor members and 3,300 supplier members.
The defendant, Hall-Erickson, Inc., under the name "The Motivation Show," entered into an agreement (which the court said "purported to create a 'strategic alliance' ") under which the parties agreed to operate a promotional-products pavilion within The Motivation Show. As part of their "strategic alliance", ASI had "the right of first refusal concerning any activity, alliance, or opportunity concerning the promotional product/advertising specialty industry." The agreement specifically stated that it would "not be extended to any other promotion products association, trade show, or conference (i.e. PPAI)." PPAI stands for Promotional Products Association International, a close rival of ASI.
The appeals court, affirming the trial court, found that The Motivation Show had "solicited and invited" PPAI to co-locate its trade show with The Motivation Show at McCormick Place, Chicago's principal trade show location. This was a clear violation of the agreement, which the trial court found to be "deliberate and . . . designed to conceal from ASI the fact that there was an opportunity in the offing." The trial court further found that ASI would have accepted this opportunity had it been offered by The Motivation Show. Even worse, the trial court found the testimony of Peter Erickson, the representative of The Motivation Show to be "regrettably false" and "completely untruthful." The appeals court affirmed these findings. At this point, it certainly looked bad for the defendants.
But, although losing the case, the defendant, Hall-Erickson, got off with only $1 in damages due to ASI's failure to prove damages "with reasonable certainty." The appeals court acknowledged that the question as to whether ASI made a sufficient showing of damages was a "close one." The appeals court was actually critical of the trial court and discussed at length its concerns that the trial court did not give enough weight and credibility to ASI's evidence of damages. The appeals court said the trial court may have a) given insufficient weight to ASI's testimony of damages; b) concluded that damages evidence was speculative even before hearing the evidence; and c) failed to address evidence of the profitability of ASI's past shows.
In fact, the appeals court spent an extraordinary amount of time discussing these factors which, in the end, the appeals court determined to be insufficient to overrule the trial court. The appeals court went on to cite a number of deficiencies in ASI's evidence, many of which could have been corrected. Says the appeals court,
"One inevitably sympathizes with ASI, which has been wronged by a company with which it hoped to enjoy a fruitful, strategic relationship. Proving damages from the improper denial of a future opportunity is a difficult endeavor, however, and ASI makes the strongest arguments it can with the evidence in the record. But in light of the preceding shortfalls in the proffered evidence, we cannot conclude that the district court clearly erred. . . . Even if we would have been inclined to find some measure of damages reasonably certain in the present case, this fact alone does not allow us to reverse the district court's factual determination to the contrary. . . . "
"The Motivation Show committed a flagrant breach of contract when it failed to provide ASI with a right of first refusal . . . . Although ASI understandably laments the district court's award of nominal damages, contending that it serves to absolve the breaching party of the consequence of its nefarious conduct, the law places the burden of proving damages on the plaintiff. A host of relevant information bearing on such injury is absent. . . ."
"We do not believe that our ruling will result in carte blanche for promisors who may seek opportunistically to breach contracts when they believe that any resulting harm will be indeterminate. Wronged parties need merely introduce evidence that is sufficient to allow the court to ascertain the degree of injury with reasonable certainty. Such evidence is absent in the record here, though it should have been within the capacity of ASI to unearth and bring before the court. The judgment of the district court is therefore affirmed."
So, apparently to the regret of the appeals court, ASI received virtually nothing, in spite of being an acknowledged victim of a breach of contract.
But what of the "strategic alliance?" The court, other than referencing the "strategic alliance" early in its decision, does not mention it. It analyzes the case as a garden-variety breach of contract case. The opinion would suggest that calling a relationship a "strategic alliance" does not increase the duties the parties owe to each other.
It is interesting to consider whether the result would have been the same if the parties had formed a corporation or a limited liability company. The parties, as part of their agreement (particularly for a limited liability company) could have established the level of duties owed to each other as shareholders or as members of a limited liability company or the parties could have left this to the "default" level in the statute and at common law.
Of course, this can only be speculation. But it is not speculation to conclude that the court, by silence, gave no weight to the parties' characterization of their relationship as a "strategic alliance." So companies forming a "strategic alliance," and their attorneys, will need to examine this kind of relationship in a deeper way so that the parties do not have a false or unrealistic expectation of their relationship.