Private Equity

Abraham Lincoln has been credited with making the observation that while you can call a calf’s tail a leg, it doesn’t mean the calf now has five legs.  As obvious as that observation may seem, there is a widespread drafting convention of disclaiming or proclaiming things as being or not being by a specific contractual provision or “ukase.”^[1]  And a recent Seventh Circuit Court of Appeals decision serves as a stark reminder that contractually declaring that someone or something does or does not have a certain legal status does not necessarily change whatever status the law confers on that someone or something based on the facts.

In United States v. Dish Networks L.L.C., No.17-3111, 2020 WL 1471844 (7th Cir. Mar. 26, 2020), Dish Networks appealed a district court finding that it “and its agents” had committed multiple violations of federal statutes and regulations.  Dish Networks claimed it should not be held liable for the conduct of persons who were retained by Dish Networks to sell its service because the contract between Dish Networks and those persons specifically disclaimed that there was any agency relationship created between the parties.  But according to the Seventh Circuit, “parties cannot by ukase negate agency if the relationship the contract creates is substantively one of agency.”  In other words, calling a tail a leg does not make it a leg.  And the court found that the actual terms of the contract between the parties created an agency relationship; and principals are liable for the acts of their agents committed within the scope of that agency.  Indeed, according to the court:

[The contract] gave DISH complete control over the order-entry retailers’ performance.  What’s more, these retailers acted directly for DISH, entering orders into DISH’s system; they did not have their own inventory and were not resellers of any kind.  Under normal principles, they were DISH’s agents notwithstanding the contractual disclaimer.^[2]

There are other examples of this drafting “fail” at work in clauses designed to mandate equitable remedies such as an injunction or specific performance.  In a recent Ninth Circuit Court of Appeals decision, Barranco v. 3D Systems Corp., 952 F.3d 1122 (9th Cir. 2020), the court held that a contractual clause purporting to require a court to grant injunctive relief and declaring that damages were an inadequate remedy did not obligate the court to so conclude.  Quoting from a sister circuit case: 

While courts have given weight to parties’ contractual statements regarding the nature of harm and attendant remedies that will arise as a result of a breach of a contract, they nonetheless characteristically hold that such statements alone are insufficient to support a finding of irreparable harm and an award of injunctive relief.^[3]

The fact that some courts ignore or dispute the effectiveness of these types of provisions is no reason to completely dispense with them.  Indeed, some state courts appear to give them substantially more weight, especially when the provisions are specific about the factual prerequisites for equitable relief.^[4]  Delaware is particularly prone to honor these provisions in granting injunctions or specific performance where there may otherwise be a close call on the typical requirements for equitable relief.  But the Delaware courts have also noted that despite a contractual provision declaring that irreparable harm always occurs from a breach, “[i]If the facts plainly do not warrant a finding of irreparable harm, this Court is not required to ignore those facts, especially since the parties cannot confer subject matter jurisdiction upon a court.”^[5]  Thus, in Delaware at least, if the calf’s tail is serving some of the functions of a leg, it may be okay to call it a leg and not have to prove it actually is a leg.  But if all the tail is doing is swatting flies, then, even in Delaware, your attempt to call it a leg may not work.