In re Cellular Tel. P'ship Litig.

IN RE CELLULAR TELEPHONE PARTNERSHIP LITIGATION

C.A. Nos. 6885-VCL, 6886-VCL, 6908-VCL

Court of Chancery of Delaware

September 28, 2021

Date Submitted: July 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.

MEMORANDUM OPINION ADDRESSING CLAIMS FOR BREACH OF THE PARTNERSHIP AGREEMENT GOVERNING SALEM CELLULAR TELEPHONE COMPANY

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]

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 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 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.

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.

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 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...