IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
THE MRS. FIELDS BRAND, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 12201-CB
)
INTERBAKE FOODS LLC, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: March 2, 2017
Date Decided: June 26, 2017
David A. Jenkins and Robert K. Beste III, SMITH KATZENSTEIN & JENKINS
LLP, Wilmington, Delaware; Bijan Amini and Avery Samet, STORCH AMINI PC,
New York, New York; Attorneys for Plaintiff.
Chad S. C. Stover and Kevin G. Collins, BARNES & THORNBURG LLP,
Wilmington, Delaware; Damon R. Leichty and Alice J. Springer, BARNES &
THORNBURG LLP, South Bend, Indiana; Attorneys for Defendant.
BOUCHARD, C.
In March 2012, Mrs. Fields Brand, Inc. entered into a Trademark License
Agreement that granted Interbake Foods LLC an exclusive license to manufacture
Mrs. Fields-branded cookies for sale in certain retail store channels. The License
Agreement has an initial term of five years that ends on December 31, 2017.
In April 2016, after the relationship between the parties had deteriorated,
Interbake notified Mrs. Fields that it was terminating the license early, which
prompted Mrs. Fields to initiate litigation and seek a declaration that Interbake’s
purported termination was invalid. For the past fourteen months, Interbake has
continued to operate the licensed business under a standstill order, but the litigation
quickly escalated, with each side asserting multiple contractual claims for damages
and other relief against the other.
In this post-trial decision, I conclude that Interbake’s purported termination of
the License Agreement was invalid and that the license thus remains in place. I
further conclude that both parties have failed to establish an entitlement to damages
or other relief based on any of the numerous theories they advanced.
I. BACKGROUND
The facts recited in this opinion are my findings based on over 700 trial
exhibits, live and video testimony from a six-day trial in which sixteen fact and three
expert witnesses testified, and deposition testimony. I accord the evidence the
weight and credibility I find it deserves.
1
A. The Parties
Founded in 1977, plaintiff The Mrs. Fields Brand, Inc. (“Mrs. Fields”) is a
Delaware corporation headquartered in Broomfield, Colorado. Mrs. Fields operates
multiple business lines, including: (1) franchising stores that serve fresh-baked
cookies; (2) licensing the Mrs. Fields trademark and recipes to make and sell shelf-
stable cookies for sale in retail stores like grocery, drug, and convenience stores; (3)
making online and catalogue-based gift sales directly to consumers; and (4)
producing confections and other products.1 Mrs. Fields is owned and managed by
Famous Brands International (“Famous Brands”), a portfolio company of Z Capital
Partners, LLC (“Z Capital”).
Defendant Interbake Foods LLC (“Interbake”) is a Delaware limited liability
company headquartered in Richmond, Virginia. Interbake is controlled by Weston
Foods US, Inc., (“Weston Foods”), which is itself controlled by George Weston
Limited (“George Weston”). Interbake operates as Weston Foods’ biscuit division,
and provides products through four business segments: retail private brands, Girl
Scout Cookies, dairy, and food service.2
1
Tr. 1279 (Lyman).
2
Tr. 224-25 (Gormley).
2
B. Mrs. Fields’ Branded Retail Business Before Interbake
In 1999, Mrs. Fields granted a company called Shadewell Grove a license to
produce and market a shelf-stable cookie in retail channels.3 Shadewell ramped up
distribution quickly but unprofitably through heavy use of slotting fees and trade
spend.4 Slotting fees are one-time payments from the supplier to retail stores to
secure shelf space for a product.5 Trade spend is a discount off the price charged to
retailers in exchange for promoting products through various methods, such as
coupons, “buy-one-get-one-free” promotions, and participation in trade shows. The
purpose of trade spend is to stimulate sales, but the expense is taken from the
supplier’s profit margin.6
Under the Shadewell license, gross sales of Mrs. Fields’ branded retail
products peaked in 2000 at $51.2 million and then declined each year thereafter to
$39 million in 2005.7 By 2006, Shadewell had put itself “in a financial hole” due to
its “big infrastructure” and its aggressive use of trade spend and slotting fees. 8
3
Tr. 9-10 (Courtney).
4
Tr. 78-79 (Courtney), 699 (Rummel).
5
Tr. 17-18 (Courtney).
6
Tr. 15-17 (Courtney).
7
JX 76 at 4.
8
Tr. 79 (Courtney).
3
Shadewell defaulted on the royalties it owed Mrs. Fields as well as payments it owed
to Oak State, the contractor responsible for manufacturing the products.9
In 2006, Shadewell filed for bankruptcy and Mrs. Fields assumed direct
control over the branded retail business, appointing Neal Courtney to manage it.10
For the first eight to ten weeks, Mrs. Fields experienced product shortages because
Oak State had stopped manufacturing the product.11 In connection with assuming
control over the business, Mrs. Fields hired a sales team and a product-supply
manager, and developed an accounting department.12 The transition in-house took
approximately six months.13
After the branded retail business was transitioned in-house, sales dropped to
$23 million in 2007 before recovering to $29.1 million in 2008.14 For the next three
years, annual sales remained within a fairly narrow range: $27.8 million in 2009,
$29.3 million in 2010, and $29.6 million in 2011.15 Analyzing the sales and trade
spend figures from 2007 to 2011, an internal Mrs. Fields board presentation
commented that “Trade spend continues to increase to maintain distribution and
9
Tr. 699-700 (Rummel).
10
Tr. 11-13 (Courtney), 700 (Rummel).
11
Tr. 700 (Rummel).
12
Tr. 1444-45 (Anson).
13
Tr. 1445 (Anson).
14
JX 76 at 4; see also JX 180 DB001194.
15
JX 76 at 4.
4
drive velocity.”16 During this same five-year period, the profitability of the branded-
retail business varied significantly:
Year Sales Trade Spend % Profit17
2007 $23.4 million 12% $1.1 million
2008 $29.1 million 14.3% $0.8 million
2009 $27.8 million 18.4% $2.3 million
2010 $29.3 million 19.6% $3.1 million
2011 $29.6 million 21.6% $2.0 million
Around 2009 or 2010, Mrs. Fields scored a “big win” by obtaining shelf space
from Walmart. 18 According to Courtney, Walmart is a “benchmark” for “every
other major grocer, retailer in the country,” and once product is on the shelves at
Walmart, it gains credibility among other retailers and obtaining shelf space
becomes easier.19
C. Negotiations over the License Agreement
In 2011, Mrs. Fields and Interbake entered into licensing talks. 20 A
considerable part of Interbake’s business comprised “private-label” manufacturing,
meaning that Interbake manufactured cookies sold under other companies’ brands.21
Mrs. Fields believed that Interbake’s vertical integration, extensive experience with
16
JX 76 at 4.
17
JX 76 at 4; Tr. 127-28 (Courtney) (trade spend depicted as a percentage of gross sales).
18
Tr. 29-30 (Courtney).
19
Tr. 30 (Courtney).
20
Tr. 33-35, 36-38 (Courtney); JX 70.
21
Tr. 33 (Courtney); JX 10 at 32 (McDonough Dep.).
5
private-label cookies, and existing retailer relationships could be leveraged to
increase distribution of Mrs. Fields cookies.22
Neal Courtney, who was now Mrs. Fields’ Chief Operating Officer, and Seth
Monette, Interbake’s primary sales leader for retail private brands and contract
manufacturing, were the primary negotiators. They exchanged drafts of a trademark
license agreement through Mrs. Fields’ broker, Stu Seltzer.23 Other key players in
the negotiations included Mrs. Fields’ then-CEO, Tim Casey, and Interbake’s then-
President, Kevin McDonough.24
On February 3, 2012, Mrs. Fields sent Interbake the first draft of a proposed
trademark license agreement that it prepared using as a template a previous license
Mrs. Fields had with Unilever.25 Section 15(e)(iii) of the draft, which Mrs. Fields
inserted into the Unilever template, allowed for early termination of the agreement
if Interbake failed to reach $25 million in net sales in any year.26 The draft also
required Interbake to meet minimum annual sales thresholds, ranging from $20
22
JX 14 at 235-36 (Courtney Dep.).
23
Tr. 47 (Courtney).
24
JX 5 at 34, 63, 67-68, 114 (Monette Dep.).
25
Tr. 43-44 (Courtney); Tr. 1092 (Monette); JX 17 at 120-22 (Seltzer Dep.); JX 81
MF00016671.
26
JX 81. The provision contains an apparent typographical error because it refers to two
different figures as the sales threshold: “twenty million ($25,000,000) dollars per Contract
Year.” JX 81 (emphasis added).
6
million to $35 million in net sales from year 1 to year 5.27 In Section 19(c), Mrs.
Fields represented and warranted that “it will not intentionally do anything to destroy
or impair its existing image.”28
On February 4, 2012, in an internal Mrs. Fields email, Casey asked Courtney
about inserting a provision in the license agreement obligating Interbake to spend
some minimum amount on advertising and marketing “to ensure [an] aggressive
growth strategy.” 29 Courtney responded, “That’s a little complicated because of
trade spend and slotting fees. Do you want a commitment above that?”30 Casey
ultimately decided it was “not worth raising” the topic with Interbake because it
would “complicate things.”31
On February 16, 2012, the parties met and reviewed the draft agreement.32 A
slide deck Mrs. Fields presented at the meeting stated that the Mrs. Fields brand
“attracts the best franchisees because we give them the best support and the best
economic model,” that the brand is “on trend” and “still resonates with consumers”
nearly “35 years later,” that “we will build and support our brands because they are
27
JX 81 § 5(b), Ex. C.
28
JX 81.
29
JX 84 MF0001120.
30
JX 84 MF0001120.
31
JX 84 MF0001120.
32
JX 86; Tr. 49-50 (Courtney).
7
the reason we are here in the first place,” and that “we will always maintain the
integrity and taste of our current recipes.” 33 On the other hand, one slide
acknowledged that Mrs. Fields was “missing the mark” with aligning “consumer
expectations across all channels.”34
Later on February 16, Selena Sanderson, an Executive Vice President at
Interbake, suggested in an internal email modifying the termination section to add
an “out for Interbake in the event of brand deterioration” or a “quality issue” outside
of Interbake’s control, such as something in “another part of [Mrs. Fields’]
business.”35 Section 19(c) of the license agreement later was revised to require Mrs.
Fields to “continue to support the brand through advertising and marketing efforts
consistent with past practice.”36
On February 22, 2012, Interbake circulated a revised draft of the license
agreement. Interbake proposed reducing the Section 15(e)(iii) termination threshold
from $25 million to $20 million in net sales.37 Mrs. Fields agreed to this change
after a discussion between Courtney and Monette.38 Interbake also added Section
33
JX 96 IBF00058187, 00058194.
34
JX 96 IBF582000.
35
JX 87 IBF00042134.
36
JX 99
37
JX 89.
38
Tr. 47-48 (Courtney).
8
15(e)(ix), permitting termination of the license agreement if Mrs. Fields made a
“fundamental change” to the Mrs. Fields brand or marketing guidelines that renders
Interbake’s performance “commercially unviable,” and Section 19(d), a
representation and warranty by Mrs. Fields that it has no knowledge of any
occurrence that could reasonably be expected to become materially adverse to Mrs.
Fields’ business, the value of the branded retail products, or Interbake’s ability to
consummate the transaction. 39 The parties exchanged another set of drafts on
February 28 with minor alterations.40
On March 12, Interbake sent Mrs. Fields a revised draft of the License
Agreement that renumbered Section 15(e) to Section 15(c), and specified that
Section 15(c)(iii)—the minimum sales termination provision—must be triggered
within 15 days following receipt of the annual report. 41 Section 15(c)(ix) now
allowed termination should Mrs. Fields breach a representation or warranty, or
materially damage the value of its brand such that Interbake’s performance is
rendered commercially unviable. Finally, the provision requiring Interbake to
achieve minimum sales volumes each year was “INTENTIONALLY DELETED.”42
39
JX 89.
40
JX 93; JX 95.
41
JX 99.
42
JX 99 §5(b); JX 81 §5(b); JX 104 §5(b).
9
Section 15(c)(iii) in the final License Agreement is silent as to which (or both)
of the parties may terminate the agreement if annual sales fall below $20 million.
Courtney testified that Mrs. Fields asked for the provision “to ensure that a minimum
sales level was maintained, because [Mrs. Fields] had worked hard to build the
business back up,” but he could not recall discussing with Monette or anyone else at
Mrs. Fields who would have the right to invoke the provision.43 On the Interbake
side of the table, Monette recalled asking Courtney for “downside protection” at
some point,44 and McDonough testified that he instructed Monette “to make sure
[Section 15(c)(iii)] was reciprocal,” 45 but there is no evidence in the record that
anyone at Interbake actually discussed reciprocity with Mrs. Fields.
D. “Cookie Confusion”
During its negotiations with Interbake, Mrs. Fields was experiencing
problems with product quality, In particular, the brand was suffering from what
witnesses described as “cookie confusion” attributable to the fact that Mrs. Fields
sells cookies in various channels (e.g., franchising, branded retail, gifting) that have
different shelf lives and are baked using different recipes.46 Pre-packaged cookies
like those sold in retail stores require preservatives and other additives to make them
43
Tr. 45, 90 (Courtney).
44
Tr. 1090-1091 (Monette).
45
Tr. 1006-07 (McDonough).
46
Tr. 115-16 (Courtney); Tr. 1615 (Barr).
10
shelf-stable that are not necessary for fresh-baked cookies. Thus, when a consumer
purchases a pre-packaged cookie expecting the quality and taste of a fresh-baked
cookie, the negative experience damages the Mrs. Fields brand.47
A January 2012 Mrs. Fields board presentation stated that the current branded
retail group “product does not meet the Mrs. Fields cookie standard or consumer
expectation impacting repeat purchase and overall velocity.”48 In the same vein,
Casey remarked to Courtney in a February 1, 2012 email discussing “Priorities” that
“We have to fix quality in all three channels—it’s our brand.”49
On March 2, 2012, Casey sent an internal email to the Mrs. Fields board
outlining key initiatives for 2012. The number one initiative was to “Reformulate
the recipe of the cookies in all three channels: franchise stores . . . gifting . . . and
branded retail.” 50 The email further explained that reformulating the recipes for its
branded retail products was “less of a priority as a licensing partner is pursued.” 51
True to this last email, Mrs. Fields did not reformulate the branded retail recipes after
it became apparent it would enter into a license agreement with Interbake.
47
Tr. 115-18 (Courtney); Tr. 1112 (Monette); see also JX 189
48
JX 76 at 3.
49
JX 78 MF00011037.
50
JX 98 DB000284.
51
JX 98 DB000284.
11
E. The License Agreement
On March 16, 2012, Mrs. Fields and Interbake entered into the License
Agreement for an initial five-year term ending December 31, 2017, with an option
to renew for an additional five years.52 The License Agreement provides Interbake
with the exclusive right and license to use specified trademarks, recipes and other
intellectual property to manufacture, market, and sell Mrs. Fields branded products
through certain distribution channels within a defined territory.53
The License Agreement contains no provision requiring Interbake to use best
or reasonable efforts, to achieve a minimum amount of sales in a given period, or to
spend a minimum amount on trade spend or other forms of promotion in a given
period, but it does require Interbake to pay Mrs. Fields a minimum royalty of $2
million each year for the last four years of the contract. 54 The License Agreement
also contains no prohibition against Interbake selling competing products.
Both parties were thrilled with the License Agreement at the time. Courtney
at Mrs. Fields was impressed with Interbake’s “tremendous expertise in the cookie
industry,” its success in the private label business, and the backing it had from
52
JX 104 § 15(a, b), Ex. A.
53
JX 104 § 1(a).
54
JX 104 § 5(a), Ex. D-1.
12
Weston Foods.55 He thought that the relationship was a “perfect fit.”56 McDonough
at Interbake remarked in an internal memorandum that the project was “a unique
opportunity to obtain an iconic brand in the cookie category for minimum
investment,” and would give Interbake “entry into branded market with a leading
cookie brand that has high brand recognition and opportunity for growth.”57
F. Transition of the Business from Mrs. Fields to Interbake
Between March 16, 2012 and November 1, 2012, Mrs. Fields continued
operating the retail brand business while Interbake prepared its sales staff and
manufacturing capabilities to take over the operations. Mrs. Fields’ lead salesman,
Robert Rummel, sent Monette weekly reports and commentary about all branded
retail sales.58
In July 2012, Interbake promoted Monette to Vice President of Retail.59 That
same month, Rummel traveled to Interbake’s headquarters in Richmond, Virginia to
bring its marketing department up to speed on what was needed to market the Mrs.
Fields products.60 Courtney and Rummel provided Interbake with the sales details
55
Tr. 58 (Courtney).
56
Tr. 58 (Courtney).
57
JX 97 IBF00045415.
58
Tr. 736 (Rummel); JX 3 at 137-38 (Rummel Dep.).
59
JX 5 at 6 (Monette Dep.).
60
Tr. 738 (Rummel).
13
of all accounts, including trade spend, off-invoice allowances, and promotional
activity.61 Mrs. Fields held weekly meetings with Interbake’s supply team to ensure
that as Mrs. Fields wound down production, Interbake could ramp up production.62
To produce the Mrs. Fields cookies, Interbake invested $5 million in
upgrading its production lines.63 The investment added cooling capacity required to
produce soft-baked cookies and certain packaging capabilities, in particular for
selling single-serve cookies.64
While the transition was underway, product quality continued to be a concern
internally at Mrs. Fields. In an August 15, 2012 meeting, the Mrs. Fields board
discussed the “causes and effects” of declining product performance at CVS and
Shopper’s Drug Mart.65 The board then decided that Mrs. Fields would “strongly
emphasize to Interbake the need to improve the quality of the current product line.”66
On November 1, 2012, Rummel was transitioned from Mrs. Fields to become
an Interbake employee, and Interbake took over operation of the business.67
61
JX 122; Tr. 37-38 (Courtney), 742 (Rummel).
62
JX 15 at 22-24 (Erpelding Dep.).
63
Tr. 960-61 (McDonough).
64
JX 107 IBF00042240; Tr. 1788-89 (Thomas).
65
JX 118 ZC002279.
66
JX 118 ZC002279.
67
Tr. 66 (Courtney), 746 (Rummel).
14
G. Concerns with the Mrs. Fields’ Brand
After Interbake assumed operational responsibility for branded retail, Mrs.
Fields continued to grapple with weakness in its franchise business, continuing
quality problems, and brand stagnation. On or about November 27, 2012, Tim
Casey, Mrs. Fields’ CEO at the time, delivered a presentation for the board of
Famous Brands, Mrs. Fields’ parent company, highlighting the challenges facing the
Mrs. Fields brand.68 Casey discussed the year-after-year decline in the number of
franchise stores since 2007. Cautioning that “[b]rick and mortar store fronts are an
essential part of the brand’s health,” his presentation stated that “[o]ur base continues
to erode putting distribution and brand equity at risk.” 69 Casey’s speaker notes
acknowledged that “[w]e are late to focus on the Mrs. Fields Brand,”70 and that “[w]e
have close to a $300M brand with little to no investment in brand stewardship!”71
The presentation included a “Case Study” of the Branded Retail Group
(“BRG”)—the business licensed to Interbake—as a “good example” of what
happens to a business when investment in a brand is neglected:
With limited investment over the last 6 years the BRG business has
realized a relatively flat top line and a very inconsistent bottom line
68
Tr. 146, 154 (Courtney); JX 134.
69
JX 134 ZC003090-91.
70
JX 134 ZC003079.
71
JX 134 ZC003079, ZC003097.
15
If the BRG business had not been licensed early this year, significant
investment would have been needed to sustain and grow the
business
Essentially, “INVEST or DIE”
The BRG scenario is a very good example of what happens when
investment isn’t made to strengthen and sustain the brand . . . Very
predictable results.72
The presentation also included a “5 Year Strategic Plan” that summarized the
“Current Reality” facing Mrs. Fields, which reiterated the need for additional
investment in its brand:
2. We need to invest in the brands to support growth
1. No significant investment in brand marketing to support our
franchising or licensing partners has occurred in several years.
3. Mrs. Fields needs revitalizing.
1. Mrs. Fields brand has not been addressed in over 10 years
2. Store unit economics don’t work therefore franchising is
stagnant73
Addressing point 2.1 quoted above, Casey explained that his presentation was
referring to “investment outside the traditional marketing expenditures that hit the
P&L” that Mrs. Fields used “to normally support the brand.”74 Casey recommended
investing $10 million in 2013 and 2014 on top of the traditional marketing
expenditures that Mrs. Fields already was incurring to support “Growth Initiatives,”
part of which was necessary to increase brand awareness across all of Mrs. Fields’
72
JX 134 ZC003100.
73
JX 134 ZC003122.
74
JX 12 at 112-13 (Casey Dep.).
16
business channels.75 The proposed investment was never made, and Casey left the
company three months after delivering the presentation.76
H. Interbake’s Initial Efforts to Acquire Mrs. Fields in 2013
Shortly after assuming operational control over the Mrs. Field retail business
as licensee, Interbake expressed interest in acquiring the business outright. A
December 13, 2012 slide deck outlining Interbake’s strategic plan for 2013-2017
stated that one of Interbake’s strategic initiatives was to “Secure Mrs. Fields long-
term brand control and drive growth of the business and brand (new items, new
customers, unlocking trade efficiencies, meaningful innovation.).” 77 The deck
identified the “[f]ailure to secure long term brand control” as a “key risk” to
expanding Mrs. Fields “across other product platforms and channels.”78
In a January 29, 2013 letter, Interbake expressed its “preliminary interest” in
purchasing the Mrs. Fields brand for the “retail and licensing segment of the
business” for approximately $30 million.79 Interbake followed up with a letter of
intent dated March 6, 2013, offering to purchase the Mrs. Fields brand for $32
million and to provide Mrs. Fields with a worldwide, perpetual, royalty-free license
75
JX 134 ZC2003123; Tr. 153-54 (Courtney).
76
Tr. 154-155 (Courtney).
77
JX 131 at 2.
78
JX 131 at 4.
79
JX 136 IBF00042798.
17
for the franchise and gifting business.80 After Mrs. Fields balked at the proposal,
Interbake sent a revised letter of intent on May 15, 2013, proposing that Mrs. Fields
retain ownership of the brand while providing Interbake a worldwide, perpetual,
royalty-free license for all purposes other than franchising and gifting for $22
million.81 Courtney remarked in a May 22 internal email to Joe Nasr of Z Capital:
“Obviously, this is not going to fly.”82
I. Z Capital Gets Frustrated with Interbake, More Discussions About
Selling the Retail Brand, and Internal Turmoil at Mrs. Fields
On January 28, 2014, James Zenni, President and CEO of Z Capital and
Chairman of the Board of Mrs. Fields, stated in an email to one of his partners that
he wanted to “break” or “modify” the License Agreement because it is “killing ou[r]
brand.”83 Zenni reiterated his views later that day to fellow board member David
Barr, blaming cookie confusion between Mrs. Fields’ premium products and
Interbake’s “crap” for crippling Mrs. Fields’ ability to expand its other business
lines:
I want to revisit the Interbake situation / contract and I don’t want to
sell the rights (unless it’s a huge number today). It’s clear to me that
80
JX 214 ZC005272.
81
JX 215 ZC005282.
82
JX 215 ZC005279.
83
JX 188 ZC004643.
18
their product is not great and killing our brand. To crank up gifting and
franchising and have their crap on the shelf doesn’t help.84
Barr sympathized with Zenni’s concerns, but reminded him that “their crap” was
once “our crap:”
I understand and do not disagree with your sentiments. In fact, many
years ago while at Great American Cookies, this is exactly why I never
went into packaged goods even though we were approached. I could
never resolve the quality difference. With that said, we need to
remember that ‘their crap’ they are selling was ‘our crap’ just two years
ago and we sold it to them.85
While Z Capital was expressing frustration with Interbake, Interbake
continued to pursue an acquisition of Mrs. Fields’ branded retail business. As of
May 2014, Interbake was proposing either to acquire the Mrs. Fields’ licensing
channel for between $36-38 million, or to secure a ten-year, extendable option to
acquire the business at higher prices in exchange for an upfront payment of
$500,000.86
On May 31, McDonough informed George Weston that “[w]e finally have
agreement to non-binding financial terms with Mrs. Fields for the purchase of the
perpetual rights to the Mrs. Fields brand for essentially all bakery products across
all channels world wide with the exception of their Mall stores and on-line gifting.”87
84
JX 189 ZC004645.
85
JX 189 ZC004645.
86
JX 197; JX 207; JX 216.
87
JX 220.
19
The parties continued to negotiate a potential sale of the licensed business to
Interbake through the summer and fall of 2014, 88 but Mrs. Fields was lukewarm
toward Interbake’s proposals. On June 15, Zenni of Z Capital instructed Courtney
and his team not to “engage in any discussions with Interbake on any topic.” 89
Instead, Z Capital and the Mrs. Fields board assumed direct control over the
negotiations with Interbake.
On June 27, Courtney emailed Zenni asking permission to resume contact
with Interbake, noting there were “a couple of items they need immediate approval
on or they will lose the sales opportunity (primarily promotional).” Courtney never
received approval and was fired later that day.90 Mrs. Fields also terminated its
entire marketing department except for one person, Stephanie Brady, who remained
until January 2015.91
Courtney’s termination marked the beginning of a two-year interregnum
where three individuals were appointed and then removed in quick succession as
Mrs. Fields’ CEO. Courtney was succeeded by Joyce Hrinya, who served in an
interim capacity for about six months until he was succeeded by Jeff Werner, who
88
JX 214; JX 221; JX 240.
89
JX 222.
90
Tr. 217 (Courtney).
91
Tr. 1419 (Anson); JX 7 at 59 (Werner Dep.).
20
also served for about six months. 92 They were followed by Jonathan Drake, who
served as CEO for just five months before he was replaced by Werner, who ran the
company for a second stint of about five months before being replaced in August
2016 by Dustin Lyman, who was serving as CEO as of the time of trial. 93 In total,
six different individuals served as the CEO of Mrs. Fields in seven separate tenures
from March 2012, when the License Agreement was signed, until August 2016.
In October 2014, George Weston’s annual enterprise risk management review
included a discussion of the “risk related to not having full control of Mrs. Fields
brand,” a topic that appeared in the previous year’s review. 94 The presentation
identified as one of its “Current Mitigation Actions” the need to “Continue to meet
Mrs. Field’s targets,” 95 and contemplated having McDonough meet with Mrs.
Fields’ private-equity group in mid-October to discuss brand ownership with the
goal of resolving the issue by the end of the year. 96 The planned October meeting
occurred, but the parties failed to come to an understanding and the negotiations
ended soon after.97
92
See Tr. 1586-89 (Lyman).
93
See Tr. 1586-89 (Lyman); JX 13 at 7 (Lyman Dep.).
94
JX 619 at 8.
95
JX 619 at 8.
96
JX 619 at 8.
97
JX 8 at 161-63 (Kipley Dep.).
21
On November 28, 2014, an enterprise risk management update circulated
among senior George Weston, Weston Foods, and Interbake employees, including
McDonough, noted that discussions to acquire Mrs. Fields had ended and that going
forward Interbake would need to “Protect volume and EBIT as we transition from
Mrs. Field’s by pursuing licensing arrangements with other biscuit brands.”98 The
update also identified a series of future mitigation actions with respect to Mrs. Fields,
including:
Invest prudently in brand insights and R&D (limit of $500K-$700k)
to achieve 2016 targets, while taking into account risk of losing
brand in long-term
Hire brand resources to conduct R&D / consumer insights
Build Mrs. Fields platform to include other channels and products
Target new business accounts.99
J. Interbake Ends Its Pursuit to Acquire the Mrs. Fields Retail Brand
In February 2015, consistent with its November 2014 enterprise risk update,
Interbake hired Lauren Reynolds as a brand manager to market Mrs. Fields
products.100 Notwithstanding the breakdown in negotiations with Mrs. Fields that
occurred in October 2014, Interbake still believed in early 2015 that it would be
“successful in buying long-term rights to the brand ownership.”101
98
JX 266 at 3.
99
JX 266 at 3.
100
Tr. 1646 (Reynolds).
101
Tr. 1069 (McDonough).
22
On April 1, Reynolds shared her 30-day observations on the Mrs. Fields brand
with Interbake leadership. The presentation stated: “Mrs. Fields is a strong brand
equity that has the potential for long-term success in the cookie category.” 102
Reynolds forecasted sales for 2015 at $28.24 million, an 18% increase over 2014.103
The presentation also reiterated Interbake’s goal to “protect control of brand at
Retail,” which Interbake would pursue by continuing “to negotiate to gain ownership
of the brand.”104
In early 2015, Z Capital decided to solicit bids to sell Famous Brands.105 An
April 15 George Weston presentation summarized the opportunity and the rationale
for making a bid, stating that “[w]e continue to believe that Mrs. Fields is a well-
recognized, premium brand that is an attractive component of our product
portfolio.”106 The “Mrs. Fields business,” the presentation continued, “generated
$18M of revenue (5% of total Interbake) and $3M of EBITDA (16% margin in 2014)
– this is currently the highest margin business in Interbake (excluding NDS).”107
The presentation further stated: “Loss of the Mrs. Fields brand would be detrimental
102
JX 288 at 12.
103
JX 288 at 8.
104
JX 288 at 6.
105
JX 290 at 2.
106
JX 300 at 5.
107
JX 300 at 5.
23
to our strategic growth plan and our ability to grow other branded business.”108 On
April 20, Interbake submitted a $50 million bid for both the branded retail business
and Mrs. Fields’ e-commerce platform and gifting business.109
On April 30, 2015, Interbake and Mrs. Fields held a strategic planning
meeting. Zenni, Monette, and Reynolds were among the attendees. Product quality
was a primary topic. Rebecca Hamilton, a Mrs. Fields project manager, recounted
that “[t]here was a lengthy discussion regarding the quality of the Interbake cookie
and what we need to do to make formula adjustments. Laura [Reynolds] and Seth
[Monette] suggested our R&D teams work together to evaluate and modify existing
formula’s to better represent the Mrs. Fields brand.”110
Another topic discussed at the April 30 meeting was a new promotional
program Interbake was undertaking with the United Service Organizations between
May and July 2015 called “Share Your Hero.” The promotion invited customers to
submit stories about their individual heroes in return for coupons and product
samples, with the winner to receive one year’s worth of cookies and to be featured
on Mrs. Fields cookie boxes.111 Interbake asked to “tie the USO program” to the
official Mrs. Fields website to appeal to a broader audience, but Mrs. Fields refused,
108
JX 300 at 5.
109
JX 305.
110
JX 311.
111
JX 311.
24
quarantining the Interbake cookies from Mrs. Fields’ other products “to avoid further
cookie confusion in the market place.”112
On May 6, 2015, Mrs. Fields rejected Interbake’s offer to acquire Mrs. Fields’
branded retail business and its e-commerce platform and gifting business for $50
million. An internal Weston/Interbake email reported that “Z-Capital has decided
to continue to own the business and execute on its business plan.”113
K. Interbake Plans to Exit the Mrs. Fields Relationship
Z Capital’s reversal of its decision to sell Famous Brands marked a turning
point in the relationship between Mrs. Fields and Interbake. After two years of
sporadic discussions, Interbake was faced with the reality that it would not be able
to acquire control of the Mrs. Fields brand and that its role would be limited to that
of a licensee. This realization set in motion a desire on Interbake’s part to exit its
relationship with Mrs. Fields. As discussed below, the initial plan was to exit when
the term of License Agreement expired at the end of 2017, but the timetable was
accelerated later in the hope of negotiating an exit in mid-2016.
On May 7, 2015, Selena Sanderson at Interbake emailed Monette and
Reynolds, asking for Reynolds’ recommendation “on additional spend given that we
will continue to be” licensees and not owners, and Monette’s thoughts on the “sales
112
JX 311; Tr. 1651-52 (Reynolds).
113
JX 313 IBF00007312.
25
benefit for this spend (vs what’s in the budget).”114 In response, Monette identified
a new risk of $1 million in lost sales due to “[c]ore business softness,” 115 which he
described as the “impact of zero consumer spend.”116 On June 2, Reynolds emailed
Tiffany Reeve, Interbake’s Vice President of Financing, explaining that the trade
spend in the budget was committed to various projects and that no additional spend
was available for the second half of 2015.117
On June 15, Daryl Gormley took over as President of Interbake, reporting
directly to McDonough, who had been promoted to President of Weston Foods’
frozen and biscuit divisions.118 On the same day, Reynolds circulated an updated
brand strategy deck.119 The presentation estimated that sales for 2015 would be
$21.5 million, down 10.2% from the prior year and down 15.7% from the 2015
budgeted amount, a drop “driven by strong headwinds, including poor retail
velocity,” and that sales for 2016 would be $21.7 million.120 The presentation also
referenced a planned exit from the relationship with Mrs. Fields in 2017:
114
JX 313 IBF00007312.
115
JX 319 at 2; Tr. 1189-90 (Monette).
116
JX 313 IBF00007311.
117
JX 324.
118
Tr. 537 (Gormley); JX 10 at 5-6 (McDonough Dep.).
119
JX 328.
120
JX 328 at 2.
26
Planned exit from Mrs. Fields brand and license in 2017 based upon
poor partnership relationship and significant investment needed to
reverse brand health
o Minimum Gross Sales of $34.0 million are needed by the end
of 2016 for license auto-renewal; large gap exists to achieve
minimum121
The plan to exit the Mrs. Field brand and license in 2017 was reiterated in a
Weston Foods Brand Strategy Update dated June 22, 2015, which noted that:
“Brand health is poor and we anticipate continued deterioration of the brand equity
due to lack of support and investment from Famous Brands.”122 Paviter Binning,
George Weston’s President and CEO, confirmed that, as of mid-June 2015, it was
Interbake’s plan to exit the relationship with Mrs. Fields in 2017.123
Although it planned to exit the Mrs. Fields business, Interbake still had a
business to run in the meantime. On June 23, Reynolds emailed Hamilton at Mrs.
Fields:
I wanted to reach out to see if you had an R&D contract you would like
us to work with on the cookie formulas? We would like to remove PHO
[partially hydrogenated oils] from all formulas and feel this is a great
opportunity to optimize the product. Please let me know who I should
be working with on this.124
121
JX 328 at 2.
122
JX 331 (Branded Strategy Update) at 2.
123
JX 25 at 90-91 (Binning Dep.).
124
JX 341.
27
Three weeks later, Hamilton relayed the email to Famous Brand’s Chief Marketing
Officer, stating: “Lauren’s second email inquiring about who to work with from our
team on the Interbake formulas. I basically told her that we had some changes
internally and were trying to figure out the best person for her to work with and that
I would get back to her.”125 Mrs. Fields never responded to Reynolds’ request for a
contact person, and never offered any resources to address cookie confusion or the
formula problem.126
While mid-2015 Interbake internal documents were reflecting its concern that
the Mrs. Fields brand was in decline, senior executives overseeing Mrs. Fields also
were discussing internally problems with the brand. One email exchange in August
2015, for example, viewed the shrinking pipeline for franchises as a “brand problem
and product development problem,” and noted the negative effect that discounting
in the retail channel was having on the brand:
The significant discounting of Mrs. Fields’ products is a weakness.
Every day I receive a different email offering Mrs. Fields cookies at a
discount. I believe that this cheapens the brand and I believe that it is
training Mrs. Fields’ customers to never pay full price because they
should wait for a coupon or other discount offer, which inevitably will
be arriving sooner rather than later. The discounting is a poor tactic
that needs to be reigned in – gifting has been running on their own
unchecked chasing sales.127
125
JX 341.
126
Tr. 1674-1675 (Reynolds).
127
JX 352 MF00033550-51.
28
L. Interbake Accelerates Its Plan to Exit the Mrs. Fields Relationship
In July 2015, Gormley and his staff at Interbake worked on developing a plan
to exit from the Mrs. Fields relationship. On July 1, Gormley asked Monette how
much Interbake was planning to spend “to support Mrs. Fields” for the remainder of
the License Agreement and the estimated return on that investment. 128 Monette
responded that trade spend “just follows sales up or down” as a percentage of sales,
and that he anticipated trade spend for 2015 would be $4.2 million (or 25%) of
estimated sales of $19 million.129
On July 3, Gormley asked Monette to “review the Mrs. Fields spending in
more detail – what are we investing, what is the return within the agreement, what
are alternatives and the associated financials including the payment rate if we drop
below threshold, what is the impact to customers/customer relationships?” 130
Monette responded that the trade spend Interbake had set up “is in line with the
category average as we understand it (25% of gross sales)” and cautioned against
reducing it:
There are no required spending minimums within the agreement. The
trade we’ve set up for the business is in line with the category average
as we understand it (25% of gross sales). . . . On the Mrs. Fields
consumer spending, it really has been and is quite limited. To the extent
that we ‘invest’ in the brand it really has been through our trade spend
128
JX 333.
129
JX 333.
130
JX 336 at 2.
29
which is needed to stay on the shelf and drive any customer support
whatsoever. If we start to peel back trade in a significant way then our
turns, distribution and customer relationships will suffer. I would not
recommend that course of action.131
By mid-July, Interbake’s plan had shifted from exiting the Licensing
Agreement at the end of the term in 2017 to “[m]anag[ing] Mrs. Fields business to
maximize cash generation without alienating customers while planning for transition
within 12 months, in advance of the agreement termination.”132 On July 23, 2015,
Gormley’s team reported their goals for the second half of 2015. One of Reeve’s
goals was to “[d]evelop an exit and backfill strategy for Mrs. Fields.”133 Monette’s
objectives included using trade spend to ensure that Interbake reached $20 million
in sales for the year and developing a two-year plan to manage the exit from the
relationship with Mrs. Fields.134
Also on July 23, representatives of Mrs. Fields and Interbake met to discuss
the state of their relationship.135 Dustin Lyman, then Vice President of Finance and
soon to become Mrs. Fields’ new CEO, was one of the attendees. He testified that
Mrs. Fields hoped to reaffirm to Monette that Mrs. Fields would be “available at the
131
JX 336 at 2.
132
JX 338 IBF00021982.
133
JX 343 (Reeve).
134
JX 343 (Monette).
135
JX 344; Tr. 1282 (Lyman).
30
highest levels of the company to interact with him and the rest of Interbake
management.” 136 Among the topics discussed was the USO Share Your Hero
campaign, which both sides agreed was a success, and continuing concerns about
cookie quality.137 On the latter issue, Interbake pointed out that it had been using
“the recipes they had been given” by Mrs. Fields and that if Mrs. Fields wanted to
change the recipes, it could provide new ones, to which Mrs. Fields responded that
it “did not have the skill set within the company to come up with a new recipe
formulation.”138
In the months after its July meeting with Mrs. Fields, Interbake implemented
its plan to “backfill” the “significant” “sales and EBIT gap” that would be left by the
planned exit from the Mrs. Fields relationship.139 At the same time, Interbake did
not “want to give Famous Brands the opportunity to leave the agreement at year end”
by failing to meet the $20 million sales threshold in Section 15(c)(iii) of the License
Agreement.140
136
Tr. 1291-92 (Lyman).
137
Tr. 1284-86 (Lyman).
138
Tr. 1285-86 (Lyman).
139
JX 695.
140
JX 358 IBF00034922.
31
In an August 27 email, Monette said he would pull together a plan to meet the
$20 million minimum by using trade spend and other approaches. 141 A few days
later, on September 2, Monette emailed his sales team to inform them that he had
received “buy-in and support from Weston Senior Leadership to take one last trade
deal driven crack at closing our year strong on Mrs. Fields,” and instructed the sales
team to “spend like drunken sailors:”
I have received buy-in and support from Weston Senior Leadership to
take one last trade deal driven crack at closing our year strong on Mrs.
Fields.
The goal is topline volume 1st, incremental contribution to plan 2nd.
What does this mean? It means that we can throw out the existing plan
and TURN UP THE HEAT.
For example, have a 2/$5 planned that will generate 500 cases in
orders? Then let’s get a 2/$4 planned that will generate 1500 cases!
All ideas are on the table so come prepared with ideas and an open
mind. I don’t want to hear anything about what hasn’t worked or what
is ideal.
The only thing I’m interested in is what do you need to drive
incremental volume for the balance of the year. Demos? Shippers?
IRC’s? Sharpened Price Points? Co-Ops? Display fees? Menu?
Tomorrow’s call will be to talk about focus and how.
It’s not often that we get the green light to spend like drunken
sailors…plan on being aggressive and moving fast.142
141
JX 358.
142
JX 360; see also JX 367.
32
While Monette’s sales team had the green light to increase trade spend to
increase sales, Reynolds was asked to cut back on marketing expenses. On
September 30, Reeve emailed Reynolds, asking, “[h]ow much of this can you pull
back on if we say we are not going to continue to support MF with marketing $?”143
Reynolds replied that “I’m at bare bones for Mrs. Fields for 2016. If we no longer
have the brand, it is a different story, but for now I would say I have already pulled
back as much as possible to keep things up and running at a minimum.”144
M. Interbake’s Private Label Initiatives
At the same time that Monette and his sales team were pushing to meet the
$20 million sales threshold for 2015, Interbake was exploring ways to “backfill” the
volume it expected to lose when it exited its relationship with Mrs. Fields. 145
Interbake started by launching a series of private-label projects to develop substitute
products in-house for this purpose.
On or about October 28, 2015, at Weston Food’s third quarter review meeting,
Interbake presented an updated Mrs. Fields exit plan that contemplated negotiating
an “end date” to its contract with Mrs. Fields in the first half of 2016, and replacing
its products through a “Three Prong Replacement Strategy:”
Leverage 2015 $20MM minimum miss for early exit
143
JX 697.
144
JX 697; see also JX 698.
145
Tr. 509-11 (Gormley).
33
Negotiate first half 2016 end date with Famous Brands
Three Prong Replacement Strategy
o Project Capricorn for US Mass, Grocery and Club
o Two SKU value soft baked line for C-Store
o Exploring “donut” cookie for Shoppers/LCL
Minimize inventory risk of product and supplies146
The first prong, Project Capricorn, was a “high quality, chocolate chip-based
cookie line of products” with packaging “completely different” from the Mrs. Fields
product.147 The Mrs. Fields cookie was soft-baked and packaged in a carton. The
Project Capricorn product was a hard cookie that would be sold “in film packaging
with a tray,” which meant that the Project Capricorn product could not go in the
same spot on the shelf as the Mrs. Fields cookie.148
The second prong was known as Project Bubba. It was an individually
wrapped single-serve cookie that was to be sold in the convenience store channel
using different recipes and flavors than the Mrs. Fields single-serve product but
would be sold in the same size packaging.149 The Project Bubba cookie never made
it past the pilot phase. 150
146
JX 393 (Weston Biscuits – 3Q Review & Strategic Plan Update) at 13.
147
Tr. 1694 (Reynolds); JX 405 (Project Capricorn Key Initiative Charter).
148
Tr. 586-88 (Bagwell).
149
Tr. 590-92 (Bagwell); JX 405 (Project Bubba Key Initiative Charter).
150
Tr. 592 (Bagwell).
34
The third prong was known as Project Sugar Shack. It was a “doughnut
cookie,” “a completely new innovation” intended for the Canadian market that had
“nothing to do with the Mrs. Fields actual product.”151
In November 2015, Interbake provided samples of the Project Capricorn
product to Walmart when it asked to see a product similar to one that Interbake made
in Canada under the “Decadent” brand name.152 On December 18, Walmart notified
Interbake that it was not interested in Project Capricorn. 153
Projects Capricorn, Bubba and Sugar Shack were never completed, and the
products contemplated by these three projects were never sold to any retailer or
consumer. 154 After Project Capricorn failed to draw any interest from Walmart,
Interbake adopted another project to make two new cookies for Walmart called
“Walmart Homestyle,” 155 which it planned to sell in packaging with the same
dimensions as the Mrs. Fields’ packaging.156 Interbake originally developed Project
Homestyle as a value soft-baked cookie for Dollar General (under the Clover Valley
151
Tr. 510, 514 (Gormley); Tr. 594-96 (Bagwell).
152
Tr. 1694 (Reynolds); JX 407. Although the record is unclear, it appears there also were
some discussions about Project Capricorn with Rite Aid and perhaps with Delhaize. See
JX 428 IBF00009204 (Rite Aid); Tr. 908-10 (Stone) (Delhaize).
153
JX 420.
154
Tr. 508, 578-79. (Gormley); see also Tr. 587, 594, 597 (Bagwell), 720-21 (Rummel),
826-27 (Stone), 1693 (Reynolds).
155
JX 426, JX 434.
156
JX 440 IBF00011786.
35
label) with less expensive ingredients than the Mrs. Fields premium brand.157 It
ultimately was not sold to Walmart or, besides Dollar General, any other
customers.158
N. Interbake Explores a Partnership with Back to Nature
Going into 2016, Interbake’s “backfill” strategy became focused on a
potential partnership with Back to Nature Foods Company, LLC (“Back to Nature”),
a natural food company. On January 29, 2016, Gormley and McDonough met with
Vincent Fantegrossi, President and CEO of Back to Nature, who recounted the
discussion in an email that day:
Interbake is very frustrated with Mrs. Fields – the brand is owned by a
PE company that won’t spend against it, no marketing or trade spend –
has had six presidents in three years. [McDonough] tried to buy the
brand and they don’t want to sell it. His strategy is to replace the Mrs.
Fields by offering a branded and/or private label offering. They can
terminate in less than 60 days, we are targeting a July 1 kickoff. I
pressed on the fact that a branded replacement assures better success of
transitioning space than waiting for PL product development, etc.
Something we are going to need to push. They project this to be worth
$3 million in sales to BTN. If we could get a bigger slice, it could go a
lot higher. They feel we need four SKU’s to do that (we currently have
two).159
157
Tr. 588-90 (Bagwell), 861-65 (Stone).
158
Tr. 1427-28 (Anson); JX 547.
159
JX 447 BTN000146.
36
In mid-February, Interbake and Back to Nature executives met in Florida to discuss
the proposed joint venture.160
On March 22, Gormley and Stephanie Bagwell, a program marketing manager
at Interbake, spoke with Back to Nature and agreed “to support the Mrs. Fields
backfill plan” using existing Back to Nature formulations for seven cookies and
“existing Mrs. Fields private label formulation[s]” for seven other cookies, and to
develop four other formulations.161 The next day, Fantegrossi informed his team
about a meeting with Interbake planned for April 6, stating: “[t]his is confidential
because it has not been announced, but we are working with Interbake toward
replacing Mrs. Fields with [SnackWell’s and Back to Nature] everywhere Interbake
controls it . . . They are notifying Mrs. Fields (Famous Brands) on April 5, then
coming to Naples on April 6 to scope our plan of attack.”162 SnackWell’s is a non-
organic brand owned by Back to Nature. 163
On March 24, Interbake sent Back to Nature some recent data on its sales of
Mrs. Fields cookies.164 Several days later, Interbake sent Back to Nature packaging
160
JX 469 at 2.
161
JX 506 IBF00021591-92.
162
JX 517 BTN001347.
163
Tr. 389 (Gormley), 597 (Bagwell). The proposed SnackWell’s cookies were at a lower
price point than the Back to Nature cookies, and were never produced. Tr. 389-91
(Gormley), 604, 607 (Bagwell).
164
JX 522.
37
specifications Interbake had used for the Mrs. Fields products.165 An internal Back
to Nature email comments that it was “attempting to stay close to Mrs. Fields
traditional architecture, while respecting the Back to Nature Brand” to give “retailers
an easy solution to replace the Mrs. Fields product slot on shelf.”166
While Interbake was exploring a transition to Back to Nature in March, it was
closely managing its Mrs. Fields packaging materials and inventory levels. This led
to some product shortages 167 and the decision to discontinue at least one of its
flavors: the red velvet cookie.168
O. Mrs. Fields’ Audit Request
Under the License Agreement, Mrs. Fields is entitled to review and audit
“relevant financial books and records” of Interbake.169 On November 16, 2015, Mrs.
Fields sent Interbake a letter asking to conduct an “inspection of books and records
relating to the License Agreement.”170 The letter stated that the inspection would be
conducted by Paul Crystal, a consultant who performs licensee contract compliance
165
JX 518, JX 529.
166
JX 529.
167
JX 486, JX 491.
168
JX 485, JX 490.
169
JX104 § 7(c).
170
JX 402 CAS000113.
38
reviews, and enclosed an extensive questionnaire and lengthy lists of items Crystal
wished to review onsite and prior to arrival.171
On November 24, Interbake objected to Mrs. Field’s request as “overly broad”
and “outside the scope of the commitment between the parties under the
Agreement.”172 After the parties discussed the parameters of the audit in December
2015, the onsite inspection occurred over the course of two days in February 2016.173
On March 4, 2016, Crystal requested some additional information as a follow
up to his onsite visit, which was provided on March 15 and 21.174 Later in the day
on March 21, Crystal sent Lyman a 37-page draft audit report.175 After March 21,
Crystal had no further communications with Interbake, and was not asked by anyone
at Famous Brands or Z Capital to follow up on his draft audit report.176
P. Interbake Seeks to Terminate the License Agreement as It
Continues Discussions with Back to Nature and Walmart
On April 5, 2016, McDonough and Gormley of Interbake met with Lyman
and Kipley, a Mrs. Fields board member, in Toronto. Gormley informed the Mrs.
Fields’ representatives that Interbake would be terminating the License Agreement
171
JX 402; Tr. 1221 (Crystal).
172
JX 408 CAS000066.
173
See Tr. 1225-27, 1231-32 (Crystal); JX 415.
174
Tr. 1265 (Crystal): JX 484, 500.
175
Tr. 1234 (Crystal); JX 503.
176
Tr. 1267-68 (Crystal).
39
under Section 15(c)(iii) because sales in 2015 had not met the specified $20 million
threshold.177 Lyman and Kipley were taken by surprise.178 That afternoon, Reeve
emailed Lyman an “annual report” containing the 2015 sales and royalty figures.179
Also on April 5, Mrs. Fields provided Walmart with updated packaging
information for each of the products it sold Walmart, except for its Mrs. Fields
products.180 Two days later, Interbake pitched Walmart on a “great soft baked
cookie” that would sell faster (“better velocities”) than Mrs. Fields as part of its
strategy to transition Walmart away from Mrs. Fields:
Our goal is still to provide you with a great soft baked cookie for your
customers. I will do everything I can to transition in a quality way. I
want to make sure that we help you with an item that has better
velocities than the current items. We can discuss options for you to
lead the market in this change if you want to move first.181
On April 13, Walmart informed Interbake that it was “not interested in adding any
other items” and had decided to discontinue selling the Mrs. Fields products. 182
Andrew Hotchkiss, an Interbake account manager, attributed Walmart’s
177
Tr. 1296 (Lyman).
178
Tr. 1296-97 (Lyman).
179
JX 712.
180
JX 537.
181
JX 537 IBF00016533; see also JX 542 IBF00016655-56.
182
JX 542 IBF00016655.
40
discontinuance of Mrs. Fields to Interbake’s decision to exit from the Mrs. Fields
relationship and the timing of Walmart’s resetting of its “modulars.”183
After giving Mrs. Fields notice of its intention to terminate the License
Agreement, Interbake prepared to launch a new partnership with Back to Nature.
On April 6, Interbake held a three-hour “Kick-Off Call” with Back to Nature, before
which Interbake circulated a presentation deck containing slides for fourteen of its
major retailers.184 The slides displayed the Mrs. Fields logo along with the logo of
each retailer and contained information Interbake had compiled during its tenure as
licensee of each retailer’s recent sales of Mrs. Fields cookies.185
On April 12, Gormley emailed Lyman a copy of Interbake’s written notice of
termination, “effective immediately, pursuant to Section 15(c)(iii) of the License
Agreement.”186 Interbake offered to “work with [Mrs. Fields] to ensure an orderly
transition of the Mrs. Fields arrangements.”187 On April 13, Mrs. Fields filed this
lawsuit and, a few days later, sought a temporary restraining order to prevent
Interbake from taking any action to terminate the License Agreement. On April 18,
183
JX 551 BTN001405; see also JX 547. A “modular” is a preplanned store arrangement
that is used across store locations and is reset after a given period, in this case annually.
See JX 4 at 309-10 (Gormley Dep.); JX 14 at 162 (Courtney Dep.).
184
JX 616.
185
JX 616.
186
JX 538.
187
JX 538.
41
2016, the Court entered a Standstill Order to which the parties stipulated. It provides
“that neither Mrs. Fields nor Interbake shall take any action to implement any
termination of the License Agreement” and that the parties would “continue to honor
and meet their respective obligations under the License Agreement” until the Court
issues a ruling after trial.188
On May 4, 2016, Gormley sent Lyman a letter providing Interbake’s “point
of view” concerning its failed relationship with Mrs. Fields.189 The letter asserted
that “Mrs. Fields’ brand health has continued to decline since February 2013, despite
significant investment and effort by Interbake to drive and build the brand.”190 It
further asserted that the business had become “commercially unviable” for
Interbake, thus warranting termination under Section 15(c)(ix) “in addition to [its]
right to terminate for sales coming in less than $20 million annually under Section
15(c)(iii) of the License Agreement.”191
The initiation of litigation by Mrs. Fields disrupted Interbake’s planned
partnership with Back to Nature. On May 26, Gormley wrote Fantegrossi
188
JX 32 ¶¶ 2-3.
189
JX 569 MF00020865.
190
JX 569 MF00020866.
191
JX 569 MF00020867.
42
referencing the litigation and putting on hold “expanding [its] relationship” with
Back to Nature.192
In April and May, Interbake continued to experience shortages of various Mrs.
Fields products, including its milk chocolate chip cookie, prompting complaints
from customers.193 According to Rummel, Interbake’s director of sales, Interbake
had “corrected the packaging situation at this point,” which was a key reason for its
inability to fill all product orders, but the shortages continued due to “backlog on the
product.”194
Q. Sales from 2013 to 2016
The License Agreement was signed in March 2012, and Interbake assumed
operational control of branded retails products in or about November 2012. For the
four full calendar years on Interbake’s watch, the trial record reflects that the volume
of Mrs. Fields product sales rose modestly from 2013 to 2014, and then declined
significantly in 2015 and again in 2016, while the amount of trade spend Interbake
192
JX 593 BTN000244.
193
See JX 553, JX 574, JX 577, JX 579, JX 583, JX 585.
194
Tr. 779-80 (Rummel).
43
incurred as a percentage of sales increased steadily over the three years for which
data are available:
Retail Branded Sales 2013-2016
195
Year Gross Sales Net Sales Trade Spend196 Trade Spend
(98% of Gross) (% of Gross)
2013 $22,764,278 $22,308,992 $4,056,725 17.82%
2014 $23,210,119 $22,745,917 $4,911,991 21.16%
2015 $17,006,419 $16,596,495 $4,110,126 24.17%
2016 $10,951,446 $10,732,418 - -
Despite Interbake’s failure to achieve $20 million in Net Sales in 2016, Mrs.
Fields did not seek to terminate the License Agreement under Section 15(c)(iii).
II. THE PARTIES’ CONTENTIONS
After this action was filed in April 2016, expedited discovery occurred over a
period of approximately six months, after which both parties amended their
pleadings. On November 2, 2016, shortly before trial, Mrs. Fields filed a Verified
Amended Complaint (“Complaint”) asserting four claims:
Count I seeks a declaratory judgment that Interbake was not entitled
to terminate the License Agreement under Section 15(c)(iii) and a
permanent injunction requiring Interbake to continue performing
under the License Agreement.
195
Sales figures (rounded) come from the annual royalty reports. JX 190 (2013); JX 276
(2014); JX 446 (2015); JX 728 (2016). On February 23, 2017, Mrs. Fields moved to
supplement the record to include JX 728. Interbake objected to the motion but offered to
stipulate to the gross sales figure included in the chart above.
196
JX 39 (Expert Report of Vincent A. Thomas) at 14.
44
Count II seeks injunctive relief and specific performance for
Interbake’s alleged breaches of certain provisions of the License
Agreement.
Count III seeks damages for Interbake’s alleged breaches of various
provisions of the License Agreement.
Count IV seeks damages for Interbake’s alleged breach of the
implied covenant of good faith and fair dealing.
On November 4, 2016, Interbake filed amended counterclaims (the “Counterclaim”),
asserting three claims:
Count I seeks a declaratory judgment that Interbake was entitled to
terminate the License Agreement under Section 15(c)(iii) as well as
Section 15(c)(ix).
Count II seeks rescission of the License Agreement and damages for
Mrs. Fields’ alleged breach of express and implied terms of the
License Agreement.
Count III seeks rescission of the License Agreement on the theory
that Mrs. Fields fraudulently induced Interbake to enter into the
License Agreement through knowingly false and misleading
representations.
Interbake did not seriously press its third counterclaim during post-trial briefing
and later abandoned it.197
197
Post-Trial Tr. at 111-12 (Dkt. #195). The amended counterclaims added the fraudulent
inducement claim (Count III) and the implied covenant claim asserted as part of Count II.
Mrs. Fields objected to these additions, which were filed without leave of Court shortly
before trial. That objection is moot given that Interbake abandoned Count III and that the
only implied covenant claim it briefed post-trial—in a one-paragraph argument—is
without merit. See IV.C.2 n. 307, infra.
45
III. LEGAL STANDARD
To succeed at trial, “Plaintiffs, as well as Counterclaim-Plaintiffs, have the
burden of proving each element, including damages, of each of their causes of action
against each Defendant or Counterclaim-Defendant, as the case may be, by a
preponderance of the evidence.” 198 “Proof by a preponderance of the evidence
means proof that something is more likely than not.”199 This standard applies to both
Mrs. Fields’ claims and Interbake’s counterclaims.200
With certain exceptions not relevant here, the License Agreement is governed
by Delaware law.201 Under Delaware law, a “contract’s express terms provide the
starting point in approaching a contract dispute.”202 If, on its face, the “contract is
unambiguous, extrinsic evidence may not be used to interpret the intent of the
parties, to vary the terms of the contract or to create an ambiguity.” 203 If a contract
198
inTEAM Associates, LLC v. Heartland Payment Systems, Inc., 2016 WL 5660282, at
*13 (Del. Ch. Sept. 30, 2016).
199
Id.
200
Medicalgorithmics S.A. v. AMI Monitoring, Inc., 2016 WL 4401038, at *17 (Del. Ch.
Aug. 18, 2016).
201
JX 104 § 22(k) (“Except to the extent governed by the United States Trademark Act of
1946 . . . or other federal law, this Agreement, and the relationship between LICENSEE
and MRS. FIELDS, shall be governed by the laws of the State of Delaware.”).
202
Ostroff v. Quality Services Laboratories, Inc., 2007 WL 121404, at *11 (Del. Ch. Jan.
5, 2007).
GMG Capital Inv., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 783-84 (Del.
203
2012) (quoting Eagle Indus., Inc. v. DeVibiss Health Care, Inc., 702 A.2d 1228, 1232 (Del.
1997).
46
is ambiguous, however, the Court may consider extrinsic evidence, including
“evidence of prior agreements and communications of the parties as well as trade
usage or course of dealing.”204
Under Delaware’s objective theory of contracts, “a contract is not rendered
ambiguous simply because the parties do not agree upon its proper construction.
Rather, 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.”205 In considering extrinsic evidence, the Court should uphold,
“to the extent possible, the reasonable shared expectations of the parties at the time
of contracting.”206 “In giving effect to the parties’ intentions, it is generally accepted
that the parties’ conduct before any controversy has arisen is given ‘great
weight.’”207
204
Eagle Indus., 702 A.2d at 1233.
205
Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del.
1992).
206
Comrie v. Enterasys Networks, Inc., 837 A.2d 1, 13 (Del. Ch. 2003).
207
Ostroff, 2007 WL 121404, at *11; see also Radio Corp. of Am. v. Philadelphia Storage
Battery Co., 6 A.2d 329, 340 (Del. 1939) (“It is a familiar rule that when a contract is
ambiguous, a construction given to it by the acts and conduct of the parties with knowledge
of its terms, before any controversy has arisen as to its meaning, is entitled to great weight,
and will, when reasonable, be adopted and enforced by the courts. The reason underlying
the rule is that it is the duty of the court to give effect to the intention of the parties where
it is not wholly at variance with the correct legal interpretation of the terms of the contract,
and a practical construction placed by the parties upon the instrument is the best evidence
of their intention.”).
47
IV. ANALYSIS OF TERMINATION CLAIMS
The dispute that precipitated the filing of this action is whether Interbake was
within its rights to terminate the License Agreement in April 2016, before the
expiration of its initial five-year term on December 31, 2017. That issue forms the
basis of the first claim in Mrs. Fields’ Complaint and Interbake’s Counterclaim.
In Count I of its Complaint, Mrs. Fields seeks a declaration that Interbake did
not have the right to terminate the License Agreement under Section 15(c)(iii), as it
purported to do in April 2016, and a permanent injunction requiring Interbake “to
continue to carry out its obligations under the License Agreement until December
31, 2017 or, with appropriate advance notice, such earlier date as Mrs. Fields may
reasonably select.”208 In Count I of its Counterclaims, Interbake seeks a declaration
that it properly and effectively terminated the License Agreement under Sections
15(c)(iii) and 15(c)(ix), 209 which Interbake first invoked in writing as a basis for
termination in April and May 2016, respectively.210 In Count II of its Counterclaim,
Interbake seeks to rescind the License Agreement based on Mrs. Fields’ alleged
material breaches of certain provisions in the License Agreement.211 I address the
issues concerning these purported grounds for termination, in turn, below.
208
Compl. ¶ 56 (Dkt. #135).
209
Counterclaim ¶ 141 (Dkt. #148).
210
See JX 538; JX 569.
211
Counterclaim ¶ 152 (Dkt. #148).
48
A. Interbake Is Not Entitled to Terminate the License Agreement
Under Section 15(c)(iii)
Section 15(c)(iii) of the License Agreement provides for early termination
should “Net Sales” fall below $20 million in any given “Contract Year:”
(c) This Agreement may be terminated as follows:
...
(iii) Within fifteen (15) days following the receipt of the annual report
pursuant to Section 7(b), if LICENSEE fails to reach Net Sales of
twenty million ($20,000,000) dollars per Contract Year, during the
Initial Term and Renewal Term, as the case may be.
“Net Sales” is defined to mean 98% of “Gross Sales,” and the term “Contract Year”
corresponds to each calendar year from January 1, 2014 forward.212
In April 2016, Interbake sought to terminate the License Agreement under
Section 15(c)(iii) because it achieved only approximately $16.6 million in Net Sales
in 2015. Interbake argues that, because Section 15(c)(iii) does not specify which
party has the right to terminate, either party must be able to do so. Mrs. Fields
counters that it would be unreasonable to construe Section 15(c)(iii) to give
Interbake—the exclusive licensee—the ability to terminate for its own failure to
reach the $20 million minimum. Having carefully considered the evidence of record,
I agree with Mrs. Fields for essentially four reasons that the parties’ reasonable
212
JX 104 at 2-3 & Ex. A.
49
expectations when they entered the License Agreement was that only Mrs. Fields
would be able to trigger a termination under Section 15(c)(iii).
First, the structure of the License Agreement and commercial logic support
this conclusion. The License Agreement entitles Mrs. Fields to receive a “running
royalty” of 9% on every dollar of Net Sales up to $28 million in Net Sales (with the
royalty rate declining thereafter),213 but it does not impose any best or reasonable
efforts obligation on Interbake to achieve a certain level of sales. Indeed, at
Interbake’s request, a provision requiring that it achieve a minimum amount of
annual sales (ranging from $20 million to $35 million from year 1 to year 5) was
removed from an early draft of the License Agreement. Mrs. Fields did obtain,
however, an important economic protection, namely the right to receive a minimum
royalty of $2 million each year beginning with the 2014 calendar year until the end
of the initial term of the License Agreement. 214 Thus, if Net Sales in a calendar year
from 2014 forward do not exceed approximately $22.2 million—the point at which
$2 million in running royalties would be due under a 9% royalty rate—Interbake is
on the hook to make a true-up payment to Mrs. Fields for the difference.215
213
The royalty rate changes to 3% between $28 million to $38 million, 4% between $38
million to $48 million, and 5% above $48 million. JX 104 § 4(b).
214
JX 104 Ex. D-1. The minimum royalty due for the period ending December 31, 2013,
which included part of 2012, was $2.5 million.
See JX 107 IBF00042242 (“Guaranteed annual minimum royalty of $2.0MM (9% of
215
$22.2MM of revenue)”).
50
Given this structure, it makes little commercial sense to think the parties
would have intended that Interbake could terminate the License Agreement early
due to its own failure to achieve the $20 million minimum sales threshold and
thereby relieve itself of its minimum annual royalty obligation.216 In interpreting a
contract, Delaware courts seek to “give each provision and term effect . . . . We will
not read a contract to render a provision or term meaningless or illusory.” 217
Interpreting Section 15(c)(iii) to apply reciprocally would negate the purpose of the
minimum annual royalty provision because Interbake could avoid the obligation to
pay the minimum royalty each year for the rest of the license term if it failed to
achieve $20 million in Net Sales in 2014, 2015 or 2016.
Second, construing Section 15(c)(iii) to be exercisable only by Mrs. Fields is
supported by the text of Section 15(d)(iv). That provision relieves Interbake of any
“further financial obligation” apart from royalties that already have accrued for a
termination under Section 15(c)(iii) “by Mrs. Fields:”
Following the termination by MRS. FIELDS pursuant to Section
15(c)(iii), the expiration of this Agreement or the earlier termination by
LICENSEE as set forth herein, LICENSEE shall have no further
216
See JX 104 § 15(d)(iv) (“The parties explicitly acknowledge and agree that nothing
herein grants a right to MRS. FIELDS to the Guaranteed Minimum Royalties in the event
of an early termination of this Agreement. LICENSEE agrees to pay all Guaranteed
Minimum Royalties that have accrued prior to termination, and to pay a pro-rata calculation
of Guaranteed Minimum Royalties during the year in which the termination notice is
provided.”).
217
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (internal quotations
omitted).
51
financial obligations of any kind hereunder other than the payment of
Running Royalties which accrued prior to the expiration or termination
….
“Contracts must be construed as a whole,”218 and courts will take into account “not
only the language of the provision itself, but also the context of this provision within
the overall framework of the [contract]. The trial court [thus] consider[s] the purpose
of the [provision], as evidenced by its text, as well as other provisions relating to the
[same subject].” 219 If the parties had intended that Interbake could trigger a
termination under Section 15(c)(iii), it is reasonable to assume they would have said
so when referring to that specific provision in Section 15(d)(iv). They did not, which
strongly suggests that they did not intend to afford Interbake this right and which is
consistent with the commercially logical result of ensuring that Interbake cannot use
Section 15(c)(iii) to avoid its minimum annual royalty obligation.
Third, the negotiation history of the License Agreement confirms that Section
15(c)(iii) was not intended to apply reciprocally. It was Mrs. Fields—not
Interbake—that inserted the original version of Section 15(c)(iii) into the first draft
of the License Agreement.220 Specifically, using as a template its preexisting license
with Unilever, which did not contain a provision similar to Section 15(c)(iii), Mrs.
218
Nw. Nat. Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del. 1996).
219
Salamone v. Gorman, 106 A.3d 354, 372 (Del. 2014).
220
See I.C., supra.
52
Fields added the first version of Section 15(c)(iii), which referred to a $25 million
minimum sales threshold.221 Monette of Interbake thereafter asked Courtney of Mrs.
Fields to “reduce it to 20 million,” which Mrs. Fields agreed to do.222 It would make
no sense for Interbake to ask that the threshold be reduced if, as Interbake now
contends, the provision was intended as downside protection for its benefit.
Fourth, contemporaneous evidence demonstrates that Interbake understood
when it signed the License Agreement that only Mrs. Fields had the right to trigger
a termination under Section 15(c)(iii). This is reflected in an internal Interbake
memorandum dated March 21, 2012—two days before the License Agreement was
signed—that was prepared to obtain authorization for expenditures related to
entering into the license. Summarizing the termination provisions of the License
Agreement, the memorandum states:
Mrs. Fields has right to terminate where net sales [are] less than $20M
in any contract year.
Interbake has the right to terminate where Mrs. Fields materially
changes the program or damages the brand such that the arrangement
becomes commercially unviable.”223
221
The original provision contained an apparent typographical error because it confusingly
referred to both $20 million and $25 million in setting the threshold. See I.C. n. 26, supra.
Nonetheless, concerned about the prospect of a $25 million sales minimum, Interbake
asked that the minimum be reduced to $20 million.
222
Tr. 47-48 (Courtney); JX 89 at § 15(c)(iii).
223
JX 107 IBF00042252. The question of whether this summary and subsequent
documents incorporating it are privileged was the subject of a motion to compel that the
Court granted after finding that Interbake had selectively waived privilege. Mot. to Compel
Tr. at 93-94 (Dkt. #161).
53
The same understanding of the parties’ termination rights was incorporated into
several other slide decks that were circulated internally at Interbake and the Weston
entities, some as recently as May 2014.224
For its part, Interbake argues that Section 15(c)(iii) was intended to operate
for its benefit based on Monette’s testimony that he asked Courtney during the
license negotiations for “downside protection” if the deal “didn’t work out.” 225
There is no parol evidence in the record, however, reflecting any discussions
between the parties over the specific issue of whether Section 15(c)(iii) was intended
to operate reciprocally.226 Monette’s testimony about “downside protection” was
vague and never expressly connected to what became Section 15(c)(iii).227 Based
on the clear weight of the evidence, I find that the “downside protection” Interbake
requested during the negotiations was provided in the form of Section 15(c)(ix),
which logically focuses on the conduct of Mrs. Fields as grounds for termination by
Interbake, and not in the form of Section 15(c)(iii).228
224
See JX 110 at 3 (March 28, 2012 slide deck); JX 209 at 8 (May 16, 2014 draft slide
deck); JX 213 at 9 (May 21, 2014 draft slide deck).
225
Tr. 1091 (Dkt. #170) (Monette).
226
See I.C., supra.
227
Tr. 1090-91 (Monette).
228
Tr. 956 (McDonough) (“Q. Was there any other provision that was included in the
agreement, in your estimation, to address this downside protection? A. Yeah. In 15(e)(ix),
I believe it was.”) Section 15(e)(ix) of an early draft became Section 15(c)(ix) in the final
License Agreement. See I.C., supra.
54
In sum, for the reasons stated above, Mrs. Fields is entitled to a declaration
that Interbake did not have the right to terminate the License Agreement under
Section 15(c)(iii), as it purported to do in April 2016.229
B. Interbake’s Purported Termination Under Section 15(c)(ix) Was
Invalid
Section 15(c)(ix) of the License Agreement states, in relevant part:
If MRS. FIELDS (i) has made a representation or warranty in this
Agreement that was not correct in any material respect at the time it
was given; . . . or (iii) materially damages the value of the Licensed
Names and Marks or the goodwill associated therewith, that directly
renders the performance of this Agreement by LICENSEE
commercially unviable (including but not limited to, a change that
materially changes the market for the Royalty Bearing Products and/or
materially changes the cost structure of the Royalty Bearing
Products)(each a “Material Program Change”), then this Agreement
may be terminated upon thirty (30) days written notice to MRS.
FIELDS, without prejudice to any and all other rights and remedies
LICENSEE may have hereunder or by law provided.
The first time Interbake invoked Section 15(c)(ix) in writing as a ground for
termination was in a letter dated May 4, 2016, three weeks after Mrs. Fields filed
this lawsuit. 230 Interbake relies specifically on the first and third subsections of
Section 15(c)(ix), quoted above, which I address in that order.231
229
Because Interbake’s purported termination under Section 15(c)(iii) was invalid, it is not
necessary to decide whether Interbake complied with the requirement in that provision that
the termination occur within “fifteen (15) days following the receipt of the annual report
pursuant to Section 7(b).”
230
JX 569.
231
Relying on this Court’s decision in U.S. Bank Nat. Ass'n v. U.S. Timberlands Klamath
Falls, L.L.C., 2004 WL 1699057 (Del. Ch. July 29, 2004), Mrs. Fields argues that Interbake
55
1. Interbake’s Purported Termination Under the First
Subsection of Section 15(c)(ix) Was Invalid
The first subsection of Section 15(c)(ix) permits Interbake to terminate the
License Agreement “[i]f MRS. FIELDS (i) has made a representation or warranty in
this Agreement that was not correct in any material respect at the time it was given.”
Interbake contends that it was entitled to terminate the License Agreement under this
provision on the theory that Mrs. Fields falsely represented in Section 19(d) of the
License Agreement that it had no knowledge when it entered into the agreement of
any fact or occurrence that was or could become materially adverse to Mrs. Fields’
business:
(d) Absence of Certain Changes, Events and Conditions. MRS.
FIELDS represents and warrants that it has no knowledge of any event,
occurrence, fact, condition or change that is, or could reasonably be
expected to become, individually or in the aggregate, materially
adverse to (a) the business, prospects, condition (financial or otherwise)
or assets of MRS. FIELDS, its goodwill, or Licensed Names and Marks,
(b) the value or marketability of the Royalty Bearing Products, or (c)
the ability of LICENSEE to consummate the transactions contemplated
hereby, including but not limited to changes in the current customer
base, knowledge of an impending or threatened loss of a material
failed to comply with the 30-day notice provision in Section 15(c)(ix) because it filed a
counterclaim seeking termination under that provision on May 6, only two days after
providing its written notice on May 4. The notice requirement in Timberlands, however,
expressly was intended to provide a 60-day cure period before an event of default could
arise under a trust indenture. Id. at *3. By contrast, the 30-day period in Section 15(c)(ix)
does not operate as a cure period but as the effective date for a termination, the ostensible
purpose of which is to afford Mrs. Fields thirty days to transition the licensed business once
a notice of termination is provided. Thus, there was no breach of the notice provision for
failure to wait until the expiration of the cure period to file suit.
56
customer, and/or material changes to the Designated Distribution
Channels.
The crux of this claim rests on what constitutes a “materially adverse” “event,
occurrence, fact, condition or change,” which Section 19(d) does not define and for
which the parties offered no parol evidence.
a. Defining “Materially Adverse”
Mrs. Fields analogizes Section 19(d) to “material adverse change” or “effect”
clauses (“MAC” or “MAE” clauses) that are a routine fixture in merger agreements,
which this Court has analyzed on a number of occasions.232 Citing this Court’s 2005
decision in Frontier Oil v. Holly Corp., Mrs. Fields asserts that a “materially adverse”
“event, occurrence, fact, condition or change” must be something that would
“substantially threaten the overall earnings potential of the target company in a
durationally significant manner,” and that none of the purported facts that Interbake
relies on satisfies that standard.233
Interbake counters that Frontier Oil is inapt because the License Agreement
is not a merger or acquisition agreement but rather a trademark license agreement,
but it offers no alternative reading of the text of Section 19(d). Interbake simply
232
See, e.g., Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch.
2008); Frontier Oil v. Holly Corp., 2005 WL 1039027 (Apr. 29, 2005); In re IBP, Inc.
Shareholders Litigation, 789 A.2d 14 (Del. Ch. 2001) (Strine, V.C.).
233
Pl.’s Ans. Br. at 39-41 (Dkt. #183).
57
observes that the provision does not contain any durational element or requirement
that the alleged “materially adverse” fact threaten “overall earnings potential.”
Interbake further notes that Section 19(d) is an inclusive representation also meant
to cover an event that “is or could reasonably be expected to become materially
adverse.”234
In my opinion, the test in Frontier Oil provides an appropriate framework to
analyze whether Mrs. Fields breached Section 19(d). In In re IBP, Inc. Shareholders
Litigation, 235 which is the origin of the Frontier Oil test,236 Chief Justice Strine,
writing as a Vice Chancellor, interpreted an MAE clause that, like Section 19(d),
functioned as a representation and warranty that the seller had not suffered a
“material adverse effect,” and which defined that concept in similar terms as:
any event, occurrence or development of a state of circumstances or
facts which has had or reasonably could be expected to have a Material
Adverse Effect . . . on the condition (financial or otherwise), business,
assets, liabilities or results of operations of [the seller] and [its]
subsidiaries taken as whole.237
234
Def.’s Rep. Br. at 8 (Dkt. #186) (emphasis in original).
235
See IBP, 789 A.2d 14.
236
Frontier Oil, 2005 WL 1039027, at *34. IBP was decided under New York law, but
Frontier Oil confirmed that the same standard applies under Delaware law. Id.
237
IBP, 789 A.2d at 65.
58
Based on a careful analysis of the purpose of such a clause, Chief Justice Strine
articulated a three-part framework for determining when such a provision is
triggered:
[E]ven where a Material Adverse Effect condition is as broadly written
as the one in the Merger Agreement, that provision is best read as a
backstop protecting the acquiror from [1] the occurrence of unknown
events that [2] substantially threaten the overall earnings potential of
the target in [3] a durationally-significant manner. A short-term hiccup
in earnings would not suffice; rather the Material Adverse Effect should
be material when viewed from the longer-term perspective of a
reasonable acquiror.238
In 2008, Vice Chancellor Lamb analyzed a similar MAE clause and similarly
held: “The important consideration therefore is whether there has been adverse
change in the target’s business that is consequential to the company’s long-term
earnings power over a commercially reasonable period.”239 He further emphasized
that a party “faces a heavy burden when it attempts to invoke a material adverse
effect clause in order to avoid its [contractual] obligation.”240
Although the License Agreement did not involve a merger or acquisition, its
drafters in 2012 had the benefit of the doctrine developed in IBP and its progeny
when they negotiated the text of Section 19(d). More importantly, the same factors
underlying its approach—knowledge, magnitude, and duration—are relevant to
238
Id.
239
Hexion, 965 A.2d at 738.
240
Id.
59
construing Section 19(d) in my view, although, as discussed below, the reasonable
expectations of licensees and licensors would not necessarily be the same for buyers
and sellers of a business insofar as the durational factor is concerned.
Beginning with knowledge, Interbake could not reasonably have expected
when it entered the License Agreement that it would be able to terminate it on the
basis of an adverse fact it knew about and yet ignored.241 If the fact or occurrence
in question were within the parties’ contemplation, they presumably would have
specifically addressed it in the License Agreement. Put differently, if Interbake
entered into the contract despite knowledge of an adverse fact, then it would be
reasonable to assume it either considered the fact to be immaterial or decided to
assume the risk.242 Allowing Interbake to terminate the License Agreement based
on something it knew about at the outset would be tantamount to building into the
agreement an at-will termination mechanism that would vitiate Mrs. Fields’ rights
under the contract, including its right to collect the minimum royalty.
241
See Y. Carson Zhou, Material Adverse Effects as Buyer-Friendly Standard, 91 N.Y.U.
L. Rev. Online 171, 175-79 (2016), http://www.nyulawreview.org/sites/default/files/
NYULawReviewOnline-91-Zhou.pdf (arguing that the MAE inquiry is derived from
principles of contractual interpretation in order to assess the reasonable acquiror’s intended
risk allocation ex ante, and that a major factor in the outcomes of Hexion and IBP was that
the sellers in those cases contemplated the risk of the adverse occurrences that ultimately
came to pass, yet agreed to the transactions anyway with their eyes wide open).
242
See IBP, 789 A.2d at 68 (“In large measure, the resolution of the parties’ arguments
turns on a difficult policy question. In what direction does the burden of this sort of
uncertainty fall: on an acquiror or on the seller?”).
60
As to magnitude, it is reasonable to infer that Mrs. Fields would not have
agreed to Section 19(d) if Interbake could terminate on the basis of a minor setback.
Common sense and commercial reality suggest that any ground for termination of a
license to operate a business should “substantially threaten” the “overall earnings
potential” of that business.
Finally, as to duration, short-term setbacks are a part of business; “the
important thing is whether the company has suffered a Material Adverse Effect . . .
that is consequential to the company’s earnings power over a commercially
reasonable period.”243 In an acquisition, where the buyer acquires the assets of a
business outright and the cash flows they generate in perpetuity, “one would think”
that a commercially reasonable period “would be measured in years rather than
months.”244 The License Agreement is different. Mrs. Fields retained ownership of
the brand and Interbake’s interest in the business only extends until the license
expires, which occurs after a five-year term, subject to an option to renew the license
for another five years.245 Thus, given the limited duration of the License Agreement,
the period of time that would be “commercially reasonable” in determining whether
243
Id. at 67.
244
Id.; see also Hexion, 965 A.2d at 738 (“it means that for such a decline to constitute a
material adverse effect, poor earnings results must be expected to persist significantly into
the future.”).
245
JX 104 § 15(a)-(b).
61
a consequential decline in earnings has had a material adverse effect on the license
presumably would be shorter than the period of time relevant to the acquisition of
business.
With the foregoing considerations in mind, I now assess whether the facts and
occurrences Interbake has identified satisfy the MAE requirement in Section 19(d)
of the License Agreement.
b. Interbake Has Not Proven that Mrs. Fields Had
Knowledge of a Materially Adverse Fact or Event
When It Entered the License Agreement
The crux of Interbake’s MAE theory is essentially twofold: that Mrs. Fields
knew when it entered into the License Agreement (1) that its retail cookies tasted
awful, and (2) that the value of the Mrs. Fields brand was declining because of a
broken franchise model and lack of investment, which impaired Interbake’s sales by
depressing sales velocity and elevating trade-spend requirements.246
Section 19(d) is a representation of Mrs. Fields’s knowledge only as of the
date it entered into the License Agreement on March 16, 2012. Interbake relies
heavily on a November 2012 internal Mrs. Fields presentation stating that “Mrs.
Fields needs revitalizing” and that the “Mrs. Fields brand has not been addressed in
246
Def.’s Op. Br. at 27 (Dkt. #180); see also Post-Trial Tr. at 112-13 (Dkt. #195) (“there’s
a critical problem with the formulation of the cookies and there’s a critical problem in terms
of branding . . . the second issue . . . is this notion that they haven’t invested in the brand
in over a decade.”).
62
over 10 years,”247 but that presentation postdates the Section 19(d) representation by
eight months. The presentation, moreover, was not intended to suggest that Mrs.
Fields had not been regularly incurring marketing expenditures to support the brand.
As Mrs. Fields’ then-CEO (Casey) explained, the presentation was referring to
“investment outside the traditional marketing expenditures that hit the P&L,” which
Mrs. Fields had been incurring in the normal course to “support the brand.”248
Interbake’s best evidence pre-dating the License Agreement consists of (1) a
September 2011 Mrs. Fields board presentation stating that the price of its retail
cookies had “realistically hit the ‘ceiling’” and describing the need to improve
product quality “to be more consistent with MF brand expectations;”249 (2) a January
2012 board presentation in which Mrs. Fields acknowledged that the “current BRG
[Branded Retail Group] product does not meet the Mrs. Fields cookie standard or
consumer expectation impacting repeat purchase and overall velocity;” 250 (3) a
February 2012 email where Courtney called the franchising model “broken,” to
which Casey responded, “we have to fix quality in all three channels—it’s our
brand;”251 and (4) a March 2, 2012 email identifying the need to “reformulate the
247
JX 134 ZC003122.
248
JX 134 ZC003100.JX 12 at 112-13 (Casey Dep.).
249
JX 66 at 2.
250
JX 76 at 3.
251
JX 78 MF00011037.
63
recipe of the cookies in all three channels” as a key initiative for 2012 and explaining
that recipe reformation for branded retail products is “less of a priority as a licensing
partner is pursued.”252 This evidence, considered in the aggregate, falls short in my
opinion of evidencing a “materially adverse” “event, occurrence, fact, condition or
change” under Section 19(d).
Awful taste does not qualify as a material adverse fact or event within the
meaning of Section 19(d) because the retail branded cookies were openly available
on store shelves. Interbake thus had ample opportunity to test the quality of the Mrs.
Fields cookies (and it is hard to imagine it did not) before deciding to enter into the
License Agreement. Mrs. Fields also expressly disclosed to Interbake in a February
16, 2012 due diligence presentation—one month before the License Agreement was
signed—that it was “missing the mark today” on aligning quality “with consumer
expectations across all channels.”253 And contrary to Interbake’s contentions that
“sky-rocketing trade spend” and “slow sales velocity” was “covered up by MSF,”254
Mrs. Fields provided Interbake during due diligence with detailed financial
252
JX 98 DB000284.
253
JX 96 IBF582000.
254
Def.’s Op. Br. at 27 (Dkt. #180).
64
information, including actual sales and trade spend figures for 2009, 2010 and most
of 2011.255 Interbake has never contested the accuracy of any of those figures.256
As for brand decline, any inference of a material adverse effect as of the date
of the License Agreement is undermined by Interbake’s own statements and conduct.
In February 2012, Kevin McDonough described Mrs. Fields as an “iconic brand”
and a “leading cookie brand that has high brand recognition and opportunity for
growth.”257 Between January 2013 and May 2015, Interbake made repeated offers
to purchase what it characterized in April 2015 as a “strong brand . . . that has the
potential for long-term success.”258 Interbake’s assertion that Mrs. Fields concealed
from it a material brand decline seems highly pretextual given the striking fact that
Interbake repeatedly tried to acquire the brand for more than two years, during which
time it was operating the retail cookie business and had first-hand knowledge of the
brand’s strength. A reasonable licensee would not have been so ardent in its
overtures if that experience indicated a brand impairment that substantially
threatened overall earnings potential.
Reinforcing the pretextual flavor of its reliance on Section 19(d) as a basis for
termination more than three years after signing the License Agreement, Interbake
255
JX 70; see also JX 92.
256
Tr. 1132 (Monette).
257
JX 97 IBF00045415.
258
JX 288 at 12.
65
did not identify Section 15(d)(ix) as a basis for termination in its April 12, 2016
“Notice of Termination,” did not articulate an MAE theory in its May 4, 2016 letter
supplementing its initial termination notice, and the alleged misrepresentations it did
identify in its May 4 letter were effectively abandoned by the time of trial. 259
Paraphrasing IBP, the “post-hoc nature of [Interbake’s] arguments bear on what it
felt the contract meant when contracting, and suggests that [the alleged decline of
the Mrs. Fields brand] would not be sufficient to cause an MAE.”260
Finally, pointing to a series of statements in a presentation Mrs. Fields
prepared for Interbake in February 2012, quoted below, Interbake asserts that it
“never would have entered into the [License] Agreement had it known the truth:”
“Our brand attracts the best franchisees because we give them the
best support and the best economic model.”
259
Compare JX 569 MF00020867 (May 4 notice) (alleging a gross sales discrepancy,
failure to disclose a client retention expenditure, and the impending loss of certain
customers), with Def.’s Op. Br. at 27 (Dkt. #180) (“a dying brand, a failed franchise model,
sky-rocketing trade spend, slow sales velocity, and poor-tasting cookies”).
At pages 36-37 of its reply brief, Interbake mentions one subject that was referenced in the
May 4 letter concerning the loss of CVS as a customer, which occurred in 2013. JX 569
MF00020867. Interbake has provided no evidence, however, that Mrs. Fields knew when
it entered the License Agreement in March 2012 that its retail business with CVS was in
real jeopardy. Interbake’s earliest evidence concerning the potential loss of CVS consists
of minutes of an August 15, 2012 Mrs. Fields board meeting, which stated: “Product
performance at CVS and Shopper’s Drug Mart are both declining. A discussion ensued
regarding causes and effects of the downturn and problems with Shopper’s Drug Mart and
CVS.” JX 118 ZC002279; see also Post-Trial Tr. at 119 (Dkt. #195). Nothing in these
minutes, which post-date the License Agreement by approximately five months, indicates
that the loss of CVS as a customer was impending or threatened as of March 16, 2012.
260
IBP, 789 A.2d at 65.
66
The Mrs. Fields brand is “on trend” and “still resonates with
consumers.”
“We will build and support our brands because they are the reason
we are here in the first place.”
“We will always maintain the integrity and taste or our current
recipes, and when we create new concoctions, they will be every bit
as delicious as the tastes that made us famous.”261
These statements amount to vague expressions of self-praise or “puffery” that
Interbake could not reasonably have relied on as a matter of law,262 and the same
presentation also stated that Mrs. Fields was “missing the mark today” on aligning
quality “with consumer expectations across all channels.”263
In sum, for the reasons explained above, Interbake has failed to prove by a
preponderance of the evidence that Mrs. Fields breached Section 19(d). Accordingly,
Interbake was not entitled to terminate the License Agreement under the first
subsection of Section 15(c)(ix).
261
Def.’s Op. Br. at 28 (Dkt. #180); JX 96 IBF00058194.
262
Airborne Health, Inc. v. Squid Soap, LP, 2010 WL 2836391, at *8 (Del. Ch. July 20,
2010) (“Puffery is a ‘vague statement’ boosting the appeal of a service or product that,
because of its vagueness and unreliability, is immunized from regulation.”) (quoting David
A. Hoffman, The Best Puffery Article Ever, 91 Iowa L. Rev. 1395, 1397 (2006)); see also
Solow v. Aspect Res., LLC, 2004 WL 2694916, at *3 (Del. Ch. Oct. 19, 2004) (Under
Delaware law, a company's optimistic statements praising its own “skills, experience, and
resources” are “mere puffery and cannot form the basis for a fraud claim.”).
263
JX 96 IBF582000.
67
2. Interbake’s Purported Termination Under the Third
Subsection of Section 15(c)(ix) Was Invalid.
The third subsection of Section 15(c)(ix) states that Interbake may terminate
the License Agreement under the following circumstances:
If MRS. FIELDS … (iii) materially damages the value of the Licensed
Names and Marks or the goodwill associated therewith, that directly
renders the performance of this Agreement by LICENSEE
commercially unviable (including but not limited to, a change that
materially changes the market for Royalty Bearing Products and/or
materially changes the cost structure of the Royalty Bearing Products)
(each a “Material Program Change”) . . . .
Interbake argues that Mrs. Fields’ “failure to support the brand” made its
performance “commercially unviable.”264
As an initial matter, the text of Section 15(c)(ix)(i) strongly suggests that the
predicate for it to apply is the taking of some affirmative action by Mrs. Fields after
the license began—such as the implementation of a “Material Program Change”—
that rendered Interbake’s performance “commercially unviable.” But Interbake has
not offered any evidence that Mrs. Fields took affirmative action that “[d]amaged
the value of the Licensed Names and Marks or the goodwill associated therewith,”
and relies instead on evidence of passive neglect, i.e., that Mrs. Fields continued to
neglect its brand during the license term as it had for years before by not investing
264
Def.’s Op. Br. at 37 (Dkt. #180).
68
in the brand. For this reason alone, Interbake has failed to establish a breach of
Section 15(c)(ix)(i).
Interbake also has failed to prove that its performance of the Agreement has
become “commercially unviable.” Although the term is undefined, and the parties
have provided no authorities to assist with its interpretation, the gravity of a
provision permitting Interbake to walk away from its contractual obligations
suggests that “commercially unviable” should amount to a loss of some significance
in both magnitude and duration. In other words, the IBP reasoning is as applicable
here as it is in the MAE context: “it is odd to think that a strategic [licensee] would
view a short-term blip in earnings as material, so long as the [license’s] earnings-
generating potential is not materially affected by that blip or the blip’s cause.”265
Interbake contends that the branded retail business had “become unprofitable,
and thus not commercially viable, at least by the beginning of 2016” due to lower
sales and increased promotional costs it incurred due to Mrs. Fields’ “failure to
support the brand.”266 In support of this contention, Interbake relies on two financial
spreadsheets (JX 644 and JX 645) known as “F9 reports” reflecting that Interbake
suffered a “segment contribution” loss in the amount of $31,831 for 2015 and
$1,681,989 for the first sixteen weeks of 2016, and the fact that its gross sales in
265
IBP, 789 A.2d at 67.
266
Def’s Op. Br. at 37 (Dkt. #180).
69
2016 were just $11 million.267 This evidence is insufficient to prove “commercial
unviability” for several reasons.
To start, I have no confidence in the reliability of the F9 reports for purposes
of reaching any conclusions about the profitability of the Mrs. Fields business at any
given moment, much less to determine if the earnings potential of the business had
deteriorated materially in a durationally significant manner. The F9 reports were
available in early 2016, but were not produced to Mrs. Fields until September 2016,
just two weeks before the fact discovery deadline.268 Thus, Mrs. Fields was deprived
of the opportunity to take meaningful discovery to test their reliability before trial,
and unfairly hamstrung in its ability to cross-examine witnesses about them at trial.
The testimony Interbake elicited concerning the F9 reports during trial only
increased my concerns over their reliability. Tiffany Reeve, who served at various
times as a controller, director of accounting and Vice President of Finance at
Interbake, explained that she historically had prepared P&L reports for the Mrs.
267
Mrs. Fields objected to the admissibility of the F9 reports under Delaware Rules of
Evidence 802 (hearsay); 901 (authentication); and 1002 (best evidence rule). Pl.’s Ans.
Br. at 17 (Dkt. #183). These objections are overruled because the documents were
authenticated as business records under Rule 803(6), see Tr. 292-93 (Gormley); Tr. 1723
(Reeve), and because Rule 1001(3) provides that “if data are stored in a computer or similar
device, any printout or other output readable by sight, shown to reflect the data accurately,
is an ‘original’” that satisfies Rule 1002. Nevertheless, I place no weight on the documents
given my concerns regarding their reliability for the reasons explained above.
268
Tr. 1732-33 (Reeve); Tr. 1735 (Interbake’s counsel).
70
Fields business manually. 269 She described “F9” as a financial reporting tool to
generate reports from the general ledger: “You define the rules that you want to use
in order to build a P&L.”270
The F9 reports that were “built” here used mixed currencies (U.S. and
Canadian dollars) and allocated costs differently from Reeve’s previous manual
P&L’s, 271 which caused the Mrs. Fields business that Interbake previously
considered to be profitable to now appear to be unprofitable. As Gormley testified:
THE COURT: So you run these reports and you see, I guess in
this case, for this report, for 2014, where you previously thought you
were profitable, now you’re negative a million 3 or thereabouts. Is that
right?
THE WITNESS: That’s right.
THE COURT: Similarly for 2015. Right?
THE WITNESS: Right …272
Gormley’s testimony is particularly remarkable given that Interbake previously
focused on the 2014 results for Mrs. Fields—which were characterized in an April
2015 presentation as “the highest margin business in Interbake (excluding NDS)”—
as a reason to submit a $50 million bid to acquire Mrs. Fields’ branded retail business
and its e-commerce platform and gifting business. 273 Significantly, furthermore,
269
Tr. 1716-17, 1740 (Reeve).
270
Tr. 1723 (Reeve).
271
Tr. 1728, 1753-54 (Reeve); see also Tr. 287-92 (Gormley).
272
Tr. 289 (Gormley)
273
JX 300 at 5; JX 305.
71
Reeve credibly testified in response to the Court’s question that her manual P&L’s
provided “a more accurate representation of allocating appropriately for Mrs. Fields”
in her opinion than the F9 reports.274
The F9 report for the first sixteen weeks of 2016—Interbake’s strongest
evidence that it allegedly was incurring significant losses—also raises more
questions than it answers on its face. Over 80% of the sixteen week segment loss
reflected in that report ($1.35 million out of $1.68 million) is attributable to the first
four weeks of the year, during which sales were reported to be negative by
approximately $10,000, apparently due to the fact that trade spend exceeded the
amount of gross sales by that amount.275 No fact or expert witness provided any
explanation or context about this subject or any other details concerning the F9
report, such as why trade spend would exceed sales during the first four weeks of
2016, whether such an event was a one-time blip, or whether Interbake’s own actions
contributed to the poor results during the first sixteen weeks of 2016 when it pursued
a backfill strategy in the hope of transitioning out of the license that year. It is not
disputed that sales for 2016 fell to approximately $11 million for the full year, but
274
Tr. 1761 (Reeve).
275
JX 645.
72
there are no profit figures in the record for the full year. 276 Notably, Interbake did
not even proffer an expert opinion on the issue of commercial unviability.
It may be true that the Mrs. Fields business became “commercially unviable”
for Interbake at some point, perhaps by the end of 2016. But Interbake failed to
provide any reliable evidence at trial from which I could reach such a conclusion,
and it failed to identify any change that Mrs. Fields implemented or any other
affirmative action Mrs. Fields took to cause that result. For these two independent
reasons, Interbake failed to establish a breach of Section 15(c)(ix)(iii).
C. Interbake Failed to Prove a Material Breach of the License
Agreement to Excuse Further Performance
Interbake contends that, independent of the right to terminate the License
Agreement under its termination provisions, Interbake is entitled to terminate the
contract under Delaware law because Mrs. Fields materially breached Sections 10(a),
19(c) and 19(d). The previous section concluded that Interbake failed to prove that
Mrs. Fields breached Section 19(d). This section addresses whether Interbake has
proven that Mrs. Fields materially breached Section 10(a) or 19(c).
276
Def.’s Opp. to Pl.’s Mot. to Supp. ¶ 4 (Dkt. #191) (“Interbake offered to stipulate that
the amount of 2016 sales was $10.95 million.”).
73
Under Delaware law, a party “is excused from performance under a contract
[only] if the other party is in material breach thereof.”277 A breach is material if it
goes “to the root or essence of the agreement between the parties,” or “touches the
fundamental purpose of the contract and defeats the object of the parties in entering
into the contract.”278 “Courts in Delaware look to Section 241 of the Restatement
(Second) of Contracts for guidance regarding materiality of a breach. That section
lists the following circumstances as significant in determining materiality of a
breach:”279
(a) the extent to which the injured party will be deprived of the
benefit which he reasonably expected;
(b) the extent to which the injured party can be adequately
compensated for the part of that benefit of which he will be
deprived;
(c) the extent to which the party failing to perform or to offer to
perform will suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to
perform will cure his failure, taking account of all the
circumstances including any reasonable assurances;
277
eCommerce Indus., Inc. v. MWA Intelligence, Inc., 2013 WL 5621678, at *13 (Del. Ch.
Sept. 30, 2013) (internal quotations omitted).
278
2009 Caiola Family Trust v. PWA, LLC, 2015 WL 6007596, at *18 (Del. Ch. Oct. 14,
2015) (internal quotations omitted), judgment entered sub nom. Caiola Family Trust v.
PWA, LLC (Del. Ch. Oct. 14, 2015), supplemented sub nom. 2009 Caiola Family Trust v.
PWA, LLC (Del. Ch. Feb. 3, 2016).
279
Medicalgorithmics, 2016 WL 4401038, at *24 (citations omitted).
74
(e) the extent to which the behavior of the party failing to perform
or to offer to perform comports with standards of good faith and
fair dealing.280
1. Mrs. Fields Did Not Materially Breach Section 10(a)
Interbake contends that Mrs. Fields breached Section 10(a) of the License
Agreement by withdrawing its approval of Interbake’s partnership with SCM
Designs to sell Mrs. Fields cookies in a cookie jar. I begin by summarizing the
relevant facts.
On May 20, 2014, Interbake submitted a licensing approval form (the
“Approval Form”) to Mrs. Fields requesting approval of “Concept Artwork” for
packaging and “Online Content” for advertising concerning a “Mrs. Fields Holiday
Club Pack for SCM Designs.”281 In the comments section of the Approval Form,
Interbake explained that “SCM designs will be purchasing bulk packed Mrs. Fields
Milk Chocolate Chip cookies (130 per box) from Interbake Foods to be repacked
and sold to Sam’s Club for Holiday 2014.”282 On May 28, 2014, a representative of
Mrs. Fields checked a box on the Approval Form indicating that the request was
“Approved with Corrections” and providing some comments about the color of the
“pallet tray art.”283
280
Restatement (Second) of Contracts § 241 (1981).
281
JX 245 IBF00031443.
282
JX 245 IBF00031443.
283
JX 245 IBF00031444.
75
In the fall of 2014, Mrs. Fields was negotiating a gift packing agreement with
Modern Gourmet. 284 Around this time, the SCM cookie jar caught Mrs. Fields’
attention because, while Interbake was paying royalties for the cookies it was selling
to SCM, SCM was not paying royalties to Mrs. Fields for the cookie jar sales. On
September 9, 2014, Stu Seltzer, Mrs. Fields’ broker, reached out to Interbake to
inquire about who at Mrs. Fields had approved the SCM product.285 Seltzer was
provided with a copy of the Approval Form reflecting Mrs. Fields’ May 28
approval.286
Later on September 9, Seltzer sent Interbake an email in which he referenced
Mrs. Fields’ relationship with Modern Gourmet and explained that any future
program with SCM would only be approved if SCM entered an agreement with Mrs.
Fields to pay a royalty on the “total wholesale price” of the cookie jar product:
. . . there’s another company [Modern Gourmet] that Mrs. Fields is
licensing to do gift set and gift baskets. The new licensee pays a
significant royalty to Mrs. Fields based on the total price of the unit (not
just the price of the cookies).
. . . in the future [the cookie jar] will only be approved if [SCM] agrees
to pay the royalty based on the total wholesale price of the item and has
an agreement directly with Mrs. Fields. . . . Can you please alert SCM
284
Tr. 1121 (Monette); JX 17 at 170-74 (Seltzer Dep.); JX 246.
285
JX 245 IBF00031441.
286
JX 245.
76
that they should not pursue 2015 business with Mrs. Fields unless they
have an agreement with Mrs. Fields.287
Seltzer forwarded this email to Mrs. Fields the same day, recommending that Mrs.
Fields “[t]ake control of [the] SCM deal:” “we propose that we contact SCM to
explain that they must work through Mrs. Fields directly and send them an
agreement ensuring they comply with Mrs. Fields rules (including ending
distribution and providing a sell-off for their current product until Jan 31.”288 Seltzer
later spoke with SCM, which refused to pay a royalty and decided not to use Mrs.
Fields cookies for its cookie jar product.289
Seth Monette was not pleased with Mrs. Fields’ actions, and told Seltzer on
September 11 that the SCM cookie jar was “worth $1.5 [million] to Interbake.”290
Interbake nevertheless confirmed that same day that “SCM Designs will not present
anything without Famous Brands Approval.”291 As a result of Seltzer’s intervention
on behalf of Mrs. Fields, the SCM cookie jar deal “went away.”292 Seltzer testified
287
JX 247 IBF00030861. It is not clear from the record whether Modern Gourmet actually
had entered a contractual relationship with Mrs. Fields by this point. See JX 249
MF00029107 (September 9, 2014 email recommending that Mrs. Fields “move forward
with” Modern Gourmet).
288
JX 249 MF00029107.
289
JX 17 at 174 (Seltzer Dep.).
290
JX 249 MF00029106; JX 17 at 174-75 (Seltzer Dep.).
291
JX 248 IBF00030093.
292
JX 17 at 177-78 (Seltzer Dep.).
77
that he ultimately was “not involved in any kind of rescinding of approval” and the
record does not reflect that any formal rescission was sent.293
Several parts of Section 10(a) are pertinent to Interbake’s claim. The
provision requires Interbake to submit to Mrs. Fields “[p]rior to any sale or
distribution . . . all items bearing the Licensed Names and Marks” for “advance
written approval, in MRS. FIELDS’ reasonable judgment, at all stages listed below:”
CONCEPT: Rough sketches or layout concepts;
PROTOTYPE: Prototypes or finished artwork; and
FINAL: Pre-production sample.
The provision further explains that “[t]he following rules shall apply to all stages of
the Approval Guidelines.” Section 10(a)(i) provides that “LICENSEE shall not
make any use of, sell or distribute such items as listed in this Section 10(a), prior to
MRS. FIELDS granting final written approval.” Section 10(a)(iii) states that “MRS.
FIELDS, in its sole discretion, reserves the right to reject an item approved at a prior
stage if in its physical form it does not meet MRS. FIELDS’ marketing standards or
departs from the approved sample.” Section 10(a)(viii) states that Interbake “shall
not have any rights against MRS. FIELDS for damages or other remedies by reason
of MRS. FIELDS’ failure or refusal to grant any approval referred to in this Section
10.”
293
JX 17 at 180 (Seltzer Dep.).
78
Interbake argues that Mrs. Fields violated Section 10(a)(iii) of the License
Agreement by withdrawing approval of the SCM cookie jar for reasons other than a
physical deviation from “marketing standards” or a departure from the “approved
sample.” Mrs. Fields responds that its May 28 approval applied only to the item for
the 2014 holiday season, that it did not approve a holiday item for 2015, and that
Section 10(a)(viii) bars any claim against Mrs. Fields for not approving an item.
Interbake has failed to establish that Mrs. Fields breached Section 10(a) for
two reasons: it is not clear from the record (1) that Interbake received a “final
approval” for an SCM cookie jar product in 2014, or (2) that the SCM product under
consideration for the 2015 holiday season had the same features for which Interbake
did receive an approval for the 2014 holiday season. As noted above, the License
Agreement requires Interbake to obtain separate approval for “all stages” of a
product’s development, including “final written approval.” The Approval Form
similarly states in bold text: “IMPORTANT NOTE: ALL PACKAGING AND
PRODUCT STEPS MUST BE SUBMITTED AND APPROVED BEFORE A
PRODUCT IS SHIPPED TO CUSTOMERS.” The Approval Form also lists a
number of steps that must be taken for obtaining approval additional to the first step
79
of providing concept artwork. These steps include providing a prototype/mock-up
(Step 2), pre-production sample (Step 3), and shipping container (Step 4).294
Interbake did not provide evidence at trial that it ever requested, let alone
received, “final written approval” from Mrs. Fields for the SCM cookie jar to be
used for the 2014 holiday season. Its May 20 request only sought approval for the
first step of the process for a packaging approval—the submission of concept
artwork. The record does not contain any evidence that any of the other steps listed
on the Approval Form for the approval of packaging were completed. Thus, it is
unclear whether the May 28 approval constitutes a “final written approval” of the
2014 holiday season SCM cookie jar within the meaning of Section 10(a).
Even if one assumes that the May 28 approval did constitute a final approval
under Section 10(a), Interbake did not submit any evidence that whatever SCM
cookie jar product it had in mind for the 2015 holiday season would use the same
artwork or the same online advertising as the one that was used for the 2014 holiday
season. Section 15(a)(iii) affords Mrs. Fields the “sole discretion . . . to reject an
item approved at a prior stage” if it “departs from the approved sample.” Thus,
Interbake has failed to establish that Mrs. Fields’ directives concerning SCM were
inconsistent with its right under Section 15(a)(iii) to reject something it had
294
JX 245 IBF00031444.
80
previously approved. In that vein, it is notable that Interbake did not push back on
Seltzer’s directives and actually acceded to them, writing on September 11 that
“SCM Designs will not present anything without Famous Brands Approval.”295
Finally, even assuming arguendo that Mrs. Fields did breach Section 10(a),
Interbake could not terminate the Agreement on that ground because such a breach
would not be material. First, Interbake cannot argue that Mrs. Fields deprived it of
a contractual benefit that Interbake could have “reasonably expected” given that the
SCM cookie jar post-dates the initiation of the parties’ licensor-licensee relationship
by two years.296 Second, Interbake offers no explanation as to how the magnitude
of its alleged loss would defeat the object of the License Agreement so as to warrant
its termination.297 Sales of the SCM cookie jar accounted for $1.1 million, or only
4.7%, of Interbake’s 2014 sales of $23.2 million.298 If warranted, damages would
295
JX 248 IBF00030093. The lack of pushback by Interbake accords with the motivation
for Seltzer’s intervention, which was to ensure that Mrs. Fields receives a royalty for
SCM’s use of Mrs. Fields’ brand to promote the cookie jar itself. See JX 17 at 174 (Seltzer
Dep.) (“So I remember talking to the SCM company and saying we’d love to have you
continue doing this, I know it is an important sale for Interbake, but you are going to have
to pay a royalty to Mrs. Fields because you are billing the entire thing as a Mrs. Fields
cookie jar. Your sale to the consumer is happening because of the Mrs. Fields brand.”).
296
See Restatement (Second) of Contracts § 241(a) (1981) (“the extent to which the injured
party will be deprived of the benefit which he reasonably expected” relevant to whether
breach is material).
297
See, e.g., Medicalgorithmics, 2016 WL 4401038, at *24 (internal quotations omitted)
(“The question whether the breach is of sufficient importance to justify nonperformance
by the non-breaching party is one of degree.”).
298
Tr. 1121 (Monette); see also Tr. 1805-06 (Thomas).
81
be adequate to compensate Interbake for any injury.299 Third, Interbake’s conduct
belies any materiality argument. 300 Specifically, Interbake sat on its purported
contractual rights for over two years before asserting Section 10(a) as a ground for
termination for the first time when it amended its Counterclaim on the eve of trial.301
For all the reasons stated above, Interbake failed to prove that Mrs. Fields
breached Section 10(a) or that such a breach would have been material so as to
excuse Interbake’s further performance under the License Agreement.
2. Mrs. Fields Did Not Materially Breach Section 19(c)
Interbake asserts that Mrs. Fields materially breached its covenant in Section
19(c) “to continue to support the brand through advertising and marketing efforts
consistent with past practice.” Under its plain meaning, this covenant requires that
Mrs. Fields undertake marketing and advertising efforts to support its brand after
entering into the License Agreement that are consistent with its practice before
entering into the License Agreement. Viewed in those terms, Interbake’s evidence
boils down to essentially two facts: (1) the drop in expenditures from Mrs. Fields’
299
See Restatement (Second) of Contracts § 241(b) (“the extent to which the injured party
can be adequately compensated for the part of that benefit of which he will be deprived”
relevant to whether breach is material).
300
See Restatement (Second) of Contracts § 241(e) (“the extent to which the behavior of
the party failing to perform or to offer to perform comports with standards of good faith
and fair dealing” relevant to whether breach is material).
301
Counterclaim ¶ 149 (Dkt. #148).
82
franchise advertising fund from $998,004 in 2012 to $678,002 in 2014, and (2) the
firing of virtually all of Mrs. Fields’ marketing department in 2014.302
The franchising advertising fund comes from franchise stores, which
contribute a percentage of gross sales to the fund to be used to support store-level
marketing efforts.303 The amount of revenues generated for the fund and the amount
spent each year out of the fund for 2010 to 2016 were as follows:
Mrs. Fields Advertising Fund Revenues and Expenditures304
Year Revenues Expenditures
2010 $656,584 $625,216
2011 $707,302 $797,014
2012 $687,140 $998,004
2013 $627,277 $738,638
2014 $634,651 $678,002
2015 $674,892 $299,333
2016 $1,384,905 $1,722,517
The average annual expenditure from the fund from 2010 to 2012, which
roughly covers the period before Interbake assumed control of the retail branded
302
Interbake also argues that Section 19(c) was breached because Mrs. Fields “had no idea
how to maintain its brand or the difference between sales execution and brand support”
and because Mrs. Fields “failed to do the normal things a brand owner does to maintain a
brand during a license agreement.” Def.’s Rep. Br. at 29 (Dkt. #186). Even if true, these
points concern Mrs. Fields’ passivity or ignorance with regard to its brand and are not
probative of what it covenanted to do in Section 19(c), i.e., to engage in marketing and
advertising efforts “consistent with past practice.”
303
Tr. 1302-03 (Lyman) (the percentage increased over time from 1% to 3%).
304
JX 45 at 3. Dollar figures are rounded. The figures for 2015 are for a six-month fiscal
year ending June 30, 2015. Id. To be conservative, I assume that the figures for 2016
comprise three six-month periods.
83
group’s operations in November 2012, is $806,745. The average annual expenditure
from the fund from 2013 to 2016, which covers the period after Interbake assumed
control of the retail branded groups’ operations, is $859,622. Viewed from this
perspective, which provides a more complete comparison of fund expenditures
before and after the retail branded business was transferred to Interbake than singling
out two years for comparison, expenditures from the fund increased after the License
Agreement was signed.
The firing of all but one person (six out of seven) from Mrs. Fields’ marketing
department in 2014 is a troubling fact that weighs in Interbake’s favor.305 On the
other hand, no evidence has been provided about how many people worked in the
Mrs. Fields’ marketing department before Interbake assumed control of the retail
brand in November 2012, or about what they actually did. And the record reflects
that from 2014—when the marketing department firings occurred—to 2015, Mrs.
Fields increased its expenditures for “Advertising & Promotions” from $703,000 to
$979,000, and increased “Catalog Expenses”—an indirect form of brand
advertising—from $2.6 million to $3.1 million.306
305
JX 1 at 45-46 (Hamilton Dep.) (estimating that six people were let go from the
marketing department).
306
JX 411 MF00032658.
84
Unaided by any expert opinion on the issue, and working with little more than
the snippets of information discussed above, I conclude based on the totality of the
evidence that Interbake has failed to demonstrate that Mrs. Fields breached its
covenant to support the brand through marketing and advertising “consistent with
past practice.” That is not to say that the Mrs. Fields brand did not deteriorate during
the license term through inattention or neglect, but only that it is more likely than
not that Mrs. Fields’ actual advertising and marketing efforts before and after
entering into the License Agreement were consistent.307
*****
For the reasons explained above, Interbake was not entitled to terminate the
License Agreement under Section 15(c)(iii), its purported termination under the first
307
In a one-paragraph argument, Interbake asserts that if Mrs. Fields is not found to have
breached Section 19(c), “it breached the implied covenant of good faith and fair dealing by
failing to support the brand.” Def.’s Op. Br. 33 (Dkt. # 180). It is a basic principle of
Delaware law that the implied covenant “cannot be invoked where the contract itself
expressly covers the subject at issue.” Allen v. El Paso Pipeline GP Co., 113 A.3d 167,
183 (Del. Ch. 2014) (internal quotations omitted), judgment entered, (Del. Ch. July 8,
2014), aff'd, No. 399, 2014, 2015 WL 803053 (Del. Feb. 26, 2015); see also Allied Capital
Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1035 (Del. Ch. 2006) (“courts should be
most chary about implying a contractual protection when the contract could easily have
been drafted to expressly provide for it”). Here, the need to protect the Mrs. Fields brand
was plainly foreseeable to Interbake when it negotiated the terms of the License Agreement
and, indeed, the parol evidence shows that it negotiated over the language of Section 19(c)
to obtain more protection than Mrs. Fields originally offered. See I.C (in the original
version of Section 19(c), Mrs. Fields merely represented that it “will not intentionally do
anything to destroy or impair its existing image.”) Under these circumstances, it would be
inappropriate to imply an open-ended covenant that would render essentially meaningless
the one which the parties negotiated and expressly agreed on.
85
and third subsections of Section 15(c)(ix) were both invalid, and Mrs. Fields did not
materially breach Sections 10(a), 19(c) and 19(d) of the License Agreement so as to
excuse further performance by Interbake. Given Interbake’s failure to establish a
breach of these provisions of the License Agreement, Interbake also has failed to
establish any right to recover damages.
The form of relief that will be entered is a declaration that the License
Agreement was not terminated and remains in place, and the dismissal with
prejudice of Counts I-III of the Counterclaim. I decline to grant Mrs. Fields an order
of specific performance or a permanent injunction requiring that the License
Agreement remain in place until December 31, 2017, because I see no basis for
depriving Interbake of its right to terminate the License Agreement if it has a valid
basis do so after the entry of judgment but before the expiration of its initial term,
however remote that possibility may be.
V. ANALYSIS OF MRS. FIELDS’ REMAINING CLAIMS
Having addressed the merits of Count I of Mrs. Fields’ Complaint and all the
claims in Interbake’s Counterclaim in the previous section, I now analyze Mrs.
Fields’ remaining claims in Counts II-IV of its Complaint.
A. Mrs. Fields Has Failed to Establish a Basis for Entry of an
Injunction or an Order of Specific Performance
In Count II of its Complaint, Mrs. Fields seeks an injunction to prevent
Interbake from misusing or disclosing its “Protected Information” (defined below),
86
and an order of specific performance requiring Interbake to allow Mrs. Fields to
conduct an audit under Section 7(c) of the License Agreement.308 These issues are
addressed in turn.
1. Mrs. Fields Has Not Proven that Its Protected Information
Was Misused to Warrant Injunctive Relief
In support of its request for injunctive relief, Mrs. Fields invokes Sections
14(a), 14(c) and 15(d)(i) of the License Agreement. Section 15(d)(i) only applies
upon a “cancellation, termination or expiration” of the License Agreement and thus
does not apply given the conclusion reached in Section IV above that the License
Agreement was not terminated and remains in place.309
Section 14(a) of the License Agreement contains an acknowledgement of
confidentiality:
Each party understands that any Protected Information disclosed to it
by the other Party under this Agreement is secret, proprietary and of
great value to the disclosing Party, which value may be impaired if the
secrecy of the Protected Information is not maintained. The Party
disclosing Protected Information is hereinafter sometimes referred to as
the “Disclosing Party” and the Party receiving Protected Information is
sometimes hereinafter referred to as the “Receiving Party”.
Section 14(c) prevents the Receiving Party from disclosing Protected Information:
308
Compl. ¶ 61-65 (Dkt. #135).
309
JX 104 § 15(d) (“On any cancellation, termination or expiration of this Agreement; (i)
LICENSEE . . . agrees never to use, disclose to others, nor assist in using such MRS.
FIELDS Protected Information.”).
87
Each Receiving Party agrees not to disclose the Protected Information
of the Disclosing Party obtained pursuant to this Agreement, to any
person or entity (other than its key officers, and employees and/or their
parent and subsidiaries to whom disclosure is necessary), during the
term of this Agreement or at any time following the expiration or
termination of this Agreement.
The term “Protected Information” is critical to determining compliance with
Section 14(c). It is defined in the License Agreement, in relevant part, as follows:
“Protected Information” shall mean, with respect to MRS. FIELDS,
all MRS. FIELDS’, and, with respect to LICENSEE, all LICENSEE’S,
recipes, formulations, systems, programs, procedures, manuals,
confidential reports and communications, marketing techniques and
arrangements, purchasing information, pricing policies, quoting
procedures, financial information, employee, customer, supplier and
distributor data, all of the materials or information relating to the
business or activities of such Party which were not otherwise known to
the other Party prior to the commencement of negotiations leading to
this Agreement, or generally known to others engaged in similar
businesses or activities, and all modifications, improvements and
enhancements which are derived from or relate to such other Party’s
access to or knowledge of any of the above enumerated materials or
information . . . which such other Party receives . . . in connection with
the license hereunder. Information which is independently developed
by a Party . . . or information which is or becomes publicly available
without breach of (i) this Agreement, (ii) any other agreement or
instrument to which a Party is a party or a beneficiary, or (iii) any duty
owed to one Party by the other Party, shall not be considered Protected
Information of the other Party hereunder.
Three aspects of this definition are important here. The definition (1) distinguishes
between Protected Information belonging to Mrs. Fields and Protected Information
belonging to Interbake, (2) provides that “[i]nformation which is independently
developed” by a party is its own Protected Information and not Protected
88
Information of the other party, and (3) generally provides that information that is
“publicly available” is not “Protected Information.”
Mrs. Fields asserts that Interbake disclosed its Protected Information in
violation of Section 14(c). The information at issue can be grouped into three
categories: (1) sales data for Mrs. Fields products; (2) packaging information and
cookie samples; and (3) recipes for making the cookies.
a. Sales Data for Mrs. Fields Products
Mrs. Fields points to various documents Interbake used internally for Project
Capricorn or that it provided to Back to Nature in 2016 containing sales and pricing
information for the Mrs. Fields products that Interbake sold as licensee as well as
some “key insights/comments” it collected about various customers to which it sold
those products.310 Most of this information concerns 2016 pricing and sales data,
and none of it pre-dates November 2012 when Interbake began operating the Mrs.
Fields branded retail business. All of the information was inputted into and
maintained on Interbake’s own systems in the regular course of its business during
Interbake’s tenure as licensee, and some of it is available for purchase from public
sources.311 As such, this information was “independently developed” by and thus
310
See JX 429, JX 522, JX 544, JX 616.
311
Tr. 647 (Bagwell) (data in JX 522 is Nielson data available for purchase).
89
constitutes Protected Information of Interbake, and not Protected Information of
Mrs. Fields.
Pointing to a clause in the definition of Protected Information referring to
“modifications, improvements and enhancements which are derived from or relate
to such other Party’s access to or knowledge of any of the above enumerated
materials or information,” Mrs. Fields argues that the sales data Interbake disclosed
to Back to Nature was Mrs. Fields’ Protected Information on the theory that it was
“derived from” sales data Mrs. Fields provided to Interbake during due diligence
before it began serving as licensee. This argument defies common sense and ignores
the key language in the clause: “modifications, improvements and enhancements.”
The plain meaning of that phrase logically would apply to items like cookie recipes
and formulations that Mrs. Fields originally provided to Interbake, but it has no
logical application to data (such as revenues and pricing information) for sales that
occurred on Interbake’s watch as a result of its own efforts, which Interbake recorded
on its systems in the regular course of its business.
b. Packaging Information and Cookie Samples
Mrs. Fields contends that Interbake breached its non-disclosure obligation by
sharing with Back to Nature documents containing diagrams with the dimensions of
90
cartons used to package certain Mrs. Fields products312 and the die line for a sheet
of packaging film. 313 Mrs. Fields did not submit evidence demonstrating that it
provided any of this information to Interbake when it became a licensee, and anyone
wishing to learn the dimensions of the cartons could do so with relative ease by
purchasing a box of Mrs. Fields cookies from a store and calculating the
measurements themselves.314 Most importantly, from the face of the documents,
they appear to have been created internally at Interbake or by one of its vendors after
it became licensee.315 Therefore, I find based on the preponderance of the evidence
that Interbake independently developed the packaging information at issue and that
this information thus constitutes Protected Information of Interbake, and not
Protected Information of Mrs. Fields.
Mrs. Fields also contends that Interbake breached its non-disclosure
obligations by providing Back to Nature with samples of the Mrs. Fields retail
cookies it bakes. Even if this occurred, it would not constitute a breach of the
312
JX 471.
313
JX 518.
314
Tr. 619-20 (Bagwell).
315
The diagrams on the first two pages of JX 471 appear to have been prepared by
“Interbake Foods Research and Development” (BTN000716-17), and the diagrams and
information on the remaining pages appear to have been prepared by vendors (Boehmer
Box or Norampac) for Interbake or Weston Foods, which are identified as the “customer”
for various carton diagrams. The dates that appear throughout this document are in 2013,
after Interbake became licensee. See also JX 518 (identifying Genpak as the printer for
packaging film).
91
License Agreement because the cookies themselves are sold publicly as a product
and do not constitute “information”—as opposed to the recipes or formulations used
to make them. Indeed, food products do not fall within any of the categories listed
in the definition of “Protection Information” quoted above.
I also am not convinced that Interbake actually sent samples of Mrs. Fields
cookies to Back to Nature. Mrs. Fields relies on a March 4, 2016 email in which a
representative of Back to Nature asked Stephanie Bagwell, Interbake’s manager of
contract sales, to “send us samples of different Mrs. Fields Cookies in a regular
metallized package” for use at Expo West.316 Bagwell denied sending any Mrs.
Fields cookies in response to this request, explaining that the phrase “Mrs. Fields
cookies” often was used as shorthand to describe soft-baked cookies generally and
that she understood from the email that she was being asked to send soft-baked
cookies using formulations that Interbake was developing for Back to Nature. 317 I
credit this testimony, particularly given Bagwell’s explanation that it would have
made no sense to send actual Mrs. Fields cookies for use at Expo West, a natural
foods trade show, because Mrs. Fields cookies do not have a “clean” label and thus
cannot be sold as a natural food product.318
316
JX 488 BTN000211.
317
Tr. 610-11, 634-36, 674-75 (Bagwell).
318
Tr. 674-75 (Bagwell).
92
c. Recipes or Formulas for Mrs. Fields Cookies
Mrs. Fields’ most serious contention concerning the alleged misuse of
Protection Information is that Interbake shared Mrs. Fields’ cookie formulas with
Back to Nature for the purpose of creating replacements for Mrs. Fields products.319
Any recipes or formulas for making the Mrs. Fields retail brand cookies that
Interbake received from Mrs. Fields and any modifications or enhancements derived
therefrom would be Protected Information of Mrs. Fields. The record contains no
evidence, however, that Interbake actually disclosed any such recipes or
formulations to Back to Nature or anyone else.
As its best evidence, Mrs. Fields points to a March 22, 2016 email from
Bagwell summarizing a call between representatives of Interbake and Back to
Nature referring to replacing Mrs. Fields cookies with cookies utilizing the “existing
Mrs. Fields private label formulation.”320 But the email does not contain or attach
any cookie recipes or formulas, and the reference to a “private label formulation”
makes no sense with respect to Mrs. Fields cookies because its retail cookies were
branded and not private label. As noted above, moreover, Bagwell credibly testified
that the phrase “Mrs. Fields cookies” often was used as shorthand to describe soft-
baked cookies generally, which would explain why the email referred to a “Mrs.
319
See JX 465, 471, 518.
320
JX 506 IBF00021592.
93
Fields private label formulation.”321 The only other evidence Mrs. Fields relies on
contains recipes or formulations for non-Mrs. Fields cookies or ingredients.322
*****
For the reasons explained above, I conclude that Mrs. Fields has failed to
establish by a preponderance of the evidence that Interbake breached Section 14(c)
of the License Agreement. Thus, Mrs. Fields is not entitled to entry of an order for
injunctive relief to enforce Section 14(c).
2. Mrs. Fields Is Not Entitled to an Order of Specific
Performance to Enforce Section 7(c)
Section 7(c) of the License Agreement affords Mrs. Fields the right to inspect
“relevant financial books and records” of Interbake for “review and audit” during
regular business hours upon 48 hours written notice:
LICENSEE will make all of its relevant financial books and records
available to MRS. FIELDS or its designated representative at all
reasonable times for review and audit by MRS FIELDS or its designee
at any time during regular business hours on not less than 48 hours prior
written notice.
Mrs. Fields asks for entry of an order of specific performance based on Section 7(c).
Such a request is governed by a “clear and convincing” evidentiary standard:
A party must prove by clear and convincing evidence that he or she is
entitled to specific performance and that he or she has no adequate legal
remedy. A party seeking specific performance must establish that (1)
321
See discussion accompanying nn. 317-18, supra.
322
See JX 511 (Homestyle), JX 512 (Homestyle), JX 534 (ingredients).
94
a valid contract exists, (2) he is ready, willing, and able to perform, and
(3) that the balance of equities tips in favor of the party seeking
performance.323
Mrs. Fields’ request for specific performance breaks down into two parts.
First, Mrs. Fields contends that Interbake stonewalled its auditor, Paul Crystal, in
connection with the inspection he conducted before this lawsuit was filed. This
contention is not supported by the record. After Interbake negotiated with Crystal
over the scope of his initial requests, Crystal performed an on-site audit for two days
in February 2016, after which Interbake provided him with additional information
in response to his requests.324 On March 21, Crystal submitted his draft audit report
to Famous Brands. Significantly, neither Crystal nor anyone else representing Mrs.
Fields made any further requests for information or had any further communications
with Interbake about Crystal’s inspection after March 21. 325 Mrs. Fields instead
opted to file this lawsuit.
In its post-trial brief, Mrs. Fields identifies three “problems requiring
investigation” arising from Crystal’s audit, 326 but it fails to identify any specific
information Crystal requested that Interbake refused to provide except for “general
323
Osborn, 991 A.2d at 1158.
324
See I.O., supra.
325
Tr. 1267-68 (Crystal).
326
Pl’s Op. Br. 58-59 (Dkt. #175) (questioning (1) whether Interbake sold Mrs. Fields
products to a Canadian affiliate at below-wholesale prices, (2) the adequacy of controls for
affiliated entities, and (3) sales to Big Lots in late 2013, early 2014).
95
ledger segments” for Norse Dairy or Colonial Cookies.327 To the extent that Mrs.
Fields is seeking access to the general ledger of Weston Foods, of which Interbake,
Norse Dairy, and Colonial Cookies are sub-divisions,328 Mrs. Fields is not entitled
to such access because Section 7(c) only requires Interbake to make available “its”
financial books and records that are “relevant” to the Mrs. Fields business. Crystal’s
draft audit report, moreover, indicates that he received what appears to be full access
to the general ledger account and subaccounts relevant to Mrs. Fields.329
Second, Mrs. Fields asks for a “full audit” or “complete audit” of Interbake’s
records to investigate a number of alleged discrepancies concerning product sales it
discovered at trial suggesting that Interbake may have “underreported royalties.”330
As just stated, Mrs. Fields is not entitled to unfettered access to all of Interbake’s
records because Section 7(c) specifically limits Mrs. Fields’ inspection right to “its
relevant financial books and records.” Furthermore, the desire to investigate
discrepancies arising from the trial record is essentially a new claim that was not in
327
Pl.’s Op. Br. at 58 (Dkt. #175).
328
JX 503 MF00046715.
329
JX 503 MF00046720 (explaining that Interbake provided access to the general ledger
account for Mrs. Fields (#7100) and subsegment codes (#251-258) for that account).
Interbake also offered Crystal the opportunity to work with Interbake’s outside auditor,
KPMG, but the parties were unable to work out an arrangement for such a process,
apparently because the parties could not agree on who would be responsible to pay for
KPMG’s fees. Id.; Tr. 1257-58 (Crystal).
330
Pl’s Op. Br. at 59-61 (Dkt. #175).
96
Mrs. Fields’ Complaint, which was amended after the conclusion of fact
discovery.331 If Mrs. Fields wishes to investigate these matters, it should make a
request under Section 7(c) and seek legal recourse, if necessary, after it has done so.
It would be premature for the Court to attempt to adjudicate an alleged violation of
Section 7(c) before Mrs. Fields has even attempted to conduct an inspection
concerning these newly discovered matters.
I conclude for the reasons just explained that Mrs. Field has failed to establish
by a preponderance of the evidence that Interbake breached Section 7(c) of the
License Agreement. Thus, Mrs. Fields is not entitled to entry of an order of specific
performance concerning Section 7(c).
B. Mrs. Fields Has Failed to Demonstrate an Entitlement to Damages
for Breach of Any Provision of the License Agreement
In Count III of its Complaint, Mrs. Fields seeks damages for alleged breaches
of Sections 8, 9, 11 and 14 of the License Agreement.332 “To prove a breach of
331
See Compl. ¶ 64 (Dkt. #135) (Interbake “breached Section 7(c) of the License
Agreement by failing to provide the material information set forth above in connection
with Mrs. Fields’ audit of Interbake’s books and records.”).
332
Count III actually referred to Section 15(d)(i) as the basis of Mrs. Fields’ damages claim
for the alleged misuse of Protected Information. As explained previously, that provision
only applies upon “cancellation, termination or expiration” of the License Agreement. The
relevant provision governing the misuse of Protected Information “during the term” of the
License Agreement is Section 14(c).
97
contract claim, a plaintiff must show: the existence of a contract, the breach of an
obligation imposed by that contract, and resulting damages to the plaintiff.”333
As explained above, Mrs. Fields has failed to establish that Interbake breached
Section 14(c) of the License Agreement. I next address Mrs. Fields’ damages claims
with respect to Section 8, 9, and 11.
1. Mrs. Fields Failed to Prove a Breach of Sections 8 or 9
Section 8(a) of the License Agreement requires Interbake to sell Mrs. Fields
cookies as “premium” products and to pay all costs it incurs for, among other things,
marketing and packaging:
All Royalty Bearing Products shall be developed, manufactured,
marketed, and sold as “premium” products consistent with MRS.
FIELDS’ then existing image. LICENSEE accepts full responsibility
for and agrees to pay all costs it incurs associated with the development
of all Royalty Bearing Products and all advertising and promotion,
packaging design, graphics, and packaging materials for Royalty
Bearing Products.
Section 9 similarly provides that Interbake “shall market Royalty Bearing Products
as premium products or as is otherwise consistent with MRS. FIELDS’ then existing
image so that such marketing shall not reflect adversely upon Royalty Bearing
Products, the good name of MRS. FIELDS, or the Licensed Names and Marks.”334
333
In re Mobilactive Media, LLC, 2013 WL 297950, at *14 (Del. Ch. Jan. 25, 2013)
(internal quotations omitted).
334
Mrs. Fields’ claims under Sections 8 and 9 are based on the first two sentences of
Section 8(a) and the first sentence of Section 9. Post-Trial Tr. at 7-9 (Dkt. #195).
98
Mrs. Fields’ explanation of the basis for its claim under these provisions has
been an incoherent mishmash. As best I can discern, Mrs. Fields contends that
Interbake violated these provisions by failing “to take steps necessary to prepare for
2016 sales of the Mrs. Fields-branded cookies” when Interbake was exploring an
expanded relationship with Back to Nature as part of its backfill strategy in 2016.335
Section 8(a) requires Interbake to accept “full responsibility for” and “to pay”
all costs it incurs “associated with the development” or the advertising and
promotion of Mrs. Fields cookies, but nothing in that provision (or Section 9)
obligates Interbake to advertise or promote Mrs. Fields cookies in any specific
manner, to attend trade shows, to participate in trade promotions, or to redesign or
repackage Mrs. Fields cookies. In fact, during the License Agreement negotiations,
Mrs. Fields considered and ultimately decided against asking Interbake to agree to a
provision obligating Interbake to a minimum level of “Ad/Marketing spend.”336 The
License Agreement, furthermore, contains no provision that prevents Interbake from
selling competing private-label cookies. To the contrary, Mrs. Fields understood
and expected when it entered into the License Agreement that Interbake would
continue to make and sell private-label cookies.337
335
Pl.’s Op. Br. at 63, 66 (Dkt. #175).
336
JX 84 MF00011120.
337
Tr. 84-85 (Courtney).
99
Section 8(a) and 9 both require that Interbake market and sell Mrs. Fields’
products as a “premium” product. But Mrs. Fields has not identified any evidence
suggesting that Interbake failed to market Mrs. Fields cookies as premium products,
or marketed them in a manner inconsistent with Mrs. Fields then-existing image.
The evidence shows the opposite. Mrs. Fields approved the recipes for the cookies
that Interbake baked, and the packaging and marketing material it used to sell
them.338 In sum, Mrs. Fields has failed to show by a preponderance of the evidence
that Interbake violated either Section 8 or 9 of the License Agreement.
2. Mrs. Fields Failed to Prove a Breach of Section 11 Entitling
It to Damages
Mrs. Fields’ explanation of its claim under Section 11 of the License
Agreement has been equally confusing and elusive. In its post-trial briefs, Mrs.
Fields focused on Section 11(b), but later conceded it does not have a claim for “an
express breach of 11(b).” 339 At post-trial argument, Mrs. Fields focused on Section
11(a), which was mentioned only in a footnote in its reply brief.
338
See, e.g., JX 678-684; Tr. 100-02 (Courtney); JX 14 119-20 (Courtney Dep.).
339
Post-Trial Tr. at 14 (Dkt. #195). Section 11(b) provides that “LICENSEE recognizes
the value of the goodwill associated with the Licensed Names and Marks and acknowledge
[sic] that the Licensed Names and Marks and all rights therein and goodwill pertaining
thereto belong exclusively to Mrs. Fields.” Even if the claim had not been abandoned, no
evidence has been identified that might support a breach of this provision, e.g., that
Interbake ever asserted that it owns any of the Licensed Names or Marks or the goodwill
associated therewith.
100
Section 11(a) provides that:
Unless MRS. FIELDS consents in writing, which consent shall not be
unreasonably withheld, LICENSEE shall use the Licensed Names and
Marks:
(i) only for the purposes of and pursuant to this Agreement,
...
(iii) only in the manner permitted and prescribed by MRS.
FIELDS as set forth herein,
(iv) only with respect to Royalty Bearing Products, and
(v) only to market, distribute or sell Royalty Bearing Products
through Designated Distribution Channels.340
The term “Licensed Names and Marks” is defined to “mean those trademarks, trade
names and service marks identified on Exhibit E hereto.”341 That exhibit lists two
names or marks registered with the U.S. Patent and Trademark Office and the
Canadian Intellectual Property Office, and two pending applications.
In a footnote of its reply brief, Mrs. Fields contends that Interbake breached
Section 11(a) by (1) telling Delhaize in January 2016 that it could provide “Premium
Cookies – i.e., Mrs. Fields type cookies,”342 and (2) using the Mrs. Fields logo in its
April 2016 Back to Nature kick-off-call slide-deck.343 As to the first contention,
340
Mrs. Fields bases its claim under Section 11(a) on subparts (i) and (iii)-(v) of that
provision. Post-Trial Tr. at 11-12 (Dkt. #195).
341
JX 104 at 3.
342
JX 427 at 5.
343
Pl.’s Ans. Br. at 21 n. 14 (Dkt. #183).
101
Interbake’s generic reference to “Mrs. Fields type cookies” as a shorthand descriptor
for premium cookies does not constitute a use of the Licensed Names and Marks in
my opinion. Nor has Mrs. Fields demonstrated how it has been damaged in any way
by Interbake’s use of this phrase.
As to the second contention, the Mrs. Fields’ logo used in the Back to Nature
slide deck (JX 616) appears to display a registered trademark symbol: ®. Interbake’s
use of the logo in the slide deck thus violated Section 11(a) in my opinion because
the logo was not being used to “market, distribute or sell Royalty Bearing Products
through Designated Distribution Channels” as Section 11(a) requires, but instead
was used to pitch a potential roll-out of private-label products with Back to Nature,
which ultimately was not pursued.344 Although Mrs. Fields has proven a breach of
Section 11(a), it provided no evidence that it suffered any damages as a result of this
breach.345
344
See JX 616. The record does not contain actual evidence that the logo used in JX 616
is on Schedule E of the License Agreement, but it would be reasonable to infer that it is.
345
The damages analysis Mrs. Fields submitted at trial is totally disconnected from the
breach of any particular provision of the License Agreement. Instead, working from the
vague assumption that “Interbake is found liable” for some unidentified “breach of
contract,” Mrs. Fields’ damages expert, Weston Anson, purported to calculate the
difference between the value of the Mrs. Fields retail cookie business between (1) July 1,
2015, when Anson had “seen evidence” that Interbake intended “to leave the license,” and
(2) September 16, 2016, the date of his report. Tr. 1330-33 (Anson). Based on various
assumptions and methodologies, Anson pegged the damages at an astounding $28.7
million—more than fourteen times the minimum annual royalty under the License
Agreement. There are many flaws in Anson’s analysis, not the least of which was his
failure to consider anything that Mrs. Fields—the owner of the brand—did or did not do
102
*****
For the reasons explained above, I conclude that Mrs. Field has failed to prove
any entitlement to recover damages under Sections 8, 9, 11 or 14 of the License
Agreement.
C. Mrs. Fields’ Implied Covenant Claim Is Not Ripe for Review
In Count IV of its Complaint, Mrs. Fields asserts that Interbake breached the
implied covenant of good faith and fair dealing. Mrs. Fields advances this claim in
the alternative to Count III if Interbake’s “actions between May 2015 and May 2016”
did not breach the express terms of the License Agreement.346
The covenant is “a way of implying terms in the agreement, whether
employed to analyze unanticipated developments or to fill gaps in the contract's
provisions,” that requires the parties to a contract to act reasonably and in a manner
that does not frustrate the contract’s underlying purpose:
Stated in its most general terms, the implied covenant requires “a party
in a contractual relationship to refrain from arbitrary or unreasonable
conduct which has the effect of preventing the other party to the
contract from receiving the fruits” of the bargain. Thus, parties are
liable for breaching the covenant when their conduct frustrates the
during the term of the license (such as failing to invest in a refreshment of its brand) that
may have caused or at least have contributed to a decline in the value of the business
Interbake operated as a licensee. Tr. 1373 (Anson). Given my conclusion that Mrs. Fields
failed to prove a breach of any provision of the License Agreement except for Section
11(a), for which Mrs. Fields failed to establish any resulting damages, it is unnecessary to
address Anson’s opinions further.
346
Pl.’s Op. Br. at 67 (Dkt. #175).
103
“overarching purpose” of the contract by taking advantage of their
position to control implementation of the agreement’s terms.347
“Delaware’s implied duty of good faith and fair dealing is not an equitable
remedy for rebalancing economic interests after events that could have been
anticipated, but were not, that later adversely affected one party to a contract. Rather
the covenant is a limited and extraordinary legal remedy.”348 The covenant does not
save a party to an agreement from regret or negligent drafting, and Delaware courts
will not rewrite contractual language “just because one party failed to extract as
complete a range of protections as it, after the fact, claims to have desired during the
negotiation process.”349 It applies instead only “to developments that could not be
anticipated, not developments that the parties simply failed to consider.”350
Mrs. Fields argues that a “fundamental premise and expectation of the
[License] Agreement was that the licensed business . . . would continue to be a viable
revenue-generating business after the Agreement was over” and thus Interbake had
“an implied obligation to provide reasonable cooperation with [Mrs. Fields] (or its
347
Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005) (internal
quotations omitted).
348
Nemec v. Shrader, 991 A.2d 1120, 1128 (Del. 2010).
349
GC-Sun Holdings, L.P., 910 A.2d at 1033.
350
Nemec, 991 A.2d at 1126.
104
designee, such as a new licensee) as the Agreement was coming to an end, in order
to facilitate a smooth transition of the business.”351
Interbake counters that Mrs. Fields knew during the License Agreement
negotiations that “the Agreement was of limited duration and could come to an end”
and thus it should not be permitted to rewrite the License Agreement to include
provisions it could have but failed to request during the negotiations, such as
provisions requiring that Interbake “ensure a smooth transition” or “return a business
viewed as ‘viable’ in [Mrs. Fields’] eyes.” 352 Interbake also points out that the
License Agreement contains a number of provisions addressing the parties’
respective rights upon its termination or cancellation,353 that it expressly provides
for a $2 million minimum annual royalty to protect Mrs. Fields, and that the parties
agreed to delete from the License Agreement any obligation for Interbake to achieve
a minimum amount of annual sales. According to Interbake, to imply “a
requirement to return a ‘viable’ business of a certain sales level would improperly
contradict the express provisions of the [License] Agreement and the intent gleaned
from the parties’ negotiations.”354
351
Pl.’s Op. Br. at 67 (Dkt. #175).
352
Def.’s Rep. Br. at 56 (Dkt. #186).
353
See JX 104 §§ 15(d), 15(e), 16, 17.
354
Def.’s Rep. Br. at 58.
105
In my opinion, it would be premature and ill-considered to attempt to
adjudicate Mrs. Fields’ implied covenant claim because the License Agreement has
not been terminated and remains in place for all the reasons discussed previously.
Indeed, Interbake has continued to serve as licensee during the pendency of this
litigation under the Standstill Order. To wade into issues of transition before the
transition actually has happened would amount to the rendering of an advisory
opinion.355 Accordingly, Count IV will be dismissed without prejudice for lack of
ripeness.
VI. CONCLUSION
For the foregoing reasons, Mrs. Fields is entitled to a declaratory judgment
that the License Agreement was not terminated and remains in place. Judgment will
be entered in Mrs. Fields’ favor on Count I of its Complaint and Counts I-III of
Interbake’s Counterclaim, and in Interbake’s favor on Counts II-III of Mrs. Fields’
Complaint. Count IV of the Complaint will be dismissed without prejudice.
Both parties sought an award of attorneys’ fees and expenses under Section
22(j) of the License Agreement, which entitles the “Party prevailing . . . to
reimbursement of its reasonable costs and expenses.” But neither party briefed the
355
See XI Specialty Ins. Co. v. WMI Liquidating Trust, 93 A.3d 1208, 1217 (Del. 2014)
(“Delaware courts do not render advisory or hypothetical opinions.”).
106
issue. The parties are directed to confer and to submit to the Court within five
business days (1) a proposed schedule for briefing the fee and expense issue, and (2)
a form of final judgment. Opening and answer briefs on the fee and expense issue
shall not exceed 3,000 words, with any reply not to exceed 2,000 words.
The net result of this overly lengthy opinion is that the License Agreement
remains in place, and that about six months remain on its initial term, which expires
on December 31, 2017. According to Mrs. Fields’ own expert, that is a common
period of time to transition a business in the consumer packaged goods industry.356
Indeed, that period is roughly equivalent to the amount of time it took for Mrs. Fields
to transition the business from Shadewell to itself, and from itself to Interbake. The
Court strongly encourages the parties to refrain from further unproductive litigation,
and to use the time that remains on the initial term of the License Agreement to work
together in a reasonable way to effectuate the transition in a business-like manner.
IT IS SO ORDERED.
356
Tr. 1382-83 (Anson).
107
Mrs. Fields Brand, Inc. v. Interbake Foods, LLC
Combined Opinion