Alerion Investment Partners I, L.P. v. Valassis Communications, Inc. et al. (2013)

MEMORANDUM OF DECISION

I. INTRODUCTION

This case arises out of the aborted sale of the plaintiff's, Alerion Investment Partners I, L.P. (“Alerion”), in-store couponing business to the defendant, Valassis In–Store Solutions, Inc. (“VIS”).  In connection with the sale, both VIS and its parent, Valassis Communications, Inc. (“Valassis”), signed a promissory note in the amount of $3,900,000 in favor of Alerion.   The note provided though that the defendants would not have to pay any amounts otherwise due under the note if they ceased engaging in the business VIS bought from Alerion by a certain date, so long as the defendants did not engage in the business for a set period of time thereafter.   It is undisputed that VIS notified Alerion in a timely fashion that it had ceased engaging in the business, thereby suspending the defendants' payment obligations under the promissory note.

What is in dispute is whether the defendants have engaged in the business thereafter, triggering the payment obligation.   Alerion claims that the defendants have, and that it provided notice to the defendants that they must pay the amount due under the promissory note.   The defendants deny that they have, and, therefore, have refused to make any payment on the promissory note.   Consequently, the plaintiff brought this one-count claim for breach of contract alleging that the defendants have failed to meet their payment obligations under the promissory note.

In addition to denying the plaintiff's claims, the defendants have asserted nine special defenses and a four-count counterclaim.   Among other things, the defendants claim that Alerion misrepresented certain material facts about the business VIS was purchasing.   They further allege that Alerion failed to provide adequate and timely notice of any actions of the defendants that would constitute engaging in the business, thereby depriving the defendants of their right to cure under the promissory note.¹

Because the plaintiff's claim turns on whether the defendants engaged in the business after VIS returned the business to Alerion, the court bifurcated the trial of this matter to consider that issue first.²  If the court finds for the plaintiff on that issue then it would hear evidence as to the defendants' special defenses and counterclaims, as well as to the plaintiff's damages.   On the other hand, if the court finds for the defendants on that issue, the only matter left for the court to consider would be the defendants' counterclaims.

The trial as to whether the defendants breached the terms of the promissory note by continuing to engage in the business and then refusing to pay the amount due on the note took place over two days.   The plaintiff presented two witnesses:  Michael Persky, a principal of Alerion;  and Michael Goodman, a marketing professor at the Stern School of Business at NYU, who was offered as an expert on in-store marketing.   The defendants presented three of their employees as witnesses:  Michael Kowalczyk, Lorne Groe, and Robert Recchia.   The parties also submitted numerous exhibits including the documents, and drafts thereof, relating to the sale of Alerion's in-store couponing business, pictures showing what in-store couponing the defendants were engaged in after returning the business to Alerion, and documents relating to how the parties understood the business Alerion was selling to VIS. Following the trial, the parties submitted post-trial briefs and reply briefs to the court.

II. FINDINGS OF FACT

Having considered all of the evidence and the credibility of the witnesses, the court finds the following facts.   Alerion is a micro-cap private equity fund.   It buys companies that are usually valued at $20,000,000 or less and are in some way distressed.   Alerion will typically change the management of the acquired company, try to improve its performance, and then “monetize” its investment in the acquired company by selling it.   In or about 2006, Alerion purchased from Leverage Point Media the “Label$Dollars” business.   At the time, Label$Dollars placed in-store coupons for consumer product manufacturers in specific departments located along the shopping perimeter of supermarkets.   In particular, Label$Dollars used a label printing machine that would generate a coupon that would be placed on the customer's packages at the deli, meat and seafood departments.   For example, if a customer ordered a pound of American cheese at the deli department, in addition to placing a label identifying the product, weight and price on the package, the deli worker who sliced the cheese might also place a Label$Dollars coupon for bread on the package before handing it to the customer.   A similar process could take place in the seafood and meat departments when the store employee weighed and packaged the customer's fish or steak order.

Following its purchase of Label$Dollars, Alerion renamed the company Perimeter Marketing Company.   This new name reflected the business's focus on placing advertising in the perimeter of stores.   There were a couple of reasons for this focus.   First and foremost, the right to place advertising on shelves throughout most supermarkets was already owned, mostly by News America Marketing (“NAM”).   This included placing coupons on shelves in the dairy and frozen food areas of the store.   Consequently, the only couponing real estate available to Perimeter Marketing was the areas like the deli where there were no shelves to which NAM had couponing rights.

Second, Alerion believed that the perimeter of the store would be attractive to advertisers because studies showed that customers shopped the perimeter of the store much more frequently than they did the center aisles of the store.   Thus, Alerion believed that consumer products companies with products in the center aisles would be interested in placing coupons in areas along the perimeter of the store to “drive” customers to the center aisles.

In support of this strategy, from the time it acquired Label$Dollars until it sold Perimeter Marketing to VIS, Alerion marketed its perimeter strategy to various supermarkets and consumer products groups.   In the presentations it prepared for its marketing pitches, Perimeter Marketing focused on the areas where it had placed coupons using the Label$Dollars products—the deli, meat and seafood areas of the store.   In those presentations, Perimeter Marketing regularly referred to these areas as “departments” or “specialty departments.”   While those presentations discussed or showed other areas along the perimeter of the store, like dairy, they only occasionally referred to these areas as “departments.”

The evidence also established that Alerion was investigating other methods of distributing coupons around the perimeters of stores that would avoid NAM's exclusive right to engage in at-shelf couponing.   The concepts developed by Alerion included free-standing displays that could dispense coupons and coupon dispensers that could be attached to newspaper stands.   Ex. 325.   There was no credible evidence though that Alerion ever discussed these concepts with any third parties, including Valassis.

At the same time it was attempting to garner new customers for Perimeter Marketing, Alerion was also attempting to market the business to companies that it thought would be interested in acquiring it.   For example, Alerion had discussions with NAM about how Perimeter Marketing complimented NAM's business because Perimeter Marketing could provide NAM with access to the last piece of supermarket real estate not owned by NAM. Ex. 211.

Despite all of Alerion's efforts, Perimeter Marketing did not generate the interest, either in customers or suitors, that Alerion had hoped.   Thus, by the end of 2007, Alerion was considering simply shutting down Perimeter Marketing.

Fortunately for Alerion, around this same time, Valassis Communications expressed interest in Perimeter Marketing.   Valassis had for some time been looking for an avenue into in-store advertising and couponing.   Valassis had limited success with a program called “Moms Matter,” through which it would hand out product samples at photo studios located in the front of supermarkets.   However, it could not gain any further traction within supermarkets due to NAM's dominance over in-store couponing.

Alerion's first contact with Valassis occurred on or about September 2007 when Mike Kowalczyk, Valassis' vice-president of retail development, spoke on the phone with Michael Persky and Bruce Failing of Alerion.   Persky and Failing were partners in Alerion.   Persky had been in charge of Alerion's purchase of Label$Dollars and was very involved in the operation of the business after the acquisition.   Failing had extensive experience with in-store couponing.   Failing had been the CEO of the company that invented the coupon box used for at-shelf couponing, and had the reputation as the “godfather of the in-store marketing industry.”

Following that call, Failing and Persky traveled to Michigan to meet with Kowalczyk and others from Valassis.   At that meeting, Failing and Persky explained that while Perimeter Marketing had a patent on the device that printed Label$Dollars, the real value of the business was the supermarket real estate that it owned.   They had convinced supermarkets to give Perimeter Marketing the exclusive right to coupon in service departments, e.g. deli, meat, seafood, that were not controlled by NAM. Failing further explained that Perimeter Marketing's model was the only way to get into supermarkets because NAM had exclusive contracts for all other space in the stores.   For example, it was known to Valassis and Alerion that in 2004 NAM had signed a ten-year contract with Safeway for exclusive rights to coupon everywhere in all Safeway stores except for the service departments.

Valassis was interested in Perimeter Marketing's business and continued discussions with Alerion about a possible acquisition after the initial meeting.   Those discussions led to the parties executing a letter of interest (“LOI”) on or about February 27, 2008.   The LOI contemplated that Valassis would purchase all of the stock of Perimeter Marketing for $6.25 million, plus an earn-out of $0.00175 for every coupon sold by Valassis through December 31, 2014.   The LOI did not bind Valassis to complete the transaction, but gave it exclusive rights to negotiate with Alerion for thirty days.   Thereafter, the parties began discussing the terms of a stock purchase agreement, and Valassis began its due diligence investigation of Perimeter Marketing.

A first draft of the stock purchase agreement was sent from Valassis' lawyers to Persky and Failing on April 3, 2008.   Ex. 101.   The draft included the same financial terms set forth in the LOI. It also included a non-competition agreement that prohibited Alerion from engaging “in the business of in-store couponing, advertising or promotion of complimentary items through pre-printed labels or any form of on-demand communication to scales or other devices used to [sic] for weighing and processing goods of all types or any other business whose products compete with the Company.”  Id., pp. 42–43.   The non-compete did permit Alerion to own a de minimus (no more than 1%) amount of stock in a competing company.

On April 16, 2008, Alerion's attorney provided a revised draft to Valassis' counsel.   Ex. 102.   That draft significantly modified both the earn-out and non-compete provisions of the earlier draft.   Alerion added additional language to the earn out provision requiring Valassis to conduct Perimeter Marketing's business “in a manner consistent with historical practice of the Company and in such a manner so as to maximize the issuance of Pre–Print Coupons and On–Demand Coupons.”  Id., p. 9. It also required Valassis to use good faith in marketing the PrePrint and On–Demand coupon business and to not set up another company that would compete against Perimeter Marketing.   It is clear that Alerion's concern in including such language was to make sure that Valassis did not pursue a course of conduct to minimize its earn-out payments to Alerion.

With respect to the non-compete, Alerion sought to limit the restriction on it to not “disseminating in-store coupons that are (A) attached to specialty department scale transaction labels issued to a consumer from a specialty department on the perimeter of any retail grocery store or (B) printed at and issued from a weigh scale in a specialty department on the perimeter of any retail grocery store to a consumer on a ‘real time’ basis.”  Id., p. 51.   The above limitations were inconsistent with Alerion's proposed earn-out provision which did not limit Valassis' payment obligation to scale transactions that occurred in specialty departments on the perimeter of the store.

On May 13, 2008, Valassis' attorney provided the next revised draft to Alerion's attorney.   Ex. 103.   Valassis deleted the earn-out language added by Alerion in the previous draft.  Id., pp. 7–8.   With respect to the non-compete, Valassis did not alter Alerion's proposed language, but noted that the issue was still unresolved by inserting “DESCRIPTION OF BUSINESS TO BE DISCUSSED.”  Id., p. 41.

On May 22, 2008, Alerion's attorney responded with another draft.   Ex. 104.   This draft included a definition of “Business” which was quoted in the earn-out section of the agreement, pp. 7–8, and referenced in the non-compete.  Id., p. 42.   It defined the “Business” as “the business or program related to disseminating Coupons from a device, piece of equipment or advertising or promotional display located in departments in or along the perimeter of any retail store or establishment (regardless of whether a consumer takes a Coupon from such device, equipment or display himself or whether an associate takes a Coupon from such device, equipment or display and delivers it directly or indirectly to a consumer.”  Id., p. 1.

In addition, the draft reflected a reduction in the purchase price from $6.25 million to $5 million.   This reduction reflected Valassis' concern, after doing due diligence, that Perimeter Marketing was not worth what it originally thought.

Following two more months of negotiations, Alerion's attorneys delivered another draft of the stock purchase agreement to Valassis' attorney on July 25, 2008.   Ex. 105.   This draft kept the same definition of “Business” that first appeared in the May 22, 2008 draft.   However, it further lowered the purchase price from $5 million to $3.9 million.  Id., p. 5. It further provided that the purchase price would be paid in the form of a promissory note to be delivered to Alerion at the closing.  Id. That note, to be executed by Valassis and VIS, contained a “Suspension of Obligations” section providing that if Valassis, VIS and any related entity ceased engaging in the Business by July 28, 2010, any payment obligation under the note would be suspended until December 31, 2015.   So long as VIS and Valassis did not engage in the Business before that date they would be relieved of any payment obligation under the note.³  If, however, Valassis or VIS engaged in the Business before December 31, 2015, the amounts due under the note would become immediately due and payable.  Id. The Suspension of Obligations provision further provided though that Alerion had to provide Valassis and VIS with notice of any alleged Business activity and a thirty-day opportunity to cure such activity to preserve the Suspension Event.  Id.

On or about July 29, 2008, the parties executed the Stock Purchase Agreement (“SPA”) and the Nonnegotiable Promissory Note (the “Note”) that are at issue in this dispute.   Exs. 301, 302.   The SPA included the same definition of “Business” as appeared in the May 22 and July 25 drafts.   It also contained the same payment terms.   The Note contained the same Suspension of Obligations provision as appeared in the July 25 draft.   Furthermore, relevant to this dispute, both agreements provide that they will be governed by Delaware law.   Ex. 301, p. 35;  Ex. 302, p. 4. The SPA also contains an integration clause that provides that “This Agreement constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and supercedes all prior written and oral agreements and understandings between the parties with respect to the subject matter of this Agreement.”   Ex. 301, p. 46.   Neither the SPA nor the Note contains a clause providing that their terms were jointly drafted and no party should be considered the drafter of any term for contract interpretation purposes.

Following VIS's purchase of Perimeter Marketing, things did not go well.   Ultimately, on April 26, 2010, Valassis provided written notice to Alerion that it would cease engaging in the Business as of June 30, 2010, thereby commencing a Suspension Event under the Note. Thus, so long as Valassis and VIS did not engage in the Business until after December 31, 2015, any obligations they had under the Note would be terminated.   On the other hand, if they engaged in the Business before December 31, 2015, and did not cease such activity after receiving notice from Alerion, the amounts they owed under the Note would become immediately due and payable.

On October 28, 2011, Alerion provided notice to VIS and Valassis that they were engaging in the Business, and gave as an example an Acme store in King of Prussia, Pennsylvania.   Ex. 303.   The notice did not provide any other details of the alleged conduct.   In response, on December 2, 2011, Valassis denied that it had engaged in the Business and asked for additional details so that it could investigate the matter further.   Ex. 307.   After considerable back and forth between counsel over the next year, Alerion finally provided pictures supporting its allegations.   Those pictures showed the placement of coupon dispensing boxes by Valassis or VIS on the shelves and refrigerated doors in the dairy and refrigerated food areas of a number of stores.   Exs. 304, 305, 309, 315, 316.   Valassis and VIS do not dispute that they placed coupon boxes in these areas.   Rather, they claim that doing so does not constitute engaging in the “Business” because the areas where the boxes were placed do not constitute “departments in or along the perimeter of any retail store or establishment.”   Alerion disagrees.

Additional facts will be discussed as necessary.

III. DISCUSSION

A. Applicable Principles of Contract Interpretation

As noted above, both the SPA and the Note are governed by Delaware law.   Delaware's rules of contract interpretation are well-established.  “Under Delaware rules of contract interpretation, contracts should be examined as a whole to give effect to the intentions of the parties.   Courts will consider extrinsic evidence to interpret the agreement only to the extent the contract is ambiguous.   Where the language of the contract is clear and unambiguous, courts interpret the contract in accordance with the ordinary and usual meaning of the language.   A contract is not rendered ambiguous merely because the parties disagree as to the proper interpretation of the contract.   Rather, a contract is ambiguous only when the provisions in controversy are reasonably and fairly susceptible to different interpretations or may have two or more different meanings.”  (Internal quotation marks omitted;  citations omitted.)   Grosvenor Orlando Assoc. v. HCP Grosvenor Orlando, LLC, Civ. Action No. 7246–VCG (Del.Ch. June 26, 2013), p. 4.

“If a writing is plain and clear on its face, i.e., its language conveys an unmistakable meaning, the writing itself is the sole source for gaining an understanding of intent ․ However, if the words of the agreement can only be known through an appreciation of the context and circumstances in which they were used a court is not free to disregard extrinsic evidence of what the parties intended.”  (Internal quotation marks omitted;  citations omitted.)   City Investing Co. v. Continental Cas., 624 A.2d 1191 (Del.1993).  “A trial judge must review a contract for ambiguity through the lens of what a reasonable person in the position of the parties would have thought the contract meant.  [The court] will read a contract as a whole and [the court] will give each provision and term effect, so as not to render any part of the contract mere surplusage.   If [the court finds] ambiguity, [it] will apply the doctrine of contra proferentem and construe ambiguous terms and provisions against the drafting party.”  (Internal quotation marks omitted;  citations omitted.)  Kuhn Const. v. Diamond State Port Corp., 990 A.2d 393, 396–97 (Del.2010).

“In interpreting an integrated agreement, attention is directed to the meaning of the written terms in light of the surrounding circumstances.   Restatement (Second) of Contracts § 212(1) (1981).   As long as the court is aware that doubts and uncertainty lurk in the meaning and application of agreed language, it will consider testimony pertaining to antecedent agreements, communications and other factors which bear on the issue ․ The primary search is for the common meaning of the parties, not a meaning imposed on them by law.   Restatement (Second) of Contracts § 201, comment c (1981).”  (Citations omitted.)  Klair v. Reese, 531 A.2d 219, 223 (Del.1987).

B. The Meaning of “Business”

The issue of contract interpretation in this case is what does “Business” mean in the SPA. As set forth above, the parties provided a definition of the term.   The plaintiff first argues that the definition set forth in the SPA is unambiguous.   It covers the dissemination of coupons “in departments in or along the perimeter of any retail store or establishment.”   The plaintiff further claims that term “departments” is unambiguous and clearly covers the dairy, refrigerated food and frozen food departments where the defendant's coupons were found.   Finally, the plaintiff claims that “in or along the perimeter of any retail store or establishment” clearly and unambiguously means the perimeter of the shopping area of such a store, where the dairy, refrigerated food and frozen food departments in which the defendants placed their coupons are located.

In support of this claim, the plaintiff argues that the court need look no further than the ordinary meaning of departments to conclude that it covers the areas where the defendants placed their coupon boxes after notifying the plaintiff that they were no longer engaging in the Business.   In particular, the plaintiff argues that the dictionary definition of department supports its conclusion, as do the decisions of numerous state and federal courts that have identified the dairy and frozen food areas of supermarkets as departments.

As the plaintiff points out:  “Under well-settled case law, Delaware courts look to dictionaries for assistance in determining the plain meaning of terms which are not defined in a contract.   This is because dictionaries are the customary reference source that a reasonable person in the position of a party to a contract would use to ascertain the ordinary meaning of words not defined in the contract.”  (Internal footnote omitted.)  Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 738 (Del.2006).   The plaintiff relies principally on the Random House Dictionary of English Language, 2nd Ed. Unabridged (1987), which defines department in the retail store context as “a section of a retail store selling a particular class or kind of goods.”   Id., 584.   The plaintiff then argues that courts throughout the country have used this common understanding of departments when discussing the various sections of a food store, including the frozen food and dairy departments.

The defendants argue that the language is ambiguous because it is susceptible of two reasonable meanings.   In particular, they argue that the parties understood departments to mean only those areas along the perimeter of the store where services are provided to customers, e.g., the deli, meat and seafood departments.   They further argue that accepting the plaintiff's broad interpretation of “departments” would essentially read that term out of the SPA because every area along the shopping perimeter of the store would constitute a department.   Finally, the defendants argue that the need to examine extrinsic evidence is reinforced by the parties' use of the phrase “in or along the perimeter” because the literal perimeter of a store would include the areas behind the shopping area that are used for storage and other employee functions.   According to the defendants, applying the literal meaning of perimeter to the SPA would make little sense because coupons would never be placed in non-public areas along the physical perimeter of the store.

The court is unpersuaded by this last argument.   Viewing the definition of Business as a whole, the only reasonable meaning of “perimeter” is the perimeter of the shopping area of the store.   Any other interpretation is not reasonable precisely for the reason set forth by the defendants—no reasonable person would understand that the parties intended for coupons to be placed in non-shopping areas of the store.   Because the phrase “in or along the perimeter” is subject to only one reasonable interpretation it is not ambiguous and does not require, or even permit, the court to review extrinsic evidence to determine its meaning.

On the other hand, the court agrees with the defendants that the word “departments” must mean something other than a section or area along the perimeter of the store.   Were this not the case, there would be no reason to include the word in the definition of Business.   The parties could have achieved the result sought by the plaintiff simply by defining Business as disseminating coupons “in or along the perimeter of any retail store or establishment.”   The court simply cannot treat the word departments as mere surplusage and ignore it.   The rules of contract interpretation require the court to read the contract as a whole and in such a way as all of its terms have meaning.   To do so, the court must interpret “departments” as in some way modifying and limiting the area of the perimeter of the store covered by the definition of Business.

The plaintiff's reliance on the dictionary definition of the word department does not persuade the court otherwise.   The problem with the plaintiff's argument is that the dictionary definition it uses would again have the effect of making the parties' use of the word departments in the SPA redundant and meaningless.   The entire shopping area of a store, including the perimeter, is nothing more than a series or collection of sections “selling a particular class or kind of goods.”   Had the parties intended the word departments to have a such a broad meaning there would have been no reason to include it in the definition of Business in the SPA.

Furthermore, the fact that other courts have referred to the dairy and frozen food areas of supermarkets as departments in other contexts provides this court with little guidance on how it should interpret the word here.   There is no reason to believe that the word department had any special significance in any of those cases.   Nor is there any suggestion that its meaning was even at issue in any of those cases.   Thus, the court cannot conclude that those courts intended their choice of the word to have any particular import.

Here, the meaning of the word is at the heart of the case and the court must carefully consider what the parties intended by using the word.   While the plain and ordinary dictionary meaning of the word might be appropriate in some contexts, the court finds that it is not appropriate here where using that meaning would essentially render the word department meaningless in the parties' agreement.   In fact, Persky admitted during his deposition that using Alerion's proposed definition of Business would have this very result.⁴

Given the above, the court determines that the phrase “departments in or along the perimeter” as used in the definition of “Business” in the SPA is ambiguous.   Thus, in order to determine what the parties intended when they used that phrase, the court must consider the meaning of the words in light of the circumstances surrounding the parties when they entered into the contract.   The court must objectively consider all of the extrinsic evidence to determine what the parties intended when they inserted that phrase into their agreement.

Several factors lead the court to conclude that the parties intended departments in or along the perimeter of the store to include only those areas where products are sold with some direct service provided by store employees, like in the meat, seafood and deli departments.   First, that is all the real estate that the plaintiff owned when it sold Perimeter Marketing to the defendants.   In fact, at the time of the parties' negotiations the plaintiff knew that the very areas at issue here, shelf and freezer doors in the dairy, refrigerated and frozen food areas of stores, were controlled almost exclusively by NAM pursuant to long-term contracts NAM had with various retailers like Safeway.⁵  Consequently, it is not reasonable to believe that the parties intended that the defendants were buying opportunities and rights the plaintiff did not have to sell.

The plaintiff attempts to avoid this conclusion by arguing that Perimeter Marketing's new business model was not tied to the Label$Dollars dispensers in certain areas of stores, but was intended to expand to other ways of displaying coupons along the entire perimeter of stores.   In support of this argument, the plaintiff points to the new devices they were considering.   Ex. 324.   The problem with this argument is that there is no evidence that any of these concepts were ever shown to or discussed with the defendants.   To the contrary, the only credible evidence is that the only business that was discussed with the defendants was Perimeter Marketing's then existing business of distributing coupons in specified areas that had common characteristics located along the perimeter of retail stores.

Second, Failing and Persky, during this litigation, both recognized that, in the context of this transaction, department had a meaning distinct from a section selling a particular class or kind of goods.   The evidence showed that when the plaintiff became aware that the defendants might be engaging in the Business following their notice of termination, Alerion sent its market consultant, Convergence, to survey and document what the defendants were doing.   Convergence is a company that specializes in in-store merchandising and logistics.   Convergence took pictures of the areas where the defendants had placed coupon boxes.   It captioned those photos and described the areas where it found the coupons as the “Dairy Section” and the “Prepared Meat Section.”   Ex. 250.   Alerion did not simply provide a copy of the document it received from Convergence to the defendants and the court.   Instead, Persky altered the document, changing the word “Section” wherever it appeared to “Department.”

Persky's conduct is significant for a number of reasons.   First, it shows that he did not view section and department to be interchangeable, as the plaintiff claims.   If he did, there would have been no need to alter the document.   Second, it shows that Convergence, a company relied on by the plaintiff for its in-store marketing expertise, did not identify the dairy and prepared meat sections of the store as departments.   The fact that Persky felt it necessary to change Convergence's designation only confirms that Persky also believed that Convergence's word choice was important.   Finally, the fact that Persky would alter the document and only admit to it when confronted with the Convergence document on cross examination causes the court to question Persky's credibility on other matters, like whether Alerion had really developed a new strategy for Perimeter Marketing that went beyond distributing coupons in specific departments.

Failing similarly acknowledged in this litigation that the words department and section are not synonymous.   At his deposition, Failing, the godfather of in-store couponing, was asked whether the dairy area of a store was a section or a department.   He testified that it was a section.   Significantly, he did not say that the words were interchangeable.   It is also significant that he made this admission in the context of this litigation when he must have understood that the definition of departments was central to the outcome of this matter.⁶

Failing's understanding that the dairy area of a store was not intended by the parties to be included as a department in their transaction is also consistent with marketing materials Perimeter Marketing was using at the same time Alerion was in discussions with Valassis for the sale of the company.   For example, Perimeter Marketing made a presentation to Johnson & Johnson (“J & J”) in November 2007.   Ex. 213.   The only program offered to J & J in that presentation was the distribution of Label$Dollars in “Service Deli, Fresh Meat and Fresh Seafood departments.”  Id., at MG001808, MG001811.   The presentation further stated that “Label Dollars are distributed at the perimeter” and specifically identified the seafood, deli and meat areas.   Id., MG001815.   One schematic in the presentation showed a store layout identifying the “Meat and Seafood Department” and the “Deli Department and In–Store Prepared Meals.”   That same schematic showed the Dairy, Frozen Food and Wine areas along the perimeter of the store but did not identify them as departments.  Id., MG001816.⁷  Finally, one schematic discussed using the power of the perimeter to drive consumers from the seafood, meat and deli departments to “J & J brands in center store” even though the schematic showed the pharmacy area, where J & J's products were located, along the perimeter.   Clearly, Perimeter Marketing did not view that perimeter area as a department in which it would place coupons.

Other Perimeter Marketing documents prepared around this same time similarly showed that the plaintiff did not consider areas that happened to be along the outer edge of the store to be departments along the perimeter of the store.   Much as Perimeter Marketing identified the pharmacy area as part of the “center store,” it also identified frozen and refrigerated products that might be physically located on the perimeter as “center store categories.”   Ex. 222, MG00177;  Ex. 207 (2008 Planning Discussion presented to Kraft).   In fact, Persky admitted, again on cross examination, that “center store” is a term of art in the supermarket industry and can include products that happen to reside along the perimeter of the store.   Consequently, it is clear to the court that at the time they entered into the SPA the parties understood that not all areas located along the physical perimeter of a store were intended by them to constitute “departments in or along the perimeter” of such store.

The plaintiff attempts to counter these facts in a number of ways.   First, it argues that the evolution of the contract language proves that the parties did not intend “Business” to be limited to specialty departments like meat, seafood and deli.   Alerion notes that early drafts of the SPA defined the contours of the earn-out and non-compete provisions of the contract in relationship to coupons tied to scales or other devices in specialty departments.   Exs. 101–02.   Alerion argues that the removal of these qualifiers in the final version of the SPA is inconsistent with the defendants' interpretation, which essentially reinserts these terms into the parties' agreement.

The court is not persuaded for a number of reasons.   First, the definition of Business that appears in the final SPA was drafted by Alerion, not Valassis.   Ex. 104.   Alerion offered no credible evidence to the contrary.   No e-mails or other documents showed that the term was the product of negotiation between the parties, and Alerion did not offer the testimony of any of its attorneys who were involved in the drafting process.   The only testimony Alerion offered regarding the negotiations was from Persky, whose recollection was vague and lacked little of the detail one would expect for what Persky claimed was such an important term.

Given that the definition of Business was drafted by Alerion, the court does not read anything from the drafting history that is instructive as to the defendants' intent.   Furthermore, as noted above, any ambiguity in the language of a disputed term must be construed against the drafter of that term, in this case Alerion.

Finally, the credible evidence established that the reason Alerion gave for eliminating the references to specialty department scales was its concern that Valassis would try to avoid its earn-out payment obligation by distributing the coupons in those departments through some device other than the Label$Dollars machine.   Even Persky admitted during his testimony that this was the primary reason the language was changed.   There is simply no credible evidence that the change in language, as drafted by Alerion, was intended by the parties to expand the scope of the transaction to cover areas within stores that Alerion had no right to and for which it had never marketed.

Plaintiff's second argument in support of its interpretation is that it was selling Valassis an opportunity to expand into the entire perimeter of the store.   Hence, the definition of Business must be read broad enough to encompass this entire opportunity.   As noted above, there is simply no credible evidence that the parties ever discussed this expanded business opportunity.   To the contrary, the credible evidence established that the only opportunity Alerion presented to Valassis was the chance to gain access to the only real estate not dominated by NAM—departments along the perimeter where coupons were not placed on shelves or on refrigerated and freezer doors.

Finally, the plaintiff relies on the testimony of its expert witness, Michael Goodman.   In addition to teaching marketing at NYU, Goodman has 35 years of experience in retail marketing.   Not only did he work for consumer product companies like Kraft and Unilever, Goodman also worked at Act Media, the company at which Failing developed the in-store coupon dispensing box.   According to Goodman, based on his experience in the industry, all stores are organized into departments.   A sub-group of departments are specialty or service departments that are manned by personnel who provide specific assistance to consumers.   These service or specialty departments include meat, seafood, bakery, and produce.   The dairy area, while not a service or specialty department, is a department within the grocery store and supermarket industry.

The court did not find Goodman's opinions useful for several reasons.   First, this case involves an issue of contract interpretation based on what the parties intended when they entered into their agreement.   Goodman did not participate in those negotiations.   Nor did he participate in the drafting of the SPA. There is simply no evidence that the parties intended to incorporate his understanding of department into their contract.

Second, Goodman's approach to defining departments is the same as the plaintiff's.   According to Goodman, every product in a store is in some department.   Consequently, every area of the perimeter of the store is made up of one or more departments.   This means that wherever coupons are placed along the perimeter of a store they would be in a department.   Just like with the plaintiff's reliance on the dictionary, the use of Goodman's definition of department would render the word meaningless in the parties' agreement.   For the reasons set forth above, the court cannot simply read the word out of the SPA.

Third, Goodman presented no support for his opinion.   For example, he referenced no industry publications defining the term that were available to or reviewed by the parties when they entered into the SPA.

Fourth, Goodman's understanding of the industry, in the context of the parties' transaction, actually supports the defendants' more limited interpretation of departments.   For example, Goodman testified that perimeter departments are those on which people select their favorite stores.   He then testified that people do not tend to select stores based on the frozen food or milk areas.   He further testified that, in industry parlance, “at shelf” is something different than perimeter departments.⁸

Fifth, Goodman was involved in the preparation and/or presentation of a number of the marketing pieces discussed above that show a more narrow understanding of a department within Alerion during the time of the parties' negotiations.   Exs. 207, 213.

Finally, Goodman is far from a disinterested expert witness.   Since Alerion's acquisition of Label$Dollars, Goodman has worked as a consultant for Alerion in its efforts to market the concept to stores and consumer product companies.   In that role, he (or his company) received $15,000 a month in consulting fees.   Having been significantly involved in the very business at issue here, Goodman came across as much as an advocate as an expert.   For these reasons, the court gives little or no weight to his testimony.

Based on all of the above, the court concludes that the parties intended “departments in or along the perimeter” to mean those departments along the shopping perimeter of stores where at-shelf couponing does not take place.   These departments are also referred to as service departments because store employees typically provide direct service to customers.   While the parties' discussions focused on the departments in which Perimeter Marketing had a presence—meat, seafood, deli, the definition of departments would also encompass other departments along the perimeter such as bakery, produce and the florist.   What it does not include are those areas along the perimeter where goods are simply placed on shelves for customers to select.   This would include the display cases in which pre-packaged frozen foods and dairy products are sold.

C. The Defendants' Conduct

There is no dispute over what the defendants did after providing notice that they were no longer going to engage in the business.   They placed coupon boxes at-shelf in the dairy and refrigerated product sections of various stores.   Ex. 350.   The plaintiff does not claim that the defendants have since the commencement of the Suspension Event distributed any coupons in departments as defined by the court above.   Consequently, the defendants have not engaged in the business during the suspension period.

IV. CONCLUSION

For all the foregoing reasons, judgment shall enter for the defendants, Valassis In–Store Solutions, Inc. and Valassis Communications, Inc. on Count One of the plaintiff's complaint.

Bright, J.

FOOTNOTES

FN1. The defendants' Ninth Special Defense claims that the court lacks subject matter jurisdiction over the plaintiff's claims due to Alerion's failure to register with the Connecticut Secretary of State in violation of General Statutes § 34–233.   Although a court must address issues of subject matter jurisdiction first when they are raised, the defendants have presented no evidence to the court in support of this claim, nor have they briefed it.   This court has recently ruled that an analogous claim raised under General Statutes § 33–412 can only be decided after the presentation of evidence on the issue.  Boston Property Exchange Transfer Co, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Docket No X04 HHD CV 11 6026660 S, Superior Court, Complex Litigation Docket at Hartford, (October 16, 2012, Bright, J.), at 23–24.   The same is true here.  FN1. The defendants' Ninth Special Defense claims that the court lacks subject matter jurisdiction over the plaintiff's claims due to Alerion's failure to register with the Connecticut Secretary of State in violation of General Statutes § 34–233.   Although a court must address issues of subject matter jurisdiction first when they are raised, the defendants have presented no evidence to the court in support of this claim, nor have they briefed it.   This court has recently ruled that an analogous claim raised under General Statutes § 33–412 can only be decided after the presentation of evidence on the issue.  Boston Property Exchange Transfer Co, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Docket No X04 HHD CV 11 6026660 S, Superior Court, Complex Litigation Docket at Hartford, (October 16, 2012, Bright, J.), at 23–24.   The same is true here

FN2. The parties' agreement contains a jury trial waiver provision which is not in dispute..  FN2. The parties' agreement contains a jury trial waiver provision which is not in dispute.

FN3. Essentially, Alerion gave Valassis a “money back guarantee” on the business.   The evidence established that such a provision was necessary, because without it Valassis would have walked away from the transaction, and Alerion was willing to do almost anything to sell the business..  FN3. Essentially, Alerion gave Valassis a “money back guarantee” on the business.   The evidence established that such a provision was necessary, because without it Valassis would have walked away from the transaction, and Alerion was willing to do almost anything to sell the business.

FN4. Persky's attempt to retreat from this testimony both at his deposition and at trial was, as was true of much of Persky's testimony on any issue in dispute, simply not credible..  FN4. Persky's attempt to retreat from this testimony both at his deposition and at trial was, as was true of much of Persky's testimony on any issue in dispute, simply not credible.

FN5. This was yet another fact on which Persky unconvincingly equivocated..  FN5. This was yet another fact on which Persky unconvincingly equivocated.

FN6. The plaintiff did not call Failing to testify at trial..  FN6. The plaintiff did not call Failing to testify at trial.

FN7. In at least one schematic in two presentations, the plaintiff identified the dairy area as the “Dairy Department.”   Exs. 109, 211.   Exhibit 109 was dated July 18, 2006, more than a year before Alerion first spoke to Valassis about the possible sale of Perimeter Marketing.   Consequently, it is of little relevance, particularly compared to documents prepared by Alerion at or around the time of the parties' negotiations.   Ex 211, dated October 23, 2007, was part of Alerion's presentation to NAM regarding the possible sale of Perimeter Marketing.   In the context of that proposed transaction, it would make little sense for Alerion to include the “Dairy Department” as part of the business it was selling as NAM already had control of at shelf couponing in that area..  FN7. In at least one schematic in two presentations, the plaintiff identified the dairy area as the “Dairy Department.”   Exs. 109, 211.   Exhibit 109 was dated July 18, 2006, more than a year before Alerion first spoke to Valassis about the possible sale of Perimeter Marketing.   Consequently, it is of little relevance, particularly compared to documents prepared by Alerion at or around the time of the parties' negotiations.   Ex 211, dated October 23, 2007, was part of Alerion's presentation to NAM regarding the possible sale of Perimeter Marketing.   In the context of that proposed transaction, it would make little sense for Alerion to include the “Dairy Department” as part of the business it was selling as NAM already had control of at shelf couponing in that area.

FN8. The plaintiff argues that there is a substantive difference between perimeter departments and departments in or along the perimeter of the store.   It claims that had the defendants intended the contract to cover only the former, they should have said so in the SPA. This argument again ignores the fact that Alerion drafted the definition of Business and is responsible for any ambiguity that exists.   The plaintiff offered no evidence that within the context of the negotiations the defendants should have appreciated the subtle linguistic nuance upon which Alerion now relies..  FN8. The plaintiff argues that there is a substantive difference between perimeter departments and departments in or along the perimeter of the store.   It claims that had the defendants intended the contract to cover only the former, they should have said so in the SPA. This argument again ignores the fact that Alerion drafted the definition of Business and is responsible for any ambiguity that exists.   The plaintiff offered no evidence that within the context of the negotiations the defendants should have appreciated the subtle linguistic nuance upon which Alerion now relies.

Bright, William H., J.