Appellate Court Enters $4.4M Judgment Against Yahoo for Breach of Contract Regarding NCAA Perfect Bracket Contest

NCAA BracketsThe U.S. Court of Appeals for the Fifth Circuit reversed a judgment in favor of Yahoo after deciding that it breached its contract with SCA Promotions by backing out of a contract to pay contest winners who correctly predicted the 2014 NCAA tournament bracket. The court of appeals awarded $4.4 million to SCA to enforce Yahoo’s contractual obligation to pay cancellation fees.

Facts of the Case

SCA provides risk management for prize promotions. Yahoo contacted SCA in connection with its plan to offer a $1 billion prize to contestants who completed a “perfect” NCAA bracket by correctly predicting the winners of all 63 games before the 2014 men’s basketball tournament began. SCA agreed to pay the winner if any contestant managed to create a perfect bracket. In exchange for that agreement, Yahoo agreed to pay an $11 million fee.

The contract permitted Yahoo to cancel the contract prior to the first tournament game by paying a cancellation fee. The amount of the fee depended on when Yahoo canceled.

After signing the contract and paying a $1.1 million deposit, Yahoo learned that Quicken Loans was sponsoring a similar “perfect bracket” contest with a $1 billion prize. The Quicken contest was underwritten by Warren Buffett and Berkshire Hathaway. Yahoo made an agreement with Quicken to cosponsor the contest. It then notified SCA that it was cancelling its contract.

Yahoo gave notice of cancellation on January 27, 2014. Under the terms of the contract, Yahoo was responsible for a cancellation fee of 50% of the contract fee. Yahoo demanded a return of its $1.1 million deposit without penalty. SCA demanded payment of $4.4 million, consisting of 50% of the $11 million contract fee less the deposit.

Breach of Contract Lawsuit

SCA sued Yahoo for breach of contract. Yahoo counterclaimed, arguing that SCA breached the contract by failing to obtain underwriting coverage required by the contract and by breaching a confidentiality agreement.

The district court agreed that SCA breached the contract, but decided that SCA should receive damages of 50% of Yahoo’s deposit, or $550,000. It therefore entered judgment against SCA for $550,000, representing the balance of the deposit that SCA was not entitled to keep. The court also dismissed Yahoo’s counterclaims as unsupported by the facts. SCA appealed and Yahoo cross-appealed.

Fifth Circuit Decision

The Fifth Circuit Court of Appeals agreed that Yahoo did not prove a breach of contract on either of its counterclaims. It affirmed the dismissal of those claims.

The primary contract dispute was whether “50% of the fee” referred to 50% of the initial deposit or 50% of the fee that would become payable if the contract had been completed. The district court agreed with Yahoo that “the fee” referred to the initial deposit paid prior to cancellation, not the full fee. The court of appeals disagreed in a decision that rendered judgment for SCA.

The district court concluded that the $11 million fee was not expressly mentioned in, and therefore was not part of, the contract. The contract referred to “invoices” that stated the fee, but it did not expressly describe the invoices to which the contract referred.

Giving effect to the obvious intent of the parties, the court of appeals disagreed with the district court that the invoices attached to the contract were not part of the contract. One of the contract terms provided that the contract, including its attachments, represented the final agreement of the parties. The court of appeals concluded that the invoices were clearly part of the contract — a conclusion that seems obvious if the contract’s requirement that Yahoo pay a fee is to have any meaning at all.

The court of appeals also decided that 50% of the “contract fee” referred to the full fee, not to the deposit. That conclusion also seems obvious, since a deposit is a partial payment of a fee and is not itself a fee. That conclusion was bolstered by contract language providing that the cancellation fee “will be” paid upon cancellation. The deposit had already been paid, and the district court’s interpretation gave no effect to the contract’s “forward looking” language.

A limitation of liability provision in the contract stated that Yahoo’s contractual liability was limited to “the amount of fees paid.” The court of appeals disagreed with the district court that the provision limited Yahoo’s liability for breach of contract to the deposit it had paid. That interpretation rendered meaningless the requirement to pay different cancellation fees depending upon the date of cancellation. Reading the contract as a whole, the court of appeals interpreted the limitation of liability provision as if it said “the amount of fees [to be] paid.”

Lessons Learned

Yahoo clearly owed the $11 million cancellation fee. As corporations often do when significant funds are at stake, it made a game effort to avoid paying its contractual obligation. It lost in the end, but only after district court and appellate proceedings that probably resulted in significant legal fees for both parties. That’s good for the lawyers, but not so good for taxpayers who fund federal courts that are bogged down in deciding commercial disputes involving businesses that don’t want to pay their debts.

The dispute was only possible because the contract was not as clear as it should have been. The lesson to learn is that contracts need to be drafted with utmost care. The contract at issue in this case could have been improved by:

  • expressly stating that the contract fee would be $11 million, rather than referring to an attachment to the contract;
  • expressly stating that the cancellation fee would be a percentage of the $11 million contract fee, rather than leaving the term “fee” undefined; and
  • making clear that the limitation of liability referred to the full contract fee, rather than “fees paid.”

Those changes would have been simple to make. When a contract charges substantial fees, it is worth investing time in tailoring the contract to reflect the specific agreement rather than using a form contract that refers to “attachments.” In the end, the appellate court gave SCA the breach of contract damages it deserved, but the legal dispute could have been avoided by drafting the contract more carefully before it was signed.

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