August 18, 2007
By Chuck Wallace

NASCAR drivers haven’t been without their big victories lately—including Tony Stewart’s win at the Brickyard and Kurt Busch’s dominating performance at Pocono. But NASCAR itself scored a big win last Monday in its high-profile court battle with AT&T when the court of appeals tossed out the injunction that allowed AT&T to sponsor the Richard Childress Racing-owned 31 car despite Sprint/Nextel’s bargain with NASCAR to be the exclusive wireless telecommunications sponsor in the Cup series. While the case isn’t over, the AT&T logo will be coming off the 31, perhaps as early as this week’s race in Michigan, and AT&T’s decision in June to extend its RCR sponsorship through 2010 now appears to have been hasty.

In overruling AT&T’s injunction, the U.S. Court of Appeals for the Eleventh Circuit concluded that AT&T did not have “standing” to sue NASCAR to enforce the wording of the grandfather clause through which NASCAR allowed RCR to keep its Cingular sponsorship despite the provision in NASCAR’s contract with Sprint/Nextel that prohibited other wireless telecommunications companies, expressly including AT&T, from sponsorship activities in the Cup series. Without “standing”, AT&T’s claim is improper and the court of appeals dismissed it.

In the legal world, “standing” means a party’s right to make the claim that it is asserting in court. Generally, in order to enforce a contract in court, the person or entity asserting the contractual right must be a party to the contract. In other words, if I sell you my car and in the sale agreement I promise that the car has never been in an accident, and your best friend finds out that the car was in an accident, he cannot sue me for breach of that promise—you have to. After all, I did not make the promise to him, I made it to you. In the AT&T case, the grandfather clause was part of an agreement between NASCAR and RCR that did not include Cingular. Therefore, by the general rule, Cingular cannot sue NASCAR to enforce a promise NASCAR made to RCR. (Cingular and AT&T are the same company—a more detailed history may be found in my previous column covering this case: Understanding The AT&T vs. NASCAR Mess).

There is, however, an exception to the requirement that a person or entity must be an actual party to the contract in order to seek enforcement of that contract in court. Most jurisdictions recognize that there are instances where a third-party (someone not actually party to the contract) may nonetheless be an intended beneficiary of the contract such that the person is allowed to enforce the contract in court. In such instances, that person or entity is called a “third-party beneficiary.”

How a person or entity qualifies as a legitimate third-party beneficiary varies from state to state. Both the trial court and the court of appeals used Georgia law to determine AT&T’s rights as a third-party beneficiary (though this is curious because neither NASCAR nor RCR, the two parties to the contract, are Georgia companies), and in Georgia it isn’t enough that a third-party merely benefited from a contract. Instead, the parties to the contract must have actually intended for the third-party to benefit. In other words, the third party’s benefit cannot simply be a side effect of the contract, but rather a result intended at the time of the contract’s formation.

When the trial judge issued the injunction ordering NASCAR to allow the AT&T logo on the 31 car, he found that the grandfather clause between NASCAR and RCR did not limit Cingular to a specific name or logo. He determined that Cingular (AT&T) was indeed a third-party beneficiary because NASCAR and RCR intended to for Cingular to benefit from the grandfather agreement. The judge noted that “the [agreement] specifically names [Cingular] and allows for ‘Cingular branding’” and pointed out that Georgia courts have recognized that third parties expressly named in an agreement have a better chance at being legitimate third-party beneficiaries than when the contract does not actually name them. The trial judge determined that the grandfather agreement not only benefited RCR by protecting its existing sponsorship arrangement when Sprint/Nextel’s exclusivity came into effect, it also benefited Cingular because it allowed Cingular to remain a sponsor in NASCAR—something that most marketing experts will tell you is very valuable.

When I wrote my previous explanation of this case and how I thought it would all shake out, I admit that I failed to fully consider the third-party beneficiary issue and how it affected AT&T’s standing. Standing is something that can be referred to as a preliminary issue—if you don’t have it, you can’t continue. But many lawyers would tell you that such preliminary issues are often where a case is decided. And courts like to decide cases on such issues because (1) they are very important—the case must, after all, be proper to proceed, and (2) they avoid lengthy and costly trials where people’s credibility and reputation are often put on the line.

In reviewing the case on appeal, the 11th Circuit disagreed with the trial judge that AT&T was a proper third-party beneficiary. The appeals court determined that the grandfather agreement was only intended to keep RCR from losing its sponsor—something we all know is necessary for competition in the Cup series—and not actually intend to benefit Cingular at all. “Any benefit to Cingular resulting from NASCAR’s commitment to grant RCR the option to continue and renew its sponsorship agreement was merely incidental to NASCAR’s intended purpose of preserving RCR’s choice of sponsorship,” the appeals court said. Because it determined that RCR and NASCAR did not intend to benefit Cingular when creating the grandfather agreement, the court of appeals concluded that AT&T was not a third-party beneficiary and thus had no right to enforce the language of that agreement in court.

That Cingular (AT&T) benefited from the grandfather clause is really indisputable. The question, however, is whether NASCAR and RCR actually intended to benefit Cingular or was the intention simply, as the appeals court concluded, to keep RCR from being left without a sponsor once the Nextel exclusivity contract came into effect.

Sports law professor Mark Conrad suggests that it might be impossible to separate the two: if the grandfather clause intended to benefit RCR by allowing the Cingular sponsorship to continue, it necessarily likewise intended to benefit Cingular. (Conrad’s article is available at Sports Law Blog). One can certainly see the value in this logic given the mutually beneficial nature of a NASCAR sponsorship agreement. On the other hand, it is quite possible that RCR and NASCAR never intended whatsoever to benefit Cingular, and the grandfather agreement served only to maintain the financial benefit to RCR of having a major sponsor that would have otherwise been lost when the Sprint/Nextel exclusivity came into effect.

If this were the case, however, I would argue that such a conclusion requires a far more thorough determination of the facts surrounding RCR and NASCAR’s intent at the time of contracting than what is currently in the record. Questions of fact are supposed to be determined by the trial court, and reviewed by the court of appeals with deference—and a party’s intent at the time of contract is certainly a question of fact. Instead of finding no intent to benefit Cingular (based on very little actual “facts”) and dismissing AT&T’s third-party beneficiary claim outright, the court of appeals perhaps should have remanded the case to the trial court to determine the facts as they pertained to RCR and NASCAR’s intent at the time of contracting.

At this point, however, AT&T’s options are few. Because the ruling is from a federal appeals court, the only possible appeal that AT&T has would be to the U.S. Supreme Court, and a hearing there in this case is highly unlikely. AT&T could also petition the 11th Circuit for a rehearing “en banc,” which means that the entire court would review the case to determine whether last week’s ruling (by a three-judge panel) was correct. En banc hearings are not common, but not impossible to obtain. Otherwise, AT&T’s third party beneficiary claim—the basis of the order for the injunction issued by the trial judge—is now dismissed, and though AT&T has several other claims that remain unresolved, they are considerably weaker. With the injunction overruled, NASCAR may again order the AT&T logo to be removed from the 31 car.

And then there’s the matter of NASCAR’s countersuit against AT&T for $100 million. I would suspect that NASCAR would offer to dismiss the counterclaim if AT&T would dismiss its case entirely—but there’s some pretty bad blood there now … they may continue to fight it out. It is worth noting that had RCR joined the case along with AT&T against NASCAR to enforce the grandfather clause, this case might be very different today (because as an actual party to the grandfather clause, RCR wouldn’t face the same issue of standing). Of course, we all know Richard is a whole lot smarter than to take NASCAR to court.

The thoughts and ideas expressed by this writer or any other writer on Insider Racing News, are not necessarily the views of the staff and/or management of IRN.