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08/09/94 ANTHONY R. GOLD v. ZIFF COMMUNICATIONS

August 9, 1994

ANTHONY R. GOLD, PC BRAND, INC., SOFTWARE COMMUNICATIONS, INC., AND HANSON & CONNORS, PLAINTIFFS-APPELLANTS,
v.
ZIFF COMMUNICATIONS COMPANY, D/B/A ZIFF-DAVIS PUBLISHING COMPANY, DEFENDANT-APPELLEE.



Appeal from the Circuit Court of Cook County. Honorable Arthur L. Dunne, Judge Presiding.

Released for Publication September 13, 1994. Petition for Leave to Appeal Denied December 6, 1994.

DiVito, Hartman, Scariano

The opinion of the court was delivered by: Divito

Presiding Justice DiVito delivered the opinion of the court:

Plaintiffs Anthony Gold (Gold), PC Brand, Inc. (PC Brand), Software Communications, Inc. (SCI), and Hanson & Connors, Inc. (Hanson) filed suit against defendant Ziff Communications Company, doing business as Ziff-Davis Publishing Company (Ziff), seeking a declaratory judgment, an injunction, and past damages arising from Ziff's alleged breach of an agreement which provided that any company controlled by Gold could advertise in Ziff's publications at reduced advertising rates. In response, Ziff filed a counterclaim alleging plaintiffs had violated the agreement and sought damages and a declaratory judgment that it had the right to terminate the agreement. Following discovery, the circuit court found that Gold did not control PC Brand within the meaning of the contract, and that lack of control constituted a material breach of the agreement which excused any further performance on the part of Ziff. The court then entered summary judgment in favor of Ziff on plaintiffs' complaint and on count I of Ziff's counterclaim, awarding Ziff $6,562,555.26 in compensatory damages.

On appeal, plaintiffs contend that (1) the circuit court erroneously entered summary judgment in favor of Ziff and against them on the issue of whether Gold controlled PC Brand within the meaning of the agreement; (2) the court improperly found as a matter of law that Gold's failure to control PC Brand constituted a material breach which excused any further performance by Ziff under the contract; (3) genuine issues of material fact remained regarding the appropriate measure of damages, if any, to be awarded; and (4) the court abused its discretion in striking their expert designation and discovery requests.

Ziff publishes, among other magazines, PC Magazine, PC Tech Journal, and PC Week. PC Magazine, a publication targeted at individuals and entities generally interested in, or in the market for, computer hardware and software products, was founded by Gold in October 1981. In November 1982, Ziff's corporate predecessor entered into various agreements with Gold whereby it obtained ownership and control from Gold of the corporation that owned PC Magazine. As consideration for the sale, Gold received a cash down payment and additional installment payments which were tied to revenues over the following five years. In a letter agreement dated November 19, 1982, which was prepared by Ziff's general counsel, J. Malcolm Morris (Morris), Gold also received the right to purchase a defined number of advertising pages in PC Magazine at an 80% discount of the advertising fee published by Ziff on its "rate cards," i.e. the rates at which Ziff generally offered to sell advertising space to advertisers, as well as the right to use PC Magazine's subscribers lists six times a year at no charge (hereinafter "the Ad/List agreement"). The Ad/List agreement provided that the rights were personal and could be used only by Gold or a company "owned and controlled" by him.

On September 15, 1986, Ziff and Gold entered into a letter agreement amending the Ad/List agreement. The amended Ad/List agreement provided that through December 31, 1992, Gold was permitted to purchase a limited amount of advertising space in Ziff's publications, equal to the average number of advertising pages used by each of the four largest advertisers in the preceding six issues, at a reduced rate that is 23.53% of Ziff's "then current rate card" fees. The 23.53% figure was suggested by Ziff to approximate its costs. Under the amended agreement, Gold was still entitled to use the subscribers lists six times each year.

The amended Ad/List agreement further provided that the rights afforded to Gold were personal rights and that the advertising pages and subscribers lists could be used only by him personally or "by a company which [he] controlled (that is, in which [Gold] owned at least 51% of the voting stock) and may not be assigned, transferred or allocated to any other person or entity."

The amended Ad/List agreement also provided that Ziff had the right to terminate the agreement in the event of any breach by Gold of any material provision of the agreement if the breach "continued uncured for thirty days after notice of such breach to [Gold] from Ziff-Davis."

In late 1987, Gold and Stephen Dukker (Dukker) decided to take advantage of the discounted advertising and other rights availableunder the amended Ad/List agreement by forming a corporation which would sell IBM-compatible personal computers by mail. Dukker's lawyer, Richard Friedman, suggested that a voting trust (whereby voting rights would be separated from other rights incident to stock ownership) be used in the formation of the corporation as a means of best utilizing the rights under the amended Ad/List agreement. After the concept of a voting trust was rejected as inconsistent with the amended Ad/List agreement, Gold and Dukker exchanged several versions of a "New Business " memorandum between November 24 and December 21, 1987. Each version, however, stated that Dukker would be the Chief Executive Officer as well as the Chief Operating Officer of the new company, and that he would have responsibility "for all matters," subject to review by the Board of Directors. Each version also provided that Gold would sell his rights under the amended Ad/List agreement to the new business in consideration for an amount equal in value to the discount received under the amended Ad/List agreement. Later versions of the memorandum provided that the new corporation would initially issue 90% of the stock to Gold and the other 10% to Dukker, but in each of the next four years, Gold would sell to Dukker, "at a nominal cost," 8% of the shares, and on the fifth year, he would transfer 9%. The fifth transfer was scheduled to occur on January 1, 1993, the day after the amended Ad/List agreement expired.

In January 1988, Gold and Dukker formed PC Brand. The Certificate of Incorporation authorized a single class of common stock comprising 1000 shares. The certificate further provided that "whenever the corporation shall be authorized to issue only one class of stock, each outstanding share shall entitled [sic ] the holder to notice of, and the right to vote at, any meeting of stockholders." It also provided that both Gold and Dukker would be directors of the corporation, and would serve in that capacity until December 31, 1992. Further, any change in the number of directors could be made only by unanimous board action, and if one director died or became disabled, the surviving able director would be the sole director until January 1, 1993. Finally, the certificate stated that until December 31, 1992, it could be amended only by unanimous consent of the shareholders. The original by-laws, adopted by Gold as the sole incorporator, contained corresponding provisions.

Following incorporation, Gold held 90% of the outstanding shares of PC Brand while Dukker held the remaining 10% interest. Various interrelated agreements were entered into between Gold, Dukker, and PC Brand, including a shareholder agreement that provided that "in the event of a proposed [s]ale of [PC Brand], Gold shall transfer to Dukker prior to the closing of such sale, stock such that Dukker's stock shall equal 51% of the company." The agreement also provided that on January 1, 1989 and on January 1st of each of the three following years, Gold would transfer 8% or 80 shares to Dukker, and on January 1, 1993, Gold would transfer another 9% of the outstanding shares of the corporation. Thus, under the agreement, Dukker would possess 51% of the outstanding shares on January 1, 1993, the day after the amended Ad/List agreement expired, or sooner if PC Brand was sold.

Gold, Dukker, and PC Brand also entered into an "Assignment of Advertising Rights Agreement" in which Gold assigned his right to reduced advertising fees in Ziff's publications to the company, and an employment agreement which provided that Dukker would be PC Brand's President and Chief Operating Officer until he acquired 51% of the outstanding shares, when he would assume the title of President and Chief Executive Officer. In May 1988, PC Brand becameoperational and commenced placing advertisements in Ziff's publications at the reduced rate under the amendedAd/List agreement. At approximately the same time, Gold formed Hanson & Connors to take further advantage of the benefits available under the amended Ad/List agreement. Hanson sold computer software by mail under the name "PC Express."

In May 1988, Ziff refused to carry Hanson's full page ads featuring products of other manufacturers, even though it had run similar ads for SCI, Gold's company which previously conducted the same business. On July 14, 1988, Ziff asked Gold for documentation which demonstrated that he controlled the companies that sought to place ads under the amended Ad/List agreement. Gold offered an affidavit which stated that he held 90% of the outstanding shares of PC Brand and 100% of the outstanding shares of Hanson, and that the corporate records of both documents would be available for inspection upon request. Ziff sought to examine the documents, and in August or September, copies of the Certificate of Incorporation, the by-laws, the assignment of advertising rights agreement, the shareholder agreement, and the employment agreement between Dukker and PC Brand were provided.

After reviewing the documents, Ziff concluded that Gold possessed nominal, rather than real ownership of 90% of PC Brand's voting stock and that Dukker was vested with actual voting control of the company. Reasoning that Gold did not really own at least 51% of the voting stock of PC Brand and that Gold's rights to reduced advertising rates under the amended Ad/List agreement were non-assignable "personal rights," Ziff concluded that PC Brand was not entitled to the reduced advertising rates. On November 8, 1988, Ziff notified Gold and PC ...


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