Professor Bainbridge...on law, politics, religion, culture & food

The Hammer Museum Backstory

The Law Blog reports:

There’s a fun Page-One WSJ story on a bubbling trademark spat between the Hammer Museum in Haines, Alaska, and the Hammer Museum in L.A.

The Alaska Hammer, created in 2000, is dedicated to the oldest human tool (check out wicked-cool slide show). The museum took in $8,104 in revenue last year (half from T-shirt sales). The L.A. Hammer, the renowned fine-art musuem formerly known as the Armand Hammer Museum of Art, dropped the “Armand” and now calls itself the Hammer Museum. In 2006, it booked about $10 million in sales.

Last year, the L.A. Hammer applied to trademark the name — 26 lawyers are listed on its trademark application. When Dave Pahl, the founder of the Alaska museum, found this out this past summer, he filed his own trademark application online without a lawyer.

Both applications are pending at the U.S. PTO.

Actually, the LA Hammer is still officially named the Armand Hammer Museum of Art and Culture Center, although it uses The Hammer in most contexts. In any case, there is a backstory to that name that will be of interest to business associations and corporations faculty, students, and lawyers.

Kahn v. Sullivan, 594 A.2d 48 (Del. Sup. Ct. 1991), illustrates one major problem with shareholder derivative litigation; namely, how settlement practices may result in meritorious suits being settled on terms that are unfavorable to shareholders. Bear in mind, of course, that the other major problem is nonmeritorious suits that result in settlements for nuisance value. The most important observation is that the plaintiffs’ lawyers can be bought off, the defendants may have a strong incentive to do so, and the court is hard-pressed to withhold approval.

Armand Hammer was the CEO of Occidental until his death in 1990 at age 92. He had invested $150,000 of his own and his wife’s money in Occidental in 1957, when it was worth little and had built it up through bribery, guile, and sheer gall. Christie Brown, The Master Cynic, Forbes, Oct. 17, 1994, page 364, at 368. He pled guilty to illegal contributions to Richard Nixon’s 1972 presidential campaign and was let off with a $3,000 fine and one year probation after arriving at court in a wheelchair and claiming that he was at death’s door. After the sentencing he had a miraculous recovery. His favorite motto was screw them before they screw you. In his later years he owned only 1 percent of the Occidental stock, but was plainly in command and used corporate assets to finance a number of money-losing hobby-type ventures, including a horse farm, a cattle ranch, and a film production company.

Hammer had a lifelong interest in art, though more for the glitz than the esthetics and more as a wheeler-dealer than as a connoisseur. He accumulated a valuable art collection. At one time he had promised to contribute this collection to the Los Angeles County Museum of Art (the major regional art museum), but when the museum refused his egocentric demands for special recognition (including a wing to be named after him and separation of his collection from the rest of the museum’s collection), he reneged. He then induced Occidental to build a museum next to its office building in Westwood, California, to house his collection. While the collection has a number of important and valuable pieces, it is not a good collection; it lacks coherence and has some undistinguished components. It would have been a great addition to the County Museum, but on its own it is second rate, and Hammer did not provide enough funds to build the collection. Hammer had designated his grandson, Michael Hammer, to head the museum’s board. Michael Hammer apparently lacked museum or arts credentials. See Allan Parachini, Confused Picture at Hammer Museum, Los Angeles Times, January 25, 1991, F1.

In 1989, Occidental’s board authorized an expenditure of $89 million to build the Hammer Museum and provide an annuity for operating funds. (Occidental’s net profit for that year was $256 million) As a result of the Occidental board’s authorization of the museum project, two derivative actions were filed in Delaware (another suit was filed in California). One, filed by Alan R. Kahn on May 2, 1989, might be called the honest suit. Kahn is a New York money manager. He was joined by the California Public Employees’ Retirement System and by the Pennsylvania Public Employees’ Retirement System. The other suit, filed on May 11, 1989, was in the name of a shareholder, Joseph Sullivan, who was represented by lawyers who frequently appear in derivative actions. This suit might be called the strike suit.

Occidental entered into an agreement to settle the Sullivan action. This settlement would have had (and ultimately did have) the effect of settling the Kahn action. Kahn then filed a motion to enjoin the settlement. This motion was denied on July 19, 1989. Kahn v. Occidental Petroleum Corporation, 1989 Del. Ch. Lexis 92. Vice Chancellor Hartnett acknowledged the risk of improper settlements and stated: “An abuse of the litigation settlement process cannot be tolerated . . ..” He went on to cite the need for heightened scrutiny in this case because of the lack of any good reason to settle the Sullivan suit rather than the Kahn suit. But the court concluded that Kahn’s objections could be considered in connection with the hearing on the settlement of the Sullivan suit.

On August 7, 1990, after the hearing on the motion to approve the Sullivan settlement (at which hearing Kahn had his chance to make his objections), Vice Chancellor Hartnett published his decision. Sullivan v. Occidental Petroleum Corporation, 1990 Del. Ch. Lexis 119, Fed. Sec. L. Rep. (CCH) Par. 95,415. Meanwhile, Occidental’s board had appointed a special committee, which in turn hired as its counsel former Delaware Chancellor Grover C. Brown. The special committee had approved the expenditures of the corporation for the museum and the settlement of the Sullivan action.

The settlement required that the museum be named Occidental Petroleum Center Building, and that Occidental be recognized as the sponsor. Three of Occidental’s board members are to serve on the museum board; Hammer was required to give all his collection to the museum on his death; a limit was placed on future financial support; and a limit is placed on the amount that can be spent on the museum. The attorney fees approved by the court were $800,000 for Sullivan’s lawyers (versus $1,400,000 provided for in the settlement agreement of the parties) and nothing for Kahn’s lawyers. See Kahn v. Occidental Petroleum Corp., 1992 Del. Ch. Lexis 11.

The court stated: “If the court was [sic] a stockholder of Occidental it might vote for new directors, if it was on the Board it might vote for new management and if it was a member of the Special Committee it might vote against the Museum project. But its options are limited . . ..” The court went on to say that the prospect for success on the merits was very poor. There was no evidence of self interest on the part of the board or the special committee. So the business judgment rule operates strongly in support of affirming the settlement and it was affirmed. The Chancellor’s decision was affirmed on appeal. See citation above.

Reportedly, Occidental shareholders were offered the chance for a “first look” when the museum opened in 1990, but were charged $40 per person for tickets. Los Angeles Bus. J., Aug. 29, 1990, available at http://www.allbusiness.com/north-america/united-states-california-metro-areas/ 130222-1.html.

In 1993 management of the museum was taken over by UCLA, under a 99-year operating agreement. UCLA has broadened the museum’s programs and removed many of the traces of Armand Hammer. The name was never changed, however, which meant the trivial settlement achieved even less for Occidental shareholders than promised.