NBN Broadcasting, Inc. and Sheridan Broadcasting Networks, Inc. operated competing radio networks. In 1991, NBN and Sheridan agreed to form American Urban Radio Network (AURN), a Pennsylvania partnership that combined NBNs and Sheridans networks. Sheridan owned 51 percent of the partnership; NBN owned 49 percent. They agreed to maintain NBNs offices in New York and Sheridans offices in Pittsburgh to allow direct oversight and input by AURNs cochairmen and co-CEOs, Sydney Small (chairman of NBN) and Ronald R. Davenport (chairman of Sheridan). NBN and Sheridan wanted equal rights in management of the partnership. The partners equal right to manage AURN was modified by the partnership agreement in sections 5.2 and 5.3. Section 5.2 created a five-member Management Committee comprising two members selected by NBN and two by Sheridan; a seat on the Management Committee was to be vacant and would be filled only when the Management Committee was deadlocked. Section 5.2 also provided:

The Management Committee shall be responsible for the following functions of the partnership and contractual arrangements relating thereto:

1. (i) Sales and marketing;

2. (ii) Promotions and public relations;

3. (iii) Affiliate relations and compensation;

4. (iv) Network programming;

5. (v) Personnel administration; and

6. (vi) Budgeting, accounting, and finance.

Section 5.3 provides:

(a) In the event that three of the four members of the Management Committee are unable to reach agreement on any issue or is- sues relating to items (i) through (v) above and remain so unable for a period of thirty days, then Ronald R. Davenport, Chairman of Sheridan, shall have the right to fill the vacant seat on the Management Committee for the purpose of reaching an agreement, and only until an agreement is reached, on such issue or issues.

Section 5.3 did not authorize appointment of a fifth member of the Management Committee when there was a deadlock re- garding budgeting, accounting, or finance or any matter other than those listed in Section 5.2(i) through (v). As to budgeting, accounting, and finance and matters not listed in Section 5.2(i) through (v), NBN and Sheridan were equal partners, and all decisions on such matters required their agreement.

At a Management Committee meeting on September 14, 1995, Davenport proposed that AURN open an expensive new office in Washington, D.C., hire Skip Finley as chief operating officer, and employ Richard Boland. When NBNs representatives opposed open- ing the new office and hiring Finley and Boland, Davenport scheduled a meeting solely to appoint a fifth member to break the deadlock. On September 15, NBN asked a Pennsylvania state trial court to grant a preliminary injunction and a permanent injunction against Sheridans opening a new AURN office in Washington and hiring Finley and Boland, on the grounds that the proposals related to bud- geting, accounting, and finance and were, therefore, not subject to the deadlock voting provision. On October 13, the state trial court denied NBNs motion for a preliminary injunction. The state trial court held that Sheridan had the right to invoke the deadlock provision to make additions to personnel by hiring Finley and Boland. The trial court did not rule on NBNs request for a permanent injunction.

At an October 16 Management Committee meeting, Davenport appointed a fifth member of the committee. By a 32 vote, the Management Committee voted to hire Finley and Boland, with NBNs representatives opposing. At that meeting, Davenport also proposed to relocate AURNs New York offices from NBNs office space in New York to other office space in the New York area; to transfer to Pittsburgh from New York AURNs traffic, billing, and collection functions; and to require Finley to make cuts in AURNs New Yorkbased marketing and research personnel. NBNs representatives opposed the proposals, and Davenport scheduled a meeting on November 28 to break the deadlock.

Sensing that the Pennsylvania state trial court would dismiss its request for a permanent injunction and hoping to litigate the issues at a later time, NBN sought to withdraw its motion for a permanent injunction. On November 28, 1995, while the state trial court judge was considering NBNs request to withdraw its lawsuit, a meeting of AURNs Management Committee was held. Davenport again invoked the deadlock provision and appointed his son as fifth member of the Management Committee. By a 32 vote, the Management Committee agreed to relocate AURNs New York offices from NBNs office space, to transfer AURN functions to Pittsburgh from New York, and to authorize Finley to make cuts in AURNs New Yorkbased marketing and research personnel. Davenport also proposed to promote Finley to chief executive officer and Boland to vice president of administration. NBN Chairman Small objected, and Davenport scheduled another meeting to break the deadlock.

On November 29 and 30, the state trial court, wanting to put a final end to this unnecessary litigation, ordered the discontinu- ance of NBNs lawsuit with prejudice, meaning that NBN could appeal the ruling to an appellate court but would not be permitted to have another trial court litigate the same issues. NBN chose not to appeal the decision of the Pennsylvania state trial court.

After the November 28 meeting, Sheridan located new office space for AURN in New York and entered a new lease with a minimum annual liability of $900,000, yet Sheridan never revealed the location of the space to NBN or sought NBN approval of the relocation or new lease. On January 18, 1996, at the next Management Committee meeting, Davenport again appointed his son as the fifth member. By a 32 vote, with NBNs representatives opposing, the Management Committee appointed Finley as CEO and Boland as vice president of administration.

On January 31, 1996, NBN filed a federal lawsuit seeking an injunction against Sheridans alleged violations of the equal management rights of the partners by hiring Finley and Boland, interfering with AURNs personnel and customer relations, and relocating AURNs New York offices. Sheridan asked the federal district court to dismiss the suit on the grounds of res judicata; that is, Sheridan argued that NBN was raising legal issues that the Pennsylvania state trial court had already considered or that NBN should have brought to the Pennsylvania trial court. Thus, Sheridan argued, because the Pennsylvania trial court had already dismissed NBNs request for an injunction with prejudice, the federal district court should not reconsider these issues. The federal district court agreed with Sheridan and dismissed NBNs lawsuit. NBN appealed to the federal court of appeal.

Pollack, Judge

A discontinuance with prejudice is deemed a final adjudication on the merits for res judicata purposes on the claims asserted or which could have been asserted in the suit. Any issue con- cerning the relocation of the New York Office could not have been raised in the State Court suit commenced on September 15, 1995, or until the voting deadlock thereon on November 28, 1995. The NBN claim on the relocation of the New York Office was a claim based on new conduct that could have only arisen long after the filing of NBNs State Court suit. Since a plaintiff has no obligation to expand its suit in order to add a claim that it could not have asserted at the time the suit was commenced, a later suit based on subsequent conduct is not barred by res judicata.

The res judicata effect is limited to those claims that had arisen at the time that NBN brought the State Court action. They did not include the relocation of the New York Office, which had not yet even been brought to an initial vote. There was no submission to the State Court of NBNs equal right to decide whether the New York Office should be moved from its existing location as part of NBNs premises.

The doctrine of res judicata embraces all claims of NBN, exclud- ing those claims relating to the relocation of the New York Office, which were passed on by the Management Committee prior to the filing of NBNs State Court action; the claims asserted therein and the dismissal thereof on the grounds of res judicata is affirmed.

Judgment for Sheridan affirmed in part; judgment in part reversed in favor of NBN. Remanded to the district court.

What do you think about the deadlock provision agreed to by the parties?

What could NBN have done differently to protect itself?