Lubrizol Corp. v. Exxon Corp. ( 1992 )

The LUBRIZOL CORP., Plaintiff–Appellant,
v.
EXXON CORP., Charles R. Evans, Richard D. Lower, and GATES Data
Center, Defendants–Appellees.
No. 91–2514.
United States Court of Appeals,
Fifth Circuit.
April 15, 1992.
Appeal from the United States District Court for the Southern
District of Texas.
Before POLITZ, Chief Judge, KING, and EMILIO M. GARZA, Circuit
Judges.
PER CURIAM:
The Lubrizol Corporation ("Lubrizol") commenced this action
for fraud against the Exxon Corporation ("Exxon"), two Exxon
employees ("Evans" and "Lower"), and an entity called GATES Data
Center on the grounds that defendants had mishandled confidential
Lubrizol information. Exxon counterclaimed for litigation expenses
incurred because of Lubrizol's breach of a covenant not to sue
entered into as part of a settlement agreement. The district court
granted judgment in favor of defendants as to Lubrizol's claims.
Those claims were separately appealed, and we affirmed the district
court's summary judgment on them.
As for Exxon's counterclaim, the district court, ruling that
Lubrizol's breach of the parties' covenant not to sue was obvious,
granted judgment in Exxon's favor. As a sanction for Lubrizol's
failure to comply with the district court's order directing
Lubrizol to submit specific attorney's fees information, the court
accepted Exxon's proof of its attorney's fees and awarded Exxon
judgment for $2,424,462.04. Lubrizol now appeals that judgment.
Finding that Lubrizol's breach was obvious and that the
district court has broad discretion to sanction Lubrizol, we
affirm.
I
This case is the postscript to one we have heard before.1 The
following is a summary of the facts and procedural background
relevant to this appeal.
This action arises out of a lawsuit—the so-called "computer
dispute"—Lubrizol instituted in 1982 against Exxon in the United
States District Court for the District of New Jersey. During
discovery in the New Jersey suit, the parties stipulated to a
protective order requiring identification of all individuals having
access to the confidential information exchanged between the
parties. That order also specified the locations where this
information was to be housed and designated that the Exxon law
department would have exclusive control over the computer system
1
For a full narration of the facts, see Lubrizol Corp. v.
Exxon Corp., 871 F.2d 1279 (5th Cir.1989). In that opinion
authored by Judge Edith H. Jones, the court firmly rejected
Lubrizol's argument that the covenant not to sue did not embrace
its fraud claims. The court held that the settlement agreement
"is unambiguous insofar as it released any claim that Lubrizol
might have brought against Exxon resulting from the computer
dispute." 871 F.2d at 1286. Also, the court was highly critical
of Lubrizol's arguments to the contrary, saying they were "too
contradictory ... to be credited" and had an "air of unreality"
that was "too thin." Id. at 1284 n. 7, 1286.
storing the confidential information. Asserting that Exxon had
violated this protective order, Lubrizol moved for sanctions. In
September 1984, the parties signed a settlement agreement that
disposed of all claims in the New Jersey case and provided for the
entry of a stipulation of dismissal with prejudice.
Lubrizol then filed a complaint in the United States District
Court for the Southern District of Texas against defendants Exxon,
Lower, and Evans, seeking some $200,000 in compensatory damages
allegedly caused by fraud and violations of the New Jersey
protective order. After two years of hotly contested discovery,
Lubrizol asserted that, because Exxon had deliberately destroyed
evidence, it could prove only about $40,000 in compensatory
damages. Exxon counterclaimed for breach of the settlement
agreement, violation of the New Jersey protective order, and fraud;
Lower and Evans counterclaimed for defamation. Ultimately, the
district court granted Exxon's motion for summary judgment, which
Lubrizol appealed to this court. See generally Lubrizol, 871 F.2d
at 1279.
In considering Lubrizol's first appeal, we held that
Lubrizol's fraud claims had been made in the earlier New Jersey
federal case in the form of motions for sanctions concerning the
computer dispute. Following that decision, and with Exxon's
counterclaim for breach of the covenant not to sue still pending,
Lubrizol—without prior notice to the district court, this court, or
to Exxon—filed a new lawsuit in the New Jersey federal district
court seeking reformation of the settlement agreement between
Lubrizol and Exxon to exclude settlement of the computer dispute.
Exxon filed a motion to dismiss the New Jersey action, which was
granted on January 29, 1990. Lubrizol then appealed to the Third
Circuit, which affirmed that dismissal. See Lubrizol Corp. v.
Exxon Corp., 929 F.2d 960 (3rd Cir.1991).
Meanwhile, back in the Texas action, Exxon filed a motion for
summary judgment on its counterclaim for litigation expenses
incurred because of Lubrizol's breach of the covenant not to sue—a
covenant entered into as part of the settlement agreement resolving
Lubrizol's original New Jersey action. Exxon argued that, since
Lubrizol breached the settlement agreement by reasserting claims
that the United States District Court for the Southern District of
Texas and this court found were clearly and unambiguously covered
by Lubrizol's covenant not to sue, Lubrizol's breach was obvious as
a matter of law. Lubrizol filed a counter motion, arguing that its
breach was not obvious and that it had acted in good faith as a
matter of law. In November 1990, the district court granted
Exxon's motion and denied Lubrizol's.2
During a December 1990 conference, Exxon and Lubrizol agreed
2
Lubrizol then filed a motion for reconsideration, or, in
the alternative, for certification under section 1292(b) of Title
28 for an interlocutory appeal. In its motion for
reconsideration, Lubrizol argued for the first time that Exxon
should be estopped from claiming the breach was an obvious one
because of statements made by Exxon that allegedly led Lubrizol
to believe that the computer dispute had not been settled. The
district court denied this motion on that grounds that Lubrizol's
assertion of estoppel was untimely.
to submit affidavits to support and contest Exxon's litigation
expenses. Exxon filed two affidavits to prove total litigation
expenses of $2,424,462.04, which was accompanied by two volumes of
supporting documentation. Lubrizol then filed a motion to have the
court set a discovery schedule, to which the district court
responded by ordering ("February 1991 order") Lubrizol to file a
statement of any necessary discovery including, but not limited to,
the name of anyone to be deposed and the reason why. Lubrizol
responded by filing a ten-page affidavit and thirty-one page
memorandum that failed to set forth the items and amounts it was
not contesting, the amounts that it considered reasonable for items
in dispute, and the names of anyone it wished to depose.
The district court ruled that Lubrizol had failed to comply
with its February 1991 order by not providing the information
required and, as a sanction for Lubrizol's "egregious" conduct,
accepted Exxon's affidavits as uncontradicted. The district court
also found the $2.4 million figure to be both reasonable and
conservative and found the Exxon affidavits to be thorough and
supported by ample documentation; accordingly, the district court
awarded Exxon the full $2.4 million.
II
Lubrizol again appeals to this court, this time contending:
(a) that the district court erred in ruling that Lubrizol's breach
of the parties' covenant not to sue was obvious and by imposing
liability in accordance with New York law; and (b) that the
district court abused its discretion when it accepted Exxon's proof
of its $2.4 million in litigation expenses as uncontradicted and
awarded Exxon judgment for that amount as a sanction for Lubrizol's
failure to comply with the district court's February 1991 order.
A
Lubrizol asserts that: (i) according to New York law,
attorney's fees may be awarded as damages for a breach of contract
only if the contract expressly and unmistakably so provides, or if
the award of attorney's fees is authorized by statute or by court
rule; (ii) the case relied upon by the district court—Artvale,
Inc. v. Rugby Fabrics Corp., 363 F.2d 1002 (2d Cir.1966)—actually
supports Lubrizol's position since the case states unequivocally
that a party is not subject to damages for a good faith testing of
the scope of a covenant not to sue, and the rule set down in
Artvale requires a finding that a party acted in bad faith before
attorney's fees will be awarded for breach of a covenant not to
sue;3 and (iii) the district court erred in finding that contract
was "unambiguous." We disagree.
3
Specifically, Lubrizol contends that:
The district court did not conclude that
Lubrizol's fraud claim against Exxon was [a] bad faith
breach of the Settlement Agreement between the parties;
and the overwhelming evidence in the record of
Lubrizol's reasonable belief—based on the statements
and conduct of Exxon—that its fraud claim against Exxon
was not included in the Settlement Agreement makes the
award of attorney's fees erroneous as a matter of law.
Brief for Appellant at 8, Lubrizol Corp. v. Exxon Corp., No.
91–2514 (5th Cir. filed Aug. 30, 1991) ["Lubrizol Brief"].
It is undisputed that, by its express terms, the Settlement
Agreement entered into by the parties on September 7, 1984 is
governed by New York law. Also, we have already decided "that the
settlement agreement is unambiguous insofar as it released any
claim that Lubrizol might have brought against Exxon resulting from
the computer dispute." Lubrizol, 871 F.2d at 1286.4 The question
now before this court is whether the district court correctly
applied New York law in finding that Lubrizol's breach of the
parties' covenant not to sue was obvious and, in accordance with
that finding, correctly imposed liability.
In awarding Exxon its litigation expenses, the district court
relied upon Artvale, 363 F.2d at 1002—a case that both frames the
issue before us and sets a standard for resolving it:
The question, in other words, is to be solved not by
invoking an abstract rule of law but by seeking to determine
what the parties fairly contemplated [in drafting their
Settlement Agreement], or would have had they addressed their
minds to the problem. Certainly it is not beyond the powers
of a lawyer to draw a covenant not to sue in such terms as to
make clear that any breach will entail liability for damages,
including the most certain of all—defendant's litigation
expense. Yet to distill all this out of the usual formal
covenant would be going too far; its primary function is to
serve as a shield rather than as a sword, often being employed
instead of a release to avoid the common law rule with respect
to the effect of a release on joint tort-feasors. In the
4
Although this Settlement Agreement is part of the record
before this court, see Record Excerpts of Appellant at tab 16, p.
120, Lubrizol Corp. v. Exxon Corp., No. 91–2514 (5th Cir. filed
Aug. 30, 1991) ["Record Excerpts"], the parties originally agreed
that this Agreement would remain confidential. Id. at 129, art.
VII, ¶ 7.01. In deference to this agreement between the parties
and the fact that we do not feel it would make a substantial
contribution to this opinion, we abstain from quoting the actual
text in any detail.
absence of contrary evidence, sufficient effect is given the
usual covenant not to sue if, in addition to its service as a
defense, it is read as imposing liability only for suits
brought in obvious breach or otherwise in bad faith—clearly
not the situation here.
Id. at 1008 (emphasis added).5 In short, we must determine whether
the district court correctly found that Lubrizol's suit was
"brought in obvious breach [of the covenant not to sue] or
otherwise in bad faith."6
The district court, applying the Artvale rule, found that
"Lubrizol's breach of the covenant not to sue was an obvious one."7
5
The Artvale rule has been applied by courts deciding cases
under New York law. See, e.g., Bellefonte Re Ins. Co. v.
Argonaut Ins. Co., 757 F.2d 523 (2nd Cir.1985); Le Cordon Bleu,
S.A. v. BPC Pub. Ltd., 451 F.Supp. 63 (S.D.N.Y.1978); Cefali v.
Buffalo Brass Co., 748 F.Supp. 1011 (W.D.N.Y.1990).
6
Lubrizol argues that "obvious breach or otherwise in bad
faith" requires a separate finding of bad faith. See Lubrizol's
Brief at 19. Lubrizol shifts the emphasis to "obvious breach or
otherwise in bad faith." To reiterate Judge Jones' reply to a
similar argument made by Lubrizol, "[w]e cannot accept either the
grammatical or linguistic underpinnings of this argument."
Lubrizol, 871 F.2d at 1286. See Cefali, 748 F.Supp. at 1011(awarding litigation expenses to defendant that prevailed on its
New York common law counterclaim for an obvious breach of a
covenant not to sue, and concluding that the court did not,
therefore, need to rule on defendant's motions for litigation
expenses on grounds that plaintiffs' claims were baseless and
made in bad faith).
7
More specifically, the district court held that:
Both this court and the Fifth Circuit have found that
the claims brought by Lubrizol in this case were
clearly and unambiguously released in the New Jersey
Settlement Agreement. Consequently, there can be no
genuine factual dispute regarding whether Lubrizol's
breach of the covenant not to sue was an obvious one.
Exxon's motion for summary judgment as to Lubrizol's
liability for damages, including attorney's fees and
other litigation expenses, should be granted.
Record Excerpts at tab 9, p. 68 (Memorandum and Order filed
We agree. Lubrizol's chief contention is that its breach was a
good faith test of the covenant not to sue—a practice recognized as
acceptable in Artvale. As support for this proposition, Lubrizol
notes that the district court originally denied Exxon's motion to
dismiss in 1986. Lubrizol also relied upon communications between
Lubrizol's chief legal officer, Roger Hsu, and Exxon Chemical
Company's general counsel, James Phillips—evidence that the
district court and this court refused to consider on the grounds
that (i) the parol evidence rule bars consideration of prior
statements to contradict an unambiguous covenant, and (ii) because
the settlement agreement unambiguously prohibits subsequent
modifications. See Lubrizol, 871 F.2d at 1286–87; Record Excerpts
at tab 11, pp. 81–83.
First, in its June 1990 Memorandum in Opposition to Exxon's
Motion for Summary Judgment, Lubrizol admitted that its "actions
involve no direct or deliberate challenge to the scope of the
settlement agreement[.]" We find that this discredits Lubrizol's
good-faith assertion argument. Second, the district court
originally denied Exxon's motion to dismiss. We note that this
early ruling of the district court was vacated by that same court's
July 27, 1987 order, which this court later affirmed.8 Third, we
stand behind our earlier decision and again refuse to consider the
Nov. 8, 1990).
8
Judge DeAnda vacated his earlier order after the New Jersey
settlement agreement and order of dismissal were introduced at
the trial and he had the opportunity to reexamine these exhibits.
Hsu–Phillips communications. Our reasons have not changed.9
Accordingly, we find that Lubrizol's breach of the parties'
covenant not to sue was obvious and that the district court
rightfully imposed liability in accordance with New York law.
B
At a conference on December 12, 1990, the district court
announced that it would hear, via affidavits, Exxon's proof of
litigation expenses and Lubrizol's counterproof. Exxon complied by
filing affidavits providing $2,424,462.04 in litigation expenses.
9
See Lubrizol, 871 F.2d at 1286–87. Even if the
Hsu–Phillips communications were relevant to the question of
obvious breach, Lubrizol cannot assert with credibility that such
communication gave Lubrizol a good-faith belief that it could
file suit against Exxon on claims that Lubrizol had clearly and
unambiguously covenanted never to reassert. Lubrizol asserts
that its alleged good-faith belief that it could file suit was
based on "Exxon's own statements [by Phillips] that it did not
consider the computer matter to have been settled by the
Settlement Agreement." Lubrizol's Brief at 22. Lubrizol
conveniently overlooks an April 12, 1985 letter from Phillips to
Hsu that predates Lubrizol's suit and makes very clear Exxon's
view that the computer dispute was settled:
With respect to the reference in your April 4, 1985
letter to the "unresolved status of the computer
issue," I do not agree with your characterization of
the events surrounding the adjournment of Lubrizol's
motion on that subject in the New Jersey case. Exxon
and Lubrizol mutually agreed to adjourn your renewed
motion so that the apparently fruitful settlement
discussions would continue without diversions resulting
from peripheral matters. That was why we both
authorized your counsel, Mr. Del Deo, to advise Judge
Debevoise that the parties were engaged in serious
settlement discussions and that the hearing on the
renewed computerization motion should be adjourned. As
you know, that decision proved sound as we were able to
agree to a settlement shortly thereafter and thus
avoided any necessity for the New Jersey Court to rule
on what had become a moot point.
Lubrizol failed to comply—even after it was given a second chance.10
Accordingly, the district court decided to sanction Lubrizol by
accepting Exxon's affidavits as uncontradicted.11
10
Consider the district court's summation of Lubrizol's
failure to comply with the December 12 order:
Instead of the counteraffidavit which Lubrizol was
to file in response to Exxon's affidavits, Lubrizol
filed a motion for the Court to set a schedule for
discovery. In order to provide Lubrizol with a second
opportunity to meet its obligations under the December
12 order, the court signed an order on February 14,
1991, directing Lubrizol to file an affidavit setting
forth (1) those items and amounts which were not
contested, (2) the amounts which Lubrizol would
consider reasonable for those items in dispute, and (3)
a statement regarding what discovery was needed by
Lubrizol, including the name of anyone to be deposed
and the reason for the deposition. Lubrizol again
failed to comply with the requirements of the Court,
filing only a blanket objection to Exxon's submission
"in its entirety." Lubrizol did not set forth any
items and amounts which were not contested or the
amounts it would consider reasonable for those items in
dispute. Instead, Lubrizol made broad, general
complaints about the alleged lack of detail in the
Exxon affidavits. Lubrizol did not provide the Court
with the name of any person needed to be deposed and
the reason for the deposition. Instead, Lubrizol
simply maintained, again in very broad and general
terms, that it needed more discovery.
Record Excerpts at tab 2, pp. 50–51.
11
Id. at 51–52:
Having been given two opportunities to submit a
counteraffidavit as required by the Court and having
failed on each occasion to do so, Lubrizol is no longer
entitled to submit its counteraffidavit and Exxon's
affidavits will be accepted as uncontradicted. The
court recognizes that the large damages claim in this
case makes this sanction seem harsh. The Court also
finds, however, that Lubrizol's conduct has been
egregious and that this severe sanction is both proper
and virtually unavoidable.
Because the Exxon affidavits are undisputed by
counteraffidavit, there is no factual issue to be
resolved by a trier of fact. Based upon the case law
The sanction imposed by the district court is severe.
However, "[t]he question, of course, is not ... whether the Court
of Appeals ... would as an original matter have [chosen the
sanction]; it is whether the District Court abused its discretion
in doing so." National Hockey League v. Metropolitan Hockey Club,
427 U.S. 639, 642, 96 S.Ct. 2778, 2780, 49 L.Ed.2d 747, reh'g
denied, 429 U.S. 874, 97 S.Ct. 197, 50 L.Ed.2d 158 (1976).
Recently reinforced by the Supreme Court, the sanctioning power of
district courts is potent:
It has long been understood that "[c]ertain implied
powers must necessarily result to our courts of justice from
the nature of their institution," powers "which cannot be
dispensed with in a court, because they are necessary to the
exercise of all others." For this reason, "Courts of justice
are universally acknowledged to be vested, by their very
creation, with power to impose silence, respect, and decorum,
in their presence, and submission to their lawful mandates."
These powers are "governed not by rule or statute but by the
control necessarily vested in courts to manage their own
affairs so as to achieve the orderly and expeditious
disposition of cases."
* * * * * *
As we recognized in Roadway Express [v. Piper, 447 U.S. 752,
100 S.Ct. 2455, 65 L.Ed.2d 488], outright dismissal of a
lawsuit, which we had upheld in Link [v. Wabash R. Co., 370
U.S. 626, 82 S.Ct. 1386, 8 L.Ed.2d 734], is a particularly
severe sanction, yet is within the Court's discretion.
Consequently, the "less severe sanction" of an assessment of
attorney's fees is undoubtedly within a court's inherent power
as well.
* * * * * *
[A] court may assess attorney's fees as a sanction for the "
"willful disobedience of a court order.' " Thus, a court's
set forth above, the pleadings in this case, and the
uncontradicted affidavits submitted by Exxon, the Court
finds that Exxon has proved damages on its counterclaim
in the amount of $2,424,462.04.
discretion to determine "[t]he degree of punishment for
contempt" permits the court to impose as part of the fine
attorney's fees representing the entire cost of the
litigation.
Chambers v. Nasco, Inc., ––– U.S. ––––, ––––, 111 S.Ct. 2123,
2132–33, 115 L.Ed.2d 27 (1991) (citations omitted).
The district court's February 14 order12 bestowed upon Lubrizol
the opportunity to conduct discovery into Exxon's litigation
expenses, and, had Lubrizol exercised that opportunity, it is
highly likely that the district court would have heard its
arguments and Exxon's counterarguments. Rather, Lubrizol failed to
comply and has missed its opportunity to persuade the district
court as to what constitutes a reasonable fee.
Lubrizol goes on to argue that the award of attorneys' fees
made to Exxon was improper because Exxon made no showing of the
reasonableness of the fees requested. Lubrizol urges us to remand
the case to the district court with instructions to make the
inquiry mandated by this Court in Johnson v. Georgia Highway
Express, 488 F.2d 714 (5th Cir.1974). We decline to do that. The
district court found that when compared to the $2,028,000 incurred
by Lubrizol for two years of pre-trial proceedings, the $2,400,000
incurred by Exxon for the entire six-year duration of this
litigation is "both reasonable and conservative."13 We review that
12
See supra note 15.
13
The district court made the following analysis:
The amount claimed by Exxon ($2,424,462.04) does not
include expenses for paralegal services or time spent
conclusion under an abuse of discretion standard.14 We are not
prepared to say, with the case in its peculiar procedural posture
as a result of Lubrizol's failure to comply with the district
court's order, that the district court abused its discretion in
arriving at the amount of the fee. Indeed, the district court's
conclusion is perfectly reasonable. To send this case back for the
district judge to go through the Johnson hoops, on the basis of the
same record and without any further input from Lubrizol, would be
a needless exercise. This case needs to come to an end.
III
on the case by non-attorney executives at Exxon. The
claimed amount is only for work performed on this case
by Exxon Litigation Section attorneys and for attorneys
fees charged to Exxon by outside law firms, fees which
were determined to be proper by Exxon and,
consequently, paid by Exxon. Additionally, the amount
claimed by Exxon is for the entire course of the
proceedings. The Court notes that Lubrizol's evidence
at trial established that it incurred $2,028,000.00 in
attorneys fees during the pre-trial proceedings. Much
of the work performed during that stage involved Exxon
and Lubrizol working on like matters, albeit from
opposing sides. When compared to the amount incurred
and deemed reasonable by Lubrizol prior to trial, the
$2,424,462.04 claimed by Exxon for the entire
litigation is both reasonable and conservative. The
damages claim is supported by affidavits which are
detailed and comprehensive, and which include two
volumes of documentation as exhibits.
14
See Von Clark v. Butler, 916 F.2d 255, 259 (5th Cir.1990);
Leroy v. City of Houston, 831 F.2d 576, 584 (5th Cir.1987) ("The
district court's findings of fact supporting its award are
reviewed under the clearly erroneous standard, but the ultimate
award of attorneys' fees is reviewed for abuse of discretion."),
cert. denied, 486 U.S. 1008, 108 S.Ct. 1735, 100 L.Ed.2d 199(1988); see also Hensley v. Eckerhart, 461 U.S. 424, 437, 103
S.Ct. 1933, 1941, 76 L.Ed.2d 40 (1983) (district court has
discretion in determining what is reasonable amount for
litigation expenses and, because of its superior understanding of
the litigation, frequent appellate review is to be avoided).
For the foregoing reasons, we AFFIRM the judgment of the
district court.
EMILIO M. GARZA, Circuit Judge, dissenting in part:
I agree with everything in the panel opinion except for the
ultimate conclusion not to send this case back to the district
court with instructions to calculate Exxon's fee in accordance with
the formula prescribed by this court in Johnson v. Georgia Highway
Express, 488 F.2d 714 (5th Cir.1974); see also Hensley v.
Eckerhart, 461 U.S. 424, 429–40, 103 S.Ct. 1933, 1937–43, 76
L.Ed.2d 40 (1983) (applying Johnson factors), clarified by Cobb v.
Miller, 818 F.2d 1227, 1231–32 (5th Cir.1987).
In my view, the district court simply has not satisfied our
Johnson standard.15 Although I acknowledge that the sanctioning
15
In rendering an award of attorney's fees, we have held
that a district court must consider:
(1) the time and labor required;
(2) the novelty and difficulty of the question(s)
presented;
(3) the skill requisite to properly perform the legal
service;
(4) the preclusion of other employment due to the
acceptance of the case;
(5) the customary fee;
(6) whether the fee is fixed or contingent;
(7) the time limitation imposed by the client or the
circumstances;
(8) the amount involved and result obtained;
power of the district court is potent (for example, I agree that
the district court may calculate Exxon's fee based solely on the
information supplied by Exxon), I am not comfortable in allowing
the district court's power to sanction to serve as license for
ignoring our Johnson formula—especially where the district court
has reduced its calculation of attorney fees to a comparative
analysis of fees charged by counsel in the case before it and
awarded $2.4 million.
Accordingly, I would vacate the amount of the district court's
award and remand with instructions to apply the Johnson formula to
the Exxon-supplied information.
(9) the experience, reputation, and ability of the
attorneys;
(10) the "undesirability" of the case;
(11) the nature and length of the professional
relationship with the client; and
(12) awards in similar cases.
Id. at 717–19 (including commentary on each factor).