C&E Services of Washington, Inc. v. Ashland, Inc. ( 2009 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
____________________________________
)
C&E SERVICES, INC., and )
CARL L. BIGGS, )
)
Plaintiffs, )
)
v. ) Civil Action No. 03-1857 (JMF)
)
ASHLAND INC., )
)
Defendant. )
____________________________________)
MEMORANDUM OPINION
Plaintiff C&E Services, Inc. (“C&E”) brought suit against defendant Ashland Inc.
alleging that Ashland committed fraud, breach of fiduciary duty and breach of the duty of good
faith and fair dealing when it failed to disclose information about a government audit. Ashland
counterclaimed against C&E claiming that C&E breached the contract, its duty of good faith and
fair dealing and that Ashland is entitled to equitable indemnification for a settlement that it paid
to the government. A jury trial was held in April 2008, and the jury concluded that Ashland had
breached its fiduciary duty and the duty of good faith and fair dealing to C&E, but had not
committed a fraud. The jury also found that C&E breached its duty of good faith and fair dealing
to Ashland but had not breached the contract. The issue of equitable indemnification was
reserved for this Court’s decision. Prior to submission of this case to the jury, both parties filed
motions for judgment as a matter of law under Federal Rule of Civil Procedure 50(a). Those
motions were denied from the bench on May 1, 2008. Now pending are the parties’ renewed
motions for judgment as a matter of law filed pursuant to Rule 50(b).
I. Background.
Ashland and C&E are both manufacturers of water treatment products. In 1987, the
parties entered into an agreement whereby C&E would purchase products from Ashland and
resell them to the public. The agreement explicitly stated that C&E would serve as Ashland’s
agent. Both Ashland and C&E sold products to the federal government in accordance with
approved General Services Administration (“GSA”) schedules. In 1997, the government audited
Ashland’s GSA schedule and alleged that Ashland had not made discounts available to
government customers that had been made available to other customers, i.e. that its prices were
“defective,” a serious allegation that could lead to its disbarment. Ashland, however, entered
into a settlement agreement with the government that resolved its concerns and decided not to
renew its GSA schedule.
At that time, Ashland and C&E negotiated an amendment to their 1987 agreement.
Where in the past C&E sold Ashland’s products under Ashland’s GSA schedule, the amendment
provided that C&E would add Ashland products to its own GSA schedule and sell them directly
through that schedule. C&E argues that Ashland did not tell C&E that the government had found
Ashland’s prices to be defective, leading C&E to use the same prices that the government had
found to be defective when used by Ashland.
C&E took efforts to try and add Ashland’s products to its GSA schedule, and, in the
meanwhile, began selling Ashland’s products to government customers. In its application to the
GSA, C&E certified that the prices it charged government buyers were the same as the lowest
prices it charged its private clients. C&E continued to charge the same prices that Ashland had
charged and that the government claimed were defective. The government investigated C&E and
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Ashland. Ashland settled with the government for $350,000. During the negotiation process, the
question arose whether the settlement would absolve C&E of any liability, but the government
representative insisted on more money before he would agree to absolve C&E as well.
Meanwhile, C&E and two of its executives were suspended from government contracting.
C&E claims that it would have never charged the “defective” prices had Ashland told it
that a government audit had found the prices to be “defective” and that C&E was suspended
because of the defective prices. Ashland, however, claims that the suspension arose out of
C&E’s decision to sell products that were not on their GSA schedule without disclosing that fact.
This case went to trial for 14 days in April and May of 2008. Both parties moved for
judgment as a matter of law pursuant to Rule 50 of the Federal Rules of Civil Procedure at the
close of their cases in chief. Both motions were denied from the bench on May 1, 2008 and the
issues were submitted to the jury. The jury awarded C&E $219,000 in damages for breach of the
implied covenant of good faith and fair dealing and $45,000 in prejudgment interest; $340,000 in
damages for breach of fiduciary duty and $100,000 in prejudgment interest. The jury also
awarded Ashland $3,200 for breach of the duty of good faith and fair dealing. A judgment was
entered consistent with the jury’s verdict, and the parties now renew their motions for judgment
as a matter of law under Rule 50.
II. Legal Standard.
Federal Rule of Civil Procedure 50(a) provides, in pertinent part, that “[i]f . . . a court
finds that a reasonable jury would not have a significant evidentiary basis to find for a party on
that issue, the court may (A) resolve the issue against the party.” Fed. R. Civ. P. 50(a).
Therefore, judgment as a matter of law is first appropriate when “no reasonable juror could reach
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the verdict rendered in the case.” Athridge v. Rivas, 421 F. Supp. 2d 140, 145 (D.D.C. 2006)
(quoting U.S. ex rel. Yesudian v. Howard Univ., 153 F.3d 731, 735 (D.C. Cir. 1998)); see Fed.
R. Civ. P. 50(a). When deciding a motion for judgment as a matter of law, the Court must
“consider[] the evidence in the light most favorable to the non-moving party and mak[e] all
reasonable inferences in its favor.” Id. (quoting Pitt v. District of Columbia, 404 F. Supp. 2d
351, 353 (D.D.C. 2005), aff’d in part, rev’d in part on other grounds, 491 F.3d 494 (D.C. Cir.
2007)). Judgment as a matter of law in favor of the moving party is only proper if, under those
circumstances, “there is no legally sufficient evidentiary basis for a reasonable jury to have found
in [the non-moving party’s] favor under controlling law.” Pitt, 404 F. Supp. 2d at 353. The
Court is not permitted to weigh the evidence or assess the credibility of witnesses. Hayman v.
Nat’l Acad. of Scis., 23 F.3d 535, 537 (D.C. Cir. 1994). Thus, “even if the Court finds the
evidence that led to the jury verdict unpersuasive, or that it would have reached a different result
if it were sitting as fact-finder, that is not a basis for overturning the jury’s verdict and granting
judgment as a matter of law.” Pitt, 404 F. Supp. 2d at 354 (citing 9 James Wm. Moore et al.,
MOORE ’S FEDERAL PRACTICE § 50.60[1] at 50-87 (3d ed. 2002)).
If, as occurred here, a motion for judgment as a matter of law is not granted, the court is
deemed to have submitted “the action to the jury subject to the court’s later deciding the legal
questions raised by the motion.” Fed. R. Civ. P. 50(b). In such a situation, the movant may, after
a verdict against her, “file a renewed motion for judgment as a matter of law.” Id. The movant
seeking judgment as a matter of law is arguing that, even if the jury were to resolve issues of fact
in her opponent’s favor, the movant is still entitled to prevail.
With one exception where it claims that there was insufficient evidence of proximate
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cause for the damages the jury awarded, Ashland proceeds on this basis, insisting that, even if
there was a sufficient evidentiary basis for the jury’s verdict, the law does not entitle plaintiff to
the verdict it secured because (1) principals, like Ashland, do not owe agents any fiduciary duty;
(2) even if such a duty was owed at one point, it could not pertain to or control the relationship
between Ashland and C&E when they were negotiating a modification of their relationship; (3)
their new relationship did not constitute a joint venture in which the parties owed each other
fiduciary duties; (4) C&E’s damages, as a matter of law, could not have been proximately caused
by Ashland’s conduct; (5) there is no independent cause of action for breach of the implied duty
of good faith and fair dealing, whether the contract at issue is governed by the Uniform
Commercial Code or the common law; (5) recognizing such an action duplicates the award C&E
received on its breach of fiduciary duty claims and (6) C&E’s recovery is barred by what Ashland
says is the principle expressed as “in pari delicto.”
III. Analysis.
A. Breach of Fiduciary Duty.
C&E alleges that it was in a fiduciary relationship with Ashland whereby Ashland owed
C&E a fiduciary duty at the time that the parties entered into the 1998 amendment. In support,
C&E says that the 1987 agreement created a principal-agent relationship, with C&E acting as the
agent and Ashland as the principal. It argues that Ashland owed C&E a fiduciary duty by virtue
of that relationship, and the relationship endured until the execution of the 1998 amendment.
Further, in 1998, C&E alleges that the relationship changed to a joint venture, which also carries
fiduciary duties. The jury was instructed that if it found that the parties were either in a
principal-agent relationship, or were joint venturers, then Ashland owed a fiduciary duty to C&E.
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Ashland responds with several arguments. First, Ashland says that, while it is “black
letter law” that agents owe fiduciary duties to their principals, there is no authority for the
proposition that principals owe fiduciary duties to their agents. Second, Ashland argues that the
parties could not have been in a fiduciary relationship during the course of the negotiations
leading up to the 1998 amendment. Third, Ashland argues that the parties were not joint
venturers, but instead entered into a manufacturer-distributor relationship, which does not carry
fiduciary duties.
The jury was presented with two independent bases for finding the existence of a
fiduciary duty: (1) a principal-agent relationship and (2) a joint venture. Even if I were to find in
Ashland’s favor on the principal-agent relationship argument, for example, sufficient evidence
may still exist to support the jury’s finding that Ashland breached a fiduciary duty based on the
alternate theory that the parties were joint venturers. The jury’s verdict should only be set aside
if Ashland prevails on all of its arguments, and I will address each of these arguments in turn.
1. Whether Ashland could have owed C&E a fiduciary duty by virtue of its status as a
principal in an agency relationship.
Ashland argues that it cannot owe C&E a fiduciary relationship by virtue of any principal-
agent relationship because principals do not owe fiduciary duties to their agents. In support,
Ashland cites Multicom, Inc. v. The Chesapeake and Potomac Telephone Co., No. 88-CV-1886,
1988 WL 118411, at *4 (D.D.C. Oct. 27, 1988), where Judge Gasch held that “[a]lthough it is
well established that an agent owes a fiduciary duty to his principal, no corresponding fiduciary
duty is owed by a principal to an agent.” Id. Judge Gasch’s opinion stands alone in this Circuit,
and the D.C. Court of Appeals has not yet ruled, but various courts nationwide that have recently
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been confronted with this issue have agreed with Judge Gasch. E.g., Fidelity Nat’l Title Ins. Co.
v. Title First Agency, Inc., No. 06-CV-13961, 2008 WL 4371838, at *6 (E.D. Mich. Sept. 22,
2008); Warrentech Auto. Inc. v. Heritage Warranty Ins. Risk Retention Group, Inc., Nos. 07-C-
3539, 07-C-6977, 2008 WL 4876936, at *5 (N.D. Ill. Aug. 12, 2008); MDM Group Assocs., Inc.
v. CX Reinsurance Co. Ltd., U.K., 165 P.3d 882, 888 (Colo. Ct. App. 2007); Metro. Enters.
Corp. v. United Techs. Int’l, No. 03-CV-1685, 2006 WL 522384, at *4 (D. Conn. Feb. 27, 2006).
Accordingly, I would be inclined to agree with Ashland’s position that the D.C. Court of
Appeals would follow those other courts had this issue been raised prior to the case being
submitted to the jury. See Tidler v. Eli Libby Co., Inc. 851 F.2d 418, 423-25 (D.C. Cir. 1988).
After review of the many filings and arguments that Ashland has raised in this case,
however, my initial suspicion was confirmed – that I had yet to hear this argument. There is no
discussion of this concern in the summary judgment briefing before Judge Sullivan, in Ashland’s
Rule 50 Motion for Judgment as a Matter of Law, in the various e-mails and filings regarding
jury instructions, or in the arguments I presided over regarding the Rule 50 motions and jury
instructions.
The initial jury instruction that plaintiff proposed contained the following sentence:
If you find that C&E and Mr. Biggs entered into a
relationship with Ashland by virtue of which C&E
and Mr. Biggs were to be the agents of Ashland,
then Ashland owed C&E and Mr. Biggs a fiduciary
duty of good faith and fair dealing in the incidents
of their relationship.
Plaintiff’s Proposed Jury Instruction No. 7 [#128-A]. At no point in the process of drafting the
instructions did Ashland object to that statement. Instead, Ashland objected to the scope of the
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principal’s duty to its agent. See Defendant Ashland Inc.’s Objections to the Court’s Initial
Determinations as to Jury Instructions [#176] at 5 (“Ashland objects to Plaintiff’s Jury
Instruction No. 7 because it misstates the principal’s fiduciary duty to an agent. D.C. adopts the
Restatement of Agency, which states that a principal’s good faith duty extends only to
information ‘material’ to the agent’s actions ‘on the principal’s behalf.’ Plaintiff’s Proposed
Instruction concerns duties owed by a parent company to a subsidiary under D.C. law.”).
Ashland then requested that the Court add the following definition of agency: “An agency is the
fiduciary relationship which results from the manifestation of consent by one person to another
that the other shall act on his behalf and subject to his control.” Ashland’s Proposed Revisions to
the Court’s Proposed Jury Instructions [#238-14] at 17. It also sought to add the word “material”
to qualify the principal’s duty to disclose facts to the agent. Id. Ashland did not, however, object
in any way to the sentence that clearly instructs the jury that principals owe fiduciary duties to
their agents. Thus, the final instruction that was read to the jury contained that language.
Similarly, in oral argument on the jury instructions and Rule 50 motions, both parties
focused on whether a principal-agent relationship existed, and Ashland did not object to the
underlying assumption that the existence of the relationship was important because the
relationship itself imposed a fiduciary duty on Ashland. See generally Transcript of Proceedings
(5/1/08) (“5/1/08 Tr.”) [#231] at 61:3-66:8, 68:11-24, 70:15-71:25, 74:3-16, 105:9-25, 106:13-
111:13. Finally, in its Rule 50 motion, captioned Defendant Ashland, Inc.’s Motion for
Judgment as a Matter of Law [#174], Ashland specifically says “to the extent a fiduciary
relationship existed between plaintiff and Ashland, it solely existed by reason of the principal-
agent relationship.” Id. at 17. At no point does it object to the proposition that Ashland, if found
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to be in a principal-agent relationship with C&E while negotiating the contract, would also owe
C&E a fiduciary duty.
This motion is brought pursuant to Rule 50(b), which provides that, when the Court
denies a motion for judgment as a matter of law brought at the close of the evidence, it is
considered to submit the case to the jury subject to the Court’s later deciding those legal issues.
Fed. R. Civ. P. 50(b). Accordingly, “the posttrial motion is limited to those grounds that were
specifically raised in the prior motion for judgment as a matter of law, . . . [and] the movant is
not permitted to add new grounds after trial.” Thomas v. Mineta, 310 F. Supp. 2d 198, 204
(D.D.C. 2004) (quoting Tolbert v. Queens Coll., 242 F.3d 58, 70 (2d Cir. 2001)); see also David
v. District of Columbia, 436 F. Supp. 2d 83, 90 n.2 (D.D.C. 2006) (“Because defendants did not
raise this argument in their original motion, the argument is deemed waived and will not be
considered.”), appeal dismissed, No. 06-CV-7131, 2006 WL 3086931 (D.C. Cir. Oct. 17, 2006).
As Ashland did not raise this argument in its Rule 50 motion, or in argument on the Rule 50
motion, and specifically did not object to a jury instruction dealing with this exact controversy, I
find that this argument is waived.
2. Whether Ashland owed C&E a fiduciary duty while they were negotiating the 1998
amendment.
While maintaining that Ashland owed no fiduciary duty to C&E at any time, Ashland
alludes to two other theories why, even if it once had a fiduciary duty to C&E, that duty was not
operative during the process of negotiating the amendment to the 1987 contract.
Ashland is saying that it is impossible for parties, despite their previous relationship as principal
and agent, to maintain their fiduciary relationship while they are negotiating a new relationship,
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even when the new relationship may also impose fiduciary duties. This is so because, by
definition, each party is pursuing its own individual interest, rendering it impossible for their
relationship to be a fiduciary one during the negotiations.
All of this is premised on the proposition that an agent breaches his fiduciary relationship
when he tries to serve two masters in the same transaction. It then follows, apparently, that when
the agent is pursuing his own interest in negotiations leading up to a modification of the
relationship there cannot be a fiduciary relationship between the principal and the agent. I am not
sure how Ashland would deal with the fact that there must be a relationship for there to be a
breach. I am also unpersuaded by Ashland’s analysis.
First, an agent can represent both sides to a transaction provided he makes complete
disclosure. Urban Invests. Inc v. Branham, 464 A.2d 93, 96 (D.C. 1986). In such a situation, he
has a fiduciary obligation to both masters.
Second, from the (incorrect) premise that an agent can never serve two parties to a
transaction, does not flow the proposition that his fiduciary relationship to the other party has
ended merely because they are negotiating its termination or modification. That an agent can be
liable to one principal if he serves that principal and another does not mean that the agent is
somehow disqualified from negotiating with his principal, let alone that he is relieved of his
fiduciary relationship during negotiations with his principal. While there is no D.C. Court of
Appeals case directly on point, this Court has determined that “District of Columbia law has
deliberately left the definition of ‘fiduciary relationship’ flexible, so that the relationship may
change to fit new circumstances in which a special relationship of trust may properly be
implied.” High v. McLean Fin. Corp., 659 F. Supp. 1561, 1568 (D.D.C. 1987) (internal
10
quotation omitted). There is no reason to suppose that the D.C. Court of Appeals would
conclude that the relationship between an agent and a principal is stripped of its fiduciary nature
merely because they are negotiating a modification or even the termination of their relationship.
To the contrary, this Court, interpreting District of Columbia law, has stated that the agent’s
obligation to treat his principal fairly survives even the agent’s making plans to go into direct
competition with his principal.
Mercer Mgmt. Consulting Inc. v. Wilde, 920 F. Supp. 219, 233 (D.D.C. 1996) (“[T]he law is
clear that an agent can make arrangements or plans to go into competition with his principal
before terminating his agency, provided no unfair acts are committed or injury done his
principal.”).
Indeed, it is relatively easy to understand why, as a matter of social policy, a fiduciary
relationship would continue to exist during negotiations leading up to its termination or
modification. In such negotiations, the person owed the fiduciary relationship may be at her most
vulnerable such as when a lawyer seeks to withdraw from her relationship with her client or a
trustee seeks to be relieved of any further trust relationship. There is simply nothing in District
of Columbia law that could permit the conclusion that the District of Columbia Court of Appeals
would conclude that a fiduciary relationship does not persist into the negotiations that seek a
modification or termination of that relationship.
Second, Ashland argues that if a fiduciary relationship persisted, then the parties were
acting outside the scope of their relationship when they were negotiating the amendment.
Ashland directs the Court to Sind v. Pollin, 356 A.2d 653, 655 (D.C. 1976), where the D.C.
Court of Appeals held that the fiduciary duty between former joint venturers did not extend to
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activities outside the scope of the joint venture, including the process of negotiating an agreement
that terminated the joint venture. Whether the parties were acting within the scope of the
fiduciary relationship is a question of fact for the jury to decide, not a question of law for the
court. See Adams v. Vertex, Inc., No. 04-CV-1026, 2007 WL 1020788, at *6 (D.D.C. Mar. 29,
2007); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cheng, 697 F. Supp. 1224, 1226 (D.D.C.
1988). In Sind, it was also clear that the parties intended to terminate their relationship.
Provided there is a minimal level of evidence from which a reasonable jury could determine that
C&E and Ashland were acting within the scope of a fiduciary relationship when they agreed to
modify their relationship, then the jury’s determination on the issue must stand. Here there was
evidence that the parties were acting within the scope of their previous arrangement because the
purpose of the agency relationship was to sell Ashland’s products, through C&E, to government
customers, as was the purpose of their new agreement. The amendment to the 1987 agreement
unquestionably deals with the sale of Ashland’s products, through C&E, to government
customers albeit under different terms. A reasonable jury could have concluded that the parties
continued to carry out the same duties while amending their agreement. While the jury could
have reached a contrary conclusion, it cannot be said that a reasonable person had to conclude
that a fiduciary relationship existed up to the negotiations, ended during the negotiations, and
resumed under the new agreement.
3. Whether Ashland and C&E entered into a joint venture by virtue of the 1998
amendment.
Ashland argues that under D.C. law, parties cannot be joint venturers unless they share
profits. Though Ashland tries valiantly to extrapolate a series of prerequisites to a joint venture
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under D.C. law similar to those one might find in Maryland or Virginia, the cases simply aren’t
there. See Marine Engineers Beneficial Assoc. Dist. Two v. Cunard Line Ltd., No. 91-CV-654,
1993 WL 141069, at *2 (D.D.C. Apr. 19, 1993) (“Defendant initially argues that plaintiffs have
failed to show each of the criteria that courts have required for the existence of a joint venture
agreement. However, as plaintiffs point out, courts in the District of Columbia appear not to
have been so strict about the elements of a joint venture agreement . . . and have permitted the
inference of such an agreement from the conduct of the parties.”). In fact, the main case Ashland
cites for its proposition that a joint venture cannot exist without profit sharing, Thomas v. Hycon,
Inc., 244 F. Supp. 151 (D.D.C. 1965), was decided under Maryland law.
In D.C., “[t]wo or more persons who join in a particular business enterprise for profit
create a ‘joint adventure’ or ‘joint venture.’” Jonathan Woodner Co. v. Laufer, 531 A.2d 280,
286 n.8 (D.C. 1987) (quoting Libby v. L.J. Corp., 247 F.2d 78, 81 (D.C. Cir. 1957)). The
question of whether a given relationship is a joint adventure is one for the trier of fact. Id. at 287
(“The existence vel non of a joint venture is a factual issue properly reserved for the . . . trier of
fact.”). Thus, in order for Ashland to succeed on its motion for judgment as a matter of law, it
must demonstrate that, viewing the evidence in the light most favorable to C&E, no reasonable
juror could have determined that Ashland and C&E joined in a business enterprise for the
purpose of making a profit. However, there is ample evidence in the record to suggest that
Ashland and C&E joined forces for the purpose of selling Ashland’s products to government
customers and making profits for both parties involved.
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4. Proximate cause.
Ashland also argues that, even if there was a breach of fiduciary duty, that breach was not
a proximate cause of C&E’s damages. Instead it argues that C&E’s damages were brought about
by its own decision to sell products that were not on its GSA schedule and represent that the
products were on the schedule. There was evidence presented to the jury at trial from which the
jury could conclude that the use of the allegedly defective prices caused C&E to incur damages.
Thus, as causation is a question of fact for the jury, I will not second guess the jury’s view of the
evidence.
B. Breach of the Duty of Good Faith and Fair Dealing.
C&E argues that Ashland breached its duty of good faith and fair dealing by withholding
information about the government audit, which prevented C&E from carrying out its contractual
obligation to add Ashland’s products to its GSA schedule. C&E focuses on requests it made to
Ashland for specific information requested by the GSA.
Ashland makes several claims in response. First, Ashland claims that there is no
independent cause of action in D.C. for breach of the duty of good faith and fair dealing, and
therefore, to prevail, C&E was required to bring a breach of contract claim. Ashland maintains
that there is no independent cause of action regardless of whether the contract is governed by the
Uniform Commercial Code (“UCC”) or the common law, but that the contract should be
governed by the UCC. Second, Ashland argues that the cause of action for breach of the duty of
good faith and fair dealing is duplicative of the cause for breach of fiduciary duty because C&E
bases its claims on the same conduct. Third, Ashland argues that the evidence is insufficient to
support C&E’s claim. Fourth, Ashland invokes the doctrine of in pari delicto to argue that
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because the jury found both parties had breached the duty of good faith and fair dealing, the bad
actions should cancel each other out.
1. Whether there is an independent cause of action, under D.C. law, for breach of the
duty of good faith and fair dealing.
a. UCC.
The UCC duty of good faith and fair dealing, codified in D.C. Code § 28:1-103,1 states
that “[e]very contract or duty within this subtitle imposes an obligation of good faith in its
performance or enforcement.” The comment explains that the section should not be read to mean
that failure to act in good faith or deal fairly is itself actionable, but failure to act in good faith or
deal fairly while performing or enforcing a specific contractual duty or obligation constitutes a
breach. See comment to D.C. Code § 28:1-103. C&E did not plead “breach of contract” in its
Second Amended Complaint [#54]. Thus, Ashland says the claim should be dismissed.
Count Five of the Second Amended Complaint is entitled “Breach of Implied Covenant
of Good Faith and Fair Dealing.” While the title does not include the words “Breach of
Contract” C&E does allege in paragraph 89 within Count Five that “Ashland breached its duty of
good faith and fair dealing under that agreement in a number of ways, including . . . impeding
CES’ ability to perform its obligations under the amendment by failing to provide correct and full
information.” Second Amended Complaint at 19-20. While Ashland claims that C&E was
trying to pursue a claim that sounded in tort, in reality, C&E pled specifically a breach of an
implied duty that arises out of a contract. Under the UCC, the duty is to be treated as though it
were a term of the contract, and therefore, to breach the duty is to breach the contract. See In re
1
All references to statutes in this opinion refer to the versions available on Westlaw or
Lexis.
15
Beitzell & Co., 163 B.R. 637, 649-50 (Bankr. D.D.C. 1993) (“A provision implied as a matter of
law in every loan agreement should be treated as appearing on the face of the agreement.”); D.C.
Code § 28:1-203, comment (“This section does not support an independent cause of action for
failure to perform or enforce in good faith. Rather, this section means that a failure to perform or
enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that
contract . . .”); see also In re Fannie Mae Secs. Litig., 552 F.3d 814, 820-21 (D.C. Cir. 2009) (all
contracts include an obligation of good faith and fair dealing).
It may be true that C&E did not entitle its claim “Count V Breach of Contract,” but
plaintiff’s evidence, if accepted by the jury, tended to establish that Ashland acted in bad faith or
unfairly in the enforcement of the contract by withholding information from C&E that Ashland
knew that C&E needed in order to satisfy its contractual obligation to add Ashland’s products to
its GSA schedule. Ashland would have me accept the proposition that, despite the fact that the
parties bargained for C&E’s obligation to get the products on the schedule, Ashland should not
be required to give information to C&E that is necessary to carry out C&E’s obligation because
the contract does not explicitly say that Ashland has to provide that information. Deriving an
obligation to provide information that only Ashland possesses and is necessary for C&E to
perform the contract flows naturally and necessarily from an obligation to act in good faith and
not to prevent the other party from rendering the consideration that is due that party under the
contract. Since that proposition flows so naturally from the implied covenant, one cannot be said
to be reading additional terms into the contract that the parties did not bargain for. Whether the
action about which C&E complains is labeled as a breach of the duty of good faith and fair
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dealing or a breach of the implied covenant of good faith and fair dealing that is read into the
contract is really just a matter of semantics.
Further, Ashland did not argue for the application of the UCC until it filed its Rule 50
motion in the middle of the trial. Accordingly, to the extent this contract is governed by the
UCC, I will permit C&E to conform the pleadings to fit the proof.
Rule 15(b) of the Federal Rules of Civil Procedure permits a “party to move –at any time,
even after judgment– to amend the pleadings to conform them to the evidence and to raise an
unpleaded issue.” Fed. R. Civ. P. 15(b); see also Baker v. John Morrell & Co., 382 F.3d 816,
830-31 (8th Cir. 2004). Leave to amend is to be freely given when justice so requires. Fed. R.
Civ. P. 15(a)(2); see Islamic Am. Relief Agency v. Gonzales, 477 F.3d 728, 738 (D.C. Cir. 2007)
(“Leave to amend one’s complaint is liberally permitted.”), cert. denied, 128 S. Ct. 92 (2007).
The only impediment to the granting of such leave now that the trial has ended would be a
showing that there would have been a significant difference between the way in which the case
was tried and the way it would have been tried had C&E moved to amend its complaint before
trial to assert that Ashland’s breach of the duty of good faith and fair dealing breached the
contract. In no other way, can Ashland establish prejudice which might preclude the liberal
amendment of pleadings, even after judgment, that Rule 15 requires. See 3 James Wm. Moore et
al., MOORE ’S FEDERAL PRACTICE, ¶ 15.18 (3d ed. 1997) (“[A court should be liberal in allowing
amendments to conform [the pleadings] to the evidence.”) (citing First Nat’l Bank of Louisville
v. Cont’l Nat. Bank and Trust, 933 F.2d 466, 469 (7th Cir. 1991) and Cotton Bros. Baking Co.,
Inc. v. Indus. Risk Insurers, 690 F. Supp. 1541, 1548 (W.D. La. 1988)). Also, it would seem that
a showing of such prejudice is essential for Ashland to establish that my granting the motion to
17
amend now is an abuse of discretion. Cf. Cotton Bros. Baking Co, Inc., 690 F. Supp. at 1548(interpreting Rule 15(b) to require serious showing of prejudice, such as surprise; if no showing,
refusing to permit leave to amend to permit assertion of unpleaded issues at trial is abuse of
discretion).
I cannot think of any different facts that C&E would have put forth in support of this
claim if it were titled a breach of contract claim. Nor can I see how Ashland would have
proceeded differently. This is not the first time Ashland has flirted with this defense; Ashland
proceeded before and at trial upon the theory that Virginia law controlled, and Virginia does not
permit an independent claim. See Eplus Tech. Inc. v. Nat’l RR Passenger Corp., 407 F. Supp. 2d
758, 762 (E.D. Va. 2005). Ashland did not rest on that defense alone, however. In these motions
and in previous filings, Ashland has fully defended the merits of C&E’s claim, not just whether it
should be permitted to bring it. It is not as though Ashland put all of its eggs in this basket and
would now be prejudiced because it would not have an opportunity to defend itself fully.
Since there would have been no difference between the case that was tried and the one
that would have been tried had C&E called its claim “breach of contract” before and at trial, it
would be an abuse of discretion for me to refuse it leave to amend its complaint to conform to the
proof offered at trial.
b. Common law.
Ashland argues that even under the common law there is no independent cause of action
for breach of the duty of good faith and fair dealing in D.C. C&E vehemently opposes this
contention, arguing that the law clearly allows such a claim. I disagree with both parties’ claims
that the law clearly takes one position or another. Ashland, for one, cites primarily cases decided
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by D.C. courts but applying other jurisdictions’ law. C&E, on the other hand, cites to language
that does not address the issue at bar and argues it clearly favors its position. The only case I
have found that is directly on point specifically concludes that the area of the law is not clear
before opining that D.C. courts would probably follow Ashland’s view. See Crystal Prods., Inc.
v. Doc Severinsen Orchestras, No. 90-CV-932, 1994 WL 507546, at *4 (D.D.C. Sept. 10, 1992).
While that opinion certainly supports Ashland’s interpretation, one unpublished opinion that is
over 15 years old and has not been cited by any other opinions hardly renders the issue “clear.”
What is clear is that the duty must arise out of a contract between the parties. See Kerrigan v.
Britches of Georgetowne, Inc., 705 A.2d 624, 626-27 (D.C. 1997) (holding that at-will employee
could not have a claim for breach of the implied covenant of good faith and fair dealing because
there was no employment contract to which the duty could be implied); see also Messina v.
Nationwide Mut. Ins. Co., 998 F.2d 2, 5 (D.C. Cir. 1993). Also, the duty is not a means to add
new terms to the agreement; it merely requires that the parties behave fairly and reasonably in the
performance and enforcement of the contract. Adler v. Abramson, 728 A.2d 86, 88 (D.C. 1999).
I am not prepared to dismiss C&E’s claim, which was proven to the satisfaction of the jury at
trial, without a showing that the law clearly prohibits bringing the claim as an independent cause
of action.
Because I find that the distinction between how the breach of the duty of good faith and
fair dealing is treated under the common law and the UCC is not important to my resolution of
this case, I will not address whether this contract should be considered to be one primarily for the
sale of goods or the sale of services.
2. Whether this cause of action is duplicative.
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Ashland argues that C&E’s cause of action for breach of the duty of good faith and fair
dealing is cumulative of its action for breach of fiduciary duty because both claims rely on the
same facts. While it is true that the basis of both claims is that Ashland withheld information
about the 1997 audit, both claims do not necessarily focus on the same information or the same
instance of withholding. The breach of the duty of good faith and fair dealing must necessarily
arise out of the performance or enforcement of the contract, not out of the contract negotiations.
Ellipso, Inc. v. Mann, 541 F. Supp. 2d 365, 373-74 (D.D.C. 2008) (“Although this duty is
implied in all contracts, the Court is aware of no District of Columbia authority that would imply
such a duty in parties’ pre-contract negotiations.”). C&E alleges both that Ashland failed to
disclose information about the audit during their negotiations and in response to C&E’s request
for information after the contract was executed. It is entirely possible that the jury awarded
damages to C&E for breach of fiduciary duty arising out of the failure to disclose information
during negotiations, and for breach of the duty of good faith and fair dealing for failure to
disclose information after the contract was executed. This would represent two separate
instances of wrongdoing entitling C&E to damages.
Ashland argues that the fact that the jury was concerned that it might be allowing double
recovery and that I told it to award the damages it felt that C&E suffered from each claim and the
total would be reduced if necessary to avoid duplicative damages suggests that this verdict is
duplicative. C&E argues that the jury was obviously concerned with preventing double recovery
and therefore this verdict must not allow for double recovery. I find each argument equally
persuasive, which is to say, I don’t know what the jury did, but I do know that there is enough
20
evidence in the record for the jury to find two separate causes of action arising out of separate
allegations. Accordingly, I will leave the verdict alone.
3. Sufficiency of the evidence.
In the District of Columbia, “all contracts contain an implied duty of good faith and fair
dealing, which means that ‘neither party shall do anything which will have the effect of
destroying or injuring the right of the other party to receive the fruits of the contract.” Allworth
v. Howard Univ., 890 A.2d 194, 201 (D.C. 2006) (quoting Paul v. Howard Univ., 754 A.2d 297,
310 (D.C. 2000)). Liability lies for breach of the duty if a party (1) evades the spirit of the
contract, (2) willfully renders imperfect performance, or (3) interferes with performance by the
other party. Id. C&E presented evidence at trial to suggest that the government requested certain
information from C&E as part of its petition to add Ashland products to its GSA schedule, that
C&E requested that information from Ashland and that Ashland said it did not exist or did not
give it to C&E. Under those circumstances, a reasonable fact-finder could determine that
Ashland interfered with C&E’s ability to perform its contractual duty to add Ashland products to
its GSA schedule.
4. In pari delicto.
Ashland also argues that because the jury found that both parties breached their duty of
good faith and fair dealing, neither should recover under the doctrine of in pari delicto or unclean
hands. “[T]he legal principle of in pari delicto . . . holds that if the parties are in equal fault, the
law will help neither of them.” Wager v. Pro, 575 F.2d 882, 884 (D.C. Cir. 1976). The doctrine
is generally only applied when the parties agree to undertake an illegal activity; the Court will not
enforce a contract between two parties to engage in illegal activities. See United States v. Phillip
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Morris USA, Inc., 300 F. Supp. 2d 61, 76 (D.D.C. 2004) (“A party truly in pari delicto is one
who has himself violated the law in cooperation with the defendant.”) (quoting Pinter v. Dahl,
486 U.S. 622, 636 (1988)). This argument was not presented in Ashland’s Rule 50 brief, and
therefore the Court need not address it, but even if it were properly preserved, Ashland has not
demonstrated that the contract at issue here was illegal. Therefore, the defense of in pari delicto
will be of no assistance to Ashland here.
C. Pre-judgment Interest.
The jury awarded pre-judgment interest to C&E on both its claim for breach of fiduciary
duty and the duty of good faith and fair dealing. Ashland argues that there is no legal basis for
the jury’s award. First, with respect to the interest awarded for the breach of the duty of good
faith and fair dealing, D.C. Code §15-109 specifically authorizes the award of prejudgment
interest in contract cases, and that claim undoubtedly arises out of the contract between these
parties. Thus, the jury’s award of prejudgment interest on the claim for breach of the duty of
good faith and fair dealing will stand.
The breach of fiduciary duty claim sounds in tort, so it is governed by § 15-108, which
provides that the Court may award prejudgment interest in an action to recover for a liquidated
debt if such interest is payable by contract, law or usage. Ashland argues that this debt is not
liquidated because it was not ascertainable until the jury awarded a specific amount in damages.
However, the courts of the District of Columbia have continued to move away from strict
adherence to the liquidated-unliquidated distinction and instead focus on whether the interest is
necessary to fully compensate the party for its loss. See Bragdon v. Twenty-Five Twelve
Assocs., LP, 856 A.2d 1165, 1171 (D.C. 2004); District of Columbia v. Pierce Assocs., Inc., 527
22
A.2d 306, 310 (D.C. 1987). The jury was instructed in accordance with these principles and thus
must have concluded that the interest awarded was necessary to make the plaintiff whole. I will
not disrupt its decision.
D. Equitable Indemnification.
Ashland asserted a claim for equitable indemnification seeking recovery from C&E for
the $350,000 it paid in settlement with the government following the second investigation. Since
that claims sounds in equity, it was understood that the Court would resolve it after the jury
returned its verdict on all the other counts, including the counterclaims Ashland had asserted for
breach of contract and breach of the implied covenant of good faith and fair dealing.
1. Principles of Indemnification.
Under traditional principles, indemnity is available only if the party seeking indemnity
(called the indemnitee) from the indemnitor has discharged the liability of both. RESTATEMENT
(THIRD ) OF TORTS, Apportionment of Liability ' 22, Reporter’s Note at 277 (2000).
Indemnification exists to prevent unjust enrichment; such enrichment occurs only when the
indemnitee=s payment to the victim protected the indemnitor from any future liability. Id. If, on
the other hand, the indemnitor remains liable to the party with whom the indemnitee settled,
there is no unfairness that needs rectification; the indemnitor was liable to the plaintiff before the
settlement and remains liable after it. She has not been unjustly enriched by the settlement
payment to the plaintiff. Hence, it is fundamental that the indemnitee must have discharged the
liability of the indemnitor for there to be any indemnification. “No case has permitted
noncontractual indemnity against a person still liable to the plaintiff.” Id.23
2. District of Columbia Law.
The District of Columbia2 follows this principle to the letter as perfectly illustrated by the
difference in the two most significant cases, District of Columbia v. Washington Hospital Center,
722 A.2d 332 (D.C. 1998) and Caglioti v. District Hospital Partners, 933 A.2d 800 (D.C. 2007).
In Washington Hospital Center, the District of Columbia, having settled with a pedestrian
who had been injured during a high speed police case, sought indemnification from the Hospital
Center, claiming that the Center had aggravated the pedestrian=s injuries by its malpractice when
she was taken to the Center after the accident. Citing the principle discussed above,3 the court of
appeals held the District=s entitlement to indemnification was a function of whether its settlement
with the pedestrian was made and accepted in full satisfaction of her claim and with the intention
to release all parties who might be liable to the pedestrian. Wash. Hosp. Ctr., 722 A.2d at 341(quoting Lamphier v. Wash. Hosp. Ctr., 524 A.2d 729, 735 (D.C. 1987)). The court looked to
the intention of the parties as to these two issues, concluding that if the language was clear and
unambiguous, the plain language of the release controlled. Id. Since the release between the
District and the pedestrian released only the District of Columbia, its officers, agents and
employees and contained no provision for the release of any other individuals or entities against
whom the pedestrian had claims, it was clear that there was no basis in the release to conclude
2
After hearing argument from the parties on May 1, 2008, I determined that D.C. law
applied to this case because no single state had an overwhelming interest in seeing its law applied
and application of D.C. law would not impair the interests of the other states who could claim a
right to have their law applied.
3
Note that the section of the RESTATEMENT (SECOND ) OF TORTS that addressed
indemnity, Section 886B, was replaced with Section 22 of the RESTATEMENT (THIRD ) OF TORTS.
See RESTATEMENT (THIRD ) OF TORTS '22 cmt. A.
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that the pedestrian released any claim she might have had for medical malpractice against the
Hospital Center. Id. at 342.
The plaintiff in Caglioti, like the pedestrian in Washington Hospital Center, claimed to
have been victimized by a hospital=s malpractice after he was seriously injured by a wheel chair
malfunction that threw him to the ground. Caglioti settled with the wheel chair manufacturer
but, unlike the pedestrian, he signed a release that expressly released the manufacturer and any
person or entity that provided medical care to him after the accident. Caglioti, 933 A.2d at 804-
05. Additionally, the same release indicated that the settlement was in full compensation for all
the injuries Caglioti suffered, to include any aggravation of injuries caused by the putative
malpractice of the hospital. Id. at 809-10. It therefore followed that the wheel chair
manufacturer could pursue (or assign) a claim for indemnity against the hospital because it had
discharged the hospital’s liability to Caglioti.
The difference in result in the two cases dictates the determination of this case. Turning,
as District of Columbia law requires, to the clear language of the agreement4 and the release it
contained in paragraph seven, there is no expressed intention to relieve C&E of liability and no
indication whatsoever that the parties were agreeing that the payment resolved entirely the
liability that C&E might have to the government.
Moreover, if parole evidence were available, it promptly defeats Ashland=s claim. Peter
White, who represented Ashland at trial, also represented Ashland during the negotiations that
led to Ashland=s settlement with the government for $350,000.
4
See Caglioti, 933 A.2d at 808-09; Wash. Hosp. Ctr., 722 A.2d at 332.
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White specifically testified that he discussed whether the United States would also settle
whatever claim it had against C&E but the idea was rejected. White also explicitly
acknowledged in his testimony that “there was no release of C&E,” (4/30/08) AM Tr. at 59:22,
and that the government did not intend to release its claims against C&E. Id. at 59:13-15 (“Q:
All right. But it suffices to say that you did not resolve any of C&E’s potential liability; isn’t that
right? A: Mr. Mene [i.e. the Assistant United States Attorney] rejected the offer to do so.”).
It would be hard to conceive of a more obvious indication that White and the Assistant
United States Attorney were only settling the government’s claim against Ashland and not
settling its claim against C&E.
Since it is indubitably clear that the settlement did not intend to relieve C&E of any
further liability and that it was not designed to settle the entire claim that the Untied States had
against both of them, Ashland’s claim for indemnification has to fail.
3. Preclusive Effect of the Jury’s Verdict.
When, as occurred here, the Court resolves an equitable claim after a jury verdict, it must
give preclusive effect to the first resolution of any factual issue presented so that it follows the
jury’s factual findings with respect to legal claims when it resolves the equitable claims. Fogg v.
Ashcroft, 254 F.3d 103, 110 (D.C. Cir. 2001). In order to be given this preclusive effect, the
issue of fact must have been actually litigated and determined by the jury’s verdict. Id. (quoting
RESTATEMENT (SECOND ) OF JUDGMENTS ' 27 (1981)); see also Consol. Edison Co. v. Bodman,
449 F.3d 1254, 1258 (D.C. Cir. 2006) (issue must have been actually and necessarily decided in
prior decision to be given preclusive effect in the second case).
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An examination of the trial evidence, the parties= argument and the Court=s instructions
and the verdict form indicates beyond any argument that the jury was not called upon to make
any factual finding as to the intention of the government and of Ashland when they entered into
the settlement agreement that resolved the government=s claim. Accordingly, the jury=s verdict
has no preclusive effect on the equitable indemnification claim.
D. Ashland’s Claim for Breach of Good Faith and Fair Dealing.
The jury found in favor of Ashland on its claim that C&E breached its duty of good faith
and fair dealing and awarded $3,200 in damages. C&E argues that the jury’s verdict must be set
aside because there was no proof of damages adduced at trial that could support the jury’s
verdict. C&E claims that the only damages Ashland presented to the jury were the $350,000 that
was the subject of Ashland’s request for indemnification that I have just denied. Thus, C&E
alleges that Ashland is trying to get around the fact that it must demonstrate an entitlement to
indemnification to recover that money by framing it as something else. I am not persuaded by
that argument, however.
In addition to evidence about the $350,000 that Ashland ultimately paid to settle, the jury
heard that Ashland incurred legal fees during the settlement process. The jury could properly
conclude that Ashland suffered those damages as a result of C&E’s breaching the implied duty of
good faith and fair dealing. Accordingly, C&E’s Motion for Judgment as a Matter of Law on
Ashland’s Counterclaim [#198] will be denied.
E. Costs.
Both C&E and Ashland argue that they are the prevailing party in this litigation for the
purpose of recovering costs under Federal Rule of Civil Procedure 54(d). Rule 54(d) provides
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that “unless a federal statute, these rules, or a court order provides otherwise, costs – other than
attorney’s fees – should be allowed to the prevailing party.” Fed. R. Civ. P. 54(d). While the
Court has discretion to determine whether they are appropriate, costs should be awarded as a
matter of course unless the
Court articulates a good reason for denying them. Baez v. U.S. Dep’t of Justice, 684 F.2d 999,
1004 (D.C. Cir. 1982) (en banc). A prevailing party is “one who has been awarded some relief
by the court, or one who succeeds on any significant issue in litigation which achieves some of
the benefits they sought in bringing suit.” Stanley v. Proctor, 591 F. Supp. 2d 12, 15 (D.D.C.
2008). Under that definition, both Ashland and C&E could conceivably be considered to be
prevailing parties because judgment was entered in favor of each of them. See Select Milk
Producers, Inc. v. Johanns, 400 F.3d 939, 946-47 (D.C. Cir. 2005) (outlining three criteria by
which a party might demonstrate that it is a prevailing party); Lopez v. District of Columbia, 383
F. Supp. 2d 18, 22 (D.D.C. 2005) (holding that a party can still be a prevailing party even if it
does not get all the relief it seeks). In a case such as this, where there are multiple claims, the
parties can only be compensated for the claims on which they prevailed. Brown v. Bolger, 102
F.R.D. 849, 856 (D.D.C. 1984). C&E initially brought six claims and judgment was entered in
its favor on two of them. Ashland brought four counterclaims and judgment was entered in its
favor on one of them.
Despite the fact that this appears to put the parties nearly in equipoise, they argue that I
should weigh the importance of the claims by looking at which claims were really predominant,
and the difference between the amounts sought and the amounts recovered to determine which
party really won the case as a whole. While I understand Ashland’s point that it prevailed on the
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fraud claim, which was the most significant monetary claim – and arguably the most stringently
pursued at trial5 – “plaintiff need not prevail on the primary issue in the lawsuit” to be a
prevailing party. Lopez, 383 F. Supp. 2d at 22. Thus, I am not convinced that Ashland’s
successful defense of the fraud claim should automatically nullify any claim C&E has to
prevailing party status. I am not alone in my confusion; in this sort of situation, courts have
taken various positions, including declaring the party who recovered more money the prevailing
party, holding that there is no prevailing party, holding that both are prevailing parties and
various other permutations. Compare Dan Cartage Co. v. United States, 289 F.2d 623, 627 (6th
Cir. 1961) (net judgment winner prevails) with Ennis v. Ring, 353 P.2d 950, 954 (Wash. 1959)
(if exact offset neither prevails) and Moran v. Lewis, 41 A.2d 905, 905 (Conn. 1945) (both
parties get costs when defendant prevailed on counterclaim).
Because both Ashland and C&E have arguably prevailed in this case, both are arguably
entitled to costs on the claims that they successfully pursued or defended. However, in reality,
lawyers do not track costs based on individual claims and defenses. It would be extremely
difficult if not impossible to differentiate between the various theories pursued here in any
meaningful way. Further, the purpose of Rule 54(d) is to deter frivolous litigation by impressing
upon would be litigants that failure to prove their case will result in their having to pay for their
opponents’ costs. That concern isn’t present here, where both parties advanced some meritorious
claims. Given the practical difficulty and the fact that ordering the parties to bear each other’s
costs would not meaningfully advance the purpose of the rule, I will use my discretion to leave
5
One could certainly argue that since the breach of fiduciary duty and duty of good faith
and fair dealing claims arose out of the same facts but required a lower standard of proof, the
emphasis on fraud was at least partially tactical.
29
them where they lie. Each party shall bear its own costs. Accordingly, the plaintiff’s Motion to
Strike Defendant Ashland’s Bill of Costs [#209] will be granted. Plaintiff’s Motion for Leave to
File Bill of Costs [#208] will be denied.
IV. Conclusion.
For the reasons stated above, plaintiff’s Motion for Judgment as a Matter of Law on
Ashland’s Counterclaims for Breach of Contract and Breach of the Implied Covenant of Good
Faith and Fair Dealing [#183] will be denied. Plaintiff’s Motion for Judgment as a Matter of
Law on Ashland’s Counterclaim for Breach of the Implied Covenant of Good Faith and Fair
Dealing and Motion to Alter or Amend the Judgment Entered by the Clerk of the Court [#198]
will be denied. Defendant’s Motion for Judgment as a Matter of Law, Renewed Motion to Alter
Judgment [#200] will be denied. Plaintiff’s Motion for Leave to File Bill of Costs [#208] will be
denied. Plaintiff’s Motion to Strike [203] Bill of Costs [#209] will be granted. Finally,
plaintiff’s Unopposed Motion to Permit Plaintiff’s Reply in Support of Plaintiffs’ Renewed
Motion for Judgment as a Matter of Law Filed One Hour Out of Time [#206] will be granted as
conceded.
An Order accompanies this Memorandum Opinion.
Date: March 9, 2009 /S/
JOHN M. FACCIOLA
U.S. MAGISTRATE JUDGE
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