Bohler Uddeholm Amer v. Ellwood Grp Inc ( 2001 )

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
5-17-2001
Bohler Uddeholm Amer v. Ellwood Grp Inc
Precedential or Non-Precedential:
Docket 99-3773
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Recommended Citation
"Bohler Uddeholm Amer v. Ellwood Grp Inc" (2001). 2001 Decisions. Paper 108.
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Filed April 11, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 99-3773
BOHLER-UDDEHOLM AMERICA, INC., a Delaware
Corporation; BOHLER-UDDEHOLM COPORATION, a
New York Corporation
v.
ELLWOOD GROUP, INC., a Pennsylvania Corporation;
ELLWOOD QUALITY STEELS COMPANY, a Pennsylvania
Business Trust; ELLWOOD SPECIALTY STEEL COMPANY,
a Pennsylvania Corporation; DAVID E. BARENSFELD,
an individual
v.
BOHLER-UDDEHOLM COPORATION, a New York
Corporation; UDDEHOLM LIMITED,
a Canadian Corporation
Ellwood Group, Inc.; Ellwood Quality Steels Co.;
Ellwood Specialty Steel Co.; David Barensfeld;
Bjorn E. Gabrielsson, Appellants
On Appeal From the United States District Court
For the Western District of Pennsylvania
(D.C. Civ. Nos. 91-cv-00706 and 96-cv-00734)
District Judge: Honorable Robert J. Cindrich
Argued: July 19, 2000
Before: BECKER, Chief Judge, SLOVITER and
NYGAARD, Circuit Judges.
(Filed: April 11, 2001)
H. WOODRUFF TURNER, ESQUIRE
(ARGUED)
ROBERT B. SOMMER, ESQUIRE
DAVID M. ACETO, ESQUIRE
DOUGLAS A. PEARSON, ESQUIRE
Kirkpatrick & Lockhart, LLP
Henry W. Oliver Building
535 Smithfield Street
Pittsburgh, PA 15222-2312
Counsel for Appellants
VINCENT J. CONNELLY, ESQUIRE
ALAN J. MARTIN, ESQUIRE
(ARGUED)
DANIEL L. RING, ESQUIRE
ERIC S. DREIBAND, ESQUIRE
TERRI HOSKINS, ESQUIRE
AUDREY FRIED-GRUSHCOW,
ESQUIRE
Mayer, Brown & Platt
190 South La Salle Street
Chicago, IL 60603
WILLIAM M. WYCOFF, ESQUIRE
Thorp, Reed & Armstrong
One Riverfront Center
Pittsburgh, PA 15222
Counsel for Appellees
OPINION OF THE COURT
BECKER, Chief Judge.
This is an appeal by defendant Ellwood Group, Inc.,
(Ellwood) from a final judgment enter ed against it by the
District Court for the Western District of Pennsylvania in
favor of plaintiff Uddeholm Tooling AB (Uddeholm). This
complicated commercial case emerges fr om the
disintegration of a joint venture enter ed into by Ellwood, a
Pennsylvania corporation in the business of for ging steel
ingots into various components of heavy machinery, and
2
Uddeholm, a Swedish company that produces specialty tool
steels. Uddeholm brought numerous claims against
Ellwood, including breach of contract, br each of fiduciary
duty, misappropriation of trade secrets, and civil
conspiracy. Resolution of this appeal requir es us to address
a number of questions of Pennsylvania contract, business
tort, and damages law, along with two questions on the
application of the Federal Rules of Evidence.
The most important issue involves the question whether
the joint venture agreement was ambiguous as a matter of
law as to whether Ellwood could properly claim rebates for
its sales to third parties of ingots pr oduced by the Ellwood-
Uddeholm Steel Company (EUS), the entity for med by the
joint venture, or whether Ellwood was limited to rebates for
sales by EUS to Ellwood for Ellwood's own use. Uddeholm
maintains that the latter interpretation r eflects not only the
clear intent of the contracting parties but also the raison
d'etre of the contract. We conclude that the District Court
was correct in finding a contractual ambiguity. We also
conclude, however, that it erred in instructing the jury that
Ellwood had the burden of establishing the meaning of the
disputed terms in the agreement because of the fiduciary
relationship between the parties that was cr eated by the
joint venture. We must therefor e vacate the jury verdict on
the contract claim and remand for a new trial.
Other important issues include: (1) whether Uddeholm's
breach of fiduciary duty and misappropriation of trade
secrets claims were covered and thus precluded by its
breach of contract claim; (2) whether Ellwood's potential
liability on the civil conspiracy claim was for eclosed
because the jury found no other conspirator; (3) whether
Uddeholm could recover on its contract claim for rebates
Ellwood received in 1991; (4) the inter est rate to be applied
to sums Uddeholm owed Ellwood for post-ventur e
purchases of steel; and (5) two evidentiary questions: the
admissibility of a document under Fed. R. Evid. 807 (the
residual exception to the hearsay rule), and whether the
court erred by requiring redaction of an Uddeholm
employee's memo before admitting it into evidence.
We will affirm the District Court's decision allowing
Uddeholm to recover on its fiduciary duty claims, for the
3
wrongful behavior that underlies this claim was not covered
by the joint venture agreement. However , we will set aside
both the verdict for Uddeholm on the misappr opriation
claim (because it was covered by the joint venture
agreement) and the verdict on the civil conspiracy claim (as
there was insufficient evidence of the existence of a second
co-conspirator, which is required under Pennsylvania law).
With respect to the latter issue, we r eject Uddeholm's
contention that Ellwood did not validly preserve its
objection. We will also set aside the District Court's order
that applied a 6% interest rate to the sums Uddeholm owed
Ellwood for steel that it bought post-ventur e, and remand
for further findings of fact on this issue. W e will affirm the
District Court's evidentiary rulings, because its application
of Rule 807 and its redaction of the employee's memo were
not abuses of the court's discretion. W e therefore will affirm
in part, reverse in part, and remand for further
proceedings.
I. Facts and Procedural History
Prior to 1984, Ellwood relied on outside manufacturers to
supply it with steel ingots for its steel-for ging business. In
early 1984, Ellwood decided to construct an ingot mill in
Ellwood City, PA, in order to produce its own supply of
steel, which it did under the name Ellwood City For ge Steel
Company (ECF). At around this time, Uddeholm decided
that it wanted to set up a manufacturing plant in the
United States in order to avoid quotas on imports of tool
steel from Sweden, deliver steel more quickly, and avoid
currency fluctuations. The two companies entered
negotiations with an eye towards forming a joint venture in
which Uddeholm would provide its steelmaking expertise
and some funding for Ellwood's new mill, while Ellwood
would provide Uddeholm with a U.S. sour ce of tool steel as
well as most of the financing of the mill.
After nine months of negotiation, the two companies
entered into a joint venture agreement which comprised
several contracts executed in April and June 1985
(collectively, the Agreement).1 For the purposes of this
_________________________________________________________________
1. More specifically, the joint ventur e agreement was between Uddeholm
and Ellwood City Forge Corporation, a subsidiary of the Ellwood Group.
4
appeal, the most important of these contracts ar e the
Shareholders Agreement, the two Steel Pur chase
Agreements (one each for Ellwood and Uddeholm, covering
their purchases from the new mill), and the Know-How
License Agreement. Under the terms of the Agreement,
Ellwood became an 80% shareholder and Uddeholm a 20%
shareholder in ECF, which changed its name to the
Ellwood-Uddeholm Steel Company (EUS). As it had with
ECF, Ellwood continued to run the daily operations of EUS.
The Agreement provided that EUS would sell steel ingots to
Uddeholm and Ellwood at cost plus a percentage of this
cost to cover overhead, which was set in the original
contracts at 35%. "Overhead" is defined in the Agreement
as including "all interest, depreciation, selling, general and
administrative costs and all other costs and expenses
which are not included as part of the ``base costs' [of the
ingots]." Uddeholm had the right to pur chase up to 10% of
the ingots produced by EUS, and Ellwood had the right to
purchase the rest.
The Agreement included the rebate pr ovision (S 2.3 of the
two Steel Purchase Agreements contained within the overall
Agreement) that is central to the current dispute. This
clause provided for "rebates" in case one of the partners
paid more than its allotted share of EUS's overhead, which
was based on each partner's percentage contr ol of EUS:
80% for Ellwood, 20% for Uddeholm. More specifically, if
the amount of Ellwood's steel purchases that went to EUS's
overhead (i.e., the 35% over the ingot cost) exceeded 80% of
the total sums that went to overhead during the calendar
year, then Ellwood was entitled to a r ebate of the amount
it paid in excess of this 80%. The same held true for
Uddeholm, but at 20%. The Agreement also pr ovided that if
either partner's contributions to EUS's over head totaled
less than its percentage control of the company (i.e., if
Ellwood's contributions were less than 80% of EUS's
overhead, or Uddeholm's contributions wer e less than
20%), that partner had to make payments to EUS in or der
_________________________________________________________________
After the joint venture began, Uddeholm changed its name to the Bohler-
Uddeholm Corporation, but for simplicity we will use the name
"Uddeholm" to refer to that corporation in this opinion.
5
to bring its share of the overhead paid to the level
equivalent to their percentage control. This system was
designed to ensure that Ellwood always paid exactly 80% of
EUS's overhead, and Uddeholm paid for exactly 20%, no
matter how much steel each was buying from EUS.
As part of the Agreement, the parties established that
after October 1, 1989, either party could cause EUS to buy
Uddeholm's 20% stake in EUS at book value (thus making
Ellwood the sole owner of EUS). The Agreement contained
non-compete provisions that went into ef fect if this
purchase option was exercised; the Agr eement granted EUS
an exclusive license for Uddeholm's "know-how," but
prohibited EUS from using such know-how for three years
after the end of the joint venture.
The documents comprising the Agreement included the
Business Plan for EUS, which was incorporated by
reference into the Shareholders Agr eement. The Business
Plan stated that "[t]he principal purpose of EUS will be to
supply high quality ingot to its owners, Ellwood City Forge
Corporation and Uddeholm Tooling AB," and that "[i]ngots
shall be cast in a variety of shapes and weights according
to the requirements of Ellwood City For ge Corporation and
Uddeholm Tooling AB." During the negotiations for the
Agreement, Ellwood proposed a draft Business Plan which
indicated that Ellwood desired to sell EUS's ingots to third-
party purchasers in the general market. Ellwood's proposed
Business Plan included the additional purpose for EUS that
"[s]econdarily, [EUS] shall be operated with the purpose of
earning the maximum possible profit fr om sale of its
product to third parties." The pr oposal added that ingots
shall be cast to the requirements of "third party
purchasers" as well as Ellwood and Uddeholm, and that
"[i]ngots may be sold to third parties to the extent permitted
under the various contracts among EUS, Ellwood City
Forge and Uddeholm Tooling."
Uddeholm rejected these proposed alterations to the
Business Plan, making clear to Ellwood that it did not want
EUS's production to go to anyone but the shar eholders.
Ellwood agreed to delete from the Business Plan all
language to the effect that the secondary purpose of EUS
was to sell tool steel to third parties, though there is
6
evidence in the record that the parties came to an
understanding that perhaps marginal amounts of ingots
would be sold by the shareholders to thir d parties if EUS's
financial circumstances so requir ed.
The EUS plant commenced operation in 1985. It is
disputed whether EUS and Ellwood provided Uddeholm
with full disclosure in EUS's monthly and yearly financial
statements during the term of the joint ventur e. Uddeholm
claims that it requested full information and did not receive
it, while Ellwood contends that it always pr ovided full
information. It is undisputed, however , that during the
venture EUS sold a substantial amount of steel ingots that
ended up going to third parties in unchanged form, i.e., not
as forged steel products but as raw steel ingots. The proper
characterization of these sales to third parties is the subject
of strong disagreement between Ellwood and Uddeholm.
Ellwood asserts that it bought the ingots fr om EUS and
resold them to the third parties, so that it properly received
a rebate on all these "purchases," as that term is defined in
S 2.3 of the Steel Purchase Agreements. Uddeholm counters
that the ingots were essentially sold dir ectly by EUS to the
third parties at Ellwood's direction, and that Ellwood was
not entitled to rebates on these sales because they were not
"purchases" as defined in S 2.3 of the Steel Purchase
Agreements.
In 1987, Uddeholm designated its employee Bertil
Rydstad to be the person responsible for Uddeholm's
relationship with Ellwood and EUS. In Mar ch 1988,
Rydstad wrote a memo that is a subject of dispute in this
appeal. In that memo, Rydstad stated that he understood
that Ellwood was free to resell the ingots bought from EUS:
"Thus, there are only two purchasers of ingots. However,
nothing precluded [sic] them from selling to a third party."
At trial, the District Court ordered this language redacted
from the memo before the memo was admitted into
evidence because these statements involved a "legal
interpretation by a non-legal person," and because the
statements did not address the relevant issue of
interpretation of the Agreement, namely, whether Ellwood
was entitled to receive rebates for its ingot sales to third
parties.
7
On January 29, 1991, Ellwood notified Uddeholm of
Ellwood's intention to exercise its right under the
Agreement to have EUS buy Uddeholm's EUS shar es at
their December 31, 1990, book value. In March 1991,
Deloitte & Touche prepared a r eport for EUS detailing
EUS's book value as of December 31, 1990. Uddeholm
objected to the calculated book value because it was about
half of the book value determination that Ellwood had
related to Uddeholm in November 1990. Uddeholm
informed Ellwood that it was willing to tender its shares at
the Deloitte & Touche calculated value subject to Uddeholm
retaining its rights to make a legal claim for an increased
book value. Ellwood insisted that Uddeholm accept the
calculated book value for the stock without r etaining any
such right to a legal claim, threatening that otherwise it
would refuse Uddeholm's tender of its stock, which would
keep Uddeholm responsible for 20% of EUS's over head
through 1991 and beyond.
Uddeholm then brought suit in the District Court,
contending that the Deloitte & Touche book value
calculation was understated because the profits that
Ellwood collected on the ingots that were sold to third
parties should have gone to EUS (and thus 20% to
Uddeholm), rather than directly and solely to Ellwood.
Uddeholm alleged in an amended complaint that Ellwood
had violated S 2.3 of the Steel Purchase Agreements by
claiming rebates on these sales when the sales were not
"purchases" as the term is used in that section. On
November 14, 1991, the parties entered into a stipulation
under which Uddeholm tendered its shares of EUS to
Ellwood (thus ending the joint venture), while payment for
Uddeholm's shares would be made pursuant to an order of
the District Court at the resolution of this litigation.
After the termination of the joint ventur e in November
1991, Ellwood created the Ellwood Specialty Steel Company
(ESS) to sell common grades of tool steel. Ellwood r ecruited
Ake Sundvall, a former president of Uddeholm who at that
time was working for an Austrian steel company, A vesta, to
become president of ESS. While Sundvall was still working
at Avesta, Ellwood sent Uddeholm's confidential pricing,
shipping, and customer information to Sundvall at his
8
Avesta office, an act which Uddeholm ar gues was a
misappropriation of its trade secrets because Avesta was a
competitor of Uddeholm's in the steel market. Uddeholm
also contends that Sundvall and other Ellwood officials
improperly persuaded sales representatives to leave
Uddeholm for ESS, and then used these repr esentatives to
solicit and sell tool steel to Uddeholm's customers in
violation of the non-competition provisions of the
Agreement. Uddeholm asserts that ESS sold over $13
million worth of steel to Uddeholm's customers between
1991 and 1994, dramatically undercutting Uddeholm's
share of the steel market.
From the time the joint venture was ter minated through
May 1992, Uddeholm bought steel from Ellwood. During
this time, Uddeholm did not pay Ellwood for appr oximately
$345,000 worth of steel. Uddeholm does not dispute the
existence of this debt, but the parties disagr ee over the rate
of interest that should be applied to it. Ellwood argues that
an 18% interest rate (which is the rate on its invoice order
form and the standard rate it char ges all of its customers)
should apply, while Uddeholm argues that the statutory 6%
rate should apply, as the steel was bought under an
agreement that did not involve Ellwood's standard terms.
The disputes between Ellwood and Uddeholm over the
Agreement resulted in four differ ent civil actions which
were eventually consolidated. At trial, the District Court
found that the Agreement was ambiguous as to whether
Ellwood could properly claim rebates for the steel ingots
sold to third parties, and it therefor e sent the issue of the
correct interpretation of the Agreement to the jury. The
court also instructed the jury that Ellwood had the burden
to prove by a preponderance of the evidence that these
transactions were in accord with the ter ms of the
Agreement. The jury returned a special verdict finding that
Ellwood had breached the Agreement by including third
party ingot sales in its rebate calculations, and awarded
Uddeholm $4.1 million in compensatory damages and
interest. The jury also found that Ellwood and David
Barensfeld (a director of both EUS and Ellwood) had
breached their fiduciary duties to Uddeholm, and awarded
$45,000 in compensatory and $85,000 in punitive damages
9
for Ellwood's breach, and $70,000 in compensatory and
$300,000 in punitive damages for Barensfeld's breach. The
jury found further that Ellwood had breached the
Agreement's non-competition clauses and committed the
torts of misappropriation of trade secr ets and civil
conspiracy; it awarded compensatory damages of $1 million
on the non-compete claim, $150,000 on the
misrepresentation claim, and $70,000 in punitive damages
on the civil conspiracy claim. (The jury exonerated the other
alleged co-conspirators.) The District Court enter ed a final
judgment in this case on July 1, 1999.
The parties reserved the issue of inter est for post-trial
determination. After the verdict, the District Court ruled on
this issue and various post-trial motions. The court found
that the post-venture steel was purchased under an
agreement that did not include Ellwood's standard terms as
printed on its steel invoices, and thus the court applied the
statutory 6% interest rate instead of the 18% invoice rate.
The District Court also rejected Ellwood's ar gument that
the rebates that Ellwood received between January 1 and
November 14, 1991 should be excluded from the damages
computation. The District Court then entered a superseding
final judgment in favor of Uddeholm for $9,458,210.86 on
September 13, 1999.
This appeal timely followed.2 Because the appeal presents
a plethora of issues, not all of which have been r eferenced
above, it will be useful to set them forth seriatim, couched
in terms of Ellwood's contentions:
1. Did the District Court err in finding that the
Agreement was ambiguous as a matter of law
regarding whether Ellwood could pr operly claim
rebates for third-party sales of ingots pr oduced by
EUS (in contrast to being limited to rebates on
purchases for its own use, which Uddeholm claims
was the clear intent of the contracting parties)?
2. Did the District Court err in its instruction to the
jury that Ellwood had the burden of establishing
_________________________________________________________________
2. The District Court had jurisdiction over this action pursuant to 28
U.S.C. S 1332, and we have jurisdiction pursuant to 28 U.S.C. S 1291.
10
the meaning of disputed contract terms in the
Agreement?
3. Did the District Court err in other jury instructions
i) by not specifically identifying the allegedly
ambiguous terms in the Agreement and the
alternative interpretations of these ter ms;
ii) by giving insufficient instruction on the
applicable principles of contract
interpretation;
iii) by giving the instruction that it was
"undisputed" that both parties were to"share
the benefits" of the joint venture, which
Ellwood alleges was biased in favor of
Uddeholm's interpretation of the Agreement;
iv) by giving an instruction on pr oving damages
for lost profits from a breach of a covenant not
to compete which Ellwood alleges was a
misstatement of Pennsylvania law; and
v) by not instructing the jury that it should
decide whether Ellwood's 420 Series of steel
fell into the category of "tool steel" as defined
under the covenant not to compete?
4. Did the District Court err in allowing the jury to
consider the misappropriation of trade secr ets tort
claim because the behavior that was alleged to
constitute this breach was covered by the terms of
the Agreement?
5. Did the District Court err in allowing the jury to
consider the breach of fiduciary duty claims
because the behavior that was alleged to constitute
this breach was also covered by the ter ms of the
Agreement?
6. Did the District Court err in allowing the jury to
consider the breach of fiduciary claim against
David Barensfeld (a director of both Ellwood and
EUS), because, as Ellwood alleges, Uddeholm
lacked standing to sue Barensfeld for this alleged
breach?
11
7. Can Ellwood be liable for civil conspiracy given that
all of the alleged co-conspirators were exonerated
by the jury, and was this issue preserved in the
District Court?
8. Did the District Court err in allowing Uddeholm to
recover damages that included the rebates received
by Ellwood from EUS in 1991?
9. Did the District Court err in admitting an affidavit
by Bo Jonsson into evidence?
10. Did the District Court err in requiring redaction in
the Bertil Rydstad memo before admitting it into
evidence?
11. Did the District Court err by applying the
statutory 6% interest rate instead of Ellwood's
standard 18% rate to money that Uddeholm owed
Ellwood for post-venture purchases of steel?
We address in the main text of this opinion only the issues
numbered 1, 2, 4, 5, and 7 through 11. Ellwood's
contentions listed in numbers 3 and 6 are addr essed in the
margin infra at footnotes 9 and 13; we summarily affirm
the District Court on those issues.
II. Was the Agreement Ambiguous?
The District Court found, as a matter of law, that the
Agreement was ambiguous as to whether Ellwood could
make sales to third parties of ingots pr oduced by EUS, keep
the profits from these sales to itself, and get rebates on
these sales when its contributions to EUS's over head
reached more than 80% of EUS's total over head costs. The
court thus sent the matter of the interpretation of the
Agreement to the jury, which found that Ellwood breached
the Agreement and awarded Uddeholm $4.1 million in
compensatory damages and interest for this br each.
Ellwood challenges the District Court's deter mination that
the contract was ambiguous. We have plenary r eview of this
matter. See Pacitti v. Macy's, 193 F .3d 766, 773 (3d Cir.
1999); Harley-Davidson, Inc. v. Morris, 19 F .3d 142, 145 (3d
Cir. 1994).
12
The main disputed part of the Agreement is the following
provision, which is contained in the Steel Pur chase
Agreement between EUS and Ellwood:
S 2.3 Price Adjustment or Rebate for Contribution.
Within 90 days after the end of each calendar year of
Seller [EUS], the prices with respect to the purchase of
Products during the preceding calendar year by Buyer
[Ellwood] shall be adjusted by way of r ebate (after
giving effect to quarterly estimated allowances) if
Buyer's Purchases (net of retur ns and allowances) in
any year constitute more than 80% of the aggr egate
amount received by Seller in such year in excess of
aggregate above defined "base costs" for such year
(hereinafter for this Section 2.3 referr ed to as
"Contribution").
(emphasis added). Ellwood argues that this clause
unambiguously allowed it to get rebates on all its
purchases from EUS when Ellwood's contribution to EUS's
overhead surpassed 80%, regardless of whether Ellwood
turned around and immediately sold the purchased ingots
to third parties.
Uddeholm responds that this clause is ambiguous
because it is not clear on its face whether "Buyer's
Purchases" is limited to purchases for the buyer's own use
only. Uddeholm contends that other evidence (both
contained within the Agreement and extrinsic to it) shows
that the disputed clause is limited to purchases for the
buyer's own use, and thus the ingots that Ellwood bought
from EUS and resold did not count as "Buyer's Purchases"
for rebate calculation purposes. As we have noted, the
District Court accepted Uddeholm's contention that the
Agreement was ambiguous and sent the issue of
interpreting the Agreement to the jury, which agreed with
Uddeholm's proffered interpr etation of the Agreement. Our
task is to review this determination by the District Court,
which requires us to examine the principles of contract
interpretation under Pennsylvania law. Both parties agree
that Pennsylvania law governs this case.
A. Pennsylvania Law on Contract Interpretation
Pennsylvania law on contract interpretation and
ambiguity is somewhat complicated; while the br oad
13
principles are clear, it is not a seamless web, and hence we
will have to review some of the relevant Pennsylvania cases
before applying the law to the facts at bar . Pennsylvania
contract law begins with the "firmly settled" point that "the
intent of the parties to a written contract is contained in
the writing itself." Krizovensky v. Krizovensky, 624 A.2d
638, 642 (Pa. Super. Ct. 1993) (citing Steuart v. McChesney,
444 A.2d 659 (Pa. 1982)). " ``Where the intention of the
parties is clear, there is no need to r esort to extrinsic aids
or evidence,' " instead, the meaning of a clear and
unequivocal written contract " ``must be determined by its
contents alone.' " Steuart, 444 A.2d at 661 (quoting East
Crossroads Ctr., Inc. v. Mellon-Stuart Co., 205 A.2d 865, 866
(Pa. 1965)). "[W]here language is clear and unambiguous,
the focus of interpretation is upon the ter ms of the
agreement as manifestly expressed , rather than as,
perhaps, silently intended." Id."Clear contractual terms
that are capable of one reasonable interpr etation must be
given effect without reference to matters outside the
contract." Krizovensky, 624 A.2d at 642.
A court may, however, look outside the "four corners" of
a contract if the contract's terms are unclear: "[w]here the
contract terms are ambiguous and susceptible of more than
one reasonable interpretation, . . . the court is free to
receive extrinsic evidence, i.e., par ol evidence, to resolve the
ambiguity." Id. But because Pennsylvania presumes that
the writing conveys the parties' intent, a contract
will be found ambiguous if, and only if, it is r easonably
or fairly susceptible of different constructions and is
capable of being understood in more senses than one
and is obscure in meaning through indefiniteness of
expression or has a double meaning. A contract is not
ambiguous if the court can determine its meaning
without any guide other than a knowledge of the
simple facts on which, from the nature of the language
in general, its meaning depends; and a contract is not
rendered ambiguous by the mere fact that the parties
do not agree on the proper construction.
Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d
604, 614 (3d Cir. 1995) (quoting Samuel Rappaport Family
Partnership v. Meridian Bank, 657 A.2d 17, 21-22 (Pa.
14
Super. Ct. 1993)) (internal quotation marks omitted). To
determine whether ambiguity exists in a contract, the court
may consider "the words of the contract, the alternative
meaning suggested by counsel, and the nature of the
objective evidence to be offered in support of that meaning."
Mellon Bank, N.A. v. Aetna Bus. Credit, Inc. , 619 F.2d 1001,
1011 (3d Cir. 1980).
Ambiguity in a contract can be either patent or latent.
While a patent ambiguity appears on the face of the
instrument, "a latent ambiguity arises fr om extraneous or
collateral facts which make the meaning of a written
agreement uncertain although the language ther eof, on its
face, appears clear and unambiguous." Duquesne Light, 66
F.3d at 614 (citing Easton v. Washington County Ins. Co.,
137 A.2d 332 (Pa. 1957)). A party may use extrinsic
evidence to support its claim of latent ambiguity, but this
evidence must show that some specific term or terms in the
contract are ambiguous; it cannot simply show that the
parties intended something different that was not
incorporated into the contract. "[L]est the ambiguity inquiry
degenerate into an impermissible analysis of the parties'
subjective intent, such an inquiry appropriately is confined
to ``the parties linguistic reference.' . . . [T]he parties'
expectations, standing alone, are irrelevant without any
contractual hook on which to pin them." Id. at 614 & n.9
(quoting Mellon Bank, 619 F.2d at 1011 n.12) (emphasis
added).
Furthermore, the alternative meaning that a party seeks
to ascribe to the specific term in the contract must be
reasonable; courts must resist twisting the language of the
contract beyond recognition. "In holding that an ambiguity
is present in an agreement, a court must not rely upon a
strained contrivancy to establish one; scarcely an
agreement could be conceived that might not be
unreasonably contrived into the appearance of ambiguity.
Thus, the meaning of language cannot be distorted to
establish the ambiguity." Steuart, 444 A.2d at 663.
Pennsylvania law on ambiguity in contracts thus seems
to contain a built-in tension between two principles: (1) a
contract is not ambiguous, and thus must be interpr eted
on its face without reference to extrinsic evidence, "if the
15
court can determine its meaning without any guide other
than a knowledge of the simple facts on which, fr om the
nature of the language in general, its meaning depends,"
Duquesne Light, 66 F.3d at 614 (quoting Meridian Bank,
657 A.2d at 21-22); and (2) contractual terms that are clear
on their face can be latently ambiguous, and "Pennsylvania
law permits courts to examine certain for ms of extrinsic
evidence in determining whether a contract is ambiguous."
Id. Thus, when a court is faced with a contract containing
facially unambiguous language, it seems that Pennsylvania
law both requires that the court interpr et the language
without using extrinsic evidence, and allows the court to
bring in extrinsic evidence to prove latent ambiguity.
Mellon Bank resolves this tension by allowing only
extrinsic evidence of a certain nature to establish latent
ambiguity in a contract; a court should deter mine whether
the type of extrinsic evidence offered could be used to
support a reasonable alternative interpr etation under the
precepts of Pennsylvania law on contract interpretation.3
See Mellon Bank, 619 F.2d at 1011-14. Once the court
determines that a party has offer ed extrinsic evidence
capable of establishing latent ambiguity, a decision as to
_________________________________________________________________
3. In particular, we think that the key inquiry in this context will
likely
be whether the proffered extrinsic evidence is about the parties'
objectively manifested "linguistic reference" regarding the terms ofthe
contract, or is instead merely about their expectations. Duquesne Light
Co. v. Westinghouse Elec. Corp., 66 F .3d 604, 614 (3d Cir. 1995). The
former is the right type of extrinsic evidence for establishing latent
ambiguity under Pennsylvania law, while the latter is not. See id. For
example, if the evidence showed that the parties nor mally meant to refer
to Canadian dollars when they used the term"dollars," this would be
evidence of the right type. See id. at 1011 n.12. Evidence regarding a
party's beliefs about the general ramifications of the contract would not
be the right type to establish latent ambiguity. See id. at 1014
(rejecting
extrinsic evidence that showed that one party to a disputed contract
thought it bore some risk of borrower's default as insufficient to vary
the
clear meaning of the term "insolvent" as used in the contract). Put
another way, a party offers the right type of extrinsic evidence for
establishing latent ambiguity if the evidence can be used to support "a
reasonable alternative semantic reference" for specific terms contained in
the contract. Mellon Bank N.A. v. Aetna Bus. Cr edit, Inc., 619 F.2d 1001,
1012 n.13 (3d Cir. 1980). See infra pp. 22-26 & n.4.
16
which of the competing interpretations of the contract is
the correct one is reserved for the factfinder, who would
examine the content of the extrinsic evidence (along with all
the other evidence) in order to make this deter mination.
See Mellon Bank, 619 F.2d at 1011, 1013-14. We will follow
Mellon Bank's approach.
Of course, any use of extrinsic evidence to support an
alternative interpretation of facially unambiguous language
must be careful not to cross the "point at which
interpretation becomes alteration of the written contract."
Id. at 1011. This point is not clearly defined by
Pennsylvania law. However, even a brief examination of the
particular facts and holdings of some repr esentative cases
involving contract ambiguity summarized in the mar gin
establish that: (1) mere disagreement between the parties
over the meaning of a term is insufficient to establish that
term as ambiguous; (2) each party's pr offered interpretation
must be reasonable, in that there must be evidence in the
contract to support the interpretation beyond the party's
mere claim of ambiguity; and (3) the pr offered
interpretation cannot contradict the common
understanding of the disputed term or phrase when there
is another term that the parties could easily have used to
convey this contradictory meaning.4
_________________________________________________________________
4. In Steuart v. McChesney, 444 A.2d 659 (Pa. 1982), the Pennsylvania
Supreme Court considered whether ther e was ambiguity in a right of
first refusal clause that stated that, upon the receipt of a bona fide
offer,
certain real property could be pur chased at a price "equivalent to the
market value of the premises according to the assessment rolls." The
trial court determined that the clause was ambiguous, and that the
evidence showed that the clause really meant that the property could be
purchased at "not less than the market value of the premises according
to the assessment rolls." The Pennsylvania Supreme Court roundly
rejected this determination. "T o no extent is the term ``equivalent',
meaning ``equal', interchangeable with ``not less than', and, since the
parties specified the former, they shall be deemed to have intended the
same," despite the fact that the market value according to the
assessment rolls was substantially less than several bona fide offers. Id.
at 664 (footnote omitted).
Similarly, in Krizovensky v. Krizovensky, 624 A.2d 638 (Pa. Super. Ct.
1993), the Pennsylvania Superior Court reversed a trial court decision
17
In United Refining Co. v. Jenkins, 189 A.2d 574 (Pa.
1963), the Pennsylvania Supreme Court set out guidelines
for an acceptable finding of ambiguity in a facially
_________________________________________________________________
that found ambiguity in the phrase "fully r educed annuity." The trial
court had concluded that, because the two parties disagreed over how to
interpret this term, it was ambiguous, and thus it looked at extrinsic
evidence. The Superior Court reversed because the interpretation
accepted by the trial court changed the meaning of the phrase from
"fully reduced annuity" to "partially reduced annuity." Since these two
phrases mean entirely different things and thus in effect contradict one
another (if an annuity is fully reduced it is not partially reduced, and
vice versa), the Superior Court held that the parties would not have used
the one term when they meant the other , because they could easily have
used this other term. "The construction ur ged by [the plaintiff] changes
the meaning of a clearly defined term. . . . The terms of the agreement
in this case were disputed, but they wer e not ambiguous." Id. at 643.
While an alternate interpretation that merely narrows or expands the
definition of a term is acceptable, Krizovensky rejects the wholesale
change of a term's definition.
In Duquesne Light Co. v. Westinghouse Electric Corp., 66 F.3d 604 (3d
Cir. 1995), this Court rejected the plaintiff 's contention that a
contract
was ambiguous as to whether it contained a 40-year guarantee for steam
generators in a nuclear power plant. The plaintif f argued that
contractual language that contained an assumption of a 42-year station
life in setting out technical specifications for certain components could
be interpreted as providing a 40-year guarantee for the steam
generators. We rejected this interpr etation as unreasonable because the
"contractual hook" did not support the pr offered interpretation:
"Duquesne's reading would stretch this language to unimaginable
proportions, as it would turn the 42 year station life by which certain
components were to be judged into an expr ess contractual guarantee
that the steam generators themselves would last for 40 years." Id. at
614.
Finally, in Mellon Bank N. A. v. Aetna Business Credit, Inc., 619 F.2d
1001 (3d Cir. 1980), we considered whether sufficient evidence had been
presented to justify finding ambiguity in the term "insolvent" in a
contract between sophisticated commercial parties. Mellon used extrinsic
evidence to argue that the liabilities and assets that accrued from the
contracted-for project should not be used in determining whether a party
was "insolvent" under the contract. The district court accepted Mellon's
use of extrinsic evidence, but this Court reversed because "[t]he district
court cited no basis in the contract document or wor ding of the
18
unambiguous term. Jenkins owed money to United and
entered into a contract to sell United all the oil that he
produced. The contested phrase in the oil contract stated
that the contract was to continue "so long as there remains
any unpaid indebtedness" of Jenkins to United. Id. at 579.
Jenkins defaulted on the loan, but then argued that the oil
contract was still in force and that United had to buy his
oil because he still owed money to United. United ar gued
that the contested phrase in the oil contract should be
interpreted to mean that the agreement would continue so
long as Jenkins remained indebted to United and Jenkins
had not defaulted in his obligations.
The Pennsylvania Supreme Court accepted United's
interpretation of the phrase, even though doing so required
the court to interpret a facially unambiguous phrase as
meaning something different than what it appeared to
mean on its face. The court reasoned that
if Jenkins' contention is correct, United was bound to
continue purchasing all Jenkins' oil . . . even though
Jenkins failed to honor his obligation to United. . . .
Such an interpretation of the language of this contract
is both absurd and unreasonable. Under such an
interpretation, Jenkins could take his pr ofits from the
"oil runs", dishonor his obligations to United and
United would be bound indefinitely to the agr eement.
_________________________________________________________________
insolvency clause for its conclusion." Id. at 1009. While the term
"insolvent" served as the basic contractual hook for Mellon's argument,
there was scant further evidence in the contract itself to support
Mellon's alternative interpretation, which in effect "made the
[insolvency]
condition a nullity." Id. at 1013. Such a radical re-interpretation,
without
evidence to support it in the actual wording of the contract, was "an
impermissible rewriting of the words of the contract." Id. at 1008. Inour
analysis, we differentiated between using extrinsic evidence to support
an alternative interpretation of a ter m that sharpened its meaning
(legitimate) and an interpretation that completely changed the meaning
(illegitimate): "extrinsic evidence may be used to show that ``Ten Dollars
paid on January 5, 1980,' meant ten Canadian dollars, but it would not
be allowed to show the parties meant twenty dollars." Id. at 1013. We
thus held that there was no latent ambiguity in the contract.
19
Id. at 580. Thus, Jenkins stands for the proposition that, if
the plain meaning of a contract term would lead to an
interpretation that is absurd and unr easonable,
Pennsylvania contract law allows a court to construe the
contract otherwise in order to reach "the only sensible and
reasonable interpretation" of the contract. Id.
To summarize: a contract that is unambiguous on its
face must be interpreted according to the natural meaning
of its terms, unless the contract contains a latent
ambiguity, whereupon extrinsic evidence may be admitted
to establish the correct interpretation. However, a claim of
latent ambiguity must be based on a "contractual hook":
the proffered extrinsic evidence must support an alternative
meaning of a specific term or terms contained in the
contract, rather than simply support a general claim that
the parties meant something other than what the contract
says on its face. In other words, the ambiguity inquiry must
be about the parties' "linguistic refer ence" rather than
about their expectations. Duquesne Light, 66 F.3d at 614.
Furthermore, a proffer ed alternative meaning for the
contractual hook must be reasonable; that is, it must be
supported by contractual evidence that goes beyond the
party's claim that the contractual hook has a certain
meaning, and the interpretation cannot contradict the
standard meaning of a term when the parties could have
easily used another term to convey this contradictory
meaning. In determining whether latent ambiguity exists in
a facially unambiguous contract, a court must consider
whether the extrinsic evidence that the proponent of the
alternative interpretation seeks to of fer is the type of
evidence that could support a reasonable alter native
interpretation of the contract, given the for egoing
principles. Finally, a court can consider an alter native
interpretation of a facially unambiguous contract term
when the plain meaning interpretation of the contract
would lead to an absurd and unreasonable outcome. With
these precepts in mind, we turn to the issue before us.
B. The Interpretation of the Agreement
Ellwood argues that the language in the Agr eement that
concerns rebates on purchases of steel from EUS is
20
straightforward and unambiguous. Section 2.3 of the Steel
Purchase Agreement, which is the section covering the
award of rebates, states that rebates shall be given if
"Buyer's Purchases . . . constitute mor e than 80%" of EUS's
overhead. Ellwood contends that the wor d "purchases" as
used in this section has an accepted meaning: Black's Law
Dictionary defines a "purchase" as the"[t]ransmission of
property from one person to another by voluntary act and
agreement, founded on a valuable consideration." Black's
Law Dictionary 1110 (5th ed. 1979). There is no express
limitation on the purpose for which the purchases can be
made anywhere in the Agreement. Thus, Ellwood argues,
"purchases" in S 2.3 of the Steel Purchase Agreements
unambiguously includes all purchases, so that Ellwood
rightfully received rebates on the steel ingots it purchased
from EUS and immediately sold to third party customers.
Ellwood further asserts that Uddeholm has not pr ovided a
reasonable alternative interpretation of "purchases," so that
the District Court should have interpreted"purchases" in
this straightforward manner, and thus should not have
sent the interpretation of the Agreement to the jury. See
Mellon Bank, 619 F.2d at 1011.
In contrast, Uddeholm's argument not only focuses on
the term "Buyer's Purchases" inS 2.3 as the main
"contractual hook" in its ambiguity ar gument, but also
points to other provisions in the Agreement that support its
interpretation that "Buyer's Purchases" in S 2.3 really
means "purchases for Ellwood's/Uddeholm's own use only."
As we noted above, this use of other provisions of the
Agreement comports with Pennsylvania law, which provides
that a court should look to the contract as a whole for
guidance in interpreting a term in the contract. See
Duquesne Light, 66 F.3d at 615 (finding support for the
court's interpretation of contested ter ms by examining the
"format, construction and terms of the contract generally").
Uddeholm first points to a provision in the Shareholders
Agreement (which is one of the contracts that comprise the
Agreement) stating that "[u]nless the Shareholders shall
agree otherwise, the total steel and other alloy metal output
of EUS shall be purchased by the Shareholders in
accordance with such Steel Purchase Agr eements."
21
Uddeholm argues that the most natural r eading of this
statement is that outside sales were not per mitted absent
the consent of both parties, and that if Ellwood could
unilaterally use the joint venture to make sales to third
parties as it pleased while keeping 100% of the benefits,
there never would be a reason for the parties to "agree
otherwise" and thus change the Agreement r equirements on
purchasing ingots. These provisions would thereby become
meaningless, which would violate the well-established
principle of contract construction "that a contract should
be read so as to give meaning to all of its ter ms when read
as an entirety." Contrans, Inc. v. Ryder Truck Rental, Inc.,
836 F.2d 163, 169 (3d Cir. 1987) (applying Pennsylvania
law, citing Monti v. Rockwood Ins. Co., 450 A.2d 24, 26 (Pa.
Super. Ct. 1982)).
Second, Uddeholm points to a provision of the Business
Plan (which is incorporated into the Agreement, see supra
at page 6) that states that ingots "shall be cast in a variety
of shapes and weights according to the r equirements of
Ellwood City Forge and Uddeholm Tooling AB." Uddeholm
argues that the term "requir ements" in this provision
impliedly refers to requirements for the internal use of
Ellwood and Uddeholm; if the parties had intended
otherwise, it submits, they would have used the phrase
"according to the specifications or dered by Ellwood and
Uddeholm," or "according to the r equirements of Ellwood,
Uddeholm, and designated third parties."5 That is, because
the process of making steel ingots involves casting each
ingot to a specific shape and weight while the ingot is still
hot (thus avoiding wasting excess steel), and because these
specifications are determined by the ultimate end product
into which the ingot will be forged, Uddeholm argues that
casting ingots "according to the r equirements of Ellwood
City Forge" means tailoring the ingot to ECF 's own forging
process.
Third, the Business Plan also states that the joint
_________________________________________________________________
5. The latter is the phrasing that Ellwood pr oposed for the Business Plan
during negotiations, but this proposal was r ejected by Uddeholm
because Uddeholm made it clear that it wanted the ingot purchases
limited to the shareholders' own use. See supra at page 6.
22
venture's purpose was "to supply high quality ingot to its
owners, Ellwood City Forge Corporation and Uddeholm
Tooling AB." (emphasis added) Uddeholm submits that the
term "supply" in this clause clearly connotes a purpose to
provide steel for Uddeholm's and Ellwood's own use in their
steel toolmaking processes rather than for the immediate
resale of the raw steel ingots. Uddeholm ar gues that one
normally "supplies" raw materials to a manufacturer who
then uses those materials himself; one does not nor mally
"supply" raw materials to a middleman who then resells
them.
These three sections of the Agreement, along with S 2.3 of
the Steel Purchase Agreements, are sufficient to serve as
the required "contractual hook" in Uddeholm's ambiguity
argument.6 Uddeholm's pr offered interpretation of these
sections does not contradict the common meaning of the
terms contained therein but merely narrows those
meanings, and Uddeholm's interpretation is r easonable
when the sections are considered together . Uddeholm's
reading of these sections thus serves to cast doubt on
Ellwood's claim that S 2.3 is unambiguous. Our next step is
to examine the extrinsic evidence that Uddeholm of fers to
support its alternative interpretation ofS 2.3.7
First, Guy Asterius, the Uddeholm General Counsel,
testified at trial that the parties discussed sales to third
parties during the negotiations leading up to the joint
venture, and agreed that such sales might sometimes be
necessary, but only if both shareholders agr eed, and only in
the marginal case. He testified that the parties understood
that, other than in such marginal cases, the tool steel that
_________________________________________________________________
6. Ellwood points out that S 5.2 of the Steel Purchase Agreements
(dealing with the inspection of ingots bought fr om EUS) provides that
"[d]efects attributable to shipment fr om the Steel Mill to Buyer or
Buyer's
customer shall be the responsibility of the Buyer." (Emphasis added.)
Although this language does support Ellwood's interpretation of the
Agreement as allowing third-party sales, it is not enough to undermine
Uddeholm's argument that other sections of the Agreement raise a
question of ambiguity on this issue.
7. As we stated earlier, our concern here is whether Uddeholm's proffered
extrinsic evidence could be used to support a r easonable alternative
interpretation of the Agreement. See supra note 3.
23
EUS provided was to be used only for the two shareholder's
businesses.
Other evidence showed that, after preliminary
discussions, Ellwood sent to Asterius a proposed version of
the Business Plan for EUS which provided that, while the
principal purpose of EUS was to supply ingots to the
owners, the secondary purpose was to earn the maximum
profit "from sale of its product to third parties." The
proposal included other references to sales by EUS to third
parties, such as a provision that ingots shall be cast
according to the requirements of Uddeholm, Ellwood, and
"third party purchasers." Uddeholm was surprised over the
inclusion of the references to thir d party sales in Ellwood's
proposal, and it met with Ellwood in or der to clarify its
understanding that the purpose of the joint ventur e was to
supply ingots for Ellwood's and Uddeholm's use only.
Thereafter, all references in the Agreement to third parties
and third party sales were deleted, including the provision
about the secondary purpose of EUS. Uddeholm contends
that this evidence strongly supports the infer ence that,
after these deletions, both parties understood that large
volume third-party sales were not pr ovided for under the
Agreement.
Finally, Bo Jonsson, who was the President of Uddeholm
and also sat on the EUS board of directors, stated in an
affidavit that
During that time [1986-88] . . . I agr eed to the sale of
raw carbon and alloy steel ingots to third parties
unrelated to either Uddeholm or ECF on the basis that
such sales were necessary to help fill up EUS's steel
mill and/or optimize production. . . . I also agreed to
third party ingot sales because defendant Bar ensfeld
represented to me that there would be at least some
contribution received by EUS as a result of these sales;
i.e., that EUS would receive from these sales some
amount over and above the actual manufacturing cost
or "base cost" of the steel ingots produced for sale to
third parties. . . . I agreed on behalf of Uddeholm to the
sale of raw steel ingots to third parties, but only as a
temporary, short term strategy for EUS. I did not agree
24
to open-ended, unlimited sales of raw steel ingots by
ECF to third parties.
We are persuaded (as was the District Court) by
Uddeholm's argument that Asterius's testimony, Jonsson's
affidavit, and the other evidence described above strongly
supports the inference that Uddeholm had clearly
communicated its understanding of the allowability of third
party sales under the Agreement to Ellwood. 8 We note
additionally that it is a central principle of contract
interpretation that if a party knew or had r eason to know
of the other parties' interpretation of ter ms of a contract,
the first party should be bound by that interpr etation. See
Emor, Inc. v. Cyprus Mines Corp., 467 F .2d 770, 775 (3d
Cir. 1972) ("[T]he meaning given to the words by one party
should be given effect if the other party knew or had reason
to know that it was in fact so given.") (quoting 3 Arthur L.
Corbin, On Contracts S 537, at 51 (1960)). Uddeholm points
out that Ellwood was aware of Uddeholm's interpretation of
the Agreement, while Uddeholm was unawar e of Ellwood's
competing interpretation; Uddeholm thus submits that
Ellwood should be bound by Uddeholm's understanding.
Furthermore, the extrinsic evidence pr offered by Uddeholm
concerns the parties' objectively manifested linguistic
reference regarding certain ter ms of the contract, rather
than merely their expectations. See Dusquesne Light Co. v.
Westinghouse Elec. Corp., 66 F.3d 604, 614 (3d Cir. 1995).
We thus conclude that the extrinsic evidence that
Uddeholm offered in support of its interpretation supports
its reasonable alternative interpr etation of the Agreement.
In sum, the evidence proffered by Uddeholm, considered
together, supports the conclusion that the District Court
was correct in deciding that the Agreement contained
latently ambiguous language and thus that the pr oper
interpretation of the Agreement was an issue for the jury to
_________________________________________________________________
8. At trial, Ellwood objected to the District Court's admission of
Jonsson's affidavit into evidence, and it has appealed this ruling to this
Court. For reasons set out in Section VII.C.1 infra, we will hold that the
District Court did not err in admitting Jonsson's affidavit under Fed. R.
Evid. 807, and hence the use of that affidavit her e to support
Uddeholm's ambiguity argument is proper .
25
decide. The sections of the Agreement that Uddeholm uses
as the contractual hook for its ambiguity ar gument are
sufficient to ground its argument, because Uddeholm offers
a reasonable alternate interpretation of these sections that
does not contradict but merely narrows the plain meaning
of the disputed terms. We thus find unavailing Ellwood's
contention that extrinsic evidence should not have been
considered because Uddeholm's alternative interpretation of
the Agreement was unreasonable. When the sections of the
Agreement that Uddeholm points to are considered
alongside the extrinsic evidence outlined above--including
the business plan, the parties' preliminary negotiations,
Ellwood's rejected draft, and Jonsson's affidavit--there is
considerable evidence supporting Uddeholm's claim that
the Agreement was intended to set up a deal under which
the parties would buy steel from EUS for their own
purposes only, and would sell raw steel to thir d parties only
in rare situations. Therefore, we hold that there is sufficient
evidence for the District Court's conclusion that the
Agreement was ambiguous as a matter of law, and thus the
court did not err in sending the issue of the interpretation
of the Agreement to the jury.
III. Did the District Court Err in its Jury Instructions
by Shifting the Burden of Proof to Ellwood
on the Breach of Contract Claim?
Ellwood contends that the District Court err ed in its
instructions to the jury by putting the burden on Ellwood
to establish the meaning of any ambiguous ter ms in the
Agreement. We review a jury instruction to determine
" ``whether the charge, taken as a whole and viewed in light
of the evidence, fairly and adequately submits the issues in
the case to the jury' and reverse ``only if the instruction was
capable of confusing and thereby misleading the jury.' "
Limbach Co. v. Sheet Metal Workers Int'l Ass'n, 949 F.2d
1241, 1259 n.15 (3rd Cir. 1991) (en banc) (quoting Link v.
Mercedes-Benz of North America, Inc., 788 F.2d 918, 922
(3d Cir. 1986)). We exercise plenary review, however, over
whether the District Court correctly stated the legal
standard for the burden of proof in its jury instructions.
See United States v. Johnstone, 107 F.3d 200, 204 (3d Cir.
1997).
26
When the District Court sent the matter of the
interpretation of the Agreement to the jury, it stated that,
although ordinarily a party asserting that a contract was
breached carries the burden of proving the breach, where a
fiduciary relationship exits the burden shifts to the
fiduciary to prove the absence of a br each. Because the
court found that a fiduciary relationship existed between
Ellwood and Uddeholm, its instructions to the jury placed
the burden on Ellwood to establish the meaning of any
ambiguous contract terms, even though Uddeholm was the
party asserting the breach of contract. Ellwood contends
that the District Court erred in shifting the burden of proof
in this manner. Since this issue concer ns the District
Court's description of a legal standard in the jury
instructions, our review is plenary.
The court found that there was a fiduciary r elationship
between Ellwood and Uddeholm because Ellwood was the
majority shareholder in a joint venture. A shareholder in
such a position is under close scrutiny, and is expected to
conform to the highest standards of conduct. See Ferber v.
American Lamp Corp., 469 A.2d 1046, 1050 (Pa. 1983) ("It
has long been recognized that majority shar eholders have a
duty to protect the interests of the minority."); Snellbaker v.
Herrmann, 462 A.2d 713, 718 (Pa. Super . Ct. 1983) ("[A]
joint venturer owes a duty of the utmost good faith and
must act towards his associate with scrupulous honesty.").
When occupying such a position, it is a breach of fiduciary
duty to act to benefit oneself at the expense of the minority
shareholder. See Ferber, 469 A.2d at 1050. Pennsylvania
law shifts the burden onto the fiduciary to prove that a
transaction is fair and not fraudulent when thefiduciary
acts to benefit himself while in the fiduciary r ole. See
Ruggieri v. West Forum Corp., 282 A.2d 304, 307 (Pa. 1971)
("[O]nce a fiduciary or confidential r elationship is shown to
exist, the burden is shifted to [the fiduciary] . . . to prove
absence of fraud, and that the transaction was fair and
equitable."); In re Estate of Harrison , 745 A.2d 676, 682 (Pa.
Super. Ct. 2000); Dresden v. W illock, 518 F.2d 281, 290 (3d
Cir. 1975).
Because Pennsylvania law shifts the burden onto
fiduciaries to prove the fairness of a self-benefitting
27
transaction, and because Ellwood was a fiduciary as the
majority shareholder in the joint ventur e, Uddeholm
requested the District Court to place the bur den on Ellwood
to establish the meaning of the disputed ter ms in the
Agreement. The District Court acceded to this r equest, but
it cautioned the plaintiff 's counsel that this was a risky
move:
You know, you realize that the plaintif f takes
considerable risk in this case going to the jury this
way. And what I mean is, if the plaintiff is confident on
the merits of its case, this little burden shifting thing
which I think interests Judges and lawyers mor e than
it does juries because of the uncertainty in the law,
and we have no idea what the Court of Appeals for the
Third Circuit might say about this ruling, the plaintiff
takes considerable risk in submitting it in this fashion.
And it may be doing you a disservice, but inasmuch as
it was what you requested, or some of what you
requested, and because I think, in good faith, that it is
the law of Pennsylvania, that is the way it is going in.
The District Court's trepidation about shifting the burden
onto Ellwood here was well-founded. Although it would
seem to comport with Pennsylvania law to put the bur den
on a fiduciary to establish the meaning of disputed terms
in a contract between the fiduciary and the beneficiary, we
need not decide that issue, because Ellwood and Uddeholm
were not in a fiduciary relationship when the Agreement
was negotiated and executed. Ellwood's fiduciary duty to
Uddeholm arose after the Agreement was executed: the
Agreement created the joint ventur e, which itself then gave
rise to the fiduciary relationship. See Snellbaker, 462 A.2d
at 716 ("The rights, duties, and obligations of joint
venturers, as between themselves, depend primarily upon
the terms of the contract by which they assume the
relationship."); see also In Re Estate of Clark, 359 A.2d 777,
781 (Pa. 1976) (stating that it is "well-settled" that if a party
contesting a gift shows that a confidential orfiduciary
relationship between the donor and donee existed at the
time of the gift, the burden then shifts to the donee to show
that the gift was free of any taint of undue influence or
deception); Weisbecker v. Hosiery Patents, Inc., 51 A.2d
28
811, 813-14 (Pa. 1947) (fiduciary duty to a minority
shareholder arises as a result of being a majority
shareholder).
Although an asymmetry in power did arise between these
parties after the Agreement was signed, no such asymmetry
existed when the parties were hammering out its disputed
and ambiguous terms, as the parties wer e not then in a
majority-minority shareholder relationship in a joint
venture. Thus, the reason for placing the burden of proof
on a fiduciary in breach of contract cases--the fiduciary is
in a position of control over the beneficiary or his property,
and must therefore meet a higher standar d in his dealings
with the beneficiary--does not apply to this case. See
Martinelli v. Bridgeport Roman Catholic Diocesan Corp., 196
F.3d 409, 421 (2d Cir. 1999) (noting that a fiduciary has
the burden of proof to explain a transaction which benefits
himself at the expense of his beneficiaries because a
"suspicion naturally arises that the fiduciary has gained by
taking advantage of its special relationship"); Ferber, 469
A.2d at 1050 (stating that a majority shareholder's fiduciary
duty to minority shareholder prevents him from using his
power as a majority shareholder to deprive minority of a
proper share of the benefits from the enterprise). While it
makes perfect sense to place the burden on a fiduciary to
explain business actions which benefitted itself over its
beneficiary, the same logic does not hold for a br each of
contract when there are dueling interpr etations of the
contract entered into at arms length by sophisticated
corporations who are not in any kind of fiduciary
relationship at the time the contract is for med.
Uddeholm cites no cases in which a fiduciary r elationship
that was created by a contract caused a court to shift the
burden of proof on the interpretation of that contract. All of
the cases Uddeholm cites in support of its position shift the
burden of proof onto the fiduciary because, at the time the
questionable transaction was consummated by the
defendant, the defendant already had an unequal or
fiduciary relationship with the plaintif f. See, e.g.,
Weisbecker, 51 A.2d at 813-14; Snellbaker, 462 A.2d at
716; Martinelli, 196 F.3d at 421; Bellis v. Thal, 373 F. Supp.
120, 125-27 (E.D. Pa. 1974), aff 'd 510 F.2d 969 (3d Cir.
29
1975). Because it is hornbook law that (when no fiduciary
relationship exists) the party alleging a br each of contract
bears the burden of proving the elements of a breach of
contract, the District Court should have placed the burden
of proving the meaning of ambiguous ter ms in the
Agreement on Uddeholm, not Ellwood. See In re Estate of
Dixon, 233 A.2d 242, 244 (Pa. 1967) ("In any contract
action, . . . the claimant bears the burden of proving the
terms of the contract." ). Uddeholm does not assert, nor
could it credibly, that this burden-shifting error was
harmless. Therefore, the jury ver dict on this claim must be
set aside, and the case remanded for a new trial.9
_________________________________________________________________
9. Ellwood maintains that several of the District Court's other
instructions to the jury were in error as well. First, Ellwood contends
that the court erred in giving an instruction that "[t]here is no dispute
that ECF and Uddeholm formed a venture . . . from which both parties
would share the benefits." Ellwood asserts that this was tantamount to
directing a verdict for Uddeholm. W e find no merit in this contention.
Whether EUS was a "cost center" (as Ellwood contends) or a "profit
center" (as Ellwood denies), the purpose of the Agreement was to benefit
both sides, thus the "share the benefits" instruction left room for the
two
parties to present their varying theories on the way in which the benefits
were to be shared. The "share the benefits" instruction, taken in the
context of the jury instruction as a whole and viewed in light of the
evidence, fairly submitted the issues to the jury and was not particularly
liable to confuse or mislead the jury. See Limbach Co. v. Sheet Metal
Workers Int'l Ass'n, 949 F.2d 1241, 1259 n.15 (3d Cir. 1991) (en banc).
This contention is therefore without merit.
Ellwood also argues that the District Court erred by failing to include
the following four matters in its jury instructions: (1) an identification
of
the specific disputed language from the Agr eement along with the
parties' competing interpretations of that language; (2) a description of
the relevant evidentiary and contract interpr etation principles; (3) an
instruction on the proximate cause requir ement for measuring damages
for a breach of a covenant not to compete; and (4) an instruction that
the jury was to decide whether a type of steel that Ellwood produced
after the joint venture ended (the "420 series" of steel) was generally
regarded as "tool steel." We review a district court's decision not to
include a party's proffered jury instruction for abuse of discretion. See
United States v. Pitt, 193 F.3d 751, 755 (3d Cir. 1999); Limbach, 949
F.2d at 1259 n.15 ("Failure to instruct the jury as requested does not
constitute error so long as the instruction, taken as a whole, properly
apprises the jury of the issues and the applicable law.") None of these
omissions rise to the level of reversible err or.
30
IV. Did the District Court Err in Allowing a Separate
Breach of Fiduciary Duty Claim Against Ellwood?
The District Court allowed the jury to consider a separate
breach of fiduciary duty claim against Ellwood for behavior
that Ellwood contends was covered by the Agr eement and
hence was subsumed in the jury charge (and ver dict) for
breach of contract. Ellwood submits that Uddeholm pressed
this tort claim simply to circumvent the unavailability of
punitive damages for contract claims under Pennsylvania
law. The issue of whether the fiduciary duty claim is
allowable here is a question of law over which our review is
plenary. See Duquesne Light Co. v. Westinghouse Elec.
Corp., 66 F.3d 604, 618 (3d Cir. 1995).
Pennsylvania courts use two methods to deter mine
whether tort claims that accompany contract claims should
be allowed as freestanding causes of action or rejected as
illegitimate attempts to procure additional damages for a
breach of contract: the "gist of the action" test and the
"economic loss doctrine" test.10 Under the "gist of the
action" test,
_________________________________________________________________
The District Court's instructions directed the jury to interpret certain
sections of the Agreement. There is no authority to support Ellwood's
claim that the court had to point out specific ter ms in the Agreement
that were the focus of the ambiguity dispute, especially when
Uddeholm's position was that the terms wer e ambiguous in the context
of the Agreement as a whole. Furthermor e, the record supports the
conclusion that the court adequately instructed the jury on the relevant
legal principles. Ellwood's claim that the District Court did not
adequately instruct the jury on the proximate cause requirement for
damages is plainly lacking in merit when portions of the court's
instructions not mentioned by Ellwood are considered, as it is clear that
the court's full jury instruction properly apprised the jury of the
relevant
law. Finally, the record is clear that the District Court's decision to
omit
an instruction concerning the jury's r ole in deciding whether the "420
series" was generally regarded as "tool steel" was based on the court's
concern for jury confusion. In our view, this decision was not an abuse
of discretion.
10. While the Pennsylvania Supreme Court has neither accepted nor
rejected the economic-loss doctrine, Pennsylvania intermediate appellate
31
to be construed as a tort action, the [tortious] wrong
ascribed to the defendant must be the gist of the action
with the contract being collateral. . . . [T]he important
difference between contract and tort actions is that the
latter lie from the breach of duties imposed as a matter
of social policy while the former lie for the breach of
duties imposed by mutual consensus.
Redevelopment Auth. of Cambria County v. Inter national Ins.
Co., 685 A.2d 581, 590 (Pa. Super. Ct. 1996) (en banc)
(quoting Phico Ins. Co. v. Presbyterian Med. Servs. Corp.,
663 A.2d 753, 757 (Pa. Super. Ct. 1995)). In other words,
a claim should be limited to a contract claim when"the
parties' obligations are defined by the ter ms of the
contracts, and not by the larger social policies embodied in
the law of torts." Bash v. Bell Telephone Co., 601 A.2d 825,
830 (Pa. Super. Ct. 1992).
This Court described the "economic-loss doctrine" test in
Duquesne Light as "prohibit[ing] plaintiffs from recovering
in tort economic losses to which their entitlementflows only
from a contract." 66 F.3d at 618. Duquesne Light explained
further that a plaintiff should be limited to a contract claim
"when loss of the benefit of a bargain is the plaintiff 's sole
loss." Id. (quotations marks omitted). Both parties argue
that both tests support their positions. For the r easons set
forth in the margin, we focus primarily on the"gist of the
action" test.11
_________________________________________________________________
courts have applied the doctrine, see, e.g., REM Coal Co., Inc. v. Clark
Equip. Co., 563 A.2d 128 (Pa. Super. Ct. 1989), and this Court has
predicted that the Pennsylvania Supreme Court would adopt the version
of the economic loss doctrine that the United States Supreme Court
developed in East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S.
858 (1986), see King v. Hilton-Davis, 855 F .2d 1047, 1053-54 (3d Cir.
1988).
11. The application of the economic-loss doctrine to the instant case does
not quite fit because that doctrine developed in the context of courts'
precluding products liability tort claims in cases where one party
contracts for a product from another party and the product
malfunctions, injuring only the product itself. See East River S.S. Corp.
v. Transamerica Delaval, Inc., 476 U.S. 858, 866-71 (1986); Duquesne
Light, 66 F.3d at 618-20. The "gist-of-the-action" test is a better fit
for
this non-products liability case.
32
Ellwood contends that the Agreement was exhaustively
negotiated and completely defined the parties' r elationship
and obligations, so that Uddeholm's alleged losses arose
only from alleged breaches of the Agr eement. Ellwood
asserts that, far from being "collateral" to the breach of
fiduciary duty claim, see Redevelopment Auth. of Cambria
County, 685 A.2d at 590, the Agreement was"the only
articulated predicate" for that claim. Appellants' Br. at 46.
Conversely, Uddeholm contends that Ellwood's r ebate
claims for third-party sales and its covering up of these
sales breached its fiduciary duty to Uddeholm, because
such actions involved Ellwood utilizing the joint venture for
its own gain to the detriment of its minority partner.
Uddeholm claims that these actions by Ellwood caused
losses that went beyond the scope of the Agr eement, thus
giving rise to a cause of action separate fr om the breach of
contract claim. Uddeholm contends further that, because
the existence of a contract between two parties does not
preclude one of the parties from r ecovering in tort for a
breached fiduciary duty, it should be allowed to recover for
Ellwood's breached fiduciary duty in this case. See Valley
Forge Convention & Visitors Bureau v. Visitor's Servs., Inc.,
28 F. Supp. 2d 947, 951 (E.D. Pa. 1998) ("That a plaintiff
may not sue in tort for economic losses arising fr om a
breach of contract, however, does not pr eclude the
possibility of a tort action between parties to a contract.")
(applying Pennsylvania law); see also United Int'l Holdings,
Inc. v. Wharf (Holdings) Ltd., 210 F .3d 1207, 1226-27 (10th
Cir. 2000) (holding that, under Colorado law, a breach of
fiduciary duty that arises from the parties' status as joint
venturers is independent of the contract that created the
joint venture, thus the economic loss doctrine does not bar
such a fiduciary duty claim).
As we explained earlier, there was afiduciary relationship
between Ellwood and Uddeholm because Ellwood was the
majority shareholder in a joint venture and had sole and
virtually exclusive control over the object of the venture
(i.e., EUS). Pennsylvania law imposes such a fiduciary duty
on joint venturers, see Snellbaker v. Herr mann, 462 A.2d
713, 718 (Pa. Super. Ct. 1983), as well as on majority
shareholders in their dealings with minority shareholders,
see Ferber v. American Lamp Corp., 469 A.2d 1046, 1050
33
(Pa. 1983). This duty imposed obligations on Ellwood that
went well beyond the particular obligations contained in the
Agreement itself. See Snellbaker, 462 A.2d at 718 (stating
that a fiduciary duty includes the duty to act toward one's
joint venturer in the utmost good faith and with scrupulous
honesty); Ferber, 469 A.2d at 1050 (noting that a fiduciary
duty prevents majority shareholder fr om "using their power
in such a way as to exclude the minority from their proper
share of the benefits accruing from the enterprise," so that,
when a majority shareholder acts in its own interest, this
action "must be also in the best interest of all shareholders
and the corporation") (emphasis omitted).
As suggested by the foregoing, the obligations that
Uddeholm alleges Ellwood breached in its fiduciary duty
claim were imposed "as a matter of social policy" rather
than "by mutual consensus." See Redevelopment Auth. of
Cambria County, 685 A.2d at 590. That is, "the larger social
policies embodied in the law of torts" rather than "the terms
of the contract," are what underlie Uddeholm's breach of
fiduciary duty claim. Bash, 601 A.2d at 830. The "larger
social policy" that defines Uddeholm's claim is the policy
requiring fair dealing and solicitude fr om a majority
shareholder to minority shareholders in a joint venture. See
Snellbaker, 462 A.2d at 718; Ferber, 469 A.2d at 1050;
William Goldstein Co. v. Joseph J. & Reynold H. Greenberg,
Inc., 42 A.2d 551, 555 (Pa. 1945) (citing Meinhard v.
Salmon, 164 N.E. 545, 546 (N.Y. 1928)). W e thus conclude
that Uddeholm's fiduciary duty claim meets the"gist of the
action" test: the tort wrong ascribed to Ellwood is the gist
of the fiduciary duty action while the Agr eement is collateral.12
See Redevelopment Auth. of Cambria County, 685 A.2d at
590. We therefore find no err or in the District Court's
_________________________________________________________________
12. Furthermore, while it is a closer question, we also believe that
Uddeholm's fiduciary duty claim passes the "economic-loss doctrine"
test. Because Uddeholm asserted that Ellwood took advantage of its
position as a fiduciary to Uddeholm's detriment, the harm Uddeholm
claimed to have suffered goes beyond the Agreement and the benefits
Uddeholm was supposed to receive under the Agr eement. See Duquesne
Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 618 (3d Cir. 1995).
34
decision to allow the jury to consider a separate br each of
fiduciary duty charge against Ellwood.13
V. Did the District Court Err in Allowing a
Separate Misappropriation of Trade Secr ets Charge
Against Ellwood?
The District Court allowed the jury to consider a
misappropriation of trade secrets and confidential
information claim against Ellwood, but Ellwood argues that
the relationship regarding trade secr ets was covered by: (1)
the license to use Uddeholm's know-how, and (2) the
covenant not to compete contained in the Know-How
Agreement section of the Agreement. Ellwood thus argues
that the separate misappropriation claim was subsumed in
the charge and verdict for breach of the covenant not to
compete. Under this view, Uddeholm's misappr opriation
_________________________________________________________________
13. Ellwood also asserts that the District Court erred in holding that
David Barensfeld, a director and officer of both Ellwood and EUS, could
be individually liable to Uddeholm for breach of fiduciary duty. (Ellwood
states that this is an issue of whether Uddeholm had standing to sue
Barensfeld, but we believe that this claim is not about Uddeholm's
standing but about whether Uddeholm has a viable claim against
Barensfeld.) This issue arises because the jury also awarded Uddeholm
$70,000 in compensatory damages and $300,000 in punitive damages
for a breach of fiduciary duty by Bar ensfeld. Ellwood argues that, under
Pennsylvania law, a director's fiduciary duty runs only to the corporation
and not directly to a shareholder like Uddeholm. A shareholder can
enforce this duty only in the name of the corporation via a derivative
action. See 15 Pa. Cons. Stat. SS 1712, 1717. Uddeholm, however,
presented evidence that Barensfeld personally manipulated rebates,
manipulated books and records, failed to disclose the effect of ingot
sales, misrepresented the book value of EUS, and misappropriated
confidential trade secrets. Under Pennsylvania law, "an officer of a
corporation who takes part in the commission of a tort by the
corporation is personally liable" for the tortious activity. Wicks v.
Milzoco
Builders, Inc., 470 A.2d 86, 90 (Pa. 1983). The harmed party then can
sue the officer directly. See id. The above alleged activities by
Barensfeld
constitute taking part in Ellwood's breach offiduciary duty. Therefore,
Uddeholm had a viable claim against Barensfeld individually for his part
in Ellwood's breach of its fiduciary duty, and we find no error in the
District Court's instruction to the jury to consider whether Barensfeld
violated a fiduciary duty to Uddeholm.
35
claim is really a claim that Ellwood's use of Uddeholm's
know-how went beyond the Agreement's ter ms. The same
two tests described in Section IV supra--the "gist of the
action" test and the "economic loss doctrine" test--apply
here for determining whether this tort claim should be
allowed as its own claim or rejected as cover ed by the
contract claim. See Redevelopment Auth. of Cambria County
v. International Ins. Co., 685 A.2d 581, 590 (Pa. Super. Ct.
1996) (en banc); Duquesne Light Co. v. W estinghouse Elec.
Corp., 66 F.3d 604, 618 (3d Cir. 1995). As in Section IV, we
will primarily focus on the "gist of the action" test, see
supra note 11. This issue involves a question of law subject
to plenary review. See Duquesne Light, 66 F.3d at 618.
Uddeholm argues that its misappropriation of trade
secrets claim is separate and independent fr om its breach
of contract claim in the following way:
Appellants had no ``license' to misappropriate
Uddeholm's trade secrets and confidential information,
especially during the three year noncompete period.
Appellants violated the noncompete covenants and
cannot now claim them as a ``license' to do the very
thing they were contractually prohibited from doing.
Appellee's Br. at 66. The key is the last part of that
passage; Uddeholm admits that Ellwood was "contractually
prohibited from doing" the actions that Uddeholm contends
form the basis of its misappropriation claim. But if this is
the case, then "the parties' obligations ar e defined by the
terms of the contract, and not by the lar ger social policies
embodied in the law of torts." Bash v. Bell T elephone Co.,
601 A.2d 835, 830 (Pa. Super. Ct. 1992) (outlining the gist
of the action test). That is, Uddeholm admits in its own
argument that the Know-How Agreement covers Ellwood's
misappropriation of its know-how (the agr eement
"contractually prohibited" the misr epresentation), so the
"gist" of Uddeholm's misappropriation action is actually
breach of contract, at least as far as the use of Uddeholm's
know-how is concerned. Thus, if the jury's ver dict for
Uddeholm on the misappropriation of trade secr ets and
confidential information claim was based on Ellwood's
36
misappropriation of Uddeholm's know-how, the verdict
cannot stand.14
However, Uddeholm argues further that, even if Ellwood's
use and misuse of Uddeholm's know-how was covered by
the Agreement, Ellwood's misappropriation of Uddeholm's
client lists, pricing information, ship-to lists and customer
profiles was sufficient to sustain the ver dict of
misappropriation, since that information is confidential
information and/or a trade secret but is not covered by the
Know-How Agreement. Section 1.02 of the Know-How
Agreement defines "Know-How" as "information (including
rights under patents and license agreements, if any)
proprietary to Licensor [Uddeholm] and useful in the
manufacture and fabrication of Products." "Products" is in
turn defined in S 1.03 as "carbon, alloy, tool, stainless and
other specialty steel ingots." Section 1.02 also states that
"Know-How" includes, but is not limited to, technical and
engineering data and information on the manufacture and
production of alloy, tool, stainless, and other specialty steel
ingots.
It is clear from our parsing of SS 1.02 & 1.03 that less
technical information like client lists and pr ofiles, pricing
information, and shipping-to information are not included
in the coverage of the Know-How Agreement. Pennsylvania
law is also clear that this kind of information can be a
trade secret. See Robinson Elec. Supervisory Co. v. Johnson,
154 A.2d 494, 496 (Pa. 1959) ("[C]ustomer lists and
customer information . . . [are] highly confidential and
constitute[ ] a valuable asset. Such data has been held to
be property in the nature of a ``trade secret' for which an
employer is entitled to protection, independent of a non-
disclosure contract."); A.M. Skier Agency, Inc. v. Gold, 747
A.2d 936, 940 (Pa. Super. Ct. 2000) (quoting above passage
from Johnson). Therefore, Uddeholm is correct that, if the
jury's verdict on this claim was based on Ellwood's
_________________________________________________________________
14. We reach a similar conclusion under the "economic loss doctrine"
test, because Uddeholm's entitlement to economic losses from the
misappropriation of its know-how flows only from the Agreement and not
from tort. See Duquesne Light Co. v. W estinghouse Elec. Corp., 66 F.3d
604, 618 (3d Cir. 1995).
37
misappropriation of this latter type of confidential
information rather than on misappropriation of know-how,
then the verdict is sustainable because it passes the gist of
the action and economic loss doctrine tests.
The problem with Uddeholm's argument her e is that, in
its jury instructions, the District Court did not distinguish
between the misappropriation of know-how and the
misappropriation of these other types of confidential
information. The jury's special verdict also did not
distinguish between these two categories of
misappropriation. Thus, we cannot deter mine whether the
jury's verdict on the misappropriation claim was properly
grounded on actions outside the scope of the Agreement.
We therefore will set aside the ver dict for Uddeholm on the
misappropriation of trade secrets claim, and remand for a
determination of this claim based solely on the
misappropriation of trade secrets that do not include the
know-how covered by the Know-How Agreement.
VI. Ellwood's Challenge to the Civil Conspiracy Award
The jury awarded Uddeholm $70,000 in punitive
damages on its civil conspiracy claim against Ellwood.
Uddeholm's complaint averred that Ellwood conspired with
the Ellwood Specialty Steel Company, Ellwood Quality Steel
Company, Bjorn Gabrielson, and David Bar ensfeld to
misappropriate its trade secrets and confidential
information. The jury found Ellwood liable on the
conspiracy claim but found in favor of all the r emaining
conspiracy defendants (except Gabrielson, who had already
been granted judgment as a matter of law under Fed. R.
Civ. P. 50), which means that the jury found only one
defendant liable for conspiracy. Ellwood challenges this
verdict on the grounds that under Pennsylvania law, civil
conspiracy requires at least two co-conspirators. See
Thompson Coal Co. v. Pike Coal Co., 412 A.2d 466, 473 (Pa.
1979).
Uddeholm does not dispute that two conspirators ar e
required under Pennsylvania law, and that, if this issue
had been preserved in the District Court, the conspiracy
verdict would have to be set aside. Instead, Uddeholm
38
argues that this issue was waived because Ellwood did not
clearly object on this basis at trial.15 See Medical Protective
Co. v. Watkins, 198 F.3d 100, 105 n.3 (3d Cir. 1999). After
the verdict, the District Court asked the parties if they
wished to raise any objections to the verdict, and the court
noted specifically that there appeared to be only one
conspirator. The court's colloquy with the parties on this
issue consisted solely of the following:
COURT: Civil conspiracy, I think they only found one
defendant.
SOMMER (counsel for Ellwood): I believe that's corr ect,
Your honor, just EGI.
MARTIN (counsel for Uddeholm): Yes.
COURT: That's a difficult undertaking. I would think
that it would require two or more.
MARTIN: I don't think the other defendant was joined,
though, and that was Mr. Sundvall, when he was out
at Avesta, because EGI was the defendant in the case.
COURT: That's correct, you did ar gue that he was a co-
conspirator. Is there anything else in there that pops
out at you as being inconsistent?
Although Uddeholm argued that Sundvall could serve as
the other co-conspirator, Sundvall had been previously
granted summary judgment on all claims against him,
including civil conspiracy. The issue here, then, is whether
Ellwood waived its argument that it could not be the only
party liable for civil conspiracy by neglecting to assert that
objection at trial. Ellwood argues that it objected by
agreeing with the District Court when the court raised the
_________________________________________________________________
15. Uddeholm argues in the alternative that, since we can affirm the
conspiracy verdict if it has any rational basis, we should do so because
of the possibility that the jury could have concluded that one Robert
Raubolt served as the other co-conspirator. This argument is without
merit. Uddeholm did not even mention Raubolt as a possible co-
conspirator at trial, and raised this possibility for the first time in
its
reply brief. We will not reach this contention because Uddeholm waived
this argument by not raising it in his opening brief. See Ghana v.
Holland, 226 F.3d 175, 180 (3d Cir . 2000).
39
problem with the conspiracy verdict. Ellwood contends that
it should not be required to do mor e when the District
Court itself raises the objection.
Rule 46 of the Federal Rules of Civil Procedur e states
that a party need not make a formal exception to a ruling
or order of a court, but instead "it is sufficient that a party,
at the time the ruling or order of the court is made or
sought, makes known to the court the action which the
party desires the court to take or the party's objection to
the action of the court and the grounds ther efor." On the
other hand, " ``[i]t is well established that failure to raise an
issue in the district court constitutes a waiver of the
argument.' " Medical Protective Co., 198 F.3d at 105 n.3
(quoting Brenner v. Local 514, United Br otherhood of
Carpenters and Joiners of America, 927 F .2d 1283, 1298
(3d Cir. 1991)).
Although this issue is close, we are satisfied that Ellwood
did not waive its argument that it could not be liable as the
sole conspirator. It is true that Ellwood should have done
more than merely agree with the District Court when the
court noted the problem with the conspiracy ver dict. But
passivity may be excusable when the District Court itself
identifies the issue not only as problematic but as almost
certain grounds for setting aside the ver dict. It would be
unfair to Ellwood to penalize it for failing to jump up and
down or labor an objection that the District Court had
placed in the record. Therefor e, we hold that the verdict
against Ellwood for civil conspiracy must be set aside, and
that judgment must be entered for Ellwood on this claim.
VII. Other Challenges to Trial Rulings
A. Should Uddeholm Have Been Allowed to Recover
Damages for 1991 Rebates?
On Uddeholm's breach of contract claim, the jury
awarded compensatory damages for Ellwood's impr oper
calculation of rebates under S 2.3 of the Steel Purchase
Agreements. The parties agree that this amount included
damages for Ellwood's 1991 rebates on steel pur chases
from EUS. Ellwood contends that, even if Uddeholm is
40
entitled to rebate damages generally, it is not entitled to
any damages for post-1990 rebates, because Ellwood was
entitled to buy out Uddeholm's share of EUS at EUS's book
value as of December 31, 1990, and in fact Ellwood
initiated these buy-out proceedings. Ellwood ar gues that
the original Shareholders Agreement is quite clear that the
buy-out price for Uddeholm's shares of EUS was to be the
book value of EUS as of the month preceding the buy-out
notice, which Ellwood gave in January 1991. Because the
buy-out price was fixed prior to the 1991 r ebates, Ellwood
submits that these rebates could not have af fected the
value of Uddeholm's shares at the buy-out, and thus
Uddeholm was not entitled to damages for the 1991
rebates.
When Ellwood sought post-trial relief on this point, the
District Court denied Ellwood's motion, ruling that the
money the jury seemingly awarded for the 1991 r ebates
was really for Ellwood's breach of the Agr eement in
rejecting Uddeholm's tender of its EUS shar es after Ellwood
initiated the buy-out. The Agreement stipulates that the
settlement of the sale of Uddeholm's stock to Ellwood
should take place as soon as is practicable after the
decision is made, and in any event within 30 days after
determination of the purchase price. Ellwood, however,
never paid for Uddeholm's stock and in fact r ejected
Uddeholm's tender of stock. This action delayed the
settlement of the buy-out, and thus extended the time that
Uddeholm had to pay overhead for EUS well into 1991.
Since the Agreement is silent on what is to happen in such
a situation, the District Court found (post-trial) that the
contract was ambiguous on this point. The court ther efore
ruled that it had been the jury's province to decide on the
proper remedy for this breach by Ellwood, and that the jury
had decided to award the amount of the 1991 r ebates as
damages.
Ellwood raises two basic challenges to this ruling. First,
it argues that the Agreement is not ambiguous on this
issue: the Shareholders Agreement unambiguously fixes
book value for buy-out purposes at the sending of buy-out
notice, and there is no provision in the Agreement to vary
this. Second, Ellwood contends that the jury was not
41
instructed on the issue of the ambiguity of the Agr eement
concerning a rejection of a share tender, nor did it return
any kind of verdict on this issue in its special verdict.
Ellwood thus argues that the award of the 1991 rebate
damages cannot stand on the District Court's theory,
because "[a] verdict cannot stand on a theory that the jury
was never asked to consider." Appellants' Br. at 59.
Ellwood's argument that the Agreement was
unambiguous on this issue is unavailing. Ellwood is correct
that the Agreement clearly sets out the method for
calculating the stock purchase price (i.e., EUS's book value)
in a buy-out, but it is just as clear in the Agr eement that
the settlement of such a buy-out was to take place no later
than 30 days after the determination of the purchase price.
The settlement did not occur within the time period set by
the Agreement, and there is no provision in the Agreement
that provides for such a circumstance. It is simply not true
that the Agreement unambiguously gives Ellwood the right
to initiate the buy-out, set the purchase price for the stock,
and then drag its heels for an indefinite time on the
settlement of the buy-out while keeping the pur chase price
for the buy-out fixed--all the while collecting overhead
costs from Uddeholm for EUS. Moreover , such an
interpretation of the Agreement would be"absurd and
unreasonable," so we will not interpr et the Agreement in
this manner. See United Refining Co. v. Jenkins, 189 A.2d
574, 580 (Pa. 1963). The District Court rightly concluded
that the Agreement was ambiguous as to what should have
occurred upon Ellwood's rejection of Uddeholm's tender,
making this question an issue for the jury to consider.
As for Ellwood's contention that the District Court
improperly attributed a rationale for the jury's verdict using
a theory that the jury was never asked to consider , we need
not decide this issue because we will set aside the jury's
award on the breach of contract claim on other grounds
(i.e., the burden-shifting error; see Section III supra). On
remand, the District Court should instruct the jury on the
issue of the ambiguity of the Agreement concer ning a
rejection of the share tender, so that the jury can explicitly
decide whether Ellwood breached the Agr eement by
rejecting Uddeholm's tender, and whether the 1991 rebates
42
should be included in the damage award as a r emedy for
this breach.
B. The Interest Rate That Should Be Applied to Post-
Venture Sales of Steel.
After the joint venture between Uddeholm and Ellwood
dissipated, Uddeholm bought approximately $345,000
worth of steel from Ellwood. Both parties agr ee that
Uddeholm still owes Ellwood this $345,000 plus inter est;
this amount is to be set off against the money Ellwood will
owe Uddeholm on the claims in this lawsuit. The parties
disagree, however, over the rate of interest that should be
applied to this debt. In a post-verdict motion to the District
Court, Ellwood argued that the 18% inter est rate that it
charges all of its customers should be applied to the
$345,000 and compounded semi-annually, as that rate was
included in the terms and conditions that wer e attached to
the invoice order form used for these steel purchases.
Uddeholm counters that the statutory 6% rate should be
applied because the agreement for this steel was part of a
general commercial agreement that did not involve
Ellwood's standard terms.
In its September 13, 1999 Memorandum Order on Post-
Trial Matters, the District Court found that the steel was
purchased via an agreement "which was not confined to the
terms included on the backs of the related invoices, [ ]
which is where defendants find the pr ovision for the high
rate of interest they seek." Dist. Ct. Mem. Order, Sept. 13,
1999 at 3. The court based this conclusion partially on
evidence presented by Uddeholm that the parties entered
into a commercial agreement with dif ferent terms from
Ellwood's standard agreement, and partially on its
conclusion that it would be "logical" for these parties not to
confine their commercial dealings to the ter ms on the back
of a form invoice, given that they had worked together for
years as joint venturers. The District Court also reasoned
that the 6% rate would be "otherwise fair ," as the 6% rate
applied to all the debts that Ellwood owed Uddeholm. The
court thus applied the 6% statutory rate.
Although the District Court determination that the post-
43
venture steel sales agreement did not include the 18%
invoice slip rate may be the best interpretation of the
evidence adduced at trial, we cannot adequately r eview this
determination because the District Court neither cited to
nor described the evidence on which its decision was based.
Moreover, if Ellwood sent the invoice slips within a
reasonable time as a "definite and seasonable expression of
acceptance or a written confirmation" of an oral agreement
between the parties, then 13 Pa. Cons. Stat. S 2207 (part of
Pennsylvania's version of the UCC) would apply, and the
terms on that invoice would become part of the agreement
unless Uddeholm's original offer expressly limited
acceptance to the terms of the offer , the invoice's terms
materially altered the original terms, or Uddeholm objected
to the new terms within a reasonable time. See 13 Pa.
Cons. Stat. S 2207(a) & (b).16
However, there is not sufficient evidence in the District
Court's Memorandum Order or in the recor d for us to
review the District Court's determination on this issue--
indeed, it is not even clear that the District Court
considered the applicability of S 2207 at all. Furthermore,
the District Court's conclusion that it would be"logical" for
the parties to have worked out their own deal separate from
the terms on the invoice and that the 6% rate would be
"fair" is insufficient to establish that there was such a deal.
_________________________________________________________________
16. Tile 13 Pa. Cons. Stat. S 2207(a) & (b) provides that
(a) General rule.--A definite and seasonable expression of
acceptance or a written confirmation which is sent within a
reasonable time operates as an acceptance even though it states
terms additional to or different fr om those offered or agreed
upon,
unless acceptance is expressly made conditional on assent to the
additional or different terms.
(b) Effect on contract.--The additional ter ms are to be construed
as
proposals for addition to the contract. Between merchants such
terms become part of the contract unless:
(1) the offer expressly limits acceptance to the terms of the
offer;
(2) they materially alter it; or
(3) notification of objection to them has alr eady been given or is
given within a reasonable time after notice of them is received.
44
We therefore will vacate the District Court's order on this
issue and remand so that the District Court can more
specifically collect and cite evidence on the post-venture
steel sales agreement between the parties in or der to show
either that the 18% interest rate included in the invoice's
terms did not become part of this agreement, or that the
18% rate was part of the agreement.
C. Evidentiary Challenges.
Ellwood also challenges two evidentiary rulings that the
District Court made at trial. We review the District Court's
evidentiary rulings for abuse of discretion. See Walden v.
Georgia-Pacific Corp., 126 F.3d 506, 517 (3d Cir. 1997).
1. The Jonsson affidavit
The District Court admitted into evidence portions of an
affidavit of Bo Jonsson, a former Pr esident of Uddeholm,
under Federal Rule of Evidence 807, the catchall exception
to the hearsay rule. Jonsson attested to the affidavit in
1994 and died in 1996, before the trial. Uddeholm used the
affidavit to counter assertions by Ellwood about what
transpired at certain directors meetings that Jonsson
attended in a representative capacity for Uddeholm. Rule
807 provides that
[a] statement not specifically cover ed by Rule 803 or
804 but having equivalent circumstantial guarantees of
trustworthiness, is not excluded by the hearsay rule, if
the court determines that (A) the statement is offered
as evidence of a material fact; (B) the statement is more
probative on the point for which it is of fered than any
other evidence which the proponent can pr ocure
through reasonable efforts; and (C) the general
purposes of these rules and the interests of justice will
best be served by admission of the statement into
evidence. However, a statement may not be admitted
under this exception unless the proponent of it makes
known to the adverse party sufficiently in advance of
the trial or hearing to provide the adverse party with a
fair opportunity to prepare to meet it, the proponent's
intention to offer the statement and the particulars of
it, including the name and address of the declarant.
45
Fed. R. Evid. 807.
Ellwood argues that the District Court's admission of the
Jonsson affidavit under Rule 807 was error , because Rule
807 is meant to be used only in the rare case, which, it
argues, this is not. See United States v. Bailey, 581 F.2d
341, 347 (3d Cir. 1978) (stating that the r esidual hearsay
exception is "to be used only rarely, and in exceptional
circumstances," and is meant to "apply only when certain
exceptional guarantees of trustworthiness exist and when
high degrees of probativeness and necessity are present").17
Specifically, Ellwood takes issue with the District Court's
findings that the Jonsson affidavit was exceptionally
trustworthy and that it was more probative than any other
evidence that Uddeholm could present.
While Ellwood is correct that Rule 807 should only be
used in rare situations, the District Court made careful and
extensive findings in support of its conclusion that this was
such a situation. See Tr. of Jury Trial, March 24, 1999.
First, the District Court ascertained that the r equirements
of Rule 807 were met. The court specifically found that
- the affidavit was offered as evidence on a material
fact, namely the parties' course of dealings, which
bears upon the interpretation of the Agr eement;
- the affidavit was more probative on the point for
which it is offered than any other evidence which
the proponent could procure thr ough reasonable
efforts: it was highly probative because Jonsson was
the only representative of Uddeholm on the EUS
board of directors at the time in question, and, as
_________________________________________________________________
17. Before 1997, the residual hearsay exceptions in the Federal Rules of
Evidence were contained in Rules 803(24) and 804(b)(5). In 1997 the
Rules were amended and these two residual exceptions were combined
and transferred to the new Rule 807. "This was done to facilitate
additions to Rules 803 and 804. No change in meaning is intended." Fed.
R. Evid. 807 advisory committee's note. Bailey addressed the old
residual hearsay exceptions contained in Rules 803(24) and 804(b)(5),
but because Rule 807 is simply the combination of these rules, Bailey's
holding applies to the current Rule 807 as well. The same is true of
other pre-1997 cases on the residual hearsay exceptions that are cited
in this Section.
46
such, this evidence was the only evidence that
Uddeholm could present to counter the Ellwood's
allegation that Uddeholm understood the Agreement
to permit sales to third parties and r eimbursement
for those sales;
- the general purpose of the rules, fair ness and the
administration of justice, would be served by
admitting the affidavit, because it would assist the
jury in determining the truth;
- there was sufficient notice to Ellwood that it would
be used, as Uddeholm proffered the affidavit months
prior to trial, and there was argument and briefs
filed on the issue.
The District Court found that the following factors also
militated in favor of admitting the Jonsson affidavit:
- Ellwood had ways to rebut the affidavit: its
witnesses were present at the meetings discussed
therein, and these witnesses could present their
testimony, while Uddeholm's only witness to these
meetings (Jonsson) was dead;
- the affidavit was trustworthy because: (1) the
declarant was known and named, (2) the statement
was made under oath and penalty of perjury, (3) the
declarant "was aware of the pending litigation at the
time he made the declaration and thus knew that
his assertions were subject to cross examination,"
(4) the statements were based on personal
observation, (5) the declarant was not employed by
the plaintiff at the time of the statements, and thus
had no financial interest in the litigation's outcome,
(6) the affidavit was corroborated, partially, by
minutes of directors meetings (some statements
Jonsson said were made match others' notations),
and (7) his position and background qualified him to
make the assertions.
The District Court then acknowledged that Rule 807
should only be used sparingly, but opined that this affidavit
presented "a rather unique combination of circumstances
where a material fact can be proved only through one
47
method, or, in this case, rebutted by only one method." The
court was also swayed by the fact that it was Ellwood that
first argued that Uddeholm knew of Ellwood's interpretation
of the Agreement because Jonsson must have gained this
knowledge at the directors meetings; the only way
Uddeholm could rebut this claim was via Jonsson's
affidavit, given that he was not available to testify.
These findings are sufficient for us to hold that the
District Court did not abuse its discretion when it admitted
the Jonsson affidavit under Rule 807. In Copperweld Steel
Co. v. Demag-Mannesmann-Bohler, 578 F.2d 953 (3d Cir.
1978), this Court upheld a district court's admission of a
similar item--a memorandum prepared by a lawyer of an
executive who was later killed--on a weaker showing by the
district court under the predecessor rule to Rule 807 (Rule
804(b)(5)). See id. at 964. We ther efore hold that the
admission of the Jonsson affidavit was not err or.
2. The Rydstad redaction
Ellwood also contends that the court erred in r equiring
the redaction of portions of a 1988 memorandum from
Bertil Rydstad before admitting it into evidence, on the
basis that the portions redacted were legal conclusions.
Uddeholm appointed Rydstad in 1987 to work with Ellwood
at EUS; in March 1988 Rydstad prepar ed a memo detailing
his understanding of Uddeholm's and Ellwood's rights and
obligations regarding EUS. The District Court admitted the
memo into evidence but first required Ellwood to redact the
following passage from the memo: "Thus, under the
contracts there are only two purchasers. Nothing, however,
precluded [sic] them from reselling to a third party." The
District Court required this language to be redacted on the
grounds that "it appears to be a legal interpretation by a
non-legal person, and not even a person who was privy to
the negotiations [on the Agreement], nor do we have any
indication that that view was adopted or accepted by
anybody else in the company in terms of their course of
dealings." Tr. of Jury Trial, Apr. 1, 1999. The court also
noted that the redacted statement did not expr ess any
point of view on whether Ellwood should be able to get
rebates for ingots sold to third parties, which is really what
48
the dispute over the interpretation of the Agr eement was
about.
Ellwood argues that the redacted language was essential
to understanding Uddeholm's interpretation of the
Agreement at the time, which would ther eby affect the
court's determination of whether the Agr eement was
ambiguous as well as the jury's interpretation of the
Agreement. Under Pennsylvania law, a party's statements
can be used to interpret a contract or to establish that
party's understanding of the meaning of the contract. See
City of Erie v. R.D. McAllister & Son. 204 A.2d 650, 660 (Pa.
1964); Z &L Lumber Co. of Atlasburg v. Nor dquist, 502 A.2d
697, 701 (Pa. Super. Ct. 1985). In our view, however, the
District Court did not abuse its discretion in requiring the
redaction. It appears from the evidence in the record that
Rydstad was not trained in the law, nor was he involved in
the contract negotiations; thus, Rydstad did not seem to
possess the requisite expertise or backgr ound to draw the
conclusion contained in the redacted passage. Furthermore,
despite his role as the point man at Uddeholm for the EUS
project, there is no evidence that R ydstad's views reflected
those of Uddeholm or that anyone else at Uddeholm
adopted them. Finally, because the redacted language did
not address whether Ellwood could receive rebates on its
third-party sales, the language does not speak to
Uddeholm's understanding of the Agreement as to this
issue, although it seems reasonable that the jury could
have become confused about that if it had been given the
memo without the redaction. Thus, it was within the court's
discretion to require the redaction.
VIII. Conclusion
For the foregoing reasons, the Judgment of the District
Court will be affirmed in part and vacated in part, and the
case remanded to the District Court for pr oceedings
consistent with this opinion. Parties to bear their own
costs.
49
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
50