Norfolk Southern Railway Company v. Zayo Group, LLC ( 2023 )

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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 22-1554
NORFOLK SOUTHERN RAILWAY COMPANY,
Plaintiff - Appellee,
v.
ZAYO GROUP, LLC,
Defendant - Appellant.
Appeal from the United States District Court for the Eastern District of Virginia, at
Alexandria. Liam O’Grady, Senior District Judge. (1:21-cv-01299-LO-JFA)
Argued: October 25, 2023 Decided: December 8, 2023
Before HARRIS and QUATTLEBAUM, Circuit Judges, and Kenneth D. BELL, United
States District Judge for the Western District of North Carolina, sitting by designation.
Affirmed by published opinion. Judge Quattlebaum wrote the opinion, in which Judge
Harris and Judge Bell joined.
ARGUED: William H. Hurd, ECKERT SEAMANS CHERIN & MELLOTT, LLC,
Richmond, Virginia, for Appellant. Tobias S. Loss-Eaton, SIDLEY AUSTIN LLP,
Washington, D.C., for Appellee. ON BRIEF: Annemarie DiNardo Cleary, Cody T.
Murphey, Richmond, Virginia, Charles A. Zbedski, ECKERT SEAMANS CHERIN &
MELLOTT, LLC, Washington, D.C., for Appellant. Gordon D. Todd, Cody L. Reaves,
Stephen S. Laudone, SIDLEY AUSTIN LLP, Washington, D.C., for Appellee.
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QUATTLEBAUM, Circuit Judge:
When two companies agree to a method for resolving their disputes, they are bound
by their contract. An internet provider, Zayo Group, LLC, entered such an agreement when
it leased a utility duct from Norfolk Southern Railway Company. When it came time to
renew the lease, Zayo and Norfolk Southern could not agree to the renewal rent. As the
lease instructed, they submitted the dispute to three appraisers, who decided the rent by a
two-to-one vote. But because the appraisers did not unanimously agree, Zayo refused to
pay that rent. Norfolk Southern sued for breach of the lease and moved to confirm the
appraisal as an arbitration award under the Federal Arbitration Act (“FAA”), 9 U.S.C.
§§ 1–16. After confirming the appraisal, the district court entered judgment on the
pleadings for Norfolk Southern, ordering Zayo to pay the rental amount determined by the
appraisers. Regardless of whether the district court properly confirmed the appraisal under
the FAA, the lease was a contract and bound Zayo to pay the amount set by the appraisers,
even if not decided unanimously. Since Zayo did not pay that amount, we affirm the
judgment on the pleadings.
I.
To supply internet, Zayo operates a fiber optic cable buried in a two-inch duct
running along nearly twenty-five miles of railroad in Virginia. Zayo pays rent to use the
duct under a lease that the railroad company, Norfolk Southern, executed in 1999 with a
corporation called Metromedia Fiber Network Services, Inc. Zayo acquired Metromedia in
2012. The lease provided for an initial twenty-year term, with rent starting at $8,000 per
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mile per year, for a total nearing $200,000 per year. The lease also gave Zayo the option of
renewing for two ten-year terms. Rent for those renewal terms was to be adjusted to “reflect
the fair market value” of the leased interest. J.A. 94.
Section 4(b) of the lease provided a process for determining that rent:
J.A. 94. Critically, if two party-appointed appraisers could not agree on the adjusted rent,
the appraisers would jointly select a third appraiser, whom both parties would compensate,
and “the three shall determine” the new rent with “final and binding” effect. J.A. 94. During
this process, the lease required Zayo to continue paying the prior rent and to pay “any
excess due” upon the “final determination” of the new rent. J.A. 94.
When Zayo first sought to renew the lease in April 2019, Zayo and Norfolk Southern
could not agree on the adjusted rent. Under section 4(b) of the lease, Norfolk Southern
proposed a rate in late 2019, and Zayo objected. Zayo failed to offer a counter appraisal
within the required sixty days under section 4(b). While Norfolk Southern believed that
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Zayo’s delay breached the lease, the parties resolved that timing dispute by amending the
lease in April 2020. The amendment extended Zayo’s appraisal deadline to September
2020 in exchange for “Extension Payments.” J.A. 111–12. And the amendment
acknowledged that, even though Zayo had yet to provide its own appraisal, Norfolk
Southern had commissioned and completed an appraisal, constituting the “second
appraisal” under section 4(b). J.A. 112. The amendment also detailed a process for jointly
selecting the third appraiser: if Norfolk Southern’s and Zayo’s appointed appraisers could
not agree on the adjusted rent within thirty days of their initial consultation, Norfolk
Southern’s appointed appraiser had ten business days to provide a list of three possible
appraisers, all of whom must have been “Members of the Appraisal Institute,” to Zayo’s
appointed appraiser, who would have an additional ten business days to select a name from
the list. J.A. 85; J.A. 112. Once the third appraiser had been selected, the three appraisers
were to “proceed as prescribed by Section 4(b)” of the lease. J.A. 112.
After the party-appointed appraisers reached a stalemate, Norfolk Southern
provided three possible third appraisers to Zayo, which picked one. In corresponding about
engaging the third appraiser, the parties expressed disagreement about section 4(b) of the
lease. Zayo claimed that section meant the parties would be bound only by a unanimous
decision of all three appraisers, while Norfolk Southern said a majority decision would
suffice. Having registered their disagreement, the parties permitted the appraisal to
proceed.
The appraisers reached a “Panel Determination” by a two-to-one vote. J.A. 67. Over
the dissent of the appraiser appointed by Zayo, the other two appraisers agreed that the rent
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for the renewal term should begin at $2,340,000 per year. Norfolk Southern sought to
collect, issuing two invoices. Zayo did not pay in full, maintaining that a nonunanimous
decision was not binding.
Norfolk Southern sued Zayo to recover the rent due on a breach of contract theory,
invoking the district court’s diversity jurisdiction. 1 See 28 U.S.C. § 1332. Norfolk Southern
then moved to confirm the appraisal as an arbitration award under the FAA. See 9 U.S.C.
§ 9. Less than a week later, Norfolk Southern filed its operative amended complaint,
alleging breach of contract and seeking both damages for Zayo’s past failure to pay and a
declaration that Zayo owed the panel-determined amount moving forward.
The district court confirmed the appraisal as an arbitration under the FAA. In doing
so, the district court rejected Zayo’s argument that the appraisal panel could act only
unanimously. First, the court concluded, “[A]n interpretation of the contract that requires
the appraisal panel’s decision to be unanimous is inconsistent with the plain language of
the contract.” J.A. 258. Alternatively, the district court decided that the appraisers could
decide for themselves whether to return a finding based on a majority vote rather than a
unanimous one since, according to the district court, that call fell within the appraisers’
purview as arbitrators. Having confirmed the appraisers’ decision under the FAA, the
district court directed Norfolk Southern “to file a motion for judgment pursuant to Federal
Rule of Civil Procedure 58 which identifies the amount of the award owed and any interest
that [Norfolk Southern] seeks.” J.A. 260.
Separately, Zayo initiated a state proceeding seeking to obtain the duct outright by
1
condemnation. That case is the subject of the related appeal in Case No. 22-1837.
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In response, Norfolk Southern moved for “judgment on the pleadings and entry of
judgment” under Rule 12(c) and Rule 58 of the Federal Rules of Civil Procedure. J.A. 261.
Treating the motion as one for judgment on the pleadings, the district court entered
judgment on the railroad’s breach of contract and declaratory judgment claims. While the
district court invoked its earlier arbitration decision, it relied on breach of contract
principles, emphasizing that the parties remained “bound by the terms of the duct lease as
agreed,” including the rent-setting mechanism of section 4(b). J.A. 265. Accordingly, the
court ordered Zayo to pay Norfolk Southern $4,390,904.79, representing unpaid rent plus
contractual interest. The district court also ordered that the appraisal panel’s rental rate
would remain in effect for the rest of the renewal term.
II.
On appeal, 2 Zayo argues that it was not bound by the panel’s rent determination
because the appraiser it selected dissented. Norfolk Southern responds that a majority vote
binds the parties under the lease. Alternatively, Norfolk Southern counters that the
appraisers themselves decided that they could act by majority vote and that the appraisers
were empowered to make that call in their capacity as arbitrators. See Dockser v.
Schwartzberg, 433 F.3d 421, 425–26 (4th Cir. 2005) (deferring to arbitrators on
“procedural questions” not resolved by the arbitration agreement that “grow out of the
2
Zayo timely appealed from the district court’s final judgment, which falls within
our appellate jurisdiction under 28 U.S.C. § 1291.
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dispute and bear on its final disposition”). While Zayo and Norfolk Southern dispute
whether the appraisal process qualified as an arbitration and whether, by litigating breach
of contract, Norfolk Southern waived its FAA rights, they agree that Zayo breached the
lease if the lease itself did not require unanimous action by the appraisers. 3 Since the lease
imposed no such unanimity requirement, we need not, and do not, look any further.
Like other contracts, we interpret the lease de novo. FindWhere Holdings, Inc. v.
Sys. Env’t Optimization, LLC, 626 F.3d 752, 755 (4th Cir. 2010). The lease specified that
Virginia law governs its interpretation. Under Virginia law, we “must give effect to the
intention of the parties as expressed in the language of their contract.” Martin & Martin,
Inc. v. Bradley Enters., Inc., 504 S.E.2d 849, 851 (Va. 1998) (quoting Rash v. Hilb, Rogal
& Hamilton Co., 467 S.E.2d 791, 794 (Va. 1996)). We cannot look beyond a contract’s
language absent ambiguity. Amos v. Coffey, 320 S.E.2d 335, 337 (Va. 1984) (“[W]hen the
parties set out the terms of their agreement in a clear and explicit writing then such writing
is the sole memorial of the contract and . . . the sole evidence of the agreement.” (quoting
Durham v. Pool Equip. Co., 138 S.E.2d 55, 59 (Va. 1964))).
3
In answering Norfolk Southern’s amended complaint, Zayo raised various
“affirmative defenses.” J.A. 149–50 (asserting that (1) the amended complaint failed to
state a claim; (2) the unpaid invoices were invalid because they were not based on a
unanimous decision; (3) Norfolk Southern could not issue valid invoices since it breached
the lease’s rent-appraisal process; (4) Norfolk Southern failed to mitigate its damages; (5)
the lease is ambiguous; and (6) the rent is unconscionable). And Zayo “counterclaimed”
that Norfolk Southern breached the lease by sending invoices based on the nonunanimous
appraisal. J.A. 155–56. Zayo did not press those arguments when Norfolk Southern moved
for judgment on the pleadings. Nor does Zayo resuscitate them now. To the contrary, Zayo
conceded at oral argument that we have nothing more to do but affirm if we decide that the
lease did not require the appraisers to reach unanimity.
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The lease is unambiguous. It provides that, within 60 days of the third appraiser’s
selection, “the three [appraisers] shall determine the Adjusted Rental . . . , which
determination shall be final and binding.” J.A. 94. The lease does not limit or specify how
the appraisers could “determine” the rental value. Zayo contends that the appraisers could
determine the rent only by unanimous vote, while Norfolk Southern says that a majority
vote sufficed. However, a contract is not ambiguous simply because the parties offer
opposing interpretations. Wilson v. Holyfield, 313 S.E.2d 396, 398 (Va. 1984). Rather, to
lead to ambiguity, the opposing interpretations must both be “reasonable,” that is, “‘equally
possible’ given the text and context of the disputed provision.” Erie Ins. Exch. v. EPC MD
15, LLC, 822 S.E.2d 351, 355–56 (Va. 2019). It is unreasonable to interpret the lease’s
silence as limiting the appraisers to unanimous decision-making.
Logically read, the lease introduced a third appraiser to break ties. Ordinarily,
“determining” an issue means definitively resolving it, no matter the mechanism. See e.g.,
Determine, Random House Webster’s College Dictionary (2d rev. ed. 2000) (defining
“determine” to mean “to settle or resolve (a dispute, question, etc.) by an authoritative or
conclusive decision”). The contract also demonstrates the parties’ desire not to drag out the
rent determination. Section 4(b) of the lease provided a timeline for each step of the
process. When Zayo missed its deadline to provide an appraisal, the parties amended the
lease, giving Zayo an extension in exchange for payments and compressing the timeline.
And greasing the skids, the amendment specified steps for appointing the third appraiser—
the appraiser appointed by Norfolk Southern was to provide three options to the appraiser
appointed by Zayo, who then would have ten business days to select a name from the list.
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Now complaining that this selection method disadvantaged it, Zayo contends that it
would have agreed to such a method only if it had believed unanimity were required.
However, Zayo’s subjective belief about the 2020 amendment does not establish what the
lease in fact means. 4 Instead, we look to the text of the written agreement. And the
amendment changed nothing about the original lease’s appraisal process beyond the third
appraiser’s selection. Once again, section 4(b) provides that “the three [appraisers] shall
determine the Adjusted Rental,” without dictating any limitations on how they do so. J.A.
94.
That the 2020 amendment may have given Norfolk Southern the upper hand in
selecting the third appraiser does not create any ambiguity in the text of the lease. As to
why Zayo agreed to that particular change, who knows? Changing the selection method
was but one of several compromises enshrined in the amendment. Perhaps Zayo settled on
the selection method to extract other favorable terms, like the extension. Or perhaps Zayo
simply agreed to a bad deal. In the end, why Zayo agreed to the amendment doesn’t really
matter. It is our job to enforce contracts, not to speculate about the parties’ possible motives
for entering into them. So, we decline to examine only one aspect of the bargained-for
exchange, now tinted by hindsight. And we decline to judicially impose a requirement into
the lease—unanimity—that the parties did not include in their agreement.
The logic of the appraisal sequence, considered as a whole, suggests that the third
appraiser’s role was to break a tie. The third appraiser is appointed only if the other two
4
In fact, Zayo had yet to enter the picture when Norfolk Southern agreed to the lease
in 1999 with Metromedia, which Zayo acquired only in 2012.
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have deadlocked. If unanimity were required, an appraiser appointed by a single party
could indefinitely hold up the process, regardless of whether the lease contemplated a third
appraiser. Such a result would render the third appraiser redundant and defy the parties’
express purpose of “determining” the rent. See Wilson, 313 S.E.2d at 398 (“The guiding
light in the construction of a contract is the intention of the parties as expressed by them in
the words they have used.” (quoting Meade v. Wallen, 311 S.E.2d 103, 104 (Va. 1984),
and Magann Corp. v. Elec. Works, 123 S.E.2d 377, 381 (Va. 1962))). Thus, a unanimity
requirement does not follow from a reasonable reading of the lease.
This logic is nothing new. Almost two hundred years ago, the Supreme Court
utilized similar reasoning in Hobson v. McArthur, 41 U.S. (16 Pet.) 182 (1842). That case
involved an agreement for valuing land whereby each party was to choose one
“disinterested” appraiser, but, “in case the two men thus chosen could not agree on the
price of said lands, then they were to choose a third man, who, together with the other two,
should agree on the price of the said lands.” Id. at 192. Despite the language that the third
man was to decide “together with the other two,” id., the Court concluded that the third
appraiser served as a tiebreaker because allowing a majority vote “would insure the
accomplishment of the object the parties had in view,” while requiring unanimity “would
most likely defeat that object” since the third appraiser “was not to be called, until the two
had disagreed.” Id. at 193. Similarly, the Norfolk Southern lease directed “the three”
appraisers to “determine the Adjusted Rental.” J.A. 94. As in Hobson, the lease, logically
read, tasked the third appraiser with breaking the stalemate.
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Zayo counters that requiring unanimity would not necessarily result in eternal
stalemate. It hypothesizes that instructing the panel to reach a unanimous decision might
galvanize the panel to agree. Id. If not, Zayo suggests that a new panel could be chosen. Id.If the stalemate persists, Zayo claims that Norfolk Southern could bypass it by later
returning to court on a quantum meruit theory. Id. But this is all speculation, as none of it
appears in the lease. To the contrary, the lease directs the appraisers to “determine” the
rent, without tying their hands to a particular decision-making method. Nothing in the lease
implies a unanimity requirement that would stymie its rent-determining objective. See
Hobson, 41 U.S. at 192–93. Rather, the only reasonable meaning of the lease is that the
third appraiser was meant to break the tie, unambiguously allowing the panel to determine
the rent by majority vote.
Undeterred, Zayo turns to extrinsic evidence and interpretive norms, but neither can
overcome the lease’s unambiguous meaning. First, Zayo invokes extrinsic evidence from
years before the lease’s execution. See Eure v. Norfolk Shipbuilding & Drydock Corp.,
561 S.E.2d 663, 667–68 (Va. 2002) (“[W]hen a contract is ambiguous, the Court will look
to parol evidence in order to determine the intent of the parties.”). Over a decade before
Zayo’s lease was first executed, Norfolk Southern entered a lease with a predecessor of
Sprint Communications Company. Like Zayo’s lease, the Sprint lease provided a three-
appraiser mechanism for deciding fair rental value, but, unlike Zayo’s lease, it expressly
specified that a majority vote would suffice to decide the issue. Id. Even so, because the
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lease is not ambiguous, as just discussed, we cannot consider Zayo’s extrinsic evidence,
regardless of its persuasive power or lack thereof. 5 See Amos, 320 S.E.2d at 337.
For that same reason, we resist Zayo’s invitation to interpret the provision’s
language against Norfolk Southern, which Zayo says drafted it. 6 See Martin & Martin,
504 S.E.2d at 851 (“In the event of an ambiguity in the written contract, such ambiguity
must be construed against the drafter of the agreement.”). That practice applies only as a
tool of last resort to resolve persistent ambiguities. See Donnelly v. Donatelli & Klein, Inc.,
519 S.E.2d 133, 140 (Va. 1999) (concluding that the interpretive tool did not apply when
the contract was not ambiguous); see also Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407,
1417 (2019) (“The rule applies ‘only as a last resort’ when the meaning of a provision
remains ambiguous after exhausting the ordinary methods of interpretation.”); 11 Williston
on Contracts § 32:12 (4th ed. May 2023 update) (“The rule of contra proferentem is
generally said to be a rule of last resort and is applied only when other secondary rules of
interpretation have failed to elucidate the contract’s meaning.”). Since the lease is not
ambiguous, the interpretive tool has no place here. 7
5
And likely Zayo’s extrinsic evidence would not have much persuasive power.
After all, a single lease executed with an unrelated entity in 1987 would not provide much
guidance as to the meaning of the Zayo lease executed in 1999.
6
Zayo charges Norfolk Southern with drafting the at-issue provision but admits that
its only evidence of that charge is the railroad’s failure to deny it. We need not resolve the
drafter’s identity. Whether or not Norfolk Southern drafted the provision, the provision
unambiguously does not require unanimity.
7
Even if the principle of contra proferentem were to apply, it likely would not apply
with full force to this commercial lease negotiated between sophisticated entities. See
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Ambiguity is one thing; breadth quite another. Broadly, the lease directed the three
appraisers to “determine” the rental rate, without specifying limitations. J.A. 94. Virginia
law precludes us from reading into the lease “language which will add to or take away from
the meaning of the words already contained therein.” Wilson, 313 S.E.2d at 398.
Accordingly, we will not narrow the lease’s broad terms by imposing an unstated
requirement that would frustrate the lease’s purpose. See City of Chesapeake v. Dominion
SecurityPlus Self Storage, LLC, 785 S.E.2d 403, 406–07 (Va. 2016) (holding that a
Virginia circuit court erred in implying a foreseeability requirement to limit a contract’s
“broad” waiver of “any claim for damages”). Therefore, under the lease, a rent decision
reached by a majority of the appraiser panel binds Zayo. Once the appraisers reached such
a decision, the lease obligated Zayo to “pay any excess due.” J.A. 94. By refusing to pay
that full amount, Zayo breached the lease.
III.
The lease’s plain language resolves this rent dispute. So, we do not opine on whether
the lease’s dispute-resolution mechanism amounted to an arbitration under the FAA.
Regardless of whether the district court erroneously confirmed the appraisal as an
arbitration award, the parties remained bound by the lease’s unambiguous terms. Because
Peoples Sec. Life Ins. Co. v. Monumental Life Ins. Co, 867 F.2d 809, 814 (4th Cir. 1989)
(attaching “no significance” to which party drafted the arbitration language because the
contract was negotiated at arms’ length through “able and experienced counsel” on behalf
of “sophisticated” parties); 11 Williston on Contracts § 32:12 (stating that application of
the rule may vary based on “the degree of sophistication of the contracting parties or the
degree to which the contract was negotiated”).
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Zayo did not abide, it breached. On that basis and that basis alone, see RLM Commc’ns,
Inc. v. Tuschen, 831 F.3d 190, 195 (4th Cir. 2016) (“We may affirm ‘on any legal ground
supported by the record and are not limited to the grounds relied on by the district court.’”
(quoting Jackson v. Kimel, 992 F.2d 1318, 1322 (4th Cir. 1993))), the district court’s
ultimate judgment directing Zayo to pay the rent determined by the appraisers is
AFFIRMED.
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