International Marine, L.L.C. v. Delta Towing, L.L.C. ( 2013 )

Case: 12-30280 Document: 00512105709 Page: 1 Date Filed: 01/08/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 8, 2013
No. 12-30280 Lyle W. Cayce
Clerk
INTERNATIONAL MARINE, L.L.C.; INTERNATIONAL OFFSHORE
SERVICES, L.L.C.,
Plaintiffs - Appellants,
v.
DELTA TOWING, L.L.C.,
Defendant - Appellee.
Appeals from the United States District Court
for the Eastern District of Louisiana
Before STEWART, Chief Judge, and KING and OWEN, Circuit Judges.
CARL E. STEWART, Chief Judge:
The district court entered an order declaring enforceable under general
maritime law a liquidated damages provision in a contract between Defendant-
Appellee Delta Towing, L.L.C. and Plaintiffs-Appellants International Marine,
L.L.C. and International Offshore Services, L.L.C. Upon Plaintiffs’ motion, the
district court certified the order as a final judgment pursuant to Federal Rule of
Civil Procedure 54(b), and Plaintiffs now appeals. We AFFIRM.
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I. BACKGROUND
A. Negotiations Lead to Vessel Sales Agreement
On September 8, 2006, International Marine, L.L.C.1 entered into a Vessel
Sales Agreement (“VSA”) with Delta Towing, L.L.C. (“Delta”) wherein
International purchased two tugboats from Delta for $4 million. The companies’
agreement was preceded by several months of negotiations between
International’s president, Stephen Williams, and counsel, Peter Rouse, and the
treasurer of Delta’s parent company, Darren Vorst. Throughout the
negotiations, Williams was clear that the vessels were for “in house” use and
would not be used to compete with Delta. Delta initially declined to sell the
vessels because it intended to use them to grow its business, but ultimately
agreed to sell them subject to its standard non-compete language.
The signed VSA includes a liquidated damages provision (“LD Provision”)
that, inter alia, provided for a $250,000 payment for, inter alia, each violation
of the non-competition clause. This figure had been the subject of significant
negotiations between Rouse and Delta, and its magnitude had dropped
significantly over several rounds of negotiations, from a starting figure of $4
million per violation.
B. Liquidated Damages and Related Provisions
The VSA contains two relevant contract provisions. The first, Paragraph
11F, is a non-competition clause between International (Buyer) and Delta
(Seller), which reads as follows:
F. Covenant Regarding Name/Use of Vessels/Hiring of
Crews. . . . Buyer represents that it is purchasing the
Vessels for use with Buyer’s owned or chartered
equipment in support of Buyer’s internal operations.
1
International Offshore Services, L.L.C. served as International Marine, L.L.C.’s
guarantor in the subsequently signed Vessel Sales Agreement. Collectively, we refer to both
companies as “International.”
2
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Inasmuch, Buyer covenants and agrees that neither it
nor any of its affiliated companies will charter
out or enter into towing contracts or otherwise
utilize or permit anyone else to utilize the Vessels
for hire (collectively “Charters Out”) in the inland or
offshore waters of the U.S. Gulf of Mexico . . . (the
“Covered Trade”) for a period of five (5) years from the
date of this Agreement (the “Covered Term”). . . .
Notwithstanding the foregoing, in the event Buyer or
its affiliated companies wish to Charter Out
either or both of the Vessels in the Covered Trade
during all or part of the Covered Term, Buyer
shall be obligated to time charter the applicable
Vessels to Seller for Seller to enter into Charters
Out with customers acceptable to Seller . . . .
VSA ¶ 11F (emphasis added). Thus, in the event International decided to
compete with Delta for third-party charters, it was first obligated to notify Delta
and give it the option of operating charters itself. If Delta chose to operate the
charter, it would remit ninety percent of the gross charter fee to International.
If Delta was unable to secure charter customers for the vessels within a
reasonable period of time, International was permitted to operate its own
charters and would remit ten percent of the charter fee to Delta. Additionally,
the charter hire rate charged to customers had to be reasonably agreeable to
both Delta and International.
The VSA’s LD Provision, Paragraph 11G, reads as follows:
G. Liquidated Damages. The consideration for the
provisions in paragraph 11F and this paragraph 11G is
that the above Purchase Price is below the fair market
price of the Vessels at the time of sale and other good
and valuable consideration the receipt and sufficiency
of which is hereby acknowledged and confessed. In the
event Buyer or its affiliated companies or other
subsequent owner, manager, or charter of the
Vessels violates any of the covenants and
agreements in paragraph 11F, Buyer shall pay to
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Seller as liquidated damages, and not as a
penalty, the greater of (i) the sum of Two
Hundred Fifty Thousand and no/100 Dollars
($250,000.00) per incident or occurrence or (ii) if
applicable the gross amount of revenue earned in
violation of such covenant and agreement with
respect of the incident or occurrence in question
. . . . All liquidated damages shall be payable within 30
days of notice of the violation. It is understood that the
resultant damages of any such breach of the
covenants and agreements contained in
paragraph 11F would be difficult to ascertain
with certainty but that the amount stipulated
herein is a good faith reasonable estimate of the
damages Seller would suffer. . . . In no event shall
any party or the affiliated companies thereof or the
respective shareholders, officers, directors, employees,
agents, or representatives thereof circumvent or
attempt to circumvent the provisions of paragraph 11F
or this paragraph 11G by any means, direct or indirect.
VSA ¶ 11G (emphasis added).
C. Delta Discovers Breach of VSA ¶ 11F
In July 2008, Delta notified International that it had become aware that
the vessels had been chartered without Delta’s knowledge in violation of the
VSA. International responded in late November 2008 by remitting a check for
$53,293.33, which it claimed was the extent of the “owed commissions.” Delta
refused to accept the check as the full amount owed and requested material
backing up International’s figure. In early 2009, while conducting an audit with
one of Delta’s employees, International discovered that it owed Delta an
additional $37,657, which it remitted in another check. Delta refused to
negotiate this check as well, and later sent a demand letter for the liquidated
damages amount multiplied by the alleged thirty-six charters that breached the
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VSA, which totaled $9 million. International has conceded it breached the
contract by operating twenty-seven charters.
D. International Seeks Declaratory Judgment
In December 2009, Delta sued International in Texas state court for
breaching the VSA, including for failing to timely remit multiple charter
payments. The VSA’s forum selection clause mandates the parties resolve their
dispute in the United States District Court for the Eastern District of Louisiana.
Therefore, International filed the instant suit, seeking a declaratory judgment
that it had not breached the VSA and that the LD Provision was an
unenforceable penalty as a matter of law. Delta counterclaimed for breach of
contract, seeking enforcement of the LD Provision. Judge McNamara was
assigned to the case. The parties engaged in discovery, including conducting
depositions.
On March 11, 2011, in a detailed and well-reasoned Order and Reasons,2
Judge McNamara granted Delta’s motion for summary judgment in part and
denied International’s motion, finding the LD Provision was enforceable. The
McNamara Order declined to resolve the issue of damages. Subsequently, Judge
McNamara retired, and the case was reassigned to Judge Fallon. International
then filed a Motion to Vacate pursuant to Federal Rule of Civil Procedure 60(b)
and a Motion to Reconsider based on additional testimony obtained from Delta’s
former damages expert and Chief Operating Officer, Barry Matherne, who had
left Delta since his previous deposition. On February 13, 2012, the district court
denied International’s motion in its entirety and reaffirmed that the LD
Provision was enforceable.3 The Fallon Order specifically declined to revisit the
merits of the McNamara Order, and instead focused on whether the new
2
Hereinafter, we will refer to this order as the “McNamara Order.”
3
Hereinafter, we will refer to this order as the “Fallon Order.”
5
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Matherne deposition changed the analysis as to whether the LD Provision was
enforceable. The Fallon Order concluded that it did not.
International then moved for Judge Fallon to certify the judgment as final
or for interlocutory appeal. On March 16, 2012, Judge Fallon certified the Fallon
Order as a final judgment pursuant to Federal Rule of Civil Procedure 54(b).
International timely appealed.3
II. DISCUSSION
At its core, International’s argument is that both the McNamara and
Fallon Orders erred when they held the LD Provision was enforceable.
International raises several specific points of error in the Orders, including
improper consideration of the parties’ negotiating capacities and the application
of an improper standard of review.
We review a grant of summary judgment de novo, applying the same
standard as the district court. QT Trading, L.P. v. M/V Saga Morus, 641 F.3d
105, 108 (5th Cir. 2011) (citation omitted). Summary judgment is appropriate
when “there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). “Factual
controversies are construed in the light most favorable to the nonmovant, but
only if both parties have introduced evidence showing that an actual controversy
exists.” QT Trading, 641 F.3d at 108 (citation and internal quotation marks
omitted). We review the district court’s judgment, and our analysis need not be
based solely on the district court’s stated reasons. See Cambridge Integrated
3
Delta briefly asserts that International has not properly appealed the McNamara and
Fallon Orders. Although Delta does not press this argument, we are “obligated to examine the
basis for our jurisdiction, sua sponte, if necessary.” In re Cortez, 457 F.3d 448, 453 (5th Cir.
2006) (citation and internal quotation marks omitted). We have determined that we have
jurisdiction over this appeal.
Additionally, the VSA states that it is governed according to general maritime law and
Louisiana law, if applicable. Judge McNamara determined the LD Provision was subject to
general maritime law, a determination the parties have not appealed.
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Servs. Grp., Inc. v. Concentra Integrated Servs., Inc., 697 F.3d 248, 253 (5th Cir.
2012) (citation and internal quotation marks omitted) (“We are not limited to the
district court’s reasons for its grant of summary judgment and may affirm the
district court’s summary judgment on any ground raised below and supported
by the record.”).
The interpretation of maritime contract terms is a matter of law we review
de novo. One Beacon Ins. Co. v. Crowley Marine Servs., Inc., 648 F.3d 258, 262
(5th Cir. 2011). When interpreting maritime contracts, federal admiralty law
rather than state law applies. See Har-Win, Inc. v. Consol. Grain & Barge Co.,
794 F.2d 985, 987 (5th Cir. 1986) (collecting citations). Whether a liquidated
damages clause is a penalty is a question of law. Louis Dreyfus Corp. v. 27,946
Long Tons of Corn, 830 F.2d 1321, 1331 (5th Cir. 1987) (citation omitted). The
burden of proving that a liquidated damages clause is a penalty is on the party
urging for it to be viewed as a penalty. Farmers Exp. Co. v. M/V Georgis Prois,
799 F.2d 159, 162 (5th Cir. 1986) (citation omitted).
A. Applicable Law
In interpreting liquidated damages clauses in maritime contracts, we
apply the Restatement (Second) of Contracts Section 356 comment b (the
“Restatement”) to determine whether such a clause is “so unreasonably large as
to be a penalty.” We have explained the comment’s two-part test as follows:
The first factor is the anticipated or actual loss caused
by the breach. The amount fixed is reasonable if it
approximates the actual loss that has resulted from a
particular breach, even though it may not approximate
the loss that might have been anticipated under other
possible situations, or if the breach approximates the
loss anticipated at the time of making the contract,
even though it does not approximate the actual loss.
The second factor is the difficulty of proof of loss. The
greater the difficulty of proof of loss, the more flexibility
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is allowed in approximating the anticipated or actual
harm.
Farmers Exp., 799 F.2d at 162 (citations omitted).
Our circuit precedent in the context of maritime liquidated damages is
limited to two cases: Farmers Export, 799 F.2d 159, and Louis Dreyfus, 830 F.2d
1321. Both concern liquidated damages that attached when a vessel overstayed
its timeslot at a berth. In Farmers Export, we upheld a $5,000 per hour
liquidated damages charge as reasonable and not a penalty. 799 F.2d at 165.
In reaching this conclusion, we noted that while “the reasonableness of the
damages [is] a question of law, in making that determination we rely on the
findings of fact of the district court.” Id. at 164. We therefore viewed as
persuasive the district court’s factual findings that $5,000 was a reasonable
forecast of the grain facility owner’s damages. Id. at 165. To reach that
conclusion, the district court considered expert testimony about actual damage
estimates and the charges levied by other grain elevators. Id. at 164.
In Louis Dreyfus, we refused to enforce a liquidated damages clause that
assessed a $30,000 per day liquidated damages charge to a ship that failed to
vacate its loading berth. 830 F.3d at 1332. We stated that the “district court
was entitled to find” that the charge, which was based on a “reasonable pre-
estimate of” the damages that would accrue in a full calendar day, “is excessive
when the vessel occupies the berth for a much shorter time.” Id.
B. Analysis
Our review of the record shows that Delta’s concerns about
competition—and International’s assurances that it would not compete with
Delta—were critical in the negotiations that led to the sale of the vessels, and
they underpin the LD Provision. This conclusion anchors our analysis of the
Restatement’s factors.
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Pursuant to our precedent, we first examine the second Restatement factor
“because the more difficult it is to prove damages, the more leeway the court
allows in determining whether the liquidated damages are reasonably related
to anticipated damages.” Farmers Exp., 799 F.2d at 162. Contrary to
International’s assertions, the damage that would accrue from International’s
breach of VSA Paragraph 11F was not just the ten-percent fee International
owed when it chartered out the vessels. Instead, and more importantly, it was
also Delta’s inability to prevent competition, leading to the potential loss of
customers, business opportunities and market share due to International’s
failure to notify Delta of its intent to compete.
International does not dispute the difficulty in estimating damages before
a non-competition clause is breached. We have previously recognized that it is
difficult to calculate the damage that results when a covenant not to compete is
breached. See Blase Indus. Corp. v. Anorad Corp., 442 F.3d 235, 238 (5th Cir.
2006) (“[C]ovenants not to compete often include a liquidated damages provision
to avoid the difficulty of calculating damages.”). The McNamara Order
considered testimony about the difficulty of estimating damages ex ante, and we
agree with its conclusion that these damages are difficult to prove. Therefore,
we have—and the district courts properly had—“more leeway” in determining
whether the LD Provision is reasonably related to anticipated damages.
Farmers Exp., 799 F.2d at 162.
In reaching its decision as to the first Restatement factor, which assesses
the reasonableness of the LD Provision, the McNamara Order assessed the
expert testimony as to potential charter contracts that Delta could have obtained
and the typical charter fee at which the vessels had been hired out before they
were sold. The testimony showed that there was variability in the length of
charter contracts, but that a single contract could last for as long as several
years. The testimony also showed that day rates for charters in late 2006 and
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2007 could range up to several thousand dollars. Thus, a single charter contract
could reasonably generate substantial revenue equal to or in excess of the LD
Provision. Moreover, as the McNamara Order noted, “International Marine has
presented no evidence suggesting that [Delta’s] concerns regarding loss of
market share, future customers or future business were unreasonable or
unrelated to [Delta’s] anticipated loss.” R. at 3742. We follow Farmers Export
in finding persuasive the district court’s careful factual findings as to whether
the LD Provision was a reasonable forecast of damages. Adopting the language
of the McNamara Order, we hold that “[l]ooking at the contract at the time it
was made, ex ante breach, this court cannot bicker with the $250,000 per
occurrence forecast.”4 R. at 3746. International has not met its burden to prove
that the LD Provision was a penalty. We thus hold that the district court
properly held the LD Provision enforceable.5
III. CONCLUSION
For the foregoing reasons, we AFFIRM the district court’s judgment.
4
International places considerable emphasis on the total amount of liquidated damages
Delta has claimed. Notwithstanding the Fallon Order’s express reservation of the damages
issue for trial, we note that the total damages claimed are so large because International
breached the non-competition provision at least twenty-seven times. We are loath to find the
LD Provision unenforceable merely because International adopted a pattern of disregarding
its contractual obligations.
5
Because we have determined the district courts’ judgment was correct, we need not
reach International’s arguments related to the district courts’ allegedly improper reasoning
and standard of review. We also decline to decide whether the Restatement’s “extreme case”
language applies to this situation. See Restatement (Second) of Contracts § 356 comment b
(“If, to take an extreme case, it is clear that no loss at all has occurred, a provision fixing a
substantial sum as damages is unenforceable.”). Matherne’s testimony that he was unaware
of any damage to Delta’s competitive position as a result of International’s breaches is more
probative of the difficulty of proving such damages than of whether damage actually occurred.
10