Hay Group Management Inc v. Bernd Schneider

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________________
No. 18-1473
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HAY GROUP MANAGEMENT, INC.,
Appellant
v.
BERND SCHNEIDER
________________
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil Action No. 2-04-cv-01236)
District Judge: Honorable Harvey Bartle III
________________
Argued March 14, 2019
Before: MCKEE, ROTH, and FUENTES, Circuit Judges
(Opinion filed: July 10, 2020)
Jeremy D. Heep (ARGUED)
Eli Segal
Benjamin J. Eichel
Alva C. Mather
Pepper Hamilton LLP
3000 Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103
Counsel for Appellant
John J. Barrett, Jr.
Reger Rizzo & Darnall LLP
2929 Arch Street,
Cira Centre, 13th Floor
Philadelphia, PA 19104
Karl Geercken (ARGUED)
Alston & Bird
90 Park Avenue, 15th Floor
New York, NY 10016
Counsel for Appellee
________________
OPINION
________________
2
ROTH, Circuit Judge
Hay Group Management, Inc., appeals the District
Court’s grant of summary judgment in which it held that Hay
Group’s claims are precluded by a final judgment issued by the
German Higher Regional Court of Frankfurt am Main. The
District Court assumed that the relevant inquiry was whether
Hay could have brought its claims as counterclaims in the
German litigation. But under Pennsylvania preclusion law, the
correct question is whether Hay was required to bring its
claims as counterclaims in the German litigation. Pursuant to
Federal Rule of Civil Procedure 44.1, we have determined that
under German law, Hay was not required to plead its claims in
this action as counterclaims in the German litigation. We
therefore hold that the District Court erred in granting
summary judgment on the basis that Hay was precluded by
German law from bringing this action. Since Hay’s contract
assignment claim seeks to functionally undo the German
litigation, however, we will affirm the summary judgment on
that claim, but we will reverse the District Court’s grant of
summary judgment on Hay’s sham investigation claim and
remand that claim to the District Court.
I
This matter arises out of Bernd Schneider’s tenure and
subsequent termination as CEO of all Hay Group companies.1
1
There are numerous Hay entities, but for our purposes, three
are relevant: Hay Group Management, Inc., (Hay USA); Hay
BV, (Hay Netherlands); and Hay GmbH, (Hay Germany). The
German litigation, at the time of final judgment, involved Hay
Netherlands and Hay Germany. The District Court held that
3
Schneider, a longtime Hay employee, was elevated to CEO in
2001, succeeding Chris Matthews, who stayed on as Chairman
of Hay Group. Schneider’s employment contract was signed
with Hay Netherlands and allowed Hay Netherlands to assign
the contract to another Hay entity for tax purposes.
Schneider was unhappy with the bonus of $850,000 that
he was awarded for 2002, his first full year as CEO. He had an
associate, Lucie Boller-Bockius, transfer funds for his bonus
using an unusually favorable conversion rate which bumped
the dollar value of the bonus up to $1,000,000, the amount that
Schneider thought he deserved. He also drastically increased
Boller-Bockius’s direct compensation and her severance
package. As a result, Schneider became involved in a
protracted dispute with Stephen Kaye, the CFO of Hay Group.
Schneider was forced to return the excess bonus, but he then
engaged a law firm to investigate Kaye. When concerns about
the aggressiveness of this investigation reached Matthews, he
terminated the investigation on November 10, 2003, and
retained another law firm to conduct an investigation. This
second investigation determined that the claims against Kaye
were unfounded. After these events, when Hay Group
discovered that Boller-Bockius had left her job and was
claiming an inflated pension, Hay Germany and Hay
Netherlands terminated Schneider in late 2003 for “good
cause.”
Hay Group is in privity with Hay Netherlands; however, that
holding was not appealed. As a result, it is not necessary to
further discuss the Hay entities’ corporate structure in order to
resolve this appeal.
4
As a result, Schneider sued Hay Germany and Hay
Netherlands in the Labor Court of Germany, contesting his
termination.2 In 2005, on the basis that his contract had not
been assigned to Hay Germany, Schneider brought a new
action in the Netherlands, seeking a determination that Hay
Netherlands violated Dutch law in firing him. The Dutch
courts found that under Dutch law there had been no valid Hay
Netherlands resolution, approving Schneider’s termination.
Schneider then returned to the German litigation, arguing that,
because there had been no assignment, Dutch law applied to
his firing. The German courts sought clarification from courts
in the Netherlands regarding whether Schneider’s contract had
been validly assigned under Dutch law; the Dutch courts
concluded that it had not been assigned. On September 19,
2012, the German trial court issued an opinion dismissing
Schneider’s claims and sustaining the Hay entities’ sole
counterclaim, which related to Boller-Bockius’s
compensation.
The German Higher Regional Court reversed in part on
February 19, 2014. Unlike the lower court, the higher court
gave preclusive effect to the Dutch court’s finding that the
contract had not been assigned. The German higher court
relied on this failure to assign Schneider’s contract to sustain
many of his arguments on appeal. As a result, the Hay entities
were required to pay Schneider over $13 million. While the
investigation into Stephen Kaye was mentioned in the German
2
Hay Group was initially a party to the suit, but it and other
Hay entities were dismissed in 2010 for lack of international
jurisdiction. The case was later transferred to the Regional
Court of Frankfurt, which rendered the 2012 decision
discussed below.
5
higher court’s decision, the court explicitly declined to rely on
it. Instead, the court focused its 122-page decision on
Schneider’s conduct surrounding Boller-Bockius’s salary and
pension.
Hay Group filed this suit on March 22, 2004, in the
Eastern District of Pennsylvania, alleging nine causes of action
with varying degrees of overlap with the German litigation.
Because of the pendency of the German litigation, the District
Court stayed this action in its entirety on April 28, 2005. After
the German proceedings became final, the District Court lifted
the stay on September 2, 2014, directed the filing of an
amended complaint, and dismissed the claims against Boller-
Bockius with prejudice. The second amended complaint, filed
on June 7, 2016, is the operative pleading at this time.
The second amended complaint alleges two causes of
action: first, that Schneider took numerous actions that
breached his fiduciary and legal duty to the board, and, second,
that Schneider conspired to defraud and harm Hay Group.
These claims are based on allegations that Schneider (1)
retained outside counsel and used the Hay entities’ funds to try
to remove Stephen Kaye; (2) initiated and controlled a sham
investigation in concert with others, impeding an impartial
review into the allegations against Kaye; (3) interfered with the
contract assignment, which caused the Dutch and German
courts to hold Schneider’s termination was invalid under Dutch
law; and (4) manipulated salaries and bonuses in order to
entrench his power.
Schneider filed for summary judgment on April 28,
2017, arguing that (1) the contract assignment claims were
6
precluded,3 (2) the remaining fiduciary duty claims were
barred by the business judgment rule, and (3) the civil
conspiracy claim could not survive without the other fiduciary
duty claims. Hay Group, in response, contested preclusion and
claimed that sufficient evidence existed to allow a jury to find
that Schneider was operating in bad faith on both the fiduciary
duty and conspiracy claims. Both parties submitted expert
declarations of German law to the District Court.
The District Court granted summary judgment for
Schneider. In dismissing each of the claims, the District Court
relied entirely on the res judicata argument that Schneider had
advanced exclusively with respect to the contract assignment,
determining that it did not need to reach the other issues.
II4
Hay Group raises two theories it believes are not
precluded by the German litigation: the contract assignment
claim and the claim relating to the investigation of Stephen
3
Schneider provided six additional theories for dismissal of
the contract assignment claim, but as we affirm the District
Court’s grant of summary judgment on this claim, we do not
need to address them.
4
The District Court had alienage jurisdiction under 28 U.S.C.
§ 1332(a)(2), as Hay Group is a Delaware corporation and
Schneider is a citizen of Germany. We have jurisdiction
pursuant to 28 U.S.C. § 1291. We review a grant of summary
judgment de novo. Simpson v. Att’y Gen., 913 F.3d 110, 113
(3d Cir. 2019).
7
Kaye.5 Schneider counters that these claims arise out of the
same cause of action and are thus precluded. Since this case
arises under alienage jurisdiction, we must determine whether
these claims are precluded under Pennsylvania law.6
Pennsylvania intermediate courts have adopted section
22 of the Restatement (Second) of Judgments,7 which reads as
follows:
(1) Where the defendant may
interpose a claim as a counterclaim
but he fails to do so, he is not
thereby precluded from
subsequently maintaining an
action on that claim, except as
stated in Subsection (2).
(2) A defendant who may
interpose a claim as a counterclaim
in an action but fails to do so is
precluded, after the rendition of
5
Hay Group’s civil conspiracy claims are not based on these
facts, so we will treat the civil conspiracy claims as not raised
on appeal.
6
See Otos Tech Co. Ltd. v. OGK Am., Inc., 653 F.3d 310,
312–13 (3d Cir. 2011) (applying New Jersey state law to a
question of whether to grant full faith and credit to a Korean
judgment).
7
Del Turco v. Peoples Home Sav. Ass’n, 478 A.2d 456, 463
(Pa. Super. Ct. 1984) (first adoption); accord Rearick v.
Elderton State Bank, 97 A.3d 374, 384–85 (Pa. Super. Ct.
2014). The Supreme Court of Pennsylvania has not reached
the question of whether counterclaims not brought elsewhere
are subject to the Restatement.
8
judgment in that action, from
maintaining an action on the claim
if:
(a) The counterclaim is required
to be interposed by a compulsory
counterclaim statute or rule of
court, or
(b) The relationship between the
counterclaim and the plaintiff’s
claim is such that successful
prosecution of the second action
would nullify the initial judgment
or would impair rights established
in the initial action.8
As section 22(2)(a) makes clear, the operative question is
whether Hay Group was required to bring its counterclaim in
the German litigation, a question of foreign law. Under Federal
Rule of Civil Procedure 44.1, the law of foreign countries is to
be treated by our federal courts as a question of law rather than
8
Restatement (Second) of Judgments § 22 (1980).
9
a fact to be proven.9 Our review of the District Court is
therefore de novo.10
The District Court correctly identified a facial
disagreement between the parties’ expert reports on the
question of whether Hay Group’s counterclaim was required to
be brought in Germany. The Hay Group expert, Dr.
Fischinger, stated that in the German courts “there is no legal
rule of compulsory counterclaim” and that “a plaintiff is free
to either (i) file a counterclaim (‘Widerklage’) or (ii) sue the
plaintiff in a completely different lawsuit in the same or a
different court.”11 Schneider’s expert, Dr. Thees, instead noted
that “all counter claims against a claim are made by the
defendant prior to the last oral hearing in the court of first
instance in order to avoid that such counter claims are barred
(‘präkludiert’)” and that counterclaims “can only be considered
by the court of second instance if the relevant party can prove
9
See Fed. R. Civ. P. 44.1 (“The court’s determination must
be treated as a ruling on a question of law.”); Arthur R. Miller,
Federal Rule 44.1 and the “Fact” Approach to Determining
Foreign Law: Death Knell for a Die-Hard Doctrine, 65 Mich.
L. Rev. 613, 661 (1967) (“[I]t must be remembered that one of
the policies inherent in Rule 44.1 is that, whenever possible,
foreign-law issues should be resolved on their merits and on
the basis of a full evaluation of the available materials.”); see
also Matthew J. Ahn, Note, 44.1 Luftballons: The
Communication Breakdown of Foreign Law in the Federal
Courts, 89 N.Y.U. L. Rev. 1343, 1353–61 (2014) (noting,
consistent with the purpose of Rule 44.1, proactive and sua
sponte determinations and redeterminations of foreign law).
10
Ferrostaal, Inc. v. M/V Sea Phoenix, 447 F.3d 212, 216 (3d
Cir. 2006).
11
Ohio App. 2038.
10
that it did not act negligently by not asserting the means of
defense earlier.”12 Rather than resolving this dispute of law,
though, the District Court found that the reports agreed that
Hay Group could have raised its current claims as
counterclaims in the German litigation and deemed the entire
action precluded. This was error.
We must, therefore, address the dispute over German
law and determine whether Hay Group was required to bring
its counterclaims in the German litigation.13 Secondary
sources unequivocally agree that German defendants are not
required to file any counterclaims within the same suit. “In
German . . . law the matter [of allowing counterclaims] is left
to the discretion of the court.”14 Legal systems outside the
United States “do not expressly provide for compulsory
counterclaims, except in specialized proceedings . . .; in all
other cases a respondent who failed to bring a counterclaim is
not precluded from doing so in the future because of the effect
of res judicata of a judgment concerning the plaintiff’s
claim.”15 “The German code, ZPO § 322(1), specifies:
‘Judgments are able to attain legal force only insofar as they
decide the demand raised by the complaint or counterclaim,’”
which indicates that preclusive effect does not attach to
12
Ohio App. 18.
13
In resolving this dispute, “the court is not limited by
material presented by the parties; it may engage in its own
research and consider any relevant material thus found.”
Advisory Committee’s Note to Rule 44.1.
14
Constantine Antonopoulos, Counterclaims Before the
International Court of Justice 11 (2011).
15
Id. at 12.
11
counterclaims not actually raised.16 Dr. Fischinger’s report
also cites to numerous judicial and secondary sources that
support this conclusion.17 We hold, therefore, that German law
did not require Hay Group to file a counterclaim. Thus, Hay
Group is not precluded from maintaining this action under
section 22(2)(a).18
Our inquiry, however, does not end there. Section
22(2)(b) of the Restatement requires us to consider whether the
16
Kevin M. Clermont, Res Judicata as Requisite for Justice,
68 Rutgers U. L. Rev. 1067, 1096 n.105 (2016) (quoting Oscar
G. Chase et al., Civil Litigation in Comparative Context 461
(2007)).
17
Ohio App. 2038–39 (“A duty to file a counterclaim neither
follows from [ZPO] § 261 . . . nor from any other statutory
provision.” (quoting Karsten Otte, Umfassende
Streitentscheidung durch Beachtung von
Sachzusammenhängen 234 (1998))).
18
While this appears directly contrary to Dr. Thees’s
unequivocal statement that claims not raised are barred, an
apparent definition resolves this tension. Dr. Thees
specifically notes that a “court of second instance” is typically
barred from considering counterclaims, App. 18, but a court of
second instance usually refers to an appellate court, not a court
considering a second suit. Court of Second Instance, Oxford
Reference,
http://www.oxfordreference.com/view/10.1093/oi/authority.2
0110810104700526 (last visited April 1, 2019) (“A court
exercising jurisdiction to rehear a case de novo (see rehearing),
or its appellate jurisdiction to hear an appeal, from the court of
first instance in which the matter originated. See also court of
last resort.”). Read in this manner, Dr. Thees’s statements are
inapplicable and thus irrelevant to the instant case.
12
German litigation would be nullified if Hay Group prevailed in
the instant action. In the case of Hay Group’s contract
assignment claim, the answer is clearly yes. Hay Group’s
theory is that Schneider interfered with the contract
assignment, rendering the assignment, and Schneider’s
subsequent termination, invalid.19 Their requested relief on the
contract assignment claim is exactly the amount for which the
Hay entities were liable to Schneider in the German litigation.
If Hay Group should prevail on this claim, it would clearly
nullify the German judgment. Therefore, under section
22(2)(b), Hay Group’s contract assignment claim is still
precluded.
Hay Group argues that the discovery of the relevant
facts did not occur until after the German litigation started;
thus, those facts cannot be precluded. This argument is
inconsistent with the principles of finality and comity that
underlie the doctrine of preclusion. To the extent that newly
discovered facts might call into question the German judgment,
the Hay entities are limited to the collateral attacks that may
exist in the German legal system. Those options cannot be
expanded through a suit in the American courts.
19
Ohio App. 132 ¶ 104 (“As a result of Schneider’s breach of his
fiduciary duty to Hay Management to ensure that his
employment agreement was assigned by [Hay Netherlands] to
Hay German, Hay Management became the Hay Group entity
responsible for the vast majority of the judgment in the German
litigation, and thus had to pay $13,794,591.37, while
Schneider, who breached his fiduciary duties, benefited by a
similar amount.”)
13
The sham investigation claim is a different matter. The
German court did not rely on the sham investigation of Kaye
in its 2014 decision, which focused on the salary manipulation
charges involving Boller-Bockius and others. The amount in
controversy under this claim is a combination of costs for the
law firm conducting the sham investigation as well as lost
productivity, costs that were never an issue in the German
litigation. This claim therefore does not seek to nullify the
German judgment or impair rights established by it. Therefore,
Hay Group’s sham investigation claim is not precluded.
III
Hay Group’s sham investigation claim must still
independently survive summary judgment. Schneider moved
for summary judgment on the basis that the Delaware Business
Judgment Rule barred the sham investigation claim.20 A party
moving for summary judgment must demonstrate that there is
no genuine dispute of material fact.21 Under the business
judgment rule, such a dispute includes whether Schneider
“breached [his] fiduciary duty of care or of loyalty or acted in
20
Schneider also moved for summary judgment on the theory
that Pennsylvania law requires Hay Group to quantify its
damages and that Hay Group did not sufficiently do so.
However, Hay Group quantified the fees paid to the first law
firm as a result of the sham investigation as roughly $83,000,
which is sufficiently specific to survive summary judgment.
21
Bland v. City of Newark, 900 F.3d 77, 83 (3d Cir. 2018).
When ruling on a motion for summary judgment, all
reasonable inferences are to be made in favor of the nonmoving
party. Nat’l Amusements Inc. v. Borough of Palmyra, 716 F.3d
57, 62 (3d Cir. 2013).
14
bad faith.”22 There are numerous facts here that directly call
into question whether Schneider acted in bad faith in handling
the investigation. Schneider’s dispute with Kaye resulted from
a series of actions Schneider took to allegedly enrich himself
and Boller-Bockius at the expense of the Hay entities. Hay
Group contends that the claims against Kaye which were being
investigated were all unfounded and in many cases factually
inconsistent; this supports a potential inference of bad faith.
The parties also genuinely dispute whether Schneider, over a
contrary recommendation, chose the initial law firm to
investigate Kaye. There are sufficient disputes of fact to make
an award of summary judgment inappropriate on the question
of Schneider’s bad faith. We will remand this claim to the
District Court for further proceedings.
IV
Because section 22 of the Restatement (Second) of
Judgments does not bar Hay Group’s sham investigation claim
and because that claim can survive Schneider’s motion for
summary judgment, we will partially vacate the District
Court’s grant of summary judgment and remand the sham
investigation claim for further proceedings consistent with this
opinion; we will affirm the grant of summary judgment of the
contract assignment claim.
22
In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 52
(Del. 2006).
15