Contract Materials Processing, Inc. v. Kataleuna GmbH Catalysts

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 10-1497
CONTRACT MATERIALS PROCESSING, INCORPORATED,
Plaintiff – Appellant,
v.
KATALEUNA GMBH CATALYSTS; TRICAT MANAGEMENT GMBH; SUD CHEMIE
ZEOLITES GMBH, f/k/a Tricat Catalytic Products GmbH,
Defendants – Appellees.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. Andre M. Davis, District Judge. (1:98-
cv-00147-AMD)
Argued: October 26, 2011 Decided: February 1, 2012
Before KING, GREGORY, and WYNN, Circuit Judges.
Affirmed by unpublished per curiam opinion.
ARGUED: Paul Stone Richter, RICHTER, MILLER & FINN, Washington,
D.C., for Appellant. Barbara Susan Wahl, ARENT FOX, LLP,
Washington, D.C., for Appellees. ON BRIEF: Thomas P. Miller,
RICHTER, MILLER & FINN, Washington, D.C., for Appellant.
Randall A. Brater, Karen E. Carr, ARENT FOX, LLP, Washington,
D.C., for Appellees.
Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:
On March 30, 2010, a litigation saga spanning more than
twelve years in the District of Maryland finally came to an end
with the entry of a Final Order and Judgment (the “Judgment”) on
behalf of KataLeuna GmbH Catalysts (“KataLeuna”), Tricat
Management GmbH (“TMG”), and Tricat Catalytic Products GmbH
(“TCP”) (collectively, the “Defendants”). The Judgment awarded
$4,726,518.81 to KataLeuna on its four counterclaims against
Plaintiff Contract Materials Processing, Inc. (“CMP”), net of
two claims on which CMP prevailed. CMP appeals the Judgment and
certain interlocutory rulings incorporated within, including
that CMP pay $202,469.26 in attorney fees and interest to
KataLeuna, along with discovery sanctions of $27,654.30. We
affirm in all respects.
I.
CMP, principally operating out of Baltimore, was
incorporated in 1987 by Dr. Edwin Albers, its president and sole
shareholder, to develop chemical and petrochemical products and
to provide analytical, research, and consulting services. By
1992, CMP had begun to produce and sell Fluid Cracking Catalyst
(“FCC”) additives, which are used in the refining process to
promote the “cracking,” or chemical transformation, of crude oil
into lighter products such as gasoline and diesel fuel. In
2
early 1995, Dr. Albers entered into discussions with Dr. P.
Kenerick Maher of Tricat Industries, Inc. (“TII”), concerning a
trio of additives that CMP was developing and for which it had
submitted patent applications: (1) “SOx A,” designed to reduce
sulfur emissions from the refining process; (2) “Combustion
Promoter B,” a cobalt-based version of Mobil’s platinum-based
progenitor, intended to facilitate the combustion of carbon
monoxide into CO2; and (3) “Octane Enhancer B.”
TII was the American parent and sole shareholder of TMG, a
German holding company managed by Maher. In May 1995, TMG
acquired 74.8% of KataLeuna, with the remaining 25.2% retained
by the Bundesanstalt für vereinigungsbedingte Sonderaufgabe
(“BvS”), a governmental agency overseeing the privatization of
former East German enterprises. Maher’s negotiations with Dr.
Albers resulted in the execution of a Sales Agency Agreement
(“SAA”) and a Research and Development Agreement (“RDA”) between
CMP and KataLeuna, and of a Technology Transfer Agreement
(“TTA”) among the same corporate entities, Dr. Albers, and J.
Gary McDaniel, a key CMP employee familiar with its FCC
operations.
Under the terms of the TTA, effective November 27, 1995,
CMP agreed to transfer to KataLeuna its “entire right, title and
interest” in the additives. In return, KataLeuna agreed to pay
$2.1 million, transfer five thousand shares of non-voting TII
3
stock (having a stipulated value of $75,000), and remit
royalties to CMP amounting to 20% of KataLeuna’s gross margin
realized from the manufacture and sale of the FCC additives, up
to a maximum of $7.6 million. KataLeuna had long been in the
catalyst business, and its acquisition of the FCC additive
technology developed by CMP was part of a plan to expand its
product line, another component being the construction of a new
manufacturing and processing plant in Leuna, Germany. The TTA
included the warranties of CMP and the individual signatories
that KataLeuna could rely on any statements in the patent
applications, that the technology had not been patented and
violated no existing patents, that the reports previously
delivered to KataLeuna “demonstrating the viability and the
reliability of the Combustion Promoter B” technology were “true,
complete and correct,” and that the technology was “new, useful
and unobvious.” J.A. 98-99. 1
The TTA also provided for the transfer of McDaniel’s
employment from CMP to KataLeuna, and it required the delivery
of the fully executed RDA, whereby Dr. Albers would devote
approximately one-third of his time for one year to further test
and develop the FCC additives in order to perfect and expand
1
Citations herein to “J.A. ___” refer to the contents of
the Joint Appendix filed by the parties to this appeal.
4
their uses. In exchange, KataLeuna agreed to pay CMP $400,000
in equal quarterly installments. The SAA, predating both the
RDA and the TTA, appointed CMP as KataLeuna’s exclusive North
American agent for the sale of smaller quantities of zeolites
(absorbent minerals used in the catalytic process). CMP agreed
thereunder to store and sell KataLeuna’s zeolites on consignment
in exchange for a commission on net sales; to defray CMP’s sales
and marketing expenses, KataLeuna covenanted to pay CMP $240,000
annually in equal monthly installments.
In October 1996, notwithstanding the efforts of Dr. Albers
to perfect SOx A, it became obvious to KataLeuna that the
compound was not working as the parties had anticipated. The
hoped-for chemical synergy between the hydrotalcite and zinc
titanate components had not developed, owing to the relative
ineffectiveness of the latter. The outcome was consistent with
tests performed in 1994 on prior versions of the compound by Dr.
Raghubir Gupta of the Research Triangle Institute. Dr. Gupta,
who conducted the testing at the request of Dr. Albers, had been
skeptical of the compound’s efficacy from the outset, given the
chemical reality that particles useful for removing hydrogen
sulfide are generally ineffective to also remove sulfur dioxide.
According to Dr. Gupta, it was “very, very well-known that zinc
oxide is an excellent H2S removal. So from common sense normally
it will not work for SO2 removal.” J.A. 1806.
5
CMP had also conducted preliminary testing on Combustion
Promoter B, with inconclusive results. Another test was run in
late 1996 after KataLeuna had taken ownership, but, absent full
saturation of the cobalt-based compound in the FCC unit, i.e.,
complete displacement of the platinum-based promoter, it could
not be conclusively determined whether CMP’s invention was
effective. McDaniel was optimistic, in that the processing
temperature had remained fairly steady throughout, but the
owners of the unit were so unimpressed that they purchased no
more of the compound. Then, at a full-saturation test in August
1997, after Mobil’s promoter had to be reintroduced to the unit
to control rapidly rising temperatures, it became apparent that
Combustion Promoter B was generally ineffective. Scientific
testing by a Dutch catalyst manufacturer in August 1999
confirmed that conclusion.
Octane Enhancer B was similarly a bust. KataLeuna
prosecuted the patent application that had been transferred to
it pursuant to the TTA, but the United States Patent and
Trademark Office rejected it on the ground that the additive was
virtually identical to a pre-existing South African patent.
Both compounds were based upon a blend of synthetic zeolites
with natural clinoptilolite, and each was designated for use in
a hydrocarbon cracking process.
6
The parties’ business association thus turned out to be
short-lived. KataLeuna opted to not renew the RDA, withholding
the final quarterly installment of $100,000. KataLeuna also
notified CMP that the SAA would be terminated at the end of
November 1996. The zeolites remained with CMP until late August
2005, when KataLeuna removed some and abandoned the rest. CMP,
whose lease on the storage area was expiring, disposed of the
remaining materials. No royalty payments, contemplated by the
TTA to begin on February 1, 1998, were ever made.
On January 15, 1998, prior to the date of performance with
respect to the royalty payments, CMP filed suit in the District
of Maryland against KataLeuna and TMG. The Complaint alleged
breaches of payments due under the RDA and SAA, and it
anticipatorily sought a declaratory judgment as to the parties’
rights and responsibilities under the TTA. Issues regarding
proper service resulted in the filing of the operative Amended
Complaint on December 9, 1998, which retained the RDA and SAA
breach claims (Counts I and II); substituted a claim (Count IV)
under the TTA for the former declaratory judgment count; amended
a separate SAA claim (Count III) to assert entitlement to
compensation for bailment of the stored zeolites; and added
claims (Counts V and VI) for misappropriation and conversion,
respectively, of trade secrets relating to CMP’s FCC additives
technology. The Amended Complaint named a third Defendant, TCP,
7
which had been created in 1997 to establish KataLeuna’s former
research division, Triadd, as a formal business entity. Counts
VII through X alleged that TMG was responsible for the acts of
KataLeuna outlined in Counts I-III, and independently liable for
conversion, misappropriation, and breach of the TTA. The latter
three allegations were essentially repeated against TCP in
Counts XI through XIII. CMP demanded a jury trial on all
claims.
The Defendants answered and counterclaimed on April 16,
1999. By its operative Second Amended Counterclaim, KataLeuna
asserted breaches of the three agreements (Counts I-III) and
alleged in the alternative (Counts IV-VI) that CMP was unjustly
enriched. According to KataLeuna, CMP did not live up to its
warranties in the TTA and ignored its obligations under the RDA
and SAA. KataLeuna also maintained that CMP had converted the
consigned zeolites (Count VII), negligently exposed them to the
elements (Count VIII), and failed to remit sales proceeds as
agreed in the SAA (Count IX). Finally, KataLeuna requested an
accounting as to chemicals it transferred to CMP, and as to FCC
additives that CMP sold to third parties (Count X).
The district court dismissed CMP’s conversion claims as to
the additives technology (Counts VI, IX, and XIII) on August 11,
1999. Thereafter, on September 18, 2001, the court granted
summary judgment to TMG and TCP as to the remaining claims
8
against them (Counts VII, VIII, X, XI, and XII), and to
KataLeuna on the claims for breach of the TTA (Count IV) and for
misappropriation (Count V), leaving only CMP’s claims for breach
of the RDA and SAA (Counts I and II) and for bailment (Count
III). On the counterclaim side of the ledger, the district
court awarded summary judgment to KataLeuna for $18,507.40, the
undisputed amount owed by CMP for the sale of zeolites (Count
IX). In a proposed joint pretrial order submitted to the court
on August 28, 2002, KataLeuna abandoned its claims for unjust
enrichment (Counts IV-VI).
With most of CMP’s case being dismissed or summarily
adjudicated against it, the district court was of the opinion
that the portion of the counterclaim relating to the TTA (Count
I) dominated the remaining issues. The court thus decided to
bifurcate that count for a bench trial on KataLeuna’s assertion
that it was entitled to equitable rescission, putting aside for
the time-being the parties’ competing legal claims under the RDA
and SAA (CMP’s Counts I-II, and KataLeuna’s Counts II-III),
along with those arising from the storage and safekeeping of the
consigned zeolites (CMP’s Count III and KataLeuna’s Counts VII-
VIII). As the result of that twelve-day bench trial, the
evidentiary portion of which was conducted over scattered dates
in the winter and spring of 2003, the district court, on
September 28, 2003, entered a Rule 54(b) judgment rescinding the
9
TTA, awarding restitution of $2,793,449.13 to KataLeuna for
“equitable damages . . . intertwined with its remedy of
rescission,” J.A. 2712, and ordering CMP and KataLeuna to
return, respectively, the TII stock and the technology
properties. 2 The judgment awarded an additional $134,945 to
KataLeuna for attorney fees incurred in defending the
misappropriation claims. CMP proceeded to file an interlocutory
appeal, which we declined to certify and therefore dismissed.
See Order, Contract Materials Processing, Inc. v. Tricat Mgmt.
GmbH, No. 03-2253 (4th Cir. Mar. 10, 2005) (unpublished).
The case languished on remand until CMP moved for the
district court’s recusal on September 28, 2006, citing in part
the litigation delay and other grounds, but based primarily on
the court’s service in 2003-05 as a member of the Board of
Directors of the Foundation for Research on Economics and the
Environment (“FREE”). FREE’s activities as a nonprofit entity
are substantially underwritten by corporate subsidies, including
donations from Shell Oil Co., which, since 1998, has been an
indirect corporate parent of KataLeuna. Following a hearing on
June 14, 2007, the court declined to recuse itself. In the
2
Rule 54 permits a district court to “direct entry of a
final judgment as to one or more, but fewer than all, claims or
parties,” on condition that “the court expressly determines that
there is no just reason for delay.” Fed. R. Civ. P. 54(b).
10
interim, on January 24, 2007, CMP petitioned for mandamus relief
to compel recusal, which we summarily denied. See Order, In re:
Contract Materials Processing, Inc., No. 07-1059 (4th Cir. Feb.
16, 2007) (unpublished).
At the June 14 hearing, the district judge revealed that he
had resigned from the Board of FREE following his receipt of an
undisclosed letter opinion on the matter from the Committee on
Codes of Conduct, an authorized body of the Judicial Conference
of the United States. CMP again sought the court’s recusal
through a second petition for a writ of mandamus filed on July
13, 2007, requesting disclosure of the letter. We again denied
relief via a short-form order. See Order, In re: Contract
Materials Processing, Inc., No. 07-1657 (4th Cir. Oct. 2, 2007)
(unpublished).
On April 28, 2008, KataLeuna tendered a Rule 68 offer of
judgment to CMP on the latter’s claims for breach of the RDA and
of the SAA (Counts I and II), agreeing to pay the damages
demanded in the pleadings, plus interest and costs, to be offset
against any judgment in its favor on the counterclaim, Counts II
and III of which (pertaining to KataLeuna’s claims against CMP
under the RDA and SAA) would be dismissed with prejudice. CMP
refused the offer, but, on October 30, 2008, the district court
nonetheless granted KataLeuna’s motion to dismiss Counts I and
II of the Amended Complaint for mootness. The dismissal order
11
also encompassed Counts II and III of the Second Amended
Counterclaim. CMP sought immediate review of the district
court’s order through a third mandamus petition and a separate
notice of appeal, neither of which were successful. See Order,
In re: Contract Materials Processing, Inc., No. 08-2246 (4th
Cir. Dec. 16, 2008) (unpublished) (denying petition for writ);
Order, Contract Materials Processing, Inc. v. KataLeuna GmbH
Catalysts, No. 08-2311 (4th Cir. Feb. 9, 2009) (unpublished)
(dismissing appeal as interlocutory).
The parties submitted an amended proposed pretrial order on
November 19, 2009, in which KataLeuna abandoned its claim for an
accounting of proceeds from the sale by CMP of certain chemicals
and additives (Count X). That paved the way, after almost
twelve years of litigation, for a jury trial solely on the
claims emanating from the consigned zeolites, relating to Count
III of the Amended Complaint and Counts VII and VIII of the
Second Amended Counterclaim. The trial commenced on December 7,
2009, with the court granting judgment as a matter of law to
KataLeuna on CMP’s claim for bailment at the close of the
latter’s case-in-chief. At the conclusion of trial, the jury
returned a verdict for KataLeuna on its claims for conversion
and negligence in the amount of $571,389.25, plus prejudgment
interest. The district court entered its final judgment against
CMP on March 30, 2010, as follows:
12
2,793,449.13 (TTA equitable damages)
+ 1,732,091.53 (interest from 10/5/99)
4,525,540.66
571,389.25 (zeolites conversion/negligence)
+ 8,452.51 (interest from 11/14/05)
5,105,382.42
+ 18,507.40 (zeolites consignment sales)
5,123,889.82
(181,021.37) (KataLeuna breach of RDA, plus interest)
+ (216,349.64) (KataLeuna breach of SAA, plus interest)
$ 4,726,518.81
The district court entered a final net judgment in
KataLeuna’s favor of $4,726,518.81, supplementing interlocutory
awards to KataLeuna of $202,469.26 in attorney fees and
interest, together with discovery sanctions of $27,654.30. On
appeal, CMP asserts that the proceedings below were infected
throughout with error. For clarity’s sake, we address in
chronological order the specific instances giving rise to these
assertions.
II.
A.
Shortly after the filing of the Amended Complaint, the
Defendants sought to dismiss CMP’s claims for misappropriation
and conversion. The district court granted dismissal of the
conversion claims, concluding that CMP’s assignment through the
TTA of the entirety of its interest in the FCC additives
deprived it of any entitlement to possess them, an essential
element of the tort. The court, however, “[i]n light of the
13
liberal spirit pervading the pleading requirements,” declined to
dismiss the misappropriation claims. J.A. 158. In so ruling,
the court recognized that CMP had not alleged “that Kataleuna
initially obtained the technology improperly,” but had instead
maintained that, through subsequent transfers, one or more of
the other Defendants had “improperly procured [its] use . . . in
order to circumvent Kataleuna’s responsibility to pay CMP
royalty payments.” Id. at 159.
The misappropriation claims were thus among those permitted
to proceed to discovery. In developing the discovery plan,
counsel for CMP became informed that TII had hired John McCauley
in April 1996 to coordinate with McDaniel in specifying and
controlling the research that CMP and Dr. Albers were to conduct
under the RDA. McCauley’s assigned station was a lab in a
trailer at CMP, where he worked through October 1996. CMP
speculated that McCauley was a potential conduit for the flow of
proprietary information that enabled KataLeuna to further its
fledgling FCC additives business by developing patentable
advances from the TTA technology and, perhaps, other CMP
discoveries. Proceeding on that theory, CMP requested at the
outset of the litigation “documents concerning . . . any FCC
additive,” J.A. 199, and “patent prosecution files . . . for all
patent applications related to [the TTA patents] or any related
non-U.S. patent applications.” Id. at 201. The defendants
14
objected on trade secret and other grounds, in particular that
“documents concerning technology other than the [TTA technology]
are irrelevant.” Id. at 213.
Some of the contested documents were accidentally produced,
relating to six patent applications that KataLeuna was then
pursuing, including one for SOx B, a magnesium oxide variation of
the zinc oxide-based SOx A technology. CMP argued for the
production of additional materials based on its assertion that
the inadvertently disclosed documents revealed that some of the
new applications were “continuation” applications, that some
were attributable to McCauley’s efforts, and that some
incorporated work product, such as testing results, produced by
CMP pursuant to the RDA. Indeed, it seems that some of these
applications contained graphs with plot points derived from a
proprietary CMP procedure, which the company evidently perfected
while developing the additives that were the subject of the TTA.
Although the threshold for relevance is not a high one,
i.e., “information . . . reasonably calculated to lead to the
discovery of admissible evidence,” Fed. R. Civ. P. 26(b)(1), the
district court, at the December 16, 1999 hearing on CMP’s motion
to compel, called the company’s attempts at discovery
“promiscuous,” J.A. 351, making it plain that the court was not
going to convert its “extraordinarily generous” denial of
KataLeuna’s threshold motion to dismiss the misappropriation
15
claims “into some dragon of a discovery machine and thereby open
up all kinds of lines of inquiry that simply are not likely to
lead anywhere fertile.” Id. at 380. After hearing from both
sides, the court declared that it was “not persuaded” by CMP’s
arguments that the requested materials were germane. Id. at
401.
A district court’s discovery rulings are reviewed for abuse
of discretion. See Carefirst of Md., Inc. v. Carefirst
Pregnancy Centers, Inc., 334 F.3d 390, 396 (4th Cir. 2003). In
denying CMP’s motion to compel, some of the court’s remarks may
have rankled (“This is exactly the kind of thing, with all
respect, sir, that people point to when they talk about
discovery abuse.”), J.A. 352, but the undercurrent motivating
them is readily understood: the relatively discrete claims that
survived dismissal had, with discovery scarcely begun, been
transformed into something much broader.
Worse, the transformation had no legal basis. A claim
under Maryland law for the misappropriation of business
information is governed by the state’s adoption of the Uniform
Trade Secrets Act (“UTSA”), which requires, among other things,
that the information be “acquired by improper means.” Md. Code.
Ann. Com. Law § 11-1201(c)(1). To the extent that KataLeuna may
have used the CMP technology to facilitate its fledgling
catalyst business, it was not barred from doing so by the TTA,
16
which merely required KataLeuna to pay royalties to CMP on sales
of the specific additives that were the subject of that
agreement; consistently therewith, the RDA imposed an obligation
of confidentiality solely on CMP, with no similar restriction on
KataLeuna. Consequently, the information that CMP sought was
not reasonably calculated to lead to the discovery of admissible
evidence, and the district court did not abuse its discretion by
declining to compel the Defendants to produce it.
Hewing more closely to the misappropriation claims as
conceived in its pleadings, CMP pursued information concerning
the April 1997 decision to transfer TMG’s majority interest in
KataLeuna to BvS, the minority owner. The arrangement as
proposed would have assigned KataLeuna’s rights to the FCC
additives to TCP, contrary to an alleged oral understanding
between Maher and Dr. Albers. That deal never materialized,
however. Instead, by virtue of a series of agreements executed
in the summer of 1998 among multiple parties, TMG indeed
divested its interest in KataLeuna, but the latter retained the
rights and obligations set forth in the TTA.
CMP sought to discover these “Summer 1998 Agreements,” but
not all of them were provided, and some that were provided were
heavily redacted. With the assistance of the court, KataLeuna
agreed to produce less-redacted versions. The matter appeared
to have been resolved, except for some complaints from CMP at a
17
hearing to dismiss KataLeuna’s counterclaims, see J.A. 562-63,
and a couple of objections at the subsequent bench trial on
rescission, see id. at 1796-97, 1912-14, that the documentation
evidencing the transfer was unclear or incomplete. Absent more
proactive efforts from CMP to bring their complaints to the
attention of the court prior to the hearing or trial, however,
we are unable to ascertain any abuse of discretion.
B.
The misappropriation claims ultimately failed at the
summary judgment stage, as CMP could show no impropriety or
misuse in that KataLeuna legitimately acquired all rights to the
FCC additives, and there was no evidence adduced of a subsequent
transfer in violation of the supposed oral agreement. In
addition, the district court noted a dearth of evidence
supporting the proposition that the technology had actually been
maintained with sufficient secrecy to qualify as a “trade
secret” under the UTSA. See Md. Code. Ann. Com. Law § 11-
1201(e)(2) (defining term in part as information that “[i]s the
subject of efforts that are reasonable under the circumstances
to maintain its secrecy”). The court thereafter granted a
petition for attorney fees of $134,945 incurred in defending the
claims, finding that KataLeuna, TMG, and TCP had “carried the
burden imposed upon them by Maryland law, frankly by a very
large margin, to show clearly and convincingly that CMP
18
initiated and maintained its trade secrets claims in bad faith.”
J.A. 1459.
A court may award attorney fees under the UTSA if a party
initiates or pursues in bad faith a claim for misappropriation
of trade secrets. See Md. Code. Ann. Com. Law § 11-1204(1);
Optic Graphics, Inc. v. Agee, 591 A.2d 578, 588 (Md. Ct. Spec.
App. 1991). Generally, an award of fees lies within the trial
court’s discretion. See Deadwyler v. Volkswagen of Am., Inc.,
884 F.2d 779, 784 (4th Cir. 1989).
The district court here concluded that the misappropriation
claims were “alleged and maintained in objective speciousness,”
J.A. 1478 (footnote omitted), and it further referred to CMP’s
approach to discovery (multiple unsuccessful motions to compel,
coupled with deposition notices and a non-party subpoena being
quashed for “reckless extravagance”) as evidence of its
subjective ill will. Insofar as the court’s ruling is
plausible in view of the facts and the law, it was not an abuse
of discretion. CMP complains that the court awarded fees
without convening an evidentiary hearing, but our precedent
counsels that due process is satisfied so long as the court has
familiarized itself with the relevant facts by becoming immersed
in the underlying proceedings. See In re Kunstler, 914 F.2d
505, 521 (4th Cir. 1990). Such was undoubtedly the case here.
19
The district court also granted summary judgment to
KataLeuna on CMP’s claim for breach of the TTA. CMP insists the
court’s ruling was in error, pointing to a single page from a
July 15, 1997 report by KataLeuna’s auditor, translated from the
German, stating that the TTA “was rescinded effective January 1,
1997.” J.A. 1119. The court excluded the report excerpt as
hearsay, but CMP contends that the statement is a party
admission, see Fed. R. Evid. 801(d)(2), in that the auditor may
properly be considered an agent of KataLeuna.
Assuming, for the sake of argument, that the auditor was
KataLeuna’s agent and that the excerpt accurately reflected his
understanding with respect to the TTA, its potential
admissibility under a hearsay exception is beside the point in
that the statement utterly lacks probative value. To suggest
that KataLeuna attempted a unilateral rescission of the TTA is
contrary to any reasonable view of the case and its surrounding
context. Following the initial exchange of rights for money,
KataLeuna’s only substantive obligation under the TTA was to pay
CMP if and when it sold the FCC additives. Having not sold any
additives, KataLeuna paid no royalties to CMP; it did not have
to “rescind” anything. KataLeuna did seek rescission as a
remedy once it had been sued, but that particular action in no
way meets the legal definition of “breach.”
20
Wrapped up in this issue, as with the misappropriation
claims, is CMP’s assertion that, prior to the execution of the
TTA, Maher and Dr. Albers reached an oral agreement that
KataLeuna would not further transfer the FCC additive rights
until the royalty payments topped out at $7.6 million. Maryland
law governs the contract, with the result that “[t]he parol[]
evidence rule only applies where the parties to a written
contract agree or intend that the writing shall be their whole
agreement.” State Dep’t of Gen. Servs. v. Cherry Hill Sand &
Gravel Co., 443 A.2d 628, 631 (Md. Ct. Spec. App. 1982)
(citations omitted). Inasmuch as there is no merger or
integration clause in the TTA, it is at least arguable that
Maher’s alleged assurances to Dr. Albers could be part of the
parties’ agreement, at least to the extent that non-
transferability is not flatly inconsistent with CMP’s written
assignment of its “entire right, title and interest.” Again,
however, there is no evidence that KataLeuna actually
transferred the rights to the additives. The district court
therefore appropriately awarded summary judgment to KataLeuna on
CMP’s claim for breach.
21
III.
A.
KataLeuna countered CMP’s claims of breach with similar
allegations of its own, asserting entitlement to alternative
remedies. In late 2002 or early 2003, as the parties were
preparing for trial, KataLeuna elected to pursue rescission,
forgoing its pursuit of legal damages and abandoning its claims
for unjust enrichment. Rescission is an equitable proceeding,
see Griggs v. E.I. duPont de Nemours & Co., 385 F.3d 440, 447 &
n.4 (4th Cir. 2004), among those that fall outside the
constitutional right to trial by jury of “suits at common law.”
U.S. Const. amend. VII; see Tull v. United States, 481 U.S. 412,
417 (1987) (citations omitted).
Nonetheless, the right to a jury trial for claims at law is
“preserved to the parties inviolate,” Fed. R. Civ. P. 38(a), and
“only in the most imperative circumstances . . . can the right
to a jury trial of legal issues be lost through prior
determination of equitable claims.” Dairy Queen, Inc. v. Wood,
369 U.S. 469, 472-73 & n.7 (1962) (quoting Beacon Theatres, Inc.
v. Westover, 359 U.S. 500, 510-11 (1959)). Thus, “where legal
and equitable claims are contained in the same set of facts, the
right to a jury trial, which the legal claims permit, should
predominate.” Ritter v. Mount St. Mary’s College, 814 F.2d 986,
22
990 (4th Cir. 1987); accord, Terry v. Chauffers, Teamsters and
Helpers Local 391, 863 F.2d 334, 336 (4th Cir. 1988).
Ritter, however, proved an exception to the rule. In that
case, the district court erroneously dismissed the plaintiff’s
legal claims and conducted a bench trial on an equitable claim;
after the legal claims were reinstated on appeal, the question
arose as to whether the bench trial findings were precluded from
relitigation before the jury. The district court ruled in the
affirmative, and we agreed, relying on the Supreme Court’s
decision in Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322(1979), arising on similar facts, for the proposition that “the
harm complained of is insufficient to override the judicial
interest in the speedy resolution of disputes.” Ritter, 814
F.2d at 991.
Plainly, “mixed” cases in which rescission is invoked as a
potential remedy pose a problem for the district courts in case
administration. One approach to the problem is to employ a
method whereby “the jury first decides the questions of fact and
then the judge decides whether rescission is an appropriate
remedy.” Falco v. Alpha Affiliates, Inc., No. 97-494, 2000 WL
727116 (D. Del. Feb. 9, 2000) (unpublished) (citing precedent
that substantial non-performance justifying rescission is a
question for the trier of fact, and noting that “many, but not
all, of the alleged facts underlying the equitable counterclaim
23
are the same as that underlying the counterclaims triable to the
jury”); cf. Terry, 863 F.2d at 339 (“Resolution of the
declaratory relief demand, however, raises legal issues that may
well require both a determination by the court of the meaning of
the collective bargaining agreement and a resolution by the jury
of disputed facts concerning whether that agreement was
breached.”).
It is arguably a different situation where the legal and
equitable claims arise on separate facts, such as in Dollar
Sys., Inc. v. Avcar Leasing Sys., Inc., 890 F.2d 165 (9th Cir.
1989), in which the court of appeals upheld the district court’s
decision to conduct a bench trial on the defendants’
counterclaim for rescission, prior to impaneling a jury to
decide the remaining legal claims. The Ninth Circuit
acknowledged the rule of Dairy Queen, but observed that “[t]he
legal and equitable claims asserted in this action . . . do not
involve any common questions of law or fact.” Id. at 170. In
such a situation, “the order of trial is immaterial, and may be
left in the discretion of the court.” Id. at 171 (quoting 9 C.
Wright & A. Miller, Federal Practice and Procedure § 2305, at 35
(1971)); accord, Arber v. Essex Wire Corp., 490 F.2d 414, 421-24
(6th Cir. 1974) (finding no violation of Seventh Amendment where
federal claim potentially implicating right to jury trial was
24
dismissed and rescission subsequently elected as to remaining
state law claim).
The parties dispute whether KataLeuna’s equitable
counterclaim seeking rescission of the TTA is truly independent
of CMP’s indisputably legal claims for damages under the RDA and
SAA. It is certainly the case that the RDA is one of several
documents referred to in the TTA whose execution and delivery
was a condition of closing. It is also true that one purpose of
the RDA was “to further develop [the TTA] technology,” J.A. 106,
together with new additives technologies. That the FCC
additives were apparently subject to additional testing and
refinement, however, has scant bearing on whether CMP lived up
to its representations in the TTA that the technology was
useful, reliable, and patentable, and very little to do with
CMP’s specific claim of non-payment under the RDA. Thus, the
facts underlying this appeal are analogous to those described by
the Ninth Circuit in Avcar, and a similar result should arguably
obtain. More to the point, however, any error occasioned by the
bifurcation in this matter was harmless, inasmuch as CMP
recovered fully on its claims under the RDA and SAA.
B.
KataLeuna’s claim under the TTA thus proceeded to trial
before the district court, sitting without a jury. Among the
witnesses were Christopher Rosenthal and Arthur Steiner.
25
Rosenthal was KataLeuna’s damages expert. Following Rosenthal’s
brief testimony, CMP declined the court’s invitation to cross-
examine, explaining that “[w]e’re going to call him during our
defense case.” J.A. 1756. KataLeuna objected, and the court
reserved ruling, although it opined “That’s not the way it’s
done.” Id. at 1759. CMP employed the same tactic with Steiner,
who had testified on behalf of KataLeuna as an expert on
patents, and also as a fact witness on KataLeuna’s attempt to
obtain certain patents. KataLeuna again objected, and the court
again deferred its ruling: “You know my feelings about the
whole question of CMP’s recalling certain witnesses . . . .
[Counsel] will have to make a very detailed proffer . . . before
I permit him to recall any witness.” Id. at 1811-12.
When the time came for the proffer, counsel explained that
CMP wanted to question Rosenthal on his damages calculation
being premised on a legal breach theory, rather than an
equitable rescission theory, to inquire as to some late
revisions to his report, and “to ask him about some defects that
are in his methodology and in his analyses.” J.A. 1817. With
respect to Steiner, CMP proposed to examine him regarding patent
applications for SOx B and combustion promoters submitted by
KataLeuna that, according to CMP, had been based upon the FCC
additives technology. The district court denied recall of both
witnesses, ruling that the proffer as to Rosenthal would have
26
been the proper subject of cross-examination, and the proffer as
to Steiner was foreclosed in reaffirmation of the court’s prior
rulings on the misappropriation claims. Proffered testimony
from Dr. Albers as to the patent sources was also excluded.
We review evidentiary rulings to ensure that the district
court did not abuse its discretion. See United States v. Blake,
571 F.3d 331, 350 (4th Cir. 2009) (citation omitted). The trial
court is afforded wide latitude in the conduct of proceedings
and presentation of evidence, and, in this instance, it gave
counsel ample and timely warning that CMP might be precluded
from eliciting evidence from hostile witnesses in the manner it
apparently preferred. Under the circumstances, the court
appears to have acted well within its sound discretion in
conforming its rulings to its warnings.
Apart from the foregoing procedural dispute, CMP maintains
that the district court substantively erred in adjudging
KataLeuna entitled to rescission. CMP contends that the court’s
conclusion flouts a number of legal prerequisites to equitable
relief, specifically that: (1) the parties could not be
restored to their respective positions prior to the TTA, because
KataLeuna sold the additives technology to TCP; (2) KataLeuna
failed to tender all the benefits it received under the TTA; (3)
KataLeuna had an adequate remedy at law for damages; (4) the
27
election of remedy came too late and was thus barred by laches;
and (5) CMP’s breach of the TTA, if any, was not material.
These contentions merit little discussion. The record is
clear that although KataLeuna contemplated a transfer of the
additives technology, it actually retained those rights
throughout. Moreover, the supposed benefits KataLeuna failed to
tender (the profits purportedly realized from the transfer that
did not happen, together with allegedly derivative SOx B and
copper palladium combustion promoter patents) likewise find no
record support for their existence. Indeed, McCauley
testified at deposition, without contradiction, “that he
learned nothing from CMP.” J.A. 392.
Although a minority of jurisdictions adhere to the
traditional rule that rescission is contingent upon damages at
law proving inadequate, Maryland affords the innocent party the
right to rescission whenever “there has been a material breach
of a contract.” Washington Homes, Inc. v. Interstate Land Dev.
Co., 382 A.2d 555, 563 (Md. 1978). The right to elect
rescission can be waived if not elected within a reasonable time
following discovery of the breach and the breaching party
suffers prejudice from the delay, see Benjamin v. Erk, 771 A.2d
1106, 1120 (Md. Ct. Spec. App. 2001), but the district court
specifically found that KataLeuna did not reasonably discover
that all the TTA technologies were without value until well
28
after litigation had commenced. See J.A. 2704. And,
notwithstanding CMP’s insistence that the TTA cannot be properly
understood independently of the RDA’s contemplation that the
additive technologies were subject to further development, it
seems plain that the essence of CMP’s obligations under the TTA
was that something worth developing was being transferred. The
district court’s judgment of rescission, being supported by the
facts and governing law, was therefore proper.
IV.
As previously noted, we dismissed as premature CMP’s appeal
of the Rule 54(b) order entering judgment for KataLeuna on its
counterclaim for rescission. About eighteen months afterward,
Dr. Albers filed a sworn declaration pursuant to 28 U.S.C.
§ 144, seeking the district court’s recusal. 3 The declaration
accused the court of intentionally delaying the proceedings on
remand, and it set forth Dr. Albers’s belief that the court had
“not been impartial in this case as a result of [its]
association with FREE or [its] identification with the
3
The statute provides, in pertinent part, that if a party
to any proceeding before the district court devises and submits
“a timely and sufficient affidavit that the judge before whom
the matter is pending has a personal bias or prejudice either
against him or in favor of any adverse party, such judge shall
proceed no further therein, but another judge shall be assigned
to hear such proceedings.” 28 U.S.C. § 144.
29
substantial contributors to that private foundation.” J.A.
4083. According to Dr. Albers, partiality was manifest in the
court’s rulings against CMP and in its statement on remand that
it would not reconsider any matter previously decided.
A district court has the discretion to entertain the
possibility of recusal, and its exercise of discretion in favor
of remaining on the matter is reviewed for abuse. See Newport
News Holdings Corp. v. Virtual City Vision, Inc., 650 F.3d 423,
432 (4th Cir. 2011). At the outset, we may decline KataLeuna’s
invitation to invoke res judicata on its assertion that our
denial of mandamus relief decided the issue. Mandamus is, of
course, an extraordinary remedy to which the petitioner need
show a clear entitlement. See In re Beard, 811 F.2d 818, 826
(4th Cir. 1987) (noting that “mandamus will not issue when all
that is shown is that the district court abused its discretion
in making the challenged ruling”). Our review would therefore
have been more deferential than it is now, on appeal of the
final order.
Under any standard, however, it was hardly incumbent upon
the district court to disqualify itself. To begin with, “the
bias or prejudice which can be urged against a judge must be
based upon something other than rulings in the case.” Berger v.
United States, 255 U.S. 22, 31 (1921). A properly sworn § 144
affidavit accompanied by the certificate of counsel that it is
30
being filed in good faith, upon being acknowledged by the court
as legally sufficient, is enough to require recusal of the
presiding judge. The affidavit, however, must “show the
objectionable inclination or disposition of the judge, which we
have said is an essential condition.” Id. at 35. Mere
intimations of prejudice or bias founded on the court’s
association with a nonprofit entity receiving indeterminate
funding by a remote parent of a corporate litigant fall short of
the required showing.
In Berger, the affidavit was filed on information and
belief by defendants in a 1918 espionage prosecution, three of
whom were of German or Austrian descent. The defendants’
averments related certain remarks attributed to the trial judge,
Kenesaw Mountain Landis, in a different proceeding. According
to the defendants, Judge Landis premised his remarks by
boasting, “If anybody has said anything worse about the Germans
than I have I would like to know it so I can us[e] it.” 255
U.S. at 28. Judge Landis went on to opine that “[o]ne must have
a very judicial mind, indeed, not to be prejudiced against
German-Americans in this country.” Id. He continued:
Their hearts are reeking with disloyalty . . . . This
same kind of excuse of the defendant offering to
protect the German people is the same kind of excuse
offered by the pacifists in this country, who are
against the United States and have the interests of
the enemy at heart by defending that thing they call
the Kaiser and his darling people . . . . I know a
31
safe-blower . . . who is making a good soldier in
France. He was a bank robber for nine years, that was
his business in peace time, and now he is a good
soldier, and as between him and this defendant, I
prefer the safeblower.
Id. at 28-29. Needless to say, Judge Landis’s purported
statements were far more illuminative of his state of mind in
that case than the circumstances alleged here to reveal the
district court’s supposed bias in favor of KataLeuna. Cf. Davis
v. Bd. of Sch. Comm’rs of Mobile Cnty., 517 F.2d 1044, 1050 (5th
Cir. 1975) (concluding that trial judge did not abuse his
discretion by refusing to disqualify himself in response to
“peremptory challenge type approach [that] would bid fair to
decimate the bench. Lawyers, once in controversy with a judge,
would have a license under which the judge would serve at their
will.”).
Though we by no means insinuate that a section 144 affiant
need produce evidence of a trial judge’s bias or prejudice to
the degree attributed to Judge Landis in Berger, Dr. Albers’s
declarations in this matter fall far short of the evidentiary
critical mass necessary to compel the conclusion that the
district court should have recused itself. That being the
situation, we can discern no abuse of discretion in the court’s
decision to remain on the case.
32
V.
A.
The matter of the court’s recusal having been resolved for
the time-being by our denial of extraordinary relief, the
parties moved inexorably toward their final trial. The issues
to be tried narrowed considerably upon the district court’s
approval of KataLeuna’s offer of judgment to CMP for the
former’s breach of the RDA and SAA. Federal Rule of Civil
Procedure 68 provides that “a party defending against a claim
may serve on an opposing party an offer to allow judgment on
specified terms, with the costs then accrued.” Fed. R. Civ. P.
68(a). If the offer is accepted, then the clerk must enter
judgment consistent with the agreed terms, but “[a]n unaccepted
offer is considered withdrawn,” and the defendant’s subsequent
costs are subject to being paid by the plaintiff in the event
that the eventual judgment obtained is less favorable than the
defendant’s offer. Fed. R. Civ. P. 68(b), (d).
The rule undoubtedly contemplates an offer in the nature of
a compromise, but in this case KataLeuna tendered full judgment
in offset, including prejudgment interest and costs, as to
Counts I and II of CMP’s Amended Complaint. Despite CMP’s
purported rejection of the offer, the district court essentially
forced its acceptance by ruling that it no longer had subject
33
matter jurisdiction over the claims because their satisfaction
had mooted the underlying case or controversy.
Our precedent supports the court’s ruling. In Zimmerman v.
Bell, 800 F.2d 386, 390 (4th Cir. 1986), a putative class
action, we affirmed the district court’s dismissal of the
plaintiff’s individual claims following the defendants’ offer of
judgment in full. We observed that in light of the offer,
“there was no longer any case or controversy. . . . [The
plaintiff’s] personal stake in the outcome had disappeared, and
federal courts do not sit simply to bestow vindication in a
vacuum.” Id.CMP counters, citing Bevier v. Blue Cross & Blue Shield of
S.C., 337 Fed. App’x 357 (4th Cir. 2009) (per curiam)
(unpublished), in which we rejected the plaintiff’s contention
on appeal that his acceptance of the defendant’s Rule 68 offer
of a money judgment failed to extinguish his right to pursue
permanent injunctive relief on the same claim. According to
CMP, the circumscribed context evident in Bevier permits
consideration of a broader proposition that a court may not
invoke an offer of judgment to dismiss particular claims in a
multiple-claim proceeding.
In so arguing, CMP conflates the dismissal of individual
“claims” in a lawsuit (which is clearly permitted by the text of
the rule), with the dismissal of the gamut of potential
34
“remedies” associated with a claim (which is all that Bevier had
occasion to address). CMP insists that the RDA and SAA issues
overlap the rest of the case, and it was therefore error to
remove the consideration of those claims from the jury, but for
the reasons previously discussed with respect to the bifurcation
of KataLeuna’s claim for rescission of the TTA, the court did
not abuse its discretion in the conduct of the proceedings.
B.
In preparing for the jury trial on the claims involving the
consigned zeolites, KataLeuna noticed depositions of Dr. Albers
and his son-in-law, Kurt Kroger, the latter being a lawyer who
had assumed responsibility for winding up CMP’s business
affairs. Although CMP had, throughout the litigation, accepted
and produced witnesses pursuant to the identical notice
templates, counsel in these instances (in conjunction with local
counsel for Dr. Albers in Florida, and with counsel for Kroger
in California) advised their clients not to attend the scheduled
depositions because, in counsel’s estimation, the notices were
technically defective for not including the witnesses’ local
addresses. Thereafter, CMP’s counsel refused all proffered
dates to reschedule the deposition of Kroger (whom his firm did
not represent), and did not relent until KataLeuna filed a
motion to compel. After the depositions were conducted, the
district court denied KataLeuna’s motion as moot.
35
In addition to the deposition shenanigans, CMP failed to
produce a videotape that KataLeuna specifically requested, one
in which Kroger detailed KataLeuna’s cleanup and removal of the
zeolites. At first, CMP disavowed the video’s existence and
denied that such a thing had ever been commissioned; six months
later, CMP acknowledged possession of the tape but produced only
a redacted copy, asserting the attorney-client and work-product
privileges in its formation.
Upon finding all the foregoing, the district court awarded
KataLeuna $27,654.30 in attorney fees. Where a party “fails to
obey an order to provide or permit discovery,” sanctions may
include paying “the reasonable expenses, including attorney’s
fees” attributable to the failure. Fed. R. Civ. P. 37(b)(2)(A),
-(C). CMP points out that it disobeyed no specific order
pursuant to a motion to compel, but that position misapprehends
the proper meaning of the word “order” in the rule. CMP’s
actions contravened the general order of the district court
authorizing discovery, see J.A. 3211, and it was therefore
within the court’s discretion to award sanctions. See Deadwyler
v. Volkswagen of Am., Inc., 884 F.2d 779, 784 (4th Cir. 1989)
(reciting abuse-of-discretion standard).
C.
A jury was impaneled to decide whether KataLeuna was liable
in bailment to reimburse CMP for the cost of keeping the
36
consigned zeolites on the latter’s property for nearly ten years
prior to their removal, and whether CMP was liable in conversion
or negligence for permitting the exposed materials to degrade by
moving them outside its warehouse. Under the SAA, CMP was
entitled to a percentage of net sales of the zeolites, plus
$20,000 per month “[i]n support of [its] sales and Marketing
expenses.” J.A. 89.
CMP took the position that $6,000 of the monthly charge for
expenses was allocated for storage, based on an alleged
conversation among McDaniel (on behalf of KataLeuna) and Dr.
Albers and his son (on behalf of CMP), following termination of
the SAA, during which CMP offered to continue to house the
zeolites for that price. Prior to trial, the district court
excluded evidence of that particular conversation and, more
generally (based on the parol evidence rule and the SAA
integration clause), evidence of any negotiations concerning the
execution of the SAA or attempted oral modification afterward.
The court explained that, in light of CMP’s failure to
respond to specific discovery inquiries regarding damages
(including the non-disclosure prior to the hearing of any
conversation involving McDaniel and the Alberses), it was stuck
with Dr. Albers’s 1999 deposition testimony that the standard
annual storage fee in the area was “probably around $6 a square
37
foot.” J.A. 3639-40, 3810. 4 The court rejected CMP’s arguments
that KataLeuna should have phrased its discovery requests
differently or moved to compel more specific answers. See id.
at 3866.
During the trial, the district court sustained objections
to questions concerning the substance of post-termination
conversations between Dr. Albers and McDaniel, to questions
regarding similar conversations between Dr. Albers’s son and
other KataLeuna representatives, and to CMP reading into the
record a letter whereby KataLeuna’s counsel referred to the
zeolites as “consigned.” See J.A. 3871-74, 3901-06, 4010. All
that was presented to the jury with respect to CMP’s claim for
bailment was KataLeuna’s recitation, for impeachment purposes,
of Dr. Albers’s conclusory testimony at deposition that CMP was
seeking $6,000 per month as storage compensation. There was no
evidence of any written agreement between the parties
establishing a bailment at a particular rate, nor of any written
demand or invoice supporting an inference that KataLeuna had
acquiesced to CMP’s terms. Dr. Albers was not even asked to
4
Based on the uncontested representations of KataLeuna’s
counsel that the zeolites had been stored in approximately 1,600
square feet of space, CMP’s claim would have been for only about
$800 per month.
38
repeat his deposition testimony that the fair market value for
storage was $6 per square foot.
At the end of CMP’s case-in-chief, the district court
granted KataLeuna’s judgment as a matter of law on CMP’s
bailment claim, ruling that no reasonable jury could conclude
that KataLeuna was legally obligated to CMP. Moreover, the lack
of evidence on damages, according to the court, would have
required the jury to engage in impermissible speculation as to
their proper measure. See J.A. 3937-39.
The rules plainly specify that “[i]f a party fails to
provide information or identify a witness . . . , the party is
not allowed to use that information or witness to supply
evidence . . . at a trial, unless the failure was substantially
justified or is harmless.” Fed. R. Civ. P. 37(c)(1). It is
therefore difficult to see how the district court abused its
discretion in excluding CMP’s late proffer. The court was also
correct, in light of the resultant lack of proof, to enter
judgment as a matter of law for KataLeuna on CMP’s bailment
claim.
VI.
Pursuant to the foregoing, the judgment of the district
court is affirmed.
AFFIRMED
39