Chem-Trend, Inc. v. Newport Industries, Inc.

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 00-1518
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Chem-Trend, Inc., a Michigan *
Corporation, *
*
Plaintiff - Appellant, *
*
v. *
*
Newport Industries, Inc., a Missouri *
Corporation, *
*
Defendant - Appellee, *
*
Joseph Cahan, an individual; *
Douglas J. Edington, an individual, *
jointly and severally; W. N. Shaw *
Company, a Missouri Corporation; and *
David Murphy, *
*
Defendants. *
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Appeals from the United States
No. 00-1520 District Court for the Eastern
___________ District of Missouri
Newport Industries, Inc., a Missouri * [TO BE PUBLISHED]
Corporation, *
*
Counter Claimant - *
Appellant, *
*
v. *
*
Chem-Trend, Inc., a Michigan *
Corporation, *
*
Counter Defendant - *
Appellee. *
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Submitted: February 12, 2001
Filed: February 6, 2002
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Before LOKEN, HEANEY, and BYE, Circuit Judges.
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BYE, Circuit Judge.
Chem-Trend, Inc., appeals a judgment awarding Newport Industries, Inc.,
contractual commission damages in the amount of $109,182.23, to which the district
court1 added a statutory penalty ($100,000) and attorney's fees ($4,863.50) pursuant
to the Michigan Sales Representatives' Commissions Act (MSRCA), Mich. Comp.
Laws § 600.2961. Newport cross-appeals, contending the district court abused its
discretion in determining the amount of attorney's fees. We affirm.
FACTUAL BACKGROUND
This case involving Michigan law finds its way into our circuit via a business
relationship between a Michigan corporation (Chem-Trend) and a Missouri
1
The Honorable Frederick R. Buckles, United States Magistrate Judge for the
Eastern District of Missouri, presiding in the district court pursuant to 28 U.S.C. §
636(c)(1).
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corporation (Newport). Chem-Trend manufactures and sells a number of chemical
products including mold release agents — products that allow molded rubber and
plastic pieces to be pulled from the molds which formed them. Joseph Cahan worked
for Chem-Trend between 1977 and 1994, selling mold release agents as well as other
Chem-Trend products. In 1994, Chem-Trend asked its salespersons to resign and
become independent sales representatives. Cahan complied and formed Newport,
which continued selling Chem-Trend products pursuant to an independent sales
agreement. The sales agreement required Newport to maximize Chem-Trend sales
within Newport's appointed territory. While the agreement did not prevent Newport
or Cahan from representing Chem-Trend competitors, it did contain a confidentiality
provision under which all product information was "only to be used by the
Representative in the performance of services under this Agreement."
Chem-Trend originally allowed Newport to act as a nonexclusive sales
representative in four states (Missouri, Arkansas, Iowa and Kansas) and portions of
three others (Illinois, Mississippi, and Tennessee). In September 1996, however,
Chem-Trend essentially cut Newport's territory in half, removing all of Iowa, Kansas,
and Tennessee, and all of Mississippi except for one customer. Shortly thereafter,
Cahan incorporated the W.N. Shaw Company to compete with Chem-Trend.
Shaw hired Douglas Edington, a Chem-Trend laboratory technician, and David
Murphy, who had been Newport's salesman in Iowa before Chem-Trend removed that
state from Newport's territory. Within months of incorporation, and despite having
only rudimentary equipment, no formal testing procedures, and no chemists on staff,
Shaw began selling substantial amounts of several mold release agents that were
essentially identical to Chem-Trend products. Shaw sold its mold release agents
primarily to former Chem-Trend customers located outside of Newport's designated
territory. At the same time, Newport continued selling Chem-Trend products within
Newport's designated territory, sometimes doubling and tripling projected sales
forecasts.
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In March 1997, Chem-Trend discovered Cahan's competing activities and
suspected foul play. On March 24, Chem-Trend terminated Newport's independent
sales agreement. About one month later, after discovering the extent to which Cahan
had misappropriated trade secrets, Chem-Trend informed Newport that commission
payments due under the sales agreement would no longer be made.
Chem-Trend sued Newport, Cahan, Edington, Murphy, and Shaw in federal
district court alleging misappropriation of trade secrets, breach of fiduciary duty,
breach of contract, fraudulent concealment, civil conspiracy, and several other claims.
Newport counterclaimed for its unpaid commissions, alleging Chem-Trend triggered
the statutory penalties of the MSRCA by intentionally failing to pay its commissions.2
2
The MSRCA provides, in pertinent part, that
All commissions that are due at the time of termination of a contract
between a sales representative and principal shall be paid within 45 days
after the date of termination. Commissions that become due after the
termination date shall be paid within 45 days after the date on which the
commission became due.
(5) A principal who fails to comply with this section is liable to the sales
representative for both of the following:
(a) Actual damages caused by the failure to pay the
commissions when due.
(b) If the principal is found to have intentionally failed to
pay the commission when due, an amount equal to 2 times
the amount of commissions due but not paid as required by
this section or $100,000.00, whichever is less.
(6) If a sales representative brings a cause of action pursuant to this
section, the court shall award to the prevailing party reasonable attorney
fees and court costs.
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The case proceeded to a jury trial in April 1999. Chem-Trend presented twenty
separate claims — five each against Newport, Cahan, and Edington, four against
Shaw, and one against Murphy. Newport presented its counterclaim for the unpaid
commissions.
As to Newport, the jury found in Chem-Trend's favor on two of the five claims,
for breach of fiduciary duty and fraudulent concealment. The jury rejected the three
other claims against Newport, including the breach of contract claim, apparently
concluding that Newport met its obligations under the independent sales agreement.
The jury awarded Chem-Trend a total of $1,056,000 against all defendants, finding
Newport responsible for 15% of those damages.
Despite Newport's breach of fiduciary duty and fraud, the jury found in
Newport's favor on the counterclaim and awarded $109,182.23 in unpaid
commissions. Because the jury also found Chem-Trend "intentionally failed to pay"
Newport's commissions when due, the district court added a statutory penalty of
$100,000 and attorney's fees pursuant to the MSRCA. The district court reduced
Newport's requested fees because the counterclaim was only one of many claims in
the case, and because one of Newport's attorneys, despite notice from the court,
inadequately differentiated between the time spent prosecuting the counterclaim and
the time spent defending against Chem-Trend's claims.
Chem-Trend challenges the counterclaim verdict on appeal, but failed to appeal
from the adverse contract verdict. In its cross-appeal, Newport challenges the district
court's reduction in the requested amount of fees.
Mich. Comp. Laws § 600.2961 (emphasis added).
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DISCUSSION
Chem-Trend first argues the award of commission damages must be reversed
because the jury's verdict on the underlying breach of contract claim is unsupported
by the evidence. Chem-Trend argues the evidence is insufficient to support the
contract verdict because the jury, having found Newport breached a fiduciary duty
and committed fraud, was obligated to find that Newport breached its contractual
obligations. In effect, Chem-Trend posits the adverse contract verdict is inconsistent
with the favorable fiduciary duty and fraud verdicts.
Newport responds that Chem-Trend cannot challenge the commission damages
indirectly through a challenge to the contract verdict because Chem-Trend failed to
appeal the adverse contract verdict. We agree. Cf. Artis v. Francis Howell N. Band
Booster Ass'n, 161 F.3d 1178, 1184 (8th Cir. 1998) (holding an unappealed jury
verdict on a claim mooted that part of the plaintiff's appeal demanding an entitlement
to damages on that claim). In addition, to the extent Chem-Trend claims an
inconsistency in the verdicts, Chem-Trend waived the challenge by failing to object
before the district court discharged the jury. Williams v. KETV Television, Inc., 26
F.3d 1439, 1443 (8th Cir. 1994).
Chem-Trend also argues the district court erred in construing the MSRCA to
allow damages in favor of a sales representative who breaches a fiduciary duty and
defrauds its principal. Newport responds that Chem-Trend actually alleges an
instructional error disguised as a claim of erroneous statutory construction. Chem-
Trend agreed to instructions which advised the jury that a breach of contract by
Newport negated the counterclaim, but which allowed the jury to consider the
counterclaim even if Newport breached a fiduciary duty or committed fraud. We
agree with Newport. Because Chem-Trend failed to object to the district court's
instructions, and failed to request an instruction indicating that a breach a fiduciary
duty or a finding of fraud negated the counterclaim, this claim is waived. Therefore,
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our review of this issue is limited to the plain error standard of review. See Fed. R.
Civ. P. 51; Cross v. Cleaver, 142 F.3d 1059, 1068 (8th Cir. 1998).
Plain error review is "narrow and confined to the exceptional case where error
has seriously affected the fairness, integrity, or public reputation of the judicial
proceedings." Des Moines Bd. of Water Works Trs. v. Alvord, 706 F.2d 820, 824
(8th Cir. 1983). The verdict should be reversed "'only if the error prejudices the
substantial rights of a party and would result in a miscarriage of justice if left
uncorrected." Rush v. Smith, 56 F.3d 918, 922 (8th Cir. 1995).
To determine whether the district court plainly erred in instructing the jury, we
must first explore whether Chem-Trend deserved an instruction indicating that a sales
representative cannot recover unpaid commissions under the MSRCA when the
representative defrauds its principal, or breaches a fiduciary duty owed thereto. The
MSRCA itself provides scant guidance in determining whether a sales representative
retains the benefit of the statutory remedy in those circumstances.3
Under Michigan common law, "[t]he general rule is that a broker forfeit[s] his
right to compensation by misconduct, breach of duty, or wilful disregard, in a
material respect, of an obligation imposed upon him by the law of agency." Sweeney
& Moore v. Chapman, 294 N.W. 711, 712 (Mich. 1940) (emphasis added). Acts of
fraud or breaches of fiduciary duty are not always material, however, so forfeiture of
commissions is not always an appropriate remedy. Muglia v. Kaumagraph Corp., 64
F.3d 663, 1995 WL 492933, at *6-7 (6th Cir. 1995) (unpublished table decision)
(interpreting Michigan law and holding that a principal who failed to prove it suffered
3
One federal court referred to the MSRCA as "one of the most haphazardly and
inartfully drafted pieces of legislation that it has ever been called upon to review.
There is no stated scope of the statute, nor any specific declaration of applicability or
intent." Kenneth Henes Special Projects Procurement v. Cont'l Biomass Indus., Inc.,
86 F. Supp. 2d 721, 728-29 (E.D. Mich. 2000).
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injury due to a sales representative's breach of fiduciary duty could not withhold
commissions); Kingsley Assoc., Inc. v. Del-Met, Inc., 918 F.2d 1277, 1285 (6th Cir.
1990) (applying Michigan law and holding that a sales representative who allegedly
breached a fiduciary duty by representing a competing company did not forfeit
commissions where the principal failed to show that dual representation caused
damage).
Thus, Chem-Trend was probably entitled to an instruction indicating Newport
forfeited commissions upon a material breach of fiduciary duty or act of fraud that
caused Chem-Trend damage. But because Chem-Trend neglected to request such an
instruction, we must decide whether this is the exceptional case requiring reversal
under the plain error standard. Although we are troubled by the commission award,
particularly the onerous and seemingly undeserved $100,000 statutory penalty
required by the MSRCA, we have equal trouble concluding that plain error exists.
First, our comments regarding Chem-Trend's entitlement to the missing jury
instruction are made hesitantly. We base our comments on Michigan common law,
not the MSRCA. Because the MSRCA is not a model of clarity, we cannot tell for
sure how extensively the Michigan legislature meant to modify the requirements of
the common law with respect to forfeiture of commissions.4 In a case addressing the
MSRCA's retroactivity, the Michigan Court of Appeals indicated "an employer who
was not liable under the common law is not liable under the [M]SRCA." Flynn v.
Flint Coatings, Inc., 584 N.W.2d 627, 629 (Mich. Ct. App. 1998). But Flynn has
since been overruled, Frank W. Lynch & Co. v. Flex Techs., Inc., 624 N.W.2d 180,
185 (Mich. 2001), so we have little guidance from the Michigan courts about the
extent to which the MSRCA modifies the common law.
4
The statute merely states "[t]his section does not affect the rights of a principal
or sales representative that are otherwise provided by law." Mich. Comp. Laws §
600.2961(9).
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Under Chem-Trend's view, the MSRCA provides no penalty for a principal
who engages in self-help by intentionally withholding commissions in the first
instance, as long as the principal justifies its actions by subsequently proving the sales
representative's disloyalty. But Chem-Trend's view is not the only plausible reading
of the statute. The MSRCA might be intended to require principals to pay earned
commissions in the first instance, then sue to recover against a disloyal servant.
Otherwise, principals could claim disloyalty as a justification for withholding
commissions in every case, thereby placing the onus of proceeding to litigation upon
sales representatives. Part of the purpose of the MSRCA may be to relieve sales
representatives of the burden of initiating litigation to recover earned commissions,
and place that burden squarely upon principals.
Second, at best, Chem-Trend may have deserved an instruction indicating
Newport forfeited commissions upon a material breach of fiduciary duty or act of
fraud that caused damage. See Muglia and Kingsley, supra. But Chem-Trend agreed
to instructions which allowed the jury to find a breach of fiduciary duty or act of
fraud without a finding of materiality. Newport suggests the jury based its fiduciary
and fraud verdicts upon evidence indicating Newport reimbursed Edington for a trip
to St. Louis to meet with Cahan about working for Shaw. Newport suggests the jury
may have viewed that conduct as disloyal, or fraudulent, without necessarily viewing
it as material to Newport's contractual right to commissions. We must agree. Under
plain error review, we are obligated to view the evidence in a manner that allows us
to uphold the verdict. Chem-Trend's failure to request pertinent instructions prevents
us from discerning whether the jury's award of commissions under the MSRCA is
consistent with its verdicts on the breach of fiduciary duty and fraud claims.
Under these circumstances, we cannot conclude Chem-Trend's substantial
rights have been prejudiced. Even while Cahan was misappropriating trade secrets
in his competing business, Newport continued to maximize Chem-Trend's sales
within Newport's assigned territory, sometimes doubling and tripling projected sales
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forecast. We can understand how the jury could believe Newport earned its unpaid
commissions under the contract, even though Newport breached a fiduciary duty or
committed fraud by assisting or hiding Cahan's conduct. In addition, the jury
essentially made Chem-Trend whole by awarding damages for all of the defendants'
wrongdoing. Michigan law seems to recognize forfeiture of commissions as a quid
pro quo for the damage a principal suffers at the hands of a disloyal servant. See
Muglia, 1995 WL 492933 at *6-7 (holding that forfeiture of commissions not
warranted where principal was ultimately not damaged); Kingsley, 918 F.2d at 1285(same). Chem-Trend was fully compensated by the jury's verdicts in its favor, and
would receive a windfall if allowed to retain Newport's unpaid commissions.
At bottom, this case turns on a civil litigant's failure to request the right
instructions and our consequent inability to determine the propriety of a jury's
verdicts because of that failure. Although we are troubled by Newport receiving the
onerous statutory penalty5 provided by the MSRCA in addition to its unpaid
commissions, we do not believe that fact alone makes this the exceptional case where
error has so seriously affected the fairness, integrity, or public reputation of judicial
proceedings that we must reverse.
We have no trouble dispensing with Newport's cross-appeal challenging the
district court's reduction of its requested fees.
5
Chem-Trend also argues the statutory penalty should not apply because it did
not withhold commissions in bad faith. We disagree. The MSRCA's "intentionally
failed to pay" provisions do not require a finding of bad faith. See M & C Corp. v.
Erwin Behr GmbH & Co., 87 F.3d 844, 850 (6th Cir. 1996). Chem-Trend agreed to
submit the issue of intent to the jury, and agreed to instructions that allowed the jury
to consider the issue notwithstanding a breach of fiduciary duty or act of fraud by
Newport. After the jury found Chem-Trend "intentionally failed to pay," the district
court was obligated to award the statutory penalty under the MSRCA.
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An award of fees is reviewed for abuse of discretion only. The trial
court knows the case best. It knows what the lawyers have done, and
how well they have done it. It knows what these efforts are worth. It
knows how to balance portions of the case together to reach a just and
reasonable award. We see no abuse of discretion here.
Young v. City of Little Rock, 249 F.3d 730, 737 (8th Cir. 2001).
For the reasons stated, we affirm the district court.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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