PATRICK E. HIGGINBOTHAM, Circuit Judge:
This case raises questions of the scope of liability under the misappropriation theory of insider trading. Taking a different view from our able district court brother of the allegations of the complaint, we are persuaded that the case should not have been dismissed under Fed.R.Civ.P. 9(b) and 12 and must proceed to discovery.
Mark Cuban is a well known entrepreneur and current owner of the Dallas Mavericks and Landmark theaters, among other businesses. The SEC brought this suit against Cuban alleging he violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 by trading in Mamma.com stock in breach of his duty to the CEO and Mamma.com — amounting to insider trading under the misappropriation theory of liability. The core allegation is that Cuban received confidential information from the CEO of Mamma.com, a Canadian search engine company in which Cuban was a large minority stakeholder, agreed to keep the information confidential, and acknowledged he could not trade on the information. The SEC alleges that, armed with the inside information regarding a private investment of public equity (PIPE) offering, Cuban sold his stake in the company in an effort to avoid losses from the inevitable fall in Mamma, corn's share price when the offering was announced.
15 U.S.C. § 77q(a).
15 U.S.C. § 78j(b).
17 C.F.R. § 240.10b-5.
Cuban moved to dismiss the action under Rule 9(b) and 12(b)(6). The district court found that, at most, the complaint alleged an agreement to keep the information confidential, but did not include an agreement not to trade. Finding a simple confidentiality agreement to be insufficient to create a duty to disclose or abstain from trading under the securities laws, the court granted Cuban's motion to dismiss. The SEC appeals, arguing that a confidentiality agreement creates a duty to disclose or abstain and that, regardless, the confidentiality agreement alleged in the complaint also contained an agreement not to trade on the information and that agreement would create such a duty.
We review de novo the district court's dismissal for failure to state a claim under Rule 12(b)(6). We accept "all well pleaded facts as true, viewing them in the light most favorable to the plaintiff." The "`complaint must contain sufficient factual matter', accepted as true, to `state a claim to relief that is plausible on its face.'" "`Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact).'"
Flaherty Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 206 (5th Cir. 2009). As the district court noted, to the extent Cuban's arguments under Rule 9(b) are distinct from his Rule 12(b)(6) arguments, the complaint pleads facts with sufficient "particularity"` and thus does not violate Rule 9(b). See id.
In re Katrina Canal Breaches Litig., 495 F.3d 191, 205(5th Cir. 2007).
Gonzalez v. Kay, 577 F.3d 600, 603 (5th Cir. 2009) (quoting Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009)).
In re Katrina Canal Breaches Litig., 495 F.3d at 205, (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
The SEC alleges that Cuban's trading constituted insider trading and violated Section 10(b) of the Securities Exchange Act. Section 10(b) makes it
The parties agree the allegations under section 17(a) of the Securities Act are evaluated under the same legal standard as the section 10(b) claim.
unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . . [t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
Pursuant to this section, the SEC promulgated Rule 10b-5, which makes it unlawful to
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
The Supreme Court has interpreted section 10(b) to prohibit insider trading under two complementary theories, the "classical theory" and the "misappropriation theory."
United States v. O'Hagan, 521 U.S. 642, 652, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997).
The classical theory of insider trading prohibits a "corporate insider" from trading on material nonpublic information obtained from his position within the corporation without disclosing the information. According to this theory, there exists "a relationship of trust and confidence between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation." Trading on such confidential information qualifies as a "deceptive device" under section 10(b) because by using that information for his own personal benefit, the corporate insider breaches his duty to the shareholders. The corporate insider is under a duty to "disclose or abstain" — he must tell the shareholders of his knowledge and intention to trade or abstain from trading altogether.
Chiarella v. United States, 445 U.S. 222, 228, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980).
Id. at 227, 100 S.Ct. 1108.
Id.
There are at least two important variations of the classical theory of insider trading. The first is that even an individual who does not qualify as a traditional insider may become a "temporary insider" if by entering "into a special confidential relationship in the conduct of the business of the enterprise [they] are given access to information solely for corporate purposes." Thus underwriters, accountants, lawyers, or consultants are all considered corporate insiders when by virtue of their professional relationship with the corporation they are given access to confidential information. The second variation is that an individual who receives information from a corporate insider may be, but is not always, prohibited from trading on that information as a tippee. "[T]he tippee's duty to disclose or abstain is derivative from that of the insider's duty" and the tippee's obligation arises "from his role as a participant after the fact in the insider's breach of a fiduciary duty." Crucially, "a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know there has been a breach." The insider breaches his fiduciary duty when he receives a "direct or indirect personal benefit from the disclosure."
Dirks v. SEC, 463 U.S. 646, 655 n. 14, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983).
Id.
Id. at 659, 103 S.Ct. 3255 (internal quotation marks omitted).
Id. at 660, 103 S.Ct. 3255.
Id. at 663, 103 S.Ct. 3255.
Both the temporary-insider and tippee twists on the classical theory retain its core principle that the duty to disclose or abstain is derived from the corporate insider's duty to his shareholders. The misappropriation theory does not rest on this duty. It rather holds that a person violates section 10(b) "when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information." The Supreme Court first adopted this theory in United States v. O'Hagan. There, a lawyer traded the securities of a company his client was targeting for a takeover. O'Hagan could not be liable under the classical theory as he owed no duty to the shareholders of the target company. Nevertheless, the court found O'Hagan violated section 10(b). The Court held that in trading the target company's securities, O'Hagan misappropriated the confidential information regarding the planned corporate takeover, breaching "a duty of trust and confidence" he owed to his law firm and client. Trading on such information "involves feigning fidelity to the source of information and thus utilizes a `deceptive device' as required by section 10(b)." The Court stated that while there is "no general duty between all participants in market transactions to forgo actions based on material nonpublic information," the breach of a duty to the source of the information is sufficient to give rise to insider trading liability.
United States v. O'Hagan, 521 U.S. 642, 652, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997).
Id. at 650, 117 S.Ct. 2199.
Id. at 653, 117 S.Ct. 2199.
Id. at 660, 117 S.Ct. 2199.
Id. at 662, 117 S.Ct. 2199. Because the duty flows to the source of the information and not to shareholders "if the fiduciary discloses to the source that he plans to trade on the nonpublic information, there is no `deceptive device' and thus no § 10(b) violation." O'Hagan, 521 U.S. at 655, 117 S.Ct. 2199.
While O'Hagan did not set the contours of a relationship of "trust and confidence" giving rise to the duty to disclose or abstain and misappropriation liability, we are tasked to determine whether Cuban had such a relationship with Mamma.com. The SEC seeks to rely on Rule 10b5-2(b)(1), which states that a person has "a duty of trust and confidence" for purposes of misappropriation liability when that person "agrees to maintain information in confidence." In dismissing the case, the district court read the complaint to allege that Cuban agreed not to disclose any confidential information but did not agree not to trade, that such a confidentiality agreement was insufficient to create a duty to disclose or abstain from trading under the misappropriation theory, and that the SEC overstepped its authority under section 10(b) in issuing Rule 10b5-2(b)(1). We differ from the district court in reading the complaint and need not reach the latter issues.
17C.F.R. § 240.10b5-2(b)(1).
The complaint alleges that, in March 2004, Cuban acquired 600,000 shares, a 6.3% stake, of Mamma.com. Later that spring, Mamma.com decided to raise capital through a PIPE offering on the advice of the investment bank Merriman Curhan Ford Co. At the end of June, at Merriman's suggestion, Mamma.com decided to invite Cuban to participate in the PIPE offering. "The CEO was instructed to contact Cuban and to preface the conversation by informing Cuban that he had confidential information to convey to him in order to make sure that Cuban understood — before the information was conveyed to him — that he would have to keep the information confidential."
Compl. at ¶ 12.
After getting in touch with Cuban on June 28, Mamma.com's CEO told Cuban he had confidential information for him and Cuban agreed to keep whatever information the CEO shared confidential. The CEO then told Cuban about the PIPE offering. Cuban became very upset "and said, among other things, that he did not like PIPEs because they dilute the existing shareholders." "At the end of the call, Cuban told the CEO `Well, now I'm screwed. I can't sell.'"
Compl. at ¶ 14.
Id.
The CEO told the company's executive chairman about the conversation with Cuban. The executive chairman sent an email to the other Mamma.com board members updating them on the PIPE offering. The executive chairman included:
Today, after much discussion, [the CEO] spoke to Mark Cuban about this equity raise and whether or not he would be interested in participating. As anticipated he initially "flew off the handle" and said he would sell his shares (recognizing that he was not able to do anything until we announce the equity) but
then asked to see the terms and conditions which we have arranged for him to receive from one of the participating investor groups with which he has dealt in the past.
The CEO then sent Cuban a follow up email, writing "`[i]f you want more details about the private placement please contact . . . [Merriman].'"
Compl. at ¶ 16 (alteration in original).
Cuban called the Merriman representative and they spoke for eight minutes. "During that call, the salesman supplied Cuban with additional confidential details about the PIPE. In response to Cuban's questions, the salesman told him that the PIPE was being sold at a discount to the market price and that the offering included other incentives for the PIPE investors." It is a plausible inference that Cuban learned the off-market prices available to him and other PIPE participants.
Compl. at ¶ 17.
With that information and one minute after speaking with the Merriman representative, Cuban called his broker and instructed him to sell his entire stake in the company. Cuban sold 10,000 shares during the evening of June 28, 2004, and the remainder during regular trading the next day.
That day, the executive chairman sent another email to the board, updating them on the previous day's discussions with Cuban, stating "`we did speak to Mark Cuban ([the CEO] and, subsequently, our investment banker) to find out if he had any interest in participating to the extent of maintaining his interest. His answers were: he would not invest, he does not want the company to make acquisitions, he will sell his shares which he can not do until after we announce.'"
Compl. at ¶ 20 (alteration in original).
After the markets closed on June 29, Mamma.com announced the PIPE offering. The next day, Mamma.com's stock price fell 8.5% and continued to decline over the next week, eventually closing down 39% from the June 29 closing price. By selling his shares when he did, Cuban avoided over $750,000 in losses. Cuban notified the SEC that he had sold his stake in the company and publically stated that he sold his shares because Mamma.com "was conducting a PIPE, which issued shares at a discount to the prevailing market price and also would have caused his ownership position to be diluted."
Compl. at ¶ 25.
In reading the complaint to allege only an agreement of confidentiality, the court held that Cuban's statement that he was "screwed" because he "[could not] sell" "appears to express his belief, at least at that time, that it would be illegal for him to sell his Mamma.com shares based on the information the CEO provided." But the court stated that this statement "cannot reasonably be understood as an agreement not to sell based on the information." The court found "the complaint asserts no facts that reasonably suggest that the CEO intended to obtain from Cuban an agreement to refrain from trading on the information as opposed to an agreement merely to keep it confidential." Finally, the court stated that "the CEO's expectation that Cuban would not sell was also insufficient" to allege any further agreement.
SEC v. Cuban, 634 F.Supp.2d 713, 728 (N.D.Tex. 2009).
Id.
Id.
Id.
Reading the complaint in the light most favorable to the SEC, we reach a different conclusion. In isolation, the statement "Well, now I'm screwed. I can't sell" can plausibly be read to express Cuban's view that learning the confidences regarding the PIPE forbade his selling his stock before the offering but to express no agreement not to do so. However, after Cuban expressed the view that he could not sell to the CEO, he gained access to the confidences of the PIPE offering. According to the complaint's recounting of the executive chairman's email to the board, during his short conversation with the CEO regarding the planned PIPE offering, Cuban requested the terms and conditions of the offering. Based on this request, the CEO sent Cuban a follow up email providing the contact information for Merriman. Cuban called the salesman, who told Cuban "that the PIPE was being sold at a discount to the market price and that the offering included other incentives for the PIPE investors." Only after Cuban reached out to obtain this additional information, following the statement of his understanding that he could not sell, did Cuban contact his broker and sell his stake in the company.
Compl. at ¶ 17.
The allegations, taken in their entirety, provide more than a plausible basis to find that the understanding between the CEO and Cuban was that he was not to trade, that it was more than a simple confidentiality agreement. By contacting the sales representative to obtain the pricing information, Cuban was able to evaluate his potential losses or gains from his decision to either participate or refrain from participating in the PIPE offering. It is at least plausible that each of the parties understood, if only implicitly, that Mamma.com would only provide the terms and conditions of the offering to Cuban for the purpose of evaluating whether he would participate in the offering, and that Cuban could not use the information for his own personal benefit. It would require additional facts that have not been put before us for us to conclude that the parties could not plausibly have reached this shared understanding. Under Cuban's reading, he was allowed to trade on the information but prohibited from telling others — in effect providing him an exclusive license to trade on the material non-public information. Perhaps this was the understanding, or perhaps Cuban mislead the CEO regarding the timing of his sale in order to obtain a confidential look at the details of the PIPE. We say only that on this factually sparse record, it is at least equally plausible that all sides understood there was to be no trading before the PIPE. That both Cuban and the CEO expressed the belief that Cuban could not trade appears to reinforce the plausibility of this reading.
The parties dispute Mamma.com's motive in providing the information to Cuban. Cuban contends that the offering was already oversubscribed and that this demonstrates the sole purpose of the phone call was to prevent Cuban from trading ahead of the offering. We express no opinion on this factual dispute or the potential implications of Cuban's allegations if they are true. At the motion-to-dismiss stage we must view all the facts in light most favorable to the SEC and assume that Mamma.com had a legitimate reason for contacting Cuban.
Such an arrangement would raise serious tipper/tippee liability concerns were it explicit. If the CEO knowingly gave Cuban material nonpublic information and arranged so he could trade on it, it would not be difficult for a court to infer that the CEO must have done so for some personal benefit — e.g., goodwill from a wealthy investor and large minority stakeholder. "A reputational benefit that translates into future earnings, a quid pro quo, or a gift to a trading friend or relative all could suffice to show the tipper personally benefitted." SEC v. Yun, ill F.3d 1263, 1277 (11th Cir. 2003). This of course is not to suggest any such improprieties occurred; rather, it simply reinforces the plausibility of the interpretation of the alleged facts as evidencing an understanding that the agreement included an agreement by Cuban not to trade.
Compl. at ¶ 14 20.
Given the paucity of jurisprudence on the question of what constitutes a relationship of "trust and confidence" and the inherently fact-bound nature of determining whether such a duty exists, we decline to first determine or place our thumb on the scale in the district court's determination of its presence or to now draw the contours of any liability that it might bring, including the force of Rule 10b5-2(b)(1). Rather, we VACATE the judgment dismissing the case and REMAND to the court of first instance for further proceedings including discovery, consideration of summary judgment, and trial, if reached.
Nor must we reach the validity of Rule 10b5-2(b)(1).
res judicata.
Although AERC sought voluntary dismissal of the STB arbitration in December 2002, BNSF and AERC ultimately agreed to a dismissal with prejudice. As noted, on December 18, 2002, the STB arbitrator dismissed the arbitration between AERC and BNSF with prejudice and on January 12, 2004, the STB issued an order confirming its decision.
It is undisputed that the arbitrator and the STB did not address the merits of the arbitration before they dismissed the arbitration with prejudice. Because the arbitrator did not reach the merits, Defendants contend the STB dismissal with prejudice does not preclude Defendants from bringing their Affirmative Defenses and Counterclaims in this action.
The Ninth Circuit has held
[a]n arbitration decision can have
res judicata or collateral estoppel effect. . . .
C.D. Anderson Co., Inc. v. Lemos, 832 F.2d 1097, 1100 (9
th Cir. 1987). In applying
res judicata and collateral estoppel to an arbitration proceeding, we make an examination of the record, if one exists, including any findings of the arbitrators.
See, e.g., Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 569, 71 S.ct. 408, 414,
95 L. Ed. 534 (1950). We must decide whether a rational factfinder could have reached a conclusion based upon an issue other than that which the defendant seeks to foreclose.
See Ashe v. Swenson, 397 U.S. 436, 444, 90 S.ct. 1189, 1194,
25 L. Ed.2d 469 (1970).
* * *
The party asserting preclusion bears the burden of showing with clarity and certainty what was determined by the prior judgment.
United States v. Lasky, 600 F.2d 765, 769 (9
th Cir.),
cert. denied,
444 U.S. 979, 100 S.ct. 480,
62 L. Ed.2d 405 (1979). "It is not enough that the party introduce the decision of the prior court; rather, the party must introduce a sufficient record of the prior proceeding to enable the trial court to pinpoint the exact issues previously litigated."
Id. Where the record before the district court was inadequate for it to determine whether it
should apply the doctrine of collateral estoppel, we will not consider the issue on appeal.
Id. See also Hernandez v. City of Los Angeles, 624 F.2d 935, 937 (9
th Cir. 1980).
Clark v. Bear Stearns Co., Inc., 966 F.2d 1318, 1321 (9
th Cir. 1992).
See also Rachford v. Air Line Pilots Ass'n, Intern., No. 06-16938,
2008 WL 2607949, at *1 (9
th Cir. July 2, 2008) (same).
In support of its assertion that res judicata bars the pertinent Counterclaims and Affirmative Defenses, Defendants produced AERC's arbitration complaint, AERC's Opening Statement, BNSF's Response and Evidence, and the STB order dismissing the arbitration with prejudice. The Court concludes BNSF has offered a sufficient record of the STB proceeding to enable the Court "to pinpoint the exact issues previously litigated" and to "decide whether a rational factfinder could have reached a conclusion based upon an issue other than that which the [D]efendant[s] seek[] to foreclose."
Accordingly, the Court concludes on this record that the STB's dismissal of the arbitration with prejudice constitutes a final decision on the merits for purposes of res judicata even though the STB did not reach the merits of the parties' claims before dismissal. D. The STB arbitration decision has res judicata effect as to four of Defendants' Affirmative Defenses and four of Defendants' Counterclaims at issue.
In its complaint before the STB, AERC sought a ruling suspending the paper barrier contained in § 2(c) of the Agreement "so that AERC and UP can interchange the new traffic at Albany, Oregon without penalty." Brown Aff., Ex. 12 at 19. In its Opening Statement, AERC described the issue as follows:
The Arbitrator is asked to determine whether or not the paper barrier in the Sale Agreement should be suspended to permit AERC to interchange with UP at Albany, OR, limited to traffic originating at a new wood planer on the Lebanon-Foster rail line at Bauman, OR, and at a formerly dormant sawmill on that line at Sweet Home, OR, destined to points in the 1-5 corridor served solely by UP.
Brown Aff., Ex. 12 at 32. AERC asserted the traffic involved in the requested suspension was new traffic, and BNSF either "cannot or will not participate in the new traffic." Even though AERC raised only the issue of suspension of § 2(c) in the arbitration, Defendants have not established any reason why AERC could not have raised the issues of impossibility of performance, frustration of purpose, breach of contract, and unlawful penalty provision in the context of arbitrating the suspension of § 2(c). Each of these issues relates directly to the same facts and the same types of transactions as those at issue in the STB arbitration.
The Court addresses Defendants' antitrust Affirmative Defense and Counterclaim in section II of this Opinion and Order.
The Court, therefore, concludes on this record that Defendants' Counterclaims and Affirmative Defenses for impossibility of performance, frustration of purpose, breach of contract, and unlawful penalty provision are barred by res judicata. Accordingly, the Court grants BNSF's Motion for [Partial] Summary Judgment as to these Affirmative Defenses and Counterclaims.
II. Defendants' antitrust Affirmative Defense and Counterclaim
A. Defendants' antitrust Affirmative Defense and Counterclaim are not barred by res judicata.
In their Amended Answer to BNSF's Second Amended Complaint, Defendants bring the following Affirmative Defense:
55.
Plaintiff is prevented from pursuing a breach of the Agreement by virtue of the doctrine of illegality, because section 2(c) of the Agreement provides for an illegal tying arrangement in violation of section 1 of the Sherman Anti-Trust Act (
15 U.S.C. § 1).
Defendants also bring the following Counterclaim:
78.
Section 1 of the Sherman Anti-Trust Act (
15 U.S.C. § 1) (the "Act") prohibits contracts in restraint of trade.
79.
Under the Act, an illegal tying arrangement is an agreement where one party agrees to sell to another on the condition that the buyer also purchases a tied product.
80.
Section 1 of the Agreement provided for the sale by plaintiff of its Rail Line to AERC and that AERC interchange all rail traffic between AERC and
BNSF at BNSF's Albany yard, notwithstanding that UP competed with plaintiff and also operated to and from the Albany yard. Further, section 2(c) of the Agreement prohibited AERC from interchanging with any other railroad other than plaintiff along the Rail Corridor. These restrictions constitute a tying arrangement in violation of section 1 of the Sherman Act (
15 U.S.C. § 1).
81.
Defendants are entitled to a judicial declaration of the rights and responsibilities of the parties under the Agreement, including a declaration that section 2(c) of the Agreement is illegal, and therefore void and unenforceable.
Defendants assert the STB lacks the authority to determine whether antitrust laws have been violated or to enforce antitrust laws. Thus, Defendants contend they could not have brought their Affirmative Defense and Counterclaim for violations of the Sherman Act in the STB arbitration, and, therefore, that Affirmative Defense and that Counterclaim are not barred by res judicata. Defendants rely on Delaware and Hudson Ry. Co. v. Consolidated Rail Corp. ( DHRC), 654 F. Supp. 1195 (N.D.N.Y. 1987), to support their position.
In DHRC, the plaintiff rail carrier brought an action against the defendant rail carrier alleging the defendant's joint rate cancellations and increased reciprocal switching charges "in the aggregate demonstrated" the defendant's monopolization or attempted monopolization of the relevant market in violation of § 2 of the Sherman Act. The defendant moved to dismiss the plaintiff's claims on the basis of primary jurisdiction of the Interstate Commerce Commission (the predecessor of the STB). 654 F. Supp. at 1199-1200. The court denied the defendant's motion on the ground that:
Although the ICC may consider antitrust principles in its determinations, the agency lacks authority to enforce the antitrust laws or even determine if they have been violated.
Transkentucky, 581 F. Supp. at 767, (citing
McKlean Trucking Co. v. United States, 321 U.S. 67, 79, 64 S.ct. 370, 376,
88 L. Ed. 544 (1944)).
Id. at 1202.
BNSF, however, asserts the STB may consider and resolve antitrust issues, and, in fact, it has already done so in STB Ex Parte No. 575. Thus, BNSF contends Defendants could have brought their antitrust Affirmative Defense and Counterclaim in the STB arbitration.
Ex Parte 575 was a legislative rulemaking in which the Western Coal Traffic League (WCTL) asked the STB to enact "rules of general applicability regarding so-called `paper barriers.'" Specifically, WCTL asked the STB to
establish a rebuttable presumption that such [paper barriers are] unreasonable and contrary to the public interest if [they] (a) last[] longer than 5 years, (b) include[] any financial penalty for interchanging traffic with another carrier, or (c) include[] a credit for interchanging traffic with the seller or lessor railroad that would provide a return in excess of the railroad industry's cost of capital.
Ex Parte 575, Review of Rail Access and Competition Issues,
2007 WL 3170981, at *1 (STB 2007). The STB declined to enact the rule proposed by the WCTL, which would have prohibited the paper barriers described "across the board."
Id., at *10. In doing so, the STB rejected the WCTL's contention that paper barriers of the kind set out by the WCTL are anticompetitive and contrary to the public interest.
Id., at *7-9. Although the STB referenced antitrust law generally in its analysis, it merely "consider[ed] antitrust principles in [making] its determination[]" as permitted by
McKlean Trucking. The STB did not analyze or determine whether the noted paper barriers violated antitrust laws. Thus,
Ex Parte 575 does not establish the STB has decided antitrust issues or that it has the authority to enforce antitrust laws or to determine whether antitrust laws have been violated.
The Court finds the DHRC court's reasoning to be persuasive. Thus, the Court concludes on this record that BNSF has not established Defendants could have brought their antitrust Affirmative Defense and Counterclaim in the STB arbitration, and, therefore, Defendants' antitrust Affirmative Defense and Counterclaim are not barred by res judicata.
B. Defendants' antitrust Affirmative Defense and Counterclaim are not preempted by the ICCTA.
BNSF also moves for summary judgment as to Defendants' antitrust Affirmative Defense and Counterclaim on the ground that they are preempted by the ICCTA.
The ICCTA (sometimes referred to as the Staggers Act), 49 U.S.C. § 10501(b), provides:
(b) The jurisdiction of the [STB] over —
(1) transportation by rail carriers, and the remedies provided in this part with respect to rates, classifications, rules (including car service, interchange, and other operating rules), practices, routes, services, and facilities of such carriers; and
(2) the construction, acquisition, operation, abandonment, or discontinuance of spur, industrial, team, switching, or side tracks, or facilities, even if the tracks are located, or intended to be located, entirely in one State, is exclusive. Except as otherwise provided in this part, the remedies provided under this part with respect to regulation of rail transportation are exclusive and preempt the remedies provided under Federal or State law.
According to BNSF, the STB has the power to "excuse" or to exempt transactions from § 10501(b). When the STB does so, the excused/exempted transaction is precluded from all regulatory constraints, "whatever the source." BNSF asserts regulatory constraints in this context include judicial remedies "against" exempted transactions because permitting a judicial remedy against an exempted transaction "would have the effect of substituting a court's regulation for the [STB's] decision in favor of deregulation."
It is undisputed that on May 14, 1998, the STB exempted the rail line sale transaction that is the subject of the Agreement here. According to BNSF, therefore, the transaction at issue may not be "regulatorily constrained" in any way, including by a judicial remedy. Thus, because Defendants' antitrust Affirmative Defense and Counterclaim "would effect a judicial remedy" that would constrain the transaction, they are preempted by the ICCTA. BNSF relies on G. T. Terminal Packaging Co., Inc. v. Consolidated Rail Corp., 830 F.2d 1230 (3d Cir. 1987), and Alliance Shippers, Inc. v. Southern Pacific Transp. Co., 858 F.2d 567 (9th Cir. 1988), to support its contention.
In G. T. Terminal Packaging, the plaintiffs, rail shippers of agricultural commodities, were served by the defendant railroad who delivered rail-car shipments of various commodities to the plaintiffs at various stations. At some point the ICC (predecessor of the STB) exempted the rates for rail transportation of the commodities at issue from the ICCTA. 830 F.2d at 1231-32. The defendant then began to impose a $500-600 per car surcharge on all rail-car shipments to the plaintiffs. The plaintiffs brought an action in federal court alleging claims for violations of the ICCTA, common law, antitrust laws, and the United States Constitution. Id. at 1232. The parties dismissed the antitrust claim by stipulation, the district court held the plaintiffs' common-law claims were preempted, and the district court dismissed the plaintiffs' constitutional and ICCTA claims. Id. at 1233. The Third Circuit affirmed and held the plaintiffs' "common law claims, whether considered as arising under state or federal common law, are preempted" by the ICCTA. Id. at 1235. The court reasoned:
[A]n interpretation which viewed exempted rates as removed from the jurisdiction of the Commission would be inconsistent with the statutory scheme, which provides for the Commission's ongoing jurisdiction over exempt traffic.
49 U.S.C. § 10505(d) permits revocation by the Commission of exemption where necessary to carry out the transportation policy of the Act. . . . The ongoing jurisdiction to reconsider the exemption in light of competitive conditions is conferred in the first instance on the Commission, not on the courts. Recognition of a common law remedy with respect to rates would have the effect of substituting a court's regulation for the Commission's decision in favor of deregulation.
Id. at 1234-35.
In Alliance Shippers, Inc., the plaintiff was a shipping agent "engaged in the business of assembling truckload shipments from various shippers and arranging transportation for these shipments to their destinations." In the course of its business, the plaintiff purchased "trailer-on-flatcar (TOFC)" service from railroads such as the defendant. At some point the ICC exempted TOFC service from regulation pursuant to 49 U.S.C. § 10505. The plaintiff discovered other shipping agents were receiving more favorable rates from the defendant and filed an action alleging federal common-law and state statutory price discrimination claims as well as federal and state antitrust claims. 858 F.2d at 568. The district court concluded the plaintiff's federal and state-law claims for price discrimination were preempted by the ICCTA and that the plaintiff failed to state a claim for antitrust violations. Id. The Ninth Circuit, relying on G. T. Terminal Packaging, affirmed the district court's decision as to the plaintiff's federal pricediscrimination claim on the ground that "allowing a common law remedy for discrimination in rates for providing exempted services would have the effect of substituting a court's regulation for the Commission's decision in favor of deregulation and would be contrary to the language, purpose, and expressed intent of Congress." Id. at 569 (quotation omitted). The Ninth Circuit also affirmed the district court's decision as to the plaintiff's state price-discrimination claim on the ground that the ICCTA "does not permit state remedies and § 10501 expressly preempts state statutory remedies." Id. at 569-70. Nevertheless, the Ninth Circuit also concluded the plaintiff's "[a]ntitrust remedies unquestionably survived deregulation. Indeed the availability of antitrust remedies was a motivating factor in ICC's decision to exempt TOFC services." Id. at 570. The Ninth Circuit held the plaintiff had not stated a claim for antitrust violations. Id.
As noted, in G. T. Terminal Packaging the parties agreed to dismissal of the plaintiffs' antitrust claim and in Alliance Shippers the court specifically concluded the plaintiff's antitrust remedy was not preempted. These cases, therefore, do not support BNSF's contention that Defendants' antitrust Affirmative Defense and Counterclaim are preempted by the ICCTA.
In addition, the STB's interpretation of the preemption power of § 10501(b) is as follows:
[A]lthough a literal reading of section 10501(b) might suggest that it supersedes other federal law, the Board and the courts have rejected such an interpretation as overbroad and unworkable. Instead, the Board and the courts have harmonized section 10501(b) with federal statutes. . . .
See, e.g., Tyrrell v. Norfolk S. Ry, 248 F.3d 517, 523 (6
th Cir. 2001).
Csx Trans., Inc. — Pet. for Decl. Order, STB Fin. Docket No. 34662,
2005 WL 584026, at *8 (STB Mar. 14, 2005).
Defendants point persuasively to a number of cases to support their assertion that despite its broad language, § 10501(b) does not preempt other federal statutes such as the Sherman Act. See, e.g., Ass'n of Am. R.R.s v. S. Coast Air Qual. Mgmt. Dist., 2007 WL 2439499, at *5 (C.D. Cal. Apr. 30, 2007) ("The District is correct that the ICCTA does not preempt the [Clean Air Act, 42 U.S.C. §§ 7401, et seq.]. . . ."); Borough of Riverdale — Pet. for Decl. Order, 4 S.T.B. 380, 386 (1999) (nothing in 49 U.S.C. § 10501(b) is intended to interfere with the implementation of federal environmental statutes); Auburn Kent, WA — Pet. for Decl. Order — Stampede Pass Line, 2 S.T.B. 330, 337 (1997) (same), aff'd sub nom. City of Auburn v. U.S., 154 F.3d 1025 (9th Cir. 1998). Defendants also rely on the following legislative history of § 10501(b): "[C]riminal statutes governing antitrust matters [are] not preempted by this Act [and] . . . remain fully applicable unless specifically displaced, because they do not generally collide with the scheme of economic regulation (and deregulation) of rail transportation." H.R. Conf. Rep. No. 422, 104th Cong. 1st Sess. 167 (1995), reprinted in 1995 U.S.C.C.A.N 850, 852.
The Court adopts the STB's interpretation of § 10501 and the reasoning of the cases cited by Defendants as well as G. T. Terminal Packaging and Alliance Shippers and concludes Defendants' antitrust Affirmative Defense and Counterclaim are not preempted by § 10501.
C. Defendants fail to establish a genuine issue of material fact exists as to their antitrust Affirmative Defense and Counterclaim.
Finally, BNSF contends Defendants fail to establish a genuine issue of material fact exists as to their antitrust Affirmative Defense and Counterclaim, and, therefore, BNSF is entitled to summary judgment.
As noted, Defendants seek a declaration that § 2(c) of the Agreement is illegal and unenforceable under the Sherman Act, 15 U.S.C. § 1, because, according to Defendants, it is a per se "illegal tying arrangement . . . [that] is imposed by a seller with monopoly power over railroad facilities in its region (the tying product), and railroad traffic (the tied product)." In the
alternative, Defendants contend even if § 2(c) does not violate the Sherman Act per se, it still violates § 1 of the Sherman Act because its "indefinite duration would violate the antitrust laws."
1. The law related to per se illegal tying arrangements.
The Sherman Act provides in pertinent part: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." 15 U.S.C. § 1.
The Ninth Circuit has held § 1
can be violated by tying two products or services together, whereby "the seller conditions the sale of one product (the tying product) on the buyer's purchase of a second product (the tied product)."
Cascade Health Solutions v. PeaceHealth,
515 F.3d 883, 912 (9
th Cir. 2008). "Tying arrangements are forbidden on the theory that, if the seller has market power over the tying product, the seller can leverage this market power through tying arrangements to exclude other sellers of the tied product."
Id.
Blough v. Holland Realty, Inc., 574 F.3d 1084, 1088 (9
th Cir. 2009). The Ninth Circuit explained:
A tying arrangement "suffer[s]
per se condemnation" if a plaintiff proves:
(1) that the defendant tied together the sale of two distinct products or services; (2) that the defendant possesses enough economic power in the tying product market to coerce its
customers into purchasing the tied product; and (3) that the tying arrangement affects a "not insubstantial volume of commerce" in the tied product market.
Id. at 1088-89 (quoting
Cascade Health Solutions,
515 F.3d at 913).
2. Analysis of per se violation of the Sherman Act.
As noted, Defendants contend § 2(c) "is a tying agreement that is illegal per se, because it is imposed by a seller with monopoly power over railroad facilities in its region (the tying product), and railroad traffic (the tied product)."
It appears Defendants' Affirmative Defense and Counterclaim based on tying are premised on the theory that BNSF sells a portion of its rail line or "railroad facilities in its region" (the tying product) only on condition that the purchaser also buy BNSF's connecting long-haul railroad service (the tied product) and refrain from using a BNSF competitor to move longhaul traffic off of the line. BNSF points out that the only companies who buy long-haul railroad traffic services from BNSF are shippers, and there is not any evidence in the record that establishes BNSF possesses enough economic power in the market for its tying product (railroad facilities in its region) to coerce its customers to purchase the tied product (long-haul railroad traffic services) or that shippers who purchase longhaul railroad traffic services from BNSF are coerced into doing so based on BNSF's economic power.
Defendants also do not offer any evidence as to the actual market conditions of railroad facilities in BNSF's region or that describes what the relevant market might be. For example, Defendants do not point to any evidence in the record that describes BNSF's region, the size of the alleged region, or railroads other than UP that also operate facilities in the region.
Defendants, however, contend a court may find a tying arrangement to be per se illegal without inquiry into actual market conditions. Although Defendants rely on Jefferson Parish Hospital to support their contention, that case makes clear a court must first find there is a "substantial potential for impact on competition in order to justify per se condemnation." 466 U.S. at 16.
If only a single purchaser were `forced' with respect to the purchase of a tied item, the resultant impact on competition would not be sufficient to warrant the concern of antitrust law. It is for this reason that we have refused to condemn tying arrangements unless a substantial volume of commerce is foreclosed thereby.
Id. Defendants also fail to identify any evidence in the record that indicates the Agreement's requirement that AERC use BNSF's long-haul services on the line in question causes a substantial volume of commerce to be foreclosed.
On this record, the Court concludes Defendants have not established § 2(c) constitutes a per se violation of the Sherman Act.
3. "Rule of reason" antitrust violation.
Even if the tying arrangement is not illegal per se, Defendants also assert it, nevertheless, violates the Sherman Act because the Agreement's duration is more than five years, which is an unreasonable restraint on trade.
The basic method of analysis for determining whether an agreement is an unreasonable restraint on trade such as violates § 1 of the Sherman Act is rule of reason review, in which a court looks to factors such as specific information about the relevant business, the restraint's history, nature, and effect, and [whether the businesses involved have market power, with the purpose of distinguish[ing] between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer's best interest.
Cal. ex rel. Brown v. Safeway, Inc., Nos. 08-55671, 08-55708,
2010 WL 3222187, at *4 (9
th Cir. Aug. 17, 2010) (quotations omitted). Defendants rely on
Shawnee Compress Co. v. Anderson, 209 U.S. 423 (1908), and
Cincinnati, Portsmouth, Big Sandy, Pomeroy Packet Co. v. Bay, 200 U.S. 179 (1906), to support their assertion that § 2(c) is an unreasonable restraint on trade.
In Cincinnati the Court concluded a limited covenant in a contract for the sale of a river craft that prohibited competing for five years in transportation between certain points on the Ohio river did not violate the Sherman Act because the restraint was not greater than the protection required by the selling party. 200 U.S. at 184-85.
In Shawnee the defendants and their affiliates were assembling a conglomerate that would control cotton compresses across the southern United States. The Court found the defendants entered into the lease "in pursuance of an effort to avoid directly or indirectly the possibility, if not the probability, of unnecessary and unreasonable competition." 209 U.S. at 432. The Court, therefore, concluded the lease violated the Sherman Act because it constituted "aid of a scheme of monopoly." Id. at 434.
In Ex Parte No. 575 the STB specifically rejected the contention that interchange commitments lasting more than five years lead to decreased competition or are likely to overcompensate the seller.
Some shippers maintain that interchange commitments that last longer than 5 years are likely to over-compensate the seller or lessor carrier. But a carrier considering a line sale or lease of line with traffic that makes a
revenue contribution presumably calculates the net present value of the stream of revenue contribution from the traffic it would be forgoing and either (a) demands an equivalent value in the sale price or rental fee, or (b) includes interchange limiting provisions in the sale or lease. The revenue stream resulting from the agreement should be no more than what the carrier would have received had it not divested or leased the rail facilities in question, or had it demanded more in the sale price or rental fee. So long as that is the
case, the interchange limiting provision would not overcompensate the carrier and may shift the risk of unexpected traffic loss to the selling or leasing (Class I) carrier — the party that was more able to assume the risk. We will not presume that short line railroads, in negotiating arms-length and voluntary contracts, are unable to protect their own financial interests or properly assess the value of an asset that they are considering for purchase. As regulators, the Board must be very wary of the temptation to override the determination of reasonable compensation as negotiated by informed private parties.
2007 WL 3170981, at *7.
Even though the STB does not have the authority to interpret antitrust laws or to determine whether they have been violated, the Court concludes the STB's analysis of competition and compensation in the context of paper barriers such as the one at issue here is informative. As BNSF notes, there was not any carrier who competed for the long-haul traffic to or from the line before its sale of the line to AERC, and, therefore, the Agreement did not produce any less competition than that which already existed. In addition, Defendants do not point to any evidence in the record that indicates BNSF was motivated to sell the line at issue to AERC by a desire to cease or to reduce competition or that AERC was coerced into completing the transaction. The record reflects Defendant Root's brother approached BNSF about selling the line, and there is not any evidence that either he or AERC are inexperienced or incapable of analyzing a rail-line purchase. Defendants, therefore, have not established § 2(c) violates the Sherman Act under the "rule of reason" analysis.
D. Summary.
In summary, the Court concludes Defendant has not established a material issue of fact exists as to the issue whether § 2(c) of the Agreement violates the Sherman Act either per se or as an unreasonable restraint on trade. Accordingly, the Court grants BNSF's Motion for [Partial] Summary Judgment as to Defendants' Affirmative Defense and Counterclaim for violations of the Sherman Act.
DEFENDANTS' MOTION FOR [PARTIAL] SUMMARY JUDGMENT
As noted, BNSF alleges in its Second Amended Complaint that AERC breached its Agreement with BNSF "by failing to pay liquidated damages on the interchange of traffic to a railroad other than BNSF when that traffic originated or terminated at a facility, which before the sale was not open to rail service from the receiving railroad." Second Am. Compl. ¶ 25. BNSF also alleges fraud claims against AERC and Root personally.
Defendants, in turn, seek summary judgment as to BNSF's fraud claims against AERC and Root on the ground that those claims are "restatements of [BNSF's] breach of contract claim without any allegations of independent tortious conduct."
I. BNSF's fraud claim against AERC
In its fraud claim against AERC, BNSF alleges in pertinent part:
27.
From July 1, 2004 to October 9, 2007, AERC fraudulently concealed that cars originating or terminating at a facility, which before the sale was not open to rail service from a carrier other than BNSF, were being interchanged with Union Pacific.
28.
AERC's fraudulent concealment was intended to, and did in fact, defraud BNSF regarding liquidated damages owed.
* * *
30.
The Agreement obligated AERC to provide BNSF a monthly report of car movements that were subject to liquidated damages pursuant to Paragraph 2(c) of the Agreement. Rather than reporting the interchange of cars that would be subject to liquidated damages, AERC caused the shipper to issue fraudulent waybills in order to cover up these movements. BNSF relied on AERC's duty to disclose this rail traffic and to pay liquidated damages pursuant to the Agreement.
31.
As a direct consequence and proximate result of that fraudulent concealment, AERC avoided paying liquidated damages in excess of $900,000.
32.
In fraudulently concealing the interchange of cars, AERC acted with malice, or showed a reckless or outrageous indifference to a highly unreasonable risk of harm and acted with a conscious indifference to BNSF's welfare. Accordingly, BNSF is entitled to punitive damages in the amount of $1,000,000.
33.
From July 1, 2004 to October 9, 2007, AERC failed to disclose that cars originating or terminating at a facility, which before the sale were only open to rail service from BNSF, were being interchanged to another railroad.
34.
AERC's deceit was intended to, and did in fact, deceive BNSF regarding its entitlement to liquidated damages.
* * *
36.
The Agreement obligated AERC to provide BNSF a monthly report of car movements that were subject to liquidated damages pursuant to Paragraph 2(c) of the Agreement. Rather than reporting the interchange of cars that would be subject to liquidated damages, AERC caused the shipper to issue fraudulent waybills in order to cover up these movements. BNSF relied on AERC's duty to disclose this rail traffic and pay liquidated damages pursuant to the Agreement.
37.
As a direct consequence and proximate result of that deceit, AERC avoided paying liquidated damages in excess of $900,000.
38.
By intentionally deceiving BNSF regarding the interchange of cars and the liquidated damages that were owed, AERC acted with malice, or showed a reckless or outrageous indifference to a highly unreasonable risk of harm and acted with a conscious indifference to the welfare of BNSF. Accordingly, BNSF is entitled to punitive damages in the amount of $1,000,000.
Second Am. Compl. ¶¶ 27-28, 30-34, 36-38.
Defendants rely on Georgetown Realty, Inc. v. The Home Insurance Company, 313 Or. 97 (1992), to support their assertion that BNSF cannot bring a fraud claim and seek punitive damages
against AERC because "no independent tort exists upon which liability against AERC . . . can be found."
In Georgetown, the plaintiff had an insurance policy with the defendant. A third party filed a tort action against the plaintiff, and the defendant assumed the plaintiff's defense under the policy. A jury returned a verdict against the plaintiff in the third-party action, and the defendant refused to pay the entire judgment. The plaintiff then brought an action in state court against the defendant alleging claims for breach of contract and breach of fiduciary duty and seeking compensatory and punitive damages. The jury returned a verdict in favor of the plaintiff on both claims and awarded punitive damages on the claim for breach of fiduciary duty. The defendant appealed on the ground that its duties were "purely contractual," and, therefore, the trial court erred when it submitted the plaintiff's claim for breach of fiduciary duty to the jury. Id. at 101-02. The Oregon Court of Appeals held the plaintiff "did not state a claim for negligence" and remanded the case to "delete[] awards of compensatory and punitive damages on breach of fiduciary duty claim." Id. at 102. The Oregon Supreme Court reversed and noted:
The lesson to be drawn from this court's cases discussing the choice between contract and tort remedies is this: When the relationship involved is between contracting parties, and the gravamen of the complaint is that one party caused damage to the other by negligently performing its
obligations under the contract, then, and even though the relationship between the parties arises out of the contract, the injured party may bring a claim for negligence if the other party is subject to a standard of care independent of the terms of the contract. If the plaintiff's claim is based solely on a breach of a provision in the contract, which itself spells out the party's obligation, then the remedy normally will be only in contract, with contract measures of damages and contract statutes of limitation. That is so whether the breach of contract was negligent, intentional, or otherwise. In some situations, a party may be able to rely on either a contract theory or a tort theory or both.
See Ashmun v. Nichols, 92 Or. at 234-35,
180 P. 510 (suggesting that a plaintiff might be able to rely on both contract and tort theories).
Id. at 106. Ultimately the court concluded the relationship of a liability insurer to its insured is the "kind of relationship [that] carries with it a standard of care that exists independent of the contract and without reference to the specific terms of the contract."
Id. at 110-11. Accordingly, the Court concluded the plaintiff could bring a claim for breach of fiduciary duty in addition to a breach-of-contract claim.
Id. at 111.
BNSF contends Georgetown does not apply here because it addresses negligent conduct or conduct based on a standard of care whereas in this matter BNSF alleges a claim for fraud against AERC based on intentional misconduct. In Georgetown, however, the court specifically noted "[i]f the plaintiff's claim is based solely on a breach of a provision in the contract, which itself spells out the party's obligation, then the remedy normally will be only in contract, with contract measures of damages and contract statutes of limitation. That is so whether the breach of contract was negligent, intentional, or otherwise." Id. at 106 (emphasis added). The Court, therefore, concludes the principles set out in Georgetown are not limited to negligence claims.
Defendants also rely on Express Creditcorp v. The Oregon Bank, 95 Or. App. 121 (1989). In that case, the court reaffirmed punitive damages are generally not available in an action for breach of contract and were not available in Express Creditcorp for breach of contract because the defendant's counterclaim did not allege any conduct by the plaintiff that exceeded the limits of the contract. Id. at 124.
Here the parties conceded at oral argument that there is not an Oregon case directly on point even though some cases touch on the issue. For example, in Ashmun v. Nichols, which is cited by the court in Georgetown, the defendant landlord had a contract to repair the premises. The plaintiff tenant was injured when the basement steps of the premises gave out. 92 Or. 223, 232 (1919). The plaintiff brought a personal-injury action, and the defendant contended the action lay in contract rather than in tort. The Oregon Supreme Court concluded the plaintiff could bring an action in tort:
In a case like this we think that when a landlord agrees to keep his premises in repair, the law fastens upon him a duty to keep that contract, and if he violates that duty, after notice of the
dangerous condition, he ought in principle to be liable for whatever injuries the tenant naturally and necessarily receives from such breach of duty.
If the only injury is one directly contemplated in the contract, as the decreased value of the use of the premises, the action of the tenant would be purely upon the contract. But if the negligence of the landlord resulted, necessarily and naturally, in some further injury to his person or property, he may bring an action, like the one at bar, and it is of little importance whether it is called technically an action on contract or an action upon the tort, or whether it partakes of a double nature, depending upon both tort and contract.
Id. at 234-34 (emphasis added).
Similarly in Hill Meat Co. v. Sioux-Preme Packing Co., Civil No. 08-1062-SU, 2009 WL 1346606 (D. Or. May 13, 2009), the parties contracted for the sale of hogs of a certain quality. The plaintiff alleged the defendant shipped poor quality hogs, including hogs that were underweight or had excess fat; shipped insufficient product; mispacked and mislabeled products; and shipped rotten pork trim. Id., at *2. The plaintiff brought an action alleging, among other things, breach of contract and misrepresentation. The court granted the defendant's motion to dismiss the plaintiff's misrepresentation claim on the ground that
Hill Meat's allegations are insufficient because the type of harm alleged is harm caused by Sioux-Preme's alleged breach of the contract, not harm caused by Sioux-Preme's allegedly false representations that it had the capacity to meet Hill Meat's orders. Harm caused by a breach of a promise is actionable through a breach of contract action, not a fraud claim.
See id. at *13.
Therefore, the court should grant the motion to dismiss Hill Meat's claim for misrepresentation with leave to amend.
Id., at *7.
In International Marketing Ltd. v. Archer Daniels Midland Co., No. 97-1328-AS, 1998 WL 1180157 (D. Or. Apr. 10, 1998), the plaintiff agreed to purchase food products from the defendants under a number of contracts. The plaintiff brought an action alleging, among other things, breach of contract and fraud. The court dismissed the plaintiff's fraud claims relating to certain contracts on the ground that
the type of harm alleged is harm caused by defendants' failure to ship the product,
not harm caused by allegedly false representations that products were ready to be shipped. Under the principles discussed above, harm caused by a breach of a promise to ship is actionable through a breach of contract action, not a fraud claim.
Id., at *13.
Here, as in Ashmun, Hill Meat Company, and International Marketing, the injury alleged is one specifically contemplated by the Agreement ( i.e., failure to report the interchange of cars, concealment of the interchange of cars, and failure to pay liquidated damages). The record reflects there is not any "further injury" to BNSF resulting from AERC's alleged actions beyond that contemplated under the Agreement.
Accordingly, the Court concludes BNSF's fraud claim against AERC sounds in contract, and, therefore, the Court grants Defendants' Motion for [Partial] Summary Judgment as to BNSF's fraud claim against AERC.
II. BNSF's fraud claim against Root
In its fraud claim against Root, BNSF alleges:
46.
From July 1, 2004 to October 9, 2007, Root was AERC's sole shareholder. Until October of 2007, Root exclusively and personally controlled and dominated AERC's operations and finances. Root fraudulently concealed and engaged in deceit by failing to disclose that cars originating or terminating at a facility, which before the sale were only open to rail service from BNSF, were being interchanged to Union Pacific. Root engaged in this scheme in order that AERC could avoid paying the liquidated damages to BNSF so that money due to BNSF could be pilfered by Root.
47.
Root perpetrated this artifice by causing fraudulent waybills to be issued for the traffic on which liquidated damages were owed. As principal Root used AERC as his agent to commit and cover up this fraud.
48.
As a direct consequence and proximate result of Root's wrongful conduct, AERC avoided paying BNSF liquidated damages in excess of $900,000. The division of revenues received from the prohibited interchange movements was diverted to Root, and as a result of the inadequate capitalization and milking of corporate assets, AERC is no longer capable of satisfying corporate liquidated damages liability to BNSF. Root's controlling and fraudulent conduct jeopardizes BNSF's ability to seek recovery against AERC.
49.
By intentionally and personally deceiving BNSF regarding the interchange of cars and the liquidated damages that were owed and by using AERC as an agent to perpetrate and conceal the scheme, Root acted with malice, or showed a
reckless or outrageous indifference to a highly unreasonable risk of harm and acted with a conscious indifference to the welfare of BNSF. Accordingly, BNSF is entitled to punitive damages in the amount of $1,000,000.
Second Am. Compl. ¶¶ 46-49.
It is undisputed that "[f]or non-disclosure to form the basis of a fraud claim, defendant must be under a duty to disclose." Paulsell v. Cohen, No. 00-CV-1175-ST, 2002 WL 31496397, at *24 (D. Or. May 22, 2002) (citing Gebrayel v. Transamerica Title Ins. Co., 132 Or. App. 271, 281 (1995)). In addition, a claim for fraud by actual concealment requires the active concealment to be perpetrated by a party to the transaction. Id., at *25 n. 12 (The plaintiff "cannot be held liable based on a theory of concealment simply because he was not a party to the TRM/ReadyCash LP transaction. A fraud claim based on a theory of concealment requires that the defendant be a `party' to the transaction at issue."). See also United States Nat'l Bank of Oregon v. Fought, 291 Or 201, 219 n. 15 (1981) (in an action for fraud by a lender against the accountants of the borrower, the court noted "§ 550 is concerned with the relationship between the parties to a transaction. Defendants were not a `party' to the transaction with plaintiff. We doubt the applicability of § 550.").
Here Defendants contend BNSF may not bring its fraud claim against Root because BNSF has not established that Root had any independent duty to report the interchange of cars, the concealment of the interchange of cars, or the failure to pay liquidated damages. The Court agrees.
BNSF, however, cites a number of cases to support its contention that Root may be held liable in fraud for either failing to disclose or actively concealing the interchange of cars. Each of those cases, however, involve fraud claims against parties to the transactions at issue. Here the record reflects Root was not a party to the Agreement, which was between AERC (before Root owned AERC) and BNSF. To the extent that BNSF seeks to hold Root personally liable for his alleged failure to disclose or for his active concealment of the interchange of cars, BNSF's fraud claim appears to be a part of its claim against Root for misrepresentation/piercing the corporate veil.
Accordingly, the Court grants Defendants' Motion for [Partial] Summary Judgment as to BNSF's fraud claim against Root.
BNSF'S MOTION TO FILE THIRD AMENDED COMPLAINT
At oral argument BNSF attempted to rely on representations allegedly made by Defendants before the STB as a basis for its fraud claims against AERC and Root. At that time the Court noted BNSF had not included these allegations or issues in its Second Amended Complaint or, in fact, in any Complaint filed in this Court. BNSF conceded it raised these allegations and issues as a basis for its fraud claims for the first time in its Memorandum in Opposition to Defendants' Motion for [Partial] Summary Judgment. BNSF also conceded it did not advise Defendants that it intended to make these allegations or raise these issues before filing its Memorandum in Opposition. On July 16, 2010, BNSF filed a Motion to File Third Amended Complaint in which it seeks to additionally support its fraud claims by including allegations as to Defendants' alleged representations before the STB.
The Court, however, notes fact discovery in this matter closed on October 16, 2009 and BNSF was aware of the facts and issues that it seeks to include in a Third Amended Complaint well before Defendants filed their Motion for [Partial] Summary Judgment on February 2, 2010. Nonetheless, BNSF has not adequately explained its failure to seek to amend its Second Amended Complaint before the Court heard oral argument in July 2010.
Accordingly, in the exercise of its case-management discretion to move this matter toward resolution, the Court denies BNSF's Motion to File Third Amended Complaint.
CONCLUSION
For these reasons, the Court GRANTS BNSF's Motion (#81) for [Partial] Summary Judgment, GRANTS Defendants' Motion (#85) for
[Partial] Summary Judgment, DENIES BNSF's Motion (#105) to File a Third Amended Complaint, DISMISSES BNSF's fraud claims against AERC and Root, and DISMISSES Defendants' Fifth through Ninth Affirmative Defenses and all of Defendants' Counterclaims.
The Court notes all previously set case-management dates were stricken to accommodate oral argument and post-hearing briefing regarding the Motions resolved in this Opinion and Order. Thus, the Court will set a new schedule for the filing of the proposed Pretrial Order and a proposed form of verdict; the filing of the trial papers necessary for the Court to conduct the Pretrial Conference; the Pretrial Conference; and a jury trial. The Court directs trial counsel to confer and to propose jointly no later than September 27, 2010, a schedule convenient to the parties, including at least two alternative trial settings for the Court's consideration.
IT IS SO ORDERED.
DATED this 20th day of September, 2010.