EMR Inc. v. Goldberg

Background

EMR (USA Holdings) Inc. sued Ken Goldberg and Neil Goldberg concerning a 2011 agreement under which the Goldbergs sold a scrap-metal-recycling business and its assets to EMR for more than $100 million. The agreement gave EMR exclusive ownership of specified confidential information and required the Goldbergs not to use that information for themselves or anyone else. EMR alleged that Ken later started Geomet Recycling with his son and used, or caused others to use, the confidential information for Geomet’s benefit.

The court had previously allowed EMR’s claim for specific performance against Ken to proceed but dismissed EMR’s indemnity claims against both Goldbergs as unripe because EMR had not established an underlying liability for which it could seek indemnity. EMR then moved under Federal Rule of Civil Procedure 15 to file a proposed amended complaint adding a breach-of-contract claim against Ken and requesting rescission and other damages. The proposed complaint also named Neil in connection with the rescission and rescissory-damages requests.

A separate Texas lawsuit involved trade-secret and other tort claims arising from alleged misuse of confidential information. The court noted that the Texas appellate decision on which the Goldbergs relied had been withdrawn and replaced, and that the Texas litigation did not involve the same contract claims or provide a substitute for the relief EMR sought in this case.

Arguments and analysis

The Goldbergs argued that amendment would be futile, meaning the proposed claims could not survive a motion to dismiss. They contended that the sale agreement made indemnification the exclusive remedy, that the Texas case required dismissal or a stay under the rule governing parallel state and federal proceedings, and that the proposed contract claim was barred by the withdrawn Texas appellate decision. They also challenged the claims against Neil, the allegations that Ken breached the agreement, the requests for rescission and several types of damages, and the possibility of double recovery.

The court rejected these arguments in large part. It concluded that the agreement did not unambiguously bar the proposed breach-of-contract claim. The court also found that the federal and Texas actions were not sufficiently parallel because the Texas case concerned state-law trade-secret and other tort claims and could not resolve all of EMR’s contract claims. Neil could remain a party because the agreement made the sellers jointly and severally responsible for certain obligations, and because a party may be necessary to a rescission claim even if no separate wrongdoing is alleged against that party.

Applying the pleading standard for a motion to dismiss, the court found that EMR alleged a contract, its own performance, Ken’s alleged breach of the confidentiality provisions, and resulting damages. The court allowed the claims for rescission, supplier-related damages, benefit-of-the-bargain damages, and reliance damages to proceed at the pleading stage. It held that questions about whether rescission was timely, whether the parties could substantially restore the prior situation, and whether EMR had an adequate legal remedy required factual development. It also held that collateral estoppel, which can prevent relitigation of an issue already finally decided, did not apply because the relied-on Texas decision had been withdrawn and there was no final merits decision.

The court did, however, reject EMR’s request for consequential damages. The proposed complaint did not identify the specific consequential damages sought, so the request did not satisfy Federal Rule of Civil Procedure 9(g), which requires special damages to be stated specifically. The court distinguished those damages from benefit-of-the-bargain damages, which it treated as general damages and allowed to remain.

The court also rejected the Goldbergs’ arguments that EMR acted in bad faith, that the amendment was too late, or that it would cause undue prejudice. EMR sought amendment less than 30 days after the earlier decision and appeared to be attempting to address the problem identified in that decision. The Goldbergs did not show that the amendment would impose an undue burden beyond ordinary litigation expense.

Ruling

Judge Edgardo Ramos granted in part and denied in part EMR’s motion to amend. The motion was denied with respect to the request for consequential damages, but was otherwise granted. EMR was directed to file its amended complaint by July 21, 2020. The order addressed only whether EMR could amend its pleading; it did not decide whether Ken or Neil breached the agreement or whether EMR would ultimately recover any damages.