Opinion
Civil Action No. 03-11659-PBS, Consolidated with: Civil Action No. 04-10251-PBS.
June 23, 2006
REPORT AND RECOMMENDATION ON CLEAN SEAS COMPANY'S MOTION TO DISMISS
I. INTRODUCTION
The above-captioned consolidated actions involve a dispute over liability for defective marine paint. Defendant Clean Seas Company ("Clean Seas") formulated and patented the paint, and contracted with Suntec Paint, Inc. ("Suntec") to mix the paint. Clean Seas sold the mixed paint to Dolphinite, Inc. ("Dolphinite") pursuant to a Distribution Agreement. Subsequently, Dolphinite resold the paint under its own brand name to numerous wholesale customers, including plaintiff West Marine Products, Inc. ("West Marine"), which in turn sold the paint to end users. Allegedly, the paint failed to perform properly and caused damage, some of which was irreparable, to boats and inflatables to which it was applied.
Dolphinite originally filed suit against Clean Seas and Suntec in state court. The matter was removed to this court in September 2003 and designated Civil Action No. 03-11659-PBS (the "Dolphinite Action"). By its First Amended Complaint, Dolphinite, the originally named plaintiff, sought recovery of costs, damages and attorneys' fees that it had incurred and expected to incur in the future as a result of the allegedly defective paints. Dolphinite also sought injunctive relief compelling Clean Seas to accept returned paints and to indemnify and defend Dolphinite for all pending and future claims against it relating to the paint. Additionally, Dolphinite sought declaratory relief establishing that Clean Seas and Suntec must indemnify it for costs incurred in connection with third-party claims against Dolphinite. In November 2003, Clean Seas filed a motion to dismiss seven of the thirteen counts against it, as well as Dolphinite's claims for injunctive relief and for incidental, consequential, punitive and special damages. However, before any opposition to Clean Seas' motion had been filed, Dolphinite filed a Suggestion of Bankruptcy and a motion to stay the Dolphinite Action, which this court granted.
In February 2004, West Marine and its insurer, United States Fire Insurance Co., filed Civil Action No. 04-10251-PBS (the "West Marine Action") in this court against Dolphinite, Clean Seas and Suntec seeking recovery of amounts that they have incurred and expect to incur as a result of the allegedly defective marine paints. In 2005, after the Bankruptcy Court lifted the automatic stay with respect to proceedings against Dolphinite, this court allowed the motions of Gary W. Cruickshank, the Chapter 7 Trustee for Dolphinite, Inc. ("Trustee"), to be substituted as the appropriately named party in both cases. Additionally, in November 2005, this court ordered that the West Marine Action be consolidated with the Dolphinite Action. Prior to consolidation, Suntec was dismissed from each action for lack of personal jurisdiction.
Currently pending before this court is Clean Seas' renewed motion to dismiss in the Dolphinite Action (Docket No. 23). Specifically, by its motion, Clean Seas is seeking dismissal, pursuant to Fed.R.Civ.P. 12(b)(6), of the counts of Dolphinite's First Amended Complaint alleging breach of implied warranty of merchantability (Count IV), breach of implied warranty of fitness for a particular purpose (Count VI), negligent misrepresentation (Count X), negligence (Count XVI), contractual indemnity (Count XX), and common law indemnity (Count XXI), as well as Count XXII seeking a declaratory judgment establishing Clean Seas' obligation to indemnify the plaintiff for all costs, losses, liabilities, expenses and attorneys' fees incurred in connection with the defense and administration of numerous third-party claims against Dolphinite. In addition, Clean Seas is seeking an order barring the plaintiff's claims for injunctive relief and for consequential, special, indirect, incidental and punitive damages. For the reasons detailed herein, this court recommends to the District Judge to whom this case is assigned that Clean Seas' motion be ALLOWED with respect to Counts IV, VI and XVI of the First Amended Complaint, and the request to strike the claims, if any, for consequential, special, indirect and incidental damages. This court further recommends that the motion be DENIED with respect to Counts X, XX, XXI and XXII of the First Amended Complaint, and the request to strike plaintiff's claim for punitive damages and injunctive relief.
Count XXII was incorrectly labeled a second Count XXI in the Amended Complaint. For convenience, this court will cite the count as Count XXII.
II. STATEMENT OF FACTS
"In considering a motion to dismiss, a court must take the allegations in the complaint as true and must make all reasonable inferences in favor of the plaintiff." Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993). Applying this standard to the instant case, the relevant facts are as follows:
Negotiations Between Clean Seas and Dolphinite
Dolphinite is a Massachusetts corporation which, at all times relevant to this action, was a wholesale distributor of marine products, including boat paints. (Am. Compl. (Docket No. 18) ¶¶ 1, 2). Clean Seas is a Florida company that manufactured marine paints. (Id. ¶¶ 1, 3). In about June 2002, Dolphinite and Clean Seas entered into discussions regarding Dolphinite's potential purchase and distribution of boat hull paint from Clean Seas. (Id. ¶ 8). During these discussions, Clean Seas made express representations to Dolphinite regarding its ability to produce, using a patented process, boat hull paint that had anti-fouling properties to inhibit the growth of marine organisms on boat hulls. (Id. ¶¶ 1, 8). Clean Seas also represented that its paints could be made with ease of application properties, which would enable the paint to be applied without extensive preparatory work, and with speed properties, which would reduce water drag on the vessel. (Id.).
Clean Seas provided Dolphinite with samples of its paints, including clear and colored paints as well as paints to be used on inflatable boats, and represented that the samples had been made using the patented process. (Id. ¶ 9). The samples, when tested, exhibited the desired anti-fouling, speed and ease of application properties, and properly adhered to boat hulls. (Id.). Clean Seas expressly represented and warranted to Dolphinite that it could produce paints containing these properties on a consistent and continuous basis. (Id. ¶ 10).
The Distribution Agreement
Based upon the test results of the samples and Clean Seas' representations, Dolphinite entered into a Distribution Agreement with Clean Seas on about January 10, 2003. (Id. ¶ 11). Pursuant to the Distribution Agreement, Clean Seas agreed to manufacture and sell to Dolphinite boat paints containing the anti-fouling, speed and ease of application properties, and Dolphinite agreed to purchase the paints and distribute them to wholesale customers in the recreational marine market. (Id. ¶ 11; Distribution Agreement, Ex. A to Am. Compl.).
The court may consider, on a motion to dismiss, documents attached to and made a part of the complaint. See Stein v. Royal Bank of Canada, 239 F.3d 389, 392 (1st Cir. 2001).
The plaintiff claims that Clean Seas is obligated to defend it from all claims against Dolphinite arising out of the failure of the paints to perform properly, and to indemnify it for all costs incurred and to be incurred by Dolphinite as a result of those claims. (Am. Compl. ¶¶ 148-166). Clean Seas, by its present motion, is seeking to dismiss the plaintiff's claims for indemnification as premature. The Distribution Agreement contains indemnification provisions, which provide in relevant part:
(i) Subject to sub-Section (ii) below, each party (an "Indemnitor") shall indemnify, defend and hold harmless the other party and its directors, officers, employees and agents and the successors and assigns of any of the foregoing (an "Indemnitee") from any and all claims, losses, costs, liabilities or expenses (including, without limitation, attorneys' fees and other expenses of litigation) resulting from a claim, suit, or proceeding made or brought by a third party against an Indemnitee arising out of (i) any acts or omissions of Indemnitor or its employees and agents in the distribution, promotion, and/or marketing of the Products, or (ii) the negligence or willful misconduct of Indemnitor or its employees and agents.
(ii) Indemnitee shall: (1) promptly notify Indemnitor in writing of any claim, action, suit, or other proceeding for which it is seeking indemnification; (2) provide Indemnitor with sole control of the defense and/or settlement thereof; and (3) provide Indemnitor, at Indemnitor's request and expense, with reasonable assistance and full information with respect thereto. Indemnitee shall have the right to participate, at its own expense, with counsel of its own choosing in the defense and/or settlement of such claim, suit or proceeding. The indemnification obligations of the parties in this Section shall not apply to amounts paid in settlement of any claim, suit or proceeding if such settlement is effected without the consent of Indemnitor, which consent shall not be unreasonably withheld or delayed. . . .
(Distribution Agreement § 2.05(a)).
Clean Seas is also seeking an order striking the plaintiff's claim for certain types of damages. The Distribution Agreement contains a provision entitled "Limitation of Liability," which reads:
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY LOST PROFITS, COST OF SUBSTITUTE GOODS, OR ANY CONSEQUENTIAL, SPECIAL, INCIDENTAL, OR INDIRECT DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, INCLUDING NEGLIGENCE, ARISING OUT OF THIS AGREEMENT, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.
(Distribution Agreement § 2.06). Clean Seas asserts that this provision limits the scope of the damages that the plaintiff may seek from Clean Seas in this action. (Def.'s Mem. (Docket No. 24) at 5-6).
Alleged Failure of the Paints to Perform
Clean Seas, without the knowledge or consent of Dolphinite, subcontracted with Suntec to manufacture the paints. (Am. Compl. ¶ 12). Thereafter, beginning in about January 2003, Clean Seas began shipping the paints to Dolphinite, which marketed them to third-party customers such as marinas, boatyards and marine hardware and supplies dealers. (Id. ¶ 13). Dolphinite claims that Clean Seas knew or should have known that the products were defective in that they did not contain anti-fouling, speed or ease of application properties. (Id. ¶ 14).
Beginning in about March 2003, Dolphinite began to receive complaints from distributors, dealers and consumers about the paint's failure to adhere properly to boat hulls. (Id. ¶ 17). Dolphinite notified Clean Seas about these complaints within a few days after receiving them. (Id. ¶ 18). Clean Seas responded by informing Dolphinite that the problem arose from improper surface preparation and paint application, and sent Dolphinite amended application instructions. (Id. ¶ 19). In reliance upon Clean Seas' representations, Dolphinite distributed the new instructions to end-users of the paint and continued to sell the products. (Id. ¶ 20). However, the amended application instructions did nothing to improve the paint's performance, and by about mid-April 2003, Dolphinite had received over one thousand complaints from customers and consumers regarding the paint's inability to adhere to boat hulls. (Id. ¶¶ 21, 22).
On about April 16, 2003, Dolphinite notified Clean Seas in writing that the paints were defective, and that Dolphinite suspected that the products did not have the same formulation as the samples. (Id. ¶ 23). Again, Clean Seas blamed the problem on inadequate surface preparation and application. (Id. ¶ 24). However, when representatives of the parties met to discuss the adhesion problems on about April 24, 2003, Clean Seas told Dolphinite that the problem was caused by the freezing of a shipment of paints during transport. (Id. ¶ 25). On the basis of this representation, Dolphinite informed its customers that the adhesion problems had been caused by freezing while in transport, paid all outstanding invoices from Clean Seas, ordered additional paints from Clean Seas, and continued to sell the products to customers. (Id. ¶ 27).
During June 2003, Dolphinite received continuing complaints about the paints' adhesion problems, as well as complaints that the paints did not have anti-fouling, speed or ease of application properties. (Id. ¶¶ 28, 29). Consequently, Dolphinite arranged for the paints to be tested and compared to the samples. (Id. ¶ 30). The testing revealed discrepancies in formulation and chemical composition between the samples and the paints that Clean Seas had provided for sale. (Id. ¶ 31). These discrepancies caused the products to fail to perform properly. (Id.).
Subsequently, some of the complaints against Dolphinite developed into lawsuits. (Id. ¶ 35). In particular, Dolphinite was named as a defendant in a class action lawsuit by end users of the paints. (Id.). Additionally, in July 2003, Dolphinite received a claim notice from its largest paint customer, West Marine, stating that the products were failing routinely. (Id. ¶¶ 34, 35). West Marine later named Dolphinite as a defendant in the West Marine Action.
Notwithstanding demands by Dolphinite, Clean Seas has refused to indemnify or defend Dolphinite with respect to any of the claims against it by consumers, retailers and distributors concerning the defective paints. (Id. ¶¶ 32, 33, 35). Clean Seas also has refused to accept the return of paints remaining in Dolphinite's possession. (Id. ¶ 35a). The plaintiff claims that as a result of Clean Seas' actions, Dolphinite has suffered various damages including, inter alia, amounts paid to Clean Seas for defective paint; costs incurred to test, market, sell, ship and store the product; costs incurred in handling claims and complaints; loss of sales, good will and other business opportunities; attorneys' and other professionals' fees; penalties paid on lines of credit and other debt; costs incurred in connection with refused and returned product; and the cessation of all ongoing business activity. (Id. ¶ 35b).
III. ANALYSIS
A. The Economic Loss Doctrine
Clean Seas has moved to dismiss the plaintiff's breach of implied warranty claims, as well as the claims for negligent misrepresentation and negligence, on the grounds that they are barred by the economic loss doctrine. The Trustee has presented no arguments in opposition to the motion to dismiss the warranty and negligence claims, and Counts IV, VI and XVI should be dismissed. The Trustee does assert, however, that Massachusetts has adopted an exception to the economic loss doctrine for economic losses resulting from negligent misrepresentation. The question whether the economic loss rule can be applied to preclude negligent misrepresentation claims remains unsettled in Massachusetts, as a result of which this court recommends that the motion to dismiss Count X be denied.
Application of the Economic Loss Doctrine to Negligence and Warranty Claims
"[T]he economic loss doctrine provides that purely economic losses are not recoverable in negligence and strict liability actions in the absence of personal injury or damage to property other than the product itself." Sebago, Inc. v. Beazer East, Inc., 18 F. Supp. 2d 70, 89 (D. Mass. 1998), and cases cited. The economic loss doctrine reflects certain underlying policy rationales that are applicable to cases involving the sale of an allegedly defective product, including that "where a commercial product injures itself and nothing or no one else, there is no need to create a product liability cause of action independent of contract obligation." Cummings v. HPG Int'l, Inc., 244 F.3d 16, 24 (1st Cir. 2001) (discussing adoption of the economic loss rule in Massachusetts). See also Sebago, 18 F. Supp. 2d at 89-90 (describing rationales underlying economic loss doctrine). Thus, the economic loss rule "draws a distinction between the situation where the injury suffered is merely the `failure of the product to function properly,' and the situation, traditionally within the purview of tort law, where the plaintiff has been exposed, through a hazardous product, to an unreasonable risk of injury to his person or property." Sebago, 18 F. Supp. 2d at 89-90 (quoting East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 868, 106 S. Ct. 2295, 2300, 90 L. Ed. 2d 865 (1986)).
The economic loss doctrine applies not only to the negligence claim against Clean Seas, but also to the claims for breach of implied warranty of merchantability and breach of implied warranty of fitness for a particular purpose. This is because under Massachusetts law, the theory of breach of implied warranty is essentially the same as strict liability in tort. See Guzman v. MRM/Elgin, 409 Mass. 563, 569, 567 N.E.2d 929, 932 (1991); Wolfe v. Ford Motor Co., 386 Mass. 95, 97-98, 434 N.E.2d 1009-10 (1982); Mattoon v. City of Pittsfield, 56 Mass. App. Ct. 124, 140, 775 N.E.2d 770, 783 (2002). Accordingly, the claims set forth in Counts IV, VI and XVI of the First Amended Complaint all are subject to the rule.
Dolphinite did not allege, and the Trustee does not argue, that Clean Seas caused Dolphinite any personal injury or property damage. In the absence of any allegations that the plaintiff suffered any harm other than purely economic losses, the negligence and breach of implied warranty claims cannot survive.See FMR Corp. v. Boston Edison Co., 415 Mass. 393, 394, 613 N.E.2d 902, 903 (1993) (affirming summary judgment in favor of defendant on negligence and warranty claims where plaintiff's damages were solely economic). Accordingly, this court recommends that Counts IV, VI and XVI be dismissed.
Application of the Economic Loss Doctrine to Claims for Negligent Misrepresentation
The parties disagree as to the viability of the plaintiff's claim for negligent misrepresentation in light of the economic loss doctrine. The Trustee argues that under Massachusetts law, there is an exception to the economic loss doctrine that permits recovery for economic losses resulting from negligent misrepresentation, and that therefore, Clean Seas' motion to dismiss the claim should be denied. Clean Seas argues that this court should adopt the reasoning of the Sebago court, which predicted that the Massachusetts Supreme Judicial Court ("SJC") would maintain an exception to the economic loss doctrine for negligent misrepresentation claims, but not if those claims arose as a result of an allegedly defective product. This court concludes, based on the case law that has been decided since Sebago, that it remains unclear how the SJC is likely to rule on the issue. Consequently, this court recommends that the motion to dismiss be denied with respect to the claim for negligent misrepresentation.
"Massachusetts has not expressly decided whether the economic loss doctrine bars claims of negligent misrepresentation where the damages result from a defective product." Sebago, 18 F. Supp. 2d at 95. See also Computer Sales Int'l, Inc. v. Lycos, Inc., No. Civ.A. 05-10017 RWZ, 2005 WL 3307507, at * 6 (D. Mass. Dec. 6, 2005) (unpublished opinion) ("it remains unclear whether Massachusetts courts would apply the economic loss doctrine to claims of negligent misrepresentation that induced the plaintiff to purchase a product"). In Sebago, the court predicted that Massachusetts would adopt a rule similar to those jurisdictions that have created "an exception to the economic loss doctrine's ban against negligent misrepresentation claims, but only for cases that do not involve an allegedly defective product." Sebago, 18 F. Supp. 2d at 96. Thus, after reviewing the case law from this and other jurisdictions, as well as the policies underlying the economic loss doctrine, theSebago court concluded, "it is reasonably clear that the Massachusetts SJC would hold that the economic loss doctrine bars negligent misrepre-sentation claims where the damages stem from an allegedly defective product." Id. at 97.
Approximately two months after Sebago was decided, however, the Massachusetts Appeals Court issued a decision in which it stated that "[a]n exception to the [economic loss] doctrine permits recovery for economic losses resulting from negligent misrepre-sentation." Nota Constr. Corp. v. Keyes Assoc., Inc., 45 Mass. App. Ct. 15, 20, 694 N.E.2d 401, 405 (1998). AlthoughNota did not involve a defective product, the Appeals Court did not make any distinction between negligent misrepresentation claims arising out of the sale of a product and those arising out of the provision of services. Id. Massachusetts courts that have relied on Nota similarly have not acknowledged any such distinction. See 695 Atlantic Ave. Co., LLC v. Commercial Constr. Consulting, Inc., 64 Mass. App. Ct. 1109, 834 N.E.2d 322, 2005 WL 2291192 *3 (Mass.App.Ct. Sept. 20, 2005) (unpublished opinion); Josefek v. Loitherstein Envtl. Eng'g, Inc., 18 Mass. L. Rptr. 663, 2004 WL 3218004 *2 (Mass.Super. Dec. 31, 2004) (unpublished opinion). Consequently, in a case involving the sale of allegedly defective roofs, the First Circuit, after acknowledging "the thoughtful analysis of the question contained in Sebago" and the subsequent decision of the Appeals Court in Nota, concluded that "[i]t is not clear to us which route Massachusetts will take as to the application of the economic loss doctrine to negligent misrepresentation claims." Cummings, 244 F.3d at 24.
Given the present status of the case law, this court concludes that the question of whether the SJC would adopt a rule banning claims for negligent misrepresentation arising out of the sale of an allegedly defective product remains unresolved, and this court cannot predict with any certainty that Massachusetts will adopt the analysis of Sebago. Therefore, this court recommends that Clean Seas' motion to dismiss Count X of the Amended Complaint be denied at this time.
B. Claims for Indemnification
Clean Seas also seeks dismissal of the plaintiff's indemnity claims, including Count XX for contractual indemnity, Count XXI for common law indemnity and Count XXII for a declaratory judgment regarding Clean Seas' obligation to indemnify Dolphinite for all costs, losses, liabilities, expenses and attorneys' fees incurred in connection with the defense and administration of third-party claims against it. As grounds for its motion, Clean Seas asserts that these claims are not yet ripe for adjudication because Dolphinite's underlying liability has not yet been fixed. Accordingly, Clean Seas' motion does not challenge the sufficiency of the claims, but instead raises a question as to whether the claims are premature. This court finds that in light of the parties' contractual agreements, the indemnity issue is ripe for adjudication and recommends that the motion to dismiss these claims be denied. This court does recognize, however, that the status of the third-party claims against Dolphinite will affect the scope of the indemnification obligations, if any, Clean Seas may have. Therefore, the ripeness issue may be appropriately revisited later in this litigation.
The Ripeness Doctrine
"Ripeness doctrine is grounded in both Article III concepts and discretionary reasons of policy. The central concern is whether the case involves a merely hypothetical dispute." Massachusetts Assoc. of Afro-American Police, Inc. v. Boston Police Dept., 973 F.2d 18, 20 (1st Cir. 1992). In order to determine whether a claim is ripe for adjudication, the court must consider "the `fitness of the issues for judicial decision' and `the hardship to the parties of withholding court consideration.'"Id. (quoting Pacific Gas Elec. Co. v. State Energy Res. Conservation Dev. Comm'n, 461 U.S. 190, 201, 103 S. Ct. 1713,1720, 75 L. Ed. 2d 752 (1983)). "The critical question concerning fitness for review is whether the claim involves uncertain and contingent events that may not occur as anticipated, or indeed may not occur at all." Id. Thus, where a claim is contingent upon the outcome of another action in another court, the claim will not be ripe for resolution. Lincoln House, Inc. v. Dupre, 903 F.2d 845, 847 (1st Cir. 1990).
Claim for Contractual Indemnity
The plaintiff's claim for contractual indemnity is based upon the indemnity provision of the Distribution Agreement between Dolphinite and Clean Seas. (Am. Compl. ¶¶ 147-154). The indemnity provision provides that after receipt of a prompt, written notice of any "claim, action, suit, or other proceeding" from the party seeking indemnification, a party must "indemnify, defend and hold harmless the other party . . . from any and all claims, losses, costs, liabilities or expenses" resulting from third-party claims against the indemnitee "arising out of (i) any acts or omissions of Indemnitor or its employees and agents in the distribution, promotion, and/or marketing of the [marine paints], or (ii) the negligence or willful misconduct of the Indemnitor or its employees and agents." (Distribution Agreement § 2.05(a)). Pursuant to this provision, the Trustee is seeking not only indemnification, but also enforcement of the obligation to defend against any third-party claims and proceedings against Dolphinite. (Am. Compl. ¶¶ 151, 152; Pl.'s Mem. at 6-10).
The duty to defend under the Distribution Agreement is not contingent upon the outcome of the underlying claims, and therefore, the contractual indemnity claim is not premature. Under Massachusetts law, "[c]ontracts of indemnity are to be fairly and reasonably construed in order to ascertain the intention of the parties and to effectuate the purpose sought to be accomplished. Courts are expected to give effect to the parties' intentions at the time of the agreement and to give them reasonable meaning." MacGlashing v. Dunlop Equip. Co., Inc., 89 F.3d 932, 940 (1st Cir. 1996) (alteration in original) (internal quotations and citations omitted). Pursuant to the plain language of the indemnity provision of the Distribution Agreement, a party is obligated to assume the defense of any third-party claims and indemnify the other party after notice of the claims from the party seeking indemnification. Moreover, when the agreement is reasonably construed, it is apparent that these obligations are intended to arise immediately upon written notification, and not after the underlying claims have been resolved. In particular, the Distribution Agreement requires that the indemnitee "provide Indemnitor with sole control of the defense and/or settlement" of third-party claims against the indemnitee. (Distribution Agreement § 2.05(a)(ii)). It also provides that "[t]he indemnification obligations of the parties in this Section shall not apply to amounts paid in settlement of any claim, suit or proceeding if such settlement is effected without the consent of Indemnitor. . . ." (Id.). Therefore, the parties clearly intended that the indemnifying party assume responsibility of any third-party claims without delay.
Although the parties dispute who caused the problems with the paint and, consequently, whether the third-party claims against Dolphinite arose out of any actions of Clean Seas that are sufficient to trigger the duty to indemnify and defend Dolphinite under the terms of the Distribution Agreement, these issues will be resolved in this litigation. Accordingly, the claim for contractual indemnity set forth in Count XX of the Amended Complaint is ripe for adjudication.
Claim for Common Law Indemnity
The parties make no distinction between the three counts for indemnification vis-àvis the issue of ripeness. In light of this court's determination that the contract-based claim for indemnification is appropriately included in this litigation, it is most efficient to maintain all the counts relating to indemnification at this point. Subsequent events may render a decision as to Clean Seas' indemnification obligations premature with respect to specific claims brought (or anticipated) against Dolphinite. The ripeness of all claims can be addressed later in this litigation.
"Whether an indemnification issue is ripe for adjudication depends on the facts and circumstances of the case under consideration." Armstrong v. Alabama Power Co., 667 F.2d 1385, 1388 (11th Cir. 1982) (quoting A/S Ludwig Mowinckles Rederi v. Tidewater Constr. Corp., 559 F.2d 928, 932 (4th Cir. 1977)). "Ordinarily, [a party] would not be entitled to indemnification or any other recovery for the anticipated amount of its liability to [a third party] until that liability is fixed by, for example, entry of final judgment." Oxford Shipping Co., Ltd. v. New Hampshire Trading Corp., 697 F.2d 1, 7 (1st Cir. 1983). Thus, before the instant litigation is finally resolved, the status of the claims against Dolphinite should be reviewed. Then, an appropriate procedure may be developed for addressing such claims. See id. at 8 (it may be appropriate for court to order indemnification for damages already incurred but defer the entry of an award for anticipated liability "until that liability is firmly established, if in fact, it is").
Claim for Declaratory Judgment
Clean Seas also has moved to dismiss, on ripeness grounds, Count XXII of the Amended Complaint, which asserts a claim for a declaratory judgment regarding Dolphinite's right to contractual and common law indemnity from Clean Seas. (Am. Compl. ¶¶ 162-65). This court finds that the claim for a declaratory judgment is not premature.
The test for determining whether a declaratory judgment claim is ripe is the same as the test employed for other claims. See State of R.I. v. Narragansett Indian Tribe, 19 F.3d 685, 692 (1st Cir. 1994). Therefore, the court must consider whether the issue is fit for review, and "the question of hardship, a question which typically turns upon whether the challenged action creates a direct and immediate dilemma for the parties." Id. Moreover, the key consideration remains the extent to which the claim involves uncertain and contingent events. Id. However, as the First Circuit has stated,
[a]pplying this test in the declaratory judgment context often requires custom tailoring, for there are at least two salient differences between declaratory actions and the mine-run of other cases: first, declaratory relief is more likely discretionary; and, second, declaratory actions contemplate an " ex ante determination of rights" that "exists in some tension with traditional notions of ripeness."Id. (quoting Step-Saver Data Sys., Inc. v. Wyse Tech., 912 F.2d 643, 647 (3d Cir. 1990)). When viewed in the context of the declaratory judgment claim, the plaintiff's request for an adjudication of the parties' indemnification obligations is ripe.
"The linchpin of ripeness under the Declaratory Judgment Act, as in all Article III cases, is adverseness." Id. at 692. In order to fulfill the adverseness requirement, the plaintiff must show "that `the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.'" Id. (quotingMaryland Cas. Co. v. Pacific Coal Oil Co., 312 U.S. 270, 273, 61 S. Ct. 510, 512, 85 L. Ed. 826 (1941)). Adverseness must be evaluated based on the circumstances of the particular case.Id. Although "a declaratory judgment should not be granted in speculative situations, a litigant does not have to await the consummation of threatened injury to obtain preventive relief. If the injury is certainly impending that is enough." Id. (internal quotations and citations omitted).
Here, the facts alleged in the Amended Complaint demonstrate that there is a substantial controversy between the parties that is sufficiently immediate to warrant declaratory relief. Although the underlying third-party claims against Dolphinite are as yet unresolved, according to the allegations, at least some of those claims have developed into lawsuits, including a class action lawsuit, and are currently pending. (Am. Compl. ¶ 35). Moreover, Dolphinite has already incurred costs and expenses in connection with third-party claims, including those that are in litigation. (Id. ¶ 35b). Consequently, there is no need to speculate as to whether Dolphinite will in fact incur costs for which the Trustee is seeking indemnification. Under these circumstances, a declaration regarding the parties' common law and contractual indemnity obligations would not be based simply "upon a hypothetical state of facts." Narragansett Indian Tribe, 19 F.3d at 693 (quotations and citation omitted). Moreover, a declaratory judgment regarding the parties' obligations would be useful to the parties because it would enable them to decide how to proceed with future claims. See id. (hardship inquiry should focus on the whether granting relief would serve a useful purpose).
For these reasons, this court recommends that Clean Seas' motion to dismiss the indemnification claims — Counts XX, XXI and XXII — be denied.
C. Claims for Damages
As set forth in the Amended Complaint, the plaintiff is seeking compensatory, incidental, consequential, punitive and treble damages against Clean Seas. (Am. Compl., Prayer for Relief ¶ B). By its motion, Clean Seas has moved to strike the plaintiff's demand for "incidental, consequential, punitive and special damages" on the grounds that the Distribution Agreement precludes recovery by one party against the other for any such damages. (Def.'s Mem. at 5-6). The Trustee agrees that the Distribution Agreement excludes certain of these damages, but contends that the parties did not agree to limit any claims for punitive or treble damages. (Pl.'s Mem. at 10). Because the parties have unambiguously agreed to preclude any liability to one another for consequential, special, indirect and incidental damages, this court agrees that the plaintiff's claims for any such damages should be stricken. However, because Clean Seas has not established that the parties intended to limit claims for punitive damages, its motion should be denied with respect to those damages.
The Complaint does not specifically seek special damages, which are "damages that arise from the special circumstances of the case, which, if properly pleaded, may be added to the general damages which the law presumes or implies from the mere invasion of the plaintiff's rights. Special damages are the natural, but not necessary, result of an injury. Thus, they are not implied by law, and while they need not be the necessary and usual result of the wrong, they must be a proximate result thereof." 22 Am. Jur. 2d, Damages § 40 (Aug. 2005).
The Distribution Agreement provides that "in no event shall either party be liable to the other for . . . any consequential, special, incidental, or indirect damages" that arise out of the Agreement. (Distribution Agreement § 2.06). "Where the language of a contract is unambiguous, the words will be given their plain or well-established meaning." Northern Assoc., Inc. v. Kiley, 57 Mass. App. Ct. 874, 879, 787 N.E.2d 1078, 1083 (2003). Thus, the unambiguous language of the Distribution Agreement precludes the plaintiff's claim for such types of damages. However, it does not clearly bar any claim for the punitive, including treble, damages which Dolphinite is seeking, and Clean Seas has not presented any evidence that the parties intended to preclude such damages. "Punitive damages are not consequential damages." Roy Ryden Anderson, 2 Damages Under the Uniform Commercial Code, § 11:36 (2005). Nor are they "incidental damages" which are intended to reimburse the aggrieved party for expenses reasonably incurred as a result of a breach of the contract. See 77A C.J.S. Sales, § 363 (May 2006). Punitive damages are also not special damages as they are not damages which proximately flow from the harm. See note 3,supra. Finally, Clean Seas does not argue, and nothing in the Amended Complaint or the Distribution Agreement suggests, that the parties intended for "indirect" damages to encompass punitive damages.
Accordingly, Clean Seas' motion to strike should be allowed to the extent that it seeks to strike any demand for consequential, special, incidental or indirect damages, but should otherwise be denied with respect to the claims for punitive and treble damages.
D. Claim for Injunctive Relief
Finally, Clean Seas is seeking to bar the plaintiff's claim for preliminary and permanent injunctive relief. Specifically, the plaintiff is seeking "[p]reliminary and permanent injunctive relief compelling Clean Seas [to] indemnify and defend Dolphinite for all pending and future claims relating to the [paints], and to accept and indemnify Dolphinite for return of the [paints] remaining in the possession of Dolphinite and their customers[.]" (Am. Compl., Prayer for Relief ¶ H). Clean Seas asserts that this claim should be barred because the plaintiff has not alleged that in the absence of injunctive relief, it will suffer irreparable harm for which a remedy at law would be inadequate. At this juncture, it is premature for the court to determine whether injunctive relief may be an appropriate remedy. Therefore this court recommends that Clean Seas' request to strike the demand for injunctive relief be denied.
When considering a party's request for a preliminary injunction, the court must consider, among other factors, "the potential for irreparable harm if the injunction is denied[.]"Ross-Simons of Warwick, Inc. v. Baccarat, Inc., 102 F.3d 12, 15 (1st Cir. 1996). Ordinarily, irreparable harm can be established "if the plaintiff shows that its legal remedies are inadequate." Id. at 18. This requirement is satisfied where "the plaintiff suffers a substantial injury that is not accurately measurable or adequately compensable by money damages. . . ." Id. at 19. Similarly, a plaintiff seeking a permanent injunction must demonstrate, among other things, that "it has suffered an irreparable injury" and "that remedies available at law, such as monetary damages, are inadequate to compensate for that injury[.]" Ebay Inc. v. Mercexchange, L.L.C., 126 S. Ct. 1837, 1839 (2006).
While including a prayer for injunctive relief in its complaint, the plaintiff has not formally moved for an injunction or otherwise asked the court to determine whether injunctive relief is appropriate. See Fed.R.Civ.P. 65. However, Dolphinite has alleged that Clean Seas has improperly failed to assume the defense of pending and future claims brought by consumers of allegedly defective paint. If it is determined that Clean Seas wrongfully failed to assume the defense of such claims, and refuses to do so voluntarily, injunctive relief may be appropriate. Therefore, this court finds that the request to strike the claim for injunctive relief is premature and should be denied.