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Nordetek Environmental, Inc., et al. v. Rdp Technologies

May 16, 2012


The opinion of the court was delivered by: Dalzell, J.


As we noted in an earlier memorandum, see Nordetek Envtl., Inc. v. RDP Tech., Inc., 677 F. Supp. 2d 825 (E.D. Pa. 2010), this case arises from the venom between two brothers, Paul G. ("Paul") and Richard ("Dick") Christy. Together for decades they ran a successful company, RDP Technologies, Inc. ("RDP"), before enmity between them led Paul to leave the company, start his own firm, Nordetek Environmental, Inc. ("Nordetek"), and attempt to compete against RDP -- all in alleged violation of his fiduciary duties to his family's company and a non-competition provision in a shareholder agreement.

Thus it was that plaintiffs and counterclaim defendants Nordetek and Paul on October 14, 2009 filed suit against defendant and counterclaim plaintiff RDP, asserting claims for patent infringement, false designation of origin, false advertising, and trade infringement. They shortly thereafter filed a motion for preliminary injunction, to which RDP responded with its own preliminary injunction motion. After a hearing, we denied Nordetek and Paul's motion for preliminary injunction and granted RDP's motion for one. Id. After further briefing, we granted RDP's motion for summary judgment with respect to all of Nordetek and Paul's claims against it. Aug. 9, 2010 Order (docket entry # 110). But by this time RDP had filed counterclaims against Nordetek and Paul -- including claims for breach of fiduciary duty and breach of contract -- which the counterclaim defendants unsuccessfully moved to dismiss. Moreover, several months after the entry of our preliminary injunction against Paul, RDP moved to hold Paul in contempt for violating the injunction -- a motion that we granted. June 11, 2010 Order (docket entry # 100).

After those battles this case settled into relative quiet for a time, as the parties first attempted (unsuccessfully) to mediate their claims before Judge Jacob P. Hart, and then participated in arbitration proceedings before our former colleague, the Hon. Edward N. Cahn, aimed at fixing a value of RDP to determine how much Paul's shares in RDP were worth at the time he resigned. Judge Cahn issued a decision in that arbitration about a year ago and offered to help the parties mediate the rest of their claims. While the parties accepted this gracious offer, Judge Cahn's efforts at mediation were unavailing, leading us to set a schedule for discovery and motion practice regarding the remaining counterclaims in this case.

RDP has now filed a motion for summary judgment with respect to its counterclaims for breach of fiduciary duty and breach of contract, a motion to hold Lisa Christy ("Lisa"), Paul's wife, in contempt and a motion to enjoin a second arbitration that Paul has initiated. Paul and Nordetek have filed a motion for summary judgment regarding seven of RDP's ten counterclaims, as well as a motion to preclude the expert testimony of J. Mark Penny that RDP has proffered.

RDP restricts its motion for summary judgment to a subset of its counterclaims explaining that it "is willing to liquidate the entirety of its damages to $5,165,000, i.e., those resulting from Paul Christy's breaches of his fiduciary duty and contractual obligations."*fn1 RDP's Mot. Summ. J. ("RDP's MSJ") at 3 n.2. With respect to liability for Paul's alleged breach of fiduciary duty, RDP argues that "collateral estoppel applies to findings made in arbitration proceedings, as well as in litigation," id. at 5, and suggests that since Judge Cahn found that Paul "'devised a plan that was intended to harm RDP,'" id. at 8 (quoting Ex. 604 to RDP's MSJ ("Cahn Opinion") at 4), RDP is entitled to summary judgment on that claim. Id. at 10. RDP also points to evidence presented in the arbitration proceedings that it says demonstrates Paul's alleged breach. Id. at 9-10. With respect to liability for Paul's alleged breach of his non-competition obligation, RDP notes that this Court has found that Paul competed with RDP, so that it is entitled to summary judgment on this claim as well. Id. at 11, Finally, with respect to damages, RDP argues that because (1) "Judge Cahn found that the value of RDP prior to a deduction for Paul Christy's bad acts was $6,490,000," id. at 14, (2) RDP's expert Edward Wilusz set "the value of RDP following Paul Christy's bad acts" at $1,325,000, id. at 15, and (3) "[a]fter hearing all of the evidence, Judge Cahn credited Wilusz's report, and rejected Paul Christy's challenges to it," id., RDP is therefore "entitled to $5,165,000 -- the difference in RDP's value." Id.

As for Paul and Nordetek, they contend in their motion for summary judgment that "Judge Cahn found, and RDP is collaterally estopped from challenging, [that] RDP has not -- and cannot -- show any damages were caused to it by Paul Christy's conduct." Nordetek's Mot. Summ. J. ("Nordetek's MSJ") at 1. Since causation and damages "are both elements of [RDP's] Counts I-IV and VI-VIII," Paul and Nordetek argue that "RDP cannot establish the existence of the elements of its claims and summary judgment is appropriate." Id. Paul and Nordetek further assert that "the only evidence of economic damages RDP has provided for any of its counterclaims rests entirely on Penny's unreliable and irrelevant expert opinion." Id. at 9. Since as counterclaim defendants they move for the preclusion of this testimony pursuant to Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 589 (1993), Paul and Nordetek suggest that they are entitled to summary judgment.

As this canvass of these motions makes clear, the two pending motions for summary judgment and motion to preclude expert testimony involve related issues. We will thus examine these motions together, considering each pertinent issue in turn, before pivoting to resolve RDP's motions to hold Lisa in contempt and enjoin Paul's second arbitration.

I. The Parties' Arguments Respecting Collateral Estoppel

We first consider the parties' respective efforts to use Judge Cahn's Opinion and Award to collaterally estop their opponents and secure summary judgment. We begin by reviewing the outlines of collateral estoppel doctrine in Pennsylvania.

As the Supreme Court of Pennsylvania explained in Safeguard Mut. Ins. Co. v. Williams, 345 A.2d 664, 668 (Pa. 1975), [A] plea of collateral estoppel is valid if, 1) the issue decided in the prior adjudication was identical with the one presented in the later action, 2) there was a final judgment on the merits, 3) the party against whom the plea is asserted was a party or in privity with a party to the prior adjudication, and 4) the party against whom it is asserted has had a full and fair opportunity to litigate the issue in question in a prior action.

While this language suggests that only four requirements need be met in order for the doctrine to apply, an array of case law makes clear that in addition "[t]he identical issue must have been necessary to final judgment on the merits." Balent v. City of Wilkes-Barre, 669 A.2d 309, 313 (Pa. 1995). See also, e.g., City of Pittsburgh v. Zoning Board of Adjustment of Pittsburgh, 559 A.2d 896, 901 (Pa. 1989) ("Collateral estoppel applies if . . . the determination in the prior proceeding was essential to the judgment."); Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 327 n.5 (1979) ("Under the doctrine of collateral estoppel . . . the second action is upon a different cause of action and the judgment in the prior suit precludes relitigation of issues actually litigated and necessary to the outcome of the first action."); Witkowski v. Welch, 173 F.3d 192, 203 n.15 (3d Cir. 1999) ("Some Pennsylvania courts state that there are actually five -- instead of four -- elements to the issue preclusion doctrine. The fifth element requires that the determination of an issue in the prior case must have been 'essential' to the previous judgment. . . . In any event, the doctrine is essentially the same under either analysis."); Irizarry v. Office of General Counsel, 934 A.2d 143, 151 (Pa. Commw. Ct. 2007) ("If the parties to an action have had an opportunity to appear and be heard in a prior proceeding involving the same subject matter, all issues of fact which were actually adjudicated in the former action and essential to the judgment therein are concluded as between the parties.") (quoted in RDP's MSJ Reply at 2).

RDP attempts to apply the doctrine of collateral estoppel to bar Paul and Nordetek from challenging (1) Wilusz's $1,325,000 valuation of RDP and (2) the contention that Paul violated his fiduciary duty to RDP. Given the requirements of the doctrine, there are at least two problems with RDP's first application of the collateral estoppel doctrine.

To begin, though RDP claims that "Judge Cahn rejected all challenges to Wilusz's $1,325,000 valuation," RDP's MSJ at 13 n.13 (citing Cahn Opinion at 7), and that "Judge Cahn credited Wilusz's report" as to "RDP's worth after Paul Christy began competing -- and after he convinced Stephansen to purport to cancel RDP's license," id. at 15 (citing Cahn Opinion generally without pin citation), this simply is not true. RDP points to no language from Judge Cahn's Opinion and Award suggesting that he accepted Wilusz's $1,325,000 valuation of RDP, and our own parsing of the Opinion -- including the passages RDP cites --reveals no language even hinting at such acceptance. Indeed, as we note below, Judge Cahn rejected the suggestion that he determine RDP's value following Paul's alleged wrongful conduct, and instead explained that he would "evaluate RDP without any deduction for Paul's conduct and leave for determination in Judge Dalzell's Court an assessment of the damages allegedly caused by Paul both before and after his resignation." Cahn Opinion at 7.

We are, in truth, puzzled by how RDP's counsel can so confidently assert a proposition that finds no support in the record and appears to be false. More seriously, this flat-footed stance brings into play Fed. R. Civ. P. 11(b), which states that "[b]y presenting to the court a pleading, written motion, or other paper -- whether by signing, filing, submitting, or later advocating it -- an attorney or unrepresented party certifies that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances: . . . (3) the factual contentions have evidentiary support . . . ."*fn2

In any case, even if Judge Cahn had credited Wilusz's $1,325,000 valuation, Paul and Nordetek would still not be estopped from challenging this valuation -- for any determination respecting this valuation was not "necessary to [Judge Cahn's] final judgment." Balent, 669 A.2d at 313. In fact, Judge Cahn explicitly noted that he would not evaluate the effect of Paul's acts on RDP's valuation and the passage warrants quoting at length:

My assignment is complicated by the fact that RDP has damage claims against Paul currently pending before Judge Dalzell. . . . I had originally intended, as confirmed by my remarks at Oral Argument, to include in my decision as to the value of RDP some consideration of Paul's acts to harm the company. I was going to weave into my decision Paul's acts up to September 18, 2009, the date of his resignation. That approach would leave for Judge Dalzell's determination an assessment of any damages caused by Paul after September 18, 2009. When I attempted to make decisions using that approach, I realized that it would be very difficult to segregate the impact of Paul's conduct before and after September 18, 2009. I also realized that Judge Dalzell, in his Order of August 9, 2010, ruled that Paul has waived any right to arbitrate RDP's claims. That is a compelling reason for me to abstain from an assessment of any of RDP's alleged damages. Consequently, I have changed my approach and will evaluate RDP without any deduction for Paul's conduct and leave for determination in Judge Dalzell's Court an assessment of the damages allegedly caused by Paul both before and after his resignation.

Cahn Opinion at 6-7. Judge Cahn then reiterated that Judge Dalzell and/or a jury will have the responsibility to assess any monetary damages in regard to RDP's claims against Paul. Paul is entitled to receive 43% of $6,490,000 in installments calculated in accordance with the Agreement. Judge Dalzell's Court will calculate the amount of damages Paul may owe to RDP for any harm he caused to RDP.

Id. at 8-9. Judge Cahn thus reached the following conclusions:

1. The Arbitrator has jurisdiction over this dispute pursuant to paragraph 15j of the Amended and Restated Shareholder Agreement.

2. The Arbitrator has in personam jurisdiction over the parties who have appeared personally and through counsel.

3. The valuation of RDP Technologies, Inc. as of September 17, 2009 is $6,490,000. Id. at 9.

In sum, Judge Cahn's only conclusion on the merits arising out of the arbitration was that RDP was worth $6,490,000 prior to Paul's alleged wrongful conduct. We are at a loss to understand how the value of RDP after Paul's alleged wrongful conduct could possibly have been "necessary" to this conclusion. To the extent RDP claims that Judge Cahn could not accept Wilusz's ex ante valuation of RDP without relying upon Wilusz's opinion as a whole -- including as to RDP's value after Paul's alleged conduct -- such a contention neither finds support in Judge Cahn's Opinion nor makes sense as a matter of logic, given that Wilusz employed different methodologies and assumptions in arriving at the two valuations. See Cahn Opinion at 4 ("VMI produced a report that valued RDP at $5,900,000 prior to Paul's resignation and at $1,325,000 thereafter. VMI's assumption in support of the lower evaluation is that any prospective purchaser would assume that Paul would compete with RDP and that RDP would lose the Tekkem license. Considering those assumptions, VMI's lower evaluation was based on a liquidation approach. VMI's higher evaluation was based on an income approach."). Thus, even if Judge Cahn accepted Wilusz's $1,325,000 valuation -- and his Opinion betrays no hint that he did -- such acceptance was not necessary to Judge Cahn's final judgment and thus cannot warrant applying the doctrine of collateral estoppel.

RDP's second attempt to apply the collateral estoppel doctrine -- to foreclose Paul from claiming that he did not violate his fiduciary duty to RDP -- also fails, though for only one of the two reasons described above. Judge Cahn did find that Evidence consisting of emails, memoranda to and from attorneys and other documents establishes that Paul, after his return to Pennsylvania, devised a plan that was intended to harm RDP. The components of Paul's plan included fomenting a dispute between Tekkem and RDP by advising Tekkem that royalty payments were underreported and taking other actions calculated to disrupt the business of RDP. As of August 13, 2009, Paul's lawyers confirm his "plan to start your own company, salvage your relationships with licensors so that they will do business with your new entity, and compete against RDP."

Id. at 2-3. But if this matter had actually been decided in the prior arbitration, it was no more necessary to Judge Cahn's conclusions than the value of RDP following Paul's alleged wrongful conduct. RDP has not bothered to explain how Judge Cahn's finding that Paul devised a plan to harm RDP was a prerequisite to his conclusion that RDP was worth $6,490,000 as of September 17, 2009, "without any deduction for Paul's conduct." Id. at 7. Such a finding is thus nothing more than dicta that does not bind Paul pursuant to the doctrine of collateral estoppel.

As for Paul and Nordetek, they suggest that "Judge Cahn noted, and RDP though [sic] its counsel confirmed, [that] RDP wasn't damaged and has recovered from Paul's actions," and that "Judge Cahn's findings are binding on RDP through collateral estoppel." Nordetek's MSJ at 5. In support of this claim, counterclaim defendants cite passages of the transcript of the arbitration proceedings before Judge Cahn wherein he explained that I also think what's going to be urged on Judge Dalzell is that the company was -- when Paul Christy did his acts following September 18th, he darn near ruined the company, and it was only through Richard Christy's Herculean efforts that the company was saved. Of course, in basic damage law you can only recover for what you lost. So even though Mr. Christy, Mr. Richard Christy, was lucky to salvage the company, it doesn't mean that Paul Christy gets short-changed. I need you to address that. . . .

What you're suggesting is that I put a liquidation value on the company because on November 12th it was at death's door, but fortunately for Richard Christy, you got Judge Dalzell to correct those things and somehow you got Stephansen back on track. Now the company's pretty good.

Nordetek's MSJ at 4-5 (quoting Arbitration Tr., Vol. V, 2055-57). We can readily reject this supposed application of estoppel doctrine. Judge Cahn's musings on this point during a colloquy with counsel in the course of the proceedings cannot mean that this was an "issue decided in the ...

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