The opinion of the court was delivered by: Emmet G. Sullivan United States District Judge
Plaintiffs, C&E Services, Inc. ("C&E") and Carl L. Biggs, filed a complaint against defendant, Ashland, Inc. ("Ashland"), alleging that defendant engaged in an unlawful scheme whereby plaintiffs were deceived into placing defendant's defectively priced products on plaintiffs' federal government contract for eventual resale to the federal government. Plaintiffs allege that defendant misrepresented and concealed material facts with regard to the status of its products' prices, which, unbeknownst to plaintiffs, had previously been alleged to be "defective" by the federal government. As a result of defendant's scheme, plaintiffs were investigated by federal agencies and the U.S. Attorney's office and their government contracting rights were suspended. Plaintiffs' complaint states six counts against defendant, alleging fraud, negligent misrepresentation, indemnification, equitable indemnification, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty. Pending before this Court are defendant's Motion for Summary Judgment and plaintiffs' Motion to Strike Ashland's Motion for Summary Judgment. Upon consideration of the motions, the responses and replies thereto, the applicable law, and the entire record, the Court GRANTS in part defendant's motion for summary judgment with regard to Count Three (indemnification) and Count Four (equitable indemnification), DENIES in part defendant's motion with regard to all other counts, and DENIES plaintiffs' motion to strike as moot.
Plaintiff, C&E, is a minority-owned Virginia corporation that provides wastewater treatment products and services to commercial and federal, state, and local government customers. 2d Am. Compl. ¶ 3. Plaintiff Carl L. Biggs is the owner and chief executive officer of C&E. Id. ¶ 4. Plaintiffs*fn1 conduct their business in Washington, D.C., Virginia, and Maryland among other places. Id. ¶ 3. Prior to becoming the owner and chief executive officer of C&E, Biggs was employed by defendant, Ashland, in one of its business units, Drew Industrial Division, from April 1977 to August 1987. Biggs Dep., Ex. 9 to Def.'s Mem. in Supp., at 16:22-17:10.
Defendant is a publicly-traded company, incorporated in Kentucky. 2d Am. Compl. ¶ 5. Defendant has its principal office in Covington, Kentucky, and also has one of its several main offices in Washington, D.C. Defendant's corporation is comprised of five large industry divisions, including Ashland Specialty Chemical Company, which manufacturers water treatment chemicals. Id. In addition, defendant's business units include, Drew Industrial Division, which supplies specialized chemicals and consulting services for the treatment of water. Id.
II. Defendant's GSA Contract and Audit
In December 1991, the U.S. General Services Administration ("GSA") awarded defendant a Multiple Award Schedule ("MAS") contract, through which defendant, from 1991 to 1997, sold water treatment products directly to government customers. 2d Am. Compl. ¶ 16. The GSA administers the contractual MAS program whereby the federal government purchases commercial products and services. Pls.' Opp'n at 7. The GSA negotiates MAS contracts with suppliers for delivery of commercial products or services commonly used by the federal government in order to provide a simplified process of acquiring supplies and services and obtaining volume discounts. Id.
After the award of a MAS contract, a contractor must submit to audits by the GSA. Koehl Dep., Att. 3 to Pls.' Opp'n, at 16-17. As a result of an audit, a contractor may be required to provide price adjustments to the government similar to any discounts offered to comparable commercial customers. Id. at 43. In addition, audits can also find that detailed pricing information submitted prior to the award of a MAS contract is "defective," meaning that the contractor provided false or misleading data to the government for use in evaluating proposed prices. Id.; see also Gelco Space, App. 1 to Pls.' Opp'n, General Services Board of Contract Appeals Nos. 7916 & 7917, 91-1 BCA ¶ 23,387.
In 1996, the GSA began an audit of defendant's MAS contract. Draft Audit Report, Ex. 1 to Def.'s Mem. in Supp., at ASH 014635, 014642. On May 13, 1997, the GSA submitted its Draft Audit Report*fn2 to defendant alleging that, prior to the contract award in 1991, defendant submitted pricing data that was "inaccurate and incomplete, and [defendant] misled GSA contracting officials during negotiations." Draft Audit Report at ASH 014642. The GSA, therefore, concluded that defendant's prices were "defective," and that Ashland owed the government $814,841.00 for the pricing violations. Id. Specifically, the GSA determined that defendant had offered non-government customers discounts off of defendant's list prices between 16 and 67 percent, while defendant told the GSA that 15 percent was the highest discount it had offered to any customer. Id. at ASH 014643. Although defendant disputed the GSA's claims, on December 11, 1997, defendant executed a settlement agreement with the GSA. Settlement Agreement, Ex. 4 to Def.'s Mem. in Supp., at 3. Defendant was required to pay the government $1,798,274.00 but there was no admission of wrongdoing or liability. Id. at 3, 6.
III. 1987 Agreement, 1997 Discussions, and 1998 Agreement
Sometime in 1997,*fn3 while defendant was negotiating its settlement agreement with the government, plaintiffs and defendant began discussions in regard to whether plaintiffs were interested in taking over defendant's sales operation as a distributor of defendant's water treatment products. Biggs Dep., Att. 6 to Pls.' Opp'n, at 24-25. Defendant asserts that plaintiffs were a "natural choice" to take over defendant's government contracting business because Biggs had sold defendant's water treatment products as defendant's employee prior to 1987 and C&E had its own GSA-approved MAS contract for distributing water treatment chemicals. See Biggs Dep., Ex. 9 to Def.'s Mem. in Supp., at 16:22-17:10. In addition, pursuant to a 1987 sales agreement between plaintiffs and defendant, C&E was an authorized sales representative for defendant. 1987 Agreement, Att. 5, Ex. A to Pls.' Opp'n. The 1987 Agreement defined the relationship between plaintiffs and defendant as "that of principal and agent ." Id. at ASH 002430. During the discussions in 1997, plaintiffs and defendant were still under contract pursuant to the 1987 Agreement. See id.
According to defendant, during these discussions, defendant was open about its reasons for getting out of the government contracting business, specifically informing plaintiffs that: (1) the GSA audited defendant's MAS contract; (2) the auditors found pricing issues with defendant's MAS contract, including sales by defendant to non-government customers at prices lower than those that had been offered to defendant's GSA customers; (3) the auditors alleged damages of at least $600,000 to $800,000; (4) defendant paid a settlement to resolve the government's claims arising from the audit; and (5) defendant was canceling its GSA contract. Def.'s Statement of Material Facts ¶ 2.
Plaintiffs, however, assert that defendant never informed plaintiffs that the GSA auditors found defendant's prices defectively negotiated in the first place and that defendant knew that plaintiffs would not be able to sell defendant's products at the prices listed in defendant's GSA contract. See Draft Audit Report; Post Award Audit; Saunders Dep., Att. 4 to Pls.' Opp'n, at 75. Plaintiffs further assert that defendant never informed plaintiffs that defendant was under investigation by the U.S. Attorney's Office and the government was considering a False Claims Act action against defendant as a result of the defective pricing. See Answer and Countercl. ¶ 26. Finally, plaintiffs assert that defendant neither informed plaintiffs that defendant settled with the government for over $1.7 million in double damages under the False Claims Act nor informed plaintiffs that the government provided defendant with both a draft and final audit report detailing the defective pricing allegations. See Biggs Aff., Att. 5 to Pls.' Opp'n, at ¶ 6; see also Draft Audit Report; Post Award Audit; Answer and Countercl. ¶ 31. In effect, plaintiffs assert that defendant did not inform them of general pricing issues or problems, but rather made specific representations regarding the nature of the problem: "during the performance of [defendant's] GSA contract some [of defendant's] salespersons gave commercial customers a better price than the government received." Pls.' Statement of Genuine Issues ¶ 2. Furthermore, plaintiffs assert that in December 1997, defendant informed Biggs that there would be no problem submitting defendant's products onto plaintiffs' GSA contract at the very same prices found on defendant's GSA contract which, allegedly unbeknownst to plaintiffs, had previously been determined to be "defective." Biggs Aff., Att. 5 to Pls.' Opp'n, ¶ 7; Kuchinski Dep., Att. 7 to Pls.' Opp'n, at 151-54.
At the conclusion of these discussions, plaintiffs and defendant signed a distributorship agreement effective January 1, 1998 ("1998 Agreement"). Def.'s Statement of Material Facts ¶ 3. Pursuant to the relevant terms of the 1998 Agreement, the prior principal/agent relationship between the parties was transformed into one of contractor and subcontractor where neither party was subject to the control of the other. 1998 Agreement, Ex. 12 to Def.'s Mem. in Supp., at 3. The 1998 Agreement required plaintiffs to seek and obtain approval from the GSA to add defendant's water treatment products to plaintiffs' GSA contract. Def.'s Statement of Material Facts ¶ 4.
IV. GSA Investigation and Audit of Plaintiffs
On January 14, 1998, plaintiffs submitted a modification request to the GSA to add defendant's products onto plaintiffs' GSA schedule. Request for Modification, Ex. 16 to Def.'s Mem. in Supp. In their modification request, plaintiffs submitted defendant's products at the same prices previously deemed defective by the government. See Letter from C&E to Flannery, Att. 5, Ex. B to Pls.' Opp'n. Although defendant asserts that plaintiffs knew defendant's prices had been the subject of government concerns, Def.'s Mem. in Supp. at 6, plaintiffs claim that in December 1997, defendant informed Biggs that there would be no problem submitting defendant's products onto plaintiffs' GSA contract at the very same prices found on defendant's GSA contract. Biggs Aff. ¶ 7; Kuchinski Dep. at 151-54. Furthermore, plaintiffs assert that they did not know the products were determined to be defectively negotiated and priced prior to the GSA contract award to defendant in 1991.*fn4 See Biggs Aff. ¶ 12; Draft Audit Report at ASH 014642.
By 2001, the GSA had still not approved plaintiffs' modification request. See Pls.' Opp'n at 13, 15. Defendant claims that plaintiffs, however, in making sales to government customers, misrepresented that defendant's products were approved on their GSA schedule. Def.'s Statement of Material Facts ¶ 10. Accordingly, defendant asserts that from 1998 to 2001, plaintiffs made unapproved sales of defendant's products to government customers. Id. Plaintiffs' allegedly made these unapproved sales even though plaintiffs knew about the GSA audit and defendant's previous pricing problems. Id.
Plaintiffs dispute this contention, asserting that plaintiffs informed government customers of the status of plaintiffs' application for adding defendant's products to their GSA Schedule contract, and in addition, informed government customers that any purchases would not be made using plaintiffs' GSA Schedule. Pls.' Statement of Genuine Issues ¶ 10. Plaintiffs further assert that while the modification request was pending, plaintiffs sold defendant's products as "open market orders," and accordingly, did not act inappropriately or deceptively. See Pls.' Statement of Genuine Issues ¶ 10. Plaintiffs point out that they devoted substantial time and resources in the attempt to obtain approval for their modification request. Biggs Aff. ¶ 9. For nearly three years, plaintiffs submitted additional request information, resubmitted entire packages of information, and called a Congressman to look into the delay in approval. Id.
Plaintiffs contend that it was in fact defendant who falsely represented to government customers that plaintiffs had added defendant's products onto their Schedule Contract, and that it was defendant's false representations that resulted in an investigation and audit of plaintiffs by the GSA Office of Inspector General ("OIG"). Letter from Key to Hannon, Att. 1, Ex. I to Pls.' Opp'n; Flannery Dep., Att. 10 to Pls.' Opp'n, at 42-42; Letter from Zdilla to Cox, Att. 1, Ex. K to Pls.' Opp'n.
Although defendant contends that plaintiffs were well aware of the pricing problems in regard to defendant's products by 1998, plaintiffs dispute all of defendant's allegations that plaintiffs knew the extent and nature of defendant's defective pricing prior to June 16, 2000. According to defendant, shortly after plaintiffs' modification request submission, the GSA contracting officer responsible for processing this request, Sharon Flannery, informed plaintiffs that the GSA had previously had issues with the prices listed for defendant's products. Def.'s Statement of Material Facts ¶ 5. Furthermore, defendant claims that in January through March 1998, during plaintiffs' discussions with the GSA in regard to adding defendant's products to plaintiffs' GSA schedule, GSA auditor Glenn Merski advised Biggs that the GSA had previously determined that defendant's prices were neither fair nor reasonable. Id. ¶ 6. Plaintiffs, however, contend that Flannery neither informed plaintiff of the results of the GSA audit of defendant nor informed plaintiffs that defendant's prices were "defective." See Pls.' Statement of Genuine Issues ¶ 5. Further, plaintiffs contend that Biggs specifically asked for a copy of any audit report from defendant, and defendant denied there was an audit report. Pls.' Additional Genuine Issues ¶ 1. In addition, plaintiffs contend that Merski only told Biggs "offhandedly that he [Merski] thought [defendant's] prices were 'high.'" Id. ¶ 6. Plaintiffs assert that the extent of their knowledge concerning defendant's pricing problems was that some of defendant's salespersons gave commercial customers a better price than the government received. Id. ¶ 7
According to plaintiffs, it is only as a result of the information provided by the GSA during the course of its investigation and audit of plaintiffs that plaintiffs finally learned defendant's products were defectively priced. During an interview on June 16, 2000, conducted by GSA-OIG investigator Sylvia Bergstedt, Biggs learned for the first time the true nature of defendant's audit. Biggs Aff. ¶ 12; Biggs Dep., Att. 11 to Pls.' Opp'n, at 162-64. Bergstedt informed Biggs that defendant's products would never be approved for plaintiffs' schedule because they were defectively priced. Id.
As a result of this audit, the GSA-OIG served search warrants on plaintiffs, and ultimately recommended and obtained plaintiffs' temporary suspension from federal government contracting. Defendant contends that GSA-OIG auditors determined that plaintiffs' employees attempted to obstruct the audit by, among other things, providing auditors with altered sales invoices and falsely representing that they could not locate any written purchase orders. Def.'s Statement of Material Facts ¶ 12; Merski Dec., Ex. 20 to Def.'s Mem. in Supp., ¶¶ 7, 8; Recommendation for Suspension, Ex. 14 to Def.'s Mem. in Supp., at CES 2695, 2697-98. Defendant further contends that the GSA-OIG concluded, in its Recommendation for Suspension, that plaintiffs "engaged in a conspiracy to defraud the government, engaged in deceptive business practices, made false certifications, obstructed a federal audit, and submitted false claims to various federal agencies for agencies' purchases made under [plaintiffs'] General Services Administration (GSA) Multiple Award Schedule (MAS) contract." Def.'s Statement of Material Facts ¶ 14.
Plaintiffs, however, dispute that they acted improperly and contend that to date "neither [Biggs], anyone at C&E, nor C&E itself has been charged with any crime, sued by the [g]overnment, or settled with the [g]overnment involving any of the issues in this lawsuit." Biggs Aff. ¶ 14. Plaintiffs assert that the Recommendation for Suspension is preliminary by nature and is directly acknowledged in the report. Pls.' Statement of Genuine Issues ¶ 12. Plaintiffs also point out that the suspension was lifted after plaintiffs had the opportunity to discuss the allegations with the GSA, which thereby indicates that any preliminary conclusion by the auditors was either unwarranted or reserved. Pls.' Statement of Genuine Issues ¶ 12.
On June 16, 2003, exactly three years after plaintiffs allegedly first learned that defendant's prices were defective, plaintiffs filed their complaint in this Court. Plaintiffs' complaint states six counts against defendant, alleging fraud, negligent misrepresentation, indemnification, equitable indemnification, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty. Plaintiffs seek: (1) compensatory damages not less than $2.7 million; (2) punitive damages not less than $13.5 million; (3) indemnification for legal expenses and other damages; (4) attorneys' fees and costs with regard to bringing and maintaining this case before the Court; (5) pre- and post-judgment interest from defendant; and (6) any other relief the Court deems appropriate. Following discovery, defendant filed its Motion for Summary Judgment with regard to all of plaintiffs' claims. In addition to opposing defendant's motion, plaintiffs also filed their Motion to Strike ...