UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
August 21, 2012
NATIONAL RAILROAD PASSENGER CORPORATION, PLAINTIFF,
VEOLIA TRANSPORTATION SERVICES, INC., ET AL.,
The opinion of the court was delivered by: Barbara J. Rothstein United States District Judge
MEMORANDUM OPINION DENYING MOTION FOR JUDGMENT OF DISGORGEMENT
Before the court is [Dkt. # 196] plaintiff National Railroad Passenger Corporation's ("Amtrak") motion for a judgment of disgorgement of the profits that defendant Veolia Transportation Services, Inc., and Veolia Transportation, Inc. ("Veolia") has earned to date on its contract with the South Florida Regional Transportation Authority to operate the Tri-Rail commuter line ("the contract"). Amtrak also seeks a constructive trust that would award it all of the future profits that Veolia earns on the contract. Upon review of Amtrak's motion, the opposition thereto, and the record of this case, the court concludes that Amtrak's motion must be denied.
In 2008, Amtrak sued Veolia for aiding and abetting the breach by three Amtrak employees of their fiduciary duties of loyalty to Amtrak, among other torts. The facts underlying this this lawsuit are recounted in more detail in other court filings. See National R.R. Passenger Corp. v. Veolia Transp. Servs., Inc., 791 F. Supp. 2d 33 (D.D.C. 2011). After the Honorable Reggie B. Walton denied the parties' cross motions for summary judgment, this court oversaw a jury trial on the aiding and abetting claim. Id. On May 10, 2012, the jury returned a verdict finding that Amtrak had proved by a preponderance of the evidence (1) that any or all of the three Amtrak employees breached the fiduciary duty of loyalty that each owed to Amtrak; (2) that Veolia had knowledge of the breach; and (3) that Veolia substantially assisted or encouraged the breach. Verdict Form [Dkt. # 194]. The jury also found that Amtrak had not proved by a preponderance of the evidence that Veolia's wrongful conduct was a proximate cause of Amtrak's failure to win the Tri-Rail operations contract. Id. Accordingly, the jury did not award Amtrak compensatory or punitive damages.
Amtrak now seeks a judgment of disgorgement of the Veolia's profits earned to date- which amount to over $2.2 million-as well as imposition of a constructive trust for Amtrak's benefit with respect to Veolia's future profits. Before trial, and over Veolia's objection, this court ruled that Amtrak is entitled to pursue a disgorgement remedy against Veolia. See Order of April 18, 2012, at 2--4 [Dkt. # 165]. It also concluded that the court, rather than the jury would determine whether such a judgment was warranted. The court now evaluates Amtrak's claim and finds it without merit. *fn1
A. The Jury Verdict Compels Denial of Disgorgement
Amtrak argues that it need not show injury in order to win disgorgement of Veolia's past and future profits on the contract. Veolia disagrees and advances a raft of arguments against the remedy. It maintains that disgorgement is a restitutionary remedy meant to restore to the plaintiff property that was wrongfully transferred or misappropriated, and that Amtrak has failed to make such a showing. Veolia further asserts the attorney-client cases that Amtrak cites in support of its motion are inapposite.*fn2 Veolia's position is more persuasive. As well, the court finds additional ground for rejecting Amtrak's arguments.
Disgorgement is an equitable remedy entrusted to the discretion of the
district court. So
v. Suchanek, 670 F.3d 1304, 1310 (D.C. Cir. 2012) (citing United
States v. Nacchio, 573 F.3d 1062, 1080 (10th Cir. 2009); BASF Corp. v.
Old World Trading Co., 41 F.3d 1081, 1096 (7th Cir. 1994));
Smith--Haynie v. Dist. of Columbia, 155 F.3d 575, 578 (D.C. Cir.
1998)); see also Remsen Partners, Ltd. v. Stephen A. Goldberg Co., 755
A.2d 412, 421 (D.C. 2000). It is rarely awarded. See Bode & Grenier,
L.L.P. v. Knight, 821 F. Supp. 2d 57, 65 (D.D.C. 2011) (citing Avianca
v. Corriea, 1992 WL 93128, at *12 (D.D.C. April 13, 1992)).*fn3
In determining the appropriateness of the remedy in this case, the court will apply
District of Columbia law. See Hendry v. Pelland, 73 F.3d 397 (D.C.
Cir. 1996). It will also look to the Restatements of Restitution and
As a general matter, plaintiffs are not required to show injury in order to disgorge a defendant's ill-gotten profits. See Restatement (Third) of Restitution, § 43. According to § 43 of the Restatement, "[a] person who obtains a benefit . . . in consequence of another's breach of such a duty, is liable in restitution to the person to whom the duty is owed." Id. To illustrate this rule, the Restatement furnishes an apt example:
A and B are employed as estimators by public-works Contractor. While still employed by Contractor, A and B form a partnership to bid on a county project in competition with Contractor. The A--B partnership is awarded the contract and performs the job, realizing a profit of $25,000. On suit by Contractor, the court determines that A and B breached their duty of loyalty when they bid on the new project in competition with their employer. Contractor is entitled to restitution of $25,000 from A and B by the rule of this section. It is not a condition of liability that, absent the disloyalty, Contractor would either have won the contract or made a profit on the job.
Id., Illus. 12 (emphasis added).
Amtrak maintains that this rule absolves it of any burden to show that it was harmed by Veolia's aiding and abetting of the employees' breach of their duty to Amtrak. Pointing to the jury finding that Veolia knowingly aided and abetted the employee's breach of their duty to Amtrak and to evidence entered at trial which, according to Amtrak, shows Veolia would not have earned the contract without the disloyal conduct, Amtrak argues that it is entitled to all of Veolia's past and future profits from the contract. In so asserting, Amtrak suggests that the jury's additional finding that Veolia did not proximately cause Amtrak's failure to win the contract is of no moment. For several reasons, Amtrak is incorrect.
First, the jury's finding on causation closes the door to disgorgement. Although, by the Restatement, "it is not a condition of liability that, absent the disloyalty, [Amtrak] would either have won the contract or made a profit," id., the jury's finding that Amtrak would not have won the contract absent the breach extinguishes Amtrak's entitlement to relief. In other words, the Restatement rule relieves the plaintiff of the burden of showing harm when it has been the victim of a disloyal agent's breach. However, when, as here, the factfinder determines that the defendant's profits would never have been enjoyed by the plaintiff, the rule does not compel disgorgement.*fn4 On the record of this case, the court determines, in its discretion, that Amtrak is not entitled to this remedy.
Second, contrary to Amtrak's assertion, harm from the breach cannot be presumed here as it is in cases dealing with disgorgement of the fees paid to disloyal attorneys. Unlike the plaintiffs in Avianca v. Corriea, 1992 WL 93128, at *12 (D.D.C. April 13, 1992), Hendry, 73 F.3d 397, and Bode & Grenier, L.L.P. v. Knight, 821 F. Supp. 2d 57, 65 (D.D.C. 2011), Amtrak is not a fee-paying client of Veolia. Although Amtrak paid the salaries of the three disloyal employees who breached their duty to Amtrak, this compensation amount is not sought in the present motion.*fn5
Therefore, the court agrees with Veolia that the holding of Hendry (the case upon Amtrak primarily relies) was not based upon a general principal that disgorgement can be awarded in the absence of causation, but rather upon the finding that causation is presumed as a matter of law where an attorney breaches his fiduciary duties to his client. In explaining why the plaintiff-client does not have to prove damages, the D.C. Circuit stated: "Unlike other forms of compensatory damages, however, forfeiture [of an attorney's fee] reflects not the harms clients suffer from the tainted representation, but the decreased value of the representation itself. Because a breach of the duty of loyalty diminishes the value of the attorney's representation as a matter of law, some degree of forfeiture is thus appropriate without further proof of injury." Hendry,73 F.3d at 402 (citing Gilchrist v. Perl, 387 N.W.2d 412, 416--175 (Minn. 1986)). As well, the Hendry court established a narrow scope of inquiry: "Although we have found no District of Columbia cases precisely on point, courts in other jurisdictions have held that clients must prove injury and proximate causation in a fiduciary duty claim against their lawyer if they seek compensatory damages, not if, as here, they seek only forfeiture of legal fees." Id. at 401 (emphasis in original).*fn6 Thus, although the Hendry court's rationale might support a claim of disgorgement of a disloyal employee's salary on the grounds that the value of her services during a period of disloyalty are reduced as a matter of law, it is not applicable to Veolia here. See In re Randolph-Bray, 942 A.2d 1142, 1147 (D.C. 2008) ("But Hendry is inapposite for a number of reasons, perhaps the most significant being that Arnold earned no fees for her service as fiduciary that she could be required to forfeit").
Moreover, unlike the plaintiffs in the above cases, Amtrak was not a fee-paying client of Veolia. No shattered fiduciary relationship between Veolia and Amtrak requires the court's protection. Therefore, any compelling reasons for sanctioning disloyal employees and thereby "enforce[ing] by prophylaxis the special duties of the fiduciary" and "protecting the reliance of the beneficiary on the fiduciary's disinterested conduct" do not militate in favor of a remedy here. Restatement (Third) of Restitution § 43. Indeed, Amtrak does not seek disgorgement that would deter disloyal conduct. An award of Veolia's profits to Amtrak in no way impacts the three disloyal employees; their incentives to breach in the future would remain exactly the same if Amtrak were to prevail in this action. Indeed, Amtrak's expressed concern for such deterrence rings hollow in light of the fact it rehired one of these disloyal employees and promoted him to higher paying position after he breached his duty to Amtrak.
Third, without some measure of harm to Amtrak that is linked to Veolia's profits, the disgorgement that Amtrak seeks sounds in punishment rather than restitution. The purpose of disgorgement is remedial, rather than punitive. Griffith v. Barnes, 560 F. Supp. 2d 29, 35 (D.D.C. 2008), and it "is meant to provide just compensation for the wrong, not to impose a penalty; it is given in accordance with the principles governing equity jurisdiction, not to inflict convincingly claims that Amtrak cannot be entitled to disgorgement of its profits when Amtrak would not have won the contract in any event and when Veolia's profits are attributable to many other factors, beyond those related to the breach and the disloyal employees.
punishment but to prevent an unjust enrichment." Estate of Corriea, 719 A.2d 1234, 1240 (D.C. 1998); Cf. SEC v. First City Fin. Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989). When "liability for the profits so designated would be unacceptably punitive, being unnecessary to accomplish the object of the disgorgement remedy in restitution," courts may deny disgorgement, even if some level of attribution exists. Restatement (Third) of Restitution § 51. The court finds as much here. On the facts established at trial, disgorgement would be unacceptably punitive because no compensatory damages are warranted, by the finding of the jury, and any future breach could be deterred with a much less radical award. "[D]isgorgement is an extraordinary remedy, and if it is ever appropriate, it should be used only in situations where the deterrence rationale is so important that only disgorgement will serve a socially useful purpose." (citing In Re Eastern Sugar Antitrust Litigation, 697 F.2d 525, 533 (3rd Cir. 1982) (reserving such extreme sanctions for misconduct "so egregious that the need for attorney discipline and deterrence of future improprieties of that type" is great)). The court does not conclude that this is such a case.
B.Veolia's Profits Are Not Attributable to the Breach Because They Are Too Remote
Even if entitlement to disgorgement were proper notwithstanding the jury's verdict as to proximate causation, the court does not find that Amtrak has met the standard for causation that that rule establishes-namely, that the profits which plaintiff seeks to disgorge be "attributable to" the breach. Restatement (Third) of Restitution§ 51. Amtrak claims that "the whole of [Veolia's] Tri-Rail profits are both attributable and causally related to its intentional wrongdoing." Pl.'s Rep at 7. Veolia counters that Amtrak has not proven that Veolia's profits are linked in any way to the breach and that even if there were some evidence, Veolia's profits are in fact "attributable to" a raft of other, more substantial factors. Once again, Veolia has the better argument.
The award of disgorgement to rests on "an implicit judgment that the claimant, rather than the wrongdoer, should . . . obtain the benefit of the favorable market conditions, acumen, or luck, as the case may be." Restatement (Third) of Restitution § 51. When a court finds the profits are "the product of legitimate contributions by the defendant that should not, in justice, be awarded to the claimant," it may deny them as "too remote" to warrant disgorgement.*fn7 Id. Such conditions exist here.
First, although the court declines to dissect Veolia's books, it finds persuasive Veolia's argument that its profits are the result of a wide range of factors that outweigh the contributions of the three disloyal employees. While Veolia may not have won the contract during the bidding round at issue without the participation of the three disloyal Amtrak employees, it does not follow that Amtrak is entitled to all the profits Veolia has earned on the contract. Thus, the court disagrees with Amtrak that "[i]t is beyond serious dispute that all of Veolia's profits on the Tri-Rail contract are attributable to its tortious conduct." Pl.'s Mot. at 4. The dispute is, in fact, serious and valid.
The reasoning of the Delaware Chancery court in Triton Const. Co.,
Inc. v. Eastern Shore Elec. Services, Inc., supports Veolia's argument
against disgorgement. 2009 WL 1387115 (Del. Ch. May 18, 2009). In that
case, the court awarded a plaintiff company the disgorged salaries of
the disloyal employee where the employee breached his fiduciary duties
while working for plaintiff and assisting plaintiff's competitor in
preparing bids. However, the court found that
even though the defendant was liable for aiding and abetting the
employees' breach, disgorgement of the defendant's profits was not
appropriate when the plaintiff could not prove that it would have
earned profits on certain projects but for employee and defendant
company's conduct. See Triton, 2009 WL 1387115, at *29.*fn8
In denying the plaintiff's claim of entitlement to
defendant's profits, the court reasoned that the plaintiff "has not
proved that [the disloyal employee's] involvement contributed
significantly to [the aider and abettor's] acquisition of those
profits." *fn9 Id. at *29. The same rationale applies
here. Amtrak has not shown that the profits that Veolia has earned are
attributable to the breach.*fn10
Second, and more fundamentally, Amtrak should not be awarded profits earned on a contract that it would not have won. As Veolia argues, equitable relief should not put Amtrak in a better position than it would have been in the absence of any wrongdoing. Therefore, the court concludes that it would not be just to disgorge all of the profits that Veolia has made since it began performing on the contract. See Avianca, 1992 WL 93128, at *12. For this reason, among the others detailed above, disgorgement is not warranted.*fn11
For the foregoing reasons, the court concludes that [Dkt. # 196] Amtrak's motion for a judgment of disgorgement must be denied.*fn12
An appropriate order accompanies this opinion.