BOHLER-UDDEHOLM AMERICA, INC. V. ELLWOOD GROUP, INC.
247 F.3d 79 (3rd 2001)
NATURE OF THE CASE: Bohleruddeholm (P), steel tool producer, sued Ellwood (D) steel ingot
forger, alleging claims of breach of contract, breach of fiduciary duty, misappropriation of
trade secrets, and civil conspiracy related to the disintegration of a joint venture. The
United States District Court entered judgment in favor of P. D filed an appeal from the
judgment.
FACTS: [The Broun 7th casebook omitted all of these facts] D relied on outside
manufacturers to supply it with steel ingots for its steel-forging business. D decided to
construct an ingot mill in order to produce its own supply of steel, which it did under the
name Ellwood City Forge Steel Company (ECF). Uddeholm (P) decided that it wanted to set up a
manufacturing plant in the United States in order to avoid quotas on imports of tool steel
from Sweden, deliver steel more quickly, and avoid currency fluctuations. The two companies
looked to form a joint venture in which P would provide its steelmaking expertise and some
funding for D's new mill, while D would provide P with a U.S. source of tool steel as well
as most of the financing of the mill. They entered into a joint venture agreement consisting
of several contracts executed in April and June 1985. D became an 80% shareholder and P a
20% shareholder in ECF, which changed its name to the Ellwood Uddeholm Steel Company (EUS).
D continued to run the daily operations of EUS. EUS would sell steel ingots to P and D at
cost plus a percentage of this cost to cover overhead, which was set in the original
contracts at 35%. Overhead included all interest, depreciation, selling, general and
administrative costs and all other costs and expenses which are not included as part of the
'base costs' [of the ingots].' P had the right to purchase up to 10% of the ingots produced
by EUS, and D had the right to purchase the rest. The Agreement included a rebate provision
in case one of the partners paid more than its allotted share of EUS's overhead, which was
based on each partner's percentage control of EUS: 80% for D, 20% for P. If D's steel
purchases that went to EUS's overhead D was entitled to a rebate of the amount it paid in
excess of this 80%. The same held true for P, but at 20%. If either partner's contributions
to EUS's overhead totaled less than its percentage control of the company that partner had
to make payments to EUS in order to bring its share of the overhead paid to the level
equivalent to their percentage control. D was to pay exactly 80% of EUS's overhead, and P
was to pay exactly 20%, no matter how much steel each was buying from EUS. Either party
could cause EUS to buy P's 20% stake in EUS at book value. The Agreement contained
noncompete provisions that went into effect if this purchase option was exercised; the
Agreement granted EUS an exclusive license for P's 'know how,' but prohibited EUS from using
such know how for three years after the end of the joint venture. D proposed a draft
Business Plan which indicated that D desired to sell EUS's ingots to third-party purchasers
in the general market. D rejected these proposed alterations as it did not want EUS's
production to go to anyone but the shareholders. D agreed to delete from the Business Plan
all language to the effect that the secondary purpose of EUS was to sell tool steel to third
parties, though there is evidence in the record that the parties came to an understanding
that perhaps marginal amounts of ingots would be sold by the shareholders to third parties
if EUS's financial circumstances so required. EUS sold a substantial amount of steel ingots
that ended up going to third parties in unchanged form, i.e., not as forged steel products
but as raw steel ingots. D asserts that it bought the ingots from EUS and resold them to the
third parties, so that it properly received a rebate on all these 'purchases.' P counters
that the ingots were essentially sold directly by EUS to the third parties at D's direction,
and that D was not entitled to rebates on these sales because they were not 'purchases' as
defined in 2.3 of the Steel Purchase Agreements. P's manager, Rydstad, wrote a memo
stating that he understood that D was free to resell the ingots bought from EUS. At trial,
the District Court ordered this language redacted from the memo before the memo was admitted
into evidence because these statements involved a 'legal interpretation by a nonlegal
person,' and because the statements did not address the relevant issue of interpretation of
the Agreement, namely, whether Ellwood was entitled to receive rebates for its ingot sales
to third parties. D notified P of its intention to exercise its right under the Agreement to
have EUS buy P's shares at their December 31, 1990, book value. P objected to the calculated
book value because it was about half of the book value determination that D had related to P
in November 1990. D insisted that P accept the calculated book value from Deloitte for the
stock without retaining any such right to a legal claim. P then brought suit in the District
Court, contending that the Deloitte book value calculation was understated because the
profits that D collected on the ingots that were sold to third parties should have gone to
EUS rather than directly and solely to D. It claimed that D had violated 2.3 of the Steel
Purchase Agreements by claiming rebates on these sales when the sales were not 'purchases'
as the term is used in that section. D did not pay P for approximately $345,000 worth of
steel. The parties disagreed over the interest to be charged. The District Court found that
the Agreement was ambiguous as to whether D could properly claim rebates for the steel
ingots sold to third parties, and it therefore sent the issue of the correct interpretation
of the Agreement to the jury. D had the burden to prove by a preponderance of the evidence
that these transactions were in accord with the terms of the Agreement. The jury returned a
special verdict finding D had breached the Agreement by including third party ingot sales in
its rebate calculations, and awarded P $4.1 million in compensatory damages and interest.
Further damages were awarded for other issues against D as well. D appealed.
[This part was in the casebook] The District Court admitted into evidence portions of an
affidavit of Bo Jonsson, a former President of P, under Federal Rule of Evidence 807, the
catchall exception to the hearsay rule. Jonsson attested to the affidavit in 1994 and died
in 1996, before the trial. P used the affidavit to counter assertions by D about what
transpired at certain directors meetings that Jonsson attended in a representative capacity
for P.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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