225 F.3d 595 (5th Cir. 2000), 99-20128, Kona Tech. Corp. v Souther Pacific Transp.

Docket Nº:99-20128
Citation:225 F.3d 595
Party Name:KONA TECHNOLOGY CORP., Plaintiff-Counter Defendant, Appellant, Cross-Appellee, v. SOUTHERN PACIFIC TRANSPORTATION CO.; ST. LOUIS SOUTHWESTERN RAILWAY CO., Defendants-Cross Defendants-Counter Claimants, Appellees-Cross Appellants, and CHEVRON CHEMICAL CO., Defendants-Cross Claimant-Third Party Plaintiff-Counter Defendant, Appellee-Cross Appellant, v
Case Date:September 13, 2000
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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225 F.3d 595 (5th Cir. 2000)

KONA TECHNOLOGY CORP., Plaintiff-Counter Defendant, Appellant, Cross-Appellee,


SOUTHERN PACIFIC TRANSPORTATION CO.; ST. LOUIS SOUTHWESTERN RAILWAY CO., Defendants-Cross Defendants-Counter Claimants, Appellees-Cross Appellants,


CHEVRON CHEMICAL CO., Defendants-Cross Claimant-Third Party Plaintiff-Counter Defendant, Appellee-Cross Appellant,


SPCSL CORPORATION, Third Party Defendant- Defendant- Counter Claimant, Appellee-Cross Appellant.

No. 99-20128


September 13, 2000

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Appeals from the United States District Court for the Southern District of Texas

Before BARKSDALE, BENAVIDES, and STEWART, Circuit Judges.

CARL E. STEWART, Circuit Judge:

Factual and Procedural History

I. Factual Background

This case involves a complex dispute over rail, freight, and shipping charges. The parties to this action are: Chevron Chemical, Co. ("Chevron"); Kona Technological Corp. ("Kona"), Southern Pacific Transportation Co. ("SP"); St. Louis Southwestern Railway Co. ("St. Louis"); and SPCSL Corp. ("SPCSL") (St. Louis, SP, and SPCSL are collectively referred to as the "Railroads.").

In 1982, Gulf Oil Corp. ("Gulf") entered into a contract ("Contract 245") with the Railroads to ship plastic products by rail. Contract 245 provided for rail transportation for plastic products manufactured from Gulf's plants located at Orange, Texas and Eldon, Texas. In 1985, Gulf merged with Chevron, and consequently Chevron became a party to Contract 245.

In 1985, Chevron entered a new contract with SP and St. Louis ("Contract 6018"). SPCSL became a party to the contract in 1990. Contract 6018 provided base rates for the movement by rail of plastic products moving from same or related origins to same or related destinations. Contract 6018 also provided a most favored nation clause which contained the following language:

Section 20 - Competitive Rate Structure: During the term of this Contract, Carriers shall provide Chevron with net rail contract rates that are equal or lower than net rates of competitors of Chevron with respect to the movement of same commodities [] from same or related origins to same or related destinations as included in addendums to this contract. In the event Chevron has reason to believe that a competitor has lower net rate or minimum weight, then Chevron will notify carriers in writing and request carriers to certify in writing that Chevron has the equivalent lower contract net rate.

(emphasis added).

Chevron also negotiated individual contracts with connecting carriers. Because the shipment of Chevron's products included destinations that were not on the Railroads' line, connecting carriers were used to transport Chevron's products to destinations not covered by the Railroads.

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Contract 6018 provided base rates for the transportation of products to destinations on the Railroads' line. The individual carriers negotiated "through rates" with Chevron which provided rates for the transportation of products from the Railroads to each destination covered by the connecting carriers. Contract 6018, Chevron's contract with the Railroads, provided that:

Chevron and Carriers are in the process of negotiating through rates (Base Rates) and until such through rates are agreed upon and are included in the Agreement or other Agreements to which Chevron and Carriers are party (with or without additional carrier), the published tariff rates will apply, less refund allowances shown in the attached addendums.

The base rates that applied to Chevron and the Railroads did not apply to the through rates negotiated between Chevron and the connecting carriers. Thus, the connecting carriers' contract contained provisions that addressed terms such as volume commitments, rates, and storage in-transit, which were not subject to the agreement between Chevron and the Railroads. Eventually, Chevron negotiated 26 separate contracts with connecting carriers.

The Railroads' marketing department was charged with monitoring the rates to insure compliance with Section 20. However, the Railroads failed to closely monitor the rates and keep accurate records. Chevron's initial rates under Contract 6018 were higher than that of Chevron's competitors. The Railroads never gave Chevron a price adjustment under Section 20 during the term of the contract. Because of the confidentiality clauses in the contracts between Chevron, its competitors, and the Railroads, Chevron could not ascertain the rates the Railroads charged their competitors nor could Chevron disclose to its competitors the rates it was receiving from the Railroads. However, the Railroads were in a position to know, or could have determined the rates it was charging Chevron and its competitors in order to comply with the favored nation clause of Section 20.

In 1992, Chevron acquired a report from A. T. Kearney, an independent consulting firm, which indicated that Chevron's rates with the Railroads were average, and thus not competitive. Later that same year, Chevron asked the Railroads to check Chevron's rates with other shippers. A Railroad representative contacted Chevron and stated that Chevron's rates compared favorably to those of other plastics producers. In 1993, Chevron requested written certifications under Section 20. The Railroads replied that they could not respond unless Chevron identified a specific competitor that it believed was receiving a more favorable rate. Because Chevron did not have access to the rates of its competitors, Chevron responded that it was not required to identify a specific competitor and provided a list of regional competitors. The Railroads never certified Section 20 compliance.

Kona performed freight audit work for Gulf before the merger and subsequently Chevron. As a freight auditor, Kona would monitor Chevron's competitor's freight rates to determine whether the Railroads were complying with Section 20. Because Kona was not party to the agreement between Chevron and the Railroads, and thus a third party auditor, Kona had access to the rates of Chevron's competitors. However, Kona could not disclose to Chevron the rates of its competitors nor could it disclose Chevron's rates to Chevron's competitors. The agreement between Kona and Chevron provided that Chevron would pay Kona a percentage of the overcharges it detected that resulted from Section 20 violations. The agreement also entitled Kona to submit claims to the Railroads in Chevron's name.

During the course of the agreement between Kona and Chevron, Kona made several efforts to demonstrate to Chevron that Section 20 was being violated by the

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Railroads. Chevron, nevertheless failed to act on Kona's efforts, and in 1993 terminated its agreement with Kona. During the course of the termination, Chevron agreed that: (1) Kona could take those actions which it was entitled to take prior to the termination date; (2) Chevron would not object to those actions; and (3) Chevron would continue to cooperate with Kona, to ensure that it paid the Railroads only that which the Railroads were lawfully entitled to receive, until Kona had exhausted reasonable efforts to pursue the claims (including Section 20 claims) Kona identified.

Kona submitted a request for a Section 20 certification to the Railroads. The Railroads replied that they could not recognize a request from Kona.

In 1994, Kona filed suit in federal district court. Because of the complexity of the issues and claims presented by the multiple parties involved, first we outline the claims the parties made below.

I. Procedural History

A. Parties' Claims Below

Kona filed an action in Texas state district court on its own behalf and as a contractually authorized representative of Chevron against the Railroads for breach of Contract 6018. Kona also sued the Railroads for tortious interference with its contract with Chevron. Additionally Kona sued Chevron for declaratory relief, attorneys' fees and quantum meruit. Chevron and the Railroads removed the case to federal district court.

Chevron filed a cross action and a third party action against the Railroads for breach of Section 20, the favored nation clause. The Railroads filed a cross action claim against Chevron for restitution of Section 20 overcharges it erroneously paid Chevron. The Railroads' restitution claim was resolved before trial. Chevron and the Railroads settled the restitution claim for $282,959. Thus, the Railroads' remaining claims are for prejudgment interest and attorneys' fees.

B. Trial Court's Rulings and Final Judgment

Prior to trial, Chevron filed a Motion to Strike Kona as a plaintiff regarding Chevron's contract claim against the Railroads. The Railroads filed a motion to dismiss Kona's contract claim, and tortious interference of contract claim. The district court granted Chevron's Motion to Strike and the Railroads' motion to dismiss Kona's contract claim, but denied the Railroads' motion to dismiss Kona's tortious interference with contract claim. The district court conducted an extensive document intensive bench trial. At the conclusion of trial, the district court issued 53-pages of findings of fact and conclusions of law. The district court ruled that Kona, pursuant to its contract with Chevron, was entitled to receive 50% of the actual amounts collected by Chevron from the Railroads, or alternatively, 50% in quantum meruit (with interest), due to Section 20 overcharges. The court also ruled that Chevron shall recover $13,409,387.00 against the Railroads minus the $282,959.00...

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