Hermes Automation Technology, Inc. v. Hyundai Electronics Industries Co., Ltd.

• Citation: 915 F.2d 739
• Decision Date: 08 June 1990
• Docket Number: No. 90-1235,90-1235
• Parties: HERMES AUTOMATION TECHNOLOGY, INC., et al., Plaintiffs, Appellants, v. HYUNDAI ELECTRONICS INDUSTRIES CO., LTD., Defendant, Appellee. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 739

915 F.2d 739

HERMES AUTOMATION TECHNOLOGY, INC., et al., Plaintiffs, Appellants, v. HYUNDAI ELECTRONICS INDUSTRIES CO., LTD., Defendant, Appellee.

No. 90-1235.

United States Court of Appeals,

First Circuit.

Heard June 8, 1990.

Decided Sept. 24, 1990.

Timothy Q. Feeley with whom James J. Marcellino, Anthony A. Bongiorno and Gaston

& Snow, Boston, Mass., were on brief, for plaintiffs, appellants

Laura L. Carroll with whom Jerome Gotkin, Robert L. Kirby, Jr., and Widett, Slater & Goldman, P.C., Boston, Mass., were on brief, for defendant, appellee.

Before CAMPBELL, Circuit Judge, BOWNES, Senior Circuit Judge, and TORRES, ^* District Judge.

LEVIN H. CAMPBELL, Circuit Judge.

Hermes Automation Technology, Inc. ("Hermes") and its President, Chipin Song (collectively, "plaintiffs"), appeal from a judgment in the United States District Court for the District of Massachusetts, dismissing their claims against Hyundai Electronics Industries, Co. ("HEI"), and awarding attorney's fees against plaintiffs and their attorney. (Plaintiffs' attorney also appeals from the fee award). The issues on appeal are whether the district court erred in ruling that plaintiffs' claims were barred as a matter of law by the plain language of a settlement agreement between Hermes and Hyundai Electronics America, ("HEA"), which settled a previous state court lawsuit between HEA and Hermes, and whether the claims are barred by the doctrine of claim preclusion. We affirm in part, vacate in part, and remand.

BACKGROUND

Since the district court dismissed the complaint on the ground that it failed as a matter of law to set forth a viable cause of action, we state the facts as alleged in the complaint, except insofar as those allegations have been conclusively rebutted by materials submitted to the district court, drawing all reasonable inferences in favor of plaintiffs. See, e.g., Chongris v. Board of Appeals, 811 F.2d 36, 37 (1st Cir.), cert. denied, 483 U.S. 1021, 107 S.Ct. 3266, 97 L.Ed.2d 765 (1987).

Hermes is a Massachusetts corporation that was founded by plaintiff Song and Hermes' former treasurer, Yung Kim, to develop and manufacture computer software. HEI is a Korean corporation, engaged in manufacturing and exporting of technological equipment. HEA is a California corporation which serves as the marketing arm for HEI in the United States. HEI owns 60 percent of the HEA stock and the remaining 40 percent is owned by another Hyundai affiliate, Hyundai Heavy Industries Co. All three companies are part of a Korean corporate conglomerate known as the Hyundai Group.

In September 1983, Song and Kim entered into a written agreement with HEA under which Song and Kim would form a corporation (Hermes) to develop certain high technology software and HEA would provide financing for the venture of up to $2,000,000. In exchange, HEA was to receive 49 percent of Hermes' stock and the exclusive marketing rights for the software products developed by Hermes.

Although the agreement stated that it was between HEA, on the one hand, and Song and Kim, on the other, the agreement was negotiated by HEI representatives as well as HEA representatives. In addition, HEI made representations indicating that it would ensure that Hermes would receive the funding needed for the venture, and led Song to believe that HEI "stood behind the Agreement as a guarantor." For this reason, Song insisted that HEA's officer sign the agreement once on behalf of HEA and separately, as an authorized representative of HEI. In reliance on this agreement, Song and Kim left their prior employment and made substantial investments in starting up and operating Hermes. On September 16, 1983, HEA advanced Song and Kim the initial payment of $41,000, as provided for in the agreement.

In October 1983, HEI informed Song and Kim that funding under the September agreement would be withheld unless certain changes were made in the agreement. Fearing that HEI would withdraw all funding for the venture, Song and Kim agreed to the changes, and on October 14, 1983, Hermes entered into an "understanding of memorandum" with HEA. This second agreement provided that HEA was to own In November 1983, an HEI and HEA representative presented Song and Kim with an additional formal writing to be signed. Although HEI had previously assured Song and Kim that the additional written agreement would formalize the material terms of the October agreement, the proposed November agreement contained material changes including a provision giving HEA the controlling interest in Hermes. Hermes refused to assent to this modified agreement and the additional formal writing was never signed. However, on November 22, 1983, HEI indicated that it would grant Hermes' request for an advance of $214,000, if Hermes would execute a promissory note for this amount plus the amount of the September payment. Hermes signed the note and received the payment.

50% of Hermes' stock, and made certain other changes regarding royalties and Hermes' operating structure. The second writing stated that it was an agreement between HEA and Hermes, but as with the September writing, it was executed by HEI as well as HEA.

Throughout this time, beginning with the signing of the September agreement, HEI used its financial leverage over Hermes to exact concessions from Hermes in favor of HEI and HEA, and to assert further control over Hermes' operations. After the second payment in November, HEI continued its pattern of assuring Hermes that the necessary funding for the venture was forthcoming, while at the same time refusing Hermes' requests for further funding, and using its relationship with Hermes to supervise, oversee, and interfere with Hermes' operations.

In March 1984, after several months of haggling between Hermes and HEA and HEI, Hermes informed HEA that it could not accept any further changes in the prior agreements and demanded that HEA and HEI provide immediate additional funding. HEI and HEA refused to provide the requested funding. On March 22, 1984, HEA demanded payment on the promissory note which had been executed by Hermes in November 1983.

After Hermes refused to pay on the promissory note, HEA brought an action against Hermes in Massachusetts state court seeking to recover $255,000 allegedly due on the note. Hermes counterclaimed against HEA, alleging breach of contract, misrepresentation, misappropriation of trade secrets, unfair and deceptive trade practices, and violation of Mass.Gen.Laws ch. 93, Sec. 42. Hermes sought to enjoin HEA from exploiting misappropriated trade secrets and from marketing products developed by Hermes. Hermes also sought $3,000,000 in damages.

After discovery in the state court action, HEA and Hermes agreed in June 1988 to settle. HEA agreed to pay Hermes $460,000. In addition, HEA and Hermes entered into an agreement releasing one another from liability for all claims arising out of their prior dealings. Section 5.1 of the agreement provides:

Except as to such rights or claims as may be created by this Agreement, [Hermes] hereby releases, remises and forever discharges [HEA], its corporate successors or predecessors of and from all claims, debts, demands, actions, causes of action, suits, accounts, contracts, agreements, damages, and all claims, demands, and liabilities of every nature heretofore or hereafter arising out of, connected with or incidental to the dealings between the parties which [Hermes] has or ever had prior to the effective date hereof, including, without limitation on the generality of the foregoing, any and all claims, demands, and cause or causes of action that were raised or could have been raised in the [state court action].

Section 5.2 of the agreement contains a similar provision under which HEA released Hermes from any claims it has or had against Hermes arising out of the dealings between them. Pursuant to the settlement agreement, the state court action was dismissed with prejudice. HEI was not a party to the state court action, nor was it a party to the settlement agreement.

In January 1989, Hermes and Song brought this diversity action against HEI HEI moved to dismiss the complaint, arguing that plaintiffs' claims were barred by the plain language of section 8.3 of the settlement agreement. ¹ Section 8.3 provides:

in the United States District Court for the District of Massachusetts. The complaint alleges that HEI engaged in a scheme of fraud, duress, and tortious interference with contractual relations, through which HEI induced plaintiffs to expend substantial sums in forming and operating Hermes and through which HEI misappropriated plaintiffs' trade secrets and proprietary information. The complaint asserts largely the same claims and allegations as were made in Hermes' state court counterclaim against HEA, including claims of contract breach, misrepresentation, misappropriation of trade secrets, unfair and deceptive practices, and violation of Mass.Gen.Laws ch. 93, Sec. 42, except that the federal court complaint is based on the alleged wrongdoing of HEI and its representatives, while the state court complaint was based on the alleged wrongdoing of HEA and its representatives. The federal court complaint against HEI also contains additional allegations of breach of fiduciary duty, economic duress, and tortious interference with contractual relations, that were not included in the state court counterclaim. Plaintiffs seek injunctive relief, damages of $17,000,000, and attorney's fees.

This agreement is binding upon and shall inure to the benefit of the parties hereto, their respective agents, employees, representatives, officers, directors, divisions, subsidiaries, affiliates, assigns, heirs, successors in interest, and shareholders. (emphasis added).

HEI argued that it was released from any liability on claims arising out of its dealings with Hermes, because it is both a shareholder and affiliate of HEA, and that this release was binding...