Norfolk Southern Ry. Co. v. Basell Usa Inc.

• Decision Date: 09 January 2008
• Docket Number: No. 06-3425.,06-3425.
• Citation: 512 F.3d 86
• Parties: NORFOLK SOUTHERN RAILWAY COMPANY, Appellant v. BASELL USA INC.
• Court: U.S. Court of Appeals — Third Circuit

512 F.3d 86

NORFOLK SOUTHERN RAILWAY COMPANY, Appellant v. BASELL USA INC.

No. 06-3425.

United States Court of Appeals, Third Circuit.

Argued September 10, 2007.

Filed: January 9, 2008.

Paul D. Keenan, [Argued], Charles L. Howard, Keenan, Cohen & Howard, Jenkintown, PA, for Appellant, Norfolk Southern Railway Company.

Nicholas J. DiMichael, [Argued], Thomson Hine, Washington, DC, Conrad O. Kattner, John P. McShea, III, McShea & Tecce, Philadelphia, PA, for Appellee, Basell USA Inc.

Before: SCIRICA, Chief Judge, RENDELL and FUENTES, Circuit Judges.

OPINION OF THE COURT

RENDELL, Circuit Judge.

Norfolk Southern Railway Co. ("Norfolk Southern") and its customer Basell USA Inc. ("Basell") agree that Basell breached a contract that existed between them. They disagree, however, as to whether the breach was material and whether it constituted a repudiation — either of which would have entitled Norfolk Southern to terminate the contract. On cross-summary judgment motions, the District Court held that Norfolk Southern did not have the right to terminate the contract, explicitly concluding that the breach was not material and implicitly ruling that there had been no repudiation. Norfolk Southern now appeals both of these aspects of the District Court's order. The District Court had jurisdiction pursuant to 28 U.S.C. § 1332 and we have jurisdiction pursuant to 28 U.S.C. § 1291. We will vacate the District Court's summary judgment order in part and remand for further proceedings consistent with this opinion.

I. Factual and Procedural History

Basell manufactures plastic pellets at a production facility in West Lake Charles, Louisiana, and contracts with others, including Norfolk Southern, to transport those pellets to customers throughout the United States. There is no single rail carrier that can offer freight transport all the way from the West Lake Charles facility to destinations in the eastern United States. The BNSF Railway Company ("BNSF") and the Union Pacific Railroad ("Union Pacific") both serve West Lake Charles, but do not serve destinations in the eastern United States. Conversely, Norfolk Southern and CSX Transportation Company ("CSX") both serve destinations in the eastern United States, but do not serve West Lake Charles. Therefore, all rail deliveries to the eastern United States are by joint-line service, involving both an origin carrier and a destination carrier — either BNSF or Union Pacific transports the pellets from the West Lake Charles facility to a rail "interchange," where it hands off the railcars to either Norfolk Southern or CSX for the second leg of the trip.

This pellet-transport traffic divides into three categories:

• "Competitive rail direct": both Norfolk Southern and CSX are capable of transporting the pellets all the way from the rail interchange to the end customer by rail.

• "Captive rail direct": only Norfolk Southern or CSX is capable of transporting the pellets all the way from the rail interchange to the end customer by rail.

• "Truck terminal": the end customer either must receive, or prefers to receive, the pellet delivery by truck instead of by rail; either Norfolk Southern or CSX transports the pellets from the rail interchange to a terminal, where it then transfers them to trucks for final delivery.

Norfolk Southern and Basell entered into a contract in early 2002 under which Norfolk Southern promised to charge Basell a rate below the published tariff rate in exchange for Basell's using Norfolk Southern for 95% of certain deliveries originating in West Lake Charles from February 2002 through May 2007.¹ According to Basell, the minimum volume commitment was 95% of the aggregate deliveries — competitive rail direct, captive rail direct, and truck terminal — that Norfolk Southern was capable of making, excluding any truck deliveries where the end customer was more than 100 miles from the nearest Norfolk Southern truck-transfer terminal. According to Norfolk Southern, the minimum volume commitment was 95% of the aggregate competitive and captive rail direct deliveries that it was capable of making, and also 95% of the truck deliveries where the end customer was less than 100 miles from the nearest Norfolk Southern truck-transfer terminal.²

Basell fulfilled its minimum volume commitment in 2002, 2003, and 2004. However, it fell short in 2005 when it entered into a contract obligating it to use CSX for shipments originating in West Lake Charles. Basell's expert calculated that in 2005 Basell used Norfolk Southern to deliver 80% of the traffic covered by their contract, instead of the promised 95%. The 15% shortfall consisted entirely of rail direct traffic — captive and competitive — and not a single truck terminal delivery.

Norfolk Southern does not dispute the 80% figure, but emphasizes that, in breaching the contract, Basell provided it with only 55% of the competitive rail direct traffic, and that this number is the proper focus for determining the magnitude of the breach. Norfolk Southern urges that it agreed to charge Basell discounted rates across the board — including for captive traffic — in order to secure the competitive traffic originating in West Lake Charles for which Basell could have chosen to use either Norfolk Southern or CSX. Since Basell would have received the captive traffic even without the contract, it maintains that the diverted competitive traffic is what is most relevant in evaluating the breach.

Basell entered into a two-year contract with CSX beginning in February 2005. It is undisputed that compliance with its contractual obligations to CSX caused its failure to meet its minimum volume commitment to Norfolk Southern. Although the details of Basell's contract with CSX are not clearly set forth in the record before us,³ the parties agree that Basell promised to use CSX as the destination carrier for 95% of a pool of deliveries that overlapped somewhat with the pool of West Lake Charles deliveries covered by Basell's contract with Norfolk Southern. In order to fulfill its minimum volume commitment to CSX, Basell diverted to CSX competitive rail direct traffic for which it was already contractually bound to use Norfolk Southern.

The procedural history of the case as it progressed in the District Court is somewhat complex, with a variety of claims and counterclaims asserted along the way. Originally, Norfolk Southern sued for (1) a declaratory judgment that Basell should have been paying the tariff rate for all transport services that Norfolk Southern had provided it since June 2002, which included deliveries originating in West Lake Charles and three other Basell pellet-production facilities, and (2) money damages for Basell's failure to pay the tariff rate. Norfolk Southern then amended its complaint to add a claim for breach of contract. Basell filed counterclaims for a declaratory judgment in its favor, quantum meruit, unfair competition, and tortious interference with existing and prospective contractual relations. It appears from the record that it was not until roughly two months before the bench trial that Norfolk Southern learned of Basell's contract with CSX, during the deposition of Samuel Slovak, a Basell employee responsible for transportation procurement. Less than one month before trial, in a stipulation filed with the District Court, Norfolk Southern withdrew its original two counts and Basell withdrew its quantum meruit counterclaim. Less than one week before trial, Norfolk Southern notified the Court and Basell for the first time of two key changes in its litigation strategy: first, it was no longer pursuing any claim related to pellet-production facilities other than West Lake Charles and, second, it was now asserting that Basell's breach of the parties' West Lake Charles contract was material and that, therefore, Norfolk Southern could treat that contract as terminated. However, with the parties in agreement that there was a West Lake Charles contract and that Basell had breached it, the District Court did not concern itself with the state of the pleadings and ordered cross-summary judgment motions.

The issues before the District Court on summary judgment centered on whether Norfolk Southern should be permitted to terminate the contract and, if not, whether the proper remedy for the breach was lost profits or liquidated damages. Norfolk Southern argued that contract termination was appropriate because Basell materially breached and/or repudiated its contract with Norfolk Southern by entering into the February 2005 contract with CSX. This was the first time that Norfolk Southern raised the issue of repudiation.⁴

The District Court concluded that Basell's breach was not material and that, therefore, Norfolk Southern could not terminate its contract with Basell; it did not address Norfolk Southern's repudiation argument. However, the Court determined that there was an immaterial breach and that the appropriate remedy was measured by lost profits. It awarded Norfolk Southern $270,430 for lost profits incurred through June 2006, which was the estimate of lost profits that Basell had submitted to the Court as part of its motion for summary judgment; Norfolk Southern's estimate had been $258,080. The Court found the estimates to be "strikingly similar" and chose the higher of the two, without explanation. Norfolk S. Ry. Co. v. Basell USA, Inc., No. 05-3419, 2006 WL 1892726, at *5 (E.D.Pa. July 10, 2006).⁵ The Court also ordered that Basell would be liable for any additional lost profits incurred by Norfolk Southern during the remaining eleven months of the contract as a result of any ongoing breach of the minimum volume commitment.

Norfolk Southern continues to seek a ruling that it is entitled to terminate the contract because Basell's breach was material, or, alternatively, because Basell's conduct amounted to a repudiation. Norfolk Southern urges that under either scenario it would then be entitled to recover — as...