Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.D. Mo.: Former gas station franchisees must pay attorneys’ fees to Shell following dismissal of their action against the oil giant, (Aug 14, 2013)

By Tobias J. Gillett, J.D., LL.M.

The federal district court in Kansas City has awarded $3.1 million in attorneys’ fees and costs to Shell Oil Co. and a subsidiary in an action against them by former gas station franchisees following the dismissal of the action as a sanction for the franchisees’ failure to preserve evidence (Coral Group, Inc. v. Shell Oil Co., August 12, 2013, Kays, G.). However, the court declined to hold the principal of the franchisees personally liable.

Coral Group, Inc. and Sentis Group, Inc. contracted with Shell Oil Co. and Equilon Enterprises LLC to operate Shell gas stations and convenience stores in Kansas and Missouri. In 2005, Coral and Sentis filed an action against Shell and Equilon, alleging that they had induced Coral and Sentis to enter the contracts through misrepresentation and fraud.

In 2012, however, the court dismissed the plaintiffs’ claims as a sanction for their bad faith failure to preserve evidence. Shell and Equilon then filed a motion seeking an award of $3.1 million in attorneys’ fees, either under a fee-shifting provision in the contracts or under the court’s inherent authority to impose sanctions, and requested the court to hold the plaintiffs’ principal personally liable.

The court granted the motion for attorneys’ fees. The court rejected the plaintiffs’ argument that the defendants had waived their request for attorneys’ fees by failing to specifically request them in their answer.

“When the parties have negotiated a fee-shifting provision in their contract attorneys’ fees and expenses are not an item of special damages which must be specifically requested in a pleading under Rule 9(g),” the court found.

The court distinguished Nat’l Liberty Corp. v. Wal-Mart Stores, Inc., 120 F.3d 913 (8th Cir. 1997), in which attorneys’ fees were required to be pled as special damages under Federal Rule of Civil Procedure 9(g), on the ground that Nat’l Liberty involved attorneys’ fees sought as damages under a referral agreement, an “unusual” situation requiring “specific proof, pleading, and notice.” Here, the defense counsel had sent a letter requesting attorneys’ fees in 2007, and the plaintiffs had been aware of the fee-shifting provisions in the contracts since they initiated the lawsuit.

The court also rejected the plaintiffs’ contention that the defendants could not recover attorneys’ fees under the language of the fee-shifting provisions. The court found, contrary to the plaintiffs’ argument, that “[w]hen a plaintiff’s claims have been dismissed with prejudice as a discovery sanction, the defendant is the prevailing party for purposes of awarding attorneys’ fees and expenses.” The provisions permitted the defendants to recover for “defend[ing] or protect[ing]” their rights under the contracts, even though the defendants did not allege that the plaintiffs had violated any contractual obligations. Moreover, since the plaintiffs’ tort claims, such as those for fraud, negligence, and tortious breach of contract, required Equilon and Shell “to defend their rights and performance under the Agreements, the cost of defending against the tort claims” could also be recovered.

The court found the defendants’ request for $3,103,110.34 in attorneys’ fees and costs to be reasonable. The $2,340,819.44 in attorneys’ fees and 11,553.8 hours billed were reasonable in light of the more than eight year duration of the litigation. Shell and Equilon, who were “sophisticated consumers of legal services,” had timely paid the fees they were billed by defense counsel, and the plaintiffs had not objected to any specific billing entry. Moreover, the case was a “complicated business dispute,” occurring in a “sophisticated, competitive, heavily regulated industry,” which the plaintiffs had “made more difficult by refusing to comply with the rules of discovery.” The case was “bet the company” litigation for the plaintiffs, comprised a substantial challenge to one of the defendants’ channels of trade, and “involved a significant amount of money.” The litigation demanded “a high degree of professional ability, skill, and experience” from the defense counsel. Finally, the result achieved by the defense counsel in convincing the court to dismiss the plaintiffs’ claims with prejudice “justifie[d] the large bill.” The $762,290.90 in expenses was also reasonable.

However, the court declined to hold the plaintiffs’ principal personally liable. Even assuming the court could impose sanctions on a non-party and that the principal had received due process, the court had cured the prejudice caused by the principal’s action by dismissing the plaintiffs’ claims, and the court’s orders had put “other courts potential business partners on notice about his behavior.” Moreover, since he was the principal of both plaintiffs, the court had “effectively sanctioned him personally.” Although the principal was responsible for the plaintiffs’ “intentional failure to preserve records,” and “his testimony was not credible,” the spoliation “was not sufficiently egregious to justify piercing the corporate veil,” particularly since the court did not find he had committed perjury.

Further, the defendants were “not innocent victims,” in that they bore “some responsibility for the acrimony in this litigation leading up to the imposition of sanctions.” The court saw imposing sanctions on the principal personally as “arguably reward[ing] their behavior.”

The case is No. 4:05-CV-0633-DGK.

Attorneys: Jeffrey R. King (King Law Offices LLC) for Sentis Group, Inc. Abby L. Risner (Greensfelder, Hemker & Gale, PC) for Shell Oil Co.

Companies: Coral Group, Inc.; Sentis Group, Inc.; Shell Oil Co.; Equilon Enterprises LLC

Cases: FranchisingDistribution MissouriNews