SGS U.S. TESTING COMPANY, INC. v. TAKATA CORPORATION et al, No. 2:2009cv06007 - Document 136 (D.N.J. 2016)
Court Description: OPINION. Signed by Judge Kevin McNulty on 4/6/2016. (seb)
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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY Civ. No. 09-6007 (KM) Plaintiff, OPINION V. TAKATA CORPORATION, TK HOLDINGS, INC., TAKATA, INC., TAKATA RESTRAINT SYSTEMS, INC., TAKATA SEAT BELTS, INC., TK-TAITO, LLC, and JOHN DOE COMPANIES (1-50), Defendants. MCNULTY, District Judge The plaintiff, SGS U.S. Testing Company (form erly U.S. Testing Company, or USTC), tested seatbelts for the defendants, Takata Corporation and its affiliates (collectively, “Takata”). Multiple lawsuits were brought against either or both, claiming that the testing was inadequate and the seatbelts substandard. None of the lawsuits were succ essful. SGS seeks from Takata indemnification of the costs of defense of thos e actions. District Judge Dennis M. Cavanaugh granted summary judgment to Takata on Count II of the complaint (common law indemnity), and he also dismissed Count I (breach of contract) and Count III (breach of the implied covenant of good faith and fair dealing) for failure to state a claim. The Unit ed States Court of Appeals for the Third Circuit affirmed summary judgment for defendant on Count II, but reversed the dismissals of Counts I and III, and remanded for further proceedings. (ECF nos. 94, 94-1) After Jud ge Cavanaugh’s retirement, the matter was reassigned to me. (ECF no. 103) Dockets.Justia.com SGS U.S. Testing Company, Inc., Now before the Court are cross-motions of Taka ta (ECF no. 121) and SGS (ECF no. 122), pursuant to Fed. R. Civ. p. 56, for summary judgment on the remaining counts, Counts I and III. For the reaso ns expressed herein, the motion of Takata will be conditionally granted, and the motion of SGS will be conditionally denied, reserving only the apportion ment issue, as provided in Section III.A.4, infra. I. Background’ SGS is an independent testing laboratory. From 1985 through 2002, SGS contracted with Takata, a seatbelt manufacturer , to perform representative sample safety tests under Federal Motor Vehi cle Safety Standard 209 (“FMVSS 209”). Among the items tested were samples of Takata’s TI-22 series ejector spring buckle. (PSMF ¶11 1—6, DSMF ¶111—7) As relevant here, the SGS testers would perform a “partial engagement” test. That is, they would attempt to induce a “false latch,” a condition wherein the belt appears to be fully latched, but is not. (DSMF ¶11 14, 15) In such a case, the testers would measure the “release force” required to disengage the buckle. (DSMF 17) ¶ The fee for each test was in the range of $200 0 to $2500. Each time SGS undertook to perform testing for Takata, it issue d an order form, containing “Terms and Conditions” which evolved over time . (PSMF 8) ¶ Herein, citations to the record are abbreviated as follo ws: DSMF = Defendant Takata’s Statement of Material Facts, ECF no. 12 1-1 PR= Plaintiff SGS’s response to DSMF, ECF no. 125-1 PSMF = Plaintiff SOS’s Statement of Material Facts, ECF no. 122-1 DR= Defendant Takata’s response to PSMF, ECF no. 127 PASMF Plaintiff SGS’s Additional Statement of Material Fact s, ECF no. 125-2 DAR= Defendant Takata’s additional response to PASMF, ECF no. 129 3d Cir. Op. = Slip Opinion of U.S. Court of Appeals for the Third Circuit, No. 12—3284, 547 F. App’x 147, 2013 WL 6172550 (3d Cir. Nov. 26, 2013) (copy filed on district court docket at ECF no. 94-1) 1 2 The 1986 Terms and Conditions contain ed the following indemnification provision: [Takata] agrees, in consideration of [SGS ’s] undertaking to perform the test program hereunder, to protect, defend, indemnify, save harmless and exonerate [SGS] from any and all claims, damages, expenses either direct or consequential for injuries to persons or property arising out of or in consequen ce of the performance of the testing or inspections hereunder and/or the performance of the products tested or inspected hereunder. (PSMF ¶ 9) The 1995 Terms and Conditions contain ed the following indemnification provision: [Takata] AGREES, IN CONSIDERATION OF SGS USTC UNDERTAKING TO PERFORM THE TES T(S) OR PROGRAM HEREUNDER, TO PROTECT, DEFEND, IND EMNIFY, SAVE HARMLESS AND EXONERATE SGS UST C FROM ANY AND ALL CLAIMS, DAMAGES, EXPENSES EITHER DIRECT OR CONSEQUENTIAL FOR INJURIES TO PER SONS OR PROPERTY ARISING OUT OF OR IN CONSEQUENCE OF THE PERFORMANCE OF THE TESTING OR INSPECTIONS HER EUNDER AND/OR THE PERFORMANCE OF THE PRODUCTS TES TED OR INSPECTED HEREUNDER UNLESS CAUSED BY THE NEGLIGENCE OF USTC. (PSMF ¶ 10) The 2000 Terms and Conditions contained the following indemnification provision: THE CLIENT [Takata] SHALL GUARANTEE , HOLD HARMLESS AND INDEMNIFY THE COMPANY [SGS] AND ITS OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRA CTORS AGAINST ALL CLAIMS MADE BY ANY THIRD PARTY OR LOSS DAMAGE OR EXPENSE OF WHATSOEVER NATURE INC LUDING REASONABLE LEGAL EXPENSES AND HOWSOEVER ARI SING RELATING TO THE PERFORMANCE, PURPORTED PERFOR MANCE OR NON PERFORMANCE, OF ANY SERVICES TO THE EXTENT THAT THE AGGREGATE OF ANY SUCH CLAIMS REL ATING TO ANY ONE SERVICE EXCEED THE LIMIT MENTIONED IN CONDITION 9 [relating to fee paid by Takata to SGS]. (PSMFj 11) 3 Starting in 2002, six actions were filed 2 concerning SOS’s testing of seatbelt assemblies, particularly the “partial engagement test.” (DSMF 4) In ¶ those class actions, the plaintiffs essentia lly claimed that the partial engagement test was required by FMVSS 209, but that SGS stopped performing it because the Takata belts coul d not pass, and then falsified results. Those results were allegedly pas sed back to Takata, which passed them along to the auto makers that pur chased the belts. (DSMF ¶J 28—42) SOS tendered written requests for indemnif ication and defense at or near the time the actions were filed. (PSMF ¶J 18, 19; DR ¶J 18, 19) Takata declined, in letters stating, inter alia, that the parties’ agreements did not require it to indemnify SOS for SOS’s own intentional or negligent acts. (PSMF ¶ 20; DR ¶ 20) SOS therefore conducted its own defense. (PSMF ¶ 22; DR ¶ 22) Takata alleges that the genesis of the claim s lay in the deposition testimony of SGS employees. (DSMF, PR ¶j 11—24) Particularly pertinent was the testimony of Frank Pepe, Director of Standard Testing and Material Evaluation for SOS. Pepe stated that a 1986 recorded release result of one half pound signified a false latch, and an actu al release force of one half pound. (DSMF, PR ¶J 13—16) Then, in the 1990s, SOS allegedly stopped performing the test. (E.g., DSMF, PR ¶J 24—25, 39) Takata and SGS appear to agree that this was a misinterpretation; what happened was that, when a false latch was not 2 They were: Zavala v. Takata Corp., No. BC277327 (Sup er. Ct., Los Angeles Cty., CA) Fernandez v. Takata Corp., No. CCV2002 -0 10887 (Super. Ct., Maricopa Cty., AZ) Baggett d/b/a American Motors v. Takata Corp., No. 3594 (28th Judicial Circuit, Haywood Cty. , TN) Lohman v. Takata Corp., No. D-l01-CV-200 2021279 (First Judicial Dist. Ct., Santa Fe, NM) Price v. Takata Corp., No. 2:08-CV-00151-J (N.D. Tex.) Stevic v. Nissan Motor Co., Ltd., No. 2006-CA -008631-0 (Super. Ct., Orange Cty., CA) (DSMF ¶{ 28—36) 4 achieved, the technicians would make a nominal entry of one half pound, because the Department of Transportatio n would not accept “not applicable.” (DSMF’, PR Vi! 20-23) The allegations focus primarily on one class action, Zavala, which went to a bench trial (DSMF, PR ¶J 28, 29, 37—49) The judge entered a decision absolving Takata and SGS of all liability. (ECF no. 75-24; DSMF, PR ¶ 52). In Fernandez, Takata and SOS were initia lly named as defendants, but eventually dismissed. In Lohman, Takata was never served, and the case was eventually dismissed against SOS. (DSMF, PR 52 n.5) ¶ In the remaining actions, SOS was not nam ed as a defendant, although some included allegations regarding its testi ng. Price, an action by an individual, went to trial, ending with a jury verdict in favor of Takata and an automobile manufacturer. (ECF no. 75-2 6) In Stevic, all claims against Takata and an automobile manufacturer were dism issed for lack of standing. (ECF no. 75-28) Baggett resulted in a voluntary dismissal as against Takata. (ECF no. 75-25) In short, the defense of all of these actions was entirely successful. Neither SOS nor Takata was found negligen t or held liable. (PSMF ¶ 26; DR ¶ 26) That success, at least in some cases, requ ired SOS to defend itself factually, by introducing evidence that it had not skipped required tests and had not falsely reported results. (See DSMF, PR 38—49) ¶f II. Governing Standards A. Rule 56 Standard Federal Rule of Civil Procedure 56(a) provides that summary judgment should be granted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see also Anderson u. Libe rty Lobby, Inc., 477 U.S. 242, 248 (1986); Kreschollek v. S. Stevedoring Co., 223 F.3d 202, 204 (3d Cir. 2000). 5 In determining whether there is a “dispute as to any material fact,” a court must construe all facts and inferences in the light most favorable to the nonmoving party. See Boyle v. Cnty. of Allegheny Pa., 139 F.3d 386, 393 (3d Cir. 1998). The moving party bears the burden of establishing that no genuin e issue of material fact remains. See Celotex Corp. v. Catrett, 477 U.S. 317, 322— 23 (1986). “[Wjith respect to an issue on which the nonmoving party bears the burden of proof the burden on the moving party may be discharged by ... ‘showing’—that is, pointing out to the district court—that there is an absenc e of evidence to support the nonmoving party’s case.” Celotex, 477 U.S. at 325. Once the moving party has met that threshold burden, the non-moving party “must do more than simply show that there is some metaphysical doubt as to material facts.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The opposing party must present actual evidence that creates a genuine issue as to a material fact for trial. Anderson, 477 U.S. at 248; see also Fed. R. Civ. P. 56(c) (setting forth types of evidence on which nonmoving party must rely to support its assertion that genuine issues of material fact exist). “[Ujnsupported allegations and pleadings are insufficient ... to repel summary judgment.” Schoch v. First Fid. Bancorporation, 912 F.2d 654, 657 (3d Cir. 1990); see also Gleason v. Norwest Mortg., Inc., 243 F.3d 130, 138 (3d Cir. 2001) (“A nonmoving party has created a genuine issue of material fact if it has provided sufficient evidence to allow a jury to find in its favor at trial.”). If the nonmoving party has failed “to make a showing sufficient to establi sh the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial, there can be ‘no genuine issue of ... material fact,’ since a complete failure of proof concerning an essential elemen t of the nonmoving party’s case necessarily renders all other facts immat erial.” Katz v. Aetna Cas. & Sur. Co., 972 F.2d 53, 55 (3d Cir. 1992) (quoting Celote x, 477 U.S. at 322—23). 6 B. Governing Substantive Law as Sta ted by the Third Circuit In determining whether a party is “en titled to judgment as a matter of law” in this diversity case, I must app ly State substantive law. See generally Erie Railroad Co. v. Tompkins, 304 U.S . 64, 58 S. Ct. 817 (1938). That require s me to determine how the State’s hig hest court has decided, or predict how it would decide, the applicable legal issu es. Of course, a decision on point by the New Jersey Supreme Court would be most pertinent. See Hunt v. U.S. Tobacc o Co., 538 F.3d 217, 220-21 (3d Cir. 200 8). But “in the absence of guidance from the state’s highest court, [I] must look to decisions of state interme diate appellate courts, of federal courts interpreting that state’s law, and of other state supreme courts that have addressed the issue,” as well as to “analogous decisions, considered dict a, scholarly works, and any other reliable data tending convincing ly to show how the highest court in the state would determine the issue at hand.” Norfolk Southern Ry. Co. v. Basell USA Inc., 512 F.3d 86, 92 (3d Cir. 2008) (quoting Koppers Co., Inc. v. Aetna Cas . & Sur. Co., 98 F.3d 1440, 1445 (3d Cir. 1996)); see also West v. AT&T Co., 311 U.S. 223, 237 (1940); McCabe v. Ernst & Young, LLP, 494 F.3d 418, 424 (3d Cir . 2007). I am not, however, writing on a clean slate. The U.S. Court of Appeals for the Third Circuit has stated the substan tive principles of law that apply to the remaining contractual claims, Counts I and III. I am bound by the Third Circuit’s statement of the law that sho uld govern the proceedings on remand : SGS’s first argument is that it has a vali d claim for contractual indemnification.... In exchange for SOS’s testing services, Takata agreed to indemnify SGS. Indeed, the parties exe cuted several contracts with various indemnification provisions ove r the years. New Jersey’s indemnification law distinguishes betw een vicarious-liability and independent-fault cases. Mantilla v. NC Mall Assocs., 167 N.J. 262, 770 A.2d 1144, 1149 (2001). In Mantil la, the Court “adopt[edj the ‘after-the-fact’ approach” to determine whether a party has defended against allegations of its ind ependent fault. Id. at 1149, 1151 (citing Cent. Motor Parts Corp. v. E.I. duPont deNemours & Co., 251 N.J. Super. 5, 596 A.2d 759 (19 91)). This approach “permits an indemnitee to recover cou nsel fees if the indemnitee is 7 adjudicated to be free from active wrongdoing regarding the plaintiff’s injury, and has tendered the defe nse to the indemnitor at the start of the litigation.” Id. at 1151 (citin g Cent. Motor Parts Corp., 596 A.2d at 759). This does not mean that an indemnitee is automatically entitled to an award for the costs of defense. Rather, as Kiefferu. Best Buy, 205 N.J. 213, 14 A.3d 737 (2011), demonstrates, when the indemnitee has been adjudged free of any wrongdoing, the ability to recover depends upon the language of the contract. Id. at 74 3—44 & n. 6 (conclud ing that adjudication that owner, contractor and subcontractor were not negligent entitled indemnitee owner to indemnification based on expansive language indemnifying it from “any and all” claims, but that indemnitee contractor was not entitled to indemnification for costs of defense since contract with subcontrac tor required judicial finding of negligence by subcontractor). If application of the afterthe-fact approach establishes that an inde mnitee “has been found to be at least partially at fault,” then the inde mnitee “may not recover the costs of its defense from an inde mnitor” unless there is explicit language in the indemnity contract. Mantilla, 770 A.2d at 1145. Employing the “after-the-fact” approach here , it is evident that the complaint alleged that SGS, as inde mnitee, was adjudicated free of wrongdoing and that it tend ered the defense to Takata, the indemnitor, at the outset of the litigation. See JA. 442 (jf 14—24). SGS, therefore, may be entitled to recover its defe nse costs depending upon the language of the various indemnity contracts. See Mantilla, 770 A.2d at 1151, Kieffer, 14 A.3d at 743— 44. Accordingly, we conclude that the alleg ations in SOS’s complaint were sufficient to state a claim for indemnification under New Jersey law and that the District Court erred by dismissing the claim. We note, however, that in New Jersey “[an ] indemnitee may recover only those fees and expenses attr ibutable to the making of defenses which are not primarily directed toward rebutting charges of active negligence.” Central Motor Parts Corp ., 596 A.2d at 762 (quoting Piedmont Equip. Co. v. Eberhard Mfg . Co., 99 Nev. 523, 665 P.2d 256, 258—259 (1983)). See also Pied mont, 665 P.2d at 260 (holding that an indemnitee who was “exo nerated of liability at trial” was, nonetheless, only entitled to reco ver expenses not directed at rebutting charges of active negl igence.) In this case, SGS incurred substantial expenses defendin g its testing methodology. On remand, the District Cou rt will need to consider whether, in light of the language of the inde mnification provisions, these expenses should be excluded from any recovery. 8 SOS’s second argument is that it also has a valid claim for breach of the duty of good faith and fair deali ng. This duty “is implied in every contract in New Jersey.” Wilson v. Amerada Hess Corp., 168 N.J. 236, 773 A.2d 1121, 1126 (2001). Conduct that is contrary to “community standards of dece ncy, fairness or reasonableness” violates the duty. Id. (quo ting Restatement (Second) of Contracts § 205 cmt. a (1981)); see also id. at 1130 (“Bad motive or intention is essential.”). The District Court dismissed this claim because it conclud ed that SGS did not have a valid “claim for contractual indemnification.” JA. 16. As explained, that conclusion was wrong and the claim should not have been dismissed. (3d Cir. Op. at 3—4, 547 F. App’x at 148—49) III. DISCUSSION A. Count I: Breach of contract As I read the Court of Appeals decision, quoted above, New Jersey law provides for contractual indemnification of defense costs if the indemnitee is adjudicated to be free of wrongdoing. Thos e costs must, however, be apportioned; costs incurred in rebutting charges of the indemnitee’s own active negligence are excluded. All of the foregoing principles, however, may be abrogated by contract; the parties’ agreemen t, if sufficiently clear and explicit, may broaden or narrow the scope of inde mnification. On Count I (breach of contract), then, the issues on remand are three: 1. Eligibility: Did the summary judgment reco rd bear out what the Third Circuit held was adequately alleg ed in the complaint: i.e., that, from an after-the-fact perspective, “SO S, as indemnitee, was adjudicated free of wrongdoing and that it tendered the defense to Takata, the indemnitor, at the outset of the litigation”? 2. Apportionment: If so, is indemnificatio of n any portion of SGS’s costs excluded by the rule against inde mnification of the indemnitee’s costs of rebutting charges of its own “active negligence”? 9 3. Contract: If so, is SGS nevertheless “entitle d to recover its defense costs [based] upon the language of the various indemnity contracts”? A party will not be indemnified for its own negligence or fault, absent a very clear and explicit agreement. Tha t fundamental principle runs through all of the indemnification case law. Accord ingly, the law of New Jersey, synthesized in the opinion of the Court of Appeals, injects similar factors—the indemnitee’s level of fault, the languag e of the indemnification agreement—at more than one step of the analysis. The step 1 requirement that the indemnitee be adjudicated to be free of negligence for , example, is phrased similarly to, but interpreted differently from, the step 2 exclusion of indemnification for costs of rebutting charges of active negligence —and both may be overridden by sufficiently clear contractual language. The result is concededly disorienting, 3 and it is perhaps unsurprising that the par ties in this case are talking past each other. One fundamental disagreeme nt concerns whether the “after-the fact” approach applies only to the step 1 issue, or whether it applies to step 2 as well. And always lurking is the questio n whether the parties nevertheless have contracted for a contrary result. What is clear, contrary to certain oversim plifications, is that New Jersey does not collapse the analysis into any sing le question: e.g., whether negligence was alleged, or whether SGS prevailed, or whether the contract calls for indemnity. Accordingly, neither did the Thi rd Circuit, and neither will 1. I consider the three steps in order. 4 1. Eligibility: Tender of defense/Adjudica tion of no fault The first prerequisite—SGS’s demand for defense and indemnity— is not in issue. SGS has placed in evidence the letters by which it demanded defense As in “If we had a little ham we could have som e ham and eggs, if we had eggs.” Carl Sandburg, The People, Yes #31 (Harcour t Brace & Co. 1936) (apparently quoting a vernacular saying). For purposes of the first two steps, I assume arguendo that the agreements provide for indemnification; whether they do so with the required clarity is discussed at step 3. 10 and indemnification, as well as Takata’ s written denials. Takata admits that these are genuine. As to the second prerequisite—that SGS was adjudicated to be free of wrongdoing— the Third Circuit extracte d from the New Jersey case law an “after-the-fact approach.” 3d Cir. Op. at 3; see also Starbucks Corp. v. Wellshire Farms, Inc., Civ. No. 14-4001, 2016 WL 845140 at *4 (D.N.J. March 4, 2016) (Hiliman, J.) (“That [after-the-factj app roach was devised in the context of determining whether an indemnitee cou ld recover counsel fees ‘so long as the indemnitee is free from active wrongd oing regarding the injury to the plaintif f and has tendered the defense to the ind emnitor at the start of the litigation.”) . It is uncontested that SOS, like Takata, was adjudicated to be free of wrongdoing. The “after-the-fact” app roach dictates that I examine, not just the allegations, but the outcome of the cas es against SOS and Takata. Not surprisingly, they agree that they are wholly blameless. They have submitted the relevant verdicts and opinions dem onstrating that neither SOS nor Takata was ever found negligent or liable in any of the cases. Thus SOS was not fou nd to be even “partially at fault”; it “was adjudicated free of wrongdoing.” (3d Cir. Op. at 3—4) To explore the significance of that issu e, however, it is necessary to briefly consider the background of the “after-the-fact” approach. As the Third Circuit pointed out, it has its roots in New Jersey’s division between indemnification for vicarious-liability and independent-fault cases. (3d Cir. Op. at 3 (citing Mantilla, 770 A.2d at 1149 )) Even at common law, indemnificatio n for liability that is completely vicarious is permitted. 770 A.2d at 114 9 (citing Central Motor Parts Corp., 596 A.2d at 761). That is, where A is forced to answer for B’s fault, then B may freely agree to indemnify A. By contrast, however, cases involving A’s own fault are indemnity ineligible. That is to say that costs will not reimbursed as to an “indemnitee who has defended against allegations of its independent fault.” Id. For purpos es II of that disqualification, “defended against alleg ations” does not really mean that at all; it turns out to be a term of art, mean ing, roughly, “defended itself successfully.” It is to this issue that the “afte r-the-fact approach” applies. The “[a]llegations in the pleadings may be a start ing point to determine whether counsel fees and costs are recoverable by [an indemnitee], but the actual facts developed during trial should control” Mantilla, 770 A.2d at 1150 (quoting Piedmont Equip., 665 P.2d at 258—59 (citin g Pender v. Skilicraft Indus., 358 S. 2d 45, 46 (Fla. Dist. Ct. App. 1978)). The outcome of the case is therefore the clinc her: indemnity is ruled out unless the indemnitee party was “adjudicated free of wrongdoing.” (3d Cir. Op. at 3 (quoting Mantilla, 770 A.2d at 1151) Phra sing the proposition in the negative, Mantilla held that, absent explicit contractual language to the contrary, “an indemnitee who has been foun d to be at least partially at fault may not recover the costs of its defense from an indemnitor.” 770 A.2d at 1145. Thus, in Mantilla, a would-be indemnitee, PBS , was found 40% liable, and the Court ruled that PBS was therefore ineligible for indemnification. SGS’s indemnity claims have surmounted this initial threshold. SGS tendered its defense to Takata and, as it turne d out, was “adjudicated” to be free of any liability—i.e., in the underlying case s, SGS was not found to be even “partially at fault.” Id. Under such circumstances , said the Third Circuit, the independent-fault disqualification does not rule out indemnification: “SGS may be entitled to recover its defense costs dependin g upon the language of the various indemnity contracts.” (3d Cir. Op. at 4) 2. Apportionment “Active negligence” rule Takata’s main contention is that New Jersey law does not permit indemnification of costs to the extent that SGS , in the underlying actions, was “rebutting charges of active negligence.” That active-negligence limitation does not rule out indemnification, but it may require 5 apportionment. Much of the confusion seems to lie here. Step l’s “def ending against allegations,” despite appearances, is not synonym ous with step 2’s “rebutting charges.” As noted above, at step 1, it is a term of art; viewed after the fact, it 12 Having held that the complaint passed step 1 and stated a claim for indemnification, the Court of Appeals state d a major caveat: We note, however, that in New Jersey “[an j indemnitee may recover only those fees and expenses attr ibutable to the making of defenses which are not primarily directed toward rebutting charges of active negligence.” Central Motor Parts Corp., 596 A.2d at 762 (quoting Piedmont Equz. Co. v. Eberhard Mfg . Co., 99 Nev. 523, 665 P.2d 256, 258—259 (1983)). (3d Cir. Op. at 4—5). Critical to the analysis is the Third Circuit’s deliberate invocation of the Piedmont case upon which the New Jersey state courts based their analysis. Immediately after the quoted passage, the Court of Appeals added the following citation and quotation: See also Piedmont, 665 P.2d at 260 (holding that an indemnitee who was “exonerated of liability at trial” was, nonetheless, only entitled to recover expenses not directed at rebutting charges of active negligence.) (3d Cir. Op. at 5). Thus the Court of Appeals specifically cited Piedmont (which was relied on by both Central Motor and Mantilla) for the proposition that the “active negligence” apportionment principle applies even where the indemnitee was ultimately “exonerated of liability at trial.” (3d Cir. Op. at 5). The clear implication is that the “after-the-fact” appr oach of step 1 does not extend to step 2. The step 2 “active negligence” apportion ment rule looks, not to the outcome of the case (“exoneration”), but to the nature of the claims (“charges”) that the indemnitee was rebutting. Where a party has been cleared of wrongdoing, it is generally eligible for indemnif ication of defense costs, but only essentially requires that the outcome be who lly in the indemnitee’s favor. Once step 1 eligibility is established, step 2 requires that the “charges” or allegations be sorted in order to apportion liability for costs. The distinction between ineligibility and apportion ment, too, is less immediately apparent here, because Takata claims that none of SGS’s costs are compensable (i.e., that the “apportionment” is on a 0/100 basis). 13 insofar as those costs were incurred in “the making of defenses which are not primarily directed toward rebutting charges of active negligence.” id. 6 Why such a rule? It is important to keep in mind that we are adjusting rights, not between plaintiff and defendant, but between Defendant #1 and Defendant #2. As to the plaintiff who asser ted a meritless claim that Defendant #1 was negligent, the equities are clear enou gh, and yet under the American Rule Defendant #1 will ordinarily bear its own litigation expenses. By hypothesis, the party who caused that need less expenditure was not Defendant #2, but the overreaching plaintiff. In such a case, the default apportionment rule limits the shifting of expenses between the defendants. 7 Indemnity, then, is permissible only to the extent that SGS incurred expenses for activities not directed at rebutting charges of its own active negligence. In other words, as I read the Thir d Circuit’s remand, the expenses will have to be apportioned: In this case, SGS incurred substantial expe nses defending its testing methodology. On remand, the District Court will need to consider whether, in light of the language of the indemnification provisions, these expenses should be exclu ded from any recovery. (3d Cir. Op. at 5) SGS may be indemnified, but only to the extent of expenses of it incurred rebutting claims other than thos e of SGS’s active negligence. There is, however, one important caveat. 6 The awkwardness here is that Central Motor and Mantilla were not nearly so explicit as the Third Circuit in separating step 1 eligibility from step 2 apportionment. That division is most clearly expressed in Piedmon t, the Nevada case relied upon by both. Neither Central Motor nor Mantilla, however , cited the particular language from Piedmont, quoted by the Third Circuit, to the effect that step 2 apportionment would be appropriate even where the indemnitee was “exo nerated of liability at trial.” See Piedmont, 665 P.2d at 260. In contrast, recall that vicarious liability—i.e., liability of Defendant #1 based on the alleged wrongdoing of Defendant #2—is treat ed separately. In such a case, Defendant #1’s need to mount a defense is clear ly attributable to Defendant #2, and indemnity is freely permitted. 14 3. Contract: Explicit and unequivocal language Step 1 and step 2 are both subject to the larger princ iple that the parties may contract for a contrary result. The step 1 “ind ependent fault” disqualification, for example, is a “default rule” that applies “absent explicit contractual language to the contrary.” Mantilla, 770 A.2d at 1145. The step 2 “active negligence” apportionment rule likewise mus t be applied “in light of the language of the indemnification provisions,” and the Third Circuit has directed that I do so on remand. (3d Cir. Op. at 5) Contract is king. Parties are free, within broad limit s, to allocate risks of future events, including litigation. Now if they could dicker forever at no cost, they could hypothetically arrive at agreements that allocate all risks for every possible contingency. But we do not live in such a worl d. Courts have therefore developed “gap-fillers”—”default rules” to decide case s not covered by explicit contractual language. Such off-the-rack rules are desig ned to be reasonable in a majority of cases, but where the case is covered by tailor-made contractual language, that contractual language will control. Wha t that means in practice is that the parties may contract around the active-ne gligence apportionment rule. How specific must such a contractual work-around be? The rules for interpreting indemnity agreements provide some guid ance. A commercial contract of indemnity is a valid, even salutary mean s of allocating risk. See Ramos u. Browning Ferris Industries, 510 A.2d 1152, 1158—59 (N.J. 1986); Stier v. Shop Rite of Manalapan, 492 A.2d 1055, 1058-59 (N.J. Super. Ct. App. Div. 1985). In the main, such a contract is interpreted like any other: primarily in terms of its plain, unambiguous language, considere d in light of its essential purpose and the object the parties were trying to achie ve. Kieffer v. Best Buy, 14 A.3d 737, 742—43 (N.J. 2011); Vitty v. D.C.P. Corp., 633 A.2d 1040, 1043 (N.J. Super. Ct. App. Div. 1993). A special rule of interpretation applies to contracts of indemnity, however. In cases of ambiguity, the contract will be “stri ctly construed against 15 the indemnitee.” Kieffer, 14 A.3d at 743 (quoting Maritilla, 770 A.2d at 1 151). That principle suggests that contractual language in derogation of the step 1 and 2 default rules must be “explicit,” see Mantilla, 770 A.2d at 1152, or “unequivocal,” see Ramos, 510 A.2d at 1159. I turn to the language of the indemnific ation provisions, quoted in full above. That language evolved from 198 5 through 2002, but throughout it remained quite broad. In 1985, it required indemnification of “any and all claims, damages, expenses either direct or consequential for injuries to persons or property arising out of or in consequence of the performance of the testing or inspections hereunder and/or the per formance” of the seat belts. The 1995 version contained exactly the same language (albeit in capital letters), but added the proviso “UNLESS CAUSED BY THE NEGLIGENCE OF USTC.” The 2000 version covered “ALL CLAIMS MAD E BY ANY THIRD PARTY OR LOSS DAMAGE OR EXPENSE OF WHATSO EVER NATURE INCLUDING REASONABLE LEGAL EXPENSES AND HOWSOEVER ARISING RELATING TO THE PERFORMANCE, PURPORTED PER FORMANCE OR NONPERFORMANCE, OF ANY SERVICES. 8 ” As to subject matter, these indemnity provisions apply to claims or expenses “arising out of” (or even mo re broadly, “HOWSOEVER ARISING RELATING TO”) the seatbelt testing und er the contract. Courts interpreting such “arising out of” language have giv en it broad scope. Vitty, for example, held that “the words ‘arising out of’ sho uld be construed in accordance with the common and ordinary meaning as refe rring to a claim ‘growing out of’ or having its ‘origin in’ the subject matter of the agreement....” 633 A.2d at 1043. As to the kinds of expenses that are compensable, it seems that legal fees and expenses would comfortably fit wit hin the indemnity provisions’ broad language. The 1985/90 provisions enc ompasses “any and all claims [or] ... 8 The 2000 version provides for indemnific ation only to the extent that such expenses exceed the fee Takata paid to SGS. 16 expenses.” The 2000 version more spe cifically covers “DAMAGE OR EXPENSE OF WHATSOEVER NATURE INCLUDING REASONABLE LEGAL EXPENSES” (2000). So, to be sure, the contractual languag e is broad. But “broad” does not equate to “explicit” and “unequivocal. ” In the context of a claim for indemnity in derogation of the default rules stated above, the contract must be not just broad but specific. In Azurak v. Cor porate Property Investors, 814 A.2d 600 (N.J. 2003), for example, the indemnity provision in a contract for janitorial services at a shopping mall covered “any claim ... or expense (including attorneys’ fees),” and it extended to mat ters “relating to, arising out of or existing by reason of Contractor’s per formance of this Agreement or the conditions created thereby . . .“ Id. at 600. Sued for a slip and fall, the mall was found 30% responsible and sought ind emnification. Affirming the Appellate Division, the Supreme Court agreed that “the cited language of the indemnification provision was neither explicit nor unequivocal on the subject of the indemnitee’s negligence, thus fall ing short of the standard we established in [Ramos, supra, and Mantilla, supra.] Id. at 601. The Court approvingly cited the Appellate Division’s reliance on the “absence of clear and explicit language addressing indemnification for the Mall ’s negligence.” Id. It was not enough, said Azurak, that the indemnity provision, which covered any claims arising out of the contract’s subject matter, was “broad.” Former case law giving comprehensive effect to such a “broad form” indemnity, Azurak held, had been “implicitly ove rruled by Ramos and Mantilla.” Id. “In . 9 The reference is to Doloughty v. Blanch ard Const. Co., 352 A.2d 613 (Law Div. 1976), a case that has been impliedly over ruled by Ramos and Mantilla. Azurak, 814 A.2d at 600—0 1. Leitao v. Damon G. Douglas Co., 693 A.2d 1209, 1212 (N.J. Super. Ct. App. Div. 1997), cited by SGS, is questionable at best, because it rests squarely on the authority of the overruled Doloughty case. In addition, Leitao relies on the Doloughty-derived rationale that in a construction case, the indemnity contracts really serve the function of allocating coverage among the parties’ insu rers. Id. (citing, e.g., The Pep Boys v. Cigna Indem. Ins. Co. of N. America, 692 A.2d 546, 549 (N.J. Super. Ct. App. Div. 1997) (insurance case); Harrah’.s Atlantic City 1122, 1124 (N.J. Super. Ct. App. Div. 1996 , Inc. v. Harleysuille Ins. Co., 671 A.2d ) (insurance case)). Contrary to contracts of 17 order to allay even the slightest doubt on the issue of what is required to bring a negligent indemnitee within an indemnification agreement we reiterate that the agreement must specifically reference the negligence or fault of the indemnitee.” Id. To be sure, the cited cases are speaking primarily of the step 1 eligibility analysis. But the concerns of step 2, like those of step 1, are bound up in the default rule barring indemnification for the indemnitee’s own negligence. And although the step 2 rule, too, can be overruled contractually, such contractual language must be similarly explicit. I find broad language, but not clear and explicit language, in the SGS/Takata indemnification provisions. They mention negligence only once: in the 2000 version, indemnification is excluded for expenses “CAUSED BY THE NEGLIGENCE OF USTC.” These indemnification provisions do not specifically refer to indemnification of the costs of defense of claims (however unsuccessful) that SGS was actively negligent. The contractual language, then, does not take us out of the realm of the “default rules.” In other words, we remain where we were at the close of Section III.A.2, supra. Under the step 2 apportionment rule, SGS may be indemnified only for expenses of defending claims apart from those alleging that SGS was actively negligent. 4. Apportionment Takata has submitted suggestive evidence that the claims SGS litigated in the underlying actions were all claims of wrongdoing by SGS. SGS has submitted other materials suggesting that it was, at least at times, defending Takata’s actions. What I do not have before me is an apportionment analysis: a statement of SGS’s claimed expenses, and an analysis of the portions that were and were not devoted to rebutting charges that SOS was actively negligent. indemnity, insurance contracts are generally construed liberally in favor of the insured. 18 To some degree, the omission is understandable. The parties simply disagreed on the applicable legal standard, and the scope or even relevance of apportionment evidence depended on that standard. Out of caution, then, I will permit (but not require) SGS, within 21 days, to make a supplemental submission, not to exceed 10 pages. In that submission, SGS should assume for purposes of argument that my apportionment analysis governs, and should establish how indem nification of its expenses would be apportioned thereunder. Within 21 days thereafter, Takata may, if it wishes, respond with a 10-page submission. No reply is authorized. B. Count III: Implied Covenant of Good Faith and Fair Dealing Breach of the implied covenant of good faith and fair dealing is a separate claim, with different elements. Nevertheless, the forego ing analysis implies that summary judgment must be granted to Takata on Count III, as well. “Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.”’ [Wilson v. Amerada Hess Corp., 168 N.J. 236, 245, 773 A.2d 1121 (2001)] (quoting Restatement (Second) of Contracts, supra, 205 comment a). The § covenant of good faith and fair dealing calls for parties to a contract to refrain from doing “anything which will have the effect of destroying or injuring the right of the other party to receive” the benefits of the contract. Palisades Props., Inc. v. Brunetti, 44 N.J. 117, 130, 207 A.2d 522 (1965) (internal quotations omitted); see also Wade v. Kessler Institute, 172 N.J. 327, 340, 798 A.2d 1251 (2002) (same). Proof of “bad motive or intention” is vital to an action for breach of the covenant. Wilson, supra, 168 N.J. at 251, 773 A.2d 1121. The party claiming a breach of the covenant of good faith and fair dealing “must provide evidence sufficient to support a conclusion that the party alleged to have acted in bad faith has engaged in some conduct that denied the benefit of the bargain originally intended by the parties.” Williston, supra, § 63:22, at 513—14 (footnotes omitted); see also Wilson, supra, 168 N.J. at 251, 773 A.2d 1121; [Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 420, 690 A.2d 575 (1997)] 19 Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Ctr. Associates, 864 A.2d 387, 396 (N.J. 2005). The bad faith here, according to SGS, lay in the decision of Takata’s counsel to deny SGS’s requests for defense and indemnit y. SGS suggests that counsel’s decision was based, not on the language of the agre ements, but on strategic considerations. From quoted deposition testimon y, an inference could plausibly be drawn that counsel sought to give SGS an incentive to participate actively in the defense and to avoid bad testimony by its employees. Counsel added (to paraphrase) that if Takata had defended but reser ved rights under the indemnity, it would have been placed in the position of chasing SGS for the money in the event of an unfavorable result. (ECF no. 122-3 at 3) I will make the SGS-friendly assumption, for purposes of argument, that this deposition testimony could be evidence of bad faith. But bad faith, though “vital,” id., is not sufficient. Breach of the implied cove nant of good faith and fair dealing requires that a party, here SGS, was deprived of its “justified expectations,” and was “denied the benefit of the bargain originally intended by the parties.” Id. I have held that SGS was not entitled to inde mnification for costs of rebutting charges of its own active negligence. It follows that Takata, whether in good or bad faith, did not deprive SGS of the bene fit of the bargain the parties made. Should SGS’s supplemental submission persuade me, howev er, that it was denied a substantial portion of the benefit of the cont ract, it may be necessary to revisit this aspect of my ruling. 20 CONCLUSION For the reasons stated above, the sum mary judgment motion of Takata (ECF no. 121) is CONDITIONALLY GRANTE D, and that of SGS (ECF no. 122) is CONDITIONALLY DENIED, subject to the supplemental submissions authorized in Section III.A.4, supra. In acc ordance with the accompanying Order, if no such submission is received, this order will become final; if supplemental submissions are received, I will rule as to any apportionment issues that remain. An appropriate Order accompanies this opi nion. Dated: April 6, 2016 (L KEVIN MCNULTY United States District Judge” 21
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