Bohler Uddeholm Amer v. Ellwood Grp Inc

Opinions of the United

2001 Decisions States Court of Appeals

for the Third Circuit

5-17-2001

Bohler Uddeholm Amer v. Ellwood Grp Inc

Precedential or Non-Precedential:

Docket 99-3773

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2001

Recommended Citation

"Bohler Uddeholm Amer v. Ellwood Grp Inc" (2001). 2001 Decisions. Paper 108.

http://digitalcommons.law.villanova.edu/thirdcircuit_2001/108

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 2001 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

Filed April 11, 2001

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 99-3773

BOHLER-UDDEHOLM AMERICA, INC., a Delaware

Corporation; BOHLER-UDDEHOLM COPORATION, a

New York Corporation

v.

ELLWOOD GROUP, INC., a Pennsylvania Corporation;

ELLWOOD QUALITY STEELS COMPANY, a Pennsylvania

Business Trust; ELLWOOD SPECIALTY STEEL COMPANY,

a Pennsylvania Corporation; DAVID E. BARENSFELD,

an individual

v.

BOHLER-UDDEHOLM COPORATION, a New York

Corporation; UDDEHOLM LIMITED,

a Canadian Corporation

Ellwood Group, Inc.; Ellwood Quality Steels Co.;

Ellwood Specialty Steel Co.; David Barensfeld;

Bjorn E. Gabrielsson, Appellants

On Appeal From the United States District Court

For the Western District of Pennsylvania

(D.C. Civ. Nos. 91-cv-00706 and 96-cv-00734)

District Judge: Honorable Robert J. Cindrich

Argued: July 19, 2000

Before: BECKER, Chief Judge, SLOVITER and

NYGAARD, Circuit Judges.

(Filed: April 11, 2001)

H. WOODRUFF TURNER, ESQUIRE

(ARGUED)

ROBERT B. SOMMER, ESQUIRE

DAVID M. ACETO, ESQUIRE

DOUGLAS A. PEARSON, ESQUIRE

Kirkpatrick & Lockhart, LLP

Henry W. Oliver Building

535 Smithfield Street

Pittsburgh, PA 15222-2312

Counsel for Appellants

VINCENT J. CONNELLY, ESQUIRE

ALAN J. MARTIN, ESQUIRE

(ARGUED)

DANIEL L. RING, ESQUIRE

ERIC S. DREIBAND, ESQUIRE

TERRI HOSKINS, ESQUIRE

AUDREY FRIED-GRUSHCOW,

ESQUIRE

Mayer, Brown & Platt

190 South La Salle Street

Chicago, IL 60603

WILLIAM M. WYCOFF, ESQUIRE

Thorp, Reed & Armstrong

One Riverfront Center

Pittsburgh, PA 15222

Counsel for Appellees

OPINION OF THE COURT

BECKER, Chief Judge.

This is an appeal by defendant Ellwood Group, Inc.,

(Ellwood) from a final judgment enter ed against it by the

District Court for the Western District of Pennsylvania in

favor of plaintiff Uddeholm Tooling AB (Uddeholm). This

complicated commercial case emerges fr om the

disintegration of a joint venture enter ed into by Ellwood, a

Pennsylvania corporation in the business of for ging steel

ingots into various components of heavy machinery, and

2

Uddeholm, a Swedish company that produces specialty tool

steels. Uddeholm brought numerous claims against

Ellwood, including breach of contract, br each of fiduciary

duty, misappropriation of trade secrets, and civil

conspiracy. Resolution of this appeal requir es us to address

a number of questions of Pennsylvania contract, business

tort, and damages law, along with two questions on the

application of the Federal Rules of Evidence.

The most important issue involves the question whether

the joint venture agreement was ambiguous as a matter of

law as to whether Ellwood could properly claim rebates for

its sales to third parties of ingots pr oduced by the Ellwood-

Uddeholm Steel Company (EUS), the entity for med by the

joint venture, or whether Ellwood was limited to rebates for

sales by EUS to Ellwood for Ellwood's own use. Uddeholm

maintains that the latter interpretation r eflects not only the

clear intent of the contracting parties but also the raison

d'etre of the contract. We conclude that the District Court

was correct in finding a contractual ambiguity. We also

conclude, however, that it erred in instructing the jury that

Ellwood had the burden of establishing the meaning of the

disputed terms in the agreement because of the fiduciary

relationship between the parties that was cr eated by the

joint venture. We must therefor e vacate the jury verdict on

the contract claim and remand for a new trial.

Other important issues include: (1) whether Uddeholm's

breach of fiduciary duty and misappropriation of trade

secrets claims were covered and thus precluded by its

breach of contract claim; (2) whether Ellwood's potential

liability on the civil conspiracy claim was for eclosed

because the jury found no other conspirator; (3) whether

Uddeholm could recover on its contract claim for rebates

Ellwood received in 1991; (4) the inter est rate to be applied

to sums Uddeholm owed Ellwood for post-ventur e

purchases of steel; and (5) two evidentiary questions: the

admissibility of a document under Fed. R. Evid. 807 (the

residual exception to the hearsay rule), and whether the

court erred by requiring redaction of an Uddeholm

employee's memo before admitting it into evidence.

We will affirm the District Court's decision allowing

Uddeholm to recover on its fiduciary duty claims, for the

3

wrongful behavior that underlies this claim was not covered

by the joint venture agreement. However , we will set aside

both the verdict for Uddeholm on the misappr opriation

claim (because it was covered by the joint venture

agreement) and the verdict on the civil conspiracy claim (as

there was insufficient evidence of the existence of a second

co-conspirator, which is required under Pennsylvania law).

With respect to the latter issue, we r eject Uddeholm's

contention that Ellwood did not validly preserve its

objection. We will also set aside the District Court's order

that applied a 6% interest rate to the sums Uddeholm owed

Ellwood for steel that it bought post-ventur e, and remand

for further findings of fact on this issue. W e will affirm the

District Court's evidentiary rulings, because its application

of Rule 807 and its redaction of the employee's memo were

not abuses of the court's discretion. W e therefore will affirm

in part, reverse in part, and remand for further

proceedings.

I. Facts and Procedural History

Prior to 1984, Ellwood relied on outside manufacturers to

supply it with steel ingots for its steel-for ging business. In

early 1984, Ellwood decided to construct an ingot mill in

Ellwood City, PA, in order to produce its own supply of

steel, which it did under the name Ellwood City For ge Steel

Company (ECF). At around this time, Uddeholm decided

that it wanted to set up a manufacturing plant in the

United States in order to avoid quotas on imports of tool

steel from Sweden, deliver steel more quickly, and avoid

currency fluctuations. The two companies entered

negotiations with an eye towards forming a joint venture in

which Uddeholm would provide its steelmaking expertise

and some funding for Ellwood's new mill, while Ellwood

would provide Uddeholm with a U.S. sour ce of tool steel as

well as most of the financing of the mill.

After nine months of negotiation, the two companies

entered into a joint venture agreement which comprised

several contracts executed in April and June 1985

(collectively, the Agreement).1 For the purposes of this

_________________________________________________________________

1. More specifically, the joint ventur e agreement was between Uddeholm

and Ellwood City Forge Corporation, a subsidiary of the Ellwood Group.

4

appeal, the most important of these contracts ar e the

Shareholders Agreement, the two Steel Pur chase

Agreements (one each for Ellwood and Uddeholm, covering

their purchases from the new mill), and the Know-How

License Agreement. Under the terms of the Agreement,

Ellwood became an 80% shareholder and Uddeholm a 20%

shareholder in ECF, which changed its name to the

Ellwood-Uddeholm Steel Company (EUS). As it had with

ECF, Ellwood continued to run the daily operations of EUS.

The Agreement provided that EUS would sell steel ingots to

Uddeholm and Ellwood at cost plus a percentage of this

cost to cover overhead, which was set in the original

contracts at 35%. "Overhead" is defined in the Agreement

as including "all interest, depreciation, selling, general and

administrative costs and all other costs and expenses

which are not included as part of the `base costs' [of the

ingots]." Uddeholm had the right to pur chase up to 10% of

the ingots produced by EUS, and Ellwood had the right to

purchase the rest.

The Agreement included the rebate pr ovision (S 2.3 of the

two Steel Purchase Agreements contained within the overall

Agreement) that is central to the current dispute. This

clause provided for "rebates" in case one of the partners

paid more than its allotted share of EUS's overhead, which

was based on each partner's percentage contr ol of EUS:

80% for Ellwood, 20% for Uddeholm. More specifically, if

the amount of Ellwood's steel purchases that went to EUS's

overhead (i.e., the 35% over the ingot cost) exceeded 80% of

the total sums that went to overhead during the calendar

year, then Ellwood was entitled to a r ebate of the amount

it paid in excess of this 80%. The same held true for

Uddeholm, but at 20%. The Agreement also pr ovided that if

either partner's contributions to EUS's over head totaled

less than its percentage control of the company (i.e., if

Ellwood's contributions were less than 80% of EUS's

overhead, or Uddeholm's contributions wer e less than

20%), that partner had to make payments to EUS in or der

_________________________________________________________________

After the joint venture began, Uddeholm changed its name to the Bohler-

Uddeholm Corporation, but for simplicity we will use the name

"Uddeholm" to refer to that corporation in this opinion.

5

to bring its share of the overhead paid to the level

equivalent to their percentage control. This system was

designed to ensure that Ellwood always paid exactly 80% of

EUS's overhead, and Uddeholm paid for exactly 20%, no

matter how much steel each was buying from EUS.

As part of the Agreement, the parties established that

after October 1, 1989, either party could cause EUS to buy

Uddeholm's 20% stake in EUS at book value (thus making

Ellwood the sole owner of EUS). The Agreement contained

non-compete provisions that went into ef fect if this

purchase option was exercised; the Agr eement granted EUS

an exclusive license for Uddeholm's "know-how," but

prohibited EUS from using such know-how for three years

after the end of the joint venture.

The documents comprising the Agreement included the

Business Plan for EUS, which was incorporated by

reference into the Shareholders Agr eement. The Business

Plan stated that "[t]he principal purpose of EUS will be to

supply high quality ingot to its owners, Ellwood City Forge

Corporation and Uddeholm Tooling AB," and that "[i]ngots

shall be cast in a variety of shapes and weights according

to the requirements of Ellwood City For ge Corporation and

Uddeholm Tooling AB." During the negotiations for the

Agreement, Ellwood proposed a draft Business Plan which

indicated that Ellwood desired to sell EUS's ingots to third-

party purchasers in the general market. Ellwood's proposed

Business Plan included the additional purpose for EUS that

"[s]econdarily, [EUS] shall be operated with the purpose of

earning the maximum possible profit fr om sale of its

product to third parties." The pr oposal added that ingots

shall be cast to the requirements of "third party

purchasers" as well as Ellwood and Uddeholm, and that

"[i]ngots may be sold to third parties to the extent permitted

under the various contracts among EUS, Ellwood City

Forge and Uddeholm Tooling."

Uddeholm rejected these proposed alterations to the

Business Plan, making clear to Ellwood that it did not want

EUS's production to go to anyone but the shar eholders.

Ellwood agreed to delete from the Business Plan all

language to the effect that the secondary purpose of EUS

was to sell tool steel to third parties, though there is

6

evidence in the record that the parties came to an

understanding that perhaps marginal amounts of ingots

would be sold by the shareholders to thir d parties if EUS's

financial circumstances so requir ed.

The EUS plant commenced operation in 1985. It is

disputed whether EUS and Ellwood provided Uddeholm

with full disclosure in EUS's monthly and yearly financial

statements during the term of the joint ventur e. Uddeholm

claims that it requested full information and did not receive

it, while Ellwood contends that it always pr ovided full

information. It is undisputed, however , that during the

venture EUS sold a substantial amount of steel ingots that

ended up going to third parties in unchanged form, i.e., not

as forged steel products but as raw steel ingots. The proper

characterization of these sales to third parties is the subject

of strong disagreement between Ellwood and Uddeholm.

Ellwood asserts that it bought the ingots fr om EUS and

resold them to the third parties, so that it properly received

a rebate on all these "purchases," as that term is defined in

S 2.3 of the Steel Purchase Agreements. Uddeholm counters

that the ingots were essentially sold dir ectly by EUS to the

third parties at Ellwood's direction, and that Ellwood was

not entitled to rebates on these sales because they were not

"purchases" as defined in S 2.3 of the Steel Purchase

Agreements.

In 1987, Uddeholm designated its employee Bertil

Rydstad to be the person responsible for Uddeholm's

relationship with Ellwood and EUS. In Mar ch 1988,

Rydstad wrote a memo that is a subject of dispute in this

appeal. In that memo, Rydstad stated that he understood

that Ellwood was free to resell the ingots bought from EUS:

"Thus, there are only two purchasers of ingots. However,

nothing precluded [sic] them from selling to a third party."

At trial, the District Court ordered this language redacted

from the memo before the memo was admitted into

evidence because these statements involved a "legal

interpretation by a non-legal person," and because the

statements did not address the relevant issue of

interpretation of the Agreement, namely, whether Ellwood

was entitled to receive rebates for its ingot sales to third

parties.

7

On January 29, 1991, Ellwood notified Uddeholm of

Ellwood's intention to exercise its right under the

Agreement to have EUS buy Uddeholm's EUS shar es at

their December 31, 1990, book value. In March 1991,

Deloitte & Touche prepared a r eport for EUS detailing

EUS's book value as of December 31, 1990. Uddeholm

objected to the calculated book value because it was about

half of the book value determination that Ellwood had

related to Uddeholm in November 1990. Uddeholm

informed Ellwood that it was willing to tender its shares at

the Deloitte & Touche calculated value subject to Uddeholm

retaining its rights to make a legal claim for an increased

book value. Ellwood insisted that Uddeholm accept the

calculated book value for the stock without r etaining any

such right to a legal claim, threatening that otherwise it

would refuse Uddeholm's tender of its stock, which would

keep Uddeholm responsible for 20% of EUS's over head

through 1991 and beyond.

Uddeholm then brought suit in the District Court,

contending that the Deloitte & Touche book value

calculation was understated because the profits that

Ellwood collected on the ingots that were sold to third

parties should have gone to EUS (and thus 20% to

Uddeholm), rather than directly and solely to Ellwood.

Uddeholm alleged in an amended complaint that Ellwood

had violated S 2.3 of the Steel Purchase Agreements by

claiming rebates on these sales when the sales were not

"purchases" as the term is used in that section. On

November 14, 1991, the parties entered into a stipulation

under which Uddeholm tendered its shares of EUS to

Ellwood (thus ending the joint venture), while payment for

Uddeholm's shares would be made pursuant to an order of

the District Court at the resolution of this litigation.

After the termination of the joint ventur e in November

1991, Ellwood created the Ellwood Specialty Steel Company

(ESS) to sell common grades of tool steel. Ellwood r ecruited

Ake Sundvall, a former president of Uddeholm who at that

time was working for an Austrian steel company, A vesta, to

become president of ESS. While Sundvall was still working

at Avesta, Ellwood sent Uddeholm's confidential pricing,

shipping, and customer information to Sundvall at his

8

Avesta office, an act which Uddeholm ar gues was a

misappropriation of its trade secrets because Avesta was a

competitor of Uddeholm's in the steel market. Uddeholm

also contends that Sundvall and other Ellwood officials

improperly persuaded sales representatives to leave

Uddeholm for ESS, and then used these repr esentatives to

solicit and sell tool steel to Uddeholm's customers in

violation of the non-competition provisions of the

Agreement. Uddeholm asserts that ESS sold over $13

million worth of steel to Uddeholm's customers between

1991 and 1994, dramatically undercutting Uddeholm's

share of the steel market.

From the time the joint venture was ter minated through

May 1992, Uddeholm bought steel from Ellwood. During

this time, Uddeholm did not pay Ellwood for appr oximately

$345,000 worth of steel. Uddeholm does not dispute the

existence of this debt, but the parties disagr ee over the rate

of interest that should be applied to it. Ellwood argues that

an 18% interest rate (which is the rate on its invoice order

form and the standard rate it char ges all of its customers)

should apply, while Uddeholm argues that the statutory 6%

rate should apply, as the steel was bought under an

agreement that did not involve Ellwood's standard terms.

The disputes between Ellwood and Uddeholm over the

Agreement resulted in four differ ent civil actions which

were eventually consolidated. At trial, the District Court

found that the Agreement was ambiguous as to whether

Ellwood could properly claim rebates for the steel ingots

sold to third parties, and it therefor e sent the issue of the

correct interpretation of the Agreement to the jury. The

court also instructed the jury that Ellwood had the burden

to prove by a preponderance of the evidence that these

transactions were in accord with the ter ms of the

Agreement. The jury returned a special verdict finding that

Ellwood had breached the Agreement by including third

party ingot sales in its rebate calculations, and awarded

Uddeholm $4.1 million in compensatory damages and

interest. The jury also found that Ellwood and David

Barensfeld (a director of both EUS and Ellwood) had

breached their fiduciary duties to Uddeholm, and awarded

$45,000 in compensatory and $85,000 in punitive damages

9

for Ellwood's breach, and $70,000 in compensatory and

$300,000 in punitive damages for Barensfeld's breach. The

jury found further that Ellwood had breached the

Agreement's non-competition clauses and committed the

torts of misappropriation of trade secr ets and civil

conspiracy; it awarded compensatory damages of $1 million

on the non-compete claim, $150,000 on the

misrepresentation claim, and $70,000 in punitive damages

on the civil conspiracy claim. (The jury exonerated the other

alleged co-conspirators.) The District Court enter ed a final

judgment in this case on July 1, 1999.

The parties reserved the issue of inter est for post-trial

determination. After the verdict, the District Court ruled on

this issue and various post-trial motions. The court found

that the post-venture steel was purchased under an

agreement that did not include Ellwood's standard terms as

printed on its steel invoices, and thus the court applied the

statutory 6% interest rate instead of the 18% invoice rate.

The District Court also rejected Ellwood's ar gument that

the rebates that Ellwood received between January 1 and

November 14, 1991 should be excluded from the damages

computation. The District Court then entered a superseding

final judgment in favor of Uddeholm for $9,458,210.86 on

September 13, 1999.

This appeal timely followed.2 Because the appeal presents

a plethora of issues, not all of which have been r eferenced

above, it will be useful to set them forth seriatim, couched

in terms of Ellwood's contentions:

1. Did the District Court err in finding that the

Agreement was ambiguous as a matter of law

regarding whether Ellwood could pr operly claim

rebates for third-party sales of ingots pr oduced by

EUS (in contrast to being limited to rebates on

purchases for its own use, which Uddeholm claims

was the clear intent of the contracting parties)?

2. Did the District Court err in its instruction to the

jury that Ellwood had the burden of establishing

_________________________________________________________________

2. The District Court had jurisdiction over this action pursuant to 28

U.S.C. S 1332, and we have jurisdiction pursuant to 28 U.S.C. S 1291.

10

the meaning of disputed contract terms in the

Agreement?

3. Did the District Court err in other jury instructions

i) by not specifically identifying the allegedly

ambiguous terms in the Agreement and the

alternative interpretations of these ter ms;

ii) by giving insufficient instruction on the

applicable principles of contract

interpretation;

iii) by giving the instruction that it was

"undisputed" that both parties were to"share

the benefits" of the joint venture, which

Ellwood alleges was biased in favor of

Uddeholm's interpretation of the Agreement;

iv) by giving an instruction on pr oving damages

for lost profits from a breach of a covenant not

to compete which Ellwood alleges was a

misstatement of Pennsylvania law; and

v) by not instructing the jury that it should

decide whether Ellwood's 420 Series of steel

fell into the category of "tool steel" as defined

under the covenant not to compete?

4. Did the District Court err in allowing the jury to

consider the misappropriation of trade secr ets tort

claim because the behavior that was alleged to

constitute this breach was covered by the terms of

the Agreement?

5. Did the District Court err in allowing the jury to

consider the breach of fiduciary duty claims

because the behavior that was alleged to constitute

this breach was also covered by the ter ms of the

Agreement?

6. Did the District Court err in allowing the jury to

consider the breach of fiduciary claim against

David Barensfeld (a director of both Ellwood and

EUS), because, as Ellwood alleges, Uddeholm

lacked standing to sue Barensfeld for this alleged

breach?

11

7. Can Ellwood be liable for civil conspiracy given that

all of the alleged co-conspirators were exonerated

by the jury, and was this issue preserved in the

District Court?

8. Did the District Court err in allowing Uddeholm to

recover damages that included the rebates received

by Ellwood from EUS in 1991?

9. Did the District Court err in admitting an affidavit

by Bo Jonsson into evidence?

10. Did the District Court err in requiring redaction in

the Bertil Rydstad memo before admitting it into

evidence?

11. Did the District Court err by applying the

statutory 6% interest rate instead of Ellwood's

standard 18% rate to money that Uddeholm owed

Ellwood for post-venture purchases of steel?

We address in the main text of this opinion only the issues

numbered 1, 2, 4, 5, and 7 through 11. Ellwood's

contentions listed in numbers 3 and 6 are addr essed in the

margin infra at footnotes 9 and 13; we summarily affirm

the District Court on those issues.

II. Was the Agreement Ambiguous?

The District Court found, as a matter of law, that the

Agreement was ambiguous as to whether Ellwood could

make sales to third parties of ingots pr oduced by EUS, keep

the profits from these sales to itself, and get rebates on

these sales when its contributions to EUS's over head

reached more than 80% of EUS's total over head costs. The

court thus sent the matter of the interpretation of the

Agreement to the jury, which found that Ellwood breached

the Agreement and awarded Uddeholm $4.1 million in

compensatory damages and interest for this br each.

Ellwood challenges the District Court's deter mination that

the contract was ambiguous. We have plenary r eview of this

matter. See Pacitti v. Macy's, 193 F .3d 766, 773 (3d Cir.

1999); Harley-Davidson, Inc. v. Morris, 19 F .3d 142, 145 (3d

Cir. 1994).

12

The main disputed part of the Agreement is the following

provision, which is contained in the Steel Pur chase

Agreement between EUS and Ellwood:

S 2.3 Price Adjustment or Rebate for Contribution.

Within 90 days after the end of each calendar year of

Seller [EUS], the prices with respect to the purchase of

Products during the preceding calendar year by Buyer

[Ellwood] shall be adjusted by way of r ebate (after

giving effect to quarterly estimated allowances) if

Buyer's Purchases (net of retur ns and allowances) in

any year constitute more than 80% of the aggr egate

amount received by Seller in such year in excess of

aggregate above defined "base costs" for such year

(hereinafter for this Section 2.3 referr ed to as

"Contribution").

(emphasis added). Ellwood argues that this clause

unambiguously allowed it to get rebates on all its

purchases from EUS when Ellwood's contribution to EUS's

overhead surpassed 80%, regardless of whether Ellwood

turned around and immediately sold the purchased ingots

to third parties.

Uddeholm responds that this clause is ambiguous

because it is not clear on its face whether "Buyer's

Purchases" is limited to purchases for the buyer's own use

only. Uddeholm contends that other evidence (both

contained within the Agreement and extrinsic to it) shows

that the disputed clause is limited to purchases for the

buyer's own use, and thus the ingots that Ellwood bought

from EUS and resold did not count as "Buyer's Purchases"

for rebate calculation purposes. As we have noted, the

District Court accepted Uddeholm's contention that the

Agreement was ambiguous and sent the issue of

interpreting the Agreement to the jury, which agreed with

Uddeholm's proffered interpr etation of the Agreement. Our

task is to review this determination by the District Court,

which requires us to examine the principles of contract

interpretation under Pennsylvania law. Both parties agree

that Pennsylvania law governs this case.

A. Pennsylvania Law on Contract Interpretation

Pennsylvania law on contract interpretation and

ambiguity is somewhat complicated; while the br oad

13

principles are clear, it is not a seamless web, and hence we

will have to review some of the relevant Pennsylvania cases

before applying the law to the facts at bar . Pennsylvania

contract law begins with the "firmly settled" point that "the

intent of the parties to a written contract is contained in

the writing itself." Krizovensky v. Krizovensky, 624 A.2d

638, 642 (Pa. Super. Ct. 1993) (citing Steuart v. McChesney,

444 A.2d 659 (Pa. 1982)). " `Where the intention of the

parties is clear, there is no need to r esort to extrinsic aids

or evidence,' " instead, the meaning of a clear and

unequivocal written contract " `must be determined by its

contents alone.' " Steuart, 444 A.2d at 661 (quoting East

Crossroads Ctr., Inc. v. Mellon-Stuart Co., 205 A.2d 865, 866

(Pa. 1965)). "[W]here language is clear and unambiguous,

the focus of interpretation is upon the ter ms of the

agreement as manifestly expressed , rather than as,

perhaps, silently intended." Id."Clear contractual terms

that are capable of one reasonable interpr etation must be

given effect without reference to matters outside the

contract." Krizovensky, 624 A.2d at 642.

A court may, however, look outside the "four corners" of

a contract if the contract's terms are unclear: "[w]here the

contract terms are ambiguous and susceptible of more than

one reasonable interpretation, . . . the court is free to

receive extrinsic evidence, i.e., par ol evidence, to resolve the

ambiguity." Id. But because Pennsylvania presumes that

the writing conveys the parties' intent, a contract

will be found ambiguous if, and only if, it is r easonably

or fairly susceptible of different constructions and is

capable of being understood in more senses than one

and is obscure in meaning through indefiniteness of

expression or has a double meaning. A contract is not

ambiguous if the court can determine its meaning

without any guide other than a knowledge of the

simple facts on which, from the nature of the language

in general, its meaning depends; and a contract is not

rendered ambiguous by the mere fact that the parties

do not agree on the proper construction.

Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d

604, 614 (3d Cir. 1995) (quoting Samuel Rappaport Family

Partnership v. Meridian Bank, 657 A.2d 17, 21-22 (Pa.

14

Super. Ct. 1993)) (internal quotation marks omitted). To

determine whether ambiguity exists in a contract, the court

may consider "the words of the contract, the alternative

meaning suggested by counsel, and the nature of the

objective evidence to be offered in support of that meaning."

Mellon Bank, N.A. v. Aetna Bus. Credit, Inc. , 619 F.2d 1001,

1011 (3d Cir. 1980).

Ambiguity in a contract can be either patent or latent.

While a patent ambiguity appears on the face of the

instrument, "a latent ambiguity arises fr om extraneous or

collateral facts which make the meaning of a written

agreement uncertain although the language ther eof, on its

face, appears clear and unambiguous." Duquesne Light, 66

F.3d at 614 (citing Easton v. Washington County Ins. Co.,

137 A.2d 332 (Pa. 1957)). A party may use extrinsic

evidence to support its claim of latent ambiguity, but this

evidence must show that some specific term or terms in the

contract are ambiguous; it cannot simply show that the

parties intended something different that was not

incorporated into the contract. "[L]est the ambiguity inquiry

degenerate into an impermissible analysis of the parties'

subjective intent, such an inquiry appropriately is confined

to `the parties linguistic reference.' . . . [T]he parties'

expectations, standing alone, are irrelevant without any

contractual hook on which to pin them." Id. at 614 & n.9

(quoting Mellon Bank, 619 F.2d at 1011 n.12) (emphasis

added).

Furthermore, the alternative meaning that a party seeks

to ascribe to the specific term in the contract must be

reasonable; courts must resist twisting the language of the

contract beyond recognition. "In holding that an ambiguity

is present in an agreement, a court must not rely upon a

strained contrivancy to establish one; scarcely an

agreement could be conceived that might not be

unreasonably contrived into the appearance of ambiguity.

Thus, the meaning of language cannot be distorted to

establish the ambiguity." Steuart, 444 A.2d at 663.

Pennsylvania law on ambiguity in contracts thus seems

to contain a built-in tension between two principles: (1) a

contract is not ambiguous, and thus must be interpr eted

on its face without reference to extrinsic evidence, "if the

15

court can determine its meaning without any guide other

than a knowledge of the simple facts on which, fr om the

nature of the language in general, its meaning depends,"

Duquesne Light, 66 F.3d at 614 (quoting Meridian Bank,

657 A.2d at 21-22); and (2) contractual terms that are clear

on their face can be latently ambiguous, and "Pennsylvania

law permits courts to examine certain for ms of extrinsic

evidence in determining whether a contract is ambiguous."

Id. Thus, when a court is faced with a contract containing

facially unambiguous language, it seems that Pennsylvania

law both requires that the court interpr et the language

without using extrinsic evidence, and allows the court to

bring in extrinsic evidence to prove latent ambiguity.

Mellon Bank resolves this tension by allowing only

extrinsic evidence of a certain nature to establish latent

ambiguity in a contract; a court should deter mine whether

the type of extrinsic evidence offered could be used to

support a reasonable alternative interpr etation under the

precepts of Pennsylvania law on contract interpretation.3

See Mellon Bank, 619 F.2d at 1011-14. Once the court

determines that a party has offer ed extrinsic evidence

capable of establishing latent ambiguity, a decision as to

_________________________________________________________________

3. In particular, we think that the key inquiry in this context will

likely

be whether the proffered extrinsic evidence is about the parties'

objectively manifested "linguistic reference" regarding the terms ofthe

contract, or is instead merely about their expectations. Duquesne Light

Co. v. Westinghouse Elec. Corp., 66 F .3d 604, 614 (3d Cir. 1995). The

former is the right type of extrinsic evidence for establishing latent

ambiguity under Pennsylvania law, while the latter is not. See id. For

example, if the evidence showed that the parties nor mally meant to refer

to Canadian dollars when they used the term"dollars," this would be

evidence of the right type. See id. at 1011 n.12. Evidence regarding a

party's beliefs about the general ramifications of the contract would not

be the right type to establish latent ambiguity. See id. at 1014

(rejecting

extrinsic evidence that showed that one party to a disputed contract

thought it bore some risk of borrower's default as insufficient to vary

the

clear meaning of the term "insolvent" as used in the contract). Put

another way, a party offers the right type of extrinsic evidence for

establishing latent ambiguity if the evidence can be used to support "a

reasonable alternative semantic reference" for specific terms contained in

the contract. Mellon Bank N.A. v. Aetna Bus. Cr edit, Inc., 619 F.2d 1001,

1012 n.13 (3d Cir. 1980). See infra pp. 22-26 & n.4.

16

which of the competing interpretations of the contract is

the correct one is reserved for the factfinder, who would

examine the content of the extrinsic evidence (along with all

the other evidence) in order to make this deter mination.

See Mellon Bank, 619 F.2d at 1011, 1013-14. We will follow

Mellon Bank's approach.

Of course, any use of extrinsic evidence to support an

alternative interpretation of facially unambiguous language

must be careful not to cross the "point at which

interpretation becomes alteration of the written contract."

Id. at 1011. This point is not clearly defined by

Pennsylvania law. However, even a brief examination of the

particular facts and holdings of some repr esentative cases

involving contract ambiguity summarized in the mar gin

establish that: (1) mere disagreement between the parties

over the meaning of a term is insufficient to establish that

term as ambiguous; (2) each party's pr offered interpretation

must be reasonable, in that there must be evidence in the

contract to support the interpretation beyond the party's

mere claim of ambiguity; and (3) the pr offered

interpretation cannot contradict the common

understanding of the disputed term or phrase when there

is another term that the parties could easily have used to

convey this contradictory meaning.4

_________________________________________________________________

4. In Steuart v. McChesney, 444 A.2d 659 (Pa. 1982), the Pennsylvania

Supreme Court considered whether ther e was ambiguity in a right of

first refusal clause that stated that, upon the receipt of a bona fide

offer,

certain real property could be pur chased at a price "equivalent to the

market value of the premises according to the assessment rolls." The

trial court determined that the clause was ambiguous, and that the

evidence showed that the clause really meant that the property could be

purchased at "not less than the market value of the premises according

to the assessment rolls." The Pennsylvania Supreme Court roundly

rejected this determination. "T o no extent is the term `equivalent',

meaning `equal', interchangeable with `not less than', and, since the

parties specified the former, they shall be deemed to have intended the

same," despite the fact that the market value according to the

assessment rolls was substantially less than several bona fide offers. Id.

at 664 (footnote omitted).

Similarly, in Krizovensky v. Krizovensky, 624 A.2d 638 (Pa. Super. Ct.

1993), the Pennsylvania Superior Court reversed a trial court decision

17

In United Refining Co. v. Jenkins, 189 A.2d 574 (Pa.

1963), the Pennsylvania Supreme Court set out guidelines

for an acceptable finding of ambiguity in a facially

_________________________________________________________________

that found ambiguity in the phrase "fully r educed annuity." The trial

court had concluded that, because the two parties disagreed over how to

interpret this term, it was ambiguous, and thus it looked at extrinsic

evidence. The Superior Court reversed because the interpretation

accepted by the trial court changed the meaning of the phrase from

"fully reduced annuity" to "partially reduced annuity." Since these two

phrases mean entirely different things and thus in effect contradict one

another (if an annuity is fully reduced it is not partially reduced, and

vice versa), the Superior Court held that the parties would not have used

the one term when they meant the other , because they could easily have

used this other term. "The construction ur ged by [the plaintiff] changes

the meaning of a clearly defined term. . . . The terms of the agreement

in this case were disputed, but they wer e not ambiguous." Id. at 643.

While an alternate interpretation that merely narrows or expands the

definition of a term is acceptable, Krizovensky rejects the wholesale

change of a term's definition.

In Duquesne Light Co. v. Westinghouse Electric Corp., 66 F.3d 604 (3d

Cir. 1995), this Court rejected the plaintiff 's contention that a

contract

was ambiguous as to whether it contained a 40-year guarantee for steam

generators in a nuclear power plant. The plaintif f argued that

contractual language that contained an assumption of a 42-year station

life in setting out technical specifications for certain components could

be interpreted as providing a 40-year guarantee for the steam

generators. We rejected this interpr etation as unreasonable because the

"contractual hook" did not support the pr offered interpretation:

"Duquesne's reading would stretch this language to unimaginable

proportions, as it would turn the 42 year station life by which certain

components were to be judged into an expr ess contractual guarantee

that the steam generators themselves would last for 40 years." Id. at

614.

Finally, in Mellon Bank N. A. v. Aetna Business Credit, Inc., 619 F.2d

1001 (3d Cir. 1980), we considered whether sufficient evidence had been

presented to justify finding ambiguity in the term "insolvent" in a

contract between sophisticated commercial parties. Mellon used extrinsic

evidence to argue that the liabilities and assets that accrued from the

contracted-for project should not be used in determining whether a party

was "insolvent" under the contract. The district court accepted Mellon's

use of extrinsic evidence, but this Court reversed because "[t]he district

court cited no basis in the contract document or wor ding of the

18

unambiguous term. Jenkins owed money to United and

entered into a contract to sell United all the oil that he

produced. The contested phrase in the oil contract stated

that the contract was to continue "so long as there remains

any unpaid indebtedness" of Jenkins to United. Id. at 579.

Jenkins defaulted on the loan, but then argued that the oil

contract was still in force and that United had to buy his

oil because he still owed money to United. United ar gued

that the contested phrase in the oil contract should be

interpreted to mean that the agreement would continue so

long as Jenkins remained indebted to United and Jenkins

had not defaulted in his obligations.

The Pennsylvania Supreme Court accepted United's

interpretation of the phrase, even though doing so required

the court to interpret a facially unambiguous phrase as

meaning something different than what it appeared to

mean on its face. The court reasoned that

if Jenkins' contention is correct, United was bound to

continue purchasing all Jenkins' oil . . . even though

Jenkins failed to honor his obligation to United. . . .

Such an interpretation of the language of this contract

is both absurd and unreasonable. Under such an

interpretation, Jenkins could take his pr ofits from the

"oil runs", dishonor his obligations to United and

United would be bound indefinitely to the agr eement.

_________________________________________________________________

insolvency clause for its conclusion." Id. at 1009. While the term

"insolvent" served as the basic contractual hook for Mellon's argument,

there was scant further evidence in the contract itself to support

Mellon's alternative interpretation, which in effect "made the

[insolvency]

condition a nullity." Id. at 1013. Such a radical re-interpretation,

without

evidence to support it in the actual wording of the contract, was "an

impermissible rewriting of the words of the contract." Id. at 1008. Inour

analysis, we differentiated between using extrinsic evidence to support

an alternative interpretation of a ter m that sharpened its meaning

(legitimate) and an interpretation that completely changed the meaning

(illegitimate): "extrinsic evidence may be used to show that `Ten Dollars

paid on January 5, 1980,' meant ten Canadian dollars, but it would not

be allowed to show the parties meant twenty dollars." Id. at 1013. We

thus held that there was no latent ambiguity in the contract.

19

Id. at 580. Thus, Jenkins stands for the proposition that, if

the plain meaning of a contract term would lead to an

interpretation that is absurd and unr easonable,

Pennsylvania contract law allows a court to construe the

contract otherwise in order to reach "the only sensible and

reasonable interpretation" of the contract. Id.

To summarize: a contract that is unambiguous on its

face must be interpreted according to the natural meaning

of its terms, unless the contract contains a latent

ambiguity, whereupon extrinsic evidence may be admitted

to establish the correct interpretation. However, a claim of

latent ambiguity must be based on a "contractual hook":

the proffered extrinsic evidence must support an alternative

meaning of a specific term or terms contained in the

contract, rather than simply support a general claim that

the parties meant something other than what the contract

says on its face. In other words, the ambiguity inquiry must

be about the parties' "linguistic refer ence" rather than

about their expectations. Duquesne Light, 66 F.3d at 614.

Furthermore, a proffer ed alternative meaning for the

contractual hook must be reasonable; that is, it must be

supported by contractual evidence that goes beyond the

party's claim that the contractual hook has a certain

meaning, and the interpretation cannot contradict the

standard meaning of a term when the parties could have

easily used another term to convey this contradictory

meaning. In determining whether latent ambiguity exists in

a facially unambiguous contract, a court must consider

whether the extrinsic evidence that the proponent of the

alternative interpretation seeks to of fer is the type of

evidence that could support a reasonable alter native

interpretation of the contract, given the for egoing

principles. Finally, a court can consider an alter native

interpretation of a facially unambiguous contract term

when the plain meaning interpretation of the contract

would lead to an absurd and unreasonable outcome. With

these precepts in mind, we turn to the issue before us.

B. The Interpretation of the Agreement

Ellwood argues that the language in the Agr eement that

concerns rebates on purchases of steel from EUS is

20

straightforward and unambiguous. Section 2.3 of the Steel

Purchase Agreement, which is the section covering the

award of rebates, states that rebates shall be given if

"Buyer's Purchases . . . constitute mor e than 80%" of EUS's

overhead. Ellwood contends that the wor d "purchases" as

used in this section has an accepted meaning: Black's Law

Dictionary defines a "purchase" as the"[t]ransmission of

property from one person to another by voluntary act and

agreement, founded on a valuable consideration." Black's

Law Dictionary 1110 (5th ed. 1979). There is no express

limitation on the purpose for which the purchases can be

made anywhere in the Agreement. Thus, Ellwood argues,

"purchases" in S 2.3 of the Steel Purchase Agreements

unambiguously includes all purchases, so that Ellwood

rightfully received rebates on the steel ingots it purchased

from EUS and immediately sold to third party customers.

Ellwood further asserts that Uddeholm has not pr ovided a

reasonable alternative interpretation of "purchases," so that

the District Court should have interpreted"purchases" in

this straightforward manner, and thus should not have

sent the interpretation of the Agreement to the jury. See

Mellon Bank, 619 F.2d at 1011.

In contrast, Uddeholm's argument not only focuses on

the term "Buyer's Purchases" inS 2.3 as the main

"contractual hook" in its ambiguity ar gument, but also

points to other provisions in the Agreement that support its

interpretation that "Buyer's Purchases" in S 2.3 really

means "purchases for Ellwood's/Uddeholm's own use only."

As we noted above, this use of other provisions of the

Agreement comports with Pennsylvania law, which provides

that a court should look to the contract as a whole for

guidance in interpreting a term in the contract. See

Duquesne Light, 66 F.3d at 615 (finding support for the

court's interpretation of contested ter ms by examining the

"format, construction and terms of the contract generally").

Uddeholm first points to a provision in the Shareholders

Agreement (which is one of the contracts that comprise the

Agreement) stating that "[u]nless the Shareholders shall

agree otherwise, the total steel and other alloy metal output

of EUS shall be purchased by the Shareholders in

accordance with such Steel Purchase Agr eements."

21

Uddeholm argues that the most natural r eading of this

statement is that outside sales were not per mitted absent

the consent of both parties, and that if Ellwood could

unilaterally use the joint venture to make sales to third

parties as it pleased while keeping 100% of the benefits,

there never would be a reason for the parties to "agree

otherwise" and thus change the Agreement r equirements on

purchasing ingots. These provisions would thereby become

meaningless, which would violate the well-established

principle of contract construction "that a contract should

be read so as to give meaning to all of its ter ms when read

as an entirety." Contrans, Inc. v. Ryder Truck Rental, Inc.,

836 F.2d 163, 169 (3d Cir. 1987) (applying Pennsylvania

law, citing Monti v. Rockwood Ins. Co., 450 A.2d 24, 26 (Pa.

Super. Ct. 1982)).

Second, Uddeholm points to a provision of the Business

Plan (which is incorporated into the Agreement, see supra

at page 6) that states that ingots "shall be cast in a variety

of shapes and weights according to the r equirements of

Ellwood City Forge and Uddeholm Tooling AB." Uddeholm

argues that the term "requir ements" in this provision

impliedly refers to requirements for the internal use of

Ellwood and Uddeholm; if the parties had intended

otherwise, it submits, they would have used the phrase

"according to the specifications or dered by Ellwood and

Uddeholm," or "according to the r equirements of Ellwood,

Uddeholm, and designated third parties."5 That is, because

the process of making steel ingots involves casting each

ingot to a specific shape and weight while the ingot is still

hot (thus avoiding wasting excess steel), and because these

specifications are determined by the ultimate end product

into which the ingot will be forged, Uddeholm argues that

casting ingots "according to the r equirements of Ellwood

City Forge" means tailoring the ingot to ECF 's own forging

process.

Third, the Business Plan also states that the joint

_________________________________________________________________

5. The latter is the phrasing that Ellwood pr oposed for the Business Plan

during negotiations, but this proposal was r ejected by Uddeholm

because Uddeholm made it clear that it wanted the ingot purchases

limited to the shareholders' own use. See supra at page 6.

22

venture's purpose was "to supply high quality ingot to its

owners, Ellwood City Forge Corporation and Uddeholm

Tooling AB." (emphasis added) Uddeholm submits that the

term "supply" in this clause clearly connotes a purpose to

provide steel for Uddeholm's and Ellwood's own use in their

steel toolmaking processes rather than for the immediate

resale of the raw steel ingots. Uddeholm ar gues that one

normally "supplies" raw materials to a manufacturer who

then uses those materials himself; one does not nor mally

"supply" raw materials to a middleman who then resells

them.

These three sections of the Agreement, along with S 2.3 of

the Steel Purchase Agreements, are sufficient to serve as

the required "contractual hook" in Uddeholm's ambiguity

argument.6 Uddeholm's pr offered interpretation of these

sections does not contradict the common meaning of the

terms contained therein but merely narrows those

meanings, and Uddeholm's interpretation is r easonable

when the sections are considered together . Uddeholm's

reading of these sections thus serves to cast doubt on

Ellwood's claim that S 2.3 is unambiguous. Our next step is

to examine the extrinsic evidence that Uddeholm of fers to

support its alternative interpretation ofS 2.3.7

First, Guy Asterius, the Uddeholm General Counsel,

testified at trial that the parties discussed sales to third

parties during the negotiations leading up to the joint

venture, and agreed that such sales might sometimes be

necessary, but only if both shareholders agr eed, and only in

the marginal case. He testified that the parties understood

that, other than in such marginal cases, the tool steel that

_________________________________________________________________

6. Ellwood points out that S 5.2 of the Steel Purchase Agreements

(dealing with the inspection of ingots bought fr om EUS) provides that

"[d]efects attributable to shipment fr om the Steel Mill to Buyer or

Buyer's

customer shall be the responsibility of the Buyer." (Emphasis added.)

Although this language does support Ellwood's interpretation of the

Agreement as allowing third-party sales, it is not enough to undermine

Uddeholm's argument that other sections of the Agreement raise a

question of ambiguity on this issue.

7. As we stated earlier, our concern here is whether Uddeholm's proffered

extrinsic evidence could be used to support a r easonable alternative

interpretation of the Agreement. See supra note 3.

23

EUS provided was to be used only for the two shareholder's

businesses.

Other evidence showed that, after preliminary

discussions, Ellwood sent to Asterius a proposed version of

the Business Plan for EUS which provided that, while the

principal purpose of EUS was to supply ingots to the

owners, the secondary purpose was to earn the maximum

profit "from sale of its product to third parties." The

proposal included other references to sales by EUS to third

parties, such as a provision that ingots shall be cast

according to the requirements of Uddeholm, Ellwood, and

"third party purchasers." Uddeholm was surprised over the

inclusion of the references to thir d party sales in Ellwood's

proposal, and it met with Ellwood in or der to clarify its

understanding that the purpose of the joint ventur e was to

supply ingots for Ellwood's and Uddeholm's use only.

Thereafter, all references in the Agreement to third parties

and third party sales were deleted, including the provision

about the secondary purpose of EUS. Uddeholm contends

that this evidence strongly supports the infer ence that,

after these deletions, both parties understood that large

volume third-party sales were not pr ovided for under the

Agreement.

Finally, Bo Jonsson, who was the President of Uddeholm

and also sat on the EUS board of directors, stated in an

affidavit that

During that time [1986-88] . . . I agr eed to the sale of

raw carbon and alloy steel ingots to third parties

unrelated to either Uddeholm or ECF on the basis that

such sales were necessary to help fill up EUS's steel

mill and/or optimize production. . . . I also agreed to

third party ingot sales because defendant Bar ensfeld

represented to me that there would be at least some

contribution received by EUS as a result of these sales;

i.e., that EUS would receive from these sales some

amount over and above the actual manufacturing cost

or "base cost" of the steel ingots produced for sale to

third parties. . . . I agreed on behalf of Uddeholm to the

sale of raw steel ingots to third parties, but only as a

temporary, short term strategy for EUS. I did not agree

24

to open-ended, unlimited sales of raw steel ingots by

ECF to third parties.

We are persuaded (as was the District Court) by

Uddeholm's argument that Asterius's testimony, Jonsson's

affidavit, and the other evidence described above strongly

supports the inference that Uddeholm had clearly

communicated its understanding of the allowability of third

party sales under the Agreement to Ellwood. 8 We note

additionally that it is a central principle of contract

interpretation that if a party knew or had r eason to know

of the other parties' interpretation of ter ms of a contract,

the first party should be bound by that interpr etation. See

Emor, Inc. v. Cyprus Mines Corp., 467 F .2d 770, 775 (3d

Cir. 1972) ("[T]he meaning given to the words by one party

should be given effect if the other party knew or had reason

to know that it was in fact so given.") (quoting 3 Arthur L.

Corbin, On Contracts S 537, at 51 (1960)). Uddeholm points

out that Ellwood was aware of Uddeholm's interpretation of

the Agreement, while Uddeholm was unawar e of Ellwood's

competing interpretation; Uddeholm thus submits that

Ellwood should be bound by Uddeholm's understanding.

Furthermore, the extrinsic evidence pr offered by Uddeholm

concerns the parties' objectively manifested linguistic

reference regarding certain ter ms of the contract, rather

than merely their expectations. See Dusquesne Light Co. v.

Westinghouse Elec. Corp., 66 F.3d 604, 614 (3d Cir. 1995).

We thus conclude that the extrinsic evidence that

Uddeholm offered in support of its interpretation supports

its reasonable alternative interpr etation of the Agreement.

In sum, the evidence proffered by Uddeholm, considered

together, supports the conclusion that the District Court

was correct in deciding that the Agreement contained

latently ambiguous language and thus that the pr oper

interpretation of the Agreement was an issue for the jury to

_________________________________________________________________

8. At trial, Ellwood objected to the District Court's admission of

Jonsson's affidavit into evidence, and it has appealed this ruling to this

Court. For reasons set out in Section VII.C.1 infra, we will hold that the

District Court did not err in admitting Jonsson's affidavit under Fed. R.

Evid. 807, and hence the use of that affidavit her e to support

Uddeholm's ambiguity argument is proper .

25

decide. The sections of the Agreement that Uddeholm uses

as the contractual hook for its ambiguity ar gument are

sufficient to ground its argument, because Uddeholm offers

a reasonable alternate interpretation of these sections that

does not contradict but merely narrows the plain meaning

of the disputed terms. We thus find unavailing Ellwood's

contention that extrinsic evidence should not have been

considered because Uddeholm's alternative interpretation of

the Agreement was unreasonable. When the sections of the

Agreement that Uddeholm points to are considered

alongside the extrinsic evidence outlined above--including

the business plan, the parties' preliminary negotiations,

Ellwood's rejected draft, and Jonsson's affidavit--there is

considerable evidence supporting Uddeholm's claim that

the Agreement was intended to set up a deal under which

the parties would buy steel from EUS for their own

purposes only, and would sell raw steel to thir d parties only

in rare situations. Therefore, we hold that there is sufficient

evidence for the District Court's conclusion that the

Agreement was ambiguous as a matter of law, and thus the

court did not err in sending the issue of the interpretation

of the Agreement to the jury.

III. Did the District Court Err in its Jury Instructions

by Shifting the Burden of Proof to Ellwood

on the Breach of Contract Claim?

Ellwood contends that the District Court err ed in its

instructions to the jury by putting the burden on Ellwood

to establish the meaning of any ambiguous ter ms in the

Agreement. We review a jury instruction to determine

" `whether the charge, taken as a whole and viewed in light

of the evidence, fairly and adequately submits the issues in

the case to the jury' and reverse `only if the instruction was

capable of confusing and thereby misleading the jury.' "

Limbach Co. v. Sheet Metal Workers Int'l Ass'n, 949 F.2d

1241, 1259 n.15 (3rd Cir. 1991) (en banc) (quoting Link v.

Mercedes-Benz of North America, Inc., 788 F.2d 918, 922

(3d Cir. 1986)). We exercise plenary review, however, over

whether the District Court correctly stated the legal

standard for the burden of proof in its jury instructions.

See United States v. Johnstone, 107 F.3d 200, 204 (3d Cir.

1997).

26

When the District Court sent the matter of the

interpretation of the Agreement to the jury, it stated that,

although ordinarily a party asserting that a contract was

breached carries the burden of proving the breach, where a

fiduciary relationship exits the burden shifts to the

fiduciary to prove the absence of a br each. Because the

court found that a fiduciary relationship existed between

Ellwood and Uddeholm, its instructions to the jury placed

the burden on Ellwood to establish the meaning of any

ambiguous contract terms, even though Uddeholm was the

party asserting the breach of contract. Ellwood contends

that the District Court erred in shifting the burden of proof

in this manner. Since this issue concer ns the District

Court's description of a legal standard in the jury

instructions, our review is plenary.

The court found that there was a fiduciary r elationship

between Ellwood and Uddeholm because Ellwood was the

majority shareholder in a joint venture. A shareholder in

such a position is under close scrutiny, and is expected to

conform to the highest standards of conduct. See Ferber v.

American Lamp Corp., 469 A.2d 1046, 1050 (Pa. 1983) ("It

has long been recognized that majority shar eholders have a

duty to protect the interests of the minority."); Snellbaker v.

Herrmann, 462 A.2d 713, 718 (Pa. Super . Ct. 1983) ("[A]

joint venturer owes a duty of the utmost good faith and

must act towards his associate with scrupulous honesty.").

When occupying such a position, it is a breach of fiduciary

duty to act to benefit oneself at the expense of the minority

shareholder. See Ferber, 469 A.2d at 1050. Pennsylvania

law shifts the burden onto the fiduciary to prove that a

transaction is fair and not fraudulent when thefiduciary

acts to benefit himself while in the fiduciary r ole. See

Ruggieri v. West Forum Corp., 282 A.2d 304, 307 (Pa. 1971)

("[O]nce a fiduciary or confidential r elationship is shown to

exist, the burden is shifted to [the fiduciary] . . . to prove

absence of fraud, and that the transaction was fair and

equitable."); In re Estate of Harrison , 745 A.2d 676, 682 (Pa.

Super. Ct. 2000); Dresden v. W illock, 518 F.2d 281, 290 (3d

Cir. 1975).

Because Pennsylvania law shifts the burden onto

fiduciaries to prove the fairness of a self-benefitting

27

transaction, and because Ellwood was a fiduciary as the

majority shareholder in the joint ventur e, Uddeholm

requested the District Court to place the bur den on Ellwood

to establish the meaning of the disputed ter ms in the

Agreement. The District Court acceded to this r equest, but

it cautioned the plaintiff 's counsel that this was a risky

move:

You know, you realize that the plaintif f takes

considerable risk in this case going to the jury this

way. And what I mean is, if the plaintiff is confident on

the merits of its case, this little burden shifting thing

which I think interests Judges and lawyers mor e than

it does juries because of the uncertainty in the law,

and we have no idea what the Court of Appeals for the

Third Circuit might say about this ruling, the plaintiff

takes considerable risk in submitting it in this fashion.

And it may be doing you a disservice, but inasmuch as

it was what you requested, or some of what you

requested, and because I think, in good faith, that it is

the law of Pennsylvania, that is the way it is going in.

The District Court's trepidation about shifting the burden

onto Ellwood here was well-founded. Although it would

seem to comport with Pennsylvania law to put the bur den

on a fiduciary to establish the meaning of disputed terms

in a contract between the fiduciary and the beneficiary, we

need not decide that issue, because Ellwood and Uddeholm

were not in a fiduciary relationship when the Agreement

was negotiated and executed. Ellwood's fiduciary duty to

Uddeholm arose after the Agreement was executed: the

Agreement created the joint ventur e, which itself then gave

rise to the fiduciary relationship. See Snellbaker, 462 A.2d

at 716 ("The rights, duties, and obligations of joint

venturers, as between themselves, depend primarily upon

the terms of the contract by which they assume the

relationship."); see also In Re Estate of Clark, 359 A.2d 777,

781 (Pa. 1976) (stating that it is "well-settled" that if a party

contesting a gift shows that a confidential orfiduciary

relationship between the donor and donee existed at the

time of the gift, the burden then shifts to the donee to show

that the gift was free of any taint of undue influence or

deception); Weisbecker v. Hosiery Patents, Inc., 51 A.2d

28

811, 813-14 (Pa. 1947) (fiduciary duty to a minority

shareholder arises as a result of being a majority

shareholder).

Although an asymmetry in power did arise between these

parties after the Agreement was signed, no such asymmetry

existed when the parties were hammering out its disputed

and ambiguous terms, as the parties wer e not then in a

majority-minority shareholder relationship in a joint

venture. Thus, the reason for placing the burden of proof

on a fiduciary in breach of contract cases--the fiduciary is

in a position of control over the beneficiary or his property,

and must therefore meet a higher standar d in his dealings

with the beneficiary--does not apply to this case. See

Martinelli v. Bridgeport Roman Catholic Diocesan Corp., 196

F.3d 409, 421 (2d Cir. 1999) (noting that a fiduciary has

the burden of proof to explain a transaction which benefits

himself at the expense of his beneficiaries because a

"suspicion naturally arises that the fiduciary has gained by

taking advantage of its special relationship"); Ferber, 469

A.2d at 1050 (stating that a majority shareholder's fiduciary

duty to minority shareholder prevents him from using his

power as a majority shareholder to deprive minority of a

proper share of the benefits from the enterprise). While it

makes perfect sense to place the burden on a fiduciary to

explain business actions which benefitted itself over its

beneficiary, the same logic does not hold for a br each of

contract when there are dueling interpr etations of the

contract entered into at arms length by sophisticated

corporations who are not in any kind of fiduciary

relationship at the time the contract is for med.

Uddeholm cites no cases in which a fiduciary r elationship

that was created by a contract caused a court to shift the

burden of proof on the interpretation of that contract. All of

the cases Uddeholm cites in support of its position shift the

burden of proof onto the fiduciary because, at the time the

questionable transaction was consummated by the

defendant, the defendant already had an unequal or

fiduciary relationship with the plaintif f. See, e.g.,

Weisbecker, 51 A.2d at 813-14; Snellbaker, 462 A.2d at

716; Martinelli, 196 F.3d at 421; Bellis v. Thal, 373 F. Supp.

120, 125-27 (E.D. Pa. 1974), aff 'd 510 F.2d 969 (3d Cir.

29

1975). Because it is hornbook law that (when no fiduciary

relationship exists) the party alleging a br each of contract

bears the burden of proving the elements of a breach of

contract, the District Court should have placed the burden

of proving the meaning of ambiguous ter ms in the

Agreement on Uddeholm, not Ellwood. See In re Estate of

Dixon, 233 A.2d 242, 244 (Pa. 1967) ("In any contract

action, . . . the claimant bears the burden of proving the

terms of the contract." ). Uddeholm does not assert, nor

could it credibly, that this burden-shifting error was

harmless. Therefore, the jury ver dict on this claim must be

set aside, and the case remanded for a new trial.9

_________________________________________________________________

9. Ellwood maintains that several of the District Court's other

instructions to the jury were in error as well. First, Ellwood contends

that the court erred in giving an instruction that "[t]here is no dispute

that ECF and Uddeholm formed a venture . . . from which both parties

would share the benefits." Ellwood asserts that this was tantamount to

directing a verdict for Uddeholm. W e find no merit in this contention.

Whether EUS was a "cost center" (as Ellwood contends) or a "profit

center" (as Ellwood denies), the purpose of the Agreement was to benefit

both sides, thus the "share the benefits" instruction left room for the

two

parties to present their varying theories on the way in which the benefits

were to be shared. The "share the benefits" instruction, taken in the

context of the jury instruction as a whole and viewed in light of the

evidence, fairly submitted the issues to the jury and was not particularly

liable to confuse or mislead the jury. See Limbach Co. v. Sheet Metal

Workers Int'l Ass'n, 949 F.2d 1241, 1259 n.15 (3d Cir. 1991) (en banc).

This contention is therefore without merit.

Ellwood also argues that the District Court erred by failing to include

the following four matters in its jury instructions: (1) an identification

of

the specific disputed language from the Agr eement along with the

parties' competing interpretations of that language; (2) a description of

the relevant evidentiary and contract interpr etation principles; (3) an

instruction on the proximate cause requir ement for measuring damages

for a breach of a covenant not to compete; and (4) an instruction that

the jury was to decide whether a type of steel that Ellwood produced

after the joint venture ended (the "420 series" of steel) was generally

regarded as "tool steel." We review a district court's decision not to

include a party's proffered jury instruction for abuse of discretion. See

United States v. Pitt, 193 F.3d 751, 755 (3d Cir. 1999); Limbach, 949

F.2d at 1259 n.15 ("Failure to instruct the jury as requested does not

constitute error so long as the instruction, taken as a whole, properly

apprises the jury of the issues and the applicable law.") None of these

omissions rise to the level of reversible err or.

30

IV. Did the District Court Err in Allowing a Separate

Breach of Fiduciary Duty Claim Against Ellwood?

The District Court allowed the jury to consider a separate

breach of fiduciary duty claim against Ellwood for behavior

that Ellwood contends was covered by the Agr eement and

hence was subsumed in the jury charge (and ver dict) for

breach of contract. Ellwood submits that Uddeholm pressed

this tort claim simply to circumvent the unavailability of

punitive damages for contract claims under Pennsylvania

law. The issue of whether the fiduciary duty claim is

allowable here is a question of law over which our review is

plenary. See Duquesne Light Co. v. Westinghouse Elec.

Corp., 66 F.3d 604, 618 (3d Cir. 1995).

Pennsylvania courts use two methods to deter mine

whether tort claims that accompany contract claims should

be allowed as freestanding causes of action or rejected as

illegitimate attempts to procure additional damages for a

breach of contract: the "gist of the action" test and the

"economic loss doctrine" test.10 Under the "gist of the

action" test,

_________________________________________________________________

The District Court's instructions directed the jury to interpret certain

sections of the Agreement. There is no authority to support Ellwood's

claim that the court had to point out specific ter ms in the Agreement

that were the focus of the ambiguity dispute, especially when

Uddeholm's position was that the terms wer e ambiguous in the context

of the Agreement as a whole. Furthermor e, the record supports the

conclusion that the court adequately instructed the jury on the relevant

legal principles. Ellwood's claim that the District Court did not

adequately instruct the jury on the proximate cause requirement for

damages is plainly lacking in merit when portions of the court's

instructions not mentioned by Ellwood are considered, as it is clear that

the court's full jury instruction properly apprised the jury of the

relevant

law. Finally, the record is clear that the District Court's decision to

omit

an instruction concerning the jury's r ole in deciding whether the "420

series" was generally regarded as "tool steel" was based on the court's

concern for jury confusion. In our view, this decision was not an abuse

of discretion.

10. While the Pennsylvania Supreme Court has neither accepted nor

rejected the economic-loss doctrine, Pennsylvania intermediate appellate

31

to be construed as a tort action, the [tortious] wrong

ascribed to the defendant must be the gist of the action

with the contract being collateral. . . . [T]he important

difference between contract and tort actions is that the

latter lie from the breach of duties imposed as a matter

of social policy while the former lie for the breach of

duties imposed by mutual consensus.

Redevelopment Auth. of Cambria County v. Inter national Ins.

Co., 685 A.2d 581, 590 (Pa. Super. Ct. 1996) (en banc)

(quoting Phico Ins. Co. v. Presbyterian Med. Servs. Corp.,

663 A.2d 753, 757 (Pa. Super. Ct. 1995)). In other words,

a claim should be limited to a contract claim when"the

parties' obligations are defined by the ter ms of the

contracts, and not by the larger social policies embodied in

the law of torts." Bash v. Bell Telephone Co., 601 A.2d 825,

830 (Pa. Super. Ct. 1992).

This Court described the "economic-loss doctrine" test in

Duquesne Light as "prohibit[ing] plaintiffs from recovering

in tort economic losses to which their entitlementflows only

from a contract." 66 F.3d at 618. Duquesne Light explained

further that a plaintiff should be limited to a contract claim

"when loss of the benefit of a bargain is the plaintiff 's sole

loss." Id. (quotations marks omitted). Both parties argue

that both tests support their positions. For the r easons set

forth in the margin, we focus primarily on the"gist of the

action" test.11

_________________________________________________________________

courts have applied the doctrine, see, e.g., REM Coal Co., Inc. v. Clark

Equip. Co., 563 A.2d 128 (Pa. Super. Ct. 1989), and this Court has

predicted that the Pennsylvania Supreme Court would adopt the version

of the economic loss doctrine that the United States Supreme Court

developed in East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S.

858 (1986), see King v. Hilton-Davis, 855 F .2d 1047, 1053-54 (3d Cir.

1988).

11. The application of the economic-loss doctrine to the instant case does

not quite fit because that doctrine developed in the context of courts'

precluding products liability tort claims in cases where one party

contracts for a product from another party and the product

malfunctions, injuring only the product itself. See East River S.S. Corp.

v. Transamerica Delaval, Inc., 476 U.S. 858, 866-71 (1986); Duquesne

Light, 66 F.3d at 618-20. The "gist-of-the-action" test is a better fit

for

this non-products liability case.

32

Ellwood contends that the Agreement was exhaustively

negotiated and completely defined the parties' r elationship

and obligations, so that Uddeholm's alleged losses arose

only from alleged breaches of the Agr eement. Ellwood

asserts that, far from being "collateral" to the breach of

fiduciary duty claim, see Redevelopment Auth. of Cambria

County, 685 A.2d at 590, the Agreement was"the only

articulated predicate" for that claim. Appellants' Br. at 46.

Conversely, Uddeholm contends that Ellwood's r ebate

claims for third-party sales and its covering up of these

sales breached its fiduciary duty to Uddeholm, because

such actions involved Ellwood utilizing the joint venture for

its own gain to the detriment of its minority partner.

Uddeholm claims that these actions by Ellwood caused

losses that went beyond the scope of the Agr eement, thus

giving rise to a cause of action separate fr om the breach of

contract claim. Uddeholm contends further that, because

the existence of a contract between two parties does not

preclude one of the parties from r ecovering in tort for a

breached fiduciary duty, it should be allowed to recover for

Ellwood's breached fiduciary duty in this case. See Valley

Forge Convention & Visitors Bureau v. Visitor's Servs., Inc.,

28 F. Supp. 2d 947, 951 (E.D. Pa. 1998) ("That a plaintiff

may not sue in tort for economic losses arising fr om a

breach of contract, however, does not pr eclude the

possibility of a tort action between parties to a contract.")

(applying Pennsylvania law); see also United Int'l Holdings,

Inc. v. Wharf (Holdings) Ltd., 210 F .3d 1207, 1226-27 (10th

Cir. 2000) (holding that, under Colorado law, a breach of

fiduciary duty that arises from the parties' status as joint

venturers is independent of the contract that created the

joint venture, thus the economic loss doctrine does not bar

such a fiduciary duty claim).

As we explained earlier, there was afiduciary relationship

between Ellwood and Uddeholm because Ellwood was the

majority shareholder in a joint venture and had sole and

virtually exclusive control over the object of the venture

(i.e., EUS). Pennsylvania law imposes such a fiduciary duty

on joint venturers, see Snellbaker v. Herr mann, 462 A.2d

713, 718 (Pa. Super. Ct. 1983), as well as on majority

shareholders in their dealings with minority shareholders,

see Ferber v. American Lamp Corp., 469 A.2d 1046, 1050

33

(Pa. 1983). This duty imposed obligations on Ellwood that

went well beyond the particular obligations contained in the

Agreement itself. See Snellbaker, 462 A.2d at 718 (stating

that a fiduciary duty includes the duty to act toward one's

joint venturer in the utmost good faith and with scrupulous

honesty); Ferber, 469 A.2d at 1050 (noting that a fiduciary

duty prevents majority shareholder fr om "using their power

in such a way as to exclude the minority from their proper

share of the benefits accruing from the enterprise," so that,

when a majority shareholder acts in its own interest, this

action "must be also in the best interest of all shareholders

and the corporation") (emphasis omitted).

As suggested by the foregoing, the obligations that

Uddeholm alleges Ellwood breached in its fiduciary duty

claim were imposed "as a matter of social policy" rather

than "by mutual consensus." See Redevelopment Auth. of

Cambria County, 685 A.2d at 590. That is, "the larger social

policies embodied in the law of torts" rather than "the terms

of the contract," are what underlie Uddeholm's breach of

fiduciary duty claim. Bash, 601 A.2d at 830. The "larger

social policy" that defines Uddeholm's claim is the policy

requiring fair dealing and solicitude fr om a majority

shareholder to minority shareholders in a joint venture. See

Snellbaker, 462 A.2d at 718; Ferber, 469 A.2d at 1050;

William Goldstein Co. v. Joseph J. & Reynold H. Greenberg,

Inc., 42 A.2d 551, 555 (Pa. 1945) (citing Meinhard v.

Salmon, 164 N.E. 545, 546 (N.Y. 1928)). W e thus conclude

that Uddeholm's fiduciary duty claim meets the"gist of the

action" test: the tort wrong ascribed to Ellwood is the gist

of the fiduciary duty action while the Agr eement is collateral.12

See Redevelopment Auth. of Cambria County, 685 A.2d at

590. We therefore find no err or in the District Court's

_________________________________________________________________

12. Furthermore, while it is a closer question, we also believe that

Uddeholm's fiduciary duty claim passes the "economic-loss doctrine"

test. Because Uddeholm asserted that Ellwood took advantage of its

position as a fiduciary to Uddeholm's detriment, the harm Uddeholm

claimed to have suffered goes beyond the Agreement and the benefits

Uddeholm was supposed to receive under the Agr eement. See Duquesne

Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 618 (3d Cir. 1995).

34

decision to allow the jury to consider a separate br each of

fiduciary duty charge against Ellwood.13

V. Did the District Court Err in Allowing a

Separate Misappropriation of Trade Secr ets Charge

Against Ellwood?

The District Court allowed the jury to consider a

misappropriation of trade secrets and confidential

information claim against Ellwood, but Ellwood argues that

the relationship regarding trade secr ets was covered by: (1)

the license to use Uddeholm's know-how, and (2) the

covenant not to compete contained in the Know-How

Agreement section of the Agreement. Ellwood thus argues

that the separate misappropriation claim was subsumed in

the charge and verdict for breach of the covenant not to

compete. Under this view, Uddeholm's misappr opriation

_________________________________________________________________

13. Ellwood also asserts that the District Court erred in holding that

David Barensfeld, a director and officer of both Ellwood and EUS, could

be individually liable to Uddeholm for breach of fiduciary duty. (Ellwood

states that this is an issue of whether Uddeholm had standing to sue

Barensfeld, but we believe that this claim is not about Uddeholm's

standing but about whether Uddeholm has a viable claim against

Barensfeld.) This issue arises because the jury also awarded Uddeholm

$70,000 in compensatory damages and $300,000 in punitive damages

for a breach of fiduciary duty by Bar ensfeld. Ellwood argues that, under

Pennsylvania law, a director's fiduciary duty runs only to the corporation

and not directly to a shareholder like Uddeholm. A shareholder can

enforce this duty only in the name of the corporation via a derivative

action. See 15 Pa. Cons. Stat. SS 1712, 1717. Uddeholm, however,

presented evidence that Barensfeld personally manipulated rebates,

manipulated books and records, failed to disclose the effect of ingot

sales, misrepresented the book value of EUS, and misappropriated

confidential trade secrets. Under Pennsylvania law, "an officer of a

corporation who takes part in the commission of a tort by the

corporation is personally liable" for the tortious activity. Wicks v.

Milzoco

Builders, Inc., 470 A.2d 86, 90 (Pa. 1983). The harmed party then can

sue the officer directly. See id. The above alleged activities by

Barensfeld

constitute taking part in Ellwood's breach offiduciary duty. Therefore,

Uddeholm had a viable claim against Barensfeld individually for his part

in Ellwood's breach of its fiduciary duty, and we find no error in the

District Court's instruction to the jury to consider whether Barensfeld

violated a fiduciary duty to Uddeholm.

35

claim is really a claim that Ellwood's use of Uddeholm's

know-how went beyond the Agreement's ter ms. The same

two tests described in Section IV supra--the "gist of the

action" test and the "economic loss doctrine" test--apply

here for determining whether this tort claim should be

allowed as its own claim or rejected as cover ed by the

contract claim. See Redevelopment Auth. of Cambria County

v. International Ins. Co., 685 A.2d 581, 590 (Pa. Super. Ct.

1996) (en banc); Duquesne Light Co. v. W estinghouse Elec.

Corp., 66 F.3d 604, 618 (3d Cir. 1995). As in Section IV, we

will primarily focus on the "gist of the action" test, see

supra note 11. This issue involves a question of law subject

to plenary review. See Duquesne Light, 66 F.3d at 618.

Uddeholm argues that its misappropriation of trade

secrets claim is separate and independent fr om its breach

of contract claim in the following way:

Appellants had no `license' to misappropriate

Uddeholm's trade secrets and confidential information,

especially during the three year noncompete period.

Appellants violated the noncompete covenants and

cannot now claim them as a `license' to do the very

thing they were contractually prohibited from doing.

Appellee's Br. at 66. The key is the last part of that

passage; Uddeholm admits that Ellwood was "contractually

prohibited from doing" the actions that Uddeholm contends

form the basis of its misappropriation claim. But if this is

the case, then "the parties' obligations ar e defined by the

terms of the contract, and not by the lar ger social policies

embodied in the law of torts." Bash v. Bell T elephone Co.,

601 A.2d 835, 830 (Pa. Super. Ct. 1992) (outlining the gist

of the action test). That is, Uddeholm admits in its own

argument that the Know-How Agreement covers Ellwood's

misappropriation of its know-how (the agr eement

"contractually prohibited" the misr epresentation), so the

"gist" of Uddeholm's misappropriation action is actually

breach of contract, at least as far as the use of Uddeholm's

know-how is concerned. Thus, if the jury's ver dict for

Uddeholm on the misappropriation of trade secr ets and

confidential information claim was based on Ellwood's

36

misappropriation of Uddeholm's know-how, the verdict

cannot stand.14

However, Uddeholm argues further that, even if Ellwood's

use and misuse of Uddeholm's know-how was covered by

the Agreement, Ellwood's misappropriation of Uddeholm's

client lists, pricing information, ship-to lists and customer

profiles was sufficient to sustain the ver dict of

misappropriation, since that information is confidential

information and/or a trade secret but is not covered by the

Know-How Agreement. Section 1.02 of the Know-How

Agreement defines "Know-How" as "information (including

rights under patents and license agreements, if any)

proprietary to Licensor [Uddeholm] and useful in the

manufacture and fabrication of Products." "Products" is in

turn defined in S 1.03 as "carbon, alloy, tool, stainless and

other specialty steel ingots." Section 1.02 also states that

"Know-How" includes, but is not limited to, technical and

engineering data and information on the manufacture and

production of alloy, tool, stainless, and other specialty steel

ingots.

It is clear from our parsing of SS 1.02 & 1.03 that less

technical information like client lists and pr ofiles, pricing

information, and shipping-to information are not included

in the coverage of the Know-How Agreement. Pennsylvania

law is also clear that this kind of information can be a

trade secret. See Robinson Elec. Supervisory Co. v. Johnson,

154 A.2d 494, 496 (Pa. 1959) ("[C]ustomer lists and

customer information . . . [are] highly confidential and

constitute[ ] a valuable asset. Such data has been held to

be property in the nature of a `trade secret' for which an

employer is entitled to protection, independent of a non-

disclosure contract."); A.M. Skier Agency, Inc. v. Gold, 747

A.2d 936, 940 (Pa. Super. Ct. 2000) (quoting above passage

from Johnson). Therefore, Uddeholm is correct that, if the

jury's verdict on this claim was based on Ellwood's

_________________________________________________________________

14. We reach a similar conclusion under the "economic loss doctrine"

test, because Uddeholm's entitlement to economic losses from the

misappropriation of its know-how flows only from the Agreement and not

from tort. See Duquesne Light Co. v. W estinghouse Elec. Corp., 66 F.3d

604, 618 (3d Cir. 1995).

37

misappropriation of this latter type of confidential

information rather than on misappropriation of know-how,

then the verdict is sustainable because it passes the gist of

the action and economic loss doctrine tests.

The problem with Uddeholm's argument her e is that, in

its jury instructions, the District Court did not distinguish

between the misappropriation of know-how and the

misappropriation of these other types of confidential

information. The jury's special verdict also did not

distinguish between these two categories of

misappropriation. Thus, we cannot deter mine whether the

jury's verdict on the misappropriation claim was properly

grounded on actions outside the scope of the Agreement.

We therefore will set aside the ver dict for Uddeholm on the

misappropriation of trade secrets claim, and remand for a

determination of this claim based solely on the

misappropriation of trade secrets that do not include the

know-how covered by the Know-How Agreement.

VI. Ellwood's Challenge to the Civil Conspiracy Award

The jury awarded Uddeholm $70,000 in punitive

damages on its civil conspiracy claim against Ellwood.

Uddeholm's complaint averred that Ellwood conspired with

the Ellwood Specialty Steel Company, Ellwood Quality Steel

Company, Bjorn Gabrielson, and David Bar ensfeld to

misappropriate its trade secrets and confidential

information. The jury found Ellwood liable on the

conspiracy claim but found in favor of all the r emaining

conspiracy defendants (except Gabrielson, who had already

been granted judgment as a matter of law under Fed. R.

Civ. P. 50), which means that the jury found only one

defendant liable for conspiracy. Ellwood challenges this

verdict on the grounds that under Pennsylvania law, civil

conspiracy requires at least two co-conspirators. See

Thompson Coal Co. v. Pike Coal Co., 412 A.2d 466, 473 (Pa.

1979).

Uddeholm does not dispute that two conspirators ar e

required under Pennsylvania law, and that, if this issue

had been preserved in the District Court, the conspiracy

verdict would have to be set aside. Instead, Uddeholm

38

argues that this issue was waived because Ellwood did not

clearly object on this basis at trial.15 See Medical Protective

Co. v. Watkins, 198 F.3d 100, 105 n.3 (3d Cir. 1999). After

the verdict, the District Court asked the parties if they

wished to raise any objections to the verdict, and the court

noted specifically that there appeared to be only one

conspirator. The court's colloquy with the parties on this

issue consisted solely of the following:

COURT: Civil conspiracy, I think they only found one

defendant.

SOMMER (counsel for Ellwood): I believe that's corr ect,

Your honor, just EGI.

MARTIN (counsel for Uddeholm): Yes.

COURT: That's a difficult undertaking. I would think

that it would require two or more.

MARTIN: I don't think the other defendant was joined,

though, and that was Mr. Sundvall, when he was out

at Avesta, because EGI was the defendant in the case.

COURT: That's correct, you did ar gue that he was a co-

conspirator. Is there anything else in there that pops

out at you as being inconsistent?

Although Uddeholm argued that Sundvall could serve as

the other co-conspirator, Sundvall had been previously

granted summary judgment on all claims against him,

including civil conspiracy. The issue here, then, is whether

Ellwood waived its argument that it could not be the only

party liable for civil conspiracy by neglecting to assert that

objection at trial. Ellwood argues that it objected by

agreeing with the District Court when the court raised the

_________________________________________________________________

15. Uddeholm argues in the alternative that, since we can affirm the

conspiracy verdict if it has any rational basis, we should do so because

of the possibility that the jury could have concluded that one Robert

Raubolt served as the other co-conspirator. This argument is without

merit. Uddeholm did not even mention Raubolt as a possible co-

conspirator at trial, and raised this possibility for the first time in

its

reply brief. We will not reach this contention because Uddeholm waived

this argument by not raising it in his opening brief. See Ghana v.

Holland, 226 F.3d 175, 180 (3d Cir . 2000).

39

problem with the conspiracy verdict. Ellwood contends that

it should not be required to do mor e when the District

Court itself raises the objection.

Rule 46 of the Federal Rules of Civil Procedur e states

that a party need not make a formal exception to a ruling

or order of a court, but instead "it is sufficient that a party,

at the time the ruling or order of the court is made or

sought, makes known to the court the action which the

party desires the court to take or the party's objection to

the action of the court and the grounds ther efor." On the

other hand, " `[i]t is well established that failure to raise an

issue in the district court constitutes a waiver of the

argument.' " Medical Protective Co., 198 F.3d at 105 n.3

(quoting Brenner v. Local 514, United Br otherhood of

Carpenters and Joiners of America, 927 F .2d 1283, 1298

(3d Cir. 1991)).

Although this issue is close, we are satisfied that Ellwood

did not waive its argument that it could not be liable as the

sole conspirator. It is true that Ellwood should have done

more than merely agree with the District Court when the

court noted the problem with the conspiracy ver dict. But

passivity may be excusable when the District Court itself

identifies the issue not only as problematic but as almost

certain grounds for setting aside the ver dict. It would be

unfair to Ellwood to penalize it for failing to jump up and

down or labor an objection that the District Court had

placed in the record. Therefor e, we hold that the verdict

against Ellwood for civil conspiracy must be set aside, and

that judgment must be entered for Ellwood on this claim.

VII. Other Challenges to Trial Rulings

A. Should Uddeholm Have Been Allowed to Recover

Damages for 1991 Rebates?

On Uddeholm's breach of contract claim, the jury

awarded compensatory damages for Ellwood's impr oper

calculation of rebates under S 2.3 of the Steel Purchase

Agreements. The parties agree that this amount included

damages for Ellwood's 1991 rebates on steel pur chases

from EUS. Ellwood contends that, even if Uddeholm is

40

entitled to rebate damages generally, it is not entitled to

any damages for post-1990 rebates, because Ellwood was

entitled to buy out Uddeholm's share of EUS at EUS's book

value as of December 31, 1990, and in fact Ellwood

initiated these buy-out proceedings. Ellwood ar gues that

the original Shareholders Agreement is quite clear that the

buy-out price for Uddeholm's shares of EUS was to be the

book value of EUS as of the month preceding the buy-out

notice, which Ellwood gave in January 1991. Because the

buy-out price was fixed prior to the 1991 r ebates, Ellwood

submits that these rebates could not have af fected the

value of Uddeholm's shares at the buy-out, and thus

Uddeholm was not entitled to damages for the 1991

rebates.

When Ellwood sought post-trial relief on this point, the

District Court denied Ellwood's motion, ruling that the

money the jury seemingly awarded for the 1991 r ebates

was really for Ellwood's breach of the Agr eement in

rejecting Uddeholm's tender of its EUS shar es after Ellwood

initiated the buy-out. The Agreement stipulates that the

settlement of the sale of Uddeholm's stock to Ellwood

should take place as soon as is practicable after the

decision is made, and in any event within 30 days after

determination of the purchase price. Ellwood, however,

never paid for Uddeholm's stock and in fact r ejected

Uddeholm's tender of stock. This action delayed the

settlement of the buy-out, and thus extended the time that

Uddeholm had to pay overhead for EUS well into 1991.

Since the Agreement is silent on what is to happen in such

a situation, the District Court found (post-trial) that the

contract was ambiguous on this point. The court ther efore

ruled that it had been the jury's province to decide on the

proper remedy for this breach by Ellwood, and that the jury

had decided to award the amount of the 1991 r ebates as

damages.

Ellwood raises two basic challenges to this ruling. First,

it argues that the Agreement is not ambiguous on this

issue: the Shareholders Agreement unambiguously fixes

book value for buy-out purposes at the sending of buy-out

notice, and there is no provision in the Agreement to vary

this. Second, Ellwood contends that the jury was not

41

instructed on the issue of the ambiguity of the Agr eement

concerning a rejection of a share tender, nor did it return

any kind of verdict on this issue in its special verdict.

Ellwood thus argues that the award of the 1991 rebate

damages cannot stand on the District Court's theory,

because "[a] verdict cannot stand on a theory that the jury

was never asked to consider." Appellants' Br. at 59.

Ellwood's argument that the Agreement was

unambiguous on this issue is unavailing. Ellwood is correct

that the Agreement clearly sets out the method for

calculating the stock purchase price (i.e., EUS's book value)

in a buy-out, but it is just as clear in the Agr eement that

the settlement of such a buy-out was to take place no later

than 30 days after the determination of the purchase price.

The settlement did not occur within the time period set by

the Agreement, and there is no provision in the Agreement

that provides for such a circumstance. It is simply not true

that the Agreement unambiguously gives Ellwood the right

to initiate the buy-out, set the purchase price for the stock,

and then drag its heels for an indefinite time on the

settlement of the buy-out while keeping the pur chase price

for the buy-out fixed--all the while collecting overhead

costs from Uddeholm for EUS. Moreover , such an

interpretation of the Agreement would be"absurd and

unreasonable," so we will not interpr et the Agreement in

this manner. See United Refining Co. v. Jenkins, 189 A.2d

574, 580 (Pa. 1963). The District Court rightly concluded

that the Agreement was ambiguous as to what should have

occurred upon Ellwood's rejection of Uddeholm's tender,

making this question an issue for the jury to consider.

As for Ellwood's contention that the District Court

improperly attributed a rationale for the jury's verdict using

a theory that the jury was never asked to consider , we need

not decide this issue because we will set aside the jury's

award on the breach of contract claim on other grounds

(i.e., the burden-shifting error; see Section III supra). On

remand, the District Court should instruct the jury on the

issue of the ambiguity of the Agreement concer ning a

rejection of the share tender, so that the jury can explicitly

decide whether Ellwood breached the Agr eement by

rejecting Uddeholm's tender, and whether the 1991 rebates

42

should be included in the damage award as a r emedy for

this breach.

B. The Interest Rate That Should Be Applied to Post-

Venture Sales of Steel.

After the joint venture between Uddeholm and Ellwood

dissipated, Uddeholm bought approximately $345,000

worth of steel from Ellwood. Both parties agr ee that

Uddeholm still owes Ellwood this $345,000 plus inter est;

this amount is to be set off against the money Ellwood will

owe Uddeholm on the claims in this lawsuit. The parties

disagree, however, over the rate of interest that should be

applied to this debt. In a post-verdict motion to the District

Court, Ellwood argued that the 18% inter est rate that it

charges all of its customers should be applied to the

$345,000 and compounded semi-annually, as that rate was

included in the terms and conditions that wer e attached to

the invoice order form used for these steel purchases.

Uddeholm counters that the statutory 6% rate should be

applied because the agreement for this steel was part of a

general commercial agreement that did not involve

Ellwood's standard terms.

In its September 13, 1999 Memorandum Order on Post-

Trial Matters, the District Court found that the steel was

purchased via an agreement "which was not confined to the

terms included on the backs of the related invoices, [ ]

which is where defendants find the pr ovision for the high

rate of interest they seek." Dist. Ct. Mem. Order, Sept. 13,

1999 at 3. The court based this conclusion partially on

evidence presented by Uddeholm that the parties entered

into a commercial agreement with dif ferent terms from

Ellwood's standard agreement, and partially on its

conclusion that it would be "logical" for these parties not to

confine their commercial dealings to the ter ms on the back

of a form invoice, given that they had worked together for

years as joint venturers. The District Court also reasoned

that the 6% rate would be "otherwise fair ," as the 6% rate

applied to all the debts that Ellwood owed Uddeholm. The

court thus applied the 6% statutory rate.

Although the District Court determination that the post-

43

venture steel sales agreement did not include the 18%

invoice slip rate may be the best interpretation of the

evidence adduced at trial, we cannot adequately r eview this

determination because the District Court neither cited to

nor described the evidence on which its decision was based.

Moreover, if Ellwood sent the invoice slips within a

reasonable time as a "definite and seasonable expression of

acceptance or a written confirmation" of an oral agreement

between the parties, then 13 Pa. Cons. Stat. S 2207 (part of

Pennsylvania's version of the UCC) would apply, and the

terms on that invoice would become part of the agreement

unless Uddeholm's original offer expressly limited

acceptance to the terms of the offer , the invoice's terms

materially altered the original terms, or Uddeholm objected

to the new terms within a reasonable time. See 13 Pa.

Cons. Stat. S 2207(a) & (b).16

However, there is not sufficient evidence in the District

Court's Memorandum Order or in the recor d for us to

review the District Court's determination on this issue--

indeed, it is not even clear that the District Court

considered the applicability of S 2207 at all. Furthermore,

the District Court's conclusion that it would be"logical" for

the parties to have worked out their own deal separate from

the terms on the invoice and that the 6% rate would be

"fair" is insufficient to establish that there was such a deal.

_________________________________________________________________

16. Tile 13 Pa. Cons. Stat. S 2207(a) & (b) provides that

(a) General rule.--A definite and seasonable expression of

acceptance or a written confirmation which is sent within a

reasonable time operates as an acceptance even though it states

terms additional to or different fr om those offered or agreed

upon,

unless acceptance is expressly made conditional on assent to the

additional or different terms.

(b) Effect on contract.--The additional ter ms are to be construed

as

proposals for addition to the contract. Between merchants such

terms become part of the contract unless:

(1) the offer expressly limits acceptance to the terms of the

offer;

(2) they materially alter it; or

(3) notification of objection to them has alr eady been given or is

given within a reasonable time after notice of them is received.

44

We therefore will vacate the District Court's order on this

issue and remand so that the District Court can more

specifically collect and cite evidence on the post-venture

steel sales agreement between the parties in or der to show

either that the 18% interest rate included in the invoice's

terms did not become part of this agreement, or that the

18% rate was part of the agreement.

C. Evidentiary Challenges.

Ellwood also challenges two evidentiary rulings that the

District Court made at trial. We review the District Court's

evidentiary rulings for abuse of discretion. See Walden v.

Georgia-Pacific Corp., 126 F.3d 506, 517 (3d Cir. 1997).

1. The Jonsson affidavit

The District Court admitted into evidence portions of an

affidavit of Bo Jonsson, a former Pr esident of Uddeholm,

under Federal Rule of Evidence 807, the catchall exception

to the hearsay rule. Jonsson attested to the affidavit in

1994 and died in 1996, before the trial. Uddeholm used the

affidavit to counter assertions by Ellwood about what

transpired at certain directors meetings that Jonsson

attended in a representative capacity for Uddeholm. Rule

807 provides that

[a] statement not specifically cover ed by Rule 803 or

804 but having equivalent circumstantial guarantees of

trustworthiness, is not excluded by the hearsay rule, if

the court determines that (A) the statement is offered

as evidence of a material fact; (B) the statement is more

probative on the point for which it is of fered than any

other evidence which the proponent can pr ocure

through reasonable efforts; and (C) the general

purposes of these rules and the interests of justice will

best be served by admission of the statement into

evidence. However, a statement may not be admitted

under this exception unless the proponent of it makes

known to the adverse party sufficiently in advance of

the trial or hearing to provide the adverse party with a

fair opportunity to prepare to meet it, the proponent's

intention to offer the statement and the particulars of

it, including the name and address of the declarant.

45

Fed. R. Evid. 807.

Ellwood argues that the District Court's admission of the

Jonsson affidavit under Rule 807 was error , because Rule

807 is meant to be used only in the rare case, which, it

argues, this is not. See United States v. Bailey, 581 F.2d

341, 347 (3d Cir. 1978) (stating that the r esidual hearsay

exception is "to be used only rarely, and in exceptional

circumstances," and is meant to "apply only when certain

exceptional guarantees of trustworthiness exist and when

high degrees of probativeness and necessity are present").17

Specifically, Ellwood takes issue with the District Court's

findings that the Jonsson affidavit was exceptionally

trustworthy and that it was more probative than any other

evidence that Uddeholm could present.

While Ellwood is correct that Rule 807 should only be

used in rare situations, the District Court made careful and

extensive findings in support of its conclusion that this was

such a situation. See Tr. of Jury Trial, March 24, 1999.

First, the District Court ascertained that the r equirements

of Rule 807 were met. The court specifically found that

- the affidavit was offered as evidence on a material

fact, namely the parties' course of dealings, which

bears upon the interpretation of the Agr eement;

- the affidavit was more probative on the point for

which it is offered than any other evidence which

the proponent could procure thr ough reasonable

efforts: it was highly probative because Jonsson was

the only representative of Uddeholm on the EUS

board of directors at the time in question, and, as

_________________________________________________________________

17. Before 1997, the residual hearsay exceptions in the Federal Rules of

Evidence were contained in Rules 803(24) and 804(b)(5). In 1997 the

Rules were amended and these two residual exceptions were combined

and transferred to the new Rule 807. "This was done to facilitate

additions to Rules 803 and 804. No change in meaning is intended." Fed.

R. Evid. 807 advisory committee's note. Bailey addressed the old

residual hearsay exceptions contained in Rules 803(24) and 804(b)(5),

but because Rule 807 is simply the combination of these rules, Bailey's

holding applies to the current Rule 807 as well. The same is true of

other pre-1997 cases on the residual hearsay exceptions that are cited

in this Section.

46

such, this evidence was the only evidence that

Uddeholm could present to counter the Ellwood's

allegation that Uddeholm understood the Agreement

to permit sales to third parties and r eimbursement

for those sales;

- the general purpose of the rules, fair ness and the

administration of justice, would be served by

admitting the affidavit, because it would assist the

jury in determining the truth;

- there was sufficient notice to Ellwood that it would

be used, as Uddeholm proffered the affidavit months

prior to trial, and there was argument and briefs

filed on the issue.

The District Court found that the following factors also

militated in favor of admitting the Jonsson affidavit:

- Ellwood had ways to rebut the affidavit: its

witnesses were present at the meetings discussed

therein, and these witnesses could present their

testimony, while Uddeholm's only witness to these

meetings (Jonsson) was dead;

- the affidavit was trustworthy because: (1) the

declarant was known and named, (2) the statement

was made under oath and penalty of perjury, (3) the

declarant "was aware of the pending litigation at the

time he made the declaration and thus knew that

his assertions were subject to cross examination,"

(4) the statements were based on personal

observation, (5) the declarant was not employed by

the plaintiff at the time of the statements, and thus

had no financial interest in the litigation's outcome,

(6) the affidavit was corroborated, partially, by

minutes of directors meetings (some statements

Jonsson said were made match others' notations),

and (7) his position and background qualified him to

make the assertions.

The District Court then acknowledged that Rule 807

should only be used sparingly, but opined that this affidavit

presented "a rather unique combination of circumstances

where a material fact can be proved only through one

47

method, or, in this case, rebutted by only one method." The

court was also swayed by the fact that it was Ellwood that

first argued that Uddeholm knew of Ellwood's interpretation

of the Agreement because Jonsson must have gained this

knowledge at the directors meetings; the only way

Uddeholm could rebut this claim was via Jonsson's

affidavit, given that he was not available to testify.

These findings are sufficient for us to hold that the

District Court did not abuse its discretion when it admitted

the Jonsson affidavit under Rule 807. In Copperweld Steel

Co. v. Demag-Mannesmann-Bohler, 578 F.2d 953 (3d Cir.

1978), this Court upheld a district court's admission of a

similar item--a memorandum prepared by a lawyer of an

executive who was later killed--on a weaker showing by the

district court under the predecessor rule to Rule 807 (Rule

804(b)(5)). See id. at 964. We ther efore hold that the

admission of the Jonsson affidavit was not err or.

2. The Rydstad redaction

Ellwood also contends that the court erred in r equiring

the redaction of portions of a 1988 memorandum from

Bertil Rydstad before admitting it into evidence, on the

basis that the portions redacted were legal conclusions.

Uddeholm appointed Rydstad in 1987 to work with Ellwood

at EUS; in March 1988 Rydstad prepar ed a memo detailing

his understanding of Uddeholm's and Ellwood's rights and

obligations regarding EUS. The District Court admitted the

memo into evidence but first required Ellwood to redact the

following passage from the memo: "Thus, under the

contracts there are only two purchasers. Nothing, however,

precluded [sic] them from reselling to a third party." The

District Court required this language to be redacted on the

grounds that "it appears to be a legal interpretation by a

non-legal person, and not even a person who was privy to

the negotiations [on the Agreement], nor do we have any

indication that that view was adopted or accepted by

anybody else in the company in terms of their course of

dealings." Tr. of Jury Trial, Apr. 1, 1999. The court also

noted that the redacted statement did not expr ess any

point of view on whether Ellwood should be able to get

rebates for ingots sold to third parties, which is really what

48

the dispute over the interpretation of the Agr eement was

about.

Ellwood argues that the redacted language was essential

to understanding Uddeholm's interpretation of the

Agreement at the time, which would ther eby affect the

court's determination of whether the Agr eement was

ambiguous as well as the jury's interpretation of the

Agreement. Under Pennsylvania law, a party's statements

can be used to interpret a contract or to establish that

party's understanding of the meaning of the contract. See

City of Erie v. R.D. McAllister & Son. 204 A.2d 650, 660 (Pa.

1964); Z &L Lumber Co. of Atlasburg v. Nor dquist, 502 A.2d

697, 701 (Pa. Super. Ct. 1985). In our view, however, the

District Court did not abuse its discretion in requiring the

redaction. It appears from the evidence in the record that

Rydstad was not trained in the law, nor was he involved in

the contract negotiations; thus, Rydstad did not seem to

possess the requisite expertise or backgr ound to draw the

conclusion contained in the redacted passage. Furthermore,

despite his role as the point man at Uddeholm for the EUS

project, there is no evidence that R ydstad's views reflected

those of Uddeholm or that anyone else at Uddeholm

adopted them. Finally, because the redacted language did

not address whether Ellwood could receive rebates on its

third-party sales, the language does not speak to

Uddeholm's understanding of the Agreement as to this

issue, although it seems reasonable that the jury could

have become confused about that if it had been given the

memo without the redaction. Thus, it was within the court's

discretion to require the redaction.

VIII. Conclusion

For the foregoing reasons, the Judgment of the District

Court will be affirmed in part and vacated in part, and the

case remanded to the District Court for pr oceedings

consistent with this opinion. Parties to bear their own

costs.

49

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

50