Opposition Brief — Compressed Gas Corp. v. United States Steel Corp.

bse

Supreme Coane US.

(3) FILED

No. 88-1316 MAR “8: 1889

| JOSBPH F. SPANIOL, JR. *

IN THE CLERK a

SUPREME COURT OF THE UNITED STATES

October Term, 1988

COMPRESSED GASCORPORATION - - Petitioner,

versus ae

UNITED STATES STEEL CORPORATION and

JACK B. KELLEY,INC. - - - - Respondents.

On Petition for Writ of Certiorari to the United States

Court of Appeals for the Sixth Circuit

BRIEF IN OPPOSITION

JOHN R. McCALL

BROWN, TODD & HEYBURN

1600 Citizens Plaza —

Louisville, Kentucky 40202

(502) 589-5400

Counsel of Record

AND

ROBERT Y. GWIN

BROWN, TODD & HEYBURN

1600 Citizens Plaza

Louisville, Kentucky 40202

(502) 589-5400

AND

WAYNE L. EMERY

USX CORPORATION

Law Department

600 Grant Street

Pittsburgh, Pennsylvania 15230

(412) 433-2898

Counsel for Respondenis

WESTERFIELD-BONTE CO., 619 W. KENTUCKY-—P.O,. BOX 3251, LOUISVILLE, KY.

| ied

QUESTIONS PRESENTED!

I. Is the Seventh Amendment violated by the Sixth Cir-

cuit’s ruling that there was insufficient evidence of

fraudulent misrepresentation under Kentucky law to

submit the issue to a jury?

Il. Does the Sixth Cireuit’s application of Kentucky law

create a conflict among federal circuits that apply

the laws of different states in diversity cases?

III. Did the Sixth Cireuit correctly apply Kentucky law

limiting the recovery of alleged lost profits?

IV. May Congress pass a law fixing the rate of post-judg-

ment interest in diversity cases?

1Pursuant to United States Supreme Court Rule 28.1, USS pro-

vides the following information. United States Steel Corporation

changed its name to USX Corporation in the summer of 1986. By

stipulation of the parties, the trial was conducted using the name,

United States Steel Corporation. USX Corporation is a publicly-

owned corporation.

li

TABLE OF CONTENTS

PAGE

QUESTIONS PRESENTED .................++--- i

PARLE OF GCOMTMNTS ow... ccc cess cccscssses ii-iii

TABLE OF AUTHORITIES’ .... 2... ccccccccences iv- Vv

PUITIONED TRI aoa cc ic cc cae Sesnnssa lita 1

STATEMENT OF THE CASE ................... 1- 5

REASONS FOR DENIAL OF WRIT ............-: 5-18

I. Summary of Arguments ............--.....-. 5- 6

II. Is The Seventh Amendment Violated By The

Sixth Circuit’s Ruling That There Was Insuffi-

cient Evidence Of Fraud To Submit The Issue

Te A FUG? ooo ic ndssaheneee eee 6-10

A. The Court May Withdraw a Case From the

Jury for Insufficient Evidence, ........... 6- 7

B. The Sixth Cireuit Correctly Determined In-

sufficient Evidence of Fraud. .............. 7- 9

C. The Sixth Cireuit Properly Considered All

Evidence of Belamee. ¢isccinactanccaaesss 9-10

III. The Sixth Circuit’s Application Of Kentucky

Law Creates No Conflict Among Federal Cir-

cuits That Apply The Laws Of Other States In

Dively GG .6. 6665 Hee 11

IV. The Sixth Circuit Correctly Applied Kentucky

Law Regarding Recovery Of Alleged Lost

rrr eae arin 12-15

A. Kentucky Law Requires Proof of Some Prof-

Melillo... csdichiis eee 12-13

B. Trial Evidence Established No Profitability .13-14

C. CGC’s Citation to Unrelated Federal Statutes

Does Not Alter the Kentucky Profitability

PORMNNNGE. oes dv oe va ee eee 14-15

lil

PAGE

V. Congress Has The Authority To Pass A Law

Fixing The Rate Of Post-judgment Interest In

sa cewieseietivekeenscvcesas 15-17

EE 18

ei. sce cns wa ckwnadaces la-18a

Appendix 1. Judgment of the United States Dis-

trict Court for the Western District of Ken-

ke lh el a a la

Appendix 2, Published Opinion of the United

States Court of Appeals for the Sixth Circuit. .3a-17a

Appendix 3. Order of the United States Court of

Appeals for the Sixth Cireuit Denying Petition

Te aaa opens ie alae. eee 18a

iv

TABLE OF AUTHORITIES

—___—

Cases: PAGE

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) 8

Bailey v. Chattem, Inc., 888 F, 2d 149 (6th Cir.),

cert. denied, __ U.S. —_, 108 S. Ct. 2831 (1988).. 17

Erie R. Co. v. Tompkins, 304 U.S. 64 (1938) ...... 11

Everaard v. Hartford Acc. and Indemn. Co., 842

: F, 2d 1186 (10th Cir. 1988) ..............-.-- 16-17

Fashion Originators Guild v. Federal T. Com., 312

ip aro. |) reer ry ree eee 11

: Galloway v. United States, 319 U.S. 872 (1943) ... 5, 6

G.M. Brod & Co. v. U.S. Home Corp., 759 F. 2d 1526

(11th Cir. 1985) .........-. cee ee sree nec ecnee 17

Gunning v. Cooley, 281 U.S. 90 Go) Beams emer 7-8

Hanna v. Plumer, 380 U.S. 460 (1965) ........... 15, 16

Improvement Co. v. Munson, 81 U.S. (14 Wall.) 442

c: ) SO ea remy Peete re rT crore te 8

Nissho-Iwai Co. v. Occidental Crude Sales, Inc., 848

F. 2d 613 (Sth Cir. 1988) .......-.2sesceecene 16

Northrop Corp. v. Triad Intern. Marketing, S.A.,

842 F. 2d 1154 (9th Cir. 1988) ................ 17

Pauline’s Chicken Villa, Inc. v. KFC Corp., Ky., 701

hfe) At) errr errr ree 6, 12

Ruhlin v. New York Life Ins. Co., 304 U.S. 202

(RN ee ois eas aes helen cee es ane eens 5-6, 11

Story Parchment Co. v. Paterson Parchment Paper

Co. SOR US. Sam CIB) ooias in eis nee cass, 6, 15

Wadkins’ Adm’x v. Chesapeake & Ohio Railway

Co., Ky., 298 S.W. 2d 7 (1956) ..........--.--- 7

Wahba v. Don Corlett Motors, Inc., Ky. App., 573

Oe Se Te EO) sb vikdaiwessaeseka Nev eewes 8

Weitz Co., Inc. v. Mo-Kan Carpet, Inc., 723 F. 2d

WE HI OE, BUD 6 oak sien eens 5 cea een 6, 16

Constitutional Provisions: PAGE

TIO Cueet. Ast. Fa CLD. cases coe ce eee ease 15-16

Statutes:

Oo URt 4 Ei ae 11

a6 UG: Cia oe ees 6, 15, 16, 17

No. 88-1316

IN THE

SUPREME COURT OF THE UMTED STATES

-~

CoMPRESSED GAs CORPORATION - - Petitioner,

Vv.

UNITED STATES STEEL CORPORATION and

Jack B. Kevitey, Inc. - - - - Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF IN OPPOSITION

OPINIONS BELOW

In addition to the opinions and judgments reprinted

in the appendix to the Petition for a Writ of Certio-

‘ari, the Judgment of the United States District Court

for the Western District of Kentucky 1s reprinted in

the Appendix at p. la.

STATEMENT OF THE CASE

The Opinion of the United States Court of Appeals

for the Sixth Circuit correctly states the facts of this

ease. For brevity, United States Steel Corporation

(*USS’’) and Jack B. Kelley, Inc. (** Kelley’’)* adopt

“Compressed Gas Corporation's Petition incorrectly refers to

Jack B. Kelley, Ine. as Jack B. Kelley Co., Ine,

2

and incorporate by reference the facts set forth in that

decision. (Appendix, pp. 5a-8a) USS and Kelley pro-

vide the following additional facts relevant to the

issues before the Court.

(1) The evidence at trial established that 31 eyl-

inders are safe containers for uncontaminated natural

gas and no witness testified otherwise.

(2) Neither USS nor Kelley ever represented to

anyone that 3 cylinders could be used to transport

gases contaminated with hydrogen sulfide and water.

In fact, USS advised all who inquired of the require-

ment for uncontaminated gas.

(3) The Department of Transportation (**DOT’’)

by special permit issued in 1974 authorized transpor-

tation of ‘‘uatural gas, proper shipping name meth-

ane’? in 37 cylinders. In a 1973 preface comment

which appeared in only one issue of the Pederal Reg-

ister, the DOT appeared to distinguish natural gas

from methane and to interpret the regulations listing

the gases approved for trausport in 3T eylinders as

excluding natural gas; however, it reversed its position

when it later granted the 1974 permit specifically allow-

ing natural gas transport in 3T cylinders and treating

it as synonymous with methane.

USS had no actual knowledge of the 1973 preface

comment (which never became a part of the regulations

and never appeared in the Code of Federal Regula-

tions). However, USS did have actual knowledge of

the special permit allowing natural gas transport in

“yr

ST eviinders and equating natural gas with methane,

3

a gas specifically listed in the regulations as approved

for transport in 3T cylinders. After the accident in

this case, the DO'T amended its regulations to exclude

natural gas as a product suitable for transport in 3T

cylinders, but the DOT specifically acknowledged that

its prior regulations had confused the industry.

(4) The DOT regulates both manufacturers and

users of 37 cylinders. The wser regulations published

in the Code of Federal Regulations and directly appli-

cable to Compressed Gas Corporation (**CGC’’) pro-

hibited users of 3T cylinders from introducing into

the cylinders any substance that might impair the

cylinders’ serviceability. Every expert at trial agreed

that hydrogen sulfide would impair the cylinders’

serviceability. Post accident analysis of CGC’s nat-

ural gas wells revealed that, contrary to CGC’s pre-

accident representations to Kelley and others, the wells

contained high concentrations of hydrogen sulfide and

water. Every expert at trial agreed that, absent CGC’s

introduction of hydrogen sulfide or water into the ey!-

inders, the rupture would not have occurred.

(5) CGC ignored or refused to learn the DOT

regulations applicable to its activities. CGC’s founder

and principal, Gobel Mattingly, saw a welley brochure

which promoted 81T cylinders, but he never read the

DOT regulations that were identified on the front of

the brochure. Prior to the accident, at CGC’s request,

Kelley sent CGC a copy of the actual DOT regulations

specifically setting forth the gases approved for trans-

port in 3 cylinders. Again, Mattingly testified he

4

did not read the regulations or the cover letter that

came with them. In addition, while visiting Kelley’s

Texas offices, Mattingly saw but did not read a USS

brochure which advised that the DOT governed the use

of the cylinders. Mattingly testified that he did not

read any USS brochures, rather he only ‘‘looked at

the pictures.”’

(6) No natural gas trailer transport business ulti-

mately made a net profit. The only other similar oper-

ation in CGC’s geographic region discontinued opera-

tions because of economic infeasibility. During the

gas curtailments in the late 1970's a nearby southern

Indiana hotel set up an operation similar to CGC’s to

meet its gas needs. After only two months of opera-

tion, it discontinued the project because it could buy

gas more cheaply from the local utility than it could

run the truck transport operation.

(7) lian attempt to create support for its claim

for lost profits, CGC has mischaracterized the evidence

from Don Fowler of Texas Gas Transport. Contrary

to statements in CGC’s Petition, Fowler never testified

that his company made $14 million in gross revenues.

CGC also fails to note that Fowler’s companies’ gross

revenues resulted from a variety of enterprises un-

related to its gas transport business. I*owler specifi-

cally testified that he did not realize a net profit on

his gas transport business. Moreover, in no event could

Fowler’s operation provide support for CGC’s claim

for lost profits. Fowler operated in a different market

area 900 miles from CGC’s operations, and Fowler

sii

5)

used only uncontaminated natural gas. Fowler pointed

out that he had considered and abandoned efforts to

operate in Kentucky because he could not find wells

with gas in the quantity and quality necessary to jus-

tify a gas hauling business.

REASONS FOR DENIAL OF WRIT

I, Summary Of Arguments

This case is a diversity, tort case in which Ken-

tucky substantive law provides the rule of decision.

CGC has overlooked this simple fact and has pre-

sented nothing warranting a writ of certiorari in its

Petition.

The Sixth Circuit received on appeal a trial court

verdict awarding damages almost forty times the trial

evidence of property damage. The Sixth Circuit eould

not find sufficient evidence in the record to justify a

jury finding of fraudulent inisrepresentation, reliance

on misrepresentation, or lost profits. Reviewing the

record and applying the standards of review required

of it, the Sixth Circuit reversed the trial court and

narrowed the issues for retrial.

fach of the four arguments CGC presents in its

Petition fails: (1) the Seventh Amendment does not

inhibit a directed verdict or JNOV where insufficient

evidence exists to submit the case to the jury. Gailo-

way V. United States, 319 U.S. 372 (1948). (2) De-

cisions of federal courts of appeals applying the laws

of different states in diversity actions do not create

reviewable conflicts among the circuits. Ruhlin v. New

6

York Life Ins. Co., 304 U.S. 202, 206 (1938). (3)

Under applicable Kentucky law and, indeed, federal

law as well, CGC failed to produce sufficient evidence

that it could ever make a profit even absent the acci-

dent. Pauline’s Chicken Villa, Inc. v. KFC Corp.,

Ky., 701 S.W. 2d 399, 401 (1985); Story Parch-

ment Co. v. Paterson Parchment Paper Co., 282 U.S.

555, 562 (1931). (4) Finally, 28 U.S.C. § 1961(a)

controls the rate of post-judgment interest on diversity

eases. ‘‘The accrual of ‘mterest on judgments is an

ordinary incident of judicial relief, and . . . the power

that creates the tribunal that enters the judgment can

also provide for such ordinary incidents.”’ Weitz Co.,

Ine. v. Mo-Kkan Carpet, Inc., 723 I. 2d 1382, 1386 8th

Cir. 1983). Therefore, CGC has presented no issue for

review by this Court and its Petition must be denied.

II. Is The Seventh Amendment Violated By The Sixth

Circuit’s Ruling That There Was Insufficient Evidence

Of Fraud To Submit The Issue To A Jury?

A. The Court May Withdraw a Case From the Jury For

Insufficient Evidence.

The court’s decision in Galloway v. United States,

319 U.S. 372 (1943) confirms the federal court’s power

to withdraw a case from a jury based on insufficiency

of the evidence. In Galloway, the court stated:

If the intention is to claim generally that the [Sev-

enth] Amendment deprives the federal courts of

power to direct a verdict for insufficiency of evi-

dence, the short answer is the contention has been

7

foreclosed by repeated decisions made here con-

sistently for nearly a century.

* * *

It is not that ‘the rules of the common law’ in 1791

deprived trial courts of power to withdraw cases

from the jury, because not made out, or appellate

courts of power to review such determinations.

The jury was not absolute master of the facts in

1791.

319 U.S. at 389-90.

B. The Sixth Circuit Correctly Determined Insufficient

Evidence of Fraud.

The Sixth Cireuit correctly ruled that CGC failed

to produce sufficient evidence of fraud to permit sub-

mission of the issue to the jury.

Contrary to the representation in CGC’s Petition,

the Sixth Circuit specifically stated the standard of

review it applied. At page 6a of its Opinion, the Court

states that it ‘‘will reverse-the denial of a judgment

notwithstanding the verdict if we do not find the evi-

dence of fraud of probative value having fitness to in-

duce conviction in the minds of reasonable persons’’.

The Court goes on to find at page 7a of its Opinion that

CGC failed to present ** ‘more than a scintilla of evi-

dence’ toward meeting’? its burden of proof. Both

the Kentucky courts and the federal courts follow the

?

same *‘more than a scintilla of evidence’’ standard re-

garding sufficiency of the evidence as the Sixth Circuit

applied in this case. Wadhins’ Adm’x v. Chesapeake &

Ohio Railway Co., Wy., 208 S.W. 2d 7, 9 (1956) ; Gun-

8

ning Vv. Cooley, 281 U.S. 90, 94 (1930) ; Improvement

Co. v. Munson, 81 U.S. (14 Wall.) 442, 449 (1871).

Kentucky law requires proof of all elements of

fraud by clear and convincing evidence. Wahba v.

Don Corlett Motors, Inc., Ky. App., 573 S.W. 2d 357,

359 (1978). To overcome a directed verdict on a fraud

elaim under Kentucky law, the party asserting the

fraud must sustain the burden of proof. This burden

requires clear and convincing evidence of all elements

of fraud. In other words, as stated by this Court in

a case involving the clear and convincing evidence

burden of proof in the context of the malice element

in a libel action:

Progressing to the specific issue in this case, we

are convineed that the inquiry involved in a ruling

on a motion for summary judgment or for a di-

rected verdict necessarily implicates the susbtan-

tive burden of proof that would apply at the trial

on the merits.

[That is, whether the evidence presented is such

that a reasonable jury might find that actual

malice had been shown with convincing clarity

(emphasis added).

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252,

257 (1986).

Similarly, the standard of review in the present case

is whether there was more than a scintilla of evidence

of probative value having fitness to induce conviction

in the minds of reasonable persons that all the elements

9

of fraud had been shown with convincing clarity. The

Sixth Circuit properly ruled that CGC did not produce

evidence sufficient to warrant submission of its fraud

claim to the jury. ‘he Appellate Court acted within

its well-established power and no Seventh Amendment

issue arises from its ruling.

C. The Sixth Circuit Properly Considered All

Evidence of Reliance.

CGC’s allegation that the Sixth Circuit’s Opinion

‘rests in part upon the wrong evidence’’ has no basis.

CGC complains that the Court did not properly con-

sider page 16 of the USS brochure when it ruled that

CGC presented insufficient evidence of reliance to sup-

port a fraud claim. CGC specifically raised the same

argument before the Court of Appeals in its Petition

for Rehearing. The Court of Appeals confirmed that

it did consider precisely the same evidentiary issue

when it stated in its order denying the Petition:

The panel has further reviewed the petition for

rehearing and concludes that the issues raised in

the petition were fully considered upon the original

submission and decision of the case. (Appendix,

p. 18a)

Further, the Sixth Circuit correctly construed this

exhibit in its analysis and opinion. The Sixth Cireuit

noted in its Opinion at page Ila, the USS brochure

relates to ‘‘various uses to which seamless pressure

vessels 2... enn be put.”” he brochure refers to

gases that a variety of USS pressure vessels can trans-

10

port without specifying which gases are suitable for

which vessels. The USS brochure contains no repre-

sentation regarding the particular use (contaminated

natural gas) to which CGC put 3T cylinders. The

Sixth Circuit correctly noted that CGC could not rely

on the brochure without further inquiry.

Moreover, the record establishes that CGC could

not have relied on the USS brochure at trial because

Mattingly never read the brochure. Although Mat-

tingly read to the jury at trial portions of page 16 of

the USS brochure, when confronted with the bold red

letters on page 16 relating to DOT regulations (Mat-

tingly claimed he did not know prior to the accident

that the DOT regulated the use of 3T cylinders), Mat-

tingly stated: ‘‘No, I did not rely, no, there was any

rules for the shipper. I didn’t read all that brochure;

still haven’t.’’ Mattingly went on to explain ‘‘I looked

at all the pictures, I will say that.’’ Finally, when

pressed for an answer as to whether he did or did not

read page 16 of the USS brochure, Mattingly confessed

that he did not know.

The Sixth Cireuit considered the entire USS bro-

chure. It properly concluded that the testimony re-

lated to the brochure does not constitute sufficient evi- -

dence of reliance to justify submission of CGC’s fraud

claim to the jury.

11

III. The Sixth Circuit’s Application Of Kentucky Law

Creates No Conflict Among Federal Circuits That

Apply The Laws Of Other States In Diversity Cases.

Contrary to CGC’s argument, no reviewable con-

flict exists among the federal circuits as to what con-

stitutes reliance as an element of a fraud claim in a

diversity case. State law defines the substantive ele-

ments of the cause of action. 28 U.S.C. § 1652; Frie

Rk. Co. v. Tompkins, 304 U.S. 64 (1938) ; Fashion Orig-

mators Guild v. Federal T. Com., 312 U.S. 457 (1941).

The Sixth Circuit correctly applied and specifically

cited the Kentucky authority establishing the substan-

tive law on which it decided this diversity case. (Ap-

pendix, pp. 8a, 10a-1la, 13a)

CGC does not argue that the Sixth Cireuit ineor-

rectly applied Kentucky law. Rather, CGC cites eases

from other federal circuits applying the law of other

states and argues that they demonstrate a reviewable

conflict among the circuits. It is axiomatie and this

Court has held that decisions by federal courts of ap-

peals applying different laws of different states do not

create reviewable conflicts among the circuits. Ruhlin

v. New York Life Ins. Co., 304 U.S. 202, 206 (1938).

The Sixth Circuit’s application of Kentucky law ere-

ates no conflict with the decisions of other federal ap-

pellate courts applying the laws of other states. CGC

has presented no issue warranting a writ of certiorari.

12

IV. The Sixth Circuit Correctly Applied Kentucky Law

Regarding Recovery Of Alleged Lost Profits.

A. Kentucky Law Requires Proof of Some Profitability.

The Sixth Circuit applying Kentucky law correctly

held that CGC did not produce sufficient evidence of

the fact that, absent the accident, CGC could have

made a profit. As the Sixth Circuit pointed out at

page 13 of its Opinion (Appendix, p. 15a) ‘‘ Kentucky

law requires that CGC establish the fact of lost profits

with reasonable certainty. Pauline’s Chicken Villa,

Inc. v. KFC Corp., 701 S.W. 2d 399, 401 (Ky. 1985).”’

The court in Pauline’s referred to nine factors exist-

ing in that case which eliminated the ‘‘uncertainty”’

of new business profitability. The Sixth Circuit listed

the nine Pauline’s factors and observed that Kentucky’s

highest court had removed *“‘virtually all the uncertain

variables’’ for determining the profitability test for a

new business under Kentucky law. Contrary to CGC’s

allegations, the Sixth Circuit did not require that CGC

prove all of the nine factors listed in Pauline’s. Rather,

the Sixth Circuit expressly stated that ‘‘[m Jot one of

these factors existed in this case’? (emphasis added).

(Appendix, p. 15a). ‘

CGC misunderstands Kentucky law when it argues

that it can recover lost profits merely by offering evi-

dence that USS and Kelley caused some kind of dam-

age. That there was damage of some kind does not

mean there was damage of a particular kind. One

13

of several possible kinds of damage is ‘‘lost profits’’.

While it is true that the wnount of lost profits need

not be proven with certainty, the fact of lost profits

still must be proven in accordance with Kentucky law.

Kentucky law requires that CGC prove with reason-

able certainty that USS and Kelley caused CGC to

suffer lost profits. Consequently, CGC must prove

with reasonable certainty that, absent the accident, it

would-have made profits.

B. Trial Evidence Established No Profitability.

In this case, the Sixth Circuit correctly held that

CGC failed to introduce sufficient probative evidence

that it would have made any profits. The evidence at

trial established that:

(a) CGC never in its entire existence made a

profit ;

(b) CGC had a pre-accident operating history of

less than*ten days without any profit;

(ec) no natural gas cylinder trailer transport oper-

ation anywhere ultimately returned a profit;

and

(d) the only similar operation in the same geo-

graphic region discontinued operations be-

cause of economic infeasibility.

Moreover, CGC’s only lost profits evidence came

from its economist, Dr. Donald Monath, who merely

subtracted CGC’s pre-operational expense estimates

from the projected maximum estimated revenues CGC

could realize if it operated 24 hours a day, 365 days

14

a year for ten years. Dr. Monath made no investiga-

tion and offered no testimony regarding CGC’s ability

to meet its expense or income projections or realize

any profits at all.

CGC’s failure of proof is highlighted by the equivo-

‘ation of Dr. Monath. He made no effort to determine i

whether CGC, absent the accident, could even have \/

continued to operate. Dr. Monath had no information

about how CGC created the pre-operational cost esti-

mates or expectations on which he relied. Dr. Monath

did not know the company had only a ten-day operat-

ing history or that CGC’s management had no exper-

ience in the gas transport industry. Dr. Monath had

no knowledge of the contaminated quality and inade-

quate quantity of CGC’s product. He did not consider

the negative financial history of other natural gas

transporters.

Applying Kentucky law, the Sixth Circuit correctly

found this evidence insufficient to submit the specula-

tive issue of lost profits to the jury.

C. CGC’s Citation to Unrelated Federal Statutes Does Not Alter

the Kentucky Profitability Standard.

CGC’s argument is not supported by its cited au-

thorities. The federal question cases CGC cites in-

volve claims under various federal statutes. ~They do \

not control this diversity case which is a common law i)

tort case in which Kentucky’s substantive law pro-

vides the rule of decision. Moreover, the standard

applied in the cases CGC cites does not significantly

differ from the Kentucky standard. Thus, the failure

a

15

of proof in this case supports the Sixth Cireuit’s hold-

ing under either standard. For example, the passage

from Story Parchment Co. v. Paterson Parchment

Paper Co., 282 U.S. 555 (1931) quoted at page 21 of

CGC’s Petition states in part:

“The rule which precludes the recovery of un-

certain damages applies to such as are not the

certain result of the wrong, not to those damages

which are definitely attributable to the wrong and

only uncertain in respect of amount.’”’

282 U.S. at 562.

The party seeking lost profits must prove that

‘‘those damages,”’ i.e., the lost profits, resulted from the

wrong. In this case, CGC did not sufficiently establish

that it could have made any profit regardless of the

accident. Therefore, irrespective of the law applied,

the Sixth Circuit correctly decided that CGC failed to

present sufficient evidence of lost profits to permit an

instruction on the issue.

—

V. Congress Has The Authority To Pass A Law Fixing

The Rate Of Post-Judgment Interest In Diversity Cases.

28 U.S.C. § 1961(a) sets the rate of interest on any

money judgments in civil cases in U.S. District Courts.

No exemption exists for diversity cases. Therefore, the

statute governs the post-judgment interest rate in this

case unless the provision is unconstitutional. Hanna

v. Plumer, 380 U.S. 460, 471 (1965): U.S. Consr. Art.

16

VI, Cl. 2.° In finding the statute constitutional, the

Court in Weitz Co., Inc. v. Mo-Kan Carpet, Inc., 723

F. 2d 1382, 1386 (8th Cir. 1983) stated:

Congress has the power, under Article III of the

Constitution, to ordain and establish inferior fed-

eral courts, including this Court and the District

Court which entered the judgment below. It has

the power to pass ail laws necessary and proper

for the execution of powers specifically granted.

The accrual of interest is an ordinary incident of

judicial relief, and we think it clear that the power

that creates the tribunal that enters the judgment

ean also provide for such ordinary incidents.

The Erie doctrine does not require a different

result. Even if the rate of interest that a judg-

ment will bear is in some sense ‘‘substantive’’ in

that it is a part of the damages recovered by the

winning side, it is also easily susceptible of char-

acterization as ‘‘procedural,’’ since it has to do ex-

clusively with events that occur after a dispute gets

< to court. The question of interest, therefore, is at

most in ‘‘the uncertain area between substance and

procedure,”’ and rationally capable of classification

as either. Hanna v. Plumer, supra, 380 U.S. at

472, 85 S. Ct. at 1144. It is therefore a subject

with respect to which Congress has full power to

legislate, even as to cases that get into the federal

courts only because of diversity of citizenship.

See also, Nissho-Iwai Co. v. Occidental Crude Sales,

Inc., 848 F. 2d 613, 622-624 (5th Cir. 1988) ; Everaard

3Because CGC has not complied with Rule 28(3)(b) of the U.S.

Supreme Court Rules, it is assumed that CGC does not challenge

the constitutionality of 28 U.S.C. § 1961(a).

eo

17

v. Hartfort Acc. and Indem. Co., 842 F. 2d 1186, 1193,

1194 (10th Cir. 1988); G. M. Brod & Co. v. U.S. Home

Corp., 759 F. 2d 1526, 1542 (11th Cir. 1985); Bailey

v. Chattem, Inc., 838 F. 2d 149, 152, 153 (6th Cir.),

cert. denied, — U.S. —, 108 S. Ct. 2831 (1988) ; North-

rop Corp. Vv. Triad Intern. Markciing, S.A., 842 F. 2d

1154, 1155-1156 (9th Cir. 1988). These authorities

specifically reject CGC’s argument that 28 U.S.C.

§ 1961(a) violates the Frie doctrine and establish that

CGC’s argument has no merit.

18

CONCLUSION

CGC has presented no argument warranting a writ

of certiorari. The Sixth Circuit’s proper application

of Kentucky law to this diversity case creates no un-

resolved constitutional questions nor any reviewable

conflict among federal circuits. USS and Kelley re-

spectfully request that this Court deny CGC’s Petition

for a Writ of Certiorari.

Respectfully submitted,

JOHN R. McCatu

Brown, Topp & HEYBURN

1600 Citizens Plaza

Louisville, Kentucky 40202

(502) 589-5400

Counsel of Record

AND

Ropert Y. Gwin

Brown, Topp & HEYBURN

1600 Citizens Plaza

Louisville, Kentucky 40202

(502) 589-5400 —

AND

WayYNE L. EMERY

USX Corporation

Law Department

600 Grant Street

Pittsburgh, Pennsylvania 15230

(412) 433-2898

Counsel for Respondents

APPENDIX

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APPENDIX 2

Nos. 87-5535/87-5608

RECOMMENDED FOR FULL TEXT PUBLICATION

See, Sixth Circuit Rule 24

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

CompressEeD Gas Corporation, Inc., - Plaintiff-Appellee

Cross-Appellant,

v.

Unitep States STEEL Corporation and

Jack B. Ketizy, Inc, - - - Defendants-Appellants

Cross-Appellees.

On Appeal From the United States District Court

for the Western District of Kentucky

Decided and Filed September 21, 1988

Before: Kerru, Kennepy and Netson, Circuit Judges.

Keitn, Circuit Judge. Defendants United States Steel

Corporation (“USS”) and Jack Kelley appeal, and plaintiff

Compressed Gas Corporation (“CGC”) cross-appeals, the

jury verdict for plaintiff in this diversity action resulting

from the explosion of a steel cylinder. The “3T” cylinder,

manufactured by defendant USS and leased by defendant

Jack B. Kelley, Inc., (“Kelley”) ruptured while being filled

with natural gas apparently containing certain contami-

nants. The explosion killed two persons, injured four

others, and caused property damage. The personal injury

4a

and wrongful death claims were adjudicated in a separate

lawsuit. At trial in this action, CGC claimed that it had

been defrauded by the misrepresentations of USS and

Kelley that the cylinders were safe for transporting natural

gas and approved for that purpose by the United States

Department of Transportation (“DOT”). CGC also made a

products liability claim for a defective cylinder and failure

to warn. This appeal focuses on the property damage re-

sulting to plaintiff CGC from the rupture of the cylinder.

For the reasons set forth below, we believe the jury was

improperly permitted to find against USS and Kelley on a

theory of fraudulent misrepresentation, and was also im-

properly permitted to include CGC’s alleged “lost profits”

in the damages award. Because the jury reached a dam-

ages verdict that apparently was calculated upon a theory

of fraudulent misrepresentation, and which also incorpor-

ated CGC’s alleged lost profits, the verdict against the

defendants must be vacated. We must therefore reverse on

those issues and remand the entire case to the district court

for a new trial. Further, we believe that an incorrect rate

of interest was applied to the judgment below. We affirm

on all of the remaining issues.

This case was tried as a summary jury trial on February

13, 1985, which resulted in a verdict of $200,000 against

defendants USS and Kelley. The case was then reassigned

to the Honorable Ronald Meredith of the Western District

of Kentucky, who allowed additional discovery. <A full trial

on the merits took place on October 21, 1986. On December

11, 1986, the jury returned a verdict, apportioning fault at

70% against USS and 30% against Kelley, and awarding

$1,766,271.20 in damages to CGC. The district court set the

post-judgment interest rate at 12% to be compounded an-

nually. The district court denied USS’s and Kelley’s mo-

tions for judgment notwithstanding the verdict and new

trial.

5a

Defendants USS and Kelley present a host of issues on

appeal. They urge: 1) that the absence of proof of fraudu-

lent misrepresentation entitled them to a directed verdict

on the question of whether they fraudulently induced CGC

to lease their steel cylinders; 2) that the jury instructions

impermissibly allowed a solitary instruction on damages

for two separate theories of liability; 3) that there was

insufficient evidence to support a jury instruction on lost

profits; 4) that Kentucky law requires the application of

contributory rather than comparative negligence to prod-

ucts liability cases; 5) that the trial court abused its discre-

tion in allowing CGC to conduct additional discovery fol-

lowing the summary jury trial; 6) that the trial court erred

in applying the 12% post-judgment interest rate; and 7)

that CGC’s agreement to indemnify Kelley from all liability

arising from the use of leased cylinder trailers entitled

Kelley to a directed verdict on claims against him. On

cross-appeal, CGC argues that punitive damages should

have been submitted to the jury.

If. FACTS

Gobel Mattingly, the retired owner of a highway con-

struction company, incorporated CGC for the purpose of

hauling natural gas from wells to commercial pipelines. A

five-paragraph trade journal article describing the success-

ful gas transportation operation of Texas Gas Transport

(“Texas Gas”) inspired Mattingly to enter the gas trans-

portation business in August, 1976. When he incorporated

CGC, Mattingly had no training or experience in gas trans-

portation or compression. Joint Appendix at 927.

Mattingly visited Jack Kelley’s Texas facilities to lease

the special trailers that hauled the USS steel cylinders used

in transporting natural gas. Kelley was one of four or five

principal purchasers of USS seamless steel cylinders. He

would purchase the cylinders from USS and fabricate

OO

6a

trailers for them. Each trailer could transport twelve

cylinders. As well as using the trailers to transport a

variety of compressed gases, Kelley sold or leased the

cylinder trailers to others. Mattingly executed a trailer

lease with Kelley in February, 1977.

On October 27, 1977, CGC’s compressor station was

damaged when a 3T seamless steel cylinder manufactured

by USS ruptured while being filled with natural gas ap-

parently tainted by the contaminants hydrogen sulfide and

water. CGC repaired its property damage for $45,307.54.

The experts who testified at trial generally agreed that

the explosion of the steel cylinder would not have occurred

if hydrogen sulfide and water had not combined with na-

tural gas in the cylinder. Natural gas is odorless and

flammable, and is composed principally of methane. Some-

times natural gas, when extracted from the ground, contains

contaminants such as hydrogen sulfide. Gas that does not

contain significant hydrogen sulfide contamination is labeled

“sweet” gas, while contaminated gas is called “sour” gas.

In the gas industry, contaminated gas is considered dan-

gerous because hydrogen sulfide in the presence of water

will embrittie high-strength steel, causing it to fail under

stress within hours. This is known in the industry as “sul-

fide stress cracking,” and is recognized and understood.

For sulfide stress cracking to occur, three factors must be

present: hydrogen sulfide, water and susceptible metal. At

the time of the accident CGC had neither installed a de-

hydrator nor any sulfide removal equipment at its gas wells,

unlike most other gas well operations in the United States.

When Mattingly and Kelley met to arrange the lease of

the 3T cylinders and trailers, Kelley testified that he told

Mattingly that Mattingly’s “gas can’t have any moisture in

it or no hydrogen sulfide.” Joint Appendix at 800. Kelley

testified that he repeated this warning to Mattingly during

Mattingly’s second visit to his offices. Mattingly testified

en Te

a ae ee ve

7a

that “someone” had advised him that the gas had to be dry

to be hauled safely in the 3T tubes, but he was not sure

that that person was Kelley. Id. at 919. Mattingly saw a

Kelley brochure which promoted the cylinder trailers, but

never read the DOT regulations that were on the front of

the brochure. In September, 1977, at CGC’s request, Kelley

sent Mattingly a copy of the DOT regulations setting forth

the gases suitable for transport in 3T cylinders. Mattingly

testified that again he did not read the regulations sent to

him. Id. at 924.

Mattingly said that he showed Kelley an analysis of a

gas well that indicated the gas was sweet. He did not,

however, have the wells tested for hydrogen sulfide or

moisture. Id. at 731. The test that he had showed Kelley

was over a year old, and contained no moisture reading.

Tests conducted on the wells following the accident revealed

high concentrations of hydrogen sulfide and moisture. Id.

at 615-16, 1043-45.

Aside from his three visits with Kelley, Mattingly’s

contacts with USS itself were scant. In September, 1976,

while visiting the Kelley offices, Mattingly saw but did not

read a USS brochure, and instead only “looked at the

pictures.” Jd. at 924. In June of 1977, Mattingly saw an

advertisement in the Wall Street Journal promoting USS

cylinders for use in natural gas transportation. The ad-

vertisement gave no specific cylinder identification or de-

tailed technical information, but gave a telephone number

and invited inquiries from persons interested in further

information. CGC never called the number in response to

the advertisement.

Prior to the accident, neither USS nor Kelley ever had

any complaints that, or knowledge that, any high pressure

jumbo cylinder had ruptured in service. Id. at 983. As of

the date of the accident, USS had produced over 15,000

jumbo steel cylinders. The 3T cylinder had transported

7

8a

approximately 48,000 loads of natural gas without diffi-

culty. According to testimony at trial, never in USS’s

history had one of its cylinders ruptured in any kind of

service until the explosion at issue here. Id.

Ill. ANALYSIS

A. The Fraud Claims

CGC claims that USS and Kelley fraudulently induced

CGC to use the 3T cylinders by “misrepresenting” the

cylinders as safe containers for natural gas transportation,

and by misrepresenting that the DOT regulations author-

ized natural gas transportation in 3T cylinders.

Under Kentucky law, which governs this diversity ac-

tion, the plaintiff must establish six elements to sustain a

fraud claim. There must be: 1) a material misrepresenta-

tion, 2) which is false, 3) which was known to be false, or

made recklessly, 4) made with inducement to be acted upon,

5) which is acted upon in reliance thereon, and 6) causes

injury. Wahba v. Don Corlett Motors, Inc., 573 S.W. 2d

357, 359 (Ky. Ct. App. 1978). Kentucky law also recognizes

a presumption of innocence and honesty against fraud

claims. Terrill v. Carpenter, 143 F. Supp. 747, 753-54 (E.D.

Ky. 1956), aff’d, 249 F. 2d 142 (6th Cir. 1957) ; 7.M. Crutch-

er Laboratory v. Crutcher, 288 Ky. 709, 720, 157 S.W. 2d

314, 319 (1941). The plaintiff bears the burden of proving

fraud by clear and convincing evidence. Brooks v. United

Kentucky Bank; 659 S.W. 2d 213, 216 (Ky. Ct. App. 1983) ;

Wahba, 573 S.W. 2d at 359; Sanford Construction Co. v.

S. & H. Contractors, Inc., 448 S.W. 2d 227 (Ky. 1969).

Under Kentucky law, a motion for a judgment notwith-

standing the verdict is subject to a “more than a scintilla”

of evidence rule; that is, we will reverse the denial of a

judgment notwithstanding the verdict if we do not find

evidence of fraud of probative value having fitness to induce

conviction in the minds of reasonable persons. Wadkins’

9a

Adm’x v. Chesapeake & Ohio Railway Co., 298 S.W. 2d 7, 9

(Ky. 1956). We find that plaintiff has not presented “more

than a scintilla of evidence” toward meeting his burden of

proof.

1. No Material Misrepresentation Known to be False

or Made Recklessly. CGC argues that USS and Kelley

falsely represented that the steel tubes were safe for

“natural gas.” Indeed, the main dispute between the parties

appears to center around their conflicting definitions of the

term “natural gas.” CGC apparently defines “natural gas”

as that which is extracted from wells in its natural state,

without dehydration or without removal of hydrogen sul-

fide. In other words, CGC’s definition is that of untreated

natural gas, which may contain certain amounts of the

contaminants at issue in this action.

USS and Kelley, on the other hand, defined “natural

~gas” as that which is suitable for transport in their steel

tubes—i.e., non-corrosive, dry and sweet gas, absent con-

taminants. This dry gas, they claim, is “essentially me-

thane.” Indeed, prior to the accident in this case, defend-

ants claim, the DOT and the industry had apparently used

the terms “natural gas” and “methane” interchangably.

The evidence shows that USS and Kelley were reasonable

in their belief that “natural gas” and “methane” could be

considered at the time to be virtual equivalents.

Kelley’s operation produced a brochure which specified

that 3T cylinders were “approved for several gases in-

cluding Methane.” Joint Appendix at 467. Kelley sent a

copy of the DOT regulations to Mattingly—regulations

which specified that the tubes were authorized to carry

methane; in the cover letter to those regulations, William

C. George of Kelley’s firm wrote that “Part 173.302, Sub 3,

of the Code authorizes the transportation of methane (na-

tural gas) in 3-T tubes.” Joint Appendix at 496-97. Kelley

painted “METHANE?” on the side of the cylinder trailers in

10a

bold letters. In other words, Kelley’s firm apparently used

the terms interchangeably.

A less plausible interpretation of the same facts, and

one that CGC would have us believe, is that Kelley some-

how connived to make CGC think that methane and natural

gas were one and the same, when he believed that this was

not true. That version of events would have Kelley paint-

ing his trucks with the word “METHANE” even though he

knew that they were to be used for transporting the less

pure natural gas, and duping CGC into thinking that the

DOT regulations were meant to cover natural gas as well

as methane. The jury found CGC’s story convincing, and

we do not overturn their finding lightly. However, under

Kentucky law, as we have stated above, there is a presump-

tion of honesty against fraud claims. “ ‘In actions involv-

ing fraud ... where the facts present a double aspect, one

consistent with fair dealing and the other involving dis-

honesty of purpose, the court, unless the scale decidedly

predominates for the latter, will strike the balance in favor

of honesty and innocence. ” T.M. Crutcher Laboratory,

157 S.W. 2d at 319 (quoting Pacific Mut. L. Ins. Co. v.

Arnold, 262 Ky. 267, 276, 90 S.W. 2d 44, 49 (1935)). There

was no evidence proferred of duplicitous behavior or intent

to deceive on the part of Kelley or Kelley’s operation. We

find that Kelley’s meshing of “natural gas” and “methane”

was more consistent with his honest belief that the terms

were interchangeable than with any attempt to fraudulently

conceal the truth.

The closest that plaintiff comes to proving fraud with

respect to Kelley is the cover letter from Kelley’s assistant

traffic manager defining the two terms as one. A copy of

the DOT regulations was sent to plaintiff with the letter.

This representation, to the extent that it is a misrepresen-

tation of law, is not actionable in Kentucky. Fields v. Life

é Casualty Co. of Tenn., 349 F. Supp. 612, 615 (E.D. Ky.

ox. re

lla

1972) ; Mosley v. Owensboro Municipal Housing Comm’n.,

252 S.W. 2d 880, 881 (Ky. 1952). Moreover, Mattingly did

not even read the letter.

USS also used the terms “methane” and “natural gas”

interchangeably, according to Peter G. Fairchock, Chief

Metallurgist at the Christy Park Plant of USS. Joint

Appendix at 1002. More importantly, however, the DOT

used the terms interchangeably on a shipping permit, which

recited :

2. COMMODITY. Natural Gas.

3. PROPER SHIPPING NAME (49 CFR 172.5) Me-

thane.

The DOT also recognized that the industry was using

the terms interchangeably, and, after the accident, promul-

gated a clarification which distinguished natural gas from

methane, a primary component of natural gas. 43 Fed.

Reg. 13,382 (1978) (to be codified at 49 C.F.R. § 173.302(a)).

While it is fairly clear in retrospect that it would be

irresponsible in 1988 to use “natural gas” when what is

really meant is pure methane, at the time of the accident,

this was not the practice. Thus, we believe that in 1977,

USS and Kelley properly represented the DOT’s regula-

tions as they reasonably interpreted them.'

As to the misrepresentations specifically made by USS,

CGC claims basically that an advertisement in the Wall

'The only indication that the DOT did not intend to permit 3T

cylinders for natural gas transport came from a ‘‘preface’’ to a

comment in a 1973 issue of the Federal Register, 38 Fed. Reg.

21,989 (1973). This preface appeared prior to the DOT’s issuing

the shipping permit mentioned above permitting 3T cylinders in

natural gas service, and prior to the Texas Gas operation. In addi-

tion, the preface never became part of the regulations and was not

published in the C.F.R. Prior to the accident, USS had no knowl-

edge of the preface. Joint Appendix at 985.

12a

Street Journal was sufficient to establish evidence of fraud.

The advertisement generally promoted USS pressure eylin-

ders for use in natural gas transportation. Joint Appendix

at 535. The ad did not specifically identify any cylinders,

and instead provided a telephone number to call for in-

quiries. CGC never contacted USS in response to the ad,

and therefore received no representations about the cylin-

ders. CGC also claims that USS misrepresented the use of

the cylinders through a USS brochure that Mattingly saw

in Kelley’s offices. Yet, since he never read the brochure,

Mattingly could not have gleaned any misrepresentations

from it.

29. No Reliance. More striking, however, than the

paucity of evidence showing any material misrepresenta-

tion is the absence of evidence of reliance. The proof

offered at trial simply does not establish that Mattingly

relied on statements made by USS or Kelley. Rather,

Mattingly testified that he never read the brochures by USS

or Kelley, nor did he telephone USS in response to the ad-

vertisement in the Wall Street Journal. Indeed, that article

appeared after he had already committed himself to his

new business venture. As defendants indicate in their

brief, from September 1976 to April 1977, Mattingly in-

corporated CGC, obtained various quotes on compressor

equipment, negotiated with potential buyers of his gas,

entered into lease agreements for 3T cylinder trailers from

Kelley, executed a contract giving him rights to various gas

wells to be used in his operation, began making improve-

ments to the road leading to the compressor site and began

laying pipes to transport the gas from the wellheads to the

compressor site. The Wall Street Journal article appeared

mouths later.

Mattingly claims that he used the articie to obtain a loan

for his business. Although it is possible that the Small

Business Administration may have relied on the advertise-

13a

ment in granting Mattingly the loan (and there was no

proof of this), that does not establish that Mattingly relied

on the advertisement in using the 3T cylinders. In fact, the

lease agreement for the cylinders was signed and completed

a full four months before the advertisement appeared.

Whether the Small Business Administration used the ad-

vertisement to grant a loan is irrelevant to the claim that

USS fraudulently misrepresented the use of 3T cylinders to

Mattingly. Kentucky law requires that the party claiming

fraud show that he or she relied on the alleged misrepre-

sentation, not a third party. Wilson v. Henry, 340 S.W. 2a

449, 451 (Ky. 1960).

Moreover, CGC never telephoned USS in response to the

advertisement. It is difficult for us to imagine reliance on

a fraudulent misrepresentation when the advertisement in

question was non-specific, made no promises, and when

CGC never even exhibited enough “reliance” on the ad to

call the telephone number listed. CGC cannot now allege

that if they had called the number, they would have relied

on some hypothetical USS statement about the propensities

of natural gas. Hypotheticals do not constitute reliance.

Even so, every person who testified about having spoken

with USS regarding the use of 3T cylinders for natural gas

transportation acknowledged that USS specified that 3T

cylinders were suitable only for sweet, dry gas.

An examination of the brochures that CGC claims also

induced reliance supports our conclusion. These brochures

are presentations of the various uses to which “seamless

pressure vessels” (USS cylinders) can be put. See Joint

Appendix at 468-95; id. at 565-78. Even assuming that it

would have been reasonable to rely exclusively on the

descriptions contained in these brochures, there is no basis

to rely on them for the proposition that it was safe to trans-

port natural gas in 3T cylinders. Rather, the brochures,

under the heading of “description,” state that “USS Seam-

l4a

less Pressure Vessels offer great inherent strength and

reliability in handling hydrogen, nitrogen, air, helium,

oxygen, and other gases.” Id. at 472 and 567. The same

list is repeated under “typical applications.” Id. at 477 and

569. Thus, even if the brochures are seen as intended to

have induced reliance, they could not reasonably have been

relied on to transport natural gas without further inquiry.

As further evidence of reliance, Mattingly asserts in his

brief that after the explosion, USS and Kelley continued to

assure him that 3T tubes were safe for transporting natural

gas and that he should resume his business. Jd. at 914-15.

Under Kentucky law, CGC must show that its reliance on

the misrepresentation was the cause of the injury. The

damages claimed by CGC-cannot be attributable to USS’s

alleged post-explosion misrepresentation. Since CGC never

resumed business, CGC could not have relied on USS’s

alleged assurances. In short, we are unimpressed by the

evidence of fraudulent misrepresentation. Plaintiff cannot

surmount the first two important hurdles in the test to

establish fraud: i.e., that there was a misrepresentation,

and that there was reliance. We need proceed no further

in our inquiry on the fraud issue.

We therefore reverse with respect to the claim that USS

and Kelley fraudulently misrepresented the use of the 3T

steel tubes, and remand the case back to the district court

with instructions to proceed solely on a negligence theory of

liability. We recognize that this decision necessarily affects

USS’s and Kelley’s ffm on appeal that the jury instruc-

tions given at trial improperly mingled the damages theor-

ies as to fraud and negligence. Since on remand the case

will be tried only on a negligence theory, there will be no

need for an instruction as to the legal theory of fraudulent

misrepresentation. A single damages instruction would

therefore be acceptable under this singular theory of lia-

bility.

15a

B. Lost Profits Instruction

The jury awarded CGC $1,137,154 in lost profits as a

result of the cylinder explosion. Defendants USS and

Kelley challenge the jury instruction on lost profits, claim-

ing that such damages in this case fail for lack of the

required certainty under Kentucky law. We agree.

Kentucky law requires that CGC establish the fact of

lost profits with reasonable certainty. Paulines Chicken

Vila, Inc. v. KFC Corporation, 701 S.W. 2d 399, 401 (Ky.

1985).? See also Mitchell Coal Company v. United Mine

Workers of America, 313 F. 2d 78 (6th Cir. 1963), where

this court held that the Mitchell plaintiff had not produced

enough evidence of lost profits to take its claim to the jury.

This court wrote:

The [plaintiff] had been in business only a few months

and had operated at a loss before the happening of the

events complained of here. There was no showing that

it could have operated at a profit. Even under the

liberal rule in Story Parchment Co. v. Paterson Parch-

ment Paper Co., 282 U.S. 555, 51 S.Ct. 248, 75 L.Ed. 544

the loss of profits must be established by at least a

The Paulines court set out in that case the facts that had re-

moved ‘‘virtually all the uncertain variables’’:

[1] This is a national franchisor, [2] with uniformity of na-

tional advertising, {3] uniform quality control, [4] earnings

and expense figures on nearby and comparable locations, [5]

and an available history concerning success and failure ratios.

The franchisee, likewise, [6] is experienced in the field and

with the specific product, with [7] a proven record of opera-

tion and management, [8] a history of profit and loss, [9] with

two current operations in the general area, ete.

701 S.W. 2d at 401-402.

Not one of these nine factors exists in this ease.

16a

reasonable probability and not on sheer speculation and

guesswork.

Mitchell, 313 F. 2d at 79.

As defendants point out in their brief, CGC’s claim for

lost profits is speculative at best. The company was newly

formed, in a relatively new industry, and dependant upon

the unpredictable gas market at a time when there was an

oil crisis. CGC operated only for a total of ten days and

transported only eleven loads or partial loads of gas. It

never made a profit. CGC had only one customer. Don

Fowler, the president of Texas Gas, a gas transport opera-

tion 900 miles from CGC, testified that Texas Gas made

little or no profit in its gas transport operation, Joint Ap-

pendix at 1066, 1978-80, and had never operated in Kentucky

because it could not find gas wells of a quality and quantity

sufficient to warrant the cost of establishing an operation.

Id. at 1076. Thus, it would appear that CGC had little hope

of making any profit, or of continuing in business at all.

CGC’s proof of lost profits consisted of the testimony of

Dr. Donald Monath, whose calculations were derived merely

from subtracting CGC’s estimated expense figures from the

revenues CGC would realize if it operated at maximum

capacity, 365 days a year for ten years. Monath concluded

that CGC would have made $1,137,154 over ten years. Id.

at 964. He made no effort to determine whether CGC in

fact could make a profit or could continue to operate in the

area. He was not informed as to how CGC developed its

cost estimates, how long the company had operated, the

nature of the product, or the level of CGC management’s

experience. Id. at 945, 968-71, 975. It is apparent to us

that these figures were far too speculative to permit an

instruction on lost profits. We therefore reverse with

respect to this issue as well, holding that the evidence on

lost profits was insufficient to warrant submitting that issue

to the jury.

17a

C. Other Issues

We assume, without deciding, that defendants did not

waive the issue of the 12% post-judgment interest rate

applied to their verdict by the district court. We believe

that the district court incorrectly applied an interest rate

in excess of the statutory mandate, and that on remand, the

district court should be guided by 28 U.S.C. § 1961 in

applying an interest rate to any verdict that may result

from the new trial.

We have carefully reviewed the other claims on appeal

and on cross-appeal, and are unable to conclude that they

also constitute reversible error. We therefore affirm on

the remaining issues.

Ill. CONCLUSION

For the reasons set forth above, we REVERSE on the

issues of fraudulent misrepresentation and lost profits, and

REMAND the case back to the district court for a new trial,

to proceed on a negligence theory of liability only. We

instruct the district court to apply the proper interest rate

to the damages verdict, if any, on remand. The jury verdict

below is VACATED. We AFFIRM on all remaining issues.

18a

APPENDIX 3

No. 87-5535/5608

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

CoMPRESSED GAS COKPORATION, Plaintiff-A ppellee,

INc., - - - - - . Cross Appellant,

v.

Unitep States STEEL CorpPora-

TION and Defendants-A ppellants,

Jack B. Kettey, Ivc., - . - Cross Appellees.

BerorE: Keitru, Kennepy and Netson, Circuit Judges.

ORDER—Filed November 9, 1988

The Court having received a petition for rehearing en

bane, and the petition having been circulated not only to

the original panel members but also to all other active

judges of this Court, and no judge of this Court having

requested a vote on the suggestion for rehearing en banc,

the petition for rehearing has been referred to the original

hearing panel.

The panel has further reviewed the petition for rehear-

ing and concludes that the issues raised in the petition were

fully considered upon the original submission and decision

of the case. Accordingly, the petition is denied.

Entered by Order of the Court

(s) Leonard Green

Leonard Green, Clerk