Eighth Circuit Contracts Cases 2011 (Part 5)

U.S. 8th Circuit Contract Cases

Monarch Fire Protection Dist. v. Freedom Consulting & Auditing Services, Inc.

According to the Eighth Circuit’s opinion in this case, under Missouri law a party to a breach of contract action can recover attorneys’ fees for enforcing its rights under the contract via an indemnification clause only if the clause expressly allows for it. But Judge Gruender took issue with that characterization of Missouri contracts law in his dissent. The Missouri Supreme Court might clarify the issue in the future, but in the meantime, the careful drafter would be advised to be crystal clear when the parties intend to maintain the right to recover attorneys’ fees incurred in inter-party litigation.

The Business Associate Agreement

Monarch Fire Protection District of St. Louis County, Missouri (“Monarch”) sued Freedom Consulting & Auditing Services, Inc. (“Freedom”) for breach of a business associate agreement (“BAA”). Monarch and Freedom entered into the BAA when Monarch engaged Freedom to audit its group health plan at the request of the local firefighter union that represented Monarch’s employees. (Monarch also brought other claims against Freedom including a claim of conversion for failing to return Monarch’s confidential information.)

A business associate agreement is a mechanism under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) that allows for an entity that has confidentiality obligations relating to patient information to engage vendors while still protecting the patient’s confidentiality. Business associate agreements impose contractual obligations on the vendors to protect the confidentiality of patient information they become privy to in the course of the engagement.

The United States District Court for the Eastern District of Missouri found that Freedom breached its confidentiality obligations under the BAA, and Monarch attempted to recover the attorneys’ fees it incurred in the course of the litigation. One of the bases for Monarch’s claim for attorneys’ fees was that an indemnification clause in the BAA required Freedom to pay Monarch’s attorneys’ fees under certain circumstances, including, according to Monarch, the initiation of litigation between Monarch and Freedom due to Freedom’s breach of the BAA. The district court ruled that the indemnification clause did not entitle Monarch to attorneys’ fees. Monarch appealed that ruling (as well as other rulings that aren’t relevant to this post).

The Indemnification Provision

The indemnification provision at issue was fairly broad, although it didn’t specifically provide that it covered attorneys’ fees incurred in inter-party claims between Monarch and Freedom. The indemnification provision read, in relevant part:

[Freedom] will indemnify and hold harmless District and Plan and any District or Plan affiliate, trustee, officer, director, employee, volunteer or agent from and against any claim, cause of action, liability, damage, cost or expense, including attorneys’ fees and court or proceeding costs, arising out of or in connection with any unauthorized use or disclosure of PHI or any failure in security measures affecting PHI or any other breach of the terms of this Agreement by [Freedom] or any person or entity under [Freedom]’s control.

Citing the 2003 Missouri Supreme Court case Nusbaum v. City of Kansas City, the Eighth Circuit stated, “[W]e think the Missouri Supreme Court would require an indemnity clause to contain express language referencing litigation between the parties before interpreting it to allow a party to recover attorneys’ fees incurred in an action asserting its rights under the contract.” The district court found that the indemnification provision in the BAA didn’t expressly provide for the recovery of attorneys’ fees incurred by Monarch in enforcing the BAA and ruled that Monarch was thus not entitled to those attorneys’ fees.

The Dissent

In his partial dissent, Judge Gruender stated that the expansive language in the BAA’s indemnification clause “arising out of or in connection with” is broad enough to encompass Monarch’s claim against Freedom for breaching the BAA agreement. He wrote, “Thus, to the extent Monarch seeks the attorneys’ fees incurred, first, in establishing that Freedom breached the BAA by disclosing PHI without authorization . . ., it seems plain that those expenses necessarily ‘arose out of’ or were ‘in connection with’ the defendants ‘unauthorized . . . disclosure of PHI.'”

Judge Gruender charged the court of adopting what many have referred to as a “magic words” approach to contract interpretation. He wrote that the court’s decision “rests on its conclusion that Missouri law requires an indemnity clause to provide expressly for ‘litigation between the parties’ before allowing a prevailing party to recover attorneys’ fees incurred during inter-party litigation” and called that a “talismanic requirement.”

Judge Gruender argued that Missouri law does not require such an approach and disagreed with the majority’s characterization of Nusbaum as requiring “express” language. Rather than announcing a bright-line rule that an indemnification clause must expressly refer to the enforcement of the right to indemnity in order for a party to recover attorneys’ fees incurred in enforcing the agreement, the Nusbaum court merely found that the indemnity provision at issue did not cover legal expenses incurred in establishing the right to indemnification. The indemnification clause in Nusbaum covered the indemnitor’s negligence, not the indemnitor’s breach of the agreement, “Hence, litigation concerning the parties’ contractual duties fell outside the circumscribed terms of the indemnity clause.”

Southern Wine and Spirits v. Mountain Valley Spring Company, LLC

In this case the United States Court of Appeals for the Eighth Circuit considered, among other issues, whether the term of an exclusive distribution agreement was perpetual, and thus could be terminated only in accordance with its terms, or indefinite, and thus could be terminated upon reasonable notice.

The case was heard on appeal from the United States District Court for the Western District of Arkansas, and Nevada contract law applied.

The Term of the Distribution Agreement

Southern Wine was granted an exclusive distributor agreement relating to the sale in seventeen Nevada counties of bottled water supplied by Mountain Valley. After years of performance under the agreement, Mountain Valley terminated the contract. Mountain Valley contended in the litigation that followed that the agreement was for an indefinite term and was thus terminable at will by either party. The district court disagreed, construing the agreement as establishing a perpetual term which was terminable only according to the contract’s provisions.

The term was stated in the contract as follows:

II. TERM. The duration of this Distributor relationship shall be conditioned upon the following:
2.1 Term. This Agreement shall become effective upon the date set forth in Paragraph 10.18 hereof and shall remain in effect until terminated under Paragraph 2.2 or 2.3 hereof.
2.2 Termination by Mutual Consent. This Agreement may be terminated at any time by mutual consent of the parties embodied in a single writing signed by each party and effective as provided therein.
2.3 Termination by Default. This Agreement may be terminated for cause pursuant to Paragraph 5.10 hereof.

Mountain Valley argued that because the term clause did not state that the agreement was “perpetual,” the term of the agreement was indefinite. Both the district court and the appeals court rejected Mountain Valley’s argument and held that the agreement was for a perpetual term. The Eighth Circuit stated that applicable precedent of the Nevada Supreme Court “did not condition the finding of a contract’s term as perpetual on the use of certain magic words.” Rather, the language of the contract must clearly provide for a perpetual term. The Eighth Circuit determined that the distributor agreement at issue did clearly provide for a perpetual term and upheld the district court’s decision on that point.

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