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American Commercial Lines LLC v. Lubrizol Corporation

United States District Court, S.D. Indiana, New Albany Division

March 28, 2014




This cause is before the Court on Defendant Lubrizol Corporation's ("Lubrizol") Motion to Dismiss the Second Amended Complaint [Docket No. 110], filed on July 19, 2013, pursuant to Federal Rule of Civil Procedure 12(b)(6). This litigation arose following Plaintiff American Commercial Lines LLC's ("ACL") purchase of a diesel fuel product called "Ultra Max" from Defendant VCS Chemical Corporation ("VCS"). In this action, ACL alleges that VCS defrauded ACL by misrepresenting that the Ultra Max contained an additive that was supplied to VCS by Lubrizol. ACL does not allege that Lubrizol itself made any misrepresentation to ACL about the Ultra Max fuel product, claiming instead that Lubrizol's actions and omissions created apparent authority on the part of VCS and Defendant Mark Michelsen to act on behalf of and thus bind Lubrizol in dealings with ACL. Pursuant to this theory, ACL has brought various claims against Lubrizol, including fraud, constructive fraud, civil deception, breach of contract, and tortious interference with contract. For the reasons detailed in this entry, we GRANT IN PART and DENY IN PART Defendant Lubrizol's Motion to Dismiss those claims.

Factual Background

ACL is a marine transportation and manufacturing company operating on the United States Inland Waterways System, which consists of the Mississippi River System, the Ohio River System, their connecting waterways, and the Gulf Intracoastal Waterways. ACL currently operates a fleet of over 2, 000 barges and 125 tow boats (collectively referred to as "towing vessels"). Sec. Am. Compl. ¶ 11. Lubrizol is a specialty chemical company that is in the business of, inter alia, inventing, formulating, testing, and manufacturing diesel fuel additives that improve fuel economy, reduce emissions, and reduce wear on diesel engines. Among other products, Lubrizol developed and exclusively manufactured the diesel fuel additive LZ8411A (the "Lubrizol Additive"). Id. ¶¶ 18-19.

Many of Lubrizol's products, including the Lubrizol Additive, are not sold by Lubrizol directly to end users. Instead, Lubrizol works thorough channel partners who market and distribute the products to the ultimate consumers. Id. ¶ 20. ACL alleges that VCS was Lubrizol's channel partner and authorized agent for marketing and selling the Lubrizol additive. According to ACL, Lubrizol represented to third parties, including ACL, that VCS was its exclusive agent for the marketing and sale of the Lubrizol Additive. Lubrizol provided VCS with marketing materials promoting Lubrizol and its products so that VCS could distribute those materials to potential customers, including ACL. With input from Lubrizol, VCS also prepared correspondence to potential customers promoting Lubrizol's products. VCS sold and marketed the Lubrizol Additive to end users under the trade name "Ultra" or "Ultra Max." Id. ¶¶ 21-25.

In 2008, VCS contacted ACL to market the use of the Lubrizol Additive for use in ACL's towing vessels, representing that use of the Lubrizol Additive would increase engine efficiency and performance while reducing fuel consumption. ACL was not then a customer of Lubrizol's, but was familiar with the company and interested in Lubrizol products. Id. ¶¶ 26-27. On October 29, 2008, representatives from ACL, Lubrizol, and VCS met at ACL's headquarters in Jeffersonville, Indiana, and VCS and Lubrizol delivered a technical presentation on the Lubrizol Additive. At that meeting, VCS and Lubrizol emphasized that the Lubrizol Additive was manufactured by Lubrizol and, according to ACL, represented that VCS was Lubrizol's exclusive agent for the sale of the Lubrizol Additive to ACL and also implied that VCS was the exclusive supplier of the product by representing that VCS Ultra Max was the only fuel additive product that contained the Lubrizol Additive. Id. ¶¶ 28-29.

Following the October 29th presentation, ACL agreed to participate in a field test ("the Field Test") of the Lubrizol Additive using ACL's towing vessels to determine whether the product would reduce ACL's fuel consumption and emissions. Lubrizol insisted that it be given ownership rights to all statistical evidence gathered during the Field Test so it could use the information for various purposes, including marketing the Lubrizol Additive to other companies. Id. ¶ 31. For a number of months, VCS, Lubrizol and ACL worked together to develop the protocol for the Field Test and ACL alleges that, during this period, VCS presented itself to ACL on numerous occasions as working for and speaking on behalf of Lubrizol. According to ACL, at no point during their interactions did Lubrizol take any affirmative action to separate itself from VCS or otherwise indicate that VCS did not have authority to speak on Lubrizol's behalf. Id. ¶ 36.

On September 14, 2009, ACL entered into a Memorandum of Understanding with VCS concerning the Fuel Trial which provided that ACL agreed to allow the testing of the Lubrizol Additive (and no other product) in certain of its towing vessels and that ACL would enter into a definitive purchase agreement for the exclusive utilization" of the Lubrizol Additive if the Field Tests satisfactorily demonstrated its effectiveness in reducing fuel consumption. Id. ¶ 39. Although Lubrizol was not a signatory to the agreement, Lubrizol's in-house counsel as well as other Lubrizol employees participated in the negotiation and drafting of the Memorandum of Understanding and Lubrizol gave consent to the final version of the agreement. Id. ¶¶ 40-41.

During the Field Test, the Lubrizol Additive was used on eight of ACL's towing vessels. Lubrizol supplied and installed the dosing equipment that was used to inject the Lubrizol Additive into the fuel of ACL's vessels. Over the course of the Field Test, fifteen metric tons of the Lubrizol Additive was used. Shipments of the Lubrizol Additive sometimes came directly from Lubrizol to ACL and at other times were shipped from VCS. Id. ¶¶ 51-52. Lubrizol made its representatives available to provide support to ACL as needed throughout the Field Test and representatives from Lubrizol, ACL, and VCS communicated frequently and met on several occasions to discuss the progress of the Field Test. According to ACL, throughout the Field Test, VCS presented itself as working for and speaking on behalf of Lubrizol when scheduling meetings among the three companies; by providing documents bearing Lubrizol's name and mark; and by making guarantees on Lubrizol's behalf regarding fuel efficiency improvement. ACL alleges that Lubrizol was aware that VCS was acting in its name and permitted VCS to do so by making no effort to separate itself from VCS or otherwise indicate to ACL that VCS did not have authority to speak and act on Lubrizol's behalf. Id. ¶¶ 53-59.

On October 27, 2010, Lubrizol and VCS presented ACL with their analysis of the results of the Field Test. At that presentation, Lubrizol stated that use of the Lubrizol Additive had resulted in a significant reduction of fuel consumption in ACL's vessels. Specifically, Lubrizol represented that, based on the results of the Field Test, ACL would save approximately 2.6% or $2, 654, 500 on its annual diesel fuel costs by using the Lubrizol Additive in its towing vessels. Id. ¶ 63. Approximately one month later, on November 23, 2010, Lubrizol memorialized its final analysis of the results of the Field Test in a report ("the Final Report"). In the Final Report, Lubrizol again stated that adopting the Lubrizol Additive system-wide would result in fuel efficiency savings of 2.6% or 2, 080, 000 gallons of diesel fuel.[1] Id. ¶ 64.

Following the conclusion of the Field Test and the issuance of the Final Report, VCS entered into discussions with ACL regarding a long-term supply contract. ACL alleges that, throughout these discussions, VCS consistently referenced Lubrizol and implied that Lubrizol would also continue to be involved in the supply relationship. According to ACL, VCS also consistently referred to the product that would be supplied to ACL as a Lubrizol product. Id. ¶¶ 66-67. ACL ultimately decided to purchase the Lubrizol Additive for use in approximately 70 of its towing vessels, and, from February 7, 2011 to November 8, 2011, it ordered and purchased $1, 062, 862.75 worth of a product it believed to be the Lubrizol Additive. Id. ¶ 68. ACL alleges that its decision to purchase the Lubrizol Additive was driven in part by the results of the Field Test and also by representations by both VCS and Lubrizol that Lubrizol would continue to be involved in the supply relationship. Id. ¶¶ 70, 72.

On February 7, 2011, ACL placed its first order with VCS for 72 drums of the Lubrizol Additive. A few days earlier, on February 2, 2011, VCS had placed an order with Lubrizol for the Lubrizol Additive in contemplation of filling ACL's initial order. According to ACL, Lubrizol was aware that VCS was placing the order so that it could fill ACL's order. On February 3, 2011, Lubrizol approved the order from VCS. Id. ¶¶ 79-82. A few weeks later, on February 23, 2011, Lubrizol issued to VCS an "Order Acknowledgement" confirming the order of the Lubrizol Additive and listing ACL as the "ship-to" recipient. Id. ¶¶ 85-86.

Lubrizol subsequently prepared barrels of the Lubrizol Additive to fill VCS's order, but those barrels were never delivered to VCS or ACL. Id. ¶¶ 87, 89. Instead, on March 4, 2011, Lubrizol informed VCS that it would not provide VCS with the Lubrizol Additive and that it would, in fact, no longer continue to do any business with VCS. Id. ¶¶ 90-91. This decision was based on the results of an internal ethics investigation into the relationship between one of Lubrizol's employees and VCS, which revealed that the employee had failed to disclose that, while employed at Lubrizol, he was also a principal and agent of VCS. Id. ¶ 92. Neither Lubrizol nor VCS informed ACL of these developments. Id. ¶ 93.

Although VCS was no longer able to procure the Lubrizol Additive, VCS nonetheless purported to fill ACL's purchase orders for the product. From April 2011 to November 2011, VCS delivered to ACL $1, 062, 862.75 worth of a fuel additive labeled "Ultra Max" which VCS represented was the Lubrizol Additive but which was actually a counterfeit additive that did not contain LZ8411A or any other Lubrizol product. Id. ¶¶ 94-96. Neither VCS nor Lubrizol ever informed ACL that it was not receiving the Lubrizol Additive, and ACL was not otherwise on notice that it was being supplied with the counterfeit additive or that the business relationship between Lubrizol and VCS had been terminated. Id. ¶¶ 101, 109.

Despite indications as early as the spring and summer of 2011 that VCS was supplying ACL with a product that was not the Lubrizol Additive and having informed other joint customers that its relationship with VCS had ended, Lubrizol did not provide this information to ACL until November 8, 2011. Id. ¶¶ 113-14. According to ACL, up until that point in time, it believed that it was purchasing and using the Lubrizol Additive, that Lubrizol was continuing to monitor the fuel consumption of ACL's towing vessels to verify that the continued use of the Lubrizol Additive was beneficial to ACL, and that VCS was acting as Lubrizol's agent for the sale of the Lubrizol Additive. Id. ¶¶ 115-17. Once ACL discovered that it had not been supplied the Lubrizol Additive, it ceased using the counterfeit additive in its towing vessels. Id. ¶ 147.

ACL filed the instant litigation on November 5, 2012, and has subsequently amended its complaint twice, filing its Second Amended Complaint on June 20, 2013, which governs this dispute. On July 19, 2013, Lubrizol filed the instant motion to dismiss. That motion is now fully briefed and ready for decision.

Legal Analysis

I. Standard of ...

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