                                                                                                                           Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


9-30-2004

SC Johnson & Son Inc v. DowBrands Inc
Precedential or Non-Precedential: Non-Precedential

Docket No. 03-2572




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                                                 NOT PRECEDENTIAL

        UNITED STATES COURT OF APPEALS
             FOR THE THIRD CIRCUIT




                       No. 03-2572




              S.C. JOHNSON & SON, INC.


                            v.


        DOWBRANDS INC.; DOW BRANDS L.P.;
           DOW CHEMICAL COMPANY,

                                 Appellants




      On Appeal from the United States District Court
                for the District of Delaware
              (Civil Action No. 00-CV-0444)
         District Judge: Hon. Joseph J. Farnan, Jr.




                  Argued: June 23, 2004




Before: NYGAARD, McKEE, and CHERTOFF, Circuit Judges.

           (Opinion Filed: September 30, 2004)



                            1
MICHELE L. ODORIZZI, ESQ. (Argued)
Mayer, Brown, Rowe & Maw
190 South LaSalle Street
Chicago, IL 60603

KENNETH J. NACHBAR, ESQ.
Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, DE 19899
Attorneys for Appellants


MAURICE J. MCSWEENEY, ESQ. (Argued)
Foley & Lardner
777 East Wisconsin Avenue
Suite 3900
Milwaukee, WI 53202

ALLEN M. TERRELL, JR., ESQ.
ANNE S. GAZA, ESQ.
Richards, Layton & Finger
One Rodney Square
P.O. Box 551
Wilmington, DE 19899
Attorneys for Appellee




                             OPINION OF THE COURT




McKEE, Circuit Judge.

      Plaintiff S.C. Johnson & Son, Inc. (“SCJ”), purchased the assets of defendant

DowBrands, Inc., pursuant to a written agreement with DowBrands, Inc., as well as co-

                                           2
defendants DowBrands, L.P., and Dow Chemical Company, Inc. (collectively referred to

as “Defendants”). SCJ later sued Defendants for fraud alleging that they had fraudulently

misrepresented the distribution of Defendants’ products in Latin America. SCJ alleged

that Defendants breached the Purchase Agreement by refusing to indemnify SCJ for costs

incurred as a result of a patent infringement suit brought against SCJ by a third party.

The district court found for SCJ on both of these claims. The court held that a non-

reliance clause in the Purchase Agreement did not preclude suits for fraud, and that the

amount of the indemnification was not subject to the $10 million deductible or “basket”

in the Agreement. For the reasons stated below, we will reverse the district court insofar

as it ruled in favor of SCJ on its fraud claim, but we will affirm the court’s ruling that SCJ

is entitled to indemnification for its attorney’s fees. However, we also conclude that the

indemnification is subject to the deductible.1

                                          I. Background

       Beginning at least in 1992, DowBrands, Inc., and DowBrands, L.P., (together,

“DowBrands”) became aware of distribution problems it was having with products it was

shipping to Latin America. DowBrands believed that goods it was earmarking for

distribution in Latin America were being diverted to U.S. markets. In 1996, Linda

Esposito, DowBrands’ Vice President for North and Latin America, hired Edward Francis

to survey DowBrands’ Latin American business. Over the next year, Francis investigated



       1
           The amount of the attorney’s fees was less than the amount of the deductible.

                                                  3
the Latin American business and met with Jose Berdasco, DowBrands’ Sales Manager for

Latin America, as well as Jesus Cutie, the head of one of DowBrands’ two largest

distributors in Latin America. After Francis reported back to Esposito, DowBrands

retained Euromonitor International, Inc., to examine the extent of its Latin American

business. In January 1997, Euromonitor reported that it was not able to find any

DowBrands products in a random sample of stores in Argentina, Brazil or Chile. In July

1997, DowBrands terminated its agreement with its largest Latin American distributor

because DowBrands was concerned that the distributor was diverting products intended

for Latin America to the U.S.

       At the same time, Dow Chemical Company, Inc., decided to sell DowBrands’

assets, and it prepared an offering memorandum for potential buyers that it distributed in

July 1997. The memorandum stated that DowBrands’ Latin American sales accounted

for $18.6 million and that its total sales were $764.2 million in 1996. DowBrands also

projected sales of $15.7 million in Latin America for 1997. SCJ was among the

companies that made preliminary bids for the assets of DowBrands after receiving that

memorandum.

       After submitting its bid, SCJ began its due diligence. SCJ reviewed voluminous

documents that Defendants placed in two “data rooms.” SCJ also interviewed

DowBrands’ employees, and attended a presentation that DowBrands’ management

conducted for bidders. During its due diligence, SCJ discovered that DowBrands



                                             4
conducted its business in Latin America solely through third-party distributors, and that

the company itself had no employees in Latin America. In addition, SCJ reviewed the

Euromonitor study that discussed the penetration of DowBrands’ products in the Latin

American market. However, DowBrands’ management never mentioned diversion during

its presentation to bidders.

       Marc English, SCJ’s Director of Acquisitions, attended the management

presentation. Significantly, English wrote: “diversion?” in his printed copy of the

presentation summary next to bullet points about the Latin American distributors.

Moreover, in his memorandum summarizing his key due diligence findings regarding

Defendants’ international business, English wrote that: “Dow has two Latin American

Distributors based in Miami – potential exists for water goods.” 2

       At the conclusion of its due diligence, SCJ made a final bid of $1.1 billion for

DowBrands’ assets which, after negotiations, was increased to $1.125 billion. However,

a few days before the Purchase Agreement was to be executed, Defendants sent SCJ

about fifty pages of material including a copy of the July 1997 letter by which

DowBrands had terminated its largest Latin American distributor because of concerns

that the distributor was diverting products intended for Latin America to the U.S.

Nevertheless, the Purchase Agreement was signed a few days later and closing was

scheduled for January 1998.



       2
           “Water goods” is a synonym for “diverted goods.”

                                             5
       A few days before the closing actually occurred, Esposito and two other

DowBrands vice-presidents were informed of the results of a diversion detection program

that DowBrands set up in 1997. Pursuant to that program, 174 coupons had been placed

in selected sealed cases of DowBrands’ products that were to be distributed in Latin

America. These coupons stated that they could be redeemed for $50 by contacting

DowBrands and identifying the store and case where the coupon had been found.

Twenty-two of these coupons were later redeemed in the U.S. rather than Latin America,

the intended place of distribution. After getting this information, one of DowBrands’

other vice-presidents told Esposito and another vice-president that this confirmed

diversion from the Latin American market. However, they agreed that the vice-president

who would be meeting with SCJ officials prior to closing should not disclose the program

or its results unless specifically asked. Despite concerns that had been raised at SCJ

regarding diversion, no one from SCJ inquired about it during the subsequent pre-closing

meeting with the DowBrands’ vice-president, and he did not volunteer any information

about the program or its results.

       Prior to closing, SCJ put Michael Caron in charge of transitioning the international

part of DowBrands’ business. On January 16, 1998, Caron met with Berdasco

(DowBrands’ sales manager for Latin America), to discuss sales in Latin America. Caron

asked Berdasco for retailers’ names, retail distribution grids, and sales data by region and

country. Berdasco said that he could not provide the information but indicated that one of



                                             6
his major distributors could. Berdasco told Caron that he would have the information

forwarded.

       However, SCJ completed the purchase of DowBrands’ assets on January 23, 1998

without waiting for the information from Berdasco. Thus, Caron did not have the

information he requested from Berdasco when the deal closed. In addition, as of the date

of the closing, DowBrands terminated another of its major Latin America distributors,

stating that it was aware that the distributor was diverting DowBrands products in breach

of a distribution agreement. Four days after the closing, SCJ officials again met with

Berdasco and asked for the list of retailers who sold DowBrands products in Latin

America. Berdasco informed them that he still did not have the list. One of the SCJ

officials replied by asking Berdasco if “it would be safe to assume that 80-90 percent of

the business never left Miami and never left the United States[.]” Berdasco did not

respond verbally, but shrugged and smiled in a manner that the SCJ officials interpreted

as affirmation.

       SCJ then had its Latin American employees conduct a survey to see whether they

could find any DowBrands products in the stores there. After about two to three weeks,

the employees reported that they found no DowBrands’ products in Latin America, except

for a few in Venezuela. Moreover, in the five months following the sale, SCJ sold no

DowBrands products in Latin America, and in the seventeen months following the sale,

SCJ sold only about $1 million worth of DowBrands’ products there.



                                             7
          In the spring of 1998, Tenneco Packaging and Specialty Products, Inc., sued SCJ

to enjoin it from selling the Slide-Loc storage bag line of products alleging that the Slide-

Loc line infringed its patents. DowBrands had developed this line in 1997 and sold it to

SCJ under the aforementioned Purchase Agreement. SCJ notified Defendants of the

Tenneco suit and demanded indemnification under the Purchase Agreement. However,

Defendants refused arguing that Tenneco’s suit was not covered by the indemnification

clause.

                      A. Relevant Terms of the Purchase Agreement

          Under the terms of the Purchase Agreement, Defendants expressly renounced all

warranties not expressly set forth in the Agreement. In addition, the Purchase Agreement

provided that SCJ was not buying any of DowBrands’ existing contracts with Latin

American distributors. Section 10.10 of the Agreement provided:

          Entire Agreement. This Agreement (including the documents and instruments
          referred to in this Agreement) sets forth the entire understanding and agreement
          between the parties as to the matters covered in this Agreement and supersedes and
          replaces any prior understanding, agreement or statement of intent. Purchaser
          acknowledges that it has conducted its own independent review and analysis of the
          Business and the Transferred Assets and that it has been provided access to the
          properties, records and personnel of Sellers for this purpose. In entering into this
          Agreement, Purchaser has relied solely upon its own investigation and analysis
          and the representations and warranties set forth in this Agreement and
          acknowledges that (a) none of Sellers or any of their respective Affiliates,
          directors, officers, employees, agents, representatives or advisors makes any
          representation or warranty, either express or implied, as to the accuracy or
          completeness of (and agrees that none of such persons shall have any liability or
          responsibility to it in respect of) any of the information, including without
          limitation any projections, estimates or budgets, provided or made available to
          Purchaser or its agents or representatives, except and only to the extent expressly

                                               8
       provided for in this Agreement. Nothing in this section 10.10 is intended to
       preclude any remedy for fraud or limit any right of Purchaser with respect to any
       breach of or inaccuracy in any representation or warranty in this Agreement.

R. at 248. (Emphasis added).

       The Agreement also provided for the transfer of intellectual property necessary to

conduct DowBrands’ business and, as we have noted, it provided for indemnification for

lawsuits arising from any breach of its terms. Section 3.15 of the Agreement discussed

the transfer of intellectual property:

       Intellectual Property. (a) The Transferred Intellectual Property . . . includes all
       intellectual property rights necessary for or used in the conduct of the Business as
       currently conducted. . . Except for [certain exceptions], (I) Sellers are the sole and
       exclusive owners of all rights to, or have a license that is in full force and effect to,
       the Transferred Intellectual Property, . . .and (ii) there is no claim by any Person or
       any Proceeding pending or, to the knowledge of the Sellers, threatened which
       relates to the use of any of the Transferred Intellectual Property in the Business as
       currently conducted and as presently proposed to be conducted, or the validity or
       enforceability of the Transferred Intellectual Property or the rights of Sellers
       therein.

R. at 213-14.

       Sections 9.01, 9.03 and 9.04 pertained to indemnification. Section 9.01 stated:

       Indemnification by Sellers. From and after the Closing and subject to the
       provisions of this Article IX (including the limitations set forth in Section 9.04) ,
       Sellers agree to . . . indemnify fully, . . . and defend each Purchaser Indemnified
       Party from . . . any and all claims . . . (including reasonable attorneys’ fees)
       (collectively, “Damages”) arising out of or relating to: (a) any inaccuracy or breach
       of any representation or warranty of Sellers contained in this Agreement; (b) any
       breach of any covenant or agreement. . . of Sellers contained in this Agreement . . .
       .

R. at 237.



                                               9
       Similarly, Section 9.03 provided:

       Indemnification Process. . . . (a) In the event that (I) any claim . . .is instituted by
       any Person other than the parties to this Agreement or their Affiliates which could
       give rise to Damages for which an Indemnifying Party could be liable to an
       Indemnified Party under this Agreement
        . . . (such claim, demand or proceedings, a “Third Party Claim”) . . . , the
       Indemnified Party shall with reasonable promptness send to the Indemnifying
       Party a written notice specifying the nature of such claim, demand or Proceedings
       and the amount or estimated amount thereof. . . .
       (b) . . . [I]n the event of a Third Party Claim, the Indemnifying Party shall be
       entitled to control the defense of such Third Party Claim and to appoint counsel of
       the Indemnifying Party’s choice at the expense of the Indemnifying Party to
       represent the Indemnified Party . . . The Indemnifying Party shall . . . pay the
       reasonable fees and expenses of counsel retained by the Indemnified Party
       (provided that such counsel is reasonably acceptable to the Indemnifying Party) if .
       . . (iii) the claim seeks an injunction or equitable relief against the Indemnified
       Party[.]

R. at 239-40.

       Finally, Section 9.04 provided:

       Limitations on Indemnity Payments. Other than with respect to Taxes, no claim
       for indemnification under sections 9.01(a) or Section 5.01 may be made, and no
       payment in respect thereof shall be required unless the aggregate amount of
       Damages against which the Purchaser Indemnified Parties are entitled to be
       indemnified exceeds $10 million (and then only for the amount of such excess).
       The maximum aggregate amount of Damages against which the Purchaser
       Indemnified Parties shall be entitled to be indemnified under Sections 9.01(a) and
       (b) with respect to all claims thereunder shall be $400 million.

R. at 242.

                                  B. Procedural History

       SCJ eventually sued Defendants alleging that they had committed fraud by

deceiving SCJ about the diversion of DowBrands products earmarked for distribution in



                                              10
Latin America. SCJ also claimed that it was entitled to indemnification for attorney’s

fees arising from the 1998 Tenneco patent infringement action.

       The district court granted SCJ summary judgment on its indemnification claim,

and later awarded SCJ $7.035 million as reimbursement for SCJ’s attorney’s fees.3 It then

held a bench trial on the fraud claim, after which it found that Defendants had made

fraudulent misrepresentations to SCJ about DowBrands’ Latin American business, and it

awarded SCJ $21.948 million in damages. That represented the difference between the

true value of the Latin American business and the price SCJ paid for it. 4 This appeal

followed.5

                                      II. Discussion

       Defendants raise four arguments on appeal. They argue that the district court erred

in concluding that Section 10.10 of the Agreement does not bar SCJ’s fraud claim.

Assuming that Section 10.10 does not bar the fraud claim, Defendants argue that the

fraud claim is not meritorious because SCJ did not justifiably rely on their representations


       3
        The court also held that the amount of indemnification SCJ was entitled to was
not subject to the $10 million deductible.
       4
         Defendants requested that the court offset these damages by the alleged increase
in the value of the North American business that was masked by the diversion, but the
court refused.
       5
        We have jurisdiction over the district court’s rulings in this case pursuant to 28
U.S.C. § 1291 because the court properly exercised its jurisdiction to hear this case under
28 U.S.C. § 1332 and has issued a final judgment. On appeal, we are asked to examine
only legal issues, over which we exercise de novo review. Henglein v. Colt Indus.
Operating Corp., 260 F.3d 201, 208 (3d Cir. 2001).

                                             11
about Latin American sales. Defendants also argue that the district court improperly

calculated damages relating to the fraud claim because the court failed to offset the

decreased value of the Latin American business by the resulting increase in value of the

U.S. business that would have been masked by any diversion. Finally, Defendants argue

that the court erred in holding that it was contractually obligated to indemnify SCJ for the

costs of defending the Tenneco patent infringement action. Alternatively, Defendants

claim that, even they were obligated to indemnify SCJ, the amount of the indemnification

should have been reduced pursuant to the $10 million “basket” contained in the

indemnification clause.6 We review these arguments seriatim.

           A. Is SCJ’s Fraud Claim Barred Under the Purchase Agreement.

       Defendants argue that the broad disclaimer contained in Section 10.10 of the

Purchase Agreement prevented SCJ from bringing a fraud claim. That disclaimer clearly

provided that SCJ was not relying upon Defendants’ disclosures, but was relying on its

own investigation instead. However, the district court rejected that position based upon

the court’s interpretation of the last sentence of the section. As set forth above, that

provision states: “Nothing in this Section 10.10 is intended to preclude any remedy for

fraud or limit any right of Purchaser with respect to any breach of, or inaccuracy in, any

representation or warranty in this Agreement.” The court also refused to accept the non-




       6
        Since the amount of the attorney’s fees did not exceed the amount of the
deductible, Defendants would owe nothing if correct.

                                              12
reliance provision based upon its conclusion that provisions such as Section 10.10 do not

bar fraud claims as a matter of Delaware law under Norton v. Poplos, 443 A.2d 1 (Del.

1982). R. at 36-37.

       Norton is a 22-year-old Delaware Supreme Court case that appears to categorically

hold that non-reliance provisions in contracts will not bar subsequent actions for fraud.

443 A.2d at 6. However, any attempt to apply Norton is complicated by a line of later

cases decided by the Delaware Chancery Court allowing sophisticated parties to waive

their right to bring fraud claims when a freely negotiated contract states their intention to

do so. See H-M Wexford, L.L.C., v. Encorp, Inc., 832 A.2d 129, 142-43 (Del. Ch. 2003);

Great Lakes Chemical Corp. v. Pharmacia Corp., 788 A.2d 544, 556 (Del. Ch. 2001). 7

       After concluding that SCJ could maintain a fraud action under Delaware law

despite the language of Section 10.10, the district court proceeded to determine whether

the record supported SCJ’s purported reliance on representations regarding the size of

DowBrands’ Latin American business. See Stephenson v. Capano Dev. Co., Inc., 462

A.2d 1069, 1074 (Del. 1983). In concluding that the record supported SCJ’s claim and

that SCJ had carried its burden, the district court focused on the thoroughness of SCJ’s




       7
        See also Kronenberg v. Katz, 2004 WL 1152282 at *19-20 (Del. Ch. May 19,
2004) (unpublished opinion); St. James Recreation, LLC v. Rieger Opportunity Partners,
LLC, 2003 WL 22659875 at *3 (Del. Ch. Nov. 5, 2003) (same); Progressive International
Corp. v. E.I. DuPont De Nemours & Co., 2002 WL 1558382 at *1, *7 (Del. Ch. Jul. 9,
2002) (same). In their briefs and at oral argument, the parties focused on the extent to
which the prohibition in Norton is still viable despite this contrary authority.

                                              13
due diligence. The court explained:

       First, the Court notes that under Delaware law “the purchaser of a business is
       under no duty to investigate the accuracy of representations made by the seller
       concerning its profitability and operational affairs, even when there is an
       opportunity to do so.” Craft v. Bariglio, 1984 WL 8207 at *10 (Del. Ch. Mar. 1,
       1984). Additionally, under Delaware law, a buyer’s independent review or
       investigation will not preclude reliance on the seller’s representations unless the
       investigation was so thorough and complete as to be “of such a character as to
       fully acquaint him with the essential facts.” Omar Oil & Gas v. MacKenzie Oil
       Co., 138 A. 392, 397 (Del. 1926). Also, “if only a partial investigation is made,
       under proper circumstances, a party may rely on another’s representation to his
       detriment particularly where the other person has superior knowledge.” Lock v.
       Schreppler, 426 A.2d 856, 861-62 (Del. Super. Ct. 1981) [].

R. at 109.

       The district court concluded that “SCJ had no affirmative duty to investigate

diversion in Latin America” and that SCJ reasonably and justifiably concluded that SCJ’s

pre-sale survey finding no DowBrands’ products on the shelves in Latin America did not

amount to a full investigation. The court therefore reasoned that, under Omar Oil and

Gas, SCJ was entitled to rely on Defendants’ other representations concerning sales to

Latin America because Defendants had superior knowledge of the Latin American

business. R. at 109-10. The court also focused on the fact that the Euromonitor study

finding no products on the shelves of Latin American stores was “noncopyable” and “part

of a document that was more than one hundred pages[,]” implying that SCJ could not

reasonably have been expected to ferret-out that information. Id.

       Defendants contend that, even if SCJ can avoid the non-reliance language in

Section 10.10, it knew enough about the problem of diversion to preclude any reasonable

                                             14
reliance on Sellers’ disclosures given the language of the Purchase Agreement. We

agree.

         Under certain circumstances, buyers can rely on the representations of sellers

without incurring a duty to investigate. For example, in Craft, the Delaware Supreme

Court stated:

                 Where a representation is made of a fact (as distinguished
                 from an expression of opinion), and relates to a matter as to
                 which the parties have not equal means of information, but
                 is peculiarly within the knowledge of the person making the
                 representation, the person receiving and acting upon it in the
                 making of a contract has an absolute right to rely on the
                 truthfulness of the representation, and is not required to seek
                 means of information to determine its falsity, although such
                 means are available. Under this rule, representations may be
                 fully relied on without investigation, and are legally
                 equivalent to a warranty of the matter referred to, when
                 made by the seller of a business concerning the profits
                 which he has received from it in the past . . . .

Id. at *8-*9 (quoting Black, On Rescission And Cancellation (2d ed.) § 118).

         Thus, Omar Oil & Gas held that buyers were entitled to rely on a seller’s material

representations. 138 A. 392, 397 (Del. 1926). The situation here is very different. SCJ

specifically agreed to rely only upon its own due diligence rather than relying upon any

information it received from Defendants. Moreover, during its due diligence, SCJ was

alerted to the likelihood of diversion. Given SCJ’s contract, the fact that Defendants knew

about the diversion of products earmarked for Latin America and chose not to volunteer

the information to SCJ despite multiple opportunities to do so is far less relevant to our



                                              15
fraud analysis than might otherwise have been the case. This is true regardless of the

current viability of Norton.

       Although SCJ complains that critical information such as the Euromonitor Study

was buried amongst the voluminous documents in a “data room,” SCJ actually found that

study, reviewed it, and specifically noted the very problem of diversion it now claims

Defendants hid from it. Defendants also gave SCJ direct access to DowBrands’ sales

manager for Latin America. SCJ asked him (Berdasco) the right questions. Those

questions were clearly focused on SCJ’s concern about the likelihood of diversion from

Latin American markets. However, as noted above, SCJ was content to proceed to

closing without waiting for answers. SCJ proceeded to closing even though it knew that

Defendants were not warranting anything about DowBrands’ Latin American distribution

and that SCJ had agreed to rely only upon its own due diligence.8

       Moreover, SCJ knew from the Euromonitor study that no DowBrands’ products

had been found in a survey of stores in Argentina, Brazil or Chile. It is, of course, true

that Defendants withheld relevant information from DowBrands’ coupon seeding

program just as SCJ argues. However, the coupon program, had it been disclosed, would

simply have confirmed SCJ’s suspicions from such sources as the Euromonitor study.




       8
         We have already explained that SCJ’s notes and communications establish that
key people conducting due diligence, including Director of Acquisitions (Marc English)
and its Director of Transitioning (Michael Caron), both suspected diversion of products
meant for Latin America was occurring.

                                             16
This all occurred against the backdrop of SCJ’s agreement to conduct “its own

independent review and analysis of the [DowBrands’] Business and the Transferred

Assets[.]” SCJ also agreed that it was “[relying] solely upon its own investigation and

analysis and the representations and warranties set forth in [the Purchase] Agreement.” R.

248.

       SCJ is now asking us to redraft its Purchase Agreement with Defendants and allow

it to rely on Defendants’ allegedly incomplete and/or misleading disclosures. However,

we can not ignore the express language of the Purchase Agreement, and we will not

redraft it by allowing SCJ to rely upon Defendants’ disclosures or to insist that its reliance

was reasonble despite the language of Section 10.10. The Purchase Agreement makes no

mention of DowBrands’ Latin America sales and certainly gave SCJ no warranty

regarding those sales. In addition, the same provision of the Agreement, Section 10.10,

contains an integration clause whereby SCJ agreed that the written terms of the

“[Purchase] Agreement . . . sets forth the entire understanding and agreement between the

parties.” Id.

       SCJ attempts to pry itself lose from its contract by focusing on the fact that the

Purchase Agreement also provided that SCJ could maintain an action for fraud. As we

noted earlier, the district court relied upon the final sentence of Section 10.10 which

provides that:”Nothing in this section 10.10 is intended to preclude any remedy for fraud

or limit any right of Purchaser with respect to any breach of or inaccuracy in any



                                             17
representation or warranty in this Agreement.” R. at 248. SCJ argues that even if the non-

reliance language is valid under Delaware law, its action for fraud survives under that

sentence.

       However, even if we were to conclude that the non-reliance provision of Section

10.10 can not be enforced as a matter of law under Norton, or that SCJ’s fraud claim is

prserved by the last sentence of Section 10.10, SCJ would still have to prove that

disregarding its own suspicions about diversion and proceeding to closing without

additional information was reasonable in order to prevail on its fraud claim.9 SCJ knew,

or certainly should have known, of the diversion that was occurring in the Latin American

market. Its reliance on disclosures from Defendants was therefore clearly unreasonable

given its contractual undertaking. To paraphrase the decision in Great Lakes, if we were

to allow

              [SCJ] to disregard the clear terms of its disclaimers [by
              arguing its reliance on Defendants’ disclosures was



       9
         The reasonableness of SCJ’s claimed reliance must be assessed in context with
the non-reliance clause unless SCJ can establish fraud in the inducement. However, SCJ
must also clear the “reasonableness hurdle” to prevail under that theory.
              "To establish fraud in the inducement, and thereby be relieved
              of the effect of the [Asset Purchase Agreement], [buyer is]
              required to establish the elements of common law deceit,
              which include 'misrepresentation of a material fact, made to
              induce action, and reasonable reliance on the false statement
              to the detriment of the person relying.
Gloucester Holding Corp., v. U.S. Tape and Sticky Products, LLC (Chancery, 2003)
(internal quotation marks omitted.


                                             18
              reasonable] and to assert its claims of fraud, the carefully
              negotiated and crafted Purchase Agreement between the
              parties would . . . not be worth the paper it is written on. To
              allow [SCJ] to assert [that it acted reasonably given the
              Purchase Agreement] . . . would defeat the reasonable
              commercial expectations of the contracting parties and
              eviserate the utility of written contractual agreements.


Id. at 556.10 Accordingly, the district court erred in entering judgment for SCJ on its

fraud claims against Defendants.

                                    B. Indemnification.

       Defendants’ final argument is that the district court incorrectly found that SCJ was

entitled to indemnification under Section 9.03 of the Purchase Agreement for costs

incurred defending against Tenneco’s patent infringement suit. Defendants argue that

Section 9.03 merely explains the indemnification process, while the language in Section

9.01(a) of the Agreement provides for SCJ’s actual right of indemnification. See

Appellants’ Br. at 53. As Defendants correctly explain, the district court held that

Defendants’ liability to indemnify SCJ for attorney’s fees did not depend on the merits of

that suit or its outcome. Rather, “the court held that the word ‘could’ as used in Section

9.03(a) suggests both the possibility of recovery and the possibility of an indemnity




       10
         Moreover, given SCJ’s willingness to go to closing without getting either
answers to questions it asked about diversion, or written warranties that would have
removed DowBrands’ Latin American distribution from the umbrella of the disclaimer in
Section 10.10, it is exceedingly difficult to conclude that that portion of DowBrands’
business was actually material to SCJ’s decision to purchase DowBrands’ assets.

                                             19
obligation under the Agreement.” Appellants’ Br. at 55 (emphasis in original). We agree

with the district court’s reading of the scope of Defendants’ obligation to indemnify SCJ

under the Purchase Agreement though our analysis differs somewhat. However, we

disagree with the district court’s conclusion that the amount of the indemnification is not

reduced by the $10 million deductible contained in Section 9.04 (“Limitations on

Indemnity Payments”).

        In Section 3.15, Defendants represented that they were transferring “all of the

intellectual property rights necessary for or used in the conduct of the Business as

currently conducted.” Section 9.03 does establish the “process” for indemnification. It

also states the procedure whereby Defendants will defend SCJ pursuant to the former’s

obligation to indemnify SCJ as long as the latter satisfies certain conditions such as

prompt notice of the third party claim. Pursuant to Section 9.01 Defendants agreed to

“pay and to indemnify fully, . . . and defend [SCJ] . . . against any and all claims . . .

(including reasonable attorney’s fees) . . . arising out of or relating to: (a) any . . . breach

of any representation or warranty of [Defendants] contained in [the Purchase]

Agreement.” This required Defendants to indemnify SCJ for attorney’s fees arising from

the Tenneco litigation because it represented, in section 3.15, that it was transferring all

necessary intellectual property rights and that it was the “sole and exclusive owner” of

those rights. However, that obligation was subject to the deductible contained in Section

9.04.



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       Section 9.01 expressly subjects Defendants’ obligation to indemnify to the $10

million deductible contained in Section 9.04. As noted above, Section 9.04 provides:

“Other than with respect to Taxes, no claim for indemnification under Sections 9.01(a) or

Section 5.01 may be made . . [or] required unless the aggregate amount of Damages . . .

exceeds $10 million (and only for the amount of such excess).” The district court refused

to apply that deductible because it concluded that “SCJ’s claim for attorneys’s fees . . . in

the Tenneco Litigation does not arise under Section 9.01(a) or Section 5.01. Instead,

[Defendants] breach of Section 9.03 of the Agreement gives SCJ a claim for

indemnification under 9.01(b), for ‘any breach of any covenant . . . of Sellers contained in

this Agreement.’” We can not agree with the district court’s reading of the Purchase

Agreement.

       The court’s reliance on Section 9.03 essentially converts the procedural provision

of Section 9.03 into a substantive provision equivalent to that found in Section 9.01.

Section 9.03, however, simply sets forth the procedural process for SCJ’s use when

indemnification is warranted by Section 9.01; it does not provide an alternative basis for

indemnification. By relying on Section 9.03, the district court incorrectly concluded that

the “basket” provision of Section 9.04 did not apply to the Tenneco Litigation because

Section 9.04 is not referenced in Section 9.03. The provision of 9.04, though, is explicitly

incorporated into the substantive provision of Section 9.01 which provides that

Defendants will indemnify SCJ for “damages” where SCJ is sued by a Third Party and the



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suit arose “out of [or related to] any breach of any covenant or . . . representation” in the

Purchase Agreement with SCJ. Because Tenneco’s suit alleged that SCJ’s use of the

assets acquired from Defendants violated Tenneco’s intellectual property rights, it

constituted a potential breach of the warranties contained in Section 3.15 of the

Agreement. Accordingly, Defendants’ obligation to indemnify SCJ arose under Section

9.01 and was subject to the $10 million dollar deductible of Section 9.04 referenced

therein. We therefore hold that the amount of “Damages” Defendants owe SCJ in the

form of indemnified attorney’s fees must be reduced by $10 million dollars. Therefore,

Defendants would only owe the amount that exceeds that $10 million deductible. As we

noted at the outset, SCJ’s attorney’s fees were less than that deductible. Accordingly,

Defendants do not owe SCJ anything pursuant to their obligation to pay those fees.

                                             IV.

       For all of the above reasons, we will reverse the district court’s order dismissing

SCJ’s fraud claim, and refusing to apply the $10 million deductible. We will affirm the

court’s determination that Defendants must indemnify SCJ’s attorney’s fees incurred in

defending against Tenneco’s patent infringement claim.




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