Bartle, J.
Plaintiff Hay Group Management, Inc. ("Hay Management") has sued Defendant Bernd Schneider for breach of fiduciary and legal duty and civil conspiracy.
We have subject matter jurisdiction pursuant to 28 U.S.C. § 1332(a). Plaintiff Hay Management is incorporated in Delaware and has its principal place of business in Pennsylvania. Defendant Schneider is a citizen and resident of Germany.
Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a);
When ruling on a motion for summary judgment, we may only rely on admissible evidence.
The Second Amended Complaint, as noted above, alleges that Schneider breached his fiduciary and legal duties to Hay Management and other Hay entities and engaged in civil conspiracy as their top executive. Specifically, it enumerates a series of actions Schneider began taking in 2003 that were contrary to their best interests. As a result, he was notified on December 7, 2003 that he was terminated from all of his positions with the Hay entities.
Plaintiff first asserts that Schneider enlisted Lucie Boller-Bockius, the former Finance Director and Officer of Hay Group GmbH ("Hay Germany"), as his co-conspirator. She aided him in his quest to retaliate against those who he perceived were his adversaries in the Hay entities or those who had played a role in recommending that he receive less than 100% of his bonus opportunity for the fiscal year 2002.
The Second Amended Complaint also details Schneider's involvement in conducting a "false investigation" into the Chief Financial Officer of Hay Group, Inc., Stephen Kaye, in order to retaliate against him for the "unjustifiably low bonus" Schneider received in 2002. Hay Management maintains that Schneider knew that the allegations giving rise to the investigation were baseless and that the investigation was a waste of company money.
Hay Management alleges that further acts by Schneider constituting breach of fiduciary duty and civil conspiracy involved his manipulation of the calculation of the annual incentive compensation to be paid to various employees. Schneider purportedly did so in order to reward those who were loyal to him and punish those who were not. He enlisted individuals in the Hay entities to assist him in this endeavor. Additionally, beginning in January 2003 Schneider took steps secretly to increase the salary of Boller-Bockius and secretly provided her with a severance payment agreement and a pension in the event of early termination.
The final subject of allegations constituting breach of fiduciary and legal duty and civil conspiracy concerns Schneider's Employment Agreement with Hay BV and a Cost Allocation Agreement ("CAA") executed by Hay BV, Hay Management, and Hay Germany. Subsequent to his purported termination, Schneider filed lawsuits in Germany and the Netherlands against Hay BV and other Hay companies, including Hay Management, challenging the validity of his termination. Ultimately in 2014, a German Court entered judgment in favor of Schneider and against Hay BV. In March 2015 Hay Germany, as the paying agent for Hay BV, paid Schneider $13,794,949.37 in accordance with the judgment.
The following facts are undisputed. Hay Management is a subsidiary corporation that is part of a larger organizational structure that contains a number of companies known as the "Hay entities." They are in the business of management consulting. Atop this organization is parent company HG (Bermuda) Limited. Below HG (Bermuda) is third-tier subsidiary Hay BV. Hay BV is a Dutch holding company that owns the assets of the other Hay entities. Plaintiff Hay Management acts as the worldwide headquarters of the Hay companies. It performs corporate and administrative functions for the Hay companies and employs most of Hay's senior executives.
Defendant Schneider is the former CEO of Hay BV and the former President of Plaintiff Hay Management. Schneider entered into an Employment Agreement with Hay BV on October 1, 2001 to become its CEO.
The Employment Agreement that Schneider entered into with Hay BV governed the terms and conditions of his employment with Hay BV. It was signed by Schneider, Matthews, and a third individual identified as "managing director." The Employment Agreement set forth the manner in which Schneider's salary and bonus were to be determined and paid by Hay BV. It contained clauses providing for the assignment of the Employment Agreement. In the preamble, the Employment Agreement stated, in relevant part:
Article 6.5 of the Employment Agreement, titled "Assignment," provided that "[Hay BV] may assign this Agreement to any other member of the Affiliated Group. With the consent of [Schneider], [Hay BV] or any other Employer may also assign this Agreement in parts to more than one member of the Affiliated Group." The Employment Agreement also provided that Schneider could be terminated "for cause."
On October 24, 2003, Plaintiff Hay Management, Hay BV, and Hay Germany executed the CAA, made retroactive to October 1, 2001, the date of the Employment Agreement.
The assignment clauses of the Employment Agreement and of the CAA later became the subjects of litigation before a German Court and are subjects of contention in this action. According to Hay Management, the intended purpose of the assignment clause in the CAA was to make Hay Management and Hay Germany responsible for proportionately allocating the costs of Schneider's compensation under the Employment Agreement and to release Hay BV of its obligation in this regard. This assignment clause had tax implications for Hay Management and other Hay entities.
Following the series of actions by Schneider detailed in the Second Amended Complaint, the Ownership Board of HG (Bermuda), the parent organization of the Hay entities, purported to terminate Schneider's employment on December 7, 2003 from all of his positions with Hay Management, Hay BV, and other Hay entities. Notice of this termination was sent to Schneider by Hay BV and Hay Germany. As noted above, Schneider thereafter challenged the validity of this termination and sought payment of salary and bonuses under his Employment Agreement. He first filed suit in Germany in the Frankfurt Labor Court regarding the validity of the termination notices and compensation under the Employment Agreement. Schneider named as defendants Hay BV, Hay Germany, Hay Acquisition, Hay Group, Inc., Hay International, and Hay Management. The portion of the action relevant to the instant action was transferred by the Frankfurt Labor Court to the Frankfurt Regional Court.
In March 2005, while the German action was pending, Schneider filed suit in the Netherlands alleging that the resolution of the management board that led to the termination notices was invalid under Dutch law. The Frankfurt Regional Court stayed the German action pending the conclusion of the Dutch action.
In July 2006 the Dutch Court found in Schneider's favor. The Dutch Court ruled, among other things, that his termination was improper under Dutch law since Hay BV failed to obtain a valid resolution of its management board and send notice of termination in accordance with the resolution.
On February 19, 2014 the Higher Regional Court reversed the lower court decision and ruled that since Schneider's termination was invalid, he continued to be employed by Hay BV through 2006 when his contract expired. It found that the CAA did not assign the Employment Agreement for all purposes from Hay BV to Hay Germany but rather only assigned it for purposes of execution. Consequently Hay BV, rather than Hay Germany and Hay Management, was responsible for Schneider's outstanding salary and applicable bonuses.
The Higher Regional Court entered judgment in favor of Schneider and against Hay BV for his salary and bonuses for the years 2004, 2005, and 2006, plus interest.
The parties have submitted expert reports pursuant to Rule 26(a)(2)(B) of the Federal Rules of Civil Procedure. Dr. Philipp S. Fischinger provided an expert report on behalf of Hay Management and Dr. Thomas Thees did so on behalf of Schneider.
Dr. Fischinger opined, in relevant part, that while "there is no legal rule of compulsory counterclaim" in Germany, "it is well established that a defendant who has potential claims against a plaintiff is free to either (i) file a counterclaim ("Widerklage") or (ii) sue the plaintiff in a completely different lawsuit in the same or a different court." In this opinion, Dr. Fischinger also stated that under German procedure, "a party's means of defense (or attack) can be barred because of presenting its
Although the experts disagree as to whether the filing of any counterclaim arising out of the original lawsuit is compulsory under German law, there is no dispute that a defendant in a German lawsuit may file counterclaims and of course may raise defenses to plaintiff's claims.
Dr. Thees concludes in his expert report that "all of the claims asserted by the U.S. Hay entities in the U.S. were either asserted by counterclaim or defense, or could have been asserted in the German proceedings." While Dr. Fischinger disagrees that all the claims were asserted in the German litigation, tellingly, he does not disagree that the claims raised here "could have been asserted" by way of counterclaims or defenses.
Schneider argues in support of his motion for summary judgment that this action is barred under the doctrine of res judicata as a result of the judgment entered in his favor as a plaintiff in the German Higher Regional Court. Since our subject matter jurisdiction is based on diversity of citizenship, we must first determine whether federal or state law of res judicata, that is claim preclusion, applies.
In
The Court of Appeals then cited two Supreme Court cases which were decided after the Third Circuit decisions applying state res judicata law:
Similarly, in
We note preliminarily that the doctrine of res judicata does not go to or affect the merits of any claim.
Under the federal doctrine of res judicata, a defendant must establish that there has been: (1) a final judgment on the merits; (2) the same parties or their privies; and (3) a subsequent suit based on the same cause of action.
The first requirement of federal res judicata has been satisfied here. There is no dispute that a valid final judgment from a German court has been entered in favor of Bernd Schneider, the current defendant who was the plaintiff in that earlier action. Furthermore, the parties agree that the foreign judgment is deserving of comity.
The next issue to be resolved is whether Hay Management, the plaintiff here, is in privity with Hay BV, the Hay entity against whom the judgment was entered in favor of Schneider in the Higher Regional Court. Privity exists where there is "a close or significant relationship" between the two parties.
Hay BV, a wholly-owned subsidiary of the ultimate parent corporation HG (Bermuda) Limited, is a holding company. Hay Management is also a wholly-owned subsidiary and serves as the worldwide headquarters for all of the Hay companies. Hay Management is where most of the senior corporate officers are employed and where corporate and administrative functions are performed for the Hay entities. At all relevant times, Hay BV and Hay Management had the same Chairman, Chris Matthews.
The only question remaining is whether the present lawsuit arises out of the same cause of action as litigated in the German courts. The Court of Appeals in
Res judicata is not limited to the situation found in
To decide for res judicata purposes whether the same cause of action is being raised a second time, the court looks not only at the basis of the plaintiff's claim in the first action but also to what constituted available defenses or counterclaims, including those not raised and not established by competent evidence in the first lawsuit.
Again, the court must look not to the legal theories advanced in the different lawsuits or to some narrow definition of cause of action useful in other contexts but to whether there is an essential similarity of underlying events. Here the court must also take into account any defenses or counterclaims that Hay BV had available in the German lawsuit as a defendant and whether Plaintiff Hay Management, a privy to Hay BV, seeks in effect to nullify in this lawsuit the German judgment entered against Hay BV.
At issue in the German litigation was Schneider's purported termination, Hay BV and Hay Germany's notices of termination to Schneider, and Schneider's compensation. In adjudicating these issues, the Higher Regional Court scrutinized the language of the Employment Agreement and the CAA. For example, the Court noted that Schneider's Employment Agreement had been "individually adjusted," rather than simply being a standard "form contract." The Court considered that Matthews and Schneider had signed the Employment Agreement and CAA on behalf of themselves and behalf of Hay entities, respectively. The Court analyzed the effect on the Hay entities of the assignment language contained in the Employment Agreement and the CAA. In sum, the language of these contracts, as well as their effect on the various Hay entities, were woven throughout the decision of the Higher Regional Court.
Further, the conduct of Schneider as a top executive of the Hay entities played a role in the German Court's determination of the bonus to be awarded to Schneider. In considering his request for compensation under the Employment Agreement, the Court discussed Schneider's fiduciary duty, and any breach thereof, to Hay BV and Hay Germany. The German Court ultimately based its award to Hay Germany on its counterclaim for repayment of severance money paid to Lucie Boller-Bockius on a breach of fiduciary duty by Schneider.
These very same allegations about Boller-Bockius from the German lawsuit are repeated in the Second Amended Complaint in this action. Both the German Court's decision and Plaintiff's Second Amended Complaint also reference Schneider's investigation of Hay Group, Inc.'s Chief Financial Officer Stephen Kaye. Again, Dr. Fischinger and Dr. Thees, the experts for the parties here, confirm that Hay BV or the various Hay entities either did or could have raised by defense or counterclaim all the factual allegations and legal theories that Hay Management has set forth in its Second Amended Complaint.
All but a small part of the damages Hay Management seeks to recover from Schneider in this second lawsuit consists of the very $13 million which it paid as a result of the German judgment entered against Hay BV and in Schneider's favor. Viewing side-by-side the German litigation and the allegations in the Second Amended Complaint, there is clearly an essential similarity of underlying events in the two lawsuits.
Putting it in its starkest terms, Hay Management, as Hay BV's privy, is seeking
Like the Court of Appeals in
(internal citations omitted). We do not see any material difference between Pennsylvania law of res judicata and the federal law. Thus, we need not decide which law governs as this action cannot proceed under either scenario.
Finally, Plaintiff asserts that Pennsylvania would, pursuant to its conflict of laws rules, apply Delaware law on the issue of res judicata.
Accordingly, the motion of defendant Bernd Schneider for summary judgment against Plaintiff Hay Management will be granted.
AND NOW, this 1st day of February, 2018, for the reasons set forth in the accompanying Memorandum, it is hereby ORDERED that the motion of defendant Bernd Schneider for summary judgment (Doc. #148) is GRANTED.
AND NOW, this 1st day of February, 2018, for the reasons set forth in the accompanying Memorandum, it is hereby ORDERED that judgment is entered in favor of defendant Bernd Schneider and against plaintiff Hay Group Management, Inc.
Fed. R. Civ. P. 56(c)(1).