Allens Manufacturing Co. v. Napco, Inc.

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

No. 92-2276

ALLENS MANUFACTURING COMPANY, INC.,

Plaintiff, Appellant,

v.

NAPCO, INC.,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF RHODE ISLAND

[Hon. Raymond J. Pettine, Senior U.S. District Judge]

Before

Breyer, Chief Judge,

Friedman,* Senior Circuit Judge,

and Stahl, Circuit Judge.

Michael J. McGovern with whom Indeglia & McGovern was on brief

for appellant.
Mark A. Pogue with whom Deming E. Sherman and Edwards & Angell

were on brief for appellee.

August 25, 1993

*Of the Federal Circuit, sitting by designation.

BREYER, Chief Judge. Allens Manufacturing Co.

brought this diversity action against Napco, Inc., claiming

that Napco failed to provide it with proper "clean up"

equipment, as promised, and on time. Allens adds that this

failure is responsible for a significant part of a $210,000

fine that Allens has agreed to pay the Environmental

Protection Agency ("EPA"). After listening to Allens'

proposed evidence about damages -- evidence designed to show

for what portion of the fine Napco was responsible -- the

district court ruled that Allens' evidence was not

sufficient to pinpoint Napco-caused damages with "reasonable

certainty." It then granted Napco's motion to exclude

evidence of the fine, at which point the parties agreed that

the court should dismiss the complaint for failure to allege

the jurisdictionally-necessary $50,000 harm. 28 U.S.C.

1332(a). Allens, having reserved the right to appeal, does

so. It asks us to review the court's evidentiary ruling.

We find the ruling lawful, and affirm the court's judgment.

I

Background

Our review of the rather skimpy record before us

on appeal suggests the following: Allens makes metal belt

buckles, shoe buckles, and other items, through processes

-2-
2

that generate waste water containing pollutants. In

February 1985 Allens ordered from Napco a waste water

treatment system that Napco installed during 1985, and which

began to operate in early 1986. In the meantime, Allens

apparently violated federal environmental rules and

regulations, some governing waste water discharges and

others setting forth reporting requirements.

The record suggests that by 1989, EPA had compiled

a list of one hundred or more separate violations committed

by Allens, which took place in more than fifty different

months, between September 1981 and June 1989. EPA

apparently contemplated possible fines for these violations

amounting to $384,000. Allens' counsel then wrote to EPA,

pointing out that Allens had "acted in good faith," was not

"recalcitrant," and had "cooperated with . . . authorities

to achieve compliance as expeditiously as possible." He

suggested a "penalty . . . in the $50,000 to $65,000 range."

EPA offered to settle with Allens for a fine of $125,000,

but Allens refused.

EPA then referred the matter to the Department of

Justice ("DOJ"). DOJ insisted on considerably more than

$125,000. Allens and DOJ ultimately entered into a consent

-3-
3

decree, in which, as we have said, Allens agreed to pay a

fine of $210,000.

Subsequently, Allens filed this lawsuit, claiming

that Napco failed to live up to its promises to install

clean-up equipment, and seeking reimbursement for the fine

(and related costs) insofar as the fine reflects "discharge"

violations taking place after September 1985 (by which time,

according to Allens, Napco should have had proper equipment

operating).

Before the case went to trial, Napco told the

court that Allens could not show with reasonable certainty

how much of the fine resulted from Napco's claimed failings.

Without some such showing, Napco argued, the $210,000 fine

figure was misleading and prejudicial. And, it asked the

court to keep evidence of that figure from the jury. The

court itself then heard Allens' evidence on the matter

(consisting of several EPA documents and the testimony of an

expert). It agreed with Napco that this evidence failed to

prove damages with "reasonable certainty," and it granted

Napco's evidentiary motion. Then, the parties having agreed

that, given the evidentiary ruling, Allens could not prove

significant harm, the court dismissed the complaint for

failure to set forth a "matter in controversy exceed[ing]

-4-
4

the sum or value of $50,000." 28 U.S.C. 1332(a). See

Gibbs v. Buck, 307 U.S. 66, 72 (1939) (plaintiff's good

faith allegation that the matter in controversy exceeds the

jurisdictional amount requirement suffices to meet the

amount in controversy test, unless challenged); Dept. of

Recreation & Sports v. World Boxing Ass'n, 942 F.2d 84, 88

(1st Cir. 1991) (citing Gibbs, 307 U.S. at 72) (once

jurisdictional amount is challenged, plaintiff must show

facts sufficient to show that it is not a "legal certainty"

that the claim involves less than the jurisdictional

amount). See also 14A Wright, Miller & Cooper Federal

Practice and Procedure 3702 at 26-28 (favoring policy of

according trial judges broad discretion as to the mode of

determining jurisdictional fact issues).

Allens appeals. Allens argues only that its

proposed evidence is sufficient to prove damages with the

requisite degree of certainty. We have examined that single

claim. We conclude that the district court's determination

of that evidentiary matter is legally correct. And, as

neither party raises any other objection, we affirm the

complaint's dismissal.

-5-
5

II

The Evidence

Allens, in its effort to show that Napco was

responsible for some reasonably identifiable portion of the

$210,000 fine, presented two EPA documents and the testimony

of one expert. The first document quantifies the economic

"benefit" that Allens obtained as a result of its failure to

follow EPA rules and standards. The second EPA document,

called a "gravity calculation," lists individually each of

56 months, refers to Allens' violations during that month,

and sets forth a possible fine for each month, the amount of

which varies with the number of violations during that

month, their duration, their significance, and the harm they

may have caused. The "benefit" amounted to about $94,000.

The "gravity calculation" totalled $290,000. Their sum is

approximately $384,000.

The expert, a former EPA lawyer, interpreted these

documents in light of EPA's "Policy on Civil Penalties,"

reprinted in 17 ELR 35,083 (Feb. 16, 1984), and his own

experience at EPA. He apparently conceded that the first

document (showing a "benefit" to Allens of $94,000) had

little to do with Napco-related violations. He analyzed the

second document -- the "gravity calculation" -- month by

-6-
6

month. He added together all penalties for any month (after

September 1985) that referred only to discharge violations.

He allocated penalties in any (post-September 1985) month

that showed both "discharge" and "reporting" violations,

between those two categories. He then added up the total.

He found that, of the "gravity calculation"'s $290,000

total, approximately $190,000 reflected "discharge

violations" occurring after September 1985. He concluded

that Napco-related violations amounted to $190,000, or about

half, of the two documents' $394,000 total.

The expert recognized that the final fine was not

$394,000; rather, it was $210,000. He said, however, that

since Napco-related violations accounted for about half the

two documents' $394,000, they likely accounted for half the

final $210,000 fine. That is because, in his view,

adjustments to the $394,000 figure likely reflected similar

treatment of both Napco-related and non-Napco-related

violations. That is to say (in the words of Allens'

brief), "a reduction of the original fine calculation no

more altered the ratio of discharge to reporting violations

than removing a slice of mince meat pie would alter the

ratio of apples to raisins in the remaining pie."

-7-
7

III

The Problem with the Evidence

The basic problem with this evidence lies in the

fact that the EPA did not fine Allens a hypothetical

$394,000. Rather, it proposed a fine of $125,000. Then

DOJ, after consulting with EPA, ended up imposing a fine of

$210,000. The record does not explain how the EPA or DOJ

arrived at these latter, actual, fine amounts. Indeed, the

record offers no more support for the pro rata (or "mince

meat pie") theory than it offers for other, equally

plausible (and equally speculative) theories that would

produce dramatically different results.

We concede that, in the absence of any evidence

about what actually happened, one might believe, as the

expert suggested, that the proposed $125,000 fine simply

reflected the fact that EPA's independent authority to

negotiate a settlement has a $125,000 ceiling, 40 CFR

122.41(a)(3), and that EPA reduced all the elements of the

$394,000 calculation pro rata in order to reach this

ceiling. On the other hand, it is at least as likely that

EPA, in reaching the $125,000 figure, attached different

degrees of significance to different elements of the

$394,000 calculation. EPA's Policy on Civil Penalties

-8-
8

states that EPA will adjust initially calculated ("benefits"

plus "gravity") fine amounts, in light of such factors as

(1) the violator's history of cooperation or recalcitrance,

as "indicated through pre-settlement action," (2) whether

actions were negligent or wilful, and (3) the violator's

ability to pay. See 17 ELR 35,083. And here, Allens could

make (and Allens' counsel did make) strong arguments to EPA

that Allens' discharge violations were unintended and minor

(not "exceed[ing] the effluent limitations by any

significant degree"). If EPA accepted these arguments, it

might have proved more willing to forgive the discharge

violations than the reporting violations for which Allens

offered no excuse. Or, even if it did not accept these

arguments, EPA might have placed more weight on forfeiting

"benefits" than on a calculation of "gravity."

Similarly, EPA and DOJ might have arrived at the

final $210,000 figure by increasing pro rata a $125,000

figure (or reducing pro rata the initial $384,000). But it

is just as plausible, if not more plausible, to believe that

they arrived at that figure in light of Allens' lack of

cooperation, or "recalcitrance" as revealed in "pre-

settlement action," and potentially increased litigation

costs for the government. And, these factors may have had

-9-
9

nothing to do with discharge violations after September

1985.

The upshot is that we do not know what actually

led EPA and DOJ to end up with a fine of $210,000.

Moreover, this uncertainty reflects, not closely-balanced

evidence, but a lack of evidence, for the record contains no

evidence about what actually happened, nor does it set forth

evidence of any agency rule, pattern, or practice indicating

that pro rata reduction or increase is the norm. The result

is that we can only speculate about the extent to which

EPA's "mitigating" or "aggravating" factors may have applied

in respect to each of the many (1981 through 1989)

violations that initially called for a fine, and about the

extent to which those factors may have played a role in

determining the ultimate fine level. More importantly, the

expert could do no more than speculate, for he had no

personal knowledge about how EPA calculated the ultimate

fine, nor did he have any special reason for believing that

these factors applied pro rata to every element identified

in the "benefit" and "gravity" calculations. Finally, the

experienced trial judge decided that the jury, too, would

have to speculate in order to determine the level of

damages. And, for the reasons stated, we agree with his

-10-
10

conclusion -- that the plaintiff's evidence does not

identify those damages with the "reasonable certainty" that

the law requires. See National Chain Co. v. Campbell, 487

A.2d 132, 134-5 (R.I. 1985) (damages must be established

"with reasonable degree of certainty" and plaintiff "cannot

rely upon speculation" in order to prove his damages);

Restatement (Second) of Contracts 352 (1981) ("Damages are

not recoverable for loss beyond an amount that the evidence

permits to be established with reasonable certainty").

Allens raises one final point. It says that the

district court should not have insisted that it demonstrate

damages to a "reasonable certainty," for in doing so, it

permits Napco to benefit from uncertainty caused by Napco's

own conduct. See Eastman Kodak Co. v. Southern Photo

Materials Co., 273 U.S. 359, 379 (1927) ("[A] defendant

whose wrongful conduct has rendered difficult the

ascertainment of the precise damages suffered by the

plaintiff, is not entitled to complain that they cannot be

measured with the same exactness and precision as would

otherwise be possible"); U.C. Castings Co. v. Knight, 754

F.2d 1363, 1374 (7th Cir. 1985) (same). The short,

conclusive answer to this claim is that Napco's conduct did

not create, nor can one expect Napco to have foreseen, the

-11-
11

present problem. Rather, Allens has found it difficult to

prove damages because EPA will not permit its officials to

testify, 40 C.F.R. 2.403, 2.404(a), and Allens did not

insist that EPA publicly explain (perhaps in the decree

itself) the basis for calculating the fine. Napco is not

responsible.

In sum, the district court properly found that

Allens' proposed evidence about damages failed to

demonstrate damages to a reasonable degree of certainty.

That being so, the court could properly exclude evidence of

the $210,000 fine (presumably on grounds of "prejudice"

overcoming "relevance," see Fed. R. Evid. 403). And the

parties, in effect, agree that, without the evidence, the

district court could dismiss the complaint for failure

properly to meet the $50,000 jurisdictional requirement.

For these reasons, the judgment of the district court is

Affirmed.

-12-
12