377 F. Supp. 3d 359
S.D. Ill.2019Background
- Press America printed/mailings for CVS under a Master Services Agreement (MSA) and a Business Associate Agreement; both required Press America to indemnify CVS for breaches involving private health information (PHI/PII).
- CVS had a separate Letter of Understanding (LOU) with IBM containing a novel, uncapped "performance guarantee" that labeled certain payments a "penalty": $45,000 per security incident (no cap for security incidents), later reflected in the Final IBM Agreement as "fee adjustments."
- On August 2, 2012, Press America mismailed 2,668 items; 41 of those contained IBM employees' PHI. IBM billed CVS $1.845 million (41 x $45,000); CVS paid IBM without notifying Press America and then demanded indemnification from Press America.
- Press America tendered the claim to insurers; insurers did not pay. Press America refused to reimburse CVS, sued for unpaid invoices; CVS sued for indemnification and other damages. Cross-motions for summary judgment followed.
- Court found (1) CVS breached no obligation to Press America that excused payment of invoices, so Press America entitled to unpaid invoices; (2) the $45,000 per-letter item in the LOU is an unenforceable penalty; (3) Press America need not reimburse CVS for the $1.845 million payment under indemnity because CVS settled an unenforceable penalty without involving its indemnitor.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Enforceability of IBM "penalty" | CVS: payment to IBM was a contractual obligation and payable | Press America: $45,000 per incident is punitive and disproportionate | Held: The LOU/LOU-based payment is an unenforceable penalty under NY law (not liquidated damages) |
| Indemnity obligation to reimburse CVS | CVS: MSA and Business Associate Agreement broadly indemnify CVS for vendor negligence/breaches, so Press America must reimburse $1.845M | Press America: indemnity does not cover an undisclosed, punitive payment; also lacked notice/ability to defend | Held: Even though indemnity language is broad, CVS cannot recover the $1.845M because it paid an unenforceable penalty without involving Press America; surety may challenge such settlements |
| Attorneys' fees recovery under indemnity | CVS: indemnity clauses authorize recovery of attorneys' fees | Press America: clauses do not unmistakably cover fees for litigation between the parties | Held: CVS may not recover attorneys' fees for this litigation under the indemnities; clauses not unmistakably clear to cover inter-party fees |
| Common-law indemnity and negligence claims | CVS: alternatively seeks common-law indemnity and negligence damages | Press America: contractual remedies govern; negligence claim barred by economic-loss rule | Held: Common-law indemnity and negligence claims precluded (valid contract controls; negligence claim barred by economic loss rule) |
Key Cases Cited
- Truck Rent-A-Ctr., Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (N.Y. 1977) (distinguishes enforceable liquidated damages from unenforceable penalties)
- JMD Holding Corp. v. Cong. Fin. Corp., 4 N.Y.3d 373 (N.Y. 2005) (reasonableness of liquidated damages judged at contract formation)
- Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487 (N.Y. 1989) (indemnity provisions must evince unmistakable intent and are strictly construed)
- Tokyo Tanker Co. v. Etra Shipping Corp., 142 A.D.2d 377 (App. Div. 1st Dep't 1989) (indemnity not read to impose obligations beyond scope or intent of parties)
- Feuer v. Menkes Feuer, Inc., 8 A.D.2d 294 (App. Div. 1st Dep't 1959) (surety/indemnitor may contest liability where indemnitee settles without involving indemnitor)
- Conner v. Reeves, 103 N.Y. 527 (N.Y. 1886) (consent judgments are presumptive only against sureties; surety may show lack of legal liability)
- Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d 186 (2d Cir. 2003) (attorneys' fees are not recoverable between contracting parties absent unmistakable contractual language)
- Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13 (2d Cir. 1996) (similar rule limiting indemnity for attorneys' fees to third-party litigation absent clear language)