NewCSI, Incorporated v. Staffing 360 Solutions, In
2017 U.S. App. LEXIS 13458
5th Cir.2017Background
- In August 2013 Staffing 360 Solutions (Purchaser) acquired Control Solutions International (CSI) from NewCSI under a stock purchase agreement containing: (1) Section 2.7 requiring Purchaser to calculate and pay 50% of the “Deferred Tax Benefit” by specified dates, and (2) Section 2.2(d) accelerating an Adjustment Amount / liquidated damages ($1.4M less any Earn Out paid) upon an "Adjustment Event" (including any breach).
- Parties disputed the meaning of “Deferred Tax Benefit”: NewCSI interpreted it as gross deferred tax assets (no netting of liabilities); Staffing 360 argued GAAP requires netting assets and liabilities and therefore no payment was due.
- At trial both sides presented experts; NewCSI’s calculations (and an auditor memo) valued gross deferred tax assets at $308,866, yielding a 50% payment of $154,433. The jury found Staffing 360 breached Section 2.7 and awarded $154,433 in actual damages.
- The district court applied the contract’s liquidated damages clause, credited prior earn-out payments, and entered judgment for approximately $1.306 million (actual damages plus accelerated liquidated damages less earn-outs paid).
- Staffing 360 appealed, arguing (1) insufficient evidence to support the jury verdict, (2) the liquidated damages clause is an unenforceable penalty or was miscalculated, and (3) the court abused its discretion by instructing the jury not to consider that a breach would trigger liquidated damages.
Issues
| Issue | NewCSI (Plaintiff) Argument | Staffing 360 (Defendant) Argument | Held |
|---|---|---|---|
| Sufficiency of evidence on breach of Section 2.7 | Evidence (negotiation testimony, auditor memo, expert) supports interpreting Deferred Tax Benefit as gross deferred tax assets and shows nonpayment | Jury disregarded uncontradicted defense expert testimony (GAAP netting; no reduction in Purchaser’s deferred taxes) | Affirmed: any evidence supports verdict; jury did not disregard uncontradicted expert testimony and record supports gross-assets reading |
| Enforceability of liquidated damages clause | Clause is a negotiated, valid liquidated-damages/acceleration clause triggered by breach; meant as estimate of damages | Clause is an unenforceable penalty or grossly disproportionate to actual damages | Affirmed: clause not forfeited as unenforceable on the merits (and procedurally forfeited); evaluated from contract formation, clause reasonable given breaches could vary and parties were sophisticated |
| Calculation of liquidated damages / earn-out credit | Court should credit only earn-outs paid before breach (consistent with clause language) | Should also credit earn-out payments made after breach and before judgment | Affirmed: district court correctly credited earn-outs paid through date of breach; post-breach payments not credited; Rule 60(a) inapplicable (no clerical error) |
| Jury instruction re: consequences of findings (jury note asking whether breach would trigger liquidated damages) | Jury was entitled to know effect of its answers; withholding that info could skew materiality determination | Court properly instructed jury not to consider consequences of its answers; materiality evaluated on factors given | Affirmed: no abuse of discretion; even if error, it was harmless because liquidated damages did not constitute a relevant forfeiture for materiality analysis |
Key Cases Cited
- United States ex rel. Wallace v. Flintco Inc., 143 F.3d 955 (5th Cir.) (standard that appellate court will not reverse if any evidence supports jury verdict)
- Webster v. Offshore Food Serv., Inc., 434 F.2d 1191 (5th Cir. 1970) (a jury may not arbitrarily disregard uncontradicted expert testimony on technical questions)
- Brown v. Ford Motor Co., 479 F.2d 521 (5th Cir. 1973) (similar limitation on disregarding uncontradicted testimony)
- OneBeacon Ins. Co. v. T. Wade Welch & Assocs., 841 F.3d 669 (5th Cir.) (Rule 50 preservation rules for motions for judgment as a matter of law)
- Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (N.Y. 1977) (liquidated damages clause treated as parties’ estimate of injury at contract formation)
- JMD Holding Corp. v. Congress Fin. Corp., 4 N.Y.3d 373 (N.Y. 2005) (tests for penalty: readily ascertainable damages at contracting or conspicuous disproportion)
- Van Duzer Realty Corp. v. Globe Alumni Student Ass’n., Inc., 24 N.Y.3d 528 (N.Y. 2014) (burden on party challenging liquidated damages; material breach limits on trivial-breach penalty rule)
- United States v. Ramos-Cardenas, 524 F.3d 600 (5th Cir.) (standard for review of jury-note responses as instructions)