### IN THE UNI TED STATES COURT OFAPPEALS FOR THE FIF TH CIRCU IT

No. 12-30280

INTERNATIONAL MARINE, L.L.C.; INTERNATIONAL OFFSHORE SERVICES, L.L.C., Plaintiffs - Appellants,
v. DELTA TOWING, L.L.C., Defendant - Appellee.

Appeals from the United States District Court for the Eastern District of Louisiana

Before STEWART, Chief Judge, and KING and OWEN, Circuit Judges. CARL E. STEWART, Chief Judge: The district court entere d an order declaring enforceable under general maritime law a liquidated damages provision in a contract between DefendantAppellee Delta Towing, L.L.C. and Plaintiffs-Appellants International Marine, L.L.C. and International Offshore Services, L.L.C. Upon Plaintiffs’ motion, the district court certified the order as a final judgment pursuant to Federal Rule of Civil Procedure 54(b), and Plaintiffs now appeals. We AFFIRM. U n i te d S ta te s C o u rt o f A p p ea l s

F i ft h C i rc u i t 

### F I L E D Janu ary8, 201 3 Lyle W . Cayce Clerk Case: 12-30280 Document: 00512105709 Page: 1 Date Filed: 01/08/2013No. 12-30280 I. BACKGROUND A. Negotiations Lead to Vessel Sales Agreement On September 8, 2006, International Marine, L.L.C. entered into a Vessel 1 Sales Agreement (“VSA”) with D e lta Towing, L.L.C. (“Delta”) wherein International purchased two tugboats from Delta for $4 million. The companies’ agreement was preceded by several months of negotiati o ns between International’s president, Stephen Williams, and counsel, Peter Rouse, and the treasurer of Delta’s parent company, Darr e n Vo rst. Throughout the negotiations, Williams wa s c l e ar that the vessels were for “in house” use and would not be used to comp e t e w i th Delta. Delta initially declined to sell the vessels because it intended to use them to grow its business, but ultimately agreed to sell them subject to its standard non-compete language. The signed VSA includes a liquidated damages provision (“LD Provision”) that, inter alia , provided for a $250,000 payment for, inter alia , each violation of the n o n - c ompetition clause. This figure had been the subject of significant negotiati o n s between Rouse and Delta, and its magnitude had dropped

s i gn if i c a ntly over several rounds of negotiations, from a starting figure of $ 4 million per violation. B. Liquidated Damages and Related Provisions The VSA contains two relevant contract provisions. The first, Paragraph 11F, is a non - c o m p etition clause between International (Buyer) and Delta (Seller), which reads as follows:

F. Covenant Regarding Name/Use of Vessels/Hiring of Crews.

. . . Buyer represents that it is pu r c h asing the Ves s e l s for use with Buyer’s owned or chartered equipment in support of Buyer’s internal operations.

Inter natio nal Of

fs hore Services , L.L. C. se rved as Inter natio nal Mar ine, L.L. C

. ’ s 1 guarant or in the sub se quent ly signe d Vess el Sale s Agreem ent. Collec tivel y, we ref er to both com pani esas “ Inter natio nal. ” 2 Case: 12-30280 Document: 00512105709 Page: 2 Date Filed: 01/08/2013No. 12-30280 Inasmuch, Buyer covenants and agrees that neither it nor any of its affiliated companies wil l c h arter out or enter into towi n g c o ntracts or otherwise utilize or permit anyone else to utilize the Vessels for hire (collectively “ C h a rters Out”) in the inland or offshore waters of the U.S. G u l f o f Mexico

. . . (the “Covered Trade”) for a period of five (5) years from the date of this Agreement (the “ C o vered Term”).

. . . Notwithstanding the foregoing, in the event Bu y er or its aff i l i ated companies wish to Charter Out either or both of the Vessels in the Covered Trade during all or part of the Covered Term, Buyer shall be obligated to time charter the applicable Vessels to Seller for Seller to enter into Charters Outwith customers acceptable to Seller . . . .

V SA ¶ 11F (emphasis added). Thus, in the event International decided t o compete with Delta for third-party charters, it was first obligated to notify Delta and give it the option of operating charters itself. If Delta chose to operate the charter, it would remit ninety percent of the gross charter fee to International. If Delta was unable to secure charter customers for the vessels within a reasonable period of time, International w a s permitted to operate its own charters and would remit ten percent of the charter fee to Delta. Additionally, the charter hire rate charged to customers had to be reasonably agreeable to both Delta and International. The VSA’s LD Provision, Paragraph 11G, reads as follows: G. Liquidated Damages. The consideration for the provisions in paragraph 11F and this paragraph 11G is that the above Purchase Price is below the fair market price of the Vessels at the time of sale and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged and confessed. In the event Buyer or its affiliated companies or o t her subsequent owner, manager, o r charter of the Vessels vi o l ates any of the covenants and agreements in paragraph 11F, Buyer shall pay to

3 Case: 12-30280 Document: 00512105709 Page: 3 Date Filed: 01/08/2013No. 12-30280 Seller as liquidated damages, and no t as a penalty, the greater of (i) the sum of Two Hundred Fifty Thousand and no/100 Dollars ($250,000.00) per incident or occurrence o r (ii) if applicable the gross amount of revenue earned in violat i on of such covenant and agreement with respect of the incident or occurrence in question

. . . . All liquidated damages shall be payable within 30 days of notice of the violation. It is understood that the resultant damages of any such brea c h o f the c o v e n a n t s a n d a g r e e m e n t s c o n t a i n e d i n paragraph 11F would be difficult to ascertain with certainty but that the amount stipulated herein is a good faith reasonable estimate of the damages Seller would suffer

. . . . In no e v e nt shall any party or th e affiliated companies thereof or the respective shareholders, officers, directors, employees, agents, or representatives thereof circ umvent or attempt to circumvent the provisions of paragraph 11F or this paragraph 11G by any means, direct or indirect.
VSA ¶ 11G (emphasis added). C. Delta Discovers Breach of VSA ¶ 11F In July 2008, Delta notified International that it had become aware that the vessels had been chartered without Delta ’ s knowledge in violation of the VSA. International responded in late November 2008 by remitting a check for $53,293.33, which it claimed was the extent of the “owed commissions.” Delta refused to accept the check as the full amount owed and requested material backing up International’s figure. In early 2009, while conducting an audit with

one of Delta’s employees, International discovered that it owed Delta an

a d di ti o n a l $37,657, which it remitted in another check. Delta refused to negotiate this check as well, a n d l a t e r sent a demand letter for the liquidated damages amount multiplied by the alleged thirty-six charters that breached the

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V SA, which totaled $9 million. International has conceded it breach e d th e contract by operating twenty-seven charters. D. International Seeks Declaratory Judgment In December 2009, Delta sued I nt e r n a t ional in Texas state court for breaching the VSA, including for failing to timely remit m u l t iple charter payments. The VSA’s forum selection clause mandates the parties resolve their dispute in the United States District Court for the Eastern District of Louisiana. Therefore, International filed the instant suit, seeking a declaratory judgment that it had no t b r e a c h e d the VSA and that the LD Provision was an unenforceable penalty as a matter of law. Delta counterclaimed f or breach of contract, seeking enforcement of the LD Provision. Judge McNamara was assigned to the case. The parties engaged in discovery, including c o n du c ting depositions. On March 11, 2011, in a detailed and well-reasoned Order and Reasons, 2 Judge McNamara granted Delta’s motion for sum m a ry j u dgment in part and denied International’s motion, finding the LD Provision was enforceabl e . The McNamara Order declined to resolve the issue of damages. Subsequently, Judge McNamara retired, and the case was reassigned to Judge Fallon. International then filed a Motion to Vacate pursuant to Federal Rule of Civil Procedure 60(b) and a Motion to Reconsider based on additional testimony obtained from Delta’s former damages expert and Chief Operating Officer, Barry Matherne, who had left Delta since his previous deposition. On February 13, 2012, the district court denied International’s motion in its en t irety and reaffirmed that the LD Provision was enforceable. The Fallon Order specifically declined to revisit the 3 merits of the McNamara Order, and instead focused on wh e th er the new

H ere inaf

ter , wew ill ref

er to this or deras t he “M cNa mar a O rd er. ” 2

H ere inaf

ter , wew ill ref

er to this or deras t he “Fall on Or der .” 3 5 Case: 12-30280 Document: 00512105709 Page: 5 Date Filed: 01/08/2013No. 12-30280

Matherne deposition changed the analysis as to whether the LD Provision was enforceable. The Fallon Order concluded that it did not. International then moved for Judge Fallon to certify the judgment as final

or for interlocutory appeal. On March 16, 2012, Judge Fallon certified the Fallon Order as a final judgment pursuant to Federal Ru l e o f C ivil Procedure 54(b). International timely appealed. 3 II. DISCUSSION At its core, International’s argument is that both the McNamara and Fallon Orders erre d when they held the LD Provision was enforceable. International raises seve r a l specific points of error in the Orders, including improper consideration of the parties’ negotiating capacities and the application of an improper standard of review. W e r eview a grant of summary judgment de novo, applying the same standard as the district court. QT Trading, L.P. v. M/V Saga Morus , 641 F.3d 105, 108 (5th Cir. 2011) (citation omitted). Summary judgment is appropriate when “there is no genuine disp u t e a s to any material fact and the movant is

e n titled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). “Factu a l

c o ntroversies are construed in the light most favorable to the nonmovant, b u t only if both parties have introduced evidence showing that an actual controversy exists.” QT Trading, 641 F.3d at 108 (citation and internal quot a ti o n m arks omitted). We review the district court’s judgment, and our analysis need not be based solely o n the district court’s stated reasons. See Cambridge Integrated

De lta brie fly ass ert s that Inter natio nal has not pr ope rly app ealed the Mc Nam ara and 3 Fallon Or der s. Altho ugh De lta doe s not pr es s this argum ent, we are “obl igated to exam ine the bas is forou r juris dic tio n, suas ponte , if nece ss ary. ” In reCor tez , 457 F.3d448 , 453 (5t h Cir

. 2006) (c itation and inte rnal quot atio n mar ks om itt ed)

. We have det erm ined that we have juris dic tio n o ver this ap pea l. Additio nally, the VSA st ates that it is governe d acc ording to genera l mar itim e law and Louis iana law , if app licable. Jud ge M cNa mar a d ete rm inedt he LD Provis ion wa s subjectt o genera l m arit im e l aw , a d ete rm inati on the partie s have not app ealed

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Servs. Grp., Inc. v. Concentra Integrated Servs., Inc. , 697 F.3d 248, 253 (5th Cir. 2012) (citation and internal quotation marks omitted) (“We are not limited to the district court’s rea s o n s for its grant of summary judgment and may affirm the district court’s summary judgment on any ground raised below and supported by the record.”). The interpretation of maritime contract terms is a matter of law we review de novo. One Beacon Ins. Co. v. Crowley Marine Servs., Inc. , 648 F.3d 258, 262 (5th Cir. 2011). When interpreting maritime contracts, federal a d m i r al ty law rather than state law applies. See Har-Win, Inc. v. Consol. Grain & Barge Co. , 794 F.2d 985, 987 (5th Cir. 1986) (collecting citations). Whether a l i qu i d a t ed damages clause is a penalty is a question of law. Louis Dreyfus Corp. v. 27,946 Long Tons of Corn , 830 F.2d 1321, 1331 (5th Cir. 1987) (citation omitted). The burden of proving that a liquidated damages clause is a penalty is on the party urging for it to be viewed as a penalty. Farmers Exp. Co. v. M/V Georgis Prois , 799 F.2d 159, 162 (5th Cir. 1986) (citation omitted). A. Applicable Law In interpre t i n g liquidated damages clauses in maritime contracts, we apply th e Restatement (Second) of Contracts Section 356 comment b (the “Restatement”) to determine whether such a clause is “so unreasonably large as to be a penalty.” We have explained the comment’s two-part test as follows:

The first factor is the anticipated or actual loss caused by the b r e ach. The amount fixed is reasonable if it approximates the actua l l o s s that has resulted from a particular breach, even though it may not approximate the loss that might have been anticipated under other possible situations, or if the breach approximates the loss anticipated at the time o f m a king the contract, ev e n though it does not approximate the actual loss. The second factor is the difficulty of proof of loss. Th e greater the difficulty of proof of loss, the more flexibility

7 Case: 12-30280 Document: 00512105709 Page: 7 Date Filed: 01/08/2013No. 12-30280 is allowed in appr o ximating the anticipated or actual harm.
Farmers Exp. , 799 F.2d at 162 (citations omitted). Our circuit precedent in the context of maritime liquidated damages is limited to two cases: Farmers Export , 799 F.2d 159, and Louis Dreyfus , 830 F.2d 1321. Both concern liquidated damages that attached when a vessel overstayed its timeslot at a berth. In Farmers E x p o r t , w e upheld a $5,000 per hour liquidated dama g e s c h arge as reasonable and not a penalty. 799 F.2d at 165. In reaching this co n c l u sion, we noted that while “the reasonableness of the damages [is] a question of law, in making that determination we r e ly o n th e findings of fact of th e district court.” Id. at 164. We therefore viewed as persuasive the district court’s factual findings that $5,000 w a s a reasonable forecast of the grain facility owner’s damages

. Id. at 165. To reach that conclusion, the district court considered expert testimony about actual damage estimates and the charges levied by other grain elevators. Id. at 164. In Louis Dreyfus , we refused to enforce a liquidated damages clause that assessed a $30,000 per day liqui d at e d d a m a ges charge to a ship that failed to vacate its loading berth. 830 F.3d at 1332. We sta t e d th a t the “district court

was entitled to find” th at th e c harge, which was based on a “reasonable preestimate of” the damages that would accrue in a full calendar day, “is excessive when the vessel occupies the berth for a much shorter time.” Id. B. Analysis Our review of the record shows that Delta’s concerns about competition—an d I nternational’s assurances that it would not compete with Delta—were critical in the negotiations that led to the sale of the vessels, and they unde r p i n the LD Provision. This conclusion anchors our analysis of the Restatement’s factors.

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Pursuant to our p re c e de nt , w e f ir s t ex a min e the second Restatement factor “because the more difficult it is to prove damages, the m o r e l e e w ay the court allows in determining whether the liquidated damages are reason ab ly r elated to anticipated damages.” Farmers Exp. , 799 F

. 2 d at 162. Contrary to International’s assert i ons, the damage that would accrue from International’s b reach of VSA Paragraph 11F was not just the ten-percent fee International owed when it chartered out the vessels. Instead, and more importantly, it was also Delta’s inability to prevent competition, leading to the potential los s of customers, business opportun i t i e s and market share due to International’s failure to notify Delta of its intent to compete. International does not dispute the difficulty in estimating damages before

a non-competition clause is breached. We have previously recognized that it is difficult to calculate the damage that results when a covenant not to compete is breached. See Blase I n d u s. Corp. v. Anorad Corp. , 442 F.3d 235, 238 (5th Cir. 2006) (“[C]ovenants not to compete often include a liquidated damages provision to avoid the difficulty of calc u l a t i ng damages.”). The McNamara Order considered testimony about the difficulty of estimating damages ex ante , and we agree with its conclusion that these damages are difficult to prove. Ther efore,

we have—and the district courts properly had—“more leeway” in determining whether the LD Provision is reasonably related to anticipated damages. Farmers Exp. , 799 F.2d at 162. In reaching its decision as to the first Restatement factor, which assesses the reasonableness of the LD Provision, the McNamar a O r d e r assessed the expert testimony as to potential ch art er contracts that Delta could have obtained and the typical charter fee at which the vessels had been hired out before they

were sold. Th e testimony showed that there was variability in the length of charter contracts, but that a single contra c t c o uld last for as long as several years. The testimony also showed that day rates for charters in late 2006 and

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2007 could range up to several thousand dollars. Thus, a single charter contract could reasonably generate substantial revenue equal to o r in excess of the LD Provision. Moreover, as the McNamara Order noted, “International Marine has presented no evidence suggesting that [Delta’s] concerns r e g a r ding loss of market share, future customers or future business were unreasonable or unrelated to [Delta’s] anticipated loss.” R. at 3742. We follow Farmers Export in finding persuasive the district court’s careful factual findings as to whether the LD Provision was a reasonable forecast of damages. Adopting the language of the McNamara Order, we h o l d that “[l]ooking at the contract at the time it

was made, ex ante breach, this court cannot bi c ker with the $250,000 per

occurrence forecast.” R. at 3746. International has not met its burden to prove 4 that the LD Provision was a penalty. We thus hold th a t th e district court properly held the LD Provision enforceable. 5 III. CONCLUSION For the foregoing reasons, we AFFIRM the district court’s judgment.

Intern ational plac es cons ide rable em phas is on the tot al amo unt of liquid ated damages 4 De lta hasc laim ed. Not wi ths tanding t he Fallon Or der ’sexp res s res ervat ion of the dam ages iss ue for tri al, we note that the tot al dam ages clai me d are so large bec a u s e Inter natio nal brea ched the non- com pet itio n pr ovis ion at leas t tw enty- se ven tim es . We are loat h to find the LD Pro visi on unenf

orc eablemer ely beca useInternat ional ad opt ed a pat ter n of dis regar ding its c ontr act ual obligat ions

. Bec aus e w e h ave d ete rm inedthe dis tri ct courts ’ judgm ent wa s correc t, w e n eedno t 5
reac h Inter natio nal’s argum ents rela ted to the dis tri ct cou r ts ’ allege dly im pr ope r reas oning and st andar d of revie w. We als o dec line to dec ide wh ethe r the Rest atem ent’ s “extrem e cas e” language app lies to this sit uatio n. See Rest atem ent (S eco nd) of Contr act s § 356 com me nt b (“ If, to tak e an extr em e cas e, it is clea r that no los s at all has occ urr e d , a p r o vi s i o n fixin g a sub st antial sum as dam ages is unenf orc eable .” ). Mat herne ’s tes tim ony that he wa s unaw are of any d ama ge t o D elt a’s c om pet itivep os itio n as a res ult of Internat ional’ s brea ches is m ore pr obat ive of the dif

fic ulty of pr oving suc h dam ages than of wh ethe r dam age act ually occ urr ed. 10 Case: 12-30280 Document: 00512105709 Page: 10 Date Filed: 01/08/2013