Opinion ID: 4649278
Heading Depth: 2
Heading Rank: 1

Heading: Damian’s Billing Practices

Text: The Damian Services Corporation provides various ad‐ ministrative and payroll services to independent temporary staﬃng companies (“temp agencies”). To explain the parties’ dispute, we must explain how Damian serves and bills its cli‐ ents. The baseline level of service, oﬀered to “money‐only” clients, is that Damian provides short‐term payroll funding to pay the temp agencies’ employees. Damian oﬀers other ser‐ vices to “full service” clients. Although Damian contracted with its temp agency clients, it invoiced the end‐user compa‐ nies that hired the temporary workers. The end‐user employ‐ ers would then pay Damian, which would, in turn, send the payments to the temp agencies after taking its cut as a fee for its services. Damian encourages its client staﬃng agencies to obtain prompt payment from the end‐user employers. If the end‐ user employers pay quickly, then the temp agencies can pay Damian faster and will be eligible for a discount. If an end‐ user waits too long and payment to Damian is delayed, Damian assesses a late fee to its client. The parties agree that Damian negotiated these discounts and fees (including tim‐ ing) with every client temp agency. Despite variations in rates 4 Nos. 19‐2300, 19‐3122, & 19‐3235 and other terms, however, the underlying client contracts al‐ ways pegged these discounts and late fees to the invoice date. The parties dispute the exact contours of Damian’s billing and invoice‐dating practices before the 2009 change. In broad brushstrokes, Damian would generally wait until it had re‐ ceived all the necessary information about each temporary employee’s hours and rates before issuing an invoice. The in‐ voice would thus be issued and dated some time after the workweek had ended—generally on a Friday, five business days after the preceding Sunday. Damian marketed this delay in processing payment as a benefit to potential clients. In 2009, however, Damian began dating its invoices as of the last day of the workweek, that is, Sunday. The date listed on an invoice was thus earlier than not just the generation and remission of the invoice, but also, in some cases, even Damian’s receipt of the information needed to generate it. This change gave Damian’s clients a narrower window to re‐ ceive early‐payment discounts and a larger chance of being hit with late‐payment fees. Sterling refers to this practice as a “backdating” scheme. For the sake of neutrality, we refer to it more blandly as “the 2009 change.” There is evidence that Damian took steps to hide the 2009 change from its clients. Damian never publicized the change, although it had previously alerted its clients to other changes in business practices that could aﬀect them. There is also evi‐ dence that Damian developed a script for its employees to fol‐ low if a client ever complained. Employees were instructed to tell the complaining client that they would “look into it,” would seek approval for a “change back” to the previous bill‐ ing scheme, and, if a change were approved, would refund fees and tell the client that Damian would have caught the Nos. 19‐2300, 19‐3122, & 19‐3235 5 (deliberate) dating change by the end of the quarter. Several clients noticed and complained, but dozens of other did not. B. Sale, Investigation, and Indemnification Demand More than five years later, on February 27, 2015, the Sellers sold Damian to Sterling for a little over $25 million. Under what we call “the Agreement,” the Stock Purchase Agreement at the center of these appeals, Sterling deposited two million dollars of the purchase price in an escrow account. If no dis‐ putes arose by December 31, 2015, one million dollars would be released to the Sellers, and the rest would be released in August 2016, eighteen months after closing. In July 2015, soon after the closing, a former Damian em‐ ployee began contacting Damian clients to expose the 2009 change. Sterling, which says it had not known before about the 2009 change, quickly investigated. It retained the law firm Wachtell, Lipton, Rosen & Katz to investigate. Sterling also placed an internal hold on all documents relevant to the in‐ vestigation and told Damian’s temp agency clients that it had uncovered a billing discrepancy. By August 11, 2015, Wachtell Lipton had prepared a preliminary memorandum on poten‐ tially fraudulent billing practices. The next day, Wachtell Lip‐ ton discussed its initial findings in a telephone call with the U.S. Attorney’s Oﬃce in the Northern District of Illinois as a potential case of corporate fraud. Sterling also hired a forensic accounting firm, AlixPartners, which calculated that if the 2009 change had not occurred, Damian’s clients would have saved $1,289,916 in discounts and avoided late fees. As Wachtell Lipton wrapped up its investigation, it drafted another memorandum, dated November 27, and pre‐ sented it to the U.S. Attorney’s Oﬃce on December 2. The 6 Nos. 19‐2300, 19‐3122, & 19‐3235 prosecutors declined to take up the case. Nine days later, on December 11, 2015, Sterling sent the Sellers a formal notice demanding indemnification under the Agreement. Before the Sellers responded, Sterling contacted each of Damian’s then‐ current clients that it had determined had been overcharged and oﬀered full refunds on the overcharges. The Sellers rejected Sterling’s demand. They said that the thirty‐page demand did not provide suﬃcient detail on how the total amount was computed. The Sellers refused to partic‐ ipate in the Agreement’s process for resolving indemnifica‐ tion claims. As a result of the dispute, no escrow funds have been released. C. Procedural History Sterling filed this suit in September 2016 seeking indemni‐ fication under the Agreement. Sterling’s claims arise under state law; federal jurisdiction rests on diversity of citizenship. The operative complaint alleges that the Sellers’ failure to dis‐ close the 2009 change and its consequences breached the Sellers’ representations and warranties in the Agreement, and that the Sellers breached the Agreement by refusing to indem‐ nify Sterling. The Sellers counterclaimed for, among other things, a declaratory judgment holding that Sterling is not en‐ titled to indemnification and that the Sellers are entitled to pre‐ and post‐judgment interest at 12% on the money in es‐ crow. Sterling and the Sellers filed cross‐motions for summary judgment. Sterling argued that undisputed facts showed that the Sellers are liable for breaching warranties and representa‐ tions in the Agreement. The Sellers argued that Sterling failed Nos. 19‐2300, 19‐3122, & 19‐3235 7 to follow the Agreement’s procedures for demanding indem‐ nification. In the alternative, the Sellers argued that the 2009 change of invoice dates did not actually breach any underly‐ ing client contracts, so that no representations or warranties were breached. The district court granted summary judgment for the Sellers on the narrow procedural ground that Sterling’s in‐ demnification notice was too late and that the delay preju‐ diced the Sellers. Sterling appealed. After some confusion about whether any counterclaims remained pending, the dis‐ trict court reopened the case and then denied the Sellers’ mo‐ tion for pre‐ and post‐judgment interest. Although the district court did not issue an amended Rule 58 judgment, both sides appealed.