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Law Digest — 4th US Circuit and Md. Court of Appeals — April 14, 2022

U.S. Court of Appeals for the 4th Circuit

Civil Practice; removal to federal court: Where the Baltimore mayor and city council sued oil and energy companies in state court for substantially contributing to greenhouse-gas pollution, global warming and climate change, and the suit was based entirely on state law, there was no basis for removal to federal court. Mayor and City Council of Baltimore v. BP PLC, Case No. 19-1644 (filed April 7, 2022).  

Employment; Maryland Trade Secrets Act: Where a company sought reasonable royalty damages for its former employee’s violation of the Maryland Trade Secrets Act, the district court erred by declining to award damages because the employee’s use was personal and not commercial. “Commercial use” is not a threshold requirement to obtaining reasonable royalty damages under Maryland law. AirFacts Inc. v. Amezaga, Case No. 20-2344 (filed April 6, 2022).

Maryland Court of Appeals

 Administrative; sales and use tax: Where a for-profit business was not the agent of not-for-profit tax-exempt hospitals, the tax court erred in holding the for-profit business was exempt from sales tax for supplies it purchased for use by the hospitals’ cleaning staffs. Broadway Services Inc. v. Comptroller of Maryland, No. 19, Sept. Term, 2021 (filed April 1, 2022).

U.S. Court of Appeals for the 4th Circuit

Civil Practice

Removal to federal court

BOTTOM LINE: Where the Baltimore mayor and city council sued oil and energy companies in state court for substantially contributing to greenhouse-gas pollution, global warming and climate change, and the suit was based entirely on state law, there was no basis for removal to federal court.

CASE: Mayor and City Council of Baltimore v. BP PLC, Case No. 19-1644 (filed April 7, 2022) (Judges Gregory, Thacker, FLOYD).

FACTS: The Baltimore mayor and city council sued defendants in state court for substantially contributing to greenhouse-gas pollution, global warming and climate change. Baltimore sued defendants under Maryland law. Chevron Corp. and Chevron U.S.A. timely removed the suit to federal court.

The district court granted Baltimore’s motion to remand. On appeal, this court reasoned that it could only analyze the propriety of removal under the federal officer removal statute and lacked appellate jurisdiction over the remaining seven grounds for removal. It ultimately held that federal officer removal was improper. The Supreme Court then held that this court is not divested of appellate jurisdiction over defendants’ other theories of removal and may consider all the bases for removal included within the district court’s remand order.

LAW: Defendants identify three “uniquely federal interests” at play: (1) the control of interstate pollution; (2) energy independence and (3) multilateral treaties. Defendants’ request for federal common law still fails, however, because they do not satisfy the necessary “precondition” of creating federal common law—the recognition of a significant conflict between a federal interest and state law’s application. And, even if defendants provided the court with a significant conflict between Maryland law and a federal interest that would justify a new federal rule of decision, the well-pleaded complaint rule would still forbid the removal of Baltimore’s complaint because it pleads no express invocation of federal common law.

Defendants invoke the Supreme Court’s older authorities that once (or possibly) recognized federal common law in the context of interstate pollution and greenhouse-gas emissions. The court cannot conclude that any federal common law controls Baltimore’s state-law claims because federal common law in this area ceases to exist due to statutory displacement.

Defendants next seek to establish federal jurisdiction under Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308 (2005), and its progeny, arguing “[s]everal aspects of [Baltimore]’s claims” present substantial and disputed federal issues. The court finds defendants’ invocation of Grable jurisdiction and the foreign-affairs doctrine fails to pass legal muster.

Next is defendants’ argument that Baltimore’s complaint is completely preempted by the Clean Air Act, or CAA. But here is simply nothing within the “text of the statute” suggesting that state-law claims are completely displaced by the CAA. And more specifically, the court does not see anything within the CAA requiring the complete preemption of state-law claims that seek to impose liability upon fossil-fuel products that are allegedly harmful to the public at large. The court joins other circuits and reject this complete-preemption argument.

Defendants next assert that federal jurisdiction is appropriate because a “substantial portion” of their operations occurred on federal land. However, federal-question jurisdiction is not conferred merely because some of defendants’ activities occurred on military installations. Here, all of Baltimore’s harms are pleaded within the confines and boundaries of Baltimore City.

Rejecting defendants’ jurisdictional invocation of the Outer Continental Shelf Lands Act, or OCSLA, the district court held that defendants failed to show a but-for connection between Baltimore’s causes of action and the Outer Continental Shelf. Defendants do not believe a but-for connection is a requirement under the OCSLA’s jurisdictional grant, and, even if it is, they maintain it is satisfied. The court disagrees with defendants on both fronts.

Defendants next maintain that Baltimore’s complaint is “related to” bankruptcy cases because it primarily seeks to hold them liable for the “pre-bankruptcy conduct” of a Chevron subsidiary. The court finds that Baltimore’s suit is too remote for bankruptcy removal to lie. Moreover 28 U.S.C. § 1452(a) provides that removal is inappropriate if the proceeding is a civil action by a “governmental unit to enforce such governmental unit’s police or regulatory power,” which the court finds is the case here.

Although defendants contend there is admiralty jurisdiction, Baltimore’s complaint never mentions any tort that occurred on navigable waters, and defendants do not identify one. Defendants seem to argue that their “floating oil rigs” and “floating drilling platforms” are vessels meeting the location test. Even if the court credits defendants with having vessels, Baltimore never alleges that any vessel on navigable waters caused any of its land-based injuries.

Defendants collectively seek removal based on: (1) fuel supply agreements between Citgo and the Navy Exchange Service Command from 1988 to 2012; (2) oil and gas leases administered by the Secretary of the Interior under the OCSLA and (3) a 1944 unit agreement between the predecessor of Chevron and the U.S. Navy for the joint operation of a strategic petroleum reserve in California known as the Elk Hills Reserve. None of these relationships are sufficient to justify removal under the federal officer removal statute in this case, either because they fail to satisfy the acting-under prong or because they are insufficiently related to Baltimore’s claims for purposes of the nexus prong.

Affirmed.

Employment

Maryland Trade Secrets Act

BOTTOM LINE: Where a company sought reasonable royalty damages for its former employee’s violation of the Maryland Trade Secrets Act, the district court erred by declining to award damages because the employee’s use was personal and not commercial. “Commercial use” is not a threshold requirement to obtaining reasonable royalty damages under Maryland law.

CASE: AirFacts Inc. v. Amezaga, Case No. 20-2344 (filed April 6, 2022) (Judges Agee, DIAZ, Floyd).

FACTS: AirFacts Inc sued its former employee, Diego de Amezaga, for breaching his employment agreement and misappropriating trade secrets under the Maryland Uniform Trade Secrets Act. In AirFacts, Inc. v. de Amezaga, 909 F.3d 84 (4th Cir. 2018), this court vacated the district court’s judgment for Amezaga on claims. On remand, the district court once again found for Amezaga.

LAW: The district court found that the flowcharts, home commission table and straight sales processing diagram all contained confidential information. So Amezaga breached the employment agreement by disclosing the flowcharts to Fareportal without AirFacts’s permission. And he violated the agreement by keeping the home commission table and straight sales processing diagram after his employment ended.

For AirFacts to recover damages, fees or costs under its indemnification clause, however, an employee must materially breach a material provision. The court agreed that paragraphs 2.2 and 4.2 were material provisions. But it determined that Amezaga only nominally breached them. This court affirms.

There’s no evidence his Amezaga’s conduct harmed or prejudiced AirFacts. Indeed, AirFacts hasn’t sought compensatory damages. Both the home commission table and straight sales processing diagram were several years old, and the record suggests Amezaga simply forgot he had them. And although disclosing the flowcharts to Fareportal “is a somewhat closer question,” AirFacts hasn’t proven any harm.

In response, AirFacts baldly asserts that Amezaga undermined the agreement’s fundamental purpose when he breached paragraphs 2.2 and 4.2, offering only general propositions about the importance of protecting confidential information. All this proves is that these paragraphs were material provisions. But by limiting the company’s ability to recover damages, attorneys’ fees and litigation costs to material breaches of the agreement, the indemnification clause expressly contemplates the potential for immaterial breaches of material provisions. So the court can’t say Amezaga materially violated the agreement simply because he breached material provisions, lest it render the material-breach requirement superfluous.

Second, AirFacts argues it has suffered harm from Amezaga’s breach. But it claims no actual damages. The only injuries the company alleges are the legal fees and forensic costs incurred in this litigation. This argument is circular.

AirFacts next argues that violated paragraph 4.2 when he downloaded flowcharts from Lucidchart, an online document-storage provider, using his AirFacts employee credentials. But paragraph 4.2 only covers “equipment, computer software, drawings, manuals, letters, notes, notebooks, reports, and all other material and records.” It doesn’t reach information a departing employee has in his head (nor could it). Without evidence that Amezaga kept a record containing his Lucidchart login credentials, AirFacts can’t prove he violated paragraph 4.2.

In its final contract claim, AirFacts argues the district court erred by holding Amezaga didn’t breach paragraph 4.2 when, on his last day with the company, he sent the documents to his personal email. The district court found that Amezaga “possessed implicit authority to keep these materials.”

But nothing in the employment agreement admits an exception to paragraph 4.2’s clear requirement that an employee return all documents containing confidential information. Nor does the district court cite any cases supporting an “implicit authority” exception to an agreement’s clear terms. Even under clear-error review, the court doesn’t agree that Amezaga had “implicit authority” to keep the proration documents. On remand, the district court should determine whether this breach was material and, if so, what (if anything) AirFacts is owed under the agreement’s indemnification clause.

AirFacts sought reasonable royalty damages for Amezaga’s misappropriation of trade secrets. The district court declined to award damages because it said AirFacts needed to show that Amezaga put the flowcharts to “commercial use,” and the way Amezaga used the flowcharts was personal, not commercial. Because “commercial use” is not a threshold requirement to obtaining reasonable royalty damages under Maryland law, the court vacates the district court’s ruling.

But the holding is limited. The court rejects only the district court’s dispositive ruling that AirFacts was ineligible for reasonable royalty damages because it failed to prove Amezaga put the flowcharts to commercial use. That’s not to say AirFacts is entitled to royalty damages or that the amount it requests is reasonable.

Affirmed in part, reversed in part, vacated in part and remanded.

Maryland Court of Appeals

Administrative

Sales and use tax

BOTTOM LINE: Where a for-profit business was not the agent of not-for-profit tax-exempt hospitals, the tax court erred in holding the for-profit business was exempt from sales tax for supplies it purchased for use by the hospitals’ cleaning staffs.

CASE: Broadway Services Inc. v. Comptroller of Maryland, No. 19, Sept. Term, 2021 (filed April 1, 2022) (Judges GETTY, McDonald, Watts, Hotten, Booth, Biran, Wilner).

FACTS: This case involves contracts between three non-profit tax-exempt hospitals of the Johns Hopkins Health System and Broadway Services Inc., a for-profit business. Under the contracts, Broadway provided management services to the hospitals, including purchasing and providing cleaning supplies for use by the hospitals’ janitorial staff. Broadway paid sales and use tax on these purchases.

The Comptroller of Maryland audited Broadway, and Broadway filed a request for an offset and refund of the taxes it paid to cleaning supply vendors, asserting that Broadway was reselling the cleaning supplies and was therefore exempt from paying sales and use tax. The comptroller denied Broadway’s requested refund and assessed additional unpaid taxes discovered from the audit. The tax court agreed that Broadway was not a reseller. It nevertheless concluded that, because Broadway  acted as the hospitals’ agent, it should not have been charged sales tax.

LAW: The hospital service agreements do not demonstrate an intent to create an express agency relationship. Thus, if an agency relationship existed between Broadway and the hospitals, it must have been an implicit relationship discerned by consideration of the three agency factors that courts use to determine whether parties’ conduct or acquiescence amounts to an agency relationship.

The first factor to consider is the agent’s power to alter the legal relations of the principal. The tax court erred as a matter of law regarding this agency factor because it considered Broadway’s relationship with the hospitals rather than Broadway’s ability to alter the hospitals’ legal relations with third parties. The first agency factor does not support the existence of an agency relationship between Broadway and the hospitals because Broadway’s purchases did not directly bind the hospitals, and no evidence presented shows that Broadway could have otherwise altered the hospitals’ legal relations.

The second factor to consider is the agent’s duty to act primarily for the benefit of the principal. The tax court also erred in its analysis of this agency factor because it failed to consider whether Broadway had a duty to act primarily for the benefit of the hospitals. There is not substantial evidence of record to demonstrate that Broadway owed any such duty. The second agency factor does not support the conclusion that an agency relationship existed between Broadway and the hospitals.

The third factor to consider is the principal’s right to control the agent. The tax court erred when considering this factor. According to the testimony of Broadway’s witness, the hospitals did not tell Broadway which cleaning supplies to purchase. Instead, Broadway ordered standard cleaning supplies, and in the event the standard order changed, the hospitals reviewed the cleaning supplies to ensure they were compliant with infectious control standards. This collaborative approval process does not equate to the principal’s control over the agent’s actions. Accordingly, the tax court’s decision is reversed.

The court additionally emphasizes that an agency relationship alone is insufficient for the agent to claim the principal’s tax-exempt status. For a tax-exemption to apply, the underlying act performed by the agent must still fit within an exemption set forth in the Maryland Code, and the parties to the agency relationship must comply with the procedures and requirements set forth in the Maryland Code when claiming a tax exemption.

The court next considers whether this court’s holding in John McShain v. Comptroller, 202 Md. 68 (1953), supports a conclusion that Broadway should not have been charged sales tax. In McShain, the building materials purchased were incorporated into the building’s final physical structure, unlike the cleaning supplies in this case. Even if the cleaning supplies were for use in carrying on the hospitals’ work, the cleaning supplies are not incorporated into the realty of the hospitals. Thus, McShain does not provide a basis for Broadway’s purchases to be exempt from sales tax.

Judgment of the Court of Special Appeals affirmed.