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SAUDI BASIC IND. CORP. v. EXXONMOBIL CORP.
April 3, 2002
SAUDI BASIC INDUSTRIES CORPORATION, INDIVIDUALLY AND IN THE NAME OF, AND ON BEHALF OF, AL-JUBAIL PETROCHEMICAL COMPANY, A PARTNERSHIP, PLAINTIFF,
EXXONMOBIL CORPORATION, DEFENDANT. EXXONMOBIL CORPORATION, EXXON CHEMICAL ARABIA, INC., AND MOBIL YANBU PETROCHEMICAL COMPANY, INC. PLAINTIFFS, V. SAUDI BASIC INDUSTRIES CORPORATION, DEFENDANT.
The opinion of the court was delivered by: Walls, District Judge
This is a complicated dispute concerning the alleged misuse of a patent
and alleged overcharges of royalties to a partnership. In the first
lawsuit, Civil Action No. 98-4897(WHW) ("NJ-I"), Plaintiff Saudi Basic
Industries ("SABIC") moves to clarify or reform a March 10, 2000
Stipulation where it agreed not to practice a technology that is the
subject of a patent dispute. SABIC also moves pursuant to Rule 12(c) for
partial judgment on the pleadings to strike Defendant ExxonMobil's
("Exxon") defenses of unclean hands and setoff. Exxon cross-moves to
dismiss the Complaint pursuant to Rule 19 for SABIC's failure to join
necessary and indispensable parties. The motion for clarification or
reformation of the March 10 Stipulation is denied; the motion for partial
judgment on the pleadings pursuant to Rule 12(c) is also denied. Exxon's
cross-motion to dismiss pursuant to Rule 19 is denied; SABIC is not
required to join either ECAI or KEMYA as an indispensable party.
In the second lawsuit, Civil Action No. 00-3841 (WHW) ("NJ-II"), SABIC
moves to dismiss the complaint of Exxon based on the Foreign Sovereign
Immunities Act, as well as on other jurisdictional grounds. Exxon moves
to consolidate the NJ-I and NJ-II actions into a single lawsuit. The
motion to dismiss is denied; the motion to consolidate is granted.
FACTS AND PROCEDURAL BACKGROUND
In the 1970's, SABIC approached a number of potential partners about
the possibility of forming joint ventures in Saudi Arabia to manufacture
polyethylene. The negotiations culminated in the formations of two joint
ventures in 1980; one with Yanbu, the other with ECAI. Exxon is not a
direct party to either of these agreements.
The first joint venture was formed by SABIC and Yanbu on April 19,
1980, and created the Saudi-Yanbu Petrochemical Co. ("YANPET"). The
second joint venture was entered into by SABIC and ECAI on April 26,
1980, and established the Al-Jubail Petrochemical Co. ("KEMYA"). Both
YANPET and KEMYA are limited liability partnerships existing under the
laws of Saudi Arabia, and in the business of manufacturing polyethylene
in Saudi Arabia.
Exxon asserts that both joint venture agreements provide that the
agreements, including their Annexes*fn1 "when executed", constitute the
"`whole agreement' between the Partners . . . " (Joint Venture
Agreement, Art. 18.1 (emphasis added)) So, according to Exxon, the
December 22, 1980 Service Agreement that is the subject of the NJ-I
action, is expressly incorporated into the joint venture agreements,
creating a "single package" of rights and obligations. This overall
scheme required participation by Exxon and Mobil (not just ECAI and
Yanbu), and Exxon argues that all parties understood that Exxon and Mobil
(now "Exxon") were intended to benefit from the joint venture
agreements. SABIC strongly refutes this version of the facts and asserts
that the Service Agreement and Joint Venture Agreements constitute
By its amended complaint, SABIC seeks a declaration that KEMYA
has ownership rights in proprietary information, including trade
secrets and U.S. Patent No. 5,352,749, by virtue of a December 22,
1980 Service Agreement between KEMYA and Exxon.
Pursuant to the Service Agreement, Exxon, acting through its
unincorporated division Exxon Chemical Company ("ECC"), agreed to provide
certain services to KEMYA from time to time, including engineering,
administrative, and technical services related to construction of a
petrochemical plant at Al-Jubail in Saudi Arabia. (Am. Compl. ¶ 11.)
Under the Agreement, processes or patents developed as a result of
services provided under the agreement were deemed the property of KEMYA,
subject to royalty-free licenses
given to Exxon and its affiliates. The Agreement is governed by Saudi
In 1991, in an attempt to expand the capacity of its Al-Jubail
petrochemical facility in Saudi Arabia, KEMYA requested that Exxon conduct
a study of the plant reactors' ultimate capacity ("the URC study"). (Am.
Compl. ¶¶ 19-21.) In connection with that request, Exxon was given
access to proprietary information belonging to KEMYA. Id. ¶ 22. SABIC
alleges that such access occurred "well prior to the filing of the last
of the patent applications that led to the '749 patent." The URC study
was completed by July 1991.
SABIC claims that Exxon has improperly withheld the results of the URC
study, as well as other aspects of KEMYA's operations, and violated the
'749 patent. Further, SABIC alleges that in March 1992, Exxon filed an
application for a patent concerning the subject matter of the URC study
without authorization. In October 1994, the U.S. Patent and Trademark
Office issued the '749 patent, entitled "Process for Polymerizing
Monomers in Fluidized Beds," to the holding company Exxon Chemical
Patents, Inc. ("ECPI") as assignee. That patent describes a method to
increase polyethylene production through a process known as "Super
Condensed Mode Technology" ("SCM-T"). SABIC charges that Exxon illegally
licensed or otherwise conveyed rights in the '749 patent and other KEMYA
trade secrets without permission.
In the NJ-I action, SABIC brings suit on behalf of KEMYA for breach of
the Service Agreement and implied covenants, specific performance
(delivery of the '749 patent and related trade secrets), misappropriation
of trade secrets, conversion, tortious interference with prospective
economic advantage, unfair competition, and unjust enrichment. SABIC has
not joined the other partner, ECAI, as a plaintiff because in its view,
ECAI as a subsidiary of Exxon, would not sue its related corporation.
SABIC claims that Exxon expressly acknowledged SABIC and KEMYA's right
to contest Exxon's claim of ownership to the technology at issue here.
(Am. Compl., Ex. A.) The NJ-I complaint alleges that SCM-T belongs to
KEMYA, and that it was wrongfully misappropriated by Exxon. Exxon
disputes this argument, and avers that it had a right to practice SCM-T.
(Answer ¶ 10.)
The NJ-II Action — Unipol License
On or about September 28, 1980, SABIC entered into an agreement with
Union Carbide Corp. ("UCC"), to have the exclusive sublicense for a
gas-phase process to manufacture polyethylene in Saudi Arabia. This
technology is referred to as Unipol process. In exchange for its
exclusive license, SABIC pays UCC, among other things, a running
royalty. (Del. Compl., ¶ 10.)
SABIC entered into two sublicense agreements with YANPET and KEMYA,
effective October 15, 1980, which gave those partnerships the right to
use Unipol process in their respective plants to manufacture
polyethylene. Under the sublicense agreements, both partnerships were
required to pay SABIC a running royalty.
In NJ-II, Plaintiffs Exxon, Yanbu and ECAI claim that SABIC overcharged
the partnerships by collecting royalties at a higher rate than agreed
upon (the "royalty overcharges").
SABIC and Exxon sharply disagree as to the nature of their overall
contractual arrangements. As mentioned, they entered into a joint venture
agreement in April 1980. The parties agree on this basic point, but
disagree on everything that follows. According to Exxon, the joint
venture agreement served as an overall operating agreement for the
parties, incorporating any future agreements or amendments. SABIC denies
this and argues that the April 26, 1980 Joint Venture Agreement, the
subject of NJ-II, and the December 22, 1980 Service Agreement, the
subject of NJ-I, are separate and distinct and should not be joined in
the same action. The Court now sets forth the most plausible nature of
the parties contractual relationship, for that determination guides much
of the analysis to follow.
The April 1980 Joint Venture Agreement entered into by SABIC and ECAI
described the parties' multiple responsibilities for the partnership
arrangement to manufacture polyethylene in Saudi Arabia. The Court agrees
with Exxon and finds that the Joint Venture Agreement provided the
overall contractual arrangement between the parties. This view is
enforced by Article 18.1 of the Joint Venture Agreement,*fn2 which
clearly states that the Joint Venture Agreement includes "[a]nnexes
hereto, when executed" which constitute the "whole agreement" between the
parties. The Joint Venture Agreement supersedes any other agreement or
correspondence between the parties. Because the December 22, 1980 Service
Agreement is "Annex VI" to the April 26, 1980 Joint Venture Agreement, it
becomes part of the whole agreement between the parties. (Dec. 22, 1980
Service Agreement ¶ 10.1.)
With this in mind, the Court now analyzes each of the six motions
brought by the parties in the NJ-I and NJ-II cases.
1. Motion to Clarify or Reform the March 10, 2000 Stipulation
SABIC seeks to clarify, and if necessary, reform the March 10, 2000
Stipulation ("March Stipulation") wherein it agreed not to practice
SCM-T. SABIC seeks permission for its affiliated plants to operate at the
lower range of the super-condensed mode, namely an allowable usage of up
to 22 wt. % condensed phase when manufacturing polyethylene.
The March 10, 2000 Stipulation
The March Stipulation arose from SABIC's motion to dismiss Count IV of
Exxon's Amended Counterclaims: Exxon accused SABIC of breaching its
fiduciary duty to KEMYA by encouraging certain SABIC affiliates,
including SHARQ, to use SCM-T. SABIC moved to dismiss, and contended that
it had not conveyed SCM-T information to affiliates, and that none,
including SHARQ, had any intention of using SCM-T without proper
authorization. Exxon agreed to a dismissal of Count IV's counterclaims
based on SABIC's representations in the March 10, 2000 Stipulation which
was signed as an Order of this Court on April 3, 2000.*fn3
In April 1997, Exxon and UCC had formed a 50/50 joint venture,
Univation, to commercialize, license and enforce SCM-T patents held by
Exxon. The parties expressly agreed that SABIC could operate its recycle
gas phase at or below 22 wt. %. (Agozzino Decl., Ex. A ¶ 12.02.)
Schedule 12.02 identifies "SABIC" as the exempt licensee. (Id. at
According to SABIC, its management was unaware of the Univation
Agreements and the fact that SABIC and its affiliates had been formally
granted the right to practice "up to" 22 wt. % condensed. (Dr. Al-Ubaid
Decl., ¶¶ 12, 13).
SABIC contends that as a result of this agreement, Exxon and UCC had
covenanted between themselves and for Univation, that a limited portion
of SCM-T patent rights (up to 22 wt. % condensed) would not be enforced
by Univation against SABIC and its affiliates. SABIC's management later
learned of the existence of these agreements.
Exxon contends that the Univation Agreements are immaterial to the
present dispute and were produced long before the March Stipulation.
According to Exxon, SABIC knew of the Univation Agreements before the
Stipulation, and cannot now claim ignorance. In addition, "before
summer", Dr. Al-Ubaid of SABIC knew of SHARQ's plans to practice over
17.4 wt. %. (Exxon Mem. In Opp'n to Mot. to Clarify ("Exxon Br.") at 8,
citing 10/28/00 Al-Ubaid Dep. at 666.) However, SABIC did not notify
Exxon or the Court of the breach of the March Stipulation.
Exxon argues that the Univation Agreements, despite assertions by
SABIC, do not permit SABIC or SHARQ to operate between 17.4 and 22 wt. %
condensed. Exxon argues: (1) that Schedule 12.02 of the Univation
Agreements does not make any reference to SABIC's affiliates; (2) ¶
12.02 of the Univation Agreements does not apply to SCM-T information at
or below 22 wt. %; (3) nothing in the Univation Agreements (or in the
law) supports SABIC's interpretation that SABIC or SHARQ is a third-party
beneficiary; (4) ¶ 12.02 of the Agreements is neither a license nor a
covenant not to sue. According to Exxon, the Univation Agreements are
agreements between Univation and UCC and provide that Univation will not
enforce the SCM-T patents in certain situations.
Permission to Use SCM-T up to 22 wt. %
Despite this Court's April 3, 2000 Order, SHARQ switched to higher
condensed phase operations to cool its recycle gas. SHARQ decided to run
plant tests up to 22 wt. % condensed as permitted by the Univation
Agreements (but forbidden by the April 3 Order). SABIC claims that it did
not know of SHARQ's plans until after the April 3 Order was executed.
SABIC then sought permission from KEMYA for SHARQ to operate at 22 wt.
% because of its concern that KEMYA might be declared the owner of SCM-T
instead of Exxon. Mr. Alaudah, the president of KEMYA, gave such
permission (in exchange for a royalty) pending the outcome of this case.
(See Exxon's Decl. of Elizabeth J. Sher ("Sher Decl."), Ex. P.)
As a result, SABIC seeks to reform or clarify the Stipulation to
reflect SHARQ's right to practice SCM-T information up to 22 wt. %
condensed. The March Stipulation and April 3 Order are silent about
SHARQ's right to practice up to 22 wt. % condensed. At that time, SHARQ
had informed SABIC that it did not intend to practice over 17.4 wt. %
condensed. SABIC now cites a "business need" to practice SCM-T up to 22
wt. % condensed, and seeks a clarification and reformation of the
stipulation to reflect this.
Exxon argues that the March Stipulation should not be clarified or
reformed for several reasons. First, Exxon says that SABIC was and is
violating the March Stipulation by allowing its affiliate, SHARQ, to
practice SCM-T information before ownership is determined. Exxon also
argues that SABIC's argument that the Univation Agreements allowed other
parties to use the technology only matters if SABIC loses this case,
because if KEMYA owns SCM-T Information as SABIC contends in this
lawsuit, then Univation or any other entity could not grant permission to
use the technology.
Exxon alleges that in seeking "permission" for SHARQ to operate up to
22 wt.% condensed, SABIC engaged in improper exparte contacts with Mr.
Alaudah. This was the subject of a series of submissions and hearings in
August and September 2000 before Special Master Weiss on the subject of
breach of the parties' agreement to avoid exparte contacts about the
litigation with KEMYA employees. Exxon says that throughout these
proceedings, SABIC failed to disclose its contacts with Mr. Alaudah and
its imminent plans to practice SCM-T. SABIC has defended SHARQ's secret
contacts with Mr. Alaudah, claiming that such contacts were "not related
to the litigation," even though it now places these communications before
the Court as evidence to justify the relief it seeks.
1. The March Stipulation Prohibits SHARQ's Use of SCM-T Information and
The March Stipulation is clear on its face as to the representations of
SABIC: ". . . neither SABIC, SHARQ, YANPET, Petrokemya, nor any SABIC
affiliate (other than KEMYA) will use or practice the SCM-T Information
until the ownership rights thereto are established and the owner
expressly authorizes such use." (March 10, 2000 Stip., 2) This Court
disagrees with SABIC's assertion that the March Stipulation is ambiguous
with regard to SHARQ's right to practice SCM-T Information.
Also, it is unclear whether Schedule 12.02 of the Univation Agreements
granted SHARQ rights to practice SCM-T information. Schedule 12.02 of the
Agreement does not explicitly include SABIC's affiliates and SABIC has
not asserted a compelling reason to find that the contract should be
interpreted to include its affiliates.
Last, assuming that the Univation Agreements afforded rights to SHARQ
to practice SCM-T information, Section 12.02 of these agreements was a
statement of present intent between UCC and Exxon. There was nothing to
preclude these two parties from amending the terms of the agreements so as
to allow Univation to enforce the patents against SABIC.*fn4 This Court
does not find the March Stipulation to conflict with the terms of the
Univation Agreements. By the March Stipulation, SABIC agreed that SABIC
and its affiliates would not use or practice the SCM-T Information until
ownership rights were established and the owner expressly authorized such
use. Exxon and UCC's earlier agreement not to enforce patent rights
against SABIC does not relieve SABIC of its obligations under the March
Stipulation. This Court finds that the March Stipulation is an
unambiguous and enforceable agreement.
2. SABIC has failed to Demonstrate Permission.
SABIC has also failed to demonstrate permission for use of the SCM-T
information. KEMYA's ownership is far from certain. It is unclear that
the President of KEMYA, Mr. Alaudah's, grant of permission to SHARQ for
use of the SCM-T information was proper.
Exxon argues that the documents governing KEMYA's operations require
Board approval for any offer to sell or dispose of property of the
Partnership. Mr. Alaudah, president of KEMYA, did not disclose his
discussions with SABIC to the other partner, and in doing so, failed to
follow KEMYA's approval processes. This Court finds that SHARQ did not
receive proper permission to practice the SCM-T information.
3. No Justification to Clarify or Reform the Stipulation
There is substantial reason to deny clarification or reformation of the
stipulation: SABIC's motion offers no legal basis to justify
reformation. Contract law generally allows reformation only where
necessary "to express the agreement [the parties intended.]" Restatement
(Second) of Contracts § 155 (1979). While "mutual mistake" can
justify reformation, unilateral mistake cannot . See In Re Resorts
International, 181 F.3d 505, 512 (3d Cir. 1999) ("`unilateral mistake of
a fact unknown to the other party is not ordinarily grounds for avoidance
of a contract.'");
see also Coca-Cola Bottling Co. v. Elizabethtown,
Inc. v. Coca-Cola Co., 988 F.2d 386, 404 (3d Cir. 1993), cert. denied,
510 U.S. 908, 114 S.Ct. 289, 126 L.Ed.2d 239 (1993) (same). SABIC has
neither raised the issue of mutual mistake, nor pled any facts of mutual
mistake about the meaning of the March 10, 2000 Stipulation.
Although there is an exception to the general principle denying relief
for unilateral mistake when the non-mistaken party "`knows or has reason
to know of the unilateral mistake'", In re Allegheny International,
Inc., 954 F.2d 167, 180 (3d Cir. 1992) (citations omitted), here SABIC
has not pled any facts of its "unilateral mistake", much less Exxon's
knowledge of any unilateral mistake. Moreover, modification of a consent
order "should not ordinarily be granted `where a party relies on events
that actually were anticipated at the time it entered into a decree.'"
Building & Constr. Trades Council of Philadelphia & Vicinity, AFL-CIO v.
NLRB, 64 F.3d 880, 886 (3d Cir. 1995) (quoting Rufo v. Inmates of Suffolk
County Jail, 502 U.S. 367, 385, 112 S.Ct. 748, 760, 116 L.Ed.2d 867
This Court denies SABIC's motion to clarify or reform the March 2000
Stipulation because legal justification is absent. Unilateral mistake is
not a basis for reformation of an Order. Since August 1, 2000, SABIC has
been violating the April 3 Order by allowing SHARQ to practice SCM-T at
levels of 22 wt. % condensed. A "business need" even if substantiated, is
not a sufficient reason to ignore a Court Order. Because SABIC's motion
is denied, Exxon's motion for expedited discovery on this issue is
2. SABIC's Rule 12(c) Motions to Strike "Unclean Hands" and "Set
In the second of its NJ-I motions, SABIC moves to strike, pursuant to
Fed. R. Civ. P 12(c), Exxon's unclean hands and "set-off" defenses
because these defenses are allegedly based on a separate agreement.
A motion for judgment on the pleadings under Rule 12(c) is appropriate
when the moving party establishes on the face of the pleadings that it is
entitled to judgment as a matter of law. Jablonski v. Pan Am. World
Airways, Inc., 863 F.2d 289, 290 (3d Cir. 1988); Soc'y Hill Civic Ass'n
v. Harris, 632 F.2d 1045, 1054 (3d Cir. 1980). The motion must be denied
"`unless the movant clearly establishes that no material issue of fact
remains to be resolved and that he is entitled to judgment as a matter of
law.'" Ilan-Gat Eng'rs, Ltd. v. Shelter Sys. Corp., 879 F. Supp. 416, 419
(D.N.J. 1994) (quoting Hayes v. Cmty. Gen'l Osteopathic Hosp., 940 F.2d 54,
56 (3d Cir. 1991)). The movant carries the heavy burden of establishing
beyond doubt that "no relief can be granted under any set of facts that
could be proved." Taj Mahal Travel, Inc. v. Delta Airlines, 164 F.3d 186,
189 (3d Cir. 1998); Inst. for Scientific Info., Inc. v. Gordon & Breach,
Sci. Publishers, Inc., 931 F.2d 1002, 1005 (3d Cir. 1991)
In reviewing a 12(c) motion, the court must accept the nonmovant's
allegations as true and view the facts and inferences in the light most
favorable to the nonmoving party. Jablonski, 863 F.2d at 289-90; Ilan-Gat
Eng'rs., 879 F. Supp. at 419.
Exxon first argues that because SABIC is relying on matters outside the
pleadings, the summary judgment standard should be applied. However,
because in motions for judgment on the pleadings, the Court may consider
the pleadings and
any written instruments attached as exhibits, there is
no need for conversion. Northern Indiana Gun & Outdoor Shows, Inc. v.
City of South Bend, 163 F.3d 449, 452 (7th Cir. 1998). The Court may also
consider any documents referred to in the pleadings, including any
undisputedly authentic documents that the claim or defense is based
upon. Pension Benefit Guar. Corp. v. White Consol. Indus., Inc.,
998 F.2d 1192, 1196 (3d Cir. 1993); In re Donald J. Trump Casino Sec.
Litig., 7 F.3d 357, 368 n. 9 (3d Cir. 1993).
Because SABIC has relied on the contents of Exxon's pleadings, together
with the documents expressly referenced therein, these motions will be
analyzed under Rule 12(c).
1. The Unclean Hands Defense Relates to the Joint Venture Agreement.
Under general principles of equity, "`[a party] who comes into equity
must be with clean hands." Heuer v. Heuer, 152 N.J. 226, 238 (1998).
Where a party has unclean hands with regard to the transaction at issue,
the party cannot invoke the equitable powers of the Court. See id.
SABIC relies on the argument that Exxon's "unclean hands" defense
arises out of two separate agreements between different sets of parties,
with the crux of the NJ-I lawsuit being Exxon's alleged breach of the
December 22, 1980 Service Agreement. In response, Exxon asserts that
SABIC acted with "unclean hands" in allegedly overcharging KEMYA for
royalty payments based on the October 15, 1980 agreement ("royalty
overcharges"*fn5). SABIC says that Exxon cannot do this because the
agreements described above are separate agreements.
As discussed above, this Court has determined that the NJ-I and NJ-II
actions arise from one overall agreement. From that, the Court agrees
with Exxon that SABIC has not met the high burden of establishing that
relief could not be granted under any set of facts. SABIC's argument that
the unclean hands defense should be stricken because it relates to a
separate agreement is rejected.
2. Unclean Hands Defense Must Relate to Subject Matter of Complaint.
The unclean hands defense must relate closely to the subject matter of
the complaint. In re New Valley Corp., 181 F.3d 517, 525 (3d Cir. 1999)
("the alleged inequitable conduct must be connected, i.e. have a
relationship to the matters before the court for resolution"), cert.
denied, 528 U.S. 1138, 120 S.Ct. 983, 145 L.Ed.2d 933 (2000). Properly
viewed, the equitable maxim of unclean hands is a tool for the court,
rather than a defense for the accused. Sears, Roebuck & Co. v. Sears
Plc., 744 F. Supp. 1297, 1309 (D.Del. 1990) ("In actuality, a defendant's
claim of unclean hands . . . is not a defense at all. When presented with
a claim of unclean hands, the court is primarily concerned with
protecting its own integrity . . .") The doctrine only comes into play
when it is evident from the pleadings that the allegedly improper conduct
is directly related to the conduct about which plaintiff complains,
because only in such circumstances is the Court's equitable power
implicated. New Valley, 181 F.3d at 525.
SABIC asserts that the contractual provision upon which Exxon bases its
defense is separate, distinct and independent of the breach of contract
claim raised by SABIC. When a party's equitable defense is not based upon
a purported breach of a contractual provision at issue, such a defense
may not serve to bar plaintiff's claims. See Laborers' Int'l Union of
North Am. v. Foster Wheeler Corp., 26 F.3d 375 (3d Cir. 1994) (suit to
compel arbitration under pre-hire agreement not barred by unclean hands
because unclean hands premised on breach of different contractual
However, this Court finds that there is a close enough relationship
between the inequitable conduct and the claims in the lawsuit to give
Exxon the opportunity to assert the defense. SABIC has not met its heavy
burden of establishing beyond doubt that, "no relief can be granted under
any set of facts that could be proved." Taj Mahal Travel, 164 F.3d at
189. The Court has already found that the Service Agreement and Unipol
Agreement are part of the overall Joint Venture Agreement. The allegation
by Exxon that SABIC has overcharged the joint venture in violation of the
Joint Venture Agreement is conduct related to the breach of the same
Joint Venture Agreement. SABIC's alleged unclean hands in overcharging
the joint venture in NJ-II are directly relevant to its effort in NJ-I to
invoke this Court's equitable powers and enforce obligations supposedly
owed by Exxon. This alleged conduct by SABIC could be considered
unconscionable conduct that permeates the transaction as a whole. See
Shell Oil v. Marinello, 120 N.J. Super. 357, 392 (N.J.Super.L 1972) ("It
is the effect of the inequitable conduct on the total transaction which
is determinative whether the [unclean hands defense] shall or shall not
3. Unclean Hands Defense Must Relate to the Party Alleged to Have
SABIC's additional argument as to why the unclean hands defense should
be stricken is that KEMYA is the real party in interest and the unclean
hands defense is against SABIC. Because the unclean hands defense must
relate to the party seeking that equitable relief, SABIC alleges that the
unclean hands defense is improper.
Exxon argues that because SABIC is suing on behalf of KEMYA, there are
no other partners against whom to assert the unclean hands defense. E ven
if KEMYA is innocent, SABIC's unclean hands would prevent it from suing
derivatively on KEMYA's behalf. See Gaudiosi v. Mellon, 269 F.3d 873, 882
(3d Cir. 1959); Recchion v. Kirby, 637 F. Supp. 1309, 1315-16 (W.D.Pa.
1986) (holding that a shareholder with unclean hands cannot sue
If SABIC as a derivative shareholder suing on behalf of KEMYA is found
to have unclean hands, the Court finds that this wrongful conduct would
bar SABIC from bringing the claims at issue. This view is
well-established in case law. Recchion applied the doctrine of unclean
hands to prevent plaintiff shareholder in a derivative action from
complaining about the very conduct which he facilitated. The close
connection between the plaintiff's own wrongful conduct and the wrongful
conduct which was the basis of the derivative suit allowed the unclean
hands defense to go forward. Id. at 1315-16. Similarly, in Gaudiosi, in a
derivative action for equitable relief related to a disputed proxy
contest, the wrongful conduct of one of the contestants in intimidating
the other stockholders abstain from voting their shares allowed an
unclean hands defense. Gaudiosi, 269 F.3d at 882.
4. Exxon's Standing to Assert the Royalty Overcharge Claim as Its
Unclean Hands Defense
SABIC's final argument in support of its motion to strike the unclean
hands defense is that Exxon lacks standing to assert the royalty
overcharge claim because it is neither a party nor a third-party
beneficiary of the Joint Venture Agreement between SABIC and ECAI. The
Court dismisses this argument for the reasons expressed in the following
discussion of the setoff defense.
SABIC incorporates its previous New Valley argument that the lack of a
close nexus between the defense and the complaint requires dismissal of
the "setoff" defense and offers other arguments.
Setoff is a procedural device to allow a party to reduce the amount
owed to an opposing party by the value of the opponent's
cross-obligations to that party. U.S. v. York, 909 F. Supp. 4, 9 (D.D.C.
1995). "[A] party can have . . . setoff rights only against one asserting
claims against himself." Nashville Lodging Co. v. Resolution Trust
Corp., 59 F.3d 236, 246 (D.C. Cir. 1995). The common law right of setoff
is permissive, not mandatory. See In re Monongahela Rye Liquors,
141 F.2d 864, 869 (3d Cir. 1944). It cannot be invoked when the general
principles of equity would not justify it. York, 909 F. Supp. at 8.
The right to a setoff depends on the existence of mutual debts between
the parties to the litigation. Id. at 9.; see also, In the Matter of
Bevelli, Bressler & Schulman, 896 F.2d 54, 57-58 (3d Cir. 1990) ("The
right of setoff depends on the existence of mutual debts and claims
between creditor and debtor."). In other words, direct privity ...