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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,
V.
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

      AMENDED OPINION

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 separate agreements.

NJ-I Action

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 Arabian law.

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").

The Delaware Action

On July 24, 2000, SABIC filed a complaint against Yanbu and ECAI in the Superior Court of Delaware (Civil Action No. OOC-07-161-VAB ("Delaware action"). SABIC's complaint seeks declaratory relief against these defendants solely on the issue of whether the royalty charges were proper under the joint venture agreements. As said, in NJ-II, Yanbu and ECAI have accused SABIC of "over-charging" both partnerships for royalties in violation of the joint venture agreements.

DISCUSSION

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

Univation Agreements

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 Schedule 12.02.)

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's Argument

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 Is Enforceable.

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 (1992)).

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 mooted.

2. SABIC's Rule 12(c) Motions to Strike "Unclean Hands" and "Set Off" Defenses

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. Standard of Review

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.

B. Arguments

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 provision).

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 be applied.").

3. Unclean Hands Defense Must Relate to the Party Alleged to Have Committed Wrongdoing.

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 derivatively).

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.

C. 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 ...


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