SGS U.S. TESTING COMPANY, INC. v. TAKATA CORPORATION et al

Filing 136

OPINION. Signed by Judge Kevin McNulty on 4/6/2016. (seb)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

SGS U.S. Testing Company, Inc.,

Civ. No. 09-6007 (KM)

Plaintiff,
OPINION
V.

TAKATA CORPORATION, TK HOLDINGS,
INC., TAKATA, INC., TAKATA
RESTRAINT SYSTEMS, INC., TAKATA
SEAT BELTS, INC., TK-TAITO, LLC, and
JOHN DOE COMPANIES (1-50),
Defendants.

MCNULTY, District Judge
The plaintiff, SGS U.S. Testing Company (form
erly U.S. Testing
Company, or USTC), tested seatbelts for the
defendants, Takata Corporation
and its affiliates (collectively, “Takata”). Multiple
lawsuits were brought against
either or both, claiming that the testing was
inadequate and the seatbelts
substandard. None of the lawsuits were succ
essful. SGS seeks from Takata
indemnification of the costs of defense of thos
e actions. District Judge Dennis
M. Cavanaugh granted summary judgment
to Takata on Count II of the
complaint (common law indemnity), and he
also dismissed Count I (breach of
contract) and Count III (breach of the implied
covenant of good faith and fair
dealing) for failure to state a claim. The Unit
ed States Court of Appeals for the
Third Circuit affirmed summary judgment for
defendant on Count II, but
reversed the dismissals of Counts I and III,
and remanded for further
proceedings. (ECF nos. 94, 94-1) After Jud
ge Cavanaugh’s retirement, the
matter was reassigned to me. (ECF no. 103)

Now before the Court are cross-motions of Taka
ta (ECF no. 121) and SGS
(ECF no. 122), pursuant to Fed. R. Civ. p. 56,
for summary judgment on the
remaining counts, Counts I and III. For the reaso
ns expressed herein, the
motion of Takata will be conditionally granted,
and the motion of SGS will be
conditionally denied, reserving only the apportion
ment issue, as provided in
Section III.A.4, infra.
I.

Background’

SGS is an independent testing laboratory. From
1985 through 2002, SGS
contracted with Takata, a seatbelt manufacturer
, to perform representative
sample safety tests under Federal Motor Vehi
cle Safety Standard 209 (“FMVSS
209”). Among the items tested were samples of
Takata’s TI-22 series ejector
spring buckle. (PSMF ¶11 1—6, DSMF
¶111—7) As relevant here, the SGS testers
would perform a “partial engagement” test. That
is, they would attempt to
induce a “false latch,” a condition wherein the
belt appears to be fully latched,
but is not. (DSMF ¶11 14, 15) In such a case, the
testers would measure the
“release force” required to disengage the buckle.
(DSMF 17)

¶

The fee for each test was in the range of $200
0 to $2500. Each time SGS
undertook to perform testing for Takata, it issue
d an order form, containing
“Terms and Conditions” which evolved over time
. (PSMF 8)

¶

Herein, citations to the record are abbreviated as follo
ws:
DSMF =
Defendant Takata’s Statement of Material Facts, ECF
no. 12 1-1
PR=
Plaintiff SGS’s response to DSMF, ECF no. 125-1
PSMF =
Plaintiff SOS’s Statement of Material Facts, ECF no.
122-1
DR=
Defendant Takata’s response to PSMF, ECF no. 127
PASMF
Plaintiff SGS’s Additional Statement of Material Fact
s, ECF no. 125-2
DAR=
Defendant Takata’s additional response to PASMF,
ECF no. 129
3d Cir. Op. = Slip Opinion of U.S. Court of Appeals for
the Third Circuit, No. 12—3284,
547 F. App’x 147, 2013 WL 6172550 (3d Cir. Nov. 26,
2013) (copy filed
on district court docket at ECF no. 94-1)
1

2

The 1986 Terms and Conditions contain
ed the following indemnification
provision:
[Takata] agrees, in consideration of [SGS
’s] undertaking to perform
the test program hereunder, to protect,
defend, indemnify, save
harmless and exonerate [SGS] from any
and all claims, damages,
expenses either direct or consequential for
injuries to persons or
property arising out of or in consequen
ce of the performance of the
testing or inspections hereunder and/or
the performance of the
products tested or inspected hereunder.
(PSMF ¶ 9)
The 1995 Terms and Conditions contain
ed the following indemnification
provision:
[Takata] AGREES, IN CONSIDERATION
OF SGS USTC
UNDERTAKING TO PERFORM THE TES
T(S) OR PROGRAM
HEREUNDER, TO PROTECT, DEFEND, IND
EMNIFY, SAVE
HARMLESS AND EXONERATE SGS UST
C FROM ANY AND ALL
CLAIMS, DAMAGES, EXPENSES EITHER
DIRECT OR
CONSEQUENTIAL FOR INJURIES TO PER
SONS OR PROPERTY
ARISING OUT OF OR IN CONSEQUENCE
OF THE PERFORMANCE
OF THE TESTING OR INSPECTIONS HER
EUNDER AND/OR THE
PERFORMANCE OF THE PRODUCTS TES
TED OR INSPECTED
HEREUNDER UNLESS CAUSED BY THE
NEGLIGENCE OF USTC.
(PSMF ¶ 10)
The 2000 Terms and Conditions contained
the following indemnification
provision:
THE CLIENT [Takata] SHALL GUARANTEE
, HOLD HARMLESS
AND INDEMNIFY THE COMPANY [SGS]
AND ITS OFFICERS,
EMPLOYEES, AGENTS OR SUBCONTRA
CTORS AGAINST ALL
CLAIMS MADE BY ANY THIRD PARTY OR
LOSS DAMAGE OR
EXPENSE OF WHATSOEVER NATURE INC
LUDING REASONABLE
LEGAL EXPENSES AND HOWSOEVER ARI
SING RELATING TO
THE PERFORMANCE, PURPORTED PERFOR
MANCE OR NON
PERFORMANCE, OF ANY SERVICES TO
THE EXTENT THAT THE
AGGREGATE OF ANY SUCH CLAIMS REL
ATING TO ANY ONE
SERVICE EXCEED THE LIMIT MENTIONED
IN CONDITION 9
[relating to fee paid by Takata to SGS].
(PSMFj 11)

3

Starting in 2002, six actions were filed
2 concerning SOS’s testing of
seatbelt assemblies, particularly the “partial
engagement test.” (DSMF 4) In
¶
those class actions, the plaintiffs essentia
lly claimed that the partial
engagement test was required by FMVSS
209, but that SGS stopped
performing it because the Takata belts coul
d not pass, and then falsified
results. Those results were allegedly pas
sed back to Takata, which passed
them along to the auto makers that pur
chased the belts. (DSMF
¶J 28—42)
SOS tendered written requests for indemnif
ication and defense at or near
the time the actions were filed. (PSMF
¶J 18, 19; DR ¶J 18, 19) Takata
declined, in letters stating, inter alia, that
the parties’ agreements did not
require it to indemnify SOS for SOS’s own
intentional or negligent acts. (PSMF
¶ 20; DR ¶ 20) SOS therefore conducted its own defense. (PSMF
¶ 22; DR ¶ 22)
Takata alleges that the genesis of the claim
s lay in the deposition
testimony of SGS employees. (DSMF, PR
¶j 11—24) Particularly pertinent was
the testimony of Frank Pepe, Director of
Standard Testing and Material
Evaluation for SOS. Pepe stated that a 1986
recorded release result of one half
pound signified a false latch, and an actu
al release force of one half pound.
(DSMF, PR ¶J 13—16) Then, in the 1990s,
SOS allegedly stopped performing the
test. (E.g., DSMF, PR ¶J 24—25, 39) Takata
and SGS appear to agree that this
was a misinterpretation; what happened
was that, when a false latch was
not

2

They were:
Zavala v. Takata Corp., No. BC277327 (Sup
er. Ct., Los Angeles Cty., CA)
Fernandez v. Takata Corp., No. CCV2002
-0 10887 (Super. Ct., Maricopa Cty.,
AZ)
Baggett d/b/a American Motors v. Takata
Corp., No. 3594 (28th Judicial Circuit,
Haywood Cty.

, TN)

Lohman v. Takata Corp., No. D-l01-CV-200
2021279 (First Judicial Dist. Ct.,
Santa Fe, NM)
Price v. Takata Corp., No. 2:08-CV-00151-J
(N.D. Tex.)
Stevic v. Nissan Motor Co., Ltd., No. 2006-CA
-008631-0 (Super. Ct., Orange
Cty., CA)

(DSMF

¶{ 28—36)
4

achieved, the technicians would make a
nominal entry of one half pound,
because the Department of Transportatio
n would not accept “not applicable.”
(DSMF’, PR Vi! 20-23)
The allegations focus primarily on one class
action, Zavala, which went
to a bench trial (DSMF, PR
¶J 28, 29, 37—49) The judge entered a decision
absolving Takata and SGS of all liability. (ECF
no. 75-24; DSMF, PR ¶ 52).
In Fernandez, Takata and SOS were initia
lly named as defendants, but
eventually dismissed. In Lohman, Takata
was never served, and the case was
eventually dismissed against SOS. (DSMF,
PR 52 n.5)

¶

In the remaining actions, SOS was not nam
ed as a defendant, although
some included allegations regarding its testi
ng. Price, an action by an
individual, went to trial, ending with a jury
verdict in favor of Takata and an
automobile manufacturer. (ECF no. 75-2
6) In Stevic, all claims against Takata
and an automobile manufacturer were dism
issed for lack of standing. (ECF no.
75-28) Baggett resulted in a voluntary dismissal
as against Takata. (ECF no.
75-25)
In short, the defense of all of these actions was
entirely successful.
Neither SOS nor Takata was found negligen
t or held liable. (PSMF ¶ 26; DR
¶
26) That success, at least in some cases, requ
ired SOS to defend itself
factually, by introducing evidence that it had
not skipped required tests and
had not falsely reported results. (See DSMF,
PR
38—49)

¶f

II.

Governing Standards
A.

Rule 56 Standard

Federal Rule of Civil Procedure 56(a) provides
that summary judgment
should be granted “if the movant shows that
there is no genuine dispute as to
any material fact and the movant is entitled
to judgment as a matter of law.”
Fed. R. Civ. P. 56(a); see also Anderson u. Libe
rty Lobby, Inc., 477 U.S. 242,
248 (1986); Kreschollek v. S. Stevedoring Co.,
223 F.3d 202, 204 (3d Cir. 2000).

5

In determining whether there is a “dispute as to any material fact,” a
court must construe all facts and inferences in the light most favorable
to the
nonmoving party. See Boyle v. Cnty. of Allegheny Pa., 139 F.3d 386, 393
(3d
Cir. 1998). The moving party bears the burden of establishing that no genuin
e
issue of material fact remains. See Celotex Corp. v. Catrett, 477 U.S.
317, 322—
23 (1986). “[Wjith respect to an issue on which the nonmoving party bears
the
burden of proof
the burden on the moving party may be discharged by
...

‘showing’—that is, pointing out to the district court—that there is an absenc
e
of evidence to support the nonmoving party’s case.” Celotex, 477 U.S.
at 325.
Once the moving party has met that threshold burden, the non-moving
party “must do more than simply show that there is some metaphysical
doubt
as to material facts.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp.,
475
U.S. 574, 586 (1986). The opposing party must present actual evidence that
creates a genuine issue as to a material fact for trial. Anderson, 477 U.S.
at
248; see also Fed. R. Civ. P. 56(c) (setting forth types of evidence on which
nonmoving party must rely to support its assertion that genuine issues
of
material fact exist). “[Ujnsupported allegations
and pleadings are insufficient
...

to repel summary judgment.” Schoch v. First Fid. Bancorporation, 912 F.2d
654,
657 (3d Cir. 1990); see also Gleason v. Norwest Mortg., Inc., 243 F.3d 130,
138
(3d Cir. 2001) (“A nonmoving party has created a genuine issue of material
fact
if it has provided sufficient evidence to allow a jury to find in its favor
at trial.”).
If the nonmoving party has failed “to make a showing sufficient to establi
sh the
existence of an element essential to that party’s case, and on which
that party
will bear the burden of proof at trial,

there can be ‘no genuine issue of

...

material fact,’ since a complete failure of proof concerning an essential elemen
t
of the nonmoving party’s case necessarily renders all other facts immat
erial.”
Katz v. Aetna Cas. & Sur. Co., 972 F.2d 53, 55 (3d Cir. 1992) (quoting Celote
x,
477 U.S. at 322—23).

6

B.

Governing Substantive Law as Sta
ted by the Third Circuit
In determining whether a party is “en
titled to judgment as a matter of
law” in this diversity case, I must app
ly State substantive law. See generally
Erie Railroad Co. v. Tompkins, 304 U.S
. 64, 58 S. Ct. 817 (1938). That require
s
me to determine how the State’s hig
hest court has decided, or predict how
it
would decide, the applicable legal issu
es. Of course, a decision on point by the
New Jersey Supreme Court would be
most pertinent. See Hunt v. U.S. Tobacc
o
Co., 538 F.3d 217, 220-21 (3d Cir. 200
8).
But “in the absence of guidance from
the state’s highest court, [I]
must look to decisions of state interme
diate appellate courts, of
federal courts interpreting that state’s
law, and of other state
supreme courts that have addressed
the issue,” as well as to
“analogous decisions, considered dict
a, scholarly works, and any
other reliable data tending convincing
ly to show how the highest
court in the state would determine the
issue at hand.”
Norfolk Southern Ry. Co. v. Basell USA
Inc., 512 F.3d 86, 92 (3d Cir. 2008)
(quoting Koppers Co., Inc. v. Aetna Cas
. & Sur. Co., 98 F.3d 1440, 1445 (3d Cir.
1996)); see also West v. AT&T Co., 311
U.S. 223, 237 (1940); McCabe v. Ernst
&
Young, LLP, 494 F.3d 418, 424 (3d Cir
. 2007).
I am not, however, writing on a clean
slate. The U.S. Court of Appeals for
the Third Circuit has stated the substan
tive principles of law that apply to the
remaining contractual claims, Counts
I and III. I am bound by the Third
Circuit’s statement of the law that sho
uld govern the proceedings on remand
:
SGS’s first argument is that it has a vali
d claim for
contractual indemnification....
In exchange for SOS’s testing services,
Takata agreed to
indemnify SGS. Indeed, the parties exe
cuted several contracts with
various indemnification provisions ove
r the years. New Jersey’s
indemnification law distinguishes betw
een vicarious-liability and
independent-fault cases. Mantilla v. NC
Mall Assocs., 167 N.J. 262,
770 A.2d 1144, 1149 (2001). In Mantil
la, the Court “adopt[edj the
‘after-the-fact’ approach” to determine
whether a party has
defended against allegations of its ind
ependent fault. Id. at 1149,
1151 (citing Cent. Motor Parts Corp. v. E.I.
duPont deNemours &
Co., 251 N.J. Super. 5, 596 A.2d 759 (19
91)). This approach
“permits an indemnitee to recover cou
nsel fees if the indemnitee is
7

adjudicated to be free from active wrongdoing
regarding the
plaintiff’s injury, and has tendered the defe
nse to the indemnitor at
the start of the litigation.” Id. at 1151 (citin
g Cent. Motor Parts
Corp., 596 A.2d at 759). This does not mean
that an indemnitee is
automatically entitled to an award for the
costs of defense. Rather,
as Kiefferu. Best Buy, 205 N.J. 213, 14 A.3d
737 (2011),
demonstrates, when the indemnitee has been
adjudged free of any
wrongdoing, the ability to recover depends
upon the language of
the contract. Id. at 74 3—44 & n. 6 (conclud
ing that adjudication
that owner, contractor and subcontractor
were not negligent
entitled indemnitee owner to indemnification
based on expansive
language indemnifying it from “any and all”
claims, but that
indemnitee contractor was not entitled to
indemnification for costs
of defense since contract with subcontrac
tor required judicial
finding of negligence by subcontractor). If
application of the afterthe-fact approach establishes that an inde
mnitee “has been found
to be at least partially at fault,” then the inde
mnitee “may not
recover the costs of its defense from an inde
mnitor” unless there is
explicit language in the indemnity contract.
Mantilla, 770 A.2d at
1145.
Employing the “after-the-fact” approach here
, it is evident
that the complaint alleged that SGS, as inde
mnitee, was
adjudicated free of wrongdoing and that it tend
ered the defense to
Takata, the indemnitor, at the outset of the
litigation. See JA. 442
(jf 14—24). SGS, therefore, may be entitled to recover its defe
nse
costs depending upon the language of the
various indemnity
contracts. See Mantilla, 770 A.2d at 1151,
Kieffer, 14 A.3d at 743—
44. Accordingly, we conclude that the alleg
ations in SOS’s
complaint were sufficient to state a claim
for indemnification under
New Jersey law and that the District Court
erred by dismissing the
claim.
We note, however, that in New Jersey “[an
] indemnitee may
recover only those fees and expenses attr
ibutable to the making of
defenses which are not primarily directed
toward rebutting charges
of active negligence.” Central Motor Parts Corp
., 596 A.2d at 762
(quoting Piedmont Equip. Co. v. Eberhard Mfg
. Co., 99 Nev. 523,
665 P.2d 256, 258—259 (1983)). See also Pied
mont, 665 P.2d at 260
(holding that an indemnitee who was “exo
nerated of liability at
trial” was, nonetheless, only entitled to reco
ver expenses not
directed at rebutting charges of active negl
igence.) In this case,
SGS incurred substantial expenses defendin
g its testing
methodology. On remand, the District Cou
rt will need to consider
whether, in light of the language of the inde
mnification provisions,
these expenses should be excluded from
any recovery.
8

SOS’s second argument is that it also has
a valid claim for
breach of the duty of good faith and fair deali
ng. This duty “is
implied in every contract in New Jersey.”
Wilson v. Amerada Hess
Corp., 168 N.J. 236, 773 A.2d 1121, 1126
(2001). Conduct that is
contrary to “community standards of dece
ncy, fairness or
reasonableness” violates the duty. Id. (quo
ting Restatement
(Second) of Contracts § 205 cmt. a (1981));
see also id. at 1130
(“Bad motive or intention is essential.”). The
District Court
dismissed this claim because it conclud
ed that SGS did not have a
valid “claim for contractual indemnification.”
JA. 16. As explained,
that conclusion was wrong and the claim
should not have been
dismissed.
(3d Cir.

Op.

at 3—4, 547 F. App’x at 148—49)

III.

DISCUSSION

A.

Count I: Breach of contract

As I read the Court of Appeals decision,
quoted above, New Jersey law
provides for contractual indemnification
of defense costs if the indemnitee is
adjudicated to be free of wrongdoing. Thos
e costs must, however, be
apportioned; costs incurred in rebutting
charges of the indemnitee’s own active
negligence are excluded. All of the foregoing
principles, however, may be
abrogated by contract; the parties’ agreemen
t, if sufficiently clear and explicit,
may broaden or narrow the scope of inde
mnification.
On Count I (breach of contract), then, the
issues on remand are three:
1.
Eligibility: Did the summary judgment reco
rd bear out what
the Third Circuit held was adequately alleg
ed in the complaint: i.e., that,
from an after-the-fact perspective, “SO
S, as indemnitee, was adjudicated
free of wrongdoing and that it tendered the
defense to Takata, the
indemnitor, at the outset of the litigation”?
2.

Apportionment: If so, is indemnificatio of
n
any portion of
SGS’s costs excluded by the rule against inde
mnification of the
indemnitee’s costs of rebutting charges of
its own “active negligence”?

9

3.

Contract: If so, is SGS nevertheless “entitle
d to recover its
defense costs [based] upon the language
of the various indemnity
contracts”?

A party will not be indemnified for its own
negligence or fault, absent a
very clear and explicit agreement. Tha
t fundamental principle runs through all
of the indemnification case law. Accord
ingly, the law of New Jersey,
synthesized in the opinion of the Court
of Appeals, injects similar factors—the
indemnitee’s level of fault, the languag
e of the indemnification agreement—at
more than one step of the analysis. The
step 1 requirement that the indemnitee
be adjudicated to be free of negligence for
,
example, is phrased similarly to, but
interpreted differently from, the step
2 exclusion of indemnification for costs of
rebutting charges of active negligence
—and both may be overridden by
sufficiently clear contractual language. The
result is concededly disorienting,
3
and it is perhaps unsurprising that the par
ties in this case are talking past
each other. One fundamental disagreeme
nt concerns whether the “after-the
fact” approach applies only to the step 1
issue, or whether it applies to step 2
as well. And always lurking is the questio
n whether the parties nevertheless
have contracted for a contrary result.
What is clear, contrary to certain oversim
plifications, is that New Jersey
does not collapse the analysis into any sing
le question: e.g., whether negligence
was alleged, or whether SGS prevailed, or
whether the contract calls for
indemnity. Accordingly, neither did the Thi
rd Circuit, and neither will 1. I
consider the three steps in order.
4
1.
Eligibility: Tender of defense/Adjudica
tion of no fault
The first prerequisite—SGS’s demand for
defense and indemnity— is not
in issue. SGS has placed in evidence the
letters by which it demanded defense
As in “If we had a little ham we could have som
e ham and eggs, if we had eggs.”
Carl Sandburg, The People, Yes #31 (Harcour
t Brace & Co. 1936) (apparently quoting a
vernacular saying).
For purposes of the first two steps, I assume
arguendo that the agreements
provide for indemnification; whether they do
so with the required clarity is discussed
at step 3.
10

and indemnification, as well as Takata’
s written denials. Takata admits that
these are genuine.
As to the second prerequisite—that SGS
was adjudicated to be free of
wrongdoing— the Third Circuit extracte
d from the New Jersey case law an
“after-the-fact approach.” 3d Cir. Op.
at 3; see also Starbucks Corp. v. Wellshire
Farms, Inc., Civ. No. 14-4001, 2016 WL
845140 at *4 (D.N.J. March 4, 2016)
(Hiliman, J.) (“That [after-the-factj app
roach was devised in the context of
determining whether an indemnitee cou
ld recover counsel fees ‘so long as the
indemnitee is free from active wrongd
oing regarding the injury to the plaintif
f
and has tendered the defense to the ind
emnitor at the start of the litigation.”)
.
It is uncontested that SOS, like Takata,
was adjudicated to be free of
wrongdoing. The “after-the-fact” app
roach dictates that I examine, not just
the
allegations, but the outcome of the cas
es against SOS and Takata. Not
surprisingly, they agree that they are
wholly blameless. They have submitted
the relevant verdicts and opinions dem
onstrating that neither SOS nor Takata
was ever found negligent or liable in
any of the cases. Thus SOS was not fou
nd
to be even “partially at fault”; it “was
adjudicated free of wrongdoing.” (3d Cir.
Op. at 3—4)
To explore the significance of that issu
e, however, it is necessary to
briefly consider the background of the
“after-the-fact” approach. As the Third
Circuit pointed out, it has its roots in
New Jersey’s division between
indemnification for vicarious-liability
and independent-fault cases. (3d Cir. Op.
at 3 (citing Mantilla, 770 A.2d at 1149
))
Even at common law, indemnificatio
n for liability that is completely
vicarious is permitted. 770 A.2d at 114
9 (citing Central Motor Parts Corp., 596
A.2d at 761). That is, where A is forced
to answer for B’s fault, then B may
freely agree to indemnify A.
By contrast, however, cases involving
A’s own fault are indemnity
ineligible. That is to say that costs will
not reimbursed as to an “indemnitee
who has defended against allegations
of its independent fault.” Id. For purpos
es

II

of that disqualification, “defended against alleg
ations” does not really mean
that at all; it turns out to be a term of art, mean
ing, roughly, “defended itself
successfully.” It is to this issue that the “afte
r-the-fact approach” applies. The
“[a]llegations in the pleadings may be a start
ing point to determine whether
counsel fees and costs are recoverable by [an
indemnitee], but the actual facts
developed during trial should control” Mantilla,
770 A.2d at 1150 (quoting
Piedmont Equip., 665 P.2d at 258—59 (citin
g Pender v. Skilicraft Indus., 358 S.
2d 45, 46 (Fla. Dist. Ct. App. 1978)).
The outcome of the case is therefore the clinc
her: indemnity is ruled out
unless the indemnitee party was “adjudicated
free of wrongdoing.” (3d Cir. Op.
at 3 (quoting Mantilla, 770 A.2d at 1151) Phra
sing the proposition in the
negative, Mantilla held that, absent explicit
contractual language to the
contrary, “an indemnitee who has been foun
d to be at least partially at fault
may not recover the costs of its defense from
an indemnitor.” 770 A.2d at 1145.
Thus, in Mantilla, a would-be indemnitee, PBS
, was found 40% liable, and the
Court ruled that PBS was therefore ineligible
for indemnification.
SGS’s indemnity claims have surmounted this
initial threshold. SGS
tendered its defense to Takata and, as it turne
d out, was “adjudicated” to be
free of any liability—i.e., in the underlying case
s, SGS was not found to be even
“partially at fault.” Id. Under such circumstances
, said the Third Circuit, the
independent-fault disqualification does not rule
out indemnification: “SGS may
be entitled to recover its defense costs dependin
g upon the language of the
various indemnity contracts.” (3d Cir. Op. at
4)
2.

Apportionment “Active negligence” rule
Takata’s main contention is that New Jersey law
does

not permit
indemnification of costs to the extent that SGS
, in the underlying actions, was
“rebutting charges of active negligence.” That
active-negligence limitation does
not rule out indemnification, but it may require
5
apportionment.
Much of the confusion seems to lie here. Step l’s “def
ending against
allegations,” despite appearances, is not synonym
ous with step 2’s “rebutting
charges.” As noted above, at step 1, it is a term of
art; viewed after the fact, it
12

Having held that the complaint passed step
1 and stated a claim for
indemnification, the Court of Appeals state
d a major caveat:
We note, however, that in New Jersey “[an
j indemnitee may
recover only those fees and expenses attr
ibutable to the making of
defenses which are not primarily directed
toward rebutting charges
of active negligence.” Central Motor Parts
Corp., 596 A.2d at 762
(quoting Piedmont Equz. Co. v. Eberhard Mfg
. Co., 99 Nev. 523,
665 P.2d 256, 258—259 (1983)).
(3d Cir. Op. at 4—5).
Critical to the analysis is the Third Circuit’s
deliberate invocation of the
Piedmont case upon which the New Jersey
state courts based their analysis.
Immediately after the quoted passage, the
Court of Appeals added the following
citation and quotation:
See also Piedmont, 665 P.2d at 260 (holding
that an indemnitee
who was “exonerated of liability at trial” was,
nonetheless, only
entitled to recover expenses not directed at
rebutting charges of
active negligence.)
(3d Cir. Op. at 5).
Thus the Court of Appeals specifically cited
Piedmont (which was relied
on by both Central Motor and Mantilla) for
the proposition that the “active
negligence” apportionment principle applies
even where the indemnitee was
ultimately “exonerated of liability at trial.”
(3d Cir. Op. at 5). The clear
implication is that the “after-the-fact” appr
oach of step 1 does not extend to
step 2. The step 2 “active negligence” apportion
ment rule looks, not to the
outcome of the case (“exoneration”), but to
the nature of the claims (“charges”)
that the indemnitee was rebutting. Where
a party has been cleared of
wrongdoing, it is generally eligible for indemnif
ication of defense costs, but only

essentially requires that the outcome be who
lly in the indemnitee’s favor. Once step 1
eligibility is established, step 2 requires that
the “charges” or allegations be sorted in
order to apportion liability for costs.
The distinction between ineligibility and apportion
ment, too, is less immediately
apparent here, because Takata claims that none
of SGS’s costs are compensable (i.e.,
that the “apportionment” is on a 0/100 basis).
13

insofar as those costs were incurred in
“the making of defenses which are not

primarily directed toward rebutting charges
of active negligence.” id.
6
Why such a rule? It is important to keep in
mind that we are adjusting
rights, not between plaintiff and defendant,
but between Defendant #1 and
Defendant #2. As to the plaintiff who asser
ted a meritless claim that Defendant
#1 was negligent, the equities are clear enou
gh, and yet under the American
Rule Defendant #1 will ordinarily bear its own
litigation expenses. By
hypothesis, the party who caused that need
less expenditure was not Defendant
#2, but the overreaching plaintiff. In such
a case, the default apportionment
rule limits the shifting of expenses between
the defendants.
7
Indemnity, then, is permissible only to the
extent that SGS incurred
expenses for activities not directed at rebutting
charges of its own active
negligence. In other words, as I read the Thir
d Circuit’s remand, the expenses
will have to be apportioned:
In this case, SGS incurred substantial expe
nses defending its
testing methodology. On remand, the District
Court will need to
consider whether, in light of the language
of the indemnification
provisions, these expenses should be exclu
ded from any recovery.
(3d Cir. Op. at 5) SGS may be indemnified,
but only to the extent of expenses of
it incurred rebutting claims other than thos
e of SGS’s active negligence.
There is, however, one important caveat.

6

The awkwardness here is that Central Motor and
Mantilla were not nearly so
explicit as the Third Circuit in separating step 1
eligibility from step 2 apportionment.
That division is most clearly expressed in Piedmon
t, the Nevada case relied upon by
both. Neither Central Motor nor Mantilla, however
, cited the particular language from
Piedmont, quoted by the Third Circuit, to the
effect that step 2 apportionment would
be appropriate even where the indemnitee was “exo
nerated of liability at trial.” See
Piedmont, 665 P.2d at 260.
In contrast, recall that vicarious liability—i.e.,
liability of Defendant #1 based on
the alleged wrongdoing of Defendant #2—is treat
ed separately. In such a case,
Defendant #1’s need to mount a defense is clear
ly attributable to Defendant #2, and
indemnity is freely permitted.
14

3.

Contract: Explicit and unequivocal language
Step 1 and step 2 are both subject to the larger princ
iple that the parties
may contract for a contrary result. The step 1 “ind
ependent fault”
disqualification, for example, is a “default rule” that
applies “absent explicit
contractual language to the contrary.” Mantilla, 770
A.2d at 1145. The step 2
“active negligence” apportionment rule likewise mus
t be applied “in light of the
language of the indemnification provisions,” and the
Third Circuit has directed
that I do so on remand. (3d Cir. Op. at 5)
Contract is king. Parties are free, within broad limit
s, to allocate risks of
future events, including litigation. Now if they could
dicker forever at no cost,
they could hypothetically arrive at agreements that
allocate all risks for every
possible contingency. But we do not live in such a worl
d. Courts have therefore
developed “gap-fillers”—”default rules” to decide case
s not covered by explicit
contractual language. Such off-the-rack rules are desig
ned to be reasonable in
a majority of cases, but where the case is covered by
tailor-made contractual
language, that contractual language will control. Wha
t that means in practice
is that the parties may contract around the active-ne
gligence apportionment
rule.
How specific must such a contractual work-around be?
The rules for
interpreting indemnity agreements provide some guid
ance. A commercial
contract of indemnity is a valid, even salutary mean
s of allocating risk. See
Ramos u. Browning Ferris Industries, 510 A.2d 1152,
1158—59 (N.J. 1986); Stier
v. Shop Rite of Manalapan, 492 A.2d 1055, 1058-59 (N.J.
Super. Ct. App. Div.
1985). In the main, such a contract is interpreted like
any other: primarily in
terms of its plain, unambiguous language, considere
d in light of its essential
purpose and the object the parties were trying to achie
ve. Kieffer v. Best Buy,
14 A.3d 737, 742—43 (N.J. 2011); Vitty v. D.C.P. Corp.,
633 A.2d 1040, 1043
(N.J. Super. Ct. App. Div. 1993).
A special rule of interpretation applies to contracts of
indemnity,
however. In cases of ambiguity, the contract will be “stri
ctly construed against

15

the indemnitee.” Kieffer, 14 A.3d at 743
(quoting Maritilla, 770 A.2d at 1 151).
That principle suggests that contractual
language in derogation of the step 1
and 2 default rules must be “explicit,”
see Mantilla, 770 A.2d at 1152, or
“unequivocal,” see Ramos, 510 A.2d
at 1159.
I turn to the language of the indemnific
ation provisions, quoted in full
above. That language evolved from 198
5 through 2002, but throughout it
remained quite broad.
In 1985, it required indemnification of
“any and all claims, damages,
expenses either direct or consequential
for injuries to persons or property
arising out of or in consequence of the
performance of the testing or
inspections hereunder and/or the per
formance” of the seat belts. The 1995
version contained exactly the same
language (albeit in capital letters), but
added the proviso “UNLESS CAUSED BY
THE NEGLIGENCE OF USTC.” The
2000 version covered “ALL CLAIMS MAD
E BY ANY THIRD PARTY OR LOSS
DAMAGE OR EXPENSE OF WHATSO
EVER NATURE INCLUDING
REASONABLE LEGAL EXPENSES AND
HOWSOEVER ARISING RELATING TO
THE PERFORMANCE, PURPORTED PER
FORMANCE OR NONPERFORMANCE, OF ANY SERVICES.
8
”
As to subject matter, these indemnity
provisions apply to claims or
expenses “arising out of” (or even mo
re broadly, “HOWSOEVER ARISING
RELATING TO”) the seatbelt testing und
er the contract. Courts interpreting
such “arising out of” language have giv
en it broad scope. Vitty, for example,
held that “the words ‘arising out of’ sho
uld be construed in accordance with the
common and ordinary meaning as refe
rring to a claim ‘growing out of’ or having
its ‘origin in’ the subject matter of the
agreement....” 633 A.2d at 1043.
As to the kinds of expenses that are
compensable, it seems that legal fees
and expenses would comfortably fit wit
hin the indemnity provisions’ broad
language. The 1985/90 provisions enc
ompasses “any and all claims [or]
...

8

The 2000 version provides for indemnific
ation only to the extent that such
expenses exceed the fee Takata paid to
SGS.
16

expenses.” The 2000 version more spe
cifically covers “DAMAGE OR EXPENSE
OF WHATSOEVER NATURE INCLUDING
REASONABLE LEGAL EXPENSES”
(2000).
So, to be sure, the contractual languag
e is broad. But “broad” does not
equate to “explicit” and “unequivocal.
” In the context of a claim for indemnity
in
derogation of the default rules stated
above, the contract must be not just
broad but specific. In Azurak v. Cor
porate Property Investors, 814 A.2d 600
(N.J. 2003), for example, the indemnity
provision in a contract for janitorial
services at a shopping mall covered
“any claim ... or expense (including
attorneys’ fees),” and it extended to mat
ters “relating to, arising out of or
existing by reason of Contractor’s per
formance of this Agreement or the
conditions created thereby . . .“ Id. at
600. Sued for a slip and fall, the mall
was
found 30% responsible and sought ind
emnification. Affirming the Appellate
Division, the Supreme Court agreed that
“the cited language of the
indemnification provision was neither
explicit nor unequivocal on the subject of
the indemnitee’s negligence, thus fall
ing short of the standard we established
in [Ramos, supra, and Mantilla, supra.]
Id. at 601. The Court approvingly cited
the Appellate Division’s reliance on the
“absence of clear and explicit language
addressing indemnification for the Mall
’s negligence.” Id.
It was not enough, said Azurak, that
the indemnity provision, which
covered any claims arising out of the
contract’s subject matter, was “broad.”
Former case law giving comprehensive
effect to such a “broad form” indemnity,
Azurak held, had been “implicitly ove
rruled by Ramos and Mantilla.” Id. “In
.

9

The reference is to Doloughty v. Blanch
ard Const. Co., 352 A.2d 613 (Law Div.
1976), a case that has been impliedly over
ruled by Ramos and Mantilla. Azurak, 814
A.2d at 600—0 1.
Leitao v. Damon G. Douglas Co., 693 A.2d
1209, 1212 (N.J. Super. Ct. App. Div.
1997), cited by SGS, is questionable at best,
because it rests squarely on the authority
of the overruled Doloughty case. In addition,
Leitao relies on the Doloughty-derived
rationale that in a construction case, the
indemnity contracts really serve the function
of allocating coverage among the parties’ insu
rers. Id. (citing, e.g., The Pep Boys v.
Cigna Indem. Ins. Co. of N. America, 692
A.2d 546, 549 (N.J. Super. Ct. App. Div.
1997) (insurance case); Harrah’.s Atlantic
City
1122, 1124 (N.J. Super. Ct. App. Div. 1996 , Inc. v. Harleysuille Ins. Co., 671 A.2d
) (insurance case)). Contrary to contracts of
17

order to allay even the slightest doubt on the issue of what is required to bring
a negligent indemnitee within an indemnification agreement we reiterate that
the agreement must specifically reference the negligence or fault of the
indemnitee.” Id.
To be sure, the cited cases are speaking primarily of the step 1 eligibility
analysis. But the concerns of step 2, like those of step 1, are bound up in the
default rule barring indemnification for the indemnitee’s own negligence. And
although the step 2 rule, too, can be overruled contractually, such contractual
language must be similarly explicit.
I find broad language, but not clear and explicit language, in the
SGS/Takata indemnification provisions. They mention negligence only once: in
the 2000 version, indemnification is excluded for expenses “CAUSED BY THE
NEGLIGENCE OF USTC.” These indemnification provisions do not specifically
refer to indemnification of the costs of defense of claims (however unsuccessful)
that SGS was actively negligent.
The contractual language, then, does not take us out of the realm of the
“default rules.” In other words, we remain where we were at the close of Section
III.A.2, supra. Under the step 2 apportionment rule, SGS may be indemnified
only for expenses of defending claims apart from those alleging that SGS was
actively negligent.
4.

Apportionment

Takata has submitted suggestive evidence that the claims SGS litigated
in the underlying actions were all claims of wrongdoing by SGS. SGS has
submitted other materials suggesting that it was, at least at times, defending
Takata’s actions. What I do not have before me is an apportionment analysis: a
statement of SGS’s claimed expenses, and an analysis of the portions that were
and were not devoted to rebutting charges that SOS was actively negligent.

indemnity, insurance contracts are generally construed liberally in favor of the
insured.

18

To some degree, the omission is understandable. The parties simply
disagreed on the applicable legal standard, and the scope or even
relevance of
apportionment evidence depended on that standard.
Out of caution, then, I will permit (but not require) SGS, within 21
days,
to make a supplemental submission, not to exceed 10 pages. In
that
submission, SGS should assume for purposes of argument that
my
apportionment analysis governs, and should establish how indem
nification of
its expenses would be apportioned thereunder. Within 21 days
thereafter,
Takata may, if it wishes, respond with a 10-page submission.
No reply is
authorized.

B.

Count III: Implied Covenant of Good Faith and Fair Dealing
Breach of the implied covenant of good faith and fair dealing
is a
separate claim, with different elements. Nevertheless, the forego
ing analysis
implies that summary judgment must be granted to Takata on
Count III, as
well.
“Good faith performance or enforcement of a contract emphasizes
faithfulness to an agreed common purpose and consistency with
the justified expectations of the other party.”’ [Wilson v. Amerada
Hess Corp., 168 N.J. 236, 245, 773 A.2d 1121 (2001)] (quoting
Restatement (Second) of Contracts, supra, 205 comment a). The
§
covenant of good faith and fair dealing calls for parties to a
contract to refrain from doing “anything which will have the
effect
of destroying or injuring the right of the other party to receive”
the
benefits of the contract. Palisades Props., Inc. v. Brunetti, 44 N.J.
117, 130, 207 A.2d 522 (1965) (internal quotations omitted); see
also Wade v. Kessler Institute, 172 N.J. 327, 340, 798 A.2d 1251
(2002) (same). Proof of “bad motive or intention” is vital to an
action for breach of the covenant. Wilson, supra, 168 N.J. at 251,
773 A.2d 1121. The party claiming a breach of the covenant of
good faith and fair dealing “must provide evidence sufficient to
support a conclusion that the party alleged to have acted in bad
faith has engaged in some conduct that denied the benefit of the
bargain originally intended by the parties.” Williston, supra,
§
63:22, at 513—14 (footnotes omitted); see also Wilson, supra, 168
N.J. at 251, 773 A.2d 1121; [Sons of Thunder, Inc. v. Borden, Inc.,
148 N.J. 396, 420, 690 A.2d 575 (1997)]
19

Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Ctr.
Associates, 864
A.2d 387, 396 (N.J. 2005).
The bad faith here, according to SGS, lay in the decision
of Takata’s
counsel to deny SGS’s requests for defense and indemnit
y. SGS suggests that
counsel’s decision was based, not on the language of the agre
ements, but on
strategic considerations. From quoted deposition testimon
y, an inference could
plausibly be drawn that counsel sought to give SGS an
incentive to participate
actively in the defense and to avoid bad testimony by its
employees. Counsel
added (to paraphrase) that if Takata had defended but reser
ved rights under
the indemnity, it would have been placed in the position of
chasing SGS for the
money in the event of an unfavorable result. (ECF no. 122-3
at 3)
I will make the SGS-friendly assumption, for purposes
of argument, that
this deposition testimony could be evidence of bad faith. But
bad faith, though
“vital,” id., is not sufficient. Breach of the implied cove
nant of good faith and
fair dealing requires that a party, here SGS, was deprived
of its “justified
expectations,” and was “denied the benefit of the bargain
originally intended by
the parties.” Id. I have held that SGS was not entitled to inde
mnification for
costs of rebutting charges of its own active negligence. It
follows that Takata,
whether in good or bad faith, did not deprive SGS of the bene
fit of the bargain
the parties made.
Should SGS’s supplemental submission persuade me, howev
er, that it
was denied a substantial portion of the benefit of the cont
ract, it may be
necessary to revisit this aspect of my ruling.

20

CONCLUSION
For the reasons stated above, the sum
mary judgment motion of Takata
(ECF no. 121) is CONDITIONALLY GRANTE
D, and that of SGS (ECF no. 122) is
CONDITIONALLY DENIED, subject to
the supplemental submissions
authorized in Section III.A.4, supra. In acc
ordance with the accompanying
Order, if no such submission is received,
this order will become final; if
supplemental submissions are received,
I will rule as to any apportionment
issues that remain.
An appropriate Order accompanies this opi
nion.
Dated: April 6, 2016

(L

KEVIN MCNULTY
United States District Judge”

21