Looking a Gift Horse in the Mouth: Intermediate Seller Wants to Say "No, Thank You" to Release It Received in Manufacturer's Class Settlement
As someone who has drafted his fair share of class action settlements, I can tell you that I always get a little nervous when I start reading a case in which a court is required to construe the language and effect of a prior class action settlement. I had that same trepidation when I picked up Lester Building Systems v. Louisiana-Pacific Corp., 2009 WL 537501 (Minn. March 5, 2009).
The plaintiff, Lester Building Systems ("Lester"), makes hog barns, which it sells directly to farmers and indirectly through a network of independent builder-dealers. In the early 1990s, Lester stopped using plywood in favor of an external siding product called "Inner-Seal," which was made by Louisiana-Pacific. Around that same time, Louisiana-Pacific started receiving complaints from around the country about its Inner-Seal product swelling and deteriorating. Eventually, Louisiana-Pacific ended up settling a nationwide class action in federal court that resolved all potential Inner-Seal claims. The opt-out settlement did not require Louisiana-Pacific to fund the settlement all at once; rather, it was to make annual payments. The claims ended up far out-pacing Louisiana-Pacific's contributions, and many class members were forced to either accept immediately-reduced payouts on their claims, or wait until such time as Louisiana Pacific could make a full payment.
Lester had bought around $3.4 million of Inner-Seal and used it to make some 2,600 hog barns. Many of its customers were not happy. Lester estimated that to repair its customers' barns would cost $13.2 million. Many of Lester's customers, however, chose an early payout from the settlement fund of only $640,000.
In negotiating the settlement, Louisiana-Pacific -- like many product manufacturers -- had tried to protect not only itself, but also the intermediate sellers of its products by including within the settlement a complete release of liability for them: "To the extent claims may be asserted against persons or entities in the chain of distribution, installation or finishing of the Exterior Inner-Seal siding, the Releasing Party shall be deemed to and does hereby release and forever discharge those persons or entities from claims based solely on distribution, handling, installation, specification, or use of the Exterior Inner-Seal Siding." 2009 WL 537501 at *5 (quoting the settlement).
Lester was far from grateful for such protection, however. In fact, it sued Louisiana Pacific in Minnesota state court, asserting theories of breach of contract, breach of implied and express warranties, and fraud. Lester won at trial handily: the jury awarded Lester $3.4 million for Lester's purchase price for the Inner-Seal products, $10.2 million for lost profits up through 2002, $2.8 million for the cost of restoring goodwill, and $13.2 million for the estimated cost of repairing its customers' barns.
Louisiana Pacific argued that the cost of repairing Lester's customer's barns was not a proper element of damages because Lester had no legal obligation to conduct such repairs, since it had received a full and complete release from the federal settlement. Lester countered that even if it did not have a legal obligation to make such repairs, it had a practical business obligation to do so, and Louisiana-Pacific should pay for it.
The Minnesota Supreme Court examined the language of the federal settlement and held that it clearly and unambiguously released all entities in the chain of distribution -- including Lester -- from liability to repair the farmers' barns. Moreover, the court held, Lester already had received from the jury awards for lost profits and loss of goodwill, and thus no "practical business obligation" could exist to support the so-called consequential repair costs. Without Lester having a legal obligation to repair its customers' barns, Lester could not force Louisiana-Pacific to pay for it.
Lester Building Systems is another good decision for my class action settlements file that squarely considers the language of an intermediary release provision and gives it full force and effect. The irony, of course, is that the release ultimately operated to the detriment of the intermediate seller, who instead wanted to extract money from the manufacturer to pay for repairs to its customers' barns.
