SPECIALTY AUTO PARTS USA INC v. HOLLEY PERFORMANCE PRODUCTS INC (2024)

MEMORANDUM AND ORDER

In 2017, Plaintiff Specialty Auto Parts USA, Inc. sued Defendant Holley Performance Products, Inc. in Michigan state court, asserting three breach-of-contract claims. (Docket No. 1-1) Holley removed the case (D.N. 1), and it was transferred to this Court. (D.N. 12) Holley then filed a motion to dismiss, which Senior Judge Joseph H. McKinley granted. (D.N. 44) On appeal, however, the Sixth Circuit Court of Appeals reversed and reinstated Specialty's claims. (D.N. 48) Specialty subsequently amended its complaint to assert a single breach-of-contract claim. (D.N. 131) Each party now moves for summary judgment on that claim. (D.N. 166; D.N. 184) The Court previously heard oral argument on the motions. (D.N. 209) After careful consideration, the Court will grant Specialty's motion and deny Holley's.

I.1

Specialty and Holley are competing automotive-performance companies that have been engaged in a series of legal disputes spanning the past twenty years. In 2000, Holley filed suit against Specialty, alleging that Specialty had “misappropriated the trade dress of Holley's carburetor main bodies.” (D.N. 5-3, PageID.607) The parties resolved the suit by entering into a “Compromise and Settlement Agreement and Release” (the Settlement Agreement), in which Holley agreed to “manufacture all of its HP line of main bodies with 6 identification surfaces cast into the main body” and “cast or stamp the word ‘Holley’ on one of the six flat surfaces on all HP main bodies manufactured for it.” (D.N. 131-1, PageID.4765)

In 2012, Specialty reopened the case, moving for summary enforcement of the Settlement Agreement (the Settlement Agreement Action). (D.N. 131-7) Specialty claimed that Holley violated the Settlement Agreement by (1) bringing previously released claims against Specialty and (2) failing to comply with the manufacturing requirements set out in the Settlement Agreement. (Id., PageID.4823; see also D.N. 131-1) Judge McKinley determined that Holley had violated the Settlement Agreement on both grounds and referred the matter to Magistrate Judge Lanny King for a report and recommendation on the appropriate relief. (D.N. 131-2, PageID.4770–74; see D.N. 131-9) Judge King concluded that specific performance was the only available remedy; he recommended that Holley be precluded “from manufacturing, distributing, or selling any breaching products.” (D.N. 131-8, PageID.4972; see D.N. 131-9, PageID.4990–91) Because the Court could only award specific performance, Judge King also suggested that Specialty could bring a separate state-court action for breach of contract based on Holley's violation of the Settlement Agreement. (D.N. 131-8, PageID.4976) Judge McKinley adopted the recommendation and entered an order in 2014 “enjoining [Holley] from manufacturing, distributing or selling any of its HP line of main bodies in violation of the settlement agreement.” (D.N. 131-9, PageID.4990 (citing D.N. 131-8))

Specialty reopened the case again in 2016, this time alleging that Holley was in contempt of the Court's 2014 Order (the Contempt Action). (See D.N. 89; D.N. 127) Although immediately after the issuance of the 2014 Order Holley changed the name of the breaching main bodies from Ultra HP to Ultra XP, creating a new line of “Xtreme Performance” products (D.N. 183-17), portions of Holley's website, the packaging for the Ultra XP, and third-party advertisements for the Ultra XP still contained references to the breaching Ultra HP main bodies. (See id.) In his report and recommendation on Specialty's motion to hold Holley in contempt, Judge King concluded that Specialty had failed to prove that Holley violated the 2014 Order. (Id.) Judge McKinley adopted Judge King's R&R, again closing the 2000 case. (See D.N. 184–19)

In 2017, Specialty sued Holley in Michigan state court, asserting three breach-of-contract claims. (D.N. 1-1, PageID.31–34) Holley removed the action to federal court (D.N. 1), and the case was transferred from the Eastern District of Michigan to this Court. (D.N. 12) Holley then moved to dismiss Specialty's complaint as barred by res judicata (D.N. 30), which Judge McKinley granted. (D.N. 44) Specialty appealed (D.N. 46), and the Sixth Circuit reversed the dismissal. (D.N. 48) The Sixth Circuit held that issue preclusion did not apply to Count II of the complaint, which alleged that Holley violated the Settlement Agreement by selling the breaching Ultra HP main bodies. (Id., PageID.2495–96; see D.N. 1-1, PageID.32–33) The Sixth Circuit determined that claim preclusion did not apply to Count II either, because the claim “likely could not have been brought” in the Settlement Agreement Action. (D.N. 48, PageID.2495)

Specialty subsequently amended its complaint, leaving only Count II. (See D.N. 131) Both parties now move for summary judgment. (See D.N. 166, D.N. 184) Specialty argues that (1) Holley is liable for breach of contract because it violated the Settlement Agreement and (2) Specialty is entitled to disgorgement of Holley's profits from the breach. (D.N. 166) Holley argues that Specialty has failed to show that it was damaged by the breach. (D.N. 184)

II.

Summary judgment is required when the moving party shows, using evidence in the record, “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 56(c)(1). For purposes of summary judgment, the Court must view the evidence in the light most favorable to the nonmoving party. Loyd v. Saint Joseph Mercy Oakland, 766 F.3d 580, 588 (6th Cir. 2014) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)). However, the Court “need consider only the cited materials.” Fed. R. Civ. P. 56(c)(3); see Shreve v. Franklin Cnty., 743 F.3d 126, 136 (6th Cir. 2014). If the nonmoving party “fails to properly support an assertion of fact or fails to properly address another party's assertion of fact as required by Rule 56(c),” the fact may be treated as undisputed. Fed. R. Civ. P. 56(e)(2)-(3). To survive a motion for summary judgment, the nonmoving party must establish a genuine issue of material fact with respect to each element of each of its claims. Celotex Corp. v. Catrett, 477 U.S. 317, 322–23 (1986) (noting that “a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial”).

“The fact that the parties have filed cross-motions for summary judgment does not mean ․ that summary judgment for one side or the other is necessarily appropriate.” Appoloni v. United States, 450 F.3d 185, 189 (6th Cir. 2006) (internal quotation marks omitted) (quoting Parks v. LaFace Recs., 329 F.3d 437, 444 (6th Cir. 2003)). “When reviewing cross-motions for summary judgment, [the Court] must evaluate each motion on its own merits and view all facts and inferences in the light most favorable to the nonmoving party.” Id. (internal quotation marks omitted) (quoting Westfield Ins. Co. v. Tech Dry, Inc., 336 F.3d 503, 506 (6th Cir. 2003)).

A. Breach of Contract

Specialty moves for summary judgment on its breach-of-contract claim based on issue preclusion. (D.N. 166-1, PageID.5825) Holley also moves for summary judgment on Specialty's breach-of-contract claim, arguing that Specialty has not presented any evidence of actual damages. (D.N. 184, PageID.6366, 6368) The parties agree that Kentucky law governs the Court's analysis of these issues. (See D.N. 184, PageID.6366–67; D.N. 193, PageID.7192–93) See also Ingenium Techs. Corp. v. Beaver Aerospace & Def., Inc., 122 F. Supp. 3d 683, 687 (E.D. Mich. 2015) (“In a diversity case, state contract law provides the rules of decision.” (citing Sault Ste. Marie Tribe of Chippewa Indians v. Engler, 146 F.3d 367, 372 (6th Cir. 1998))). A breach-of-contract claim under Kentucky law requires: (1) a valid and enforceable contract, (2) a breach of that contract, and (3) damages caused by that breach. Tex. Cap. Bank, N.A. v. First Am. Title Ins. Co., 822 F. Supp. 2d 678, 682 (W.D. Ky. 2011) (citing Ward v. Daugherty, 14 S.W.2d 1089, 1089 (Ky. 1929)).

The doctrine of issue preclusion generally “precludes relitigation of issues of fact or law actually litigated and decided in a prior action between the same parties and necessary to the judgment, even if decided as part of a different claim or cause of action.” Ga.-Pac. Consumer Prods. LP v. Four-U-Packaging, Inc., 701 F.3d 1093, 1098 (6th Cir. 2012) (quoting Gargallo v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 918 F.2d 658, 661 (6th Cir. 1990)). In Kentucky, issue preclusion bars further litigation of an issue if the following elements are met:

(1) at least one party to be bound in the second case must have been a party in the first case; (2) the issue in the second case must be the same as the issue in the first case; (3) the issue must have been actually litigated; (4) the issue was actually decided in that action; and (5) the decision on the issue in the prior action must have been necessary to the court's judgment and adverse to the party to be bound.

Nat'l Tr. Ins. Co. v. Heaven Hill Distilleries, Inc., No. 3:14-CV-394-DJH-CHL, 2018 WL 1542148, at *6 (W.D. Ky. Mar. 29, 2018) (quoting Miller v. Admin. Off. of Cts., 361 S.W.3d 867, 872 (Ky. 2011)).

According to Specialty, the Settlement Agreement Action established that Holley is liable for breach of contract. (D.N. 166-1, PageID.5825) As Holley notes, however, the Settlement Agreement Action did not reach the issue of damages. (See D.N. 201, PageID.7522) Indeed, Judge King noted that damages are a necessary element for breach of contract, but they are not a necessary element for enforcement of a settlement agreement. (See D.N. 131-8, PageID.4978 (“The necessity of damages is less certain outside the contract realm where public policy rather than the intention of the parties must justify enforcement.”)) And Specialty essentially concedes that the issue of damages was not actually litigated. (See D.N. 166-1, PageID.5827 n.4) Thus, issue preclusion does not bar Holley from challenging Specialty's breach of contract claim. See Heaven Hill Distilleries, 2018 WL 1542148, at *6. The Court must now determine if there is a genuine dispute as to the third element of Specialty's breach-of-contract claim, as Holley argues that Specialty has not shown actual damages. (D.N. 184)

In Kentucky, the typical measure of contract damages “is that sum which will put the injured party into the same position he would have been in had the contract been performed.” Hibbett Sporting Goods, Inc. v. ML Georgetown Paris, LLC, No. CV 5:18-524-DCR, 2020 WL 1170220, at *4 (E.D. Ky. Mar. 11, 2020) (internal quotation marks omitted) (quoting Barnett v. Mercy Health Partners-Lourdes, Inc., 233 S.W.3d 723, 728 (Ky. Ct. App. 2007)). “Actual damages are an amount awarded to a complainant to compensate for a proven injury or loss; damages that repay actual losses.” Babcock Power, Inc. v. Kapsalis, 854 F. App'x 1, 6 (6th Cir. 2021) (internal quotation marks and alteration omitted) (quoting Craig & Bishop, Inc. v. Piles, 247 S.W.3d 897, 907 (Ky. 2008)). An injured party generally cannot recover damages “for loss beyond an amount that the evidence permits to be established with reasonable certainty.” Id. (internal quotation marks omitted) (quoting Pauline's Chicken Villa, Inc. v. KFC Corp., 701 S.W.2d 399, 401 (Ky. 1985)).

Specialty asserts that Holley's breach of the Settlement Agreement deprived it of the benefit of the bargain (D.N. 193, PageID.7193) and caused lost sales:

As explained by Richard Platt, Specialty's President since 1984 (D.N. 195-1, PageID.7445), to comply with the Settlement Agreement, Specialty “invested time and money to revise it[s] tooling,” so that it could “change its main body design.” (See D.N. 65-7, PageID.2865 ¶ 6) The value of this investment was lost because Holley violated the Settlement Agreement. (Id.) Also, after introduction of the [breaching main bodies], Specialty's sales “flatlined,” and that [sic] “there is no question ․ as a seller of product that we lost substantial sales as a result of this new product that Holley introduced as the Ultra HP.” (D.N. 195-1, PageID.7219–20, 7230–31; D.N. 193-2)

(D.N. 193, PageID.7187 (internal citations modified)) Specialty makes no attempt to quantify any such losses, however, arguing that disgorgement is the proper remedy because its damages are “impossible to quantify.” (D.N. 212, PageID.8259) Holley asserts that Specialty's damages are too speculative and unsubstantiated to be recoverable. (See D.N. 201, PageID.7521) According to Holley, Specialty has not identified any lost profits or sales with particularity (see id., PageID.7521 (citing D.N. 183-20, PageID.6366)), and the decline in Specialty's carburetor sales started before Holley started selling the breaching HP main bodies. (Id.; see D.N. 195-1, PageID.7462)

Specialty's president conceded that he cannot prove that a customer purchased one of Holley's breaching main bodies instead of Specialty's main bodies. (D.N. 195-1, PageID.7449) Instead, the president's “opinion is that many people purchased the Ultra HP main body instead of” Specialty's product. (Id. (emphasis added)) Specialty's lost-sales claim is therefore based on speculation. Specialty maintains that it was damaged because Holley's breach deprived it of the benefit of the bargain. (D.N. 166-1, PageID.5827) Specialty's president asserts that in order to comply with the Settlement Agreement, “Specialty invested time and money to revise its tooling,” and it lost out on the value of that investment when Holley breached the agreement. (D.N. 65-7, PageID.2865)

Based on the record, and as Specialty has acknowledged (see D.N. 212, PageID.8259), the Court cannot quantify the benefit Specialty would have received had Holley complied with the Settlement Agreement. Specialty's lost profits are speculative, and the “value of the investment” that Specialty “lost out on” is vague. (D.N. 65-7, PageID.2865) In short, Specialty cannot show actual damages. See Babcock Power, Inc. v. Kapsalis, No. 3:13-CV-717-CRS, 2019 WL 1518166, at *3 (W.D. Ky. Apr. 8, 2019), aff'd, 854 F. App'x 1 (6th Cir. 2021) (explaining that “vague concerns ․ are not sufficiently concrete to ground a jury finding of ‘actual damage’ ”). “However, Kentucky law indicates that a plaintiff's failure to establish his or her entitlement to compensatory damages is not fatal to a claim if he or she can otherwise establish a cause of action.” EQT Prod. Co. v. Magnum Hunter Prod. Co., 266 F. Supp. 3d 961, 973 (E.D. Ky. 2017) (citing Curry v. Bennett, 301 S.W.32 502, 506 (Ky. Ct. App. 2009), Mo–Jack Distrib., LLC v. Tamarak Snacks, LLC, 476 S.W.3d 900, 908 (Ky. Ct. App. 2015)). Indeed, “[i]n the absence of actual damages, a party may recover nominal damages for breach of contract.” Babcock Power, 854 F. App'x at 6 (citing Harness v. Fluor Spar Co., 147 S.W. 934, 940 (Ky. 1912)). Thus, Specialty's inability to show actual damages is not fatal to its breach-of-contract claim. The Court must now determine whether Specialty is only entitled to nominal damages for that breach, or if disgorgement is an available remedy.

B. Disgorgement

Specialty asserts that it is entitled to disgorgement of the $2,028,264.19 net profit that Holley earned from its sales of the breaching Ultra HP main bodies. (D.N. 166-1, PageID.5828) In response, Holley argues that Specialty is not entitled to disgorgement because (1) claim preclusion bars Specialty's request for disgorgement; (2) disgorgement is not a proper contract remedy; (3) Holley's profits from the breaching products are not “ill-gotten gains”; and (4) Specialty has “unclean hands.” (D.N. 184) The Court will address each argument in turn.

1. Claim Preclusion

Holley argues that claim preclusion bars Specialty from seeking disgorgement because Specialty unsuccessfully sought disgorgement from Holley in the prior litigation between the parties. (See D.N. 184, PageID.6372) Specialty sought disgorgement in the Settlement Agreement Action (see D.N. 5-23) and in the Contempt Action.² (See D.N. 194-7) Because the Settlement Agreement Action and the Contempt Action were federal-question cases, the Court must apply federal preclusion law to determine whether Specialty's prior requests for disgorgement preclude it from seeking disgorgement now. See Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 507 (2001) (stating that federal preclusion law determines “the claim-preclusive effect of a federal-court judgment in a federal-question case”).

“Claim preclusion prevents parties from litigating matters that ‘should have been advanced in an earlier suit.’ ” Wheeler v. Dayton Police Dep't, 807 F.3d 764, 766 (6th Cir. 2015) (quoting Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 77 n.1 (1984)). Claim preclusion has four elements: (1) “[a] final decision on the merits by a court of competent jurisdiction”; (2) “[t]he second action involves the same parties, or their privies, as the first”; (3) “[t]he second action raises an issue actually litigated or which should have been litigated in the first action”; and (4) “[a]n identity of the causes of action.” Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474, 480 (6th Cir. 1992). “Claim preclusion does not apply when a plaintiff was ‘unable to rely on a certain theory of the case or to seek a certain remedy or form of relief in the first action because of the limitations on the subject matter jurisdiction of the courts ․, and the plaintiff desires in the second action to rely on that theory or to seek that remedy or form of relief.’ ” Specialty Auto Parts USA, Inc. v. Holley Performance Prods., Inc., 771 F. App'x 584, 592 (6th Cir. 2019) (quoting Restatement (Second) of Judgments, § 26(1)(c) (Am. L. Inst. 1982)).

Specialty argues that claim preclusion does not apply here because it could not have brought its present breach-of-contract claim in the Settlement Agreement Action. (D.N. 192, PageID.7255) On the appeal of the dismissal of this case, the Sixth Circuit confirmed Specialty's position. Specialty Auto Parts USA, Inc., 771 F. App'x at 592–93. The Sixth Circuit also decided that “an overly strict application of the doctrine of claim preclusion would not serve the best interests of justice in this case.” Id. at 593. And in the Settlement Agreement Action, Judge King concluded that the Court's authority to enforce the terms of the Settlement Agreement did not allow it to mandate disgorgement. (D.N. 81, PageID.693–94) Specialty was therefore unable to pursue its present breach-of-contract claim and associated request for disgorgement in the Settlement Agreement Action. Accordingly, claim preclusion does not apply here. See Specialty Auto Parts, 771 F. App'x at 592.

2. Disgorgement as an available remedy

“Disgorgement is an equitable remedy to force a defendant to give up the amount equal to the defendant's unjust enrichment.” Gavriles v. Verizon Wireless, 194 F. Supp. 2d 674, 681 (E.D. Mich. 2002). In other words, “[a]n equitable disgorgement award seeks to deprive the wrongdoer of his ill-gotten profits.” Osborn v. Griffin, 865 F.3d 417, 452 (6th Cir. 2017). According to Holley, disgorgement is not a proper breach-of-contract remedy. (D.N. 184, PageID.6372) Specialty maintains that “[d]isgorgement is an appropriate remedy for breach of a settlement agreement here.” (D.N. 192, PageID.6767)

“In American law, disgorgement of profits is not generally an available remedy for breach of contract.” Kansas v. Nebraska, 574 U.S. 445, 482 (2015) (Thomas, J., concurring in part). Unlike compensatory damages, which is the usual remedy for breach of contract, “disgorgement ․ is an extraordinary remedy that goes beyond a plaintiff's damages, requiring the breaching party to refund additional profits gained in the breach.” Id. But “there are numerous legal relationships––including some created by contract––in which a legal entitlement receives insufficient protection when the remedy for violation is limited to compensation in the form of damages.” Restatement (Third) of Restitution and Unjust Enrichment § 39 cmt. a (Am. L. Inst. 2011). “If a profitable interference has already occurred, the law of restitution allows a claim to disgorgement of profits, as an alternative to damages, in cases of intentional interference with legal entitlements of any kind.” Id. “Restitution affords ․ protection after the fact, awarding the gains from a profitable breach of a contract that the defendant can no longer be required to perform.” Id.

Although the Court is aware of no Kentucky cases addressing the propriety of a disgorgement award for a breach-of-contract claim premised on the breach of a settlement agreement, “Kentucky's highest court has ordered the surrender of profits received by a wrongdoer.” Thoro-Graph, Inc. v. Lauffer, No. 2010-CA-000891-MR, 2012 WL 5038254, at *4 (Ky. Ct. App. Oct. 19, 2012) (citing Edwards v. Lee's Adm'r, 96 S.W.2d 1028, 1032 (1936)). Existing Kentucky case law therefore does not necessarily preclude an award of disgorgement in this case.

In addition, as the Court has noted previously, see Specialty Auto Parts USA, Inc. v. Holley Performance Prods., Inc., No. 1:17-CV-147-DJH-LLK, 2022 WL 848029, at *3 (W.D. Ky. Mar. 21, 2022), disgorgement “may be imposed for the intentional or reckless violation of a settlement agreement.” Cernelle v. Graminex, L.L.C., 437 F. Supp. 3d 574, 594 (E.D. Mich. 2020), amended on reconsideration in part, 539 F. Supp. 3d 728 (E.D. Mich. 2021), aff'd, No. 21-1579, 2022 WL 2759867 (6th Cir. July 14, 2022), and aff'd, No. 21-1579, 2022 WL 2759867 (6th Cir. July 14, 2022) (citing Kansas v. Nebraska, 574 U.S. 445, 461–62 (2015)). “The reason is that ‘a party's profitable breach of contract may be a source of unjust enrichment at the expense of the other contracting party.’ ” Id. (quoting Restatement (Third) of Restitution and Unjust Enrichment § 39 cmt. a).

Here, although Specialty's claim is for breach of contract, the breach at issue was Holley's violation of the Settlement Agreement. It is undisputed that Holley derived “$2,028,264.19 in net profit” from that breach. (D.N. 166-7, PageID.5871) Considering that Specialty is unable to recover more than nominal damages at law for a breach that profited Holley millions, disgorgement may be an appropriate equitable remedy; Holley's breach appears to be “a source of unjust enrichment at the expense of the other contracting party.” Restatement (Third) of Restitution and Unjust Enrichment § 39 cmt. a; see also McKeon Prods., Inc. v. Honeywell Safety Prods. USA, Inc., No. 95-CV-76322, 2022 WL 397565, at *8 (E.D. Mich. Feb. 9, 2022) (awarding disgorgement because the court “agreed that [defendant] should not be permitted to benefit from those years of prior sales in violation of the Consent Order”). Moreover, Judge McKinley previously determined that “Holley freely chose to brand the Aluminum Ultra HP carburetor as an ‘HP’ carburetor, as opposed to including it in some other line or coming up with a new name for it.” Holley Performance Prods. v. Specialty Auto Parts U.S.A., Inc., No. 1:00-CV-00186-M, 2014 U.S. Dist. LEXIS 65351, at *15–16 (W.D. Ky. May 12, 2014). Holley thus at least recklessly violated the Settlement Agreement, which would support a disgorgement award. See Cernelle, 437 F. Supp. 3d at 594. Holley maintains, though, that disgorgement is improper, as discussed below.

3. Ill-Gotten Gains

According to Holley, “[e]ven if disgorgement were an available remedy ․, to obtain it, Specialty would still need to prove that the $2 million in profits that it seeks to have disgorged were “ill-gotten”—i.e., that Holley ‘would not have realized [those profits] but for the breach.’ ” (D.N. 201, PageID.7529 (citing Restatement (Third) of Restitution and Unjust Enrichment § 39(3)) Specialty contends that the hypothetical profits Holley would have gained absent the breach are irrelevant. (D.N. 193, PageID.7202)

“[T]he unjust enrichment of a conscious wrongdoer ․ is the net profit attributable to the underlying wrong.” Restatement (Third) of Restitution and Unjust Enrichment § 51(4). The party seeking disgorgement “has the burden of producing evidence permitting at least a reasonable approximation of the amount of the wrongful gain.” Id. § 51(5)(d). But the defendant bears the “residual risk of uncertainty in calculating net profit.” Id.

In response to Specialty's interrogatory, Holley reported that “in connection with its sale of its Ultra Aluminum HP product line, Holley derived ․ $2,028,264.19 in net profit.” (D.N. 166-7, PageID.5871) Thus, $2,028,264.19 is the “net profit attributable to the underlying wrong”––the breach of the Settlement Agreement. Restatement (Third) of Restitution and Unjust Enrichment § 51(4). Specialty therefore properly seeks disgorgement of that sum. See id. § 51(5)(d). The profits that Holley hypothetically could have gained had it not breached the Settlement Agree are irrelevant. See id.

McKeon further supports the conclusion that Holley's net profit constitutes ill-gotten gains. In McKeon, the defendant violated its consent decree with the plaintiff by selling a particular line of earplugs. 2022 WL 397565, at *5. The court ordered the defendant to disgorge its profits from the sale of the earplugs. Id. at *10. In reaching its decision, the court distinguished the case that Holley now relies on, Balance Dynamics Corp. v. Schmitt Industries, Inc., 204 F.3d 683 (6th Cir. 2000). According to the McKeon court, Balance Dynamics “d[id] not compel a different result” because “[t]hat case involve[d] a false advertising claim between competitors,” and “the plaintiff was not entitled to defendant's profits unless it could show that it lost sales or profits, or that defendant gained them, as a result of the alleged false advertising.” McKeon, 2022 WL 397565, at *10. Balance Dynamics was not a case, like McKeon and the instant case, where a party sought disgorgement of profits from sales that violated a settlement agreement. See id. In sum, Specialty has shown that the approximately $2 million in profits that it seeks to disgorge were ill-gotten.

4. Unclean Hands

As a final challenge to Specialty's request for disgorgement, Holley argues that it “is also entitled to summary judgment on Specialty's equitable claim for disgorgement ․ because [Specialty] is pursuing this claim with unclean hands.” (D.N. 184, PageID.6375)

The equitable doctrine of unclean hands precludes a party from obtaining equitable relief “if that party engaged in fraudulent, illegal or unconscionable conduct in connection with the matter in litigation.” Mem'l Hall Museum, Inc. v. Cunningham, 455 F. Supp. 3d 347, 361 (W.D. Ky. 2020) (internal quotation marks omitted) (quoting Mullins v. Picklesimer, 317 S.W.3d 569, 577 (Ky. 2010), as modified on denial of reh'g (Aug. 26, 2010)). The doctrine “does not appl[y] to all misconduct or operate as to repel all sinners from courts of equity.” Id. (internal quotation marks omitted) (alteration in original) (quoting Mullins, 317 S.W.3d at 577). “A trial [court's] decision to invoke the equitable defense of unclean hands rests within its sound discretion.” Id. (internal quotation marks omitted) (alteration in original) (quoting Mullins, 317 S.W.3d at 577).

Holley contends that the unclean-hands doctrine bars Specialty's request for disgorgement because “the undisputed material facts demonstrate that Specialty is improperly using this lawsuit as retribution for Holley's refusal to enter into an unfavorable, long-term supply agreement with Specialty.” (D.N. 184, PageID.6376) “[S]tated another way,” Holley asserts, “had Holley succumbed to Specialty's extortionate bullying in January 2016, this lawsuit would have never been filed.” (Id. (internal citation omitted)) Specialty challenges Holley's assertion of the unclean-hands doctrine on several grounds. (See D.N. 193, PageID.7203–7207)

Holley's “retribution” argument relates to emails between Specialty's president, Richard Platt, and his relatives. (D.N. 184, PageID.6357) In a May 2013 email to his daughter, Platt stated:

Holley is facing crunch time: come up with a contract we like or take a risk of huge legal exposures which could be far more costly to them than remunerative to sue, but worth watching the outcome nonetheless, if that's what they want to do. From a business standpoint, of course, I'd like to come away with a stream of future monies, but, if that isn't to be, just watching the legal game play out should be entertaining, and, with the remaining issues are covered [sic] by legal defense insurance, I'll litigate until hell freezes over or until there's an unexpected turn for the worse.

(D.N. 186, PageID.6432) Holley also cites emails between Platt and his wife and daughter in April 2014, where he said:

It will be interesting to see which choice Holley makes:

(1) allow Specialty to purchase a freely selected choice of products for 41% below Holley's lowest selling price to others, with a cap of $1.5MM on what Specialty can purchase in a year or,

(2) roll the dice on the [Settlement Agreement Action], and just hope most of the following orders are not granted to Specialty ․

(D.N. 187, PageID.6435) Below that, Platt copied and pasted Specialty's request for relief in the Settlement Agreement Action. (Id., PageID.6435–36) And in a subsequent email in the chain, Platt described the litigation as “just a chess game, with money, not ‘justice,’ as the objective.” (Id., PageID.6435) Finally, Holley's assertion regarding “Specialty's extortionate bullying in January 2016” concerns a letter that Platt sent to Holley's president that month, in which Platt reiterated his proposal for the supply agreement and previewed the Contempt Action. (See D.N. 183-7, PageID.6086) He also stated: “[B]ecause a court battle will benefit no one (save for counsel) and poses a distinct downside for Holley, it remains my sincere hope that we can work out a long-term deal ․ Nonetheless, if I do not hear by January 20 that you are prepared to work out a long-term deal as outlined above, we plan to file this Motion [for contempt].”³ (Id.)

As the Court observed during oral argument, the record is replete with evidence of the animus the parties have towards one another. The record does not show, however, that Specialty has “engaged in fraudulent, illegal or unconscionable conduct in connection with the matter in litigation.” Cunningham, 455 F. Supp. 3d at 361 (emphasis added). “In a long and unbroken line of cases,” Kentucky courts “ha[ve] refused relief to one, who has created by his fraudulent acts the situation from which he asks to be extricated.” Wain v. Cent. Bank and Tr. Co., No. 2021-CA-0202-MR, 2022 WL 16702687, at *3 (Ky. Ct. App. Nov. 4, 2022), review denied (Jan. 10, 2024) (internal quotation marks omitted) (quoting Asher v. Asher, 129 S.W.2d 552, 553 (Ky. 1939)). But this action concerns Holley's breach of the Settlement Agreement, which Specialty had no part in. As Judge McKinley observed previously, Holley “freely chose” to breach the parties' agreement. Holley Performance Prods., 2014 U.S. Dist. LEXIS 65351, at *15–16. Any misconduct on the part of Specialty occurred after Holley had independently chosen to violate the Settlement Agreement. Under these circumstances, the unclean-hands doctrine does not apply; Specialty is entitled to the profits Holley derived from its willful breach of the Settlement Agreement.

III.

For the reasons set forth above, and the Court being otherwise sufficiently advised, it is hereby

ORDERED as follows:

(1) Specialty's motion for summary judgment (D.N. 166) is GRANTED.

(2) Holley's motion for summary judgment (D.N. 184) is DENIED.

(3) A separate Judgment will issue this date.

FOOTNOTES

2.   Holley only makes a claim-preclusion argument as to Specialty's request for disgorgement in the Settlement Agreement Action, so the Court will not examine Specialty's request for disgorgement in the Contempt Action. (See D.N. 184, PageID.6369–72)

3.   Specialty argues that the parties' communications regarding the long-term supply agreement are inadmissible under Federal Rule of Evidence 408. Assuming that the communications fall within the Rule's scope, Rule 408 only proscribes the use of evidence of settlement negotiations “to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement.” Fed. R. Evid. 408. “The Rule expressly provides that ‘conduct [and] statements made in compromise negotiations’ are nevertheless admissible if used for a purpose other than one of those expressly prohibited by the Rule.” Stryker Corp. v. XL Ins. Am., Inc., No. 1:05-CV-51, 2013 WL 3276408, at *3 (W.D. Mich. June 27, 2013) (quoting Fed. R. Evid. 408). Here, Holley is using the communications for a “purpose other than one of those expressly prohibited by the Rule”: in support of an affirmative defense. Thus, the communications are admissible.

David J. Hale, Judge United States District Court