Hemlock Semiconductor Corp. v. Kyocera Corp., Case No. 17-2276

HEMLOCK SEMICONDUCTOR CORPORATION;HEMLOCK SEMICONDUCTOR, LLC, Plaintiffs-Appellees, v. KYOCERA CORPORATION, Defendant-Appellant.

Case No. 17-2276

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

August 16, 2018

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

File Name: 18a0413n.06

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN

BEFORE: COLE, Chief Judge; CLAY and THAPAR, Circuit Judges.

THAPAR, Circuit Judge. Kyocera Corporation is locked in a long-running bout with Hemlock Semiconductor Corporation and Hemlock Semiconductor, LLC, which supply Kyocera with polysilicon that it uses to make solar panels. Kyocera is fighting to get out of certain obligations under the parties' contracts. Below, the district court declared victory for Hemlock. But at this stage, Hemlock has earned only a partial victory. We therefore reverse in part and affirm in part.

I.

In the mid-2000s, the market for solar panels was taking off. Kyocera needed a steady supply of quality polysilicon. So it entered into four contracts with Hemlock, in which Kyocera promised to purchase specified amounts of polysilicon from Hemlock at specified prices over the course of the next ten years or so.

Those contracts contain so-called "take-or-pay" provisions. Under these provisions, the contracts require Kyocera to "take" a specified quantity of polysilicon from Hemlock each year. But if Kyocera does not want to take the polysilicon in a given year, Kyocera still has to "pay" full price for it. This means that Kyocera is on the hook for a certain quantity of polysilicon annually, whether it takes the polysilicon or not.

The contracts also contain so-called "acceleration" provisions. If Kyocera defaults under the contracts, these provisions accelerate the amount it owes Hemlock, such that Hemlock can demand all remaining sums owed. For these acceleration provisions to take effect, Kyocera must default, Hemlock must serve notice of default, and Hemlock must give Kyocera 180 days to cure its default. But if Kyocera does not cure, Hemlock can elect to terminate, at which point Kyocera becomes liable for all remaining payments due—effectively, the sum of the take-or-pay provisions.

Several years into Kyocera and Hemlock's deal, the Chinese government disrupted the solar-panel market by subsidizing Chinese solar-panel companies. This intervention reduced the market price of polysilicon such that the price Kyocera agreed to pay Hemlock was far greater than the going rate. And so Kyocera sought to renegotiate. Initially, the parties came to a compromise, temporarily lowering the price of polysilicon under the parties' deal. But eventually, Hemlock signaled that it would begin insisting that Kyocera take or pay for polysilicon at the original (and now inflated) price.

This litigation ensued. Hemlock sought a declaratory judgment that Kyocera had repudiated the parties' contracts by indicating that it would not take or pay at the original price. In response, Kyocera counterclaimed, seeking a declaratory judgment that the "pay" portion of thetake-or-pay provisions is an unlawful penalty, and thus that the acceleration provisions are too. Kyocera also counterclaimed for breach of contract, alleging that three of the parties' contracts obligated Hemlock to expand certain production facilities, which Hemlock had not done. Hemlock moved to dismiss Kyocera's counterclaims, and the district court agreed. Kyocera now appeals.

II.

Kyocera first appeals the dismissal of its challenge to the take-or-pay provisions. We review the district court's decision de novo. JPMorgan Chase Bank, N.A. v. Winget, 510 F.3d 577, 581 (6th Cir. 2007). In doing so, we accept Kyocera's well-pled allegations as true and ask whether Hemlock is nevertheless "clearly entitled to judgment." Id. (quoting S. Ohio Bank v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 479 F.2d 478, 480 (6th Cir. 1973)). We view the facts as alleged in the light most favorable to Kyocera and draw all reasonable inferences in its favor. See Gavitt v. Born, 835 F.3d 623, 640 (6th Cir. 2016). Our task is to determine whether Kyocera raises a plausible claim for relief. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007). And Kyocera's claim is plausible if, assuming the truth of Kyocera's allegations, a reasonable factfinder could rule in its favor. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

In assessing Kyocera's claim, we apply Michigan law—the law of the forum state and that designated in the parties' contracts. Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); see Kipin Indus., Inc. v. Van Deilen Int'l, Inc., 182 F.3d 490, 493 (6th Cir. 1999). As it happens, Michigan's courts provide little guidance here. The thrust of Kyocera's claim is that the take-or-pay provisions are unlawful penalties in disguise. But there is no case in which a Michigan court has considered such a claim. The closest we have is a Michigan Court of Appeals decision resolving an earlier chapter of the parties' dispute in which Kyocera attempted to invoke a force majeure clause in the contracts. In dicta, the court referenced the take-or-pay provisions, but only to note their existenceand operation as a means of refuting Kyocera's force-majeure argument. Kyocera Corp. v. Hemlock Semiconductor, LLC, 886 N.W.2d 445, 447-48, 453 (Mich. Ct. App. 2015). Hemlock makes much of this discussion, reading it to suggest that Michigan always enforces take-or-pay provisions and would do so here. But because Kyocera did not challenge the validity of the take-or-pay provisions in those proceedings,¹ we cannot read the Michigan court's discussion as setting out a general rule that it will always enforce take-or-pay provisions or even that it would do so in this case. And neither of the other cases Hemlock identifies goes so far. See McLouth Steel Corp. v. Jewell Coal & Coke Co., 570 F.2d 594, 605 (6th Cir. 1978); Attorney Gen. v. Pub. Serv. Comm'n No. 1, 431 N.W.2d 47, 49 (Mich. Ct. App. 1988).

With no Michigan authority on point, we must look elsewhere to attempt to discern what path the Michigan Supreme Court might take. Combs v. Int'l Ins. Co., 354 F.3d 568, 577 (6th Cir. 2004) (explaining that "when evaluating an undecided question of [state] law, a federal court sitting in diversity must make the [sic] 'the best prediction, even in the absence of direct state precedent, of what the [state] Supreme Court would do if confronted with [the] question,'" including considering "jurisprudence from other jurisdictions" (last alteration in original) (first quoting Managed Health Care Assocs., Inc. v. Kethan, 209 F.3d 923, 927 (6th Cir. 2000); then quoting Lexington Ins. Co. v. Rugg & Knopp, Inc., 165 F.3d 1087, 1090 (7th Cir. 1999))). Under the approach followed in other jurisdictions, the key question is whether the take-or-pay provisions offer Kyocera two viable performance options, on the one hand, or one performance option coupled with a liquidated damages provision, on the other. See, e.g., Superfos Invs. Ltd. v. FirstMiss Fertilizer, Inc., 821 F. Supp. 432, 434-35 (S.D. Miss. 1993) (collecting cases); Minnickv. Clearwire U.S. LLC, 275 P.3d 1127, 1130-31 (Wash. 2012) (en banc); Am. Soil Processing, Inc. v. Iowa Comprehensive Petroleum Underground Storage Tank Fund Bd., 586 N.W.2d 325, 329 (Iowa 1998); 11-59 Corbin on Contracts § 59.10 (2017); 14 Williston on Contracts § 42:10 (4th ed.). If the former, the take-or-pay provisions are enforceable as written. If the latter, the question becomes whether the "pay" option quantifies lawful liquidated damages or an unlawful penalty. If the payment obligation is a penalty, it is unenforceable—regardless of what the parties' contract labels it. And at least on this point, Michigan law certainly agrees. Mich. Comp. Laws § 440.2718(1); Moore v. St. Clair Cty., 328 N.W.2d 47, 50 (Mich. Ct. App. 1982) ("[U]se of the terms 'liquidated' or 'stipulated' damages does not necessarily mean that the clause is valid and not a penalty."). So if the provisions here are penalties, it is doubtful that Michigan courts would let them fly by night under the guise of take-or-pay provisions.

Alternative Performance v. Liquidated Damages. First, we ask whether the take-or-pay provisions offer Kyocera two viable performance options, or one option coupled with liquidated damages. To make this call, courts consider whether, at the time of contracting, it appears that the parties intended that the "pay" option present a relatively equivalent (and thus desirable) mode of performance—and not, as Kyocera claims, a measure to coerce compliance with the "take" option. See Superfos, 821 F. Supp. at 434; Minnick, 275 P.3d at 1131; Am. Soil Processing, 586 N.W.2d at 333-34. And at the outset, common sense points to coercion: Why would Kyocera opt to pay for polysilicon and get nothing in return? See Iqbal, 556 U.S. at 679 (instructing courts to gauge plausibility by "draw[ing] on [their] judicial experience and common sense").

Hemlock offers three suggestions. First, Hemlock reasons that Kyocera must have seen the pay option as a viable alternative, because Kyocera is a big, smart corporation and would never have agreed to the deal otherwise. But the fact that a sophisticated entity has agreed to pay a sumdoes not necessarily mean that the law will always enforce its promise, see, e.g., Lake River Corp. v. Carborundum Co., 769 F.2d 1284, 1289 (7th Cir. 1985), and Hemlock points to no Michigan authority holding otherwise. Kyocera's sophistication at the bargaining table may later become relevant, but in this posture, it does not doom Kyocera's claim as a matter of law. So Hemlock's first argument swings and misses. Second, Hemlock hypothesizes that Kyocera might have thought that in certain circumstances it would be willing to pay for polysilicon one year (but not take it) as a way to keep the contract alive in the event it still wanted polysilicon in the future. But if Kyocera wanted to keep the contract alive, it...