LESLEY WELLS, District Judge.
This matter comes before the Court on defendants SAP and SAP AG's (collectively,
This Court makes "a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made and may accept, reject, or modify, in whole or in part, the findings or recommendations made by the Magistrate Judge." Local Rule 72.3(b). The failure by either party to file specific objections constitutes a waiver of the right to appeal the Magistrate Judge's recommendations. Thomas v. Arn, 474 U.S. 140, 155, 106 S.Ct. 466, 88 L.Ed.2d 435 (1985); Howard v. Sec'y of Health & Human Servs., 932 F.2d 505, 508-09 (6th Cir.1991). As such, except where clearly erroneous, any finding or recommendation of the Magistrate Judge to which the parties do not timely object is accepted by this Court.
Plaintiff Hodell is a wholesaler of fastener and chain products. (Doc. 26, ¶ 9). Prior to the events of this suit, Hodell had been using a software product called FACTS in combination with two add-on software products, In-Flight and Radio Beacon. These software products provided invoicing, billing, and accounting functions for Hodell's business. (Doc. 105-9, p. 28; Doc. 105-7, 14-20; Doc. 105-38, pp. 10-12). Defendant IBIS was providing software support to Hodell in relation to the FACTS system. In 2003, Hodell considered replacing FACTS with a newer, scalable product that would provide it integrated financial and sales management capabilities. (Doc. 110-4, p. 7, 8). It was important to Hodell that the software be capable of accommodating its eighty then-existing users, with room for growth up to three-hundred users. (Doc. 26, ¶ 34; Doc. 110-4, p. 7).
In early 2003, Hodell's CEO Otto Reidl attended a conference in Cleveland, Ohio, where he learned about software called Business One. (Doc. 105-37, p. 11). The software was developed by defendant SAP AG, and it is distributed and licensed by defendant SAP America. At that time, non-party American Express was a Channel Partner
On 20 October 2003, Mr. Reidl participated in an online webinar about Business One presented by SAP and American Express. (Doc. 105-37, p. 30). Mr. Reidl in turn discussed the product with Dale Van Leeuwen of Defendant IBIS. (Doc. 105-7, pp. 14-15). Mr. Van Leeuwen was intrigued and he contacted Dan Lowery of Defendant LSi-Lowery. (Doc. 105-7, pp. 15-16). Both Van Leeuwen and Lowery were looking for the next technology beyond FACTS, and because Business One looked like a promising option within their market, they discussed joining forces and becoming an SAP Channel Partner. (Doc. 105-7, pp. 13-16, 17). According to Mr. Van Leeuwen, he met with SAP personnel to determine whether Business One would be a good fit for Hodell. (Doc. 105-7, pp. 16-17, 18-20, 38-40). At some point thereafter, Van Leeuwen and Lowery became Channel Partners of SAP to sell and develop add-ons to Business One. (Doc. 105-9, pp. 5-7).
On 3 December 2003, Mr. Reidl participated in a phone conference with American Express, Mr. Van Leeuwen, and Mr. Lowery. (Doc. 155-82, pp. 7-8). According to Mr. Reidl, during this conference he was assured that Business One would support up to 500 users. (Doc. 155-82, p. 8). It was Mr. Reidl's belief that both American Express and Mr. Van Leeuwen were representing SAP. (Doc. 155-82, p. 8). Hodell contends that throughout 2004, it received additional assurances from SAP, through its Channel Partners, that Business One would support Hodell's needs. (See Doc. 155, pp. 9-10). Based on these assurances, Hodell decided to replace FACTS with Business One. However, Hodell was also aware from the start that for Business One to fulfill all its needs, two add-ons were required. (Doc. 110-3, p. 16(160)). Hodell planned to use the add-ons it was already using with the FACTS based system, namely, Radio Beacon for warehousing functions and In-Flight for inventory management functions. These add-ons were to be coded from scratch in order to work with Business One. (Doc. 105-9, pp. 4-5). SAP authorized LSi/IBIS to develop them for use with Business One. (Doc. 105-9, pp. 14-16).
On 20 December 2004, Hodell and LSi/ IBIS executed a Development Agreement, which called for Hodell to order eighty user licenses of SAP's Business One software at a cost of $300,000. (Doc. 26, ¶¶ 30-32). The agreement also called for LSi/IBIS to develop the software add-ons, eventually known as In-Flight Enterprise, for Business One. (Doc. 26, ¶ 75). The development period lasted over two years, during which time the code was written and the software was tested. On 23 December 2005, Hodell entered into a second agreement-the License Agreement-pursuant to which it agreed to purchase an additional 40 user licenses from IBIS. (Doc. 26, ¶ 46). According to SAP, the License Agreement provided a performance warranty to Hodell; disclaimed all prior representations and implied warranties; and limited SAP's liability in the event the software did not meet the performance warranty. (Doc. 110-1, p. 12).
During this time, multiple "live stress tests" were performed on the software as it was being developed. (Doc. 105-36, pp. 9-15; Doc. 105-35, pp. 3-7). The stress
On 21 November 2008, Hodell brought this lawsuit, and on 22 April 2009, it filed a five count Amended Complaint against SAP America, Inc, SAP AG, LSi-Lowery Systems, Inc., and the IBIS Group. (Doc. 26). Hodell brings claims of (1) Fraudulent Inducement; (2) Fraud; (3) Breach of Contract; (4) Negligence; and (5) Negligent Misrepresentation. On 18 May 2009, LSi and IBIS filed a joint answer.
On 1 June 2009, the SAP defendants filed a motion to dismiss the Amended Complaint. (Doc. 36). Hodell filed a brief in opposition (Doc. 40), and SAP filed a reply. (Doc. 41). On 8 July 2010, the motion was referred to United States Magistrate Judge Greg White for a report and a recommended decision. (Doc. 46). After hearing oral arguments, the Magistrate Judge issued a Report and Recommendation advising that the motion should be granted in part and denied in part. (Doc. 50). Specifically, it was recommended that the negligence claim and the breach of contract claim, as it related to the Development Agreement, be dismissed as to both SAP defendants. It was recommended that the breach of contract claim, in relation to the License Agreement, be dismissed as to SAP AG only. It was further recommended that the motion be denied as to Hodell's claims of fraud, fraudulent inducement, and negligent misrepresentation. On 2 June 2011, 2011 WL 2174365, this Court adopted the Report and Recommendation over the parties' respective objections. (Doc. 61). The SAP defendants answered the Amended Complaint on 24 June 2011. (Doc. 69).
A case management conference was held on 30 June 2011. (Doc. 71). Discovery commenced. After a number of phone conferences, extensions of case deadlines, and the resolution of a discovery dispute by Magistrate Judge White, LSi/IBIS filed a motion for summary judgment on 6 September 2012. (Doc. 105). On 7 September 2012, the SAP defendants filed for summary judgment (Doc. 110), and Hodell
On 13 June 2013, the Magistrate Judge issued two R & Rs. In the first, he recommended that the SAP defendants motion for summary judgment be denied. (Doc. 182). In the second, he recommended that LSi/IBIS's motion for summary judgment be granted in part and denied in part. (Doc. 183). Specifically, it was recommended that summary judgment be granted as to Hodell's negligence claim against LSi/IBIS and denied as to all other claims. It was also recommended that Hodell's motion for judgment on the pleadings/motion for summary judgment be denied in its entirety. (Doc. 183). On 22 August 2013, the SAP defendants and LSi/IBIS filed objections, respectively. (Doc. 187, 188). Hodell responded on 22 August 2013. (Doc. 190, 191). Hodell does not object to the recommendation that its motion for summary judgment be denied. That recommendation will accordingly be accepted.
Summary judgment is warranted "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). "In deciding a motion for summary judgment, this court views the factual evidence and draws all reasonable inferences in favor of the nonmoving party." McLean v. 988011 Ontario, Ltd., 224 F.3d 797, 800 (6th Cir.2000) (citing Northland Ins. Co. v. Guardsman Prods., Inc., 141 F.3d 612, 616 (6th Cir.1998)).
The Magistrate Judge recommended denying SAP's motion for summary judgment with respect to the plaintiff's claims of fraud/fraudulent inducement, negligent misrepresentation, and breach of contract. SAP contends that this conclusion was erroneous, because the Magistrate Judge failed to consider a number of facts that came to light during discovery.
First, SAP states that while Hodell alleges that Business One was never properly implemented, Hodell's president later admitted that Hodell "ran its business" using Business One from March 2007 until April 2009. SAP notes that Hodell was using the software at the time this suit was filed. This argument suggests either that Hodell has conceded that it has not suffered damages or that no representation made by SAP, if any, was false.
In response, Hodell contends that SAP's argument mischaracterizes some facts while ignoring others. While Hodell admits that Business One was installed in Hodell's facility for two years, it maintains that the software never functioned as promised. The Court agrees with Hodell that there is sufficient record evidence to show that Business One did not perform as promised. According to Kevin Reidl, Hodell's president, during 2007 the company was "limping along" using workarounds, as a result of Business One's speed and performance issues. (Doc. 141, p. 149; Doc. 142, pp. 129-30). Evidence also exists to
SAP next challenges the Magistrate Judge's conclusion that SAP made representations regarding Business One's capabilities prior to the signing of the 2004 Development Agreement or the 2005 License Agreement. SAP cites the deposition testimony of Otto Reidl which indicates that Hodell never had any direct contact with SAP at any time prior to execution of the 2005 License Agreement. (Doc. 110-3, pp. 198-99). SAP maintains that because Hodell did not receive any representations, promises, advice or guidance from SAP prior to entering either contract, its misrepresentation claims fail as a matter of law.
In the Court's view, notwithstanding Mr. Reidl's testimony, Hodell has provided sufficient evidence to show that prior to the signing of the agreements, SAP otherwise made representations to Hodell directly through its marketing literature. One document, referred to as "The SAP Business One Brief," indicates that Business One "helps emerging business, from those with 10 to several hundred employees." It further states, "Whether you have 5 employees or 500, the solution helps emerging businesses." (Doc. 155-59). SAP's former director of the Business One channel, Daniel Kraus, acknowledged that this literature was intended for prospective customers. (Doc. 137, p. 60). Hodell also provides a document entitled the "SAP Business One White paper" which claims that Business One supports "an unlimited number of simultaneous user transactions." (Doc. 155-77, p. 7). This evidence would support a finding that SAP represented to Hodell that the Business One software could accommodate at least 120 users.
SAP contends that even if the marketing materials could be construed as a misrepresentation on its part, Mr. Reidl admitted that Hodell did not rely on those materials. (See Doc. 129-1, pp. 35 (sub p. 135)). Thus, SAP argues that Hodell cannot satisfy the necessary element of justifiable reliance to support its fraud and misrepresentation claims. The Court disagrees. In addition to these direct representations, the Magistrate Judge cited numerous representations made by SAP's alleged business partners and co-defendants LSi and IBIS, for which Hodell maintains SAP should be liable. There is evidence that LSi/IBIS based its representations on the SAP marketing materials. The Court agrees with the Magistrate Judge's observation that "factual issues remain whether SAP could be found liable through a theory of apparent agency or agency by estoppel." SAP does not provide a convincing argument to the contrary.
SAP also argues that the Magistrate Judge erred by failing to consider other alleged admissions in discovery, including Hodell's CEO Otto Reidl's testimony that at the time the License Agreement was signed, he believed that "SAP knew that [Business One] would not handle [Hodell's needs]." Based on this testimony, SAP
In addition to the factual arguments noted above, SAP challenges the Magistrate Judge's legal reasoning with respect to Hodell's claims of fraud and fraudulent inducement. SAP maintains that contrary to the Magistrate Judge's recommendation, Hodell's breach of contract claim forecloses its claims of fraud.
Generally, "the existence of a contract action ... excludes the opportunity to present the same case as a tort claim." Wolfe v. Continental Cas. Co., 647 F.2d 705, 710 (6th Cir.1981). A tort claim based upon the same actions as those upon which a claim of contract breach is based will exist independently of the contract action only if the breaching party also breaches a duty owed separately from that created by the contract, that is, a duty owed even if no contract existed. Battista v. Lebanon Trotting Assn., 538 F.2d 111, 117 (6th Cir.1976). In this instance, the Magistrate Judge concluded that SAP's alleged false promise that Business One would accommodate the required number of users was in breach of a duty separate from the License Agreement.
On de novo review, it is the Court's opinion that the Magistrate Judge's conclusion was not in error. In Ohio, there is a common law duty to refrain from making fraudulent representations to induce a party to enter a contract. Onyx Envtl. Servs. v. Maison, 407 F.Supp.2d 874, 879 (N.D.Ohio 2005). The Supreme Court of Ohio has stated that a claim of fraudulent inducement often involves "a misrepresentation of facts outside the contract or other wrongful conduct [inducing] a party to enter into the contract." ABM Farms, Inc. v. Woods, 81 Ohio St.3d 498, 503, 692 N.E.2d 574, 578 (Ohio 1998).
In the present case, there is sufficient evidence to show that SAP, either directly or through agency principles, knowingly misrepresented the capabilities of Business One to induce Hodell to enter the License Agreement, thus breaching a duty collateral to the contract. As set forth in the Report and Recommendation, there are numerous instances of Hodell being informed that Business One was capable of supporting hundreds of users. (See Report and Recommendation, Doc. 182, pp. 807-08). There is also ample evidence that this representation was false. Further, as described by the Magistrate Judge, there is evidence by which it might be inferred that those representations were known to be false by the parties making them. (See Report and Recommendation, Doc. 182, pp. 808-09).
Further buttressing the conclusion that this claim occurred "outside the contract," is the fact that the representation that Business One could accommodate at least 120 users was not inconsistent with any provision in the Licensing Agreement. As explained by the Magistrate Judge, the Licensing Agreement is silent as to Business One's optimal number of users. Magistrate Judge White reasoned that
(Report and Recommendation, Doc. 182, p. 817).
The Court disagrees with SAP's contention that Magistrate Judge's focus on whether terms of the Licensing Agreement are consistent with the alleged false representations creates "an exception that swallows the rule." According to SAP, the Magistrate Judge's reasoning allows for the untenable result that "any promise that is not memorialized in a later integrated written contract is necessarily collateral to the contract." The Court disagrees with this assessment, because the promise at issue in this instance is not just "any promise." Rather, it was a false representation made in breach of a common law duty independent of the Licensing Agreement. As such, the alleged misrepresentations, being collateral to the written agreement, properly form the basis of Hodell's claim of fraudulent inducement.
None of the authorities cited by SAP in its objections undermine the Magistrate Judge's conclusion. First, in Graphic Enterprises, Inc. v. TAS International, Inc., 2000 WL 330059 (Ohio Ct.App. March 13, 2000), the plaintiff claimed fraud independent of a contract for the sale of copy machines. The plaintiff argued that the defendant fraudulently failed to disclose that "remanufactured" machines actually meant "used" machines. Id. at *5. The court rejected the claim and reasoned that
Id.
Graphic Enterprises is distinguishable from the present case. That court's rejection of the plaintiff's fraud claims turned on the "contractual nature" of the claims, in that they amounted to nothing more than the allegation that the defendant failed to supply conforming goods. The Graphic Enterprises court further reasoned that the fraud claim failed because the plaintiffs did not offer "evidence of damages which were distinct from, and in addition to, those [the plaintiffs] claimed were suffered due to [the defendant's] alleged breach of the contract." Id. In the present case, the question of whether fraud damages are distinct contract damages is not presently at issue. Moreover, Hodell's fraud claims do not simply restate its breach of contract claims. Instead, as described above, Hodell sets forth sufficient evidence to show that it was induced to enter the Licensing Agreement on the basis of numerous false representations. Graphic Enterprises is inapposite.
Cuthbert v. Trucklease Corp., 2004 WL 1879023 (Ohio Ct.App.2004), is also distinguishable. In that case, the plaintiff alleged negligence because a car rental agency failed to ensure that he had insurance coverage under a rental agreement. The court rejected the plaintiff's tort claims because they were not distinct from his breach of contract claim. The court reasoned that "any purported duties and responsibilities relating to [the defendant] procuring insurance on behalf of [the plaintiff] arose out of that contract." Id. at *10. In contrast, as already discussed, Hodell has provided evidence to demonstrate breach of a duty independent of the Licensing Agreement.
In addition, because SAP does not object to the Magistrate Judge's recommendation that summary judgment be denied as to Hodell's claim that SAP fraudulently induced the Development Agreement transaction, that recommendation is accepted as well.
SAP takes issue with the Magistrate Judge's recommendation that Hodell's negligent misrepresentation claim survive summary judgment. According to SAP, the Magistrate Judge erred because he failed to recognize that the viability of a claim of negligent representation depends on the existence of a "special relationship" between the parties. As noted by SAP, some Ohio courts have limited claims of negligent misrepresentation to plaintiffs who allege injury by a certain class of professionals, "who are in the business of supplying information to others, ... such as `attorneys, surveyors, abstractors of title and banks dealing with no-depositors' checks.'" Middlefield Banking Co. v. Deeb, 2012-Ohio-3191, P31. SAP argues that because it is not a member of this class of professionals, the claim fails as a matter of law.
As observed by the Magistrate Judge, there is also authority that rejects the requirement that a "special relationship" exist between the parties. National Mulch and Seed, Inc. v. Rexius Forest By-Products, Inc., No. 2:02cv1288, 2007 WL 894833, at *10 (S.D.Ohio Mar. 22, 2007). National Mulch advises that "a special relationship is not a formal element of a negligent misrepresentation claim under Ohio law." Id. The more essential consideration is whether the "defendant suppl[ied] false information for the guidance of the plaintiff in its business transactions." Id.
The Magistrate Judge concluded that National Mulch's approach was more persuasive than any authority on this subject that was cited by SAP. Because he determined that Hodell had supplied facts that could satisfy the standard as explained by National Mulch, he recommended that summary judgment be denied as to the negligent misrepresentation claim. SAP maintains this was error, but fails to explain why, except for repeating the same arguments and citing the same cases already rejected by both the Magistrate Judge and this Court. Because SAP fails to provide a convincing argument that the Magistrate Judge should be reversed, his recommendation is accepted.
SAP America argues that the Magistrate Judge erred by recommending that summary judgment be denied as to Hodell's breach of contract claim. The relevant provision of the Licensing Agreement reads as follows:
(Doc. 110-12, Ex. K). SAP argues that Hodell's failure to offer any evidence that Business One failed to meet the functional specifications forecloses the need for trial.
The Court disagrees. As discussed by the Magistrate Judge, Hodell provided sufficient evidence to meet its summary judgment
Because none of SAP's objections has merit, the Court accepts the Magistrate Judge's recommendation that SAP's motion for summary judgment be denied.
LSi/IBIS maintains that the Magistrate Judge erred by recommending that that summary judgment be denied with respect to Hodell's claims of fraud and fraudulent inducement. To prove fraud, a plaintiff must demonstrate:
Cohen v. Lamko, Inc., 10 Ohio St.3d 167, 169, 462 N.E.2d 407, 409 (1984). LSi/IBIS maintains that Hodell has not presented sufficient evidence to satisfy the first, third, or fifth elements of its fraud claim and that Magistrate Judge erred by concluding otherwise.
LSi/IBIS first argues that there is no evidence that it made any "independent representations" as to the quality and capacity of Business One. According to LSi/ IBIS, any representation that it may have made in this regard has its source with SAP. As a consequence, LSi/IBIS argues, it cannot be held liable. This argument has no merit. As noted by the Magistrate Judge, LSi/IBIS fails to identify any authority to support the proposition that a viable fraud claim depends on the existence of false representation that was made "independently." (See Doc. 183, p. 8).
LSi/IBIS also argues that Hodell has not presented evidence that LSi/IBIS made a representation "with knowledge of its falsity, or with such utter disregard and recklessness as to whether it is true or false that knowledge may be inferred." It is LSi/IBIS's position that it was only passing along bad information obtained from SAP, and that when it did so it was unaware that the information was false. The Magistrate Judge recognized that evidence exists to support LSi/IBIS's contention, since Mr. Van Leeuwen testified that he was told by three SAP representatives that Business One was appropriate for a business of Hodell's size. Further, a jury may find that LSi/IBIS held the honest belief that Business One could accommodate Hodell's needs based on SAP's marketing materials which advised that the software was appropriate for businesses with five to 500 employees. On the other hand, the Magistrate Judge correctly recognized that there is also evidence by which a jury could reasonably infer otherwise. The following evidence cited by the Magistrate Judge would permit a reasonable
(Report and Recommendation, Doc. 183, pp. 9-10). LSi/IBIS fails to explain how Judge White erred by relying on this evidence to reach the conclusion that "a reasonable juror could further find that the information was transmitted to Hodell with either knowledge of its falsity or with such recklessness that knowledge of the
Next, LSi/IBIS maintains that Judge White incorrectly concluded that the evidence supports the element of justifiable reliance. LSi/IBIS argues that because Hodell independently investigated Business One prior to any involvement on the part of LSi/IBIS, Hodell could not have justifiably relied on any representation that LSi/IBIS might have later made with regard to Business One. As the Court understands it, LSi/IBIS seems to be arguing that by forming a prior independent basis for believing that Business One would accommodate its needs, Hodell either could not possibly rely on LSi/IBIS's representations or Hodell was not justified in doing so. Neither argument has merit. First, LSi/IBIS fails to offer any reasoned explanation as to how Hodell's own investigation forecloses reliance on LSi/IBIS's representations. There is no apparent reason why, despite its independent belief, Hodell could not also have relied on the representations of a company that took a meeting with SAP to "evaluate whether [Business One] might be a fit for Hodell...." And, because Hodell did independently investigate Business One, it would be all the more justified in relying on LSi/IBIS's representations since they were consistent with its own findings. Moreover, the record evidence described in Hodell's response to LSi/IBIS's objections supports a finding of justifiable reliance. LSi/IBIS's objection is accordingly overruled.
Next, LSi/IBIS objects to the recommendation that summary judgment be denied in relation the Hodell's breach of contract claim. LSi/IBIS argues that it fulfilled all its obligations under the Development Agreement to develop In-Flight Enterprise for Business One. The Magistrate Judge concluded that the Development Agreement could reasonably be construed to obligate LSi/IBIS to successfully implement In-Flight for Business One. Because the contract was not clear and unambiguous as to what constituted "successful implementation," Judge White concluded that the definition of "successful implementation" may depend on extrinsic evidence, which should be considered by the trier of fact. Further, because record evidence suggests that In-Flight was not successfully implemented, the Magistrate Judge recommended denying the LSi/ IBIS's motion in relation to the breach of contract claim.
LSi/IBIS argues that Judge White erred because when he reviewed the Development Agreement, he failed to consider the following language:
According to LSi/IBIS this language means that "the project is for the development and integration of In-flight for Business One." Thus, LSi/IBIS argues, because it fulfilled this obligation, Hodell cannot demonstrate that LSi/IBIS breached the Development Agreement.
LSi/IBIS offers no clear explanation as to how the language contained in the "Project Description" undercuts the Magistrate Judge's conclusion that a reasonable interpretation of the contract is that LSi/IBIS was obligated to successfully implement In-Flight Enterprises. As noted by the Magistrate Judge, "the Development Agreement ... affirmatively and unequivocally states that [payment] `will be due on successful implementation.'" It is not readily apparent how Judge White could be said to have erred in light of the language contained in the Project Description. Nor does LSi/IBIS challenge the
LSi/IBIS also argues that Hodell's implied warranty theories fail. First, LSi/IBIS argues that Hodell cannot establish a breach of the implied warranty of merchantability because Business One is a good that is "one-of-a-kind, new, or for which there is not yet a market to which to compare the good." (Doc. 188, p. 18).
Goods are not merchantable when they are "not of an acceptable quality when compared to that generally acceptable in the trade for goods of the kind." Price Bros. Co. v. Philadelphia Gear Corp., 649 F.2d 416, 424 (6th Cir.1981). LSi/IBIS contends that because the combination of In-Flight Enterprise with Business One had not previously existed in the industry, there are no other "goods of the kind" by which its quality may be judged. As such, it maintains that no implied warranty of merchantability exists in this instance.
LSi/IBIS relies on Price Brothers to support its argument. In that case, the parties
Id. at 424. The owners of the machinery sued the seller of the components, arguing a breach of implied warranties. The court held that
Id.
This Court is not persuaded that Price Brothers forecloses Hodell's claim that LSi/IBIS breached the implied warranty of merchantability. There is no dispute that In-Flight had never been paired with Business One and that, in this way, the good was unique. However, this is not to say that no other goods of the kind exist in the trade. Unlike the situation in Price Brothers, In-Flight was an existing product that had been previously paired with FACTS, the software product used by Hodell before it switched to Business One. Further, Business One was itself an existing product. Based on these distinguishing facts, LSi/IBIS does not make a convincing case that there is "no average or usual standard[] for determining ordinary performance or quality." Id. at 424. LSi/IBIS does not explain why the applicable standard of merchantability could not be determined with reference to how Business One and In-Flight (or similar software) had performed in the past.
LSi/IBIS also argues that it is entitled to summary judgment on Hodell's claim that it breached the implied warranty of fitness for a particular purpose. In order to recover under an implied warranty of fitness for a particular purpose under Ohio Rev.Code § 1302.28, Plaintiff must prove the following two elements:
Price Bros. Co. v. Philadelphia Gear Corp., 649 F.2d 416, 423 (6th Cir.1981) (citing Ohio Rev.Code Ann. § 1302.28). LSi/IBIS maintains that Hodell's claim
In response, Hodell presents the testimony of Mr. Van Leeuwen, which states that he "had a very good understanding of Hodell-Natco's business processes, just because of the length of engagement and the relationship [he] had with them." (Doc. 138, p. 52). Further, Mr. Van Leeuwen acknowledged that Hodell was relying on LSi's judgment and skills in selecting Business One and In-Flight. In the Court's view, Hodell has presented evidence by which a jury could conclude that Hodell relied on LSi/IBIS skill or judgment to select the software products.
Finally, LSi/IBIS argues that the Magistrate Judge erroneously recommended that summary judgment be denied as to Hodell's claim of negligent misrepresentation. LSi/IBIS maintains that under Ohio law Hodell cannot recover under theories of both fraud and negligence based on the same course of conduct. See Textron Financial Corp. v. Nationwide Mutual Ins. Co., 115 Ohio App.3d 137, 149, 684 N.E.2d 1261 (Ohio Ct.App.1996). While this is certainly true, since a defendant cannot act both intentionally and negligently in relation to the same conduct, it is not a problem at this stage of the proceedings. As noted by Hodell, while a plaintiff cannot ultimately recover on both theories, it may try both claims, alternatively, before a judge or jury.
For the reasons stated above, the Magistrate Judge's R & Rs are adopted by this Court. SAP's motion for summary judgment is denied. (Resolving Doc. 110). LSi/IBIS's motion for summary judgment is granted in part and denied in part. (Resolving Doc. 105). Specifically, the motion is granted as to Hodell's negligence claim and denied in other respects. Hodell's motion for judgment on the pleadings/motion for summary judgment is denied. (Resolving Doc. 109).
IT IS SO ORDERED.
GREG WHITE, United States Magistrate Judge.
On November 16, 2012, this matter was referred to the Court to address three pending motions for summary judgment. (ECF No. 170.) This Report and Recommendation addresses the motion for summary judgment filed on September 7, 2012 by Defendant SAP America and SAP AG (collectively "SAP"). (ECF No. 110.) Plaintiff Hodell-Natco Industries, Inc. (hereinafter "Hodell") filed a brief in opposition (ECF Nos. 155, 162), to which SAP replied. (ECF No. 163.) On February 28, 2013, the Court heard oral arguments.
Plaintiff Hodell, an Ohio corporation with its principal place of business in Valley View, Ohio, filed an Amended Complaint on April 22, 2009 setting out five causes of action against LSi-Lowery Systems,
On May 18, 2009, Defendants LSi and IBIS filed a joint Answer.
On June 21, 2009, the SAP defendants filed a motion to dismiss. (ECF No. 36.) On September 2, 2010, 2010 WL 6765522, after hearing oral arguments, this Court issued a Report and Recommendation providing that SAP's motion to dismiss should be granted in part and denied in part. (ECF No. 50.) Specifically, it was recommended that Hodell's claim for breach of contract, as it related to the Development Agreement entered into on or about December 20, 2004, as well as the simple negligence action, be dismissed as to both SAP defendants. Id. In addition, it was recommended that Hodell's claim for breach of the License Agreement should be dismissed as to Defendant SAP AG only, and that the motion to dismiss be denied with respect to counts one, two and five (fraud, fraud in the inducement, and negligent misrepresentation). Id.
On June 2, 2011, 2011 WL 2174365, Judge Lesley Wells adopted the Report and Recommendation in its entirety. (ECF No. 61.)
On June 24, 2011, SAP filed an Answer. (ECF No. 69.)
Though many of the facts in this matter are contested, the following are either uncontested or are now law of the case.
On or about December 20, 2004, Hodell and LSi executed a Development Agreement, attached to the Amended Complaint as Exhibit D (hereinafter the "Development Agreement"). (ECF No. 26 at ¶¶ 30-32; ECF No. 30 at ¶ 15.) The Court has found that the SAP defendants were not parties to the Development Agreement. (ECF Nos. 50, 61.) The Development Agreement called for Hodell to order 80 user licenses for SAP's Business One ("B1") software at a cost of $300,000.00. (ECF No. 26 at ¶¶ 30-32; ECF No. 30 at ¶ 15.) SAP denies that it received a $300,000 license fee from Hodell for 80 user licenses of B1 software. (ECF No. 69 at ¶ 31.) On December 20, 2004, LSi issued an invoice to Hodell-Natco for 80 user software licenses for SAP B1, a copy of which is attached to the Amended Complaint as Exhibit F.
On or about December 23, 2005, Hodell alleges it purchased 40 user licenses from IBIS and, in connection with this purchase, signed a License Agreement attached to the Amended Complaint as Exhibit G. (ECF No. 26 at ¶ 46.) In its Answer, SAP admitted only that Hodell executed a maintenance schedule to the License Agreement in December 2005. (ECF No. 69 at ¶ 46.) However, SAP's motion for summary judgment argument is based almost entirely on the existence of the License Agreement as a binding contract
While the total number of licenses purchased should be straightforward, SAP maintains that it sold only 80 licenses to Hodell. (ECF No. 110-1 at 9, 12; Oral Arguments Tr. 29.) However, because the Court must make all reasonable inferences in favor of the non-moving party, the Court will presume that Hodell purchased a total of 120 B1 user licenses from SAP. The following, though not inclusive of all the evidence on the issue, is sufficient to give rise to the inference in Hodell's favor. The aforementioned invoice from IBIS to Hodell, dated December 24, 2004, referencing the purchase of 80 SAP B1 user licenses for $300,000. (ECF No. 26 at ¶¶ 31-32, Exh. F; ECF No. 30 at ¶ 15.) Hodell alleges that it purchased 40 more licenses on or about December 25, 2005, when it signed the License Agreement.
Federal Rule of Civil Procedure 56(a) governs summary judgment motions and states:
In considering summary judgment motions, this Court must view the evidence in a light most favorable to the non-moving party to determine whether a genuine issue of material fact exists. Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970). A fact is "material" only if its resolution will affect the outcome of the lawsuit. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Summary judgment is appropriate whenever the non-moving party fails to make a showing sufficient to establish the existence of an element essential to that party's case and on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Moreover, "the trial court no longer has a duty to search the entire record to establish that it is bereft of a genuine issue of material fact." Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479-80 (6th Cir.1989) (citing Frito-Lay, Inc. v. Willoughby, 863 F.2d 1029, 1034 (D.C.Cir.1988)). The non-moving party is under an affirmative duty to point out specific facts in the record which create a genuine issue of material fact. Fulson v. City of Columbus, 801 F.Supp. 1, 4 (S.D.Ohio 1992). The non-movant must show more than a scintilla of evidence to overcome summary judgment; it is not enough for the non-moving party to show that there is some metaphysical doubt as to material facts. Id. "[T]he plaintiff must present affirmative evidence in order to defeat a properly supported motion for summary judgment. This is true even where the evidence is likely to be within the possession of the defendant, as long as the plaintiff has had a full opportunity to conduct discovery." Anderson, 477 U.S. at 257, 106 S.Ct. 2505.
In other words, "[w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial." Scott v. Harris, 550 U.S. 372, 380, 127 S.Ct. 1769, 1776, 167 L.Ed.2d 686 (2007). When ruling on a motion for summary judgment, "a judge's inquiry, therefore, unavoidably asks whether reasonable jurors could find by a preponderance of the evidence that the plaintiff is entitled to a verdict — `whether there is [evidence] upon which a jury can properly proceed to find a verdict for the party producing it, upon whom the onus of proof is imposed.'" Anderson, 477 U.S. at 252, 106 S.Ct. 2505 (citations omitted); accord Fuller v. Landmark 4 LLC, 2012 WL 1941792 (N.D.Ohio May 29, 2012). "[A]t the summary judgment stage the judge's function is not himself to weigh the evidence and determine the truth of the matter...." Anderson, 477 U.S. at 249, 106 S.Ct. 2505. "It is an error for the district court to resolve credibility issues against the nonmovant." Cen-Tra,
Hodell maintains that SAP is liable for fraud and fraud-in-the-inducement regarding both the License Agreement and the Development Agreement. (ECF No. 162 at 27.) SAP asserts that it is entitled to summary judgment with respect to Hodell's fraud and fraud-in-the-inducement claims because there is insufficient evidence to satisfy all the necessary elements.
According to Ohio law, in order to maintain a cause of action for fraud, a plaintiff must demonstrate the following:
Cohen v. Lamko, Inc., 462 N.E.2d 407, 10 Ohio St.3d 167, 169 (Ohio 1984) (citations omitted); accord Magical Farms, Inc. v. Land O'Lakes, Inc., 356 Fed.Appx. 795 (6th Cir.2009); David A. Flynn, Inc. v. GMAC, 2008 WL 2185377, 2008 U.S. Dist. LEXIS 41597 (N.D.Ohio May 23, 2008). "The elements of the claim are conjunctive, and accordingly all of them must be shown." Graham v. Am. Cyanamid Co., 350 F.3d 496, 507 (6th Cir.2003). Likewise, under Ohio law, "a claim of fraud in the inducement arises when a party is induced to enter into an agreement through fraud or misrepresentation.... A classic claim of fraudulent inducement asserts that a misrepresentation of facts outside the [agreement] or other wrongful conduct induced a party to enter into the [agreement]." Am. Coal Sales Co. v. N.S. Power Inc., 2009 WL 467576, 2009 U.S. Dist. LEXIS 13550 (S.D.Ohio, Feb. 23, 2009) (citing ABM Farms, Inc. v. Woods, 81 Ohio St.3d 498, 502-3, 1998-Ohio-612, 692 N.E.2d 574 (Ohio 1998)). To prove fraudulent inducement, a plaintiff must demonstrate the same elements necessary to prove an action for fraud. See, e.g., Micrel, Inc. v. TRW, Inc., 486 F.3d 866, 874 (6th Cir.2007); Scotts Co. LLC v. Liberty Mut. Ins. Co., 606 F.Supp.2d 722, 741 (S.D.Ohio 2009).
First, it is asserted that Hodell cannot show that SAP made a false representation regarding B1's capabilities that was material to the execution of the December 2005 License Agreement. Specifically, SAP argues that Hodell cannot show SAP's B1 software was incapable of handling up to 300 users. (ECF No. 110-1 at 20-24.) Hodell was sold 120 user licenses. The material issue is whether Hodell was told that the B1 software could accommodate at least that many users. Hodell has pointed to the following representations it received from SAP, directly or through its alleged partners, concerning the capabilities of B1 software:
The above cited evidence is not intended to be all inclusive. However, the evidence is sufficient to support a finding by reasonable jurors that SAP, directly and/or through third parties that it held out as agents and/or partners, represented to Hodell that its B1 Software could handle at least 250 users and, by implication, the 120 user licenses that Hodell purchased.
The following evidence of record
The intent to mislead may also be inferred from the above evidence. As noted by several Ohio courts, "[r]arely is the subjective intent of the party alleged to have committed fraud provable by direct evidence. Fraud must be measured by objective standards.... The existence of intent to mislead or defraud must be considered under the totality of the circumstances." Klapchar v. Dunbarton Properties, Ltd., CA-8521, 1991 WL 249432 (Ohio Ct.App. Nov. 4, 1991); accord Arales v. Furs By Weiss, Inc., 2003-Ohio-3344, 2003 WL 21469131 (Ohio Ct.App. June 26, 2003); Davis v. Sun Ref & Mktg. Co., 109 Ohio App.3d 42, 56, 671 N.E.2d 1049, 1059 (1996) (observing that "as intent is rarely provable by direct evidence, it may be inferred from the `totality of the circumstances.'") Reasonable jurors could find that SAP intentionally misled Hodell so that it would purchase the B1 software. This inference is further buttressed by the statement of SAP's former director of channel sales for the B1 software, Mr. Ashley, who was updated weekly about the Hodell sale. (ECF No. 114-1, Ashley Dep. at 103-04.) In an email, Mr. Ashley stated that Hodell was "a very high profile account we are working to bring live" and was SAP's "first customer for a new addon product specifically created by [LSi] for the Fastener Distribution Industry." (ECF No. 155-50, Exh. 178.) In a letter dated January 2, 2006, Mr. Ashley stated that "LSi, was able to close Hodell-Natko Industries for $105,000 to SAP. This was an important win not only for its size, but also for the fact that it is the first of what we hope will be many new customers in the Fastener micro-vertical. LSi has created a Business One vertical solution specific to this industry and we are looking to Hodell-Natko to be our first happy, referenceable customer within this space." (ECF No. 155-49, Exh. 177.) Based on the above and the totality of the circumstances, it can be inferred that SAP oversold its B1 product as Hodell was seen as a critical gateway customer to gain a foothold in a whole new industry.
While it may be that the sales team for SAP did not actually know the alleged representations were inaccurate or
Despite the presence of a genuine issue of material fact as to whether SAP falsely represented the capabilities of its B1 software to Hodell, SAP argues that any representation made as to the number of users B1 could accommodate was not material to the transaction at hand. (ECF No. 110-1 at 24-26.) Specifically, SAP asserts that Hodell possessed information that contradicted the above representations that B1 was suitable for Hodell's needs. Id. SAP points to a news release from October 2004 which states that B1 was developed for companies with less than 250 employees, a news release cited in the Amended Complaint. Id. at 25. While SAP considers this evidence to be critical, the Court disagrees. Even if SAP only stated that B1 could handle as few as 250 users, this representation necessarily implies that the B1 software could accommodate the 120 licenses sold to Hode11.
SAP also asserts that representations as to the higher number of users were not material because a document dated November 1, 2005, indicated that B1 was aimed at companies who are looking for 10 to 100 users. (ECF No. 110-1 at 26.) However, there is no evidence that Hodell had seen this document prior to entering the License Agreement in December of 2005. The only evidence on this issue cited by the parties is Otto Reidl's testimony that this document was not obtained until an internet search was performed
SAP cites the following Ohio law on determining the reasonableness of reliance:
Lucas Ford, LLC v. Ford Motor Credit Co., 2011 WL 1831739, 2011 U.S. Dist. LEXIS 51141 (N.D.Ohio May 12, 2011) (quoting Freedom Foods, Inc. v. Rose Valley Land Group, Ltd., 2006 WL 2045887, 2006 U.S. Dist. LEXIS 49591 (S.D.Ohio)). Under the circumstances, it can hardly be said that Hodell and SAP were equals in ascertaining the capabilities of the B1 software. The Court finds the issue of whether Hodell reasonably relied on the statements catalogued above is best left to the trier of fact.
Finally, SAP argues that Hodell cannot demonstrate an injury proximately caused by the reliance as a matter of law. (ECF No. 110-1 at 31-34.) SAP avers that the harm suffered by Hodell was the result of its own decision to "go-live" after testing in March of 2007. Id. SAP's argument on this issue is devoid of any citation to law, and is conclusory at best. Further, it assumes that no damages were incurred by Hodell prior to the "go-live" date. In this Court's view, this argument goes to the extent of the damages suffered, an issue best left for the trier of fact.
SAP asserts that it is entitled to summary judgment on Hodell's negligent misrepresentation claim because it is not in the business of supplying information. (ECF No. 110-1 at 34-35.)
Under a claim for negligent misrepresentation in Ohio, a defendant who, "in the course of his business, profession, or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions ... is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information." David A Flynn, Inc. v. GMAC, 345 Fed. Appx. 974, 977 (6th Cir.2009) (citing Andersons, Inc. v. Consol, Inc., 348 F.3d 496, 505-06 (6th Cir.2003)); Delman v. City of Cleveland Heights, 534 N.E.2d 835, 41 Ohio St.3d 1, 4 (Ohio 1989).
SAP argues that a recent decision of an Ohio appellate court, Middlefield Banking Co. v. Deeb, 2012-Ohio-3191, 2012 WL 2874893 (Ohio Ct.App. July 16, 2012), clarified that negligent misrepresentation claims are limited to professionals, such as accountants and attorneys, in the business of supplying information. (ECF No. 110-1 at 34-35.) However, in her order adopting the previous Report and Recommendation, Judge Wells found as follows:
(ECF No. 61 at 13-14.)
First, the Middlefield Banking decision — a state appellate court opinion — does
Second, there are decisions that reject the "special relationship" requirement. See, e.g., Versatile Helicopters v. City of Columbus, 879 F.Supp.2d 775, 783 (S.D.Ohio 2012) (noting that "some persuasive authority rejects the argument that there must be a `special relationship' between" a plaintiff making a negligent misrepresentation claim and the defendant who made the representation); Culy Constr. & Excavating, Inc. v. Laney Directional Drilling Co., 2012 WL 2071804, 2012 U.S. Dist. LEXIS 79575 (S.D.Ohio June 8, 2012) ("some persuasive authority rejects Culy's too-narrow `special relationship' argument."); Bank of Am. v. Kenwood Towne Place, 2010 Ohio Misc. LEIS 528 (Ohio C.P. Aug. 20, 2010) ("The Court finds that Ohio law does not require a special relationship as an element of negligent misrepresentation.") Perhaps the clearest and most persuasive decision on this matter was cited by Hodell. In National Mulch and Seed, Inc. v. Rexius Forest By-Products, Inc., 2007 WL 894833, 2007 U.S. Dist. LEXIS 24904 (S.D.Ohio, Mar. 22, 2007), the United States District Court for Ohio's Southern District explained as follows:
Id. at **9-40, 2007 U.S. Dist. LEXIS 24904 at **30-35 (footnotes omitted).
Therefore, it is recommended that SAP's motion for summary judgment as to the negligent misrepresentation claim be denied.
SAP asserts that the License Agreement precludes all of Hodell's tort claims. (ECF No. 110-1 at 11-19.) Specifically, SAP asserts that the alleged misrepresentations were not collateral to the agreement, and that the agreement's integration/merger clause, contained in Section 11.9 and quoted below, bars Hodell from arguing that contrary representations were made. Id. at 14-17. Notably, SAP made a virtually identical argument in its earlier motion to dismiss. (ECF No. 36-1 at 8-11.) In the previous Report and Recommendation, the Court addressed this argument as follows:
(Compl., Exh. G § 11.9.)
Id. at 788-790 (emphasis added).
The Ohio Supreme Court's analysis in Galmish is fatal to SAP's position. Hodell alleges that SAP represented its Software could at least accommodate the 80 licenses contemplated in the Development Agreement and the additional 40 licenses purchased at the time the License Agreement was signed. This representation is not inconsistent with any provision of the License Agreement. Hodell has further alleged that SAP knew of the falsity or was, at the very least, reckless in making such representation. Had the License Agreement stated that the Software could only handle thirty users, or that SAP did not make any representations or guarantees as to the number of users the Software could handle, the parol evidence rule might well bar evidence of contradictory terms. Here, however, if it is true that SAP falsely represented the number of user licenses the Software could handle — and the Court must construe such allegations as true on a 12(b)(6) motion — then arguably both agreements were induced by promises fraudulently made that SAP had no intention of keeping or, more appropriately, had no ability to keep.
(ECF No. 50 at 22-25) (footnotes omitted).
Previously, the Court specifically found that the representations as to the number
Finally, even if the Court found that the representation as to the number of users was not collateral and was rather contrary to the License Agreement, such a finding would only bar the fraud-in-the-inducement claim as to the License Agreement. SAP could still be held liable for fraudulently inducing Hodell into entering into the Development Agreement, notwithstanding the Court's finding that SAP was not a party to that agreement. In fact, as noted in the Court's previous report and recommendation, SAP has conceded that a defendant may be liable for fraudulent inducement even though it is not a party to the relevant agreement. (ECF No. 50 at 18; ECF No. 51 at 26, 52-54.)
Hodell's claim for breach of the Development Agreement entered into on or about December 20, 2004 was previously dismissed as to SAP. (ECF Nos. 50, 61.) The claim for breach of the License Agreement was dismissed with respect to Defendant SAP AG only. Id. Defendant SAP America now moves for summary judgment with respect to Hodell's claim for breach of the License Agreement. (ECF No. 110-1 at 36-39.)
In the Amended Complaint, Hodell alleges the breach of implied warranties and of an express warranty. (ECF No. 26 at ¶¶ 72-85.) Specifically, Hodell asserted that the Development Agreement contained an implied warranty of merchantability and an implied warranty of fitness for a particular purpose. Id. at ¶ 82. The breach of that agreement, however, is no longer an issue with respect to SAP. The Amended Complaint does not allege that the License Agreement contains an implied warranty of merchantability and/or an implied warranty of fitness for a particular purpose. Id. at ¶¶ 72-85. Hodell's brief in opposition appears to concede this point, as it does not argue that SAP breached an implied warranty. (ECF No. 162 at 46-49.) Nonetheless, the Amended Complaint also alleges a violation of an express warranty contained in the License Agreement:
(ECF No. 26 at ¶ 84.)
In its brief, Hodell argues that it will offer evidence that SAP breached the express warranty, that the warranty "failed its essential purpose," and that SAP breached the covenant of good faith and fair dealing implied in every contract. (ECF No. 162 at 46-49.) The express
(ECF No. 110-12, Ex. K)
SAP asserts that Hodell cannot offer any evidence that B1 did not conform to the functional specifications supplied by SAP. (ECF No. 110-1 at 38.) Hodell disagrees and relies on the following evidence:
The above evidence is sufficient to allow reasonable jurors to conclude that SAP breached the express warranty of the License Agreement by B1's failure to conform to the functional specifications contained in the documentation. Furthermore, Mr. Kraus's deposition testimony and email could support the inference that these problems arose within the first six months, as he stated that Hodell began experiencing issues in 2006. SAP asserts that it was not notified of any defect within six months of delivery. (ECF No. 110-1 at 39.) However, the License Agreement merely refers to the six month period for which B1 will substantially conform to the functional specifications contained in the documentation. As such, genuine issues of material fact remain as to whether SAP breached the License Agreement.
It is recommended that the SAP defendants' Motion for Summary Judgment (ECF No. 110) be DENIED. Filed June 13, 2013.
