KEITH P. ELLISON, District Judge.
Pending before the Court is the motion for summary judgment of Defendant Thinkware, Inc. (Doc. No. 17). For the following reasons, Defendant's Motion must be granted in part and denied in part.
Plaintiff Fagan Holdings, Inc.'s ("Fagan") purchase of a license to use Defendant Thinkware Inc.'s software and its subsequent software implementation are the basis for this suit for breach of contract, fraudulent misrepresentation, and negligent misrepresentation.
Fagan is a holding company that owns and operates several staff leasing companies. (Affidavit of Michael Todd Fagan ("Fagan Aff.") at ¶ 2.) Staff leasing companies, which are also known as professional employer organizations ("PEO"), provide client companies with payroll, human resources, benefits, and workers' compensation services. (Id.) In order to carry out these services, Fagan uses a software system. (Id.) Fagan had been using a DOS-based software system called "Summit" for approximately fourteen years, before deciding in 2006 to upgrade its software. (Id.; Deposition of Michael Fagan ("Fagan Depo.") at 12:19-22, 13:12-14.)
Thinkware is a software company that produces and licenses software called Darwin (the "Software") to PEOs. (Affidavit of Kevin Eickmann ("Eickmann Aff.") at ¶ 2.) Darwin enables PEOs to provide payroll, invoicing, finance, reporting, human resources, and other functions to their clients. (Id.) Fagan learned of Thinkware's software and began exchanging emails with a Thinkware salesperson, Tom Allen, to obtain a demonstration of the Software. (Fagan Depo. at 18:6-13.) Mr. Allen eventually conducted a remote demonstration of the Software via telephone and computer for a few of Fagan's employees. (Id. at 18:14-19:1.) A few months after the first demonstration, Mr. Allen conducted a second remote demonstration of the Software for about fifteen of Fagan's managers. (Id. at 20:20-22:4.) A few weeks later, Mr. Allen conducted a third demonstration in-person at Fagan's offices with the same set of Fagan employees. (Id. at 22:11-24:12.)
While Fagan was receiving demonstrations of the Darwin Software, it was also considering and receiving demonstrations from other software companies offering similar products. (Id. at 22:20-23:12.) Fagan ultimately decided to license the Software based on certain features of Darwin that would make Fagan's benefits process easier. (Id. at 25:2-10.) In addition, Fagan allegedly relied on representations made by Mr. Allen during the demonstrations that "Darwin was going to make our lives a whole lot easier and allow us to do a whole lot more for our clients." (Id. at 25:11-19.) On June 13, 2008, Fagan and Thinkware entered into an End-User License Agreement (the "License Agreement"), and Fagan delivered a check in the amount of $220,000.00 to Thinkware in exchange for the Software license. (Fagan Aff. at ¶ 3.)
Fagan and Thinkware subsequently began implementation of the Software in stages. (Fagan Aff. at ¶ 4.; Fagan Depo. at 27:19-25.) A Thinkware customer service
The Software implementation did not go smoothly. Fagan encountered a multitude of problems with various aspects of the Software and its features. Thinkware attempted to address these problems by providing telephone customer support and the services of Ms. McVay. (Eickmann Aff. at ¶ 5.) Thinkware also offered to design custom enhancements or changes to accommodate Fagan's desire for certain features. (Doc. 18, Exh. A.) Dissatisfied with these attempts, Fagan's President, Michael Fagan, wrote to Thinkware's Vice President, Kevin Eickmann, on October 17, 2008 with a list of approximately thirty-five various problems and deficiencies that Fagan believed the Darwin software possessed. (Doc. 18, Exh. A.) Thinkware designated an employee, Erin Martin, to oversee Fagan's implementation process. (Doc. 18, Exh. B.) On November 13, 2008, Mr. Fagan sent a list of approximately thirty problems with Darwin to Ms. Martin. (Id.) Fagan and Thinkware continued to work towards resolution of these problems. On January 21, 2008, Erin Martin wrote to Fagan and conveyed information about several prospective software releases and updates that Thinkware believed would resolve Fagan's problems. (Doc. 18, Exh. C.) Fagan did not respond and, on April 13, 2009, Fagan's counsel wrote to Thinkware and formally terminated the License Agreement. (Doc. 18, Exh. D.) Thereafter, Fagan filed suit against Thinkware in Montgomery County, Texas and alleged that Thinkware's sale of Darwin and the subsequent problems with the Software constituted negligent misrepresentation, fraudulent inducement and fraudulent misrepresentation, and breach of contract. Thinkware removed the lawsuit to this Court on the basis of diversity jurisdiction.
Defendant has moved for application of Ohio law to both Plaintiff's breach of contract and tort claims. Plaintiff has objected to the application of Ohio law to its tort claims, and argues that Texas law should govern. District courts sitting in diversity apply the choice-of-law rules of the forum state. Smith v. EMC Corp., 393 F.3d 590, 597 (5th Cir.2004). Texas courts use the "most significant relationship" test set forth in the Restatement (Second) of Conflict of Laws (1971) for all choice-of-law cases except contract cases in which the parties have agreed to a valid choice of law clause. Mayo v. Hartford Life Ins. Co., 354 F.3d 400, 403 (5th Cir.2004).
For contracts with choice of law clauses, Texas courts apply section 187 of the Restatement to determine whether the choice of law clause is enforceable.
However, the choice of law provision in the License Agreement does not cover Plaintiff's tort claims of negligent and fraudulent misrepresentation. The License Agreement's provision is a narrow one, addressing only the construction and interpretation of the agreement itself, rather than a broad provision purporting to "govern, construe and enforce all of the rights and duties of the parties arising from or relating in any way to the subject matter of this contract." Caton v. Leach Corp., 896 F.2d 939, 943 (5th Cir.1990). Therefore, the Court must return to Texas choice-of-law principles, which require, in tort cases, the use of the "most significant relationship" test provided by the Restatement (Second) Conflict of Laws. Torrington Co. v. Stutzman, 46 S.W.3d 829, 848 (Tex.2000); Gutierrez v. Collins, 583 S.W.2d 312, 318 (Tex.1979); RESTATEMENT (SECOND) OF CONFLICTS OF LAW § 145 (1971). Section 148 of the Restatement outlines several factors that should be taken into account when resolving choice of law issues presented in fraud or misrepresentation cases.
Application of the Restatement factors in § 148 to the facts presented demands the use of Texas law with respect to Plaintiff's tort claims. Fagan acted in reliance on Mr. Allen's alleged misrepresentations in Texas. Fagan received Mr. Allen's alleged misrepresentations during the demonstrations conducted while Fagan's employees were in its Texas offices. Fagan rendered its performance under the License Agreement—delivery of the license fee—from its Texas office. Despite Thinkware's business headquarters in Ohio, Fagan's residence in Texas is more important because the "the financial loss involved will usually be of greatest concern" where the plaintiff's business is located. Tracker Marine, L.P., 108 S.W.3d at 356 (citing Restatement (Second) of Conflicts of Law § 148 cmt. i at 448). The facts presented to the Court do not reveal whether Mr. Allen made his alleged misrepresentations during his in-person demonstration at Fagan's offices in Texas or the remote demonstrations.
Therefore, the Court will apply Ohio law to Plaintiff's breach of contract claim and
A motion for summary judgment under Federal Rule of Civil Procedure 56 requires the Court to determine whether the moving party is entitled to judgment as a matter of law based on the evidence thus far presented. FED. R. CIV. P. 56(c). Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Kee v. City of Rowlett, 247 F.3d 206, 210 (5th Cir.2001) (quotations omitted). A genuine issue of material fact exists if a reasonable jury could enter a verdict for the non-moving party. Crawford v. Formosa Plastics Corp., 234 F.3d 899, 902 (5th Cir.2000). The Court views all evidence in the light most favorable to the non-moving party and draws all reasonable inferences in that party's favor. Id. Hearsay, conclusory allegations, unsubstantiated assertions, and unsupported speculation are not competent summary judgment evidence. F.R.C.P. 56(e)(1); see, e.g., Eason v. Thaler, 73 F.3d 1322, 1325 (5th Cir.1996); McIntosh v. Partridge, 540 F.3d 315, 322 (5th Cir. 2008); see also Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.1994) (noting that a non-movant's burden is "not satisfied with `some metaphysical doubt as to the material facts.'") (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)).
In order to prevail on a breach of contract claim under Ohio law, a plaintiff must present evidence of existence of a contract, performance by the plaintiff, breach by the defendant, and damage or loss to the plaintiff. Doner v. Snapp, 98 Ohio App.3d 597, 600, 649 N.E.2d 42 (Ohio Ct.App., Miami County 1994). In its original petition, Plaintiff described one of its causes of action as "breach of contract," arising from Thinkware's failure to perform its obligations under the License Agreement. Specifically, Plaintiff alleged that the Software failed to perform as promised and Thinkware did not provide adequate customer support, rendering the Software useless for Plaintiff's business. Plaintiff subsequently stated, in response to Thinkware's First Set of Interrogatories, that it believed Thinkware to have breached the following sections of the License Agreement: (1) section 6(a), product support services; (2) section 12(a), Think-Ware's limited warranties; and (3) section 24(a), indemnification. (Fagan Depo., Exh. B at 16.) Defendant seeks summary judgment as to all of Plaintiff's bases for a breach of contract. The Court will review each one in turn, below.
Defendant argues that Plaintiff's claim for breach of contract is essentially a breach of warranty claim that is foreclosed under section 12(a) of the License Agreement. Plaintiff contends that it has pled a breach of contract claim distinct from a breach of warranty claim.
Acceptance of goods occurs when a buyer, after a reasonable opportunity to inspect the goods, indicates to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity. Ohio R.C. Ann. § 1302.64(A)(1) (adopting UCC § 2-606). Rejection of goods results when a buyer does not accept the goods within a reasonable time after their delivery or tender. Ohio R.C. Ann. § 1302.61(A) (adopting UCC §§ 2-603, 2-604). A buyer may revoke acceptance when the good's nonconformity substantially impairs its value to him, if the buyer's acceptance was made on the reasonable assumption that the non-conformity would be cured and it has not been, or without discovery of the non-conformity if acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances. Ohio R.C. Ann. § 1302.66(A) (adopting UCC § 2-608). Revocation must be made within a reasonable time of the discovery of the non-conformity and the buyer must notify the seller of the non-conformity. Id. § 1302.66(B).
As Defendant correctly points out, the predicate for Plaintiff to revoke acceptance of the License Agreement and claim remedies for breach of contract is a finding that the Darwin software was non-conforming. "A determination of the existence or non-existence of a nonconformity requires reference to the terms of the contract, including the law of warranty." Cannon v. Neal Walker Leasing, 1995 WL 404961, *3, 1995 Ohio App. LEXIS 2839, *7-*8 (Ohio Ct.App., Summit County 1995). Goods conform to a contract "if they are in accordance with the obligations under a contract." Ohio R.C. Ann. § 1302.01(A)(12). A contract encompasses both the express terms of the written agreement as well as other obligations implied from the parties' course of dealing. Ohio R.C. Ann. § 1301.1(C). If a written contract contains an effective disclaimer of all express and implied warranties, the seller owes the buyer no obligation relating to the quality of the goods. Ohio R.C. Ann. § 1302.29 cmt. 7.
Although the License Agreement contained an effective disclaimer of implied warranties, it did not contain an effective disclaimer of express warranties. Section 12(c) of the License Agreement disclaims all implied warranties and uses the words "merchantability," "fitness," and "fitness for a particular purpose" in capital letters. See Ohio R.C. Ann. § 1301.01(J) (defining "conspicuousness" as including language in the body of a contract that is in larger or contrasting type). Further, the provision states in capital letters that the "entire risk as to the quality and performance of
Plaintiff may revoke the License Agreement if Thinkware's or Mr. Allen's oral representations during the demonstrations about the performance of the Software constituted an express warranty. "Whenever any affirmation of fact or promise relating to the goods becomes part of the basis for the bargain between parties, an express warranty is created by the seller." Barksdale v. Van's Auto Sales, Inc., 62 Ohio App.3d 724, 728, 577 N.E.2d 426 (Ohio Ct.App., Cuyahoga County 1989) (quoting Ohio R.C. Ann. § 1302.26(A)(1)) Oral representations creating express warranties are not excluded under the parol evidence rule because "in situations where express warranties are made during the bargain, but then allegedly disclaimed in the actual sales contract, preference is to be given to the express warranties and inconsistent disclaimers are inoperative to the extent they are unreasonable." Barksdale, 62 Ohio App.3d at 728, 577 N.E.2d 426 (quoting Ohio R.C. Ann. § 1302.29(A)) Even if a written agreement was intended by the parties to be a final expression of their agreement, a plaintiff may present "evidence of a contemporaneous oral agreement when that agreement was made in order to induce the party into entering the written contract." Stormont v. Tenn-River Trading Co., 1995 WL 250806, *3, 1995 Ohio App. LEXIS 1759, *9 (Ohio Ct.App., Franklin County 1995). Defendant Thinkware cites several cases for the proposition that evidence of prior or contemporaneous negotiations relating to the final terms of a written agreement are to be excluded when the parties integrated their negotiations into a final and unambiguous written agreement. However, most of these cases involve claims of fraudulent inducement rather than breach of contract. The one case that does directly address a breach of contract case, Keel v. Toledo Harley-Davidson/Buell, 184 Ohio App.3d 348, 352, 920 N.E.2d 1041 (Ohio Ct.App., Lucas County 2009), involves an oral statement that a motorcycle was "reliable, dependable, and had no defects" that was later superseded by a written agreement containing a merger clause and disclaimed all express and implied warranties. However, the purported warranties in Keel can be distinguished as mere "puffing" rather than specific factual representations that may give rise to an express warranty. See Gallagher v. WMK Inc., 2007 Ohio 6615, *20, 2007 WL 4322531 (Ohio Ct.App., Summit County 2007) ("[T]he specificity of the comment and the context in which it was made will impact the determination of whether a statement falls into the category of `puffing' versus affirmation of fact.").
Plaintiff asserts that Thinkware made certain oral representations about the capability and performance of the Software
Since there are genuine issues of material fact regarding the oral express warranties made to Fagan during the Software demonstrations, the Software's conformity or non-conformity cannot be conclusively resolved in favor of ThinkWare. If the Software is found to be nonconforming, Plaintiff is able to revoke acceptance of the Software and bring a claim for breach of contract that is not foreclosed by any disclaimers preventing breach of warranty claims. In addition, there are genuine issues of material fact as to whether the value of the Software was substantially impaired. Mr. Fagan states that he had to return the Software to Thinkware once it became clear that the Software could not be used. (Fagan Aff. at ¶ 6.) "[O]nce it is established that an item is non-conforming, the issue becomes whether that non-conformity substantially impaired its value to the buyer." Cannon v. Neal Walker Leasing, 1995 WL 404961, *3, 1995 Ohio App. LEXIS 2839, *8 (Ohio Ct.App., Summit County 1995). "Whether a complained of nonconformity substantially impairs an item's worth to the buyer is a determination exclusively within the purview of the fact-finder and must be based on objective evidence of the buyer's idiosyncratic tastes and needs." McCullough v. Bill Swad Chrysler-Plymouth, Inc., 5 Ohio St.3d 181, 186, 449 N.E.2d 1289 (Ohio 1983). Finally, there are genuine issues of material fact exist as to the question of whether Plaintiff's revocation of its acceptance occurred within a "reasonable" time. Mr. Fagan states that he worked with Thinkware through January 2009, at which time Fagan realized that the Software's failure to perform according to Thinkware's representations could not be cured. Fagan terminated the License Agreement approximately four months later. (Fagan Aff. at ¶¶ 4-6.) As a result of these factual issues, Defendant is not entitled to summary judgment on Plaintiff's breach of contract claim.
Defendant argues that there is no evidence to support Plaintiff's claims that it breached section 6(a) of the License Agreement, which covers customer support services. Plaintiff alleges that each of the thirty or so complaints listed in Mr.
Plaintiff asserted in its response to Thinkware's First Set of Interrogatories that Thinkware breached section 24(a) of the License Agreement, in which Thinkware agrees to indemnify Fagan.
Section 24(a) does not explicitly limit its application to third party claims. See Mead, 319 F.3d at 798. Thinkware agrees to indemnify Fagan from "any and all . . . losses, damages, costs and expenses . . . from, or alleged to have arise[n] from the acts or omissions (whether negligent, reckless, intentional, or otherwise) of Thinkware." (Fagan Depo., Exh. A at ¶ 24(a).) The language can be interpreted as requiring Thinkware to compensate Fagan for Fagan's losses linked to the failure of Thinkware's Software to perform as Fagan wished. The License Agreement does not contain language purporting to limit the indemnification to claims, liabilities, or damages of third-parties.
Contrary to Defendant's argument, indemnity does not apply solely to third-party situations. "The typical meaning of `indemnify' is akin to `reimburse' rather than `reimburse for losses incurred by third parties.'" See Battelle Memorial Institute v. Nowsco Pipeline Svcs., Inc., 56 F.Supp.2d 944,
With respect to the factual determination of whether Fagan is entitled to indemnification under section 24(a), we find that a genuine issue of material fact exists as to whether Fagan's losses arose from the acts or omissions of Thinkware. Fagan has specified instances in which the Software failed to perform as Thinkware represented it would during the Software demonstrations. Fagan also has identified its losses in the form of the license fee paid to Thinkware and additional customer service fees it incurred during the Software implementation. These facts are sufficient to defeat Thinkware's request for summary judgment on Plaintiff's claim of indemnification.
Defendant Thinkware moves for summary judgment on Plaintiff's claim of fraudulent misrepresentation. Plaintiff alleges that Thinkware made fraudulent misrepresentations through the statements of Mr. Allen that "Darwin was going to make our lives a whole lot easier and allow us to do a whole lot more for our clients." (Fagan Depo. at 25:11-19.)
To prevail on a fraud claim, a plaintiff must prove that: (1) the defendant made a material representation that was false; (2) it knew the representation was false or made it recklessly as a positive assertion without any knowledge of its truth; (3) it intended to induce the plaintiff to act upon the representation; and (4) the plaintiff actually and justifiably relied upon the representation and thereby suffered injury. Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex.2001) (quoting Trenholm v. Ratcliff, 646 S.W.2d 927, 930 (Tex.1983)).
Fagan has not pointed to any evidence that Thinkware or Mr. Allen knew that any purported misrepresentations were either false at the time they were made or were made recklessly. Even if Fagan could show that Defendant Thinkware or Mr. Allen possessed the requisite knowledge, Mr. Allen's statements were puffery rather than representations of fact. See Dowling v. NADW Marketing, Inc., 631 S.W.2d 726, 729 (Tex.1982) (citing Gulf Oil
Therefore, Defendant Thinkware is entitled to summary judgment on Plaintiff's claim of fraudulent misrepresentation.
Plaintiff has agreed to summary judgment on its claim of negligent misrepresentation because it is no longer pursuing this claim. Therefore, the Court grants summary judgment to Defendant on Plaintiff's negligent misrepresentation claim.
Defendant Thinkware's Motion for Summary Judgment (Doc. No. 17) is
RESTATEMENT (SECOND) OF CONFLICTS OF LAW § 187 (1971).
(2) When the plaintiff's action in reliance took place in whole or in part in a state other than that where the false representations were made, the forum will consider such of the following contacts, among others, as may be present in the particular case in determining the state which, with respect to the particular issue, has the most significant relationship to the occurrence and the parties:
RESTATEMENT (SECOND) OF CONFLICTS OF LAW § 148 (1971).
