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finding that a fraud in the inducement counterclaim asserted by the defendant was "interwoven with" its breach-of- contract claim "rather than extraneous to the contractual dispute" between the parties, and thus was "barred by the economic loss doctrine"
Summary of this case from Randall S. Miller & Assocs., P.C. v. Pitney Bowes Inc.Opinion
Case No. 1:03-CV-25
July 3, 2003
Richard A. Gaffin, for Plaintiff(s).
James B. Doezema, for Defendant(s).
OPINION
Plaintiff, TIBCO Software, Inc. ("TIBCO"), alleges that Defendant, Gordon Food Service, Inc. ("Gordon"), breached the parties' software licensing contract by failing to fulfill its financial obligations. In its answer to TIBCO's complaint, Gordon raised a number of affirmative defenses and brought a Counterclaim based on five grounds: (1) silent fraud; (2) misrepresentation; (3) mistake of fact; (4) breach of contract; and (5) duress. Before the Court is TIBCO's motion to dismiss and for summary judgment on Gordon's Counterclaim and to strike Gordon's affirmative defenses. The Court will grant TIBCO's motion.
Factual and Procedural Background
In late 2001, Gordon approached TIBCO regarding TIBCO providing Gordon with software (the "Software") for enterprise application integration ("EAI"). In an effort to ascertain whether TIBCO's software was capable of meeting its needs, Gordon requested that TIBCO respond to a "Request for Information" that listed questions that Gordon had regarding the material and performance specifications that Gordon required. (Request for Information, Pl.'s Br. Supp. Mot. Dis., Summ. J., and Strike Affirmative Defenses Ex. 1.) TIBCO provided a written response to Gordon's RFI. (Id.) Gordon then requested a "Proof of Concept" from TIBCO. (Proof of Concept, id. Ex. 2.) TIBCO responded by providing on-site evaluations to demonstrate the Software to Gordon and installed and demonstrated the Software at Gordon's site in Grand Rapids, Michigan. (Id.) Gordon also asked TIBCO to provide an estimate of the effort and expense required for the installation of the Software and configuration needed for its use. At Gordon's request, TIBCO provided consulting services to Gordon for that purpose. (Work Order, id. Ex. 3.)
Gordon contends that at some point prior to signing a contract with TIBCO, Gordon asked TIBCO if the Software would function as a file transfer protocol server ("FTP Server"). (Duran Aff. ¶ 4, Def.'s Br. Opp'n Ex. 1.) Gordon claims that someone at TIBCO assured Gordon that the Software would meet this specification without a need for a third-party FTP Server. (Id.) Gordon states that no discussion regarding FTP Servers occurred at that time.
On August 30, 2002, TIBCO and Gordon entered into a license agreement (the "License Agreement") for the Software. (License Agreement, Pl.'s Br. Supp. Ex. 4.) TIBCO provided Gordon financial incentives to get Gordon to sign the agreement before the end of TIBCO's financial year. The License Agreement does not mention FTP Servers.
The License Agreement contains the following clause limiting Gordon's warranties and remedies:
Limited Warranties. TIBCO warrants that: (a) for ninety (90) days following initial delivery of the TIBCO Software to Licensee, the unmodified TIBCO Software, under normal use on the Platform for which it is intended, will perform all material functions described in its Documentation, and (b) that TIBCO has the right to grant the licenses and other rights set forth herein. If a defect is reported to TIBCO during such ninety-day period, TIBCO may repair or replace the TIBCO Software or provide Licensee a full refund. . . . The foregoing shall be Licensee's sole and exclusive remedies and the entire liability of TIBCO and its licensors for any breach of these limited warranties. NO TIBCO AGENT OR EMPLOYEE IS AUTHORIZED TO MAKE ANY MODIFICATIONS, EXTENSIONS OR ADDITIONS TO THESE LIMITED WARRANTIES.
EXCEPT AS PROVIDED ABOVE, THE TIBCO SOFTWARE AND SERVICES ARE PROVIDED "AS IS", AND ALL OTHER EXPRESS OR IMPLIED CONDITIONS, REPRESENTATIONS, AND WARRANTIES INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE (EVEN IF INFORMED OF SUCH PURPOSE), OR ARISING FROM A COURSE OF DEALING, USAGE, OR TRADE PRACTICE, ARE HEREBY EXCLUDED TO THE EXTENT ALLOWED BY APPLICABLE LAW. NO WARRANTY IS MADE THAT THE TIBCO SOFTWARE'S FUNCTIONALITY OR SERVICES WILL MEET LICENSEE'S REQUIREMENT, OR THAT THE OPERATION OF THE TIBCO SOFTWARE OR SERVICES WILL BE UNINTERRUPTED OR ERROR-FREE.
(Id. ¶ 4 (capitalization in original).)
The License Agreement also contains an integration clause:
General. This Agreement constitutes the complete and exclusive statement of the parties' agreement as relates to the subject matter hereof and supersedes all proposals, representations, statements, negotiations and undertakings related to the same.
(Id. ¶ 12.)
After the parties signed the License Agreement, Gordon informed TIBCO that Gordon needed the Software to perform some additional functions. TIBCO responded by providing additional consulting services to reprogram the Software as Gordon requested. Gordon contends that at some point a TIBCO representative informed Gordon that the Software could not perform the FTP functions that Gordon sought, and that a third-party FTP Server was required to perform this function. Gordon determined that the Software could not meet its needs and sent a letter to TIBCO dated November 19, 2002, stating that it would not pay for the Software. (Letter from Toren to Parks of 11/19/02, id. Ex. 5.)
On January 7, 2003, TIBCO brought this against Gordon for breach of the License Agreement. In its January 28, 2003, answer to TIBCO's complaint, Gordon raised a number of affirmative defenses and brought a Counterclaim based on five grounds: (1) silent fraud; (2) misrepresentation; (3) mistake of fact; (4) breach of contract; and (5) duress. TIBCO filed the instant motion on March 2, 2003.
Standard of Review
While TIBCO has brought the instant motion both as a motion to dismiss and as a motion for summary judgment, the Court need only address TIBCO's motion to dismiss, because each of the counts that Gordon asserts in its Counterclaim fails to state a claim for which relief can be granted.
An action may be dismissed if the complaint fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). The moving party has the burden of proving that no claim exists. Although a complaint is to be liberally construed, it is still necessary that the complaint contain more than bare assertions of legal conclusions. Allard v. Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236, 1240 (6th Cir. 1993) (citing Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir. 1988)). All factual allegations in the complaint must be presumed to be true, and reasonable inferences must be made in favor of the non-moving party. 2A James W. Moore, Moore's Federal Practice, ¶ 12.34[1][b] (3d ed. 1997). The Court need not, however, accept unwarranted factual inferences. Morgan v. Church's Fried Chicken, 829 F.2d 10, 12 (6th Cir. 1987). Dismissal is proper "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02 (1957)).
Discussion
I. Gordon's Silent Fraud and Misrepresentation Counts
Gordon alleges in its Counterclaim that TIBCO is liable in tort for silent fraud and misrepresentation, based on TIBCO's alleged failure to disclose that the Software would not function properly without a third-party FTP server. TIBCO argues that both of these tort claim are barred by Michigan's economic loss doctrine. The Court agrees.
It is not clear from Count II of Gordon's Counterclaim whether Gordon is alleging the intentional tort of fraudulent misrepresentation or merely negligent misrepresentation. Gordon pleads facts in Paragraph 3 of its Counterclaim that, if true, may support a claim of fraudulent misrepresentation. However, Count II makes no specific allegations of fraud. As the result of the Court's economic loss doctrine analysis is the same for either tort, the Court will treat Count II as an allegation of fraudulent misrepresentation.
The economic loss doctrine bars a party from recovering in tort economic losses suffered because of a breach of duty assumed only by contract. Huron Tool Eng'g Co. v. Precision Consulting Servs. Inc., 209 Mich. App. 365, 374; 532 N.W.2d 541, 546 (1995) (citingNeibarger v. Universal Cooperatives, Inc., 439 Mich. 512, 530, 486 N.W.2d 612, 619 (1992)). Where a contractual relationship exists, the economic loss doctrine prohibits a party to the contract from bringing tort claims that are factually indistinguishable from breach of contract claims. Id. The economic loss doctrine thus distinguishes between commercial transactions, where commercial and contract law protect the parties' economic expectations, and tort actions intended to remedy unanticipated, physical injuries to individuals as a result of defective products. Neibarger, 439 Mich. at 520, 486 N.W.2d at 531. The Michigan Supreme Court expounded on this distinction in Neibarger:
The purpose of a tort duty of care is to protect society's interest in freedom from harm, i.e., the duty arises from policy considerations formed without reference to any agreement between the parties. A contractual duty, by comparison, arises from society's interest in the performance of promises. Generally speaking, tort principles, such as negligence, are better suited for resolving claims involving unanticipated physical injury, particularly those arising out of an accident. Contract principles, on the other hand, are generally more appropriate for determining claims for consequential damage that the parties have, or could have, addressed in their agreement.Id. at 521, 486 N.W.2d at 615 (quoting Spring Motors Distribs., Inc. v. Ford Motor Co., 98 N.J. 555, 579-80, 489 A.2d 660, 672 (1985)). Michigan courts have not limited the principles of Neibarger to contracts for the sale of goods. See, e.g., Huron Tool, 209 Mich. App. at 374, 532 N.W.2d at 546 ("Although the Supreme Court's discussion of the economic loss doctrine in Neibarger was linked closely to the UCC context of the case, the doctrine is not limited to the UCC.");see also Rinaldo's Constr. Corp. v. Mich. Bell Tel. Co., 454 Mich. 65, 84-85, 559 N.W.2d 647, 658 (1997) (applying the economic loss doctrine to a telephone service contract) (citing Corl v. Huron Castings, Inc., 450 Mich. 620, 626-28, 544 N.W.2d 278, 281 (1996) (refusing to apply the collateral source rule for tort damages to an employment contract)), but see Cargill, Inc. v. Boag Cold Storage Warehouse, Inc., 71 F.3d 545, 550 (6th Cir. 1995) (narrowly construing Neibarger to only apply to contracts involving the sale of goods).
Michigan courts have also recognized a narrow exception to the economic loss doctrine for the intentional tort of fraudulent misrepresentation. Huron Tool, 209 Mich. App. 372-73, 532 N.W.2d at 545. In Huron Tool, the court stated:
Fraud in the inducement presents a special situation where parties to a contract appear to negotiate freely — which normally would constitute grounds for invoking the economic loss doctrine — but where in fact the ability of one party to negotiate fair terms and make an informed decision is undermined by the other party's fraudulent behavior.Id. The economic loss doctrine thus does not bar a claim for fraud in the inducement because, "by definition, [it] redresses misrepresentations that induce the buyer to enter into a contract but that do not in themselves constitute contract or warranty terms subsequently breached by the seller." Id. at 375, 532 N.W.2d at 546. However, not all claims for fraud in the inducement are immune from the economic loss doctrine. If the fraud in the inducement claim involves the actual subject matter of the contract, then the claim is nonetheless barred.
[W]here the only misrepresentation by the dishonest party concerns the quality or character of the goods sold, the other party is still free to negotiate warranty and other terms to account for possible defects in the goods.
The distinction between fraud in the inducement and other kinds of fraud is the same distinction drawn . . . between fraud extraneous to the contract and fraud interwoven with the breach of contract. With respect to the latter kind of fraud, the misrepresentations relate to the breaching party's performance of the contract and do not give rise to an independent cause of action in tort.
. . .
We hold that plaintiff may only pursue a claim for fraud in the inducement extraneous to the alleged breach of contract.Id. at 373-74, 532 N.W.2d at 545-46; see also Valleyside Dairy Farms, Inc. v. A.O. Smith Corp., 944 F. Supp. 612, 617 (W.D.Mich. 1995) (applying the economic loss doctrine to bar the plaintiffs' claim of fraud when the "alleged fraudulent representations that induced the plaintiffs to use . . . [the product] concern the quality and characteristics" of the product); Martin v. A.O. Smith Corp., 931 F. Supp. 543, 546-47 (W.D.Mich. 1996) (finding that plaintiff's allegations "do not make out claims for fraud in the inducement as the term is defined in Huron Tool" because the alleged misrepresentations about the specifications of the farm equipment "concern the quality or character of the" equipment which "could have been made part of the . . . contract negotiations.")
For example, in Huron Tool, a manufacturer sued a consulting service and an individual for breach of contract, breach of warranty, fraud, and misrepresentation, alleging that the consulting service supplied defective software. Id. at 367, 532 N.W.2d at 543. The parties' contract for the sale of a computer system stated that the consulting service would provide the plaintiff with "systems's design, programing, training and installation services." Id. The court found that even though the plaintiff alleged fraud in the inducement, the exception to the rule nonetheless barred the fraud claim. The court stated:
The fraudulent representations alleged by plaintiff concern the quality and the characteristics of the software system sold by defendants. These representations are indistinguishable from the terms of the contract and the warranty that plaintiff alleges were breached. Plaintiff fails to allege any wrongdoing by defendants independent of defendants' breach of contract and warranty. Because plaintiff's allegations of fraud are not extraneous to the contractual dispute, plaintiff is restricted to its contractual remedies under the UCC.Id. at 375, 532 N.W.2d at 546 (footnote omitted).
In the instant case, Gordon does not contest that the economic loss doctrine is applicable to its fraud claims since the sale or lease of software is typically treated as a sale of goods governed by the Uniform Commercial Code, even though the agreement contains some service elements. Dahlman v. Sulcus Hospitality Techs. Corp., 63 F. Supp.2d 772, 775 (E.D.Mich. 1999). Gordon contends, however, that its fraud claims should not be barred because the alleged fraud is not based on the malfunction of the software, but upon "the need to implement a different piece of equipment." (Def.'s Br. Opp'n Mot. Dis. Summ. Disposition Strike Affirmative Defenses at 5.) In support of this proposition, Gordon citesSamuel D. Begola Servs. v. Wild Bros., 210 Mich. App. 636, 640, 534 N.W.2d 217, 219 (1995) (discussing an agreement to remove trees from land), and Indalski v. Crouse Cartage Co., 299 F. Supp.2d 730, 739 (E.D.Mich. 2002) (discussing an attorney referral agreement). While both of these cases address the tort of fraud in the inducement, neither addresses a sale of goods, discusses the economic loss doctrine, nor sheds any light on any exceptions thereto. The Court thus finds these cases unhelpful in the instant case.
Gordon's fraud claims are based on the character of the Software. Gordon alleges that TIBCO said that it would provide Software that would perform certain functions that Gordon desired. According to Gordon, the Software that TIBCO delivered could not perform these functions. Thus, the essence of Gordon's breach of contract claim, as well as its fraud claims, is that the Software lacked the character for which Gordon bargained. Gordon's fraud claims, therefore, are interwoven with the breach of contract rather than extraneous to the contractual dispute. Accordingly, Counts I and II of Gordon's Counterclaim are barred by the economic loss doctrine and will be dismissed.
II. Gordon's Mutual Mistake Count
In its Counterclaim, Gordon alleges mutual mistake of fact based on Gordon's contention that the parties believed that they were contracting for Software that did not require a third-party server. TIBCO contends that this claim should be dismissed because it is barred by the License Agreement's integration clause. The Court agrees.
In order to state a claim for mutual mistake of fact, Gordon asks the Court to consider parol evidence to support its allegations. However, the Court is barred from considering parol evidence to invalidate a contract when the contract at issue contains an integration clause unless the alleged fraud or mistake would invalidate the merger clause itself. See, e.g., Smoracy, L.L.C. v. Cook, No. 02-CV-10103 BC, 2002 WL 2031385, at *2-3 (E.D.Mich. Aug. 31, 2002) (dismissing with prejudice a claim based on allegations of fraud or mutual mistake unrelated to the formation of the contract's integration clause) (citing UAW-GM v. KSL Recreation Corp., 228 Mich. App. 486, 503, 579 N.W.2d 411, 419 (1998) ("In the context of an explicit integration clause, Corbin recognizes exceptions to the barring of parol evidence only for fraud (or other grounds sufficient to set aside a contract) and for the rare situation when the written document is obviously incomplete `on its face' and, therefore, parol evidence is necessary `for the filling of gaps.'") (citing 3 Arthur L. Corbin, Corbin on Contracts § 578 (interim ed. 2002)). The KSL Recreation court stated:
[W]hile parol evidence is generally admissible to prove fraud, fraud that relates solely to an oral agreement that was nullified by a valid merger clause would have no effect on the validity of the contract. Thus, when a contract contains a valid merger clause, the only fraud that could vitiate the contract is fraud that would invalidate the merger clause itself, i.e., fraud relating to the merger clause or fraud that invalidates the entire contract.Id. The same reasoning applies to allegations of mistake of fact. Thus, because Gordon's allegations of mistake of fact do not attack the validity of the integration clause itself, Gordon's mutual mistake claim is barred by the integration clause. Count III of Gordon's Counterclaim will be dismissed accordingly.
III. Gordon's Breach of Contract Count
Gordon alleges in its Counterclaim that TIBCO breached the License Agreement because "[t]he software and products provided by TIBCO did not conform to the agreement of the parties and the products will not function properly without the use of a third party FTP server." (Countercl. ¶ 20.) TIBCO contends that Gordon failed to avail itself of the limited warranty provisions of the integrated agreement, thus all remaining claims are barred. The Court agrees.
The License Agreement explicitly stated that TIBCO's limited warranty only extended for ninety days following initial delivery of the Software to Gordon, and after that time the Software is provided "AS IS." (License Agreement ¶ 4 (capitalization in original).) It is uncontested that Gordon did not bring a warranty claim within the prescribed time period and that Gordon did not send TIBCO a letter stating its intention not to pay for the Software until November 19, 2002. Thus, the plain language of the contract bars Gordon's breach of contract claim.
Gordon attempts to avoid the plain language of the contract by claiming that the remedy provided in the License Agreement fails its essential purpose, thereby allowing Gordon to pursue all remedies allowed under the Uniform Commercial Code, including rejection and revocation. This principle, however, has no relevance to the facts alleged by Gordon. A warranty fails of its essential purpose where "unanticipated circumstances preclude the seller from providing the buyer with the remedy to which the parties agreed." Severn v. Sperry Corp., 212 Mich. App. 406, 413, 538 N.W.2d 50, 54 (1995). This principle has been almost exclusively applied in cases where the seller provides the buyer with a warranty of repair and the seller is unable to successfully repair the goods. See, e.g., id.; see also Krupp PM Eng'g, Inc. v. Honeywell, Inc., 209 Mich. App. 104, 108-09, 530 N.W.2d 146, 148-49 (1995); King v. Taylor Chrysler Plymouth, Inc., 184 Mich. App. 204, 214, 457 N.W.2d 42, 46 (1990).
Here, Gordon did not make a warranty claim within the ninety-day period. Thus, Gordon cannot claim that TIBCO's warranty failed it essential purpose when the warranty was never utilized. Since Gordon agreed to waive all other warranties in the License Agreement, the analysis of whether TIBCO's warranty fails its essential purpose must end with the expiration of the ninety-day period. Gordon is therefore not entitled to rejection or revocation under this theory.
Gordon also contends that it should be allowed to introduce parol evidence pursuant to M.C.L. §§ 440.2316, 440.2864 to "explain the scope and meaning of the limited warranty given by TIBCO." (Def.'s Br. Opp'n Mot. Dis. Summ. Disposition Strike Affirmative Defenses at 8.)
Section 440.2316 states:
Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of this article on parol evidence (section 2202) negation or limitation is inoperative to the extent that such construction is unreasonable.
M.C.L. § 440.2316(1) (footnote omitted).
Section 440.2202 states:
Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented . . . by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.
M.C.L. § 440.2202 (emphasis added) (footnotes omitted).
When these sections are read together, it is evident that parol evidence is not permitted where the agreement is integrated. It is undisputed that the License Agreement is an integrated agreement. (License Agreement ¶ 12.) Thus, Gordon may not introduce parol evidence to explain the scope and meaning of the limited warranty given by TIBCO.
Accordingly, Count IV of Gordon's Counterclaim will be dismissed.
IV. Gordon's Duress Count and Negligence Affirmative Defense
In its brief in opposition to TIBCO's motion to dismiss, Gordon "concedes that its comparative negligence defense and common law duress claim should be dismissed." (Def.'s Br. Opp'n Mot. Dis. Summ. Disposition Strike Affirmative Defenses at 4 n. 1.) The Court will thus dismiss Count V of Gordon's Counterclaim and strike Gordon's negligence affirmative defense (Affirmative Defense ¶ 1).
V. Gordon's Unconscionability Affirmative Defense
Gordon has asserted the affirmative defense that the License Agreement should not be enforced because it is an unconscionable agreement. (Affirmative Defenses ¶ 3.) TIBCO contends that the doctrine of unconscionability is not applicable. The Court agrees with TIBCO.
A court may refuse to enforce a contract, or any clause of a contract, which it finds to have been unconscionable at the time it was made. M.C.L. § 440.2302(1). "Unconscionability is a question of law for the Court to decide." Citizens Ins. Co. v. Proctor Schwartz, Inc., 802 F. Supp. 133, 143 (W.D.Mich. 1992). "Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties," and it is rarely found to exist in agreements entered into by two commercial parties. Id. at 143-45.
In the instant case, Gordon claims that the License Agreement was unconscionable because Gordon was "only talking to TIBCO," "[i]t was asked to sign the contract before the software was tested in order to get some financial incentives," and the License Agreement contains limited warranties. (Def.'s Br. Opp'n Mot. Dis. Summ. Disposition Strike Affirmative Defenses at 9.) These alleged facts, taken as true, do not come close to establishing that the License Agreement, which was made between two sophisticated commercial parties, was unconscionable. Gordon's affirmative defense of unconscionability will thus be stricken pursuant to Rule 12(f) of the Federal Rules of Civil Procedure.
Conclusion
For the foregoing reasons, TIBCO's motion to dismiss and for summary judgment on Gordon's Counterclaim and to strike Gordon's affirmative defenses will be granted. An Order consistent with this Opinion will be entered.