Per-Se Technologies F/N/A Medaphis Corporation, Inc. v. Sybase, Inc.

Opinion issued June 30, 2005 In The Court of Appeals For The First District of Texas NO. 01-03-01293-CV PER-SE TECHNOLOGIES, INC., FORMERLY KNOWN AS MEDAPHIS CORPORATION, INC., Appellant V. SYBASE, INC., Appellee On Appeal from the 269th District Court Harris County, Texas Trial Court Cause No. 1999-38316 MEMORANDUM OPINION Appellant, Per-Se Technologies, Inc., formerly known as Medaphis Corporation, sued appellee, Sybase, Inc., alleging negligent misrepresentation and fraud. Appellee filed a rule 166a(c) motion for summary judgment, and the trial court, without specifying its grounds, granted the motion. In five issues on appeal, appellant contends that appellee did not conclusively negate causation, that appellant is entitled to recover as damages attorney’s fees incurred in arbitration with a third party and fees for services to that third party, that appellant is entitled to indemnity for contractual fees paid, and that the two-year limitations period was tolled by the discovery rule and by fraudulent concealment. We affirm in part and reverse in part, and remand the cause to the court below. BACKGROUND Appellant, Per-Se Technologies, Inc., is the assignee of the rights of BSG Alliance/IT (BSG). BSG was the party involved in the underlying events in this case. In June 1995, SCI Management Corp. (“SCI”), a nation-wide funeral home chain, contracted with BSG to develop a company-wide computer system (the “Horizon Project”) for intra-company communications. The project was divided into three phases. Phase I consisted of consultation with SCI regarding its requirements and the design of the system. Phases II and III consisted of the construction and implementation of the system, with Phase II focusing on SCI’s cemetery business and Phase III focusing on the funeral home operations. SCI required a system with a “three-tiered architecture” to provide for the synchronization of data between the individual funeral homes (the third tier), the regional “clusters” (the middle tier), and the central database located at SCI’s corporate headquarters (the top tier). This communication process is referred to as “replication.” Additionally, SCI required that the three-tiered architecture system be able to replicate data using a “non-persistent connection” (a dial-up connection present only while data are being sent or received). A non-persistent connection was a critical component for the system—and therefore the entire Horizon Project—because a persistent connection, requiring a dedicated data line, would have been prohibitively expensive, rendering the Horizon Project economically infeasible. To complete its bid for Phase II, BSG solicited bids from Sybase and another vendor, Oracle, for the design of software needed for the project. In January 1996, the two vendors conducted a proof of concept (“POC”) to test the capability of their software designs. Oracle, in its POC, demonstrated that it could replicate the data, but only in a two-tiered architecture. Sybase’s POC demonstrated that it could perform the replication in a three-tiered architecture, using its “SQL Anywhere” database software for the remote locations and its “System 11" database software at the regional clusters and corporate headquarters. However, while Sybase showed that it could replicate data using a persistent connection, the system operated in an “error condition” when performing the replication task using a non-persistent connection. Sybase referred to this as an “asynchronous” problem. David Cornell, BSG’s lead technical architect on the Horizon Project, testified that Sybase represented to BSG that a software upgrade to correct the problem would be available in August 1996. Doug Odom, SCI’s lead manager, testified that BSG told SCI that BSG had received assurances from Sybase concerning the software upgrade. Notwithstanding the replication issue discovered during the POC, BSG, in its report to SCI, recommended that Sybase be selected as the software vendor for the Horizon Project. Sybase, following its selection, prepared an Engagement Report for SCI and BSG, detailing the POC. The report stated: The purpose of this document is to confirm the work conducted during the course of the engagement, together with details of any issues, observations, and recommendations arising. The report further stated that the “POC architecture was found to support the 3 tier replication scheme satisfactorily.” The report, however, omitted a final page, titled “Addendum (For Sybase Internal Use Only).” The final page of the report (“Page 6”), authored by Anish Shah, a Sybase employee, identified eight problems encountered during the POC, three of which dealt directly with replication issues. Page 6 of the report was not provided to BSG or to SCI. Sybase proceeded with the project and, in the spring of 1996, signed a separate software licensing agreement with SCI that required Sybase to produce a generally available version of “Replication Agent for SQL Anywhere” by January 1, 1997 or when SCI’s remote locations (the third tier of the architecture) required its development, whichever came later. In the event that Sybase failed in its obligation, it agreed to procure, at its own expense, the necessary hardware from BSG to allow SCI to replicate data with a persistent connection. About the same time that Sybase and SCI signed the software licensing agreement, BSG and SCI negotiated the final terms of the agreement for the second and third phases of the Horizon Project (“Attachment A-4”). BSG agreed to develop and build SCI’s Horizon computer system for a fixed fee of $10.3 million dollars, a substantial amount of which would come from the Phase II portion of the project. The agreement also specified that BSG would be responsible for third-party software vendors that it recommended. On August 28, 1996, Sybase notified BSG that the requisite software to correct the replication problem would be forthcoming by the end of that calendar year. In early January 1997, Sybase told BSG that, although the replication software was not yet ready, it was in its internal alpha test mode and would be available soon. Later that month, however, Sybase told BSG that not only was the replication software not yet ready, but they did not have such a product at all. BSG, Sybase, and SCI met on February 12, 1997 to discuss the status of the Horizon Project. Based on the software licensing agreement Sybase had signed with SCI, it was determined that Sybase should procure the necessary hardware and software components to allow replication on the SQL Anywhere database. Sybase, however, told BSG that this measure was not needed and it would soon have the replication software ready. On March 4, 1997, Sybase delivered to BSG the promised replication software, called SQL Remote for SQL Server (“SS Remote”). Sybase represented that the software was beta grade; however, when BSG implemented the software, it did not work. Sybase employee, Jim Graham, testified that he knew the software would not be ready for SCI to implement their business applications, and that the software Sybase provided to BSG was pre-beta. SCI, aware of the continuing difficulties with the replication software, proposed, in May 1997, a new target date of November 1, 1997 for completion of Phase II of the Horizon Project, and BSG agreed. However, on July 26, 1997, Sybase reported that it would need an additional 15 weeks to produce adequately functioning software. In turn, on July 29, BSG informed SCI that it believed that it was “increasingly unlikely” that the replication within a three-tiered technical architecture “can be implemented in an acceptable timeframe.” On August 11, SCI informed BSG that it had 30 days in which to fulfill its contractual obligations. BSG could not cure the deficiencies in its performance—that is, produce the software—and SCI terminated BSG on September 17, 1997. On June 17, 1998, SCI initiated arbitration proceedings against BSG, alleging that: BSG represented to SCI that a system designed and built around the [three-tiered] technical architecture, and utilizing Sybase product, would function and would meet the Horizon business requirements. SCI, relying totally upon BSG’s representations and work product, followed BSG’s recommendation and approved the use of this Sybase software for Horizon. In fact, BSG did not design a true three-tiered architecture as it had represented to SCI. Instead, the design was totally dependent on the Sybase software which was unproven at the time BSG recommended its use. The result was a system that could not be made to function. BSG attempted to introduce Sybase’s liability as an issue in the arbitration. SCI filed a motion for summary judgment, asking for a ruling that BSG was responsible “for the acts and/or omissions, if any, of Sybase Inc. that contributed to the failure of the Horizon Project.” The arbitrators granted SCI’s motion for summary judgment, and the parties settled, with BSG agreeing to refund $5.3 million of the original $7.4 million SCI had paid to BSG for work on Phase II of the Horizon Project. BSG then sued Sybase, alleging negligent misrepresentation and common law fraud, or, alternatively, common law indemnity for its losses. DISCUSSION I. Standard of Review Summary judgment under rule 166a(c) is proper only when the movant establishes that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law. Tex. R. Civ. P. 166a(c); Randall’s Food Mkts., Inc. v. Johnson, 891 S.W.2d 640, 644 (Tex. 1995); Lawson v. B Four Corp., 888 S.W.2d 31, 34 (Tex. App.—Houston [1st Dist.] 1994, writ denied). In reviewing a summary judgment, we must indulge every reasonable inference in favor of the nonmovant and resolve any doubts in its favor. Johnson, 891 S.W.2d at 644; Lawson, 888 S.W.2d at 33. We will take all evidence favorable to the nonmovant as true. Johnson, 891 S.W.2d at 644; Lawson, 888 S.W.2d at 33. As movant, the defendant is entitled to summary judgment if the evidence disproves as a matter of law at least one element of each of the plaintiff’s cause of action. Lear Siegler, Inc. v. Perez, 819 S.W.2d 470, 471 (Tex. 1991); Marchal v. Webb, 859 S.W.2d 408, 412 (Tex. App.—Houston [1st Dist.] 1993, writ denied). When the judgment does not specify the ground relied on, we will affirm the summary judgment if any of the theories advanced in the motion for summary judgment and preserved on appeal is meritorious. See Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 626 (Tex. 1996). II. Statute of Limitations In its fifth issue, appellant contends that its negligent misrepresentation claim is not time-barred because the discovery rule applies to the claim and Sybase fraudulently concealed its wrongdoing. The Texas Supreme Court has identified two categories in which accrual of a cause of action is deferred for limitations purposes: (1) those involving fraud and fraudulent concealment and (2) all others. S.V. v. R.V., 933 S.W.2d 1, 4 (Tex. 1996). The policy behind the doctrine of fraudulent concealment is that a party cannot avail itself of the protection of the statute of limitations when its own fraud concealed the cause of action. Borderlon v. Peck, 661 S.W.2d 907, 909 (Tex. 1983). The second category of cases—all others—allows for deferred accrual because the nature of the injury is inherently undiscoverable and the evidence of the injury is objectively verifiable. S.V., 933 S.W.2d at 6–7. The term “discovery rule” has been applied to both categories; however, the term is conceptually correct only as applied to the second category of cases because different procedural and substantive rules apply to these two categories. Id. at 4. A. Discovery Rule Generally, the discovery rule applies in those cases in which the nature of the injury is inherently undiscoverable and the evidence of the injury is objectively verifiable. Id. at 6. When a defendant moves for summary judgment on the basis of limitations and the plaintiff pleads the discovery rule, the defendant must conclusively prove the date of accrual and negate the discovery rule. Wheeler v. Methodist Hosp., 95 S.W.3d 628, 637 (Tex. App.—Houston [1st Dist.] 2002, no pet.). Thus, it was Sybase’s burden to prove, as a matter of law, (1) that the nature of the injury was not inherently undiscoverable or that the evidence of the injury was not objectively verifiable or (2) that there was no genuine issue of material fact about when BSG discovered or, through the exercise of reasonable diligence, should have discovered the misrepresentations made by Sybase. Tanglewood Terrace, Ltd. v. City of Texarkana, 996 S.W.2d 330, 337 (Tex. App.—Texarkana 1999, no pet.). Appellant asserts that Sybase’s misrepresentation that the report discussed “all of the details of any observations, recommendations or issues arising during the POC” was undiscoverable until Sybase produced Page 6, which revealed that Sybase misrepresented the success of the POC. Appellant fails to recognize that it is the nature of the injury that must be inherently undiscoverable, not the documentation of the tort. Sybase points to many occasions between January 1996 and September 26, 1997 on which Sybase failed to deliver the promised product or delivered a product that did not perform as promised. Sybase argues that “[T]here is nothing inherently undiscoverable about ‘non-functional software.’” Although this argument somewhat oversimplifies the problem, we agree that BSG’s injury was not inherently undiscoverable. According to appellant’s pleadings, which were attached to Sybase’s motion as summary judgment proof, Sybase made repeated assurances prior to September 26, 1997 that it would deliver software in a three-tiered architecture that would function on a non-persistent connection by deadlines that consistently were not kept. Most notably, on January 29, 1997, approximately one year after the first representations that Sybase could and would supply the software, a Sybase manager informed BSG that the desired software did not exist. This information, standing alone, should have alerted BSG that there was a problem with Sybase’s favorable report on the results of the POC. Thus, BSG knew, or should have known, more than two years before it filed suit on July 27, 1999, the nature of its injury. We hold that the discovery rule did not toll BSG’s two-year statute of limitations. B. Fraudulent Concealment The effect of fraudulent concealment is to delay accrual of the cause of action until the fraud is discovered or could have been discovered with reasonable diligence. Velsicol Chem. Corp. v. Winograd, 956 S.W.2d 529, 531 (Tex. 1997). The tolling effect of fraudulent concealment ends when the plaintiff learns of facts or circumstances that would cause a reasonable person to be aware of the existence of a cause of action or would cause a reasonable person to make inquiry that would lead to the discovery of the cause of action if pursued. Rubalcaba v. Kaestner, 981 S.W.2d 369, 376 (Tex. App.—Houston [1st Dist.] 1998, pet. denied). Appellant cannot rely on fraudulent concealment as a defense to the statute of limitations for the same reason it cannot rely on the discovery rule. Although Sybase did not reveal to BSG the existence of Page 6 of its Engagement Report, BSG was put on notice that there were significant problems with the software Sybase was supposed to design to complete the project for SCI. We conclude that a reasonable company would have made inquiry that would have led to the discovery of BSG’s cause of action. We hold that the accrual of BSG’s cause of action was not tolled by Sybase’s fraudulent concealment. Accordingly, we overrule appellant’s fifth issue. III. Causation In its first issue, appellant contends that Sybase did not conclusively negate the causation element of appellant’s fraud claims. Appellant argues that the summary judgment evidence presented by Sybase was disputed and that appellant’s summary judgment evidence was sufficient to raise a fact issue regarding causation. A defendant’s act or omission causes a plaintiff’s injury only if the act or omission is a substantial factor in bringing about the injury and without which no harm would have been incurred. Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 549 (Tex. 1985). A defendant’s conduct will be considered a substantial factor if it “had such an effect in producing the harm as to lead reasonable [people] to regard it as a cause, using that word in the popular sense, . . . rather than in the so-called ‘philosophic sense,’ which includes every one of the great number of events without which any happening would not have occurred.” Perez, 819 S.W.2d at 472 (quoting the Restatement (Second) of Torts § 431, cmt. a (1965)). Whether the defendant’s conduct was the cause in fact of the plaintiff’s injuries is ordinarily a fact question for jury determination. See Farley v. MM Cattle Co., 529 S.W.2d 751, 756 (Tex. 1975); J.K. & Susie L. Wadley Research Inst. and Blood Bank v. Beeson, 835 S.W.2d 689, 698 (Tex. App.—Dallas 1992, writ denied). However, whether a defendant’s conduct was the cause in fact of the plaintiff’s injury may be decided as a matter of law if the circumstances are such that reasonable minds could only arrive at the same conclusion. See Boyd v. Fuel Distribs., Inc., 795 S.W.2d 266, 272 (Tex. App.—Austin 1990, writ denied). In its motion for summary judgment, Sybase contended that appellant could not carry its burden to plead and prove that Sybase’s acts were a substantial factor in bringing about BSG’s injuries. Sybase argued that BSG’s injuries were the result of its own actions and the actions of third parties. Sybase’s summary judgment evidence included deposition testimony and documents showing BSG’s problems relating to management, staffing, and cost overruns. On appeal, Sybase directs us specifically to two pieces of evidence that, according to Sybase, “conclusively demonstrate that Sybase was not a substantial factor in the Horizon project’s failure.” The first is a May 30, 1997 BSG letter to SCI requesting an additional $3 million in fees due to cost overruns on the project. In that letter, BSG attributed 76 percent of the cost overruns to BSG’s fixed-fee bid to SCI and other actions and 5 percent of the cost overruns to Sybase. The second is a June 15, 1999 report—nearly a year after BSG had been terminated by SCI—prepared by Ernst & Young for BSG, which also attributed 5 percent of the responsibility for the overruns to Sybase’s failure to deliver the software. Based upon these two documents, Sybase argues that, as a matter of law, five percent is not a substantial factor as required to determine causation. See Nixon, 690 S.W.2d at 549. Sybase cites Kramer v. Lewisville Memorial Hospital and Gross v. Burt to support this proposition. See Kramer v. Lewisville Mem’l Hosp., 858 S.W.2d 397, 400 (Tex. 1993); Gross v. Burt, 149 S.W.3d 213, 230 (Tex. App.—Fort Worth, 2004, pet. filed). Neither of these cases is on point. Kramer deals with sufficiency of evidence standards for submitting a medical malpractice case to a jury. 858 S.W.2d at 399–400. Gross determines whether a doctor may be held liable for medical malpractice when, at the time he took over care of the patient, there was not a 50 percent or greater chance that any of his acts and omissions was a substantial factor in the patient’s injuries. 149 S.W.3d at 230. Here, the issue was not the responsibility for overruns, although that may be a factor to be considered. The issue was whether the alleged fraud of Sybase was a substantial factor in damages suffered by BSG in connection with the failure of the Horizon Project. Although Sybase has produced some evidence that there were causes other than Sybase’s fraudulent actions, it has not conclusively negated its own actions as a cause. Furthermore, Sybase appears to attempt to shift the burden to appellant by arguing that appellant did not offer evidence controverting Sybase’s evidence and that appellant offered irrelevant and incompetent evidence. However, until Sybase conclusively negated its own actions as a cause of BSG’s injury, BSG was not required to produce any evidence relating to causation. We sustain appellant’s first issue as it relates to BSG’s cause of action for fraud. IV. Indemnity In its fourth issue, appellant contends that the trial court erred in granting summary judgment on appellant’s alternative theory of indemnity for the $5.3 million dollars BSG refunded SCI to settle SCI’s arbitration claim. Appellant first argues that, notwithstanding the merits of this claim, the indemnity issue was not properly before the trial court because Sybase’s motion for summary judgment addressed only statutory indemnity. Sybase moved for summary judgment on the basis that appellant could not establish the elements of its statutory indemnity claim. Specifically, Sybase asserted that, although appellant did not cite to a specific provision of the Civil Practice and Remedies Code, the only conceivable chapters that could apply were chapters 32 and 33. After Sybase filed its motion for summary judgment, appellant filed its third amended petition in which it abandoned its claim for contribution and indemnity under the Texas Civil Practice and Remedies Code and asserted a cause of action for implied indemnity. Sybase addressed this claim only in its reply papers. “[A] motion for summary judgment must itself expressly present the grounds upon which it is made.” McConnell v. Southside Indep. Sch. Dist., 858 S.W.2d 337, 341 (Tex. 1993). We have recognized an exception to this rule when the grounds are broad enough to contemplate all causes of action later pleaded. See Judwin Props., Inc. v. Griggs & Harrison, 911 S.W.2d 498, 503 (Tex. App.—Houston [1st Dist.] 1995, no writ) (holding that, when pleading stated no specific cause of action, broadly stated motion for summary judgment contemplated causes of action eventually specified in amended pleading). Sybase contends that its motion for summary judgment—in particular the sentence that “Texas law does not permit Plaintiff’s claim for contribution or indemnity against Sybase”—was sufficient to contemplate appellant’s common law indemnity pleading. We disagree. Sybase’s motion specifically addressed only statutory indemnity under chapters 32 and 33 of the Civil Practice and Remedies Code. In light of the fact that, in its motion for summary judgment, Sybase addressed only contribution and indemnity under the Civil Practice and Remedies Code, we hold that the general statement that “Texas law does not permit Plaintiff’s claim for contribution or indemnity” cannot be construed to address implied indemnity. See McConnell, 858 S.W.2d at 341. We sustain appellant’s fourth issue. V. Attorney’s Fees In its second issue, appellant contends that the attorney’s fees BSG incurred in the arbitration of the dispute between BSG and SCI are recoverable from Sybase as damages resulting from Sybase’s fraud. Appellant argues that it is entitled to recover its attorney’s fees incurred in the arbitration under the “tort of another” exception to the general rule that attorney’s fees may be recovered only when required by contract or by statute. The “tort of another” exception is based on principles of equity to compensate parties who are required to prosecute or defend an action because of the wrongful act of another. Lesikar v. Rappeport, 33 S.W.3d 282, 306 (Tex. App.—Texarkana 2000, pet. denied). The party must have incurred the attorney’s fees in a prior action, and the litigation must have involved a third party. Turner v. Turner, 385 S.W.2d 230, 234 (Tex. 1964). Although some Texas courts of appeals have allowed such attorney’s fees as damages, others have not. In Turner, the Texas Supreme Court referred to a discussion of this exception in an annotation in 45 A.L.R.2d 1184. However, the court did not apply the exception in that case and has not directly addressed this issue. See id. In the present case, SCI filed for arbitration of its claims against BSG based on representations made by BSG to SCI and BSG’s breach of its contract with SCI. Therefore, under the “tort of another” exception, BSG is not entitled to recover attorney’s fees incurred in the arbitration because it is not a wholly innocent party. See Dayton Hudson Corp. v. Eldridge, 742 S.W.2d 482, 488 (Tex. App.—Dallas 1987, writ denied). We overrule appellant’s second issue. VI. Change-Order Fees In its third issue, appellant contends that it is entitled to recover from Sybase $1,127,000 in fees BSG expended to perform work added by change orders to its original agreement with SCI. Appellant argues that the work required by these change orders was the natural and foreseeable consequences of the fraud committed by Sybase. Sybase responds that the deposition testimony of former project manager for BSG, Don Palmour, established that the change orders had nothing to do with the replication technology. Palmour’s testimony was not clear and unequivocal. His deposition was taken approximately six years after the events in question. Although he testified that some of the change orders did not have anything to do with the replication technology, he often could not remember details of the change orders. For example, during one exchange, the following occurred: Q.The next one is PFS conversion SPPT. Does that mean something to you? A.Say that one again. Q. PFS conversion SPPT. A. SPPT is probably support. Q. Okay. A.      PFS. Q. This one was $10,120. A.That was a change order, or was that a separate contract between BSG and SCI? Q.It may have been. Is that your recollection? A.Not that I would be willing to say that I really remembered, no. No. PFS. That sounds familiar, but I can’t - - I’m thinking that may be an entity that SCI acquired but I’m not sure. Q.I guess you can’t testify whether that has anything to do with Sybase’s replication technology. We conclude that Palmour’s testimony may be some evidence that at least some of the change orders may have nothing to do with Sybase’s replication technology. However, viewing the evidence in the light most favorable to the non-movant, we cannot say that it established that proposition, as a matter of law, with respect to all the change orders. Accordingly, we sustain appellant’s third issue. CONCLUSION We affirm the judgment of the trial court as it relates to the limitations bar of BSG’s cause of action for negligent misrepresentations. We further affirm the judgment as it relates to appellant’s claim for attorney’s fees as damages. We reverse the remainder of the judgment and remand the cause for further proceedings. Sam Nuchia Justice Panel consists of Justices Nuchia, Hanks, and Higley.