Door Control Svcs v. Besam Automated

In the United States Court of Appeals for the Fifth Circuit _______________

m 01-41269 _______________

DOOR CONTROL SERVICES, INC.,

Plaintiff-Counter-Defendant-Appellee- Cross-Appellant,

VERSUS

BESAM AUTOMATED ENTRANCE SYSTEMS, INC.,

Defendant-Third-Party Plaintiff-Counter Claimant-Appellant-Cross-Appellee.

_________________________

Appeal from the United States District Court for the Eastern District of Texas m 6:00-CV-293 _________________________ February 5, 2003

Before JONES, SMITH, and SILER,* grant it a distributorship for the Houston and Circuit Judges.** San Antonio areas. Door Control took out a loan to finance its expansion into those mar- JERRY E. SMITH, Circuit Judge: kets.

Besam Automated Entrance Systems, Inc. In February or March 2000, Besam in- (“Besam”), appeals a jury award of $6,000,- formed Door Control that it would directly 000 to Door Control Services, Inc. (Door distribute and service its doors in the Houston Control”), for fraud. Door Control cross-ap- area. Besam later asked Door Control to stop peals a judgment as a matter of law (“j.m.l.”) servicing clients in the area, but Door Control on its claims of breach of contract, breach of refused. Besam then terminated Door Con- duty of good faith and fair dealing, and tor- trol’s north/east/central Texas distributorship. tious interference with contractual relations. Lacking a major door line to sell, Door Con- We affirm in part, reverse in part, and remand trol suffered a decline in business. for further proceedings. B. I. Door Control sued Besam in Texas state A. court alleging, inter alia, breach of contract, Besam manufactures a line of commercial breach of the duty of good faith and fair deal- automatic doors that are sold and serviced by ing, fraud, and tortious interference. Besam independent distributors. From 1983 to 2000, removed the case to federal court based on di- Door Control was Besam’s distributor for the versity jurisdiction and asserted counterclaims. north/east/central Texas region, which includ- The case proceeded to trial, and Besam moved ed the Dallas and Fort Worth markets. After for j.m.l. at the close of Door Control’s pre- 1986, their legal relationship was controlled by sentation of evidence. The district court a written agreement (the “Distributorship granted j.m.l. on all claims except fraud, on Agreement”); Door Control claims the agree- which the jury awarded $6,000,000 in lost ment has been orally modified over the years. profits and $400,000 in reliance damages.1

In 1999, the Houston area distributor of II. Besam doors faced serious financial difficulties Besam contends it is entitled to j.m.l. with and could not meet installation deadlines for respect to lost profits because the record con- several large clients; Door Control helped Be- tains insufficient evidence to support the ver- sam meet those installation deadlines and dict, in light of the fact that Door Control’s claims that, in return, Besam orally agreed to damages expert testified as to lost gross prof- its, rather than lost net profits as required un- der Texas law. Door Control argues that be- * cause the jury was properly instructed that it Judge of the United States Court of Appeals for the Sixth Circuit, sitting by designation. ** Pursuant to 5TH CIR. R. 47.5, the court has 1 determined that this opinion should not be pub- Besam was awarded $360,711 on its counter- lished and is not precedent except under the limited claim for Door Control’s failure to pay money due circumstances set forth in 5TH CIR. R. 47.5.4. under the Distributorship Agreement.

was to award net profits,2 it was allowed to The plaintiff is not required to calculate lost consider other evidence that supported the profits precisely; rather, “it is sufficient that amount awarded. there be data from which they may be ascer- tained with a reasonable degree of certainty A. and exactness.” Tex. Instruments, Inc. v. Tele- We review de novo a ruling on a motion for tron Energy Mgmt., Inc., 877 S.W.2d 276, at j.m.l. “whether based upon an interpretation of 279 (Tex. 1994) (quoting Southwest Battery Texas law or based upon the sufficiency of the Corp. v. Owen, 115 S.W.2d 1097, 1098 (Tex. evidence.” Info. Communication Corp. v. 1938)). Still, this burden is onerous, and Unisys Corp., 181 F.3d 629, 633 (5th Cir. “Texas courts have not hesitated to direct ver- 1999). We review the record as a whole and dicts where plaintiffs have failed to present ev- draw all reasonable inferences in favor of the idence of lost profits meeting these standards.” non- moving party. Phillips v. Monroe Coun- Info. Communication Corp., 181 F.3d at 633. ty, 311 F.3d 369, 373 (5th Cir. 2002). In an action tried to a jury, a motion for j.m.l. chal- C. lenges the legal sufficiency of the evidence Door Control contends that the jury prop- supporting the verdict. Cozzo v. Tangipahoa erly used net profits as the measure of lost Parish Council-President Gov’t, 279 F.3d profits. It argues that the jury could have tak- 273, 280 (5th Cir. 2002). Thus, the “‘standard en the damage expert’s estimate of lost gross of review with respect to a jury verdict is es- profits of between $8,619,070.94 and $15,- pecially deferential.’” Id. (quoting Brown v. 000,000 and reduced it to $6,000,000 by tak- Bryan County, Okla., 219 F.3d 450, 456 (5th ing into account future expenses. Door Con- Cir. 2000)). trol reasons that these expenses were predict- able, because financial statements from 1997 B. through the first quarter of 2001 were admit- In Texas, the proper measure of damages ted into evidence, and Door Control’s con- for lost profits is lost net profits. Holt Ather- troller explained that the financial statements ton Indus., Inc. v. Heine, 835 S.W.2d 80, 83 accurately represented Door Control’s income n.1 (Tex. 1992). “[T]he injured party must do and expenses. more than show that it suffered some lost pro- fits.” Helena Chem. Co. v. Wilkins, 47 In Fury Imports, Inc. v. Shakespeare Co., S.W.3d 486, 504 (Tex. 2001). Recovery must 554 F.2d 1376, 1387 (5th Cir. 1977), which be “predicated on one complete calculation,” applied New York law, we considered the evi- and “opinions or estimates of lost profits must dence supporting lost profits damages awarded be based on objective facts, figures, or data to a distributor for the manufacturer’s breach from which the amount of lost profits may be of contract. Evidence was presented showing ascertained.” Szczepanik v. First S. Trust Co., the amount of lost gross profits caused by the 883 S.W.2d 648, 649 (Tex. 1994). manufacturer’s breach and resulting lost retail sales. Though the plaintiff presented evidence that there were multiple categories of expenses 2 The district court defined net profits as “what that would have increased in different ways remains in the conduct of a business after deduct- had the sales not been lost, there was no esti- ing from its total receipts all of the expenses mate of how each of these categories would incurred in carrying on the business.”

have varied with increased sales, nor even D. what the overall effect on expenses might have Door Control contends that other evidence been. Instead, the jury was provided profit- supports the award. Its controller, Ricky and-loss statements from previous years. We Northcutt, testified that, based on a year-end concluded that these financial records did not comparison of net profits from 1999 and 2000, provide the jury with sufficient evidence to cal- Door Control experienced a decrease in net culate lost net profits, because the jury had no profits of $120,000. He also stated that in the way of extrapolating, from the past actual ex- first quarter of 2001, profits were down $483,- penses, a prediction for how future expenses 000 compared to the first quarter of 2000. would have increased. Absent proper guid- Don Gilchrist, the owner of Door Control, tes- ance, there “was simply no evidence at all as to tified that it would take five to ten years to re- net, as distinguished from gross, profits.” Id. turn Door Control to the level of profitability it experienced when it was Besam’s distributor The reasoning of Fury Imports is persua- for the north/east/central Texas region. Door sive here. Although Door Control provided Control contends that a jury could find that it the jury an estimate of lost gross profits, it suffered $6,000,000 of lost net profits based gave no similar guidance as to how future ex- on the combined testimony of Northcutt and penses would have varied. We have thorough- Gilchrist, by projecting the two quarters of re- ly reviewed the financial records considered by duced net profit testified to by Northcutt over Door Control’s expert in estimating lost gross the time period of injury testified to by Gil- profits. With each financial statement, gross christ. and net profits varied greatly and were not correlated in any way that is readily apparent. The testimony of Northcutt and Gilchrist does not combine to form a calculation that For example, from 1999 to 2000, gross demonstrates lost net profits with the reason- profits grew by about 30%, from $2,608,- able certainty necessary to support an award of 986.52 to $3,381,366, yet net profits fell damages. Evidence to establish profits must $120,786.30, a decrease of over 20% from the not be uncertain or speculative. Tex. Instru- previous year. Similarly, the fourth quarter of ments, 877 S.W.2d at 279. Northcutt testified 1999 represented both the best quarter of the only that profits were lower than in the previ- year for gross profits and the worst quarter of ous year; he did not state how large those pro- the year for net profits. This historical data is insufficient to allow a jury to determine, with 3 reasonable certainly, how expenses would (...continued) have changed in future years.3 the lost gross profits were likely to have remained as net profits after expenses, it could have em- ployed the Door Control expert’s projected lost gross profits and awarded between $1,500,000 and 3 Even were we to find that these past expenses $2,500,000. The best year on record yielded net were competent evidence to predict future expens- profits that were 22% of gross profits, which, if ex- es, the records contain no information that even trapolated, would lead to an estimate of lost net arguably could support a verdict of $6,000,000. profits of between $1,900,000 and $3,000,000. From 1998 through 2000, net profits were 17% of The award of $6,000,000 is 40% to 70% of the gross profits. Had the jury determined that 17% of range of projected lost gross profits, a percentage (continued...) nowhere suggested by the financial records.

fits would have been absent Besam’s fraud, writing. nor did he even assert that this drop was at- tributable to Besam’s conduct. He also pro- The Distribution Agreement contains a vided no evidence that could be used as the clause that prohibits modification of the con- basis for a projection of future net profits be- tract except by a written agreement by a duly yond the two quarters named. authorized Besam representative. If the New Jersey common law for contracts applies,6 the Gilchrist offered no support, based on ob- Distribution Agreement could have been modi- jective facts or data, for his assertion that it fied orally, notwithstanding this provision; would take five to ten years for Door Control New Jersey law allows every agreement, no to regain profitability.4 Gilchrist’s speculative matter how firmly drawn, to be modified by testimony is not competent evidence to sup- another agreement.7 The Uniform Commercial port an award of lost profits. See Szczepanik, Code covers all contracts for the sale of goods 883 S.W.2d at 650. On this record, there is no sold for $500 or more. N.J. STAT. ANN. § evidence of lost profits damages, so the denial 12A:2-201(1). Had the UCC applied to the of Besam’s motion for j.m.l. is reversed.5 contract, its statute of frauds would have required that all modifications be in writing. III. See § 12A:2-209; 5-80 N.J. TRANSACTION Door Control contends that the district GUIDE § 80.34. court erred in granting Besam’s motion for j.m.l. on the breach of contract claim, because “[B]ecause of the mixed character of many Door Control presented sufficient evidence to distributorships, the UCC’s statute of frauds allow a reasonable jury to find that Besam’s may or may not apply in a given case.” Cus- termination of Door Control’s north/east/cen- tom Communications Eng’g, Inc. v. E.F. tral Texas distributorship breached the Distrib- Johnson Co., 636 A.2d 80, 85 (N.J. Super. Ct. utorship Agreement. Door Control argues App. Div. 1993). Custom Communications that the agreement had been orally modified distinguishes between contracts involving a and that Besam breached the agreement as transaction of goods plus incidental services, modified. Besam avers that the Uniform Com- which are covered by the UCC, and contracts mercial Code’s statute of frauds, N.J. STAT. for services plus the incidental sale of goods, ANN. § 12A:2-201, applies to the agreement, which are covered by customary contract law. requiring that any modifications had to be in Id. at 83. The court in Custom Communica- tions found the law of other jurisdictions per- 4 To provide context to the remarks, we note 6 that Gilchrist next declared that it would also take The distributorship agreement provides that “take thousands of sales calls to get people to un- New Jersey law controls the performance and con- derstand the new line” and “probably five to ten struction of the contract. million dollars.” His testimony was based on con- 7 jecture, not reasoned analysis supported by facts. Estate of Connelly v. United States, 398 F. Supp. 815, 827 (D.N.J. 1975) (“Even a formal 5 Besam challenges the award of lost profits on agreement which expressly states that it cannot be several other grounds. Because the evidence is in- modified except in writing, is subject to modifi- sufficient to support lost profit damages, we need cation by oral agreement since the requirement for not address those arguments. a writing is itself subject to modification.”).

suasive, stating: sufficient evidence for a jury to find that Be- sam intended to deprive Door Control of its The common theme expressed in nearly distributorship before the time of termination all of the cases is that, although most and that it withheld this information from Door dealership or distributorship agreements Control in violation of the implied covenant of involve more than a mere sale of goods, good faith and fair dealing found in the con- the sales aspect of the relationship pre- tract under New Jersey law. Besam answers dominates. Accordingly, courts have that Door Control has waived the right to ar- not hesitated to conclude that a direct gue that New Jersey law applies, and Besam dealership agreement, as here, is subject contends that, under Texas law, the duty of to the . . . UCC. We adopt the majority good faith and fair dealing does not extend to rule as sound, since it is entirely consis- ordinary contractual relationships. tent with the underlying purposes of the UCC: to foster consistency and predict- A. ability in the commercial marketplace. Besam asserts that Door Control waived its argument under New Jersey law because it did Id. at 84. See also Spring Motors Distribs., not specifically raise New Jersey law in its oral Inc. v. Ford Motor Co., 489 A.2d 660, 668 response to Besam’s motion for j.m.l. The (N.J. 1985) (“[T]he U.C.C. is the more appro- record demonstrates that the district court was priate vehicle for resolving commercial dis- sufficiently aware of the grounds for Door putes arising out of business transactions Control’s objections to Besam’s motion for between persons in a distributive chain.”). j.m.l., including its position under New Jersey law. New Jersey law adopts a strong presump- tion that the UCC applies to distribution Formal exceptions to rulings or orders agreements. The Distribution Agreement is of the court are unnecessary; but for all sufficiently similar to those found in the many purposes for which an exception has cases cited by the Custom Communications heretofore been necessary it is sufficient court to apply the UCC statute of frauds to its that a party, at the time the ruling or enforcement. Custom Communications, 636 order of the court is made or sought, A.2d at 84 (citing cases). Oral modifications makes known to the court the action therefore were not allowed. The agreement which the party desires the court to take provided that it could be terminated for any or the party’s objection to the action of reason on thirty days’ notice. Besam exercised the court and the grounds therefor; and, its rights in accordance with this provision if a party has no opportunity to object to when it terminated Door Control’s distributor- a ruling or order at the time it is made, ship, so the district court properly granted the absence of an objection does not j.m.l. in this regard. thereafter prejudice the party.

IV. FED. R. CIV. P. 46. “The purpose of the rule is Door Control appeals the j.m.l. with regard that the district court should be given notice of to its claim for breach of duty of good faith an alleged defect so the court has an opportu- and fair dealing. It argues that it presented nity to cure it.” Hartford Lloyd’s Ins. Co. v

Teachworth, 898 F.2d 1058, 1060 (5th Cir. the court announced that it already had pre- 1990). pared its ruling, which it began reading. After listing all of Door Control’s claims except the Normally, “that purpose can be ade- fraud claim, the court stated that it “finds that quately served only by the making of an plaintiff has failed to present legally-sufficient objection on the record, but if the court evidence, regardless of whether Texas or new and the other litigants know what action a party desires the court to take, the 8 purpose of the rule is served.” Stone v. (...continued) Morris, 546 F.2d 730, 736 (7th Cir. MR. BURKE: If I can maybe say one sen- 1976). In such circumstances, a formal tence about each one of the plaintiff’s claims objection is not required, “and the fail- and limit it to that? ure of the court to take the desired ac- THE COURT: I don’t think that is going to tion may be asserted as error on appeal.” be necessary. Id. at 1060-61; see also 9 CHARLES A. Burke proceeded quickly to outline his motion, and WRIGHT & ARTHUR R. MILLER, FEDERAL at his conclusion, Mr. Travis, trial counsel for PRACTICE AND PROCEDURE § 2472, at 92-105 Door Control, began. (2d ed. 1995). MR. TRAVIS: May I respond, Your Door Control made a pretrial motion that Honor? was never ruled on, asking the court to recog- nize the applicability of New Jersey law to all THE COURT: Briefly. contractual claims. In the pretrial order, the applicability of New Jersey law to the claim for MR. TRAVIS: Your Honor, I will en- breach of good faith and fair dealing was listed deavor– specifically as a contested issue of law. The THE COURT: Your response has been district court never ruled on the question. what you have been putting on for four It is apparent that neither side was expected days. to say much regarding the motions, because the court decided that it was unnecessary to MR. BURKE: I was going to make your listen to arguments with which it was already job easier and make a concessionSSI was familiar.8 As soon as both sides had finished, going to make your job easier and concede on someSScertain claims. Would you like me to do that, or shall we keep all our 8 Moments after Besam’s trial counsel, claims? Mr.Burke, began making his motion for j.m.l., the court interrupted him: THE COURT: If you can be brief about it. I’ve heard the evidence for four days. I THE COURT: I don’t want you to go into don’t think it is necessary for you to repeat the testimony. Just make your motions, and it to me. I think it is broad enough the way you have already made it, unless you want to add to At the court’s instruction, counsel quickly listed it. which claims he was withdrawing and which ones (continued...) he intended to pursue.

Jersey law controls, such that a reasonable vesting substantial sums of money to expand Jury could find in its favor on these claims.” its operations within the territory. Consequently, before the motion for j.m.l. was made, Door Control had sufficiently made Door Control presented evidence to sup- known to the court its position on the applica- port a claim under breach of good faith and bility of New Jersey law to satisfy the require- fair dealing. It demonstrated that Besam at- ments of rule 46. tempted to purchase all or part of Door Con- trol on more than one occasion, but, each time, B. Door Control refused the offer. There also The UCC, including its choice-of-law was evidence that Besam attempted to hire provision, applies to the Distributorship several Door Control employees months be- Agreement. See Davidson Oil Country Supply fore Besam terminated the distributorship. Ev- Co. v. Klockner, Inc., 908 F.2d 1238, 1248 idence indicated that Besam may have con- (5th Cir. 1990). The relevant provision is tacted competitors of Door Control in at- identical in the law of Texas and New Jersey; tempts to purchase them, potentially in an ef- it provides that “when a transaction bears a fort to transfer the distributorship to the newly reasonable relation to this State and also to owned competitor. another state or nation the parties may agree that the law either of this State or of such Gilcrest also testified that he received a other state or nation shall govern their rights secret call from a Besam employee advising and duties.” TEX.BUS. & COM.CODE ANN. him to look for a second line of doors, because § 1.105(a); N.J. STAT. § 12A:1-105(1). others at Besam were “planning on doing some things with our distributorship that he This requirement is satisfied here with re- didn’t think was right.” Door Control present- spect to Texas and New Jersey. New Jersey ed sufficient evidence for a reasonable jury to law therefore applies to the issue of breach of find that Besam breached an implied covenant good faith and fair dealing, because the choice of good faith and fair dealing under New Jer- of law provision in the Distributorship Agree- sey law, so the j.m.l. in this respect is revers- ment provides that New Jersey law applies to ible error. the performance and construction of the agree- ment. V. Door Control argues that the district court C. erred in granting Besam’s motion for j.m.l. on Under New Jersey law, every contract has the tortious interference claim, because Door an implied covenant of good faith and fair Control presented sufficient evidence for a jury dealing. Onderdonk v. Presbyterian Homes, to find that Besam tortiously interfered with 425 A.2d 1057, 1062 (N.J. 1981). In Bak-A- employment contracts between Door Control Lum Corp. of Am. v. Alcoa Bldg. Prods., Inc., and its employees. Besam argues that under 351 A.2d 349, 350-52 (N.J. 1976), the court Texas law, third-party interference in at-will held that a manufacturer breached its implied employment is not tortious interference and covenant of good faith and fair dealing when it that competitors are privileged to compete for failed to tell a distributor that it was planning employees’ services. to end the exclusivity of the distributor’s ter- ritory, knowing that the distributor was in-

A. all at will employees was proper.10 Texas law adopts the view of the second Restatement that employment at will is treated B. analogously to prospective contracts with re- One former Door Control employee, Pat- spect to tortious interference:9 “[T]o establish rick Lyness, was under an employment con- liability for interference with a prospective tract that contained a covenant not to compete contractual or business relation the plaintiff when he left to work for Besam; therefore, in- must prove that it was harmed by the defen- terference with his employment must be ana- dant’s conduct that was either independently lyzed separately. Evidence indicated that Be- tortious or unlawful. By ‘independently tor- sam contacted Lyness about potential employ- tious’ we mean conduct that would violate ment before he quit his job and that he went to some other recognized tort duty.’” Wal-Mart, work for Besam two weeks after leaving Door 52 S.W.3d at 713. This holding employs more Control. limiting language than did the second Restate- ment or prior Texas law, though the court Lyness’s employment contract and cove- noted “that the case law is generally consistent nant not to compete, if valid, may form the with this position as a matter of outcomes as basis of a claim for interference with contrac- distinct from articulation.” Id. at 721. tual relations. Travel Masters, Inc. v. Star Tours, Inc., 827 S.W.2d 830, 833 (Tex. 1991). We read Wal-Mart to apply to at-will con- tracts. Because Door Control has neither 10 proven nor alleged any independently tortious Before Wal-Mart was decided, the view was or unlawful conduct by Besam in its efforts to that “Texas law supports a claim for interference lure Door Control’s employees, j.m.l. on the with a terminable-at-will contract where a claim of tortious interference with respect to third-party has induced the contract’s breach with- out any economic justification or goal other than evisceration of the underlying contract.” C.E. Servs., Inc. v. Control Data Corp., 759 F.2d 1241, 1249 n.11 (5th Cir. 1985). With an economic mo- tive, and absent otherwise illegal conduct, however, 9 See Sterner v. Marathon Oil Co., 767 S.W.2d the conduct is justified. Id. Door Control’s claim 686, 689 (Tex. 1989) (citing RESTATEMENT (SEC- fails under this standard, as well, because it has OND) OF TORTS § 766 comment g); Wal-Mart asserted that Besam’s goal was economic in nature. Stores, Inc. v. Sturges, 52 S.W.3d 711, 719 (Tex. 2001) (“The second Restatement, like the first, We further recognize that the Texas Supreme provided that lawful competition was not tortious Court, in the context of tortious interference with interference with a prospective business relation employment at will, has held that legal justification although it might be tortious interference with any or excuse is an affirmative defense on which the contract not terminable at will.”) (emphasis add- defendant has the burden of proof. Sterner v. ed); see also RESTATEMENT (SECOND) OF TORTS Marathon Oil Co., 767 S.W.2d 686 690. We read § 766 comment g (“One’s interest in a contract ter- that holding to be limited to the context therein minable at will is primarily an interest in future described, where a third-party is alleged to have relations between the parties, and he has no legal intervened to cause an employer to terminate an assurance of them. For this reason, an interference employee. See id. at 688. In any case, Besam has with this interest is closely analogous to interfer- asserted legal justification, and it is uncontroverted ence with prospective contractual relations.”). that such justification existed.

Besam has not challenged the validity of this agreement, nor has it offered a defense.11 The district court committed reversible error in granting j.m.l. on Door Control’s claim of tor- tious interference with Lyness’s employment contract.

The judgment is AFFIRMED in part, RE- VERSED in part, and REMANDED for fur- ther appropriate proceedings.

11 Besam’s arguments addressed only the law applicable to at-will employees. Though Besam asserts that it is a competitor, “[t]he fact that one is a competitor of another for the business of a third person does not prevent his causing a breach of an existing contract with the other from being an improper interference if the contract is not terminable at will.” RESTATEMENT (SECOND) OF TORTS § 768(2); see also Wal-Mart, 52 S.W.3d at 719 n.32 (quoting § 768).