Golden Spread Cooperative v. Emerson Process Manag ( 2020 )

Case: 19-10238 Document: 00515375403 Page: 1 Date Filed: 04/08/2020
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
April 8, 2020
No. 19-10238
Lyle W. Cayce
Clerk
GOLDEN SPREAD ELECTRIC COOPERATIVE, INCORPORATED,
Plaintiff - Appellant
WESTPORT INSURANCE COMPANY, as subrogee of Golden Spread
Electric Cooperative, Incorporated,
Intervenor - Appellant
v.
EMERSON PROCESS MANAGEMENT POWER & WATER SOLUTIONS,
INCORPORATED,
Defendant - Appellee
Appeal from the United States District Court for the
Northern District of Texas
Before WIENER, HIGGINSON, and HO, Circuit Judges.
WIENER, Circuit Judge:
Plaintiff-Appellant Golden Spread Electric Cooperative, Inc. (“Golden
Spread”) and Intervenor-Appellant Westport Insurance Company (“Westport”)
appeal the dismissal of their tort claims against Defendant-Appellee Emerson
Process Management Power & Water Solutions, Inc. (“Emerson”). Golden
Spread and Westport (collectively, “Appellants”) contend that the district court
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erred in applying Texas’s economic loss rule to bar tort remedies for damage to
a turbine generator. For the reasons discussed below, we AFFIRM.
I. BACKGROUND
The parties do not dispute the facts in this case. Golden Spread is a
public utility. It operates a power generation facility in Texas that employs
several turbine generators, including an Alstom steam turbine generator
known as Unit 3. That generator was purchased from Alstom and installed
from 1999 to 2000. Emerson played no part in the design, sale, or installation
of Unit 3 or its original control system.
In 2013, Golden Spread asked Emerson to make a proposal for upgrading
Unit 3’s control system. As described by Emerson,
The control system includes computer hardware, software[,] and
associated equipment, and is the control interface for all
engagement and control functions of the steam turbine to include,
but not limited to[:] an interface to field instrumentation, complete
control of system devices, startup and shutdown sequencing, [and]
adjusting system settings and inputs/outputs that the turbine
converts into energy. The control system is also the necessary
means for operation and control of the steam turbine’s integrated
subsystems.
Emerson visited the power generation facility to gather information and made
a proposal to Golden Spread in early 2014 for the provision of a new,
customized control system. Emerson did not simply offer to supply a part. Its
letter proposed to provide Golden Spread with “detailed project engineering,
control strategy implementation, system testing, system start-up[,] and
ongoing support” for the upgrade effort. The parties completed their contract
in March 2014 after specifically negotiating over liability issues.
Emerson installed the new control system pursuant to the contract. In
March 2015 during testing and commissioning of the new control system, Unit
3 suffered a power failure. As the turbine coasted to a stop, the control system
failed to maintain the flow of oil lubricant, causing the turbine to overheat and
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suffer damage. The control system’s software had been programmed
incorrectly; it issued a stop command to a specific lubricant pump while the
turbine was spinning and while no other source of lubricant was available.
Golden Spread made a warranty claim to Emerson, which Emerson satisfied
by modifying the control system software. Golden Spread returned Unit 3 to
service and obtained nearly $8 million from its insurance.
Golden Spread sued Emerson in state court for breach of contract,
negligence, and products liability, seeking more than $8 million in damages.
Emerson removed the case to federal court on the basis of diversity jurisdiction.
Intervenor-Appellant Westport Insurance Company intervened as subrogee of
Golden Spread. The district court adopted the magistrate judge’s
recommendations, granting summary judgment for Emerson and dismissing
all claims against it. The court dismissed Appellants’ contract claims because
Golden Spread had not revoked acceptance of the contract, and because
Emerson satisfied its sole duty under the contract, viz., to remedy the defective
software. The district court dismissed Appellants’ tort claims (negligence and
products liability) as barred by the economic loss rule.
Appellants now appeal only the district court’s ruling as to their tort
claims. They contend that, under Texas law, the damage to Unit 3 was damage
to other property not covered by the economic loss rule.
II. STANDARD OF REVIEW
The facts are not in dispute, so we review de novo the district court’s
grant of summary judgment “to determine whether it was rendered according
to law.” United States v. Jesco Const. Corp., 528 F.3d 372, 374 (5th Cir. 2008).
Whether the economic loss rule bars Appellants’ tort claims is a question of
law. See McCaig v. Wells Fargo Bank (Tex.), N.A., 788 F.3d 463, 474 (5th Cir.
2015); Eagle Oil & Gas Co. v. Shale Expl., LLC, 549 S.W.3d 256, 268 (Tex.
App.—Houston [1st Dist.] 2018, pet. dism’d).
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III. ANALYSIS
“When adjudicating a claim for which state law provides the rule of
decision, federal courts are bound to apply the law as interpreted by the state’s
highest court. . . .” Terrebonne Par. Sch. Bd. v. Columbia Gulf Transmission
Co., 290 F.3d 303, 317 (5th Cir. 2002). When, as is the case here, the state’s
highest court has not spoken to a particular issue, we must make an Erie guess
to “determine, in our best judgment, how we believe that court would resolve
[it].” 84 Lumber Co. v. Cont’l Cas. Co., 914 F.3d 329, 333 (5th Cir. 2019)
(quoting Boyett v. Redland Ins. Co., 741 F.3d 604, 607 (5th Cir. 2014)); see also
Erie R.R. Co. v. Tompkins, 304 U.S. 64, 77–80 (1938). “In making an Erie guess,
we defer to intermediate state appellate court decisions, ‘unless convinced by
other persuasive data that the highest court of the state would decide
otherwise.’” Mem’l Hermann Healthcare Sys. Inc. v. Eurocopter Deutschland,
GMBH, 524 F.3d 676, 678 (5th Cir. 2008) (quoting Herrmann Holdings Ltd. v.
Lucent Techs. Inc., 302 F.3d 552, 558 (5th Cir. 2002)).
Under Texas law, the economic loss rule generally prevents recovery in
tort for purely economic damage unaccompanied by injury to persons or
property. See LAN/STV v. Martin K. Eby Const. Co., 435 S.W.3d 234, 235 (Tex.
2014); Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 418
(Tex. 2011); see also Am. Eagle Ins. Co. v. United Techs. Corp., 48 F.3d 142,
144 (5th Cir.), on reh’g, 51 F.3d 468 (5th Cir. 1995). There are two principal
rationales for the rule: (1) Purely economic harms proliferate widely and are
not self-limiting in the way that physical damage is, possibly leading to
indeterminate liability and pressure to avoid economic activity altogether; and
(2) the risks of economic harms are better suited to allocation by contract
because (a) the parties usually have a full opportunity to consider their
positions and manage risks ahead of time, and (b) pecuniary remedies are
fungible. LAN/STV, 435 S.W.3d at 240–41 (quoting RESTATEMENT (THIRD) OF
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TORTS: LIABILITY FOR ECONOMIC HARM § 1 cmt. c (AM. LAW INST., Tentative
Draft No. 1, 2012)). “The rule is based on the proposition that commercial
parties may negotiate for whatever warranty or liability limits they choose,
and adjust their price accordingly.” Equistar Chems., L.P. v. Dresser-Rand Co.,
123 S.W.3d 584, 590 (Tex. App.—Houston [14th Dist.] 2003), rev’d on other
grounds, 240 S.W.3d 864 (Tex. 2007). Thus, the economic loss rule also serves
to enforce the boundary between tort and contract, encouraging parties to
contract ahead of time how to allocate risks, and to ensure that those
allocations will not be undone later by the application of tort law. See
LAN/STV, 435 S.W.3d at 240; RESTATEMENT (THIRD) OF TORTS: LIABILITY FOR
ECONOMIC HARM § 3 cmt. b. “In operation, the rule restricts contracting parties
to contractual remedies for those economic losses associated with the
relationship, even when the breach might reasonably be viewed as a
consequence of a contracting party’s negligence.” Lamar Homes, Inc. v. Mid-
Continent Cas. Co., 242 S.W.3d 1, 12–13 (Tex. 2007).
The Texas Supreme Court directs that “the application of the [economic
loss] rule depends on an analysis of its rationales in a particular situation.”
LAN/STV, 435 S.W.3d at 245–46. Still, we need not start entirely from
scratch. When a defect in a product deprives a buyer of profits, those are purely
economic damages recoverable only in contract. Hininger v. Case Corp., 23 F.3d
124, 126 (5th Cir. 1994) (denying recovery in tort of profits lost when tractor
wheels broke). Physical damage is generally recoverable in tort, but a defective
product causing damage to itself is not enough—the economic loss rule still
limits recovery for such damage to contract. See LAN/STV, 435 S.W.3d at 241,
n.33; Equistar Chems., L.P. v. Dresser-Rand Co., 240 S.W.3d 864, 867 (Tex.
2007). This is because “damage to the product itself is essentially a loss to the
purchaser of the benefit of the bargain with the seller,” recoverable in contract
rather than tort. Mid Continent Aircraft Corp. v. Curry Cty. Spraying Serv.,
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Inc., 572 S.W.2d 308, 313 (Tex. 1978). If, however, the defective product
damages other property, the economic loss rule does not bar recovery in tort
for those damages. See Signal Oil & Gas Co. v. Universal Oil Prod., 572 S.W.2d
320, 325 (Tex. 1978) (allowing recovery in tort when a reactor heater exploded
and damaged “other property in the area”).
If a product was purchased as a complete whole, damage to that product
caused by one of its component parts is considered damage to the product
itself—rather than damage to other property—and limited to recovery in
contract by the economic loss rule. See Mid Continent Aircraft Corp., 572
S.W.2d at 310, 313 (holding that damage to an aircraft’s wings and fuselage on
emergency landing forced by a defective engine was limited by the economic
loss rule); Arkwright-Bos. Mfrs. Mut. Ins. Co. v. Westinghouse Elec. Corp., 844
F.2d 1174, 1175–76, 1177–78 (5th Cir. 1988) (holding that economic loss rule
barred recovery in tort for damage to a turbine caused by a defective blade that
suddenly broke). The self-damage rule applies both when a component part
breaks and prevents the product from functioning properly, see, e.g., Hininger,
23 F.3d at 125, 127 (tractor wheels leaked air and cracked, causing down-time),
and when the component part’s failure causes physical damage to a different
component part, see, e.g., Mid Continent Aircraft Corp., 572 S.W.2d at 310–11,
313. And it applies even when the defective component part was manufactured
by an entity other than the entity that assembled the final product. See
Hininger, 23 F.3d at 126–27 (holding that purchaser of tractor could not
recover in tort from company that supplied defective tires to the entity that
incorporated them into the finished tractor and sold it to purchaser).
Those rules guided this court in American Eagle Insurance Co. v. United
Technologies Corp., 48 F.3d 142, 144–45 (5th Cir.), on reh’g, 51 F.3d 468 (5th
Cir. 1995), when we held that, under Texas law, damage to the hull of an
aircraft caused by a defective engine was covered by the economic loss rule and
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therefore not recoverable in tort. Plaintiff had purchased the aircraft as a
finished product, complete with hull and engines already joined. Id. This court
reasoned that, rather than the engine being the defective product that
damaged the hull, the “entire aircraft was the defective product” that damaged
itself, just as in Mid Continent Aircraft Corp. v. Curry County Spraying Service,
Inc., 572 S.W.2d 308 (Tex. 1978). See Am. Eagle Ins. Co., 48 F.3d at 144–45.
We found it particularly compelling that there was no evidence that the buyer
had bargained for the engine separately from the aircraft. See id.
Such a lack of separate bargaining can inform the determination of
whether a product has damaged other property, rather than itself, but the
presence of separate bargaining alone is not necessarily determinative.
Replacement parts, for example, are often purchased separately from the
original product. The Texas Supreme Court has not considered whether
damage to a product caused by defective replacement parts is damage to other
property, but both of the two Texas intermediate courts to do so have held that
the economic loss rule applies, at least when the replacement parts come from
the manufacturer of the original product.
In Grizzly Mountain Aviation, Inc. v. Honeywell International, Inc., No.
13-11-00676-CV, 2013 WL 5676069, at *1 (Tex. App.—Corpus Christi Oct. 17,
2013, no pet.) (mem. op.), the plaintiff separately purchased two complete
helicopters from the seller, both of which were equipped with engines
manufactured by the defendant. The plaintiff later transferred an engine from
one helicopter to the other, which then crashed because the engine failed. Id.
The plaintiff argued that the economic loss rule did not apply because the
component part that damaged the helicopter was bargained for separately
from the airframe. Id. at *5. The state appellate court rejected that analysis
and held that moving an identical engine from one helicopter to another did
not make the receiving helicopter “other property.” Id. at *8.
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In Equistar Chemicals, L.P. v. Dresser-Rand Co., 123 S.W.3d 584, 585
(Tex. App.—Houston [14th Dist.] 2003), rev’d on other grounds, 240 S.W.3d 864
(Tex. 2007), the plaintiff purchased gas compressors from the defendant in
1975 to use in its chemical plant. 1 The compressor impellers failed twice in
1999, causing damage to a compressor and lost profits. Id. at 586. Those
impellers had been purchased from the defendant as replacements in 1988 and
1991. Id. at 588. The court held that, even though the impellers that failed
were purchased separately from the compressor that they damaged, the
compressor was not “other property” so the economic loss rule applied. Id. at
588–90. Among other justifications, the court looked to the rationale of the
economic loss rule. Id. at 589–90. It reasoned that allowing recovery in tort in
such situations could make replacement parts too expensive and that the risk
was thus better allocated by contract. Id. at 590.
One Texas intermediate court and several federal district courts
applying Texas law have gone a step further, applying the economic loss rule
when, in the hands of a commercial firm assembling its own finished product,
the failure of a component part purchased from one supplier physically
damages another component part not purchased from that supplier. In Lopez
v. Huron, 490 S.W.3d 517, 519 (Tex. App.—San Antonio 2016, no pet.), the
plaintiff manufactured masa and purchased plastic bags from the defendant in
which to package it. The bags split, forcing the plaintiff to take customer
returns and causing the masa to spoil. Id. The court held that the damage to
the masa itself was not damage to other property exempt from the economic
loss rule because “the claim [was] for damage to a finished product caused by
1The Texas Supreme Court reversed on the issue of whether defendant had preserved
error regarding the economic loss rule, but “express[ed] no opinion on that part of the court
of appeals’ opinion which addresse[d] the rule and its application.” Equistar Chems., L.P.,
240 S.W.3d at 868–89, n.2.
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a defective component.” Id. at 524. The court reasoned that the damage could
have been “reasonably contemplated” by the parties. Id. See also TEU Servs.,
Inc. v. Inventronics USA, Inc., No. SA-16-CV-01023-RCL, 2018 WL 3338217,
at *5 (W.D. Tex. Feb. 5, 2018) (applying economic loss rule to damage suffered
to other components in an LED fixture caused by a faulty driver purchased
separately because the damage was to an “integrated, finished product”);
Sanitarios Lamosa, S.A. de C.V. v. DBHL, Inc., No. CIV.A. H-04-2973, 2005
WL 2405923, at *6 (S.D. Tex. Sept. 29, 2005) (applying economic loss rule to
damage suffered by toilet tanks in which plaintiff had installed defective
ballcocks purchased from a supplier, because the toilet was the “completed
product”); Alcan Aluminum Corp. v. BASF Corp., 133 F. Supp. 2d 482, 488,
504–05 (N.D. Tex. 2001) (applying economic loss rule to aluminum shells
damaged by the separately purchased structural foam that plaintiff had
sprayed into them to form architectural panels, because the damage was
foreseeable and therefore addressable in contract, and because the nature of
the defect was more like the failure to meet expectations, an issue of contract,
than a dangerous condition, an issue of tort).
Here, a commercial firm purchased a faulty component part to integrate
it with other components with the intent to use, not to resell, the finished unit.
In considering whether to apply the economic loss rule, we do not believe that
the Texas Supreme Court would apply a strict separately-bargained-for test,
but rather would analyze the rule’s “rationales in [the] particular situation” to
determine whether the risk suffered is better addressed in tort or in contract.
LAN/STV, 435 S.W.3d at 245–46. We conclude that the economic loss rule
applies.
First, the object of the bargain here, or the subject of the contract, was
an upgraded, more efficient steam turbine generator. The physical control
system itself is a component part of the functioning generator. It has no
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purpose apart from the turbine, and the turbine will not work without a control
system of some kind. In that way, the integrated Unit 3 is like the many
products damaged by component parts that have been covered by the economic
loss rule in Texas. Golden Spread purchased the control system from a
different entity than the turbine and in a separate transaction, which weighs
against applying the economic loss rule. But Golden Spread’s purchase of the
control system was more than just obtaining a replacement part. Emerson
offered to “target and analyze conditions” in Golden Spread’s plant to
“determin[e] optimal operating conditions and offer[] tremendous cost
savings.” In order to accomplish that, Emerson provided “detailed project
engineering, control strategy implementation, system testing, system start-
up[,] and ongoing support.” Rather than the simple purchase of a physical part,
Golden Spread sought, and Emerson provided, the means to achieve an
upgraded version of a complex machine, the whole turbine. Cf. Lopez, 490
S.W.3d at 524 (analyzing finished product of masa-in-bag, not the bags alone).
Second, the problem that caused the damage to the turbine is more akin
to a failure to meet contractual expectations than a dangerous defect
redressable in tort. The control system did not catch fire and damage the
turbine; rather, it sent the wrong commands. Improving the commands sent to
the turbine was the very purpose of the upgrade contract. See Chapman
Custom Homes, Inc. v. Dallas Plumbing Co., 445 S.W.3d 716, 718 (Tex. 2014)
(“[T]he source of the duty and the nature of the wrong should be examined to
determine whether the underlying claim is in tort or contract.”).
Together, these reasons also make the damage suffered foreseeable to
the parties. As they were contemplating the details of the operation of the
integrated turbine and control system to improve its efficiency, it was
eminently foreseeable that the control system might send the wrong
commands.
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For those reasons, we believe that the Texas Supreme Court would
conclude that the risk suffered here is better addressed in contract than in tort.
The parties are sophisticated, commercial actors that actually did negotiate
over the allocation of risk. 2 It is well-established that, under Texas law, a party
cannot recover from a seller in tort for damage to the product itself. The facts
in this case present a much closer issue, but the parties themselves were in the
best position to understand and allocate the risks of their transaction ahead of
time to resolve any ambiguities in the application of that rule to their
circumstances. As the Texas Supreme Court reasoned, “we think the
availability of contractual remedies must preclude tort recovery in the
situation generally because . . . ‘clarity allows parties to do business on a surer
footing.’” LAN/STV, 435 S.W.3d at 248 (quoting RESTATEMENT (THIRD) OF
TORTS: LIABILITY FOR ECONOMIC HARM § 6 cmt. c (AM. LAW INST., Tentative
Draft No. 2, 2014)) (holding that the economic loss rule bars a contractor from
suing for negligent designs the owner’s architect with whom the contractor was
not in privity).
The judgment of the district court is AFFIRMED.
2Although Appellants argue otherwise, the inclusion of an overall cap on liability does
not speak to what may trigger that liability.
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