Mark Schwartz v. Electronic Data Systems, Inc. , 913 F.2d 279 ( 1990 )

LIVELY, Senior Circuit Judge.

In this diversity action a former employee of Electronic Data Systems, Inc. (EDS) seeks damages for alleged fraudulent misrepresentations concerning the content of a training program for which the plaintiff was hired. He also charges EDS with breach of his employment contract.

I.

The plaintiff, Mark Schwartz, is a citizen of Michigan. EDS, a Texas corporation with its principal place of business in Dallas, is a wholly-owned subsidiary of General Motors Corporation (GM), a Delaware corporation with its principal place of business in Michigan. Although some of the events leading to the plaintiff’s employment took place in California, both parties rely on the substantive law of Michigan, and we agree that Michigan law controls.

A.

The plaintiff has a bachelor’s degree in electrical engineering from the Massachusetts Institute of Technology and a doctorate in neuro-science from the University of California at Los Angeles. After completing his degree at UCLA, Schwartz stayed on for several years doing research under various grants. In the spring of 1985 the funding for his current research program was running out and he began looking for employment in industry. In the course of his search Schwartz answered an advertisement by EDS in the Los Angeles Times which described in general terms a new training program that EDS had created in which qualified individuals would receive “world class training ... specially designed for engineers who want to advance quickly in a computer technology environment that can only be described as state-of-the-art." The ad went on to state: “Your career will be at the leading edge of technology — in robotics, CAE [Computer Aided Engineering]/CAD [Computer Aided Design]/CAM [Computer Aided Manufacturing]/CIM [Computer Integrated Manufacturing], machine vision, manufacturing control systems, expert systems and simulation systems.”

Although Schwartz had many years of computer training and had used computers extensively in research, he had no experience in manufacturing. He was particularly interested in robotics and “artificial intelligence.” Schwartz met at least twice with an EDS recruiter, Becky Larkin, who described the Engineering Systems Development Program (the program) in broad terms and gave him some documents describing the program, and the two corporations, EDS and GM. She stated that the program was designed to gain maximum benefits for GM out of its recent “alliance” with EDS.

At the second meeting with Ms. Larkin, Schwartz submitted a formal application for employment by EDS. He had previously furnished a resume. Following that meeting Schwartz was contacted by EDS and invited to come to Detroit for a further interview. Following an interview with Howard Falls at the GM Technical Center near Detroit, Schwartz signed an employment agreement, and other documents, on July 9, 1985. EDS agreed to pay for Schwartz and his family to move to Michigan, and he was to begin work on September 30, 1985, at a salary of $29,000 per year. This was approximately $8,000 more than his stipend at UCLA.

B.

Ms. Larkin furnished a handwritten outline of the program at the first meeting. According to this outline, the program was divided into three phases, and was designed to last 20 to 24 months. Phase I involved learning the GM engineering/manufacturing environment, the computer tools used in that environment, and working on various simulation and modeling projects. At the conclusion of Phase I, the trainee would be assigned to an area of expertise such as CAD /CAM, artificial intelligence or process control. Phase II was to consist of 15 weeks of classroom instruction, including 8 weeks devoted to the trainee’s specialty area. Phase III, which was projected to last 6 to 9 months, was to involve project analysis and programming in the area of the trainee’s expertise. The purpose of the training was to apply the trainee’s knowledge and experience to the manufacturing environment. According to Schwartz, Ms. Larkin told him that upon graduation a person would be a “full-fledged EDS systems engineer.”

In addition to the handwritten summary, Ms. Larkin gave Schwartz a seven-page typed “overview” of the program. The description of the three phases of the program was largely written in the future tense and clearly indicated that changes might be made. (“The format of the ESD Program presently includes three phas-es_ As the format of the program becomes more clearly defined, revisions to this document will be provided.”) Schwartz testified by deposition that he relied on the overview — that it “speaks for itself” — in addition to the newspaper advertisement and Ms. Larkin’s oral description of the program and her handwritten summary.

C.

In October, 1985, about two weeks after Schwartz began working in Phase I of the program, an EDS manager, Reeves, called a meeting of about 100 trainees. He advised them that EDS had determined after further consideration to change Phase II of the program. Instead of 15 weeks of classroom work, the trainees would be given ten weeks of further EDS computer training, with an option for continuing education courses from a University of Michigan professor. Schwartz testified that he believed EDS was saying that its objectives for the program remained the same, but that “how they intended to achieve the objective [was] going to change.” He testified that he felt some “disquietitude” about the program after the Reeves meeting, but felt that EDS would return to the original format. Nevertheless, when his supervisor offered him an opportunity in November 1985 to leave the program and become a systems engineer for EDS, Schwartz accepted. He continued to work as a systems engineer until he was terminated in early 1987.

II.

At oral argument the court raised a question concerning subject matter jurisdiction, and requested the parties to file supplemental briefs on this issue. Research and study of the jurisdictional issue has delayed our decision.

The plaintiff, Schwartz, is a citizen and resident of Michigan. While EDS is a Texas corporation, it is a wholly-owned subsidiary of GM, which has its principal place of business in Michigan. The diversity statute states that “a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business_” 28 U.S.C. § 1332(c)(1). Thus, for diversity purposes GM, the non-party corporate parent of the defendant, is a citizen of Michigan. The question posed is whether EDS should be treated as a separate entity for purposes of federal court jurisdiction, or whether it should be treated as an alter ego of its corporate parent, GM.

A.

In Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U.S. 333, 45 S.Ct. 250, 69 L.Ed. 634 (1925), the Supreme Court was required to determine whether Cudahy, a Maine corporation, could be sued in a federal district court in North Carolina for breach of contract allegedly committed by Cudahy’s subsidiary, an Alabama corporation. The parent corporation was not doing business in North Carolina; however, its subsidiary maintained an office in that state and distributed Cudahy products within North Carolina. The Court stated the question for decision as “whether the corporate separation carefully maintained must be ignored in determining the existence of jurisdiction.” Id. at 336, 45 S.Ct. at 251.

In affirming the district court’s dismissal of the action for lack of jurisdiction, the Court found that the separation of the two corporations, “though perhaps merely formal, was real. It was not pure fiction.” Id. at 337, 45 S.Ct. at 251-52. Noting that Cudahy owned all the stock of its subsidiary, the Court stated: “But whatever might be other legal consequences of the concentration [of all the subsidiary’s stock in one owner], we cannot say that for purposes of jurisdiction, the business of the Alabama corporation in North Carolina became the business of the defendant.” Id. at 338, 45 S.Ct. at 252.

The Supreme Court was not concerned with diversity jurisdiction in Cannon. Nevertheless, the principle enunciated there should be applied in any case where federal court jurisdiction depends on the relationship between a corporate parent and its corporate subsidiary. That principle is: When formal separation is maintained between a corporate parent and its corporate subsidiary, federal court jurisdiction over the subsidiary is determined by that corporation’s citizenship, not the citizenship of the parent. So far as we can determine, every court of appeals that has considered the question has reached this conclusion.

Topp v. CompAir Inc., 814 F.2d 830 (1st Cir.1987), quoted Moore’s Federal Practice in applying the “general rule” that a “subsidiary corporation which is incorporated as a separate entity from its parent corporation is considered to have its own principal place of business.” Id. at 835. This rule applies even where the parent owns all the stock of the subsidiary and exercises close control over its operations. Referring to its decision in Topp, the court stated in U.S.I. Properties Corp. v. M.D. Construction Co., 860 F.2d 1, 7 (1st Cir.1988), cert. denied, — U.S.-, 109 S.Ct. 2064, 104 L.Ed.2d 629 (1989), that “even if the parent corporation exerts a high degree of control through ownership or otherwise, and even if the separateness is perhaps only formal, the subsidiary’s place of business is controlling for diversity purposes if the corporate separation is real and carefully maintained.”

The court reached the same conclusion in Quaker State Dyeing & Finishing Co. v. ITT Terryphone Corp., 461 F.2d 1140 (3d Cir.1972). In Quaker State the plaintiff sought to have a subsidiary treated as nothing more than an agent of its corporate parent. Since the subsidiary and the plaintiff were both citizens of Pennsylvania, complete diversity would exist only if the subsidiary’s separate corporate citizenship were ignored and it could be treated as having the same citizenship as its corporate parent. Applying the rule that we adopt in this case, the court of appeals affirmed the district court’s dismissal of the action for lack of jurisdiction. Though the corporate parent exerted a high degree of control over the subsidiary, the court found that the separate citizenship of the subsidiary determined the question of jurisdiction.

In J.A. Olson Co. v. City of Winona, Mississippi, 818 F.2d 401 (5th Cir.1987), the plaintiff, an Illinois corporation with its only manufacturing plant in Mississippi, sued a Mississippi city in a federal court in that state. Upon finding that Mississippi was the plaintiff corporation’s principal place of business, the district court dismissed for lack of jurisdiction. In affirming, the court of appeals rejected the argument of the plaintiff that as a subsidiary of another Illinois corporation, it was merely an alter ego of its corporate parent. When a subsidiary chooses to be incorporated separately from its parent, for whatever reason, it is treated as an independent entity for purposes of determining federal court jurisdiction. Id. at 414.

B.

Cases that have found the corporate parent’s citizenship to control have not rejected the “general rule.” Rather, in those cases the courts have determined on the basis of particular facts that a subsidiary’s principal place of business was the same as that of the corporate parent, Toms v. Country Quality Meats, Inc., 610 F.2d 313 (5th Cir.1980), or that the subsidiaries were not actually separate corporate entities, Frazier v. Alabama Motor Club, Inc., 349 F.2d 456, 460 (5th Cir.1965).

Nor do we believe that Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280 (7th Cir.1986), requires a different conclusion. That case did not deal with a corporate parent and its subsidiary. The issue was the citizenship of a division of a corporation. The court held that the state of which a division of a corporation is a citizen for the purpose of determining diversity “is the state of which the corporation that owns the division is a citizen.” Id. at 1282. A division of a corporation does not possess the formal separateness-upon which the general rule is based, and thus is not an independent entity for jurisdictional purposes.

There is no dispute that GM is a citizen of Michigan under section 1332. But GM is not a defendant in this action. EDS is a citizen of Texas under section 1332, and nothing in the record would support a finding that EDS is not, formally, a separate corporation, though it is wholly owned by GM. We conclude that the district court had jurisdiction over this case under the diversity statute.

C.

Chief Judge Merritt’s dissent has a certain appeal, not least of all because it would tend to reduce diversity cases. We believe, however, that desirable as such a result might be for the federal courts, such changes in jurisdiction are to be made by Congress. Congress recognized the need to restrict the availability of diversity jurisdiction to corporations when it enacted the 1958 amendment to section 1332. That amendment invested multi-state corporations with dual citizenship — a corporation must be treated as a citizen both of its state of incorporation and of the state of its principal place of business. It may be that the next logical step in limiting the availability of diversity jurisdiction to corporations at a time when so many large firms operate through numerous subsidiaries and are the progenitors of corporate “children” to second and third generations is the adoption of the rule that the dissent proposes. As we see it, however, that is not the law today.

III.

In granting summary judgment for EDS the district court found on undisputed facts that the representations made to Schwartz were not essentially false and were not made with reckless disregard for their truth or with any knowledge of their falsity. Thus, the court held, the plaintiff failed to produce evidence of the basic element of a cause of action for fraud. The recruiter, Becky Larkin, and the documents in Schwartz’s possession described a new program as it was then planned. Nothing indicated that EDS used trickery or a misrepresentation of the actual plans of the company in recruiting Schwartz. Although EDS adhered to the same goal of training people to meet GM’s needs, it changed the program, particularly Phase II. The plaintiff was dissatisfied because he felt that the change in Phase II rendered it a much lower level of training than he had anticipated and desired.

A.

We agree with the district court that Schwartz failed to produce evidence of fraud sufficient to avoid summary judgment. As we have noted, the program was new and the printed materials specifically advised that they described the program as it was presently designed and that as it became more clearly defined, revisions would be provided. Schwartz testified that he did not get the impression from Ms. Larkin that anything was “set in stone.” He stated that Howard Falls told him nothing different from Ms. Larkin’s information. Nevertheless, he felt, for some unexplained reason, that EDS never intended to offer “state-of-the-art” world class training. Nothing in the record supports this conclusion. Schwartz conducted extensive discovery and makes no complaint on appeal that he was denied an opportunity to meet the requirements of Fed.R.Civ.P. 56.

When Reeves announced the program changes, he gave business reasons. He stated that the final design of the program was the end result of an evaluation process. The decision was related to the known needs of GM and the cost and availability of various methods of satisfying those needs. The record reflects an investigation by EDS into the availability of classroom training at leading universities, and its costs, and supports the defendant’s assertions that Phase II was changed for business reasons, and not because EDS never contemplated offering classroom training.

Schwartz knew from the first contact with Ms. Larkin that the program was new and that it was subject to revision. The fact that the changes in Phase II particularly disappointed him did not demonstrate that EDS had fraudulently misrepresented the program. Of course, Schwartz never entered Phase II, but quit the program after about six weeks in Phase I. There were no significant changes in Phase I, yet he did not persevere even to the end of that portion of the program, much less give Phase II a try to determine what value it might have for him. Finally, EDS promoted Schwartz to systems engineer immediately after he left the program in Phase I, the very position he would have attained if he had completed the program successfully-

With one exception that will be discussed later, Michigan adheres to the general rule that six elements of actionable fraud or misrepresentation must be proved by clear and convincing evidence. The elements, all of which must be found to exist, were set forth in Candler v. Heigho, 208 Mich. 115, 121, 175 N.W. 141 (1919), and repeated more recently in Hi-Way Motor Co. v. International Harvester Co., 398 Mich. 330, 336, 247 N.W.2d 813 (1976):

The general rule is that to constitute actionable fraud it must appear: (1) That defendant made a material representation; (2) that it was false; (3) that when he made it he knew that it was false, or made it recklessly, without any knowledge of its truth and as a positive assertion; (4) that he made it with the intention that it should be acted upon by plaintiff; (5) that plaintiff acted in reliance upon it; and (6) that he thereby suffered injury.

Our rather lengthy recitation of the undisputed facts, as opposed to the plaintiffs unsupported assumptions, makes it clear that Schwartz failed to produce evidence in response to the motion for summary judgment that would satisfy his burden under Michigan law, Fed.R.Civ.P. 56 and Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986) (“In our view, the plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial.”).

B.

As an exception to the usual requirements of an action for fraud, Michigan recognizes the “innocent misrepresentation” doctrine, which permits recovery of damages for a misrepresentation of fact, though made innocently, if the consequences to the plaintiff are the same “as though it had proceeded from a vicious purpose.... ” U.S. Fidelity & Guaranty v. Black, 412 Mich. 99, 115, 313 N.W.2d 77 (1981) (quoting Holcomb v. Noble, 69 Mich. 396, 399, 15 N.W. 129 (1888)). Application of the innocent misrepresentation rule is limited to cases where the misrepresentation is made in connection with a contract. Not only must the plaintiff in such a case show that he has suffered an injury; he must also show that the injury inures to the misrepresenter’s benefit. 412 Mich, at 118, 313 N.W.2d 77.

Schwartz failed to produce evidence in support of a claim for damages for innocent misrepresentation. His expectations concerning his future with EDS were based on his subjective evaluation of a portion of Phase II (15 weeks of classroom work) as the most significant feature of the program. Yet, the entire program was presented as a new approach that was subject to revisions. When EDS changed the program in a way that made it less appealing to Schwartz, he was offered and accepted appointment as a systems engineer, the very position he would have attained upon successfully completing the program. In addition to identifying no misrepresentation, he failed to demonstrate either that he suffered an injury or that the injury inured to the benefit of EDS.

C.

Schwartz also sought damages for breach of contract. He contends that EDS breached his employment agreement by failing to provide the training it had promised. He did not sue for wrongful discharge, and his ultimate termination by EDS is not an issue.

Schwartz signed an employment agreement with EDS under which he agreed to “assume responsibilities as ESD PHASE I” effective September 30, 1985 at a salary of $29,000'per year. He began working in Phase I at that time and was paid the agreed salary. When changes in Phase II were announced, he became dissatisfied with his prospects under the program, and though he had not even completed Phase I he was permitted to transfer immediately to the position of systems engineer. His chief complaint appears to be that the changes in the program reduced it to the level of another training program known as SED. Yet, one of the documents that Schwartz provided at his deposition to support his claims stated: “The ESD program, like the SED program, culminates when a candidate is named a systems engineer.” The employment agreement mentioned no particular training, but merely provided for Schwartz’s at-will employment as “ESD PHASE I.” The plaintiff produced absolutely no evidence in support of his claim that EDS breached this contract.

The judgment of the district court is affirmed.