469 F.3d 416 (5th Cir. 2006), 05-50673, Brazos River Authority v. GE Ionics, Inc.

Docket Nº:05-50673.
Citation:469 F.3d 416
Party Name:BRAZOS RIVER AUTHORITY, Plaintiff-Appellant, v. GE IONICS, INC., Also Known as Ionics, Incorporated, et al., Defendants, GE Ionics, Inc., Also Known as Ionics, Incorporated; Cajun Constructors, Inc., Formerly Known as Cajun Contractors, Inc., Defendants-Appellees.
Case Date:November 06, 2006
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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469 F.3d 416 (5th Cir. 2006)

BRAZOS RIVER AUTHORITY, Plaintiff-Appellant,

v.

GE IONICS, INC., Also Known as Ionics, Incorporated, et al., Defendants,

GE Ionics, Inc., Also Known as Ionics, Incorporated; Cajun Constructors, Inc., Formerly Known as Cajun Contractors, Inc., Defendants-Appellees.

No. 05-50673.

United States Court of Appeals, Fifth Circuit.

November 6, 2006

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Danny S. Ashby (argued), Mark Keith Sales, James Anthony Baker, Bart Sloan, Hughes & Luce, Dallas, TX, for Plaintiff-Appellant.

J. David Rowe, DuBois, Bryant, Campbell & Schwartz, Austin, TX, Anne M. Johnson (argued), Haynes & Boone, Dallas, TX, Leslie A. Palmer, Jr., Haley & Davis, Waco, TX, Charles William Shipman, Haynes & Boone, San Antonio, TX, Kenneth H. Laborde, Gieger, Laborde & Laperouse, New Orleans, LA, for GE Ionics, Inc.

W. Lee Kohler (argued), Dallas, TX, Fred Morris Johnson, Jr., Pakis, Giotes, Page & Burleson, Waco, TX, for Cajun Constructors, Inc.

Appeal from the United States District Court for the Western District of Texas

Before Smith and Stewart, Circuit

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Judges, and Hanen, District Judge.[*]

Jerry E. Smith, Circuit Judge

The Brazos River Authority ("BRA") appeals a judgment after a jury trial in its suit for breach of contract, breach of implied warranties, and fraud against GE Ionics, Inc. ("Ionics"), and Cajun Constructors, Inc. ("Cajun"), arguing that the district court improperly excluded evidence. Finding reversible error, we vacate and remand.

I.

BRA is responsible for developing and managing the water resources of the Brazos River Basin; as part of its duties it operates the Lake Granbury Surface Water and Treatment System ("SWATS"). Because Lake Granbury has a high concentration of salts, SWATS used a process called electrodialysis reversal ("EDR") to reduce the salt content of the water. Ionics designed and manufactured the original "Mark III" EDR system installed at SWATS in 1989.

The fundamental working unit of the EDR system is a "stack," which consists of alternating layers of membranes and plastic spacers. The spacers contain channels through which water flows. Electric current is applied to the stack, and the resulting electrical field separates the salt ions out of the water, reducing the mineral content. Other EDR components relevant in this appeal are the electrodes, which are large metal plates that transfer electricity; electrode cable assemblies, by which voltage is supplied to the electrodes; electrode spacers, which are special thicker spacers adjacent to the electrodes; and stack siding, which are large plastic protective coverings for the stacks.

In the 1990's Ionics developed the "Mark IV" or third generation ("3G") spacers for its next generation Mark IV EDR stack systems. Ionics also made a retrofit version of the spacer for use in older Mark III systems known as the "3G retrofit," "retrofit screen," and the "retrofit" spacer. In 1996 BRA concluded that it needed to expand the capacity of SWATS to meet customer demand. The parties disagree about many of the details after this point.

Ionics proposed that BRA could increase its capacity by using the retrofit spacers. BRA accepted the proposal and announced the job for public bid. Cajun Constructors, Inc. (Ca-jun"), submitted a bid and was awarded the prime contract, then entered into a subcontract with Ionics whereby Ionics agreed to retrofit the stacks with the new spacers. Cajun and Ionics performed the retrofit in 1998 and 1999. BRA alleges, and brought evidence at trial, that after the retrofit it began experiencing problems with the plant (so that the water quality decreased), problems that culminated in fires in June 2001 and March and April 2002. BRA closed the SWATS plant in December 2002.

BRA sued in state court, inter alia, Ionics and Cajun, alleging negligence, negligent misrepresentation, fraud, breach of implied warranty of good and workmanlike performance, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, strict liability in tort, and breach of contract. The suit was removed to federal court. Before trial the district court dismissed the tort claims on account of the contractual relationship among the parties; the dismissal of the tort claims was not appealed. The jury rendered a verdict in favor of Ionics and Cajun on all the remaining claims.

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II.

The standard of review for evidentiary rulings is abuse of discretion. If, however, the district court applies the wrong legal rule, the standard is de novo. Moss v. Ole S. Real Estate, Inc., 933 F.2d 1300, 1305-06 (5th Cir. 1991).1

A.

BRA argues that the district court incorrectly applied Federal Rule of Evidence 404(b), by excluding, as to an inanimate object as distinguished from a natural person, evidence meant to prove action in conformity with character. We agree this was serious error. Specifically, the court erred in excluding evidence of fires at other facilities on the basis of rule 404(b).

Rule 404(b) provides that "[e]vidence of other crimes, wrongs, or acts is not admissible to prove the character of a person in order to show action in conformity therewith" (emphasis added). This rule is applied most frequently in the criminal law context, Aetna Cas. & Sur. Co. v. Guynes, 713 F.2d 1187, 1193 (5th Cir. 1983), and we have limited its application to civil actions "where the focus is on essentially criminal aspects," Crumpton v. Confederation Life Ins. Co., 672 F.2d 1248, 1253-54 n.7 (5th Cir. 1982). An example is a civil action for trade secret misappropriation in which the plaintiff seeks to introduce evidence of the defendant's having taken proprietary trade secrets before from a prior employer (because this would prove "propensity" to commit misappropriation).

As BRA correctly points out, the propensities of a particular person to act a certain way are not at issue in this case, which involves the properties and functions of inanimate objects (EDR components) at various facilities. The rule talks about the character of a "person," and there is no person whose character BRA is trying to prove.

Given that it was error to exclude evidence of similar occurrences on the basis of rule 404(b), we ask whether that error is harmless. Compaq Computer Corp. v. Ergonome Inc., 387 F.3d 403, 408 (5th Cir. 2004). We "may not disturb the district court's exclusion of the evidence . . . if that ruling can be upheld on other grounds, regardless of whether the court relied on those grounds." Metallurgical Indus., Inc. v. Fourtek, Inc., 790 F.2d 1195, 1207 (5th Cir. 1986). We "will not reverse erroneous evidentiary rulings unless the aggrieved party can demonstrate 'substantial prejudice.'" Viazis v. Am. Ass'n of Orthodontists, 314 F.3d 758, 767 (5th Cir. 2002) (citation omitted).

In Davidson Oil Country Supply v. Klockner, Inc., 917 F.2d 185 (5th Cir. 1990) (per curiam) (on petition for rehearing), we held that exclusion of evidence of similar occurrences was not harmless, so a new trial was required. We explained that exclusion of similar occurrences seriously hindered the presentation of plaintiff's case and that the "scarcity of instances of Ferrotubi pipe failure" turned into "affirmative proof" of the lack of defect, discrediting the plaintiffs' witnesses and creating "an atmosphere so unreal and so prejudicial" as to require remand: "Our original opinion reflects the exclusion of a substantial volume of relevant evidence which created an atmosphere of disbelief for the claims and defenses of DOCS. This atmosphere of disbelief permeated the entire trial and tainted the jury findings." Id. at 186.

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We noted that against the two isolated failures, the proffered and excluded evidence reflected approximately thirteen failures of Ferrotubi tubing that contributed to the discrediting of DOCS's witnesses, who were limited to telling of only two failures in Klockner-supplied Ferrotubi materials. Id. we explained that "this atmosphere of disbelief permeated the entire trial and tainted the jury findings," permitting it to find for Klockner despite "spectacular admissions" that it had made, id., as shown by (for example) admitted Klockner documents acknowledging a "tremendous quality problem with the Ferrotubi material," Davidson Oil Country Supply v. Klockner, Inc., 908 F.2d 1238, 1244 (5th Cir. 1990). We also held that the evidence of similar failures was not irrelevant, because it was offered to prove that the Ferrotubi products contained a latent manufacturing defect and because it was "clearly relevant to the questions of merchantability and good faith." Id. at 1245.

Ionics contends that Davidson is distinguishable because, unlike the situation there, in the instant case significant evidence against Ionics has been introduced at trial. Nonetheless, although there was evidence acknowledging, as in Davidson, a tremendous quality problem with Ionics material, that evidence, as in Davidson, could not dispel the atmosphere of disbelief created by the exclusion of evidence of the failure of Ionics equipment. Although this case is slightly closer than was Davidson, because more evidence against the defendants appears to have been introduced here, the exclusion of this evidence is not harmless, because we cannot say with positive assurance that the jury would have decided the same way had it been admitted.2

We agree with BRA that a crushing majority of the evidence of other fires was excluded, so the excluded evidence is not merely cumulative. In Johnson v. William C....

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