Davidson Oil Country Supply, Inc. v. Klockner, Inc.

• Decision Date: 15 August 1990
• Docket Number: No. 89-2221,89-2221
• Citation: 908 F.2d 1238
• Parties: , 12 UCC Rep.Serv.2d 664, 30 Fed. R. Evid. Serv. 1230, Prod.Liab.Rep.(CCH)P 12,551 DAVIDSON OIL COUNTRY SUPPLY CO., INC., Appellant, v. KLOCKNER, INC., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1238

908 F.2d 1238

17 Fed.R.Serv.3d 473, 12 UCC Rep.Serv.2d 664,

30 Fed. R. Evid. Serv. 1230,

Prod.Liab.Rep.(CCH)P 12,551

DAVIDSON OIL COUNTRY SUPPLY CO., INC., Appellant, v. KLOCKNER, INC., Appellee.

No. 89-2221.

United States Court of Appeals,

Fifth Circuit.

Aug. 15, 1990.

Eugene B. Wilshire, Jr., Patrick J. Dyer, Wilshire, Scott, Halbach & Dyer, Houston, Tex., for appellant.

Rick L. Oldenettle, Gilpin Maynard, Houston, Tex., Kenneth L. Everett, Paul J. O'Neill, Jr., New York City, for appellee.

Appeal from the United States District Court For the Southern District of Texas.

Before BROWN, WILLIAMS, and JONES, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

Prologue

Davidson Oil Country Supply Co., Inc. (DOCS) bought tubular materials from Klockner, Inc. (Klockner). Klockner had purchased the tubular goods from an Italian mill called Ferrotubi. Ferrotubi manufactured the pipe. DOCS's purchase orders specified that the materials were to be J-55 ERW API tubing. ¹ DOCS sold the pipe to customers who used it in well operations. Two of those customers experienced downhole weld seam failure in the pipe.

DOCS's primary claim was that the Ferrotubi materials contained a latent manufacturing defect which made those materials unmerchantable as API-grade. Thus DOCS claims the tubing was sold in breach of the warranty of merchantability. ² To establish unfitness and noncompliance with the API specifications, DOCS sought to offer evidence of several instances of the failure of the same or similar Ferrotubi pipe. ³ Beginning with its granting of a motion in limine, applied throughout the jury trial, the trial court rejected as inadmissible any failure of Ferrotubi pipe other than that sold by Klockner to DOCS. The exclusion of this evidence is the principal issue in the case. ⁴

We hold that the trial court prejudicially erred and remand for a new trial.

The Motion in Limine

Prior to the jury voir dire the trial court heard Klockner's motion in limine which sought the exclusion of many categories of evidence, among them evidence of failures involving Ferrotubi materials ⁵ not sold by Klockner. The trial court's position on this issue was made clear by its first statement with regard to the motion in limine: "Well, there's not much there that's really of any import." (Vol. 20 p. 3). The trial court rejected the arguments put forth by DOCS. ⁶ Klockner's counsel responded by agreeing that the rule in this circuit favors admission, but distinguished those cases because they were all brought against the manufacturer rather than a seller of the goods. Klockner also raised several other arguments, none of merit, against admissibility. ⁷

In addition to the general similar occurrence evidence Klockner sought to exclude, they specifically wanted to exclude a Southwestern Laboratories report which analyzed one of the pipe failures. Their objections were on relevancy and hearsay grounds. ⁸ DOCS's counsel responded that Klockner had knowledge of the reports ⁹ since before the lawsuit was commenced and had the opportunity to depose Southwestern Laboratories about them. ¹⁰

After hearing and considering the arguments on these and other aspects of the motion in limine, the trial judge granted it in nearly all respects. The only exceptions made were to allow a certified copy of the petition to be admitted and to allow references to Klockner's parent company. At first, the trial judge indicated that this was a preliminary ruling and that "it doesn't mean that you can't get around it at that time but you need to approach the bench and we will discuss it ahead of time." ¹¹

DOCS's counsel immediately asked the court to reconsider and to consider the cited case law. As DOCS's counsel pointed out, "You have in fact instructed a verdict against me if this evidence does not come in. Our whole case for four-and-a-half years has been built on the latent defect in this product. If I can't prove that, then my case has been taken away from me." The following exchange ensued:

THE COURT: Let me ask you this: What relevance does it have if other tubes fail? Why can't you prove it just through what happened here in this case?

MR. WILSHIRE: Because the question is when you have a latent defect, it cannot be tested for adequately. And you have the same failure coming over and over again from the same manufacturer.

The point of focus is on the product, not on who sold it. The one case that addressed that specifically, Your Honor, is an Audi case that said it doesn't matter who the distributor is if the manufacturer has a latent defect. That is what we've got. It's clear happenstance.

THE COURT: Again, why can't you prove it as to just the pipe in this case?

MR. WILSHIRE: Well, because they would say that two failures as opposed to 13, all of which are alike, wouldn't be enough.

But when you have got a person standing here holding a group of pipe of which he has evidence of as a reasonable businessman has failed downhole as many as 13 times, the question is the integrity of that product, not who sold it to him.

Who sold it to him is a matter of happenstance. We're not trying to hold them for damages on those extraneous, but we're trying to let this jury understand why we say there's a latent defect and why we had to downgrade it and why its not merchantable. ¹²

After examining DOCS's authority, ¹³ the trial judge made his final ruling which he adhered to throughout the trial:

All right. Motion to reconsider is denied. Motion in limine stays.

I've read the plaintiff's trial memorandum, and I'm stating that similar happenstance, similar occurrences with other clients will not be admitted. ¹⁴

DOCS tried again to admit this evidence through narrative offers of proof during trial. (Vol. 24 pp. 3-5). At this time, DOCS sought to introduce (i) the testimony of Walton and Clark (DOCS officers) that DOCS customers, see supra note 3, had three additional downhole failures with Ferrotubi materials manufactured during the relevant time; (ii) the business records of six additional companies who experienced downhole failures of J-55 ERW Ferrotubi materials manufactured during the relevant time; (iii) DOCS's business records documenting the failures of all its clients; (iv) the testimony of Smith from Quanex Corp. regarding their downhole failures with Ferrotubi ERW materials, their threading problems, and their ultimate rejection of their entire Ferrotubi inventory which Ferrotubi accepted; and (v) a letter of Ferrotubi's metallurgist explaining the reason for the failures. ¹⁵ DOCS offered this evidence,

... to show that there is a clear likelihood of latent manufacturing defect and improper mill inspection, defects and problems that compelled the conclusion that ERW material manufactured by Ferrotubi Corbetta between--during the years 1980 and 1981 could not be sold and used for downhole drilling and completion requiring pipe with properties and characteristics and manufacturing integrity equal to J-55 API material.

This offer of proof was denied.

In another attempt to get some of this "gut issue" evidence in, DOCS immediately made a limited offer of proof by which it attempted to introduce that part of the evidence showing (i) Klockner's knowledge of problems with the Ferrotubi materials in March 1982 and (ii) the type of information relied on in the trade to make a reasonable decision to downgrade. This offer was also denied.

Three main categories of evidence were excluded by the motion in limine.

A. Evidence of TAD-Supplied Ferrotubi Failures. DOCS bought its Ferrotubi inventory from both Klockner and TAD. Three downhole failures--all in the weld seam--occurred in Ferrotubi material known to have been supplied by TAD. DOCS was precluded by the motion in limine from telling the jury about these failures. It was also precluded from telling the jury that it had downgraded the TAD supplied Ferrotubi materials and that TAD had accepted the downgrade. The exclusion of this evidence enabled Klockner's counsel in closing argument to urge that DOCS never had downgraded its Ferrotubi inventory.

In order to show these facts, DOCS offered, and was not allowed to present, (i) testimony of Walton and Clark (DOCS officers) that failures in Ferrotubi pipe sold to DOCS by TAD had in fact occurred, (ii) DOCS's claim files prepared for each of those failures along with authenticating and explanatory testimony, (iii) a Southwestern Laboratories report attributing one of those failures to improper heat treatment, (iv) a Ferrotubi report prepared for TAD and delivered to Klockner by DOCS in which Ferrotubi admitted to "repeated and numerous instances" of defects in its ERW material, and (v) testimony by three experts that five downhole failures in a particular product renders that product unmerchantable as API material.

All of this evidence was offered to show the unmerchantability of the Ferrotubi material as API grade. All of the evidence related to Ferrotubi ERW materials and by it, DOCS attempted to show a defect in the manufacturing process by which there was an improper heat treatment of the weld seam which caused the failures. The exclusion prevented DOCS from showing that materials which had suffered five downhole weld seam failures were unmerchantable because they could not "pass without objection in the trade." Tex.Bus. & Com.Code Ann. Sec. 2.314(b)(1) (Vernon 1968).

The exclusion also allowed Klockner to make closing arguments based on facts it knew to be untrue. Klockner argued that the materials were merchantable because even if two failures had occurred in Klockner-supplied materials, that was a normal rate of failure in the industry. Klockner argued that the absence of other failures showed there was no defect. Thus the scarcity of instances of Ferrotubi pipe failure that the jury was allowed to hear about--because of the trial court's rulings on the motion in limine and the offers of proof--turned into affirmative proof of the lack of a...