Clements Auto Company v. Service Bureau Corporation

• Decision Date: 27 May 1971
• Docket Number: No. 19783.,19783.
• Citation: 444 F.2d 169
• Parties: CLEMENTS AUTO COMPANY, d/b/a Southern Minnesota Supply Company, SM Supply Company, a Wisconsin Corporation, and SM Supply Company, a Minnesota Corporation, Appellees, v. The SERVICE BUREAU CORPORATION, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

444 F.2d 169 (1971)

CLEMENTS AUTO COMPANY, d/b/a Southern Minnesota Supply Company, SM Supply Company, a Wisconsin Corporation, and SM Supply Company, a Minnesota Corporation, Appellees, v. The SERVICE BUREAU CORPORATION, Appellant.

No. 19783.

United States Court of Appeals, Eighth Circuit.

April 27, 1971.

Rehearing Denied May 27, 1971.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Nicholas deB. Katzenbach, Armonk, N. Y., Thomas R. Behan, Stuart W. Rider, Jr., Dayton E. Soby, Richard J. Nygaard, Michael Wolcott, Minneapolis, Minn., for appellant; Rider, Bennett, Egan, Johnson & Arundel, Minneapolis, Minn., of counsel.

Kelton Gage, Mankato, Minn., Blethen, Ogle, Gage & Krause, Mankato, Minn., for appellees.

Before MEHAFFY, HEANEY and BRIGHT, Circuit Judges.

HEANEY, Circuit Judge.

The Service Bureau Corporation, a wholly-owned subsidiary of International Business Machines Corporation, appeals from a judgment awarding SM Supply Company $480,811 in damages, the basis of the award being actionable misrepresentations made by SBC to SM in connection with the sale of data processing services.

SBC asks this Court to set aside the judgment. It contends: (1) that the trial court erred in finding that SBC had made actionable misrepresentations, and (2) that the trial court's award of damages was improper.

Diversity of citizenship is present and the amount in controversy exceeds $10,000.

We review the evidence only briefly because the trial court's opinion does so thoroughly. We accept all inferences which reasonably tend to support the conclusions of the trial court. Minnesota Amusement Company v. Larkin, 299 F.2d 142 (8th Cir. 1962).¹

SBC is engaged in the business of electronic data processing, offering to the public its services in eighty-four branch offices throughout the United States. It sells data processing services in the following areas: payroll, personnel records, accounts receivable, billing, sales accounting, marketing studies, cost accounting, inventory record, budgets and general accounting.

SM operates wholesale supply houses at Mankato and Rochester, Minnesota, and at Eau Claire, Wisconsin. It operated a similar supply house in LaCrosse, Wisconsin, through 1965. It deals in automotive parts and supplies, electrical construction materials, and electronic parts, supplies and equipment. Each outlet stocks more than sixty thousand items, ranging in value from a few cents per item to hundreds of dollars per item and in quantities of from one to several thousands each. SM's volume of business exceeded $6,900,000 each year from 1962 through 1966.

The first business relationships between the plaintiff and the defendant developed in 1961. In that year, SBC agreed to furnish data processing service to a Chevrolet dealership affiliated with SM. The services proved satisfactory and led SM's president to discuss SM's inventory problems with SBC. SBC indicated that it did not, at that time, have the computer capacity to provide the required data processing services. In the summer of 1962, however, SBC informed SM that, early in 1963, it would be acquiring an IBM 1401 computer which would have the capacity to produce data processing service for SM.

SBC made a study of SM's operations during the summer of 1962, with the view of providing data processing services to SM. SBC conferred with SM frequently during the study period and subsequent thereto. In February, 1963, SM signed two contracts dated December 20, 1962, under which SBC agreed to provide certain basic data processing services to SM. The two contracts were "accepted" by SBC in New York on April 4, 1963. Twelve additional contracts providing for additional services were signed by the parties during the succeeding four years. Processing of cards to be used in the system was initiated at the Mankato outlet in September, 1963; at the Rochester outlet in late 1963; and in the Wisconsin stores in the spring of 1964.

The nature of the data processing services provided during the four-year relationship between SBC and SM may be conveniently categorized into three basic stages. Initially, SBC automated SM's accounting and billing. At the same time, SBC used this input material to prepare certain monthly sales analysis reports and a weekly report of inventory movement. The inventory reports contained a six-week history of sales for all of SM's inventory. In August of 1964, the weekly inventory report was changed to a bi-weekly report which provided twelve weeks of history.

Second generation inventory reports began in January, 1965, and continued through December 4, 1965. These were bi-weekly reports which provided a twelve-week movement history, a record of inventory purchases, receipts and inter-branch transfers, and, for the first time, an on-hand balance of items for certain vendors selected by SM.

Finally, in December, 1965, SM signed a contract to obtain a third generation of inventory reports. These reports were to contain a detailed history for each item for the previous year, a movement history during specified months, an on-hand figure, and a computation of the number of weeks' supply of each item on hand. These reports were to be delivered beginning in January, 1966, but were not received until July, 1966, due to the discovery of an earlier programming error by SBC.

The services proved to be unsatisfactory to SM. It charges that the input method was slow and expensive, and that the reports were too error-prone and voluminous to be of use in purchasing inventory. SM finally terminated all contracts with SBC in January, 1967.

SM then brought the present lawsuit against SBC in September of 1967. It proceeded on the theories of rescission, breach of implied warranty, breach of contract, reformation and fraudulent misrepresentation. SBC counterclaimed for payments due.

The action was tried to the court without a jury. The court filed a detailed memorandum opinion and order on March 31, 1969. Clements Auto Company v. Service Bureau Corporation, 298 F.Supp. 115 (D.Minn.1969). The court denied recovery on all grounds other than misrepresentation, but found that SBC had made one central actionable misrepresentation to SM, i. e., that the proposed data processing system would, when fully implemented, be capable of providing SM sufficient information in a form such that when properly utilized, it would constitute an effective and efficient tool to be used in inventory control.²

It further found that SBC had made several other specific actionable misrepresentations to SM:

(1) that the only way SM would ever get an inventory control system such as that in use at the Chevrolet dealership would be by automating the firm's accounting;

(2) that there were controls built into the system which were adequate to prevent any but a minimal number of errors;

(3) that Friden Flexowriters were a suitable input device to be used in the data processing system, that eight Flexowriters would be sufficient to do the job, that the Flexowriters could be operated by normal clerical personnel, and that the Flexowriters would produce a typed hard copy of the invoice which could be sent along with the customer's order; and

(4) that weekly sales management reports provided by the contract would allow management by exception.

It is conceded by the parties that the trial court properly relied on Hanson v. Ford Motor Company, 278 F. 2d 586 (8th Cir. 1960), in enumerating the essential elements of a fraud action in Minnesota:³

"1. There must be a representation;

"2. That representation must be false;

"3. It must have to do with a past or present fact;

"4. That fact must be material;

"5. It must be susceptible of knowledge;

"6. The representer must know it to be false, or in the alternative, must assert it as of his own knowledge without knowing whether it is true or false;

"7. The representer must intend to have the other person induced to act, or justified in acting upon it;

"8. That person must be so induced to act or so justified in acting;

"9. That person\'s action must be in reliance upon the representation;

"10. That person must suffer damage;

"11. That damage must be attributable to the misrepresentation, that is, the statement must be the proximate cause of the injury."

Id. at 591.⁴

It is important to emphasize that, in Minnesota, the element of scienter, or intent to deceive, or even recklessness, is not necessary to actionable fraud. As the Minnesota Supreme Court stated in Swanson v. Domning, 251 Minn. 110, 86 N.W.2d 716, 720-721 (1957):

"It is immaterial whether a statement made as of one\'s own knowledge is made innocently or knowingly. An intent to deceive no longer is necessary. Nor is it necessary to prove that defendants knew the representations were false.

* * * * *

"* * * It is not necessary that the statement be recklessly or carelessly made. It makes no difference how it is made if it is made as an affirmation of which defendant has knowledge and it is in fact untrue. The right of recovery in a case of this kind is based on the fact that such statement, being untrue in fact, relied upon by the other party in entering into the transaction, has resulted in the loss to him which he should not be required to bear." (Footnotes omitted.)

See also Berryman v. Riegert, 286 Minn. 270, 175 N.W.2d 438 (1970).

While accepting the above as a correct statement of Minnesota law, SBC raises two arguments in opposition to the trial court's finding of liability for fraud. It first argues that the trial court erred in applying the Minnesota law of fraud to the present situation. The argument is rooted in what SBC considers to be a legal inconsistency in the trial court's findings. It is developed by SBC as follows:

(1) The trial court found certain aforementioned representations made to SM to be actionable under the Minnesota law of fraud.

(2) The trial court found that these same representations did not give rise to an express...