Datamatic, Inc. v. International Business Machines Corp.

• Decision Date: 28 July 1986
• Docket Number: No. 85-4527,85-4527
• Citation: 795 F.2d 458
• Parties: DATAMATIC, INC., Plaintiff-Appellant, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 458

795 F.2d 458

DATAMATIC, INC., Plaintiff-Appellant, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, Defendant-Appellee.

No. 85-4527.

United States Court of Appeals Fifth Circuit.

July 28, 1986.

Lisa Brener Cusimano, Perret & Castle, Henry C. Perret, Jr., Lafayette, La., for plaintiff-appellant.

Robert E. Barkley, Jr., Sessions, Fishman, Rosenson, Boisfontaine, Nathan & Winn, New Orleans, La., for defendant-appellee.

Appeal from the United States District Court for the Western District of Louisiana.

Before GEE, RUBIN, and GARZA, Circuit Judges.

ALVIN B. RUBIN, Circuit Judge:

Invoking the Louisiana civil-law doctrine of redhibition, La.Civ.Code art. 2520, a purchaser of second-hand computer equipment sued the computer manufacturer to recover purely economic losses resulting from alleged defects in the equipment. The manufacturer defended on the ground that its sales contracts with the original purchasers of the computer equipment included warranty limitations restricting its liability. The district court granted summary judgment for the manufacturer. While the Louisiana cases hold that a buyer who purchases a used product from one who is not a dealer in that product may recover in redhibition from the manufacturer with whom it is not in privity, they are not clear concerning whether the action is based on the buyer's own right or is derived from subrogation to the rights of its vendor. Under either theory, however, a warranty limitation legally operative against the original consumer-buyer is effective against all successive buyers, and we therefore affirm the district court.

I.

In the late 1960s, IBM manufactured certain computer components. It initially sold these components to four different corporations under contracts of sale that expressly limited IBM's warranty liability. The contracts stated:

For one year from the date of installation, IBM warrants the machines ... to be free from defects in material and workmanship.

IBM will not be liable for personal injury or property damages except personal injury or property damage caused by IBM's negligence. IBM shall in no event have obligations or liabilities for consequential damages.

The foregoing Warranties and Limitations are exclusive remedies and are in lieu of all other warranties express or implied, including but not limited to the implied warranty of merchantability. (Emphasis in original.)

ITEL, a Dallas-based computer leasing company, subsequently acquired the IBM components and assembled them into a tape system, which it sold to Datamatic, a Louisiana corporation, in 1974 and 1975 for $75,000. In the contract of sale, ITEL excluded all implied warranties but assigned to Datamatic any rights that ITEL still had against IBM.

Datamatic then made a computer service agreement with IBM. Datamatic contends that, despite regular service by IBM, one of the tape systems continuously malfunctioned from the date it was installed until June 1982, when, six or seven years after Datamatic had purchased the equipment and almost fifteen years after IBM had originally sold it, an IBM engineer discovered a defect in the "terminator," a part incorporated in one of the tape drives. The engineer found that some of the pins or terminals in the terminator had been "wire-wrapped" rather than soldered. Datamatic contends that, once the pins were soldered, the equipment functioned properly.

A few days after this 1982 equipment repair, Datamatic demanded a refund from IBM for all of the maintenance charges attributable to the allegedly defective terminator. When negotiations proved unsuccessful, Datamatic sued IBM in June 1983 in Louisiana state court, alleging that the unsoldered pins constituted a redhibitory defect as defined in La.Civ.Code art. 2520. Datamatic claimed that it was entitled to rescind its purchase of the tape system and to recover these damages: the purchase price of the defective equipment; lost profits; damage to its business reputation; costs of rerunning work; costs incurred as a result of computer "down time"; and maintenance fees paid to IBM. These claims totalled over $960,000.

IBM removed the suit to federal court, and afterwards moved for summary judgment. The district court applied Louisiana law and held that Datamatic did have a claim in redhibition against IBM. The court concluded, however, that the basis of Datamatic's right to recover against IBM was its subrogation to any rights against IBM that ITEL, Datamatic's seller, may have had under the contracts it or its predecessors had with IBM. Finding that the warranty limitations contained in these contracts would have precluded ITEL's recovery from IBM, the court concluded that Datamatic's claim was similarly barred. ¹

II.

IBM contends that New York law applies to Datamatic's claim because the original contracts of sale for the computer equipment provided that the agreement would be governed by New York law. Datamatic argues that it cannot be bound to a choice-of-law provision in a contract to which it was not a party, and contends that application of Louisiana choice-of-law principles requires that the court apply Louisiana law. The district court agreed, deciding that redhibition cases have been treated like tort actions for purposes of conflicts analysis. ² However, we need not wrestle with this choice-of-law question. Datamatic concedes that it would not have a cause of action against IBM under New York law in the absence of privity. Its only hope of recovery lies in the Louisiana law of redhibition. Because we find that Datamatic cannot recover under Louisiana law, we do not consider the possible applicability of New York law. ³

III.

Sales of goods in Louisiana carry an implied warranty that the goods are free of hidden defects ("redhibitory vices") and are reasonably fit for their intended use. ⁴ This warranty against redhibitory vices arises out of the contract of sale. ⁵ If a redhibitory vice exists, the buyer may demand reduction of the purchase price ⁶ or rescission of the sale. ⁷ If, however, the seller knew of the defective nature of the product and concealed the vice from the buyer, he is considered to be in bad faith, and the law permits the buyer to recover damages and attorneys' fees in addition to the purchase price. ⁸ A manufacturer is presumed to know of the defects in its products and is therefore always in constructive "bad faith." ⁹

Datamatic's claim against IBM is unusual because it involves factors that are not typically found together in a redhibition suit: a claim against a nonseller manufacturer of allegedly defective equipment purchased second-hand from an intermediate owner who was not a dealer in the manufacturer's products. Therefore, the issue is whether a buyer in Datamatic's situation is entitled to bring a claim in redhibition against the manufacturer.

Privity of contract is no longer a prerequisite to a redhibitory action under the Civil Code. The Louisiana Supreme Court abolished that requirement in Media Production Consultants, Inc. v. Mercedes-Benz of North America. ¹⁰ Adopting a "consumer-protection" rule, the court there allowed a buyer who had purchased a defective new automobile from a dealer to recover directly from the car's manufacturer. Thus, lack of privity is irrelevant when the claim involves defects in equipment purchased new by the plaintiff from a dealer who is franchised by the manufacturer. It is not as clear whether the buyer of used equipment who buys from an intermediate buyer and user has the same right. Louisiana courts have held that a buyer of used equipment does have an action in redhibition against the seller of that equipment, but the warranty is not as extensive as that implied in sales of new goods. ¹¹ One Louisiana court of appeal has permitted the buyer of used goods an action in redhibition against the manufacturer when the manufacturer's representatives, its dealer, and the second seller, all had actual knowledge of the defect before the resale, and the defect became known during the time when the manufacturer's express warranty was in effect. ¹² Considering Media's emphasis on consumer protection, however, we see no reason why a Louisiana court would limit a buyer's action in redhibition to such circumstances. We therefore agree with the district court that a buyer of used goods is entitled to bring a redhibitory action against the goods' manufacturer.

IV.

The action in redhibition is inherently contract-based. Both the theory of the action and the relief available differ from those applicable to a suit in tort. Datamatic, however, asserts only a claim in redhibition, perhaps because of statute of limitations problems or perhaps because of differences in allowable remedies. We must, therefore, determine the extent of Datamatic's contractual (redhibitory) rights against IBM. IBM argues that Datamatic can recover only so much as its predecessors in title could have recovered. IBM's thesis is that a buyer proceeding "in contract" against a seller with whom it is not in privity has no rights of its own but is merely subrogated to the rights of its seller. It contends that, in consequence, the warranty-limitation provisions in the contracts it executed with the original buyers are, assuming their validity, equally operative against Datamatic. Datamatic, relying on Media, contends that its rights are not restricted to those of ITEL, its seller, but arise independently from those of intervening buyers and, for this reason, the provisions in the IBM sales contracts have no effect against it.

Media was a suit by the buyer of a defective automobile to rescind the sale of the automobile and to recover the purchase price from the manufacturer. The buyer had purchased the car from a dealer franchised by the manufacturer who, at the time of suit, was defunct. With its purchase the buyer had received a manufacturer's express warranty containing a clause stating that it superseded all other warranties,...