DHL Express (USA), Inc. v. Falcon Express Int'l, Inc.

• Decision Date: 19 September 2013
• Docket Number: No. 01–10–01080–CV.,01–10–01080–CV.
• Citation: 408 S.W.3d 406
• Parties: DHL EXPRESS (USA), INC., Appellant v. FALCON EXPRESS INTERNATIONAL, INC., Appellee.
• Court: Texas Court of Appeals

408 S.W.3d 406

DHL EXPRESS (USA), INC., Appellant

v.FALCON EXPRESS INTERNATIONAL, INC., Appellee.

No. 01–10–01080–CV.

Court of Appeals of Texas, Houston (1st Dist.).

Feb. 14, 2013.

Rehearing Overruled Sept. 19, 2013.

Michael Lamar Brem, Laura Friedl Jones, Schirrmeister Diaz–Arrastia Brem LLP, Houston, TX, William Wayne Oxley, Christopher S. Ruhland, Edwin V. Woodsome, Dechert LLP, Los Angeles, CA, for Appellant.

Stewart E. Hoffer, Hicks Thomas LLP, Houston, TX, for Appellee.

Panel consists of Justices JENNINGS, MASSENGALE, and HUDDLE.

OPINION

REBECA HUDDLE, Justice.

In May 2008, Falcon Express International obtained the rights to buy and resell DHL package delivery services under a DHL Express (USA) Inc. reseller agreement. To obtain those rights, which previously belonged to Freight Savers Express, Inc., Falcon entered into an Assignment and Assumption Agreement with Freight Savers and DHL, in which Falcon agreed to assume Freight Savers's obligations under the reseller agreement, including Freight Savers's significant outstanding debt to DHL.

Over the next few months, DHL sold its package delivery services to Falcon, which, in turn, resold them to its customers, pursuant to the terms of the reseller agreement. But Falcon fell behind in its payments to DHL and, on that basis, DHL terminated the reseller agreement effective November 7, 2008. Three days later, DHL announced it was discontinuing domestic package delivery services, a large part of Falcon's business.

Falcon sued DHL, seeking rescission of the assumption agreement on the theory that Falcon was induced to enter into the assumption agreement by DHL's deliberately misleading statements that it had “ruled out” a cessation of its U.S. domestic shipping services. DHL countersued for breach of contract, to recover amounts it claimed were due from Falcon under the reselling and assumption agreements. The trial court's judgment awarded Falcon $1.7 million under a rescission theory and $3.2 million in punitive damages based on the jury's finding that DHL committed fraud by failing to disclose to Falcon a material fact—that DHL still was contemplating exiting the domestic package delivery services market—before Falcon entered into the assumption agreement. The trial court's judgment also recited that DHL shall take nothing on its counterclaim for breach of contract.

DHL appeals, contending, among other things, that Falcon's fraud claim is preempted by the Airline Deregulation Act of 1978 (49 U.S.C. § 41713(b)(1)) and the Federal Aviation Administration Authorization Act ( id. § 14501(c)(1)), and that factually insufficient evidence supports the jury's finding that $0 would compensate DHL for Falcon's breach of contract. Finding both contentions meritorious, we reverse the trial court's judgment, dismiss Falcon's fraud claim, and remand DHL's counterclaim for breach of contract.

Background

DHL Express (USA), Inc. is a federally regulated express package delivery company that, in 2008, provided domestic and international package delivery services. While DHL sold its services to larger customers directly, it also sold to resellers, which, in turn, marketed and sold DHL's services to smaller customers. Freight Savers Express, Inc. was one such reseller. It bought and resold DHL's services under the terms of a reseller agreement between Freight Savers and DHL.

In early 2008, DHL had sent Freight Savers notice that it intended to terminate the reseller agreement because Freight Savers had fallen behind in its payments. Three Freight Savers employees, James Fisher, Rick Bouse and David Shavian, decided to form a new entity, Falcon, and have Falcon take over Freight Savers's business. The men had heard rumors that DHL was contemplating exiting the domestic shipping market due to huge financial losses. But there was also evidence the men knew, before they took over Freight Savers's business, that high-level DHL executives had been quoted as saying that DHL had “ruled out the option of withdrawal,” and that DHL “expects to present a plan for the division there in May.” Bouse testified that, the day before Falcon entered into the assumption agreement, Bouse contacted Beth Taylor, his main contact at DHL, to ask about the rumors. According to Bouse, Taylor assured Bouse that the plan for reducing the domestic footprint involved no more than a four percent reduction in services and that the reduction would affect only rural areas in the U.S. The next day, May 28, Fisher signed the assumption agreement on behalf of Falcon, assuming Freight Savers's rights and obligations under Freight Savers's reseller agreement with DHL. The assumption agreement reflects that DHL consented to the assignment and agreed to withdraw its notice of material breach and contract termination on the condition that Falcon pay $1,571,426.31 against Freight Savers's past due debt by May 29.

Falcon met that condition and began doing business under the reseller agreement, but soon fell behind on payments due to DHL. Over the next several months, Falcon repeatedly promised to catch up, but it never did. On September 29, 2008, four months after entering into the assumption agreement, Falcon sent the last payment it would make to DHL. On that same day, DHL informed Falcon that DHL would cease domestic shipping “fairly soon.” Despite this news, Falcon and DHL continued doing business and discussing Falcon's unpaid invoices. In an October meeting, Falcon disputed some of DHL's charges. Shortly thereafter, Bouse sent DHL an email explaining that Falcon felt it had been defrauded because it paid “an awful lot of money ... based on [the] belief that DHL would be in business in the United States.”

On October 24, 2008, DHL sent Falcon a Default Notice demanding payment of approximately $1.6 million. The following week, DHL sent another notice offering to waive $562,000 of the past due debt in exchange for Falcon's agreement to pay $966,348.49, and enter into “a mutual full release of any existing claims.” Falcon did not agree, and DHL terminated the reseller agreement on November 7, 2008. Three days later, DHL announced publicly that it would cease domestic package delivery services.

Falcon sued DHL for fraudulent inducement and fraud, and DHL countersued for breach of contract. After a seven-day trial, the jury found DHL committed “fraud by failure to disclose a material fact prior to [Falcon] entering into the [assumption agreement]” ¹ and awarded out-of-pocket damages in the amount of $1.7 million and punitive damages in the amount of $3.2 million. With respect to DHL's counterclaim for breach of contract, the jury found Falcon breached both the assumption and the reseller agreements, and that $0 would fairly and reasonably compensate DHL for its damages. The trial court entered judgment on the jury's verdict, awarding Falcon the sum of $4.9 million ² and denying DHL relief on its counterclaim for breach of contract. DHL appeals.

Preemption under the ADA and FAAAA

In its first issue, DHL contends Falcon's claim fraud claim is preempted by the Airline Deregulation Act of 1978 (ADA) and the Federal Aviation AdministrationAuthorization Act (FAAAA). Under the Supremacy Clause, if a state law conflicts with federal law, the state law is preempted and without effect. Maryland v. Louisiana, 451 U.S. 725, 746, 101 S.Ct. 2114, 2128–29, 68 L.Ed.2d 576 (1981). Preemption may be either express or implied. Delta Air Lines, Inc. v. Black, 116 S.W.3d 745, 748 (Tex.2003), cert. denied,540 U.S. 1181, 124 S.Ct. 1418, 158 L.Ed.2d 84 (2004). Whether a claim is preempted is an issue of law we review de novo. See Meredith v. La. Fed'n of Teachers, 209 F.3d 398, 404 (5th Cir.2000); Skilled Craftsmen of Tex., Inc. v. Tex. Workers' Comp. Comm'n, 158 S.W.3d 89, 93 (Tex.App.-Austin 2005, pet. dism'd).

Both the ADA and FAAAA have express preemption provisions. The ADA's provides:

A State, political subdivision of a State, or political authority of 2 or more States may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route or service of an air carrier....

49 U.S.C. § 41713(b)(4)(A). Through this provision, Congress expressly preempted state law as applied to the price, route, or service of an air carrier. Morales v. Trans World Airlines, Inc., 504 U.S. 374, 383, 112 S.Ct. 2031, 2036, 119 L.Ed.2d 157 (1992). The FAAAA's preemption provision is similar, but it forbids enactment or enforcement of laws, regulations, or other provisions having the force and effect of law related to a price, route, or service of any motor carrier.49 U.S.C. § 14501(a)(1). Both provisions have the same breadth and express a “broad pre-emptive purpose.” See Morales, 504 U.S. at 384, 112 S.Ct. at 2037 (adopting standards in other preemption contexts to conclude that ADA preemption occurs when State enforcement actions have “a connection with or a reference to” airline rates, routes, or services); Rowe v. N.H. Motor Transp. Ass'n, 552 U.S. 364, 370, 128 S.Ct. 989, 994, 169 L.Ed.2d 933 (2008) (adopting Morales's analysis of ADA provisions in analyzing preemption provisions of FAAAA).

It is undisputed that DHL is both an air carrier and a motor carrier within the statutes' meaning. The question before us, then, is whether enforcement of Falcon's state law fraud claim qualifies as “a law, regulation, or other provision having the force and effect of law related to a price, route, or service” of DHL. Several decisions of the United States Supreme Court and the Texas Supreme Court provide the framework for our analysis.

1. U.S. Supreme Court trio: Morales, Wolens, Rowe

In Morales v. Trans World Airlines, Inc., the Supreme Court construed the ADA's preemption provision as having a broad scope. 504 U.S. at 383, 112 S.Ct. at 2037. The National Association of Attorneys General had promulgated Air Travel Industry Enforcement Guidelines to address allegedly deceptive airline fare...