Dunbar Medical Systems Inc. v. Gammex Inc.

• Decision Date: 21 June 2000
• Docket Number: No. 99-20274,99-20274
• Parties: (5th Cir. 2000) DUNBAR MEDICAL SYSTEMS INC Plaintiff - Counter Defendant - Appellee v. GAMMEX INC, formerly known as Radiation Measurements Inc Defendant - Counter Claimant - Appellant
• Court: U.S. Court of Appeals — Fifth Circuit

Page 441

216 F.3d 441 (5th Cir. 2000)

DUNBAR MEDICAL SYSTEMS INC Plaintiff - Counter Defendant - Appellee v. GAMMEX INC, formerly known as Radiation Measurements Inc Defendant - Counter Claimant - Appellant

No. 99-20274

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

June 21, 2000

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

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

Before KING, Chief Judge, and REAVLEY and STEWART, Circuit Judges.

KING, Chief Judge:

Gammex Inc. appeals the district court's entry of judgment on Dunbar Medical Systems Inc.'s fraudulent inducement claim, arguing that two clauses in the parties' settlement agreement or Texas Rule of Civil Procedure 11 bar that claim. Gammex further contends that the court erred in finding that there was no intent to perform at the time the alleged misrepresentations were made, in awarding punitive damages given the existence of contract language barring the recovery of such damages, in awarding punitive damages given the elements of fraud had not been proved by clear and convincing evidence, and in awarding pre-judgment interest on both compensatory and punitive damages. We affirm the entry of judgment and the award of punitive damages, and reform the judgment solely to clarify the pre-judgment interest award.

I. FACTUAL AND PROCEDURAL BACKGROUND

Gammex Inc. is a manufacturer of teleradiology equipment, which is used to digitize data from a medium such as x-ray film or ultrasound and to transmit those data to a remote unit for purposes of medical review and diagnosis. Until 1994, Ms. Linda Dunbar, president and sole shareholder of Dunbar Medical Systems, Inc. ("DMSI"), was an independent distributor of teleradiology equipment for Gammex.¹ A by-product of the dissolution of the parties' relationship was a lawsuit, filed by Gammex on April 28, 1994, in which Gammex sought return of equipment and damages ("1994 Litigation"). In February 1995, DMSI filed a counterclaim asserting breach of contract, fraud, defamation, and various other claims against Gammex. Shortly before trial, the parties executed a Settlement Agreement. That Agreement is the focus of the case before us.

Discussions leading up to the execution of the Settlement Agreement occurred between December 1995 and July 1996. In December, the parties participated in unsuccessful court-ordered mediation. Sometime thereafter, Ms. Margaret Lescrenier, a vice-president of Gammex, telephoned Ms. Dunbar to discuss settlement terms, including the possibility of transferring equipment to DMSI in lieu of cash. The district court found that in that conversation, Ms. Dunbar told Ms. Lescrenier that she did not want to consider older Courier II units because they had software and hardware defects.² According to Ms. Dunbar, Ms. Lescrenier assured her that the units would be new and come from the latest run of fifty manufactured by Gammex and would be problem free. A follow-up letter dated February 1, 1996 faxed by Ms. Lescrenier to Ms. Dunbar listed various equipment, including ten Courier II units, that Gammex was willing to give DMSI. The letter gave a list price of the Courier II units of $10,000 each, a total list priceof all offered equipment of $203,600, and stated that "[t]he majority of the above equipment is new, never been used. Some of the Courier computers were demonstration units."

On February 8, Ms. Dunbar sent a fax to Ms. Lescrenier that responded to the proposal. That transmission included a list of the same equipment along with dealer transfer prices. Ms. Dunbar's fax indicated that, based on the dealer prices, the actual value of Gammex's proposal was $44,654.25. Ms. Dunbar also stated that she did not "know what to do" with some of the listed equipment, and that there had to be a cash settlement along with the equipment package.

The two principals again corresponded later in February. Ms. Lescrenier proposed as a counteroffer a new combination of equipment and $50,000 in cash. Ms. Dunbar, the district court found, emphasized in a phone conversation with Ms. Lescrenier the importance to DMSI that the equipment (including the Courier IIs) be new. Ms. Lescrenier made the same representations as earlier -- that the Courier IIs were from the latest production run and that for the most part, the equipment was new or demonstration units and thus practically new. Ms. Dunbar requested a particular type of camera that normally went with the base units that were part of the proposed package, but was told that Gammex had none in stock and did not wish to purchase one merely for purposes of settlement.³

These discussions were outlined in a fax dated February 26. That communication (1) explained the equipment substituted for the items for which Ms. Dunbar indicated she had no use; (2) made reference to an exclusive dealer contract, a definition of a sales territory, service arrangements, and assistance with advertising that were agreed to in earlier mediation proceedings, and (3) offered $50,000 in cash. The total list price associated with the new equipment package was $203,975, and again, the communication indicated that the majority of the equipment was "new, never been used" and that "[s]ome of the Courier computers were demonstration units." The fax also stated that Ms. Dunbar had "misstated the value of the equipment in the original list" in her February 8 response.

Negotiations resumed in late April, when Ms. Dunbar's attorney contacted Gammex's counsel. By April, DMSI was no longer interested in maintaining certain relationships with Gammex,⁴ and it indicated that several aspects of the earlier proposals were no longer of value (e.g., a new distributorship agreement, assistance with advertising). Negotiations between the parties' counsel dealt, inter alia, with the amount of cash Gammex was to pay to DMSI, the equipment to be transferred (e.g., whether mouses and cables were included, whether a six-month warranty would be included, configuration and programming issues), the availability of documentation regarding the equipment, the availability of discounts on such items as replacement parts, responsibility for shipping and insurance costs, and the timing of the delivery of the cash and the equipment. Thus, the focus of the second stage was on the consideration Gammex was to give DMSI in return for DMSI releasing its claims.

The parties eventually agreed to Gammex's releasing claims related to the 1994 Litigation, and transferring to DMSI the equipment listed in Ms. Lescrenier's second proposal and $70,000 in cash. The final agreement included three express warranties: (1) that Gammex "has good and clear title to the Equipment, and that the Equipment is free of all liens, mortgages and encumbrances at the time of shipment to Dunbar Medical"; (2) that the equipment "is either new and has never been used, or has previously been used as demonstration or loaner equipment"; and (3) that the "Equipment, at the time of shipment to Dunbar Medical, is working and operational in accordance with the manufacturer's specifications applicable to each item included in the Equipment." In return, DMSI agreed to release claims related to the 1994 Litigation. The agreement was signed by Ms. Dunbar, on behalf of herself and DMSI, on July 18, 1996; Charles Lescrenier, Gammex's CEO, signed the agreement on July 23, 1996.

As per the agreement, Gammex transferred $70,000 to DMSI. The parties dismissed, with prejudice, their respective claims. Ms. Dunbar sent to Gammex instructions regarding how the Courier II units were to be configured and programmed. DMSI received equipment from Gammex, albeit after the date stated in the Agreement. After receiving the equipment, some of which was damaged in transit, Ms. Dunbar determined through testing that it differed in significant ways from what it had been represented to be.

As a result, on November 11, 1996, DMSI filed in the 152nd Judicial District Court of Harris County, Texas an action asserting breach of contract and fraud claims. Gammex removed the case on December 23, 1996 to the United States District Court for the Southern District of Texas.⁵ In response to the district court's granting of Gammex's November 28, 1997 motion for a more definite statement, DMSI filed a first amended complaint on January 16, 1998. In that complaint, DMSI alleged breach of contract and fraudulent inducement, and sought $150,000 in compensatory damages, $600,000 in punitive damages, pre- and post-judgment interest, and attorney fees.

Gammex filed a motion for summary judgment on February 2, 1998, arguing, inter alia, that under the Texas Supreme Court's decision in Schlumberger Technology Corporation v. Swanson, 959 S.W.2d 171 (Tex. 1997), the Settlement Agreement barred DMSI's fraudulent inducement claim.⁶ The district court denied Gammex's motion on March 4, 1998, and also denied Gammex's subsequent motion to reconsider.⁷ A three-day bench trial began March 31, 1998. Gammex's motion for a judgment as a matter of law was denied.

In the district court's careful and thorough Findings of Fact and Conclusions of Law, the court admitted DMSI's parol evidence of Gammex's prior oral representations and promises, finding that they did not contradict or vary the Agreement, and instead specified and clarified the nature of the equipment made part of that Agreement. It found that Gammex had breached its contract with DMSI. According to the court:

The evidence revealed that some of the highly technical equipment was not only not new, but outmoded, or defective, or had been used not merely for demonstration or loaner purposes. The ten Courier II units were not programmed as set forth by Linda Dunbar in breach of Paragraph 2.2 of the Agreement. The evidence, both testimonial and spreadsheet documentation, showed that upon arrival, none of the ten Courier IIs captured images off the digitizer or ultrasound and that the...