Emerson Elec. v. American Permanent Ware

• Decision Date: 15 August 2006
• Docket Number: No. 05-04-01266-CV.,05-04-01266-CV.
• Citation: 201 S.W.3d 301
• Parties: EMERSON ELECTRIC CO. d/b/a Chromalox, Appellant v. AMERICAN PERMANENT WARE CO., Appellee.
• Court: Texas Court of Appeals

201 S.W.3d 301

EMERSON ELECTRIC CO. d/b/a Chromalox, Appellant v. AMERICAN PERMANENT WARE CO., Appellee.

No. 05-04-01266-CV.

Court of Appeals of Texas, Dallas.

August 15, 2006.

Rehearing Overruled October 9, 2006.

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Scott J. Atlas, Weil, Gotshal & Manges LLP, Houston, Richard Illmer, Brown, McCarroll, L.L.P., Dallas, and Penelope E. Nicholson, Law Office of Vinson & Elkins, L.L.P., Houston, for Appellant.

Scott S. Hershman, Lackey Hershman, L.L.P., Dallas, and John W. Bickel II, Bickel & Brewer, Dallas, for Appellee.

Before Chief Justice THOMAS and Justices WHITTINGTON and FRANCIS.

OPINION

Opinion by Justice FRANCIS.

This appeal arises out of a dispute between American Permanent Ware Co. (APW) and Emerson Electric Co. d/b/a Chromalox over the design and manufacture of heating elements for a bagel toaster. A jury found Emerson liable on APW's claims for breach of contract and breach of express and implied warranties and awarded more than $2.1 million in damages. The trial court rendered judgment on the jury's verdict and also awarded attorney's fees as well as pre- and post-judgment interest.

In sixteen issues, Emerson challenges the liability findings, the trial court's directed verdict on its limitation of remedies and disclaimer of warranty issues, the attorney's fee award, and the failure to allow a settlement credit. In a cross-issue, APW complains the trial court erred in failing to award an additional $19.5 million in damages. For reasons set out below, we sustain the issue regarding the settlement credit, reverse the judgment with respect to that issue only, and remand for the trial court to (1) deduct the full amount of the Maytag settlement from APW's damage award and (2) recalculate the amount of prejudgment interest on the actual damages. We affirm the trial court's judgment in all other respects.

Einstein Brothers Bagels asked APW to design a fifteen-second bagel toaster. At the time, the standard toasting time for bagels was forty-five to sixty seconds. In response, APW designed the BT-15, a toaster with a conveyor belt requiring multiple heating elements. In 1995 and 1996, APW sent out heating element specifications to four potential manufacturers, including Emerson. The specifications required a one-year warranty. Although Emerson bid on the contract, APW selected Heatube, a division of Maytag, to manufacture the elements.

In April 1998, Emerson purchased the assets of Heatube from Maytag and assumed its contractual obligations, including the manufacture of the heating elements. Emerson continued to supply APW with heating elements manufactured in the Heatube plant until late 1998 when Emerson transferred production of the elements to its Chromalox plant. Up until that point, APW had purchased fewer than 250 elements.

In 1998, APW received orders for 15,000 BT-15 toasters from two restaurant chains, McDonald's and Kentucky Fried Chicken. The first of the three major bagel toaster rollouts took place in January 1999. Three months later, APW informed Don Shuhart of Don Shuhart Company, Emerson's manufacturing representative, that a significant number of heating elements failed while in use in the toasters. Consequently, in April, Shuhart visited the APW plant. During that visit, Shuhart observed the manufacturing of the BT-15 toaster and saw APW employees bending the elements during the assembly process. Believing the bending was causing the elements to fail, Shuhart suggested APW change its assembly process. APW instituted the change, but the failures continued.

At that point, Shuhart recommended sealing the crown of each element with silicone, and APW returned the elements to Emerson for sealing. When sealing the elements did not decrease the failure rate, Shuhart suggested Emerson had produced a "bad" batch of elements, identified at trial as R-1. In response, APW purged all R-1 elements from its inventory, but again the failures continued. Shuhart then told APW there was a problem with a second batch of elements, R-2, and advised APW to stop using those elements. APW purged the R-2 batch of elements from its inventory. Still, the elements continued to fail.

In September 1999, APW informed Emerson it had incurred more than $77,000 in expenses related to the element failures. In addition to purchasing new elements, APW expended funds in shipping and service fees because it had to replace elements at numerous restaurants across the country. APW's director of technical services and customer service, Bart Bolton, testified he was receiving 100 complaints a day regarding the failed elements and was working fourteen to sixteen hours a day, six days a week, to try to resolve the issues. Bolton testified he had to hire temporary workers to assist him in handling the complaints. By November 1999, APW estimated it had spent nearly $300,000 related to element failures.

In the last quarter of 1999, APW sent a bagel toaster to Emerson for inspection. At a December meeting, Emerson suggested that APW wire the elements "in series" rather than "in parallel" and lower the voltage for each element. However, Emerson could not assure APW that this would cure the problem. Since Emerson had not identified a specific cause for the element failures, APW sought assistance from Watlow, another element manufacturer. Watlow determined there was a design flaw in that the elements required a thicker wire to withstand the heat produced inside the bagel toaster. In addition, Watlow suggested wiring the elements in series. Watlow produced new elements, and at the time of trial, APW had placed 100,000 Watlow elements in toasters in the field with only fifty complaints.

In December 2000, Emerson division president John Stoops wrote a letter to APW denying that the element failures were the result of "any defect in our product but solely the result of APW's misapplication and inappropriate appliance design." Stoops notified APW that, in light of APW's refusal to modify the toaster design "and the currently pending litigation," Emerson would no longer supply APW with the heating elements. (APW filed lawsuits against Emerson in February and July 2000, but dismissed both. Emerson filed this suit in September 2000.)

APW and its parent company, Associated American Industries, Inc. (AAI), sued Maytag and Emerson as well as the Donald Shuhart Company for breach of contract, breach of express and implied warranties, negligence, negligent misrepresentation, DTPA violations, fraud, and fraud in the inducement. The trial court granted summary judgment against AAI on all of its claims and against APW on its claims for negligence, negligent misrepresentation, and fraud. APW settled with Maytag before trial. The remaining claims were tried to a jury.

Following a six-week trial, the trial court granted a directed verdict against Emerson on its affirmative defenses that it disclaimed warranties and limited the buyer's remedies. The jury found in APW's favor on its breach of contract and warranty claims and awarded the same damages for each: $1,831,000 for out-of-pocket expenses and $333,000 in lost profits, incurred after April 23, 1998. APW's claim for attorney's fees was tried to the court, which did not require APW to segregate the fees and awarded $2,678,904. This appeal ensued.

In its first issue, Emerson complains APW cannot recover for breach of contract as a matter of law because APW accepted the elements and, under the Uniform Commercial Code, was therefore limited to breach of warranty claims. Although Emerson acknowledges that the UCC does not preclude contract damages when the buyer has either rejected or revoked acceptance of the goods, it argues APW failed to plead, prove, or obtain a jury finding on that issue and there is no legally and factually sufficient evidence to support such a finding. We begin with Emerson's complaint regarding APW's pleadings.

Texas follows a "fair notice" standard for pleading, which tests whether the opposing party can ascertain from the pleading the nature and basic issues of the controversy and what testimony will be relevant. Horizon/CMS Healthcare Corp. v. Auld, 34 S.W.3d 887, 896 (Tex.2000); COC Servs., Ltd. v. CompUSA, Inc., 150 S.W.3d 654, 677 (Tex.App.-Dallas 2004, pet. denied). "A petition is sufficient if it gives fair and adequate notice of the facts upon which the pleader bases his claim." Horizon, 34 S.W.3d at 897. The rule's purpose is to give the opposing party information sufficient to enable him to prepare a defense. Id.

An opposing party should use special exceptions to identify defects in a pleading so the other party can cure them, if possible, by amendment. Id.; COC Servs., 150 S.W.3d at 677. Texas Rule of Civil Procedure 90 governs special exceptions:

Every defect, omission or fault in a pleading either of form or of substance, which is not specifically pointed out by exception . . . shall be deemed to have been waived by the party seeking reversal on such account . .

TEX.R. CIV. P. 90. When a party fails to specially except, courts should construe the pleadings liberally in favor of the pleader. Horizon, 34 S.W.3d at 897; COC Servs., 150 S.W.3d at 654.

Emerson did not specially except to APW's breach of contract claim. Given this failure, we question whether Emerson has preserved this issue for review. Regardless, construing the pleadings liberally in APW's favor, we conclude they are sufficient to put Emerson on notice of the issue of rejection or revocation of acceptance.

In its ninth amended petition, APW alleged facts to sustain both a breach of contract and breach of warranty cause of action. In particular, APW alleged that Emerson continued to produce and sell the Maytag-designed heating elements; the elements were defective; and the defects forced APW to replace them in a large number of toasters nationwide. APW further alleged that it ...