Golden Spread Elec. Coop., Inc. v. Emerson Process Mgmt. Power & Water Solutions, Inc.

• Decision Date: 08 April 2020
• Docket Number: No. 19-10238,19-10238
• Citation: 954 F.3d 804
• Court: U.S. Court of Appeals — Fifth Circuit
• Parties: GOLDEN SPREAD ELECTRIC COOPERATIVE, INCORPORATED, Plaintiff - Appellant Westport Insurance Company, as subrogee of Golden Spread Electric Cooperative, Incorporated, Intervenor - Appellant v. EMERSON PROCESS MANAGEMENT POWER & WATER SOLUTIONS, INCORPORATED, Defendant - Appellee

954 F.3d 804

GOLDEN SPREAD ELECTRIC COOPERATIVE, INCORPORATED, Plaintiff - AppellantWestport Insurance Company, as subrogee of Golden Spread Electric Cooperative, Incorporated, Intervenor - Appellant

v.EMERSON PROCESS MANAGEMENT POWER & WATER SOLUTIONS, INCORPORATED, Defendant - Appellee

No. 19-10238

United States Court of Appeals, Fifth Circuit.

FILED April 8, 2020

Mark R. Pickering, Donato, Minx, Brown & Pool, P.C., Houston, TX, Reagan William Simpson, Esq., April L. Farris, Yetter Coleman, L.L.P., Houston, TX, Lawrence Matthew, Mullin Hoard & Brown, L.L.P., Lubbock, TX, Brook F. Minx, Zabel Freeman, L.L.P., Houston, TX, for Plaintiff-Appellant.

James Donovan Dendinger, Cozen O'Connor, P.C., Dallas, TX, for Intervenor-Appellant.

James E. Breitenbucher, Patrick D. McVey, Fox Rothschild, L.L.P., Seattle, WA, David M. Gunn, Beck Redden, L.L.P., Houston, TX, Tate Louis Hemingson, Clark Hill Strasburger, Dallas, TX, Elizabeth Bonvillain Kamin, Clark Hill Strasburger, Houston, TX, Matt Douglas Matzner, Esq., Crenshaw, Dupree & Milam, L.L.P., Lubbock, TX, for Defendant-Appellee.

Before WIENER, HIGGINSON, and HO, Circuit Judges.

WIENER, Circuit Judge:

Plaintiff-Appellant Golden Spread Electric Cooperative, Inc. ("Golden Spread") and Intervenor-Appellant Westport Insurance Company ("Westport") appeal the dismissal of their tort claims against Defendant-Appellee Emerson Process Management Power & Water Solutions, Inc. ("Emerson"). Golden Spread and Westport (collectively, "Appellants") contend that the district court erred in applying Texas’s economic loss rule to bar tort remedies for damage to a turbine generator. For the reasons discussed below, we AFFIRM.

I. BACKGROUND

The parties do not dispute the facts in this case. Golden Spread is a public utility. It operates a power generation facility in Texas that employs several turbine generators, including an Alstom steam turbine generator known as Unit 3. That generator was purchased from Alstom and installed from 1999 to 2000. Emerson played no part in the design, sale, or installation of Unit 3 or its original control system.

In 2013, Golden Spread asked Emerson to make a proposal for upgrading Unit 3’s control system. As described by Emerson,

The control system includes computer hardware, software[,] and associated equipment, and is the control interface for all engagement and control functions of the steam turbine to include, but not limited to[:] an interface to field instrumentation, complete control of system devices, startup and shutdown sequencing, [and] adjusting system settings and inputs/outputs that the turbine converts into energy. The control system is also the necessary means for operation and control of the steam turbine’s integrated subsystems.

Emerson visited the power generation facility to gather information and made a proposal to Golden Spread in early 2014 for the provision of a new, customized control system. Emerson did not simply offer to supply a part. Its letter proposed to provide Golden Spread with "detailed project engineering, control strategy implementation, system testing, system start-up[,] and ongoing support" for the upgrade effort. The parties completed their contract in March 2014 after specifically negotiating over liability issues.

Emerson installed the new control system pursuant to the contract. In March 2015 during testing and commissioning of the new control system, Unit 3 suffered a power failure. As the turbine coasted to a stop, the control system failed to maintain the flow of oil lubricant, causing the turbine to overheat and suffer damage. The control system’s software had been programmed incorrectly; it issued a stop command to a specific lubricant pump while the turbine was spinning and while no other source of lubricant was available. Golden Spread made a warranty claim to Emerson, which Emerson satisfied by modifying the control system software. Golden Spread returned Unit 3 to service and obtained nearly $8 million from its insurance.

Golden Spread sued Emerson in state court for breach of contract, negligence, and products liability, seeking more than $8 million in damages. Emerson removed the case to federal court on the basis of diversity jurisdiction. Intervenor-Appellant Westport Insurance Company intervened as subrogee of Golden Spread. The district court adopted the magistrate judge’s recommendations, granting summary judgment for Emerson and dismissing all claims against it. The court dismissed Appellants’ contract claims because Golden Spread had not revoked acceptance of the contract, and because Emerson satisfied its sole duty under the contract, viz., to remedy the defective software. The district court dismissed Appellants’ tort claims (negligence and products liability) as barred by the economic loss rule.

Appellants now appeal only the district court’s ruling as to their tort claims. They contend that, under Texas law, the damage to Unit 3 was damage to other property not covered by the economic loss rule.

II. STANDARD OF REVIEW

The facts are not in dispute, so we review de novo the district court’s grant of summary judgment "to determine whether it was rendered according to law." United States v. Jesco Const. Corp. , 528 F.3d 372, 374 (5th Cir. 2008). Whether the economic loss rule bars Appellants’ tort claims is a question of law. See McCaig v. Wells Fargo Bank (Tex.), N.A. , 788 F.3d 463, 474 (5th Cir. 2015) ; Eagle Oil & Gas Co. v. Shale Expl., LLC , 549 S.W.3d 256, 268 (Tex. App.—Houston [1st Dist.] 2018, pet. dism’d).

III. ANALYSIS

"When adjudicating a claim for which state law provides the rule of decision, federal courts are bound to apply the law as interpreted by the state’s highest court. ..." Terrebonne Par. Sch. Bd. v. Columbia Gulf Transmission Co. , 290 F.3d 303, 317 (5th Cir. 2002). When, as is the case here, the state’s highest court has not spoken to a particular issue, we must make an Erie guess to "determine, in our best judgment, how we believe that court would resolve [it]." 84 Lumber Co. v. Cont’l Cas. Co. , 914 F.3d 329, 333 (5th Cir. 2019) (quoting Boyett v. Redland Ins. Co. , 741 F.3d 604, 607 (5th Cir. 2014) ); see also Erie R.R. Co. v. Tompkins , 304 U.S. 64, 77–80, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). "In making an Erie guess, we defer to intermediate state appellate court decisions, ‘unless convinced by other persuasive data that the highest court of the state would decide otherwise.’ " Mem’l Hermann Healthcare Sys. Inc. v. Eurocopter Deutschland, GMBH , 524 F.3d 676, 678 (5th Cir. 2008) (quoting Herrmann Holdings Ltd. v. Lucent Techs. Inc. , 302 F.3d 552, 558 (5th Cir. 2002) ).

Under Texas law, the economic loss rule generally prevents recovery in tort for purely economic damage unaccompanied by injury to persons or property. See LAN/STV v. Martin K. Eby Const. Co. , 435 S.W.3d 234, 235 (Tex. 2014) ; Sharyland Water Supply Corp. v. City of Alton , 354 S.W.3d 407, 418 (Tex. 2011) ; see also Am. Eagle Ins. Co. v. United Techs. Corp. , 48 F.3d 142, 144 (5th Cir.), on reh’g , 51 F.3d 468 (5th Cir. 1995). There are two principal rationales for the rule: (1) Purely economic harms proliferate widely and are not self-limiting in the way that physical damage is, possibly leading to indeterminate liability and pressure to avoid economic activity altogether; and (2) the risks of economic harms are better suited to allocation by contract because (a) the parties usually have a full opportunity to consider their positions and manage risks ahead of time, and (b) pecuniary remedies are fungible. LAN/STV , 435 S.W.3d at 240–41 (quoting RESTATEMENT ( THIRD ) OF TORTS: LIABILITY FOR ECONOMIC HARM § 1 cmt. c ( AM. LAW INST. , Tentative Draft No. 1, 2012)). "The rule is based on the proposition that commercial parties may negotiate for whatever warranty or liability limits they choose, and adjust their price accordingly." Equistar Chems., L.P. v. Dresser-Rand Co. , 123 S.W.3d 584, 590 (Tex. App.—Houston [14th Dist.] 2003), rev’d on other grounds , 240 S.W.3d 864 (Tex. 2007). Thus, the economic loss rule also serves to enforce the boundary between tort and contract, encouraging parties to contract ahead of time how to allocate risks, and to ensure that those allocations will not be undone later by the application of tort law. See LAN/STV , 435 S.W.3d at 240 ; RESTATEMENT ( THIRD ) OF TORTS: LIABILITY FOR ECONOMIC HARM § 3 cmt. b. "In operation, the rule restricts contracting parties to contractual remedies for those economic losses associated with the relationship, even when the breach might reasonably be viewed as a consequence of a contracting party’s negligence." Lamar Homes, Inc. v. Mid-Continent Cas. Co. , 242 S.W.3d 1, 12–13 (Tex. 2007).

The Texas Supreme Court directs that "the application of the [economic loss] rule depends on an analysis of its rationales in a particular situation." LAN/STV , 435 S.W.3d at 245–46. Still, we need not start entirely from scratch. When a defect in a product deprives a buyer of profits, those are purely economic damages recoverable only in contract. Hininger v. Case Corp. , 23 F.3d 124, 126 (5th Cir. 1994) (denying recovery in tort of profits lost when tractor wheels broke). Physical damage is generally recoverable in tort, but a defective product causing damage to itself is not enough—the economic loss rule still limits recovery for such damage to contract. See LAN/STV , 435 S.W.3d at 241, n.33 ; Equistar Chems., L.P. v. Dresser-Rand Co. , 240 S.W.3d 864, 867 (Tex. 2007). This is because "damage to the product itself is essentially a loss to the purchaser of the benefit of the bargain with the seller," recoverable in contract rather than tort. Mid Continent Aircraft Corp. v. Curry Cty. Spraying Serv., Inc. , 572 S.W.2d 308, 313 (Tex. 1978). If, however, the defective product damages other property, the economic loss rule does not bar recovery in tort for those damages. See Signal Oil & Gas Co. v. Universal Oil Prod. , 572 S.W.2d 320, 325 (Tex. 1978) (...