Hiller v. Manufacturers Product Research Group of North America, Inc.

• Decision Date: 04 August 1995
• Docket Number: No. 93-8421,93-8421
• Citation: 59 F.3d 1514
• Parties: 27 UCC Rep.Serv.2d 795 Sam B. HILLER, et al., Plaintiffs, Federal Signal Corp., Plaintiff-Appellant, v. MANUFACTURERS PRODUCT RESEARCH GROUP OF NORTH AMERICA, INC., Intervenor-Plaintiff-Appellee, v. DURAVISION, INC., et al., Defendants, Duravision, Inc., Defendant-Appellee. DURAVISION, INC., et al., Plaintiffs, Duravision, Inc., Plaintiff-Appellee, v. FEDERAL SIGNAL CORP., Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1514

59 F.3d 1514

27 UCC Rep.Serv.2d 795

Sam B. HILLER, et al., Plaintiffs, Federal Signal Corp., Plaintiff-Appellant, v. MANUFACTURERS PRODUCT RESEARCH GROUP OF NORTH AMERICA, INC., Intervenor-Plaintiff-Appellee, v. DURAVISION, INC., et al., Defendants, Duravision, Inc., Defendant-Appellee.

DURAVISION, INC., et al., Plaintiffs, Duravision, Inc., Plaintiff-Appellee, v. FEDERAL SIGNAL CORP., Defendant-Appellant.

No. 93-8421.

United States Court of Appeals, Fifth Circuit.

Aug. 4, 1995.

Order Denying Rehearing Sept. 1, 1995.

Roger Townsend, Joy Soloway Fulbright & Jaworski, Holman, Hogan, Dubose & Townsend, Houston, TX for Federal Signal Corp.

Pete F. Andarsio, Jerry Kacal, Karen Alvarado, Dunn, Kacal, Adams, Pappas & Law, P.C., Houston, TX, for Manufactures Product Research.

Sam L. Stein, Robert E. Garner, Joe L. Lovell, Tim D. Newsom, Garner, Lovell & Stein, P.C., Amarillo, TX, for Duravision, Inc.

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

Before GARWOOD and EMILIO M. GARZA, Circuit Judges, and HEAD, District Judge. ^*

EMILIO M. GARZA, Circuit Judge:

Federal Signal Corporation ("Federal") appeals from a judgment entered against it after trial before a jury. After finding Federal liable for fraud and violations of the Texas Deceptive Trade Practices and Consumer Protection Act ("DTPA"), Tex.Bus. & Com.Code Ann. Secs. 17.41-17.63 (Vernon 1987), the jury awarded Duravision, Inc. ("Duravision") and Manufacturers Product Research Group of North America, Inc. ("MPR"), compensatory damages for lost profits, and punitive damages. Federal appeals this damage award, and we vacate and remand. ¹

I

In 1987 Marc Johnson was hired by an advertising company called Rollavision, U.S.A., Inc., which was in the business of selling ads displayed on large video units in grocery stores, banks, airports, and other public places frequented by consumers. Film inside each machine rotated periodically, displaying in succession as many as twenty-five to thirty advertisements. Johnson worked as an ad salesman for Rollavision from October 1987 to December 1987, and his exposure to Rollavision influenced him to start a business of his own, selling ads for machines like the ones used by Rollavision.

After leaving Rollavision, Johnson met with representatives of Federal, and informed them that he wanted to develop a display machine, for placement in public establishments, which would handle multiple ads and display them frequently during the day. Federal represented to Johnson that it was well-equipped to design and manufacture a device which would meet his needs. Johnson incorporated Duravision, Inc., and ten days later Duravision and Federal agreed that Federal would construct twenty display machines capable of housing from eight to forty transparency frames, and Duravision would buy the units for $3,100 each. An addendum to that agreement, executed several months later, provided that Federal would not sell a Duravision display machine to anyone other than Duravision, as long as Duravision purchased at least 100 signs every twelve months.

Duravision then began marketing the machines, assigning to MPR the exclusive right to buy Duravision displays from Federal for export to Mexico and to all of South America except Colombia. In return Duravision was to receive one-half of MPR's profits on the resale of the machines, as well as one-half of any license fees received by MPR. A Mexican firm, Servicios Tecnicos Orientados al Commercio ("STOC"), ² agreed to purchase Duravision machines from MPR, and to pay MPR a franchise fee, as well as a licensing fee for each machine it bought. Gran Bazar--a major retailer in Mexico City--agreed to lease a number of Duravision units from STOC for installation in its stores. Ricardo Guerra purchased from MPR the exclusive These arrangements all came to nought, however, when it became apparent that Federal was unable to produce a working Duravision machine as promised. Despite continual reassurances of the impending completion of the project and the quality of the machines, Federal never delivered a working Duravision sign. As a result, all prospects for the distribution of the Duravision displays were lost.

right to market the Duravision concept in South America, Central America, and the Caribbean, except for Colombia, agreeing to buy Duravision machines from MPR and to pay MPR a franchise fee, as well as a licensing fee for each machine purchased. Duravision also granted a franchise to an Arkansas firm known as Duravision of America, Inc. ("the Arkansas franchisee"), agreeing to sell Duravision machines to the Arkansas franchisee at cost plus $1000, in return for a 6% royalty on any revenues the franchisee might earn.

This litigation ensued, with Duravision and MPR asserting claims for fraud and violations of the Texas DTPA. The case was tried before a jury, which found Federal liable and awarded Duravision and MPR compensatory damages for lost profits in the amounts of $3,995,000, and $4,750,000 respectively. The jury also awarded punitive damages of $4,500,000 each to Duravision and MPR. The magistrate judge entered judgment on the jury verdict and awarded Duravision and MPR prejudgment interest. ³

Federal appeals, contending that (a) the jury's findings of lost profits must be set aside, and the corresponding damage award reversed, because MPR's and Duravision's recovery of lost profits is precluded by Texas law, and because the lost profits were not proved with reasonable certainty; (b) it is entitled to a new trial because the district court committed reversible error by excluding from evidence Plaintiff's Exhibits 51 and 51a; (c) the award of punitive damages must be set aside, because there was neither evidence nor a jury finding that Duravision or MPR was injured in tort; and (d) the magistrate judge's award of prejudgment interest must be set aside.

II

A

Federal contends that the jury's finding of Duravision's and MPR's lost profits must be set aside, and the damage award for those lost profits must be reversed, because (1) Texas law does not permit unestablished or unprofitable businesses, such as Duravision and MPR, to recover damages for lost profits; (2) Duravision and MPR failed to prove lost profits with reasonable certainty; and (3) the statute of frauds prevents Duravision and MPR from recovering profits.

a

Before we address Federal's first argument, we clarify whether Duravision and MPR can recover any lost profits under Texas law. Texas common law traditionally awarded only out-of-pocket costs in fraud cases. Morriss-Buick v. Pondrom, 131 Tex. 98, 113 S.W.2d 889 (1938); see also Camp v. Ruffin, 30 F.3d 37 (5th Cir.1994) (rejecting benefit-of-the-bargain damages in common-law fraud action). That measure, however, is no longer exclusive. With the enactment of the DTPA, Texas expanded the allowable methods by which damages in a fraud case can be measured, and today, Texas common law allows "either the 'out-of-pocket' or the 'benefit of the bargain' damages, whichever is greater." W.O. Bankston Nissan, Inc. v. Walters, 754 S.W.2d 127, 128 (Tex.1988). ⁴ Fraud victims are "also entitled to recover for pecuniary loss suffered otherwise as a

                consequence of [their] reliance upon the misrepresentation."  Texas Commerce Bank Reagan v. Lebco Constructors, Inc., 865 S.W.2d 68, 73 (Tex.App.--Corpus Christi 1993, writ denied). 5  Where properly proven, that is, not speculative, these special damages can include lost profits. 6  Consequently, Texas law does allow the recovery of lost profits in DTPA cases, and Duravision and MPR are not precluded per se from proving and recovering lost profits
                

b

Federal first argues that "as a matter of law" neither Duravision nor MPR may recover damages for lost profits, because neither company was an established, profitable business at the time of the transactions in question. Federal points out that Duravision was incorporated less than one month before it entered into the Display Sales Agreement, and has never made a profit; and that MPR has never made a profit, although it had been in business for several years when the transactions at issue here occurred. ⁷ Federal argues that "under Texas law, an unestablished business is not entitled to recover lost profits." ⁸

A number of decisions of this Court and the Texas courts indicate that businesses lacking a history of profitability may not recover lost profits under Texas law. However, in light of the most recent decisions on this subject, we conclude that this Texas rule is not an absolute one. Under Texas law a business's failure to demonstrate a history of profitability should be considered, but is not independently dispositive, in deciding whether lost profits may be recovered.

The Supreme Court of Texas recently stated:

[W]here it is shown that a loss of profits is the natural and probable consequence[ ] of the act or omission complained of, and their amount is shown with sufficient certainty, there may be a recovery therefor .... It is not necessary that profits should be susceptible of exact calculation, it is sufficient that there be data from which they may be ascertained with a reasonable degree of certainty and exactness.... "In order that a recovery may be had on account of loss of profits, the amount of the loss must be shown by competent evidence with reasonable certainty."

Texas Instruments, Inc. v. Teletron Energy Mgmt., Inc., 877 S.W.2d 276, 279 (Tex.1994) (quoting Southwest Battery Corp. v. Owen, 131 Tex. 423, 115 S.W.2d 1097, 1098 (1938)). The court also quoted a passage from Southwest Battery which indicates that new and unestablished businesses may not recover lost profits: "The rule denying a recovery ... where the enterprise is new or unestablished, is still enforced, on the ground that the profits which might have been made from such business are not susceptible of being established by proof to that degree of certainty which the...