Springs Window Fashions v. Blind Maker, 03-03-00376-CV.

CourtCourt of Appeals of Texas
Writing for the CourtBob Pemberton
Citation184 S.W.3d 840
PartiesSPRINGS WINDOW FASHIONS DIVISION, INC.; Springs Window Fashions, L.P.; and SWF, Inc. d/b/a SC-SWF, Inc., Appellants, v. The BLIND MAKER, INC., Appellee.
Docket NumberNo. 03-03-00376-CV.,03-03-00376-CV.
Decision Date20 January 2006
184 S.W.3d 840
SPRINGS WINDOW FASHIONS DIVISION, INC.; Springs Window Fashions, L.P.; and SWF, Inc. d/b/a SC-SWF, Inc., Appellants,
The BLIND MAKER, INC., Appellee.
No. 03-03-00376-CV.
Court of Appeals of Texas, Austin.
January 20, 2006.

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Michael Diehl, Susman Godfrey, L.L.P., Seattle, WA, John M. Harmon, Michael J. Whellan, G. Douglas Kilday, Graves, Dougherty, Hearon & Moody, Austin, for appellants.

Michael G. Burk, Colten W. Smith, Joseph W. Schultz, The Burk Law Firm, PC, Austin, for appellee.

Before Chief Justice LAW, Justices B.A. SMITH and PEMBERTON.



We grant the motion for rehearing of appellants, Springs Window Fashions Division, Inc., Springs Window Fashions, L.P. and SWF, Inc. d/b/a SC-SWF, Inc. ("Springs"), withdraw our opinion and judgment of July 29, 2005, and substitute the following in its place.

Springs appeals a judgment awarding appellee, The Blind Maker, Inc., $5,167,240 in actual damages and $2,090,000 in exemplary damages. The sole liability theory submitted to the jury was fraud, and the sole element of actual damages submitted was lost profits as consequential damages. Springs asserts that the evidence is legally and factually insufficient to support either a finding of fraud or the damages award. For reasons we explain below, we conditionally affirm the judgment of the trial court.


The parties and their businesses

Springs manufactures blinds and similar window coverings and sells its products under the brand names Graber, Nanik, and Bali. The ultimate consumers of Springs's products are persons who purchase the blinds for use in their homes or offices.

Springs distributes its products to consumers chiefly through two channels. First, Springs sells fully assembled blinds directly to large retail outlets like Home Depot or Lowe's. This retail channel of distribution, as well as other lower-priced sales channels like 800 numbers and the Internet, have put significant downward pressure on prices within the blinds industry. Springs's second distribution channel is the "distributor/fabricator" channel. Springs sells component parts of its blinds to blinds fabricators who have business relationships with retail establishments like paint and hardware stores, or individual interior designers, decorators, and architects. These retail-level customers of the blind fabricator, in turn, sell to ultimate consumers. Utilizing samples and other promotional materials, the retail-level

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customers obtain from consumers color and style preferences, window measurements and other specifications and transmit them in orders to the blind fabricator. The blinds fabricator then "fabricates" custom-made blinds by cutting and assembling the appropriate Springs components in accordance with consumer specifications.1

Blind Maker is a blinds fabricator based in Austin, with facilities also in Dallas and Houston. It was established in 1981 by Ray Hicks, its president and sole shareholder. Hicks started the company after earning his M.B.A. The families of both of Hicks's parents had been involved in the blinds industry for many years. Blind Maker began fabricating and selling Springs's Graber brand in 1983 or 1984. Blind Maker experienced steady growth throughout its history. In its first year of operation, Blind Maker's sales totaled $627,656. Ten years later, Blind Maker had over $11,000,000 in sales. Blind Maker's annual sales tripled in the 1990s—its 1998 figure exceeded $35 million—ranking it as the largest fabricator of Graber products in the nation. Despite Blind Maker's large annual sales figures, the company's annual net profits during the 1990s averaged around $37,000, or just over one percent of total sales.2 Blind Maker's history of small net profits reflects, among other things, a corporate strategy of financing its rapid and continuous growth through capital investment and of paying large salaries to its executives including Hicks, to avoid double taxation.

Hicks testified at trial that, throughout the 1990s, Blind Maker voluntarily chose to sell almost exclusively Graber products and considered itself the "Graber guys."3 Blind Maker also prided itself in being a "full line" Graber fabricator, carrying the components necessary to fabricate the complete range of Graber products. The company strove to fill and ship orders from its retail-level customers on the same day they were received. These strategies required Blind Maker to maintain large inventories—Hicks testified that the company would frequently carry six million dollars in inventory, which would take roughly two months to turn over through sales. Hicks added that Blind Maker took around another month to collect its accounts receivable from sales, meaning that it could take three months or more to realize cash from the sale of inventory it purchased from Springs.

Throughout Blind Maker's seventeen-year relationship with Springs, Hicks expressed concern that Springs's business practices in the distributor/fabricator channel reduced Blind Maker's profitability. Chief among Hicks's complaints were Springs's perceived emphasis on its lower-priced retail channel at the expense of its fabricators, a lack of "price parity" enabling Blind Maker to compete with large retailers, and sales incentives that Hicks believed rewarded fabricators who made small or occasional purchases from Springs while penalizing "full line" fabricators like Blind Maker. Hicks urged a series of changes in Springs's business practices that he believed would enhance

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profitability for both Springs and "full line" fabricators and revisited them periodically throughout the parties' relationship. These proposals, which included special incentives for a designated class of committed "Full Line Graber Fabricators," became known to both parties as "Ray's Obsessions."

For many years, Springs and Blind Maker did business without a written contract—Blind Maker would order Springs's components as needed, Springs would invoice Blind Maker, and Blind Maker would pay. Hicks testified that Springs always permitted Blind Maker to pay later than the due date on the invoice. Furthermore, while the invoices stated that Blind Maker could take a 2% discount if it paid within fifteen or thirty days, Springs "forever" allowed Blind Maker to take the discount whenever it paid. Hicks explained that Springs did this in recognition of Blind Maker's preeminence as a Graber fabricator and the duration of its cash cycle.

In 1997, for the first time, Springs and Blind Maker entered into a formal credit agreement at Springs's request. In that agreement, Blind Maker acknowledged that Springs "is not obligated to sell goods to [Blind Maker] or to grant open account payment terms," and that "[t]he decision to sell product and extend credit shall be solely within the exclusive discretion of Springs." The agreement further provided that Blind Maker "hereby agrees to make payments as necessary to keep the account balance within terms established by Springs" and that if Blind Maker failed to do so, Springs "may immediately suspend all future shipments on other than prompt payment terms such as cash or cashier's check and may further demand immediate payment of the full balance."4

Project Overlord

The overriding theory of Blind Maker's case at trial was that Springs committed a variety of fraudulent acts in furtherance of a plan to take over existing fabricators, move the fabrication process to Mexico, and utilize the prior fabricators as distributors. This plan was termed Project Overlord. Various Springs executives testified to the existence of Project Overlord, but there was some disagreement over the extent to which it was implemented.5 However, evidence of the implementation of the plan was presented at trial, including the purchases of fabricators, debt-for-equity swaps to acquire fabricators having large accounts payable to Springs,6 and the acquisition of a blinds manufacturing plant in Reynoso, Mexico. There was testimony that Blind Maker was a target of Project Overlord and that Springs ultimately acquired as many as three other fabricators.

The Fabricator License Agreement

Beginning in 1998, Springs took additional steps to formalize its relationship with Blind Maker and other blinds fabricators, including the initiation of a "preferred fabricator" program and the utilization of a licensing contract. Blind Maker

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characterized these steps as tools used by Springs to advance Project Overlord. Blind Maker's fraud claim is based largely on a series of alleged misrepresentations and failures to disclosure information regarding these new business initiatives. We accordingly explore this evidence in some detail.

The pilot program

In August 1998, Springs invited Hicks and representatives from a handful of other Graber fabricators to a meeting at Springs's Wisconsin headquarters. At the meeting, Springs unveiled the concept of a "Fabricator Pilot Program," which it termed a "Joint Partnership." The stated goal of the pilot program was to "[s]trengthen our partnership through the design of effective programs that enhance market position and increase profitability for our fabricating partners and Springs." Key components were efforts to build product and brand awareness (through advertising assistance and incentives), market penetration and sales growth (through new product development and possibly a "value brand" or "fighter brand" to compete with lower-priced private label brands), margin enhancement (through rebates and a fund that accrues a percentage of purchase totals for use in...

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