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Hess Corp. v. Schlumberger Technology Corp.

United States District Court, S.D. Texas, Houston Division

June 29, 2017

HESS CORPORATION, Plaintiff,
v.
SCHLUMBERGER TECHNOLOGY CORPORATION, Defendant.

          MEMORANDUM OPINION AND ORDER

          SIM LAKE UNITED STATES DISTRICT JUDGE

         Pending before the court is Defendant's Motion to Dismiss Second Amended Complaint Under Rule 12(b)(6) ("Defendant's Motion to Dismiss") (Docket Entry No. 29) . For the reasons stated below, the motion will be granted in part and denied in part.

         I. Factual and Procedural Background

         This case arises from the sale and subsequent failure of several Subsurface Safety Valves ("SSVs") purchased by Hess Corporation ("Hess") from Schlumberger Technology Corporation ("Schlumberger") .[1]Hess and Schlumberger set out the terms of the agreement in Commercial Agreement Number 46000010410 (the "Commercial Agreement").[2] Exhibit J to the Commercial Agreement sets out the quality standards agreed upon by the parties.[3]Section 2.10 of the exhibit, titled "Engineering, Design Reviews & Safety Critical Equipment, " states: "Contractor equipment shall comply with the latest editions of applicable standards and specifications, e.g., -API, ASME, ANSI, ASTM, ASNT, ISO, etc., as required by local/federal regulations, specified by the Company or identified within the Contract."[4]

         The Commercial Agreement, along with other documents concerning the terms of the purchase, was subject to Master Service Contract No. 7525 (the "MSC"), entered into by the parties in February of 2000.[5] The MSC states that it "shall control and govern all work performed by [Schlumberger] for [Hess], and shall be deemed to be incorporated in full in every subsequent oral and/or written work or purchase order, service agreements or other project documents."[6]The MSC also states that "[u]pon [Hess] notifying [Schlumberger] of the services, products, equipment, materials or other items desired, [Schlumberger] will commence furnishing same ... in strict conformity with the specifications and requirements contained herein and in any applicable work order, purchase order, service agreement or other project document."[7] The MSC also contains the following express warranty:

[Schlumberger] warrants that all equipment, products, materials and other items furnished hereunder shall: (1) be new if specified by [Hess]; (2) be free from defects in design, materials, fabrication and other workmanship; and (3) conform to AHC s specifications, drawings or other descriptions contained in the applicable service agreement, purchase order, work order or other project document. [Schlumberger] warrants that all work and other services performed hereunder (whether by [Schlumberger], its subcontractors or other parties for whom it is responsible) shall be free from all faults and defects and of a quality consistent with the prevailing standards of workmanship for experienced contractors with expertise in the particular type of work or service being performed.[8]

The MSC limits Schlumberger's warranties to "a period of one (1) year after [Schlumberger's] delivery and/or installation . . . . "[9] The MSC expressly and conspicuously disclaims all other express or implied warranties:

[SCHLUMBERGER] MAKES NO OTHER WARRANTY AS TO PRODUCTS, WORKMANSHIP OR MERCHANTABILITY, WHETHER EXPRESSED OR IMPLIED (INCLUDING, WITHOUT LIMITATION, THAT THE PRODUCTS OR SERVICES SHALL BE FIT FOR ANY PARTICULAR PURPOSE), EXCEPT AS EXPRESSLY STATED HEREIN OR IN AN EXPRESS AMENDMENT HERETO.[10]

         The SSVs at issue were purchased for wells in the Tubular Bells Field, located 135 miles southeast of New Orleans on the Outer Continental Shelf.[11] Hess is the operator of the Tubular Bells Field. The SSVs for Wells D, B, and C were installed in April 2014, June 2014, and April 2015, respectively.[12] Production on Well D began on January 14, 2015, and ceased due to valve failure on August 10, 2015.[13] Production on Well B began on December 14, 2014, and ceased due to valve failure on January 29, 2016.[14] Production on Well C began on July 21, 2015, and ceased due to valve failure on July 28, 2016.[15]

         Hess reported each well failure to Schlumberger. Schlumberger investigated the failures and concluded that the primary cause of the valve failures was the quality of the Metal Spring Energized ("MSE") seals. On April 29, 2016, Schlumberger issued a report stating that it had identified an issue with the seals and had engaged in a worldwide recall of all SSVs in inventory manufactured from 2012 to 2015.[16] The MSE seals identified in the investigation were part of the suspect batches. Schlumberger's engineers also informed Hess that the issues with the MSE seals may have been exacerbated by Schlumberger's own Factory Acceptance Testing, during which high-pressure bleed off may have damaged or at least compromised the seals.[17] Schlumberger informed Hess that destructive testing confirmed that the MSE seals in the Well B valve suffered from the same issue as those in the Well D valve.

         On May 17, 2016, Hess notified Schlumberger that it revoked acceptance of the Schlumberger Safety Valves used in Wells D and B pursuant to § 2.608 of the Texas Business & Commerce Code.[18] Hess revoked acceptance of the SSV used in Well C on July 29, 2016, on the same basis.[19] Hess now seeks to recover damages for breach of contract.

         Schlumberger moved to dismiss Hess's Original Complaint on the basis that the SSVs complied with Schlumberger's time-limited warranties. Because the court could not determine the viability of Hess's claims from its Original Complaint, the court allowed Hess to amend in order to clarify its allegations. Hess was instructed to identify specific contractual obligations with which the valves failed to conform. The court also directed the parties to articulate a test for distinguishing between claims that sound in contract and warranty claims to assist the court in analyzing Schlumberger's argument that its disclaimer precluded Hess's warranty claims.

         Hess now alleges that the SSVs containing the defective MSE seals were non-conforming goods and that the non-conformities substantially impaired the value of the SSVs to Hess. Hess lists several ways in which SSVs were non-conforming, but each of Hess's allegations falls into one of two categories: (1) the SSVs were not designed, manufactured, or tested according to the relevant contractually agreed standards (e.g., American Petroleum Institute (API), International Organization for Standardization (ISO), etc.), or (2) the SSVs failed to perform as specified (e.g., non-commanded closures and a completion life span of less than 10-years).[20] Hess seeks to recover for breach of contract pursuant to § 2.711 of the Texas Business and Commerce Code. Schlumberger moves to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), citing its disclaimer and the fact that each of the installed SSVs functioned for a period of at least one year.

         II. Legal Standard

         A. Rule 12(b) (6)

         In a motion to dismiss under Rule 12(b) (6), the court must "'accep[t] all well-pleaded facts as true and vie[w] those facts in the light most favorable to the plaintiff.'" Bowlby v. City of Aberdeen, Mississippi, 681 F.3d 215, 219 (5th Cir. 2012). "[A] plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1964-65 (2007) (internal quotation marks omitted). "Factual allegations must be enough to raise a right to relief above the speculative level [.]" Id. at 1965. Dismissal under Rule 12(b)(6) is appropriate when a plain-tiff's legal theory is incorrect: "When a complaint raises an arguable question of law which the district court ultimately finds is correctly resolved against the plaintiff, dismissal on Rule 12(b) (6) grounds is appropriate . . . ." Neitzke v. Williams, 109 S.Ct. 1827, 1833 (1989). " [W] hen the allegations in a complaint, however true, could not raise a claim of entitlement to relief, this basic deficiency should ... be exposed at the point of minimum expenditure of time and money by the parties and the court." Twombly, 127 S.Ct. at 1966 (internal quotation marks omitted) .

         B. Texas Business and Commerce Code § 2.608

         Section 2.608 of the Texas Business and Commerce Code, entitled "Revocation of Acceptance in Whole or in Part" states:

(a) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it
(1) on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or
(2) without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or ...

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