Court of Appeals of Texas, Twelfth District, Tyler
INTERNATIONAL BUSINESS MACHINES CORP., APPELLANT/CROSS-APPELLEE,
LUFKIN INDUSTRIES, INC., APPELLEE/CROSS-APPELLANT,
from the 159th District Court of Angelina County, Texas
consisted of Worthen, C.J., Hoyle, J., and Neeley, J.
T. Worthen Chief Justice
Business Machines Corporation (IBM) appeals the trial
court's judgment in favor of Lufkin Industries, Inc.
(Lufkin). IBM raises five issues on appeal, and Lufkin raises
a conditional cross-issue in its response brief and a
separate cross-appeal. We affirm in part, reverse and render
in part, and suggest a remittitur of a portion of the damages
awarded in the trial court's judgment incorporating the
is a NASDAQ traded company that is an industry leader in
manufacturing "engineered-to-order" power
transmission gear boxes and "manufactured-to-order"
oil field pumping units. Its sales of both dropped in the Great
Recession of 2007-2008. However, it expected a strong market
recovery for both of these products, particularly due to the
"fracking" and horizontal drilling revolution
throughout Texas, North Dakota, and other states.
position itself for growth, Lufkin's leadership realized
it needed to replace its highly configured but increasingly
outdated Enterprise Resources Planning (ERP) System. An ERP
system is a computer software business operating system that
integrates all departments and functions across the company.
Because of the high demand expected for Lufkin's two
signature products, as the economy improved, time was of the
essence to install a new ERP operating system. Lufkin's
executive team had experienced the installation of new
business operating systems, both at Lufkin and at other
companies, that had taken more time than expected. These
delays negatively impacted company earnings.
through its hardware division, learned of Lufkin's
concerns about a lengthy and delay-riddled implementation of
a new ERP operating system. David Bisker, an IBM salesman,
contacted Lufkin executives, and at his behest,
representatives of the two companies began discussions about
IBM's Express Solution. IBM designed its Express Solution
in 2006 and 2007 with a team of engineers under the direction
of Juan Gonzalez, an IBM employee who implements SAP
operating systems for small companies.
September 30, 2009, Gonzalez, on behalf of IBM but with the
assistance of SAP, demonstrated software that IBM represented
showed the functionality of IBM's Express Solution.
Furthermore, IBM represented that its Express Solution was
preconfigured in a way to manage both of Lufkin's vastly
different product lines-its engineered-to-order transmission
gear boxes and manufactured-to-order oil field pumping units.
Additionally, IBM represented that its Express Solution would
generate financial results for all of Lufkin's required
reports, both for U.S. and international plants. After IBM
represented that these vital functions required by Lufkin
were already preconfigured in the Express Solution, Lufkin
agreed to execute a contract, formally called the
"Statement of Work" (SOW), with IBM on March 25,
projected the implementation would be completed by March 1,
2011, when Lufkin would be able to "Go-Live" with
its fully implemented IBM Express Solution. However, the
first test of the system in November 2010 was a complete
failure. The second test in February 2011 also failed. IBM
requested a Project Change Request (PCR) extending the
"Go-Live" date to June 1, 2011, along with an
increase of its implementation fees by 2.6 million dollars.
Lufkin's President, Jay Glick, became concerned
"that the project was off the rails." IBM even
fired its project manager, William Berry, in early 2011.
Nevertheless, IBM continued to insist that it could complete
the project if only given more time and money. IBM failed to
inform Lufkin that it stopped marketing the Express Solution
in the U.S. at the end of 2010.
June 1, 2011 "Go-Live" date passed without an
operational system. Later in June, IBM requested another PCR
which added over four million dollars to its fees. IBM
assured Lufkin that this would allow it to properly complete
the implementation for a January 1, 2012 "Go-Live"
date. In September 2011, IBM's third test failed with
many of the same problems from the previous two tests
continuing to recur. A fourth test in November 2011 also went
poorly. By the end of 2011, Lufkin had executed nine PCRs and
paid $12, 983, 736 for IBM's Express Solution. As the
January 1, 2012 "Go-Live" date approached, Lufkin
sought assurances from IBM that the Express Solution would
properly function. IBM promised Glick that although it would
be a "Go-Live Ugly and that things might be a little
rockier in a few places than a normal startup, " IBM had
thoroughly tested the payroll system and that it would
correctly function. Glick decided to deactivate Lufkin's
operating system and to initiate IBM's Express Solution
on January 1, 2012.
"Go-Live Ugly" was likewise unsuccessful. Lufkin
was forced to manually calculate payroll amounts because the
Express Solution did not function properly. Lufkin's
employees were upset and company morale sank. Moreover, the
vendor payment system failed, requiring Lufkin to manually
make payments to vendors. Likewise, project materials were
not delivered to the appropriate machine on a timely basis,
and Lufkin's products were not able to be shipped as
scheduled and promised. The company had to mostly operate
manually during most of the first half of 2012.
problems extended to financial reporting. As a publicly
traded stock on the NASDAQ stock exchange, Lufkin released
quarterly reports every three months. With the IBM Express
Solution unable to run its business operation system, Lufkin
was unable to close its books for January, February, and
March of 2012. Lufkin, as a publicly-traded company, was
required to report the failed IBM Express Solution
implementation and the resultant problems to the public.
Lufkin's stock price suffered. Glick reported that the
financial situation for the second quarter of 2012 was
"similarly bad." Lufkin's stock price continued
to be adversely affected.
summer of 2012, after six months of a virtually
nonfunctioning Express Solution, Lufkin invited IBM and SAP
to assess what needed to be done to implement an effective
operating system for Lufkin. IBM sent one person who did not
have authority to take any action. SAP, on the other hand,
began analyzing what could be done to reconfigure the Express
Solution so that its software would become operable for
Lufkin. With SAP's help, along with other third party
consultants, Lufkin was eventually able to develop an
operating system after a year and a half of effort. Lufkin
continues using this system today. After the disastrous
"Go-Live Ugly" Express Solution implementation on
January 1, 2012, Lufkin paid third-party consultants an
additional $7, 544, 545.
implementing an effective business operating system, with the
assistance of SAP and third-party contractors, Lufkin sued
IBM for, among numerous causes of action, fraudulent
inducement of a contract, fraud, and breach of contract. IBM
filed a motion for summary judgment, claiming that Lufkin
agreed to disclaim its reliance on IBM's representations
made prior to signing the SOW, and consequently, Lufkin could
not establish the reliance element of the fraudulent
inducement and fraud claims as a matter of law.
trial court denied IBM's motion, and the case proceeded
to a jury trial. The jury first determined that IBM
fraudulently induced Lufkin to execute the SOW, as modified
by the PCRs. It further determined that IBM committed fraud
against Lufkin and made a negligent misrepresentation on
which Lufkin justifiably relied. The jury also found Lufkin
had not waived or ratified IBM's fraudulent acts and it
was not estopped from asserting its fraud claims.
Furthermore, the jury determined that IBM breached the
contract by failing to comply with the SOW, as modified by
the nine PCRs.
jury found that Lufkin had suffered ten million dollars in
out-of-pocket damages, which represented the difference in
the value of IBM's Express Solution and the amount Lufkin
paid for it. The jury also found Lufkin incurred eleven
million dollars in "reasonable and necessary expenses
incurred in attempting to restore operation of Lufkin's
software." On Lufkin's fraud claim, the jury awarded
six million dollars. Although the jury determined IBM made
negligent misrepresentations and breached the SOW, it found
no damages for Lufkin on either cause of action. The jury
also declined to award exemplary damages against IBM.
trial court entered a judgment in favor of Lufkin against IBM
for $23, 776, 025.10, which was based on twenty-one million
dollars in out-of-pocket and mitigation damages for
Lufkin's fraudulent inducement claim, and $2, 776, 025.10
in prejudgment interest. IBM timely appealed.
first issue, IBM challenges the jury's finding of
fraudulent inducement, and argues that a provision in the SOW
disclaiming reliance on representations it made to Lufkin
conclusively negates fraudulent inducement's reliance
considering a legal sufficiency challenge, we review all the
evidence in the light most favorable to the trial court's
judgment and indulge every reasonable inference in its favor.
City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex.
2005). We credit any favorable evidence if a reasonable
factfinder could and disregard any contrary evidence unless a
reasonable factfinder could not. Id. at 821-22, 827.
We may only sustain a legal sufficiency challenge when (1)
the record discloses a complete absence of a vital fact, (2)
the court is barred by rules of law or evidence from giving
weight to the sole evidence offered to prove a vital fact,
(3) the sole evidence offered to prove a vital fact is no
more than a mere scintilla, or (4) the evidence conclusively
establishes the opposite of a vital fact. Id. at
810. More than a scintilla of evidence exists when the
evidence rises to a level that would enable reasonable and
fair minded jurors to differ in their conclusions.
Wal-Mart Stores, Inc. v. Spates, 186 S.W.3d 566, 568
(Tex. 2006) (per curiam); Forbes Inc. v. Granada
Biosciences, Inc., 124 S.W.3d 167, 172 (Tex. 2003).
reviewing a factual sufficiency challenge, we consider all of
the evidence and uphold the finding unless it is so against
the overwhelming weight of the evidence as to be clearly
wrong and unjust. Cain v. Bain, 709 S.W.2d 175, 176
(Tex. 1986) (per curiam). But factfinders are the sole judges
of the credibility of the witnesses and the weight to give
their testimony. Wilson, 168 S.W.3d at 819. They may
choose to believe one witness and disbelieve another.
Id. If the evidence at trial would enable reasonable
minds to differ in their conclusions, we will not substitute
our judgment, so long as the evidence falls within the zone
of reasonable disagreement. Id. at 822.
inducement is a particular species of fraud that arises only
in the context of a contract. Nat'l Prop. Holdings v.
Westergren, 453 S.W.3d 419, 423 (Tex. 2015). A party
asserting that it was fraudulently induced into entering into
a contract must show that (1) the other party made a material
representation, (2) the representation was false and was
either known to be false when made or made without knowledge
of the truth, (3) the representation was intended to be and
was relied upon by the injured party, and (4) the injury
complained of was caused by the reliance. In re Int'l
Profit Assocs., Inc., 274 S.W.3d 672, 678 (Tex. 2009).
enforceability of a reliance disclaimer is a question of law.
Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of
Am., 341 S.W.3d 323, 333 (Tex. 2011) (citing
Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171,
181 (Tex. 1997)). The Texas Supreme Court has declined to
adopt a per se rule that a disclaimer automatically precludes
a fraudulent inducement claim. See Forest Oil Corp. v.
McAllen, 268 S.W.3d 51, 61 (Tex. 2008).
analysis of the parties' intent begins with the
contract's express language, and we consider the entire
agreement. Italian Cowboy Partners, 341 S.W.3d at
333. To disclaim reliance, the parties must use clear and
unequivocal language. Id. at 336 (citing Forest
Oil Corp., 268 S.W.3d at 62; Swanson, 959
S.W.2d at 179-80). This elevated requirement of precise
language helps ensure that parties to a contract-even
sophisticated parties represented by able
attorneys-understand that the contract's terms disclaim
reliance such that the contract may be binding even if it was
induced by fraud. Id.
Texas Supreme Court has further stated that it has a clear
desire to protect parties from unintentionally waiving claims
for fraud, but also identified "the competing concern -
the ability of parties to fully and finally resolve disputes
between them." Id. at 332 (quoting
Swanson, 959 S.W.2d at 179). A disclaimer included
in an agreement at the initiation of a business relationship
should be all the more clear and unequivocal to effectively
disclaim reliance and preclude a claim for fraudulent
inducement, lest we "forgive intentional lies regardless
of context." Id. at 335 (quoting Forest Oil
Corp., 268 S.W.3d at 61). In such a case, "to
refuse relief [by enforcing the disclaimer] would result in
opening the door for a multitude of frauds and in thwarting
the general policy of the law." Id. at 332
(quoting Dallas Farm Mach. Co. v. Reaves, 307 S.W.2d
233, 239 (Tex. 1957)).
only after we determine that the contract clearly and
unequivocally disclaims the complaining party's reliance
on representations that we proceed to examine the other
circumstances surrounding the contract's formation and
analyze the Forest Oil factors, such as whether the
parties: (1) negotiated the terms of the contract rather than
simply included boilerplate language, (2) specifically
discussed the issue which became the topic of the subsequent
dispute, and (3) were represented by counsel, experienced in
business matters, and dealing with each other in an arm's
length transaction. See id. at 337, n.8 (citing
Forest Oil, 268 S.W.3d at 60).
September 30, 2009, IBM presented to Lufkin a version of SAP
software that was already highly configured, representing
that it was IBM's Express Solution. This was the only
implementation system that IBM discussed with Lufkin before
signing the SOW. IBM represented to Lufkin that its Express
Solution was already eighty percent preconfigured and would
need only about twenty percent customization. Thus, according
to IBM, Lufkin would have a new business operating system
without spending an inordinate amount of time implementing
the software. However, Gonzalez, in a November 4, 2009 email
to the IBM sales representatives negotiating the transaction,
warned that the functionality Lufkin wanted would need
significant configuration and customization. For example,
Gonzalez knew that the Express Solution was created only for
approximately thirty users. Lufkin had 650 users. Gonzalez
also knew that the Express Solution was intended and designed
for a company with one company code. Lufkin had nine company
codes. He testified that the Express Solution was intended
and designed for the operation of two plants. Lufkin had
testified that the Express Solution implementation for many
companies, including Lufkin, was likely "doomed to fail
from signature." He testified that IBM's strategy
was to secure a contract and hope that its implementation
team would figure out the details later.
after the parties signed the SOW, IBM implementation
engineers told Lufkin that the Express Solution did not have
the enhanced functionality and configuration that had been
represented and that it would need much more extensive
customization than twenty percent. When Lufkin management
brought these concerns to IBM management, they were
continually reassured to have patience and trust IBM's
process because its personnel "were the experts."
Even after each integration test cycle (ITC) failure and
subsequent "Go-Live" extension date, IBM continued
to ensure Lufkin that it would eventually deliver an Express
Solution system that would be capable of operating the SAP
software and conducting Lufkin's business functions.
Lufkin determined that it had no choice but to go forward and
trust IBM because to start over would have been both cost and
time prohibitive. When the parties initiated the
"Go-Live, " Lufkin switched from its existing
business operating system to the Express Solution, but the
new system could perform only ten percent of what IBM had
promised. Unable to simply reinstitute its prior system, the
Express Solution implementation failure required Lufkin to
manually conduct its financial and manufacturing processes.
In mid-2012, after Lufkin looked to begin an effective
implementation of the SAP platform, IBM ceased to provide
substantive support in correcting the system's problems.
This forced Lufkin to work with SAP and third-party
contractors to develop the business system, which it
currently uses, over the next year and a half.
materially misrepresented the functionality of its Express
Solution. Gonzalez's email to the IBM sales team and
other executives established that IBM knew that the
representations regarding the Express Solution that it made
to Lufkin were false. IBM knew that the key to obtaining a
contract with Lufkin, as explained by Berry, was that Express
Solution would be installed quickly. Further, IBM knew they
could make the sale to Lufkin with the representation that
the Express Solution would be installed quickly because it
was eighty percent preconfigured and did not require time
consuming and expensive customization. The record shows that
Lufkin relied upon these representations by IBM. Finally, the
failed implementation of IBM's Express Solution following
the January 1, 2012 "Go-Live Ugly" forced Lufkin to
virtually operate without a business operating system for six
months, and then up to another year and a half before a
workable configuration for the SAP software could be
viewing all the evidence in the light most favorable to the
verdict, we hold that the evidence is legally sufficient to
support the jury's finding that IBM fraudulently induced
Lufkin to execute the SOW on March 25, 2010. See
Wilson, 168 S.W.3d at 822. Such a finding is not so
against the overwhelming weight of the evidence as to be
clearly wrong and unjust. See Cain, 709 S.W.2d at