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Correct RX Pharmacy Services, Inc. v. Cornerstone Automation Systems, L.L.C.

United States Court of Appeals, Fifth Circuit

December 19, 2019

CORRECT RX PHARMACY SERVICES, INCORPORATED, Plaintiff - Appellee
v.
CORNERSTONE AUTOMATION SYSTEMS, L.L.C., Defendant-Appellant

          Appeals from the United States District Court for the Northern District of Texas

          Before HIGGINBOTHAM, DENNIS, and HO, Circuit Judges.

          JAMES L. DENNIS, Circuit Judge.

         Defendant Cornerstone Automation Systems, L.L.C. ("CASI") contracted with Plaintiff Correct Rx Pharmacy Services, Inc. ("Correct Rx") to supply a custom automated pharmacy system by a specified deadline. CASI failed to deliver, and Correct Rx brought the present diversity action. Rather than bringing a breach of contract claim, Correct RX asserted a Texas common law tort claim for negligent misrepresentation based on various alleged misstatements CASI had made over the course of their dealings regarding its experience, resources, and capabilities. The jury found in favor of Correct Rx, and CASI appeals the district court's denial of its subsequent motion for judgment as a matter of law. CASI argues that Texas's "economic loss rule" precludes tort liability for economic losses resulting from a defendant's negligence in negotiating or fulfilling a contract between the parties.

         On review, we hold that the district court correctly determined that Texas's economic loss rule does not preclude Correct Rx's tort claim, and, accordingly, we AFFIRM.

         I.

         A.

         Correct Rx is a Maryland-based licensed institutional pharmacy that primarily services correctional facilities and other government entities. In 2013, Correct Rx's Manager of Operations, Dr. Jaye Wexler, viewed an internet video of CASI's customizable warehouse automation system, SolidSuite. Hoping to increase the efficiency of Correct Rx's operations, Wexler contacted CASI's Texas headquarters to inquire whether the company knew of any businesses offering similar automated solutions for packaging and shipping medication. CASI's Director of Pharmacy Sales, Mark Gillet, introduced Wexler to CASI founder Michael Doke, and the two informed Wexler that CASI was itself working in the pharmacy industry. Gillet and Doke asserted that CASI had already created SolidSuiteRx, an adaptation of its standard software that was optimized for pharmacy use.

         They stated that CASI had previously supplied an automated system much like the one Correct Rx was interested in to the California Department of Correction and Rehabilitation ("CDCR"), and Gillet related his belief that "a very similar system" would be "the ultimate solution" for Correct Rx's needs. Correct Rx alleges that CASI repeatedly and falsely assured Correct Rx at this meeting and over the following ten months that creating its pharmacy automation system would require only minor adaptations from products that the company had already fully developed for its other institutional pharmacy clients.[1]

         As the companies negotiated and drew closer to a purchase agreement, Correct Rx informed CASI in April 2014 that its lease on its current workspace was expiring and that it was preparing to lease a larger facility to accommodate the new automation system. It was thus a priority that the system be installed by November 2014 in order for it to be fully functional when Correct Rx began operations at the new facility on January 1, 2015. This would allow for a 30-week timeline for CASI to completely develop and install the system.

         Doke, who was in charge of CASI's engineering and software development, met with two CASI project managers, Carlos Jiminez and Kory Ballew, to discuss whether CASI would be able to meet the deadline. Both Jiminez and Ballew, the latter of whom would become the manager of the Correct Rx project, informed Doke that they did not believe it was possible to complete and install the system within 30 weeks. At that time, CASI had never completed and installed a pharmacy-automation system in less than 104 weeks. Jiminez would later testify that no pharmacy-automation project he had worked on had been delivered on-time. The CDCR account had taken three years and ten deadline extensions to complete, and a system CASI had contracted to supply to the United States Veterans Administration was incomplete as of the date of trial despite eight deadline extensions. CASI did not disclose these facts to Correct Rx.

         Despite the reservations expressed by the project managers, CASI informed Correct Rx that it would agree to the 30-week timeline for installation. To facilitate this accelerated timeline, CASI requested an "enhanced" down payment of 52.5% of the contract price so that it could immediately order components with "long lead times"-those parts that would take a protracted period to manufacture, deliver, or assemble. Correct Rx agreed to the enhanced down payment, and the parties signed a contract on May 1, 2014, with an agreed upon purchase price of $4, 194, 654.

         For unspecified reasons, CASI experienced delays in starting the initial assembly of the system. In late July 2014, CASI informed Correct Rx that it would not meet the 30-week deadline. Correct Rx proceeded to secure an extension of its previous lease so as to still allow CASI to install the automated system in an empty workspace at its new location. On September 10, 2014, the parties entered into an amended agreement extending the delivery deadline to March 6, 2015, in exchange for a $200, 000 reduction in the purchase price.

         Correct Rx contends that CASI made additional false representations during this period in order to conceal its lack of progress on the system. Correct Rx also claims that CASI misrepresented its use of the enhanced down payment it required of Correct Rx, pointing to a progress chart Dr. Wexler viewed during site visits in August 2014 and ...


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