United States Court of Appeals
Fifth Circuit
F I L E D
June 6, 2003
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
Clerk
_____________________
No. 02-10596
_______________________
JOHN ARMSTRONG and DAN ARMSTRONG,
Plaintiffs-Appellants
versus
AMERICAN HOME SHIELD CORPORATION,
Defendant-Appellee
Appeal from the United States District Court
For the Northern District of Texas
Before GARWOOD and HIGGINBOTHAM, Circuit Judges, and FELDMAN,*
District Judge.
FELDMAN, District Judge:
John and Dan Armstrong sued American Home Shield Corporation
(AHS) for breach of contract in Texas state court. The lawsuit
was removed to federal court,1 and the Armstrongs subsequently
*
District Judge of the Eastern District of Louisiana, sitting
by designation.
1
AHS removed this lawsuit on the basis of diversity
jurisdiction: the Armstrongs are Texas residents; AHS is a Delaware
corporation with its principal place of business in Tennessee.
1
amended their complaint to include claims for fraud and negligent
misrepresentation. The district court summarily dismissed each
of the Armstrongs’ claims. We affirm.
I.
AHS sells and services home warranty contracts throughout
Texas. In 1995, AHS acquired Texas Home Warranty Corporation
(THW) from John and Dan Armstrong. AHS was particularly
interested in emulating THW’s practice of entering fixed-rate
agreements with its contractors,2 and AHS hired John and Dan
Armstrong.
The Armstrongs’ employment agreements included several
savings programs:3
Program one: the Armstrongs were to convert all AHS
pool/spa contractors in Texas to the THW fixed-rate
methodology;
Program two: the Armstrongs were to convert 5,000 AHS
contracts in the Dallas-Fort Worth area to the THW
fixed-rate methodology;
Program four: the Armstrongs were to recommend the
implementation of contract coverages, limitations, and
exclusions which AHS had not previously adopted; and
2
Home warranty firms in Texas generally paid their
contractors on a per-claim basis. Under the fixed-rate
methodology, however, contractors agree to manage all repairs for
a particular homeowner for a flat fee regardless of the number of
service calls required.
3
These programs are outlined in Paragraph 8 of the
agreements’ Incentive Plans. Cost savings program three is not
relevant to our review.
2
Program five: the Armstrongs were to develop and
implement a program for checking heating and air
conditioning systems at the time the homeowner
purchased the warranty contract.
AHS agreed to pay the Armstrongs a portion of the cost savings
accomplished under each program.
The Armstrongs complained that they were not sufficiently
compensated under the terms of the savings programs, and sued AHS
for breach of contract, negligent misrepresentation and fraud.4
II.
Review of a grant of summary judgment is de novo. See Young
v. Equifax Credit Info. Servs. Inc., 294 F.3d 631, 635 (5th Cir.
2002). Summary judgment is proper if “the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with any affidavits filed in support of the motion, show
that there is no genuine issue of material fact and that the
moving party is entitled to judgment as a matter of law.” Id.
The moving party bears the burden of pointing to an absence of
evidence to support the nonmoving party’s case, and summary
judgment will be granted where the nonmovant is unable to point
to any evidence in the record that would sustain a finding in the
4
The Armstrongs allege that, during contract negotiations,
AHS misrepresented that: 1) it was losing money in the Dallas-Fort
Worth market; 2) the Systems Check program was likely to expand;
and 3) the average contract cost in Texas was “based on current and
historical cost information.”
3
nonmovant’s favor on any issue on which he bears the burden of
proof at trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-
24 (1986). Moreover, all facts and inferences must be viewed in
the light most favorable to the nonmoving party. See Perez v.
United States, 312 F.3d 191, 194 (5th Cir. 2002).
A. Breach of Contract
The appellants first contend that AHS breached the terms of
savings programs one and four. They assert that AHS failed to
sufficiently compensate them for converting pool/spa contractor
fee arrangements, and for recommending that AHS charge its
customers for freon recovery.
1) Savings Program One: Converting Pool-Spa Contractor Fee
Arrangements
Savings program one provides that the Armstrongs are to be
paid 25% of all cost savings realized from their conversion of
AHS’s pool/spa contractors to the fixed-rate methodology.
Program one states:
For example, AHS will establish its average contract
cost for pool/spa option in Texas for 1995 (the “Base
Cost Per Option”). If we assume the Base Cost Per
Option was $140 and the average Cost Per Option in
Texas in 1996 is $79, or a Cost Savings of $61 per
average Cost Per Option, AHS, at the beginning of 1997,
would calculate its Cost Savings (total # of applicable
pool/spa options times $61), subtract applicable
Deductions Against Cost Savings, multiply that amount
by 18.75%, and pay Armstrong the result. The remaining
6.25% (excluding deductions) would be set aside for
payment at the end of year three.
4
Accordingly, cost savings realized under program one are a
function of the 1995 average cost for pool/spa contracts.
The appellants contend that AHS breached the terms of the
savings program because its calculation of the 1995 “average
contract cost” reflected only those pool/spa contracts which the
Armstrongs later converted to the fixed-rate methodology. The
Armstrongs claim that the 1995 “average contract cost” should
have been compiled from all of AHS’s Texas pool/spa contracts.
Although the parties intended to convert pool/spa contracts
throughout the entire state, contracts were actually converted
only in Dallas-Fort Worth, Austin, and San Antonio. The 1995
average costs for contracts in non-urban areas are greater than
in urban areas.5 Thus, a bonus scheme based upon the difference
between the average costs for post-conversion urban contracts,
and pre-conversion statewide contracts, would effectively
compensate the Armstrongs for cost savings not actually realized.
The language of the Armstrongs’ employment agreements
clearly states that bonuses are to be derived from actual cost
savings.6 The Armstrongs’ interpretation, which compensates them
5
The 1995 average contract cost in Dallas-Fort Worth was
$106.03; Austin, $94.35; and San Antonio, $108.03. The average
contract cost state-wide was $124.44.
6
Paragraph 1, entitled “Basis Understanding,” states that
“AHS will share certain cost savings with Armstrong.” Paragraph 3
explains, “AHS shall pay Armstrong his share of the cost savings
generated from each Cost Savings Program.” Paragraph 8(d) requires
AHS to pay the Armstrongs a percentage of cost savings on “the
applicable converted contracts.”
5
for cost savings not actually realized, is obviously contrary to
the spirit and intent of the savings programs. We agree with the
district court that program one “permitted AHS to pay Plaintiffs
based only on the cost savings generated in the areas where the
pool/spa program had been implemented.”
2) Savings Program Four: Recommending that AHS Charge
Customers for Freon Recovery
Savings program four rewards the Armstrongs for proposing
cost saving “contract coverages, limitations, and exclusions
which AHS has not previously adopted.” The Armstrongs contend
that AHS breached the terms of program four when it refused to
compensate them for the cost savings generated by their proposal
that AHS charge customers for freon recovery.
AHS’s home warranty contracts did not provide coverage for
the costs related to freon recovery. The Armstrongs proposed
that cost savings would be realized by a stricter enforcement of
the freon exclusionary clause. Because the Armstrongs merely
suggested that AHS enforce an existent contractual provision, the
appellants did not propose a contractual change “which AHS has
not previously adopted.” Thus, AHS’s refusal to compensate the
Armstrongs for the resultant cost savings was not a breach of the
employment agreement.
B. Negligent Misrepresentation
The appellants next urge that AHS negligently misrepresented
6
itself throughout contract negotiations. In particular, the
Armstrongs assert that AHS misstated that it was unprofitable in
the Dallas-Fort Worth market, and that the average contract cost
in Texas was based on “historical and current cost data.”
The district court held that both of the Armstrongs’
negligent misrepresentation claims were time-barred by the Texas
two-year statute of limitations. See Tex. Civ. Prac. & Rem. Code
Ann. § 16.003(a) (Vernon 2002). The Armstrongs do not contend
that they filed their lawsuit within two years of being injured;
rather they assert that the Texas statute of limitations was
tolled by the discovery rule.
It is unclear whether the discovery rule tolls the Texas
statute of limitations for negligent misrepresentation claims.
See Kansa Reins. Co. v. Congressional Mortgage Corp., 20 F.3d
1362, 1372 (5th Cir. 1994) (“We similarly decline to apply the
discovery rule to a negligent misrepresentation claim, finding
that the Texas courts classify such a cause of action as a
negligent tort rather than a fraud action.”). But see
Matthiessen v. Schaefer, 27 S.W.3d 25, 31 (Tex. App.--San Antonio
2000, pet. denied) (“[T]he discovery rule applies to [a] claim of
negligent misrepresentation.”); Hendricks v. Thornton, 973 S.W.2d
348, 365 (Tex. App.--Beaumont 1998, pet. denied). We need not
address this issue of law, however, unless the Armstrongs’
negligent misrepresentation claims are of the type protected by
7
the discovery rule.
The discovery rule only reaches a claim if the injury is
inherently undiscoverable, and the evidence of the injury is
objectively verifiable. See Velsicol Chemical Corp. v. Winograd,
956 S.W.2d 529, 531 (Tex. 1997). An injury is inherently
undiscoverable if it is of a type not generally discoverable by
the exercise of reasonable diligence. See HECI Exploration Co.
v. Neel, 982 S.W.2d 881, 886 (Tex. 1998) (the applicability of
the discovery rule is determined categorically by examining the
nature of the particular injury alleged).
We find that the profitability of a corporate division, and
the source of information which underlies a cost quotation, are
precisely the types of information that a seller involved in a
substantial business transaction would seek to discover and could
discover through the exercise of reasonable diligence. See
Martinez Tapia v. Chase Manhattan Bank, N.A., 149 F.3d 404, 409
(5th Cir. 1998) (“The investor who seeks to blame his investment
loss on fraud or misrepresentation must himself exercise due
diligence to learn the nature of his investment and associated
risks.”). Of added significance, the Armstrongs even seem to
have been aware of their injury. For instance, in a December
1995 deposition, the appellants acknowledged that they might have
been defrauded by AHS.
Thus, assuming that the discovery rule applies to claims for
8
negligent misrepresentation, the Armstrongs would nonetheless not
benefit from its application because their injuries were not
inherently undiscoverable. We therefore affirm the finding of
the district court that appellants’ claims are time-barred under
the Texas statute of limitations.
C. Fraud
The appellants next urge that AHS intentionally
misrepresented itself during contract negotiations. They contend
that AHS fraudulently stated that it was expanding its Systems
Checks program, and that the average contract cost in Texas was
based on “historical and current cost data.”
Under Texas law, fraud requires “a material representation,
which was false, and which was either known to be false when made
or was asserted without knowledge of its truth, which was
intended to be acted upon, which was relied upon, and which
caused injury.” Formosa Plastics Corp. USA v. Presidio Engineers
and Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998). AHS
maintains that the employment agreements’ merger clauses preclude
the Armstrongs from establishing the “reliance” element of fraud
claims.
Texas courts hold that “a merger clause can be avoided based
on fraud in the inducement and that the parol evidence rule does
not bar proof of such fraud.” Schlumberger Technology Corp. v.
Swanson, 959 S.W.2d 171, 179 (Tex. 1997) (citing Dallas Farm
9
Machinery Co. v. Reaves, 307 S.W.2d 233 (1957)). This general
principle, however, does not wholly preclude parties from
bargaining for, and executing, a release barring future fraud
claims. For instance, a fraud claim can be negated where a
merger clause evinces a party’s clear and unequivocal expression
of intent to disclaim reliance on specific representations. See
Schlumberger, 959 S.W.2d at 179. Moreover, courts utilize parol
evidence to evaluate whether a disclaimer of reliance is
enforceable. Id. (“[T]he contract and the circumstances
surrounding its formation determine whether the disclaimer of
reliance is binding.”).
The Armstrongs’ employment agreements provide:
This Agreement shall constitute the entire contract
between the parties and supercedes all existing
agreements between them, whether oral or written, with
respect to the subject matter hereof.
This clause, while indicative of the parties’ intent to bar
later disputes related to underlying agreements, notably fails to
mention or refer to prior representations. Cf. U.S. Quest Ltd.
v. Kimmons, 228 F.3d 399 (5th Cir. 2000) (holding that merger
clause superceding all prior “agreements, communications, or
understandings” was a valid disclaimer of reliance upon
representations). We nonetheless conclude, upon review of the
entire employment agreement, that the Armstrongs’ merger clauses
were unequivocal disclaimers of reliance.
The language and the intent of the employment agreements
10
makes clear that the Armstrongs did not rely upon AHS’s
representation that it was expanding its Systems Checks program.
For example, savings program five states that “AHS shall have the
sole right to determine whether to implement a systems check
program and to what extent.”
Moreover, the agreements demonstrate that the Armstrongs did
not rely upon statements that the average contract cost in Texas
was based on “historical and current cost data.” Paragraph 11 of
the Incentive Plan dictates that “AHS makes no representations,
warranties, and/or guarantees of the accuracy of the numbers
and/or assumptions, the savings to be realized and/or bonus to be
paid under Cost Savings Programs 1-6," and that all numerical
information and assumptions were “estimated” and “provided for
information purposes only.”
Reviewing the employment agreement in whole, we find the
merger clauses were clear and unequivocal disclaimers of
reliance. Thus, summary judgment of the Armstrongs’ fraud claims
was warranted.
III.
AHS did not breach the Armstrongs’ employment agreements.
We find that the “average contract cost,” as outlined in savings
program one, is a function of those contracts which the
Armstrongs later converted to the fixed-rate methodology. We
also find that the fourth savings program does not reward
11
recommendations to enforce warranty provisions. Moreover, the
appellants’ negligent misrepresentation claims are time-barred by
Texas’ statute of limitations, and their fraud claims are
precluded by the agreements’ merger clauses. AFFIRMED.
12