Safeway, Incorporated v. PDX, Incorporated

Case: 15-10552 Document: 00513841927 Page: 1 Date Filed: 01/19/2017

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

United States Court of Appeals
Fifth Circuit
No. 15-10552 FILED
January 19, 2017

SAFEWAY, INCORPORATED, Lyle W. Cayce
Clerk
Plaintiff–Appellant,

v.

PDX, INCORPORATED; AXIS SURPLUS INSURANCE COMPANY,

Defendants–Appellees.

Appeal from the United States District Court
for the Northern District of Texas
USDC No. 4:14-CV-683

Before STEWART, Chief Judge, and OWEN and COSTA, Circuit Judges.
PER CURIAM:*
Safeway filed this action in the Northern District of Texas, seeking a
declaratory judgment that it is not obligated to indemnify PDX for claims
asserted in an underlying lawsuit in California state court. After the parties
filed cross-motions for summary judgment, the district court denied Safeway’s
motion, granted PDX’s motion, and awarded PDX attorneys’ fees under a fee-
shifting provision in the contract between the parties. Because PDX’s claims

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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No. 15-10552
for indemnity from Safeway are unenforceable under Texas law, we reverse
and remand for consideration of Safeway’s claims for fees and costs under the
contract as a prevailing party.
I
PDX, Inc. (PDX) is a developer and licensor of software. One of its
programs is the PDX Pharmacy System, which assists pharmacies in filling
prescriptions. Safeway, Inc. (Safeway) was a customer of PDX and licensed
the PDX Pharmacy System during the relevant time period.
Among other things, the PDX Pharmacy System enables pharmacists to
print information to distribute to patients with their medications, including
“patient education monographs.” Patient education monographs provide drug
information from databases unaffiliated with PDX to patients in concise, non-
technical language. They are neither required by law nor regulated by the
FDA. Prior to 2006, the default setting on the PDX Pharmacy System printed
monographs with five paragraphs of information, but enabled pharmacists to
print monographs with three additional paragraphs titled “Overdose,” “Before
Using,” and “Additional Information.”
In 1996, Congress passed a law directing the Secretary of Health and
Human Services to collaborate with members of the healthcare community to
develop a plan for achieving certain goals relating to the dissemination of
medical information. That group developed an “Action Plan for the Provision
of Useful Prescription Medicine Information” containing recommendations,
referred to as the “Keystone Criteria,” for members of the pharmaceutical
industry. The Keystone Criteria recommend information that pharmacists
should provide patients along with their medications and the manner in which
such information should be presented. They are not binding.
In response to the Keystone Criteria, PDX modified its Pharmacy
System to remove the option of printing five-paragraph monographs, such that
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No. 15-10552
all monographs printed from the software would contain eight paragraphs,
including the additional three noted above. After PDX notified its customers
of the modification, Safeway requested that PDX provide a customized version
that reversed the modification and allowed Safeway to continue to print five-
paragraph monographs.
In a contract titled the Keystone Indemnity Agreement (the Agreement),
PDX agreed to provide Safeway with a customized version of the software as
requested (the Program). In the Agreement, Safeway agreed to indemnify PDX
as follows:
[Safeway] hereby expressly waives any claims against PDX with
respect to such Program and the use of such and further agrees to
indemnify and hold PDX harmless from any and all loss, damage,
or expense (or claims of damage or liability) asserted against PDX
arising from [Safeway’s] use of the Program, including, without
limitation, claims that the Program or the purpose for which this
Program is used by [Safeway] constitutes a violation of [the statute
directing the HHS Secretary to develop the Keystone Criteria].
Four days after PDX and Safeway executed the Agreement, PDX uploaded the
Program to a server, and Safeway immediately downloaded it. Safeway then
installed the Program on its servers.
Almost five years later, Kathleen and Dane Hardin (the Hardins)
brought suit in California state court against Safeway and several other
parties based on injuries Kathleen Hardin sustained after using a prescription
drug she purchased from Safeway (the Hardin Litigation). The Hardins’
original complaint alleged, inter alia, that Safeway was negligent by failing to
provide information sufficient to warn her of certain risks posed by the drug.
In 2012, they amended their complaint to add PDX as a defendant, asserting
against it claims for negligence and strict product liability based on PDX’s

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No. 15-10552
provision of the Program to Safeway. Safeway was later dismissed from the
Hardin Litigation under a statute of limitations defense. 1
Thereafter, PDX sought indemnification from Safeway for the Hardin
Litigation based on the indemnity provision of the Agreement, and Safeway
refused to provide indemnification. PDX then sought coverage from its surplus
insurance provider, Axis Surplus Insurance Company, which has provided a
defense in the Hardin Litigation. Safeway brought suit in the Northern
District of Texas seeking a declaratory judgment that it owed PDX no
indemnification because the Agreement does not specifically reference
negligence or strict liability as required under Texas law to indemnify a party
for its own negligence or strict liability. PDX counterclaimed, seeking
indemnification.
After the parties filed cross-motions for summary judgment, the district
court denied Safeway’s motion, granted PDX’s motion, and entered judgment
in favor of PDX. The court also awarded attorneys’ fees to PDX under the
Agreement’s fee-shifting provision. Safeway timely appealed.
II
The court reviews “a grant of summary judgment de novo, applying the
same standards as the district court.” 2 Summary judgment is appropriate “if
the movant shows that there is no genuine dispute as to any material fact and
the movant is entitled to judgment as a matter of law.” 3
III
The district court entered summary judgment in PDX’s favor after
holding that the Agreement satisfies the express negligence test. That test,

1 See Safeway, Inc. v. Superior Court, No. A141505, 2014 WL 2772306, at *8 (Cal. Ct.
App. June 19, 2014), review denied (Sept. 10, 2014).
2 Meadaa v. K.A.P. Enters., L.L.C., 756 F.3d 875, 880 (5th Cir. 2014) (quoting EEOC

v. Agro Distrib., LLC, 555 F.3d 462, 469 (5th Cir. 2009)).
3 FED. R. CIV. P. 56(a).

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No. 15-10552
first adopted by the Supreme Court of Texas in Ethyl Corp. v. Daniel
Construction Co., 4 is a rule of contract interpretation dictating that
“contracting parties seeking to indemnify one party from the consequences of
its own negligence must express that intent in specific terms, within the four
corners of the document.” 5 Contracts that fail the express negligence test are
unenforceable as a matter of law with respect to claims for indemnification of
such negligence. 6 The rule applies with full force when a party seeks
indemnification after its own negligence “causes injury jointly and
concurrently with the indemnitor’s negligence.” 7 Texas courts have expanded
the rule to apply to strict liability as well. 8
Safeway argues that the district court erred in concluding that the
Agreement satisfies the express negligence rule. In contrast, PDX argues both
that the district court’s determination was correct and that this court can
affirm on alternative grounds raised, but not considered, below: that the
express negligence rule does not apply at all to the Agreement and that, even
if it does and is not satisfied by the Agreement’s text, Safeway’s knowledge of
its obligations suffices.
A
We have previously stressed that “broad statements of indemnity” are
insufficient to satisfy the express negligence rule. 9 In fact, Texas courts have
held insufficient even clauses that provide indemnification “from and against
all claims, damages, losses, and expenses” “[t]o the fullest extent permitted by

4 725 S.W.2d 705, 707-08 (Tex. 1987).
5 Quorum Health Res., L.L.C. v. Maverick Cty. Hosp. Dist., 308 F.3d 451, 458 (5th Cir.
2002) (citing Ethyl, 725 S.W.2d at 707-08).
6 Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex. 2004).
7 Ethyl, 725 S.W.2d at 708.
8 See Hous. Lighting & Power Co. v. Atchison, Topeka, & Santa Fe Ry. Co., 890 S.W.2d

455, 457-59 (Tex. 1994).
9 Quorum, 308 F.3d at 461.

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No. 15-10552
law.” 10 Moreover, where the intent to indemnify a party for its own negligence
can be gleaned from a contract only by implication or deduction, the agreement
is not enforceable. 11
For example, in Singleton v. Crown Central Petroleum Corp., the
contract at issue required a contractor to indemnify a premises owner
from and against any and all claims . . . of every kind and character
whatsoever, . . . for or in connection with loss of life or personal
injury . . . directly or indirectly arising out of . . . the activities of
Contractor . . . excepting only claims arising out of accidents
resulting from the sole negligence of Owner. 12
Although the provision broadly indemnified the owner and excluded only the
owner’s sole negligence, implicitly requiring indemnification when the owner
was not exclusively at fault—defining what was included “by stating what
[wa]s excluded” 13—the Supreme Court of Texas held that the agreement did
not satisfy the express negligence test. 14 As that court later clarified, the
provision failed because it was merely an “implicit indemnity agreement
requiring [the owner] to deduce his full obligation”—not an express
agreement. 15
Similarly, in Quorum Health Resources, L.L.C. v. Maverick County
Hospital District, this court confronted a provision indemnifying a party “from
and against any and all losses, claims, damages, liabilities, costs and

10 Fisk Elec. Co. v. Constructors & Assocs., Inc., 888 S.W.2d 813, 814 (Tex. 1994);
accord Tex. Utils. Elec. Co. v. Babcock & Wilcox Co., 893 S.W.2d 739, 741-42 (Tex. App.—
Texarkana 1995, no writ) (holding that a provision that indemnified a party “from and
against any and all claims of every kind and character whatsoever . . . with the only exception
being . . . causes of action resulting from [indemnitee’s] sole negligence” did not indemnify
the indemnitee from a claim asserting that the indemnitee and indemnitor were concurrently
negligent).
11 Quorum, 308 F.3d at 462.
12 713 S.W.2d 115, 117-18 (Tex. App.—Houston [1st Dist.] 1985), rev’d, 729 S.W.2d

690 (Tex. 1987) (emphasis added).
13 Quorum, 308 F.3d at 461.
14 Singleton, 729 S.W.2d at 691.
15 Atl. Richfield Co. v. Petroleum Pers., Inc., 768 S.W.2d 724, 725 (Tex. 1989).

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No. 15-10552
expenses,” specifically excluding the indemnitee’s gross negligence or willful
misconduct. 16 By carving out the indemnitee’s own gross negligence, the
provision arguably implied that the indemnitee’s simple negligence would be
covered. The clause also explicitly referenced “medical malpractice or other
tort claims” asserted against the indemnitee, and the underlying claim was for
medical malpractice. 17 Nevertheless, after observing the strictness with which
Texas courts apply the express negligence test, we held that the provision was
insufficient because it did not specifically and explicitly refer to the
indemnitee’s own negligence. 18
Likewise here, we conclude that the four corners of the Agreement do not
express, in specific terms, an intent to indemnify PDX for its own negligence.
As noted above, the provision here requires Safeway to “indemnify and hold
PDX harmless from any and all loss, damage, or expense (or claims of damage
or liability) . . . arising from [Safeway’s] use of the Program,” including claims
that the Program’s use constitutes a violation of the statute underlying the
Keystone Criteria. This provision is comparable to those that have failed the
express negligence test in other cases. In fact, the Agreement appears no more
clearly to include the indemnitee’s negligence than the provision at issue in
Quorum. If anything, Quorum appears to be a closer case than this one given
the breadth of the clause at issue there (appearing to imply simple negligence
by carving out gross negligence, and referencing the very cause of action at
issue) as compared to the one here.
Nor can the Agreement’s recitals and other provisions bear the weight
PDX asks of them. Contrary to PDX’s assertions, those provisions do not
demonstrate that the Hardin Litigation “is the precise scenario contemplated

16 308 F.3d at 456.
17 Id. at 454, 456.
18 Id. at 467-68.

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No. 15-10552
by” the Agreement, such that if providing the Program constitutes negligence
or strict liability “then the . . . Agreement expressly and unambiguously
manifests the parties’ intent that Safeway would indemnify PDX” for those
torts. Moreover, this argument would require the court to conclude that the
indemnity obligation covers PDX’s negligence by implication, which is
impermissible under the express negligence test.
More generally, PDX has offered no support for its argument that the
express negligence test is satisfied simply because PDX “perform[ed] a single,
identifiable act, with a known outcome[,] . . . which gives the indemnitor the
capability to perform a single act precisely in the manner that the indemnitor
requested.” PDX effectively asks this court to create an exception to the
generally strict express negligence rule for such circumstances, but it has not
offered any legal support for doing so.
In concluding that the Agreement satisfies the express negligence test,
the district court placed great weight on the reasoning that absent
indemnification for negligence, the indemnity clause would be meaningless.
But this is exactly the type of obligation by implication that Texas courts hold
to be insufficient under the express negligence test. In Quorum, we noted that
the test is not satisfied “even if excluding [a certain] type or degree of liability
appears, by deduction, to leave only the type or degree of liability for which
indemnity is sought.” 19 In other words, that a provision may be meaningless
is immaterial; to satisfy the test, a provision must expressly state, without
requiring inference, that it covers the indemnitee’s negligence.
In any event, the district court’s conclusion in this respect was factually
problematic as well. The provision of the Agreement at issue specifically
references indemnification for claims that the program “constitutes a violation”

19 Id. at 465 (emphasis added).
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of the statute underlying the Keystone Criteria. Based on this language,
Safeway argues that the risk indemnified by the Agreement was “that the
software modifications requested by Safeway might expose PDX to federal
statutory or regulatory claims—not state law negligence or strict liability
claims” of the type asserted by the Hardins. PDX asserts that this position is
disingenuous, because (1) at the time the Agreement was consummated (and
still today), the Keystone Criteria were voluntary and (2) PDX as software
vendor rather than Safeway as pharmacy would likely never face liability even
if they were to become mandatory. But a contract might account for risks not
yet present, like the possibility that the Keystone Criteria may become
mandatory. Additionally, the mere fact that Safeway would be the most logical
defendant in any potential suit or regulatory action for a violation of the
Keystone Criteria does not mean that PDX could not face consequences for
such a violation, meritorious or not.
To be sure, PDX’s assertion that the “constitutes a violation” language of
the provision actually reflected the parties’ concerns that the new law “created
a common-law standard by which courts might measure the Monographs
produced by Safeway’s use of the Program” is plausible. But in light of the fact
that the Agreement contemplates indemnification if the Program’s use
amounts to a violation of the law, the clause can also be fairly read to cover
federal statutory and regulatory claims PDX might face, as Safeway argues.
In applying the express negligence test, we need not attempt to discern the
specific intent of the parties or the true meaning of the contract. Rather, unless
the four corners of a contract expressly evince an intent to cover the
indemnitee’s negligence, that contract fails the express negligence test. The
fact that Safeway has offered an interpretation of the provision that is a
reasonable alternative to that urged by PDX demonstrates that the provision
may fairly cover more than the district court concluded it does and is, at the
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very least, ambiguous. Thus, even if indemnification for PDX’s negligence
would implicitly be required were the indemnity clause meaningless without
it—which seems doubtful after Quorum—the fact that the Agreement may or
may not be meaningless without so indemnifying PDX establishes that it fails
the express negligence test.
Finally, Safeway did not waive the opportunity to assert that the
indemnity clause covers more than just PDX’s own negligence and strict
liability by failing to argue this point below, as PDX argues. Because PDX did
not raise this issue in the district court in any meaningful sense, Safeway had
no reason to proactively respond to it. Rather, Safeway’s insistence in this
court that the provision has meaning beyond indemnifying PDX for its own
negligence was motivated by the district court’s holding to the contrary. The
district court’s “meaningless” rationale was its own invention; the onus was
not on Safeway to rebut in the district court a point that PDX did not make.
Accordingly, we conclude that the Agreement fails the express
negligence test and that the district court’s holding otherwise was erroneous.
B
PDX alternatively argues that the express negligence rule does not apply
to this case at all, a question the district court did not reach. PDX argues the
rule does not apply both because the Hardins’ claims against PDX “are not
based on PDX’s negligence or strict liability” and because the provision here
gives indemnification for PDX’s past or contemporaneous acts, not future ones.
With respect to the contention that the Hardins’ claims are not actually
based on PDX’s alleged negligence or strict liability despite their labels, PDX
argues that because it performed as expected under the contract, and because
it also provided Safeway with the code necessary to revert back to eight-
paragraph monographs, Safeway’s decision to use five-paragraph monographs
is the sole reason for any potential liability. On this basis, PDX contends that
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its conduct was not negligent or strictly liable, so the rule does not apply. But
the Hardins have undoubtedly asserted those two causes of action against
PDX, and PDX does not contest that the Hardins’ complaint alleges direct,
rather than vicarious, liability. In other words, the underlying complaint
specifically targets PDX’s conduct in developing and providing the Program,
not Safeway’s conduct in using it. Critically, application of the express
negligence rule turns not on whether the indemnitee is ultimately found liable
but is instead “established as a matter of law from the pleadings.” 20 Thus, the
fact that PDX does not believe its conduct was culpable in a manner cognizable
under negligence or strict liability causes of action is of no moment. The
Hardins brought claims for negligence and strict liability, so the express
negligence rule is implicated regardless of the outcome of those claims.
PDX also argues that the express negligence rule does not apply here
because PDX’s alleged conduct occurred contemporaneously with the parties’
execution of the Agreement, rather than after it. Texas courts have limited the
applicability of the express negligence rule to agreements to indemnify or
release a party for its future negligence; where an agreement relates to past
negligence, ordinary principles of contract interpretation apply. 21 Here,
however, even leaving aside the timing of both the sale of medication to
Kathleen Hardin and her injury, there is no dispute that PDX’s provision of
the Program to Safeway occurred after the Agreement’s execution: Safeway
signed the Agreement on November 29, 2006, PDX signed it the following day,

20 Fisk Elec. Co. v. Constructors & Assocs., Inc., 888 S.W.2d 813, 815 (Tex. 1994); see
also DDD Energy, Inc. v. Veritas DGC Land, Inc., 60 S.W.3d 880, 882-84 (Tex. App.—Houston
[14th Dist.] 2001, no pet.) (holding that “application of the express negligence rule [wa]s
proper” because the underlying complaint alleged a negligence cause of action against the
indemnitee).
21 See Green Int’l, Inc. v. Solis, 951 S.W.2d 384, 386-87 (Tex. 1997) (noting that a

previous decision construing the express negligence rule “is explicitly limited to releases and
indemnity clauses in which one party exculpates itself from its own future negligence.”).
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and PDX uploaded the Program for Safeway to download on December 4, 2006.
Indeed, the contract specifically states that PDX was “in the position” to modify
the software for Safeway and that it would provide such modification “[u]pon
execution of th[e] Agreement . . . in a commercially reasonable amount of time.”
PDX’s broad definition of “contemporaneous,” with no relevant legal authority,
does not undermine the fact that that the Agreement indemnified PDX for
future conduct as of the time of its execution.
Thus, the express negligence rule applies to this case.
C
Finally, PDX also argues that even if the express negligence rule applies
to the Agreement, the fact that Safeway knew of and understood its indemnity
obligations satisfies the rule’s requirements and obviates our need to consider
the Agreement’s text directly. The express negligence rule is one of two “fair
notice” requirements that govern indemnity agreements under Texas law; the
other is “conspicuousness,” which is not at issue here. 22 There is no doubt that
an indemnitor’s actual knowledge of its obligation obviates the need for a court
to consider conspicuousness under Texas law. 23 The parties dispute, however,
whether an indemnitor’s actual knowledge can substitute for compliance with
the express negligence rule.
Although both the Supreme Court of Texas 24 and our court 25 have
suggested that there may be an actual knowledge exception to the express
negligence rule, neither has so held. Intermediate courts in Texas are split on

22 Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 507 (Tex. 1993).
23 Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex. 2004).
24 See Dresser Indus., 853 S.W.2d at 508 n.2 (stating, in dicta, that the “[t]he fair notice

requirements are not applicable when the indemnitee establishes that the indemnitor
possessed actual notice or knowledge of the indemnity agreement”).
25 See Millennium Petrochemicals, Inc. v. Brown & Root Holdings, Inc., 390 F.3d 336,

345 (5th Cir. 2004); Cleere Drilling Co. v. Dominion Expl. & Prod., Inc., 351 F.3d 642, 647
(5th Cir. 2003).
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the question. 26 We do note that an actual knowledge exception appears
inconsistent with the express negligence rule’s extremely limited text-based
inquiry. 27
Nevertheless, we need not resolve whether there is an actual knowledge
exception to the express negligence rule under Texas law. Even assuming that
there is, PDX has offered no evidence that it would be satisfied. PDX asserts
that Safeway’s knowledge is “undisputed” and established conclusively by
Safeway’s acknowledgment that it agreed to indemnify PDX in exchange for
PDX’s provision of the software. However, to the extent there is an actual
knowledge exception to the express negligence rule, such knowledge must be
of the fact that the indemnitee’s negligence or strict liability is included in the
indemnity obligation. PDX, which has the burden of proving knowledge, 28 has
offered no evidence whatsoever, here or below, that Safeway knew at any point
that it must indemnify PDX for PDX’s own negligence. Instead, PDX
repeatedly argues that Safeway’s acknowledgment of some general indemnity
obligation suffices under the exception. But the purpose of the express
negligence rule is to confirm that those on the hook for another party’s

26 Compare, e.g., Blankenship v. Spectra Energy Corp., No. 13-12-546-CV, 2013 WL
4334306, at *5 (Tex. App.—Corpus Christi Aug. 15, 2013, no pet.) (mem. op.), and Sydlik v.
REEIII, Inc., 195 S.W.3d 329, 333 (Tex. App.—Houston [14th Dist.] 2006, no pet.) (“While
actual notice may serve as a substitute for conspicuousness, it may not serve as a substitute
for express negligence.”), with Lopez v. Garbage Man, Inc., No. 12-08-384-CV, 2011 WL
1259523, at *15 (Tex. App.—Tyler Mar. 31, 2011, no pet.) (mem. op.) (holding that “actual
knowledge of the release negates the common law fair notice requirements of
conspicuousness and the express negligence rule”), and Mo. Pac. R.R. Co. v. Lely Dev. Corp.,
86 S.W.3d 787, 791-92 (Tex. App.—Austin 2002, pet. dism’d) (holding that an indemnitor’s
actual knowledge satisfied both of the fair notice requirements).
27 See, e.g., DDD Energy, Inc. v. Veritas DGC Land, Inc., 60 S.W.3d 880, 885 (Tex.

App.—Houston [14th Dist.] 2001, no pet.) (“A fortiori, the fact that Veritas had actual notice
of the indemnity and risk allocation provisions of the agreement cannot create a risk shifting
provision where none exists.”).
28 Reyes v. Storage & Processors, Inc., 86 S.W.3d 344, 350-51 (Tex. App.—Texarkana

2002) (“Actual knowledge is an affirmative defense that the indemnitee has the burden to
prove.”), aff’d, 134 S.W.3d 190 (Tex. 2004).
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negligence are fully aware of the extent of that obligation; 29 an understanding
merely that there is some obligation is not a valid alternative.
Accordingly, Safeway’s purported knowledge is no substitute for
compliance with the express negligence doctrine.
IV
Safeway urges us to reverse the lower court’s judgment and enter
judgment in its favor if we conclude, as we have, that the district court erred
in its application of the express negligence rule. PDX has not disputed the
propriety of this step. Because the parties filed cross motions for summary
judgment and “neither party argues that this case presents any genuine issue
of material fact,” we need not remand for further consideration of the merits
and instead grant partial summary judgment in Safeway’s favor. 30
Additionally, the district court awarded attorneys’ fees in favor of PDX
under a provision of the Agreement providing that, “[i]n any legal
action . . . concerning this Agreement, the prevailing party shall be awarded
its reasonable attorneys’ fees [and] costs.” PDX does not contest that if this
court reverses the district court and enters judgment in Safeway’s favor,
Safeway would be the prevailing party and entitled to its fees. Accordingly, we
remand to the district court for the purpose of considering the fees and costs to
which Safeway is entitled under the Agreement. 31
* * *
For the reasons set forth above, we REVERSE the district court’s entry
of summary judgment in favor of PDX, VACATE the district court’s award of
fees and costs, RENDER partial summary judgment in Safeway’s favor, and
REMAND for consideration of the fees and costs that Safeway seeks to recover.

29 See, e.g., Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705, 708 (Tex. 1987).
30 Vela v. City of Houston, 276 F.3d 659, 671 (5th Cir. 2001).
31 See Walker v. City of Mesquite, 313 F.3d 246, 252 (5th Cir. 2002).

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