Introduction. Negligent misrepresentation and fraud can be viable alternative causes of action to a breach of contract claim, as shown by the recent Texas federal court case of Correct RX Pharmacy Services, Inc. v. Cornerstone Automation Sys., L.L.C., 945 F.3d 423 (5th Cir. 2019). In this case, Plaintiff, Correct RX Pharmacy Services (“Correct RX”), contracted with Defendant, CASI Automation Systems, LLC (“CASI”), for CASI to provide an automated pharmacy delivery system. Correct RX advised CASI that time of completion was essential. CASI failed to timely perform and Correct RX filed this lawsuit.
Correct RX alleged causes of action for fraud and negligent misrepresentation, rather than breach of contract. The jury found in favor of Correct RX on the negligent misrepresentation allegations and awarded $3,131,064 in damages. CASI appealed this award on the grounds that Correct RX’s tort claim of negligent misrepresentation sounded in contract and was precluded by the economic loss rule. The 5th Circuit Court of Appeals disagreed with CASI and affirmed the trial court judgment based upon the jury verdict.
Background. Correct RX was in the business of providing pharmacy services to correction facilities and government entities. CASI was in the business of developing and providing automated pharmacy delivery systems. So, Correct RX began dealing with CASI to develop a more efficient means of providing pharmacy services to Correct Rx’s customers. According to the record, CASI made various representations about the quality of its services including that it had already developed software that, with only minor adaptations, would meet the needs of Correct RX.
Correct RX informed CASI that its lease at its current work location would soon expire and it was going to lease a larger facility to accommodate the new automated system that CASI would be providing. CASI agreed to develop and install the system within 30 weeks. Correct RX agreed to pay CASI $4,194,654 for its services with an enhanced down payment of over 50% to accommodate for this short completion deadline. After the agreement was entered, CASI experienced delays and later informed Correct RX that it would not be able to complete the project by the agreed deadline.
As a result, Correct RX negotiated an extension of its existing lease. Additionally, Correct RX and CASI amended their agreement so as to extend the delivery deadline in exchange for a $200,000 price deduction. Unfortunately, CASI failed to complete the project by the new deadline resulting in Correct RX suing CASI for negligent misrepresentation and fraud.
At the trial, the evidence included that CASI engineers informed CASI negotiators that the 30 week deadline could not be met and one of the engineers even testified that no Correct RX project he had worked on had ever been completed on time. The jury found in favor of Correct RX on the negligent misrepresentation claim and awarded damages for the deposits, equipment loan interest, $73,390 for out of pocket expenses, for a total award of $3,131,064.
Appellate Court’s Decision. On appeal, CASI argued that in Texas the “economic loss rule…generally precludes recovery in tort for economic losses resulting from the failure of a party to perform under a contract.” After reciting a history of Texas cases discussing the economic loss rule, the 5th Circuit found that it did not apply to Correct RX’s claims. In finding that it did not apply and affirming the trial court’s judgment against CASI, the Court stated:
What remains is the simple determination of whether Correct Rx satisfied Texas’s independent injury requirement by recovering only the damages permitted in a negligent misrepresentation suit under section 552B of the Second Restatement. See D.S.A., Inc., 973 S.W.2d at 663. This provision permits recovery “for the pecuniary loss” resulting from “the plaintiff’s reliance upon the misrepresentation.” Restatement (Second) of Torts § 552B(1)(a)-(b). It prohibits recovery of “the benefit of the plaintiff’s contract with the defendant.” Id. at (2). As the district court determined, Correct Rx recovered only its out-of-pocket expenses, placing it back into the position it occupied before its detrimental reliance on CASI’s negligent misrepresentations. The company did not recover the value of what CASI had promised. Given this straightforward analysis, the district court also did not err in finding that Correct Rx had satisfied Texas’s independent-injury requirement. Having established a breach of an independent duty and an independent injury within the meaning of Texas law on the matter, Correct Rx’s recovery was not precluded by the Texas contractual economic loss rule.
Correct RX Pharmacy Services, Inc. v. Cornerstone Automation Sys., L.L.C., supra.
Lessons Learned. Often times, parties to a business transaction are in a rush to close the deal. In reading this opinion, it is unclear whether the contract between Correct RX and CASI contained a clause disclaiming reliance upon extracontractual representations. As discussed in one of my previous blog articles, a tightly drafted disclaimer and integration clause can even provide a defense to a defendant being sued for fraudulent inducement to enter into a contract. (https://www.texascommerciallitigator.blog/2019/06/multi-million-dollar-judgment-against-ibm-reversed-by-texas-supreme-court.html). Possibly, a tightly drafted disclaimer and integration clause would have provided CASI with a defense to the tort claim of negligent misrepresentation. This case is also an example of the plaintiff thinking outside of the box in alleging alternative causes of action to a mere breach of contract. This was probably done to allow Correct RX to recover damages that were not recoverable for a mere breach of contract. This is a prime example of why it is important to retain experienced commercial litigation counsel in high-stakes business disputes.