Opinion
No. 01-06-01073-CV
Opinion issued February 5, 2009.
On Appeal from the 127th District Court, Harris County, Texas, Trial Court Cause No. 2002-27864B.
MEMORANDUM OPINION
In this products-liability suit brought by Sandstone Products, Inc. (Sandstone) against Para-Chem Southern, Inc. (Para-Chem) and Goodrich Corporation (Goodrich), the trial granted summary judgment in favor of Para-Chem and judgment as a matter of law in favor of Goodrich. The trial court also awarded Sandstone monetary sanctions against Para-Chem for discovery abuse. Para-Chem and Sandstone each appeal.
Para-Chem presents five issues in which it challenges the trial court's monetary sanctions. Sandstone raises two issues attacking the trial court's rendition of judgment in favor of Para-Chem and Goodrich.
We affirm the judgment in part and reverse in part.
Background
Sandstone manufactures roof sealant coatings. Resin is a component ingredient in Sandstone's roof sealant. From 1994 until 2002, Sandstone purchased resin from Scott Bader, Inc. (Scott Bader) to use in the manufacture of its roof sealant. Scott Bader provided a formula to Sandstone instructing it how to mix the resin with nine other ingredients to make Sandstone's roof sealant. Scott Bader's resin, known as "Texigel," was the component ingredient that caused Sandstone's roof coating to "bind" or adhere to roofs.
In 1999, Sandstone began receiving complaints from its customers that its roof sealant was swelling with water and not adhering to roofs. Sandstone ultimately concluded that Texigel was causing the failure of its roof sealant. Scott Bader denied the claim, contending that Sandstone was mixing the sealant incorrectly.
In 2002, Sandstone sued Scott Bader and its distributor, National Pigment Chemicals, Inc. (NPCI). Through the discovery process, Sandstone learned that Scott Bader did not actually manufacture Texigel; rather, Scott Bader contracted with "toll" or sub-manufacturers to make the product. The toll manufacturers then placed Scott Bader's label on the product. Goodrich was Scott Bader's toll manufacturer until 1999. At that point, Para-Chem began to make Texigel for Scott Bader. In May 2004, Sandstone added Para-Chem and Goodrich to the lawsuit.
One of the allegations that Sandstone made against Scott Bader was that Scott Bader was aware that Texigel deviated from its product specifications. More precisely, Sandstone charged that Scott Bader was aware that Goodrich, its toll manufacturer, had at some point deviated from the resin formula of Scott Bader's British parent corporation and had started using styrene acrylic instead of pure acrylic to make Texigel. It is undisputed that Texigel is a styrene acrylic resin not a pure acrylic resin. Styrene acrylic contains the compound acrylamide, a water absorbent material, not a water resistant material. For this reason, Sandstone contended that Texigel was unsuitable for use in commercial roof sealant coatings.
Sandstone alleged that Scott Bader was also aware that quality control issues persisted with Texigel, even after Scott Bader contracted with new toll manufacturer, Para-Chem. Sandstone asserted that, despite Scott Bader's awareness of these problems and its awareness of Sandstone's customer complaints, Scott Bader never disclosed this information to Sandstone.
During litigation, a discovery dispute arose between Scott Bader and Sandstone. Sandstone filed motions to compel production of information and documentation regarding product specification and testing, other customer complaints received by Scott Bader, and the identity of the current or former Scott Bader employees most knowledgeable regarding product development and formulation issues. Scott Bader responded that it had produced all testing documents and that it had no customer complaints, other than those of Sandstone. As supplier and seller, Scott Bader claimed that it had never been involved in the mixing or formulation of Texigel. It informed Sandstone that the person with the most knowledge regarding product formulation was a person who resided in the United Kingdom and was not a Scott Bader employee. Scott Bader did not reveal the identity of the person.
From May 2004 until March 2005, Scott Bader produced approximately 200 pages of documents to Sandstone in response to Sandstone's discovery requests. On March 1, 2005, Scott Bader produced 8,000 pages of documents to Sandstone. Before the production of these documents, Scott Bader and Para-Chem had filed no-evidence motions for summary judgment against Sandstone. Also by this point, Sandstone had already taken numerous depositions.
On August 15, 2005, which was shortly before trial, Sandstone filed a motion for sanctions against Scott Bader. The principal basis for the motion was that Scott Bader had failed to timely produce an important, responsive document. On March 1, 2005, as part of the 8,000-page document production, Scott Bader produced, for the first time, a memorandum authored by Scott Bader employee, David Boothe. The Boothe memorandum was the first page of a 17-page document.
Scott Bader had previously produced the document on July 15, 2004, without the Boothe memorandum. In that earlier document production, the document's second page had a handwritten number "1" on the top, right corner. Thus, page two appeared to be the document's first page, rather than its second page. The Boothe memorandum was correctly produced as the first page of the 17-page document toward the end of the 8,000-page document production on March 1, 2005. At that time, Scott Bader did not point out to Sandstone that the document's actual first page, i.e., the Boothe memorandum, had been left off when the document was first produced in July 2004.
The Boothe memorandum was written on November 9, 2000 and identifies concerns associated with Scott Bader's transition from toll manufacturer Goodrich to toll manufacturer Para-Chem. The Boothe memorandum stated that Texigel was manufactured by Goodrich until August of 1999 and that Scott Bader "changed to Para-Chem at that time to start a closer relationship with the [Para-Chem] folks and to increase our margins" on Texigel. The Boothe memorandum revealed that, at the time of the transition, Scott Bader was without a president and that Terry Strickland (an employee of Scott Bader's British parent company) was the "main lead" on the transition from Goodrich to Para-Chem. The Boothe memorandum stated that "our singular pursuit should be to handle viscosity drift and stability issue." The memorandum acknowledges that the "USA formulation" for Texigel differs from the "UK version" because the "US version contains acrylamide, where the UK version does not."
The memorandum notes that the "UK people" handled the transfer from Goodrich to Para-Chem and continues,
There was no control material sent at the time. The lab material was made and reviewed in the UK and approvals were sent from the UK. Once we changed to [Para-Chem], we never went back to [Goodrich]. It is now Nov. 2000 and we are reviewing the scale up performed at [Para-Chem] because we believe we have a slightly different product due to viscosity drifts and also extra tackiness (as reported from our customers).
Sandstone contended that the Boothe memorandum was a "smoking gun" document because it refuted many of the previous representations made by Scott Bader during the discovery process. Significantly, at least eight witnesses, including the memorandum's author, David Boothe, had already been deposed when Sandstone had received the Boothe memorandum on March 1, 2005.
In addition, Scott Bader produced documents revealing that, at one point, Terry Strickland had been Scott Bader's director. Sandstone contended that this was relevant because it further highlighted the importance of Strickland's role in the production of Texigel. Sandstone alleged that Scott Bader should have identified Strickland as the corporate representative with the most knowledge of formulation and testing for deposition purposes.
Scott Bader also produced customer invoices from which the customer names and addresses had been redacted by hand. Sandstone asserted that Scott Bader had redacted the information to prevent Sandstone from identifying other customers that may have experienced similar problems with Texigel, as referenced in the Boothe memorandum. Sandstone also pointed out that it had discovered that another Scott Bader customer, Sealoflex, had complained to Scott Bader about a roofing issue. Scott Bader did not produce the documents related to the Sealoflex complaint; rather, Sandstone had obtained the documents by subpoena directly from Sealoflex. The trial court granted Sandstone's request for sanctions following a hearing. In its sanctions, order signed on August 22, 2005, the trial court made the following findings of fact:
a.The Court finds that Defendant SCOTT BADER has knowingly and in flagrant bad faith engaged in discovery abuse, including the following:
(i)withholding critical responsive documents until the production of more than 8,000 pages of documents on March 1, 2005, after the depositions in the lawsuit had already taken place of witnesses set in this order [the trial court later identified the depositions of eight witnesses].
(ii)producing documents in a manner calculated to conceal information (through removing the key first page of a document and marking out information in other documents), with conflicting and inadequate explanations for the same that lack credibility;
(iii)presenting deposition witnesses with such critical documents and information concealed or not produced;
(iv)failing to name Terry Strickland as a witness with knowledge of relevant facts, or to produce responsive documents, related to Strickland's role as director of Defendant SCOTT BADER, his role as the "main lead" in Defendant SCOTT BADER's transition from using Co-Defendant Goodrich['s] services to those of Co-Defendant Para-Chem, his direct supervision over specific issues regarding the formulation and testing of Defendant's product, and his direct involvement in specific issues related to customer reports of problems.
(v)failing to produce as a corporate representative a witness with knowledge as requested; and
(vi)filing two no-evidence motions for summary judgment motions on December 10, 2004 and February 23, 2005, respectively, when Defendant SCOTT BADER and its counsel knew that the production of documents and witnesses was deficient.
b.In particular, [the] Court finds that Defendant SCOTT BADER's actions were calculated to conceal evidence that would indicate
(i)that SCOTT BADER's product did not meet its stated specifications; and
(ii)that the stated specifications were modified.
c.The Court further finds that Defendant SCOTT BADER's actions and representations to the Court throughout the pretrial discovery indicate a pattern or history of bad faith discovery abuse, demonstrate callous disregard for the responsibilities of discovery under the rules, and significantly interfere with the integrity and core judicial functions of this Court and its rulings;
d.For all of the reasons of [sic] above, the Court finds that Defendant SCOTT BADER prejudiced Plaintiff SANDSTONE's ability to present its case.
The trial court's sanctions order further provides,
The sanctions order below is directly related to the offensive conduct, and is appropriate and necessary because a lesser sanction will not promote compliance. The Court has considered the possibility of all lesser available options. Under these circumstances, however, there is [sic] no lesser sanctions available to address and deter Defendant SCOTT BADER's conduct while preserving SANDSTONE's rights. The trial court awarded the following sanctions to Sandstone:
Plaintiff has requested and shall be entitled to the following jury instruction, which shall be treated as a partial default judgment limiting issues in dispute as Defendant Scott Bader, Inc. and its indemnified co-defendant's pleadings [are] struck to this extent:
"You are to presume (1) that the product that was shipped between mid-1999 and 2001 did not meet the specifications Scott Bader provided to Sandstone, and (2) that the specifications that Scott Bader provided to Sandstone for the product during mid-1999 and 2001 were modified."
Defendant SCOTT BADER and the party it indemnifies [NPCI] shall not be permitted to rebut the factual presumptions above and any affirmative defenses addressed to this issue shall be stricken.
The trial court also ruled that Scott Bader could not use Terry Strickland as a witness at trial and ordered that Scott Bader "may not use the deposition testimony of any witness from a deposition unless SCOTT BADER first demonstrates to the Court that such deposition was taken after full production of documents." The trial court then identified eight witnesses that were deposed before Scott Bader's "production of critical documents on March 1, 2005."
The trial court further ordered that Scott Bader pay $68,000 in sanctions for attorney's fees and expenses incurred by Sandstone attributable to Scott Bader's discovery abuse. The trial court also set aside earlier rulings on summary judgments and struck motions for summary judgment filed after March 1, 2005.
The trial court signed an order severing the sanctions orders from the remainder of the case. The trial court then signed a final judgment in the severed case that incorporated the sanctions orders, thereby making the sanctions order final for purposes of appeal. Scott Bader appealed the sanctions order to this Court in appellate cause number 01-05-00940-CV.
Goodrich and Para-Chem requested that Sandstone's claims against them be tried separately. Goodrich and Para-Chem asserted that they would be unfairly prejudiced by the sanctions, particularly the jury instruction regarding liability. The court granted Goodrich's and Para-Chem's request.
Sandstone tried its claims against Scott Bader in September 2005. Pursuant to the earlier sanctions order, the trial court instructed the jury as follows:
BINDING INSTRUCTIONS
The following instructions are binding on the jury.
You are given these binding instructions by the Court for all purposes in this Charge and to govern your deliberations and answers to the Jury Questions.
The Jury is instructed that:
(1)The specifications that Scott Bader provided to Sandstone for the product during mid-1999 and 2001 were modified.
(2)The product that was shipped between mid-1999 and 2001 did not meet the specifications Scott Bader provided to Sandstone.
These instructions are also binding instructions. You are further instructed that:
Modification of Specifications
Such modification of the specifications is a breach of the sales contract between Scott Bader and Sandstone.
Such modification is a breach of the warranty from Scott Bader to Sandstone.
Failure to Meet Specifications
Such failure to meet specifications is a breach of the sales contract between Scott Bader and Sandstone.
Such [failure to meet specifications] is a breach of the warranty from Scott Bader to Sandstone.
The first jury question following the binding instructions asked the jury, "What sum of money, if any, if paid now in cash, would fairly and reasonably compensate Sandstone Products, Inc. for its damages, if any, that resulted from modification of specifications and failure to meet specifications as instructed?" In response to this question, the jury awarded Scott Bader a total of $3,375,000 in actual damages.
The next four questions pertained to Sandstone's DTPA claim. In addition to the actual damages awarded in the first jury question, the jury awarded $950,000, $225,000, and $25,000 for each of Scott Bader's knowing violations of the DTPA.
The jury further found that Scott Bader had committed fraud and negligent misrepresentation. With regard to these claims, the jury awarded Sandstone $300,000 for the reasonable and necessary cost of the repair or replacement of the failed roof coatings and $30,000 for Sandstone's past lost profits. Lastly, the jury awarded Sandstone $486,000 for attorney's fees.
The trial court rendered judgment in the "A" case awarding Sandstone the actual damages found by the jury in Question Number 1, totaling $3,375,000, the $950,000 in additional damages awarded for Scott Bader's knowing DTPA violation, and $486,000 for attorney's fees. The trial court also awarded $903,667 in pre-judgement interest. Scott Bader appealed the trial court's judgment in appellate cause number 01-06-00593-CV.
The trial court then severed Sandstone's claims against Goodrich and Para-Chem. The severed "B" case against Para-Chem and Goodrich proceeded toward trial, with additional discovery being conducted.
On February 28, 2006, Sandstone filed a motion for sanctions against Para-Chem. Sandstone alleged that Para-Chem had colluded with Scott Bader to obfuscate the discovery process and, more precisely, to conceal the Boothe memorandum. Sandstone asserted that it had uncovered Para-Chem's complicity following the Scott Bader trial. Sandstone argued that, like Scott Bader, Para-Chem had filed no-evidence motions for summary judgment despite knowing that certain responsive, case-determinative documentation had been withheld from Sandstone.
Sandstone further asserted that Para-Chem had misled the trial court when Para-Chem requested to be tried separately from Scott Bader. In its motion for a separate trial, Para-Chem had asserted that it was innocent of discovery abuse and would be unfairly penalized if it were tried with Scott Bader and subject to the same adverse jury instructions as Scott Bader.
On April 6, 2006, Para-Chem filed its third motion for summary judgment against Sandstone. Ultimately, the trial granted summary judgment in Para-Chem's favor and judgment as a matter of law in Goodrich's favor.
The trial court further determined that Para-Chem should be sanctioned for discovery abuse. The trial court signed a sanctions order against Para-Chem on August 21, 2006. The sanctions order provides, in part, as follows:
Scott Bader resisted and concealed highly relevant discovery including Para-Chem's role and involvement in the production of the product in question. Court intervention was necessary to obtain compliance with valid pre-trial discovery requests to Scott Bader including orders to require disclosure and discovery of documents, to require the identification of persons with knowledge of relevant information, and take the depositions of vital witnesses with personal knowledge, even to require the disclosure of Para-Chem as the "toll manufacturer" of the product in question. All that could be done to hinder discovery was done.
Para-Chem resisted and concealed highly relevant discovery of the role of Scott Bader and its own role in the production of the product in question. Discovery from Para-Chem was crucial to proof of the facts in the underlying case against Scott Bader. Para-Chem first worked to conceal documents ordered to be produced, and when such concealment became apparent, Para-Chem embarked on a course to obscure its obstructive conduct.
Discovery from the defendants was crucial to seeking the true facts and circumstances in this dispute. Plaintiff [Sandstone] was entitled to such discovery under the Rules of Civil Procedure.
. . . .
The Court finds that the discovery directed by [Sandstone] to Para-Chem was relevant to the claims of [Sandstone] against Scott Bader, the principal of Para-Chem, which was the agent of Scott Bader to produce the product in question.
From the discovery documented by [Sandstone], the Court finds that Para-Chem was not forthright with the Court involving failure to produce relevant information. The Court finds that Defendant Para-Chem knowingly was involved in the activities that led to the sanctions levied against Scott Bader in the underlying case. The Court finds that Defendant Para-Chem intentionally failed to accurately respond to document production and to requests to identify persons with knowledge of relevant facts. If the accurate facts had been disclosed to the Court, discovery sanctions against Defendant Scott Bader would have included Defendant Para-Chem; a separate trial would not have been granted Defendant Para-Chem; and [Sandstone's] discovery costs since the granting of the separate trial would have been minimized.
This lack of forthrightness and failure to fully respond continued in this separate trial granted when the Court did not have knowledge of Para-Chem's involvement and allowed the claims against Para-Chem to continue at added, needless expense.
[Sandstone's] motions for sanctions against Defendant Para-Chem are granted. The Court is mindful that a sanction for discovery abuse should be tailored to the harm resulting. The Court's analysis of the cause against Defendant Para-Chem as the undisclosed agent of Scott Bader, Inc. will result in a take nothing judgment in favor or Defendant Para-Chem on the basis of the legal issues involved, thereby rendering the factual dispute as to defective nature of Para-Chem's product immaterial to liability of Para-Chem. The Court declines to levy any sanctions that would alter the proper ruling on the legal basis of the claim. That leaves the troubling issue of how to address the serious violation found against a party which knowingly participated in a scheme to block the opposing party's acquisition of damaging discovery.
The Court finds a sanctions assessment of $250,000 against Para-Chem.
Finding that Para-Chem was knowingly involved in the discovery abuse prior to the Scott Bader, Inc. trial, [the] Court rules that this pattern of abuse should be met with a judgment that Para-Chem is jointly and severally liable with Scott Bader, Inc. for the amount of $68,000, the attorney's fees and expenses that the Court was able to segregate at the time of the discovery of the original discovery abuse. . . .
In addition, due to the actions in electing a separate trial, [Sandstone] needlessly incurred extensive attorney's fees. [Sandstone] shall be awarded its attorney's fees incurred in this "B" suit which the Court finds to be $375,000 through trial and appellate fees of $70,000 in the Court of Appeals, $40,000 if a Petition for Review is filed in the Supreme Court, and $30,000 if the Petition is granted. All costs for the severance and all costs for depositions taken in this severed cause are taxed against Defendant Para-Chem, including any costs incurred by Defendant Goodrich Corporation.
The trial court signed its final judgment in the "B" case on August 22, 2006, incorporating the sanctions order against Para-Chem and the trial court's rulings that Para-Chem and Goodrich were entitled to judgment, as a matter of law, regarding Sandstone's claims. Both Para-Chem and Sandstone appealed the trial court's judgment.
On February 28, 2008, we issued our opinion in appellate cause number 01-05-00940-CV (Scott Bader's appeal of the sanctions order against it) and in 01-06-00593-CV (Scott Bader's appeal of the judgment in the "A" case awarding Sandstone damages against Scott Bader). In the sanctions appeal, we reversed the sanctions order in part and remanded and affirmed it in part. We concluded that the trial court did not abuse its discretion by finding that Scott Bader had engaged in sanctionable conduct during the discovery process. We affirmed the sanctions order with regard to the $68,000 in sanctions for attorney's fees attributable to Scott Bader's discovery abuse.
Scott Bader, Inc. v. Sandstone Products, Inc., 248 S.W.3d 802, 818 (Tex.App.-Houston [1st Dist.] 2008, no pet.).
Id. at 814.
With regard to the portions of the sanctions order (1) requiring the jury to be instructed that Scott Bader's product did not meet specifications and that product specifications provided by Scott Bader to Sandstone had been modified, (2) prohibiting Scott Bader from rebutting these presumptions, and (3) striking Scott Bader's affirmative defenses addressed to this issue, we concluded that the trial court abused its discretion because it had not first considered the imposition of lesser sanctions. We reversed the order with respect to those sanctions and remanded to the trial court for further proceedings.
Id. at 815.
Id. at 823.
In Scott Bader's appeal of the money judgment, we concluded that the improper sanctions ordered by the trial court affected and shaped the presentation and development of the "A" case at trial, for both Sandstone and Scott Bader.
Id. at 822.
For this reason, we reversed the money judgment against Scott Bader and remanded the case for further proceedings.
Id.
Para-Chem's Sanctions Appeal
Raising five issues, Para-Chem challenges the trial court's assessment of monetary sanctions against it. As reflected in the August 21, 2006 sanctions order, the trial court sanctioned Para-Chem for aiding Scott Bader in obstructing the discovery process and for itself failing to accurately respond to requests for document production and to requests for the identity of persons with knowledge of relevant facts.
A. Standard of Review and Governing Principles
We review a trial court's ruling on a motion for sanctions under an abuse of discretion standard. Cire v. Cummings, 134 S.W.3d 835, 838 (Tex. 2004). A trial court abuses its discretion when its ruling is arbitrary and unreasonable without reference to any guiding rules and principles. Id. at 838-39. In conducting our review, we are not limited to a review of the "sufficiency of the evidence" to support the trial court's findings; rather, we make an independent inquiry of the entire record to determine if the court abused its discretion by imposing the sanction. Daniel v. Kelley Oil Corp., 981 S.W.2d 230, 234 (Tex.App.-Houston [1st Dist.] 1998, pet. denied) (op. on reh'g).
Rule of Civil Procedure 215.2 allows a trial court to enter "just" sanctions for a party's failure to comply with a discovery order or request. TEX. R. CIV. P. 215.2. The Supreme Court of Texas in TransAmerican Natural Gas Corp. v. Powell developed a two-part test for courts to apply when determining whether a sanction is "just." 811 S.W.2d 913, 917 (Tex. 1991). First, there must be a direct nexus among the offensive conduct, the offender, and the sanction imposed. Spohn Hosp. v. Mayer, 104 S.W.3d 878, 882 (Tex. 2003) (citing TransAmerican, 811 S.W.2d at 917). A just sanction must be directed against the abuse and toward remedying the prejudice caused to the innocent party, and the sanction should be visited upon the offender. Id.
Second, just sanctions must not be excessive. TransAmerican, 811 S.W.2d at 917. That is, a sanction imposed for discovery abuse should be no more severe than necessary to satisfy its legitimate purposes, which includes securing compliance with discovery rules, deterring other litigants from similar misconduct, and punishing violators. Id.; see Spohn Hosp., 104 S.W.3d at 882; Chrysler Corp. v. Blackmon, 841 S.W.2d 844, 849 (Tex. 1992). For this reason, the supreme court requires courts to consider less stringent sanctions and whether such lesser sanctions would fully promote compliance. TransAmerican, 811 S.W.2d at 917; see Cire, 134 S.W.3d at 839; Spohn Hosp., 104 S.W.3d at 882.
B. The Sanctionable Conduct
In its first issue, Para-Chem contends that, because Scott Bader's conduct with respect to discovery was not sanctionable, Para-Chem cannot be sanctioned for aiding or colluding with Scott Bader. Para-Chem's briefing in this appeal was filed before we issued our opinion in Scott Bader's sanctions appeal. In our opinion, we concluded that the trial court had not abused its discretion with regard to finding that Scott Bader had engaged in sanctionable conduct. Scott Bader, Inc. v. Sandstone Products, Inc., 248 S.W.3d 802, 812-14 (Tex.App.-Houston [1st Dist.] 2008, no pet.). Of particular relevance to the trial court's sanctions order against Para-Chem, we concluded that the record supported the trial court's finding that Scott Bader abused the discovery process regarding the production of the Boothe memorandum and the disclosure of Terry Strickland's identity and role. Id. The opinion discusses the significance of the Boothe memorandum and the misleading way in which Scott Bader initially produced the 17-page document without the Boothe memorandum. Id. at 813-14. The opinion also makes clear that the untimely production of the Boothe memorandum is sanctionable conduct despite the fact that it was produced five months before trial. See id. at 814. The opinion notes that at least eight witnesses, including the memorandum's author, David Boothe, were deposed before Sandstone received the memorandum. Id. As such, Scott Bader's discovery caused Sandstone to incur attorney's fees and other expenses.
Para-Chem does not premise its challenge to the sanctions on the ground that ScottBader's discovery abuse should not be imputed to it. In this regard, we note that the record shows that Para-Chem and Scott Bader had a joint defense agreement under which each could review the discovery responses of the other before the responses were given to Sandstone. Para-Chem also does not address the language of the trial court's sanctions order indicating that Para-Chem was also sanctioned for its own discovery abuse. Pertinent to this finding, the record shows that Para-Chem had the Boothe memo in its records, the memo was responsive to requests propounded by Sandstone on Para-Chem, and Para-Chem failed to produce the memo in its September 10, 2004 discovery responses. As did Scott Bader, Para-Chem produced the 17-page document, of which the Boothe memo is the first page, without the memo on October 21, 2004. Para-Chem finally produced the Boothe memo on October 25, 2005, after the Scott Bader trial. This indicated that Para-Chem had the memo in its records but failed to disclose it. Applying an abuse of discretion standard, we cannot say, on this record, that the trial court abused its discretion by finding that ScottBader's sanctionable conduct could be imputed to Para-Chem or by finding that Para-Chem itself engaged in discovery abuse.
Our earlier decision determining that the trial court did not abuse its discretion by finding that Scott Bader engaged in sanctionable discovery abuse is sound and supported by the record. Here, Para-Chem presents no new arguments regarding why Scott Bader's conduct was not sanctionable. Thus, we will not revisit that determination.
We overrule Para-Chem's first issue to the extent that it challenges the propriety of the trial court's finding that Scott Bader engaged in sanctionable conduct, which the trial court imputed to Para-Chem.
C. Propriety of Sanctions
In its fifth issue, Para-Chem contends that each of the monetary sanctions assessed was excessive or "legally improper."
1. $375,000 Attorney's Fees Sanction
The trial court assessed a $375,000 sanction against Para-Chem, which represents the total attorney's fees Sandstone claimed that it incurred in prosecuting the "B" suit against Para-Chem and Goodrich. Sandstone supported the amount of its attorney's fees with affidavits of two of its attorneys. The attorneys averred that $375,000 was the amount of fees Sandstone incurred since the conclusion of the Scott Bader trial on October 11, 2005 until the "B" suit was called to trial on May 15, 2006. In its order, the trial court supported the sanction by reasoning that, because Para-Chem elected a separate trial from Scott Bader, Sandstone "needlessly incurred extensive attorney's fees." The trial court also stated in its order that, had it known of Para-Chem's sanctionable conduct before the Scott Bader trial, it never would have granted Para-Chem a separate trial; rather, it would have required Para-Chem to be tried with Scott Bader.
Courts may award attorney's fees as a sanction for violations of the discovery process. See TEX. R. CIV. P. 215.2(b)(8); Brantley v. Etter, 677 S.W.2d 503, 504 (Tex. 1984); City of Colleyville v. Powell, 846 S.W.2d 126, 128 (Tex.App.-Fort Worth 1993, writ denied). Nonetheless, a court abuses its discretion when there is no reasonable relationship between the harm done and the sanction assessed. Bradt v. Sebek, 14 S.W.3d 756, 761 (Tex.App.-Houston [1st Dist.] 2000, pet. denied). A just sanction must be directed against the abuse and toward remedying the prejudice created against the innocent party. Transamerican, 811 S.W.2d at 917. A sanction is excessive if the punishment does not fit the crime. Id.
Here, the $375,000 attorney's fees sanction lack a reasonable relationship to the harm done by the cited discovery abuse. In its order, the trial court reasoned that, had it known of Para-Chem's participation in the discovery abuse before the Scott Bader trial, it would have required Para-Chem to have been tried with Scott Bader and presumably would have been subject to the same adverse jury instruction regarding liability. This reasoning, however, cannot be reconciled with the trial court's ultimate determination that Sandstone was not entitled to a trial against Para-Chem, as a matter of law; rather, Para-Chem was entitled to summary judgment.
The $375,000 attorney's fees sanction was also excessive for remedying the prejudice caused, if any, to Sandstone. As pointed out by Para-Chem, Sandstone would have incurred attorney's fees in prosecuting its suit against Goodrich regardless of whether the trial court had denied Para-Chem's request for a separate trial. Any attorney's fees awarded as a sanction should have been limited to those fees attributable to the harm or prejudice caused by Para-Chem's sanctionable conduct. The amount awarded necessarily exceeds this amount. Sandstone neither presented evidence of only those fees attributable to Para-Chem's conduct nor made a showing why such fees could not be segregated.
In short, the record does not support the trial court's $375,000 sanction. Accordingly, the trial court abused its discretion by awarding the $375,000 in attorney's fees sanction.
2. Appellate Fees as Sanctions
Para-Chem also challenges the sanctions directing Para-Chem to pay "appellate fees of $70,000 in the Court of Appeals, $40,000 if a Petition for Review is filed in the Supreme Court, and $30,000 if the Petition is granted." Para-Chem asserts that the sanctions are not permitted. We agree.
"[A]lthough a trial court may grant appellate attorney's fees as part of a sanctions order under Rule 215, the court must condition the award on the outcome of the appeal." In re Ford Motor Co., 988 S.W.2d 714, 721 (Tex. 1998). Rule 215 only allows the shifting of appellate costs to the party seeking review of the trial court's order when that party does not succeed on appeal. Id. Permitting an unconditional award of appellate fees would deter a party from seeking appellate review and unjustly penalize a party for seeking such relief. See id.
In this case, the trial court did not condition the award of appellate costs on the outcome of the appeal process. The sanction in no manner related to the harm suffered as a result of the Para-Chem's discovery abuse and served only to improperly deter Para-Chem from seeking review of the sanctions order. See id. We hold that the trial court abused its discretion by awarding appellate costs without conditioning the award on the outcome of the appellate process. See id. 3. $250,000 Penalty
Para-Chem challenges the trial court's award of $250,000 as a sanction against it. Para-Chem asserts that the award is "arbitrary and capricious."
The sanctions order reflects that the trial court was troubled with regard to what sanctions it could assess against Para-Chem in light of the trial court's determination that Para-Chem was entitled to a take-nothing judgment against Sandstone, as a matter of law. As a solution, the trial court assessed what is essentially a $250,000 fine or penalty.
The record does not reveal how the trial court arrived at the amount of the $250,000 sanction levied against Para-Chem nor does it contain evidentiary support for the $250,000 sanction. When a monetary sanction is imposed, the sanctionable conduct alone does not prescribe the amount of the sanction. Stromberger v. Turley Law Firm, 251 S.W.3d 225, 227 (Tex.App.-Dallas 2008, no pet.). "To review the decision of the amount of the monetary sanction imposed by examining only the conduct giving rise to the sanction would permit a `wavering standard of subjectivity' unrestrained by law or statute." Id.
In short, arbitrary fines, such as the $250,000 sanction in this case, are not susceptible to meaningful review. See id. at 226-27. We can determine no reason why the trial court chose to impose a $250,000 sanction rather than some other amount. Without supporting evidence or an explanation regarding the basis of the trial court's award, we cannot determine whether the $250,000 sanction is just or excessive. See id. at 227; see also IFC Credit Corp. v. Specialty Optical Systems, Inc., 252 S.W.3d 761, 773 (Tex.App.-Dallas 2008, pet. filed). We conclude that the trial court abused its discretion by awarding Sandstone $250,000 in sanctions against Para-Chem. See Stromberger, 251 S.W.3d at 227.
In support of the $250,000 sanction, Sandstone points out that, after the Scott Bader trial, it discovered additional documents improperly withheld by Para-Chem that were responsive to Sandstone's discovery requests. We do not agree that the with holding of these "post-trial documents" necessarily support the trial court's $250,000 sanction. The trial court does not mention the post-trial documents as a basis for any of the sanctions. And, as mentioned, when a monetary sanction is imposed, the sanctionable conduct alone does not prescribe the amount of the sanction. Stromberger v. Turley Law Firm, 251 S.W.3d 225, 227 (Tex.App.-Dallas 2008, no pet.).
4. $68,000 Sanction
Para-Chem also challenges the trial court's order that "Para-Chem is jointly and severally liable with Scott Bader, Inc. for the amount of $68,000, the attorney's fees and expenses that the Court was able to segregate at the time of the discovery of the original discovery abuse." Para-Chem contends that the affidavit of Sandstone's attorney, which provided that Sandstone incurred $68,000 in attorney's fees to address Scott Bader's discovery abuse, was conclusory and constituted insufficient evidence to support the award. Para-Chem asserts that Sandstone failed to show that the attorney's fees were reasonable and necessary. Scott Bader made these same assertions in its appeal of the $68,0000 sanction. Scott Bader, 248 S.W.3d at 816-17. There, we recognized that "[i]n cases in which the judgment is not one for earned attorney's fees, but rather a judgment imposing attorney's fees as sanctions, it is not invalid because a party fails to prove attorney's fees." Id. at 816. "When attorney's fees are assessed as sanctions, no proof of necessity or reasonableness is required." Id. at 817 (quoting Miller v. Armogida, 877 S.W.2d 361, 365 (Tex.App.-Houston [1st Dist.] 1994, writ denied)). We concluded that "by focusing on the lack of evidentiary value of [the attorney's] affidavit to prove the reasonableness and necessity attorney's fees actually earned by Sandstone's attorneys, Sandstone has not demonstrated that the trial court abused its discretion when it awarded $68,000 in attorney's fees as sanctions." Id.
We further noted that, in addition to the attorney's affidavit, the record indicated "that much of Sandstone's attorney time was affected by the sanctionable conduct." Id. For example, "[a]t least eight depositions were taken by Sandstone in locations across the United States without the benefit of the Boothe memorandum." Id. And, "the record reflect[ed] that Sandstone's counsel prepared two motions to compel discovery and engaged in communications with Scott Bader's counsel over a substantial period in an attempt to obtain discoverable information." Id.
We concluded that "Scott Bader has not shown that the trial court abused its discretion by awarding $68,000 in attorney's fees and expenses as sanctions." Id. For the reasons discussed in the Scott Bader opinion, we similarly conclude here that Para-Chem has not shown that the trial court abused its discretion by ordering that Para-Chem is jointly and severally liable with Scott Bader for $68,000 in attorney's fees and expenses. 5. Conclusion Regarding Sanctions
Although not specifically directed at the $68,000 in sanction, arguments raised in Para-Chem's other issues may have application to this sanction. Para-Chem asserted in its second issue that the sanctions assessed were improper because the trial court ultimately ruled that Para-Chem was not liable to Sandstone. We find no case law holding that an ultimate determination of liability is required to support a sanction against a defendant. To the contrary, "sanctions serve a variety of purposes, including the compensation of a party for past prejudice or punishment and deterrence of bad faith conduct." Johnson v. Chestnutt, 225 S.W.3d 737, 742 (Tex.App.-Dallas 2007, pet. denied) (citing Aetna Casualty Surety Co. v. Specia, 849 S.W.2d 805, 807 n. 4 (Tex. 1993)). Courts have held that, even when a suit is dismissed against a defendant, sanctions may survive. See id. (concluding that sanctions for discovery abuse not rendered moot by plaintiff's nonsuit of claims). In issues two and three, Para-Chem further attacks the sanctions by asserting that the mere delay of production of documents, such as the Boothe memo, should not result in sanctions when Sandstone had the memo five months before trial. We disagree. As discussed with respect to the $68,000 sanctions Scott Bader's discovery abuse caused Sandstone to incur additional attorney's fees and expenses. Significantly, the production of the Boothe memo occurred after at least eight depositions had been taken, including Booth's deposition. Thus, we overrule Sandstone's issues with respect to these arguments.
On this record, the only sanction shown to be allocable to Para-Chem's wrongful conduct cited in the trial court's August 21, 2006 order and supported by sufficient evidence is the $68,000 sanction for which Para-Chem is jointly and severally liable. Sandstone neither showed that the $375,000 attorney's fees sanction is allocable to the wrongful conduct cited in the sanctions order nor that the $375,000 sanction is not excessive. Regarding the $250,000 sanction, Sandstone failed to offer proper evidentiary support for this award.
We hold that the trial court abused its discretion with regard to assessing the $375,000 attorney's fees sanction and $250,000 sanction. We reverse the judgment with respect to these sanctions and render judgment that appellant takes nothing with regard to the $375,000 attorney's fees sanction and $250,000 sanction.
The trial court did not properly condition the appellate fee sanction on the outcome of Para-Chem's appeal. For this reason, we hold that the trial court abused its discretion by awarding appellate fees as sanctions. We reverse the trial court's judgment with respect to the appellate fee sanctions and render that Sandstone take nothing with respect to them.
Because Para-Chem has generally prevailed on its sanctions appeal, we need not remand the appellate fee sanctions to the trial court for the court to sign an order that conditions the appellate fee sanction on the outcome of the appeal.
As discussed, we sustain Para-Chem's fifth issue in part and overrule it in part.
Because we have resolved issues that are dispositive of Para-Chem's sanctions appeal, we need not address any remaining issues Para-Chem has raised.
Sandstone's Appeal
In its appeal, Sandstone challenges the trial court's summary judgment in favor of Para-Chem and the trial court's rendition of judgment in favor of Goodrich at the Rule 166 pretrial conference.
A. Summary Judgment in Favor of Para-Chem
In its fifth amended petition, Sandstone alleged that the Texigel resin made by toll manufacturers Para-Chem and Goodrich "had substandard adhesive qualities, which resulted in deterioration, resulting in numerous warranty and liability claims against Sandstone [by its customers]." Sandstone sued Para-Chem and Goodrich for breach of implied warranty of merchantability and breach of implied warranty of fitness for a particular purpose. Para-Chem also asserted a Deceptive Trade Practices Act Claim (DTPA) claim based on its breach of warranty claims. Para-Chem moved for traditional summary judgment, which was granted by the trial court.
1. Standard of Review
The movant for traditional summary judgment must show that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. TEX. R. CIV. P. 166a(c); Nixon v. Mr. Property Management Co., Inc., 690 S.W.2d 546, 548 (Tex. 1985). A defendant moving for traditional summary judgment must conclusively negate at least one essential element of each of the plaintiff's causes of action. Sw. Elec. Power Co. v. Grant, 73 S.W.3d 211, 215 (Tex. 2002). Evidence is conclusive only if reasonable people could not differ in their conclusions. City of Keller v. Wilson, 168 S.W.3d 802, 816 (Tex. 2005). Once the defendant establishes its right to summary judgment as a matter of law, the burden shifts to the plaintiff to present evidence raising a genuine issue of material fact, thereby precluding summary judgment. City of Houston v. Clear Creek Basin Auth., 589 S.W.2d 671, 678-79 (Tex. 1979).
We review a trial court's grant of a traditional summary judgment de novo. See Provident Life Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex. 2003). When reviewing a traditional summary judgment, we take as true all evidence favorable to the nonmovant, and we indulge every reasonable inference and resolve any doubts in the nonmovant's favor. Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 157 (Tex. 2004).
2. Breach of Implied Warranty of Merchantability
A plaintiff asserting a breach of implied warranty of merchantability claim must show as follows: (1) that the product was defective as unfit for its purpose because of a lack of what was required for adequacy; (2) that the alleged defect existed when the product left the defendant's possession; and (3) that the alleged defect proximately caused the injuries for which plaintiff seeks damages. See Roventini v. Ocular Scis., Inc., 111 S.W.3d 719, 723 (Tex.App.-Houston [1st Dist.] 2003, no pet.) (citing Plas-Tex, Inc. v. U.S. Steel Corp., 772 S.W.2d 442, 444 (Tex. 1989) and Harris Packaging Corp. v. Baker Concrete Constr. Co., 982 S.W.2d 62, 66 (Tex.App.-Houston [1st Dist.] 1998, pet. denied)); see also TEX. BUS. COM. CODE. ANN. § 2.314 (Vernon 1994).
In the context of an implied warranty of merchantability case, the word "defect" means a condition of the goods that renders them unfit for the ordinary purposes for which they are used because of a lack of something necessary for adequacy. Plas-Tex, 772 S.W.2d at 444. Sandstone alleged that the ordinary purpose of Texigel was to serve as an adhesive. Sandstone asserted that the Texigel produced by Para-Chem was defective because it had "substandard adhesive qualities." Sandstone alleged that the defect resulted from Para-Chem's failure to follow the specifications for manufacturing Texigel provided by Scott Bader.
In its motion for summary judgment Para-Chem asserted, "Sandstone's claim for breach of implied warranty of merchantability fails because there is no evidence that any resin manufactured by Para-Chem and actually delivered to Sandstone was ever off-spec, or in any way substandard." To support this assertion, Para-Chem offered the affidavit of Jeffrey Ellis, Para-Chem's marketing director. In his affidavit, Ellis acknowledges that Para-Chem produced out-of-specification Texigel. But Ellis avers in his affidavit that, after his review of Para-Chem's quality control and shipping records, "none of the out of specification Texigel 13-034 manufactured by Para-Chem for Scott Bader . . . was ever shipped to Scott Bader." Ellis further explains, "In the event a lot [of Texigel] was produced, which was out of specification, the lot was either rejected and destroyed or was re-worked into a lot that met all of Scott Bader's specifications before it was approved [and] shipped to Scott Bader."
On appeal, Sandstone contends that the motion for summary judgment should have been denied because the Ellis affidavit "is blatantly and substantively defective and should not be considered in evidence." Sandstone bases this assertion on Para-Chem's failure to attach "the underlying manufacturing and shipping records" referenced by Ellis.
We have previously concluded that a party's failure to attach documents referenced in an affidavit is a defect in form, not a defect in substance. Mathis v. Bocell, 982 S.W.2d 52, 60 (Tex.App.-Houston [1st Dist.] 1998, no pet.). Sandstone filed a written objection in the trial court protesting Para-Chem's failure to attach the referenced records to Ellis's affidavit. However, the record does not reflect that Sandstone obtained a ruling on its objection. When, as here, an objection is to the form, not the substance, of an affidavit, failure to obtain a ruling waives the objection. See Harris v. Spires Council of Co-Owners, 981 S.W.2d 892, 897 (Tex.App.-Houston [1st Dist.] 1998, no pet.); see also TEX. R. APP. P. 33.1. Thus, we may consider the Ellis affidavit, which we conclude negates conclusively the second element of Sandstone's claim: that the defect existed when it left Para-Chem's possession.
Texas appellate courts are divided on this issue. Some appellate courts agree with this Court and have concluded that the failure to attach documents referenced in an affidavit is a defect of form, not one of substance. See, e.g., Sunsinger v. Perez, 16S.W.3d 496, 501 (Tex.App.-Beaumont 2000, pet. denied); Martin v. Durden, 965S .W.2d 562, 565 (Tex.App.-Houston [14th Dist.] 1997, pet. denied); Knetsch v. Gaitonde, 898 S.W.2d 386, 389-90 (Tex.App.-San Antonio 1995, no writ). In contrast, other courts have held that the defect is one of substance. See, e.g., Galindo v. Dean, 69 S.W.3d 623, 627 (Tex.App.-Eastland 2002, no pet.); Kleven v. Tex.Dep't of Criminal Justice-Inst. Div., 69 S.W.3d 341, 345 (Tex.App.-Texarkana2002, no pet.); Lee v. Lee, 43 S.W.3d 636, 640 (Tex.App.-Fort Worth 2001, nopet.); Rodriquez v. Tex. Farmers Ins. Co., 903 S.W.2d 499, 506 (Tex.App.-Amarillo1995, writ denied); Ceballos v. El Paso Health Care Sys., 881 S.W.2d 439, 445 (Tex.App.-El Paso 1994, writ denied).
Sandstone contends that it provided clear and uncontroverted evidence that "out of specification product" was shipped by Para-Chem. We disagree. Although the evidence cited by Sandstone indicates that Para-Chem produced out-of-specification Texigel, as acknowledged by Ellis, the cited evidence does not show that the out-of-specification Texigel was shipped to Scott Bader.
In sum, Para-Chem successfully negated the second element of Sandstone's breach of implied warranty of merchantability claim. Viewing all evidence favorable to Sandstone as true and indulging every reasonable inference in it favor, Sandstone has not met its summary judgment burden to present evidence raising a genuine issue of material fact regarding the second element. We conclude that Para-Chem is entitled to summary judgment as a matter of law on Sandstone's breach of implied warranty of merchantability claim. We hold that the trial court properly granted summary judgment on this claim.
3. Breach of Implied Warranty of Fitness for a Particular Purpose
To establish a breach of the implied warranty of fitness for a particular purpose, the plaintiff must establish that (1) the seller had reason to know any particular purpose for which the goods were required at the time of contracting and (2) the buyer was relying on the seller's skill or judgment to select or furnish suitable goods. TEX. BUS. COM. CODE. ANN. § 2.315 (Vernon 1994); ASAI v. Vanco Insulation Abatement Inc., 932 S.W.2d 118, 121 (Tex.App.-El Paso 1996, no writ) (affirming trial court's finding that buyer failed to establish elements of an implied warranty of fitness for a particular purpose). Here, Sandstone alleges that Para-Chem "knew or reasonably should have known of Sandstone's particular purpose for purchasing the products, i.e., for use as a binder in a commercial grade roof coating."
In support of its motion for summary judgment, Para-Chem attached Sandstone's fifth amended petition in which Sandstone alleged that it did not become aware that Para-Chem, rather than Scott Bader, was the "true manufacturer" of Texigel until "after problems began to occur" with its customer's roofs.
Para-Chem also attached Sandstone's answers to interrogatories in which it identified Scott Bader as the only party that made representations to Sandstone regarding Texigel. In addition, Para-Chem offered the deposition testimony of Sandstone's owner, Benny Stegall, who testified that he never spoke or corresponded with anyone from Para-Chem.
We agree with Para-Chem that its summary judgment evidence negates the second element of Sandstone's claim for breach of implied warranty of fitness, namely, that Sandstone relied on the Para-Chem's skill or judgment to select or furnish suitable resin to use as a binder in commercial grade roofing sealant. In response, Sandstone offered no evidence to show that it relied on Para-Chem's skill or judgment to select Texigel for use in the manufacture of its commercial grade roof sealant.
Related to this element, Sandstone does assert, "[T]o require Sandstone to actually know the manufacturer would be to require privity between the two parties, which [the] court found to be unnecessary in Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77, 80-81 (Tex. 1977)." Nobility Homes is inapposite to this issue. The claim involved in Nobility Homes was breach of implied warranty of merchantability. Id. at 80. There was no claim for breach of implied warranty of fitness for a particular purpose, as here. At issue in Nobility Homes was whether a manufacturer impliedly warrants the merchantability of a mobile home to a purchaser with whom it is not in privity. Id. at 78. The supreme court held in the affirmative. Id. Nobility Homes does not stand for the proposition that a plaintiff asserting breach of implied warranty of fitness for a particular purpose against a defendant, with whom it is not in privity, need not show that it relied on the defendant seller's skill or judgment to select or furnish suitable goods.
Para-Chem successfully negated the second element of Sandstone's breach of implied warranty of fitness for a particular purpose claim. Viewing all evidence favorable to Sandstone as true and indulging every reasonable inference in it favor, Sandstone has not met its summary judgment burden to present evidence raising a genuine issue of material fact regarding the second element. We hold that Para-Chem is entitled to summary judgment as a matter of law on Sandstone's breach of implied warranty of fitness for a particular purpose claim, and the trial court properly granted summary judgment in that regard. 4. DTPA Claims
When, as in this case, the trial court does not specify the grounds on which it granted summary judgment in its order, we must affirm the summary judgment if any of the grounds presented are meritorious. Western Invs., Inc. v. Urena, 162 S.W.3d 547, 550(Tex. 2005). Thus, because we have found two of the grounds raised by Para-Chem to be meritorious, we need not discuss the other summary judgment grounds raised by Para-Chem in its motion and challenged by Sandstone on appeal. See Carr v. Brasher, 776 S.W.2d 567, 569 (Tex. 1989). We also note that Sandstone contends that the trial court based its summary judgment ruling on a ground not raised by Para-Chem in its motion for summary judgment. Indeed, it can be gleaned from the trial court's oral statements at the Rule 166 pretrial hearing that it granted summary judgment in Para-Chem's favor on the ground that a toll manufacturer cannot be held liable as a matter of law for breach of implied warranties. This was not a ground raised by Para-Chem in its motion for summary judgment. Nonetheless, the basis for the trial court's summary judgment ruling is not reflected in its written order. We have previously recognized that we look only to the trial court's written order for determining the basis for granting summary judgment and may not consider any oral reason given at a summary judgment hearing. See Richardson v. Johnson Higgins of Texas, Inc., 905 S.W.2d 9, 11-12 (Tex.App.-Houston [1st Dist.] 1995, writ denied) ("It is the court's order that counts, not the stated reason or oral qualifications.") see also Blitz Holdings Corp. v. Grant Thornton, LLP, No. 01-04-00627-CV, 2008 WL 1971374, at *14-15 (Tex.App.-Houston [1st Dist.]May 8, 2008, pet. filed) (mem. op. on reh'g) (following Richardson).
DTPA section 17.50(a)(2) permits a consumer to maintain a DTPA action when a breach of an express or implied warranty is a producing cause of the consumer's economic or mental anguish damages. TEX. BUS. COM. CODE ANN. § 17.50(a) (Vernon Supp. 2008). Sandstone brought a DTPA claim against Para-Chem based on Sandstone's claim that Para-Chem breached implied warranties. Because Para-Chem successfully challenged Sandstone's breach of implied warranty claims, on which its DTPA claim is based, Para-Chem is also entitled to summary judgment on Sandstone's DTPA claim. See Mott v. Red's Safe And Lock Services, Inc., 249 S.W.3d 90, 98 ((Tex.App.-Houston [1st Dist.] 2007, no pet.).
Sandstone also asserts that Para-Chem is liable under the DTPA because Para-Chem placed labels on the barrels of Texigel indicating that the product was Scott Bader's "Texigel 13-034." Sandstone contends that the labels were misrepresentations because Para-Chem was not manufacturing Texigel 13-034 according to Scott Bader's formula. Thus, the product was not actually Texigel 13-034, and the label was a misrepresentation. Para-Chem's DTPA claim was not based on this allegation in its live pleading, i.e., its fifth amended petition. After Para-Chem filed its third amended motion for summary judgment, Sandstone sought leave to file its sixth amended petition, which does include this allegation. The trial court denied leave to amend, and Sandstone does not challenge the trial court's ruling. In moving for summary judgment, Para-Chem was required to defeat Sandstone's causes of action as pleaded and to demonstrate that Sandstone could not prevail. Cook v. Brundidge, Fountain, Elliott Churchill, 533 S.W.2d 751, 759 (Tex. 1976). As discussed, Para-Chem met this burden with respect to Sandstone's live pleading. We need not address Sandstone's DTPA claim based on alleged misrepresentations by Para-Chem in labeling the product.
We overrule Sandstone's first issue.
B. Take-Nothing Judgment in Favor of Goodrich
In its second issue, Sandstone challenges the trial court's determination that Goodrich was entitled to judgment against Sandstone as a matter of law.
On the first day scheduled for trial, the trial court held a Rule 166 pretrial conference. At the conference, the trial court stated that it had determined that no issues of fact remained for the jury and that Goodrich was entitled to a "directed verdict" against Sandstone. The trial court based its ruling on its conclusion that a toll manufacturer, such as Goodrich, cannot be liable, as a matter of law, to a downstream purchaser for breach of implied warranty. 1. Standard of Review and Relevant Procedural Principles
The trial court also stated that it was granting summary judgment in favor of Para-Chem on this basis. As discussed, we need not address this issue as it relates to Para-Chem because the trial court properly granted Para-Chem summary judgment on other grounds.
The purpose of Rule 166 is "to assist in the disposition of the case without undue expense or burden to the parties." TEX. R. CIV. P. 166. A trial court may summarily dispose of issues at a Rule 166 pretrial conference when the trial court determines that no fact issues remain and the issues may be determined as a matter of law. See Walden v. Affiliated Computer Services, Inc., 97 S.W.3d 303, 323 (Tex.App.-Houston [14th Dist.] 2003, pet. denied).
On appeal, Sandstone challenges the trial court's determination that Goodrich is entitled to judgment as a matter of law. We review Sandstone's challenge by the same standard used to review a directed verdict. See id. at 324.
A directed verdict in favor of a defendant is proper when the plaintiff does not present evidence that raises a fact issue essential to the plaintiff's right of recovery, or when the plaintiff admits or the evidence conclusively establishes a defense to the plaintiff's cause of action. Prudential Ins. Co. v. Fin. Rev. Servs. Inc., 29 S.W.3d 74, 77 (Tex. 2000). In reviewing a directed verdict, the standards are the same as a legal sufficiency challenge. Keller, 168 S.W.3d at 823. We must credit favorable evidence if reasonable jurors could and disregard contrary evidence unless reasonable jurors could not. See id. at 827.
2. Liability for Breach of Implied Warranties
Each side relies on PPG Indus., Inc. v. JMB/Houston Ctrs. Partners L.P., 146 S.W.3d 79 (Tex. 2004) to support its respective position. As it did in Nobility Homes, the supreme court recognized in PPG that a downstream consumer can assert a breach of implied warranty claim against a remote manufacturer, even though there is no privity of contract between them. Id. at 88 (citing Nobility Homes, 557 S.W.2d at 81). The PPG court explained that warranty claims pass with the underlying goods and are assignable to the subsequent purchaser. Id. at 89.
Goodrich asserts that under the reasoning in PPG, it cannot be liable for implied warranties. Goodrich contends that it is not a "remote manufacturer" as referenced in PPG. Rather, it is a "toll manufacturer." Goodrich asserts that the distinction is significant. In its brief, Goodrich explains its position as follows:
A "toll manufacturer" is a contract manufacturer or processor of a chemical intermediate or finished product that provides a manufacturing service under specific terms of a contract. . . .
Toll contractors typically specify the technology to be used, set performance standards and product quality criteria, utilize their own labeling and packaging criteria, and specify strict confidentiality and non-use obligations. The toll contractor also owns the product formula at all times and controls the sale of the product. The toll manufacturer simply acts as an extension of the toll contractor in the manufacturing process, the toll contractor rather than the toll manufacturer should be held liable for any breach of implied warranties.
In this case, the evidence proves that Goodrich manufactured resin for Scott Bader pursuant to Bader's specifications and quality control standards. . . . After Goodrich manufactured the product, it was completely out of Goodrich's control. Bader's labels were placed on the resin, and it was eventually sold to Bader's customers, including Sandstone. . . .
Where, as here, the toll contractor specifies the product formula, exercises control over the manufacturing process, and the toll manufacturer has no contact whatsoever with the purchaser, the purchaser should not be allowed to pursue breach of implied warranty claims against the toll manufacturer. The justification for allowing upstream warranty liability is to ensure that purchasers obtain recourse for product defects. In the case of tolled products, that recourse is had by suing the toll contractor. There is no independent act by the toll manufacturer that should give rise to an additional warranty separate and apart from any warranty extending from the toll contractor — here, Bader.
(Footnotes and record citations omitted.)
Goodrich continues that "the toll manufacturer provides only a service to the toll contractor, whereas the toll contractor is responsible for the product." Citing Rocky Mountain Helicopters, Inc. v. Lubbock County Hosp. Dist., 987 S.W.2d 50, 53 (Tex. 1998), Goodrich points out that "Texas law does not recognize an implied warranty for the performance of services in the absence of a demonstrated compelling need." Goodrich contends that "there is no compelling need for an implied warranty when other adequate remedies are available to the consumer." See id.
Sandstone contends that, even assuming that a legal distinction exists between a toll manufacturer and a remote manufacturer for purposes of determining implied warranty liability, evidence was presented showing that Goodrich acted outside of its roll as a simple "toll manufacturer" and conducted itself more like a "remote manufacturer." Sandstone points to evidence, including the Boothe memorandum, indicating that Goodrich deviated from Scott Bader's specifications in producing Texigel. Such evidence supports an inference that Scott Bader did not control Goodrich's manufacturing process and indicates that Goodrich acted autonomously in manufacturing Texigel. Indeed, the allegation that Goodrich (and Para-Chem) deviated from Scott Bader's formula in making Texigel is at the heart of Sandstone's claims. Accordingly, even if a "true" toll manufacturer falls outside of the holdings of Nobility Homes and PPG regarding remote manufacturer liability, we conclude that, on this record, genuine issues of fact exist with respect to whether Goodrich acted outside its role of toll manufacturer in producing Texigel. With fact issues present regarding Goodrich's liability for breach of implied warranty, the trial court improperly granted judgment as a matter of law in Goodrich's favor.
In Nobility Homes, the supreme court explained the underlying policy reason for holding that a remote seller can be held liable to a consumer for breach of implied warranty of merchantability. It explained, "To hold otherwise, would encourage manufacturers to use thinly capitalized `collapsible corporations' to sell their commercially inferior products leaving no one for the buyer to sue for his economic loss." Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77, 81-82 (Tex. 1977). As a point of observation, it would appear that such concern would apply equally to a decision regarding whether a toll manufacturer can be held liable for breach of an implied warranty and weakens the argument that the consumer can always seek compensation from the toll contractor.
Although not directly on point, we also find instructive the supreme court's decision in Signal Oil Gas Co. v. Universal Oil Prods., 572 S.W.2d 320, 329-31 (Tex. 1978). There, the supreme court determined whether a party, Procon, could be sued for breach of implied warranty for assembling an isomax unit and hydrogen plant" ("the unit"). Id. at 322-23. A defective component part of the unit caused an explosion, resulting in damage to Signal Oil's facility. Id. Procon defended against Signal Oil's breach of implied warranty claims by arguing it was not a "seller" under the Business and Commerce Code ("the Code"). Id. at 329-30. Procon maintained that by assembling the unit it was providing a "service," which fell outside the scope of the Code. Id. at 330.
In determining this issue, the supreme court looked at the contract between Procon and Signal Oil, which provided Procon would construct a isomax heater at Signal Oil's facility. Id. The court found significant that the contract required Procon to procure all materials and labor to construct the isomax heater. Id. The contract also provided for Signal Oil to pay Procon a "purchase price" for the finished product, not a "construction price." Id. The supreme court also considered that title to the isomax heater remained with Procon and did not pass to Signal Oil until the heater was completed. Id.
The supreme court framed the issue as determining whether an assembler of a completed product is a "seller" under the Code. The Signal Oil court held that an assembler of a product is a "seller," reasoning as follows:
The suitability of the finished product depends as much upon actions of the assembler as upon actions of the manufacturer of the component parts. In order for the finished product to be merchantable or fit for its intended purposes, it must possess suitable component parts, as well as the proper arrangement, assembly, or combination of such parts. Consequently, the assembler constitutes an essential link in the chain of distribution.
Id.
The court also determined that Procon specifically acted as a "seller" under the Code. The court explained,
In the instant case the contract between Signal and Procon clearly shows that Procon acted as a seller. Procon functioned as the assembler of the component parts into a final completed product, the isomax unit and hydrogen plant. Procon maintained title in such product until it was sold to Signal by a bill of sale. Under the contract provisions and circumstances of the instant case, we hold that Procon was a "seller" under the provisions of the Texas Business and Commerce Code.
Id. at 331.
The reasoning in Signal Oil has potential to assist in determining whether a toll manufacturer can be liable for breach of an implied warranty. For example, in determining a toll manufacturer's liability, it may be useful to know the details of the contract between the toll manufacturer and the toll contractor. Specifically, which entity purchases the component parts to make the product, what is the basis for the contract price — the service or the product — and when does title pass to the product. We note that, in this case, such information is not contained in the record.
In sum, we conclude that Goodrich was not entitled to judgment as a matter of law regarding Sandstone's breach of implied warranty claims. We hold that the trial court erred by granting Goodrich a take nothing-judgment regarding those claims. 3. Liability for DTPA Claim
Goodrich also asserts that, even if it was not entitled to a "directed verdict" based on its toll manufacturer status, it was entitled to a directed verdict based on its statute of limitations defense and other grounds raised in its earlier filed motion for summary judgment. On June 24, 2005, the trial court denied Goodrich's motion for summary judgment, which raised the grounds it now relies on in its brief. As part of its sanctions order against Scott Bader, the trial court vacated all of its June 24, 2005summary judgment rulings, which necessarily included its ruling on Goodrich's motion for summary judgment. Regardless of whether Goodrich's motion for summary judgment was still pending at the time of the Rule 166 conference, nothing in the record indicates that the trial court reconsidered Goodrich's motion for summary judgment or based its directed verdict ruling on any grounds asserted in the motion. The trial court expressly stated that it was granting a directed verdict based on Goodrich's toll manufacturer status. No mention was made of Goodrich's motion for summary judgment or any of the grounds asserted in the motion. In contrast, the trial court expressly granted summary judgment to Para-Chem at the Rule 166conference. On appeal, Sandstone contends that this Court can consider the grounds asserted in its motion for summary judgment as a basis for supporting the directed verdict. Sandstone relies on the established principle that an appellate court must affirm a directed verdict, even though the trial court's rationale was erroneous, if the directed verdict can be supported on another basis. Cano v. N. Tex. Nephrology Assocs., P.A., 99 S.W.3d 330, 339 (Tex.App.-Fort Worth 2003, no pet.). We do not believe that this principle should be extended to a case in which the trial court grants judgment as a matter of law at a Rule 166 hearing. Importantly, a directed verdict may only be properly granted after the plaintiff has had the opportunity to present all of its evidence. See Nassar v. Hughes, 882 S.W.2d 36, 38 (Tex.App.-Houston [1st Dist.] 1994, writ denied). Such safeguard is lacking when the trial court grants judgment as a matter of law at a Rule 166 conference, as in this case.
Goodrich also contends that Sandstone cannot recover against it based on the "one-satisfaction rule" because Sandstone recovered its complete damages from Scott Bader. However, as discussed, we have subsequently reversed the judgment against Scott Bader and remanded for further proceedings.
We next turn to Sandstone's DTPA claim against Goodrich. In PPG, the supreme court explained that a manufacturer cannot be held liable for a DTPA claim to a "downstream purchaser," but clarified that a manufacturer which makes representations or warranties directly to consumers can be held liable under the DTPA, despite a lack of privity. See PPG, 146 S.W.3d at 89.
Here, Sandstone contends that its DTPA claim against Goodrich should be permitted because Goodrich made misrepresentations to Sandstone by mislabeling the Texigel. We disagree. In its live pleading, Sandstone's DTPA claim was premised on its breach of implied warranties claims, not on representations made by Goodrich in the Texigel labels. Based on PPG, the trial court properly granted judgment in favor of Goodrich on Sandstone's DTPA claims, as stated in Sandstone's live pleading. See id.
We sustain Sandstone's second issue in part and deny it in part.
Conclusion
We reverse the trial court's judgment with respect to the following sanctions against Para-Chem: $375,000 in attorney's fees as sanctions, appellate fees as sanctions, and $250,000 in sanctions and render judgment that Sandstone take nothing as to these sanctions. We affirm the portions of the judgment ordering that Para-Chem is jointly and severally liable for $68,000 in attorney's fees and expenses. We affirm the portion of the judgment granting summary judgment to Para-Chem and a take-nothing judgment against Sandstone in Para-Chem's favor. We affirm the portion of the judgment ordering that Sandstone take nothing against Goodrich with regard to Sandstone's DTPA claims. We reverse the portion of the judgment ordering that Sandstone take nothing against Goodrich based on its claims for breach of implied warranty of merchantability and for breach of implied warranty of fitness for a particular purpose and remand the case to the trial court for further proceedings.