United States District Court, D. Kansas
BHC DEVELOPMENT, L.C. and BHCMC, L.L.C., Plaintiffs,
BALLY GAMING, INC., Defendant.
MEMORANDUM AND ORDER
JAMES P. O'HARA, Magistrate Judge.
This case arises out of a contract for the sale of more than a million dollars in specialized software, related hardware, and services by the defendant, Bally Gaming, Inc., to the plaintiffs, BHC Development, L.C. and BHCMC, L.L.C., for use in managing the Boot Hill Casino and Resort in Dodge City, Kansas. A few months before trial, U.S. District Judge Kathryn H. Vratil granted defendant summary judgment on plaintiffs' claims of fraudulent inducement and breach of express warranty, but ruled plaintiffs could proceed on their alternatively pleaded claims of negligent misrepresentation, breach of contract, and breach of implied warranty of merchantability. The parties later consented to trial being presided over by the undersigned U.S. Magistrate Judge, James P. O'Hara. Just before jury selection, prompted by defendant's motion to force an election of remedies,  plaintiffs announced they would proceed at trial only on their negligent misrepresentation claim, i.e., plaintiffs abandoned their breach of contract and implied warranty claims. Trial thus was confined to the negligent misrepresentation claim and defendant's counterclaim for $441, 560.90 in goods and services that had been billed to but admittedly not paid by plaintiffs. At the close of all the evidence during five days of trial, defendant moved for judgment as a matter of law. The court denied the motion. Later that same day, the jury returned a verdict in favor of plaintiffs for $1, 423, 542.27 on the negligent misrepresentation claim, and against defendant on the counterclaim. The court entered judgment accordingly. Defendant has filed a renewed motion for judgment as a matter of law and a motion to stay execution of judgment.
I. Defendant's Renewed Motion for Judgment as a Matter of Law
A post-trial motion for judgment as a matter of law under Rule 50(b) of the Federal Rules of Civil Procedure is appropriate only if the evidence, viewed in light most favorable to the nonmoving party, "points but one way and is susceptible to no reasonable inferences supporting the party opposing the motion." Such motions should be "cautiously and sparingly granted." In determining whether judgment as a matter of law is proper, the court may not weigh the evidence, consider the credibility of witnesses, or substitute its judgment for that of the jury. Rather, the court must affirm the jury verdict if, viewing the record in a light most favorable to the nonmoving party, it contains evidence upon which the jury could have properly returned a verdict for the nonmoving party. Conversely, though, the court must enter judgment as a matter of law for the movant if "there is no legally sufficient evidentiary basis... with respect to a claim or defense... under the controlling law.'"
Defendant contends that it's entitled to judgment as a matter of law on plaintiffs' negligent misrepresentation claim for two basic reasons: (1) given the uncontroverted facts of this case, most notably, the parties are sophisticated businesses that negotiated and entered into a detailed written contract with advice of counsel, plaintiffs' claim is barred by the so-called "economic loss doctrine"; and (2) even if the economic loss doctrine does not present an absolute bar, there was insufficient evidence on an essential element of the negligent misrepresentation claim, specifically, that defendant failed to exercise reasonable care or competence and thereby provided false information to plaintiffs. Defendant also asserts that, assuming plaintiffs were entitled to any verdict, the allowable damages on the negligent misrepresentation claim must be capped at $281, 135.00 (the amount actually paid by plaintiffs for the software part of the system), as provided in a limitation-of-damages clause in the parties' contract.
A. Economic Loss Doctrine
Judge Vratil addressed the economic loss doctrine at length in her summary judgment ruling. As she explained, courts are reluctant, subject to a few recognized exceptions, to allow negligent misrepresentation claims (and most other tort-based remedies) where a party seeks to recover purely economic loses in circumstances that otherwise are or should be governed by contract law. Because this case involves a written commercial contract executed at arm's length by sophisticated parties with the advice of counsel, and because no personal injuries or property damage are involved, defendant asserts that the economic loss doctrine should preclude any recovery for negligent misrepresentation. Specifically, defendant argues that plaintiffs' only available theory of recovery (albeit now abandoned) is for breach of contract, subject of course to the limitation-of-damages clause in the parties' contract.
The economic loss doctrine seems to have gained much traction recently in courts throughout the United States. Hence, it is unsurprising that defendant seeks to rely on the doctrine here. But regardless of whatever trends are developing in other courts, it is imperative to bear in mind that this court's subject matter jurisdiction statutorily is based upon the parties' diversity of citizenship and the amount in controversy. Although federal law controls the procedural question of whether judgment as a matter of law for defendant is appropriate, in diversity cases such as this, the substantive law of the forum state governs the analysis of the underlying claims. The parties agree Kansas law is controlling. And, as explained below, Kansas's highest court very recently held that negligent misrepresentation may be a viable theory of recovery in commercial cases even if there's privity of contract between the parties. As a practical matter, the determinative question is what the Kansas Supreme Court has held about negligent misrepresentation, not whether that court's holding is well-reasoned or in accord with the holdings of other state and federal courts-the undersigned magistrate judge will confine himself only to the former and express no views about the latter.
Defendant does grudgingly acknowledge that the Kansas Supreme Court recently held in Rinehart v. Morton Buildings, Inc . that negligent misrepresentation claims are not subject to the economic loss doctrine, but defendant proceeds to argue that the rationale for that holding does not apply because the facts in this case are distinguishable. Specifically, defendant emphasizes the fact that unlike in Rinehart, there is privity of contract between the parties in this case. As earlier indicated, defendant argues that the parties here are sophisticated business entities with no material disparity in bargaining power and that they entered the contract under the guidance and advice of counsel. Defendant asserts that the "narrow" holding in Rinehart and the rationale for it does not apply because plaintiffs survived summary judgment on their claims for breach of contract and breach of implied warranty. On this basis, defendant asks that the court apply the economic loss doctrine to bar plaintiffs' negligent misrepresentation claim and grant defendant's renewed motion for judgment as a matter of law.
Plaintiffs respond that the Rinehart holding is clear and unambiguous: "negligent misrepresentation claims are not subject to the economic loss doctrine because the duty underlying such claims arises by operation of law and the doctrine's purposes would not be furthered by extending it to such claims." Further, plaintiffs argue that the Rinehart court did not base its holdings on the particular facts of that case, but on the special nature of the negligent misrepresentation tort.
In Rinehart, the Kansas Supreme Court rejected a bright-line rule that would apply the economic loss doctrine to bar all negligent misrepresentation claims where the parties had contractual privity. Indeed, the Kansas Supreme Court stated that "[i]mportantly, it can be seen that we do not require privity of contract as an element for this cause of action, nor have we said the existence of contractual privity bars the tort. "
When defendant filed its motion for summary judgment,  Judge Vratil carefully analyzed and considered the long line of cases that apply the economic loss doctrine in Kansas, as well as the Kansas Supreme Court's holding in Rinehart, and held "the economic loss doctrine does not bar [plaintiffs'] negligent misrepresentation claim." Therefore, she denied defendant's motion for summary judgment on plaintiffs' negligent misrepresentation claim. Defendant never sought reconsideration of that decision.
Notably, defendant does not argue that the trial record contains evidence not available on summary judgment-that there was privity of contract and that sophisticated parties entered into the contract with the advice of counsel is not new information. Nor does defendant point to any new court decision issued after the summary judgment ruling. Rather, defendant attempts to re-argue the same points previously made in its motion for summary judgment. Although only final judgments qualify as law of the case,  defendant has provided no good reason to persuade the undersigned magistrate judge to change Judge Vratil's previous holding with regard to the economic loss doctrine ...