A.T. Kearney, Inc. v. International Business Machines Corp.

Citations: 73 F.3d 238; 96 Daily Journal DAR 48; 96 Cal. Daily Op. Serv. 15; 1995 U.S. App. LEXIS 37139; 1995 WL 764256Docket: Nos. 94-35890, 94-36183

Court: Court of Appeals for the Ninth Circuit; December 28, 1995; Federal Appellate Court

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A.T. Kearney, Inc., a management consulting firm, was hired by Fred Meyer (FM) to develop a management information system (MIS) using IBM mid-size computers. After FM's new management deemed the system a failure, FM sued Kearney, leading to a settlement. Concurrently, Kearney filed a lawsuit against IBM in state court, alleging negligence and seeking contribution and indemnity, which IBM successfully removed to federal court. There, IBM obtained summary judgment, resulting in Kearney's appeal. 

In 1989, FM engaged Kearney to overhaul its computer system, pursuing a decentralized approach. Although IBM proposed a mainframe system, FM and Kearney opted for a distributed architecture using IBM AS/400 mid-size computers, despite concerns from IBM employees that this choice was unusual for a large company. FM purchased around one hundred AS/400 computers under a contract that excluded warranties of merchantability and fitness. IBM provided installation and technical support but had no contractual relationship with Kearney. 

After a management change at FM, the new team found the MIS inadequate and switched to an IBM mainframe. FM then sued Kearney for $14 million, which was later amended to $110 million, ultimately settling for $13.25 million. While the lawsuit was pending, Kearney's indemnity claim against IBM was removed to federal court, where IBM secured summary judgment, leading to Kearney's appeal.

Summary:

Summary judgment is reviewed de novo, adhering to the same standard as the trial court under Fed. R. Civ. P. 56(c). The court must consider evidence favorably to Kearney, identifying any genuine issues of material fact and assessing the correct application of substantive law. Under Oregon law, contribution is permitted when multiple parties are jointly or severally liable in tort for the same injury (Ore. Rev. Stat. 18.440(1)). Kearney's contribution claim against IBM hinges on establishing IBM's tort liability to Fred Meyer, alongside a "special relationship" theory asserting IBM's duty to inform Kearney of concerns regarding the suitability of its computers for Fred Meyer's needs.

The court focuses on whether a vendor involved in a significant information systems project has a duty to avoid misrepresentation. Kearney’s claims are analyzed within the context of Oregon law, which dictates that the question of duty is a legal issue for the court, not a factual one for a jury. The Oregon Supreme Court has established that claims for purely economic loss require a duty beyond the general obligation to prevent foreseeable harm. While ordinarily, one is not liable for negligently causing another's economic loss without physical injury, liability may arise if the injured party relied on negligent misrepresentations. The definition of economic losses includes financial losses like incurred debts and refunds, distinct from physical damage. The Oregon Supreme Court has opted for a case-by-case approach to determine the scope of duty and recovery in economic loss scenarios. The court ultimately finds that IBM did not owe a duty to either FM or Kearney, rendering the question of breach unnecessary.

Liability is determined by evaluating the relationship between parties and comparing it to recognized relationships that impose a duty of care, such as attorney-client, agent-principal, and others. The court emphasized that suppliers of information have a duty to exercise reasonable care to avoid misrepresentation to their clients and intended third-party beneficiaries. These special relationships exist to further the economic interests of the client. Conversely, relationships characterized as “arm’s length” involve adversarial parties negotiating to maximize their own interests, where negligent misrepresentation does not result in actionable claims. The court referenced Professor Alfred Hill, stating that allowing claims for negligent misrepresentation during negotiations would undermine contract law. IBM asserted its role as a vendor, thus limiting its duty to the contractual terms, which included a disclaimer of warranty for specific purposes. Kearney contended that it was a partner and intended third-party beneficiary of the IBM-FM contract, claiming a special relationship with IBM. However, the court determined that no true partnership existed since there was no mutual agreement on profit and loss sharing or control. Kearney was categorized as an incidental beneficiary at best, lacking enforceable rights under the contract per Oregon law.

Kearney's claims regarding partnership and beneficiary duties relate to the nature of IBM's relationships with FM and Kearney, which Kearney argues are similar to those in the Onita case that suggest a heightened duty of care. Kearney cites two Oregon cases, Lindstrand and Meininger, asserting that they demonstrate an intent to extend this duty to parties like IBM when providing information. In Lindstrand, the Oregon Court of Appeals indicated that a jury could find that an escrow company, as a "nongratuitous supplier of information," had a duty to exercise care in providing information, while in Meininger, a roof inspector was found to owe a duty of care to homebuyers as intended beneficiaries of a contractual relationship.

The court clarified that the relationships in both cases were fiduciary, lacking an adversarial nature, contrasting with IBM's buyer-seller relationship with FM, which was purely commercial. The court rejected Kearney's argument that IBM had extracontractual obligations to FM based on its conduct, emphasizing that IBM's friendly behavior and self-interest did not elevate its duty beyond standard commercial norms. As a result, the court concluded that IBM owed no special duty to FM and that Kearney's derivative claim against IBM must fail. Additionally, the court found no basis in Oregon case law to support Kearney's claim that IBM owed a duty of care to Kearney, since FM was the customer and Kearney was merely the expert hired to fulfill FM’s needs.

Kearney asserts that sellers of sophisticated computer equipment, such as IBM, have a legal duty to provide support and assistance that is independent of contractual terms. However, Kearney fails to provide legal precedents or statutes to substantiate this claim but offers expert testimony indicating that manufacturers typically offer extensive support. IBM acknowledges providing significant assistance to buyers but argues that this support is quantitatively, not qualitatively, different from that of sellers of other technology. 

IBM cites the case Triangle Underwriters, Inc. v. Honeywell, Inc., which established that contracts for the sale of computer hardware are categorized as sales of goods rather than services, regardless of additional support. Kearney counters that Triangle is not applicable as it pertains to the statute of limitations rather than negligence liability, suggesting the court could not classify the contract as both goods and services. Despite this, Triangle clearly classified the contract as a sale of goods. 

Further supporting IBM's position, the case Apollo Group, Inc. v. Avnet, Inc. confirmed that contracts for computer hardware are considered sales contracts despite any technical advice offered by the manufacturer. The ruling emphasized that when a sale predominates, any incidental services do not change the nature of the transaction. The agreement between IBM and FM was primarily for the sale of hardware, lacking any consulting provisions or a warranty disclaimer, and both FM’s and Kearney's leadership viewed IBM as a vendor rather than a consultant. The court concludes there is no evidence of a special relationship between IBM and FM or Kearney and declines to recognize computer sales contracts as distinct from other sales contracts, affirming the district court's ruling.

Kearney does not contest the district court's dismissal of its indemnity claim. It asserts a right to pursue a contribution claim for economic damages under Ore. Rev. Stat. 18.440(1), which allows contribution among parties jointly liable in tort for the same injury, provided there is no contribution from a non-liable party. The district court did not address this issue, and since IBM is not liable in tort to FM, the court declines to evaluate Kearney’s claim further. Kearney’s interpretation of Onita, which differentiates between "adversaries" and "partners," is deemed misleading; the case identifies commercial adversaries without using the term "partners." IBM’s motion to strike certain evidence was denied as moot, as the court found Kearney's evidence insufficient to establish a special relationship necessary for the claim. The court noted that expert witnesses may only provide factual insights, not legal conclusions. In a related case, Apollo, the plaintiff attempted to frame a transaction as a services agreement to bypass the economic loss rule, contrasting Oregon's allowance for recovery in tort based on a special relationship with Arizona's general prohibition against such recovery for pecuniary injuries alone.