217 F. Supp. 3d 813
E.D. Pa.2016Background
- Axalta (plaintiff) and Midwest II (defendant) negotiated a five-year exclusivity supply agreement (Feb. 2015) under which Midwest would buy 100% of its e-coat from Axalta and received an $800,000 prebates; Axalta could recoup prorated amounts on termination.
- The written agreement contained a boldface, conspicuous disclaimer of all warranties (merchantability and fitness for a particular purpose).
- Midwest alleges that during final negotiations it insisted on an express warranty in Exhibit A that Axalta’s product would “meet or exceed published quality standards,” signed draft copies containing that warranty on Feb. 16, 2015, but Axalta later presented and caused Midwest to sign a version without that warranty.
- Midwest began using Axalta’s paint in April 2015 and experienced severe coating failures and high reject rates, prompting Midwest to stop using Axalta’s product in September 2015; Axalta sued for breach and recovery of the prorated prebates.
- Midwest counterclaimed for (1) breach of contract based on implied warranties and (2) fraud in the execution (alleging surreptitious substitution/removal of the warranty term). Axalta moved to dismiss the counterclaims and to strike the fraud-in-execution defense.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Midwest may pursue breach-of-implied-warranties despite the contract disclaimer | Disclaimer in boldface (Sec. 9.2) is enforceable and bars implied-warranty claims | Disclaimer is unconscionable given circumstances and Axalta's alleged knowledge of defects | Dismissed — Pennsylvania law enforces conspicuous disclaimers; Midwest failed to plead substantive or procedural unconscionability |
| Whether Midwest adequately pleaded fraud in the execution under Rule 9(b) | Allegations are conclusory and lack particularity; Midwest failed to read final doc so cannot show excusable ignorance or justifiable reliance | Identified who, what, when, where, and how (surreptitious substitution by Axalta’s rep); alleged justifiable reliance and excusable ignorance because Axalta concealed deletion | Survives — pleadings satisfy Rule 9(b); allegations support excusable ignorance and justifiable reliance, so fraud-in-execution claim stands |
| Whether Midwest’s failure to read the document precludes fraud in the execution | Failure to read precludes justifiable reliance and excusable ignorance | No duty to read where the omission was fraudulent and not obvious; party need not investigate when misled about a material term | Held for Midwest — Pennsylvania law permits fraud-in-execution claim where substitution was concealed and omission not obvious |
| Whether Axalta’s motion to strike the fraud-in-execution defense should be granted | Strike as insufficient and prejudicial | Defense is legally cognizable and fact-specific, so should not be struck | Denied — striking is drastic; pleadings plausibly relate to the controversy |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for pleading)
- Toy v. Metropolitan Life Ins. Co., 928 A.2d 186 (Pa. 2007) (fraud-in-execution: no duty to read when party is misled by fraud)
- Connors v. Fawn Mining Corp., 30 F.3d 483 (3d Cir. 1994) (fraudulent substitution of contract can establish excusable ignorance)
- Central Pa. Teamsters Pension Fund v. McCormick Dray Line, Inc., 85 F.3d 1098 (3d Cir. 1996) (rejection of fraud claim where party had multiple opportunities and notice to review final agreement)