Kevin M. Ehringer Enterprises, Inc. v. McData Services Corp.
646 F.3d 321
5th Cir.2011Background
- Ehringer and McData entered into a contract in 2003 under Minnesota law for Ehringer to acquire products (FMS and IFS) with a 25% royalty for three years and title transfer after $1 million in royalties.
- McData promised Ehringer reasonable access to customers, best efforts to promote market sell the Products, respond to inquiries, allow visits and inspections, and participate in industry events.
- McData also promised not to compete with Ehringer's products and not to buy or sell competing products in North America, while a limitation-of-remedies clause barred lost profits and certain damages.
- Approximately one year in, Ehringer paid $1 million in royalties and title transferred; disputes later arose in 2006 when Ehringer sued for breach of contract and fraudulent inducement.
- District court granted summary judgment for McData on the breach claim (limitation-of-remedies barred lost profits); fraudulent inducement proceeded to trial; the jury ruled for Ehringer and awarded $12.53 million in damages.
- On appeal, the Fifth Circuit reversed to the extent of the best efforts clause, holding it too indefinite for enforceable fraud, and remanded for judgment in McData’s favor on that claim; damages related to non-competition were not proven.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is the best efforts clause enforceable for fraudulent inducement? | Ehringer argues best efforts breached; intent to deceive shown | Best efforts is indefinite; cannot measure intent | Best efforts clause unenforceable for fraud |
| Did Ehringer prove McData intended to deceive? | McData never intended to perform; evidenced by promises and other conduct | No direct evidence of intent; no admission of deception | Insufficient evidence of intent to deceive; issue not for jury |
| Is damages evidence supporting fraudulent inducement recoverable given the contract damages cap? | Damages flow from fraudulent inducement independent of contract | Damages limited by contract; cannot recover speculative lost profits | Damages cannot be sustained for fraud under the best efforts theory; remand for judgment for McData |
| Can Ehringer recover for non-competition promises given damages failure? | Non-competition damages constitute fraud-related losses | No damages proven separate from best efforts claim | No damages proven for non-competition claim; cannot stand |
Key Cases Cited
- Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432 (Tex. 1986) (fraudulent inducement requires intent not to perform)
- Formosa Plastics Corp. USA v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41 (Tex. 1998) (economic loss not bar to fraud; independent duty not to fraudulently procure a contract)
- Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299 (Tex. 2006) (limits on tort recovery for contract-based claims)
- CKB & Associates, Inc. v. Moore McCormack Petroleum, Inc., 809 S.W.2d 577 (Tex. App.—Dallas 1991) (best efforts clause requires objective guideline or goal to be enforceable)
- Herrmann Holdings Ltd. v. Lucent Techs. Inc., 302 F.3d 552 (5th Cir. 2002) (enforceability of best efforts depends on objective measurement)
- First Nat'l Bank of Durant v. Trans Terra Corp., 142 F.3d 802 (5th Cir. 1998) (treats best efforts and related terms for contract interpretation)