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Haynes Trane Service Agency, Inc. v. American Standard

April 7, 2009



The opinion of the court was delivered by: Hartz, Circuit Judge.


Before HARTZ, TYMKOVICH, and HOLMES, Circuit Judges.

This is the second appeal in litigation between Plaintiffs/counterdefendants Frederick M. Haynes (Mr. Haynes) and Haynes Trane Service Agency (HaynesTSA) and Defendant/counterclaimant American Standard d/b/a Trane (Trane). For almost four decades Mr. Haynes operated a Denver-based franchise of Trane, a manufacturer of heating, ventilation, and air conditioning (HVAC) products. After receiving his franchise, Mr. Haynes formed HaynesTSA, which initially functioned as a service wing of his operations. HaynesTSA later entered into a separate agreement with Trane to distribute certain HVAC products. The disputes arose when HaynesTSA cheated Trane by abusing a rebate program under which Trane would reduce the price it charged retailers, such as HaynesTSA, to enable them to meet the retail prices of products sold by their competitors. Trane terminated its distributorship agreement with HaynesTSA and, shortly thereafter, terminated Mr. Haynes's franchise. Mr. Haynes and HaynesTSA brought suit in the United States District Court for the District of Colorado. Trane counterclaimed.

An initial jury trial and appeal, see Haynes Trane Serv. Agency, Inc. v. Am. Standard, Inc., 51 F. App'x 786 (10th Cir. 2002) (Haynes I), whittled the case down to the following claims: (1) Mr. Haynes's claim that Trane, despite language in the franchise agreement permitting it to terminate the franchise at will, could terminate only for good cause (which it lacked) because statements and conduct by Trane had either (a) modified the agreement to require good cause or (b) equitably estopped Trane from denying that the agreement required good cause; (2) claims by both Mr. Haynes and HaynesTSA that Trane breached fiduciary duties; and (3) Trane's counterclaims against HaynesTSA (a) for fraud based on its abuse of the rebate program and (b) for unjust enrichment and an accounting arising out of HaynesTSA's allegedly fraudulent acts.*fn1

Before the second trial the district court ruled that Trane's unjustenrichment claim added nothing to its fraud claim; that its accounting claim was dependent on Trane's proving its fraud claim; and that if Trane did prove fraud, an equitable accounting would be performed because a jury would have difficulty calculating Trane's damages. At the close of the Plaintiffs' case at the second trial the court granted judgment as a matter of law (JMOL) against the modification-of-contract claim of Mr. Haynes and the fiduciary-duty claims of Mr. Haynes and HaynesTSA. The jury then returned verdicts that Mr. Haynes had established the elements of his equitable-estoppel claim and that Trane had established its fraud counterclaim. After the jury was discharged, the court ruled that Mr. Haynes's misconduct precluded application of an equitable doctrine in his favor and, despite the jury's verdict, entered judgment for Trane on Mr. Haynes's equitable-estoppel claim. And with respect to Trane's fraud claim, the court appointed a special master for an accounting to determine damages.

Before the special master heard any evidence, however, the parties stipulated that Trane's damages were $1,770,000.

Mr. Haynes and HaynesTSA appeal. Exercising jurisdiction under 28 U.S.C. § 1291, we affirm in part and reverse in part. Mr. Haynes's breach-of-contract claim was properly dismissed because (1) Mr. Haynes presented insufficient evidence that his franchise agreement had been modified, and (2) his unclean hands gave the district court authority to deny him an equitable-estoppel remedy. We reject Mr. Haynes's argument that our rulings on the first appeal regarding the sufficiency of his evidence of modification bound the district court under the law-of-the-case doctrine, because the evidence he presented at the second trial was materially inferior to the evidence that we considered on that appeal. In addition, the district court did not err in dismissing the fiduciary-duty claims of Mr. Haynes and HaynesTSA, because they failed to establish the requisites of a fiduciary relationship. Again, the law-of- the-case doctrine does not assist Mr. Haynes on this claim because the evidence at trial was materially inferior to the evidence that we considered on the first appeal.

Finally, the district court erred in appointing a special master to calculate Trane's damages, because the calculation was not too complicated for a jury. A recalculation of damages by a jury, however, will also require resolving liability issues, so we must remand for a full trial of Trane's fraud claim.


A. The Parties' Relationships

The second trial lasted 16 days. To put our analysis in context, we summarize here the essential evidence at that trial. Additional evidence will be addressed in our discussion of specific issues. Mr. Haynes's relationship with Trane began in 1958 when he took a sales position at Trane's Boston franchise. Over the course of the next decade he took on increasing responsibility and in 1967 his efforts were rewarded with an offer to run Trane's Denver franchise. The franchise agreement was for an "indeterminate" length, and provided that it could be "terminated by either party upon 30 days notice to the other." Aplts. App. Vol. XII at 5388. Mr. Haynes formed HaynesTSA soon after he received the franchise.

Initially HaynesTSA was a service wing of Mr. Haynes's operations. Its role expanded in 1990, however, when it entered into an agreement with Trane to distribute Trane's unitary HVAC products, smaller units for residential and light-commercial applications. Although the initial agreement was for a term of five and one-half months, it was renewed on a yearly basis the following five years in substantially the same form. Either party could terminate the agreement at will upon proper notice.

Central to this case is a flexible pricing program that Trane developed through a series of policy statements or "Sales Plan[s]" provided to its distributors. The program helped Trane distributors compete for business. Thus, although the program was not set forth in HaynesTSA's contract with Trane, HaynesTSA had good reason to participate.

The program worked as follows: If a distributor risked being underbid by its competition, it could request a lowered price quote from Trane. If the request was granted, the distributor could then sell the product at a reduced price and "claim back" (that is, seek from Trane) a portion of the reduction. Id. Vol. XIII at 5984. As a precaution against error or fraud, distributors were required to accompany claimbacks with the invoice number for the sale and retain a copy of the invoice for two years, thereby enabling Trane to determine whether a distributor ultimately sold the unit for the stated price. If a discrepancy was discovered before Trane credited a claimback, Trane adjusted the claimback; but even after a claimback was credited, Trane reserved the right to recover the "amount of credit improperly claimed." Id. Vol. XIII at 5988. Although Mr. Haynes was president of HaynesTSA, he had little experience in the unitary-products market and therefore hired Willard Forward to manage that company's distributorship venture. Forward and his subordinates gamed the claimback program in a number of ways. Denice Louder, a billing administrator at HaynesTSA, testified that at Forward's behest she routinely submitted claimbacks that stated a price quote below the actual price at which HaynesTSA sold the item. She also testified that HaynesTSA submitted some claimbacks for nonexistent projects and others for units that had been secretly sold to Trane salesmen (claimbacks were available only for units sold to final customers). All told, Louder testified that "nearly every one" of the claimbacks that she submitted to Trane contained "something that wasn't completely right." Id. Vol. XI at 4983.

Periodically, Trane would request random invoices from HaynesTSA to determine whether the amount HaynesTSA billed a customer matched the price stated in a claimback. When there was a mismatch, Louder would recreate or alter the customer invoice so that it comported with the claimback documents previously submitted to Trane. But HaynesTSA was not able to conceal the fraud completely. HaynesTSA's unusually high claimback rate (that is, the percentage of units for which it sought a claimback) led Trane to conduct an on- site audit of its books in 1995. Trane's auditor would ultimately visit HaynesTSA's offices on three occasions-March 6, April 3-5, and April 17-18-and discover significant discrepancies between HaynesTSA's claimback submissions and its customer invoices.

During the weeks between the announcement of the audit in mid- or late- February and the arrival of Trane's auditor on March 6, HaynesTSA employees engaged in a concerted, though ultimately unsuccessful, effort to replace customer invoices with fraudulent invoices that matched the representations supporting the claimbacks. This effort came to the attention of Mr. Haynes when two employees, Denice Louder and Vicki Graves, told him that invoices were being retyped to give to Trane's auditors and that employees were, in effect, "covering our tracks." Id. Vol. VI at 2479. Mr. Haynes asked HaynesTSA's chief financial officer, Steven Moss, to investigate the matter. Moss reported back to Mr. Haynes that invoices were indeed being recreated for the claimback audit. Mr. Haynes, however, did not inform Trane of the coverup, despite several opportunities to do so. He said nothing to Trane's auditor on March 6.

On March 17 a former HaynesTSA employee informed Trane that HaynesTSA was generating false claimback documentation. Trane officials flew to Denver and confronted Mr. Haynes with that accusation on March 21. During the meeting Mr. Haynes adamantly denied that HaynesTSA kept "two sets of books," Id. Vol. V at 2265, again neglecting to mention that fake invoices had been typed for the audit.

During the continuation of the audit in April, the extent of HaynesTSA's abuse of the claimback program became apparent. Extrapolating from the limited sample of claimbacks reviewed, the auditor estimated that HaynesTSA had collected $852,000 in undeserved claimbacks. Trane also confirmed that HaynesTSA had attempted to conceal discrepancies by altering and recreating invoices. When Trane confronted Mr. Haynes with its findings, he asked for the auditor's report so that he could investigate its accuracy; he did not confess his awareness of the coverup effort.

On June 6 Trane terminated HaynesTSA's distributorship agreement. Shortly thereafter it gave Mr. Haynes notice that it would terminate his franchise in 30 days (the length of notice required by the franchise agreement). When it terminated the franchise agreement, Trane suspected that Mr. Haynes was aware of the claimback abuses. That suspicion would be confirmed during the second trial when Mr. Haynes testified that he had been aware before the March 6 audit that HaynesTSA employees were recreating invoices to give to Trane's auditors.

B. Procedural History

The first trial and appeal in this case are relevant to this appeal insofar as our rulings on the first appeal established the law of the case, which the district court was presumptively obliged to follow on remand. That law of the case must be addressed in our discussion of three issues on appeal. But we postpone our summary of the earlier proceedings until our discussions of the law-of- the-case issues. For now, we summarize only the proceedings after remand.

Mr. Haynes's primary allegation at the second trial was that Trane breached his franchise agreement by terminating it without good cause. According to Mr. Haynes, good cause was lacking because any abuse of the claimback program or subsequent coverup occurred at HaynesTSA, not at his franchise.

Although the franchise agreement stated that it was terminable at will after 30-days' notice, Mr. Haynes contended that it had been modified by Trane's consistent pattern of terminating franchises only for cause. Alternatively, he alleged that various representations by Trane induced him to rely on a good-cause requirement, which, under principles of equitable estoppel, Trane could not deny. Trane defended on the grounds that the franchise agreement had not been modified and that it had made no representations that could support an equitable-estoppel claim.

It also asserted that Mr. Haynes's unclean hands made it improper to apply equitable estoppel for his benefit.

In addition, both Mr. Haynes and HaynesTSA asserted that Trane had breached fiduciary duties arising from a confidential relationship. They alleged that while Trane had made gestures to induce their trust, it was in fact scheming to cut out middlemen and assume control of their operations. In their view, Trane had used HaynesTSA's erroneous claimbacks as an excuse to carry out this underhanded policy. Trane denied that it had any fiduciary relationship with either Plaintiff.

Trane countered with a fraud claim against HaynesTSA, alleging that HaynesTSA had knowingly submitted false claimback requests and schemed to cover up its efforts. Trane also raised claims against both Plaintiffs for unjust enrichment and an accounting, specifying in the pretrial order that these equitable matters could be addressed by the district court at an "appropriate time." Id. Vol. I at 241. In response to these counterclaims, the Plaintiffs contended that Trane's fraud claim was precluded by the economic-loss rule (which bars certain tort claims for economic loss arising out of a contractual relationship) and that Trane's equitable claims for unjust enrichment and an accounting were not maintainable because fraud damages would provide Trane with an "`adequate remedy at law.'" Id. at 242.

Mr. Haynes and HaynesTSA did not prevail on any of their claims at trial.

At the close of evidence the district court granted JMOL against Mr. Haynes's modification-of-contract claim. On his equitable-estoppel claim the jury found that he had established the elements of equitable estoppel and that Trane had terminated Mr. Haynes's franchise agreement without good cause. But the court nevertheless granted judgment to Trane on this claim, reasoning that Mr. Haynes's failure to inform Trane of the claimback coverup made it improper to apply an equitable doctrine in his favor. As with Mr. Haynes's contractmodification claim, the district court disposed of the Plaintiffs' fiduciary-duty claims by granting JMOL against them at the close of evidence.

Trane prevailed only on its fraud claim. During a pretrial hearing the district court had ruled that Trane's unjust-enrichment and accounting claims were not viable as freestanding equitable claims. At the same time, the court concluded that Trane lacked an adequate remedy at law for fraud because having a jury review individual claimbacks to calculate damages would unduly prolong proceedings. Accordingly, the court construed Trane's accounting claim as merely seeking a remedy for fraud, ruling that if Trane prevailed on its fraud claim at trial, an equitable accounting would be performed to calculate its damages. The court rejected HaynesTSA's economic-loss-rule argument during the same hearing. The jury then found that HaynesTSA had "followed a pattern or practice of fraudulent conduct in submitting" claimbacks. Id. Vol. II at 682-84. Over HaynesTSA's objection, the court appointed a special master for an accounting "of the amount of damages Trane sustained." Id. Vol. III at 980.

But the special master never had occasion to calculate Trane's damages. After HaynesTSA reserved the right to appeal the special master's appointment, the parties stipulated that Trane's fraud damages were $1,770,000. The district court adopted the parties' damages stipulation and awarded Trane an additional $2,982,763.47 in prejudgment interest and costs.

Mr. Haynes and HaynesTSA appeal, presenting the following issues: (1) whether the district court violated the law of the case determined in the first appeal by granting JMOL against Mr. Haynes's modification-based contract claim; (2) whether the court exceeded its equitable authority and contravened the jury's verdict by refusing to grant equitable-estoppel relief to Mr. Haynes; (3) whether the court violated the law of the case by granting JMOL against the Plaintiffs' fiduciary-duty claims; (4) whether Trane's fraud claim is barred by the economic-loss rule; and (5) whether the jury should have been permitted to determine Trane's damages. We affirm the district court's resolution of all issues but the last.


A. Mr. Haynes's ...

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