Scott Bader Inc., et al. v. Sandstone Products Inc.

Click here for the full text of this decision FACTS:Scott Bader Inc. sells a resin, known as Texigel, which is used as a component ingredient in roof coatings. Scott Bader does not manufacture Texigel; rather, it contracts with “toll” or submanufacturers to make the product. Goodrich Corp. was Scott Bader’s toll manufacturer until 1999. At that point, Para-Chem Southern Inc. began to manufacturer Texigel for Scott Bader. Sandstone manufactures and sells roof sealant coatings. From 1994 until 2002, Sandstone purchased Texigel from Scott Bader to use in manufacturing its roof coating. Texigel was the component ingredient in Sandstone’s roof coating that caused its roof coating to adhere to roofs. Scott Bader provided a formula to Sandstone instructing it how to mix Texigel with nine other ingredients to make Sandstone’s roof coating. In 1999, Sandstone began receiving customer complaints that its roof coating was failing. Specifically, Sandstone’s roof coating was swelling with water and not adhering to the roofs to which it had been applied. Sandstone contacted Scott Bader about the problems. Initially, Scott Bader attributed the problems to improper application of the roof coating. As more complaints arose, Scott Bader worked with Sandstone to modify the formula used to make Sandstone’s roof coating. The modified formulas continued to include varying amounts of Texigel. Despite the modifications, Sandstone’s roof coating continued to fail. Sandstone ultimately attributed the failure of its roof coating to Texigel. Scott Bader denied that claim, contending that Sandstone was mixing the roof coating improperly. Sandstone sued Scott Bader asserting claims for breach of contract, breach of warranty, violations of the Texas Deceptive Trade Practices Act (DTPA), fraud and negligent misrepresentation. Sandstone also sued NPCI, Para-Chem and Goodrich. During the course of the litigation, a discovery dispute arose between the parties. Sandstone filed two separate motions to compel production of information and documentation regarding product specification and testing, other customer complaints received by Scott Bader, and the identity of the current or former Scott Bader employee most knowledgeable regarding product development and formulation issues. In its response to Sandstone’s second motion to compel, Scott Bader represented that it had produced all testing documents and that it had no customer complaints, other than those of Sandstone. Scott Bader also represented that it had never been involved in the mixing or formulation of Texigel; rather, it was a supplier and seller of the product. Scott Bader’s counsel also informed Sandstone that the person with the most knowledge regarding product formulation was not a Scott Bader employee but was a person who resided in the United Kingdom. Scott Bader did not reveal the identity of the person. From May 2004 until March 2005, Scott Bader produced approximately 200 pages of documents to Sandstone in response to Sandstone’s discovery requests. On March 1, 2005, Scott Bader produced 8,000 pages of documents to Sandstone. Before the production of these documents, Scott Bader had filed two no-evidence motions for summary judgment against Sandstone. Also at this point, Sandstone had already taken numerous depositions. On Aug. 15, 2005, which was shortly before trial, Sandstone filed its Trial Brief in Support of Sanction, Spoliation Instruction, and/or Continuance. The principal basis for the motion was a document produced for the first time by Scott Bader on March 1, 2005, as part of the 8,000-page document production. The document was a memorandum authored by Scott Bader employee David Boothe. The Boothe memorandum was the first page of a 17-page document that had previously been produced without the memorandum. The Boothe memorandum was written on Nov. 9, 2000, and identified concerns associated with Scott Bader’s transition from toll manufacturer Goodrich to toll manufacturer Para-Chem. The Boothe memorandum stated that Texigel was manufactured by Goodrich until August 1999 and that Scott Bader “changed to Para-Chem at that time to start a closer relationship with the [Para-Chem] folks and to increase our margins” on Texigel. The Boothe memorandum revealed that, at the time of the transition, Scott Bader was without a president and that Terry Strickland (an employee of Scott Bader’s British parent company) was the “main lead” on the transition from Goodrich to Para-Chem. The Boothe memorandum stated that “our singular pursuit should be to handle viscosity drift and stability issue.” The memorandum acknowledges that the “USA formulation” for Texigel differs from the “UK version” because the “US version contains acrylamide, where the UK version does not.” The memorandum further noted: “[W]e believe we have a slightly different product due to viscosity drifts and also extra tackiness (as reported from our customers).” Sandstone contended that the Boothe memorandum was a “smoking gun” document, because it refuted many of the previous representations made by Scott Bader during the discovery process. In addition, Scott Bader produced documents revealing that, at one point, Strickland had been Scott Bader’s director. Sandstone contended that this was relevant, because it further highlighted the importance of Strickland’s role in the production of Texigel. Sandstone alleged that Scott Bader should have identified Strickland as the corporate representative with the most knowledge of formulation and testing for deposition purposes. Scott Bader also produced customer invoices from which the customer names and addresses had been redacted by hand. Sandstone asserted that Scott Bader had redacted the information to prevent Sandstone from identifying other customers that may have experienced similar problems with Texigel, as referenced in the Boothe memorandum. The trial court granted Sandstone’s request for sanctions following a hearing. The trial court awarded the following sanctions to Sandstone: “Plaintiff has requested and shall be entitled to the following jury instruction, which shall be treated as a partial default judgment limiting issues in dispute as Defendant Scott Bader, Inc. and its indemnified co-defendant’s pleadings [are] struck to this extent: “”You are to presume (1) that the product that was shipped between mid-1999 and 2001 did not meet the specifications Scott Bader provided to Sandstone, and (2) that the specifications that Scott Bader provided to Sandstone for the product during mid-1999 and 2001 were modified.’ “Defendant SCOTT BADER and the party it indemnifies [NPCI] shall not be permitted to rebut the factual presumptions above and any affirmative defenses addressed to this issue shall be stricken.” The trial court also ruled that Scott Bader could not use Terry Strickland as a witness at trial and ordered that Scott Bader “may not use the deposition testimony of any witness from a deposition unless SCOTT BADER first demonstrates to the Court that such deposition was taken after full production of documents.” The trial court then identified eight witnesses that were deposed before Scott Bader’s “production of critical documents on March 1, 2005.” The trial court further ordered that Scott Bader pay $68,000 in sanctions for attorneys’ fees and expenses incurred by Sandstone attributable to Scott Bader’s discovery abuse. Shortly after the court signed the sanctions order, the case proceeded to trial against Scott Bader. On Aug. 30, 2005, the third day of trial, Scott Bader’s lead trial counsel, Amy Wright, “violated an in limine order when she”intentionally injected liability insurance of [Sandstone] into the evidence presented in front of the jury.’ For this conduct, the trial granted Sandstone’s request for mistrial and sanctioned Wright and her firm, Kern & Wooley, $79,012.40, representing Sandstone’s”reasonable and necessary fees and expenses’ from voir dire through the hearing on the motion for sanctions.” HOLDING:In appellate Cause No. 01 05 00940 CV, Scott Bader, Wright and Wright’s firm Kern & Wooley appealed sanctions assessed against them. In appellate Cause No. 01 -06 -00593 -CV, Scott Bader and National Pigments & Chemicals Inc. challenged the trial court’s judgment rendered against them in favor of Sandstone. In appellate Cause No. 01 -05 -00940 -CV, the court affirmed in part, and reversed and remanded in part. In appellate Cause No. 01 -06 -00593 -CV, the court reversed the judgment and remanded. Scott Bader challenged the sanctions for discovery abuse. Wright and her firm challenged the sanctions for Wright’s violation of the in limine order. Texas Rule of Civil Procedure 215.2, the court stated, allows a trial court to enter “just” sanctions for a party’s failure to comply with a discovery order or request. A sanction imposed for discovery abuse should be no more severe than necessary to satisfy its legitimate purposes, which includes securing compliance with discovery rules, deterring other litigants from similar misconduct and punishing violators. First, the court found that the trial court did not abuse its discretion by imposing sanctions for Scott Bader’s failure to disclose Strickland’s identity in conjunction with the roles he played and the knowledge he possessed. Based on the record, the court stated that it could not conclude that the trial court abused its discretion by finding that Scott Bader abused the discovery process by producing invoices in a manner calculated to conceal customer information. Next, the court concluded that the trial court did not abuse its discretion by finding that Scott Bader’s manner of producing the Boothe memorandum was sanctionable conduct. As a result of these findings, the court concluded the trial court did not abuse its discretion by finding that Scott Bader had engaged in sanctionable conduct during the discovery process. Based on the record, the court held that the trial court abused its discretion 1. by ordering that the jury be instructed that Scott Bader’s product did not meet specifications and that product specifications provided by Scott Bader to Sandstone had been modified; 2. by prohibiting Scott Bader from rebutting these presumptions; and 3. by striking Scott Bader’s affirmative defenses without first considering lesser sanctions. Moreover, the court held that the trial court abused its discretion by prohibiting Scott Bader’s use of eight depositions without considering lesser sanctions. Next, the court stated that “it can reasonably be surmised that Sandstone’s counsel spent time addressing the no-evidence motions for summary judgment that were ultimately stricken in the sanctions order.” Accordingly, the court concluded that Scott Bader did not show that the trial court abused its discretion by awarding $68,000 in attorneys’ fees and expenses as sanctions. As for the approximately $79,000 in sanctions against Wright and her firm, the court noted that Wright never raised the challenges in the trial court regarding the sanctions. Thus, she and the firm waived the point on appeal. Next, the court stated that the trial court abused its discretion by including the “Binding Instructions” in its jury charge, because they derived from the improper sanctions. “[T]he Binding Instructions,” the court stated, “not only instructed the jury that Scott Bader’s product did not meet specifications and that the product specifications provided by Scott Bader to Sandstone had been modified . . . but also instructed the jury that Scott Bader’s modification of specifications and failure to meet specifications each constituted breach of contract and breach of warranty.” The trial court’s judgment awarded Sandstone $3,375,000 in actual damages. It is apparent, the court stated, that the damages finding was shaped by the improper instructions. Thus, the court found that the “Binding Instructions” probably caused the rendition of an improper judgment. OPINION:Higley, J.; Nuchia and Higley, J. DISSENT:Keyes, J. “I respectfully dissent. I would hold that the sanctions assessed against Scott Bader were well within the discretion of the trial court and that there is no requirement that the trial court explain its rejection of lesser sanctions when, as here, the trial court’s order detailed the offending party’s abuses and directly tailored sanctions specifically authorized by Rule 215 of the Texas Rules of Civil Procedure to cure the prejudice to the innocent party caused by the abuse. I would affirm the judgment of the trial court.”