BHC Development, LC et al v. Bally Gaming, Inc

Filing 207

MEMORANDUM AND ORDER finding as moot 199 Motion for Order; denying 201 Motion for Judgment. Signed by Magistrate Judge James P. O'Hara on 5/9/2014. (kg)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
BHC DEVELOPMENT, L.C. and
BHCMC, L.L.C.,
Plaintiffs,
v.

Case No. 12-2393-JPO

BALLY GAMING, INC.,
Defendant.

MEMORANDUM AND ORDER
This case arises out of a contract for the sale of more than a million dollars in
specialized software, related hardware, and services by the defendant, Bally Gaming,
Inc., to the plaintiffs, BHC Development, L.C. and BHCMC, L.L.C., for use in managing
the Boot Hill Casino and Resort in Dodge City, Kansas. A few months before trial, U.S.
District Judge Kathryn H. Vratil granted defendant summary judgment on plaintiffs’
claims of fraudulent inducement and breach of express warranty, but ruled plaintiffs
could proceed on their alternatively pleaded claims of negligent misrepresentation,
breach of contract, and breach of implied warranty of merchantability.1 The parties later
consented to trial being presided over by the undersigned U.S. Magistrate Judge, James
P. O’Hara.2 Just before jury selection, prompted by defendant’s motion to force an
1

ECF doc. 152.

2

ECF doc. 163.

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election of remedies,3 plaintiffs announced they would proceed at trial only on their
negligent misrepresentation claim, i.e., plaintiffs abandoned their breach of contract and
implied warranty claims. Trial thus was confined to the negligent misrepresentation
claim and defendant’s counterclaim for $441,560.90 in goods and services that had been
billed to but admittedly not paid by plaintiffs. At the close of all the evidence during five
days of trial, defendant moved for judgment as a matter of law. The court denied the
motion.

Later that same day, the jury returned a verdict in favor of plaintiffs for

$1,423,542.27 on the negligent misrepresentation claim, and against defendant on the
counterclaim.4 The court entered judgment accordingly.5 Defendant has filed a renewed
motion for judgment as a matter of law6 and a motion to stay execution of judgment.7
I.

Defendant’s Renewed Motion for Judgment as a Matter of Law
A post-trial motion for judgment as a matter of law under Rule 50(b) of the

Federal Rules of Civil Procedure is appropriate only if the evidence, viewed in light most
favorable to the nonmoving party, “points but one way and is susceptible to no

3

See ECF docs. 175, 176, and 179-81.

4

ECF doc. 194.

5

ECF doc. 197.

6

ECF doc. 201.

7

ECF doc. 199.

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reasonable inferences supporting the party opposing the motion.”8 Such motions should
be “cautiously and sparingly granted.”9 In determining whether judgment as a matter of
law is proper, the court may not weigh the evidence, consider the credibility of witnesses,
or substitute its judgment for that of the jury.10 Rather, the court must affirm the jury
verdict if, viewing the record in a light most favorable to the nonmoving party, it contains
evidence upon which the jury could have properly returned a verdict for the nonmoving
party.11 Conversely, though, the court must enter judgment as a matter of law for the
movant if “‘there is no legally sufficient evidentiary basis … with respect to a claim or
defense … under the controlling law.’”12
Defendant contends that it’s entitled to judgment as a matter of law on plaintiffs’
negligent misrepresentation claim for two basic reasons: (1) given the uncontroverted
facts of this case, most notably, the parties are sophisticated businesses that negotiated
and entered into a detailed written contract with advice of counsel, plaintiffs’ claim is
8

Sanjuan v. IBP, Inc., 275 F.3d 1290, 1293 (10th Cir. 2002) (quoting Baty v.
Willamette Indus., Inc., 172 F.3d 1232, 1241 (10th Cir. 1991)).
9

Black v. M & W Gear Co., 269 F.3d 1220, 1238 (10th Cir. 2007) (quoting Neese v.
Schuckman, 98 F.3d 542, 548 (10th Cir. 1996)).
10

Turnbull v. Topeka State Hosp., 255 F.3d 1238, 1241 (10th Cir. 2001) (citing
Lockard v. Pizza Hut, 162 F.3d 1062, 1068 (10th Cir. 1998)).
11

Roberts v. Progressive Independence, Inc., 183 F.3d 1215, 1219-20 (10th Cir. 1999)
(citing Harolds Stores, Inc. v. Dillard Dep’t Stores, Inc., 82 F.3d 1533, 1546 (10th Cir.
1996)).
12

Deters v. Equifax Credit Info. Servs., Inc., 202 F.3d 1262, 1268 (10th Cir. 2000)
(quoting Harolds, 82 F.3d at 1546-47).
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barred by the so-called “economic loss doctrine”; and (2) even if the economic loss
doctrine does not present an absolute bar, there was insufficient evidence on an essential
element of the negligent misrepresentation claim, specifically, that defendant failed to
exercise reasonable care or competence and thereby provided false information to
plaintiffs. Defendant also asserts that, assuming plaintiffs were entitled to any verdict,
the allowable damages on the negligent misrepresentation claim must be capped at
$281,135.00 (the amount actually paid by plaintiffs for the software part of the system),
as provided in a limitation-of-damages clause in the parties’ contract.
A.

Economic Loss Doctrine

Judge Vratil addressed the economic loss doctrine at length in her summary
judgment ruling.13 As she explained, courts are reluctant, subject to a few recognized
exceptions, to allow negligent misrepresentation claims (and most other tort-based
remedies) where a party seeks to recover purely economic loses in circumstances that
otherwise are or should be governed by contract law. Because this case involves a
written commercial contract executed at arm’s length by sophisticated parties with the
advice of counsel, and because no personal injuries or property damage are involved,
defendant asserts that the economic loss doctrine should preclude any recovery for
negligent misrepresentation. Specifically, defendant argues that plaintiffs’ only available

13

ECF doc. 152 at 14-18.

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theory of recovery (albeit now abandoned) is for breach of contract, subject of course to
the limitation-of-damages clause in the parties’ contract.
The economic loss doctrine seems to have gained much traction recently in courts
throughout the United States.14 Hence, it is unsurprising that defendant seeks to rely on
the doctrine here. But regardless of whatever trends are developing in other courts, it is
imperative to bear in mind that this court’s subject matter jurisdiction statutorily is based
upon the parties’ diversity of citizenship and the amount in controversy.15 Although
federal law controls the procedural question of whether judgment as a matter of law for
defendant is appropriate, in diversity cases such as this, the substantive law of the forum
state governs the analysis of the underlying claims.16 The parties agree Kansas law is
controlling.17 And, as explained below, Kansas’s highest court very recently held that
negligent misrepresentation may be a viable theory of recovery in commercial cases even
if there’s privity of contract between the parties. As a practical matter, the determinative
question is what the Kansas Supreme Court has held about negligent misrepresentation,
14

See generally The Honorable Michael M. Baylson, Kelly D. Eckel, & Sandra A.
Jeskie, The Intersection of Contract Law and Tort Principles—Economic Loss Doctrine,
7 Bus. & Com. Lit. Fed. Cts. § 78:7, American Bar Ass’n (3d ed. rev. Nov. 2013); and
Christine Spinella Davis, Daniel Wilson, Scott R. Wolf, Frank P. Tiscione, Van Cates,
Michael A. Sirignano, & Michelle A. Bholan, Recent Developments in Business
Litigation, 49 Tort Trial & Ins. Prac. L.J. 89 (2013).
15

See Pretrial Order at ¶ 3(a) (ECF doc. 92 at 2) (citing 28 U.S.C. § 1332).

16

Jones v. United Parcel Serv., Inc., 674 F.3d 1187, 1195 (10th Cir. 2012) (citing
Wagner v. Live Nation Motor Sports, Inc., 586 F.3d 1237, 1244 (10th Cir. 2009)).
17

See Pretrial Order at ¶ 3(d) (ECF doc. 92 at 2).

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not whether that court’s holding is well-reasoned or in accord with the holdings of other
state and federal courts—the undersigned magistrate judge will confine himself only to
the former and express no views about the latter.
Defendant does grudgingly acknowledge that the Kansas Supreme Court recently
held in Rinehart v. Morton Buildings, Inc. that negligent misrepresentation claims are not
subject to the economic loss doctrine, but defendant proceeds to argue that the rationale
for that holding does not apply because the facts in this case are distinguishable.18
Specifically, defendant emphasizes the fact that unlike in Rinehart, there is privity of
contract between the parties in this case. As earlier indicated, defendant argues that the
parties here are sophisticated business entities with no material disparity in bargaining
power and that they entered the contract under the guidance and advice of counsel.
Defendant asserts that the “narrow” holding in Rinehart and the rationale for it does not
apply because plaintiffs survived summary judgment on their claims for breach of
contract and breach of implied warranty. On this basis, defendant asks that the court
apply the economic loss doctrine to bar plaintiffs’ negligent misrepresentation claim and
grant defendant’s renewed motion for judgment as a matter of law.
Plaintiffs respond that the Rinehart holding is clear and unambiguous: “negligent
misrepresentation claims are not subject to the economic loss doctrine because the duty
underlying such claims arises by operation of law and the doctrine’s purposes would not
18

ECF doc. 202 at 4 (citing Rinehart v. Morton Buildings, Inc., 297 Kan. 926, 932,
305 P.3d 622 (2013)).
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be furthered by extending it to such claims.”19 Further, plaintiffs argue that the Rinehart
court did not base its holdings on the particular facts of that case, but on the special
nature of the negligent misrepresentation tort.
In Rinehart, the Kansas Supreme Court rejected a bright-line rule that would apply
the economic loss doctrine to bar all negligent misrepresentation claims where the parties
had contractual privity.20 Indeed, the Kansas Supreme Court stated that “[i]mportantly, it
can be seen that we do not require privity of contract as an element for this cause of
action, nor have we said the existence of contractual privity bars the tort.”21
When defendant filed its motion for summary judgment,22 Judge Vratil carefully
analyzed and considered the long line of cases that apply the economic loss doctrine in
Kansas, as well as the Kansas Supreme Court’s holding in Rinehart, and held “the
economic loss doctrine does not bar [plaintiffs’] negligent misrepresentation claim.”23
Therefore, she denied defendant’s motion for summary judgment on plaintiffs’ negligent
misrepresentation claim. Defendant never sought reconsideration of that decision.
Notably, defendant does not argue that the trial record contains evidence not
available on summary judgment—that there was privity of contract and that sophisticated
19

ECF doc. 204 at 13-14 (quoting Rinehart, 305 P.3d at 624).

20

Rinehart, 305 P.3d at 632.

21

Id. (emphasis added).

22

ECF doc. 83.

23

ECF doc. 152 at 17.

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parties entered into the contract with the advice of counsel is not new information. Nor
does defendant point to any new court decision issued after the summary judgment
ruling. Rather, defendant attempts to re-argue the same points previously made in its
motion for summary judgment. Although only final judgments qualify as law of the
case,24 defendant has provided no good reason to persuade the undersigned magistrate
judge to change Judge Vratil’s previous holding with regard to the economic loss
doctrine and Rinehart’s application to this case. In consideration of the foregoing,
defendant’s renewed motion for judgment as a matter of law on this issue is respectfully
denied.
B.

Sufficiency of the Evidence

Mindful the court might decline to apply the economic loss doctrine, defendant
argues the verdict of negligent misrepresentation must be set aside because there was
insufficient evidence presented that defendant was negligent in its communications with
plaintiffs and that the communications were false.

Further, defendant asserts that

plaintiffs did not present any competent expert testimony to show the information
regarding defendant’s products and services was inaccurate.

24

Univ. of Kan. v. Sinks, 644 F. Supp. 2d 1287, 1299 (D. Kan. 2008) (citing Echo
Acceptance Corp. v. Household Retail Servs., Inc., 267 F.3d 1068, 1079 (10th Cir. 2001);
Fed. R. Civ. P. 54(b) (“any order … that adjudicates fewer than all the claims … may be
revised at any time before the entry of judgment adjudicating all the claims and all the
parties’ rights and liabilities.”)).
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Plaintiffs effectively counter defendant’s arguments with the following evidence:
Ramesh Srinivasan, defendant’s chief executive officer, testified by videotaped
deposition that he understood the purpose of the detailed pre-contract request for proposal
(“RFP”), submitted by plaintiffs to defendant and other prospective vendors, was to
determine whether the various casino computer systems that were available in the market
met 644 specified functional requirements for the casino in Dodge City.25 Mr. Srinivasan
also testified that he knew plaintiffs would rely upon defendant’s responses to the RFP.26
Clark Stewart, the chief executive officer of plaintiff BHCMC, L.L.C., testified how and
why defendant’s representations in response to the RFP were false, and gave several
examples in support of his testimony.27 Two of plaintiffs’ on-site managers, Sharon
Stroburg and Jessica Rabe, also testified about how defendant’s system failed to perform
as promised, was chronically rife with bugs, and that defendant’s system never did
perform properly or reliably despite the continuing efforts of defendant’s personnel to fix
the bugs.
Several damaging intra-company e-mails written by Mr. Srinivasan were admitted
into evidence. He candidly discussed the system’s deficiencies, including its inability to

25

ECF doc. 186-1 (Tr. of Mr. Srinivasan’s Videotaped Deposition Testimony, at 29:12
– 30:14).
26

Id. at 31:12 – 32:13.

27

ECF doc. 204, Ex. A (Partial Tr. of Mr. Stewart’s Trial testimony, at 46:19 – 49:14
and 51: 8-13).
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run multiple promotions at once, mismatched reports, and overall lack of functionality.28
For example, on April 2, 2011, Mr. Srinivasan wrote:
Whoever goes [to Dodge City] needs to make a real attempt to drive home the
final solutions of how [plaintiffs] can use CMP [the subject computer system] to
meet their needs. I am quite shocked how the [defendant’s] Services teams have
not done a better job of REALLY working through their issues. It is quite
amazing how everyone at Bally love to operate at 30,000 feet and not trouble
themselves with working out real solutions for customers.
I did not realize till this meeting that CMP was this weak in so many areas. I am
also more than a little surprised how these deficiencies have persisted after all
these years of development. Are we all just experts in explaining how CMP works
today- or are we really good at improving the product functionality as well? Our
objectives during our meeting there should be as much to understand how CMP
needs to be improved quickly to remove some of the age-old ridiculously stone
age constraints (no expiry date functionality yet? cannot run multiple promotions
at the same time? Reports never match?) - as much helping them with work-a
rounds so that they can use the current CMP version better. I think one of the
reasons why CMP has not moved forward may be because we are too confident
about it and have not fully appreciated why it needs to 'grow up/ a bit faster.
One other thing that came out of the meeting is how much Customer Support gives
the run-around to customers with their various 'guesses' one after the other ... try
this ... Oh did it not work? ... now try this ..... do we really take the solutions we
suggest seriously?29
In his testimony, Mr. Srinivasan adroitly tried to minimize his e-mails as the
product of an “emotional” manager seeking to “motivate” subordinates to perform at a
level higher than what is customary in the gaming industry. But the court finds Mr.
Srinivasan’s own printed words are such that the jury could properly infer that

28

See, e.g., ECF doc. 204, Ex. C at 2.

29

Id.

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defendant’s top executive essentially had admitted both falsity of defendant’s RFPresponse and defendant’s failure to exercise reasonable care. If that were not enough, Joe
Sellens, a former audit enforcement agent for the regulating Kansas Lottery, testified that
Mr. Srinivasan admitted to him that the system had “probably been pushed out to market
too fast” and “probably needed some more … curing or development testing before it
actually had been put on the market.”30
Of course, “[t]he jury has the exclusive function of appraising credibility,
determining the weight to be given to the testimony, drawing inferences from the facts
established, resolving conflicts in the evidence, and reaching ultimate conclusions of
fact.”31 In order to defeat defendant’s motion, plaintiffs must simply point to evidence in
the trial record that could persuade a reasonable jury to find for plaintiffs.32
Viewing the evidence presented in the light most favorable to plaintiffs, they
assert (and the court agrees) that the jury had more than a sufficient basis to conclude
defendant’s representations were false and that defendant was negligent in its response to
plaintiffs’ RFP. The jury had sufficient evidence to find in favor of plaintiffs on their
negligent misrepresentation claim, and thus the court overrules defendant’s renewed
motion for judgment as a matter of law on this point.
30

ECF doc. 204 at 24 (citing Ex. E).

31

Sinks, 644 F. Supp. 2d at 1293-94 (citing United Int’l Holdings, Inc. v. Wharf
(Holdings) Ltd., 210 F.3d 1207, 1227 (10th Cir. 2000)).
32

Id. at 1296.

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C.

Limitation of Damages

Again being mindful the court might decline to apply the economic loss doctrine,
defendant also argues that, under the terms of the parties’ contract, plaintiffs’ claim for
negligent misrepresentation must be limited to $281,135.00, i.e., the amount paid by
plaintiffs for the allegedly defective software. The remaining amounts paid by plaintiffs,
in excess of $1 million, related to special computer hardware sold by defendant with the
system, along with certain services that were provided in connection with the parties’
contract.
Plaintiffs did not present any evidence at trial that defendant’s computer hardware
was defective. Nor did plaintiffs present any evidence that services were not provided by
defendant. But plaintiffs did present evidence, and notably this was never seriously
challenged by defendant, that ultimately plaintiffs had to procure new specialized
computer hardware from another vendor because defendant could never get its software
to operate properly for plaintiffs. It is undisputed, and customary in the industry, that
defendant’s specialized hardware can’t be used to run any other vendor’s casino software.
The parties’ contract provides that any damages “shall be limited to the total sum
of the amounts actually paid by USER for any particular Bally Hardware or Software.”33
Defendant argues that because the foregoing limitation was “fairly and honestly
negotiated, and understandingly entered into” and because its “language was clearly

33

ECF doc. 9-1 at 15.

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written in plain language, and there is no evidence that the limitation was hidden within
the agreement,” it should apply not only to a breach of contract claim but also to
plaintiffs’ claim for negligent misrepresentation.34
Defendant insists that the following facts justify limiting damages: plaintiffs were
represented by counsel during the contract negotiations; plaintiffs made changes to the
contract during negotiations; plaintiffs are sophisticated and experienced in business
negotiations; and as such, it should be assumed that plaintiffs read the contract and
understood its terms. Therefore, defendant argues, per the contract, plaintiffs’ damages
should be limited to the amount plaintiffs paid for the software: $281,135.00.
Plaintiffs respond that the damages limitation does not apply because they
disaffirmed the contract by abandoning their contract-based claims in favor of their
negligent misrepresentation claim. Therefore, plaintiffs seek to be restored to their status
before the sale.
Plaintiffs also assert that the damages limitation does not apply because their
negligent misrepresentation claim arises from a duty imposed by law, not by contract.
Plaintiffs argue that their claim is not subject to the “strictures of contract” and that they
should receive the full amount of damages allowed by tort law, which is not limited by
the contract. Finally, plaintiffs contend that the plain language of the contract supports
their argument. Because plaintiffs’ negligent misrepresentation claim did not arise from

34

ECF doc. 202 at 7.

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defendant’s performance under the contract, plaintiffs assert that it is not subject to the
contract’s limitation on damages.
Even if the court applied the contract’s damages limitation, plaintiffs assert that
this should have no effect on their damages. Mr. Stewart testified that it was defendant’s
negligent misrepresentations about the software that led plaintiffs to purchase the
associated hardware.35

Plaintiffs provided evidence that they never would have

purchased defendant’s hardware but for the misrepresentations about the software.36 It
was undisputed at trial that plaintiffs paid $1,582,475.00 for the hardware, software, and
installation services. The jury awarded plaintiffs damages of $1,423,542.27. Because the
jury’s award of damages is within the limits set by the contract, plaintiffs assert that the
judgment need not be disturbed.
In its reply, defendant merely cites Kansas cases where the parties were allowed to
limit damages contractually, and cases outside of this district where the courts applied
limitation-of-damages clauses to negligent misrepresentation claims. Defendant then reasserts that plaintiffs were represented by counsel throughout the contract negotiations
and that the district court previously applied that limitation-of-damages provision to its
breach of contact claim in ruling on its motion for summary judgment.

35

See ECF doc. 204-1 at 3-5.

36

Id. at 6-7.

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Significantly, however, Judge Vratil did not apply the limitation-of-damages
provision to defendant’s negligent misrepresentation claim. Upon defendant’s motion for
reconsideration of that ruling, she held “the legal authority which defendant cites in
support of its claim falls short of suggesting that reconsideration is necessary to correct
clear error or prevent manifest injustice.”37 This is now defendant’s third attempt for the
court to limit plaintiffs’ damages on its negligent misrepresentation claim per the
contract. Once again, the court is unpersuaded.
“[T]he misrepresentation claim stems from defendant’s alleged negligence in
conveying inaccurate information before plaintiffs entered the Agreement.”38 Consistent
with Judge Vratil’s previous rulings, this court finds that defendant has not shown the
damages limitation in the contract limits the damages recoverable for plaintiffs’ negligent
misrepresentation claim.

Therefore, defendant’s renewed motion for judgment as a

matter of law is denied. The jury’s award of damages shall remain intact.
II.

Defendant’s Motion to Stay Execution of Judgment

Under 62(b) of the Federal Rules of Civil Procedure, defendant moves to stay the
execution of judgment until the court rules on its renewed motion for judgment as a
matter of law. Rule 62(b) provides that “[o]n appropriate terms for the opposing party’s
security, the court may stay the execution of a judgment— or any proceedings to enforce

37

ECF doc. 162 at 6.

38

ECF doc. 152 at 17.

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it— pending disposition of any of the following motions: (1) under Rule 50, for judgment
as a matter of law.”

Because this order disposes of defendant’s Rule 50 motion,

defendant’s motion to stay is denied as moot.
Defendant states that “[s]hould further appeals be needed, the issue of appropriate
bond may be addressed at that time.” However, the court cautions that it is disinclined to
grant a stay of execution of the judgment pending appeal. Although the issue has not
been fully briefed, defendant’s reference to “Bally Technologies, Inc.’s” 10-Q for the
quarter ending December 31, 2013, without more, is insufficient to show defendant is
more than capable of paying the judgment, nor does it persuade the court to veer from the
general rule requiring defendant to post a supersedeas bond in the amount required by D.
Kan. R. 62.2.
In consideration of the foregoing,
IT IS HEREBY ORDERED:
1.

Defendant’s renewed motion for judgment as a matter of law (ECF doc.

201) is denied.
2.

Defendant’s motion for stay of execution of judgment (ECF doc. 199) is

denied as moot.
Dated May 9, 2014, at Kansas City, Kansas.

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s/ James P. O’Hara
James P. O’Hara
U. S. Magistrate Judge

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