AUSTIN, TX (KTRE) - On Friday, the Texas Supreme Court issued a ruling that partially negated a previous ruling by an appeals court in a multi-million dollar lawsuit Lufkin Industries filed against the International Business Machines Corporate (IBM).
The lawsuit claimed that IBM fraudulently misrepresented a business operations computer software system the company sold to Lufkin Industries, and as a result, Lufkin Industries suffered losses of millions of dollars.
In the background section of the ruling, it said that Lufkin Industries, which manufactures machinery and equipment used in the energy industry, decided to upgrade its business operations computer software system in 2009.
Then over a period of several months, Lufkin industries and IBM communicated via numerous meetings, “discovery workshops,” and other methods about Lufkin Industries’ needs and IBM’s capabilities.
“Lufkin’s representatives explained that Lufkin needed an ‘out-of-the-box’ or ‘off-the-shelf’ system that could quickly replace its old system for a price lower than the cost of upgrading that system,” the opinion stated. “Based on Lufkin’s operational needs, IBM recommended its ‘Express Solution for SAP,’ which utilizes software developed by SAP, a separate German corporation.”
According to the ruling, IBM made numerous claims during these discussions about its Express Solution computer system that turned out to be false. The computer company claimed Lufkin Industries could implement Express Solution within four to six months and meet 80 percent of Lufkin Industries’ requirements.
“IBM knew, however, that its Express Solution would require extensive customization before it could meet most of Lufkin’s needs,” the opinion stated. “Yet IBM continued to represent the Express Solution as a ‘fit’ for Lufkin, hoping it could land the sale and then figure out how to provide what Lufkin needed.”
At the end of the process, Lufkin Industries wound up paying IBM just under $13 million, which was an increase of about $6 million over the original price and agreed to a “go-live-ugly” implementation on Jan. 1, 2012.
Then on that date, Lufkin Industries shut down its old computer system at IBM’s instruction, the opinion stated.
“Lufkin was unable to use the Express Solution to invoice customers, manage inventory, track orders, shipments, or costs, calculate payroll, or pay employees and vendors,” the opinion stated. Because the system did not integrate with Lufkin’s financial modules, Lufkin had to delay filing public financial reports, and its stock lost value. In short, the system failure crippled Lufkin’s business.”
Lufkin Industries started performing all the above functions manually, the opinion stated. The company then paid consultants an additional $7.5 million to salvage the computer system IBM delivered, the opinion stated.
As a result, Lufkin Industries filed a lawsuit against IBM, and it sought damages for “fraudulent inducement, fraudulent misrepresentation and concealment, negligent misrepresentation, and breach of contract.”
“At trial, the jury found IBM liable on all claims,” the opinion stated.
The jury set the damages at $10 million for Lufkin Industries’ out-of-pocket losses, $10 million for the additional costs to mitigate and replace IBM’s computer system, and an additional $6 million for fraudulent misrepresentation. They awarded no damages for negligent misrepresentation and breach of contract.
Later, the ruling by the appeals court lessened that total amount to $13.5 million, the opinion stated.
The Texas Supreme Court ruling affirmed the lower court’s judgment in regard to Lufkin Industries’ “common-law-fraud” claim and reversed the appeals court’s ruling that levied $13.5 million in damage against IBM for “fraudulent inducement."
In addition, the Texas Supreme Court sent the case back to the trial court level for a new trial on Lufkin Industries’ breach-of-contract claim.
“Lufkin is entitled to a new trial on its claim for breach of contract because the evidence conclusively established that it suffered some amount of damages as a result of IBM’s breach,” the opinion stated.
For the full text of the Texas Supreme Court’s ruling, click this link.