Michael L. Schwartz v. Diagnostix Network Alliance ( 2014 )

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
September 17, 2014 Session
MICHAEL L. SCHWARTZ, ET AL. v. DIAGNOSTIX NETWORK
ALLIANCE, LLC, ET AL.
Direct Appeal from the Circuit Court for Davidson County
No. 10-C-1821 Carol Soloman, Judge
No. M2014-00006-COA-R3-CV - Filed November 17, 2014
This case involves an agreement between a distributor of medical tests and a healthcare
consultant. The agreement provided that the consultant would earn a commission on sales
of the medical test that he solicited on behalf of the distributor. After several months, the
distributor terminated the agreement. The consultant filed a lawsuit against the distributor.
The consultant alleged that the distributor breached its duty of good faith under the contract
by terminating the agreement in order to avoid paying commissions and by failing to provide
an adequate sales force to assist the consultant in making sales. The consultant alleged that
the distributor breached a separate verbal contract for the development of marketing
materials. The consultant also alleged that the distributor fraudulently misrepresented its
intent to compensate the consultant for his efforts in soliciting orders for the medical test.
The trial court dismissed the consultant’s fraud claim and granted summary judgment to the
distributor on each of the remaining claims. We affirm the judgment of the trial court with
respect to the consultant’s breach of good faith and fraud and misrepresentation claims.
However, we find that the trial court erred in granting summary judgment on the consultant’s
claim that the distributor breached a separate verbal contract. We also vacate and remand
the trial court’s award of attorney’s fees for reconsideration after issues related to the verbal
contract are resolved.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Affirmed in
part, Reversed in part, Vacated in part and Remanded
B RANDON O. G IBSON, J., delivered the opinion of the Court, in which J. S TEVEN S TAFFORD,
P.J., W.S., and JOHN W. M CC LARTY, J., joined.
Martin Douglas Holmes, Nashville, Tennessee, for the appellants, Michael L. Schwartz and
M.L. Schwartz & Associates, Inc.
Kevin Clayton Baltz and David L. Johnson, Nashville, Tennessee, for the appellees,
Diagnostix Network Alliance, LLC, and Clyde Spencer.
OPINION
I. B ACKGROUND AND P ROCEDURAL H ISTORY
Diatherix Laboratories, Inc. (“Diatherix”) is a clinical laboratory headquartered in
Huntsville, Alabama that provides laboratory testing for the early detection of infectious
diseases through a medical test called Tem-PCR.1 In March 2008, Diatherix granted
Defendant/Appellee Diagnostix Network Alliance, LLC (“Diagnostix”) the exclusive right
to distribute Tem-PCR in the United States. Plaintiff/Appellant Michael L. Schwartz has
worked as a healthcare consultant since 1977. Schwartz is president of M.L. Schwartz &
Associates, Inc. Unless otherwise distinguished, we refer to M.L. Schwartz & Associates,
Inc. and Michael L. Schwartz collectively as “Schwartz” in this opinion.
Schwartz first met with Diagnostix CEO Clyde Spencer to discuss assisting
Diagnostix in the marketing and sale of Tem-PCR in September 2008. Shortly thereafter,
Schwartz began contacting medical facilities in order to sell Tem-PCR. On November 28,
2008, Diagnostix entered into a written “REPRESENTATIVE AGREEMENT” with
“Michael L. Schwartz dba M.L. Schwartz & Associates.” The agreement provided that
Schwartz would solicit orders for Tem-PCR from potential customers within an assigned
territory. In return, Diagnostix would pay Schwartz a commission of two percent of all
invoices for Tem-PCR within his territory. Of particular relevance to this case, Section 6 of
the agreement, titled “Term and Termination of Agreement” provided:
b. The term of this Agreement (the “Term”) shall commence upon the
date last set forth below, and shall terminate immediately upon notice
of termination by DNA or Representative. Notice of termination shall
be sent via mail, fax, email or any other form which provides an
acknowledgment of receipt.
c. DNA agrees that when Representative has made or exceeded his or her
Quota for the Territory in the preceding fiscal year, and has sales in the
current fiscal year which are consistent with his or her achievement of
Quota for that time period, DNA may only terminate Representative for
good cause. In all other situations, the parties agree that DNA shall
1
Tem-PCR is an acronym for Target Enriched Multiplex Polymerase Chain Reaction.
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have the right to terminate this Agreement with or without cause with
advanced notice.
****
h. Upon the termination of this Agreement, Representative shall cease
acting as a sales representative for the Product and or Services in the
Territory or elsewhere and agrees not to commence any action or
proceeding claiming that Representative still has rights under this
Agreement or otherwise. Representative waives any claim against DNA
for loss or damage of any kind (including, without limitation, damages
or other compensation for unjust enrichment, loss of prospective
profits, reimbursements for investments or expenditures made or
goodwill) arising from the expiration or termination of this Agreement.
Representative acknowledges and agrees that any amounts spent by
Representative in the performance of this Agreement, including,
without limitation, establishment or maintenance of sales personnel,
equipment or facilities, advertising or promotion costs, and travel and
living costs and expenses, shall be spent and incurred with the
knowledge that this Agreement may be terminated as provided in this
Agreement, and thus Representative shall make no claim against DNA
or DNA’s contracted partners for, and DNA shall not be liable with
respect to, investments and expenditures incurred by Representative in
anticipation of the continuance of this Agreement.
****
j. This Agreement may be terminated at any time by DNA immediately
upon prior notice to Representative if Representative shall be acquired
by or merged with a non-affiliated third party or if ownership or control
of Representative shall change by any other means. DNA reserves the
right to terminate this agreement upon (30) days notice to the
Representative in the event DNA or any of DNA’s contracted partners
shall be acquired by or merged with a non-affiliated third party or if
ownership or control of DNA or any of DNA’s contracted partners shall
change by any other means. On termination of this Agreement, the
Representative shall have no further interest in outstanding quotes,
prospective orders, unfinished sales or orders not filled prior to
termination.
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From October 2008 to May 2009, Schwartz traveled extensively and made numerous
contacts on behalf of Diagnostix and Diatherix. During that time, Schwartz and other Tem-
PCR representatives made presentations and marketing pitches to VHA Southeast, Inc.
(“VHASE”), an organization that provides products and services to a network of hospitals
throughout the southeast. On May 1, 2009, Diatherix entered into a contract with VHASE
that provided a means for VHASE member hospitals to purchase Diatherix’s services though
the contract did not require them to do so. Meanwhile, Diatherix had apparently received
complaints from VHASE representatives about Schwartz’s aggressive sales tactics. On May
18, 2009, Diagnostix CEO Dennis Grimaud sent an email to Spencer stating that Schwartz’s
behavior had “created a negative environment” for Diagnostix and Diatherix in providing
services to VHASE and requesting that Schwartz no longer represent Diatherix effective
immediately. Later that day, Spencer notified Schwartz that Diagnostix was terminating its
business relationship with Schwartz in accordance with Section 6.b. The parties do not
dispute that Schwartz’s efforts did not lead to any sales of Tem-PCR prior to termination of
the agreement.
On May 18, 2010, Schwartz filed a complaint in the Davidson County Circuit Court,
naming Diagnostix and Spencer as defendants.2 Schwartz alleged that Spencer conspired
with Grimaud to create Diagnostix in order to insulate Diatherix from the claims of
independent representatives who marketed and solicited sales for Tem-PCR. Schwartz
alleged that Diagnostix terminated the agreement in bad faith in order to reap the benefits of
Schwartz’s work while depriving him of commissions on future Tem-PCR sales. Schwartz
alleged that, in terminating the agreement, Diagnostix breached both the express terms of the
agreement as well as its implied obligation to perform in good faith. Schwartz also asserted
a claim of fraud and misrepresentation against the defendants.3 Schwartz alleged that
Spencer was vicariously liable for the actions of Diagnostix and requested an award of actual
and punitive damages to be determined by a jury.
The defendants responded by filing a motion to dismiss for failure to state a claim,
which the trial court granted in part after a hearing. The court found that because the clear
language of the agreement permitted Diagnostix to terminate the agreement at any time,
Schwartz could not maintain a cause of action based on its express terms. Though the court
dismissed Schwartz’s breach of contract claim based on the express terms, it found that
2
The complaint also named Diatherix and Grimaud as defendants, citing theories of vicarious
liability. However, because the claims against Diatherix and Grimaud are not relevant to this appeal, we will
not discuss them.
3
The complaint also alleged unjust enrichment by the defendant. However that claim was
subsequently dismissed as to all of the defendants and is not relevant to this appeal.
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Schwartz sufficiently alleged breach based on Diagnostix’s obligation to exercise good faith
in terminating the contract. Accordingly, the court found that the good faith claim survived
a motion to dismiss as to both Diagnostix and Spencer.4 Finally, the court dismissed
Schwartz’s fraud and misrepresentation claim, finding that it failed to meet the specificity
requirements of Tennessee Rules of Civil Procedure 9.02.
On July 27, 2011, the defendants filed a motion for summary judgment contending
they were entitled to judgment as a matter of law because the undisputed facts established
that Diagnostix terminated the agreement in good faith. Specifically, they presented evidence
to show that potential Tem-PCR customers complained about Schwartz’s sales tactics on
numerous occasions. The defendants also asserted that because Schwartz’s efforts did not
result in any Tem-PCR sales, Diagnostix had no motivation to terminate Schwartz to avoid
paying him commissions. As further proof of good faith, the defendants pointed out that
although it was not required to do so under the agreement, Diagnostix offered to pay
Schwartz a commission on sales made within ninety days of his termination if Schwartz
would help facilitate a smooth transition with existing contacts. Finally, the defendants
argued that the court should dismiss Schwartz’s corporate veil-piercing claims against
Spencer in his individual capacity because undisputed facts established that Diagnostix
followed appropriate corporate formalities.
Schwartz filed a response to the defendants’ motion, arguing that disputed material
facts precluded summary judgment and presenting two new theories of recovery developed
during the discovery period. Schwartz reiterated his original theory that Diagnostix breached
a duty of good faith in terminating the agreement to avoid paying commissions but added that
Diagnostix also breached a duty of good faith because it failed to provide an adequate sales
force to follow up on leads Schwartz generated. Schwartz also alleged that Diagnostix
breached a separate verbal contract that Schwartz entered with Spencer, acting on behalf of
Diagnostix, to develop marketing materials in exchange for a payment of $20,000.
The parties filed lengthy briefs articulating their respective positions. The court heard
arguments on the motions for summary judgment and filed a memorandum opinion and order
on November 15, 2012. The court declined to grant summary judgment to Diagnostix on
Schwartz’s claim that it terminated the agreement in bad faith, stating that it was “unable at
this time to conclude that the evidence is undisputed and that DNA is entitled to judgment
as a matter of law.” The court also denied summary judgment to the defendants on
Schwartz’s theory of imputing liability through piercing the corporate veil. The court
4
The court found that Schwartz’s complaint was sufficient to support two theories of vicarious
liability against Spencer: (1) through an agency relationship between Diagnostix (principal) and Spencer
(agent); and (2) through piercing the corporate veil of Diagnostix to impute liability to Spencer.
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declined, however, to rule on the two additional theories of liability Schwartz alleged for the
first time in response to summary judgment. Instead, the court instructed Schwartz to file an
amended complaint alleging facts to support the new theories and granted the defendants
leave to file a renewed motion for summary judgment on the amended complaint.
Pursuant to the court’s instructions, Schwartz filed an amended complaint on
November 29, 2012 alleging three theories of breach against the defendants: (1) breach of
good faith in terminating the agreement to avoid paying commissions; (2) breach of good
faith in failing to provide adequate sales support; and (3) breach of a verbal contract for
payment for the development of marketing materials. The defendants answered, denying
liability under each of the theories and filing a counterclaim for fees and costs incurred in the
litigation pursuant to the agreement’s attorney’s fees clause.
On October 4, 2013, the defendants filed a motion for partial summary judgment
directly challenging only Schwartz’s “new” claims.5 The defendants argued they were
entitled to judgment on Schwartz’s sales support claim because the parties’ agreement did
not impose any obligation on Diagnostix–express or implied–to provide any level of sales
support to follow up on any leads generated by Schwartz. The defendants asserted that
reading such an obligation into the contract would create new contractual duties not
contemplated by the parties when they executed the agreement. The defendants also argued
that Schwartz’s claim for breach of a verbal contract to develop marketing materials was
barred by the parol evidence rule, relying on Section 8.a. of the agreement, which states that
“[r]epresentative expressly waives any claim against DNA for damages or compensation with
respect to the development of ‘goodwill’ or marketing development with respect to the
Product or Services on behalf of DNA.” Schwartz filed a lengthy response to the motion,
and the defendants filed a reply to that response.
On November 15, 2013, the trial court conducted a hearing on the defendants’
pending motion. Initially, the court granted summary judgment to the defendants on
Schwartz’s sales support and verbal contract claims. After dismissing both claims that were
the subject of the pending motion, the court also revisited and reversed its earlier denial of
summary judgment on Schwartz’s original claim that Diagnostix terminated the agreement
in bad faith.
Following the court’s dismissal of all of Schwartz’s claims, Diagnostix filed a motion
requesting an award of reasonable attorneys’ fees and discretionary costs based on a clause
in the agreement providing for such an award to the “prevailing party” in litigation arising
5
The motion did not request that the court revisit its earlier denial of summary judgment on
Schwartz’s original claim that Diagnostix terminated the agreement in bad faith.
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from the contract.6 Schwartz conceded that Diagnostix was entitled to such an award as the
prevailing party but argued that the judgment should only be entered against M.L. Schwartz
& Associates, Inc., and not against Michael Schwartz individually because as he was not a
party to the agreement in his individual capacity. The court rejected Schwartz’s argument
and entered a judgment of $179,162.34 against both M.L. Schwartz & Associates, Inc., and
Michael L. Schwartz, jointly and severally. Schwartz appealed.
II. D ISCUSSION
The parties raise multiple issues on appeal. First, Schwartz contends that the trial
court erred in revisiting and reversing its initial denial of summary judgment on the breach
of good faith in termination claim. Second, Schwartz contends that, in any event, the court
erred in granting summary judgment to the defendants on each of his three breach of contract
claims. Third, Schwartz contends that the trial court erred in dismissing the claim for fraud
and misrepresentation. Finally, Schwartz contends that the trial court erred in determining
that he should be held liable in his individual capacity for the award of attorney’s fees and
costs to Diagnostix. Finally, both Schwartz and Diagnostix take issue with the amount of the
trial court’s award for attorney’s fees and costs.
A. B REACH OF C ONTRACT
Schwartz contends that the trial court erred in granting summary judgment on each
of the breach of contract claims. Although Schwartz concedes that Diagnostix did not breach
any express terms of the parties’ written agreement, Schwartz contends that Diagnostix
breached its implied obligation to perform the contract in good faith in two ways: (1) by
terminating the agreement in bad faith to prevent Schwartz from receiving commissions on
future sales that were the result of his efforts, and (2) by failing to provide adequate sales
support to generate sales from the contacts Schwartz made on behalf of Diagnostix.
Schwartz also contends that he and Spencer reached a verbal agreement for Schwartz to
develop marketing materials explaining the financial benefits of Tem-PCR in exchange for
$20,000. Schwartz contends that Diagnostix breached the contract because he performed the
work but was never paid. We address each of Schwartz’s breach of contract claims
separately.
Good Faith in Termination of the Agreement
6
Section 8.b.iv. of the agreement, which addresses litigation between the parties, states that “[t]he
prevailing party shall be entitled to an award of all reasonable attorneys fees and expenses incurred by it in
connection with such lawsuit . . . .”
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Schwartz maintains that the trial court erred in revisiting and reversing its initial denial
of summary judgment to Diagnostix on the claim that Diagnostix terminated the agreement
in bad faith. To begin, we address whether Judge Soloman erred in revisiting the issue after
the defendants’ motion for summary judgment on the issue was initially denied by Judge
McClendon.7 Schwartz contends that the trial court erred by sua sponte reversing its prior
order without a motion for summary judgment pending before it.
We find that the trial court had the discretion to revisit and reverse its prior order
pursuant to Rule 54.02 of the Tennessee Rules of Civil Procedure and Rule 3(a) of the
Tennessee Rules of Appellate Procedure. Those rules provide that in cases involving
multiple parties or claims for relief, any order adjudicating fewer than of all the claims or the
rights and liabilities of fewer than of all the parties is subject to revision at any time before
entry of a final judgment. Tenn. R. Civ. P. 54.02; Tenn. R. App. P. 3(a). Judge
McClendon’s order denying the motion for summary judgment was not a final judgment.
See, e.g., Richardson v. Tenn. Bd. of Dentistry, 913 S.W.2d 446, 460 (Tenn. 1995) (“An
order denying a motion for summary judgment, for example, is not a final judgment because
the entire suit remains for disposition.”). Accordingly, the order was subject to revision at
any time before entry of a final judgment. This conclusion is supported by other cases in
which this Court has upheld the authority of trial courts to revisit and reverse its prior order
denying summary judgment under similar circumstances. See Shelburne v. Frontier Health,
No. E2000-02551-COA-R3-CV, 2001 WL 1328531, at *7 (Tenn. Ct. App. Oct. 29, 2001)
(holding that the trial court did not err in granting defendant’s third motion for summary
judgment after its earlier motions were denied by a different judge), rev’d on other grounds,
126 S.W.3d 838 (Tenn. 2003); Con Pac South, Inc. v. Burnett, No. 03A01-9811-CV-00389,
1999 WL 419708, at *2 (Tenn. Ct. App. June 24, 1999) (holding that the trial court did not
err in revisiting another judge’s earlier denial of summary judgment even though no new
motion had been filed and no new facts or legal issues had arisen).8 Therefore, we find no
error in the trial court’s decision to revisit its prior ruling on summary judgment. Plaintiffs
make no allegation in this Court that the trial court considered new facts or new legal issues
beyond those raised in the pleadings relating to the earlier motion for summary judgment.
Schwartz contends that even if the trial court had the discretion to revisit its earlier
7
When the case was initially filed in May 2010, it was assigned to Judge Amanda McClendon of the
Second Circuit Court of Davidson County. Judge McClendon ruled on the defendants’ first motion for
summary judgment. Between the defendants’ first and second motions for summary judgment, the case was
transferred to Judge Carol Soloman.
8
See also Gurley v. King, 183 S.W.3d 30, 33 (Tenn. Ct. App. 2005) (reversing the trial court’s grant
of summary judgment on the merits rather than the trial court’s sua sponte decision to revisit its previous
denial of summary judgment).
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summary judgment ruling, the court erred in reversing the ruling and granting summary
judgment to Diagnostix. Summary judgment is appropriate if the “pleadings, depositions,
answers to interrogatories, and admissions on file, together with the affidavits . . . show that
there is no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.” Tenn. R. Civ. P. 56.04. Schwartz argues that Diagnostix is
not entitled to a judgment as a matter of law because the question of whether Diagnostix
terminated the agreement in bad faith presents a genuine issue of material fact for a jury.
However, a disputed fact is only material if it must be decided in order to resolve the
substantive claim at which the motion is directed. Byrd v. Hall, 847 S.W.3d 208, 215 (Tenn.
1993). After reviewing the specific terms of the contract at issue, we conclude that the
factual question of whether Diagnostix terminated the agreement in bad faith is not material
because it was entitled to terminate the agreement for any reason.
It is well-established in Tennessee that the common law imposes a duty of good faith
in the performance of contracts. Dick Broad. Co., Inc. of Tenn. v. Oak Ridge FM, Inc., 395
S.W.3d 653, 660 (Tenn. 2013) (citing Wallace v. Nat’l Bank of Commerce, 938 S.W.2d 684,
686 (Tenn. 1996)). Thus, when a contractual provision is silent regarding the standard of
conduct governing a party’s performance, the party must perform in good faith and in a
commercially reasonable manner. Id. at 669. However, parties are free to contract for a
standard of conduct in performance that is different than the standard of good faith imposed
by common law. Id. at 669; Bank of Crockett v. Cullipher, 752 S.W.2d 84, 91 (Tenn. App.
1988) (“[Parties] may by agreement, however, determine the standards by which the
performance of obligations are to be measured.”). To determine whether the parties have
contracted for a different standard of conduct, the court must examine the specific language
of the contract at issue. Wallace, 938 S.W.2d at 686; Barnes & Robinson Co., Inc. v.
OneSource Facility Servs., Inc., 195 S.W.3d 637, 643 (Tenn. Ct. App. 2006).
In examining and interpreting contracts, we are guided by the well-settled principles
of contract construction. “A cardinal rule of contractual interpretation is to ascertain and
give effect to the intent of the parties.” Allstate Ins. Co. v. Watson, 195 S.W.3d 609, 611
(Tenn. 2006) (citation omitted). We can ascertain the intent of the parties from the ordinary
meaning on the language used in the body of the contract. 84 Lumber Co. v. Smith, 356
S.W.3d 380, 383 (Tenn. 2011). If the language of the contract is clear and unambiguous, the
literal meaning of the contract language controls. Allmand v. Pavletic, 292 S.W.3d 618, 630
(Tenn. 2009).
In this case, the parties’ agreement was made for an indefinite term. Nothing in the
agreement suggests that Schwartz’s right to terminate the agreement was restricted in any
way. Additionally, neither party disputes that because Schwartz had not made any Tem-PCR
sales prior to the termination, Diagnostix was entitled to terminate the agreement at any time
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“with or without cause.” Accordingly, the clear and unambiguous language of the agreement
indicates that the parties’ relationship, under the circumstances, was analogous to a contract
for employment at will. See Guy v. Mutual of Omaha Ins. Co., 79 S.W.3d 528, 534-35
(Tenn. 2002) (“Tennessee has long adhered to the common law employment-at-will doctrine,
which provides that an employment contract for an indefinite term is terminable at the will
of either the employer or the employee for any cause or for no cause.”). Tennessee courts
have consistently held that a contract for employment at will may be terminated without
breach for good cause, bad cause, or no cause at all. Forrester v. Stockstill, 869 S.W.2d 328,
330 (Tenn. 1994); Clanton v. Cain-Sloan Co., 667 S.W.2d 441, 443 (Tenn. 1984). The clear
terms of the contract provide that Diagnostix may terminate the contract “without cause.”
To hold that the covenant of good faith prevented Diagnostix from exercising its right to
terminate the contract for any reason would be contrary to the parties’ clear intention, as
evidenced by the agreement.
We recognize that Schwartz’s termination after working to secure sales of Tem-PCR,
but before any commissions from its sale became formally due, may be perceived as harsh.
However, an unfortunate business outcome does not invalidate the parties’ contractual
structure. Pursuant to Section 6.h of the agreement, Schwartz explicitly entered the
agreement with full knowledge of how the agreement could be terminated and, with that
knowledge, waived any claims against Diagnostix for expenses he incurred in his
performance. Schwartz also acknowledged under Section 6.j. of the agreement that on
termination of the agreement, he would have no interest in future sales. We must respect the
right of competent parties in a commercial transaction to construct their own bargains. See
Dick Broad. Co., 395 S.W.3d at 672-673 (Koch, J., concurring). Diagnostix’s performance
according to the terms of the parties’ agreement cannot be characterized as bad faith. See
Wallace v. Nat’l Bank of Commerce, 938 S.W.2d 684, 687 (Tenn. 1996). In light of the
foregoing, we affirm the trial court’s grant of summary judgment to the defendants on
Schwartz’s claim that Diagnostix breached a duty of good faith in terminating the parties’
agreement.
Good Faith in Providing Sales Support
The trial court also granted summary judgment to the defendants on Schwartz’s claim
that Diagnostix breached the parties’ agreement because it failed to provide adequate sales
support to follow up and pursue leads Schwartz created. The court found that Diagnostix did
not have any express or implied duty under the agreement to provide any particular level of
sales support. On appeal, Schwartz does not contend that any language in the agreement
imposes an express obligation on Diagnostix to provide adequate sales support; rather,
Schwartz argues that the trial court erred in granting the defendants’ summary judgment
motion because Diagnostix had an implied duty of good faith to provide such support and
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whether it did so is a genuine issue of material fact.
As we previously stated, Tennessee courts recognize that there is implied duty of good
faith and fair dealing in every contract. Dick Broad., 395 S.W.3d at 660. However, the
implied duty of good faith should not be interpreted so broadly as to create new contractual
rights or obligations for the parties. Id. at 666. Schwartz has failed to identify any provision
in the parties’ agreement from which it can be inferred that Diagnostix was obligated to
provide any level of sales support to follow up on Schwartz’s contacts. The plain language
of the contract simply provided that Schwartz would “solicit orders” for Tem-PCR based on
the terms and conditions provided by Diagnostix and that the orders would become binding
after acceptance by Diagnostix. We decline to recognize and enforce an implied obligation
that has no foundation in the parties’ unambiguous written agreement.
Moreover, we note that in this case Schwartz had an opportunity to review the
agreement prior to signing it and, in fact, initially rejected it. In his deposition, Schwartz
stated that when Spencer first sent him a copy of the proposed agreement, he insisted that it
be redrafted to provide him further protection and to more clearly define his role as a
consultant rather than a salesperson. Nevertheless, after Spencer indicated that its terms were
not negotiable, Schwartz voluntarily signed the agreement. It is not the duty of the courts to
come to the aid of parties who enter undesirable commercial transactions. Ellis v. Pauline
S. Sprouse Residuary Trust, 280 S.W.3d 806, 814 (Tenn. 2009) (“[T]he courts do not concern
themselves with the wisdom or folly of a contract and will not relieve a party of its
contractual obligations simply because the contract later proves to be burdensome or
unwise.”); see also Dick Broad. Co., 395 S.W.3d at 672–676 (Koch, J., concurring)
(explaining the limited scope of the implied duty of good faith and fair dealing in the context
of arm’s length commercial transactions).
In sum, the alleged failure of Diagnostix to provide adequate sales support to
Schwartz does not amount to a breach of the parties’ agreement or of the implied duty of
good faith. The unambiguous language of the agreement did not impose any obligation on
Diagnostix to provide any level of sales support. We affirm the trial court’s grant of
summary judgment to the defendants on Schwartz’s claim that Diagnostix breached a duty
of good faith by failing to provide adequate sales support.
Breach of a Verbal Contract
In addition to claims related to the parties’ written contract, Schwartz alleged in the
first amended complaint that Diagnostix breached a verbal contract Schwartz entered with
Spencer, acting on behalf of Diagnostix, to develop marketing materials demonstrating the
potential cost savings and financial benefits of Tem-PCR. Schwartz alleged that because
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both parties agreed that the development of marketing materials was outside the scope of his
duties under the written agreement, Spencer agreed to pay Schwartz separately for the work.
Schwartz claims he developed the materials in reliance on Spencer’s promise but that he was
never compensated for his work.
As outlined above, a party moving for summary judgment under the standard set forth
in Hannan may shift the burden to the nonmoving party either by negating an essential
element of the nonmoving party’s claim or by demonstrating that the nonmoving party cannot
establish an essential element of the claim at trial. Hannan v. Alltel Pub’l Co., 270 S.W.3d
1, 6 (Tenn. 2008). The trial court found that Diagnostix demonstrated that Schwartz would
be unable to prove the existence of the verbal contract at trial. The court determined that
evidence of the alleged verbal agreement would be inadmissible under the parol evidence
rule because it was inconsistent with Section 8.a. of the agreement, which states that
“[r]epresentative expressly waives any claim against DNA for damages or compensation with
respect to the development of ‘goodwill’ or marketing development with respect to the
Product and or Services on behalf of DNA.” (Emphasis added.) After examining the record,
however, we find that, because it is not clear from the record when the alleged verbal
contract was created, the trial court improperly applied the parol evidence rule to determine
that it would prevent Schwartz from presenting evidence of the alleged verbal contract at
trial.
This Court discussed the parol evidence rule in GRW Enterprises, Inc. v. Davis:
The parol evidence rule is a rule of substantive law intended to protect
the integrity of written contracts. Since courts should not look beyond
a written contract when its terms are clear, the parol evidence rule
provides that contracting parties cannot use extraneous evidence to
alter, vary, or qualify the plain meaning of an unambiguous written
contract.
The rule appears to be quite all-encompassing. However, the courts
have been reluctant to apply it mechanically and have now recognized
that it has numerous exceptions and limitations. Thus, the rule does not
prevent using extraneous evidence to prove the existence of an
agreement made after an earlier written agreement, or to prove the
existence of an independent or collateral agreement not in conflict with
a written contract. In each of these circumstances, the courts have
conceived that the parol evidence is not being used to vary the written
contract but rather to prove the existence of another, separate contract.
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GRW Enters., Inc. v. Davis, 797 S.W.2d 606, 610–11 (Tenn. Ct. App. 1990) (emphasis
added) (citations omitted). Accordingly, although a written contract must prevail over prior
and contemporaneous representations, Lyons v. Farmers Inc. Exch., 26 S.W.3d 888 (Tenn.
Ct. App. 2000), evidence of an agreement made subsequent to the execution of the written
agreement, even though it may have the effect of adding to, changing, modifying, or
altogether abrogating the parties’ written agreement, is not barred by the parol evidence rule.
Brunson v. Gladish, 125 S.W.2d 144, 147 (Tenn. 1939); Univ. Corp. v. Wring, No. W2011-
01126-COA-R3-CV, 2012 WL 4078517, at *6 (Tenn. Ct. App. Sept. 18, 2012). After a
written contract is made, it can be modified by the express words of the parties either
verbally or in writing. Lancaster v. Ferrell Paving, Inc., 397 S.W.3d 606, 611 (Tenn. Ct.
App. 2011).
There is no evidence in the record to establish whether the alleged verbal contract was
entered before or after the execution of the parties’ written agreement on November 28,
2008.9 If the verbal contract was created subsequent to the written agreement, the parol
evidence rule would not apply to the admission of evidence regarding its formation. We
therefore hold that the trial court erred in determining that the defendants established
Schwartz would not be able to prove the existence of the contract at trial.
Diagnostix emphasizes that Schwartz has not presented any evidence to show that
there was a definite meeting of the minds on the terms of the alleged verbal contract or that
the alleged verbal agreement was entered after the execution of the written agreement.10
However, because the defendants did not satisfy their initial burden, Schwartz was not
required to produce evidence to survive summary judgment under Hannan. See Hannan v.
Alltel Pub’l Co., 270 S.W.3d 1, 5 (Tenn. 2008) (“If the moving party does not satisfy its
initial burden of production, the court should dismiss the motion for summary judgment.”);
see also White v. Target Corp., No. W2010-02372-COA-R3-CV, 2012 WL 6599814, at *7
(Tenn. Ct. App. Dec. 18, 2012) (applying Hannan). In light of the foregoing, we must vacate
the trial court’s grant of summary judgment to the defendants on Schwartz’s claim for breach
of a verbal contract.
9
In Schwartz’s first amended complaint, Schwartz alleges that the verbal contract was entered “[i]n
late 2008.”
10
Diagnostix points out that Schwartz stated during depositions that he could not remember whether
the alleged verbal agreement was reached before or after the execution of the written agreement.
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B. Fraud and Misrepresentation Claim
Next, Schwartz contends that the trial court erred in dismissing his claim for fraud and
misrepresentation on the grounds that it was not pled with particularity in his original
complaint. The basic elements for a claim of fraud are: (1) an intentional misrepresentation
with regard to a material fact, (2) knowledge of the representation’s falsity, (3) injury to the
plaintiff caused by reasonable reliance on the representation, and (4) the misrepresentation
relates to an existing or past fact, or, if based on promissory fraud, the misrepresentation
embodies a promise of future action with no present intent to perform. Shahdar v. Global
Housing, Inc., 983 S.W.2d 230 (Tenn. Ct. App. 1998). Schwartz’s allegations of promissory
fraud are contained in the following paragraphs of the complaint:
33. Defendants, either individually or through their officers and/or agents,
intentionally misrepresented material facts and/or created a false impression
to Plaintiffs with full knowledge of their falsity. Specifically, Defendants
intentionally represented to Plaintiffs that if Schwartz developed contacts and
leads which culminated in sales orders, and/or contracts for the Tem-PCR
product from health care providers, that Plaintiffs would be fairly compensated
for their performance. In reality, Defendants never intended to compensate
Plaintiffs and had previously conspired to dupe Schwartz into believing that
his hard work and efforts would be compensated considerably, knowing that
after Schwartz developed contacts and leads, that Defendants would
prematurely terminate any agreement with Plaintiffs and refuse to pay
Plaintiffs accordingly.
34. Defendants not only fraudulently conspired in the aforementioned manner
with respect to Plaintiffs, but also did so with other representatives and/or
“sub-distributors” of the Tem-PCR product. Defendants’ overall pattern of
conduct with respect to other representatives and/or “sub-distributors” is
evidence of Defendants’ nefarious plots and schemes.
35. Alternatively, Defendants (either individually or through their officers
and/or agents) negligently made material misrepresentations to Plaintiffs.
36. Plaintiffs relied upon Defendants’ representations and performed work
which led to or will lead to sales, orders, and/or contracts for the Tem-PCR
product from Defendants. Further, in reliance upon Defendants’
representations, Plaintiffs developed marketing materials to assist DNA and
Diatherix in marketing the Tem-PCR technology to prospective purchasers and
end-users.
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37. As a result of Defendants’ misrepresentation and/or fraud, Plaintiffs have
suffered injury, harm and damages, and are likely to suffer future injury, harm
and damages as well. Plaintiffs are entitled to actual damages and punitive
damages as a result of Defendants’ misrepresentation and fraudulent conduct.
The trial court dismissed Schwartz’s fraud claim after finding that it failed to meet the
specificity requirement of Tennessee Rule of Civil Procedure 9.02, which states that “the
circumstances constituting fraud or mistake shall be stated with particularity.” “To pass the
particularity test, the actors should be identified and the substance of each allegation should
be pled.” Kincaid v. SouthTrust Bank, 221 S.W.3d 32, 41 (Tenn. Ct. App. 2006). This Court
recently stated that particularity requires reference to “a single or specific person, thing,
group class, occasion, etc., rather than to others or all.” Diggs v. Lasalle Nat’l Bank Ass’n,
387 S.W.3d 559, 565 (Tenn. Ct. App. 2012).
Here, Schwartz’s claim for fraud and misrepresentation was not alleged with
particularity in his complaint. The allegations in the complaint are general and do not
identify any particular defendant as making false and misleading statements. Schwartz does
not allege any particular facts that establish an intent to deceive; rather the complaint
generally alleges that the defendants acted with such an intent. Moreover, we note that the
complaint does not contain any particular allegations regarding the reasonableness of
Schwartz’s reliance on the alleged fraudulent statements. Accordingly, Schwartz’s fraud and
misrepresentation claim was properly dismissed.
C. Attorney’s Fees
Following the dismissal of Schwartz’s claims, the trial court awarded Diagnostix
$179,162.34 in attorney’s fees and costs pursuant to a clause in the parties’ written agreement
that provided for such an award to the prevailing party in a lawsuit to resolve disputes arising
from or related to the agreement. The court entered the judgment jointly and severally
against both M.L. Schwartz & Associates, Inc. and Michael L. Schwartz personally. Each
of the parties raises issues related to the amount of the trial court’s award. Additionally,
Schwartz contends that the trial court erred in finding that he should be personally liable for
the award.
We first address Schwartz’s claim that he is not personally liable for the attorney’s fee
award. Schwartz argues that the parties’ written agreement was between Diagnostix and
M.L. Schwartz and Associates, Inc. only and that the trial court therefore erred in holding
him personally liable for the award of fees and costs. Whether or not Schwartz was
personally bound by the agreement requires us to interpret the contract to ascertain the
parties’ intent. See Bill Walker & Assocs., Inc., v. Parrish, 770 S.W.2d 764 (Tenn. Ct. App.
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1989) (interpreting the parties’ written contract to determine whether a party was personally
liable under the contract). If a contract is ambiguous, we may look outside the four corners
of the document and consider extrinsic evidence to determine the parties’ intent. Cummings
Inc. v. Dorgan, 320 S.W.3d 316, 333 (Tenn. Ct. App. 2009).
The parties’ agreement is ambiguous regarding the parties’ intent to personally bind
Schwartz in addition to M.L. Schwartz and Associates, Inc. The designation of the
“Representative” as “Michael L. Schwartz dba M.L. Schwartz & Associates” indicates that
an individual person, Michael Schwartz, is doing business under the name of “M.L. Schwartz
& Associates” and is agreeing to be bound by the contract. See Bill Walker & Assocs., 770
S.W.2d at 770. However, Schwartz’s signature on the last page of the contract is preceded
by the handwritten name “M.L. Schwartz & Assoc. Inc.” and is followed by his title as
President. “A corporate officer’s signature, preceded by the corporation’s name and
followed by words denoting the officer’s representative capacity, binds only the corporation.”
Id. Accordingly, the contract is ambiguous regarding whether the parties intended Schwartz
to be personally liable, and we must look to extrinsic evidence to determine the parties’
intent.
We need not look far to determine that Schwartz intended to be personally bound to
the contract. In his first amended complaint, Schwartz designated himself in his individual
capacity as “Schwartz.” Schwartz did not use any tag to designate the entity M.L. Schwartz
and Associates, Inc. The complaint states that “[i]n late November or early December 2008,
DNA and Schwartz entered into a Representative Agreement, a copy of which is attached
hereto as Exhibit 1.” Under the doctrine of judicial estoppel, a party is not permitted to take
a position directly contrary to, or inconsistent with, one that party previously assumed.
Marcus v. Marcus, 993 S.W.2d 596, 602 (Tenn. 1999). Because Schwartz previously
asserted that he personally entered the agreement with Diagnostix, he is barred from taking
a contrary position now. We find no error in the trial court’s decision to hold Schwartz
personally liable under the parties’ agreement.
Although the parties take issue with the amount of attorney’s fees awarded, we note
that our opinion necessitates further proceedings in the trial court regarding the existence of
a verbal contract. As such, and given that the parties may seek fees associated with this
appeal, we vacate the trial court’s award of attorney’s fees with instructions for the trial court
to consider the attorney fee issue after a determination is made regarding an verbal contract.
In doing so, we do not express any opinion regarding whether attorney’s fees are available
with respect to the verbal contract portion of Schwartz’s claim.
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III. C ONCLUSION
We affirm the trial court’s grant of summary judgment to Diagnostix on Schwartz’s
claim that Diagnostix breached a duty of good faith in terminating the parties’ agreement.
We affirm the trial court’s grant of summary judgment to Diagnostix on Schwartz’s claim
that Diagnostix breached a duty of good faith by failing to provide adequate sales support.
We reverse the trial court’s grant of summary judgment to Diagnostix on Schwartz’s claim
for breach of a verbal contract. We vacate and remand the trial court’s award of attorney’s
fees and costs for reconsideration after issues related to the verbal contract are resolved.
The decision of the trial court is affirmed in part and reversed in part, and the case is
remanded for further proceedings consistent with this opinion. Costs on appeal are taxed
one-half against the appellees, Diagnostix Network Alliance, LLC, and Clyde Spencer, and
one-half against the appellants, Michael L. Schwartz and M.L. Schwartz & Associates, Inc.,
and their surety, for which execution may issue if necessary.
_________________________________
BRANDON O. GIBSON, JUDGE
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