### TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-02-00562-CV

Agillion, Inc., Appellant

v.

Mary Oliver, Appellee

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 126TH JUDICIAL DISTRICT

NO. GN1-00571, HONORABLE F. SCOTT MCCOWN, JUDGE PRESIDING

O P I N I O N

Mary Oliver sued Agillion, Inc. and Steve Papermaster, the former CEO of Agillion,

for breach of contract, fraud, and negligent misrepresentation involving the circumstanc e s

surrounding her decision to leave American Express to work for Agillion. Oliver dismissed her

fraud claim as well as all claims against Papermaster. Oliver filed a motion for partial summary

judgment on her breach of contract claim, which the trial court granted. The case proceeded to trial

on the sole claim of negligent misrepresentation . The jury awarded Oliver $589,200 in actual

damages and $883,800 in punitive damages.

On appeal, Agillion argues that the trial court erred in: (1) submitting the negligent

misrepresentation claim to the jury and rendering judgment on the findings of the jury because

Oliver’s claim is a contract claim not a tort claim and (2) submitting a punitive damages charge to2

the jury and rendering judgment on the finding of punitive damages made by the jury. Agillion also

argues that: (3) the evidence is legally and factually insufficient to support the finding of negligent

misrepresentation made by the jury and (4) the evidence is legally and factually insufficient to

support the finding of malice made by the jury.

Because we conclude that Oliver’s only claim sounds in contract and not in tort, we

hold that the trial court erred in submitting the negligent misrepresentation claim to the jury and

rendering judgment on the verdict. We also hold that the trial court erred in submitting a punitive

damages charge to the jury and rendering judgment on the finding of punitive damages because a

breach of contract will not support punitive damages. We will reverse the judgment of the trial court

and remand for entry of a judgment pursuant to the order granting partial summary judgment on the

breach of contract.

FACTUAL BACKGROUND

Mary Oliver was an executive at American Express in New York in the fall of 1999

when she was contacted by a headhunter about a position at Agillion, I nc., a company located in

Austin, Texas. In her negotiations with Papermaster, the chief executive officer (“CEO”) of

Agillion, Oliver indicated that she would not leave her present employer unless Agillion agreed to

cover the value of her compensation agreement with American Express, specifically, stock options

that would not vest until March 2001. Oliver claims that Papermaster agreed to cover her American

Express Compensation but admits that she expected there would be negotiations over how much

would be paid, how it would be paid, and when it would be paid. Because Papermaster needed1 This letter was the second offer letter sent by Agillion to Oliver because Oliver had rejected

the first offer letter.

2 While Oliver is adamant that Papermaster agreed t o guarantee her American Express

compensation, she admits that th ey never agreed to any specific terms. It would have been

impossible to reach an agreement on how m uch would be paid because she would not know how

much the American Express stock options were worth until over a year later.

3 Oliver to start to work immediately on a Super Bo wl ad campaign, she claims he agreed that he

would “make her whole,” even though the specifics could not be finalized until a later date.

In December 1999, Agillion sent Oliver an offer letter laying out some of the terms

of the agr eement including stock options, salary, start date, bonuses, and which party was responsible

for relocation expenses. 1 This offer letter also stated that a more formal employment agreement

would be prepared later that would incorporate the terms in the offer letter and other issues,

including a severance agreement. Oliver made substantial alterations to the offer letter including

adding a provision that there needed to be a clarification on the severance and termination terms.

The offer letter contained no specific provision guaranteeing Oliver the equivalent of her American

Express compensation package. 2 There was no action on the part of Agillion in response to Oliver’s

changes.

Oliver star ted working for Agillion in January 2000, before a formal employment

agreement had been prepared and before there was an agreement specifying what her severance

package woul d be or addressing the amount necessary to match her American Express package,

which Oliver claims Papermaster agreed to guarantee her. Concerning this guarantee, Oliver said

that it is not that uncommon for high level executives to begin working for a new company before

working out all the details of an employment agreement.3 Oliver initially stated that she thought that if she stayed at American Express until March

of 2001 it would be like having a “check for $2 million.”

4 Oliver said that the draft provi ded for $1.5 million and not $2 million because she had

recouped approximately $500,000 when she left American Express by selling the portion of her stock

that had already vested.

4

The ultimate value of the compensation package Oliver had with American Express

could not be known until 2001, when her package would have vested. In addition, part of the

compensation she had with American Express consisted of portfolio grants whose values were based

on an algorithm that Oliver admitted made it difficult to esti mate how much the grants would be

worth in 2001. Oliver admitted that she had to make a few assumptions on the share price to come

up with an estimate of how much her American Express agreement would have been worth in 2001. 3

In January 2000, Papermaster went to California because his father was dying of

cancer. When Papermaster was leaving, he told Oliver he would start a draft of the employment

agreement. Oliver admitted that she did not push Papermaster to finalize the employment agreement

because she felt it would have been inappropriate to discuss the matter given the situation with

Papermaster’s father.

As of June 2000, there was still no formal employment agreement between Agillion

and Oliver. In frustration, Oliver drafted her own version of an employment agreement, which called

for Agillion to pay her $1.5 million as severance. 4 Oliver gave the draft to Papermaster, intending

it to be a starting point to negotiate a final agreement. Because Papermaster was going out of town,

he asked Oliver to work with Dave Henkel, another Agillion executive hired around the same time

as Oliver, in preparing a fo rmal employment agreement. Henkel prepared a draft, but the

employment agreement he prepared contained no reference to a $1.5 million severance agreement5

or any guarantee to cover Oliver’s American Express compensation package. Henkel told Oliver he

was unaware of any agreement to make Oliver whole with respect to her American Express

compensation package.

Oliver f ound the employment agreement prepared by Henkel completely

unacceptable. Almost immediately after reviewing the agreement, and before allowing Agillion or

Papermaster to correct any misunderstandings, Oliver tender ed her resignation. At the time she

resigned, she continued negotiating specific terms of a severance agreement. After she was unable

to reach an agreement with Henkel, Oliver again met with Papermaster and they negotiated an

ag reement that she would receive approximately $1 million in two installments. The formal

severance agreement, signed by all parties, provided that Agillion would pay Oliver $407,633 on

July 31, 2000, and $589,200 on January 31, 2001.

Agillion made the first payment of $407,633, but was unable to make the second

payment of $589,200 because by January 2001 the company had become insolvent. Oliver made a

demand for payment but Agillion failed to pay. Oliver then sued Agillion for breach of contract,

fraud, and negli g ent misrepresentation, obtaining partial summary judgment on her breach of

contract claim for $589,200. After she dropped her fraud claim, the case proceeded to trial on her

negligent misrepresentation claim and the jury awarded $589,200 in reliance damages. It also found

malice and awarded $883,800 in punitive damages. Because the breach of contract and negligent

misrepresentation claims were pled in the alternative, Oliver elected her remedy and moved for entry

of judgment on her negligent misrepresentation claim.6 DISCUSSION

Negligent Misrepresentation

Agillion argues that the trial court erred in submitting the claim of negligent

misrepresentation to the jury and rendering judgment on the jury’s finding of negligent

misrepresentation because Oliver’s only claim is in contract. In order to determine whether a claim

falls under tort or contract law, the substance of the claim must be examined. Jim Walter Homes,

Inc. v. Reed

, 711 S.W.2d 617-18 (Tex. 1986) (citing International Printing Pressmen and Ass’t

Union v. Smith

, 198 S.W.2d 729 (Tex. 1946)). If the injury is only the economic loss from a contract

itself, the action should be a breach of contract claim. Id. at 618.

The Texas Supreme Court has required an independent injury other than a breach of

contract in order for there to be a valid negligent misrepresentation claim. D .S.A., Inc. v. Hillsboro

Indep. Sch. Dist., 973 S.W.2d 662, 663 (Tex. 1998) (reinforcing the independent injury requirement

of sectio n 552B of the R estatement (Second) of Torts ). A common scenario for negligent

misrepresentation occurs when a defendant states that a contract exists and the plaintiff relies on the

s tatement, but it is later discovered that the contract was rejected or never completed. Abbott v.

Pollock, 9 46 S.W.2d 513, 518 (Tex. App.—Austin 1997, writ denied). A claim for negligent

misrepresentation is recognized in the place of a breach of contract claim and is not usually available

when a contract was in force between the parties. Id.

When Oliver came to work for A gillion, she did so on the basis of an offer letter.

Bo th parties recognized that a more formal employment agreement, to be prepared in the future,

would be needed to clarify the termination and severance provisions. When Oliver ultimately5 Although the dispute between Oliver and Agillion encompasses more than one agreement,

the history of dealings between these parties points to a single objective—compensating Oliver for

the value of the American Express compensation she surrendered by starting to work with Agillion

before that compensation had vested.

6 Because they were unable to work out a for mal employment agreement before Oliver

resigned, Agillion’s agreement to cover the amount o f the American Express compensation was

honored in a severance, rather than employment, agreement.

7 resigned from the company, she entered into a severance agreement with Agillion that afforded her

$1 million. 5

This is not a situation where Oliver relied on Agillion’s statement that a contract

existed only to later find out that the contract had never been completed. C f. Abbott

, 946 S. W.2d

at 518). The basis of Oliver’s claim is that Agillion and Oliver entered into an agreement that if

Oliver came to work for Agillion right away (January 2000), Agillion would make her whole with

regards to her American Express package. Both parties apparently agreed that the amount

guaranteed to Oliver would be negoti a ted in a formal employment agreement at a later date,

primarily because Oliver was not able to articulate specific details regarding the worth of her stock

options at that time.

Before a formal employment agreement was completed, Oliver tendered her

resignation. Nevertheless, Oliver and Agillion signed a severance agreement providing Oliver with

an amount she was apparently satisfied represented the worth of her American Express stock as there

is no evidence to the contrary. 6 When Oliver accepted employment at Agillion she knew that certain

terms of her compensation package were to be spelled out in a later agreement. No specific terms

were discussed because it was impossible to know the value of her American Express compensation

package at that time. According to Oliver, “[the calculation of the amount] wasn’t simple

. . .” “I7 It is worth noting that Henkel was hired shortly after Oliver and during the time that

Papermaster was tending to his dying father. It is not surprising that Henkel was not made aware of

Oliver’s discussions with Papermaster regarding her compensation in light of the surrounding

circumstances.

8 never told them

. . . I knew exactly what it was. I expected that we would negotiate the assumptions

[that my approximations were based on].”

When Oliver began negotiating her formal employment contract in Ju ne 2000,

Papermaster was out of town and asked her to work with Henkel. Unfortunately, Henkel was

unaware of her discussions with Papermaster and drafted an agreement that did not address

guaranteeing her American Express compensation. 7 Oliver resigned within 24 hours of being

presented with the initial employment agreement that failed to compens ate her in an amount

equivalent to her American Express package. She did not discuss with Papermaster why Henkel was

unaware of Papermaster’s “make whole” guarantee.

During her employment, Oliver received her salar y, stock options, and relocation

expenses, all as set forth in the offer letter. When Papermaster accepted her resignation, they

immediately began to discuss the severance agreement. Oliver told him she was going to “hold him

to his promise that Agillion was going to guarantee my American Express compensation package.”

He agreed and instructed Henkel to come up with an of fer to cover Oliver’s American Express

compensation. When Henkel’s offer was unacceptable to Oliver, she went back to Papermaster that

same day. Oliver testified that Papermaster apologized and made her an offer of $1 million in cash

as severance. The severance agreement was entered into mutually and was meant to cover the loss8 Oliver testified that when Papermaster made the offer, she had referred to his promise to

guarantee her American Express compensation and “that’s what he was doing.”

9 Oliver had worked for Agillion for approximately six months and received a severance

package of $1 million, an unusually high amount not typical to executives in most companies,

according to both Papermaster and Henkel.

9 of Oliver’s American Express c ompensation package. 8 There is no evidence that Oliver received less

in the severan ce agreement than a fair equivalent to her surrendered American Express compensation

package. In fact, when asked what she was “left losing,” Oliver testified that “it’s approximately

$500,000. It’s a little more, but it’s approximately [$500,000].” In other words, had Agillion not

breached the severance agreement, Oliver would have received al l that she apparently hoped to

receive. 9

Throughout the dealings between Oliver and Agillion, the objective had always been

the fulfillment of Oliver’s demand that she be compensated for her lost American Express package.

This started with an offer letter, several terms of which were to be negotiated at a later date, and

culminated in a severance contract. There was no evidence this contract was anything other than an

arms length transaction satisf actory to both sides. Because Oliver agreed to the severance agreement,

the damages she complains of are unquestionably premised upon Agillion’s failure to perform under

the written severance agreement. In other words, her claim sounds in contract.

The supreme court has observed t hat it is the nature of the injury which is most

helpful in determining whether the duty that has been breached sounds in contract of tort. A irborne

Freight Corp., Inc., v. C.R. Lee Enters., Inc.

, 847 S.W.2d 289, 293 (Tex. App.—El Paso 1992, writ

denied). When the injury is only an economic loss pursuant to the terms of a contract, the action10 The actual damages the jury awarded Oliver for her misrepresentation claim were

$589,200, which is the exact amount of money Agillion was unable to provide Oliver under the

severance contract. In a similar case, the supreme court decided that a claim more appropriately

sounded in contract than in negligent misrepresentation, noting that the damages awarded by the jury

for the misrepresentation claim were identical to the damages the jury awarded for the breach of

contract claim. D.S.A.

, Inc. v. Hillsboro Indep. Sch. Dist. , 973 S.W.2d 662, 663 (Tex. 1998).

10 soun ds in contract. 10 I

d. ; Southwestern Bell Tele. Co. v. Delanney

, 809 S.W.2d 493, 495 (Tex.

1991); Jim Walter Homes

, 711 S.W.2d at 618. The substance of the severance contract encompassed

all claims Oliver had against Agill ion arising from this employment relationship. Specifically, it

states that “[t]his Agreement

. . . constitute[s] an integrated, written contract, expressing the entire

agreement between the Company and you with respect to the subject matter hereof. In this regard,

you represent and warrant that you are not relying on any promises or representations that do not

appear in this Agreement.” Had this contract not been breached, there would be no dispute. The

injury Oliver complains of arises out of a specific agreement between the parties. Because there was

no injury independent from Agillion’s breach of contract, Oliver’s claim is a contract claim and the

trial court erred in submitting the claim of negligent misrepresentation to th e jury. W e sustain

Agillion’s first issue.

In its ninth issue, Agillion claims that the evidence is legally insufficient to support

the j ury’s finding of malice and award of punitive damages. Because we have held that Oliver’s

claim sounds in contract and not tort, an award of exemplary damages cannot stand because they are

not allowed for breach of contract. Even a malicious breach would not be grounds for awarding

exemplary damages, absent a distinct tort that h as been alleged and proved. A moco Prod. Co. v.11

Alexander

, 622 S.W.2d 563, 571 (Tex. 1981). Therefore, we sustain Agillion’s ninth issue and

reverse the award of $883,800 in punitive damages.

CONCLUSION

We conclude that Oliver’s only cause of action is a contract claim and the trial court

erred in submitting the claim of negligent misrepresentation to the jury. We reverse the judgment

of the trial court entered on the jury’s verdict and remand for entry of a judgment pursuant to the

order granting partial summary judgment on the breach of contract.

David Puryear, Justice

Before Chief Justice Law, Justices B. A. Smith and David Puryear

Reversed and Remanded

Filed: July 11, 2003