2005 D e c i sion s O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit 9-16-2005 

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A D V A N C E D T U B U L A R P R O D U C T S , IN C ., * A ppel l ant v. S OLAR ATM OSP HERE S , I NC. ( Pur s uantt o C l er k’ s O r derof 6/ 16/ 04) * O n A p p ea l from the U n it ed S tat es D istri ct C o u rt f o r th e E a ste rn D istric t o f P e n n sy lv a n ia ( D . C . N o. 03- cv- 00946) D i s t r i ctJ udge: H on. B er l e M . Schi l l er Subm i t t ed U nderT hi r d C i r cui tL A R 34. 1( a)

Sept ember 12, 2005 B efor e: SL O V I T E R , B A R R Y and SM I T H , C i r cui tJ udges

( Fi l ed: Sept ember 16, 2005)

OP I NI ON2

SL O V I T E R , C i r cui tJ udge. T h is case co m es to u s o n ap p ea l byA d v an ce d T u b u lar P rod u cts (T u b u lar) fr om an or derof t he D i s t r i ctC our tgr ant i ng s um m aryj udgm entt o defe ndantSol ar At mo s p h e r e s ( S o l a r ) . On a p p e a l , we mu s td e t e r mi n e wh e n t h e c o n t r a c tb e t we e n t h e t wo part i es w as form ed an d w hethert he co ntr acti ncluded S olar ’s “T erm s of S al e. ” W e m ust al s o deci de w hethert he l i m i t ed r emedi es avai l abl e t o T ubul arunderSol ar ’ s t er m s fai l ed i n t hei res s ent i al purpos e and thus barr ed s um m aryj udgm ent . L as t l y , w e mustdet er m i ne w hetherSol arfr audul ent l yi nduced Tubul art o ent eri nt o t he contr actand w hethert he

“ g i s to f t h e a c t i o n ” d o c t r i n e b a r s Tu b u l a r ’ s f r a u d c l a i m. I. T u b u la r w a s a K e n tu c k yc o rp o ra tio n th a t m a n u f a c tu re d s ta in le s s s te e l tu b in g . O r i gi nal l y , t he maj or i t yof t he company ’ s bus i nes s w as der i ved fr om t he aut om ot i ve i ndus t r ybuti n 2000/ 2001 T ubul ardeci ded t o begi n s el l i ng tubi ng t o t he oi l and gas i ndus t r y . A s a r es ul t , T ubul arcont act ed Sol arr egar di ng Sol ar ’ s abi l i t yt o pr ovi de hea t t r eatm entforT ubul ar ’ s s t ai nl es s s t eel tubi ng. T ubul arm etw i t h Sol arand di s cus s ed t he demands of the part i cul arheatt r eatm entappl i cat i on neede d fort he j ob. T hi s t r eatm ent i ncl uded the s peci fi cat i on s t andar d know n as A ST M A 789. A ft erbei ng i nfor m ed of the need t o us e A ST M A 789, Sol aras s ur ed Tubul art hati tw as fami l i arw i t h t he pr oces s and t hat“theycoul d handl e i t . ” A pp. at2. O n February19, 2001, T ubul ars entSol art hr ee s ampl e coi l s of tubi ng, l abel ed3

“s ampl e, ” t o Sol arfort r eatm ent . T hes e s ampl e tubes w er e hea tt r eat ed bySol arand t hen sen t bac k to T u b u lar t o b e tested . A fter rec eivin g the h ea t trea ted s am p les fro m S o lar, T u b u lar tes ted th e m f

o r “ sig m a p h a se ” (im p ro p e r h e a t trea tm e n t) a t “a v a rie tyo f p o in ts t hr ough t he coi l . ” A pp at113. A ft ert he February19, 2001 s hi pm ent , T ubul ars ent anothert w o s et s of “s ampl e” c oi l s t o Sol art o be hea tt r eat ed and then r etur ned fort es t i ng. A ft erconduct i ng t hes e t es t s , T ubul arw as s at i s fi ed thatSol arcoul d per for m t he w or k, and on M ar ch 19, 2001, T ubul arbegan s hi ppi ng l ar gerquant i t i es of tubes t o Sol arand o m itt in g th e “ sa m p le” lab e l. O n F ebruary20 , 20 01 , t he d ayaft er Tu bu l ar s ent i t s fi rs tshi pm ent of sam ple coi l s, Sol arfaxe d a quot at i on fort he pr i ce of i t s heat i ng s er vi ces and mai l ed a ha r d copyof t he quot at i on al ong w i t h t he Ter m s of Sal e t o T ubul ar . T he fa xed quot at i on r efe r r ed t o t he T er m s of Sal e butdi d noti ncl ude them. T he Ter m s of Sal e i ncl uded a l i m i t at i on of liab ili tya n d re m e d ies . T h e lim ited liab ili typ ro v isio n sta ted th a t “s e ller’ s lia b ili tysh a ll n o te x c e e d t w i c e t h e a m o u n to f s e l l e r ’ s c h a r g e s f

o rs e r v i c e s p e r f

o r m e d o n a n y m a te ri a l . . . e x c e p t b yw ri tte n a g re e m e n t s ig n e d b ya n o f f ic e r o f s e lle r.” A p p a t 3 . A ft erSol art r eat ed t he non- s ampl e tubes , T ubul ars entt hem t o T ubeco, I nc. , w hi ch i n tur n s ol d t hem t o a contr act ori n T exas . Shor t l yt her eaf t er , T ubul arw as i nfor m ed t hat th e tu b in g w a s b ri ttle a n d f a ile d a s a re s u lt o f

im p ro p e r “ s ig m a p h a s e .” A p p . a t 6 . B eca us e of thi s fai l ur e, T ubul ar ’ s cus t om er s r efus ed t o payT ubul arand Tubul aral l eges t hat as a res ulti tw ent out of b usi ness.4

T ubul arbr oughts ui tagai ns tSol ari n t he U ni t ed St at es D i s t r i ctC our tfort he E as t ern D i s t r i ctof Penns y l vani a bas ed on di ver s i t yj ur i s di ct i on, al l egi ng br eac h of or al c o n tr a c t a n d f

ra u d u le n t m is re p re s e n ta tio n a ri s in g o u t o f th e s e rv ic e s p ro v id e d b yS o la r. Sol arfi l ed a mot i on t o di s m i s s , as s er t i ng t hatt he contr actbetw een the part i es l i m i t ed l i abi l i t yt o an amount l es s t han $75, 000 and ther ebydi ves t ed the D i s t r i ctC our tof j ur i s di ct i on. O n Sept ember 24, 2003, t he C our tdeni ed the mot i on w i t houtpr ej udi ce bas ed on the nee d forfur t herdi s covery . L i m i t ed di s coveryr egar di ng t he contr act f o rm a tio n w a s ta k e n a f

ter w h ich S o lar a g a in m o v e d f o r su m m a ryju d g m e n t. T her eaf t er , t he D i s t r i ctC our tgr ant ed Sol ar ’ s m ot i on fors um m aryj udgm ent . T he D i s t r i ctC our tfound t hatt he l i m i t ed l i abi l i t ycl aus e w as a t er m of t he contr act . A ccor di ng t o t he D i s t r i ctC our t , t he Ter m s of Sal e w er e i ncorpor at ed byr efe r ence i n t he quot at i on se n t b yS o lar a n d T u b u lar m a n if e ste d its a ss e n t to th e se ter m s w h e n it rep e a ted lyse n t it s tubi ng t o Sol arforheatt r eatm ent . T he D i s t r i ctC our tfur t herfound t hi s t ype of l i m i t ed l i abi l i t ycl aus e i s t he t ype r out i nel yenfor ced be t w een s ophi s t i cat ed part i es and thati tw as r eas onabl e. T her efor e, t he D i s t r i ctC our thel d t hati tw as an enf or cea bl e partof t he c o n tra c t. T h e D istric t C o u rt a lso h e ld th a t T u b u lar ’s c laim th a t S o lar f ra u d u len tlyin d u c e d it to e n ter in to th e c o n tra c t w a s b a rre d b yth e “ g ist o f th e a c tio n ” d o c trin e . U n d e r th is d o c trin e , a p lain tiff

is b a rre d f

ro m b rin g in g a to rt c laim w h e n su c h a c laim is m e re ly anotherw ayof s t at i ng t he part y ’ s br eac h of contr actcl ai m orw hen the s ucce s s of s uch aW e have j ur i s di ct i on t o r evi ew t he D i s t r i ctC our t ’ s or der 1 p u rsua n t t o 2 8 U . S . C . § 1 2 9 1 . O u r rev iew o f th e D istri ct C o u rt ’s entr yof sum m ary j udgm ent i s pl enary . W at s on v. E as t m an K odak C o . , 2 3 5 F . 3 d 8 5 1 , 8 5 4 (3d C ir . 2 0 0 0 ). 5 cl ai m i s w hol l ydependa ntupon t he t er m s of t he contr act . See Sunques tI nfo. Sy s . , I nc. v. D ea n W itter R ey n o lds, I n c., 4 0 F . S u p p . 2 d 6 4 4 , 6 5 1 (W . D . P a. 19 9 9 ). T h e D istri ct C o u rt h e l d t h a tu n d e rP e n n s y l v a n i a l a w t h e “ g i s to f t h e a c t i o n ” d o c t r i n e ma yn o ta p p l yt o c l a i ms of fr aud i n t he i nducement , butt hatT ubul ar ’ s cl ai m w as notone of f r audul ent i nducementbut“a que s t i on of per for m ance of t he contr act , ” i . e. , w hetherSol ari n fac t pr oper l yheatt r eat ed t he coi l s . A pp. at13- 14. T her efor e, t he C our tconcl uded thatt he g i s to f t h e a c t i o n d o c t r i n e b a r r e d Tu b u l a r ’ s f r a u d c l a i m. 1 II. T u b u lar ra ise s th re e iss u e s o n a p p e a l. F irst, T u b u lar a rg u e s th a t th e c o n tra c t w ith S o la r w a s f

o rm e d b e f

o re it r e c e iv e d S o la r’ s T e rm s o f S a le . T h e re f

o re , T u b u la r c o n te n d s , th e ter m s w e re n o t p a rt o f th e o rig in a l co n tra c t an d th a t th e yc o u ld n o t h a v e su b se q u e n tly b e c o m e p a r to f

t h e c o n t r a c tb e c a u s e t h e y m a t e r i a l l y a l t e r e d t h e b a r g a i n . A c c o r d i n g l y, T ubul arar gues t hatt he D i s t r i ctC our terr ed i n det er m i ni ng t hatt he t er m s w er e partof t he co n tr ac t. In a d d it ion , T u b u lar argu es th at t h e D istri ct C o u rterred in g ran ti n g su m m ary j udgm entbeca us e t he l i m i t ed r emedyfai l ed i n i t s es s ent i al purpos e. L as t l y , T ubul ar argues t hat the D i stri ctC ou rterr ed in fi nd i ng t hat i t s fr aud cl ai m w as barr ed b yt he “g i st of t he ac t i on” doctr i ne.B i t t er m an t es t i fi ed tha the di d obj ectbyl et t erw hen he 2 fin all yrea d the term s o f sa le, b u t th ere is no rec o rd o f th is lett er. I n any event , T ubul ar cont i nued t o s end coi l s for he at t r eatm ent e v e n a f te r B itte rm a n ’s “ o b

je c tio n .” 6 A. T he D i s t r i ctC our tfound t hatt he Ter m s of Sal e w er e i ncl uded i n t he contr act beca us e theyw er e i ncorpor at ed byr efe r ence i n t he February20, 2001 offe r . T hatfi ndi ng s uffe r s fr om t he fa ctt hatt he fa xed off erdi d notactual l yi ncl ude a c opyof t he Ter m s of S a le. H o w e v e r, b e c a u se w e a g re e w ith S o lar th a t th e c o n tra c t w a s n o t f o rm e d u n til M ar ch 19, w el l aft erT ubul arr ece i ved the t er m s , w e conc l ude thatT ubul arw as bound by t he l i m i t ed l i abi l i t ypr ovi s i on. I ti s undi s put ed thatt he fi r s ts etof tube coi l s w er e s enton February19, a day befor e Sol arfaxe d i t s offe r , and t hatt hes e coi l s w er e l abel ed “s ampl e. ” I ti s cl eart hat S o lar ’s a b ili tyto e f

f e c tiv e lyh e a t trea t th e sa m p le tu b e s w a s a c o n d iti o n p re c e d e n t to T ubul ar ’ s acc ept ance of Sol ar ’ s offe r . O nce Sol arhad s at i s fi ed thi s condi t i on pr ece dent byeff ect i vel yheatt r eat i ng t he s ampl e tube coi l s , T ubul aracc ept ed Sol ar ’ s offe rby s hi ppi ng non- s ampl e tube coi l s on M ar ch 19. A ccor di ngl y , beca us e Tubul arhad r ece i ved t h e t e r ms o f

s a l e b yt h a td a t e a n d b e c a u s e t h e r e i s n o r e c o r d o f a n yo b j e c t i o n , t h e Te r ms

2
o f S a le w e re p a rt o f

th e c o n tra c t. B. A ccordi ng t o T ub ular , sum m aryj ud gm ent w as i nap propri at e beca use t here i s a7

ques t i on of fa ctconce r ni ng w hethert he l i m i t ed l i abi l i t ycl aus e fa i l ed i n i t s es s ent i al p u rp o se o f

p ro v id in g a n e f

f e c tiv e re m e d y . P e n n sy lv a n ia c o u rts h a v e ro u tin e lyu p h e ld l i m i t ed l i abi l i t ycl aus es as codi fi ed i n 13 Pa. C ons . St at . A nn. § 2719. I n V al hal C orp. v. S u lli v a n A ss o c s., In c ., 4 4 F .3 d 1 9 5 (3 d C ir. 1 9 9 5 ), w e sta ted th a t li m itatio n s o n liab ili ty ar e a “ fac tof eve r y daybus i nes s and comm er ci al l i fe” and conc l uded that“[s ] o l ong as t he l i m i t at i on w hi ch i s es t abl i s hed i s r eas onabl e and nots o dr as t i c as t o r emove t he i ncent i ve t o per for m w i t h due ca r e, Penns y l vani a court s uphol d t he l i m i t at i on. ” I d. at204. C ases that have d i sr egarded such clauses based on a fai l ure of essent i al pu rpose have typi cal l ybeen c as es w her e t he r emedyw as l i m i t ed t o r epai rorr epl ace m entor re f u n d o f th e p u rc h a se p ric e . In th e f o rm e r situ a tio n , co u rts h a v e f o u n d a re m e d yf

a ils in i t s es s ent i al purpos e w hen the s el l eri s unabl e t o r epai rorr epl ace t he pr oduct . See W ebco In d u s., In c . v . T h e rm a to o l C o rp ., 2 7 8 F .3 d 1 1 2 0 , 1 1 3 1 (1 0 th C ir. 2 0 0 2 ); L e w is R efr i ger at i on C o. v. Saw y erFr ui t , V eget abl e & C ol d St or age Co. , 709 F. 2d 427, 431- 32 ( 6t h C i r . 1983) . I n t he l at t ers i tuat i on, cour t s have he l d t hata r emedyfai l s i n i t s es s ent i al purpos e w hen the r emedyi s l i m i t ed t o t he pur chas e pr i ce f ora def ectt hatw as not di s cover abl e w i t hi n a r eas onabl e per i od aft err ece i ptof s hi pm ent . See N evi l l e C hem. C o. v. U ni on C arbi de C orp. , 422 F. 2d 1205 ( 3d C i r . 1970) ; Fi ber gl as s C om ponentPr od. , I nc. v. R ei chhol d C hems. , I nc. , 983 F. Supp. 948 ( D . C ol o. 1997) ; E ar l M . J or gens en C o. v. M ar k C ons t r . , I nc. , 540 P. 2d 978 ( H aw . 1975) . N ei t hers i tuat i on i s appl i cabl e her e. T he r emedyher e w as notl i m i t ed t o r epai rand r epl ace m entand, m or e i m por t ant l y , al t houghS o lar ’s T e rm s o f S a le in f

o r m e d T u b u lar th a t itc o u ld 3 requestadd i t i on al i nsuran c e by“no t i fy [i ng ] SolarA t m osph eres , I nc. i n w r i t i ng on [t he] pur chas e or der , i f addi ti o n al par cel or carr i eri ns ur ance i s r equi r ed above t he s t andar d l i m i t . ” A pp. at90. 8 t he def ectw as notdi s cover ed w i t hi n a s hor tt i m e af t ers hi pm ent , t hi s pos s i bi l i t yw as r eas onabl ycont empl at ed byt he part i es . Sol arexpr es s l yadvi s ed Tubul art hat“eve n aft er empl oy i ng al l t he s ci ent i fi c met hods know n t o s el l er , haza r ds s t i l l r emai n i n pr ovi di ng p ro c e ss se rv ice s.” A p p . at 9 2 . A c c o rd in g ly , T u b u lar w a s a w a re o f th e p o ss ib ili tyth a t a defe ctw oul d notbe di s cover abl e upon r ece i ptof s hi pm ent . I f Tubul arhad found the r emedyunacc ept abl e i ts houl d have not i fi ed Sol arw hen i tr ece i ved the Ter m s of Sal e. 3 T her efor e, beca us e t he r emedyw as t w i ce the pur chas e pr i ce a nd T ubul arw as aw ar e of t he pos s i bi l i t yof an undi s cover abl e pr obl em, w e conc l ude thatt he r emedyw as r eas onabl e, es peci al l ygi ven t he r el at i ve i nexpens i venes s of t he s er vi ce pr ovi ded bySol ar com pared t o the l i m i t l ess l i abil i t yT ub ularpo si t s. C. A ccor di ng t o T ubul ar , t he D i s t r i ctC our terr ed i n fi ndi ng t hatT ubul ar ’ s fr aud claim w as b arred b ythe g isto f th e a cti o n d o ctri n e. T h e g isto f th e a cti o n d o ctri n e b ars t ortcl ai m s: ( 1) ar i s i ng s ol el yfr om a contr actbetw een the part i es ; ( 2)

w her e t he dut i es al l egedl ybr eac hed w er e cr eat ed and g r o u n d e d i n t h e c o n t r a c ti t s e l f; ( 3 ) wh e r e t h e l i a b i l i t ys t e ms f ro m a c o n tra c t; o r (4 ) w h e re th e to rt c laim e ss e n tially dupl i cat es a br eac h of contr actcl ai m ort he s ucce s s of w hi ch is w h o llyd e p e n d e n t o n th e ter m s o f a c o n tra c t.T h e D istri ct C o u rtg ran ted th e m o tio n fo r sum m ary 4 j udgm ent beca us e i t concl uded t hat “the l i m i t ed l i abi l i t ypr ovi s i on appl i es t o t he cont r act ” and t her efor e T ubul ar’ s “m axi m um pos s i bl e r ecove r yof appr oxi m at el y$27, 000. 00 fal l s below t he j ur i s di ct i onal amount r equi r ed by28 U . S. C . § 1332. ” A pp at14. H ow ever , i n det er m i ni ng w hethert he part yas s er t i ng t he j uri sdi ct i on of the co urthas m ett he am ou nt i n co ntr ov ers y r eq u i r ement , “the s um cl ai m ed byt he [pa r t yas s er t i ng t he ju ri s d ic tio n ] c o n tr o ls if th e c la im is a p p a re n tly m a d e in g o o d f a ith .” S tat e F arm M u t. A u to. I n s. C o . v . P o w ell , 8 7 F . 3 d 9 3 , 9 6 (3d C ir . 1996) ( quot i ng St . Paul M er curyI ndem. C o. v. R ed C ab C o. , 303 U . S. 283, 288 ( 1938) ) . T ubul ar ’ s cl ai m fordamages exce edi ng t he amount i n contr over s yw as notunr eas onabl e, and w e conc l ude that t he D i s t r i ct C our terr ed i n di s m i s s i ng t he ca s e on j ur i s di ct i onal g rou n d s. N o n ethe less, w e w il l aff irm the g ra n t of

su m m ary ju d g m e n t. 9 eTol l , I nc. v. E l i as / Savi on A dver . , I nc. , 811 A . 2d 10, 19 ( Pa. Super . 2002) ( i nt ernal ci t at i ons and quot at i ons om i t t ed) . A l t hough Penns y l vani a court s have r ecogni zed thatt he g ist o f th e a c tio n d o c trin e m a yn o t co v e r f ra u d in th e in d u c e m e n t, th e yh a v e h e ld th a t th is d o c tr in e u n q u e s tio n a b ly ap p lie s to f ra u d in th e p e rf

o rm a n c e o f

a c o n tr a c t. I d . a t 1 7 , 2 0 . W e fi nd no m er i tt o T ubul ar ’ s cl ai m t hati tw as fr audul ent l yi nduced. Sol ar ’ s t r eatm entof t he s ampl es demonst r at es t hati tcoul d eff ect i vel yheatt r eatt he tube coi l s . T her efor e, T ubul arw as notfr audul ent l yi nduced i nt o ent er i ng t he contr act . T he fa ctt hatSol art hen s ubs equent l yfai l ed t o eff ect i vel yheatt r eatt he non- s ampl e coi l s i s s i m pl ya br eac h of contr actand anyfr aud cl ai m i s bar r ed byt he gi s tof t he ac t i on doctr i ne. III . F o r th e re a so n s s e t f

o rth , w e w ill a f

f irm th e ju d g m e n t o f

th e D istric t C o u rt. 4