State of Texas v. Precision Solar Controls, Inc.

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-04-00632-CV

State of Texas, Appellant

v.

Precision Solar Controls, Inc., Appellee

FROM THE DISTRICT COURT OF WILLIAMSON COUNTY, 26TH JUDICIAL DISTRICT

NO. 04-197-C26, HONORABLE BILLY RAY STUBBLEFIELD, JUDGE PRESIDING

O P I N I O N

Appellant the State of Texas, acting on behalf of "its agency or department, the Texas

Department of Transportation" ("TxDOT"), sued appellee Precision Solar Controls, Inc., (1) alleging

that Precision Solar had manufactured and sold defective traffic signals that TxDOT used across the

State. The State asserted claims for breach of contract, breach of warranty, and quantum meruit.

Precision Solar answered, denying that its products were defective and asserting that it had not

entered into any contracts with the State or TxDOT. Precision Solar also filed a counterclaim,

alleging that the State had committed business disparagement by wrongfully communicating to

governmental offices and industry representatives statewide that Precision Solar's products were

defective and that it had breached its warranty. Precision Solar alleged that fewer than ten of the

thousands of signals used in Texas had malfunctioned; only two of those malfunctions were a result

of Precision Solar's manufacturing, while the others were the result of mishandling, damage, or

improper installation; and Precision Solar had satisfied its warranty by offering to repair or replace

any malfunctioning products during the five-year warranty period. The State filed a plea to the

jurisdiction, arguing that Precision Solar's claims were barred by sovereign immunity. Precision

Solar responded, asserting that by filing its lawsuit, the State waived its immunity to counterclaims

incident to, connected with, arising out of, or germane to the State's claims. The trial court denied

the State's plea, and the State filed this appeal. We affirm the trial court's order.

Discussion

The State is protected from suit and from liability by sovereign immunity. Texas

Dep't of Parks & Wildlife v. Miranda , 133 S.W.3d 217, 224 (Tex. 2004). Unless the State consents

to suit, sovereign immunity defeats a court's exercise of subject-matter jurisdiction over the State.

Id . A plea to the jurisdiction seeks to have a case dismissed for lack of subject-matter jurisdiction,

and we review a trial court's ruling on a plea to the jurisdiction de novo. (2) Texas Parks & Wildlife

Dep't v. Dearing , 150 S.W.3d 452, 457-58 (Tex. App.--Austin 2004, pet. denied). A party seeking

to prevail on a plea to the jurisdiction must show that even if the claimant's allegations are true, there

is an incurable jurisdictional defect apparent on the face of the pleadings. Id . In reviewing a trial

court's decision on a plea to the jurisdiction, we view the pleadings in favor of the claimant,

considering the claimant's intent and accepting its factual allegations as true, rather than looking at

the merits of the case. Id . at 458.

Precision Solar argues that the supreme court's decision in Reata Construction Corp.

v. City of Dallas is dispositive of this appeal, while the State attempts to distinguish Reata

Construction and asserts that it does not control our decision. See No. 02-1031, 2004 Tex. LEXIS

303 (Tex. April 2, 2004) (pending on reh'g). Therefore, a discussion of the facts and holding of

Reata Construction is helpful to our determination. The City of Dallas issued a permit to a

contractor to install fiber optic cable. Id. at *1. The contractor hired Reata as a subcontractor on the

project and, after Reata inadvertently drilled into a water main, a nearby property owner whose

building was flooded sued Reata and the contractor for negligence. Id . Reata filed a third-party

claim against the City, alleging that the City had misidentified the location of the water main. Id .

at *1-2. The City filed a plea in intervention to assert a negligence claim against and seek damages

from Reata, and the next day filed a plea to the jurisdiction, asserting it was immune from Reata's

claims. Id . at *2. The trial court denied the plea to the jurisdiction, and the City appealed. Id . at *3.

In a unanimous per curiam opinion, the supreme court affirmed the trial court's denial, holding that

the City waived its governmental immunity from suit and subjected itself to the trial court's

jurisdiction when it filed claims against Reata. (3) Id . at *4.

Precision Solar argues that the trial court properly denied the State's plea to the

jurisdiction. The State argues that Reata Construction is distinguishable because: (1) Reata asserted

a negligence-based claim, a claim for which the City's immunity might have been waived under the

Texas Tort Claims Act, (4) rather than an intentional tort, as is asserted here by Precision Solar; (2)

Reata's negligence claim mirrored the City's negligence counterclaim, whereas Precision Solar's

counterclaim for business disparagement does not mirror the State's claims for breach of contract

and breach of warranty; and (3) the immunity at issue in Reata Construction was "governmental

immunity held by a mere municipal corporation rather than the sovereign State." Thus, the State

asserts that Reata Construction is not controlling and that we should hold that the State did not waive

its sovereign immunity from suit by suing Precision Solar.

The State argues that because it is the State, and not a municipality, the Reata

Construction holding should not be extended to the "different context of sovereign immunity." The

State is correct that sovereign immunity and governmental immunity, although frequently used

interchangeably, are two different concepts. (5) See Wichita Falls State Hosp. v. Taylor , 106 S.W.3d

692 , 694 n.3 (Tex. 2003). "Sovereign immunity refers to the State's immunity from suit and

liability" and applies to "the various divisions of state government, including agencies, boards,

hospitals, and universities." Id . "Governmental immunity, on the other hand, protects subdivisions

of the State, including counties, cities, and school districts." Id . Although the two concepts protect

different governmental entities, the supreme court has recognized that sovereign immunity, like

governmental immunity, may be waived, usually through a constitutional provision or legislative

enactment. (6) Id . at 695.

Although immunity is usually waived through constitutional or legislative provisions,

the courts have held that waiver may also occur if a governmental entity avails itself of the judicial

system and seeks to have its rights determined by a court, thus submitting itself to the court's

jurisdiction. Anderson, Clayton & Co. v. State ex rel. Allred , 62 S.W.2d 107, 110 (Tex. 1933).

In Anderson, Clayton & Co. , the Attorney General sought penalties from and a

temporary injunction against a private company for statutory violations. Id . at 107. The private party

in turn counterclaimed, seeking an injunction against the Attorney General and other State officials.

Id . at 107-08. The State argues that the supreme court in Anderson, Clayton & Co. addressed only

whether the counterclaim could be brought against a State official and whether a particular trial court

could consider the matter under venue principles, asserting that the court did not decide "anything

at all about the subject matter of claims that could be brought against the State." (7) However, in noting

the general rule that the State was immune from suit, the supreme court stated that "where a state

voluntarily files a suit and submits its rights for judicial determination, it will be bound thereby, and

the defense will be entitled to plead and prove all matters properly defensive. This includes the right

to make any defense by answer or cross-complaint germane to the matter in controversy." Id . at 110;

see also Kinnear v. Texas Comm'n on Human Rights ex rel. Hale , 14 S.W.3d 299, 300 (Tex. 2000)

(holding that when Commission sued Kinnear, it waived immunity from suit as to Kinnear's

counterclaim for attorney's fees sought as a consequence of Commission's lawsuit).

We do not read the supreme court's holdings in Anderson, Clayton & Co. and Reata

Construction so narrowly as to apply only to suits involving political subdivisions, injunctive relief,

or questions of venue. The supreme court's language is not so restrictive as that, and its reasoning

in Anderson, Clayton & Co. and Reata Construction applies here, where the State did not merely

intervene or counterclaim once sued, but instead initiated this lawsuit, seeking damages for breach

of contract and breach of warranty, thus subjecting itself to the court's jurisdiction. We therefore

disagree with the State's argument that Anderson, Clayton & Co. and Reata Construction do not

apply to this cause brought by the State. (8)

The State has diligently attempted to distinguish this suit from cases containing

language to the effect that the State may waive its immunity by filing suit. However, we believe that

the supreme court's clear language in Anderson, Clayton & Co. and Reata Construction , despite

differences in the procedural stances or governmental entities involved, (9) shows that the State, by

filing suit in a trial court, may be held to have waived its sovereign immunity from suit as to

counterclaims germane to the subject matter of the State's claims.

The State argues that we erred in the past by holding that the State waives its

immunity from counterclaims seeking an "affirmative judgment," and invites us to overrule

Commonwealth of Massachusetts v. Davis , 160 S.W.2d 543 (Tex. Civ. App.--Austin), rev'd in part

on other grounds , 168 S.W.2d 216 (Tex. 1942), State v. Martin , 347 S.W.2d 809 (Tex. Civ.

App.--Austin 1961, writ ref'd n.r.e.), and State v. Fidelity & Deposit Co. , 127 S.W.3d 339 (Tex.

App.--Austin 2004, pet. filed). In Davis , we quoted the supreme court's holding in Anderson,

Clayton & Co. that when the State sues and seeks a judicial determination of its rights, it is bound

by that determination, "and the defense will be entitled to plead and prove all matters properly

defensive. This includes the right to make any defense by answer or cross-complaint germane to the

matter in controversy." Anderson, Clayton & Co. , 62 S.W.2d at 110 , quoted in Davis , 160 S.W.2d

at 547 . In Martin , we stated that when the State filed suit, the defendant's "right to defend such suit

included the right to cross-claim and obtain affirmative judgment on such claim where the claim so

asserted is incident to, connected with, arises out of, or is germane to the suit or controversy brought

by the State." 347 S.W.2d at 814 (citing Anderson, Clayton & Co. , 62 S.W.2d at 110 ; Davis , 160

S.W.2d at 547 ); see also Fidelity & Deposit Co. , 127 S.W.3d at 344 -45 (citing Anderson, Clayton

& Co. and Martin and holding, "Without commenting on the merits of either parties' claims, but

based on the face of the pleadings, it is clear that the issues that will arise in Fidelity's counterclaim

are germane to the State's suit. If this Court were to conclude that Fidelity could not counterclaim

against the State in district court, Fidelity and the State would essentially have to litigate many of

the same issues twice, the State in district court and Fidelity through administrative proceedings.").

We decline to overrule our precedent and note that in Reata Construction the supreme

court quoted approvingly from Martin , stating, "[B]y filing a suit for damages, a governmental entity

waives immunity from suit for any claim that is 'incident to, connected with, arises out of, or is

germane to the suit or controversy brought by the State.'" 2004 Tex. LEXIS 303 , at *7 (quoting

Martin , 347 S.W.2d at 814 ) (emphasis added); see also State v. Cook United, Inc. , 463 S.W.2d 509,

516 (Tex. Civ. App.--Fort Worth), aff'd as modified on other grounds , 469 S.W.2d 709 (Tex. 1971)

(quoting Martin ); State v. Brunson , 461 S.W.2d 681, 684 (Tex. App.--Corpus Christi 1970, writ

ref'd n.r.e.) (citing Anderson, Clayton & Co. and Martin ) ("Appellees' right to defend included the

right to file a cross-action and obtain affirmative relief where their claim is incident to, connected

with, or is germane to the suit or controversy originated by the State."); State v. Noser , 422 S.W.2d

594 , 599 n.1 (Tex. Civ. App.--Corpus Christi 1967, writ ref'd n.r.e.) (citing Martin and Davis ). But

see Fesal v. Hutchinson County , 443 S.W.2d 937, 938 (Tex. Civ. App.--Amarillo 1969, writ ref'd

n.r.e.) (distinguishing Martin and holding that county did not waive immunity from tort liability by

filing suit on sworn account for services rendered by county hospital).

The State next argues that Precision Solar's counterclaim for business disparagement

does not fall within the scope of any waiver resulting from the State's suit for breach of contract and

breach of warranty. The State contends that the intentional tort alleged by Precision Solar is of a

different nature and arises from a different body of law than the State's claims, and thus cannot be

considered germane to the State's claims.

The State is correct that the counterclaim leveled by Precision Solar is an intentional

tort and does not mirror the breach of contract and breach of warranty claims brought against it by

the State. The State is also correct that the Tort Claims Act does not waive immunity for intentional

torts. See Tex. Civ. Prac. & Rem. Code Ann. § 101.057 (West 2005). However, the Tort Claims

Act is not the basis of the State's waiver of immunity in this case. If the Tort Claims Act had waived

the State's immunity for the intentional tort of business disparagement, we would not be called upon

to decide whether the State waived its immunity by filing suit. Therefore, the fact that the Tort

Claims Act does not waive immunity from intentional torts has no bearing on whether the State may

waive its immunity by bringing suit.

Case law holds that the State, by seeking damages in a lawsuit, waives immunity for

any claims incident to, connected with, arising out of, or germane to the State's claims. Reata

Constr. , 2004 Tex. LEXIS 303 , at *7 (quoting Martin , 347 S.W.2d at 814 ); Anderson, Clayton &

Co. , 62 S.W.2d at 110 ("[W]here a state voluntarily files a suit and submits its rights for judicial

determination, it will be bound thereby, and the defense will be entitled to plead and prove all

matters properly defensive. This includes the right to make any defense by answer or

cross-complaint germane to the matter in controversy."); see also Kinnear , 14 S.W.3d at 300

("Because the Commission initiated this proceeding under the Texas Fair Housing Act, and Kinnear

claimed attorney fees as a consequence of that suit, the jurisdictional question in this case was

answered when the Commission filed suit, regardless of whether the Commission can ultimately be

liable for fees."). Our sister court in City of Dallas v. Redbird Development Corp. examined what

kind of claims fall within the Reata Construction waiver by suit, addressing the City's contention

that claims should only be considered to be "germane" to the governmental unit's claims if they

involve "offsets and defense matters rather than a counterclaim." 143 S.W.3d 375, 381 (Tex.

App.--Dallas 2004, no pet.). The court considered the usual meaning of "germane," reviewing the

cases cited in Reata Construction , and determined that "germane" is not limited to the narrow

definition proposed by the City. Id . at 381-83. We agree that it is not necessary for Precision Solar's

counterclaim to mirror the cause of action brought by the State. Instead, Precision Solar's claims

will fall within the Reata Construction waiver if they are related, connected, or pertinent to the

matter in controversy. See id . at 381.

In determining whether one claim is germane or incident to another, it is helpful to

consider issues related to res judicata and compulsory and permissive counterclaims. "Texas law

forbids splitting one claim into several suits when a single suit will suffice," Schneider Nat'l

Carriers, Inc. v. Bates , 147 S.W.3d 264, 278 (Tex. 2004), and causes of action arising out of the

same facts should, if practicable, be litigated in the same lawsuit. Morris v. Landoll Corp. , 856

S.W.2d 265, 268 (Tex. App.--Fort Worth 1993, writ denied) (citing Barr v. Resolution Trust Corp. ,

837 S.W.2d 627, 630 (Tex. 1992)); see also Ray Ferguson Interests, Inc. v. Harris County Sports

& Convention Corp. , 169 S.W.3d 18, 26 (Tex. App.--Houston [1st Dist.] 2004, no pet.) (holding

that by asserting compulsory counterclaims in response to suit brought by company, governmental

entity waived immunity from suit). Rule 97 of the rules of civil procedure provides that a party must

assert any counterclaim "not the subject of a pending action, which at the time of filing . . . the

pleader has against any opposing party, if it arises out of the transaction or occurrence that is the

subject matter of the opposing party's claim" and does not require the presence of third parties over

whom the trial court could not exercise jurisdiction. Tex. R. Civ. P. 97(a) ("Compulsory

Counterclaims"). A party may assert a counterclaim "whether or not arising out of the transaction

or occurrence that is the subject matter of the opposing party's claim," except that a tort counterclaim

may only be asserted in response to a contractual demand if it "arises out of or is incident to or is

connected with same." Tex. R. Civ. P. 97(b), (g). Under principles of res judicata, a party may not

re-litigate claims already decided in an earlier suit or assert new claims arising out of the same

subject matter as the previous suit and that should have been litigated in the earlier suit. Bates , 147

S.W.3d at 278 ; Cadle Co. v. Wilson , 136 S.W.3d 345, 354 (Tex. App.--Austin 2004, no pet.) (citing

Barr , 837 S.W.2d at 628 ).

To succeed on its claims for breach of warranty and breach of contract, the State will

have to show that the signals were defective and poorly made and that Precision Solar did not live

up to its promises once any defects were made known. Precision Solar's claim for business

disparagement will in part require contrary findings that the signals functioned as intended and that

it satisfied its warranties and contracts in the event that any signals malfunctioned. Although the

elements of the claims differ, the core facts are the same, and the issues of whether the signals

functioned as intended or were defective and whether Precision Solar offered or failed to remedy any

defects are necessary to the claims asserted by both the State and Precision Solar. If Precision Solar

were not to bring this counterclaim now and attempt to raise it later, sovereign immunity issues

aside, factual determinations made in this proceeding about the quality of the signals and whether

Precision Solar breached any contracts or warranties would be res judicata on Precision Solar's later

claim for business disparagement. See Bates , 147 S.W.3d at 279 ; Cadle Co. , 136 S.W.3d at 354 .

We hold that Precision Solar's intentional tort counterclaim does not fall outside the

State's waiver of immunity effected by its filing suit against Precision Solar. See Ray Ferguson

Interests , 169 S.W.3d at 26 (holding that by asserting compulsory counterclaims in response to suit

brought by company, governmental entity waived immunity from suit for company's claims for

intentional torts of fraud and conspiracy); see also City of Carrollton v. Golf Works, Inc. , No. 05-03-01831-CV, 2004 Tex. App. LEXIS 6952 , at *2 (Tex. App.--Dallas July 30, 2004, no pet.) (mem.

op.) (by suing for breach of contract and breach of warranty, City waived immunity against tort

counterclaims arising out of same contract). We further hold that under the facts of this case,

Precision Solar's claim for business disparagement arises out of, is incident to, or is connected with

the sale and quality of the traffic signals, as are the State's claims for breach of contract and breach

of warranty. See Tex. R. Civ. P. 97. Thus, we hold that Precision Solar's claim is sufficiently

germane to the State's claims to survive the State's plea to the jurisdiction. See Redbird Dev. Co. ,

143 S.W.3d at 383 ("The City's and RDC's claims arise from the same transaction: the lease of

Redbird Airport land and facilities. . . . Resolution of the rights of the parties before us depends on

facts pertinent to the parties' conduct regarding the same lease. . . . It is clear that RDC's

counterclaim is 'compulsory' in that it 'arises out of the transaction or occurrence that is the subject

matter of the opposing party's claim.'").

Conclusion

Because Precision Solar's claim is sufficiently connected to the State's claims and

after viewing the pleadings in favor of Precision Solar and taking its allegations of facts as true, see

Dearing , 150 S.W.3d at 458 , we hold that by suing Precision Solar for breach of contract and breach

of warranty, the State waived its sovereign immunity from suit with regard to Precision Solar's

counterclaim. We affirm the trial court's denial of the State's plea to the jurisdiction.

__________________________________________

David Puryear, Justice

Before Chief Justice Law, Justices Patterson and Puryear

Affirmed

Filed: March 17, 2006

1. The State also sued Texas Highway Products Ltd., which distributes Precision Solar's

products, but Texas Highway Products is not a party to this appeal.

2. Immunity from suit is properly made the subject of a plea to the jurisdiction, while

immunity from liability is an affirmative defense. Texas Dep't of Parks & Wildlife v. Miranda , 133

S.W.3d 217, 224 (Tex. 2004).

3. The supreme court handed down its opinion in April 2004, and in October 2004, a majority

voted to grant rehearing. The court heard oral argument on rehearing on December 2, 2004.

4. See Tex. Civ. Prac. & Rem. Code Ann. §§ 101.001 -.109 (West 2005 & Supp. 2005).

5. We note that the legislature itself used both terms in section 101.025 of the Tort Claims

Act. That section, titled, "Waiver of Governmental Immunity; Permission to Sue," provides,

" Sovereign immunity to suit is waived and abolished to the extent of liability created by this

chapter." Id . § 101.025(a) (West 2005) (emphasis added).

6. The State argues that the supreme court has held that "the State does not waive immunity

from suit when it brings suit," citing to Bates v. Republic of Texas , 2 Tex. 616, 618-19 (1847) ("set-off, though not denominated a suit, is in the nature of a cross action" and "cannot be instituted or set

up against the government without its consent"), and Borden v. Houston , 2 Tex. 594, 611-13 (1847)

(refusing to allow defendants to remit bonds as set-off to customs monies owed by defendants to

government; "The government can not be coerced in any manner."). But see Bitter v. Bexar County ,

11 S.W.2d 163, 166 (Tex. Comm'n App. 1928, judgm't adopted) (tax collector "did not sue the

county . . . ; the County sued him for recovery of the 'residue'; and in computing that 'residue' it was

necessary . . . to take all amounts to which he was lawfully entitled . . . into consideration"; court

distinguished Borden and Bates , noting that Borden's and Bates's claims arose "in transactions

distinct from and independent of those out of which the obligations sought to be enforced by the

[governmental] plaintiffs arose" and that government was "at all times entitled to have the whole of

the specific funds involved, and not merely a residue or balance thereof").

The supreme court has not relied on Bates or Borden for the proposition that a counterclaim

may not be brought against and in response to a suit filed by the State since 1881. See Dean v. State ,

54 Tex. 313, 314 (1881); Ex parte Towles , 48 Tex. 413, 447-48 (1877) ("The courts take jurisdiction

of suits against the State, whether for money or for land certificates, only when the State has given

its consent by statute, and then the jurisdiction is taken by such tribunals and under such regulations

as the statute directs."); Chevallier's Adm'r v. State , 10 Tex. 315, 316 (1853). Although the supreme

court has not expressly overruled Bates and Borden , it has more recently stated that when the State

files suit, it becomes bound by the court's judicial determination and the defense may raise all

matters properly defensive, including counterclaims germane to the State's claims. Anderson,

Clayton & Co. v. State ex rel. Allred , 62 S.W.2d 107, 110 (Tex. 1933); see also Reata Constr. Corp.

v. City of Dallas , No. 02-1031, 2004 Tex. LEXIS 303 , at *6-7 (Tex. April 2, 2004) (pending on

reh'g) ("when a governmental entity files suit against a party, that entity waives, at a minimum,

immunity from suit for counterclaims filed as a consequence of the suit").

7. In arguing that sovereign immunity is broader and more protective than governmental

immunity, the State cites a case holding that a political subdivision may not assert immunity against

the State, from which the subdivision derives its immunity. See Texas Workers' Comp. Comm'n v.

City of Eagle Pass , 14 S.W.3d 801, 803-04 (Tex. App.--Austin 2000, pet. denied) (political

subdivision's "derivative" immunity protects against suits by private parties but does not act "as a

shield against the State, from which the subdivision derives its immunity"). That case did not

address whether the subdivision would be able to cross-claim against the State in the same suit.

8. The State argues that policy considerations require that Precision Solar not be allowed to

bring its counterclaim against the State. However, in deciding this case, we are simply applying the

law as set forth by the supreme court, and policy considerations do not enter into our decision-making. See Font v. Carr , 867 S.W.2d 873, 879 (Tex. App.--Houston [1st Dist.] 1993, writ dism'd

w.o.j.); see also Swilley v. McCain , 374 S.W.2d 871, 875 (Tex. 1964) (supreme court's decisions

are binding on lower courts); Ran Ken, Inc. v. Schlapper , 963 S.W.2d 102, 107 (Tex. App.--Austin

1998, pet. denied) (extension of supreme court precedent is left to that court, and lower courts must

conscientiously follow supreme court's determinations of law; "[w]hile courts of appeals are often

called on to recognize new exceptions to legal principles, we must be loath to ignore a deliberate and

express position enunciated by a higher court").

9. The State strives to distinguish cases holding that the State may waive its immunity by

seeking damages, arguing that the factual or procedural backgrounds of those cases differs from the

case at hand. The State asserts that we should instead follow Borden and Bates , which it notes have

never been explicitly overruled. However, Borden and Bates also involved situations different than

this suit; Bates has been summarized by the supreme court as standing for the proposition that, "in

the absence of a statute authorizing it, in an action by the State or any municipality for taxes,

offsetting of an indebtedness due by the State or municipality to the tax debtor will not be allowed."

State v. Humble Oil & Refining Co. , 169 S.W.2d 707, 708 (Tex. 1943).