explaining that when interpreting a contract “courts should examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless”
How later courts described this case
- explaining that when interpreting a contract “courts should examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless”
- holding that “counterfactual uncertainty” precludes summary judgment
Written by the judges who cited it.
The opinion
Case: 21-40648 Document: 00516749565 Page: 1 Date Filed: 05/12/2023
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
May 12, 2023
No. 21-40648 Lyle W. Cayce
Clerk
National Oilwell Varco, L.P.,
Plaintiff—Appellee/Cross-Appellant,
versus
Auto-Dril, Incorporated,
Defendant—Appellant/Cross-Appellee.
Appeal from the United States District Court
for the Eastern District of Texas
USDC No. 5:15-CV-27
Before Richman, Chief Judge, and King and Higginson, Circuit
Judges.
King, Circuit Judge:
This dispute began with a patent infringement suit in 2009. In 2011,
the parties settled, but discord over that settlement re-emerged in later
litigation. Now, the parties appeal various holdings that both preceded and
followed a trial regarding their 2011 Settlement Agreement. We hold that we
lack jurisdiction over Auto-Dril’s counterclaim for being fraudulently
induced into entering the Settlement Agreement. For the remaining issues,
we REVERSE the rulings of the district court and REMAND for further
proceedings consistent with this opinion.
Case: 21-40648 Document: 00516749565 Page: 2 Date Filed: 05/12/2023
No. 21-40648
I.
In 2004, Varco, L.P. (“Varco”), an oil and gas drilling company,
purchased the assets of another drilling company, including U.S. Patent No.
5,474,142 (the “’142 Patent”). The ’142 Patent covers technology that
automatically controls a drill bit to be used in oil and natural gas extraction
based on drilling fluid pressure. In March 2005, following the asset sale,
Varco’s parent company, Varco International, Inc., and a competitor,
National Oilwell, Inc., completed a merger to form National Oilwell Varco,
Inc. It was understood that Varco, as Varco International, Inc.’s operating
company, would transfer its assets to the newly formed entity’s operating
company: Plaintiff-Appellee/Cross-Appellant National Oilwell Varco, L.P.
(“NOV”).
In 2009, NOV filed an action in the United States District Court for
the Eastern District of Texas alleging that Defendant-Appellant/Cross-
Appellee Auto-Dril, Inc. (“Auto-Dril”) infringed the ’142 Patent (the
“Underlying Action”). In November 2011, Auto-Dril and NOV entered into
a confidential settlement agreement that was intended to end their litigation
over the ’142 Patent (the “Settlement Agreement”). Under the terms of the
Settlement Agreement: (1) Auto-Dril was granted a license to the ’142 Patent
in exchange for a licensing fee of $900,000 to be paid in sixteen quarterly
installments of $62,412.05; (2) NOV agreed “on behalf of itself and Varco”
that it would not “bring or maintain any claim or action against Auto-Dril”
for infringement of the ’142 Patent; (3) the parties agreed to file a joint
motion to dismiss the pending litigation concerning the ’142 Patent; and (4)
“[e]xcept for claims arising from” the Settlement Agreement, each party
agreed to release the other from various claims. The Settlement Agreement
states that “[t]he Parties represent and warrant to each other that the person
signing this Agreement on their respective behalf’s [sic] is authorized to sign
same and that the Agreement shall be binding upon any entity on whose
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behalf this Agreement is signed.” NOV also represented and warranted that
“no other persons or entities have or have had any interest in the claims,
demands, obligations, or causes of action referred to in this Agreement.” The
Settlement Agreement is governed by the laws of Texas. Despite only NOV
and Auto-Dril being listed as parties to the Settlement Agreement, Greg
Martin, Vice President of NOV, signed the Settlement Agreement on behalf
of both NOV and Varco. In the final judgment dismissing the action, the
district court retained jurisdiction over the Settlement Agreement “in the
event of a dispute concerning that agreement, to interpret and enforce the
agreement, if necessary.”
In March 2015, Auto-Dril sued NOV for infringing U.S. Patent No.
6,994,172 (the “’172 Patent”) in the United States District Court for the
Western District of Texas in Waco (the “Waco Action”). Later that month,
NOV filed a separate action against Auto-Dril in the Eastern District of Texas
in Texarkana for breach of the Settlement Agreement (the “Texarkana
Action”). Specifically, NOV asserted that it had been released from claims
relating to the ’172 Patent under the Settlement Agreement, that it had not
infringed the ’172 Patent, and that the ’172 Patent was otherwise invalid,
among other claims. In May 2015, Auto-Dril amended its complaint in the
Waco Action and included a new count for fraud, alleging that NOV either
knew or recklessly represented that it owned the ’142 Patent throughout the
Underlying Action when it in fact did not own that patent.
In January 2016, the court in the Waco Action granted a motion to
transfer venue to the Southern District of Texas in Houston (the “Houston
Action”). In February 2016, NOV and Auto-Dril filed a motion in the
Texarkana Action stating that they had “agreed to resolve claims relating to
the 2011 Settlement Agreement in this Court, and resolve
infringement/validity claims regarding [the ’172 Patent] in the . . . Southern
District of Texas.” The parties thus moved the court to, inter alia, (1) permit
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NOV to file an amended complaint that only included contract claims and (2)
provide Auto-Dril two weeks to answer the amended complaint, at which
time it would need to assert any claims under the Settlement Agreement. The
court in the Texarkana Action granted the motion. NOV subsequently
amended its complaint in the Texarkana Action in accordance with its motion
and the court’s implementing order. In March 2016, Auto-Dril filed its
answer and counterclaims, asserting the same claim for fraud that it brought
in the Waco Action and a claim for breach of the Settlement Agreement as
well. In June 2016, NOV again amended its complaint to include an additional
breach-of-contract claim, alleging that Auto-Dril failed to make the
remaining four payments under the Settlement Agreement. NOV now
asserts that Auto-Dril failed to remit only the final three payments in
accordance with testimony elicited at trial.
In March 2017, the court in the Texarkana Action ruled on the parties’
cross motions for summary judgment. In its ruling, the court determined that
NOV did not own the ’142 Patent. NOV then moved to dismiss for lack of
federal subject matter jurisdiction in April 2017. In its motion, NOV argued
that because the court held that NOV never owned the ’142 Patent, NOV
lacked standing in the Underlying Action, and therefore, the court lacked
jurisdiction to make rulings in the Underlying Action, including its order
retaining jurisdiction over disputes involving the Settlement Agreement. The
court disagreed, holding that NOV could not collaterally attack the court’s
jurisdiction in the prior, final Underlying Action based on principles of claim
preclusion.
Meanwhile, the court in the Houston Action ruled that the ’172 Patent
was invalid and unenforceable, and Auto-Dril’s claims in the Houston Action
were eventually dismissed in April 2018.
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In April 2021, as trial approached in the Texarkana Action, the district
court in that case granted summary judgment for NOV on Auto-Dril’s
breach-of-contract counterclaim, reasoning that Auto-Dril “failed to
produce evidence of damages.” A jury trial was held later that month. The
jury ultimately found that Auto-Dril did not “fail to comply with the
[Settlement Agreement],” NOV “commit[ted] fraud against Auto-Dril,”
and Auto-Dril “should . . . have discovered the fraud” “in the exercise of
reasonable diligence” by October 21, 2011. The jury awarded Auto-Dril
$5,000,000 in compensatory damages for the fraud. NOV then moved for
entry of judgment on the verdict and for judgment as a matter of law
(“JMOL”), while Auto-Dril moved for entry of judgment on the jury’s fraud
and damages findings.
The district court ultimately granted NOV’s motions with respect to
Auto-Dril’s fraud claim, denied the remaining motions, and dismissed
NOV’s breach-of-contract claim with prejudice. First, in ruling on the fraud
claim, the court reasoned that the jury found that Auto-Dril should have
discovered NOV’s fraud by October 21, 2011 because that was the date on
which Auto-Dril filed a motion to dismiss in the Underlying Action alleging
that NOV did not own the ’142 Patent. Because Auto-Dril entered into the
Settlement Agreement in November 2011, the court ruled that a fraud “could
not have ‘arisen out of’ an agreement signed weeks later.” The court also
noted that had it “not granted JMOL in NOV’s favor on Auto-Dril’s fraud
claim, it would have entered a take-nothing judgment” because the fraud
claim was otherwise barred under Texas’s four-year statute of limitations.
Second, the court exercised its inherent authority to dismiss NOV’s claim
for breach of the Settlement Agreement due to the jury’s fraud finding.
Specifically, the court held that NOV’s repeated assertions that it owned the
’142 Patent in the Underlying Action amounted to a “fraud on the court”
and “an abuse of the judicial process.” The court would not allow NOV to
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No. 21-40648
maintain its breach-of-contract claim because, although “Auto-Dril’s owner
admitted to not making the last three payments required under the
Settlement Agreement, the jury nonetheless found that Auto-Dril had not
breached the Agreement.”
Both parties now appeal the district court’s rulings in the Texarkana
Action. After the appeals had been filed, NOV filed a motion to dismiss both
appeals for lack of subject matter jurisdiction, making similar arguments to
those that it presented in the Texarkana Action. That motion has been
carried with the case.
II.
We begin by addressing NOV’s two jurisdictional challenges: first,
NOV asserts that federal subject matter jurisdiction is lacking over this entire
action; second, NOV contends that Auto-Dril’s fraud claim is outside the
bounds of federal jurisdiction. “[E]very federal appellate court has a special
obligation to ‘satisfy itself not only of its own jurisdiction, but also that of the
lower courts in a cause under review,’ even though the parties are prepared
to concede it.” Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541
(1986) (quoting Mitchell v. Maurer, 293 U.S. 237, 244 (1934)). “Issues of
subject matter jurisdiction are questions of law reviewed de novo.” Pershing,
L.L.C. v. Kiebach, 819 F.3d 179, 181 (5th Cir. 2016).
A.
First, NOV argues that the district court’s holding that NOV did not
own the ’142 Patent retroactively stripped the court in the Underlying Action
of jurisdiction. NOV thus contends that the court never possessed
jurisdiction over this case because the court in the Underlying Action lacked
the authority to retain jurisdiction in the first instance.
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Parties may not waive the issue of subject matter jurisdiction, and a
court may likewise raise this issue at any time sua sponte. Ins. Corp. of Ir. v.
Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982). “A party that
has had an opportunity to litigate the question of subject-matter jurisdiction
may not, however, reopen that question in a collateral attack upon an adverse
judgment.” Id. at 702 n.9; see also Chicot Cnty. Drainage Dist. v. Baxter State
Bank, 308 U.S. 371, 376 (1940) (“If the jurisdiction be not alleged in the
proceedings, their judgments and decrees are erroneous, and may, upon a
writ of error or appeal, be reversed for that cause. But they are not absolute
nullities.” (quoting McCormick v. Sullivant, 23 U.S. (10 Wheat.) 192, 199
(1825))). “The question is not whether the issue of subject matter was
actually litigated, but instead whether the parties had the opportunity to raise
the question.” Royal Ins. Co. of Am. v. Quinn-L Cap. Corp., 960 F.2d 1286,
1293 (5th Cir. 1992) (citing Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1053
(5th Cir. 1987)).
A federal court dismissing an action pursuant to Federal Rule of Civil
Procedure 41(a)(2) may retain jurisdiction over the enforcement of a
settlement agreement relating to that dismissal. Kokkonen v. Guardian Life
Ins. Co. of Am., 511 U.S. 375, 381 (1994). A court may choose to exercise its
retained enforcement powers based on its ancillary jurisdiction over the
settlement agreement. Id. Here, in its order dismissing the Underlying
Action pursuant to Rule 41(a)(2), the court retained its jurisdiction over the
Settlement Agreement, which permitted the court to later enforce that
agreement through its ancillary jurisdiction. But according to NOV, the
court’s ancillary jurisdiction was abrogated when it held that NOV never
owned the ’142 Patent, as this was the only basis for NOV’s standing in the
Underlying Action. Consequently, NOV contends that the court in the
Underlying Action never had the authority to retain jurisdiction over the
Settlement Agreement, and that court’s order retaining jurisdiction cannot
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presently serve as the jurisdictional anchor for the court in the Texarkana
Action.
But NOV is now precluded from collaterally attacking the Underlying
Action. “Under the doctrine of issue preclusion, ‘a prior
judgment . . . foreclos[es] successive litigation of an issue of fact or law
actually litigated and resolved in a valid court determination essential to the
prior judgment.’” Herrera v. Wyoming, 139 S. Ct. 1686, 1697 (2019)
(alteration in original) (quoting New Hampshire v. Maine, 532 U.S. 742, 748–
49 (2001)). The Underlying Action was dismissed via a final order, and NOV
was afforded the opportunity to litigate the issue of subject matter
jurisdiction throughout the Underlying Action. See Royal Ins. Co. of Am., 960
F.2d at 1293. NOV counters that it neither had the opportunity nor motive
to litigate jurisdiction in the Underlying Action because it was the plaintiff in
that suit. But our holding in Royal Insurance does not distinguish between
plaintiffs and defendants, and we have subsequently applied that holding to
litigants who were plaintiffs in their respective underlying actions. See, e.g.,
Frank C. Minvielle LLC v. Atl. Refin. Co., 337 F. App’x 429, 432–33 (5th Cir.
2009) (per curiam); Winograd v. Fowler, 184 F.3d 816 (5th Cir. 1999)
(unpublished per curiam). Furthermore, NOV fails to cite any authority that
would otherwise demonstrate that acting as a plaintiff in an underlying action
or otherwise lacking motivation vitiates one’s opportunity to litigate subject
matter jurisdiction. NOV had an opportunity to litigate subject matter
jurisdiction when it initially filed the Underlying Action, asserting in its
complaint that “[t]his Court has subject matter jurisdiction under 28 U.S.C.
§§ 1331 and 1338.” Indeed, every plaintiff filing a new action is required to
represent the basis for the court’s jurisdiction under the Federal Rules of
Civil Procedure. Fed. R. Civ. P. 8(a)(1) (“A pleading that states a claim
for relief must contain . . . a short and plain statement of the grounds for the
court’s jurisdiction. . . .”).
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NOV also argues that its jurisdictional argument is not precluded
based on our holding in Giannakos v. M/V Bravo Trader, 762 F.2d 1295 (5th
Cir. 1985) (per curiam). In that case, the plaintiff, Giannakos, sued Scullin
for failure to compensate for services rendered. Id. at 1297. Scullin then
moved to dismiss for lack of subject matter jurisdiction, but the parties
entered into a settlement agreement that was adopted by the court before it
could rule on the pending motion. Id. Later, Giannakos applied to the court
for an order to enforce the settlement agreement, which the court entered.
Id. On appeal, Scullin contended that the court’s latest order was invalid
because it lacked jurisdiction over the underlying controversy. Id. Giannakos
countered that Scullin was estopped from challenging the court’s jurisdiction
after already agreeing to the settlement agreement and that there were
alternative bases for jurisdiction. Id. at 1297–98. We ultimately held that
there were insufficient facts demonstrating that the district court possessed
jurisdiction, and thus vacated the order enforcing the settlement agreement
and remanded to the district court so that it could determine whether
jurisdiction in fact existed. Id. at 1297–99.
NOV contends that the facts in Giannakos are akin to those in our
case, and therefore, we should hold as the Giannakos Court did and permit a
challenge to the district court’s jurisdiction in the Underlying Action. We
find this argument unpersuasive. It is unclear whether the proceedings in
Giannakos were all part of a single case or two separate cases, i.e., one that
culminated in the settlement agreement and another concerning
enforcement of the settlement agreement. In its opinion, the Giannakos
Court does not specify whether the district court ever entered a final
judgment that dismissed the initial matter upon the parties agreeing to
settle—the only judgment mentioned is the judgment by the district court
enforcing the settlement agreement. Therefore, it is plausible that all of the
proceedings in Giannakos arose in a single case: Scullin merely challenged the
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district court’s jurisdiction over a continuous and unresolved single suit and
did not collaterally attack a prior action. Furthermore, this reading
harmonizes Giannakos with Insurance Corp. of Ireland, 456 U.S. 694, and
Chicot County Drainage District, 308 U.S. 371, Supreme Court precedent that
preceded Giannakos and which would control if such harmony is not possible.
Accordingly, the district court had the requisite subject matter jurisdiction to
enforce the Settlement Agreement.
B.
Alternatively, NOV argues that our recent decision in Vikas WSP,
Ltd. v. Economy Mud Products Co., 23 F.4th 442 (5th Cir. 2022), barred the
district court in the Texarkana Action from considering Auto-Dril’s fraud
claim because that claim fell outside of the court’s retained jurisdiction.
In that case, Vikas sued Economy for breach of contract. Id. at 447.
The parties eventually agreed to a settlement, and the district court retained
jurisdiction to enforce the settlement agreement when dismissing the action
with prejudice. Id. at 448. Vikas later moved the court to enforce the
settlement agreement. Id. At summary judgment on the enforcement action,
the district court ruled for Economy on its counterclaim for fraud, holding
that Vikas breached the settlement agreement and that its breach was so
egregious that it must have fraudulently induced Economy to enter into the
settlement agreement. Id. at 450, 447. On appeal, we reversed the district
court’s summary judgment ruling for Economy. First, we determined that
the district court properly retained jurisdiction to enforce the settlement
agreement but that its retention of jurisdiction did not “authorize the district
court to reach new issues or issues that only relate to the settlement.” Id. at
452. We reasoned that while a court “may decide ‘whether and under what
terms’ to enforce the settlement, . . . it may go no further without an
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independent basis for jurisdiction.” Id. (quoting Wise v. Wilkie, 955 F.3d 430,
436 (5th Cir. 2020)).
Next, we held that the district court did not retain jurisdiction over
Economy’s fraud claim. Unlike other contractual defenses, we explained
that, in Texas, fraud is also a distinct tort—“‘an independent legal duty’ that
is ‘separate from the existence of the contract itself.’” Id. (quoting Formosa
Plastics Corp. USA v. Presidio Eng’rs & Contractors, 960 S.W.2d 41, 47 (Tex.
1998)). We thus held that even in a case of fraudulent inducement, “the fraud
has no necessary connection with the settlement’s enforcement or
nonenforcement” and to rule that jurisdiction existed in such a case “would
stretch retained jurisdiction too far.” Id. at 452–53; see also id. at 453 n.2
(citing Fazio v. Cypress/GR Hous. I, L.P., 403 S.W.3d 390, 398 (Tex. Ct. App.
2013) (en banc) (“While a contract undoubtedly can affect the scope of a legal
duty to not commit fraud and is essential in determining the measure of
damages for fraudulent inducement, the tort itself . . . does not arise from the
contract’s operation—it [is] a pre-contract tort to induce [the contract of
sale].”)).
The fraud claim in Vikas is similar to Auto-Dril’s fraud claim in this
case. Both claims contend that a counterparty to a settlement agreement
fraudulently induced the party asserting its fraud claim into entering said
settlement agreement. Accordingly, Auto-Dril’s fraud claim is a tort claim
falling outside the scope of the district court’s retained jurisdiction.
Auto-Dril’s attempt to distinguish Vikas is unavailing. Auto-Dril
argues that the language the district court used to retain jurisdiction over the
Settlement Agreement in this case is broader than the language used by the
district court in Vikas. The relevant portion of the Vikas order reads: “This
court retains jurisdiction to enforce the settlement.” Final Dismissal Order,
Vikas WSP Ltd. v. Econ. Mud Prods. Co., No. 4:13-CV-3426 (Doc. 50) (Dec.
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5, 2014). In the present case, the district court’s implementing order reads:
“this Court shall retain jurisdiction over the [Settlement Agreement], in the
event of a dispute concerning that agreement, to interpret and enforce the
agreement, if necessary.” Without citation to authority, Auto-Dril asserts
that the power to “interpret” the Settlement Agreement provides the district
court with jurisdiction over tort claims requiring a court’s interpretation of
that agreement. Auto-Dril provides no analysis regarding its non-obvious
reading of the court’s implementing order. A less strained reading of the
court’s order in our case is that the two words “interpret” and “enforce”
work together so that a court may interpret the Settlement Agreement to aid
in the enforcement of that agreement.
Auto-Dril ascribes too much meaning to the word “interpret.” To
accept Auto-Dril’s reading would allow a single inexplicit word to “stretch
retained jurisdiction too far.” See Vikas, 23 F.4th at 453. Therefore, the
district court lacked the requisite subject matter jurisdiction to consider
Auto-Dril’s fraud claim.1
III.
Our jurisdictional holding above leaves one non-mooted issue that
Auto-Dril raises on appeal: whether the district court erred in granting
summary judgment for NOV on Auto-Dril’s counterclaim for breach of the
Settlement Agreement.
We review a “grant of summary judgment de novo, applying the same
legal standards as the district court.” Petro Harvester Operating Co. v. Keith,
954 F.3d 686, 691 (5th Cir. 2020) (quoting Tradewinds Env’t Restoration, Inc.
v. St. Tammany Park, LLC, 578 F.3d 255, 258 (5th Cir. 2009)). “Summary
1
Auto-Dril appeals the district court’s JMOL ruling on its fraud claim. We need
not consider this appeal in light of our jurisdictional holding.
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judgment is appropriate when ‘the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a
matter of law.’” United States v. Nature’s Way Marine, L.L.C., 904 F.3d 416,
419 (5th Cir. 2018) (quoting Fed. R. Civ. P. 56(a)).
Federal courts “look to state law for rules governing contract
interpretation.” F.D.I.C. v. Firemen’s Ins. Co. of Newark, 109 F.3d 1084, 1087
(5th Cir. 1997) (per curiam). The Settlement Agreement is governed by the
laws of Texas. Under Texas law,
[i]n construing a written contract, the primary concern of the
court is to ascertain the true intentions of the parties as
expressed in the instrument. To achieve this objective, courts
should examine and consider the entire writing in an effort to
harmonize and give effect to all the provisions of the contract so
that none will be rendered meaningless. No single provision
taken alone will be given controlling effect; rather, all the
provisions must be considered with reference to the whole
instrument. . . . If the written instrument is so worded that it
can be given a certain or definite legal meaning or
interpretation, then it is not ambiguous and the court will
construe the contract as a matter of law.
Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983) (citations omitted).
The elements of a claim for breach of contract are: “(1) the existence
of a valid contract; (2) the plaintiff performed or tendered performance as
the contract required; (3) the defendant breached the contract by failing to
perform or tender performance as the contract required; and (4) the plaintiff
sustained damages as a result of the breach.” USAA Tex. Lloyds Co. v.
Menchaca, 545 S.W.3d 479, 501 n.21 (Tex. 2018). “The goal of measuring
damages for a breach-of-contract claim is to provide just compensation for
any loss or damage actually sustained as a result of the breach.” Tex. Ear Nose
& Throat Consultants, PLLC v. Jones, 470 S.W.3d 67, 79 (Tex. Ct. App.
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2015). “The normal measure in such cases is the benefit of the bargain, which
seeks to place the injured party in the economic position it would have been
in had the contract been performed,” i.e., expectancy damages. Id.; see also
49 David R. Dow & Craig Smyser, Tex. Prac. Series:
Contract Law § 10.7 (“It is sometimes said that expectancy damages
are the ‘normal measure’ of damages. What this phrase probably means is
that benefit-of-the-bargain damages is the most commonly sought measure
or type of damages. It is not in any sense superior to the other measures.”
(footnote omitted)). Alternatively, a plaintiff may seek reliance damages,
which are measured by “the amount necessary to compensate that party for
a loss already suffered.” Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726, 734
(Tex. 1981). Put another way, reliance damages “seek to put the injured party
in the position he would have been in had he not relied on the promise.”
Zenor v. El Paso Healthcare Sys., Ltd., 176 F.3d 847, 866 (5th Cir. 1999) (citing
Fretz Constr. Co. v. S. Nat’l Bank of Hous., 626 S.W.2d 478 (Tex. 1982)); see
also Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 817 (Tex.
1997) (“Out-of-pocket [reliance] damages measure the difference between
the value the buyer has paid and the value of what he has received.”). Such
damages include expenditures made by the aggrieved party in performance
of the contract. Mistletoe Express Serv. of Okla. City v. Locke, 762 S.W.2d 637,
638 (Tex. App. 1988) (citing Restatement (Second) of
Contracts § 349 (1981)); see also 24 Williston on Contracts
§ 64:4 (4th ed. 2022) (“This measure of recovery [for reliance damages]
includes expenditures incurred by the nonbreacher in preparing to perform
or in performance . . . .”).
At summary judgment, the district court reasoned that Auto-Dril
received the benefit of its bargain because it did not suffer either expectancy
or reliance damages. According to the court, for expectancy damages, Auto-
Dril was “in the same position it would have been in had NOV performed—
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by owning the ’142 Patent.” And regarding reliance damages, the court held
that Auto-Dril received the benefits it remitted for the $900,000 licensing
fee: an end to the Underlying Action and “a license to practice the ’142
Patent moving forward.” On appeal, Auto-Dril argues that the district court
incorrectly calculated its reliance damages. Auto-Dril contends that it never
received a license for the ’142 Patent from NOV because NOV did not own
the patent, thus making the licensing fee wholly unnecessary.
It is undisputed that NOV did not own the ’142 Patent at the time the
Settlement Agreement was signed. And the Settlement Agreement states
that Auto-Dril would be granted a license for the ’142 Patent in exchange for
the licensing fee. Apart from the exchange of the licensing fee and the license
for the ’142 Patent, the exchange between the parties in the Settlement
Agreement was symmetrical: the parties agreed to dismiss the Underlying
Action and mutually release one another from all related matters. It is thus
far from obvious to us that the licensing fee was in exchange for anything
other than the license, especially considering the symmetry of the remaining
terms and their differing subject matter. Therefore, we are doubtful that
Auto-Dril would have agreed to the remainder of the Settlement
Agreement’s terms—including agreeing to pay a $900,000 licensing fee—
without receiving the license. If our doubts are indeed correct, then Auto-
Dril’s performance, i.e., its $900,000 remittance, would likely constitute
reliance damages. The parties devoted scant attention to this issue below (as
they do in this court). So, at the very least, there was a genuine dispute of
material fact regarding whether the parties would have entered into the
Settlement Agreement absent a license for the ’142 Patent, all else being
equal.
NOV counters that, regardless of the above uncertainty, Auto-Dril
received the benefits of its bargain because Varco, the true owner of the ’142
Patent, was authorized to license the ’142 Patent and covenanted not to sue
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Auto-Dril for its use of the patent. But although Greg Martin, Vice President
of NOV, signed the Settlement Agreement on behalf of Varco, the agreement
does not list Varco as one of its parties. And Varco is otherwise mentioned
only once in the Settlement Agreement. Under a section titled “Immunity
for Existing Products”: “NOV agrees, on behalf of itself and Varco . . . that
it will not bring or maintain any claim or action against Auto-Dril . . . alleging
that Auto-Dril’s making, having made, using, selling, offering to sell, renting,
leasing, using, importing or otherwise exploiting or disposing of the
Navigator or Navigator Pro [devices subject to the Underlying Action] of
Auto-Dril infringes the ’142 Patent.” The parties do not devote any
meaningful analysis to this issue,2 which was insufficiently addressed in the
litigation below as well.
Consequently, two issues affecting the parties’ bargain, and whether
Auto-Dril suffered damages, remain unresolved: (1) whether they would
have agreed to the terms of the Settlement Agreement knowing that NOV
did not own the ’142 Patent and (2) whether Varco is a party to the
Settlement Agreement. Due to the unresolved ambiguity and lingering
counterfactual uncertainty, we are unconvinced that there was no genuine
dispute of material fact that Auto-Dril was not entitled to damages at
summary judgment. This was the sole basis for the district court’s dismissal
of Auto-Dril’s counterclaim for breach of the Settlement Agreement.
Accordingly, we remand Auto-Dril’s counterclaim to the district court.3
2
Auto-Dril cites only one controlling case, Willis v. Donnelly, 199 S.W.3d 262 (Tex.
2006), for the proposition that “courts generally cannot bind a nonparty to a contract
because the nonparty never agreed to the contract’s terms.” But this proposition is
inapposite to the issue that Auto-Dril raised below and on appeal: whether Varco is a party
to the Settlement Agreement, not whether it could be bound as a non-party.
3
It is possible that the district court may not have to resolve both issues on remand.
If Varco is a party to the Settlement Agreement, then the court need not address whether
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IV.
Next, we turn to the remaining issues raised by NOV, beginning with
NOV’s argument that the district court erred when it dismissed NOV’s
claim for breach of the Settlement Agreement under its inherent authority.
“We review de novo a district court’s invocation of its inherent power
and the sanctions granted under its inherent power for an abuse of
discretion.” In re Moore, 739 F.3d 724, 729 (5th Cir. 2014) (quoting Positive
Software Sols., Inc. v. New Century Mortg. Corp., 619 F.3d 458, 460 (5th Cir.
2010)). The courts have certain implied and inherent powers that are
the parties would have entered into the Settlement Agreement knowing that NOV did not
own the ’142 Patent. If Varco is indeed a party, then Auto-Dril would have received an
actual license for the ’142 Patent in exchange for the licensing fee upon execution of the
Settlement Agreement.
The dissent contends that Varco was bound by the Settlement Agreement and that
Auto-Dril received the benefit of its bargain, meaning that Auto-Dril breached the
Settlement Agreement in failing to remit the final three installment payments. But that is
belied by the text of the agreement. Varco is not listed as a party to the Settlement
Agreement in the section explicitly listing the parties. No authority has been cited for the
proposition that an entity may be bound by its signature alone in such a scenario. And the
evidence surrounding the drafting of the Settlement Agreement is instructive, to the extent
a court were to hold that the relevant provisions are ambiguous. See Nat’l Union Fire Ins.
Co. of Pittsburgh v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995) (“Only where a
contract is first determined to be ambiguous may the courts consider the parties’
interpretation . . . and admit extraneous evidence to determine the true meaning of the
instrument.”). Auto-Dril specifically requested that both NOV and Varco be parties to the
Settlement Agreement, but NOV expressly rejected including Varco. Furthermore, it is
unclear whether NOV could effectively license the ’142 Patent through its control of Varco
solely through the parent-subsidiary relationship. While NOV agreed “on behalf of itself
and [Varco] . . . that it [would] not bring or maintain any claim or action against Auto-Dril,”
nowhere did it explicitly promise to preclude a suit by Varco. Nor could it necessarily make
such a guarantee. For example, NOV would have no way of preventing such a suit if Varco
had been spun off or sold. That Auto-Dril appears to have received what it had sought is
not synonymous with it receiving the benefit of its actual, bargained-for contract. To hold
otherwise would impermissibly disregard the corporate form and ignore the text (and, if
necessary, drafting history) of the Settlement Agreement.
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“governed not by rule or statute but by the control necessarily vested in
courts to manage their own affairs so as to achieve the orderly and expeditious
disposition of cases.” Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991)
(quoting Link v. Wabash R.R. Co., 370 U.S. 626, 630–31 (1962)). These
powers include the “outright dismissal of a lawsuit” and a court’s ability to
“vacate its own judgment upon proof that a fraud has been perpetrated upon
the court.” Id. at 45, 44. “Because of their very potency, inherent powers
must be exercised with restraint and discretion. A primary aspect of that
discretion is the ability to fashion an appropriate sanction for conduct which
abuses the judicial process.” Id. at 44–45 (citation omitted). Accordingly,
“we uphold a lower court’s decision to invoke its inherent sanctioning power
only if clear and convincing evidence supports the court’s finding of bad faith
or willful abuse of the judicial process.” Moore, 739 F.3d at 730.
“To establish fraud on the court, ‘it is necessary to show an
unconscionable plan or scheme which is designed to improperly influence the
court in its decision.’” First Nat’l Bank of Louisville v. Lustig, 96 F.3d 1554,
1573 (5th Cir. 1996) (quoting Rozier v. Ford Motor Co., 573 F.2d 1332, 1338
(5th Cir. 1978)).
Generally speaking, only the most egregious misconduct, such
as bribery of a judge or members of a jury, or the fabrication of
evidence by a party in which an attorney is implicated, will
constitute a fraud on the court. Less egregious misconduct,
such as nondisclosure to the court of facts allegedly pertinent
to the matter before it, will not ordinarily rise to the level of
fraud on the court.
Rozier, 573 F.2d at 1338 (citations omitted) (quoting United States v. Int’l Tel.
& Tel. Corp., 349 F. Supp. 22, 29 (D. Conn. 1972), aff’d, 410 U.S. 919 (1973)).
Here, NOV’s conduct did not rise to the level of a fraud on the court.
Specifically, there is not clear and convincing evidence that NOV was
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cognizant that it did not own the ’142 Patent while it was litigating the
Underlying Action. In sanctioning NOV, the district court stated that “[i]n
front of this Court, NOV accused Auto-Dril of infringing a patent that NOV
had no right to assert,” referring to the Underlying Action. The court also
relied on the jury’s finding that “NOV’s conduct rose to the level of fraud.”
But the court’s jury instructions state a more lenient standard for fraud than
the standard required for a fraud on the court.4 The key differences between
these standards are the requisite intent and the unlawful conduct that is
bound with such intent. As we explained in Rozier, “only the most egregious
misconduct” qualifies as a fraud on the court. 573 F.2d at 1338 (quoting Int’l
Tel. & Tel. Corp., 349 F. Supp. at 29). In Rozier, all of the examples of
egregious misconduct necessarily include the implicated party’s willfulness
to actively deceive. Here, though, the jury was instructed that it could find
that fraud occurred upon a showing of mere recklessness—a less culpable
state of mind than willfulness. Indeed, actions attributable to recklessness are
more akin to the “[l]ess egregious misconduct” that the Rozier Court
recognized did not constitute a fraud on the court. Id. (quoting Int’l Tel. &
Tel. Corp., 349 F. Supp. at 29). Relatedly, there is no evidence that NOV’s
assertions regarding its ownership of the ’142 Patent in the Underlying
4
The jury was instructed that:
Fraud occurs when—
1. a party makes a material misrepresentation, and
2. the misrepresentation is made with knowledge of its falsity or
made recklessly without any knowledge of the truth and as a
positive assertion, and
3. the misrepresentation is made with the intention that it should be
acted on by the other party, and
4. the other party relies on the misrepresentation and thereby suffers
injury.
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Action amounted to an “unconscionable plan or scheme . . . designed to
improperly influence the court in its decision.” First Nat’l Bank, 96 F.3d at
1573 (quoting Rozier, 573 F.2d at 1338).
The district court also provided no explanation as to how NOV abused
the judicial process. See Chambers, 501 U.S. at 44–45. Furthermore, NOV’s
untrue assertions in the Underlying Action were devoid of the intent required
to show “bad faith or willful abuse of the judicial process.” See Moore, 739
F.3d at 730. That NOV committed a fraud on the court or otherwise abused
the judicial process cannot be substantiated by clear and convincing evidence.
Accordingly, the district court erred in invoking its inherent authority to
dismiss NOV’s claim for breach of the Settlement Agreement. Because it
first dismissed NOV’s claim for breach of the Settlement Agreement before
addressing the merits, the district court never ruled on NOV’s JMOL
motion. Therefore, on remand, the district court should consider the merits
of NOV’s motion.
V.
NOV also contends that the district court improperly allowed James
Ray, Auto-Dril’s founder, to provide expert testimony during trial, even
though he was testifying as a lay witness. Ray testified that he believed he
could stop remitting licensing fees for the ’142 Patent because he was
fraudulently induced into entering the Settlement Agreement.
We review a district court’s rulings on the admission of lay and expert
testimony for an abuse of discretion. United States v. El-Mezain, 664 F.3d 467,
511 (5th Cir. 2011). The opinion testimony of a lay witness is limited to
testimony that is: “(a) rationally based on the witness’s perception; (b)
helpful to clearly understanding the witness’s testimony or to determining a
fact in issue; and (c) not based on scientific, technical, or other specialized
knowledge within the scope of Rule 702.” Fed. R. Evid. 701. “An opinion
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is not objectionable just because it embraces an ultimate issue.” Id. 704(a).
But “Rule 704(a) ‘does not allow a witness to give legal conclusions.’”
United States v. Williams, 343 F.3d 423, 435 (5th Cir. 2003) (quoting United
States v. Izydore, 167 F.3d 213, 218 (5th Cir. 1999)). “In evaluating challenged
testimony, the court must distinguish ‘between an impermissible opinion on
an ultimate legal issue and “a mere explanation of the [witness’s] analysis of
facts which would tend to support a jury finding on the ultimate issue.”’”
United States v. Keys, 747 F. App’x 198, 207 (5th Cir. 2018) (per curiam)
(alteration in original) (quoting United States v. Buchanan, 70 F.3d 818, 833
n.20 (5th Cir. 1995)).
NOV argues that Ray’s testimony included legal conclusions on
multiple occasions. For example, Ray responded in the affirmative when
asked, “do you believe you were fraudulently induced to enter into the
[Settlement Agreement].” Later, he was asked for his “understanding and
not a legal opinion” about whether “Auto-Dril was releasing a claim for
fraudulent inducement of the [Settlement Agreement].” Ray responded,
“It’s my understanding, since it was fraudulent inducement, as come up
awhile ago, that the agreement goes away.”5 In the context of Ray’s
testimony, these statements cannot be interpreted as anything other than
legal conclusions. Even if they were admitted in order to demonstrate why
Ray decided to cease paying the licensing fees, that would have no bearing on
whether Auto-Dril had breached the Settlement Agreement and constitutes
irrelevant testimony. See Fed. R. Evid. 401(b) (“Evidence is relevant
if . . . the fact is of consequence in determining the action.”); id. 402
5
NOV also references testimony that it objected to on different grounds or that
was later stricken. This testimony is thus inapplicable to its arguments.
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(“Irrelevant evidence is not admissible.”). We thus conclude that the district
court abused its discretion in admitting the above testimony.
Auto-Dril admits that it failed to make the final three licensing-fee
payments under the Settlement Agreement. Furthermore, it is not apparent
that the other evidence introduced at trial supports a finding that Auto-Dril
did not breach the Settlement Agreement. Therefore, while reconsidering
NOV’s JMOL motion on remand, see supra Part IV, the district court should
consider how Ray’s inadmissible testimony may have infected the jury’s
verdict on NOV’s claim for breach of the Settlement Agreement.
VI.
We hold that neither we nor the district court have subject matter
jurisdiction over Auto-Dril’s fraud claim. We REVERSE the ruling granting
summary judgment for NOV on Auto-Dril’s claim for breach of the
Settlement Agreement. We REVERSE the dismissal of NOV’s claim for
breach of the Settlement Agreement and REMAND NOV’s JMOL motion
for reconsideration. In light of our evidentiary holding, see supra Part V, the
district court is instructed to consider how its admission of James Ray’s
inadmissible testimony may have infected the jury’s verdict on NOV’s claim
for breach of the Settlement Agreement when reevaluating NOV’s JMOL
motion.
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Priscilla Richman, Chief Judge, concurring in part, dissenting in part:
I write separately because I would hold, as a matter of law, that Varco
was bound by the Settlement Agreement and that Auto-Dril received all that
it bargained for under the Settlement Agreement—the right to use the ’142
patent without complaint from NOV or Varco. Despite receiving all that it
bargained for, Auto-Dril failed to make the final three installment payments,
thereby breaching the Settlement Agreement. I would affirm the district
court’s dismissal of Auto-Dril’s breach-of-contract claim and remand
NOV’s breach-of-contract claim for the district court to determine the
damages owed by Auto-Dril. I concur in the majority opinion in all other
respects.
The Settlement Agreement expressly extended its reach beyond NOV
and Auto-Dril as parties and also bound Varco. Greg Martin signed the
Settlement Agreement on Varco’s behalf, and the agreement stated that it
“shall be binding upon any entity on whose behalf this Agreement is signed.”
Martin had been a vice president at Varco. However, prior to the Settlement
Agreement, all Varco employees and nearly all Varco assets were transferred
to NOV. At that time, Martin became an NOV vice president. He was
therefore well positioned to sign on behalf of Varco. Moreover, all agree that
NOV was a party to the agreement, and the agreement stated that “NOV
agrees, on behalf of itself and Varco, . . . that it will not bring or maintain any
claim or action against Auto-Dril” relating to the ’142 patent. This language
would be meaningless if Varco is not bound by the agreement. It is “our
duty . . . to give effect to all contract provisions, and render none
meaningless.”1 The majority opinion asserts in footnote 3 that “[w]hile
1
King v. Dall. Fire Ins. Co., 85 S.W.3d 185, 193 (Tex. 2002) (citing Balandran v.
Safeco Ins. Co. of Am., 972 S.W.2d 738, 741 (Tex. 1998)).
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NOV agreed ‘on behalf of itself and [Varco] . . . that it [would] not bring or
maintain any claim or action against Auto-Dril,’ nowhere did it explicitly
promise to preclude a suit by Varco.” I simply cannot square that assertion
with the NOV’s promise and representation in the Settlement Agreement
that “on behalf of itself and [Varco] . . . it [would] not bring or maintain any
claim or action against Auto-Dril.” This is a plain statement that neither
NOV nor Varco would sue Auto-Dril. Varco’s Vice-President signed this
agreement on behalf of Varco.
Auto-Dril bargained for the right to use the ’142 patent unburdened
by claims of infringement by NOV and Varco, and it received just that. The
Settlement Agreement stated that, in exchange for the licensing fee of
$900,000 to be paid in sixteen quarterly installments of $62,412.05, Auto-
Dril would face no infringement claims by NOV or Varco. Just as the
agreement required, neither NOV nor Varco brought or maintained any
claims against Auto-Dril relating to the patent. Both NOV and Varco acted
in accordance with the Settlement Agreement.
However, NOV did not receive the full benefits of its bargain because
Auto-Dril failed to remit the final three payments. 2 NOV “tendered
performance as the contract required,” but Auto-Dril “breached the
contract by failing to perform or tender performance as the contract
required.”3 As a result, NOV received less money than was promised under
2
See Vikas WSP, Ltd. v. Econ. Mud Prods. Co., 23 F.4th 442, 457 (5th Cir. 2022)
(stating that whether breach occurred depended on whether party “was ‘paid in full’ as the
settlement required”).
3
USAA Tex. Lloyds Co. v. Menchaca, 545 S.W.3d 479, 501 n.21 (Tex. 2018).
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the agreement, “sustain[ing] damages as a result of the breach.”4 Therefore,
Auto-Dril breached the Settlement Agreement as a matter of law.
* * *
I would affirm the district court’s dismissal of Auto-Dril’s breach-of-
contract claim and remand NOV’s breach-of-contract claim for the district
court to determine the damages owed by Auto-Dril as a result of its breach.
4
Id.
25