Third Party Plaintiff-Appellant.Richard Scheckenbach; R-Squared Nutrition, Inc.,
Defendants-Appellants,v.
Lexington Insurance Co., Third Party Defendant-Ap-pellee.
No. 06-11157.April 11, 2008.
Background: Distributor of nutrition and weight-loss supplements brought state-court action againstinsured supplier, and against production consultantand consultant's company, alleging, inter alia, con-spiracy, breach of contract and fraud in connectionwith customers' damages suits arising from use ofephedra, a weight-loss supplement. Insured re-moved action and asserted third-party complaintagainst products liability insurer, which had refusedto defend or indemnify insured against ephedra-re-lated claims. Insured and consultant asserted coun-terclaims against distributor. The United States Dis-trict Court for the Northern District of Texas, 2006WL 89852 and 2006 WL 278993,Barefoot Sanders,Senior District Judge, granted summary judgmentfor insurer on third-party complaint, and grantedpartial summary judgment for distributor. Insuredand consultant appealed.
Holdings: The Court of Appeals, Patrick E. Hig-ginbotham, Circuit Judge, held that:(1) products liability insurance policy's ephedra ex-clusion barred coverage for customers' suits;(2) distributor did not waive breach of contractcause of action against insured;(3) contract requiring insured to obtain products li-
ability insurance for distributor required thatephedra claims be covered;(4) Texas law governed issue of prejudgment in-terest on distributor's breach of contract claimagainst insured;(5) limitations period for distributor's claimsagainst consultant began to run only when consult-ant's assurances of no outside relationships wereshown to be misrepresentations;(6) sufficient evidence supported breach of fidu-ciary duty claim against consultant;(7) sufficient evidence supported fraud claimagainst consultant; and(8) consultant's same course of conduct could notsupport multiple punitive damages awards.
Affirmed in part, reversed and rendered in part,and vacated and remanded in part.
217k2359 Manufacturers' or Contractors'Liabilities
217k2362 k. Particular Exclusions.Most Cited Cases
Under California law, products liability insur-ance policy's weight management pharmaceuticalexclusion for “any pharmaceutical used for thetreatment of obesity ... including ... ephedra” barredcoverage for damages suits arising from customers'use of insured's ephedra products, regardless of in-sured's characterization of such products as dietarysupplements or “food” and its insistence thatproducts were not “pharmaceuticals”; common-sense reading of exclusion was that coverage forephedra lawsuits was excluded. West'sAnn.Cal.Health & Safety Code §§ 109925(c),117747(a).
217XIII(G) Rules of Construction217k1830 Favoring Insureds or Benefi-
ciaries; Disfavoring Insurers217k1832 Ambiguity, Uncertainty or
Conflict217k1832(1) k. In General. Most
Cited CasesUnder California law, any ambiguity or uncer-
tainty in insurance policy is resolved against in-surer.
[3] Insurance 217 1835(2)
217 Insurance217XIII Contracts and Policies
217XIII(G) Rules of Construction217k1830 Favoring Insureds or Benefi-
ciaries; Disfavoring Insurers217k1835 Particular Portions or Provi-
sions of Policies217k1835(2) k. Exclusions, Excep-
tions or Limitations. Most Cited CasesUnder California law, exclusionary clauses in
insurance contract are interpreted narrowly againstinsurer.
[4] Insurance 217 1702
217 Insurance217XII Procurement of Insurance by Persons
Other Than Agents217k1702 k. Contracts. Most Cited Cases
Under Texas law, distributor that contractedwith supplier to obtain products liability insurancefor distributor did not waive cause of action againstsupplier for failure to obtain the desired coverageby failing to raise coverage issue with supplier; dis-tributor had no burden to police compliance withcontract before claiming breach.
[5] Insurance 217 1702
217 Insurance
217XII Procurement of Insurance by PersonsOther Than Agents
217k1702 k. Contracts. Most Cited CasesUnder Texas law, contract that required suppli-
er of ephedra products and other dietary supple-ments to obtain for distributor “insurance coveragefor product liability in adequate amounts” requiredthat supplier obtain insurance covering ephedra-re-lated claims, since approximately 24% of productsthat supplier manufactured for distributor containedephedra, and contract did not provide exception forproducts containing ephedra.
[6] Contracts 95 202(1)
95 Contracts95II Construction and Operation
95II(C) Subject-Matter95k202 Trade and Business
95k202(1) k. In General. Most CitedCases
Under Texas law, contract that required suppli-er of dietary supplements to “undertake such ac-tions as necessary to obtain the DSVP [DietarySupplement Verification Program] certificationmark for the products within 180 days” required, atminimum, that supplier begin all steps necessaryfor DSVP within prescribed period.
[7] Contracts 95 309(1)
95 Contracts95V Performance or Breach
95k309 Discharge by Impossibility of Per-formance
95k309(1) k. In General. Most CitedCases
Under Texas law, supplier could not assert im-possibility defense against distributor's breach ofcontract claim arising from supplier's failure tocomply with contractual requirement to obtain Di-etary Supplement Verification Program (DSVP)certification mark for supplier's products, wheresupplier's principal knew, prior to signing of con-tract, of requirements for DSVP certification.
95k316 Waiver of Breach95k316(1) k. In General. Most Cited
CasesUnder Texas law, distributor did not waive
breach of contract cause of action against supplierfor its failure to obtain Dietary Supplement Verific-ation Program (DSVP) certification mark for sup-plier's products, which supplier had agreed to dowithin specified time limit, by communicating tosupplier, following expiration of time limit, thatDSVP certification was no longer worthwhile topursue.
[9] Federal Courts 170B 776
170B Federal Courts170BVIII Courts of Appeals
170BVIII(K) Scope, Standards, and Extent170BVIII(K)1 In General
170Bk776 k. Trial De Novo. MostCited Cases
District court's prejudgment interest award isquestion of law that Court of Appeals reviews denovo.
[10] Federal Courts 170B 829
170B Federal Courts170BVIII Courts of Appeals
170BVIII(K) Scope, Standards, and Extent170BVIII(K)4 Discretion of Lower Court
170Bk829 k. Amendment, Vacation, orRelief from Judgment. Most Cited Cases
Court of Appeals reviewed for abuse of discre-tion district court's denial of motion to alter oramend judgment to reflect different rate of prejudg-ment interest. Fed.Rule Civ.Proc.Rule 59(e), 28U.S.C.A.
[11] Federal Courts 170B 634
170B Federal Courts170BVIII Courts of Appeals
170BVIII(D) Presentation and Reservation inLower Court of Grounds of Review
170BVIII(D)2 Objections and Exceptions170Bk634 k. Amount or Extent of Re-
lief; Costs; Judgment. Most Cited CasesParty preserved its argument that higher rate of
prejudgment interest was applicable, by raising ar-gument in pretrial objections, even though party didnot raise issue again between district court's issu-ance of proposed and final judgments.
[12] Interest 219 28
219 Interest219II Rate
219k28 k. What Law Governs. Most CitedCases
Under most significant relationship test ofTexas law, Texas law governing rate of prejudg-ment interest, rather than California law, applied inbreach of contract action brought by Texas distrib-utor against California supplier; although bothstates had policy interest in limiting interest ratechargeable for amounts overdue, Texas's interestwas stronger since payments were made in Texas,and products were distributed there.
[13] Federal Civil Procedure 170A 2625
170A Federal Civil Procedure170AXVII Judgment
170AXVII(F) Entry, Record and Docketing170Ak2623 Time for Entry
170Ak2625 k. Nunc Pro Tunc Entry.Most Cited Cases
District court abused its discretion, in processof denying motion to amend judgment to changerate of prejudgment interest, by not allowing cor-rection of clerical error nunc pro tunc as to amountof judgment to which prejudgment interest rate wasapplied; movant had not waived objection to prin-cipal amount by failing to raise issue prior to judg-ment. Fed.Rule Civ.Proc.Rule 59(e), 28 U.S.C.A.
170BVIII(K) Scope, Standards, and Extent170BVIII(K)1 In General
170Bk763 Extent of Review Depend-ent on Nature of Decision Appealed from
170Bk765 k. Judgment Notwith-standing Verdict. Most Cited Cases
Federal Courts 170B 776
170B Federal Courts170BVIII Courts of Appeals
170BVIII(K) Scope, Standards, and Extent170BVIII(K)1 In General
170Bk776 k. Trial De Novo. MostCited Cases
Standard of review for district court's denial ofmotion for judgment as a matter of law is de novo,but Court of Appeals reverses jury determinationonly if facts and inferences point so strongly and sooverwhelmingly in favor of one party that reason-able men could not arrive at any verdict to the con-trary.
[15] Limitation of Actions 241 100(12)
241 Limitation of Actions241II Computation of Period of Limitation
241II(F) Ignorance, Mistake, Trust, Fraud,and Concealment or Discovery of Cause of Action
241k98 Fraud as Ground for Relief241k100 Discovery of Fraud
241k100(12) k. What ConstitutesDiscovery of Fraud. Most Cited Cases
Under discovery rule of Texas law as appliedto distributor's fraud and breach of fiduciary dutyclaims against production consultant whom distrib-utor alleged had secretly sold raw materials to dis-tributor's supplier and had misrepresented factsconcerning his work for other companies, limita-tions period began to run not when distributor firsthad suspicions as to consultant's outside relation-ships, since consultant gave clear assurances of nosuch relationships in response to distributor's in-quiry, but only later when consultant's assurances
were shown to be misrepresentations.
[16] Fraud 184 64(1)
184 Fraud184II Actions
184II(F) Trial184k64 Questions for Jury
184k64(1) k. In General. Most CitedCases
In distributor's breach of fiduciary duty actionagainst production consultant alleging that consult-ant had secretly sold raw materials to distributor'ssupplier and had misrepresented facts concerninghis work for other companies, scope of consultant'sfiduciary duty to distributor, and whether consult-ant's activities fell within such duties, were factquestions for jury.
[17] Fraud 184 58(1)
184 Fraud184II Actions
184II(D) Evidence184k58 Weight and Sufficiency
184k58(1) k. In General. Most CitedCases
There was sufficient evidence that consultantwho was under contract to supervise production fordistributor of dietary supplements, and who hadagreed to “not accept[] or receiv[e] any gratuities,commissions, or fees from direct suppliers,” hadformed direct supply companies and had used thosecompanies to sell raw materials to distributor's sup-plier at higher prices than prices he had paid forsame materials, and at distributor's expense, as re-quired to support finding under Texas law of con-sultant's breach of his fiduciary duty owed to dis-tributor.
184k58(2) k. Falsity of Representa-tions and Knowledge Thereof. Most Cited Cases
There was sufficient evidence that consultant,who was under contract to supervise production fordistributor of dietary supplements, and who hadagreed to “not accept[] or receiv[e] any gratuities,commissions, or fees from direct suppliers,” hadmisrepresented to distributor, in response to directinquiry, facts concerning his work for direct-supplycompanies, including ones he had formed himself,as required to support finding of fraud under Texaslaw.
[19] Damages 115 15
115 Damages115III Grounds and Subjects of Compensatory
Damages115III(A) Direct or Remote, Contingent, or
Prospective Consequences or Losses115III(A)1 In General
115k15 k. Nature and Theory of Com-pensation. Most Cited Cases
Under Texas law, although defendant's mis-deeds resulted in judgments for both breach of fidu-ciary duty and fraud, plaintiff was not entitled totwo awards of punitive damages, one for each the-ory of liability; same course of conduct could sup-port only one such award.
[20] Fraud 184 65(1)
184 Fraud184II Actions
184II(F) Trial184k65 Instructions
184k65(1) k. In General. Most CitedCases
Jury instructions in fraud action were not mis-leading even though they failed to spell out thatjury could not base its damages award on conductthat preceded start of limitations period, andplaintiff presented its damages testimony as singlelump sum covering period that included some timeoutside limitations period; jury was aware of limita-tions period, and defendant's attorney did not object
to instructions.
*682 Daniel J. Sheehan, Jr. (argued), Daniel Shee-han & Associates, Dallas, TX, for Plaintiff-Ap-pellee.
James Gregory Morris (argued), Morris & Asso-ciates, Sherman Oaks, CA, for Horizon Laborator-ies, Inc.
Charles E. Leche (argued), Deutsch, Kerrigan &Stiles, New Orleans, LA, *683Jay Reynolds Downs, Downs & Stanford, Dallas, TX, for Lexington Ins.Co.
Appeals from the United States District Court forthe Northern District of Texas.
Before HIGGINBOTHAM, DAVIS and SMITH,Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:AdvoCare International, L.P. formulated and
sold products for improving nutrition and weightloss. It contracted with Horizon Laboratories, Inc.to manufacture some of its products, includingproducts with ephedra, an ingredient that proved tobe controversial. AdvoCare also contracted with R-Squared and its owner, Richard Scheckenbach, toformulate some of AdvoCare's products. Variousdamages suits were filed against AdvoCare, R2,and Scheckenbach for personal injuries caused tousers of products containing ephedra. Lexington In-surance Company, Horizon's insurer, refused to de-fend and indemnify Horizon or AdvoCare for theephedra claims.
AdvoCare sued Horizon, alleging that it con-spired with R2 and Scheckenbach to defraud Advo-Care and was guilty of breach of contract and fraud.AdvoCare also asserted claims against Schecken-bach and R2 for breach of contract, breach of fidu-ciary duty, and fraud. Scheckenbach, R2, and Hori-zon counterclaimed, and Horizon named Lexingtonas a third-party defendant. AdvoCare and Lexing-
ton prevailed on most of their claims. Horizon, R2,and Scheckenbach appealed.
IHorizon manufactured products for AdvoCare
under a 1997 and a 2002 contract. Both contractsrequired Horizon to maintain products liability in-surance with AdvoCare as an additional named in-sured under the policy. Under the 2002 contract,FN1 AdvoCare agreed to make minimum monthlypurchases of Horizon's products, and Horizonagreed to take the steps necessary to obtain DietarySupplement Verification Program (DSVP) certifica-tion within 180 days. Horizon failed to obtain thiscertification, and AdvoCare by letter gave Horizonnotice of the breach and terminated the 2002 con-tract. But Horizon continued to ship products toAdvoCare accompanied by invoices that containeda provision billing 18% interest for amounts due.AdvoCare did not pay, maintaining that Horizonhad not reimbursed it for the expenses of theephedra lawsuits. Horizon's insurer, Lexington, hadrefused coverage, relying on a coverage exemptionfor ephedra in the policy.
FN1. This contract had a Texas choice-of-law provision.
In the meantime, Scheckenbach worked as aconsultant to AdvoCare; he formulated AdvoCare'sproducts and ordered ingredients for them. Scheck-enbach agreed in his consulting contract to declinecommissions, gratuities, or fees from suppliers.Nonetheless, he profited from arrangements withsuppliers, including companies that Scheckenbachhad founded himself. AdvoCare sued Schecken-bach, R2, and Horizon in a state district court inTexas;FN2 Horizon removed the case to federaldistrict court. AdvoCare claimed that Scheckenbachand R2 conspired with Horizon to raise artificiallythe price of the raw materials used in AdvoCare'sproducts.FN3 AdvoCare stipulated*684 that itowed Horizon approximately $3.4 million reflectedin unpaid invoices but claimed an offset of ex-penses incurred in defending ephedra lawsuits, anda breach of Horizon's commitment to provide ad-
equate insurance coverage. AdvoCare also main-tained that Horizon had breached the 2002 contractby failing to obtain DSVP certification. Horizoncounterclaimed, arguing that AdvoCare wrongfullyterminated the 2002 contract and failed to satisfythe minimum monthly purchase commitment. Hori-zon also requested that the court enter a declaratoryjudgment requiring Lexington to indemnify Hori-zon for the ephedra claims.FN4
FN2. Horizon also filed claims againstHerbAsia Corporation, one of Schecken-bach's companies, but those claims are notat issue here.
FN3. AdvoCare also claimed that Scheck-enbach breached his fiduciary duties toAdvoCare and committed fraud.
FN4. The court granted summary judgmentfor AdvoCare on Horizon's claim that Ad-voCare was guilty of fraud in failing tomake the minimum monthly purchaseguarantees. Horizon did not appeal thatruling.
The district court granted partial summaryjudgment in favor of AdvoCare, holding that Hori-zon had breached the 2002 contract by failing toobtain DSVP certification within 180 days andbreached the 1997 and 2002 contracts with Advo-Care by failing to provide insurance coverage forthe ephedra claims. The court also granted sum-mary judgment for Lexington and dismissed withprejudice Horizon's claims for declaratory judgmentregarding Lexington's duty to indemnify. The ques-tion of damages arising from Horizon's breach ofcontract with AdvoCare, and the amount owed byAdvoCare to Horizon under the unpaid invoices,went to a jury. The jury awarded AdvoCare $2.8millionFN5 in damages to date and $500,000 in fu-ture damages. In turn, the jury awarded Horizon ap-proximately $3.5 millionFN6 for the unpaid in-voices. Applying Texas law, the district court ap-plied an interest rate of 6% to the invoiced amountdue.FN7 Horizon moved post-judgment for judg-
ment as a matter of law and to alter and amendjudgment under Rules 50 and 59,FN8 objecting tothe interest rate, arguing for a rate of 18% underCalifornia law.
FN5. The exact award was $2,896,399.
FN6. The exact award was $3,463,195.
FN7. The Final Judgment included the fol-lowing awards for Horizon: actual dam-ages of $66,796 from AdvoCare (resultingfrom a $3,429.253.70 recovery on thestated account, plus interest, less the$3,396,399 jury award to AdvoCare forHorizon's breach of contract), prejudgmentinterest of $158,054 from AdvoCare, andpostjudgment interest at a rate of 4.91%per annum.
FN8. FED.R.CIV.P. 50, 59.
In Scheckenbach and R2's portion of the case,R2 and Scheckenbach counterclaimed against Ad-voCare's claims of fraud and breach of fiduciaryduties, arguing that AdvoCare had wrongfully ter-minated the consulting agreement and committedfraud by promising to indemnify them in productsliability suits and failing to do so; they sought de-claratory judgment regarding AdvoCare's duty toindemnify. The court granted partial summary judg-ment, finding that R2 and Scheckenbach had notbreached their contract with AdvoCare and sendingthe remainder of the claims to the jury. The juryfound no conspiracy among Scheckenbach, R2, andHorizon. It found that AdvoCare had a duty to in-demnify Scheckenbach and R2, awarding R2 andScheckenbach $320,799 on that claim. It also foundthat AdvoCare was not liable for breach of the 2000consulting agreement. Rather, the jury found thatScheckenbach had breached his fiduciary duty toAdvoCare and committed fraud. The jury awardedactual and punitive damages. The court deductedScheckenbach's and R2's indemnity award fromAdvoCare's damages, resulting in a total award ofapproximately $12 million to AdvoCare for *685
its claims against Scheckenbach and R2.FN9 Hori-zon, Scheckenbach, and R2 appealed. We addressHorizon's arguments, followed by Scheckenbach'sand R2's.
FN9. The Final Judgment included the fol-lowing awards for AdvoCare: actual dam-ages of $2,679,201 from Scheckenbach(resulting from an award of $3 million forScheckenbach's breach of fiduciary duty,less $320,799 awarded to Scheckenbackand R2 for indemnity), $6,312,132 fromScheckenbach for profits wrongly ob-tained, $2 million in exemplary damagesfrom Scheckenbach, $1,018,862 fromScheckenbach for prejudgment interest,and postjudgment interest at a rate of4.91% per annum.
II[1] Horizon argues that the district court erred
in finding that the insurance policy unambiguouslyexcluded coverage for ephedra lawsuits and grant-ing summary judgment for Lexington. ApplyingCalifornia's substantive law, we review de novo thecourt's grant of summary judgment.FN10 We alsoreview de novo “the interpretation of a contract, in-cluding the question of whether the contract is am-biguous.”FN11
FN10. Barnard Const. Co., Inc. v. City ofLubbock, 457 F.3d 425, 427 (5th Cir.2007).
FN11. Id. (quoting Constitution State Ins.Co. v. Iso-Tex Inc., 61 F.3d 405, 407 (5thCir.1995)).
Approximately eleven lawsuits for personal in-juries and wrongful death caused by weight lossproducts containing ephedra or ephedrine werefiled against AdvoCare and others. Horizon takesissue with the six lawsuitsFN12 alleging injuriessuffered between 2000 and 2001, claiming cover-age for these lawsuits under an insurance policythat Lexington issued to Horizon, with AdvoCare as
an additional insured, for October 27, 2000, to Oc-tober 27, 2001. FN13 This was an “occurrence”policy, defining “occurrence” as “an accident, in-cluding continuous or repeated exposure to substan-tially the same general harmful conditions.” Thepolicy excluded coverage for ephedra lawsuits un-der the “Weight Management Pharmaceutical Ex-clusion” in Endorsement 7, stating,
FN12. Horizon concedes that the post-October 27, 2001 insurance policies unam-biguously excluded coverage for defensecosts in lawsuits involving ephedra claims.
FN13. One lawsuit alleged the use ofThermo-E around June 2001, a productcontaining ephedrine, rather than“ephedra.” Webster's International Dic-tionary defines ephedra as “a large genusof jointed nearly leafless desert shrubs(family Gnetaceae) having the leaves re-duced to opposite ... scales at the nodes-seeMAHUANG” or “any plant of the genusEphedra.” It defines ephedrine as “a whitecrystalline alkaloid ... extracted esp. frommahuang or made synthetically” and indic-ates the word's origins as from “(Ephedra,genus name of Ephedra sinica) + ine. ”WEBSTER'S THIRD NEW INTERNA-TIONAL DICTIONARY 761 (1961).
This insurance does not apply to: “Bodily In-jury,” “property damage,” “personal injury,” or“advertising injury,” arising out of any pharma-ceutical used for the treatment of obesity, weightcontrol, and/or weight management, includingbut not limited to Dexfenfluramine, Phentermineand Ephedra.
[2][3] In California,
[a] liability insurer owes a broad duty to defendits insured against claims that create a potentialfor indemnity ... The insurer does not need to de-fend if the third party complaint can by no con-ceivable theory raise a single issue which could
bring it within the policy coverage.FN14
FN14. Michaelian v. State Comp. Ins.Fund, 50 Cal.App.4th 1093, 1106, 58Cal.Rptr.2d 133 (1996).
*686 The “insured need only show that the un-derlying claim may fall within policy coverage; theinsurer must prove it cannot.” FN15 Furthermore,with respect to ambiguous language,
[a]ny ambiguity or uncertainty in an insurancepolicy is to be resolved against the insurer. If se-mantically permissible, the contract will be givensuch construction as will fairly achieve its mani-fest object of securing indemnity to the insuredfor the losses to which the insurance relates.FN16
FN16. Crane v. State Farm Fire & Cas.Co., 5 Cal.3d 112, 95 Cal.Rptr. 513, 485P.2d 1129, 1130 (1971).
“A policy provision will be considered ambigu-ous when it is capable of two or more construc-tions, both of which are reasonable,” FN17 and“exclusionary clauses are interpreted narrowlyagainst the insurer.”FN18
FN17. TRB Invs., Inc. v. Fireman's FundIns. Co., 40 Cal.4th 19, 50 Cal.Rptr.3d597, 145 P.3d 472, 477 (2006).
FN18. Id. (quotation omitted).
Horizon argues that the policy did not unam-biguously exclude coverage for ephedra,FN19 thatit only applies to pharmaceuticals, and Horizon'sherbal products are dietary supplements or “food,”not pharmaceuticals. Horizon cites to California'slegal definition of pharmaceutical as “a prescriptionor over-the-counter human or veterinary drug, in-
cluding, but not limited to, a drug as defined in Sec-tion 109925 or the Federal Food, Drug, and Cos-metic Act” FN20 and that a drug is, among otherthings, defined as “any article other than food.”FN21
FN19. See Lambert v. CommonwealthLand Title Ins. Co., 53 Cal.3d 1072, 1077,282 Cal.Rptr. 445, 811 P.2d 737 (1991)(describing how the duty to defend is acontinuing duty).
FN20. Cal. Health & Safety Code §117747(a) (West 2008).
FN21. Cal. Health & Safety Code §109925(c) (West 2008).
Lexington argues that, following the ordinary,common sense interpretation of the policy lan-guage, as required in interpreting contracts underCalifornia law,FN22 the “exclusion [essentially]says: ‘we don't cover diet pills containing ephedra.’” The district court found similarly, stating, “theendorsement language does not imply that it en-compasses Ephedra only if it is a pharmaceutical.”FN23
FN22. See, e.g., Golden Eagle Ins. Co. v.Ins. Co. of the W., 99 Cal.App.4th 837, 121Cal.Rptr.2d 682, 685 (2002) (“Words in aninsurance policy must be understood intheir ordinary sense unless given specialmeanings by the policy.” (quotation omit-ted)); Producers Dairy Delivery Co. v.Sentry Ins. Co., 41 Cal.3d 903, 912, 226Cal.Rptr. 558, 718 P.2d 920 (1986)(finding that “words in an insurance policymust be read in their ordinary sense”).
FN23. Advocare Int'l L.P. v. HorizonLabs., Inc., 3:04-CV-1988-H, 2006 WL89852, at *3, 2006 U.S. Dist. LEXIS 1170at *10 (N.D.Tex. Jan. 13, 2006).
“[W]ords in an insurance policy must be readin their ordinary sense, and any ambiguity cannot
be based on a strained interpretation of the policylanguage.” FN24 A finding that the policy was am-biguous in excluding coverage for “ephedra” law-suits under a heading including the word“pharmaceuticals” would be a strained interpreta-tion. The district court did not err in finding thepolicy unambiguous in its exclusion of defensecosts for ephedra lawsuits and granting summaryjudgment for Lexington.
*687 III[4] In their 1997 and 2002 contracts, Horizon
committed to provide insurance for AdvoCare.FN25 Approximately 24% of the products that Ho-rizon manufactured for AdvoCare containedephedra, yet Horizon's 2000-2001 insurance policyand subsequent policies with Lexington excludedpolicy coverage for ephedra. For AdvoCare'sbreach of contract claim against Horizon, the dis-trict court granted summary judgment for Advo-Care,FN26 but it was “unable from the summaryjudgment materials submitted by AdvoCare to de-termine whether any of AdvoCare's alleged dam-ages of approximately $2.5 million ... [were] attrib-utable to breach of the 1997 Agreement,” FN27
leaving the damages question to the jury. The juryawarded more than $3 millionFN28 to AdvoCare.
FN25. The 1997 contract provided,
Manufacturer [Horizon] shall maintainin place at all times insurance coveragefor product liability in adequateamounts. Further, Manufacturer shall ob-tain an endorsement to such policy ofproduct liability insurance, which en-dorsement names AdvoCare as an addi-tional insured. Manufacturer shallprovide to AdvoCare the original of saidpolicy endorsement.
Manufacturer [Horizon] agrees to main-tain: (a) commercial general liability in-surance (with contractual liability en-dorsement), including personal injury,product liability and product damagecoverage of at least $5,000,0000 per oc-currence; and (b) “all risks” or so-called“special form” insurance coverage ...Such policies shall: (a) name AdvoCareInternational, L.L.C. as additional in-sured ...; (b) be issued by an insurancecompany reasonably acceptable to Advo-Care; (c) provide that such insurancemay not be cancelled [without 30 days'prior notice to AdvoCare]; and (d) be de-livered to AdvoCare by Manufacturer(15) days before each renewal thereof.
FN26. Advocare, 2006 WL 89852, at *3,2006 U.S. Dist. LEXIS 1170, at *11.
FN27. Id. at *2, 2006 U.S. Dist. LEXIS at*7-*8.
FN28. The exact amount of damages sus-tained in the past was $2,896,399, and$500,000 for damages with a reasonableprobability of being sustained in the future.
Horizon urges that “[a]ny objections that Ad-voCare had to the insurance coverage provided byHorizon were waived by its failure to raise thequestion of coverage with Horizon.” As the districtcourt explained, “Horizon cites no authority for theconcept that an aggrieved party has the burden topolice compliance with a contract before claimingbreach, and the Court can conceive of none.”FN29
FN29. Advocare, 2006 WL 89852, at *3,2006 U.S. Dist. LEXIS 4416 at *11. Onappeal, Horizon also fails to cite any casessupporting this proposition.
Horizon also argues impossibility of perform-ance, stating that AdvoCare was aware of the diffi-culty and expense of obtaining insurance coverage
for ephedra, and that “[i]t is unreasonable for Ad-voCare to maintain that the 1997 and 2002 Con-tracts required Horizon to obtain insurance cover-ing ephedra claims which AdvoCare could not ob-tain.” Horizon provides no evidence to show that itwas impossible or even prohibitively expensive toobtain insurance for ephedra products. It onlyclaims that AdvoCare dropped its product liabilityinsurance “because of high premiums concerningephedra claims.”
[5] Finally, Horizon argues that both the 1997and 2002 agreements are ambiguousFN30 as to thetype and extent of insurance *688 coverage re-quired, arguing that “[n]othing in either contractsays that Horizon would be liable for all claims; itmerely says insurance.” Furthermore, Horizon al-leges, although the 2002 contract specifies thatneither party is the drafter, AdvoCare was thedrafter of the 1997 contract and any ambiguitiesshould be resolved against the drafter.FN31 It fol-lows, urges Horizon, that the district court shouldhave denied AdvoCare's motion for summary judg-ment for breach of contract. Both Horizon and Ad-voCare rely on Texas law for their disputes over the1997 and 2002 contracts.
FN30. Horizon, although arguing that bothcontracts are ambiguous, also maintainsthat we should look only to the 1997 con-tract in determining whether Horizonbreached its insurance commitments to Ad-voCare, as “[t]he 2002 Contract wassigned after the 2000-2001 period when in-juries occurred,” and that the 2002 contractwould only apply to the insurance cover-age for the ephedra lawsuits if the contractrequired a “claims made” policy, a policythat applied to claims made within thepolicy period, rather than harm that oc-curred within the period. AdvoCare main-tains that Horizon raises these issues forthe first time on appeal and that we shouldnot address them. We are persuaded thatHorizon failed to raise this issue before the
district court and has waived the argument.We find no mention of the “occurrence”versus “claims made” issue with respect tothe 1997 versus 2002 AdvoCare/Horizoncontracts in Horizon's complaints, answers,replies, motions, or counterclaims or in thejoint pre-trial order. Horizon argued in re-sponse to Lexington's Motion for SummaryJudgment that “[t]he 2000-2001 Lexingtoninsurance policy is an occurrence policy,”but this does not capture Horizon's argu-ment on appeal that Horizon's 2002 con-tract with AdvoCare failed to require a“claims made” policy.
FN31. Horizon cites to Republic Nat. Bankof Dallas v. Northwest Nat'l Bank, 578S.W.2d 109, 114 (Tex.1978) (holding, “InTexas a writing is generally construedmost strictly against its author and in sucha manner as to reach a reasonable resultconsistent with the apparent intent of theparties”).
We are persuaded that the language is not am-biguous under Texas law. The agreements both re-quire “insurance coverage” for “product liability.”As AdvoCare points out, the term “adequate” in the1997 contract only refers to the amount of insur-ance required, providing, “Manufacturer shallmaintain in place at all times insurance coveragefor product liability in adequate amounts.” Hori-zon's argument that “adequate” insurance mighthave meant an insurance policy that covered mostof the products that Horizon manufactured for Ad-voCare, with the exception of ephedra, is unconvin-cing. Both agreements require, without ambiguity,that Horizon maintain product liability insurance,and they do not provide an exception for productscontaining ephedra. The district court did not err inholding that Horizon failed to maintain insurancecoverage for ephedra in breach of its contractualobligation.
IV[6] In addition to requiring insurance coverage,
AdvoCare's and Horizon's 2002 agreement requiredthat Horizon obtain special certification for manu-facture of dietary supplements, stating,
USP Compliance. Manufacturer agrees to parti-cipate in and fully comply with the Dietary Sup-plement Verification Program (“DSVP”) estab-lished by U.S. Pharmacopeia (“USP”). Manufac-turer further agrees to undertake such actions asnecessary to obtain the DSVP certification markfor the Products within the 180 days from the Ef-fective Date of this Agreement.
AdvoCare argued before the district court thatHorizon breached the contract by failing to obtainDSVP certification within 180 days of the contract,by April 13, 2003. The district court agreed andgranted summary judgment. We find no error.
Horizon argues that the term “undertake” isambiguous because to “undertake” means to“commit to take” and not to “complete.” UnderTexas law, ambiguity exists if after reading a con-tract “in light of the surrounding circumstances ... acontract is subject to two or more reasonable*689interpretations.” FN32 The argument is that thereare two reasonable interpretations: the contract lan-guage may require that Horizon complete all of thesteps necessary to obtain certification within 180days, or that Horizon begin all of the steps neces-sary for certification within this time period. Per-haps consideration of parol evidence to address thisambiguity may be reasonable, despite the existenceof an integration clause.FN33
FN33. The agreement contained a clausestating, “The parties agree and acknow-ledge that this Agreement sets for the en-tire agreement between AdvoCare and theManufacturer ....”
We need not pause there, however, because theparol evidence does not show that Horizon even
began all of the steps necessary for certificationwithin the 180-day window, nor does Horizonclaim that it did so.FN34 Horizon did not meet withAdvoCare until more than one month after thedeadline for certification passed, and at this meet-ing it told AdvoCare that certification would be ex-pensive. Under the most generous interpretation ofthe language and the parol evidence, Horizon failedto take even the initial steps required by the con-tract and thus breached the contract.
FN34. Horizon argues that it “understoodthe sentence to be: Manufacturer furtheragrees to undertake such actions within180 days as are necessary to obtain DSVPcertification for the Products.” Yet it failsto argue or demonstrate that it undertookthe necessary actions, nor does the recordindicate that it did so. An affidavit of Ger-ald Farris, Horizon's president at the time,only indicates that Horizon began to lookinto the costs and requirements of the pro-cess, not that it undertook the necessarysteps. He stated that he “began the processof collecting the information, putting to-gether budgets, and making estimates ofthe expense required to obtain DSVP certi-fication by the end of 2002, within 180days of the October 2002 contract beingsigned.” Affidavit of Gerald Farris (Nov.14, 2005).
Horizon, in addition to arguing ambiguity,urges that performance of DSVP certification wasimpossible and that the party alleging breach-AdvoCare-prevented performance. It urges that thecontract required it to obtain “DSVP certificationfor all of AdvoCare's products within 180 days,”and that AdvoCare did not take the steps necessaryto make certification possible. Specifically, it ar-gues that AdvoCare “had not completed what wasrequired from it to proceed under the certificationprocess,” pointing to a post-breach AdvoCarememorandumFN35 that stated, “neither AdvoCarenor Horizon Labs has documented its business pro-
cedures.” FN36 But Horizon fails to specify whatsteps AdvoCare should have completed and failedto complete. Because Horizon itself took no stepstoward certification, the argument that AdvoCarefailed to perform and stifled Horizon's ability toperform under the contract has little weight.
FN35. Horizon failed to undertake thesteps necessary for certification by April13, 2003, thus breaching the contract. Thememorandum is from July 2003.
FN36. This memorandum was not in refer-ence to DSVP certification required in thecontract.
[7] Horizon's argument of impossibility of per-formance is also unpersuasive. Horizon states thatits president found that certification for just oneproduct would take “one ... to two ... years and over$800,000.” Under Texas law, impossibility de-fenses generally fail when the “ ‘probability’ of theunanticipated occurrence was known to the partyseeking relief before contracting.” FN37 AdvoCarepresented evidence that Horizon's president knew,prior *690 to the signing of the contract, of the re-quirements for DSVP certification.FN38
FN38. In a deposition of Farris, Horizon'sthen-president, an attorney asked, “So yourview is-your view, in October of 2002, be-fore this agreement was signed, was get-ting that certification within 180 days justwasn't something that could be done?” Far-ris responded, “It couldn't be done.” De-position of Gerald Farris (July 27, 2005).
[8] Finally, Horizon argues that AdvoCarewaived any arguments for breach because Advo-Care's president, Todd Cash, stated in a meetingthat DSVP certification was not worthwhile to pur-
sue. This meeting did not occur until after Horizonhad failed to meet the certification deadline in thecontract. Furthermore, although AdvoCare contin-ued to order products from Horizon after Horizon'sbreach, it sent two letters clearly indicating that itwas no longer operating under the 2002 agreementbecause Horizon had breached and AdvoCare hadterminated the agreement. The district court did noterr in granting summary judgment.
V[9] The 2002 agreement between AdvoCare
and Horizon contained a Texas choice of law provi-sion but failed to specify an interest rate for pastdue amounts. After AdvoCare terminated the agree-ment, Horizon continued manufacturing productsfor AdvoCare and sent AdvoCare invoices. The in-voices provided that past due amounts would ac-crue interest of 18% per annum. AdvoCare accep-ted the products but did not pay for them. The dis-trict court applied a 6% rate in awarding Horizonamounts for unpaid invoices. In DP Solutions, Inc.v. Rollins, Inc., we held that “[t]he [prejudgment]interest award is a question of law and is reviewedde novo.”FN39
Horizon objects to the court's use of the 6%prejudgment interest rate under Texas law, arguingthat a rate of 18% under California law should ap-ply. Horizon's objection came in post-judgment mo-tions to alter or amend the judgment pursuant toRule 59(e) and for entry of judgment as a matter oflaw under Rule 50(b). The district court rejectedboth.
AdvoCare urges that Horizon waived its pre-judgment interest arguments by failing to makethese objections in earlier motions, arguing that“AdvoCare submitted its proposed judgment withthe prejudgment interest award that Horizon nowchallenges on March 9, 2006,” and the court “didnot enter the Final Judgment until April 28, 2006”;
that during this time, AdvoCare should have objec-ted to the interest rate. Horizon replies that “[t]hisissue was preserved and identified in the Pre-TrialorderFN40 and left for the Court to determine,” andthat “[t]he Account Stated count stated a request foreighteen percent (18% interest), as did the prayer.”
FN40. The Joint Pre-Trial Order, underPart V, “Contested Issues of Law”“Submitted by Horizon” includes the issueof “[w]hether California or Texas law ap-plies regarding Horizon's claim for interestand attorneys' fees on products sold to Ad-voCare and invoiced by Horizon.”
We need not address waiver with respect toRule 50(b) because the prejudgment interest issueturns on a choice of law,FN41 a legal question forthe court, not the jury. It is not the subject of a Rule50(b) motion.
FN41. See supra note 39 and accompany-ing text.
[10][11] We review denial of the Rule 59(e)motion to amend the judgment to *691 reflect an18% interest rate under California law “only for ab-use of discretion.” FN42 A Rule 59(e) motion “‘must clearly establish either a manifest error oflaw or fact or must present newly discovered evid-ence’ ” FN43 and cannot raise issues that “could,and should, have been made before the judgment is-sued.”FN44 Although Horizon did not object to the6% interest rate between the court's issuance of theproposed and final judgments, its pretrial objectionspreserved the issue. In Simon, where we held thatthe government waived a legal argument by failingto raise it “at some point before the entry of judg-ment,”FN45 we emphasized that the issue was notin the pretrial order.FN46 Here, it was. The orderincluded as a “Contested Issue[ ] of Law”“[w]hether California or Texas law” applied to Ho-rizon's interest claim. The pretrial order is thepleading on which the case goes to trial. Unlike thesituation in Simon, the pretrial pleadings gave“notice to the plaintiff ... [and] to the court” FN47
that Horizon would argue for an 18% interest rateunder California law, and we will review denial ofthis motion.
FN42. Simon v. United States, 891 F.2d1154, 1159 (5th Cir.1990).
FN43. Rosenzweig v. Azurix Corp., 332F.3d 854, 863 (5th Cir.2003) (quoting Si-mon, 891 F.2d at 1159).
FN44. Id. (quoting Simon, 891 F.2d at1159).
FN45. 891 F.2d at 1159.
FN46. Id. at 1158 (“The pretrial order lis-ted among the ‘Contested Issues of Fact’‘the amount of actual damages' and amongthe ‘Contested Issues of Law’ ‘those issuesof law implicit in the factual issues.’ Theorder also contained a stipulation ‘thatLouisiana law applies to both liability anddamages.’ These general statements do notsuffice to preserve the issue of the mal-practice limitation.”).
FN47. Id.
[12] The district court did not abuse its discre-tion in denying the Rule 59(e) motion. Because wefind no agreed-upon choice-of-law provision gov-erning the interest issue,FN48 the “most significantrelationship” test applies. FN49 This test providesthat “the law of the state with the most significantrelationship to the particular substantive issue willbe applied to resolve that issue.” FN50 To determ-ine the contacts with the state, the Texas SupremeCourt in Duncan looked to where the products weremanufactured, where the manufacturer was incor-porated, where the product was placed in the streamof commerce, and where the party injured by theproduct lived, and held that, “[t]he beginning pointfor evaluating these contacts is the identification ofthe policies or ‘governmental interests,’ if any, ofeach state in the application of its rule.”FN51
FN48. AdvoCare argues that the Texaschoice-of-law provision from the termin-ated 2002 agreement still applies, pointingto Lemmon v. United States Waste Systems,Inc. In Lemmon, a Texas state court heldthat claims for post-termination breacheswere subject to the choice of law provisionin the terminated contract. 958 S.W.2d493, 499 (Tex.App.-Fort Worth 1997, pet.denied). In Lemmon there was “nothing inthe record indicating that the parties actu-ally changed the choice of law provisionduring post-termination proceedings.” Id.In this case, the parties did not change thechoice of law provision in subsequent con-tracts. That Horizon continued providinggoods to AdvoCare under invoices thatcontained an 18% interest rate and laterstipulated to money due is insufficient;AdvoCare did not pay the invoices when itreceived the goods.
FN49. This test applies in Texas where theparties have not agreed to a “valid choiceof law clause.” Duncan v. Cessna AircraftCo., 665 S.W.2d 414, 421 (Tex.1984).
FN50. Id.
FN51. Id. at 422.
Both California and Texas would reasonablyhave a policy interest in limiting the *692 interestrate that can be charged for amounts overdue, al-though Texas has a strong interest, as the paymentswere made in Texas. FN52 Horizon is based inCalifornia, while AdvoCare is a Texas company.FN53 Horizon manufactured the products in Cali-fornia and sent them from California to Texas,where AdvoCare then sent the products to distribut-ors in Texas. AdvoCare ordered the product fromTexas and sent payments to Horizon from Texas.Given the significant commercial activities that oc-curred in Texas, the district court did not err in ap-plying a 6% interest rate under Texas law.
FN52. AdvoCare argues that “[w]hileTexas has a strong interest in protecting itscitizens from usurious charges, Californiahas little, if any, interest in regulatingcharges made by its residents to out ofstate customers.”
FN53. AdvoCare is a Delaware LimitedPartnership, but its principal place of busi-ness is in Texas.
[13] Horizon also argues on appeal that thecourt applied the 6% interest rate to an amount ofprincipal less than the amount owed under the ac-count stated, urging, “The worksheet used by AD-VOCARE was attached with its proposed Judgment... and shows the interest rate calculated on$3,429.253.70, but the judgment was for$3,463,195.00, as stated in the Judgment.” Advo-Care's Proposed Final Judgment listed, in error, theaccount stated amount as $3,429,253.70 in calculat-ing prejudgment interest,FN54 and the court reliedon this number in its calculations.FN55 AdvoCareargues that Horizon waived any error by failing toobject prior to the Court's entry of judgment. Wedisagree. “Courts, sitting in equity, have tradition-ally applied nunc pro tunc to correct limited typesof errors, namely clerical or other record keepingerrors.”FN56 The court abused its discretion in notallowing correction of a clerical error in denyingthat portion of the Rule 59(e) motion. We make thatcorrection here, ordering the district court to calcu-late the prejudgment interest based on an accountstated amount of $3,463,195.00.
FN54. AdvoCare's Proposed Final Judg-ment and the court's Final Judgment stated,“The proposed judgment awards Horizonlaboratories actual damages in the amountof $66,796 representing $3,396,399 awar-ded by the jury in Question No. 15 offsetagainst Horizon's stated account claim inthe amount of $3,463,195.” Yet its spread-sheet calculating interest erroneously listedthe account stated amount, “unpaid in-voices,” as $3,429,253.70.
FN55. The court ordered “that HorizonLaboratories, Inc. shall recover prejudg-ment interest in the amount of $158,054from AdvoCare International, L.P. (Thisamount is calculated based upon accruedinterest on Horizon's account stated lessaccrued prejudgment interest on theamount awarded by the jury to AdvoCareon its breach of contract claim for damagessustained in the past.)” AdvoCare's Pro-posed Final Judgment, Exhibit B, uponwhich the court based its calculations, con-tained a spreadsheet listing the prejudg-ment interest on the amount awarded toAdvoCare for the breach of contract claimas $161,571.95, and prejudgment interestaccrued on Horizon's account stated as$319,625.24. This interest was based on anaccount stated amount of $3,429,253.70,rather than the correct account statedamount. $319,625.24 minus $161,571.95 is$158,053.29, which matches the interestawarded in the court's Final Judgment.
FN56. Romero-Rodriguez v. Gonzales, 488F.3d 672, 677 (5th Cir.2007) (citing Larin-Ulloa v. Gonzales, 462 F.3d 456, 460 (5thCir.2006)); see also Larin-Ulloa, 462 F.3dat 460 n. 5 (quoting BLACK'S LAW DIC-TIONARY 848 (7th ed. 1999)) (“A nuncpro tunc judgment is ‘[a] procedural deviceby which the record of a judgment isamended to accord with what the judge ac-tually said and did, so that the record willbe accurate.’ ”).
VIWe now turn to the issues involving Schecken-
bach and R2. After concluding in *693 its ruling onsummary judgment that Scheckenbach had notbreached his consulting contract with AdvoCare,the district court instructed the jury that Schecken-bach was an agent of AdvoCare, that AdvoCarebore “the burden of proof to establish the scope ofMr. Scheckenbach's agency, and that Scheckenbach
The jury had to determine whether Scheckenbach'sactions in obtaining raw materials for AdvoCarefell within the scope of his duties to AdvoCare andwhether Scheckenbach breached his fiduciary du-ties to AdvoCare.
FN57. The court instructed the jury that itcould find that Scheckenbach breached aninformal or formal fiduciary duty to Advo-Care, as we will discuss.
The jury found that Scheckenbach was liable toAdvoCare for a breach of fiduciary duty. It awardedAdvoCare approximately $3 million in damagesand $6.3 million in lost profits for the breach.FN58
The jury also found that Scheckenbach “committedfraud against AdvoCare,” awarding $1.4 million toAdvoCare for “direct damages” as a result of thefraud and $1 million in exemplary damages, and itrejected Scheckenbach's limitations defense.Scheckenbach argued in a motion for judgment as amatter of law that there was no evidence to supportthe jury's rejection of the statute of limitations de-fense for the fraud and fiduciary duty claims, itsfinding of a breach of fiduciary duty, damages, or abreach of informal fiduciary duty. Both parties relyon Texas law in their appeal.
FN58. Specifically, the jury awarded Ad-voCare $3 million in damages for Scheck-enbach's breach of fiduciary duty andfound that Scheckenbach had received$6,312,132 in profits as a result of thebreach. It awarded $1 million in exemplarydamages resulting from the breach.
[14] The standard of review for denial of aJMOL motion is de novo, FN59 but we reverse ajury determination only if “the facts and inferencespoint so strongly and so overwhelmingly in favor ofone party that reasonable men could not arrive atany verdict to the contrary.”FN60 Under this stand-ard, reversal is not merited.
FN59. Palasota v. Haggar Clothing Co.,
499 F.3d 474, 480 (5th Cir.2007).
FN60. Cousin v. Trans Union Corp., 246F.3d 359, 366 (5th Cir.2001).
Statute of limitationsFor the limitations defense, the court instructed
the jury,
[F]or Mr. Scheckenbach to meet his burden ofproof for the defense of limitations, he must showby a preponderance of the evidence that beforeAugust 10, 2000, AdvoCare knew, or in the exer-cise of reasonable diligence should have dis-covered, the alleged injury.
The jury rejected Scheckenbach's limitationsdefense, and the district court denied Schecken-bach's JMOL motion on the limitations issue.Scheckenbach argues on appeal that AdvoCare'sclaims were barred by Texas' four year statute oflimitations for fraud and breach of fiduciary dutyclaims, relying on the “legal injury” rule that startsthe limitation clock running when the injury occurs.AdvoCare argues that Texas' discovery rule shouldapply, where the limitations period starts to runwhen the injury is discovered.
While we review the record as a whole, we mustdisregard all evidence favorable to the movingparty that the jury is not required to believe.Thus, we are required to give credence to theevidence favoring the nonmovant as well as thatevidence supporting the moving party that is un-contradicted and unimpeached, *694 at least tothe extent that that evidence comes from disinter-ested witnesses.FN61
FN61. Palasota, 499 F.3d at 480-81(internal quotations and citations omitted).
[15] AdvoCare filed suit on August 10, 2004.AdvoCare alleged in its complaint that Schecken-bach engaged in secret sales of raw materials to Ho-rizon, thus inflating AdvoCare's prices and failingto disclose these sales or the fact that he had formedsupplier companies that sold to Horizon. It also ar-
gued that Scheckenbach misrepresented facts whenAdvoCare asked if he was working for other com-panies. Although, as Scheckenbach argues, Advo-Care was suspicious of Scheckenbach's activitiesand the first injury occurred before August 10,2000, we are persuaded that in this case, the discov-ery rule appliesFN62 and that there was evidencefrom which the jury could conclude that discoverydid not occur more than four years prior to Advo-Care's filing suit. In Murphy v. Campbell, the TexasSupreme Court held that the “ ‘discovery rule’ ...applies in cases of fraud and fraudulent conceal-ment,” FN63 and in Computer Associates Interna-tional, Inc. v. Altai, Inc., it held similarly with re-spect to fiduciary claims.FN64 Scheckenbach ar-gues that the evidence showed that “discovery oc-curred no later than August 9, 2000 because on Au-gust 8, 2000.” Indeed, AdvoCare's in-house counseltold Scheckenbach in a letter on August 8, “Wehave a very strong sense that there is a supplier ormanufacturer, or more than one, in which you havean interest or from which you earn a fee.” But Ad-voCare's in-house counsel testified that whenScheckenbach responded to her August 8 letter andstated, “Let me be very clear. I have no interest ineither of these two companies [Horizon or Multi-Pak] or the others named herein or their possibleholding companies or subsidiaries, no intended oranticipated interest in them, no do I earn a fee ofany sort from any of them,” she believed that shewas “getting the assurances from Mr. Schecken-bach that ... [she was] seeking for some time.”FN65 AdvoCare presented evidence that, althoughit was suspicious of Scheckenbach, his misrepres-entations at least temporarily assuaged its fears.Suspicions followed by misrepresentations calmingthose suspicions do not indicate that AdvoCare ac-tually knew or with reasonable diligence shouldhave known of Scheckenbach's fraud and breachesof fiduciary duties before August 10, 2000. Advo-Care also presented evidence that it asked Scheck-enbach if he was involved in supply companies andreceived assurances that he was not; it did not con-firm Scheckenbach's ownership of supply compan-ies until 2003, when it hired a law firm that identi-
fied those companies and confronted Scheckenbachwith the companies' names, asking if he knew ofthem and was involved in *695 them. There was noerror in the jury's denial of the limitations defense.
FN62. Scheckenbach concedes that“[c]ertainly, the discovery rule is applic-able to claims for breach of fiduciary dutyand to claims for fraud,” but disputes thedate of discovery claimed by AdvoCare.
FN63. 964 S.W.2d 265, 270 (Tex.1997).
FN64. 918 S.W.2d 453, 456 (Tex.1996)(citing Courseview, Inc. v. Phillips Petro-leum Co., 158 Tex. 397, 312 S.W.2d 197,205 (1958)) (“Generally, application [ofthe discovery rule] has been permitted inthose cases where the nature of the injuryincurred is inherently undiscoverable .... inthe fiduciary context, it may be said thatthe nature of the injury is presumed to beinherently undiscoverable, although a per-son owed a fiduciary duty has some re-sponsibility to ascertain when an injury oc-curs.”).
FN65. The attorney asked the in-housecounsel at trial, “Ms. Box, did you believethat you were getting the assurances fromMr. Scheckenbach that you were seekingfor some time?” She responded, “Yes, andI thought they were very clearly stated.”
Breach of fiduciary dutyThe breach of fiduciary duty charges against
Scheckenbach rested on alternate theories ofbreach, including a breach of a formal duty arisingfrom Scheckenbach's agency relationship or abreach of an informal duty arising from Schecken-bach's confidential relationship with AdvoCare.The court instructed the jury,
AdvoCare claims that Richard Scheckenbachbreached his fiduciary duty to AdvoCare. Spe-cifically, AdvoCare claims that Mr. Schecken-
bach (or his companies) wrongfully priced andsold raw materials to AdvoCare and to Horizonfor use in AdvoCare products, in violation of hisfiduciary duty. For you to find Mr. Scheckenbachto be liable to AdvoCare for this claim, you mustfind:
(1) that Mr. Scheckenbach owed AdvoCare a fi-duciary duty with respect to the transaction(s) atissue; and
(2) that Mr. Scheckenbach breached that duty;and
(3) that Mr. Scheckenbach does not have a validdefense to AdvoCare's claim.
The instructions then listed two different typesof fiduciary relationships, a “formal” and an“informal” fiduciary relationship, and gave instruc-tions as to both. Under “Formal Fiduciary Relation-ship,” the court stated,
A fiduciary duty may arise from a formal rela-tionship between the parties, or, alternatively, itmay arise from an informal relationship. In thiscase, you are instructed that a formal fiduciary re-lationship existed between AdvoCare andRichard Scheckenbach. Richard Scheckenbachwas AdvoCare's agent. As such, he owed Advo-Care a fiduciary duty with respect to all matterswithin the scope of his agency.
An agent (in this case Mr. Scheckenbach) has aduty to act solely for the benefit of his principal(in this case, AdvoCare) in all matters connectedwith his agency. An agent is free, however, tocarry on activities outside the scope of hisagency, even if those actions injuriously affectthe principal's business.
The “scope” of Mr. Scheckenbach's agency-thatis, the range and type of matters for which Mr.Scheckenbach acted as AdvoCare's agent-is aquestion of fact to be determined by you, jury ....AdvoCare bears the burden of proof ....
Under “Informal Fiduciary Relationship,” thecourt then instructed the jury,
In addition, and alternatively, you are instructedthat a fiduciary duty may arise informally from a“relationship of trust and confidence.” A relation-ship of trust and confidence existed in this case ifAdvoCare justifiably placed trust and confidencein Mr. Scheckenbach to act in AdvoCare's bestinterest.
AdvoCare's subjective trust and feelings alone donot justify transforming arm's-length dealings in-to a relationship of trust and confidence. In abusiness transaction, the relationship of trust andconfidence must be proved to have existed beforeand apart from the agreement in existencebetween the parties. AdvoCare bears the burdenof proof to establish this relationship.
[16] Scheckenbach moved for JMOL, arguingthat there was insufficient evidence of a breach offiduciary duty. Scheckenbach argues on appeal thatthere was no dispute as to the scope of his formalfiduciary duty and that breach was a legal questionthat should not have been determined by the jury.Further, he argues, there was no evidence that hissales *696 of raw materials “fell within the limitedscope” of these duties, urging that we should re-verse the jury's finding of a breach of fiduciaryduty. To the contrary, the extent to which Scheck-enbach's activities with supplier companies fellwithin his duties to AdvoCare was disputed by theparties;FN66 the court did not err in leaving thatportion of the breach question to the jury. Further-more, there was sufficient evidence for a jury find-ing that Scheckenbach breached his formal fidu-ciary duties arising under the agency relationship,even if there was no proof of a breach of the in-formal duty.FN67
FN66. AdvoCare disputed the scope ofScheckenbach's fiduciary duty, arguingthat his agency relationship, not the agree-ment, defined his fiduciary duties, and thathis activities in forming supply companies
violated the duties arising from the agencyrelationship. See, e.g., Joint Pre-Trial Or-der (listing under “Contested Facts” sub-mitted by AdvoCare, “Whether Schecken-bach breached his fiduciary duty to Advo-Care in profiting from the sale of raw ma-terials used in the AdvoCare products heformulated.”).
FN67. Scheckenbach argues that there wasinsufficient proof of a breach of informalduty, as there was no proof of a relation-ship of trust and confidence arising prior toScheckenbach's arm's-length dealings withAdvoCare. In Texas, “[t]o impose an in-formal fiduciary duty in a business transac-tion, [a] special relationship of trust andconfidence must exist prior to, and apartfrom, the agreement that made the basis ofthe suit.” Meyer v. Cathey, 167 S.W.3d327, 331 (Tex.2005) (quoting AssociatedIndem. Corp. v. CAT Contracting, Inc.,964 S.W.2d 276, 288 (Tex.1998)). Scheck-enbach consulted exclusively for Advo-Care from 1993 through 2004. The juryverdict did not show whether the jury un-animously relied upon a theory of formalor informal fiduciary duty in finding abreach and awarding damages for thatbreach. Sufficient evidence for one theoryof breach-breach of the formal fiduciaryduty-is adequate here, as there was no leg-al infirmity in the instructions on breach ofthe formal or informal fiduciary duty. Cf.Griffin v. United States, 502 U.S. 46, 60,112 S.Ct. 466, 116 L.Ed.2d 371 (1991)(“When ... jurors have been left the optionof relying upon a legally inadequate the-ory, there is no reason to think that theirown intelligence and expertise will savethem from that error. Quite the opposite istrue, however, when they have been leftthe option of relying upon a factually inad-equate theory, since jurors are wellequipped to analyze the evidence .... In-
deed, if the evidence is insufficient to sup-port an alternative legal theory of liability,it would generally be preferable for thecourt to give an instruction removing thattheory from the jury's consideration. Therefusal to do so, however, does not providean independent basis for reversing an oth-erwise valid conviction.”).
[17] Scheckenbach conceded that he was anagent of AdvoCare but argued that he had a limitedagency capacity-narrower than that argued by Ad-voCare-and that the 2000 agreement defined andlimited those duties. The agreement provided,
This contract is conditioned upon AdvoCare be-ing the exclusive recipient of Scheckenbach's ser-vices in the direct sales/multilevel nutritionalproducts industry; R2 or Scheckenbach not ac-cepting or receiving any gratuities, commissions,or fees from direct suppliers to AdvoCare ormanufacturers except for those monies receivedby Scheckenbach from R2; and R2's and Advo-Care's confidential treatment of each others [sic]proprietary and privileged information ....
In contesting the sufficiency of the evidence ofbreach, Scheckenbach primarily argues that his2000 agreement with AdvoCare limited his agencyrelationship and drew the bounds of his fiduciaryduties. He points to the fourth paragraph of the2000 agreement, which makes AdvoCare the ex-clusive recipient of Scheckenbach's services, andargues that “each of these ... clauses creates andlimits a particular fiduciary duty.” He also arguesthat the negotiations leading up to the contract,wherein AdvoCare, at Scheckenbach's insistence,*697 reduced the limitations on his dealings withsuppliers, limited his fiduciary duties.
Indeed, under some circumstances, fiduciaryduties are limited by contract. FN68 But the Advo-Care/ Scheckenbach contract or contract negoti-ations did not so limit Scheckenbach's duties as tocompel the jury to conclude that there was nobreach.FN69 Although in the consulting agreement
Scheckenbach had only promised not to receivefees, commissions, or gratuities from direct suppli-ers to AdvoCare, there was evidence that Schecken-bach supervised the formulation and production ofAdvoCare's products and thus had control over theraw ingredients comprising those products;FN70
that Scheckenbach formed direct supply companies,some consisting only of a mailbox and Schecken-bach's home. There was also evidence that he usedthese companies to sell raw materials to AdvoCare'smanufacturer, Horizon, at prices higher than theprices he paid for the materials and at AdvoCare'sexpense, and he failed to disclose these activities toAdvoCare.FN71
FN68. In Crown Life Ins. Co. v. Casteel,for example, the court found that the con-tract stripped the agency of “any power tobind the Company by making any promise,interpretation or representation,” and thatTexas' insurance code “modified the com-mon law fiduciary duties.” 22 S.W.3d 378,385 (Tex.2000). Scheckenbach has notpointed us to such language in the contract.
FN69. Since Scheckenbach and R2 submit-ted their brief, the Texas Supreme Courtfiled Nat'l Plan Adm'rs, Inc. v. Nat'l HealthIns. Co., 235 S.W.3d 695, 700 (Tex.2007)(quoting Johnson, 73 S.W.3d at 200) (“Weapproved the Restatement (Second) ofAgency in regard to the general duty of anagent: ‘[u]nless otherwise agreed, an agentis subject to a duty to his principal to actsolely for the benefit of the principal in allmatters connected with his agency.’ Weadhere to that view. Unless otherwiseprovided by statute or law, duties owed byan agent to his or her principal may bealtered by agreement.”). This does notchange our holding, as Scheckenbach hasnot persuaded us that the jury must haveconcluded from the evidence that his dutieswere limited to the bounds of the contractand the contract negotiations.
FN70. When asked on direct, “And did youunderstand that Mr. Scheckenbach and Dr.Hackman had responsibility for basicallysupervising the production of AdvoCareproducts?” Ruth Ann Box, former counselfor AdvoCare responded, “Yes.” “And wasthat not an important job?” “It was a critic-al job.” Former AdvoCare CEO Todd Cashtestified that Mr. Scheckenbach was in-volved in the products to the extent of“[e]verything from naming the product alot of times to deciding what the productswere going to be ... The ingredients thatwent in those products, the manufacturersthat were chosen, the raw material suppli-ers that they were chosen from.”
FN71. On direct, Cash testified about ameeting where AdvoCare questionedScheckenbach regarding certain raw mater-ial supply companies that AdvoCare hadrecently discovered and believed thatScheckenbach owned. When asked, “DidMr. Scheckenbach admit that he had beenselling raw materials to Horizon?” He re-sponded, “No.” “Did he admit that he hadraw materials?” “He did say that he hadsome raw materials, Moomiyo I believe.”“Did he have an inventory of raw materi-als?” “He said there was an inventory. Hesaid at that time ‘I have about two hundredfifty thousand dollars worth of raw materi-als that I would like for you to purchaseback.’ ” “Did you communicate anythingto him at that meeting to indicate that thissale to Horizon had to stop?”“Absolutely.” “And he wanted AdvoCareto take the inventory off his hands?” “Totake it off his hands. Something we did notknow about and now we're supposed totake it off his hands and buy it back.”
found that “Scheckenbach committed fraud againstAdvoCare.” In his post-trial motion for judgment asa matter *698 of law, and here, Scheckenbach chal-lenged the sufficiency of the evidence to sustain afinding of fraud. We find the evidence sufficient.
[18] At trial, AdvoCare presented evidence ofmisrepresentations by Scheckenbach that it justifi-ably relied upon, and evidence that Scheckenbachformed several supply companies that sold raw ma-terials to Horizon. One of AdvoCare's former attor-neys testified that she sent a letter on August 8,2000, indicating that AdvoCare was concerned thatScheckenbach might be consulting for companiesother than AdvoCare and that Scheckenbach re-sponded, “The assumptions put forth in that letterare both provocative and incorrect. First and fore-most, for the last seven years, all of my consultingwork has been for AdvoCare.” When asked, “Now,did you know in August of 2000 that Mr. Schecken-bach had for a period of four years another com-pany by the name of Transglobal Resources?,” Ad-voCare's attorney responded, “Absolutely not andthat makes that sentence a bald-faced lie.” Whenasked, “And did you know that he devoted at leastsome time to TransGlobal Resources ordering ma-terials to sell to AdvoCare for products?” she re-sponded, “I would never in the world have dreamedor imagined it.”
AdvoCare also provided evidence that Scheck-enbach wrote to AdvoCare that, “As to owning aninterest or earning a fee from a manufacturer orsupplier, I can only surmise that you are referring toHorizon or Multi-Pak since these other manufactur-ing facilities are basically minimal. Let me be veryclear. I have no interest in either of these two com-panies or the others named herein or their possibleholding companies or subsidiaries.”FN72 Yet evid-ence produced at trial showed that Scheckenbachworked with Horizon and sold substantial quantitiesof raw materials to Horizon. AdvoCare's former at-torney at trial, when asked whether she “believe[d]that ... [she was] getting the assurances from Mr.Scheckenbach that ... [she was seeking],” respon-
ded that she did believe them, and believed that“they were very clearly stated.”
FN72. AdvoCare's in-house counsel sentcommunications to Scheckenbach stating,“We have a very strong sense that there isa supplier or manufacturer, or more thanone, in which you have an interest or fromwhich you earn a fee.”
Another of AdvoCare's attorneys testified,
I had received ... [a] report from the Washingtonlaw firm showing that Mr. Scheckenbach ownedHerbAsia and Fife and Taylor, the two suppliersthat we were looking into ... In ... [a July 15,2003] meeting I first asked Mr. Scheckenbach ....I asked him do you own any companies that areselling raw materials, and he said no. And I fol-lowed up that question with “Do you know acompany called HerbAsia.” Yes. “Do you ownthat company?” Yes. “Is that the only other com-pany you do business through.” That's all. “Doyou know of a company called Fife and Taylor?”Yes. He denied it when we asked him, but whenwe asked him specifically about the name of thecompany, he would admit it .... We learned thathe owned companies when he had always told ushe wasn't doing that .... We did not know howmuch he had sold to Horizon or what prices hehad been marking them up.
As if by way of confession and avoidance,Scheckenbach urges that his misrepresentationswere obvious and that AdvoCare should haveknown better than to rely on them. When AdvoCarewrote to Scheckenbach indicating its suspicionsthat *699 he owned interests in some of AdvoCare'smanufacturers and suppliers, Scheckenbach respon-ded that he had no interest in any AdvoCare manu-facturers and that “Beyond that, any shares that Iown in any other company, whether it be DuPont,AT&T, Intel ... is my personal financial business.”Scheckenbach now argues that his reply was“exactly the type of ‘red flag’ that prevents justifi-able reliance.” We are not persuaded. Mere suspi-
cions, followed by denials of those suspicions and arefusal to disclose personal information unrelated toAdvoCare, are not evidence that compelled the juryto conclude that AdvoCare unjustifiably relied onScheckenbach's misrepresentations.
VIII[19] The jury returned two punitive damages
awards against Scheckenbach, each for $1 million;one for acting with malice in breaching his fidu-ciary duty and one for acting with malice in com-mitting fraud. Scheckenbach argues that we shouldreverse the award of punitive damages for fraud be-cause of Texas's “one satisfaction” rule,FN73 ur-ging,
FN73. See, e.g., Coffel v. Stryker Corp.,284 F.3d 625, 628, 639-40 (5th Cir.2002)(looking to Texas law to affirm an exem-plary damages award in a case with claimsunder federal and Texas law); SterlingTrust Co. v. Adderley, 119 S.W.3d 312,323 (Tex.App.-Fort Worth 2003) (rev'd onother grounds by Sterling Trust Co. v. Ad-derley, 168 S.W.3d 835 (Tex.2005)) (“Weare not aware of any authority, and ap-pellees cite none, giving a plaintiff theright to pick and choose an actual damageaward under one theory and a punitivedamage award under an alternative theory.Rather, the plaintiff is entitled to judgmenton the single theory under which he re-covered the greatest relief.”).
Here, AdvoCare could only recover damages un-der the “single theory” that would give thegreatest relief. This is his breach of fiduciaryclaim, and the jury awarded only $1 million inpunitive damages for that claim. It was error toadd another $1 million based on the fraud claim.
Although in Ratner v. Sioux Natural Gas Corp.we held that “the rationale of the ‘one satisfaction’rule is usually inapposite to punitive damages,”FN74 the rule does not stand for the propositionthat one theory of liability can support several pun-
itive damages awards. The theory of the case wasthat Scheckenbach had interposed his own busi-nesses into AdvoCare's chain of production and liedto AdvoCare about it, simultaneously a breach of fi-duciary duty and fraud. That by the verdict form,AdvoCare had two bites at the liability apple, fraudand breach of fiduciary duty, does not entitle Advo-Care to two awards of punitive damages for thesame course of misdeeds. We affirm only one of thetwo awards.
FN74. 719 F.2d 801, 804 (5th Cir.1983).
IX[20] Scheckenbach argues that “AdvoCare
presented its damages testimony as a single lumpsum figure covering the period 1999-2003. But thefirst alleged fraudulent misrepresentation was notmade until July of 2000.” He concludes that thejury could not “allocate some of this lump sum fig-ure to the period after that date.” He cites to Annisv. County of Westchester, a Second Circuit case,which held,
When “[i]t is not possible to ascertain what por-tions of the compensatory and punitive damagesawards were attributable” to claims that weretime-barred, the damages awards must be va-cated.FN75
FN75. 136 F.3d 239 (2d Cir.1998) (quotingRush v. Scott Specialty Gases, Inc., 113F.3d 476, 485 (3d Cir.1997)).
*700 Scheckenbach urges, “While this issuecannot be fully resolved until the court decideswhich if any of Scheckenbach's six statements are,in fact, fraudulent, it is possible that in the end,some of AdvoCare's fraud damages may be barredby limitations and some may not.”
The jury, in assessing damages for fraud, awar-ded $1.4 million in response to Question 6, whichstated, “What sum of money, if paid now in cash,would fairly and reasonably compensate AdvoCarefor the direct damages, if any, that resulted from
Richard Scheckenbach's fraud”? It awarded $1 mil-lion in “exemplary damages ... for the conduct in-volved in defrauding AdvoCare.” The jury was alsoaware of the limitations period. The court instructedthe jury that
under Texas law, a party claiming breach of fidu-ciary duty or fraud must file its lawsuit withinfour (4) years of the time the party discovers, inthe exercise of reasonable diligence, that it hasbeen the victim of breach of fiduciary duty orfraud. This lawsuit was filed on August 10, 2004.Accordingly, for Mr. Scheckenbach to meet hisburden of proof for the defense of limitations, hemust show by a preponderance of the evidencethat before August 10, 2000, AdvoCare knew, orin the exercise of reasonable diligence shouldhave discovered, the alleged injury.
One of AdvoCare's exhibits showed “totals”from Scheckenbach's companies' and Schecken-bach's tax returns from 1999-2003, such as grossreceipts and wages and distributions. Although theinstructions would have been clearer had they in-dicated that the jury could not base is damagesaward on conduct before the start of the limitationsperiod, the instructions were not legally flawed,particularly because Scheckenbach's attorney didnot object during the charge conference nor requestan instruction making the matter more clear.
Accordingly, the judgment is AFFIRMED, ex-cept that one of the awards of punitive damages toAdvoCare for Scheckenbach's fraud and breachesof fiduciary duty is REVERSED; a punitive damageaward is RENDERED in the single amount of$1,000,000. The award of prejudgment interest toHorizon is VACATED and REMANDED for recal-culation.
C.A.5 (Tex.),2008.Advocare Intern. LP v. Horizon Laboratories, Inc.524 F.3d 679
