Contractors Exposed to Copyright Liability Where Owner Breaches Agreement with Architect

A federal court in the case Eberhard Architects, LLC v. Bogart Architecture, Inc. et al., 314 F.R.D. 567 (N.D.Ohio 2016) recently held that contractors and subcontractors cannot, as a matter of law, avoid liability if an owner uses an architect's plans and drawings without a license.

In Eberhard, the Architect entered into an AIA contract with the Owner to provide architectural services in connection with the design of a 12-bed hospital facility.  Per the contract the Architect granted the Owner a "nonexclusive license" to use its plans and drawings, the "instruments of service," for the hospital project unless Owner failed to make payments.  In such instance, the contract stated that the license in favor of the Owner would be cancelled.

When the Owner failed to make payment to the Architect, the Architect issued cease and desist letters to all project participants - Owner, Contractor, Subcontractor - to stop using its instruments of service as they were protected by copyright law.  The Contractor and Subcontractors, who did not have a contractual relationship with the Architect and who did not have a basis in their contract with the Owner to stop work, continued to use the drawings and plans.  The Architect then filed a lawsuit against all project participants.  The Contractor and Subcontractors moved to dismiss. The federal court denied the motion.

The Contractor and Subcontractors first argued that case did not “arise” under the Copyright Act and was really a contract dispute concerning nonpayment of fees. The court disagreed holding that the complaint sounded in infringement by Contractor and Subcontractors and therefore arises under the Act. The court commented that it did not matter that the Defendants would raise an affirmative defense that they were not infringers in light of the nonexclusive license.

Then the court likewise discarded the arguments from the Contractor and Subcontractors that they did not exceed the scope of the license because the instruments of service were used on the exact project that the architect had intended.  According to the Contractor and Subcontractors, the Owner did not breach its agreement with the Architect (entitling the Architect to withdraw the license in full) because complete payment was not a condition precedent to the Owner-Architect Agreement.  The court pointed out that the Architect-Owner contract granted the license “upon execution” and "therefore, by granting the license before full payment was due, the parties clearly did not intend the full payment to be a condition precedent to the license itself." And furthermore, by agreement of the parties, the license indeed "ceased to exist" upon the architect's rightful termination of which non-payment was rightful reason. In sum, the Owner and Architect had agreed that the license  would be extinguished.Accordingly, by proceeding to use the instruments of service without a license all project participants, including the Contractor and Subcontractors, were potentially liable under the Copyright Act.

Beyond this case--where, in light of the cease and desist letters, the Contractors and Subcontractors arguably were aware that the license was potentially expired--it is important to note that civil violations of the Copyright Act need not be willful or knowing. See generally R. Anthony Reese, Innocent Infringement in US Copyright Law: A History, 30 Colum. J.L. & Arts 133 (2007).  As such, contractors and subcontractors who use plans and drawings that are unlicensed, whether they know so or not, may expose themselves to liability.

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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Texas Supreme Court Denies General Contractor’s Negligent-Misrepresentation Claim Against Architect for Increased Construction Costs Caused By Deficient Plans

The Texas Supreme Court recently held that the economic-loss rule bars claims of negligence and negligent misrepresentation from a general contractor against an architect because there was no contract between the parties. Instead, the contractor was limited to its claims for breach of contract against the project’s owner. LAN/STV v. Martin K. Eby Constr. Co., 435 S.W. 3d 234 (Tex. Jun. 20, 2014).

The Dallas Area Rapid Transportation Authority (the “Owner”) contracted with the architect, LAN/STV (the “Architect”), to prepare plans, drawing, and specifications for the construction of a rail line within downtown Dallas. The Architect agreed to be responsible for the professional quality, technical accuracy, and coordination of all designs, drawings, specification, and to be liable to the Owner for all damages caused by the Architect’s negligent performance of any of the services furnished. The Owner incorporated the Architect’s plans into its solicitation for competitive bids to construct the rail line. The project was awarded to Martin K. Eby Construction Company (the “Contractor”). The construction contract contained administrative procedures for the Contractor to follow if asserting disputes against the Owner, including any design problems. There was no contact or contractual privity between the Contractor and the Architect.

Just after starting construction, the Contractor discovered that the Architect’s plans were replete with errors. While the Contractor expected that only 10% of the plans would be changed, eventually 80% of the Architect’s plans had to be changed. This greatly disrupted the construction schedule and required additional labor and materials. In total, the Contractor calculated that it lost nearly $14 million on the Project.

After settling with the Owner, the Contractor filed this tort action against the Architect alleging claims for negligent misrepresentation. The jury apportioned some responsibility to the Owner and the Contractor, but found that the Architect was 45% responsible. Judgment was subsequently rendered in favor of the Contractor for about $2.25 million. The Court of Appeals affirmed the judgment.

The Texas Supreme Court analyzed whether the economic-loss rule barred the Contractor’s recovery for negligent misrepresentation. Under the economic-loss rule in Texas, a plaintiff suffering purely economic loss cannot recover under negligence theories against a defendant if the duties allegedly breached arose solely from the defendant’s contract with a third-party. Put another way, the economic-loss rule means that there is “no general duty to avoid the unintentional infliction of economic loss.” Restatement (Third) of Torts: Liability for Economic Harm, § 1.

The economic-loss rule does not create a bright-line standard, and has caused some confusion among courts as to its application. In the construction context, the Court recently explained that the economic-loss rule does not bar an owner’s negligence claims directly against a subcontractor for damage to the owner’s property caused by defective work. Though the owner had no contract directly with the subcontractor, the subcontractor owes all persons (including the owner) the duty to perform its work with reasonable care to avoid causing damage to other persons’ property. In that case, the property damage was to the owner’s property and fell outside the scope of work in the subcontractor’s construction contract with the general contractor. Thus, the owner’s negligence claims were permitted to proceed. Chapman Custom Homes, Inc. v. Dallas Plumbing Co., 445 S.W. 3d  716 (Tex. 2014). The case is analyzed in further detail here.

In the LAN/STV case, in contrast, the Contractor sought to recover only for its increased costs of construction resulting from the Architect’s failure to comply with the standards of performance required under its design contract with the Owner. The Court explained that participants in construction projects typically cannot recover their economic losses from parties with whom they did not contract. A roofing subcontractor, for example, could not recover its economic losses through negligence claims against a foundation subcontractor that caused construction delays by failing to perform its work in a timely manner. Rather, the roofing subcontractor’s recovery, if any, would lie in claims for breach of contract against the general contractor, the only party with whom the roofing subcontractor had an agreement.

With respect to the Contractor’s negligent-misrepresentation claims against the Architect, the Court felt that the same reasoning barred any recovery. This is a divergence from the recent Restatement on the issue, which suggests that an architect’s duty to a contractor arises from the expectation that plans are prepared for contractors to rely upon to carry out the construction. Restatement (Third) of Torts: Liability for Economic Harm, § 6, cmt. b. While the Court agreed with this concept, it held that the contractor’s “principal reliance must be on the presentation of the plans by the owner, with whom the contract is to reach an agreement, not the architect, a contractual stranger.” The Court felt that contractors were sophisticated parties who could protect their interests adequately through allocating risk in their construction contracts with the owners.

As the Court noted, there are significant differences of opinion among various states as to whether contractors may assert negligent-misrepresentation claims against architects absent contractual privity. Indeed, prior to this case, several Texas courts of appeals permitted such claims. However, this case clarifies that, in Texas, contractors may not recover purely economic losses through negligent-misrepresentation claims against architects with whom they lack contractual privity.

Thanks to Ian Fullington at Griffith Davison& Shurtleff, P.C. for assistance with preparing this post.

Certificates of Merit are Not Required to Assert Third-Party or Cross-Claims Against a Design Professional in Texas.

In certain states, a plaintiff seeking to file a lawsuit against a design professional (such as an architect or engineer) based on the provision of professional services must include a “certificate of merit” with the initial pleading. In Texas, this certificate must be a sworn affidavit from a professional with the same license as the defendant that is knowledgeable in the defendant’s area of practice. Tex. Civ. Prac. & Rem. Code § 150.002. It must specifically describe the allegedly negligent acts of the defendant, including the factual basis for each claim. Id. Failure to file the certificate of merit with the initial pleading will result in dismissal, possibly with prejudice. Id.

As a practical matter, this requirement has created tactical problems for general contractors and other construction companies whose scope of work includes responsibility for design. If an owner sues a general contractor for damages arising from alleged design problems, the general contractor must evaluate whether to bring in its design professional as a third-party defendant to bear responsibility for the claims. If the certificate-of-merit requirement applies to such claims, then the general contractor is left with the dilemma of deciding whether to provide sworn proof of the design problems (potentially admitting the general contractor’s liability to the owner) or refraining from joining the design professional (and therefore giving up the benefits of seeking indemnity while the owner’s lawsuit is pending).

In Texas, this issue was recently resolved. In Jaster v. Comet II Construction, the Texas Supreme Court held, in a 5-4 plurality opinion, that defendants and third-party defendants who filed third-party claims or cross-claims against design professionals are not required to file certificates of merit accompanying those claims.

The Court’s decision rested on an analysis of the language of Chapter 150 which requires “the plaintiff” in “any action or arbitration proceeding for damages arising out of the provision of professional services by a licensed or registered professional” to file a certificate of merit (an affidavit signed by a design professional specifically stating what was done incorrectly) with the petition. The Court drew a distinction between “plaintiff” and “third-party plaintiff”/ “cross-claimant” by finding that a plaintiff initiates the lawsuit whereas a “third party-plaintiff”/ “cross-claimant” does not. The Court also found support for that distinction when it interpreted “action” to mean the filing of a lawsuit as opposed to “causes of action” which are the individual claims that make up a lawsuit. The action would be filed brought by the plaintiff as well as causes of action whereas only causes of action would be brought by third-party plaintiffs/cross-claimants.

The Court explicitly did not render an opinion as to whether, in multi-plaintiff suits, each plaintiff would be required to submit a certificate of merit, as that issue was not before the Court.

Notably, there is no majority opinion in this case, which means that the case technically cannot be used as binding precedent. However, the similarity of the concurrence written by Justice Willet to the plurality opinion written by Justice Boyd makes it likely that lower courts can and will consider the majority opinion binding. The concurrence takes the same textual approach as the plurality but instead of focusing on the distinction between “plaintiff” and “third-party plaintiff”/ “cross claimant” the plurality honed in on the phrasing of the statute that describe “the plaintiff” and “the complaint.” The concurrence found that the modifier “the” means a singular plaintiff, thus excluding later claimants, and the initial pleading, not subsequent causes of action added to the complaint. Thus, coming to the same conclusion as the plurality, that the first plaintiff filing the original petition must include a certificate of merit, but subsequent third-party plaintiffs and cross-claimants need not.

Jaster v. Comet II Const., Inc., No. 12-0804 (Tex. July 3, 2014).

Thanks to Nick Brooks at Griffith Davison & Shurtleff, P.C. for assistance with preparing this post.