               IN THE COURT OF APPEALS OF TENNESSEE
                          AT KNOXVILLE
                                April 16, 2013 Session

       COPPER BASIN FEDERAL CREDIT UNION ET AL. v. FISERV
               SOLUTIONS, INC., d/b/a INTEGRASYS

                  Appeal from the Chancery Court for Polk County
                  No. 2011-CV-26     Jerri S. Bryant, Chancellor


                 No. E2012-02145-COA-R3-CV - Filed July 3, 2013


This action sounding in negligence and breach of contract was dismissed by the trial court
pursuant to Rule 12 of the Tennessee Rules of Civil Procedure. Plaintiffs alleged in their
complaint that Defendant negligently performed professional services concerning the
provision and maintenance of web defense software and that Defendant breached its
contractual duty to protect the computer system of Copper Basin Federal Credit Union from
computer incursion. For the reasons stated herein, we hold that the complaint alleges
sufficient facts to allow the case to proceed, and, therefore, dismissal was in error. The
decision below is reversed, and the case is remanded for further proceedings.


      Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
                            Vacated; Case Remanded

T HOMAS R. F RIERSON, II, J., delivered the opinion of the Court, in which D. M ICHAEL
S WINEY and J OHN W. M CC LARTY, JJ., joined.

James R. McKoon and John R. Hegeman, Chattanooga, Tennessee, for the appellants,
Copper Basin Federal Credit Union and Cumis Insurance Society, Inc.

John A. Lucas, Knoxville, Tennessee, for the appellee, Fiserv Solutions, Inc., d/b/a
Integrasys.

                                       OPINION

                         I. Factual and Procedural Background

      Plaintiffs, Copper Basin Federal Credit Union (“CBFCU”) and Cumis Insurance
Society, Inc. (“Cumis”), filed a complaint asserting tort and breach of contract claims against
Defendant, Fiserv Solutions, Inc., d/b/a Integrasys (“Fiserv”).1 CBFCU is a Tennessee credit
union servicing individuals in Polk County. Cumis is a Wisconsin-based mutual insurance
company that issued a credit union bond to CBFCU to provide coverage in the event of a
computer attack on CBFCU’s systems. Fiserv, also a Wisconsin-based corporation, provides
professional computer services. CBFCU stated in the complaint, inter alia, that it utilized
Fiserv as its “sole technical support and web defense firm since at least 1985.” CBFCU also
utilized Fiserv’s data processing services to access the National ACH Banking System.

       Several facts relevant to the issues presented on appeal have been alleged by Plaintiffs
in their complaint. In 2007, CBFCU entered into a renewal contract (also known as the
Master Agreement) with Fiserv for the provision of data processing services. CBFCU has
specifically asserted that the technical support and web defense services Fiserv agreed to
provide predated this contract and were separate and apart from it. As part of the technical
support and web defense services it provided to CBFCU, Fiserv required CBFCU to purchase
Trend Micro Antivirus Firewall and Protection software. Although CBFCU purchased this
software, Fiserv maintained exclusive access to it, providing CBFCU no passwords to and
no control over same. When the Trend subscription was renewed in May 2009, CBFCU
timely paid the renewal fee and informed Fiserv that it had done so.

        According to the complaint, in early July 2009, CBFCU employees contacted Fiserv
and complained that they were observing an unusual number of “pop-up” advertisements on
their computers. Fiserv accessed CBFCU’s computers remotely twice in an attempt to
remedy this problem. It then reported to CBFCU that the problem had been corrected. On
July 14-15, 2009, the CBFCU system was infiltrated by unauthorized computer hackers, who
introduced software to the CBFCU system that allowed the hackers to change user names and
passwords in order to originate a series of transfers from CBFCU’s account with Volunteer
Corporate (“VolCorp”) into a large number of privately-owned accounts distributed in banks
across the United States. CBFCU discovered the funds had been stolen from its VolCorp
account on July 15, 2009. CBFCU employees immediately contacted VolCorp and attempted
to retrieve the illegally transferred funds. CBFCU and VolCorp successfully reclaimed some
of the transferred funds but were unable to recover additional funds in the total amount of
$544,789.41.

      As Plaintiffs further allege, CBFCU also contacted Fiserv to inform Fiserv that the
system had been compromised. Because there were no Fiserv personnel on site, a CBFCU
employee attempted to access the Trend Micro Antivirus Protection System. Following a


       1
          Because Fiserv did not file an answer before the case was dismissed, the allegations of the
complaint remain undisputed at this point.

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few attempts at guessing the password, she was successful in gaining access to the system.
Once access was accomplished, she discovered that the software had never been activated
by Fiserv. When the CBFCU employee clicked the respective icon to activate the software,
it immediately engaged, updated its virus definitions (which were more than 60 days old),
and began protecting the CBFCU computer system.

        CBFCU and Cumis filed the instant lawsuit against Fiserv on July 12, 2011, alleging
claims of negligence, gross negligence, and breach of contract. Plaintiffs assert, inter alia,
that the web defense and tech support services provided by Fiserv were separate services,
which were not governed by the Master Agreement entered into in 2007. Therefore,
Plaintiffs’ breach of contract claims were not based upon the 2007 contract, but on an earlier
and separate contract, apparently oral, as no other written contract was produced. Plaintiffs
alleged that Fiserv owed a duty of professional competency in providing the web defense and
technical support services, but that Fiserv breached that duty by failing to activate the
software and failing to protect CBFCU’s computer system. Plaintiffs sought compensatory
and punitive damages. Plaintiffs claimed, in the alternative, that the terms of the Master
Agreement were not negotiated and were unconscionable.

      The Master Agreement, appended to the complaint, describes three types of services:
“Account Processing Services,” “Virtual Branch ® Services,” and “ConfirmIT™.” The
Master Agreement does not specifically reference web defense or technical support services.

        Fiserv filed a motion to dismiss pursuant to Tennessee Rule of Civil Procedure
12.02(6), contending that the Master Agreement was the controlling agreement between
CBFCU and Fiserv. Fiserv asserted that the Master Agreement contained (1) a contractual
limitation period, requiring that all claims be filed within two years; (2) a choice-of-law
provision, which stated that New York law would apply; and (3) a provision stating that
Fiserv would not be held liable for “consequential or tort damages arising out of or relating
to this agreement, regardless of whether such claim arises in tort or contract.” Fiserv also
argued that Plaintiffs’ tort claims were barred by the economic loss rule and that Plaintiffs
had failed to allege sufficient facts to support their claim of gross negligence or request for
punitive damages.

      The trial court heard the motion to dismiss on November 30, 2011. The court
subsequently entered an order on February 27, 2012, which stated as follows:

              This cause came to be heard on the 30th day of November, 2011
              on Defendant’s Motion to Dismiss. Defendant moved to
              dismiss this case under TRCP 12.02(6) based on two grounds:



                                              -3-
              1.      The parties had a contractual statute of limitations of two
                      years after the cause of action or claim accrued.

              2.      Defendant claims that by contract, the parties waived
                      consequential and tort damages arising out of any breach
                      of contract.

              Arguing that New York law applies, Defendant quotes
              Paragraph 10C of the Master Contract which states that
              arbitrators are to use New York’s substantive law. There does
              not appear to be a like provision for the court and therefore the
              court will look at the circumstances alleged in the Complaint
              and Motion to decide where and when the cause of action
              accrued. The court in using Tennessee law finds that the breach
              of contract cause of action accrued at the time the loss was
              sustained by Plaintiffs and therefore overrules the Motion to
              Dismiss on that basis.

              With regard to Defendant’s second prong of its Motion to
              Dismiss, the court finds that the damages complained of by the
              Plaintiffs are direct rather than consequential damages and have
              been adequately [pled] at this point to survive the Motion to
              Dismiss. However, all actions sounding in tort are dismissed.

(Emphasis in original.)

        Fiserv thereafter filed a motion pursuant to Tennessee Rule of Civil Procedure 60.01,
asserting that there was a typographical error contained in its motion to dismiss, such that the
trial court was not properly advised that paragraph 13(d) of the Master Agreement provided
that New York law would govern the entire agreement. As a second motion hearing was held
on August 14, 2012, the trial court entered an order stating as follows:

              This matter came on for hearing on August 14, 2012, on the
              Motion by Fiserv Solutions, Inc., d/b/a Integrasys (“Fiserv”)
              pursuant to Rule 60.01, Tenn. R. Civ. P., to correct a mistake or
              error in the Court’s Order entered on February 23, 2012. Upon
              consideration of that Motion, in that the court was cited to and
              relied upon an incorrect or incomplete review of the contract,
              the court is of the opinion that the Motion should be and hereby
              is GRANTED. Accordingly, the Court finds and holds that the

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              alleged contract between the parties is governed by New York
              law. While Tennessee seems to have significant contacts with
              the transaction, New York law was chosen for consistency in
              Defendant’s multistate operation. Pursuant to New York law,
              a cause of action accrues at the time of the alleged breach,
              irrespective of when damages begin to accrue. See Welwart v.
              Dataware Elecs. Corp., 277 A.D.2d 372 (N.Y. App. Div. 2000).
              Plaintiff’s cause of action for breach of contract therefore
              accrued under New York law in May 2009. Because Plaintiffs’
              Complaint was not filed until July 12, 2011, Plaintiffs’ claim for
              breach of contract is barred by the two-year limitation provision
              in paragraph 8 of the Master Agreement between the parties that
              is attached as Exhibit A to Plaintiffs’ Complaint. Accordingly,
              the Court’s February 23, 2012 Order is hereby modified to
              provide that Fiserv’s Motion to Dismiss is GRANTED.
              Plaintiffs’ Complaint is therefore DISMISSED, with prejudice.
              Fiserv’s Motion for an extension of time in which to file its
              answer to the Complaint is DENIED as moot.

Plaintiffs timely appealed.

                                    II. Issues Presented

       The parties present four issues for review, which we have restated as follows:

       1.     Whether the Master Agreement dated December 1, 2007, is controlling
              regarding Plaintiffs’ claims in this case.

       2.     Whether the economic loss rule bars the Plaintiffs’ claims sounding in
              tort.

       3.     Whether the facts pled by Plaintiffs are sufficient to support a cause of
              action for gross negligence.

       4.     Whether the facts pled by Plaintiffs are sufficient to support a claim for
              punitive damages.

                                  III. Standard of Review

       The trial court dismissed Plaintiffs’ claims pursuant to Tennessee Rule of Civil

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Procedure 12.02. It is well settled that a motion to dismiss pursuant to Rule 12.02

       tests only the legal sufficiency of the complaint, not the strength of a plaintiff’s
       proof. Such a motion admits the truth of all relevant and material averments
       contained in the complaint, but asserts that such facts do not constitute a cause
       of action. In considering a motion to dismiss, courts should construe the
       complaint liberally in favor of the plaintiff, taking all allegations of fact as
       true, and deny the motion unless it appears that the plaintiff can prove no set
       of facts in support of her claim that would entitle her to relief. In considering
       this appeal from the trial court’s grant of the defendant’s motion to dismiss, we
       take all allegations of fact in the plaintiff’s complaint as true, and review the
       lower courts’ legal conclusions de novo with no presumption of correctness.

Stein v. Davidson Hotel Co., 945 S.W.2d 714, 716 (Tenn. 1997) (internal citations omitted).

                           IV. Application of Master Agreement

        The trial court dismissed Plaintiffs’ claims based solely on provisions contained in the
Master Agreement executed by the parties in 2007, thereby finding that the Master
Agreement was controlling in this situation. Plaintiffs argue, however, that the Master
Agreement does not control, because (1) the web defense and technical support duties were
governed by a previous separate and distinct contract, and (2) this separate contract was in
existence at the time the Master Agreement was executed and was therefore unaffected by
its terms. Utilizing the proper standard of review applicable to the grant of a motion to
dismiss, we agree with Plaintiffs’ assertions.

        This Court must take all allegations of fact in the Plaintiffs’ complaint as true and
review the trial court’s legal conclusions de novo with no presumption of correctness. See
Stein, 945 S.W.2d at 716. In their complaint, Plaintiffs alleged that CBFCU had a contract
with and relied upon Fiserv or its predecessors to provide web defense and technical support
services since at least 1985. Plaintiffs propound that CBFCU entered into the Master
Agreement in 2007 for the provision of data processing services, but assert that the web
defense and technical support services were not a part of this agreement and were “separate
and apart” from it. Plaintiffs allege that Fiserv owed a duty of professional competency to
CBFCU in providing the separate services of web defense and technical support that “were
not governed by the Master Agreement.” According to the complaint, Fiserv grossly
breached its duty, causing Plaintiffs to incur a loss of $544,789.41. Plaintiffs also claim that
Fiserv breached its contract with CBFCU to provide professional web defense and technical
support services.



                                               -6-
       Taking all of these allegations as true, as this Court must, we conclude that the trial
court erred in granting Fiserv’s motion to dismiss. Plaintiffs alleged that there was a separate
contract governing Fiserv’s provision of web defense and technical support services, and that
this contract predated the 2007 Master Agreement. Plaintiffs alleged that the web defense
and technical support services provided by Fiserv were not governed by the Master
Agreement, as it only covered Fiserv’s provision of data processing services. A review of
the Master Agreement does not disprove this assertion.2 Therefore, the trial court erred in
relying on the provisions of the Master Agreement in dismissing Plaintiffs’ tort and breach
of contract claims against Fiserv. The trial court failed to accept Plaintiffs’ allegations in the
complaint as true, as it must when ruling on a motion to dismiss made pursuant to Tennessee
Rule of Civil Procedure 12.02.

                                     V. Economic Loss Rule

       Fiserv posits that even if the Master Agreement does not control, Plaintiffs’ tort claims
were properly dismissed because they violate the Economic Loss Rule. Regarding this
doctrine, our Supreme Court has explained:

        The economic loss doctrine is implicated in products liability cases when a
        defective product damages itself without causing personal injury or damage to
        other property. In this context, “economic loss” is defined generally as “the
        diminution in the value of the product because it is inferior in quality and does
        not work for the general purposes for which it was manufactured and sold.”

Lincoln Gen. Ins. Co. v. Detroit Diesel Corp., 293 S.W.3d 487, 489 (Tenn. 2009) (internal
citations omitted). This Court has further explained application of the doctrine as follows:

        The economic loss rule is a judicially created principle that requires parties to
        live by their contracts rather than to pursue tort actions for purely economic
        losses arising out of the contract. The rule comes into play when the purchaser
        of a product sustains economic loss without personal injury or damage to
        property other than the product itself. In that circumstance, the purchaser must
        seek a remedy in contract, not in tort. Ritter v. Custom Chemicides, Inc., 912
        S.W.2d 128, 133 (Tenn. 1995); Trinity Indus., Inc. v. McKinnon Bridge Co.,
        77 S.W.3d 159, 171 (Tenn. Ct. App. 2001).



       2
           It would be improper for this Court to engage in an in-depth review of Fiserv’s arguments
regarding the provisions contained within the Master Agreement at this juncture, because Plaintiffs have
alleged that it is not the controlling contract, and we must view Plaintiffs’ allegations as true.

                                                  -7-
McLean v. Bourget’s Bike Works, Inc., M2003-01944-COA-R3-CV, 2005 WL 2493479 at
*5 (Tenn. Ct. App. Oct. 7, 2005).

        As this language demonstrates, the Economic Loss Rule has been applied
predominantly3 in the context of products liability cases involving the sale of a defective
product, wherein the product causes injury only to itself. See Lincoln, 293 S.W.3d at 489.
This rule would appear to have no applicability to the case at bar inasmuch as (a) the
software product was recommended but not sold by Fiserv; (b) the software product was not
alleged to be defective; rather, Fiserv allegedly failed to activate it; and (c) the injury alleged
was not merely to the product itself. This Court cannot fully analyze this issue even though
it was raised at the trial court level, as the trial court never considered nor ruled upon it. See
Dorrier v. Dark, 537 S.W.2d 888, 890 (Tenn. 1976) (“This is a court of appeals and errors,
and we are limited in authority to the adjudication of issues that are presented and decided
in the trial courts . . . .”); see also Heatherly v. Merrimack Mut. Fire Ins. Co., 43 S.W.3d 911,
916 (Tenn. Ct. App. 2000) (“As a general matter, appellate courts will decline to consider
issues . . . that were not raised and considered in the trial court.”); Hayes v. Gentry,
03A01-9303-CH-00120, 1993 WL 191999 at *2 (Tenn. Ct. App. June 8, 1993) (“[S]ince this
issue was not adjudicated in the trial court, we cannot consider it on appeal.”). This issue is
more properly addressed to the trial court upon remand.

                VI. Sufficient Facts - Gross Negligence and Punitive Damages

        Fiserv also argues that Plaintiffs’ complaint fails to allege facts sufficient to support
a claim for gross negligence or punitive damages. Again, these issues were not considered
or ruled upon by the trial court, although they were raised in Fiserv’s motion to dismiss. As
stated above, this Court should only address those issues on appeal that were actually decided
by the trial court in the first instance. These issues should also be addressed by the trial court
on remand.

                                            VII. Conclusion

        The trial court’s order dismissing Plaintiffs’ claims against Fiserv is vacated, and the
case is remanded for further action consistent with this opinion. Costs on appeal are assessed
to the Appellee, Fiserv Solutions, Inc., d/b/a Integrasys.




        3
           The economic loss rule has also been applied in construction lawsuits, which are equally
distinguishable from the case at bar. See, e.g., John Martin Co., Inc. v. Morse/Diesel, Inc., 819 S.W.2d 428,
430 (Tenn. 1991).

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      _________________________________
      THOMAS R. FRIERSON, II, JUDGE




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