Consumer Class Actions and Mass Torts : Class Action Lawyer & Attorney : J. Russell Jackson : Skadden Law Firm : Complex Class Actions : Consumer Class Actions & Mass Torts Law Blog

In a strange opinion that raises nearly as many questions as it answers, the Nebraska Supreme Court last week adopted a very restrictive form of the economic loss doctrine.  See Lesiak v. Central Valley Ag Cooperative, Inc., 2012 WL 246641 (Neb. Jan. 27, 2012) (per curiam).

In Lesiak, a farmer contracted with the local ag coop for the "complete package":  The coop would provide all of the farmer's diesel fuels, chemicals, fertilizer and seed for his 2,000-acre farming operation.  As part of the package, the coop would test the farmer's soil in his various fields and then recommend which fertilizers, seed corn, pesticides and herbicides to use. In fact, the coop even applied the herbicide to the fields once the farmer was done planting them.

Apparently the coop used too high of a concentration of herbicide, allegedly harming the farmer's yield on his crops.  The farmer sued and the case went to trial on the following theories:  negligence, breach of the implied warranty of merchantability, and breach of the implied warranty of services.

There is no description of the contract, and no explanation of why there was no breach of contract claim.

At trial, the court granted summary judgment on the implied warranty of services claim, holding that the common law only recognizes such warranties in the construction context.  The Lesiak court affirmed that holding.

The trial court also granted summary judgment on the negligence claim, holding that such a claim was barred by the economic loss doctrine.  The Nebraska Supreme Court reversed this holding, and it is this holding that I'll focus on in this blog post.  (There was also a lengthy discussion of why the trial court was wrong to direct a verdict on the plaintiffs' proof of damages, but I won't get into that here.  Amazingly, however, the court set out a complicated formula for how damages could be calculated, holding that no expert testimony was necessary because Nebraska jurors were more than capable of making such calculations themselves.  Maybe they are really good at word problems in Nebraska.)

The Nebraska Supremes traced the history of the economic loss doctrine, from California's articulation of it in 1965 in Seely through its adoption by the U.S. Supremes in East River Steamship in 1986.  The court noted that Nebraska previously had adopted the economic loss doctrine, but had only applied it in product liability cases involving a defective product.  It viewed the Lesiak case as an opportunity to define the boundaries of what it viewed as an ever-expanding doctrine.

The court held:

[W]e hold that the economic loss doctrine precludes tort remedies only where the damages caused were limited to economic losses and where either (1) a defective product caused the damage or (2) the duty which was allegedly breached arose solely from the contractual relationship between the parties.  And economic losses are defined as commercial losses, unaccompanied by personal injury or other property damage.  

2012 WL 246641 at *11.

The court explained that the doctrine's underlying rationale is to preserve the distinction between contract and tort where both theories could apply, and thereby preserve the ability of the parties to privately order the risk of loss through contract.  It noted that "[i]f a party could simply avoid its contractual bargain by suing in tort, which often offers more generous terms of recovery, then the effectiveness of contract law would be reduced."  Id.

The court then made a logical leap that does not necessarily follow:

But the opposite must also be true, and the same type of concern must also exist for tort law.  While the doctrine has its place in the law of damages, it should not be interpreted so broadly as to undermine tort law and preclude remedies in situations which, historically, have presented viable tort cases.  That is to say, the doctrine should not be expanded to allow traditional tort remedies to drown in a sea of contract.

Id. at *12.

The court said that it was reaffirming the doctrine's "continued application in the products liability context," namely that "where a defective product causes harm only to itself, unaccompanied by either personal injury or damage to other property, contract law provides the exclusive remedy to the plaintiff."  Id.  This, the court reasoned, was merely the loss of the benefit of the bargain, "which is the essence of a warranty action." 

The court gave no hint, however, of the fact that courts in other states have been struggling for decades about precisely what "harm to the product itself" actually means.  For example, where the product is a motor that has been incorporated into a boat, if the motor's failure causes the complete destruction of the boat, is that damage to "other property," or is it the type of economic loss that the parties can be expected to have bargained over in the contract?  The opinion in Lesiak suggests that Nebraska would take a very narrow view of the applicability of the economic loss doctrine in any such situation.

The court also justified its "new" rule that the doctrine applies where "the alleged breach is only of a contractual duty, and no independent tort duty exists."  Id.  (Of course, I have to ask myself, if no independent tort duty exists, why do you need the economic loss doctrine to bar tort claims in the first place?)  The court said that it "serves to 'weed[] out cases involving nothing more than an allegedly negligent failure to perform a purely contractual duty -- a duty that would not otherwise exist.'"  Id. (citation omitted).  Apparently some Nebraska decisions previously had recognized a cause of action for "negligent performance of a contract."   In such cases, the economic loss doctrine would now bar recovery, so long as there was no independent duty in tort.

The Nebraska Supreme Court then sought to apply its newly-demarcated economic loss doctrine to the facts in Lesiak.  It held that the trial court had improperly invoked the doctrine to grant summary judgment to the defendant on the negligence claim:

The question still remains whether the doctrine bars the Lesiaks' negligence claims here.  It does not.  It is true that the alleged breach was of a contractual duty which would not have existed but for the creation of the contractual relationship between the Lesiaks and [the coop].  But the damage allegedly caused by the breach was not purely economic loss; rather, [the coop's] actions allegedly caused damage to the Lesiaks' corn, which qualifies as "other property" -- that is, property other than the property that was sold pursuant to the contract.  Thus, this case is removed from the doctrine's reach.

Id. at *13. So apparently you still can have a cause of action for negligent breach of a contractual duty in Nebraska, so long as the damage is to something other than the product sold in the contract.

In reaching this conclusion, the court specifically rejected the approach of other courts that would view the crop loss as part of the parties' "disappointed commercial expectations" and thus would apply the economic loss doctrine to bar tort claims by reasoning that the parties could best assign the risk among themselves through contractual bargaining, rather than tort.  See id. (rejecting Grams v. Milk Prods., Inc., 699 N.w.2d 167 (Wisc. 2005)).  The Nebraska Supremes explained:

[A]lmost nothing would qualify as "other property" under the "disappointed expectations" test.  This is because the "disappointed expectations" test precludes tort remedies whenever the purchaser should have anticipated the occurrence of the damage at issue -- in essence, whenever the occurrence of the damage was reasonably foreseeable.  Thus, under this test, if "other property" damage occurs, but it was foreseeable at the time of contracting, then all tort theories would be precluded.  Therefore, the only circumstance in which tort theories would not be precluded would be when the damages were not foreseeable.  But, of course, then a plaintiff would likely have no remedy in tort either.  In effect then, the "disappointed expectations" test eliminates tort remedies for damage to "other property," but that type of damage has traditionally been recoverable in tort.

. . . But where the damages were never bargained for and are not expressly dealt with in the contract, it makes no sense to preclude a party's traditional tort remedies.

Id. at *13 - *14.

The opinion in Lesiak certainly piques one's curiosity as to what the provisions of the underlying contract were and if there was a way in which the entire economic loss discussion could have been avoided.  But for now, it is enough to know that Nebraska has squarely placed itself in the restrictive camp when it comes to the application of the economic loss doctrine to bar tort claims -- even negligent breach of contract.

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Cases brought by public water authorities often present special challenges, particularly where the party sued is not a neighboring landowner, but instead is a product manufacturer that stands far removed from any alleged contamination.  Federal preemption sometimes can be an issue.  Proximate causation is often problematic, since the presence of any alleged contaminant can only have occurred through the conduct of independent third parties, like neighboring farmers, who may or may not have followed the manufacturer's instructions and warnings.

The recent opinion in City of Greenville v. Syngenta Crop Protection, Inc., 2010 WL 4791674 (S.D. Ill. Nov. 18, 2010) raises different issues, including the adequacy of pleadings.  The plaintiffs in the case are public water authorities from various states.  They sued to recover the cost of testing and monitoring their water for atrazine, a chemical used in Syngenta's herbicide.  They also want the cost of installing a carbon-based filtration system to remove atrazine from the water, as well as punitive damages.  

Plaintiffs assert four causes of action:  (i) trespass onto plaintiffs' rights to possess raw water; (ii) public nuisance for interfering with the use and enjoyment of the raw water; (iii) strict liability, and (iv) negligence for breaching duties to avoid contaminating plaintiffs' water sources.  

The defendant moved to dismiss, and the court ultimately mostly denied the motion.  The court began its analysis by considering the defendant's argument that the plaintiffs had not properly pled any injury -- and thus lacked standing -- because they did not plead that their "finished water" (or post-treatment water) contained atrazine at maximum contaminant levels ("MCLs") higher than the EPA's set limit of 3 parts per billion on an average annualized basis.  Without contamination at such levels, the defendant argued, the plaintiffs had not demonstrated that they were impaired in their ability to provide potable water to the public.

The court rejected this argument and sided with plaintiffs, who had cited an opinion from the MTBE Products Liability Litigation.  The court reasoned that where the presence of atrazine at any level makes the plaintiffs' job of providing potable water more difficult and costly, the plaintiffs have suffered an injury regardless of whether the MCL threshhold has been reached.  The court remarked:

[I]t seems an extremely bad rule to require a public water supplier to provide overly contaminated water to the public before it can seek redress from one responsible for the contamination.  Thus, the Court agrees with the In re:  MTBE court that a water provider may demonstrate an injury in fact even if its finished water does not exceed an MCL if its use of the water to meet its statutory obligations to the public becomes more costly because of a defendant's conduct.

Id. at *4.  The court warned, however, that on summary judgment, the plaintiffs will have to show a specific, immediate threat of atrazine in excess of the MCL to maintain standing to sue.  Id. at *5.

Next, the court considered the defendant's challenge to the strict liability claim of the Indiana plaintiffs.  It summarily dismissed the strict liability claim because Indiana law does not allow strict liability in design defect cases; design defect is measured by a negligence standard.  Thus, the court granted the defendant's motion on that count against the claims of the Indiana plaintiffs.  Id. at *6.

The court next analyzed whether the economic loss doctrine barred the tort claims of the remaining plaintiffs under Ohio, Iowa, Kansas, Missouri and Indiana law.  The court concluded that it did not.  The court recited a basic description of the economic loss doctrine, and then concluded that the "economic loss rule simply does not apply in this case because the plaintiffs have alleged that the defendants are responsible for damages to their property rights in their raw water sources by causing those sources to be contaminated by atrazine."  Id. at *8 (citing MTBE).

Finally, the court refused to dismiss the plaintiffs' claims for future damages and refused to apply the statute of limitations at the motion to dismiss stage.

So, the City of Greenville plaintiffs live to fight another day.  But there are many, many more legal defenses that they must surmount, and it remains to be seen whether the claims can be tried together as a class action.  This is a litigation worth monitoring, and we'll report on further developments as they arise.

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One of the basic principles of product liability law is that where a defective product injures itself (requiring repair or replacement) or creates only economic loss and the sales transaction was governed by a contract, there is no cause of action in tort.  Instead, the remedy lies, if at all, in contract.  The reason is because where the issue is not personal injury or property damage, but merely financial loss, the parties had the ability to allocate the risk of loss between themselves in contract, and allowing recovery under a tort theory would undermine the parties' agreed-upon risk allocation.

But apparently not in the state of Washington.  See Eastwood v. Horse Harbor Foundation, Inc., 2010 WL 4351986 (Wash. Nov. 4, 2010).  

Eastwood was not a product liability case; instead, it involved a lessor's attempt to recover from the lessee for the common law tort of waste outside of the lease's provisions requiring the lessee to repair and maintain the property and return it in the same condition it was tendered at the beginning of the lease.  The intermediate appellate court, on its own, had invoked the economic loss doctrine to reverse the judgment on the common law waste theory.  So the Washington Supreme Court took review of the case.  It could have simply held that the economic loss doctrine does not apply outside of the product liability context.  But it did not.  Instead, it chose to rewrite Washington law on the economic loss doctrine.

The court explained its rejection of the term "economic loss doctrine" this way:

The term 'economic loss rule' has proved to be a misnomer.  It gives the impression that this is a rule of general application and any time there is an economic loss, there can never be recovery in tort.  This impression is too broad for two reasons.  First, it pulls too many types of injuries into its orbit.  When a contractual relationship exists between the parties, any harm arising from that relationship can be deemed an economic loss for which the law of tort never provides a remedy. . . .

Second, and most importantly, the broad application of the economic loss rule does not accord with our cases.  Economic losses are sometimes recoverable in tort, even if they arise from contractual relationships.  For instance, we recognize the torts of intentional and wrongful interference with another's contractual relations or business expectancies, wrongful discharge in violation of public policy, failure of an insurer to act in good faith, fraudulent concealment, fraudulent misrepresentation, negligent misrepresentation, breach of an agent's fiduciary duty to act in good faith, and negligent real estate appraisal.  Thus, the fact that an injury is an economic loss or the parties also have a contractual relationship is not an adequate ground, by itself, for holding that a plaintiff is limited to contract remedies.

Id. at *3-*4 (citations omitted).

The court then reasoned that the real question was whether there should be a tort duty or a party should be limited to his remedy in contract, and engaged in revisionist history to recharacterize its prior economic loss doctrine jurisprudence:

Where this court has stated that the economic loss rule applies, what we have meant is that considerations of common sense, justice, policy, and precedent in a particular set of circumstances led us to the legal conclusion that the defendant did not owe a duty.  When no independent tort duty exists, tort does not provide a remedy. 

Id. at *4.  The court proceeded to explain a number of its cases -- and the U.S. Supreme Court's decision in East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986) -- as cases examining whether tort law imposed a legal duty independent of contract, concluding that "the economic loss rule does not bar recovery in tort where the defendant's alleged misconduct implicates a tort duty that arises independently of the contract."  Id. at *8.  The court then abandoned the term "economic loss rule" altogether, in favor of the "independent duty rule."  Id.  

Of course, the problem with the rule, as explained by the court, is that one can never know until after the fact whether a cause of action in tort exists and whether the parties' contractual risk allocation will, in fact, be honored.  This is complicated even further by the court's suggestion that in nearly every case, this is going to be a jury question:

Although we find clarity in thinking of the problem in terms of an independent duty, we see potential difficulty, when a defendant has obligations under both the contract terms and an independent tort duty, in distinguishing between a harm that implicates only the contract and a harm that implicates the independent duty as well.  It is a factual question of proximate causation.  As a matter of law, the court defines the duty of care and the risks of harm falling within the duty's scope.  As a matter of fact, the jury decides whether the plaintiff's injury was withing the scope of the risks of harm, which the court has held the defendant owed a duty of care to avoid.

Id. at *8 (citations omitted).

The irony of all of this is that, by deferring to the parties' contractual risk allocation, the economic loss doctrine is supposed to create more -- not less -- predictability.  The Washington Supreme Court's new rule fosters anything but predictability.

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The Uniform Commercial Code allows sellers to limit the scope of relief available under an express warranty.  Typically, manufacturers do limit warranties to repair and replacement of defective parts.  But what happens where the manufacturer has had numerous opportunities to make repairs and it doesn't seem to have fixed the problem?

That's the basic allegation in Commercial Steam Cleaning, L.L.C. v. Ford Motor Co., 2010 WL 1734792 (S.D. W. Va. Apr. 27, 2010).  There, plaintiffs alleged that Ford offered as an option in its 2002 through 2006 model years of F-Series trucks a 6.0 liter Power Stroke diesel engine made by Navistar.  The plaintiffs alleged that these engines were subject to numerous failures, including "fuel system and injector issues, oil leaks, broken turbochargers, wiring harness troubles, faulty sensors, defective exhaust gas recirculation valves and faulty computers."  Id. at *1. Basically, plaintiffs threw every possible problem into their class action kitchen sink.

The named plaintiff, Commercial Steam Cleaning ("CSC"), had bought three trucks with the engine.  It pled that, because of repairs, it was "without use of its three trucks for approximately 325 days between December 9, 2005 and May 31, 2008, resulting in assorted forms of economic harm."

The plaintiffs asserted, on behalf of a putative class, claims for breach of express warranty, breach of implied warranty, and negligence, gross negligence and recklessness.  They sought an injunction requiring Ford or Navistar to repurchase all vehicles with the engine, a declaration that the engine is defective and inherently dangerous, and compensatory and punitive damages (with attorneys fees and costs).

Defendants moved to dismiss the express warranty claim.  The court analyzed the complaint, applying Twombly and Iqbal, noting that plaintiffs had alleged multiple repair attempts, two recalls, and the failure to fix the problems with the vehicles.  The court refused to dismiss the express warranty count:

The allegations of the Second Amended Complaint, taken in their entirety, satisfy Twombly in fleshing out the necessary elements for an express warranty claim.  Regarding the existence of an express warranty, plaintiffs allege that Ford promised to repair, replace or adjust all defective vehicle parts free of charge.  Regarding the breach, plaintiffs allege that the problems they have experienced are not susceptible to repair or replacement and that Ford and Navistar have refused to repair certain defects and problems.  Regarding the question of damages, plaintiffs plead, inter alia, that similarly situated class members have been required to personally incur repair costs.

While further factual detail might have simplified the inquiry and provided Ford with better notice of the nature of the claim, the allegations, again, minimally suffice for the purposes of pleading an express warranty action.

Id. at *5.

The defendants also sought partial dismissal on the "diminution in value" damages and on consequential damages (which are disclaimed by the warranty), but the court held that such issues were better reserved for summary judgment.  In particular, the warranty's exclusion of consequential damages was "frequently imbued with some complexity, especially where a plaintiff, as here, asserts that a warranty has failed of its essential purpose, namely, repair or replacement that is, allegedly, ineffective."  Id. at *6.

The court reached the same conclusion on the implied warranty claim, refusing to dismiss the claim or rule on the types of damages that might be available.

As for the claim for negligence, gross negligence, and recklessness, the defendants argued that it was barred by the economic loss doctrine.  (Readers will remember that the economic loss doctrine basically says that you cannot sue in tort for purely economic loss associated with an allegedly defective product.  The theory is that the parties are able to assign risks of economic harm in contract, and allowing tort causes of action for such harm would disrupt such risk assignments.)

The court analyzed West Virginia law on the economic loss doctrine, which has exceptions for sudden calamitous events and for special relationships -- neither of which were present here.  Accordingly, the court dismissed the asserted tort clams.

There were a few curious items to note that were set forth at the end of the opinion.  First, plaintiffs had notified the court in early April of their intention NOT to seek class certification.  There is no explanation as to why.  Perhaps they acknowledge that the idiosyncratic nature of each class member's engine trouble could not be tried on a classwide basis?  Second, in a lawsuit that had been framed like a classic Lemon Law claim, plaintiffs only now were asking the court for leave to amend to assert a cause of action under West Virginia's Consumer Protection Act.

There no doubt will be further motion practice in this case, from which we will be able to glean more about these claims.

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Recently the Tenth Circuit affirmed dismissal of strict liability and negligence claims arising out of a plane crash because the damages sought -- the value of the plane itself -- implicated the economic loss doctrine.  See Mountain Bird, Inc. v. Goodrich Corp., No. 09-3017, Slip op. (10th Cir. Mar. 23, 2010).  In Mountain Bird, an air cargo company bought a Cessna with a special de-icing system.  Nearly five years later, the plane crashed in Idaho, killing the pilot and one passenger, and destroying the plane. 

The air cargo company alleged the crash was caused by ice accumulation and sued the manufacturer of the de-icing system and Cessna (the manufacturer of the plane) in strict liability and nelgigence for $1.4 million -- the value of the plane.  The District of Kansas had dismissed the claim pursuant to Idaho's economic loss doctrine, which bars the buyer of a product from recovering economic loss -- such as the value of repair or replacement of the product -- caused by an alleged defect in the product.  Slip op.at 3.  The court explained that the doctrine is designed to maintain the boundary between contract law and tort law.

The plaintiff alleged that its claims were rescued by three exceptions to the economic loss rule:  (1) the "special relationship" exception, (2) the "unique circumstances" exception, and (3) the "parasitic loss" exception.  The Tenth Circuit rejected all three.

Idaho -- like most states -- narrowly construes the "special relationship" exception, finding such a relationship only where a quasi-professional performs personal services or where an entity holds itself out to the public as having special expertise that induces reliance.  Neither was the case here.  Plaintiff tried to argue that Cessna held itself as having expertise because it marketed an airplane with a government-certified de-icer.  The court disagreed: 

Neither the affidavit nor the specification document says anything about Cessna conducting a certification; each simply notes that the plane was certified.  As Cessna persuasively argues, we would not infer that a car manufacturer held itself out as a vehicle safety certification expert by advertising that its cars complied with federal safety regulations.  To do so would permit the special relationship exception to swallow the rule by allowing tort claims to proceed against every manufacturer of a regulated product.

Id. at 7.

The court also refused to conclude that unique circumstances require a different allocation of risk.  Indeed, no Idaho court had ever applied the unique circumstances exception.  The court held that the trial court had properly concluded that companies buy planes all the time, and thus they should remain free to allocate the risk of loss as they see fit.

Finally, the court held that the exception involving economic loss which is "parasitic to an injury to person or property" was inapplicable because the physical injury in this case -- the death of two people -- did not occur to the air cargo company, but rather to other individuals.  Physical injury to third parties is simply insufficient to satisfy the parasitic loss exception to the economic loss doctrine.  Indeed, the court noted that the Restatement (Third) of Torts expressly requires loss to "'the plaintif's person" or "the plaintiff's property other thann the defective product itself."  Restatement (Third) of Torts, Products Liability, sec. 21(a), (c).

Mountain Bird is just one recent decision in a long line of cases which recognize that parties should be free in contract to allocate the risk of loss to the product if the product fails to perform as warranted.  Making a tort case out of such an economic loss interferes with the parties' own risk allocation.  Absent extraordinary circumstances, where the loss is simply the product itself, the governing principles should be those of warranty and contract, not tort.

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Recently U.S. District Judge John Feikens affirmed the report and recommendation of U.S. Magistrate Judge R. Steven Whalen, holding that Michigan's economic loss doctrine barred common law fraud claims in consumer fraud litigation.  See Murphy v. The Proctor & Gamble Co., 2010 WL 889796 (E.D. Mich. Mar. 9, 2010).

The case clearly presented one of the most pressing consumer fraud issues of the day.  (Not.)  The defendant makes Fusion and Fusion Power handles for disposable razor heads.  Fusion Power -- as you might guess -- houses a little battery and vibrates.  Plain ole Fusion does not.  The defendants also make Fusion and Fusion Power disposable razor heads that plaintiffs say are identical, except that Fusion Power razor heads cost a dollar more than plain ole Fusion razor heads.

(Can't you just picture a federal judge getting up in the morning and saying to himself "It's cases like this Murphy case that are why I went to law school.  They're simply fascinating!")

The defendants moved to dismiss the common law "fraud" and "silent fraud" counts.  Judge Feikens held that Magistrate Judge Whalen correctly analyzed Michigan law, concluding that the economic loss doctrine bars torts claims for purely economic losses arising out of the quality of the goods because such claims arise out of contract -- not tort -- and are governed by the Uniform Commercial Code, not common law fraud.  Although Michigan recognizes an exception for fraud in the inducement, that exception does not apply if the alleged misrepresentation concerns the quality of the goods sold.  Accordingly, plaintiffs' claims were nothing more than contract claims repackaged as fraud claims, and thus were barred by the economic loss doctrine.

Although it was a close shave, the defendant got out of the common law fraud counts without so much as a nick.

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Cars -- like diamonds -- are forever.  Or so we'd like to think.  I used to have a vintage Mercedes that I bought for $4,000.  I loved to sit in that car.  Of course, that's all I could do with it.  It never really ran.  But I looked fantastic in it, sitting in my garage.  My friends used to say it looked like a sedan a Latin American dictator would be assassinated in -- which was fitting, since it killed me to junk that car (which, it turns out, was held together with Bondo).

Gilbert Noble, no doubt, knows what I mean.  He bought a 1999 Porsche 911 Carrera Coupe in 2005.  It was already out of warranty (4 years/50,000 miles).  The 1999 911 was the first year that Porsche began equipping their products with a water-cooled engine.  Gilbert used his car for about a year, when he started noticing smoke billowing from the tailpipe.  It turns out that antifreeze had leaked into the car's oil through a defective cylinder, irreparably damaging the engine.

Gilbert wrote Porsche.  Porsche said, "Sorry, you didn't buy the car from us, and it was out of warranty when you bought it."  So Gilbert sued Porsche, asserting two causes of action:  (1) strict liability, and (2) violation of New Jersey's Consumer Fraud Act.  The court dismissed his claim on the pleadings.  Noble v. Porsche Cars North America, Inc., 2010 WL 606305 (D.N.J. Feb. 19, 2010).

The court made easy work of Gilbert's strict liability claim, holding that it was barred by the economic loss doctrine, which "bars tort claims for harm sustained to the product alone, as opposed to harm to persons or other property damage."  Id. at *3.

The claim under New Jersey's Consumer Fraud Act ("CFA") was more difficult.  There are three elements to a CFA claim:  (1) unlawful conduct, (2) an ascertainable loss, and (3) a causal relationship between the two.  The court held that, under New Jersey law, "a plaintiff cannot maintain an action under New Jersey's CFA when the only allegation is that the defendant 'provided a part -- alleged to be substandard -- that outperforms the warranty provided."  Id. at *4.  To hold that the CFA covers parts failures beyond the warranty period "'would be tantamount to rewriting that part of [the] contract which defined the length and scope of the warranty period . . . [which] would also have a tendency to extend those warranty programs for the entire life of the vehicle.'"  Id. (citation omitted).

Gilbert (and I) learned a valuable lesson:  nothing lasts forever, and when you buy a used product outside of the warranty period, you bear the risk that the product will no longer work.  That's how you can buy a Mercedes for $4,000, or a Porsche 911 for whatever Gilbert paid for it. 

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New Yorkers always warn: "Don't buy a dog at a pet store!  They all come from puppy mills, are sick, and were raised in deplorable conditions."

But I bought my dog at a mall pet store.  I wasn't shopping for a dog nearly two years ago when Ted came into my life.  But decisions have consequences, and the decision to kill time at a pet store while waiting for friends to arrive for dinner at a nearby restaurant resulted in me sharing my apartment with Mr. Ted E. Bear.

I didn't know much about where he came from.  His papers said a farm in Missouri, my home state.

And frankly, I didn't care.  Although I sincerely hoped he had not come from a puppy mill, he had a very chill personality and I could tell we would get along well together.  If he had the croup and I had to pay for a vet visit, so be it.  (Thankfully, he didn't.)

Given this experience, I read Martinelli v. Petland, Inc., 2010 WL 376921 (D. Ariz. Jan. 26, 2010) with great interest.  In Martinelli, 32 plaintiffs brought a class action against Petland, alleging that they defrauded consumers by selling sick dogs that were raised in puppy mills while representing to the public that the puppies were "healthy," "the finest available," bred by "professional and hobby breeders who have years of experience in raising quality family pets," and "bred under safe and humane conditions by a reputable breeder with proper canine husbandry practices."  Plaintiffs plead causes of action under RICO, state consumer protection statutes, and unjust enrichment.

The court in Martinelli dismissed all but two plaintiffs' RICO and consumer protection claims for failure to adequately plead causation.  The complaint was chock full of allegedly fraudulent statements made by Petland and the breeder, The Hunte Corporation, on websites and in written materials.  Conspicuously absent from the complaint, however, were allegations saying that these statements caused them to make their purchase.  The court noted that "not a single Plaintiff has alleged that he or she ever visited Defendants' websites, received Defendants' written brochures, or relied on a written health certificate or warranty."  Id. at *3.

The court held that "absent some allegation of reliance, Plaintiffs have not pled a 'direct and proximate causal relationship' between Plaintiffs' injuries and [the] purported fraudulent scheme."  Id.  The plaintiffs argued that causation should be inferred as a matter of common sense, as no one would want to purchase defective goods.  But the court noted that even if plaintiffs had received the alleged misrepresentations, the court could not presume that they were material to the plaintiffs' decisions to purchase the animals:

[T]here is no single, common-sense reason for a puppy purchase.  A person might buy a puppy because he falls in love with it in the store window, he has heard it will make a good guard dog, he likes the price, he is referred to the store by a friend, or he finds the store convenient.  It is not necessarily true that every purchaser would base his or her decision on the fact that the puppy was "the finest available" or was bred by professional, hobby, or USDA-approved breeders -- key misrepresentations identified in the amended complaint.

In making their common-sense causation argument, Plaintiffs focus exclusively on the health of the puppies, asserting that "it is illogical that Plaintiffs would purchase their sickly or dying puppy mill puppy absent a misrepresentation as to its health. . . . A person who falls in love with a puppy in the store window might well purchase the puppy in the absence of any representation concerning its health.  However unwise, some people may even buy a sick puppy in order to provide it a good home and nurse it back to health.  It simply cannot be said that a representation concerning the puppy's health is obviously relied on in the same way that a consumer looking for car wax relies on the product's label as "car wax" or in the same way that a person paying for a tax service relies on the assumption that the service will be available.  Plaintiffs conspicuously have failed to allege that they relied on representations concerning the puppies' health, and the Court cannot assume that such representations were the reason Plaintiffs purchased the puppies.

Id. at *4 (citations omitted).

The court dismissed the RICO claims of all plaintiffs except two -- Plaintiffs Moskow and Galatis -- who alleged reliance upon oral representations made by Petland (but not the breeder, Hunte).  Plaintiff Galatis allegedly was specifically reassured by a Petland employee that the puppy was healthy and "(1) it had never been sick, (2) was up to date on his shots, (3) was not hypoglycemic, and (4) was lethargic and quiet only because he was stuck in a cage all day long."  Id. at *5.  Plaintiff Moskow asked whether his puppy was from a puppy mill and he was assured that it was not.  The court held that these oral representations were part of the scheme alleged in the complaint, and it inferred that plaintiffs had relied upon them in making their purchase.  Thus, the RICO claim survived for Plaintiffs Moskow and Galatis.

The court applied the same analysis to the Rule 9(b) challenge to the complaint and to the state consumer protection act claims.  The generic allegations of the vast majority of the plaintiffs failed to sufficiently plead causation:

Plaintiffs assert that reliance is not an element of many state consumer protection claims.  But plaintiffs do not dispute that causation is an essential element.  Indeed, "whether it be termed an issue of reliance or an issue of proximate cause, an appropriate rule is that where the defendant is alleged to have made material misrepresentations or misstatements, there must be a cause and effect relationship between the defendant's acts and the plaintiff's injuries.  Thus, regardless of whether reliance is a required element under state consumer protection statutes, Plaintiffs "must at least allege that they were exposed to the offensive conduct."  Plaintiffs other than Moskow and Galatis have made no such allegation.

Id. at *9 (citations omitted).

The court thus dismissed the state consumer protection claims except for Plaintiff Moskow's claim under the Maine consumer protection act.  (Plaintiff Galatis was from Massachusetts, but the Massachusetts act had not been pled in the amended complaint.)  It also dismissed the unjust enrichment claims for all plaintiffs except Moskow and Galatis; because the two had adequately pled a fraud-based claim, the unjust enrichment claim could stand, the court held.

Finally, the court rejected the defendant's assertion of the economic loss doctrine as a defense to the claims.  Petland argued that because plaintiffs allegedly received damaged goods, they therefore were asserting typical warranty claims that give rise to purely economic loss.  The court disagreed, observing that plaintiffs were seeking damages for being fraudulently induced into entering into the sales contract.

Martinelli is an interesting decision because it parses through the possible motivations underlying the purchase decision and holds that, after already having been given one chance to amend the complaint, a plaintiff cannot plead consumer fraud or RICO without pleading a causal connection between the allegedly fraudulent statements and the reason he made the purchase.  Because this is an essential element of each class member's claim, it seems clear that individual issues would predominate a trial, making class certification unlikely. 

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Sometimes if you shake them, you can coax a few more pages out of them.

No, not associates.  Printer ink cartridges. 

It's hardly news to those of us who actually change printer cartridges that there's some little bit of ink left in there.  We've all tried to coax it out when trying to print a last-minute brief or presentation and we've forgotten to stock up on backup cartridges.  And, at least intellectually, we know that extra bit of ink is in there to keep us from ruining the printer by running it completely dry, as we otherwise would if left to our own devices.

But who would've thought you could make a federal case about it?  Apparently at least one California resident.

In Baggett v. Hewlett-Packard Co., Case No. SACV 07-0667 AG (RNBx), Slip op. (C.D. Cal. Sept. 29, 2009), plaintiff brought a putative class action against HP because its laser jet printers shut down printer operations before the toner cartridges are really empty.  According to plaintiff, the average amount of toner left in the cartridge was 9% for Black, 26% for Cyan, 30% for Magenta, and 19% for Yellow.  The User Manual did not disclose that toner would remain in the cartridges when they reached "empty," but rather advised that the cartridges would yield up to 2,000 color pages.  Plaintiff sued for trespass to chattels, conversion, violation of the Unfair Competition Law, and fraudulent concealment.  The court granted the defendant's motion for summary judgment, thus mooting plaintiff's motion for class certification.

The court granted summary judgment on the trespass to chattels and conversion counts, applying the economic loss doctrine, which "requires a purchaser to recover in contract, and not tort, for 'purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise.'"  Slip op. at 3 (citation omitted).  The purpose of the rule is to ensure that the law of sales is not overrun by tort law.  Id.  The court rejected plaintiff's argument that the rule did not apply to intentional torts.  Id. at 4.

The court also rejected plaintiff's UCL claim, finding that the fact that he might have been able to print more pages with his original cartridge if HP had not instituted its automatic "hard stop" was irrelevant.  Id. at 5-6.  Rather, Plaintiff was promised the ability to print up to 2,000 color pages, which he apparently could do.  As such, "Plaintiff received exactly what he paid for, and his "loss" of toner beyond that which he was promised cannot confer standing under the UCL.

Finally, the court considered and rejected plaintiff''s fraudulent concealment theory, which was based on the computer providing messages that toner must be replaced and the manufacturer failing to disclose that cartridges still contain "'a significant amount of toner'" when that message comes on.  Id. at 6-7 (citation omitted).  The court noted that "at no point did HP represent to Plaintiff that no toner remained in the cartridge," and observed that:

Under California law, a defendant can only be held liable for an omission where it is 'contrary to a representation actually made by the defendant, or an omission of fact the defendant was obligated to disclose.'"

Id. at 7 (citations omitted).

Because all of Plaintiff's causes of action had run dry, the court dismissed the case, holding that plaintiff's motion for class certification was moot.

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Two recent decisions from neighboring states offer important insights into the economic loss doctrine. 

In Lincoln General Ins. Co. v. Detroit Diesel Corp., No. M2008-10427-SC-R23-CQ (Tenn. Aug. 21, 2009), the Tennessee Supreme Court for the first time answered the question whether the economic loss doctrine was part of Tennessee law.  In Lincoln General, an insurer sued the manufacturer of a bus and the manufacturer of the bus engine for monies that the insurer had paid to its insured after the engine caught fire and destroyed the bus.  Only the bus had been destroyed; there was no injury to people or other property.

The federal district court that had been adjudicating the case certified this question to the Tennessee Supremes:  "Does Tennessee law recognize an exception to the economic loss doctrine under which recovery in tort is possible for damage to the defective product itself when the defect renders the product unreasonably dangerous and causes the damage by means of a sudden, calamitous event?"

The court's decision in Lincoln General has a good discussion of the seminal U.S. Supreme Court case on the economic loss doctrine, East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986).  It also does an excellent job of collecting cases that have interpreted that decision.

After a discussion of the doctrine's purpose in preserving the risk allocation inherent in the contract-based warranty causes of action, the Lincoln General court considered the plaintiff's argument that where the machine suffers a catastrophic failure that, but for the grace of God, could have seriously injured or killed someone, an exception to the economic loss doctrine should apply so that tort theories could be pled and the deterrence interests of tort law could be satisfied.  

The court concluded that a buyer who suffers a catastrophic failure that only injures the product itself is still in the same position as a buyer who bought a product that simply does not work, and thus the parties' allocation of risk should be respected.  Moreover, the court reasoned, it would be difficult for courts to apply a rule that focuses on the degree of risk and how the product was damaged.  "[D]eterrence is adequately promoted by existing law that permits tort recovery for personal injury and damage to property other than the product itself" because the manufacturer cannot predict that the damage his product will cause will not include personal injuries and property damage," the court held.  It also noted that this holding is consistent with Restatement (Second) of Torts Section 21.

Accordingly, the court suggested that the negligence and strict liability claims could not proceed under the economic loss doctrine.

An intermediate appellate court in Kentucky was faced with a somewhat different question in Industrial Risk Insurers v. Giddings & Lewis, Inc., No. 2007-CA-0012163-MR (Ky. App. Aug. 21, 2009).  There, the insured had bought a special lathe, two machining centers, and a material handling system from the defendant.  In using the lathe's clamp -- which weighed 1,500 pounds -- to hold blocks of metal weighing up to several hundred pounds, the whole thing collapsed, causing damage not only to the lathe itself, but also to the machining centers and the material handling system.

The Industrial Risk court first concluded that Kentucky law recognizes the economic loss doctrine.  It then considered whether there should be an exception where the loss results from a catastrophic event that could have harmed other people or property.  The court held that Kentucky law recognizes no such exception.

The court next considered what causes of action were eliminated by the economic loss doctrine.  The answer to this question mattered to the plaintiff because the statute of limitations had run on the implied warranty claim.  The court held that one must look to the source of the duty (rather than the harm the product caused), and that the economic loss doctrine only precludes claims whose duties "arise" out of contract.  Thus, the court concluded, the negligence and warranty claims were contractual in nature and were precluded by the economic loss doctrine.  But the duties for the negligent misrepresentation and fraud claims arise out of common law duties not to deceive and thus are not subject to the economic loss doctrine, the court held.  The court remanded the case to the trial court for a jury's determination of whether the lathe, two machining centers, and the material handling system were properly considered "one product" so that it could be said that the "product" only injured "itself," or whether they were separate products (in which case the plaintiff could recover for harm to the two machining centers and the material handling system as "other property").

These cases demonstrate the difficulties in applying the economic loss doctrine in practice.  It also should be noted that these cases involved commercial sellers and purchasers.  The conclusions reached in these cases should not be assumed to be the ones that would have been reached if one of the parties were a consumer who bought the product under a contract of adhesion.

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How far should the duty to avoid negligent harm to another run?  Courts have struggled with this question for as long as there has been tort law.

Recently, a federal court faced this question in TS & C Investments, LLC v. Beusa Energy, Inc., 2009 WL 259675 (W.D. La. Feb. 2, 2009).  There, plaintiffs alleged the defendants were responsible for an oil well blowout near an Interstate highway.  Plaintiffs were businesses who sought to represent a class of businesses that lost money when the Interstate was shut down to address the blowout.  Plaintiffs argued that the defendants should have foreseen, when they placed the oil well near the Interstate, that businesses would be harmed if they negligently caused a blowout.

The defendants moved to dismiss, arguing that the plaintiffs' claims were barred by the economic loss doctrine.  The doctrine, articulated in Robins Dry Dock v. Flint, 275 U.S. 303 (1927), is a prudential limit on tort liability and holds that a negligent tortfeasor's liability does not extend to economic loss not associated with physical injury or property damage.   The rule prevents limitless liability for tortfeasors and prevents litigation of speculative harm.

The Louisiana Supreme Court had adopted the economic loss doctrine in a maritime context, but had not incorporated it into the state's common law for tort.  Thus, the court was forced to make an Erie guess as to whether the economic loss doctrine would be the law of Louisiana.  An intermediate appeals court had recognized and applied the doctrine, as had another federal court sitting in diversity.

Thus, "there has been a trend among both Louisiana state and federal courts not to permit the recovery of indirect economic losses caused by a negligent injury to property, both in the maritime and non-maritime contexts, and in contractual and non-contractual settings.  Certain of these cases couch the policy determination within the rhetoric of a duty-risk analysis; others do not."  Id. at *7.

The court predicted that Louisiana would apply the economic loss doctrine, and thus granted the motion to dismiss on policy grounds:

This Court does not find today that the plaintiffs in this matter were not impacted.  Indeed, this Court is cognizant of the impact on the businesses in question resulting from the closure of I-10.  However, this Court must give force and effect to the policy considerations set forth by the courts in Louisiana that have considered the issue.  Indeed, were this Court to permit claims for purely economic damages to go forward under these circumstances, could not an argument be made that anytime the interstate is closed due to an accident of any nature, those businesses along that span of the interstate, and all of their impacted suppliers, could seek economic damages occasioned by the interstate's closure on grounds that those drivers owed a duty to those businesses located several miles away but along the interstate?

Id. at 9.

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