Khasin v. Hershey: Unduly Narrowing the Preemptive Scope of Pom Wonderful

As we have briefly explored here, the Ninth Circuit has broadly construed Buckman implied preemption of state law claims pertaining to food, drugs, and medical devices, which are regulated under the federal Food, Drug, and Cosmetic Act (“FDCA”). Of particular note, the court held in PhotoMedex that Buckman “limits the ability of a private plaintiff to pursue claims under state law theories where such claims collide with the exclusive enforcement power of the federal government.” PhotoMedex, Inc. v. Irwin, 601 F.3d 919, 924 (9th Cir. 2010). In Pom Wonderful, the Ninth Circuit put an expansive gloss on that holding, stating “PhotoMedex teaches that courts must generally prevent parties from undermining, through private litigation, the FDA’s considered judgments.” Pom Wonderful LLC v. Coca-Cola Co., 679 F.3d 1170 (9th Cir. 2012). Nowhere has the Ninth Circuit stated that implied preemption is limited to federal statutory claims. That, however, was the implication of a recent district court opinion interpreting Pom Wonderful.  

In Khasin, the plaintiff filed a putative class action against Hershey under several California laws including the Unfair Competition Law, Business & Professions Code § 17200 et seq., the Consumers Legal Remedies Act, and the Beverly Song Act. Khasin v. The Hershey Co., 2012 WL 5471153 at * 1 (N.D. Cal. Nov. 9, 2012). Plaintiff alleged Hershey “engaged in misleading conduct by advertising and labeling several of its products in violation of the aforementioned laws and labeling requirements.” Hershey moved to dismiss the amended complaint, inter alia, because each of plaintiff’s claims was preempted by the FDCA.

In support of its position, Hershey argued that plaintiff’s claims were preempted under the Ninth Circuit’s ruling in Pom Wonderful. The Khasin court rejected this argument, noting that Pom Wonderful only recognized preemption of federal Lanham Act claims that require litigation of whether the alleged conduct violated the FDCA. Indeed, the Khasin court noted, Pom Wonderful remanded the California state law claims for determination of a standing issue. Thus, the district court held, Pom Wonderful did not preempt Khasin’s claims because they were based on state law.

The Khasin court’s refusal to apply Pom Wonderful to state law claims suggests that the Ninth Circuit preempted Lanham Act claims simply because they were federal in nature, but a close reading of Pom Wonderful indicates otherwise. In fact, the district court in Pom Wonderful actually preempted only a subset of Lanham Act claims regarding the names and labels of the juice drink at issue, because only those claims intruded upon the FDA’s comprehensive regulation of food and beverage naming and labeling. The Ninth Circuit’s decision to uphold the district court’s preemption ruling was “primarily guided … by Congress’s decision to entrust matters of juice beverage labeling to the FDA and by the FDA’s comprehensive regulation of that labeling.” “[U]nder our precedent, for a court to act when the FDA has not – despite regulating extensively in the area – would risk undercutting the FDA’s expert judgments and authority.” Importantly, though the court acknowledged that “a Lanham Act claim is barred when it would require a court to interpret ambiguous FDA regulations, that is not the only circumstance in which such a claim is barred. PhotoMedex teaches that courts must generally prevent private parties from undermining, through private litigation, the FDA’s considered judgments.” 

There is nothing in these broad statements to indicate that Buckman preemption is limited only to federal claims. The phrase “private litigation” surely encompasses state tort claims. Indeed, PhotoMedex specifically preempted state tort claims. And, while the Ninth Circuit remanded the state law claims in Pom Wonderful, it made clear it was doing so solely on the preliminary question of standing, leaving issues such as express (and, presumably, implied) preemption to be addressed by the district court on remand “as needed.” Thus, the broad language and procedural posture of Pom Wonderful strongly suggest the preemption principle it articulated properly applies with equal force to any state law claim alleging naming or labeling deficiencies, because the FDA alone is entitled to determine those deficiencies in the first instance. Yet the court in Khasin refused to apply Pom Wonderful at all, despite the fact that at least 3 of the 7 claims it allowed to proceed specifically alleged labeling defects. The Khasin court’s refusal to preempt those claims, solely because they sounded in state tort law, indicates an unduly narrow view of the true scope of Buckman preemption as set forth in Pom Wonderful.

Rosa v. TASER Int'l, Inc.: Keeping Hindsight Bias Out of Failure-to-Warn Claims

The Ninth Circuit has provided product manufacturers some potent ammunition in their ongoing efforts to keep hindsight bias from infecting the scope of their constructive knowledge in failure-to-warn claims. In defending such claims, manufacturers often struggle to define what risks associated with their products were “knowable” from the scientific literature (and thus within the scope of their constructive knowledge) at the time their products allegedly caused injury. Plaintiffs attempt to compound this difficulty by presenting pre-injury scientific literature that does not address the product – or even the injury – at issue, but instead vaguely pertains to the product’s mechanism or the injury’s pathology. Their experts then rely on hindsight in opining that the manufacturer should have “put the pieces together” to draw a causal conclusion the scientific literature only reached later.

This tactic renders the Ninth Circuit’s recent opinion in Rosa v. TASER Int’l [pdf] a welcome development for product manufacturers, particularly those litigating in California. --- F.3d ---, 2012 WL 2775006 (9th Cir. Jul. 10, 2012). In affirming summary judgment in favor of TASER, the Court held that scientific articles that do not link their findings regarding the injury at issue to the product at issue are not sufficient to constitute constructive knowledge that the product could cause that injury. Neither are articles that actually do associate the injury with the product, but as an untested hypothesis – especially if they are not publicly-available. Indeed, Rosa strongly suggests that only articles that are publicly available prior to the alleged injury and articulate a scientifically-validated causal link between a manufacturer’s product and the plaintiff’s injury will trigger the manufacturer’s duty to warn of that injury. By insisting that a manufacturer’s constructive knowledge is only informed by scientific literature that explicitly and concretely links its product to the plaintiff’s injury, the Ninth Circuit has essentially foreclosed plaintiffs’ tactic of importing hindsight bias into their interpretation of the relevant literature.

Self-Contradictory Testimony Does Not Necessarily Create A Triable Issue of Fact Requiring Denial of Summary Judgment

It is not uncommon for a deposition witness testifying regarding critical events to make somewhat inconsistent statements under direct- and cross-examination.  For decades California trial courts have denied summary judgment motions on the ground that such inconsistencies create triable issues of fact that must be resolved by juries.  The lower courts cite two California Supreme Court opinions, Clemmer v. Hartford Insurance Co., 22 Cal.3d 865 (1978) and Reid v. Google, Inc., 50 Cal.4th 512 (2010), for the principle that "the task of disambiguating ambiguous utterances is for trial, not for summary judgment."

In Davis v. Foster Wheeler Energy Corp., __Cal.App.4th__, 2012 WL 1435016 (2012) [pdf], the California Court of Appeal was asked to reverse a summary judgment entered against the heirs of a refinery worker who had died of asbestos-related disease and in favor of the manufacturer of an industrial boiler that had been insulated with asbestos.  A witness who had worked with the decedent testified under examination by plaintiffs’ counsel that he had witnessed (while working nearby the decedent) the manufacturer’s employees remove asbestos insulation from pipes attached to the boiler, creating dust that was inhaled by the decedent.  Later in the deposition, while being examined by defense counsel, the witness said the opposite; only insulators hired by the refinery had applied and removed asbestos.  He denied having any knowledge that anyone associated with the manufacturer had ever applied or removed asbestos.  The trial judge, having reviewed the testimony of another percipient witness that corroborated the deponent’s second version of the relevant events, granted summary judgment for the manufacturer:  “[N]o reasonable jury considering this opposing testimony would conclude that the [Foster Wheeler] workers are the workers who removed the asbestos insulation around the Foster Wheeler boilers.”

On appeal plaintiffs argued that Clemmer and Reid required reversal.  The Court of Appeal, affirming, disagreed:  “In this case, the testimony is not ambiguous, but is contradictory, and the issue is . . . whether with [the witness’s] internally contradictory testimony plaintiffs established the existence of a triable issue of fact, and on de novo review [citation] we agree with the trial court that it did not.”

Under Davis counsel need not shy away from bringing a summary judgment motion even where there are internal inconsistencies in the testimony, especially where the testimony favorable to the client is consistent with the weight of other evidence submitted for the trial court’s evaluation.

California Supreme Court Hears Argument in Pivotal Asbestos Product Liability Case

The California Supreme Court heard oral argument in O’Neil v. Crane Co. The Court’s decision will likely define an important area of strict products liability law in California – specifically, it will expand or limit the duty of product manufacturers to warn about the hazards of replacement parts made by others that are subsequently incorporated by the purchaser into the manufacturer’s original product. 

O’Neil arises out of the plaintiff’s exposure to asbestos-containing gaskets and packing materials used in and around the defendants’ valves and pumps, which were incorporated by the Navy into the steam propulsion system aboard the USS Oriskany, where the plaintiff served while he was enlisted. Though the pumps and valves delivered to the Navy originally incorporated asbestos-containing gaskets and packing, all parties agreed that by the time plaintiff served aboard the Oriskany, the original asbestos packing and gaskets had been removed and replaced with packing and gaskets manufactured by third parties. Nevertheless, the plaintiff argued the pump and valve manufacturers had a duty to warn him regarding the hazards of asbestos.  

Prior to O’Neil this legal issue had been addressed by the California Court of Appeal, most notably in Taylor v. Elliot Turbomachinery Co., Inc. (2009) 171 Cal. App. 4th 564. There, the First Appellate District noted, on facts indistinguishable from the present case, that the plaintiff’s injury did not come from the defendants’ equipment itself, but instead was released from products made or supplied by other manufacturers, though used in conjunction with the defendants’ equipment. Thus, the defendant manufacturers were not part of the chain of distribution of the injury-causing product, which was actually the asbestos-containing insulation. The court held that California law did not recognize a duty to warn of defects in another manufacturer's product.  The Second District Court of Appeal below in O’Neil rejected the reasoning of Taylor, and instead ruled that a manufacturer is strictly liable for dangerous products with which its product will necessarily be used. The Supreme Court granted certiorari in O’Neil to resolve the conflict between the O’Neil and Taylor decisions.

At oral argument, one of the Justices’ primary concerns appeared to be factual in nature: What exactly was meant by the parties’ contention that the Navy “specified” or “required” the use of asbestos-containing insulation? As phrased by Chief Justice Cantil-Sakauye, did the Navy “say the magic word, ‘asbestos’” in its specifications to the defendants, or did the Navy merely promulgate performance specifications and the defendant manufacturers independently determined that asbestos-containing insulation was the best (or even only) material suitable to meet those requirements?  

Another significant concern of the Court appeared to be whether the pumps and valves were capable of functioning without the asbestos-containing components. In other words, was asbestos required for the pumps and valves to function properly, or was asbestos merely required by the dictates of the steam propulsion system, and not the design of the valves or pumps themselves. The Court seemed troubled settling on the proposition that the pumps and valves could be deemed defectively designed if the pumps and valves were “asbestos neutral,” and could function just as well in other systems utilizing non-asbestos containing materials. 

Ultimately this latter point may be where the court draws the line, assigning a duty to warn about replacement parts made by others only if the replacement part is identical to the original hazardous part, and the replacement part is essential to the function of the defendant’s product. The Court will issue its opinion within 90 days. 

Extending the Economic Loss Rule to Service Contracts in Arizona

From time to time, I've reported on important new decisions from around the country on the scope of the economic loss rule, see here, and here, and here. Last month, the Arizona Court of Appeals gave the defense bar an important new precedent, extending the economic loss rule to service contracts.

First, to review: economic losses are frustrated commercial expectations: “it wasn’t worth what I paid,” or “it broke,” or “I didn’t make as much money as I expected.” The economic loss rule, simply stated, holds that where a plaintiff has suffered nothing but economic losses, tort claims are barred, and he or she must sue, if at all, on the contract. Most states have found that the economic loss rule arises from a desire to promote contractual certainty by holding parties, in the vast majority of cases, to their bargain.

Cook v. Orkin Exterminating Company arose from a home construction project gone bad. When the plaintiffs occupied their new home, they discovered termite infestations. The general contractor referred the matter to its insurer, which hired the defendant.   Plaintiffs entered into a contract with defendant to treat the termite problem. Unfortunately, it didn't work; in the end, the defendants treated the house eighteen times in eighteen years. Finally, the plaintiffs sued Orkin for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of warranty, breach of fiduciary duty, negligence, negligent and intentional misrepresentation, and fraud. The trial court entered partial summary judgment, finding that defendant owed plaintiff no fiduciary duty, and that the economic loss rule barred plaintiffs' tort claims.

The central issue on appeal in Cook was whether the economic loss rule is applicable to service contracts. The court concluded that the underlying policy of upholding the parties' reasonable expectations, rooted in the contract, necessarily meant that the economic loss rule barred all of plaintiffs' tort claims.

Although a number of states have not yet taken the same step, the Court of Appeal's decision is certainly correct. Some have argued that the rule is solely intended to maintain the terms of the Uniform Commercial Code as an exclusive remedy where the Code applies, meaning that the rule should be limited to products liability. Nevertheless, many states have extended the economic loss rule to tort claims arising out of construction contracts. Given that construction contracts are to a considerable degree service contracts, both settled law and the policy underlying the economic loss rule should make the rule applicable to service contracts.

A quarter century ago, the Supreme Court recognized that if the trend towards introducing tort into everyday business disputes continued unabated, "contract law would drown in a sea of tort." The Arizona Court of Appeals has taken an important step towards redeeming the Supreme Court's long-ago promise.

Supreme Court Holds Seatbelt Suits Not Pre-empted

The Supreme Court recently decided that Federal Motor Vehicle Safety Standard 208 (FMVSS 208), which requires auto manufacturers to install lap-and-shoulder seatbelts on seats next to a vehicle’s door frames, but allows manufacturers to choose between simple lap belts or lap-and-shoulder belts for rear inner seats (such as middle seats or those next to a minivan’s aisle), did not pre-empt a state tort suit that would deny manufacturers a choice of belts for rear inner seats by imposing tort liability on those who choose to install a simple lap belt.  Williamson v. Mazda Motor of America, Inc., No. 08-1314 (Feb. 23, 2011) .pdf.

In 2002 the Williamson family’s Mazda minivan was struck head-on by another vehicle.  One family member sitting in a rear aisle seat, wearing a lap belt, died in the accident.  Two other family members wearing lap-and-shoulder belts survived.  They sued Mazda saying it should have installed lap-and-shoulder belts on rear aisle seats.  The California trial court dismissed the claim and the California Court of Appeal affirmed, relying on an earlier Supreme Court case, Geier v. American Honda Motor Co., 529 U.S. 861 (2000), where the court held that a different portion of FMVSS 208 requiring installation of passive restraint devices (airbags) pre-empted a state tort suit that sought to hold an auto manufacturer liable for failure to install a particular kind of passive restraint.  The Williamsons sought certiorari, and the Supreme Court granted review because other courts have interpreted Geier as indicating that FMVSS 208 pre-empts state tort suits similar to the Williamsons’.  Holding that FMVSS 208 does not pre-empt these suits, the Supreme Court reversed the California Court of Appeal’s decision.
 
The court explained that a state law that “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of a federal law” is preempted, and in Geier it determined – based on the airbag regulation’s history, the promulgating agency’s explanation of its objectives, and the agency’s views of the regulation’s pre-emptive effect – that giving auto manufacturers a choice among different kinds of passive restraint devices was a significant objective of the airbag regulation, and the tort suit stood as an obstacle to the accomplishment of that objective.  But the court determined, based likewise on history and agency interpretation – that choice was not a significant regulatory objective of the seatbelt regulation in Williamson, so even though the state tort suit might restrict the manufacturer’s choice, it did not stand as an obstacle to the regulation’s full purposes and objectives, and was therefore not pre-empted.

Supreme Court Sides with Vaccine Manufacturers in Bruesewitz v. Wyeth LLC

The Supreme Court, voting 6-2, ruled on Tuesday that the National Childhood Vaccine Act of 1986 (NCVIA or Act) bars state-law product liability claims against vaccine manufacturers.  [See Bruesewitz v. Wyeth LLC, FKA Wyeth, Inc. .pdf]. The Act, designed to ensure a stable vaccine supply by limiting vaccine manufacturers’ potential tort liability, created a special, company-financed, no-fault system that offers guaranteed payments to patients for injuries shown to be caused by a vaccine.  The federal program has awarded more than $1.8 billion for vaccine injury claims in nearly 2,500 cases since 1989.

Design Defect Claims are Preempted under the Act

Writing for the majority, Justice Scalia noted that Congress intended to bar lawsuits against vaccine manufacturers based on so-called design defects.  “Vaccine manufacturers fund from their sales an informal, efficient compensation program for vaccine injuries; in exchange they avoid costly tort litigation and the occasional disproportionate jury verdict.  Congress enacted this deal to coax manufacturers back into the vaccine market.”

The case involved a lawsuit over the injection of a diphtheria, tetanus, and pertussis (DPT) vaccine to six-month old Hannah Bruesewitz.  After her parents’ claims were rejected under the federal compensation system, Hannah’s parents filed suit against the vaccine manufacturer in state court claiming their daughter developed a seizure disorder and experienced serious developmental delays from toxins in the vaccine.  The parents argued that a safer alternative had been available but was not used. 

The vaccine manufacturer removed the case to federal court and subsequently sought dismissal under the express preemption provision of the Act, which protects manufacturers from most state-law claims where there was an unavoidable injury and where the vaccine was both properly prepared and administered with the proper directions and warnings: 

No vaccine manufacturer shall be liable in a civil action for damages arising from a vaccine-related injury or death associated with the administration of a vaccine after October 1, 1988, if the injury or death resulted from side effects that were unavoidable even though the vaccine was properly prepared and was accompanied by proper directions and warnings.

Plaintiffs opposed dismissal, arguing that the DPT manufacturer knew there was a safer version of the vaccine that could have been used.  They maintained that the vaccine maker should be liable despite the Act’s express preemption provision because it chose not to produce the available safer vaccine, thereby rending the injury avoidable.  The federal district court and later the Third Circuit Court of Appeals both ruled that the Act barred such claims.  

In rejecting plaintiffs’ claims and affirming the Third Circuit’s decision, Justice Scalia wrote: “If a manufacturer could be held liable for failure to use a different design, the word ‘unavoidable’  would do no work.  A side effect of a vaccine could always have been avoidable by use of a differently designed vaccine not containing the harmful element.”

Justices Sotomayor and Ginsburg dissented.  They maintain that the ruling “leaves a regulatory vacuum in which no one ensures that vaccine manufacturers adequately take account of scientific and technological advancements when designing or distributing their products.”  Justice Kagan took no part in the consideration or decision of the case.

Future Implications

The decision has broad ramifications for the vaccine manufacturers as well as the public.  The Court’s opinion effectively ends pending vaccine-related autism litigation.  The decision also ensures the continuing viability of a stable vaccine market in the United States. 

The Court’s position may also bode well for generic drug manufacturers later this term in Mensing, since the Court acknowledged the economic realities of increasing tort liability on vaccine manufacturers when deciding these claims were preempted.  These same economic realities apply equally to generic drug manufacturers.

California Supreme Court Establishes Economic Injury Threshold for Unfair Competition and False Advertising Claims

The California Supreme Court has declared that “labels matter,” and that under California’s Unfair Competition Law, a consumer’s subjective sense of feeling duped translates to a cognizable economic injury.

The Court’s majority opinion in Kwikset Corporation v. Superior Court (.pdf), issued today, January 27th, held that plaintiffs “who can truthfully allege they were deceived by a product’s label into spending money to purchase the product, and would not have purchased it otherwise, have ‘lost money or property,’” and therefore have standing to sue under California’s Unfair Competition Law and False Advertising Law.  The Court reversed a decision of the Fourth District Court of Appeal, and potentially opened the door to class action litigation brought by plaintiffs who have experienced no dissatisfaction with the actual function or performance of a manufacturer’s product. 

The plaintiffs brought a class action lawsuit alleging that they purchased locksets manufactured by Kwikset in reliance upon representations that the locks were “Made in U.S.A.” or similarly designated.  The locks contained components made in Taiwan or involved latch sub-assembly performed in Mexico.  The plaintiffs alleged violations of California’s Unfair Competition Law (Cal. Bus. & Prof. Code § 17200) for unlawful, unfair, and fraudulent business practices.  Their complaint further alleged violation of California’s False Advertising Law (Cal. Bus. & Prof. Code § 17500.)

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A Busy Month For the Economic Loss Rule

In the first three weeks of November, we've already seen two major decisions on the economic loss rule from two state Supreme Courts. The economic loss rule provides in most states that a plaintiff cannot sue in tort for disappointed commercial expectations, regardless of whether he had a contractual agreement with the defendants.

On November 4, a badly fractured Washington Supreme Court filed three separate opinions in Eastwood v. Horse Harbor Foundation, Inc. [pdf]

Eastwood arose from a lease on a horse farm. The owner accepted rent below the market rate in return for a promise to maintain, a covenant the lessee allegedly failed to keep. The owner sued for breach of the lease, negligence and waste. Nobody raised the economic loss rule before the trial court, and plaintiffs won. On appeal, nobody argued the economic loss rule. Nevertheless, the Court of Appeals held that the economic loss rule barred the negligence and waste claims.

The Supreme Court reversed.  According to the plurality, the economic loss rule -- which the Court renamed the "independent duty rule" -- isn't a rule at all. It simply means that a court decides on a case by case basis whether there is an independent tort duty involved under the facts presented:

An injury is remediable in tort if it traces back to the breach of a tort duty arising independently of the terms of the contract. The court determines whether there is an independent duty of care, and 'the existence of a duty is a question of law and depends on mixed considerations of logic, common sense, justice, policy, and precedent.'

The plurality acknowledged that some courts have established a bright-line rule dividing economic losses from personal injury and property damage, but at least according to the plurality -- despite having apparently received the negotiated rent payments -- Eastwood hadn't received the benefit of its economic bargain. The plurality concluded that waste was a duty independent of the contract, so the "independent duty rule" didn't bar the claim.

Both concurrences argued that the plurality's analysis was largely unnecessary. According to Chief Justice Barbara Madsen and Justice Gerry Alexander [pdf], the case should have been easy: first, separation of powers barred the court from using the economic loss rule to wipe out a statutory cause of action for waste, and second, since Eastwood had received the benefit of the bargain -- rent payments -- the suit didn't seek economic loss anyway. In a concurrence signed by four members of the Court, Justice Tom Chambers wrote that a lot of the confusion surrounding the economic loss rule could be traced to the definition of "economic loss" in the Washington Product Liability Act, which encompassed virtually anything that could be expressed in dollars and cents. Justice Chambers wrote that Washington had never applied the rule outside the context of products liability, real property construction and property sales.

On November 15, the New Jersey Supreme Court weighed in with Dean v. Barrett Homes, Inc. [pdf] The homeowners bought a house fitted with synthetic stucco walls. A year after buying the house, the owners noticed damage to the walls; they hired an industrial hygienist, who found toxic mold. Plaintiffs sued, arguing that the synthetic stucco was defective. The trial court granted summary judgment, holding that plaintiffs' claims were barred by the economic loss rule, and the Appellate Court affirmed.

The Supreme Court reversed in part. Although the economic loss rule applied to plaintiffs' claims, the Court held that the doctrine did not fully bar the claim. The Court held that the integrated product doctrine -- which provides that the economic loss rule bars a claim for damage to a product where a component has been fully integrated into the whole -- did not apply to the synthetic stucco and home. Nevertheless, the Court held that the economic loss rule limited plaintiff's claim to damages caused to elements of the home outside of the synthetic stucco system itself.

Justice Roberto Rivera-Soto filed a spirited dissent. Quoting from a lengthy explanation of how a synthetic stucco system is installed on a house, Rivera-Soto concluded that the product "can only be removed by extensive demolition work." He labeled the majority's refusal to apply the integrated product rule as:

. . . so fanciful, so nonsensical, that it beggars the imagination. It is a conclusion that can germinate only in the minds of lawyers and can find root only in the rarified environment of this Court's decisions; it cannot, however, long survive in the atmosphere of the real world.

Indiana Supreme Court Reaffirms Economic Loss Rule

In late March, I blogged on an important new case from the Tenth Circuit reaffirming the economic loss rule.  Last week, the Indiana Supreme Court handed down a major decision in a construction case, reaffirming this important principle of business law.

According to the economic loss rule, where a plaintiff has suffered merely economic loss – frustrated commercial expectations – the plaintiff is limited to suing in contract. Tort suits are barred. Once a plaintiff is restricted to contract remedies, limitations on liability provided in the contract will generally be enforced, and punitive damages are unlikely to be available. The economic loss rule is an important (and controversial) tool in business litigation, particularly in the construction industry -- so much so that, as I reported in May, the American Law Institute will shortly be resuming its work on the Restatement (Third) of Torts: Economic Torts and Related Wrongs, collecting the law of the economic loss rule from across the country.

Indianapolis-Marion County Public Library v. Charlier Clark & Linard[pdf] arose from the construction of a new library and parking garage in downtown Indianapolis. The Library contracted with an architectural firm, which, in turn, subcontracted with various architectural and engineering firms.   The Library also contracted directly with the general contractor for the project. A number of construction and design defects were found in the parking garage, and the Library sued the architects, the general contractor, and the subcontractors in tort. The defendants successfully moved to dismiss, arguing that the economic loss rule barred the Library's tort claims.

The Supreme Court affirmed. The Court noted several policy justifications for the economic loss rule. 

First, liability for purely economic loss is more appropriately determined by commercial rather than tort law.

Second, tort law should not be permitted to impose liability on commercial actors which is so uncertain in time, class or amount that the defendant has no way of allocating risk before acting.

The Library argued that a range of exceptions to the economic loss rule applied. The Library claimed that because it purchased discrete products from each defendant -- blueprints, materials, inspection services, and so on -- it had suffered damage to property other than the subject of its contracts, making the economic loss rule inapplicable. The Court disagreed, holding that each of the defendants' products was integral to a whole: the "product" for purposes of applying the "damage to property other than the product" exception to the economic loss rule was a renovated and expanded library facility, not any individual defendant's contribution to the project.

The Library also claimed that the Court should not apply the economic loss rule where the alleged flaws in the product or service created an imminent danger of physical harm to members of the public. The Court declined to carve out such an exception to the rule.

The Library next argued that the economic loss rule should not be applied to design professionals, but the Court followed a decision from the Arizona Supreme Court earlier this year, holding that the economic loss rule applied equally in construction defect cases to contractors and design professionals. The Court emphasized the importance, as a matter of policy, of applying the economic loss rule to all participants in a major construction project:

When parties are connected through a chain of contracts, as in the construction context, courts should defer to the language of the contracts governing their relationship . . . Such a rule promotes private ordering by respecting a commonly understood allocation of risk even though the relevant term may or may not be in the contract.

Finally, the Library argued that the economic loss rule should not apply where the defendants allegedly provided false information to the plaintiff, or where the defendants provided a service, rather than a product.   The Supreme Court refused to create a new exception to the economic loss rule to govern either case.

Every few years, articles appear predicting the death of the economic loss rule. But with new decisions from two state Supreme Courts in only four months, reports of its death are once again exaggerated.

Keeping Tort Out of a Business Dispute: The Tenth Circuit and the Economic Loss Rule

In law school, it seemed simple enough: business relationships were generally governed by contract and warranty, and tort was reserved for conduct that hurt people or damaged property. But in practice, the line is constantly shifting: the plaintiffs’ bar – often aided by state legislatures – tries to turn routine business disputes into torts, while the defense bar responds that the parties’ relationship should be governed by the terms of their negotiated contract.

The Supreme Court chose an apt metaphor for this battle in a 1986 maritime case, worrying that if this trend were allowed to develop too far, “contract law would drown in a sea of tort.”

Defense lawyers have a potent weapon at their command in defending their clients’ negotiated allocations of risk: the economic loss rule. Economic losses are frustrated commercial expectations: “it wasn’t worth what I paid,” or “it broke,” or “I didn’t make as much money as I expected.” The economic loss rule, simply stated, holds that where a plaintiff has suffered nothing but economic losses, tort claims are barred, and he or she must sue, if at all, on the contract.

Last week, the Tenth Circuit reaffirmed this important doctrine in Mountain Bird, Inc. v. Goodrich Corporation [pdf]. There, plaintiff purchased an aircraft which included an optional de-icing system which the manufacturer said was “certified for flight in icing conditions.” The plaintiff added an additional after-market de-icing system, also manufactured by the same defendant. Five years after it was purchased, the aircraft crashed, allegedly due to ice accumulating on the wings. The owner of the aircraft sued in tort, seeking to recover the value of the plane.

On appeal, plaintiffs argued that their claim came under an exception to the economic loss rule for expert services. Plaintiff offered an affidavit saying that it wouldn’t have bought the plane if the defendant hadn’t issued a form saying it was certified for flight in icing conditions.

The Court disagreed, pointing out that the defendant hadn’t claimed to be a certification expert:

[W]e 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 regulation. To do so would permit the special relationship exception to swallow the rule by allowing tort claims against every manufacturer of a regulated product.

The plaintiffs pointed to a controversial line of California cases imposing tort duties based on a series of policy-based factors, including the extent to which the transaction was intended to affect plaintiff, the closeness of the connection between the defendant’s conduct and the plaintiff’s injury, and the moral blameworthiness of defendant’s conduct. The Court declined to apply these cases where the parties’ relationship was already governed by a contract.

In the forty-five years since the economic loss rule was first stated by the California Supreme Court, the doctrine has spread to nearly every state in the country. However, the contours of the doctrine vary somewhat from state to state.

In 2004, the American Law Institute announced that as part of its ongoing work on the third generation of Restatements, it would undertake the “Restatement (Third) of Torts: Economic Torts and Related Wrongs.” Unfortunately, that project has been on hold since 2007, when the Reporter resigned. Given that the conflict between contract and tort continues every day in commercial litigation across the country, it is time for work on the ALI’s proposed Restatement to resume. In the meantime, when looking for a tool to weed out tort claims from a business dispute, defense counsel should keep the economic loss rule firmly in mind.