State Farm Mutual Automobile Insurance Company v. Ford Motor Company
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SUPREME COURT OF WISCONSIN Case No.: 97-2594 Complete Title of Case: State Farm Mutual Automobile Insurance Company, Plaintiff-Appellant, v. Ford Motor Company, Defendant-Respondent, Neenah Menasha Ford, ABC Company, a fictitious company, and ABC Insurance Company, a fictitious insurance company, Defendants. ON CERTIFICATION FROM THE COURT OF APPEALS Opinion Filed: Submitted on Briefs: Oral Argument: Source of APPEAL COURT: COUNTY: JUDGE: JUSTICES: Concurred: Dissented: May 4, 1999 November 11, 1998 Circuit Outagamie Dee R. Dyer Abrahamson, C.J., dissents (opinion filed) Bradley, J., joins Not Participating: ATTORNEYS: For the plaintiff there were briefs by Patrick J. Coffey and Menn, Nelson, Sharratt, Teetaert & Beisenstein, Ltd., Appleton and oral argument by Patrick J. Coffey. For the defendant respondent there was a brief by Peter J. Hickey, Jeffrey T. DeMeuse and Everson, Whitney, Everson & Brehm, Green Bay and Karen Kies DeGrand, Mark M. Burden and Donohue, Brown, Mathewson & Smyth, Chicago, IL and oral argument by Terry E. Johnson of Peterson, Johnson & Murray, S.C., Milwaukee. NOTICE This opinion is subject to further editing and modification. The final version will appear in the bound volume of the official reports. No. 97-2594 STATE OF WISCONSIN : IN SUPREME COURT FILED State Farm Mutual Automobile Insurance Company, MAY 4, 1999 Plaintiff-Appellant, Marilyn L. Graves Clerk of Supreme Court Madison, WI v. Ford Motor Company, Defendant-Respondent, Neenah Menasha Ford, ABC Company, a fictitious company, and ABC Insurance Company, a fictitious insurance company, Defendants. APPEAL from an order of the Circuit Court for Outagamie County, Dee R. Dyer, Circuit Court Judge. ¶1 WILLIAM A. BABLITCH, J. It Affirmed. is established law in Wisconsin that the economic loss doctrine bars tort recovery for economic loss suffered by commercial entities. This case requires us to determine whether the economic loss doctrine also applies to consumer transactions. The circuit court concluded that the economic loss doctrine bars tort damages for purely economic losses in consumer transactions. Automobile Insurance Company (State Farm) State Farm Mutual requests that this court reverse the order of the circuit court entering summary judgment in favor of Ford Motor Company (Ford) on State Farm s negligence and strict liability claims to recover payments it 1 No. 97-2594 made to its insured for an economic loss. Because we conclude that the same policies that justify applying the economic loss doctrine to commercial transactions apply with equal force to consumer transactions, we hold that the economic loss doctrine applies to claims for circuit consumer purely court s transactions economic order and loss. bars State Therefore, Farm s we entering summary judgment of appeal, the tort affirm in the favor of Ford. ¶2 For purposes dispute. Ford this facts are not in In 1992 James Renberg (Renberg) purchased a used 1990 Bronco 4x4 dealership. as Along is with from the Neenah-Menasha vehicle, Ford, Renberg a Ford purchased extended service warranty from Ford for the vehicle. an Renberg also insured the vehicle with State Farm. ¶3 to On July 31, 1996, Renberg drove his 1990 Ford Bronco work. At the end of his shift, Renberg approached his vehicle to find that a fire had occurred within the vehicle although rolled the up. vehicle was Unfortunately still locked for Renberg, and the his windows extended were service warranty had expired. Renberg filed a claim with his insurance company, State Farm. State Farm conducted an investigation of Renberg s claim and concluded that the fire in Renberg s vehicle was caused by a defective ignition switch. On August 8, 1996, State Farm paid $11,602.40 pursuant to its contract of insurance with Renberg, an amount which represented the fair market value of the vehicle. 2 No. 97-2594 ¶4 In September 1996, Renberg received a recall notice from Ford stating that 1988 through 1991 model Bronco and Fseries trucks could develop switch, causing steering a overheating, column. The short smoke recall circuit and notice in the possibly stated ignition fire that in the the short circuit could develop when the vehicle was in use or unattended. ¶5 State thereafter Farm initiated was notified this of subrogation this recall action notice against recover money it had paid to its insured, Renberg. and Ford to State Farm based its action on theories of negligence, strict liability and breach of contractual warranties. State duties Farm including later express voluntarily and implied dismissed its contractual causes of action because the sales contract for the vehicle was as is and the extended service warranty had expired at the time of the fire. ¶6 as an In its answer Ford raised the economic loss doctrine affirmative defense, asserting that the doctrine bars State Farm s tort claims of negligence and strict liability. Ford also moved for summary judgment. ¶7 The Outagamie County Circuit Court, the Honorable Dee R. Dyer presiding, granted Ford s motion for summary judgment, agreeing that the economic loss doctrine barred State Farm s tort claims. 3 No. 97-2594 ¶8 State Farm appealed. The court of appeals certified the appeal to this court pursuant to Wis. Stat. § (Rule) 809.61 (1993-94),1 and this court accepted the certification. ¶9 damage State Farm s claim to recover the payment it made for only to the Ford Bronco negligence and strict liability. was based on theories of The issue presented by this case, and as certified by the court of appeals, is whether the economic loss doctrine applies to consumer transactions2 to bar tort recovery for purely economic loss. determine whether State Farm may In other words, we must rely on tort theories to recover damages resulting from a defect that causes harm only to the product itself. We conclude that the economic loss doctrine applies to consumer transactions. Therefore, State Farm s tort claims for purely economic loss are barred. ¶10 applies The to question consumer of whether transactions, the economic given the loss doctrine undisputed facts presented by this case, is a question of law that this court reviews Risberg, de novo. Inc., 148 Sunnyslope Wis. 2d Grading 910, 915, v. Miller, 437 N.W.2d Bradford 213 & (1989) 1 All references to the Wisconsin Statutes are to the 199394 version unless otherwise indicated. 2 Neither party argues that the transaction at issue in this case is not a consumer transaction. Consumer transaction is defined as a transaction in which one or more of the parties is a customer for purposes of that transaction. Wis. Stat. § 421.301(13). Customer in turn is defined as a person other than an organization (s. 421.301(28)) who seeks or acquires real or personal property, services, money or credit for personal, family, household or agricultural purposes. Wis. Stat. § 421.301(17). 4 No. 97-2594 (citing First Nat. Leasing Corp. v. Madison, 81 Wis. 2d 205, 208, 260 N.W.2d 251 (1977)). ¶11 Economic loss is 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. Northridge Co. v. W.R. Grace & Co., 162 Wis. 2d 918, 925-26, 471 N.W.2d 171 (1991) (citing Comment, Manufacturers Liability to Remote Purchasers for Economic Loss DamagesTort or Contract?, 114 U. Pa. L. Rev. 539, 541 (1966)). See also, Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis. 2d 395, 401, 573 N.W.2d 842 (1998). Economic loss has also been defined as damages for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profitswithout any claim of personal injury or damage to other property . . .. Note, Economic Loss in Products Colum. L. Rev. 917, 918 (1966). Liability Jurisprudence, 66 See also Daanen, 216 Wis. 2d at 401. ¶12 Because economic losses are those associated with a defective product or a product that does not meet a purchaser s expectations, causing damages that are meant to be addressed through the law of contract and warranties, Wisconsin has joined a majority of jurisdictions which have held that in the commercial transaction setting, damages for economic losses are recoverable only in contract and not in tort. 148 Wis. 2d at 921. See Sunnyslope, This rule has become known as the economic loss doctrine. The economic loss doctrine is a judicially created providing doctrine that 5 a commercial purchaser of a No. 97-2594 product cannot recover from a manufacturer, under tort theories of negligence or strict products liability, damages that are solely economic in nature. ¶13 Three doctrine to historical policies support commercial distinction Daanen, 216 Wis. 2d at 400. applying transactions: between tort the economic loss it maintains the contract law; 1) and 2) it protects parties freedom to allocate economic risk by contract; and 3) it encourages the party best situated to assess the risk of economic loss, usually the purchaser, to assume, allocate or insure against that risk. Daanen, 216 Wis. 2d at 403. Our review of these policies convinces us that each policy applies with equal force to consumer transactions. ¶14 The application first of and the most compelling economic loss policy doctrine to supporting commercial transactions is that it maintains the distinction between tort and contract law. Daanen, 216 Wis. 2d at 403. It is important to maintain this distinction because the two theories serve very different purposes. ¶15 Tort law is rooted in the concept of protecting society as a whole from physical harm to person or property. Daanen, 216 Wis. 2d at 405 (citing East River S.S. Corp. v. Transamerica Delaval, Prosser Keeton and on 476 U.S. Torts 858, § 1 Northridge, 162 Wis. 2d at 933. (5th 866 ed. (1986), 1984)). and Keeton, See also It is society s interest in human life, health, and safety that demands protection against defective products, and imposes a duty upon manufacturers of those products. Daanen, 216 Wis. 2d at 405 (citing Northridge, 6 No. 97-2594 162 Wis. 2d at 933). Tort law was designed to protect people from unexpected losses that amount to an overwhelming misfortune that a person may be unprepared to meet. East River, 476 U.S. at 871 (citing Escola v. Coca Cola Bottling Co., 150 P.2d 436, 441 (Cal. 1944) (concurring op.)). See also Christopher Scott D Angelo, The Economic Loss Doctrine: Saving Contract Warranty Law from Drowning in a See of Torts, 26 U. Tol. L. Rev. 591, 594 (1995). The manufacturer is deemed best able to bear the cost of such unexpected personal injury or property damage since, at least in theory, it can spread its loss throughout society in the form of higher prices. 26 U. Tol. (referring to East River, 476 U.S. at 872). reasonably foreseeable parties; it may L. Rev. at 594 Tort extends to all encompass unforeseen damages as well as those reasonably contemplated because it is circumscribed only by proximate cause. at 947. Tort law provides Note, 66 Colum. L. Rev. redress for safety hazards, Northridge, 162 Wis. 2d at 934, and embodies risk sharing, id. at 938. ¶16 Contract law, on the other hand, is based on obligations imposed by bargain, and it allows parties to protect themselves through bargaining. Daanen, 216 Wis. 2d at 403; Northridge, 162 Wis. 2d at 938; David B. Gaebler, Negligence, Economic Loss, and the U.C.C., 61 Ind. L.J. 593, 593 (Fall 1986) (referring to Tort Theories in Computer Litigation, 38 Rec. A.B. City N.Y. 426, 437 (1983); Keeton, Prosser and Keeton on Torts 655, 656; J. Dooley, Modern Tort Law § 2.06, at 13-14 (1977); G. Gilmore, The Death of Contract 7 87-90 (1974); S. Speiser, C. No. 97-2594 Krause & A. Bertschy, Gans, The Negligent American Performance Law of of Torts Service § 1.20 Contracts (1983); and Economic Loss Doctrine, 17 J. Mar. L. Rev. 249 (1984)). law of contracts is designed to effectuate exchanges the The and to protect the expectancy interest of parties to private bargainedfor agreements. Daanen, 216 Wis. 2d at 404 (citing 1 E. Allen Farnsworth, Contracts § 1.3 at 10-11 (1990)). contract voluntarily assumes a duty to A party to a perform a promise. Daanen, 216 Wis. 2d at 404 n.4 (quoting 1 Thomas M. Cooley, A Treatise on the Law of Torts, § 2 (4th ed. 1932)). The law of contracts seeks to hold parties to their promises, ensuring that each party receives the benefit of his or her bargain. Daanen, 216 Wis. 2d at 404. ¶17 Recovery under contract is limited to the parties to the contract or those for whose benefit the contract was made. Note, 66 Colum. L. Rev. at 947. Damages are limited to those reasonably contemplated by the parties when the contract was made. Id. Contract law provides redress suitability and quality of a product. at 934. for defects in Northridge, 162 Wis. 2d Warranty law permits recovery of economic damages and makes the plaintiff whole by providing recovery for the costs of repair and/or replacement of the product and any consequent loss of profits, thus putting the plaintiff into the position would have been in had the product functioned properly. he 26 U. Tol. L. Rev. at 594 (referring to East River, 476 U.S. at 87273) (footnotes omitted). 8 No. 97-2594 ¶18 Throughout legal history, courts have struggled to find the appropriate boundary between tort and contract. See generally and William Lloyd Prosser, Contract, in SELECTED TOPICS ON THE LAW The OF Borderland of Tort TORTS 380, 380 (The Thomas M. Cooley Lectures, Fourth Series, University of Michigan 1953). This boundary has fluctuated with societal pressures. For example, early in legal history, parties relied on the strict forms of action rather than a distinction between tort and Id. at 380-81; Prosser & Keeton on Torts § 6 at 28. contract. However, there were occasions where the gravamen of the action prevailed over the form of the action. Prosser at 437. This gravamen of the action approach led to the modern distinction between tort and contract law. ¶19 As society became more industrial, it needed to address the influx of mass-produced products reaching the market place, some of which were defective. Initially it was thought necessary to protect struggling and unstable industry against an onslaught Wis. 2d 443, of disastrous 450, 155 claims. N.W.2d 55 Dippel (1967). v. Sciano, Courts 37 protected manufacturers from liability by requiring privity of contract between the Protecting manufacturer the development and ultimate purchaser. industry took of protecting injured plaintiffs. See precedence id. over Id. (referring to Winterbottom v. Wright, 10 M. & W. 109, 152 Eng. Rep. 402 (1842)). ¶20 However, at least by the mid-1960 s society had long since passed from the unsure days of industrial revolution to a settled and affluent society where we must be concerned about 9 No. 97-2594 the just claims of the injured and hapless user or consumer of industrial products. Dippel, 37 Wis. 2d at 450. Thus the boundary between tort and contract law began to move in the direction of protecting purchasers. as a totally separate area Strict liability developed of recovery for such injured purchasers, aimed at recovery for physical injury to both person and other property. 149, 152 (Cal. Seely v. White Motor Company, 403 P.2d 145, 1965) (citations omitted). Imposing strict liability on manufacturers for defective products grew out of a public policy judgment that people needed more protection from dangerous products than is afforded by the law of warranty. East River, 476 U.S. at 866 (citing Seely, 403 P.2d at 149). ¶21 Wisconsin first adopted the rule of strict products tort liability in 1967, specifically adopting the Restatement (Second) Torts § 402A. sells any product in Dippel, 37 Wis. 2d at 459. a defective condition One who unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property . . .. Restatement (Second) Torts § 402A). Id. (quoting Strict liability law rests on the idea that the cost of physical injury to person or other property may be an overwhelming misfortune to the person injured, and a needless one, for the risk of injury can be insured by the manufacturer and distributed among the public as a cost of doing business. Seely, 403 P.2d at 151 (quoting Escola, 150 P.2d at 436 (concurring op.)). 10 No. 97-2594 ¶22 Products liability law was designed to govern the distinct problem of physical injuries resulting from a defective product; it was not designed to undermine contract law or the warranty provisions of Seely, 403 P.2d at 149. its own function. law the Uniform Commercial Code (U.C.C.). The law of contract and warranty has The law of warranty grew as a branch of the of commercial controlling the transactions commercial and aspects was of primarily these aimed at transactions. Seely, 403 P.2d at 150 (citing James, Products Liability, 34 Tex. L. Society, determine Rev. 36 192; Colum. the Llewellyn, L. quality Warranty 341). The Rev. On of the product of rules of promised manufacturer and the quality it must deliver. at 150. Quality, and warranty by the Seely, 403 P.2d When a product does not function as warranted by the manufacturer, that is the manufacturer fails in its end of the bargain, the purchaser may recover contract damages. ¶23 With the acceptance of products liability law, commercial plaintiffs, appreciating the advantages provided by tort law, continued to push the boundary between tort and contract law by filing claims under tort theories of products liability and negligence where their only damages were economic loss; that is, where the defective product caused no personal injury or damage to other property but only damage to itself. See, e.g., Sunnyslope, 148 Wis. 2d at 914-15; East River, 476 U.S. at 861. ¶24 It is clear . . . that if [strict products liability law] development were allowed to progress too far, contract law 11 No. 97-2594 would drown in a sea of tort. East River, 476 U.S. at 866 (citing G. Gilmore, The Death of Contract 87-94 (1974)). It was perceived that plaintiffs were attempting to move the boundary between tort and economic loss developed and contract too doctrine. applied far. The largely Thus, economic as a the response to of the doctrine loss dawn was attempts to extend products liability law too far and into the unintended realm of economic loss. ¶25 The economic loss doctrine maintains the distinction between tort and contract. It recognizes that whether a product meets of a certain level performance or a purchaser s expectations is not a matter of societal interest. Rather, the specific functions of a product are a matter of contract. A manufacturer cannot be held for the level of performance of his products in the consumer s business unless he agrees that the product was designed to meet the consumer s demands. 403 P.2d at 151. Seely, Therefore, contract law . . . is better suited than tort law for dealing with purely economic loss in the commercial arena. omitted). Daanen, 216 Wis. 2d at 404 (citations Contract law permits the parties to specify the terms of their bargain and to protect themselves from commercial risk. Parties use the rules of warranty and contract to determine the quality of the product the manufacturer promises and thereby deliver. ¶26 determine the quality [the manufacturer] must Seely, 403 P.2d at 150. If a plaintiff could recover tort damages for purely economic loss, the manufacturer would be liable even though it 12 No. 97-2594 did not agree wished or that [the expected it product] to do. would perform Seely, 403 as plaintiff P.2d at 150. Society s interest in tort law in protecting purchasers from the overwhelming misfortune attendant with physical injury does not justify requiring the consuming public to pay more for their products so that a manufacturer can insure against the possibility that some of his products will not meet the business needs of some of his [or her] customers. ¶27 Id. at 151. The United States Supreme Court, along with a majority of other courts readily adopted the economic loss doctrine for commercial transactions to bar tort recovery for purely economic loss. See East River, 476 U.S. at 868 (citing Seely, 403 P.2d at 145; Jones & Laughlin Steel Corp. v. Johns-Manville Sales Corp., 626 F.2d, 280, 287 and 13 n.13 (3rd Cir. 1980) (citing No. 97-2594 cases)).3 [A] commercial buyer seeking damages for economic loss resulting from the purchase of defective goods may recover 3 See also Exxon Shipping Co. v. Pacific Resources, Inc., 835 F. Supp. 1195 (D. Haw. 1993) (doctrine precluded tort recovery for damage to bus caused by fire); Bowling Green Mun. Utils. V. Thomasson Lumber Co., 902 F. Supp. 134 (W.D. Ky. 1995) (applying Kentucky law) (doctrine barred tort recovery for damage to utility poles); ERA Helicopters, Inc. v. Bell Helicopter Textron, Inc., 696 F. Supp. 1096 (E.D. La. 1987) (applying Louisiana law) (doctrine precluded recovery for damage resulting from helicopter s defective engine component); Nelson v. Todd s Ltd., 426 N.W.2d 120 (Iowa 1988) (doctrine applied to preclude tort recovery to butcher for spoiled meat caused by defective meat curing agent); Oceanside at Pine Point Condominium Owners Ass n v. Peachtree Coors, Inc., 659 A.2d 267 (Me. 1995) (doctrine precluded recovery for water damage caused by allegedly defective windows); FMR Corp. v. Boston Edison Co., 613 N.E.2d 902 (Mass. 1993) (doctrine precluded tort recovery when power outages caused economic losses); National Union Fire Ins. Co. of Pittsburgh, Pa. V. Pratt & Whitney Canada, 815 P.2d 601 (Nev. 1991) (doctrine precluded tort recovery when airplane engine failed and destroyed entire airplane (may be sudden and calamitous case); Lempke v. Dagenais, 547 A.2d 290 (N.H. 1988) (doctrine precluded recovery for damages to garage); Chemtrol Adhesives, Inc. v. American Mfrs. Mut. Ins. Co., 537 N.E.2d 624 (Ohio 1989) (economic loss doctrine barred tort recovery where dryer, used in manufacturing setting, malfunctioned and damaged only the dryer); Waggoner v. Town & Country Mobile Homes, Inc., 808 P.2d 649 (Okla. 1990) (doctrine applied to bar tort recovery where defect to mobile home caused damage to only the home itself); Boston Inv. Property v. E.W. Burman, Inc., 658 A.2d 515 (R.I. 1995) (doctrine barred recovery for economic damage caused by general contractor); City of Lennox v. Mitek Indus., Inc., 519 N.W.2d 330 (S.D. 1994) (doctrine barred tort recovery for losses caused by defective building trusses); Mid-Continent Aircraft Corp. v. Curry County Spraying Serv., Inc., 572 S.W.2d 308 (Tex. 1978) (doctrine applied to bar tort recovery where defective crankshaft forced airplane to land on rough road, causing damage to its fuselage and wings; implied doctrine is limited to transactions between commercial entities); Maack v. Resource Design & Constr., 875 P.2d 570 (Utah Ct. App. 1994) (doctrine barred tort recovery damage to residence caused by water leakage); Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 374 S.E.2d 55 (Va. 1988) (doctrine barred tort 14 No. 97-2594 . . . under negligence. the U.C.C., but not in strict liability or Spring Motors Distributors v. Ford Motor Co., 489 A.2d 660, 663, 672 (N.J. 1985). ¶28 Wisconsin has similarly followed East River and the majority of courts across the country in applying the economic loss doctrine to commercial transactions and barring tort recovery for purely economic loss in commercial transactions. See Daanen, 216 Wis. 2d at 400 ( even in the absence of privity, the economic loss doctrine bars a remote commercial purchaser from recovering economic losses from a manufacturer under tort theories of strict liability and negligence. ); Northridge, 162 Wis. 2d at 938 (court recognized economic loss doctrine but allowed plaintiffs to recover tort damages for harm caused by asbestos); Sunnyslope, 148 Wis. 2d at 921 ( a commercial purchaser of a product cannot recover solely economic losses from the manufacturer under negligence or strict liability theories, particularly, as here, where the warranty given by the manufacturer specifically precludes the recovery of such damages. ); D Huyvetter v. A.O. Smith Harvestore, 164 Wis. 2d 306, 328, 330, 475 N.W.2d 587 (Ct. App. 1991) (affirmed summary judgment for defendants on strict liability and negligence claims because the plaintiff s damages stemmed from the failure of the product to perform as expected); and Spychalla Farms v. Hopkins Agr. Chem., 151 Wis. 2d 431, 444 N.W.2d 743 (Ct. App. recovery for damage to foundation of house caused by leaking swimming pool). 15 No. 97-2594 1989) (allowed tort damages because the defective product caused physical damage to other property). Recovery for economic loss is intended to protect purchasers from losses suffered because a product failed in its intended [or expected] use. Recovery for economic loss necessarily focuses on the bargain struck between the parties; warranty law is premised on protection of the bargain. Economic loss is defined, as we stated previously, as damages for inadequate value, because the product is inferior and does not work for the general purpose for which it was manufactured or sold. Liability for economic loss is based on express or implied representations manifesting the manufacturer s or seller s intent to guarantee the product. Prosser and Keeton on Torts, th secs. 95-95A, p. 677 (5 ed. 1984). Northridge, 162 Wis. 2d at 933-34. See also Sunnyslope, 148 Wis. 2d at 920-21. ¶29 We conclude that the policy of maintaining the distinction between tort and contract applies with equal force to consumer established transactions. that a As discussed manufacturer has above, no duty it to is well- another commercial entity to prevent a product from injuring itself. Daanen, 216 Wis. 2d at 406. 871. See also East River, 476 U.S. at However, there is no principled reason to hold that same manufacturer to a different standard when it sells its product to an individual consumer. Whether the purchase is a commercial or consumer transaction, the specific functions of the product are a matter of contract. transaction, the specific Whether a commercial or consumer functions of the product and the purchaser s expectations are the meat and drink of contract law. Edward T. O Donnell, et al., On the Differences Between 16 No. 97-2594 Blood and Red Ink: A Second Look at the Policy Arguments for the Abrogation of the Economic Loss Rule in Consumer Litigation, 19 Nova L. Rev. 923, 944 (Spring, 1995). Just as contract law allows commercial parties to bargain and protect themselves from risk, so too does contract law allow consumer parties to protect themselves. that the Contract law most appropriately enforces the duties parties contracts. imposed upon themselves by entering into Whether in a commercial or consumer context, the distinction between tort and contract should not be eroded. ¶30 In this case, Renberg purchased the Bronco as is, an agreement which likely affected the price of the vehicle. Ford did not warrant that it would be free from defects, such as a faulty ignition service warranty certain price. switch. which Renberg provided also purchased certain an protections extended for a Were Renberg or State Farm, as his insurer, allowed to recover tort damages for purely economic lossthe very type of loss meant to be covered by these contractsthe contracts would be rendered meaningless. Ford would be liable though it did not agree that the Bronco would perform as Renberg expected or wished, and though the service warranty had expired. The manufacturer would be liable for damages of unknown and unlimited scope. ¶31 This appreciating Seely, 403 P.2d at 150-51. case the more illustrates congenial that plaintiffs, environment, still provided to consumers by tort law, Spring Motors, 489 A.2d at 668, continue to push the boundary between tort and contract by filing tort actions for purely economic loss. 17 However, whether a consumer No. 97-2594 or commercial plaintiff, if tort law were allowed to provide tort relief for purely economic loss, contract law would drown in a sea of tort. See East River, 476 U.S. at 866. Because tort and contract serve entirely different purposes, maintaining the distinction between the two theories is important, whether in commercial or consumer transactions.4 4 The dissent argues that the economic loss doctrine should not apply in this case because the defective product, the Ford Bronco, posed an unreasonable danger to person and property. Dissent at 2-3. The dissent asserts that society should be protected from the risk of such defective products through strict products liability law even when the loss is only economic. We respectfully disagree. The dissent s concern regarding safety was recently addressed by the Illinois Supreme Court. Trans States Airlines v. Pratt & Whitney Canada, 682 N.E.2d 45, 53 (Ill. 1997). The Trans State court applied the economic loss doctrine over concerns regarding safety for two reasons. First, when a product damages only itself, the very harm meant to be addressed by products liability law is not realized. Id. Thus, products liability safety concerns are not compromised. Id. Second, despite applying the economic loss doctrine to situations in which there is damage only to the product itself, strict liability and negligence law nonetheless continue to adequately protect damage to other property and personal injury. Id. Where the product causes personal injury or other property damage, the manufacturer may yet be subject to liability in tort. Because no manufacturer can predict with any certainty that the damage his unsafe product causes will be confined to the product itself, tort liability will continue to loom as a possibility. Therefore, in our view, the incentive to build safe products is not diminished. 18 No. 97-2594 ¶32 economic The second loss doctrine policy in supporting the application commercial setting is of that the it protects parties freedom to allocate economic risk by contract. Daanen, 216 Wis. 2d at 403. As we stated earlier, economic loss is loss suffered in the value of a product because it is defective; that is, it is of inferior quality and it does not work for the purposes for which it was manufactured and sold. Northridge, 162 Wis. 2d at 925-26. Economic risk is the risk that such a loss might occur. ¶33 Contract law, the law of warranty and the Uniform Commercial Code are designed to allow the parties to allocate the risk of product failure. Sunnyslope, 148 Wis. 2d at 920- 21. Parties can set the terms of their agreements, East River, 476 U.S. at 872-73, and thereby contract performance and the purchaser s expectations. regarding product The U.C.C. allows manufacturers to limit liability by disclaiming warranties or restricting remedies, in which case the purchaser pays less for the product. East River, 476 U.S. at 873. provides built-in limitations, bargain. Id. at 874. derived Contract law also from the parties For example, consequential damages such as lost profits, must be a foreseeable result of a breach of the contract. Id. (citing Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854)). Courts should assume that parties factor Id. We agree with the reasoning of the Illinois Supreme Court. The looming and unpredictable threat of tort liability for personal injury and damage to other property caused by a defective product continues as an incentive to manufacturers to produce safe products. 19 No. 97-2594 risk allocation into their agreements . . .. Daanen, 216 Wis. 2d at 408 (citation omitted). ¶34 Although society, through products liability law, has imposed a duty on manufacturers to protect against the risk of foreseeable difficult personal for purchaser s that not property economic to damage, it assess a expectations. is more commercial Daanen, 216 This is particularly true when the purchaser inform expectations. or manufacturer disappointed Wis. 2d at 410. does injury the manufacturer Seely, See 403 of P.2d his at or her 150. specific Although a manufacturer cannot predict failures as its product is used by a purchaser, it is able to limit risk by contract. Wis. 2d at 411-12. Daanen, 216 Forcing commercial parties to negotiate and allocate risk gives manufacturers certainty in pricing goods, since they can more potential damages. reliably predict future liability and Id. at 412 (citing East River, 476 U.S. 873). ¶35 Allowing tort recovery for economic loss would render contractual protections a nullity and destroy any freedom to allocate economic effect, would allocate, (citing be risk by deprived contract. of and limit liability. Note, 66 Colum. L. Rev. their [M]anufacturers, freedom Daanen, at 962). 216 to in negotiate, Wis. 2d Purchasers at 408 would essentially receive full warranty protections against economic risk without ever having to negotiate or pay for such warranty. See Daanen, 216 Wis. 2d at 410. Purchasers would be encouraged to forego purchasing a warranty or insurance and would instead 20 No. 97-2594 rely on tort remedies for their warranty protection against economic risk. Daanen, 216 Wis. 2d at 408 (citing Dakota Gasification Co. v. Pascoe Bldg. Sys., 91 F.3d 1094, 1100 (8th Cir. 1996)). Purchasers would gain much more than that for which they bargained or paid in the purchase price. Daanen, 216 Wis. 2d at 409. ¶36 If tort damages were allowed for economic loss the manufacturer would be liable for risks for which it neither Daanen, 216 Wis. 2d at 410-11. bargained nor expected. See also Sunnyslope, 148 Wis. 2d at 921; Seely, 403 P.2d at 150-51. Manufacturers could not invoke any contractual disclaimer or limitation of liability against the purchaser, as bargained. For example, in Seely, the manufacturer, White Motor Company, could have sold the truck as is and accordingly, not made any promises regarding the function of the truck. If tort law applied to economic loss, such an attempt to limit liability (for which the purchaser would be meaningless. purchaser s pay a lower price), If tort damages were allowed for the sold the anyway; the manufacturer would bear the entire risk of economic loss. See product as economic would probably is, loss, the though purchaser the manufacturer would recover Daanen, 216 Wis. 2d at 407 (citing Note, 66 Colum. L. Rev. at 965). ¶37 allows Reliance and on protects the both economic the loss doctrine, manufacturer s freedom to allocate economic risk by contract. Wis. 2d at 407. and however, purchaser s See Daanen, 216 The economic loss doctrine encourages parties 21 No. 97-2594 to negotiate for warranty protection or to take steps, such as purchasing insurance, interests. to Id. at 413. protect their purely economic It is more appropriate to enforce a bargain than to allow an end run around a contract by using tort principles. Id. at 407. Subject to requirements of good faith and conscionability, manufacturers can include disclaimers and limit their liability. lower price. In exchange, purchasers might pay See id. at 407-08; Wis. Stat. § 402.719(3). economic loss doctrine holds parties to their bargain. a The There is no reason to intrude into the parties allocations of the risk of economic bargains. ¶38 loss and to extricate the parties from their Daanen, 216 Wis. 2d at 410. The policy of protecting commercial parties freedom to allocate economic risk by contract applies with equal force to consumer transactions. In the present allocated the risk of product failure. case the parties Renberg purchased the Ford Bronco as is according to the contract of sale. Ford made no promises regarding the vehicle s performance and Renberg likely paid less than he would have were it guaranteed. also purchased an extended warranty. Renberg He paid a certain price in exchange for the protections provided by the warranty. With both the contract of sale and the extended service warranty, Renberg received a certain level of protection against economic loss in exchange for a certain price. amount of economic risk. He also assumed some Had he been willing to pay more, he could have received additional protections. 22 No. 97-2594 ¶39 Were Renberg or State Farm, as his insurer, allowed to recover tort damages for purely economic lossthe very type of loss meant to be covered by contractsthe contracts would be meaningless. Renberg and his insurer would receive full warranty protection against purely economic risk in the form of tort damages warranty. without having negotiated or paid for that Renberg would gain much more than that for which he bargained or paid in the purchase price. If Renberg were allowed to recover tort damages for his purely economic loss, Ford would be stripped of its ability to limit liability by contract. Ford, which economic losses by extended warranty, would thought it means of be limited contract the liable its of for liability sale and the for damages for which it neither bargained nor expected. ¶40 should equal State not Farm apply bargaining argues to that consumers power with the because economic loss consumers manufacturers. do doctrine not However, have [t]he buyer who is not a corporation is not necessarily so poor or unsophisticated as suggest. 19 situations where the Nova L. the sacred Rev. texts at 935. parties of products Although bargaining liability there power is may be extremely disparate, relative bargaining power is not the touchstone of the economic loss rule, nor even an element. Id. at 957 (in footnote citing Spring Motors, 489 A.2d at 670-71; Greenman v. Yuba Power Products, Inc., 377 P.2d 897 (Cal. 1963)). parity is not required bargaining power. for a finding of Perfect substantially equal Alloway v. General Marine Ind., 695 A.2d 23 No. 97-2594 264, 268 (N.J. 1997). In fact, the law of warranty and the U.C.C. are not limited to parties with equal bargaining power. See Seely, 403 P.2d at 151. Such a limitation is not supported by the language or history of the sales act and is unworkable. Id. ¶41 To entities but apply not the economic to consumers loss doctrine would mean to one commercial rule for businesses and another for those who buy products from these businesses. The equilibrium could not be stable. Rev. at 944 (footnote omitted). 19 Nova L. Such a rule would assume that commercial entities always have equal bargaining power with each other and that consumers never have equal bargaining power with the manufacturer or producer of the good. This is a naïve and over-simplified approach. ¶42 In the case before the court, the consumer, Renberg, purchased the vehicle for his personal use. He could have just as easily purchased the same vehicle for his small painting or heavy-duty hauling business, as in Seely. Whether the truck was for individual use or for a business, the same scenario could have occurredRenberg returning to his locked vehicle after completing a job, and finding that a fire had occurred in his truck. Under the approach advocated by State Farm, Renberg as an consumer purchaser, would not be barred by the economic loss doctrine from recovering tort damages. However, Renberg as a small business owner, that is, as a commercial purchaser, would not be able to recover in tort because of the economic loss doctrine. In reality, Renberg as a small business owner has no 24 No. 97-2594 more equality in bargaining power than does Renberg as an situations in individual. ¶43 We recognize that there may be some which the disparate bargaining position between the parties is so great that it would be unconscionable to hold a party to such a contract. This, however, is not one of those cases. There is nothing in the record to indicate that Renberg was forced to purchase the vehicle as is. He could have purchased another vehicle that came with warranties. It is also likely that he had several options in extended warranties available to him. ¶44 Whether in a commercial or consumer setting, there is no reason to intrude into the parties allocations of the risk of economic bargains. loss and to extricate the Daanen, 216 Wis. 2d at 410. parties from their Because the consumer can allocate his or her economic risk by contract, the policy of protecting parties freedom to allocate risk through contract applies equally to consumers as to commercial parties. ¶45 The third policy that supports applying the economic loss doctrine to commercial transactions is that it encourages the party best situated, usually the purchaser, allocate or insure against economic risk. at 403. economic to assume, Daanen, 216 Wis. 2d The purchaser is in the best position to plan for loss because when a defective product injures only itself, the purchaser, not the manufacturer, stands to lose the value of the product, risks the displeasure of its customers who find that the product does not meet their needs, or experiences increased costs in performing a service. 25 . . . Losses No. 97-2594 like these can be insured. East River, 476 U.S. at 871-72 (citing 10A G. Couch, Cyclopedia of Insurance Law §§ 42:38542:401, 42:414-417 (2d ed. 1982); 7 E. Benedict, Admiralty, Form No. 1.16-7, p. (7th 1-239 Ed. 1985); 5A J. Appleman & J. Appleman, Insurance Law and Practice § 3252 (1970)). ¶46 used Only the buyer knows how and where the product will be and devices whether or it will components. be 19 used in Nova L. conjunction Rev. at with 939. other Because purchasers know their own needs and expectations, they are best suited to protect themselves against economic loss. The manufacturer or intermediate seller usually does not know these things and if it does, its information will come from the buyer. As a result, the seller is unable to predict and protect Id. against the severity of economic loss to a particular purchaser. Id. The purchaser is in a better position to understand the impact of disappointed defective product. economic expectations Daanen, 216 Wis. 2d at 411. caused by a A purchaser can anticipate and assume, allocate, or insure against this risk by agreeing to a certain contract of warranties or purchasing insurance. ¶47 This policy of sale, contracting through Id. at 412. encouraging purchasers to assume, allocate or insure against economic loss really distills to whether the consuming public as a whole should bear the cost of economic losses sustained by those commercial purchasers failed to bargain for adequate contract remedies. who Daanen, 216 Wis. 2d at 412 (citing Casa Clara v. Charley Toppino and Sons, 620 So.2d 1244, 1246 (Fla. 1993)). 26 If a purchaser could recover No. 97-2594 tort damages for purely economic loss, regardless of any contractual arrangements between the parties, the manufacturer would be liable in tort and therefore forced to assume, allocate or insure against economic risk. A manufacturer would pass this cost on, forcing the consuming public to bear the very cost the commercial purchaser contractually agreed to forego in exchange for a lower price. Daanen, 216 Wis. 2d at 412. Allowing tort damages for purely economic loss would transform all manufacturers into insurers with seemingly unlimited tort liability. Consumers would then be forced to subsidize or pay premiums for commercial purchasers who choose not to assume, allocate, or insure against their risk of economic loss. The cost of tort protection for economic expectations ultimately would be borne by society. We do not think that the consuming public as a whole should bear the cost of economic losses sustained by those commercial purchasers who fail to bargain for adequate contract remedies. Id. at 412-13. ¶48 express In See also East River, 476 U.S. at 872, 874. Daanen, warranty the or manufacturer s warranty. to do so. plaintiff that the could have distributor requested an extend the Daanen, 216 Wis. 2d at 409. It failed The plaintiff also could have purchased insurance to guard against equipment failure. failed to do so. Id. at 412. It apparently Therefore, this court concluded that Daanen could not now benefit from recovering tort damages when it had foregone these contractual protections, probably in exchange for a lower price. ¶49 The policy of encouraging the party best situated, usually the purchaser, to assume, allocate or insure against 27 No. 97-2594 economic loss applies with equal force to consumer transactions. Whether in commercial or consumer transactions, if tort damages were allowed for purely economic losses, manufacturers would become insurers with seemingly unlimited tort liability. Daanen, 216 Wis. 2d at 412. See As discussed at oral argument in this case, if tort damages were recoverable for purely economic loss, warranties if offered at all, would protection to the full extent of tort law. likely add the increased cost of have to provide Manufacturers would providing such expansive protection to their product, thereby causing society as a whole to pay for the economic losses of a handful who chose not to bargain for consuming products adequate public so contract [should that a not remedies. have] manufacturer to can See pay id. more insure [T]he for their against the possibility that some of his products will not meet the business needs of some of his customers. Seely, 403 P.2d at 151. Purchasers, whether commercial entities or consumers, are in a better position disappointed to assess economic and protect expectations, and themselves therefore against purchase warranties or insurance accordingly. ¶50 In the present case, Renberg purchased the Ford Bronco as is though it is likely he could have purchased a different vehicle with warranties. As we have noted several times, it is likely that this contract of sale affected the purchase price. Renberg also purchased an extended service warranty. Again, there were likely several options available, some providing more coverage, or for a longer period of time. 28 Finally, Renberg No. 97-2594 entered into an insurance contract with State Farm, for which he paid a premium in exchange for a certain level of protection from damages. It is likely that he could have received greater protection had he been willing to pay a higher premium. Renberg made his decisions based on his personal knowledge regarding the use of his vehicle and his comfort level with risk. fulfilled his end of the insurance contract by Renberg paying his premiums, and State Farm fulfilled its end of the bargain by paying Renberg s claim regarding the damages to his Ford Bronco. ¶51 In sum, Renberg was able to contractually protect himself. As illustrated by this case, the third policy that justifies applying transactions, the that economic it loss encourages doctrine commercial party the to best situated, usually the purchaser, to assume, allocate, or insure against economic risk, applies with equal force to consumer transactions. ¶52 justify For the applying reasons the stated economic above, loss the doctrine policies to that commercial transactions apply with equal force to consumer transactions. Whether a commercial or consumer transaction, it is important to maintain the distinction between tort and contract because the two theories serve very different purposes: tort law to protect societal interests in human life, health contract law to protect the parties bargain. and safety, and Second, whether a commercial or consumer transaction, it is important to protect the parties freedom to allocate 29 economic risk by contract. No. 97-2594 Allowing tort recovery for economic loss would allow an end run around the bargain and provide recovery for which the parties neither bargained nor expected. Finally, whether a commercial or consumer transaction, it is important to encourage the party best situated, usually the purchaser, to assume, allocate, or insure against economic risk. Only the purchaser, not the manufacturer, can appreciate the severity of the consequences of an economic loss and thereby contract accordingly. Our review of the three policies that justify applying the economic loss doctrine to commercial transactions convinces us that these policies apply with equal force to consumer transactions. ¶53 A majority of courts in other jurisdictions have also applied the economic loss doctrine to consumer transactions by relying on the same polices used by this court to apply the 30 No. 97-2594 economic loss doctrine to commercial transactions.5 For example, like this court in Sunnyslope and Daanen and the United States 5 See Wellcraft Marine v. Zarzour, 577 So.2d 414 (Ala. 1990) (under Alabama's extended manufacturer's liability doctrine, no recovery for damage to product itself regardless of whether product is sold to consumer or commercial buyer); Pratt & Whitney Canada, Inc. v. Sheehan, 852 P.2d 1173 (Alaska 1993) (distinguishing between consumers and commercial buyers is problematic and this court rejected such distinction); Danforth v. Acorn Structures, Inc., 608 A.2d 1194 (Del. 1992) (rejected homeowner s contention that economic loss doctrine should not apply to consumers purchasers as opposed to commercial purchasers. Such a rule would defeat the legislative intent in enacting the Uniform Commercial Code); Casa Clara Condominium Assoc., Inc. v. Charley Toppino and Sons, Inc., 620 So.2d 1244 (Fla. 1993); Chrysler Corp. v. Taylor, 234 S.E.2d 123 (Ga. Ct. App. 1977) (purchaser of car must sue under warranty law, not strict liability or negligence, for loss of benefit of the bargain); State Farm Mutual Automobile Ins. Co. v. Ford Motor Company, 572 N.W.2d 321 (Minn. Ct. App. 1997) (economic loss doctrine applies to consumers; fire damage to automobile resulted in purely economic loss and recoverable only in contract); Alloway v. General Marine Industries, 695 A.2d 264, 270-71 (N.J. 1997); Jandreau v. Sheesley Plumbing & Heating Co., 324 N.W.2d 266 (S.D. 1982) (regarding privity, absent the commercial or consumer purchaser s ability to show reliance on express representations by the remote seller, most courts hold that a non-privity buyer cannot recover for direct economic loss on either an express or an implied warranty theory); Ritter v. Custom Chemicides, Inc., 912 S.W.2d 128 (Tenn. 1995) (the consumer does not have an action in tort for economic damages caused by product s failure to protect tomato crop from frost damage as promised on the label); Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77 (Tex. 1977) (strict liability inapplicable to action by purchaser of mobile home to recover economic losses); Paquette v. Deer & Co., 719 A.2d 410 (Vt. 1998) (no distinction in application of economic loss doctrine between consumers and commercial entities; reduced value in motor home because of defective wiring and related problems is purely economic loss and recoverable only in contract); Berschauer/Phillips Construction Co. v. Seattle School District No. 1, 881 P.2d 986 (Wash. 1994) (applied the economic loss doctrine to a general contractor, a sophisticated consumer, because the legislature deprived the unsophisticated consumer of economic damages under the WPLA). 31 No. 97-2594 Supreme Court in East River, the Delaware Supreme Court relied on the first policy, the distinction between tort and contract law, to reject an exception to the economic loss doctrine for consumers. The rationale underlying the economic loss doctrine is best understood by considering the distinct functions served by tort law and contract law. . . . Productsliability tort law has evolved to protect the individual and his property from the risk of physical harm posed by dangerous products. Contract-warranty law has evolved to protect a different interest: viz., the bargained for expectations of both contracting parties and other foreseeable users who suffer loss when a product fails to meet the qualitative expectations of a consumer, i.e., when a product is unfit for its intended use. Danforth v. Acorn Structures, Inc., 608 A.2d 1194, 1195-96 (Del. 1992) (citations and footnotes omitted). See also Casa Clara, 620 So.2d at 1246-47. ¶54 second Courts in other jurisdictions have also relied on the policy, consumers must recognizing be free to that, allocate like risk commercial by parties, contract. The [economic loss] rule remains the same, regardless of the nature of the customer: A defective product is a loss of the benefit of the bargain which is a contract rather than a tort action. Wellcraft Marine v. Zarzour, 577 So.2d 414, 418 (Ala. 1990) (quoting Dairyland Ins. Co. v. General Motors Corp., 549 So.2d 44, 46 (Ala. 1989)). The availability of warranties, statutory duties imposed on sellers, the consumer s ability to inspect goods before purchase and protections to the consumer. to bargain over price all provide See Casa Clara, 620 So.2d at 1247. 32 No. 97-2594 [T]hese protections must be viewed as sufficient when compared with the mischief that could be caused by allowing tort recovery for purely economic losses. ¶55 Other jurisdictions Id. (footnote omitted). have also applied the economic loss doctrine to consumer transactions because, like the third policy, the party best situated to assess the risk of economic loss, usually the purchaser, should be encouraged to assume, allocate or insure against that risk. against the risk of the purchase of [M]any buyers insure defective goods either directly through the purchase of an insurance policy, . . . or through insurance provided indirectly through many credit card purchases. ¶56 Alloway, 695 A.2d at 275. State Farm points to jurisdictions where the court did not apply the economic loss doctrine to consumer transactions. We are not persuaded by these cases. First, the courts which have held the economic loss doctrine does not apply to consumers are in the minority. See Alloway, 695 A.2d at 271 (referring to Sharon Steel Corp. v. Lakeshore, Inc., 753 F.2d 851, 855-56 (10th Cir. 1985) (regarding New Mexico law); Cova v. Harley Davidson Motor Co., 182 N.W.2d 800, 804 (Mich. App. 1970); City of LaCrosse v. Schubert, Schroeder & Assoc., 72 Wis. 2d 38, 240 N.W.2d 124, 127 (1976) [overruled by Daanen, 216 Wis. 2d at 416]; Lloyd F. Smith Co. v. Den-Tal-Ez, Inc., 491 N.W.2d 11, 17 (Minn. 1992)). ¶57 Also, the strength of this minority group of cases is questionable because many of the cases on which they relied to not apply the economic loss doctrine to consumers have since 33 No. 97-2594 been overruled or questioned. For example, in Thompson v. Nebraska Mobile Homes Corp., 647 P.2d 334 (Mont. 1982) the court did not apply transaction, the economic reasoning loss that doctrine the consumer to a had an bargaining position with respect to the manufacturer. 647 P.2d at 337. consistent with Wisconsin, relying The cases on court in City noted several of that its other LaCrosse, consumer Thompson, holding states 72 unfair was including Wis. 2d at 38. However, LaCrosse was first limited by this court in Sunnyslope, 148 Wis. 2d at 917, in 1989, and then expressly overruled in 1998 in Daanen, 216 Wis. 2d at 416. the dissent s reliance on Similarly, State Farm and Thompson stands on shaky ground because most of the cases relied on by the Thompson court have been questioned or limited in some fashion.6 ¶58 Further Restatement support (Third) of for Torts: our holding Products 6 is found Liability § 21 in the (1998) Following is the history of cases relied on in Thompson v. Nebraska Mobile Homes, Corp., 647 P.2d 334, 337 (Mont. 1982): Hiigel v. General Motors Corp., 544 P.2d 983 (Colo. 1975) was limited by Richard O Brien Cos. V. Challenge-Cook Bros. Inc., 672 F. Supp. 466 (D. Colo. 1987); Santor v. A and M Karagheusian, Inc., 207 A.2d 305 (N.J. 1965) was questioned in East River Steamship Corp v. Transamerica Delaval, Inc., 476 U.S. 858, 870 (1986); City of La Crosse v. Schubert, Schroeder and Associates, 72 Wis. 2d 38, 240 N.W.2d 124 (1976) was overruled by Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis. 2d 394, 416, 573 N.W.2d 842 (1998); Superwood Corp. v. Siempelkamp Corp., 311 N.W.2d 159 (Minn. 1981) was overruled by Hapka v. Paquin Farms, 458 N.W.2d 683 (Minn. 1990). Only Gautheir v. Mayo, 258 N.W.2d 748 (Mich. App. 1977) and C&S Fuel, Inc. v. Clark Equipment Co., 524 F. Supp. 949 (E.D. Ky. 1981), both cited in Thompson as support for not extending the economic loss doctrine to consumers, have no negative history. 34 No. 97-2594 which follows the majority of jurisdictions and excludes tort recovery for damage only to the defective product itself. When a more party suffers pure economic loss recovery is appropriately determined by contract law and the remedies set forth in the U.C.C.. Liability § 21 cmt. a. Restatement (Third) Torts: Products When a product defect results in harm to the product itself, the law governing commercial transactions sets forth a comprehensive scheme governing the rights of the buyer and seller. ¶59 Id. cmt. d.7 Additional support for our holding is found in the protections afforded consumers under the U.C.C., the lemon law, warranties, and insurance. ¶60 The legislature adopted the U.C.C. in 1963, effective July 1, 1965. See Ch. 158, Laws of 1963. Once the Legislature acts, respect for it as a co-equal branch of government requires courts to consider the legislation in determining the limits of judicial action. Alloway, 695 A.2d at 268 (citing Spring Motors, 489 A.2d at 671; see also Danforth, 608 A.2d at 1200-01 (declining actions)). to displace [T]he provisions legislative 7 of the protections U.C.C. with granted by tort the The dissent argues that an argument can be made for applying products liability law in this case. Dissent at 4. Although the Restatement recognizes that there is a plausible argument for relying on strict products liability law when a product poses a danger, contrary to the dissent s implication, dissent at 4, the Restatement nonetheless concludes that the Uniform Commercial Code provides the appropriate remedy when a plaintiff suffers only economic loss. Restatement (Third) Torts: Products Liability § 21 cmt. d at 295, cmt. a at 293. 35 No. 97-2594 Uniform Commercial principles and Code are recovery. not to be buttressed Sunnyslope, 148 (citing Spring Motors, 489 A.2d at 673). by Wis. 2d at tort 916 The U.C.C. provides a comprehensive system for compensating consumers for economic loss arising from the purchase of defective products. Alloway, 695 A.2d at 268. ¶61 product Protection injuring against only damages itself is caused the purpose implied warranties provided for in the U.C.C. 476 U.S. at 872. by of a defective express and See East River, When a product fails to operate as warranted or as a consumer expected, the proper avenue for relief is a breach-of-warranty claim. Id. Or, if the customer prefers, it can reject the product or revoke its acceptance and sue for breach of contract. 612). Id. (citing U.C.C. §§ 2-601, 2-608, 2- Regardless, the U.C.C. has built-in protections for both the purchaser and manufacturer. ¶62 Purchasers are able to recover repair costs and lost profits, thus putting the purchaser in the same position as if the product functioned properly. 873. See East River, 476 U.S. at The expectation damages available in warranty for purely economic loss give a plaintiff the full benefit of its bargain by compensating (citing Fuller for & forgone Perdue, business The opportunities. Reliance Interest in Id. Contract Damages: 1, 46 Yale L.J. 52, 60-63 (1936); R. Posner, Economic Analysis of Law § 4.8 (3d ed. 1986)). ¶63 The manufacturers. U.C.C. By terms also of provides a 36 contract, protections a manufacturer for can No. 97-2594 restrict its liability, within reason, by disclaiming warranties or limiting remedies. See East River, 476 U.S. at 873. exchange, the purchaser likely pays a lower price. Id. In The limitation in a contract action comes from the agreement of the parties and the requirement that consequential damages, such as lost profits, be a foreseeable result of the breach. Id. at 874 (referring to Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854)). ¶64 State Farm cites Wis. Stat. § 401.102 for its argument that the U.C.C. applies only to commercial transactions. The statute provides that the underlying purposes of the U.C.C. are (a) To simplify, clarify and modernize the law governing commercial transactions; (b) To permit the continued expansion of commercial practices through custom, usage and agreement of the parties references . to . .. Wis. commercial Stat. § 401.102. transactions Despite and these commercial practices, nowhere does the U.C.C. indicate that consumers as a group are to be excluded from the class of buyers whose rights may be limited under that section. 961 (referring invalidate a to U.C.C. manufacturer s Note, 66 Colum. L. Rev. at § 2-316). Although disclaimer as a court may unconscionable, the U.C.C. does not purport to hold that disclaimers directed to consumers are unconscionable per se. Note, 66 Colum. L. Rev. at 961; 19 Nova L. Rev. at 943; U.C.C. § 2-302. ¶65 Furthermore, the U.C.C. devotes explicit attention to the subject of sales to ultimate consumers. to U.C.C. § 2-318, comments 2 and 3]. 37 [footnote referring This renders feeble any No. 97-2594 argument that the Code s drafters intended to deal only with businessmen and to leave ultimate consumers to be regulated by tort law. Marc A. Franklin, When Worlds Collide: Liability Theories and Disclaimers in Defective-Product Cases, 18 Stan. L. Rev. 974, 995 (1966) (footnote omitted). The U.C.C. governs the allocation of risk between the consumer purchaser and the seller just as it does between the commercial purchaser and the seller, where and the it imposes warranties transaction provisions. is upon devoid the of transaction expressed even warranty 26 U. Tol. L. Rev. at 598 (citing U.C.C. §§ 2-314, 2-315 (1977)). ¶66 Some consumer transactions may be governed by the Wisconsin Consumer Act contained in Wis. Stat. chs. 421 to 427. Wis. Stat. § 421.101. However, [u]nless superseded by the particular provisions of chs. 421 to 427 parties to a consumer transaction have all of the obligations, duties, rights and remedies provided in chs. 401 to 411 [the U.C.C.] which apply to the transaction. Wis. Stat. § 421.103(3). The parties have not argued nor can we discern any provision of the Consumer Act that would supersede the obligations, duties, rights and remedies applicable to the purchase of an automobile provided in the U.C.C. ¶67 State Farm also ignores the many applied the U.C.C. to consumer transactions. cases that have See, e.g., Ewers v. Eisenzopf, 88 Wis. 2d 482, 276 N.W.2d 802 (1979); Murray v. Holiday Rambler, Inc., 83 Wis. 2d 406, 265 N.W.2d 513 (1978); Gerner v. Vasby, 75 Wis. 2d 660, 250 N.W.2d 319 (1977). 38 See No. 97-2594 also Daniel E. Murray, The Consumer and the Code: A Cross- Sectional View, 23 U. Miami L. Rev. 11 (1968); Orrin L. Helstad, The Impact of the Uniform Commercial Code on Wisconsin Law, 1964 Wis. L. Rev. 355, 364 (1964). In fact, the U.C.C. has specifically been applied to the purchase of motor vehicles made by individual consumers. See Hughes v. Chrysler Motors Corp., 197 Wis. 2d enactment 973, of 979, lemon 542 laws, N.W.2d the 148 only (1996) kinds of ( Prior to remedial the relief available to consumers were the statutory remedies of revocation of acceptance and breach of warranty under the Uniform Commercial Code. ); Taterka v. Ford Motor Co., 86 Wis. 2d 140, 271 N.W.2d 653 (1978) (applying several U.C.C. provisions to consumer s demand to Ford to repair latent defect in the taillight assembly gaskets); and Northwestern Motor Car, Inc. v. Pope, 51 Wis. 2d 292, 187 N.W.2d 200 (1971) (regarding liquidated damages under Wis. Stat. § 402.718(1) in automobile purchase contract). ¶68 In addition to the legislative protections afforded consumers by the U.C.C., the legislature enacted the lemon law to provide further protections from economic loss. Wisconsin s lemon law, Wis. Stat. § 218.015, was enacted to improve auto manufacturers quality control . . . [and] reduce the inconvenience, the expense, the frustration, the fear and [the] emotional Wis. 2d at trauma that lemon 982 (quoting owners Statement by endure. Vernon Hughes, 197 Holschbach, co- sponsor of the bill, Lemon Car Bill Has Sweet, Sour Sides, Wisconsin State Journal, March 2, 1983). 39 If a consumer has No. 97-2594 purchased seller a vehicle that is unwilling not function unable or does to remedy properly the consumer has recourse under the lemon law. and the situation, the Hughes, 197 Wis. 2d at 979-80. Wisconsin s lemon law provides that if a new motor vehicle does not conform to an applicable express warranty, the nonconformity shall be repaired before the expiration of the warranty or one year after delivery of the vehicle, whichever is sooner. Section 218.015(2)(a). If the nonconformity is not repaired after a reasonable attempt to repair, the manufacturer must accept return of the vehicle, and at the direction of the consumer, either replace the vehicle or refund to the consumer the full purchase price plus any sales tax, finance charge, costs, less a reasonable allowance for use. Section 218.015(2)(b)1 and 2. A reasonable attempt to repair means either that the nonconformity is subject to repair four times and the nonconformity continues or that the vehicle is out of service for an aggregate of at least 30 days because of warranty nonconformities. Section 218.015(1)(h)1 and 2. Id. at 981. If the automobile manufacturer refuses to voluntarily replace or repurchase a lemon vehicle as demanded by the consumer, the manufacturer violates the lemon law, and the remedies of § 218.015(7) are available. ¶69 U.C.C. In and addition the to lemon the law Id. legislative afforded protections consumers, a of the consumer purchaser, just as a commercial purchaser, can usually choose whether to purchase a product on the terms offered. Consumers are also able to inspect goods before purchase, negotiate over the price of a product, and shop around for the best deal. The consumer provide is just as greater warranties, free to and to 40 find a seller decide whether willing he to or she No. 97-2594 wishes to pay for greater warranties. 599. 26 U. Tol. L. Rev. at The consumer is free to accept the basic warranty, or pay the price of an extended warranty to avoid the risk of product failure for an extended period. ¶70 supply Id. In short, a seller simply does not owe a tort duty to a product expectations. that will meet the 26 U. Tol. L. Rev. at 599. buyer s economic Express and implied warranties in contract law and the U.C.C. provide the exclusive remedy for disappointed commercial entities. the lemon negotiate law, over Id. insurance price and purchasers, whether consumers or Consumers also have protections under and the shop ability around. to inspect goods, If consumers were allowed tort recovery for purely economic loss, tort law would forever be used to trump contract law and render the parties bargains and the careful allocation of duties and risks in the U.C.C. meaningless. Contract lawnot tort plaintiff s claims for solely economic losses. ¶71 lawgoverns a Id. State Farm finally argues that the fact that Renberg purchased an insurance policy should make no difference in our analysis or treatment of this case. State Farm argues that this is a subrogation action, and therefore State Farm stands in the shoes of Renberg. State Farm also asserts that subrogation is an equitable doctrine whereby the party liable for a defective product should pay the debt satisfied by another in order to avoid unjust enrichment. We are not persuaded by State Farm s subrogation argument. 41 No. 97-2594 ¶72 Subrogation rights derive from right to recover from the wrong-doer. the injured party s American Standard Ins. Co. v. Cleveland, 124 Wis. 2d 258, 262, 369 N.W.2d 168 (Ct. App. 1985). See also Cunningham v. Metropolitan Life Ins. Co., 121 Wis. 2d 437, 443-44, 360 N.W.2d 33 (1985) (citing 1 G.E. Palmer, Law of Restitution sec. 1.5(b) (1978)). the [injured party] party s right. has a right subrogation measures the extent [citation omitted] to recover arises. from of the subrogated Unless the [injured party] the American The original right of tortfeasor, Standard, 124 no issue Wis. 2d at of 262 (citation omitted). ¶73 Because we have determined that the injured party, in this case Renberg, does not have a legal right against Ford for his purely economic loss because his damages are barred by the economic loss doctrine, neither does State Farm have a legal right of recovery as a subrogated party. No issue of subrogation arises because the injured party, Renberg, has no right to recover tort damages from Ford. ¶74 In sum, we hold that the economic loss doctrine applies to consumer transactions to bar tort recovery for purely economic loss. The economic loss doctrine equal force to same to consumer policies that commercial justify applying transactions transactions. the apply with Additionally, like commercial entities, consumers have many protections available against economic loss. Therefore, State Farm s tort claims for purely economic loss are barred. We make one note of caution. Like the New Jersey Supreme Court, we do not reach the issue of 42 No. 97-2594 the preclusion of a strict-liability claim when the parties are of unequal bargaining power, the product is a necessity, no alternative source for the product is readily available, and the purchaser damages. cannot reasonably insure Alloway, 695 A.2d at 273. present in this case. against consequential None of these concerns are That is a different case for a different time. By the Court. The order of the circuit court is affirmed. 43 No. 97-2594.ssa ¶75 SHIRLEY (dissenting). S. ABRAHAMSON, CHIEF JUSTICE In this case the consumer bought a Ford Bronco "as is" and also entered into a warranty contract with Ford Motor Company, the manufacturer. Bronco caught on fire, After the warranty ended, the allegedly because defect in the ignition switch. of a manufacturing Subsequently, the consumer's insurer, State Farm, paid the fair market value of the Bronco and brought this subrogation suit in which it "stepped into the shoes" of the consumer for purposes of seeking reimbursement. The majority opinion, however, does not limit its holding to the circumstances presented in this case, but instead broadly holds "that the economic transactions loss and State economic loss." ¶76 its bars Farm's applies tort to claims consumer for purely to justify Majority op. at 2. After an extensive holding doctrine that the discussion economic loss attempting doctrine applies to all consumer transactions, the majority opinion itself admits that its holding is too broad. In the final paragraph of this lengthy decision, the majority quotes Alloway v. General Marine Industries, 695 A. 2d 264, 273 (N.J. 1997), in cautioning that "we do not liability reach claim the when issue the of the parties preclusion are of of unequal a strict- bargaining power, the product is a necessity, no alternative source for the product is readily available, and the purchaser reasonably insure against consequential damages." cannot A reader can only conclude that the majority opinion is not really holding 1 No. 97-2594.ssa that the economic transactions. Yet loss the doctrine reader applies does not to all which know consumer consumer transactions are excepted from the new rule because the very factors about which the majority opinion cautions are present in this case. ¶77 Although the majority opinion relies heavily on the Alloway case, the New Jersey Supreme Court in Alloway expressly refused to resolve the issue presented by the facts of this case. The New Jersey Supreme Court stated: An unresolved issue is whether the U.C.C. or tort law should apply when a defective product poses a serious risk to other property or persons, but has caused only economic loss to the product itself. In the present case, plaintiffs have not alleged that the defective seam in the boat posed such a risk. Hence we do not resolve the issue. Alloway, 695 A.2d at 273. ¶78 The majority opinion also relies on Trans States Airlines v. Pratt & Whitney Canada, 682 N.E.2d 45 (Ill. 1997), which like Alloway, involves a commercial transaction, not a consumer transaction Alloway, expressed as in no this case. opinion Trans on States, whether like "the consumer/commercial transaction distinction makes any difference when the product damages only itself." See Trans States, 682 N.E.2d at 54. ¶79 I would allow the consumer in this case to proceed to trial under the doctrine of strict product liability for the damage claimed, that is, the injury to the defective product itself. This case involves an allegedly defective product that 2 No. 97-2594.ssa poses an unreasonable risk of harm to person and property. Strict product liability law is grounded on policies of safety and risk-spreading. The theory is that manufacturers will use greater care if they are liable for defective products. Safety concerns are not reduced when the injury is only to the product itself. ¶80 A manufacturer's duty to market safe products should not depend on whether the full extent of personal or property injury actually happens. When defective products present a risk of harm, it is purely fortuitous that the resulting damage is only to the product itself. I can find no distinction for imposing different liability upon a manufacturer whose defective product causes a consumer to suffer personal injury or property damage and a manufacturer whose defective product presents an identical safety risk to the consumer but happens by chance to result only in damage to the product itself. The manufacturer remains in the best position to avoid injury to the product itself and to absorb the damage to the product itself. ¶81 In this case, I would adopt the reasoning of Supreme Court of Montana in a case similar to the case at bar: The public remains in an unfair bargaining position as compared to the manufacturer. In the case of damage arising only out of loss of the product, this inequality in bargaining position becomes more pronounced. Warranties are easily disclaimed. Negligence is difficult, if not impossible, to prove. The consumer does not generally have large damages to attract the attention of lawyers who must handle these cases on a contingent fee. We feel that the consumer should be protected by affording a legal remedy which 3 the No. 97-2594.ssa causes the manufacturer to bear the cost of its own defective products. Thompson v. Nebraska (Mont. 1982). Mobile Homes Corp., 647 P.2d 334, 337 See also Oklahoma Gas & Elec. Co., 834 P.2d 980, 982-85 (Okla. 1992) (Wilson, Opala and Kauger, JJ., dissenting). ¶82 The Restatement similarly recognizes that under the circumstances presented in this case a good argument can be made for applying products liability law. See Restatement (Third) of Torts: Products Liability § 21 (1997) (regarding harm to the defective product itself, "a plausible argument can be made that products that are dangerous, rather than merely ineffectual, should be governed by the rules governing products liability law," comment d. to § 21 at p. 294) (Reporters' Note and numerous cases cited at § 21 at p. 304). ¶83 I need not decide in this case any other issues presented under the economic loss doctrine. ¶84 For the reasons set forth, I dissent. ¶85 I am authorized to state BRADLEY joins this dissent. 4 that JUSTICE ANN WALSH No. 97-2594.ssa 5
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