THE ECONOMIC LOSS DOCTRINE: ARGUING FOR THE INTERMEDIATE RULE AND TAMING THE TORT-EATING MONSTER

Gennady A. Gorel*
TABLE OF CONTENTS I. INTRODUCTION ..................................................................................518 II. BACKGROUND ON THE ECONOMIC LOSS DOCTRINE ........................519 A. What Is Economic Loss? .............................................................. 520 B. Practical Application ................................................................... 521 C. What Constitutes a Product? ....................................................... 522 D. Policy Considerations.................................................................. 524 1. Enforcing Contracts Versus Protecting Consumers..................525 2. Limiting Corporate Liability Versus Discouraging Dangerous Defects....................................................................525 III. VARIOUS APPROACHES TO THE ECONOMIC LOSS DOCTRINE .........526 A. Recent History .............................................................................. 527 B. The Minority Rule......................................................................... 529 1. Santor v. A & M Karagheusian, Inc. ........................................529 2. Variations on the Minority Rule ...............................................531 C. The Majority Rule ........................................................................ 533 1. Seminal Cases ...........................................................................534 2. Asbestos Exception...................................................................539 D. The Intermediate Rule.................................................................. 540

* J.D. Candidate, Rutgers University School of Law–Camden, May 2006. I would like to thank J. Michael Kvetan, Esquire, for inspiring my research into the economic loss doctrine.

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IV. PROBLEMS WITH THE MAJORITY APPROACH..................................541 A. Fails to Protect Consumers Even from Unforeseeable Dangers . 541 B. Dilutes Tort Policy of Discouraging Dangerous Defects............. 544 C. Limits Discretion of Courts.......................................................... 547 D. Leads to Arbitrary Results ........................................................... 547 V. THE WISDOM OF THE INTERMEDIATE APPROACH............................548 A. Offers Equitable Justice ............................................................... 548 B. Discourages Dangerous Defects While Sufficiently Limiting Liability .......................................................................... 549 C. Promotes Judicial Discretion and Avoids Arbitrary Results ....... 550 VI. CONCLUSION ...................................................................................550

I. INTRODUCTION In 1986, the economic loss doctrine was expanded to save “contract law [from] drown[ing] in a sea of tort.”1 However, the expansion of the economic loss doctrine has gone too far. Today, it is tort law that needs protection from “the tort-eating monster.”2 The economic loss doctrine is at the center of the struggle to define the boundaries between tort and contract law principles.3 Its main function is to limit tort recovery of purely economic losses.4 Various approaches to the doctrine have emerged, best categorized as the minority, majority and
1. E. River S.S. Corp. v. Transam. Delaval, Inc. (East River), 476 U.S. 858, 866 (1986); see Christopher Scott D’Angelo, The Economic Loss Doctrine: Saving Contract Warranty Law from Drowning in a Sea of Torts, 26 U. TOL. L. REV. 591, 593-96 (1995) (discussing the impact of the East River opinion). 2. Charles R. Walker, Moransais v. Heathman and the Florida Economic Loss Rule: Attempting to Leash the Tort-Eating Monster, 52 FLA. L. REV. 769, 769 (2000); see also Paul J. Schwiep, The Economic Loss Rule Outbreak: The Monster that Ate Commercial Torts, 69 FLA. B.J. 34, 34 (1995). 3. Schwiep, supra note 2, at 34 (“[I]t is clear that judges, lawyers, and commercial clients alike are all desperately struggling to define the parameters of the economic loss doctrine.”); see also R. Joseph Barton, Note, Drowning in a Sea of Contract: Application of the Economic Loss Rule to Fraud and Negligent Misrepresentation Claims, 41 WM. & MARY L. REV. 1789, 1789 (2000) (“The economic loss rule is one of the most confusing doctrines in tort law.”); Christopher J. Faricelli, Wading into the “Morass”: An Inquiry into the Application of New Jersey’s Economic Loss Rule to Fraud Claims, 35 RUTGERS L.J. 717, 718 (2004) (“Courts have struggled in their attempts to uniformly apply the economic loss rule.”). 4. See D’Angelo, supra note 1, at 591.

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intermediate rules.5 The minority rule, applied by a small number of jurisdictions, allows recovery of purely economic losses in tort.6 The majority rule, on the other hand, completely bars recovery of economic losses in tort.7 The intermediate rule takes the middle ground, allowing recovery of economic loss in tort in limited situations.8 This Note concentrates specifically on product liability cases.9 In product liability cases, the economic loss doctrine bars tort recovery when a defective product damages only itself.10 Parts II and III of this Note work on defining the economic loss doctrine, with Part II developing the necessary background and Part III discussing various approaches to the doctrine. Part IV then points out problems with the widely accepted majority approach. Finally, Part V demonstrates how the intermediate approach can overcome these problems. This leads to the conclusion that the majority rule has overstepped its bounds in limiting tort law and that the intermediate approach is more effective at balancing countervailing policy interests. II. BACKGROUND ON THE ECONOMIC LOSS DOCTRINE Before jumping into an in-depth discussion of the economic loss doctrine, it is important to provide some background. Section A of this part defines economic loss. Section B provides a simple hypothetical to show
5. See East River, 476 U.S. at 868-71 (discussing the minority, majority, and intermediate approach to the economic loss doctrine). 6. Id. at 868-69. 7. Id. at 868. 8. Id. at 869-70. 9. The economic loss doctrine has also been applied to limit liability of services providers. See, e.g., Bristol-Myers Squibb v. Delta Star, Inc., 620 N.Y.S.2d 196, 198-99 (App. Div. 1994) (installation services); Key Int’l Mfg., Inc. v. Morse/Diesel, Inc., 536 N.Y.S.2d 792, 793-95 (App. Div. 1988) (architectural and engineering services). But cf. Cargill, Inc. v. Boag Cold Storage Warehouse, Inc., 71 F.3d 545, 550 (6th Cir. 1995) (holding that under Michigan law the economic loss doctrine applies only to transactions in goods). 10. See, e.g., East River, 476 U.S. at 871 (defective ship turbine damaged only itself); Hininger v. Case Corp., 23 F.3d 124, 126-27 (5th Cir. 1994) (combine contained a defective wheel, which required replacement); Transp. Corp. of Am., Inc. v. IBM, 30 F.3d 953, 956 (8th Cir. 1994) (defective computer disc drive crashed damaging only itself); Carstens v. City of Phoenix, 75 P.3d 1081, 1083-84 (Ariz. Ct. App. 2003) (home was constructed in violation of construction code, but no damage outside the home itself was caused); Casa Clara Condo. Ass’n v. Charley Toppino & Sons, Inc., 620 So. 2d 1244, 1245 (Fla. 1993) (home contained defective concrete that only damaged the home itself); Koss Constr. v. Caterpillar, Inc., 960 P.2d 255, 260 (Kan. Ct. App. 1998) (defective hydraulic hose in roller damaged roller only); Stanton v. Bayliner Marine Corp., 866 P.2d 15, 18 (Wash. 1993) (defective boats damaged only themselves).

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how the economic loss doctrine works. Section C discusses the more complex concept of what constitutes a product. And finally, Section D analyzes court policies that affect the development of the economic loss doctrine. A. What Is Economic Loss? 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.’”11 It is probably easier to consider which losses are economic from an exclusive perspective.12 From this view, personal injury and damage to other property13 are not economic losses.14 All other losses are, thus, economic.15 Economic loss can be divided into two categories: direct and consequential.16 A direct economic loss is defined as: “‘out of pocket’—the difference in the value between what is given and received—or ‘loss of bargain’—the difference between the value of what is received and its value as represented. Direct economic loss may also be measured by costs of

11. D’Angelo, supra note 1, at 592 (quoting Comment, Manufacturers’ Liability to Remote Purchasers for “Economic Loss” Damages—Tort or Contract?, 114 U. PA. L. REV. 539, 541 (1966)). 12. See Barton, supra note 3, at 1793 (defining economic loss in the exclusive); Faricelli, supra note 3, at 718 (explaining that not all damages are economic losses). 13. Other property is meant to distinguish from the defective product itself. Miller v. U.S. Steel Corp., 902 F.2d 573, 574 (7th Cir. 1990) (distinguishing the cost of replacing the defective product itself from the damages to plaintiff’s person or property); see also Barton, supra note 3, at 1793 (referring to other property). 14. Barton, supra note 3, at 1793; D’Angelo, supra note 1, at 592; Reeder R. Fox & Patrick J. Loftus, Riding the Choppy Waters of East River: Economic Loss Doctrine Ten Years Later, 64 DEF. COUNS. J. 260, 263 (1997). 15. Economic losses are sometimes referred to as commercial losses. See, e.g., Seely v. White Motor Co., 403 P.2d 145, 150-51 (Cal. 1965) (using the term “commercial losses” interchangeably with “economic losses”); Nobility Homes of Tex., Inc. v. Shivers, 557 S.W.2d 77, 80 (Tex. 1977). It has been suggested that “commercial loss” is a more appropriate term. See Miller, 902 F.2d at 574 (suggesting that “[i]t would be better to call it a ‘commercial loss,’ . . . because personal injuries and especially property losses are economic losses, too— they destroy values which can be and are monetized”). 16. See D’Angelo, supra note 1, at 592; Note, Economic Loss in Products Liability Jurisprudence, 66 COLUM. L. REV. 917, 918 (1966) [hereinafter Economic Loss]; see also A.J. Decoster Co. v. Westinghouse Elec. Corp., 634 A.2d 1330, 1333 (Md. 1994) (stating that consequential damages are economic loss).

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replacement and repair.”17 Consequential economic loss, on the other hand, includes losses such as lost profits.18 Most importantly, the economic loss doctrine draws a distinction between incidents resulting in only economic loss and those where other losses are present.19 Where a defective product injures only itself all losses are economic.20 Conversely, where a defective product causes personal injury or damage to other property, non-economic losses are present.21 B. Practical Application Now that economic loss has been defined, we are ready to examine a practical application of the economic loss doctrine. The facts of C.A. Johnson Trenching, L.C. v. Vermeer Manufacturing Co.,22 an unpublished opinion from the Court of Appeals of Utah, provide a great example.23 In Johnson Trenching, the plaintiff purchased an allegedly defective trenching machine from the defendant.24 The defective machine caused lost profits for the plaintiff’s business.25 The plaintiff pursued the case under theories of strict liability in tort and breach of implied warranty in contract.26 The
17. D’Angelo, supra note 1, at 592 (internal quotation marks omitted) (quoting Economic Loss, supra note 16, at 918). 18. Id.; Economic Loss, supra note 16, at 918. 19. Mark R. Sullivan, Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co.: Abuse of Pennsylvania’s Products Liability Symmetry, 43 U. PITT. L. REV. 1181, 1195 (1982) (noting that the distinction determines whether tort recovery is available); see also Steven C. Tourek et al., Bucking the “Trend”: The Uniform Commercial Code, the Economic Loss Doctrine, and Common Law Causes of Action for Fraud and Misrepresentation, 84 IOWA L. REV. 875, 897 (1956) (pointing out that the economic loss doctrine hinges on distinction of damages); Michael F. Vitt, Stemming the Tide: Uniformity in Admiralty Commands No Recovery for Recreational Vessel Losses Under a Marine Products Liability Theory in Maryland Courts Due to the Economic Loss Rule of East River Steamship Corp. v. Transamerica Delaval, Inc., 28 U. BALT. L. REV. 423, 487 (1999) (noting that plaintiffs may face “severe penalties” based on the outcome of the distinction in damages). 20. See Wash. Water Power Co. v. Graybar Elec. Co., 774 P.2d 1199, 1207 (Wash.) (“The broadest definition . . . encompasses all damages attendant to the failure and loss of use of a product.”), amended by sub nom. Wash. Power Co. v. Graybar Elec. Co., 779 P.2d 697 (Wash. 1989). See generally East River, 476 U.S. 858 (1986). 21. See, e.g., East River, 476 U.S. at 871. 22. No. 20030714-CA, 2005 WL 487881 (Utah Ct. App. Mar. 3, 2005) (mem.). 23. Id. at *1. This case was chosen for its simplicity. It demonstrates the basics of applying the economic loss doctrine, without invoking a winded discussion about court policy and the history of the doctrine. 24. Id. 25. Id. 26. Id.

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defendant invoked the economic loss doctrine to bar the tort claim.27 The court agreed that the strict liability claim was barred under the economic loss doctrine since the plaintiff only suffered business interruption, an economic loss.28 This left only the contract remedy for consideration. However, the court also ruled against the plaintiff on the breach of implied warranty claim because the agreement of sale expressly and clearly29 disclaimed implied warranties of merchantability and fitness for a particular purpose.30 In turn, the plaintiff was left without any opportunity to recover. In Johnson Trenching, the court draws a clear distinction between contract and tort remedies.31 It further shows how the economic loss doctrine can conclusively bar a plaintiff’s ability to recover damages when there is no contract remedy available.32 C. What Constitutes a Product? In more complex cases the boundaries between economic loss and injury to other property are blurred. In order to draw a distinction between the two, the courts attempt to define what constitutes a product.33 Economic loss jurisprudence looks to answer this question by analyzing the context in which the item at issue was obtained.34 Specifically, courts look to identify “‘the finished product bargained for by the buyer.’”35
27. Id. 28. Id. 29. Utah law requires that exclusions or modifications of the warranty of merchantability mention merchantability and be conspicuous. UTAH CODE ANN. § 70A-2316(2) (West 2004). 30. C.A. Johnson Trenching, L.C., 2005 WL 487881, at *1. 31. See D’Angelo, supra note 1, at 594 (discussing the distinction between tort and contract policies). 32. Kenneth L. Carson & Gail E. Horowitz, Software and Computer Law: Old Questions to Be Answered in the New Millennium, 43 BOSTON B.J. 10, 24 (1999) (“The delineation of tort versus contract may . . . clarify the applicability of contractual limits on liability, [and] the determination of the relevant statute of limitations and other issues.”); see DiIorio v. Structural Stone & Brick Co., Inc., 845 A.2d 658, 661-62 (N.J. Super. Ct. App. Div. 2004) (different statutes of limitation apply under tort and contract claims); C.A. Johnson Trenching, L.C., 2005 WL 487881 at *1 (tort recovery was barred by the economic loss doctrine, and recovery in contract was limited by a disclaimer of warranties). 33. See Shipco 2295, Inc. v. Avondale Shipyards, Inc., 825 F.2d 925, 928 & n.1 (5th Cir. 1987) (looking to determine whether a steering mechanism for a vessel constituted a component or a product). 34. See, e.g., D’Angelo, supra note 1, at 599 (“In determining whether a product injures only itself or ‘other property,’ the courts must look to the product the plaintiff purchased rather than to what the defendant sold.”); see also King v. Hilton-Davis, 855 F.2d 1047, 1051

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This issue is particularly prevalent where a defect in a component part causes damage to the whole.36 In such cases, plaintiffs may attempt to recover from the component part manufacturer, claiming that damage to the whole constitutes other property.37 However, where the component comes integrated into the whole when purchased, courts reason that “‘the purchaser bargained for the whole product, not merely a component of it.’”38 Thus, the whole is not other property.39 Most courts also consider replacement parts provided by the original seller as part of the product and not other property.40
(3d Cir. 1998) (reasoning that the bargain determines plaintiff’s economic loss); Shipco 2295, Inc., 825 F.2d at 928 (stating that the analysis of what constitutes a product requires the court to determine “what . . . the object of the contract or bargain” is). 35. King, 855 F.2d at 1052 (quoting Shipco 2295, Inc., 825 F.2d at 930). 36. See Fox, supra note 14, at 264. 37. See Shipco 2295, Inc., 825 F.2d at 928 (attempting to recover from the manufacturer of a steering mechanism for damage to the boat in which it was a component); Midway Helicopter Airways, Inc. v. Sikorsky Aircraft, 849 F. Supp. 666, 672 (E.D. Wis. 1994) (attempting to recover based on an argument that a helicopter was “other property” apart from its tail rotor drive), aff’d, 42 F.3d 1391 (7th Cir. 1994) (unpublished table decision). 38. Fox, supra note 14, at 264 (quoting Myrtle Beach Pipeline Corp. v. Emerson Elec. Co., 843 F. Supp. 1027, 1057 (D.S.C. 1993)); see King, 855 F.2d at 1051-52; Shipco 2295, Inc., 825 F.2d at 929. The King court quotes Shipco for the following reasoning: We see no rational reason to give the buyer greater rights to recover economic losses for a defect in the product because the component is designed, constructed, or furnished by someone other than the final manufacturer. The buyer ordinarily has no interest in how or where the manufacturer obtains individual components. The buyer is usually interested in the quality of the finished product and is content to let the manufacturer decide whether to do all the work or delegate part of it to others. King, 855 F.2d at 1051-52 (quoting Shipco 2295, Inc., 825 F.2d at 929). 39. See, e.g., Lexington Ins. Co. v. W. Roofing Co., 316 F. Supp. 2d 1142, 1148 (D. Kan. 2004) (mesh screens installed for roof drainage during building construction are a component part of the building); Wausau Tile, Inc. v. County Concrete Corp., 593 N.W.2d 445, 453 (Wis. 1999) (cement is a component part of concrete paving blocks); Bay Breeze Condo. Ass’n v. Norco Windows, Inc., 651 N.W.2d 738, 746 (Wis. Ct. App. 2002) (windows are a component part of a house). 40. Equistar Chemicals, L.P. v. Dresser-Rand Co., 123 S.W.3d 584, 589 n.27 (Tex. App. 2003) (citing Petroleum Helicopters, Inc. v. Avco Corp., 930 F.2d 389 (5th Cir. 1991) (finding that a flotation device and a helicopter were one product for economic loss pruposes, even though the flotation device had been removed, overhauled, and reinstalled several times, and at the time of its failure the device was installed on a different helicopter than the one it had been originally sold with); Northland Power v. Gen. Elec., Co., 105 F. Supp. 2d 775, 78992 (S.D. Ohio 1999) (finding that, under California law, engine blades and a generator were one product for economic loss purposes, even though the engine blades were refurbished and recoated); Exxon Shipping Co. v. Pac. Res., Inc., 835 F. Supp. 1195, 1201 (D. Haw. 1993) (finding that a chain and mooring system were one product for economic loss purposes, even though the chain was sold as a spare and installed later as a replacement)). A replacement part

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As such, a product is defined based on the bargain made by the purchaser.41 A component part is within the confines of the product, as long as it was sold as part of the same bargain or is a replacement provided by the original seller.42 D. Policy Considerations Courts mold the economic loss doctrine in order to strike an equitable balance between countervailing public policies.43 The definition of economic loss, for instance, hinges on whether damage to person or other property has occurred.44 This distinction finds its roots in tort policy, which provides recourse to victims in personal injury cases.45 The definition of a product, on the other hand, finds its roots in contract policy.46 By looking to the whole bargain in order to define a product, courts are applying a contract policy of

may not become part of the product where it is purchased from someone other than the seller of the original product. See Transco Syndicate # 1, Ltd v. Bollinger Shipyards, Inc., 1 F. Supp. 2d 608, 612 (E.D. La. 1998) (holding that the owner of a boat was not barred from pursuing the boat-engine-installer for damage to the boat where the boat-engine-installer was not the seller of the boat). 41. Linden v. Cascade Stone Co., 687 N.W.2d 823, 830 (Wis. Ct. App. 2004) (pointing out that a purchaser bargained for the finished product, not for the various components), aff’d, 699 N.W.2d 189 (Wis. 2005). 42. See Shipco 2295, Inc., 825 F.2d at 928 (steering mechanism and entire boat are a product); Lexington Ins. Co., 316 F. Supp. 2d at 1148 (mesh screens used for roof drainage and building are a product); Midway Helicopter Airways, Inc., 849 F. Supp. at 672 (tail rotor drive and entire helicopter are a product); Wausau Tile, Inc., 593 N.W.2d at 453 (cement and concrete paving blocks are a product); Bay Breeze Condo. Ass’n, 651 N.W.2d at 746 (windows and house are a product). But see City of Greenville v. W.R. Grace & Co., 827 F.2d 975, 977-78 (4th Cir. 1987) (recognizing that where asbestos contaminates the building in which it is a component part, the contamination results in damage to other property); Bd. of Educ. of Chi. v. A, C & S, Inc., 546 N.E.2d 580, 588-91 (Ill. 1989) (same); Detroit Bd. of Educ. v. Celotex Corp., 493 N.W.2d 513, 518 (Mich. Ct. App. 1992) (same). 43. Daniel London, Is the Economic Loss Rule in Peril? Courts, Negligence, and the Economic Loss Wolves, 71 DEF. COUNS. J. 379, 384 (2004) (noting that “economic loss difficult[ties] are interdependent”). 44. See supra Part II.A. 45. See Spring Motors Distribs., Inc. v. Ford Motor Co., 489 A.2d 660, 666 (N.J. 1985) (noting that an objective of strict liability is to protect the consumer); see also East River, 476 U.S. 858 866-67 (1986) (recognizing that tort law offers protection from both personal injury and property damage). 46. See Wood v. State, 815 A.2d 350 (Del. 2003) (unpublished table decision) (noting that the formation of a contract requires a bargain). See supra Part II.C for a discussion of looking to the essence of the bargain to define the product.

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enforcing agreements between parties.47 In this way, courts balance a variety of conflicting policies in applying the economic loss doctrine.48 Particularly notable are the countervailing policies of enforcing liability disclaimers versus providing consumer protection and limiting liability versus providing greater deterrence for manufacturing defective products. 1. Enforcing Contracts Versus Protecting Consumers Contract and tort policy diverge when it comes to upholding liability disclaimers and providing consumer protection.49 Tort law, specifically product liability law, is based on a public policy concern that consumers “need more protection from dangerous products than is afforded by the law of warranty.”50 This places tort policy directly at odds with contract law, which is more concerned with “holding parties to the terms of their agreements.”51 In doing so, contract law enforces agreements that allocate risk and limit liability, which may estop protections available under tort law.52 Thus, in creating a boundary between tort and contract law, courts must reconcile the policy of allowing risk allocation against the policy of offering extra protection. 2. Limiting Corporate Liability Versus Discouraging Dangerous Defects Likewise, there are conflicting policies involved in limiting liability and discouraging product defects. Tort policy, particularly strict liability, is

47. See Rich Prods. Corp. v. Kemutec, Inc., 66 F. Supp. 2d 937, 968 (E.D. Wis. 1999) (“Society allows the parties to set the terms of their bargain and only intervenes to enforce or give meaning to those terms once a dispute develops.”), aff’d, 241 F.3d 915 (7th Cir. 2001). 48. Fla. Bldg. Inspection Servs., Inc. v. Arnold Corp., 660 So. 2d 730, 732 (Fla. Dist. Ct. App. 1995) (en banc) (“[L]iability for economic losses . . . requires a balance between public policy and reallocation of economic risks throughout society.”). See London, supra note 43, at 380-85, for a comprehensive analysis of policy considerations in economic loss. 49. See Daanen & Janssen, Inc. v. Cedarapids, Inc., 573 N.W.2d 842, 846 (Wis. 1998) (acknowledging that contract and tort law policies overlap, but also diverge); Faricelli, supra note 3, at 722 (noting that “contract and tort claims can easily arise from the same set of underlying facts”). 50. East River, 476 U.S. at 866. 51. Proriver, Inc. v. Red River Grill, LLC, 83 F. Supp. 2d 42, 46 (D.D.C. 1999). 52. See Grams v. Milk Prods., Inc., 685 N.W.2d 172, 175 (Wis. Ct. App. 2004) (unpublished table decision) (“As a matter of policy, when commercial parties have allocated their respective risks through contract, the economic loss doctrine directs that it is more appropriate to enforce that bargain than to allow ‘end runs’ around that bargain through tort law.”), aff’d, 699 N.W.2d 167 (Wis. 2005).

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aimed at discouraging dangerous product defects.53 It requires holding manufacturers liable when their products cause damage.54 By holding manufacturers liable in more cases, courts create a greater incentive for manufacturers to make safer products.55 The countervailing policy is to limit liability. This policy is concerned with hindering productive behavior.56 It reasons that overextending liability will cause businesses to forego productive and socially desirable behavior out of fear of unbearable risk.57 Courts applying the economic loss doctrine must weigh the benefits of enforcing liability limits against the benefits of discouraging product defects. III. VARIOUS APPROACHES TO THE ECONOMIC LOSS DOCTRINE The economic loss doctrine has taken different forms throughout the United States.58 This part explores each of these approaches. It starts with a brief historic overview and then continues with a discussion of the minority rule, the majority rule and the intermediate rule of the economic loss doctrine.

53. Ronen Perry, Relational Economic Loss: An Integrated Economic Justification for the Exclusionary Rule, 56 RUTGERS L. REV. 711, 731 (2004) (“One of the main functions of tort law—at least from an economic perspective—is to provide incentives for behavioral changes that may reduce the loss of social welfare caused by human interactions.”). 54. East River, 476 U.S. at 866-67 (“The manufacturer is [strictly] liable whether or not it is negligent because ‘public policy demands that responsibility be fixed wherever it will most effectively reduce the hazards to life and health inherent in defective products that reach the market.’” (quoting Escola v. Coca Cola Bottling Co. of Fresno, 150 P.2d 436, 441 (Cal. 1944) (Traynor, J., concurring))); see Spring Motors Distribs., Inc. v. Ford Motor Co., 489 A.2d 660, 666 (1985) (“One of the main purposes of strict liability . . . is the allocation of the risk and distribution of the loss to the better risk-bearer[—the manufacturer].”). 55. Perry, supra note 53, at 731 (“Tort liability raises the price of potential injurers’ activities and thus encourages them to take further precautions or reduce their level of activity.”); see Spring Motors Distribs., Inc., 489 A.2d at 666 (“Generally, the manufacturer, who is better able to eliminate defects from its product and who can spread the cost of the risk among all of customers, is the better risk-bearer.”). 56. See John H. Boswell & George Andrew Coats, Saving the General Aviation Industry: Putting Tort Reform to the Test, 60 J. AIR L. & COM. 533, 550-53 (1995) (discussing problems of over-deterrence in the aviation industry). 57. London, supra note 43, at 381 (noting that if liability was not limited, “the magnitude of potential liability in economic loss cases would have a chilling effect on socially beneficial conduct”). 58. See D’Angelo, supra note 1, app. at 609-19.

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A. Recent History Most modern economic loss jurisprudence in the United States can be linked to Seely v. White Motor Co.,59 a case decided by the Supreme Court of California in 1965.60 While the economic loss doctrine has it roots in midnineteenth-century jurisprudence,61 here we only discuss the modern trends starting from 1965. The year 1965 was an important one in the development of the economic loss doctrine.62 During that year, “the high[est] courts of New Jersey63 and California64 handed down contrasting opinions” on the issue.65 The Supreme Court of New Jersey, in Santor v. A & M Karagheusian, Inc., held that a purchaser could recover in tort for economic loss alone.66 Just a few months later, the Supreme Court of California, in Seely, held just the opposite—that a purchaser could not recover in tort for economic losses alone.67
59. 403 P.2d 145 (Cal. 1965). 60. See, e.g., Casa Clara Condo. Ass’n v. Charley Toppino & Sons, Inc., 620 So. 2d 1244, 1245-46 n.2 (Fla. 1993) (citing Seely and noting that the “economic loss rule has been adopted in a majority of jurisdictions”); see also, e.g., East River, 476 U.S. 858, 871 (1986) (applying admiralty law and adopting an approach similar to Seely); Lloyd Wood Coal Co. v. Clark Equip. Co., 543 So. 2d 671, 673-74 (Ala. 1989) (looking at Alabama law and citing Seely); Clark v. Int’l Harvester Co., 581 P.2d 784, 792 (Idaho 1978) (applying Idaho law and adopting the reasoning in Seely); Neibarger v. Universal Coops., 486 N.W.2d 612, 618-19 (Mich. 1992) (applying Michigan law and adopting the reasoning in Seely). 61. See generally Eileen Silverstein, On Recovery in Tort for Pure Economic Loss, 32 U. MICH. J.L. REFORM 403, 409-22 (1999) (providing a detailed history of the economic loss doctrine starting from the mid-nineteenth century). 62. See Faricelli, supra note 3, at 719-20, 724 (referring to the 1965 cases Seely v. White Motor Co. and Santor v. A & M Karagheusian, Inc. as among the important cases in economic loss jurisprudence). 63. In Santor, the Supreme Court of New Jersey allowed a purchaser of a defective carpet to recover from the manufacturer in tort, even when the only damage was to the carpet itself. 207 A.2d 305, 312-13 (N.J. 1965), abrogated by Alloway v. Gen. Marine Indus., L.P., 695 A.2d 264, 275 (N.J. 1997). Note that this case is no longer good law. See Alloway, 695 A.2d at 275 (denying recovery in tort to a purchaser of a defective boat which sank while docked). 64. In Seely, the Supreme Court of California did not allow the purchaser of a defective truck to recover from the manufacturer in tort when there was only damage to the truck itself and business interruption. 403 P.2d 145, 151 (Cal. 1965). 65. D’Angelo, supra note 1, at 592 (footnotes added). Seely responded directly to Santor, stating that “it was inappropriate to impose liability . . . in the [Santor] case, for it would result in imposing liability without regard to what representations of quality the manufacturer made.” Seely, 403 P.2d at 151. 66. See supra note 63. 67. See supra note 64.

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It was not until 1986 that the next major economic loss doctrine case came along.68 In East River S.S. Corp. v. Transam Delaval, Inc. (East River), the Supreme Court of the United States, applying admiralty law, adopted an approach similar to Seely.69 The East River opinion led jurisdictions throughout the country to either adopt the Seely rule or to, at least, reconsider their approach to economic loss.70 Even New Jersey first limited71 and then abrogated Santor.72 Only a small number of jurisdictions today abstain from the Seely approach.73 At least one jurisdiction has retained the Santor rule.74 At least three others apply Santor in very limited circumstances.75 A growing group, however, has shown its discomfort with Seely by adopting exceptions to the strict economic loss rules.76 Today, “the question [of] whether a particular jurisdiction recognizes the economic loss rule is straightforward, [while] issues relating to the

68. See Faricelli, supra note 3, at 719-20 (referring to East River as the other seminal case in economic loss jurisprudence, besides Seely). 69. East River, 476 U.S. 858, 871 (1986) (holding “that a manufacturer in a commercial relationship has no duty under either a negligence or strict products-liability theory to prevent a product from injuring itself”). 70. See, e.g., Drexel Props., Inc. v. Bay Colony Club Condo., Inc., 406 So. 2d 515 (Fla. Dist. Ct. App. 1981); Sharp Bros. Contracting Co. v. Am. Hoist & Derrick Co., 703 S.W.2d 901, 903 (Mo. 1986); REM Coal Co. v. Clark Equip. Co., 563 A.2d 128, 132 (Pa. Super. Ct. 1989); see also WASH. REV. CODE ANN. § 7.72.010(4), (6) (West 1992) (excluding claims for “direct consequential economic loss” under the Uniform Commercial Code and discarding the previous rule established in Berg v. General Motors Corp., 555 P.2d 818 (Wash.1976)). 71. See Spring Motors Distribs., Inc. v. Ford Motor Co., 489 A.2d 660, 676 (N.J. 1985) (limiting the application of Santor to commercial parties). 72. See Alloway v. Gen. Marine Indus., L.P., 695 A.2d 264, 267 (N.J. 1997) (holding that a purchaser is limited to contract remedies to recover for economic loss). 73. Fox, supra note 14, at 262 (noting that a minority of jurisdictions have declined to follow the economic loss rule and that some jurisdictions have “crafted limited exceptions to, or deviations from,” the rule). 74. See Thompson v. Neb. Mobile Homes Corp., 647 P.2d 334, 338 (Mont. 1982) (allowing recovery of economic loss in tort without restriction). 75. See Four Corners Helicopters, Inc. v. Turbomeca, S.A., 979 F.2d 1434, 1443-44 (10th Cir. 1992) (non-commercial transactions); Auto Owners Ins. Co. v. Chrysler Corp., 341 N.W.2d 223, 224 (Mich. Ct. App. 1983) (non-contractual relationships); Lloyd F. Smith Co. v. Den-Tal-Ez, Inc., 491 N.W.2d 11, 13-14 (Minn. 1992) (non-commercial transactions). 76. See D’Angelo, supra note 1, at 601 (noting that some jurisdictions have adopted a “sudden and calamitous” event exception); Fox, supra note 14, at 262 (noting that some jurisdictions have adopted an exception when “the defect creates a serious risk of death or personal injury”); Walker, supra note 2, at 785 (noting that Florida has recognized a “no alternative theory of recovery” exception).

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applicability and scope of the doctrine are more uncertain and continue to evolve.”77 B. The Minority Rule The minority essentially rejects the economic loss doctrine. It allows a plaintiff to recover in tort for economic loss without limitation.78 Santor was, for a long time, the leading case advocating this view.79 However, it maintained only a limited following.80 Today, there are only a few jurisdictions following the minority rule, and most of them follow it only under limited circumstances.81 The remainder of this section discusses the Santor opinion, as well as current variations in its application. 1. Santor v. A & M Karagheusian, Inc. The Santor court held that a purchaser of a defective product had a cause of action against the manufacturer for breach of implied warranty of reasonable fitness, even in the absence of privity of contract and even when a plaintiff’s damages are limited to the loss of value in the defective product itself.82 The court further held that a tort cause of action also exists in such cases, regardless of whether damage is limited to the article sold.83

77. Fox, supra note 15, at 260. 78. See Walker, supra note 2, at 776-77. 79. See East River, 476 U.S. 858, 868 (1986). 80. See Alloway v. Gen. Marine Indus., L.P., 695 A.2d 264, 267 (N.J. 1997). Even before Alloway abrogated Santor, it was noted that “‘Santor . . . appears today to stand alone in allowing a products liability action when a product did not create an unreasonable risk of harm but merely caused economic loss when it failed to meet performance expectations.’” Id. at 272 (alteration in original) (quoting RESTATEMENT (THIRD) OF TORTS: PRODUCTS LIABILITY § 21 cmt. d (Proposed Final Draft Apr. 1, 1997)). 81. See Four Corners Helicopters, Inc. v. Turbomeca, S.A., 979 F.2d 1434, 1443-44 (10th Cir. 1992) (applying Colorado law and allowing recovery of economic loss in tort in non-commercial transactions); Auto Owners Ins. Co. v. Chrysler Corp., 341 N.W.2d 223, 22425 (Mich. Ct. App. 1970) (applying Michigan law and allowing recovery of economic loss in tort in non-contractual relationships); Lloyd F. Smith Co. v. Den-Tal-Ez, Inc., 491 N.W.2d 11, 13-14 (Minn. 1992) (applying Minnesota law and allowing recovery in non-commercial transactions); Thompson v. Neb. Mobile Homes Corp., 647 P.2d 334, 338 (Mont. 1982) (applying Montana law and allowing recovery of economic loss in tort without restriction). 82. Santor v. A & M Karagheusian, Inc., 207 A.2d 305, 310-11 (N.J. 1965), abrogated by Alloway v. Gen. Marine Indus., L.P., 695 A.2d 264 (N.J. 1997). 83. Id. at 312-13.

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This case arose out of a purchase of defective carpeting.84 The brief facts of the case are that the plaintiff purchased carpeting, which was marketed as “Grade #1.”85 Shortly after installation, the plaintiff found the carpeting to be defective.86 Over a period of time, the plaintiff made unsuccessful attempts to have the carpet replaced by the retailer or the manufacturer.87 The plaintiff then brought an action against the manufacturer and the distributor, but not the retailer, to recover for damage to the carpet.88 At trial, the manufacturer conceded that the carpet was, in fact, defective.89 The only issue that remained was whether defendants could be held liable when there is no privity of contract and when the only damage is loss of value to the defective product itself.90 The court began its analysis by determining that privity of contract is not necessary where an action for a defective product is brought against a manufacturer.91 Prior case law already established that privity was not necessary where a product was of the type that if defectively manufactured “will be dangerous to life or limb.”92 The Santor court simply extended this holding, reasoning that there is

84. Id. at 307. 85. Id. at 306. 86. Id. at 307. After installation plaintiff noticed an “unusual line” in the carpet. Id. The plaintiff notified the retailer and was assured that the line would “walk out.” Id. But shortly thereafter “additional lines appeared.” Id. 87. See id. at 307. About eight months after delivery of the carpet the plaintiff went to the retailer only to find an out-of-business sign. Id. After some time passed, the plaintiff found out that the retailer had moved to another state. Id. The plaintiff then made contact with the retailer at the new location, who put the plaintiff in touch with the manufacturer, A & M Karagheusian, Inc. Id. Some three years after the installation, the manufacturer eventually sent a representative to look at the carpet. Id. 88. Id. at 306. 89. Id. at 307. 90. See id. 91. See id. at 307-09 (reasoning that “[t]he dealer is simply . . . a conduit on [the product’s] trip from manufacturer to consumer,” and determining that liability for an implied warranty of reasonable fitness should be placed “on the person responsible for the existence of the article and the origin of the marketing process”). 92. See id. at 308 (discussing Henningsen v. Bloomfield Motors, Inc., 161 A.2d 69, 75 (N.J. 1960)). Henningsen involved a defective automobile. 161 A.2d at 73. The defect caused the automobile to crash, which caused personal injury to the owner’s wife. Id. Particularly important is that the wife filed suit under a theory of express and implied warranty against the dealer and the manufacturer of the automobile, but she did not have privity with either party. Id. at 73, 80. The court allowed her to recover for injuries, reasoning that it was in society’s interest to allow recovery against a manufacturer in the absence of privity when a defective product is of the type that, if defective, will be dangerous to life or limb. Id. at 81.

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no just cause for recognition of the existence of an implied warranty of merchantability and a right to recovery for breach thereof regardless of lack of privity of the claimant in the one case and the exclusion of recovery in the other simply because of loss of value of the article sold is the only damage 93 resulting from the breach.

The court also came to the conclusion that a tort cause of action could be maintained even for economic loss alone.94 The court reasoned that the law of strict liability95 exists to “insure that the cost of injuries or damage, either to the goods sold or to other property, resulting from defective products, is borne by the makers . . . rather than by the injured or damaged persons who ordinarily are powerless to protect themselves.”96 Further, this liability “arises from mere presence of the product [in] the market.”97 The Santor holding, thus, determined that plaintiffs can recover against a manufacturer of a defective product regardless of privity, either in contract or in tort, even when they have suffered only economic loss. 2. Variations on the Minority Rule As stated previously, at least three jurisdictions apply the minority rule under limited circumstances.98 These jurisdictions may apply either the majority or the intermediate rule when these circumstances are not met.99
93. Santor, 207 A.2d at 309 (“It should make no difference that the defect in the product did not or was not likely to cause harm to the purchaser.”). 94. Id. at 312 (stating that “the responsibility of the maker should be no different where damage to the article sold or to other property of the consumer is involved”). 95. The court explained, Under the strict liability in tort doctrine, as in the case of express or implied warranty of fitness or merchantability, proof of the manufacturer’s negligence in the making or handling of the article is not required. If the article is defective, i.e., not reasonably fit for the ordinary purposes for which such articles are sold and used, and the defect arose out of the design or manufacture or while the article was in the control of the manufacturer, and it proximately causes injury or damage to the ultimate purchaser or reasonably expected consumer, liability exists. Id. at 313. 96. Id. at 312. Here, the court reasoned that “when the manufacturer presents his goods to the public . . . he accompanies them with a representation that they are suitable and safe for the intended use.” Id. at 311. 97. Id. at 312. 98. See cases cited supra note 81. 99. See Richard O’Brien Cos. v. Challenge-Cook Bros., 672 F. Supp. 466, 471-73 (D. Colo. 1987); Hiigel v. Gen. Motors Corp., 544 P.2d 983 (Colo. 1975) (barring recovery in tort

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Two of these jurisdictions apply the minority rule when non-commercial parties are involved; the other one applies the minority rule when a noncontractual relationship is involved. a. Non-Commercial Parties Limitation The non-commercial parties limitation allows application of the minority rule when the purchaser is a non-commercial party.100 A non-commercial party is one that is not a merchant in goods of the kind.101 Courts applying this limitation construe “commercial transaction,” as it is used in the Uniform Commercial Code, very narrowly.102 This limitation is sought to protect unsophisticated consumers.103 b. Non-Contractual Relationship Limitation The non-contractual relationship limitation allows the application of the minority rule when there is no contractual relationship between the plaintiff and the manufacturer. For instance, in Auto Owners Insurance Co. v. Chrysler Corp.,104 the plaintiff105 purchased a motor home from ShellerGlobe.106 The motor home consisted of a chassis manufactured by Chrysler and a body that was manufactured and installed by Sheller-Globe.107 The motor home was destroyed by fire when a fuel feed that was part of the Chrysler chassis malfunctioned.108 The court allowed the plaintiff’s strict

for economic loss when commercial parties are involved); Great Am. Ins. Co. v. Paty’s Inc., 397 N.W.2d 853, 855-56 (Mich. Ct. App. 1986); McGhee v. Gen. Motors Corp., 296 N.W.2d 286, 291-92 (Mich. Ct. App. 1980). 100. See Four Corners Helicopters, Inc. v. Turbomeca, S.A., 979 F.2d 1434, 1443-44 (10th Cir. 1992) (holding that the Uniform Commercial Code applies only to commercial transactions); Lloyd F. Smith Co. v. Den-Tal-Ez, Inc., 491 N.W.2d 11, 13-14 (Minn. 1992) (same). 101. Lloyd F. Smith Co., 491 N.W.2d at 17; see also Fox, supra note 14, at 263. 102. See Four Corners Helicopters, Inc., 979 F.2d at 1443. 103. See Hiigel, 544 P.2d at 989-90 (requiring disclaimers to be clearly brought to the attention of a non-commercial buyer in order for them to be upheld). 104. 341 N.W.2d 223 (Mich. Ct. App. 1983). 105. The plaintiff was actually the purchaser’s insurer exercising its subrogation rights. Id. at 223. For purposes of the above discussion the plaintiff is identified as the purchaser. 106. Id. at 224. 107. Id. at 223. 108. Id. at 224.

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liability suit against Chrysler109 even though the motor home was purchased as a single item and only the motor home was damaged.110 This decision was based on the reasoning that contractual remedies do not arise in the absence of privity.111 Thus, when there is no contract, the manufacturer could not disclaim liability and may be liable to the plaintiff.112 C. The Majority Rule On the opposite end of the spectrum is the majority rule. Majority rule jurisdictions do not permit recovery of purely economic losses in tort.113
109. The motor home dealer was not a party to the appeal. Id. at 224. 110. Id. at 223-24. 111. The Auto Owners Insurance Co. court contended that there was no recovery in tort when the relationship between the parties was contractual and there was no personal injury or damage to other property. Id. However, the court reasoned that “[t]he rationale behind this holding is that it would be unfair to allow a contracting party to nullify the terms of the [Uniform Commercial Code] where the only injury is to the property purchased and is caused by the condition of that property. This rationale fails when there is no contractual relationship between the parties.” Id. The court concluded that where the purchaser bought the defective product from a dealer there is no privity of contract with the manufacturer. Id. 112. Id. (“[T]he [Uniform Commercial Code] has no relevancy in a case . . . in which a consumer brings a claim against a manufacturer for damage to its product which the consumer purchased from someone other than the manufacturer.”). 113. See, e.g., Fredonia Broad. Corp. v. RCA Corp., 481 F.2d 781, 797 (5th Cir. 1973) (applying Texas law to strict liability action); Bright v. Goodyear Tire & Rubber Co., 463 F.2d 240, 242 (9th Cir. 1972) (applying California law); Sw. Forest Indus., Inc. v. Westinghouse Elec. Corp., 422 F.2d 1013, 1019-20 (9th Cir. 1970) (applying Arizona law to strict liability action); Plainwell Paper Co. v. Pram, Inc., 430 F. Supp. 1386, 1387-88 (W.D. Pa. 1977) (applying Pennsylvania law to strict liability action); Arizona v. Cook Paint & Varnish Co., 391 F. Supp. 962, 971 & n.9 (D. Ariz. 1975) (concluding that under the law of either Arizona, California, Hawaii, Texas or Alaska purely economic losses were not recoverable in strict liability or negligence actions), aff’d, 541 F.2d 226 (9th Cir. 1976); Cooley v. Salopian Indus., Ltd., 383 F. Supp. 1114, 1118-19 (D.S.C. 1974) (applying South Carolina law to strict liability action); Morrow v. New Moon Homes, Inc., 548 P.2d 279, 28386 (Alaska 1976) (strict liability); Beauchamp v. Wilson, 515 P.2d 41, 44-45 (Ariz. Ct. App. 1973) (same); Seely v. White Motor Co., 403 P.2d 145, 151 (Cal. 1965) (same); Anthony v. Kelsey-Hayes Co., 102 Cal. Rptr. 113, 115-16 (Ct. App. 1972) (strict liability and negligence); Hiigel, 544 P.2d at 987 (strict liability); Long v. Jim Letts Oldsmobile, Inc., 217 S.E.2d 602, 604-05 (Ga. Ct. App. 1975) (negligence); Alfred N. Koplin & Co. v. Chrysler Corp., 364 N.E.2d 100, 103-04 (Ill. App. Ct. 1977) (same); Rhodes Pharmacal Co. v. Cont’l Can Co., 219 N.E.2d 726, 730 (Ill. App. Ct. 1966) (strict liability); Hawkins Constr. Co. v. Matthews Co., 209 N.W.2d 643, 652-53 (Neb. 1973) (same); Avenell v. Westinghouse Elec. Corp., 324 N.E.2d 583, 588 (Ohio Ct. App. 1974) (same); Price v. Gatlin, 405 P.2d 502, 503 (Or. 1965) (same); Nobility Homes of Tex., Inc. v. Shivers, 557 S.W.2d 77, 80 (Tex. 1977) (same).

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First, this section discusses the seminal cases advocating this rule. Then, this section addresses the asbestos exception to the majority rule. 1. Seminal Cases a. Seely v. White Motor Co. In Seely, California’s highest court held that a manufacturer of a defective truck may be liable for breach of warranty, but could not be liable under tort law when the defect causes only economic losses.114 The facts of Seely revolve around the purchase of a defective truck.115 Numerous attempts to repair the truck by the manufacturer were allegedly to no avail.116 Eleven months after the purchase, the plaintiff was slowing down for a turn and “found that the brakes did not work,” causing the truck to overturn.117 The plaintiff did not suffer any personal injuries in the accident.118 However, the plaintiff brought breach of contract and tort actions against the dealer and the manufacturer to recover for economic losses.119 The trial court awarded damages consisting of the payments made on the
114. 403 P.2d at 151. The court reasoned that 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.” Id. Further, “[e]ven in actions for negligence, a manufacturer’s liability is limited to damages for physical injuries and there is no recovery for economic loss alone.” Id. 115. Id. at 147. The truck was purchased for use in plaintiff’s heavy-duty hauling business. Id. The plaintiff found that the truck “bounced violently, an action known as ‘galloping.’” Id. 116. Id. The court took judicial notice of the multiple repairs. The following changes were made on the truck: five sets of front springs; five drive line changes; alteration of back springs; replacement of front shock absorbers; fish plating of frame; replacement of clutch brake; replacement of two clutch release bearings; replacement of pilot bearing; replacement of two auxiliary transmissions; reinstallation of new front bearings; front end aligned six times; entire truck and trailer aligned twice; welded cross member; new cross member installed; replaced tires five times; moved fifth wheel back and forth. Id. at 150 n.2. 117. Id. at 147. 118. Id. 119. Id. at 147-48. The plaintiff sued for damages to the truck, for payment made on the truck’s purchase price, and for lost business income. Id. In doing so, the plaintiff was suing for payments made because the truck was financed through the dealer. Id. at 147. After the accident, the plaintiff notified the dealer that he would stop making payments. Id. The dealer repossessed and resold the truck. Id. The plaintiff, therefore, sued for the payments that he had made on the loan. Id.

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purchase price and lost profits.120 The court did not grant damages for repair to the truck because it held that the plaintiff failed to prove that the alleged defect caused the accident.121 On appeal, the Supreme Court of California held that the damages for lost profits and for money paid on the purchase price were appropriate under breach of warranty.122 The court reasoned that when “the warrantor repeatedly fails to correct the defect as promised, it is liable for breach of that promise as a breach of warranty.”123 “The damages awarded by the trial court, ‘the loss directly and naturally resulting in the ordinary course of events from the breach of warranty,’ can properly include lost profits as well as the amount paid on the purchase price.”124 The Seely court also determined that the plaintiff could not pursue the same claim in tort since he suffered only economic loss.125 The court expressly rejected Santor’s holding,126 reasoning that contract law is best at dealing with economic expectation and that tort law is best left for dealing
120. Id. at 148. 121. Id. 122. Id. The court expressly noted the wording of the truck warranty, which stated the following: “The White Motor Company hereby warrants each new motor vehicle sold by it to be free from defects in material and workmanship under normal use and service, its obligation under the warranty being limited to making good at its factory any part or parts thereof.” Id. 123. Id. (citing Rose v. Chrysler Motors Corp., 28 Cal. Rptr. 185, 189-90 (Ct. App. 1963); Allen v. Brown, 310 P.2d 923, 928-29 (Kan. 1957)); see also supra note 116 (quoting list of attempted repairs). 124. Seely, 403 P.2d at 148 (citations omitted) (quoting CAL. CIV. CODE § 1789.6 (West 1963)) (citing Grupe v. Glick, 160 P.2d 832, 840 (Cal. 1945); Mack v. Hugh W. Comstock Associates, Inc., 225 Cal. App. 2d 583, 587 (Dist. Ct. of App. 1st Dist. 1964)), repealed by 1963 Cal. Stat. 1997 (current version at CAL. COM. CODE § 2714 (West 1995)). 125. Id. at 150. The Seely court noted, If under these circumstances defendant is strictly liable in tort for the commercial loss suffered by plaintiff, then it would be liable for business losses of other truckers caused by the failure of its trucks to meet the specific needs of their businesses, even though those needs were communicated only to the dealer. Moreover, this liability could not be disclaimed, for one purpose of strict liability in tort is to prevent a manufacturer from defining the scope of his responsibility for harm caused by his products. Id. 126. Id. at 151. The Seely court showed its disapproval, stating: [I]t was inappropriate to impose liability . . . in the Santor case, for it would result in imposing liability without regard to what representations of quality the manufacturer made. It was only because the defendant in [Santor] marketed the rug as Grade #1 that the court was justified in holding that the rug was defective. Id.

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with physical injuries alone.127 Further, the distinction is unaffected by the strength or bargaining power of the parties.128 After all, manufacturers cannot disclaim tort liability for non-economic loss,129 because it would be irrational to require consumers to pay more so that manufacturers could insure the performance of their products.130 The Seely court, thus, barred tort recovery when a defective product caused only economic losses.131 Seely has been widely cited for this proposition and is still good law today.132 b. East River Steamship Corp. v. Transamerica Delaval, Inc. The United States Supreme Court took the lead in economic loss doctrine jurisprudence with its decision in East River.133 The East River Court, applying admiralty law, held that “no products liability claim lies in admiralty when a commercial party alleges injury only to the product itself resulting in purely economic loss.”134
127. Id. The Seely court noted, The distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the “luck” of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products. He can appropriately be held liable for physical injuries caused by defects by requiring his goods to match a standard of safety defined in terms of conditions that create unreasonable risks of harm. He 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. Id. When referring to physical injuries, the Seely court included both personal injury and injury to property apart from the defective product. See id. at 152 (“Physical injury to property is so akin to personal injury that there is no reason for distinguishing them.”). 128. Id. at 151. 129. Id. at 152. The Uniform Commercial Code expressly recognizes that a limitation on damage for personal injury is prima facie unconscionable. Id. (citing CAL. COM. CODE § 2719 (West 2002)). 130. Id. at 151 (stating that a purchaser “can . . . be fairly charged with the risk that the product will not match his economic expectations unless the manufacturer agreed that it will”). 131. Id. 132. See cases cited supra note 60. 133. See D’Angelo, supra note 1, at 593 (noting that the majority rule “took a giant step toward the nearly universal acceptance it enjoys” today after the East River decision). 134. East River, 476 U.S. 476 U.S. 858, 858 (syllabus) (1986). The East River Court held that “a manufacturer in a commercial relationship has no duty under either a negligence or strict products-liability theory to prevent a product from injuring itself.” Id. at 871.

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The East River case revolved around the manufacture of four oiltransporting supertankers.135 The issue considered was whether a manufacturer of defective turbines could be liable for economic loss to the operator of the ships on which the turbines were installed.136 The defendant was the manufacturer and installer of turbines for each of these tankers.137 The plaintiffs were operators of the four tankers.138 Once placed into operation, each of the tankers’139 turbines malfunctioned due to design and manufacturing defects.140 Only economic loss resulted.141 The plaintiffs filed a complaint in tort142 based on a products liability theory and sought damages for the cost of repairing the ships and for business interruption.143 The district court granted summary judgment in favor of the defendants.144 The Third Circuit and the U.S. Supreme Court each affirmed.145 In its holding, the East River Court effectively “adopt[ed] an approach similar to Seely.”146 The main difference being that East River did not decide whether the economic loss rule would bar recovery when non-commercial

135. Id. at 859. 136. Id. at 859-60. The transaction that took place was somewhat complex. See id. The pertinent facts are that Seatrain Shipbuilding Corp. was in the process of constructing four oiltransporting supertankers. Id. at 859. Transamerica Delaval Inc., the defendant, was engaged to “design, manufacture, and supervise the installation of turbines” that would drive each of the supertankers. Id. After the ships were completed, ownership was transferred to a trust company, which chartered these tankers to the plaintiffs. Id. at 859-60. The plaintiffs are also subsidiaries of Seatrain Shipbuilding Corp. Id. at 860. Under the charters, each of the plaintiffs assumed responsibility for all repairs. Id. 137. Id. at 859. 138. Id. 139. The fourth tanker was manufactured last, after the defects had been corrected. Id. at 861. However, a certain valve was installed backwards, which caused vibrations and damaged the tanker’s turbines. Id. 140. Id. at 860-61. 141. Id. at 861. The plaintiffs sought damages for the cost of repair and lost income for the time the ships were out of service. Id. 142. Id. Contract law claims were apparently time-barred by the statue of limitations. See id. The initial complaint alleged breach of contract and breach of warranty causes of action. Id. The defendant raised “a statute of limitations defense.” Id. In response, the complaint was amended, and the contract claims removed. Id. 143. Id. 144. Id. at 861-62. 145. Id. at 876. 146. Id. at 871.

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parties are involved.147 The Court did, however, expressly reject the minority rule adopted in Santor148 and the intermediate rule.149 In its reasoning, the East River Court was especially concerned with leaving the floodgates open for indefinite amounts of damages.150 The Court pointed out that “[i]n products-liability law, where there is a duty to the public generally, foreseeability is an inadequate brake.”151 The Court expressed that “the tort concern with safety is reduced when an injury is only to the product itself.”152 Other arguments made were similar to those previously discussed in Seely.153 The East River Court, thus, barred tort recovery for purely economic loss.154 Following this opinion, many jurisdictions that were not already applying the majority rule chose to adopt its application.155
147. See id. The Court stated that “[w]e do not reach the issue whether a tort cause of action can ever be stated in admiralty when the only damages sought are economic.” Id. at 871 n.6. 148. Id. at 870-71 (recognizing that the minority rule “raise[s] legitimate questions about the theories behind restricting products liability”). 149. Id. at 870 (“The intermediate positions, which essentially turn on the degree of risk, are too indeterminate to enable manufacturers to structure their business behavior. Nor do we find persuasive a distinction that rests on the manner in which the product is injured.”); see also discussion infra Part III.D. 150. 476 U.S. at 874. The East River Court chose to restrict the application of tort law, noting that “[p]roducts liability [law] grew out of a public policy judgment that people need more protection from dangerous products than is afforded by the law of warranty. It is clear, however, that if this development were allowed to progress too far, contract law would drown in a sea of tort.” Id. at 866 (citation omitted). The Court further found that a distinction between economic loss and damage to other property was appropriate, reasoning that [t]he distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the “luck” of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products. Id. at 871 (internal quotation marks omitted) (quoting Seely v. White Motor Co., 403 P.2d 145, 151 (Cal. 1965)). 151. Id. at 874 (“Permitting recovery for all foreseeable claims for purely economic loss could make a manufacturer liable for vast sums. It would be difficult for a manufacturer to take into account the expectations of persons downstream who may encounter its products.”). 152. Id. at 871 (“When a product injures only itself the reasons for a tort duty are weak and those for leaving the party to its contractual remedies are strong.”). 153. Compare East River, 476 U.S. at 868-75, with Seely v. White Motor Co., 403 P.2d 145, 150-52 (Cal. 1965). 154. See East River, 476 U.S. at 871-72. 155. See supra note 70.

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2. Asbestos Exception Even courts applying the majority rule have found it necessary to create an exception that would allow recovery for purely economic losses, specifically in asbestos cases.156 These cases involve plaintiffs who seek recovery for the cost of removal or encapsulation of asbestos within their buildings.157 Defendants argue that the asbestos is just a component of the larger product—the building.158 Courts, however, have carved out an exception, finding that asbestos contamination is a “unique circumstance,” which warrants recovery in tort.159 Thus they conclude that the contamination is harm to other property.160 Courts acknowledge that the asbestos exception is a stretch.161 However, courts are sufficiently troubled by the dangers of asbestos that they have molded an exception into the majority rule jurisprudence.162
156. See, e.g., City of Greenville v. W.R. Grace & Co., 827 F.2d 975, 977-78 (4th Cir. 1987) (asbestos from fireproofing material contaminated city hall); City of Manchester v. Nat’l Gypsum Co., 637 F. Supp. 646, 651 (D.R.I. 1986) (asbestos products causing damage to numerous schools and other public buildings); Town of Hooksett Sch. Dist. v. W.R. Grace & Co., 617 F. Supp. 126, 130-31 (D.N.H. 1984) (asbestos contained in insulation was released into the school’s atmosphere, contaminating the air, the carpeting, the curtains, other school furnishings, personnel, and occupants); Bd. of Educ. of Chicago v. A, C & S, Inc., 546 N.E.2d 580, 588 (Ill. 1989) (asbestos damaged other property by contamination); Detroit Bd. of Educ. v. Celotex Corp., 493 N.W.2d 513, 518-19 (Mich. Ct. App. 1992) (suit by city school board and several hundred public schools against asbestos manufacturers and sellers); Kershaw County Bd. of Educ. v. U.S. Gypsum Co., 396 S.E.2d 369, 371 (S.C. 1990) (asbestos in school ceiling tile damaging other property of the plaintiff). But see Catasauqua Area Sch. Dist. v. Eagle-Picher Indus., Inc., Civ. A. No. 85-3743, 1988 WL 102689, at *3 (E.D. Pa. Sept. 28, 1988) (asbestos cement in schools); Franklin County, slip op. (N.D. Ala. Feb. 13, 1986); Pearl v. Allied Corp., 566 F. Supp. 400, 403 (E.D. Pa. 1983) (urea-formaldehyde insulation in a home). 157. D’Angelo, supra note 1, at 601; see also supra note 156. 158. D’Angelo, supra note 1, at 601 (“Asbestos suppliers . . . argue forcefully that the plaintiff has suffered only an economic loss . . . .”). 159. Id.; Fox, supra note 14, at 264; see also supra note 156. 160. See supra note 156. 161. See A, C & S, Inc., 546 N.E.2d at 588 (“[I]t is difficult, and may appear somewhat artificial, to fit a claim for asbestos damage within the framework which has been established for more traditional tort or contract actions. Indeed, the nature of the “defect” and the “damage” caused by asbestos is unique from most of the cases we have addressed. . . . [T]he holding in this case should not be construed as an invitation to bring economic loss contract actions within the sphere of tort law through the use of some fictional property damage.”); see also Nat’l Gypsum Co., 637 F. Supp. at 649-50 (“[I]t is at best, somewhat artificial to try to characterize the damage plaintiff claims as either one or the other, as either physical damage to its property or economic damage. Such pigeon holes may have been useful when tort and contract suits were less complex, but today in situations where dangers are discovered only

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D. The Intermediate Rule The intermediate rule is similar to the majority rule under most circumstances.163 However, courts applying the intermediate rule allow tort recovery for economic loss where certain limited exceptions are met.164 By allowing exceptions, intermediate rule “courts attempt to differentiate between ‘the disappointed users . . . and the endangered ones,’ and permit only the latter to sue in tort.”165 Exceptions vary from jurisdiction to jurisdiction, but most apply when a defect renders a product unreasonably dangerous or when the defective product damages itself in a “sudden and calamitous” manner.166 These exceptions focus of the nature of the defect itself, rather than on the damages, which are the central focus of the majority rule.167 By focusing on the nature of the defect, intermediate rule courts are able to address two important policy concerns. First, they are able to provide extra protection for consumers where a product has the potential to cause personal injury.168

after many years and where the harm caused or to be caused comes from allegedly dangerously defective materials which must be removed so as to avoid further dangers, the reasons for such divisions are less clear and the ability to make such distinctions is questionable.”). 162. A, C & S, Inc., 546 N.E.2d at 588 (“The nature of the defect in [asbestos cases] is the asbestos fibers, which are toxic and which, it has been determined, may, in certain circumstances, be harmful.”). 163. See, e.g., Moorman Mfg. Co. v. Nat’l Tank Co., 435 N.E.2d 443, 448 (Ill. 1982) (adopting the reasoning in Seely, while applying the intermediate rule). 164. Salt River Project Agric. Improvement & Power Dist. v. Westinghouse Elec. Corp., 694 P.2d 198, 207-11 (Ariz. 1984) (unreasonable risk of harm), abrogated by Phelps v. Firebird Raceway, Inc., 111 P.3d 1003 (Ariz. 2005); Moorman Mfg. Co., 435 N.E.2d at 450 (applying the intermediate rule when damage caused by a sudden and dangerous occurrence); Council of Co-Owners Atlantis Condo., Inc. v. Whiting-Turner Contracting Corp., 517 A.2d 336, 345-48 (Md. 1986) (clear danger of death or personal injury); Anderson v. Chrysler Corp., 403 S.E.2d 189, 192-93 (W. Va. 1991) (sudden, calamitous event); see Daitom, Inc. v. Pennwalt Corp., 741 F.2d 1569, 1581 (10th Cir. 1984) (unreasonable dangerousness); AgriStor Leasing v. Meuli, 634 F. Supp. 1208, 1216-18 (D. Kan. 1986), aff’d, 865 F.2d 1150 (10th Cir. 1988); Berkeley Pump Co. v. Reed-Joseph Land Co., 653 S.W.2d 128, 131-32 (Ark. 1983) (unreasonable dangerousness). 165. East River, 476 U.S. 858, 869-70 (1986) (alteration in original) (quoting Russell v. Ford Motor Co., 575 P.2d 1383, 1387 (Or. 1978)). 166. D’Angelo, supra note 2, at 601; see also supra note 164. 167. See supra note 164. 168. See Star Furniture Co. v. Pulaski Furniture Co., 297 S.E.2d 854, 859 (W. Va. 1982) (“Tort law traditionally has been concerned with compensating for physical injury to person or property.”).

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Second, they are able to provide greater deterrence against manufacturing dangerously defective products.169 IV. PROBLEMS WITH THE MAJORITY APPROACH There are several drawbacks to adopting the majority rule’s stringent approach to economic loss. This part points out how the majority rule: fails to provide victims protection even from unforeseeable dangers; dilutes tort policy of protecting against personal injury; significantly limits the discretion of courts; and leads to arbitrary results in certain circumstances. A. Fails to Protect Consumers Even from Unforeseeable Dangers The majority rule leaves victims with no opportunity to recover for economic loss alone, even in cases of unforeseeable danger.170 The majority of courts support this outcome by citing the importance of limiting liability of manufacturers.171 They further reason that purchasers, as opposed to manufacturers, can best insure against economic losses.172 This reasoning balances liability of manufacturers against the rights of victims to recover and errs on the side of the manufacturers in all cases.173 These results are flawed, especially where the loss creates an unforeseeable danger.

169. See id. at 861. 170. See East River, 476 U.S. at 871 (“[A] manufacturer in a commercial relationship has no duty under either a negligence or a strict products-liability theory to prevent a product from injuring itself.”). 171. See, e.g., id. at 874 (expressing concern about making manufacturers liable for “vast sums”). 172. Alloway v. Gen. Marine Indus., L.P., 695 A.2d 264, 268 (N.J. 1997); see Daanen & Janssen, Inc. v. Cedarapids, Inc., 573 N.W.2d 842, 849 (Wis. 1998) (“[P]urchaser’s [economic] expectations may be unrealistic or inflated by advertising claims made by someone else in the distribution chain over whom the manufacturer has no control.”); Elizabeth A. Heiner, Sunnyslope Grading, Inc. v. Miller, Bradford, & Risberg, Inc.: What Recovery for Economic Loss—Tort or Contract?, 1990 WIS. L. REV. 1337, 1345 (“Although a manufacturer can assess the possibility of personal injury or property damage, it is more difficult to assess a buyer’s disappointed expectation.”). 173. See Mary J. Davis, The Supreme Court and Our Culture of Irresponsibility, 31 WAKE FOREST L. REV. 1075, 1135 (1996) (suggesting that courts “strain[] to immunize conduct to protect the interest of the institution over the individual”).

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This flaw is specifically evident is asbestos cases. In these cases, consumers were never warned of the dangers of asbestos.174 In fact, it was not until the 1970s that consumers became aware of the unreasonable dangers of asbestos.175 Asbestos manufacturers, on the other hand, had known of the dangerous effects of asbestos as early as the 1930s.176 This scenario stumped majority rule courts because manufacturers here were clearly better suited than consumers to insure against the dangers of asbestos, as consumers could not foresee these dangers.177 Most majority courts were so troubled by the issue that they dubbed it a “unique situation.”178 These courts then went out on a limb to recognize an asbestos exception.179 Unfortunately, less daring courts felt bound by the precedent of the majority rule and foreclosed victims of asbestos contamination from any recovery.180 Asbestos cases, however, are not so “unique,” as simpler situations create similar foreseeability problems. For instance, a boat hypothetical may be used to demonstrate the problem. A boat purchaser certainly has an economic expectation of quality. If the boat’s engine were to have a defect that required repair, then the purchaser’s expectation would be disappointed.181 This would be a simple situation of economic loss, as mechanical repairs are well within the realm of foreseeability.182 On the other hand, if the engine defect was so egregious that it caused the entire boat to be destroyed by a sudden fire, then the scenario would hardly be the same. This result is not mere economic disappointment, as it leaves the consumer
174. E.g., Borel v. Fibreboard Paper Prods. Corp., 493 F.2d 1076, 1086 (5th Cir. 1973) (noting that manufacturers never warned contractors or insulation workers of hazard associated with asbestos). 175. See, e.g., Bd. of Educ. of Chi. v. A, C & S, Inc., 546 N.E.2d 580, 595 (Ill. 1989) (indicating that the EPA issued a document in 1979 warning school districts of the dangers of asbestos and that lawsuits on behalf of school districts were initiated in the 1980s). 176. Borel, 493 F.2d at 1083 (“By the mid-1930’s, the hazard of asbestosis . . . was universally accepted.”). 177. See D’Angelo, supra note 1, at 601 (noting that asbestos cases present a “particularly difficult issue”). 178. See supra note 159. 179. See supra note 161 and accompanying text. 180. Catasauqua Area Sch. Dist. v. Eagle-Picher Indus. Inc., Civ. A. No. 85-3743, 1988 WL 102689, at *3 (E.D. Pa. Sept. 28, 1988) (stating that plaintiff failed to prove that asbestos caused other property damage or contaminated the building). 181. See E. River S.S. Corp. v. Delaval Turbine, Inc., 752 F.2d 903, 908 (3d Cir. 1985) (en banc) (finding that defective turbines resulted in dissatisfaction with quality), aff’d sub nom. East River, 476 U.S. 858 (1986). 182. Daanen & Janssen, Inc. v. Cedarapids, Inc., 573 N.W.2d 842, 849 (Wis. 1998) (“Even if a commercial purchaser cannot detect product failures before they occur, it can at least anticipate problems . . . .”).

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without the benefit of the bargain entirely and potentially places the consumer in harm’s way. Further, it is not the type of defect one would easily foresee. This type of incident poses a foreseeability problem, since the purchaser may foresee a component defect, but not a defect that destroys the entire product in a sudden manner. Where the defect is unforeseeable, the purchaser’s ability to insure against the loss is significantly reduced.183 While the possibility of a boat fire is not quite as remote as the case of asbestos, the boat purchaser, nevertheless, weighs the cost of insurance against the expected loss to decide whether insurance is justified or whether to bear the burden of future losses.184 In performing this mental calculus, the purchaser would account for foreseeable losses, but may not be able to properly account for unforeseeable ones.185 Manufacturers, on the other hand, are in a better position to foresee remote dangers.186 In asbestos cases, for example, the manufacturers knew of the potential dangers of asbestos, but did not warn purchasers.187 In any case, the manufacturer has the benefit of knowing its product; by virtue of its status, the manufacturer, not the purchaser, would be alerted first to any unforeseeable defects that its product may have.188 This information empowers manufacturers to better deal with unforeseeable dangers.189

183. Deborah A. Stone, Promises and Public Trust: Rethinking Insurance Law Through Stories, 72 TEX. L. REV. 1435, 1439 (1994) (“[T]he very idea of an insurance contract presumes the parties can specify foreseeable losses that will trigger the insurer’s promise to pay. . . . [B]ut in monitoring claims, insurers press the narrow reading of the contract and their obligation to limit payouts to situations foreseen by the contract.”). 184. See generally C. ARTHUR WILLIAMS, JR. & RICHARD M. HEINS, RISK MANAGEMENT AND INSURANCE 737-42 (5th ed. 1985) (explaining the “expected utility approach” to making decisions regarding risk). 185. See Bd. of Educ. of Chicago v. A, C & S, Inc., 546 N.E.2d 580, 594 (Ill. 1989) (noting the plaintiffs’ allegation that they “were induced to use the [asbestos] products while being deprived of information necessary to make a knowledgeable choice”). 186. Daanen & Janssen, Inc., 573 N.W.2d at 849 (“[A] manufacturer may be better able than a consumer to assess the possibility of foreseeable personal injury or property damage, [although] it is more difficult for that manufacturer to assess a commercial purchaser’s disappointed economic expectations.”). 187. See supra note 174. 188. See Michael L. Matula, Manufacturers’ Post-Sale Duties in the 1990s, 32 TORT & INS. L.J. 87, 105-07 (1996) (discussing ways that manufacturer may be alerted to dangers of its own product). 189. See id. at 106-19.

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Unfortunately, the majority rule requires courts to summarily deny recovery for economic loss.190 This leaves victims with no possibility of recovery, even in circumstances of unforeseeable danger and even when the manufacturer is better suited to foresee the potential loss. B. Dilutes Tort Policy of Discouraging Dangerous Defects Another limitation of the majority rule is that it dilutes tort policy of discouraging dangerous product defects.191 This policy is one of the key aspects behind tort law.192 Tort law promotes it by holding manufacturers liable when products cause injuries, thereby creating an incentive to reduce injury.193 By increasing the cost of liability, the law “provide[s] reasonable incentives for balancing productive behavior against safety and compensation.”194 The majority rule of economic loss, however, works to decrease the liability of manufacturers, thus creating a disincentive to eliminate dangerous defects.195 Majority rule courts argue that where there is no personal injury, the tort policy of discouraging dangerous defects is weak.196 They figure that the possibility of liability for injury is deterrent enough.197 This results in
190. Davis, supra note 173, at 1090-91 (stating that in Richard O’Brien Cos. v. Challenge-Cook Bros., Inc., 672 F. Supp. 466 (D. Colo. 1987), the court granted summary judgment for the defendant, disregarding a prior case that allowed recovery for purely economic loss in tort because it was decided prior to East River). 191. See J. Matthew Thompson, Torts: Dutsch v. Sea Ray Boats, Inc.: A Policy Based Analysis of the Recovery of Economic Loss Under Manufacturer’s Products Liability in Oklahoma, 47 OKLA. L. REV. 397, 398 (1994) (“[P]rohibiting recovery of economic loss in manufacturer’s products liability is inconsistent with underlying policy goals of strict tort action.”). 192. See id. at 408. 193. See id. 194. Jay M. Feinman, Un-Making Law: The Classical Revival in the Common Law, 28 U. SEATTLE L. REV. 1, 31 (2004); see also Richard A. Roth, The Essence of the Agent Orange Litigation: The Government Contract Defense, 12 HOFSTRA L. REV. 983, 1012-14 (1984) (discussing the policy impact of allowing government contractors to avoid product liability). 195. Contra Thompson, supra note 191, at 409 (noting that strict liability provides an incentive to make safe products). 196. East River, 476 U.S. 858, 871 (1986) (reasoning that tort concern with safety is reduced when only the product itself is injured); Alloway v. Gen. Marine Indus., L.P., 695 A.2d 264, 270 (N.J. 1997) (stating that economic loss does not justify “increased cost to the public that would result from holding the manufacturer liable in tort”). 197. Bocre Leasing Corp. v. Gen. Motors Corp., 645 N.E.2d 1195, 1198 (N.Y. 1995) (“Since any product put into the stream of commerce has the theoretical potential to injure persons and property, the incentive to provide safe products is always present.”); see also Rich

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manufacturers being off the hook when, by luck, personal injury is avoided and only economic loss occurs.198 Majority rule courts fail to take account of the fact that where the chances of recovery increase, the expected cost of claims increases.199 This, in turn, creates a greater incentive to eliminate dangerous defects.200 Each time a manufacturer is relieved from liability, the balance shifts the other way, toward allowing dangerous defects to continue.201

Prods. Corp. v. Kemutec, Inc., 66 F. Supp. 2d 937, 976 (E.D. Wis. 1999), aff’d, 241 F.3d 915 (7th Cir. 2001); Gen. Cas. Co. of Wis. v. Ford Motor Co., 592 N.W.2d 198, 201 (Wis. 1999); D’Angelo, supra note 1, at 602. 198. But see East River, 476 U.S. at 871 (the distinction between tort recovery and contract recovery rests on the nature of the manufacturer’s responsibility in distributing its product); Seely v. White Motor Co., 403 P.2d 145, 147 (Cal. 1965) (same). 199. A graphical demonstration of how the cost of claims increases when the probability of recovery increase:
Cost of Claim s Versus Probability of Recovery

Cost of Claims 0%

20%

40%

60%

80%

100%

Probability of Recovery

200. See supra note 191 and accompanying text. 201. The following chart compares the cost of liability under each of the economic loss rules:

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Further, the manufacturer “is in a far better position than the consumer to prevent the circulation of defective products.”202 Therefore, the policy for holding manufacturers liable for dangerous products is strong whenever a defective product causes injury, whether economic or personal. As such, decreasing manufacturer liability dilutes the incentives for manufacturers to make safer products.

Cost of Claims Under Each Approach to the Economic Loss Rule

Cost of Claims

Number of Defects Majority Rule Intermediate Rule Minority Rule

This chart assumes that 10% of all defects are dangerous and warrant recovery under the intermediate rule. It also assumes that dangerous defects have a 30% chance of causing actual harm to person or other property. Notice the decrease in the cost of claims under the intermediate rule and an even further decrease under the majority rule. Also notice that under either rule, a manufacturer who is able to eliminate defect altogether will have no claims. Of course, the slope of the lines will vary for every product. 202. Kline v. Sec. Guards, Inc., 159 F. Supp. 2d 848, 853 (E.D. Pa. 2001) (inferring sellers as manufacturers); Francioni v. Gibsonia Truck Corp., 372 A.2d 736, 739 (Pa. 1977) (same).

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C. Limits Discretion of Courts The majority rule of the economic loss doctrine also significantly limits the discretion of courts to decide whether damages for economic loss should be awarded.203 Instead of taking a case-by-case approach, the majority rule creates a stringent rule to bar recovery.204 This approach takes away the court’s discretion to apply policy in determining whether circumstances warrant recovery.205 Thereby, the rule takes away the court’s ability to ensure equitable outcomes. The reasons to take discretion out of the hands of the courts are limited. After all, courts have wide discretion in other areas of law.206 However, majority rule courts choose to apply a bright-line test that favors manufacturers by limiting liability and litigation, rather than an approach that allows courts to use discretion in deciding whether the circumstances warrant recovery. D. Leads to Arbitrary Results Lastly, the majority rule of the economic loss doctrine leads to arbitrary results by allowing recovery in a case where a defect causes injury and denying recovery where the same defect does not cause injury.207 The rule arbitrarily concentrates only on damages and completely disregards the nature of the defect.208
203. See D’Angelo, supra note 1, at 591 (“[T]here is no tort liability—whether under strict liability, negligence or negligent misrepresentation theories—when a defect causes only economic losses. . . .”). 204. See Thompson, supra note 191, at 412 (criticizing courts for treating economic loss as a legal conclusion). 205. See Davis, supra note 173, at 1082 (noting that East River did not fully explore the policies behind tort law). 206. United States v. Taylor, 487 U.S. 326, 336 (1988) (“This Court previously has recognized . . . that courts were to have ‘wide discretion exercising their equitable powers.’” (quoting 118 CONG. REC. 7168 (1972)); see also United States v. Abel, 469 U.S. 45, 54 (1984) (“A district court is accorded a wide discretion in determining the admissibility of evidence.”); Rhodes v. Chapman, 452 U.S. 337, 356 n.4 (1981) (“This Court has upheld the exercise of wide discretion by trial courts to correct conditions of confinement found to be unconstitutional.”). 207. But see Seely v. White Motor Co., 403 P.2d 145, 151 (Cal. 1965) (suggesting the distinction between personal injury and economic loss does not rest on the “luck” of the draw). 208. See Thompson, supra note 191, at 412 (recommending that “[t]he true focus should be on the nature of the defect; the particular manifestation of the defect may or may not evidence the relative danger of the defective product”).

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A boat purchase scenario once again shows the arbitrariness of the majority rule.209 For example, take two boats with dangerously defective engines. The only difference is that one boat has a factory-installed engine, while the other has an aftermarket engine. The engines on both boats malfunction and cause each of the boats to be destroyed by sudden fires, but, by chance, nothing beyond the boats is damaged. The majority rule would allow recovery in the case of the aftermarket engine, but not in the case of the factory-installed engine.210 Yet, the loss is identical in both instances. What reason is there to hold the manufacturer of the engine liable in the first instance and not the second? If the same manufacturer sells engines to both boat manufacturers and consumers, why should liability change based on who the buyer is? What reason is there to protect the victim in the first instance and not in the second? In the eyes of the consumer the loss is identical both times. Clearly, the difference in results is erroneous. By concentrating only on defining the product and the damages, the majority rule leads to different results in very similar situations.211 The only result is that manufacturer liability is limited at a cost to the consumer.212 V. THE WISDOM OF THE INTERMEDIATE APPROACH The intermediate rule artfully crafts an exception to the majority approach, which allows it to better deal with cases and policies that are problematic to the majority rule. This part discusses how the intermediate rule offers equitable justice to victims; discourages dangerous product defects while providing sufficient limits on liability; and insures that courts have discretion to avoid arbitrary results. A. Offers Equitable Justice The essence of the intermediate rule is that it looks to the nature of the defect so that the consumer-victim who bore the cost of the defect is

209. See id. at 413 (using a boat example to demonstrate the arbitrary nature of the majority rule). 210. See Gunkel v. Renovations, Inc., 822 N.E.2d 150, 156-57 (Ind. 2005) (allowing the owners of a damaged home to seek recovery from stone façade installer, where the façade was installed after the home was built). 211. See Davis, supra note 173, at 1135. 212. See id.

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equitably reimbursed.213 The “sudden and calamitous” event and the “unreasonable risk of death or bodily injury” exceptions both insure that victims are reimbursed where policy reasons for protecting manufacturers are weaker than the policy reasons for reimbursing consumers.214 These exceptions give courts tools to accommodate cases where damages are either unreasonable or unforeseeable. The intermediate approach would easily apply to asbestos cases, and majority rule courts would not have to stretch to allow recovery.215 Nor would some majority rule courts find it necessary to deny recovery in asbestos cases, despite their better judgment.216 As such, the intermediate rule is better suited to achieve equitable results for victims. B. Discourages Dangerous Defects While Sufficiently Limiting Liability The intermediate rule discourages dangerous defects, while limiting liability of manufacturers for purely economic losses. By holding manufacturers accountable for all dangerous defects that manifest themselves, the rule increases incentives for manufacturing safer products.217 While the intermediate rule creates greater liability for manufacturers, it does not create liability to the same extent as the minority rule.218 Instead, it creates reasonable incentives to eliminate dangerous defects and leaves other defects to contract law.219 As long as a manufacturer avoids dangerous

213. Coop. Power Ass’n v. Westinghouse Elec. Corp., 493 N.W.2d 661, 663 (N.D. 1992) (explaining that the intermediate rule “focus[es] on the nature of the defect, the type of risk, and the manner in which the product is damaged”). 214. See Pa. Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165, 1174-75 (3d Cir. 1981) (permitting tort action for damage to a defective product resulting from an unreasonably dangerous condition and precluding tort action for damage resulting from a nondangerous impairment in the quality of the product); N. Power & Eng’g Corp. v. Caterpillar Tractor Co., 623 P.2d 324, 329 (Alaska 1981) (permitting tort action if a defective product creates a potentially dangerous situation, and the product is damaged as a proximate result of the danger under calamitous circumstances). 215. See supra note 161 and accompanying text; see also D’Angelo, supra note 1, at 601 (noting that asbestos cases are “usually resolved through finesse (or perhaps even fiction)”). 216. See supra note 180 and accompanying text (courts refusing to adopt an asbestos exception). 217. See Feinman, supra note 194, at 31-32 (discussing the market mechanism of tort liability). 218. See graph supra note 201. 219. See supra note 194 and accompanying text.

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defects, liability outside of warranty is avoided.220 Therefore, the intermediate rule only allows recovery of economic loss in limited situations, where such recovery is warranted. C. Promotes Judicial Discretion and Avoids Arbitrary Results The intermediate rule allows courts more discretion in deciding cases. Instead of summarily denying recovery in every case where only economic loss has occurred, these courts are able to use equitable means to account for the need to reimburse victims who bear the cost of dangerous defects and the need to discourage such defects. If such courts find that allowing recovery is justified, then they are able to place the occurrence into the exception category. As such, these courts are able to insure equitable results. Further, by primarily concentrating on the defect, these courts are able to insure a consistent result for reimbursing victims.221 VI. CONCLUSION While many states have moved in favor of the majority rule, praising East River for its analysis, the majority rule fails to address important policy considerations. The majority rule fails to reimburse victims of unforeseeable product defects when they suffer only economic losses; dilutes incentives to manufacture safer products; limits the discretion of courts; and leads to arbitrary results in certain situations. The intermediate rule, on the other hand, adopts a more forgiving approach. Intermediate rule courts agree with the policy reasons behind the majority rule. However, they realize that certain situations require a different outcome. By crafting exceptions to the bright-line majority rule, these courts address situations on a case-by-case basis. Intermediate rule courts draw a predictable line on liability, just as the majority rule courts do, but they simply weigh their decision more in favor of plaintiffs when policy is strongest to hold manufacturers accountable. Therefore, the intermediate rule is the better approach to economic loss.

220. See D’Angelo, supra note 1, at 601 (stating that the intermediate rule allows tort recovery only “where the defect renders the product unreasonably dangerous or causes the product to fail in a ‘sudden and calamitous manner’”). 221. See Thompson, supra note 191, at 413 (“The right to pursue the remedy of manufacturers’ products liability must be determined by focus[ing] on the danger posed by the product rather than the kind of damages claimed.” (alteration added) (quoting Dutsch v. Sea Ray Boats, Inc., 845 P.2d 187, 194 (Okla. 1992) (Wilson, J., dissenting)).

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