Rich Products Corp v. Kemutec Incorporated ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-1262
RICH PRODUCTS CORPORATION,
Plaintiff-Appellant,
v.
KEMUTEC INCORPORATED,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 95-CV-968--Rudolph T. Randa, Judge.
Argued September 28, 2000--Decided March 2, 2001
Before FLAUM, Chief Judge, BAUER, and HARLINGTON WOOD,
JR., Circuit Judges.
HARLINGTON WOOD, JR., Circuit Judge. This is a
diversity suit filed in 1994 by plaintiff, Rich
Products Corporation ("RPC"), a Delaware
corporation, with its principal place of business
in New York, against defendant Kemutec, Inc.
("Kemutec"), a Pennsylvania corporation, joined
with Zurich Insurance Company, Kemutec’s insurer.
In 1995, the case was transferred from the
Western District of New York to the Eastern
District of Wisconsin where RPC has a food
manufacturing plant.
RPC seeks to recover damages from Kemutec which
sold a conveyor to be used to move food
components in RPC’s manufacture of food products.
It is alleged that the conveyor was defective
because steel wire strands from the conveyor
cable shredded off and contaminated RPC’s food
products. On two occasions in 1994, RPC plant
employees allegedly discovered a total of twenty-
nine (29) pieces of wire, while others were found
by customers in RPC’s food products, but no
personal injuries are alleged. As a precautionary
measure, RPC recalled all its food products for
the prior eleven months beginning from the time
the conveyor was first installed. RPC claims
damages of $7.2 million in expenses in connection
with the recall, and a loss of $4.2 million in
profits for a total of $11.4 million damages. RPC
does not seek, however, to recover losses for any
damage to the conveyor itself, for its non-
performance, or for losses due to insufficient
throughput/1 or downtime.
Kemutec is a distributor of materials handling
equipment under an agreement with an English
company that is no longer a party to this suit.
RPC alleges that the conveyor had a history of
fractured wire cables of which Kemutec was aware,
but RPC was not. Kemutec allegedly did not reveal
these difficulties to RPC, but instead
misrepresented that the conveyor had an excellent
record handling baking materials. RPC accepted a
quotation from Kemutec in a 1993 purchase order
and the conveyer was soon shipped to RPC and
installed.
This brief summary of the facts sets the stage
for consideration of the applicability of the
Wisconsin Economic Loss Doctrine, the major issue
in this case./2 The district court on cross
motions for summary judgment partially decided
the case, granting in part and denying in part
each of the cross motions. Thereafter, RPC moved
to enter final judgment pursuant to Fed. R. Civ.
P. 54(b). That motion was allowed and the court
certified that "no good reason exists for
delaying judgment against the plaintiff on its
tort claims." The court then dismissed RPC’s tort
claims. That left only RPC’s breach of express
and implied warranties claims in the district
court. This court accepted the appeal.
RPC explains that Kemutec only has insurance
coverage for the tort claims. Kemutec’s insurer
disclaimed coverage on the warranty claims, and
RPC maintains that Kemutec has insufficient
assets to satisfy any residuary judgment. Not
unmindful of RPC’s bleak recovery outlook, we
find the judgment of the district court to be
well-considered, and must be affirmed, as we
discuss below. The warranty claims remaining in
the district court are not involved in this
appeal.
I. DISCUSSION
In this case where there is friction between
tort and contract law, we must apply the
Wisconsin Economic Loss Doctrine. In response to
a certified question of law from this court in
1998, the Wisconsin Supreme Court gave a thorough
and detailed explanation of the doctrine in
Daanen & Janssen, Inc. v. Cedarapids, Inc., 573
N.W.2d 842 (Wis. 1998), which controls the case
at issue. The economic loss doctrine is a
judicially created doctrine, id. at 844, the
application of which is "to maintain the distinct
functions of tort and contract law." Id. at 846.
The doctrine provides:
[A] commercial purchaser of a product cannot
recover from a manufacturer, under the tort
theories of negligence or strict products
liability, damages that are solely "economic" in
nature. As other courts have recognized, defining
"economic loss" is difficult. Economic loss is
generally defined as damages resulting from
inadequate value because the product is inferior
and does not work for the general purposes for
which it was manufactured and sold. It includes
both direct economic loss and consequential
economic loss. The former is loss in value of the
product itself; the latter is all other economic
losses attributable to the product defect.
* * * *
Direct economic loss may be said to encompass
damage based on insufficient product value; thus,
direct economic loss may be "out of pocket"--the
difference in 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. . . . Consequential
economic loss includes all indirect loss, such as
loss of profits resulting from inability to make
use of the defective product.
* * * *
The economic loss doctrine, however, does not bar
a commercial purchaser’s claims based on personal
injury or damage to property other than the
product, or economic loss claims that are alleged
in combination with noneconomic losses. In short,
economic loss is damage to a product itself or
monetary loss caused by the defective product,
which does not cause personal injury or damage to
other property.
Id. at 844-45 (citations omitted).
The Wisconsin Economic Loss Doctrine is applied
to tort actions between commercial parties based
on three policies:
(1) to maintain the fundamental distinction
between tort law and contract law; (2) to protect
commercial parties’ freedom to allocate economic
risk by contract; and (3) to encourage the party
best situated to assess the risk (sic) economic
loss, the commercial purchaser, to assume,
allocate, or insure against that risk.
Daanen & Janssen, 573 N.W.2d at 846. The court
considered both the contract law and tort law
aspects of the doctrine.
From its inception the economic loss doctrine has
been based on an understanding that contract law
and the law of warranty, in particular, is better
suited than tort law for dealing with purely
economic loss in the commercial arena. . . .
Contract law rests on obligations imposed by
bargain. The law of contracts is designed to
effectuate exchanges and to protect the
expectancy interests of parties to private
bargained-for agreements. Contract law,
therefore, seeks to hold commercial parties to
their promises, ensuring that each party receives
the benefit of their bargain. Accordingly, the
individual limited duties implicated by the law
of contracts arise from the terms of the
agreement between the particular parties.
* * * *
The law of torts, on the other hand, rests on
obligations imposed by law. Tort law is rooted in
the concept of protecting society as a whole from
physical harm to person or property. Products
liability and negligence law, in particular,
developed to protect consumers from unreasonably
dangerous goods that cause personal injury and
damage to other property. It is society’s
interest in human life, health, and safety that
demands protection against defective products,
and imposes a duty upon manufacturers of those
products.
* * * *
By definition economic loss excludes claims for
personal injury and damage to other property.
Recovery of economic loss is intended solely to
protect purchasers from losses suffered because
a product failed in its intended use. As a
result, the general duty of care to refrain from
acts unreasonably threatening physical harm is
not paralleled by any comparable duty when the
harm threatened is merely economic. A
manufacturer in a commercial relationship has no
duty under either negligence or strict liability
theories to prevent a product from injuring
itself. The duty to provide a product which
functions to certain specifications is
contractual. Contract law, therefore, is better
suited for enforcing duties in the commercial
arena because it permits the parties to specify
the terms of their bargain and to protect
themselves from commercial risk.
Id. at 846-47 (internal quotations and citations
omitted).
In the present case, RPC is seeking "to recover
in tort what are essentially contract damages."
Daanen & Janssen, 573 N.W.2d at 847. RPC attempts
to do that by selective pleading to avoid the
Wisconsin Economic Loss Doctrine, but even
skillful pleading does not transform the damages
sought into tort claims to make up for what
hindsight shows was the lack of a sufficient
sales contract to protect RPC. Tort law does not
provide a remedy in cases where the commercial
parties "are free to allocate the risk of
economic loss by disclaiming or limiting their
respective liabilities by contract." See id. at
847-48 (citation omitted). RPC failed to do that,
although the record shows that RPC had
experienced trouble with its prior food conveyor
(although not a belt system) and was seeking a
remedy with a new and reliable conveyor for its
food products business. Why RPC did not seek
contract and warranty protection with its new
system does not appear. If it had, this lawsuit
might have been avoided. That RPC chose instead
to rely on Kemutec’s advertising and self-serving
promotions does not change this action from
contract to tort. In a commercial relationship,
liability is determined by contract. RPC should
have sought performance guarantees from Kemutec
or gone elsewhere for equipment with warranties.
RPC knew what could or might happen, and it did.
See id. at 849 ("[Daanen] could have anticipated
production problems caused by equipment failures
and guarded against such failures by purchasing
insurance or through allocating these risks by
contract."). A protective contract may or may not
justify the increased cost, but without such a
contract there remains the risk that RPC chose to
take. These commercial parties had complete
freedom to contract. We cannot do for RPC what it
did not do. See id. ("We see no reason to intrude
into the parties’ allocations of risk of economic
loss and to extricate the parties from their
bargains.").
We have used the words of the Wisconsin Supreme
Court as found in the various quotes above rather
than try to paraphrase the holding. The Wisconsin
Supreme Court chose its words carefully in
explaining its Economic Loss Doctrine and this
court is not at liberty to disregard that
comprehensive opinion.
As it turns out, RPC’s recall of its products
and its other precautionary actions no doubt
saved RPC’s reputation as a reliable and
trustworthy food manufacturer even though it must
lose this tort dispute. The other arguments of
RPC are without merit.
The judgment of the district court is affirmed,
leaving RPC’s warranty claims to be resolved by
that court.
AFFIRMED.
/1 Throughput is defined as "an amount of raw
material put through processing or finishing
operations in a specific time." Webster’s Third New
International Dictionary 2385 (1981).
/2 Other pertinent facts will be mentioned where
needed, but for a comprehensive review of all the
facts and issues, see Rich Products Corp. v.
Kemutec, Inc., 66 F.Supp. 2d 937 (E.D. Wis.
1999).