Chmm v. Freeman Marine Equipment , 791 F.3d 1059 ( 2015 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
CHMM, LLC, No. 13-35163
Plaintiff-Appellant,
D.C. No.
v. 3:12-cv-01484-ST
FREEMAN MARINE EQUIPMENT,
INC., OPINION
Defendant-Appellee.
Appeal from the United States District Court
for the District of Oregon
Anna J. Brown, District Judge, Presiding
Argued and Submitted
October 8, 2014—Portland, Oregon
Filed June 29, 2015
Before: Alex Kozinski, Raymond C. Fisher
and Andre M. Davis,* Circuit Judges.
Opinion by Judge Kozinski
*
The Honorable Andre M. Davis, Senior Circuit Judge for the U.S.
Court of Appeals for the Fourth Circuit, sitting by designation.
2 CHMM V. FREEMAN MARINE EQUIP.
SUMMARY**
Admiralty Law
Reversing the district court’s judgment in an admiralty
case, the panel held that a vessel owner could sue for the
physical damage a defective vessel component caused to
property that the owner added to the vessel before the vessel
was delivered.
The panel held that the vessel owner’s tort claims were
not barred by the economic loss doctrine, which precludes
recovery against a manufacturer for physical damage that the
manufacturer’s defective product causes to the “product
itself,” but allows recovery for physical damage the product
causes to “other property.”
COUNSEL
Brian P.R. Eisenhower, Anthony J. Pruzinsky (argued), Hill
Rivkins LLP, New York, New York; David R. Boyajian,
Colin J. Folawn, Daniel F. Knox, Schwabe, Williamson &
Wyatt, Portland, Oregon, for Plaintiff-Appellant.
Jay W. Beattie (argued), James P. McCurdy, Lindsay, Hart,
Neil & Weigler, Portland, Oregon; David W. Lannetti,
Edward J. Powers, Vandeventer Black LLP, Norfolk,
Virginia, for Defendant-Appellee.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
CHMM V. FREEMAN MARINE EQUIP. 3
OPINION
KOZINSKI, Circuit Judge:
The economic loss doctrine precludes recovery against a
manufacturer for physical damage that the manufacturer’s
defective product causes to the “product itself.” E. River S.S.
Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 866–71
(1986). But the manufacturer can be sued for physical
damage the product causes to “other property.” Id. at
867–68. We consider whether a vessel owner may sue for the
physical damage a defective vessel component causes to
property that the owner adds to the vessel before the vessel is
delivered. Put another way, is property added by the owner
to a vessel prior to the delivery of the vessel considered
“other property”?
I. Background
CHMM, LLC is the owner of M/Y JAMAICA BAY, a
59.5-meter luxury yacht. In 2006, CHMM contracted with
Nobiskrug GmbH to “construct, equip, launch and complete
[the yacht] at [Nobiskrug’s] shipyard and to sell and deliver
[the yacht] to [CHMM]” for approximately €34.2 million.
Nobiskrug subcontracted with Freeman Marine Equipment
for the manufacture of a “weathertight” door for installation
in the yacht. This door provided access from the foredeck to
the interior of the yacht.
The shipbuilding contract between Nobiskrug and
CHMM states that “the Interior Outfit of the Yacht is to be
provided by [CHMM]” and that “delivery and installation of
the Interior Outfit has to be executed within the time frame
laid down in [Nobiskrug’s] Construction Schedule.” CHMM
4 CHMM V. FREEMAN MARINE EQUIP.
contracted with third parties for the purchase and installation
of the items in the yacht’s interior. The yacht that Nobiskrug
ultimately delivered to CHMM contained a finished interior
outfit.
In 2011, while the yacht was at sea en route to the
Bahamas, the Freeman door allegedly malfunctioned, letting
in a substantial amount of water. The subsequent flooding
severely damaged the yacht and its interior, including
woodwork, furniture, carpeting, electrical wiring, and
electronics. CHMM estimates it would cost over $18 million
to repair the damage.
CHMM sued Freeman, alleging five tort claims—
negligence, defect in design, defect in manufacture, failure to
properly instruct in the installation and use of the door and
negligent misrepresentation. Freeman moved to dismiss on
the ground that recovery for physical damage to the yacht’s
interior was barred by the economic loss doctrine announced
in East River Steamship. While this motion was pending,
CHMM amended its complaint to add a sixth claim for breach
of “contract, quasi-contract and/or warranty.”
The magistrate judge construed the motion as against the
amended complaint and determined that the economic loss
doctrine barred CHMM’s five tort claims because the interior
of the vessel was “integrated into” the completed vessel and
was therefore part of the product itself. The magistrate judge
held that the portion of the sixth count that alleged breach of
contract should be dismissed because CHMM had no
contractual relationship with Freeman. But the magistrate
judge concluded that it would be premature to dismiss the
breach of quasi-contract or express warranty claims without
giving CHMM an opportunity for discovery. The district
CHMM V. FREEMAN MARINE EQUIP. 5
court adopted the magistrate judge’s Findings and
Recommendation in full and granted CHMM leave to file a
second amended complaint “to the extent that [CHMM] seeks
tort remedies for damage to ‘other property’ added after
delivery of the Vessel by Nobiskrug to [CHMM].”
CHMM now appeals the district court’s interlocutory
order dismissing the five tort claims as barred by the
economic loss doctrine. We have jurisdiction under
28 U.S.C. § 1292(a)(3), which allows us to hear appeals from
“[i]nterlocutory decrees of . . . district courts . . . determining
the rights and liabilities of the parties to admiralty cases.”
28 U.S.C. § 1292(a)(3); see All Alaskan Seafoods, Inc. v. M/V
Sea Producer, 882 F.2d 425, 427 (9th Cir. 1989) (“To fall
within the ambit of section 1292(a)(3), it is sufficient if a[]
[district court] order conclusively determines the merits of a
particular claim as between the parties.”); see also Sea Lane
Bahamas Ltd. v. Europa Cruises Corp., 188 F.3d 1317, 1321
(11th Cir. 1999) (“As a general rule, a district court’s order
resolving one or more claims on the merits is appealable
under § 1292(a)(3), irrespective of any claims that remain
pending.”). We review de novo, accepting all facts alleged in
the amended complaint as true and construing them in the
light most favorable to CHMM. Barker v. Riverside Cnty.
Office of Educ., 584 F.3d 821, 824 (9th Cir. 2009).
II. Discussion
We have described the economic loss doctrine, as applied
in products liability cases, as follows:
If a plaintiff is in a contractual relationship
with the manufacturer of a product, the
plaintiff can sue in contract for the normal
6 CHMM V. FREEMAN MARINE EQUIP.
panoply of contract damages, including
foreseeable lost profits and other economic
losses. Whether or not the plaintiff is in
a contractual relationship with the
manufacturer, the plaintiff can sue the
manufacturer in tort only for damages
resulting from physical injury to persons or to
property other than the product itself.
Giles v. Gen. Motors Acceptance Corp., 494 F.3d 865, 874
(9th Cir. 2007) (emphasis added). This doctrine is rooted in
“[t]he distinction that the law has drawn between tort
recovery for physical injuries and warranty recovery for
economic loss.” Seely v. White Motor Co., 403 P.2d 145, 151
(Cal. 1965) (en banc). As Chief Justice Traynor explained in
Seely, this distinction rests on the understanding that a
manufacturer “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,” but he “cannot be held [liable]
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.The Supreme Court relied on Seely in applying the
economic loss doctrine to products liability cases in East
River. 476 U.S. at 871. There, supertanker charterers sought
recovery in tort for damage caused by defective turbine parts.
The Court held that the charterers were precluded from tort
recovery because “there was no damage to ‘other’ property,”
as “each supertanker’s defectively designed turbine
components damaged only the turbine itself.” Id. at 867. The
Court reasoned:
CHMM V. FREEMAN MARINE EQUIP. 7
Damage to a product itself is most naturally
understood as a warranty claim. Such damage
means simply that the product has not met the
customer’s expectations, or, in other words,
that the customer has received “insufficient
product value.” The maintenance of product
value and quality is precisely the purpose of
express and implied warranties. Therefore, a
claim of a nonworking product can be brought
as a breach-of-warranty action. Or, if the
customer prefers, it can reject the product or
revoke its acceptance and sue for breach of
contract.
Id. at 872 (citations and footnote omitted).
The Court added that a contract or warranty action has a
“built-in limitation on liability” in the form of the “agreement
of the parties and the requirement that consequential
damages, such as lost profits, be a foreseeable result of the
breach.” Id. at 874. By contrast, permitting tort recovery for
“all foreseeable claims for purely economic loss could make
a manufacturer liable for vast sums,” as products liability law
imposes “a duty to the public generally.” Id. Indeed, it’s
“difficult for a manufacturer to take into account the
expectations of persons downstream who may encounter its
product.” Id. Thus, the Court observed, the economic loss
doctrine “account[s] for the need to keep products liability
and contract law in separate spheres and to maintain a
realistic limitation on damages.” Id. at 870–71.
A decade later, the Court revisited this “corner of tort
law” in Saratoga Fishing Co. v. J.M. Martinac & Co.,
520 U.S. 875, 877 (1997). Martinac built a fishing vessel in
8 CHMM V. FREEMAN MARINE EQUIP.
which it installed a hydraulic system designed by Marco
Seattle Inc. Joseph Madruga purchased the vessel and added
equipment—a skiff, fishing net and spare parts. Madruga
then sold the vessel, which contained the additional
equipment, to Saratoga Fishing Company. The vessel later
caught fire and sank as a result of a defective hydraulic
system, after which Saratoga Fishing filed a tort suit against
Martinac and Marco Seattle.
There was no dispute that the “product itself” consisted
“at least of a ship as built and outfitted by its original
manufacturer and sold to an initial user.” Id. at 877. The
question was whether Saratoga Fishing, the subsequent user,
could recover in tort for “the physical destruction of extra
equipment . . . added by the initial user after the first sale and
then resold as part of the ship when the ship itself is later
resold to a subsequent user.” Id. The Court held that the
equipment added by Madruga was “other property” and, as
such, Saratoga Fishing was eligible to recover in tort for
damage to that equipment. “When a manufacturer places an
item in the stream of commerce by selling it to an Initial
User, that item is the ‘product itself’ under East River. Items
added to the product by the Initial User are therefore ‘other
property,’ and the Initial User’s sale of the product to a
Subsequent User does not change these characterizations.”
Id. at 879.
Freeman argues that Saratoga Fishing established a
“bright-line rule stating that the product is defined at the time
it enters the stream of commerce, and that any items added
after that time constitute ‘other property’ for purposes of the
economic loss doctrine.” Freeman views as dispositive that
the yacht wasn’t “placed into the stream of commerce, i.e.,
was not delivered to CHMM, until the [yacht] was fully
CHMM V. FREEMAN MARINE EQUIP. 9
complete.” Its position is that the damaged property in the
interior of the yacht consists of the “product itself,” for which
tort recovery is unavailable, because CHMM added that
property before Nobiskrug delivered the completed yacht
from the shipyard.
A closer look at Saratoga Fishing reveals that it draws no
bright-line rule based on the time of delivery. Rather, in
determining whether items added to a product can be
considered “other property,” the Court focused on who added
those items to the product—the user or the manufacturer of
the product.
Saratoga Fishing observed that “[s]tate law often
distinguishes between items added [by a user] to or used in
conjunction with a defective item purchased from a
Manufacturer (or its distributors) and (following East River)
permits recovery for the former when physically harmed by
a dangerously defective product.” 520 U.S. at 880 (citing, for
example, A.J. Decoster Co. v. Westinghouse Electric Corp.,
634 A.2d 1330 (Md. 1994) (chicken farm owner could
recover in tort for the death of his chickens caused by a
defective chicken house ventilation system)). The Court also
cited another admiralty case, Nicor Supply Ships Associates
v. General Motors Corp., 876 F.2d 501 (5th Cir. 1989),
which held that a ship charterer who added seismic
equipment to the ship may recover in tort for damage to that
equipment caused by a defective engine. The Court
concluded that it would maintain the distinction the case law
suggests “between the components added to a product by a
manufacturer before the product’s sale to a user” and “those
items added by a user to the manufactured product.”
Saratoga Fishing, 520 U.S. at 884.
10 CHMM V. FREEMAN MARINE EQUIP.
Saratoga Fishing does not turn on the timing of the
addition to the product. What matters for purposes of tort
recovery is that the items were added by the user. This is
because there is a fundamental difference between the
situation where “a defective manufactured product causes
[damage] to property added by the Initial User” and the
situation in East River, where “a defective component causes
[damage to] the manufactured product, other than the
component itself.” Id. at 883. As the Court explained in
Saratoga Fishing, the latter situation is well-suited for a
warranty action, while the former is not:
Initial users, when they buy, typically depend
upon, and likely seek warranties that depend
upon, a manufacturer’s primary business skill,
namely, the assembly of workable product
components into a marketable whole.
Moreover, manufacturers and component
suppliers can allocate through contract
potential liability for a manufactured product
that does not work, thereby ensuring that
component suppliers have appropriate
incentives to prevent component defects that
might destroy the product. There is no reason
to think that initial users systematically
control the manufactured product’s quality or
. . . systematically allocate responsibility for
user-added equipment [] in similar ways.
Id. at 883–84 (citations omitted). This reasoning holds true
regardless of whether the user added items “after the initial
sale,” as in Saratoga Fishing, id. at 884, or, as here, prior to
it. In both instances, the manufacturer of the product to
CHMM V. FREEMAN MARINE EQUIP. 11
which the user added items had no responsibility for
manufacturing or assembling the user-added items.
“Manufacturers of integrated products can avail
themselves of warranty provisions and can spread the risk of
product defect over their entire market.” All Alaskan
Seafoods, Inc. v. Raychem Corp., 197 F.3d 992, 995 (9th Cir.
1999). For example, “[w]hen purchasing component parts,
[they] can exercise market power to negotiate price and
allocation of downstream risks of defective components.” Id.They can also “impose specifications on component
suppliers.” Id. And they can “use the same components in
multiple iterations of the same product” in order to achieve
economies of scale. Id. But a manufacturer who lacks
responsibility for the manufacture or assembly of user-added
items isn’t in a position to work with component suppliers of
user-added items in such ways. Warranty law is thus ill-
suited to protect against a malfunctioning product that causes
physical damage to user-added items.
Freeman argues that “[t]he initial purchaser of a vessel
has the opportunity to negotiate warranties with the various
vessel builders with which it contracts—before vessel
delivery into the stream of commerce—whereas such
warranties typically are unavailable from those builders for
equipment added after delivery.” But the Supreme Court
rejected this very argument in Saratoga Fishing. In
discussing whether the initial user should have been expected
to offer a warranty to the subsequent purchaser for the items
the initial user added to the vessel, the Court stated:
Of course, nothing prevents a user/reseller
from offering a warranty. But neither does
anything prevent a Manufacturer and an Initial
12 CHMM V. FREEMAN MARINE EQUIP.
User from apportioning through their contract
potential loss of any other items—say, added
equipment or totally separate physical
property—that a defective manufactured
product, say, an exploding engine, might
cause. No court has thought that the mere
possibility of such a contract term precluded
tort recovery for damage to an Initial User’s
other property.
520 U.S. at 882 (emphasis added).
None of the cases Freeman cites in support of its proposed
bright-line rule are on point. See, e.g., All Alaskan Seafoods,
Inc., 197 F.3d at 993–95 (the act of resale does not preclude
the subsequent user from tort recovery); Sea-Land Serv., Inc.
v. Gen. Elec. Co., 134 F.3d 149, 154–55 (3d Cir. 1998) (a
defective replacement component by the same manufacturer
is part of the product itself); Petroleum Helicopters, Inc. v.
Avco Corp., 930 F.2d 389, 393 (5th Cir. 1991) (a defective
interchangeable component by the same manufacturer is part
of the product itself); Shipco 2295, Inc. v. Avondale
Shipyards, Inc., 825 F.2d 925, 929 (5th Cir. 1987)
(manufacturer assembled the entire vessel, and thus the
product was the completed vessel); Exxon Shipping Co. v.
Pac. Res., Inc., 835 F. Supp. 1195, 1201 (D. Haw. 1993) (a
defective interchangeable component purchased directly from
the manufacturer is part of the product itself). Freeman
claims that these cases show that courts “evaluated the object
of the parties’ bargain, which was the acquisition of a fully-
functioning product.” However, in All Alaskan Seafoods, we
interpreted Saratoga Fishing as having “rejected the view . . .
that would define the ‘product’ . . . as the object of the
purchaser’s bargain.” 197 F.3d at 994. In so doing, we
CHMM V. FREEMAN MARINE EQUIP. 13
emphasized “the distinction between components
incorporated by a manufacturer before sale to an initial user
and those items added by a user of the manufactured
product.” Id.
The rule of Saratoga Fishing can thus be distilled as
follows: Where the manufacturer of a product had no
responsibility for manufacturing or assembling items that the
user adds to the product, the user-added items are considered
“other property” for purposes of the economic loss doctrine.
In applying this rule to our case, we begin by examining
Section 2.10 of the Shipbuilding Contract, entitled “Interior
Outfit,” which sets forth the respective responsibilities of
CHMM (“the Purchaser” and user) and Nobiskrug (“the
Builder” and manufacturer):
(a) The Interior Outfit of the Yacht is to be
provided by the Purchaser. The Builder does
not assume any responsibility or liability with
regard to the Interior Outfit, except as
provided herein. The interface between the
scope of work of the Builder and the Interior
Outfit is described in the Interior Outfitting
Demarcation List.
(b) The Purchaser will supply and install the
Interior Outfit by using materials and methods
which are consistent with the requirements
and Specifications related to specified noise
and vibration standards as pre-approved by
the Builder, the Classification Society and the
Flag State and in compliance with the weight
limits for the Interior Outfit as stipulated in
14 CHMM V. FREEMAN MARINE EQUIP.
the Weight Limits List attached as Schedule
11. The delivery and installation of the
Interior Outfit has to be executed within the
time frame laid down in the Builders’
Construction Schedule and in the Action List
by the contractor(s) chosen and employed by
the Purchaser who will not interfere with the
Builders’ scope of work. Any delay in
delivering and installing of the Interior Outfit
shall be a Permissible Delay.
(c) The Purchaser shall furnish the Builder
with all documentation related to the Interior
Outfit which is needed for Classification of
the Yacht.
The “Interior Outfitting Demarcation List” specifies that
Nobiskrug’s scope of work is the “bare ship,” while CHMM’s
is the Interior Outfit. To further clarify matters, the Contract
defines “Interior Outfit” as “the Interior Outfit of the Yacht
for which [CHMM] is responsible.”
In Section 2.10, Nobiskrug disclaims “any responsibility
or liability with regard to the Interior Outfit,” with the
exception of pre-approving the noise and vibration standards
that CHMM used for the Interior Outfit and obtaining
Classification certificates for the yacht once it received the
relevant documentation from CHMM. CHMM, on the other
hand, is responsible for “supply[ing] and install[ing] the
Interior Outfit by using materials and methods which are
consistent” with certain industry specifications; completing
delivery and installation of the Interior Outfit “within the time
frame laid down in [Nobiskrug’s] Construction Schedule”;
ensuring that the contractors CHMM hired to work on the
CHMM V. FREEMAN MARINE EQUIP. 15
Interior Outfit don’t “interfere with [Nobiskrug’s] scope of
work”; and providing Nobiskrug with “all documentation
related to the Interior Outfit which is needed for
Classification of the Yacht.”
The relevant facts can be boiled down to the following:
(1) Nobiskrug was responsible for manufacturing the bare
ship; (2) CHMM, the user, added items to the bare ship; and
(3) Nobiskrug wasn’t responsible for manufacturing or
assembling these user-added items. Under Saratoga Fishing,
the items in the Interior Outfit consist of “other property,”
while the bare ship consists of the “product itself.”
As discussed above, this is not a case within the
wheelhouse of warranty law. CHMM and Nobiskrug didn’t
work together to manufacture or assemble the Interior Outfit
and the bare ship. Rather, CHMM assumed sole
responsibility for providing and installing items in the Interior
Outfit, and Nobiskrug assumed sole responsibility for
manufacturing the bare ship. It’s unreasonable to expect
CHMM to depend upon a warranty from Nobiskrug that the
bare ship would not damage any items in the Interior Outfit.
And it should come as no surprise that Nobiskrug did not
offer such a warranty; the shipbuilding contract states that the
warranties provided therein “apply only to the work of
[Nobiskrug], [Nobiskrug’s] employees, and of its sub-
contractors and suppliers.”
It makes no difference that CHMM added the items
comprising the Interior Outfit prior to the delivery of the
yacht from Nobiskrug’s shipyard. CHMM agreed in the
Shipbuilding Contract to complete the Interior Outfit by the
time Nobiskrug finished construction of the bare ship.
Perhaps this arrangement was made to speed up the process
16 CHMM V. FREEMAN MARINE EQUIP.
so CHMM didn’t have to wait until the bare ship was ready
to then outfit the interior and receive the necessary
registration and Classification certificates. Whatever the
parties’ motivations, CHMM shouldn’t be penalized for not
waiting until after the delivery of the bare ship to outfit the
interior.
Nobiskrug subcontracted with Freeman to provide the
door connecting the foredeck to the interior of the yacht, and
there is no dispute that this door is part of the product.
CHMM’s claim is that the product (the bare yacht, which
included the Freeman door) caused physical damage to other
property (the Interior Outfit). The economic loss doctrine
does not bar CHMM from suing in tort for damage to the
Interior Outfit caused by the allegedly defective Freeman
door.
REVERSED and REMANDED.