The lawyers in our Consumer Fraud & Commercial Litigation Section felt that we should write this month on the often misunderstood “Economic Loss Doctrine,” herein after referred to as ELD. This is something they have to deal with quite often. For those who are not familiar with the ELD, it is a court-developed doctrine that has been adopted by the majority of the states in the U.S. In general, the doctrine prohibits a plaintiff from recovering economic damages in tort where a product defect or failure causes damage to the product itself, resulting in economic loss, but does not cause personal injury or damage to any other property.

The purpose of the doctrine is to maintain the difference between tort law and contract law. It encourages parties to allocate economic risk through contract, typically by negotiating warranties and other contract remedies.

The public policy behind the doctrine is that the purchaser is in the best position to weigh the risk of economic loss and then act accordingly through warranties and insurance. The fear is that if manufacturers were forced to bear the risk of economic loss themselves they would raise prices accordingly to compensate for the risk. This would place the entire cost of economic losses − for those failing to bargain for contract remedies − upon the consuming public as a whole.

One way to combat the ELD defense is to argue that the loss was not purely economic. Pure economic loss, as it relates to the ELD, is either damage to the product itself or a monetary loss caused by the defective product where no other property was damaged and no person was injured.

For example, if a front-end loader caught fire because of a new heated seat the Plaintiff bought and had installed on the tractor, the Plaintiff could possibly recover the damages in tort from the manufacturer of the heated seat if the seat was found to be defective. This would be possible because the destruction of the front-end loader would be considered “damage to other property” and, thus, not purely economic.

However, if the Plaintiff ordered the front-end loader with a heated seat already installed, the heated seat would then be part of the product and the tort action against the manufacturer would likely be barred by the ELD.

The most important thing to remember is that states differ on how they approach and apply the ELD. For instance, Alabama provides a fraudulent inducement exception to the ELD defense. See e.g., Ford Motor Co. v. Rice, 726 So. 2d 626, 631 (Ala. 1998). Other states have promulgated product liability statutes that explain how the ELD shall apply and in what types of circumstances. As more states expand the application of the ELD, however, the law’s potential intersection with other statutes increases.

For example, the question about whether and how general construction statutes could co-exist with the ELD came up in a recent summary judgment decision in Wisconsin. In Housing Authority of the City of Milwaukee et. al. v. Zimmerman Design Group, et al., Milwaukee County Case No. 12-CV-11532, the local housing authority asserted claims for, among other things, breach of contract, warranty, and negligence against various parties, including the architect and a supplier of a multi-story, multi-tenant subsidized housing development in Milwaukee, Wis.

Plaintiff’s lawyers argued that, under Wisconsin law, the court could not apply the ELD and that parties to construction contracts, like the local housing authority, could pursue tort claims for purely economic losses. It was further argued that it was against Wisconsin public policy to allow a contractor to attempt to limit or eliminate its tort liability.

The lawyers for the Defendant supplier, which filed for summary judgment seeking to dismiss the negligence claim asserted against it, argued that the Wisconsin statute at issue merely provided that parties could not contract away tort liability and that “nothing in the language of the statute added to, subtracted from, or revised the elements of tort liability, including when, where, or how the ELD would be applied.” The court ultimately concluded that the Wisconsin statute at issue could run parallel with the ELD.

This is just one example of how one state has had to reconcile the application of the ELD with its other statutes in a particular case. Because each state is different, it would be worthwhile to examine your state’s statutes and case law precedent to determine how to best approach an ELD defense in your state.

If you have any questions on the ELD, contact Claire Burns, a lawyer in our firm’s Consumer Fraud & Commercial Litigation Section, at 800-898-2034 or by email at Claire.Burns@beasleyallen.com.

Sources: “Unraveling the Applications of the Economic Loss Doctrine, LAW360, http://www.law360.com/articles/858374/unraveling-the-applications-of-the-economic-loss-doctrine

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