Thursday, December 27, 2012

The Economic Loss Rule in Florida - A Primer

Note: this article deals primarily with the "other property" exception to Florida's Economic Loss Rule. As the rule itself applies in several situations, with a number of exceptions, please note that this is not a comprehensive treatment of the entirety of the rule. 

Having dealt with this area of law on multiple occasions, I can authoritatively tell you that Florida's Economic Loss Rule is a mess. The rule, in its most basic form, posits that when a product malfunctions and destroys itself, a Plaintiff may not recover in tort for those purely economic losses. Instead the Plaintiff is limited to the remedies that he or she bargained for when purchasing the product (i.e., breach of warranty). If however, the product's malfunction results in personal injury, or damage to "other property," a Plaintiff may sue to recover for those damages in tort.

The basic policy behind the Economic Loss Rule, as articulated in a number of cases, including the seminal case of Casa Clara, is that where a product causes damage only to itself, the parties who contracted for that product should be limited to the warranties they bargained for. If your car breaks down earlier than you expected, you should not be allowed to circumvent your contract and sue the manufacturer in tort. Rather, you should be limited to the warranty you bargained for. Allowing purchasers of products to sue for damages above and beyond the contractual warranties results in “the consuming public as a whole [bearing] the cost of economic losses sustained by those who failed to bargain for adequate contract remedies.” See e.g. Casa Clara Condo. Assoc., Inc. v. Charley Toppino and Sons, Inc., 620 So. 2d 1244 (Fla. 1993).

Obviously, this rule can have rather harsh consequences if actually applied. It relies on the fiction that the two parties are truly "free" to contract for a warranty, when in the real world we know that the individual consumer is essentially in a "take it or leave it" position when it comes to purchasing most consumer goods. You can't bargain for a better warranty on a belt sander at Lowe's. Moreover, when an individual consumer reasonably expects that a product will work for a certain amount of time, and it fails to do so, our basic sense of justice leads us to conclude that the consumer should be able to sue the negligent manufacturer.

Frankly, I believe that much of the confusion in the application of this rule results from Courts' (justified) sympathy for the Plaintiffs in these cases. Rather than articulating and applying the rule in a clear way, limiting Plantiffs to the terms of their contract, the published opinions in this area of law lay out confusing and contradictory doctrine, with very few clear standards. Specifically, with respect to the "other property" exception to the rule.

Let me lay out a hypothetical. Plaintiff purchases a car new from a dealership. He has a 3 year warranty. In year 4 of the warranty, a radiator malfunctions and the entire car burns up. Further, let's say that this gentleman had a valuable guitar in the trunk when the car burned down. Can he sue the manufacturer of the radiator to recover for the guitar? The economic loss rule says that yes, he can sue for damage to other property. But does the loss of that other property abrogate the rule all together, so that he can turn around and sue for the entire car? Take a look at Indemnity Ins. Co. v. American Aviation, Inc., 891 So. 2d 532 (Fla. 2004):

We further conclude that, in general, actionable conduct that frustrates economic interests should not go uncompensated solely because the harm is unaccompanied by any injury to a person or other property
This application of the doctrine makes absolutely no sense whatsoever if your goal is to limit parties to the contract that they bargained for. Letting the Plaintiff recover for "other property" makes sense, but requiring them to formalistically plead $1 in "other property" damages so that they can recover for everything? Why have the rule at all?

I believe that when litigating cases like these, on the Defense side, you can't let this particular issue lie, as it contradicts the basic notion of the economic loss rule. Other states have addressed this specific question and come to the conclusion that you can recover for the other property which was damaged, but not the original property you contracted for (because that destroys the entire rule). See e.g., Murray v. Ford Motor Co., 97 SW 3d 888 (Tex. 5th DCA 2003).

Let's assume that the oblique language American Aviation will be seen as dicta (because it makes no sense), and go back to our hypothetical.  Plaintiff purchases a car new from a dealership. He has a 3 year warranty. In year 4 of the warranty, a radiator malfunctions and the entire car burns up. Can the Plaintiff sue the manufacturer of that radiator for damage to the car?

Well, the "freedom of contract" policy says no, the Plaintiff can't. The radiator was included in the car that the Plaintiff purchased, and so it was a part of his bargain with the dealership. Allowing him to sue the radiator manufacturer would allow him to go above and beyond the terms of the contract, which would result in  “the consuming public as a whole [bearing] the cost of economic losses sustained by those who failed to bargain for adequate contract remedies.”

However, a number of Florida cases would lead you to the conclusion that the Plaintiff could sue the manufacturer, because the radiator was not an "integral" component of the car that he bargained for.

“Other Property Analysis”
Product Purchased vs. Integral Part/Component:

        The doctrinal tension evident in Florida’s interpretation of the Economic Loss Rule finds its roots in the landmark Casa Clara case. In Casa Clara, the Florida Supreme Court held that the Plaintiffs’ disappointed economic expectations (arising from defective concrete in their houses) could only be vindicated through contractual remedies, as they had bargained for the finished product (the homes). It followed that any damage done to the finished product (home) by one of its component parts (concrete) was not recoverable in tort, as the Plaintiffs disappointed expectations were clearly contractual in nature – the product that they purchased did not perform as they had hoped. Allowing the Plaintiffs to seek a remedy in tort would override the contractual bargain for the purchase of these homes (i.e., the warranty that the Plaintiffs bargained for). Unfortunately, the Court went on to confuse this clear principle by suggesting that because the concrete was an “integral part” of the finished homes, the damage to the homes was not damage to “other property”:

        The homeowners also argue that Toppino's concrete damaged "other" property because the individual components and items of building material, not the homes themselves, are the products they purchased. We disagree. The character of a loss determines the appropriate remedies, and, to determine the character of a loss, one must look to the product purchased by the plaintiff, not the product sold by the defendant. King v. Hilton-Davis, 855 F.2d 1047 (3d Cir. 1988). Generally, house buyers have little or no interest in how or where the individual components of a house are obtained. They are content to let the builder produce the finished product, i.e., a house. These homeowners bought finished products--dwellings--not the individual components of those dwellings. They bargained for the finished products, not their various components. The concrete became an integral part of the finished product and, thus, did not injure "other" property.

Casa Clara Condo. Assoc., Inc. 620 So. 2d at 1247.

Integral Part/Component Line of Cases:

Pursuant to the Florida Supreme Court’s language in Casa Clara, a line of cases have arisen focusing on the “integral” nature of the malfunctioning part itself, and suggesting that the determination as to whether “other property” has been damaged requires a determination as to whether or not the malfunctioning component was “integral” to the damaged finished product. Note, however, that there are no clear standards or factors to consider when determining whether a product should be considered “integral.” An exhaustive list of the Integral Part/Component line of cases follows:

Comptech Int'l, Inc. v. Milam Commerce Park, Ltd., 753 So. 2d 1219, 1226 (Fla. 1999) (subject of the contract was the renovation of a warehouse - a service, not a product, but to the extent the warehouse was the object of the contract, the computers inside the warehouse that were damaged during renovation were not an integral part of the "product" and were, therefore, "other property".)

All American Semi Conductor, Inc. v. Mil-Pro Services, Inc., 686 So. 2d 760 (Fla. 5th DCA 1997) (“Mil-Pro’s programming efforts destroyed nothing more than the microchips which were to be programmed. And the Bytek machine, just as the concrete in Casa Clara became a part of the living unit purchased by the condominium owners, became an integral part of the programming services purchased by All American in this case.”)

Am. Universal Ins. Group v. Gen. Motors Corp., 578 So. 2d 451 (Fla. 1st DCA 1991) (“It is our view that the oil pump was an integral or component part of the engine manufactured by General Motors and thus the damage to the engine caused by this component part was not damage to separate property… The pump became an integral part of the repaired engine and when it damaged itself, and the engine parts, this was not damage to ‘other property’.”)

Jeld-Wen, Inc. v. Nebula Glass Int'l, Inc., 2008 U.S. Dist. LEXIS 44277, 07-22326-CIV-DIMITROULEAS (SD Fla. 2008) (“In Casa Clara, the Florida Supreme Court held that homes damaged by defective concrete did not constitute other property as the concrete was an integral part of the finished products purchased by the owners. Similarly, in the present case, the resin is an integral part of the finished product--the windows and doors.”)

Pycsa Pan., S.A. v. Tensar Earth Techs., Inc., 625 F. Supp. 2d 1198 (SD Fla. 2008) (“In determining if plaintiff has suffered damage to other property, the question is whether property other than the defective property itself, or property other than that which the defective property is an integral part of, has been damaged.”)

Pulte Home Corp. v. Ply Gem Indus., Inc., 804 F. Supp. 1471 (MD Fla. 1992)( In the context of actions in tort, in determining whether a party has suffered "property damage" the question for the court is whether property other than the defective property itself, or property other than that which the defective property is an integral part of has been damaged. Once the roofs were installed, they became an integral part of the homes. Any costs incurred as a result of damage to those roofs, or damage to the structure of the units, is not damage recoverable in tort.)
        Thus, it does appear that there are a significant number of cases, particularly 11th Circuit cases, which require that the malfunctioning product to be an “integral part” of the finished product in order to bar recovery for damage to the finished product under the Economic Loss Rule. Note, however, that none of the cases performing integral part analysis lay out any standards for determining whether a part is integral.

“Product Purchased” Line of Cases:

        Despite some cases emphasis on “integral component” analysis, there are a number of cases which track the “freedom of contract” policy as articulated in Casa Clara.      For example, In Jarmco, Inc. v. Polyguard, Inc., 668 So. 2d 300 (Fla. 5th DCA  1996), a case relating to defective resin which was used in the construction of a (subsequently unusable) boat, the Fifth DCA interpreted Casa Clara in the following manner:

The essence of Casa Clara is that purchasers of defective products are limited by law to those damages that were or could have been provided by contract between the purchaser and his immediate seller. The Economic Loss Rule requires that party to make use of traditional contract remedies for redress. Correspondingly, it bars the use of tort remedies to make society as whole pay for the failure of the purchaser to protect his own interests by bargaining for appropriate provisions in his own contract.

        This clearly articulated policy of favoring contractual remedies, and requiring parties to bargain for protection against a defective product directly conflicts with the line of cases which ask whether the malfunctioning component was “integral.” See also Pycsa Pan., S.A. v. Tensar Earth Techs., Inc., 625 F. Supp. 2d 1198 (SD Fla. 2008) (approvingly citing Jarmco). Additional cases follow:

Premix-Marbletite Mfg. Corp. v. SKW Chem. Inc. 145 F. Supp 2d 1348 (SD Fla. 2001) (“Florida case law does not consider property that the defective product is integrated into to be other property.”) (Citing Jarmco).

Turbomeca, S.A. v. French Aircraft Agency, Inc., 913 So. 2d 714, 717 (Fla. 3d DCA 2005) (damages for loss of helicopter were barred by the economic loss doctrine because the helicopter airframe and engine were one product, not two separate pieces of property; "[c]ourts have refused to bifurcate products into parts where a component part harms or destroys the finished product.")

Fishman v. Boldt, 666 So. 2d 273, 274 (Fla. 4th DCA 1996) (the product purchased by the plaintiff was a home with all its component parts, including the seawall, pool, and patio, consequently, no "other property" was damaged when the seawall failed and the home, pool, and patio were damaged, meaning economic loss doctrine precluded recovery in tort).

By now it should be clear that there is an unresolved doctrinal conflict in Florida case law relating to the economic loss rule. Specifically, do you look to the contract between the parties, or do you consider whether the malfunctioning component was “integral”? If so, what are the standards?

In short, any litigator who handles these cases should be prepared for a fair bit of uncertainty on this issue.