Hininger v. Case Corp. , 23 F.3d 124 ( 1994 )

United States Court of Appeals,
Fifth Circuit.
No. 93-1577.
Zella HININGER, Individually and as Personal Representative of
the Estate of Thurlo Hininger, a/k/a Ted Hininger, Plaintiff-
Appellee/Cross-Appellant,
v.
CASE CORPORATION, et al., Defendants,
Can-Am Industries, Inc., Defendant-Appellant/Cross-Appellee.
June 22, 1994.
Appeals from the United States District Court for the Northern
District of Texas.
Before GOLDBERG, DAVIS, and DeMOSS, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
In this products liability action, plaintiff seeks to recover
her lost profits and repair costs resulting from the failure of
combine wheels manufactured by defendant and supplied to Case for
incorporation into the combines. The district court awarded
plaintiff recovery on her negligence claims and denied her recovery
on her implied warranty claims. Because we conclude that her
negligence claims are barred by the "economic loss" rule, we
reverse that part of the court's judgment. Because we conclude
that she cannot assert an implied warranty claim for economic loss
against Can-Am, we affirm that part of the court's judgment.
I.
Zella and Thurlo Hininger operated a custom grain and seed
harvesting business. In January 1989, the Hiningers purchased four
combines from Parmer County Implement Company ("Parmer") in Friona,
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Texas. In September 1989, while working in Idaho, the Hiningers
had trouble maintaining air pressure in the drive wheel tires. As
a result, the combines were rendered inoperable, causing the
Hiningers to experience downtime and suffer losses which the jury
found to total $70,340.
The manufacturer of the combines, Case Corporation ("Case"),
replaced two of the drive wheels in the fall of 1989 and replaced
the other six in April 1990. The replacement wheels, however,
began to crack around the bolt holes in September 1990. As a
result, the Hiningers again experienced downtime and suffered
losses, which the jury found to total $46,500. The original and
replacement wheels were manufactured by Can-Am Industries ("Can-
Am") in Illinois and were delivered to Case in Illinois. The
Hiningers had no contact with Can-Am in connection with the
purchase of the combines.
On May 6, 1991, Mrs. Hininger filed suit in her individual
capacity and as representative of her husband's estate, seeking
recovery on theories of negligence, strict liability, breach of
warranty, and violation of the Texas Deceptive Trade Practices Act
("DTPA"). Mrs. Hininger sought damages for lost profits, lost
contracts, and repair costs from Parmer, Case, Can-Am, and Case
Credit Corporation resulting from the failure of the combine
wheels.
In August 1992, Mrs. Hininger settled with all of the
defendants except Can-Am. The district court then ruled that Texas
law applied to her tort claims, as well as to her contract claims.
2
Following a trial in January 1993, the jury found for Mrs. Hininger
on her breach of warranty and negligent manufacturing claims.
However, in response to Can-Am's motion for judgment n.o.v., the
district court limited Mrs. Hininger's recovery to her negligence
claims.
II.
A.
Can-Am argues first that the district court erred in applying
Texas law to Mrs. Hininger's tort claims. Can-Am asserts that
Idaho and Illinois have the most significant contacts with this
case, and that their laws would not allow Mrs. Hininger to recover
her lost profits and repair costs in tort. Because Mrs. Hininger
does not contest this interpretation of Idaho and Illinois law and
because we conclude below that Texas law also disallows the
recovery of such damages in tort, we need not decide whether the
district court erred in applying Texas law. See Eugene F. Scoles
& Peter Hay, Conflict of Laws 17 (1984) (" "false conflict' exists
when the potentially applicable laws do not differ").
B.
Can-Am argues that the district court erred in allowing Mrs.
Hininger to recover her lost profits and repair costs resulting
from Can-Am's negligence in manufacturing the combine wheels. For
the reasons that follow, we agree with Can-Am's argument and
therefore reverse this part of the court's judgment.
In Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77
(Tex.1977), the Texas Supreme Court held that a purchaser of a
3
defective mobile home could not recover the difference between the
unit's reasonable market value and its purchase price from the
manufacturer based on a strict liability theory. In so holding,
the court adopted the "economic loss" rule, which requires
plaintiffs to recover their economic losses resulting from a
defective product in contract rather than in tort.1 The court
explained that the Uniform Commercial Code was "drafted
specifically to govern commercial losses and obviously provides the
proper remedies to recover such losses." Id. at 80; see generally
Marshall S. Shapo, The Law of Products Liability ¶ 27.01 et seq.
(1987); J. Hadley Edgar, Jr. & James B. Sales, Texas Torts and
Remedies § 40.04[3] (1994).
In Arkwright-Boston Manufacturers Mutual Insurance Co. v.
Westinghouse Electric Corp., 844 F.2d 1174, 1177-78 (5th Cir.1988),
we held that, under Texas law, a plaintiff cannot recover economic
losses resulting from a defective product based on a negligence
1
As the court explained, economic losses can be either
direct or consequential:
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. Direct economic loss also may be measured
by costs of replacement and repair. Consequential
economic loss includes all indirect loss, such as loss
of profits resulting from inability to make use of the
defective product.
Nobility Homes, 557 S.W.2d at 78 n. 1 (quoting Note,
Economic Loss in Products Liability Jurisprudence, 66
Colum.L.Rev. 917, 918 (1966)).
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theory. In that case, a blade in an electrical turbine broke,
causing extensive damage to the turbine. For purposes of our
decision, we assumed the manufacturer's negligence, but denied
plaintiff recovery because it was only seeking to recover its
economic loss. See id. We concluded that the magistrate judge had
properly granted defendant's summary judgment motion on the ground
that: "Texas law does not permit recovery under a negligence
theory for economic loss resulting from damages to a defective
product." Id.2
In deciding Arkwright-Boston, we relied on the Texas Supreme
Court's decision in Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617
(Tex.1986). In that case, plaintiffs sought recovery for a
defective home. They complained of defendant's negligent
supervision of the construction of the home. In concluding that
plaintiffs could not recover punitive damages, the court held that:
The nature of the injury most often determines which duty or
duties are breached. When the injury is only the economic
loss to the subject of a contract itself, the action sounds in
contract alone.
Id. at 618; see also Southwestern Bell Tel. Co. v. DeLanney, 809
S.W.2d 493, 494 (Tex.1991) ("When the only loss or damage is to the
subject of the contract, the plaintiff's action is ordinarily on
the contract."); see generally William Powers, Jr. & Margaret
Niver, Negligence, Breach of Contract, and the "Economic Loss"
2
The United States Supreme Court, in East River S.S. Corp.
v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S. Ct. 2295, 90
L. Ed. 2d 865 (1986), surveyed the law in this area and adopted a
similar rule for admiralty cases: a purchaser cannot recover its
economic losses resulting from a defective product from a
manufacturer in tort.
5
Rule, 23 Tex.Tech L.Rev. 477 (1992).
However, because Can-Am did not manufacture the combines, but
rather supplied the wheels to Case to incorporate into the
combines, the question remains: Can Mrs. Hininger recover her
economic losses from Can-Am in tort?
Initially, it is clear to us that most of the reasoning that
led the Texas Supreme Court to reject an action in tort against a
manufacturer of a finished product for economic loss supports the
denial of a similar action against a component supplier. Thus, we
believe that a rejection of Mrs. Hininger's tort action against
Can-Am is consistent with the Texas Supreme Court's reasoning in
Nobility Homes.
In King v. Hilton-Davis, 855 F.2d 1047 (3d Cir.1988), cert.
denied, 488 U.S. 1030, 109 S. Ct. 839, 102 L. Ed. 2d 971 (1989), the
Third Circuit addressed the same question and concluded that, under
Pennsylvania law, a plaintiff cannot recover her economic losses
resulting from a defective product from a component supplier in
tort. In that case, plaintiffs alleged that their potato crop had
failed because the seed potatoes they purchased that spring had
been treated with a defective sprout suppressant. Id. at 1048.
The grower from whom plaintiffs purchased the potatoes had used a
sprout suppressant manufactured by defendant. Id. at 1049.
In analyzing plaintiffs' suit against the manufacturer of the
sprout suppressant, the court noted that defendant was "a component
supplier who is remote from the plaintiff in the production and
distribution chain." Id. at 1053. The court gave a number of
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reasons for rejecting plaintiffs' tort claims against the component
supplier. First, if plaintiffs had a warranty claim against the
component supplier, they should be required to pursue that claim in
order to preserve "private risk allocation" so that "manufacturers
of products or components thereof will not be exposed to open-ended
and indefinite liability." Id. at 1054. Second, even if
plaintiffs did not have a valid warranty claim against the
component supplier, they would still have "a warranty claim against
the immediate seller that ... will give the purchaser the benefit
of its bargain." Id. Finally, the court concluded that, even if
plaintiffs could not assert a valid warranty claim against their
immediate seller, they still should not be allowed to recover
against the component part supplier in tort because:
Implicit in the [economic loss rule] is the policy judgment
that in a commercial context the possibility of an inadequate
recovery ... does not justify permitting a tort recovery that
will allow a purchaser to reach back up the production and
distribution chain, thereby disrupting the risk allocations
that have been worked out in the transactions comprising that
chain.
Id.; see also Nathaniel Shipping, Inc. v. General Elec. Co., 920
F.2d 1256, 1265 (5th Cir.1991) (economic loss rule applies in
admiralty despite lack of privity); Shipco 2295, Inc. v. Avondale
Shipyards, Inc., 825 F.2d 925 (5th Cir.1987); Casa Clara
Condominium Ass'n v. Charley Toppino & Sons, Inc., 620 So. 2d 1244
(Fla.1993).
We find the Third Circuit's reasoning to be persuasive and are
convinced that the Texas Supreme Court would adopt this position.
We therefore conclude that the district court erred in allowing
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Mrs. Hininger to recover her lost profits and repair costs from
Can-Am based on a negligence theory.
C.
On cross-appeal, Mrs. Hininger contends that the district
court erred in dismissing her implied warranty of merchantability
claim. The district court held that:
In this case, it is clear that the bargained-for
expectation of Plaintiff was a complete and functional Case
combine. Plaintiff points to no evidence that the Hiningers
expected anyone other than Case and/or Parmer to resolve their
problems with the defective wheels. Both Case and Parmer took
affirmative action in an attempt to resolve the wheel
problems; Can-Am was not consulted and did not participate in
the repair attempts. Plaintiff cites no Texas cases extending
liability to a component part supplier in the circumstances of
this case. For this reason, the Court concludes that there is
no contractual liability to Plaintiff for Can-Am.
Because we agree that Mrs. Hininger cannot assert an implied
warranty claim for economic loss against Can-Am, we affirm the
district court's dismissal of this claim.
Under Texas law, a warranty of merchantability is implied in
every contract for the sale of goods by a merchant, unless the
warranty is properly excluded or modified. V.T.C.A. Bus. & C. §
2.314(a). The warranty of merchantability may be disclaimed or
modified by the merchant, provided that: (1) the disclaimer is in
writing; (2) it is conspicuous; and (3) it expressly mentions the
term "merchantability." V.T.C.A. Bus. & C. § 2.316(b).
A number of states make privity a requirement for asserting
an implied warranty claim for economic loss. See Barkley Clark &
Christopher Smith, The Law of Product Warranties ¶ 10.03[3] (1984
& 1993 Supp.); Robert E. Cartwright & Jerry J. Phillips, Products
8
Liability § 2.26 (1986). However, in Nobility Homes, the Texas
Supreme Court held that: "a manufacturer can be responsible,
without regard to privity, for the economic loss which results from
his breach of the Uniform Commercial Code's implied warranty of
merchantability." 557 S.W.2d at 81. Thus, the Texas Supreme Court
dispensed with the privity requirement and permitted a purchaser to
assert an implied warranty claim for economic loss against a remote
manufacturer of a finished product.
Today's case, however, presents a related, but different
question: Can a purchaser go upstream from the manufacturer of the
finished product and assert an implied warranty claim for economic
loss against a manufacturer of a component part? Although we find
no Texas authorities directly addressing this question, we believe
that the experienced Texas district judge in this case properly
distinguished between the manufacturer of the finished product and
the component part manufacturer. She reasoned that the Hiningers
bargained for a "complete and functional Case combine," not wheels
and axles and all the myriad components that make up the combine.
Thus, the district court concluded that the Hiningers had no
expectation that Can-Am or any of the other manufacturers of
unbranded components would resolve any problem they might
experience with the combines.3 See also William K. Jones, Product
Defects Causing Commercial Loss: The Ascendancy of Contract over
3
Mrs. Hininger does not contend that she and her husband had
any contact with Can-Am, that Can-Am's name was on the wheels, or
that Can-Am advertised its product to the public at-large. See
Spring Motors Distrib., Inc. v. Ford Motor Co., 98 N.J. 555, 489
A.2d 660, 676-77 (1985).
9
Tort, 44 U.Miami L.Rev. 731, 789-93 (1990).
In a general maritime law case dealing with a related problem,
we reached a similar conclusion: "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."
Shipco 2295, 825 F.2d at 929.
Moreover, we believe that the reasoning of Nobility Homes
supports the district court's conclusion that Mrs. Hininger cannot
assert an implied warranty claim against Can-Am. In explaining its
holding, the Nobility Homes court recognized that a number of
states still require a purchaser to show privity with the defendant
to assert an implied warranty claim for economic loss, but that:
Courts which have declined to overturn the privity
requirement in warranty actions for economic loss ... fear
that holding manufacturers liable for economic loss imposes
unlimited and unforeseeable liability upon manufacturers.
These fears are justified when manufacturers are held strictly
liable for economic loss under the terms of section 402A of
the Restatement (Second) of Torts. But, these fears are not
justified when manufacturers are held liable by the Uniform
Commercial Code because the Code, itself, protects
manufacturers against unlimited and unforeseeable liability.
First, the Uniform Commercial Code allows manufacturers to
restrict their liability by the exclusion or modification of
both implied and express warranties.... Second,
manufacturers' liability is restricted by the very terms of
the Uniform Commercial Code sections which furnish the
consumer's implied warranty remedies....
557 S.W.2d at 82.
Thus, the court in Nobility Homes reasoned that a purchaser
cannot maintain a strict liability action for economic loss, in
part, because of the unlimited and unforeseeable liability it would
10
impose on manufacturers. However, the court concluded that a
manufacturer's ability to limit its warranty exposure permitted it
to protect itself against unlimited and unforeseeable liability and
distinguished the warranty action from the strict liability action.
We read this as an important justification for the Nobility Homes
court's decision to dispense with the privity requirement and allow
a purchaser to assert an implied warranty claim for economic loss
against a remote manufacturer.
Clark v. DeLaval Separator Corp., 639 F.2d 1320 (5th Cir. Unit
A 1981), illustrates our point. In that case, we applied Nobility
Homes and held a remote manufacturer liable for the ultimate
purchaser's economic loss based on the manufacturer's breach of the
implied warranty of merchantability. We observed that a remote
manufacturer can effectively disclaim its warranty liability either
by including a disclaimer in the materials that accompany the
product or by insisting that the retailer include the
manufacturer's disclaimer in the sales contract with the consumer.
Id. at 1324.
However, as Judge Logan observed in Patty Precision Products
Co. v. Brown & Sharpe Manufacturing Co., 846 F.2d 1247 (10th
Cir.1988), it may be difficult or even impossible for a component
supplier to disclaim its warranty liability:
The difficulty of notifying ultimate purchasers is exacerbated
if the manufacturer has produced a component rather than a
finished product. Components are often hidden within the
product, making it difficult or impossible for the
manufacturer to notify ultimate purchasers by posting
disclaimers on the product itself. Further, while the
manufacturer before us, G.E., may be economically powerful
enough to require someone like Brown & Sharpe to notify all
11
purchasers of the warranty limitation, the typical component
part manufacturer will be selling to a larger entity which it
cannot reasonably be expected to control.
Id. at 1257 (Logan, J., concurring in part and dissenting in part).
In sum, we believe that the Texas Supreme Court would
distinguish between the manufacturer of the finished product and
the component supplier because of the component supplier's
inability to disclaim its warranty liability effectively. This
distinction, together with the Hiningers' lack of any expectation
that Can-Am, the upstream component supplier, would respond to
defects in the finished product, lead us to agree with the district
court that Mrs. Hininger has no implied warranty action against
Can-Am.4
III.
For the reasons stated above, we affirm the district court's
dismissal of Mrs. Hininger's implied warranty claims, but reverse
the district court's judgment awarding Mrs. Hininger recovery on
her negligence claims and render a take-nothing judgment in favor
of Can-Am.
AFFIRMED in part; REVERSED and RENDERED in part.
4
In light of this finding, we need not address the viability
of Mrs. Hininger's DTPA claim. See La Sara Grain Co. v. First
Nat'l Bank of Mercedes, 673 S.W.2d 558, 565 (Tex.1984) (DTPA
"does not create any warranties; therefore any warranty must be
established independently of the act.").
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