Healthbanc Int'l, LLC v. Synergy Worldwide, Inc. ( 2018 )

This opinion is subject to revision before final
publication in the Pacific Reporter
2018 UT 61
IN THE
SUPREME COURT OF THE STATE OF UTAH
HEALTHBANC INTERNATIONAL, LLC and BERNARD FELDMAN,
Plaintiffs and Counterclaim Defendants,
v.
SYNERGY WORLDWIDE, INC. and NATURE’S SUNSHINE PRODUCTS, INC.,
Defendants and Counterclaim Plaintiffs.
No. 20170591
Filed December 21, 2018
On Certification from the
United States District Court for the District of Utah
The Honorable Jill N. Parrish
Case No. 2:16-cv-00135
Attorneys:
Mitchell A. Stephens, Salt Lake City, Annabella Q. Bonfa, Scott W.
Wellman, Laguna Hills, for plaintiffs and counterclaim defendants
Chris Martinez, Kimberly Neville, Salt Lake City, for defendants and
counterclaim plaintiffs
ASSOCIATE CHIEF JUSTICE LEE authored the opinion of the Court, in
which JUSTICE HIMONAS, JUSTICE PEARCE, JUSTICE PETERSEN, and JUDGE
HAGEN joined.
Having recused himself, CHIEF JUSTICE MATTHEW B. DURRANT does
not participate herein; COURT OF APPEALS JUDGE DIANA HAGEN sat.
ASSOCIATE CHIEF JUSTICE LEE, opinion of the Court:
¶1 This case is before us on certification from the United States
District Court for the District of Utah. That court asked us to decide
whether the “economic loss rule” in Utah law extends to the tort of
fraudulent inducement. This question arises in a case in which the
alleged fraudulent inducement overlaps entirely with claims for
breach of contract. We therefore reframe the question certified by the
federal court. We hold that the economic loss rule applies in the
circumstances of this case—there is no fraud exception that applies
HEALTHBANC v. SYNERGY
Opinion of the Court
where the alleged fraudulent inducement arises out of the very
grounds alleged as a basis for a breach of contract action. We stop
short, however, of resolving the broad question of whether there
may ever be a fraudulent inducement exception to the economic loss
rule in Utah. We defer that question to a future case in which the
facts may warrant it.
I
¶2 The question presented stems from litigation arising under a
royalty agreement. HealthBanc International, LLC (“HealthBanc”)
sold a “Greens Formula” to Synergy Worldwide Inc. (“Synergy”) for
use in Synergy’s multilevel marketing business.1 In the royalty
agreement HealthBanc assigned its rights in the Greens Formula to
Synergy and Synergy agreed to pay HealthBanc a royalty. Synergy
specifically requested that the royalty agreement include
representations and warranties that HealthBanc owned the Greens
Formula and associated intellectual property rights. HealthBanc then
made the following representation and warranty:
HealthBanc hereby represents and warrants that it is
the sole and exclusive owner of the entire rights, title
and interest, including without limitation all patent,
trademark, copyright and other intellectual property
rights, in and to the Greens Formula . . . free and clear
of all liens, claims or encumbrances.
¶3 The following year HealthBanc sued Synergy for breach of
contract. It alleged that Synergy had not paid the required royalty on
certain sales. Specifically, HealthBanc asserts that Synergy paid the
royalty only on sales in Australia and the United States, and failed to
pay the royalty on product sales in other countries.
¶4 Synergy filed a counterclaim asserting that HealthBanc did
not own the Greens Formula. On that premise Synergy alleges
counterclaims sounding in breach of contract and tort. The breach of
contract claim alleges that “HealthBanc has breached [the contract],
in which HealthBanc ‘represents and warrants that it is the sole and
exclusive owner’” of the Greens Formula and all associated
intellectual property rights. Synergy’s tort claim alleges fraudulent
_____________________________________________________________
1 Synergy manufactures, markets, and sells nutritional, skin, and
personal care products. The Greens Formula is a health supplement
alleged to provide health benefits.
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Opinion of the Court
inducement on the ground that HealthBanc misrepresented that it
“had the exclusive right to use, assign or sell the Specified Greens
Formula and its associated intellectual property rights.”
¶5 HealthBanc filed a Motion to Dismiss and a Motion for
Partial Summary Judgment as to Synergy’s fraud claim. Synergy
responded and the court scheduled oral argument. HealthBanc’s
motion did not assert that the economic loss rule barred Synergy’s
fraud claim. But the district court issued a minute entry instructing
the parties to “be prepared to address whether this court should
certify to the Utah Supreme Court the question of whether Utah[’s]
economic loss rule applies to a fraudulent inducement claim.”
HealthBanc argued against certification, but the district court
disagreed and entered an Order of Certification. We then granted
certification.
II
¶6 “[T]raditional standards of review do not apply” to a
certified case. Egbert v. Nissan N. Am., 2007 UT 64, ¶ 7, 167 P.3d
1058 (quoting Robert J. DeBry & Assocs., P.C. v. Qwest Dex, Inc., 2006
UT 41, ¶ 11, 144 P.3d 1079). This is because we are not asked “to
affirm or reverse a lower court’s decision” in such a case. Id. And we
are not tasked to decide the underlying federal case.2 Fundamentalist
Church of Jesus Christ of Latter-Day Saints v. Horne, 2012 UT 66, ¶ 10,
289 P.3d 502. Instead, we aim to “resolve disputed questions of state
law in a context and manner useful to the resolution of a
pending federal case.” Id. ¶ 8.
¶7 In so doing we are not required to answer a certified
question in the precise form in which it is presented. See Egbert v.
Nissan Motor Co., 2010 UT 8 ¶ 13 n.2, 228 P.3d 737 (noting our
authority to “reformulate” a certified question). Nor are we
foreclosed from considering the facts of the underlying dispute. As
we explained in Horne: “If facts are necessary to frame
a certified question, surely they may also be relevant to our
answer. . . . We routinely refer to surrounding facts and
circumstances not just to set the stage for our resolution
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2 “The resolution of the parties’ competing claims and arguments
will be up to the federal courts, which of course retain jurisdiction to
decide this case under the law as they see it.” Fundamentalist Church
of Jesus Christ of Latter-Day Saints v. Horne, 2012 UT 66, ¶ 10, 289 P.3d
502.
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of questions certified by federal courts, but also to illustrate the
application of our answer in the context of the case.” Horne, 2012 UT
66, ¶ 9.3
¶8 Here we choose to answer a narrower question than the one
certified by the district court. In the context of this case we conclude
that we need only decide whether the Utah economic loss rule
applies to a fraudulent inducement claim that is duplicative of a
breach of contract claim.
¶9 We frame the question in this way in light of the nature of
Synergy’s counterclaims. Synergy’s breach of contract claim alleges
that “HealthBanc has breached the [parties’ contract], in which
HealthBanc ‘represents and warrants that it is the sole and exclusive
owner of the” Greens Formula and all associated intellectual
property rights. And Synergy’s fraudulent inducement claim
appears to arise out of the same central allegation—the assertion that
HealthBanc misrepresented it “had the exclusive right to use, assign,
or sell the Specified Greens Formula and its associated intellectual
property rights.” For this reason this is not a case in which we need
to decide whether there could ever be a fraudulent inducement
exception to the economic loss rule. We need only decide whether
the economic loss rule applies to a fraudulent inducement claim that
overlaps completely with a contract claim—in the sense that the
alleged fraudulent inducement is also a breach of a warranty in the
contract.
¶10 And we hold it does. In cases like this one, where the
party’s tort claim is a mere duplication of its breach of contract claim,
there is no exception to the economic loss rule. The tort claim is
barred. We do not foreclose the possibility that in a future case a
limited exception for fraud in the inducement may be warranted. But
we decline to create such an exception on these facts.
¶11 We first identify the central grounds for our decision. Then
we respond to two of Synergy’s central arguments.
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3 See also McArthur v. State Farm Mut. Auto Ins. Co., 2012 UT 22,
¶¶ 33–38, 274 P.3d 981 (applying the answer to a certified question to
the facts and circumstances of the underlying dispute); Whitney v.
Div. of Juvenile Justice Servs., 2012 UT 12, ¶¶ 18–19, 274 P.3d 906
(same).
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Opinion of the Court
A
¶12 The economic loss rule has two complementary yet distinct
applications. “First, it bars recovery of economic losses in negligence
actions unless the plaintiff can show physical damage to other
property or bodily injury.” Sunridge Dev. Corp. v. RB&G Eng’g., Inc.,
2010 UT 6, ¶ 28, 230 P.3d 1000. This branch of the economic loss rule
applies when there is no contract between the relevant parties.
Second, the economic loss rule applies when a contract exists
between the parties. This branch declares that “when a conflict arises
between parties to a contract regarding the subject matter of that
contract, the contractual relationship controls, and parties are not
permitted to assert actions in tort.” Reighard v. Yates, 2012 UT 45,
¶ 20, 285 P.3d 1168 (citation omitted) (internal quotation marks
omitted). Synergy seeks to establish a fraudulent inducement
exception to this latter application of the economic loss rule.
¶13 We have acknowledged some possible exceptions to the
second branch of the economic loss rule. We have even said that
“fraud may be an exception to the economic loss rule . . . .” Grynberg
v. Questar Pipeline Co., 2003 UT 8, ¶ 48, 70 P.3d 1. But we have not yet
established a fraud exception. And we decline to do so here.
¶14 A blanket exception for fraud in the inducement would
undermine the central premises of the economic loss rule. Some of
those premises were highlighted in our opinion in Reighard. There
the plaintiffs asserted claims in contract and tort. Reighard, 2012 UT
45, ¶¶ 3, 6. And we held that the economic loss rule barred plaintiff’s
tort-based claims because “[a]ny tort duties” owed to the plaintiffs
“overlap[ped] with [defendant’s] contract duties to the [plaintiffs].”
Id. ¶ 25.
¶15 The Reighard inquiry asks whether the contract covers the
subject of the tort claims—or in other words whether the basis for
the plaintiff’s tort claims is distinct and separable from the basis for
the contract claims. “When a duty exists that does not overlap with
those contemplated in contract, the economic loss rule does not bar a
tort claim because the claim is based on a recognized independent
duty of care . . . .” Id. ¶ 21 (citation omitted) (internal quotation
marks omitted). When the tort claim and the contract claim overlap,
on the other hand—“when [the] conflict [that] arises between parties
to a contract [is] regarding the subject matter of that contract”—“the
contractual relationship controls, and parties are not permitted to
assert actions in tort.” Id. ¶ 20 (citation omitted).
¶16 Reighard did not consider the precise tort at issue in this
case—the tort of fraudulent inducement. But the rationale holds
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here. To find a blanket exception to the economic loss rule for all
fraudulent inducement claims would open the door to tort claims
that directly overlap breach of contract claims. This blurring of the
line between tort and contract law is precisely what the economic
loss rule is designed to prevent. See Sunridge Dev. Corp., 2010 UT 6, ¶
28 (“The economic loss rule . . . marks the fundamental boundary
between contract law, which protects expectancy interests created
through agreement between the parties, and tort law, which protects
individuals and their property from physical harm by imposing a
duty of reasonable care.” (citation omitted) (internal quotation marks
omitted)). And these considerations sustain our extension of the
economic loss rule to a case in which the alleged fraudulent
inducement overlaps completely with a claim for breach of contract.
B
¶17 Synergy advances two primary grounds for a contrary
conclusion. First, because inducement occurs prior to the execution
of a contract, Synergy contends that this kind of tort is necessarily
independent of the contract. And second, Synergy asserts tort
damages are needed to punish wrongdoers and make wronged
parties whole. We find neither argument persuasive.
¶18 Synergy invites us to follow the lead of the Colorado
Supreme Court in endorsing its first point. Citing Van Rees v.
Unleaded Software, Inc., Synergy asserts that “there is an important
distinction between failure to perform the contract itself, and
promises that induce a party to enter into a contract in the first
place.” 373 P.3d 603, 607 (Colo. 2016).
¶19 We disagree. When the subject matter of the inducing
promises are later negotiated for and included in the contract, the
distinction advanced by Synergy is illusory. As explained by the
Third Circuit:
[I]f “all claims for fraud in the inducement are
extraneous or independent of the contract because they
occur ‘prior to the formation of the contract itself,’ . . .
every breach of warranty claim would be turned into a
tort by a simple affidavit stating, in effect, that the
warranty was spoken before it was written.” . . .
“[W]ritten disclaimers of warranties could be voided
after the fact by the same affidavit, so long as the oral
representations preceded the contract,” thus causing
chaos and uncertainty in commercial transactions.
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Werwinksi v. Ford Motor Co., 286 F.3d 661, 678 (3d. Cir. 2002) (second
alteration in original) (quoting Rich Prod. Corp. v. Kemutec, Inc., 66 F.
Supp. 2d 937, 977–80 (E.D. Wis. 1999)). Contracts are negotiated first
and drafted second. To claim that a promise is independent of a
contract simply because it was spoken prior to the formation of a
contract would open the door to tort liability for all pre-contractual
negotiations that were eventually enshrined in a contract. This
exception would swallow the rule. And we decline to endorse such
an exception.
¶20 On the second point, Synergy asserts that without a
fraudulent inducement exception the law will shield intentional
tortfeasors from liability. Again we disagree. Intentional bad acts are
insufficient by themselves to justify an exception to the economic
loss rule. If the “bad acts” (even intentional ones) are covered by a
contract, they remain in the realm of contract law. And contract law
remains sufficient to “punish” the breaching party.
¶21 Contract law seems sufficient to make wronged parties
whole. When the contract terms contain the grounds for the tort
claim, we see no reason to conclude that recovery under contract law
is insufficient—“when a party is merely suing to recover the benefit
of its contractual bargain, there is no inherent unfairness in limiting
that party to a breach-of-contract claim.” Louisburg Bldg. & Dev. Co. v.
Albright, 252 P.3d 597, 622 (Kan. Ct. App. 2011). Wronged parties will
still have access to traditional contract damages for breach, including
expectation damages. And such parties will also have access to
exceptional contract remedies—liquidated damages, rescission,
etc.—where applicable. The possibility of liquidated damages seems
particularly salient. If the parties to a contract with express
warranties are concerned about the insufficiency of expectation
damages they can bargain for liquidated damages. And where they
fail to do so it seems problematic for a court to make a better contract
for them than the one they negotiated—by importing tort remedies
into the deal.
¶22 We reject Synergy’s arguments on this basis. And we
conclude that the economic loss rule applies where a party’s tort
claims are entirely duplicative of its contract claims.
III
¶23 For the above reasons we hold that the economic loss rule
applies to fraudulent inducement claims that overlap completely
with a breach of contract claim. In so holding we do not foreclose the
possibility of a fraudulent inducement exception in some other
circumstance. But we conclude that we need not reach that question
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here. We can decide whether and to what extent to define any such
exception in a case in which the facts may warrant it.
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