City of Franklin, Tennessee v. W. L. Hailey & Co., Inc.

10/30/2019
IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
August 13, 2019 Session
CITY OF FRANKLIN, TENNESSEE v. W. L. HAILEY & CO., INC. ET AL.
Appeal from the Chancery Court for Williamson County
No. 46766 Joseph A. Woodruff, Judge
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No. M2018-01535-COA-R3-CV
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Appellant city appeals from the dismissal of its negligent misrepresentation claim on the
basis of the economic loss doctrine, arguing that Tennessee law recognizes an exception
to the economic loss doctrine for negligent misrepresentations. Because we conclude that
Tennessee law does not recognize a negligent misrepresentation exception to the
economic loss doctrine, we affirm the decision of the trial court.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed
J. STEVEN STAFFORD, P.J., W.S., delivered the opinion of the court, in which ARNOLD B.
GOLDIN, and CARMA DENNIS MCGEE, JJ., joined.
L. Wearen Hughes, John W. Dawson, IV, and Sarah B. Miller; Nashville and Shauna R.
Billingsley and Tiffani Pope; Franklin, Tennessee, for the appellant, City of Franklin,
Tennessee.
Donald Capparella, Tyler Chance Yarbro, and Vic L. McConnell, Nashville, Tennessee
for the appellant, Smith Seckman Reid, Inc.
John A. Day and Elizabeth Sitgreaves, Brentwood, Tennessee and William Earl
Touchstone, Houston, Texas, for the appellee, Hobas Pipe USA, LP.
OPINION
I. FACTS AND PROCEDURAL HISTORY
On November 17, 2017, the City of Franklin (“the City”) brought suit against
defendants W.L. Hailey & Company (“Hailey”), Smith Seckman Reid, Inc. (“SSR” and
together with the City, “Appellants”), and Hobas Pipe USA, LP (“Hobas”), in the
Chancery Court for Williamson County (“the trial court”). The City alleged, inter alia,
claims for breach of contract, negligence, breach of warranty, and negligent
misrepresentation. These claims arose out of a construction project that the City
undertook from 2001–2003, in which the City constructed a sewage line for its residents.
The City retained SSR to design the sewage line project. Following a bidding process
based on the designs created by SSR, Hailey was awarded the project. Eventually, Hobas
was selected to provide the pipes necessary to convey the sewage from residents to a
treatment facility. The project was substantially completed in 2003. According to the
complaint, however, the sewage line, known as the Interceptor, failed beginning in 2017,
necessitating emergency repair work throughout the system. Eventually, flood damage
led to portions of the Interceptor being replaced.
Relevant to this appeal, Hobas filed a motion to dismiss on December 20, 2017,
wherein Hobas alleged that the gravamen of the City’s claims was for products liability,
and that the ten-year statute of repose applicable to products liability claims barred the
action. At the same time, Hobas filed an answer to the complaint denying the material
allegations against it and raising a number of affirmative defenses.
The City responded to Hobas’s motion on January 19, 2018. As an initial matter,
the City denied that its claims against Hobas should be characterized as a products
liability action because the claims were not cognizable under the Tennessee Products
Liability Act (“the Products Liability Act” or “the Act”).1 As such, the City argued that
the Products Liability Act statute of repose did not apply. To the extent that any statute of
limitations was applicable, however, the City submitted that application thereof was
barred by the doctrine of nullum tempus occurrit regi. See Hamilton Cty. Bd. of Educ. v.
Asbestospray Corp., 909 S.W.2d 783, 785 (Tenn. 1995), as clarified on reh’g (Nov. 20,
1995) (“The common law doctrine of nullum tempus occurit regi, which is literally
translated as “time does not run against the king,” prevents an action brought by the State
from being dismissed due to the expiration of the statutory period of limitations normally
applicable to the specific type of action.”).
On January 29, 2018, Hobas filed an amended motion to dismiss. In addition to its
statute of limitations argument, Hobas raised two additional arguments in support of
dismissal: (1) that the economic loss doctrine prevented a negligent misrepresentation
claim, and (2) there was no privity between Hobas and the City so as to support a
warranty claim.
The City of Franklin moved for permission to amend its complaint on March 8,
2018. The trial court granted the motion by agreement on March 22, 2018. The amended
complaint contained more specific allegations regarding the alleged negligent
misrepresentation by Hobas, as relevant to this appeal. Specifically, the amended
complaint alleged as follows:
1
Specifically, in this response, the City admitted that there was no damage to persons or other property
due to the failure of the Hobas pipe.
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14. As part of its bid for the Project, Hailey presented options or alternates
for the type of pipe to be used in the Project, including ductile iron pipe and
centrifugally cast fiberglass reinforced polyester pipe.
15. SSR assisted [the City] with evaluation of the pipe options. The
evaluation of centrifugally cast fiberglass reinforced polyester pipe
included pipe manufactured by Hobas.
16. During this evaluation, Hobas represented that its fiberglass pipe had an
anticipated life of over 100 years. Hobas also provided information
purporting to show that its fiberglass pipe was acceptable and appropriate
for the Project’s design parameters.
17. Based on SSR’s evaluation of the options for the [project] and the
information presented by Hobas during that evaluation, [the City] selected
Hobas centrifugally cast fiberglass reinforced polyester pipe for the
[project].
* * *
78. Hobas acted in the course of its business and with a pecuniary interest
in its presentation and sale of its fiberglass pipe for use in the Project.
79. Hobas supplied faulty information to [the City] regarding the
anticipated life of its fiberglass pipe.
80. Hobas also supplied faulty information to [the City] regarding the
stiffness of the pipe, which testing shows was below the specified stiffness,
including that indicated on the pipe.
81. Hobas failed to exercise reasonable care in obtaining and/or
communicating information about the anticipated life of its pipe and the
stiffness of its pipe.
82. To the extent the information provided by Hobas purporting to show
that its fiberglass pipe was acceptable and appropriate for the Project’s was
faulty, Hobas failed to exercise reasonable care.
83. In choosing Hobas pipe, [the City] justifiably expected Hobas to supply
to the project participants information that was not faulty and relied upon
what turned out to be faulty information provided by Hobas.
84. Faulty information from Hobas proximately caused or contributed to
the Interceptor failures and resulting damages to [the City].
85. [The City] has suffered, and continues to suffer, damages as a result of
Hobas’ negligent misrepresentations in an amount to be proven at trial and
consisting of damages to, and costs to repair (including replacing), some of
the pipe.
The City thereafter responded to Hobas’s amended motion to dismiss, arguing that
Tennessee law recognizes an exception to the economic loss doctrine for claims of
negligent misrepresentation, citing John Martin Co. v. Morse/Diesel, Inc., 819 S.W.2d
428 (Tenn. 1991). Hobas later responded in opposition, arguing that John Martin was
not controlling.
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The trial court held a hearing on the motion to dismiss on March 22, 2018, and
entered its memorandum and order granting the motion on May 18, 2018. Therein, the
trial court found that (1) the City had not asserted a products liability claim, but that if it
had, the ten-year statute of repose would have applied; (2) the breach of warranty claims
could not survive because there was no contract between the parties; and (3) that the
economic loss doctrine barred the City’s negligent misrepresentation claim. The parties
later joined in asking the trial court designate its ruling as final pursuant to Rule 54.02 of
the Tennessee Rules of Civil Procedure, which the trial court did on July 24, 2018. The
City thereafter timely appealed to this Court.
II. ISSUES PRESENTED
This appeal involves a single issue: Whether the trial court erred in ruling that the
economic loss doctrine barred the City’s claim of negligent misrepresentation against
Hobas.2
III. STANDARD OF REVIEW
This case was resolved on a motion to dismiss. In considering a motion to dismiss,
courts “‘construe the complaint liberally, presuming all factual allegations to be true and
giving the plaintiff the benefit of all reasonable inferences.’” Webb v. Nashville Area
Habitat for Humanity, Inc., 346 S.W.3d 422, 426 (Tenn. 2011) (quoting Tigg v. Pirelli
Tire Corp., 232 S.W.3d 28, 31–32 (Tenn. 2007)). A motion to dismiss should be granted
only where the plaintiff “‘can prove no set of facts in support of the claim that would
entitle the plaintiff to relief.’” Id. (quoting Crews v. Buckman Labs. Int’l, Inc., 78
S.W.3d 852, 857 (Tenn. 2002)). Our review of the trial court’s decision to grant Hobas’s
motion to dismiss is de novo with no presumption of correctness. Id.
IV. DISCUSSION
The sole issue presented in this appeal involves whether the trial court correctly
concluded that the City’s claim that it was harmed by Hobas’s negligent
misrepresentations concerning the pipe was barred by the economic loss doctrine.
Tennessee officially recognized and adopted the economic loss doctrine at issue in this
case in Lincoln General Insurance Co. v. Detroit Diesel Corp., 293 S.W.3d 487 (Tenn.
2009). “The economic loss doctrine is implicated in products liability cases when a
defective product damages itself without causing personal injury or damage to other
property.” Id. at 489. This doctrine generally “precludes recovery in tort when a product
damages itself without causing personal injury or damage to other property.” Id.
2
The City raised an additional issue on the condition that the issue was raised in Hobas’s appellate brief.
Because Hobas raised no issues beyond the economic loss issue raised in the City’s initial brief, we will
not analyze this additional issue.
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Generally, the purpose of the doctrine is to avoid the “collision between warranty and
contract on the one hand and the torts of strict liability, negligence, fraud and
misrepresentation on the other.” Trinity Indus., Inc. v. McKinnon Bridge Co., Inc., 77
S.W.3d 159, 171 (Tenn. Ct. App. 2001) (quoting James J. White & Robert S. Summers,
Uniform Commercial Code § 10-5, 580 (4th ed. 1995)).
Although the doctrine takes many forms throughout the United States, see Milan
Supply Chain Sols. Inc. v. Navistar Inc., No. W2018-00084-COA-R3-CV, 2019 WL
3812483, at *4 (Tenn. Ct. App. Aug. 14, 2019) (discussing “lack of uniformity in the
approaches taken”), the question in this case is whether the doctrine adopted by the
Tennessee Supreme Court bars the particular claims in this case. Hobas contends that the
doctrine indeed bars the City’s tort claims because it is undisputed for purposes of appeal
that the sole damage that occurred in this case was to the Interceptor system itself. In
contrast, Appellants contend that Tennessee recognizes an exception to the economic loss
doctrine for claims involving negligent misrepresentation.
To resolve this dispute, we begin at the beginning. Although Tennessee did not
formally recognize the economic loss doctrine at issue in this case for nearly another two
decades, a form of the doctrine was discussed by the Tennessee Supreme Court as early
as 1991 in John Martin Co. v. Morse/Diesel, Inc., 819 S.W.2d 428 (Tenn. 1991). In
John Martin, the plaintiff subcontractor filed suit against its construction manager,
alleging that the construction manager negligently supplied information that it relied
upon in a construction project. Eventually, the defendant filed a motion for summary
judgment on the ground that “economic losses are not recoverable for negligence absent
privity.” Id. at 430. The trial court granted the motion, and the Tennessee Court of
Appeals reversed, holding that “economic loss may be recoverable by parties not in
privity upon a showing of ‘negligence, misrepresentation, and justifiable reliance.’” Id.
(quoting John Martin Co., Inc. v. Morse/Diesel, Inc., No. 918, 1990 WL 28776, at *20
(Tenn. Ct. App. March 20, 1990)).
Before the Tennessee Supreme Court, the defendant argued that the plaintiff
should not be allowed to recover for purely economic losses even under a theory of
negligence in the absence of privity. Our high court also noted that “the amicus curiae
brief in support of the defendant’s position argues in favor of the ‘economic loss
doctrine’: a general principle that prohibits the recovery of purely economic damages for
negligence when the plaintiff lacks privity of contract with the defendant.” Id. The
amicus curiae did acknowledge an exception to what it deemed the “time-honored rule”:
actions for negligent misrepresentations “usually provided by a professional, in
determining whether to enter into or participate in a business transaction.” Because the
misrepresentation did not regard “the transaction,” but the day-to-day performance of the
contract, the amicus curiae argued that the exception would not apply. In contrast, the
plaintiff asserted that it had no choice but to rely on the manager’s negligent
misrepresentations with regard to the design and negligent supervision of the project.
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In resolving this dispute, the Tennessee Supreme Court acted swiftly to make one
point clear: “This is not a products liability case.” Id. at 431. Instead, the court
characterized the claim as involving the plaintiff’s reliance on the defendant’s
“misrepresentation in the performance of his contracted service” causing the plaintiff to
“experience[] business losses as a result.” Id. The court therefore quickly dispensed with
cases involving only claims of products liability in respect to design defects” as those
“losses suffered were caused by defective products, not misguidance or misdirection in
the performance of services.” Id. For claims involving misrepresentation, rather than
products liability, the court found guidance in the Restatement (Second) of Torts § 552
(1977), which had been previously adopted by the Tennessee Supreme Court in Howell v.
Betts, 211 Tenn. 134, 362 S.W.2d 924, 925–926 (Tenn. 1962). Section 552 provided as
follows:
(1) One who, in the course of his business, profession or employment, or in
any other transaction in which he has a pecuniary interest, supplies false
information for the guidance of others in their business transactions, is
subject to liability for pecuniary loss caused to them by their justifiable
reliance upon the information, if he fails to exercise reasonable care or
competence in the obtaining or communicating of the information.
(2) Except as stated in Subsection (3), the liability stated in Subsection (1),
is limited to loss suffered
(a) by the person or one of a limited group of persons for whose benefit and
guidance he intends to supply the information or knows that the recipient
intends to supply it; and
(b) through reliance upon it in a transaction that he intends the information
to influence or knows that the recipient so intends or in a substantially
similar transaction.
John Martin, 819 S.W.2d at 431 (quoting Restatement (Second) of Torts § 552). The
court explicated that this provision allows recovery in the absence of privity where
(1) the defendant is acting in the course of his business, profession, or
employment, or in a transaction in which he has a pecuniary (as opposed to
gratuitous) interest; and
(2) the defendant supplies faulty information meant to guide others in their
business transaction; and
(3) the defendant fails to exercise reasonable care in obtaining or
communicating the information; and
(4) the plaintiff justifiably relies upon the information.
Id. Moreover, section 552 explicitly allows recovery of merely “pecuniary loss[.]”
Restatement (Second) of Torts § 552. Thus, the John Martin court recognized that the
privity requirement had been “dispensed with . . . for actions in tort based upon negligent
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misrepresentation against” certain professionals, with “no distinction based on the nature
of the profession.” Id. at 434. The supreme court therefore affirmed the court of
appeals’s decision to reinstate the plaintiff’s claim for economic losses resulting from a
negligent misrepresentation despite the lack of privity. Id. at 435–436.
The Tennessee Supreme Court was presented with a second opportunity to
consider a claim for purely economic losses in Ritter v. Custom Chemicides, Inc., 912
S.W.2d 128 (Tenn. 1995). In Ritter, the plaintiffs sued the defendant manufacturer in
federal court for damages to their tomato crop. Id. at 129. The plaintiffs claimed that the
manufacturer negligently misrepresented a product to protect tomato plants from frost in
advertisements directed at plaintiffs and other commercial growers, that plaintiffs relied
upon these misrepresentations to purchase the product, and the product caused extensive
damage to the plaintiffs’ tomato crop, resulting in economic losses. Id. The district court
granted summary judgment as to several claims including breach of warranty and
negligent misrepresentation. Id. The plaintiff appealed only the claim for negligent
misrepresentation. Id. The United States Court of Appeals for the Sixth Circuit thereafter
sent two certified questions to the Tennessee Supreme Court:
(1) Whether the tort of negligent misrepresentation applies only to
professionals and others who specialize in providing information as a
service; and not to commercial entities or businesses which allegedly
supply misleading information for the guidance of others in their business
transactions; and
(2) Whether a party alleging negligent misrepresentation, in order to
recover “economic losses,” must be in privity of contract with the
defendant.
Id. Although the court answered both certified questions in the negative, it ultimately
ruled that dismissal of the plaintiff’s claims for only pecuniary losses was appropriate.
To reach this result, the court first recognized that there were several types of
misrepresentation recognized by Tennessee law: (1) fraud and deceit; (2) negligent
misrepresentation under Section 552 of the Restatement, as described in John Martin,
supra; and (3) strict liability under Section 402B of the Restatement (Second) of Torts
(1965). The court stated that only the latter two were at issue in the present case. As to
Section 552 liability, the court noted that prior cases had confirmed that privity was not a
prerequisite for liability thereunder. Id. at 130–31. The court also rejected the defendant’s
contention that this rule applies only to “professionals,” as not being supported by the
language of Section 552 or prior Tennessee caselaw. Rather, the Ritter court held that
Section 552’s language “obviously includes non-professionals involved in certain
business activities or transactions” including construction managers, John Martin, 819
S.W.2d at 431, accountants, Bethlehem Steel Corp. v. Ernst & Whinney, 822 S.W.2d
-7-
592, 595 (Tenn. 1991), the seller of a log home kit, Stamp v. Honest Abe Log Homes,
Inc., 804 S.W.2d 455, 458 (Tenn. Ct. App. 1990), a landlord, Keller v. West-Morr
Investors, Ltd., 770 S.W.2d 543, 547 (Tenn. Ct. App. 1988), and a seller of real estate.
Chastain v. Billings, 570 S.W.2d 866, 868 (Tenn. Ct. App. 1978).
This conclusion, however, did not end the court’s inquiry. Rather, the court
emphasized that Section 552 further requires that the defendant supplied false
information and failed to exercise reasonable care in obtaining or communicating the
information. Ritter, 912 S.W.2d at 131. After reviewing the plaintiff’s complaint, the
high court found allegations as to these essential elements lacking:
There is no identification of the information supplied and no assertion that
information supplied was false. Nor is there any identification of
negligence committed by the defendant in obtaining or communicating
information relied upon by the plaintiffs. Advertisements and even direct
statements that the product was “effective” does not constitute proof that
the defendant supplied false information for the guidance of others. The
allegation that the product harmed the plaintiffs’ crops is not an allegation
that the defendant was negligent in obtaining or communicating
information. On the alleged facts, there is no basis for finding either of the
essentials of Section 552(1), that the defendant supplied false information
for the guidance of others in a business transaction, or that the defendant
did not exercise reasonable care or competence in obtaining or
communicating the information.
Id. Given the absence of allegations of negligence, the Ritter court concluded that the
plaintiffs’ claims fell more squarely within an action for strict liability under Section
402B. As the court explained, however,
Section 402B imposes strict liability upon a seller for misrepresentation of
material facts concerning the character or quality of a chattel sold by it,
even in the absence of negligence and privity of contract. However, liability
under Section 402B is limited to physical harm to a person or property and
does not extend to economic loss. Even the description of the loss reflected
in the Sixth Circuit’s order, “there was extensive damage to their crops,”
suggests physical damage to property for which recovery can be had under
Section 402B. However, since the plaintiffs sued for “economic damages
resulting from the lost profits,” there can be no recovery under Section
402B.
Id. at 131–32. In reaching this result, the court recognized its prior emphasis on the fact
that “Section 552 does not apply to products liability cases[.]” Id. at 132 (citing John
Martin, 819 S.W.2d at 431). Because the “losses suffered by the plaintiffs in this case
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were caused by a defective product, not misguidance or misdirection in the performance
of services,” recovery under Section 552 was not available. Instead, the court opined that
its decision reaffirmed the principle “that product liability claims resulting in pure
economic loss can be better resolved on theories other than negligence.” Id. at 133
(footnote omitted).
More than a decade following the decision in Ritter, the economic loss doctrine
was put squarely before the Tennessee Supreme Court in Lincoln General Insurance Co.
v. Detroit Diesel Corp., 293 S.W.3d 487 (Tenn. 2009). In Lincoln General, a rental
company purchased a bus manufactured by the defendants. Id. at 488. The bus later
caught fire due to a manufacturing defect; the fire did not cause any personal injuries or
property damage to anything other than the bus itself. The plaintiff, the rental company’s
insurance provider, filed suit against the manufacturers for breach of warranties,
negligence, and strict products liability. Id. The case was removed to federal court and
the defendants filed a motion to dismiss arguing that that the claims were barred by the
economic loss doctrine. The district court thereafter certified the following question to
the Tennessee Supreme Court, which our high court accepted: “Does Tennessee law
recognize an exception to the economic loss doctrine under which recovery in tort is
possible for damage to the defective product itself when the defect renders the product
unreasonably dangerous and causes the damage by means of a sudden, calamitous
event?” Id.
As an initial matter, the Lincoln General court stated that the district court’s
question “presupposes that Tennessee recognizes the economic loss doctrine, a judicially
created principle that reflects an attempt to maintain separation between contract law and
tort law by barring recovery in tort for purely economic loss.” Id. The court explained,
however, that while it had expressed agreement with the policies underlying the doctrine,
it had never formally adopted it. Id. at 489 (citing Ritter, 912 S.W.2d at 133). The
Tennessee Supreme Court therefore took the opportunity to formally adopt the economic
loss doctrine in Lincoln General. Id. at 489.
In adopting the doctrine, the court first explained when it is implicated: “[t]he
economic loss doctrine is implicated in products liability cases when a defective product
damages itself without causing personal injury or damage to other property.” Id.
According to the court, “[i]n this context, ‘economic loss’ is defined generally as ‘the
diminution in the value of the product because it is inferior in quality and does not work
for the general purposes for which it was manufactured and sold.’” Id. (citing Comment,
Manufacturers’ Liability to Remote Purchasers for “Economic Loss” Damages–Tort or
Contract?, 114 U. Pa. L. Rev. 539, 541 (1966)).
To determine the proper parameters of the newly adopted doctrine when only the
defective product is damaged, the Tennessee Supreme Court turned to the seminal case
on the doctrine, East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S.
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858, 106 S. Ct. 2295, 2295, 90 L. Ed. 2d 865 (1986). In East River, a company that had a
chartered a ship sued the two manufacturers after turbines installed in the ships
malfunctioned due to design and manufacturing defects; only the turbines were damaged.
Id. at 861. One question on appeal was whether the claim was barred by the economic
loss doctrine. Id. at 867–71. In analyzing this question, the Supreme Court considered
three approaches to the economic loss doctrine utilized by various jurisdictions, “which it
described as the ‘majority,’ ‘minority,’ and ‘intermediate’ positions[.]” Lincoln Gen.,
293 S.W.3d at 489 (citing East River, 476 U.S. at 868–70). Ultimately, the Supreme
Court adopted the majority approach and held that the shipbuilder’s claim for damages
related to the defective turbines was barred by the economic loss doctrine. East River,
476 U.S. at 870–71.
The Tennessee Supreme Court likewise considered each of the approaches
outlined by the United States Supreme Court. First, the court described the majority
approach adopted by the Supreme Court as “a bright-line rule that precludes recovery in
tort when a product damages itself without causing personal injury or damage to other
property.” Lincoln Gen., 293 S.W.3d at 489. The basis for this rule is that “‘[w]hen a
product injures only itself the reasons for imposing a tort duty are weak and those for
leaving the party to its contractual remedies are strong.’” Id. (quoting East River, 476
U.S. at 871). As the Lincoln General court explained, “the Supreme Court reasoned that
damage to a defective product is merely a failure of the product to meet the purchaser’s
expectations, a risk that the parties had the opportunity to allocate by negotiating contract
terms and acquiring insurance.” Id. at 490 (citing East River, 476 U.S. at 871–72).
Finally, the court noted the Supreme Court’s “concern that permitting recovery in tort for
purely economic loss could subject the manufacturer to an indefinite amount of
damages.” Id. at 490 (citing East River, 476 U.S. at 874).
On the other end of the spectrum was the “minority approach,” which permits tort
recovery for purely economic losses. Id. The jurisdictions following this view “do not
distinguish between economic loss and personal injury or property damage because in
either circumstance, the damage was caused by the defendant’s conduct.” Id. (citing East
River, 476 U.S. at 869). The Supreme Court, however, rejected this approach “because it
‘fails to account for the need to keep products liability and contract law in separate
spheres and to maintain a realistic limitation on damages.’” Id. (quoting East River, 476
U.S. at 870–71).
Finally the Tennessee Supreme Court considered the intermediate approach, which
would allow “tort recovery for damage to the defective product alone under limited
exceptions that ‘turn on the nature of the defect, the type of risk, and the manner in which
the injury arose.’” Id. (quoting East River, 476 U.S. at 870). In particular the plaintiff in
Lincoln General sought an exception where unreasonably dangerous products “cause
damage to themselves during sudden, calamitous events.” Id. The Lincoln General court
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explained that the Supreme Court rejected such an exception as “‘too indeterminate to
enable manufacturers easily to structure their business behavior.’” Id. at 491 (quoting
East River, 476 U.S. at 870). Likewise, the Supreme Court “found unpersuasive an
exception that focuses on the manner in which the harm occurred”:
We realize that the damage may be qualitative, occurring through gradual
deterioration or internal breakage. Or it may be calamitous. But either way,
since by definition no person or other property is damaged, the resulting
loss is purely economic. Even when the harm to the product itself occurs
through an abrupt, accident—like event, the resulting loss due to repair
costs, decreased value, and lost profits is essentially the failure of the
purchaser to receive the benefit of its bargain—traditionally the core
concern of contract law.
Id. (quoting East River, 476 U.S. at 870).
Ultimately, the Tennessee Supreme Court likewise adopted the majority approach
to claims of economic loss. As the court explained,
We agree with the United States Supreme Court that the owner of a
defective product that creates a risk of injury and was damaged during a
fire, a crash, or other similar occurrence is in the same position as the
owner of a defective product that malfunctions and simply does not work. It
follows that the remedies available to these similarly situated product
owners should derive from the parties’ agreements, not from the law of
torts, lest we disrupt the parties’ allocation of risk. See Prosser & Keeton
on the Law of Torts § 101(3), at 709 (5th ed. 1984) (“[R]isk of harm to the
product itself due to the condition of the product would seem to be a type of
risk that the parties to a purchase and sale contract should be allowed to
allocate pursuant to the terms of the contract.”). To hold otherwise would
make it more difficult for parties to predict the consequences of their
business transactions, the cost of which ultimately falls on consumers in the
form of increased prices. . . .
It is difficult, moreover, for parties and courts to apply a rule that
focuses on the degree of risk and the manner in which the product was
damaged as opposed to a rule that hinges on harm the plaintiff actually
sustains. [The plaintiff] suggests, nonetheless, that adopting the bright-line
rule espoused in East River would come at too great a price—the decreased
safety of Tennessee citizens. We believe, however, that deterrence is
adequately promoted by existing law that permits tort recovery for personal
injury and damage to property other than the product itself. . . .
In our view, the East River approach fairly balances the competing
policy interests and clearly delineates between the law of contract and the
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law of tort. We therefore hold that Tennessee law does not recognize an
exception to the economic loss doctrine under which recovery in tort is
possible for damage to the defective product itself when the defect renders
the product unreasonably dangerous and causes damage by means of a
sudden, calamitous event.
Finally, our holding is consistent with the Restatement (Third) of
Torts: Products Liability (1998). Section 21 specifically excludes harm to
“the defective product itself” from the definition of “harm to persons or
property” for which economic loss is recoverable. Comment (d) to section
21 further explains:
A plausible argument can be made that products that are
dangerous, rather than merely ineffectual, should be governed
by the rules governing products liability law. However, a
majority of courts have concluded that the remedies provided
under the Uniform Commercial Code—repair and
replacement costs and, in appropriate circumstances,
consequential economic loss—are sufficient. Thus, the rules
of this Restatement do not apply in such situations.
Id. at 491–93. Thus, the Tennessee Supreme Court formally adopted the economic loss
rule in its most expansive approach.
The central dispute in this case turns on which of the above cases controls this
litigation. For purposes of this appeal, the parties agree that the City’s claim against
Hobas seeks recovery for solely economic losses caused by damage to the product itself.
Appellants contend, however, that John Martin recognized an exception to the economic
loss doctrine for claims of negligent misrepresentation that remains good law to this day.
In particular, Appellants argue that Lincoln General did not overrule John Martin and,
in any event, the later case’s holding was limited to the exception expressly considered,
i.e., for damage caused by dangerous products in sudden, calamitous events.3
3
SSR further argues that the application of the economic loss doctrine to this negligent misrepresentation
claim conflicts with the Uniform Commercial Code (“UCC”). See Tenn. Code Ann. § 47-1-103(b)
(“Unless displaced by the particular provisions of chapters 1-9 of this title, the principles of law and
equity, including . . . the law relative to . . . misrepresentation . . . supplement its provisions.”). SSR does
not indicate where this argument was cited to the trial court and this Court’s review has not revealed that
it was in fact cited in the trial court. See R. Tenn. Ct. App. 6 (noting that written arguments must include
where errors were “called to the attention of the trial judge”). In any event, although misrepresentation
may be allowed under the UCC, the economic loss doctrine is a “judicially created principle” governed by
the common law. Milan Supply Chain Sols. Inc. v. Navistar Inc., No. W2018-00084-COA-R3-CV,
2019 WL 3812483, at *3 (Tenn. Ct. App. Aug. 14, 2019); see also Bermel v. BlueRadios, Inc., 2019 CO
31, ¶ 15, 440 P.3d 1150, 1153 (Colo. 2019); Wadlington v. Cont’l Med. Servs., Inc., 728 So. 2d 352, 352
(Fla. Dist. Ct. App. 1999) (“The economic loss rule ‘is a judge-made limitation on common law tort
remedies,’ providing that ‘absent a tort independent of breach of contract, remedy for economic loss lies
- 12 -
In contrast, Hobas contends that the rule applied in John Martin does not apply in
the context of an action involving a defective product. Instead, Hobas submits that the
bright line rule adopted in Lincoln General does not allow any exceptions to the
economic loss doctrine and bars the City’s claim in this case because the losses suffered
involved only damage to the pipes, i.e., the product themselves.
As an initial matter, we must conclude that Appellants’ argument that this dispute
is resolved solely by reference to the opinion in John Martin is not persuasive. Rather,
the John Martin court itself made clear that the holding espoused therein did not apply in
this context, emphasizing that the case was “not a products liability case[.]”John Martin,
819 S.W.2d at 431. Appellants contend that their case likewise is not a products liability
case, but rather is a case solely involving an alleged negligent misrepresentation.
Respectfully, this argument is unavailing.
It is true that without a claim for personal injury or property damage, no claim
may lie under the Products Liability Act. Indeed, the Act defines a “[p]roduct liability
action” as one “brought for or on account of personal injury, death or property damage
caused by or resulting from the manufacture, construction, design, formula, preparation,
assembly, testing, service, warning, instruction, marketing, packaging or labeling of any
product.” Tenn. Code Ann. § 29-28-102(6). Of course, the statute limits this definition
only “for purposes of this chapter[.]” Id. More generally, the term products liability is
defined as “[a] manufacturer’s or seller’s liability for any damages or injuries suffered by
a buyer, user, or bystander as a result of a defective product.” Black’s Law Dictionary
1328 (9th ed. 2009). Importantly, the Tennessee Supreme Court has made clear that a
case can involve products liability without actually being cognizable under the Products
Liability Act. As previously noted, in Lincoln General, the Tennessee Supreme Court
expressly held that “[t]he economic loss doctrine is implicated in products liability cases
when a defective product damages itself without causing personal injury or damage to
other property.” Lincoln General, 293 S.W.3d at 489 (emphasis added). If this court
were to define “products liability cases” solely as those cognizable under the Products
Liability Act, the Lincoln General court’s adoption of the economic loss rule applicable
in “products liability cases” would be entirely redundant—no such claim could exist
involving the liability of a product without damage to persons or other property. As such,
the Tennessee Supreme Court’s language must be read to include in the definition of
“products liability cases” all cases involving the liability of a manufacturer or seller for
harm caused by a product, rather than the far more circumscribed definition applicable
under the Products Liability Act. Pursuant to Lincoln General’s definition, the claims
in contract law[.]’” (internal citations omitted)). As such, the simple fact that the UCC preserves claims
for misrepresentation may be instructive, but it is not dispositive of whether the economic loss doctrine
nevertheless bars the City’s claim for purely economic losses in this case.
- 13 -
against Hobas certainly involve the liability of a seller or manufacturer of a product for
damages suffered by a buyer or user as a result of a defective product. As such, we must
conclude that unlike in John Martin, which only involved the provision of services, this
case indeed involves a products liability action.
The nature of this action as involving products liability is important to the
determination of whether an exception to the economic loss rule applies to the City’s
negligent misrepresentation claim. Although the overarching theme of the economic loss
rule is that a party does not owe a duty to prevent purely economic damage, see East
River, 476 U.S. at 871, the doctrine has evolved differently depending on the context.
Indeed, many jurisdictions make distinctions between the rule as applied in the
contract/services context and in the products liability context. See Burns v. Winnebago
Indus., Inc., No. 8:13-CV-1427-T-24, 2013 WL 4437246, at *3 (M.D. Fla. Aug. 16,
2013) (noting that prior to a Florida Supreme Court case abolishing the economic loss
rule as applied outside the products liability context, Florida recognized two types of
economic loss rule, one applicable in “contractual privity cases” and one in “product
liability cases”); see also Vesta Const. & Design, L.L.C. v. Lotspeich & Assocs., Inc.,
974 So. 2d 1176, 1179 (Fla. Dist. Ct. App. 2008) (“Because of the differing history,
rationales and purposes of these separately developed doctrines, confusion often arises
when one attempts to apply cases addressing the products liability economic loss rule to
contractual privity cases, and vice versa.”); Elizabeth Z. Brabb and Prof. James E. Wren,
III, Part III: How Has The Economic Loss Rule Developed In Texas Case Law?, State
Bar of Texas, 2017 WL 5895887 (2017) (discussing the two types of economic loss rule
adopted in Texas, one in the contract arena, and one in products liability cases); cf.
Reeder R. Fox & Patrick J. Loftus, Riding the Choppy Waters of East River: Economic
Loss Doctrine Ten Years Later, 64 Def. Couns. J. 260, 266 (1997) (noting that “the
expansion of the economic loss rule to claims involving ‘services[,]’ rather than goods,
“has led to seemingly inconsistent results”).
Tennessee likewise appears to have considered two separate rules. First, in John
Martin, the Tennessee Supreme Court was invited to adopt a rule that prevents purely
economic losses “for negligence when the plaintiff lacks privity of contract with the
defendant.” Id. at 430; see also Acuity v. McGhee Eng’g, Inc., 297 S.W.3d 718, 734
(Tenn. Ct. App. 2008) (discussing the John Martin rule in the services context). Later in
Lincoln General, the Tennessee Supreme Court did formally adopt an economic loss rule
that applies “when a defective product damages itself without causing personal injury or
damage to other property.” 293 S.W.3d at 489. Although these rules have similar
underpinnings, they are distinct. Indeed, the inapplicability of the John Martin rule to
products liability cases is not only present in the clear language of John Martin noted
supra, but also from the language of later Tennessee Supreme Court cases. First, in
Ritter, the Tennessee Supreme Court expressly held that, based on the language of John
Martin, “Section 552 does not apply to products liability cases[.]” Ritter, 912 S.W.2d at
- 14 -
132 (citing John Martin, 819 S.W.2d at 431).4 Thus, the Tennessee Supreme Court made
clear that the rule adopted in John Martin, allowing a claim for economic loss related to
a negligent misrepresentation in the absence of contractual privity, was simply
inapplicable in the products liability arena.
Next, the Lincoln General court, when faced with a claim of economic loss in the
products liability context, did not find support for the doctrine in John Martin or even
discuss the case. Rather, the Court stated that Tennessee had yet to formally adopt the
economic loss rule and that the case presented the court “with [its] first opportunity to
examine the proper application of the economic loss doctrine when only the defective
product is damaged.” Lincoln General, 293 S.W.3d at 489. Thus, the language of the
Lincoln General opinion clearly indicates that whatever rule was adopted or espoused in
John Martin, it had no relevance to the question of whether claims for economic losses
should be barred in the products liability context.
While we find little guidance in the John Martin opinion to resolve the dispute at
issue, we must concede that Lincoln General also fails to explicitly rule on the issue
presented in this case. Instead, in adopting the majority approach, the only exceptions that
were expressly considered and rejected by the Lincoln General court involved defects
that render the product unreasonably dangerous and cause damage by means of a sudden
calamitous event. See Lincoln General, 293 S.W.3d at 488 (noting the limited question
certified to the supreme court by the federal court); see also Staats v. McKinnon, 206
S.W.3d 532, 550 (Tenn. Ct. App. 2006) (citing Shousha v. Matthews Drivurself Serv.,
Inc., 210 Tenn. 384, 390, 358 S.W.2d 471, 473 (Tenn. 1962)) (“It is axiomatic that
judicial decisions do not stand for propositions that were neither raised by the parties nor
actually addressed by the court.”). As such, Appellants raise two lines of cases in support
of their theory that the negligent misrepresentation exception to the economic loss
doctrine should apply to claims involving the liability of products notwithstanding the
adoption of the majority approach in Lincoln General.5 First, Appellants contend that
4
Indeed, none of the cases cited in John Martin to support the rule involved manufacturers or sellers of
products, despite the City’s insistence otherwise. See, e.g., Ultramares Corp. v. Touche, 255 N.Y. 170,
173, 174 N.E. 441, 442 (N.Y. 1931) (involving a claim against public accountants); Glanzer v. Shepard,
233 N.Y. 236, 238, 135 N.E. 275, 275 (N.Y. 1922) (involving a claim against third party “public
weighers” by the purchasers of beans, rather than against the sellers of the product); Kennedy v.
Columbia Lumber & Mfg. Co., 299 S.C. 335, 384 S.E.2d 730 (S.C. 1989) (involving a suit by home
buyers against the home builder); see also John Martin, 819 S.W.2d at 435 n.1(including a discussion of
additional cases in support of its holding, none of which involve a manufacturer or seller of goods).
5
Appellants also cite several cases citing John Martin as support for a negligent misrepresentation
exception to the economic loss rule that are outside the products liability context. See Cadence Bank,
N.A. v. DLO Title, LLC, No. 3:17-CV-01170, 2018 WL 1399584, at *1 (M.D. Tenn. Mar. 20, 2018)
(involving a breach of contract, rather than a defective product); City of Morristown v. AT&T Corp., 206
F. Supp. 3d 1321, 1325 (E.D. Tenn. 2016) (same); Acuity v. McGhee Eng’g, Inc., 297 S.W.3d 718
(Tenn. Ct. App. 2008) (same); Amsouth Erectors, LLC v. Skaggs Iron Works, Inc., No. W2002-01944-
COA-R3-CV, 2003 WL 21878540, at *1 (Tenn. Ct. App. Aug. 5, 2003) (same). These cases are therefore
- 15 -
both unreported Tennessee caselaw and federal opinions interpreting Tennessee law
continued to recognize the negligent misrepresentation exception in a products liability
context following Lincoln General. Second, Appellants assert that other jurisdictions
continued to recognize the exception notwithstanding their own adoption of the majority
approach to the economic loss doctrine.
We begin with the caselaw relative to Tennessee. As an initial matter, we dispense
with those cases decided prior to Lincoln General, as the Tennessee Supreme Court had
yet to adopt an economic loss rule where a defective product injures only itself. See
Valmet-Enerdry v. Alcoa Steel Fabricators, Inc., No. 03A01-9412-CH-00436, 1995 WL
329126, at *1 (Tenn. Ct. App. May 31, 1995) (involving defective paint but decided prior
to the adoption of the economic loss rule at issue); Metro. Gov’t of Nashville &
Davidson Cty. v. Affiliated Computer Servs., Inc., No. 3:07CV0080, 2008 WL
11393151, at *14 (M.D. Tenn. July 17, 2008) (ruling, prior to the decision in Lincoln
General, that a claim of negligent misrepresentation against the seller of product was not
barred by the economic loss doctrine because the “duty allegedly breached is therefore
collateral to and distinct from [the defendant’s] obligations under the Contract.”). Other
cases that considered this issue following the adoption of the defective product economic
loss rule in Lincoln General do not appear to consider that opinion and therefore likewise
lack significant persuasive value. See McMahan Jets, LLC v. Roadlink Transp., Inc., 68
F. Supp. 3d 817, 823 (W.D. Tenn. 2014) (briefly discussing John Martin with regard to a
choice of law issue to note that Tennessee allows a claim for economic losses for a
negligent misrepresentation but not discussing John Martin’s express statement that it
was not a products liability case or the holding in Lincoln General). Thus, it appears that
only a single federal case cited by Appellants has given at least superficial consideration
to the rule adopted in Lincoln General and nevertheless concluded that an exception for
negligent misrepresentation exists to the defective product economic loss rule. See N5ZX
Aviation, Inc. v. Bell, No. 3-11-0674, 2011 WL 5520973, at *4 (M.D. Tenn. Nov. 14,
2011) (citing Lincoln General only in the context of a statute of repose argument). Still,
from our review, arguments were not raised in any of the above cases specifically
concerning whether the John Martin rule should apply in the products liability context;
rather it appears that the parties and courts assumed that such was the case. In any event,
none of the above cases are controlling on this Court. See Tenn. R. Sup. Ct. 4(G)(1)
(stating that unreported cases are not controlling precedent); Summers Hardware &
Supply Co. v. Steele, 794 S.W.2d 358, 362 (Tenn. Ct. App. 1990) (opining that “[c]ases
from other jurisdictions, including federal cases, are always instructive, sometimes
persuasive, but never controlling in our decisions”).
Many of the cases cited from our sister jurisdictions are also not helpful. Of the
three cases cited by Appellants in support of their claim that other “majority”
jurisdictions have recognized an exception to the economic loss rule for negligent
inapposite.
- 16 -
misrepresentations, two did not involve any claims in the products liability context. See
Rinehart v. Morton Bldgs., Inc., 297 Kan. 926, 928, 305 P.3d 622, 625 (Kan. 2013)
(involving misrepresentations as to the construction of a building, a claim “outside the
product liability sphere”); Lopez v. Javier Corral, D.C., 126 Nev. 690, 367 P.3d 745
(Nev. 2010) (involving a claim against a chiropractor and not discussing East River).
Only one case cited by Appellants, Progressive Northern Insurance Company of Illinois
v. Ford Motor Company, 259 F. Supp. 3d 887 (S.D. Ill. 2017), appears to indicate that
Illinois law may allow a negligent misrepresentation claim for economic losses in the
products liability context. Id. at 888 (noting, in a case involving a defective product, that
negligent misrepresentation is a recognized exception to the economic loss rule under
Illinois law). While it is true that Illinois law permits a claim for economic losses related
to a negligent misrepresentation, the Illinois Supreme Court has held that such a claim
did not apply to a manufacturer of a product because the manufacturer is not in the
business of supplying information for the guidance of others. See Anderson Elec. v.
Ledbetter Erection Corp., 115 Ill. 2d 146, 154, 503 N.E.2d 246, 249 (Ill. 1986). As such,
it does not appear that Illinois law lends support for the approach advanced by Appellants
in this case. See also Sebago, Inc. v. Beazer E., Inc., 18 F. Supp. 2d 70, 96 (D. Mass.
1998) (describing Illinois as one of the jurisdictions that has a “created narrow
exception[] to the economic loss doctrine’s ban against negligent misrepresentation
claims for cases that do not involve an allegedly defective product”).
Our own research has not revealed a persuasive majority as to either competing
approach championed by the parties in this case; rather, in the few cases to explicitly
decide this issue, courts have come to opposite conclusions. For example, in State by
Bronster v. U.S. Steel Corp., 82 Haw. 32, 43, 919 P.2d 294, 305 (1996), the Hawaii
Supreme Court held that the economic loss rule did not prevent a claim for negligent
misrepresentation where the damage did not arise from a defect in the product but from a
claim that the defendant did not “exercise reasonable care or competence in obtaining or
communicating information for the guidance of the [plaintiff] in its decision regarding the
[product] to be used in the construction[.]” Id. at 304. In reaching this result, the Hawaii
Supreme Court made clear that a duty to exercise reasonable care in providing guidance
to others “is distinct from the duty eliminated by the economic loss rule[,]” which
“absolves manufacturers in commercial relationships from a duty ‘ . . . to prevent a
product from injuring itself.’” Id. (quoting East River, 476 U.S. at 871). The court also
acknowledged that one purpose behind the economic loss rule is to prevent tort claims
from undermining the provisions of the UCC; however, the UCC expressly permits
misrepresentation claims. Id. at 305. Finally, the court cited other cases that had come to
similar conclusions. Id. at 305 (citing Vermont Plastics, Inc. v. Brine, Inc., 824 F. Supp.
444, 452 (D. Vt. 1993), aff’d, 79 F.3d 272 (2d Cir. 1996) (involving a claim against a
product manufacturer but relying on Vermont law involving a service contract);
McCarthy, Lebit, Crystal & Haiman Co., L.P.A. v. First Union Mgt., Inc., 87 Ohio
App. 3d 613, 622 N.E.2d 1093 (1993) (involving a claim against a landlord)); see also
Moorman Mfg. Co. v. Nat’l Tank Co., 91 Ill. 2d 69, 435 N.E.2d 443 (Ill. 1982) (noting a
- 17 -
previously recognized exception to the economic loss rule where an intentional or
negligent misrepresentation has been made, but not applying the exception). But see
discussion of Illinois law, supra).
In contrast, the Kentucky Supreme Court held that such a claim would be barred
by the economic loss doctrine in Giddings & Lewis, Inc. v. Indus. Risk Insurers, 348
S.W.3d 729 (Ky. 2011). In that case, the purchaser provided extensive specifications for
metal working equipment to be manufactured by the defendant. Id. at 733–34. The
defendant manufactured the equipment. After a seven year express warranty expired, an
incident occurred damaging the equipment, but no persons or other property. The
purchaser’s insurer paid for the equipment to be rebuilt at a significant cost. The insurer
thereafter filed suit against the defendant for a variety of claims, including negligent
misrepresentation. Id. at 734. Eventually, the trial court held that the negligent
misrepresentation claim was barred by the economic loss doctrine. Id. at 735. The
Kentucky Court of Appeals reversed, ruling that the economic loss doctrine did not bar
the insurer’s “negligent misrepresentation . . . claim[] because [it] ar[o]se in tort,
independent of any contractual duty.” Id. at 735.
Before the Kentucky Supreme Court, the defendant argued that the insurer’s claim
should be barred by the economic loss doctrine “because they are not distinct tort claims
arising independent of the contract. Rather, both claims reference the quality or character
of the [product] and are thus simply the warranty claims ‘repackaged’ which causes them
to fall squarely within the ambit of the economic loss rule.” Id. In contrast, the insurer
claimed that the tort claims at issue “are not based solely on the product’s failure to
perform but are premised on classic tort theories beyond the scope of the economic loss
rule” and urged the court to adopt an exception to the economic loss rule for negligent
misrepresentation. Id.
Like the Tennessee Supreme Court in Lincoln General, the Kentucky Supreme
Court first took the opportunity to formally adopt the East River economic loss rule
applicable in the products liability context. Id. at 738. According to the court, the rule
“recognizes that economic losses, in essence, deprive the purchaser of the benefit of his
bargain and that such losses are best addressed by the parties’ contract and relevant
provisions of Article 2 of the Uniform Commercial Code.” Id. “Losses for injuries to
people and to ‘other property,’” however, remained subject to traditional theories of
negligence and strict liability. Id. As support for the adoption of the rule, the court
emphasized that it protects the boundary between tort and contract law:
Where tort law, primarily out of a concern for safety, fixes the
responsibility for a defective product directly on the parties responsible for
placing the product into the stream of commerce, contract law gives the
parties to a venture the freedom to allocate risk as they see fit. . . .
- 18 -
Three policies support applying the economic loss doctrine to
commercial transactions: (1) it maintains the historical
distinction between tort and contract law; (2) it protects
parties’ freedom to allocate economic risk by contract; and
(3) it encourages the party best situated to assess the risk of
economic loss, usually the purchaser, to assume, allocate, or
insure against that risk.
Id. at 738–39 (quoting Mt. Lebanon Pers. Care Home, Inc. v. Hoover Universal, Inc.,
276 F.3d 845, 848 (6th Cir. 2002) (citing Louis R. Frumer & Melvin I. Friedman,
Products Liability § 13.11[1] (2000))). In adopting this rule, the court acknowledged that
it was “entirely consistent with the latest Restatement of Torts which allows the buyer of
a defective product to recover in tort for injuries to persons or other property but not for
economic losses.” Id. (citing Restatement (Third) of Torts: Products Liability §§ 1 and 21
(1998)).
The Giddings court next declined to adopt an exception to the economic loss rule
for damage occurring in calamitous events. Rejecting this exception, the court explained,
was “a matter of logic,” as it “grounds Kentucky law in what has actually occurred as
opposed to what might have occurred, the facts as opposed to speculation.” Id. at 739.
Rather, the court held that the predictability of the majority approach as adopted in East
River was the proper approach for determining the parameters of the economic loss rule
in Kentucky.
After deciding some other tangential issues, the Kentucky Supreme Court finally
considered the issue at the center of this case: whether an exception exists to the products
liability economic loss rule for negligent misrepresentations. The court first
acknowledged that the tort of negligent misrepresentation had been recognized as a basis
for recovery in 2004 when the Kentucky Supreme Court adopted Section 552 of the
Restatement (Second) of Torts. Id. at 744 (citing Presnell Const. Managers, Inc. v. EH
Const., LLC, 134 S.W.3d 575, 582 (Ky. 2004)). The court, however, distinguished a
traditional misrepresentation claim from that against a manufacturer:
A construction consulting firm and an attorney providing a title opinion, as
well as an auctioneer, offer services which consist of information upon
which others will rely. A manufacturer of a product is not in the business of
supplying information but rather the product itself and, only incidentally,
information about the product. The product and any information about its
character, nature or performance are properly the subject of the parties’
contract.
Id. at 745. Thus, the court recognized a distinction between misrepresentations in the
services context and the products liability context. See also id. at 746 (“While a negligent
- 19 -
misrepresentation claim obviously was recognized several years later in Kentucky in
Presnell Construction, it was not in the context of a sale of a commercial product but in
the context of construction services where the parties to the dispute had no contractual
relationship.”).
Ultimately, the court held that the economic loss rule bars a claim that a seller or
manufacturer “misrepresented several facts regarding ‘the quality, nature and appropriate
uses of the product[.]’” Id. at 745 (quoting Miller’s Bottled Gas, Inc. v. Borg-Warner
Corp., 955 F.2d 1043, 1054 (6th Cir. 1992) (applying and anticipating Kentucky law)).
Simply put,
Although dressed in a different costume, the essence of [the plaintiff’s]
claim is that its losses occurred as a result of the [defendant’s] defects and
failure to perform as expected. “But the injury suffered—the failure of the
product to function properly—is the essence of a warranty action, through
which a contracting party can seek to recoup the benefit of its bargain.”
East River [], 476 U.S. [at] 868[]. Thus, the Supreme Court’s reasoning in
East River precluding negligence-based actions for purely economic losses,
which we have expressly adopted . . . applies with equal force to the tort of
negligent misrepresentation in a commercial context.
Giddings, 348 S.W.3d at 746 (quoting Miller’s Bottled Gas, 955 F.2d at 1054). Finally,
the Court recognized that barring a negligent misrepresentation claim in the products
liability context in the absence of injury to persons or other property was congruent with
the Restatement (Third) of Torts, which likewise bars a tort claim in this context. Id. at
746 & n.11 (citing Restatement (Third) of Torts: Products Liability § 9 (discussed infra)).
Thus, the Kentucky Supreme Court held that even where the plaintiff claims an
affirmative misrepresentation as to the product, such a claim is barred by the economic
loss rule. Id. at 746 (“[T]he economic loss rule applies to a negligent misrepresentation
claim just as it does to negligence and strict product liability claims.”).6
Other courts appear to have come to similar conclusions relying on a variety of
rationales. See, e.g., Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 620
(3d Cir. 1995) (“[C]ourts in jurisdictions which have adopted the economic loss doctrine
routinely have declined to carve out an exception for claims of negligent
misrepresentation.”);7 Apollo Grp., Inc. v. Avnet, Inc., 58 F.3d 477, 480 (9th Cir. 1995)
6
Although the two parties in Giddings were in privity, courts later applying the rule adopted therein have
held that because privity was not required in the East River case, the Giddings rule likewise did not
require privity. See Morris Aviation, LLC v. Diamond Aircraft Indus., Inc., 536 F. App’x 558, 566 (6th
Cir. 2013) (“Although the parties in Giddings were in contractual privity, the reasoning of the opinion
would seem to support the position that economic losses in commercial transactions cannot be recovered
in tort whether there is privity or not.”).
7
Privity is required for the application of the rule under Pennsylvania law. See id. (“The economic loss
- 20 -
(holding that by the Arizona Supreme Court’s adoption of a broad economic loss rule in
the products liability context, it signaled its intention not to except negligent
misrepresentations from the ambit of the rule);8 Bailey Farms, Inc. v. NOR-AM Chem.
Co., 27 F.3d 188, 191 (6th Cir. 1994) (applying Michigan law to hold that the tort of
negligent misrepresentation would be barred by the economic loss doctrine in the
products liability context); Aprigliano v. Am. Honda Motor Co., 979 F. Supp. 2d 1331,
1336–37 (S.D. Fla. 2013) (holding, under Florida law, that claims for negligent
misrepresentation in the products liability context are barred by the economic loss rule
when the allegations are that the product did not meet the customer’s expectations);
Sebago, 18 F. Supp. 2d at 96 (“Upon review of the forgoing authorities, the court
concludes that it is reasonably clear that Massachusetts would adopt some version of the
second category of decisions, which create an exception to the economic loss doctrine’s
ban against negligent misrepresentation claims, but only for cases that do not involve an
allegedly defective product.”); Bishop Logging Co. v. John Deere Indus. Equip. Co.,
317 S.C. 520, 530–31, 455 S.E.2d 183, 189 (S.C. Ct. App. 1995) (declining to find an
exception to the economic loss rule for negligent misrepresentations in the products
liability context).
After considering the foregoing authorities, we must conclude that the Kentucky
Supreme Court’s reasoning is more aligned with Tennessee law on this subject. As in
Kentucky, the Tennessee Supreme Court has adopted the broad majority approach to the
products liability economic loss doctrine espoused by the United States Supreme Court in
East River. The Tennessee Supreme Court characterized its adopted rule as “a bright-line
rule that precludes recovery in tort when a product damages itself without causing
personal injury or damage to other property.” Lincoln General, 293 S.W.3d at 489
(citing East River, 476 U.S. at 871). An important basis for Tennessee’s adoption of the
majority approach economic loss rule in Lincoln General is that “damage to a defective
product is merely a failure of the product to meet the purchaser’s expectations, a risk that
the parties had the opportunity to allocate by negotiating contract terms and acquiring
insurance.” Id. 489–90 (citing East River, 476 U.S. at 871–72). Indeed, the Tennessee
Supreme Court rejected the exceptions championed by the plaintiff in Lincoln General
on the basis that a party who suffers damage due to a calamitous event “is in the same
position as the owner of a defective product that malfunctions and simply does not
work.” Id. at 491. Thus, the court held that the remedies for either type of injury would
be the same and economic losses would not be recoverable in tort under either
doctrine . . . only covers situations in which ‘a party in privity of contract with another suffers an injury
to a product itself, resulting in purely economic loss.’”). Appellants have made no argument in this appeal
that the product liability economic loss rule adopted by the Lincoln General court requires privity
between the parties.
8
Other federal courts have questioned whether the Apollo holding has been applied too broadly. See, e.g.,
Evans v. Singer, 518 F. Supp. 2d 1134, 1143 (D. Ariz. 2007) (noting that while the Apollo court came to
the correct result, “the language and the rationale used to get there [] has created confusion” in later
cases). The Apollo decision, however, has never been overturned or expressly abrogated.
- 21 -
occurrence. Id. (“It follows that the remedies available to these similarly situated product
owners should derive from the parties’ agreements, not from the law of torts, lest we
disrupt the parties’ allocation of risk.”). The Kentucky Supreme Court held that such
reasoning was equally applicable with regard to a negligent misrepresentation claim, as
the damage is the same in either type of action: the failure of the product to meet the
consumer’s expectations. Giddings, 348 S.W.3d at 746 (quoting Miller’s Bottled Gas,
955 F.2d at 1054).
We agree with the Kentucky Supreme Court’s conclusion. While the City was
careful to couch its allegations against Hobas consistent with the language contained in
Section 552 of the Restatement (Second) of Torts, unlike the plaintiff in Ritter, the
allegations in the complaint clearly involve the product’s failure to meet the City’s
expectations as to use and longevity.9 However, a plaintiff alleging that it was injured by
the negligent misrepresentations of the manufacturer as to the suitability and longevity of
the product “is in the same position” as the owner of a malfunctioning product—with
diminished economic expectations, i.e., purely economic losses. Lincoln General, 293
S.W.3d at 489. These are exactly the types of damages that the Tennessee Supreme
Court has held are better adjudicated on other theories, regardless of how they are
characterized in the City’s complaint. See Lincoln General, 293 S.W.3d at 492 (quoting
First Nat. Bank of Louisville v. Brooks Farms, 821 S.W.2d 925, 931 (Tenn. 1991)
(“[T]he rights and liabilities of parties to actions based on diminished economic
expectations can be better adjudicated on other legal theories.”)); Ritter, 912 S.W.2d at
133 (“Tennessee has joined those jurisdictions which hold that product liability claims
resulting in pure economic loss can be better resolved on theories other than
negligence.”). We therefore join other courts in concluding that “plaintiffs should not be
able to circumvent the policies of the economic loss doctrine by recasting a negligence or
product liability claim as a claim for negligent misrepresentation.” Sebago, 18 F. Supp.
2d at 97; see also Giddings, 348 S.W.3d at 746 (coming to a similar conclusion).
Moreover, although Tennessee has long accepted Section 552 as the template for
negligent misrepresentation claims, the Tennessee Supreme Court has never recognized
the tort as an exception to the economic loss rule in the product liability context.
Importantly, both the John Martin and Ritter courts have strongly suggested that the tort
is not applicable in the product liability context. Ritter, 912 S.W.2d at 132 (“Section 552
does not apply to products liability cases and distinguished the causes of action.”); John
9
For example, the amended complaint contains the following allegations regarding the alleged
misrepresentations:
79. Hobas supplied faulty information to [the City] regarding the anticipated life of its
fiberglass pipe.
80. Hobas also supplied faulty information to [the City] regarding the stiffness of the
pipe, which testing shows was below the specified stiffness, including that indicated on
the pipe.
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Martin, 819 S.W.2d at 431 (noting that the case did not involve product liability). Indeed,
the Ritter court emphasized that “a manufacturer does not owe a duty to avoid causing
purely economic damage.” Ritter, 912 S.W.2d at 132 (quoting Prairie Production, Inc.
v. Agchem Div.-Pennwalt, 514 N.E.2d 1299, 1304 (Ind. Ct. App. 1987)). Moreover,
other courts that have adopted Section 552 have nevertheless refused to allow it to
provide a basis for avoiding the application of the economic loss rule in the product
liability context. See, e.g., Axiall Corp. v. descote S.A.S., No. 2:15-CV-00250-LPL, 2018
WL 621287, at *18 (W.D. Pa. Jan. 30, 2018) (noting that despite the adoption of Section
552, Pennsylvania law does not recognize an exception to the economic loss rule for
negligent misrepresentations by manufacturers); Giddings, 348 S.W.3d at 746.
Here, the Tennessee Supreme Court adopted a bright-line rule prohibiting the
recovery of purely economic losses in tort for damage to defective products in an effort to
increase predictability and decrease the possibility of limitless liability. See Lincoln
General, 293 S.W.3d at 490–91 (“To hold otherwise would make it more difficult for
parties to predict the consequences of their business transactions . . . .”). To allow parties
to impose liability based on negligent misrepresentations in this context defeats this
purpose, as illustrated by the federal district court opinion in Metro. Gov’t of Nashville &
Davidson Cty. v. Affiliated Computer Servs., Inc., No. 3:07CV0080, 2008 WL
11393151 (M.D. Tenn. July 17, 2008). In allowing a claim for negligent
misrepresentation against a manufacturer for purely economic damages to proceed, the
district court placed several caveats on the viability of the action, allowing the claim only
so “long as the plaintiff’s claims do not sound in products liability and the alleged
misrepresentations are collateral to and distinct from any duties related to the parties’
contractual relationship.” Id. at *14. Thus, without the benefit of the Lincoln General
opinion, the federal district court adopted a rule that determined the applicability of the
economic loss rule on a case-by-case basis.
In Lincoln General, however, the Tennessee Supreme Court rejected another
exception to the economic loss rule that would except claims from the ambit of the rule
on a case-by-case basis because it did not provide sufficient predictability for
manufacturers. Lincoln General, 293 S.W.3d at 490–91. The same reasoning was used
by the Kentucky Supreme Court: in adopting both the East River majority approach and
in later rejecting a negligent misrepresentation exception, the Kentucky Supreme Court
similarly opined that a “fact-intensive approach offers no predictability to contracting
parties regarding the applicability of tort law and can produce varying results in
seemingly similar cases, even though, in the end, the losses in those cases, . . . are exactly
the same—economic losses.” Giddings, 348 S.W.3d at 740. Thus, although Section 552
does provide specific limitations on the scope of liability, the Kentucky Supreme Court
concluded that predictability was still better served with a bright-line rule disallowing
economic damages in this context. Applying the same reasoning to the City’s negligent
misrepresentation claim, we must come to the same conclusion—that a bright-line rule
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disallowing recovery of economic losses when a defective product injures only itself
offers greater predictability for parties and preserves the proper separation between
product liability and contract law so as to “‘maintain a realistic limitation on damages.’”
Lincoln General, 293 S.W.3d at 491. (quoting East River, 476 U.S. at 870–71).
Finally, a careful review of the language utilized by the Tennessee Supreme Court
confirms that economic losses should not be recoverable in actions involving the liability
for harm caused by products notwithstanding any allegation of negligent
misrepresentation by the manufacturer. In the conclusion of Lincoln General, the
Tennessee Supreme Court stated that Tennessee’s adoption of the majority approach to
the products liability economic loss doctrine was “consistent with the Restatement
(Third) of Torts: Products Liability (1998).” Lincoln General, 293 S.W.3d at 493.
Section 9 of the Restatement (Third) of Torts: Product Liability provides as follows:
“One engaged in the business of selling or otherwise distributing products who, in
connection with the sale of a product, makes a fraudulent, negligent, or innocent
misrepresentation of material fact concerning the product is subject to liability for harm
to persons or property caused by the misrepresentation.” Thus, Section 9 does not provide
for the recovery of economic losses for claims of negligent misrepresentations in the
product liability context. See Restatement (Third) of Torts: Prod. Liab. § 21 (defining
“harm to persons or property” as requiring harm to a person or property other than the
defective product itself); see also Giddings, 348 S.W.3d at 746 (relying on Section 9 to
conclude that there is no negligent misrepresentation exception to the economic loss rule
in the product liability context). Consequently, in order to follow the Tennessee Supreme
Court’s mandate that our economic loss rule be consistent with the Restatement (Third) of
Torts: Products Liability, we must likewise reject Appellants’ assertion that Tennessee
recognizes an exception to the economic loss rule in this context. Because the City seeks
recovery for purely economic losses related to a defective product, we affirm the trial
court’s decision to dismiss the City’s negligent misrepresentation claim.
V. CONCLUSION
The judgment of the Williamson County Chancery Court is affirmed. This appeal
is remanded to the trial court for all further proceedings as may be necessary and
consistent with this Opinion. Costs of this appeal are taxed to Appellants the City of
Franklin and Smith Seckman Reid, Inc., for which execution may issue if necessary.
_________________________________
J. STEVEN STAFFORD, JUDGE
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