Vt. Gas Sys. v. Riser Mgmt. Sys.

Vermont Gas v. Riser Management, No. S1186-03 CnC (Katz, J., Mar. 8,
2004)
[The text of this Vermont trial court opinion is unofficial. It has been
reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is
not guaranteed.]
STATE OF VERMONT
Chittenden County, ss.:
S1186-03 CnC
VERMONT GAS SYSTEMS
v.
RISER MANAGEMENT SYSTEMS &
LONG DISTANCE PARTNERSHIP
ENTRY
This small claims court appeal concerns the Economic Loss Rule,
issues of negligence, and valuation for the loss of telecommunication
services. Appellant Union-Water is the party responsible for severing
appellee’s telephone lines as the result of negligent digging on June 4,
2002. This accident effectively shut down appellee Riser1 for an entire day
since its business was long distance service and support for various
customers. The lower court found Union-Water liable for “physical”
damage resulting from their actions and awarded Riser damages for its loss.
The New Economy and the Economic Loss Doctrine
Union-Water first raises the Economic Loss Rule as a bar to
recovery because Riser does not own the phone lines severed by Union-
Water but only leases the use of them, which means that none of Riser’s
property suffered any physical harm as a result of Union-Water’s
negligence. Nor were any Riser employees injured as a result of Union-
Water’s actions. Riser’s damage claim comes instead from economic
losses: lost business and man-hours expended because of the loss of
telephone lines. Union-Water’s first argument for appeal is that the
Economic Loss Rule should bar Riser’s recovery. Under the Economic
Loss Rule, plaintiffs may not recover in tort for consequential damages that
are strictly economic if there is not an accompanying tort. By arguing the
Economic Loss Rule, however, Union-Water is unnecessarily confusing
two concepts in tort law. As a bar to tort recovery, the Economic Loss Rule
has first and foremost functioned to keep tort law out of commercial or
consumer transactions where contract law controls. See, e.g., S. Gardner &
M. Sheynes, The Moorman Doctrine Today: A Look at Illinois’ Economic-
loss Rule, 89 Ill. B.J. 406, 406 (2001) (“The practical application of this
1
Long Distance Partnership is also plaintiff in this case. Due to the unity
of their interests and the purposes of this entry, all references to Riser are
applicable to Long Distance Partnership.
rule bars consequential damages not necessarily intended by the parties at
the time of making the contract, as well as punitive damages, which
typically are not recoverable in contract, unless the conduct allegedly in
breach can be characterized as an independent tort.”); E. Ballinger, Jr. & S.
Thumma, The History, Evolution and Implications of Arizona's Economic
Loss Rule, 34 Ariz. St. L.J. 491, 492–93 (2001) (“[T]he economic loss rule
is one of several principles that have evolved to define the boundaries of
both contract and tort and to ensure a proper and vital role for both bodies
of law.”); T. Yocum & C. Hollis, III, The Economic Loss Rule in
Kentucky: Will Contract Law Drown in a Sea of Tort?, 28 N. Ky. L. Rev.
456, 459 (2001) (“[Kentucky’s Economic Loss Rule] recognizes a mutual
exclusivity between claims sounding in contract and tort, encouraging
sophisticated parties entering into contracts to bargain now rather than sue
in tort later.”); S. Tourek, et al., Bucking the “Trend”: The Uniform
Commercial Code, the Economic Loss Doctrine, and Common Law Causes
of Action for Fraud and Misrepresentation, 84 Iowa L. Rev.875 (2001)
(“The Economic Loss Doctrine is a judicially created doctrine that provides
commercial purchasers of goods cannot recover damages that are solely
economic losses from manufacturers of those goods under ‘tort’ theory.”).
It functions to prevent plaintiffs from using negligence and strict liability to
do an end-run around the tighter requirements of contract and warranty law,
where parties can predict and shift their risk of loss accordingly. In other
words, the Economic Loss Rule is a stabilizing principle to keep the “soft”
analysis of policy and duty under tort law away from parties who have had
the opportunity to bargain for the risk or who can rely on a set of rules to
supply any missing terms in a predictable manner. See, e.g., 9A V.S.A. §§
2-313–2-316 (U.C.C. warranty law).2
2
Historically, the Economic Loss Rule developed as a judicial check on §
Similarly, the major Vermont cases enunciating the Economic Loss
Rule have involved parties whose primary relationship was contractual.
Springfield Hydroelectric Co. v.Copp, 172 Vt. 311, 314 (2001) (“As our
caselaw makes clear, claimants cannot seek, through tort law, to alleviate
losses incurred pursuant to a contract.”); Gus’ Catering v. Menusoft, 171
Vt. 556 (2000) (mem.) (refusing damages for negligence to customer who
bought software which was negligently installed); Paquette v. Deere & Co.,
168 Vt. 258, 260–64 (1998) (applying the doctrine to a strict liability claim
for a defective motor home purchased from defendant manufacturer);
Breslauer v. Fayston Sch. Dist., 163 Vt. 416, 421–22 (1995) (denying
negligence claim for economic losses for breach of employment contract);
see also East River Steamship Corp. v. Transamerica Delaval, 476 U.S.
858, 870–71 (1986) (limiting damages to the cost of the product and not
consequentials “[w]hen a product injures only itself.”). In each of these
cases, the courts had the separation of contract and tort law as an
underlying interest. In Riser’s case, there was no contractual relationship
with Union-Water.
The question then becomes whether or not the Economic Loss Rule
should apply. Without a contractual relationship, the Rule has nothing to
protect and its application provides no clarity between contract and tort law.
If anything, it expands the scope of the Rule by pushing beyond contract/
product liability origins, where there is always a contractual relationship
402A strict liability. Springfield Hydroelectric Co. v.Copp, 172 Vt. 311,
314–15 (2001). In such situations, a contract was always involved because
the defendant was the seller or manufacturer whose connection to the
plaintiff was through a sale. While the Rule has since spread to areas of
tort law such as negligence, id., it has in nearly all cases kept this initial and
significant connection to contract law.
between the parties, to where the Rule functions as a prerequisite of any tort
action. Compare Springfield, 172 Vt. at 314–15 (discussing the function of
the Economic Loss Rule and its origins in the rise of strict liability product
law); with Heidtman Steel Prods., Inc. v. Compuware Corp., 164 F. Supp.
2d 931, 938–39 (N.D. Ohio 2001) (refusing to apply Michigan’s Economic
Loss Rule to a computer system because as a service it did not fall under
the rule).
What Union-Water is actually arguing when it asserts the Economic
Loss Rule is an older principle of negligence law, which requires a physical
harm of some kind. 1 D.Dobbs, The Law of Torts 258–59 (2001) (“Other
tort rules protect against intangible losses like emotional or financial harm,
but negligence alone is often not enough”); cf. Springfield, 172 Vt. at 314
(“The underlying premise of the economic loss rule is that negligence
actions are best suited for ‘resolving claims involving unanticipated
physical injury, particularly those arising out of an accident. Contract
principles, on the other hand, are generally more appropriate for
determining claims for consequential damage that the parties have. . .’”)
(quoting Spring Motors Distribs. v. Ford Motor Co., 489 A.2d 660, 672
(N.J. 1985)). Unlike Springfield, this present case has a physical injury that
resulted from an accident. Like the plaintiffs in Springfield, however,
Riser’s claim for injuries is strictly economic loss.
Notwithstanding the economic nature of Riser’s injuries, the lower
court concluded that the physical accident, the severing of the telephone
lines, was enough to trigger negligence because it was really a physical
injury against Riser. “The evidence in this case indicates that the product,
which [Lightship] sold and Plaintiffs paid for was telephone service. It is
not tangible, but it is physical.” Riser v. Vt. Gas Sys., No. S0203-03 Cnsc,
at 3 (Villa, J., Aug. 29, 2003). While the lower court, Riser, and Union-
Water have crafted metaphors and analogies to support or disprove this
metaphysical conceit, we will resist the temptation.3 The issue that the
lower court raises, however, is quite valid. As our economy shifts from
manufacturing and goods to more ethereal products such as electronic data
and information processing, Why should not our tort law continue to
compensate businesses for unexpected losses that derive from accidents
that simply cannot be contracted away? Negligence’s emphasis on the
physical cannot be simply dogma where widgets are compensated while
software and databases are ignored. See M. Colombell, Note, The
Legislative Response to the Evolution of Computer Viruses, 8 Rich. J. L &
Tech. 1 (2002) (discussing some initial shifts in attitude toward computer
damages in tort law). Caselaw, however, has not progressed to this point
and still requires the physical to be tangible for the purposes of tort
protection. See Rockport Pharmacy, Inc. v. Digital Simplistics, Inc., 53
F.3d 195, 198 (8th Cir. 1995) (citing failure of a customized computer
system, including hardware and software, which destroyed data, did not fall
into “other property” exception to economic loss doctrine); Lucker
Manufacturing v. Home Insurance Co., 23 F.3d 808, 819–21 (3d Cir. 1994)
(defining tangible within the context of caselaw); D. Perlman, Who Pays
3
We do find the entire situation comparable to the one faced by nineteenth
century denizens awakening to their new age of electricity.
Between the dynamo in the gallery of machines and the engine-
house outside, the break of continuity amounted to abysmal fracture
for a historian’s objects. No more relation could he discover
between the steam and the electric current than between the Cross
and the cathedral.
H.Adams, The Education of Henry Adams ch. 25, ¶ 4 (1918).
the Price of Computer Software Failure?, 24 Rutgers Computer & Tech.
L.J. 383, 395–97 (1998).
There remains still the problem of how Riser, an innocent party,
could recover damages caused by an accident completely outside the
context of contract. This is precisely what negligence was developed to
handle. Merely sweeping this case under the broad skirt of the Economic
Loss Rule would simultaneously expand the Rule to a situation devoid of
contract considerations yet weaken negligence’s purpose of requiring
responsible parties to compensate wronged persons for their injuries based
on a careful calculus of duty and proximate cause. People Express Air.,
Inc. v. Consol. Rail Corp., 495 A.2d 107, 111–12 (N.J. 1985); see also
Springfield, 172 Vt. at 316 (applying a duty of care analysis to pure
economic loss). To bar negligence from this situation would create a
paradox, where “the loss of information is recoverable if it is in a tangible
folder but not if it is in intangible digital form.” Riser, No. S0203-03 Cnsc,
at 4. No sound reason supports such a restriction to applying negligence in
the present case.
While this represents a step away from a traditional preoccupation
with the corporeal in negligence, it is part of a growing acceptance of
economic loss as a valid source of damages in negligence. People Express,
495 A.2d at 109–10, 116 (rejecting traditional requirements of physical
harm as unfounded in earlier caselaw and unfair to a fairly grounded claim
for redress). In reality, it is a recognition that negligence in its complex
analysis, rather than arbitrary rule, is the best avenue to resolve claims
where an accident is involved. Union-Water’s concern that this would open
the floodgates to all kinds of lawsuits is checked by the long standing gates
of proximate cause and duty of care. See Palsgraf v. Long Island R.R., 162
N.E. 99 (1928) (asserting duty of care and proximate cause to limit a
defendant’s liability).
Duty of Care and Negligence
We therefore come to the question of whether Union-Water had a
duty of care toward Riser to avoid cutting the telephone lines. Riser argues
that the Vermont dig-safe statutes, 30 V.S.A. §§ 7001–7008, create such a
duty as part of negligence per se. To support this claim, however, they do
not cite to caselaw from either Vermont or another state that has found such
a duty to arise toward a telephone user from these now common statutes.
Under Vermont law, negligence per se requires that:
The statute or regulation must be intended at least in part:
(a) to protect a class of persons which includes the one whose
interest is invaded, and
(b) to protect the particular interest which is invaded, and
(c) to protect that interest against the kind of harm which has
resulted, and
(d) to protect that interest against the particular hazard from
which the harm results.
Dalmer v. State, 174 Vt. 157, 164 (2002) (adopting the standard from the
Restatement (Second) of Torts § 286 (1965)). The purpose of Vermont’s
Dig-Safe statutes is to protect underground utilities, which as defined in §
7001(9) means the physical “pipe, wire, conduit, or cable located beneath
the surface,” from damage, which is defined in § 7001(3) as the
“weakening or destruction” of these utilities. Notice of digging or damage
under these statutes runs only between the public utility system, the owners
of the utilities, and the excavator. §§ 7002, 7004, 7005, 7007. Under the
penalties in § 7008, there is no mention or compensation for the users or
recipients of utilities to receive compensation. Aside from not even
mentioning utility users, the dig-safe statutes do not protect users or
consider their losses. Instead, they create a duty between utility owners and
excavators to accurately mark and dig for utilities. See, e.g., Crews v.
Hollenbach, 751 A.2d 481, 484 (Md. 2000) (noting that a similar statute
was created to protect individuals during excavation and the utilities
themselves from destruction). We therefore decline to conclude that users
are the individuals protected by the statutes. Hence Riser is not eligible to
claim negligence per se against Union-Water.
Without negligence per se, Riser’s argument for duty becomes a
question of foreseeability. Does Union-Water owe a common law duty of
care when digging to the users of the utilities affected? Union-Water does
not appear to contest this point but prefers to look beyond to the question of
proximate causation. Notwithstanding this, we must examine the lower
court’s implicit conclusion that Union-Water does owe a duty to
foreseeable users of the utilities. See Palsgraf, 162 N.E. 99 (beginning the
debate in tort theory over duty and proximate cause); see also 1 Dobbs,
supra, at §§ 227–230 (discussing the slippery nature of duty analysis and its
confusion with proximate cause). Common-law duty of care standards, not
created by statute or contract, must arise out of a basis of public policy
considerations including foreseeability. Langle v. Kurkul, 146 Vt. 513, 518
(1986); United States v. Carroll Towing, 159 F.2d 169 (2d Cir. 1947);
People Express, 495 A.2d at 115–16.
In this case, Riser was the direct user of the severed phone lines.
While utility users may not be protected by the dig-safe statutes per se, the
statutes do illustrate the dangers and potential damages in excavating near
utilities. Indeed, but for ownership, Riser’s interests in the phone lines and
their continuing preservation are nearly identical to the owner’s. It requires
therefore only a small deduction to draw the statutory consequences out a
little further to cover the direct users. Utilities by their nature are services
for others. Gas, electricity, and telecommunications are not shipped about
underground merely for the profit and pleasure of the utility companies,
they always serve another user. Excavators such as Union-Water must be
aware that negligent digging will not merely affect the physical lines but
also the services they carry. It is highly foreseeable that any damage
therefore to the physical will be accompanied by damage to the users. Any
duty Union-Water had not to harm Lightship’s phone lines is therefore
extendable to users who will invariable suffer harm as a result of this kind
of accident.
But foreseeability alone is not enough to create duty. Langle, 146
Vt. at 519. Beyond foreseeability, a court must look at other public interest
considerations:
These factors include: “. . . the degree of certainty that the
plaintiff suffered injury, the closeness of the connection
between the defendant's conduct and the injury suffered, the
moral blame attached to the defendant's conduct, the policy
of preventing future harm, the extent of the burden to the
defendant and consequences to the community of imposing a
duty to exercise care with resulting liability for breach, and
the availability, cost, and prevalence of insurance for the risk
involved.”
Coulter v. Superior Court, 577 P.2d 669, 674 (Cal. 1978) (quoting Rowland
v. Christian, 443 P.2d 561, 564 (Cal. 1968)), quoted in Langle 146 Vt. at
519. A legal duty of care requires a determination that there is a public
interest in expanding the duty. Langle 146 Vt. at 519. In this case, the
legislature chose to limit dig-safe remedies to only owners and excavators.
While the dig-safe statutes do not appear to preempt liability in this area,
they do suggest an established range that excavators have for a duty of care.
To extend this range even a little further to users would create liability in
defendants, like Union-Water, far beyond the value of their work. For
example, if excavators owed a duty to users, then we can see nothing that
would stop them from being liable in a wrongful death suit for negligently
cutting power to a hospital which shut off life-support systems to patients (a
suit which would hypothetically not have the economic loss problem faced
by Riser). Utility work, under this duty, would have an additional level of
risk depending solely on the users in the area. Excavators would be liable
to a limitless and unknown body of users who could suffer any level of
harm. As is the case here where there is no evidence that Union-Water was
or could have been aware that Riser depended so heavily on its phone lines
or that the accident would cause so much damage.
Even if Union-Water had some way of knowing the potential results
of its digging, there is no evidence that it or any other excavator would
have behaved more carefully. Liability to users will not make excavators
dig more carefully or avoid lines. Statutes already create liability for
excavators and are effective motivation to take precautions. Riser cannot
say that future telephone users will suffer any less disruption in service if
liability for excavators is expanded. In fact, there does not appear to be any
social policy reason to expand Union-Water’s duty of care in this situation
beyond creating a source of recovery for Riser. Such private reasoning,
however, cannot compel public tort law to expand. See Langle, 146 Vt. at
520 (refusing to expand duty of care to merely allow plaintiff to recover).
We therefore conclude that Union-Water did not owe Riser a legal duty of
care to avoid severing telephone lines. Since there is no duty of care, there
is no reason to address any further issues of proximate cause or damages.
The judgment of the Small Claims Court is reversed. All claims
against defendants are dismissed.
Dated at Burlington, Vermont________________, 2004.