Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-35163/USCOURTS-ca9-13-35163-0/pdf.json

Parties Involved:
CHMM, LLC
Appellant
Freeman Marine Equipment, Inc.
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CHMM, LLC,

Plaintiff-Appellant,

v.

FREEMAN MARINE EQUIPMENT,

INC.,

Defendant-Appellee.

No. 13-35163

D.C. No.

3:12-cv-01484-ST

OPINION

Appeal from the United States District Court

for the District of Oregon

Anna J. Brown, District Judge, Presiding

Argued and Submitted

October 8, 2014—Portland, Oregon

Filed June 29, 2015

Before: Alex Kozinski, Raymond C. Fisher

and Andre M. Davis,* Circuit Judges.

Opinion by Judge Kozinski

* The Honorable Andre M. Davis, Senior Circuit Judge for the U.S.

Court of Appeals for the Fourth Circuit, sitting by designation.

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2 CHMM V. FREEMAN MARINE EQUIP.

SUMMARY**

Admiralty Law

Reversing the district court’s judgment in an admiralty

case, the panel held that a vessel owner could sue for the

physical damage a defective vessel component caused to

property that the owner added to the vessel before the vessel

was delivered.

The panel held that the vessel owner’s tort claims were

not barred by the economic loss doctrine, which precludes

recovery against a manufacturer for physical damage that the

manufacturer’s defective product causes to the “product

itself,” but allows recovery for physical damage the product

causes to “other property.”

COUNSEL

Brian P.R. Eisenhower, Anthony J. Pruzinsky (argued), Hill

Rivkins LLP, New York, New York; David R. Boyajian,

Colin J. Folawn, Daniel F. Knox, Schwabe, Williamson &

Wyatt, Portland, Oregon, for Plaintiff-Appellant.

Jay W. Beattie (argued), James P. McCurdy, Lindsay, Hart,

Neil & Weigler, Portland, Oregon; David W. Lannetti,

Edward J. Powers, Vandeventer Black LLP, Norfolk,

Virginia, for Defendant-Appellee.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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CHMM V. FREEMAN MARINE EQUIP. 3

OPINION

KOZINSKI, Circuit Judge:

The economic loss doctrine precludes recovery against a

manufacturer for physical damage that the manufacturer’s

defective product causes to the “product itself.” E. River S.S.

Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 866–71

(1986). But the manufacturer can be sued for physical

damage the product causes to “other property.” Id. at

867–68. We consider whether a vessel owner may sue for the

physical damage a defective vessel component causes to

property that the owner adds to the vessel before the vessel is

delivered. Put another way, is property added by the owner

to a vessel prior to the delivery of the vessel considered

“other property”?

I. Background

CHMM, LLC is the owner of M/Y JAMAICA BAY, a

59.5-meter luxury yacht. In 2006, CHMM contracted with

Nobiskrug GmbH to “construct, equip, launch and complete

[the yacht] at [Nobiskrug’s] shipyard and to sell and deliver

[the yacht] to [CHMM]” for approximately €34.2 million. 

Nobiskrug subcontracted with Freeman Marine Equipment

for the manufacture of a “weathertight” door for installation

in the yacht. This door provided access from the foredeck to

the interior of the yacht.

The shipbuilding contract between Nobiskrug and

CHMM states that “the Interior Outfit of the Yacht is to be

provided by [CHMM]” and that “delivery and installation of

the Interior Outfit has to be executed within the time frame

laid down in [Nobiskrug’s] Construction Schedule.” CHMM

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4 CHMM V. FREEMAN MARINE EQUIP.

contracted with third parties for the purchase and installation

of the items in the yacht’s interior. The yacht that Nobiskrug

ultimately delivered to CHMM contained a finished interior

outfit.

In 2011, while the yacht was at sea en route to the

Bahamas, the Freeman door allegedly malfunctioned, letting

in a substantial amount of water. The subsequent flooding

severely damaged the yacht and its interior, including

woodwork, furniture, carpeting, electrical wiring, and

electronics. CHMM estimates it would cost over $18 million

to repair the damage.

CHMM sued Freeman, alleging five tort claims—

negligence, defect in design, defect in manufacture, failure to

properly instruct in the installation and use of the door and

negligent misrepresentation. Freeman moved to dismiss on

the ground that recovery for physical damage to the yacht’s

interior was barred by the economic loss doctrine announced

in East River Steamship. While this motion was pending,

CHMM amended its complaint to add a sixth claim for breach

of “contract, quasi-contract and/or warranty.”

The magistrate judge construed the motion as against the

amended complaint and determined that the economic loss

doctrine barred CHMM’s five tort claims because the interior

of the vessel was “integrated into” the completed vessel and

was therefore part of the product itself. The magistrate judge

held that the portion of the sixth count that alleged breach of

contract should be dismissed because CHMM had no

contractual relationship with Freeman. But the magistrate

judge concluded that it would be premature to dismiss the

breach of quasi-contract or express warranty claims without

giving CHMM an opportunity for discovery. The district

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CHMM V. FREEMAN MARINE EQUIP. 5

court adopted the magistrate judge’s Findings and

Recommendation in full and granted CHMM leave to file a

second amended complaint “to the extent that [CHMM]seeks

tort remedies for damage to ‘other property’ added after

delivery of the Vessel by Nobiskrug to [CHMM].”

CHMM now appeals the district court’s interlocutory

order dismissing the five tort claims as barred by the

economic loss doctrine. We have jurisdiction under

28 U.S.C. § 1292(a)(3), which allows us to hear appeals from

“[i]nterlocutory decrees of . . . district courts . . . determining

the rights and liabilities of the parties to admiralty cases.” 

28 U.S.C. § 1292(a)(3); see All Alaskan Seafoods, Inc. v. M/V

Sea Producer, 882 F.2d 425, 427 (9th Cir. 1989) (“To fall

within the ambit of section 1292(a)(3), it is sufficient if a[]

[district court] order conclusively determines the merits of a

particular claim as between the parties.”); see also Sea Lane

Bahamas Ltd. v. Europa Cruises Corp., 188 F.3d 1317, 1321

(11th Cir. 1999) (“As a general rule, a district court’s order

resolving one or more claims on the merits is appealable

under § 1292(a)(3), irrespective of any claims that remain

pending.”). We review de novo, accepting all facts alleged in

the amended complaint as true and construing them in the

light most favorable to CHMM. Barker v. Riverside Cnty.

Office of Educ., 584 F.3d 821, 824 (9th Cir. 2009).

II. Discussion

We have described the economic loss doctrine, as applied

in products liability cases, as follows:

If a plaintiff is in a contractual relationship

with the manufacturer of a product, the

plaintiff can sue in contract for the normal

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6 CHMM V. FREEMAN MARINE EQUIP.

panoply of contract damages, including

foreseeable lost profits and other economic

losses. Whether or not the plaintiff is in

a contractual relationship with the

manufacturer, the plaintiff can sue the

manufacturer in tort only for damages

resulting from physical injury to persons or to

property other than the product itself.

Giles v. Gen. Motors Acceptance Corp., 494 F.3d 865, 874

(9th Cir. 2007) (emphasis added). This doctrine is rooted in

“[t]he distinction that the law has drawn between tort

recovery for physical injuries and warranty recovery for

economic loss.” Seely v. White Motor Co., 403 P.2d 145, 151

(Cal. 1965) (en banc). As Chief Justice Traynor explained in

Seely, this distinction rests on the understanding that a

manufacturer “can appropriately be held liable for physical

injuries caused by defects by requiring his goods to match a

standard of safety defined in terms of conditions that create

unreasonable risks of harm,” but he “cannot be held [liable]

for the level of performance of his products in the consumer’s

business unless he agrees that the product was designed to

meet the consumer’s demands.” Id.

The Supreme Court relied on Seely in applying the

economic loss doctrine to products liability cases in East

River. 476 U.S. at 871. There, supertanker charterers sought

recovery in tort for damage caused by defective turbine parts. 

The Court held that the charterers were precluded from tort

recovery because “there was no damage to ‘other’ property,”

as “each supertanker’s defectively designed turbine

components damaged only the turbine itself.” Id. at 867. The

Court reasoned:

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CHMM V. FREEMAN MARINE EQUIP. 7

Damage to a product itself is most naturally

understood as a warranty claim. Such damage

means simply that the product has not met the

customer’s expectations, or, in other words,

that the customer has received “insufficient

product value.” The maintenance of product

value and quality is precisely the purpose of

express and implied warranties. Therefore, a

claim of a nonworking product can be brought

as a breach-of-warranty action. Or, if the

customer prefers, it can reject the product or

revoke its acceptance and sue for breach of

contract.

Id. at 872 (citations and footnote omitted).

The Court added that a contract or warranty action has a

“built-in limitation on liability” in the form of the “agreement

of the parties and the requirement that consequential

damages, such as lost profits, be a foreseeable result of the

breach.” Id. at 874. By contrast, permitting tort recovery for

“all foreseeable claims for purely economic loss could make

a manufacturer liable for vast sums,” as products liability law

imposes “a duty to the public generally.” Id. Indeed, it’s

“difficult for a manufacturer to take into account the

expectations of persons downstream who may encounter its

product.” Id. Thus, the Court observed, the economic loss

doctrine “account[s] for the need to keep products liability

and contract law in separate spheres and to maintain a

realistic limitation on damages.” Id. at 870–71.

A decade later, the Court revisited this “corner of tort

law” in Saratoga Fishing Co. v. J.M. Martinac & Co.,

520 U.S. 875, 877 (1997). Martinac built a fishing vessel in

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8 CHMM V. FREEMAN MARINE EQUIP.

which it installed a hydraulic system designed by Marco

Seattle Inc. Joseph Madruga purchased the vessel and added

equipment—a skiff, fishing net and spare parts. Madruga

then sold the vessel, which contained the additional

equipment, to Saratoga Fishing Company. The vessel later

caught fire and sank as a result of a defective hydraulic

system, after which Saratoga Fishing filed a tort suit against

Martinac and Marco Seattle.

There was no dispute that the “product itself” consisted

“at least of a ship as built and outfitted by its original

manufacturer and sold to an initial user.” Id. at 877. The

question was whether Saratoga Fishing, the subsequent user,

could recover in tort for “the physical destruction of extra

equipment . . . added by the initial user after the first sale and

then resold as part of the ship when the ship itself is later

resold to a subsequent user.” Id. The Court held that the

equipment added by Madruga was “other property” and, as

such, Saratoga Fishing was eligible to recover in tort for

damage to that equipment. “When a manufacturer places an

item in the stream of commerce by selling it to an Initial

User, that item is the ‘product itself’ under East River. Items

added to the product by the Initial User are therefore ‘other

property,’ and the Initial User’s sale of the product to a

Subsequent User does not change these characterizations.” 

Id. at 879.

Freeman argues that Saratoga Fishing established a

“bright-line rule stating that the product is defined at the time

it enters the stream of commerce, and that any items added

after that time constitute ‘other property’ for purposes of the

economic loss doctrine.” Freeman views as dispositive that

the yacht wasn’t “placed into the stream of commerce, i.e.,

was not delivered to CHMM, until the [yacht] was fully

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CHMM V. FREEMAN MARINE EQUIP. 9

complete.” Its position is that the damaged property in the

interior of the yacht consists of the “product itself,” for which

tort recovery is unavailable, because CHMM added that

property before Nobiskrug delivered the completed yacht

from the shipyard.

A closer look at Saratoga Fishing reveals that it draws no

bright-line rule based on the time of delivery. Rather, in

determining whether items added to a product can be

considered “other property,” the Court focused on who added

those items to the product—the user or the manufacturer of

the product.

Saratoga Fishing observed that “[s]tate law often

distinguishes between items added [by a user] to or used in

conjunction with a defective item purchased from a

Manufacturer (or its distributors) and (following East River)

permits recovery for the former when physically harmed by

a dangerously defective product.” 520 U.S. at 880 (citing, for

example, A.J. Decoster Co. v. Westinghouse Electric Corp.,

634 A.2d 1330 (Md. 1994) (chicken farm owner could

recover in tort for the death of his chickens caused by a

defective chicken house ventilation system)). The Court also

cited another admiralty case, Nicor Supply Ships Associates

v. General Motors Corp., 876 F.2d 501 (5th Cir. 1989),

which held that a ship charterer who added seismic

equipment to the ship may recover in tort for damage to that

equipment caused by a defective engine. The Court

concluded that it would maintain the distinction the case law

suggests “between the components added to a product by a

manufacturer before the product’s sale to a user” and “those

items added by a user to the manufactured product.” 

Saratoga Fishing, 520 U.S. at 884.

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10 CHMM V. FREEMAN MARINE EQUIP.

Saratoga Fishing does not turn on the timing of the

addition to the product. What matters for purposes of tort

recovery is that the items were added by the user. This is

because there is a fundamental difference between the

situation where “a defective manufactured product causes

[damage] to property added by the Initial User” and the

situation in East River, where “a defective component causes

[damage to] the manufactured product, other than the

component itself.” Id. at 883. As the Court explained in

Saratoga Fishing, the latter situation is well-suited for a

warranty action, while the former is not:

Initial users, when they buy, typically depend

upon, and likely seek warranties that depend

upon, a manufacturer’s primarybusiness skill,

namely, the assembly of workable product

components into a marketable whole. 

Moreover, manufacturers and component

suppliers can allocate through contract

potential liability for a manufactured product

that does not work, thereby ensuring that

component suppliers have appropriate

incentives to prevent component defects that

might destroy the product. There is no reason

to think that initial users systematically

control the manufactured product’s quality or

. . . systematically allocate responsibility for

user-added equipment [] in similar ways.

Id. at 883–84 (citations omitted). This reasoning holds true

regardless of whether the user added items “after the initial

sale,” as in Saratoga Fishing, id. at 884, or, as here, prior to

it. In both instances, the manufacturer of the product to

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CHMM V. FREEMAN MARINE EQUIP. 11

which the user added items had no responsibility for

manufacturing or assembling the user-added items.

“Manufacturers of integrated products can avail

themselves of warranty provisions and can spread the risk of

product defect over their entire market.” All Alaskan

Seafoods, Inc. v. Raychem Corp., 197 F.3d 992, 995 (9th Cir.

1999). For example, “[w]hen purchasing component parts,

[they] can exercise market power to negotiate price and

allocation of downstream risks of defective components.” Id.

They can also “impose specifications on component

suppliers.” Id. And they can “use the same components in

multiple iterations of the same product” in order to achieve

economies of scale. Id. But a manufacturer who lacks

responsibility for the manufacture or assembly of user-added

items isn’t in a position to work with component suppliers of

user-added items in such ways. Warranty law is thus illsuited to protect against a malfunctioning product that causes

physical damage to user-added items.

Freeman argues that “[t]he initial purchaser of a vessel

has the opportunity to negotiate warranties with the various

vessel builders with which it contracts—before vessel

delivery into the stream of commerce—whereas such

warranties typically are unavailable from those builders for

equipment added after delivery.” But the Supreme Court

rejected this very argument in Saratoga Fishing. In

discussing whether the initial user should have been expected

to offer a warranty to the subsequent purchaser for the items

the initial user added to the vessel, the Court stated:

Of course, nothing prevents a user/reseller

from offering a warranty. But neither does

anything prevent aManufacturer and an Initial

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12 CHMM V. FREEMAN MARINE EQUIP.

User from apportioning through their contract

potential loss of any other items—say, added

equipment or totally separate physical

property—that a defective manufactured

product, say, an exploding engine, might

cause. No court has thought that the mere

possibility of such a contract term precluded

tort recovery for damage to an Initial User’s

other property.

520 U.S. at 882 (emphasis added).

None of the cases Freeman cites in support of its proposed

bright-line rule are on point. See, e.g., All Alaskan Seafoods,

Inc., 197 F.3d at 993–95 (the act of resale does not preclude

the subsequent user from tort recovery); Sea-Land Serv., Inc.

v. Gen. Elec. Co., 134 F.3d 149, 154–55 (3d Cir. 1998) (a

defective replacement component by the same manufacturer

is part of the product itself); Petroleum Helicopters, Inc. v.

Avco Corp., 930 F.2d 389, 393 (5th Cir. 1991) (a defective

interchangeable component by the same manufacturer is part

of the product itself); Shipco 2295, Inc. v. Avondale

Shipyards, Inc., 825 F.2d 925, 929 (5th Cir. 1987)

(manufacturer assembled the entire vessel, and thus the

product was the completed vessel); Exxon Shipping Co. v.

Pac. Res., Inc., 835 F. Supp. 1195, 1201 (D. Haw. 1993) (a

defective interchangeable component purchased directlyfrom

the manufacturer is part of the product itself). Freeman

claims that these cases show that courts “evaluated the object

of the parties’ bargain, which was the acquisition of a fullyfunctioning product.” However, in All Alaskan Seafoods, we

interpreted Saratoga Fishing as having “rejected the view . . .

that would define the ‘product’ . . . as the object of the

purchaser’s bargain.” 197 F.3d at 994. In so doing, we

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CHMM V. FREEMAN MARINE EQUIP. 13

emphasized “the distinction between components

incorporated by a manufacturer before sale to an initial user

and those items added by a user of the manufactured

product.” Id.

The rule of Saratoga Fishing can thus be distilled as

follows: Where the manufacturer of a product had no

responsibility for manufacturing or assembling items that the

user adds to the product, the user-added items are considered

“other property” for purposes of the economic loss doctrine.

In applying this rule to our case, we begin by examining

Section 2.10 of the Shipbuilding Contract, entitled “Interior

Outfit,” which sets forth the respective responsibilities of

CHMM (“the Purchaser” and user) and Nobiskrug (“the

Builder” and manufacturer):

(a) The Interior Outfit of the Yacht is to be

provided by the Purchaser. The Builder does

not assume any responsibility or liability with

regard to the Interior Outfit, except as

provided herein. The interface between the

scope of work of the Builder and the Interior

Outfit is described in the Interior Outfitting

Demarcation List.

(b) The Purchaser will supply and install the

Interior Outfit by using materials and methods

which are consistent with the requirements

and Specifications related to specified noise

and vibration standards as pre-approved by

the Builder, the Classification Society and the

Flag State and in compliance with the weight

limits for the Interior Outfit as stipulated in

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14 CHMM V. FREEMAN MARINE EQUIP.

the Weight Limits List attached as Schedule

11. The delivery and installation of the

Interior Outfit has to be executed within the

time frame laid down in the Builders’

Construction Schedule and in the Action List

by the contractor(s) chosen and employed by

the Purchaser who will not interfere with the

Builders’ scope of work. Any delay in

delivering and installing of the Interior Outfit

shall be a Permissible Delay.

(c) The Purchaser shall furnish the Builder

with all documentation related to the Interior

Outfit which is needed for Classification of

the Yacht.

The “Interior Outfitting Demarcation List” specifies that

Nobiskrug’s scope of work is the “bare ship,” while CHMM’s

is the Interior Outfit. To further clarify matters, the Contract

defines “Interior Outfit” as “the Interior Outfit of the Yacht

for which [CHMM] is responsible.”

In Section 2.10, Nobiskrug disclaims “any responsibility

or liability with regard to the Interior Outfit,” with the

exception of pre-approving the noise and vibration standards

that CHMM used for the Interior Outfit and obtaining

Classification certificates for the yacht once it received the

relevant documentation from CHMM. CHMM, on the other

hand, is responsible for “supply[ing] and install[ing] the

Interior Outfit by using materials and methods which are

consistent” with certain industry specifications; completing

delivery and installation of the Interior Outfit “within the time

frame laid down in [Nobiskrug’s] Construction Schedule”;

ensuring that the contractors CHMM hired to work on the

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CHMM V. FREEMAN MARINE EQUIP. 15

Interior Outfit don’t “interfere with [Nobiskrug’s] scope of

work”; and providing Nobiskrug with “all documentation

related to the Interior Outfit which is needed for

Classification of the Yacht.”

The relevant facts can be boiled down to the following:

(1) Nobiskrug was responsible for manufacturing the bare

ship; (2) CHMM, the user, added items to the bare ship; and

(3) Nobiskrug wasn’t responsible for manufacturing or

assembling these user-added items. Under Saratoga Fishing,

the items in the Interior Outfit consist of “other property,”

while the bare ship consists of the “product itself.”

As discussed above, this is not a case within the

wheelhouse of warranty law. CHMM and Nobiskrug didn’t

work together to manufacture or assemble the Interior Outfit

and the bare ship. Rather, CHMM assumed sole

responsibility for providing and installing items in the Interior

Outfit, and Nobiskrug assumed sole responsibility for

manufacturing the bare ship. It’s unreasonable to expect

CHMM to depend upon a warranty from Nobiskrug that the

bare ship would not damage any items in the Interior Outfit. 

And it should come as no surprise that Nobiskrug did not

offer such a warranty; the shipbuilding contract states that the

warranties provided therein “apply only to the work of

[Nobiskrug], [Nobiskrug’s] employees, and of its subcontractors and suppliers.”

It makes no difference that CHMM added the items

comprising the Interior Outfit prior to the delivery of the

yacht from Nobiskrug’s shipyard. CHMM agreed in the

Shipbuilding Contract to complete the Interior Outfit by the

time Nobiskrug finished construction of the bare ship. 

Perhaps this arrangement was made to speed up the process

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16 CHMM V. FREEMAN MARINE EQUIP.

so CHMM didn’t have to wait until the bare ship was ready

to then outfit the interior and receive the necessary

registration and Classification certificates. Whatever the

parties’ motivations, CHMM shouldn’t be penalized for not

waiting until after the delivery of the bare ship to outfit the

interior.

Nobiskrug subcontracted with Freeman to provide the

door connecting the foredeck to the interior of the yacht, and

there is no dispute that this door is part of the product. 

CHMM’s claim is that the product (the bare yacht, which

included the Freeman door) caused physical damage to other

property (the Interior Outfit). The economic loss doctrine

does not bar CHMM from suing in tort for damage to the

Interior Outfit caused by the allegedly defective Freeman

door.

REVERSED and REMANDED.

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