must demonstrate that she has sustained “other property damage” resulting from a sudden,
dangerous, or calamitous occurrence. Trans States Airlines, 682 N.E.2d at 54-55; In re Chi.
Flood Litig., 680 N.E.2d at 275. The Illinois Supreme Court has stated that in those instances,
“its strong interest in keeping the spheres of tort and contract separate outweighs the difficulties
in making the deterioration versus calamitous occurrence distinctions.” Trans States Airlines,
682 N.E.2d at 54. While Illinois may have a stronger interest than Indiana in maintaining the
spheres of tort and contract separate, as suggested by its requirement that a plaintiff meet a
higher hurdle in order to fall within the “other property” exception to the economic loss doctrine,
that is not to say that Indiana does not have any interest in the same. Id. at 54-55. Illinois’
“stronger interest” is not a sufficient reason to apply its law over Indiana law to this action. See
Restatement (Second) of Conflict of Laws § 6, at 15 (1971) (noting that in instances where the
policies of the interested states are largely the same, but where there are nevertheless minor
differences between them, “there is good reason for the court to apply the local law of that state
which will best achieve the basic policy, or policies, underlying the particular field of law
involved”).

As Indiana has more than a modicum of interest in the instant action, and it cannot be
said that the application of Indiana law to this action will not further the basic goals of the
economic loss doctrine in both Indiana and Illinois, the § 6 factors do not serve to demonstrate
that Illinois has a more significant relationship to this suit than Indiana. Having considered the §
145 contacts, in light of the § 6 factors, the Court concludes that the presumption that Indiana
law should apply has not been overcome by a showing that Illinois has a more or greater
significant relationship to this action than Indiana. Accordingly, the Court applies Indiana law.

Il. Whether Indiana’s economic loss doctrine bars recovery

20


by general provisions like § 145 (torts) and § 188 (contracts).” Townsend, 879 N.E.2d at 903
(citing R. Crampton, D. Currie, & H. Kay, Conflict of Laws: Cases—Comments—Questions 117,
120 (Sth ed. 1993)).

The parties agree that under Illinois’ choice-of-law rules, Section 147 of the Second
Restatement is the starting point for a choice-of-law analysis in the instant action. (R. 28, PI.’s
Resp. at 3; R. 29, Def.’s Reply at 3.) Section 147 of the Second Restatement provides:

In an action for an injury to land or other tangible thing, the local law of the state

where the injury occurred determines the rights and liabilities of the parties

unless, with respect to the particular issue, some other state has a more significant

relationship under the principles stated in § 6 to the occurrence, the thing and the

parties, in which event the local law of the other state will be applied.

Restatement (Second) of Conflict of Laws § 147, at 438 (1971). In other words, § 147 of the
Second Restatement raises the rebuttable presumption that where an action concerns an injury to
a tangible thing, “the law to be applied is that of the state where the injury occurred.” Burlington
N. & Santa Fe Ry. Co., 906 N.E.2d at 92 (citing Restatement (Second) of Conflict of Laws §

147, at 438 (1971)). Thus, because Indiana was the site of the injury to the cylinder drums, a
presumption exists in favor of applying Indiana law, unless Illinois has a more significant
relationship with the occurrence and the parties. See id.; Townsend, 879 N.E.2d at 905. This
presumption is a strong one that is difficult to overcome. Townsend, 879 N.E.2d at 903 (“Thus, a
presumption exists, which may be overcome only by showing a more or greater significant
relationship to another state.”)

The second step of the choice-of law analysis requires the Court determine if another
state has a more significant relationship to the action by testing the presumptive choice from step

one against the principles of § 6 of the Second Restatement in light of the contacts identified in §

145(2) of the Second Restatement. Townsend, 879 N.E.2d at 905. The Court first considers the

14


Village-Vernon Hills, LLC v. K. Reinke, Jr. & Co., 810 N.E.2d 235, 247 (Ill. Ct. App. 2d Dist.
2004)).

On January 10, 2013, J.K. filed its reply in support of its motion to dismiss. (R. 29,
Def.’s Reply.) J.K. argues that Illinois law governs this action because there is no substantive
difference between Illinois and Indiana law, and that Federal Insurance’s claims are barred by
the economic loss doctrine under both Illinois and Indiana law. (Jd. at 2-8.)

LEGAL STANDARD

A motion under Federal Rule of Civil Procedure 12(b)(6) “challenges the sufficiency of
the complaint to state a claim upon which relief may be granted.” Hallinan v. Fraternal Order
of Police of Chi. Lodge No. 7,570 F.3d 811, 820 (7th Cir. 2009). Pursuant to Rule 8(a)(2), a
complaint must contain “a ‘short and plain statement of the claim showing that the pleader is
entitled to relief,’ sufficient to provide the defendant with ‘fair notice’ of the claim and its basis.”
Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008) (quoting Fed. R. Civ. P. 8(a)(2) and
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). When considering a motion to dismiss
under Rule 12(b)(6), the Court construes the complaint in the light most favorable to the plaintiff
by accepting as true all of the well-pleaded factual allegations and drawing all reasonable
inferences in the plaintiff's favor. Id. To survive a motion to dismiss, “a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570.) “Threadbare
recitals of the elements of a cause of action, supported by mere conclusory statements, do not
suffice.” Jd. (citing Twombly, 550 U.S. at 555). Furthermore, “[a] claim has facial plausibility
when the plaintiff pleads factual content that allows the court to draw the reasonable inference

that the defendant is liable for the misconduct alleged.” Jd. (citing Twombly, 550 U.S. at 556.)


Federal Insurance argues that Indiana’s economic loss doctrine does not bar its claims for
negligence and strict products liability against J.K. because these claims meet the “other property
damage” exception. (R. 28, Pl.’s Resp. at 4.) Federal Insurance relies on Gunkel, 822 N.E.2d at
153-55, to argue that damage resulting from a defective product is recoverable in tort if the
defect causes damage to other property. (/d.) Federal Insurance also points out that in Indiana,
property acquired separately from the defective good constitutes “other property.” (/d.) Federal
Insurance then asserts that not only were the MonoFlow spiral cylinder drums acquired
separately from MonoSol’s production line, but these cylinder drums also “caused the cutting of
stainless steel carrier belts” and damaged Production Line Nos. 1 and 2, neither of which J.K.
furnished. (/d.) The stainless steel carrier belts and production lines constitute “other property,”
and thus, Federal Insurance concludes, its claims are not barred by Indiana’s economic loss rule.
(Ud. at 5.) Without citing to any authority, J.K. argues that “[t]he production line should be
considered one unit, of which the cylinder drums were an essential component.” (R. 29, Def.’s
Reply at 8.)

Again, as discussed above, Indiana law provides that damage from a defective product
may be recoverable under a tort theory if the defect causes damage to other property. Gunkel,
822 N.E.2d at 153. In Gunkel, the Indiana Supreme Court was squarely confronted with the
question of what constitutes “other property” for purposes of the economic loss doctrine. 822
N.E.2d at 151. The court determined that “whether damaged property is ‘other property’ turns
on whether it was acquired by the plaintiff as a component of the defective product or was
acquired separately.” Jd. The court instructed that where “a component is sold to the first user
as a part of the finished product,” the component is not “other property” because the

consequences of its failure are within the rationale of the economic loss doctrine. Jd. at 155.

21


In reaching this conclusion, the Court does not comment on whether Federal Insurance will
ultimately be successful, but only concludes that Federal Insurance has raised a claim under
which it could potentially recover.
CONCLUSION
For the foregoing reasons, J.K. Manufacturing’s Motion to Dismiss (R. 9) is DENIED.
The parties are requested to reevaluate their settlement positions in light of this opinion and to
exhaust all efforts to settle this case. A status hearing is set for 9:45 a.m. on April 16, 2013.

Judge Ruben Castillo
United States District Court

Date: March 28, 2013

23


for resolving disputes over purely economic losses). Further, litigants should not be allowed “to
opt out of commercial law by refusing to avail [themselves] of the opportunities which that law
[provides.]” Id.; see also Moorman Mfg. Co., 435 N.E.2d at 448 (noting that a purchaser may
protect itself against risk by bargaining for a warranty, or accepting a lower price in lieu of a
warranty, and that it is preferable to relegate the purchaser to contract remedies than to require
all other consumers to pay more for a manufacturer’s product so that the manufacture may insure
against the possibility that his products will not meet his customers’ expectations); Ind ’polis-
Marion Cnty. Pub. Library, 929 N.E.2d at 729-30 (noting first, that “the economic loss rule
reflects that the resolution of liability for purely economic loss caused by negligence is more
appropriately determined by commercial rather than tort law,” and second, that “liability should
not be imposed when it creates a potential for liability that is so uncertain in time, class, or
amount that a defendant should not fairly or practically be expected to account for the potential
liability when undertaking the conduct that gives rise to it”). In short, the primary policy
concerns underlying the economic loss doctrine are: “(1) to maintain the fundamental distinction
between tort law and contract law; (2) to protect commercial parties’ freedom to allocate
economic risk by contract; and (3) to encourage the party best situated to assess the risk of
economic loss, the commercial purchaser, to assume, allocate, or insure against that risk.” Jn re
StarLink Corn Prods. Liab. Litig., 212 F. Supp. 2d 828, 839 (N.D. Ill. 2002) (quoting Daanen &
Janssen, Inc., 573 N.W.2d 842, 845 (Wis. 1998)). These underlying policy goals may be
fulfilled regardless of whether the Court applies Illinois or Indiana law, because both states have
adopted a version of the economic loss doctrine in an effort to meet these concerns. Thus, this

factor does not favor the application of Illinois law over Indiana law.

18


Products Liability Jurisprudence, 66 Colum. L. Rev. 917, 918 (1966)); see also Trans States
Airlines v. Pratt & Whitney Canada, Inc., 177 N.E.2d 45, 48 (Ill. 1997). The rationale
underpinning the Moorman tule is that “[tJort theory is appropriately suited for personal injury or
property damage resulting from a sudden or dangerous occurrence[, whereas t]he remedy for
economic loss, loss relating to a purchaser’s disappointed expectations due to deterioration,
internal breakdown or nonaccidental cause, on the other hand, lies in contract.” Moorman Mfg.
Co., 435 N.E.2d at 450.

Illinois recognizes several exceptions to the Moorman economic loss rule, including, as
relevant here, “where the plaintiff sustained damage, i.e., personal injury or property damage,
resulting from a sudden or dangerous occurrence.” In re Chi. Flood Litig., 680 N.E.2d 265, 275
(Ill. 1997) (internal citations omitted) (citing Moorman Mfg. Co., 435 N.E.2d at 450, 452). The
exception requires personal injury or property damage coupled with a sudden, dangerous, or
calamitous event. Id. at 275-76. In Trans States Airlines, the Illinois Supreme Court was
presented with the question of whether there could be tort recovery when the damage caused by
the defective product was confined to the product itself. 682 N.E.2d at 48. The Illinois Supreme
Court held that the exception does not apply, and therefore an Illinois plaintiff cannot recover in
tort, when a defective product only damages itself. Jd. at 54-55. The court rationalized its
holding by noting that “when the product damages itself only, the risks against which products
liability law was designed to protect simply are not realized.” Jd. The court further noted that
under this approach, manufacturers maintain an incentive to produce safe products, as they may
still be subject to liability in tort where their product causes personal injury or “other property

damage.” Jd. at 53.

10


A federal court sitting in diversity applies the forum state’s choice-of-law rules to
determine which state’s substantive law applies. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313
U.S. 487, 496-97 (1941) (“The conflict of laws rules to be applied by the federal court in
Delaware must conform to those prevailing in Delaware’s state courts.”); Auto-Owners Ins. Co.
v. Websolv Computing, Inc., 580 F.3d 543, 547 (7th Cir. 2009) (citing Klaxon Co., 313 U.S. at
496)). “Courts do not worry about conflict of laws unless the parties disagree on which state’s
law applies.” Auto-Owners Ins. Co., 580 F.3d at 547 (7th Cir. 2009) (quoting Wood v. Mid-
Valley Inc., 942 F.2d 425, 427 (7th Cir. 1991)). In the instant action, J.K. argues that Federal
Insurance’s negligence (Count I) and products liability (Count II) causes of action should be
dismissed because they are barred by the economic loss doctrine as set forth by the Illinois
Supreme Court in Moorman Manufacturing Co., 435 N.E.2d 443. (R. 9, Def.’s Mem. at 3-7.) In
response, Federal Insurance contends that Indiana law, rather than Illinois law, applies. (R. 28,
PI.’s Resp. at 3.)

As the parties do not agree on whether Illinois or Indiana law applies, the Court looks to
Illinois choice-of-law rules to determine whether Illinois or Indiana law applies. In Illinois,
before a court “undertakes a choice-of-law analysis to determine which state’s law governs a
claim, [it] must look to see whether a conflict exists.” Sterling Fin. Mgmt., L.P. v. UBS
PaineWebber, Inc., 782 N.E.2d 895, 899 (Ill. App. Ct. 1st Dist. 2002). “This is a threshold
question because choice-of-law considerations are not implicated unless there is an actual
conflict in the law of the two states.” Id.; see also Townsend v. Sears, Roebuck & Co., 879
N.E.2d 893, 898 (Ill. 2007) (“A choice-of-law determination is required only when a difference
in law will make a difference in the outcome.”) (citing Morris B. Chapman & Assocs., Ltd. v.

Kitzman, 716 N.E.2d 829 (Ill. App. Ct. 5th Dist. 1999); Kramer v. Weedhopper of Utah, Inc.,


“Plausibility’ in this context does not imply that the district court should decide whose version
to believe, or which version is more likely than not.” Swanson v. Citibank, N.A., 614 F.3d 400,
404 (7th Cir. 2010). After all, “the plausibility standard is not akin to a ‘probability
requirement.’” Iqbal, 556 U.S. at 678. Rather, to survive a motion to dismiss under Rule
12(b)(6), “the plaintiff must give enough details about the subject-matter of the case to present a
story that holds together.” Swanson, 614 F.3d at 404. Therefore, “the court will ask itself could
these things have happened, not did they happen.” Jd. (emphasis in original).
ANALYSIS

I. Whether the Court should apply Illinois or Indiana state law

Federal Insurance is a resident of the State of New Jersey with its principal place of
business in New Jersey, and J.K. is a resident of the State of Illinois with its principal place of
business in Illinois. (R. 1, Compl. {§ 1, 4.) Federal Insurance avers that it has paid the entire
claim of its insured, MonoSol, and therefore it is the only real party in interest to this action. See
United States v. Aetna Cas. & Sur. Co., 338 U.S. 366, 380-81 (1949) (“If the subrogee has paid
an entire loss suffered by the insured, it is the only real party in interest and must sue in its own
name) (citing 3 Moore, Federal Practice 1339 (2d Ed.); Krueger v. Cartwright, 996 F.2d 928,
931-32 (7th Cir. 1993) (“The general rule in federal court is that if an insurer has paid the entire
claim of its insured, the insurer is the real party in interest under Federal Rule of Civil Procedure
17(a) and must sue in its own name.”) (citing Aetna Cas. & Sur. Co., 338 U.S. at 380-81).
Further, Federal Insurance seeks $866,252.98 for property and business interruption damage
sustained by MonoSol, (id. 14, 18, 30), and the amount in controversy thus exceeds $75,000.

Therefore, the Court has diversity jurisdiction to hear this action pursuant to 28 U.S.C. § 1332.


The Court next considers the relevant policies of Indiana and the relative interests of
Indiana in the determination of this particular issue. Restatement (Second) of Conflict of Laws §
6(2)(c), at 10 (1971). “The public policy of a state may be sought in its constitution, legislative
enactments and judicial decisions.” Morris B. Chapman & Assocs., Ltd., 739 N.E.2d at 1270
(citing Scholtens v. Schneider, 671 N.E.2d 657 (Ill. 1996)). The Indiana Supreme Court has
clearly stated that the economic loss doctrine “is only implicated where a plaintiff has suffered
‘pure economic loss.’” Ind’polis-Marion Cnty. Pub. Library, 929 N.E.2d at 731. “Pure
economic loss” in Indiana is defined as “pecuniary harm not resulting from an injury to the
plaintiff's person or property.” Jd. Nonetheless, “damage from a defective product or service
may be recoverable under a tort theory if the defect causes personal injury or damage to other
property.” Gunkel, 822 N.E.2d at 153. With respect to Indiana’s interests in the instant action,
Indiana has an interest in ensuring that safe products are used within its borders, and in deterring
the use of defective products within its borders. Indiana also has an interest in protecting its
citizens, such as MonoSol, who are personally injured or whose property is injured within its
borders.

Finally, the Court considers the relevant policies of the forum, i.e., Illinois. Restatement
(Second) of Conflict of Laws § 6(2)(b), at 10 (1971). In Illinois, “[a]bsent injury to a plaintiff's
person or property, a claim presents economic loss not recoverable in tort.” In re Chi. Flood
Litig., 680 N.E.2d at 275 (citing N. Ill. Gas Co. v. Vincent DiVito Construction, 573 N.E.2d 243
(Ill. 1991)). Nonetheless, Illinois’ “economic loss rule applies even to plaintiffs who have
incurred physical damage to their property if the damage is caused by disappointed commercial
expectations, gradual deterioration, internal breakage, or other nonaccidental causes, rather than

a dangerous event.” Jd. To recover damages in tort for pure economic losses, an Illinois plaintiff

19


Generally, where “a defective product causes physical harm to a person or to property
other than the product itself, a tort action may be brought.” Johnson, supra note 1, at 549-550;
see also Ralph C. Anzivino, The Economic Loss Doctrine: Distinguishing Loss From Non-
Economic Loss, 91 Marq. L. Rev. 1081, 1082 (2007-2008) (noting that if a defective product
“causes ‘personal injury’ or ‘other property’ damage, then negligence and strict liability theories
are available”) (citing Restatement (Third) of Torts: Prods. Liab. § 1 (1998)). By contrast, where
the loss is solely economic in nature, “such as when a product defect injures the product itself or
impairs the product’s value,” the economic loss doctrine bars the plaintiff from pursuing a
remedy in tort and the plaintiff is instead “relegated to compensation under contract principles,”
Johnson, supra note 1, at 549-50; Anzivino, supra, at 1082. “The nature of the loss incurred
dictates whether the [plaintiff's] claim is to be brought in contract or tort.” Anzivino, supra, at
1082 (citing E. River S.S. Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 869-71 (1986)).

Both Illinois and Indiana have adopted the economic loss doctrine. Illinois’ economic
loss rule has its origins in Moorman Manufacturing Co., 435 N.E.2d at 453, where the Illinois
Supreme Court held, in relevant part, that “‘a plaintiff cannot recover for solely economic loss
[from a defective product] under the tort theories of strict liability, [and] negligence.” In
Moorman, the Illinois Supreme Court defined economic losses as “damages for inadequate
value, costs of repair and replacement of the defective product, or consequent loss of profits-
without any claim of personal injury or damage to other property . . .” as well 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.” Moorman Mfg. Co., 435 N.E.2d at 449
(quoting Comment, Manufacturers’ Liability to Remote Purchasers for “Economic Loss”

Damages-Tort or Contract?, 114 U. Pa. L. Rev. 539, 541 (1966); Note, Economic Loss in


fin

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
FEDERAL INSURANCE COMPANY, )
as subrogee of MonoSol Holdco, LLC, )
)
Plaintiff, ) No. 12 C3465

v. )

) Judge Ruben Castillo
J.K. MANUFACTURING CO., )
)
Defendant. )

MEMORANDUM OPINION AND ORDER

Federal Insurance Company (“Federal Insurance”), as subrogee of MonoSol Holdco,
LLC (“MonoSol”), brings this diversity action against J.K. Manufacturing Company (“J.K.”) for
negligence (Count I), breach of express and implied warranties (Count II), and products liability
(Count Ill). (R. 1, Compl. {§ 15-31.) Presently before the Court is J.K.’s motion to dismiss
pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons stated below, J.K.’s
motion is denied.

RELEVANT FACTS

MonoSol is a limited liability company (“LLC”) incorporated in Delaware with its
principal place of business in Merrillville, Indiana. (/d. § 2.) During the time relevant to this
action, MonoSol owned the property located at 1701 County Line Road, Portage, Indiana (the
“MonoSol Facility”). (Jd.) MonoSol manufactures plastic water soluble films inside the
MonoSol Facility. (/d.) Federal Insurance is an insurance provider with its principal place of
business in Warren, New Jersey. (Id. J 1.) At all times relevant to this action, Federal Insurance
provided property and business interruption insurance coverage to MonoSol and related

MonoSol entities. (Jd. 43.) J.K. is an Illinois corporation with its principal place of business in


loss’ even though it may have a component of physical destruction.” Gunkel, 822 N.E.2d at 154.
The Indiana Supreme Court has explained that “the theory underlying the economic loss doctrine
is that the failure of a product . . . to live up to expectations is best relegated to contract law and
to warranty either express or implied.” /d. at 155. In that realm, the buyer and seller to a
transaction are able to allocate the risk that an item being sold will not live up to expectations,
and price the product accordingly. Id.

Thus, not only do both Illinois and Indiana recognize the economic loss doctrine, both
States also recognize a relevant exception to the doctrine when a defective product injures “other
property.” In re Chi. Flood Litig., 680 N.E.d at 275 (identifying as an exception to the economic
loss rule “where the plaintiff sustained damage, i.e., personal injury or property damage,
resulting from a sudden or dangerous occurrence”) (citing Moorman, 435 N.E.2d 443);
Ind’polis-Marion Cnty. Pub. Library, 929 N.E.2d at 726 (“where the injury to the plaintiff is
from a defective product .. . the defendant is liable under a tort theory if the defect causes
personal injury or damage to property other than the product . . . itself”) (citing Gunkel, 822
N.E.2d at 153). Although both States allow a plaintiff to recover damages in tort where a
product defect causes damage to other property, the exceptions to the economic loss doctrine are
slightly different. See Gunkel, 822 N.E.2d at 154 n.2 (noting difference and citing Am. Xyrofin,
Inc. v. Allis-Chalmers Corp., 595 N.E.d 650, 656 (Ill. App. Ct. 2d Dist. 1992)). Specifically, in
Indiana, “other property damage” standing alone is sufficient for the exception to apply, whereas
in Illinois “other property damage” must be coupled with a sudden or calamitous event. Trans
States Airlines, 682 N.E.2d at 54. In Illinois, “[n]either (1) an injury (personal injury or other
property damage) standing alone nor (2) a sudden and calamitous occurrence standing alone is

sufficient to bring a claim within the bounds of tort recovery.” Id. at 55 (citing In re Chi. Flood

12


Indiana first applied the economic loss doctrine in Reed v. Central Soya Co., 621 N.E.2d
1069, 1074-75 (Ind. 1993), modified on other grounds, 644 N.E.2d 84 (Ind. 1994), a case
brought under the Indiana Products Liability Act, Ind. Code § 33-1-1.5-2 (1988). See Gunkel,
822 N.E.2d at 152 (discussing history of economic loss doctrine in Indiana). The Indiana
economic loss doctrine provides that “contract is the sole remedy for the failure of a product or
service to perform as expected.” Jd. The Indiana Supreme Court later extended the economic
loss doctrine to negligence actions premised on the failure of a product to perform as expected.
Id, Thus, under the Indiana Products Liability Act and Indiana’s common law on negligence,

damage from a defective product . . . may be recoverable under a tort theory if the

defect causes personal injury or damage to other property, but contract law

governs damage to the product . . . itself and purely economic loss arising from

the failure of the product . . . to perform as expected.

Gunkel, 822 N.E.2d at 153.

The Indiana Supreme Court has held that “‘economic losses’ occur when there is no
personal injury and no physical harm to other property.” Gunkel, 822 N.E.2d at 153-54 (citing
W. Prosser, Handbook on the Law of Torts § 101, at 665 (4th ed. 1971)). Economic losses are
viewed as “disappointed contractual or commercial expectations.” Id. at 154 (citing Am. United
Logistics, Inc. v. Catellus Dev. Corp., 319 F.3d 921, 926 (7th Cir. 2003)). Thus, Indiana courts
have defined economic loss as “the diminution in the value of a product and consequent loss of
profits because the product is inferior in quality and does not work for the general purposes for
which it was manufactured and sold.” Reed, 621 N.E.2d at 1074 (quoting Prairie Prod., Inc. v.
Agchem Div.-Pennwalt Corp., 514 N.E.2d 1299, 1304 (Ind. 1987)). “Economic loss includes
such incidental and consequential losses as lost profits, rental expense and lost time.” Jd. (citing

Dutton v. Int'l Harvester Co., 504 N.E.2d 313, 318 (Ind. App. Ct. 4th Dist. 1987)). Furthermore,

“[dJamage to the product itself, including costs of its repair or reconstruction, is an ‘economic

11


562 N.E.2d 271 (Ill. App. Ct. 1st Dist. 1990)); Barron v. Ford Motor Co. of Canada Ltd., 965
F.2d 195, 197 (7th Cir. 1992) (“before entangling itself in messy issues of conflict of laws a
court ought to satisfy itself that there actually is a difference between the relevant laws of the
different states”). “A conflict exists when the application of one state’s law over another will
make a difference in the outcome.” Sterling Fin. Mgmt., 782 N.E.2d at 899 (citing Malatesta v.
Mitsubishi Aircraft Int’l, Inc., 655 N.E.2d 1093, 1096 (Ill. App. Ct. Ist Dist. 1995)). “If the law
of the jurisdictions in question is essentially the same on the disputed issue, there is no need to
apply a choice-of-law analysis.” Id. (citing Wreglesworth v. Arctco, Inc., 738 N.E.2d 964, 969
(Ill. App. Ct. 1st Dist. 2000)).

Federal Insurance does not argue that a conflict exists. Rather, in its opposition brief,
Federal Insurance simply asserts that Indiana Law governs. (R. 28, Pl.’s Resp. at 3.) J.K., on the
other hand, argues that Illinois law applies because there is no substantive difference between
Illinois and Indiana law with respect to the economic loss doctrine. (R. 29, Def.’s Reply at 2.)
Specifically, J.K. contends that “[b]oth Illinois and Indiana recognize the economic loss doctrine.
Although the application varies slightly, in both states, the underlying principles remain the
same.” (Jd. at 2-3) (citing Moorman Mfg. Co., 436 N.E.2d 443; Ind’polis-Marion Cnty. Pub.
Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722 (Ind. 2010)). Thus, the Court must
decide whether there is a conflict in the laws of the two states regarding the economic loss
doctrine when applied to Federal Insurance’s claims. “[I]f there is no conflict, Illinois law
applies as the law of the forum.” Sterling Fin. Mgmt., 782 N.E.2d at 899 (citing Dearborn Ins.
Co. v. Int’l Surplus Lines Ins. Co., 719 N.E.2d 1092, 1096 (Ill. App. Ct. 1st Dist. 1999)).

A. Whether Illinois and Indiana law on the economic loss doctrine conflict


Property acquired separately from the defective good, however, is “other property,” regardless of
whether “it is, or is intended to be, incorporated into the same physical object.” Id.

Here, Federal Insurance alleges that it hired J.K. to design and manufacture the
Monoflow spiral cylinder drums “to replace the baffled shell cylinders originally installed on
production lines at the MonoSol Facility.” (R. 1, Compl. {5.) The allegations establish that the
Monoflow spiral cylinder drums furnished by J.K. were acquired separately from the MonoSol
production lines into which they were incorporated. Furthermore, Federal Insurance alleges that
as a result of the defective Monoflow spiral cylinder drums, Production Line No. 2’s stainless
steel carrier belts were cut so as to remove the defective cylinder drum. (Jd. §§ 10, 12.) Federal
Insurance’s allegations that the defective products, the Monoflow spiral cylinder drums, were
acquired separately from the production lines, sufficiently establish that the production lines
constitute “other property” under Indiana law. Furthermore, as the production lines were
physically damaged by cutting the production lines’ stainless steel carrier belts, Federal
Insurance has also sufficiently alleged that the defective product damaged “other property”
thereby implicating the exception to Indiana’s economic loss doctrine. See Guideone Ins. Co. v.
US. Water Sys. Inc., 950 N.E.2d 1236, 1245 (Ind. Ct. App. 2011) (concluding that “the ‘other
property’ exception to the economic loss doctrine would permit tort recovery for the flood
damage to [subrogors’] home because the damaged floor, walls, etc. were acquired separately
from the water system and were not merely a component of the water system, but rather were
separate, distinct items”) (citing Gunkel, 822 N.E.2d at 156-57; Ind ‘polis-Marion Cnty. Pub.
Library, 929 N.E.2d at 732. Thus, because Federal Insurance has sufficiently alleged that the
defective Monoflow spiral cylinder drums caused damage to “other property,” its negligence

(Count I) and products liability (Count ITI) claims are not barred by the economic loss doctrine.

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manufacture of the Monoflow cylinder drums. (/d. {J 15-18.) In Count II, Federal Insurance
asserts a claim for breach of express and implied warranties, (id. §{ 19-26), and in Count III,
Federal Insurance alleges that J.K. is liable under a products liability theory, (id. {{] 27-31).

On August 1, 2012, J.K. filed a motion to dismiss Counts I and III of Federal Insurance’s
complaint. (R. 9, Mot.) J.K. argues that the negligence and products liability causes of action
should be dismissed because damages for economic losses cannot be recovered in tort pursuant
to the economic loss doctrine! set forth in Moorman Manufacturing Company v. National Tank
Company, 435 N.E.2d 443 (Ill. 1982). (R. 9, Def.’s Mem. at 2.)

On December 27, 2012, Federal Insurance filed its response to J.K.’s motion, (R. 28, Pl.’s
Resp.), arguing that Indiana law, and not Illinois law, governs this dispute because “the law to be
applied is that of the state where the accident [or] injury occurred.” (R. 28, Pl.’s Resp. at 3.)
(quoting Burlington N. & Santa Fe Ry. Co. v. ABC-NACO, 906 N.E.2d 83, 92 (Ill. Ct. App. Ist
Dist. 2009)). Federal Insurance further argues that the economic loss doctrine does not bar its
claims for negligence and strict products liability against J.K. because, it asserts, it may recover
damages under either general negligence or products liability principles if a defective product
causes damage to other property. (Jd. at 4) (citing Gunkel v. Renovations, Inc., 822 N.E.2d 150,
153-54 (Ind. 2005)). Alternatively, Federal Insurance argues that even if Illinois law applies, its
claims survive the economic loss doctrine under the “sudden and dangerous occurrence”
exception, whereby a plaintiff who “has sustained property damage or personal injury resulting

from a sudden or dangerous occurrence” may recover damages. (Jd. at 6) (quoting Muirfield

' The phrase “economic loss doctrine” is used interchangeably with the phrase “economic loss
tule.” See Vincent R. Johnson, The Boundary-Line Function of the Economic Loss Rule, 66
Wash. & Lee L. Rev. 523, 585 n.1 (2009).


§ 145 contacts present in this case. Section 145(2) of the Second Restatement provides that the
contacts to be taken into account in applying the principles of § 6 include: “(a) the place where
the injury occurred, (b) the place where the conduct causing the injury occurred, (c) the domicil,
residence, nationality, place of incorporation and place of business of the parties, and (d) the
place where the relationship, if any, between the parties is centered.” Restatement (Second) of
Conflict of Laws § 145, at 414 (1971). Generally, in a tort case, “the two most important
contacts are the place where the injury occurred and the place where the conduct causing the
injury occurred.” Miller v. Long-Airdox Co., 914 F.2d 976, 978 (7th Cir. 1990) (applying Illinois
law).

First, as previously discussed, the dispute involves an injury to a tangible thing that
occurred in Indiana, and thus a presumption is raised in favor of applying Indiana law.
Restatement (Second) of Conflict of Laws § 147, at 438 (1971). Section 145 of the Second
Restatement cautions that situations exist “where the place of injury will not play an important
role in the selection of the state of the applicable law,” such as when the place of injury is
fortuitous or when the defendant could not foresee that his actions could result in an injury in
that particular state. Restatement (Second) of Conflict of Laws § 145, at 419-20 (1971). Here,
however, Indiana has a strong relationship to the occurrence. J.K. sold the cylinder drums to
MonoSol, an Indiana company, and could therefore foresee that the cylinder drums would be
used in Indiana.

The second § 145 contact to consider is the place where the conduct causing the injury
occurred. The Illinois Supreme Court instructs courts to consider not only the plaintiff's theories
of the case, but “all conduct from any source contributing to the injury.” Townsend, 879 N.E.2d

at 906 (noting that defendant pleaded affirmative defense of contributory negligence and taking

15


Section 6(2) of the Second Restatement identifies the following factors that are relevant
to the choice of the applicable rule of law:

(a) the needs of the interstate and international systems,

(b) the relevant policies of the forum,

(c) the relevant policies of other interested states and the relative interests of those

states in the determination of the particular issue,

(d) the protection of justified expectations,

(e) the basic policies underlying the particular field of law,

(f) certainty, predictability and uniformity of result, and

(g) ease in the determination and application of the law to be applied.

Restatement (Second) of Conflict of Laws § 6, at 10 (1971). Of these seven factors, the Illinois
Supreme Court singles out three of them as relevant in tort cases. Townsend, 879 N.E.2d at 906-
07; see also Fisher v. Brilliant World Int’l, No. 10 C 2381, 2011 WL 3471222, at *4 (N.D. Ill.
Aug. 4, 2011). Specifically, the Illinois Supreme Court looks at § 6(2)(b), the relevant policies
of the forum, § 6(2)(c), the relevant policies of other interested states and the relative interests of
those states in the determination of the particular issue, and § 6(2)(e), the basic policies
underlying the particular field of law. Townsend, 879 N.E.2d at 906-07.

The Court first assesses the basic policies underlying the particular field of law.
Restatement (Second) of Conflict of Laws § 6(2)(e), at 10 (1971). The economic loss doctrine
was originally “a limitation on who could bring a tort suit for the consequences of a personal
injury or damage to property: only the injured person himself, or the owner of the damaged
property himself.” All-Tech Telecom., Inc. v. Amway Corp., 174 F.3d 862, 865 (7th Cir. 1999)
(collecting cases). Individuals who only possessed commercial links to the owner could not
bring suit. Jd. The rationale behind the doctrine is that “commercial disputes ought to be
resolved according to the principles of commercial law rather than according to tort principles

designed for accidents that cause personal injury or property damage.” Miller v. U.S. Steel

Corp., 902 F.2d 573, 575 (7th Cir. 1990) (noting that “tort law is a superfluous and inapt tool”

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11.) The cracking caused the drum to vibrate, which in turn damaged the existing production
line. (Id.) According to Federal Insurance, the cracking in the head cylinder drum and the
associated damage to the existing assembly line caused Production Line No. 2 to be out of
service until June 28, 2010, when the head cylinder drum was removed and replaced with the
original baffled shell cylinder. (Jd. § 12.) The head cylinder drum was removed by cutting
Production Line No. 2’s stainless steel carrier belt. (Id.)

In March 2010, the MonoSol Facility’s Production Line No. 1 was upgraded with new
tail and head Monoflow cylinder drums fabricated by J.K. (Jd. 96.) Federal Insurance avers that
on or about September 3, 2010, Production Line No. 1 began making abnormal noises and
visible cracking was noted on the tail cylinder drum. (Id. § 13.) The cracking caused the tail
cylinder drum to vibrate, which in turn damaged the existing production line. (/d.)

As a result of the cracking of the cylinder drums and the damage to Production Line Nos.
1 and 2, MonoSol “sustained property and business interruption damage in an amount in excess
of $866,252.98 exclusive of interest and costs.” (Id. §{ 14, 18, 30.) MonoSol thus made claims
to Federal Insurance pursuant to its insurance policy, and Federal Insurance reimbursed MonoSol
for those claims in an amount in excess of $866,252.98. (Jd. J 14.) Therefore, Federal Insurance
avers that it is legally, equitably and contractually subrogated to the claims of MonoSol against
any responsible third parties, including J.K. (Jd.) Federal Insurance seeks a judgment in its
favor “in an amount in excess of $866,252.98, together with interest and the cost of this action,
and any other relief that this Court deems equitable and proper.” (/d. §{ 18, 31.)

PROCEDURAL HISTORY
Federal Insurance filed a three-count complaint against J.K. in this Court on May 7, 2012.

(R. 1, Compl.) In Count I, Federal Insurance alleges that J.K. was negligent in the design and


Bedford Park, Illinois. (/d. § 4.) At all times relevant to this action, J.K. was in the business of
designing and manufacturing cylinder drums used in production lines. (Id.)

On or about November 6, 2009, MonoSol hired J.K. to design and manufacture four
Monoflow spiral cylinder drums to replace baffled shell cylinders that were originally installed
on production lines at the MonoSol Facility. (Id. 9 5; R. 1-1, Ex. A, Quote & Purchase Order at
2-4.) J.K. charged MonoSol $152,000.00 for the four cylinder drums. (R. 1-1, Ex. A, Quote &
Purchase Order at 2-4.) The MonoSol Facility production lines each have head and tail cylinder
drums. (R. 1, Compl. { 6.) Head cylinder drums are used to pre-heat the plastic water soluble
film, and tail cylinder drums are used to cool the plastic water soluble film after it comes out of
the oven. (/d. 7.)

In February 2010, the MonoSol Facility’s Production Line No. 2 was upgraded with new
head and tail Monoflow cylinder drums fabricated by J.K. (Jd. 6.) Federal Insurance alleges
that on or about May 26, 2010, Production Line No. 2 began making abnormal noises and visible
cracking was noted on the tail cylinder drum. (Jd. § 8.) The cracking caused the tail cylinder
drum to vibrate, which in turn damaged the existing production line. (/d.) J.K. repaired the tail
cylinder drum, and it was returned to service on June 8, 2010. (/d. 49.) Prior to reaching full
production, however, the tail cylinder drum again began making noise. (/d.) According to
Federal Insurance, the cracking in the tail cylinder drum and the associated damage to the
existing assembly line caused Production Line No. 2 to be out of service until June 12, 2010.
(id. 410.) That day, the tail cylinder drum was removed and replaced with the original baffled
shell cylinder. (/d.) The tail cylinder drum was removed by cutting Production Line No. 2’s
stainless steel carrier belt. (/d.) On or about June 21, 2010, Production Line No. 2 once again

began making abnormal noises and visible cracking was noted on the head cylinder drum. (/d.


Litig., 680 N.E.2d at 275.) Assuming that the alleged damage to the steel carrier belts constitutes
other property, (R. 1, Compl. 10, 12), application of one state’s law over the other could alter
the outcome in this case; Federal Insurance would need to satisfy an additional element under
Illinois law before the “other property damage” exception to the economic loss doctrine could be
applied.” Therefore, it appears that there is a conflict between Illinois and Indiana law.

B. Illinois’ Choice-of-Law Analysis

Having determined that a potential conflict exists, the Court applies Illinois’ choice-of-
law rules to determine which state’s law applies to the instant action. Klaxon Co., 313 U.S. at
496-97; Auto-Owners Ins. Co., 580 F.3d at 547. The Illinois Supreme Court has “adopted the
choice-of-law analysis of the Second Restatement of Conflict of Laws.” Townsend, 879 N.E.2d
at 903 (citing Morris B. Chapman & Assocs., Ltd. y. Kitzman, 739 N.E.2d 1263 (Ill. 2000); Esser
y. McIntyre, 661 N.E.2d 1138 (Ill. 1996); Nelson v. Hix, 522 N.E.2d 1214 (Ill. 1988)). “The
cornerstone of the Second Restatement is the ‘most significant relationship’ test, the objective of
which is ‘to apply the law of the state that, with regard to the particular issue, has the most
significant relationship with the parties and the dispute.’” Burlington N. & Santa Fe Ry. Co.,
906 N.E.2d at 91 (quoting E. Scoles, P. Hay, P. Borchers & S. Symeonides, Conflict of Laws §
2.14, at 61 (4th ed. 2004)). The Second Restatement “contemplates a two-step process in which
the court (1) chooses a presumptively applicable law under the appropriate jurisdiction-selecting

rule, and (2) tests this choice against the principles of § 6 in light of relevant contacts identified

2 Here, Plaintiff has not pleaded any facts that would support the finding of a sudden and
dangerous occurrence. A “sudden and dangerous occurrence” is an occurrence that is “highly
dangerous and presents the likelihood of personal injury or injury to other property.” Mars, Inc.
v. Heritage Builders of Effingham, Inc., 763 N.E.2d 428, 435 (Ill. App. Ct. 4th Dist. 2002)
(quoting Stepan Co. v. Winter Panel Corp., 948 F. Supp. 802, 807-08 (N.D. Ill. 1996)); see also
Moorman Mfg. Co., 435 N.E.2d at 450 (noting that a crack that had developed on a grain storage
tank “was not the type of sudden and dangerous occurrence best served by the policy of tort law
that the manufacturer should bear the risk of hazardous products”).

13


this conduct into account). The gravamen of Federal Insurance’s complaint is that J.K., an
Illinois corporation, negligently designed and manufactured the cylinder drums. (R. 1, Compl.
445, 15-18, 27-30.) Thus, under Federal Insurance’s theory of its case, the culpable acts were
committed in Illinois. That said, J.K. has pleaded an affirmative defense of contributory
negligence by MonoSol, which is located in Indiana. (R. 11, Def.’s Ans. at 11.) As relevant
conduct occurred in both Illinois and Indiana, the second § 145 contact does not favor one state
over the other.

The third § 145 contact is the domicile, residence, place of incorporation, and place of
business of the parties. Here, Federal Insurance is a New Jersey corporation, (R. 1, Compl. 1),
and J.K. is an Illinois corporation with its principal place of business in Illinois, (id. § 4). As
between Indiana and Illinois, this contact favors Illinois.

The fourth § 145 contact is the place where the parties’ relationship is centered. In the
instant action, the relationship between Federal Insurance and J.K. arose from MonoSol’s
purchase of the cylinder drums from J.K., which is in Illinois. (id. 1.) Prior to purchasing the
cylinder drums, MonoSol obtained a quote from J.K., which quote was drafted in Illinois. (R. 1-
1, Ex. A, Quote & Purchase Order at 2-4.) That said, the cylinder drums were used in Indiana,
(R. 1, Compl. § 6), and J.K. attempted to repair MonoSol’s cylinder drums in Indiana. (id. § 9;
R. 28, Pl.’s Resp. at 4). Thus, this contact does not favor one state over the other. In sum, the
first contact favors Indiana, whereas the third contact favors Illinois, and the second and fourth
contacts do not favor either state. Considered alone, the § 145 contacts do not override the
presumption that Indiana law governs the substantive issues in this case. These contacts must
now be evaluated in light of the general principles embodied in § 6 of the Second Restatement.

Townsend, 879 N.E.2d at 906.

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