In the

United States Court of Appeals

For the Seventh Circuit

No. 10-3762

SCHREIBER FOODS, INC.,

Plaintiff-Appellant,

v.

LEI WANG,

Defendant-Appellee.

Appeal from the United States District Court

for the Eastern District of Wisconsin.

No. 1:08-cv-00962-WCG—William C. Griesbach, Judge.

ARGUED JUNE 8, 2011—DECIDED JULY 5, 2011

Before POSNER, KANNE, and HAMILTON, Circuit Judges.

POSNER, Circuit Judge. In a diversity suit that presents

issues of Wisconsin common law, Schreiber Foods

charges Lei Wang with fraud. The district court granted

summary judgment in favor of the defendant on the

ground that the suit was barred by Wisconsin’s version

of the economic-loss doctrine of tort law.

Lei Wang is an American citizen of Chinese descent

who owns an automotive-parts supply business in Chi-
2 No. 10-3762

cago. A cousin of hers who lives in China, Cade Wang,

runs a pair of trading companies, one of which is named

Mature Sky. (Originally a defendant along with Lei

Wang, Mature Sky was never served, and the district

judge dismissed it from the case, without prejudice.) To

simplify the opinion we’ll pretend that the two trading

companies are actually one, and call it Mature Sky.

Mature Sky did business with a large Chinese manufacturer of dairy products called Inner Mongolia Yili

Industrial Group (“Yili”). Cade Wang asked his cousin to

help him find a supplier in the United States of dairy

product ingredients. Lei Wang went to China and met

with executives of Yili to get a better idea of what Yili

wanted. Returning to the United States she approached

Schreiber, a leading supplier of dairy products and

dairy product ingredients, and told Juliet Prescod, the

Schreiber Global Sales Associate with whom she dealt,

that although she really didn’t know anything about the

dairy business, Yili was interested in buying ingredients

for dairy products in the United States through Mature

Sky. She didn’t claim to be an agent of Yili, however.

Prescod asked Lei Wang to supply her with credit information about Yili. Lei Wang forwarded the request to

her cousin, who faxed what appeared to be (and for all

we know was) an authentic signed copy of Yili’s credit

statement.

Shortly afterward Mature Sky ordered a batch of a

whey protein concentrate from Schreiber at an agreed

price of $42,240. The transaction was a success, though

because of delay in transferring money from China Lei
No. 10-3762 3

Wang paid Schreiber with a check issued by her

automotive-parts company; she was reimbursed by

Mature Sky.

A few months later Lei Wang negotiated with Prescod

the sale by Schreiber to Mature Sky of 200 metric

tons of “Demineralized Whey Powder 70%” (D70), an

ingredient in infant formula. Schreiber set a price of

$603,000. Lei Wang told Prescod that although the

price was stiff, Yili was willing to pay it; the unmistakable implication—given the prior course of dealing—

was that Mature Sky would be buying the D70 on behalf

of Yili. Schreiber claims that this was a misrepresentation; that Yili was not committed to buying Schreiber’s

D70 from Mature Sky.

Although Schreiber had contracted to sell D70 to

Mature Sky, it decided to substitute Reduced Minerals

Whey Blend (RMW-2) without telling Yili, Mature

Sky, or either Wang about the substitution. It claims that

RMW-2 is materially identical to D70—yet a previous

shipment by Schreiber of RMW-2, to another Chinese

company, a deal also handled by Prescod, had failed

to clear customs in China; the customs officials

had declared that it didn’t satisfy the Chinese hygienic

standard for whey powder. Schreiber didn’t reveal this

contretemps to Yili or the others. It did send a sample

of RMW-2 to Mature Sky (of course without revealing

that it wasn’t D70) before the sale of the 200 metric tons

was consummated, and Mature Sky accepted it. But the

sample had been hand-blended in a laboratory to make

it look and taste just like D70, rather than being taken

from an RMW-2 production line.
4 No. 10-3762

We are disappointed that a company of Schreiber’s

standing (it has $3 billion in annual revenues) would

do what it did: substitute for the product specified in

its contract with Mature Sky, without disclosure, an

ingredient in infant formula that it knew had previously

been refused entry into China on hygienic grounds. In

any event the 200 metric tons were shipped, and apparently they made it through Chinese customs. But Yili

refused to accept the product, on the ground that “the

protein was lower, fat was higher, and . . . the flavor is

different” from what it had expected. Schreiber was

never paid, and refused to accept the return of the

product, for which apparently there was no market

because it was perishable and had deteriorated.

Schreiber’s contract was with Mature Sky rather than

with Yili, but Schreiber is not at present pursuing any

remedies it might have against Mature Sky. Instead it

claims that Lei Wang’s representation to Prescod that

Yili had agreed to buy the 200 metric tons from Mature

Sky was fraudulent; and it notes that Cade Wang gave

Lei Wang a 17.5 percent ownership interest in Mature

Sky and thus a financial stake in Mature Sky’s profits,

though she claims to have been unaware of the gift.

Without attempting to resolve any factual disputes, the

district judge ruled that even if Lei Wang did defraud

Schreiber, its suit against her was barred by the economicloss doctrine; whether this ruling was correct is the

only issue we need address.

The aspect of the doctrine that is applicable to this

case bars tort liability when the plaintiff has a contract
No. 10-3762 5

with the defendant and contract law provides an adequate remedy for the type of injury alleged. Courts

prefer parties to govern their relations through privately

negotiated contracts when that is feasible (that is, when

transaction costs—the costs of making an effective contract—are low), provided there are no third-party effects, as there are for example when the performance of

a contract causes pollution to third parties. Contracting

parties know their business better than a court can

and so can allocate risk and responsibility between them

more intelligently than a court could do. “[T]ort law is

a superfluous and inapt tool for resolving purely commercial disputes. We have a body of law designed for

such disputes. It is called contract law . . . . [C]ommercial 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. A disputant should

not be permitted to opt out of commercial law by

refusing to avail himself of the opportunities which that

law gives him.” Miller v. United States Steel Corp., 902

F.2d 573, 574-75 (7th Cir. 1990) (Wisconsin law); see

Daanen & Janssen, Inc. v. Cedarapids, Inc., 573 N.W.2d

842, 847-50 (Wis. 1998).

This branch of the economic-loss doctrine stems from

Seely v. White Motor Co., 403 P.2d 145, 150-51 (Cal. 1965).

The plaintiff in that case had bought a truck that turned

out to have defective brakes. The truck overturned but

the plaintiff was not hurt; nor was there damage to

any other property. He sued in both contract and tort to

recover repair costs and lost profits. The court held that
6 No. 10-3762

he was limited to suing for breach of warranty. Imposing

tort liability, which would be strict liability for a

product defect, would have prevented the parties to the

sale of a product from agreeing between themselves on

the allocation of the risk of a purely commercial loss, and

of the responsibility for trying to minimize it. “Had

defendant not warranted the truck, but sold it ‘as is,’ it

should not be liable for the failure of the truck to serve

plaintiff’s business needs.” Id. at 150. “To allow [the

plaintiff] to use tort law in effect to enforce an oral warranty would unsettle contracts by exposing sellers to the

risk of being held liable by a jury on the basis of selfinterested oral testimony and perhaps made to pay punitive as well as compensatory damages. This menace

is averted by channeling disputes into warranty (contract) law, where oral warranties can be expressly disclaimed, or extinguished by operation of the parol

evidence rule.” All-Tech Telecom, Inc. v. Amway Corp., 174

F.3d 862, 866 (7th Cir. 1999) (Wisconsin law).

But suppose the seller of the truck, knowing it was

defective, had told the plaintiff that it was in mint condition, and, thus reassured, the plaintiff had waived all

warranties in exchange for a lower price. That would be

a case in which a person had been induced to sign a

contract (or agree to particular provisions in a contract)

by fraud on the part of the other party. Many state

courts don’t apply the doctrine of economic loss in such

a case but instead permit the defrauded party to sue in

tort. Without such an exception “prospective parties to

contracts will be able to obtain legal protection against

fraud only by insisting that the other party to the
No. 10-3762 7

contract reduce all representations to writing, and

so there will be additional contractual negotiations,

contracts will be longer, and, in short, transaction costs

will be higher. And the additional costs will be incurred

in the making of every commercial contract, not just

the tiny fraction that end up in litigation.” Id. at 867; see

also Steven C. Tourek, Thomas H. Boyd & Charles J.

Schoenwetter, “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, 891-95 (1999). True, the parties

could include a clause warranting that they had made

no intentional misrepresentations in the course of negotiating the contract. But the negotiation of such a warranty would be complicated and engender suspicion.

The unavailability of punitive damages in contract cases

would also be a problem; because fraud is concealed,

punitive damages may be necessary for deterence. With

a tort suit for fraud as an option in the background of the

negotiations, parties can negotiate a limitation of liability for fraud if they want, as in Extra Equipamentos

e Exportação Ltda. v. Case Corp., 541 F.3d 719, 722-26

(7th Cir. 2008).

Several states, however, including Wisconsin, recognize only a very narrow fraud exception to the denial of

recovery for economic loss. (Exceptions that vary from

state to state are a common feature of the economicloss doctrine. See Anthony Niblett, Richard A. Posner &

Andrei Shleifer, “The Evolution of a Legal Rule,” 39 J. Legal

Stud. 325, 334-36 (2010).) These states hold that the fraud

must be “extraneous” to the contract, rather than “inter-
8 No. 10-3762

woven” with it, to be actionable as a tort. Wickenhauser

v. Lehtinen, 734 N.W.2d 855, 868-69 (Wis. 2007);

Kaloti Enteprises, Inc. v. Kellogg Sales Co., 699 N.W.2d 205,

219-20 (Wis. 2005); Digicorp, Inc. v. Ameritech Corp., 662

N.W.2d 652, 665-66 (Wis. 2003); John J. Laubmeier, Comment, “Demystifying Wisconsin’s Economic Loss Doctrine,” 2005 Wis. L. Rev. 225, 237-40; see also Huron Tool &

Engineering Co. v. Precision Consulting Services, Inc., 532

N.W.2d 541, 544-45 (Mich. App. 1995).

The extraneous versus interwoven formula is not pellucid, but the facts and analysis in the Kaloti Enterprises

case help us to understand it. Kellogg sold cereal to a

wholesaler, Kaloti, knowing that because Kaloti was

a wholesaler it was buying the cereal in order to resell

it to retailers. Kellogg did not tell Kaloti that it had

decided to sell cereal directly to Kaloti’s principal customers. As a result of that decision, those customers

refused to buy from Kaloti, preferring to buy directly

from Kellogg now that they could. The court held that

Kellogg’s implied representation to Kaloti that the latter

could resell the cereal (at a remunerative price: doubtless

at some price Kaloti could have unloaded the cereal on

the customers, who were not, so far as appears, required

to buy directly from Kellogg) was an “extraneous” fraud.

The implied representation did not concern Kellogg’s

performance of the contract, as it would have done had

it concerned the quality or character of the product,

but rather “a matter whose risk was never contemplated

to be a part of the contract”; it was “not a matter that

was dealt with in the contract, nor would one expect it

to be dealt with in the contract.” Kaloti Enteprises, Inc. v.

Kellogg Sales Co., supra, 699 N.W.2d at 220, 228.
No. 10-3762 9

The critical phrase is the last—“nor would one expect

it to be dealt with in the contract.” The rationale for the

broader fraud exception that a number of other states

have embraced is that fraud places the other party to

the contract at an information disadvantage. Now it is

true that parties to a contract often have unequal information going in, and ordinarily a party with superior

information is entitled to exploit it in negotiations.

(For a famous example, see Laidlaw v. Organ, 15 U.S.

(2 Wheat.) 178 (1817).) Otherwise businessmen’s incentives to obtain commercially valuable information, and

by doing so speed the adjustment of prices to new conditions of supply and demand, would be impaired.

Emerald Investments Limited Partnership v. Allmerica Financial Life Ins. & Annuity Co., 516 F.3d 612, 616-17 (7th Cir.

2008). But that is different from obtaining an information advantage over the other party to the contract by

fraud.

Yet as the Wisconsin courts recognize, not all frauds in

a contractual setting have that effect, and the fraud

alleged in this case is a good example of one that does

not. The falseness of a false representation by Lei Wang

that Yili wanted the 200 metric tons of (supposed)

D70 would undoubtedly reduce the probability that

Schreiber would ever collect the $603,000 sale price. But

that probability was always well below 100 percent. The

contract was with Mature Sky, an obscure middleman

in a foreign country, and had been procured for the

trader by the owner of a company in a business (auto

parts) unrelated to that of Schreiber or Mature Sky. The

trader was expecting to resell the product to another

Chinese company, one with which Schreiber had no
10 No. 10-3762

contract; and as far as Schreiber knew, if that company

(Yili) refused to buy the product from Mature Sky, the

latter would be unable to sell it to anyone else, and if it

became stuck with the product it might be unable or

unwilling to pay Schreiber. And finally Schreiber did not

ship the product that it had contracted to sell, and thus

assumed the risk that the product it did ship would turn

out not to be salable in China at all, which would

justify Mature Sky in refusing to accept it; and if it

refused, the product, being perishable, might be worthless and so a dead loss to Schreiber—as it turned out to be.

Schreiber acted recklessly in failing to take steps to

protect itself against a range of risks of nonpayment, of

which fraud by Lei Wang, one of the go-betweens, was

only one. The risk of nonpayment was so salient a risk

that one would expect it to have been dealt with in the

contract. It’s not as if contract law contains no

resources for dealing with such a matter. Schreiber could

have done many things to protect itself, such as

requiring Mature Sky or Yili to obtain a letter of credit

for Schreiber’s benefit guaranteeing payment by Mature

Sky; or obtaining a contractual guaranty from Yili; or

at the very least warning Mature Sky that it was

shipping RMW-2 rather than D70. Schreiber failed in

negotiating the contract to take elementary precautions

for an international shipment and now wants the

judiciary to bail it out.

Schreiber’s conduct thus came within the “interwoven”

exception to Wisconsin’s fraud exception to the doctrine

of economic loss and more broadly within the theory
No. 10-3762 11

behind the doctrine, which as we said is to require

private ordering of commercial relations where feasible

and not harmful to third parties. Just as “where there

are well-developed contractual remedies, such as the

remedies that the Uniform Commercial Code (in force

in all U.S. states) provides for breach of warranty of the

quality, fitness, or specifications of goods, there is no

need to provide tort remedies for misrepresentation,” AllTech Telecom, Inc. v. Amway Corp., supra, 174 F.3d at 865,

so when there are well-developed contractual means

of protecting against risk of nonpayment there is

likewise no need to provide tort remedies.

Schreiber invokes a second exception in Wisconsin law

to the economic-loss doctrine, however, and that is the

doctrine’s nonapplicability to contracts for the sale

of services rather than of goods. E.g., Insurance Co. of

North America v. Cease Electric Inc., 688 N.W.2d 462, 467-72

(2004). Most states do not apply the doctrine to providers of specified professional services, such as doctors,

lawyers, and architects. See, e.g., Bilt-Rite Contractors, Inc.

v. Architectural Studio, 866 A.2d 270, 284-85 (Pa. 2005)

(architects); Collins v. Reynard, 607 N.E.2d 1185, 1186-87

(Ill. 1992) (lawyers); Tommy L. Griffin Plumbing & Heating

Co. v. Jordan, Jones & Goulding, Inc., 463 S.E.2d 85, 88-89

(S.C. 1995) (engineers); Chew v. Paul D. Meyer, M.D., P.A.,

527 A.2d 828, 831-32 and n. 2 (Md. App. 1987) (doctors).

There is often an extreme asymmetry of information

between seller and buyer when the seller is the provider

of a professional service. Many clients don’t understand professional services and so cannot negotiate effectively for protection against providers’ negligence.
12 No. 10-3762

That is why the law imposes fiduciary duties on such

providers, duties that go beyond the duty of care

imposed by a negligence standard and require the

provider to treat his customer as well as he would want

to be treated himself.

The Supreme Court of Wisconsin has decided to

simplify the exception by extending it to all providers of

services, not just professionals. Insurance Co. of North

America v. Cease Electric Inc., supra, 688 N.W.2d at 472;

Shister v. Patel, 776 N.W.2d 632, 637 (Wis. App. 2009);

Andrew Gray, Note, “Drowning in a Sea of Confusion:

Applying the Economic Loss Doctrine to Component

Parts, Service Contracts, and Fraud,” 84 Wash. U. L. Rev.

1513, 1524-27 (2006). This opens the way for Schreiber’s

argument that Lei Wang is not protected by the doctrine because she was providing a service to Schreiber

rather than buying goods from it.

The defendant in Shister v. Patel was a real estate

broker; Lei Wang was a kind of broker. But the application of the doctrine to her would be perverse. Rather

than being more knowledgeable about the subject matter of the contract than Schreiber, she was less knowledgeable. Anyway the Wisconsin courts have already

tumbled to the fact that a literal interpretation of the

exception would be untenable because every sale of

goods involves the provision of service, if only by the

employees or other agents who negotiate the contract,

supervise performance, and so forth, and so the exception would swallow the rule (though often the employee

or other agent, but especially an employee, would be
No. 10-3762 13

judgment proof and so not worth suing). The Supreme

Court of Wisconsin has held therefore that the services

exception applies only if the contract is predominantly

one for services, Linden v. Cascade Stone Co., 699 N.W.2d

189, 193-94 (Wis. 2005)—which the contract between

Schreiber and Mature Sky was not. It was a contract for

the sale of goods. The provision of services was limited

to services normally involved in such sales, such as, in

this case, finding a seller of a product desired by

the agent’s principal.

Imposing liability on Lei Wang would not correct an

unjustifiable information asymmetry; it would plug no

other loophole in contract law either, since, as we said

earlier, Schreiber could easily have protected itself contractually against the risk of nonpayment that it seeks

ex post to shift to Lei Wang by invoking tort law.

AFFIRMED.

7-5-11