1 United States Court of Appeals,

Fifth Circuit.

No. 93-1577.

Zella HININGER, Individually and as Personal Representative of

the Estate of Thurlo Hininger, a/k/a Ted Hininger, PlaintiffAppellee/Cross-Appellant,

v.

CASE CORPORATION, et al., Defendants,

Can-Am Industries, Inc., Defendant-Appellant/Cross-Appellee.

June 22, 1994.

Appeals from the United States District Court for the Northern

District of Texas.

Before GOLDBERG, DAVIS, and DeMOSS, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

In this products liability action, plaintiff seeks to recover

her lost profits and repair costs resulting from the failure of

combine wheels manufactured by defendant and supplied to Case for

incorporation into the combines. The district court awarded

plaintiff recovery on her negligence claims and denied her recovery

on her implied warranty claims. Because we conclude that her

negligence claims are b arred by the "economic loss" rule, we

reverse that part of the court's judgment. Because we conclude

that she cannot assert an implied warranty claim for economic loss

against Can-Am, we affirm that part of the court's judgment.

I.

Zella and Thurlo Hininger operated a custom grain and seed

harvesting business. In January 1989, the Hiningers purchased four

combines from Parmer County Implement Company ("Parmer") in Friona,2

Texas. In September 1989, while working in Idaho, the Hiningers

had trouble maintaining air pressure in the drive wheel tires. As

a result, the combines were rendered inoperable, caus ing the

Hiningers to experience downtime and suffer losses which the jury

found to total $70,340.

The manufacturer of the combines, Case Corporation ("Case"),

replaced two of the drive wheels in the fall of 1989 and replaced

the other six in April 1990. The replacement wheels, however,

began to crack around the bolt holes in September 1990. As a

result, the Hiningers again experienced downtime and suffered

losses, which the jury found to t otal $46,500. The original and

repla cement wheels were manufactured by Can-Am Industries ("CanAm" ) in Illinois and were delivered to Case in Illinois. The

Hiningers had no contact with Can-Am in connection with the

purchase of the combines.

On May 6, 1991, Mrs. Hininger filed suit in her individual

capacity and as representati ve of her husband's estate, seeking

re covery on theories of negligence, strict liability, breach of

warranty, and violation of the Texas Deceptive Trade Practices Act

("DTPA"). Mrs. Hininger sought damages for lost profits, lost

contracts, and repair costs from Parmer, Case, Can -Am, and Case

Credit Corporation resulting fromthe failure of the combine

wheels.

In August 1992, Mr s. Hininger settled with all of the

defendants except Can-Am. The district court then ruled that Texas

law applied to her tort claims, as well as to her contract claims.3

Following a trial in January 1993, the jury found for Mrs. Hininger

on her breach of warranty and negligent manufacturing claims.

H owever, in response to Can-Am's motion for judgment n.o.v., the

district court limited Mrs. Hininger's recovery to her negligence

claims.

II.

A.

Can-Am argues first that the district court erred in applying

Texas law to Mrs. Hininger's tort claims. Can-Am asserts that

Idaho and Illinois ha ve the most significant contacts with this

case, and that their laws would not allow Mrs. Hininger to recover

her lost profits and repair costs in tort. Because Mrs. Hininger

does not contest this interpretation of Idaho and Illinois law and

because we conclude below that Texas law also disallows the

recovery of such damages in tort, we need not dec ide whether the

district court erred in applying Texas law. See Eugene F. Scoles

& Peter Hay, Conflict of Laws 17 (1984) (" "false conflict' exists

when the potentially applicable laws do not differ").

B.

Can-Am argues that the district court erred in allowing Mrs.

Hininger to recover her lost profits and repair co sts resulting

from Can-Am's negligence in manufacturing the combine wheels. For

the reasons t hat follow, we agree with Can-Am's argument and

therefore reverse this part of the court's judgment.

In Nobility Homes of Te xas, Inc. v. Shivers, 557 S.W.2d 77

(Tex.1977), the Texas Supreme Court held that a purchaser of a1 As the court explained, economic losses can be either

direct or consequential:

Direct economic loss may be said to encompass

damage based on insufficient product value; thus,

direct economic loss may be "out of pocket"—the

difference in value between what is given and

received—or "loss of bargain"—the difference between

the value of what is received and its value as

represented. Direct economic loss also may be measured

by costs of replacement and repair. Consequential

economic loss includes all indirect loss, such as loss

of profits resulting from inability to make use of the

defective product.

Nobility Homes, 557 S.W.2d at 78 n. 1 (quoting Note,

Economic Loss in Products Liability Jurisprudence, 66

Colum.L.Rev. 917, 918 (1966)).

4 defective mobile home could not recover the difference between the

unit's reasonable market value and its purchase price from the

manufacturer based on a strict liability theory. In so holding,

the c ourt adopted the "economic loss" rule, which requires

plaintiffs to recover their economic losses resulting from a

defective product in contract rather than in tort. 1 The court

explained that the Unif orm Commercial Code was "drafted

specifically to govern commercial losses and obviously provides the

proper remedies to recover such losses." I d. at 80; s ee generally

Marshall S. Shapo, T he Law of Products Liability ¶ 27.01 et s eq.

(1987); J. Hadley Edgar, Jr. & James B. Sales, Texas Torts and

Remedies § 40.04[3] (1994).

In Arkwright-Boston Manufacturers Mutual Insurance Co. v.

Westinghouse Electric Corp., 844 F.2d 1174, 1177-78 (5th Cir.1988),

we held that, under Texas law, a plaintiff cannot recover economic

losses resulting from a defective product based on a n egligence2 The United States Supreme Court, in East River S.S. Corp.

v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S.Ct. 2295, 90

L.Ed.2d 865 (1986), surveyed the law in this area and adopted a

similar rule for admiralty cases: a purchaser cannot recover its

economic losses resulting from a defective product from a

manufacturer in tort.

5 theory. In that case, a blade in an electrical turbine broke,

causing extensive damage to the turbine. For purposes of our

decision, we assumed the ma nufacturer's negligence, but denied

plaintiff recovery because it was only seeking to recover its

economic loss. See i d. We concluded that the magistrate judge had

properly granted defendant's summary judgment motion on the ground

that: "Texas law does not permit recovery under a negligence

theory for economic loss resulting from damages to a defective

product." Id. 2

In deciding Arkwright-Boston, we relied on the Texas Supreme

Court's decision in Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617

(Tex.1986). In that case, plaintiffs sought recovery for a

defective home. They complained of defendant's negligent

supervision of the construction of the home. In concluding that

plaintiffs could not recover punitive damages, the court held that:

The nature of the injury most often determines which duty or

duties are breached. When the injury is only the economic

loss to the subject of a contract itself, the action sounds in

contract alone.

Id. at 618; see also Southwestern Bell Tel. Co. v. DeLanney, 809

S.W.2d 493, 494 (Tex.1991) ("When the only loss or damage is to the

subject of the contract , the plaintiff's action is ordinarily on

the contract."); s ee generally William Powers, Jr. & Margaret

Niver, Negligence, Breach of Contract, and the "Economi c Loss"6

Rule, 23 Tex.Tech L.Rev. 477 (1992).

However, because Can-Am did not manufacture the combines, but

rather supplied the w heels to Case to incorporate into the

combines, the question remains: Can Mrs. Hininger recover her

economic losses from Can-Am in tort?

Initially, it is clear to us that most of the reasoning that

led the Texas Supreme Court to reject an action in tort against a

manufacturer of a finished product for economic loss supports the

denial of a similar action against a component supplier. Thus, we

believe that a reject ion of Mrs. Hininger's tort action against

Can-Am is consistent with the Tex as Supreme Court's reasoning in

Nobility Homes.

In K ing v. Hilton-Davis, 855 F.2d 1047 (3d Cir.1988), cert.

denied, 488 U.S. 1030, 109 S.Ct. 839, 102 L.Ed.2d 971 (1989), the

Third Circuit addressed the same question and concluded that, under

Pennsylvania law, a p laintiff cannot recover her economic losses

resulting from a defective p roduct from a component supplier in

tort. In that case, plaintiffs alleged that their potato crop had

failed because the seed potatoes they p urchased that spring had

been treated with a defective sprout suppressant. I d. at 1048.

The grower from whom plaintiffs purchased the potatoes had used a

sprout suppressant manufactured by defendant. Id. at 1049.

In analyzing plaintiffs' suit against the manufacturer of the

sprout suppressant, the court noted that defendant was "a component

supplier who is remote from the plaintiff in the production and

distribution chain." I d. at 1053 . The court gave a number of7

reasons for rejecting plaintiffs' tort claims against the component

supplier. First, if plaintiffs had a warranty claim against the

component supplier, they should be required to pursue that claim in

order to preserve "private risk allocation" so that "manufacturers

of products or components thereof will not be exposed to open-ended

and indefinite liability." I d. at 1054. Second, even if

plaintiffs did not have a valid warranty claim against the

component supplier, they would still have "a warranty claim against

the immediate seller that ... will give the purchaser the benefit

of its bargain." Id. Finally, the court concluded that, even if

plaintiffs could not assert a val id warranty claim against their

immediate seller, they st ill should not be allowed to recover

against the component part supplier in tort because:

Implicit in the [economic loss rule] is the p olicy judgment

that in a commercial context the possibility of an inadequate

recovery

... does not justify permitting a tort recovery that

will allow a purchaser to reach back up the production and

distribution chain, thereby disrupting the risk allocations

that have been worked out in the transactions comprising that

chain.

Id.; see also Nathaniel Shipping, Inc. v. General Elec. Co., 920

F.2d 1256, 1265 (5th Cir.1991) (economic loss rule app lies in

admiralty despite lack of privity); S hipco 2295, Inc. v. Avondale

Shipyards, Inc., 825 F.2d 925 (5th Cir.1987); C asa Clara

Condominium Ass'n v. Charley Toppino & Sons, Inc., 620 So.2d 1244

(Fla.1993).

We find the Third Circuit's reasoning to be persuasive and are

convinced that the Texas Supreme Court would adopt this position.

We therefore conclude that the district court erred in allowing8

Mrs. Hininger to recover her lost profits and repair costs from

Can-Am based on a negligence theory.

C.

On cross-appeal, Mrs. Hininger contends that the district

court erred in dismissing her implied warranty of merchantability

claim. The district court held that:

In this case, it is clear that th e bargained-for

expectation of Pl aintiff was a complete and functional Case

combine. Plaintiff points to no evidence that the Hiningers

expected anyone other than Case and/or Parmer to resolve their

problems with the defective wheels. Both Case and Parmer took

affirmative action in an attempt to resolve the wheel

problems; Can-Am was not consulted and did not participate in

the repair attempts. Plaintiff cites no Texas cases extending

liability to a component part supplier in the circumstances of

this case. For this reason, the Court concludes that there is

no contractual liability to Plaintiff for Can-Am.

Because we agree that Mrs. Hining er cannot assert an implied

warranty claim for economic loss against Can-Am, we affirm the

district court's dismissal of this claim.

Under Texas law, a warranty of merchantability is implied in

e very contract for the sale of goods by a merchant, unless the

warranty is properly excluded or modified. V.T.C.A. Bus. & C. §

2.314(a). The warranty of merchantability may be disclaimed or

modified by the merchant, provided that: (1) the disclaimer is in

writing; (2) it is conspicuous; and (3) it expressly mentions the

term "merchantability." V.T.C.A. Bus. & C. § 2.316(b).

A number of states make privity a requirement for asserting

an implied warranty claim for economic loss. See Barkley Clark &

Christopher Smith, The Law of Product Warranties ¶ 10.03[3] (1984

& 1993 Supp.); Robert E. Cartwright & Jerry J. Phillips, P roducts3 Mrs. Hininger does not contend that she and her husband had

any contact with Can-Am, that Can-Am's name was on the wheels, or

that Can-Am advertised its product to the public at-large. See

Spring Motors Distrib., Inc. v. Ford Motor Co., 98 N.J. 555, 489

A.2d 660, 676-77 (1985).

9 Liability § 2.26 (1986). However, in N obility Homes, the Texas

S upreme Court held that: "a manufacturer can be responsible,

without regard to privity, for the economic loss which results from

his breach of the Uniform Commercial Code's implied warranty of

merchantability." 557 S.W.2d at 81. Thus, the Texas Supreme Court

dispensed with the privity requirement and permitted a purchaser to

assert an implied warranty claim for economic loss against a remote

manufacturer of a finished product.

Today's case, however, presents a related, but different

question: Can a purchaser go upstream from the manufacturer of the

finished product and assert an implied warranty claim for economic

loss against a manufacturer of a component part? Although we find

no Texas authorities directly addressing this question, we believe

that the experienced Texas district judge i n this case properly

distinguished between the manufacturer of the finished product and

the component part manufacturer. She reasoned that the Hiningers

bargained for a "complete and functional Case combine," not wheels

and axles and all the myriad components that make up the combine.

Thus, the district court conclude d that the Hiningers had no

expectation t hat Can-Am or any of the other manufacturers of

unbranded c omponents would resolve any problem they might

experience with the combines. 3 S ee also William K. Jones, Product

Defects Causing Commercial Loss: The Ascendancy of Contract over10

Tort, 44 U.Miami L.Rev. 731, 789-93 (1990).

In a general maritime law case dealing with a related problem,

we reached a similar conclusion: "The buyer ordinarily has no

interest in how or where the manu facturer obtains individual

components. The buyer is usually interested in the quality of the

finished product and is content to let the manufacturer decide

whether to do all the work or delegate part of it to others."

Shipco 2295, 825 F.2d at 929.

Moreover , we believe that the reasoning of N obility Homes

supports the district court's conclusion that Mrs. Hininger cannot

assert an implied warranty claim against Can-Am. In explaining its

holding, the Nobility Hom es court recognized that a number of

states still require a purchaser to show privity with the defendant

to assert an implied warranty claim for economic loss, but that:

Courts which have declined to ove rturn the privity

requirement in warranty actio ns for economic loss ... fear

that holding manufacturers liable for eco nomic loss imposes

unlimited and unforeseeable liability upon manufacturers.

These fears are justified when manufacturers are held strictly

liable for economic loss under the terms of section 402A of

the Restatement (Second) of Torts. But, these fears are not

justified when manufacturers are held liable by the Uniform

Commercial Code because the Code, itself, protects

manufacturers against unlimited and unforeseeable liability.

First, the Unif orm Commercial Code allows manufacturers to

restrict their liability by the exclusion or modification of

both implied and express warranties.... Second,

m anufacturers' liability is restricted by the very terms of

the Uniform Commercia l Code sections which furnish the

consumer's implied warranty remedies....

557 S.W.2d at 82.

Thus, the court in Nobility Homes reasoned that a purchaser

cannot maintain a strict liability action for economic loss, in

part, because of the unlimited and unforeseeable liability it would11

impose on manufacturers . However, the court concluded that a

manufacturer's ability to limit its warranty exposure permitted it

to protect itself against unlimited and unforeseeable liability and

distinguished the warranty action from the strict liability action.

We read this as an important justification for the Nobility Homes

court's decision to dispense with the privity requirement and allow

a purchaser to assert an implied warranty claim for economic loss

against a remote manufacturer.

Clark v. DeLaval Separator Corp., 639 F.2d 1320 (5th Cir. Unit

A 1981), illustrates our point. In that case, we applied N obility

Homes and hel d a remote manufacturer liable for the ultimate

purchaser's economic loss based on the manufacturer's breach of the

implie d warranty of merchantability. We observed that a remote

manufacturer can effectively disclaim its warranty liability either

by including a discl aimer in the materials that accompany the

product or by insisting that the retailer include the

manufacturer's disclaimer in the sales contract with the consumer.

Id. at 1324.

However, as Judge Logan observed in Patty Precision Products

Co. v. Brown & Sharpe Manufacturing Co., 846 F.2d 1247 (10th

Cir.1988), it may be difficult or even impossible for a component

supplier to disclaim its warranty liability:

The difficulty of notifying ultimate purchasers is exacerbated

if the manufactur er has produced a component rather than a

finis hed product. Components are often hidden within the

product, making it difficult or i mpossible for the

manufacturer to notify ultimate purchasers by posting

disclaimers on the product itself. Further, while the

manufacturer before us, G.E., may b e economically powerful

enough to require someone like Brown & Sharpe to notify all4 In light of this finding, we need not address the viability

of Mrs. Hininger's DTPA claim. See La Sara Grain Co. v. First

Nat'l Bank of Mercedes, 673 S.W.2d 558, 565 (Tex.1984) (DTPA

"does not create any warranties; therefore any warranty must be

established independently of the act.").

12 purchasers of the warranty limitation, the typical component

part manufacturer will be selling to a larger entity which it

cannot reasonably be expected to control.

Id. at 1257 (Logan, J., concurring in part and dissenting in part).

In sum, we believe that the Texa s Supreme Court would

distingui sh between the manufacturer of the finished product and

the component supplier because of the component supplier's

inability to disclaim its warranty l iability effectively. This

distinction, together with the Hiningers' lack of any expectation

that Ca n-Am, the upstream component supplier, would respond to

defects in the finished product, lead us to agree with the district

court that Mrs. Hininger has no implied warranty action against

Can-Am. 4

III.

For the reasons stated above, we affirm the district court's

dismissal of Mrs. Hininger's implied warranty claims, but reverse

the district court's judgment awarding Mrs. Hininger recovery on

her negligence claims and render a take-nothing judgment in favor

of Can-Am.

AFFIRMED in part; REVERSED and RENDERED in part.