Title: Digicorp, Inc. v. Ameritech Corporation
Citation: 2003 WI 54
Docket Number: 2001AP001833
State: Wisconsin
Issuer: Wisconsin Supreme Court
Date: June 3, 2003

2003 WI 54 
 
 
 
SUPREME COURT OF WISCONSIN 
 
 
 
 
 
CASE NO.: 
01-1833 & 01-2258 
 
 
COMPLETE TITLE: 
 
 
Digicorp, Inc., a Wisconsin corporation,  
 
Plaintiff-Respondent-Cross-Appellant, 
The Cincinnati Insurance Company,  
 
Intervening-Plaintiff, 
 
v. 
Ameritech Corporation,  
 
Defendant-Third-Party Plaintiff-Appellant- 
 
Cross-Respondent-Petitioner, 
Dann Krinsky,  
 
Defendant, 
 
v. 
Bacher Communications, Inc.,  
 
Third-Party Defendant-Respondent. 
 
 
 
Digicorp, Inc., a Wisconsin corporation,  
 
Plaintiff, 
The Cincinnati Insurance Company,  
 
Intervening-Plaintiff, 
 
v. 
Ameritech Corporation,  
 
Defendant-Third-Party Plaintiff-
Respondent- 
 
Cross-Appellant-Petitioner, 
Dann Krinsky,  
 
Defendant, 
 
v. 
Bacher Communications, Inc.,  
 
Third-Party Defendant-Appellant-Cross- 
 
Respondent. 
 
 
 
 
REVIEW OF A DECISION OF THE COURT OF APPEALS 
Reported at:  256 Wis. 2d 1046, 650 N.W.2d 321 
(Ct. App. 2002-Unpublished) 
 
 
OPINION FILED: 
June 3, 2003   
SUBMITTED ON BRIEFS: 
        
ORAL ARGUMENT: 
January 23, 2003   
 
 
SOURCE OF APPEAL: 
 
 
COURT: 
Circuit   
 
COUNTY: 
Brown   
 
 
2
 
JUDGE: 
William C. Griesbach   
 
 
 
JUSTICES: 
 
 
CONCURRED: 
        
 
CONCURRED/DISSENTED: SYKES, J., concurred in part, dissented in part 
(opinion filed). 
 
DISSENTED: 
BRADLEY, J., dissented (opinion filed). 
BABLITCH, J., joined dissent.   
 
NOT PARTICIPATING: 
ABRAHAMSON, C.J., and WILCOX, J., did not 
participate.   
 
 
 
ATTORNEYS: 
 
For Ameritech Corporation there were briefs by Michael B. 
Apfeld, Daniel T. Flaherty, Craig A. Kubiak and Godfrey & Kahn, 
S.C., Appleton, and oral argument by Michael B. Apfeld. 
 
For Bacher Communications, Inc., there was a brief by 
Gregory J. Cook, Anthony P. Hahn, and Kasdorf, Lewis & Swietlik, 
S.C., Wausau, and oral argument by Gregory J. Cook. 
 
For Digicorp, Inc., there was a brief by Victor E. 
Plantinga, Douglas W. Rose, and Rose & Dejong, S.C., Brookfield, 
and oral argument by Victor E. Plantinga. 
 
Am amicus curiae brief was filed by Edward E. Robinson, 
Charles David Schmidt, and Cannon & Dunphy S.C., Brookfield, on 
behalf of the Wisconsin Academy of Trial Lawyers. 
 
 
2003 WI 54 
NOTICE 
This opinion is subject to further 
editing and modification.  The final 
version will appear in the bound 
volume of the official reports.   
No.  01-1833 & 01-2258  
(L.C. No. 
98CV1312 & 99CV919) 
STATE OF WISCONSIN  
 
 
   : 
IN SUPREME COURT 
 
 
Digicorp, Inc., a Wisconsin corporation,  
 
          Plaintiff, 
 
The Cincinnati Insurance Company,  
 
          Intervening-Plaintiff, 
 
     v. 
 
Ameritech Corporation,  
 
          Defendant-Third-Party Plaintiff- 
          Respondent-Cross-Appellant- 
          Petitioner, 
 
Dann Krinsky,  
 
          Defendant, 
 
     v. 
 
Bacher Communications, Inc.,  
 
          Third-Party Defendant-Appellant- 
          Cross-Respondent. 
 
FILED 
 
JUNE 3, 2003 
 
Cornelia G. Clark 
Clerk of Supreme Court 
 
 
 
 
 
REVIEW of a decision of the Court of Appeals.  Reversed and 
cause remanded to the circuit court.   
 
No. 
01-1833 & 01-2258   
 
2 
 
¶1 
N. 
PATRICK 
CROOKS, 
J.   Ameritech 
Corporation 
(Ameritech) seeks review of a court of appeals' decision that 
affirmed the circuit court's judgment, entered on the jury's 
verdict, awarding damages to Digicorp, Inc., (Digicorp) for 
Ameritech's 
breach 
of 
contract 
and 
intentional 
misrepresentation.  The jury also awarded damages to Bacher 
Communications, 
Inc., 
(Bacher) 
for 
Ameritech's 
intentional 
misrepresentation made by one Ray Taylor (Taylor), an Ameritech 
employee. 
¶2 
This court is presented with the question of whether 
Wisconsin recognizes a fraud in the inducement exception to the 
economic loss doctrine, and if so, what the elements of that 
exception are.  In addition, we must determine whether one may 
avoid the application of the economic loss doctrine due to an 
absence of contractual privity, and whether recovery of the 
benefit of the bargain is prohibited where a fraud in the 
inducement exception applies and tort remedies are sought. 
¶3 
We hold that Wisconsin recognizes a narrow fraud in 
the inducement exception to the economic loss doctrine such as 
the one adopted in Huron Tool and Engineering Co. v. Precision 
Consulting Services, Inc., 209 Mich. App. 365, 532 N.W.2d 541 
(1995).  This rule is not as broad as the rule adopted by the 
court of appeals in Douglas-Hanson Co. v. BF Goodrich Co., 229 
Wis. 2d 132, 598 N.W.2d 262 (Ct. App. 1999), which we reviewed 
and which resulted in a three-to-three vote on this court and a 
No. 
01-1833 & 01-2258   
 
3 
 
per curiam opinion,1 Douglas-Hanson Co. v. BF Goodrich Co., 2000 
WI 22, 233 Wis. 2d 276, 607 N.W.2d  621.  We hold, consistent 
with the decision in Huron Tool, that the economic loss doctrine 
acts as a bar where the fraud in the inducement is interwoven 
with the contract in that it involved matters for which risks 
and responsibilities were addressed.  Such matters must not be 
extraneous to the contract. 
¶4 
In addition, we hold that the language of Daanen & 
Janssen, 
Inc. 
v. 
Cedarapids, 
Inc., 
216 
Wis. 2d 395, 
573 
N.W.2d 842 (1998), is clear that the economic loss doctrine 
generally precludes recovery in tort for solely economic losses, 
regardless of whether privity of contract exists between the 
parties.  We also hold that recovery of the benefit of the 
bargain is not permissible where the fraud in the inducement 
exception applies and tort remedies are sought. 
                                                 
1 Because this court was evenly divided, the court of 
appeals' decision in Douglas-Hanson was affirmed.  See Smith v. 
State, 41 Wis. 2d 145, 163 N.W.2d 8 (1968).  
No. 
01-1833 & 01-2258   
 
4 
 
¶5 
Accordingly, we reverse the court of appeals' decision 
and remand to the circuit court for a new trial limited to 
contract remedies.2 
I. 
FACTUAL AND PROCEDURAL BACKGROUND 
¶6 
 The factual and procedural background of this case is 
extensive and complicated.  Digicorp, an authorized Ameritech 
distributor,3 
contracted 
Ameritech 
for 
approval 
to 
sell 
Ameritech's calling services and calling plans known as "Value-
Link"4 through a third party, Bacher Communications, which was 
                                                 
2 A majority of this court, Justices Crooks, Prosser and 
Sykes, rejects the broad exception that the court of appeals 
adopted in Douglas-Hanson.  However, because Justice Sykes would 
not adopt any fraud exception, there is also a majority of this 
court, Justices Bradley, Bablitch and Sykes, that rejects the 
narrow exception that was adopted by the Huron Tool court.  Two 
Justices, Bradley and Bablitch, dissent stating that the 
Douglas-Hanson exception should apply.  A majority holds that a 
fraud in the inducement exception to the economic loss doctrine 
exists, but there is an even split as to what the fraud in the 
inducement exception entails.  While four Justices agree that 
there should be an exception, only two Justices, Crooks and 
Prosser, agree that the Huron Tool exception should be adopted.  
Chief Justice Abrahamson and Justice Wilcox did not participate 
in this case.   
3 As noted by the court of appeals, because Bacher was not 
an authorized distributor, it could not receive commissions on 
the sales 
of 
Ameritech 
products. 
 
In order 
to receive 
commissions, Bacher was required to enter into a sub-agency 
agreement with an existing authorized distributor to sell the 
products under the authorized distributor's agreement.  See 
Digicorp, Inc. v. Ameritech Corp., Nos. 01-1833, 01-2258, 
unpublished slip op., ¶8 (Wis. Ct. App. June 11, 2002).   
4 The court of appeals in their opinion referred to the plan 
as "Valu-Link;" the actual contract in the record shows it 
spelled "Value-Link." 
No. 
01-1833 & 01-2258   
 
5 
 
not an Ameritech-authorized distributor.5  Digicorp and Bacher, 
however, had a pre-existing relationship.  During the course of 
discussions with Digicorp, an Ameritech employee, Ray Taylor 
(Taylor), failed to inform Digicorp that one of Bacher's 
salesmen, Dann Krinsky (Krinsky) had engaged in fraudulent acts 
of forging customers' signatures when Krinsky had worked for 
Northeast Communications (NCS), another authorized Ameritech 
distributor.  (Krinsky was the person who initially approached 
Bacher with the suggestion that Bacher distribute Ameritech's 
Value-Link plan through Digicorp.)  Unaware of Krinsky's past 
fraudulent 
actions, 
Digicorp 
entered 
into 
an 
agreement, 
superseding its earlier one with Ameritech, and incorporating 
Bacher (and its employees) as part of the distribution plan for 
Ameritech products. 
¶7 
On April 30, 1996, Taylor sent a letter to Digicorp's 
President, Stewart Clark (Clark), outlining the conditions for 
that company and Bacher's use of what was referred to as "1099 
employees."  The letter stated, among other things, that a sales 
person had to be approved and certified by Ameritech.  In 
addition, the letter said that Ameritech required those sales 
people to be 1099 employees of the authorized distributor, and 
                                                 
5 The Value-Link plan allows a small business to pay lower 
per-minute charges for local long distance in exchange for 
guaranteed minimum usage. If the customer did not use the 
minimum number of minutes required by the contract by the end of 
the contract, the customer would be billed the difference 
between what minutes it actually used and the amount it had 
agreed to use.  See Digicorp, ¶5 n.2. 
No. 
01-1833 & 01-2258   
 
6 
 
to 
represent 
themselves 
as 
employees 
of 
the 
authorized 
distributor when they sold Ameritech's services.  As such, the 
letter set forth Ameritech's expectation that Digicorp would be 
responsible for the actions of its 1099 employees.   
¶8 
On June 1, 1996, Digicorp and Ameritech signed a Non-
Exclusive Authorized Distributor Agreement.  The agreement 
contained a provision that either party could terminate the 
agreement.  The agreement contained a specific provision to the 
effect that Ameritech could terminate the contract without any 
notice, 
in 
the 
event 
that 
Digicorp 
submitted 
any 
sales 
agreements 
subsequently 
found 
to 
contain 
forged 
customer 
signatures.  This provision was new and had not been included in 
previous contracts between Ameritech and Digicorp.  
¶9 
Krinsky, through his employment at Bacher, continued 
to sell Ameritech Value-Link plans as one of Digicorp's 1099 
employees.  A few weeks later, an Ameritech employee discovered 
that 
the 
customer 
signatures 
on 
two 
Ameritech 
contracts 
submitted by Krinsky were forgeries.  Digicorp was notified of 
the investigation; Krinsky then quit Bacher. 
¶10 Bacher thereafter retrieved the Ameritech contracts 
from Krinsky's files and discovered that, during the two and a 
half months Krinsky had been employed by Bacher, only two or 
three of the over 250 Value-Link contracts he sold had genuine 
signatures. All of the rest were forged.  Krinsky was ultimately 
No. 
01-1833 & 01-2258   
 
7 
 
charged with and convicted of forging contracts, and after 
pleading no contest was sentenced to six months in jail.6 
¶11 In October 1996, about three months after the forged 
contracts were first discovered, Ameritech exercised its right 
under its agreement with Digicorp and terminated Digicorp's 
status as an Ameritech authorized distributor.  Following that,  
Bacher was unable to sell Ameritech products. 
¶12 Digicorp thereafter commenced a lawsuit against Bacher 
to recover damages based on Bacher's hiring and supervision of 
Krinsky.  After Digicorp determined that Ameritech (through 
Taylor) had been aware of Krinsky's previous forgeries, when he 
had been employed by another Ameritech distributor, Digicorp 
filed suit against Ameritech and alleged breach of contract, 
intentional 
misrepresentation, 
strict 
liability 
misrepresentation, negligent misrepresentation, and negligence 
by Ameritech.  Digicorp also claimed it was entitled to punitive 
damages from Ameritech.  It dismissed its suit against Bacher. 
¶13 Ameritech counterclaimed, alleging breach of contract, 
indemnification, intentional misrepresentation, strict liability 
misrepresentation, 
negligent 
misrepresentation, 
negligent 
hiring, training and supervision, and unjust enrichment.  In 
addition, Ameritech filed a third party complaint against 
Bacher, alleging the same claims it asserted against Digicorp 
with the exception of its claim for indemnification.  
                                                 
6 Evidence at trial showed that Krinsky submitted as many as 
400 forged contracts while employed at Northeast Communications 
(NCS), an authorized Ameritech distributor, and at Bacher.  
No. 
01-1833 & 01-2258   
 
8 
 
¶14 Bacher filed a counterclaim against Ameritech alleging 
strict liability misrepresentation, negligent misrepresentation, 
wrongful litigation, negligent hiring and supervision, breach of 
contract and secret rebates; it did not seek punitive damages. 
¶15 Thereafter, 
Ameritech 
moved 
for 
summary 
judgment 
arguing, among other things, that all of the pending tort claims 
were barred by the economic loss doctrine.  The circuit court 
dismissed Digicorp's claims of negligence and Bacher's claims 
for negligent supervision against Ameritech; however, the court 
withheld ruling on the economic loss doctrine and allowed the 
remaining claims to go to trial.  During an eight-day trial, 
Bacher was allowed to amend its pleadings to conform to the 
evidence claiming against Ameritech on a theory of intentional 
misrepresentation as well.  The circuit court refused to apply 
the economic loss doctrine and allowed the remaining claims to 
go to the jury.   The circuit court reasoned that Ameritech's 
fraudulent activities, through Taylor's actions, placed this 
case within the fraudulent inducement exception to the economic 
loss doctrine.  The circuit court stated: 
Fraud and deceit, it seems to me is the very 
antithesis of the purposes underlying [the economic 
loss] doctrine.  One who acts fraudulently prevents 
the parties from freely allocating risk by deceiving 
the other party about the nature of the risk that is 
being allocated or even creating the risk after the 
contract is entered into; it's inimical to the very 
kind of good faith bargaining that should take place 
between 
contracting 
parties . . . and 
that 
the 
Economic Loss Doctrine is intended to further and 
protects.   
No. 
01-1833 & 01-2258   
 
9 
 
Digicorp, Inc. v. Ameritech Corp., Nos. 01-1833, 01-2258, 
unpublished slip op., ¶39 (Wis. Ct. App. June 11, 2002). 
¶16 The jury returned a special verdict answering all 
liability questions in the affirmative and awarding damages.  
Digicorp was awarded $13,080 for Ameritech's breach of contract, 
$254,926.83 for Ameritech's intentional misrepresentation, and 
$139,051 in punitive damages.  Bacher was awarded $100,000 for 
Ameritech's misrepresentation.  Ameritech was awarded $46,573.30 
for Digicorp's breach of contract and $5,000 for Bacher's 
negligent 
hiring, 
training, 
and 
supervision 
of 
Krinsky.  
However, that $5,000 award was "negated by the contributory 
negligence" found by the jury to have been 20% for Bacher and 
80% for Ameritech.  Digicorp, unpublished slip op., ¶33.   The 
circuit court denied all motions after verdict and affirmed the 
jury's verdict with one, non-material, correction.   
¶17 Digicorp, Ameritech and Bacher all appealed or cross-
appealed, and the appeals were consolidated.  The court of 
appeals agreed with the circuit court and held that Ameritech's 
fraud, as found by the jury, placed this case within the 
fraudulent inducement exception to the economic loss doctrine 
first recognized by the court of appeals in Douglas-Hanson Co. 
v. BF Goodrich Co., 229 Wis. 2d 132, 149, 598 N.W.2d 262 (Ct. 
App. 1999).  The court of appeals also held that the economic 
loss doctrine did not apply to the third party cross-respondent, 
Bacher Communications, because Bacher and Ameritech did not have 
a contractual relationship; they were not in privity with each 
other.  
No. 
01-1833 & 01-2258   
 
10 
 
¶18 The court of appeals reversed the award of damages to 
Ameritech for Digicorp's breach of contract, but affirmed the 
judgment in all other respects, thus allowing recovery of the 
benefit of the bargain despite application of a fraud in the 
inducement exception.  
¶19 Ameritech petitioned this court, and obtained review 
on September 18, 2002. 
¶20 This court is presented with the following issues:  
(1) Does Wisconsin law recognize the so-called “fraud 
exception” to the economic loss doctrine and, if so, 
what are its elements? 
(2) May a subcontractor of the party to whom the 
alleged 
misrepresentations 
were 
made 
avoid 
the 
operation of the economic loss doctrine because it was 
not in contractual privity with the party that made 
the alleged misrepresentation? 
(3)  Assuming that the economic loss doctrine does not 
bar a given claim for fraud in the inducement of a 
contract, may the allegedly defrauded party recover 
the 
benefit 
of 
the 
bargain 
premised 
upon 
the 
continuing vitality of the contract? 
¶21 With respect to the first issue, we answer in the 
affirmative.  Wisconsin recognizes a narrow fraud in the 
inducement exception, such as the one adopted in Huron Tool and 
Engineering Co. v. Precision Consulting Services, Inc., 209 
Mich. App. 365, 532 N.W.2d 541 (1995).  This exception is not as 
broad as the one set forth by the court of appeals in Douglas-
Hanson Co. v. BF Goodrich Co., 229 Wis. 2d 132, 598 N.W.2d 262 
(1999).  We hold that, consistent with the on Huron Tool 
decision, the economic loss doctrine acts as a bar where the 
fraud is interwoven with the contract, and not extraneous to it.   
No. 
01-1833 & 01-2258   
 
11 
 
¶22 With respect to the second issue, this court answers 
in the negative.  The language in Daanen & Janssen, Inc. v. 
Cedarapids, Inc., 216 Wis. 2d 395, 573 N.W.2d 842 (1998), is 
clear.  The economic loss doctrine precludes recovery in tort 
for solely economic losses, regardless of whether privity of 
contract exists between the parties.   
¶23 We also answer the third issue in the negative, based 
on consistent interpretations of Wisconsin case law prohibiting 
recovery for the benefit of the bargain under the circumstances 
set forth.  Where the fraud in the inducement exception applies, 
recovery for the benefit of the bargain is not permitted. 
¶24 Accordingly, we reverse the court of appeals' decision 
and remand these matters to the circuit court for a new trial on 
contract remedies. 
¶25 Petitioner, Ameritech, asks this court to determine 
what the elements of the fraud exception are, and what measure 
of damages is available if these elements are satisfied.  
Ameritech contends that it is "undisputed" that all damages 
awarded in this case were purely economic.  For that reason, 
Ameritech argues that the court of appeals erred in allowing 
Digicorp and Bacher to bring claims in tort, while at the same 
time recovering lost profits predicated on the terms of the very 
contracts they were simultaneously ignoring in order to pursue 
tort remedies.  Ameritech asserts that the fraud in the 
inducement exception adopted by the court of appeals in the 
Douglas-Hanson case, and applied by the court of appeals in this 
case, imperils the basic purpose of the economic loss doctrine 
No. 
01-1833 & 01-2258   
 
12 
 
in Wisconsin.  As such, Ameritech asks this court to reverse the 
decision of the court of appeals. 
¶26 Ameritech argues that if Wisconsin law recognizes a 
"fraud exception" to the economic loss doctrine, the Huron Tool 
fraud in the inducement exception is a better-reasoned rule than 
the broad rule espoused by the court of appeals, since it allows 
recovery in tort only where the alleged fraud was extraneous to 
the contract.  Such an exception, Ameritech argues, is wholly 
consistent with the policies underlying the economic loss 
doctrine. 
¶27 Finally, 
Ameritech 
claims 
that 
the 
alleged 
misrepresentations in this case were interwoven with the subject 
matter of the contracts, and therefore, they would not provide a 
basis for an independent tort claim if this court adopts the 
narrow Huron Tool fraud exception to the economic loss doctrine.  
In support of this position, Ameritech contends that the parties 
both expressly and impliedly assigned the responsibility and 
risk for the 1099 employees in the contracts involved here. 
¶28 Digicorp, on the other hand, asks this court to affirm 
the decision of the court of appeals.  Digicorp claims that the 
fraud in the inducement exception to the economic loss doctrine 
adopted by the court of appeals preserves the distinction 
between tort and contract law, yet upholds the importance this 
court has emphasized in regard to parties being truthful and 
honest in contract negotiations.   
No. 
01-1833 & 01-2258   
 
13 
 
¶29 Digicorp asserts that it would be unjust to allow 
Ameritech to benefit from its own fraud by allowing it to 
recover. 
¶30 Unlike Ameritech, which argues that the risk of fraud 
was interwoven into the contract so that the exception to the 
economic loss doctrine is inapplicable, Digicorp argues that if 
this 
court 
adopts 
the 
Huron 
Tool 
exception, 
the 
misrepresentations made by Ameritech were extraneous to the 
contract, allowing Digicorp to pursue remedies in tort.    
¶31 Finally, 
Bacher 
asserts 
that 
the 
economic 
loss 
doctrine is inapplicable to the relationship between Bacher, 
Digicorp and Ameritech, and therefore, cannot shield Ameritech 
from its own fraudulent conduct.  If this court applies the 
economic loss doctrine to these facts, Bacher claims it will be 
left without a remedy. 
¶32 The facts are undisputed in this case.  The question 
of whether Wisconsin law provides for a fraud in the inducement 
exception to the economic loss doctrine is a question of law 
which we review de novo. First Nat'l Leasing Corp. v. City of 
Madison, 81 Wis. 2d 205, 208, 260 N.W.2d 251 (1977). 
II. THE ECONOMIC LOSS DOCTRINE AND ITS UNDERLYING POLICIES 
¶33 We begin our analysis by discussing the economic loss 
doctrine and its underlying policies. This court adopted the 
economic loss doctrine in Sunnyslope Grading, Inc., v. Miller, 
Bradford & Risberg, Inc., 148 Wis. 2d 910, 437 N.W.2d 213 
(1989).  The court recognized that the economic loss doctrine is 
a judicially created doctrine providing that "a commercial 
No. 
01-1833 & 01-2258   
 
14 
 
purchaser of a product cannot recover solely economic losses 
from the manufacturer under negligence or strict liability 
theories, particularly, as here, where the warranty given by the 
manufacturer 
specifically 
precludes 
the 
recovery 
of 
such 
damages."  Id. at 921. 
¶34.  The economic loss doctrine exists to preserve the 
distinction between tort and contract law.  It "exists to 
protect the expectations of parties to commercial transactions 
to allow such parties the freedom to allocate any incidental 
risks."  City of West Allis v. WEPCO, 2001 WI App 226, ¶16, 248 
Wis. 2d 10, 635 N.W.2d 873.  In other words, the economic loss 
doctrine requires transacting parties in Wisconsin to pursue 
only their contractual remedies when asserting an economic loss 
claim, in order to preserve the distinction between contract and 
tort law.  As we noted in Wausau Tile, Inc. v. County Concrete 
Corp., 226 Wis. 2d 235, 265, 593 N.W.2d 445 (1999), "[w]e refuse 
to pass on to society the economic loss of a purchaser such as 
Wausau Tile who may have failed to bargain for adequate contract 
remedies."  
¶35 The underlying policy reasons supporting the economic 
loss 
doctrine 
are 
set 
forth 
in 
Daanen 
& 
Janssen, 
216 
Wis. 2d 395.   It is well settled that the economic loss 
doctrine was created to maintain the fundamental distinction 
between tort law and contract law; protect commercial parties' 
freedom to allocate economic risk by contract; and encourage the 
party best situated to assess the risk of economic loss, the 
No. 
01-1833 & 01-2258   
 
15 
 
commercial purchaser, to assume, allocate, or insure against 
that risk.7    
¶36 However, there are valid policy reasons why a party 
engaging in fraud should not be allowed to hide behind the 
protections of the economic loss doctrine.  Wisconsin has a 
long-standing principle that parties need a background of truth 
                                                 
7 See Harley-Davidson Motor Co. v. Powersports, Inc., 319 
F.3d 973 (7th Cir. 2003).  While this recent decision of the 
Seventh Circuit does not address the issue presented in this 
case, it nevertheless provides an excellent summary of our 
rationale for the economic loss doctrine.  The Seventh Circuit 
noted that neither Home Valu, Inc. v. Pep Boys, 213 F.3d 960 
(7th Cir. 2000), Douglas-Hanson Co. v. BF Goodrich Co., 229 
Wis. 2d 132, 598 N.W.2d 262 (1999), nor the present case of 
Digicorp, "address[] whether a party may rescind a contract 
based on fraudulent inducement or a misrepresentation."  Harley-
Davidson, Id. at 19.  As noted by the Seventh Circuit, this 
court has "acknowledged that Wisconsin would allow such an 
action for rescission.  Harley-Davidson, Id. at 20 (citing 
Marine Bank, N.A. v. Meat Counter, Inc., 826 F.2d 1577, 1588 
(7th Cir. 1987).  See also id. at 15.   
While noting that the rationale behind the economic loss 
doctrine does not apply to a misrepresentation claim when the 
remedy sought is rescission of contract, the Harley-Davidson 
opinion went on to summarize the economic loss doctrine and its 
underlying policies: 
[a]pplication of the economic loss doctrine to tort 
actions between commercial parties is generally based 
on 
three 
policies . . . :(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.  
Harley-Davidson, Id. at 24 (citing Daanen & Janssen, Inc. v. 
Cedarapids, Inc., 216 Wis. 2d 395, 573 N.W.2d 846 (1998)).   
No. 
01-1833 & 01-2258   
 
16 
 
and fair dealing in commercial relationships.  Douglas-Hanson, 
229 Wis. 2d at 144 (citing Daanen & Janssen, 216 Wis. 2d at 407, 
573 N.W.2d at 848.   
¶37 Furthermore, "[a] party to a business transaction is 
under a duty to disclose facts basic to the transaction if he 
knows the other is about to enter into it under a mistake as to 
them, and the other party could reasonably expect a disclosure 
of those facts.  Douglas-Hanson at 144 (citing Ollerman v. 
O'Rourke Co., 94 Wis. 2d 17, 26, 288 N.W.2d 95, 105 (1980).8   
¶38 Consistent with the above principles and policies, 
Wisconsin law does not reward intentional misrepresentations and 
bad faith dealings.   
¶39 According to Douglas-Hanson, Wisconsin law does not 
allow 
the 
party 
perpetrating 
the 
fraud 
to 
hide 
behind 
contractual remedies.  Douglas-Hanson at 148-50.   In Douglas-
Hanson, 
the 
court 
of 
appeals 
adopted 
a 
broad 
exception 
permitting tort claims to be asserted whenever the contract was 
induced by fraud.  The court held that the economic loss 
doctrine did not preclude the plaintiff's claim for intentional 
misrepresentation, 
when 
the 
misrepresentation 
fraudulently 
induced the plaintiff to enter into the contract.  Douglas-
Hanson, 229 Wis. 2d at 137-38.  In that case, the court of 
appeals reasoned that when an intentional misrepresentation 
                                                 
8 Based on the above principles of good faith and fair 
dealing, the economic loss doctrine is not applied to pre-
contract negotiations, as it would frustrate those principles.    
See Budgetel Inns, Inc. v. Micros Sys., Inc., 8 F. Supp.2d 1137, 
1148 (E.D. Wis. 1998).   
No. 
01-1833 & 01-2258   
 
17 
 
fraudulently induces a party to enter into a contract, the 
parties appear to negotiate freely; but, in fact, one party's 
ability to negotiate fair terms and make an informed decision is 
undermined by the other party's fraudulent conduct.  Id. at 146.  
Similarly, the United States District Court in Budgetel said 
that "contract negotiations that begin with the assumption that 
the other party is lying will hardly encourage free and open 
bargaining."  Budgetel, 8 F. Supp.2d at 1148. 
¶40 On appeal, this court was evenly split, in reviewing 
the Douglas-Hanson decision, on whether there should be a fraud 
in the inducement exception to the economic loss doctrine.  
Consequently, the precise issue of whether a fraud in the 
inducement exception to the economic loss doctrine is recognized 
in Wisconsin was left open to further debate by our split 
decision in Douglas-Hanson. 
¶41 In 
Northridge 
Co. 
v. 
W.R. 
Grace 
& 
Co., 
162 
Wis. 2d 918, 471 N.W.2d 179 (1991), this court "dr[ew] the line 
between economic and non-economic loss".  Home Valu, Inc. v. Pep 
Boys, 213 F.3d 960 (7th Cir. 2000). In Northridge, this court 
adopted a narrow public safety exception to the economic loss 
doctrine.  In that case, the defendant sold a fireproofing 
material containing asbestos to the plaintiff's contractor for 
use in the construction of the plaintiffs' shopping centers.  
The plaintiffs sued for breach of warranty, strict products 
liability and negligence, claiming that the asbestos "presented 
unreasonable danger to persons and property."  Northridge, 162 
Wis. 2d at 922.  The plaintiffs sought to recover the amounts it 
No. 
01-1833 & 01-2258   
 
18 
 
had expended in inspecting the building and removing the 
asbestos.  The defendant argued that the tort claims were barred 
by the economic loss doctrine.  Id. at 929-30.  This court 
agreed with other jurisdictions, which permit tort recovery for 
asbestos damage to buildings.  The plaintiffs in that case, 
Northridge Company and Southridge Company, filed a complaint 
alleging breach of warranty and several tort claims, based on 
the defendant's sale of the fireproofing material to the 
plaintiffs' general contractor for use in the construction of 
the plaintiffs' shopping centers.  The complaint alleged that 
the fireproof material was "in a defective condition and, 
because it contains asbestos, presented unreasonable danger to 
persons and property."  In addition, the plaintiffs asserted 
that the asbestos contaminated the building and, as a result, 
the plaintiffs suffered damages by incurring expenses for 
inspection, testing and removal of the fireproofing material, 
and because of diminished value of the property.  In response to 
the plaintiffs' complaint, we said: 
We conclude that the complaint in this case can be 
interpreted as alleging that a defect in the product 
has caused physical harm to property, property other 
than the product itself.  The alleged physical harm to 
other property consists of the contamination of the 
plaintiffs' 
buildings 
with 
asbestos 
from 
the 
defendant's product, posing a health hazard. 
Northridge, 162 Wis. 2d at 923. 
¶42 Based on our decisions, the United States Court of 
Appeals for the Seventh Circuit in Cooper, predicted that the 
Wisconsin Supreme Court "would not allow a negligence or strict 
No. 
01-1833 & 01-2258   
 
19 
 
liability misrepresentation claim seeking to recover economic 
damages."  Cooper Power Sys., Inc. v. Union Carbide Chems. & 
Plastics Co., 123 F.3d 675, 682 (7th Cir. 1997) (citing Badger 
Pharmacal, Inc. v. Colgate-Palmolive Co., 1 F.3d 621, 628 (7th 
Cir. 1993)).  
 
¶43 Accordingly, the court in Cooper concluded that there 
was "no basis for treating [] intentional misrepresentation 
claim[s] [] differently" than other misrepresentation claims 
applying the economic loss doctrine.  Id. at 682.    
¶44 Similarly, in Pep Boys, the Seventh Circuit cited 
Badger Pharmacal in analyzing Wisconsin law: 
In Badger Pharmacal, we applied Wisconsin law and 
reasoned that "'tort law provides no remedy in a case 
in which the plaintiff is seeking to recover for a 
commercial 
loss 
rather 
than 
damage 
to 
person, 
property, or reputation'". 
Pep Boys, 213 F.3d at 964. 
¶45 In arriving at that conclusion, the court noted that: 
Wisconsin's highest court draws the line between 
economic and non-economic loss by emphasizing that 
economic loss is damage "which does not cause personal 
injury or damage to other property."  In contrast, 
non-economic damages, which are recoverable in tort, 
involve some "physical harm" or other "unreasonable 
risk of injury to person or property.   
Pep Boys, 213 F.3d at 963 (citing Daanen & Janssen, Inc. v. 
Cedarapids, Inc., 216 Wis. 2d 395, 573 N.W.2d 842, 845 (1998), 
and Northridge Co. v. W.R. Grace and Co., 162 Wis. 2d 918, 471 
N.W.2d 179, 185 (1991)).  The court predicted: "We therefore 
adhere to our view that the Wisconsin Supreme Court would not 
No. 
01-1833 & 01-2258   
 
20 
 
recognize tort claims for negligent or strict responsibility 
misrepresentation . . . ."  Pep Boys, 213 F.3d at 964.   
¶46 Decisions from the United States District Court for 
the Eastern District of Wisconsin have recognized an exception 
to the economic loss doctrine for fraudulent inducement claims, 
but only when the claim is extraneous, rather than "interwoven" 
with the subject matter of the contract. Raytheon Co. v. McGraw-
Edison Co., 979 F. Supp. 858, 870 (E.D. Wis. 1997).  See also 
Ice Bowl L.L.C. v. Weigel Broad. Co., 14 F. Supp. 2d 1080, 1083 
(E.D. Wis. 1998).  
¶47 Similarly, a Michigan court of appeals, prior to the 
Raytheon and Ice Bowl decisions, recognized a narrow fraud 
exception to the economic loss doctrine where the fraud is 
extraneous to, rather than interwoven with, the contract.  Huron 
Tool and Eng'g Co. v. Precision Consulting Servs., Inc., 209 
Mich. App. 365, 367, 532 N.W.2d 541, 543 (1995).  In defining 
extraneous versus interwoven, the Huron Tool court said that 
extraneous 
fraud 
concerns 
those 
matters 
whose 
risk 
and 
responsibility were not expressly or impliedly dealt with in the 
contract.9   
                                                 
9 We take strong issue with the broad, sweeping assertion in 
the dissent that "the Huron limitation fatally undermines the 
viability of the tort of fraud in the inducement."  See ¶86 of 
the dissent.  The fraud exception to the economic loss doctrine 
that we adopt is not dead on arrival.  We expect that, through 
the years, there indeed will be circumstances where there is 
extraneous 
fraud, 
concerning 
matters 
whose 
risk 
and 
responsibility were not expressly or impliedly dealt with in the 
contract. 
No. 
01-1833 & 01-2258   
 
21 
 
¶48 Huron Tool involved the sale of a computer software 
system between two commercial parties.  The plaintiff in Huron 
Tool asserted various claims, including fraud, based on alleged 
defects in the software system.  Id.  The Huron Tool court 
recognized and approved a fraud in the inducement exception to 
the economic loss doctrine.  The court declined to adopt the 
defendant's position that the economic loss doctrine precludes 
any fraud claim.  Instead, the court stated that: 
[f]raud in the inducement presents a special situation 
where parties to a contract appear to negotiate 
freely——which normally would constitute grounds for 
invoking the economic loss doctrine——but where in fact 
the ability of one party to negotiate fair terms and 
make an informed decision is undermined by the other 
party's fraudulent behavior.  In contrast, where the 
only misrepresentation by the dishonest party concerns 
the quality or character of the goods sold, the other 
party is still free to negotiate warranty and other 
terms to account for possible defects in the goods.  
Id. at 372-73.   
¶49 Turning to the facts of this case, as noted above, 
Ameritech argues that Wisconsin should recognize the narrow 
fraud in the inducement exception of Huron Tool, rather than the 
broad exception from the court of appeals' decision in Douglas-
Hanson, which permits tort claims to be asserted whenever the 
contract in question was induced by fraud.   
¶50 Digicorp 
agrees 
with 
Ameritech 
on 
this 
point, 
maintaining that public policy supports a narrow fraud in the 
inducement exception to the economic loss doctrine, because it 
promotes honesty, good faith and fair dealing during contract 
negotiations. Relying on the policies set forth in Douglas-
No. 
01-1833 & 01-2258   
 
22 
 
Hanson and Budgetel, Digicorp reiterates that there can be no 
effective bargaining if contract negotiations begin with the 
assumption that the other party is lying.   
¶51 As noted previously, we hold that there is indeed a 
fraud in the inducement exception to the economic loss doctrine.  
However, that exception is not as broad as the rule set forth by 
the court of appeals' decision in Douglas-Hanson.  Instead, we 
adopt the narrow approach set forth in Huron Tool, and overrule 
the Douglas-Hanson decision to the extent that it is contrary to 
that narrow exception.  The fraud in the inducement exception we 
adopt is wholly consistent with the policies underlying the 
economic loss doctrine.   
¶52 The fraud in the inducement exception we adopt is very 
narrow, and does not nullify the economic loss doctrine.  It 
seems clear that, generally, in order for the fraud in the 
inducement exception to apply, the misrepresentation would have 
occurred before the formation of the contract.  In addition, to 
constitute deceit or intentional misrepresentation, a plaintiff 
would have to prove the five elements set forth in the case law 
and in Wisconsin Civil Jury Instruction 2401.10  Those five 
                                                 
10 See the cases cited herein in the discussion of Wisconsin 
Civil Jury Instruction 2401: Misrepresentation: Intentional 
Deceit.  The five elements are: 
1. 
The defendant made the representation of fact.  
See Killeen v. Parent, 23 Wis. 2d 244, 127 N.W.2d 38 
(1964). 
2. 
Such representation of fact was untrue. 
No. 
01-1833 & 01-2258   
 
23 
 
elements would have to be proved by "clear, satisfactory, and 
convincing evidence."  See Wisconsin Civil Jury Instruction 205, 
Burden 
of 
Proof: 
Middle, 
and 
see 
Nommensen 
v. 
American 
Continental Ins. Co., 2001 WI 112, 246 Wis. 2d 132, 619 
N.W.2d 301. The underlying purposes of the economic loss 
doctrine are preserved, since the exception is a narrow one that 
maintains the distinction between contract and tort remedies in 
most situations.   
III. APPLICATION OF HURON TOOL EXCEPTION 
¶53 Having determined the proper analytical framework for 
evaluating claims of fraud in the inducement, we now turn to the 
facts of this case.  Our task is to determine whether the fraud 
involved matters for which risks and responsibilities were 
extraneous to, or interwoven into, the contract.  As discussed 
in detail below, the alleged misrepresentations in this case 
were interwoven with the subject matter of the contracts.  
                                                                                                                                                             
3. 
Such 
untrue representation 
was made 
by the 
defendant knowing the representation was untrue or 
recklessly without caring whether it was true or 
false.  See Stevenson v. Barwineck, 8 Wis. 2d 557, 99 
N.W.2d 690 (1959) (representations without sufficient 
basis are reckless). 
4. 
That the representation was made with intent to 
deceive and induce the plaintiff to act upon it to the 
plaintiff’s pecuniary damage.  See Household Finance 
Corp. 
v. 
Christian, 
8 
Wis. 2d 53, 
98 
N.W.2d 390 
(1959). 
5. 
That the plaintiff believed such representation 
to be true and relied on it.  See Household Finance 
Corp. v. Christian, 8 Wis. 2d 53, and Miranovitz v. 
Gee, 163 Wis. 246, 157 N.W. 790 (1916). 
No. 
01-1833 & 01-2258   
 
24 
 
Therefore, they do not provide a basis for an independent claim 
under the narrow Huron Tool fraud in the inducement exception to 
the economic loss doctrine.  
¶54 The subject of the alleged misrepresentation in this 
case does not involve the actual Value-Link service, but 
instead, deals with the responsibility and risk of the 1099 
employee, Krinsky.   
¶55 Here, we find that based on the evidence in the 
record, 
the 
fraud 
involved 
matters 
for 
which 
risks 
and 
responsibilities were interwoven into the contract.  It is clear 
from the record that the parties expressly and impliedly 
assigned and allocated the responsibilities and risks for the 
1099 employees.   
¶56 First, The Digicorp Fox Valley Division Sales Program 
Agreement Section Five states: 
Conduct of employees——DIGICORP reserves the right to 
approve all individuals engaged by Contractor in the 
sale and marketing of Ameritech services covered by 
this agreement.  DIGICORP'S reputation in the industry 
is mutually agreed to be a valuable asset.  If 
DIGICORP becomes aware of any representations not in 
conformity with this agreement or sales activities 
deemed 
harmful 
to 
its 
reputation 
or 
business 
interests, we will immediately advise Contractor.  
Contractor agrees to take corrective action, up to and 
including 
termination 
of 
the 
employee, 
to 
expeditiously 
address 
the 
improper 
activities 
or 
representations. 
 
Continuation 
or 
recurrence 
of 
unacceptable activities will be deemed a material 
breach of this agreement.   
Pet'r App. to Opening Br. of Pet. Ameritech at 043 (emphasis 
added).  Section Five of the Sales Program Agreement illustrates 
that Digicorp, during pre-contract negotiations, anticipated and 
No. 
01-1833 & 01-2258   
 
25 
 
allocated 
the 
risks 
and 
responsibilities 
associated 
with 
entering into an agreement with Ameritech.   
¶57 Second, the letter from Taylor to the President of 
Digicorp, Clark, lists the duties and responsibilities of 
Ameritech and Digicorp 1099 employees.  In particular, the 
letter unequivocally sets forth the criteria that must be met 
for an Ameritech Authorized Distributor to use sales people 
employed by another company to sell Ameritech services.11  In 
addition to the list of criteria, Taylor included the following 
statement in the letter:  
                                                 
11 The following criteria were set forth in the letter from 
Taylor to the President of Digicorp: 
 The sales people involved must be 1099 employees 
of the Authorized Distributor. 
 The 
sales 
people 
must 
be 
registered 
with 
Ameritech as sales people through the Authorized 
Distributor.  Sales people cannot be concurrently 
registered 
with 
more 
than 
one 
Ameritech 
Authorized Distributor. 
 Each sales person must be approved and certified 
by Ameritech. 
 Each sales person must represent themselves as an 
employee 
of 
the 
Authorized 
Distributor 
when 
selling Ameritech services and products. 
 Each 
sales 
person 
will 
present 
potential 
customers with a business card that identifies 
them 
as 
a 
representative 
of 
the 
Ameritech 
Authorized Distributor.  This business card would 
include the Authorized Distributor company name 
and if desired Ameritech identification that 
conforms to Ameritech Corporate guidelines. 
No. 
01-1833 & 01-2258   
 
26 
 
I want to make it clear that Ameritech holds its' 
[sic] Authorized Distributors responsible for the 
actions of 1099 sales representatives.  
Any activity by a 1099 sales person, as with any 
other sales representative, that is contrary to the 
standards established by Ameritech, will place in 
jeopardy your status as an Ameritech Authorized 
Distributor.  
The detailed discussion included in this letter demonstrates 
that both Ameritech and Digicorp understood the terms of their 
agreement, and had an opportunity to allocate the risks involved 
during contract negotiations.    
¶58 Finally, 
the 
June 
1996 
Non-Exclusive 
Authorized 
Distributor Agreement between Ameritech and Digicorp, clearly 
sets forth in Section 5.01 what happens if forged signatures are 
discovered.  Section 5.1(c) states in relevant part: 
Notwithstanding 5.1(a) and (b) above, it is agreed 
that Ameritech may terminate this Agreement without 
notice in the event of . . . submission of any sales 
agreement by the AD, any of its representatives, or 
its agents which is subsequently found to contain 
forged customer signatures or of which the customer 
denies any knowledge of placing an order with AD.  
No. 
01-1833 & 01-2258   
 
27 
 
In addition, Sections 1.3 and 6.4 refer to aspects of forgery.12  
                                                 
12 1.3 
Subdistributors. 
 
The 
AD 
[Authorized 
Distributor] acknowledges that only those distributors 
who 
are 
specifically 
and 
directly 
authorized in 
writing by Ameritech are permitted to function and 
represent 
themselves 
as 
Ameritech 
Authorized 
Distributors.  The AD shall not appoint or in any way 
authorize anyone to distribute or represent themselves 
as authorized to distribute or sell as an agent or 
"authorized" Ameritech Distributor, and AD shall not 
sell Products to any such distributor, representative 
or agent nor shall AD process orders with Ameritech  
for network service products marketed or sold by any 
such distributor, representative or agent unless such 
person(s) have been certified under standards solely 
set 
by 
Ameritech, 
and 
the 
individual 
has 
been 
registered by Ameritech, and such authorization shall 
have been previously and expressly approved in writing 
by Ameritech.  In the event that AD violates this 
provision, Ameritech shall have the right, in addition 
to any other right that Ameritech may have, to 
terminate 
this 
Agreement 
immediately. 
 
(Emphasis 
added.)  
6.0  AUTHORIZED DISTRIBUTOR DUTIES. 
 . . . . 
6.4 AD 
agrees 
that 
Ameritech's 
business 
reputation is one of it's [sic] most valuable assets.  
Distributor will always employ a high degree of 
integrity in selling to it's [sic] customers and will 
not, by act or omission, tarnish that reputation.  AD 
agrees 
to 
comply 
at 
all 
times 
with 
Ameritech 
Authorized 
Distribution 
Code 
of 
Business 
Conduct 
incorporated by reference herein as Annex E, which may 
be modified by Ameritech from time-to-time and such 
modification shall be construed as if set forth 
originally herein.  In addition, AD agrees to: 
(a) Not mislead customers either by advertising, 
oral statement, or otherwise; 
(b) Not use Ameritech's brand to entice, for 
bait and switch, or any similar purposes. 
No. 
01-1833 & 01-2258   
 
28 
 
¶59 The entire relationship among Ameritech and Digicorp 
and Bacher was governed by contract.  There was a pre-existing 
authorized 
distributorship 
agreement 
between 
Ameritech 
and 
Digicorp going back to 1993.  Next, the April 30, 1996 letter 
sets 
forth 
the 
"certify 
and 
approval" 
condition, 
while 
emphasizing Digicorp's responsibility for the actions of the 
1099 employees.  Finally, the June 1996 contract covers a whole 
variety of duties and responsibilities, and expressly provides 
explicit terms for termination.  It references Ameritech's 
policies with regard to forgery, and the Authorized Distributor, 
Digicorp's, duties with regard to forgery.  The duties, 
responsibilities and risks of both Ameritech and Digicorp were 
set forth in great detail.  The parties clearly allocated, by 
use of the contract terms, the risks and responsibilities of 
entering into the agreement.   
¶60 It is clear from this information that the parties 
expressly and impliedly assigned responsibility and risk for the 
1099 employees——the subject of the alleged misrepresentation.  
¶61 Contrary 
to 
Digicorp's 
argument, 
the 
June 
1996 
contract between Digicorp and Ameritech was not a new contract, 
but a modification of a prior one.  It was a routine renewal of 
                                                                                                                                                             
(c) Not refer to or in any way disparage other 
Ameritech Distributors in advertising or 
promotional materials, or at any time during 
the selling process whether in oral or 
written communications to any potential or 
existing Ameritech customer.  
(Emphasis added.) 
No. 
01-1833 & 01-2258   
 
29 
 
a pre-existing contract.  Even assuming, arguendo, that the 
misrepresentation made by Taylor with regard to knowledge of 
Krinsky's past fraudulent behavior, was a material inducement to 
Digicorp to enter into its replacement agreement with Ameritech, 
it was part and parcel of an overall allocation of risks and 
responsibilities for 1099 employees.   
¶62 This 
information 
shows 
that 
the 
alleged 
misrepresentations by Taylor were interwoven with the subject 
matter of the contract.  The alleged fraud here is similar to 
the fraudulent misrepresentation made to the plaintiff in Huron 
Tool.  The misrepresentations concerned matters related to the 
performance of the contract itself, and as such, cannot be found 
to be extraneous to the contractual dispute.  Accordingly, 
Digicorp is limited to contract remedies.  See Huron Tool, 532 
N.W.2d at 546.  The fraud in the inducement exception to the 
economic 
loss 
doctrine 
is 
inapplicable 
under 
these 
circumstances. 
IV. CONTRACTUAL PRIVITY 
¶63 Our analysis does not end with the analysis of the 
economic loss doctrine and the Huron Tool exception in regard to 
the facts 
presented.  We 
must also 
consider 
whether a 
subcontractor 
of 
the 
party 
to 
whom 
the 
alleged 
misrepresentations were made avoids the operation of the 
economic loss doctrine, because it was not in contractual 
privity with the party allegedly engaging in fraud. 
No. 
01-1833 & 01-2258   
 
30 
 
¶64 Ameritech argues that Bacher should not be able to 
escape application of the economic loss doctrine just because 
there was no privity between them.   
¶65 We answered the question in Daanen & Janssen, 216 
Wis. 2d 395, and unequivocally held there that even in the 
absence of privity, the economic loss doctrine bars one party in 
the distributive chain from recovering economic losses in tort 
from another party in that chain.  See also Cooper, 123 F.3d 675 
at 681 (citing Miller v. United States Steel Corp., 902 F.2d 
573, 575 (7th Cir. 1990)).  For the reasons discussed herein, 
the economic loss doctrine applies to Bacher as well, and the 
fraud in the inducement exception is not applicable to its 
claims. 
¶66 With regard to Bacher, it is important to note that it 
hired Krinsky before any representation was made by Ameritech.  
Under the facts of this case, Digicorp, an authorized Ameritech 
distributor, 
contacted 
Ameritech 
for 
approval 
to 
sell 
Ameritech's calling services and calling plans known as "Value-
Link" through the third party, Bacher Communications.  Bacher 
was not an Ameritech-authorized distributor.   Even though 
Taylor failed to inform Digicorp during these discussions that 
Krinsky had engaged in fraudulent acts of forging customers' 
signatures when Krinsky had worked for another authorized 
Ameritech distributor, by that time Krinsky was already employed 
by Bacher.  He was so employed before Digicorp and Ameritech had 
entered into the agreement for Digicorp to sell the Value-Link 
system through Bacher. 
No. 
01-1833 & 01-2258   
 
31 
 
V. 
DAMAGES——ELECTION——BENEFIT OF BARGAIN 
¶67 The court of appeals decision allowed Digicorp and 
Bacher to avoid the contract, but at the same time use the 
contract to recover the benefit of the bargain related to the 
contract that they had repudiated.  As noted above, the 
application of the fraud in the inducement exception to the 
economic loss doctrine renders the underlying contract voidable, 
and gives the defrauded party the option of electing either tort 
or contract damages.  See Douglas-Hanson, 229 Wis. 2d at 145.  
Thus, allowing Digicorp and Bacher to avoid the contract, but 
recover the benefit of the bargain contravenes not only the 
logic of the fraud exception, but the core principles of the 
doctrine of election of remedies.  The decision in First Nat'l 
Bank & Trust Co. v. Notte states that where grounds for 
avoidance of a contract exist, the aggrieved party must elect 
between rescinding the contract, or affirming the contract and 
seeking damages.  First Nat'l Bank & Trust Co. v. Notte, 97 
Wis. 2d 207, 225, 293 N.W.2d 530 (1980).  This court has 
consistently applied the rule that a party may not seek to set 
aside a contract on the basis of fraud and at the same time 
recover the benefit of the bargain.  Head & Seemann, Inc. v. 
Gregg, 107 Wis. 2d 126, 127, 318 N.W.2d 381 (1982). 
VI. CONCLUSION 
¶68 For the reasons set forth above, we hold that 
Wisconsin recognizes a narrow fraud in the inducement exception 
to the economic loss doctrine.  Consistent with the exception 
adopted in  Huron Tool, we hold that the evidence in the record 
No. 
01-1833 & 01-2258   
 
32 
 
shows that the alleged fraud in the present case involved 
matters for which risks and responsibilities were interwoven 
into the contract.  As such, the economic loss doctrine acts as 
a bar, and the parties are limited to contractual remedies.   
¶69 Additionally, we hold that the language of Daanen & 
Janssen is clear that the economic loss doctrine generally 
precludes a recovery in tort for solely economic losses, 
regardless of whether privity of contract exists between the 
parties.   
¶70 We also hold that recovery of the benefit of the 
bargain is prohibited where the fraud in the inducement 
exception applies, and tort remedies are sought. 
¶71 Accordingly, we reverse the court of appeals' decision 
and remand to the circuit court for a new trial limited to 
contract remedies. 
By the Court.—The decision of the court of appeals is 
reversed and the cause is remanded to the circuit court for 
further proceedings consistent with this opinion. 
¶72 SHIRLEY S. ABRAHAMSON, C.J. and JON P. WILCOX, J., did 
not participate. 
 
 
No.  01-1833 & 01-2258.dss 
 
1 
 
¶73 DIANE S. SYKES, J.   (concurring in part, dissenting 
in part).  I would not adopt a fraud exception to the economic 
loss doctrine.  The economic loss doctrine precludes commercial 
contracting parties from recovering tort damages for purely 
economic losses associated with the contract relationship.  That 
is, the doctrine restricts commercial contracting parties to 
contract remedies when they allege an economic loss stemming 
from the contract relationship.13 
¶74  As the lead opinion notes, the economic loss doctrine 
promotes 
three 
important 
policies: 
1) 
it 
preserves 
the 
fundamental distinction between contract and tort law; 2) it 
protects the freedom of commercial contracting parties to 
allocate economic risk by contract; and 3) it encourages the 
parties best situated to assess the risk of economic loss——the 
contracting parties themselves——to assume, allocate, or insure 
against that risk.  Lead op., ¶35.  See also Wausau Tile, Inc. 
v. County Concrete Corp., 226 Wis. 2d 235, 247, 593 N.W.2d 445 
(1999) (citing Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 
Wis. 2d 395, 403, 573 N.W.2d 842 (1998)). 
¶75  "From its inception the economic loss doctrine has 
been based on an understanding that contract law and the law of 
                                                 
 
13   In Danaan & Janssen, Inc. v. Cedarapids, Inc., 216 Wis. 
2d 395, 414-15, 573 N.W.2d 842 (1998), this court held that the 
economic loss doctrine applies in the absence of privity of 
contract: "whether or not privity of contract exists between the 
parties, a commercial purchaser of a product cannot recover 
solely economic losses from the manufacturer under tort theories 
of negligence or strict liability."  Id. at 414-15.  I agree 
with 
the 
majority's 
extension 
of 
this 
holding 
to 
the 
distributor/subdistributor here.  Lead op., ¶¶63-66. 
  
No.  01-1833 & 01-2258.dss 
 
2 
 
warranty, in particular, is better suited than tort law for 
dealing with purely economic loss in the commercial arena."  
Danaan & Janssen, 216 Wis. 2d at 403-04.  The distinction 
between contract and tort law is based fundamentally on their 
different concepts of duty: "contract law rests on bargained-for 
obligations, while tort law is based on legal obligations."  
Wausau Tile, 226 Wis. 2d at 247.  These differences in the 
source and nature of duty in contract and tort law produce 
different rules regarding remedy and damages (punitive damages 
are not recoverable in contract actions, for example), and the 
economic loss doctrine exists in large part to keep each in its 
proper sphere. 
¶76 The creation of a fraud exception to the economic loss 
doctrine undermines these important purposes and distinctions.  
A contracting party who alleges that he was fraudulently induced 
to enter into the contract already has adequate contract 
remedies: he can affirm the contract and seek damages for 
breach, or he can pursue the equitable remedy of rescission and 
seek restitutionary damages.  See Harley-Davidson Motor Co. v. 
Powersports, 
Inc., 
319 
F.3d 
973, 
978 
n.7 
(7th 
Cir. 
2003)(collecting Wisconsin cases and holding that the economic 
loss doctrine does not apply to an equitable action in contract 
for rescission/restitution).  A contract fraudulently induced is 
void or voidable; a party fraudulently induced to enter into a 
contract "has the election of either rescission or affirming the 
contract and seeking damages."  First Nat'l Bank & Trust Co. of 
Racine v. Notte, 97 Wis. 2d 207, 225, 293 N.W.2d 530 (1980); see 
No.  01-1833 & 01-2258.dss 
 
3 
 
also Eklund v. Koenig & Assocs., 153 Wis. 2d 374, 381, 451 
N.W.2d 150 (Ct. App. 1989)("When a party discovers an alleged 
fraud . . . he may affirm the contract and sue for damages, or 
he may disaffirm and seek restitution.").  This election of 
remedies requirement does not confer upon the aggrieved party 
the option of pursuing either contract or tort remedies, but, 
rather, involves a choice between two different contract 
remedies: damages for breach or rescission/restitution.14 
¶77 Notte was decided before this court adopted the 
economic loss doctrine in Sunnyslope Grading, Inc. v. Miller, 
Bradford & Risberg, Inc., 148 Wis. 2d 910, 437 N.W.2d 213 
(1989).  In Notte, this court specifically distinguished between 
tort remedies for misrepresentation, and contract remedies for 
breach or rescission in the context of a fraudulently induced 
contract.  Notte, 97 Wis. 2d at 212-14.  The court concluded 
that tort remedies are inapplicable, and required an election of 
remedies in contract.  Id. at 225-26. 
¶78 The court of appeals' decision in Douglas-Hanson Co. 
v. BF Goodrich Co., 229 Wis. 2d 132, 598 N.W.2d 262 (Ct. App. 
1999), was based in part upon a misinterpretation of the 
election of remedies doctrine.  There, the court held that 
"[t]he economic loss doctrine does not apply to fraudulently 
induced contracts because the person fraudulently induced to 
                                                 
 
14 Restitutionary damages are recoverable in an equitable 
action in contract for rescission of a contract fraudulently 
induced.  Head & Seemann, Inc. v. Gregg, 104 Wis. 2d 156, 166-
67, 311 N.W.2d 667 (Ct. App. 1981).  These include "'any sums 
that are necessary to restore [the party fraudulently induced] 
to his position prior to the making of the contract.'"  Id. at 
166. 
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enter the contract can affirm or avoid the contract, and in so 
electing, has the option of selecting tort or contract damages."  
Id. at 145.  But the election to either affirm or rescind a 
fraudulently induced contract is an election between two 
different contract remedies, one at law for breach and the other 
in equity for rescission and restitution; it is not an election 
between tort and contract remedies.  Notte, 97 Wis. 2d at 225-
26. 
¶79  While the lead opinion partially overrules Douglas-
Hanson and prefers a narrower fraud exception than that 
articulated by the court of appeals, lead op., ¶51, it 
nevertheless perpetuates that decision's conceptual confusion.  
Lead op., ¶67.  The lead opinion concludes that there is a fraud 
in the inducement tort but disallows benefit-of-the-bargain tort 
damages.  See Wis JI——Civil 2405.  The lead opinion apparently 
restricts recovery in this new tort to that which would be 
allowed in an equitable action in contract for rescission and 
restitution, although it does not directly say so. 
¶80  I certainly do not disagree with this outcome, because 
I would leave the parties to their contract remedies in the 
first place.  However, the lead opinion's hybrid cause of action 
blurs rather than preserves the distinction between tort and 
contract remedies. 
¶81  The lead opinion's narrow fraud exception does less 
damage to the second and third purposes underlying the economic 
loss doctrine, because it bars a tort claim for fraud in the 
inducement concerning matters that are "interwoven with" or 
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"expressly or impliedly dealt with in the contract."  Lead op., 
¶¶47-48.  I agree that the facts of this case do not support a 
claim under the lead opinion's narrow exception to the economic 
loss doctrine.  As a general matter, however, we should refrain 
from attempting to articulate new legal rules where the factual 
predicates to do so are not present in the case.  See Bicknese 
v. Sutula, 2003 WI 31, ¶66, ___ Wis. 2d ___, ___ N.W.2d ___ 
(Sykes, J., dissenting).  Articulating a new common law rule 
when the facts of the case do not warrant doing so is 
essentially an exercise in hypothetical decisionmaking. 
¶82  The facts of this case do not warrant the creation of 
a 
fraud-in-the-inducement 
exception 
to 
the 
economic 
loss 
doctrine, even one that is narrowly drawn.  Digicorp had a pre-
existing, ongoing, terminable-at-will distributorship agreement 
with Ameritech, and there is no evidence that the June 1, 1996, 
renewal of that agreement was induced by Ameritech's failure to 
disclose what it knew about the past forgeries of an employee 
that Digicorp's subdistributor, Bacher, had already hired.  That 
is, there is no causal link between the fraudulent nondisclosure 
and the June 1, 1996, contract, the termination of which 
provided the premise for the award of lost profits and punitive 
damages in this case.  There is no factual basis for the 
recognition of a fraud exception to the economic loss doctrine 
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in this case, but the lead opinion purports to recognize one 
anyway.15   
¶83 Contracting parties can protect themselves against 
economic losses associated with pre-contract misrepresentations 
by appropriate contract language, and, in the event that one 
party's fraud frustrates the other party's ability to do so, 
contract law renders the contract voidable at the option of the 
aggrieved party and allows recovery of restitution.  I would not 
adopt a fraud-in-the-inducement exception to the economic loss 
doctrine.  In other respects, I concur in the majority opinion. 
 
                                                 
15 Because of the nonparticipation of two justices and the 
split decision among the participating justices, this case 
accomplishes only the rejection of the broad fraud-in-the- 
inducement exception contained in Douglas-Hanson Co. v. BF 
Goodrich Co., 229 Wis. 2d 132, 598 N.W.2d 262 (Ct. App. 1999).  
Neither the broad nor the narrow fraud exception has the support 
of a majority of this court. 
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¶84 ANN WALSH BRADLEY, J.   (dissenting).  Typically, when 
you narrow the viability of a cause of action, you chip away at 
the edges while being careful to preserve its core essence.  
However, by endorsing the Huron limitation, the lead opinion 
eviscerates the core of the tort of fraud in the inducement 
while purportedly leaving the edges of this cause of action 
intact.  Because the Huron limitation essentially eliminates the 
viability of the tort of fraud in the inducement and undermines 
the purpose of the economic loss doctrine, I respectfully 
dissent. 
¶85 While I agree with the lead opinion that there is a 
fraud in the inducement exception to the economic loss rule, I 
disagree with the lead opinion's endorsement of the limitation 
on that exception set forth in Huron Tool and Engineering Co. v. 
Precision Consulting Services, Inc., 532 N.W.2d 541, 543 (Mich. 
App. 1995).  Like the court of appeals, I would uphold the rule 
set forth in Douglas-Hanson Co. v. BF Goodrich Co., 229 Wis. 2d 
132, 138-139, 598 N.W.2d 262 (Ct. App. 1999), that "the economic 
loss doctrine does not preclude a plaintiff's claim for 
intentional 
misrepresentation 
when 
the 
misrepresentation 
fraudulently induces a plaintiff to enter into a contract." 
¶86 The lead opinion rejects the rule established in 
Douglas-Hanson and concludes that the economic loss doctrine 
acts as a bar to a fraud in the inducement tort claim only in 
those circumstances where the fraud is "interwoven" with the 
contract, and not extraneous to it.  Lead op., ¶21.  However, 
the lead opinion fails to acknowledge that the Huron limitation 
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fatally undermines the viability of the tort of fraud in the 
inducement.  The court in Budgetel Inns, Inc. v. Micro Systems, 
Inc., 8 F. Supp. 2d 1137, 1146 (E.D. Wis. 1998), acknowledged 
this fatal flaw when it explained that the Huron limitation 
essentially eliminates the fraud in the inducement exception: 
 
In practice, the Huron limitation renders the fraud in 
the inducement exception a nullity.  The Huron 
limitation to the fraud in the inducement exception is 
so broad that it swallows the exception whole. 
 
In all cases cited by the parties and researched by 
the court, use of the Huron limitation eliminated the 
claims of fraud in the inducement.  For instance, 
after discussing the fraud in the inducement exception 
with the Huron limitation, the Huron court itself 
found that the plaintiff's fraud claim was not viable 
apart from its contract claims . . . ." 
¶87 Black's 
Law 
Dictionary 
defines 
"fraud 
in 
the 
inducement" as "fraud occurring when a misrepresentation leads 
another to enter into a transaction with a false impression of 
the risks, duties, or obligations involved."  Black's Law 
Dictionary 671 (7th ed. 1999).  As this definition reflects, the 
core 
of 
a 
fraud 
in 
the 
inducement 
action 
addresses 
misrepresentations regarding the risks, duties or obligations to 
be set forth in, and therefore "interwoven" with, a contract.  
It is hard to see how any of this core can survive under the 
lead opinion's formulation of the rule which bars a fraud in the 
inducement action where the fraud "is interwoven with the 
contract in that it involved matters for which risks and 
responsibilities were addressed."  Lead op., ¶3. 
¶88 The use of the Huron limitation creates an analytical 
disconnect in cases that involve a tort claim of fraud in the 
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inducement.  The disconnect is created because the type of case 
that the tort of fraud in the inducement is designed to address 
is the same type of case that the Huron limitation prevents from 
being brought.  The court in Budgetel highlighted this problem: 
 
The tort, after all, is inducing someone to enter into a 
contract, so to say it does not apply where the tort 
involves the contract or its subject matter analytically 
makes no sense. 
Budgetel Inns, 8 F. Supp. 2d at 1147. 
¶89 Not only does the Huron limitation render a nullity 
the tort of fraud in the inducement, but it also undermines the 
very doctrine it purports to support.  The lead opinion endorses 
the Huron limitation in furtherance of the economic loss 
doctrine.  However, the purposes for the economic loss doctrine 
are undermined by the Huron limitation.  As the lead opinion 
notes, the economic loss doctrine was created to (1) maintain 
the fundamental distinction between tort law and contract law; 
(2) protect commercial parties' freedom to allocate economic 
risk by contract; and (3) encourage the party best situated to 
assess the risk of economic loss, the commercial purchaser, to 
assume, allocate, or insure against risk. 
¶90 The first purpose of maintaining the distinction 
between tort law and contract law is compromised because the 
Huron limitation essentially eliminates the fraud in the 
inducement exception.  Eliminating tort law in favor of contract 
law does not maintain a distinction.  It instead does away with 
the distinction.  In addition, the Douglas-Hanson rule, which 
does not have the Huron limitation, constitutes "a better, 
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bright-line rule" in that "it does not require courts to ask the 
murky 'interwoven' question."  Budgetel Inns, 8 F. Supp.2d at 
1149. 
¶91 With respect to the two other purposes for the 
economic loss doctrine, it is difficult for a party engaged in 
contract negotiations to freely assess, allocate and insure 
against risk when the other party is blatantly lying regarding 
material terms of the contract.  See Douglas-Hanson Co., 229 
Wis. 2d at 145-147.  The existence of tort remedies provides a 
deterrent effect against such conduct.  Accordingly, it is hard 
to see how a party's ability to freely assess, allocate and 
insure against risk is advanced by removing the deterrent effect 
created by the tort remedies. 
¶92 Let's be clear, we are talking here about fraudulent 
misrepresentation during the negotiations of a contract.  The 
parties should be able to operate under a legal backdrop that 
promotes honest negotiation.  While rescission and restitution 
may be adequate remedies in many fraudulent inducement cases, 
there are certainly cases in which the fraud is so blatant and 
extensive as to warrant tort damages.  Today, the lead opinion 
takes away the possibility of tort damages in those cases. 
¶93 I also disagree with the lead opinion's effort to 
expand the rule set forth in Daanen & Janssen, Inc. v. 
Cedarapids, Inc., 216 Wis. 2d 395, 573 N.W.2d 842 (1998), 
without sufficient analysis.  Daanen & Janssen held that privity 
is not required for the economic loss doctrine to bar a remote 
commercial purchaser from recovering economic losses from a 
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manufacturer under theories of strict liability and negligence.  
Id., 216 Wis. 2d 395, ¶1 and ¶38.  The lead opinion prefers a 
significant expansion of this rule to cover situations such as 
this case in which the plaintiff is not a remote commercial 
purchaser, the defendant is not a manufacturer, and the tort 
claim is not strict liability or negligence. 
¶94 Rather than explain its analysis, the lead opinion 
simply states that the language in Daanen & Janssen is clear in 
establishing a rule that the "economic loss doctrine precludes 
recovery in tort for solely economic losses, regardless of 
whether privity of contract exists between the parties."  Lead 
op., ¶4, ¶22 and ¶69.  However, the lead opinion's formulation 
is clearly an expansion of the holding of Daanen & Janssen and 
the lead opinion should more fully explain its reasoning for 
making such an expansion. 
¶95 Since 
Bacher 
had 
no 
contract 
with 
Ameritech, 
presumably the lead opinion's application of Daanen & Janssen 
leaves Bacher without a tort remedy or a contract remedy.  It 
acknowledges that Bacher raised the concern that if the economic 
loss doctrine prevents its intentional tort claim, it will be 
left without a remedy for Ameritech's fraud.  Lead op., ¶31.  
However, the opinion does not explain why Bacher being left 
without a remedy is the correct result.  Perhaps it did not 
address this question because it cannot fairly answer it. 
¶96 Finally, I take issue with the lead opinion's third 
conclusion in this case:  "We also hold that recovery of the 
benefit of the bargain is not permissible where the fraud in the 
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inducement exception applies and tort remedies are sought."  
Lead op., ¶4; see also ¶23, ¶67, ¶70.  Because the lead opinion 
determined in ¶62, ¶65 and ¶68 that Digicorp's and Bacher's 
fraud in the inducement claims are not permitted to proceed, I 
am at a loss as to why the opinion makes a conclusion that is 
only relevant if one of those claims was permitted to proceed. 
¶97 In sum, I disagree with the lead opinion's endorsement 
of the Huron limitation to the fraud in the inducement exception 
to the economic loss doctrine.  Further, I take issue with its 
unexplained effort to expand the Daanen & Janssen rule regarding 
contractual privity and its reaching out and taking a position 
on an issue regarding the benefit of the bargain that it need 
not address.  Accordingly, I respectfully dissent. 
¶98 I am authorized to state that WILLIAM A. BABLITCH, J. 
joins this dissent.