Opinion ID: 380443
Heading Depth: 2
Heading Rank: 2

Heading: Johns-Manville's Appeal

Text: 14 As it did in the district court, Johns-Manville urges here that there is no cause of action under Illinois tort law against the seller of a product for the failure of the product to perform as it was expected, as distinguished from injuries to persons or other property caused by a defect in the product. In support of this position, Johns-Manville relies primarily on two cases decided by the intermediate appellate courts of Illinois. 15 In Rhodes Pharmacal Co. v. Continental Can Co., 72 Ill.App.2d 362, 219 N.E.2d 726 (1966), the plaintiff sued an aerosol can manufacturer for damages that resulted from the leakage of cans in which the plaintiff's product was packaged. The appellate court concluded that liability could be based on the existence of an implied warranty of fitness, but held that the plaintiff had no cause of action for strict tort liability. The court stated simply we are not persuaded that the doctrine of 'strict tort liability' should be applied here. Id. at 368, 219 N.E.2d at 730. 16 More recently, in Alfred N. Koplin & Co. v. Chrysler Corp., 49 Ill.App.3d 194, 7 Ill.Dec. 113, 364 N.E.2d 100 (1977), the court extensively considered the justifications underlying the refusal to impose tort liability on a product manufacturer for the failure of its product to perform satisfactorily. The plaintiff had purchased two air conditioning units manufactured by Chrysler. When the units failed to work correctly, suit was brought against Chrysler for the costs of repairing and replacing the units. The jury found that (1) Chrysler had given the plaintiff an express warranty; (2) Chrysler negligently manufactured the products; and (3) the plaintiff was not contributorily negligent. After reviewing the record, the court concluded that Chrysler had expressly disclaimed any warranties of merchantability or fitness. It therefore reversed the verdict for the plaintiff based on the contract claim and turned to the question whether Illinois tort law provided a basis for recovery. Id. at 197, 7 Ill.Dec. at 116, 364 N.E.2d at 101-02. The court asserted that this case falls within the narrow range of situations dividing tort theory from contract theory. This is so because the loss suffered by plaintiff in this case was 'economic' loss . . . . Id. at 199, 7 Ill.Dec. at 116, 364 N.E.2d at 103. Economic loss was defined by the court as  'damages for inadequate value, costs of repair and replacement of the defective product or consequent loss of profits without any claim of personal injury or damage to other property.'  Id. (quoting Note, Economic Loss in Products Liability Jurisprudence, 66 Colum.L.Rev. 917, 918) (emphasis added). 8 The line of demarcation between physical harm and economic loss, the court declared, reflects the line of demarcation between tort theory and contract theory. Id. at 199, 7 Ill.Dec. at 117, 364 N.E.2d at 104. It noted that the jurisdictions were divided on the question of tort recovery for economic losses, id. at 202, 7 Ill.Dec. at 119, 364 N.E.2d at 105-06 (citing cases), but chose to follow the lead of the Rhodes court and hold that a manufacturer is not liable under tort doctrines for the failure of its products to perform properly: 17 We conclude, as did the court, without analysis, in Rhodes, that tort theory (there strict liability, here negligence) does not extend to permit recovery against a manufacturer for solely economic losses absent property damage or personal injury from the use of the product. 18 Id. at 203, 7 Ill.Dec. at 120, 364 N.E.2d at 107. Accordingly, the judgment of the trial court was reversed in full. 19 As we observed just a short time ago, the concept that a federal court must determine state law is somewhat misleading inasmuch as it implies the existence of a readily accessible and easily understood body of state law. 9 In those few instances in which the highest state court has recently addressed the precise question at issue in the occurrent action, the application of state law is readily achieved. The problem of ascertainment arises where, as here, the highest state court has not yet dealt with the issue at hand. Under these circumstances, it is the duty of the federal court to predict how the state's highest court would decide the question were it adjudicating the matter. 10 In order to make an accurate prediction of this kind, a federal court should examine all relevant sources of the pertinent state law including related decisions of the highest state court, decisions of the intermediate appellate courts, decisions of lower courts, scholarly treatises, Restatements of Laws, and germane law review articles. 11 20 Inasmuch as the Supreme Court of Illinois has not addressed the question whether economic losses are recoverable under tort theories of liability, we cannot ascertain precisely the Illinois law on this subject. We are persuaded, however, that were the state supreme court to consider this question today, it would follow the decisions in Rhodes and Koplin, which find support in several well-reasoned discussions by other courts and commentators. 12 21 About fifteen years ago, the Supreme Courts of New Jersey and California handed down the two landmark opinions in this area. In Santor v. A and M Karagheusian, Inc., 44 N.J. 52, 207 A.2d 305 (1965), the plaintiff purchased carpeting, that had been manufactured by the defendant, from a third-party seller. After several months, unsightly lines began to appear on the surface of the carpeting. The trial court determined that there was an implied warranty of fitness and concluded that the defendant breached the warranty. The Supreme Court of New Jersey affirmed and held that the plaintiff could maintain a breach of implied warranty claim directly against the manufacturer despite the lack of privity between them. In dicta, the court went on to declare that the plaintiff also possessed a cause of action for strict tort liability. It reasoned that, as with cases involving personal and property injuries caused by defective products, a manufacturer of an unsatisfactory product is better able to insure against and to spread the risk of economic losses than are individual consumers: 22 (W)hen the manufacturer presents his goods to the public for sale he accompanies them with a representation that they are suitable and safe for the intended use. . . . The obligation of the manufacturer thus becomes what in justice it ought to be an enterprise liability, and one which should not depend upon the intricacies of the law of sales. The purpose of such liability is to insure that the cost of injuries or damage, either to the goods sold or to other property, resulting from defective products, is borne by the makers of the products who put them in the channels of trade, rather than by the injured or damaged persons who ordinarily are powerless to protect themselves. 23 Id. at 64-65, 207 A.2d at 311-12. 24 Several months after Santor was decided, the California Supreme Court adopted a contrary position in Seely v. White Motor Co., 63 Cal.2d 9, 403 P.2d 145, 45 Cal.Rptr. 17 (1965). There, Seely purchased a truck manufactured by the defendant. Upon taking possession, Seely discovered that the truck bounced violently. Nine months later, the truck overturned. Seely, who was not injured, had the damage repaired and ceased making his installment payments on the truck. The defendant subsequently repossessed the truck. Seely sued on theories of breach of express warranty and strict tort liability, and sought damages for the repair of the truck, for money paid on the purchase price, and for lost profits occasioned by the unsuitability of the truck for normal use. The trial court denied the claim for damages for the cost of repair because it found that the plaintiff failed to prove that the defect caused the accident, but awarded the plaintiff damages for money paid on the purchase price and for lost profits. 25 The California Supreme Court, holding that the manufacturer was liable on the basis of the express warranty, affirmed. It rejected strict liability, however, on the ground that the economic loss involved the failure of the product to perform to the level of the party's expectations a concept that, for both traditional and practical reasons, is grounded essentially in the law of contracts, not the law of torts. Writing for the court, Chief Justice Traynor extensively analyzed the relationship between contract law and tort law: 26 The distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the luck of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products. He can appropriately be held liable for physical injuries caused by defects by requiring his goods to match a standard of safety defined in terms of conditions that create unreasonable risks of harm. He cannot be held for the level of performance of his products in the consumer's business unless he agrees that the product was designed to meet the consumer's demands. A consumer should not be charged at the will of the manufacturer with bearing the risk of physical injury when he buys a product on the market. He can, however, be fairly charged with the risk that the product will not match his economic expectations unless the manufacturer agrees that it will. Even in actions for negligence, a manufacturer's liability is limited to damages for physical injuries and there is no recovery for economic loss alone. 27 Id. at 18, 403 P.2d at 151-52, 45 Cal.Rptr. at 23-24, quoted in Koplin, 49 Ill.App.3d at 200-02, 7 Ill.Dec. at 118, 364 N.E.2d at 105. 28 In cases decided subsequently to Santor and Seely, a large majority of courts following Seely have held that economic losses are not recoverable under claims sounding in tort law. 13 As noted above, both Illinois appellate courts that have addressed the question adopted this rule. Indeed, the Koplin court specifically rejected Santor and instead relied heavily on Chief Justice Traynor's analysis in Seely. See 49 Ill.App.3d at 200-02, 7 Ill.Dec. at 117-19, 364 N.E.2d at 104-05. 29 The position adopted in Koplin and Rhodes also has been more favorably received by the commentators than was the Santor analysis. 14 Dean Prosser even went so far as to assert: 30 There can be no doubt that the seller's liability for negligence covers any kind of physical harm, including not only personal injuries, but also property damage to the defective chattel itself, as where an automobile is wrecked by reason of its own bad brakes, as well as damage to any other property in the vicinity. But where there is no accident, and no physical damage, and the only loss is a pecuniary one, through loss of the value or use of the thing sold, or the cost of repairing it, the courts have adhered to the rule . . . that purely economic interests are not entitled to protection against mere negligence, and so have denied the recovery. 15 31 Disallowance of tort claims for economic losses accords with the provisions of the Restatement (Second) of Torts that discuss a manufacturer's liability for negligence and for strict liability. Section 323 of the Restatement (Second), for example, which defines the liability of one who negligently performs an undertaking to render services, provides that a manufacturer is liable to persons using its products for physical harm caused by its negligence. Neither the rule nor its accompanying commentary and illustrations extends liability for negligence to encompass economic losses. 16 Similarly, §§ 402A and 402B, which establish respectively strict liability for defective products and misrepresentation in the sale of products, apply only where the product or misrepresentation causes physical harm to the user of the product. Nowhere in the accompanying commentary or illustrations do the reporters of the Restatement indicate that the doctrine of strict liability covers economic losses. 17 Indeed, comment d to § 402B strongly implies that the rule was not intended to overlap the provisions of the Uniform Commercial Code or the common law of sales, which traditionally provided the sole basis for recovery of economic losses: The liability stated in this section is liability in tort, and not in contract; and if it is to be called one of 'warranty,' it is at least a different kind of warranty from that involved in the ordinary sale of goods from the immediate seller to the immediate buyer. 18 32 Policy considerations also support the view that the Illinois Supreme Court would follow the decisions in Rhodes and Koplin. Courts have adopted strict liability for cases involving injury to persons or other property in order to place the cost of such injuries on the manufacturer the party best able to distribute the costs. Inasmuch as the defective product may well injure persons who have not purchased the product or in any way dealt with the manufacturer, there is no price mechanism by which to insure such persons against the risk of loss. As a consequence, there is no way effectively to internalize the product's true costs, which necessarily include the risk that some products will be defective and cause injury. The imposition on manufacturers of strict liability for defective products accomplishes the cost internalization that the price mechanism cannot achieve by placing the complete cost of the injuries on the manufacturer. In turn, the manufacturer can allocate a portion of that cost to the purchasers of its products in the form of higher prices. 19 33 The rationale behind strict liability in personal injury situations is not well-suited to claims alleging only economic loss. Economic loss results from the failure of the product to perform to the level expected by the buyer and the seller. Such loss is most frequently measured by the cost of repairing the infirmity or by the difference in the value of the product as it exists and the value it would have had if it performed as expected. 20 Thus, economic loss is almost always incurred by the owner of the product, not by persons who merely use it or come into contact with it. The original purchaser, particularly a large company such as Jones & Laughlin, can protect itself against the risk of unsatisfactory performance by bargaining for a warranty. Alternatively, it may choose to forego warranty protection in favor of a lower purchase price for the product. Subsequent purchasers may do likewise in bargaining over the price of the product. In any event, because persons other than the owner of the product will not incur economic losses resulting from the product's poor performance, the costs associated with economic loss will likely be reflected in the price of the product. There accordingly would seem to be no need to internalize these costs through a non-price mechanism such as strict liability. 34 Finally, the extension of strict liability proposed here by Jones & Laughlin would appear to conflict with the decision by the Illinois Legislature to enact the sale provisions of the Uniform Commercial Code (UCC). Ill.Rev.Stat. ch. 26, §§ 2-101 to 2-725 (1973). Section 2-313 of the Code recognizes the existence of express warranties, and § 2-314 enacts an implied warranty of merchantability and fitness. Section 2-314 provides that (u)nless excluded or modified . . ., a warranty that the goods shall be merchantable is implied in a contract for their sale. Id. § 2-314(1). To be merchantable, the goods, inter alia, must be fit for the ordinary purposes for which such goods are used. Id. § 2-314(2)(c). The Code also provides, however, that the parties to a sales contract may agree that the buyer possesses no warranty protection at all, or may limit any warranties in any reasonable manner. Id. § 2-316. The parties may even agree to exclude the implied warranty of merchantability and fitness if they do so in writing, and may modify the implied warranty by clear and conspicuous language. Id. § 2-316(2). 35 The extension of strict liability to cover economic losses in effect would make a manufacturer the guarantor that all of its products would continue to perform satisfactorily throughout their reasonably productive life. Inasmuch as the doctrine of strict liability does not permit a manufacturer to limit its liability through the use of a waiver or a limited warranty, 21 importation of strict liability into the economic loss area would effectively supersede § 2-316 of the UCC. Yet, there is nothing in prior opinions of the Illinois Supreme Court to suggest that it would undertake such an encroachment on the legislative prerogative. As the Supreme Court of Idaho remarked recently in dealing with this very question: 36 (T)he legislatures of nearly every state in the Union, have adopted the UCC which carefully and painstakingly sets forth the rights between the parties in a sales transaction with regard to economic loss. This Court, in the common law evolution of the tort law of this state, must recognize the legislature's action in this area of commercial law and should accommodate when possible the evolution of tort law with the principles laid down in UCC. 22 37 Consequently, we do not believe that the Illinois Supreme Court would extend its common law of tort liability in the manner suggested by Jones & Laughlin. 38 For the foregoing reasons, we predict that the Illinois Supreme Court would hold that economic losses are not recoverable under claims based on principles of tort law. The decisions of the intermediate Illinois appellate courts, the considered opinions of the vast majority of other courts and commentators who have addressed the matter, and reasons of public policy and judicial deference combine to support such a decision. Inasmuch as Illinois law does not permit a claim for economic loss to be premised on tort theories, we hold that Jones & Laughlin has not stated valid causes of action for strict liability or for negligence. Since we believe that the district court erred in denying Johns-Manville's motion for judgment notwithstanding the verdict, the judgment in favor of Jones & Laughlin will be reversed.