Opinion ID: 3012319
Heading Depth: 3
Heading Rank: 2

Heading: Intentional Fraud Exception

Text: Appellants next challenge the district court’s order on the grounds that it improperly applied the economic loss doctrine to their fraudulent concealment and UTPCPL claims, as they contend that pertinent Pennsylvania state court decisions and federal district court opinions interpreting Pennsylvania law do not support its holding. Ford argues, however, that the district court, after reviewing persuasive case law from other jurisdictions, correctly predicted that the Supreme Court of Pennsylvania would resist creating an exception for intentional fraud actions. Before examining decisions from other jurisdictions addressing whether the economic loss doctrine bars claims of intentional fraud, the district court first found a split in authority among Pennsylvania federal district courts on the issue. Appellants maintain, however, that there is no such split arguing that the three decisions arising out of the Eastern District of Pennsylvania that the court cited in support of its finding are distinguishable. Appellants explain that Factory Market, Inc. v. Schumer International, Inc., 987 F. Supp. 387, 395, 397 (E.D. Pa. 1997), and Sun Co., Inc. v. Badger Design & Constructors, Inc., 939 F. Supp. 365, 370, 374 (E.D. Pa. 1996), involved negligent 20 misrepresentation claims, not intentional fraud claims. In addition, they argue that the passage in Sneberger v. BTI Americas, Inc., No. Civ. A. 98-932, 1998 WL 826992, at  (E.D. Pa. Nov. 30, 1998), stating that fraud and negligent misrepresentation actions are barred by the economic loss doctrine was dicta supported by only one case, Eagle Traffic Control v. Addco, 882 F. Supp. 417 (E.D. Pa. 1995), which itself was a negligent misrepresentation case. Appellants contend that, inasmuch as there is not a split in authority among district courts interpreting Pennsylvania law, the district court erred in relying on authority from other jurisdictions in predicting how the Supreme Court of Pennsylvania would decide the issue. Appellants submit that the district court should have followed the holdings of the other federal district courts in Pennsylvania to have addressed the specific issue raised in this case-- namely, whether claims for intentional fraud, as distinguished from negligent misrepresentation, are barred by the economic loss doctrine. See Peerless Wall & Window Coverings, Inc. v. Synchronics, Inc., 85 F. Supp. 2d 519, 535 (W.D. Pa. 2000); KNK Med.-Dental Specialities, Ltd. V. Tamex Corp. , Nos. Civ. A. 99-3409, Civ. A. 99-5265, 2000 WL 1470665, at  (E.D. Pa. Sept. 28, 2000); Polymer Dynamics, Inc. v. Bayer Corp., No. Civ. A. 99-4040, 2000 WL 1146622, at  n.5 (E.D. Pa. Aug. 14, 2000); Montgomery County v. Microvote Corp., No. Civ. A. 97-6331, 2000 WL 134708, at  (E.D. Pa. Feb. 3, 2000); N. Am. Roofing & Sheet Metal Co., Inc. v. Bldg. & Constr. Trades Council of Phila. & Vicinity, AFL-CIO , No. Civ. A. 99-2050, 2000 WL 230214, at  (E.D. Pa. Feb. 29, 2000); Sunquest Info. Sys., Inc. v. Dean Witter Reynolds, Inc., 40 F. Supp. 2d 644, 658 (W.D. Pa. 1999); Auger v. Stouffer Corp., No. 93-2529, 1993 WL 364622, at  (E.D. Pa. Aug. 31, 1993); Palco Linings, Inc. v. Pavex, Inc., 755 F. Supp. 1269, 1271 (M.D. Pa. 1990). In the face of appellants’ string of district court decisions, Ford first notes that the district court opinions are not binding on this court, for we must give only Pennsylvania state court decisions proper regard. Ford then goes on to argue that all of these cases are unavailing because they can be traced back to Palco Linings, 755 F. Supp. at 1271, which is not based on a Pennsylvania state court decision, 21 but on the Illinois Supreme Court opinion in Moorman Manufacturing Co. v. National Tank Co., 435 N.E.2d 443 (Ill. 1982). See Peerless Wall, 85 F. Supp. 2d at 535; KNK Med., 2000 WL 1470665, at ; Polymer Dynamics, 2000 WL 1146622, at  n.5; Montgomery County, 2000 WL 134708, at ; N. Am. Roofing, 2000 WL 230214, at ; Sunquest, 40 F. Supp. 2d at 658; Auger, 1993 WL 364622, at . Ford also points out that the district courts in KNK Medical, Polymer Dynamics, and Montgomery County -- like the district court in this case -- explicitly recognized that there was a split in authority on the issue. Moreover, as Ford asserts, the three decisions lend questionable support to appellants’ argument in favor of an intentional fraud exception. For instance, KNK Medical is unavailing because the court permitted the fraud claim only after concluding that it was sufficiently distinct from [the] contract claims. KNK Med., 2000 WL 1470665, at . Polymer Dynamics is not controlling because the court explicitly declined to resolve the question after noting that the defendant did not raise the doctrine as a defense. See Polymer Dynamics, 2000 WL 1146622, at  n.5. Finally, Montgomery County is unreliable because the court emphatically stated that the economic loss doctrine bars the County’s recovery for both negligent and intentional misrepresentation, but then inexplicably reversed course and permitted the plaintiff ’s intentional misrepresentation claim, perhaps out of an abundance of caution in light of the apparent split in authority. Montgomery County, 2000 WL 134708, at . We are satisfied from our review of the case law Ford and appellants cite that the law in Pennsylvania with respect to the application of the economic loss doctrine to intentional fraud actions remains unsettled, and the district court opinions interpreting Pennsylvania law on the point provide little guidance. As already noted, the Supreme Court of Pennsylvania and the other Pennsylvania appellate courts have not resolved the issue in a published opinion. The Pennsylvania federal district court cases appellants and Ford cite are of limited help, for not only is there an apparent split among them, but these opinions address the issue in a very conclusory fashion without providing any explanation why the Supreme Court of Pennsylvania would 22 rule in a particular way. Moreover, as Ford points out, these district court prognostications do not control our prediction of how the Supreme Court of Pennsylvania would settle the issue. Having determined that the federal and state decisions interpreting Pennsylvania law shed little light on the question at issue, we next look outside the jurisdiction for persuasive authority on the subject. See Hughes v. Long, 242 F.3d 121, 128 (3d Cir. 2001) (In predicting how a matter would be decided under state law we examine: (1) what the Pennsylvania Supreme Court has said in related areas; (2) the decisional law of the Pennsylvania intermediate courts; (3) federal appeals and district court cases interpreting state law; and (4) decisions from other jurisdictions that have discussed the issues we face here.). We start with the three opinions interpreting Florida, Wisconsin, and Minnesota law that the district court cited in its order. See Hoseline, Inc. v. U.S.A. Diversified Prods., Inc., 40 F.3d 1198, 1200 (11th Cir. 1998); Cooper Power Sys., Inc. v. Union Carbide Chem. & Plastics Co., Inc., 123 F.3d 675, 682 (7th Cir. 1997); Nelson Distrib., Inc. v. Stewart-Warner Indus. Balancers, a Div. of Stewart-Warner Corp., 808 F. Supp. 684, 688 (D. Minn. 1992). Appellants assert that these opinions are irrelevant, insisting that we should disregard them because they bear no relation to this consumer fraud action. Br. of Appellants at 26 n.9. Aside from referring to the opinions as out-of-court decisions, however, appellants fail to explain why the opinions are inapposite. Instead, they simply comment that the opinions underscore their argument that we already have rejected that the economic loss doctrine is limited to disputes between commercial enterprises. Notwithstanding appellants’ position, these opinions squarely support the district court’s holding, as they undeniably recognize that the economic loss doctrine bars tort recovery for intentional fraud claims. Nevertheless, we find that the opinions are short on explanation and therefore provide little insight into how the Supreme Court of Pennsylvania might resolve the matter. Appellants urge us to adopt the position appellants advance because it represents the majority rule. In a 23 footnote in their reply brief, they cite 23 cases from other federal and state jurisdictions recognizing some type of fraud exception to the economic loss doctrine. See Br. of Appellants at 10-12 n.6. After reviewing the opinions cited in both parties’ briefs and conducting our own independent research, we find most persuasive the well-developed federal and state case law interpreting Michigan and Wisconsin law regarding the economic loss doctrine. We particularly are influenced by an emerging trend in these and other jurisdictions recogniz[ing] a limited exception to the economic loss doctrine for fraud claims, but only where the claims at issue arise independent[ly] of the underlying contract. Raytheon Co. v. McGraw-Edison Co., Inc., 979 F. Supp. 858, 870 (E.D. Wis. 1997). The leading case is Huron Tool & Engineering Co. v. Precision Consulting Services, Inc., 532 N.W.2d 541, 545 (Mich. Ct. App. 1995), in which a Michigan state appellate court recognized an exception for fraud-in-the-inducement claims, but only if the fraud is extraneous to the contract, not interwoven with the breach of contract. The court acknowledged that [f]raud in the inducement presents a special situation where parties to a contract 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. Id. The court limited the exception for fraud-in-the-inducement claims, however, stating that 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. Accordingly, the court held that the plaintiff may pursue a claim for fraud in the inducement extraneous to the alleged breach of contract. Id. at 546. Huron’s impact extends beyond Michigan. The Court of Appeals for the Seventh Circuit relied on Huron when it determined that there was no basis for treating an intentional misrepresentation claim differently from a negligent misrepresentation claim under Wisconsin law. See Cooper Power, 123 F.3d at 682. Explaining that the plaintiff 24 was free to extract an express warranty from the manufacturer to remedy any misrepresentation, whether intentional or innocent, the court reasoned that intentional [m]isrepresentations . . . that ultimately concern the quality of the products sold[ ] are properly remedied through claims for breach of warranty. Id. The Huron limitation also influenced the Court of Appeals for the Eighth Circuit when it concluded that [a] fraud claim independent of the contract is actionable, but it must be based upon a misrepresentation that was outside of or collateral to the contract, such as many claims of fraudulent misrepresentation. AKA Distrib. Co. v. Whirlpool Corp., 137 F.3d 1083, 1086 (8th Cir. 1998). Finally, the Florida Supreme Court explicitly embraced Huron ’s distinction between fraud extraneous to the contract and fraud interwoven with the breach of contract when it held that [w]here a contract exists, a tort action will lie for either intentional or negligent acts considered to be independent from acts that breached the contract. HTP, Ltd. v. Lineas Aereas Costarricenses, S.A., 685 So. 2d 1238, 1239-40 (Fla. 1996). This approach is not without its critics, however, as at least one district court in the Eastern District of Wisconsin has challenged the Huron limitation on several grounds. See Budgetel Inns, Inc. v. Micros Sys., Inc., 8 F. Supp. 2d 1137 (E.D. Wis. 1998) (Budgetel I); Budgetel Inns, Inc. v. Micros Sys., Inc., 34 F. Supp. 2d 720 (E.D. Wis. 1999) (Budgetel II). That court presented three reasons to support its prediction that the Wisconsin Supreme Court would reject Huron and conclude that fraud-in-the-inducement claims as a rule are not barred by the economic loss doctrine. First, it surmised that the practical effect of the Huron limitation would be the complete elimination of the fraud-in-the-inducement exception because fraudulent inducement cases always involve misrepresentations concerning the quality or characteristics of the subject matter of the underlying contract. See Budgetel I, 8 F. Supp. at 1146. See also Black’s Law Dictionary at 661 (6th ed. 1990) (defining fraud in the inducement as [m]isrepresentation as to the terms, quality or other aspects of a contractual relation . . . that leads a person to agree to enter into the transaction with a false impression 25 or understanding of the risks, duties or obligations she has undertaken). Second, the court stated that fraudulent inducement claims are, in reality, always independent of the contract insofar as the fraudulent inducement must occur before the formation of the contract. See Budgetel I, 8 F. Supp. 2d at 1147. Third, the court found that the Huron limitation conflicted with the underlying policies of the economic loss doctrine inasmuch as intentional misrepresentations impede parties from freely allocating economic risk between them. See id. at 1148. Only eight months after the court decided Budgetel II, another district court in the Eastern District of Wisconsin upheld the Huron limitation and, in so doing, responded to each of the criticisms of Huron in the Budgetel opinions. See Rich Prod. Corp. v. Kemutec, Inc., 66 F. Supp. 2d 937, 977-80 (E.D. Wis. 1999). First, the court rejected the notion that the limitation rendered the fraud-in-the-inducement exception a nullity, maintaining that [i]t is not difficult to conceive of several scenarios giving rise to claims for fraud in the inducement that survive a challenge under Huron. See id. at 979. The court explained: For example, a company might falsely misrepresent its financial condition, or the level of its insurance coverage, in order to induce another company to enter into a contract. Such considerations, while they may be relevant when considering who[m] to do business with, do not concern the underlying subject matter of the contract or a party’s performance thereunder. Another example is representations regarding organizational form and status. A company may represent itself as a non-profit, charitable organization in order to induce another company to do business on terms more favorable than would otherwise be the case. Or someone doing business as a corporation may represent themselves as a sole proprietorship or partnership, inducing another party to do business thinking they have recourse against personal assets should a dispute develop. Such representations have nothing to do with the subject matter of the underlying contracts or the offending party’s performance thereunder, yet they may inflict damages upon the 26 party that relies on them when deciding whether or not to do business. The Huron limitation may set the bar high, but it is not the death knell of fraud in the inducement claims between contracting parties. Id. Second, the Rich Products court stated that if fraudulent inducement claims are exempted from the economic loss doctrine because, as Budgetel asserted, they always arise independently of a contract, then the economic loss doctrine would be rendered a nullity, and tort law would swallow contract law. The court explained that ifall claims for fraud in the inducement are extraneous or independent of the contract because they occur ‘prior to the formation of the contract itself,’ . . . every breach of warranty claim would be turned into a tort by a simple affidavit stating, in effect, that the warranty was spoken before it was written. Id. (internal citation omitted). The court also warned that written disclaimers of warranties could be voided after the fact by the same affidavit, so long as the oral representations preceded the contract, thus causing chaos and uncertainty in commercial transactions. Id. Third, the Rich Products court rejected the Budgetel court’s concerns that the Huron limitation conflicts with the underlying purpose of the economic loss doctrine by allowing intentional misrepresentations to hamper the bargaining process and prevent the free allocation of economic risk by the parties. It explicated that[w]arranties of merchantability and fitness for a particular purpose are common hedges against the carelessness or outright dishonesty of a party’s representations regarding the subject matter of a contract. Id. at 980. The district court in this case seems to have followed the Huron line of cases when it found more persuasive the reasoning of courts that do bar fraud claims that are intertwined with contract claims and the resulting loss has been economic. Werwinski, 2000 WL 1201576, at  (emphasis added). Indeed, because appellants’ fraudulent concealment claims relate to the quality or character of the goods sold, the claims clearly are intertwined with, and not extraneous to, their breach of warranty claims. Huron, 27 532 N.W.2d at 545. Appellants’ fraud claims are undergirded by factual allegations identical to those supporting their breach of contract counts. Pub. Serv. Enter. Group, Inc. v. Phila. Elec. Co., 722 F. Supp. 184, 201 (D.N.J. 1989). Moreover, the alleged fraudulent concealment did not cause harm to the plaintiffs distinct from those caused by the breach of contract; and the mere fact that disclosure of certain facts to plaintiffs may have allowed them to take corrective action does not change the result. Id. In addition to exploring persuasive authority from other jurisdictions, we also examine the justifications presented by the parties in support of their competing positions. Ford argues that appellants have failed to articulate any rationale for carving out an exception for intentional fraud actions when the alleged misrepresentation relates to the quality or properties of the subject matter of the underlying contract. See Br. of Appellee at 28. In particular, Ford submits that neither appellants nor any of the opinions they cite provide any justification for treating intentional fraud actions differently from negligent misrepresentation actions, which both parties agree the economic loss doctrine bars under Pennsylvania state case law. Ford explains that from the perspective of a buyer, intentional (fraudulent) and innocent (negligent) misrepresentations have the same effect, and a buyer can insure against both types of harms through express warranties and statutory warranties. Id. at 30. As Ford opines, just as the purchaser can protect itself in the contractual language against the other party’s innocent, though wrong representations, so too can it protect itself -- by means of warranty -- against the other party’s intentionally wrong representations about a product’s performance or durability. Id. (internal citations and internal quotation marks omitted). The essence of appellants’ rationale for an intentional fraud exception is that applying the economic loss doctrine to such claims would not serve the doctrine’s purpose of preventing tort law from reallocating risks between parties who fairly have negotiated an arms-length contract. First, appellants maintain that a transaction has not been 28 negotiated fairly -- and therefore does not allocate risk fairly -- if one party has made intentional false misrepresentations to the other. Second, appellants explain that a party making an intentional misrepresentation is in a better position to assess the true risks associated with a contract and therefore should bear the risk of liability for a fraud claim. Amico v. Radius Communications, Inc., No. 1793, slip op. at 7 (C.P. Phila. Jan. 9, 2001) (attached as Exhibit B to Reply Brief of Appellants). Finally, appellants submit that parties to a contract should not have to anticipate possible intentional misrepresentations by the other party when negotiating the allocation of risk between the parties: Although it makes sense to allow parties to allocate the risk of mistakes or accidents that lead to economic losses, it does not make sense to extend the [economic loss] doctrine to intentional acts taken by one party to subvert the purposes of the contract. Although theoretically parties could include contractual provisions discussing the allocation of responsibility when one party intentionally lies or misleads the other, it would not be conducive to amicable commercial relations to require parties to include such clauses in contracts. Expressing such a basic lack of trust in the other party would be likely to sour a deal from the start. A party to a contract cannot rationally calculate the possibility that the other party will deliberately misrepresent terms critical to that contract. Public policy is better served by leaving the possibility of an intentional tort suit hanging over the head of a party considering outright fraud . . . . First Republic Bank v. Brand, No. 147, slip op. at 13 (C.P. Phila. Dec. 19, 2000) (quoting Stoughton Trailers, Inc. v. Henkel Corp., 965 F. Supp. 1227, 1236 (W.D. Wis. 1997)) (attached as Exhibit C to Reply Brief of Appellants). Both parties provide plausible explanations for their respective positions. On the one hand, appellants’ policy justifications for creating an intentional fraud exception are somewhat persuasive, as it makes sense to provide parties 29 who have been victims of another party’s intentionally fraudulent behavior special protections under tort law in order to deter such behavior. On the other hand, appellants are unable to explain why contract remedies are inadequate to provide redress when the alleged misrepresentation relates to the quality or characteristics of the goods sold. As Ford points out, the mental state of the wrongdoer is irrelevant from the buyer’s perspective: a plaintiff suffers the same harm -- i.e., economic losses-- regardless of whether the misrepresentation is innocent, negligent, or intentional. Moreover, express warranties and state warranty statutes can provide for compensation to be awarded for these economic losses, regardless of whether the misrepresentation is innocent, negligent, or intentional. Thus, the need to provide a plaintiff additional tort remedies is diminished greatly when (1) the plaintiff can be made whole under contract law, and (2) allowing additional tort remedies will impose additional costs on society. As we have stated previously, when loss of the benefit of a bargain is the plaintiff ’s sole loss, . . . the undesirable consequences of affording a tort remedy in addition to a contract-based recovery [are] sufficient to outweigh the limited interest of the plaintiff in having relief beyond that provided by warranty claims. Duquesne Light , 66 F.3d at 618-19 (internal quotations omitted). Furthermore, the district court based its prediction as to how the Supreme Court of Pennsylvania would resolve the issue on sound deductive reasoning. The district court applied the economic loss doctrine to the fraudulent concealment claims after recognizing the willingness of Pennsylvania courts to restrict intentional tort claims that overlap with contract claims. In particular, the district court cited the gist of the action doctrine 8 as evidence of _________________________________________________________________ 8. As Phico Insurance Co. v. Presbyterian Medical Services Corp., 663 A.2d 753, 757 (Pa. Super. Ct. 1995), articulated, the gist of the action doctrine bars plaintiffs from bringing a tort claim that merely replicates a claim for breach of an underlying contract. Appellants spend several pages of their opening brief challenging the district court’s conclusion with respect to the gist of the action doctrine. Appellants misinterpret the district court’s opinion, however, as relying on the gist of the action doctrine as an alternate basis for dismissing appellants’ fraud claims. As Ford correctly points out, the district court merely cited that rule by analogy as an indication of the Pennsylvania Supreme Court’s likely leanings if presented with this issue in the context of the analogous economic loss doctrine. Br. of Appellee at 28-29 n.11. 30 the Pennsylvania courts’ penchant for dismissing fraud claims that simply restate breach of contract claims. In the absence of any pertinent Pennsylvania case law on the subject, the district court aptly predicted that the Supreme Court of Pennsylvania would apply the economic loss doctrine to intentional fraud cases by drawing an analogy from Pennsylvania’s acceptance of the gist of the action doctrine. Such a conclusion is congruent with our past recognition that Pennsylvania state courts have exhibited a lack of hospitality to tort liability for purely economic loss. Aloe Coal Co. v. Clark Equip. Co., 816 F.2d 110, 119 (3d Cir. 1987). See also Pub. Serv. Enter. Group, Inc., 722 F. Supp. at 193 (recognizing that Pennsylvania law is hostile to the recovery of economic losses in tort). Finally, even if we were torn between two competing yet sensible interpretations of Pennsylvania law and did not find the district court’s deductive reasoning to be persuasive, we should opt for the interpretation that restricts liability, rather than expands it, until the Supreme Court of Pennsylvania decides differently. See City of Philadelphia v. Beretta U.S.A. Corp., 277 F.3d 415, 421 (3d Cir. 2002); Home Valu, Inc. v. Pep Boys, 213 F.3d 960, 965 (7th Cir. 2000) (Where, as in this case, we are faced with two equally plausible interpretations of state law, we generally choose the narrower interpretation which restricts liability, rather than a more expansive interpretation which creates substantially more liability. (internal quotation marks omitted)). The economic loss doctrine is designed to place a check on limitless liability for manufacturers and establish clear boundaries between tort and contract law. Carving out an exception for intentional fraud would eliminate that check on liability and blur the boundaries between the two areas of law, thus exposing manufacturers to substantially greater liability. In light of these realities, we select the path that limits liability by rejecting appellants’ request for an intentional fraud exception. Based on these reasons, we believe the district court correctly applied the economic loss doctrine to appellants’ fraudulent concealment claims. Therefore, we will affirm the district court’s order with respect to appellants’ common law fraudulent concealment claims. 31