Opinion ID: 1915029
Heading Depth: 2
Heading Rank: 1

Heading: Common-Law Fraud Claim

Text: [3] ¶ 12. The plaintiffs' common-law fraud claim is premised on the allegation that Harley failed to disclose or concealed the existence of the cam bearing defect prior to the plaintiffs' purchases of their motorcycles. It is well-established that a nondisclosure is not actionable as a misrepresentation tort unless there is a duty to disclose. Ollerman v. O'Rourke Co., Inc., 94 Wis. 2d 17, 26, 288 N.W.2d 95 (1980). Our decision in Ollerman outlined the three categories of misrepresentation in Wisconsin lawintentional misrepresentation, negligent misrepresentation, and strict responsibility misrepresentationand described the common and distinct elements of the three torts. Id. at 24-25. [4, 5] ¶ 13. All misrepresentation claims share the following required elements: 1) the defendant must have made a representation of fact to the plaintiff; 2) the representation of fact must be false; and 3) the plaintiff must have believed and relied on the misrepresentation to his detriment or damage. Id. The plaintiffs here allege intentional misrepresentation, which carries the following additional elements: 4) the defendant must have made the misrepresentation with knowledge that it was false or recklessly without caring whether it was true or false; and 5) the defendant must have made the misrepresentation with intent to deceive and to induce the plaintiff to act on it to his detriment or damage. Id. [6] ¶ 14. Ollerman reiterated the general rule that in a sales or business transaction, silence, a failure to disclose a fact, is not an intentional misrepresentation unless the seller has a duty to disclose. Id. at 26. The existence and scope of a duty to disclose are questions of law for the court. Id. at 27. Ollerman held that a subdivider-vendor of a residential lot has a duty to a `non-commercial' purchaser to disclose facts which are known to the vendor, which are material to the transaction, and which are not readily discernible to the purchaser. Id. at 42. We specified that this was a narrow holding, premised on certain policy considerations present in non-commercial real estate transactions. Id. at 41-42. ¶ 15. The transactions at issue here, however, are motorcycle purchases, not residential real estate purchases, and it is an open question whether the duty to disclose recognized in Ollerman extends more broadly to sales of consumer goods. This is a significant common-law policy issue. Id. at 27. ([W]hen a court resolves a question of legal duty the court is making a policy determination.) But the parties did not brief it, and therefore we do not decide it.
[7] ¶ 16. Ollerman also held that damages in intentional misrepresentation cases are measured according to the benefit of the bargain rule, typically stated as the difference between the value of the property as represented and its actual value as purchased. Id. at 52-53. Benefit of the bargain damages in fraud cases depend on the nature of the bargain and the circumstances of each case. Id. at 53. [8] ¶ 17. In the context of deciding when a claim accrues for purposes of the statute of limitations, we have generally held that a tort claim is not capable of present enforcement (and therefore does not accrue) unless the plaintiff has suffered actual damage. Pritzlaff v. Archdiocese of Milwaukee, 194 Wis. 2d 302, 315, 533 N.W.2d 780 (1995); Hennekens v. Hoerl, 160 Wis. 2d 144, 152, 465 N.W.2d 812 (1991). Actual damage is harm that has already occurred or is reasonably certain to occur in the future. Pritzlaff, 194 Wis. 2d at 315; Hennekens, 160 Wis. 2d at 152-53. Actual damage is not the mere possibility of future harm. Id. at 153 (citing Meracle v. Children's Serv. Soc., 149 Wis. 2d 19, 26-27, 437 N.W.2d 532 (1989)). By statute, a fraud claim accrues when the aggrieved party discovers the facts constituting the fraud. Wis. Stat. § 893.93(1)(b). [2] Although we are not confronted here with a question of when this claim accrued for purposes of a statute of limitations defense, the amended complaint must adequately plead an actual injurya loss or damage that has already occurred or is reasonably certain to occurin order to state an actionable fraud claim. Ollerman, 94 Wis. 2d at 25, 54. In addition, fraud claims must be pleaded with particularity. Wis. Stat. § 802.03(2). [9] ¶ 18. The injury complained of here is diminution in value onlythe plaintiffs allege that their motorcycles are worth less than they paid for them. However, the amended complaint does not allege that the plaintiffs' motorcycles have diminished value because their engines have failed, will fail, or are reasonably certain to fail as a result of the TC-88 cam bearing defect. The amended complaint does not allege that the plaintiffs have sold their motorcycles at a loss because of the alleged engine defect. The amended complaint alleges only that the motorcycles have diminished valueprimarily diminished potential resale valuebecause Harley motorcycles equipped with TC-88 engines have demonstrated a propensity for premature engine failure and/or will fail as a result of the cam bearing defect. This is insufficient to state a legally cognizable injury for purposes of a fraud claim. [10] ¶ 19. Diminished value premised upon a mere possibility of future product failure is too speculative and uncertain to support a fraud claim. The plaintiffs do not specifically allege that their particular motorcycles will fail prematurely, only that the Harley product line that consists of motorcycles with TC-88 engines has demonstrated a propensity for premature engine failure. An allegation that a particular product line fails prematurely does not constitute an allegation that the plaintiffs' particular motorcycles will do so, only that there is a possibility that they will do so. [11] ¶ 20. We certainly agree with the court of appeals that the damages allegations in a fraud complaint are not evaluated against a standard of absolute certainty for purposes of a motion to dismiss for failure to state a claim. Tietsworth, 261 Wis. 2d 755, ¶ 16. But an allegation that a product is diminished in value because of an event or circumstance that mightor might notoccur in the future is inherently conjectural and does not allege actual benefit-of-the-bargain damages with the reasonable certainty required to state a fraud claim. ¶ 21. This conclusion is consistent with many federal and state court decisions that have affirmed the dismissal of claims brought under fraud, strict products liability, and other tort theories where the allegedly defective product has not actually malfunctioned. These no injury cases are too numerous to list, but for a representative sample, see, e.g., Angus v. Shiley Inc., 989 F.2d 142, 147-48 (3d Cir. 1993) (affirming dismissal of a claim for intentional infliction of emotional distress based on allegedly defective heart valve that was functioning properly); Carlson v. General Motors Corp., 883 F.2d 287, 297 (4th Cir. 1989) (affirming dismissal of a claim for diminished resale value of diesel cars due to poor reputation rather than actual damage or loss resulting from vehicle defect); Briehl v. General Motors Corp., 172 F.3d 623, 627-29 (8th Cir. 1999) (affirming dismissal of class action lawsuit for fraud and breach of warranty where the only alleged damage from vehicles' defective brake system was overpayment and diminished resale value); Jarman v. United Industries Corp., 98 F.Supp.2d 757, 767 (S.D. Miss. 2000) (dismissing fraud, warranty, and various statutory claims for purchase of allegedly ineffective pesticide where there is no allegation of actual product failure); Weaver v. Chrysler Corp., 172 F.R.D. 96, 99-100 (S.D.N.Y. 1997) (dismissing class action fraud and warranty lawsuit for allegedly defective integrated child seats where there is no allegation that the product has malfunctioned or the defect manifested itself); Yost v. General Motors Corp., 651 F.Supp. 656, 657-58 (D.N.J. 1986) (dismissing fraud and warranty claim for alleged engine defect where engine has not malfunctioned and plaintiff alleges diminished value only); Ziegelmann v. DaimlerChrysler Corp., 649 N.W.2d 556, 559-65 (N.D. 2002) (collecting cases and dismissing class action fraud and negligence lawsuit for alleged brake system defect where damages were premised only on diminution in value); Frank v. Daimler-Chrysler Corp., 741 N.Y.S.2d 9, 17 (N.Y. App. Div. 2002) (dismissing class action fraud, negligence, and products liability lawsuit for alleged seat backrest defect in the absence of allegation of actual product failure); Yu v. Int'l Bus. Mach. Corp., 732 N.E.2d 1173, 1177-78 (Ill. App. 2000) (affirming dismissal of class action fraud, negligence, and deceptive trade practices lawsuit for allegedly defective computer software where there was no allegation of actual product failure); Ford Motor Co. v. Rice, 726 So.2d 626, 631 (Ala. 1998) (affirming dismissal of class action fraud lawsuit for SUV design defect alleged to cause rollover tendency where defect did not manifest itself and vehicles did not roll over). ¶ 22. We note, however, that the amended complaint does contain one allegation that is arguably sufficient to state a more particularized injury to these plaintiffs: at paragraph 35 of the amended complaint the plaintiffs allege that Harley knew that all of the motorcycles with the TC-88s are defective and will prematurely fail. This reference to all motorcycles with TC-88 engines includes the plaintiffs' motorcycles, and therefore can be read as the equivalent of a more particularized allegation that the plaintiffs' motorcycles will fail prematurely. Accordingly, we address the application of the economic loss doctrine to this claim.
[12] ¶ 23. Apart from the generally insufficient damages allegations in the fraud cause of action, the economic loss doctrine bars this claim. The economic loss doctrine is a judicially-created remedies principle that operates generally to preclude contracting parties from pursuing tort recovery for purely economic or commercial losses associated with the contract relationship. Digicorp, Inc. v. Ameritech Corp., 2003 WI 54, ¶¶ 33-35, 262 Wis. 2d 32, 662 N.W.2d 652. [13] ¶ 24. Adopted by this court in Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc., 148 Wis. 2d 910, 921, 437 N.W.2d 213 (1989), the economic loss doctrine precludes recovery in tort for economic losses resulting from the failure of a product to live up to a contracting party's expectations. Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 245-46, 593 N.W.2d 445 (1999). The doctrine generally requires transacting parties in Wisconsin to pursue only their contractual remedies when asserting an economic loss claim. Digicorp, 262 Wis. 2d 32, ¶ 34. [14] ¶ 25. Economic loss for purposes of the doctrine includes the diminution in the value of the product because it is inferior and does not work for the general purposes for which it was manufactured and sold. Northridge, 162 Wis. 2d at 925-26. It includes both direct economic loss and consequential economic loss. Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis. 2d 395, 401, 573 N.W.2d 842 (1998). The economic loss doctrine has been extended to consumer transactions as well as transactions between commercial contracting parties. State Farm Mut. Auto. Ins. Co. v. Ford Motor Co., 225 Wis. 2d 305, 311-12, 592 N.W.2d 201 (1999). ¶ 26. The economic loss doctrine is based on an understanding that contract law and the law of warranty, in particular, is better suited than tort law for dealing with purely economic loss in the commercial arena. Daanen, 216 Wis. 2d at 403-04. If a [contracting party] is permitted to sue in tort when a transaction does not work out as expected, that party is in effect rewriting the agreement to obtain a benefit that was not part of the bargain. Kailin v. Armstrong, 2002 WI App 70, ¶ 27 n.19, 252 Wis. 2d 676, 643 N.W.2d 132. ¶ 27. Thus, we have often stated that the economic loss doctrine serves the following three important common-law policies: (1) to maintain the fundamental distinction between tort 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 the risk. Daanen, 216 Wis. 2d at 403. [15] ¶ 28. The distinction between tort and contract law rests on their differing concepts of duty: contract law rests on bargained-for obligations, while tort law is based on legal obligations imposed on society at large. Wausau Tile, 226 Wis. 2d at 247; see also State Farm, 225 Wis. 2d at 316-18. The economic loss doctrine recognizes that whether a product meets a certain level of performance or a purchaser's expectations is not a matter of societal interest [but] [r]ather, . . . [is] a matter of contract. Id. at 321. 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. Digicorp, 262 Wis. 2d 32, ¶ 75 (Sykes, J., concurring in part, dissenting in part). ¶ 29. The economic loss doctrine has been applied by Wisconsin courts to bar claims of negligent and strict responsibility misrepresentation, and by federal courts applying Wisconsin law to bar claims of negligent, strict responsibility, and intentional misrepresentation. Selzer v. Brunsell Bros., Ltd., 2002 WI App 232, ¶¶ 31-33, 257 Wis. 2d 809, 652 N.W.2d 806 (negligent and strict responsibility misrepresentation); Home Valu, Inc. v. Pep Boys, 213 F.3d 960, 964 (7th Cir. 2000) (intentional, negligent, and strict responsibility misrepresentation); Cooper Power Systems, Inc. v. Union Carbide Chems. & Plastics Co., Inc., 123 F.3d 675, 682 (7th Cir. 1997) (intentional misrepresentation); Badger Pharmacal, Inc. v. Colgate-Palmolive Co., 1 F.3d 621, 628 (7th Cir. 1993) (negligent and strict responsibility misrepresentation). [16] ¶ 30. Applying the economic loss doctrine to misrepresentation claims furthers the doctrine's central purpose: Where there are well-developed contractual remedies, such as the remedies that the Uniform Commercial Code (in force in all U.S. states) provides for breach of warranty of the quality, fitness, or specifications of goods, there is no need to provide tort remedies for misrepresentation. The tort remedies would duplicate the contract remedies, adding unnecessary complexity to the law. Worse, the provision of these duplicative tort remedies would undermine contract law. All-Tech Telecom, 174 F.3d 862, 865 (7th Cir. 1999). Thus, misrepresentations such as these, that ultimately concern the quality of the product sold, are properly remedied through claims for breach of warranty. Cooper Power Systems, 123 F.3d at 682. ¶ 31. We cited generally to the foregoing line of federal appellate opinions in last term's decision in Digicorp, 262 Wis. 2d 32, ¶¶ 43-45. Digicorp presupposed the general applicability of the economic loss doctrine to misrepresentation claims; the case tested the continued viability of the court of appeals' decision in Douglas-Hanson Co., Inc. v. BF Goodrich Co., 229 Wis. 2d 132, 598 N.W.2d 262 (Ct. App. 1999), which had recognized an exception to the economic loss doctrine for claims of intentional fraud-in-the-inducement of a contract. [3] Also at issue in Digicorp was an alternative to Douglas-Hanson 's broad fraud exception to the economic loss doctrine: the so-called Huron Tool claim, based on the Michigan case of Huron Tool and Engineering Co. v. Precision Consulting Services, Inc., 532 N.W.2d 541 (Mich. Ct. App. 1995), which recognized a narrow fraud-in-the-inducement cause of action for misrepresentations extraneous to and not interwoven with the subject matter of the contract. ¶ 32. Two justices did not participate in Digicorp, however, and the five members of the court who decided the case divided 2-1-2 on the issue of a fraud-in-the-inducement exception to the economic loss doctrine. Digicorp, 262 Wis. 2d 32, ¶ 5 n.2 (Crooks, J., lead opinion, joined by Prosser, J.); ¶ 82 n.3 (Sykes, J., concurring in part, dissenting in part); ¶ 85 (Bradley, J., dissenting, joined by Bablitch, J.). A majority of the justices participatingJustices Crooks, who authored the lead opinion, joined by Justice Prosser and this writeroverruled Douglas-Hanson Co. to the extent that it recognized a broad exception to the economic loss doctrine for all claims of fraud-in-the-inducement of a contract. Digicorp, 262 Wis. 2d 32, ¶ 51. ¶ 33. Two members of the Digicorp majority, Justices Crooks and Prosser, announced their recognition of a narrow Huron Tool -type cause of action as an exception to the economic loss doctrine. Id. at ¶¶ 3, 5 n.2, 51. This writer dissented from that part of the lead opinion, concluding that a fraud-in-the-inducement exception to the economic loss doctrine was unnecessary and inappropriate, because contract remedies at law and in equity for contracts fraudulently induced were adequate. Id. at ¶¶ 73-83 (Sykes, J., concurring in part, dissenting in part). The three-justice majority reversed the judgment, agreeing that the facts of the case were insufficient to satisfy even a narrow, Huron Tool -type claim. Id., ¶¶ 62, 82. ¶ 34. Justice Bradley dissented in Digicorp, joined by Justice Bablitch; the dissenters rejected Huron Tool, and would have maintained Douglas-Hanson in its entirety. Id., ¶¶ 84-91. Thus, while a majority of the justices participating in Digicorp overruled Douglas-Hanson, and a separate majority announced a willingness to allow some type of fraud-in-the-inducement tort as an exception to the economic loss doctrine, three of the five justices participating (albeit different sets of three) rejected both Douglas-Hanson and Huron Tool. Accordingly, Digicorp did not produce the majority agreement necessary for the authoritative recognition of an element-specific fraud-in-the-inducement tort cause of action as an exception to the economic loss doctrine. ¶ 35. This case does not present an opportunity to determine whether a Huron Tool -type cause of action as an exception to the economic loss doctrine would be recognized by a majority of this court. The fraud alleged here plainly pertains to the character and quality of the goods that are the subject matter of the contract. [17, 18] ¶ 36. As such, the plaintiffs have warranty remedies for the alleged defects in their motorcycles. In addition, there are contract remedies at law and in equity to the extent that the plaintiffs were fraudulently induced to purchase their motorcycles. A contract fraudulently induced is void or voidable; a party fraudulently induced to enter a contract may affirm the contract and seek damages for breach or pursue the equitable remedy of rescission and seek restitutionary damages, including sums necessary to restore the party fraudulently induced to his position prior to the making of the contract. First Nat'l Bank & Trust Co. of Racine v. Notte, 97 Wis. 2d 207, 225, 293 N.W.2d 530 (1980); Eklund v. Koenig & Assocs., 153 Wis. 2d 374, 381, 451 N.W.2d 150 (Ct. App. 1989); Head & Seemann, Inc. v. Gregg, 104 Wis. 2d 156, 166-67, 311 N.W.2d 667 (Ct. App 1981). The economic loss doctrine does not bar these contract remedies for fraudulently induced contracts. See Harley-Davidson Motor Co v. Powersports, Inc., 319 F.3d 973, 978 n.7 (7th Cir. 2003) (collecting Wisconsin cases). [19] ¶ 37. In short, we see no reason to recognize an exception to the economic loss doctrine to allow this consumer contract dispute to be remedied as an intentional misrepresentation tort. The economic loss doctrine bars the plaintiffs' common-law fraud claim. The plaintiffs may have contract remediesbreach of contract/warranty or rescission and restitutionbut may not pursue a tort claim for misrepresentation premised on having purchased allegedly defective motorcycles.