Court Opinion

ID: 6499
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:18:05+00
Date Added: 2024-06-11T16:46:10.781011
License: Public Domain

United States Court of Appeals,

                          Fifth Circuit.

                           No. 93-1577.

 Zella HININGER, Individually and as Personal Representative of
the Estate of Thurlo Hininger, a/k/a Ted Hininger, Plaintiff-
Appellee/Cross-Appellant,

                                v.

              CASE CORPORATION, et al., Defendants,

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

                          June 22, 1994.

Appeals from the United States District Court for the Northern
District of Texas.

Before GOLDBERG, DAVIS, and DeMOSS, Circuit Judges.

     W. EUGENE DAVIS, Circuit Judge:

     In this products liability action, plaintiff seeks to recover

her lost profits and repair costs resulting from the failure of

combine wheels manufactured by defendant and supplied to Case for

incorporation into the combines.       The district court awarded

plaintiff recovery on her negligence claims and denied her recovery

on her implied warranty claims.      Because we conclude that her

negligence claims are barred by the "economic loss" rule, we

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

that she cannot assert an implied warranty claim for economic loss

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

                                I.

     Zella and Thurlo Hininger operated a custom grain and seed

harvesting business. In January 1989, the Hiningers purchased four

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

                                1
Texas.    In September 1989, while working in Idaho, the Hiningers

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

a result, the combines were rendered inoperable, causing the

Hiningers to experience downtime and suffer losses which the jury

found to total $70,340.

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

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

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

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

result, the Hiningers again experienced downtime and suffered

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

replacement wheels were manufactured by Can-Am Industries ("Can-

Am") in Illinois and were delivered to Case in Illinois.                         The

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

purchase of the combines.

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

capacity and as representative of her husband's estate, seeking

recovery on theories of negligence, strict liability, breach of

warranty, and violation of the Texas Deceptive Trade Practices Act

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

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

Credit Corporation resulting from the failure of the combine

wheels.

     In   August    1992,   Mrs.    Hininger       settled    with   all   of    the

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

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

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

on her breach of warranty and negligent manufacturing claims.

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

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

claims.

                                  II.

                                  A.

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

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

Idaho and Illinois have the most significant contacts with this

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

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

does not contest this interpretation of Idaho and Illinois law and

because we   conclude   below   that    Texas   law   also   disallows   the

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

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

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

when the potentially applicable laws do not differ").

                                  B.

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

Hininger to recover her lost profits and repair costs resulting

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

the reasons that follow, we agree with Can-Am's argument and

therefore reverse this part of the court's judgment.

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

(Tex.1977), the Texas Supreme Court held that a purchaser of a

                                   3
defective mobile home could not recover the difference between the

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

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

the   court    adopted   the   "economic   loss"   rule,   which    requires

plaintiffs to recover their economic losses resulting from a

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

explained      that   the   Uniform   Commercial    Code    was     "drafted

specifically to govern commercial losses and obviously provides the

proper remedies to recover such losses."       Id. at 80;    see generally

Marshall S. Shapo, The Law of Products Liability ¶ 27.01 et seq.

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

Remedies § 40.04[3] (1994).

      In Arkwright-Boston Manufacturers Mutual Insurance Co. v.

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

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

losses resulting from a defective product based on a negligence

      1
      As the court explained, economic losses can be either
direct or consequential:

                   Direct economic loss may be said to encompass
              damage based on insufficient product value; thus,
              direct economic loss may be "out of pocket"—the
              difference in value between what is given and
              received—or "loss of bargain"—the difference between
              the value of what is received and its value as
              represented. Direct economic loss also may be measured
              by costs of replacement and repair. Consequential
              economic loss includes all indirect loss, such as loss
              of profits resulting from inability to make use of the
              defective product.

      Nobility Homes, 557 S.W.2d at 78 n. 1 (quoting Note,
      Economic Loss in Products Liability Jurisprudence, 66
      Colum.L.Rev. 917, 918 (1966)).

                                      4
theory.     In that case, a blade in an electrical turbine broke,

causing extensive damage to the turbine.              For purposes of our

decision, we assumed the manufacturer's negligence, but denied

plaintiff recovery because it was only seeking to recover its

economic loss.       See id.   We concluded that the magistrate judge had

properly granted defendant's summary judgment motion on the ground

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

theory for economic loss resulting from damages to a defective

product."     Id.2

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

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

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

defective     home.       They   complained    of   defendant's    negligent

supervision of the construction of the home.            In concluding that

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

     The nature of the injury most often determines which duty or
     duties are breached. When the injury is only the economic
     loss to the subject of a contract itself, the action sounds in
     contract alone.

Id. at 618;     see also Southwestern Bell Tel. Co. v. DeLanney, 809
S.W.2d 493, 494 (Tex.1991) ("When the only loss or damage is to the

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

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

Niver, Negligence, Breach of Contract, and the "Economic Loss"

     2
      The United States Supreme Court, in East River S.S. Corp.
v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S. Ct. 2295, 90
L. Ed. 2d 865 (1986), surveyed the law in this area and adopted a
similar rule for admiralty cases: a purchaser cannot recover its
economic losses resulting from a defective product from a
manufacturer in tort.

                                        5
Rule, 23 Tex.Tech L.Rev. 477 (1992).

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

rather   supplied   the   wheels   to   Case   to   incorporate   into   the

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

economic losses from Can-Am in tort?

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

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

manufacturer of a finished product for economic loss supports the

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

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

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

Nobility Homes.

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

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

Third Circuit addressed the same question and concluded that, under

Pennsylvania law, a plaintiff cannot recover her economic losses

resulting from a defective product from a component supplier in

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

failed because the seed potatoes they purchased that spring had

been treated with a defective sprout suppressant.            Id. at 1048.

The grower from whom plaintiffs purchased the potatoes had used a

sprout suppressant manufactured by defendant.          Id. at 1049.

     In analyzing plaintiffs' suit against the manufacturer of the

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

supplier who is remote from the plaintiff in the production and

distribution chain."      Id. at 1053.     The court gave a number of

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reasons for rejecting plaintiffs' tort claims against the component

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

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

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

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

and    indefinite   liability."         Id.    at    1054.    Second,   even    if

plaintiffs    did   not     have   a   valid    warranty     claim   against   the

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

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

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

plaintiffs could not assert a valid warranty claim against their

immediate seller, they still should not be allowed to recover

against the component part supplier in tort because:

       Implicit in the [economic loss rule] is the policy judgment
       that in a commercial context the possibility of an inadequate
       recovery ... does not justify permitting a tort recovery that
       will allow a purchaser to reach back up the production and
       distribution chain, thereby disrupting the risk allocations
       that have been worked out in the transactions comprising that
       chain.

Id.;    see also Nathaniel Shipping, Inc. v. General Elec. Co., 920
F.2d 1256, 1265 (5th Cir.1991) (economic loss rule applies in

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

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

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

(Fla.1993).

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

convinced that the Texas Supreme Court would adopt this position.

We therefore conclude that the district court erred in allowing

                                         7
Mrs. Hininger to recover her lost profits and repair costs from

Can-Am based on a negligence theory.

                                  C.

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

court erred in dismissing her implied warranty of merchantability

claim.   The district court held that:

          In this case, it is clear that the bargained-for
     expectation of Plaintiff was a complete and functional Case
     combine. Plaintiff points to no evidence that the Hiningers
     expected anyone other than Case and/or Parmer to resolve their
     problems with the defective wheels. Both Case and Parmer took
     affirmative action in an attempt to resolve the wheel
     problems; Can-Am was not consulted and did not participate in
     the repair attempts. Plaintiff cites no Texas cases extending
     liability to a component part supplier in the circumstances of
     this case. For this reason, the Court concludes that there is
     no contractual liability to Plaintiff for Can-Am.

Because we agree that Mrs. Hininger cannot assert an implied

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

district court's dismissal of this claim.

     Under Texas law, a warranty of merchantability is implied in

every contract for the sale of goods by a merchant, unless the

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

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

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

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

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

      A number of states make privity a requirement for asserting

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

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

& 1993 Supp.);   Robert E. Cartwright & Jerry J. Phillips, Products

                                  8
Liability § 2.26 (1986).     However, in Nobility Homes, the Texas

Supreme Court held that:      "a manufacturer can be responsible,

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

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

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

dispensed with the privity requirement and permitted a purchaser to

assert an implied warranty claim for economic loss against a remote

manufacturer of a finished product.

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

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

finished product and assert an implied warranty claim for economic

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

no Texas authorities directly addressing this question, we believe

that the experienced Texas district judge in this case properly

distinguished between the manufacturer of the finished product and

the component part manufacturer.       She reasoned that the Hiningers

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

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

Thus, the district court concluded that the Hiningers had no

expectation that Can-Am or any of the other manufacturers of

unbranded    components   would   resolve   any   problem   they   might

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

Defects Causing Commercial Loss:       The Ascendancy of Contract over

     3
      Mrs. Hininger does not contend that she and her husband had
any contact with Can-Am, that Can-Am's name was on the wheels, or
that Can-Am advertised its product to the public at-large. See
Spring Motors Distrib., Inc. v. Ford Motor Co., 98 N.J. 555, 489
A.2d 660, 676-77 (1985).

                                   9
Tort, 44 U.Miami L.Rev. 731, 789-93 (1990).

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

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

interest in how or where the manufacturer obtains individual

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

finished product and is content to let the manufacturer decide

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

Shipco 2295, 825 F.2d at 929.

     Moreover, we believe that the reasoning of Nobility Homes

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

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

holding, the Nobility Homes court recognized that a number of

states still require a purchaser to show privity with the defendant

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

          Courts which have declined to overturn the privity
     requirement in warranty actions for economic loss ... fear
     that holding manufacturers liable for economic loss imposes
     unlimited and unforeseeable liability upon manufacturers.
     These fears are justified when manufacturers are held strictly
     liable for economic loss under the terms of section 402A of
     the Restatement (Second) of Torts. But, these fears are not
     justified when manufacturers are held liable by the Uniform
     Commercial   Code   because   the   Code,   itself,   protects
     manufacturers against unlimited and unforeseeable liability.
     First, the Uniform Commercial Code allows manufacturers to
     restrict their liability by the exclusion or modification of
     both   implied    and   express   warranties....       Second,
     manufacturers' liability is restricted by the very terms of
     the Uniform Commercial Code sections which furnish the
     consumer's implied warranty remedies....
557 S.W.2d at 82.

     Thus, the court in Nobility Homes reasoned that a purchaser

cannot maintain a strict liability action for economic loss, in

part, because of the unlimited and unforeseeable liability it would

                                10
impose on manufacturers.        However, the court concluded that a

manufacturer's ability to limit its warranty exposure permitted it

to protect itself against unlimited and unforeseeable liability and

distinguished the warranty action from the strict liability action.

We read this as an important justification for the Nobility Homes

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

a purchaser to assert an implied warranty claim for economic loss

against a remote manufacturer.

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

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

Homes and held a remote manufacturer liable for the ultimate

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

implied warranty of merchantability.       We observed that a remote

manufacturer can effectively disclaim its warranty liability either

by including a disclaimer in the materials that accompany the

product   or   by   insisting     that   the   retailer   include   the

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

Id. at 1324.

     However, as Judge Logan observed in Patty Precision Products

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

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

supplier to disclaim its warranty liability:

     The difficulty of notifying ultimate purchasers is exacerbated
     if the manufacturer has produced a component rather than a
     finished product.    Components are often hidden within the
     product, making it difficult or impossible for the
     manufacturer to notify ultimate purchasers by posting
     disclaimers on the product itself.        Further, while the
     manufacturer before us, G.E., may be economically powerful
     enough to require someone like Brown & Sharpe to notify all

                                   11
      purchasers of the warranty limitation, the typical component
      part manufacturer will be selling to a larger entity which it
      cannot reasonably be expected to control.

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

      In   sum,   we   believe    that    the      Texas   Supreme     Court   would

distinguish between the manufacturer of the finished product and

the   component    supplier      because      of    the    component    supplier's

inability to disclaim its warranty liability effectively.                      This

distinction, together with the Hiningers' lack of any expectation

that Can-Am, the upstream component supplier, would respond to

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

court that Mrs. Hininger has no implied warranty action against

Can-Am.4

                                     III.

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

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

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

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

of Can-Am.

      AFFIRMED in part;     REVERSED and RENDERED in part.

      4
      In light of this finding, we need not                address the viability
of Mrs. Hininger's DTPA claim. See La Sara                 Grain Co. v. First
Nat'l Bank of Mercedes, 673 S.W.2d 558, 565                (Tex.1984) (DTPA
"does not create any warranties; therefore                 any warranty must be
established independently of the act.").

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