September 2000
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September 2000 |
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Classifieds
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Building a New Foundation: Torts, Contracts,
and the Economic Minnesota’s new economic loss statute, enjoying broad support from persons across the legal and political spectrum, builds a new foundation for balancing tort and contract claims in transactions involving goods, but leaves "other property" undefined. |
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In 1998, Gov. Arne Carlson called a special legislative session to address a matter of pressing public concern: not stadium financing, not tax cuts, not educational reform -- but rather the economic loss doctrine and Minn. Stat. §604.10. The economic loss doctrine determines when a plaintiff can sue in tort and when the plaintiff is limited to contract claims. The doctrine uses the term "economic loss" to limit the tort claims a plaintiff may bring for damages resulting from a defect in goods. The doctrine serves two principal functions: to protect the contractual process of risk allocation and to respect tort law’s concern for safety. In every state but Minnesota the economic loss doctrine is a matter of common law. Since 1991, Minn. Stat. §604.10 has been Minnesota’s unique approach to the doctrine. Whether codified or judge-made, the doctrine has considerable practical significance. Contract claims arising from the sales of goods typically come within Article 2 of the Uniform Commercial Code (UCC) and are subject to warranty disclaimers, remedy limitations, and a statute of limitations that often runs from the date of delivery. Tort claims, in contrast, are more difficult to disclaim, and the statute of limitations begins to run only when injury occurs. As a result, if the economic loss doctrine is too broad, contract law will squelch too many legitimate claims. If the doctrine is too narrow, tort law will overrun the system of private risk allocation provided by Article 2. The economic loss doctrine thus functions as an important boundary between the law of tort and the law of contract. Nonetheless, at first glance the subject hardly seems the stuff of which special sessions are made. In 1998, however, the statute and the doctrine were at the center of a contentious product defect lawsuit between Marvin Windows, a major Minnesota employer, and PP&G, a large, out-of-state corporation. The statute appeared to be hurting the Minnesota plaintiff, and the governor wanted the statute clarified. The proposed legislation was intensely debated, with some parties loudly denouncing the bill as an unconstitutional attempt at retroactive lawmaking. A bill did pass,1 but to date has done nothing to change the outcome of the Marvin Windows litigation. The case is in federal court, and the trial judge has decided that, since the transactions at issue predated the original enactment of section 604.10, the statute simply does not apply to the dispute.2 The matter is now on appeal to the 8th Circuit. The special session did, however, have one salutary effect, focusing high-level legislative attention on the economic loss doctrine and section 604.10. Every legislator who took time to study section 604.10 saw the section’s failings -- convoluted structure, vague terminology, double negatives -- and many legislators questioned whether a patchwork amendment of the statute was enough. Consensus on problems does not necessarily produce consensus on solutions. Drawing the line between contract and tort involves balancing the interests of those who see themselves as plaintiffs and those who see themselves as defendants. The first two efforts to fix section 604.10 followed ordinary political channels and failed. In 1998, after the special session, the Democrats chairing the House and Senate judiciary committees circulated an open-ended proposal to repeal and replace section 604.10. The proposal contained alternative versions of key points and sought to highlight the policy issues requiring resolution. The response was underwhelming. The 1998 election returned control of the state House of Representatives to the Republican Party, and in 1999 the House Majority Leader, Rep.Tim Pawlenty, introduced a bill to repeal section 604.10 and substitute a new statute. The Minnesota Business Partnership pushed hard for the bill, and the House Committee on Civil Laws approved it on a close vote. However, the bill never received a hearing in the Democratic-controlled Senate, and the House took no further action on the bill. Following the 1999 session, Sen. Jane Ranum, the chair of the Senate Judiciary Committee, decided to try something new. On behalf of the committee, she retained two experienced mediators and convened a large working group of interested parties. Participants numbered approximately 20 and represented groups with traditionally diverse points of view, ranging from consumer advocates to business lobbyists. Rep. Pawlenty participated, as did senators Don Betzold and Tom Neuville.3 The hope was to develop agreement on key policy issues and then produce a consensus bill. The working group met on three occasions over a three-month period and then appointed a drafting subcommittee that held five lengthy meetings before reaching agreement on bill language, which was approved by the working group. The consensus-building process preempted any effective discord, and the bill passed the Senate by a vote of 56-0 and the House by a vote of 131-1. Gov. Ventura signed the bill on April 20, 2000, and the new act -- codified as Minn. Stat. §604.101 -- took effect on August 1, 2000. |
 Daniel L. Kleinberger is a professor of law at William Mitchell College of Law. He is author of Agency and Partnership: Examples and Explanations (Little Brown 1995) and was a co-reporter for the new economic loss statute.  Linda J. Rusch is the associate dean for academic affairs and a professor of law at Hamline University School of Law. She was a co-reporter for the new economic loss statute and was recently appointed as an ALI representative to the Permanent Editorial Board of the UCC.  Alan I. Silver is a partner and shareholder in the firm of Bassford, Lockhart, Truesdell, & Briggs, P.A. in Minneapolis. He practices in the areas of business and commercial litigation, served on the drafting committee, and was one of the co-reporters for the new economic loss statute. |
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"The statute neither
creates any new tort claims nor alters the elements necessary
to establish a tort claim." |
The new statute is best understood in the context of the events that led to its passage.4 The Minnesota Supreme Court first addressed the economic loss doctrine in 1981 in Superwood Corp. v. Siempelkamp Corp., 311 N.W.2d 159 (Minn. 1981). The Court’s holding seemed simple enough: for a plaintiff to pursue a product defect claim in tort, the plaintiff had to show either personal injury or damage to "other property," i.e., property other than the allegedly defective goods. Subsequent state court cases revealed that "other property" is a complex concept. Two Supreme Court cases made clear that a de minimus amount of other property damage did not warrant a tort claim,5 but the Court of Appeals struggled with a more perplexing issue. How unforeseeable did damage to other property have to be in order to allow a tort claim? For example, was grain damaged in a defective grain dryer "other property"?6 What about silage damaged by a defective silo?7 In 1990, the Minnesota Supreme Court decided that it had had enough of "other property" and overruled Superwood’s use of the concept. Eschewing the approach of most other states, the Court in Hapka v. Paquin Farms, 458 N.W.2d 683 (Minn. 1990), barred product defect claims by commercial buyers under any circumstances, except where the buyer could show personal injury. Prodded by commercial property insurers, the Legislature swiftly overruled Hapka and injected a statute into what had previously been the exclusive domain of the common law. Minn. Stat. §604.10 focused primarily on two potential categories of plaintiffs -- merchants and merchants in goods of the kind -- and provided a different economic loss rule for each category. Tort claims for economic loss were completely barred for claimants who were merchants in goods of the kind alleged to be defective. Mere merchants, i.e., businesses that were not merchants in goods of the kind, could sue in tort for economic loss -- but only for damage to other property.8 For all buyers -- even consumers -- the statute provided that "economic loss recoverable in tort . . . does not include economic loss due to damage to the goods themselves."9 Section 604.10 soon proved problematic. It had borrowed its core "merchant" concepts from Article 2, where they have nothing to do with drawing lines between tort and contract claims. The use of these concepts in Section 604.10 led to frequent litigation with inconsistent results.10 Moreover, section 604.10 referred generally to "tort" claims, which fueled a controversy as to whether the economic loss doctrine applied to common law misrepresentation claims relating to goods. Federal and state courts interpreting Minnesota law reached discordant results,11 and this was the particular issue that prompted the 1998 special session. |
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.Drafting Policies Underlying the New Statute In crafting the new statute, the working group developed and then followed six basic policies:
Section 604.101 functions as a barrier or filter, precluding some tort claims and limiting others. The statute neither creates any new tort claims nor alters the elements necessary to establish a tort claim. The statute addresses claims relating to goods brought by a "buyer" (defined to include both purchasers and lessees)12 and against a "seller" (defined to include lessors)13. The scope of the statute is confined to "product defect tort claim[s]," defined as "common law tort claim[s] for damages caused by a defect in the goods"14 and to "common law misrepresentation claim[s] relating to the goods sold or leased."15 The statute does not, however, apply to claims for injury to the person.16 In short, the statute applies so long as: (1) the claim relates to a defect in goods sold or leased or some misrepresentation related to the goods; (2) both the claimant and the person claimed against are within the chain of distribution;17 and (3) the claim is not for personal injury suffered by the claimant. Where the statute does apply, it occupies the field; there is no residual common law economic loss doctrine.18 Example: Manufacturer sells goods to Leasing Company, which then leases the goods to Commercial User. The goods are defective, and the defect causes significant damage to tangible personal property of the Commercial User. If Commercial User brings a "product defect tort claim" against Leasing Company and against Manufacturer, the statute will apply to both claims.19 The statute will likewise apply if Commercial User claims that Manufacturer and Leasing Company misrepresented the characteristics of the goods. The new statute rejects retroactivity. For the statute to apply, both buyer and seller must have entered the relevant chain of distribution after July 31, 2000. The old statute, section 604.10, therefore remains in effect for some transactions. Example: On June 1, 2000, Manufacturer sold goods to Distributor. On August 2, 2000, Distributor sold the same goods to Retailer. Section 604.10 applies to any product defect tort claim by Distributor or Retailer against Manufacturer, because Manufacturer did not become a "seller" of the goods before section 604.101 took effect. Section 604.101 does, however, apply to Retailer’s claims against Distributor, because Distributor became a "seller" of the goods and Retailer became a "buyer" of the goods after August 1.20 |
"The doctrine serves two principal
functions: to protect the contractual process of risk allocation
and to respect tort law’s concern for safety." |
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"Subdivision 3 reflects
a compromise among conflicting views, and its approach is new
to Minnesota and unique in the country." |
In its subdivision 3, the new statute provides that "[a] buyer may not bring a product defect tort claim against a seller for compensatory damages unless a defect in the goods sold or leased caused harm to the buyer’s tangible personal property other than the goods or to the buyer’s real property." In all cases, the subdivision excludes recovery for damage to, diminution in the value of, and loss of the allegedly defective goods. The concept of "harm to the buyer's tangible personal property other than the goods" is evidently crucial to the new statute; a claimant must show such harm (or harm to the buyer's real property) or be barred from bringing a product-defect tort claim. Nevertheless, the statute does not define the concept of "other property." The working group had no consensus for a precise definition and concluded that in Minnesota, as elsewhere around the nation, the concept is best developed through case law.21 Example: Manufacturer sells processing equipment to Converter. The equipment is defective and causes Converter’s operations to shut down. The defect does not, however, cause harm to Converter’s "tangible personal property other than the [processing equipment] or to [Converter’s] real property." Subdivision 3 bars a product defect tort claim by Converter against Manufacturer for the loss of, damage to, or diminution in value of the processing equipment and for the losses resulting from the shut down of Converter’s operations. Example: Same situation as the previous Example, except that the defect does cause harm to Converter’s "tangible personal property other than the [processing equipment] or to [Converter’s] real property" and that harm causes the shut down of Converter’s operations. Subdivision 3 will permit a product defect tort claim.22 For those product defect tort claims that are not barred by the statute, subdivision 3 limits the available remedies. Assuming a valid product defect tort claim, the claimant may recover, in essence, only: (1) direct damages to the value of the other property; (2) business interruption and other, similar losses suffered during the time reasonably necessary to restore, rehabilitate, or replace that property (the statute uses the term "period of restoration" to explain how to calculate that reasonable period); and (3) any "additional family, personal, or household expenses that are actually incurred during the period of restoration."23 Direct damages to other property may be measured either by the "loss of, damage to, or diminution in value of the other tangible personal property or real property" or by the "reasonable costs of repair, replacement, rebuilding, and restoration."24 The statute does not define "business interruption losses," except to specifically exclude "loss of goodwill and harm to business reputation." Typically, the core of business interruption losses will be the profits (not gross revenues) which the business would otherwise have made during the period of restoration. In proper circumstances, business interruption losses may include operating expenses reasonably necessary to preserve the business during the period of restoration regardless of whether the business would have been profitable during that period. Subdivision 3 reflects a compromise among conflicting views, and its approach is new to Minnesota and unique in the country. Traditional economic loss rules either bar tort claims entirely, or permit tort claims without circumscribing the compensatory damages available. Subdivision 3 limits the remedies available for those tort claims that are permitted, barring all product defect tort claims for lost profits suffered after the period of restoration and all product defect tort claims for lost goodwill or for harm to business reputation, whenever suffered. The compromise was necessary because, at the working group’s bargaining table, defense-sensitive participants feared opened-ended claims of business destruction and saw the "merchant in goods of the kind" category as an important barrier to product defect tort claims in general. Plaintiff-sensitive participants insisted on preserving some reasonable amount of business interruption claims. All participants opted for clear rules and predictability in the statute. Misrepresentation Claims Subdivision 4 contains the new statute’s filter on common law misrepresentation claims relating to goods sold or leased and permits such claims if the misrepresentation was intentional or reckless. This approach is consistent with a major premise that supports the economic loss doctrine, namely, protection of contractual bargains relating to goods. An intentional or reckless misrepresentation undermines the bargaining process, and subdivision 4 therefore permits tort remedies for those types of misrepresentations. The statute does bar a buyer’s claim against a seller for negligent misrepresentation relating to the goods sold or leased. Whether a misrepresentation is "intentional" or "reckless" is to be determined under the applicable common law.25 In contrast to subdivision 3, subdivision 4 places no remedy limits on the misrepresentation claims it permits. Like the rest of the statute, subdivision 4 does not apply to claims for injury to the person.26 |
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The new statute does not resolve all issues; gray areas remain.
As already noted, the statute depends on the courts to refine
the key concept of other "property." In addition, the
statute leaves to the courts the question of what constitutes
a claim for injury to the person.27 Even
so, the new statute is a major improvement. It simplifies the
economic loss doctrine, reduces vagueness, and eschews the irrational
and confusing "merchant" approach. Perhaps equally
importantly, section 604.101 shows what can be accomplished when
legislative leaders and interest groups manage to reason together. 1 1998 Minn. Laws, 1 Sp. Sess. ch. 2, §1. 2 Marvin Windows v. P.P. & G., 1999 WL 21243, 34 F.Supp. 738 (D. Minn. 1999). 3 The other participants were: Dan Boivin (representing the Minnesota Trial Lawyers Association); Mike Bryant (representing the Minnesota Consumer Alliance); Mike Dady (Dady & Garner, P.A.); Michael Garner (Dady & Garner, P.A.); Mike Hickey (representing the National Federation of Independent Business); Dan Kleinberger (William Mitchell College of Law); Tom Marshall (representing the Minnesota Defense Lawyers Association); Mark McKeon (representing the Minnesota Association of Farm Mutual Insurance Companies); Kathy Pontius (Senate Counsel); Linda Rusch, (Hamline University School of Law); Alan Silver (representing the Minnesota Business Partnership); and Beverly Turner (representing the Insurance Federation of Minnesota). The main sessions were cochaired by Michael Landrum of the Center for Conflict Management/Americord at William Mitchell College of Law and Roger Williams of the Office of Dispute Resolution, State Bureau of Mediation Services. 4 For a detailed review of the economic loss doctrine in Minnesota, see Bye, Jonathan M. and Eric J. Peck, "New Windows on Tort Claims: Minnesota’s Economic Loss Doctrine, " Bench & Bar of Minn. 55:5 (May/June 1998), 40-45. 5 Minneapolis Society of Fine Arts v. Parker-Klein Associates Architects, Inc., 354 N.W.2d 816 (Minn. 1984); S.J.Groves & Sons, Co. v. Aerospatiale Helicopter Corp., 374 N.W.2d 431, 435 (Minn. 1985). 6 Thofson v. Redex Industries, Inc., 433 N.W.2d 901 (Minn. App. 1988), pet. for rev. denied (Minn. Feb. 22, 1989). 7 Holstad v. Southwestern Porcelain, Inc., 421 N.W.2d 371 (Minn. App.1988), pet. for rev. denied (Minn. Apr. 28, 1988). 8 Minn. Stat. §604.10(a) and (b). 9 Minn. Stat. §604.10 (c). 10 Compare Lloyd F. Smith Co. v. Den-Tal-Ez, Inc., 491 N.W.2d 11 (Minn. 1992), Regents of the Univ. of Minn. v. Chief Indus., Inc., 106 F.3d 1409 (8th Cir. 1997) and Jennie-O Foods, Inc. v. Safe-Glo Prods. Corp., 582 N.W.2d 576 (Minn. App. 1998). 11 See e.g. Northern States Power Co. v. International Tel. and Tel. Corp., 550 F.Supp. 108 (D. Minn. 1982) abrogated by AKA Distrib. Co. v. Whirlpool Corp., 137 F.3d 1083 (8th Cir. 1998), Nelson Distrib., Inc. v. Stewart-Warner Indus. Balancers, 808 F.Supp. 684 (D. Minn. 1992), ETM Graphics, Inc. v. City of St. Paul, C2-91-2103, 1992 WL 61394 (Minn. App. Mar. 31, 1992), Jones v. Trucks of Duluth, Inc., C3-91-1476, 1992 WL 83311 (Minn. App. Apr. 28, 1992), and AKA Distrib. Co. v. Whirlpool Corp., 137 F.3d 1083 (8th Cir. 1998). 12 The definition applies regardless of whether the buyer is a consumer. See, e.g., Minn. Stat. §604.101, subd. 3(3) (allowing recovery of "additional family, personal, or household expenses that are actually incurred during the period of restoration"). 13 Minn. Stat. §604.101, subd. 1(f). 14 Minn. Stat. §604.101, subd. 1(e). To come within the definition of "product defect tort claim" a common law tort claim must seek recovery "for damages caused by a defect in the goods." Id. "[S]tatutory claims" are expressly excluded. Id. 15 Minn. Stat. §604.101, subd. 4. 16 Minn. Stat. §604.101, subd. 2. 17 The relevant sale or lease need not have been each transaction’s "primary purpose." As a result, the statute will sometimes apply even when Article 2 and Article 2A do not. Reporters’ Notes, subd. 2. 18 Minn. Stat. §604.101, subd. 5. 19 To this point the example is taken essentially verbatim from Reporters’ Notes to Minn. Stat. §604.101, subd. 2, Example 5. 20 This example is based on Reporters’ Notes to Minn. Stat. §604.101, subd. 6, Example 10. 21 Section 604.10 likewise depends fundamentally on the "other property" concept and likewise provides no definition. Minn. Stat. §604.10 (a) and (b). 22 These examples are taken essentially verbatim from Reporters’ Notes to Minn.Stat. §604.101, subd. 3, examples 8 and 9. 23 Minn. Stat. §604.101, subd. 3. 24 Id. 25 See Florenzano v. Olson, 387 N.W.2d 168 (Minn. 1986). 26 SeeMinn. Stat. §604.101, subd. 2. 27 See e.g. S.J. Groves & Sons, Co. v. Aerospatiale Helicopter Corp., 374 N.W.2d 431, 435 (Minn. 1985) and Restatement (Third) of Torts: Products Liability, §21. |
"The concept of "harm to the
buyer's tangible personal property other than the goods"
is evidently crucial to the new statute; a claimant must show
such harm (or harm to the buyer's real property) or be barred
from bringing a product-defect tort claim." |
The new Minn. Stat. §604.101 addresses three distinct situations in determining whether a buyer may bring a product defect tort claim or a common law misrepresentation claim:
1. Product defect tort claims alleging loss to the goods are barred under the statute, along with any losses suffered by the buyer caused solely by loss or injury to the goods;
2. Product defect tort claims may be brought where the defect in the goods sold or leased causes harm to other tangible property or to real property, but the buyer’s remedy is limited;
3. Where the buyer alleges intentional or reckless misrepresentation, the economic loss doctrine does not bar the claim or limit the remedy.
The statute applies regardless of whether the parties are merchants or non-merchants, whether the transaction is a consumer or commercial transaction, and whether the goods are sold or leased.
