Eleventh Circuit Upholds Economic Loss Rule in Product Liability Lawsuits
Thursday, January 5, 2017
The Economic Loss Rule is a doctrine of law that prohibits a product liability claim being brought against a manufacturer for a defective product that only destroys itself, without harm to other property or to a person. In those instances where the product fails but only damages itself and nothing else, the plaintiff’s only remedy is to sue for breach of contract against the manufacturer of the product. The plaintiff cannot seek recovery from the manufacturer under product liability causes of action. The Economic Loss Rule has historically served as the boundary between tort and contract law. Despite the fact it is part of the basic fabric that makes up tort law, it is still challenged by plaintiffs in product liability actions.
On December 20, 2016, the U.S. Court of Appeals, Eleventh Circuit upheld a district court’s decision dismissing a product liability negligence claim made against a manufacturer, upholding the Economic Loss Rule’s application in product liability cases.
In Florida, the scope of the Economic Loss Rule has been expanded over the years. In 2013, the Florida Supreme Court decided Tiara Condo. Ass’n. v. Marsh & McLennan Cos., 110 So.3d 399, 407 (Fla. 2013). That decision was actually in response to a certified question posed by the Eleventh Circuit. The Tiara court held that a manufacturer “in a commercial relationship has no duty under either a negligence or strict products-liability theory to prevent a product from injuring itself.” Id. at 404, citing East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 871, 106 S. Ct. 2295 (1983). It reaffirmed that the product liability “economic loss rule precludes recovery of economic damages in tort where there is no property damage or personal injury.” Id.
The court limited the application of the rule to those situations where the parties were not in privity with each other, as was the original intent of the rule. In other words, being in privity had no longer been a bar to application of the Economic Loss Rule. As a result, for those parties who had an existing contractual relationship, the Economic Loss Rule would completely bar a product liability claim. This is significant, as the historical application of the rule only allowed a tort claim where there was no contractual relationship. If there were a contract between the parties, any claim between them had to sound in contract and could not be brought in tort (i.e., product liability). These contracts typically include limited warranties or other exculpatory language.
In Eiber v. Toshiba Americas Medical Systems, the plaintiff radiologist tried to sue an international electronics manufacturer for failing to maintain an MRI scanner that was out of date. The manufacturer advised the radiologist that the scanner had reached the end of its useful life, and the manufacturer would no longer provide service to it under contract. The aging scanner eventually stopped working, which the plaintiff claimed was due to negligent repairs rather than a failure of the scanner.
The case has been moved to federal court and motioned to dismiss based on the Economic Loss Rule, arguing that any claim exiting between the parties could only sound in contract under the Economic Loss Rule. The terms of the contract had expired before the lawsuit was filed. Fortunately for the manufacturer, the court agreed that enough of the Economic Loss Rule remained after Tiara to bar the claim.
The court dismissed the claim, but gave the plaintiff a chance to amend. The amended complaint was no better, and the court dismissed again, this time with prejudice. On appeal, the plaintiff essentially argued that he should have been given a second opportunity to amend his complaint. The Eleventh Circuit ruled that the plaintiff did have that opportunity, but squandered it. It affirmed the dismissal with prejudice. It was clear, however, that it would have been impossible to recast this contract claim as a negligence claim based on the principles of the Economic Loss Rule.
Product liability exposures increasingly drive the litigation risk profile of many U.S. and global corporations. These matters frequently extend beyond legal defense to the business effects on risk management, insurance coverage, brand image, financing, financial reporting, corporate governance, future corporate transactions and communications to shareholders. Moreover, they rarely are limited to one court or jurisdiction. Each claim has nationwide and, often, international implications.
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