9th Circuit Revives Tort Claims Initially Dismissed Under Economic Loss Doctrine Where Product Caused Damage to “Other Property”

On June 29, 2015, the Ninth Circuit Court of Appeals, in CHMM LLC v. Freeman Marine Equipment, Case No. 13-35163 (D.C. No. 3:12-cv-01484-ST), reversed the District Court’s judgment in an admiralty case, holding that a vessel owner could sue for the physical damage a defective vessel component caused to property the owner, himself, added to the vessel. The panel held that the vessel owner’s tort claims were not barred by the economic loss doctrine, which precludes recovery against a manufacturer for physical damage that the manufacturer’s defective product causes to the “product itself,” but allows recovery for physical damage the product causes to “other property.”

Plaintiff, CHMM, contracted with Nobriskrug to construct a 59.5-meter luxury yacht. The contract provided that the interior portions of the yacht were to be outfitted by the owner, CHMM, not Nobriskrug. Nobriskrug subcontracted with Defendant, Freeman Marine Equipment, for the manufacture of a weathertight door for the yacht. This door provided access from the foredeck to the interior of the yacht. CHMM contracted with other third parties for installation of the yacht’s interior. The yacht was ultimately delivered to CHMM, with the bare ship completed by Nobriskrug/Freeman and the interior outfit completed by CHMM’s third party contractors. While at sea, the Freeman door on the yacht allegedly malfunctioned, flooding the yacht’s interior. The estimated cost of repair for the interior damage was over $18 million.

CHMM sued Freeman, and in its amended complaint, alleged five tort claims – negligence, defect in design, defect in manufacture, failure to properly instruct, and negligent misrepresentation – as well as a sixth cause of action for breach of contract, quasi contract and/or warranty. Freeman moved for dismissal on the grounds that recovery for physical damage to the yacht’s interior was barred by economic loss doctrine. A magistrate judge determined the economic loss rule barred the first five causes of action, and that only a portion of the sixth cause of action could stand, which would require an opportunity for discovery. The District Court adopted the magistrate judge’s findings but granted CHMM’s request to file a second amended complaint to the extent CHMM sought tort remedies for damage to “other property” added after delivery of the vessel to CHMM. CHMM appealed the order dismissing the tort claims.

In products liability cases, where a plaintiff has a contractual relationship with the manufacturer of a product, the plaintiff can sue in contract for normal contract damages, including lost profits and other economic losses. Whether or not the plaintiff is in a contractual relationship with the manufacturer, a plaintiff can sue the manufacturer in tort only for damages resulting from physical injury to persons or to property other than the product itself. This distinction rests on the understanding that a manufacturer can appropriately be held liable for physical injuries caused by defects but he cannot be held liable for the level of performance of his products in the consumer’s business unless he agrees that the product was designed to meet the consumer’s demands. Seely v. White Motor Co. (Cal. 1965) 403 P.2d 145, 151 (en banc).

In reaching its holding, the Ninth Circuit evaluated several cases which applied Seely, reviewed the contract between CHMM and Nobriskrug and ultimately determined that because Nobriskrug/Freeman were only responsible for manufacturing the bare ship, including the weather tight door, and CHMM, the user, added items to the bare ship, the interior items constituted “other property” from the bare product itself. The Court concluded this case was not a warranty matter, as Nobriskrug/Freeman were not warranting the items in the interior of the yacht. Because CHMM’s claim was that the product (the bare yacht, which included Freeman’s door) caused physical damage to other property (the Interior Outfit), the economic loss rule did not bar CHMM from suing in tort for damage to the yacht’s interior caused by the allegedly defective Freeman door.

This case is significant in that it expands the availability of tort claims in products liability actions where the product causes damage to “other property” other than the product itself.

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July 1, 2015