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Economic Loss Case Analysis

By: dmc-admin//June 22, 2005//

Economic Loss Case Analysis

By: dmc-admin//June 22, 2005//

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The court would seem to be indisputably correct — that the economic loss doctrine would be found applicable to an asset purchase agreement, if the Wisconsin Supreme Court were to consider the issue.

The best support for that conclusion, however, comes from a decision that the Seventh Circuit did not even mention, Van Lare v. Vogt, Inc., 2004 WI 110, 274 Wis.2d 631, 683 N.W.2d 46. In Van Lare, the Supreme Court held that the economic loss doctrine applies to a written contract for the sale of commercial property between two sophisticated parties represented by counsel.

Previous to Van Lare, the doctrine had only been considered in the context of a sale of products. The fact that the "products" in Van Lare was commercial real estate was not a bar to application of the doctrine. Van Lare, 683 N.W.2d at 48-49.

The court wrote, "the economic loss doctrine may not be discarded simply because a transaction involves real estate. In this case, we have a written, bargained-for contract for the sale of commercial-use land between two sophisticated parties represented by counsel during the negotiation process. This is the kind of situation that is tailor made for the application of traditional contract law." Id., at 52.

If a sale of commercial real estate is tailor made for contract law, rather than tort, an asset purchase agreement is even more so. An exception created for contracts for services (oral or boilerplate) cannot reasonably be extended to the merger and acquisition field.

In any event, Van Lare is more relevant to the issue than the cases addressed by the Seventh Circuit, which deal with traditional commercial law involving contracts for goods.

The question remains whether the fraud in the inducement claim would nevertheless be found viable. In Van Lare, the court held that the doctrine bars a claim for strict liability misrepresentation. Id., at 53. However, a claim for intentional misrepresentation could be viable in the real estate arena. The court did not address the issue, because the plaintiff withdrew that claim, for reasons not given in the opinion. Id., at 54.

However, a statement by the court, discussing its decision in Digicorp, Inc., v. Ameritech Corp., 2003 WI 54, 262 Wis.2d 32, 662 N.W.2d 652, suggests that a claim for intentional misrepresentation is viable: "Wisconsin has a long-standing principle that parties need a background of truth and fair dealing in commercial relations and that a party to a business transaction is under a duty to disclose facts basic to the transaction if he knows the other is about to enter into the transaction with a mistaken or incomplete understanding of those facts, and the other party could reasonably expect a disclosure of those facts." Id., at 53-54.

Furthermore, it is not clear that allowing a claim of intentional fraud would blur the line between tort and contract law, in the context of an asset purchase agreement.

Suppose that, instead of negotiating an asset purchase agreement for all of CERAbio’s assets to Wright, CERAbio went public and issued stock. The misrepresentations alleged in this case, if true, would not merely result in tort remedies, but would support criminal charges, as well. Accordingly, even though the mergers and acquisitions field is one to which the doctrine should be most applicable, allowing an exception for fraud in the inducement is not as far fetched as it may seem intuitively.

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Thus, the court’s conclusion that the exception would not apply, merely because the parties were "two sophisticated commercial entities [that] created contractual remedies to address the concern that the product Wright was purchasing from CERAbio might not result in the desired outcome" is insufficient. Unquestionably, that is grounds for the doctrine to apply generally, as discussed above; however, it is not necessarily grounds for denying an intentional fraud in the inducement exception.

Rehashing why the doctrine applies to the transaction in the first place will not be enough to foreclose the exception for fraud in the Wisconsin Supreme Court.

Thus, parties hoping to pursue such a claim would be wise to do what they can to keep the case in state court, and emphasize Wisconsin’s "long-standing principle[s]" concerning truth and fair dealing. Even so, given the fractured opinions in Digicorp, it is all but impossible to determine the scope of Wisconsin’s exception, much less apply it to any given case, without engaging in pure speculation.

– David Ziemer

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David Ziemer can be reached by email.

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