Economic loss doctrine evolves

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Few legal doctrines are as divisive in Wisconsin as the economic loss doctrine (ELD), which, when it applies, bars a plaintiff from seeking tort remedies for purely commercial damages arising from breach of a contract.

Its defenders maintain it is necessary to prevent contract law from “drown[ing] in a sea of tort.” East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 866 (1986).

Detractors in Wisconsin say it is tort law that is endangered: “Like the ever-expanding, all-consuming alien life form portrayed in the 1958 B-movie classic “The Blob”, the economic loss doctrine seems to be a swelling globule on the legal landscape of this state.” Grams v. Milk Prods., Inc., 2005 WI 112, par. 57 (Abrahamson, C.J., dissenting).

Detractors and defenders alike, however, struggle with how the doctrine applies to tort claims that allege fraud in the inducement to the contract.

In an address to the Dane County Bar Association on Nov. 11, Attorney Timothy M. Barber, of Axley Brynelson LLP in Madison, shed some light on its application.

Barber emphasized that the key inquiry is whether the alleged misrepresentation concerns the quality of the goods sold, or some other aspect of the contract.

Barber began with the unusual history of the ELD’s application to fraud claims. In the first case, Digicorp., Inc. v. Ameritech Corp. 2003 WI 54, only five justices participated in the case, and the case produced three separate opinions, none of which resulted in a clear rule of law.

The next year, in Tietsworth v. Harley-Davidson, Inc. 2004 WI 32, the court assumed, without deciding, that the ELD does allow some exception for fraud in the inducement.

Finally, the year after that, in Kaloti Enters., Inc. v. Kellogg Sales Co., 2005 WI 111, the court finally held unequivocally that there is an exception, but it is a narrow one.

Adopting the reasoning of a Michigan Court of Appeals opinion, Huron Tool and Engineering Co. v. Precision Consulting Services, Inc., 532 N.W.2d 541 (Mich.App.Ct. 1995), the court held “A fraud in the inducement claim is not barred by the economic loss doctrine where the fraud is extraneous to, rather than interwoven with, the contract.”

Courts have struggled with the meaning of that language ever since.

To determine whether the Huron Tool exception applies, Barber advised not to bother trying to give meaning to the terms “extraneous” or “interwoven.”

Instead, attorneys should focus on the alternative language the court used to delineate the exception: “[S]tated another way, the fraud concerns matters whose risk and responsibility did not relate to the quality or the characteristics of the goods for which the parties contracted or otherwise involved performance of the contract.” Kaloti, at par. 42.

Looking to this language, rather than asking whether a representation is extraneous or interwoven, the Supreme Court’s cases can be reconciled, with one exception.

In the Kaloti case, Barber said, the contract involved the sale of breakfast cereal. The misrepresentation, however, concerned exclusivity restrictions on retailers. Because the fraud did not concern the quality of the cereal, the plaintiffs could pursue their claims in tort.

Similarly, the plaintiffs could pursue tort claims in Wickenhauser v. Lehtinen, 2007 WI 82.

The contract in Wickenhauser was for a loan; the misrepresentation was that the lender would not record an option — something that had no relation to the quality of the loan.

In contrast, the plaintiffs could not pursue tort claims in Tietsworth, because the alleged misrepresentations concerned the quality of the goods sold –- motorcycles.

And in the most recent case by the Supreme Court to discuss the fraud exception, Below v. Norton, 2008 WI 77, the property at issue was a residential home. Because the misrepresentation concerned the quality of that home, the court held that the ELD barred the tort claims.

Of the four cases, Barber said only Wickenhauser did not fit into the Huron Tool methodology. He noted that there were no “goods” sold in Wickenhauser; instead, the contract was for a loan. As a result, he contended, the ELD should not even apply in the first place.

The other three cases, however, are useful in determining when the fraud exception will and won’t apply.