Beware of Defendants Who Attempt to Push the Boundaries of the Economic Loss Rule (Texas)

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In most jurisdictions today, to recover under a strict products liability theory, the Plaintiff must prove that a defect in the subject product was a producing cause of the Plaintiff’s damages. More importantly, in order to recover under a strict products liability theory, the Plaintiff must show that the defective product caused physical harm to person(s) and/or property other than the defective product itself. In East River S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 866, 106 S. Ct. 2295, 90 L. Ed. 2d 865 (1985), a unanimous U.S. Supreme Court ruled that when a defective product injures only itself and causes only economic harm, tort claims (i.e., negligence, strict products liability) do not apply. Justice Harry A. Blackmun, writing for the Court, stated "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." Therefore, in East River, suit could only be brought under a warranty theory. Suit under a warranty theory could no longer be filed because of a time limit in the contract, so the Plaintiff was left with no remedy. That, in a nutshell, is the Economic Loss Rule.

Quoting from Vincent R. Johnson, The Boundary – Line Function of the Economic Loss Rule, 66 Wash. & Lee L.Rev. 523, 534–35 (2009), the Texas Supreme Court emphasized that using the term “the economic loss rule” is “something of a misnomer” because “there is not one economic loss rule that is broadly applicable throughout the field of torts, but rather several more limited rules that govern recovery of economic losses in selected areas of the law.” Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 415 (Tex. 2011). In products liability cases, when a loss arises from failure of a defective product and the damage or loss is limited to the product itself, “recovery is generally limited to remedies grounded in contract (or contract-based statutory remedies), rather than tort.” Id. at 415. However, the economic loss rule “does not preclude tort recovery if a defective product causes physical harm to the ultimate user or consumer or other property of the user or consumer in addition to causing damage to the product itself.” Equistar Chems., L.P. v. Dresser-Rand Co., 240 S.W.3d 864, 867 (Tex. 2007) (citing Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77, 79-80 (Tex. 1977)); Signal Oil & Gas Co. v. Universal Oil Prods., 572 S.W.2d 320, 325 (Tex. 1978); Mid Continent Aircraft Corp. v. Curry County Spraying Serv., 572 S.W.2d 308, 313 (Tex.1978)).

In recent years, some courts have held that when a defective product is “integrated” into another product or system, the whole integrated product is “the product itself” for purposes of the economic loss rule. For example, in Pugh v. Gen. Terrazzo Supplies, Inc., 243 S.W.3d 84 (Tex. App.—Houston [1st Dist.] 2007, pet. denied), the First District Court of Appeals of Texas concluded that strict products liability and negligence claims brought by the purchasers of a home against the supplier of EIFS were barred by the economic loss rule. Pugh, 243 S.W.3d at 93. The homeowners in Pugh alleged that the EIFS, which had been applied on their home, allowed moisture to penetrate into their home and caused damage to their home consisting of “decayed wood framing, water damage, and mold” and “warping in their hardwood flooring.” Id. at 86-87. The Pugh court noted that all of the alleged damages were property damages to the home and found that, “under the controlling case law, there was no personal injury or damage to other property that would have permitted the [homeowners] to assert a tort claim that would be excepted from the economic loss doctrine.” Id. at 94.

Pugh and cases in other jurisdictions like it raise interesting questions regarding the breadth of the economic loss rule. Should the integrated products approach apply only when a component part is integrated into another product? Should the rule apply to products installed in homes, which are not products per se, but improvements to real property? Should the rule apply to replacement products that were added to the original product, or just to the original product and its component parts? What is required to show a product is “integrated” into another product? If the rule applies to residential or commercial structures, what products are truly integrated? Prefabricated fireplaces? EIFS? Kitchen appliances? Extension cords? Light bulbs? Toilet ball cock valves? Toilet tank connectors? What if the product was added by the property owner years after the property was built?

In addition to products liability claims, some courts have applied the economic loss rule to construction claims. The doctrine has been applied to preclude tort claims brought to recover economic losses when those losses are the subject matter of a contract. See Jim Walter Homes, Inc. v. Reed, 77 S.W.2d 617, 618 (Tex. 1988). In Jim Walter Homes, the Court held that when the injury suffered is limited to economic loss to the subject of the contract itself, the action sounds in contract alone. Id. In Schambacher v. R.E.I. Elec., Inc., 2010 WL 3075703 (Tex.App. – Fort Worth 2010, no pet.), the Fort Worth Court of Appeals held the economic loss rule barred tort claims against two subcontractors who performed electrical and insulation work during the construction of a house that was damaged by fire. Jim Walter Homes and Schambacher also raise questions regarding the scope of the economic loss rule. Does the rule apply in the absence of privity of contract between the plaintiff and the defendant? If the defendant’s work was limited to the installation of the electrical systems, which cause a fire that ultimately destroys a home, does the economic loss rule bar recovery in tort for the entire home or just the subject of the subcontract?

The above cases relating to the economic loss rule have come from Texas, but every jurisdiction has their own interpretation as to the scope of the economic loss rule.  As a result, it is important that you review these cases with counsel as your state may allow tort causes of action under the specific facts of your case.

 

Topics:  Economic Damages, Economic Loss Doctrine

Published In: Civil Procedure Updates, Civil Remedies Updates, General Business Updates, Products Liability Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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