All-Tech Telecom, Inc. v. Amway Corp.

• Decision Date: 07 April 1999
• Docket Number: ALL-TECH,No. 98-2634,98-2634
• Citation: 174 F.3d 862
• Parties: 38 UCC Rep.Serv.2d 88 TELECOM, INC., Plaintiff-Appellant, v. AMWAY CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 862

174 F.3d 862

38 UCC Rep.Serv.2d 88

ALL-TECH TELECOM, INC., Plaintiff-Appellant, v. AMWAY CORPORATION, Defendant-Appellee.

No. 98-2634.

United States Court of Appeals,

Seventh Circuit.

Argued Dec. 2, 1998.

Decided April 7, 1999.

Matthew A. Biegert (argued), Doar, Drill & Skow, New Richmond, WI, for Plaintiff-Appellant.

David Lucey (argued), Foley & Lardner, Milwaukee, WI, for Defendant-Appellee.

Before POSNER, Chief Judge, and BAUER and MANION, Circuit Judges.

POSNER, Chief Judge.

A disappointed plaintiff, All-Tech Telecom, appeals from the district court's grant of summary judgment to the defendant, Amway, on All-Tech's claims of intentional and negligent misrepresentation and promissory estoppel. All-Tech was allowed to get to the jury on claims of breach of warranty, and the jury found a breach but awarded no damages. There is no challenge to the jury's verdict, only to the grant of summary judgment on the other claims. The basis of federal jurisdiction is diversity of citizenship, and the parties agree that the substantive issues are governed by Wisconsin law.

In 1987, Amway had offered distributors a new product (really a product plus a service), the "TeleCharge" phone. The phone was intended for the use of customers of hotels and restaurants. The customer would use a credit card or telephone calling card to pay for a long-distance call. The hotel or restaurant, along with the distributor, Amway, and the long-distance phone companies involved in the calls, would divide the line charges. Beginning in 1988, All-Tech, which was created for the very purpose of being an Amway distributor of TeleCharge phones and the associated telephone service, bought a large number of the phones. For a variety of reasons beyond All-Tech's control, including equipment problems, regulatory impediments to the provision of the TeleCharge program, and finally the obsolescence of the phones, which caused Amway to withdraw the product from the market in 1992, TeleCharge was a flop. All-Tech claims to have been lured into and kept in this losing venture by a series of misrepresentations, such as that Amway had done extensive research before offering the service, that the service would be the "best" in the nation, that any business telephone line could be used with the TeleCharge phone, that the service had been approved in all 50 states and did not require the approval of any telephone company, that each phone could be expected to generate an annual revenue for the distributor of $750, that the carrier that Amway had retained to handle the calls and billings for the TeleCharge phones (International Tele-Charge, Inc. (ITI)) was the largest company of its kind in the nation, and that the purchaser of a TeleCharge phone would have to deal with ITI--the phone could not be reprogrammed to work with any other carrier.

The district court threw out All-Tech's claims of misrepresentation on the basis of the "economic loss" doctrine of the common law. Originally this doctrine was merely a limitation on who could bring a tort suit for the consequences of a personal injury or damage to property: only the injured person himself, or the owner of the damaged property himself, and not also persons having commercial links to the owner, such as employees or suppliers of a merchant whose store was burned down as a result of the negligence of a third party, the tort defendant. Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis.2d 395, 573 N.W.2d 842 (1998); Northridge Co. v. W.R. Grace & Co., 162 Wis.2d 918, 471 N.W.2d 179, 181-86 (1991); Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc., 148 Wis.2d 910, 437 N.W.2d 213 (1989); Saratoga Fishing Co. v. J.M. Martinac & Co., 520 U.S. 875, 117 S.Ct. 1783, 138 L.Ed.2d 76 (1997); Miller v. U.S. Steel Corp., 902 F.2d 573 (7th Cir.1990) (applying Wisconsin law); Rardin v. T & D Machine Handling, Inc., 890 F.2d 24 (7th Cir.1989); Moorman Mfg. Co. v. National Tank Co., 91 Ill.2d 69, 61 Ill.Dec. 746, 435 N.E.2d 443 (1982); Seely v. White Motor Co., 63 Cal.2d 9, 45 Cal.Rptr. 17, 403 P.2d 145 (1965) (Traynor, J.). Since damage to property and even to person is a real cost and hence "economic," the doctrine would be better named the "commercial loss" doctrine. Miller v. U.S. Steel Corp., supra, 902 F.2d at 574.

One explanation for it is that a tort may have indirect consequences that are beneficial--in the example just given, to competitors of the burned-down store--as well as harmful, and since the tortfeasor is not entitled to sue for the benefits, neither should he have to pay for the losses. CSY Liquidating Corp. v. Harris Trust & Savings Bank, 162 F.3d 929, 933 (7th Cir.1998); Rardin v. T & D Machine Handling, Inc., supra, 890 F.2d at 29. Another and less esoteric explanation is the desirability of confining remedies for contract-type losses to contract law. Suppliers injured in their pocketbook because of a fire at the shop of a retailer who buys and distributes their goods sustain the kind of purely business loss familiarly encountered in contract law, rather than the physical harm, whether to person or to property, with which tort law is centrally concerned. These suppliers can protect themselves from the loss caused them by the fire by buying business-loss insurance, by charging a higher price, or by including in their contract with the retailer a requirement that he buy a minimum quantity of goods from the supplier, regardless. The suppliers thus don't need a tort remedy. Daanen & Janssen, Inc. v. Cedarapids, Inc., supra, 573 N.W.2d at 847-49.

This point has implications for commercial fraud as well as for business losses that are secondary to physical harms to person or property. Where there are well-developed contractual remedies, such as the remedies that the Uniform Commercial Code (in force in all U.S. states) provides for breach of warranty of the quality, fitness, or specifications of goods, there is no need to provide tort remedies for misrepresentation. The tort remedies would duplicate the contract remedies, adding unnecessary complexity to the law. Worse, the provision of these duplicative tort remedies would undermine contract law. That law has been shaped by a tension between a policy of making the jury the normal body for resolving factual disputes and the desire of parties to contracts to be able to rely on the written word and not be exposed to the unpredictable reactions of lay factfinders to witnesses who testify that the contract means something different from what it says. Many doctrines of contract law, such as the parol evidence and "four corners" rules, are designed to limit the scope of jury trial of contract disputes (a further example is the statute of frauds). Tort law does not have these screens against the vagaries of the jury. In recognition of this omission, the "economic loss" doctrine in the form invoked by the district judge in this case on the authority of a growing body of case law illustrated by Cooper Power Systems, Inc. v. Union Carbide Chemicals & Plastics Co., 123 F.3d 675, 682 (7th Cir.1997) (applying Wisconsin law); Badger Pharmacal, Inc. v. Colgate-Palmolive Co., 1 F.3d 621, 628 (7th Cir.1993) (ditto); Rissler & McMurry Co. v. Sheridan Area Water Supply Joint Powers Bd., 929 P.2d 1228, 1234-35 (Wyo.1996); Tomka v. Hoechst Celanese Corp., 528 N.W.2d 103, 107-08 (Iowa 1995), and AKA Distributing Co. v. Whirlpool Corp., 137 F.3d 1083 (8th Cir.1998), forbids commercial contracting parties (as distinct from consumers, and other individuals not engaged in business) to escalate their contract dispute into a charge of tortious misrepresentation if they could easily have protected themselves from the misrepresentation of which they now complain. The principle is well illustrated by Tatge v. Chambers & Owen, Inc., 219 Wis.2d 99, 579 N.W.2d 217, 220-21 (1998), a suit by a former employee claiming that the employer had misrepresented the employment contract to be terminable only for cause, rather than at will. The bearing of those representations could be fully considered in a suit for breach of contract.

The function of the economic-loss doctrine in confining contract parties to their contractual remedies is particularly well illustrated by cases involving product warranties, such as our Cooper Power Systems case. See also Neibarger v. Universal Cooperatives, Inc., 439 Mich. 512, 486 N.W.2d 612, 618 (1992). If the seller makes an oral representation that is important to the buyer, the latter has only to insist that the seller embody that representation in a written warranty. The warranty will protect the buyer, who will have an adequate remedy under the Uniform Commercial Code if the seller reneges. To allow him to use tort law in effect to enforce an oral warranty would unsettle contracts by exposing sellers to the risk of being held liable by a jury on the basis of self-interested oral testimony and perhaps made to pay punitive as well as compensatory damages. This menace is averted by channeling disputes into warranty (contract) law, where oral warranties can be expressly disclaimed, or extinguished by operation of the parol evidence rule. UCC §§ 2-202, 2-316(1) and comment 2; 1 James J. White & Robert S. Summers, Uniform Commercial Code, § 12-4 (3d ed. 1988). It is true that, in principle, the cheapest way to prevent fraud is to punish the fraudfeasor; but in practice, owing to the ever-present possibility of legal error, the really cheapest way in some cases may be to place a burden of taking precautions on the potential victim. Cf. Alon Harel, "Efficiency and Fairness in Criminal Law: The Case for a Criminal Law Principle of Comparative Fault," 82 Calif. L. Rev. 1181 (1994).

Some of our cases describe the economic-loss doctrine in words that might seem to imply the abolition of the tort of misrepresentation (including deliberate fraud) in all cases in which the plaintiff and the defendant are business firms having a preexisting...