Schreiber Foods Inc. v. Wang

• Decision Date: 05 July 2011
• Docket Number: No. 10–3762.,10–3762.
• Citation: 651 F.3d 678
• Parties: SCHREIBER FOODS, INC., Plaintiff–Appellant,v.LEI WANG, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

651 F.3d 678

SCHREIBER FOODS, INC., Plaintiff–Appellant,

v.LEI WANG, Defendant–Appellee.

No. 10–3762.

United States Court of Appeals, Seventh Circuit.

Argued June 8, 2011.Decided July 5, 2011.

T. Wickham Schmidt (argued), Liebmann, Conway, Olejniczak & Jerry, S.C., Green Bay, WI, for Plaintiff–Appellant.Joseph M. Nicks (argued), Godfrey & Kahn, Green Bay, WI, for Defendant–Appellee.Before POSNER, KANNE, and HAMILTON, Circuit Judges.POSNER, Circuit Judge.

In a diversity suit that presents issues of Wisconsin common law, Schreiber Foods charges Lei Wang with fraud. The district court granted summary judgment in favor of the defendant on the ground that the suit was barred by Wisconsin's version of the economic-loss doctrine of tort law.

Lei Wang is an American citizen of Chinese descent who owns an automotive-parts supply business in Chicago. A cousin of hers who lives in China, Cade Wang, runs a pair of trading companies, one of which is named Mature Sky. (Originally a defendant along with Lei Wang, Mature Sky was never served, and the district judge dismissed it from the case, without prejudice.) To simplify the opinion we'll pretend that the two trading companies are actually one, and call it Mature Sky.

Mature Sky did business with a large Chinese manufacturer of dairy products called Inner Mongolia Yili Industrial Group (“Yili”). Cade Wang asked his cousin to help him find a supplier in the United States of dairy product ingredients. Lei Wang went to China and met with executives of Yili to get a better idea of what Yili wanted. Returning to the United States she approached Schreiber, a leading supplier of dairy products and dairy product ingredients, and told Juliet Prescod, the Schreiber Global Sales Associate with whom she dealt, that although she really didn't know anything about the dairy business, Yili was interested in buying ingredients for dairy products in the United States through Mature Sky. She didn't claim to be an agent of Yili, however. Prescod asked Lei Wang to supply her with credit information about Yili. Lei Wang forwarded the request to her cousin, who faxed what appeared to be (and for all we know was) an authentic signed copy of Yili's credit statement.

Shortly afterward Mature Sky ordered a batch of a whey protein concentrate from Schreiber at an agreed price of $42,240. The transaction was a success, though because of delay in transferring money from China Lei Wang paid Schreiber with a check issued by her automotive-parts company; she was reimbursed by Mature Sky.

A few months later Lei Wang negotiated with Prescod the sale by Schreiber to Mature Sky of 200 metric tons of “Demineralized Whey Powder 70%” (D70), an ingredient in infant formula. Schreiber set a price of $603,000. Lei Wang told Prescod that although the price was stiff, Yili was willing to pay it; the unmistakable implication—given the prior course of dealing—was that Mature Sky would be buying the D70 on behalf of Yili. Schreiber claims that this was a misrepresentation; that Yili was not committed to buying Schreiber's D70 from Mature Sky.

Although Schreiber had contracted to sell D70 to Mature Sky, it decided to substitute Reduced Minerals Whey Blend (RMW–2) without telling Yili, Mature Sky, or either Wang about the substitution. It claims that RMW–2 is materially identical to D70—yet a previous shipment by Schreiber of RMW–2, to another Chinese company, a deal also handled by Prescod, had failed to clear customs in China; the customs officials had declared that it didn't satisfy the Chinese hygienic standard for whey powder. Schreiber didn't reveal this contretemps to Yili or the others. It did send a sample of RMW–2 to Mature Sky (of course without revealing that it wasn't D70) before the sale of the 200 metric tons was consummated, and Mature Sky accepted it. But the sample had been hand-blended in a laboratory to make it look and taste just like D70, rather than being taken from an RMW–2 production line.

We are disappointed that a company of Schreiber's standing (it has $3 billion in annual revenues) would do what it did: substitute for the product specified in its contract with Mature Sky, without disclosure, an ingredient in infant formula that it knew had previously been refused entry into China on hygienic grounds. In any event the 200 metric tons were shipped, and apparently they made it through Chinese customs. But Yili refused to accept the product, on the ground that “the protein was lower, fat was higher, and ... the flavor is different” from what it had expected. Schreiber was never paid, and refused to accept the return of the product, for which apparently there was no market because it was perishable and had deteriorated.

Schreiber's contract was with Mature Sky rather than with Yili, but Schreiber is not at present pursuing any remedies it might have against Mature Sky. Instead it claims that Lei Wang's representation to Prescod that Yili had agreed to buy the 200 metric tons from Mature Sky was fraudulent; and it notes that Cade Wang gave Lei Wang a 17.5 percent ownership interest in Mature Sky and thus a financial stake in Mature Sky's profits, though she claims to have been unaware of the gift.

Without attempting to resolve any factual disputes, the district judge ruled that even if Lei Wang did defraud Schreiber, its suit against her was barred by the economic-loss doctrine; whether this ruling was correct is the only issue we need address.

The aspect of the doctrine that is applicable to this case bars tort liability when the plaintiff has a contract with the defendant and contract law provides an adequate remedy for the type of injury alleged. Courts prefer parties to govern their relations through privately negotiated contracts when that is feasible (that is, when transaction costs—the costs of making an effective contract—are low), provided there are no third-party effects, as there are for example when the performance of a contract causes pollution to third parties. Contracting parties know their business better than a court can and so can allocate risk and responsibility between them more intelligently than a court could do. “[T]ort law is a superfluous and inapt tool for resolving purely commercial disputes. We have a body of law designed for such disputes. It is called contract law.... [C]ommercial disputes ought to be resolved according to the principles of commercial law rather than according to tort principles designed for accidents that cause personal injury or property damage. A disputant should not be permitted to opt out of commercial law by refusing to avail himself of the opportunities which that law gives him.” Miller v. United States Steel Corp., 902 F.2d 573, 574–75 (7th Cir.1990) (Wisconsin law); see Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis.2d 395, 573 N.W.2d 842, 847–50 (1998).

This branch of the economic-loss doctrine stems from Seely v. White Motor Co., 63 Cal.2d 9, 45 Cal.Rptr. 17, 403 P.2d 145, 150–51 (1965). The plaintiff in that case had bought a truck that turned out to have defective brakes. The truck overturned but the plaintiff was not hurt; nor was there damage to any other property. He sued the manufacturer in both contract and tort to recover repair costs and lost profits. The court held that he was limited to suing for breach of warranty. Imposing tort liability, which would be strict liability for a product defect, would have prevented the parties to the sale of a product from agreeing between themselves on the allocation of the risk of a purely commercial loss, and of the responsibility for trying to minimize it. “Had defendant not warranted the truck, but sold it ‘as is,’ it should not be liable for the failure of the truck to serve plaintiff's business needs.” Id., 45 Cal.Rptr. 17, 403 P.2d at 150. “To allow [the plaintiff] 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.” All–Tech Telecom, Inc. v. Amway Corp., 174 F.3d 862, 866 (7th Cir.1999) (Wisconsin law).

But suppose the manufacturer of the truck, knowing it was defective, had represented to plaintiff that it was in mint condition, and, thus reassured, the plaintiff had waived all warranties in exchange for a lower price. That would be a case in which a person had been induced to sign a contract (or agree to particular provisions in a contract) by fraud on the part of the other party. Many state courts don't apply the doctrine of economic loss in such a case but instead permit the defrauded party to sue in tort. Without such an exception “prospective parties to contracts will be able to obtain legal protection against fraud only by insisting that the other party to the contract reduce all representations to writing, and so there will be additional contractual negotiations, contracts will be longer, and, in short, transaction costs will be higher. And the additional costs will be incurred in the making of every commercial contract, not just the tiny fraction that end up in litigation.” Id. at 867; see also Steven C. Tourek, Thomas H. Boyd & Charles J. Schoenwetter, “Bucking the ‘Trend’: The Uniform Commercial Code, the Economic Loss Doctrine, and Common Law Causes of Action for Fraud and Misrepresentation,” 84 Iowa L.Rev. 875, 891–95 (1999). True, the parties could include a clause warranting that they had made no intentional misrepresentations in the course of negotiating the contract....