Home Warranty Corp. v. Caldwell

• Citation: 777 F.2d 1455
• Decision Date: 11 December 1985
• Docket Number: No. 84-8698,84-8698
• Parties: HOME WARRANTY CORPORATION, et al., Plaintiffs-Appellees, v. Johnnie L. CALDWELL, Insurance Commissioner of the State of Georgia, Defendant- Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 1455

777 F.2d 1455

54 USLW 2338

HOME WARRANTY CORPORATION, et al., Plaintiffs-Appellees, v. Johnnie L. CALDWELL, Insurance Commissioner of the State of Georgia, Defendant- Appellant.

No. 84-8698.

United States Court of Appeals Eleventh Circuit.

Dec. 11, 1985.

R.O. Lerer, Asst. Atty. Gen., Atlanta, Ga., for defendant-appellant.

Herbert Shellhouse, Atlanta, Ga., Peter C. Schaumber, Washington, D.C., for plaintiffs-appellees.

Appeal from the United States District Court for the Northern District of Georgia.

Before RONEY and HILL, Circuit Judges, and PITTMAN ^*, District Judge.

HILL, Circuit Judge:

INTRODUCTION

These facts show how rare and difficult it is rationally and

logically to combine all the several parts of

legislation. ¹

We review the district court's construction of a recent federal statute, The Product Liability Risk Retention Act of 1981. ² Most immediately at issue is the validity of an insurance marketing enterprise with outstanding insurance contracts valued at $70,000,000,000. Our decision also inevitably implicates the balance of state and federal power in the regulation of insurance sales.

The question presented is whether an insurance organization selling what Georgia law would characterize as a home owner's policy may, by virtue of federal law, insure homes sold to Georgia home owners without complying with otherwise applicable Georgia insurance regulations. The Product Liability Risk Retention Act of 1981 is the basis for this claim of exemption. The district court, accepting the appellee's, ³ Home Warranty's, arguments, permanently enjoined the appellant, the Insurance Commissioner for the State of Georgia, from interfering with the appellee's activities in the state, except insofar as authorized by the federal act. The Commissioner appealed. Under the terms of the Risk Retention Act, the dispositive issues are these: (1) whether Home Warranty assumes or distributes a product liability risk; (2) whether that is its primary activity; and (3) whether it assumes or distributes this risk on behalf of its members.

We address an area of the law that is unsettled ⁴ and rife with far-reaching political and economic choices. In adding judicial gloss to this field we are mindful that these choices are for the Congress, not this court. Yet we must also recognize that our interpretation of congressional action is writ large in practical effect. For that reason, we seek to ground our opinion upon the broadest range of information available to us. We begin, in Part I of the opinion, with the evolution of product liability. Part II examines the economic consequences of that liability, the climate in which the Congress enacted the Product Liability Risk Retention Act. Part III reviews the development and passage of the Act itself, its legislative history, text and amendments. Part IV examines the development and purpose of the Home Warranty Corporation, its subsidiaries, its product, and prior judicial conclusions drawn about the activities of this entity. In Part V we set out the arguments presented, our decision, and its rationale.

I. EVOLUTION OF PRODUCT LIABILITY LAW IN THE UNITED STATES

Product Liability, as a branch of tort law, is traditionally concerned with one's duty to third parties. It begins with the notion that, "by entering into a contract with A, the defendant may place himself in such a relation toward B that the law will impose upon him an obligation, sounding in tort and not in contract, to act in such a way that B will not be injured." W. Prosser, The Law of Torts 622 (4th Ed.1971). The crucial point is that this duty arises by operation of law and not by operation of the bargain of the parties themselves. In this way the courts obviated the earlier necessity of contract as the basis of duty, the celebrated "privity" requirement. See National Savings Bank v. Ward, 100 U.S. 195, 25 L.Ed. 621 (1879); Bohlen, Fifty Years of Torts, 50 Harv.L.Rev. 1225, 1232 (1937). Under this evolving theory, as it concerned a plaintiff, the fact of contractual relations between the defendant and A was incidental; liability was predicated upon the expectation which the defendant had, or should have had, that his affirmative conduct toward A would affect the interests of B, a plaintiff. Prosser, supra at 622. In the years intervening between the inception of this concept and the present the expansion of liability arising out of product sales has been " 'spectacular' in the extreme...." Id.

The erosion of the nineteenth century "privity" requirement began in the New York case of Thomas v. Winchester, 6 N.Y. 397 (1852), in which it was held that a seller who negligently prepares and sells an article inherently or imminently dangerous to human life may be held liable to one injured by the article on the basis of his negligence alone. Prosser, supra at 642. The existence or absence of liability under this vague standard was uncertain for a number of years. ⁵ It remained for Judge Cardozo to gather these miscellaneous authorities into an articulable formulation in the case of MacPherson v. Buick Motor Co., 217 N.Y. 382, 111 N.E. 1050 (1916). Although purporting merely to expand the "inherently dangerous" exception to the general requirement of privity, the case as persuasively reasoned exploded the general rule itself. The dangerous nature of an instrumentality would or should lead a manufacturer to foresee potential harm caused by the negligent design or manufacture of that instrumentality. Out of this foreseeability arose a duty to design and manufacture the instrumentality with due care.

If the nature of a thing is such that it is reasonably certain to place life and limb in peril when negligently made, it is then a thing of danger. Its nature gives warning of the consequences to be expected. If to the element of danger there is added knowledge that the thing will be used by persons other than the purchaser and used without new tests, then, irrespective of contract, the manufacturer of this thing of danger is under a duty to make it carefully.

MacPherson, 217 N.Y. at 389, 111 N.E. at 1053. In the aftermath of MacPherson it became clear "that the duty is one imposed by the law because of the defendant's affirmative conduct, which he must know to be likely to affect the interests of another." Prosser, supra at 643.

Over time the MacPherson rule was extended to include harm to property, see e.g., United States Radiator Corp. v. Henderson, 68 F.2d 87 (10th Cir.1933); Todd Shipyards Corp. v. United States, 69 F.Supp. 609 (D.Me.1947), and to liability caused by goods which involved no recognizable risk of personal injury. See e.g., Cohan v. Associated Fur Farms, Inc., 261 Wis. 584, 53 N.W.2d 788 (1952); Dunn v. Purina Co., 38 Tenn.App. 229, 272 S.W.2d 479 (1954); Brown v. Bigelow, 325 Mass. 4, 88 N.E.2d 542 (1949). Broadened from its traditional protection of the purchaser, the MacPherson rule was also extended to cover employees, see e.g., Rosebrock v. General Electric Co., 236 N.Y. 227, 140 N.E. 571 (1923); Marsh Wood Products Co. v. Babcock & Wilcox, 207 Wis. 209, 240 N.W. 392 (1932) (dictum); Kalash v. Los Angeles Ladder Co., 1 Cal.2d 229, 34 P.2d 481 (1934) (dictum); O'Donnell v. Geneva Metal Wheel Co., 183 F.2d 733 (6th Cir.1950), members of the purchaser's family, see e.g., White Sewing Machine Co. v. Feisel, 28 Ohio App. 152, 162 N.E. 633 (1927); Baker v. Sears, Roebuck & Co., 16 F.Supp. 925 (S.D.Cal.1936), subsequent purchasers, Beadles v. Servel, Inc., 344 Ill.App. 133, 100 N.E.2d 405 (1951); Quackenbush v. Ford Motor Co., 167 App.Div. 433, 153 N.Y.S. 131 (1915); State ex rel. Woodzell v. Garzell Plastics Industries, Inc., 152 F.Supp. 483 (E.D.Mich.1957), other users of the defective chattel, Hoenig v. Central Stamping Co., 273 N.Y. 485, 6 N.E.2d 415 (1936); Lill v. Murphy Door Bed Co., 290 Ill.App. 328, 8 N.E.2d 714 (1937); Reed & Barton Corp. v. Maas, 73 F.2d 359 (1st Cir.1934); Coakley v. Prentiss-Wabers Stove Co., 182 Wis. 94, 195 N.W. 388 (1923), casual bystanders, see e.g., McLeod v. Linde Air Products Co., 318 Mo. 397, 1 S.W.2d 122 (1927); Statler v. George A. Ray Manufacturing Co., 195 N.Y. 478, 88 N.E. 1063 (1909) (dictum); Hopper v. Charles Cooper & Co., 104 N.J.L. 93, 139 A. 19 (Ct. of Error & Appeal 1927), and others located in the general vicinity of the chattel's probable use. Restatement, Torts Sec. 395 (1934); Flies v. Fox Brothers Buick Co., 196 Wis. 196, 218 N.W. 855 (1928); Gaidry Motors, Inc. v. Brannon, 268 S.W.2d 627 (Ky.1954); Carpini v. Pittsburg & Weirton Bus Co., 216 F.2d 404 (3d Cir.1954); Whitehead v. Republic Gear Co., 102 F.2d 84 (9th Cir.1939) (dictum); Ford Motor Co. v. Zahn, 265 F.2d 729 (8th Cir.1959). This rapid expansion of liability notwithstanding, the cases shared a common theme: the operative theory of liability was negligence--a duty arising in the manufacturer by virtue of the foreseeability of harm. While these developments were taking place another branch of products liability was developing.

In the early part of the twentieth century a national uproar over the sorry state of manufactured food began. A dismayed public learned that its daily bread (and other eatables) was in large part adulterated and not fit to eat. ⁶ This public concern resulted in a national movement for the purification of food and drugs. The common law fell in line with the procession. The Supreme Court of Washington, in Mazetti v. Armour & Company, 75 Wash. 622, 135 P. 633 (1913), held a meat packer strictly liable to the consumer without privity. The basis of liability was an implied representation that the food was safe to eat. Prosser, Assault Upon the Citadel (Strict Liability to the Consumer ), 69 Yale L.J. 1099, 1106 (1960) [hereinafter cited as Assault Upon the Citadel ]. Other states followed suit. ⁷ Finally, in 1927, the Mississippi Supreme Court decided the case of Coca Cola Bottling Work v. Lyons, 145 Miss. 876, 111 So. 305 (1927), which drew the...