Pulte Home Corp. v. Osmose Wood Preserving, Inc.

• Citation: 60 F.3d 734
• Decision Date: 18 July 1995
• Docket Number: No. 93-2314,93-2314
• Parties: PULTE HOME CORP., Plaintiff-Appellant, v. OSMOSE WOOD PRESERVING, INC., Defendant-Cross-Defendant-Appellee, Georgia Pacific Corp.; Lowe's Companies; Lowe's Investment Co., Defendants-Cross-Claimants-Third Party Plaintiffs.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 734

60 F.3d 734

PULTE HOME CORP., Plaintiff-Appellant, v. OSMOSE WOOD PRESERVING, INC., Defendant-Cross-Defendant-Appellee Georgia Pacific Corp.; Lowe's Companies; Lowe's Investment Co., Defendants-Cross-Claimants-Third Party Plaintiffs.

No. 93-2314.

United States Court of Appeals Eleventh Circuit.

July 18, 1995.

Rehearing Denied Aug. 30, 1995.

Robert W. Boos, Kevin M. Gilhool, Tampa, FL, Stephen Wasinger, E. Powell Miller, E. Norma McKenna, Detroit, MI, for appellant.

Michael K. Houtz, Harris, Barrett, Mann & Dew, Tampa, FL, Read K. McCaffrey, Andrew J. Tolant, Patton, Boggs & Blow Baltimore, MD, and T. Gregory Slother, Griffin, GA, for appellee.

Barbara Wrubel, Loring I. Fenton, Skadden, Arps, Slate, Meagher & Flom, New York City, and Debra M. Kubicsek, Langford, Hill, Mitchell, Trybus & Whalen, P.A., Tampa, FL, for Georgia Pacific Corp.

David Paul Rhodes, Raymond A. Haas, and David LoNigro, Haas, Austin, Ley, Roe & Patsko, P.A., Tampa, FL, for Lowe's Inv. Co.

Appeal from the United States District Court for the Middle District of Florida.

Before TJOFLAT, Chief Judge, DYER and RONEY, Senior Circuit Judges.

TJOFLAT, Chief Judge:

Appellant Pulte Home Corporation ("Pulte"), a nationwide homebuilder, challenges the grant of judgment notwithstanding the verdict in favor of appellee Osmose Wood Preserving, Inc. ("Osmose"), a manufacturer of chemicals that were applied to plywood Pulte used in constructing the roofs of 1876 townhouses. After the townhouses were sold, the chemicals caused the plywood to deteriorate; Pulte subsequently replaced the plywood at a cost exceeding $3,650,000. A jury found that Pulte's loss from replacing the plywood was caused by Osmose's (1) misrepresentation that the plywood would not deteriorate and (2) negligence in failing to warn Pulte that the plywood would deteriorate, and it awarded Pulte $3,750,000 in compensatory damages. Finding that Osmose's misrepresentation was made with fraudulent intent to induce Pulte to purchase Osmose-treated plywood, the jury awarded an additional $2,500,000 in punitive damages.

Following the return of the jury's verdict, but before entering judgment, the district court revisited Osmose's Fed.R.Civ.P. 50(a) motion, which had been made prior to the submission of the case to the jury, and granted Osmose judgment as a matter of law. The court acted on the theory that Pulte's tort claims were barred by the economic loss rule. We agree with the district court that the economic loss rule barred Pulte's negligence claim, but disagree that the rule precluded its fraud claim. The evidence adduced at trial, however, did not support that claim. We therefore affirm the district court's judgment in full.

I.

Pulte, one of the largest homebuilders in the United States, operates building divisions in several states including Florida and Georgia. ¹ Pulte constructs and sells between seven and ten thousand homes each year. These homes include condominiums, single family homes, and multi-family townhouses, which are sold at various prices. The multi-family townhouses consist of a row of single-family housing units that are joined by a common wall and, in part, at the roof.

During the time period relevant to this case, Osmose manufactured a chemical used by lumber suppliers to make plywood fire retardant and specified the procedures that the suppliers had to follow in treating the plywood. ² After treatment, the suppliers stamped each sheet of plywood with the Osmose trademark to certify that the wood had been treated with Osmose fire retardant chemicals. Although Osmose itself did not treat or sell the plywood that carried its trademark, Osmose distributed promotional materials that described the safety and effectiveness of plywood treated with its chemicals. At the time of the incidents giving rise to this cause of action, Osmose was only one of several manufacturers of chemicals used to create fire retardant treated ("FRT") plywood. Moreover, Osmose's competitors conducted business essentially in the same manner as did Osmose, and their trademarks were also placed on plywood treated with their products.

FRT plywood was primarily used as a fire wall and in the common roof areas of multi-family townhouses. Every major building code required the use of noncombustible materials, including, for example, FRT plywood, in the common roof areas of multi-family townhouses. ³ The specific purpose of these code provisions was to ensure that builders designed and constructed multi-family housing in a manner that would prevent the spread of fire between the individual housing units. ⁴ When a builder used FRT plywood to satisfy code fire safety requirements, building inspectors would not issue an occupancy permit for a multi-family townhouse unless the plywood in the common roof areas carried a FRT certification stamp. ⁵

In addition to a FRT certification stamp, every sheet of FRT plywood carried a second certification stamp mandated by the American Plywood Association ("APA"). ⁶ The APA stamp, which denoted the strength characteristics and appropriate uses for the plywood, ⁷ was placed on the wood directly by the plywood manufacturer. The APA stamp was placed on plywood prior to any treatment process, including the fire retardant treatment.

The APA stamp also was required by the major building codes, such that an inspector would not issue an occupancy permit unless the APA stamp indicated that the wood was being used for its specified purpose. The APA stamp could not be relied on, however, for wood that subsequently underwent a fire retardant treatment procedure because the treatment process and chemicals used therein resulted in a strength loss. The building codes reflected this fact by requiring builders to "take into account" at least a one-sixth reduction in strength when using FRT plywood.

Beginning in 1984, Pulte constructed 1876 townhouses with roofs containing FRT plywood treated with Osmose chemicals. ⁸ When purchasing FRT plywood, Pulte purchasing agents did not specify a particular brand name, such as Osmose, nor did they rely on any of Osmose's promotional materials. Rather, Pulte treated FRT plywood as a "commodity," requiring only that it be cost-effective and contain the code-mandated FRT stamp.

In late 1988, after Pulte had sold the townhouses containing Osmose-treated FRT plywood, Pulte began receiving scattered reports that the plywood in its multi-family townhouses was degrading in service. ⁹ At the same time, Pulte also became aware of reports in wood industry journals indicating that FRT plywood generally was unfit for use in roof systems because high temperatures and humidity levels in attic environments caused excessive reductions in the strength and structural integrity of the plywood. ¹⁰

In response to these reports, Pulte immediately notified its homeowners of the situation and warned them to stay off their roofs until Pulte could inspect them. After inspection, Pulte discovered universal degradation in the Osmose-treated FRT plywood, such that, according to Pulte, every roof containing Osmose-treated FRT plywood was "dangerously unpredictable" and unsafe. ¹¹ Appellant's Brief at 6.

Pulte asked Osmose for assistance in resolving its FRT plywood dilemma, but Osmose refused. Pulte then launched an extensive remedial campaign culminating in the systematic replacement of all of the Osmose-treated FRT plywood. In replacing this plywood, Pulte was also forced to remove and replace other components of its roof systems, including untreated plywood and shingles. In total, Pulte's roof replacement project cost $3,658,200, or $1950 per roof.

II.

On June 2, 1989, Pulte brought this diversity action against Osmose in the United States District Court for the Middle District of Florida. In its five-count complaint, which also named Lowe's Companies and Georgia Pacific Corporation as party defendants, Pulte alleged that Osmose "is engaged in the manufacture and sale of ... fire retardant plywood" and that Lowe's and Georgia Pacific had sold Pulte substantial quantities of "FRT plywood manufactured by Osmose." ¹² Pulte subsequently reached undisclosed settlement agreements with Lowe's and Georgia Pacific and dismissed its claims against those defendants.

The five counts against Osmose in Pulte's complaint alleged: (1) breach of express and implied warranties; (2) strict liability; (3) negligence; (4) "common law misrepresentation;" and (5) fraud. In each count, Pulte sought compensatory and punitive damages. After the parties joined issue, Pulte voluntary dismissed its breach of warranty claims. On February 20, 1992, the case proceeded to trial on the claims that remained. At the close of all of the evidence, Osmose moved for judgment as a matter of law pursuant to Fed.R.Civ.P. 50(a). The court denied its motion and submitted the case to the jury on Pulte's claims for strict liability, fraud, and negligence. ¹³ By special verdict, the jury found in favor of Osmose on Pulte's claim of strict liability, concluding that the chemicals were not defective when they left Osmose's control. The jury also concluded that Osmose had been negligent in failing to warn Pulte that the FRT plywood would deteriorate if incorporated into Pulte's construction of the townhouse roofs (the negligence claim) and that Osmose had fraudulently induced Pulte to purchase the plywood (the fraud claim). Accordingly, the jury awarded Pulte $3,750,000 in compensatory damages (on both claims) and an additional $2,500,000 in punitive damages (on the fraud claim).

After the jury rendered its verdict, the district court revisited Osmose's Rule 50(a) motion, and, concluding that the economic loss rule barred Pulte's negligence and fraud claims, entered judgment for Osmose. Pulte now appeals.

III.

We review the district court's grant of Rule 50(a) relief by considering the evidence in the light most favorable to the nonmoving party. In so doing, we recognize that "[j]...