Robinson Helicopter Co., Inc. v. Dana Corp., No. S114054.

• Court: United States State Supreme Court (California)
• Writing for the Court: BROWN, J.
• Citation: 22 Cal.Rptr.3d 352,102 P.3d 268,34 Cal.4th 979
• Parties: ROBINSON HELICOPTER COMPANY, INC., Plaintiff and Respondent, v. DANA CORPORATION, Defendant and Appellant.
• Docket Number: No. S114054.
• Decision Date: 23 December 2004

22 Cal.Rptr.3d 352
34 Cal.4th 979
102 P.3d 268

ROBINSON HELICOPTER COMPANY, INC., Plaintiff and Respondent,
v.
DANA CORPORATION, Defendant and Appellant

No. S114054.

Supreme Court of California.

December 23, 2004.

Rehearing Denied March 16, 2005.¹

22 Cal.Rptr.3d 354

Orrick, Herrington & Sutcliffe, Edwin V. Woodsome, Jr., D. Barclay Edmundson; Howrey Simon Arnold & White, David G. Meyer, Michael L. Resch, Los Angeles; Bowman and Brooke, Lawrence R. Ramsey, Gardena; Cardelli, Hebert & Lanfear and Thomas G. Cardelli for Defendant and Appellant

Quinn Emanuel Urquhart Oliver & Hedges, Fred G. Bennett, Robert J. Becher and Sarah J. Cole, Los Angeles, for Northrop Grumman Corporation and The California Manufacturers & Technology Association as Amici Curiae on behalf of Defendant and Appellant.

Greines, Martin, Stein & Richland and Robert A. Olson, Los Angeles, for Association of Southern California Defense Counsel as Amicus Curiae on behalf of Defendant and Appellant.

Deborah J. La Fetra and Timothy Sandefur, Sacramento, for Pacific Legal Foundation as Amicus Curiae on behalf of Defendant and Appellant.

Tim A. Goetz, Torrance; Waller Lansden Dortch & Davis, Raymond E. Hane III, Los Angeles; and Edward J. Horowitz, Pacific Palisades, for Plaintiff and Respondent.

Kaye Scholer, George T. Caplan, Los Angeles, Steven Rosenthal, San Francisco and Julian Brew, Los Angeles, for EADS Astrium, S.A.S. and EADA Astrium, Ltd., as Amici Curiae on behalf of Plaintiff and Respondent.

Parker, Milliken, Clark, O'Hara & Samuelian and Brenton F. Goodrich, Los Angeles, for California State Association of Counties and Los Angeles County Metropolitan Transportation Authority as Amici Curiae on behalf of Plaintiff and Respondent.

James C. Sturdevant, San Francisco, for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiff and Respondent.

Lieff, Cabraser, Heimann & Bernstein, Elizabeth J. Cabraser, San Francisco, Jonathan D. Selbin, New York, NY and Lisa J. Leebove, San Francisco, as Amici Curiae on behalf of Plaintiff and Respondent.

Milberg Weiss Bershad Hynes & Lerach, Eric A. Isaacson, Pamela M. Parker, Kevin K. Green, San Diego; Hagens Berman and Kevin P. Roddy, Cambridge, MA, for National Association of Shareholder and Consumer Attorneys as Amicus Curiae on behalf of Plaintiff and Respondent.

22 Cal.Rptr.3d 353

22 Cal.Rptr.3d 355

BROWN, J

In this case, we decide whether the economic loss rule, which in some circumstances bars a tort action in the absence of personal injury or physical damage to other property, applies to claims for intentional misrepresentation or fraud in the performance of a contract. Because plaintiff Robinson Helicopter Company, Inc.'s (Robinson) fraud and intentional misrepresentation claim, with respect to Dana Corporation's (Dana) provision of false certificates of conformance, is an independent action based in tort, we conclude that the economic loss rule does not bar tort recovery.

FACTS

The underlying facts are undisputed and largely immaterial to this question of law. We therefore adopt our statement of facts from that of the Court of Appeal.²

Robinson is a manufacturer of helicopters. Its R22 model is a two-seat helicopter used as a primary trainer for pilots. The R44 model is a heavier model used for a wide variety of purposes. Both of these models use sprag clutches manufactured by Dana's Formsprag division. The sprag clutch on a helicopter functions like the "free wheeling" clutch mechanism on a bicycle where the rider transmits power to the rear wheel by operating the pedals, but when the rider stops pedaling, the wheel continues to rotate. A sprag clutch is primarily a safety mechanism. If a helicopter loses power during flight, the sprag clutch allows the rotor blades to continue turning and permits the pilot to maintain control and land safely by the "autorotating" of the rotor blades.[³] [¶][] At all relevant times, Dana's Formsprag division was the only manufacturer of the sprag clutches that Robinson required for its R22 and R44 helicopters.

All aircraft manufacturers in the United States, including Robinson, must obtain a "type certificate" from the Federal Aviation Administration (FAA). The type certificate freezes the design as of the date the certificate is issued. Every aircraft made pursuant to the certificate must be produced exactly in accordance with that certificate. Any proposed changes must first be submitted to and approved by the FAA. The components of the sprag clutch must be ground to precise tolerances, measured in thousandths of an inch, to avoid distortions that lead to cracking and failure. Pursuant to the type certificate issued to Robinson by the FAA for the R22 and R44 models, the parts of the sprag clutches, including the sprag ears, were required to be ground at a particular level of hardness to assure their metallurgical integrity. The required level of hardness of the R22 and the R44 clutches, pursuant to the type certificates, was described as "50/55 Rockwell" (50/55).

Between 1984 and July 1996, Robinson purchased 3,707 sprag clutches from Dana. Each was ground to the required 50/55 level of hardness. There were only three incidents of cracking or failure of these sprag ears, a rate of 0.03 percent. In July 1996, Dana changed its grinding process to a higher, "61/63 Rockwell" (61/63) level of hardness. Dana did not notify

22 Cal.Rptr.3d 356

Robinson or the FAA of this change.[⁴] After such change was made in the grinding process, Dana nonetheless continued to provide written certificates to Robinson with each delivery of clutches that the clutches had been manufactured in conformance with Robinson's written specifications (which specifications prohibited unapproved changes in Dana's manufacturing process).[]

In October 1997, again without notifying either Robinson or the FAA, Dana changed its grinding process back to the 50/55 level of hardness that was required by its contract with Robinson. Beginning in early 1998, the sprag clutch ears that had been ground at the 61/63 level of hardness and sold to Robinson experienced a failure rate of 9.86 percent.[] This compared with a failure rate for clutches manufactured before July 1996 of 0.03 percent and 00.0 percent for clutches manufactured after October 1997.

Between August 24, 1998, and November 30, 1998, Robinson sent several letters to Dana reporting that 11 clutch assemblies with cracked sprags had been returned to Robinson from its operator customers. Each of these assemblies was ultimately traced to serial numbers of Dana sprag clutches that had been sold to Robinson during the period that Dana was grinding the clutches to the higher 61/63 level of hardness. On November 30, 1998, during a conference call between Robinson and Dana officials, Dana disclosed, for the first time, that it had used the 61/63 hardness level in its manufacturing process during the period July 1996 to October 1997.

Although it was a disputed issue, the record reflects that substantial evidence was presented at trial demonstrating that the higher failure rate of Dana's sprag clutches manufactured during the July 1996 to October 1997 period was due to the higher hardness level to which they had been ground. Fortunately, these clutch failures did not result in any helicopter accident and there were no incidents of injury or property damage that were caused by any clutch defect or failure, nor did any of the defective clutches cause any damage to other parts of the helicopters in which they had been installed.

Nonetheless, Robinson was ultimately required by the FAA and its British equivalent, the Air Accidents Investigation Branch of the United Kingdom's Department of Transport [], to recall and replace all of the faulty clutch assemblies (i.e., those manufactured with Dana's sprag clutches ground to the higher hardness level of 61/63 rather than the 50/55 level required by the Robinson specifications). This led to a total claimed expense to Robinson of $1,555,924, which represented the cost of (1) replacement parts, and (2) substantial employee time spent investigating the cause of the malfunctioning parts and the identification and replacement of parts on helicopters that had already been sold to customers.

There were approximately 990 sprag clutches that were ultimately identified as having been manufactured at the higher nonconforming level of hardness. It was important to Robinson that the defective clutches be identified as soon as possible so that it could effect full replacements before any accident might occur. Although Dana had disclosed on November 30, 1998, that it had previously changed the hardness level, it did not provide Robinson with the necessary serial and lot number information until February 12,

22 Cal.Rptr.3d 357

1999, despite repeated demands therefor.[⁵]

When this information was finally provided and Robinson was able to identify the clutch assemblies that had to be replaced, it submitted the necessary orders to Dana,[⁶] together with a request that the issue as to which party would bear the cost of such replacement parts be left for later determination. Dana, however, disputed any liability, and, in fact, claimed that Robinson's problems were due to its own inadequate designs that placed too much stress on the clutch assemblies. Dana refused to ship any new clutches except on a COD or other assured payment basis.

Having no alternative, Robinson went forward, incurred the costs described above, purchased the new clutches, and effected the necessary replacements. It then filed this action alleging causes of action for breach of contract, breach of warranty and negligent and intentional misrepresentations. After a nine-day trial, the jury returned a verdict in favor of Robinson for $1,533,924 in compensatory damages and $6 million in punitive damages. The jury found that Dana had not only breached its contract with Robinson and the warranties made thereunder,...