Roto Zip Tool Corporation v. Design Concepts, Inc., No. 2004AP1379 (WI 3/30/2006)

• Decision Date: 30 March 2006
• Docket Number: No. 2004AP1379.,2004AP1379.
• Parties: Roto Zip Tool Corporation, Plaintiff-Appellant, v. Design Concepts, Inc., Defendant-Respondent.
• Court: Wisconsin Supreme Court

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Roto Zip Tool Corporation, Plaintiff-Appellant, v. Design Concepts, Inc., Defendant-Respondent.

Court of Appeals of Wisconsin, District IV.

No. 2004AP1379.

Opinion Filed: March 30, 2006.

APPEAL from a judgment of the circuit court for Dane County: ROBERT DE CHAMBEAU, Judge. Reversed and cause remanded.

Before Lundsten, P.J., Dykman and Vergeront, JJ.

DYKMAN, J.

¶1 Roto Zip Tool Corp. appeals from a summary judgment granted to Design Concepts, Inc., dismissing Roto Zip's claims of breach of contract, breach of warranty and negligence against Design Concepts.¹ The circuit court determined Roto Zip could not recover damages on its contract and negligence claims against Design Concepts because the parties' contract required that Roto Zip test Design Concepts' prototypes before putting them into production and Roto Zip failed to conduct these tests.

¶2 Roto Zip contends that the circuit court erred in granting Design Concepts' summary judgment motion because the requirement to test was not incorporated into the final pre-production phase of the agreement. It further contends that even if the testing provision was a part of the contract, summary judgment was inappropriate because disputed issues of material fact exist. Design Concepts asserts alternate grounds for summary judgment, including that an indemnity clause was also a part of the parties' agreement and precludes recovery, and that the negligence claim is barred by the economic loss doctrine.

¶3 We conclude that: (1) the contracts are ambiguous as to whether Roto Zip was responsible for testing the prototypes in the final phase of the contract; (2) disputed issues of material fact exist as to whether Roto Zip fulfilled a purported duty to test and as to whether an alleged breach of this duty was sufficiently material to excuse Design Concepts' alleged breach of contract; (3) the economic loss doctrine does not bar Roto Zip's negligence claim because the parties' contract was predominantly for services and not goods, and service contracts are not subject to the economic loss doctrine; (4) the complaint states a claim in negligence because Design Concepts had a duty of care independent from the contract to exercise the standard of care exercised by members of its profession; and (5) disputed issues of material fact preclude summary judgment on the negligence claim. For these reasons, we conclude the trial court erred in granting Design Concepts' motion for summary judgment on Roto Zip's breach of contract and negligence claims. We therefore reverse and remand for further proceedings.

BACKGROUND

¶4 The following facts are taken from the parties' affidavits, pleadings and other supporting materials. Roto Zip is a power tool manufacturer founded in 1976 by Robert and Becky Kopras in Black Earth, Wisconsin. Roto Zip's first product was a modified router tool originally developed for cutting drywall. The tool was a commercial success, and Roto Zip developed new models for use outside of the drywall industry, including the SpiraCut, which was later sold as the SCS-01 spiral saw. Roto Zip's power tools are now sold in national chain retail stores and in international markets. In 2002, Roto Zip reported worldwide sales of $1.7 billion. In 2003, the company was acquired by Robert Bosch Tool Corporation of Mt. Prospect, Illinois.

¶5 Design Concepts is a Wisconsin company founded in 1967. Design Concepts contracts with businesses for product design and development. The company develops design blueprints and, at the client's request, three-dimensional prototypes of these designs. Design Concepts employs a staff of about forty-five full-time employees.

¶6 Beginning in 1998, Roto Zip entered into a series of contracts with Design Concepts to create designs and prototypes for a new generation of Roto Zip's hand-held power tools. Among these was a project that came to be known as "SpiraCut II," a redesign of Roto Zip's SCS-01 and cordless SCS-02 spiral saws that incorporated new features such as multiple speed controls, an easily detachable handle and lights on the front of the tools. Roto Zip also contracted with Scientific Molding Corporation (SMC) to review and implement Design Concepts' designs and manufacture and assemble the component parts for Roto Zip's power tools.

¶7 Design Concepts submitted a proposal for the SpiraCut II project designated as proposal 6185, which envisioned three phases to the project. Phase 1 included development of the concept and delivery of detailed illustrations of the new product. Phase 2 was geared toward the production and delivery of a working prototype. The first two phases of the project included cost and time estimates. The proposal described phase 3 as follows:

PHASE 3—Product Implementation (Optional)

1. Product Launch Program—Should you request additional services following Phase 2, a development and/or production launch program can be proposed. Such a program will insure a smooth transition, through tooling and into production.

2. Multiple Prototypes—Following the construction of the initial prototype and subsequent refinements to the design, we will fabricate additional prototypes as requested. Prototype tooling will be designed, built, and evaluated. Multiple prototypes will be constructed to facilitate market and field testing.

3. Generate & Develop Manufacturing Plans—As necessary, we will consult with you to explore manufacturing and assembly alternatives, including the following: tooling coordination, manufacturing sources, schedules, capabilities, and sequence of events.

4. Manufacturing Documentation—As requested, we can generate packaging design and graphics, exploded views, assembly drawings, and/or a detailed billof materials.

5. Deliverables & Cost—Because of the wide variety of efforts and outcomes required for product implementation, Phase 3 will be estimated at the conclusion of Phase 2. The schedule and cost for Phase 3 are not included in this proposal.

¶8 The proposal included attachments and indicated that acceptance would be understood to include the terms of these attachments.² Attachment I, entitled "Proposal Terms," stated that Roto Zip was "solely responsible" for testing Design Concepts' prototypes and designs. It also indemnified Design Concepts "against any loss or expense or claim" arising from its designs and services, and provided that it "shall not be liable, whether in contract or in tort, for any special, indirect, incidental, or consequential damages, including but not limited to lost profits, that may arise from [Design Concepts'] performance or failure to perform under this contract."³ Each of Design Concepts' eight project proposals to Roto Zip included indemnity and product-testing language that was either identical or substantially similar to the verbiage above.

¶9 During phase 2 of the project, Design Concepts sent Roto Zip a revised proposal numbered 6185A. The proposal was dated January 18, 1999, and contained increased cost and time estimates for phase 2. Under the revised phase 2 proposal, Design Concepts offered to "construct one working prototype of each model" which it would "review ... for functionality, and forward ... to [Roto Zip] for further testing and development by [Roto Zip's] personnel." The section outlining phase 1 of the project was omitted from the revised proposal, but phase 3 remained as it had appeared in the original proposal. The revised proposal included the same attachments that were appended to the original proposal.

¶10 As phase 2 neared completion, Design Concepts indicated in a June 4, 1999 letter its desire to provide Roto Zip with additional services, at least some of which had been described in phase 3 of proposals 6185 and 6185A. The letter began: "The purpose of this letter is to propose a more formal arrangement for our continuing support of your SpirAcut II program, beyond the design services we have performed so far." It did not refer to either prototype testing or the attachments that had been appended to proposals 6185 and 6185A. The full text of the letter is set forth in the discussion section. Roto Zip states that the purchase order dated June 10 it sent to Design Concepts constituted a written acceptance of the phase 3 proposal. The purchase order does not include any additional terms relevant to the parties' agreement.

¶11 As a result of the SpiraCut II project, two new tools, the Revolution and the Rebel, based on the SCS-01 and SCS-02, respectively, were designed and manufactured. Robert Kopras of Roto Zip avers that his company has experienced numerous quality problems and defects with the Revolution and the Rebel. These problems, he avers, resulted from Design Concepts' substandard designs. Specifically, Kopras avers that the new models had defective handles that would separate from the housing; problems with the shaft lock, a button that releases the tool bit; defective control panels, which prevented the units from turning on or running properly; and problems with the air diverter and the circle cutter, an attachment tool. Kopras avers that the product return rate for the Revolution and Rebel was fifty to sixty percent in 2001, fourteen to sixteen percent in 2002 and nine to eleven percent in the first two months of 2003. Kopras contrasts these return rates with those of the SCS-01 and SCS-02, which he avers have been in the range of four percent per year. Kopras avers that the high number of product defects cost Roto Zip millions of dollars in returns alone, and caused the company substantial damage to its reputation for reliabilityand quality. Additional statements and exhibits from the parties' summary judgment submissions will be set forth as necessary in the discussion section.

¶12 Roto Zip sued Design Concepts and SMC, alleging breach of contract against both companies, and negligence against Design Concepts only. Roto Zip settled its claims against SMC. Design Concepts moved for summary judgment,...