Stoughton Trailers, Inc. v. Henkel Corp.

• Decision Date: 27 May 1997
• Docket Number: No. 96-C-580-C.,96-C-580-C.
• Citation: 965 F.Supp. 1227
• Parties: STOUGHTON TRAILERS, INC., Plaintiff, v. HENKEL CORPORATION, Defendant.
• Court: U.S. District Court — Western District of Wisconsin

Page 1227

965 F.Supp. 1227

STOUGHTON TRAILERS, INC., Plaintiff, v. HENKEL CORPORATION, Defendant.

No. 96-C-580-C.

United States District Court. W.D. Wisconsin.

May 27, 1997.

Thomas Heneghan, Michael, Best & Friedrich, Madison, WI, for Stoughton Trailers, Inc.

W. Stuart Parsons, Quarles & Brady, Milwaukee, WI, for Henkel Corp.

W. Scott McAndrew, Bell, Metzner, Gierhart & Moore, Madison, WI, for Dukes Industries, Inc.

Edward A. Hannan, Milwaukee, WI, for Sheboygan Paint Company.

CRABB, District Judge.

Plaintiff Stoughton Trailers, Inc. decided that it needed to expand and enhance its capacity to paint the trailers it sells to the trucking industry. After evaluating the market, plaintiff settled on a painting process offered by defendant Henkel Corporation. Although defendant did not install the painting system required to apply its Autophoretic® paint chemicals, it discussed the performance specifications of the system with plaintiff. The system never worked properly and plaintiff sued defendant on a variety of contract and tort claims. Defendant has moved for summary judgment on plaintiffs tort claims, contending that the "economic loss" doctrine prevents plaintiff from recovering on those claims. I conclude that the economic loss doctrine bars plaintiff's negligence and strict liability claims but not its intentional tort claims. Accordingly, defendant's motion for summary judgment will be granted in part and denied in part.

Jurisdiction is proper under 28 U.S.C. § 1332. From the parties' proposed findings of fact, I find the following facts to be undisputed.

UNDISPUTED FACTS

Plaintiff Stoughton Trailers, Inc. is a Wisconsin corporation in the business of manufacturing and selling trailers to the trucking industry. Defendant Henkel Corporation is a Delaware corporation with its headquarters in Gulph Mills, Pennsylvania. Henkel Surface Technologies, formerly known as Parker Amchem, is a division of Henkel Corporation that sells chemicals that can be used to paint, coat and rust proof.

Plaintiff is one of the six largest manufacturers of van trailers in North America. In the late 1980's, plaintiff determined that it needed to expand its trailer painting capabilities. From 1989 through 1992, plaintiff looked for a painting system that would offer a superior paint finish, be environmentally friendly and provide a lower per-unit cost. In 1993, plaintiff selected a process promoted by Parker Amchem that involved the use of Parker Amchem's Autophoretic® chemicals. No other companies sold Parker Amchem's proprietary Autophoretic® chemicals.

During the course of negotiations about the performance specifications necessary for constructing a system that could use the Autophoretic® chemicals, plaintiff received two letters from Parker Amchem. The first letter, dated May 24, 1993, suggested a number of performance conditions that plaintiff should establish in constructing the system and explained that Parker Amchem "will always stand behind the claims we make for our process and the performance specifications we develop jointly with our customers." The second letter, dated August 23, 1993, incorporated several revisions to the suggested performance criteria and agreed to "approve the final design specifications and system layout as proposed by Dukes Industries." Between November 1994 and May 1996, plaintiff purchased over $450,000 of Autophoretic® chemicals from defendant.

Plaintiff hired Dukes Industries, Inc. to serve as the general contractor in the construction of the paint application system. Throughout the construction and installation of the system, Parker Amchem was involved in design specifications and layout. (The extent of that involvement is in dispute.) A representative of Parker Amchem attended weekly building review meetings. Eventually, plaintiff became disillusioned with the work of Dukes Industries, Inc., stopped payments and finished the construction itself. The system was in place by April 1995 and became operational in June 1995.

Problems developed quickly. The biggest one was that the paint was not adhering completely to the trailer parts. Between June 1995 and December 1995, plaintiff painted over 4,000 trailers using the new system and the Autophoretic® chemicals. Because a number of these trailers later lost almost all their paint, plaintiff and Parker Amchem agreed to reanalyze the system. The parties inspected 1,500 trailers in Stoughton's lot that were ready for shipment. The inspection revealed significant adhesion failures on 75% of the units inspected. As a result of the inspection, plaintiff stopped shipping the trailers. From March to May 1996, plaintiff shut down two of its four assembly lines and reworked the inspected trailers by removing the nonadhering Autophoretic® coating and repainting them by hand. Plaintiff is not using the system today.

OPINION

Plaintiffs complaint sets forth nine claims against defendant: 1) breach of contract; 2) breach of express warranty; 3) breach of implied warranty of fitness for a particular purpose; 4) breach of implied warranty of merchantability; 5) negligence; 6) fraudulent misrepresentation; 7) negligent misrepresentation; 8) strict liability misrepresentation; and 9) fraudulent representation in violation of Wis.Stat. § 100.18. Plaintiff seeks to recover damages, including the capital costs of the inoperable paint system, its expenses for fulfilling warranty claims filed by its customers, the costs of reworking and repainting 1,556 vehicles, the costs of shutting down production lines, the increased costs in painting its trailers by hand, damage to its reputation and loss of profits and market share caused by reduced production. Defendant argues that claims 5 through 9 should be dismissed because the "economic loss" doctrine precludes plaintiff from suing in tort for damages that are purely "economic" in nature.

I. DIVERSITY JURISDICTION AND THE ERIE PRINCIPLE

I begin with a familiar principle: federal courts hearing cases pursuant to their diversity jurisdiction, 28 U.S.C. § 1332, must apply state substantive law, commonly that of the forum state. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). (Both sides agree that Wisconsin substantive law governs the resolution of this case.) Where a question of law is unclear, a federal court must predict how the highest court of the state would decide the question today. See Boland v. Engle, 113 F.3d 706, 709 (7th Cir.1997); McGeshick v. Choucair, 72 F.3d 62, 65 (7th Cir.1995), cert. denied, ___ U.S. ___, 116 S.Ct. 1834, 134 L.Ed.2d 937 (1996). In making that prediction, decisions of the lower state courts may be helpful. See King v. Damiron Corp., 113 F.3d 93, 95 (7th Cir.1997); Arnold v. Metropolitan Life Ins. Co., 970 F.2d 360, 361 (7th Cir.1992). Interests of comity warrant caution on the part of the federal courts in announcing what state law is; federal courts should be wary of expanding the boundaries of established state jurisprudence. King, 113 F.3d at 96.

II. ECONOMIC LOSS DOCTRINE

A. General Considerations

Like many other states, Wisconsin has adopted the "economic loss doctrine," pursuant to which a party bringing a tort claim cannot recover damages that are solely "economic" in character if its claim arises out of a commercial transaction. See Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc., 148 Wis.2d 910, 437 N.W.2d 213 (1989); see also Rardin v. T & D Mach. Handling, Inc., 890 F.2d 24, 28 (7th Cir.1989) (briefly discussing history of economic loss doctrine); Northridge Co. v. W.R. Grace & Co., 162 Wis.2d 918, 925 n. 3, 471 N.W.2d 179, 181 n. 3 (1991) (citing commentary on economic loss doctrine). The basic theory of the economic loss doctrine is straightforward. Commercial entities are capable of bargaining to allocate the risk of loss inherent in any commercial transaction. Courts should assume that parties factor risk allocation into their agreements and that the absence of comprehensive warranties is reflected in the price paid. Permitting parties to sue in tort when the deal goes awry rewrites the agreement by allowing a party to recoup a benefit that was not part of the bargain. See, e.g., East River S.S. Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 871-75, 106 S.Ct. 2295, 2302-04, 90 L.Ed.2d 865 (1986) (adopting economic loss doctrine for admiralty cases); Miller v. U.S. Steel Corp., 902 F.2d 573, 575 (7th Cir.1990) (commercial disputes should be resolved pursuant to commercial law); Rardin, 890 F.2d at 27-28 (commercial parties can protect themselves against risk of financial loss). Generally, this means that where two sophisticated parties have reached an agreement over the sale of a product, the purchaser cannot sue the seller in tort for economic losses suffered when the product does not work. That is a problem that warranties can cover and should be treated under warranty law. East River, 476 U.S. at 872, 106 S.Ct. at 2302-03.

Defining "economic loss" is difficult. The Wisconsin Supreme Court has noted that economic loss encompasses direct economic loss and consequential economic loss. Northridge Co., 162 Wis.2d at 926, 471 N.W.2d at 181-82 (citing Note, Economic Loss in Products Liability Jurisprudence, 66 Colum.L.Rev. 917, 918 (1966)). Direct economic loss is the "loss of bargain," or the difference between the value of what is received and its value as represented. Id. Consequential economic loss includes loss of profits resulting from the inability to use what was bargained for. Id. Economic loss can be measured by repair costs, replacement costs, loss of profits or diminution of value. Id. at 932-33, 471 N.W.2d at 184.

The economic loss doctrine does not apply where a product that one party has purchased from another party causes personal injury or property damage to property other than the product itself. In those instances, the traditional concern of tort law prevails: protecting society from an...