Wisconsin Lawyer: Wisconsin Lawyer June 2000: 1999 Significant Court Decisions:

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June 01, 2000

Wisconsin Lawyer June 2000: 1999 Significant Court Decisions

Torts

In State Farm Mut. Ins. Co. v. Ford Motor Co.¹ the Wisconsin Supreme Court held that the economic loss doctrine applied to consumer transactions. The consumer purchased a used Ford Bronco truck "as is" from a Ford dealership and purchased an extended service warranty. After the warranty expired, the consumer approached his parked vehicle to find that a fire had occurred even though it was still locked and the windows were rolled up. His insurer, State Farm, determined that the fire was caused by a defective ignition switch and paid the consumer $11,600, which it determined to be the fair market value of the vehicle.

gavel Several months later, the consumer received a recall notice from Ford indicating that a short circuit in the ignition switch of Bronco trucks could cause overheating, smoke and, possibly, fire. State Farm then initiated a subrogation action against Ford to recover the money it had paid to its insured. Ford raised the economic loss doctrine as an affirmative defense, asserting that the doctrine bars State Farm's tort claims of negligence and strict liability.

The court held that the damage to the vehicle constituted "economic loss" in that no property other than the vehicle was damaged and no personal injuries occurred. Economic loss is the diminution in the value of the product because of its inferior quality or because it does not work for the purposes for which it was manufactured and sold. Such economic losses associated with a defective product that does not meet a purchaser's expectations must be addressed through the law of contracts and warranties and not through tort law. Policy justifications supporting the application of the economic loss doctrine are that it maintains the historical distinction between tort and contract law, protects parties' freedom to allocate economic risk by contract, and encourages the party best situated to assess the risk of economic loss, enabling the purchaser in this case to assume, allocate, or insure against that risk.

Under contract law, recovery is limited to the parties to the contract. Products liability law was designed to govern the problem of physical injuries resulting from a defective product; it was not designed to undermine contract law or warranty provisions. If a plaintiff could recover tort damages for purely economic loss, the manufacturer would be liable even though it did not agree that the product would perform as plaintiff wished or expected it to do. Society's interest in tort law in protecting purchasers from physical injury does not justify requiring the consuming public to pay more for products so that a manufacturer can insure against the possibility that some of the products will not meet the expectations of some of its customers.

The policy of maintaining the distinction between tort and contract law applies to consumer transactions. In this case, the consumer purchased the truck "as is" and also purchased an extended warranty which had expired. If the consumer or his insurer were allowed to recover tort damages for purely economic loss, the contract would be rendered meaningless. Ford would be liable even though it did not agree that the Bronco would perform as the consumer expected and even though the warranty had expired.

Chief Justice Abrahamson and Justice Bradley dissented. They emphasized that the economic loss doctrine should not preclude a strict liability claim when the parties are of unequal bargaining power, the product is a necessity, no alternative source for the product is readily available, and the purchaser cannot reasonably insure against consequential damages. They argued that the consumer in this case should be able to proceed to trial under the doctrine of strict product liability for the injury to the defective product itself. The allegation was that this allegedly defective product posed an unreasonable risk of harm to person and property. Strict liability is grounded on policies of safety and risk spreading to advance on the theory that manufacturers will use greater care if they are liable for defective products. Safety concerns are not reduced when the injury is only to the product itself.2

Attorney Fees

In Jandrt v. Jerome Foods Inc.³ the supreme court upheld a substantial award in attorney fees and costs against a law firm that brought a class action alleging a toxic tort. The complaint alleged, upon information and belief, that plaintiffs' birth defects were caused by the exposure of their mothers during pregnancy to certain chemicals present and used at defendant's turkey processing plant where the mothers worked. The causation allegation was made upon information and belief because, among other things, the law firm was advised by a consultant that it would need discovery from the defendant concerning the specific chemicals used and the levels of exposure before conclusively determining causation.

The firm filed the action within one week of a significant change in Wisconsin's law of joint and several liability that potentially would have a significant impact upon plaintiffs' recovery should their lawsuit be successful. Nine months after the action was filed, the law firm offered to voluntarily dismiss the action. The firm and its clients concluded that the causal connection between the chemicals used at the plant and the plaintiffs' birth defects could only be demonstrated through epidemiological studies and chose not to commence such an undertaking. Defendant then filed a motion seeking sanctions. The trial court held that the commencement and continuation of the action was frivolous because the firm failed to make a reasonable inquiry into the facts underlying the allegation of causation prior to and following filing. The trial court awarded defendant a total of $716,000 in attorney fees and costs.

After reviewing the evidence, the supreme court concluded that the law firm did not file a frivolous action. Giving the firm the benefit of the doubt, the court determined that the action was not commenced frivolously in light of the pending need to file an order to avoid application of the new statute changing the joint and several liability rules. However, the court concluded that the action was frivolously continued.

In signing a pleading, motion, or other paper, the signing attorney warrants that it was not interposed for any improper purpose, that to the best of his or her knowledge the paper is well grounded in fact, and that the signer has conducted a reasonable inquiry and that the papers warranted by existing law or a good faith argument for a change in it. The analysis must be made from the perspective of the attorney and with a view of the circumstances that existed when the paper was signed.

The element of causation within the plaintiffs' negligence claims required factual support. Attorneys do not have the unfettered right to rely either on the investigation of a referring attorney or on client statements for the factual basis of a claim. Here, the information from the referring attorney was skeletal and insufficient to support a claim. The client's statement that her doctor had attributed cause to the chemicals, while objectively reasonable, should have prompted the firm to contact the doctor prior to filing to determine whether he did opine as to the causation of the birth defects.

Finally, the court rejected the firm's argument that the circuit court erred by, in effect, requiring that an expert opinion be retained prior to filing. The circuit court thoroughly explained its decision as one requiring expert opinion precisely because the firm had no other objective evidence of causation. The law firm never engaged in comprehensively reviewing the medical records, identifying the risk factors present in the mothers, and obtaining any evaluation through consultation with medical and scientific efforts of the scientific invalidity of an associate's elimination analysis. The firm could have made document requests under OSHA. As such, the "safe harbor" does not relieve an attorney from establishing the factual basis for a claim when that basis could be established by means other than discovery. The essential element of plaintiffs' allegation requiring a factual basis was causation.

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