Wisconsin Lawyer
Vol. 78, No. 11, November 2005

More litigation to come:
Exceptions to the economic loss doctrine

by R. Thomas Cane & Sheila Sullivan

n an earlier article in this journal, we suggested that the resolution of three then-pending cases - Kaloti, Grams, and Cascade Stone - would reveal whether the Wisconsin Supreme Court was ready to articulate "an economic loss doctrine rule with a well-defined and logical reach."¹ This doctrine, barring commercial purchasers of goods from bringing tort claims against the manufacturers of those goods for solely economic losses, was originally intended to limit the products liability torts of negligence and strict liability.² Over the last decade, however, the doctrine's application has been radically expanded, narrowing and in some cases effectively eliminating a variety of common-law tort causes of action.³ Given the uncertainty this expansion has created, we speculated that the court's recent concern with the economic loss doctrine might signal a desire to rethink the doctrine's purposes and its defining paradigms.

Kaloti, Grams, and Cascade Stone, decided on July 8, 2005, do offer some guidance to those interested in the doctrine's development in Wisconsin.⁴ Read together, the opinions in this trio of cases also reveal continuing divisions within our highest court about the policies in which the doctrine is rooted and how its reach should be circumscribed. Those divisions make it unlikely that Kaloti, Grams, and Cascade Stone represent a final word on the economic loss doctrine. The cases remain important, however, because they identify questions of law whose resolution will affect not only business and contract law practitioners, but also the ordinary citizens whose ability to protect themselves against negligence increasingly depends on how courts deploy the judge-made economic loss doctrine. The most important of these questions is whether clearly formulated exceptions to the doctrine will ensure the survival of whole classes of common-law torts or whether those exceptions will be so eroded that the economic loss doctrine becomes a blanket rule.

Kaloti and the Fraud in the Inducement Exception

Kaloti⁵ apparently settles the question of whether Wisconsin will join other states in recognizing a fraud in the inducement exception to the economic loss doctrine. This exception holds that the doctrine does not bar tort claims when the fraud in question is "extraneous to the contract."⁶ In certain restricted factual situations, a party alleging it was fraudulently induced to enter a contract can seek tort remedies for intentional misrepresentation from another party to the contract. The economic loss doctrine cannot be used as a defense unless the fraud is "interwoven with" the contract. Kaloti thus adopts what has become known as a Huron Tool-style exception⁷ to the rule that commercial purchasers of goods cannot use tort theories to recover solely economic losses from the manufacturers of those goods.

Whether to apply a fraud exception to the doctrine has been contested for almost a decade. In the 1990s, various federal courts predicted that Wisconsin would not allow an intentional misrepresentation claim when a plaintiff sought to recover only economic damages; that Wisconsin would adopt a broad, general fraud in the inducement exception; and that Wisconsin would choose a narrow Huron Tool exception.⁸ In 1999, in Douglas-Hanson Co. v. BF Goodrich Co.,⁹ the Wisconsin Court of Appeals concluded that public policy and common-law tradition favored a general fraud in the inducement exception to the economic loss doctrine.¹⁰ On review, the Wisconsin Supreme Court formally affirmed Douglas-Hanson in a 3-3 decision.¹¹

The supreme court returned to the problem of fraud in the inducement again, however, in 2003 and 2004. Of the five justices who participated in Digicorp Inc. v. Ameritech Corp.,¹² two agreed on a Huron Tool exception, two argued for a general Douglas-Hanson exception, and the fifth, Justice Sykes, insisted there should be no exception to the economic loss doctrine for fraud. The next year, the majority in Tietsworth v. Harley-Davidson Inc.¹³ concluded that Digicorp overruled Douglas-Hanson with respect to recognizing a general exception to the economic loss doctrine for all fraud in the inducement, but they did not determine whether any narrower exception existed.

The Kaloti Facts. Against this backdrop of uncertainty, Kaloti provided the court with an opportunity to determine the precise scope of a critical exception to the economic loss doctrine. Kaloti, a Wisconsin food wholesaler, had worked for several years with Geraci & Associates, a Kellogg agent.¹⁴ Geraci initiated contact with Kaloti and negotiated the elements of every transaction.¹⁵ After Geraci and Kaloti reached an agreement, Kellogg shipped its products directly to Kaloti, which resold them to large market stores.¹⁶ Sometime after Kaloti, Kellogg, and Geraci established this pattern of business, Kellogg decided to market certain products directly to those stores.¹⁷ Despite knowing that Kellogg would be shifting to direct sales, Geraci solicited another order from Kaloti.¹⁸ That order was delivered, and customers began notifying Kaloti they would be buying their products directly from Kellogg from that time on.¹⁹ Geraci told Kaloti it had kept silent about the marketing change because it was bound by a confidentiality agreement.²⁰ When Kaloti attempted to return the products, Kellogg refused them, and Kaloti was left without a market for the goods it had purchased.²¹ Kaloti sued, alleging that Geraci's intentional misrepresentation resulted in a $100,000 economic loss.²²

According to the Kaloti majority, a narrow fraud in the inducement exception exists when, "as here," a plaintiff can show that intentional misrepresentation occurred, the misrepresentation took place before the contract was formed, and the misrepresentation was extraneous to that contract.²³ The first two elements were easily established. The majority then determined that Kaloti had alleged the occurrence of misrepresentation extraneous to the contract because the facts Geraci omitted did not "concern Kellogg and Geraci's performance of the contract ... and ... [did] not regard the quality or character of the ... products that Kellogg sold Kaloti."²⁴ The majority characterized the alleged misrepresentation as "a matter whose risk was never contemplated to be a part of the contract."²⁵Such an application of the economic loss doctrine was appropriate because, "in these limited circumstances," the purchaser should not be "expected to assume, allocate or insure against the risk of the seller's intentional lie or material omission."²⁶

Concurring in the result, Chief Justice Abrahamson strongly criticized the rule adopted by the court. A Huron Tool-style exception is, she wrote, "deficient as a matter of principle" and "inherently defective because it cannot be applied in a principled way."²⁷ In the chief justice's analysis, a narrow fraud in the inducement exception is deficient as a matter of principle because it does not recognize the public interest in discouraging intentional misrepresentation and instead embraces a vision of the world in which risk allocation reflects purely private choices and has only individual consequences.²⁸

Even if one finds that vision compelling, however, there are reasons to be disturbed by Kaloti.

Kaloti suggests the line between tort law and contract law can best be maintained by distinguishing between fraud "extraneous to" a contract and fraud "interwoven" with it.²⁹ At first glance, that distinction appears to be clear, but the test or standard for determining whether a misrepresentation belongs in one category or another is not clear - in part because Kaloti provides several versions of that test. The first version of the Huron Tool/Kaloti test is that fraud is interwoven with a contract if the misrepresentation concerns "the quality or character of the goods sold." ³⁰ This version is rooted simply in the terms of the contract. But the test is also formulated this way: "[or] stated another way, the fraud concerns matters whose risk and responsibility did not relate to the quality or the characteristics of the goods for which the parties contracted."³¹ This formulation applies both to misrepresentations explicitly dealt with in the contract and to the unwritten "expectations of the parties to the risk of loss in the event the goods purchased did not meet the purchaser's expectations."³² In a third variant of the test, fraud is interwoven with a contract if the misrepresentation relates to the performance of the contract.³³ Based on the facts in Kaloti, the majority appears to have combined the first and second articulations of the test. However, the third version undoubtedly sometimes will be cited as the holding in Kaloti, begging the question of what kind of misrepresentation would not somehow relate to contract performance.

The questions raised by Kaloti are brought into sharp focus by a recent decision of the Seventh Circuit Court of Appeals. On June 13, 2005, the court used a prediction that Wisconsin would elect a Huron Tool-style fraud in the inducement exception to settle a dispute between Cerabio LLC, a research and development company, and Wright Medical Technology Inc., a designer and manufacturer of bone replacement products.³⁴ Cerabio developed a bone replacement made from tricalcium phosphate (TCP), the FDA approved the product, and Cerabio patented the production process and materials.³⁵ Wright and Cerabio eventually negotiated a deal in which Wright bought all of Cerabio's assets. Before entering into the agreement, Cerabio told Wright it had established a repeatable process for producing the filler and that all the raw materials necessary were commercially available.³⁶ After Wright made an initial payment, Wright found it could not repeat the process because the old TCP powder was no longer available.³⁷ Wright refused to pay a second installment, notifying Cerabio that Cerabio was in breach. After Wright began producing a replacement product, which, it claimed, was different from the one Cerabio sold it, Cerabio sued.³⁸ Wright counter-sued, alleging it was fraudulently induced to enter the contract because Cerabio knew the TCP powder was unavailable before the contract was signed.³⁹

The Seventh Circuit concluded that Wright's claims were barred by the economic loss doctrine. The court focused first on evidence that the parties had negotiated the risks of repeatability.⁴⁰ The contract was explicitly contingent on a successful run of three test lots, an end which could not have been achieved if "the starting materials were not available."⁴¹ The court found that the repeatability contingency clause thus reflected a consideration of exactly the kind of problem that actually occurred. The other evidence that the availability of starting materials was addressed came in a nondisclosure agreement (or nonreliance clause) in which Cerabio specified it provided all information on an "as is basis."⁴² Based on these terms, the court reasoned that Cerabio's alleged fraud was interwoven with the contract although the availability of TCP powder was never explicitly mentioned in the contract.

The Hon. R. Thomas Cane, Marquette 1964, LL.M.,Virginia 1986, is chief judge for the Wisconsin Court of Appeals.

Sheila Sullivan, U.W. 2004 magna cum laude, Order of the Coif, is a former law clerk for Judge Cane.

Cerabio thus indicates that misrepresentation is not interwoven with a contract unless there is at least vestigial evidence in the contract's terms that the parties actually allocated the risks of fraud. But does Kaloti stand for the same proposition? Would the Kaloti majority have followed the Seventh Circuit's analytic model and decided that the doctrine of economic loss barred Kaloti's claims if the contract had included a nonreliance clause?

Depending on the answer to that question, Kaloti could transform a broadly drafted nonreliance clause into a get-out-of-tort-free card. But it might just as easily make unnecessary the type of analysis engaged in in Cerabio. Under the broad third formulation of the Kaloti test, for example, Cerabio's silence about the fact that a third party was no longer producing TCP would be misrepresentation related to the performance of the contract, whatever the contract said, and thus the misrepresentation would be interwoven with the contract.

Comparing Cerabio with Kalotiidentifies another area of potential concern. Cerabio repeatedly stresses the parties' sophistication and the thoughtfulness of the negotiations between them.⁴³ As business entities, Kaloti, Geraci, and Kellogg also are presumably sophisticated parties. Yet Kaloti nowhere explicitly limits its holding to that class of actors. Rather it speaks broadly of parties who are "expected to negotiate ... and will be held to their agreements" and of commercial purchasers, buyers, and sellers.⁴⁴

Where does Kalotileave business and contract law practitioners? If the parties to a transaction are commercial entities, it may be best to attempt to allocate the risk of misrepresentation directly. Drafting nonreliance clauses and agreements with contingency terms might also help protect parties that are determined to avoid tort liability for economic losses arising from misinformation. How such negotiations will affect the relations among commercial parties is difficult to predict, but judicial limitations on access to tort remedies will necessarily produce greater attention to fraud in contract drafting.

Kaloti's effect on ordinary consumers is more uncertain. The holdings in Huron Tool and Kalotiare premised on the assumption that negotiation is not just possible but also that it is a fundamental responsibility of contracting parties. Two recent supreme court decisions, Cease Electric and Swimwest,⁴⁵ suggest a majority of the court recognizes that ordinary consumers often cannot realistically negotiate contract terms. Whether that recognition will inform the court's view of fraud in the inducement claims made in the consumer context, however, remains an open question.

Cascade Stone and Home Buyers and Construction Contracts

Linden v. Cascade Stone is likely to have a more immediately visible impact than Kaloti because Cascade Stone deals with such a common type of transaction. The Lindens contracted with Groveland to build a new home.⁴⁶ Groveland hired subcontractors, including Cascade, which applied exterior stucco, and Fern, which shingled the roof.⁴⁷ Construction was delayed by water infiltration, and the Lindens eventually sued Groveland, Cascade, Fern and others, alleging breach of contract, breach of warranty, and negligence.⁴⁸ After Groveland settled,⁴⁹ the circuit court granted summary judgment to the remaining defendants on the ground that the economic loss doctrine barred the Lindens' tort claims against Fern and Cascade. The supreme court agreed to review the case to decide three issues: what controls the analysis of whether a contract is for goods or services; whether an objective test should be used to determine a contract's predominant purpose; and whether "the integrated system" limitation to the "other property" exception to the economic loss doctrine bars a negligence claim against a subcontractor who provided services.⁵⁰

The contract questions were inextricably intertwined with the economic loss doctrine question in Cascade Stone because of the court's recent ruling that the doctrine does not apply to service contracts.⁵¹ The contracts between Groveland and its subcontractors were predominately for services.⁵² Thus, the Lindens argued as a threshold issue that those contracts were controlling and that the economic loss doctrine should not bar them from asserting tort claims against Cascade and Fern. Cascade and Fern countered that the general contract with Groveland controlled. Because that contract was for a product, the finished house, the economic loss doctrine should be available to them as a defense.

The majority agreed with Fern and Cascade, citing the general policies furthered by the economic loss doctrine.⁵³ The majority concluded that focusing on the service contracts would allow the Lindens to make an "end run" around their contract with Groveland - even though Groveland was no longer a party to the lawsuit.⁵⁴ The Lindens had, the majority reasoned, the best opportunity to bargain for coverage of the risk of faulty workmanship. The majority also agreed with the court of appeals that, "at its core, the Lindens' complaint is that the house they received is not the house for which they contracted."⁵⁵ Allowing the Lindens to maintain a tort claim against the subcontractors would thus undermine the terms of the general agreement they had made.⁵⁶

Having determined that the general contract controlled,⁵⁷ the majority addressed the nature of the contract. The parties agreed the general contract was for both goods and services. They also agreed that the applicability of the economic loss doctrine depended on the contract's predominant purpose. But they did not agree on how to resolve what was the contract's predominant purpose. The Lindens argued that predominant purpose should be determined by a quantifiably objective test. The court should, they suggested, calculate the costs of materials and labor and compare the two totals. The majority admitted that relying on quantifiably objective factors would "make courts' applications of the predominant purpose test predictable."⁵⁸ But they did not accept that such a test would make "applications more consistent, or ... more fair or accurate."⁵⁹ The majority concluded that the Bonebrake predominant purpose test, which considers both quantitative and subjective factors, was preferable because "considering the totality of the circumstances will give the most complete picture of the transaction at issue."⁶⁰

Cascade Stone's analysis of the costs of materials and services is brief. Its discussion of the contract's language is equally brief. Though the majority found evidence of mixed purpose in both the cost information and the contract language, it concluded that the Lindens contracted with Groveland for a product.⁶¹ Dismissing the issue of how much money was spent on goods versus services, the court focused on how the project's cost was billed. Like many home buyers, the Lindens signed a fixed price contract - the cost was dependent on project specifications.⁶² This structure demonstrated, the majority observed, that the parties bargained based on the nature of the product, not on the work put into it.⁶³

As applied in Cascade Stone, the predominant purpose test looks less like a cumulative test than a general feel test, reflecting a judicial decision about the essential nature of the underlying transaction. The less the test depends on construing specific provisions of a text, of course, the more difficult it is to predict what, if any, changes in terms could prevent an agreement between a home buyer and a general contractor from being characterized as a contract for goods. The majority's conclusion rests primarily on the contract's basic form, a fixed price linked to product specifications.⁶⁴ Would the predominant purpose of that contract be different if the contract had set out a formula for specification changes demonstrating the relation between those costs and the cost of labor expended to make the changes? Based on the majority's analysis, it might. However, it is equally possible that, under Cascade Stone, a court might still decide the contract was for a good.⁶⁵

Nothing in the majority opinion limits Cascade Stone's holding. The language is expansive. General contracts will control whether an economic loss doctrine defense is available to subcontractors. The totality of the circumstances will determine the predominant purpose of those contracts. And, most intriguingly, "the integrated system limitation of the other property exception to the economic loss doctrine is applicable where the subcontractor mainly provided services that have no independent value or use apart from their function as components of the project into which they were incorporated."⁶⁶ Identifying subcontractor services as part of an integrated system - a component of the completed product - raises the question of whether Cease applies to service contracts associated with the construction of a new home.

In 1325 North Van Buren LLC v. T-3 Group Ltd., decided a few months before Cascade, the court of appeals concluded that Cease governed a commercial contract for the renovation and management of a warehouse.⁶⁷ The core of the opinion was an analysis of the contract's purpose. Without mentioning "predominant purpose" or Bonebrake, the court observed that the contract involved providing "construction and administrative services," that there was no record that T-3 constructed anything itself, and that it had no design authority.⁶⁸ While only $176,000 of the $6 million contract went to pay T-3 for its services, the court concluded that T-3 was merely the conduit through which the majority of the money flowed, and controlling that flow was part of the service it provided.⁶⁹

How T-3 and Cascade Stone are reconciled may determine whether the precise wording of commercial agreements with a general contractor will remain significant in determining the predominant purpose of those agreements.⁷⁰ T-3 indicates that a totality of the circumstances analysis requires assessing particular facts and specific contract language. But it is also possible to read T-3as reflecting the court's judgment that, at bottom, renovating an existing structure is different than constructing a new one. If predominant purpose analyses finally rest on the generic nature of a transaction, it will probably make no difference how an agreement describes what is being purchased.

The Cascade Stone majority reiterated its approval of the rationale, adopted by Bay Breeze,⁷¹ that home buyers buy an integrated product when they contract for a house, in large part because they are uninterested in how the components of the product are obtained.⁷² In that context, it makes sense to assert that, like bad concrete in condominiums or defective windows installed after a house is completed, stucco siding and roof shingling "have no independent value or use apart from their function as components of the house."⁷³

Justice Roggansack dismissed the idea that Cascade Stone diminishes Wisconsin homeowners' right to bring suit for negligent work.⁷⁴ Homeowners retain contractual remedies against general contractors who have their own remedies against subcontractors.⁷⁵ She also suggested that homeowners might be able to bring third-party beneficiary actions against negligent subcontractors.⁷⁶ The dissent admitted that, in theory, homeowners could protect themselves by obtaining warranties directly from individual subcontractors.⁷⁷ In practice, however, as Justice Bradley noted, such protections would be difficult to secure because subcontractors often are not identified until after general contracts are signed.⁷⁸

Knowledgeable consumers - or their lawyers - will thus now have to consider whether general contracts can be revised to reflect the service aspects of the parties' agreement, whether consumers can convince general contractors to provide assurances that subcontractor-related losses will be fully compensated for, and whether consumers can obtain protection by direct agreement with individual subcontractors. None of those options seem likely to achieve greater protection for the home buyer, however. Home buyers from small or rural areas will be particularly handicapped because they ordinarily have only a few general contractors to choose among and an equally limited choice of experienced and competent subcontractors. In such virtually captive markets, contractors and subcontractors have little incentive to agree to increase their potential liability and thus little reason to bargain with consumers.

For people interested less in its precise holding than in the policies served by the economic loss doctrine, Cascade Stone highlights inconsistencies that make the doctrine's continued expansion problematic. Negligent subcontractors now may be protected from tort liability for failures that, under state law, they once might have been accountable for. The principle that justifies this limitation on traditional common-law tort causes of action reflects the policy choice that the buyer is best suited to allocate the risk of economic loss through negotiation.⁷⁹ Yet the hook that brings the losses that plaintiffs like the Lindens suffer into the reach of the doctrine is the integrated systems limitation to the other property exception. And that limitation is premised on the assumption that home buyers are unaware of, and thus logically incapable of assessing, the risks associated with the complex network of services, suppliers, and products that are the component parts of the home they contract for.

Grams and the "Other Property" Exception

The economic loss doctrine has never precluded tort claims when a product causes personal injury nor does it bar claims for damage to property other than the property itself.⁸⁰ However, as Justice Prosser's majority opinion in Grams candidly recognizes, the parameters of the other property exception to the doctrine have "proved elusive."⁸¹ Unfortunately, Grams does little to solidify those elusive parameters.

The plaintiffs in Grams raised calves for resale.⁸² During the first weeks of the calves' lives, the Grams fed their charges a milk replacer, manufactured by Milk Products Inc. and bought from Cargill.⁸³ Initially, the Gramses fed the calves a medicated milk replacer.⁸⁴ The medicated replacer was expensive, however, and the Gramses approached Cargill about finding a less costly version. Cargill told them they could buy the same replacer without medication more cheaply. Soon after the Gramses began using the cheaper product, they noticed their calves were not gaining weight. The mortality rate of the calves tripled, rising from an average of 8 percent to a high of 34 percent.⁸⁵ As a result of these problems, the Gramses sued Cargill and Milk Products, alleging breach of implied warranty, strict liability tort, negligence, intentional misrepresentation, and strict responsibility misrepresentation. The circuit court granted summary judgment to both defendants on all tort claims,⁸⁶ finding they were barred by the economic loss doctrine.⁸⁷ The Gramses appealed, and the supreme court agreed to review the economic loss questions.

The Grams majority first set out the policies that underlie the economic loss doctrine, stressing its roots in Uniform Commercial Code (U.C.C.) policy and the distinction between economic losses, for which risk-sharing is encouraged, and other losses, such as personal injury losses, for which such sharing is undesirable.⁸⁸ The majority also noted that the most developed test for distinguishing between damage to the product itself and damage to other property, the integrated systems concept,⁸⁹ does not "translate well to all situations involving property damage to which the economic loss doctrine logically applies." For that reason, some courts, like the Michigan Supreme Court, have adopted a disappointed expectations concept - or test - to govern a situation in which commercial products cause damage that was either within the "scope of the bargaining" or in which "the occurrence of such damage could have been the subject of negotiations between parties."⁹⁰ In such a test, the determination of whether particular damage qualifies as damage to other property depends on what the parties expect of the bargained-for product.⁹¹

A Wisconsin court employed the disappointed expectations concept to bar tort claims against the manufacturer of a defective silo when the feed damaged by the defect reduced milk production and killed cattle.⁹² The plaintiffs expected the silo to enrich the feed, and thus all their losses flowed from that disappointed expectation. The court of appeals similarly applied the concept to another transaction that did not appear to involve component parts of the purchased product, in Selzer v. Brunsell Bros. Ltd.⁹³ There the plaintiff bought windows that were warranted to protect permanently against decay and rot.⁹⁴ Years later, defects in the windows spread rot to the siding and other parts of the house. The court of appeals concluded that the losses involved stemmed "at bottom" from disappointed expectations.⁹⁵ Such damages, the court felt, could and should have been expected.

Based on these cases, the Grams majority incorporated both "disappointed expectations" and "integrated systems" methodologies into its analysis of the facts before it, concluding that "the economic loss doctrine will apply when `prevention of the subject risk was one of the contractual expectations motivating the purchase of the defective product.'"⁹⁶ Rejecting as overly formalistic the Gramses' claim that "other property" should include damage to everything beyond the physical dimensions of the purchased property, the majority analogized all products to products that are components of an integrated system.⁹⁷ "If a product is expected and intended to interact with other products and property, it naturally follows that the product could adversely affect and even damage that property."⁹⁸ Such a test will not necessarily be simple, requiring "interpretation of the purpose of a transaction and the expected uses of a product," but it will help strike the appropriate balance between tort and contract claims.

Chief Justice Abrahamson's dissent focused on the effects of using the "disappointed expectations" test to distinguish between property and other property. She raises the possibility that consistent application of the test "might completely eliminate the [other property] exception to the economic loss doctrine."⁹⁹ She asked whether, for example, it would bar claims for economic losses if a defective car lurched backward, out of park, destroying a garage door.¹⁰⁰ Cars are, in the chief justice's hypothetical, expected to interact with other property, including garages; damage to a garage would be an injury flowing from disappointment with the car's performance.

Whether one believes expansion of the doctrine is a good or a bad thing, it seems unarguable that the parameters of "other property," already blurred considerably by the "integrated systems" concept, are further softened by the addition of a malleable "disappointed expectations" test. It is easy to see how a composite "integrated systems" and "disappointed expectations" test could, as the U.S. Supreme Court observed in an earlier other-property case, erode a fundamental principle of defective product tort law: that manufacturers will make safer products if they are liable both for injuries to people and for damages to property other than the product purchased.¹⁰¹

Considered in this context, Grams presents a challenge not only for practitioners but also for the courts that must determine when to apply the "integrated systems test," when to consider the facts in terms of "disappointed expectations," and when to combine both frameworks. Perhaps more important, judges will need a principled way to constrain "disappointed expectations" analyses. As a matter of common sense, any product we buy that damages something we own disappoints us. As a legal standard, "disappointed expectations" must mean something more than that. Is disappointment confined to the specific functions for which a product is designed or the specific use for which it is purchased? For example, would a dishwasher that cleaned dishes perfectly well but emitted fumes that discolored walls and destroyed paint cause damages that were the product of "disappointed expectations"? Arguably not, because the dishwasher did what it was supposed to do: it got dishes clean. However, those damages might be seen as flowing from disappointed expectations because it is foreseeable that a product that malfunctions inside a house would damage the house. Damages arising from the dishwasher's malfunction might, in addition, be considered to be damages to the integrated system of the kitchen, and thus not part of the "other property" exception to the economic loss doctrine.

Recognizing the policy interests served by the other property exception, some courts have moved to articulate standards that protect the exception. A recent Florida admiralty case distinguished neatly between integrated systems purchased as integrated systems and products purchased separately that would become part of an integrated system.¹⁰² In Ice Fern, the parties contracted for a governor (the part that regulates the speed of a ship's engine). Although the governor was, after installation, part of the engine system, the court nonetheless reasoned that "because only the governor was covered under the terms of the contract .... [p]laintiffs may recover under a negligence theory."¹⁰³ A Massachusetts admiralty case similarly permitted tort recovery for damages to a vessel's engine caused by defects in a separately purchased engine filter.¹⁰⁴ With Grams, Wisconsin appears to have moved in the opposite direction, crafting a test that invites further erosion of the other property exception to the economic loss doctrine.

Conclusion

As we have suggested elsewhere, the supreme court's recent focus on the economic loss doctrine might have signaled a willingness "to rethink the recent evolution of the economic loss doctrine."¹⁰⁵ Indeed, Cease invited speculation that the court would attempt to limit the doctrine's expansion by rerooting it in its original policy ground, the U.C.C. To the extent they indicate a direction, Kaloti, Cascade Stone, and Grams reject such revisionism, placing Wisconsin solidly in the camp of a federal judiciary that is enthusiastically extending the economic loss doctrine to the majority of situations in which commercial parties and consumers suffer economic losses caused by malfunctioning products. The clarity of that signal is undercut, however, by divisions within the court and by the generalized policies and broad standards employed in the majority opinions. In the wake of Kaloti, Cascade Stone, and Grams,the only safe bet to make about the future of the economic loss doctrine in Wisconsin thus seems to be that the number of such cases litigated will continue to increase.

Endnotes

¹See R. Thomas Cane & Sheila Sullivan, The Future of the Economic Loss Doctrine in Wisconsin, 78 Wis. Law. 5, 13 (May 2005) (citing Rich Prod. Corp. v. Kemutec Inc., 66 F. Supp. 2d 937, 970 (E.D. Wis. 1999)). The court's first bite at the economic loss doctrine last term came on Nov. 9, 2004, when it unanimously held that the doctrine did not apply to service contracts. See Insurance Co. of N. Am. v. Cease Elec. Inc., 2004 WI 139, ¶52, 276 Wis. 2d 361, 688 N.W.2d 462.

²See Cane & Sullivan, supra note 1, at 13.

³See generally R. Joseph Barton, Drowning in a Sea of Contract: Application of the Economic Loss Rule in Fraud and Negligent Misrepresentation Claims, 41 Wm. & Mary L. Rev. 1789 (May 2000).

⁴See Kaloti Enters. Inc. v. Kellogg Sales Co., 2005 WI 111, __ Wis. 2d __, 699 N.W.2d 205; Grams v. Milk Prods. Inc., 2005 WI 112, __ Wis. 2d __, 699 N.W.2d 167; Linden v. Cascade Stone Co., 2005 WI 113, __ Wis. 2d __, 699 N.W.2d 189. With Cease, the court thus heard four economic loss doctrine cases in a single term.

⁵Kaloti also holds that a party to a business transaction has a duty to disclose a fact when: 1) the fact is material to the transaction; 2) the party who knows the fact also knows the other party is about to enter into the transaction under a mistake as to the fact; 3) the fact is peculiarly and exclusively within the knowledge of one party, and the mistaken party could not reasonably be expected to discover the fact; and 4) on account of the objective circumstances, the mistaken party would reasonably expect disclosure of the fact. Kaloti, 2005 WI 111, ¶ 17. According to Chief Justice Abrahamson, this formulation extends the duty to disclose beyond the realm of residential real estate transactions in which it was first articulated. Id. ¶ 54. See, e.g., Ollerman v. O'Rourke Co., 94 Wis. 2d 17, 29-42, 288 N.W.2d 95 (1980). Indeed, she contended, the formulation extends that duty beyond what is described in the Restatement (Second) of Torts § 551. The consequences of any expansion of the duty to disclose may be more illusory than real, however. The kind of fact that would create a duty to disclose would also generally fall outside the newly announced fraud in the inducement exception, negating tort liability.

⁶Kaloti, 2005 WI 111, ¶ 42. Interestingly, any dispute over whether there should be a fraud in the inducement exception has disappeared. The court only considered the scope of the exception.

⁷Id. The Michigan Court of Appeals first formulated this rule in a case involving defective software. Huron Tool & Eng'g Co. v. Precision Consulting Servs. Inc., 532 N.W.2d 541 (Mich. 1995).

⁸See Cooper Power Sys. Inc. v. Union Carbide Chems. & Plastics Co., 123 F.3d 675, 682 (7th Cir. 1977); Budgetel Inns Inc. v. Micros Sys. Inc., 8 F. Supp. 2d 1137, 1149 (E.D. Wis. 1988); Raytheon Co. v. McGraw-Edison Co., 979 F. Supp. 858, 872 (E.D. Wis. 1977).

⁹Douglas-Hanson Co. v. BF Goodrich Co., 229 Wis. 2d 132, 137-38, 598 N.W.2d 262 (Ct. App. 1999), aff'd, 2000 WI 22, 233 Wis. 2d 276, 607 N.W.2d 621.

¹⁰Wisconsin has long made distinctions between negligent and intentional misrepresentation that could justify using the economic loss doctrine to bar tort claims for one and not the other. See O'Rourke, 94 Wis. 2d 17. Most significantly, courts have concluded that limiting liability for accidental misrepresentation encourages a free flow of information considered vital to economic health. But, as the Restatement (Second) of Torts, § 552 comment a (1977) observes, that "limitation applies ... only in the case of information supplied in good faith `for no interest of society is served by promoting the flow of information not genuinely believed by its maker to be true.'" The question is whether a Huron Tool-style exception, which encourages individuals to insure against the risk that their commercial partners are intentionally lying, encourages a flow of false information detrimental to the economy and the public good.

¹¹Douglas-Hanson, 2000 WI 22, ¶¶ 1-2, 233 Wis. 2d 276.

¹²Digicorp Inc. v. Ameritech Corp., 2003 WI 54, ¶47, 262 Wis. 2d 32, 662 N.W.2d 652.

¹³Tietsworth v. Harley-Davidson Inc., 2004 WI 32, ¶32, 270 Wis. 2d 146, 677 N.W.2d 233.

¹⁴Kaloti, 2005 WI 111, ¶¶ 3-4.

¹⁵Id. ¶ 3.

¹⁶Id. ¶ 4.

¹⁷Id. ¶ 5.

¹⁸Geraci knew it would take Kaloti some months to resell the products it purchased. Id. ¶ 6.

¹⁹Id. ¶ 7.

²⁰Id. ¶ 8.

²¹Id.

²²Id. ¶ 9.

²³Id. ¶ 42.

²⁴Id. ¶ 45.

²⁵Id.

²⁶Id. ¶ 50.

²⁷Id. ¶ 78 (Abrahamson, C.J., concurring).

²⁸See id. ¶¶ 75-77 (Abrahamson, C.J., concurring).

²⁹Id. ¶¶ 46-47.

³⁰Id. ¶ 43.

³¹Id. ¶ 42.

³²Id. ¶¶ 42-43.

³³Id.

³⁴Cerabio LLC v. Wright Med. Tech. Inc., 410 F. 3d 981 (7th Cir. 2005).

³⁵Id. at 984.

³⁶Id.

³⁷Id. at 984-85.

³⁸Id. at 985-86.

³⁹Id. at 986.

⁴⁰Id. at 984.

⁴¹Id. at 990.

⁴²Id. at 991.

⁴³Id.

⁴⁴Kaloti, 2005 WI 111, ¶ 48.

⁴⁵See Cease, 2004 WI 139, ¶¶ 42-46 (noting that the circumstances surrounding consumer service contracts - informality, absence of lawyers, and disparities of information and power - make it unlikely the parties will negotiate risk allocation); Atkins v. Swimwest Family Fitness Ctr., 2005 WI 4, ¶ 26, 277 Wis. 2d 303, 691 N.W.2d 334 (finding an exculpatory clause that was part of a standardized agreement void because the customer had no opportunity to bargain).

⁴⁶Cascade Stone, 2005 WI 113, ¶ 2.

⁴⁷Id. ¶ 3.

⁴⁸Id.

⁴⁹Id.

⁵⁰Id. ¶ 4.

⁵¹Id. ¶ 12. See Cease, 2004 WI 139, ¶ 2.

⁵²Cascade Stone, 2005 WI 113, ¶ 12.

⁵³Id. ¶ 16

⁵⁴Id. ¶ 17.

⁵⁵Id.

⁵⁶The conclusion that a contract to construct a house is a contract for a good is not necessarily obvious. A recent unpublished decision of the North Carolina Court of Appeals, Pedan General Contractors Inc. v. Bennett, No. COAO4-744, 2005 WL 1804298 (N.C. App. Aug. 2, 2005),employs the same test as Cascade, but decides that such contracts are agreements to provide services. The Pedancourt characterized general contractors as suppliers of services without citation to authority, indicating that the court believes such a characterization is simply logical. Id. at 33. Comparing Peden and Cascade Stonemakes it clear that Bonebrake can be used not only as a method of textual analysis, but also as authority for an impressionistic reading of the nature of a questioned transaction. If one focuses on the buyer's bargain, the product at issue is more easily characterized as a house. If one focuses on the seller's bargain, the product at issue is more easily characterized as services. In this context, it is worth remembering that the predominant purpose test was developed in a case involving both existing goods and services, in response to the U.C.C.'s definition of goods as things moveable at the time of identification. See, e.g., Bonebrake v. Cox, 499 F.2d 951, 957-58 (8th Cir. 1974).

⁵⁷Cascade Stone thus determines which contract prevails based on economic loss doctrine principles before it decides whether the doctrine applies to that contract.

⁵⁸Cascade Stone, 2005 WI 113, ¶ 22.

⁵⁹Id.

⁶⁰Id. ¶ 9 (citing Bonebrake, 499 F.2d 951). The test was first used in Wisconsin several years later. See Van Sistine v. Tollard, 95 Wis. 2d 678, 685, 291 N.W.2d 636 (Ct. App. 1980).

⁶¹Cascade Stone, 2005 WI 113, ¶ 25.

⁶²Id.

⁶³Clearly, fixed price contracts reflect labor costs as well as material costs; the cost of a change in specifications is based on projected changes in both kinds of costs.

⁶⁴Cascade Stone, 2005 WI 113, ¶ 25.

⁶⁵A buyer who chooses a fixed price contract can be seen as bargaining to avoid both the risk of service errors and uncertainty about the purchase price. A general contract that did not specify price but that did specify how costs would be calculated might thus have a better chance of not being characterized as a contract for a good despite the fact that the underlying transaction is the same.

⁶⁶Cascade Stone, 2005 WI 113, ¶ 32.

⁶⁷1325 N. Van Buren LLC v. T-3 Group Ltd., 2005 WI App 121, ¶ 2, 701 N.W.2d 13.

⁶⁸Id. ¶ 19.

⁶⁹Id.

⁷⁰On Oct. 3, 2005, the supreme court accepted the T-3 case to consider whether application of the economic loss doctrine is strictly limited to contracts for the purchase and sale of goods governed by Article 2 of the UCC.

⁷¹See Bay Breeze Condo. Ass'n v. Norco Windows Inc., 2002 WI App 205, ¶ 25, 257 Wis. 2d 511, 651 N.W.2d 738.

⁷²See Cascade Stone, 2005 WI 113, ¶ 9. Both Bay Breeze and Cascade Stone depend on the same dicta from a Florida case. See Casa Clara Condo. Ass'n v. Charley Toppino & Sons, 620 So. 2d 1244, 1247 (Fla. 1993) ("Generally, house buyers have little or no interest in how or where the individual components of a house are obtained. ... They bargain[] for the finished products, not their various components.").

⁷³Cascade Stone, 2005 WI 113, ¶ 22.

⁷⁴The majority did not otherwise address the dissent's claim that it has diminished Wisconsin buyers' protection against negligent performance. Id. ¶ 35.

⁷⁵Id.

⁷⁶Id. ¶ 31.

⁷⁷Id. ¶ 48 (Bradley, J., dissenting).

⁷⁸Justice Bradley pointed out the irony of seeking to maintain the fundamental distinction between tort and contract law by barring home buyers from seeking tort remedies from subcontractors with whom they have no contract. Id. ¶ 42 (Bradley, J., dissenting).

⁷⁹Again, the majority relied on the logic of Casa Clara Condo. See supra n.72.

⁸⁰See, e.g., Wausau Tile Inc. v. County Concrete Corp., 226 Wis. 2d 235, 247, 593 N.W.2d 445 (1999).

⁸¹Grams, 2005 WI 112, ¶ 2.

⁸²Id. ¶ 5.

⁸³Id. ¶ 6.

⁸⁴Id.

⁸⁵Id. ¶ 8.

⁸⁶The court granted summary judgment to Milk Products on the contract claim because there was no privity between the Gramses and the producer. Id. ¶ 10.

⁸⁷Id.

⁸⁸Id. ¶¶ 18-20.

⁸⁹Id. ¶ 31. The "integrated system" concept was introduced in Wisconsin in Wausau Tile, 226 Wis. 2d at 249, and recognized by the U.S. Supreme Court in Saratoga Fishing Co. v. J.M. Martinac & Co.,520 U.S. 875, 883 (1997).

⁹⁰Grams, 2005 WI 112, ¶ 31 (citing Neibarger v. Universal Coops Inc., 486 N.W.2d 612, 620 (Mich. 1992)).

⁹¹Id. ¶ 32 (citing Rich Prods., 66 F. Supp. 2d at 972).

⁹²Id. ¶ 33; see D'Huyvetter v. A.O. Smith Harvestore Prods., 164 Wis. 2d 306, 317, 475 N.W.2d 587 (Ct. App. 1991).

⁹³Selzer v. Brunsell Bros. Ltd., 2002 WI App 232, 257 Wis. 2d 809, 652 N.W.2d 806.

⁹⁴Id. ¶ 5.

⁹⁵Id. ¶ 36.

⁹⁶Grams, 2005 WI 112, ¶ 43 (quoting Rich Prods., 66 F. Supp. 2d at 975).

⁹⁷Id. ¶¶ 45-46.

⁹⁸Id. ¶ 47.

⁹⁹Id. ¶ 75 (Abrahamson, C.J., dissenting).

¹⁰⁰Id. ¶ 76 (Abrahamson, C.J., dissenting).

¹⁰¹See Saratoga Fishing Co., 520 U.S. at 881.

¹⁰²Ice Fern Shipping Co. v. Golten Serv. Co., No. 04-20741, 2005 U.S. Dist. Lexis 12200, 10, unpublished slip op. (So. Dist. Fla. Mar. 22, 2005).

¹⁰³Id.

¹⁰⁴See Irish Venture Inc. v. Fleetguard Inc.,270 F. Supp. 2d 84, 85-86 (D. Mass. 2003).

¹⁰⁵See Cane & Sullivan, supra note 1, at 62-63. Wisconsin first recognized the doctrine in 1989, some years after federal courts initially predicted it would, and many years after its first articulation, in 1969. See Sunnyslope Grading Inc. v. Miller, Bradford & Risberg Inc., 148 Wis. 2d 910, 921, 437 N.W.2d 213 (1989); see also Seeley v. White Motor Co., 403 P.2d 145 (Cal. 1965). Both Sunnyslope and Seeley stressed the doctrine's complementary relation to U.C.C. policies; the judge-made doctrine thus drew its original authority from a legislatively imposed scheme rather than from abstract legal principles.

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