Product Liability Claim is Barred by the Economic Loss Doctrine

In New Jersey, where a sophisticated buyer enters into a contract with a sophisticated seller of an allegedly defective product that causes damage to the product itself as well as something other than the product, the buyer’s remedy against the seller may only be contractual. On February 5, 2010, the Third Circuit, in a diversity action, opined that the New Jersey Supreme Court would apply the economic loss doctrine, barring the product liability claims of a manufacturer of food and beverage items against the producer of the raw materials. Travelers Indemnity Co. v. Dammann & Co., No. 09-1225, 2010 WL 395915 (3d Cir. Feb. 5, 2010) [PDF].

The procedural posture of this case would likely bore you and create a lot of extra reading to get the important lesson from this case across to you. That said, I will only briefly recite the basic underlying facts of this case. Dammann is a producer of raw foods, including vanilla beans. Dammann sold IFF vanilla beans, by written contract, for incorporation into IFF’s food and beverage flavoring. IFF incorporated Dammann’s beans into its vanilla extract only later to find out that the beans were contaminated with mercury. As a result, IFF filed claims against Dammann for breach of express warranty, breach of implied warranty, and product liability.

The New Jersey District Court reasoned that IFF’s product liability claim sounded in contract and therefore, the economic loss doctrine barred the application of the New Jersey Product Liability Act to IFF’s claim. IFF appealed. On appeal, the Third Circuit had to determine whether, under New Jersey law, the economic loss doctrine barred claims such as IFF’s claim. The Court stated that no New Jersey case had specifically decided the sort of claim IFF alleged, which involved a defective product, the vanilla bean, and damage to other property, IFF’s flavoring products contaminated with mercury.

The Court found that there were two schools of thought resolving this question. The majority employs some variation of the following test:

Tort remedies are unavailable for property damage experienced by the owner where the damage was a foreseeable result of a defect at the time the parties contractually determined their respective exposure to risk, regardless whether the damage was to the goods themselves or to other property.

On the other hand, the minority test differentiates between damage to the product itself and other property. The Court held that the New Jersey Supreme Court would likely join the majority and apply the economic loss doctrine to bar IFF’s claim. The Court reasoned this way because New Jersey precedent consistently held that “contract law [was] better suited to resolve disputes between parties where a plaintiff alleges direct and consequential losses that were within the contemplation of sophisticated business entities with equal bargaining power and that could have been the subject of their negotiations.” Further, the Court found that IFF alleged damages, including scrapping of contaminated finished flavoring, claims from customers, testing costs, plant cleaning costs, and lost profits were purely economic damages.

Practitioners should be aware of both the majority and minority rules on this issue and be on the look out to see if the New Jersey Supreme Court resolves this issue as the Third Circuit predicted it would rule in this matter.

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