In Hinrichs v. Dow Chem. Co., 2020 WI 2, 2020 Wisc. LEXIS 2 (2020), the Supreme Court of Wisconsin considered whether two recognized exceptions to the economic loss doctrine—the “fraud in the inducement” and “other property” exceptions—applied to allow the plaintiffs’ tort claims to go forward. The court held that the fraud in the inducement exception only applies to alleged fraud that is unrelated to either the quality or characteristics of the product for which the parties contracted or performance of the contract. In addition, the court held that the fraud in the inducement exception did not apply to the plaintiffs’ tort claims because the alleged fraud was related to the quality and characteristics of the product, and thus was not extraneous to the contract. The court also held that the “other property” exception to the economic loss doctrine did not apply because the product at issue was integrated into a more complete product, and when that happened, the completed product ceased to be “other property” for purposes of the economic loss doctrine. This case narrows the application of two exceptions to the economic loss doctrine, which is a common defense in product defect cases.
In Hinrichs, the plaintiffs, Chris Hinrichs and Autovation Limited, designed and installed JeeTops, which are aftermarket acrylic skylights for certain Jeep Wrangler vehicles. The plaintiffs installed the skylights using an adhesive manufactured by the defendant, Dow Chemical Company (Dow). In 2013, an agent of Dow informed the plaintiffs about a new primer product that they could use with the adhesive. After the plaintiff began using the primer, customers started experiencing cracks in the lighting panels. The plaintiffs claimed that the issues with the primer significantly hindered the reputation of the JeeTops skylights, which caused sales to decline. The plaintiffs sued Dow for negligent misrepresentation, intentional misrepresentation, strict responsibility misrepresentation and violation of Wis. Stat. 100 18(1).
Dow filed a motion to dismiss on grounds that the economic loss doctrine barred the plaintiffs’ common law claims. The trial court granted the defendant’s motion, holding that the economic loss doctrine barred the plaintiffs’ common law claims. The court found that the plaintiffs’ losses were purely economic in nature and that neither the “fraud in inducement” nor the “other property” exceptions to the economic loss doctrine applied. The court of appeals affirmed.
The Supreme Court noted that in Wisconsin, the economic loss doctrine bars a commercial purchaser of a product from recovering economic losses from the manufacturer under negligence and strict liability theories. The two relevant exceptions to the economic loss doctrine were the “fraud in the inducement” and “other property” exceptions. The court noted that the fraud in the inducement exception applies to narrow circumstances, where the ability of one party to negotiate fair terms and make an informed decision is undermined by the other party’s fraudulent behavior. The court identified three elements that a plaintiff must establish for the fraud exception to apply: 1) the defendant engaged in an intentional misrepresentation, 2) the misrepresentation occurred before the contract was formed, and 3) the misrepresentation was extraneous to the contract. The last element requires that the alleged misrepresentation be unrelated to either the quality or the characteristics of the goods for which the parties contracted or the performance of the contract.
The court found that the “fraud in the inducement” exception did not apply because the basis for the plaintiffs’ claims were rooted in the allegation that Dow misrepresented the ability of the acrylic to maintain a watertight seal. In other words, the plaintiffs’ claim regarding the effectiveness of the adhesive related to the quality and characteristics of the product in question and, thus, was not extraneous to the contract.
With the respect to the “other property” exception, the court acknowledged that the economic loss doctrine does not bar claims based on personal injury or damage to property other than the product. However, if the allegedly defective product is integrated as a component into a more complete product or system, the complete product or system is no longer “other property.”
Here, the plaintiffs argued that the damage to the JeeTops lights constituted “other property.” However, because the adhesive was an integral component of the JeeTops lights, the court found that the adhesive was integrated into the JeeTops lights. As such, the court found that the JeeTops lights did not constitute “other property” for the purposes of the economic loss doctrine. In light of its findings, the Supreme Court affirmed the lower court’s ruling that the economic loss doctrine barred the plaintiffs’ tort claims.
The economic loss doctrine can be a challenging defense in subrogation cases related to product defects. Legally recognizable exceptions to the doctrine are sometimes critical to the survival of a plaintiff’s tort claims. Unfortunately, the Hinrichs decision narrows the application of two available exceptions to the economic loss doctrine. Subrogation professionals practicing in Wisconsin should be mindful of this decision when evaluating whether the “fraud in the inducement” or “other property” exceptions to the economic loss doctrine apply to their case.