The Lawletter No. 50 Vol. 3
Charlene Hicks—Senior Attorney
Beginning with the United States Supreme Court’s decision in East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S. Ct. 2295 (1986), courts nationwide have utilized the economic loss doctrine to preclude plaintiffs from obtaining a tort remedy for contract-based claims. In effect, a plaintiff cannot pursue a tort claim to recover purely economic losses.
Although the economic loss doctrine is universally accepted, the practical application of this doctrine varies considerably from state to state. See In re Target Corp. Customer Data Sec. Breach Litig., 66 F. Supp. 3d 1154, 1171 (D. Minn. 2014) (analyzing the economic loss rules in 11 different states as applied to data breach litigation and finding that some states allowed the negligence claim to continue whereas others barred the claim); Reno Flying Servs. v. Piper Aircraft, Inc., No. 13-cv-04346 NC, 2014 U.S. Dist. LEXIS 163470, at *6 (N.D. Cal. Nov. 21, 2014) (determining that although California, Nevada, and Florida all “employ some form of the economic loss rule, each state would apply it differently in this case”).
“Some states only apply the economic loss doctrine in products liability cases or when a plaintiff in privity with defendant is seeking to circumvent provisions of the contract. Other states apply the doctrine more broadly and bar all claims in tort failing to allege either personal or property damage.” Clearone Communs. v. JAS Forwarding, No. 2:09-CV-450-TS, 2009 U.S. Dist. LEXIS 93545, at *7 (D. Utah Oct. 7, 2009) (internal quotation marks and footnotes omitted). Further, some additional states “view the economic loss doctrine as a method for determining whether a defendant owes a special duty to the plaintiff and go through a foreseeability analysis in applying the doctrine.” Id.
In North Carolina, for example, the economic loss doctrine bars a plaintiff from asserting a negligence claim in cases where a product causes injury to itself. However, an exception to this rule applies in cases where property other than the product itself is damaged. Moore v. Coachmen Indus., 129 N.C. App. 389, 402, 499 S.E.2d 772, 780 (1998). In contrast, Virginia case law has defined an economic loss as “a loss that flows from the failure of the product to perform as expected.” Redman v. John D. Brush & Co., 111 F.3d 1174, 1182 (4th Cir. 1997).
In Indemnity Insurance Co. of North America v. American Eurocopter LLC, No. 1:03CV949, 2005 U.S. Dist. LEXIS 34011, at *42 n.10 (M.D.N.C. July 8, 2005), the United States District Court for the Middle District of North Carolina pointed out that these two state law tests are very different. The Virginia economic loss doctrine is a “more sweeping product liability provision[ ]” than North Carolina courts have adopted. Id. Accordingly, the Virginia courts have “used the economic loss rule to constrain that broad liability, particularly between commercial entities.” Id. In contrast, “North Carolina courts have clearly held that the application of the economic loss rule in this state depends upon the existence of injury to a person or to property other than the product itself, and given the historical basis for this rule and the more limited nature of product liability claims in North Carolina, there is no basis to anticipate that the North Carolina state courts would redefine this rule.” Id.
Ultimately, it is not enough for a civil defendant to simply raise the economic loss doctrine and thereby completely shield himself from tort liability even in cases where the plaintiff’s loss seems to involve damage only to a defective product itself. Instead, it is critical to first determine the parameters of the economic loss doctrine as applied in the state wherein the damage occurred or the case is filed. A defendant who would be exempt from liability under the economic loss doctrine in one state may well be exposed to an actionable tort claim if the same claim were to be filed in a neighboring state.
