The economic loss doctrine is a judicially created rule that determines whether contract or tort law applies when a defective product causes damage. The doctrine’s starting premise is that contract law governs if the defective product causes economic loss and tort law governs when the defective product causes property damage. A common refrain is that the doctrine was created to prevent contract law from drowning in a sea of tort. However, as the rule has developed, courts have continued to expand contract coverage at the expense of tort coverage. First, when the defective product damages only itself, the courts concluded that such property damage should be resolved under contract law, not tort law. Next, when the defective product damages the system of which it was a component part, the courts concluded that such property damage should also be resolved under contract law, not tort law. Recently, another rule has begun to receive judicial acceptance that further expands the coverage of contract law at the expense of tort law. The rule is called the “disappointed expectations” test or the “reasonably foreseeable” rule. It provides that property damage that was reasonably foreseeable at the time of contracting is recoverable only under contract law, not tort law. The purpose of this Article is to examine the disappointed expectations rule and determine whether it is a positive addition to the legal landscape of the economic loss doctrine.

After surveying the development of the disappointed expectations test, which has been adopted by the Wisconsin Supreme Court, Ralph identifies several reasons why the test should be rejected.  He pointedly concludes, “The rule is the most recent progression of tort law drowning in a sea of contract law.”

These remarks bring to mind — but are not identical to — somewhat more pointed comments delivered by a renowned Marquette lawyer, Aaron D. Twerski (pictured above), who is the Irwin and Jill Cohen Professor at Brooklyn Law School (and former dean at Hofstra). Twerski is an extremely well-regarded law professor (as is O’Hear, although they are at different points in their careers) and received the prestigious Robert C. McKay Law Professor Award from the Tort Trial & Insurance Practice Section of the American Bar Association. Professor Twerski used the occasion of his award to lament the seeming lack of interest of many law professors in saying things of interest to judges and practicing lawyers.

Among his milder comments:

[T]he idea that the legal academy is a closed club whose members speak only to each other and not to the bench and bar is decidedly not healthy. If interdisciplinary work is to have an impact on the changing face of the law, it must be made accessible to the lawyers and judges who are not schooled in other disciplines. And the scholars must demonstrate that the theories they set forth have real-world relevance — that they make a difference.

He also had this memorable comment:

I often wonder whether William Prosser would be tenured today at a great law school. And I am almost certain that his article, “The Assault upon the Citadel,” published in the Yale Law Journal in 1960, would not grace its pages today. It would be viewed as “too much case-crunching.” Never mind that it accelerated the demise of privity and the adoption of strict tort liability in less than a decade.

Professor Twerski’s remarks are available in the most recent issue of Marquette Lawyer, and both his and Professor O’Hear’s are linked to above. Both seem to me worth reading as academics around the country head into summer, where they will spend much of their time pursuing scholarship — and in doing so, I admit my hope, will consider the relevance of their work to the bench and bar.

A similar approach seems to be occurring here in Wisconsin.  Buried in the governor’s budget bill (A 75 2009-2010 Legislature), at pages 1588 and 1605, are significant modifications of state tort law that have as much to do with the state budget as chewing gum has to do with nuclear fusion.

Section 3223 of the bill contains a provision requiring the court to explain to a jury “the effect on awards and liabilities of the percentage of negligence found by the jury to be attributable to each party.”  Translation: “If you find the plaintiff more negligent than that rich old defendant, the plaintiff and his or her lawyer won’t recover a dime!”  Aren’t juries supposed to be finders of fact and not charity institutions?

Section 3271 of the bill changes the Wisconsin comparative negligence rule in two significant respects. 

First, contrary to what has been the rule since 1931, the plaintiff’s negligence would no longer be compared separately to that of each defendant, with the plaintiff barred from recovery against one whose negligence percentage is smaller.  Under the proposal the plaintiff would be barred only if his or her negligence was found greater than the combined negligence of all the defendants.  An illustration may help.  Now if the plaintiff is found 40 percent at fault and the three defendants are found 10, 20, and 30 percent, respectively, the plaintiff will recover nothing.  With the proposed change, the same numbers would result in the plaintiff and his or her attorney recovering 60 percent of his or her damages, with 1/6 of that amount paid by the 10 percent defendant, 2/6 by the 20 percent defendant, and the balance by the 30 percent defendant.

A final provision in section 3271 would have any defendant with a percentage of fault equal to or greater than the plaintiff’s jointly and severally liable to the plaintiff.  At present only defendants found 51 percent or more at fault incur joint and several liability. Under the proposal, for example, if a plaintiff was fond to be 20 percent at fault and four defendants were each found to be a similar percentage, the plaintiff could recover 80 percent of his or her total damages from any one of the four.  That target would have to recoup shares from the others, bearing the whole burden should any be insolvent.

These proposals are obviously a big, wet, sloppy kiss from the governor and involved legislators to the plaintiffs’ bar in thanks for campaign contributions and other favors.  However, even The Milwaukee Journal Sentinel suggested that these measures, regardless of their merit, should be considered separately in the legislative process outside of the Joint Finance Committee (Editorial, “Afraid of Scrutiny, at A10 (April 10, 2009)).  Enough said!

Today the Wisconsin Supreme Court accepted three new cases for review, two criminal cases and one civil case.

One of the criminal cases, State v. Smith, 2008AP1011, asks the court to determine whether the sex offender registration statute, Wisconsin Statute section 301.45, is unconstitutional in its application to a defendant whose crime, false imprisonment of a minor, concededly had no sexual component whatsoever.  The Defendant Smith was convicted of falsely imprisoning a minor in connection with a drug crime.  That conviction triggered application of the sex offender registration requirements in section 301.45.  Smith did not register, and was charged with failing to register as required.  He argues that the sex offender registration requirement violates his due process and equal protection rights because his crime had no sexual component.

The Defendant in the other criminal case, State v. Allen, 2007AP795, argues that, even though he did not respond to his postconviction counsel’s no-merit report, his claims that his pretrial counsel was ineffective should be heard in a new postconviction motion.  Allen argues that he should have a chance to file this additional postconviction motion because his postconviction counsel was ineffective in failing to raise the issues regarding the pretrial counsel’s ineffective assistance.  In an unpublished decision, the court of appeals rejected Allen’s argument, pointing out that Allen had the chance to make these arguments in response to the no-merit report.

In the third case, a civil matter, Colleen Pawloski, who suffered a dog bite from a dog owned by a man named Walter Waterman, is suing Nancy L. Seefeldt and her husband, and their insurer, because they owned the home where Waterman resided with his dogs at the time the bite occurred.  See Pawlowski v. American Family Ins., 2007AP2651. The circuit court held that Seefeldt could not be liable because at the instant when the dog bit Pawlowski, Seefeldt was not its “keeper” because its owner, Waterman, was the one “exercis[ing] dominion” over the dog. The court of appeals reversed, holding that Seefeldt was the dog’s “keeper” at the time of the bite, because she was providing it a home.  The Supreme Court is asked to resolve this question of interpretation of the dogbite statute, Wisconsin Statute section 174.02.

In the Yale article Prosser traced the various exceptions that developed since Lord Abinger’s 1842 proclamation of the rule that tort liability would not aid one with no privity to a contract who was injured as a result of its breach.  His second article on the subject, some six years later is his final chapter in that story [William L. Prosser, The Fall of the Citadel (Strict Liability to the Consumer), 50 Minn. L. Rev. 791 (1966).

What initially attracted me to the Yale article was Prosser’s status as an icon.  I used his casebook and hornbook as a law student.  He was “Mr. Torts.”  But as I matured I found it offered so much more.  It clearly demonstrates that while some courts treat ancient rules as if they were holy writs, stare decisis is not a commitment to intellectual stagnation.  I believe that nowhere in the law is this truer than in Torts.  It also made clear that legal scholarship does not have to be a stranger to humor.  The two can coexist. 

Thus, in my own writing I always attempt to be a critic, albeit one who at times can point to humorous situations in the law.  In my teaching I attempt to call the students’ attention to how old law is not necessarily good law and always to be alert to areas where improvement is needed and to develop the ability to clearly articulate why that is so.

The first of my favorites is considered in my Torts class.  It is Quesenberry v. Milwaukee County, 106 Wis.2d 685, 317 N.W.2d 468 (1982).  It arises in the discussion of the duties of owners and occupiers of land to those who come upon the property.  It is referenced to show how, at times, state legislatures see fit to modify common law rules.  The case dealt with a provision of the Wisconsin Statutes in effect at the time of an accident (then § 29.68) that barred recovery for injuries received while engaging in “recreational” activities on lands of another. 

The plaintiff broke her leg when she stepped into a hole on a golf course fairway.  She alleged that the hole was not easily visible.  In holding that the statute was not applicable to the plaintiff’s case, the court construed the legislative intent for the statute to apply to “the type of activity that one associates being done on land in its natural undeveloped state as contrasted to the more structured, landscaped and improved nature of a golf course.” 106 Wis.2d at 693, 317 N.W.2d  at 472.  This case also allows noting to the students that the Wisconsin Legislature subsequently amended the statute (now § 895.52) and in so doing stated that the new “legislation should be liberally construed in favor of property owners to protect them from liability” and that it “is intended to overrule any previous Wisconsin supreme court decisions interpreting section 29.68 of the statutes if the decision is more restrictive than or inconsistent with the provisions of this act.” 1983 Act 418, § 1.  It helps for the students to be aware that, at times, member of the legislature do read court decisions interpreting legislation and can act to overturn interpretations they do not like.  I close the discussion of the case by noting that I am unaware if Quesenberry was one of the cases the legislature was unhappy with.  I also note that when I first read the opinion I sent a letter to its author, Justice Day.  Therein I said that either he was a scratch golfer or never played the game because the vast majority of golfers spend most of their time on the “natural undeveloped” portions of golf courses.

The second “favorite” is Gross v. Lloyds of London Ins. Co., 121 Wis.2d 78, 358 N.W.2d 266 (1984), which is considered in my Insurance course.  In August 1982, at The Experimental Aircraft Association’s annual fly-in at Oshkosh, an unoccupied aircraft owned by the insured rolled into the tent occupied by a young woman. She was severely injured by its operating propeller. The plane owner’s insurer investigated and determined that the woman’s damages greatly exceed the policy limits of $100,000 and that their insured’s liability was clear.  It unsuccessfully attempted to settle the case for that amount with the woman’s attorney. It then attempted to tender the policy limits into court so as to be relieved from any further duty to defend its insured.  The Supreme Court held that because the insured had not received notice of the change in the duty to defend provisions of the policy, the insurer’s tender of policy limits into court did not relieve it of the duty to defend.  It further held that “for an insurer to be relieved of its duty to defend upon tender of the policy limits, the ‘tendered for settlements’ language must be highlighted in the policy and binder by means of conspicuous print, such as bold, italicized, or colored type.” 121 Wis.2d at 89, 358 N.W.2d at 271.  Then Justice, now Chief Justice, Abrahamson concurred in remanding the case to the trial court, but she argued that it should be remanded for an evidentiary hearing as to whether the insured knew before the fact that the insurer could terminate its defense effort.  She noted that an appellate court cannot make a finding of fact.  She also said she “cannot join the majority in its adoption of a ‘readability’ and ‘notice’ rule for binders and insurance policies. These are matters for the legislature and the commissioner of insurance.” 121 Wis.2d at 91, 358 N.W.2d at 272.  I also advise my students that the case caused me to write a letter to Justice Abrahamson in which I stated that for the first time I could remember I agreed with one of her opinions in a case dealing with a subject I teach.  The letter came back a few days letter with a penned note at its foot: “My God, I must have done something wrong!  S.”

The priest’s action against the diocese (alleging, among other things, racial discrimination) was dismissed based upon the ministerial exception. No surprise there.

The charity then sued the Bishop for tortious interference and defamation. As noted above, these claims were also dismissed based upon the ministerial exception. The exception has been applied in contexts other than claims based upon employment. In my home state of Wisconsin, for example, it has been applied to claims for the negligent hiring, retention and supervision of priests who committed sexual abuse.

But should it be applied here? The tortious interference claim seemed easier. The Bishop certainly had a right to order his priest not to raise money for it and certainly should be privileged to tell advise his congregants that they should not donate to it.

But what about the claim for defamation? Should he be privileged to make what were alleged to be false statements of fact about the charity? Does the assessment of whether or not those statements are false really implicate canon law? Doesn’t it depend upon what they were?

Is the idea is that regard for free exercise requires allowing the Bishop breathing space to explain his decision to parishioners or to enforce canonical requirements that fund raising appeals be “truthful and forthright…?” Could that need be accommodated by something like an “actual malice” standard or would the application of that standard result in excessive entanglement?

H/T: Religion Clause Blog

Cross posted at PrawfsBlawg.

The most newsworthy civil matter seems to be Biskupic v. Cicero, 2007AP2314. Through this appeal Vince Biskupic seeks to have his libel and slander claims against various defendants reinstated. Biskupic, as you may know, is a former Outagamie County D.A. who ran for state attorney general in 2002. Biskupic v. Cicero, 2008 WI App 117, ¶ 1. The defendants include a Shawano newspaper, the Shawano Leader, which published a false report stating that Biskupic had been convicted of bribery and graft. Id. ¶1

The Defendants moved for summary judgment against Biskupic’s claims. The circuit court “concluded Biskupic was a limited purpose public figure, and the actual malice standard applied. The court held the summary judgment submissions showed ‘the defamation occurred as a result of confusion and negligence, not malice.’”  The circuit court also rejected Biskupic’s argument that he should be granted judgment against the newspaper defendants, or a jury instruction, based on a reporter’s destruction of interview notes. Id. ¶10-11. The Court of Appeals affirmed, and the Supreme Court has accepted Biskupic’s petition for review.

The next civil case, Hocking v. City of Dodgeville, 2007AP1754, is a certification from the Court of Appeals, asking, “Can an uphill landowner who has done nothing to affect surface water flow be held liable to the owner’s downhill neighbor for damages sustained as a result of the water flow?” The Hockings bought a house in 1978, and later, in 1991, the City of Dodgeville developed a subdivision around that home. The Hockings contend that the development changed the surface water flow and damaged their property. They sued the city and some individual homeowners, but the claim was dismissed on summary judgment because the property owners did nothing to their properties to alter the flow to the Hockings’ detriment, so that under the “reasonable use” doctrine, there was no liability. In its certification, the Court of Appeals explains,

The Hockings argue that the neighbors are liable for negligently failing to abate a nuisance, relying on a recent supreme court case, Milwaukee Metropolitan. This case involves damages caused by water in sewers and pipelines, not surface water. In Milwaukee Metropolitan, the sewerage district brought a claim for maintaining a nuisance against the City of Milwaukee for damage to a sewer allegedly caused by a collapse of the city’s water main. Id., ¶3. The supreme court cited with favor RESTATEMENT (SECOND) OF TORTS § 839, which imposes liability on a party who negligently fails to abate a nuisance condition. See id. The Hockings argue that the neighbors have not appropriately managed the surface water flow from their property and are thus subject to liability for negligently failing to abate this nuisance under Milwaukee Metropolitan.

Finally, Donaubauer v. The Farmers Auto Ins. Assoc., 2007AP1992. This case gives the court the opportunity to clarify whether the appraisal process of resolving an insurance dispute is equivalent to the arbitration process. The plaintiff’s home was burned down in a fire caused by a passing Union Pacific train. His insurer paid him $530,000 for the loss, but the plaintiff claimed that more money was due under his “Home Guard replacement endorsement.” After the lawsuit had been filed, the insurer asked the plaintiff to participate in an appraisal process to settle the claim, and the plaintiff initially agreed, but then wished to back out of the process. He also wanted to conduct futher discovery about the appraisal. The circuit court granted summary judgment against his claims, holding that the appraisal could not be set aside. The court of appeals affirms. The Wisconsin Supreme Court news release explains that in the petition,

Donaubauer has asked the Supreme Court to review if the standards for challenging appraisals and arbitrations precisely mirror one another and to provide guidance on the method to challenge an appraisal. He also asks if it was appropriate for him to be forced to participate in a binding appraisal process, even though nothing in his insurance policy mandated a binding process. He also wants the Supreme Court to review if he should have been allowed to conduct discovery on the undertakings of the appraisal process.

Farmers contends that Donaubauer agreed in writing to the appraisal process and that his attorney acknowledged doing so in court. Farmers also contends the Court of Appeals correctly decided that under the facts, requiring actual replacement under the policy was not unfair but commercially reasonable.

A decision by the Supreme Court could clarify law in this area.

I suspect that will be true if a Republican is elected president. If a Democrat is elected, I also suspect there will be little change in tort law brought about by Congressional action, especially when one considers the financial support the organized plaintiffs’ bar is providing to the dems, particularly to their presidential candidate.

However, if the November election results in the continuation of Democrat control of Congress and puts a Democrat in the White House, there could be a significant impact on insurance law. That impact could well be a switch from state to federal regulation of insurance.

The McCarran-Ferguson Act (15 U.S. 1011) was passed by Congress on March 9, 1945, after the Supreme Court ruled (United States v. South-Eastern Underwriters, 322 U. S. 533 (1944)) that insurance could be regulated by the federal government via the Commerce Clause as interstate commerce. The McCarran-Ferguson Act provides that the Sherman Act, the Clayton Act, and the Federal Trade Commission Act apply to the business of insurance after June 30, 1948 “to the extent that such business is not regulated by state law” (emphasis added).

Needless to say, but I will anyway, state insurance regulators and the insurance industry, both comfortable with state regulation of insurance up to then, jumped into action. They worked together and quickly prepared a number of state regulatory laws (the “All-Industry Laws”) that foreclosed, at least up to now, federal intervention into the insurance business.

In recent years, efforts by Democrats in Congress to repeal McCarran-Ferguson have proved unsuccessful. Fewer insurers write coverage only in a single state than was the case in 1945. Many multi-state insurers might prefer one-stop regulating coming from Washington than from fifty separate states. They might see this as giving them a competitive advantage over smaller insurers writing in only a few states.

There are those who think that meaningful thought is impossible west of the Potomac River. Of course, regulation can be the predicate to increased taxation. Nevertheless, fifty-state regulation of the business of insurance works. It does not appear to be broken and should not be fixed by the folks who brought us such fine-tuned operations as the Post Office, Fanny Mae and Freddy Mac!

It is somewhat of an historical anomaly that while auto manufacturers were required by law to install safety belts in new vehicles starting about the middle of the last century, the same laws did not mandate the use of those belts by vehicle occupants. A strong case can and has been made that regardless of statutory mandate, a reasonable person of ordinary prudence would make use of available automotive belts. Since most states now require safety belt use, e.g., Wis. Stat. § 347.48(2m), that argument is no longer necessary. Thus the legislatures have established a standard of care.

However, an example of the lobbying power of the plaintiffs’ personal injury bar may be seen in the fact that many state belt use statutes contain provisions limiting reduction of an auto accident victim’s damages if he or she did not use an available safety belt. For example, Wis. Stat. § 347.48(2m)(g) provides that damages may not be reduced by more than fifteen percent.

Assume a situation in which a biomechanical engineer may convincingly demonstrate that the unbelted passenger’s up-close and personal encounter with a tree along the side of a road would have not occurred if a safety belt had been used. Assume further that all other occupants of the care were belted and sustained no or minor injuries. Nevertheless, the statute would allow the unbelted passenger to recover eighty-five percent of the damages sustained.

Someone once said, possibly me, but more certainly Shakespeare, if the law says that, the law is a ass.

Ralph nicely summarizes the abundant (and not entirely consistent) case law and other legal authorities on this question, focusing especially on Wisconsin law. He then argues that the courts should look to insurance law to help clarify the line between economic and non-economic losses. Standard commercial liability policies make similar distinctions between property damage that is tortious or contractual in nature, which turns on whether there has been “physical damage to tangible property.” Ralph’s instincts seem quite sensible (and echo some of the work of my colleague Keith Sharfman on valuation): as the courts deal with allocating responsibility for damages after the fact, it may be helpful for them to draw on the way that sophisticated players allocate responsibilities by contract (here, insurance contract)–if bargaining occurs in a rational way, it should result in an economically efficient distribution of liabilities.

Most jurisdictions do allow punitive damages to be awarded against business entities for the wrongful conduct of their employees or agents. Some are very liberal, allowing punitives to be awarded against the business simply if the agent’s conduct was sufficient to make the business liable for the compensatory damages occasioned by the act. In others additional proof is required. The principal must direct the agent to perform the egregious act; the principal must subsequently approve that act; or, the agent who performed the act must have been in a “managerial capacity” at the time that act was performed. Obviously, with a corporation, the one doing any of those three things must be a human being.

Imposing punitive damages upon a corporation does not punish or deter the human being who engaged in the egregious conduct, it merely renders such a person anonymous. It is akin to requiring a liability insurer to pay the punitive damages resulting from the wrongful conduct of its insured. But some jurisdictions allow that as well. The life of the law is certainly not logic!

I admire Dan’s project for its ambitiousness and theoretical elegance. Still, I wonder if it is possible to impose the sort of rational order on civil litigation outcomes that Dan wants to achieve in a world in which nearly all cases settle. The natural tendency of plaintiffs’ lawyers will be to bargain for high compensatory damages and low retributive damages (since the state gets to keep the latter, but not the former). Dan would address this problem by requiring settlements to be submitted to the state attorney general for review; the AG would supposedly ensure adequate retribution. Yet, in a case that has not gone to trial (and in which there may not even have been any discovery), how is the AG to have enough information to judge whether the retribution is adequate? If we imagine the AG’s office hiring a bunch of new lawyers and investigators to look into proposed settlements, then Dan’s system may start to get unacceptably expensive. Rather than funding a new bureaucracy to review civil settlements, perhaps it would be better to put the money into more police and prosecutors so that more cases can be processed through the conventional criminal justice system, which is where we traditionally expect the state’s interests in retribution to be vindicated.