Hyundai Motor America, Inc. v. Goodin

Attorneys for Appellant Attorneys for Appellee

Julia Blackwell Gelinas Scott M. Cohen

Robert B. Thornburg John D. Barker

Indianapolis, Indiana Chicago, Illinois

____________________________________________________________________________

__

In the

Indiana Supreme Court

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No. 82S05-0406-CV-279

Hyundai Motor America, Inc.,

Appellant (Defendant below),

v.

Sandra Goodin,

Appellee (Plaintiff below).

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Appeal from the Vanderburgh Superior Court, No. 82D03-0111-CP-3964

The Honorable Mary Margaret Lloyd, Judge

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On Petition To Transfer from the Indiana Court of Appeals, No. 82A05-0303-

CV-155

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February 22, 2005

Boehm, Justice.

We hold that a consumer may sue a manufacturer for economic loss based

on breach of the implied warranty of merchantability even if the consumer

purchased the product from an intermediary in the distribution chain.

There is no requirement of “vertical” privity for such a claim.

Facts and Procedural Background

On November 18, 2000, Sandra Goodin test drove a Hyundai Sonata at

AutoChoice Hyundai in Evansville, Indiana. The car was represented as new

and showed nineteen miles on the odometer. Goodin testified that when she

applied the brakes in the course of the test drive she experienced a

“shimmy, shake, pulsating type feel.” The AutoChoice salesperson told her

that this was caused by flat spots on the tires from extended inactivity

and offered to have the tires rotated and inspected. After this

explanation, Goodin purchased the Sonata for $22,710.00.

The manufacturer, Hyundai, provided three limited warranties: 1

year/12,000 miles on “wear items;” 5 years/60,000 miles “bumper to bumper;”

and 10 years/100,000 miles on the powertrain.[1] Hyundai concedes that

brake rotors, brake calipers, and brake caliper slides were subject to the

5 year/60,000 mile warranty covering “[r]epair or replacement of any

component originally manufactured or installed by [Hyundai] that is found

to be defective in material or workmanship under normal use and

maintenance.” To claim under this warranty, a vehicle must be serviced by

an authorized Hyundai dealer who is then reimbursed by Hyundai for any

necessary parts or labor.

Three days after the car was purchased, Goodin’s husband, Steven

Hicks, took it back to AutoChoice for the promised tire work. Goodin

testified that she continued to feel the shimmy but did nothing further for

a month. On December 22, she took the car to a different Hyundai dealer,

Bales Auto Mall, in Jeffersonville, Indiana, for an unrelated problem and

also made an appointment six days later for Bales to inspect the brakes.

Bales serviced the brake rotors for warping, but on May 1, 2001, Goodin

returned to Bales complaining that the vehicle continued to vibrate when

the brakes were applied. Bales found the rotors to be out of tolerance and

machined them. Eighteen days later Goodin again returned to Bales,

reporting that she still felt vibrations and for the first time also heard

a “popping” noise. Goodin told the service advisor at Bales that she

thought there may be a problem with the suspension, and Bales changed and

lubed the strut assembly. Eleven days later Goodin once more brought the

car to Bales reporting continued shimmy and also a “bed spring type” noise

originating from the brakes. The Bales mechanic was unable to duplicate

the brake problem, but balanced and rotated the tires as Goodin had

requested. One week later Goodin returned to Bales where she and Jerry

Hawes, Bales’s Service Manager, test drove the Sonata. The brake problem

did not occur during the test drive, but Hawes identified a noise from the

direction of the left front tire and repaired the rubber mounting bracket.

Goodin told Hawes that the brake problem had occurred about seventy

percent of the time. The problem was worse when it was wet or cool, was

consistently occurring when she drove down a steep hill near her home, and

was less frequent when a passenger’s weight was added. Goodin made

arrangements to leave the car with Hawes at Bales, but, according to Hawes,

over a several day period he could not duplicate the symptoms Goodin

reported.

On August 24, 2001, Goodin took her car back to her original dealer,

AutoChoice, reporting that the brakes “squeak and grind when applied.”

Goodin left the car with AutoChoice where the left front rotor was machined

and loose bolts on the front upper control arm were tightened. Goodin

testified that after this five-day procedure the brakes began to make the

same noises and vibrations even before she arrived home.

In October 2001 Goodin hired an attorney who faxed a letter to Hyundai

Motor America giving notice of her complaint and requesting a refund of the

purchase price. On November 13, 2001, Goodin filed a complaint against

Hyundai Motor America, Inc. alleging claims under the Magnuson-Moss

Warranty Act, 15 U.S.C. §§ 2301-2312, for breach of express warranty,

breach of implied warranty, and revocation of acceptance. On April 23,

2002, in anticipation of litigation, Goodin hired William Jones to inspect

her car. Jones noted that the odometer read 57,918 miles and the car was

still under warranty. Jones drove the car approximately five miles and

found “severe brake pulsation on normal stops” which “was worse on high

speed stops.” Although he did not remove the tires to inspect the brake

rotors, Jones opined that the rotors were warped and defective or there was

“a root cause that has not been discovered and corrected by the repair

facilities.” His ultimate conclusion was that the “vehicle was defective

and unmerchantable at the time of manufacture and unfit for operation on

public roadways.” Three weeks later, after the 5 year/60,000 mile warranty

had expired, Goodin’s husband, Hicks, replaced the rotors with new rotors

from a NAPA distributor.[2] After this repair, according to Hicks, the

pulsation went from “very bad” to “mild” and “less frequent.”

Steven Heiss, District Parts and Service Manager for Hyundai Motor

America served as the liaison between Hyundai and the dealers and provided

warranty training. If a dealer is not performing repairs correctly,

Hyundai, through its liaisons, addresses the problem. Heiss inspected

Goodin’s Sonata on October 21, 2002. At that point the Sonata had been

driven 77,600 miles. He testified that during his twenty-three mile test

drive he neither heard the noise described by Goodin nor felt any vibration

from the brakes. However, Heiss did hear a “droning noise” which he later

concluded was due to a failed left rear wheel bearing. He regarded this as

a serious problem and not one caused by abuse or misuse of the vehicle.

The wheel bearing would have been covered by the 5 year/60,000 mile

warranty. Before his inspection, Heiss had been told that the rotors had

been changed by Hicks five months earlier, and when Heiss measured the

rotors he found that they were out of standard.[3] Heiss testified a

miscast from the factory was one of a number of possible reasons for

damaged rotors.

At the conclusion of a two day trial, the jury was instructed on all

claims. Over defendants’ objection, the instructions on implied warranties

made no reference to a privity requirement. The jury returned a verdict

for Hyundai on Goodin’s breach of express warranty claim, but found in

favor of Goodin on her claim for breach of implied warranty of

merchantability. Damages of $3,000.00 were assessed and Goodin’s counsel

was later awarded attorneys’ fees of $19,237.50 pursuant to the fee

shifting provisions of the Magnuson-Moss Warranty Act.

Hyundai orally moved to set aside the verdict as contrary to law on

the ground that Goodin purchased the car from AutoChoice and therefore did

not enjoy vertical privity with Hyundai. The court initially denied that

motion, but the following day set aside the verdict, holding lack of

privity between Goodin and Hyundai precluded a cause of action for breach

of implied warranty. Goodin then moved to reinstate the verdict, and,

after briefing and oral argument, the trial court granted that motion on

the ground that Hyundai was estopped from asserting lack of privity.

Hyundai appealed, asserting: (1) it was not estopped from asserting a

defense of lack of privity; and (2) lack of vertical privity barred

Goodin’s recovery for breach of implied warranty of merchantability. The

Court of Appeals agreed on both points, holding that Hyundai was not

estopped from asserting that privity was an element of Goodin’s prima facia

case, and, because privity was lacking, Goodin did not prove her case.

Hyundai Motor Am., Inc. v. Goodin, 804 N.E.2d 775, 781 (Ind. Ct. App.

2004). The Magnuson-Moss Warranty Act looks to state law for the contours

of implied warranties. The Court of Appeals was “not unsympathetic” to

Goodin’s claims but regarded itself as bound by a footnote in Martin

Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078, 1084 n.2 (Ind. 1993),

where this Court stated: “In Indiana, privity between the seller and the

buyer is required to maintain a cause of action on the implied warranties

of merchantability.” Id. at 784. We granted transfer. Hyundai Motor Am.,

Inc. v. Goodin, 812 N.E.2d 808 (Ind. 2004).

Vertical Privity

A. The Relationship Between Federal and State Law in Claims Based on

Implied Warranty of Merchantability

This case is brought under a federal statute. The Magnuson-Moss

Warranty Act, 15 U.S.C. §§ 2301-2312 (2000), provides a federal right of

action for consumers to enforce written or implied warranties where they

claim to be damaged by the failure of a supplier, warrantor, or service

contractor to comply with any obligation under that statute or under a

written warranty, implied warranty, or service contract. The Act also

limits the extent to which manufacturers who give express warranties may

disclaim or modify implied warranties, but looks to state law as the source

of any express or implied warranty. Schimmer v. Jaguar Cars, Inc., 384

F.3d 402, 405 (7th Cir. 2004). As the Seventh Circuit recently put it:

“Because §§ 2308 and 2304(a) do not modify, or discuss in any way, a

state’s ability to establish a privity requirement, whether privity is a

prerequisite to a claim for breach of implied warranty under the Magnuson-

Moss Act therefore hinges entirely on the applicable state law.” Voelker

v. Porsche Cars N. Am., Inc., 353 F.3d 516, 525 (7th Cir. 2003).

Goodin’s claim is for breach of the implied warranty of

merchantability, not for violation of any substantive provision of the

federal statute. Accordingly, her claim lives or dies on the resolution of

an issue of state law, specifically whether Indiana requires privity

between buyer and manufacturer for a claim of breach of implied warranty.

B. Standard of Review

Hyundai does not dispute that under circumstances applicable here

Indiana recognizes implied warranties of fitness for a particular purpose

and implied warranties of merchantability. Ind. Code §§ 26-1-2-314, 315

(2003). Rather, Hyundai contends that under Indiana law, a buyer must be

in vertical privity with a seller to impose liability on the seller for

breach of an implied warranty. Whether Indiana law requires privity to

sustain an action for breach of an implied warranty is purely a question of

law and therefore is reviewed under a de novo standard. See Griffith v.

State, 788 N.E.2d 835, 839 (Ind. 2003). An implied warranty of

merchantability imposed by operation of law is to be liberally construed in

favor of the buyer. Frantz v. Cantrell, 711 N.E.2d 856, 859 (Ind. Ct. App.

1999).

C. Origins of Privity

Indiana has adopted the Uniform Commercial Code, notably its provision

that: “A warranty that the goods shall be merchantable is implied in a

contract for their sale if the seller is a merchant with respect to goods

of that kind. . . .” Ind. Code § 26-1-2-314(1) (2004). Hyundai asserts,

and the Court of Appeals found, Indiana law requires vertical privity

between manufacturer and consumer when economic damages[4] are sought.

Hyundai, 804 N.E.2d at 783. Goodin argues that traditional privity of

contract between the consumer and manufacturer is not required for a claim

against a manufacturer for breach of the implied warranty of

merchantability, especially if the manufacturer provides a Magnuson-Moss

express warranty with the product.

Privity originated as a doctrine limiting tort relief for breach of

warranties. The lack of privity defense was first recognized in

Winterbottom v. Wright, 10 M. & W. 109, 152 Eng Rep 402 (Ex. 1842). 2

Hawkland, UCC Series, § 2-318:1 at 771 (2001). In that case, the court

sustained a demurrer to a suit by an injured coachman for breach of

warranty by a third party who contracted with the owner to maintain the

coach. In this century, however, MacPherson v. Buick Motor Co., 217 N.Y.

382, 111 N.E. 1050 (1916), and Henningsen v. Bloomfield Motors, Inc., 32

N.J. 358, 161 A.2d 69 (1960), established that lack of privity between an

automobile manufacturer and a consumer would not preclude the consumer’s

action for personal injuries and property damage caused by the negligent

manufacture of an automobile. “Vertical” privity typically becomes an

issue when a purchaser files a breach of warranty action against a vendor

in the purchaser’s distribution chain who is not the purchaser’s immediate

seller. Hawkland, supra, at 771. Simply put, vertical privity exists only

between immediate links in a distribution chain. Rheem Mfg. Co. v. Phelps

Heating & Air Conditioning, Inc., 714 N.E.2d 1218, 1228 n.8 (Ind. Ct. App.

1999). A buyer in the same chain who did not purchase directly from a

seller is “remote” as to that seller. Id. “Horizontal” privity, in

contrast, refers to claims by nonpurchasers, typically someone who did not

purchase the product but who was injured while using it. 1 James J. White

& Robert S. Summers, Uniform Commercial Code 585 (4th ed. 1995). Goodin

purchased her car from a dealership and is thus remote from the

manufacturer and lacks “vertical” privity with Hyundai.

“Although warranty liability originated as a tort doctrine, it was

assimilated by the law of contracts and ultimately became part of the law

of sales.” Hawkland, supra, at 771. But “privity is more than an accident

of history. It permitted manufacturers and distributors to control in some

measure their risks of doing business.” Richard W. Duesenberg, The

Manufacturer’s Last Stand: The Disclaimer, 20 Bus. Law 159, 161 (1964).

Because vertical privity involves a claim by a purchaser who voluntarily

acquired the goods, it enjoys a stronger claim to justification on the

basis of freedom of contract or consensual relationship. It nevertheless

has come under criticism in recent years, and this is the first opportunity

for this Court to give full consideration to this issue.

D. Indiana Case Law

Although this Court did not address the issue, even before the

Products Liability Act, both the Court of Appeals and federal courts

applying Indiana law held that a claimant was not required to prove privity

to succeed in a personal injury action in tort based on breach of implied

warranties. Lane v. Barringer, 407 N.E.2d 1173, 1175 (Ind. Ct. App. 1980);

Dagley v. Armstrong Rubber Co., 344 F.2d 245, 252 (7th Cir. 1965) (drawing

support from J. I. Case Co. v. Sandefur, 245 Ind. 213, 221-22, 197 N.E.2d

519, 523 (1964)); Neofes v. Robertshaw Controls Co., 409 F. Supp. 1376,

1379 (S.D. Ind. 1976). Three federal court decisions drew on these

decisions to conclude that privity of contract is not required in Indiana

to maintain a cause of action for personal injury based on breach of an

implied warranty. See Filler v. Rayex Corp., 435 F.2d 336, 337-38 (7th

Cir. 1970) (Indiana law does not require privity between manufacturer and

plaintiff under theories of implied warranty, strict liability or

negligence); Dagley, 344 F.2d at 254; Karczewski v. Ford Motor Co., 382 F.

Supp. 1346, 1352 (N.D. Ind. 1974).

However, several Court of Appeals decisions subsequently held that

recovery of economic loss for alleged failure of the expected benefit of

the bargain based on breach of implied warranty under the UCC required a

buyer to be in privity of contract with the seller. See Candlelight Homes,

Inc. v. Zornes, 414 N.E.2d 980, 982 (Ind. Ct. App. 1981); Lane, 407 N.E.2d

at 1173; Richards v. Goerg Boat & Motors Co., 179 Ind. App. 102, 384 N.E.2d

1084 (1979). Corbin v. Coleco Industries, 748 F.2d 411, 415 (7th Cir.

1984), took the view that “[s]ubsequent Indiana cases have shed new light

on Indiana’s interpretation of implied warranty under the UCC, thus making

it clear that privity is indeed required.”

This Court has mentioned the common law privity requirement in the

context of actions sounding in contract only once, and that in a footnote.

Martin Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078 (Ind. 1993),

addressed negligence and express and implied warranty claims by a farmer

against both the direct seller and the grower of seed that allegedly

damaged the farmer’s crops. The footnote cited to the UCC and two Court of

Appeals decisions and other courts have taken the footnote as settled

Indiana law on this issue. As the Court of Appeals put it in its decision

in this case:

[T]he [footnote] indicates our supreme court’s unequivocal acceptance

that privity between a consumer and a manufacturer is required in

order to maintain a cause of action for breach of an implied warranty

of merchantability. . . . Any change in the law removing the privity

requirement in implied warranty actions should be left to that court.

. . . To the extent Goodin argues that this result is inequitable, we

are not entirely unsympathetic. Whether the cons of the vertical

privity rule outweigh the pros is something for either our supreme

court or the General Assembly to address.

Hyundai Motor America, Inc. v. Goodin, 804 N.E.2d 775, 784, 788 (Ind. Ct.

App. 2004). In Martin Rispens, the implied warranty claims were rejected

based on an effective disclaimer of implied warranty, under Indiana Code

section 26-1-2-316(2) which permits parties to agree to exclude or modify

implied warranties if done in a particular manner. The farmer did not

present privity as an issue on transfer to this Court and neither party

briefed it. It was not necessary to the decision. Accordingly, the

language in Martin Rispens, though often cited, is dicta and we accept the

invitation from the Court of Appeal to reconsider it.

Indiana law, as developed in the Court of Appeals, has already eroded

the privity requirement to some degree. In Thompson Farms, Inc. v. Corno

Feed Products, Inc., 173 Ind. App. 682, 366 N.E.2d 3 (1977), the Court of

Appeals permitted the plaintiff to recover on an implied warranty where it

was shown that the contractual arrangements between the manufacturer and

the dealer who sold to the plaintiff created an agency relationship; and

the manufacturer’s agents participated significantly in the sale both

through advertising and personal contact with the buyer. Under those

circumstances the Court of Appeals held that the manufacturer was a

“seller” within the meaning of Indiana Code section 26-1-2-314. Richards,

179 Ind. App. at 112, 384 N.E.2d at 1092, involved a defective boat sold by

a dealer where the manufacturer’s agents also engaged in personal contact

with the buyer by giving demonstrations and attempting to adjust the loss

after the sale. The Court of Appeals then, following Thompson Farms, Inc.,

held that the participation in the sale by the manufacturer was sufficient

to bring it into the transaction as a seller within the requirements of

Indiana Code section 26-1-2-314. However, if the plaintiff could not show

perfect vertical privity or an exception to the rule, then the plaintiff

could not prove the claim. Candlelight Homes, 414 N.E.2d at 982.

E. Statutory Developments in Indiana

The Product Liability Act, Indiana Code § 34-20-2-1 et seq. (1999),

does not require a personal injury plaintiff to prove vertical privity in

order to assert a products liability claim against the manufacturer. See

Lane, 407 N.E.2d at 1175. Even before the Product Liability Act in 1978,

the requirement of privity of contract in warranty actions in Indiana began

to erode in 1963 with the passage of the Uniform Commercial Code under

section 2-318:

A seller’s warranty whether express or implied extends to any natural

person who is in the family or household of his buyer or who is a

guest in his home if it is reasonable to expect that such person may

use, consume or be affected by the goods and who is injured in person

by breach of the warranty. A seller may not exclude or limit the

operation of this section.

I.C. § 26-1-2-318. Section 2-318 was taken verbatim from the UCC as

originally prepared by the Uniform Code Committee Draftsmen in 1952. It

eliminated “horizontal” privity as a requirement for warranty actions.

However, that version of 2-318 took no position on the requirement of

vertical privity. White & Summers, supra, at 586.

The purpose of the original version of section 2-318, which remains

unchanged in Indiana today, was to give standing to certain non-privity

plaintiffs to sue as third-party beneficiaries of the warranties that a

buyer received under a sales contract. Hawkland, supra, at 769. That

version of section 2-318 provided only that the benefit of a warranty

automatically extended to the buyer’s family, household, and houseguests.

Id., supra, at 775. It was intended to, and did, accomplish its goal of

“freeing any such beneficiaries from any technical rules as to [horizontal]

privity.” U.C.C. § 2-318 cmt. 2. Some states refused to enact this

version of section 2-318, and others adopted nonuniform versions of the

statute. Hawkland, supra, at 777. In 1966, in response to this

proliferation of deviant versions of a purportedly uniform code, the

drafters proposed three alternative versions of section 2-318. Only

California, Louisiana, and Texas have failed to adopt one of these three

versions of section 2-318.[5]

The majority of states, including Indiana, retained or adopted the

1952 version of section 2-318, which now appears in the Uniform Commercial

Code as “Alternative A.”[6] Alternative B provides that “any natural

person who may reasonably be expected to use, consume or be affected by the

goods and who is injured in person by breach of warranty” may institute a

breach of warranty action against the seller. U.C.C. § 2-318 cmt. 3.

Alternative B expands the class of potential plaintiffs beyond family,

household, and guests, and also implicitly abolishes the requirement of

vertical privity because the seller’s warranty is not limited to “his

buyer” and persons closely associated with that buyer.[7] See Hawkland,

supra, at 789. Alternative B is applicable only to claims for personal

injury.

Because Alternatives A and B of 2-318 are limited to cases where the

plaintiff is “injured in person,” they do not authorize recovery for

such loss. But neither do they bar a non-privity plaintiff from

recovery against such a remote manufacturer for direct economic loss.

. . . Thus, Alternatives A and B of 2-318 do not prevent a court from

abolishing the vertical privity requirement even when a non-privity

buyer seeks recovery for direct economic loss.

White & Summers, supra, at 593 (emphasis in original).

Alternative C is the most expansive in eliminating the lack-of-privity

defense. White & Summers, supra, at 593; Hawkland, supra, at 792. It

provides that: “A seller’s warranty whether express or implied extends to

any person who may reasonably be expected to use, consume or be affected by

the goods and who is injured by breach of the warranty.” Hawkland, supra,

at 769. Alternative C expands the class of plaintiffs to include other

nonpurchasers such as the buyer’s employees and invitees, and bystanders.

Jane M. Draper, Annotation, Third Party Beneficiaries of Warranties Under

UCC § 2-318, 100 A.L.R.3d 743 at §§ 5-6 (1980). Alternative C also

eliminates the vertical privity requirement, but is not restricted to

“personal” injury. Because Alternative C refers simply to “injury,”

plaintiffs sustaining only property damage or economic loss in some states

have been held to have standing to sue under this language. See, e.g.,

Milbank Mut. Ins. Co. v. Proksch, 244 N.W.2d 105 (Minn. 1976) (allowing

purchaser’s father to recover for residential property damage caused when

their Christmas tree caught fire). This is consistent with the stated

objective of the drafters that the third alternative follow “the trend of

modern decisions as indicated by Restatement of Torts 2d § 402A (Tentative

Draft No. 10, 1965) in extending the rule beyond injuries to the person.”

Hawkland, supra, at 770; But see Nebraska Innkeepers, Inc. v. Pittsburgh-

Des Moines Corp., 345 N.W.2d 124, 129 (Iowa 1984) (holding Alternative C

did not permit non-privity plaintiffs to seek recovery solely for economic

loss).

The commentaries to the UCC were careful to explain that the these

alternatives were not to be taken as excluding the development of the

common law on the issue of vertical privity:

[Alternative A] expressly includes as beneficiaries within its

provisions the family, household and guests of the purchaser. Beyond

this, the section in this form is neutral and is not intended to

enlarge or restrict the developing case law on whether the seller’s

warranties, given to his buyer who resells, extend to other persons in

the distributive chain.

U.C.C § 2-318, cmt. n.3.

F. Privity as an Obsolete Requirement as Applied to Consumer Goods

There is a split of authority in other jurisdictions with similar or

identical versions of section 2-318 on the availability of implied warranty

claims by remote purchasers, particularly if only economic loss is claimed,

as in the present case.[8] Courts of other jurisdictions that have

retained or adopted Alternative A note that the statute speaks only to

horizontal privity, and is silent as to vertical privity. See, e.g.,

Morrow v. New Moon Homes, Inc., 548 P.2d 279, 287 (Alaska 1976); Kassab v.

Central Soya, 246 A.2d 848, 855 (Pa. 1968), overruled on other grounds,

AM/PM Franchise Ass’n v. Atlantic Richfield Co., 584 A.2d 915, 926 (Pa.

1990). As the Pennsylvania Supreme Court put it: “Merely to read the

language [of § 2-318] is to demonstrate that the code simply fails to treat

this problem. . . . There thus is nothing to prevent this court from

joining in the growing number of jurisdictions which, although bound by the

code, have nevertheless abolished vertical privity in breach of warranty

cases.” Kassab, 246 A.2d at 856 (emphasis in original). Indiana has not

legislated on this issue since 1966 when the UCC adopted these three

alternatives. More recently, the “Buyback Vehicle Disclosure” statute

eliminated the lack-of-privity defense for actions under that section. See

I.C. § 24-5-13.5-13(c) (1995). In short, the General Assembly in keeping

Alternative A left to this Court the issue of to what extent vertical

privity of contract will be required.

Courts that have abolished vertical privity have cited a variety of

reasons. Principal among these is the view that, in today’s economy,

manufactured products typically reach the consuming public through one or

more intermediaries. As a result, any loss from an unmerchantable product

is likely to be identified only after the product is attempted to be used

or consumed. Hininger v. Case Corp. 23 F.3d 124, 127 (5th Cir. 1994) (In

Texas, the privity requirement is not needed to assert a claim for breach

of an implied warranty against a remote manufacturer of a finished

product); Reed v. City of Chicago, 263 F. Supp. 2d 1123, 1125 (N.D. Ill.

2003) (Under Alternative A of 2-318, privity is no longer an absolute

requirement for breach of warranty actions. Since benefit of paper gowns

were for the protection of potentially suicidal detainees privity between

the detainee and the manufacturer was not required for the warranty to

apply); Hubbard v. General Motors Corp., 39 U.C.C.2d (Callaghan) 83

(S.D.N.Y. 1996) (buyer from dealer could sue manufacturer for direct

economic loss for defective braking system in truck). Others have cited

the concern that privity encourages thinly capitalized manufacturers by

insulating them from responsibility for inferior products. See Groppel

Co., Inc. v. United States Gypsum Co., 616 S.W.2d 49, 59 (Mo. Ct. App.

1981). Yet others have focused on the point that if implied warranties are

effective against remote sellers it produces a chain of lawsuits or

crossclaims against those up the distribution chain. See Old Albany

Estates, Ltd. v. Highland Carpet Mills, Inc., 604 P.2d 849, 851-52 (Okla.

1979) (“To require vertical privity results in perpetuating a needless

chain of actions whereby each buyer must seek redress from his immediate

seller until the actual manufacturer is eventually reached.”). And some

focus on the reality in today’s world that manufacturers focus on the

consumer in communications promoting the product. See Spring Motors

Distribs., Inc. v. Ford Motor Co., 489 A.2d 660, 676-77 (N.J. 1985)

(“Eliminating the requirement of vertical privity is particularly

appropriate in the present action where Spring Motors read advertisements

published by Clark, specifically requested Clark transmissions, expected

the transmissions to be incorporated into trucks to be manufactured by

Ford, contracted with Ford only, and now seeks to recover its economic

loss.”).

Finally, some jurisdictions have abolished privity in warranty actions

where only economic losses were sought based on the notion that there is

“no reason to distinguish between recovery for personal and property

injury, on the one hand, and economic loss on the other.” Hiles Co. v.

Johnston Pump Co., 560 P.2d 154, 157 (Nev. 1977); accord Salvador v.

Atlantic Steel Boiler Co., 389 A.2d 1148 (Pa. Super. Ct. 1978). A variance

on this theme is the view that abolishing privity “simply recognizes that

economic loss is potentially devastating to the buyer of an unmerchantable

product and that it is unjust to preclude any recovery from the

manufacturer for such loss because of a lack of privity, when the slightest

physical injury can give rise to strict liability under the same

circumstances.” Groppel, 616 S.W.2d at 59. One court preserving the

privity requirement expressed the view that “there may be cases where the

plaintiff may be unfairly prejudiced by the operation of the economic loss

rule in combination with the privity requirement.” Ramerth v. Hart, 983

P.2d 848, 852 (Idaho 1999).

In Indiana, the economic loss rule applies to bar recovery in tort

“where a negligence claim is based upon the failure of a product to perform

as expected and the plaintiff suffers only economic damages.” Martin

Rispens, 621 N.E.2d at 1089. Possibly because of the economic loss rule,

Goodin did not raise a negligence claim here. Furthermore, at oral

argument Goodin’s attorney pointed to the warranty disclaimer in the

Buyer’s Order as a bar to Goodin’s ability to sue her direct seller,

AutoChoice, which could then have sued Hyundai for reimbursement. This

disclaimer, Goodin contends, precluded a chain of claims ultimately

reaching the manufacturer. Therefore, Goodin claims that if this Court

does not abolish the vertical privity requirement she will be left without

a remedy for Hyundai’s breach of its implied warranty of merchantability,

and Hyundai’s implied warranty becomes nonexistent in practical terms.

The basis for the privity requirement in a contract claim is

essentially the idea that the parties to a sale of goods are free to

bargain for themselves and thus allocation of risk of failure of a product

is best left to the private sector. Otherwise stated, the law should not

impose a contract the parties do not wish to make. The Court of Appeals

summarized this view well:

Generally privity extends to the parties to the contract of

sale. It relates to the bargained for expectations of the buyer and

seller. Accordingly, when the cause of action arises out of economic

loss related to the loss of the bargain or profits and consequential

damages related thereto, the bargained for expectations of buyer and

seller are relevant and privity between them is still required.

Implied warranties of merchantability and fitness for a

particular use, as they relate to economic loss from the bargain,

cannot then ordinarily be sustained between the buyer and a remote

manufacturer.

Richards, 179 Ind. App. at 112, 384 N.E.2d at 1092 (citations omitted). We

think that this rationale has eroded to the point of invisibility as

applied to many types of consumer goods in today’s economy. The UCC

recognizes an implied warranty of merchantability if “goods” are sold to

“consumers” by one who ordinarily deals in this product. Warranties are

often explicitly promoted as marketing tools, as was true in this case of

the Hyundai warranties. Consumer expectations are framed by these legal

developments to the point where technically advanced consumer goods are

virtually always sold under express warranties, which, as a matter of

federal law run to the consumer without regard to privity. 15 U.S.C. §

2310. Magnuson-Moss precludes a disclaimer of the implied warranty of

merchantability as to consumer goods where an express warranty is given.

15 U.S.C. § 2308. Given this framework, we think ordinary consumers are

entitled to, and do, expect that a consumer product sold under a warranty

is merchantable, at least at the modest level of merchantability set by UCC

section 2-314, where hazards common to the type of product do not render

the product unfit for normal use. Cf. Allgood v. R.J. Reynolds Tobacco

Co., 80 F.3d 168, 171 (5th Cir. 1996) (under Texas law, only actual sellers

are liable, not trade associations nor public relations agents who play a

role in distribution. “Even where a party has promoted a product, and made

promises regarding that product, if the party is not the actual seller a

claim for breach of warranty will not lie.”).

Even if one party to the contract—the manufacturer—intends to extend

an implied warranty only to the immediate purchaser, in a consumer setting,

doing away with the privity requirement for a product subject to the

Magnuson-Moss Warranty Act, rather than rewriting the deal, simply gives

the consumer the contract the consumer expected. The manufacturer, on the

other hand is encouraged to build quality into its products. To the extent

there is a cost of adding uniform or standard quality in all products, the

risk of a lemon is passed to all buyers in the form of pricing and not

randomly distributed among those unfortunate enough to have acquired one of

the lemons. Moreover, elimination of privity requirement gives consumers

such as Goodin the value of their expected bargain, but will rarely do more

than duplicate the Products Liability Act as to other consequential

damages. The remedy for breach of implied warranty of merchantability is

in most cases, including this one, the difference between “the value of the

goods accepted and the value they would have had if they had been as

warranted.” I.C. § 26-1-2-714(2). This gives the buyer the benefit of the

bargain. In most cases, however, if any additional damages are available

under the UCC as the result of abolishing privity, Indiana law would award

the same damages under the Products Liability Act as personal injury or

damage to “other property” from a “defective” product. Gunkel v.

Renovations, Inc., 2005 W.L. 236630 (Feb. 01, 2005).

For the reasons given above we conclude that Indiana law does not

require vertical privity between a consumer and a manufacturer as a

condition to a claim by the consumer against the manufacturer for breach of

the manufacturer’s implied warranty of merchantability.

Conclusion

The judgment of the trial court is affirmed.

Shepard, C.J., and Dickson, Sullivan, and Rucker, JJ. concur.

-----------------------

[1] On the “Buyers Order,” AutoChoice Hyundai included the following

preprinted language in capital letters:

All warranties, if any, by a manufacturer or supplier other than

dealer are theirs, not dealer’s, and only such manufacturer or other

supplier shall be liable for performance under such warranties, unless

dealer furnishes buyer with a separate written warranty made by dealer

on its own behalf. Dealer hereby disclaims all warranties, express or

implied, including any implied warranties of merchantability or

fitness for a particular purpose, on all goods and services sold by

DEALER. . . .

[2] Hicks is an A.C. Certified Master Engine Machinist and Diesel Fuel

Technician who had been trained in brakes during his certification process.

[3] Hyundai’s minimum standard thickness for rotors is 22.4 millimeters and

the rotors on Goodin’s car (bought from NAPA and installed by Hicks)

measured 21.9 and 22 millimeters.

[4] In Reed v. Central Soya Co., Inc., 621 N.E.2d 1069, 1074 (Ind. 1993),

this Court defined economic damages under Indiana law as “the diminution in

the value of a product and consequent loss of profits because the product

is inferior in quality and does not work for the general purposes for which

it was manufactured and sold.” In this case, Goodin seeks only direct

economic damages the decreased value of the Sonata by reason of the

allegedly defective brakes. Goodin seeks the difference between the actual

value of the goods accepted and the value they would have had if they had

been as warranted. See I.C. § 26-1-2-714(2). Damages can also be measured

by the cost of replacement or the cost of repair. Rheem Mfg. Co. v. Phelps

Heating & Air Conditioning, Inc., 746 N.E.2d 941, 955-56 (Ind. 2001).

[5] Texas has adopted a statute that leaves questions of horizontal and

vertical privity for the courts. Tex. Bus. & Com. Code § 2.318 (2004)

(“This chapter does not provide whether anyone other than a buyer may take

advantage of an express or implied warranty of quality made to the buyer or

whether the buyer or anyone entitled to take advantage of a warranty made

to the buyer may sue a third party other than the immediate seller for

deficiencies in the quality of the goods. These matters are left to the

courts for their determination.”) Louisiana has never enacted any part of

Article 2 of the Uniform Commercial Code.

[6] Alternative A has been adopted in the following states in addition to

Indiana: Alaska, Arizona, Arkansas, Connecticut, District of Columbia,

Florida, Georgia, Idaho, Illinois, Kentucky, Maryland, Michigan,

Mississippi, Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico,

North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee,

Washington, West Virginia, and Wisconsin. See Hawkland, supra, at 778 n.

1. The Florida statute is a nonstandard version of Alternative A, and

includes the purchaser’s employees among those entitled to assert implied

warranty. Fla. Stat. § 672.318 (2004). In addition, case law in Illinois

and Pennsylvania has expanded the class of potential third party

beneficiaries and defendants. See, e.g., Whitaker v. Lian Feng Mach. Co.,

509 N.E.2d 591, 595 (Ill. App. Ct. 1987); and Salvador v. Atlantic Steel

Boiler Co., 319 A.2d 903, 906 (Pa. 1974).

[7] Indiana Code section 26-1-2-103(1)(a) defines “buyer” as “a person who

buys or contracts to buy goods” and section 26-1-2-103(1)(d) defines

“seller” as “a person who sells or contracts to sell goods.” Indiana’s

version of the U.C.C. restricts those terms to direct buyers and direct

sellers.

[8] Several jurisdictions that have adopted Alternative A have abolished

privity. See Morrow v. New Moon Homes, 548 P.2d 279, 291-92 (Alaska 1976);

Manheim v. Ford Motor Co., 201 So. 2d 440 (Fla. 1967); Groppel Co., Inc. v.

U.S. Gypsum Co., 616 S.W.2d 49, 58 (Mo. Ct. App. 1981) (abolishing vertical

privity and extending implied warranty to remote purchasers even when only

economic loss is claimed); Peterson v. N. Am. Plant Breeders, 354 N.W.2d

625, 631 (Neb. 1984); Hiles Co. v. Johnston Pump Co., 560 P.2d 154, 157

(Nev. 1977); Spring Motors Distrib., Inc. v. Ford Motor Co., 489 A.2d 660,

676 (N.J. 1985); Old Albany Estates Ltd. v. Highland Carpet Mills, Inc.,

604 P.2d 849, 852 (Okla. 1979); Spagnol Enters., Inc. v. Digital Equipment

Corp., 568 A.2d 948, 952 (Pa. 1989); Dawson v. Canteen Corp., 212 S.E.2d

82, 82-83 (W. Va. 1975).

Others have retained the common law privity rule. See Flory v.

Silvercrest Indus., 633 P.2d 383, 388 (Az. 1981); Ramerth v. Hart, 983 P.2d

848, 852 (Idaho 1999) (upheld vertical privity requirement but left open

the possibility of a different conclusion if the combination of the privity

requirement and the economic loss rule proved unjust); Presnell Constr.

Managers, Inc. v. EH Constr., LLC, 134 S.W.3d 575, 579 (Ky. 2004); Energy

Investors Fund, L.P. v. Metric Constructors, Inc., 525 S.E.2d 441, 446

(N.C. 2000); Hupp Corp. v. Metered Washer Serv., 472 P.2d 816 (Or. 1970);

Messer Griesheim Indus. v. Cryotech of Kingsport, Inc., 131 S.W.3d 457, 463

(Tenn. Ct. App. 2003); City of La Crosse v. Schubert, Schroder &

Associates, Inc., 240 N.W.2d 124, 126 (Wis. 1976), overruled on other

grounds, Daanen & Janssen v. Cedarapids, Inc., 573 N.W.2d 842 (Wis. 1998).