Jimenez v. Superior Court

BROWN, J. Concurring and Dissenting.

In a single paragraph and without significant analysis (maj. opn., ante, at p. 484), the majority sharply narrows the economic loss rule and thereby substantially erodes the demarcation between contract and tort law in California. Plaintiffs allege they bought a product (a mass-produced home) that included defective components (the windows), which malfunctioned, damaging the product as a whole but otherwise causing no personal injury or property damage. In short, plaintiffs claim they did not get the full benefit of their bargain because the product they bought deteriorated in value due to the malfunctioning of a component. The case raises no issue of public safety, nor does it involve an injury that exceeds the subject matter of the parties’ bargain. As such, it is a purely commercial dispute involving failure to deliver bargained-for value (monetary harm) and dependent for its resolution on the terms of the parties’ agreement. Plaintiffs have not shown that traditional warranty principles are somehow inadequate to provide redress for the harm at issue here. Nevertheless, the majority permits a strict products liability action without discussing why a tort remedy is appropriate in this context.

In a world full of complex, integrated products, the general malfunction of a product is almost always traceable to the malfunctioning of a component. Therefore, the majority’s rule turns virtually every product failure into a tort. Because this ill-considered abandonment of settled principles is wrong and fraught with potentially far-reaching consequences, I dissent. 1

I.

The acknowledged genesis of strict products liability in California is Justice Traynor’s concurring opinion in Escola v. Coca Cola Bottling Co., supra, 24 Cal.2d at pages 461-468 (conc. opn. of Traynor, J.) (Escola), which the court adopted in Greenman v. Yuba Power Products, Inc. (1963) 59 Cal.2d 57, 62 [ 27 Cal.Rptr. 697 , 377 P.2d 897 , 13 A.L.R.3d 1049 ] (Greenman): “A manufacturer is strictly liable in tort when an article he places on *489 the market, knowing that it is to be used without inspection for defects, proves to have a defect that causes injury to a human being.” “The purpose of such liability is to insure that the costs of injuries resulting from defective products are borne by the manufacturers that put such products on the market rather than by the injured persons who are powerless to protect themselves.” (Id. at p. 63.) Thus, “[e]ven if there is no negligence [on the part of the manufacturer], public policy demands that responsibility be fixed wherever it will most effectively reduce the hazards to life and health inherent in defective products that reach the market.” (Escola, at p. 462 (conc. opn. of Traynor, J.).)

The court’s concern was thus to maximize consumer safety (see Vandermark v. Ford Motor Co. (1964) 61 Cal.2d 256, 262 [ 37 Cal.Rptr. 896 , 391 P.2d 168 ]; see also Escola, supra, 24 Cal.2d at p. 462) and to fill a gap in warranty law that effectively left no recourse to an individual injured by a defective product. “ ‘The remedies of injured consumers ought not to be made to depend upon the intricacies of the law of sales.’ [Citation.]” (Greenman, supra, 59 Cal.2d at p. 64 .) “Sales warranties serve this purpose fitfully at best. [Citation.]” (Id. at pp. 63-64; see also Seely v. White Motor Co. (1965) 63 Cal.2d 9, 15-16 [ 45 Cal.Rptr. 17 , 403 P.2d 145 ] (Seely).) And, as the high court noted in East River S.S. Corp. v. Transamerica Delaval (1986) 476 U.S. 858, 867 [ 106 S.Ct. 2295, 2300 , 90 L.Ed.2d 865 ] (East River), “[f]or similar reasons of safety, the manufacturer’s duty of care was broadened to include protection against property damage.” When a defective product malfunctions and causes damage to other property, safety concerns are implicated because of the very real possibility that the same malfunction might easily have caused a personal injury. “Physical injury to property is so akin to personal injury that there is no reason to distinguish them. [Citations.]” (Seely, at p. 19.)

But imposition of strict products liability for damage a defective component of a product causes to the product itself cannot be brought within the foregoing rationale. Here, plaintiffs complain solely of damage to their house, that is, to the product they originally purchased; the safety of their person and other property has never been at issue. That circumstance takes this case outside the scope of strict products liability. The concern driving strict products liability law is that “[a] consumer should not be charged at the will of the manufacturer with bearing the risk of physical injury when he buys a product on the market.” (Seely, supra, 63 Cal.2d at p. 18 .) This concern does not arise when the product itself suffers damage, whether or not caused by a component. In that case, a different rule applies; that is, a consumer “can ... be fairly charged with the risk that the product will not match his economic expectations.” (Ibid.)

*490 II.

When no safety concerns are implicated because the damage is limited to the product itself, the consumer’s recourse is in contract law to enforce the benefit of the bargain. This principle underlies the economic loss rule, a rule that distinguishes between damages from physical injuries caused by a defective product and economic losses resulting from the failure of the product to meet the consumer’s expectations (for example, losses in a business or the diminished value of the product). The acknowledged seminal articulation of this rule is Chief Justice Traynor’s opinion in Seely, supra, 63 Cal.2d 9 (see East River, supra, 476 U.S. at p. 868 [106 S.Ct. at pp. 2300-2301]; Aas v. Superior Court (2000) 24 Cal.4th 627, 639-640 [ 101 Cal.Rptr.2d 718 , 12 P.3d 1125 ] (Aas); Stearman v. Centex Homes (2000) 78 Cal.App.4th 611, 616 [ 92 Cal.Rptr.2d 761 ] (Stearman); see also Rest.3d Torts, Products Liability, § 21, com. c, pp. 293-294); “The law of sales has been carefully articulated to govern the economic relations between suppliers and consumers of goods. The history of the doctrine of strict liability in tort indicates that it was designed, not to undermine the warranty provisions of the sales act or of the Uniform Commercial Code but, rather, to govern the distinct problem of physical injuries.” (Seely, at p. 15, italics added.) “Although the rules of warranty frustrate rational compensation for physical injury, they function well in a commercial setting. [Citations.] These rules determine the quality of the product the manufacturer promises and thereby determine the quality he must deliver.” (Id. at p. 16, italics added.)

“The distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the ‘luck’ of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products. He can appropriately be held liable for physical injuries caused by defects by requiring his goods to match a standard of safety defined in terms of conditions that create unreasonable risks of harm. He cannot be held for the level of performance of his products in the consumer’s business unless he agrees that the product was designed to meet the consumer’s demands.” (Seely, supra, 63 Cal.2d at p. 18 , italics added; see Aas, supra, 24 Cal.4th at p. 642 ; East River, supra, 476 U.S. at p. 873 [ 106 S.Ct. at p. 2303 ].)

The court also emphasized the appropriateness of bargained-for limitations of liability when a product simply malfunctions, or functions below expectations, but causes no personal injury or damage to other property. The court noted that, because strict products liability “prevents] a manufacturer from defining the scope of his responsibility for harm caused by his products,” its application in the case of a product that merely performs below *491 expectations would make “[t]he manufacturer . . . liable for damages of unknown and unlimited scope. Application of the rules of warranty prevents this result.” (Seely, supra, 63 Cal.2d at p. 17 ; see East River, supra, 476 U.S. at p. 874 [106 S.Ct. at pp. 2303-2304].)

The court made equally clear its decision did not depend on the relative bargaining power of the parties. “The law of warranty is not limited to parties in a somewhat equal bargaining position. Such a limitation is not supported by the language and history of the sales act and is unworkable. Moreover, it finds no support in Greenman . The rationale of that case does not rest on the analysis of the financial strength or bargaining power of the parties to the particular action. It rests, rather, on the proposition that ‘The cost of an injury and the loss of time or health may be an overwhelming misfortune to the person injured, and a needless one, for the risk of injury can be insured by the manufacturer and distributed among the public as a cost of doing business.’ [Citation.] That rationale in no way justifies requiring the consuming public to pay more for their products so that a manufacturer can insure against the possibility that some of his products will not meet the business needs of some of his customers.''’ ( Seely, supra, 63 Cal.2d at pp. 18-19, italics added; see East River, supra, 476 U.S. at p. 872 [106 S.Ct. at pp. 2302-2303].)

The majority offers no reasoned explanation for ignoring the foregoing principles here where the cause of the product’s failure to meet expectations is that a defective component in the product has damaged the product. In other words, how does the fact that a product somehow damages itself bar invocation of the economic loss rule? The simple answer is that it does not, as the United States Supreme Court has explained in East River, supra, 476 U.S. 858. (See Saratoga Fishing Co. v. J.M. Martinac & Co. (1997) 520 U.S. 875 [ 117 S.Ct. 1783 , 138 L.Ed.2d 76 ] (Saratoga Fishing); Seely, supra, 63 Cal.2d at pp. 16-17.) 2

III.

In East River , components of supertanker turbine engines failed, causing damage—but only to the engines themselves, i.e., “purely monetary harm.” (East River, supra, 476 U.S. at p. 868 [ 106 S.Ct. at p. 2301 ].) Relying substantially on the reasoning in Seely, supra, 63 Cal.2d 9 , which it characterized as defining “one end of the spectrum” (East River, at p. 868 [106 *492 S.Ct. at pp. 2300-2301]), and rejecting any compromise of the economic loss rule tolerated by the “minority” and “intermediate” views, the high court held that the plaintiffs could not recover damages in strict liability. (East River, at p. 870 [106 S.Ct. at pp. 2301-2302].) “Since each turbine was supplied by [defendant] as an integrated package [citation], each is properly regarded as a single unit. ‘Since all but the very simplest of machines have component parts, [a contrary] holding would require a finding of “property damage” [triggering strict products liability] in virtually every case where a product damages itself. Such a holding would eliminate the distinction between warranty and strict products liability.’. . . Obviously, damage to a product itself has certain attributes of a products-liability claim. But the injury suffered—the failure of the product to function properly—is the essence of a warranty action, through which a contracting party can seek to recoup the benefit of its bargain.” (Id. at pp. 867-868 [ 106 S.Ct. at p. 2300 ].) Regardless of the manner in which the harm occurs, “the resulting loss due to repair costs, decreased value, and lost profits is essentially the failure of the purchaser to receive the benefit of its bargain—traditionally the core concern of contract law. [Citation.] [f] . . . The minority view fails to account for the need to keep products liability and contract law in separate spheres and to maintain a realistic limitation on damages.” (Id. at pp. 870-871 [ 106 S.Ct. at p. 2302 ].)

Equally important, “[w]hen a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong. [1f] The tort concern with safety is reduced when an injury is only to the product itself. When a person is injured, the ‘cost of an injury and the loss of time or health may be an overwhelming misfortune,’ and one the person is not prepared to meet. [Citation.]” (East River, supra, 476 U.S. at p. 871 [ 106 S.Ct. at p. 2302 ].) By contrast, one can readily insure against economic losses or recover them in warranty. (Id. at pp. 871, 873-874 [106 S.Ct. at pp. 2302, 2303].) Accordingly, “[s]ociety need not presume that a customer needs special protection. The increased cost to the public that would result from holding a [component] manufacturer liable in tort for injury to the product itself is not justified. [Citation.]” (Id. at p. 872 [ 106 S.Ct. at p. 2302 ]; see Seely, supra, 63 Cal.2d at p. 19 .)

The United States Supreme Court further noted that the more circumscribed scope of foreseeability in contract law imposes an additional necessary limit on liability in this context. (East River, supra, 476 U.S. at p. 874 [106 S.Ct. at pp. 2303-2304].) By contrast in strict products liability, “where there is a duty to the public generally, [and hence foreseeability is construed more broadly,] foreseeability is an inadequate brake. [Citations.] Permitting recovery for all foreseeable claims for purely economic loss could make a manufacturer liable for vast sums.” (Ibid.)

*493 The high court reiterated these principles in Saratoga Fishing and explained that “[w]hen a manufacturer places an item in the stream of commerce by selling it to an Initial User, that item is the ‘product itself under East River.” (Saratoga Fishing, supra, 520 U.S. at p. 879 [ 117 S.Ct. at p. 1786 ].) “Items added to the product by the Initial [or a subsequent] User are therefore ‘other property,’ ” which, if damaged, could trigger strict products liability. (Ibid.)

The court thus articulated a “product sold” test for determining what constitutes damage to the product and what constitutes damage to other property. This test harmonizes principles underlying both the economic loss rule and strict products liability, preventing the latter from subsuming the former. As noted in East River , “preserving a proper role for the law of warranty precludes imposing tort liability if a defective product causes purely monetary harm,” as occurs when a defect in the product damages the product itself, and thereby diminishes its value, but causes no other damage. (East River, supra, 476 U.S. at p. 868 [106 S.Ct. at pp. 2300-2301]; see Aas, supra, 24 Cal.4th at p. 640 ; Stearman, supra, 78 Cal.App.4th at p. 616 .)

IV.

The majority fails even to recognize, much less resolve on any principled basis, the tension generated by resorting to strict products liability despite the adequacy of alternative remedies 3 and the total absence of safety concerns. Instead, it sidesteps the difficulty by relying on two Court Appeal decisions: Casey v. Overhead Door Corp. (1999) 74 Cal.App.4th 112 [ 87 Cal.Rptr.2d 603 ] (Casey) and Stearman, supra, 78 Cal.App.4th 611 . Noting that we mentioned the holdings of these cases in Aas, supra, 24 Cal.4th 627 , the majority asserts that, under “long recognized” California law, the economic loss rule does not necessarily bar recovery for physical damage to a product caused by a defective component. (See maj. opn., ante, at p. 484.) With all due respect to the Courts of Appeal, it is not this court’s role to blandly default to their decisions without a searching analysis. (Cf. Cronin v. J.B.E. Olson Corp. (1972) 8 Cal.3d 121, 130-135 [ 104 Cal.Rptr. 433 , 501 P.2d 1153 ] [discussing at length whether California products liability law includes “unreasonably dangerous” requirement imposed under Rest.2d , Torts, § 402A].) The crucial point is that, whatever else they say, the courts in Casey and Stearman failed to consider whether the facts of those cases implicated the consumer safety rationale of strict products liability and *494 justified applying tort law rather than warranty law. Since neither decision addressed these issues, they cannot be read as support, and certainly not dispositive support, for rejecting the economic loss rule in this context. 4

The problem in particular with the analysis in Stearman , which the majority implicitly and uncritically accepts, is that the Court of Appeal misconceived the driving principle underlying the economic loss rule. “The economic loss doctrine marks the fundamental boundary between contract law, which is designed to enforce the expectancy interests of the parties, and tort law, which imposes a duty of reasonable care and thereby encourages citizens to avoid causing physical harm to others.” (Barrett, Recovery of Economic Loss in Tort for Construction Defects: A Critical Analysis (1989) 40 S.C. L.Rev. 891, 894.) As the Nevada Supreme Court explained when it addressed the question of recovery for water damage caused to homes by defective roofing and siding: “Contract law is designed to enforce the expectancy interests created by agreement between the parties and seeks to enforce standards of quality. ‘This standard of quality must be defined by reference to that which the parties have agreed upon.’ [Citation.] In contrast, tort law is designed to secure the protection of all citizens from the danger of physical harm to their persons or to their property and seeks to enforce standards of conduct. These standards are imposed by society, without regard to any agreement. Tort law has not traditionally protected strictly economic interests related to product quality—in other words, courts have generally refused to create a duty in tort to prevent such economic losses. [Citation.]” (Calloway v. City of Reno (2000) 116 Nev. 250 [ 993 P.2d 1259, 1265-1266 ] (Calloway).) Accordingly, “the economic loss doctrine serves to define the scope of duty and ‘shield[s] a defendant from unlimited liability for all of the economic consequences of a negligent act, particularly in a commercial or professional setting, and thus . . . keep[s] the risk of liability reasonably calculable.’ [Citation.]” (Id. at p. 1266.)

The Nevada high court noted that Florida’s supreme court had reached a similar conclusion in the present context: “ ‘Buying a house is the largest investment many consumers ever make, and homeowners are an appealing, sympathetic class. If a house causes economic disappointment by not meeting a purchaser’s expectations, the resulting failure to receive the benefit of the bargain is a core concern of contract, not tort, law. There are protections *495 for homebuyers, however, such as statutory warranties, the general warranty of habitability, and the duty of sellers to disclose defects, as well as the ability of purchasers to inspect houses for defects. Coupled with homebuyers’ power to bargain over price, these protections must be viewed as sufficient when compared with the mischief that could be caused by allowing tort recovery for purely economic losses. ’ [Citation.]” (Calloway, supra, 993 P.2d at p. 1266 , quoting Casa Clara v. Charley Toppino and Sons (Fla. 1993) 620 So.2d 1244, 1247 .)

Here, as in Calloway, the allegedly defective windows were “an integral component” of plaintiffs’ homes. (Calloway, supra, 993 P.2d at p. 1269 .) “The damage caused by the allegedly defective [windows] therefore constituted damage to the structures themselves—no ‘other’ property damage resulted, and [plaintiffs] suffered purely economic losses. Because of the alleged construction defects [plaintiffs] failed to receive the benefit of their bargains; the defects resulted in a lower standard of quality than that expected. Such inferior workmanship, which leads to building deterioration, is not properly addressed by tort law. [Citation.] In such circumstances, the overriding policy of tort law, to promote safety, is not implicated. We therefore discern no reason to impose, in tort law, a general societal duty to prevent such economic losses.” (Ibid)

The majority proffers no rationale—in terms of either strict products liability or the economic loss rule—for rejecting the reasoning of East River, Calloway, and other decisions (from a majority of jurisdictions that have addressed the issue) barring tort recovery for home damage caused by defective parts. (See Calloway, supra, 993 P.2d at p. 1268 , and cases cited therein.) Admittedly, the issues are complex, but we are not without a solid analytical framework. “[T]he more reasoned method of analyzing the economic loss doctrine is to examine the relevant policies in order to ascertain the proper boundary between the distinct civil law duties that exist separately in contract and tort. . . . [Permitting tort recovery for economic losses from construction defects would create a general, societally imposed duty on the part of builders and developers to avoid such losses. These losses are not properly addressed by tort law, which has as its underlying policy the promotion of safety. Instead, such harm is paradigmatically addressed by the policies underlying contract law—to enforce standards of quality as defined by the parties’ contractual relationships.” (Id. at p. 1266, fn. 3.) Rather than such analysis, however, we are simply given ipse dixit conclusions.

The majority’s holding not only eviscerates the economic loss rule (see East River, supra, 476 U.S. at p. 867 [ 106 S.Ct. at p. 2300 ]) but poses *496 considerable problems of principled application. Will all defective constituent parts support an action in strict products liability if they damage the product sold? If not, how are courts to draw a meaningful line? 5 I agree with the Nevada Supreme Court that “any attempt to exempt a certain type of case from the [economic loss] doctrine’s application, without analyzing the policy rationales underlying the doctrine, and without considering the very real distinctions between the policies governing recovery in contract and tort, necessarily shifts the focus to a particular plaintiff or group of plaintiffs. Such an approach undermines the very purpose of the economic loss doctrine—to provide a boundary between contract law and tort law—and results in outcome-determinative decisions that may have no analytical consistency. Such decision making will inevitably blur and potentially destroy the distinctions between these two fundamentally different civil remedies.” (Calloway, supra, 993 P.2d at p. 1266, fn. 3 ; see East River, supra, 476 U.S. at p. 875 [106 S.Ct. at p.. 2304].)

Unlike the majority’s rule, a “product sold” test can be readily applied not only in this case but in any circumstance where a component of a product damages the product itself. Here, plaintiffs bought their homes as single, integrated products complete with windows and other constituent parts one would expect in a home. They allege the windows were defective and caused damage to the other parts of their homes, but plaintiffs suffered no personal injury from these defects, nor was any property, other than the homes themselves, damaged. In other words, the product they bought—their homes—did not meet the quality standard they expected at the time of purchase. In those circumstances, the economic loss rule limits their recovery to the benefit of their bargain. If for some reason, such as a limited warranty, they find their contractual remedies inadequate, that fact is a function of their bargain with the seller; it is not a loss the general public should have to subsidize. (See Seely, supra, 63 Cal.2d at p. 19 .)

The petition of real party in interest Viking Industries, Inc., for a rehearing was denied January 22, 2003. Brown, J., was of the opinion that the petition should be granted. -

Although the majority’s analysis of whether component manufacturers can ever be subject to strict products liability comprises the greater portion of its discussion, that proposition is, in fact, a question on which the law appears substantially settled; and I do not take issue with that aspect of the opinion. Indeed, Justice Traynor’s concurring opinion in Escola v. Coca Cola Bottling Co. (1944) 24 Cal.2d 453 [ 150 P.2d 436 ] anticipated such a rule (see id. at p. 462), which the Restatement of Torts now considers an established proposition. (See Rest.3d Torts, Products Liability, § 19, com. b, p. 268.)

The fact that a component may be defined as a “product” for purposes of imposing strict products liability when its defective condition causes personal injury or damage to other property (see Rest.3d Torts, Products Liability, § 19, com. b, p. 268) is irrelevant here where the only damage is to the product itself. Under established principles, imposition of strict liability is appropriate in the former circumstances to preclude component manufacturers from avoiding responsibility for the harm caused by their defective products.

Such remedies are rooted in the general law of sales and in special statutory provisions governing home sales. We note in this regard that the Legislature has not failed to enact special protections for the purchasers of homes. (See, e.g., Stats. 2002, ch. 722, § 3 [enacting new Civ. Code, § 895 et seq., eff. Jan. 1, 2003].)

Stearman notes that some Court of Appeal decisions rely on cryptic dicta in the last paragraph of Seely suggesting, without explanation, that the plaintiff in that case might have recovered in strict products liability if he had established causation. (Seely, supra, 63 Cal.2d at p. 19 ; see Stearman, supra, 78 Cal.App.4th at p. 617 .) Other decisions “apparently assumed physical damages were recoverable.” (Stearman, at p. 622.) Clearly the Court of Appeal was attempting to identify some coherent principle among these cases. Its inability to do so highlights the need for a thorough and well-reasoned analysis by this court.

The majority purports to reserve the question whether raw materials come within its holding. (See maj. opn., ante, at p. 484.) Given the Restatement’s definition of “product,” however (see Rest.3d Torts, Products Liability, § 19, com. b, p. 268), it is unclear by what principle raw materials could be excluded.