Petition — Two Rivers Co. v. Curtiss Breeding Service

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80-1 — QEC 9 1980

IN THE

MI

SUPREME COURT OF THE UNITED L RODAK, JR, CLERK

OCTOBER TERM, 1980

NO.

TWO RIVERS COMPANY,

Petitioner

versus

CURTISS BREEDING SERVICE, DIVISION OF

SEARLE AGRICULTURE, INC.,

Respondent

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

James N. Haltom

HUBBARD, PATTON, PEEK, HALTOM

& ROBERTS

700 Texarkana National Bank

Building - P. 0. Box 1928

Texarkana, Texas 75504

(214) 794-3341

Counsel for Petitioner

QUESTIONS PRESENTED

1. Whether the Court of Appeals’ holding

that, as a matter of public policy, Two Rivers

Company was precluded from recovering its damages

on a theory of strict liability in tort is in

conflict with applicable Texas law.

2. Whether the Court of Appeals’ holding

that Curtiss Breeding Service's disclaimer of

implied warranties was effective against Two Rivers

Company, which never saw such disclaimers or

learned of their existence until long after the

sale, is in conflict with applicable Texas law.

3. Whether the determination of the Court

of Appeals that, as a matter of law, the product

in question was not unreasonably dangerous con-

stitutes such a departure from the accepted and

usual course of judicial proccedings as to call

for an exercise of this Court's power of super-

vision.

TABLE OF CONTENTS

QUESTIONS PRESENTED . . . 2 «© 6 «© © © « « ]

AUTHORITIES CITED . . 1. 1 ow ew wo ww we gS

OPINIONS BELOW . . 26 0 «© 8's © 6 we @ 4

PUREE GLEOD. % Oe 6 ew 8 8 ee ae ee 4

STATUTES INVOLVED... «© ses cecveeens 4

STATEMENT OF THE CASE .. . © © e es ee 5

REASONS FOR GRANTING WRIT ....... . 6-18

CONCLUSION. . «© es eee BR est wwe se 18

RETA. 0 08 2 So Oke eee eee

1. Decision of the Court of Appeals . A-1l

2. Order Denying Petition for Re-Hearing

and Petition for Re-Hearing En Banc A-31l

AUTHORITIES CITED

CASES:

Borel v. Fibreboard Paper Products Corp.

493 F2d 1076 (Sth Cir. 1973) .... « «8a

Equitable Life Assurance Society of the

United States v. Fry, 386 F2d 239 .. 15

Erie R.R. Co. v. Tompkins, 304 US 64 (1938) 8

First National Bank of Fort Worth v.

Bullock, 584 SW2d 548 (Tex.Civ.App. 1979,

writ ref'd n. ree . 7 . 7 . . . . 7. . 13

Lavender v. Kurn, 327 U.S. 645 (1946). . 15

Manheim v. Ford Motor Co., 201 SW2d 77

(Fla. 1967). . . . . - . . . . . - . . 12

McKisson v. Sales Affiliates, Inc., 416 SW2d

Cs Raa AONE) 4S acca we hie, 0c, eS 7

Mid-Continent Aircraft Corp. v. Curry County

Spraying Service, Inc., 572 SW2d 77

(Tex. 1977) + ° . . . . © . . . ° ° - . cleGe?

Mueller & Co. v. Corley, 570 SW2d 140 (Tex.

Civ.App., 1978, writ ref'd n.r.e.) .«... 16

Nobility Homes of Texas, Inc. v. Shivers, 557

BWaG 71 Cees E97) 4 bo ee 6 a 6 oe ee 18,

Pioneer Hi-Bred International, Inc. v. Talley,

493 SW2d 602 (Tex.Civ.App. 1973, writ ref'd

n.r.e). . . . . +. . 2 . . . o . o . « . . 10

Reyes v. Wyeth Laboratories, 498 F2d 1076,

(5th Cit. 1973) . . . * . . . . + © . . . 15

Signal Oil & Gas Co. v. Universal Oil Products,

Fo ge ) Eee. eo: 5 re re Py 8

Sugarland Industries, Inc. v. Falco, 360 SW2d

806 (Tex.Civ.App. 1962, writ ref'd n.r.e) 13

Truck Insurance Exchange v. Cartmill, 385 SW2d

277 (Tex.Civ.App. 1964, writ ref'd n.r.e.) 13

W. D. Haden Co. v. Ryman, 362 SW2d 133 (Tex.

Civ App. 1962 weit ret*@).. 2 «se wes 13

STATUTES :

Texas Business and Commerce Code §2-316 (1967) ..

7 . . . . . 7 7 . . 7 + . . . . . . . 11,12,14

Texas Business and Commerce Code §1-201(10)

(1967) . . . . . . . . . . . . . . - . - ll

SECONDARY AUTHORITIES:

Restatement (Second) of Torts §402 A (1967). . 9

Two Rivers Company prays that a Writ of

Certiorari issue to review the judgment of the

United States Court of Appeals for the Fifth

Circuit entered in the above-entitled case on

August 25, 1980 (Court of Appeals Opinion, infra,

p. A-l).

OPINIONS BELOW

The judgment of the United States District

Court for the Eastern District of Texas was not

supported by written opinion. The opinion of the

Court of Appeals is included in the Appendix

beginning at A-1l. A Petition for Re-hearing and

a Petition for Re-hearing En Banc were filed by

Petitioner herein on or about September 19, 1980,

and both were denied by Order of the Court of

Appeals on October 6, 1980.

JURISDICTION

The judgment of the Court of Appeals was

entered on August 25, 1980. The jurisdiction of

this Court rests upon 28 USC Section 1254(1) (1966).

STATUTES INVOLVED

Texas Business and Commerce Code §2-316

(1967)

Texas Business and Commerce Code §1-201

(10) (1967)

5

STATEMENT OF THE CASE

1. Statement of Facts

This is a products liability case involving

the artificial insemination branch of the cattle

industry. In the years 1973 and 1974, Two Rivers

Company, an Arkansas Corporation engaged in cattle

breeding, purchased over one hundred one-half blood

Chianina heifers, which Two Rivers intended to

develop, through artificial breeding of successive

generations, into a "pure bred” line of Chianina

cattle. In 1974, Two Rivers contracted with Tony

Hall, a local rancher trained in artificial insemi-

nation procedures, for Mr. Hall to select and

purchase the semen of a reputable Chianina bull,

and therewith to artificially inseminate Two Rivers’

one-half blood heifers.

Mr. Hall then visited Hi-Pro Feeds, Inc., a

distributor of semen marketed by Curtiss Breeding

Service, a division of Searle Agriculture, Inc.,

and, after discussing the matter with Hi-Pro

employees, and consulting with the 1974 Curtiss

Beef Breeding Guide (an advertisement brochure

put out by Curtiss Breeding Service), selected and

purchased for Two Rivers’ herd the semen of the

Curtiss Breeding Service bull "Farro”. The 1974

Curtiss Beef Breeding Guide contained language of

disclaimer of warranty. Mr. Hall then began

artificially inseminating Two Rivers’ one-half

blood Chianina heifers with the semen of the bull

"Farro", which had been purchased by Hi-Pro Feeds,

Inc., from Curtiss Breeding Service.

After Mr. Hall had artificially inseminated

sixty-four of Two Rivers' heifers with Farro semen,

Curtiss notified its distributors that Farro was

very possibly a carrier of the recessive gene

for a genetic abnormality known as syndactylism,

or "mule footedness", and removed Farro'’s semen

from the market. Subsequently, of the sixty-four

6

heifers which were artificially inseminated with

Farro semen, twenty-six calved; of the twenty-

six calves, four (all stillborn) exhibited syndac-

tylsm. Moreover, the value of the sixty-eight

"healthy" Chianina calves born to Two Rivers in

1975 (twenty-two of which were Farro calves) and

the thirty "healthy" Chianina calves born to Two

Rivers in 1976, was adversely affected by the stigma

of being part of a herd of which over thirty cows

were unquestionably carriers of the genetic abnor-

mality syndactylism.

2. Course of Prodeedings

Two Rivers instituted this action in February

of 1976 seeking recovery from Curtiss Breeding

Service and Hi-Pro Feeds, Inc., for recovery of

two elements of damage, namely the loss of the

four stillborn syndactyl calves and the reduction

in market value of the ninety-eight "healthy"

Chianina calves which were alive and on the ground

at the time of trial; Federal jurisdiction was

based upon diversity of citizenship. Trial com-

menced October 20, 1977 in the United States

District Court for the Eastern District of Texas,

and the case was submitted to the jury on alter-

native theories of strict liability in tort and

breach of implied warranty. Verdict was rendered

on October 24, 1977 in favor of Two Rivers and

against Curtiss Breeding Service in the amount

prayed for, namely $52,900.00; Judgment was entered

upon the verdict.

Curtiss Breeding Service subsequently appealed

to the United States Court of Appeals for the

Fifth Circuit, which, over a vigorous dissent re-

versed the judgment of the trial court.

REASONS FOR GRANTING THE WRIT

The questions presented by the parties in this

case are questions of extreme importance in Texas

product liability jurisprudence. First of all,

this case presents an important state question,

with which the Supreme Court of Texas has

wrestled numerous times in the past three years,

with regard to under what circumstances a seller

of a defective and unreasonably dangerous product

will be held strictly liable for damages other

than personal injuries. Secondly, the case

presents an equally important state question,

which the Supreme Court of Texas has yet to

directly confront, of whether a purported dis-

claimer of warranties can be "conspicuous", so

as to be effective against a user of the product

sold, when it has never been seen by or brought

to the attention of such user. Moreover, the case

presents an important question of federal law,

namely the appropriate scope of review by a

Court of Appeals of a jury finding. For these

reasons, as will be more fully developed herein-

after, the Writ should issue.

I.

According to three recent decisions of the

Texas Supreme Court, in Texas products liability

jurisprudence the availability of a remedy under

the doctrine of strict liability in tort depends

upon the type (or types) of harm which an indivi-

dual or entity has suffered. Nobility Homes of

Texas, Inc. v. Shivers, 557 SW2d 77 (Tex. 1977),

Mid-Continent Aircraft Corporation v. Curry County

Spraying Service, Inc., 572 SW2d 308 (Tex. 1978),

Signal Oil & Gas Co. v. Universal Oil Products,

572 SW2d 320 (Tex. 1978).

Clearly under Section 402A of the Restatement

(Second) of Torts (adopted in Texas in McKisson

v. Sales Affiliates, Inc., 416 SW2d 787 (Tex. 1967)),

physical harm to the person or property of the

ultimate user or consumer is within the purview of

the doctrine of strict liability; Just as clearly

under Texas Supreme Court decisions, mere ‘'economic

8

loss" in the form of diminished product value

(Nobility Homes of Texas, Inc. v. Shivers, supra),

or damage which the product causes solely to itself

(Mid-Continent Aircraft Corporation v. Curry County

Spraying Service, Inc., supra), is without the pur-

view of the doctrine of the Restatement, and is

governed instead by the Uniform Commercial Code.

Where the product causes physical injury to other

property of the ultimate user as well as economic

loss, however, strict liability applies (Signal

Oil and Gas Co. v. Universal Oil Products, supra).

The Texas Supreme Court has thus developed a

workable, objective standard by which to test

product liability actions fer the applicability

of Section 402A.

The majority opinion of the Court of Appeals,

however, in apparent disregard of Erie Railroad

Company v. Towpkins, 304 US 64 (1938), concludes

that the tests as promulgated by the Texas Supreme

Court are "helpful" only, and not dispositive,

because the cases in which those tests were announced

did not specifically deal with the situation where

one product is biologically combined with another

to form, by a natural process, a continuation of

those products. The majority further reasons that

unlike the defective crankshaft gear bolt lock

plate in Mid-Continent Aircraft Corporation, supra,

or the Isomax reactor charge heater in Signal Oil

and Gas Company, supra, which each might have been

replaced by the defendant to cure the defect in

the whole product, the semen provided by Curtiss

has been irrevocably incorporated into another

"product", a calf, by the process of fertilization.

It takes very little logic, however, to see

that the distinction drawn by the majority opinion

of the Court of Appeals does not hold water. Surely

the majority recognizes that many industrial pro-

cesses, especially those chemical in nature, like

mammalian reproduction create one product from the

9

merger of two or more, in such a manner as to

irrevocably prohibit replacement of a component

part to result in a satisfactory whole. To draw

a distinction between products on the basis of

the ability of the producer to switch-out the

component parts simply makes no sense. A seller's

liability on a strict liability theory must be

measured at the time the product is sold, having

in mind foreseeable union with other products---

not after such union has taken place.

Likewise, there is no rational basis for

ignoring the clear mandate of the Texas Supreme

Court merely because the product here in question

is involved in the biological process of mammalian

reproduction. Many products (the most notable being

contraceptives) are involved with the reproductive

process and other biological processes. The act

of placing into the stream of commerce an un-

reasonably dangerous and defective product, of

whatever nature and variety, and whatever may

be its forseeable uses, should precipitate strict

tort liability. Restatement (Second) of Tort,

Section 402A (1967).

Having thus refused to apply the objective

tests set out by the Texas Supreme Court, the

majority opinion of the Court of Appeals proceeded

to embark on the vary sort of general, subjective

analysis which the Texas Supreme Court had attemp-

ted to avoid in Mid-Continent Aircraft Corporation

and Signal Oil and Gas Company, supra, and in so

doing, concluded that as a matter of public policy

strict liability should not be applied. In

support of this position, the opinion first cites

certain Texas cases in what it deems the "analogous"

area involving the sale of seeds, which cases

supposedly indicate that the Texas Supreme Court

would not apply the doctrine of strict liability

in the case at bar. It is interesting, in this

regard, that of the eight cases here cited by the

opinion, seven were decided prior to 1967, when

the Texas Supreme Court first recognized the

10

doctrine of strict liability in tort, and that the

one case decided after the doctrine of strict

liability obtained judicial acceptance, Pioneer

Hi-Bred International, Inc. v. Talley, 493 SW2d

602 (Tex. Civ. App. 1973, writ refused n.re.),

was a case where the only injury alleged was

clearly "economic loss" in the form of a failure

of the product with respect to its own value; Here,

Two Rivers seeks to recover for, inter alia, phy-

sical injury to four calves born dead with

syndactylism, such that Pioneer is inapposite.

Had the four calves in question not conceived at

all, or had they merely been smaller in size and

thus less valuable than others, the loss could

well be characterized as "economic" only, under

the theory of Pioneer; Where instead they were not

only born dead but were so physicially deformed

that they had to be dismembered in order to be

removed from the mother's womb, however, there

exists "physical injury" not present in Pioneer or

the other cases cited by the majority opinion.

Beyond this, however, the Court of Appeals

concludes that "essentially, Two Rivers is complaining

as a purchaser of bull semen, that the product did

not fulfill its commercial expectations" (Opinion

8803), and characterizes Two Rivers as nothing more

than a disappointed buyer (id.). Simple logic

points out the flaw in this reasoning. First of

all, a "disappointed buyer" is one who complains

either that the product he bought did not do that

for which it was purchased, or did not do it as

well as expected. In this case, the product (the

semen) did exactly what it was purchased for, and

all too well! The problem was not non-performance,

or inadequate performance, but injurious side effects

of performance--namely, the causation of the deformity

and death of four calves. Two Rivers does not claim,

as did Mr. Talley in Pioneer, or Mr. Shivers in

Nobility Homes, that the product it purchased was

economically worthless; Two Rivers claims, as did

Signal Oil and Gas Company in its suit against

Universal Oil Products, that the product contained

11

an unreasonably dangerous defect which damaged

“other property" and caused economic loss.

Petitioner respectfully urges, therefore,

that the Court of Appeals incorrectly decided an

important state question concerning the scope of

the doctrine of strict products liability, in a

manner in conflict with the 1978 Texas Supreme

Court decision of Signal Oil and Gas Company v.

Universal Oil Products, supra.

II.

Texas Business and Commerce Code §2-316 (b)

specifically provides, inter alia, that:

...to exclude or modify the implied

warranty of merchantability or any

part of it the language must mention

merchantability and in case of a

writing must be conspicious....

Since the disclaimers relied upon by Curtiss

are written, they are unquestionably subject to

the statutory requirement of conspicuousness.

Texas Business and Commerce Code §1-201(10)

defines "conspicuous" as "so written that a

reasonable person against whom it is to operate

ought to have noticed it."

Obviously, in this action it is Two Rivers,

if anyone, against whom the disclaimer is to

operate. It is undisputed, moreover, that Two

Rivers had neither occasion nor opportunity to

read the disclaimer language. How then, could

the language in question be considered as so

written that Two Rivers, or a reasonable person in

its stead, ought to have noticed it?

Since not until 1977 did the Supreme Court of

Texas make it clear that the privity of contract

12

was no longer required for implied warranty

actions in Texas (Nobility Homes of Texas, Inc.,

supra), it is not suprising that Texas judicial

opinion has not to date addressed the important

issue of whether the requirement of conspicuousness

applies in favor of persons other than those with

whom the seller is in privity. The whole theory

behind §2-316 of the Uniform Commercial Code,

however, is to insure that no one is saddled with,

and precluded from a remedy by, a disclaimer or

exclusion of warranty unless he has unequivocally

"bargained" for same. Comment (1) to Texas

Business and Commerce Code, §2-316. Moreover,

authority from other jurisdictions indicates that

a disclaimer cannot be effective against an

ultimate user or consumer where it was not com-

municated to, or bargained for by, said person or

entity. Manheim v. Ford Motor Company, 201 So. 2d

440 (Fla. 1967).

Having in mind the foregoing, the logical

conclusion as to how the Texas Supreme Court would

decide the immediate issue is that the Texas court

would apply the conspicuousness requirement in

favor of remote purchasers like Two Rivers; the

only possible application of that requirement in

this case would, moreover, be that since the

disclaimer language was neither communicated to

nor in any way bargained for by Two Rivers, a

reasonable person in Two Rivers’ position could

not be expected to notice same. As to Two Rivers,

then, the disclaimer would be inconspicuous, and

thus, ineffective.

The Court of Appeals’ opinion dodges this

conclusion by holding that, conspicuousness aside,

the relationship between Tony Hall and Two Rivers

was such that disclaiming as to Hall was effective

as against Two Rivers. The only possible theory

on which this holding could be sustained is the

questionable proposition that Hall was an agent

of Two Rivers, whose knowledge should be imputed

to his principal. The Court of Appeals ‘does not

13

cite a preced«nt or authority to justify its

imputation. The only case it does cite, Sugarland

Industries, Inc. v. Falco, 360 SW 2d 806 (Tex.

Civ. App. 1962, writ ref'd n.r.e), stands (as

is recognized by the opinion's citation as (cf.

Sugarland Industries, Inc....(opinion, p. 8805))

in diametric opposition to the proposition advanced

by the majority. *.

Even if there were Texas authority for imputing

the knowledge of a disclaimer from an agent to a

principal, however, the fact is undeniable that Hall

was not an "agent", but was an ‘independent contrac-

tor" .of Two Rivers. In Texas, as elsewhere, the

test of whether an individual is an agent or an

independent contractor is whether the "employer"

has the right to control the means and details of

the accomplishment sought, or merely the right to

control the end result. The First National Bank

of Fort Worth v. Bullock, 584 SW 2d 548(Tex. Civ.

App. 1979, writ ref'd n.r.e), Truck Insurance

Exchange v. Cartmill, 385 SW 2d 277 (Tex. Civ.

App. 1964, writ ref‘d n.r.e), W. D. Haden Company

v. Ryman, 362 SW 2d 133 (Tex. Civ. App. 1962, writ

ref'd). The transcript of this case is replete

with evidence that Two Rivers had merely the right

to control the end result sought to be accomplished,

and that Tony Hall had the right to control the

means and details of accomplishment. For instance,

John Davenport, President of Two Rivers, testified

as follows:

Q. And in the artificial insemination

process you felt that you did not have

this: - sufficient expertise to do that,

that you needed to get a technician to

assist you?

A. Correct.

Q. And that's why you called Mr. Tony Hall?

A. Correct.

Q. And you relied upon his experience and

his training to perform this function

of impregnation or artificial insemi-

nation?

14

A. Correct.

Q. And you did not in any way attempt

to control the way he did it, you

simply asked him to do it and asked

for the end result, is that correct?

A. Correct. (Transcript at 92, 93)

And: Q. You did not request Mr. Hall to pur-

chase the semen of a particular bull,

did you sir?

A. No...

Q You didn't instruct him to get it from

Hi-Pro, did you?

A. No. (Transcript at 95, 96).

Tony Hall testified similarly: 7

Q. It is correct, is it not, that Mr.

Davenport did not tell you to buy

any particular bull semen, he didn't

specify he wanted you to --- "I want

you to utilize Farro semen or Diasetta...'

or anything of that nature?

No sir.

And you agree with me he did not

specify it?

A. That's correct, he didn't." (Transcript

at 379, 380).

oD >

In light of this testimony, Petitioner

earnestly contends that even if agency were the

true issue (as oppused to conspicuousness), Tony

Hall was not, as the Court of Appeals concludes,

an "agent" as a matter of law, but was an indepen-

dent contractor, whose knowledge of the disclaimer

language should not be imputed.

Petitioner respectfully urges, therefore, that

the Court of Appeals incorrectly decided an impor-

tant state question concerning the effectiveness

of unbargained for language of disclaimer, in a

manner in conflict with Texas Business and Commerce

Code §2-316 (b).

15

tit.

In Reyes v. Wyeth Laboratories, 498 F2d

1264, 1288 (5th Cir. 1974), the Court of Appeals

for the Fifth Circuit stated:

As an appellate court, our sole

function is to ascertain whether

there is a rational basis in the

record for the jury's verdict....

In Borel v. Fibreboard Paper Products Corporation,

493 F2d 1076, 1092 (5th Cir. 1973), the Fifth

Circuit stated:

An appellate court must, of course,

scrupulously avoid usurping the

function of the jury by weighing

conflicting evidence and inferences

or by judging the credibility of

witnesses and then arriving at

its own conclusion concerning the

merits of the parties’ contentions.

Furthermore, only where there is a complete

absence of probative facts to support a conclusion

does reversible error appear. Lavender v. Kurn,

327 US 645 (1946), Equitable Life Assurance Society

of the United States v. Fry, 386 F 2d 239 (5th

Circuit 1967).

In chis case, however, the Fifth Circuit Court

of Appeals felt constrained to overturn a presumed

jury finding of unreasonable dangerousness, con-

cluding that there was "no evidence” in the records

to support such a finding (Opinion at p. 8801). If

the Court of Appeals were correct, that there was

no evidence of unreasonable dangerousness, its

holding in this regard could not be challenged; as

will be demonstrated, however, the Court of Appeals

was not correct, and there was evidence which could

support a jury finding of unreasonable dangerousness.

16

In Texas, as the Court of Appeals points out,

unreasonable dangerousness is defined in terms of

a consumer expectation test; i.e., a product is

unreasonably dangerous if it is dangerous to an

extent beyond which would have been contemplated

by the ordinary user with the knowledge, common to

- the community as to the characteristics of the

product. Mueller & Co. v. Corley, 570 SW 2d 140

(Tex. Civ. App. 1978, writ ref'd n.r.e.). In

. this case, the jury had before it evidence that

fifteen percent of the calves sired by Farro were

syndactyl (Transcript at 489-491); that these

syndactyl calves were so deformed that normal

birth was impossible (Transcript at 38); that the

syndactyl calves were so deformed that each had

to be dismembered to be removed from the mothers

womb (Transcript at 37-48); that none of the

syndactyl calves survived birth (id.); and that

an unknown percentage of the calves that were

not deformed were made carriers of the recessive

gene, des.roying their value for anything besides

slaughter purposes. (Transcript at 489-491). As

the dissenting judge points out, this sort of

dramatic, fatal result could well be considered

by the jury to indicate that the semen was

dangerous to an extent beyond the contemplation of

the ordinary consumer. Opinion at 8806. Even

Hi-Pro Feeds, Inc.,'s expert witness, Dr. Lee

McKeller, testified on cross-examination as

follows:

Q. Have you heard of any instances as

high as fifteen percent of genetically

defective offspring?

Well, I don't know...

Pretty high, isn't it?

Yes.

- In fact, have you ever heard of any

higher than that?

A. Really, I haven't. (Transcript at 431).

DPA >

Considering this evidence (along with the other

evidence in the case) in the light and with all

reasonable inferences most favorable to Two Rivers

17

(as this court must do under Borel v. Fibreboard

Paper Products Corp., supra), it can scarcely be

denied that the jury could reasonably have concluded

that an ordinary cattleman would not have expected

fifteen percent of his calf "crop" to be deformed

and stillborn, and that, therefore, the semen of

the bull Farro as marketed by Curtiss, was unreason-

ably dangerous.

Likewise, the emphasis placed by the majority

opinion upon testimony to the effect that an ordinary

cattleman recognizes the possibility that a bull's

seman may contain recessive genes is misplaced.

The ordinary consumer of any product must certainly

recognize the "possibility" of an unreasonably

dangerous defect; if, therefore, the recognition

of such a "possibility" were the test of consumer

expectations, the doctrine of strict products

liability would never come into play. The test is

not, however, what "possibilities" the consumer might

recognize, but what the consumer might reasonably

expect; as Judge Tate, in dissent, accurately points

out, the sort of fatal result in question, and the

high incidence of deformity, were far beyond any

custom or consumer expectation (opinion at 8806).

Two Rivers therefore would argue that, contrary to

the holding of the majority in this case, "reason-

able and fair-minded men in the exercise of impartial

judgment" might reach the conclusion that the semen

was unreasonably dangerous (Borel, supra at p. 1092).

Two Rivers would also point out to the court

that Curtiss certainly did not feel that Farro's

semen met the reasonable expectations of its customers,

since Curtiss removed Farro's semen from the market

upon discovering that he carried syndactylism

(transcript at 155, 156).

In light of the foregoing, Petitioner would

submit that the Court of Appeals has not "scrupulously

avoid(ed) usurping the function of the jury" as

required by Borel, supra but instead has far

18

exceeded the permissible scope of appelate review.

This case thus presents a situation where a court

of appeals has so far departed from the accepted

and usual course of judicial proceedings as to

call for an exercise of this Court's power of

supervision.

CONCLUSION

It is submitted that Petitioner's construc-

tion of the applicable Texas and federal authori-

ties, and the facts of this case constitutes the

only rational, workable approach to a novel and

complicated products liability case such as the

present. For this and the other reasons herein

stated, this Petition for Certiorari should,

therefore, be granted.

Reapectfully ae

James\N. Haltom

BBARD, PATTON, PEEK,

HALTOM & ROBERTS

Attorneys at Law

700 Texarkana National

Bank Building

P. O. Box 1928

Texarkana, Texas 75504

(214) 794-3341

Attorneys for Petitioner

APPENDIX

TWO RIVERS COMPANY,

Plaintiff-Appellee,

Vv.

CURTISS BREEDING SERVICE,

Division of Searle Agriculture

Inc., Defendant~-Appellant,

Hi-Pro Feeds, Inc., Defendant.

United States Court of Appeals,

Fifth Circuit.

Aug. 25, 1980.

Purchaser of bull semen brought action

against seller to recover for losses sustained

when some of the artificially inseminated

cattle produced calves suffering from syndac-

tylism. The United States District Court for

the Eastern District of Texas, Joe J. Fisher,

Chief Judge, entered judgment on verdict in

favor of purchaser and seller appealed. The

Court of Appeals, Thornberry, Circuit Judge,

held that: (1) strict liability was not appli-

cable to loss resulting from damage to reputation

of the herd, reducing its saleability, as a

result of the fact that some of the herd might

be carriers of syndactylism; (2) loss suffered

as result of the fact that some of the calves

received the genes for syndactyl from the semen

was also governed by the rules of commerical

law rather than strict liability; (3) the bull

semen was not unreasonably dangerous; (4) dis-

claimer of warranty of merchantability was

effective against the buyer's agent; and (5)

the implied warranty was also effective against

the buyer.

Reversed.

A-2

Tate, Circuit Judge, filed a dissenting

opinion.

Appeal from the United States District

Court for the Eastern District of Texas.

Before THORNBERRY, GODBOLD, and TATE,

Circuit Judges.

THORNBERRY, Circuit Judge:

This action was brought by Two Rivers

Company (Two Rivers), alleging that it purchased

from Hi-Pro Feeds, Inc. (Hi-Pro) semen used for

artificial insemination of its cattle, and that

the semen caused syndactylism in the offspring

of its cattle. The semen was marketed by

Curtiss Breeding Service, Division of Searle

Agriculture, Inc. (Curtiss). Two Rivers' claim

for damages against Curtiss and Hi-Pro is based

on the doctrines of strict liability and implied

warranty.

This appeal arises from a jury verdict in

favor of Two Rivers. The jury apparently found

that Curtiss was strictly liable for the sale

of defective semen and that Curtiss breached

its implied warranty of merchantability. The

jury also found that Two Rivers was entitled to

damages in the sum of $52,900.00. This amount

represents the damage to the reputation of Two

Rivers’ herd of cattle as computed by the loss

of the prospective market value of the cattle.

The court entered judgment for plaintiff in

the amount found by the jury and denied Curtiss's

motion for judgment notwithstanding the verdict.

We hold that, under Texas law, the district court

erred in that Two Rivers is not entitled to a

recovery of damages based on either strict

liability or implied warranty. |

A-3

Curtiss markets semen around the world that

is used to artificially inseminate cattle. Because

federal regulations prohibit direct importation

of certain bulls into the United States, Curtiss

maintains its bulls in other countries and imports

semen into the United States. The process of

artificial insemination allows one sire to arti-

ficially inseminate thousands of cattle in its

lifetime while a bull in natural service can sire

no more that 125-150 offspring in the same span

of time. These techniques allow a breeder access

to many different bulls without incurring the cost

of maintaining a large number of bulls.

Curtiss markets the semen of many different

breeds of cattle, including the Chianina breed.

In 1972, Curtiss entered into an agreement with

a Canadian firm to market in the United States

the semen from a Chianina bull known as Farro AC

35. Before entering into this agreement, Curtiss

conducted an examination of Farro's pedigree and

of the Chianina breed.

In 1973 and 1974, Two Rivers purchased over

one hundred registered one-half blood Chianina

heifers with the intention of developing a pure-

bred line of Chianina cattle by artificially

breeding successive generations. To accomplish

this goal, Two Rivers contracted with Mr. Tony

Hall in 1974 to obtain quality semen and artifi-

cially inseminate the herd of one-half blood

Chianina heifers.

Hall is a Texarkana dairyman who also

artificially inseminates cattle as a part-time

job. Hall successfully completed a two-week

course in 1957, where he learned how to artificially

inseminate cattle, and he has since continued in

this business as a technician.

Hall, as an agent of Two Rivers, was given

the responsibility of selecting the bull and

the semen supplier. He purchased on his own

account the Farro semen, which was marketed by

A-4

Curtiss through Hi-Pro Feeds, Inc., that was used

to breed the Two Rivers cattle. When purchasing

the semen, he examined a pamphlet entitled the

"1974 Curtiss Beef Breeding Guide" which contained

a conspicuous disclaimer of any express or implied

warranties. After consummating the purchase, Hall

transported the semen to Two Rivers and insemi-

nated the cattle. Hall charged Two Rivers a

certain amount for each heifer he inseminated.

On July 24, 1974, Curtiss determined that

Farro had sired offspring which might have ex-

hibited the genetic abnormality known as syndactylism.

Curtiss immediately notified its distributors and

informed them that they were recalling the semen.

At that time, Two Rivers had already inseminated

64 of the heifers with Farro semen. While some

ranchers continued to use Farro semen, Two Rivers

decided to switch to another bull. Of the 64

heifers that were artificially inseminated with

Farro semen, 22 calves were born alive. Four of

the Farro calves were stillborn and exhibited the

genetic abnormality known as syndactylism.

Syndactylism is a genetic abnormality that

can only appear when both the sire and the dam

are carriers of the recessive gene. Therefore,

Farro, as well as several of the heifers purchased

by Two Rivers, were carriers. Syndactylism is

exhibited by the fusion or nondivision of the

functional digits of one or more feet of a cow.

It is a hereditary genetic trait traced to the

recessive gene. It is virtually impossible to

detect the existence of a recessive genetic

trait such as syndactylism until it is manifested

by the union of two carriers of this recessive

gene.

Two Rivers commenced this lawsuit on

February 26, 1976, seeking two elements of

damages in the amount of $52,900.00. This

included the loss of the value of the stillborn

calves and loss of the prospective market value

A-6

of the entire herd. The trial commenced on

October 20, 1977, in the United States District

Court for the Eastern District of Texas. On

October 24, 1977, a verdict was entered in

favor of Two Rivers assessing damages of

$52,900.00 against Curtiss. Curtiss now appeals

claiming that (1) the law of strict liability

cannot be applied to this fact situation which

involves a claim for economic loss and (2) any

implied warranties were properly disclaimed. We

agree with Curtiss and accordingly reverse the

decision of the district court.

TYPES OF LOSS

The critical question presented in this

case is whether Two Rivers is entitled to

an award of damages pursuant to section 402A

of the Restatement (Second) of Torts, the

implied warranties of the Uniform Commercial

Code, or under both theories. To analyze this

issue, it is necessary to distinguish the four

types of property loss which are recognized in

Texas. A different legal analysis attaches to

each type of loss.

The first type of loss involves personal

injury to the user (or consumer) or physical

injury to the property of the user (or consumer).

It is specifically covered by the language of

section 402A of the Restatement (Second) of

Torts which states that:

(1) One who sells any product in a

defective condition unreasonably dangerous

to the user or consumer or to his pro-

perty is subject to liability for phy-

sical harm thereby caused to the ultimate

user or consumer, or to his property, if

(a) the seller is engaged in the busi-

ness of selling such a product, and

(b) it is expected to and does reach

the user or consumer without substantial

change in the condition in which it is

sold.

_ PREVIOUS PAGE WAS BLANK |

A-7

(2) The rule stated in Subsection (1)

applies although

(a) the seller has exercised all possi-

ble care in the preparation and sale of

his product, and

(b) the user or consumer has not

bought the product from or entered into

any contractual relation with the seller.

Restatement (Second) of Torts § 402A (1965)

(emphasis added). Texas courts adopted the

language of section 402A in 1967 and have applied

strict liability to the case of personal injuries

resulting from unreasonably dangerous products,

Turner v. General Motors Corp., 584 S.W.2d 844

(Tex.1979); Bristol-Myers Company v. Gonzales,

561 S.W.2d 801 (Tex.1978); General Motors Corp.

v. Hopkins, 548 S.W.2d 344 (Tex.1977); Rourke

v. Garza, 530 S.W.2d 794 (Tex.1975); Crocker

v. Winthrop Laboratories, Inc., 514 S.W.2d 429

(Tex.1974); Darryl v. Ford Motor Company, 440

S.W.2d 630 (Tex.1969); McKisson v. Sales Affli-

ates, Inc., 416 S.W.2d 787 (Tex.1967); Shamrock

Fuel & Oil Sales Co. v. Tunks, 416 S.W.2d 779

(Tex.1967), as well as to physical injuries to

a consumer's property other than the product

caused by a defective product. Signal Oil and

Gas Co. v. Universal Oil Products, 572 S.W.2d

(Tex.1978); O.M. Franklin Serum Co. v. C.A.

Hoover & Son, 418 S.W.2d 482 (Tex.1967); Tide

Products, Inc. v. Browning, 493 S.W.2d 654

(Tex.Civ.App.--Amarillo 1973, no writ); FMC

Corp. v. Burns, 444 S.W.2d 315 (Tex.Civ. App.--

San Antonio 1969, no writ).

The second type of loss, on the complete

opposite end of the spectrum, can be classified

as economic loss resulting from a product with

defective workmanship or materials. This category

of loss was examined in Nobility Homes of Texas

v. Shivers, 557 S.W.2d 77 (Tex.1977), where an

individual who purchased a mobile home sought to

recover damages for economic loss suffered as

A-8

the result of defects in the product. The

mobile home was negligently constructed and

was not fit for the purposes for which it was

sold. The consumer was awarded $8,750 as the

difference between the purchase price and the

market value of the mobile home for his economic

loss.

(1) The court held in Nobility Homes that an

individual may not recover for economic loss

under section 402A. The court stated that an

individual must instead seek damages under the

implied warranties of the Uniform Commercial

Code and the theory of common law negligence.

Strict liability was not extended to instances

of economic loss because the distinction that

exists between physical damage and commercial

loss had to be recognized. The Uniform Com-

mercial Code and the theory of common law neg-

ligence. Strict liability was not extended to

instances of economic loss because the distinc-

tion that exists between physical damage and

commercial loss had to be recognized. The Uni-

form Commercial Code governs the case of a mere

loss of value resulting from the failure of the

product to perform according to the contractual

bargain and the expectations of the consumer.

A third type of loss consists of "eco-

nomic loss to the purchased product itself."

Mid Continent Aircraft Corp. v. Curry County

Spraying Service, 572 S.W.2d 308 (Tex.1978).

In Mid Continent Aircraft, plaintiff sought

damages for physical injury to an airplane

(damage to fuselage and wings) and for loss of

its use value when it made a forced landing be-

cause an individual negligently failed to install

a crankshaft gear bolt lock plate. Noting that

the explicit language of section 402A applied

only to physical harm to a person or his other

property, the court stated that in a commercial

sale, strict liability should not be extended

to cover a loss resulting from damage to the

A-9

product itself. The court stated that "when

no physical injury has occurred to persons or

other property, injury to the defective product

itself is an economic loss governed by the

Uniform Commercial Code." 572 S.W.2d at 313.

This is because the damage to the product is

merely a loss to the purchaser of the benefit

of the bargain with the seller.

(2) The fourth type of loss is a hybrid

involving physical harm to a plaintiff's other

property as well as to the product itself.

This fact pattern was presented in Signal Oil

where a defective isomax reactor charge heater

exploded. The explosion and ensuing fire at

Signal Oil's Houston refinery destroyed not only

the heater, but also a significant portion of

the refinery (other property). It is clear

that the damage to the refinery presents a strict

liability cause of action under section 402A

since a buyer is entitled to recover for damage

to his other property. But the court went even

further and held that:

(W)here such collateral property dam-

age exists in addition to damage to

the product itself, recovery for such

damages are recoverable under Section

402A of the Restatement (Second) of

Torts as damage to property or under

the Texas Business and Commerce Code,

Section 2.715, as consequential dam-

ages for a breach of an implied

warranty. To the extent that the

product itself has become part of

the accident risk or the tort by

causing collateral property damage,

it is properly considered as part of

the property damages, rather than as

economic loss.

572 S.W.2d at 325 (emphasis added). Therefore,

if both the product and other property are

damaged, a plaintiff has a cause of action

under strict liability and the U.C.C.

A-10

STRICT LIABILITY

Two Rivers asserts a cause of action based

on the doctrine of strict liability against

Curtiss, alleging that Curtiss sold a geneti-

cally defective product that was unreasonably

dangerous. Two Rivers sought damages for the

loss of the market value of the entire herd

and for the value of the four calves born with

syndactylism. In assesing Two Rivers' claim,

the herd of calves must be divided into two

groups: a group composed of those calves that

received a gene for syndactyl from Farro semen

(including the four syndactyl calves) and a

second group composed of those calves that were

not artificially inseminated with Farro semen.

Only 22 of the 98 calves born alive were

the product of Farro's semen. Two Rivers claims

that it is entitled to damages equal to the

reduction in the market value of the 76 non-

Farro calves (the second group) because of the

stigma caused by having as many as 22 carriers

in the herd.

(3) After an examination of the con-

trolling Texas case law, it is clear that Two

Rivers has not stated a cause of action under

Strict liability with respect to the second

group of calves. If anything, any damage in-

curred upon discovering and making publicly

known a latent physical defect in the herd of

one-half blood Chianina heifers purchased by

Two Rivers constitutes economic loss governed

by the rules of commercial law. A plaintiff

in Texas is precluded from recovering for

economic loss under strict liability.

First, it is obvious that this injury does

not come within either the first or fourth

category of loss, discussed supra, each of

which provides for recovery under the doctrine

of strict liability. There was obviously no

physical injury to any of the 76 calves merely

A-11

because the other 22 calves were artificially

inseminated with Farro semen. Second, a decrease

in market value can best be described as an

intangible commercial loss. Keeton, Private Law

Torts, 25 S.W.L.J. 1 (1971). The syndactyly gene

that some of these calves undoubtedly carry was

already present in Two Rivers’ original herd. The

crux of Two Rivers' complaint about the non-

Farro calves is that everyone now knows about

this potentially deleterious gene and that since

it is impossible to distinguish the carrier from

the non-carrier calves, the value of all the

calves is reduced. This loss in market value

due solely to the stigma of an accidentally

discovered defective gene is, if anything, a

commercial loss that is not cognizable in strict

liability.

With respect to the first group of calves

(artificially inseminated with Farro semen),

the question is much more difficult. These

calves were either born with a syndactyly gene

or were possible carriers of syndactylism. The

damage suffered by Two Rivers does not fit neat-

ly into any one of the four categories discussed

above.

On the one hand, it could be argued that

this case presents a situation merely involving

injury to the product itself. Therefore, it

would only involve economic loss governed by

Mid Continent and the U.C.C. At least some of

the product, Farro semen, carried the recessive

gene. This semen was used to fertilize ova

produced by Two Rivers’ herd, at least some of

which also carried the defective gene. As a

result, four of the calves born were syndactyl,

and some or perhaps all of the remaining

calves were carriers. Arguably, a calf is a

continuation of the product (bull semen) so

any damage was to the product itself and not to

any other property. Therefore this case would

be governed by Mid Continent and the U.C.C.

A-12

On the other hand, it could just as easily

be argued that the product (bull semen) is a

constituent part of a new product (the calf)

which is the other property. Because there is

damage to other property, Signal Oil would pro-

vide for recovery under the doctrine of strict

liability.

But Mid Continent and Signal Oil do not

fit the situation presented in this case. Both

of these cases deal with mechanical items in-

volving incorporation of parts into a whole.

They do not address the question presented in

this case where the product (bull semen) re-

acts with another product to create something

new through the biological process of mammalian

reproduction that is a continuation of both

products. In this case, once fertilization has

occurred, the products are inextricably inter-

woven. Unlike a defective crankshaft gear bolt

lock plate or isomax reactor charge heater that

may be replaced to cure the defect in the whole,

fertilization irrevocably prohibits replacement

of a component part to result in a satisfactory

whole. Mid Continent and Signal Oil are concerned

with mechanical items and the concept of a part

or a whole in a mechanical sense as opposed to

a biological sense. While they are helpful in

determining the reasoning of the Texas Supreme

Court, they are not dispositive of this case.

Because there are no Texas Supreme Court

cases on point dealing with the situation where

one product is biologically combined with

another to form, by a natural process, a con-

tinuation of those products, we must decide

whether the Texas Supreme Court would view this

case as one that should be governed by the

doctrine of strict liability or the rules of

commercial law. The theoretical bases and

policy rationale of contract law and strict

liability have been separated and firmly es-

tablished. Mid Continent, supra, 572 S.W.2d

A-13

at 311. The Texas Supreme Court noted the dis-

tinction in Nobility Homes when it quoted the

following language of Chief Justice Traynor:

The law of sales has been carefully arti-

culated 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.

AAKKKREKRK RK KK REAR KK

The distinction that the law has drawn

between tort recovery for physical in-

juries and warranty recovery for eco-

nomic loss is not arbitrary and does not

rest on the "luck" of one plaintiff in

having an accident causing physical in-

jury. The distinction rests, rather, on

an understanding of the nature of the

responsibility a manufacturer must under-

take 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.

577 S.W.2d at 77, quoting Seely v. White Motor

Co., 63 Cal.2d9,15,45 Cal. Rptr. 17,23,403

P2d 145, 151 (1965).

(4) This case is governed by the rules of

commercial law for two reasons. First, even if

the bull semen is considered to be defective, it

A-14

is not unreasonably dangerous. Second, the

Texas case law indicates that the policy ratio-

nale of contract law is to govern this situation.

A. Unreasonably Dangerous

As noted earlier, strict liability in Texas

has been defined to cover personal injuries and

physical injuries to a consumer's other property

caused by an unreasonably dangerous product.

The test for determining what is unreasonably

dangerous is different depending on whether the

case involves a flaw in a product or a design

defect. This case presents a flaw in the pro-

duct in that it was not improperly designed,

but it arrived in a state which did not comport

with its expected condition. Ina flaw ease,

"unreasonably dangerous" is defined in terms of

a consumer expectation test. Comment, Special

Project Texas Tort Law in Transition, 57 Texas

L.Rev. 381, 470-71 (1979). A product is "“un-

reasonably dangerous" when it is in a "defective

condition rendering it unsafe for its intended

use."" Metal Window Production Co. v. Magnusen,

485 S.W.2d 355 (Tex.Civ.App.--Houston (14th

Dist.) 1972, writ ref'd n.r.e.). A product is

"unfit for its intended use" when it is "danger-

ous to an extent beyond that which would have

been contemplated by the ordinary user with the

knowledge available to him as to the character-

istics of the product."

C.A. Hoover & Son v. O.M. Franklin Serum Co.,

444 S§.W.2d 596,597 (Tex.1969); see also Signal

Oil, 572 S.W.2d at 324 n.5 ("To be unreasonably

dangerous’ a product must be dangerous to an

extent beyond that which would be expected by

the ordinary petroleum refiner...... with the

ordinary knowledge common to the community of

petroleum refiners as to the characteristics

of such heaters.") V. Mueller & Co. v. Corley

570 S.W.2d 140, 145 (Tex.Civ.App.--Houston

(lst Dist.)1978, writ ref'd n.r.e.) (dangerous

A-15

"to an extent beyond that which would be con-

templated by the ordinary user.").

(5,6) In a diversity case, a federal

rather than a state test is applied to deter-

mine whether there is fufficient evidence to

create a jury question as to whether a product

is unreasonably dangerous. Reyes v. Wyeth

Laboratories, 498 F.2d 1264 (5th Cir. 1974);

see also Boeing v. Shipman, 411 F.2d 365 (5th

Cir. 1969). A federal appeallate court will

avoid usurping the function of the jury by

weighing evidence and judging credibility; our

function is limited to determining whether

there is a conflict in substantial evidence

sufficient to create a jury question. Borel v.

Fireboard Paper Products Corporation, 493 F.2d

1076 (5th Cir. 1973).

(7,8) Despite this stringent standard, we

must still find that the bull semen was not

unreasonably dangerous as a matter of law.

There is no evidence supporting plaintiff's

claim that the product was unreasonably danger-

ous in the light of the proper "consumer expec-

tation" test. The evidence showed that all bull

semen has the possibility of carrying recessive

genes. Two Rivers, as a cattle breeder, knew

this. But most importantly, the evidence

indicates that the "ordinary" cattle breeder

with the ordinary knowledge common to the

community of cattle breeders expects that the

bull semen will carry some recessive genes.

The industry custom is only to guarantee that

(1) the semen is from the correct bull, (2)

the bull is fertile, and (3) the semen will

impregnate a heifer. The custom is that the

risk of a genetic defect falls on the owner

of the herd. This is especially true in the

case of exotic breeds such as the Chianina.

While custom is not dispositive, it is indi-

cative of an ordinary consumer's expectations.

A-16

The evidence indicates that the presence

of recessive genes in bull semen is contem-

plated by the ordinary consumer with knowledge

of the product. All breeds possess genetic

defects and all bulls possess some recessive

genes. The testimony reveals that a cattle

breeder accepts the risk of any unknown genetic

defects and undiscovered abnormalities turning

up in the offspring. The evidence indicates

that the recessive gene carried by Farro was an

unknown and undiscovered genetic defect. As

soon as it was discovered, the Farro semen was

taken off the market.

(9) The evidence also revealed that

several calves exhibiting syndactylism were

stillborn. Each of the calves was the product

of Farro bull semen. Therefore, it can be

said that the evidence revealed the presence of

a genetic defect in the Farro semen. But this

is not evidence that the product is unreasonably

dangerous. It says nothing concerning the

contemplation of the ordinary consumer. It is

not enough to find a defect without also finding

that the defect is unreasonably dangerous. A

product that is dangerous or defective, but no

more dangerous than the ordinary consumer would

expect does not trigger liability under section

402A. Comment, Special Project at 465.

Two Rivers may not recover damages under

the doctrine of strict liability because the

bull semen, as a matter of law, was not un-

reasonably dangerous. Therefore, this case

must be governed by the doctrine of commercial

law. But even if the bull semen is deemed to

be unreasonably dangerous, this case is still

governed by the policy rationale of commercial

law.

B. Policy Rationale of Commercial Law

In Nobility Homes, the Texas Supreme Court

A-17

adopted the rule that economic loss resulting

from a product with defective workmanship and

materials only constituted a loss of value

caused by the failure of the product to perform

according to the contractual bargain. This re-

presented economic loss and was not recoverable

in strict liability. Strict liability was not

designed to govern every sale of a faulty pro-

duct. Mid Continent, 572 S.W.2d at 312. Com-

mercial law governs the case where the purchaser

has lost some of the benefit of his bargain.

This is clearly demonstrated in an anal-

ogous area involving the sale of seeds that are

of inferior quality and seeds that will not

germinate. Pyle v. Eastern Seed Co., 145 Tex,

385, 198 S.W.2d 562 1946; Burchfield v. Tanner,

142 Tex. 404, 178 S.W.2d 681 1944; Pioneer Hi-

Bred International, Inc. v. Talley, 493 S.W.2d

602 (Tex.Civ.App.--Amarillo 1973, no writ);

Asgrow Seed Co. v. Gulick, 420 S.W.2d 438 (Tex

Civ.App.--San Antonio 1967, writ ref'd n.r.e);

Hall v. Mosteller, 245 S.W.2d 338 (Tex.Civ.App.--

Austin 1951, writ ref'd n.r.e.); Dutch Mill

Gardens v. Grullemans & Sons, 238 S.W.2d 232

(Tex.Civ.App.--Galveston 1951, writ ref'd);

Texas Seed & Floral Co. v. Watson, 160 S.W.

659 (Tex.Civ.App.--Dallas 1913, no writ);

Browne v. Allen, 53 Tex.Civ.App. 458, 116 S.W.

133 (1909, no writ). Each of these cases in-

volving a natural process was decided on the

basis of commercial law. They indicate that

the Texas Supreme Court would apply commercial

law in this case that also involves a natural

process. In the seed cases a "defect" in the

seed resulted in a product that did not allow

the purchaser to receive all the benefits of

the bargain. The same can be said of this case

where the genetic defect in the semen meant

that Two Rivers did not receive all the benefits

of its bargain with Curtiss.

ae — Lee...

—

A-18

The seed case that most closely resembles

the fact situation presented here is Pioneer

Hi-Bred, supra. In Pioneer Hi-Bred, the plain-

tiff complained of defective corn seed. While

the "seeds planted well, came up to a good stand

and the corn grew until it was approximately

"knee-high,'" the plants then turned yellow and

failed to grow as uniformly as, or as tall as,

or to produce as much corn as the purchaser had

expected. The court stated that even if there

was sufficient evidence to show a causative

"defect" in the corn seed, any loss would be

regarded only as economic loss due to failure

of the product with respect to its own value.

While the seed was defective, the damage was to

the resulting corn plant. The same is true in

this case where the defect in the semen caused

injury to some of the resulting calves. The

court in Pioneer Hi-Bred found that the injury

to the corn was not "physical harm.....

caused to the ultimate user or consumer, or to

his property" within the language of section

402A. The same can be said in the case of the

injury to the calves. We choose to follow the

reasoning of the court in Pioneer Hi-Bred and

apply it to this case. The loss is deemed as

economic loss only. See also Texsun Feed Yards,

Inc. v. Ralston Purina Co., 447 F.2d 660 (5th

Cir. 1971) (this court applied the same rule to

cattle feed supplement where the defect caused

the supplement to be less effective than anti-

cipated).

The loss claimed by Two Rivers, represented

by the decrease in market value of the herd, can

best be described as an intangible commercial

loss. Keeton, Private Law Torts, 25 SW. L.J.

1 (1971). This description encompases (1) eco-

nomic losses generally measured by the cost of

repair or replacement, (2) losses measured by

the difference in market value of the product

without the defect and its value diminished by

its existing defective condition, (3) losses

rr ee ee oy

A-19

measured by the difference in value between what

is given and received, as well as (4) indirect or

consequential losses measured by a loss of profits.

Sales & Perdue, The Law of Strict Tort Liability in

Texas, 14 Hous.L.Rev. 1,144 (1977). Consistent

with this category of losses is a loss represented

by a reduction in the market value of a herd of

cattle caused by the stigma of a recessive gene.

This is a commercial loss that does not allow the

application of strict liability.

Essentially, Two Rivers is complaining, as

a purchaser of bull semen, that the product did

not fulfill its commercial expectations. Two

Rivers purchased the semen to artificially in-

seminate its half-blood heifers and to eventually

create a purebred Chianina herd. This goal can

still be achieved. The Farro semen had an accep-

table conception rate. The only problem is that

Two Rivers desired semen that was free of all

genetic abnormalities. The presence of the reces-

sive gene meant that the product did not fulfill

Two Rivers’ commercial expectations. The policy

reasons behind strict liability are simply not

compelling in the case of a disappointed buyer.

Id. at 149. Two Rivers’ case is even less com-

pelling than the situation presented in Nobility

Homes where the unfulfilled expectations made

the mobile home uninhabitable. At least in this

case, the semen performed according to the con-

tractual bargain. It merely possessed one un-

desirable characteristic that arguably caused a

loss of value.

The Farro bull semen satisfied Two Rivers'

business demands since it had a satisfactory

conception rate. It did not cause physical harm

to individuals or to Two Rivers’ dams or bulls.

Strict liability evolved to provide a remedy for

physical injuries. It was not designed to re-

place the U.C.C. in governing commercial trans-

actions. The damages claimed by Two Rivers are

A-20

not the type protected by the social policy of

Strict liability to protect consumers and dis-

tribute the costs to the consuming public. The

public need not be burdened with additional costs

because of a consumer's unfulfilled commercial

expectations. The socio-economic policy and

enterprise theory behind strict liability was

not designed to provide a remedy for a disap-

pointed buyer. Sales & Perdue, supra at 148-149.

This is a case of economic loss that must be

governed by commercial law.

IMPLIED WARRANTY

Because this case presents a situation

involving the principles of commercial law, the

provisions of the Uniform Commercial Code govern

the outcome. Nobility Homes, supra; Mid Con-

tinent, supra. The U.C.C. was designed to deal

with obligations imposed by law for commercial

losses and it provides both express and implied

warranties. Two Rivers does not claim that Cur-

tiss made an express warranty, but it does

contend that the judgment of the trial court may

be affirmed on the theory of breach of an implied

warranty.

(10,11) The U.C.C. provides for two

implied warranties including an implied war-

ranty of merchantability and an implied war-

ranty of fitness for a particular purpose.

An implied warranty of merchantability arises

from a merchant seller with respect to goods

of the kind that he normally sells. Tex.Bus.

& Comm. Code Ann. §2.314(Vernon 1968). For

goods to be merchantable, they must be fit for

the ordinary purposes for which the goods are

ordinarily used. Id § 2.314(b)(3). An implied

warranty of fitness for a particular purpose

arises when the seller, at the time of con-

tracting, has reason to know any particular

purpose for which the goods are required and

A-21

that the buyer is relying on the seller's

skill or judgment to select or furnish suit-

able goods. Tex.Bus.& Comm. Code Ann. § 2.315

(Vernon 1968).

(12) Because Curtiss is a merchant seller

dealing in buss semen, it impliedly warranted

that its goods would be fit for the ordinary

purposes for which they are ordinarily used.

After Nobility Homes, it is clear that this

warranty extends to Two Rivers despite the

absence of privity of contract between Curtiss

and Two Rivers. But Curtiss did not impliedly

warrant the fitness of the bull semen for a

particular purpose. Two Rivers did not rely on

Curtiss to select the particular semen involved

but relied on Tony Hall. Therefore, Two Rivers

must rely on the implied warranty of merchant-

ability to support a recovery of damages for

economic loss.

(13) Two Rivers pleaded and the trial

court found that Curtiss breached its implied

warranty of merchantability to Two Rivers by

distributing a product that was not fit for

the purpose of artificially inseminating cattle.

Without addressing the validity of this conclu-

sion, we find that this case may be decided on

the issue of disclaimer of warranty. To dis-

claim an implied warranty of merchantability,

the disclaimer must (1) mention the word mer-

chantability and (2) in the case of a writing,

must be conspicuous.

(14) Each sale from Curtiss to Hi-Pro

included a disclaimer of all warranties, ex-

press or implied, using the following language:

Notwithstanding the fact that artifi-

cial insemination is successfully em-

ployed in the breeding of livestock on

a worldwide basis and Curtiss customers

-,

A-22

for many years have achieved satisfac-

tory results, Curtiss Breeding Service,

a division of Searle Agriculture, Inc.,

and its agents or employees cannot

guarantee the conception rate, quality

or productivity to be obtained in con-

nection with the use of its products or

recommended techniques. Curtiss does

warrant that all semen sold will be

processed according to standards rec-

commended by the American Veterinary

Medical Association and adopted by the

National Association of Animal Breeders.

IT MAKES NO OTHER WARRANTY OF ANY KIND

AND HEREBY DISCLAIMS ALL WARRANTIES,

BOTH EXPRESS AND IMPLIED, OF MERCHANT-

ABILITY AND FITNESS FOR A PARTICULAR

PURPOSE.

Further, neither Curtiss Breeding

Service, nor any of its agents or em-

ployees, shall be responsible for any

injury or damage caused to persons,

animals or property through the negli-

gent use or handling of its’ products,

or for any damages or loss due to any

defects in the containers used in con-

nection therewith.

This language appeared in large type on the

back of each invoice Hi-Pro received from

Curtiss when it purchased bull semen. This

disclaimer was also conveyed from Curtiss,

through Hi-Pro, to Tony Hall when he purchased

the Farro semen. The same language was printed

on page two of the "1974 Curtiss Beef Breeding

Guide." The record indicated that Hall ex-

amined page two of the Guide and noticed the

conspicuous disclaimer of warranty.

(15) The only remaining question is

whether the disclaimer that was effective

against Hi-Pro and Hall could be extended to

Two Rivers. While Hall purchased the semen on

A-23

his own account, he did so for the benefit of

Two Rivers. Hall can not be considered a seller

of bull semen. The testimony reveals that Hall

merely had the semen billed to his account and

that he was later reimbursed by Two Rivers in

an amount equal to his cost. At least to this

extent, Hall was an agent of Two Rivers. Hall

also charged Two Rivers a nominal fee for the

services he performed. We hold that the relation-

ship between Hall and Two Rivers requires a

finding that the disclaimer effective against

Hi-Pro and Hall was also effective as to Two

Rivers. Cf. Sugarland Industries, Inc. v.

Falco, 360 S.W.2d 806 (Tex.Civ.App.--Waco 1962,

writ ref'd n.r.e.). Therefore, the implied

warranty of merchantability was properly dis-

claimed and Two Rivers is not entitled to

recover any damages.

We find additional support for the manner

in which Texas courts have analyzed this problem

from the Supreme Court of Oregon in Brown v.

Western Farmers Ass'n, 268 Or. 470,521 P.2d 537

(1974). In Brown, plaintiff sought to recover

damages based on strict liability for the loss

of eggs caused to taste bad, for loss of chic-

kens caused to become valueless and which had

to be replaced, for the cost of defective feed,

and for lost profits against a retailer of

chicken feed because the feed was defective.

While the Oregon Supreme Court did not reach the

question of economic loss, it held that an action

for damages by the purchaser of defective goods

brought on a theory of strict liability is

proper only when the defective goods are un-

reasonably dangerous to the user or his other

property. There was no showing that the feed

was unreasonably dangerous. As in this case,

strict liability could not be relied upon to

recover for a decrease in the value of property

or for other forms of economic loss.

In summary, in Texas the type of loss

presented in this case is governed by the U.C.C

A-24

and the law of warranty. But Curtiss success-

fully disclaimed any and all implied warranties

in this case. Therefore, the district court

incorrectly allowed Two Rivers to receive damages

based on the theories of strict liability and

breach of an implied warranty of merchantability.

REVERSED.

TATE, Circuit Judge, dissenting:

I respectfully dissent.

The majority's persuasive opinion is thought-

ful and scholarly. However, like the district

judge whom we reverse, my Erie guess is that, in

the particular configuration of facts before us,

the Texas courts would hold that strict liability

recovery is allowable.

As acknowledged by the majority, the chief

difficulty in the present legal characterization

of the "product," the "defect," and the "econo-

mic loss" arises from the nature of the present

product and its defect, unique in jurisprudence

to date concerning strict liability for product

defects. The "product" is commercially sold

semen, here used for artificial insemination of

the heifers in a fine heard of one hundred breeding

cattle. The "defect" in this product was a

recessive gene of syndactylism, a genetic abnor-

mality that results in the birth of deformed or

stillborn calves (when both dam and sire have

the recessive genes). All the calves sired by

Farro suffered damage from this recessive gene,

four dying stillborn and twenty-two becoming

carriers of the syndactylism gene. In my view,

my brothers of the majority improperly disallow

this damage as being purely an "economic loss,"

a loss of market value of the "product."

The damage to these calves, though partially

measured in terms of ‘toss of market value, is

not an "economic loss" in the technical sense

A-25

used in the Texas products liability cases. Tort-

recovery for physical damage to an automobile

caused by a third person's negligence could

similarly be described as an “economic loss,"

because such damage can be measured by the dif-

ference between the automobile's market value

before and after the tort-caused damage. More-

over, aside from any technical conceptual char-

acterization based solely on the measure of

damage, the judicial determination of strict

liability in tort should be based upon the nature

of the loss and upon whether recovery is appro-

priate in the light of the purposes of strict

liability for defective products. In my view, the

damage here suffered is appropriately recovered

under strict liability.

The majority valiantly struggles with the

three most recent Texas cases discussing strict

liability recovery for "economic loss" resulting

from a product's defect, Signal Oil and Gas. Co.

v. Universal Products, 572 S.W.2d 320 (Tex.1978);

Mid Continent Aircraft Corp. v. Curry County

Spraying Service, Inc., 572 S.W.2d 308 (Tex.1978);

Nobility Homes of Texas, Inc. v. Shivers, 557

S.W.2d 77 (Tex.1977), and admits that none of

these cases control the present circumstances.

However, my brothers of the majority conclude

that strict liability is not appropriate in

this case because they believe that the semen

was not unreasonably dangerous and that the

facts of this case do not fall within the policy

rationale of strict liability and the economic

loss cases. It is with these two conclusions

that I respectfully disagree.

To begin with, I believe that the majority

errs in determining that, as a matter of law,

the semen in this case was not unreasonably

dangerous. As stated in Reyes v. Wyeth Labora-

tories, 498 F.2d 1264, 1288 (5th Cir. 1974)

(italics ours), "As an appellate court, our

sole function is to ascertain whether there

is a rational basis in the record for the jury's

verdict, we are forbidden to usurp the function

A-26

of the jury by weighing the conflicting evidence

and inferences and then reaching our own conclu-

sion." I believe that the conclusion reached by

the jury has a rational basis.

Although the evidence indicates that pur-

chasers of bull semen are aware that there may be

some recessive genes, the jury was not compelled

to excuse the distributor from liability for

damage directly resulting from a defective gene

that essentially destroyed the value of the

calves for which the semen had been purchased.

Four of the calves died in their mothers' wombs,

and the calves that became carriers of the de-

fective gene lost all value except for purposes

of slaughter. |! This sort of fatal result is far

beyond any custom or consumer expectation. I

think that the majority errs in holding that

the jury was not, as a matter of law, entitled

to conclude that a genetic defect of this magni-

tude was unreasonably dangerous.

With respect to whether the damage suffered

by the calves in this case is recoverable under

strict liability as opposed to being simply an

"economic loss," I think that the most applicable

cases are Signal Oil and Gas Co. v. Universal

Products, Inc. 572 S.W.2d 320 (Tex.1978), and

C.A. Hoover and Son v. O. M. Franklin Serum

Company, 444 S.W.2d 596 (Tex. 1969). In Signal

Oil a defective heater (the product) exploded,

causing damage not only to itself but also to

the rest of the refinery (other property). There,

in upholding a products liability cause of action

for all damages thereby sustained, the Texas court

held that preducts liability recovery is avail-

able where "collateral property damage exists in

addition to damage to the product itself," 572

S.W.2d at 320. In my opinion, the semen should

be classified as the "product" and the defective

calves as "other property" that was damaged.

(Only by conceptualizing the "product" as both

the semen sold and the calves thereafter con-

A-27

ceived and nurtured in the heifers' wombs until

born months later, may the present facts be forced

into the Mid Continent formula so as to deny

recovery.)

Unlike the majority, I believe that analo-

gizing to the Signal Oil decision reaches a

result that is consistent with the policy behind

strict liability and the cases that have distin-

guished purely "economic loss" from other types

of damage. In the seed cases relied on by the

majority, the product simply failed to perform

as expected. In the instant case, however, as

in Signal Oil and C.A. Hoover, the defect in

the product has caused physical injury to the

other property of the purchaser. In the instant

case the injury is no less a "physical injury"

because produced by the injection of recessive

genes than if, instead, permanent injury to the

calves has been caused by the injection of

defective serum, as in C. A. Hoover.

The real issue, as the majority remarks in

closing, is whether this type of damage should

be borne by the consumer (as merely his un-

fulfilled commercial expectation), or should

instead be borne by the distributor of a product

presenting an unreasonably dangerous risk of

injury to the property of others (in order to

protect individual consumers from unwarranted

loss and to spread the risk among the consuming

public). The issue is close, but in my view

the Texas Supreme court, more likely than not,

would allow products liability recovery in this

case, and hold that the distributor of this

defective semen is strictly liable for the damages

it caused.

Therefore, I would allow products liability

recovery at least che damages resulting from

(a) the loss of the four calves stillborn due

to Farro's unreasonably dangerous semen and (b)

A-28

the loss in value of the 22 calves due to their

being born afflicted by the defect resulting

from such semen. Accordingly, I respectfully

dissent.

A-29

FOOTNOTES

John Davenport, owner of Two Rivers, testi-

fied that the difference in the value between

a heifer used for breeding ($750) and one

sold for slaughter ($125) is approximately

$625. In the case of a bull, the difference

is approximately $375 ($500 for breeding

less $125 for slaughter). Two Rivers claims

that it is entitled to damages for calves born

in the first crop as well as in the second

crop, even though no calves were born with

syndactylism in the second crop, because they

claim that the stigma of syndactylism attaches

to the entire herd. The total amount sought

as damages of $52,900 is computed as follows:

FIRST CROP

Healthy Caives

Heifers (38 x $625) $23,750

Bulls (30 x $375) 11,250

Syndactyl Calves

Heifers (3 x $750) 2,250

Bulls (1 x $500) 500

SECOND CROP

Healthy Calves

Heifers (16 x $625) 10,.000

Bulls (14 x $375) 5,250

53,000

MATHEMATICAL ERROR (100)

TOTAL DAMAGES SOUGHT $52,900

It is significant to note that only 22 of

the 98 calves born alive were sired by Farro,

but Two Rivers seeks damages for loss of

value to the entire herd, arguing that the

stigma of syndactylism attaches to the

entire herd.

. The Texas Supreme Court in Nobility Homes

adonted in a footnote the following defi-

Dl.

D2.

D3.

of economic loss:

Direct economic loss may be said to

encompass damage based on insufficient

product value, thus, direct economic

loss may be "out of pocket"--the differ-

ence in value between what is given and

received--or "loss of bargain''--the

difference between the value of what is

received and its value as represented.

Direct economic loss also may be measured

by costs of replacement and repair.

Consequential economic loss includes

all indirect loss, such as loss of

profits resulting from inability to make

use of the defective product.

577 S.W.2d at 78,n.1 quoting Note, Economic

Loss in Products Liability Jurisprudence,

66 Colum L.Rev. 917 (1966).

The district court in this case defined unrea-

sonably dangerous to mean "some feature of

the product threatens harm to the property of

the users to the extent that such product would

not be placed in the channels of commerce by

a prudent seller or distributor aware of the

risk involved in its use or to the extent that

the product would not meet the reasonable

expectations of the ordinary user as to safety

to the users property." This dual standard

encompasses not only the consumer expectations

test but also the prudent manufacturer test.

As noted in footnote 1 of the majority opinion,

the value of the female calves that became

carriers was reduced from $725 to $125.

In C.A. Hoover strict liability tort recovery

was allowed when impure serum caused death and

permanent injuries to calves.

See note 2, supra.

A-3]

United States Court of Appeals

Fifth Circuit

Office of the Clerk

October 6, 1980

TO ALL PARTIES LISTED BELOW:

NO. 78-1014 - TWO RIVERS CO. V. CURTISS

BREEDING SERVICE, ETC., ET AL.

Dear Counsel:

This is to advise that an order has this day been

entered denying the petition( ) for rehearing, and

no member of the panel nor Judge in regular active

service on the Court having requested that the

Court be polled on rehearing en banc (Rule 35,

Federal Rules of Appellate Procedure; Local Fifth

Circuit Rule 16) the petition( ) for rehearing

en banc has also been denied.

See Rule 41, Federal Rules of Appellate Procedure

for issuance and stay of the mandate.

Very truly yours,

GILBERT F. GANUCHEAU, Clerk

By Sally Hayward

Deputy Clerk

' ec: Mr. David S. Kidder

Mr. George L. McWilliams