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Recent State Supreme Court Rulings Could Impact Wisconsin Product Liability Law

August 01, 2005

In its recently ended term, the Wisconsin Supreme Court issued several opinions interpreting Wisconsin products liability law. Depending on how trial courts apply this recent authority, some of the rulings have the potential to change current Wisconsin product liability law in rather dramatic fashion. Among its rulings (all of which are discussed in more within this newsletter), the Wisconsin Supreme Court:

  • Expanded the application of the “risk-contribution” doctrine beyond its previous limitation only to cases in which plaintiffs alleged a rare form of cancer through use of the drug DES. The risk-contribution theory permits plaintiffs to sue an entire industry that manufactured a generic product for injuries that the plaintiff sustained from the product, even in the absence of any proof that a specific manufacturer created the product to which the plaintiff was exposed. In the case of Steven Thomas v. Clinton L. Mallett et al., the Court ruled that the risk-contribution theory applies to the white lead pigment industry.

  • Upheld Wisconsin’s 10-year statute of repose for improvements to real property against a constitutional challenge and applied the statute’s protection to permanent bleachers at a high school football field. In so doing, the Court reversed the Court of Appeals’ decision and reinstated the trial court’s summary judgment in favor of the company that sold the bleachers to the school in 1969. The Kohn v. Darlington Community Schools decision is the first time the Wisconsin Supreme Court has upheld Wisconsin’s 10-year statute of repose for improvements to real property, Wis. Stat. § 893.89, against a constitutional challenge. It also reaffirmed earlier cases regarding the test for what constitutes an “improvement to real property” under the statute. Now all parties who are protected by the statute for their role in improvements to real property, including, in many instances, product manufacturers, can rely on the statute’s protection.

  • Interpreted the “economic loss doctrine” expansively to bar plaintiffs from asserting tort claims where the plaintiff’s alleged damages result from the plaintiff’s disappointed expectations of a bargained-for product’s performance. In Grams v. Milk Products, Inc. and Linden v. Cascade Stone Company, Inc., the Court ruled that plaintiffs must pursue claims for purely economic loss, such as the malfunction or failure of a product, only through contractual remedies. And in Kaloti Enterprises, Inc. v. Kellogg Sales Company, the Court adopted a “narrow” exception to the economic loss doctrine where a plaintiff can show that it was fraudulently induced to enter into the transaction, the misrepresentation occurred before the contract was formed, and the fraud was extraneous to the contract.

  • Expanded the tort of intentional representation to impose on parties to business transactions – even arms-length transactions between sophisticated parties – a duty to disclose information where, under previous case law, no such duty existed. In Kaloti Enterprises, Inc. v. Kellogg Sales Company, the Court held that a duty to disclose a fact exists where: (1) the fact is material to the transaction; (2) the party with knowledge of the fact knows that the other party is about to enter into the transaction under a mistake as to that fact; (3) the fact is peculiarly and exclusively within the knowledge of one party, and the mistaken party could not reasonably be expected to discover it; and (4) on account of the objective circumstances, the mistaken party would reasonably expect disclosure of the fact.

Following are summaries of these recent Wisconsin Supreme Court decisions and how they may affect product liability actions in the future.

The Court Expands the Risk Contribution Doctrine
In a decision that may have wide impact on Wisconsin product liability law, the Wisconsin Supreme Court held that a plaintiff may sue virtually an entire raw material industry when he is unable to pinpoint which particular company may have produced the allegedly defective component part that he claims caused his injury.

In Stephen Thomas v. Clinton L. Mallett, et al., plaintiff Thomas is a teenager who claims that he suffered from an elevated blood lead level as an infant. He claims his elevated lead level was caused by ingestion of lead paint containing white lead pigment at two homes in Milwaukee. One home was constructed in 1900 and the other in 1905. When tested, both homes had many layers of lead paint at various locations throughout the homes.

Thomas’s claimed injuries consist of a number of mild learning disorders that are not uncommon in the general population. He first brought claims against his landlords, who have an absolute duty under Wisconsin law to abate lead paint hazards in rental property. Thomas settled with his landlords and from them received compensation of more than $300,000.

He then brought suit against several white lead pigment manufacturers, claiming that one or more of them were responsible for his elevated blood lead levels. His complaint did not assert claims based literally on the manufacture of paint. Instead, he sued several manufacturers because they or their alleged corporate predecessors made white lead pigment for use in interior house paint. Thomas admitted in his suit that he is unable to prove who manufactured the paint in the homes, what type of lead pigment was contained in the paint (there are multiple types of lead pigments), or when it was applied. Thomas’s lack of evidence to prove these three points doomed all of his common-law and statutory claims under the law as it existed at the time that he brought his lawsuit.

Because Thomas was unable to say who manufactured the white lead pigment that supposedly injured him, his complaint alleged a theory of collective liability called “risk contribution.” This theory was first adopted by the Wisconsin Supreme Court in 1982 in Collins v. Eli Lilly Co., where the plaintiff claimed she contracted a rare form of cancer due to in utero exposure to diethylstilbestrol (DES).

When the Wisconsin Supreme Court created the risk-contribution theory in Collins, it held that the theory could be applied in other cases that were factually similar to Collins. In the 22 years since Collins, however, Courts both inside and outside of Wisconsin consistently had rejected application of the risk-contribution theory (and similar theories from other jurisdictions) to lawsuits alleging injuries caused by all products other than DES.

In examining whether the risk-contribution theory of liability should be extended to injuries caused by paint with white lead pigment, the Court focused on the Wisconsin Constitution, which provides that: “Every person is entitled to a certain remedy in the laws for all injuries, or wrongs which he may receive in his person, property or character...” (Art. I, § 9.) The Court interpreted this provision as requiring not only that all injured persons have a remedy (recall that Thomas already had received more than $300,000 in settlement of other claims), but that they be given an adequate remedy. Where no adequate remedy exists, the Court held that the Wisconsin Constitution requires Courts to fashion a remedy.

Turning to the application of the risk-contribution theory to the facts of the case before it, the Thomas Court held that Thomas’ case could survive summary judgment because he had submitted evidence suggesting that: (1) the defendants all contributed to the risk of injury; (2) the defendants are in a better position to absorb the cost of the injury than is the plaintiff; and (3) white lead pigment is “fungible.” In defining fungibility, the Court refused to create a hard and fast rule, instead holding that “fungibility” requires consideration of whether the product (white lead pigment) was functionally interchangeable among the various defendants’ products; whether the white lead pigments in the various defendants’ products were “physically indistinguishable”; and whether they all posed the same uniformity of risk. The Court held that the plaintiff could proceed on his claims under both negligence and strict liability theories against all manufacturers, as modified by the risk-contribution theory. The Court refused to consider the defendants’ challenges to application of the risk-contribution theory based on a number of constitutional grounds, saying that those challenges were “not ripe” at the summary judgment stage. Two of the six justices (the seventh justice did not participate in the decision) wrote very strong dissents.

Thomas was a break from the unanimity of all previous jurisprudence, both in Wisconsin and nationwide, that had refused to apply the risk-contribution approach in any context other than DES litigation, including lawsuits against former lead pigment manufacturers. The Thomas decision is potentially quite hostile to manufacturers of products other than DES and white lead pigment, if Courts determine that the same rationale held in Thomas to justify extension of the risk-contribution theory to white lead pigment manufacturers also apply to manufacturers of other products.

It is likely that Thomas will provoke attempts by plaintiffs to convince Courts that their product liability claims should proceed under the risk-contribution theory and that the facts of their claims meet the Collins and Thomas criteria. Defendants must distinguish the facts of claims brought against them from the facts that the Collins and Thomas Courts held justified application of the risk-contribution theory to entire industries in those cases.

Based on the Thomas Court’s reasoning, the most likely ways to defeat application of the risk-contribution theory will be to show one or more of the following: the plaintiff has available an adequate remedy without application of the risk-contribution theory; there is not a long-standing history of knowledge of risks posed by the product at issue; any risks posed by the product are not industry-wide; the product is not “fungible”; and the plaintiff is in at least as good a position as the defendant to avoid the risk of injury.

Statute of Repose Upheld
In 1969, the Darlington Community School District (Darlington) entered into an agreement for installation of aluminum bleachers at Darlington High School’s football field. In 2000, more than 31 years after the bleachers were installed, Lori Kohn and her 4-year-old daughter Elaine attended the Darlington Redbirds homecoming football game. Elaine fell through the bleachers and sustained head injuries requiring surgery and resulting in nearly $50,000 in medical expenses. She has recovered fully from her injuries.

The Kohns sued Darlington and its insurer, claiming the school was negligent in its maintenance of the bleachers and had not fulfilled its obligations under Wisconsin’s Safe Place Statute. The Kohns also sued Illinois Tool Works (ITW), the corporate successor to the original bleacher manufacturer, alleging negligence and strict liability for the bleachers’ construction, design and installation. The Kohns made no allegation of material failure or defect.
ITW asserted, as an affirmative defense, that the bleachers were an “improvement to real property” subject to Wisconsin’s ten-year statute of repose applicable to such improvements, found at Wis. Stat. § 893.89 (Wisconsin has no statute of repose for products liability, and claims of material defect against manufacturers or producers of materials are specifically exempt from the statute’s protection).

When ITW moved for summary judgment, the plaintiffs opposed the motion on two grounds: (1) the case was a products liability case not subject to the statute of repose; and (2) the statute of repose was unconstitutional. The trial Court granted summary judgment, deciding that the bleachers were an improvement to real property subject to the statute of repose and that the statute of repose was constitutional. The Court of Appeals reversed, holding that the bleachers were not an improvement to real property; the Court of Appeals did not address the constitutional challenge.

ITW appealed the Court of Appeals’ decision and, in a 5-2 decision, the Supreme Court reversed the Court of Appeals and reinstated the summary judgment in ITW’s favor. In so doing, the Court specifically held: (1) the bleachers were an improvement to real property; (2) the statute of repose did not violate the “right to remedy” provision of Wisconsin’s Constitution; and (3) the statute did not violate the Equal Protection Clause.

Applying the standard laid out in earlier cases involving predecessors to Wis. Stat. § 893.89, and rejecting a “degree of physical annexation” analysis used by the Court of Appeals and the Kohns, the Supreme Court held that the bleachers at Darlington constituted an “improvement to real property” because they were a permanent addition to Darlington’s real property that enhanced its capital value, involved the expenditure of labor and money, and were designed to make the property more useful.

After putting the bleachers under the statute’s umbrella, the Court then rejected both of the Kohns’ constitutional challenges to the statute of repose. First, rejecting the plaintiffs’ “right to remedy” challenge, the Court noted that Article I, Section 9 confers no legal rights; the provision applies only when a prospective litigant seeks a remedy for an already existing right. When the legislature enacts a statute of repose, which by definition cuts off a right of action, it expressly chooses not to recognize rights after the conclusion of the repose period.

Finally, the Court rejected the equal protection challenge—an argument used twice before to invalidate Wis. Stat. § 893.89’s predecessors—holding that limiting long-term liability of those who improve real property was a legitimate policy objective and, most importantly, that the classifications in the statute were legitimately based on the conduct of certain individuals. That is, the protected classes are protected for their involvement in the improvement; the unprotected classes are so designated because of their post-improvement conduct (subsequent maintenance, operation or inspection) or, as noted above, pre-improvement conduct (manufacturing or producing materials). As the Court aptly put it, the statute “protects all persons involved in the improvement to real property but does not protect individuals whose liability arises based on conduct occurring prior to or subsequent to the improvement.”

The Kohn v. Darlington Community Schools decision is important for all parties who fall within the scope of the existing statute of repose for improvements to real property in Wisconsin, who now can rely on its protection. It also is particularly significant that the Court was, as it was with respect to the medical malpractice statute of repose, willing to recognize the Legislature’s right to put temporal limits on claims, notwithstanding the date of
their accrual.

However, the victory of those who furnish improvements to real property may have come at a price to landowners. Although the decision of the Supreme Court does not expressly so state, those who now possess and control those improvements may now be responsible for updating their safety features to conform to the state of the art.

The Court Expands the Economic Loss Doctrine
In two separate opinions released on the same date, the Wisconsin Supreme Court expanded the scope of the economic loss doctrine, which generally holds that purchasers of goods cannot sue a seller or manufacturer under a tort theory where the good is damaged or malfunctions; rather, purchasers are limited to contractual remedies.

In Grams v. Milk Products, Inc., the Court examined the scope of the economic loss doctrine and held that a plaintiff could not sue in tort where the claim is based on the plaintiff’s “disappointed expectations of a bargained-for product’s performance,” even where the product’s allegedly poor performance caused damage other than to the product itself. There, the plaintiffs alleged that a product known as “milk replacer” they had purchased from the defendant did not work properly because it failed to nourish the plaintiffs’ calves, as it was intended to do. The Court first held that such claims fell within the economic loss doctrine, stating that the doctrine applies where “claimed damages are the result of disappointed expectations of a bargained-for product’s performance.”

Next, the Court addressed the plaintiffs’ argument that the damage that they alleged was to a product (their calves) other than the product (the milk replacer) that was the subject of their tort claim and, therefore, that the “other product” exception to the economic loss doctrine prevented the Court from applying the doctrine to their tort claims. (Generally, the “other property” exception limits the economic loss doctrine’s application only to claims arising from damage caused to the product that the defendant produced, not to other products that might have been damaged by the failure of the product at issue.) The Court rejected that argument, reasoning that “[t]his bargain was not about milk replacer per se; it was about a product that would foster the healthy development and growth of young calves.” Thus, the Court refused to apply the “other property exception,” and held that the plaintiffs’ “disappointed expectations” in the performance of the milk replacer, and the resulting damage to their calves, was required to be resolved under their contractual remedies alone.

In Linden v. Cascade Stone Company, Inc., the Court examined a tort claim brought by homeowners against a subcontractor hired by the general contractor with whom the plaintiffs had contracted for the construction of their house. The plaintiffs sued both the general contractor and the subcontractors, alleging that the defendants’ negligence and poor workmanship had caused water to infiltrate their house, causing delays in the project, deterioration, mold, and deficient air quality. The plaintiffs settled their tort and contract claims against the general contractor and pursued their claims against the subcontractors. The trial Court granted the subcontractors’ motion for summary judgment, holding that the economic loss doctrine barred the plaintiffs’ claims. The plaintiffs argued on appeal that the doctrine should not apply because it only applies to goods, not services, and that the subcontractors’ work for them had been a service. As the plaintiffs pointed out, they did not have a contract with the subcontractors (whose only contractual relationship was with the general contractor) and so they did not have any contractual remedies.

In a 4-3 ruling, the Supreme Court rejected the plaintiffs’ arguments and held that the economic loss doctrine barred their claims. The Court noted that the economic loss doctrine is intended to maintain the fundamental distinction between tort and contract law; protect the parties’ freedom to allocate risk by contract; and encourage the purchaser – the party best situated to assess the risk of economic loss – to assume, allocate, or insure against that risk. Applying those principles, the Court held that failing to apply the economic loss doctrine would “allow the [plaintiffs] to make an end run around the contract for which [the parties] had bargained,” noting that even though the plaintiffs did not have contractual remedies against the subcontractors, they did have contractual remedies against the general contractor, which were the only contractual remedies for which the plaintiffs had bargained.

The Court also applied the “predominant purpose” test to determine whether the plaintiffs’ contract with the general contractor was primarily for the purchase of goods or services. Examining the “totality of the circumstances,” the Court concluded that the plaintiffs had bargained for the purchase of an entire house, rather than for specific services, and that the “predominant purpose” of the mixed contract was “for a product, a new house, rather than one
for services.”

Finally, the Court rejected the plaintiffs’ argument that the economic loss doctrine should not be applied because the damage complained of was to property (the house) other than the specific product and services that the subcontractor supplied, and the “other property” exception to the economic loss doctrine therefore barred the doctrine’s application. The Court held that where “the subcontractor mainly provided services that have no independent value or use apart from their function as components of the product into which they were incorporated,” the “integrated system limitation” defeated the “other property” exception to the economic loss doctrine.

Taken together, Grams and Linden represent continued expansion of the economic loss doctrine (as the dissents in both cases point out) to tort claims where a plaintiff might have resort to contractual remedies, even if the contract is not with the tort defendant, the property damaged is not limited to the product that the defendant supplied, and the defendant provided the plaintiff with services rather than a good.

The Court Restates the Formulation for the Tort of Intentional Misrepresentation
In a third opinion issued on the same day as Grams and Linden, the Wisconsin Supreme Court worked what appears to be a change in the law of intentional misrepresentation and, consequently, in the duty of parties to commercial transactions to disclose facts to one another. In Kaloti Enterprises, Inc. v. Kellogg Sales Company, the Court was presented with claims by a wholesaler (Kaloti) who alleged that the defendant (Kellogg) had engaged in a “practice of doing business” with Kaloti such that Kellogg was “aware that Kaloti bought Kellogg’s products to resell them ‘as a secondary supplier to large market stores.’” Kellogg later changed its practice and began to sell directly to the stores. The stores subsequently notified Kaloti that they would no longer purchase Kellogg products from Kaloti. Because this notification came only two weeks after Kaloti had negotiated with Kellogg to purchase a three-month supply of Kellogg products for $124,000, Kaloti sued Kellogg, claiming that the contract should be rescinded because Kellogg had intentionally concealed facts material to Kellogg’s change in marketing strategy, causing Kaloti to be shut out of the market for the sale of Kellogg products.

Kellogg raised two primary defenses to Kaloti’s claims. First, it argued that it could not be liable for intentional misrepresentation because in an arms-length commercial transaction between sophisticated parties, Wisconsin law does not impose a duty to disclose facts such as the ones that Kaloti claims were withheld. Second, Kellogg argued that even if a duty to disclose existed, the economic loss doctrine precluded Kaloti from bringing its claims.

In a break with previous authority, the Cout imposed a new standard for determining when a duty to disclose exists. Examining the duty of participants to a business transaction to disclose facts to one another, the Supreme Court held that a duty to disclose exists – even in an arms-length commercial transaction between sophisticated parties – where the following are present: (1) the fact is material to the transaction; (2) the party with knowledge of that fact knows that the other party is about to enter into the transaction under a mistake as to the fact; (3) the fact is peculiarly and exclusively within the knowledge of one party, and the mistaken party could not reasonably be expected to discovery it; and (4) on account of the objective circumstances, the mistaken party would reasonably expect disclosure of the fact.

Applying that standard to the facts of Kaloti’s claims, the Supreme Court found that Kaloti had stated a claim for intentional misrepresentation. The Court found that Kaloti’s complaint alleged that it would not have placed the most recent purchase order if it had known that Kellogg intended to sell directly to retailers; Kellogg knew that selling directly to retailers would deny Kaloti the market for Kellogg products that it had enjoyed for several years; the information that Kellogg would sell directly to retailers was not publicly disclosed and Kaloti could not reasonably have been expected to have discovered that fact; and, finally, Kaloti reasonably could expect that if Kellogg was going to sell its products directly to the same retailers that had, up to that point, purchased the same products from Kaloti, Kellogg would advise Kaloti of this.

Turning to Kellogg’s economic loss doctrine argument, the Court examined whether a “fraud in the inducement” exception applied to preclude application of the doctrine. The Court adopted a “narrow” formulation of that exception, holding that a Court will not apply the economic loss doctrine to bar the plaintiff’s tort claims if the plaintiff can establish: (1) all of the elements of an intentional misrepresentation claim; (2) that the fraud occurred before the contract was formed; and (3) that the fraud was extraneous to, rather than interwoven with, the contract. Examining the allegations in Kaloti’s complaint, the Court found that all three elements of the fraud in the inducement exception were met: the complaint stated a claim for intentional misrepresentation; the alleged fraud occurred before the purchase order was placed; and the fraud did not concern the performance of the contract or the quality of the goods for which the parties contracted but rather “concerned a matter whose risk was never contemplated to be a part of the contract to purchase Kellogg’s products.”

Thus, under Kaloti, the merits of an intentional misrepresentation claim will not turn on the nature of the relationship between the parties to a business transaction or on the existence of any previous disclosures or discussions by those parties on the same topic. Rather, the focus now is on the materiality of the facts at issue; the withholding party's knowledge of the potential effect of failing to disclose the facts to the opposing party; the opportunity for the allegedly defrauded party to learn the facts; and the injured party's reasonable expectations that the facts would be disclosed. Following Kaloti, participants in commercial transactions must carefully consider these factors when determining the scope of information to reveal to the party on the opposite side of the transaction.

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