Contract Law
Torts
Economic Loss Doctrine
Fraud in the Inducement
Misrepresentation
Common Law
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Unfair Competition
Consumer Law
Commercial Purchaser
Wisconsin Law
All subsequent references to the Wisconsin statutes are to the 2015-16
version unless otherwise indicated.
Wisconsin Stat. § 100.18(1) provides:
No person, firm, corporation or association, or agent or employee
thereof, with intent to sell, distribute, increase the consumption of or in any
wise dispose of any real estate, merchandise, securities, employment, service,
or anything offered by such person, firm, corporation or association, or agent
or employee thereof, directly or indirectly, to the public for sale, hire, use
or other distribution, or with intent to induce the public in any manner to
enter into any contract or obligation relating to the purchase, sale, hire, use
or lease of any real estate, merchandise, securities, employment or service,
shall make, publish, disseminate, circulate, or place before the public, or
cause, directly or indirectly, to be made, published, disseminated, circulated,
or placed before the public, in this state, in a newspaper, magazine or other
publication, or in the form of a book, notice, handbill, poster, bill,
circular, pamphlet, letter, sign, placard, card, label, or over any radio or
television station, or in any other way similar or dissimilar to the foregoing,
an advertisement, announcement, statement or representation of any kind to the
public relating to such purchase, sale, hire, use or lease of such real estate,
merchandise, securities, service or employment or to the terms or conditions
thereof, which advertisement, announcement, statement or representation
contains any assertion, representation or statement of fact which is untrue,
deceptive or misleading.
(This section is part of Wisconsin's Deceptive Trade Practices Act, the
purpose of which is "to protect consumers from untrue, deceptive or
misleading representations to promote the sale of a product." Bonn v. Haubrich, 123 Wis. 2d 168, 173, 366 N.W.2d 503
(Ct. App. 1985). It is also intended "to deter
sellers from making false and misleading representations in order to protect
the public." Novell v. Migliaccio, 2008 WI 44, ¶30, 309 Wis. 2d 132, 749
N.W.2d 544).
Hinrichs developed a product called JeeTops, which he manufactures and
installs through his company, Autovation Limited. He obtained a patent for the
JeeTops in 2010.
JeeTops are acrylic skylights installed aftermarket in the roofs of Jeep
Wrangler vehicles equipped with a certain type of hardtop. The complaint
describes the JeeTops as giving "front- seat passengers unparalleled views
of the outdoors" and rear-seat passengers "unprecedented panoramic
views." After installation, "the cumulative effect is to give the
Wrangler's occupants the sensation of directly experiencing the environment
through which they are driving."
Installation of JeeTops is accomplished using an adhesive manufactured
by Dow. The adhesive performs a dual role, attaching the JeeTops to the
existing Jeep and maintaining a watertight seal.
(…) Hinrichs relayed to Dow that customers were experiencing cracks in
their JeeTops panels.
In examining Hinrichs' common law claims, we conclude that the
"fraud in the inducement" exception to the economic loss doctrine
does not apply to allow Hinrichs' common law claims to go forward because the
alleged misrepresentation is related to the quality and characteristics of the
product in question and is thus not extraneous to the contract. We further
conclude that the "other property" exception to the economic loss
doctrine does not apply to allow Hinrichs' common law claims to go forward
because the JeeTops and adhesive are components of an integrated system.
The economic loss doctrine is a judicially created doctrine with three
primary purposes. Van Lare v. Vogt, Inc., 2004 WI 110, ¶17, 274 Wis. 2d 631,
683 N.W.2d 46 (citing Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis.
2d 395, 403, 573 N.W.2d 842 (1998)). First, the doctrine exists to
"maintain the fundamental distinction between tort law and contract law .
. . ." Id. Second, it protects "commercial parties' freedom to
allocate economic risk by contract . . . ." Id. Third, the doctrine
encourages "the party best situated to assess the risk of economic loss,
the commercial purchaser, to assume, allocate, or insure against that
risk." Id. The doctrine has been part of our jurisprudence since it was
first adopted by this court in Sunnyslope Grading, Inc. v. Miller, Bradford and
Risberg, Inc., 148 Wis. 2d 910, 437 N.W.2d 213 (1989).
We have described the economic loss doctrine as holding that "a
commercial purchaser of a product cannot recover solely economic losses from
the manufacturer under negligence or strict liability theories . . . ."
Van Lare, 274 Wis. 2d 631, ¶18. "Economic loss" in the context of the
doctrine is defined as "the loss in a product's value which occurs because
the product is 'inferior in quality and does not work for the general purposes
for which it was manufactured and sold.'" Insurance Co. of N. Am., 276
Wis. 2d 361, ¶23 (quoting Wausau Tile, Inc. v. Cty. Concrete Corp., 226 Wis. 2d
235, 246, 593 N.W.2d 445 (1999)). Both direct and consequential economic loss
are encompassed within this definition. Daanen & Janssen, Inc., 216 Wis. 2d
at 401.
The upshot of the economic loss doctrine is that it "requires
transacting parties in Wisconsin to pursue only their contractual remedies when
asserting an economic loss claim, in order to preserve the distinction between
contract and tort." Ins. Co. of N. Am., 276 Wis. 2d 361, ¶24 (quoting
Digicorp, Inc. v. Ameritech Corp., 2003 WI 54, ¶34, 262 Wis. 2d 32, 662 N.W.2d
652).
It "precludes parties under certain circumstances from eschewing
the more limited contract remedies and seeking tort remedies." Id.
We have recognized several exceptions to the economic loss doctrine, two
of which are at issue here. See John J. Laubmeier, Demystifying Wisconsin's
Economic Loss Doctrine, 2005 Wis. L. Rev. 225, 228 (2005). First, we address
the "fraud in the inducement" exception. Subsequently, we turn to the
"other property" exception.
This court has recognized "a narrow fraud in the inducement
exception" to the economic loss doctrine. Kaloti Enters., Inc. v. Kellogg
Sales Co., 2005 WI 111, ¶42, 283 Wis. 2d 555, 699 N.W.2d 205. We have
emphasized the limited nature of this exception. See id.
Fraud in the inducement presents a special situation where parties to a
contract appear to negotiate freely— —which normally would constitute grounds
for invoking the economic loss doctrine——but where in fact the ability of one
party to negotiate fair terms and make an informed decision is undermined by
the other party's fraudulent behavior.
Huron Tool and Eng'g Co. v. Precision Consulting Servs., Inc., 532
N.W.2d 541, 545 (Mich. Ct. App. 1995).
Pursuant to this exception, "a fraud in the inducement claim is not
barred by the economic loss doctrine where the fraud is extraneous to, rather
than interwoven with, the contract." Kaloti Enters., 283 Wis. 2d 555, ¶42
(citations and internal quotation omitted). To invoke the "fraud in the
inducement" exception, a plaintiff must demonstrate three elements: (1)
that the defendant engaged in an intentional misrepresentation; (2) that the
misrepresentation occurred before the contract was formed; and (3) that the
alleged misrepresentation was extraneous to the contract. Id. Stating the third
element differently, the misrepresentation must "concern matters whose
risk and responsibility did not relate to the quality or the characteristics of
the goods for which the parties contracted or otherwise involved performance of
the contract." Id.
A misrepresentation relates to the quality or characteristics of the
goods sold if it is expressly dealt with in the contract's terms. Id., ¶43. If
not addressed explicitly in the contract, a misrepresentation is still related
to the quality or characteristics of the goods sold, precluding the application
of the "fraud in the inducement" exception, if the misrepresentation
informs the reasonable expectations of the parties to the risk of loss in the
event the goods purchased did not meet the purchaser's expectations. Id.
Hinrichs urges us to apply the "fraud in the inducement"
exception here to preclude application of the economic loss doctrine. He
contends that his prior purchases of adhesive from Dow do not preclude a claim
where a subsequent purchase is induced by a misrepresentation.
We disagree with Hinrichs. His argument ignores a fatal shortcoming:
that the alleged misrepresentation regarding the effectiveness of Dow's
adhesive is related to the quality and characteristics of the product in
question and is thus not extraneous to the contract. As the court of appeals
correctly stated, "whether the Dow adhesive was properly functioning on
the acrylic used in JeeTops directly relates to its quality and
characteristics——in particular its ability to maintain a water- tight seal,
which was one of its main functions." Hinrichs, No. 2017AP2361,
unpublished slip op., ¶14. Hinrichs therefore cannot fulfill the third necessary
element for application of the "fraud in the inducement" exception.
Therefore, we conclude that the "fraud in the inducement"
exception to the economic loss doctrine does not apply to allow Hinrichs'
common law misrepresentation claims to go forward because the alleged
misrepresentation is related to the quality and characteristics of the product
in question and is thus not extraneous to the contract.
We turn now to the "other property" exception to the economic
loss doctrine. Pursuant to this exception, the economic loss doctrine
"does not bar a commercial purchaser's claims based on personal injury or
damage to property other than the product, or economic loss claims that are
alleged in combination with noneconomic losses." Daanen & Janssen,
Inc., 216 Wis. 2d at 402; Grams v. Milk Products, Inc., 2005 WI 112, ¶24, 283
Wis. 2d 511, 699 N.W.2d 167. In other words, the economic loss doctrine bars
"the recovery of purely economic losses in consumer transactions through
tort remedies where the only damage is to the product purchased by the
consumer." State Farm Fire and Cas. Co. v. Hague Quality Water, Int'l,
2013 WI App 10, ¶6, 345 Wis. 2d 741, 826 N.W.2d 412 (citing State Farm Mut.
Auto. Ins. Co. v. Ford Motor Co., 225 Wis. 2d 305, 341, 348, 592 N.W.2d 201
(1999)).
To determine whether the "other property" exception applies,
we apply a two part test. Id. First, we consider whether the defective product
and the damaged property are part of an "integrated system." Id., ¶7.
If the product and damaged property are part of such a system, then any damage
to that property is considered to be damage to the product itself. Id. That is,
"once a part becomes integrated into a completed product or system, the
entire product or system ceases to be 'other property' for purposes of the
economic loss doctrine." Selzer v. Brunsell
Bros., Ltd., 2002 WI App 232, ¶38, 257 Wis. 2d 809, 652 N.W.2d 806.
If the damaged property and the defective product are not part of an
integrated system, we then apply the second part of the "other
property" test——the "disappointed expectations" test. State Farm
Fire and Cas. Co., 345 Wis. 2d 741, ¶7. In doing so, we focus on the product's
expected function and whether the purchaser should have foreseen that the
product could cause the damage at issue. Id. When claimed damages are merely
the result of disappointed expectations of a product's performance, the
exception will not apply and the economic loss doctrine will bar recovery in
tort. Grams, 283 Wis. 2d 511, ¶3.
The court of appeals here concluded that the JeeTops and the adhesive
were components of an integrated system. Hinrichs, No. 2017AP2361, unpublished
slip op., ¶15. It reasoned that "they became components of an integrated
system once the adhesive was applied to bond the JeeTops to the motor vehicle.
At that point, they were integral parts of a greater whole and did not serve an
independent purpose." Id. Accordingly, the court of appeals concluded that
the "other property" exception did not apply. Id.
We agree with the court of appeals that the JeeTops and the adhesive
formed an integrated system.
Wis. 2d 235, provides a useful analogy. In that case, Wausau Tile
purchased cement from Medusa Corporation for use in manufacturing concrete
paving blocks. Id. at 241. Wausau Tile claimed that the concrete it received
from Medusa was defective and brought claims against Medusa sounding in both
contract and tort. Id. at 242.
This court determined that the economic loss doctrine barred Wausau
Tile's tort claims. Id. at 241. Rejecting Wausau Tile's argument that the
"other property" exception applies, this court reasoned that
"the pavers were integrated systems comprised of several component
materials, including Medusa's cement." Id. at 251. "Various substances incorporated into
finished products constitute integral components of those products."
Id.
Similarly here, when the adhesive joins a JeeTops to the body of a Jeep,
it creates an integrated system. An adhesive does not function on its own——its
basic purpose is to integrate two parts by adhering them together. Like the
court of appeals did, we see no relevant difference between the products here
and others that courts have determined to be components of an integrated
system, such as the cement in a concrete paving block in Wausau Tile, a window
in a house, a
gear in a printing press, a generator connected to a turbine, and a drive system in a helicopter.
(…) Wisconsin Stat. § 100.18 created a new cause of action, providing
"protection and remedies for false advertising that do not exist at common
law." Kailin, 252 Wis. 2d 676, ¶42; see also K & S Tool & Die
Corp. v. Perfection Mach. Sales, Inc., 2007 WI 70, ¶36, 301 Wis. 2d 109, 732
N.W.2d 792 (determining that "the legislature created a distinct cause of
action" pursuant to § 100.18). As the Kailin court stated, the policies
underlying the economic loss doctrine— —the allocation of risk and the
distinction between tort and contract law——are irrelevant to the legislature's
choice to provide a purely statutory cause of action and remedy by way of §
100.18. Kailin, 252 Wis. 2d 676, ¶42. A common law restriction like the
economic loss doctrine therefore does not apply to Hinrichs' statutory claim.
Therefore, we conclude that the economic loss doctrine does not serve as
a bar to claims made under Wis. Stat. § 100.18.
Following Automatic Merchandisers, Wisconsin courts have consistently
applied the "particular relationship" test in determining whether a
plaintiff is a member of "the public" for purposes of Wis. Stat. §
100.18(1). See, e.g., K & S Tool & Die Corp., 301 Wis. 2d 109, ¶27;
Kailin, 252 Wis. 2d 676, ¶44. The test provides that "a plaintiff remains
a member of 'the public' unless a particular relationship exists between him or
her and the defendant." K & S Tool & Die Corp., 301 Wis. 2d 109,
¶27. Whether such a relationship exists is a question of fact that depends on
the peculiar facts and circumstances of the case. Id., ¶¶27, 30 (citing Cawker
v. Meyer, 147 Wis. 320, 326, 133 N.W. 157 (1911)).
(…) We reaffirm that one person can be "the public" for
purposes of Wis. Stat. § 100.18(1) and decline Dow's invitation to overrule
Automatic Merchandisers.
(…) Whether Hinrichs and Dow were in a "particular
relationship" so as to remove Hinrichs from the realm of "the
public" pursuant to Wis. Stat. § 100.18(1) remains an open question to be
determined by the circuit court after further discovery.
Secondary sources: John S. Greene, Navigating
Wisconsin's Consumer Protection System, 90 Wis. Law. 22, 24 (Sept. 2017); see
also James D. Jeffries, Protection for Consumers Against Unfair and Deceptive
Business Practices in Wisconsin, 57 Marq. L. Rev. 559, 595-605 (1974); Mark R.
Hinkston, Protecting Consumers in the Modern Age: Wisconsin's Deceptive Trade
Practices Act, 81 Wis. Law. 14, 16 (Oct. 2008).
(Supreme Court of Wisconsin, January 9, 2020,
Chris Hinrichs and Autovation Limited, v. The Dow Chemical Company d/b/a Dow
Automotive, No. 2017AP2361, Review of Decision of the Court of Appeals,
Reported at 386 Wis. 2d 351, 927 N.W.2d 156)
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