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San Francisco—The California Supreme Court recently gave businesses a new incentive to be honest by ruling that they could be hit with punitive damages for fraudulently breaching contracts. The 6-1 decision affirms $6 million in punitive damages that Los Angeles jurors awarded Torrance, Calif.-based Robinson Helicopter Co. Inc. for faulty safety clutches built by the Dana Corp. of Toledo, Ohio. In the much-watched case, which drew powerful amici curiae on both sides, the majority found that Dana could be slapped with punitive damages because its fraudulent conduct was separate from breaching a contract. “But for Dana’s affirmative misrepresentations by supplying false certificates of conformance, Robinson would not have accepted delivery and used the non-conforming clutches over the course of several years, nor would it have incurred the cost of investigating the cause of the faulty clutches,” wrote Justice Janice Rogers Brown. A bad cure? In dissent, Justice Kathryn Mickle Werdegar accused the majority of prescribing “a cure worse than the disease.” “Today’s decision greatly enhances the ease with which every breach of contract claim can don tort clothes,” she wrote. “I fear that in doing so, it opens a Pandora’s box better left sealed.” Robinson sued Dana for intentionally concealing that its sprag clutches-parts that keep helicopter blades rotating through a loss of power-weren’t up to federal specifications. Robinson was awarded $1.5 million in compensatory damages, plus the punitive damages. The California 2d District Court of Appeal in Los Angeles reversed last year, finding that punitive damages weren’t permissible under the state’s economic loss rule, which prohibits tort damages in contractual disputes unless someone is physically injured. None of the helicopters with faulty parts crashed. In reversing, the California Supreme Court held that the economic loss rule doesn’t bar fraud claims if they are independent of the underlying breach. “Allowing Robinson’s claim for Dana’s affirmative misrepresentation discourages such practices in the future while encouraging a ‘business climate free of fraud and deceptive practices,’ ” Brown wrote. In a footnote addressing Werdegar’s dissent, Brown said that the economic loss rule was designed to limit liability in commercial activities that inadvertently go awry, “not to reward malefactors who affirmatively misrepresent and put people at risk.” Werdegar argued that the majority ruling “breathes new life” into bad-faith denial of a contract, a tort, she said, the high court had briefly recognized in the 1980s and 1990s. She agreed with Dana’s attorneys that allowing punitive damages would threaten the predictability of risk in commercial contracts. Dana’s attorney, Edwin Woodsome Jr., a partner in Orrick, Herrington & Sutcliffe’s Los Angeles office, had raised that argument in briefs and before the court. He was backed in court documents by several amici curiae, including Pacific Legal Foundation of Sacramento, Calif., and the L.A.-based Association of Southern California Defense Counsel. Robinson was backed by such groups as the Consumer Attorneys of California and the California State Association of Counties, which said the appeal court ruling would have put honest parties at a disadvantage. Woodsome could not be reached for comment. But Robinson’s attorney, Pacific Palisades, Calif., solo practitioner Edward Horowitz, called the ruling a “fair and equitable result.” “It just shows that California remains a leader in protecting against fraud in the marketplace,” he said. Horowitz also downplayed Werdegar’s concerns that the ruling would open a Pandora’s box. “The chance of the floodgates opening up is incredibly remote,” he said. “Fraud is hard to plead and prove.” The ruling is Robinson Helicopter v. Dana, No. 04 C.D.O.S. 11271.

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