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In a ruling that significantly expands the scope of the economic loss doctrine, a federal appeals court has ruled that a consumer class action that accuses a car manufacturer of knowingly selling thousands of defective vehicles cannot include tort claims for fraud and unfair trade practices. In Werwinski v. Ford Motor Co., the 3rd U.S. Circuit Court of Appeals rejected the argument that the economic loss doctrine should be limited to transactions between commercial enterprises. Instead, the unanimous three-judge panel held that the doctrine extends to transactions between manufacturers and individual consumers as well. The court also refused to carve out an exception for claims for intentional fraud. “The economic loss doctrine is designed to place a check on limitless liability for manufacturers and establish clear boundaries between tort and contract law. Carving out an exception for intentional fraud would eliminate that check on liability and blur the boundaries between the two areas of law, thus exposing manufacturers to substantially greater liability,” Senior 3rd Circuit Judge Morton I. Greenberg wrote. The ruling upholds decisions by U.S. District Judge Ronald L. Buckwalter of the Eastern District of Pennsylvania that dismissed nearly all of the claims in a class action suit that accused Ford of knowingly selling thousands of cars with defective transmissions during the 1990-1995 model years. The suit alleged that Ford knew about the defective parts since at least 1991. It included claims for breach of express warranty, breach of implied warranty, fraudulent concealment, and violations of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law. According to the suit, the transmissions contained two defective parts — aluminum (rather than steel) forward clutch pistons that allegedly cracked prematurely, and inadequately lubricated planetary gears. The eight plaintiffs claimed that both defects caused transmission failures, including “sudden acceleration, delayed forward or reverse engagement, sudden shifts into reverse, and a total loss of acceleration or forward movement.” The plaintiffs’ lawyers — Joseph C. Kohn, Martin J. D’Urso, David J. Cohen, Diana Liberto and Hilary Cohen of Kohn, Swift & Graf — argued that Ford’s technical service bulletins showed the company knew about the clutch defects since at least 1991, and that it redesigned the part twice before switching to steel. Despite its awareness of the malfunctioning components, the suit said, Ford never warned the overwhelming majority of car owners about the transmission defects. Instead, the suit said, Ford not only concealed the information from consumers as it continued to market and sell automobiles with defective transmissions, but also cut its warranty from a 6-year/60,000-mile power train warranty for its 1991 models to a 3-year/36,000-mile warranty for its 1992 models. After Ford removed the suit to U.S. District Court, it moved for dismissal of the fraudulent concealment and UTPCPL claims under the economic loss doctrine. Judge Buckwalter agreed, saying “recovery in tort is barred in product liability actions between commercial enterprises where the only damage alleged is to the product itself, even if the defect posed a potential risk of injury.” On appeal, the plaintiffs’ team argued that Buckwalter should have sent the case back to the state courts since none of the individual plaintiffs had a claim that came close to meeting the federal $75,000 minimum since the complaint requests compensatory damages only for the costs of repairing or replacing the defective transmissions, which range from $848 to $2,434. Judge Greenberg disagreed, saying the suit originally demanded that Ford disgorge its “ill-gotten profits” or be held responsible for “all or part of the sums [appellants] paid to purchase or lease [their] automobiles.” And since the suit also asked for punitive damages, Greenberg found that Buckwalter was correct in holding that a jury could return a verdict for more than $75,000. As a result, Greenberg found that the plaintiffs’ pledges to limit their claims to the costs of repairs was legally irrelevant. “The amount in controversy must be calculated based on a ‘reasonable reading’ of the complaint, and a plaintiff’s stipulation subsequent to removal as to the amount in controversy or the types of relief sought is of ‘no legal significance’ to the court’s determination,” Greenberg wrote. Greenberg also found that Buckwalter had correctly predicted how the Pennsylvania Supreme Court would rule on two questions relating to the application of the economic loss doctrine. The economic loss doctrine prohibits plaintiffs from recovering in tort economic losses to which their entitlement flows only from a contract. Greenberg found that the U.S. Supreme Court has applied the doctrine and explained that the need for a remedy in tort is reduced when the only injury is to the product itself and “the product has not met the customer’s expectations.” The justices held that in such a situation, express and implied warranties under contract law are best suited to compensate for a loss in product value. Although the Pennsylvania Supreme Court has not ruled on the viability of the economic loss doctrine, Greenberg found that an en banc panel of the Pennsylvania Superior Court adopted the doctrine in REM Coal Co. v. Clark Equipment Co. Since then, Greenberg said, the Superior Court has extended the doctrine to apply not only to commercial entities, but also to individuals. The plaintiffs’ team urged the 3rd Circuit to limit the doctrine, arguing that the Superior Court’s extension to individuals was in conflict with that court’s own case law which had previously limited it to commercial entities. But Greenberg found that the doctrine was never truly limited and that applying it to individuals made perfect sense. “To differentiate between ordinary consumers and commercial entities would prove to be difficult to apply in practice,” Greenberg wrote. “Businesses purchasing automobiles — or any mass-produced product, for that matter — may have no greater ability to negotiate the specific terms of a warranty than ordinary consumers,” he wrote. The level of sophistication of a plaintiff, he said, “cannot be assumed simply because it is a business or corporation as distinguished from an individual consumer.” Greenberg was joined by 3rd Circuit Judge Anthony J. Scirica and visiting 8th Circuit Senior Judge Myron H. Bright. Ford was represented in the appeal by attorneys Srikanth Srinivasan, Lynn E. Parseghian, Brian C. Anderson and Martha Dye of O’Melveny & Myers in Washington, D.C., along with Robert Toland II of Campbell Campbell Edwards & Conroy in Wayne, Pa. Attorneys Christopher Scott D’Angelo and Janelle E. Fulton of Montgomery, McCracken, Walker & Rhoads filed a friend-of-the-court brief on behalf of the Product Liability Council Inc.

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