High-Tech Sports Co.’s Warranty Claims Too Late Says Seventh Circuit (Newspin v. Arrow Electronics – Part I of II)

Newspin Sports, LLC v. Arrow Electronics, Inc., 2018 WL 6295272 (7th Cir. 2018), analyzes the goods-versus-services dichotomy under the Uniform Commercial Code (UCC) and how that difference informs the applicable statute of limitations.

The defendant supplied electronic sensor components for plaintiff’s use in its high-tech sports performance products.  Plaintiff sued when most of the parts were faulty and didn’t meet Plaintiff’s verbal and written requirements.  Plaintiff brought both contract- and tort-based claims against the Plaintiff.

The Breach of Contract Claims

The Seventh Circuit affirmed the dismissal of the contract claims on the basis they were time-barred under the UCC’s four-year limitations period for the sale of goods.

In Illinois, a breach of written contract claimant has ten years to sue measured from when its claim accrues. 735 ILCS 5/13-206.  A claim accrues when the breach occurs, regardless of the non-breaching party’s lack of knowledge of the breach.  For a contract involving the sale of “goods,” a shortened 4-year limitations period applies. 810 ILCS 5/2-102 (goods df.), 810 ILCS 5/2-725(2)(4-year limitations period).

With a mixed contract (an agreement involving the supply of goods and services), Illinois looks at the contract’s “predominant purpose” to determine whether the 10-year or the compressed 4-year limitations period governs.

To apply the predominant purpose test, the court looks at the contract terms and the proportion of goods to services provided for under the contract.  The court then decides whether the contract is mainly for goods with services being incidental or if its principally for services with goods being incidental.

Here, the Court noted the Agreement was a mixed bag: the defendant promised to provide both goods and services.  But various parts of the contract made it clear that the defendant was hired to first provide a prototype product and later, to furnish components pursuant to plaintiff’s purchase orders.  The court found that any services referenced in the agreement were purely tangential to the main thrust of the contract – defendant’s furnishing electronic sensors for plaintiff to attach to its client’s golf clubs.  Support for this finding lay in the fact that the Agreement set out specific quantity and price terms for the goods (the components) but did not so specify for the referenced assembly, manufacturing and procurement services.

Other Agreement features that led to the court ruling the Agreement was one for goods included its warranty, sales tax, “F.O.B. and title passing provisions. The court noted that the warranty only applied to the manufactured products and not to any services and the contract’s sales tax provision – making Plaintiff responsible for sales taxes –  typically applied in goods contracts, not services ones.

Additionally, the Agreement’s F.O.B. (“free on board”) and title passage terms both signaled this was a goods (not a services) deal. See 810 ILCS 5/2-106(1)(sale consists in passing title from seller to buyer for a price). [*5]

Since the plaintiff didn’t sue until more than five years elapsed from the breach date, the Court affirmed the dismissal of plaintiff’s breach of contract, breach of implied covenant of good faith and fair dealing and breach of warranty claims.

The Negligent Misrepresentation Claim

The Seventh Circuit also affirmed dismissal of plaintiff’s negligent misrepresentation claim. Under New York law (the contract had a NY choice-of-law provision), a plaintiff alleging negligent misrepresentation must establish (1) a special, privity-like relationship that imposes a duty on the defendant to impart accurate information to the plaintiff, (2) information that was in fact incorrect, and (3) plaintiff’s reasonable reliance on the information.

Like Illinois, New York applies the economic loss rule. This precludes a plaintiff from recovering economic losses under a tort theory. And since the plaintiff’s claimed negligent misrepresentation damages – money it lost based on the component defects – mirrored its breach of contract damages, the economic loss rule defeated plaintiff’s negligent misrepresentation count. [*10]

Afterwords:

The case presents a useful summary of the dispositive factors a court looks at when deciding whether a contract’s primary purpose is for goods or services.  Besides looking at an agreement’s end product (or service), certain terms like F.O.B., title-shifting and sales tax provisions are strong indicators of contracts for the sale of goods.

The case also demonstrates the continuing viability of the economic loss rule.  Where a plaintiff’s breach of contract damages are identical to its tort damages, the economic loss rule will likely foreclose a plaintiff’s tort claim.

 

No Consumer Fraud Where Deceptive Act Doesn’t Actually Reach Plaintiff: Cabbie’s Crash Damages Case Gutted – IL ND

The economic loss doctrine bars a plaintiff from recovering certain money damages under a tort theory (e.g. negligence, products liability, property damage, etc.) where a contract defines his relationship with a defendant.

“Economic loss” means (i) damages for inadequate value, (ii) costs of repair and replacement of the defective product, (iii) loss of profits (without any claim of personal injury or damage to other property) or (iv) the diminution in the value of the product caused by its defect.   (http://paulporvaznik.com/the-negligent-misrepresentation-exception-to-economic-loss-rule-the-information-v-tangible-product-dichotomy/2849).

The rule aims to keep a clear line of demarcation between breach of contract and tort law and remedies.  

Kesse v. Ford Motor Company, 2015 WL 920960 (N.D.Ill. 2015) examines the economic loss doctrine through the lens of a products liability suit involving the crash of a taxi cab.

The plaintiff cab driver claimed his cab suddenly accelerated and wouldn’t stop, requiring the driver to swerve into a roadside pole to avoid hitting oncoming traffic.  After hitting the pole, the cab struck and killed a pedestrian.

He sued the car maker alleging various design defects that caused the cab to accelerate without warning and that lacked a brake override system. The driver joined a consumer fraud claim against the automotive giant.

In addition to his personal injuries, the plaintiff sought damages for (i) lost income (his license was suspended after the accident), (ii) for lease payments he made to use the cab under the assumption it was defect-free, and (iii) damages for time and expense defending criminal charges brought by the State of Illinois in the wake of the fatality.  The defendant moved to dismiss plaintiff’s claims.

Gutting much of the plaintiff’s damage claims,  the court found that most of the claimed damages easily qualified as economic loss that can’t be recovered in a products liability (tort) suit.

The court rejected plaintiff’s argument that the crash was a “sudden and calamitous occurrence” and therefore, the economic loss rule didn’t limit plaintiff’s damages.

This exception to the economic loss rule applies where an occurrence is highly dangerous and presents a likelihood of personal injury or injury to other property (not the property involved in the occurrence).  Typical examples include fires and explosions.  

The court gave the sudden and calamitous occurrence exception a cramped application.  It held that even if the crash was considered a sudden  and calamitous occurrence, the plaintiff could still only recover for damage to other property (i.e. not the cab itself).  Since the plaintiff didn’t allege damage to other property, the sudden and calamitous occurrence exception didn’t apply.

The plaintiff’s consumer fraud claim, premised on Ford not disclosing safety risks associated with the car, also failed.

An Illinois consumer fraud act claimant must show (1) a deceptive act or practice; (2) the defendant intended for the plaintiff to rely on the deception; (3) the deceptive act occurred in the course of trade or commerce; (4) actual damage to the plaintiff; and (5) damages to the plaintiff proximately caused by the defendant.  *3.

A consumer fraud claim fails where the deception doesn’t actually reach the plaintiff, though.  Where a plaintiff isn’t the direct or indirect recipient of deceptive communication from a defendant, such as through advertising, the plaintiff can’t establish that the defendant was the proximate cause of the plaintiff’s injuries.

Here, the plaintiff failed to allege a deceptive act by Ford or that any false statement of Ford actually reached the plaintiff.  As a consequence, the court dismissed the consumer fraud count.

Take-aways:

Sudden and calamitous occurrence only applies where the precipitating event damages property other than the defective product involved in the occurrence;

A consumer fraud plaintiff must prove that he actually read, heard, or received a deceptive act or false statement in order to show proximate cause – that his damages were caused by a deceptive act.

 

Bank Customer’s Suit Versus Bank For Unauthorized On-Line Transfer Defeated by Economic Loss Rule

After a hacker accessed its on-line banking system and wired about $125,000 from its account, a healthcare firm sued its former (and now defunct) bank for breach of contract, negligence and breach of the implied duty of good faith and fair dealing.

The FDIC substituted in as defendant after it was appointed receiver of the closed bank and moved for summary judgment on all complaint counts.  The Northern District of Illinois in Envision Healthcare, Inc. v. FDIC, 2014 WL 6819991 (N.D.Ill. 2014) granted summary judgment in favor of the bank on all claims.

Reasons:

Two contracts governed the parties relationship, both of which required the bank to permit withdrawals based on recognized user ID and password credentials and allowed plaintiff’s authorized agents to initiate wire transfers from its account.  Other than verifying that the person requesting a withdrawal or wire transfer entered valid log-in data, the bank had no other obligations in either written agreement.

Rejecting the plaintiff’s breach of contract claim, the court noted that banks generally owe a duty of reasonable care to depositors. This duty arises from the position of trust banks occupy vis-a-vis their customers.  But in the context of lawsuits lodged by bank customers for unauthorized transfers, UCC Article 4A’s “Funds Transfers” section governs and sets out a detailed scheme of customer rights and remedies. 810 ILCS 5/4A.  In cases involving unauthorized withdrawals or funds transfers, this statute takes precedence over any common law obligations owed by a bank to its customer.

The court held that the plaintiff couldn’t show a breach of contract since all the bank was obligated to do was honor any request by someone who supplied recognized log-in data. Since the person requesting the funds transfer had a valid ID and password, and the contract terms didn’t saddle the bank with any additional duties, the plaintiff failed to establish the bank’s breach of contract.

Economic Loss Rule

The plaintiff’s negligence suit was defeated by the economic loss doctrine.  This rule posits that where a contract governs the relationship between the parties, the contract defines each side’s rights and responsibilities.  A plaintiff cannot recover in tort (i.e., in negligence) where a contract defines the parties’ relationship and the defendant fails to perform his contractual obligations. *6.

Here, the bank-customer relationship was controlled by the two written agreements.  In Illinois, the general rule is that a service provider is only responsible for physical harm (and not economic harm ) resulting from a breach of duty.

Since the bank defendant was a service provider, and the plaintiff’s damages were purely economic (the $125K unauthorized wire transfer), the economic loss rule barred plaintiff’s negligence claim. *6.

Another reason the court ruled for the bank on the negligence count was because UCC Article 4A (810 ILCS 5/4A) pre-empted or displaced plaintiff’s negligence count.  This Section sets forth in detail a bank’s obligations and a customer’s remedies for honoring an unauthorized payment order. Since the plaintiff didn’t premise its claims under this UCC section, its negligence claim was pre-empted.

Duty of Good Faith and Fair Dealing

The bank also defeated plaintiff’s ‘good faith and fair dealing count. The duty of good faith and fair dealing is implied in every Illinois contract and requires a party who has “contractual discretion” to exercise that discretion reasonably, and not arbitrarily.

The duty does not give rise to a stand-alone cause of action, though. Instead, it’s an interpretive tool employed by the court when assessing the validity of a breach of contract clam.  Any reference to the duty of good faith and fair dealing should be alleged as part of a broader breach of contract claim – not a separate cause of action.

In this case, since the plaintiff failed to incorporate its good faith and fair dealing claims into its breach of contract count, the claim failed as a matter of law.

The Court also noted that the bank didn’t have broad “discretion” in deciding whether to honor a funds transfer.  The bank had to honor a transfer request so long as it was made by someone with a valid log-in and password.

Since the bank didn’t have the option of refusing a bank customer’s payment request, it lacked contractual discretion and the good faith and fair dealing duty claim failed. **8-9.

Take-aways:

– The bank-customer contract will govern the parties’ relationship;

– A service provider (like a bank) owes no extra-contractual duty (a duty that’s not spelled out in the document) to its customer absent physical damage to a customer or his property;

– A plaintiff suing his bank for unauthorized wire transfers should couch his complaint in the language of UCC Section 4A to have the best prospects for recovery.