Tag: Economic Loss

Actuarial Firm Owes No Independent Legal Duty to Health Plan; Lost Profits Claim Lopped Off – 2nd Cir.

The Second Circuit appeals court recently examined the contours of New York’s economic loss rule in a dispute involving faulty actuarial services.

The plaintiff health care plan provider in MVP Health Plan, Inc. v. Optuminsight, Inc., 2019 WL 1504346 (2nd Cir. 2019) sued an actuary contractor for breach of contract and negligence when the actuary fell short of professional practice standards resulting in the health plan losing Medicare revenue.

The plaintiff appealed the district court’s bench trial verdict that limited plaintiff’s damages to the amounts it paid the actuary in 2013 (the year of the breach) and denied the plaintiff’s request for lost revenue.

The plaintiff also appealed the district court’s dismissal of its negligence count on the basis that it was duplicative of the breach of contract claim and the actuary owed the plaintiff no legal duty outside the scope of the contract.

Affirming, the Second Circuit first addressed the dismissal of plaintiff’s negligence claim. In New York, a breach of contract claim is not an independent tort (like negligence) unless the breaching party owes a legal duty to the non-breaching party independent of the contract. However, merely alleging a defendant’s breach of duty of care isn’t enough to bootstrap a garden variety contract claim into a tort.

Under New York law, an actuary is not deemed a “professional” for purposes of a malpractice cause of action and no case authorities saddle an actuary with a legal duty to its client extraneous to a contract. In addition, the court found the alleged breach did not involve “catastrophic consequences,” a “cataclysmic occurrence” or a “significant public interest” – all established bases for a finding of an extra-contractual duty.

Next, and while tacitly invoking Hadley v. Baxendale, [1854] EWHC Exch J70, the seminal 19th Century British court case involving consequential damages, the appeals court jettisoned the plaintiff’s lost revenues claim.

Breach of contract damages aim to put the plaintiff in the same financial position he would have occupied had the breaching party performed. “General” contract damages are those that are the “natural and probable consequence of” a breach of contract. Lost profits are unrecoverable consequential damages where the losses stem from collateral business arrangements.

To recover lost revenues as consequential damages, the plaintiff must establish (1) that damages were caused by the breach, (2) the extent of those damages with reasonable certainty, and (3) the damages were within the contemplation of the parties during contract formation.

To determine whether consequential damages were within the parties’ reasonable contemplation, the court looks to the nature, purpose and peculiar circumstances of the contract known by the parties and what liability the defendant may be supposed to have assumed consciously.

The court found that plaintiffs lost revenues were not damages naturally arising from defects in actuarial performance. Instead, it held those claimed damages were twice removed from the breach: they stemmed from plaintiff’s contracts with its member insureds. And since there was no evidence the parties contemplated the defendant would be responsible for the plaintiff’s lost revenues if the defendant breached the actuarial services agreement, the plaintiff’s lost profits damage claim was properly dismissed.

Afterwords:

MVP provides a useful primer on breach of contract damages, when lost profits are recoverable as general damages and the economic loss rule.
The case cements the proposition that where there is nothing inherent in the contract terms or the parties’ relationship that gives rise to a legal duty, the non-breaching party likely cannot augment its breach of contract action with additional tort claims.

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.