Robinson Helicopter Co. v. Dana Corp. (34 Cal. 4th 979, 2004)

Opinion

BROWN, J.

In this case, we decide whether the economic loss rule, which in some circumstances bars a tort action in the absence of personal injury or physical damage to other property, applies to claims for intentional misrepresentation or fraud in the performance of a contract. Because plaintiff Robinson Helicopter Company, Inc.’s (Robinson) fraud and intentional misrepresentation claim, with respect to Dana Corporation’s (Dana) provision of false certificates of conformance, is an independent action based in tort, we conclude that the economic loss rule does not bar tort recovery.

Facts

The underlying facts are undisputed and largely immaterial to this question of law. We therefore adopt our statement of facts from that of the Court Appeal.

Robinson is a manufacturer of helicopters. Its R22 model is a two-seat helicopter used as a primary trainer for pilots. The R44 model is a heavier model used for a wide variety of purposes. Both of these models use sprag clutches manufactured by Dana’s Formsprag division. The sprag clutch on a helicopter functions like the “free wheeling” clutch mechanism on a bicycle where the rider transmits power to the rear wheel by operating the pedals, but when the rider stops pedaling, the wheel continues to rotate. A sprag clutch is primarily a safety mechanism. If a helicopter loses power during flight, the sprag clutch allows the rotor blades to continue turning and permits the pilot to maintain control and land safely by the “autorotating” of the rotor blades.[] [f] [] At all relevant times, Dana’s Formsprag division was the only manufacturer of the sprag clutches that Robinson required for its R22 and R44 helicopters.

All aircraft manufacturers in the United States, including Robinson, must obtain a “type certificate” from the Federal Aviation Administration (FAA). The type certificate freezes the design as of the date the certificate is issued. Every aircraft made pursuant to the certificate must be produced exactly in accordance with that certificate. Any proposed changes must first be submitted to and approved by the FAA. The components of the sprag clutch must be ground to precise tolerances, measured in thousandths of an inch, to avoid distortions that lead to cracking and failure. Pursuant to the type certificate issued to Robinson by the FAA for the R22 and R44 models, the parts of the sprag clutches, including the sprag ears, were required to be ground at a particular level of hardness to assure their metallurgical integrity. The required level of hardness of the R22 and the R44 clutches, pursuant to the type certificates, was described as “50/55 Rockwell” (50/55).

Between 1984 and July 1996, Robinson purchased 3,707 sprag clutches from Dana. Each was ground to the required 50/55 level of hardness. There were only three incidents of cracking or failure of these sprag ears, a rate of 0.03 percent. In July 1996, Dana changed its grinding process to a higher, “61/63 Rockwell” (61/63) level of hardness. Dana did not notify Robinson or the FAA of this changed[] After such change was made in the grinding process, Dana nonetheless continued to provide written certificates to Robinson with each delivery of clutches that the clutches had been manufactured in conformance with Robinson’s written specifications (which specifications prohibited unapproved changes in Dana’s manufacturing process).[]

In October 1997, again without notifying either Robinson or the FAA, Dana changed its grinding process back to the 50/55 level of hardness that was required by its contract with Robinson. Beginning in early 1998, the sprag clutch ears that had been ground at the 61/63 level of hardness and sold to Robinson experienced a failure rate of 9.86 percent.[] This compared with a failure rate for clutches manufactured before July 1996 of 0.03 percent and 00.0 percent for clutches manufactured after October 1997.

Between August 24, 1998, and November 30, 1998, Robinson sent several letters to Dana reporting that 11 clutch assemblies with cracked sprags had been returned to Robinson from its operator customers. Each of these assemblies was ultimately traced to serial numbers of Dana sprag clutches that had been sold to Robinson during the period that Dana was grinding the clutches to the higher 61/63 level of hardness. On November 30, 1998, during a conference call between Robinson and Dana officials, Dana disclosed, for the first time, that it had used the 61/63 hardness level in its manufacturing process during the period July 1996 to October 1997.

Although it was a disputed issue, the record reflects that substantial evidence was presented at trial demonstrating that the higher failure rate of Dana’s sprag clutches manufactured during the July 1996 to October 1997 period was due to the higher hardness level to which they had been ground. Fortunately, these clutch failures did not result in any helicopter accident and there were no incidents of injury or property damage that were caused by any clutch defect or failure, nor did any of the defective clutches cause any damage to other parts of the helicopters in which they had been installed.

Nonetheless, Robinson was ultimately required by the FAA and its British equivalent, the Air Accidents Investigation Branch of the United Kingdom’s Department of Transport [], to recall and replace all of the faulty clutch assemblies (i.e., those manufactured with Dana’s sprag clutches ground to the higher hardness level of 61/63 rather than the 50/55 level required by the Robinson specifications). This led to a total claimed expense to Robinson of $1,555,924, which represented the cost of (1) replacement parts, and (2) substantial employee time spent investigating the cause of the malfunctioning parts and the identification and replacement of parts on helicopters that had already been sold to customers.

There were approximately 990 sprag clutches that were ultimately identified as having been manufactured at the higher nonconforming level of hardness. It was important to Robinson that the defective clutches be identified as soon as possible so that it could effect full replacements before any accident might occur. Although Dana had disclosed on November 30, 1998, that it had previously changed the hardness level, it did not provide Robinson with the necessary serial and lot number information until February 12, 1999, despite repeated demands therefor.[]

When this information was finally provided and Robinson was able to identify the clutch assemblies that had to be replaced, it submitted the necessary orders to Dana,[] together with a request that the issue as to which party would bear the cost of such replacement parts be left for later determination. Dana, however, disputed any liability, and, in fact, claimed that Robinson’s problems were due to its own inadequate designs that placed too much stress on the clutch assemblies. Dana refused to ship any new clutches except on a COD or other assured payment basis.

Having no alternative, Robinson went forward, incurred the costs described above, purchased the new clutches, and effected the necessary replacements. It then filed this action alleging causes of action for breach of contract, breach of warranty and negligent and intentional misrepresentations. After a nine-day trial, the jury returned a verdict in favor of Robinson for $1,533,924 in compensatory damages and $6 million in punitive damages. The jury found that Dana had not only breached its contract with Robinson and the warranties made thereunder, but also had made false misrepresentations of fact and had knowingly misrepresented or concealed material facts with the intent to defraud. The award of punitive damages was based on this latter finding.[]

Dana appealed. The Court of Appeal affirmed the judgment on the contract and warranty causes of actions. However, applying the economic loss rule, the Court of Appeal held that because Robinson suffered only economic losses, it could not recover in tort. Accordingly, the Court of Appeal reversed the judgment in part, based on the misrepresentation claims. As a result, the Court of Appeal held the punitive damages award could not be maintained.

Robinson seeks review of the Court of Appeal’s application of the economic loss rule to its fraud and intentional misrepresentation claims.

Discussion

Robinson contends the Court of Appeal erred in its decision because the economic loss rule does not bar its fraud and intentional misrepresentation claims. We conclude that, with respect to Dana’s provision of false certificates of conformance, Robinson is correct.

We begin with a brief background on the economic loss rule. Economic loss consists of “ ‘ “ ‘damages for inadequate value, costs of repair and replacement of the defective product or consequent loss of profits— without any claim of personal injury or damages to other property. . . ’ [Citation.]” (Jimenez v. Superior Court (2002) 29 Cal.4th 473, 482 [127 Cal.Rptr.2d 614, 58 P.3d 450].) Simply stated, the economic loss rule provides: “ ‘ “[W]here a purchaser’s expectations in a sale are frustrated because the product he bought is not working properly, his remedy is said to be in contract alone, for he has suffered only ‘economic’ losses.” ’ This doctrine hinges on a distinction drawn between transactions involving the sale of goods for commercial purposes where economic expectations are protected by commercial and contract law, and those involving the sale of defective products to individual consumers who are injured in a manner which has traditionally been remedied by resort to the law of torts.” (Neibarger v. Universal Cooperatives, Inc. (1992) 439 Mich. 512 [486 N.W.2d 612, 615], fns. omitted.) The economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise. (Redarowicz v. Ohlendorf (1982) 92 Ill.2d 171 [65 Ill.Dec. 411, 441 N.E.2d 324, 327].) Quite simply, the economic loss rule “prevents] the law of contract and the law of tort from dissolving one into the other.” (Rich Products Corp. v. Kemutec, Inc. (E.D.Wis. 1999) 66 F.Supp.2d 937, 969.)

In Jimenez v. Superior Court, supra, 29 Cal.4th 473, we set forth the rationale for the economic loss rule: “ ‘The distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the “luck” of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products.’ [Citation.] We concluded that the nature of this responsibility meant that a manufacturer could appropriately be held liable for physical injuries (including both personal injury and damage to property other than the product itself), regardless of the terms of any warranty. [Citation.] But the manufacturer could not be held liable for ‘the level of performance of his products in the consumer’s business unless he agrees that the product was designed to meet the consumer’s demands.’ [Citation.]” (Id. at p. 482.)

In Jimenez, we applied the economic loss rule in the strict liability context. We explained the principles surrounding the economic loss rule in that context: “[Rjecovery under the doctrine of strict liability is limited solely to ‘physical harm to person or property.’ [Citation.] Damages available under strict products liability do not include economic loss, which includes ‘ “ ‘damages for inadequate value, costs of repair and replacement of the defective product or consequent loss of profits—without any claim of personal injury or damages to other property. . . ’ [Citation.] [f] . . . [