SARATOGA FISHING CO. v. J. M. MARTINAC & CO. ET AL.
No. 95-1764
SUPREME COURT OF THE UNITED STATES
Argued February 18, 1997—Decided June 2, 1997
520 U.S. 875
Daniel B. MacLeod argued the cause for respondents. With him on the brief was Duncan Koler.*
JUSTICE BREYER delivered the opinion of the Court.
The issue before us concerns limits upon the damages that a tort plaintiff in admiralty can recover for physical damage to property caused by a defective product. In East RiverS. S. Corp. v. Transamerica Delaval Inc., 476 U. S. 858 (1986), the Court held that an admiralty tort plaintiff cannot recover for the physical damage the defective product causes to the “product itself“; but the plaintiff can recover for physical damage the product causes to “other property.” In this case all agree that the “product itself” consists at least of a ship as built and outfitted by its original manufacturer and sold to an initial user. This case asks how this corner of tort law treats the physical destruction of extra equipment (a skiff, a fishing net, spare parts) added by the initial user after the first sale and then resold as part of the ship when the ship itself is later resold to a subsequent user. Is that added equipment part of the “product itself,” in which case the plaintiff cannot recover in tort for its physical loss? Or is it “other property,” in which case the plaintiff can recover? We conclude that it is “other property.” Hence (assuming other tort law requirements are satisfied) admiralty‘s tort rules permit recovery.
I
This case arises out of an engine room fire and flood that led to the sinking of the fishing vessel M/V Saratoga in January 1986. We must assume that a hydraulic system defectively designed by respondent Marco Seattle Inc. was one significant cause of the accident. About 15 years before the accident, respondent J. M. Martinac & Co. had built the ship, installed the hydraulic system, and sold the ship new to Joseph Madruga. Madruga then added extra equipment—a skiff, a seine net, and various spare parts—and used the ship for tuna fishing. In 1974, Madruga resold the ship to petitioner, Saratoga Fishing Co., which continued to use the ship for fishing. In 1987, after the ship caught fire and sank, Saratoga Fishing brought this tort suit in admiralty against Marco Seattle and J. M. Martinac.
The District Court found that the hydraulic system had been defectively designed, and it awarded Saratoga Fishing damages (adjusted to reflect Saratoga Fishing‘s own partial
The Ninth Circuit held that the District Court should not have awarded damages for the added equipment. Saratoga Fishing Co. v. Marco Seattle Inc., 69 F. 3d 1432, 1445 (1995). A majority noted that the equipment, though added by Madruga, was part of the ship when Madruga resold the ship to Saratoga Fishing, and, for that reason, the majority held, the added equipment was part of the defective product that itself caused the harm. Applying East River‘s distinction between the product that itself caused the harm and “other property,” the majority concluded that Saratoga Fishing could not recover in tort for the loss. A dissenting judge believed that the “product itself” was the ship when launched into the stream of commerce by Martinac, its original builder. Consequently, the added equipment was “other property.” We granted certiorari to resolve this uncertainty about the proper application of East River. We now agree with the dissenting judge.
II
The facts before us show: (1) a Component Supplier who (2) provided a defective component (the hydraulic system) to a Manufacturer, who incorporated it into a manufactured product (the ship), which (3) the Manufacturer sold to an Initial User, who (4) after adding equipment and using the ship, resold it to a Subsequent User (Saratoga Fishing). The applicable law is general maritime law, “an amalgam of traditional common-law rules, modifications of those rules, and newly created rules,” drawn from both state and federal sources. East River, supra, at 865; see also Fitzgerald v. United States Lines Co., 374 U. S. 16, 20 (1963); Kermarec v. Compagnie Generale Transatlantique, 358 U. S. 625, 630 (1959). The context is purely commercial. The particular question before us requires us to interpret the Court‘s deci-
East River arose at the intersection of two principles that govern recovery in many commercial cases involving defective products. The first principle is that tort law in this area ordinarily (but with exceptions) permits recovery from a manufacturer and others in the initial chain of distribution for foreseeable physical harm to property caused by product defects. See Restatement (Second) of Torts § 402A (1965); W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts § 101 (5th ed. 1984); East River, 476 U. S., at 867. The second principle is that tort law in this area ordinarily (but with exceptions) does not permit recovery for purely economic losses, say, lost profits. See Restatement (Third) of Torts: Products Liability § 6, Comment d (Proposed Final Draft, Preliminary Version, Oct. 18, 1996); e. g., Rardin v. T & D Machine Handling, Inc., 890 F. 2d 24, 27-30 (CA7 1989). The Court in East River favored the second principle, for it held that an injury to the defective product itself, even though physical, was a kind of “economic loss,” for which tort law did not provide compensation. 476 U. S., at 871.
The Court reasoned that the loss of the value of a product that suffers physical harm—say, a product that destroys itself by exploding—is very much like the loss of the value of a product that does not work properly or does not work at all. See id., at 870. In all such cases, the Court held, “[c]ontract law, and the law of warranty in particular, is well suited” to setting the responsibilities of a seller of a product
The Ninth Circuit reasoned that East River required it to define the defective “product itself” by looking to that which the plaintiff had purchased, for that is the product that, in principle, the plaintiff could have asked the seller to warrant. Since Saratoga Fishing, the Subsequent User, might have asked Madruga, the Initial User, to warrant the M/V Saratoga, skiff, nets, and all, that product, skiff, nets, and all, is the “product itself” that stands outside the reach of tort recovery. In our view, however, this holding pushes East River‘s principle beyond the boundary set by the principle‘s rationale.
For one thing, the Ninth Circuit‘s holding creates a tort damage immunity beyond that set by any relevant tort precedent that we have found. State law often distinguishes between items added to or used in conjunction with a defective item purchased from a Manufacturer (or its distributors) and (following East River) permits recovery for the former when physically harmed by a dangerously defective product. Thus the owner of a chicken farm, for example, recovered for chickens killed when the chicken house ventilation system failed, suffocating the 140,000 chickens inside. A. J. Decoster Co. v. Westinghouse Electric Corp., 333 Md. 245, 634 A. 2d 1330 (1994). A warehouse owner recovered for damage to a building caused by a defective roof. United Air Lines,Inc. v. CEI Industries of Ill., Inc., 148 Ill. App. 3d 332, 499 N. E. 2d 558 (1986). And a prior case in admiralty (not unlike the one before us) held that a ship charterer, who adds expensive seismic equipment to the ship, may recover for its loss in a fire caused by a defective engine. Nicor Supply Ships Assocs. v. General Motors Corp., 876 F. 2d 501 (CA5 1989). Indeed, respondents here conceded that, had the ship remained in the hands of the Initial User, the loss of the added equipment could have been recovered in tort. See Tr. of Oral Arg. 29-30. We have found no suggestion in state (or in federal) law that these results would change with a subsequent sale—that is, we have found no case, other than the Ninth Circuit case before us, that suggests that the courts would deny recovery to a subsequent chicken farmer, who had later purchased the farm, chickens, coop, ventilation system, and all.
Indeed, the denial of recovery for added equipment simply because of a subsequent sale makes the scope of a manufacturer‘s liability turn on what seems, in one important respect, a fortuity, namely, whether a defective product causes foreseeable physical harm to the added equipment before or after an Initial User (who added the equipment) resells the product to a Subsequent User. One important purpose of defective-product tort law is to encourage the manufacture of safer products. The various tort rules that determine which foreseeable losses are recoverable aim, in part, to provide appropriate safe-product incentives. And a liability rule that diminishes liability simply because of some such resale is a rule that, other things being equal, diminishes that basic incentive. That circumstance requires a justification. That is to say, why should a series of resales, after replacement and additions of ever more physical items, progressively immunize a manufacturer to an ever greater extent from the liability for foreseeable physical damage that would otherwise fall upon it?
Of course, nothing prevents a user/reseller from offering a warranty. But neither does anything prevent a Manufacturer and an Initial User from apportioning through their contract potential loss of any other items—say, added equipment or totally separate physical property—that a defective manufactured product, say, an exploding engine, might cause. No court has thought that the mere possibility of such a contract term precluded tort recovery for damage to an Initial User‘s other property. Similarly, in the absence of a showing that it is ordinary business practice for user/resellers to offer a warranty comparable to those typically provided by sellers of new products, the argument for extending East River, replacing tort law with contract law, is correspondingly weak. That is to say, respondents have not explained why the ordinary rules governing the manufacturer‘s tort
Respondents make two other important arguments. First, they say that our reasoning proves too much. They argue that, if a Subsequent User can recover for damage a defective manufactured product causes to property added by the Initial User, then a user might recover for damage a defective component causes the manufactured product, other than the component itself. Saratoga Fishing, for example, could recover the damage the defective hydraulic system caused to any other part of the ship. But the lower courts, following East River, have held that it is not a component part, but the vessel—as placed in the stream of commerce by the manufacturer and its distributors—that is the “product” that itself caused the harm. See Shipco 2295, Inc. v. Avondale Shipyards, Inc., 825 F. 2d 925, 928 (CA5 1987); see also, e. g., National Union Fire Ins. Co. of Pittsburgh v. Pratt & Whitney Canada, Inc., 107 Nev. 535, 539-542, 815 P. 2d 601, 604-605 (1991). As the Court said in East River:
“‘Since all but the very simplest of machines have component parts, [a contrary] holding would require a finding of “property damage” in virtually every case where a product damages itself. Such a holding would eliminate the distinction between warranty and strict products liability.‘” 476 U. S., at 867 (quoting Northern Power & Engineering Corp. v. Caterpillar Tractor Co., 623 P. 2d 324, 330 (Alaska 1981)).
Our holding here, however, does not affect this rule, for the relevant relations among initial users, manufacturers, and component suppliers are typically different from those at issue here. Initial users, when they buy, typically depend upon, and likely seek warranties that depend upon, a manufacturer‘s primary business skill, namely, the assembly of workable product components into a marketable whole.
Second, respondents argue that our holding would impose too great a potential tort liability upon a manufacturer or a distributor. But we do not see how that is so. For one thing, a host of other tort principles, such as foreseeability, proximate cause, and the “economic loss” doctrine, already do, and would continue to, limit liability in important ways. For another thing, where such principles are satisfied, liability would exist anyway had the manufactured product simply remained in the hands of the Initial User. Our holding merely maintains liability, for equipment added after the initial sale, despite the presence of a resale by the Initial User.
We conclude that equipment added to a product after the Manufacturer (or distributor selling in the initial distribution chain) has sold the product to an Initial User is not part of the product that itself caused physical harm. Rather, in East River‘s language, it is “other property.” (We are
The decision of the Ninth Circuit is
Reversed.
JUSTICE O‘CONNOR, dissenting.
I do not disagree with our decision to grant certiorari in this case, but I agree with JUSTICE SCALIA—and for the reasons he states—that we should affirm the judgment of the Court of Appeals.
JUSTICE SCALIA, with whom JUSTICE THOMAS joins, dissenting.
In East River S. S. Corp. v. Transamerica Delaval Inc., 476 U. S. 858 (1986), we adopted as part of admiralty law the so-called “economic loss” rule, which denies the purchaser of a defective product a tort action against the seller or manufacturer for purely economic losses sustained as a result of the product‘s failure. Applying this rule, we held that a plaintiff may not recover in tort when a defective product damages only itself, but may recover for personal injuries and for damage to other property. See id., at 871-875. The present case involves a relative detail of application of the East River holding: whether, and under what circumstances, “other property” can include property added to the defective product, not by the plaintiff-purchaser himself, but by some earlier purchaser in the chain of ownership leading back to the manufacturer. In the context of the present case, the question is whether a skiff, a net, and communications and navigational electronics added by Joseph Madruga to the M/V Saratoga before she was sold to petitioner constitute
It would have been better, in my view, not to grant certiorari in this case. By the time East River was decided, we had a wealth of lower court development to draw upon, including well-reasoned opinions taking no less than three distinct positions on the economic-loss rule. See id., at 868-871. We could be confident in our decision, knowing that it broke little new ground; the rule we adopted had been endorsed by a majority of state courts and had been tested for two decades since its enunciation by Chief Justice Traynor in Seely v. White Motor Co., 63 Cal. 2d 9, 403 P. 2d 145 (1965). In the present case, by contrast, the Court sets sail into uncharted seas. Not a single lower court decision (other than the one under review) has addressed the precise question presented: the status as “other property” of additions made by a prior purchaser who was a user. I would feel less uncomfortable about our plying these unknown waters if we were skilled navigators. But unlike state courts, we have little first-hand experience in the development of new common-law rules of tort and contract governing commercial transactions. Better to have followed some state-court pilots than to proceed on our own—and even, perhaps, to lead state courts aground. With this disclaimer, and with the admission that I am only modestly more confident of my resolution of this case than I am of the Court‘s, I proceed (reluctantly) to discussion of the merits.
The Court‘s opinion suggests that this is a rather straightforward case. The relevant facts—according to the Court—are quite simple, showing: “(1) a Component Supplier who (2) provided a defective component . . . to a Manufacturer, who incorporated it into a manufactured product (the ship), which (3) the Manufacturer sold to an Initial User, who (4) after adding equipment and using the ship, resold it to a Subsequent User.” Ante, at 878. What the Court‘s opinion does not disclose is that Madruga—the Court‘s “Initial
As respondents point out, there is no finding in the record as to whether Madruga was engaged in the business of selling such products and the issue was never raised or considered. Brief for Respondents 33, n. 28. I assume that the Court disregards this issue (neither resolving it nor remanding for its consideration) because the Court deems the question irrelevant. Under the Court‘s test, as I understand it, the “product” is fixed when it is sold to an “Initial User,” even if that user is also in the business of modifying and reselling the product. In my view, there is little to recommend such a rule.
The Court is driven to take the position it does by the concern that liability would otherwise turn on “a fortuity, namely, whether a defective product causes . . . harm to the added equipment before or after an Initial User (who added the equipment) resells the product to a Subsequent User.”
One rule that generally avoids making liability turn on either of the above described “fortuities” is what might be called the “last-402A-seller rule.” Under this rule, the “product” would be fixed when it is sold by the last person in the chain of distribution who is, in the words of § 402A of the Restatement (Second) of Torts (1964), “engaged in the business of selling such a product.” This would offer at least as much predictability as can be expected from the Court‘s approach, would ensure that the availability of tort remedies will be uniform with regard to all end-users, and would avoid making liability turn on the seemingly irrelevant question whether the distributor of the product used it before sale. The last-402A-seller rule is also more consistent with one of the principal considerations underlying our decision in East River: the desirability of invoking tort protection only where contract-warranty protection is infeasible. Defining the product as what was sold by the last person engaged in the business of selling such products denies tort recovery for those additions to the originally manufactured product which the purchaser could have covered by warranty protection (persons in the business will generally offer
The last-402A-seller rule appears to me superior to the initial-user rule adopted by the Court today, but the two are in reality quite similar and will in most cases produce the same result. Each essentially attempts to differentiate between additions made before and after the product has left the market chain of distribution. I doubt, however, whether leaving the market chain of distribution ought to be so momentous an event for the purpose at hand. So long as the plaintiff is a commercial entity (and I understand the rule under consideration to be one applicable only to commercial, as opposed to consumer, transactions, see ante, at 878-879) it seems to me to make no difference whether the purchase was made from a “402A seller” or not. Commercial entities do not typically suffer, at the time they make their purchase, a disparity in bargaining power that makes it impossible for them to obtain warranty protection on the entire product; nor are they unable to insure the product they have purchased, including those portions of it added by upstream owners. Our decision in East River suggests that in such circumstances there is inadequate reason to interfere with private ordering by importing tort liability—that is, inadequate reason to permit the purchaser to recover any tort damages for loss of the product he purchased. See East River, 476 U. S., at 872-873.
In recognition of that reality, an impressive line of lower court decisions, applying both federal and state law, has held that the purchaser of a product damaged by a defective component cannot recover in tort against the manufacturer of the component on the theory that the remainder of the product is “other property.” See, e. g., Pulte Home Corp. v. Osmose Wood Preserving, Inc., 60 F. 3d 734, 741-742 (CA11 1995) (Florida law); American Eagle Ins. Co. v. United Technologies Corp., 48 F. 3d 142, 144-145 (CA5 1995) (Texas law);
“As we read East River, it is the character of the plaintiff‘s loss that determines the nature of the available remedies. When loss of the benefit of a bargain is
the plaintiff‘s sole loss, the judgment of the Supreme Court was that the undesirable consequences of affording a tort remedy in addition to a contract-based recovery were sufficient to outweigh the limited interest of the plaintiff in having relief beyond that provided by warranty claims. The relevant bargain in this context is that struck by the plaintiff. It is that bargain that determines his or her economic loss and whether he or she has been injured beyond that loss.” 855 F. 2d, at 1051.
There are undoubtedly other rules that can be—and have been—conceived of. One recent article describes the current state of the law regarding damage to “other property” on construction projects as follows:
“There has been a growing trend in many jurisdictions to interpret ‘economic loss’ broadly to include damage that formerly was considered ‘other property.’ Courts that follow this trend have utilized the following rationales:
“• There is no damage to ‘other property’ where the damage extends only to property within the confines of the bargain. . . . ‘Other property’ does not include damage to property if those losses are direct and consequential losses that were within the contemplation of the parties and could have been the subject of negotiations between the parties.
“• The phrase ‘other property’ does not include the type of property that one would reasonably expect, on a foreseeability test, to be damaged as a direct consequence of the failure of the product at issue.
“• No ‘other property’ has been damaged, because the allegedly defective product has been incorporated into the structure that has been damaged.
“• Losses caused by the inferior quality of the product must be considered ‘economic’ and therefore cannot be
considered ‘property.‘” Fox & Loftus, supra, at 265-266 (footnotes omitted).
And there can of course be combinations of the various rules. For example, one might adopt an “integrated unit” exception to the initial-user rule that the Court announces today.
As I have confessed above, I have little confidence in my ability to make the correct policy choice in an area where courts more experienced than we have not yet come to rest. I would have been inclined to let the lower federal courts struggle with this issue somewhat longer, in the hope that there would develop a common-law consensus to which we could refer for our admiralty rule, as we did in East River. Put to a choice, however, I would not select the rule adopted by the Court today. I would adopt the rule proposed by respondents and define the “product” for purposes of East River‘s economic-loss rule as the object of the purchaser‘s bargain. That was essentially the approach followed by the Court of Appeals below, and I would accordingly affirm its judgment.
I respectfully, and indeed diffidently, dissent.