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reasoning that "silence or concealment of facts can be the basis for a fraud action, especially when there are half-truths or misleading statements"
Summary of this case from Benson Tower Condo. Owners Ass'n v. Victaulic Co.Opinion
CV-04-103-ST.
October 8, 2004
FINDINGS AND RECOMMENDATION
INTRODUCTION
Plaintiffs, Dixie McFadden ("Mcfadden") and Gregory Byrne and Debra Byrne ("the Byrnes"), filed a Complaint against defendant, Dryvit Systems, Inc. ("Dryvit"), for damages arising out of the installation of a siding system on their homes. They allege the following claims:
First Claim: Deceit;
Second Claim: Strict liability;
Third Claim: Violation of the Magnuson-Moss Warranty Act ("MMWA"), 15 USC § 2301 et seq;
Fourth Claim: Breach of implied warranty of merchantability;
Fifth Claim: Breach of implied warranty of fitness.
As affirmative defenses, Dryvit alleges the statute of limitations, comparative fault, failure to mitigate, failure to state a claim, alteration or modification of product, misuse, economic loss rule, warranty limitations and exclusions, unconstitutionality of the statute at issue, and res judicata.
The parties are citizens of different states and the amount in controversy exceeds $75,000. Therefore, this court has diversity jurisdiction under 28 USC § 1332(a). Additionally, this court has original jurisdiction over the federal MMWA statutory claim under 28 USC § 1331 and supplemental jurisdiction over the state law claims under 28 USC § 1367.
Dryvit's Motion for Summary Judgment (docket #15) is now before this court. This court stayed Dryvit's constitutional arguments pending certification of this case to the Oregon State Attorney General and the Oregon Supreme Court (docket #47). The Oregon State Attorney General subsequently indicated that he does not wish to intervene in the case. However, the parties have not yet indicated whether they wish to continue pursuing certification of the constitutional arguments to the Oregon Supreme Court.
While awaiting possible certification of the constitutional arguments, this Findings and Recommendation deals only with Dryvit's nonconstitutional arguments that plaintiffs' claims fail on the merits. For the reasons that follow, Dryvit's Motion for Summary Judgment (docket #15) should be denied with respect to the nonconstitutional arguments.
LEGAL STANDARDS
FRCP 56(c) authorizes summary judgment if "no genuine issue" exists regarding any material fact and "the moving party is entitled to judgment as a matter of law." The moving party must show an absence of an issue of material fact. Celotex Corp. v. Catrett, 477 US 317, 323 (1986). Once the moving party does so, the nonmoving party must "go beyond the pleadings" and designate specific facts showing a "genuine issue for trial." Id. at 324, citing FRCP 56(e). The court must "not weigh the evidence or determine the truth of the matter, but only determines whether there is a genuine issue for trial." Balint v. Carson City, 180 F3d 1047, 1054 (9th Cir 1999) (citation omitted). A "` scintilla of evidence,' or evidence that is `merely colorable' or `not significantly probative,'" does not present a genuine issue of material fact. United Steelworkers of Am. v. Phelps Dodge Corp., 865 F2d 1539, 1542 (9th Cir), cert denied, 493 US 809 (1989) (emphasis in original) (citation omitted).
The substantive law governing a claim or defense determines whether a fact is material. T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F2d 626, 631 (9th Cir 1987). The court must view the inferences drawn from the facts "in the light most favorable to the nonmoving party." Id. (citation omitted). Thus, reasonable doubts about the existence of a factual issue should be resolved against the moving party. Id. at 631.
FACTS
Because all material facts must be viewed in the light most favorable to the non-movant, this court will view the evidence in the light most favorable to plaintiffs. A review of the parties' facts, as well as the other materials submitted by the parties, including affidavits, declarations, and deposition excerpts, reveal the following facts.
Both parties have submitted documents with various attachments. Citations to affidavits, declarations, and depositions are identified by the last name of the affiant, declarant, or deponent, and citations are to the paragraph(s) of the affidavit, declaration or page(s) of the deposition transcript. All other citations are to the exhibit number of the parties' submissions.
I. Dryvit's Building Products
Dryvit manufactures two types of exterior siding known generically as Exterior Insulation and Finish Systems ("EIFS"): (1) Outsulation, a system that serves as a watertight membrane barrier to water (Plaintiffs' Exhibit 51, p. 2); and (2) Infinity System, a newer system that has "drainage channels that capture, control, and direct any incidental moisture from the system." Plaintiffs' Exhibit 56, p. 3. Dryvit developed its Infinity System, in part, because of difficulties consumers experienced with water penetrating the Outsulation System and then becoming trapped. Dryvit acknowledged this problem with its Outsulation System in a patent application for a drainable EIFS:
Notwithstanding the high degree of care during construction to provide a water-impermeable, i.e., rain-fast, membrane to the outside cladding surface, over periods of time . . . hairline cracks inevitably are formed in the rain-fast layer to permit . . . ingress of moisture through the cladding. . . . Thus, cladding systems relying solely on outer face sealing materials suffer the risk of water ingress over time[.]
Plaintiffs' Exhibit 54.
In 1995, Dryvit began an advertising program "aimed directly at the residential consumer." Plaintiffs' Exhibit 60, p. 1. It placed advertisements in various consumer magazines designed to reach seven million potential homebuyers, targeting middle to higher income people likely to build new homes or remodel older ones. Id. It also created a "consumer residential response package" consisting of a brochure and other materials. Id. II. Installation of Dryvit's Products on Plaintiffs' Building
Sometime in 1995, Debra Byrne saw one of Dryvit's magazine ads and contacted Dryvit for information. Debra Byrne Depo, pp. 40-41. In response, on October 25, 1995, Dryvit sent Debra Byrne a letter attaching promotional brochures and referring her to Dryvit's "local representative," Larry Brown ("Brown"), for further assistance. Defendant's Exhibits 4 and 17.
Two years later, plaintiffs decided to replace the siding on their homes. Debra Byrne Depo, p. 41. Mrs. Byrne again contacted Dryvit for information. On June 12, 1997, Dryvit's Customer Service Representative, Candy Penkoff ("Penkoff"), sent Mrs. Byrne a letter similar to the 1995 letter. Defendant's Exhibit 16. The attached brochures described both the barrier and moisture drainage systems. Plaintiffs' Exhibits 62A-F. At least two brochures stated that "[a]ll Dryvit products are designed to be virtually maintenance free." Plaintiffs' Exhibits 62B, Bates #00166, and 62C, Bates #00141.
The record leaves it unclear which of the six brochures (Plaintiffs' Exhibits 62A-F) Mrs. Byrne received in response to her 1995 inquiries with Dryvit versus her 1997 inquiries. See Debra Byrne Depo, pp. 48, 108, 164, 167.
Penkoff's letter again referred Mrs. Byrne to Dryvit's "local representative" Brown for further assistance. Defendant's Exhibit 16. After soliciting bids from several contractors, Mrs. Byrne telephoned Brown, who informed her that of the contractors she was considering, only Mike Busher ("Busher"), who owned Exterior Specialty Systems, Inc. ("ESSI"), was certified by Dryvit. Debra Byrne Depo, p. 43. Brown also told her that ESSI was the only applicator whose work Dryvit would warrant. Id.
Gregory Byrne, an attorney, had previously heard rumors of water penetration problems in Dryvit's products. Gregory Byrne Depo, p. 23. However, one of Dryvit's brochures received by plaintiffs promoted a "residential" EIFS system that provided "moisture drainage." Defendant's Exhibit 4. Busher assured the Byrnes that ESSI would install Dryvit's "moisture drainage" system. Gregory Byrne Depo, p. 24; Debra Byrne Depo, p. 25. The Byrnes did not realize that Dryvit still sold barrier systems that did not drain, such as Outsulation. Gregory Byrne Depo, p. 25.
The Byrnes and McFadden paid ESSI $54,560 to install Dryvit's EIFS on their adjoining townhouses in the summer and fall of 1997. Defendant's Exhibit 8, p. 4. In October 1997, Dryvit issued a 5-year limited materials warranty to the Byrnes. Defendant's Exhibit 6.
III. Discovery of Damage and Filing of State Court Lawsuit
In 2000, plaintiffs had their homes professionally inspected by Bryan Weight ("Weight"), an EIFS consultant, who informed them that ESSI had installed a barrier system (Outsulation), not a drainage system (Infinity System). Defendant's Exhibit 7, p. 2.
In late 2001 or early 2002, plaintiffs filed suit in Multnomah County, Oregon against Dryvit and Busher. Defendant's Exhibit 8. During the discovery process, plaintiffs learned that Dryvit had published a Homeowners Manual (Plaintiffs' Exhibit 65), which was supposed to be sent to them with their warranty, but was not. Stotts Depo, pp. 31-32; Debra Byrne Depo, pp. 89-90. It contained a recommendation that homeowners inspect sealant joints a couple of times a year and replace cracked or dried sealant. Plaintiffs' Exhibit 65, p. 3. Plaintiffs claim that had they known of this requirement, they would not have installed EIFS on their homes, which were four stories in height and could only be inspected using scaffolding or a snorkel-lift. Plaintiffs' Exhibit 51, p. 6, and Exhibit 71.
Plaintiffs also learned that even if they had been able to reach their sealant joints, they would not have been able to inspect them, as ESSI had covered them with a finish coat. Defendant's Exhibit 7, p. 4. Dryvit was aware of this deviation from industry standards and approved it. Busher Depo, pp. 65-66, 121-23; Stotts Depo, pp. 70-71; Plaintiffs' Exhibit 67, p. 2. Plaintiffs also learned that even though Dryvit's June 12, 1997 letter to Debra Byrne proclaimed that it had "extensive technical and field service teams" (Defendant's Exhibit 17), these "teams" consisted in the Northwest of only Brad Stotts ("Stotts"), whose territory included Oregon, Washington, California, Alaska, and Hawaii. Stotts Depo, pp. 6-7.
In 2003, plaintiffs had the EIFS removed and replaced with cedar siding. Declaration of Gregory W. Byrne, ¶ 2. Water trapped behind the Dryvit EIFS had caused dry rot in at least 15-20% of the homes. Tiffee Depo, p. 35. Plaintiffs paid $110,795 to replace the siding and repair the wood decay. Declaration of Gregory W. Byrne, ¶ 2.
IV. Outcome of State Court Litigation
Plaintiffs' lawsuit in state court against Dryvit and Busher encountered several obstacles. On October 23, 2002, Multnomah County Circuit Court Judge Cinniger granted Dryvit's motion for summary judgment on the merits as to plaintiffs' breach of express warranty and negligence claims. Defendants' Exhibit 9, p. 2. Additionally, although the court found that all of the plaintiffs' claims, except the deceit claim, were "in reality products liability claims" subject to the statute of limitations in ORS 30.905 for product liability actions, issues of fact remained regarding whether the statute of limitations barred plaintiffs' claims. Id.
Plaintiffs subsequently settled with Busher. Their case against Dryvit was eventually removed to this court. Defendant's Exhibit 11. On October 31, 2003, the case was transferred to a multi-district litigation ("MDL") panel in the Eastern District of North Carolina. On December 11, 2003, the MDL panel granted Dryvit's motion for summary judgment, holding that plaintiffs' product liability claims were barred by Oregon's product liability statute of limitations, ORS 30.905, in effect at that time. Defendant's Exhibit 12, p. 9. The MDL panel dismissed the case, although it did not explain why it was dismissing plaintiffs' fraud/deceit claims. Id. V. Filing of this Action
After the MDL panel dismissed the case, ORS 30.905 was amended by the 2003 Oregon Legislature. The amendment included a provision which plaintiffs believe revived their cause of action. As a result, they filed this action on January 22, 2004.
DISCUSSION
Dryvit maintains that summary judgment is appropriate because the 2003 amendment to ORS 30.905 violates the federal and state constitutions. If Dryvit is correct, then plaintiffs' claims are barred by the preclusive effect of the MDL panel's prior decision. Alternatively, Dryvit contends plaintiffs' claims fail on the merits. If the claims fail on the merits, then this court need not address the constitutionality of ORS 30.905, as amended. Therefore, this court first addresses the merits of plaintiffs' claims, assuming that ORS 30.905, as amended, is constitutional.
I. Implied Warranty Claims (Claims 4 and 5)
Dryvit argues that plaintiffs' implied warranty claims fail because: (1) there is no evidence Dryvit's products were defective, which precludes a claim that the product was unmerchantable or not fit for a particular purpose; (2) the lack of privity between plaintiffs and Dryvit precludes an implied warranty claim under Oregon law; (3) Dryvit's product was misused; and (4) the negligence of a third-party was the cause of plaintiffs' alleged damages. As discussed below, each of these arguments should be rejected.
A. Evidence of Defect
To prevail on a breach of an implied warranty claim, a plaintiff must prove that the defendant either sold goods that were not merchantable or that the goods did not serve a particular purpose. ORS 72.3140; ORS 72.3150. Dryvit argues that plaintiffs have not provided any evidence to meet either of these requirements. Dryvit points to plaintiffs' own inspector, Weight, who focused on defects in ESSI's installation, not on any product that Dryvit sold or manufactured. To the extent that Weight discussed any goods that might have been defective, Dryvit maintains he only discussed the insulation boards and fasteners, products that Dryvit did not manufacture. Stotts Aff, ¶ 3.
Any attempt by Dryvit to characterize its product as mere "siding," or to imply that the only products at issue in this case (and hence for which defects must be found) were the EIFS components Dryvit manufactured, is disingenuous. Dryvit sells an EIFS system, not just mere siding. Dryvit itself admits that "EIFS is a multi-layered siding system that includes insulation boards, attachment systems, base coat adhesive, reinforcing mesh, acrylic finish, and joint sealant." Amended Answer, ¶ 3 (emphasis added). Also, Dryvit makes repeated references to its "systems" in its product literature. See Defendant's Exhibits 3 and 4.
With respect to Dryvit's overall EIFS Outsulation system, plaintiffs have submitted substantial evidence that it is defective. Plaintiffs' expert, Joe J. Johnson ("Johnson"), states that "the EIFS barrier system design concept is inherently flawed since all cladding systems, at some time, will incur water penetration," and "when water does penetrate the [EIFS] cladding, it becomes trapped." Plaintiffs' Exhibit 51, p. 3. He also testified in his deposition:
I think that the barrier system is a flawed system . . . I cannot think of another barrier system that's used in residential. Most systems have a weather barrier, secondary barrier. The EIFS system is the only one that I know of that has just a primary barrier relying on the skin membrane to keep water out. If at any time water penetrates the system, the substrate, which is usually composed of either plywood, OSB, gyp sheathing, is essentially at the mercy of the water and can ultimately produce damage to the structure.
Q. Is there any other basis for this opinion?
A. The barrier system does not allow water to weep out once it's trapped behind there. The water has a tendency to stay in there longer. It's not able to permeate out.
Johnson Depo, pp. 29-30.
Dryvit's own Northwest Field Service Manager, Brad Stotts, admitted in his deposition that water penetration in a barrier system is serious because no mechanism allows the water to drain out. Stotts Depo, p. 24. Busher also testified that a barrier system "relies on the sealant joint, which you know is going to fail at some point in time, to keep moisture out." Busher Depo, p. 137.
Together, this expert and layperson testimony raise a material issue of fact as to whether Dryvit's EIFS Outsulation system was defective.
B. Privity of Contract
Dryvit argues that because plaintiffs are only seeking damages for economic loss, they must demonstrate privity of contract between themselves and Dryvit. Davis v. Homasote, 281 Or 383, 386, 574 P2d 1116, 1117-18 (1978) ( en banc) (where the plaintiff purchased floor decking products from the manufacturer's distributor, and then tried to sue the manufacturer directly for economic loss from a breach of an implied warranty, the court held the manufacturer could not be held liable because there was no privity of contract); Hupp Corp v. Metered Washer Serv., 256 Or 245, 472 P2d 816 (1970) (finding an ultimate purchaser cannot recover for economic loss upon a theory of implied warranty against a manufacturer from whom he did not directly purchase the product); see also Dravo Equip. Co. v. German, 73 Or App 165, 169, 698 P2d 63, 65 (1985) (reviewing Davis and Hupp and finding privity is essential before a purchaser can recover economic loss from a manufacturer for breach of an implied warranty).
Plaintiffs respond that privity of contract is not necessary because they are not simply seeking damages for economic loss, but are seeking to recover property damage to their homes.
1. Whether Plaintiffs are Seeking Only Economic Loss Damages
In Oregon, "the term `economic losses' describes financial losses such as indebtedness incurred and return of monies paid, as distinguished from damages for injury to person or property." Portland Trailer Equip., Inc., v. A-1 Freeman Moving Storage, Inc., 166 Or App 651, 655, 5 P3d 604, 607 (2000); see also Onita Pac. Corp. v. Trustees of Bronson, 315 Or 149, 159 n 6 (1992) ("In this opinion we use the term `economic losses' to describe financial losses such as indebtedness incurred and return of monies paid, as distinguished from damages for injury to person or property"). "In the traditional `property damage' cases, the defective product damages other property." East River S.S. Corp. v. Transamerica Delaval, 476 US 858, 867 (1986).
Here, Dryvit's EIFS leaked and trapped water, causing physical damage to plaintiffs' existing homes. Plaintiffs are seeking damages to repair their homes, not simply to replace the defective EIFS. Repairing damage to the homes is the sort of damage to other property that is more than economic loss, at least when the underlying claim is one for breach of an implied warranty. 2. Use of Implied Warranty Claims to Recover Property Damages
As discussed later, establishing the difference between property and economic damages is more difficult in the context of a strict liability claim.
However, the fact that plaintiffs are seeking property damage raises the more difficult issue of whether they can recover those damages on an implied warranty theory from Dryvit, with whom they are not in privity. According to ORS 72.3180, an implied warranty:
extends to any natural person who is in the family or household of the buyer or who is a guest in the home of the buyer if it is reasonable to expect that such person may use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.
On the face of this statute, "a seller's warranty extends beyond the buyer only in cases involving personal injuries and then only to a limited number of people." Dravo, 73 Or App at 168, 698 P23d at 65. However, that statute "is not dispositive." Id. ORS 72.3180 is the same as Alternative A of the three versions available for Uniform Commercial Code § 2-318. See White Summers, Uniform Commercial Code § 11-3 (4th ed. 1995) (setting forth the three alternatives). Subparagraph 3 of the official commentary for UCC § 2-318, which also applies to ORS 72.3180, states that "the section is neutral and is not intended to enlarge or restrict the developing case law on whether the seller's warranties, given to his buyer who resells, extend to other persons in the distributive chain." Dravo, 73 Or App at 168, 698 P2d at 65. Therefore, this court must "look at the case law to ascertain whether the warranty in this case can extend to remote purchasers like defendant[.]" Id.
Oregon courts provide no direct guidance on whether a plaintiff can recover under an implied warranty theory from a remote seller for property damage. The Oregon Supreme Court has never directly addressed the subject. It has only restricted recovery from remote sellers for economic loss, as mentioned above. Davis, 281 Or at 386, 574 P2d at 1117-18. Lower courts have also not addressed the subject, though they have restricted recovery under an implied warranty theory for injuries to a person outside the distributive chain. See Colvin v. FMC Corp, 43 Or App 709, 715-17, 604 P2d 157, 161 (holding that privity of contract is a prerequisite to recovery for a breach of a implied warranty claim from a person outside the distributive chain seeking recovery for personal injury); But see Allen v. G.D. Searle Co., 708 F Supp 1142, 1159-1160 (D Or 1989) (holding that Oregon law does not require privity of contract for a plaintiff within the normal distributive chain seeking to recover damages for personal injury through an implied warranty claim).
The best indication of how Oregon courts would rule on the subject is found in dicta in State ex re. Western Seed Prod. Corp. v. Campbell, 250 Or 262, 265, 442 P2d 215, 217 (1968), where the plaintiffs' sought to recover the lost profits for a seed-caused crop loss from the producer of the seed, who sold to the plaintiff's local supplier, based on a breach of an implied warranty. The court compared the facts to Price v. Gatlin, 241 Or 315, 405 P2d 502 (1965), which held that a purchaser of a defective tractor could not hold the wholesaler, with whom he had no contract, strictly liable where the defect had resulted only in a loss of profits to the purchaser's business. Western Seed held the damage was "essentially the same" as in Price because "plaintiffs lost the profits they expected to derive from the normal sugar-beet crop. There was no damage to their land; there was only a loss of use thereof." Western Seed, 250 Or at 265, 442 P2d at 217 (emphasis added). Following Price, the court dismissed the plaintiffs' claim for lack of privity.
This dicta in Western Seed implies that if plaintiff had suffered some damage to its land, rather than just economic loss, then the court would have reached a different outcome. This outcome makes sense, because damage to land or property, like personal injury, is more foreseeable for a business seeking to calculate its risks before entering into a bargain. Moreover, a plaintiff within the normal distributive chain whose person or property is injured is far more than just a "disappointed consumer" or "disappointed bargain hunter," unlike those seeking to recover economic losses from a remote seller. Id. at 267-68, 442 P2d at 217-18.
Although the issue also is not settled outside of Oregon, plaintiffs are frequently permitted latitude when seeking to recover property damages in warranty. For example, commentators have noted that "many non-privity plaintiffs who today seek recovery for property damage now find themselves in much the same position as those who seek recovery for personal injury." White Summers, supra, § 11-4 (citing cases where plaintiffs recovered property damages for implied warranty claims).
One Ninth Circuit case applying Montana law sheds some light on that court's view of the role of privity in implied warranty actions for property damages. In Plant Food Co-Op v. Wolfkill Feed Fertilizer Corp., 633 F2d 155 (9th Cir 1980), the third-party plaintiff, Wolfkill, filed an indemnity action against third-party defendant Pillsbury. Wolfkill sought reimbursement for damages it paid on the plaintiff's express and implied warranty claims. The plaintiff recovered damages from Wolfkill amounting to the wholesale cost of its fertilizer that was mixed with mis-labeled fertilizer Wolfkill supplied, as well as the costs for testing and storing the contaminated fertilizer. Wolfkill purchased the mis-labeled fertilizer from a wholesaler, who in turn purchased the fertilizer from Pillsbury. Citing cases dealing with damages for economic loss, Pillsbury argued that Wolfkill had no cause of action against it based on lack of privity. The Ninth Circuit rejected that argument, simply stating: "this is not an economic loss case. Plant Food recovered from Wolfkill for property damage only." Id. at 160. Therefore, the court upheld Plant Food's indemnity claim.
Considering the dicta in Western Seed and what appears to be the general trend in the Ninth Circuit and elsewhere, this court concludes that in Oregon, a plaintiff within the normal distribution chain may recover property damages from a seller with whom he is not in privity based on breach of an implied warranty. Because plaintiffs are in the normal distribution chain for EIFS, they may seek property damages from Dryvit for breach of implied warranty.
C. Misuse
Dryvit next argues that according to both parties' experts, ESSI misused Drvyit's products when installing them. See Defendant's Exhibits 1, 7, and 15. Drvit contends this misuse relieves it of any liability for a breach of an implied warranty.
1. Legal Standard
In Oregon, a manufacturer of a product is relieved of all liability for a breach of warranty claim if damages result from misuse of a the product. Landers v. Safeway Stores, Inc., 172 Or 116, 130, 139 P2d 788, 793 (1943), citing Fredendall v. Abraham, 279 NY 146, 18 NE2d 11 (1938). "Misuse" is defined as "use or handling so unusual that the average consumer could not reasonably expect the product to be designed and manufactured to withstand it — a use which the seller, therefore, need not anticipate and provide for." Findlay v. Copeland Lumber Co, 265 Or 300, 306, 509 P2d 28, 31 (1978), superseded by statute on other grounds as stated in Sandford v. Chevrolet Div. of Gen. Motors, 292 Or 590, 593-94, 642 P2d 624, 626 (1982). The defense of misuse disproves the plaintiffs' charge that the product was not fit for use as warranted. Landers, 172 Or at 130, 139 P2d at 793, citing Fredendall, 279 NY 146, 18 NE2d 11.
2. Application
Plaintiffs argue that Drvyit expressly approved the deviations ESSI made from Drvyit's published specifications and industry standards when installing the EIFS system. Plaintiffs argue that because "misuse" is a use that a seller need not anticipate or provide for, Findlay, 265 Or at 306, 509 P2d at 31, then by approving ESSI's methods, Drvyit cannot rely on misuse as a defense.
Drvyit was aware of and approved each of the deviations ESSI made that allegedly contributed to the EIFS' problems. Dryvit's Field Service Manager, Stotts, admitted he was aware that ESSI had a practice of covering sealant joints. Stotts Depo, p. 52. Dryvit eventually authorized this deviation. Id. at 71. Dryvit also approved bringing the insulation foam and surface coat down to grade (Busher Depo, p. 165), was aware of the lack of adequate slope on the deck rails ( id at 168), and approved eliminating the plastic drainage track. Id. at 177. Busher testified that Dryvit was aware of ESSI's installation techniques on residential jobs. Id. at 102.
Q: Did you have any oral approval —
A: Yes.
Q: — by anybody —
A: Yeah, we would have.
Q: — from somebody from Dryvit or somebody from Insulation Supply?
A: Yeah. I believe Rodney [Anderson, Dryvit's West Coast Vice President,] was sitting in our office with Beverly and Larry Brown, and we went over how we did our system when they were soliciting our business. And we said, "This is the way I want to install it." And they said, "Fine We can go ahead and do it that way."
Q: Okay. So it sounds to me, correct me if I'm wrong, that it's just this one time that you went over how you were going to install the system and you got approval.
A: No. We were constantly doing upgrades and add-ons, so we were constantly interfacing with Dryvit and their personnel or Insulation Supply and their personnel on things that would occur and changes we'd want to make.
Q: Okay. So did you know that —
A: They were — let me qualify this. They were very aware of how we installed our system.
Q: Okay.
A: Our systems were not unknown to Dryvit.
Id. at 166-67.
Such evidence raises a material issue of fact as to whether Dryvit was aware of the methods ESSI was using. As a result, Dryvit is not entitled to summary judgment based on its defense of misuse.
D. Negligence of a Third-Party
Finally, Dryvit argues that it cannot be liable for breach of an implied warranty because ESSI was negligent in installing the EIFS system. Even if such a defense is available in warranty actions, a material issue of fact exists as to whether ESSI installed the EIFS system in a manner Drvyit approved, as discussed above. As a result, Drvyit is not entitled to summary judgment on its defense of third-party negligence.
Accordingly, Drvyit has failed to meet its burden for obtaining summary judgment against plaintiffs' claims of breach of an implied warranty. II. Deceit (Claim 1)
Independent of their other warranty and strict liability claims, plaintiffs allege that Drvyit failed to disclose information for which it had a duty to inform plaintiffs and also made false and misleading representations to induce plaintiffs to purchase its product. Complaint, ¶¶ 21-22. Dryvit argues that it cannot be liable for its omissions because it had no duty to inform plaintiffs of anything. Even if it had a duty, Drvyit argues that plaintiffs cannot prove a prima facie case of fraudulent representation.
A. Collateral Estoppel
Plaintiffs first respond that Drvyit is collaterally estopped from seeking summary judgment against their deceit claim because Multnomah County Circuit Judge Cinniger already found genuine issues of material fact involving this claim. See Marrese v. American Academy of Orthopaedic Surgeons, 470 US 373 (1986) (holding that federal courts must give state judicial proceedings the same full faith and credit as they had by law or usage in courts of the state from which they were taken); Fairbank v. Johnson, 212 F3d 528, 530 (9th Cir, 2000) (finding that an interlocutory holding by another court involving the same parties becomes the "law of the case" and may not be set aside or reversed unless "either cogent reasons or exceptional circumstances exist"); Carpenter v. Land O'Lakes, 880 F Supp 758, 761 (D Or 1995) ("The law of the case most commonly applies when a case is remanded after an appeal. . . . However, the law of the case may apply when a federal district court reviews matters previously decided in state court involving the same parties").
Assuming, without deciding, that Judge Cinniger's opinion has preclusive effect, plaintiffs' arguments for collateral estoppel still fail. Judge Cinniger's opinion on Drvyit's motion for summary judgment in the prior state proceedings mentioned plaintiffs' deceit claim only in the following context:
The motion is allowed to the extent I find that all plaintiff's claims except the deceit claim are in reality products liability claims, and, therefore, the two year statute of limitations [ORS 30.905] applies. The deceit claim remains a separate claim.
Defendant's Exhibit 9, p. 2.
Judge Cinneger was merely characterizing the plaintiffs' claims for the purposes of determining whether they were subject to ORS 30.905, Oregon's statute of limitations for products liability actions. He ruled only that the deceit claim was not a products liability action and made no substantive ruling on the merits of the deceit claim.
B. Fraudulent Concealment
Under Oregon law, proof of fraud generally requires a showing that "(1) the accused had falsely represented a material fact; (2) the accused knew that the representation was false; (3) the misrepresentation was made with the intent to induce the recipient to act or refrain from acting; (4) the recipient justifiably relied on the misrepresentation; and (5) the recipient was damaged by that reliance." Pollock v. D.R. Horton, Inc.-Portland, 190 Or App 1, 20, 77 P3d 1120, 1131 (2003) (citations omitted). However, in addition to affirmative misrepresentations, silence or concealment of facts can be the basis for a fraud action, especially when there are half-truths or misleading statements. Whitlatch v. Bertagnolli, 45 Or App 985, 989, 609 P2d 902, 905 (1980), citing Musgrave et ux. v. Lucas et ux., 193 Or 401, 410, 238 P2d 780, 784-85 (1951); In re Brown, 255 Or 628, 634-635, 469 P2d 763, 765-766 (1970), citing Heise v. Pilot Rock Lumber Co., 222 Or 78, 90, 352 P2d 1072, 1077-78 (1960). "Non-disclosure of a known fact that is material to the transaction is actionable fraud." Whitlatch, 45 Or App at 989, 609 P2d at 905, citing Millikin v. Green, 283 Or 283, 583 P2d 548 (1978). Indeed, "when one party has a fiduciary relationship to the other a simple failure to make a full and fair disclosure of the facts may constitute fraud. Pollock, 190 Or App at 20, 77 P3d at 1132, citing In re Conduct of Brown, 326 Or 582, 595, 956 P2d 188, 196 (1998).
Plaintiffs argue that Drvyit had a duty to inform them that: (1) ESSI would install an Outsulation system, not a moisture-drainage system; (2) even though Dryvit sold a system that allowed moisture to drain, it nevertheless continued to sell the Outsulation system for residential use; (3) sealant joints were the major source of water intrusion behind Outsulation; (4) sealant joints had to be inspected at least twice a year and the sealant replaced if cracked or dried-out; (5) there had been at least 1,000 documented cases of sealant failure; (6) Dryvit's certified applicators, including ESSI, were not following Dryvit's specifications concerning sealant joints in residential construction; (7) Dryvit authorized ESSI to depart from its specifications for covering sealant joints; (8) Dryvit's certified applicators were not required to use materials manufactured and sold by Dryvit, and that a Dryvit warranty would offer no protection if the applicator used these non-Dryvit materials; (9) Dryvit would make no effort to ensure that its certified applicator had installed Dryvit products before issuing a warranty; and (10) Dryvit revised its standard warranty to exclude claims of defective workmanship. Complaint, ¶¶ 13, 22.
It is important to note that plaintiffs did not actually engage in a transaction with Dryvit. Dryvit did not sell the plaintiffs the EIFS system, but instead merely responded to plaintiffs' requests for information by mailing them brochures and then suggesting they contact its local representative, Brown, who referred them to ESSI. Dryvit argues that plaintiffs' contact with ESSI broke any chain of justifiable reliance on any representations of Dryvit. Nevertheless, the occurrence of an actual sales transaction is unnecessary for fraud to occur, so long as the elements of fraud are otherwise met. See Knepper v. Brown, 182 Or App 597, 50 P3d 1209 (2002) (allowing fraud claims against the publisher of a telephone directory that failed to disclose a doctor's actual certifications).
Dryvit's brochures failed to inform plaintiffs of material facts that a reasonable person seeking information on its siding products would want to know prior to entering into a contract, such as what modifications Dryvit's certified applicators were permitted to make. See Millikin, 283 Or at 285, 583 P2d at 550 ("A misrepresentation is material where it would be likely to affect the conduct of a reasonable man with reference to a transaction with another person" (citation omitted)). Additionally, Brown referred plaintiffs to ESSI, a Dryvit-certified applicator, without informing them that Dryvit would not warrant ESSI's actual installation. Dryvit made this recommendation knowing that it would likely produce a sale of Drvyit's products through one of its suppliers, and despite plaintiffs' reasonable expectation under the circumstances that Dryvit provided a more complete warranty of its certified applicator's conduct. Accordingly, there is sufficient evidence to support some allegations of fraudulent concealment for plaintiffs to avoid summary judgment.
C. Fraudulent Misrepresentation
Plaintiffs argue that Dryvit made three representations to them it its brochures and letters that were affirmative misrepresentations: (1) Drvyit's "residential" EIFS system was a "moisture drainage system;" (2) EIFS required "little maintenance" and was "designed to be virtually maintenance free;" and (3) Dryvit had "extensive field service teams." Complaint, ¶¶ 8, 21. Dryvit contends that plaintiffs cannot prove by "clear and convincing evidence" that those statements are fraudulent. Riley Hill Gen. Contractor, Inc., v. Tandy Core, 303 Or 390, 392, 737 P2d 595, 592 (1987).
1. Drvyit's "residential" EIFS System was a "moisture drainage system"
With regard to the first alleged misrepresentation, Dryvit argues that no evidence establishes that Dryvit made this representation to plaintiffs, or if made, intended plaintiffs to rely on it. Plaintiffs testified they do not remember whether any Dryvit official asked whether they intended to use the EIFS system for residential purposes. Debra Byrne Depo, pp. 164-65. Dryvit contends that unless it knew the EIFS was for residential use, it could not have intentionally mislead plaintiffs into believing the product was suitable for use in their homes.
The cover of one of Dryvit's brochures received by plaintiffs represented that its "residential" EIFS system was a "moisture drainage" system. Defendant's Exhibit 4. As such, a person reading this brochure could reasonably conclude that a "residential" system would drain. In fact, Dryvit continued to sell its Outsulation barrier systems for residential purposes, a fact that this brochure did not disclose. Moreover, while two of the brochures that Dryvit sent plaintiffs promoted Outsulation, both give the impression that Outsulation is designed for commercial use, rather than residential use. Every photograph in these two brochures shows commercial buildings (Defendant's Exhibit 3 and Plaintiffs' Exhibit 62F), and one of them states that "[m]ore than a billion square feet of Dryvit materials have been applied on commercial, institutional and industrial structures." Plaintiffs' Exhibit 62F, Bates #00161.
At oral argument, Dryvit explained that some building codes in other locations allow installation of the barrier system on buildings.
After reviewing these brochures, plaintiffs were reasonable in concluding that a residential EIFS system would be a drainage system, not an Outsulation barrier system. Additionally, plaintiffs' inability to recall whether Dryvit asked if their purchase was for residential use before sending the brochures and referring them to ESSI is not sufficient to demonstrate a lack of reliance. If Brown did not know plaintiffs sought to use an EIFS system in their residences, he should have known. At the very least, there is a material issue of fact on this element. Accordingly, summary judgment as to this alleged misrepresentation is inappropriate.
2. Dryvit's EIFS Required "little maintenance" and was "designed to be virtually maintenance free"
With respect to the second alleged misrepresentation, Dryvit first argues the absence of reliance because plaintiffs reached their conclusions regarding the maintenance of the EIFS through their own assumptions. However, Debra Byrne's testimony demonstrates that she reached her conclusion based on her review of Dryvit's brochures. Mrs. Byrne testified that despite her prior experiences with faulty siding, when she and her husband bought Dryvit's EIFS system, her "assumption was that we didn't have to do anything [to maintain it] for five, ten years." Debra Byrne Depo, pp. 178-79. But when asked if she requested any materials related to maintenance from Dryvit, she responded: "I felt they covered that in the brochures that I received." Id. Considering these brochures' declarations about the easy maintenance of EIFS, it was reasonable for Mrs. Byrne to reach this conclusion.
Dryvit next argues that a general promise, such as "little maintenance," cannot be a falsity because the term is not an absolute. This argument must be rejected. The brochures' representations regarding maintenance are similar to those made in Carpenter, 880 F Supp 758, where the plaintiff dairy farmers sued the manufacturer of allegedly defective cattle feed that killed a large number of their cattle. The manufacturer had represented, among other things, that it marketed only quality feed. Finding that the statements were actionable as misrepresentations, the court reasoned:
the alleged misrepresentations do not, as a matter of law, constitute statements of opinion, sales talk, or mere puffery. The misrepresentations alleged concern the quality and condition of the feed to be supplied by the defendants. Accordingly, the question of whether the representations made were fraudulent misrepresentations is for the trier of fact.880 F Supp at 765 (emphasis added).
As in Carpenter, Dryvit's declarations regarding the maintenance of its EIFS system were statements concerning the "quality and condition" of its product. Moreover, the case cited by Dryvit in support of its argument, Webb v. Clark, 274 Or 387, 392-93, 546 P2d 1078, 1080 (1976), only addresses the rule that "mere nonperformance of a promise made, or the failure to carry out an intention expressed, in the course of negotiations, is neither fraud nor evidence of fraud." Representing that a product will require little maintenance relates to the quality or condition of the product, and is wholly different from the promise by the contractor in Webb to install a system that "would be a brand new, modern, up-to-date unit, the best of its type that money could buy." Id. 3. Dryvit had "extensive field service teams"
Webb also addressed whether a contractor acted fraudulently when stating that a heater was "a properly designed unit for [the plaintiff's] home." 274 Or at 391, 546 P2d at 1080. The court treated the statement as actionable for a claim for fraudulent misrepresentation, but found insufficient evidence that the statement was actually made. Id.
Finally, Dryvit argues that plaintiffs reached the conclusion that it had "extensive field service teams" based on their own assumptions rather than any statements Dryvit made to them. However, in a letter sent to Mrs. Byrne in response to her inquires, Dryvit wrote: "Our total commitment to the industry is evident in the superior quality of our products, our extensive technical and field service teams, and our worldwide network of trained contractors." Defendant's Exhibit 17. There is no other reason for Dryvit's letter to have contained this statement unless it was meant to encourage prospective buyers to believe that Dryvit had "extensive field service teams" that would somehow be of service to them if they bought Dryvit's products, such as by monitoring EIFS applicators or inspecting a particular building after the EIFS was installed. After receiving this letter, plaintiffs contacted Brown, who then referred them to ESSI for application of Dryvit's EIFS system. Therefore, plaintiffs did not reach their conclusion based on their own assumptions. They were reasonable in relying on Dryvit's statement to conclude that Dryvit had field service teams who would ensure that its product was installed on their home properly. Dryvit lacked any sort of "extensive field service teams." Stotts Depo, pp. 6-7. Thus, plaintiffs have submitted sufficient evidence to avoid summary judgment on this alleged misrepresentation.
III. Applicability of the Magnuson-Moss Warranty Act (Claim 3)
Plaintiffs allege that Dryvit's five-year limited warranty did not comply with the MMWA's requirements. Dryvit argues that plaintiffs have no MMWA claim because it did not manufacture the allegedly defective product, its EIFS system was not a "consumer product" covered by the MMWA, 15 USC § 2301(1), and plaintiffs failed to provide Dryvit with notice and opportunity to cure. A. Whether Dryvit Manufactured the Defective Product
As an initial matter, Dryvit argues that it did not manufacture the allegedly defective product. Dryvit does not further articulate this argument, but this court assumes it is similar to Dryvit's contention that plaintiffs' implied warranty claim is invalid because Dryvit did not manufacture the EIFS components that allegedly failed. However, as discussed previously, Dryvit sells an EIFS system, not mere siding. Even if the actual components that failed were fasteners or other materials manufactured by others, plaintiffs argue that Dryvit's overall EIFS Outsulation system is defective, mainly because as with all cladding/barrier systems, water will inevitably penetrate it, become trapped, and cause dry rot. This argument is sufficient to establish that Dryvit manufactured a defective product.
B. Whether Dryvit's EIFS System was a "Consumer Product" 1. Legal Standards
The MMWA only applies to a warranty that covers a "consumer product," which is defined as "any tangible personal property which is distributed in commerce and which is normally used for personal, family, or household purposes (including any such property intended to be attached to or installed in any real property without regard to whether it is so attached or installed)." 15 USC § 2301(1). Federal regulations separate products into two major categories: products which are separate items of equipment attached to real property and products that are not (otherwise known as "integral component parts of the structure"). 16 CFR § 700.1(c)-(f). "Separate items of equipment," such as air conditioners, furnaces, and water heaters, always qualify as consumer products covered by the MMWA. 16 CFR § 700.1(d). Whether non-separate items of equipment (integral component parts of the structure) are consumer products for the purposes of the MMWA depends on how they are purchased. See 16 CFR §§ 700.1(d), (e).
Additionally, "where it is unclear whether a particular product is covered under the definition of consumer product, any ambiguity will be resolved in favor of coverage." 16 CFR § 700.1(a).
2. Separate Items of Equipment
Dryvit's EIFS system is not a "separate item of equipment attached to real property" under 16 CFR § 700.1(d). A siding system attached onto the outside of a house does not compare with the other examples of a "separate item of equipment attached to real property" given in 16 CFR § 700.1(d), such as "appliances and other thermal, mechanical, and electrical equipment."
3. Non-separate Items of Equipment (Integral Component Parts)
The next issue is whether Dryvit's EIFS system qualifies as a non-separate item of equipment (integral component part) covered by the MMWA as a result of the manner in which it was purchased. Federal regulations describe five basic purchase situations where the MMWA will consider non-separate items of equipment, such as wiring, plumbing, ducts, and in this case, siding systems, to be "consumer products:"
(1) when a consumer purchases any products "which go into the construction of a consumer dwelling" when sold "over the counter" by hardware and building supply retailers; (2) when a consumer contracts to purchase materials in the improvement, repair, or modification of a home (for example, paneling, dropped ceilings, siding, roofing, storm windows, remodeling); (3) when a consumer purchases a dwelling where the products cannot be practically distinguished from the realty; (4) when a consumer contracts to build a home; or (5) when a consumer contracts for a substantial addition to be added to the home (such as a garage or an in-ground swimming pool).People ex rel. Mota v. Central Sprinkler Corp., 174 F Supp 2d 824, 831 (CD Ill 2001), citing 16 CFR §§ 700.1(e), (f).
The EIFS system was purchased and installed on plaintiffs' already existing homes. This would place their purchase into either the first or second of the above categories of non-separate items of equipment. See Mota, 174 F Supp 2d at 831 (analyzing commercial sprinklers installed on existing structures).
The first category indicates that goods purchased over the counter from hardware and building supply retailers will be considered consumer products even if they are not separate items of equipment. 16 CFR § 700.1(e). However, plaintiffs purchased Dryvit's EIFS system from ESSI, a vendor and applicator. They do not allege that the same system could have been purchased by consumers at retail hardware or home improvements stores. Therefore, the EIFS system does not fit into this category of non-separate items of equipment covered by the MMWA.
The second category of non-separate items of equipment covered by the MMWA is "where a consumer contracts for the purchase of [non-separate items of equipment] in connection with the improvement, repair, or modification of a home (for example, paneling, dropped ceilings, siding, roofing, storm windows, remodeling)." 16 CFR § 700.1(e). This category does cover plaintiffs' EIFS purchase. Plaintiffs contracted to purchase Dryvit's EIFS system in order to repair or improve their existing home. See Muchisky v. Frederic Roofing Co., Inc., 838 SW2d 74 (Mo Ct App 1992) (holding that a roofing system installed to replace an existing system in a home is a "consumer product"). Therefore, the EIFS system is a "consumer product" for the purposes of the MMWA.
Dryvit's reliance on People ex rel. Mota v. Central Sprinkler Corp., 174 F Supp 2d 824, is misplaced. In that case, the plaintiff sued a sprinkler manufacturer that installed sprinklers in existing government buildings. The court found that the commercial water sprinkler systems were not consumer products since they were not manufactured or advertised as for use by the average consumer, and under the facts of that case, were not purchased to improve, repair, or modify a home. Id. at 831. Here, Dryvit did manufacture and advertise an EIFS system that was bought for use in residential homes by average consumers.
C. Opportunity to Cure
No action under the MMWA, with the exception of class actions, "may be brought . . . for failure to comply with any obligation under any written or implied warranty or service contract . . . unless the person obligated under the warranty or service contract is afforded a reasonable opportunity to cure such failure to comply." 28 USC § 2310(e).
Plaintiffs informed Dryvit in a letter dated September 13, 2000, that they were asserting a claim under their warranty because the products used in their EIFS system were "substandard." Defendant's Reply Exhibit A (copy of letter); Complaint, ¶ 18, 33. Defendants argue that the letter only identified as defective the insulation boards and fasteners, both of which Dryvit did not manufacture. Dryvit contends it was not until the filing of this lawsuit that it was informed its design is defective. However, the letter did inform Dryvit that a claim was being asserted pursuant to the warranty offered by Dryvit. Even if the specific products plaintiffs referenced as defective were not manufactured by Dryvit, this claim was enough to put Dryvit on notice that plaintiffs were objecting to Dryvit's product in at least some way.
Moreover, under the MMWA, the opportunity to cure requirement can also be met where the manufacturer knew of the defects at the time of sale. For example, a court found the requirement satisfied by an allegation that the defendant automobile manufacturer knew of an alleged braking system's defects at the time it made automobile sales. Alberti v. Gen. Motors Corp., 600 F Supp 1026, 1028 n 2 (D DC 1985); see also Radford v. Daimler Chrysler Corp., 168 F Supp 2d 751, 754 (ND Ohio 2001) (finding the MMWA's opportunity to cure requirement met where plaintiff alleged defendant automobile manufacturer knew of the allegedly defective instrument panel at the time of sale of the plaintiff's car). Considering plaintiffs are alleging that Dryvit previously knew of numerous problems with its Outsulation system, such that its manufacturing should have been discontinued, the requirement of an opportunity to cure was met.
Accordingly, summary judgment should be denied as to the MMWA claim.
IV. Validity of Strict Liability Claim (Claim 2)
Dryvit's final argument is that plaintiffs cannot recover under a strict liability theory because, in Dryvit's view, they are only seeking to recover for pure economic loss.
A. Legal Standards
ORS 30.920(1) provides that a seller can be strictly liable only for physical harm or property damage caused by a defective product. A defective product need not be "man-endangering" to produce strict liability; "it is sufficient that the defective product poses an unreasonable danger to property." Russell v. Deere Co., 186 Or App 78, 82, 61 P3d 955, 958 (2003), citing Gladhart v. Oregon Vineyard Supply Co., 164 Or App 438, 453, 994 P2d 134, 142-43 (1999), rev'd on other grounds, 332 Or 226, 26 P3d 817 (2001). "A defective product is not unreasonably dangerous, however, if it poses a risk only to itself; rather, the defective product must pose a risk to other property." Id; see also East River, 476 US at 866-67 (when determining the role of strict liability in admiralty, the Court noted that strict liability applies to manufacturers whose defective products cause personal injuries or property damage, but "[i]n the traditional `property damage' cases, the defective product damages other property").
ORS. § 30.920 provides, in relevant part:
(1) One who sells or leases any product in a defective condition unreasonably dangerous to the user or consumer or to the property of the user or consumer is subject to liability for physical harm or damage to property caused by that condition, if:
(a) The seller or lessor is engaged in the business of selling or leasing such a product; and
(b) The product is expected to and does reach the user or consumer without substantial change in the condition in which it is sold or leased.
(2) The rule stated in subsection (1) of this section shall apply, even though:
(a) The seller or lessor has exercised all possible care in the preparation and sale or lease of the product; and
(b) The user, consumer or injured party has not purchased or leased the product from or entered into any contractual relations with the seller or lessor.
(3) It is the intent of the Legislative Assembly that the rule stated in subsections (1) and (2) of this section shall be construed in accordance with the Restatement (Second) of Torts sec. 402A, Comments a to m (1965). All references in these comments to sale, sell, selling or seller shall be construed to include lease, leases, leasing and lessor.
Strict liability does not apply to "a defective product that merely causes property to decrease in value or subjects the user to economic loss" Russell, 186 Or App at 83, 61 P3d at 958, citing Brown v. Western Farmers Assoc., 268 Or 470, 480, 521 P2d 537, 541-42 (1974). Indeed, according to the "`economic loss doctrine,'" a claim seeking recovery for a "`stranger's purely economic loss'" — i.e. to recover from a party with whom there is no contract or privity — "must be based upon some duty beyond the common-law duty to exercise reasonable care to prevent foreseeable harm. Int'l Paper Co. v. TCR Northwest 1993, Inc., 2004 WL 1173182, *4 (D Or May 25, 2004), quoting Onita Pac. Corp. v. Trustees of Bronson, 315 Or 149, 159, 843 P2d 890 (1992). The rationale underlying the economic loss doctrine is that damage to a product itself "means simply that the product has not met the customer's expectations, or, in other words, that the customer has received `insufficient product value.' The maintenance of product value and quality is precisely the purpose of express and implied warranties." East River, 476 US at 872.
B. Analysis
The harm that occurred here was not merely damage to the EIFS system installed on plaintiffs' homes. Instead, Dryvit's EIFS leaked and trapped water, causing physical damage to plaintiffs' underlying, existing structures. At first glance, this appears to be the sort of damage to an owner's property, as opposed to damage only to the product itself, that is compensable under ORS 30.920.
Dryvit responds that the EIFS was integrated into the plaintiffs' homes such that the product at issue here was the plaintiffs' entire buildings, not just the EIFS system. Therefore, even when the EIFS system leaked and damaged the underlying structures, no damage occurred to "other property" such that Dryvit can be held strictly liable. Russell, 186 Or App at 82, 61 P3d at 958; see also East River, 476 US at 866-67. Dryvit points to other integrated products situations where the economic loss doctrine precluded strict liability claims for faulty construction of buildings, either by a contractor who acted negligently or by a manufacturer who provided defective products.
In International Paper Co. v. TCR Northwest 1993, Inc., 2004 WL 1173182, Magistrate Judge Jelderks discussed a contribution action brought by International Paper ("IP"), the maker of exterior siding, against subcontractors who allegedly applied the exterior siding to the property owner's home in a negligent manner during construction, which led to water damage to the underlying building. The subcontractors had no contract with the property owner who sued Masonite, a subsidiary of IP and the supplier of the siding; rather, they contracted with the general contractors (who were previously dismissed from IP's contribution action). Therefore, the court applied the economic loss doctrine in order to determine:
whether damage to a building itself resulting from negligent construction is the kind of property damage that is recoverable in the absence of any special relationship with the owners, or is the kind of "economic loss" that is only recoverable if the subcontractors and the owners have the kind of relationship that gives rise to potential tort liability.Id. at *4.
After examining several Oregon precedents, Judge Jelderks held:
The conclusion that the damage defective construction causes to the structure itself is "economic loss" not generally actionable in tort is consistent with the decisions cited above holding that construction defects that cause personal injuries are actionable in tort, while defects reducing the value of the property are actionable in contract. See Cabal [v. Donnelly,] 302 Or. 115[, 727 P.2d 111 (1986)], Woodward [ v. Chirco Constr. Co., Inc.], 141 Ariz. 514[, 687 P.2d 1269 (1984)].
Based on those decisions, and on the Jones [ v. Emerald Pac. Homes, Inc., 188 Or App 471, 71 P3d 574, review denied, 336 Or 125 (2003),] court's implicit conclusion that damage resulting from defective construction is an "economic loss," I conclude that any damage to a building allegedly caused by a subcontractor's negligent work could be recovered through a tort claim only if the subcontractor had a relationship with the owner that would impose the heightened "duty of care" discussed in Onita [ 315 Or 149] and related decisions.Id. at *5.
Judge Jelderks then concluded that the subcontractors and the owners did not have any sort of special relationship giving rise to a heightened duty of care that could create liability for economic loss caused to the owners' property.
Plaintiffs do not contend they have a special relationship with Dryvit such that Dryvit can be liable if the damage caused to their home was merely economic loss. However, plaintiffs argue that the economic loss doctrine, as applied in International Paper to new construction, does not apply to their claim for property damage.
International Paper does not create an exception for manufacturers of construction products from the general rule of strict liability where a defective product causes damage to property other than the product itself. See East River, 476 US at 867. Instead, International Paper and nearly every other construction-related case cited by Dryvit involve construction of new buildings, not improvements or modifications to an existing structure. A purchaser of a new building buys a product consisting of a building and all its integrated parts, including siding. A purchaser of a new structure can contract for warranties, usually from the general contractor, that cover defects in the structure as a whole and all its component parts, including its siding system. See Casa Clara, 620 So2d at 1247 ("If a house causes economic disappointment by not meeting a purchaser's expectations, the resulting failure to receive the benefit of the bargain is a core concern of contract, not tort law"). On the other hand, when entering into a contract for improvement or modification of a structure, the product purchased is the new addition to the building, such as an EIFS system, not a whole new building. This type of purchaser can usually obtain a warranty covering the new addition, not for the building as a whole. Some of the construction-related economic loss doctrine cases cited by Dryvit tacitly recognize this difference. See, e.g. Easling, 804 F Supp at 590 (no recovery for building damage caused by defective bricks because plaintiffs purchased completed apartment complex and not a load of bricks); Oceanside, 659 A2d at 271 (no recovery for building damage caused by defective windows because plaintiff owners purchased completed condominium units and not windows); Casa Clara, 620 So2d at 1247 (no recovery for damages caused by defective concrete because plaintiffs purchased finished homes, not component parts).
Dryvit cites the following construction-related cases which either involved new construction or the court failed to mention when the defective product was installed. Mt. Lebanon Personal Care Home, Inc. v. Hoover Univ., Inc., 276 F3d 845 (6th Cir 2002) (chemicals used to treat trusses included in original construction); Chicago Heights Venture v. Dynamit Nobel of Am., Inc., 782 F2d 723 (7th Cir 1986) (facts unclear on when roof built); Wilson v. Dryvit Sys., Inc., 206 F Supp2d 749 (ED NC 2002) (siding applied when home originally built); In re Masonite, 21 F Supp 2d 593 (ED La 1998) (installation of siding on new condominiums); Hartford Fire Ins. Co. v. Huls Am., Inc., 893 F Supp 465 (ED Pa 1995) (opinion unclear on when roof built); Easling v. Glen-Gery Corp., 804 F Supp 585 (D NJ 1992) (bricks used to build apartment buildings); Keck v. Dryvit Sys., Inc., 830 So2d 1 (Ala 2002) (plaintiffs suing for damage to their home caused by a faulty EIFS system applied when the home was originally built); Nastri v. Wood Bros. Homes, 142 Ariz 439, 690 P2d 158 (Ariz Ct App 1984) (cracks in floors built in original construction); Yacht Club II Homeowners Assoc., Inc. v. A.C. Excavating, 94 P3d 1177 (Colo Ct App 2003) (defects in original construction); Case Clara Condo. Ass'n Inc. v. Charley Toppino and Sons, Inc., 620 So2d 1244 (Fla 1993) (concrete used to build a new home); Redarowicz v. Ohlendorf, 441 NE2d 324 (Ill 1982) (defective chimney, wall, and patio built in original construction); Washington Courte Condo. Ass'n-Four v. Washington-Golf Corp., 501 NE2d 1290 (Ill Ct App 1986) (defects in original condominium construction); Gunkel v. Renovations, Inc., 797 NE2d 841 (Ind Ct App 2003) (facade work made when home built); Northwest Ark. Masonry v. Summit Specialty Prods., 31 P3d 982 (Kan 2001) (walls part of original construction); Prendiville v. Contemporary Homes, Inc., 83 P3d 1257 (Kan Ct App 2004) (leaky stucco siding applied when home originally built); N.W. Ark. Masonry, Inc. v. Summit Specialty Prods., Inc., 31 P3d 982 (Kan Ct App 2001) (cement powder used when building originally built); Oceanside at Pine Point Condo. Owners Ass'n v. Peachtree Doors, 659 A2d 267 (Me 1995) (windows installed in original condominium construction); Calloway v. City of Reno, 993 P2d 1259 (Nev 2000) (roofing and siding installed when townhouses originally built); Hemming v. Certainteed Corp., 468 NYS2d 789 (NY App Div 1983) (opinion unclear on when siding used); Am. Tower Owners Assoc., Inc., v. CCI Mech. Inc., 930 P2d 1182 (Utah 1996) (plumbing and mechanical systems in original construction); Sensenbrenner v. Rust, Orting Neale, 374 SE2d 55 (Va 1998) (indoor pool originally built in home); Griffith v. Centex Real Estate Corp., 969 P2d 486 (Wash Ct App 1998) (new homes); Bay Breeze Condo Ass'n v. Norco Windows, 651 NW2d 738 (Wis 2002) (windows installed in original condominium construction).
Several cases Dryvit cited did not involve construction. Saratoga Fishing Co. v. J.M. Martinac, 520 US 875 (1997) (fishing vessel); Clark v. Int'l Harvester Co., 581 P2d 784 (Idaho 1978) (defective tractor); Okla. Gas Electric v. McGraw-Edison, 834 P2d 980 (Okla 1992) (defective transformer).
Deciding that a manufacturer could not be liable for negligence or strict liability for the defective components of a supertanker's turbine, which caused damage only to the turbine itself, the Supreme Court warned against too easily finding that a product is separate property:
"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."East River, 476 US at 867, quoting Northern Power Eng'g Corp. v. Caterpillar Tractor Co., 623 P2d 324, 330 (Alaska 1981).
However, the circumstances here are different than in East River. The defective component in East River was a failed first-stage steam reversing ring, which was part of a turbine unit the defendant manufacturer sold as a whole to the builder of the supertanker. It is easy to see that the defective product in that situation was the turbine as a whole, not the ring. Otherwise nearly every complicated piece of machinery that includes even so much as a defective screw could create liability in tort for vast amounts of economic losses, such as for the period of time a vessel with a broken turbine spends in port. If this were the rule, "contract law would drown in a sea of tort." Id. at 866 (citation omitted). Instead, the better rule is to require the purchaser of the turbine to seek recovery in the warranties he contracted for when purchasing the turbine and its component parts.
On the other hand, an EIFS system placed on an existing building is wholly unlike a ring built into a turbine unit, or even a newly constructed building sold with an EIFS system. The EIFS system was not bought as part of an entire home or piece of machinery. It is a product installed on an existing building which retains its separate identity as a product. See Calloway, 993 P2d at 271 n 5 (acknowledging in dicta that "certain products may be installed in a building and retain their separate identities as products, without becoming an integrated part of the structure. In such instances, the doctrine of strict products liability could apply to the manufacturers of these distinct products, if dangerously defective").
Dryvit cites several cases as specifically rejecting any difference between new construction and renovation for the purpose of the economic loss doctrine. Two of these cases, Council of Unit Owners of Breakwater House Condo. v. Simpler, 603 A2d 792 (Del 1992), and LTV Steel Co. Inc. v. Northwest Eng'g Constr., Inc., 845 F Supp 1295 (ND Ind 1994), are not on point. They address the difference between renovated buildings and new construction with regard to claims for breach of implied warranties and breach of an Indiana construction indemnity statute, respectively, not strict liability or other tort claims. Similarly, Ridge Heating, Air Conditioning and Plumbing, Inc. v. Brennen, 762 A2d 161 (Md Ct Spec App 2000), is not on point because it held only that the residential exception to the state mechanics' lien statute applies to repairs or improvements to homes. It did not address tort issues.
Another case cited by Dryvit, Towers Tenant Assoc., Inc. v. Towers Ltd. P'ship, 563 F Supp 566 (D DC 1983) also is distinguishable. In that case, plaintiffs sued a developer for negligence and breach of implied warranties, among other claims, arising from the defective conversion of their building into a condominium. The court refused to dismiss the negligence claim, finding a legal duty was imposed by an obligation independent of the contract itself. It did not address the economic loss doctrine or related issues. Regarding the implied warranty claims, the issue was whether certain condominium laws passed by the District of Columbia's Council precluded claims for breach of implied warranties of merchantability, reasonable fitness for ordinary use, and compliance with workmanlike standards. At that time, the District of Columbia's courts held that the doctrines of implied warranty and strict liability in tort were "conceptually identical." Id. at 574. As a result, the court sought to determine whether products liability/implied warranties principles applicable to real estate transactions concerning new construction also applied to extensive conversion and renovation of an existing structure. The Towers court reasoned that "[e]ven though many unit owners might have been previous residents of the Towers, they were entitled to rely on the good faith and expertise of the defendants to provide quality renovations, when those former tenants made their ultimate decisions to purchase units outright." Id. at 575. Therefore, the court held that "[u]nder these circumstances, we perceive no meaningful difference between a newly constructed apartment building and an old building that has been significantly refurbished and reconstructed, for purposes of imposing liability for defective conditions." Id. Accordingly, it held that the District's condominium laws did not bar this products liability/implied warranty independent cause of action.
The court found that the other plaintiff, the tenant association, could pursue its claim of breach of the implied warranty of habitability based on the long-standing right to make that claim in the District of Columbia.
Towers contrasts with this case because Oregon treats implied warranty claims differently than products liability claims. Furthermore, Towers did not address the issue of new construction versus renovation in the context of the economic loss doctrine and the requirement of damage to "other property" as a basis for strict liability. It simply decided that certain local statutes did not bar a claim related to the conversion and renovation of an existing building. If presented with a more concrete issue related to whether a certain construction defect was property other than the building itself, such as a new siding system installed to replace existing siding, the court might have reached a conclusion more relevant to this case.
In a footnote, Dryvit also cites Sebago, Inc., v. Beazer East, Inc., 18 F Supp2d 70 (D Mass 1998), in which the prior owner of the plaintiff's building installed a phenolic foam roof insulation ("PFRI") on the roof as part of a renovation. The PFRI was defective and permitted leaks that damaged the plaintiff's property, caused a loss of rents, and lowered building value. The court held that the product at issue was the entire building. Therefore, the economic loss doctrine barred the plaintiff's negligence and strict liability claims against the manufacturer because no "other property" was damaged by the building/PFRI's failure. In reaching this conclusion, the court determined the relevant product by applying the "purchaser's perspective" or "object of the bargain" test, which seeks to determine what product the buyer purchased or bargained for, rather than the product sold by the defendants. Id. at 91 (citations omitted).
Sebago actually involved two plaintiffs, only one of which had a pre-existing building on which the PFRI was installed. Sebago's discussion of the other plaintiff, whose building was provided with the roof foam at the time of its original construction, is not relevant.
This court is not persuaded by Sebago's reasoning. By simply applying the purchaser's perspective test, Sebago found that because the plaintiff "purchased a building from its former owners, the building [rather than the PFRI] is the relevant product for purposes of the economic loss doctrine." Id. at 92. However, that approach contravenes the approach of the Supreme Court in Saratoga Fishing Co. v. J.M. Martinac, 520 US at 884.
In Saratoga, plaintiffs were the second owners of a fishing vessel that sank due to a defective hydraulic system. They sued the manufacturer of the hydraulic system for loss of a skiff, fishing net, and spare parts installed by the previous owners. The Court drew a distinction between components added to a product by a manufacturer before the product's sale to a user (the "integrated product" rule) and " equipment added after the initial sale, despite the presence of a resale by the Initial User." Id. (emphasis in original). Therefore, the manufacturer of the vessel, who installed the defective hydraulic system as a component part, could be held liable in tort for the cost of the added equipment to the plaintiff, who purchased the vessel with the added equipment. In contrast, damages caused by the defective hydraulic system to any other part of the vessel could not be recovered. "[I]t is not the 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. Saratoga, 520 US at 883.
The Court also noted that all the parties conceded that had the vessel remained in the hands of the initial user, the loss of the added equipment could have been recovered in tort.
Although recognizing Saratoga's distinction between components added to a product by the manufacturer prior to the initial sale and those added by a subsequent user, Sebago concluded that the plaintiff, as a subsequent purchaser, bargained for the purchase of a completed building. However, under Saratoga's analysis, the PFRI was an added product, not an integrated product, because it was added to the building by the prior owner after the initial construction and sale of the building. In any event, unlike Sebago, this case involves a product purchased and installed on an existing building by an initial user, not by a subsequent purchaser. From a purchaser's perspective, plaintiffs clearly contracted to buy an EIFS system, not an entire building.
Sebago also rejected the argument that the PFRI was installed as a replacement part during the renovation, citing Sea-Land Service, Inc., v. Gen. Elec., Co., 134 F3d 149 (3rd Cir 1998). In that case, the plaintiff sought lost profits while its ship was inoperable due to the damage caused by a defective connecting rod which had been replaced in an old diesel engine. The Third Circuit concluded that the replacement part was not a new product, but was integrated into the engine for purposes of the economic loss doctrine. It reasoned that because all "commercial parties are aware that replacement parts will be necessary, the integrated product should encompass those replacement parts when they are installed in the engine." Sea-Land, 134 F3d at 154. It also noted that "in purchasing and installing replacement parts, the parties can, as with the original purchase, negotiate the terms of the sale and of any warranties." Id.
Finding Sea-Land persuasive, Sebago held that:
the PFRI was purchased to be installed and to become integrated with the building. It is a component of the building and has no use to the plaintiffs otherwise. Moreover, in purchasing and installing replacement parts, the parties could have, as with the original purchase, negotiated the terms of the sale and of any warranties. Accordingly, the result of the purchaser's perspective test is the same whether the PFRI is viewed as a component part or a replacement component part.18 F Supp2d at 93 (citations omitted).
In reaching this conclusion, Sebago took too far the warning in East River against easily finding that a small component of a complex machine was "other property." 476 US at 867. There is a large difference between foam roof insulation installed as part of a new roof on a preexisting building and the replacement of a single component in a complex piece of machinery. A new roof installed on a pre-existing building does not lose its distinctive character as a separate product in the way that a rod, bolt, or nut does when replacing another rod, bolt, or nut in a complex piece of machinery. Additionally, the purchaser of a new roof (or siding system) on a pre-existing building does not anticipate replacing it for years, if ever, unlike the purchaser of a complex piece of machinery, who usually anticipates replacing many of the component parts at expected times.
Moreover, Sebago relied too heavily on the potential for a warranty to cover any and all damage. Relying on a potential warranty, which may or may not be obtained, could make it impossible to ever find damage to "other property" sufficient to support a strict liability claim. Besides, it seems unlikely that a person can obtain a warranty covering all damage to an existing building and business for a simple renovation item.
As made clear by Russell, 186 Or App at 82, 61 P3d at 958, strict liability can be applied when a defective product causes damage to property other than the product itself. Plaintiffs have demonstrated that the EIFS system installed on their pre-existing buildings was separate property from their buildings as a whole. As a result, when the EIFS system failed, causing damage to their houses, this was damage to "other property" for which defendants can be strictly liable under ORS 30.920. The economic loss doctrine does not preclude this claim.
The $110,795 plaintiffs seek to recover from their strict liability claim represents the costs of the repair of the dry rot in plaintiffs' homes caused by the failed EIFS system and the replacement of the EIFS system with cedar siding. Complaint, ¶¶ 17, 27. Dryvit did not argue that plaintiffs cannot recover the costs of replacing the EIFS system if they can otherwise recover for the damage to their homes. Therefore, this court will not address that issue.
RECOMMENDATION
For the reasons stated above, Dryvit's motion for summary judgment (docket #15) should be DENIED, except as to the constitutional issues which are stayed pursuant to this Court's prior Order (docket #47).SCHEDULING ORDER
Objections to these Findings and Recommendation(s), if any, are due October 29, 2004. If no objections are filed, then the Findings and Recommendation(s) will be referred to a district court judge and go under advisement on that date.
If objections are filed, then the response is due within 10 days after being served with a copy of the objections. When the response is due or filed, whichever date is earlier, the Findings and Recommendation(s) will be referred to a district court judge and go under advisement.