The economic-loss rule and Section 75-1.1: current trends
Appeared as part of the sponsored section, 2018 Law Journal, in the September issue.
Ellis & Winters LLP
When a dispute involves economic losses in a contractual setting, the economic-loss rule operates to bar tort claims to recover those economic losses.
Defendants frequently rely on the rule as a defense to any of those extracontractual claims. While the rule’s application in those settings is relatively clear, how does it apply to claims brought under Section 75-1.1 of North Carolina’s Unfair and Deceptive Trade Practices Act?
Courts have not agreed. Even on similar facts, courts have reached different conclusions. This article examines some courts’ decisions on the issue, with some applying the rule to bar the claims and others refusing to apply the rule. In the absence of guidance from the North Carolina Supreme Court, it appears that the economic-loss rule’s application will continue to depend on the circumstances of the case and the particular court’s approach to the issue.
Applying the economic-loss rule in Buffa v. Cygnature Construction & Development, Inc.
In Buffa v. Cygnature Construction & Development, Inc., the North Carolina Court of Appeals held that the economic-loss rule barred an UDTPA claim.
In 2006, the plaintiffs built a home in Beech Mountain. Five years after the construction ended, the plaintiffs discovered extensive water damage that had already harmed the structural integrity of the home. Several inspections suggested that the water had entered through windows.
The plaintiffs sued several companies associated with the construction, including the window manufacturer. The plaintiffs’ UDTPA claim alleged only that the window manufacturer failed to notify a known design defect. The trial court granted summary judgment in favor of the window manufacturer because the economic-loss rule barred the 75-1.1 claim and several tort claims.
The plaintiffs appealed. On the section 75-1.1 claim, the plaintiffs argued that the economic-loss rule does not apply to UDTPA claims at all. They cited a string of state and federal cases that allowed consumers to recover under section 75-1.1 “for purely economic loss.”
The court rejected the plaintiffs’ “conten[tion that] the trial court erred by applying the economic-loss rule to a claim of unfair and deceptive trade practices.”
While the Buffa decision suggests that the decision is resolved, a different panel of the Court of Appeals held otherwise at nearly the same time.
Declining to apply the economic-loss rule in Bradley Woodcraft, Inc. v. Bodden
In Bradley Woodcraft, Inc. v. Bodden, a different panel of the Court of Appeals issued an opinion in the opposite direction. The court appeared to hold that fraud claims are never subject to the economic-loss rule. As a result, the court appeared to similarly refuse to apply the doctrine to the UDTPA claim as well.
In 2013, Christine Bodden and her husband bought a 20-year-old home in Raleigh. They signed an agreement with a contractor to renovate the home. The homeowners were dissatisfied with the renovation work and discussed their complaints with the contractor. After the discussion, they believed that the contractor had promised to fix the problems, so the homeowners used a credit card to pay the final $26,000 due. The contractor, in contrast, did not believe that he had agreed to do any further work. When the contractor did no further work, the homeowners disputed the $26,000 charge on the credit card.
The contractor then sued for breach of contract. The homeowners counterclaimed for breach of contract, fraud, and violations of the UDTPA. The case went to trial. At the close of plaintiffs’ evidence, the contractor moved for a directed verdict on the fraud and UDTPA counterclaims, citing the economic-loss rule. The trial court granted the contractor’s motion.
On appeal, the Court of Appeals focused on the fraud claim. On that claim, the court seemed to hold categorically that the economic-loss rule does not apply to fraud claims: “[W]hile claims for negligence are barred by the economic-loss rule where a valid contract exists between the litigants, claims for fraud are not so barred.”
The court went on to reverse the directed verdict against the homeowners’ UDTPA claim because it was “factually interwoven” with the fraud claim. This ruling arguably extended the court’s economic-loss reasoning to section 75-1.1.
With the North Carolina courts coming to different conclusions, perhaps courts outside the state can provide some clarity.
Still another approach from a federal court in Duncan v. Nissan North America, Inc.
A recent decision from the United States District Court of Massachusetts provides another data point in the analysis. In Duncan v. Nissan N. Am., Inc., Judge Denise Casper applied the economic-loss rule to dismiss a UDPTA claim brought under North Carolina’s statute in a putative class action.
The putative class in Duncan included eight plaintiffs from across the country who had purchased several different models of Nissan vehicles. Their claims focused on the vehicles’ timing chain tensioning systems, or TCTS. According to the plaintiffs, the TCTS was defective, caused damage to the vehicles’ engines, and posed attendant safety risks. One of the named plaintiffs was a North Carolina citizen. She purchased her 2007 Nissan Pathfinder in North Carolina, and she learned in 2015 that the car’s TCTS needed to be replaced.
The named plaintiffs alleged violations of the unfair and deceptive trade practices statutes of several states, including a claim under the North Carolina statute. The court’s analysis of the claim turned on its reading of the economic-loss rule and its views of how the rule applies to an UDTPA claims.
The court reviewed the history of the economic-loss rule in North Carolina and relied on Moore v. Coachmen Industries, a 1998 decision of the North Carolina Court of Appeals. Judge Casper characterized the holding in Moore as the plaintiff having “failed to state a claim under UDTPA.” The plaintiff in Moore, however, asserted a negligence claim, not a UDPTA claim. When the court characterized the holding in Moore, it was likely relying on other courts’ extension of Moore to section 75-1.1 claims. The court separately distinguished on the facts each of the cases on which the plaintiffs relied, and held that “Moore makes clear that where the parties have done so [through an agreement], the UDTPA does not provide an additional remedy that would upset the balance struck by the parties.”
These courts’ differing decisions provide guideposts to litigants in navigating the economic-loss rule in the context of a UDPTA claim. Plaintiffs can rely on decisions like Bradley Woodcraft to attempt to bring extracontractual claims—and seek the attendant damages multiplier and potential of attorneys fees— even in the face of a contract. Defendants can find some support in decision like Buffa and Duncan to try and block those extracontractual claims.
At some point, however, the North Carolina Supreme Court will need to provide some clarity on the rule’s application to the UDTPA. Until then, litigants will need to be aware of the different holdings by different courts on this issue.
Jeremy Falcone is a partner in the Charlotte office of Ellis & Winters LLP. He litigates complex commercial cases, including claims involving contracts, intellectual property, securities, and allegations of fraud. Jeremy also defends companies in products liability claims and has represented higher education clients in a variety of litigation matters. He also litigates employment matters, including claims involving trade secrets and breach of covenants not to compete. He is a member of the Board of Directors of BarCARES of North Carolina, Inc., and an active member of DRI and the North Carolina Association of Defense Attorneys. Jeremy also serves as
an editor and writer of “What Fair?”, a blog on the law of unfair trade practices which can be found at www.unfairtradeprac-ticesnc.com.