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Hinrichs v. The DOW Chemical Co.

Supreme Court of Wisconsin

January 9, 2020

Chris Hinrichs and Autovation Limited, Plaintiffs-Appellants-Petitioners,
v.
The DOW Chemical Company d/b/a Dow Automotive, Defendant-Respondent-Petitioner.

          Submitted on Briefs: Oral Argument: October 3, 2019

         REVIEW OF DECISION OF THE COURT OF APPEALS Reported at 386 Wis.2d 351, 927 N.W.2d 156 (2019 - unpublished)

          Circuit Court Waukesha County L.C. No. 2016CV1544 Kathryn W. Foster judge.

          For the defendant-respondent-petitioner, there were briefs filed by Patrick M. Harvey, Gabrielle Baumann Adams, and Husch Blackwell LLP, Milwaukee. There was an oral argument by Patrick M. Harvey.

          For the plaintiff-appellant-petitioner, there were briefs filed by Terry J. Booth and Rogahn Jones LLC, Waukesha. There was an oral argument by Terry J. Booth.

          JUSTICES: ANN WALSH BRADLEY, J., delivered the majority opinion of the Court, in which ROGGENSACK, C.J., ZIEGLER and DALLET, JJ., joined and REBECCA GRASSL BRADLEY, J., joined with respect to Parts I, II, and III. REBECCA GRASSL BRADLEY, J., filed an opinion concurring in part and dissenting in part.

          ANN WALSH BRADLEY, J.

         ¶1 In this case we are asked to address a multitude of issues that arise out of common law and statutory misrepresentation claims. Along the way, we discuss the economic loss doctrine together with its exceptions and examine statutes and their applications.

         ¶2 Both parties to this case seek review of aspects of an unpublished, per curiam decision of the court of appeals.[1] The court of appeals affirmed the circuit court's dismissal of Chris Hinrichs and Autovation Limited's (collectively, Hinrichs) common law misrepresentation claims against the DOW Chemical Company (Dow) and reversed the circuit court's dismissal of Hinrichs' statutory claim made pursuant to Wis.Stat. § 100.18 (2015-16) .[2]

         ¶3 Hinrichs appeals the dismissal of his common law misrepresentation claims. Specifically, he contends that the court of appeals erred by applying the economic loss doctrine to bar such claims. He argues that the "fraud in the inducement" and "other property" exceptions to the economic loss doctrine apply and that as a result his common law claims should go forward.

         ¶4 Dow cross-petitioned for review of the court of appeals' determination that Hinrichs' Wis.Stat. § 100.18 claim survives its motion to dismiss. It asserts first that Hinrichs' statutory claim is barred by the economic loss doctrine. Next, it contends that Hinrichs is not "the public" within the meaning of § 100.18 and that this court should overrule its previous decision in State v. Automatic Merchs. of Am., Inc., 64 Wis.2d 659, 221 N.W.2d 683 (1974). Finally, Dow contends that the heightened pleading standard set forth by Wis.Stat. § 802.03(2) for claims of fraud applies to claims made under § 100.18, and that Hinrichs' complaint fails to meet those heightened standards.

         ¶5 In examining Hinrichs' common law claims, we conclude that the "fraud in the inducement" exception to the economic loss doctrine does not apply to allow Hinrichs' common law claims to go forward because the alleged misrepresentation is related to the quality and characteristics of the product in question and is thus not extraneous to the contract. We further conclude that the "other property" exception to the economic loss doctrine does not apply to allow Hinrichs' common law claims to go forward because the JeeTops and adhesive are components of an integrated system.

         ¶6 With regard to Hinrichs' statutory claim, we conclude first that the economic loss doctrine does not serve as a bar to claims made under Wis.Stat. § 100.18. We conclude second that one person can be "the public" for purposes of Wis.Stat. § 100.18(1) and decline Dow's invitation to overrule Automatic Merchandisers. The court of appeals correctly determined that dismissal for failure to meet "the public" component of a § 100.18 claim in this case was in error. Finally, we conclude that the heightened pleading standard set forth by Wis.Stat. § 802.03(2) for claims of fraud does not apply to claims made under Wis.Stat. § 100.18 and that Hinrichs' complaint states a claim under the general pleading standard.

         ¶7 Accordingly, we affirm the decision of the court of appeals.

         I

         ¶8 The facts set forth below are taken from Hinrichs' complaint. Because we are reviewing the circuit court's determination of a motion to dismiss for failure to state a claim, we must assume that these facts are true.[3]

         ¶9 Hinrichs developed a product called JeeTops, which he manufactures and installs through his company, Autovation Limited. He obtained a patent for the JeeTops in 2010.

         ¶10 JeeTops are acrylic skylights installed aftermarket in the roofs of Jeep Wrangler vehicles equipped with a certain type of hardtop. The complaint describes the JeeTops as giving "front-seat passengers unparalleled views of the outdoors" and rear-seat passengers "unprecedented panoramic views." After installation, "[t]he cumulative effect is to give the Wrangler's occupants the sensation of directly experiencing the environment through which they are driving."

         ¶11 Installation of JeeTops is accomplished using an adhesive manufactured by Dow. The adhesive performs a dual role, attaching the JeeTops to the existing Jeep and maintaining a watertight seal.

         ¶12 In 2013, Mark Formentini, an agent for Dow, informed Hinrichs that Dow had a new primer available for use with the adhesive employed in installing JeeTops panels. Formentini further informed Hinrichs that the primer would be tested with the acrylic used in JeeTops.

         ¶13 Shortly thereafter, Hinrichs relayed to Dow that customers were experiencing cracks in their JeeTops panels. Dow responded that the acrylic used in the JeeTops had been sent to its labs for testing.

         ¶14 After completing testing, Dow sent a report to Hinrichs claiming that the adhesive was properly functioning. The report further indicated that Dow found "[n]o evidence of any crazing or surface cracking . . . ."

         ¶15 Hinrichs continued purchasing and using Dow adhesives to install JeeTops, but customers continued to observe crazing and fracturing of the acrylic. By October of 2014, one-third of all JeeTops panel installations using the Dow adhesive system had failed.

         ¶16 Investigation eventually revealed that the Dow adhesive was attacking the integrity of the acrylic, which caused the panels to leak, and subsequently to craze and fracture. By this time JeeTops had received extensive negative publicity, high profile customers had stopped purchasing the product, and dealers had dropped JeeTops from their product lines.

         ¶17 In time Hinrichs was able to identify a suitable replacement adhesive, but by then the product had suffered a rash of negative publicity. As a result, Hinrichs alleges that despite the warm reception JeeTops initially received, he is unable to sell them because of the perception that they are unreliable.

         ¶18 Following these events, Hinrichs brought four causes of action against Dow: negligent misrepresentation, intentional misrepresentation, strict responsibility misrepresentation and violation of Wis.Stat. § 100.18 (1).[4] Dow moved to dismiss the complaint for failure to state a claim upon which relief can be granted.[5]

         ¶19 The circuit court granted Dow's motion to dismiss. As relevant here, the circuit court determined first that the economic loss doctrine barred Hinrichs' common law misrepresentation claims. It characterized Hinrichs' losses as purely economic in nature and rejected Hinrichs' argument that either the "fraud in the inducement" exception or "other property" exception applied.

         ¶20 Second, the circuit court determined that Hinrichs' Wis.Stat. § 100.18 claim must fail because Hinrichs is not "the public" within the meaning of the statute. Specifically, the circuit court based its conclusion on the "plain inference from the complaint . . . that Dow's agent had already been dealing with Plaintiff, and was merely offering another product to them."

         ¶21 Hinrichs appealed and the court of appeals affirmed in part and reversed in part. The court of appeals affirmed the circuit court's determination that the economic loss doctrine bars Hinrichs' common law misrepresentation claims. Like the circuit court, the court of appeals concluded that neither of the claimed exceptions to the economic loss doctrine applied. Hinrichs v. The DOW Chemical Co., No. 2017AP2361, unpublished slip op., ¶¶14-16 (Wis. Ct. App. Feb. 6, 2019) (per curiam).

         ¶22 However, the court of appeals reversed the circuit court's determination with regard to the Wis.Stat. § 100.18 claim. It concluded that "dismissal of the Wis.Stat. § 100.18 claim based upon the failure to meet 'the public' component of the first element was improper. The issue requires further exploration through the discovery process." Id., ¶22. Hinrichs petitioned for review of the court of appeals' conclusion regarding the common law misrepresentation claims, and Dow cross-petitioned for review of the § 100.18(1) issue.

         II

         ¶23 We are asked to review the court of appeals' determination affirming in part and reversing in part the circuit court's grant of Dow's motion to dismiss for failure to state a claim. Whether a motion to dismiss was properly granted is a question of law this court reviews independently of the determinations rendered by the circuit court and court of appeals. Town of Lincoln v. City of Whitehall, 2019 WI 37, ¶21, 386 Wis.2d 354, 925 N.W.2d 520.

         ¶24 A motion to dismiss tests the legal sufficiency of the complaint. Meyers v. Bayer AG, Bayer Corp., 2007 WI 99, ¶21, 303 Wis.2d 295, 735 N.W.2d 448. Under our established methodology for review of a motion to dismiss, we accept all facts pleaded in the complaint as true. Id.

         ¶25 In our review, we are called upon to review the court of appeals' determination that the economic loss doctrine bars Hinrichs' common law misrepresentation claims. The application of the economic loss doctrine to a set of facts presents a question of law we review independently from the determinations of the circuit court and court of appeals. Insurance Co. of N. Am. v. Cease Elec. Inc., 2004 WI 139, ¶15, 276 Wis.2d 361, 688 N.W.2d 462.

         ¶26 Next, we are asked to review the court of appeals' conclusion that Hinrichs' claim under Wis.Stat. § 100.18(1) may proceed. In our review, we must interpret §§ 100.18(1) and Wis.Stat. 802.03(2) . Statutory interpretation likewise presents a question of law we review independently without deference to the interpretations of the circuit court or court of appeals. Maple Grove Country Club Inc. v. Maple Grove Estates Sanitary Dist., 2019 WI 43, ¶25, 386 Wis.2d 425, 926 N.W.2d 184.

         III

         ¶27 We address first whether the economic loss doctrine bars Hinrichs' common law misrepresentation claims. For context, we initially set forth the legal principles underlying the economic loss doctrine. Subsequently, we address the applicability of the "fraud in the inducement" and "other property" exceptions to the economic loss doctrine in this case.

         ¶28 Second, we address whether the court of appeals properly determined that Hinrichs' Wis.Stat. § 100.18 claim survives Dow's motion to dismiss. In our review, we analyze whether the economic loss doctrine can bar claims made pursuant to § 100.18(1). Next, we examine whether Hinrichs is properly "the public" for purposes of § 100.18(1) . We then address whether a claim pursuant to § 100.18(1) is subject to the heightened pleading standard set forth by Wis.Stat. § 802.03(2) for claims of fraud and whether Hinrichs' complaint meets the applicable standard.

         A

         ¶29 The economic loss doctrine is a judicially created doctrine with three primary purposes. Van Lare v. Vogt, Inc., 2004 WI 110, ¶17, 274 Wis.2d 631, 683 N.W.2d 46 (citing Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis.2d 395, 403, 573 N.W.2d 842 (1998)). First, the doctrine exists to "maintain the fundamental distinction between tort law and contract law . . . ." Id. Second, it protects "commercial parties' freedom to allocate economic risk by contract . . . ." Id. Third, the doctrine encourages "the party best situated to assess the risk [of] economic loss, the commercial purchaser, to assume, allocate, or insure against that risk." Id. The doctrine has been part of our jurisprudence since it was first adopted by this court in Sunnyslope Grading, Inc. v. Miller, Bradford and Risberg, Inc., 148 Wis.2d 910, 437 N.W.2d 213 (1989).

         ¶30 We have described the economic loss doctrine as holding that "a commercial purchaser of a product cannot recover solely economic losses from the manufacturer under negligence or strict liability theories . . . ." Van Lare, 274 Wis.2d 631, ¶18. "Economic loss" in the context of the doctrine is defined as "the loss in a product's value which occurs because the product is 'inferior in quality and does not work for the general purposes for which it was manufactured and sold.'" Insurance Co. of N. Am., 276 Wis.2d 361, ¶23 (quoting Wausau Tile, Inc. v. Cty. Concrete Corp., 226 Wis.2d 235, 246, 593 N.W.2d 445');">593 N.W.2d 445 (1999)). Both direct and consequential economic loss are encompassed within this definition. Daanen & Janssen, Inc., 216 Wis.2d at 401.

         ¶31 The upshot of the economic loss doctrine is that it "requires transacting parties in Wisconsin to pursue only their contractual remedies when asserting an economic loss claim, in order to preserve the distinction between contract and tort." Ins. Co. of N. Am., 276 Wis.2d 361, ¶24 (quoting Digicorp, Inc. v. Ameritech Corp., 2003 WI 54, ¶34, 262 Wis.2d 32, 662 N.W.2d 652) . It "precludes parties under certain circumstances from eschewing the more limited contract remedies and seeking tort remedies." Id.

         B

         ¶32 We have recognized several exceptions to the economic loss doctrine, two of which are at issue here. See John J. Laubmeier, Demystifying Wisconsin's Economic Loss Doctrine, 2005 Wis. L. Rev. 225, 228 (2005). First, we address the "fraud in the inducement" exception. Subsequently, we turn to the "other property" exception.

         ¶33 This court has recognized "a narrow fraud in the inducement exception" to the economic loss doctrine. Kaloti Enters., Inc. v. Kellogg Sales Co., 2005 WI 111, ¶42, 283 Wis.2d 555, 699 N.W.2d 205. We have emphasized the limited nature of this exception. See id.

         ¶34 As explained by the Michigan court of appeals, on whose opinion we relied in Kaloti Enters.,

Fraud in the inducement presents a special situation where parties to a contract appear to negotiate freely- -which normally would constitute grounds for invoking the economic loss doctrine-but where in fact the ability of one party to negotiate fair terms and make an informed decision is undermined by the other party's fraudulent behavior.

Huron Tool and Eng'g Co. v. Precision Consulting Servs., Inc., 532 N.W.2d 541, 545 (Mich. Ct. App. 1995).

         ¶35 Pursuant to this exception, "a fraud in the inducement claim is not barred by the economic loss doctrine where the fraud is extraneous to, rather than interwoven with, the contract." Kaloti Enters., 283 Wis.2d 555, ¶42 (citations and internal quotation omitted). To invoke the "fraud in the inducement" exception, a plaintiff must demonstrate three elements: (1) that the defendant engaged in an intentional misrepresentation; (2) that the misrepresentation occurred before the contract was formed; and (3) that the alleged misrepresentation was extraneous to the contract. Id. Stating the third element differently, the misrepresentation must "concern[] matters whose risk and ...


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