Economic Loss Rule Precluded Vessel Owner’s Tort Recovery Against Shipyard

Associated Gas & Oil Co. (“Associated”) purchased liftboats from Offshore Marine, Inc. (“OMI”).  Pursuant to the parties’ agreement, OMI was to make certain additions and improvements to the vessels.  In order to install additional living quarters on one of the boats, the shipyard had to cut, extend and re-weld a crane boom and cradle stanchion of the hydraulic pedestal crane mounted on the vessel.

Associated acquired the liftboats to carry out contract work in Nigeria that it had recently won and, once modified, had to ship the vessels from Louisiana to Nigeria.  En route to Nigeria, the flotilla transporting the liftboats had to navigate rough seas.  This caused the re-welded stanchion to snap at the site of the weld.  This allowed the boom swing free and cause damage to the living quarters.  The flotilla was diverted to St. Thomas, British Virgin Islands to assess the damage.  Finally underway, the flotilla experienced more rough seas and was diverted to Trinidad.  The flotilla was eventually sent back to Louisiana for repairs.

In the ensuing litigation that involved several interested parties, Associated asserted claims against the shipyard that performed the repair work, alleging that its negligence caused the damage and that the delays and inability of Associated to utilize the boats in Nigeria caused further financial loss.  The shipyard moved for summary judgment, arguing that the economic loss rule announced in East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986), precluded Associated’s recovery of economic losses.  The district court granted the motion and Associated appealed.

The Fifth Circuit’s analysis centered on the applicability of East River and its economic loss rule.  East River involved a shipbuilder that contracted with a company to design, manufacture and supervise the installation of turbines in supertankers.  Once in service, the turbines malfunctioned.  The Supreme Court held that no duty, under a negligence or strict products liability theory, is owed by a manufacturer to prevent a product from injuring itself.  476 U.S. at 871.  The Fifth Circuit has extended East River’s applicability to claims against a provider of professional services to a vessel manufacturer and to a repairer of a vessel.  The Fifth Circuit explained that “[t]he public policy concerns underpinning tort duties are not present here, and that parties are capable of defining satisfactory performance and allocating the risk of defective performance in their contract.”  Nathaniel Shipping, Inc. v. General Elec. Co., 932 F.2d 366, 368 n.3 (5th Cir. 1991).

Despite Associated’s attempts to distinguish itself from East River and its progeny, the court was unconvinced and quoted East River’s statement that “[d]amage to a product itself is most naturally understood as a warranty claim.  Such damage means simply that the product has not met the customer’s expectations, or, in other words, that the customer has received ‘insufficient product value.’”  476 U.S. at 872.  The Fifth Circuit stated simply that those claims are best left to contract and warranty law, not tort law.  Finding that East River was applicable to the facts, the Fifth Circuit affirmed the summary judgment entered against Associated.  Notably, the unpublished opinion was originally released on January 3, 2013 but was subsequently redesignated for publication on March 12, 2013.

Smith Mar., Inc. v. L/B KAITLYN EYMARD, 12-30378, 2013 WL 886226 (5th Cir. Jan. 3, 2013), redesignated as published opinion Mar. 12, 2013.

A Navy Ship is Not a “Product” for Strict Products Liability Law

The Eastern District of Pennsylvania recently addressed arguments testing the intersection between maritime and product liability law, all of which stemmed from a plaintiff’s exposure to asbestos on various Navy ships during the 1960s and 1970s.  At that time, the plaintiff was employed as a welder by the Department of Defense.  The issues of first impression before the court were (i) whether “maritime law recognize[s] a sophisticated user and/or sophisticated purchaser defense and, if so, to what causes of action does the defense(s) apply”; and (ii)  whether a Navy ship is a “product” within strict products liability law.

Section 388 of the Restatement (Second) of Torts provides guidelines for the “sophisticated user” defense:

One who supplies directly or through a third person a chattel for another to use is subject to liability to those whom the supplier should expect to use the chattel with the consent of the other or to be endangered by its probable use, for physical harm caused by the use of the chattel in the manner for which and by a person for whose use it is intended, if the supplier:

(a) knows or has reason to know that the chattel is or is likely to be dangerous for the use for which it is supplied, and

(b) has no reason to believe that those for whose use the chattel is supplied will realize its dangerous condition, and

(c) fails to exercise reasonable care to inform them of its dangerous condition or of the facts which make it likely to be dangerous.

The “sophisticated user” defense places a burden on the manufacturer or supplier of a product to demonstrate that the ultimate end-user of the product was a “sophisticated” user of the product.  A user is “sophisticated” when the user knew or should have known of the particular risks of harm from a product, or who can be expected to know of a product’s hazards by virtue of training, education or employment.

The “sophisticated purchaser” defense differs from the “sophisticated user” defense.  Under the “sophisticated purchaser” defense:

[A] manufacturer or supplier of a product is absolved of liability for any harm that comes to the ultimate end-user if (i) the manufacturer or supplier adequately warned the purchaser (which could include an intermediary such as the Navy or an employer) of the hazards associated with the product, or (ii) it was reasonable for the manufacturer or supplier to rely on the intermediary to warn the ultimate end user (e.g., the plaintiff or seaman/employee).

After comparing the two defenses, the court concluded that maritime law recognizes the “sophisticated user” defense, but not the “sophisticated purchaser” defense.  The “sophisticated user” defense was accepted–with respect to negligence, but not strict liability claims–because it furthers the policy considerations of maritime law, including participation in maritime commerce by limiting potential liabilities, and promoting uniformity in the law.  The court rejected the “sophisticated purchaser” defense because the defense would thwart the goals of maritime law.  By punting the responsibility to warn, the “sophisticated purchaser” defense would discourage commercial maritime workers and leave Navy seaman without a remedy (because Navy seaman do not have a remedy against the U.S. for asbestos-related injuries arising from their Navy service).

Having resolved the “sophisticated user” defense issue, the court then turned to the “product” involved.  Ultimately, the court concluded that the Navy ship was not a “product” within the meaning of strict products liability law.  The court reasoned:

After careful consideration, the Court concludes that, to impose upon a Navy shipbuilder potential liability for each of the thousands (if not tens of thousands) of products assembled in a Navy ship pursuant to Navy specifications, would be an undue, unmanageable, and cumulative burden likely to discourage the activity of shipbuilding.  Moreover, the Court also recognizes that the entity most knowledgeable about–and with the most control over–a given product (such as a turbine, boiler, pump, or valve) is the manufacturer of that product (rather than the shipbuilder who must handle  every product aboard the ship).

Finally, the Court finds that the role of the builder of Navy ships appears to be more like a provider of a service (assembly of an assortment of products) than a manufacturer or supplier of a product.  . . .  Accordingly, the Court concludes that a Navy ship is not a “product” within the meaning of maritime strict product liability law.

Once it resolved the issues of first impression, the court determined that the defendants were entitled to summary judgment with respect to the plaintiff’s strict liability claims.  The Navy ship was not a “product” for purposes of strict products liability law.  The defendants were not, however, entitled to summary judgment with respect to the plaintiff’s negligent failure to warn claims because none of the defendants presented evidence that the plaintiff was a sophisticated user.

Mack v. General Elec. Co., MDL No. 875, 2012 WL 4717918, slip op. (E.D. Pa. Oct. 3, 2012).