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Economic Loss Doctrine: CHMM v. Freeman Marine Equipment, Inc.

CHMM, LLC ("CHMM") is the owner of M/Y JAMAICA BAY, a 59.5-meter luxury yacht. In 2006, CHMM contracted with Nobiskrug GmbH ("Nobiskrug") to "construct, equip, launch and complete [the yacht] at [Nobiskrug's] shipyard and to sell and deliver [the yacht] to [CHMM]" for approximately 34.2 million dollars. Nobiskrug subcontracted with Freeman Marine Equipment for the manufacture of a "weathertight" door for installation in the yacht.

In 2011, while the yacht was at sea en route to the Bahamas, the Freeman door allegedly malfunctioned, letting in a substantial amount of water. The subsequent flooding severely damaged the yacht and its interior, including woodwork, furniture, carpeting, electrical wiring, and electronics. CHMM estimates it would cost over $18 million to repair the damage.

CHMM sued Freeman, alleging five tort claims-negligence, defect in design, defect in manufacture, failure to properly instruct in the installation and use of the door and negligent misrepresentation. Freeman moved to dismiss on the ground that recovery for physical damage to the yacht's interior was barred by the economic loss doctrine announced in E. River S.S. Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 866-71, (1986). The economic loss doctrine precludes recovery against a manufacturer for physical damage that the manufacturer's defective product causes to the "product itself."

The Ninth Circuit discussed Saratoga Fishing Co. v. J.M. Martinac & Co., 520 U.S. 875, 877 (1997). In this case, Martinac built a fishing vessel in which it installed a hydraulic system designed by Marco Seattle Inc. Joseph Madruga purchased the vessel and added equipment-a skiff, fishing net and spare parts. Madruga then sold the vessel, which contained the additional equipment, to Saratoga Fishing Company. The vessel later caught fire and sank as a result of a defective hydraulic system, after which Saratoga Fishing filed a tort suit against Martinac and Marco Seattle. The question was whether Saratoga Fishing, the subsequent user, could recover in tort for "the physical destruction of extra equipment ... added by the initial user after the first sale and then resold as part of the ship when the ship itself is later resold to a subsequent user." The Court held that the equipment added by Madruga was "other property" and, as such, Saratoga Fishing was eligible to recover in tort for damage to that equipment. When a manufacturer places an item in the stream of commerce by selling it to an Initial User, that item is the 'product itself' under East River. Items added to the product by the Initial User are therefore 'other property,' and the Initial User's sale of the product to a Subsequent User does not change these characterizations."

The Ninth Circuit further noted that under Saratoga Fishing, user-added items are considered "other property" for the purposes of the economic loss doctrine where the manufacturer of a product had no responsibility for manufacturing or assembling items that the user adds to the product. The Ninth Circuit then applied this rule to the facts of the case. The Court first examined the sections of the Shipbuilding Contract that set forth the respective responsibilities of CHMM (the user) and Nobiskrug (manufacturer). Under the contract, Nobiskrug was responsible for manufacturing the bare ship while CHMM was responsible for the "Interior Outfit," adding items to the bare ship. In addition Nobiskrug disclaimed any responsibility with regarding the items added by CHMM. Under Saratoga Fishing, the items in the Interior Outfit consist of "other property," while the bare ship consists of the "product itself." CHMM's claim is that the product (the bare yacht, which included the Freeman door) caused physical damage to other property (the Interior Outfit). Therefore, the Ninth Circuit held that the economic loss doctrine did not bar CHMM's claim.

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