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Manufacturer’s Corner: Implied Warranties, Part 5

We’re going to take a brief detour from our implied warranty roadmap to elaborate on our previous installment of this series, addressing disclaiming implied warranties.  Although we want to impress upon you (once again) the importance of disclaiming implied warranties, we also think it is important to make clear some things that your disclaimer may not be able to do for you.

This post is prompted by a recent BloombergBusinessweek article reporting that the American Tort Reform Association “announced a ‘multiyear, multistate campaign to reform [state consumer protection laws].’”  Those laws address a host of issues, many of which are not particularly important to manufacturers.  But, they can serve as a workaround for plaintiffs who want to circumvent a warranty disclaimer and, accordingly, they are important to consider in this series.

As we have discussed in previous installments (see hereherehere, and here), the Uniform Commercial Code sets out certain implied warranties that you give when you sell your product, and the steps you must take if you wish to disclaim those warranties.  If those disclaimers could be circumvented by creative attorneys styling their claims as something other than breach of warranty claims, the disclaimer provisions of the UCC would essentially be worthless.  To preserve the integrity of the UCC, many courts apply what is known as the “economic loss doctrine.”  In essence, the economic loss doctrine provides that one cannot recover in tort where the claimed damages arise from the failure of a product to perform properly (unless certain exceptions apply[1]), because such claims are, at their heart, warranty or contract claims.

But the economic loss doctrine doesn’t necessarily extend to statutory consumer protection laws.  Let’s take Missouri’s Merchandising Practices Act as an example.  It allows private causes of action for, among other things, failure to disclose material information to a consumer.  The statute further allows an attorneys’ fee award for the prevailing party, and class-wide relief.  It must be taken seriously.

The statute allowed for the attorney general to promulgate regulations under the MPA, and the attorney general took advantage of that by promulgating regulations that define “omissions” to include any “omission of a material fact” that is known by the seller, or “upon reasonable inquiry would be known” to the seller.  In turn, a “material fact” is “any fact which a reasonable consumer would likely consider to be important in making a purchasing decision, or which would be likely to induce a person to manifest his/her assent [to the sale], or which the seller knows would be likely to induce a particular consumer to manifest his/her assent, or which would be reasonably likely to induce a consumer to act, respond or change his/her behavior in any substantial manner.”  Reliance on the omission is not necessary for a consumer to prevail under the MPA, as it would be in a fraud or negligent misrepresentation claim.

It is now well-settled that this obligation to disclose cannot be disclaimed by contract.[2]  So query: can a disclaimer of warranties effectively avoid the consumer protection statute?  Probably not.  The effect is that, in the consumer context, a warranty disclaimer would not allow a manufacturer to decline to disclose potentially material facts – for instance, that a product wears at a certain rate, or that it does not work in certain environments.[3]  In other words, a consumer may not be able to recover on a warranty theory for the product wear, but could obtain relief for your failure to disclose the wear rate.  Because reliance is not a requirement of the cause of action, however, the net effect is that the consumer can effectively sue under the MPA for the wear itself, even though you disclaimed the applicable warranties.

So, while a disclaimer of implied warranties would prelude implied warranty liability to a consumer in virtually all American jurisdictions,[4] and tort liability in most American jurisdictions, it does not necessarily follow that it will preclude substantially similar liability under state consumer protection laws.

This is surely the wrong result.  As noted UCC commentators White and Summers write: “we indorse the idea that economic losses should not be recovered in tort.  For tort to intrude willy-nilly into the system of liability that has been quite carefully constructed in Part 3 of Article 2 upsets that balance.”  By permitting a tort-like liability in the sale of goods context – and apparently inadvertently at that[5] – the state legislatures may have mistakenly undermined the careful balance of the UCC.  This is a risk that manufacturers must be aware of.  Unfortunately, the only protection I can think of at this time is a careful risk-reward analysis.

So, disclaim your implied warranties (please), but understand that there are limits to what those disclaimers can do for you.

[1]  For instance, if personal injury results, or the product damages property other than the product itself.

[2]  Hess v. Chase Manhattan Bank, USA, N.A., 220 S.W. 3d 758, 773-74 (Mo. banc 2007) (applying the AG’s regulations in the civil context, and holding that the MPA cannot be avoided by an “as-is” sale).  That case involved the sale of real property, not goods.  I would argue, for the reasons I’m about to set out in this post, that the MPA does not extend to the sale of goods subject to the UCC (because the UCC includes a “construction against implicit repeal” provision), but that would be an uphill battle.  I might also challenge the regulations themselves, which was not done in the Hess case, but again: uphill battle.

[3] Whether or not the seller knows of those facts – all that is required is that the seller could so determine “upon reasonable inquiry.”  What does “reasonable inquiry” mean?  We don’t know yet.

[4] But not Massachusetts.  Mass. Gen. Laws ch. 106, § 2-316A.

[5] Again, I’ll carve out Massachusetts here.  Prudently or not, the Massachusetts legislature made it very clear that it intended to create an exception to the UCC’s standard text with respect to consumer sales.