United States: A Possible End To Pa. Court Split Over Economic Loss

Pennsylvania federal and state courts are split on whether the economic loss and "gist of the action" doctrines apply in claims brought under Pennsylvania's Unfair Trade Practices and Consumer Protection Law. Because the Third Circuit predicted that the Pennsylvania Supreme Court would apply the economic loss doctrine in UTPCPL cases, federal courts are bound to and do follow that Third Circuit predictive ruling. By contrast, the Pennsylvania Superior Court has ruled that the economic loss and "gist of the action" doctrines do not apply to UTPCPL claims, so Pennsylvania state courts diverge from the rule followed by their federal counterparts. A case currently pending before the Pennsylvania Supreme Court, Grimes v. Enterprise Leasing Inc., No. 488 MAL 2013, could provide the platform for the court to resolve this split, although neither doctrine was included in the issues to be addressed on appeal.

The economic loss doctrine provides that "no cause of action exists for negligence that results solely in economic damages unaccompanied by physical injury or property damage." See Excavation Technologies Inc. v. Columbia Gas Co., 985 A.2d 840, 841 n.3 (Pa. 2009), quoting Adams v. Copper Beach Townhome Communities LP, 816 A.2d 301, 305 (Pa. Super. 2003). The "gist of the action" doctrine goes one step further and "maintain[s] the conceptual distinction between breach of contract claims and tort claims[,]" and precludes the recasting of ordinary breach of contract claims as tort claims. McShea v. City of Philadelphia, 995 A.2d 334, 339 (Pa. 2010), quoting eToll Inc. v. Elias/Savion Advertising Inc., 811 A.2d 10, 14 (Pa. Super. 2002)

As noted, the Third Circuit predicted in Werwinski v. Ford Motor Co., 286 F.3d 661 (3d Cir. 2002) that the Pennsylvania Supreme Court would apply the economic loss doctrine to claims brought under the UTPCPL. In Werwinski, a proposed class of purchasers and lessees of Ford vehicles claimed breach of warranty, fraudulent concealment and UTPCPL violations for allegedly defective transmissions — an area governed by warranty. Notably, the only damages alleged were to the vehicles themselves, thus directly implicating the economic loss doctrine.

The Third Circuit first decided that the economic loss doctrine applied to intentional fraud claims, except where the alleged fraud was "'extraneous to the contract,' not 'interwoven with the breach of contract.'" Id. at 676. Having concluded that the economic loss doctrine would apply to the fraudulent concealment claims, the Third Circuit then concluded that the economic loss doctrine should apply equally to claims of both intentional fraud and statutory fraud claims, such as those brought under the UTPCPL.

The Pennsylvania Superior Court reached a different result in Knight v. Springfield Hyundai, 81 A.3d 940 (Pa. Super. 2013). In Knight, the Pennsylvania Superior Court declined to apply the "gist of the action" doctrine to UTPCPL claims that were in the nature of fraudulent inducement and extrinsic to the contract of sale for a used automobile, including false dealer representations that the car had one owner, had not been in an accident, and that the odometer reading was accurate. This portion of the decision is in accord with the Third Circuit's reasoning in Werwinski. However, the Knight court took an additional step. In contrast to Werwinski, Knight ruled that the plaintiff's UTPCPL claims were not barred because the economic loss doctrine precluded recovery in tort, and plaintiff's claims were statutory in nature. 81 A.3d at 951-952 (ruling that "the economic loss doctrine is inapplicable" because UTPCPL claims are statutory claims that "do not sound in negligence"). However, federal district courts remain bound to follow the Werwinski decision. This leaves the unwieldy result that UTPCPL claims brought in federal district courts may be subject to the economic loss and "gist of the action" doctrines under Werwinski while UTPCPL claims brought in Pennsylvania Courts of Common Pleas are not. See, e.g., Gadley v. Ellis, No. 3:13-CV-00017, 2014 U.S. Dist. LEXIS 99992 (W.D. Pa. July 23, 2014); Zeglen v. Northwestern Mutual Life Ins. Co., No. 3:14-CV-00173, 2014 U.S. Dist. LEXIS 118147 (M.D. Pa. Aug. 25, 2014); Tubman v. USAA Casualty Ins. Co., 943 F. Supp. 2d 525, 530-31 (E.D. Pa. 2013); see also Pesotine v. Liberty Mutual Group Inc., No. 3:14-CV-00784, 2014 U.S. Dist. LEXIS 118178 (M.D. Pa. Aug. 25, 2014).

Much has been written recently about the Grimes dispute currently pending before the Pennsylvania Supreme Court. Grimes involved a short-term automobile lessee who declined an optional damage waiver provision in a rental agreement, agreeing to pay for repairs to the vehicle but also for administrative, loss of use and diminution in value fees in the event of damage to the vehicle. When plaintiff returned the car scratched, she was charged a total of $840.42 for these categories. Although she did not actually pay the invoiced charges, she filed suit under the UTPCPL alleging deception by Enterprise. Plaintiff alleged that the deceptive conduct under the UTPCPL was the invoice issued for the damage and various fees, even though the invoice was authorized by the rental agreement.

The claims in Grimes are analogous to those alleged in Werwinski. The alleged deception in Grimes was the $840.42 invoice, while the fraud in Werwinski was the concealment of the defective transmission — both matters that were addressed by the applicable contract or warranty. In Werwinski, the Third Circuit acknowledged the range of warranty options offered to consumers by car manufacturers. Similarly, rental agencies offer different options to consumers regarding insurance coverage and waivers for damage to a rental vehicle. In Grimes, as in Werwinski, the factual premise of the UTPCPL claims was interwoven with — and not independent of — the underlying car rental agreement which specifically authorized the allegedly deceptive charges. Unlike Knight, in which the plaintiff challenged precontract representations, Grimes did not involve fraud in the inducement. Indeed, at the Grimes oral argument, the Pennsylvania Supreme Court voiced concern about the UTPCPL claim proceeding when the plaintiff had voluntarily entered into a contract allowing the invoice that she claimed was deceptive.

Because the alleged deception in Grimes arises out of a written agreement, Grimes presents an opportunity for the Pennsylvania Supreme Court to provide guidance on the economic loss and "gist of the action" doctrines in UTPCPL litigation and to resolve the split between federal and Pennsylvania courts. However, the court did not grant allowance of the appeal in Grimes on the application of the economic loss or "gist of the action" doctrines. Rather, the court limited its review to the requirements of justifiable reliance and ascertainable loss under the UTPCPL. It could be unfair to the litigants to rule on the application of these doctrines without including them in the questions presented and without briefing on the issue. See Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1436 (2013) (Justices Ruth Bader Ginsberg and Stephen Breyer dissenting).

On the other hand, some guidance on the application of the doctrines even in dicta might shed light on the manner in which the UTPCPL should be analyzed in future cases. At a minimum, the court could address whether the UTPCPL claims for "deceptive" conduct may proceed when a contract specifically authorizes the conduct resulting in the ascertainable loss alleged, thereby at least giving some guidance on whether the economic loss and "gist of the action" doctrines apply in cases brought under consumer protection statutes.

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Originally published by Law360, October 06, 2014

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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