1. The material must consist of documents or tangible things,

2. Prepared in anticipation of litigation or for trial

• Applies in ADR and administrative actions

3. By or for another party or by or for that party’s representative.

Gold Standard, Inc. v. American Barrick Res. Corp., 801 P.2d 909, 910 (Utah 1990).

Purpose of the Privilege.

• Featherstone v. Schaerrer, 2001 UT 86, ¶33, 34 P.3d 194 (“The work product privilege derives from dual policy goals aimed at ‘preserving the adversary system’ and ‘providing attorneys with a zone of privacy permitting effective client advocacy,’ and it thus follows that to the extent these goals are trampled on, the scope of the attorney work product privilege may be eroded.”)
• United States v. Nobles, 422 U.S. 225, 238 (1975) (“[T]he work-product doctrine shelters the mental processes of the attorney, providing a privileged area within which he can analyze and prepare his client’s case.”).
• In re Air Crash Disaster at Sioux City, 133 F.R.D. 515, 519 (N.D.Ill.1990) (“Work product includes ‘[s]ubject matter that relates to the preparation, strategy, and appraisal of the strengths and weaknesses of an action, or to the activities of the attorneys involved, rather than to the underlying evidence.’”).

Bases of the Privilege.

Codification of Hickman v. Taylor, 329 U.S. 495, 511–12 (1947) (the material “falls outside the arena of discovery. . . . Not even the most liberal of discovery theories can justify unwarranted inquiries into the files and the mental impressions of an attorney.”)

 Rule 26 of the Utah Rules of Civil Procedure.

(b)(5) Trial preparation materials. A party may obtain otherwise discoverable documents and tangible things prepared in anticipation of litigation or for trial by or for another party or by or for that other party’s representative (including the party’s attorney, consultant, surety, indemnitor, insurer, or agent) only upon a showing that the party seeking discovery has substantial need of the materials and that the party is unable without undue hardship to obtain substantially equivalent materials by other means. In ordering discovery of such materials, the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party.

(b)(6) Statement previously made about the action. A party may obtain without the showing required in paragraph (b)(5) a statement concerning the action or its subject matter previously made by that party. Upon request, a person not a party may obtain without the required showing a statement about the action or its subject matter previously made by that person. If the request is refused, the person may move for a court order under Rule 37. A statement previously made is (A) a written statement signed or approved by the person making it, or (B) a stenographic, mechanical, electronic, or other recording, or a transcription thereof, which is a substantially verbatim recital of an oral statement by the person making it and contemporaneously recorded.

(b)(7) Trial preparation; experts.

(b)(7)(A) Trial-preparation protection for draft reports or disclosures. Paragraph (b)(5) protects drafts of any report or disclosure required under paragraph (a)(4), regardless of the form in which the draft is recorded.

(b)(7)(B) Trial-preparation protection for communications between a party’s attorney and expert witnesses. Paragraph (b)(5) protects communications between the party’s attorney and any witness required to provide disclosures under paragraph (a)(4), regardless of the form of the communications, except to the extent that the communications:

(b)(7)(B)(i) relate to compensation for the expert’s study or testimony;

(b)(7)(B)(ii) identify facts or data that the party’s attorney provided and that the expert considered in forming the opinions to be expressed; or

(b)(7)(B)(iii) identify assumptions that the party’s attorney provided and that the expert relied on in forming the opinions to be expressed.

(b)(7)(C) Expert employed only for trial preparation. Ordinarily, a party may not, by interrogatories or otherwise, discover facts known or opinions held by an expert who has been retained or specially employed by another party in anticipation of litigation or to prepare for trial and who is not expected to be called as a witness at trial. A party may do so only:

(b)(7)(C)(i) as provided in Rule 35(b); or

(b)(7)(C)(ii) on showing exceptional circumstances under which it is impracticable for the party to obtain facts or opinions on the same subject by other means.

(b)(8) Claims of privilege or protection of trial preparation materials.

(b)(8)(A) Information withheld. If a party withholds discoverable information by claiming that it is privileged or prepared in anticipation of litigation or for trial, the party shall make the claim expressly and shall describe the nature of the documents, communications, or things not produced in a manner that, without revealing the information itself, will enable other parties to evaluate the claim.

(b)(8)(B) Information produced. If a party produces information that the party claims is privileged or prepared in anticipation of litigation or for trial, the producing party may notify any receiving party of the claim and the basis for it. After being notified, a receiving party must promptly return, sequester, or destroy the specified information and any copies it has and may not use or disclose the information until the claim is resolved. A receiving party may promptly present the information to the court under seal for a determination of the claim. If the receiving party disclosed the information before being notified, it must take reasonable steps to retrieve it. The producing party must preserve the information until the claim is resolved.

Rule 26(b) of the Federal Rules of Civil Procedure.[2]

(3) Trial Preparation: Materials.

(A) Documents and Tangible Things. Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party’s attorney, consultant, surety, indemnitor, insurer, or agent). But, subject to Rule 26(b)(4), those materials may be discovered if:

(i) they are otherwise discoverable under Rule 26(b)(1); and

(ii) the party shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means.

(B) Protection Against Disclosure. If the court orders discovery of those materials, it must protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of a party’s attorney or other representative concerning the litigation.

(C) Previous Statement. Any party or other person may, on request and without the required showing, obtain the person’s own previous statement about the action or its subject matter. If the request is refused, the person may move for a court order, and Rule 37(a)(5) applies to the award of expenses. A previous statement is either:

(i) a written statement that the person has signed or otherwise adopted or approved; or

(ii) a contemporaneous stenographic, mechanical, electrical, or other recording—or a transcription of it—that recites substantially verbatim the person’s oral statement.[3]

(4) Trial Preparation: Experts.

(A) Deposition of an Expert Who May Testify. A party may depose any person who has been identified as an expert whose opinions may be presented at trial. If Rule 26(a)(2)(B) requires a report from the expert, the deposition may be conducted only after the report is provided.

(B) Trial-Preparation Protection for Draft Reports or Disclosures. Rules 26(b)(3)(A) and (B) protect drafts of any report or disclosure required under Rule 26(a)(2), regardless of the form in which the draft is recorded.

(C) Trial-Preparation Protection for Communications Between a Party’s Attorney and Expert Witnesses. Rules 26(b)(3)(A) and (B) protect communications between the party’s attorney and any witness required to provide a report under Rule 26(a)(2)(B), regardless of the form of the communications, except to the extent that the communications:

(i) relate to compensation for the expert’s study or testimony;

(ii) identify facts or data that the party’s attorney provided and that the expert considered in forming the opinions to be expressed; or

(iii) identify assumptions that the party’s attorney provided and that the expert relied on in forming the opinions to be expressed.

(D) Expert Employed Only for Trial Preparation. Ordinarily, a party may not, by interrogatories or deposition, discover facts known or opinions held by an expert who has been retained or specially employed by another party in anticipation of litigation or to prepare for trial and who is not expected to be called as a witness at trial. But a party may do so only:

(i) as provided in Rule 35(b); or

(ii) on showing exceptional circumstances under which it is impracticable for the party to obtain facts or opinions on the same subject by other means.

(E) Payment. Unless manifest injustice would result, the court must require that the party seeking discovery:

(i) pay the expert a reasonable fee for time spent in responding to discovery under Rule 26(b)(4)(A) or (D); and

(ii) for discovery under (D), also pay the other party a fair portion of the fees and expenses it reasonably incurred in obtaining the expert’s facts and opinions.

(5) Claiming Privilege or Protecting Trial-Preparation Materials.

(A) Information Withheld. When a party withholds information otherwise discoverable by claiming that the information is privileged or subject to protection as trial-preparation material, the party must:

(i) expressly make the claim; and

(ii) describe the nature of the documents, communications, or tangible things not produced or disclosed—and do so in a manner that, without revealing information itself privileged or protected, will enable other parties to assess the claim.

(B) Information Produced. If information produced in discovery is subject to a claim of privilege or of protection as trial-preparation material, the party making the claim may notify any party that received the information of the claim and the basis for it. After being notified, a party must promptly return, sequester, or destroy the specified information and any copies it has; must not use or disclose the information until the claim is resolved; must take reasonable steps to retrieve the information if the party disclosed it before being notified; and may promptly present the information to the court under seal for a determination of the claim. The producing party must preserve the information until the claim is resolved.

Federal Rules of Criminal Procedure 16(a)(2).

Information Not Subject to Disclosure. Except as permitted by Rule 16(a)(1)(A)-(D), (F), and (G), this rule does not authorize the discovery or inspection of reports, memoranda, or other internal government documents made by an attorney for the government or other government agent in connection with investigating or prosecuting the case. Nor does this rule authorize the discovery or inspection of statements made by prospective government witnesses except as provided in 18 U.S.C. §3500.

 Utah Rules of Prof. Conduct, Rule 1.6.

The principle of client-lawyer confidentiality is given effect by related bodies of law: the attorney-client privilege, the work-product doctrine and the rule of confidentiality established in professional ethics. The attorney-client privilege and work-product doctrine apply in judicial and other proceedings in which a lawyer may be called as a witness or otherwise required to produce evidence concerning a client. The rule of client-lawyer confidentiality applies in situations other than those where evidence is sought from the lawyer through compulsion of law. The confidentiality rule, for example, applies not only to matters communicated in confidence by the client but also to all information relating to the representation, whatever its source. A lawyer may not disclose such information except as authorized or required by the Rules of Professional Conduct or other law.

 Statutes.

Utah Code Ann. § 63G-2-305(18) (Effective 07/01/14)(GRAMA).

“The following records are protected if properly classified by a governmental entity:. . .

(18) records prepared for or by an attorney, consultant, surety, indemnitor, insurer, employee, or agent of a governmental entity for, or in anticipation of, litigation or a judicial, quasi-judicial, or administrative proceeding;”

Restatement of the Law (3^rd) Governing Lawyers.

§ 87. Lawyer Work-Product Immunity

(1) Work product consists of tangible material or its intangible equivalent in unwritten or oral form, other than underlying facts, prepared by a lawyer for litigation then in progress or in reasonable anticipation of future litigation.

(2) Opinion work product consists of the opinions or mental impressions of a lawyer; all other work product is ordinary work product.

(3) Except for material which by applicable law is not so protected. Work product is immune from discovery or other compelled disclosure to the extent stated in §§ 88 (ordinary work product) and 89 (opinion work product) when the immunity is invoked as described in § 90.

§ 88. Ordinary Work Product

When work product protection is invoked as described in § 90, ordinary work product, (§ 87(2)) is immune from discovery or other compelled disclosure unless either an exception recognized in §§ 91-93 applies or the inquiring party:

(1) has a substantial need for the material in order to prepare for trial; and

(2) is unable without undue hardship to obtain the substantial equivalent of the material by other means.

A foundational case on the interaction of tortious misrepresentation claims and the economic loss rule is Huron Tool and Engineering Co. v. Precision Consulting Services, Inc., 532 N.W.2d 541 (Mich. Ct. App. 1995).  In that case, the Plaintiff brought breach of contract, breach of warranty, fraud, and misrepresentation claims against the Defendant from whom it had purchased allegedly defective software.  Id. at 543.  At issue was whether the economic loss rule barred a fraudulent inducement claim independent of contractual claims.  Id.  In holding that fraudulent inducement claims are not precluded by the economic loss rule the Huron Court recognized that fraud in the inducement is a recognized tort arising independent of contract: “Fraud in the inducement, however, addresses a situation where the claim is that one party was tricked into contracting.   It is based on pre‑contractual conduct which is, under the law, a recognized tort.”  Id. at 544.  However, in upholding the dismissal of the Plaintiffs’ inducement claim the Huron Court recognized that the economic loss rule still bars tortious inducement claims where the misrepresentations concern the quality and character of the goods sold:

[W]here the only misrepresentation by the dishonest party concerns the quality or character of the goods sold, the other party is still free to negotiate warranty and other terms to account for possible defects in the goods.

. . . .

The fraudulent representations alleged by plaintiff concern the quality and characteristics of the software system sold by defendants.   These representations are indistinguishable from the terms of the contract and warranty that plaintiff alleges were breached.

Id. at 545-46.  Such a limitation on tortious inducement claims preserves the essence of the economic loss rule and eliminates the “danger that tort remedies could simply engulf the contractual remedies and thereby undermine the reliability of commercial transactions.” Id. at 544. 

Where the alleged misrepresentations concerned the quality and character of the contract property, those alleged misrepresentations concern the heart of the parties’ negotiated contract and the economic loss rule limits the parties’ remedies to those they negotiated through the contract.  “Such fraud is not extraneous to the contractual dispute among the parties, but is instead but another thread in the fabric of [the] plaintiffs’ contract claim.”^[1]

Other Courts have similarly concluded that where a plaintiff’s misrepresentation claims concern the quality and character of the contracted for property, the economic loss rule confines the parties to contractual remedies.  In the cases of Martin v. A.O. Smith Corp., 931 F. Supp. 543 (W.D. Mich. 1996) and Valleyside Dairy Farms, Inc. v. A.O. Smith Corp., 944 F. Supp. 612 (W.D. Mich. 1995), the Plaintiffs purchased feed storage systems from the Defendant manufacturer of the storage systems.  The Plaintiffs subsequently brought fraud and other claims against the manufacturer for misrepresenting the ability of the storage systems to “preserve feed quality and improve herd health” by limiting the exposure of feed to oxygen.^[2]  The feed storage “systems allegedly failed to perform as represented and allowed plaintiffs’  feed to become exposed to oxygen, causing feed spoilage and nutritional deficits in plaintiffs’ herd.”^[3] In both cases, the Court found that the economic loss doctrine barred the tortious misrepresentation claims because the misrepresentations concerned the quality and character of the contracted for property.

As explained by the Valleyside Court:

Plaintiffs’ fraud claims are inextricably connected to the “quality or character” of the silos about which plaintiffs could have negotiated a warranty and other terms to account for possible defects in the goods or nonperformance.   Clearly, the defendants representations were not extraneous to the quality and characteristics of the silos.   Further, plaintiffs’ allegations are essentially indistinguishable from a contract claim that they could have brought against their seller, had they negotiated a warranty of quality and performance.   Accordingly, the economic loss doctrine applies and bars plaintiffs’ fraud claims.^[4]

The limitation on misrepresentation claims running to the heart of the parties’ contract also has been extensively explored by Florida courts.  In Hotels of Key Largo, Inc. v. RHI Hotels, Inc., the Plaintiff alleged that it was fraudulently induced into entering a franchise agreement through the Defendant’s misrepresentations regarding the services and benefits accompanying the franchise.^[5] The Court determined that the economic loss rule barred such claim, explaining:^[6]

Applying common sense to the Supreme Court’s analysis, we decline to adopt the defendants’ position that one can always avoid operation of the economic loss doctrine by merely pleading fraud in the inducement.   A critical distinction must be made where the alleged fraudulent misrepresentations are inseparably embodied in the parties’ subsequent agreement.  This would seem especially so where the parties have specifically agreed in an integration clause that their written contract “supersedes all prior agreements or understandings.”

. . . .

[W]here the only alleged misrepresentation concerns the heart of the parties’ agreement, simply applying the label of “fraudulent inducement” to a cause of action will not suffice to subvert the sound policy rationales underlying the economic loss doctrine.

Id. at 77. 

            Key Largo seemed consistent with the rulings from other jurisdiction applying the economic loss rule.  In Tiara Condominium Ass’n, Inc. v. Marsh & McLennan Cos. Inc., 110 So. 3d 399 (Fla. 2013), the Florida Supreme Court brought a halt to what it considered the unprincipled expansion of the economic loss rule, stating:

Having reviewed the origin and original purpose of the economic loss rule, and what has been described as the unprincipled extension of the rule, we now take this final step and hold that the economic loss rule applies only in the products liability context. We thus recede from our prior rulings to the extent that they have applied the economic loss rule to cases other than products liability.^[7]

There were numerous concurring and dissenting opinions.  At least the Florida Supreme Court, however, has “receded” from its prior opinions allowing the application of the economic loss rule in any case other than in the product liability context.

In Aclys International, LLC v. Equifax, Inc., No. 2:08–cv–00954, 2010 WL 1816248 (D. Utah 2010), the Plaintiff claimed it lent over $5 million to certain business partners based upon Equifax’s omissions from its credit report, including a $236,000 default judgment and a $157,000 judgment.  The Plaintiff claimed these omissions resulted from negligence or constituted negligent misrepresentations.  Plaintiff obtained the Equifax credit report from First Credit Corp., who it hired to investigate the potential business partners. 

Under these facts, the Plaintiff did not have a contract with Equifax and did not assert a breach of contract claim.  “Because Aclys seeks damages for purely economic losses sustained as a consequence of relying on the Equifax credit report, its loss falls squarely within the economic loss rule.”  Id. at *3.  Because Plaintiff could not establish an independent common law or statutory duty, the Court concluded that the economic loss rule barred Plaintiff’s claims.

Using the economic loss doctrine to bar tort claims of non-contracting parties is not new to Utah law.  Am. Towers Owners Ass’n v. CCI Mech., Inc., 930 P.2d 1182 (Utah 1996) (barring condominium homeowners from collecting economic damages from contractors for faulty construction in the plumbing and mechanical systems of the building where homeowners were not parties to any of the construction contracts and had no enforceable rights as third-party beneficiaries); Fennell, 2003 UT App 291, 77 P.3d 339 (barring a homeowner’s claim against a developer for negligent misrepresentation and finding that “the economic loss rule applies to prevent the imposition of ‘economic expectations’ on non-contracting parties”).

In the Mountain Bird case, the Court rejected the buyer’s argument that a special relationship exists with respect to its claims against Cessna (the airplane manufacturer) because Cessna self-certified that its de-icing system complied with Federal Aviation Administration regulations. That did not form a “special relationship.”  This exception only comes into play where a party holds themselves out to the public as an expert.  Mountain Bird, 369 Fed. App’x. at 943-44.

 The Fair Credit Reporting Act does not impose an independent statutory duty sufficient to overcome the economic loss doctrine.  Aclys International, LLC v. Equifax, Inc., No. 2:08–cv–00954, 2010 WL 1816248 *3 (D. Utah, May 5, 2010). The Uniform Commercial Code § 4–103 does not create an independent duty sufficient to overcome the economic loss doctrine.  Andersen v. Homecomings Financial, LLC, No. 2:11–CV–332–TS; 2011 WL 3626828 (D. Utah 2011).

The Court in Steiner Corp. v. Johnson & Higgins of California, 196 F.R.D. 653 (D. Utah 2000), refused to extend the economic loss rule to bar a malpractice claim against an actuarial firm which handled aspects of employer’s retirement plan.

Actions against professionals often involve purely economic loss without any accompanying personal injury or property damage. Extending the economic loss rule to these cases would effectively extinguish such causes of action. Attorneys and other professionals might support a rule which would serve as a complete bar to claims of malpractice and consequently eliminate the necessity of paying malpractice insurance premiums. However, this court does not believe that the Utah Supreme Court intended such a result and refuses to render an “Erie guess” that the Utah high court would so extend the reach of the rule. . . .

Id. at 658.  In deciding the Steiner Corp. case, Judge Greene was correct in refusing to render an “Erie guess.”

Two years later, the “independent duty” exception to the economic loss rule was developed in Utah in Hermansen v. Tasulis, 2002 UT 52, 48 P.3d 235 and later in West v. Inter-Financial, Inc., 2006 UT App 222, 139 P.3d 1059.  The Utah Supreme Court set forth the “independent duty” analysis holding that “[w]hen an independent duty exists, the economic loss rule does not bar a tort claim.”  Hermansen v. Tasulis, 2002 UT 52, ¶ 17, 48 P.3d 235, 240. This, of course, is a year after the decision in SME Industries, 2001 UT 54, 28 P.3d 669, applying the economic loss rule to bar claims design professionals (e.g., an architect or engineer).

Professionals owe such duties of care, not because of contractual relationships, but because they are in the business of supplying the type of information contained in the misrepresentation:

[W]hen or if “information is given in the capacity of one in the business of supplying such information, that care and diligence should be exercised which is compatible with the particular business or profession involved.   Those who deal with such persons do so because of the advantages which they expect to derive from this special competence.   The law, therefore, may well predicate on such a relationship, the duty of care to insure the accuracy and validity of the information.”

Hermansen, 2002 UT 52 at ¶ 17 (quoting v. Commonwealth Land Title Co., 666 P.2d 302 (Utah 1983)).

In West v. Inter-Financial, Inc., 139 P.3d 1059 (Utah Ct. App. 2006), the plaintiffs sued the Defendant appraiser for negligent misrepresentation due to an error contained within an appraisal. Id. at 1060.  The West Court noted the limitations placed upon negligent misrepresentation claims by the economic loss rule quoting SME Industries:

“[T]o maintain the fundamental boundary between tort and contract law, we hold that when parties have contracted, as in the construction industry, to protect against economic liability, contract principles override the tort principles enunciated in section 552 of the Restatement (Second) of Torts and, thus, economic losses are not recoverable.”

West, 2006 UT App 222 at ¶ 11 (quoting SME Industries, Inc. v. Thompson, 2001 UT 54, ¶ 42, 28 P.3d 669, 683-84 (Utah 2001)).  The West Court allowed the plaintiffs’ negligent misrepresentation claim because appraisers legally owe an independent duty of care to their clients: 

“We conclude that the Wests’ negligence and negligent misrepresentation claims are not barred as a matter of law because real estate appraisers, like other real estate professionals, are not shielded by the economic loss rule and have an independent duty to non‑contracting parties.”

Id. at ¶ 29. On the other hand, in contrast to Hermansen, a Real Estate Purchase Contract (“REPC”) does not create a special relationship eliminating the application of the economic loss rule, Gibbons v. National Real Estate Investors, LC, 2011 WL 6069236 *5 (D. Utah, Dec. 6, 2011); Mountain Dudes, LLC v. Split Rock, Inc., Nos. 2:08–cv–940–CW, 2011 WL 1549425 *5 (D. Utah, Apr. 21, 2011),  nor do Covenants, Conditions and Restrictions.Mountain Dudes at *5.

Under Utah law, the issue is whether the professional “owe[s] an independent duty to non-contracting buyers, thereby removing them from the rubric of the economic loss rule.”  West, 2006 UT App 222 at ¶ 19.   The United States Court of Appeals for the Tenth Circuit, applying Colorado law, adopted a more complex analysis.  In Standard Bank, PLC v. Runge, Inc., 443 Fed. App’x. 347 (10th Cir. 2011), the Court addressed the factual scenario where a professional engineer firm negotiated limitations of its liability for consequential damages to $50,000, unless the owner was willing to pay a higher fee for an increase in its level of liability.  The contract also established the engineering firm’s duty under the contract with the owner as the same duty it would owe under a negligence standard:  “in accordance with the standard of care of its profession” meaning “generally accepted professional practices, in the same or similar localities, related to the nature of the work accomplished, at the time the services are performed.” Id. at 348.

The interesting twist is that a third party brought the lawsuit for negligent misrepresentation and professional negligence against the engineering firm.  The Court relied upon a three-part test the Colorado Supreme Court developed in BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004), to determine whether the economic loss rule applies to a contract with an engineer:

“(1) whether the relief sought in negligence is the same as the contractual relief; (2) whether there is a recognized common law duty of care in negligence; and (3) whether the negligence duty differs in any way from the contractual duty.” BRW, Inc., 99 P.3d at 74.

Id. at 352. The Standard Bank court found that the economic loss rule barred the third-party’s claim against the engineering firm:  “The relationships here were governed by a set of interrelated contracts between sophisticated commercial entities, all of which had the opportunity to allocate risk and loss through negotiation of their separate contracts.” Id. at 353.  The third party did not have a contract with the engineering firm.  This ruling, therefore, left the third party with no viable claim against the engineering firm.

Perhaps, depending on the facts, a principal-agent relationship could create a source of independent duty outside of the contract, allowing the application of the economic loss doctrine. Clearone Commc’ns, Inc. v. Jas Forwarding, No. 2:09–CV–450–TS; 2009 WL 3248120 (D. Utah Oct. 7, 2009).  Simply alleging that an agent breached his duty to his principal, however, it not sufficient.  The Plaintiff must demonstrate that the breached “duties, rights, or obligations [of the agent are] independent of those imposed upon [it] under contract.” Salt Lake City Corp. v. Erm–West, Inc., Case No. 2:11–CV–1174 TS; 2013 WL 5873292 (D. Utah, Oct 30, 2013); see also UBS Bank USA v. Ibby, LLC, 2009 WL 4884383 (D. Utah Dec. 10, 2009) (holding the tort claims of negligence and negligent misrepresentation did not stem directly from the limited fiduciary duty and thus were not barred by the economic loss rule).

“The Supreme Court noted that the economic loss rule is ‘particularly applicable’ to construction and design situations because parties ‘can avoid economic loss’ with contracts and are thus ‘free to adjust their respective obligations to satisfy their mutual expectations.’” West v. Inter-Financial, Inc., 2006 UT App 222, ¶ 8, 139 P.3d 1059 (quoting American Towers, 930 P.2d at 1190).  The economic loss rule allows one to recover economic losses under a contract theory, but not under a non-intentional tort theory.  At the Utah Court of Appeals explained, “The economic loss rule arises from intrinsic differences between tort and contract law.  Contract law protects expectancy interests created through agreement between the parties, while tort law protects individuals and their property from physical harm by imposing a duty to exercise reasonable care.” Maack v. Resource Design & Construction, Inc., 875 P.2d 570, 580 (Utah Ct. App. 1994) (emphasis added) (“The [plaintiff’s] claims for purely economic damages based upon allegations of negligent design and construction must fail.”)

The Utah Supreme Court applied the “economic loss rule” to bar a home owner’s association claims against the general contractor and subcontractors for negligent construction of the American Tower condominiums in Salt Lake City:

Builders who construct low quality housing that does not cause injury to persons or property may still be held liable for damages, but that liability should be defined by the contract between the parties.  The law of torts imposes no standards on the parties’ performance of the contract; the only standards are those agreed upon by the parties.  Tort law is concerned only with the safety of a product or an action.  Otherwise, the extension of tort law would result in “liability in an indeterminate amount for an indeterminate time to an indeterminate class.”East River Steamship Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 871, 106 S.Ct. 2295, 2302, 90 L.Ed.2d 865, 876‑77 (1986) (noting need to keep products liability and contract law in separate spheres and to maintain realistic limitation on damages).

These rationales are particularly applicable to claims of negligent construction. Construction projects are characterized by detailed and comprehensive contracts that form the foundation of the industry’s operations. Contracting parties are free to adjust their respective obligations to satisfy their mutual expectations.   See W. Page Keeton et al., Prosser & Keeton on the Law of Torts § 92, at 659 n.15 (5th ed. 1984) (“[G]enerally…a contractor’s liability for economic loss is fixed by the terms of his contract.”).

American Towers, 930 P.2d at 1190. Allowing recovery through a negligent misrepresentation claim, instead of through the parties’ contracts and any claims arising therefrom, would undermine the sound policies of the economic loss rule:

The policy reasons supporting the economic loss rule are sound.  When a product does not perform or last as long as the consumer thinks it should, the claim pertains to the quality of the product as measured by the buyer’s and user’s expectations-expectations which emanate solely from the purchase transaction.  Thus, contract principles resolve issues when the product does not meet the user’s expectations while tort principles resolve issues when the product is unsafe to person or property. 

Cathco, Inc. v. Valentiner Crane Brunjes Onyon Architects, 944 P.2d 365, 368 (Utah 1997) (quoting American Towers, 930 P.2d at 1190 (emphasis added)).

SME Industries, Inc. v. Thompson, 2001 UT 54, 28 P.3d 669, is an application of the “economic loss doctrine” in a construction setting.  In that case, Salt Lake County entered into a contract with Thompson, Ventulett, Stainback and Associates, Inc., and Robert Veale (collectively “TVSA”) for architectural services, i.e., drafting the plans, drawings and specifications, associated with remodeling and expansion of the Salt Palace Center.  TVSA contracted with Gillies, Stransky, Brems & Smith and Jonathan Bradshaw (collectively “GSBS”) to provide local architectural services for the project (the “TVSA‑GSBS contract”), and Reaveley Engineers & Associates, Inc., and Earl S. Eppich (collectively “Reaveley”) to provide structural engineering services for the project (the “TVSA‑Reaveley contract”).   Neither GSBS nor Reaveley contracted directly with the County.  TVSA, GSBS and Reaveley constituted the design team.

Hughes‑Hunt, a joint venture, submitted a bid to the County to become the general contractor and, in furtherance of that purpose, received a bid from SME Industries, Inc. (“SME”), to furnish, fabricate, and erect the structural steel for the project.  SME encountered significant problems with the plans and specifications for the structural steel for the project, causing delays and other economic damages.  After the project was completed, SME submitted a claim to Hughes-Hunt for over $2 million in damages. SME claimed that the design team’s responses to SME’s Requests for Information were consistently late and often inaccurate.

After receiving SME’s claim, Hughes-Hunt forwarded it to the County, which submitted it to the design team.  The design team recommended that it be rejected.  Despite this recommendation, the County reached a settlement with Hughes-Hunt, paying Hughes-Hunt $150,000 and assigning all of the County’s claims against the design team to Hughes-Hunt.  Hughes-Hunt then settled with SME, paying SME $150,000 and assigning to SME all of its direct and assigned claims against the design group.

SME filed a complaint in the District Court against TVSA, GSBS, and Reaveley, seeking delay damages and other economic losses it allegedly sustained as a result of its work on the project.  SME’s lawsuit asserted its direct claims against TVSA, GSBS, and Reaveley, as well as the assigned claims that the County and/or Hughes‑Hunt had against defendants. Specifically, SME sought recovery under a total of five legal theories:

• Breach of the County‑TVSA contract;
• Breach of express and implied warranties allegedly contained in the County‑TVSA contract; 
•  Negligent interference with advantageous economic interests against TVSA;
•  Professional negligence against TVSA, GSBS, and Reaveley;  and
•  Breach of third‑party beneficiary claims arising out of the County‑TVSA, TVSA‑GSBS, and TVSA‑Reaveley contracts.

TVSA, GSBS, and Reaveley filed Motions to Dismiss, which the District Court granted, holding among other things that the “economic loss doctrine” barred SME’s assigned and direct claims.

SME argues that the rationale enunciated in American Towers for extending the economic loss rule outside the products liability context is inapplicable in this case because American Towers involved remote purchasers’ claims against an architect, not, like the instant case, a subcontractor’s professional malpractice claim against an architect. However, all parties to a construction project, not just the buyers and developers at issue in American Towers, resort to contracts and contract law to protect their economic expectations.   Indeed, this is particularly true with contractors and subcontractors whose fees are founded upon their “expected liability exposure as bargained and provided for in the[ir] contract[s].” Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 124 Wash.2d 816, 881 P.2d 986, 992 (1994) (en banc).   Protection against economic losses caused by another’s failure to properly perform, including an architect or design professional, is but one provision a contractor, subcontractor, or sub‑subcontractor may require in striking his or her bargain.  Accordingly, contractors’ negligence claims against architects ‑‑ like the owners’ negligence claims against architects in American Towers ‑‑ are akin to the types of commercial situations to which the economic loss rule was meant to apply. See id. at 990 (noting that the “economic loss rule was developed to prevent disproportionate liability and allow parties to allocate risk by contract” (emphasis added)).

Moreover, in view of the contractual foundation of the construction industry, and the ability of contractors and subcontractors to negotiate toward the risk distribution that is desired or customary, other jurisdictions have specifically applied the economic loss doctrine to bar contractors’ and subcontractors’ malpractice claims against architects and design professionals.   See, e.g., Fleischer v. Hellmuth, Obata & Kassabaum, Inc., 870 S.W.2d 832, 837 (Mo. Ct. App. 1993) (rejecting contractor’s negligence claim against architect under economic loss rule); Floor Craft Floor Covering, Inc. v. Parma Cmty. Gen. Hosp. Ass’n, 54 Ohio St.3d 1, 560 N.E.2d 206, 212 (1990) (same);  Bernard Johnson, Inc. v. Continental Constructors, Inc., 630 S.W.2d 365, 374 (Tex. App. 1982) (same);  Blake Constr. Co. v. Alley, 233 Va. 31, 353 S.E.2d 724, 727 (1987) (same);  Berschauer/Phillips Constr. Co., 881 P.2d at 992 (same);  Rissler  & McMurry Co. v. Sheridan Area Water Supply Joint Powers Bd., 929 P.2d 1228, 1235 (Wyo. 1996) (same).

Therefore, consistent with our prior analysis in American Towers, and the foregoing authority from other jurisdictions, we hold that the general rule in this jurisdiction prohibiting the recovery of purely economic loss in negligence is applicable to a contractor’s or subcontractor’s negligence claim against a design professional (e.g., an architect or engineer).

Id. at 681-82 (emphasis added; footnote omitted).  The Court affirmed the District Court’s conclusion that “the economic loss rule bars SME’s direct and assigned negligence claims against the design team.”  Id. at 685-86.

In Grynberg v. Questar Pipeline Co., 2003 UT 8, 70 P.3d 1 (applying Wyoming law), owners of working interests in natural gas wells brought claims against gas purchaser for breach of contract, negligent or intentional misrepresentation, fraud, conversion, negligence, and breach of fiduciary duty. These claims, however, all were based upon whether Questar adhered to formulas set forth in the contracts between the parties. The Court clarified the application of the economic loss rule:  “the economic loss rule does not bar tort claims when those tort claims are based on a duty independent of those found in the contract.”  Id. at ¶ 51.

In affirming the dismissal of the Grynberg’s claims based upon negligent or intentional misrepresentation, fraud, conversion, negligence, and breach of fiduciary duty, the Court stated,

The Grynbergs have provided no authority for the proposition that Wyoming recognizes independent tort duties of the sort alleged here when the contract prescribes identical duties. The fact that the exact same conduct is described in both the contract and tort claims, and the exact same facts and circumstances are at play, is indicative of the overlapping duties in this case. Furthermore, we are influenced by the nature of the parties and contracts at issue: here are two sophisticated business parties agreeing to buy and sell goods in a commercial contract. Strict application of the economic loss doctrine is even more appropriate in cases involving the Uniform Commercial Code. . . .

Id. at ¶ 53.  The threshold question, therefore, in analyzing the application of the economic loss rule is whether the contract covers the subject matter of the tort claims.

Town of Alma v. Azco Constr. Co.  10 P.3d 1256, 1258 (Colo. 2000), is cited favorably in Grynberg v. Questar Pipeline Co., 2003 UT 8, 70 P.3d 1.  In the Town of Alma case, the court in examined the application of the economic loss rule to the Plaintiff’s claim for negligence in the Defendant’s installation of leaky pipes. While noting the “independent duty” analysis, the Town of Alma Court determined that the Plaintiff’s negligence claim was barred by the economic loss rule, explaining:

Limiting tort liability when a contract exists between parties is appropriate because a product’s potential nonperformance can be adequately addressed by rational economic actors bargaining at arm’s-length to shape the terms of the contract.  For example, a buyer may demand additional warranties on a product while agreeing to pay a higher price, or the same buyer may choose to assume a higher level of risk that a product will not perform properly by accepting a more limited warranty in exchange for a lower product price. 

Id. at 1262 (emphasis added).

In Mountain Dudes, LLC v. Split Rock, Inc., Nos. 2:08–cv–940–CW, 2011 WL 1549425 *5 (D. Utah, Apr. 21, 2011), the buyer purchased a house using a REPC.  The property was subject to recorded CC&Rs.  The buyer sued for negligence for the removal of two arches from the common area subject to CC&Rs. Utilizing the economic loss doctrine, the Court dismissed the negligence claim, in part, finding that the “removal of a feature that did not comply with the design code is a risk that was contemplated in the CC&Rs. Beyond the removal the arches, which were found to be out of compliance, there was no property damage in this case.”  Id. 

 Economic loss is defined as:

[d]amages for inadequate value, costs of repair and replacement of the defective product, or consequential loss of profits without any claim of personal injury or damage to other property…as well as ‘the diminution in the value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold.

SME Industries, 2001 UT 54 at ¶ 32 (citations omitted) (emphasis added).  Note Utah Code Ann. § 78B-4-513, which defines economic loss using essentially the same definition. Accordingly, where there is no personal injury or damage to “other property”, the economic loss rule prevents claims for at least unintentional torts based upon damage relating to the contractual property. 

“Other property” outside of a contract is protected from damage by the common law duty of care and such a determination is a means to identify if a contractual duty, or the common law duty, applies. American Towers Owners Ass’n, Inc. v. CCI Mech., Inc., 930 P.2d 1182, 1191 (noting a distinction between tort recoveries for “physical injuries” and contract/warranty for economic loss); Davencourt, 2009 UT 65 at ¶¶ 24-26 at  (suggesting that “other property” retains a separate character from the contracted-for product); see also Grams v. Milk Prods., Inc., 699 N.W.2d 167, 172-173 (Wis. 2005) (discussing how contract and tort deal with risk of damage or loss in different ways and under different standards).

 “Other property” excepted from the economic loss rule does not include property that is part of the same “package” for which the parties contracted. Davencourt, 2009 UT 65 at ¶¶ 24-26 (finding construction components integrated into a finished product do not constitute “other property.”).  Davencourt discusses the “other property” exception for construction defect cases like this one.  In that case, the Plaintiff homeowners association (HOA) sought to sue the developer, general contractor, and subcontractor for various construction defects to the complex.  The HOA only had a contractual relationship with the developer, Davencourt at Pilgrims Landing, LC; the HOA did not contract with any of the construction contractors. Id. at ¶¶ 24-26.

Recognizing the challenges of the economic loss rule, but while still trying to maintain a negligence action against the general contractor and the other construction contractors, the HOA argued that the defective construction had caused damage to other public property in the development that would not otherwise have been damaged. Id.  In other words, separate components of the finished development that the HOA had purchased from the developer constituted “other property” preventing the economic ross rule from operating. Id. at ¶¶ 24-26.

The Supreme Court disagreed.  Where the “property” was the entire project itself “that was constructed as an integrated unit under one general contract,” the physical damaged caused by one portion of the building to another is not “other property.”  Id. at ¶ 25.   This is because the plaintiffs “bought finished products—dwellings—not the individual components of those dwellings.  They bargained for the finished products, not their various components.  The [allegedly defective component] became an integral part of the finished product and, thus, did not injure ‘other’ property.”  Id. (emphasis added). 

Elaborating, the Court continued by stating that the HOA members “did not separately bargain for and purchase individual components when they acquired their townhomes.”  Id.  “Rather, each purchased a finished product, which included the integral components of the roof, the foundation, and the siding.” Id. at ¶ 26. (emphasis added). “To contend that these integral components somehow retain a separate character apart from the final product of the townhome goes too far.”  Id. The result would be that the exception would swallow the rule in every construction defect case. See also American Towers, 930 P.2d at 1191 (“This argument fails because in this case the ‘property’ was the entire complex itself that was constructed as an integrated unit under one general contract…The package is alleged to have been defective–one or more of its component parts was sufficiently substandard as to cause damage to other parts.  The effect of the failure of the substandard parts to meet the bargained-for level of quality was to cause a diminution in the value of the whole, measured by the cost of repair.  This is a purely economic loss, for which the law of contracts provides the sole remedy.”) (citations and internal quotation marks omitted).

A dwelling, such as a townhome, is an integrated product.  The components of a dwelling, such as its roof, foundation, etc., are not various other products. Rather, the buyer purchased an integrated unit.  In Fennell, 2003 UT App 291, 77 P.3d 339, for example, the court held “the damaged property, the land, was part of the ‘package’ [plaintiff] contracted for” thus the plaintiff could not “argue it [was] ‘other property’ for the purpose of establishing an exception to the economic loss rule.”  Fennell v. Green, 2003 UT App, 291, n.8, 77 P.3d 339.

As a starting point, Utah courts have struggled to define what constitutes “other property”. See Davencourt, 2009 UT 65 at ¶ 25 (“[T]his court has never precisely defined what constitutes ‘other property’…”); Wilson v. Tuxen, 754 N.W.2d 220, 226 (Wis. Ct. App. 2008) (“‘Other property’ is a legal term of art, not a literal description.”); Grams, 699 N.W.2d at 173 (a definition for “other property” remains elusive; such distinction is often a difficult task).  “Other property” outside of a contract is protected from damage by the common law duty of care and such a determination is a means to identify if a contractual duty, or the common law duty, applies.  American Towers, 930 P.2d at 1191 (noting a distinction between tort recoveries for “physical injuries” and contract/warranty for economic loss); see also Davencourt, 2009 UT 65 at ¶ 18 (“The economic loss rule is a judicially created doctrine that marks the fundamental boundary between contract law, which protects expectancy interests created through agreement between the parties, and tort law, which protects individuals and their property from physical harm by imposing a duty of reasonable care.”).

In making this determination, the Utah Supreme Court suggests that “other property” retains a separate character from the contracted-for product.  Davencourt, 2009 UT 65 at ¶ 25; see also Grams, 699 N.W.2d at 172-173 (discussing how contract and tort deal with risk of damage or loss in different ways and under different standards).  Once the parties enter into a contract, any tort claim can only be premised on an independent duty that exists separate and apart from the contract and the plaintiff must specify that duty; any breach of a contractual duty must be enforced only through a breach of contract action. Reighard, 2012 UT 45 at ¶¶ 21-22.

In some instances, the concept of “other property” can be difficult to understand, particularly if the damages are the result of the failure of a contracted-for product.  While Utah law is not clear as to where the boundary lies in these cases, Wisconsin law has gone one step further.  Courts there incorporate a “disappointed expectations” analysis, such that the “economic loss doctrine will apply when ‘prevention of the subject risk was one of the contractual expectations motivating the purchase of the defective product.’”  Grams, 699 N.W.2d at 178.   In other words, when the alleged property damage was a result of a product or work not performing to the plaintiff’s expectations, then the economic loss rule bars recovery for that loss.  Id. (the loss of livestock resulting from defendant’s defective product constituted an economic loss and not a damage to “other property”); see also D’Huyvetter v. A.O. Smith Harvestore Products, 475 N.W.2d 587 (Wis. Ct. App. 1990) (holding plaintiff’s claims for death and illness of cattle from compromised feed resulting from defendant’s improperly functioning silo constituted economic loss because silo did not perform “as expected”); Selzer v. Brunsell Bros., Ltd., 652 N.W.2d 806 (Wis. Ct. App. 2002) (stating rot in plaintiff’s house, that spread from windows provided by defendant seven years earlier, constituted economic loss because the windows were warranteed to be “deep treated” against rot and decay and the claim was about “disappointed performance expectations.”); Neibarger v. Universal Coops, Inc., 486 N.W.2d 612, 620 (Mich. 1992) (“Where damage to other property was caused by the failure of a product purchased for commercial purposes to perform as expected, and this damage was within the contemplation of the parties to the agreement, the occurrence of such damage could have been the subject of negotiations between the parties.”).

A direct cause of action is where a member sues another member, or the manager of the LLC, claiming damage to the plaintiff-member’s interest in the LLC.  Direct actions are available only where there are a small number of shareholders or members.  In a derivative action, under Utah R. Civ. P. 23A, or Fed. R. Civ. P. 23.1, the lawsuit is brought in the name of and on behalf of the LLC, seeking damages inflicted upon the LLC. Where there are only a small number of members of an LLC, the Courts in Utah have allowed direct actions.  Banyan Investment Co., LLC v. Evans, 292 P.3d 698 (Utah Ct. App. 2012).  The Court in Banyan simply extended the policy allowing direct actions between shareholders of closely held corporations.  Aurora Credit Services, Inc. v. Liberty West Development, Inc., 970 P.2d 1273 (Utah 1998).

Importantly, in Banyan, the Court applied the closely-held corporation exception to LLCs.  The aggrieved member in Banyan was not required to prove that the injury he suffered was distinct from the injury suffered by the LLC.  “To impose this requirement here would be to effectively do away with the closely-held corporation exception because proof of an injury to a shareholder distinct from the injury to the corporation gives rise to a direct cause of action, . . . and makes invocation of the exception unnecessary.”  Banyan, 292 P.3d at 703-04.

The 2014 Utah Revised Uniform Limited Liability Company Act, Utah Code Ann. § 48-3a-101, et seq., (the “2014 LLC Act”) addresses the ability of one member to bring a direct cause of action against another member or against a manager or the LLC itself:

(1) subject to subsection (2), a member may maintain a direct action against another member, a manager, or the [LLC] to enforce the member’s rights and otherwise protect the member’s interests, including rights and interests under the operating agreement or this chapter or arising independently of the membership relationship.

(2) A member maintaining a direct action under this section must plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the [LLC].

Utah Code Ann. § 48-3a-801. By the way, Section 48-3a-112(3)(k) of the 2014 LLC Act states as “non-waivable”: “An operating agreement may not . . . unreasonably restrict the right of a member to maintain an action under Part 8, Action by Members,” which is quoted above. 

The Prior LLC Act has no similar provision, but subsection (2) in the preceding quote essentially abrogates Banyan.   Subsection (2) is precisely the opposite of the holding in Banyan, where the Court concluded that a requirement of such proof would effective do away with the closely-held entity exception to the derivative rule.  As a result, although the 2014 LLC Act on first glance would appear to embrace the concept of a direct member action, on careful reading it eliminates all but the most mundane of claims, such as breach of an employment agreement.  It abrogates over a dozen years of the development of the concept of a direct action in closely-held entity litigation.

If you oppose embezzlement and inappropriate self-dealing transactions, you will hate this provision of the 2014 Utah LLC Act.

 © 2014 Mark A. Larsen