Federal Court Narrows Impact Of New Jersey Limitation On Economic Loss Rule And Integrated Product Doctrine For Component Part Manufacturers

Previously published in the Bloomberg BNA Product Safety & Liability Reporter

The United States District Court for the District of New Jersey has signaled that, on a case-by-case basis, component part manufacturers may be protected from tort claims by the combined effect of the economic loss rule and integrated product doctrine under New Jersey law, despite a New Jersey Supreme Court ruling that left product manufacturers vulnerable to increased exposure in litigation over pure economic loss to a product as a whole.

In Adams Extract & Spice, LLC v. Van De Vries Spice Corp., Civ. No. 11-720, 2011 U.S. Dist. Lexis 147851 (D.N.J. Dec. 23, 2011), the court defined the narrow scope of the New Jersey Supreme Court ruling and thereby reestablished the viability of the integrated product doctrine, as an extension of the economic loss rule, in barring tort-based recovery when an allegedly defective product is incorporated into another product that the incorporated product then allegedly damages.

Understanding the Legal Principles

While these legal arguments are not frequently employed by defense counsel, they are by no means a new legal creation. The seminal U.S. Supreme Court decision, East River S.S. Corp. v. Transamerica Delaval Inc., 476 U.S. 858 (1986), held that the economic loss rule barred a claim by the corporate plaintiff against the manufacturer of a ship's engine turbines, a part of which had allegedly failed causing damage only to the turbines themselves. The Court explained that the public policy behind the rule is that contract law, and the law of warranty in particular, is better suited than tort law to set and regulate the responsibilities of a manufacturer if a product fails to perform the function for which it was intended. In keeping with this principle, under the economic loss rule a manufacturer has ''no duty under either a negligence or strict productsliability theory to prevent a product from injuring itself,'' because if the product itself is defective, the purchaser is limited to a contract claim for breach of warranty. East River, 476 U.S. at 871.

The economic loss rule evolved following East River, and lower courts throughout the country began applying the rule to consumer plaintiffs as well. New Jersey's economic loss rule, codified in the New Jersey Product Liability Act, only permits a plaintiff to recover for ''harm'' which it defines as personal injury and ''physical damage to property, other than the product itself.'' N.J.S.A. 2A:58C-1(b)(2).

The New Jersey Supreme Court, in Alloway v. General Marine Industries, L.P., 695 A.2d 264 (1997), found that, pursuant to the economic loss rule and the integrated product doctrine, a luxury boat owner's insurance company was barred from any recovery against the manufacturer of an allegedly defective seam in the boat that caused the boat to sink. In determining the proper allocation of the risk of...