Summary
applying economic loss doctrine to a contract that provided web-based computer programs to a nursing home administration
Summary of this case from Levinson v. PSCC Services, Inc.Opinion
No. CV-09-5025871-S
June 5, 2009
MEMORANDUM OF DECISION ON MOTION TO STRIKE FIFTH COUNT
The defendant, Kettlebrook Care Center, LLC, has moved to strike the Fifth Count of the complaint on the grounds that that count alleges purely economic losses arising out of a breach of contract and is, therefore, barred by the economic loss doctrine.
Allegations of the Complaint
The plaintiff, Dart Chart Systems LLC, alleges that it is a Wisconsin limited liability company with its principal place of business in Milwaukee, Wisconsin and provides web-based application programs that are designed to improve nursing home assessments, documentation management and regulatory compliance under the Medicare Prospective Payment System. The plaintiff further alleges that on August 7, 2007, it entered into a contract with the defendant (the "Agreement"), under the terms of which the plaintiff agreed to furnish a "web-based application program designed to improve nursing home assessments, documentation management, and regulatory compliance under the Medicare Prospective Payment System (the "System")." In an addendum to the Agreement, the parties agreed that the defendant would not be obligated to pay the plaintiff "until the first date Dart Chart could demonstrate `achievement of 95% of the Composite Result recommended in the Original Findings Report.'" The plaintiff claims that the defendant began using the System on August 15, 2007 and that on September 30, 2007, the plaintiff notified the defendant that 1) the System had achieved 95% of the composite result and 2) the plaintiff intended to commence billing.
The plaintiff claims that the defendant breached the Agreement by failing to pay the invoices for the system and further alleges that "[u]pon information and belief, [defendant] never intended to honor its commitment to pay Dart Chart for the System yet used the System for 13 months," and that the intentional failure to pay for the System constituted an unfair and deceptive trade practice in violation of Connecticut General Statutes § 42-110a et seq., the Connecticut Unfair Trade Practice Act ("CUTPA").
Discussion of the Law and Ruling
The function of a motion to strike is to test the legal sufficiency of a pleading. Practice Book § 10-39; Ferryman v. Groton, 212 Conn. 138, 142, 561 A.2d 432 (1989); Mingachos v. CBS, Inc., 196 Conn. 91, 108, 491 A.2d 368 (1985). In deciding a motion to strike the trial court must consider as true the factual allegations, but not the legal conclusions set forth in the complaint. Liljedahl Bros., Inc. v. Grigsby, 215 Conn. 345, 348, 576 A.2d 149 (1990); Blancato v. Feldspar Corp., 203 Conn. 34, 36, 522 A.2d 1235 (1987).
The court should view the facts in a broad fashion, not strictly limited to the allegations, but also including the facts necessarily implied by and fairly provable under them. Dennison v. Klotz, 12 Conn.App. 570, 577, 532 A.2d 1311 (1987). In ruling on a motion to strike, the court must take as admitted all well-pled facts, and those necessarily implied thereby, and construe them in the manner most favorable to the pleader. Norwich v. Silverberg, 200 Conn. 367, 370, 511 A.2d 336 (1986).
"It is incumbent on a Plaintiff to allege some recognizable cause of action" in the complaint and it is not the burden of the defendant to attempt to correct the deficiency. Brill v. Ulrey, 159 Conn. 371, 374, 269 A.2d 262 (1970). A motion to strike is an appropriate means of presenting to the court legal issues at the outset of litigation. Gordon v. Bridgeport Housing Authority, 208 Conn. 161, 170, 544 A.2d 1185 (1988).
The defendant argues that the Fifth Count alleging a CUTPA violation fails to state a cognizable cause of action because the economic loss rule prohibits recovery in tort when the basis for that tort claim arises from a contract and damages are purely economic. The Connecticut Supreme Court applied the economic loss rule in Flagg Energy Development Corp. v. General Motors Corp., 244 Conn. 126, 709 A.2d 1075 (1988).
There have been no appellate decisions in Connecticut since Flagg. Some superior courts have found that the holding in Flagg warrants an extension of the economic loss doctrine well beyond cases involving the sale of goods. See, e.g., ODP, LLC et al. v. Shelterlogic, LLC et al., 2007 Ct.Sup. 22330, 44 Conn. L. Rptr. 722 (December 21, 2007, Shortall, J.); American Progressive Health Life Insurance Co. v. Better Benefits, LLC, 2007 Ct.Sup. 265, 42 Conn. L. Rptr. 618 (Jan. 4, 2007, Munro, J.); Dobco, Inc. v. Williams Development Co., 2002 Ct.Sup. 6454, CT Page 9691 32 Conn. L. Rptr. 214 (May 17, 2002, Sferrazza, J.); Morganti National Inc. v. Greenwich Hospital Ass'n., 2001 Ct.Sup. 13468-fy (September 27, 2001, McWeeny, J.); Worldwide Preservation Services, LLC v. IVth Shea, LLC, 2001 Ct.Sup. 1878, 29 Conn. L. Rptr. 7 (February 1, 2001, Tierney, J.). Others have found either that the economic loss doctrine has not been recognized in Connecticut or that the application of the ruling in Flagg is limited to claims arising from the sale of goods. See, e.g, Militex Properties v. Johnson, 2004 Ct.Sup. 3846, 36 Conn. L. Rptr. 780 (March 15, 2004, Hurley, J.); Reynolds, Person Co., LLC v. Miglietta, 2001 Ct.Sup. 4520 (March 27, 2001, Berger, J.); Darien Asphalt Paving, Inc. v. Newtown, 23 Conn. L. Rptr. 495, 497 (December 7, 1999, Nadeau, J.); Scap Motors, Inc. v. Pevco Systems International, Inc., 25 Conn. L. Rptr. 283, 284 (August 12, 1999, Melville, J.).
In Flagg, the plaintiffs alleged that certain gas turbine engines they had purchased pursuant to a contract with the defendant were defective. They brought suit for breach of express and implied warranties, breach of contract, misrepresentation and a violation of CUTPA. The trial court granted the defendant's motion to strike the misrepresentation count and the count which alleged a violation of CUTPA on the grounds that the plaintiffs were seeking recovery solely for a commercial loss and were limited to their contract remedies under the Uniform Commercial Code.
On appeal, the Supreme Court affirmed the trial court's decision and expressly stated its agreement with the holdings of cases in other jurisdiction that bar such tort claims where the losses alleged are purely commercial and arise out of a breach of contract for the sale of goods. Flagg, supra, at 153. The Flagg court cited with approval Duquesne Light Co. v. Westinghouse Electric Corp., 66 F.3d 604, 618 (3d Cir. 1995), and Princess Cruises, Inc. v. General Electric Co., 950 F.Sup. 151, 155 (E.D.Va. 1996), quoting from the latter case: "The parties are sophisticated corporations familiar with the type of services rendered, and the consequences of a mechanical failure likely to result from a failure to perform the contract as promised. The parties were free to allocate the risks, insure against potential losses, and adjust the contract price as they deemed most wise. This Court sees `no reason to extricate the parties from their bargain.'" Princess Cruises, supra, at 153-54.
While the Flagg court ostensibly limited its holding to the sale of goods, the Princess Cruises case concerned claims arising from a contract obligating the defendant to perform services. The court in Princess Cruises relied on the United States Supreme Court decision of East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S.Ct. 2295, 90 L.Ed.2d 865 (1986), where the Court gave the rationale for the economic loss rule:
Contract law, and the law of warranty in particular, is well suited to commercial controversies of the sort involved in this case because the parties may set the terms of their own agreements. The manufacturer can restrict its liability, within limits, by disclaiming warranties or limiting remedies. In exchange, the purchaser pays less for the product. Since a commercial situation generally does not involve large disparities in bargaining power, we see no reason to intrude into the parties allocation of the risk.
Id. at 872-73, 106 S.Ct. at 230.
The Princess Cruises court further stated:
The economic loss doctrine has since been applied to contracts for repair services, Nathaniel Shipping, Inc. v. General Elec. Co., 932 F.2d 366 (5th Cir. 1991), and contracts for services rendered as part of the construction or manufacture of products. See Employers Ins. of Wausau v. Suwannee River Spa Lines, Inc., 866 F.2d 752 (5th Cir. 1989), cert. denied, Employers Ins. Of Wausau v. Avondale Shipyards, Inc., 493 U.S. 820, 110 S.Ct. 77, 107 L.Ed.2d 43 (1989).
Id. at 154.
The plaintiff in Princess Cruises argued that the economic loss doctrine should not apply because the defendant breached a tort duty independent of the contract in that it made certain negligent misrepresentations, relied upon by the plaintiff, which resulted in damages. The Court observed that:
In International Ore Fertilizer Corp. v. SGS Control Serv., Inc., 38 F.3d 1279, 1284 (2nd Cir. 1994), cert. denied, U.S., 115 S.Ct. 2276, 132 L.Ed.2d 280 (1995), the United States Court of Appeals for the Second Circuit, specifically rejected this argument.
Id.
In International Ore Fertilizer, the plaintiff, an international trader of fertilizer products, contracted with the defendant to inspect and certify that the hold of a ship chartered to carry its fertilizer was clean, dry and suitable for its purposes. The defendant failed to properly inspect the ship's hold, but nevertheless certified that the hold was clean and suitable when, in fact, some of the ship's prior cargo remained in the hold and contaminated the plaintiff's fertilizer, rendering it unmarketable. The Second Circuit reversed the district court's holding that the defendant's certification was actionable in tort as a negligent misrepresentation and stated:
We agree with [defendant] that East River, . . . compel[s] the holding that any duty owed by [defendant] to [plaintiff] must be derived from the contract and that the negligent misrepresentation claim, which sounds in tort and entails a duty independent of contract, should have been dismissed.
International Ore Fertilizer, supra, at 1284.
This Court finds that it also is compelled by the reasoning, if not the specific holding of East River. As the Court explained in East River, contract law and tort law address fundamentally different concerns.
When a person is injured, the cost of the injury and the loss of time or health may be an overwhelming misfortune, and one the person is not prepared to meet. In contrast, when a product injures itself, the commercial user stands to lose the value of the product, risks the displeasure of its customers who find that the product does not meet their needs, or, as in this case, experiences increased costs in performing a service . . . Such damage[s] mean simply that the product has not met the customer's expectations, or, in other words, that the customer has received insufficient product value.
Id.
The court in Princess Cruises explained the economic loss rule as follows:
Almost any contract breach can be conceived of in terms of a negligent or intentional tort claim. When, through the negligence of one of the parties, the subject of the transaction physically injures a person, or damages the property of someone not a party to the contract, the law of tort properly provides a cause of action. But to permit a party to a broken contract to proceed in tort where only economic losses are alleged would eviscerate the most cherished virtue of contract law, the power of the parties to allocate the risks of their own transactions.
Princess Cruises, supra, at 155.
Based on Flagg and the rationale for the economic loss rule stated by the courts cited above, this court does not believe that the rule is limited to cases involving the sale of goods. The overriding rationale for the rule is that imposing tort remedies on contracts entered into by sophisticated parties improperly and unnecessarily interferes with the legitimate expectations and powers of the parties to allocate their risks.
The plaintiff admits that it is a sophisticated party. Plaintiff's Memorandum of Law, p. 7. The parties entered into a contract that addressed the parties' obligations to each other and their remedies upon a breach by the other party. Section 5.1 of the Agreement, which is Exhibit A to the complaint, addresses the plaintiff's remedies upon the defendant's failure to make timely payments. The only damages allegedly suffered by the plaintiff were purely economic. Permitting a sophisticated party such as Dart Chart to recover in tort for damages that are purely economic and arise out of a contractual relationship would lead to "contract law drowning in a sea of tort." See Princess Cruises, supra, at 156.
For the foregoing reasons, the motion to strike the Fifth Count is granted.