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July 16, 1985


The opinion of the court was delivered by: Aspen, District Judge:


Dixie-Portland Flour Mills, Inc. ("Dixie-Portland") filed this diversity suit*fn1 against National Enterprises, Inc. ("Nation") alleging breach of a sales contract. The basic facts are undisputed: Dixie-Portland contracted to sell flour to Nation for the latter to use in its production of pizza crusts. Dixie-Portland claims that Nation failed to pay for the flour, breaching the contract. Nation counterclaims, alleging that the flour it bought was contaminated with sand. It seeks damages for lost profits, loss of business and costs of replacement of the flour and other ingredients mixed with it. It alleges tort theories of negligence and negligent misrepresentation, strict liability, fraud and willful and wanton conduct (Counts I, II, VII and VIII, respectively). It also alleges several contract theories, including breach of express warranty, implied warranty of merchantability, implied warranty of fitness for particular purpose and breach of contract (Counts III-VI, respectively). Dixie-Portland filed an answer to the four contract counterclaims but has moved to dismiss the tort counterclaims. For the reasons stated below, the motion is granted.


Dixie-Portland's main attack is that Nation's negligence and strict liability counterclaims seek only "economic damages," and that Illinois law*fn2 requires that such damages be recovered in contract, not tort. The parties agree with this general statement of the law but disagree as to whether Nation seeks only "economic damages."

The seminal Illinois case is Moorman Mfg. Co. v. National Tank Co., 91 Ill.2d 69, 61 Ill.Dec. 746, 435 N.E.2d 443 (1982). The Supreme Court there held that a plaintiff may not recover solely economic losses under tort theories of negligence or strict liability. The court defined "economic losses" as

  damage for inadequate value, costs of repair and
  replacement of the defective product, or consequent
  loss of profits — without any claim of personal
  injury or damage to other property as well as the
  diminution on 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.

91 Ill.2d at 82, 61 Ill.Dec. at 752, 435 N.E.2d at 449 (citations and internal quotations omitted). The court reasoned that such losses are essentially losses of contractual expectation interests, which are comprehensively regulated through the Uniform Commercial Code's (UCC) network of warranties; the Court felt that UCC "provides the proper standard when a qualitative defect is involved, i.e., when a product is unfit for its intended use." Id. at 81, 61 Ill.Dec. at 751, 435 N.E.2d at 448. However, when the product is unreasonably dangerous to the consumer or to his or her property, strict liability (or negligence liability, if relevant) applies to his or her personal or property injuries. "This comports with the notion that the essence of a product liability tort case is not that the plaintiff failed to receive the quality of product he expected, but that plaintiff has been exposed, through a hazardous product, to an unreasonable risk of injury to his person or property." Id.

Nation argues that the defective product did damage some of its property so that it may recover in tort under Moorman. It contends that the sand not only rendered the product itself defective, but also contaminated other ingredients used in making the crust, as well as causing it to use up, and thereby "destroy," materials used to package the crusts. Dixie-Portland counters that Nation is really seeking only "economic" losses: the countercomplaint explicitly seeks only lost profits and damages for loss of reputation and future business.

We do not think much can be gained by focussing on the type of damages claimed. The facts of this case make clear that in the business context there is not always a bright line separating "economic losses" from "damages to property"; indeed, the two categories tend to overlap. The "damage" to Nation's other ingredients and to its packaging can plausibly be called damage to its "property." This was caused by a defective product. In this description, we are speaking the language of tort. See also Abco Metals Corp. v. J.W. Imports Co., Inc., 560 F. Supp. 125, 129-30 (N.D.Ill. 1982) (faulty wire-chopper caused plaintiff to waste wire, recovery in tort allowed), aff'd on other grounds, 721 F.2d 583 (7th Cir. 1983). Yet it can also be described reasonably as a diminution of its inventory, leading to loss of profits. The second description concerns diminished expectations and "economic" loss and thus speaks the language of contract. In sum, the demarcation between economic loss and property damage is not helpful in this case because it yields no clear answer.

Illinois courts, including Moorman, recognize that a court should not lavishly adhere to the economic loss/property damage distinction. Rather, the Court must look deeper to the policies underlying the Moorman rule:

  In drawing this distinction [between economic loss
  and physical damage], the items for which damages are
  sought, such as repair costs, are not determinative.
  Rather, the line between tort and contract must be
  drawn by analyzing

  interrelated factors such as the nature of the
  defect, the type of risk, and the manner in which the
  injury arose. These factors bear directly on whether
  the safety-insurance policy of tort law or the
  expectation-bargain protection policy of warranty is
  most applicable to a particular claim.

Moorman, 91 Ill.2d at 85, 61 Ill.Dec. at 753, 435 N.E.2d at 450, quoting Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165, 1172-73 (3d Cir. 1981). Thus, if the "nature of the defect" is a "qualitative" one, such that at core it merely injures a purchaser's expectations, the UCC provides the remedies. Id. 91 Ill.2d at 85, 61 Ill.Dec. at 753, 435 N.E.2d at 450. But if the product's defect makes it hazardous or unreasonably dangerous, so that it causes a "sudden and dangerous occurrence" which in turn causes physical injury, tort provides the remedy.

A recent Illinois Appellate Court opinion also emphasizes that the type of damages sought is not controlling. See Vaughn v. General Motors Corp., 118 Ill.App.3d 201, 73 Ill.Dec. 643, 454 N.E.2d 740 (1983), aff'd, 102 Ill.2d 431, 80 Ill.Dec. 743, 466 N.E.2d 195 (1984). In that case, only the product itself was harmed. A truck with defective brakes locked, damaging the vehicle, leading to loss of business profits. A crabbed reading of Moorman would have precluded recovery in tort because the Moorman court does mention that tort does not apply "where only the defective product is damaged." 91 Ill.2d at 85, 61 Ill.Dec. at 753, 435 N.E.2d at 450. But the Vaughn court correctly read Moorman as holding that the nature of the damages is not the sole factor to consider. 118 Ill.App.3d at 203, 73 Ill.Dec. at 645, 454 N.E.2d at 741. Rather, after a discussion similar to ours above, the Vaughn court concluded that "the element of causation is essential to the court's holding in Moorman." Id. The economic loss/physical injury distinction is important, but so is the Moorman court's distinction "between damages caused by a qualitative defect (i.e., by failing to perform up to purchaser's expectations) and those caused by a sudden and dangerous occurrence." Id. The former will usually be remedied in contract, the latter in tort.

The Vaughn opinion signals, we believe, a move toward Justice Simon's well-reasoned concurrence in Moorman, which criticized heavy reliance on the economic loss/physical injury distinction, favoring instead an analysis which relies on the policies underlying tort and contract. See 91 Ill.2d at 95-99, 61 Ill.Dec. at 758-60, 435 N.E.2d at ...

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