In Golden Spread Electric Cooperative v. Emerson Process Management, the Fifth Circuit confronted a classic “economic loss rule” problem under Texas law. Judge Jacques Wiener wrote the opinion, joined by judges Stephen Higginson and James Ho. While the case involved a dispute about the operation of a power turbine, the legal framework described by Golden Spread could easily set the ground rules for future business tort litigation arising from the COVID-19 crisis.
Golden Spread, a public utility, contracted with Emerson to provide “a new, customized control system” for a steam turbine generator. During testing of the new system, the software installed by Emerson issued a mistaken command that caused the turbine to overheat and become damaged.
Golden Spread, joined by its insurer, brought contract and tort claims against Emerson. The district judge dismissed the contract claims because Emerson had discharged its sole duty under the parties’ contract by fixing the defective software. It dismissed the tort claims based on Texas’s economic loss rule and the Fifth Circuit affirmed.
In Sharyland Water Supply v. City of Alton, the Texas Supreme Court called the economic loss rule “a complex area of the law that defies precise categorization.” Its complexity, and the surprisingly small number of cases that explain it, make the reasoning in Golden Spread particularly useful.
The Fifth Circuit noted that “[u]nder Texas law, the economic loss rule generally prevents recovery in tort for purely economic damage unaccompanied by injury to persons or property.” It does so for two policy reasons.
First, “[p]urely economic harms proliferate widely and are not self-limiting in the way that physical damage is.” Second, “the risk of economic harms are better suited to allocation by contract” because the parties “usually have a full opportunity” to negotiate such risks before finalizing a contract.
The court reasoned that under Texas law, it should “analyze the rule’s ‘rationales in [the] particular situation’ to determine whether the risk is better addressed in tort or in contract.” It focused on two aspects of the parties’ dispute to conclude that the rule applied.
First, Emerson had only contracted to provide a component. Texas cases have tended to apply the rule to claims against component suppliers, as they are at particular risk from economic damages that may “proliferate widely” to include matters far beyond the specific component they worked on.
Second, the problem that led to the turbine damage “is more akin to a failure to meet contractual specifications than a dangerous defect redressable in tort.” Because “improving the commands sent to the turbine was the very purpose of the upgrade contract,” it was “eminently foreseeable that the control system might send the wrong commands.”
The framework used by the Fifth Circuit in Golden Spread could easily guide business tort litigation arising from the COVID-19 crisis.
The first of the two policy issues identified by the court – “economic harms proliferat[ing] widely” – speaks directly to the many businesses that will find themselves defending claims involving maintenance issues, supply-chain breakdowns, security breaches and other such issues arising from the unprecedented strain placed on ordinary business practices by the novel coronavirus.
Using this principle, a business can defend such a claim under the economic loss rule by arguing that it played a small and discrete role in the overall economic picture. The plaintiff will describe the defendant’s product or services broadly, to make it seem proportionate to the size of the damages sought.
And the second policy concern – whether a claim is “better suited to allocation by contract” – will provide a useful focus for both sides in litigating business issued caused by the virus. The defense will focus on the character of a business’s work, and what specific risks are associated with that particular work. The plaintiffs’ side will cast a broader net and argue about the overall allocation of risks associated with unexpected calamity.
The combination of arguments about those two concerns will likely lead to more opinions applying the economic loss rule to disputes arising from the present health crisis.
The full citation for the case is Golden Spread Electric Cooperative v. Emerson Process Management, No. 19-10238 (5th Cir. 2020).