The Wheels of Progress on the Economic-Loss Rule and Unfair and Deceptive Trade Practices Claims
Two years ago, I left Ellis & Winters to spend a few years as in-house counsel at a financial institution. Before I left, I wrote several times about the uncertainty surrounding the economic-loss rule and section 75-1.1 (here, here, here, and here). While I was away, my colleagues continued to chart courts’ application of the economic-loss rule—with much better graphics, puns, and pop culture references than me (here, here, and here).
I’ve now returned to Ellis & Winters, and I am excited to return to my firm and this blog. I had hoped that in the intervening years, our courts would have developed more certainty on how the economic-loss rule applies to section 75- 1.1 claims.
While we still lack definitive authority from the North Carolina Supreme Court on the issue, our federal courts have been charting their own roadmap.
In two recent products liability decisions against the same defendant in the United States District Court for the Middle District of North Carolina, the court concluded that the economic-loss rule did not bar section 75- 1.1 claim at the pleadings stage.
In this post, I examine both decisions. Fasten your seatbelt as I try to make sense of our current direction on the economic-loss rule (and try to catch up on my lagging pun count). Both decisions involve claims about BMW’s N63 engine—a high performance, twin-turbocharged V8 engine whose alleged reliability problems led to a nationwide class action settlement.
In our most recent case, Plaintiff Wheeler—I didn’t make that up—bought a used BMW from a BMW dealership in late 2015. The 2012 750i BMW had an N63 engine.
After a few months, Wheeler believed that the vehicle was burning more oil than it should. Wheeler determined that the vehicle needed oil every 3,000 miles, and she believed that to be excessive. Your neighborhood oil and lube might disagree.
Wheeler went back to the dealer a few times and wrote BMW about her concerns. She also began some internet sleuthing, and she learned that other owners of vehicles with the N63 engine had similar complaints. She also learned that in 2014, BMW launched a customer care package for vehicles with N63 engines, like Wheeler’s car. Under that customer care package, BMW instructed its service technicians to check and replace engine components at no charge. BMW also reduced its recommended oil change interval for N63 engines from 15,000 to 10,000 miles. Finally, BMW gave its impacted customers one for the road and offered them a discount on a new BMW.
Wheeler sued BMW, and she included a section 75-1.1 claim. BMW moved to dismiss.
Magistrate Cayer Pumps the Brakes
Magistrate Judge David S. Cayer had the first pass at the motion to dismiss.
Judge Cayer recommended dismissal of the section 75-1.1 claim because the economic-loss rule barred recovery. Judge Cayer tried to make sure he was on the right track by reviewing the previous cases considering the economic-loss rule in section 75-1.1 cases—including the Bradley Woodcraft case discussed here, and the Fourth Circuit’s Legacy Data Access case discussed here—to conclude that an unfair and deceptive trade practices claim in a contract case would be barred unless there is a separate, independent legal duty that is distinct from the contractual duty. In Wheeler’s case, she did not allege any separate duty, and the section 75-1.1 allegations were “intertwined” with the warranty-based claims.
As a result, Judge Cayer concluded, Ms. Wheeler’s section 75-1.1 claim had run out of gas.
Fortunately for Ms. Wheeler, Judge Cayer’s decision was just a speed bump, as District Court Judge Robert J. Conrad declined to adopt the recommendation. Judge Conrad also took a tour through the economic-loss hall of fame. But a case decided after Judge Cayer’s recommendation, allowed Judge Conrad to take his history lesson into fifth gear and ultimately pull a U-turn on the section 75-1.1 claim.
Shifting Gears to Another Case Against BMW
In Jones v. BMW of North Carolina—decided a few months after Judge Cayer’s recommendation—United States District Judge Thomas D. Schroeder considered whether to apply economic-loss rule to dismiss a section 75-1.1 claim at the 12(b)(6) stage.
In Jones, a different plaintiff purchased a used 2011 BMW 550i in 2012 that also had an N63 engine. Jones experienced the same oil issue as Wheeler. Jones sued BMW and included a section 75-1.1 claim. Given the overlapping issues, claims, and defendant, one might say that Jones’s case was on all four wheels with Wheeler’s dispute.
On the unfair and deceptive trade practices claim, Jones pointed to several actions by BMW that Judge Schroeder segregated into two bucket seats—namely, pre-sale allegations and post-sale allegations. That distinction became the driving force behind Judge Schroeder’s opinion.
Jones argued that BMW had taken affirmative steps to conceal the severity of the N63 engine’s issues, such as reporting that the engine functioned correctly, instructing service technicians to put more oil in cars experiencing the oil-consumption issue, and altering the recommended oil change intervals. But all of these actions came after Jones already purchased the car.
So those post-sale theories all crashed and burned before Judge Schroeder.
But Jones also argued that BMW was aware of the defect before Jones purchased and that Jones was unaware and could not have discovered the oil issue before Jones purchased.
Judge Schroeder allowed the unfair and deceptive trade practices claim based on pre-sale conduct to proceed. But Judge Schroeder cautioned that down the road, Jones would need to show that he could not have discovered the defect through his own due diligence.
Back to the Future on Section 75-1.1
Turning back to Wheeler, Judge Conrad kicked the tires of Judge Schroeder’s opinion in Jones and took it for a test drive.
Like Judge Schroeder, Judge Conrad looked to Wheeler’s pre-purchase allegations. Wheeler alleged that BMW was aware of the defect as far back as mid-2008, but withheld the information from consumers and instead concealed the issue by instructing technicians to just add more oil when the car was brought in for service. Wheeler also alleged that she relied on BMW’s warranties before deciding to purchase the vehicle, and those warranties stood in contrast to what BMW actually knew about the N63 engine’s problems.
Based on these allegations, Judge Conrad decided to follow Judge Schroeder’s lead from Jones and allowed Wheeler’s claims to proceed.
So, Wheeler and Jones had survived for another day on their section 75-1.1 claims. It will be interesting to see whether the plaintiffs get caught asleep at the wheel at summary judgment, since Jones and Wheeler will need to show that they could not have discovered the alleged defect. Both plaintiffs purchased used vehicles after the buyers had a chance to spend time with their vehicles, and Wheeler alleged she found information about the defect on internet forums.
The Finish Line
We still lack clear guidance from the North Carolina Supreme Court on the economic-loss rule’s application to unfair and deceptive trade practices claims. Fortunately, our other state and federal courts have done the fine-tuning needed to get us down the homestretch and past the Supreme Court’s checkered flag.
I hope that this has been a helpful trip around the economic loss rule track. And I hope I’ve used enough puns in this post to allow me to draft through the next few.
Author: Jeremy Falcone