The Remains of the Citadel (Economic Loss Rule in Products Cases)

By Catherine M. Sharkey. Full text here.

Though its seeds may have been planted long before, the economic loss rule in products liability tort law emerged in full force at the very same moment as the doctrine of strict products liability in the mid-1960s. This moment, fueled by the fall of privity and the rise of implied warranty earlier in the century, was of great doctrinal import—a moment when strict liability threatened to erase altogether the boundary between tort and contract in the context of defective products cases and move those cases firmly into the tort realm. The economic loss rule emerged as a crucial new levee against a flood of potentially limitless tort liability. It forged a new dividing line, keeping cases involving pure financial losses within the domain of contract by denying recovery for such losses under any theory of tort. Seen in this light, the economic loss rule emerged to protect the “remains” of the citadel of privity.

William Prosser, so intently focused on the dramatic siege on the citadel of privity, overlooked a few, highly significant cases, where courts continued to require privity in order for the plaintiff to recover for negligently inflicted economic losses by defective products. Over the two decades that followed Prosser’s The Fall of the Citadel, the debate over the economic loss rule in products cases continued to unfold, culminating in the U.S. Supreme Court’s embrace in East River Steamship. That case ensured the economic loss rule would keep contract from “drowning in a sea of tort” and that the wall between the “separate spheres” of tort and contract law could not be breached.

After an exploration of the evolution of, and rationales for, the economic loss rule in products cases, this Article examines whether the citadel’s last bastion should be preserved. It concludes that the economic loss rule in products cases may be best justified as a means to induce the putative victims—here, the parties with superior information regarding risk of financial loss—to protect themselves.