Robinson Helicopters v. Dana Corp. 1/24/03 CA2/3

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State: California

Court: 1st District Court of Appeal 1st District Court of Appeal

Docket No: B150963

Case Date: 01/24/2003

Preview:Filed 1/24/03

CERTIFIED FOR PUBLICATION IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION THREE ROBINSON HELICOPTER COMPANY, INC., Plaintiff and Respondent, v. DANA CORPORATION, ETC., Defendant and Appellant. B150963 (Super. Ct. No. YC036795)

Appeal from a judgment of the Superior Court of Los Angeles County. Jean Matusinka, Judge. Reversed in part and affirmed in part. Howrey Simon Arnold & White, LLP, Edwin V. Woodsome, Jr., David G. Meyer and Michael L. Resch; Bowman and Brooke, LLP and Lawrence R. Ramsey; Cardelli, Hebert & Lanfear, PC and Thomas G. Cardelli for Defendant and Appellant. Tim A. Goetz; Waller Lansden Dortch & Davis and Raymond E. Hane, III; Edward J. Horowitz, PC for Plaintiff and Respondent.

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Dana Corporation (Dana) appeals from a judgment in the sum of $7,533,924 (including $6 million in punitive damages) entered against it following a jury trial. This case arose out of a contract between Dana and the respondent, Robinson Helicopter Company, Inc. (Robinson), pursuant to which Dana manufactured and sold sprag clutches for use in the helicopters manufactured by Robinson. After a nine-day trial, the jury found Dana liable for breach of contract, breach of warranty and intentional fraud. The principal issue presented involves the application of the economic loss rule. That rule precludes a recovery in tort where the sale of a defective product has resulted in no property damage or bodily injury, but only economic loss to the buyer of that product. In California, the rule has operated to preclude a tort recovery by the purchaser of a defective product under either negligence or product liability theories. As we explain, the rule also should be applied to intentional fraud cases where such fraud has been committed in the performance, as opposed to the inducement, of the product sale contract. Dana argues that the trial court improperly permitted a relatively simple claim for breach of a commercial sales contract and warranty to be transformed into an action for fraud, thus justifying an award of punitive damages. We have carefully reviewed this record and find that we agree with Dana. In breaching its contract with Robinson, Dana did not commit an independent tortious act. At most, it fraudulently concealed its acts of breach from Robinson. However, because this did not result in any additional damage to
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Dana was sued in this matter as Dana Corporation, dba Dana Corporation, a Virginia Corporation, dba Warner Electric Division and Formsprag Division. 2

Robinson nor any detrimental reliance, the economic loss rule is properly applied to restrict Robinson's recovery to contract damages. No legal or factual basis existed for the submission of fraud and punitive damage issues to the jury. Therefore, this case should have been limited to contract and warranty claims. With respect to those claims, the record fully supports the jury's verdict. We therefore will reverse the judgment to the extent that it is based on a finding of fraud and awards punitive damages, but we will affirm the portion of the judgment that awards damages for breach of contract and warranty. FACTUAL AND PROCEDURAL BACKGROUND
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Robinson is a manufacturer of helicopters. Its R22 model is a two seat helicopter used as a primary trainer for pilots. The R44 model is a heavier model used for a wide variety of purposes. Both of these models use sprag clutches manufactured by Dana's Formsprag division. The sprag clutch on a helicopter functions like the "free wheeling" clutch mechanism on a bicycle where the rider transmits power to the rear wheel by operating the pedals, but when the rider stops pedaling, the wheel continues to rotate. A sprag clutch is primarily a safety mechanism. If a helicopter loses power during flight, the sprag clutch allows the rotor blades to continue turning and permits the pilot to maintain control and land safely by the "autorotating" of the rotor blades.
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As Robinson prevailed below, the facts we recite, including all reasonable inferences to be drawn therefrom, are those that support the jury's verdict. We do not, however, include argumentative or speculative conclusions.
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Robinson emphasizes that this is particularly important for the R22 model. Since 3

Dana is one of nearly 1,000 vendors from which Robinson purchases parts for its R22 and R44 helicopters. Each vendor has its own quotation form with additional terms and conditions printed on the reverse side of the form. Generally, however, Robinson received quotations from vendors by facsimile transmission. These copies did not include the reverse side of the original document. Thus, absent other evidence that Robinson was aware of, and had agreed to, the terms and conditions of a quotation offer that were printed on the reverse side of the original document, it would be difficult to conclude that the agreement between Robinson and the offering party would include those terms and conditions. At all relevant times, Dana's Formsprag division was the
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it is used as a trainer, it engages in autorotation on a regular basis. A properly functioning sprag clutch is vital to the performance of this critical safety function. In this case, the record reflects that Dana's quotation and sales documents contained certain provisions on the reverse thereof including a reservation of "the right at any time to make changes in drawings, designs, specifications [or] materials . . . ." In addition, those provisions included a warranty that the clutches manufactured by Dana "will be free from defects in material and workmanship for a period of twelve (12) months from the date of delivery," and that "its products will conform to drawings and specifications mutually agreed upon in writing." The express warranties required that written notice of any claimed defect be provided within 30 days of the time that the defect is or "should have been" discovered. In capital letters, the warranty provisions also stated that: "This warranty is in lieu of and excludes all other warranties, expressed or implied, including warranties of merchantability and of fitness for a particular purpose, arising by operation of law or otherwise, and in no event will seller be liable for incidental or consequential damages." Robinson, however, contends it never saw nor accepted these provisions. Thus, this was a disputed issue. There was evidence presented at trial that supports the conclusion that either the reverse sides of the Dana sales documents were never sent to Robinson or were unreadable. Indeed, the copy of the terms and conditions set out on the reverse side of the Dana sales documents that is included in the appellate record is totally illegible.
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only manufacturer of the sprag clutches that Robinson required for its R22 and R44 helicopters. All aircraft manufacturers in the United States, including Robinson, must obtain a "type certificate" from the FAA. The type certificate freezes the design as of the date the certificate is issued. Every aircraft made pursuant to the certificate must be produced exactly in accordance with that certificate. Any proposed changes must first be submitted to and approved by the FAA. The components of the sprag clutch must be ground to precise tolerances, measured in thousandths of an inch, to avoid distortions that lead to cracking and failure. Pursuant to the type certificate issued to Robinson by the Federal Aviation Administration (FAA) for the R22 and R44 models, the parts of the sprag clutches, including the sprag ears, were required to be ground at a particular level of hardness to assure their metallurgical integrity. The required level of hardness of the R22 and the R44 clutches, pursuant to the type certificates, was described as "50/55 Rockwell" (50/55). Between 1984 and July 1996, Robinson purchased 3,707 sprag clutches from Dana. Each was ground to the required 50/55 level of hardness. There were only three incidents of cracking or failure of these sprag ears, a rate of 0.03%. In July 1996, Dana changed its grinding process to a higher, "61/63 Rockwell" (61/63) level of hardness. Dana did not notify Robinson or the FAA of this change. After such change was made
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It would appear that Robinson makes no claim in this case that Dana had any fraudulent intent in changing its grinding standard. At oral argument on Dana's motions for new trial and judgment notwithstanding the verdict, Robinson's counsel (Raymond E. 5

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in the grinding process, Dana nonetheless continued to provide written certificates to Robinson with each delivery of clutches that the clutches had been manufactured in conformance with Robinson's written specifications (which specifications prohibited unapproved changes in Dana's manufacturing process).
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In October 1997, again without notifying either Robinson or the FAA, Dana changed its grinding process back to the 50/55 level of hardness that was required by its contract with Robinson. Beginning in early 1998, the sprag clutch ears that had been ground at the 61/63 level of hardness and sold to Robinson experienced a failure rate of 9.86%. This compared with a failure rate for clutches manufactured before July 1996 of 0.03% and 00.0% for clutches manufactured after October 1997.
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Hane, III, Esq.) stated: " `But the conduct was the concealment, as your Honor pointed out. The conduct wasn't changing the process. They're right. I don't think there was any malice or malicious intent when they changed the grinding process.' [

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