United States Court of Appeals
For the First Circuit
No. 05-2501
ISLA NENA AIR SERVICES, INC.;
SAN JUAN JET CHARTER, INC.,
Plaintiffs, Appellants,
v.
CESSNA AIRCRAFT COMPANY;
PRATT & WHITNEY CANADA CORP.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Raymond L. Acosta, U.S. Senior District Judge]
Before
Boudin, Chief Judge,
Torruella, Circuit Judge,
and Hansen,* Senior Circuit Judge.
Lawrence D. Goodman, with whom Luis Del Valle-Emmanuelli,
García & Fernández Law Office, Juan A. López-Conway, and Devine
Goodman Pallot & Wells, P.A. were on brief, for appellants.
James M. Derr, with whom Bruce J. McGiverin were on brief, for
appellee Cessna Aircraft Company.
Kathleen M. O'Connor, with whom Thornton, Davis & Fein, P.A.,
A.J. Bennazar-Zequeira, José R. García-Pérez and Bufete Bennazar,
C.S.P. were on brief, for appellee Pratt & Whitney Canada Corp.
May 31, 2006
*
Of the Eighth Circuit, sitting by designation.
TORRUELLA, Circuit Judge. Plaintiffs-Appellants Isla
Nena Air Services, Inc. and its successor in interest San Juan Jet
Charter, Inc. (hereinafter "Isla Nena") brought suit against
defendants-appellees Cessna Aircraft Company ("Cessna") and Pratt
& Whitney Canada Corporation ("PWC") in the United States District
Court for the District of Puerto Rico. The complaint alleged
claims arising from an airplane crash near Culebra, an island
municipality of Puerto Rico. Isla Nena now appeals from the
district court's dismissal of its complaint for failure to state a
claim upon which relief may be granted. After careful review, we
affirm the judgment of the district court.
I.
Isla Nena is a Puerto Rico corporation that operates a
short-haul commercial airline in Puerto Rico. Cessna is a Kansas
corporation that designs, manufactures, and sells aircraft. PWC is
a Canadian corporation that designs, manufactures, and sells
aircraft engines. On November 26, 2001, Isla Nena purchased a new
Cessna 208B (the "Aircraft") from Cessna and took delivery at
Cessna's factory delivery center in Wichita, Kansas. The Aircraft
was powered by a PWC engine.
On August 30, 2003, the Aircraft was carrying nine
passengers and a pilot from Fajardo, a city on the northeast coast
of Puerto Rico, to Culebra, an island municipality of Puerto Rico
approximately twenty miles east of Fajardo. About five miles west
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of the Culebra airport at an altitude of 2500 feet, in clear
weather, the engine failed and the Aircraft lost power. The pilot
was able to glide the Aircraft toward Flamenco Beach near Culebra
and performed a controlled emergency water landing just off the
beach. Following the landing, the pilot assisted all of the
passengers -- none of whom were seriously injured -- to shore. The
Aircraft suffered major damage to all of its components and the
engine was destroyed.
After the accident, the National Transportation Safety
Board ("NTSB") conducted an investigation. The NTSB determined
that certain rivets installed around an engine inlet duct were
either fractured or corroded. After the NTSB examined the engine,
it was shipped back to PWC. PWC examined the engine's component
parts and found that the damage to the engine was consistent with
ingestion of a foreign object. Isla Nena's theory is that the
rivets were defectively designed or installed, causing them to
break off, and that the rest of the engine failed when it ingested
one of the broken rivets.
On September 20, 2004, Isla Nena filed a six-count
complaint against Cessna and PWC1 in the United States District
Court for the District of Puerto Rico. The complaint asserted
diversity jurisdiction and contained claims for strict liability
1
The complaint also alleged as defendants a John Doe, Jane Doe,
River Doe, and Insurance Companies A, B, and C.
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(Counts I and II) and negligence (Counts III and IV).2 The
complaint sought to recover damages for loss of value to the
Aircraft and engine, cost to repair the Aircraft and engine, loss
of use of the Aircraft, and lost profits.
On November 12, 2004, PWC filed a motion to dismiss
Counts I-IV pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure. Cessna joined the motion. The motion argued that,
despite the fact that the complaint asserted diversity
jurisdiction, federal admiralty jurisdiction and substantive
admiralty law applied. Federal admiralty law has adopted the
"economic loss rule." Under the economic loss rule as articulated
by the United States Supreme Court, a party generally may not
recover damages in tort if a defective product damages only itself.
See E. River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S.
858, 876 (1986). Because the Aircraft damaged only itself, the
motion argued that Isla Nena's claims were barred by the economic
loss rule. In the alternative, the motion argued that Puerto Rico
substantive law would also apply the economic loss rule.3 Isla
Nena opposed the motion, arguing that admiralty jurisdiction did
2
The complaint also asserted a direct claim against Insurance
Companies A, B, and C (Count V), and a claim for indemnity for any
claims brought by the Aircraft's passengers (Count VI). Neither
count is part of this appeal.
3
The parties do not appear to dispute whether Isla Nena has
claimed damages for only economic loss -- that is, to the Aircraft
itself.
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not apply and that the economic loss rule did not apply under
Puerto Rico law. In January 2005, the parties filed replies and
sur-replies. On March 16, 2005, an initial scheduling conference
was held and the issues raised in the motions were discussed.
Simultaneous supplemental briefs were filed on April 11, 2005, and
simultaneous supplemental responses were filed on April 22, 2005.
On July 11, 2005, Isla Nena filed a motion for leave to supplement
the record, arguing for the first time that, even if federal
admiralty jurisdiction applied, under the Puerto Rico Dock and
Harbor Act the court was bound to apply Puerto Rico law.
On August 9, 2005, the district court granted the motion
to dismiss. The court found that admiralty jurisdiction applied
and therefore that Isla Nena's tort claims were barred by the
economic loss rule. The court also found that, even if Puerto Rico
law applied, the result would be the same because Puerto Rico law
would follow the economic loss rule. Finally, the court denied
Isla Nena's motion to supplement but stated that, even if it were
to allow the motion, the economic loss rule would still apply. The
court therefore entered partial judgment with respect to Counts I-
IV. Thereafter, Isla Nena agreed to drop Counts V and VI, and the
partial judgment was modified to a final judgment on August 30,
2005. Isla Nena has timely appealed.
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II.
A. Standard of Review
We review a district court's decision to grant a Rule
12(b)(6) motion to dismiss de novo, taking as true the well-pleaded
facts in the complaint. Vistamar, Inc. v. Fagundo-Fagundo, 430
F.3d 66, 69 (1st Cir. 2005).
B. The Economic Loss Rule
Under the economic loss rule, a party generally may not
recover in tort when a defective product harms only the product
itself (instead of a person or other property). See, e.g., East
River, 476 U.S. at 867-68; Lockheed Martin Corp. v. RFI Supply,
Inc., 440 F.3d 549, 552-53 (1st Cir. 2006) (applying New Hampshire
law); Restatement (Third) of Torts: Prod. Liab. § 21, comment d
(1998). Under the formulation of the rule that the majority of
courts have adopted, a party may not recover in tort "[e]ven when
the harm to the product itself occurs through an abrupt, accident-
like event." East River, 476 U.S. at 870.
East River is an admiralty case; therefore, if we were to
apply federal admiralty law, Isla Nena's claims would be barred by
the economic loss rule, as it is undisputed that the defect in the
Aircraft caused damage to the Aircraft and nothing else. However,
the instant case presents an unresolved question as to whether
admiralty jurisdiction should apply, and the Supreme Court's
precedents on this issue have not been entirely clear. If the
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economic loss rule applies under Puerto Rico law, we need not reach
the question of admiralty jurisdiction and could leave that issue
aside for the Court to clarify at a later date. Because we find
that Puerto Rico courts would apply the economic loss rule, we
affirm the judgment of the district court and do not address
whether admiralty jurisdiction should apply.
C. Puerto Rico Law and the Economic Loss Rule
The Puerto Rico Supreme Court has not directly addressed
whether the economic loss rule is applicable under Puerto Rico law.
We therefore "look to analogous state court decisions, persuasive
adjudications by courts of the states, learned treatises, and
public policy considerations . . . in order to make an informed
prophecy of how the Puerto Rico Supreme Court would rule." Pérez-
Trujillo v. Volvo Car Corp., 137 F.3d 50, 55 (1st Cir.
1998)(quoting Rodríguez-Surís v. Montesinos, 123 F.3d 10, 13 (1st
Cir. 1997))(brackets and internal quotation marks omitted).
Article 1802 of Puerto Rico's Civil Code, 31 P.R. Laws
Ann. § 5141, provides for a right of action stemming from a
person's negligence. Although neither Article 1802 nor any other
provision of the Civil Code has explicitly incorporated the
doctrine of strict liability, it is well-settled that Puerto Rico
courts have adopted that doctrine under Article 1802. See Guevara
v. Dorsey Labs., Inc., 845 F.2d 364, 365 (1st Cir. 1988)(stating
that, under Article 1802, "the Supreme Court of Puerto Rico has
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developed a strict liability standard for manufacturers of
defective products"); Rivera-Santana v. Superior Packaging, Inc.,
132 P.R. Dec. 115, 126, 1992 P.R.-Eng. 754830, 1992 WL 754830
(1992). We begin by discussing Article 1802 and the economic loss
rule.
1. Article 1802 and the Economic Loss Rule
Article 1802 provides that "[a] person who by an act or
omission causes damage to another party through fault or negligence
shall be obliged to repair the damage so done." 31 P.R. Laws Ann.
§ 5141. After careful consideration, we believe that the Puerto
Rico Supreme Court would rule that the economic loss rule bars an
action under Article 1802 where a defective product harms only
itself.
We addressed an issue similar to the present one in
Betancourt v. W.D. Schock Corp., 907 F.2d 1251 (1st Cir. 1990). In
that case, a plaintiff found a serious defect in a sailboat he had
purchased and sued the manufacturer. The plaintiff sued in both
tort and contract under Puerto Rico law, seeking damages for his
investment in the boat, upkeep of the boat, and alleged pain and
mental anguish he suffered because the boat did not work properly.
We held that the plaintiff could not assert a tort claim because
"Puerto Rico's negligence statute, [31 P.R. Laws Ann. § 5141], does
not apply in the context of a commercial transaction." Id. at 1255
(citing Stainless Steel & Metal Mfg. v. Sacal V.I., Inc., 452 F.
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Supp. 1073, 1081 (D.P.R. 1978)); see also Nieves Domenech v. Dymax
Corp., 952 F. Supp. 57, 65 (D.P.R. 1996). We also stated that the
plaintiff could not re-label what was in essence a warranty action
as a tort action. In support of this point, we quoted from East
River:
Even when the harm to the product itself
occurs through an abrupt, accident-like event,
the resulting loss . . . is essentially the
failure of the purchaser to receive the
benefit of its bargain . . . . [A]
manufacturer in a commercial relationship has
no duty under either a negligence or strict
products-liability theory to prevent a product
from injuring itself.
Betancourt, 907 F.2d at 1255 (quoting East River, 476 U.S. at 870-
72).
The instant case presents basically the same situation as
Betancourt. However, Isla Nena argues that our decision in
Betancourt misapprehended Puerto Rico law because Puerto Rico law
"does not preclude claims for strict liability or negligence simply
because a warranty claim is not available or not pursued." Isla
Nena argues that, under the doctrine of concurrence of actions, a
party may elect which cause of action to bring if the party has a
choice between valid contract and tort claims. Isla Nena relies
principally on two cases in support of its argument: Márquez v.
Torres Campos, 111 P.R. Dec. 854 (1982) (official English
translation: No. R-79-101, slip op. (P.R. Jan. 18, 1982)), and
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Ramos Lozada v. Orientalist Rattan Furniture, Inc., 130 P.R. Dec.
712 (1992).4 We discuss each in turn.
In Márquez -- which we discussed in Betancourt -- the
defendant sold the plaintiff cattle that had tuberculosis and
failed to tell the plaintiff that the cattle had been quarantined.
As a result, the plaintiff's farm was put under quarantine and the
plaintiff suffered damage to other cattle and farm animals. The
plaintiff brought suit, and the defendant claimed that the suit was
barred by a statute of limitations governing suits for hidden
product defects. The Puerto Rico Supreme Court ruled that "the
action of warranty for hidden defects does not by itself exclude
other actions that may lie under the special circumstances of the
case." Id. at 1094. The court eventually held that the suit could
be brought under a theory of contractual deceit, as opposed to
warranty, and that a longer limitation period applied. In support
of this holding, the court emphasized that
plaintiff's cause of action arises, not from
the objective fact of the defect in the object
of the contract, which is what gives life to
an action of warranty, but from a subjective
circumstance provoked by the defendant's
deceitful action which resulted in damages
that go beyond the defect in the object of the
contract and which is thus outside the frame
of the concept of warranty.
4
Although Ramos Lozada has not yet been included in the Official
Translations of the Opinions of the Supreme Court of Puerto Rico,
the parties have provided an official English translation. When we
cite to specific pages of the case, we are referring to the pages
of the translation provided by the parties.
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Id. at 1105 (emphasis added). Unlike the plaintiff in Márquez,
Isla Nena's claims rest solely upon "the objective fact of the
defect in the object of the contract." Id. Further, the damages
that resulted from the defect did not go beyond the defect in the
object of the contract; they were limited to the product itself.
In other words, the damages that Isla Nena seeks are squarely
inside "the frame of the concept of warranty." Id. We thus find
that Márquez is unhelpful to Isla Nena's case.
Isla Nena also argues that our holding in Betancourt has
been undermined by Ramos Lozada, which was decided two years after
Betancourt. In that case, some leased property was destroyed
following a fire that was attributable to the lessee's negligence.
The lessor sued under a theory of breach of contract (the lease
agreement), which had a longer statute of limitations than an
action under Article 1802. However, because the lessor's theory
was that the fire was the result of the lessee's negligence, the
trial court held that Article 1802 -- along with its statute of
limitations -- applied and dismissed the action as untimely. On
appeal, the Puerto Rico Supreme Court reversed. The court held
that "a claim for noncontractual damages resulting from the breach
of a contract lies if the act that caused the damage constitutes a
breach of a general duty not to injure anyone and, at the same
time, a breach of contract." Ramos Lozada, 130 P.R. Dec. 712 at
*8. However, the court also emphasized that an action for breach
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of contract only lies "when the damage suffered arises exclusively
as a consequence of the breach of an obligation specifically agreed
upon, which damage would not occur without the existence of a
contract." Id.
After careful consideration, we do not think that Ramos
Lozada changes the result we reached in Betancourt. We base this
conclusion on several factors. First, Ramos Lozada involved a
lessor-lessee relationship. It did not involve a commercial
transaction, and we see nothing in the case to indicate that the
Puerto Rico Supreme Court intended to replace the general rule that
Article 1802 does not apply in commercial transactions.
Second, Ramos Lozada in no way implicated the economic
loss rule, which is a rule peculiar to the law of products
liability and applies only where a defective product harms itself.
Ramos Lozada holds only that if a party has valid claims stemming
from both tort and contract, that party may choose under which
theory to bring her claims. However, the argument in this case is
that Isla Nena does not have a valid tort claim due to the economic
loss rule. Ramos Lozada never addressed this particular point --
what it means to have a valid tort claim in the product liability
context -- and for good reason, since the case involved a lessor-
lessee relationship and did not implicate the economic loss rule.
In other words, in Ramos-Lozada, the injury arose not from a defect
in the leased property but from the lessee's negligence. There is
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simply no indication that the Puerto Rico Supreme Court intended to
apply Ramos Lozada in the products liability context or intended to
make a pronouncement on the economic loss rule or our decision in
Betancourt, even though it must have been aware of that decision.5
Third, Ramos-Lozada emphasized that a party may not
choose whether to proceed in contract or tort "when the damage
suffered exclusively arises as a consequence of the breach of an
obligation specifically agreed upon, which damage would not occur
without the existence of a contract." Id.; see also Nieves
Domenech, 952 F. Supp. at 66 (explaining that, under Ramos Lozada,
in order to bring a negligence claim based on a contractual
relationship, the "general duty not to act negligently must arise
out of conditions separate from the parties' contract. If a
plaintiff's damages arise exclusively from a defendant's alleged
breach of contract, the plaintiff does not have a separate cause of
action for negligence") (emphasis added) (internal citations
omitted). In the instant case, assuming Isla Nena's claims are
true, the damage suffered -- harm to the product contracted for --
arose exclusively as a consequence of a breach of contract.
Further, the damages would not have occurred without the existence
5
If Isla Nena were arguing that the appellees' alleged negligence
breached a contract or warranty and also caused damage to other
property besides the defective product, Isla Nena would potentially
have valid contract and tort claims and could, under the doctrine
of concurrence of actions, choose whether to proceed in contract or
tort.
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of a contract. Therefore, even assuming that the Puerto Rico
Supreme Court intended Ramos Lozada to apply in the present
context, Isla Nena still would not have any valid claims under
Article 1802.
We also think that application of the economic loss rule
is in accord with the policies underlying contract and tort law,
which the United States Supreme Court has extensively discussed in
East River. Although East River is an admiralty case, and its
decision is therefore not controlling in determining Puerto Rico
law, we think the policy rationales explained by the Court
logically apply to the decision we reach today. See Lockheed
Martin, 440 F.3d at 553-54 (applying the policy rationales in East
River to a case involving New Hampshire law after finding that New
Hampshire had adopted the economic loss doctrine). First, the
damages suffered by Isla Nena in this case are essentially those
for which the law of warranty is best suited. In East River, the
Court stated that, where a malfunctioning product harms only
itself, "the resulting loss due to repair costs, decreased value,
and lost profits is essentially the failure of the purchaser to
receive the benefit of its bargain -- traditionally the core
concern of contract law." 476 U.S. at 870. Second, commercial
transactions such as the one involved in this case "generally [do]
not involve large disparities of bargaining power." Id. at 873.
The law of warranty is therefore particularly well-suited to govern
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such commercial controversies because "[t]he manufacturer can
restrict its liability . . . by disclaiming warranties or limiting
remedies. In exchange, the purchaser pays less for the product."
Id. (internal citations omitted). We think this particular policy
concern helps explain the general rule in Puerto Rico that Article
1802 does not apply in commercial transactions. Finally, the
application of the economic loss rule in this context prevents the
erasure of the line between tort law and contract law. As the
Court explained, "[p]roducts liability grew out of a public policy
judgment that people need more protection from dangerous products
than is afforded by the law of warranty. It is clear, however,
that if this development were allowed to progress too far, contract
law would drown in a sea of tort." Id. at 866 (internal citations
omitted).
In conclusion, we see nothing in Ramos Lozada to indicate
an intention to set aside our holding in Betancourt or to provide
for the application of Article 1802 in commercial transactions.
Further, even if we were to read Ramos Lozada that broadly, it
would be of no use to Isla Nena because the damages claimed arose
entirely from the parties' contractual relationship and would not
have occurred apart from the parties' contract. We therefore find
that, under Puerto Rico law, Isla Nena's claims are barred by the
economic loss rule. See Torres-Mas v. Carver Boat Corp., 233 F.
Supp. 2d 253, 255-56 (D.P.R. 2002)(stating that, where plaintiff
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alleged damages for defects in a boat, "[t]here are no allegations
. . . regarding specific damages or injuries to plaintiff which
would intimate either an action in torts or a products liability
suit") (citing Betancourt, 907 F.2d at 1254).
2. Strict Liability
Although the previous section applies to both Isla Nena's
negligence and strict liability claims, there are additional
reasons -- that do not apply to Isla Nena's negligence claims -- to
find that the economic loss rule bars Isla Nena's strict liability
claims due to the history and evolution of the doctrine of strict
liability in Puerto Rico. We address these briefly.
As we stated above, the doctrine of strict liability is
found nowhere in Puerto Rico's Civil Code. Instead, the doctrine
has been adopted by the Puerto Rico courts under principles flowing
from Article 1802. Guevara, 845 F.2d at 365. In adopting the
strict liability doctrine, the Puerto Rico courts have relied upon
United States common law product liability principles "to fill a
gap in our body of laws." Rivera-Santana, 132 P.R. Dec. at 126
n.4, 1992 P.R.-Eng. 754830 n.4.6 In particular, the Puerto Rico
6
We have stated that "[t]he Supreme Court of Puerto Rico has made
clear that the common law of the United States is not controlling,
when filling gaps in the civil law system." See Guevara, 845 F.2d
at 366. However, in Guevara we also noted that "when faced with a
lack of authority, it may be appropriate to search for relevant
principles in the common law." Id. (internal citations omitted).
We then went on to state that "[s]ince the [Puerto Rico] Supreme
Court has freely taken from common law decisions in developing the
concept of strict liability, and since the principles we find there
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Supreme Court has consistently relied upon the precedent of the
California Supreme Court for its strict liability jurisprudence.
Collazo-Santiago v. Toyota Motor Corp., 149 F.3d 23, 25 (1st Cir.
1998). We think this background provides additional reasons to
find that the Puerto Rico courts would apply the economic loss rule
to Isla Nena's strict liability claims.
First, one of the seminal cases setting forth the
economic loss rule is from the California Supreme Court. In Seely
v. White Motor Co., 403 P.2d 145, 150-51 (Cal. 1965), the
California Supreme Court held that a party could not recover in
tort -- under either negligence or strict liability theories -- if
a defective product damaged only itself.7 Since the Puerto Rico
Supreme Court has borrowed much of its strict liability
jurisprudence from the California Supreme Court, we think it likely
that the court would also incorporate this portion of the
California Supreme Court's strict liability jurisprudence. Second,
it is undisputed that the vast majority of courts have adopted the
economic loss rule in some form. See, e.g., Lockheed Martin Corp.,
440 F.3d at 553 n.6 (noting that "the majority of courts have held
are useful and persuasive, we believe the Supreme Court of Puerto
Rico would follow essentially the same path we follow today." Id.
We follow that same course today.
7
In East River, the United States Supreme Court cited to and
discussed Seely with approval and also noted that Seely represented
the majority view on the economic loss rule. East River, 476 U.S.
at 868.
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that a party may not recover in tort when a product's malfunction
damages only the product itself"). Given the fact that the Puerto
Rico Supreme Court has relied on United States common law in
formulating its strict liability jurisprudence, we think it likely
that the court would also adopt the majority view as to the
economic loss rule.
In sum, the majority common law view, including the view
of the California Supreme Court, is that a party may not recover in
strict liability if a product's defect damages only the product
itself. Given the Puerto Rico Supreme Court's general reliance on
United States common law strict liability principles and its
specific reliance on California Supreme Court precedent -- and
absent any indication to the contrary -- we think it clear that the
Puerto Rico Supreme Court would hold that the economic loss rule
bars Isla Nena's strict liability claims.8
8
Isla Nena cites to several cases that, it argues, indicate that
the Puerto Rico courts would not adopt the economic loss rule in
cases involving strict liability. These cases are easily
distinguishable from the present case. For example, Isla Nena
relies on In Re Dupont-Benlate Litig., 877 F. Supp. 779 (D.P.R.
1995). However, as appellees point out, that case did not involve
a defective product causing injury only to itself. Rather, the
case involved a claim that a defect in a fungicide caused damage to
other property (plaintiffs' crops). Id. at 782. Thus, the
district court's discussion of strict liability and "economic loss"
is inapposite to the instant case because "economic loss" as used
by the Dupont-Benlate court clearly referred to "injury to property
besides the defective product," as opposed to "injury to the
defective product itself."
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III.
For the foregoing reasons, the judgment of the district
court is affirmed.
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