Supply Agreements are Critical for Risk Mitigation in Food Manufacturing: Wisconsin’s Economic Loss Doctrine Bars Food Manufacturer’s Tort Claims for Contaminated Ingredients

A recent decision from the Eastern District of Wisconsin, Hans Kissle Inc v. Echo Lake Foods Inc, No. 24-CV-484-SCD, 2024 WL 4186678 (E.D. Wis. Sept. 13, 2024), provides a helpful discussion of exceptions to Wisconsin’s economic loss doctrine and an important reminder of the critical role that the doctrine can play in narrowing the claims in a supply chain dispute, including disputes involving allegedly contaminated food products.  The two main takeaways from the decision are:

• A food product that is contaminated by one of its main ingredients is not “other property” for purposes of the economic loss doctrine, and
• Wisconsin does not recognize a general “public safety” exception to the economic loss doctrine.

The decision underscores that potential liability for contaminated ingredients or other defective components is best addressed proactively through the terms of a supply agreement, rather than by relying on  common-law claims like negligence after the fact.  

Background

The plaintiff in Hans Kissle was a manufacturer of a breakfast taco filling composed primarily of precooked scrambled eggs that the plaintiff purchased from the defendant.  2024 WL 4186678 at *1.  After the plaintiff discovered that some of the defendant’s precooked eggs were contaminated with Listeria, E. coli, and other bacteria, the plaintiff stopped using the eggs and sued the defendant for negligence, negligent misrepresentation, product liability, breach of implied warranties, and equitable indemnity.  Id.  The defendant moved to dismiss the negligence and product liability claims on the ground that they were barred by Wisconsin’s economic loss doctrine.  Id. at *2.  The plaintiff responded that the economic loss doctrine did not apply because the contaminated eggs caused damage to other property (i.e., the rest of the plaintiff’s breakfast taco filling) and posed an unreasonable danger to public safety.  Id.  Following a careful examination of the recognized exceptions to Wisconsin’s economic loss doctrine, the district court granted the motion to dismiss. 

The “Other Property Exception” to the Economic Loss Doctrine

The district court began by outlining the contours of the “other property” exception to the economic loss doctrine.  As the court explained, “[t]he economic loss doctrine precludes recovery in tort for ‘damages to the product itself and economic losses flowing therefrom,’” but it “does not preclude a product purchaser’s claims of … damage to property other than the product itself.”  Id. at *2 (quoting Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc., 148 Wis. 2d 910, 911, 437 N.W.2d 213, 213 (1989)), and Wausau Tile, Inc. v. Cnty. Concrete Corp., 226 Wis. 2d 235, 247, 593 N.W.2d 445, 451 (1999)). 

“Wisconsin courts use two tests to determine whether damaged property is ‘other property’: the ‘integrated system’ test and the ‘disappointed expectations’ test.”  Id. at *3 (quoting Foremost Farms USA Coop. v. Performance Process, Inc., 2006 WI App 246, ¶ 1, 726 N.W.2d 289, 291).  The question under the “integrated system” test is “whether the allegedly defective product is a component in a larger system.”  Id.  If it is, the “other property” exception does not apply, and the inquiry ends there.  Id.

 “However, if the damaged property appears to be ‘other property’ under the ‘integrated system’ test, then the ‘disappointed expectations’ test is applied.”  Id.  That test asks “whether the damage was ‘reasonably foreseeable’”; if it was, the purchaser “could have obtained protection in the contract,” and the economic loss doctrine applies to bar any tort claims.  Id.

Based on the allegations of the complaint, the district court held that contamination of the plaintiff’s breakfast taco filling through incorporation of the defendant’s contaminated eggs was not damage to “other property” under either of these tests:

•  First, the breakfast taco filling was an “integrated system” because the contaminated eggs “were the key ingredient in the breakfast taco filling, which served no function without the eggs.”  Id. at *4.
• Second,  contamination was a reasonably foreseeable outcome, which could have been addressed in the parties’ contact, because “[the plaintiff] [wa]s in the food production business, and it required [the defendant] to test for microbial contaminants.”  Id. at *5.

No General “Public Safety” Exception to the Economic Loss Doctrine

Having determined that the “other property” exception did not apply, the district court quickly dispensed with the plaintiff’s other argument that “the economic loss doctrine does not apply in this case because the complaint alleges that the contaminated cooked egg products were unreasonably dangerous and posed a public safety risk.”  Id. at *6. 

The plaintiff relied on Northridge Co. v. W.R. Grace & Co., 162 Wis. 2d 918, 471 N.W.2d 179 (1991), where the Wisconsin Supreme Court held that the economic loss doctrine did not bar a commercial purchaser’s tort claim against the manufacturer of fireproofing material that contained asbestos and that released toxic substances into the shopping centers where the fireproofing material was installed.  The plaintiff in Hans Kissle argued that Northridge “established an exception to the economic loss doctrine for unreasonably dangerous products.”  2024 WL 4186678, at *6. 

The district court disagreed.  It explained that the economic loss doctrine did not apply to the claims in Northridge because the complaint there alleged damage to other property—the shopping centers where the defective fireproofing material was installed.  Id.  Northridge did not create a broad “public safety exception” to the economic loss doctrine, as the Wisconsin Supreme Court clarified in subsequent decisions.  Id. (citing Wausau Tile, 226 Wis. 2d at 264, 593 N.W.2d at 458).  The district court concluded by squarely rejecting the plaintiff’s suggestion that the economic loss doctrine is “inapplicable in food safety cases, especially where the allegedly dangerous food never made it to consumers.”  Id. at *7. 

Key Takeaways

Hans Kissle provides an important reminder that Wisconsin’s economic loss doctrine remains a powerful tool for narrowing the claims in a supply chain dispute as early as the pleadings stage.  And food manufacturers in particular should take note that the policies underlying the economic loss doctrine—“preserving the fundamental distinction between tort law and contract law, protecting commercial parties’ freedom to allocate risk by contract, and encouraging the party best situated to assess the risk of economic loss (i.e., the purchaser) to assume, allocate, or insure against that risk,” id., apply with equal force to claims regarding allegedly contaminated food products, at least where none of the other recognized exceptions to the doctrine applies.  More broadly, manufacturers should bear in mind that concerns regarding potential liability for contaminated ingredients or other defective components are best addressed proactively through the terms of a purchase agreement or other contract.