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SUPREME COURT OF THE UNITED STATES

No. 95–1764

SARATOGA FISHING COMPANY, PETITIONER v.

J. M. MARTINAC & COMPANY and MARCO

SEATTLE INC.

on writ of certiorari to the united states court of appeals for the ninth circuit

[June 2, 1997]

Justice Breyer delivered the opinion of the Court.

The issue before us concerns limits upon the damages that a tort plaintiff in admiralty can recover for physical damage to property caused by a defective product. In East River S. S. Corp. v. Transamerica Delaval Inc., 476 U. S. 858 (1986), the Court held that an admiralty tort plaintiff cannot recover for the physical damage the defective product causes to the "product itself"; but the plaintiff can recover for physical damage the product causes to "other property." In this case all agree that the "product itself" consists at least of a ship as built and outfitted by its original manufacturer and sold to an initial user. This case asks how this corner of tort law treats the physical destruction of extra equipment (a skiff, a fishing net, spare parts) added by the initial user after the first sale and then resold as part of the ship when the ship itself is later resold to a subsequent user. Is that added equipment part of the "product itself," in which case the plaintiff cannot recover in tort for its physical loss? Or is it "other property," in which case the plaintiff can recover? We conclude that it is "other property." Hence (assuming other tort law requirements are satisfied) admiralty's tort rules permit recovery.

This case arises out of an engine room fire and flood that led to the sinking of the fishing vessel M/V Saratoga in January 1986. We must assume that a hydraulic system defectively designed by respondent Marco Seattle Inc. was one significant cause of the accident. About 15 years before the accident, respondent J. M. Martinac & Co. had built the ship, installed the hydraulic system, and sold the ship new to Joseph Madruga. Madruga then added extra equipment—a skiff, a seine net, and various spare parts—and used the ship for tuna fishing. In 1974, Madruga resold the ship to the petitioner, Saratoga Fishing Co., which continued to use the ship for fishing. In 1987, after the ship caught fire and sank, Saratoga Fishing brought this tort suit in admiralty against Marco Seattle and J. M. Martinac.

The District Court found that the hydraulic system had been defectively designed, and it awarded Saratoga Fishing damages (adjusted to reflect Saratoga Fishing's own partial fault). Those damages included damages for the loss of the equipment that Madruga had added after the initial purchase of the ship.

The Ninth Circuit held that the District Court should not have awarded damages for the added equipment. Saratoga Fishing Co. v. Marco Seattle Inc., 69 F. 3d 1432, 1445 (CA9 1995). A majority noted that the equipment, though added by Madruga, was part of the ship when Madruga resold the ship to Saratoga Fishing, and, for that reason, the majority held, the added equipment was part of the defective product that itself caused the harm. Applying East River's distinction between the product that itself caused the harm and "other property," the majority concluded that Saratoga Fishing could not recover in tort for the loss. A dissenting judge believed that the "product itself" was the ship when launched into the stream of commerce by Martinac, its original builder. Consequently, the added equipment was "other property." We granted certiorari to resolve this uncertainty about the proper application of East River. We now agree with the dissenting judge.

The facts before us show: (1) a Component Supplier who (2) provided a defective component (the hydraulic system) to a Manufacturer, who incorporated it into a manufactured product (the ship), which (3) the Manufacturer sold to an Initial User, who (4) after adding equipment and using the ship, resold it to a Subsequent User (Saratoga Fishing). The applicable law is general maritime law, "an amalgam of traditional common-law rules, modifications of those rules, and newly created rules," drawn from both state and federal sources. East River, supra, at 865; see also Fitzgerald v. United States Lines Co., 374 U. S. 16, 20 (1963); Kermarec v. Compagnie Generale Transatlantique, 358 U. S. 625, 630 (1959). The context is purely commercial. The particular question before us requires us to interpret the Court's decision in East River: does the term "other property," as used in that case, include the equipment added by the Initial User before he sold the ship to the Subsequent User? We conclude that it does: When a Manufacturer places an item in the stream of commerce by selling it to an Initial User, that item is the "product itself" under East River. Items added to the product by the Initial User are therefore "other property," and the Initial User's sale of the product to a Subsequent User does not change these characterizations.

East River arose at the intersection of two principles that govern recovery in many commercial cases involving defective products. The first principle is that tort law in this area ordinarily (but with exceptions) permits recovery from a manufacturer and others in the initial chain of distribution for foreseeable physical harm to property caused by product defects. See Restatement (Second) of Torts §402A (1965); W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts §101 (5th ed. 1984); East River, supra, at 867. The second principle is that tort law in this area ordinarily (but with exceptions) does not permit recovery for purely economic losses, say, lost profits. See Restatement (Third) of Torts: Products Liability §6, Comment d (Proposed Final Draft, Preliminary Version, Oct. 18, 1996); e.g., Rardin v. T & D Machine Handling, Inc., 890 F. 2d 24, 27–30 (CA7 1989). The Court in East River favored the second principle, for it held that an injury to the defective product itself, even though physical, was a kind of "economic loss," for which tort law did not provide compensation. East River, 476 U. S., at 871.

The Court reasoned that the loss of the value of a product that suffers physical harm—say, a product that destroys itself by exploding—is very much like the loss of the value of a product that does not work properly or does not work at all. See id., at 870. In all such cases, the Court held, "[c]ontract law, and the law of warranty in particular, is well suited" to setting the responsibilities of a seller of a product that fails to perform the function for which it was intended. Id., at 872–873. The commercial buyer and commercial seller can negotiate a contract—a warranty—that will set the terms of compensation for product failure. If the buyer obtains a warranty, he will receive compensation for the product's loss, whether the product explodes or just refuses to start. If the buyer does not obtain a warranty, he will likely receive a lower price in return. Given the availability of warranties, the courts should not ask tort law to perform a job that contract law might perform better. Ibid.; Seely v. White Motor Co., 63 Cal. 2d 9, 18–19, 403 P. 2d 145, 151 (1965) (en banc).

The Ninth Circuit reasoned that East River required it to define the defective "product itself" by looking to that which the plaintiff had purchased, for that is the product that, in principle, the plaintiff could have asked the seller to warrant. Since Saratoga Fishing, the Subsequent User, might have asked Madruga, the Initial User, to warrant the M/V Saratoga, skiff, nets, and all, that product, skiff, nets, and all, is the "product itself" that stands outside the reach of tort recovery. In our view, however, this holding pushes East River's principle beyond the boundary set by the principle's rationale.

For one thing, the Ninth Circuit's holding creates a tort damage immunity beyond that set by any relevant tort precedent that we have found. State law often distinguishes between items added to or used in conjunction with a defective item purchased from a Manufacturer (or its distributors) and (following East River) permits recovery for the former when physically harmed by a dangerously defective product. Thus the owner of a chicken farm, for example, recovered for chickens killed when the chicken house ventilation system failed, suffocating the 140,000 chickens inside. A. J. Decoster Co. v. Westinghouse Electric Corp., 333 Md. 245, 634 A. 2d 1330 (1994). A warehouse owner recovered for damage to a building caused by a defective roof. United Air Lines, Inc. v. CEI Industries of Ill., Inc., 148 Ill. App. 3d 332, 499 N. E. 2d 558 (1986). And a prior case in admiralty (not unlike the one before us) held that a ship charterer, who adds expensive seismic equipment to the ship, may recover for its loss in a fire caused by a defective engine. Nicor Supply Ships Assocs. v. General Motors Corp., 876 F. 2d 501 (CA5 1989). Indeed, respondents here conceded that, had the ship remained in the hands of the Initial User, the loss of the added equipment could have been recovered in tort. See Tr. of Oral Arg. 29–30. We have found no suggestion in state (or in federal) law that these results would change with a subsequent sale—that is, we have found no case, other than the Ninth Circuit case before us, that suggests that the courts would deny recovery to a subsequent chicken farmer, who had later purchased the farm, chickens, coop, ventilation system, and all.

Indeed, the denial of recovery for added equipment simply because of a subsequent sale makes the scope of a manufacturer's liability turn on what seems, in one important respect, a fortuity, namely whether a defective product causes foreseeable physical harm to the added equipment before or after an Initial User (who added the equipment) resells the product to a Subsequent User. One important purpose of defective-product tort law is to encourage the manufacture of safer products. The various tort rules that determine which foreseeable losses are recoverable aim, in part, to provide appropriate safe-product incentives. And a liability rule that diminishes liability simply because of some such resale is a rule that, other things being equal, diminishes that basic incentive. That circumstance requires a justification. That is to say, why should a series of resales, after replacement and additions of ever more physical items, progressively immunize a manufacturer to an ever greater extent from the liability for foreseeable physical damage that would otherwise fall upon it?

The East River answer to this question—because the parties can contract for appropriate sharing of the risks of harm—is not as satisfactory in the context of resale after an initial use. That is because, as other courts have suggested, the Subsequent User does not contract directly with the Manufacturer (or distributor.) Cf. Peterson v. Idaho First Nat. Bank, 117 Idaho 724, 727, 791 P. 2d 1303, 1306 (1990); Tillman v. Vance Equipment Co., 286 Ore. 747, 755–756, 596 P. 2d 1299, 1304 (1979). Moreover, it is likely more difficult for a consumer—a commercial user and reseller—to offer an appropriate warranty on the used product he sells akin to a manufacturer's (or distributor's) warranty of the initial product. The user/reseller did not make (or initially distribute) the product and, to that extent, he normally would know less about the risks that such a warranty would involve. Cf. Tillman, supra, at 755, 596 P. 2d, at 1303–1304; Peterson, supra, at 726–727, 791 P. 2d, at 1305–1306. That is to say, it would seem more difficult for a reseller to warrant, say, a ship's engine; as time passes, the ship ages, the ship undergoes modification, and it passes through the hands of users and resellers.

Of course, nothing prevents a user/reseller from offering a warranty. But neither does anything prevent a Manufacturer and an Initial User from apportioning through their contract potential loss of any other items—say, added equipment or totally separate physical property—that a defective manufactured product, say an exploding engine, might cause. No court has thought that the mere possibility of such a contract term precluded tort recovery for damage to an Initial User's other property. Similarly, in the absence of a showing that it is ordinary business practice for user/resellers to offer a warranty comparable to those typically provided by sellers of new products, the argument for extending East River, replacing tort law with contract law, is correspondingly weak. That is to say, respondents have not explained why the ordinary rules governing the manufacturer's tort liability should be supplanted merely because the user/reseller may in theory incur an overlapping liability in contract.

Respondents make two other important arguments. First, they say that our reasoning proves too much. They argue that, if a Subsequent User can recover for damage a defective manufactured product causes to property added by the Initial User, then a user might recover for damage a defective component causes the manufactured product, other than the component itself. Saratoga Fishing, for example, could recover the damage the defective hydraulic system caused to any other part of the ship. But the lower courts, following East River, have held that it is not a component part, but the vessel—as placed in the stream of commerce by the manufacturer and its distributors—that is the "product" that itself caused the harm. See Shipco 2295, Inc. v. Avondale Shipyards, Inc., 825 F. 2d 925, 928 (CA5 1987); see also, e.g., National Union Fire Ins. Co. of Pittsburgh v. Pratt & Whitney Canada, Inc., 107 Nev. 535, 539–542, 815 P. 2d 601, 604–605 (1991). As the Court said in East River,

"`Since all but the very simplest of machines have component parts, [a contrary] holding would require a finding of `property damage' in virtually every case where a product damages itself. Such a holding would eliminate the distinction between warranty and strict products liability.'" East River, 476 U. S., at 867 (quoting Northern Power & Engineering Corp. v. Caterpillar Tractor Co., 623 P. 2d 324, 330 (Alaska 1981)).

Our holding here, however, does not affect this rule, for the relevant relations among initial users, manufacturers, and component suppliers are typically different from those at issue here. Initial users when they buy typically depend upon, and likely seek warranties that depend upon, a manufacturer's primary business skill, namely the assembly of workable product components into a marketable whole. King v. Hilton-Davis, 855 F. 2d 1047, 1052 (CA3 1988); Shipco 2295, supra, at 929; National Union Fire Ins., supra, at 541, 815 P. 2d, at 605. Moreover, manufacturers and component suppliers can allocate through contract potential liability for a manufactured product that does not work, thereby ensuring that component suppliers have appropriate incentives to prevent component defects that might destroy the product. King, supra, at 1054; cf. Shipco 2295, supra, at 930. There is no reason to think that initial users systematically control the manufactured product's quality or, as we have said, systematically allocate responsibility for user-added equipment, in similar ways. Regardless, the case law does suggest a distinction between the components added to a product by a manufacturer before the product's sale to a user, e.g., Airlift Int'l, Inc. v. McDonnell Douglas Corp., 685 F. 2d 267 (CA9 1982); King, supra; Shipco 2295, supra; and those items added by a user to the manufactured product, e.g., Nicor Supply Ships Assocs. v. General Motors Corp., 876 F. 2d 501 (CA5 1989); and we would maintain that distinction.

Second, respondents argue that our holding would impose too great a potential tort liability upon a manufacturer or a distributor. But we do not see how that is so. For one thing, a host of other tort principles, such as foreseeability, proximate cause, and the "economic loss" doctrine already do, and would continue to, limit liability in important ways. For another thing, where such principles are satisfied, liability would exist anyway had the manufactured product simply remained in the hands of the Initial User. Our holding merely maintains liability, for equipment added after the initial sale, despite the presence of a resale by the Initial User.

We conclude that equipment added to a product after the Manufacturer (or distributor selling in the initial distribution chain) has sold the product to an initial User is not part of the product that itself caused physical harm. Rather, in East River's language, it is "other property." (We are speaking, of course, of added equipment that itself played no causal role in the accident that caused the physical harm.) Thus the extra skiff, nets, spare parts, and miscellaneous equipment at issue here, added to the ship by a user after an initial sale to that Initial User, are not part of the product (the original ship with the defective hydraulic system) that itself caused the harm.

The decision of the Ninth Circuit is

Reversed.