Member Article

Being the smartest lawyer in the room does not always guarantee success.  Rather, success in the field of law almost always results from an attorney’s determination and dedication.  We learn quickly that the attorney who is willing to slog through twenty boxes of documents to find the proverbial needle in the haystack or who meticulously maintains a record of her witness  interviews will find greater success than one who is disdainful of such grunt work but who is fluent in highminded academic legal concepts. Nevertheless, all lawyers should still have available a toolbox of general legal knowledge with which to frame a case to their advantage.

One particularly important tool is the economic loss rule.  Generally speaking, this rule prohibits recovery of damages in tort when the subject injury is unaccompanied by either property damage or personal injury.1 One state’s highest court summarized the economic loss rule as “a judicially created doctrine that sets forth the circumstances under which a tort action is prohibited if the only damages suffered are economic loss.”2  The economic loss rule came about as a  consequence of the “more or less inevitable efforts of lawyers to turn every breach of contract into a tort.”3 First recognized in the products liability arena, the economic loss rule now is frequently applied to bar even intentional torts related to contract obligations.

The economic loss rule is therefore an important consideration whenever a franchise lawsuit is involved. These lawsuits are usually economic in nature, and application of the rule will often narrow the scope of the claims and the damages available as a remedy. Similarly, the rule is important to franchisee attorneys because careful pleading and framing of a complaint can be the difference between forcing a case to trial or its early dismissal.

Familiarity with the rule is important even to those who practice on the transactional side because choices made in the drafting phase can affect the outcome of a lawsuit years down the road.

In application, the economic loss rule is far more complex than the rudimentary definition above might imply.  Appellate decisions have riddled the rule with exceptions and nuances that vary widely from jurisdiction to jurisdiction.  Surprisingly, though, little academic commentary is devoted to the rule and almost none ties the rule to franchise law.  This article tries to fill that void. It proceeds in three parts.  First, it discusses the basic history of the rule.  This discussion avoids a tedious review of the rule’s nuances and focuses instead on the policies and seminal cases that shaped the rule’s development. Second, this article reviews the rule’s application in a variety of franchising contexts. Last, this article concludes with a discussion of how franchise attorneys might use the rule in litigating claims and in drafting franchise agreements.

California and New Jersey Beginnings

The economic loss rule, also known as the economic loss doctrine, the gist of the action doctrine, or the Moorman doctrine, is a relatively recent judicial invention.4  In the 1960s, courts took notice of an increasingly aggressive use of products liability law to expand the reach of damages available to aggrieved plaintiffs. In cases where defendants previously faced only contractual damages for breach of contract and the like, defendants were increasingly being held to answer for treble or punitive damages under strict liability theories being developed in state courts.

To combat this blurring of tort and contract law, judges began to craft what is now known as the economic loss rule.  The court usually credited with first announcing this rule along with a clear exposition of the rationale is the Supreme Court of California. In Seely v. White Motor Co.,5 plaintiff bought a truck, which turned out be a lemon, manufactured by defendant. The truck flipped over after the brakes failed, causing around $5,500 in damage to the vehicle.  However, the owner was not physically injured, and no damage was done to property other than the truck itself.6 The plaintiff sued for damages consisting of the purchase price of the truck, the cost to repair the truck, and lost profits.  Although the bulk of the decision is dedicated to explaining the damages recoverable for a breach of warranty, the most famous portion of the court’s opinion is dedicated to showing why the doctrine of breach of warranty had not been rejected by the development of strict liability. The opinion of Chief Justice Traynor, one of the major figures in the development of the law of strict liability,7 explained that The history of the doctrine of strict liability in tort indicates that it was designed, not to undermine the warranty provisions of the sales act or of the Uniform Commercial Code but, rather, to govern the distinct problem of physical injuries.8  Explaining the court’s rationale for this holding,  Justice Traynor explained that [t]he distinction rests . . . on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products. He can appropriately be held liable for physical injuries caused by defects by requiring his goods to match a standard of safety defined in terms of conditions that create unreasonable risks of harm.9  Traynor continued by observing that a manufacturer cannot be held for the level of performance of his products in the consumer’s business unless he agrees that the product was designed to meet the consumer’s demands.  A consumer should not be charged at the will of the manufacturer with bearing the risk of physical injury when he buys a product on the market.10  He then explained that “[h]e can, however, be fairly charged with the risk that the product will not match his economic expectations unless the manufacturer agrees that it will.”11 Had Justice Traynor stopped there, the truly revolutionary nature of the economic loss rule may well have been halted.  Up to this point in the Seely opinion, the economic loss rule was fairly narrow in scope and could be interpreted as nothing more than a narrow exception to the growing field of strict liability for product defects. Justice Traynor, however, wrote one more sentence of dicta that has since been quoted by courts in more than twenty states: “Even in actions for negligence, a manufacturer’s liability is limited to damages for physical injuries and there is no recovery for economic loss alone.”12  Thus, it was clear from the beginning that the economic loss rule was supported by some principle larger than the mere inapplicability of strict liability in products liability cases. More than four decades later, though, courts have still not worked through all of the implications of this dicta.

Not every court took the view of Justice Traynor and the Seely court. The most famous case to reach an opposite conclusion to that reached in Seely was Santor v. A & M Karagheusian, Inc.13 Decided by the Supreme Court of New Jersey just months before Seely, the Santor court found that it was proper for plaintiff to recover for damage to a carpet absent any physical or other damages to plaintiff or property other than the carpet.14 After being repeatedly and falsely reassured that a carpet he purchased was a quality carpet, plaintiff saw the carpet’s condition deteriorate.15  Although the case was an implied warranty of merchantability case in which plaintiff sued for costs only,  the court discussed in dicta its desire that strict liability would become a “stable principle” for New Jersey law and expressed its view that such a claim sounded in tort rather than contract.16 Thus, the court rejected the view that products liability law should be limited to cases where a plaintiff suffered actual physical damages.

A Slow Expansion

The Santor and Seely cases framed the debate that played out in courts across the country for the next twenty years.  From the outset, the Santor view seemed unlikely to prevail, and few courts in the following decades adopted the view that actions for purely economic loss could be brought in strict liability.17  Most followed the decision in Seely,18 though they struggled mightily to define the limits of the new doctrine.  For instance, in Moorman Manufacturing Co. v. National Tank Co. and Superwood Corp. v. Siempelkamp Corp., the Supreme Courts of Illinois and Minnesota rejected the Seely court’s view that the economic loss rule should apply equally to claims sounding in negligence.19 Eventually, even California refined the rule and held that a cause of action lay for purely economic loss sounded in tort when a defect in a product caused physical damage to the product itself or other property.20  The slow expansion of the rule would accelerate dramatically, however, after the Supreme Court issued a rare ruling commenting upon the scope of a common law tort doctrine.

East River Steamship Corp.

Any momentum that the Santor view may have once had ground to a halt with the Supreme Court’s unanimous endorsement of the economic loss rule in East River Steamship Corp. v. Transamerica Delaval.21 Although obviously not binding on any state court, the decision is of tremendous importance: literally hundreds of cases have discussed the Court’s reasoning when wrestling with their own murkily defined economic loss doctrines.  In East River, several supertankers used a defective turbine that had been manufactured by defendant. The turbines suffered damage, raising the question of the scope of the economic loss rule for a federal court sitting in admiralty.  Specifically, the Court was required to consider “whether a commercial product injuring itself is the kind of harm against which public policy requires manufacturers to protect, independent of any contractual obligation.”22  The Court answered this question in the negative. Its analysis began with a brief examination of the development of products liability law in federal courts, noting that the motivation behind the growth in this area of law was a desire to enlarge the scope of protection from dangerous or defective products.23 The Court then noted, somewhat famously, that the expansion of this rule threatened to “drown” contract law “in a sea of tort” by turning any case involving disappointed consumer expectations into a tort claim.24 To remedy these concerns, the Court agreed with the views in Seely and held that an action may not proceed in negligence or in strict liability where the only damage claimed is to the product itself.25

The influence of the Court’s decision in East River cannot be overstated.26 States that had previously rejected the economic loss rule, including New Jersey, chose to accept it,27 and today only a small minority of states follows the rule in Santor. 28 Unfortunately, the East River Court provided little guidance on the scope of the rule.  Most glaringly, it did not establish a clear distinction between damage to the “product itself,” for which recovery is denied, and damage to “other property,” for which recovery is allowed. The Court also left open the question of “whether a tort cause of action can ever be stated in admiralty when the only damages sought are economic.”29  Although East River indirectly ended the debate over whether the economic loss rule applied in cases involving defective products, its imprecision left the door open to those seeking the rule’s application in other contexts.  The years following the Court’s decision would bear witness to increasingly frequent attempts by defense attorneys to expand the reach of the economic loss rule into fact patterns reaching beyond the traditional products liability suit. Initially, attempts to apply the economic loss rule to typical business disputes were not successful. Before the decision in East River, for example, the Supreme Court of California rejected application of the rule to bar a claim for intentional interference with prospective economic advantage even when purely economic losses were at issue.30  After East River, though, the distinction between business torts and products liability claims blurred significantly as courts began to “radically expand” the rule’s scope.31  This, in turn, threatened a number of commercial torts that typically arise only in the context of economic losses, especially fraud and negligent misrepresentation. The application of the economic loss rule to these torts is of great concern to an attorney litigating the franchisor-franchisee relationship.  Although the franchise lawyer may rarely encounter a products liability claim, claims for fraud and its variants are likely to make up a large portion of the practice.  The next several sections of this article will explore the application of the law in these contexts.

 

Fraud Claims

The application of the economic loss rule to fraud claims was not fully explored until the 1990s.32 This was largely because the seminal decision in Moorman Manufacturing flatly rejected application of the economic loss rule to these torts.33  Defense lawyers, however, found fraud claims to be ripe for application of the rule after the East River decision, seizing on the almost-always-economic nature of fraud claims.  Thereafter, the courts experienced great difficulty reconciling the sometimes expansive language used to support the economic loss rule with the field of intentional torts.  Some courts exclude intentional misrepresentation claims from the scope of the economic loss rule altogether.  For instance, the Supreme Court of California held that a cause of action for economic losses may survive in the context of a fraud claim.34  The California court’s rationale was that “because in fraud cases we are not concerned about the need for predictability about the cost of contractual relationships, fraud plaintiffs may recover out-of-pocket damages in addition to benefit of the bargain damages.”35 Many other courts have followed California’s lead.36  However, other courts have held that the economic loss rule completely prohibits recovery for purely economic injuries suffered by a plaintiff. For example, the Connecticut Uniform Commercial Code arguably supplants the common law tort of fraud when the sale of goods is involved.37 Similarly, a federal court in Louisiana has, perhaps erroneously, construed New York law as barring a fraud claim for purely economic loss.38

The most common approach strikes an uneasy balance between the economic loss rule and a claim for fraud by permitting an intentional fraud action to proceed as long as the claimed damages arise from a representation independent of the contract.  As one court in Pennsylvania has articulated the rule: To be construed as in tort, however, the wrong ascribed to defendant must be the gist of the action, the contract being collateral . . . . In other words, a claim should be limited to a contract claim when the parties’ obligations are defined by the terms of the contracts, and not by the larger social policies embodied by the law of torts.39  This view has its roots in the Michigan Court of Appeals decision in Huron Tool & Engineering Co. v. Precision Consulting Services, Inc.,40 and courts adopting it hold that if a representation concerns the subject matter or the performance of the contract, then the fraud claim is nothing more than a contract claim in disguise—a sort of “con-tort” claim or, as other courts have put it, a mere “dressed up contract claim.”41

Fraud Claims and Franchise Agreements

Broussard v. Meineke Discount Muffler Shops, Inc.,42 an example of how courts treat this issue in the context of a franchise relationship, shows how much can be at stake.  In Broussard, plaintiffs included a class that consisted of “all persons or entities throughout the United States that were Meineke franchises operating at any time during or after May of 1986.”43 Meineke required franchisees to pay a franchise fee and a portion of their weekly gross revenues as royalties. Additionally, franchisees paid 10 percent of their weekly revenues to fund advertising.44 This function was originally carried out by a third party, M&N Advertising.  The franchise agreements directly addressed the advertising, stating that the services would be provided “[i]n consideration for the payment of Franchisee’s initial license fee” and also stated that Meineke would spend on advertising an amount equal to the amount collected from franchisees.45 Franchisees, however, took umbrage with Meineke’s use of funds to settle a suit against M&N Advertising and were also disturbed by Meineke’s creation of an “in-house” advertising agency to replace M&N, which was paid commission rates of 5 percent to 15 percent.46 Arguing that such uses of the advertising budget constituted a departure from what the franchisees had been promised, they sued variety of theories, including breach of contract, breach of fiduciary duty, fraud, unjust enrichment, negligence, negligent misrepresentation, intentional interference with contractual relations, and violation of the Unfair Trade Practices Act (UTPA).47 After a trial, the jury awarded the franchisees $196,956,596 in compensatory damages with an additional $150 million in punitive damages. But even worse to Meineke, rather than accept the punitive damages, plaintiffs chose to treble the damages under the UTPA provisions, bringing the total damages award to $590,869,788, which was later reduced to $390 million.48  On appeal, the Fourth Circuit reversed the judgment in its entirety. First, it found that class certification was improper.  Next, the court rejected plaintiffs’ tort claims, noting that “in various ways this lawsuit managed to wander way beyond its legitimate origins, and at the end it spun completely out of control.”  49 The court demonstrated that the gravamen of plaintiffs’ complaints was a difference of opinion between them and defendants over their rights and obligations under the contract.  Although couched in terms of fraud and misrepresentation, the complaints grew out of a belief that the franchisor had not spent the advertising contributions on advertising, as arguably required by the terms of the franchise agreement.  As the Fourth Circuit noted, “[a]t bottom then, this lawsuit centers on a dispute between Meineke and its franchisees over the interpretation of different FTAs and over Meineke’s performance under those FTAs. This is a straightforward contract dispute, yet it somehow managed to become a massive tort action in the end.”50  Thus, although an independent tort could conceivably arise out of breach of contract in limited circumstances,51 it could not do so in situations such as this where the claims were not “identifiable” and distinct from the primary breach of contract claim.52  A court, therefore, could not allow fraud claims to proceed under North Carolina law where all that existed was “[t]he mere failure to carry out a promise in contract.” 53 The Fourth Circuit reversed for a new trial on the question of contract damages, holding that when a party “has failed to fulfill its contractual obligations, the remedy is contract damages, not the blank check afforded to juries when they are authorized to return a punitive award.”54

Fraud in the Inducement Claims

It is not uncommon for an experienced plaintiff’s lawyer to plead around an economic loss rule prohibiting the dressing up of a breach of contract claim as a fraud claim by characterizing the fraud claim as a fraud in the inducement claim.  As the Supreme Court has stated, [f]raud vitiates everything into which it enters. It is like the deadly and noxious simoom of arid and desert climes. It prostrates all before its contaminating touch, and leaves death only and destruction in its train. No act, however solemn, no agreement,  however sacred, can resist its all-destroying power.  All acts into which fraud enters are nullities.55  Albeit without this level of dramatics, many courts have concluded that if the claimed fraud arises from the making of the contract rather than its performance, the contract is a nullity and the economic loss rule does not apply. In other words, tort claims, such as fraudulent inducement claims, that are independent from contract claims are not precluded by the economic loss rule.56 Many courts have in turn taken steps to prevent such anend run around the economic loss rule, creating an “exception to the exception” by holding that “statements or misrepresentations made to induce an individual to enter a contract, if later contained within the terms of the actual contract, cannot constitute a basis on which to bring a fraud claim.”57 One court has explained the rationale behind such an exception to the exception: “It is patently unreasonable for [plaintiff] to rely on a promise that the Agreement would be renewed annually . . . based on performance where the Agreement specifically and unambiguously creates only a single renewal term based on performance.”58  A recent example of aggressive application of this exception to the exception is found in the Seventh Circuit’s ruling in CERAbio LLC v. Wright Medical Technology, Inc.59  The facts of this case are difficult to pin down; as the Seventh Circuit put it, “the statements of facts in the two briefs begin to read like two unrelated novels.”60 The gist seems to be that CERAbio LLC developed bone replacement products and contracted to sell its products to a distributor,  Wright Medical Technology, Inc. (Wright). This relationship turned into an asset purchase agreement of CERAbio by Wright.61  Unfortunately, one of the key ingredients in the product became unavailable at some point during or before the negotiations.  After some considerable effort, Wright nonetheless managed to make a similar product using a different set of ingredients. Wright, however, refused to pay for the remainder of the amount due under the asset purchase agreement, claiming that nothing was owed because it had created an entirely different product than that contemplated by the original agreement. CERAbio sued for the amount due under the contract. Wright counterclaimed for breach of contract, fraudulent inducement, fraud in the performance, precontract negligent misrepresentation, and negligent misrepresentation in the performance of the contract.62  Simultaneously construing the laws of Delaware, Tennessee, and Wisconsin, the district court found that all four of Wright’s misrepresentation claims were barred by the economic loss rule.63 The Seventh Circuit affirmed in part. It noted that the purpose of the economic loss rule is to ensure that “parties cannot use tort principles to circumvent the terms of an agreement.” 64  The court of appeals held that the district court was correct that fraud in the inducement is an exception to the economic loss rule in Wisconsin. However, the court found that the trial court incorrectly synthesized a splintered Wisconsin Supreme Court opinion narrowing the scope of the fraud in the inducement exception to the economic loss rule, and held that “the fraud in the inducement exception to the economic loss doctrine . . . does not apply when the fraud pertains to the character and quality of the goods that are the subject matter of the contract.”65 In a footnote, the Seventh Circuit also held that Tennessee and Delaware law contained similar exceptions to the exception, thereby dodging a thorny choice of law issue.66  The court then held that the economic loss rule barred Wright’s claims. Because the parties to the contract were sophisticated businesses represented by attorneys, they could have negotiated warranty and other terms to account for the possibility that the products being purchased would fail.  Because the parties chose not to do so, the court concluded, it was proper to dismiss Wright’s claim.67  Although the rule embodied in CERAbio was once an outlying rule, it has become increasingly popular, especially in federal court.68

 

Fraud in the Inducement Claims and Franchise Agreements

Examples of the economic loss rule applied to fraud in the inducement claims in the context of franchise or distribution agreements abound. Florida courts, in particular, have taken up this issue on several occasions. For example, in Rosa v. Amoco Oil Co.,69 plaintiff complained that he relied upon allegedly false representations that his dealer agreement with defendants would continue for a total of twelve years, when in reality the contract was only for four years. Defendants argued that plaintiff’s fraud claims were barred by Florida’s economic loss rule. Agreeing with this analysis, the Southern District of Florida noted that “statements or misrepresentations made to induce an individual to enter a contract, if later contained within the terms of the actual contract, cannot constitute a basis on which to bring a fraud claim.”70  Because the contract unambiguously spelled out the duration of the agreement, the court found that plaintiff could not claim to have been fraudulently induced into entering a contract by a contrary representation and that plaintiff’s fraud and negligent misrepresentation claims therefore could not survive.71  Other cases from numerous jurisdictions echo this approach.72

 

Negligent Misrepresentation Claims

The Restatement (Second) of Torts allows recovery for “pecuniary loss” for claims brought against a defendant “who . . . supplies false information for the guidance of others in their business transactions” if that defendant “fails to exercise reasonable care or competence in obtaining or communicating the information.”73 Under the Restatement view, negligent misrepresentation claims may be brought for purely economic damages.  This implicates many of the same economic loss rule issues that a claim for intentional misrepresentation implicates.  However, in many respects, the case for finding that the economic loss rule bars a claim is stronger for negligent misrepresentation than for intentional misrepresentation.  Unlike intentional misrepresentation or fraud claims, negligent misrepresentation is a tort of fairly recent vintage, tracing its lineage to Glanzer v. Shepard,74 which was decided in 1922. Consequently, most states do not have a welldeveloped body of law that provides clear examples of negligent misrepresentation claims proceeding for economic injury only.

Also, recall that the earliest expressions of the economic loss rule made clear that the rule applied to actions for strict liability and negligence.75 Although such language arguably did not cover intentional misrepresentation, whether it would cover negligent misrepresentation is a much closer question.  If a court considers the source of a duty in a negligent misrepresentation claim to be more akin to an action for simple negligence than for fraud, it is likely to dismiss a claim.

Indeed, courts from a variety of jurisdictions have found that negligent misrepresentation claims are not actionable if they seek damages for purely economic losses.76  There is, however, a diversity of approach to the issue.77  Some Florida courts, for example, treat a claim for negligent misrepresentation in a manner similar to an action for intentional misrepresentation.  That is, if the misrepresentation is independent of the contract, then the claim will survive application of the economic loss rule.78  Cases from other states, such as Moorman Manufacturing,79 take the view that a cause of action for negligent misrepresentation may only lie against a defendant “who is in the business of supplying information for the guidance of others in their business transaction [and] makes negligent misrepresentations.”80  Still other courts have focused on the question of privity, holding that the existence of privity of contract removes the need for a tort for negligent misrepresentation.81

 

Negligent Misrepresentation Claims and Franchise Agreements

A number of cases have applied the economic loss rule to negligent misrepresentation claims in the context of franchise agreements.82  One example is Lithuanian Commerce Corp., Ltd. v. Sara Lee Hosiery,83 in which a Lithuanian distributor sued a manufacturer of panty hose. Plaintiff claimed that its business was damaged when Sara Lee donated panty hose to an international relief organization that subsequently distributed the panty hose to nations around Lithuania, thereby enabling black marketeers to flood the Lithuanian market with cheap panty hose.84  To settle this complaint, Sara Lee agreed to provide plaintiff with a large volume of panty hose that had been manufactured in panty hose were of the same quality as that manufactured in America, plaintiff claimed that the panty hose were defective and brought suit for, among many other claims, negligent misrepresentation.  Part of the court’s decision focused on application of the economic loss rule to plaintiff’s claim for negligent misrepresentation.  The district court noted that New Jersey had long since abandoned its opposition to the economic loss rule as initially enunciated in Santor and had stated that “a commercial buyer seeking damages for economic loss resulting from the purchase of defective goods may recover from an immediate seller and a remote supplier in a distributive chain for breach of warranty under the U.C.C., but not in strict liability or negligence.”85 Thus, the district court found that contract law, and not tort law, applies when a case involves a party’s disappointed commercial expectations.86  The district court then provided a useful overview of New Jersey law on the economic loss rule. It noted that the New Jersey Supreme Court had refined its test for when recovery was permissible under the economic loss rule, stating that, in general, “[c]ontract principles more readily respond to claims for economic loss caused by damage,” while “tort principles are better suited to resolve claims for personal injuries or damage to other property.”87 Given that the parties had roughly equal bargaining power, as evidenced by the concessions that plaintiff had previously won and given that plaintiff was essentially suing on its disappointed expectations, the court found that dismissal of plaintiff’s claims for negligent misrepresentation was appropriate.88

 

Franchise Litigators

Franchise litigators, for both the defense and the plaintiff, should review their cases in light of the economic loss rule.  Oftentimes, a misrepresentation claim in an initial pleading is deficient when considered in light of the rule.  Even when the allegations are cleverly crafted otherwise, defense attorneys can often nail down a plaintiff’s theory in depositions and discovery to show that the claims involve nothing more than disappointed economic expectations clothed in tort.  The more a plaintiff’s theories can be brought into line with the terms of the contract, the more likely the client is to succeed when the time comes for a dispositive motion. The chore for a plaintiff’s attorney is the opposite.  After learning the intricacies of the forum state’s economic loss rule, the job of the plaintiff is to distance the language of the complaint, and especially the basis of any misrepresentation claims, as far away from any contractual terms or disclaimers as possible. Another avenue to consider is statutory claims.  Courts addressing this issue have generally concluded that the economic loss rule does not bar statutory claims despite allegations forming essentially the same basis as breach of contract and even negligence claims.89  The stakes are far from academic.  If plaintiffs are forced  to proceed in contract, they may find themselves bound by warranty disclaimers and remedy limitations contained in the agreement.  On the other hand, misrepresentation claims are often paired with requests for an award of punitive damages, increasing a plaintiff’s leverage in settlement negotiations and the plaintiff’s potential recovery by an order of magnitude if the case goes to trial.  Mere familiarity with the rule is enough to gain an commentary describes an attorney who, having had a products liability claim against Ford Motor Company dismissed, exclaimed, “I just find it hard to believe that a company like Ford can issue a recall notice essentially admitting they defectively designed something and then be able to hide behind an obscure legal doctrine.”90  That obscurity can work to the advantage of an attorney facing an opponent who is unfamiliar with the economic loss rule; at the same time, unfamiliarity with the rule can cause an attorney to waste valuable time and money litigating a case only to have it dismissed at the outset.

 

Transactional Attorneys

Similarly, the economic loss rule raises serious concerns for transactional attorneys drafting franchise agreements.  In particular, the choice of law provision may well determine the outcome of litigation further on down the road.  An attorney drafting an agreement on behalf of a franchisor should consider selecting a state with a strong body of law on the economic loss rule, if available. On the other hand, an attorney advising a franchisee may wish to consider putting up a fight over a choice of law clause if a state with an expansive economic loss rule is selected.

Also, the economic loss rule should be a factor in deciding what contractual disclaimers are worthy of inclusion in a franchise agreement. Because in many states the economic loss rule will act as something of a parol evidence rule for fraud claims sounding in tort, it behooves a drafting attorney to include expansive disclaimers, if possible.  Common statements that form the basis of fraud in the inducement claims, such as an alleged representation concerning the profits a franchisee can expect, can potentially be avoided if the franchise agreement includes statements that explicitly disclaim such representations.  On the other hand, an attorney advising a franchisee should make doubly certain that a franchisee understands and agrees to all of the representations and warranties in a franchise agreement because old tricks such as using a cause of action sounding in tort to avoid the parol evidence rule are no longer likely to succeed.

Conclusion

Perhaps the most straightforward explication of courts’ attitudes toward misrepresentation claims arising out of a contractual relationship was set forth by the Michigan Supreme Court: “We have a body of law designed for such disputes.  It is called contract law.”91 The body of law that determines whether an action sounds in contract or tort, however, is still very much in a state of flux. The clear trend in the states, however, is toward a more constricted approach to remedies available in tort. Franchise attorneys who stay abreast of these developments involving the economic loss rule will have an indispensable tool to use in defending, prosecuting, and preventing many cases down the road.