On January 28, 2014, the Supreme Court of Wisconsin was equally divided regarding the application of the “economic loss doctrine” to a water softener that leaked and caused damage to flooring, drywall, and woodwork.

As a result the decision of the three judge Court of Appeals panel in State Farm Fire and Casualty Company v. Hague Quality Water, et al., 2012 WI App 392, was affirmed. The Court of Appeals determined that the “economic loss doctrine” did not preclude tort claims in a case where a water softener leak caused damage to drywall, flooring, and woodwork. The primary issue for the court was analysis of the leaky water softener under the disappointed expectations test of the economic loss doctrine.

The “economic loss doctrine” is employed by Wisconsin courts to bar purely economic loss in consumer transactions through tort remedies where the only damage is to the product purchased by the consumer. State Farm Mut. Auto. Ins. Co. v. Ford Motor Co., 225 Wis.2d 305, 341, 348, 592 N.W.2d 201 (1999). However, Wisconsin does permit recovery for economic losses when the product defect causes damage to “other property” as determined by a two-part analysis. Foremost Farms USA Coop. v. Performance Process, Inc. (Foremost I), 2006 WI App 246, 25, 297 Wis.2d 724, 726 N.W.2d 289.

The first part of the analysis is whether the defective product and damaged property are part of an integrated system. If the damaged property is part of an integrated system with the defective product then the damage is not considered damage to “other property” and the “economic loss doctrine” bars recovery. Id., 15-16.

If the damaged property is not part of an integrated system with the defective product then the analysis turns to what has been termed the “disappointed expectations” analysis. Id., 16-17. In this analysis, the court must determine if “prevention of the subject risk was one of the contractual expectations motivating the purchase of the defective product.” Grams v. Milk Prods., Inc., 2005 WI 112, 43, 283 Wis. 2d 511, 699 N.W.2d 167 (citation omitted). The analysis will turn on the “purpose for purchasing the product, the reasonableness of anticipating a risk of the product’s failed performance, the availability of warranties or risk sharing mechanisms, and the extremity of the facts.” Id., 40.

The respondent’s in Hauge argued that a reasonable purchaser of a water softener should have foreseen the risk of water leaking from its product and therefore cannot be disappointed when a leak happens. The court of appeals, citing Foremost I, determined such an argument was misplaced because it confused reasonable foreseeability with foreseeable interaction and it focused on a defect that results from the process used to perform a function rather than a defect in the function of the product itself. Hauge Quality Water, 17. The Court of Appeals took a very narrow approach in its analysis of the disappointed expectations test, essentially finding that the only way the “economic loss doctrine” would apply was if the water softener failed to “soften water.”

Justice David Prosser did not participate.