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Manufacturers Of Mass-Produced Products

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
ALL ALASKAN SEAFOODS, INC.;
AAS-DMP MANAGEMENT
PARTNERSHIP; KODIAK MARINE
PROTEIN, INC., General Partner
AAS-DMP; DALMOREPRODUCT,
Holding Company; SHIN NIHON
GLOBAL COMPANY, LTD.,
Plaintiffs-Appellants,
                                                     No. 98-35540
v.
                                                     D.C. No.
RAYCHEM CORPORATION,
                                                     CV-95-00351-BJR
Defendant-third-party-
plaintiff-Appellee,
                                                     OPINION
and
MINNESOTA MINING &
MANUFACTURING COMPANY,
Defendant-Appellee,
v.
MARINE ELECTRIC, INC.,
Third-party-Defendant.
Appeal from the United States District Court
for the Western District of Washington
Barbara J. Rothstein, Chief Judge, Presiding
Argued and Submitted
October 4, 1999--Seattle, Washington
Filed December 7, 1999
                               14321

Before: Thomas M. Reavley,1 Robert Boochever, and
Stephen S. Trott, Circuit Judges.
Opinion by Judge Reavley
_________________________________________________________________

COUNSEL
Jonathan Meier, Sirianni & Youtz, Seattle, Washington, for
the plaintiffs-appellants.
Greg Gilchrist, Legal Strategies Group, Emeryville, Califor-
nia, for the defendant-third-party-plaintiff-appellee. Daniel J.
Gunter, Graham & James, LLP/Riddell Williams P.S., Seattle,
Washington, for the defendant-appellee.
_________________________________________________________________
OPINION
REAVLEY, Circuit Judge:
Appellant AAS-DMP Management Partnership ("AAS-
DMP") appeals the judgment in favor of appellees Raychem
Corporation ("Raychem") and Minnesota Mining & Manufac-
turing Co. ("3M"). The district court granted summary judg-
ment for appellees on appellant's claims for product liability
arising from a fire aboard the P/V ALL ALASKAN. We reverse
and remand.
The following facts are not in dispute. In 1987, All Alaskan
Seafoods, Inc. ("All Alaskan") purchased the hull of an oil
drill ship, then spent over $25,000,000.00 to build a seafood
processing factory on the hull, and named the vessel P/V ALL
ALASKAN. All Alaskan built the vessel for its own use and
operated the vessel in the Bering Sea to process salmon and
crab meat. The first season of operation began in June, 1989.
Before the second season, All Alaskan purchased Raychem
heating cable in bulk and installed some of the cable on a new
drain line on the vessel. An end cap manufactured by 3M was
installed on the end of the Raychem heating cable. On July 5,
1994, after operating the ship for another four seasons, All
Alaskan transferred title of the ship "as is where is" to AAS-
DMP, created for a joint venture between All Alaskan and a
                               14324

Russian entity, Dalmoreproduct Holding Company. The P/V
ALL ALASKAN caught fire on July 24, 1994 while operating in
Bristol Bay and suffered substantial damage in the fire.
AAS-DMP alleges that the fire was caused by defects in the
Raychem heating cable and the 3M end cap installed between
the first and second fishing seasons. The district court granted
summary judgment on the ground that under the rule of East
River S.S. Corp. v. Transamerica Delaval, Inc.2 AAS-DMP
could not recover in product liability for economic loss to the
vessel.
The Supreme Court in East River recognized product liabil-
ity, including strict liability, as part of the general maritime
law, but the Court limited that liability where a defect dam-
ages only the product itself. In East River, defective turbine
components damaged only the turbine and interrupted the
commercial operation of the vessel. The bareboat charterer of
the vessel sought damages in product liability from the tur-
bine manufacturer. The Court restricted this claim to the con-
tractual warranty between the manufacturer and the purchaser,
and held that, in the absence of a contractual obligation, a
commercial product injuring itself is not the kind of harm
against which public policy requires manufacturers to protect.
The Court focused on the exposure of the product manufac-
turer and held "that a manufacturer in a commercial relation-
ship has no duty under either a negligence or strict products-
liability theory to prevent a product from injuring itself." 476
U.S. at 871, 106 S.Ct. at 2302. The Court explained that war-
ranty law sufficiently protects a purchaser by allowing the
purchaser to obtain the benefit of his or her bargain. "Thus . . .
it is more natural to think of injury to a product itself in terms
of warranty." 476 U.S. at 873, 106 S. Ct. at 2295.
The Court applied the East River rule in Saratoga Fishing
_________________________________________________________________
2 468 U.S. 858, 106 S. Ct. 2295, 90 L. Ed.2d 685 (1986).
                               14325

Co. v. J.M. Martinac & Co.,3 in which Joseph Madruga pur-
chased a vessel built by J.M. Martinac, then added equipment
to the vessel before reselling it to Saratoga Fishing. A defect
in the hydraulic system caused a fire and the vessel was lost.
Saratoga Fishing recovered for the skiff, nets, and spare parts
added to the ship by Madruga. The Court rejected the view of
the dissent and the Ninth Circuit that would define the
"product" for the purposes of the East River economic loss
rule as the object of the purchaser's bargain. Instead the Court
retained the distinction between components incorporated by
a manufacturer before sale to an initial user and those items
added by a user of the manufactured product.
[1] The case at bar raises questions in maritime law which
have not been addressed. Who is the manufacturer and who
is the initial user? What is the "product" for which a tort claim
is limited? The Court has not said whether the seller should
be considered a manufacturer for East River purposes when,
as in the case of All Alaskan, it refurbishes and operates a
vessel for its own business before selling the vessel. Likewise,
it has not been decided whether East River has any applica-
tion where the vessel is not sold new or is sold in a commer-
cial transaction where a warranty is not likely; and if East
River does not apply in those circumstances, how the
"product" is to be determined. We believe that the boundary
set by the East River rationale is best observed by treating All
Alaskan as a user, not a manufacturer, and by treating the
items sold by Raychem and 3M as products. The P/V A LL
ALASKAN was not the "product" for East River purposes dur-
ing the four years it was operated by All Alaskan after instal-
lation of the heating cable and end cap. We see no
justification for changing the characterization of the product
upon the sale to AAS-DMP, nor for immunizing Raychem
and 3M from tort liability because of the transaction between
All Alaskan and AAS-DMP.
_________________________________________________________________
3 520 U.S. 875, 117 S. Ct. 1783, 138 L. Ed.2d 76 (1997)
                               14326

Product liability promotes safer products by placing
responsibility on the manufacturer, which is the party most
able to prevent harm. See Saratoga Fishing, 520 U.S. at 881,
117 S. Ct. at 1787; East River, 476 U.S. at 806, 106 S. Ct. at
2300. Product liability law provides manufacturers with
incentives to determine design and quality control specifica-
tions in light of the potential exposure to liability for defects.
RESTATEMENT THIRD, TORTS: PRODS. LIAB.S 2 cmt. a (1997).
Manufacturers can set prices to spread the risk of defects over
the entire market for their products. Id.
[2] The economic loss rule serves as a boundary at the
intersection of contract and tort law to protect the law of war-
ranty from being absorbed in tort. East River , 476 U.S. at
866-68, 106 S. Ct. at 2300. Under that rule when a defective
product damages itself, the only loss is the value of the prod-
uct, which is the subject of warranty rather than tort law. Id.
Protecting warranty regimes from incursions by tort law is
important because manufacturers rely on limitations of war-
ranty to make financial decisions regarding costs for product
failure. Product liability law provides notice to manufacturers
that warranty limitations may not protect against exposure
when a defective product causes personal injury or property
damage, but the economic loss rule allows reliance on war-
ranty for damage the product causes to itself.
[3] A corollary to the economic loss rule is the component
part rule, the principles of which can be extrapolated from the
principles of the economic loss rule. Manufacturers of inte-
grated products can avail themselves of warranty provisions
and can spread the risk of product defect over their entire
market. Manufacturers replace or repair products according to
their warranties as a normal part of doing business. When pur-
chasing component parts, integrated product manufacturers
can exercise market power to negotiate price and allocation of
downstream risks of defective components. See Saratoga
Fishing, 520 U.S. at 884, 117 S. Ct. at 1788. Because inte-
grated product manufacturers use the same components in
                               14327

multiple iterations of the same product, economies of scale
exist to support investigation and testing of component suppli-
ers' products. Alternatively, integrated product manufacturers
can exercise market power to impose specifications on com-
ponent suppliers. Id. Component part suppliers can evaluate
exposure to downstream risk for component failure by refer-
ence to the risk allocation with the integrated product manu-
facturer and the warranty provisions for the integrated
product. Id.
[4] Appellees Raychem and 3M qualify as manufacturers of
mass produced products, therefore the principles of product
liability law apply to their sale of the cable and end cap.
Appellees are in the best position to know the risks created by
the design and manufacture of their products and can best pro-
tect against the failure of their products. Appellees can spread
the cost of product failures and can limit their exposure for
product failure through warranty. Appellees are on notice of
the product liability risks associated with the normal use of
the these products.
The principles underlying the protection of component part
manufacturers do not apply to the use of these products in the
P/V ALL ALASKAN. Appellees did not sell these products in a
bulk component part transaction with a mass producer of inte-
grated products, therefore the price did not reflect any alter-
ation of normal product liability exposure. Appellees did not
have any reason to expect that the sale of these products
would be insulated from product liability exposure because
there was no negotiated allocation of risk or subsequent war-
ranty of a mass-produced integrated product. There is no
rational basis for immunizing appellees from product liability
solely because the vessel was transferred to appellant after
initial use. See Saratoga Fishing, 520 U.S. at 881, 882, 117
S. Ct. at 1787.
The principles applicable to manufacturers of integrated
products do not apply to the assembly of the P/V A LL
                               14328

ALASKAN by All Alaskan. All Alaskan is not in the business
of selling vessels of this type. All Alaskan was not in the posi-
tion to spread the risk of a component defect over several ves-
sel sales. All Alaskan purchased these components off the
shelf from manufacturers with reliable reputations. The cable
and end caps were not acquired in a negotiated allocation of
downstream risk. Unlike a mass producer of integrated prod-
ucts, All Alaskan was not in the position to exercise market
power to impose manufacturing specifications for the cable
and end caps as component parts. All Alaskan relied on the
manufacturing and design expertise of appellees.
Appellees had every reason to expect that these products
created a risk of property damage exposure such as the fire
aboard the P/V ALL ALASKAN. Appellees have reason to
expect limitation of this exposure only when their products
are incorporated into integrated products for sale by a manu-
facturer. When appellees' products are used in vessels such as
the P/V ALL ALASKAN, appellees can only expect the eco-
nomic loss rule to prevent recovery for the cable or end cap
damaging themselves. But for the fortuity of the transfer of
the vessel's title, the economic loss rule would not be an
issue. The Court has expressly disapproved the immunization
of a manufacturer from product liability solely by virtue of a
fortuitous transfer. Id.
[5] Under the principles of product liability, the cable and
end cap are products and not components in this case. The
transfer of the vessel to AAS-DMP provides no justification
for changing the characterization of the vessel and these prod-
ucts.
Appellee 3M raises an entirely different issue in this
appeal, arguing that appellant has abandoned or waived its
claims with regard to 3M because appellant's opening brief
focuses exclusively on Raychem. Appellant's opening brief
names 3M as appellee and 3M was served with all notices and
briefs for the appeal. Appellant explains its exclusive focus on
                               14329

Raychem on the basis that Raychem briefed and argued the
economic loss rule in the district court without any assistance
from 3M. 3M participated in the summary judgment only by
stipulating that it would be bound by the outcome of Ray-
chem's motion on this issue.
Appellant's explanation of its focus in the brief is of no
matter. Because 3M suffered no prejudice, there is no waiver
or abandonment of the claims against 3M. See Lynn v. Sheet
Metal Workers' Int'l. Ass'n, 804 F.2d 1472, 1482 (9th Cir.
1986); Meehan v. County of Los Angeles, 856 F.2d 102, 105
(9th Cir. 1988). The only issue in this appeal is the application
of the economic loss rule. The legal and factual issues
involved in the application of the economic loss rule are iden-
tical for both Raychem and 3M. Appellant's opening brief
provided 3M with notice of the arguments supporting reversal
of the summary judgment and 3M had the opportunity to fully
brief these issues in its response.
3M was named as an appellee, was served with all briefing,
was on notice of all issues on appeal and had the opportunity
to fully respond to all of appellant's points of appeal. Because
3M had full notice and was not prejudiced, appellant's focus
on Raychem in its opening brief does not result in waiver or
abandonment of the claims against 3M. See Lynn , 804 F.2d at
1482.
We reverse the judgment of the district court and remand
the case for further proceedings.
REVERSED AND REMANDED

*** Any law, statute, regulation or other precedent is subject to change at any time ***

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