Economic Loss Rule
UNITED STATES COURT OF APPEAL
FOR THE NINTH CIRCUIT
APOLLO GROUP, INC., an Arizona
Plaintiff-Appellant, No. 93-16131
v. D.C. No.
AVNET, INC., a New York
corporation dba HAMILTON/AVNET OPINION
Appeal from the United States District Court
for the District of Arizona
Roger G. Strand, District Judge, Presiding
Argued and Submitted
February 16, 1995--San Francisco, California
Filed June 28, 1995
Before: Joseph T. Sneed and Diarmuid F. O'Scannlain,
Circuit Judges; Robert R. Merhige, Jr.,* District Judge.
Opinion by Judge O'Scannlain
*The Honorable Robert R. Merhige, Jr., Senior United States District
Judge for the Eastern District of Virginia, sitting by designation.
E. Jeffrey Walsh, Snell & Wilmer, Phoenix, Arizona, for the
Thomas G. Ryan, Lewis and Roca, Phoenix, Arizona, for the
O'SCANNLAIN, Circuit Judge:
"We are told that Contract, like God, is dead."1 In this computer
age case, we learn that Contract, at least, is very much
alive and well in the Ninth Circuit.
Apollo Group, Inc. ("Apollo") purchased software from
Oracle Corporation ("Oracle"), a software vendor. Apollo's
purchase included both a database system and Oracle Financials,
an accounting software package. Apollo then sought to
purchase an appropriate computer system to run the software.
To this end, Apollo contacted Avnet, Inc. ("Avnet"), a distributor
of Digital Equipment Corporation computer products.
In early May 1989, representatives of Apollo, Avnet, and
Oracle met to discuss the potential sale of computer hardware
to Apollo. The content of this meeting is disputed. According
to Apollo, Avnet assured Apollo that it was familiar with the
Oracle software and could design an appropriate hardware
system. In contrast, Avnet contends that it "could not and did
not represent that it had any expertise in assessing the hardware
requirements for the Oracle financial software."
Following their meeting, on May 11, Avnet submitted to
Apollo, in writing, a price quote for a MicroVAX 3800. In an
attached cover letter ("the May 11 letter"), Bob Hopkins,
Avnet's account representative, stated: "In creating this configuration
we reviewed all system requirements with Gayle
Fitzpatrick of Oracle. We both agree that the MicroVAX 3800
1 So begins the introduction to the renowned lectures given at Ohio State
University Law School in April 1970 by Grant Gilmore, late Sterling Professor
of Law at Yale Law School. Grant Gilmore, The Death of Contract
(1974) at 3.
will meet your requirements." Avnet also attached to the May
11 letter a price quote for two MicroVAX 3300s; however,
the cover letter did not reference the 3300s.
Apollo never accepted Avnet's May 11 proposal, and it
expired one month later. Following a series of subsequent
proposals, on June 13, 1989, Avnet submitted to Apollo a
price quote for the purchase of a MicroVAX 3400. This proposal
contained the following warranty disclaimer:
Seller warrants to Buyer that the products will conform
to the applicable manufacturer's or United
States government military specifications for such
Products and that any value added work performed
by Seller on any such Products will conform to
applicable Buyer's specifications relating to such
work. Seller makes no other warranty, express or
implied, with respect to the Products. IN PARTICULAR,
SELLER MAKES NO WARRANTY
RESPECTING THE MERCHANTABILITY OF
THE PRODUCTS OR THEIR SUITABILITY OR
FITNESS FOR ANY PARTICULAR PURPOSE
OR USE. . . . BUYER SHALL NOT IN ANY
EVENT BE ENTITLED TO, AND SELLER
SHALL NOT BE LIABLE FOR INDIRECT, SPECIAL,
INCIDENTAL OR CONSEQUENTIAL
DAMAGES OF ANY NATURE INCLUDING,
WITHOUT BEING LIMITED TO, LOSS OF
PROFIT, PROMOTIONAL OR MANUFACTURED
EXPENSES, OVERHEAD, INJURY TO
REPUTATION OR LOSS OF CUSTOMERS.
BUYER'S RECOVERY FROM SELLER FOR
ANY CLAIM SHALL NOT EXCEED BUYER'S
PURCHASE PRICE FOR THE PRODUCTS IRRESPECTIVE
OF THE NATURE OF THE CLAIM,
WHETHER IN CONTRACT, TORT, WARRANTY
Additionally, under the subheading "Advice," the proposal
stated that "[i]f technical advice is offered or given in connection
with the use of any Products it will be as an accommodation
to Buyer and without charge and Seller shall have no
responsibilities or liabilities whatsoever for the content or use
of such advice." That same day, Apollo accepted Avnet's proposal
by its signed purchase order for a MicroVAX 3400
computer, "per attached [Avnet] proposal."
Once the MicroVAX 3400 was installed, Apollo discovered
that it was insufficient to run the Oracle software. According
to Apollo, it took days to process a single report and there was
a two to ten minute response time on routine tasks. In October
1989, representatives of Apollo, Oracle, and Avnet met once
again, this time to discuss the problems experienced by
Apollo. The consensus at the meeting was that the MicroVAX
3400 was underpowered to operate the Oracle Financials.
In late October 1989, Apollo sought to replace the
MicroVAX 3400 with a more powerful machine. Apollo
requested that Avnet accept return of the MicroVAX 3400 or
permit Apollo to trade the MicroVAX 3400 for a larger computer.
Avnet refused to accept the return of the MicroVAX
3400. In December 1989, Apollo tendered, in writing, the
return of the MicroVAX 3400. Again, Avnet declined the
Apollo brought suit against Avnet, alleging negligent misrepresentation,
negligence, breach of warranty, and breach of
contract, seeking purely economic losses in its complaint.2
Avnet responded by filing a motion for summary judgment,
which the district court granted. Apollo timely appealed.
2 Specifically, Apollo requested database consulting fees, late fees not
paid to vendors due to system breakdown, fees for Oracle consulting on
the installation of the MicroVAX 3400, accounting department overtime,
lease payments for the MicroVAX 3400 and compensation for the cost of
 Apollo's first claim is for negligent misrepresentation.
Apollo contends that under Arizona law this particular tort
claim is an exception to the so-called "economic loss" rule
which would otherwise bar recovery and that summary judgment
for Avnet was erroneously granted. Generally, under the
"economic loss" rule, a plaintiff who suffers only pecuniary
injury as a result of the conduct of another cannot recover
those losses in tort. Instead, the claimant is limited to recovery
under the law of contract. See East River Steamship Corp. v.
Transamerica Delaval, Inc., 476 U.S. 858, 870 (1985).
Applying this principle, the district court reasoned that
because Apollo sought only pecuniary damages, its tort claim
of negligent misrepresentation was barred. Apollo does not
dispute that it seeks purely economic losses; rather, Apollo
argues that negligent misrepresentation falls outside the
"economic loss" rule.
 Arizona courts have yet to rule on this question.3 We
nonetheless find guidance in the Arizona Supreme Court's
decision in Salt River Project Agricultural Improvement and
Power District v. Westinghouse Electric Corp., 694 P.2d 198
(Ariz. 1984). The language of that decision indicates that the
court reads the "economic loss" rule broadly. As the court
stated, "[i]f the only loss is non-accidental and to the product
itself, or is of a consequential nature, the remedies available
under the UCC will govern and strict liability and other tort
theories will be unavailable." Id. at 210 (emphasis added).
3 There is no consensus among courts that have been squarely faced with
this issue. Compare Ritchie Enter. v. Honeywell Bull, Inc., 730 F. Supp.
1041, 1052 (D. Kan. 1990) (negligent misrepresentation is not an exception
to the "economic loss" rule) with Northern States Power Co. v. International
Tel. & Tel. Corp., 550 F. Supp. 108, 112 (D. Minn. 1982)
(excepting negligent misrepresentation from rule) and Moorman Mfg. Co.
v. National Tank Co., 435 N.E.2d 443, 452 (Ill. 1982) (requiring plaintiff
to demonstrate that the defendant was in the business of supplying information
and that the information was supplied to the plaintiff for a transaction
with a third party before permitting the recovery of economic losses).
Moreover, the court's rationale in Salt River Project
suggests that negligent misrepresentation is not an exception
to the "economic loss" rule. As the court explained, "[w]here
the potential for danger to person or property is absent, tort
principles need not be invoked because the safety incentive
policy of tort liability is not implicated." Id. at 207. Apollo's
claim in no way implicates the safety rationale underlying the
law of tort. Apollo seeks to recover purely "benefit of the
bargain" and consequential losses. Such foreseeable risks
could have been -- and indeed were -- allocated by the parties
in their contractual agreement.
 Although Arizona has yet to decide this issue, the broad
language of Salt River Project, when coupled with the rationale
underlying that decision, persuades us that negligent misrepresentation
-- at least as represented by the facts before
this panel -- would not be excepted from the "economic loss"
rule by the Arizona Supreme Court.4
To escape the preclusive effect of the "economic loss" rule,
Apollo nevertheless seeks to recast the transaction at issue as
a contract to provide services, falling outside Arizona's Uniform
Because Arizona courts have not yet articulated a test for
determining whether a contract is one of sale or to provide
services, we look to federal law for guidance. In determining
4 St. Joseph's Hosp. and Medical Ctr. v. Reserve Life Ins. Co., 742 P.2d
808 (Ariz. 1987) and Donnelly Constr. Co. v. Oberg/Hunt/Gilleland, 677
P.2d 1292 (Ariz. 1984) are not to the contrary. Although in both cases the
Arizona Supreme Court permitted plaintiffs to sue for economic losses in
negligent misrepresentation, these cases can be distinguished from the
instant case. Both St. Joseph's and Donnelly involved suits by third parties
against defendants with whom they were not in contractual privity. This
lack of privity limited the contractual remedies available to plaintiffs, rendering
commercial law an inadequate framework in which to resolve
plaintiffs' claims. By contrast, here the parties' relationship is clearly governed
by the law of contract.
the character of a contract, this court looks to "the essence of
the agreement." RRX Indus., Inc. v. Lab-Con, Inc., 772 F.2d
543, 546 (9th Cir. 1985). "When a sale predominates, incidental
services provided do not alter the basic transaction." Id.
 We do not doubt that Avnet offered opinions regarding
Apollo's computer needs. But it is equally clear that the heart
of the transaction was the sale of computer hardware. Indeed,
Apollo vice-president Matthew Anticevich admitted in a
deposition that Avnet served as a hardware distributor, and
not as a consultant; when asked to describe Avnet's role in the
disputed transaction, Anticevich stated that "[t]hey were
brought in as a computer sales company." The relevant
invoices indicate that money paid by Apollo to Avnet was
related to the purchase of hardware. These records nowhere
suggest that Apollo paid for professional consulting advice.
Apollo's attempt to sever its precontractual negotiations from
the purchase of the hardware is not persuasive.
 We are satisfied that the Arizona Commercial Code
governs and Apollo's negligent misrepresentation claim is
Apollo also seeks to bring what it describes as a "common
law" breach of warranty claim. Although Apollo's argument
on this matter is not entirely clear, Apollo appears to suggest
that its "common law" claim arises from Avnet's provision of
services, rather than from the sale of goods; as the claim's origin
is non-contractual, Apollo concludes, it is not barred by
the "economic loss" rule.
As we recognized above, incidental statements made by
Avnet regarding the suitability of its product do not suffice to
transform this transaction into the provision of services. The
June 1989 offer and acceptance is a contract for the sale of
goods. The entire transaction is thus governed by the U.C.C.
 Accordingly, we must determine whether Apollo can
bring a common law breach of warranty claim to recover
solely economic losses. It is clear that Arizona recognizes a
common law breach of warranty claim. See Seekings v. Jimmy
GMC, Inc., 638 P.2d 210, 215 (Ariz. 1981) (privity between
manufacturer and consumer not required where consumer
alleges common law breach of warranty); see also Rocky
Mountain Fire and Cas. Co. v. Biddulph Oldsmobile, 640
P.2d 851, 856 (Ariz. 1982). What is substantially less clear is
whether this common law breach of warranty claim can coexist
with contract claims when a plaintiff seeks only economic
 Logic persuades us that the "economic loss" rule would
bar Apollo's common law breach of warranty claim. As
Apollo itself concedes, "[c]ommon law warranty claims
sound in tort." See also Flory v. Silvercrest Indus., Inc., 633
P.2d 383, 388 (Ariz. 1981) (noting, in dicta, that an action for
breach of implied warranty is "in essence an action based on
strict liability in tort").5 As a tort claim, Apollo's breach of
warranty claim falls squarely within the parameters of the
"economic loss" rule. Apollo complains that it has failed to
receive the anticipated benefit of its bargain. Such benefit of
5 Avnet cites Flory, to support its contention that Arizona does not recognize
a common law breach of warranty claim where the damages sought
are purely economic. Flory's holding is substantially less clear than Avnet
asserts, however. In Flory, the court held that plaintiffs' claim for damages
based on breach of warranty under Arizona's Commercial Code could not
succeed as plaintiffs were not in privity with defendants. The court went
on to note that plaintiffs could not bring their action in strict liability, as
economic losses are not recoverable under such doctrine. Earlier in the
opinion, the court stated that "[i]n Arizona we have recognized that an
action styled as `breach of implied warranty' to recover damages for physical
injury to person or property is in essence an action based on strict liability
in tort . . ." Id. at 388. If a breach of warranty claim is essentially
one of strict liability, and if economic losses are not recoverable under the
doctrine of strict liability, then Avnet's conclusion -- that economic losses
are not recoverable under common law breach of warranty claim -- is a
sensible one. The court nowhere makes this assertion explicit, however.
the bargain claims are based in contract law and should be
governed thereby. See East River Steamship, 476 U.S. at 870
("[L]oss due to repair costs, decreased value, and lost profits
is essentially the failure of the purchaser to receive the benefit
of its bargain -- traditionally the core concern of contract
 Ultimately, Apollo has simply recast what would traditionally
be a U.C.C. breach of warranty claim into what it
calls a "common law" tort-based breach of warranty claim to
evade the preclusive effect of the "economic loss " doctrine.
Such effort fails. Contract lives!
 Finally, Apollo seeks to revoke its acceptance of the
MicroVAX 3400. Under the Arizona Commercial Code, the
remedy of revocation is available "whenever goods sold fail
to conform to the seller's representation of the goods if the
nonconformity `substantially impairs' the value of the goods
to the buyer." Seekings, 638 P.2d at 216; see also A.R.S.
S 47-2608. To advance its claim of nonconformity, Apollo
attempts to introduce representations made by Avnet prior to
the June 1989 proposal and acceptance. We conclude that
such statements are parol evidence and thus inadmissible.
Pursuant to the parol evidence rule, the parties' final and
fully integrated agreement may not be contradicted by any
prior agreement. See A.R.S. S 47-2202. Apollo argues that the
June 1989 agreement was not fully integrated. To support its
claim, Apollo points to the warranty in Avnet's proposal,
which provided, in part, that "Seller warrants to Buyer . . .
that any value-added work performed by Seller on any such
Products will conform to applicable Buyer's specifications
relating to such work." Apollo contends that the meaning of
the phrase "value-added work" cannot be derived without
resort to evidence outside the June 13, 1989 proposal as to
what work was done and to what specifications. See Anderson
v. Preferred Stock Food Markets, Inc., 854 P.2d 1194, 1197
(Ariz. App. 1993) ("A completely integrated contract is a contract
adopted by the parties as a complete and exclusive statement
of the terms of the contract.").
 We have no doubt that the agreement at issue was a
final one. At most, Apollo's argument regarding the warranty
for "any value-added work performed by Seller " indicates an
ambiguity in the language of the June 1989 agreement. Apollo
does not, however, convincingly demonstrate that the parties
intended that the June 1989 proposal and acceptance reflect
only a partial statement of the parties' agreement. Indeed, the
Avnet proposal expressly provides that it supersedes any prior
agreements between the parties.
Apollo next argues that even if the June 1989 agreement is
considered final and fully integrated, the representations it
seeks to introduce do not conflict with the contractual provisions;
rather, Apollo contends, such representations simply
explain the meaning of "value-added." Apollo's argument is
not persuasive. Although parol evidence is admissible to aid
in contract interpretation, see Taylor v. State Farm Mutual
Auto. Ins., 854 P.2d 1134, 1138-39 (Ariz. 1993), the evidence
which Apollo offers has no probative value in determining the
meaning of the phrase "value-added work performed by Seller
on any such Products." Apollo's evidence pertains to representations
made by Avnet concerning the capacity of the
product it was selling, and not to additional work performed
on the hardware by Avnet. These representations clearly contradict
the parties' final agreement, which disclaimed any
warranties as to fitness for a particular purpose or use.
Accordingly, these representations are inadmissible and summary
judgment for Avnet was proper.
Section 12-341.01 of the Arizona Revised Statutes provides
that "[i]n any contested action arising out of a contract,
express or implied, the court may award the successful party
reasonable attorney's fees." Both Apollo and Avnet have
made a motion for fees under this provision.
The award of fees under section 12-341.01 is discretionary
with the court. Associated Indem. Corp. v. Warner, 694 P.2d
1181, 1184 (Ariz. 1985). Neither party has made a persuasive
showing meriting the award of fees. For this reason, we deny
the motions of both Apollo and Avnet.
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