Digicorp, Inc. v. AMERITECH CORP.,

262 Wis.2d 32

2003 WI 54

662 N.W.2d 652

DIGICORP, INC., a Wisconsin corporation, Plaintiff-Respondent-Cross-Appellant, The CINCINNATI INSURANCE COMPANY, Intervening-Plaintiff, v. AMERITECH CORPORATION, Defendant-Third-Party Plaintiff-Appellant-Cross-Respondent-Petitioner, Dann KRINSKY, Defendant, v. BACHER COMMUNICATIONS, INC., Third-Party Defendant-Respondent.¹

DIGICORP, INC., a Wisconsin corporation, Plaintiff, The CINCINNATI INSURANCE COMPANY, Intervening-Plaintiff, v. AMERITECH CORPORATION, Defendant-Third-Party Plaintiff-Respondent-Cross-Appellant-Petitioner, Dann KRINSKY, Defendant, v. BACHER COMMUNICATIONS, INC., Third-Party Defendant-Appellant-Cross-Respondent.

Nos. 01-1833, 01-2258.

Supreme Court of Wisconsin.

Oral argument January 23, 2003.

Decided June 3, 2003.

For Ameritech Corporation there were briefs by Michael B. Apfeld, Daniel T. Flaherty, Craig A. Kubiak and Godfrey & Kahn, S.C., Appleton, and oral argument by Michael B. Apfeld.

For Bacher Communications, Inc., there was a brief by Gregory J. Cook, Anthony P. Hahn, and Kasdorf, Lewis & Swietlik, S.C., Wausau, and oral argument by Gregory J. Cook.

For Digicorp, Inc., there was a brief by Victor E. Plantinga, Douglas W. Rose, and Rose & Dejong, S.C., Brookfield, and oral argument by Victor E. Plantinga.

An amicus curiae brief was filed by Edward E. Robinson, Charles David Schmidt, and Cannon & Dunphy S.C., Brookfield, on behalf of the Wisconsin Academy of Trial Lawyers.

¶ 1. N. PATRICK CROOKS, J

Ameritech Corporation (Ameritech) seeks review of a court of appeals' decision that affirmed the circuit court's judgment, entered on the jury's verdict, awarding damages to Digicorp, Inc., (Digicorp) for Ameritech's breach of contract and intentional misrepresentation. The jury also awarded damages to Bacher Communications, Inc., (Bacher) for Ameritech's intentional misrepresentation made by one Ray Taylor (Taylor), an Ameritech employee.

¶ 2. This court is presented with the question of whether Wisconsin recognizes a fraud in the inducement exception to the economic loss doctrine, and if so, what the elements of that exception are. In addition, we must determine whether one may avoid the application of the economic loss doctrine due to an absence of contractual privity, and whether recovery of the benefit of the bargain is prohibited where a fraud in the inducement exception applies and tort remedies are sought.

¶ 3. We hold that Wisconsin recognizes a narrow fraud in the inducement exception to the economic loss doctrine such as the one adopted in Huron Tool and Engineering Co. v. Precision Consulting Services, Inc., 209 Mich. App. 365, 532 N.W.2d 541 (1995). This rule is not as broad as the rule adopted by the court of appeals in Douglas-Hanson Co. v. BF Goodrich Co., 229 Wis. 2d 132, 598 N.W.2d 262 (Ct. App. 1999), which we reviewed and which resulted in a three-to-three vote on this court and a per curiam opinion,²Douglas-Hanson Co. v. BF Goodrich Co., 2000 WI 22, 233 Wis. 2d 276, 607 N.W.2d 621. We hold, consistent with the decision in Huron Tool, that the economic loss doctrine acts as a bar where the fraud in the inducement is interwoven with the contract in that it involved matters for which risks and responsibilities were addressed. Such matters must not be extraneous to the contract.

¶ 4. In addition, we hold that the language of Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis. 2d 395, 573 N.W.2d 842 (1998), is clear that the economic loss doctrine generally precludes recovery in tort for solely economic losses, regardless of whether privity of contract exists between the parties. We also hold that recovery of the benefit of the bargain is not permissible where the fraud in the inducement exception applies and tort remedies are sought.

¶ 5. Accordingly, we reverse the court of appeals' decision and remand to the circuit court for a new trial limited to contract remedies.³

I. FACTUAL AND PROCEDURAL BACKGROUND

¶ 6. The factual and procedural background of this case is extensive and complicated, Digicorp, an authorized Ameritech distributor,⁴ contracted Ameritech for approval to sell Ameritech's calling services and calling plans known as "Value-Link"⁵ through a third party, Bacher Communications, which was not an Ameritech-authorized distributor.⁶ Digicorp and Bacher, however, had a pre-existing relationship. During the course of discussions with Digicorp, an Ameritech employee, Ray Taylor (Taylor), failed to inform Digicorp that one of Bacher's salesmen, Dann Krinsky (Krinsky) had engaged in fraudulent acts of forging customers' signatures when Krinsky had worked for Northeast Communications (NCS), another authorized Ameritech distributor. (Krinsky was the person who initially approached Bacher with the suggestion that Bacher distribute Ameritech's Value-Link plan through Digicorp). Unaware of Krinsky's past fraudulent actions, Digicorp entered into an agreement, superseding its earlier one with Ameritech, and incorporating Bacher (and its employees) as part of the distribution plan for Ameritech products.

¶ 7. On April 30, 1996, Taylor sent a letter to Digicorp's President, Stewart Clark (Clark), outlining the conditions for that company and Bacher's use of what was referred to as "1099 employees." The letter stated, among other things, that a sales person had to be approved and certified by Ameritech. In addition, the letter said that Ameritech required those sales people to be 1099 employees of the authorized distributor, and to represent themselves as employees of the authorized distributor when they sold Ameritech's services. As such, the letter set forth Ameritech's expectation that Digicorp would be responsible for the actions of its 1099 employees.

¶ 8. On June 1, 1996, Digicorp and Ameritech signed a Non-Exclusive Authorized Distributor Agreement. The agreement contained a provision that either party could terminate the agreement. The agreement contained a specific provision to the effect that Ameritech could terminate the contract without any notice, in the event that Digicorp submitted any sales agreements subsequently found to contain forged customer signatures. This provision was new and had not been included in previous contracts between Ameritech and Digicorp.

¶ 9. Krinsky, through his employment at Bacher, continued to sell Ameritech Value-Link plans as one of Digicorp's 1099 employees. A few weeks later, an Ameritech employee discovered that the customer signatures on two Ameritech contracts submitted by Krinsky were forgeries. Digicorp was notified of the investigation; Krinsky then quit Bacher.

¶ 10. Bacher thereafter retrieved the Ameritech contracts from Krinsky's files and discovered that, during the two and a half months Krinsky had been employed by Bacher, only two or three of the over 250 Value-Link contracts he sold had genuine signatures. All of the rest were forged. Krinsky was ultimately charged with and convicted of forging contracts, and after pleading no contest was sentenced to six months in jail.⁷

¶ 11. In October 1996, about three months after the forged contracts were first discovered, Ameritech exercised its right under its agreement with Digicorp and terminated Digicorp's status as an Ameritech authorized distributor. Following that, Bacher was unable to sell Ameritech products.

¶ 12. Digicorp thereafter commenced a lawsuit against Bacher to recover damages based on Bacher's hiring and supervision of Krinsky. After Digicorp determined that Ameritech (through Taylor) had been aware of Krinsky's previous forgeries, when he had been employed by another Ameritech distributor, Digicorp filed suit against Ameritech and alleged breach of contract, intentional misrepresentation, strict liability misrepresentation, negligent misrepresentation, and negligence by Ameritech. Digicorp also claimed it was entitled to punitive damages from Ameritech. It dismissed its suit against Bacher.

¶ 13. Ameritech counterclaimed, alleging breach of contract, indemnification, intentional misrepresentation, strict liability misrepresentation, negligent misrepresentation, negligent hiring, training and supervision, and unjust enrichment. In addition, Ameritech filed a third party complaint against Bacher, alleging the same claims it asserted against Digicorp with the exception of its claim for indemnification.

¶ 14. Bacher filed a counterclaim against Ameritech alleging strict liability misrepresentation, negligent misrepresentation, wrongful litigation, negligent hiring and supervision, breach of contract and secret rebates; it did not seek punitive damages.

¶ 15. Thereafter, Ameritech moved for summary judgment arguing, among other things, that all of the pending tort claims were barred by the economic loss doctrine. The circuit court dismissed Digicorp's claims of negligence and Bacher's claims for negligent supervision against Ameritech; however, the court withheld ruling on the economic loss doctrine and allowed the remaining claims to go to trial. During an eight-day trial, Bacher was allowed to amend its pleadings to conform to the evidence claiming against Ameritech on a theory of intentional misrepresentation as well. The circuit court refused to apply the economic loss doctrine and allowed the remaining claims to go to the jury. The circuit court reasoned that Ameritech's fraudulent activities, through Taylor's actions, placed this case within the fraudulent inducement exception to the economic loss doctrine. The circuit court stated:

Fraud and deceit, it seems to me is the very antithesis of the purposes underlying [the economic loss] doctrine. One who acts fraudulently prevents the parties from freely allocating risk by deceiving the other party about the nature of the risk that is being allocated or even creating the risk after the contract is entered into; it's inimical to the very kind of good faith bargaining that should take place between contracting parties ... and that the

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