Wednesday, January 07, 2009, 9:06 AM

COA Rejects Fraud, UTPA Claims In Products Case

Yesterday in Hospira Inc. v. Alphagary Corp. the NC Court of Appeals (COA) rejected fraud, negligent misrep, and UTPA deception claims brought by a manufacturer of medical devices. It's an important case on the limits of indirect fraud and deception--i.e., when the plaintiff didn't deal directly with the defendant.

Plaintiff didn't deal directly with defendant. Rather, plaintiff had outsourced manufacturing to another manufacturer (we'll call it "middleman") who in turn contracted with defendant. Defendant's job was to produce a radiation-grade substance for use in manufacturing so that the product could withstand sterilization. But defendant used a non-radiation grade resin instead, and plaintiff wasn't informed of this switch. Uninformed, plaintiff purchased millions of the products from middelman and distributed them. Plaintiff then learned from its customers that the products were defective because they weren't radiation grade.

Plaintiff sued defendant for fraud, UTPA deception, and negligent misrepresentation, alleging that defendant concealed its use of an unapproved compound substitute and made false and misleading statements to middleman to cover-up the switch.

As for fraud, the COA held that defendant's misrepresentations to middleman weren't actionable by plaintiff. The COA distinguished Rowan County Bd. of Ed. v. U.S. Gypsum Co. (NC. 1992) as a case that involved indirect misrepresentations through the plaintiff's agent. Today's holding: misrepresentations conveyed through a non-agent aren't actionable fraud. On the facts of this case, the COA ruled that middelman wasn't plaintiff's agent. Thus, defendant was entitled to summary judgment on the fraud claim.

Likewise, the COA rejected plaintiff's negligent misrepresentation claim: "under a theory of negligent misrepresentation, liability cannot be imposed when the plaintiff does not directly rely on information prepared by the defendant, but instead relies on altered information provided by a third party", i.e., by middelman (emphasis in original).

The UTPA claim also failed, because plaintiff provided no record evidence to indicate that representations made by defendant to middelman had the capacity to deceive plaintiff. There was no evidence that plaintiff relied on defendant's statements. In fact, plaintiff's own employee testified that if he had seen the technical data sheet that defendant had given to middelman, he would've known that it wasn't radiation-grade material.

It wasn't a total loss for plaintiff, however. The COA held that the trial court erred in relying on the economic loss rule to dismiss plaintiff's negligence claim. The economic loss rule didn't apply here because there was no contractual privity between plaintiff and defendant, thanks to middleman. Thus, the negligence claim will go forward.

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