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Pennsylvania’s Superior Court creates a conflict with the Third Circuit by holding that UTPCPL claims are not subject to the economic loss doctrine

On December 11, 2013 by Schnader in Finance

By Stephen J. Shapiro

The Pennsylvania Superior Court’s recent decision in Knight v. Springfield Hyundai is notable for two reasons.  First, addressing an issue of first impression, the Court held that disputes arising in connection with automobile installment sale contracts are not subject to arbitration unless the installment sale agreement itself contains an arbitration clause.  Second, and contrary to a decision by the Third Circuit, the Court held that the economic loss doctrine does not apply to claims under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL).

In connection with her purchase of a used car, plaintiff Beverly Knight signed two documents – a Buyer’s Order, which included the terms of the purchase, and a Retail Installment Sales Contract (RISC), which detailed her financing agreement.  The Buyer’s Order contained an arbitration clause, but the RISC did not.

Alleging that the car dealer had misrepresented the condition of the vehicle she purchased, Knight sued the dealer and financing company in Pennsylvania state court.  Among other claims, Knight alleged that defendants violated the UTPCPL, which prohibits sellers from engaging in unfair or deceptive acts or practices, by misrepresenting characteristics of the vehicle.  The defendants filed the state law equivalent of a motion to dismiss, arguing, among other things, that the arbitration clause in the Buyer’s Order required Knight to bring her claims in arbitration and that Knight’s UTPCPL claim was barred by the economic loss doctrine.

The trial court dismissed several of Knight’s claims, including her UTPCPL claim, and held that she was required to arbitrate her surviving claims. Knight then proceeded to arbitration, at the conclusion of which the arbitrator awarded her $971.41, plus costs and fees.  Knight filed a motion in the trial court to vacate the arbitration award, which the trial court denied.

On appeal, the Superior Court first held that the trial court erred in compelling arbitration.  Under Pennsylvania’s Motor Vehicle Sales Finance Act (MVSFA), an installment sale contract for the purchase of an automobile “shall contain all of the agreements between the buyer and seller relating to the installment sale of the motor vehicle sold.”  The Court held that this language clearly and unambiguously provides that “when a buyer makes a purchase of a vehicle by installment sale, the RISC subsumes all other agreements relating to the sale.”  Therefore, the Court held that the Buyer’s Order was subsumed by the RISC, and since the RISC did not contain an arbitration clause, no enforceable agreement to arbitrate existed.

The Superior Court also held that the economic loss doctrine, which prohibits plaintiffs from recovering in tort for purely economic damages, does not prohibit Knight from pursuing her UTPCPL claim on remand.  This holding contradicts the 2002 case Werwinski v. Ford Motor Company, in which the Third Circuit predicted that the Pennsylvania Supreme Court would hold that the economic loss doctrine bars claims under the UTPCPL.  The Superior Court did not discuss Werwinski, instead relying on Excavation Technologies, Inc. v. Columbia Gas Co., a 2009 decision in which the Pennsylvania Supreme Court stated that the economic loss doctrine bars claims “for negligence that result solely in economic damages unaccompanied by physical injury or property damage.”  From this statement, the Superior Court concluded that the economic loss doctrine only bars negligence-based claims and, because UTPCPL claims are statutory claims that do not sound in negligence, they are not barred by the doctrine.

The Superior Court’s reliance on Excavation Technologies for the proposition that the economic loss doctrine only applies to claims sounding in negligence is questionable.  The sole claim at issue in Excavation Technologies was one for negligent misrepresentation, so the Supreme Court was not faced with the question and did not hold that the economic loss doctrine is inapplicable to claims that do not sound in negligence.

Unless and until the Pennsylvania Supreme Court resolves the discrepancy, the economic loss doctrine will not be a viable defense to a UTPCPL claim in the Pennsylvania state trial courts, which are bound by Knight, but may still be a viable defense to a UTPCPL claim in the federal trial courts in the Third Circuit, which are bound by Werwinski.

Category: Finance