Transcript

CHIEF JUSTICE WILLIAM REHNQUIST: We'll hear argument now in Number 95-1764, Saratoga Fishing Company v. J. M. Martinac & Company. Mr. Zakarin.

ORAL ARGUMENT OF KEITH ZAKARIN ON BEHALF OF THE PETITIONER

MR. ZAKARIN: Mr. Chief Justice, may it please the Court:

The task before the Court in this case is to now make explicit what East River requires but necessarily left implicit, a definition of the product itself which is true to the principles of East River and is capable of uniform application by the Federal courts sitting in admiralty.

The product itself is the thing sold by the original seller or manufacturer to the original buyer of that thing. If that product self-destructs, its loss can only be recovered in contract.

East River teaches so. Property destroyed by the defect which is not the product itself is recoverable in tort.

The Ninth Circuit in its final opinion, the last of three, has damaged that balance, and that balance must now be set aright.

JUSTICE SANDRA DAY O'CONNOR: Mr. Zakarin, is it not possible in contract suit to recover also damages for property that it is clear would be at risk if the item sold were destroyed?

MR. ZAKARIN: Justice O'Connor--

JUSTICE O'CONNOR: I mean, there's some leeway, is there not, under a contract theory?

MR. ZAKARIN: Justice O'Connor, that depends, of course, upon the existence both of privity and the scope of the contract at issue. There may or may not be privity and there may or may not be recovery.

Nevertheless, the principles which drive the existence of strict liability, the necessity to make manufacturers responsible to produce safe goods put into the stream of commerce, counsel a broader interpretation of recovery.

JUSTICE O'CONNOR: Well, but even in the East River situation where you're dealing with commercial sellers, if you would--you may not want to concede that, but assuming we're dealing with a commercial seller and a commercial buyer, does East River indicate that a contract recovery, if it were available for these other things, should be applied?

MR. ZAKARIN: Ordinarily, the answer is--the answer is that East River is silent as to the recovery in a particular contract of those items. It may be, under Hadley v. Baxendale and cases in particular State jurisdictions, that a contract could permit broader recovery than for the item itself, governed, of course, by the doctrine of foreseeability.

Nevertheless, East River speaks to a limitation and a balance between tort and contract which permit tort recovery for those other items where contract does not permit it.

CHIEF JUSTICE REHNQUIST: Well, do you think East River meant to not go as far as, say, Hadley v. Baxendale would?

MR. ZAKARIN: The standards for recovery of damages are different in tort and in contract, and I do not believe that East River necessarily sets those parameters.

East River does say quite correctly that recovery in contract will be governed by foreseeability as to those items governed by contract, the product itself.

CHIEF JUSTICE REHNQUIST: That's Hadley v. Baxendale, too, is it not?

MR. ZAKARIN: Yes, Mr. Chief Justice.

CHIEF JUSTICE REHNQUIST: That's the rule.

MR. ZAKARIN: But that is, of course, the measure of contract recovery and not of tort recovery. Tort recovery is necessarily those things--those damages proximately caused by the defect. In this case--

CHIEF JUSTICE REHNQUIST: Which is a more relaxed standard of foreseeability, is it not?

MR. ZAKARIN: Yes, Mr. Chief Justice, it is indeed, but that relaxed standard is important in the area of unreasonably dangerous and defective products, since the manufacturer may not always be able to foresee, unlike a contracting party, the scope of damage that its product may cause.

JUSTICE DAVID SOUTER: Should it matter at all, for purposes of our analysis, that when the ship was sold it was incomplete for the purpose for which it was sold, and which it was understood that everyone was going to use it for, so that the ship was kind of--in a way, it was sort of a component that really wouldn't be of any use to tuna fishing until it was outfitted with a substantial amount of further equipment.

Should that affect our view of the case?

MR. ZAKARIN: No, Justice Souter, it should not. The product as it left the Martinac Shipyard with the Marco hydraulic system aboard was a fully complete ship, admittedly not complete for the purpose it had eventually been intended, tuna purse seine fishing, but she was capable of sailing away, and did sail away.

Were that distinction of a changing product adopted by the Court, the balance given to us by East River

--that is that the object of the bargain between the original manufacturer and/or seller, as it were, and the original buyer would be disturbed

--the product would change as each went on, and the original focus upon the object of the contract would become diluted over time.

JUSTICE ANTONIN SCALIA: Mr. Zakarin, I'm not clear as to whether what East River is saying is that the manufacturer has the opportunity to protect himself against tort liability and, therefore, if he doesn't he should be socked, or rather is saying that the purchaser has an opportunity to protect itself against injury through contract and, therefore, if he doesn't do so the purchaser should not be given the tort recovery.

Now, if East River is looking to the purchaser and saying look, the purchaser could have put this in the contract, then logically we ought to look to the second contract and not to the first contract, whereas if East River is looking to the seller, then you're quite correct, we ought to look at the first contract.

But why do you say that East River focuses on the seller rather than the purchaser? I mean, each of them can protect themselves.

Why shouldn't we say, look, in this last transaction if the purchaser wanted to be able to recover for all of the incidentals besides the tuna, he could have put it in the contract. He didn't do it. Tough luck.

MR. ZAKARIN: There are two reasons, Justice Scalia, why that would be the wrong focus. For one thing, East River is not a singular focus upon the ability of the manufacturer, as you correctly point out, to protect itself, but it also looks to, as you also correctly point out, the buyer's ability to negotiate for additional warranties and the like, and that balance is respected in East River.

However, if that object of the contract is--if we look to subsequent sales, the object of that contract becomes ignored.

Therefore, looking at the downstream sales and looking at what protections the purchasers in those sales made or didn't make is an unrelated proposition to the balance in East River between the original purchaser and the original buyer.

But there's another reason, which is that--

JUSTICE SCALIA: Well, excuse me. I'm not sure what point you're making. Are you making the point that the immunity that the manufacturer had acquired for itself by the contract could be undone by a later reseller? Is that the point?

MR. ZAKARIN: No, Your Honor. Under the--

Well, that is the point--that is the point I am making. The original purchase provides an immunity for the product sold. \

If that immunity is expanded, the expansion of that immunity bears no relation to the original object of the contract and is in effect a windfall for that manufacturer for immunity it never bargained for, never was paid for, and never discussed.

But looking beyond that, East River is not a singular focus upon contract but also recognizes the important necessities driving the tort system, which is the place of proper encouragement upon manufacturers to foresee, spread, and control the risk. If--

JUSTICE SCALIA: Why not upon purchasers? I mean, you know, they're both in this together, and we're only dealing with situations in which they're--it's arm's length between people of comparable bargaining power.

We're not talking about the purchase of a bottle of pop in the grocery store, right?

MR. ZAKARIN: That's true.

JUSTICE SCALIA: So I mean, why pick on the manufacturer? They're both grown-ups, and they can both protect themselves.

MR. ZAKARIN: The proposed rule that we advance is not inconsistent with the manufacturer being able to protect itself in that instance. By respecting the product, tort immunity for the product itself, that particular balance is respected.

However, absurd results would obtain if we focus on continuing purchases down the line.

JUSTICE O'CONNOR: Well, can I ask about the circumstances of this sale? Your client, Saratoga, bought the boat with certain things added after the original sale of the boat from the original purchaser of the boat, Madruga, is that correct?

MR. ZAKARIN: Yes, Justice O'Connor.

JUSTICE O'CONNOR: And could Saratoga Fishing have asked for certain warranties at the time it bought from Madruga?

MR. ZAKARIN: Of course it could have.

JUSTICE O'CONNOR: And apparently it didn't, and made the sale on an as-is basis.

MR. ZAKARIN: That is correct.

JUSTICE O'CONNOR: Are there any implied warranties from Madruga in the case of an as-is basis sale?

MR. ZAKARIN: I would believe not. No contractual warranties, it is admitted, were extended, granted, or received by Captain Vargas through Saratoga Fishing Company.

JUSTICE O'CONNOR: Does the record tell us whether Saratoga had insurance for loss of the boat?

MR. ZAKARIN: Sara--there are references to insurance in the record. It is uncontested that Saratoga did have insurance, though the subrogation was not total. It was--

JUSTICE O'CONNOR: So conceivably Saratoga paid a lesser price as a result of not requiring warranties and thought it could do so--protect itself more cheaply by just getting insurance.

MR. ZAKARIN: Of course.

The existence--the existence of an as-is sale in a downstream transaction, which is as-is, where-is, is not hostile to the balance struck in East River of holding manufacturers strictly liable for unreasonably dangerous defects.

JUSTICE O'CONNOR: Well, I thought the East River represented, as has been suggested in other questions this morning, a choice that in the commercial context we will focus on a contract remedy because the commercial buyer is able to protect itself by demanding warranties if it sees fit.

MR. ZAKARIN: That is only, Justice O'Connor, if we allow the focus of the bargain to shift with each subsequent sale. East River, again, is not a singular focus upon contract, but a balance between contract and tort.

JUSTICE STEPHEN BREYER: What is the first--suppose you have the first sale, a screw. A defective screw is in the engine, and then the engine goes in the boat, and then the boat is resold, all right.

Everybody I think agrees that if it's a defective screw that blows up, and it blows up the engine, that you can't recover in tort for the engine because the it is the engine, right? Is that right? That's the defective product.

MR. ZAKARIN: I'm not sure I follow the hypothetical. The screw--

JUSTICE BREYER: Well, suppose you have a screw that's defective, and it's in an engine, and the engine blows up because of the screw.

MR. ZAKARIN: And the screw is part of the original engine?

JUSTICE BREYER: That's what I'm getting at. What's original?

You see, I mean, what you had was a screw that was sold to an engine-builder that was sold to a shipbuilder that was sold to another captain.

You talk about the defective product, and then the downstream things from the defective product. I take it what your opponents are arguing is that this resold ship is the defective product.

What I'm looking for--and the line of the defective product is a contract line. That's what I think people--I mean, at least I think they're driving at that.

So what I want to know is, what's the line? What's the English words that would describe a circumstance so that we all agree that engine in my hypothetical case with the screw is the defective product but your resold ship is not the defective product?

What words in English, or what line of law clearly defines those two, making the one the defective product but not the other, because I think you have to find that line in order to win the case.

MR. ZAKARIN: I quite agree, Justice Breyer, that the--in English, the rule would be that the completed product as first placed into the stream of commerce in a commercial sale would be the product--

JUSTICE BREYER: Yes, but why isn't it the screw? The screw entered the scream of--the screw entered the stream of commerce in the defect--so that doesn't work, so that would then mean that the engine wouldn't be the defective product, but we all agree it is.

MR. ZAKARIN: As I understood your hypothetical, the screws as sold to the first buyer was in an engine contained in a ship which all went in a completed product to the first buyer.

JUSTICE BREYER: The whole ship went to--the completed product to your present client.

MR. ZAKARIN: That's the Shipco case out of the Fifth Circuit.

JUSTICE SCALIA: That would be the case where the engine manufacturer produces his own screws. I guess that is unusual.

I think Justice Breyer was giving you the case where there are screws in the engine, but the engine manufacturer gets the screw from, you know--Screws Unlimited or something, the screw manufacturer. (Laughter.)

MR. ZAKARIN: That's right. That's right. That, indeed, is both in microcosm and in gross the East River case and the Shipco case out of the Fifth Circuit.

JUSTICE O'CONNOR: But that is East River, is it not?

MR. ZAKARIN: East River--

JUSTICE O'CONNOR: That what caused the damage there was a defective component that East River didn't produce but incorporated in the equipment that was sold.

MR. ZAKARIN: That's correct.

JUSTICE O'CONNOR: And aren't the cases pretty much uniform in saying you look at the product that was sold the first time, the whole entity, not at the component parts that may have been produced by someone else?

MR. ZAKARIN: Absolutely.

JUSTICE O'CONNOR: At least that's the--MR. ZAKARIN: That's--JUSTICE O'CONNOR: The normal holding of the courts.

MR. ZAKARIN: East River necessarily did not address the case that--the facts that Shipco later out of the Fifth Circuit did address and answered the question put by Justice Breyer.

JUSTICE BREYER: I understand. My problem--you see my problem? My problem is, what's the defective product? What's the first time?

JUSTICE SCALIA: To put it another way--why is a screw a component part of an engine, but an engine is not a component part of a ship under your theory?

JUSTICE BREYER: Or the first isn't the component part of the improved ship.

MR. ZAKARIN: The engine under our theory would most certainly be part of the component ship. The ship as delivered into the stream of commerce with every widget, screw, wire, and fastener aboard, is that product originally placed into the stream of commerce.

JUSTICE BREYER: Fine. Then why isn't what your client bought the defective product?

MR. ZAKARIN: Because--

JUSTICE BREYER: Because all that happened was that the--they simply added a few nets and things, just as the engine manufacturer added some metal to the screw, just as the shipbuilder added some wood to the engine, and then, see, we have a line here that works against you if you're going to look at the contract.

MR. ZAKARIN: I respectfully disagree, Justice Breyer. The--we have to look at the first commercial sale and what fully completed product was delivered out into that commercial sale.

In the Saratoga case, as Justice O'Connor focused us upon, the product was the completed product with all the widgets, screws, and wires that came out of the Martinac Shipyard. That was the object of that original bargain.

JUSTICE ANTHONY KENNEDY: Is one definition of that whether or not the first user added the equipment, as opposed to a manufacturer adding the equipment?

Suppose, for instance, leaving apart Saratoga--we just have as between Martinac and Madruga--the manufacturer had designed a special place for the skiff, and he designed a special place for the nets, and then Madruga just sailed it off and put the skiff on and the nets. Would the skiff and the nets then be part of the whole product in the case that I put?

MR. ZAKARIN: It would not be. If the skiff and the nets were purchased separately by Madruga--

JUSTICE KENNEDY: And that's because Madruga is the user, and the user added the parts?

MR. ZAKARIN: Quite correct. The--

JUSTICE BREYER: No, but why do you characterize it that way? The first buyer--is it Madruga or Magruda?

MR. ZAKARIN: Madruga.

JUSTICE BREYER: Madruga. The first--

MR. ZAKARIN: There was some confusion in the record.

JUSTICE BREYER: Okay. The first buyer in effect went to the manufacturer of the ship and said, I want to buy 90 percent of a ship to fish for tuna. I will complete it. I will put in whatever it was, the navigation equipment, the skiff, the seines and so on. Why isn't he to be regarded as the manufacturer of the completed product, which is the complete tuna fishing ship?

MR. ZAKARIN: Simply put, he's not--

Simply put, he's not a 402A seller. Strict liability does not apply under 402A, which the Court has given us as the standard in admiralty for product liability between casual sales or occasional sales.

It focuses on commercial sales by manufacturer--

JUSTICE RUTH BADER GINSBURG: Suppose it was his business to convert bare boats into tuna boats and he did that in quantity? Here there were about seven boats, was it not the case?

MR. ZAKARIN: Yes, Justice Ginsburg, but that would--although that might create liability if Madruga turned out to be a 402A seller from running to Saratoga Fishing Company, it would not vitiate liability as against Martinac, another seller in the chain of distribution.

The product vis--in any lawsuit for product liability between parties A and B may involve, indeed, a different product, but the rule--and it's important to have a uniform rule, is merely to find the product sold by that manufacturer to the ultimate consumer.

Let me give you an example. In our case, the product we contend was the complete ship with everything aboard, as the Shipco case teaches us, as it left the Martinac Shipyard.

If, later on, a defective heat tape or some other product had been added aboard, a completely different engine, some new machinery had been put aboard and had caught fire, and had destroyed the vessel, that comp--that additional equipment manufacturer would have tort immunity for that engine, widget, whatever it was that was sold, would not be able to get recovery of that product itself from that manufacturer, but would be liable for the hull and all the rest of the goods.

It may be in every instance, because every lawsuit is necessarily between two or more parties, that we focus on a somewhat different product, but it doesn't make the rule difficult to apply, because we look at the bargain between that manufacturer in its original sale and the purchaser in that original sale, assuming that it is a commercial sale, not a casual sale.

JUSTICE SCALIA: Well, a commercial--not just a commercial sale, but a commercial sale to an end user.

MR. ZAKARIN: Yes.

JUSTICE SCALIA: That is how you decide where to draw the line between the screw and the engine and the ship.

MR. ZAKARIN: That's correct.

JUSTICE SCALIA: Which sale was a sale to an ultimate user. The screw was not sold to an ultimate user, since it was sold to a manufacturer of an engine.

MR. ZAKARIN: You're quite correct, Justice Scalia. In fact, as I referred to the Shipco case, here was an attempt out of the Fifth Circuit which is illustrative, an attempt to get the component manufacturer for a part that they had put in the engine, and that was a specific end around, as it were, the East River, and the Fifth Circuit stopped it cold and said no, it is the negotiated, final, complete product that left that particular shipyard which is the product itself, and there was no property in that particular case outside of that.

JUSTICE SOUTER: So I guess you're saying in answer to Justice Scalia's first question way back earlier on in the argument--I think you're saying that the capacity of the end user to contract is basically irrelevant.

There's simply got to be a conventional line, and the conventional line which would work as well as any other is the one that we've already given at least some lip service to, and that's the 402A line.

So it's not a--it doesn't turn on the power to contract. It turns on the power of the court in effect to impose a conventional line.

MR. ZAKARIN: That is correct, though I assume you don't mean the capacity to contract. I assume you mean, what is the nature of the original contract? Is it a commercial sale into the stream of commerce?

JUSTICE SOUTER: No, but one of the--I think one of the questions that plays around in this case is that when the ultimate end user, who later becomes a plaintiff, buys whatever he buys, he can contract in a way that will protect him. No warranty, extended warranty, warranty plus or minus insurance, and so on.

And you're saying that the capacity of that end user who later becomes a plaintiff to contract for protection when he buys whatever the thing is he buys is essentially irrelevant.

MR. ZAKARIN: It is indeed irrelevant for this purpose, because strict liability in its balance in contract as given by East River takes account of both.

It looks at the original purchaser's ability to contract with the manufacturer, what warranties might exist. In other words, recovery for the product itself might be permitted in warranty.

A warranty might be assignable, transferable and the like.

But it also takes account quite correctly of the purposes of product liability to impose a duty upon manufacturers-- JUSTICE SCALIA: Well, that's--MR. ZAKARIN:--to design and produce safe products.

JUSTICE SCALIA: That's nifty for the original purchaser. He can protect himself. But the original seller is really left without a way to protect himself.

I guess he can interrogate the original purchaser and say, are you going to be the last end user, or are you going to sell to somebody else?

MR. ZAKARIN: The original purchaser can protect itself under warranty, obviously, by putting restrictions as to the original purchaser, but cannot protect itself against tort liability for damage to other property, damage downstream, except by designing safe, reliable, and not unreasonably damaged goods.

JUSTICE SCALIA: I guess you could write a contractual provision that says, if you resell the ship, or whatever I'm selling you, you will be liable for any damaged goods that I'm held liable for in tort.

You could assume that contractually, couldn't you, or would that violate public policy?

MR. ZAKARIN: I suspect that would violate public policy, Justice Scalia, but it certainly is possible in the hands of the first purchaser, vis-a-vis a red letter clause or some other device, to limit tort liability to the original buyer, and that's done fairly conventionally. The--

JUSTICE GINSBURG: Do I understand your position to be that whatever Madruga--was other property in Madruga's hands stays other property vis-a-vis the manufacturer no matter how many subsequent sales there are?

MR. ZAKARIN: That's correct, Justice Ginsburg.

JUSTICE GINSBURG: So as long as--Madruga could have recovered had there been--for the additional things, and anyone forthwith, no matter how much is added onto the boat.

The original product is what the manufacturer is insulated for and nothing that anyone else adds to it?

MR. ZAKARIN: I would suggest that the best focus would be what did the manufacturer sell as a completed product? Anything beyond that in the hands of the ultimate consumer, when a product--

JUSTICE BREYER: Yes, but how does that--how does that--MR. ZAKARIN:--shows up in other property.

JUSTICE BREYER: How does that work, because what is the--I mean, suppose the screw blows up while the manufacturer's turning it into an engine?

MR. ZAKARIN: That's East River.

JUSTICE BREYER: Fine--no, in the engine shop, the screw blows up, okay. So I guess the manufacturer could sue the screw-making for damage to the engine, couldn't he?

MR. ZAKARIN: Assuming it was an admiralty case, and assuming--

JUSTICE BREYER: Yes. Yes. You're right. I'm just-- He could. MR. ZAKARIN: So--

JUSTICE BREYER: But that doesn't mean that your client can sue for damage to the engine. Of course, he can't. In other words, this line, ultimate consumer, is just as flaky as the other one.

What's an ultimate consumer in a commercial context where a person uses a screw to make an engine to make a ship, to sail in the water to get fish to sell to the ultimate consumer who eats the fish? I mean, how does it work?

MR. ZAKARIN: I respectfully disagree, Justice Breyer. It is not a flaky line at all. If we have an--if I am an ultimate consumer, whatever I bought from the manufacturer is the thing itself.

JUSTICE BREYER: Well, fine. Whatever you bought from the manufacturer, then, after all, the maker of the engine could sue the screw-maker for damage to the engine, but we know he can't, so Madruga vis-a-vis the ship they're saying is in the same position as the engine-maker vis-a-vis the screw-maker.

MR. ZAKARIN: In your hypothetical the screw which was defective came with the engine?

JUSTICE BREYER: Yes, just as the engine--

MR. ZAKARIN: Then that's correct.

JUSTICE BREYER: Do you see the--I'm looking for a line.

MR. ZAKARIN: If I'm understanding your question--

JUSTICE KENNEDY: Is your answer to Justice Breyer's question that Madruga is not in the business of making engines and machines, and he's not even in the business of reselling boats. He happened to sell this one boat. Is that the answer?

MR. ZAKARIN: It is certainly part of the answer. The--whether Madruga could have liability to Vargas is a separate question, of course, from whether Martinac may have liability to the downstream consumer.

The product itself in Madruga's hands was the ship as it left the Martinac Shipyard with all the screws and widgets aboard. There's--that's an easy line to determine. It's easy in theory, anyway.

The trial of such a case is necessarily complicated, as I can personally vouch for, because one has to have lists of all the things that were aboard, but in a sophisticated commercial transaction, that's done.

JUSTICE SCALIA: Mr. Zakarin, what is magic about the end user? I mean, I can understand what's magic about the end user when you're talking about transactions that may involve unsophisticated end users--the pop bottle example.

But once you've limited the rule that you're concerned with to sophisticated buyers and sellers, merchants, people in commerce, why should the engine manufacturer not be able to get the cost of his engine from the screw manufacturer, but the fisherman who buys the whole boat, a sophisticated fisherman who has seven of them, who sells some of them for resale later on, he can get the value of his seines and other equipment added on? What's so magic about the end user?

MR. ZAKARIN: The end user is sought to be protected by the law of product liability, the ultimate consumer. That is the intent--

JUSTICE SCALIA: Why? I understand you say that, but why?

MR. ZAKARIN: Well, I suppose that the distinction might be that a sophisticated consumer was capable of a greater level of inspection to detect manufacturing or design defects, and therefore perhaps could enjoy a lesser protection, but that standard would be very difficult to draw in reality.

It would be hard to determine whether any particular user was so sophisticated that they would not get the benefit of 402A's focus upon the ultimate consumer.

The simpler rule, and simplicity in application given the uniformity of admiralty, is important, is to pick a line, the ultimate consumer, the user, and a user could be a user of a machine, for example, in a machine shop.

JUSTICE SCALIA: It could be General Motors.

MR. ZAKARIN: General Motors could be an ultimate consumer, but the chances are in a relationship of that type we wouldn't be talking about a single screw.

We'd be talking about a fairly sophisticated transaction with tort remedies and the like.

We're talking about downstream purchasers here. Saratoga was certainly not a sophisticated fishing entity, as the contributory negligence findings of the district court show us. This was--

JUSTICE GINSBURG: But isn't--as far as the condition of the boat, Captain Vargas probably knew more about that boat than--and he probably knew about the defective hydraulic system--

MR. ZAKARIN: He certainly did.

JUSTICE GINSBURG:--when he bought it.

MR. ZAKARIN: That is correct. That is correct, but the--we do not place in product liability law the burden upon the ultimate consumer to redesign or inspect products for design defect, which is what we have here.

JUSTICE O'CONNOR: May I ask a quick question? You're almost out of time, but I'm curious. If this Court were to apply the contract theory rather than your product liability theory to a successive purchase, what is other property?

Would it include the tuna catch? Would it include the fuel? Would it include the replacement skiff?

MR. ZAKARIN: It certainly would include the fish. I believe it would include the fuel, unless you say fuel is a fungible item and therefore is the same no matter what. That would be the recovery under those circumstances, but again, employing a contract--

JUSTICE O'CONNOR: And the replacement skiff?

MR. ZAKARIN: The replacement skiff was a different skiff than Madruga got, but I believe-- JUSTICE O'CONNOR: Right. MR. ZAKARIN: I believe it was replaced in the hands of Vargas, and that's correct, but to conclude on that, using a contract analysis to determine the product itself is not hostile to the application of strict products liability for property not sold by that manufacturer.

Under the balance given to us by East River, they live in harmony with one another, assuming a line can be given to determine what is the product, and that product is that sold into the stream of commerce.

JUSTICE O'CONNOR: Yes, well, East River says other property may still be recoverable in tort, right?

MR. ZAKARIN: Yes, Justice O'Connor. Thank you.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Zakarin. Mr. Macleod, we'll hear from you.

ORAL ARGUMENT OF DANIEL B. MACLEOD ON BEHALF OF THE RESPONDENTS

MR. MACLEOD: Mr. Chief Justice, and may it please the Court:

In this situation, a commercial business entity bargained with another commercial business corporation for the purchase of a fully outfitted, totally functional purse seiner.

That's exactly what it acquired. It operated it for 12 years, and that's exactly what it lost. It lost the benefit of its own bargain, nothing more and nothing less.

JUSTICE JOHN PAUL STEVENS: May I ask you two questions, just to be sure I understand part of the case?

If the injury to the additional equipment had occurred while the original purchaser still owned it, Madruga, would you have been liable for that?

MR. MACLEOD: Probably. I would suggest to Your Honor that the approach would be exactly the same, that the examination would be of the bargain made by--

JUSTICE STEVENS: Assume the bargain included warranties on the ship itself but nothing more, and then you add the--Madruga added the additional equipment, which was lost in the--for tortious reasons. Would your client be liable?

MR. MACLEOD: Yes, I think so.

JUSTICE STEVENS: All right. Now, supposing instead of Madruga selling it on an as-is basis, supposing Madruga had given a warranty to Saratoga covering both the additional equipment and the original ship, so that Saratoga then recovered on the warranty for the additional equipment. Would Madruga then have been able to recover over against you for precisely the same loss that would have occurred if they'd still owned the ship?

MR. MACLEOD: I think not, Your Honor. I think that the analysis in the hands of Mr. Madruga would be the analysis under the contract between Madruga's business corporation and J. M. Martinac, and I think that the warranties would have expired.

JUSTICE STEVENS: But Madruga then would be the person who suffered the loss, but it would have been by paying its customer. Why would that--why should that loss be different than if it occurs while he still owns the ship?

MR. MACLEOD: I think the proper focus is on the benefits and the responsibilities of the bargaining of the commercial contracting parties, and if Mr. Madruga chose for one reason or another to extend a warranty on the equipment that he put aboard, or extend the original manufacturer's warranty, I think that's Mr. Madruga's problem, and I think undoubtedly he would be compensated for it in the purchase price.

JUSTICE SOUTER: It seems to me that Madruga--let's assume that Madruga just sold one vessel. He didn't sell seven of them.

If he's talking to Saratoga and Saratoga says, well, I want a warranty, Madruga would say, you know, I don't know anything about engines and boats. I'm a fisherman. I don't know how to draw a warranty.

It seems to me somewhat artificial for us to suggest that Madruga and Saratoga were well-positioned to design and to negotiate a warranty.

Madruga doesn't know anything about ships insofar as their technical manufacture, as is shown by the fact that he added a turbocharger unit that caused the ship to sink.

MR. MACLEOD: Actually that was the second purchaser, Your Honor. That was Captain Vargas.

JUSTICE SOUTER: Vargas.

MR. MACLEOD: That turbocharger uncovered.

JUSTICE SOUTER: It seems to me that this just goes to show that Madruga is not in the business of selling vessels, and that, it seems to me, may cut against you.

MR. MACLEOD: Well, there is evidence in the record here that Madruga purchased a total of seven vessels from J. M. Martinac which were ultimately sold.

There is also substantial trial testimony concerning the fact that Madruga had a full-time engineer at the shipyard during the entire course of construction.

CHIEF JUSTICE REHNQUIST: But Madruga had a case here in the fifties. He's not an unknown person in maritime transactions.

MR. MACLEOD: That's correct, Your Honor, Madruga v. Superior Court was here in the fifties, and he was one of the parties to that partition of a vessel, if I remember correctly.

JUSTICE O'CONNOR:Under the East River theory, what do we really look to first and foremost in applying a contract theory of recovery?

MR. MACLEOD: I--

JUSTICE O'CONNOR: To the commercial nature of the purchaser, or to the commercial nature of the seller? Would the real focus be on whether the purchaser is in a commercial business of acquiring products like this?

MR. MACLEOD: I think the focus should be on the transaction as a whole, this being clearly a commercial transaction, whereas a business corporation transferring assets to another business corporation, and as I read East River and understand it, the public policy choice to be made is the choice between contract and tort, and--

JUSTICE O'CONNOR: In making that choice, should we be more concerned with what the purchaser might suffer, and therefore look to whether the purchaser is, indeed, a commercial entity?

MR. MACLEOD: Yes, Your Honor. I would suggest that the test is the benefit of the bargain, and in order to define the benefit of the bargain one has to look at what the purchaser purchased, which it was the ultimate decision in the Ninth Circuit.

JUSTICE BREYER: What about the 402--is the 402A seller Madruga? Because I think one possible-- MR. MACLEOD: There is-- JUSTICE BREYER: line about a possible line that says where there are a series of suppliers, each one of them supplies an ingredient to a product that ends up eventually in somebody's hands, the it, the defective thing as compared to the other property, is whatever was that thing in its form when it last left the hands of the last 402A seller. That would work.

That's very generous in your direction, but if that were the line, I don't see any reason for drawing a line beyond that.

MR. MACLEOD: Well, Your Honor, that seems to assume that there's a sort of an essential platonic product that we can--

JUSTICE BREYER: Well, there is. There is the defective product, and what we're trying to do is get a definition for the defective product compared to other property that surrounds the defective product, and I'm suggesting the most liberal possible definition in your favor would be the defective product is that product in its form when it left the hands of the last 402A seller.

MR. MACLEOD: The application of that rule would result in a rather con--substantial amount of confusion, I believe, because the vessel

--a vessel, complex products in the normal course of events, undergo modifications, additions, et cetera, and if the vessel is modified and added to in the hands of subsequent purchasers on down the line, the liability of the manufacturer of that product increases as the manufacturer's involvement becomes more remote in time.

JUSTICE BREYER: Yes, limited by foreseeability principles, which is a normal tort limitation.

MR. MACLEOD: Well, yes. I think the public policy choice there was made in East River in favor of contract, and I would suggest that--

JUSTICE STEVENS: I don't understand your suggestion in favor of contract. As I understand your position, the manufacturer is protected from liability as soon as the product is resold regardless of the terms of the reseller's bargain with his customer.

MR. MACLEOD: Well, the manufacturer--

JUSTICE STEVENS: Isn't that correct?

MR. MACLEOD: The manufacturer's not protected from liability for personal injuries, for damages to other property, et cetera. He's simply--

JUSTICE STEVENS: Well, talk about other property. This is other property, isn't it?

MR. MACLEOD: I suggest the manufacturer is insulated from liability for--for the--

JUSTICE STEVENS: For the other property added to the property he sold.

MR. MACLEOD: Yes. To do otherwise would increase the manufacturer's liability with the passage of time.

JUSTICE STEVENS: But that could happen--the original purchaser could keep adding things to the ship, but that would still--each addition to the ship would increase the exposure of the manufacturer for greater liability, wouldn't it?

MR. MACLEOD: It could do, yes.

JUSTICE STEVENS: But as I understand you, as soon as the ship is resold that exposure is extinguished, isn't that correct?

MR. MACLEOD: Yes.

JUSTICE STEVENS: Regardless of the terms of the bargain between the first purchaser and the second purchaser.

MR. MACLEOD: Yes.

JUSTICE SCALIA: But the manufacturer can protect himself against the increasing liability of new components added by the original purchaser. He can protect himself against that by contract, can he not?

MR. MACLEOD: He certainly can, Your Honor.

JUSTICE SCALIA: Okay, and he cannot protect himself against the addition of new components by someone downstream.

MR. MACLEOD: That is absolutely correct. There was also a balancing test suggested in the products liability cases in the consumer context to the extent that a manufacturer can, with very slight price increases, protect himself against that through the purchase of insurance, and I suggest that that's not economically available in the context of a manufacturer of a vessel where, if the price were increased to accommodate additional insurance the shipyard would become--

JUSTICE GINSBURG: Mr. MacLeod I didn't understand your answer to Justice Scalia, because I didn't understand you to be contesting that if Vargas, the second purchaser, bought all new equipment, a new seine, a new boat, that would be other property, would it not, for which the manufacturer would be liable?

MR. MACLEOD: I would--no, Your Honor. I'm suggesting that replacement property is not recoverable as other property, where parts of the ship wear out and are replaced or

--and modified and repaired in the normal course of operations, for the same reason, that we're constantly going to have additions and modifications and repair with replacement parts being added to a vessel, or any large complex piece of machinery.

JUSTICE GINSBURG: So there's nothing that--as part of the boat that Vargas puts on that the manufacturer--that would constitute other property vis-a-vis the manufacturer, is that what you're saying?

MR. MACLEOD: No, I'm not suggesting that.

JUSTICE GINSBURG: Well, what could--what would constitute other property vis-a-vis the manufacturer as far as the vessel that Vargas is operating is concerned?

MR. MACLEOD: Property of a third party, or property if Mr. Vargas, or Vargas' corporation which was unrelated to the bargain made by Mr. Vargas.

JUSTICE BREYER: Well, anything that wasn't a replacement, I take it. If he had come along and said, I think it would be great to have a second skiff, during the period in which the adder of the second skiff owned the boat, that would be other property under your rule, wouldn't it, and then it would cease to be other property if he sold the boat with the second skiff on it. Isn't that correct on your theory?

MR. MACLEOD: Yes. In fact, in the present case the property of other crewmen that was aboard the vessel is other property.

JUSTICE SCALIA: But was your answer to my earlier question correct, that the original seller can protect himself by contract against tort liability for other property added by the original purchaser?

MR. MACLEOD: Yes, it was. He can protect himself by contract.

JUSTICE SCALIA: How does he do that? How does he do that? What does a contract say, there shall be no tort liability for other property?

MR. MACLEOD: The builder shan't be responsible for any of the property of the purchaser that's aboard the vessel.

CHIEF JUSTICE REHNQUIST: But that shouldn't bind people further downstream. I don't think you can by contract restrict tort liability for people who aren't parties to the contract.

MR. MACLEOD: I--that's not my position, Your Honor. I think your statement is exactly correct, and exactly why we should be looking at the benefit of the bargain to what the purchaser acquired.

CHIEF JUSTICE REHNQUIST: But I thought you had said in answer to Justice Scalia's question that the purchaser could--the manufacturer could protect himself from liability, tort liability simply by contracting with the purchaser. You don't mean--

MR. MACLEOD: In the hands of the first purchaser.

CHIEF JUSTICE REHNQUIST: Yes.

MR. MACLEOD: But not in the hands of the second or subsequent purchasers.

CHIEF JUSTICE REHNQUIST: So all you're contracting for is no tort liability as between the manufacturer and the first purchaser.

MR. MACLEOD: Yes, Your Honor.

JUSTICE SOUTER: And then for subsequent sales it is the object sold in the subsequent sales that is the product, and that's what protects him, and the one loophole in that protection, I take it, is in the period between the time--between sales.

Let's say, the period between the sale to the second buyer, who then adds not just replacement equipment but adds equipment to it like the second skiff.

During that period the manufacturer has gotten other property liability if the second skiff gets blown up along with the ship, but if you're lucky, and the second skiff and the ship are then sold to a third purchaser, then he's off the hook again. Is that the way your theory works?

MR. MACLEOD: Yes, Your Honor, except that in the hands of the second purchaser I think the analysis should be of the bargain made by that purchaser.

JUSTICE SOUTER: Well, he bought a ship without a second skiff. Then he adds the second skiff, so the second skiff is not subject to the bargain that he made when he purchased the ship, so I thought on your theory the second skiff is other property during that second owner's ownership, but when the second owner then sells to a third, and the second skiff goes with it, then the second skiff is part of the bargain.

The product then includes the second skiff, and there wouldn't be product liability vis-a-vis the original manufacturer.

MR. MACLEOD: Yes, Your Honor. JUSTICE SOUTER: Okay.

JUSTICE GINSBURG: Mr. Macleod, is the response you gave to Justice Stevens before, is that settled law, that if there is a contract running between Madruga and Vargas, a warranty, and Madruga pays, that Madruga could not go back against the manufacturer for the--what would have been other property in Madruga's ownership period? Is that settled?

MR. MACLEOD: I think it is, and I think it's a matter of contract law.

JUSTICE GINSBURG: It was--there was a tort liability--

JUSTICE STEVENS: I don't think you can give me a case for that proposition.

MR. MACLEOD: I don't think I can either.

JUSTICE STEVENS: No, I really don't. (Laughter.)

JUSTICE GINSBURG: The tort liability that Madruga would have had vanishes, even as to Madruga. That's--that's essentially what you said.

MR. MACLEOD: I'm suggesting that the second purchaser purchased a warranty from Mr. Madruga in the initial sale, that Mr. Madruga would have to make good on that warranty.

JUSTICE GINSBURG: Yes. Now the question is--

MR. MACLEOD: As a matter of contract law.

JUSTICE GINSBURG: --can he turn around and get back from the manufacturer the extent to which the warranty covered what would have been other property in Madruga's hands?

MR. MACLEOD: I believe that the proper analysis of the relationship between Mr. Madruga and the shipbuilder at that point would be made under contract and warranty law with an examination of that particular contract and, if my memory serves me correctly, it would not be recoverable in this case because of a time limit on warranties.

JUSTICE SCALIA: Well, it wouldn't have been covered by the warranty anyway, because it's other property. Your--the manufacturer only warrants the original ship.

So there'd be no warranty recovery. The only recovery would be the same tort recovery as if they had happened while he still owned the ship.

He'd say, well, I have suffered this loss as a result of your delivering me a dangerous product. It's not loss of the original ship. I had to pay out this money to a third party.

I don't know why it's any different if it's a purchaser or a passenger.

MR. MACLEOD: That would be assigning a tort claim, presumably--actually creating a tort claim, because no claim existed to be assigned.

JUSTICE O'CONNOR: Well, wait a minute. Under East River it preserved liability in tort, product liability theory for other property loss.

MR. MACLEOD: Yes, Your Honor.

JUSTICE O'CONNOR: And so why does that liability disappear in the event the ship is resold and the original purchaser had to pay damages to his purchaser?

Why can't he look back to the original manufacturer for those losses for other property under tort liability, assuming the statute hasn't run?

It would have been a tort theory all along, and it just stays that way.

Let's talk about the tuna catch. That's the most valuable thing in this whole lawsuit, isn't it?

MR. MACLEOD: Yes, it is.

JUSTICE O'CONNOR: Yes. Well, let's talk about the tuna catch, because that's other property under anybody's definition, and if the original buyer, Madruga, has to fork over under tort theory to Saratoga for the loss of the tuna, then why can't he in turn look back to the manufacturer for that loss.

JUSTICE SCALIA: I think you say he can, don't you, unless there's been an exclusion of that in the original contract. No, he said originally he could not. That's his position, isn't it?

MR. MACLEOD: I believe--

JUSTICE STEVENS: His position is you look entirely to the intermediate purchaser.

CHIEF JUSTICE REHNQUIST: Would you care to give us your own version? (Laughter.)

MR. MACLEOD: I believe that the proper approach is contractual, and that the complete analysis should be made in contract because of the commercial contract.

JUSTICE O'CONNOR: Well, under East River it is not contractual recovery as to other property. Do you agree with that?

MR. MACLEOD: Yes, Your Honor.

JUSTICE O'CONNOR: Okay.

MR. MACLEOD: That's what East River says.

JUSTICE O'CONNOR: And tuna is other property. Don't we all agree with that--the catch?

MR. MACLEOD: I don't agree with that proposition.

JUSTICE O'CONNOR: Oh, you don't?

MR. MACLEOD: No, Your Honor.

JUSTICE O'CONNOR: Well, that wasn't sold originally.

MR. MACLEOD: I think--no, it was not sold--

JUSTICE O'CONNOR: By the manufacturer.

MR. MACLEOD: But I believe--

JUSTICE O'CONNOR: That was something that was caught--

MR. MACLEOD: That's correct.

JUSTICE O'CONNOR: --by the original buyer, and I would have thought [*41] surely that was other property.

MR. MACLEOD: The approach that was taken to the analysis of the tuna was a lost profit analysis, and I think that lost profits are derived from the benefit of the bargain, and that what was actually lost here was an expectancy, which is the equivalent of lost products, a simple consequential economic loss flowing from the--

JUSTICE O'CONNOR: The fish had been caught and put in the hold. That's other property. It's not an expectancy. They caught the fish, and they're worth something.

MR. MACLEOD: It was still necessary that that catch be delivered, and the catch--the catch represents an expectancy of money.

CHIEF JUSTICE REHNQUIST: Yes, but if the boat hadn't broken down they would have been delivered.

MR. MACLEOD: True.

JUSTICE GINSBURG: Did you petition on that question and we didn't--we didn't grant it, right, on the fish?

MR. MACLEOD: We did. We petitioned on the--several liability issues, Your Honor, as well as that.

JUSTICE BREYER: But if--I wondered if--what's bothering me basically is, I thought East River's like this: there's a glass on the table in the galley, and it's defective, and it cracks and breaks and people are cut, and there's a good claim that of course all these cut people can recover in tort, and then somebody says I also want tort recovery for the glass itself.

You say, wait a minute. When you have a defective glass you don't get the value of the glass in tort. I mean, it's the glass that was defective. Recover in contract or warranty for the defective glass.

And now that principle, which seems right in that case, seems to have gotten way out of control.

I mean, now suddenly we're talking about they have to recover in contract. They can't get a tort recovery for the fish that are hurt, and they--all these other things.

It doesn't seem right that it's so far out of control, but I'm having trouble thinking of what the limiting principle is.

It doesn't seem right to me when you buy a ship, under all these other appurtenance things there's a little bit of a glass or something somewhere that breaks.

You say you can't get recovery in tort for all these other things that have nothing to do with the glass. What's the line you draw?

MR. MACLEOD: The line that I would draw would be the object of the plaintiff's bargain, what the plaintiff bargained for and got, together with the economic loss that flows from the loss of that bargain.

JUSTICE SCALIA: But we've rejected that. I mean, we have accepted that even out of a contract context there can arise tort recovery. I mean, we've gone beyond what you've said. That's already been held.

What you want to do is simply eliminate the basic rule that a tort recovery can be had on the basis of a transaction that was a contract. Isn't that what you're arguing?

Your sole remedy has to be through the contract. I mean, that's not even--that's not even up for debate. We've held that.

JUSTICE STEVENS: And not only that, your point as I understand it is the sole remedy has to be against the person from whom you made the purchase, so that if a big company sells the ship to a small person who sells it to a third party, the third party can only sue the small person who may not be able to pay the judgment, but the person who manufactured the dangerous item is scott-free, under your theory.

MR. MACLEOD: Under my theory, but only as to the loss of the product and the economic losses that flow from the loss of the product. They are not scott-free as to personal injuries or damages to property of a third party, or--

CHIEF JUSTICE REHNQUIST: Well, why should there be a different rule for damages to property in a case like this and damage--personal injuries?

MR. MACLEOD: The commercial purchaser in the commercial context can protect themselves, whereas the injured person is probably suffering a personal disaster in their life and has no method of protecting themselves against the dangerous product, or a defective product, or likely any knowledge about the dangerous--

JUSTICE SCALIA: Ah, but if it was a personal injury of the buyer, then you'd say, tough luck, because you could have protected yourself. So it's not--

MR. MACLEOD: Oh, no, Your Honor.

JUSTICE SCALIA: --all personal injuries. It's just personal injuries of third persons.

MR. MACLEOD: No, Your Honor. If the buyer was personally injured--the human being buyer--

JUSTICE SOUTER: The only thing you're saying that contract controls I think is, the value of the--the identity of the product for the plaintiff's purpose when the plaintiff sues.

That's the only--that is the only point at which contract law is controlling on your theory, isn't it?

MR. MACLEOD: Contract law--yes, Your Honor.

JUSTICE SOUTER: All right, and that's why, as I understand it, you don't have a category--you don't make any categorical distinction between property loss and personal injury because in the case that I was giving you before you said, well, if the second skiff is injured as a result of the products defect while the product is owned by the person who bought the second skiff, the second skiff would be other property and would be recoverable. Isn't that right?

MR. MACLEOD: Yes.

JUSTICE SOUTER: And by the same token, if the second owner were injured personally, those personal injuries would be recoverable.

MR. MACLEOD: Absolutely.

JUSTICE SOUTER: So the only categorical distinction you're making is the categorical distinction that involves saying, you define what product is for the plaintiff's purpose by looking to the contract by which the plaintiff bought whatever it was the plaintiff bought. Is that correct?

MR. MACLEOD: That's correct.

JUSTICE SOUTER: Yes, okay.

MR. MACLEOD: And I would foreclose recovery for the loss of that thing, whatever it is, that's the object of the bargain and the economic losses that flow from the loss of the benefit of the bargain or the destruction of that thing.

JUSTICE SCALIA: And you acknowledge that the recovery for the skiff and the recovery for the personal injury in the hypothetical that Justice Souter just gave you would be tort recovery and not contract recovery.

MR. MACLEOD: Yes, Your Honor.

JUSTICE SCALIA: Well, that contradicts what you said earlier. That's why I don't really understand your argument.

I thought that this was what you were saying much earlier in the argument, but then in your quite recent exchange with the Chief Justice you said the exclusive recovery is under the contract.

You don't really believe that. There is tort recovery in some instances.

MR. MACLEOD: Yes. There are tort recoveries in some instances, personal injuries being the prime example. Thank you, Your Honor.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Macleod. The case is submitted. (Whereupon, at 11:15 a.m., the case in the above-entitled matter was submitted.)