Privity - or lack thereof – has traditionally been a strong defense for product manufacturers against claims by indirect purchasers of their products.  Most contract or warranty-based claims require some form of privity in order to establish liability.  However, the Texas Supreme Court recently issued an opinion in the context of a purchase of a used product that should remind companies of the need for diligence in protecting themselves against claims from downstream purchasers.

In MAN Engines & Components, Inc. v. Shows, the plaintiff purchased a used fishing yacht originally manufactured by the U.S. subsidiary of a German ship building company, MAN Nutzfahrzeuge Aktiengesellschaft (MAN).  Plaintiff purchased the yacht through a broker, and prior to the purchase had the yacht inspected by a third-party company, Ace Marine Diesel (AMD), that was an authorized service dealer for MAN.  At the time of purchase, plaintiff received a letter from AMD to the broker containing a three-year express warranty “on major components” in connection with the sale.  Subject to those express warranties, the yacht was sold to plaintiff “as is.”  Two years after the yacht was purchased, the engine failed while plaintiff was fishing due to the presence of a bad valve.  When the plaintiff filed a warranty claim for the valve, he was informed that the bad valve did not qualify as a “major component,” and therefore, was not covered by the warranty included with the purchase.  Although it was not covered by the warranty, MAN provided plaintiff with $5,800 from its “goodwill account” to help defray a portion of the $40,000 repair costs.  A year later, the engine failed again due to the same bad valve, and this time was unrepairable.  After again being told the valve was not covered by the warranty, plaintiff had to replace the entire engine at a cost of approximately $90,000.  After replacing the engine, plaintiff sued MAN for negligence, fraud, negligent misrepresentation, breaches of express and implied warranties, and deceptive trade practices.  The jury found for the plaintiff only on the claim for breach of the implied warranty of merchantability and awarded plaintiff damages to cover his cost in replacing the engine.

The trial count granted MAN’s motion for judgment notwithstanding the verdict, finding that plaintiff could not prevail on a breach of implied warranty claim due to a lack of privity with MAN.  The trial court also held that MAN had disclaimed its implied warranties at the time of the sale of the yacht to the original purchaser.  The appellate court reversed the trial court, holding that a purchaser of used goods is entitled to rely on an implied warranty from the manufacturer to the original purchaser because warranties pass with the product.  The appellate court refused to consider MAN’s express disclaimer defense because it was not included as an affirmative defense in MAN’s pleadings and was not tried by consent.  The appellate court also refused to consider the effect of the “as is” clause in the letter received by the plaintiff from AMD because MAN did not raise that argument during the trial or in the appeal.

The Texas Supreme Court affirmed the appellate court’s refusal to consider MAN’s express disclaimer defense due to the failure to include the defense as an affirmative defense in its pleadings.  Due to this “procedural” defect, the Court did not address the sufficiency of the disclaimer.  The Court then turned to the question of whether implied warranties terminate when a product is resold.  The Court held that the issue of privity is subject to a case-by-case factual review.  The Court held that whether a product is new or used is immaterial to the outcome because the focus of the inquiry depends on the state of the product when it left the manufacturer’s hands.  In other words, “[a] downstream purchaser who seeks to recover for economic loss under an implied-warranty theory, whether he buys the product new or used, seeks to hold the merchant accountable only for the state of the product when it passed to the first buyer.”  As a result, the Court held that MAN could not rely on the fact that the plaintiff was not the original purchaser to avoid liability for breach of the implied warranty of merchantability due to lack of privity.  The Court also rejected MAN’s claim that the plaintiff’s inspection of the yacht through AMD cut off its liability because an “inspection by an authorized service dealer for the manufacturer of the good is a reasonable and prudent examination under the circumstances,” and that inspection did not reveal the defect in the engine valve.  Finally, the Court rejected MAN’s argument that allowing subsequent purchasers to maintain breach of implied warranty claims would prevent manufacturers from effectively asserting defenses such as improper use or maintenance by the original purchaser.  The Court noted that the burden of proof is on the plaintiff to show that the good was defective at the time it left the manufacturer’s hands, and held that “[i]f the plaintiff can make his case, we see no reason why the fortuity of a downstream sale should excuse a manufacturing defect.”

The ability of subsequent purchasers to bring breach of implied warranty claims against manufacturers does not place additional burdens on companies, but it does magnify the need for companies to be vigilant in their warranty disclaimers. While the Texas Supreme Court stated that the burden is on the plaintiff to show that the good was defective at the time it left the manufacturer’s hands, when you are dealing with the presence of one or more users of the product between the manufacturer and the plaintiff, the proof sufficient to satisfy that burden becomes somewhat murky.  Depending on the product, it may be difficult to ascertain what effect, if any, an intermediate user’s use of the product had on the alleged defect.  Circumstantial evidence may be sufficient for the plaintiff to meet his or her burden, and the practical effect may shift the burden to the manufacturer to show that there was no defect at the time the product left its hands.  This case serves as a reminder to companies to ensure that their warranty disclaimer language is clear and sufficient to disclaim all implied warranties, and to make sure and include such disclaimers as an affirmative defense in all pleadings and at all stages of a case.  The ability to rely on privity-related defenses may not be eliminated, but courts may try to find a way to allow consumers to latch onto any theory available to maintain their claims.