The Colorado Supreme Court's decision in Bermel v. BlueRadios, Inc., 2019 CO 31, has slightly lessened the power of the economic loss rule (“ELR”) under Colorado law. After Bermel, the ELR is no longer a bar to statutory civil theft claims where the theft also constitutes a breach of contract. The decision expressly overturns Makoto USA v. Russell, 250 P.3d 625 (Colo. App. 2009) which reached the opposite holding. The change in ELR jurisprudence is welcome news to plaintiffs and may protect other statute-based tort claims from the economic loss rule.
What is the Economic Loss Rule?
The judge-made doctrine known as the economic loss rule has long been a bane to Colorado plaintiffs trying to recover tort damages where the claimed conduct also constituted a breach of contract.
The Colorado Supreme Court adopted the economic loss rule in Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256 (Colo. 2000). The policy reasons behind the rule were to “maintain the distinction between contract and tort law.” Alma, 10 P.3d at 1262. As stated in Alma, “a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.” Id. at 1264. In 2000, at the time of the Alma decision, the Court was concerned about defendants being subject to both contract and tort liability for the same economic injury. The Court reasoned that “limiting the availability of tort remedies for economic losses when a contract exists between the parties holds parties to the terms of their bargain and serves to encourage parties to confidently allocate risks and costs without fear that unanticipated liability may arise in the future”. Bermel, 2019 CO 31 at ¶ 20 (internal citations and quotations omitted).
In practice, the economic loss rule has precluded numerous business tort claims because the alleged tortious conduct was also a breach of contract with overlapping damages. The typical victims of the ELR were common law tort claims such as negligence and negligent misrepresentation when they arose in the context of a contract breach. In 2009, a division of the Colorado Court of Appeals went a step further by extending the reach of the ELR to nullify a statutory civil theft claim arising under 18-4-405, C.R.S. The case was Makoto USA v. Russell, 250 P.3d 625 (Colo. App. 2009). The Makoto opinion was controversial, creating a split of authority on its key holding. Nevertheless, the ELR persisted as the tort-killing weapon of choice for business litigators.
In its May 6, 2019 decision in Bermel v. Blue Radios, Inc., however, the Colorado Supreme Court finally put a leash on its runaway dog. The Court employed a separation of powers argument reasoning that because the economic loss rule is a judge-made doctrine, it would be improper for the courts to use the rule to nullify a cause of action created by the state legislature. In the majority opinion, Justice Marquez explained “it would be particularly inappropriate to apply the economic loss rule to bar statutorily imposed liability for intentionally wrongful conduct.” The wrongful conduct contemplated here is civil theft as codified at 18-4-405, C.R.S. The opinion expressly overturned Makoto USA v. Russell, 250 P.3d 625 (Colo. App. 2009) (holding the economic loss rule barred a claim of civil theft arising under 18-4-405, C.R.S.). This is a positive development for plaintiffs that resolves a legal controversy that has lingered for ten years.
Bermel was a contractor for BlueRadios. The employment agreement prohibited Bermel from taking company materials from the business premises unless the information was needed by Bermel to perform his job. The agreements required Bermel to return all company materials when his contracting relationship ended. Bermel, however, forwarded numerous emails and attachments to his personal email account without authorization. The emails contained proprietary company information, confidential information and trade secrets. Bermel later sued BlueRadios for breach of contract and other claims. BlueRadios filed counterclaims including civil theft pursuant to section 18-4-405 of the Colorado Revised Statutes. Bermel argued in his motion for directed verdict that the civil theft counterclaim was barred by the economic loss rule. The trial court denied the motion ruling the economic loss rule does not bar a cause of action arising from statute. The court of appeals affirmed the trial court's decision and explained, based on principles of separation of powers, that the “judicially constructed economic loss rule cannot preclude a statutory claim for civil theft.” Bermel, 2019 CO 31 at ¶ 12.
The Split Between Divisions of the Court of Appeals
In the Bermel opinion, the Court discusses the divisional split that began in 2008. In Rhino Fund, LLP v. Hutchins, 215 P.3d 1186 (Colo. App. 2008), a division of the court of appeals decided whether the ELR precluded an investor from suing a fund owner for civil theft. In Rhino Fund, the fund owner breached the investment contract by diverting funds that were required under the contract to be placed in escrow. The fund owner argued that the ELR barred the statutory theft claim. The appellate panel disagreed, following the reasoning of a Florida opinion which “decline[d] to allow the economic loss rule to abrogate a legislatively created scheme designed to extend a civil remedy to those harmed by alleged criminal activity.” Rhino Fund, 215 P.3d at 1194 (quoting Burke v. Napieracz, 674 So. 2d 756, 758-59 (Fla. Dist. Ct. App. 1996).
The next year, another division of the Court of Appeals reached the opposite holding regarding the reach of the ELR to abrogate statutory civil theft in the context of a breach of contract. In Makoto USA, the appellate panel distinguished the facts and holding of Rhino Fund by arguing the civil theft and contract breach in Makoto USA were inextricably intertwined, unlike Rhino Fund. In Makoto USA, the plaintiff entered into a contract to purchase the Makoto product line which included a design patent, a utility patent, and a trademark among other things. The plaintiff later discovered the utility patent had become unenforceable because the defendant failed to make required maintenance payments. The plaintiff sued for breach of contract, fraud and civil theft. The plaintiff prevailed on all three claims, including the civil theft claim, which pursuant to statute carried a penalty of treble damages and attorney fees. The appellate panel reasoned that the facts of the contract breach and civil theft claim were inextricably intertwined because the proofs of each claim were essentially identical. The division concluded the remedies under contract law provided the only remedies available because the economic loss rule abrogated a separate claim for civil theft.
The appellate panel further concluded there was no indication the legislative intent of the civil theft statute was to provide extra-contractual remedies. Makoto USA, 250 P.3d at 629. Further, the division proclaimed “[w]e conclude that applying the economic loss rule on the facts of this case to preclude a civil theft claim does not improperly deny plaintiff a statutory remedy. Plaintiff was not entitled to pursue a civil theft claim in this action for breach of contract.” Id.
Supreme Court Critical of the Makoto USA decision
Justice Marquez, writing for the majority, was expressly critical of the Makoto USA opinion. The Bermel opinion concludes the Makoto division “overstepped by looking beyond the text of the statute to discern the legislature's intent without engaging in even a perfunctory analysis of whether the language of the statute is ambiguous.” Bermel, 2019 CO 31 at ¶41.
The majority opinion also criticized the Makoto division for assuming the legislature would have stated its intent to expand contractual remedies if it meant to do so when it last updated the civil theft statute. However, as Justice Marquez points out, the civil theft statute was last updated in 1987, thirteen years before the economic loss rule was adopted in Colorado. As the Bermel opinion explains, “the General Assembly cannot be understood to have legislated against a background of common law that did not yet exist. Hence, by asking whether the legislature intended to expand contractual remedies when it enacted the rights in stolen property statute, the Makoto division's analysis erroneously assumed the legislature's awareness of policy rationales for an economic loss rule that had not yet been adopted.”
Justice Gabriel's Dissent
An interesting side note is that Justice Gabriel was a member of the Colorado Court of Appeals back in 2008. He was also one of the three appellate panelists who decided Makoto. In his lengthy and thoughtful dissent to the majority opinion in Bermel, Justice Gabriel warns of an expansion of extra-contractual remedies that could see future breach of contract claims recast as civil theft torts in order for plaintiffs to take advantage of the treble damages and attorney fee provisions of the civil theft statute. The dissent offers the following example: “a great many contract claims arise from a scenario in which one contracting party pays the other for goods or services and the other does not perform. Under the majority's analysis, the payor in this scenario could virtually always assert a civil theft claim (the payee allegedly stole the payor's money), allowing it to seek treble damages and attorney fees not otherwise available under the parties' contract.” Bermel, 2019 CO 31 at ¶66 (Gabriel, R., dissenting).
Justice Gabriel also argues that the holding in Bermel does exactly what it criticized Makoto for doing - overriding legislative intent. According to the dissent, the Bermel opinion creates conflict with section 7-74-108(1) of the Uniform Trade Secrets Act.
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