PREGERSON, Circuit Judge:
Twin Disc, the manufacturer of components used in diesel engines, appeals from a $254,047.06 judgment entered against it in favor of the Alaskan Enterprise, a fishing vessel. A ruptured hose on a reduction gear manufactured by Twin Disc caused the gear unit to overheat, disabling the Alaskan Enterprise's port engine while the vessel was sailing in the Bering Sea. The district court held Twin Disc strictly liable for the Alaskan Enterprise's repair costs and lost profits. We affirm.
Twin Disc supplied a reduction gear unit that was incorporated in a diesel engine installed on the Alaskan Enterprise, a 150 foot, steel-hulled fishing vessel. An essential component of the reduction gear was a hose that carried lubricating oil between the manifold and oil pump of the gear unit. Twin Disc did not manufacture the hose, but selected it, and installed it on the reduction gear unit. The district court found that Twin Disc had not stress-tested the hose. The district court also found that Twin Disc's reduction gear unit was designed to accommodate a temperature sensor, which could be plugged into a system that would warn the crew when the gear unit was overheating. Twin Disc did not install the temperature sensor on the reduction gear, but shipped it separately for later installation. The court found that Twin Disc did not provide clear and adequate instructions regarding the installation of the temperature sensor, and as a result, the device was never installed on the Alaskan Enterprise.
In 1978, during a fishing trip in Alaskan waters, the reduction gear hose ruptured. Oil drained out of the system. The gear overheated and became immobilized, disabling the port engine. The vessel was only two hours out of Kodiak when the hose ruptured, and was able to return to port on one engine. Because of the reduction gear's failure, the Alaskan Enterprise was out of service for a sixteen-day period at the height of the 1978 king crab season, one of the most successful in Alaskan crab industry history.
The reduction gear unit was repaired and the Alaskan Enterprise operated without incident until the spring of 1980, when mechanics during routine maintenance discovered a crack in the metal casing of the reduction gear. The district court found that the cracked casing was a result of the 1978 overheating incident. The casing had to be replaced, resulting in more repair bills.
Emerson G.M. Diesel, the company doing the repair work, brought suit in admiralty to foreclose a lien on the vessel because the Alaskan Enterprise, for reasons not clear from the record, failed to pay the repair bill. The Alaskan Enterprise then brought a third-party claim against Twin Disc for indemnity. The main action was settled prior to trial, leaving the third-party claim. The Alaskan Enterprise elected to proceed in admiralty and, over Twin Disc's objection, a court trial was held.
The district court found Twin Disc strictly liable and awarded the Alaskan Enterprise damages for both repairs and lost fishing profits. Twin Disc appeals, contending (1) that the district court erred in denying a jury trial; (2) that the district court erred in holding that the Alaskan Enterprise could recover for purely economic losses — e.g., the cost of repairs and lost profits; and (3) that the district court's finding of fact that Twin Disc supplied the defective hose was clearly erroneous. The Alaskan Enterprise cross-appeals, contending that the district court should have found Twin Disc liable on negligence and breach of warranty theories as well as under the doctrine of strict liability in tort. We address these contentions in order.
II. Denial of Jury Trial
The Alaskan Enterprise originally labelled its third-party claim against Twin Disc as one "in admiralty and at law," and demanded a jury trial.
The procedure followed by the Alaskan Enterprise in withdrawing its jury demand complied with Rules 9(h) and 15, Fed.R.Civ.P. When a claim is cognizable either at law or in admiralty, the pleader may elect to proceed in admiralty, without a jury, by filing an identifying statement under Rule 9(h). The election need not be made in the original pleading. Rule 9(h) provides that a pleading may be amended to add or withdraw such an identifying statement in accordance with Rule 15. Rule 15 provides that a party may amend its pleading once as a matter of course before a responsive pleading is served (or if a responsive pleading is not required, within 20 days after service) or by leave of court or by written consent of the adverse party. Rule 15 provides further that leave to amend shall be freely given where justice so requires.
Twin Disc argues, however, that Rule 38(d) Fed.R.Civ.P. — which provides that "[a] demand for trial by jury ... may not be withdrawn without the consent of the parties" — prohibits the Alaskan Enterprise from withdrawing its jury demand without Twin Disc's consent. Twin Disc relies on a Fifth Circuit decision, Johnson v. Penrod Drilling Company, 469 F.2d 897, 903 (5th Cir.1972), reh'g granted, 478 F.2d 1208 (5th Cir.1973), reh'g, 510 F.2d 234 (5th Cir.), cert. denied, 423 U.S. 839, 96 S.Ct. 69, 46 L.Ed.2d 58 (1975), overruled on other grounds, Culver v. Slater Boat Co., 688 F.2d 280, 283 (5th Cir.1982). In Johnson, the Fifth Circuit held that injured seamen who asserted both diversity jurisdiction and Jones Act jurisdiction could not, through the device of amending their complaint to state admiralty and maritime claims, effectively withdraw their demand for a jury trial without obtaining the defendant's consent.
We considered this same issue in McCrary v. Seatrain Lines, Inc., 469 F.2d 666 (9th Cir.1972) and came to the opposite conclusion. In McCrary, a shipowner filed a third-party complaint for indemnity against a stevedoring company. At the pre-trial conference, the district judge determined that the shipowner's indemnity claim lay solely in admiralty, and therefore rejected the shipowner's proffered Rule 9(h) amendment as redundant. On appeal, we held that the indemnity action did not lie solely in admiralty, but that the district court's denial of a jury trial was proper nonetheless, because the court should have accepted the 9(h) amendment and allowed the action to proceed in admiralty without a jury. We flatly rejected the stevedoring company's argument that the court could not permit an amendment which would eliminate a jury trial without the stevedore's consent. We said:
469 F.2d at 668.
We find that under McCrary, the Alaskan Enterprise could amend its third-party
In short, the situation here is almost identical to the situation in McCrary where we expressly held that the plaintiff could avoid a jury trial by electing to proceed in admiralty. Twin Disc's argument that denial of a jury trial requires reversal lacks merit.
III. Recovery of Economic Damages
The district court found that the Alaskan Enterprise was entitled to $227,919.64 in lost fishing profits and $32,159.70 in repair costs, less a $6,032.28 reimbursement received from General Motors. Twin Disc and amicus Caterpillar Tractor Company contend that the district court erred in awarding damages for purely economic losses in a strict liability admiralty action. We disagree and affirm the district court.
The general rule is that economic losses, e.g., loss of profits and repair costs, are not recoverable by an aggrieved buyer against a nonperforming seller under tort theories of negligence or strict liability because the buyer's rights are limited to warranty law. See Jones & Laughlin Steel v. Johns-Manville Sales, 626 F.2d 280, 287-88 n. 13 (3d Cir.1980) (extensive citation of authorities); S.M. Wilson & Co. v. Smith International, Inc., 587 F.2d 1363, 1376 (9th Cir.1978). The rule in admiralty is different. Recovery of economic losses is permitted against a manufacturer of defective goods when liability is based on negligence. Jones v. Bender Welding & Machine Works, Inc., 581 F.2d 1331, 1337 (9th Cir.1978). "In admiralty it is well settled that fishing vessel owners and commercial fishermen may recover for lost fishing profits under the general maritime law of negligence." Id. See also Union Oil Co. v. Oppen, 501 F.2d 558, 567 (9th Cir.1974) (holding that commercial fishermen whose harvests were depleted in the tragic Santa Barbara oil spill could recover lost profits from Union Oil Company in a negligence action); Carbone v. Ursich, 209 F.2d 178, 182 (9th Cir.1953) (members of crew of fishing vessel recovered lost profits from owners of another vessel that negligently fouled their nets). The rationale for the rule allowing recovery of lost profits in an admiralty negligence action is "the familiar principle that seamen are favorites of admiralty and their economic interests entitled to the fullest possible legal protection." Id.
There is no federal circuit authority, however, deciding whether economic losses are recoverable as damages in admiralty actions based on strict liability.
Allowing an admiralty plaintiff to recover lost profits promotes the primary purpose of the strict liability doctrine which is to protect consumers from losses caused by defective and unreasonably dangerous products. Liability is imposed on the manufacturer because the manufacturer is in a better position than the purchaser or consumer to spread the cost of insuring against losses caused by the defective product and to prevent such products from entering the stream of commerce in the first place. See W. Prosser, Law of Torts § 75 (4th ed. 1971). Extending the scope of the manufacturer's liability to economic losses would provide manufacturers with additional incentive to spread the cost of insuring against losses resulting from product defects, as well as an incentive for manufacturers to produce safer products.
Twin Disc and amicus curiae argue, however, that this court should adopt the rule followed in most states
Id. at 18, 45 Cal.Rptr. at 23, 403 P.2d at 151.
We decline to follow Seely in the case at hand for a number of reasons. First, its rule against awarding economic loss has become riddled with exceptions. A plaintiff can now recover economic losses if he has also suffered some personal injury or property damage. See, e.g., Hales v. Green Colonial, Inc., 490 F.2d 1015 (8th Cir.1974). Requiring recovery for economic loss to depend on the presence of personal injury or property damage is an arbitrary distinction leading to opposite results in cases that are virtually the same. For instance, if the reduction gear unit in the Alaskan Enterprise had caused some physical damage to the ship itself or its crew members, the appellants would have unquestionably recovered their lost profits. Yet, because only the unit itself was damaged, Seely if followed would operate to deny the recovery of lost profits, even though the overall loss in both cases would be essentially equivalent.
Second, Seely seems to regard economic loss as inherently different from property damage or personal injury and therefore not properly redressed by tort liability.
Finally, we disagree with the Seely court's concern that providing for the recovery of economic loss in strict liability would expose manufacturers to "damages of unknown and unlimited scope." 63 Cal.2d at 17, 45 Cal.Rptr. at 22-23, 403 P.2d at 150-51. The manufacturer knows the purpose for which its product is to be used and by whom. Although all purchasers are not identical, the manufacturer can determine within a reasonable range of predictability the ramifications of a product failure for the ordinary user. Having this information, the manufacturer can include in its costs the expense of adequate insurance coverage.
IV. The Court's Finding that Twin Disc Supplied the Hose.
A products liability plaintiff must prove that the product was defective when it left the hands of the manufacturer and that the product reached the user or consumer without substantial change. Restatement (Second) of Torts § 402A (1965). The district court found that Twin Disc selected and supplied the defective hose and that the hose was not altered or changed when it reached the consumer. Twin Disc argues that these findings are clearly erroneous. We have reviewed the record and disagree.
Twin Disc also argues that the only explanation for the district court's findings is that the court incorrectly assigned the burden of proof. There is no evidence in the record that the district court made a mistake of law regarding the burden of proof. Twin Disc simply infers that the district court used an incorrect burden of proof from the fact that its version of the facts was not accepted. Alaskan Enterprise introduced adequate evidence to prove that Twin Disc supplied a defective hose that was not damaged or altered after it left Twin Disc's hands. Although Twin Disc presented conflicting evidence, it does not appear that the only way the district court could have found for Alaskan Enterprise was by using an erroneous burden of proof.
Moreover, even assuming that the hose in question was not supplied by Twin Disc, or that the hose was altered or damaged after leaving Twin Disc's hands, the district court found that Twin Disc was liable on another account. The court found that Twin Disc followed the practice of not installing a temperature-sensing device on the reduction gear, but rather shipped the device separately for later installation. The district court found that Twin Disc supplied no clear instructions warning the purchaser to install the temperature sensor on the gear unit. The evidence showed that the Alaskan Enterprise was equipped with a sophisticated warning system that could have easily accepted the temperature sensor. Had the temperature sensor been installed, the crew would have received advance warning of the reduction gear's overheating and thus could have prevented the damage. Twin Disc does not defend its practice of shipping the temperature gauge separately, or its failure to provide clearer instructions. Rather, Twin Disc says that there was no proof that installation of the sensor would have warned the crew and prevented damage to the gear. The inference drawn by the district court that such installation would have avoided the damage is commonsensical and not clearly erroneous.
V. The Cross-Appeal
The Alaskan Enterprise presented three theories of recovery to the district court — strict liability, negligence, and breach of implied warranties. The district court held in favor of the Alaskan Enterprise on the strict liability theory. The court's conclusions of law do not state whether the Alaskan Enterprise was entitled to recover based on the alternate theories of negligence and breach of implied warranties.
In view of our holding that economic losses such as lost profits and repair expenses are recoverable in admiralty strict liability actions, the district court's failure to reach a decision on the other theories is harmless.
When the main action was settled and Emerson G.M. Diesel dropped out of the law suit, complete diversity existed between the remaining parties — Alaskan Enterprise and Twin Disc. Thus, Alaskan Enterprise's action for indemnity against Twin Disc was cognizable both at law and in admiralty.
On the other hand, damages for the loss of use of a vessel were held recoverable in Miller Industries, Inc. v. Caterpillar Tractor Co., 473 F.Supp. 1147, 1156 (S.D.Ala.1979), vacated on other grounds, 516 F.Supp. 84 (S.D.Ala.1980). In that case, the court found that plaintiffs were entitled to recover for loss of use of a vessel where the manufacturer of a malfunctioning engine was held strictly liable.
A handful of states have followed the Santor approach. See City of LaCrosse v. Schubert, Schroeder & Assoc., Inc., 72 Wis.2d 38, 240 N.W.2d 124, (1976); Berg v. General Motors Corp., 87 Wn.2d 584, 555 P.2d 818 (1976); Iacono v. Anderson Concrete Corp., 42 Ohio St.2d 88, 326 N.E.2d 267 (1975).