Schreiber Foods, Inc. v. Lei Wang

In the
United States Court of Appeals
For the Seventh Circuit
No. 10-3762
SCHREIBER FOODS, INC.,
Plaintiff-Appellant,
v.
LEI WANG,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 1:08-cv-00962-WCG—William C. Griesbach, Judge.
ARGUED JUNE 8, 2011—DECIDED JULY 5, 2011
Before POSNER, KANNE, and HAMILTON, Circuit Judges.
POSNER, Circuit Judge. In a diversity suit that presents
issues of Wisconsin common law, Schreiber Foods
charges Lei Wang with fraud. The district court granted
summary judgment in favor of the defendant on the
ground that the suit was barred by Wisconsin’s version
of the economic-loss doctrine of tort law.
Lei Wang is an American citizen of Chinese descent
who owns an automotive-parts supply business in Chi-

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2 No. 10-3762
cago. A cousin of hers who lives in China, Cade Wang,
runs a pair of trading companies, one of which is named
Mature Sky. (Originally a defendant along with Lei
Wang, Mature Sky was never served, and the district
judge dismissed it from the case, without prejudice.) To
simplify the opinion we’ll pretend that the two trading
companies are actually one, and call it Mature Sky.
Mature Sky did business with a large Chinese manu-
facturer of dairy products called Inner Mongolia Yili
Industrial Group (“Yili”). Cade Wang asked his cousin to
help him find a supplier in the United States of dairy
product ingredients. Lei Wang went to China and met
with executives of Yili to get a better idea of what Yili
wanted. Returning to the United States she approached
Schreiber, a leading supplier of dairy products and
dairy product ingredients, and told Juliet Prescod, the
Schreiber Global Sales Associate with whom she dealt,
that although she really didn’t know anything about the
dairy business, Yili was interested in buying ingredients
for dairy products in the United States through Mature
Sky. She didn’t claim to be an agent of Yili, however.
Prescod asked Lei Wang to supply her with credit infor-
mation about Yili. Lei Wang forwarded the request to
her cousin, who faxed what appeared to be (and for all
we know was) an authentic signed copy of Yili’s credit
statement.
Shortly afterward Mature Sky ordered a batch of a
whey protein concentrate from Schreiber at an agreed
price of $42,240. The transaction was a success, though
because of delay in transferring money from China Lei

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No. 10-3762 3
Wang paid Schreiber with a check issued by her
automotive-parts company; she was reimbursed by
Mature Sky.
A few months later Lei Wang negotiated with Prescod
the sale by Schreiber to Mature Sky of 200 metric
tons of “Demineralized Whey Powder 70%” (D70), an
ingredient in infant formula. Schreiber set a price of
$603,000. Lei Wang told Prescod that although the
price was stiff, Yili was willing to pay it; the unmis-
takable implication—given the prior course of dealing—
was that Mature Sky would be buying the D70 on behalf
of Yili. Schreiber claims that this was a misrepresenta-
tion; that Yili was not committed to buying Schreiber’s
D70 from Mature Sky.
Although Schreiber had contracted to sell D70 to
Mature Sky, it decided to substitute Reduced Minerals
Whey Blend (RMW-2) without telling Yili, Mature
Sky, or either Wang about the substitution. It claims that
RMW-2 is materially identical to D70—yet a previous
shipment by Schreiber of RMW-2, to another Chinese
company, a deal also handled by Prescod, had failed
to clear customs in China; the customs officials
had declared that it didn’t satisfy the Chinese hygienic
standard for whey powder. Schreiber didn’t reveal this
contretemps to Yili or the others. It did send a sample
of RMW-2 to Mature Sky (of course without revealing
that it wasn’t D70) before the sale of the 200 metric tons
was consummated, and Mature Sky accepted it. But the
sample had been hand-blended in a laboratory to make
it look and taste just like D70, rather than being taken
from an RMW-2 production line.

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4 No. 10-3762
We are disappointed that a company of Schreiber’s
standing (it has $3 billion in annual revenues) would
do what it did: substitute for the product specified in
its contract with Mature Sky, without disclosure, an
ingredient in infant formula that it knew had previously
been refused entry into China on hygienic grounds. In
any event the 200 metric tons were shipped, and appar-
ently they made it through Chinese customs. But Yili
refused to accept the product, on the ground that “the
protein was lower, fat was higher, and . . . the flavor is
different” from what it had expected. Schreiber was
never paid, and refused to accept the return of the
product, for which apparently there was no market
because it was perishable and had deteriorated.
Schreiber’s contract was with Mature Sky rather than
with Yili, but Schreiber is not at present pursuing any
remedies it might have against Mature Sky. Instead it
claims that Lei Wang’s representation to Prescod that
Yili had agreed to buy the 200 metric tons from Mature
Sky was fraudulent; and it notes that Cade Wang gave
Lei Wang a 17.5 percent ownership interest in Mature
Sky and thus a financial stake in Mature Sky’s profits,
though she claims to have been unaware of the gift.
Without attempting to resolve any factual disputes, the
district judge ruled that even if Lei Wang did defraud
Schreiber, its suit against her was barred by the economic-
loss doctrine; whether this ruling was correct is the
only issue we need address.
The aspect of the doctrine that is applicable to this
case bars tort liability when the plaintiff has a contract

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No. 10-3762 5
with the defendant and contract law provides an ade-
quate remedy for the type of injury alleged. Courts
prefer parties to govern their relations through privately
negotiated contracts when that is feasible (that is, when
transaction costs—the costs of making an effective con-
tract—are low), provided there are no third-party ef-
fects, as there are for example when the performance of
a contract causes pollution to third parties. Contracting
parties know their business better than a court can
and so can allocate risk and responsibility between them
more intelligently than a court could do. “[T]ort law is
a superfluous and inapt tool for resolving purely com-
mercial disputes. We have a body of law designed for
such disputes. It is called contract law . . . . [C]om-
mercial disputes ought to be resolved according to the
principles of commercial law rather than according to
tort principles designed for accidents that cause
personal injury or property damage. A disputant should
not be permitted to opt out of commercial law by
refusing to avail himself of the opportunities which that
law gives him.” Miller v. United States Steel Corp., 902
F.2d 573, 574-75 (7th Cir. 1990) (Wisconsin law); see
Daanen & Janssen, Inc. v. Cedarapids, Inc., 573 N.W.2d
842, 847-50 (Wis. 1998).
This branch of the economic-loss doctrine stems from
Seely v. White Motor Co., 403 P.2d 145, 150-51 (Cal. 1965).
The plaintiff in that case had bought a truck that turned
out to have defective brakes. The truck overturned but
the plaintiff was not hurt; nor was there damage to
any other property. He sued in both contract and tort to
recover repair costs and lost profits. The court held that

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6 No. 10-3762
he was limited to suing for breach of warranty. Imposing
tort liability, which would be strict liability for a
product defect, would have prevented the parties to the
sale of a product from agreeing between themselves on
the allocation of the risk of a purely commercial loss, and
of the responsibility for trying to minimize it. “Had
defendant not warranted the truck, but sold it ‘as is,’ it
should not be liable for the failure of the truck to serve
plaintiff’s business needs.” Id. at 150. “To allow [the
plaintiff] to use tort law in effect to enforce an oral war-
ranty would unsettle contracts by exposing sellers to the
risk of being held liable by a jury on the basis of self-
interested oral testimony and perhaps made to pay puni-
tive as well as compensatory damages. This menace
is averted by channeling disputes into warranty (con-
tract) law, where oral warranties can be expressly dis-
claimed, or extinguished by operation of the parol
evidence rule.” All-Tech Telecom, Inc. v. Amway Corp., 174
F.3d 862, 866 (7th Cir. 1999) (Wisconsin law).
But suppose the seller of the truck, knowing it was
defective, had told the plaintiff that it was in mint condi-
tion, and, thus reassured, the plaintiff had waived all
warranties in exchange for a lower price. That would be
a case in which a person had been induced to sign a
contract (or agree to particular provisions in a contract)
by fraud on the part of the other party. Many state
courts don’t apply the doctrine of economic loss in such
a case but instead permit the defrauded party to sue in
tort. Without such an exception “prospective parties to
contracts will be able to obtain legal protection against
fraud only by insisting that the other party to the

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No. 10-3762 7
contract reduce all representations to writing, and
so there will be additional contractual negotiations,
contracts will be longer, and, in short, transaction costs
will be higher. And the additional costs will be incurred
in the making of every commercial contract, not just
the tiny fraction that end up in litigation.” Id. at 867; see
also Steven C. Tourek, Thomas H. Boyd & Charles J.
Schoenwetter, “Bucking the ‘Trend’: The Uniform Com-
mercial Code, the Economic Loss Doctrine, and Common
Law Causes of Action for Fraud and Misrepresentation,”
84 Iowa L. Rev. 875, 891-95 (1999). True, the parties
could include a clause warranting that they had made
no intentional misrepresentations in the course of nego-
tiating the contract. But the negotiation of such a war-
ranty would be complicated and engender suspicion.
The unavailability of punitive damages in contract cases
would also be a problem; because fraud is concealed,
punitive damages may be necessary for deterence. With
a tort suit for fraud as an option in the background of the
negotiations, parties can negotiate a limitation of lia-
bility for fraud if they want, as in Extra Equipamentos
e Exportação Ltda. v. Case Corp., 541 F.3d 719, 722-26
(7th Cir. 2008).
Several states, however, including Wisconsin, recog-
nize only a very narrow fraud exception to the denial of
recovery for economic loss. (Exceptions that vary from
state to state are a common feature of the economic-
loss doctrine. See Anthony Niblett, Richard A. Posner &
Andrei Shleifer, “The Evolution of a Legal Rule,” 39 J. Legal
Stud. 325, 334-36 (2010).) These states hold that the fraud
must be “extraneous” to the contract, rather than “inter-

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8 No. 10-3762
woven” with it, to be actionable as a tort. Wickenhauser
v. Lehtinen, 734 N.W.2d 855, 868-69 (Wis. 2007);
Kaloti Enteprises, Inc. v. Kellogg Sales Co., 699 N.W.2d 205,
219-20 (Wis. 2005); Digicorp, Inc. v. Ameritech Corp., 662
N.W.2d 652, 665-66 (Wis. 2003); John J. Laubmeier, Com-
ment, “Demystifying Wisconsin’s Economic Loss Doc-
trine,” 2005 Wis. L. Rev. 225, 237-40; see also Huron Tool &
Engineering Co. v. Precision Consulting Services, Inc., 532
N.W.2d 541, 544-45 (Mich. App. 1995).
The extraneous versus interwoven formula is not pellu-
cid, but the facts and analysis in the Kaloti Enterprises
case help us to understand it. Kellogg sold cereal to a
wholesaler, Kaloti, knowing that because Kaloti was
a wholesaler it was buying the cereal in order to resell
it to retailers. Kellogg did not tell Kaloti that it had
decided to sell cereal directly to Kaloti’s principal cus-
tomers. As a result of that decision, those customers
refused to buy from Kaloti, preferring to buy directly
from Kellogg now that they could. The court held that
Kellogg’s implied representation to Kaloti that the latter
could resell the cereal (at a remunerative price: doubtless
at some price Kaloti could have unloaded the cereal on
the customers, who were not, so far as appears, required
to buy directly from Kellogg) was an “extraneous” fraud.
The implied representation did not concern Kellogg’s
performance of the contract, as it would have done had
it concerned the quality or character of the product,
but rather “a matter whose risk was never contemplated
to be a part of the contract”; it was “not a matter that
was dealt with in the contract, nor would one expect it
to be dealt with in the contract.” Kaloti Enteprises, Inc. v.
Kellogg Sales Co., supra, 699 N.W.2d at 220, 228.

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No. 10-3762 9
The critical phrase is the last—“nor would one expect
it to be dealt with in the contract.” The rationale for the
broader fraud exception that a number of other states
have embraced is that fraud places the other party to
the contract at an information disadvantage. Now it is
true that parties to a contract often have unequal infor-
mation going in, and ordinarily a party with superior
information is entitled to exploit it in negotiations.
(For a famous example, see Laidlaw v. Organ, 15 U.S.
(2 Wheat.) 178 (1817).) Otherwise businessmen’s incen-
tives to obtain commercially valuable information, and
by doing so speed the adjustment of prices to new con-
ditions of supply and demand, would be impaired.
Emerald Investments Limited Partnership v. Allmerica Finan-
cial Life Ins. & Annuity Co., 516 F.3d 612, 616-17 (7th Cir.
2008). But that is different from obtaining an informa-
tion advantage over the other party to the contract by
fraud.
Yet as the Wisconsin courts recognize, not all frauds in
a contractual setting have that effect, and the fraud
alleged in this case is a good example of one that does
not. The falseness of a false representation by Lei Wang
that Yili wanted the 200 metric tons of (supposed)
D70 would undoubtedly reduce the probability that
Schreiber would ever collect the $603,000 sale price. But
that probability was always well below 100 percent. The
contract was with Mature Sky, an obscure middleman
in a foreign country, and had been procured for the
trader by the owner of a company in a business (auto
parts) unrelated to that of Schreiber or Mature Sky. The
trader was expecting to resell the product to another
Chinese company, one with which Schreiber had no

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10 No. 10-3762
contract; and as far as Schreiber knew, if that company
(Yili) refused to buy the product from Mature Sky, the
latter would be unable to sell it to anyone else, and if it
became stuck with the product it might be unable or
unwilling to pay Schreiber. And finally Schreiber did not
ship the product that it had contracted to sell, and thus
assumed the risk that the product it did ship would turn
out not to be salable in China at all, which would
justify Mature Sky in refusing to accept it; and if it
refused, the product, being perishable, might be worth-
less and so a dead loss to Schreiber—as it turned out to be.
Schreiber acted recklessly in failing to take steps to
protect itself against a range of risks of nonpayment, of
which fraud by Lei Wang, one of the go-betweens, was
only one. The risk of nonpayment was so salient a risk
that one would expect it to have been dealt with in the
contract. It’s not as if contract law contains no
resources for dealing with such a matter. Schreiber could
have done many things to protect itself, such as
requiring Mature Sky or Yili to obtain a letter of credit
for Schreiber’s benefit guaranteeing payment by Mature
Sky; or obtaining a contractual guaranty from Yili; or
at the very least warning Mature Sky that it was
shipping RMW-2 rather than D70. Schreiber failed in
negotiating the contract to take elementary precautions
for an international shipment and now wants the
judiciary to bail it out.
Schreiber’s conduct thus came within the “interwoven”
exception to Wisconsin’s fraud exception to the doctrine
of economic loss and more broadly within the theory

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No. 10-3762 11
behind the doctrine, which as we said is to require
private ordering of commercial relations where feasible
and not harmful to third parties. Just as “where there
are well-developed contractual remedies, such as the
remedies that the Uniform Commercial Code (in force
in all U.S. states) provides for breach of warranty of the
quality, fitness, or specifications of goods, there is no
need to provide tort remedies for misrepresentation,” All-
Tech Telecom, Inc. v. Amway Corp., supra, 174 F.3d at 865,
so when there are well-developed contractual means
of protecting against risk of nonpayment there is
likewise no need to provide tort remedies.
Schreiber invokes a second exception in Wisconsin law
to the economic-loss doctrine, however, and that is the
doctrine’s nonapplicability to contracts for the sale
of services rather than of goods. E.g., Insurance Co. of
North America v. Cease Electric Inc., 688 N.W.2d 462, 467-72
(2004). Most states do not apply the doctrine to pro-
viders of specified professional services, such as doctors,
lawyers, and architects. See, e.g., Bilt-Rite Contractors, Inc.
v. Architectural Studio, 866 A.2d 270, 284-85 (Pa. 2005)
(architects); Collins v. Reynard, 607 N.E.2d 1185, 1186-87
(Ill. 1992) (lawyers); Tommy L. Griffin Plumbing & Heating
Co. v. Jordan, Jones & Goulding, Inc., 463 S.E.2d 85, 88-89
(S.C. 1995) (engineers); Chew v. Paul D. Meyer, M.D., P.A.,
527 A.2d 828, 831-32 and n. 2 (Md. App. 1987) (doctors).
There is often an extreme asymmetry of information
between seller and buyer when the seller is the provider
of a professional service. Many clients don’t under-
stand professional services and so cannot negotiate ef-
fectively for protection against providers’ negligence.

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12 No. 10-3762
That is why the law imposes fiduciary duties on such
providers, duties that go beyond the duty of care
imposed by a negligence standard and require the
provider to treat his customer as well as he would want
to be treated himself.
The Supreme Court of Wisconsin has decided to
simplify the exception by extending it to all providers of
services, not just professionals. Insurance Co. of North
America v. Cease Electric Inc., supra, 688 N.W.2d at 472;
Shister v. Patel, 776 N.W.2d 632, 637 (Wis. App. 2009);
Andrew Gray, Note, “Drowning in a Sea of Confusion:
Applying the Economic Loss Doctrine to Component
Parts, Service Contracts, and Fraud,” 84 Wash. U. L. Rev.
1513, 1524-27 (2006). This opens the way for Schreiber’s
argument that Lei Wang is not protected by the doc-
trine because she was providing a service to Schreiber
rather than buying goods from it.
The defendant in Shister v. Patel was a real estate
broker; Lei Wang was a kind of broker. But the applica-
tion of the doctrine to her would be perverse. Rather
than being more knowledgeable about the subject mat-
ter of the contract than Schreiber, she was less knowl-
edgeable. Anyway the Wisconsin courts have already
tumbled to the fact that a literal interpretation of the
exception would be untenable because every sale of
goods involves the provision of service, if only by the
employees or other agents who negotiate the contract,
supervise performance, and so forth, and so the excep-
tion would swallow the rule (though often the employee
or other agent, but especially an employee, would be

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No. 10-3762 13
judgment proof and so not worth suing). The Supreme
Court of Wisconsin has held therefore that the services
exception applies only if the contract is predominantly
one for services, Linden v. Cascade Stone Co., 699 N.W.2d
189, 193-94 (Wis. 2005)—which the contract between
Schreiber and Mature Sky was not. It was a contract for
the sale of goods. The provision of services was limited
to services normally involved in such sales, such as, in
this case, finding a seller of a product desired by
the agent’s principal.
Imposing liability on Lei Wang would not correct an
unjustifiable information asymmetry; it would plug no
other loophole in contract law either, since, as we said
earlier, Schreiber could easily have protected itself con-
tractually against the risk of nonpayment that it seeks
ex post to shift to Lei Wang by invoking tort law.
AFFIRMED.
7-5-11

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