The Hall & Evans Rocky Mountain Litigation Reporter is a periodic online newsletter directed to a select group of individuals and organizations. In this edition, we summarize recent decisions from the Colorado Supreme Court and Court of Appeals.

 Topics In This Issue

Economic Loss Rule Does Not Apply to Tort Claims Arising from Breach of Independent Duty
Colorado Governmental Immunity Act Does Not Bar Claims for Injunctive Relief from Future Injury
Placing Product Into the Stream of Commerce, with Expectation that Product Will Be Delivered Through Sales Channels to Colorado, Provides Sufficient Basis for Colorado Court to Exercise Personal Jurisdiction Over Manufacturer
State Law Preempts Local Regulation of Hydraulic Fracturing


Economic Loss Rule Does Not Apply to Tort Claims Arising from Breach of Independent Duty

John VanRees sells crystals through a website.  VanRees contracted with Unleaded Software to perform web-related services and to design additional websites. After Unleaded missed deadlines and failed to deliver the promised services, VanRees sued Unleaded, asserting multiple tort claims, a civil theft claim, three breach of contract claims, and a claim for violation of the Colorado Consumer Protection Act. Granting Unleaded’s motion to dismiss, the trial court dismissed all but the contract claims, on which the jury found in VanRees’ favor. VanRees appealed the dismissal of his other claims, and the Court of Appeals affirmed, holding that the tort and civil theft claims were barred by the economic loss rule because they were related to promises memorialized in the contract.  The Colorado Supreme Court granted VanRees’ petition for certiorari and issued a decision affirming in part and reversing in part the opinion of the Court of Appeals.

The critical question, according to the Colorado Supreme Court, is not whether VanRees’ tort claims are related to the promises that eventually formed the basis of the contract, but whether the tort claims flow from some independent duty under tort law. VanRees’ tort claims alleged that Unleaded induced him to enter into a contractual agreement with false promises that it could perform web-related services. The Supreme Court noted that these pre-contractual misrepresentations were distinct from the contract itself and could form the basis of an independent tort claim. The Supreme Court therefore reversed that portion of the Court of Appeals’ opinion which held that VanRees’ tort claims were barred by the economic loss rule.  Future litigants will need to determine whether the Supreme Court is moving away from the rule stated in earlier cases, that to survive the economic loss rule, the “independent duty” forming the basis of the tort claims must not be memorialized in the contact between the parties. Full text of opinion . . . VanRees v. Unleaded Software 2016 CO 51 (June 27, 2016).

Colorado Governmental Immunity Act Does Not Bar Claims for Injunctive Relief from Future Injury

Jessie Lipschuetz challenged the validity of a rooming and boarding permit that the City of Denver issued to Open Door Ministries.  Lipschuetz, who owns property adjacent to Open Door’s propert, filed claims against the City and Open Door seeking to revoke the permit. Open Door filed crossclaims against the City, seeking declaratory and injunctive relief to prevent the revocation of its permit. The trial court concluded that the City should not have issued the permit, but stayed the enforcement of its order to revoke the permit until Open Door’s crossclaims were resolved.  Several months later, the trial court granted summary judgment in favor of Open Door on its crossclaims.

Lipschuetz appealed from the trial court’s ruling, arguing that Open Door’s crossclaims against the City were barred by the Colorado Governmental Immunity Act (“CGIA”), C.R.S. §24-10-106.  Lipschuetz argued that because Open Door did not notify the City prior to filing its crossclaims, as required by the CGIA, the trial court lacked subject matter jurisdiction over the crossclaims.  The Court of Appeals agreed and reversed the trial court.  Open Door Ministries then petitioned the Colorado Supreme Court for discretionary review, which the Supreme Court granted.

The Supreme Court then reversed the Court of Appeals, finding that the Court of Appeals failed to consider whether, at the time of filing its crossclaims, Open Door had suffered an injury that would subject its crossclaims to the CGIA.  The Supreme Court concluded that the CGIA did not apply to Open Door’s request for prospective injunctive relief to prevent future injury.  Because Open Door had not suffered any injury before it filed its crossclaims, the CGIA did not bar its crossclaims seeking prospective relief from future injury, and the trial court had jurisdiction over the crossclaims.  Full text of opinion . . . Open Door Ministries v. Lipschuetz, 2016 CO 37 (May 23, 2016).

Placing Product Into the Stream of Commerce, with Expectation that Product Will Be Delivered Through Sales Channels to Colorado, Provides Sufficient Basis for Colorado Court to Exercise Personal Jurisdiction Over Manufacturer

Align Corporation Ltd. is a Taiwanese company that manufactures and sells remote control model helicopters.  Align has no corporate presence in the United States, but engages distributors in the United States who sell Align’s products to retailers who, in turn, sell their products to consumers.  When the incident at issue arose, Align had engaged four distributors in the United States, including Horizon Hobby, Inc.

Plaintiff Allister Boustred purchased a remote control model helicopter manufactured by Align and distributed by Horizon.  Boustred was then injured when operating the helicopter.

Boustred filed strict product liability and negligence claims against Align and Horizon in Larimer County District Court.  After Boustred served Align in Taiwan, Align asked the trial court to quash service and dismiss all claims against it for lack of personal jurisdiction.  The trial court found that it could assert personal jurisdiction over Align and denied the motion.  The trial court later granted Align’s motion to certify interlocutory appeal, which the Court of Appeals accepted. After extensive review, the Court of Appeals affirmed the trial court’s decision that it could assert personal jurisdiction over Align.

Colorado’s long arm statute confers jurisdiction to the maximum extent allowable by the Due Process Clauses of the United States and Colorado Constitutions.  To meet the requirements of due process, a defendant must have sufficient minimum contacts with the forum state so that he may reasonably foresee being sued in the courts of that state.  Because Boustred’s complaint alleged only that the trial court had specific jurisdiction over Align, and not general jurisdiction, the court did not need to address the question of general jurisdiction.

Specific jurisdiction exists when the injuries resulting in litigation arise out of and are related to a defendant’s activities that are significant and purposely directed at residents of the forum state.  Evaluating minimum contacts for specific jurisdiction involves a two-part test, assessing (1) whether defendant purposely availed itself of the privilege of conducting business in the forum state, and (2) whether the litigation arises out of the defendant’s forum-related contacts.  Once the plaintiff establishes that the defendant has the requisite minimum contacts with the forum state, the next inquiry involves a determination of whether the court’s exercise of personal jurisdiction over the defendant is reasonable and comports with notions of fair play and substantial justice. Align argued that merely placing a product into the stream of commerce, without more, is insufficient for a Colorado court to assert personal jurisdiction over it. The Court of Appeals disagreed.

In World-Wide Volkswagen v. Woodson, 444 U.S. 286 (1980), the United States Supreme Court held that a forum state does not exceed its powers under the Due Process Clause if it asserts personal jurisdiction over a corporation that delivered its products into the stream of commerce with the expectation that they will be purchased by consumers in the forum state.  Since World-Wide Volkswagen established the stream of commerce theory, United States Supreme Court Justices have provided competing versions of the scope of that theory in two later decisions: Asahi Metal Industry v. Superior Court, 480 U.S. 102 (1987); and J. McIntyre Machinery v. Nicastro, 131 S. Ct. 2780 (2011).  Justice Brennan’s concurrence in Asahi opined that the stream of commerce does not refer to an unpredictable current which sweeps a product further than reasonably foreseeable, but consists of the regular and anticipated flow of products from the manufacturer to distributer to retail sale.  Justice Brennan noted that World-Wide Volkswagen carefully differentiated between a product reaching a forum through a chain of distribution as opposed to the unilateral act of a consumer, and concluded that World-Wide Volkswagen’s articulation of the stream of commerce theory should not be altered.  The Court of Appeals agreed that Justice Brennan’s opinion in Asahi provides the correct test, ultimately holding that a plaintiff may establish a defendant’s sufficient minimum contacts by showing that the defendant placed products into the stream of commerce with the expectation that the regular course of sales would lead those products to the forum state.

In this case, Align had provided marketing materials to distributors, attended trade shows in the United States, and established channels through which consumers could receive assistance with their Align products in the United States.  Align also injected a substantial number of products into the stream of commerce, knowing that those products had reached Colorado.  The Court of Appeals concluded that Align purposely availed itself of the privilege of conducting business in Colorado by placing its products into the stream of commerce with the expectation that they would be sold to consumers in Colorado through the regular flow of commerce.  Accordingly, the Court of Appeals held that the trial court could exercise specific personal jurisdiction over Align.  Full text of opinion . . . Boustred v. Align Corp., 2016 COA 67 (April 21, 2016)

Kenneth Lyman and Ryan Winter, both members of Hall & Evans, and Conor Boyle, Special Counsel of Hall & Evans, represented co-defendant Horizon Hobby, Inc., in the trial court and Court of Appeals.  For further information regarding this decision, contact Kenneth Lyman at 303-628-3396 or by email to lymank@hallevans.com; Ryan Winter at 303-628-3358 or by email to winterr@hallevans.com; or Conor Boyle at 303-628-3484 or by email to boylec@hallevans.com.

State Law Preempts Local Regulation of Hydraulic Fracturing

Despite competing views of the economic benefits and environmental impacts of hydraulic fracturing or “fracking,” the Colorado Supreme Court issued two much anticipated opinions regarding whether the City of Longmont’s ban and Fort Collins’ moratorium on fracking and the storage and disposal of fracking waste within city limits are preempted by state law. Applying well-established preemption principles, Colorado’s highest court concluded an operational conflict exists between Longmont’s and Fort Collins’ fracking bans and applicable state law.  Consequently, the Court held Longmont’s ban and Fort Collins’ moratorium, which banned fracking and the storage and disposal of fracking waste within city limits, were preempted by state law.

Longmont’s ban and Fort Collins’ moratorium were created pursuant to those cities’ “home-rule” sovereignty under the Colorado Constitution that allows for certain ordinances to supersede a state statute.  However, as recognized by the Colorado Supreme Court, when a home-rule ordinance conflicts with state law in a matter of statewide or mixed state and local concern, the state law supersedes that conflicting ordinance. In both cases, the Court held the ordinance/moratorium involved matters of mixed state and local concern.

Colorado recognizes three forms of preemption: express, implied, and operational conflict preemption.  Express and implied preemption are primarily matters of statutory interpretation, and apply when the legislature clearly and unequivocally states its intent to prohibit a local government from exercising its authority over the subject matter at issue or when it impliedly evinces its intent to completely occupy any given field of interest.  Here, however, the court focused on “operational conflict” preemption, under which a state law will preempt a local regulation when the operational effect of the local regulation conflicts with the application of state law.  Courts analyze operational conflicts by considering whether the effectuation of the local interest would materially impede or destroy a state interest.

Applying these standards, the Court evaluated the respective statutory and regulatory schemes.  The Court held the State Oil & Gas Conservation Act and the pervasive rules and regulations promulgated by the Oil & Gas Conservation Commission, which evince state control over numerous aspects of fracking, from the chemicals used to the location of waste pits, demonstrated the state’s strong interest in the efficient and responsible development of oil and gas resources, including the uniform regulation of fracking. On the other hand, Longmont’s and Fort Collins’ ordinance/moratorium prevented operators from fracking even when in total compliance with state rules and regulations – rendering the state’s rules and regulations “superfluous.”  Because the local ordinances materially impeded the effectuation of the state’s interest, the Court held that the ban and moratorium were invalid and unenforceable.

Nonetheless, each city’s authority to regulate noise, lighting, traffic, and other common complaints from fracking operations remains intact. And the Court’s ruling may not be the final word on fracking in Colorado. Opponents of fracking plan to place state-wide initiatives on the November ballot, initiatives which would expressly grant local governments authority to regulate fracking within city limits.

Full text of opinions…. City of Longmont v. Colorado Oil & Gas Assoc., 2016 CO 29 (May 2, 2016), and City of Fort Collins v. Colorado Oil & Gas Assoc., 2016 CO 28 (May 2, 2016).