Texas Supreme Court decides that implied warranties can pass to second-hand buyers

June 06, 2014 | By CHRISTINA MARTIN

Today, the Texas Supreme Court released a narrow decision in MAN Engines & Components, Inc v. Shows.  Doug Shows purchased a used 55-foot yacht, “as-is,” containing engines built by the defendant, MAN Engines.  When the engines failed, Mr. Shows sued MAN Engines and prevailed on his claim that MAN breached the implied warranty of merchantability.  In other words, the jury decided that a manufacturing defect caused the engine to fail sooner than a normal consumer would expect, and awarded Mr. Shows more than $80,000 for the replacement value of the engines.

The trial court overturned the jury award because MAN Engines disclaimed the vague warranty of merchantability, instead offering its buyers a guarantee that its engines would last two years (and that major engine components would last three years).  Moreover, the trial court held that the promise applied only to first-hand buyers – not to subsequent purchasers.  The appellate reversed, upholding the jury award on the theory that the engine came with an implied warranty from the manufacturer that it would last longer, even though the original buyer’s sales contract explained that there was no such promise. The result? Mr. Shows got a better warranty than the original buyer!

PLF submitted an amicus brief explaining that extending an implied warranty of merchantability to used goods could hurt consumers (especially low-income consumers), manufacturers, businesses, and ultimately, the state’s economy. An implied warranty for used goods increases costs for manufacturers, who may absorb higher costs by laying off employees, dropping salaries, decreasing investment in innovation, raising prices, or some combination thereof.  Because higher prices for new goods increase demand for used goods, low-income consumers feel the most pain, since they most rely on secondhand markets to get the goods that they need. If they cannot afford the higher prices, they will go without.  Additionally, start-up companies – one of the most important ingredients for a healthy economy – likewise need used goods to open their doors or to expand.  New tech companies, for example, have internal knowledge of how to repair used machinery and computers and therefore place no value on any added warranties.  In short, the court’s attempt to “protect” consumers could end up hurting the most vulnerable consumers and businesses.

The Texas Supreme Court held that warranties and disclaimers generally pass to subsequent buyers: “If the manufacturer validly disclaims implied warranties at the first sale, as is commonly done, that disclaimer carries with the good, just as the warranty otherwise would.” This narrow holding does not address “as is” contracts for sale, largely avoiding PLF’s policy concerns.  The court decided the case very narrowly because of MAN Engines’ procedural miscues, namely that MAN Engines failed to properly raise or preserve the key issues of whether it expressly disclaimed the implied warranty, or whether the “as is” bill of sale voided the implied warranty.  As a practical matter, the lesson for Texas manufacturers and sellers is to clearly establish all disclaimers and terms of sale at the time of the purchase and in any subsequent litigation.