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Saturday, February 5, 2005

The Not-So-Uniform Parts of UCC Article 2

In Compaq Computer Corp. v. Lapray, 135 S.W.3d 657, 53 UCC Rep. Serv. 2d 483, 2004 WL 1048336 (decided May 7, 2004), the Supreme Court of Texas reversed a decision by the district court certifying a class action against Compaq Computer Corporation, alleging Compaq sold computers containing defective floppy disk controllers.  The grounds for the reversal were that common questions may not  predominate in the litigation, because the Uniform Commercial Code is not so uniform with respect to three provisions of Article 2 likely to be at issue in the claims.  The variation among the jurisdictions is significant because the claims are likely to be governed by Article 2 as adopted in and interpreted by a number of different states.  The particular provisions that troubled the Court are 2-607(3)(a), 2-313, and 2-714. 

The Court pointed to 2-607(3)(a)), which requires the buyer to "notify the seller of breach" within a reasonable time after discovery of the breach.  Some courts require notification only to the immediate seller, while others require notification to remote sellers in order to pursue them up the distributive chain.  Whether Compaq will be liable on an individual claim may thus depend not only on who the buyer notified and whether Compaq sold the computer directly to the buyer, but on which notification scheme is in force in that buyer's state.

Similar problems develop under 2-313, which governs creation of express warranties.  Some jurisdictions require that the buyer establish reliance on the seller's representations, some do not, and some haven't decided, the Court concluded.  Common questions may therefore not predominate in determining whether an express warranty exists in individual claims.

Finally, the Court noted considerable uncertainty among the states over the question whether, in order to establish a breach of warranty under 2-714, a buyer need show only that the goods sold were not as promised or must also show that he/she has suffered some injury from the defect.  For some buyers, the defective floppy disk controller may have already manifested itself and caused them damage.  For others, the alleged problem remains a latent defect.

Questions surrounding notification to remote sellers, creation of express warranty, and existence of breach of warranty are likely to appear regularly in claims by remote buyers of goods against manufacturers, so the Texas Supreme Court decision appears to call into question the viability of any breach of warranty class action in such circumstances.

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