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Date: November 2007
Prepared by:
Daniel P. Gallagher, Jr., Esquire
Reed Smith LLP
435 Sixth Avenue
Pittsburgh, PA 15219-1886
Tel.: +1 (412) 288-3018
Fax: +1 (412) 288-3063
E-Mail: dgallagher@reedsmith.com
Introduction
This introduction will give a brief overview on the general background to product liability in the United States. Some actions will involve both product liability issues to the extent of personal injuries and warranty claims for other aspects of damages including claims for defective products and losses resulting from defects, but the language of product liability tends to dominate the discussion because of the larger damage awards and potential liability associated with personal injury claims.
Unlike many other areas (securities, bankruptcy, for example), there is no body of federal product liability law in the United States. While there are many similarities from jurisdiction to jurisdiction, there is no guarantee that the legal analysis from one state will be the same as any other state. Each jurisdiction must be examined. Damage awards vary widely from state to state so “forum shopping” is common.
Detailed Information
Product liability involves physical harm/bodily injury or likelihood of future injury. Warranty claims are usually associated with product failures resulting in economic loss or business losses and they may be eliminated by contract or significantly mitigated by agreement. Punitive damages generally are not available in warranty claims.
Product liability claims generally cannot be eliminated by contract (indemnification and contribution theories may, however, mitigate the manufacturer’s total exposure and a manufacturer may contract for the benefit of contribution from another party – e.g. of component supplier). Product liability claims do not require a relationship (seller and purchaser, for example) between manufacturer and injured party. Punitive damages are often awarded – as a “message” or deterrent. Threat (or reality) of class action litigation; the class action culture in the United States.
There are four different theories that may result in liability to a manufacturer of defective products but one has become the predominant basis for claims, particularly claims involving personal injury.
  • Strict Liability: predominant basis for personal injury claims is strict liability based solely on a claim that a manufacturer sold a defective product.
  • Negligence: a manufacturer which fails to exercise reasonable and ordinary care in designing, manufacturing and/or testing a product causing harm is subject to liability for such harm; or a negligence case involves proof of negligence and the absence of any of a number of defenses (e.g. contributory negligence as a total bar to recovery) that the manufacturer might raise.
  • Misrepresentation: a theory of liability based upon a manufacturer’s or seller’s material misrepresentation concerning the character or quality of a product. This has become a subset of strict liability analysis under a separate Section (402B) of the Restatement (Second) of Torts and is for the most part indistinguishable from the dominant strict liability analysis.
  • Breach of Warranty: implied warranty of merchantability; or implied warranty of fitness for a particular purpose; or express warranties. Because breach of warranty claims can be barred by a disclaimer from the manufacturer and because punitive damages are not recognized in claims based solely in warranty, these types of claims have little application in product liability matters today.
    Frequently Asked Questions
    How can a manufacturer mitigate potential claims and reduce its overall prod-uct liability exposure?
    Identify the manufacturer’s position in the transaction and make sure that the relevant agreement positively describes this role and specifically lists those things that are not part of the intended relationship.

    The Agent shall solicit orders in the Territory for the Manufacturer’s Products. Each order so solicited shall be forwarded to the Manufacturer. The Manufacturer may, in its sole discretion, accept or reject any order forwarded by the Agent and the Manufacturer shall have no obligation to the Agent except the payment of commission for Products sold by Manufacturer as a result of an order forwarded by Agent.

    The Manufacturer might try to make the Agent a “Supplier”. Agent shall promote the sale of Products in the Territory by all usual and customary means employed in the Territory and shall assume exclusive responsibility for promotional activities on behalf of the Manufacturer. Agent shall consult with its customers and prospects with a view to advising Manufacturer of improvements to the Products that will enhance Agent’s sales of Products in the Territory.

    The Agent will try to distance itself from issues related to project design and promotion. The Agent is acting as an independent contractor hereunder and, as such, shall solely in its discretion determine the resources it will devote to soliciting orders for the Products in the Territory. Agent shall have no responsibility for promoting the Products or for suggesting any improvements to the Products. Clearly establish indemnification and contribution obligations and obligations to assist with product recalls or alerts, etc.

    Manufacturer and Distributor mutually cooperate to reduce overall exposure. Distributor agrees to maintain detailed records with respect to its sales of Products and all warranty claims and repairs related to claimed product defects or product failures. Distributor shall notify Manufacturer of any recurring warranty claims and Manufacturer shall advise Distributor of any improvements to Products or corrective steps suggested with respect to Products to mitigate such recurring claims. Manufacturer shall provide product improvements to Distributor at Manufacturer’s cost for such improvements. If Products previously purchased by Distributor cannot be made free of whatever condition has been determined to be the cause of such recurring warranty claims, Manufacturer shall purchase Distributor’s entire stock of Products at Distributor’s cost therefore.

    Manufacturer agrees to notify Distributor promptly after determining that it is necessary or advisable to issue any advice with respect to the Products or their use or to issue any recall of the Products. Manufacturer and Distributor shall assist each other as necessary to ensure an orderly recall of affected Products. Manufacturer shall indemnify Distributor for any losses, costs and expenses related to any such recall including repurchasing Products from Distributor at Distributor’s cost therefore, if there is no reasonable repair available for such Products.

    Take advantage of exceptions; identify specific role in manufacture or development of product.

    The Manufacturer might attempt to have the following language included in the relevant agreement. Manufacturer has designed and manufactured the product strictly in compliance with the specifications therefor required by Purchaser [i.e. government entity]. Purchaser acknowledges that it has supplied all relevant product specifications and expressly assumes responsibility for providing users of Products with all necessary instructions and warnings related to the use of Products. Purchaser also acknowledges that it has not and is not relying on Manufacturer to ascertain any design defects or damages inherent in the design or use of any Product.

    The Manufacturer should attempt to obtain express indemnification undertakings from component manufacturers. Supplier [component manufacturer] agrees to indemnify and hold harmless Manufacturer from all losses, costs and damages including without limitation all consequential and punitive damages and attorneys’ fees and expenses arising from or related to any claim or loss related to a defect in or failure of the component parts manufactured by Supplier and furnished to Manufacturer for incorporation by Manufacturer into its products.

    A Manufacturer will try to expand the responsibility of a third-party service provider while a third-party service provider will try to limit its role.

    Manufacturer has relied on Engineer to design the Products for safe use in accordance with the directions prepared by Engineer and included with the Products.

    Engineer has executed the design of the Products solely in reliance upon the specifications therefore provided by Manufacturer and has undertaken no independent analysis with respect to such design or the performance of any Product.
    What are the responsibilities of successors to a manufacturer?
    Stock acquisitions and mergers
  • product liability claims usually follow the acquisition or merger
  • continuation of lines of business
  • continuation of insurance coverage/liability management
    Asset acquisitions and product lines
  • The general goal is to acquire only assets and have seller retain liabilities unless
  • buyer assumes liabilities for existing products; or
  • buyer may become liable by virtue of holding itself out as the successor of the seller
  • a factual analysis or the buyer’s conduct and expectations.
  • creation of a separate entity to manage and resolve claims; collect insurance proceeds, etc., but in the absence of a bankruptcy proceeding or other adjudication it may be difficult to limit exposure only to this entity.
  • succession through bankruptcy proceedings to eliminate prior liabilities.
    Useful Links
  •  
  • Cornell University Law School Legal Information Institute
  •  
  • United States Consumer Product Safety Commission