managing products liability risk for manufacturers and distributors

Managing Products Liability Risk for Manufacturers and

Distributors

The material provided herein is for informational purposes only and is not intended as legal advice or

counsel.

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Please help yourself to food and drinksPlease let us know if the room temperature is too hot or coldBathrooms are located past the reception desk on the rightPlease turn OFF your cell phonesPlease complete and return surveys at the end of the seminar

Current Acts and Warranties

Moderator and Presenter:Hon. William A. Dreier

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Product Liability of Manufacturers, Distributors and Sellers

1. StateA.Common Law

B.Statutoryi New Jersey Product Liability Act

ii. Consumer Fraud Act

iii. Uniform Commercial Code Warranties

2. Federal

A. Magnusson-Moss Act

B. Consumer Product Safety Act

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N.J. Product Liability ActA. Manufacturing Defect

1. If causes injury, strict liability

B. Design Defect1. Cannot warn later – Must correct2. Reasonable person standard3. Federal preemptions – Benefits lessened

by Supreme Court

C. Warning Defect1. Post-sale warning required, if later

discovered2. Reasonable person standard

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U.C.C. WarrantiesA. Express Warranties

1. Contracts

2. Advertisements and brochures

B. Implied Warranties1. Warranty of merchantability

2. Warranty of fitness for particular purpose

3. Waivers and limitations

4. Magnusson-Moss prohibitions

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Highly Technical – Don’t Go It Alone

• Multiple state and federal statutes• Hundreds of published and unpublished

court decisions• Federal and state regulations• Sometimes no definitive answers• When in doubt, err on the side of

caution

Strategies for Reducing Products Liability Risk

Presented By:Steven A. Karg

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Advance Planning and Effort

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Handout Materials• A Primer in Protecting Your Company Against

Products Liability Risk, published by Somerset Business (2001).

• Seller Beware! A Timebomb Could Be Ticking Within Your Good Faith Business Practices, New Jersey Defense, Vol. 25, Issue 2 (2009).

• Contractual Indemnity for Product Manufacturers, New Jersey Defense, Volume 16, Issue 2 (1999).

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General Risk Reduction Techniques

• Good Business Structure Planning– Limit Liability of Owners.

• Selection of Good Business Partners– Financially sound partners who can withstand

liability and who share your goal of producing a good product.

Good Design, Manufacturing, Sales, Distribution and Monitoring Practices

• Avoidance of Successor Liability

• The Shift of Risk to Others

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Good Practices – Producing a Safe Product – Three Goals

Design a product for which there is no reasonable safer alternative design.

• Manufacture the product as it was designed and without manufacturing defects.

• Incorporate appropriate warnings and instructions to avoid risks that could not be eliminated through reasonable alternative design.

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15 Ideas for Producing a Product for Which There is No Reasonable Safer

Alternative Design 1) Establish a products liability loss

prevention committee.

2) Keep abreast of and employ the state of the art.

3) Hire experienced and knowledgeable design personnel to design your products.

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15 Ideas for Designing a Safe Product

4) Closely monitor competing products.

5) Keep active in related industry organizations.

6) Closely monitor and comply with applicable minimum regulatory and industry standards.

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15 Ideas for Designing a Safe Product

7) Correct design and manufacturing defects as you acquire knowledge of them for past and future products. • Improve the product for the future.

• Consider a recall, retrofit, or supplemental warnings for past products with after-discovered defects.

8) Conduct safety testing.

9) Consider and design against foreseeable misuses of your product.

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15 Ideas for Designing a Safe Product

10) Consider the environment in which the product will operate and design the product to operate safely in that environment.

11) Design against safety problems created by worn parts.

12) Hire a safety consultant to review and improve the product.

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15 Ideas for Designing a Safe Product

13) Patent your product innovations.

14) Document your improvement effort.• Teach your organization the

importance of the documents they generate.

15) Update your designs to keep up with safety innovations.

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Good Practices – Producing a Safe Product – The Second Goal

• Design a product for which there is no reasonable safer alternative design.

Manufacture the product as it was designed and without manufacturing defects.

• Incorporate appropriate warnings and instructions to avoid risks that could not be eliminated through reasonable alternative design.

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5 Ideas for Manufacturing a Product Without Manufacturing Defects

1) Carefully purchase and inspect raw materials and component parts.

2) Institute a quality control program for your manufacturing lines and document your efforts.

3) Closely monitor the manufacturing process to avoid recurring manufacturing problems.

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5 Ideas for Manufacturing a Product Without Manufacturing Defects 4) Inspect completed products for proper operation

and compliance with manufacturing standards, then document the individual results where practical.

5) Use some of the 15 good design practice ideas for the manufacturing phase as may be applicable.

• For instance, conduct testing, join manufacturing groups and keep abreast of the industry.

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Good Practices - Producing A Safe Product – The Third Goal

• Design a product for which there is no reasonable safer alternative design.

• Manufacture the product as it was designed and without manufacturing defects.

Incorporate appropriate warnings and instructions to avoid risks that could not be eliminated through reasonable alternative design.

Why So Many Warnings?

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11 Ideas for Using Appropriate Warnings and Instructions

1) Know the difference between, and how to apply, the terms of art: "DANGER", "WARNING", and "CAUTION".• “DANGER” indicates an imminently hazardous situation

which, if not avoided, will result in death or serious injury.

• “WARNING” indicates a potentially hazardous situation which, if not avoided, could result in death or serious injury.

• “CAUTION” indicates a potentially hazardous situation which, if not avoided, may result in mild or moderate injury.

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11 Ideas for Using Appropriate Warnings and Instructions

2) Comply with State and Federal labeling regulations and standards.

3) Address the foreseeable audience by:

• writing at its level,

• writing in its languages, and

• effectively delivering the warning to it.

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11 Ideas for Using Appropriate Warnings and Instructions

4) Place and distribute the warnings properly to ensure that the information is delivered in a manner calculated to reach the end user.

5) Document the delivery and use of warnings and training materials and save contemporaneous copies or samples to be produced later if needed.

6) Provide first aid or antidote information where applicable.

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11 Ideas for Using Appropriate Warnings and Instructions

7) Provide an instruction manual containing:

a) a safe method for assembly of the product;

b) instructions for safe use of the product;

c) a description of the product's intended uses and its limitations;

d) warnings of any latent dangers inherent in the product;

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11 Ideas for Using Appropriate Warnings and Instructions

e) maintenance procedures;

f) measurable adjustment specifications for safe and proper operation;

g) a recommended frequency for maintenance; and

h) warnings against misuse or modification that stress the consequences of misuse or modification.

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11 Ideas for Using Appropriate Warnings and Instructions

8) Employ a safety and warnings consultant where warranted.

9) Review manuals and warnings with an experienced products liability attorney.

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11 Ideas for Using Appropriate Warnings and Instructions

10) Consider Warranty-Related Issues:• Whether to Use an Express Warranty• Limitations of Remedies• Disclaimers of Warranty• Magnuson-Moss Compliance for Consumer

Products• Consumer Fraud Issues

11) Avoid too many warnings – the “Billboard Effect.”

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3 Risk Reduction Ideas for the Sale of Products

1) Avoid affirmative misrepresentations of the capabilities of the product.

2) Disclose information about the product that the buyer would deem important to his known application.

3) Avoid verbal warranties that are inconsistent with express warranties or disclaimed warranties.

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Consumer Fraud Act

• Damage caused by a product as opposed to economic harm relating to purchase

• Treble Damages

• Attorneys Fees

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Consumer Fraud Act

• Actionable Conduct Under CFA:

• Innocent or intentional misrepresentations in an affirmative statement

• Intentional omissions of material fact

• Innocent or intentional violation of applicable regulation

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Consumer Fraud Act

• Bosland v. Warnock Dodge

• Six year limitations period

• No demand requirement

• Class action problem

• Ticking time bomb

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General Risk Reduction Techniques

• Business Structure Planning• Selection of Good Business Partners • Good Design, Manufacturing, Sales,

Distribution and Monitoring PracticesAvoidance of Successor Liability• The Shift of Risk to Others

• Contractual Indemnity

• Insurance Considerations

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What is Successor Liability?

• Court imposed liability of a successor in interest for the liabilities of its predecessor.

• The rationale is that the acquiring entity has benefited by the dissolution of the predecessor, and should cover its responsibilities.

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Some Potential Sources of Successor Liability

• An express or implied agreement to assume the predecessor company's debts and obligations;

• A fraudulent transfer;

• A de facto merger or consolidation of entities;

• A purchasing company becomes a mere continuation of the selling company;

• A transfer for no adequate consideration; and

One entity acquires all or substantially all of the manufacturing assets of another entity and continues to manufacture essentially the same product line, and by doing so leaves those harmed by the transferor's products without a remedy.

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2 Tips for Avoiding Successor Liability

1. Conduct due diligence before purchasing assets from other businesses.

2. Consult counsel regarding potential successor liabilities when purchasing assets from other businesses.

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General Risk Reduction Techniques

• Business Structure Planning• Selection of Good Business Partners • Good Design, Manufacturing, Sales,

Distribution and Monitoring Practices• Avoidance of Successor LiabilityThe Shift of Risk to Others

• Contractual Indemnity

• Insurance Considerations

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Chain of Distribution Liabilities

Manufacturer

Distributor

Retailer

Injured Party

LiabilityCommon Law IndemnityContractual Indemnity

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Underlying Themes for Reducing Products Liability Risk

• Strive to Produce a Good, State of the Art Product;

• Select Good Business Partners;

• Plan Ahead to Reduce Product Related Risk; and

• Use Risk Shifting Techniques.

Insurance Considerations

Presented By:

Charles W. Miller III

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Insurance Considerations

Largest Lawsuits

Owens Corning $1.2 billion Dow Chemical $4.25 billion GM $4.9 billion GM $20 billion Phillip Morris $28 billion

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Insurance Considerations

Product Liability Insurance

1. Legal liability

2. Arising out of accidents

3. During the period of insurance

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Insurance Considerations

Product Liability Insurance

4. Arising out of any defects in the product5. Only as to claims arising out of products covered under the policy6. After they have left the insured’s premises

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Insurance Considerations

Recall Insurance

Reimbursement for:

1. Recall expenses

2. Loss of profit

3. Product rehabilitation

4. Crisis communications

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Insurance Considerations

Practical Suggestions

1. Regular risk assessment/insurance review

2. Negotiate for the best coverage

3. Purchase needed insurance coverage

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Insurance Considerations

4. Buy sufficient policy limits

5. Use business partners’ coverages, if possible

6. Review coverage once it is issued

Product Sellers: Liability Concerns and Solutions

Regarding Foreign Manufacturers/Suppliers

Presented by:

M. Karen Thompson

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Problems Arising from Dealings with Foreign Manufacturers/Suppliers:

• Less sophisticated safety and quality systems

• Limited governmental oversight

• Jurisdictional Issues

• Post-sale problems/recalls

• Difficulty of service of process

• Lack of assets in the U.S.

• Damage to reputation

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Fact Pattern:

• New Jersey distributor purchases grinding tools from Taiwanese manufacturer

• No formal contract between them, just purchase orders

• Manufacturer attaches distributor’s logo to the tools in the factory

• Manufacturer drafts all instructions and warnings for tools

• Manufacturer boxes tools in individual packaging with instructions and warnings

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Fact Pattern: (Continued)

• Tools are shipped direct from Taiwan to distributor

• Distributor sells tools to customers in original packaging

• Tools fail to include recommended ANSI and OSHA warnings

• New Jersey resident sustains injury and sues distributor in New Jersey court

Can this distributor be held liable???

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Product Liability Causes of Action in New Jersey:

The manufacturer or seller of a product shall be liable if the claimant proves that the product was not reasonably fit, suitable or safe for its intended purpose because it:

a. failed to contain adequate warnings, or

b. deviated from the design specifications, formulae, or performance standards of identical units (i.e. a manufacturing flaw)

c. was designed in a defective manner (i.e. design defect).

New Jersey Products Liability Act, N.J.S.A. 2A:58C-2

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“Product Seller” under New Jersey Statute Means:

Any person who, in the course of a business conducted for that purpose:

• sells; distributes; leases; installs; prepares or assembles

• a manufacturer’s product according to the manufacturer’s plan, intention, design, specifications or formulations, or

• blends; packages; labels; markets; repairs; maintains or otherwise is involved in placing a product in the line of commerce.

N.J.S.A. 2A:58C-8

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Limited Statutory Protection for Product Sellers in New Jersey:

Statute may afford relief from imputed liability if certain criteria are met:

a) Product seller must certify as to the manufacturer’s correct identity, and

b) Product seller’s role with respect to the product was minimal

N.J.S.A. 2A:58C-9(a) and (d)

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Statutory Protection Doesn’t Apply and Product Seller is Strictly Liable if:

• the identity of the manufacturer is incorrect, or

• the manufacturer has no known agents, facility or other presence within the United States, or

• the manufacturer has no attachable assets in the United States, or

• the manufacturer has been adjudicated as bankrupt and is judgment proof

N.J.S.A. 2A:58C-9(a) and (c)

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Imputed Liability to Domestic Distributors if Foreign Manufacturer is

“Unavailable”:

a. By Statute: Ten states, in addition to New Jersey

b. Model Uniform Product Liability Act

c. Restatement (3d) of Torts, § 1

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Product Seller Shall Also be Liable if:

Product seller has exercised significant control over the product’s

• Design

• Manufacture

• Packaging

• Labeling

with respect to the alleged defect or warning which caused the injury, or

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Product Seller Shall Also be Liable if:

• Product seller knew or should have known of the defect or had facts available from which it should have known of the alleged defect, or

• Product seller created the defect in the product which caused the injury.

N.J.S.A. 2A:58C-9(d)

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Risk Controls for Distributors/Product Sellers:

Good Importer Practices (draft guidance)

• Know the foreign company and other companies with which they do business

• Understand the products and vulnerabilities

• Understand the hazards that may arise

• Ensure proper control and monitoring of hazards

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Risk Controls for Distributors/Product Sellers:

• Initial Investigation Before Purchasing• Reputation of manufacturer• Financial stability of manufacturer• Quality and safety of product

• Quality Assurance Procedures• Testing• Conformity to specifications• Compliance with U.S. requirements• Compliance with industry standards• Monitoring throughout life cycle of product

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Risk Controls for Distributors/Product Sellers:

• Warnings and Instructions

• Clear and direct

• Proper language for intended users

• Compliance with industry or regulatory standards

• Advertising and Sales Literature

• Accurate statement of capabilities and uses

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Risk Controls for Distributors/Product Sellers:

• Packaging and Shipping• Adequate to prevent damage• Contains warnings and instructions• Required documents• Retain shipping records and identification data

• Transfer the Risk to Foreign Manufacturers through Detailed Contract Provisions:

• Certifications of safety and quality testing (in English)• Audit procedures• Product warranties

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Risk Controls for Distributors/Product Sellers:

• Notice obligations

• Regarding safety issues

• Regarding changes in manufacturing processes

• Regarding suppliers or parts (quality fade issue)

• Recalls

• Responsibility for recalls

• Recall protocols

• Cooperation Clause

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Risk Controls for Distributors/Product Sellers:

• Indemnification provisions• Strict construction• Conspicuous placement• Duty to defend• Identification of protected parties• Cover negligence of distributor• Assumption of defense• Consent to settlement

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Risk Controls for Distributors/Product Sellers:

• Indemnification provisions (Cont’d)• Survival of duty• Assignments• Sophisticated parties• Consent to jurisdiction

• Insurance Coverage• U.S. based insurer• Distributor as additional insured• Certificates of insurance • Tail coverage

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Pending Legislative Solution – S. 1606:

Foreign Manufacturers Legal Accountability Act of 2009

• Foreign manufacturers must designate a registered agent in at least one state to accept service of process

• Foreign companies must consent to the jurisdiction of the state or federal court where the registered agent is located

• State should have a substantial connection to the importation, distribution or sale of the products of the foreign manufacturer

Reporting & Recalls Under the Consumer Product Safety Improvement Act of 2008

Presented By:

Haekyoung Suh

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Consumer Product Safety Improvement Act of 2008

• Third-party testing of children’s products by certified laboratories for certification purposes.

• Certificate of conformance required for all consumer products.

• ASTM F963-07 now mandatory.• Ban on children’s products containing more than a

minimal amount of lead or phalates.• Packaging for children’s toys and games must

contain a label or cautionary statement about choking hazards.

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Consumer Product Safety Commission

• Regulation

• Public Information

• Compliance

• Research

• Import Safety

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SaferProducts.gov

• Active by March 11, 2011

• Consumer Portal

• Industry Portal

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Commission Receives

Incident Report Manufacturer

(5)

Commission Manufacturer

Publishes (10) Responds to

Incident Report Incident Report

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Time-Saving Strategies

• Register your contact information with the Commission.

• Designate a central person or unit within your company to handle all incident reports.

• Develop a protocol or system to review, analyze and rapidly respond to incident reports.

• Establish a protocol to scan incident reports for confidential information.

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NotificationManufacturers, distributors, and retailers of a consumer product or any other product over which the Commission has jurisdiction must notify the Commission immediately upon receipt of information that reasonably supports the conclusion that the product:

• Fails to comply with an applicable consumer product safety rule or voluntary consumer product safety standard.

• Fails to comply with any other rule, regulation, standard or ban enforced by the Commission.

• Contains a defect that could create a substantial product hazard.

• Creates an unreasonable risk of serious injury or death.

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“If in doubt, report.”

“Report early and often.”

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Strategies For Notification

• Gather information needed to report to the Commission.

• Draft an explanatory letter and follow up with a telephone call.

• Commence a dialogue with the Commission.

• Request that the Commission acknowledge receipt of your company’s notification, in writing, to confirm the date of notification.

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TOTAL RECALL

or

FAST TRACK PROGRAM

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Strategies For Handling a Recall

• Develop Pre-Recall Plans.

• Establish a Recall Protocol.

• Implement Post-Recall Procedures.

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Myth #1: I’m a small company; I won’t get

caught.

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Myth #2: I’d rather pay a small fine than

deal with the headache and

cost of a recall.

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Myth #3: I don’t sell products across state

lines so I don’t need to worry

about a federal statute.

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Myth #4: I can handle the problem by

myself.

Question & Answer Session

Thank you for coming!

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