BUSINESS TORTS AND
PRODUCT LIABILITY
Chapter 7
Meiners, Ringleb & Edwards
The Legal Environment of Business, 12th Edition
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TORT LAW AND BUSINESS

There is no such thing as a “business tort”.

By definition, these are torts that concern businesses.

Often, potentially successful cases with businesses are
settled out of court.

There are often big awards, as plaintiffs view
businesses as “deep pockets”.
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TYPES OF BUSINESS TORTS

Intentional

Negligence

Strict Liability

Torts are traditionally common law.

More and more statutes are playing an important role
in this area of the law.
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TORTS PARTICULAR TO BUSINESSES

Fraud or Intentional Misrepresentation

Interference With Contractual Relations

Interference With Prospective Advantage

Product Liability

Consumer Products & Negligence

Strict Liability

Primary Areas of Product Liability Law

Ultrahazardous Activity
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FRAUD

Deliberate Deception

The tort may be called fraud, misrepresentation,
fraudulent misrepresentation or deceit

Intentional Misrepresentation or Fraud

Relationship of parties is a factor in creating legal duties

(1) Representation has been made knowingly

(2) Without belief in its truth, OR

(3) Recklessly and careless whether it is true or false
“Malice, intent, knowledge and other conditions of a person’s mind
may be alleged generally” (Rule 9b, Federal Rules of Civil
Procedure)

Claim often added to a suit for breach of contract

See Lightle v. Real Estate Commission
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INTENTIONAL MISREPRESENTATION OR FRAUD







#1 Misstatement of an important or material fact
 Misstatement induces another to enter into some sort of
business relationship
 Unrelated or unimportant misstatement cannot be a basis of
fraud, i.e. hyping a product
#2 Scienter or intent to defraud
 Intentionally misleading and deceiving another
#3 Person knows or has reason to know that statement being
made is false
#4 Recipient of false information justifiably relies on the
information and makes a decision to enter into the deal
#5 Privity between the parties – relationship exists
#6 Proximate Cause – logical link between reliance on
misstatement & losses to the plaintiff
# 7 Damages
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CASE
LIGHTLE V. REAL ESTATE COMMISSION

Lightle, Alaska real estate agent, listed house for sale by Leighs. Williams
made offer to buy, conditioned on obtaining mortgage (a usual condition).

Another realtor had a client, Seeley, who was interested in the house.
Lightle said house was available. Seeley made an offer; Leighs accepted.
Seeley cancelled her existing lease, switched utilities, prepared to move.

Unknown to Seeley, Lightle wrote on her offer it was a “back-up contract” if
Williams couldn’t get financing.

Seeley found out, rescinded offer, demanded her deposit back. Seeley filed
a claim against the Alaska Real Estate Commission’s surety fund (to
compensate losses in real estate due to fraud).

Commission heard case. Held that Lightle committed fraudulent
misrepresentation. Awarded Seeley damages. Suspended Lightle’s real
estate license.

Lightle appealed.

HELD: Affirmed Commission’s ruling.

Lightle said that prior deal was “dead”; that Seeley offer had been accepted,
and “the house is yours”. Lightle made partial disclosure but failed to
disclose facts that might have affected Seeley’s decision.
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INTERFERENCE WITH CONTRACTUAL RELATIONS
o
Known also as
• Interference With Business Relations or
• Interference With Contractual Relations
o
Breaking the contract benefits a 3rd party
1.
Existence of a contractual relationship
2.
3rd party knows about the contract
3.
3rd party intentionally interferes with the contractual
relationship
4.
Absence of justification for the interference
5.
Damages as a result of the interference

See Slater Numismatics v. Driving Force

See Exhibit 7.2
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CASE
SLATER NUMISMATICS V. DRIVING FORCE











Slater bought & sold rare and modern coins.
Worked with ICG to grade and ship coins to Cable Shopping Network
– which advertised coins for sale.
ICG and Slater shared revenues form that work.
Cable was Slater’s most important client.
Taylor and Williams worked with ICG. They left the company and set
up Driving Force which operated as ANACS in coin business
ANACS hired away most of ICG’s key employees.
Essentially drove ICG out of business.
Then knowing the terms of Slater’s deal with Cable, offered Cable a
better deal and took the account away from Slater.
Slater sued for intentional interference with contractual relations.
Trial court granted summary judgment for Driving Force.
Slater appealed.
(Continued)
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CASE
SLATER NUMISMATICS V. DRIVING FORCE

Intentional interference occurs by inducing or otherwise causing the
third person not to perform the contract

Result is pecuniary loss from failure of 3rd person to perform the
contract

A reasonable jury could conclude that ANACS purposefully depleted
the ranks of ICG. It also significantly impaired ICG’s ability to fulfill
Cable’s coin grading needs.

ANACS also used Slater’s confidential information and made a play
for Cable’s business while undercutting ICG’s pricing.

HELD: Reversed and remanded.

This is “not just the nature of competition”

There is a triable claim for intentional interference with contractual
relations in this case
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INTERFERENCE WITH PROSPECTIVE ADVANTAGE

Known also as
• Interference With Prospective Economic Advantage or
• Interference With Prospective Contractual Relationship

One party makes it difficult/impossible for another party to
continue in some/all business dealings

A business attempts to improve its place in the market by
interfering with another’s business

Unreasonable, improper manner of interference

Predatory behavior, not “merely competitive”

See Gieseke v. IDCA

See Issue Spotter “Hiring Employees from Competitors”
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CASE
GIESEKE V. IDCA, INC.

Brothers Michael (MH) and Arthur Hogenson (AH) owned Standard
Water together.

Gieseke worked for them.

MH & DH got into a dispute; stopped working together.

MH kept Standard and fired Gieseke because he was friendly with AH

Gieseke & AH started Diversified Water (each owned ½).

MH bought AH’s half interest in Diversified Water and merged into a
new company, IDCA.

Without Gieseke’s consent, MH changed all business correspondence
for Diversified Water to another address.

Hauled away some physical equipment

Made it nearly impossible for Gieseke to continue operations

Gieseke sued MH and IDCA for interference with prospective
advantage.

District Court awarded $220,000 to Gieseke.

IDCA and MH appealed.
(Continued)
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CASE
GIESEKE V. IDCA, INC.


Relations protected against intentional interference include

Any prospective contractual relations

If the potential contract would be of pecuniary value to plaintiff
Included in interferences

Obtaining employment or employees

Opportunity of selling or buying land, chattels or services, and

Any other relations leading to potentially profitable contracts

Interference with the exercise by a 3rd party of an option to renew or extend
a contract included

Also included is interference with a continuing business or other
customary relationship not amounting to a formal contract.

Not necessary that prospective relation be expected to be reduced to
an actual formal, binding contract – just that there was interference
with business or customary relationship.

HELD: Affirmed. Diversified Water had reasonable expectation of
economic advantage before IDCA interfered with that prospective
advantage.
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PRODUCT LIABILITY

Liability of producers and sellers of goods re:
defective products

On one hand, we want companies to have incentives
to ensure their products are safe.

On the other hand, we do not want companies to pay
for injuries consumers suffer while using products
improperly.

General term applied that deals primarily in tort law

Involves some contract law

Involves some statutory law
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CONSUMER PRODUCTS AND NEGLIGENCE

In the 19th century courts, there was the privity of
contract requirement – a contractual relationship with
the manufacturer was needed

Burden on consumer

If there was no relationship, caveat emptor applied –
”Let the buyer beware”

This changed with MacPherson v. Buick Motor
Company
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NEGLIGENCE IN TORT

Manufacturer must exercise reasonable care under the
circumstances.

Failure to inspect or test materials used in the product

Were the dangers foreseeable?

Care must be taken to avoid misrepresentation.

Defects and dangers must be revealed.

Causal connection must be present between the product or the
design defect and the injury.

By the 1960s, courts began to apply strict liability.

Producers are responsible for damages and punitive damages may
be added.

This theory can be used in conjunction with and as a separate
theory from strict liability in a lawsuit.
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CASE
MACPHERSON V. BUICK MOTOR COMPANY
Buick sells cars to dealers.
 NY dealer sells car to MacPherson.
 Wheels made by another company; wheel collapses,
causing accident that results in injury.
 MacPherson files a negligence suit; Buick says it has no
privity with MacPherson; trial court holds that privity is not
required; MacPherson wins.
 NY Ct. of Appeals holds manufacturer has primary control
over product design & safety.
 Defects could have been discovered by reasonable
inspection, which was omitted.
 Buick is responsible for the finished product.
 Judgment affirmed.

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STRICT LIABILITY UNDER CONTRACT LAW




Implied Warranty
Implied Warranty of safety
 Manufactured Products
 Food Products
Implied Warranty of
Merchantability
Under the UCC Implied
Warranty For Fitness For A
Particular Purpose
Implied AT LAW – whether the
manufacturer wants the
warranty for the product or not







Express Warranty
Guarantee of safety or
performance
By model
By statement
By contract
By advertising
Misrepresentation theory is
used as well to create strict
liability
Ex: Baxter v. Ford Motor Company
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CASE
BAXTER V. FORD MOTOR COMPANY

Baxter buys new Model A.

Printed material states “Triple
Shatter-Proof Glass”--”will not
fly or shatter under the hardest
impact. . .it eliminates the
danger of flying glass.”

Rock hits windshield – Baxter
loses an eye.

Trial court did not allow
advertising to be admitted into
evidence; said there was no
privity of contract.

Baxter appeals.

Held: Trial court erred in
taking the case from the jury.

Representations of Ford were
false and Baxter relied on
them.

Ford failed to provide the
safety glass as advertised.

Breach of express warranty.

Reversed and remanded to
grant a new trial allowing
advertisement to be
admissible evidence.
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STRICT LIABILITY IN TORT

Manufacturers are strictly liable for defective products

The courts ask:

Was the product defective?

Did the defect create an unreasonably dangerous product or
instrumentality?

Was the defect a proximate cause or substantial factor of the
injury?

Did the injury cause damages?

Courts do not worry about due care, reasonableness, in
production. The issue is if there was a defect as defined.
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CASE
GREENMAN V. YUBA POWER

Wife buys husband power tool.

Two years later wood flies out of machine, striking
Greenman’s head.

He alleges breaches of warranties and negligence.

However: S. Ct. of Calif. affirms trial court decision in
favor of Greenman and says that the manufacturer is
“strictly liable in tort.”

By mid-1970s every state supreme court had adopted
strict liability rule.
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RESTATEMENT (THIRD) OF TORTS ON
PRODUCTS LIABILITY

The American Law Institute’s (ALI) definition of strict liability in Section
402A of the Restatement (Second of Torts).

This was the leading rule adopted by most states to define liability for
product-related injury.

ALI wrote a new standard for product defect cases in newer Restatement
(Third) of Torts.

State supreme courts consider the new concepts of law and often
gradually adopt it.

Key part to the Restatement (Third) of Torts define categories of defect
in §2 regarding (a) product departing from intended design, (b)
foreseeable risk of harm could be reduced or avoided by an alternative
design and (c) harm could have been reduced by reasonable
instructions or warnings.

Restatement Third speaks of “risk-utility balancing”.

Restatement Third encourages courts to move away from the a
distinction between negligence and strict liability.

Product defect law deals with design defects and manufacturing defects.
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FAILURE TO WARN
Failure by manufacturer to warn of dangers in using a
product
 Includes a wide variety of circumstances
 Failure to give information about specific dangers
 Failure to issue added warnings about problems
that become known after product has been in use
 Failure to give special emphasis on biggest dangers

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CASE
PARISH V. ICON

Parish was jumping on a backyard trampoline made by Jumpking.

Surrounded by a safety net (fun ring) made by ICON

He did a back somersault, landed on his head, rendered a quadriplegic.

Sued ICON and Jumpking for failure to warn of dangers in using
products.

District court granted summary judgment for manufacturers; Parish
appealed.

HELD: Affirmed. Warnings were not inadequate.

Look at reasonable instructions or warnings if foreseeable risks of
using a product.

Numerous warnings provided in this case.

3 warnings placed permanently on pad of trampoline.

Included warnings not to land on head or neck; paralysis or death could
result; reduce chance of landing on head or neck by not doing
somersaults/flips; only 1 person on trampoline at a time; multiple jumpers
increase chances of loss of control, collision, falling off; results can be
broken head, neck, back or leg; not recommended for children under 6 years
of age.
(Continued)
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CASE
PARISH V. ICON

Had nationally recognized warning symbols on the product.

1 warning on each of 8 legs of Jumpking trampoline – designed to assemble so
that warnings face out, visible to user. Jumpking manufactures 2 printed nonpictorial warnings sewn onto the trampoline bed.

Warning placard for the owner to affix to the trampoline – both pictorial warning
and language re: safe use of trampoline. Owner’s manual contains warnings.

Warnings exceed the warnings required by the American Society for Testing
and Material (ASTM).

Warnings are also provided with fun ring, which has separate owner’s manual
with added warnings.

Restatement says that users must pay some attention for their own safety.

Users and consumers are required to “bear appropriate responsibility for proper
product use.”

“Prevents careless users and consumers from being subsidized by more careful
users and consumers” – damages paid from law suits are built into higher
product prices.

Warnings here were adequate.
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CASE
TIMPTE INDUSTRIES, INC. V. GISH

Gish, a long haul trucker, arrived at a plant to pick up load of
fertilizer.

His truck was pulling a trailer made by Timpte Industries.

It is an open-top, twin hopper trailer, loaded from above by a
downspout that pours fertilizer into the hopper.

Downspout wasn’t going into position; he climbed on top of trailer;
walked out along the top rail that is about 5” wide so he could grab
downspout and put it in position to pour in fertilizer.

Was on the rail; gust of wind blew; he fell & was severely injured.

Gish (& his workers compensation insurance carrier) sued for design
defect.

Contended that trailer “shouldn’t have a ladder that allowed him to
climb up to the rail” (top rail is too narrow to walk on safely).

Timpte argued: Danger of being on rail was “open and obvious.”

District court granted summary judgment for Timpte.

Appeals court reversed for Gish. Timpte appealed.
(Continued)
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CASE
TIMPTE INDUSTRIES, INC. V. GISH

HELD: Reversed Court of Appeal’s judgment and reinstated trial court’s
summary judgment in favor of Timpte.

No evidence that the design defects rendered the trailer unreasonably
dangerous.

Gish’s expert witness proposed 3 design changes. (1) Remove top 2
rungs of ladder to make it impossible for person to climb atop trailer; (2)
Provide adequate foothold and handhold at top of trailer; (3) If an
adequate handhold cannot be provided, widen the side rail to at least 12
“ to provide adequate footing

Texas courts apply risk-utility analysis.

Basis of design defect claim is whether there is a reasonable
alternative design (at a reasonable cost) that would reduce a
foreseeable risk of harm.

Timpte always warned users to maintain 3-point contact with trailer (this
can’t be done if a user standing on the top rail).

Gish did not adhere to warning. Loses lawsuit.

No evidence of design defects.
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UNKNOWN HAZARDS

Dangers not known at the time
of the product’s manufacture

Claims are often class action
suits

Hazard associated with the
product is not learned for many
years


See Issue Spotter: “A Way to
Reduce the Damage?”
Asbestos Industry – has paid
billions of dollars to tens of
thousands of plaintiffs in
claims over a 30-year period

Consumer Expectation
standard used by courts
Injuries caused by IUDs have
been in the courts for years

Manufacturers must have
recalls or warnings when
hazard is detected


What is the expectation of an
ordinary customer regarding
safety of a product?
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JOINT AND SEVERAL LIABILITY

Most states have held plaintiffs may sue any or all
manufacturers to share the liability created.

Manufacturers are allowed to fight it out as to which
should pay for amounts of damages.

Any of the defendant-manufacturers may be held
responsible for all damages.

The result has been limits on application of joint &
several liability in some areas (i.e. medical malpractice)
in some states.
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DEFENSES IN PRODUCT LIABILITY SUITS


Product Misuse or Abuse
Assumption of Risk



Tobacco and alcohol use are controversial areas; so far courts haven’t
applied the defense to users.
Sophisticated User Defense and Bulk Supplier Doctrine

Usually apply to business settings

Bulk supplier does not have to police details of what is done as
product continues down the chain, as bulk products go to intermediary
in bulk and on down.

Sophisticated user or Knowledgeable purchaser is one who
“reasonably should know of the product’s dangers” e.g. another
manufacturer.

Ex: Air Force employees who handle certain chemicals – have a
knowledgeable staff.
Some statutory limits exist.
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ULTRAHAZARDOUS ACTIVITY

Abnormally Dangerous Activity

Common law rules developed about uncommon
activities where utmost care is needed

i.e. use of explosives, transport of dangerous chemicals, crop
dusting, etc.

Kansas Case: Groundwater contamination from oil refinery
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DOES PRODUCT LIABILITY NEED REFORM?


Does a costly tort system make American firms less competitive than foreign
forms?

Not likely, as any company selling their products in the U.S. must meet
same liability standard as U.S. companies.

High standards of products marketed abroad force improvement of
standards worldwide.
The “tort crisis” in the U.S.:

Has abated since Supreme Court has cracked down on massive punitive
damage awards and doubtful expert testimony.

Tort reform legislation from Congress has made class actions suits more
difficult.

State laws are working to cap liability for certain damages.

Tort payouts may have stabilized.

Between 2004 and 2006, growth seemed to have stopped.

HOWEVER, tort litigation involving companies will continue to be a “flashpoint”
in the law – injured people seek relief from deep pockets and “heartless”
companies.

On the other hand, firms subject to dubious suits are devoting resources to
“fending off the deep-pocket and frivolous litigators.”
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