VI. Customers
Readings and Resources: S&R Chapters 21-25 (Skim), 42
Outline:
I. Behavior Toward Customers -- A Thicket of Regulation/Rules
A. State Common Law of Contracts and UCC (State Statutes) Big Factors,
BUT…
B. Other State/Federal Legislation Applies To Product and Service Sales
Process/Afterward
1. Need for Qualifying Information/Price of Credit (Truth in
Lending, Fair Credit Reporting Act)
2. Discrimination in Granting Credit
3. Deception/Mistake (UCC Art 2, FTC Act, Lemon Laws,
Telemarketing Acts)
4. Product Liability
II. Sales Law – Customers (and Suppliers) -- (Drawn From Gillette & Walt,
Sales Law, 1999 Foundation Press)
A. UCC (State Statutory Law) Rationale
1. Freedom/Efficiency of Contract Principle – Reflecting Preference of
Majority
2. Minimize Transaction Costs on Basic Transactions
a. Marshalling Terms
b. Negotiating
c. Drafting
3. Creating Transactions Costs on Variant Terms
4. Concept of “Default Rules” v. Mandatory Rules -- Deviation Allowed
[Examples: (1) If no price is specified, and delivery is made, the price
is a reasonable one at the time of delivery; but (2) an agreement
among sellers on price fixing is a mandatory rule because price fixing
creates transaction costs external to the bargain]
B. UCC Coverage
1. Sales Transactions in “Goods”
a. “Goods” basically moveables at time of sale, but not real property
and not intangibles (stocks, bonds…) or money
b. Includes Incidental Services [Example: Installation and Set-Up]
c. Lease Included If Sale Subject To Security Interest [Example:
Lease car for 15 years. Meaningless reversionary interest v. 3-5
year lease with option to buy]
d. Does Not Include “Normal” Security Interests [Example: Sell Car
1/1 For $100, Buy Back 7/1 for $105]
C. Formation of Contract
1. “Consent to Agreement” Model v. Formal Offer/Acceptance
2. Offer-Varying Acceptance – Battle of the Forms
a. Acceptance Contains Terms Not in Offer
b. Generally, Exchange of Standardized Writings
c. Detailed Rules to Resolve
3. Implied Terms – Trade Usage, Course of Dealing, Course of
Performance [But: UCC allows modification without consideration]
4. Statute of Frauds -- >= $500 – Mandatory Rule
D. Performance -- Allocating Risk of Loss Via Poor Performance
1. Insecurity & Adequate Assurance of Performance
2. Anticipatory Repudiation
3. Tender, Inspection, Acceptance, Rejection, Cure
4. Generally, Risk of Loss Follows Control
E. Warranties – Allocating Risk of Quality, Given Performance
1. Express Warranties
2. Implied Warranties
a. Fitness for Particular Purpose
b. Merchantability
3. Disclaiming Warranties – Rules
4. Products Liability Distinguished – Remedies and Parties – Privity of
Contract
F. Remedies – Allocating Loss of Transactional Breakdown
III. Products Liability – Non-UCC Regulation of Quality/Function –Unique Business
Risk Characteristics/ Wide Coverage (Drawn From Abraham, Forms and Functions of
Tort Law, 1997 Foundation Press)
A. Liability for Injury/Damage by Defective Products
1. Potential Defendants – Often Indirect Contractual Relationship; No
Privity
2. Chain of Distribution Reality
a. Supplier of Components, Manufacturer, Intermediary ( Wholesaler,
Distributor, Dealer), Retailer, Purchaser, User
b. Bystander – Beyond Customers
3. Legal Rules (Mostly State Law) Evolved As Manufacturing and
Commerce Evolved
B. Today’s Rule: Strict Liability for Personal Injury/Property Damage From
Defective Products
1. Manufacturing Defects
a. Non-Conformity to Manufacturer’s Design [Example: Seat
belt improperly attached to car frame]
b. Need Not Show Inadequate Manufacturing Materials
c. Need Not Show Improper Inspection
d. Rationale:
i. Hard to Pinpoint Negligence
ii. Manufacturer in Superior Position to Reduce Harm
[Example: Research, Cost-Effective Statistical
Sampling]
iii. Manufacturer Can Better Spread Cost of Defects
When Not Cost-Effective to Eliminate [Example:
Mouse in Coke Bottle]
2. Design Defects
a. Occurs in Entire Product Line [Examples: Faulty blueprint,
tooling, bad specification, bad choice of materials for
product]
b. Can Design Ever be Risk-Free? [ Example: Knives]
c. Standards:
i. Consumer Expectations -- Flawed? (Jury)
ii. Risk/Benefit Test -- Flawed? (Hindsight)
3. Warning Defects
a. Problem of “Complete” Information on Product Risks/Benefits
b. Standard: Is Purchaser in Best Position to Decide Benefits
Outweigh Risks [Example: McDonald’s Coffee]
C. Defenses to Product Liability Claims
1. Standard Negligence Defenses – Contributory Negligence,
Comparative Negligence (Reduces Damages), Assumption of Risk
2. Product Misuse – [Exception: Foreseeable Misuse. Examples –
Chainsaw cutting upward v. using chainsaw to cut holiday turkey]
3. Disclaimer of Product Liability -- Not an Option
D. Management Issues
1. Insurance v. Self-Insure?
2. Corrective or Protective Measures?
3. Liability Runs With Corporation!
IV. Payment Systems
A. Drafts and Notes
B. HIDC
C. Theft by Check
D. Bank Handling of Checks
E. Funds Transfer without Checks
F. Letters of Credit
Product Line Legal Planning for Competitive Advantage
(Drawn in part from Siedel, Using the Law for Competitive Advantage
(2002, Jossey-Bass))
I.
The Problem of Product Liability
A. Company issues.
1. Adverse Publicity – e.g. asbestos, tobacco, breast implants, tires.
2. Increased costs – e.g. insurance premiums, legal costs.
3. Bankruptcy – e.g. bankrupt Johns Manville Corporation settled
over 320,000 asbestos injury claims, has 70,000 pending,
anticipates 500,000 more!
B. Customer dilemmas. e.g. Car rear-ended by a drunk driver. Children in back
seat injured by exploding gas tank. Suit against auto manufacturer. Internal
memo: cost of relocating gas tank $9 per car vs. expected cost of injuries $2 per
car ($200k per injury X # of injuries / number of cars). Billion dollar verdict!
1. Higher prices?
2. Less choice? E.g. Riddell.
3. Safer products?
C. Societal issues
1. Tax on innovation
2. Inhibits product development
II. Strategies to Create Competitive Advantage
A. General Observation: Product liability risks – e.g. costs, publicity, inhibited
product development -- affect all competitors in an industry.
B. 4-Step Approach
1. Understand the Law – A state law-driven remedy (rooted in
negligence principles) for product-related injuries.
Design Defects
Product Liability
Manufacturing Defects
Warranties
Warning Defects
Marketing
What isn’t said
Marketing Issues
What is said
Past Tobacco Ads:
• “Play Safe. Smoke Chesterfield.”
• “[Chesterfields are] entirely safe for the mouth.”
• “[L & M filters are] just what the doctor ordered.”
2. Determine a legal response to specific legal problems (claims)
a. Go to a more favorable jurisdiction (state or country)?
Increasingly impractical. US product liability law has spread as a
global model. Some countries are even harsher than US – e.g.
China, Vietnam.
b. Fight for law reform? Some successes at the state level, but nofault strict liability is still the rule. And, in any event, law reform
benefits all competitors in a jurisdiction.
c. Fight individual cases? No defect, risk-utility test, etc. Decision
trees, game theory issues.
3. Adopt business measures that address the specific legal problems
faced.
a. Drop product or line
b. Fix product
i. Correct the manufacturing process (organizational
structure, product review teams).
ii. Redesign the product.
iii.Improve warnings; correct marketing (copy, use
research).
iv. Warranty disclaimers.
4. Translate legal problem into a business problem
a. Business Problem: Should you be upset when you learn that
customers for your hair dryer product were injured using the
product for drying pets, starting barbecues, thawing frozen pipes,
drying fingernail polish, defrosting a refrigerator? Should you
immediately follow the steps above in addressing these potential
liabilities? Should you stop here?
b. Strategy:
i. Listen to customers regarding their wide variety of
product uses.
ii. Move beyond a pure legal approach of minimizing
liability. Is there a common theme in product uses? E.g.
customers need a portable warm air device?
iii. Treat customer research as everyone’s job – including the legal department. Mine
legal data on claims, etc.