BUSINESS TORTS and
PRODUCT LIABILITY
Chapter 9
Torts in the
Business Setting
• There is no such thing as a
“business tort”.
• This just means torts that
concern businesses.
• Often cases with
businesses are settled out
of court.
• There are often big awards,
as plaintiffs and juries view
businesses as “deep
pockets”.
The Types and Costs of
Business Torts
• Types of Torts
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Intentional
Negligence
Strict Liability
Torts are
traditionally
common law.
– More and more
statutes are playing
an important role in
this area of the law.
– See Exhibit 9.1
• Costs of Tort System
– Average annual cost
of $260 billion per
year – 2/3 of that
involves business.
– Businesses lobby for
statutory limits on tort
liability.
– Pain & suffering and
punitive damages
place a high “sticker
price” on certain
behavior.
Torts Particular To Businesses
• Intentional
Misrepresentation or Fraud
• Interference With
Contractual Relations
• Interference With
Prospective Advantage
• Product Liability
• Consumer Products &
Negligence
• Strict Liability in Tort
• Primary Areas of Product
Liability Law
• Ultrahazardous Activity
Fraud
• Deliberate Deception
• The tort may be called fraud, misrepresentation,
fraudulent misrepresentation or deceit
• Intentional Misrepresentation or Fraud
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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 of breach of contract
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See Lightle v. Real Estate Commission
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/has reason to know 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
Lightle v. Real Estate
Commission
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Lightle, Alaska real estate agent, listed house for sale by Leighs.
Williams's made offer to buy conditioned on obtaining mortgage.
Another realtor had a client, Seeley – was interested in the house.
Lightle said house was available as “the first offer was dead.”
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's couldn’t get their 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.
Interference With Contractual Relations
and
Interference With Prospective Advantage
• Interference with Contractual
Relations
– 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
See ASC Construction Equipment
USA v. City Commercial Real
Estate
See Exhibit 9.2
• Interference With Prospective
Economic Advantage
– 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 MDM Group v. CX Reinsurance
See Test Yourself, p. 346
See Issue Spotter “Hiring Employees
from Competitors”
ASC Construction Equipment USA
v. City Commercial Real Estate
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ASC hired City to serve as ASC’s exclusive real estate agent in Atlanta.
ASC wanted land for showrooms for Volvo. City found suitable land.
Received 5% commission for ASC’s purchases
At ASC’s request, City then called for construction proposals.
Invited developers to pitch construction alternatives
Each developer promised to pay City a commission if it got the job.
One developer, Seefried, did not have in-house construction services.
Seefried called upon Catamount Constructors to help with its bid.
Seefried & Catamount had no contract, but Seefried anticipated hiring
Catamount if it won the construction job.
ASC then decided to handle construction directly.
This meant City would get no commission for arranging construction.
ASC told Catamount not to proceed with City & hired Catamount to build
one of the showrooms. City got no commission.
(Continued)
ASC Construction Equipment USA v.
City Commercial Real Estate, cont.
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City sued ASC for tortious interference with business relations.
Awarded City $467,674 compensatory and $1.25 m. punitive damages
ASC appealed.
HELD: Affirmed in part; reversed in part and case remanded.
To recover under tortious interference, plaintiff must show defendant
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1) acted improperly & without privilege,
2) acted purposely with malice and intent to injure
3) induced 3rd party not to enter into or continue relationship with plaintiff
4) caused financial injury
Element 1 requires proof that defendant was “stranger” to the relationship
Evidence presented no basis for jury to find ASC was a stranger to City’s
business relationship with Catamount.
Object of ASC’s interference (prospective commission agreement between
City & Catamount) was mechanism to effect verbal agreement between City
& ASC regarding City’s compensation.
No tortious interference; punitive award cannot stand.
MDM Group Associates v. CX
Reinsurance Company, Ltd.
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MDM is insurance broker – insures ski resorts against risk that # of ski
days during ski season would fall below a certain minimum.
CX agreed to write policies. MDM received a commission of 12.5%.
Premiums grew to $3 m., but poor snow in 1999 meant many lost ski days.
Ski resorts made insurance claims. CX resisted, negotiated, mediated,
litigated with $23 million in claims payouts.
CX stopped issuing policies, which it had a right to do.
MDM sued CX for intentional interference with prospective business
relations for not renewing policies with ski resorts resulting in MDM not
receiving commissions.
Contended CX handled the ski resort claims poorly. Jury awarded MDM
$6.75 million in damages. CX appealed.
HELD: Reversed & remanded with judgment in favor of CX.
No interference when the defendant (CX) decided not to renew policies.
There is no interference when MDM and CX have a contract that is affected
by CX’s decisions not to renew other contracts (with ski resorts) and
cancelling contracts with ski resorts means lack of commissions to MDM.
MDM cannot maintain an action against CX for interference with any
contract to which CX is a party.
Product Liability
• Liability of producers and sellers of
goods re: defective products
• We want companies to have incentives
to ensure their products are safe.
• But, 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
• Primarily now statutory law
“Is Japan Really Different?”
It is usually said that Japan
has less litigation and
fewer lawyers.
Some analysts say fewer
lawsuits make Japan
more competitive.
In fact, the U.S. and
Japanese tort systems
have similar results even
if the rules are different.
History of 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
Negligence in Tort
• Manufacturer must exercise reasonable care under
the circumstances.
• 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.
MacPherson v. Buick Motor
Company (1916 landmark case)
• 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; tort law
applies; 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, so Buick negligent in tort.
• Buick is responsible for the finished product.
• Judgment affirmed.
You Can’t Be Too Careful:
Winning Warning Labels
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On the underside of a cereal bowl: Always use
this product with adult supervision.
On a washing machine: Do not put any person
in this washer.
On a baby stroller: Remove child before
folding.
On a cell phone: Don’t try to dry your phone in
a microwave oven.
On the Yellow Pages: Please do not use this
directory while operating a moving vehicle.
On a wart removal product instruction booklet:
Do not use if you cannot see clearly to read the
information in the information booklet.
On a gas tank: Never use a lit match or open
flame to check fuel level.
Strict Liability Created
Under Contract Law
• 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
such a warranty for the
product or not
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See Issue Spotter: “Understanding
Product Problems”
• 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
Baxter v. Ford Motor Company
(1932 case)
• Baxter buys 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 left 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.
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 carefulness, due
care, reasonableness, etc.
Strict Liability in Tort Law – California Changes
Law: 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.
• 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 in tort rule.
“I’m From the FBI: I Know the Law”
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FBI Special Agent Clymer jumped
the curb with his pickup.
Was found passed-out drunk
(blood alcohol 0.306).
He was in his truck, with an empty
bottle of rum.
The truck caught fire and police
pulled him out.
Claimed he stopped along the road
to make a call, had the pickup in
“Park”, then he “somehow lost
consciousness” and truck
“somehow produced heavy smoke
that filled the passenger cab.”
He sued Chevy and the Chevy
dealer for selling him a defective
vehicle.
Restatement (Third) of
Torts on Products Liability
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The American Law Institute’s (ALI) definition of strict liability in Section
402A of the Restatement (Second) of Torts.
This is 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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See Parish v. ICON – Issue: Failure to warn under the standards of Restatement (Third) of Torts
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Parish v. ICON
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Parish was jumping on a backyard trampoline made by Jumpking.
Surrounded by a safety net (fun ring) made by ICON
He did a jump, landed on his head, left quadriplegic.
Sued ICON and Jumpking for failure to warn of dangers in
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 were provided.
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 on next slide)
Parish v. ICON, cont.
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Had nationally recognized warning symbols on the product.
1 warning on each of 8 legs of trampoline – designed to assemble so that
warnings face out, visible to user.
Jumpking manufactures 2 printed non-pictorial warnings sewn onto the
trampoline bed.
Warning placard for the owner to affix to the trampoline – both pictorial
warning and language about safe use of trampoline.
Owner’s manual contains warnings found on trampoline, plus additional
warning about supervision and educational instruction.
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 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.
Strict Liability and the Failure To
Warn Standard
(Manufacturers wonder how far laws will go)
• Gun mfgr. is liable for failure to warn of possible damage
to users’ hearing from long-term exposure to gun fire.
• Diet-food producer is liable for failure to warn about
using adult diet food as baby food.
• Commercial pizza dough roller machine maker liable
when worker sticks hands in machine to clean it &
machine is on.
• Johnson & Johnson pays $8.85 million to a liver
transplant patient due to the fact years of alcohol
consumption & taking Tylenol had destroyed his liver.
Company knew drinking & taking regular doses of
Tylenol could damage liver.
Strict Liability & Design
Defects
• Worker receives $750,000. Co-worker removes
metal plate & covers machine with cardboard
(failing to put plate back). Worker falls into
machine and loses his leg. It is a manufacturing
design defect that machine can run when the
metal plate is removed.
• Restaurant employee badly burned. He tries to
retrieve an item that fell from his shirt pocket
into French Fry machine.
• Child pushed emergency stop button on an
escalator, causing person to fall, and be
injured. It’s a design defect to make a button
red – kiddies might like it and push it!!!
Reason #4 Why West Virginia Is
Considered a Litigation Hellhole?
West Virginia Supreme Court Justice Richard Neely,
in his book: The Product Liability Mess, p. 4
“As long as I am allowed to redistribute wealth from
out-of-state companies to injured in-state plaintiffs,
I shall continue to do so. Not only is my sleep
enhanced when I give someone else’s money
away, but so is my job security, because the instate plaintiffs, their families, and their friends will
reelect me.”
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.
• An open-top, twin hopper trailer, loaded from above by a downspout
that pours fertilizer into the hopper.
• Downspout wasn’t going into position; Gish climbed on top of trailer;
walked out along the top rail that is about 5” wide so he could put
downspout in position to pour in fertilizer.
• While on top, 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. Timpte appealed.
(Continued)
Timpte Industries, Inc. v. Gish
• HELD: Reversed; reinstated trial court’s judgment for 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 if 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.
Strict Liability and Unknown
Hazards or Latent Defects
• Dangers not known at the
time of the product’s
manufacture
• Hazard associated with the
product is not learned for
many years
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See Issue Spotter: “A Way to
Reduce the Damage?”
• Consumer Expectation
standard used by courts
– What is the expectation
of an ordinary customer
regarding safety of a
product?
• Claims are often class action
suits
• Asbestos Industry – has paid
billions of dollars to tens of
thousands of plaintiffs in
claims over a 30-year period
• Injuries caused by IUDs have
been in the courts for years
• Manufacturers must have
recalls or warnings when
hazard is detected
Joint and Several Liability
• Courts 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
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 products)
in some states
“Busted!”
• Michigan judge Robert Colombo quashed
thousands of apparently bogus lawsuits for
asbestos-related injuries.
• Principal examining doctor, Michael Kelly,
had diagnosed injuries on 7,323 patients’ xrays over 15 years (for $500 each).
• His detection rate of abnormalities was 58
times the detection rate by independent
radiologists.
• Judge found that Kelly was neither
radiologist nor pulmonologist.
• Had failed the certification test for reading xrays.
• The day Judge Colombo commenced the
investigation of the x-ray evidence, plaintiffs’
attorneys withdrew all lawsuits except one.
Asbestos Litigation in the United States
and United Kingdom
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Asbestos is carcinogen that causes lung diseases.
Damages of asbestos were known decades ago; little was done about it.
By mid-1970s, litigation exploded.
More than 850,000 claims had sued – 8,400+ defendants (sellers,
(manufacturers, distributors & installers of asbestos-containing products).
Has resulted in bankruptcy and reorganizations of many defendants.
In U.S. asbestos litigation: “the longest running mass tort in U.S. history”.
Leading 1973 case was Borel v. Fibreboard Paper Products
By 2005 RAND study estimated $70 billion spent on compensation &
litigation costs through 2002 alone & reasonable estimates range from $200
to $265 billion.
Cape Industries plc (UK-based company) was sued and default judgment
entered but had no assets in the U.S.
Plaintiffs took their judgment to the UK courts for enforcement.
UK law didn’t recognize Borel theory & court refused to enforce U.S.
judgment. Plaintiffs would have to sue Cape under UK law.
In UK, “loser pays” rule in lawsuits. UK court held even though Cape
created multinational corporate structure to specifically ensure no recovery
by U.S. plaintiffs, UK courts would not disregard the legal structure to
enforce judgment against the parent company.
Defenses To Negligence
and Strict Liability
• 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 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.
Ultrahazardous 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.
See Old Island Fumigation (in
text)
See Test Yourself, p. 204
Perspective On Tort U.S. Litigation
• 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.:
– abated since Supreme Court has cracked down on
massive punitive damage awards and doubtful expert
testimony.
• Congress has made class actions suits more difficult.
• State laws are working to cap liability for certain damages.
• Tort payouts may have stabilized.
– After 2004, 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.
• Firms subject to dubious suits are devote resources to
fending off the deep-pocket and frivolous litigators.