BUSINESS TORTS and
PRODUCT LIABILITY
Chapter 7
Torts in the Business
Setting
• There is no such thing
as a “business tort”
• By definition, this
means torts that
concern businesses
• Often cases with
businesses are settled
out of court
• There are usually big
awards, as plaintiffs
view businesses as
“deep pockets”
The Types and Costs of
Business Torts
• Types of 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
• 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 Usually Particular to
Businesses
• Fraud
• Interference With
Contractual Relations
• Interference With
Prospective Advantage
• Premises Liability
• Product Liability
• Consumer Products &
Negligence
• Consumer Products &
Strict Liability
• Ultrahazardous Activity
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
• Often added to a suit of breach of contract
Lightle v. Real Estate
Commission
• Lightle, Alaska real estate agent, listed Leighs’ house for
sale
• Williams offered to buy conditioned on obtaining mortgage
• Another realtor had a client, Seeley, interested in house
• Lightle said house was available: “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 that it was a
“back-up contract” if Williams couldn’t get financing.
• Seeley found out, rescinded offer, demanded deposit back.
• Seeley filed a claim against the Alaska Real Estate
Commission’s surety fund. It compensates losses in real
estate due to fraud.
Lightle v. Real Estate Commission
• Alaska Real Estate 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 Matrix Group Ltd. v.
Rawlings
• Interference With
Prospective 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 Co.
Matrix Group Limited v. Rawlings
Sporting Goods Company
• Matrix (FL company) makes sporting equipment bags.
• Rawlings (DE company) makes sporting equipment.
• In 1996, Rawlings contracted that Matrix had exclusive
license to use Rawlings’ trademark to produce, market
and sell equipment bags.
• Parties agreed not to compete against each other.
• In 2003 K2 acquired Rawlings as a subsidiary.
• K2 also acquired Worth, a competitor to Matrix in sports
bag market.
• Soon after, Rawlings terminated the agreement with
Matrix.
• Matrix sued Rawlings for breach of contract and K2 for
interference with business relationship (the issue here).
Matrix Group Limited v. Rawlings
Sporting Goods Company
• HELD: Affirmed
• K2 was aware of the Rawlings-Matrix contract.
• President of Rawlings had discussed with K2’s
general counsel a letter from Matrix’s president,
warning Rawlings that K2’s plan to consolidate
with Worth would breach the Rawlings-Matrix
contract.
• The jury could infer that K2 intended to breach
the contract by its actions.
• Jury could award damages under both claims of
breach of contract and tortious interference.
MDM Group Associates v. CX
Reinsurance Company, Ltd.
• MDM is insurance broker – insures ski resorts against
risk that # of ski days during ski season would fall below
a certain minimum.
• CX and others agreed to write policies for them.
• MDM received a commission of 12.5%. Premiums grew to
$3 million, but poor snow in 1999-2000 caused big losses.
• Ski resorts made insurance claims. CX resisted,
negotiated, mediated, litigated: $23 million in 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.
MDM Group Associates v. CX
Reinsurance Company, Ltd.
• HELD: Reversed & remanded with judgment in favor
of CX.
• There is 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
cancellation of contracts with ski resorts means lack
of commissions to MDM.
• MDM cannot maintain an action against CX for
interference with any contract of which CX is a party.
Product Liability
• Liability of producers
and sellers of goods
re: defective products
• General term applied
that deals primarily in
tort law
• Involves some
contract law
• Involves some
statutory law
• See “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
are similar (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
between injured party and 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
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 (no contract with him); trial court holds that
privity is not required; MacPherson wins.
• NY Court 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. Eventually, all states adopt this rule.
After MacPherson: The New
Standard: NEGLIGENCE
• 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.
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
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
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
producer is “strictly liable in
tort.”
• By mid-1970s every state
supreme court had adopted
strict liability rule.
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 has been the leading rule adopted by most states to define
liability for product-related injury.
• ALI now offers a new standard for product defect cases in
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.
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, left 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 adequate.
• Look at reasonable instructions or warnings if foreseeable risks of
using a product.
• Numerous warnings 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.
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 has 2 printed 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 found on trampoline, plus
additional warning re: 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: 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.”
• Warning here were adequate.
Strict Liability and the Failure To
Warn Standard
(How far liability can go)
• Gun mfgr. 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 mfgr. liable
when worker sticks hands in machine to clean it when
machine is on.
• Johnson & Johnson pays $8.85 million to a liver
transplant patient. Years of drinking & 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!
Force v. Ford Motor
Company
• Force was driving a Ford – was hit head on by another vehicle.
• Was wearing his seatbelt and shoulder harness but sustained
severe head injury.
• Sued Ford and Mazda for product defect, saying the shoulder
harness was designed defectively.
• Jury held for defendants. Force appealed.
• At trial Force had proposed a jury instruction from Restatement
(Second) Of Torts that a product is defective if it fails to perform
as an ordinary consumer would expect it to – Consumer
Expectation Test.
• Force also wanted an instruction that the risk of danger in design
outweighs the design benefits – Risk-Utility Test.
• Ford and Mazda argued that consumer-expectation test cannot
applied to design defects of complex products, among them
seatbelts.
• Ford and Mazda said that ordinary consumer of a car “simply has
‘no idea’ how it should perform in all foreseeable situations. . . .”
Force v. Ford Motor Company
• Court of Appeals: Said that with respect to
seatbelts, the consumer-expectation
standard can be used.
• The instruction including the consumerexpectation standard was necessary to
resolve the issues before the court.
• Mr. Force was entitled to submit to the jury
both the risk-utility test and the consumerexpectation test.
• HELD: Reversed and remanded for a new
trial.
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
• 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 cased by IUDs
have been in the courts for
years
• Manufacturers must have
recalls or warnings when
hazard is detected
Market Share Liability or Enterprise
Liability
• Used when, because of
latent effect, plaintiffs do not
know the specific
manufacturer
• Arose in response to DES
drug suits
• May sue any or all of the
manufacturers in question
• Manufacturers share liability
according to their share of
the market for the item
Joint and Several Liability
• Plaintiffs may sue any or all
manufacturers to share the
liability created
• Any of the defendantmanufacturers may be held
responsible for all damages
• Some states have abolished
it
• The tendency is to use
“market share liability”
(though that term is not
always actually used by
courts)
“European-American Product Liability:
Same Law, Different Procedures”
• Product liability law for 25 members of European Union governed by
Product Liability Directive adopted in 1985.
• Member states (most civil law nations) interpret Directive through
their own codes – but moving to a more uniform standard.
• Directive adopted “liability without fault” for defective products -much like strict liability in U.S. tort law.
• Plaintiff must show causal connection between the defect and
damaged suffered – very much like Section 402A of Restatement
(Second) of Torts.
• One big difference between U.S. and EU: Producer not liable in EU
when “state of scientific knowledge” at the time of placing the
product into circulation was not available to discover the existence
of a defect.
• This eliminates unknown hazards, such as DES and asbestos.
• Europe also has procedural differences: no contingency fee cases,
many more limits on discovery, a “loser pays” rule, no punitive
damages and no juries.
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 mgfr.
– 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)
Perspective On Tort U.S.
Litigation
• Does a costly tort system make American firms less competitive
than foreign forms?
– Not likely - any company selling their products in the U.S.
must meet same liability standard as U.S. companies.
– High standards of products force improvement of standards
worldwide.
• The “tort crisis” in the U.S. may have abated since
Supreme Court has cracked down on massive punitive
damage awards and doubtful expert testimony.
• State and federal laws are working to restrain certain suits or
damages.
• 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 devote significant resources to
fending off the deep-pocket and frivolous litigators.