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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Current Acts and Warranties
Moderator and Presenter:
Hon. William A. Dreier
Product Liability of Manufacturers,
Distributors and Sellers
1.
State
A.
B.
Common Law
Statutory
i 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 Act
A. Manufacturing Defect
1. If causes injury, strict liability
B. Design Defect
1. Cannot warn later – Must correct
2. Reasonable person standard
3. Federal preemptions – Benefits lessened
by Supreme Court
C. Warning Defect
1. Post-sale warning required, if later
discovered
2. Reasonable person standard
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U.C.C. Warranties
A. Express Warranties
1. Contracts
2. Advertisements and brochures
B. Implied Warranties
1.
2.
3.
4.
Warranty of merchantability
Warranty of fitness for particular purpose
Waivers and limitations
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• Hundreds of published and unpublished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
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Strategies for Reducing
Products Liability Risk
Presented By:
Steven A. Karg
P r o d u c ts L ia b ilit y R is k
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0
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.
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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
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or moderate injury.
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 Practices
 Avoidance 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 Liability
 The Shift of Risk to Others
• Contractual Indemnity
• Insurance Considerations
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Chain of Distribution Liabilities
Manufacturer
Distributor
Retailer
Injured Party
Liability
Common Law Indemnity
Contractual 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.
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Insurance Considerations
Presented By:
Charles W. Miller III
Insurance Considerations
Largest Lawsuits





Owens Corning
Dow Chemical
GM
GM
Phillip Morris
$1.2 billion
$4.25 billion
$4.9 billion
$20 billion
$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 product
5. Only as to claims arising out of products
covered under the policy
6. After they have left the insured’s premises
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Insurance Considerations
1.
2.
3.
4.
Recall Insurance
Reimbursement for:
Recall expenses
Loss of profit
Product rehabilitation
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
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Product Sellers:
Liability Concerns and Solutions
Regarding Foreign
Manufacturers/Suppliers
Presented by:
M. Karen Thompson
Problems Arising from Dealings with
Foreign Manufacturers/Suppliers:
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Less sophisticated safety and quality systems
•
Limited governmental oversight
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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:
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New Jersey distributor purchases grinding tools from
Taiwanese manufacturer
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No formal contract between them, just purchase orders
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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)
•
•
•
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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:
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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:
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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
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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
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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
(5)
Commission
Publishes
(10)
Incident Report
Manufacturer
Manufacturer
Responds to
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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Notification
Manufacturers, 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.
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Question & Answer Session
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