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Managing Products Liability Risk for Manufacturers and Distributors

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Title: Managing Products Liability Risk for Manufacturers and Distributors


1
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.
2
  • Please help yourself to food and drinks
  • Please let us know if the room temperature is too
    hot or cold
  • Bathrooms are located past the reception desk on
    the right
  • Please turn OFF your cell phones
  • Please complete and return surveys at the end of
    the seminar

3
Current Acts and Warranties
  • Moderator and Presenter
  • Hon. William A. Dreier

4
Product Liability of Manufacturers, Distributors
and Sellers
  • 1. State
  • Common Law
  • Statutory
  • i New Jersey Product Liability Act
  • Consumer Fraud Act
  • Uniform Commercial Code Warranties
  • 2. Federal
  • A. Magnusson-Moss Act
  • B. Consumer Product Safety Act

5
N.J. Product Liability Act
  • Manufacturing Defect
  • If causes injury, strict liability
  • Design Defect
  • Cannot warn later Must correct
  • Reasonable person standard
  • Federal preemptions Benefits lessened by
    Supreme Court
  • Warning Defect
  • Post-sale warning required, if later discovered
  • Reasonable person standard

6
U.C.C. Warranties
  • Express Warranties
  • Contracts
  • Advertisements and brochures
  • Implied Warranties
  • Warranty of merchantability
  • Warranty of fitness for particular purpose
  • Waivers and limitations
  • Magnusson-Moss prohibitions

7
Highly Technical Dont 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  • Hundreds of published and unpublished court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

8
Strategies for Reducing Products Liability Risk
Presented By Steven A. Karg
9
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10
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).

11
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

12
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.

13
15 Ideas for Producing a Product for Which There
is No Reasonable Safer Alternative Design
  • Establish a products liability loss prevention
    committee.
  • Keep abreast of and employ the state of the art.
  • Hire experienced and knowledgeable design
    personnel to design your products.

14
15 Ideas for Designing a Safe Product
  • Closely monitor competing products.
  • Keep active in related industry organizations.
  • Closely monitor and comply with applicable
    minimum regulatory and industry standards.

15
15 Ideas for Designing a Safe Product
  • 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.
  • Conduct safety testing.
  • Consider and design against foreseeable misuses
    of your product.

16
15 Ideas for Designing a Safe Product
  • Consider the environment in which the product
    will operate and design the product to operate
    safely in that environment.
  • Design against safety problems created by worn
    parts.
  • Hire a safety consultant to review and improve
    the product.

17
15 Ideas for Designing a Safe Product
  • Patent your product innovations.
  • Document your improvement effort.
  • Teach your organization the importance of the
    documents they generate.
  • Update your designs to keep up with safety
    innovations.

18
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.

19
5 Ideas for Manufacturing a Product Without
Manufacturing Defects
  • Carefully purchase and inspect raw materials and
    component parts.
  • Institute a quality control program for your
    manufacturing lines and document your efforts.
  • Closely monitor the manufacturing process to
    avoid recurring manufacturing problems.

20
5 Ideas for Manufacturing a Product Without
Manufacturing Defects
  • Inspect completed products for proper operation
    and compliance with manufacturing standards, then
    document the individual results where practical.
  • 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.

21
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.

22
Why So Many Warnings?
23
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24
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25
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26
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27
11 Ideas for Using Appropriate Warnings and
Instructions
  • 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 or moderate injury.

28
11 Ideas for Using Appropriate Warnings and
Instructions
  • Comply with State and Federal labeling
    regulations and standards.
  • Address the foreseeable audience by
  • writing at its level,
  • writing in its languages, and
  • effectively delivering the warning to it.

29
11 Ideas for Using Appropriate Warnings and
Instructions
  • Place and distribute the warnings properly to
    ensure that the information is delivered in a
    manner calculated to reach the end user.
  • Document the delivery and use of warnings and
    training materials and save contemporaneous
    copies or samples to be produced later if needed.
  • Provide first aid or antidote information where
    applicable.

30
11 Ideas for Using Appropriate Warnings and
Instructions
  • Provide an instruction manual containing
  • a safe method for assembly of the product
  • instructions for safe use of the product
  • a description of the product's intended uses and
    its limitations
  • warnings of any latent dangers inherent in the
    product

31
11 Ideas for Using Appropriate Warnings and
Instructions
  • maintenance procedures
  • measurable adjustment specifications for safe and
    proper operation
  • a recommended frequency for maintenance and
  • warnings against misuse or modification that
    stress the consequences of misuse or modification.

32
11 Ideas for Using Appropriate Warnings and
Instructions
  • Employ a safety and warnings consultant where
    warranted.
  • Review manuals and warnings with an experienced
    products liability attorney.

33
11 Ideas for Using Appropriate Warnings and
Instructions
  • 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
  • Avoid too many warnings the Billboard Effect.

34
3 Risk Reduction Ideas for the Sale of Products
  • Avoid affirmative misrepresentations of the
    capabilities of the product.
  • Disclose information about the product that the
    buyer would deem important to his known
    application.
  • Avoid verbal warranties that are inconsistent
    with express warranties or disclaimed warranties.

35
Consumer Fraud Act
  • Damage caused by a product as opposed to economic
    harm relating to purchase
  • Treble Damages
  • Attorneys Fees

36
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

37
Consumer Fraud Act
  • Bosland v. Warnock Dodge
  • Six year limitations period
  • No demand requirement
  • Class action problem
  • Ticking time bomb

38
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

39
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.

40
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.

41
2 Tips for Avoiding Successor Liability
  • Conduct due diligence before purchasing assets
    from other businesses.
  • Consult counsel regarding potential successor
    liabilities when purchasing assets from other
    businesses.

42
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

43
Chain of Distribution Liabilities
Manufacturer
Distributor
Retailer
Injured Party
Liability
Common Law Indemnity
Contractual Indemnity
44
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.

45
Insurance Considerations
  • Presented By
  • Charles W. Miller III

46
Insurance Considerations
  • Largest Lawsuits
  • Owens Corning 1.2 billion
  • Dow Chemical 4.25 billion
  • GM 4.9 billion
  • GM 20 billion
  • Phillip Morris 28 billion

47
Insurance Considerations
  • Product Liability Insurance
  • Legal liability
  • Arising out of accidents
  • During the period of insurance

48
Insurance Considerations
  • Product Liability Insurance
  • 4. Arising out of any defects in the product
  • Only as to claims arising out of products
  • covered under the policy
  • After they have left the insureds premises

49
Insurance Considerations
  • Recall Insurance
  • Reimbursement for
  • Recall expenses
  • Loss of profit
  • Product rehabilitation
  • Crisis communications

50
Insurance Considerations
  • Practical Suggestions
  • Regular risk assessment/insurance review
  • Negotiate for the best coverage
  • Purchase needed insurance coverage

51
Insurance Considerations
  • Buy sufficient policy limits
  • Use business partners coverages, if possible
  • Review coverage once it is issued

52
Product Sellers Liability Concerns and
Solutions Regarding Foreign Manufacturers/Supplier
s
  • Presented by
  • M. Karen Thompson

53
Problems Arising from Dealings with Foreign
Manufacturers/Suppliers
  • Less sophisticated safety and quality systems
  • Limited governmental oversight
  • Jurisdictional Issues
  • Post-sale problems/recalls
  • Difficulty of service of process
  • Lack of assets in the U.S.
  • Damage to reputation

54
Fact Pattern
  • New Jersey distributor purchases grinding tools
    from Taiwanese manufacturer
  • No formal contract between them, just purchase
    orders
  • Manufacturer attaches distributors 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

55
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???

56
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
  • failed to contain adequate warnings, or
  • deviated from the design specifications,
    formulae, or performance standards of identical
    units (i.e. a manufacturing flaw)
  • was designed in a defective manner (i.e. design
    defect).
  • New Jersey Products Liability Act, N.J.S.A.
    2A58C-2

57
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 manufacturers product according to the
    manufacturers 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. 2A58C-8

58
Limited Statutory Protection for Product Sellers
in New Jersey
  • Statute may afford relief from imputed liability
    if certain criteria are met
  • Product seller must certify as to the
    manufacturers correct identity, and
  • Product sellers role with respect to the product
    was minimal
  • N.J.S.A. 2A58C-9(a) and (d)

59
Statutory Protection Doesnt 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. 2A58C-9(a) and (c)

60
Imputed Liability to Domestic Distributors if
Foreign Manufacturer is Unavailable
  • By Statute Ten states, in addition to New
    Jersey
  • Model Uniform Product Liability Act
  • Restatement (3d) of Torts, 1

61
Product Seller Shall Also be Liable if
  • Product seller has exercised significant control
    over the products
  • Design
  • Manufacture
  • Packaging
  • Labeling
  • with respect to the alleged defect or warning
    which caused the injury, or

62
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. 2A58C-9(d)

63
Risk Controls for Distributors/Product Sellers
  • Good Importer Practices (draft guidance)
  • 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

64
Risk Controls for Distributors/Product Sellers
  • 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

65
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

66
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

67
Risk Controls for Distributors/Product Sellers
  • 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

68
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

69
Risk Controls for Distributors/Product Sellers
  • Indemnification provisions (Contd)
  • Survival of duty
  • Assignments
  • Sophisticated parties
  • Consent to jurisdiction
  • Insurance Coverage
  • U.S. based insurer
  • Distributor as additional insured
  • Certificates of insurance
  • Tail coverage

70
Pending Legislative Solution S. 1606
  • Foreign Manufacturers Legal Accountability Act of
    2009
  • 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

71
Reporting Recalls Under the Consumer Product
Safety Improvement Act of 2008
  • Presented By
  • Haekyoung Suh

72
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73
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74
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75
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76
Consumer Product Safety Improvement Act of 2008
  • Third-party testing of childrens products by
    certified laboratories for certification
    purposes.
  • Certificate of conformance required for all
    consumer products.
  • ASTM F963-07 now mandatory.
  • Ban on childrens products containing more than a
    minimal amount of lead or phalates.
  • Packaging for childrens toys and games must
    contain a label or cautionary statement about
    choking hazards.

77
Consumer Product Safety Commission
  • Regulation
  • Public Information
  • Compliance
  • Research
  • Import Safety

78
SaferProducts.gov
  • Active by March 11, 2011
  • Consumer Portal
  • Industry Portal

79
  • Commission Receives
  • Incident Report Manufacturer
  • (5)
  • Commission Manufacturer
  • Publishes (10) Responds to
  • Incident Report Incident Report

80
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.

81
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.

82
  • If in doubt, report.
  • Report early and often.

83
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 companys notification, in writing, to
    confirm the date of notification.

84
  • TOTAL RECALL
  • or
  • FAST TRACK PROGRAM

85
Strategies For Handling a Recall
  • Develop Pre-Recall Plans.
  • Establish a Recall Protocol.
  • Implement Post-Recall Procedures.

86
  • Myth 1 Im a small company I wont get
  • caught.

87
  • Myth 2 Id rather pay a small fine than
  • deal with the headache and
  • cost of a recall.

88
  • Myth 3 I dont sell products across state
  • lines so I dont need to worry
  • about a federal statute.

89
  • Myth 4 I can handle the problem by
  • myself.

90
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